18547
 1                             BEFORE THE
 2                       POSTAL RATE COMMISSION
 3    - - - - - - - - - - - - - - - X
 4    In the Matter of:             :
 5    POSTAL RATE AND FEE CHANGES   :   Docket No. R97-1
 6    - - - - - - - - - - - - - - - X
 7
 8                             Third Floor Hearing Room
 9                             Postal Rate Commission
10                             1333 H Street, N.W.
11                             Washington, D.C.  20268
12
13                             Volume 35
14                             Thursday, March 19, 1998
15
16              The above-entitled matter came on for hearing,
17    pursuant to notice, at 9:31 a.m.
18
19    BEFORE:
20              HON. EDWARD J. GLEIMAN, CHAIRMAN
21              HON. W. H. "TREY" LeBLANC, III, COMMISSIONER
22              HON. GEORGE W. HALEY, COMMISSIONER
23              HON. GEORGE A. OMAS, COMMISSIONER
24
25

                                                             18548
 1    APPEARANCES:
 2    On behalf of the United States Postal Service:
 3              SUSAN DUCHEK, ESQUIRE
 4              ERIC KOETTING, ESQUIRE
 5              RICHARD COOPER, ESQUIRE
 6              MICHAEL TIDWELL, ESQUIRE
 7              ANNE REYNOLDS, ESQUIRE
 8              DAVID RUBIN, ESQUIRE
 9              KENNETH N. HOLLIES, ESQUIRE
10              SCOTT L. REITER, ESQUIRE
11              ANTHONY ALVERNO, ESQUIRE
12              United States Postal Service
13              475 L'Enfant Plaza West, SW
14              Washington, D.C.  20260
15
16    On behalf of American Business Press:
17              DAVID STRAUS, ESQUIRE
18              Thompson Coburn
19              700 14th Street, NW, Suite 900
20              Washington, D.C.  20005
21              (202) 508-1013
22              fax (202) 508-1010
23
24
25

                                                             18549
 1    APPEARANCES:  [continued]
 2    On behalf of the Association of Alternate Postal Systems:
 3              BONNIE S. BLAIR, ESQUIRE
 4              Thompson Coburn
 5              700 14th Street, NW, Suite 900
 6              Washington, D.C.  20005
 7              (202) 508-1003
 8              fax (202) 508-1010
 9
10    On behalf of Nashua Photo, Inc.; District Photo, Inc.;
11    Mystic Color Lab; Seattle FilmWorks, Inc.; ValPak Direct
12    Marketing Systems, Inc.; ValPak Dealers' Association; Carol
13    Wright Promotions:
14              WILLIAM J. OLSON, ESQUIRE
15              ALAN WOLL, ESQUIRE
16              JOHN S. MILES, ESQUIRE
17              JOHN F. CALLENDER, JR., ESQUIRE
18              William J. Olson, P.C.
19              8180 Greensboro Drive, Suite 1070
20              McLean, VA  22102-3823
21              (703) 356-5070
22              fax (703) 356-5085
23
24
25

                                                             18550
 1    APPEARANCES:  [continued]
 2    On behalf of Readers Digest Association, Parcel Shippers
 3    Association:
 4              TIMOTHY J. MAY, ESQUIRE
 5              Patton Boggs, LLP
 6              2550 M Street, NW
 7              Washington, D.C.  20037
 8              (202) 457-6050
 9
10    On behalf of Advertising Mail Marketing Association:
11              IAN D. VOLNER, ESQUIRE
12              Venable, Baetjer, Howard & Civilletti
13              1201 New York Avenue, NW
14              Washington, D.C.  20005
15              (202) 962-4814
16              fax (202) 962-8300
17
18    On behalf of the Dow Jones & Company, Inc.:
19              SAM BEHRENDS, ESQUIRE
20              MICHAEL F. McBRIDE, ESQUIRE
21              LeBoeuf, Lamb, Greene & Macrae
22              1875 Connecticut Avenue, NW
23              Washington, D.C.  20009
24              (202) 986-8018
25              fax (202) 986-8102

                                                             18551
 1    APPEARANCES:  [continued]
 2    On behalf of the Major Mailers Association:
 3              RICHARD LITTELL, ESQUIRE
 4              1220 19th Street, NW, Suite 400
 5              Washington, D.C.  20036
 6              (202) 466-8260
 7
 8    On behalf of the Office of Consumer Advocate:
 9              SHELLEY S. DREIFUSS, ESQUIRE
10              KENNETH E. RICHARDSON, ESQUIRE
11              Office of the Consumer Advocate
12              Postal Rate Commission
13              1333 H Street, NW, Suite 300
14              Washington, D.C.  20268
15
16    On behalf of the United Parcel Service:
17              JOHN E. McKEEVER, ESQUIRE
18              Piper & Marbury
19              3400 Two Logan Square
20              18th and Arch Streets
21              Philadelphia, PA  19103
22              (215) 656-3310
23              fax (215) 656-3301
24
25

                                                             18552
 1    APPEARANCES:  [continued]
 2    On behalf of Hallmark Cards, Incorporated:
 3              DAVID F. STOVER, ESQUIRE
 4              2070 S. Columbus Street, Suite 1B
 5              Arlington, VA  22206
 6              (703) 998-2568
 7              fax (703) 998-2987
 8
 9    On behalf of ADVO, Inc.:
10              JOHN M. BURZIO, ESQUIRE
11              THOMAS W. McLAUGHLIN, ESQUIRE
12              Burzio & McLauglin
13              1054 31st Street, NW, Suite 540
14              Washington, D.C.  20007
15              (202) 965-4555
16              fax (202) 965-4432
17
18    On behalf of Time Warner, Inc.:
19              JOHN M. BURZIO, ESQUIRE
20              TIMOTHY L. KEEGAN, ESQUIRE
21              1054 31st Street, NW, Suite 540
22              Washington, D.C.  20007
23              (202) 965-4555
24              fax (202) 965-4432
25

                                                             18553
 1    APPEARANCES:  [continued]
 2    On behalf of the Direct Marketers Association:
 3              DANA T. ACKERLY, II, ESQUIRE
 4              MICHAEL D. BERGMAN, ESQUIRE
 5              Covington & Burling
 6              1201 Pennsylvania Avenue, NW
 7              Washington, D.C.  20016
 8              (202) 662-5296
 9              fax (202) 778-5296
10
11    On behalf of the Newspaper Association of America:
12              WILLIAM B. BAKER, ESQUIRE
13              ALAN R. JENKINS, ESQUIRE
14              MICHAEL YOURSHAW, ESQUIRE
15              Wiley, Rein & Fielding
16              1776 K Street, NW
17              Washington, D.C.  20006
18              (202) 429-7255
19              fax (202) 429-7049
20
21              ROBERT J. BRINKMANN
22              Newspaper Association of America
23              529 14th Street, NW, Suite 440
24              Washington, D.C.  20045-1402
25

                                                             18554
 1    APPEARANCES:  [continued]
 2    On behalf of the McGraw-Hill Companies, Inc.:
 3              TIMOTHY W. BERGIN, ESQUIRE
 4              Squire, Sanders & Dempsey
 5              1201 Pennsylvania Avenue, NW, Suite 500
 6              P.O. Box 407
 7              Washington, D.C.  20044
 8              (202) 626-6608
 9              fax (202) 626-6780
10
11    On behalf of the Mail Order Association of America:
12              DAVID C. TODD, ESQUIRE
13              Patton Boggs, LLP
14              2550 M Street, NW
15              Washington, D.C.  20037
16              (202) 457-6410
17              fax (202) 457-6513
18
19    On behalf of David B. Popkin:
20              DAVID B. POPKIN
21              P.O. Box 528
22              Englewood, NJ  07631-0528
23              (201) 569-2212
24              fax (201) 569-2864
25

                                                             18555
 1    APPEARANCES:  [continued]
 2    On behalf of the Magazine Publishers of America:
 3              JAMES R. CREGAN, ESQUIRE
 4              Magazine Publishers of America
 5              1211 Connecticut Avenue, NW, Suite 610
 6              Washington, D.C.  20036
 7              (202) 296-7277
 8              fax (202) 296-0343
 9
10    On behalf of the Alliance of Nonprofit Mailers:
11              JOEL T. THOMAS, ESQUIRE
12              11326 Dockside Circle
13              Reston, VA  20191
14              (703) 476-4646
15              fax (703) 620-2338
16
17    On behalf of the National Newspaper Association:
18              TONDA F. RUSH, ESQUIRE
19              King & Ballon
20              P.O. Box 50301
21              Arlington, VA  22205
22              (703) 534-5750
23              fax (703) 534-5751
24
25

                                                             18556
 1    APPEARANCES:  [continued]
 2    On behalf of the National Newspaper Association: 
 3    [continued]
 4              SENNY BOONE
 5              National Newspaper Association
 6              1525 Wilson Boulevard, Suite 550
 7              Arlington, VA  22209
 8              (703) 907-7900
 9
10    On behalf of the National Federation of Nonprofits:
11              CAROLYN EMIGH, ESQUIRE
12              Nonprofit Service Group
13              815 15th Street, NW, Suite 822
14              Washington, D.C.  20005
15              (202) 628-4380
16
17    On behalf of the Florida Gift Fruit Shippers Association:
18              M.W. WELLS, JR., ESQUIRE
19              Maxwell W. Wells, Jr., P.A.
20              105 E. Robinson Street, Suite 201
21              Orlando, FL  32801
22              (407) 422-8250
23              fax (407) 422-8262
24
25

                                                             18557
 1    APPEARANCES:  [continued]
 2    On behalf of the Recording Industry Association of America,
 3    and Advertising Mail Marketing Association:
 4              N. FRANK WIGGINS, ESQUIRE
 5              Venable, Baetjer, Howard & Civiletti, L.L.P.
 6              1201 New York Avenue, NW
 7              Washington, D.C.
 8              (202) 962-4957
 9
10    On behalf of Edison Electric Institute:
11              R. BRIAN CORCORAN, ESQUIRE
12              Oliver & Oliver, P.C.
13              1090 Vermont Avenue, NW, Suite 800
14              Washington, D.C.  20005
15              (202) 371-5656
16              fax (202) 289-8113
17
18    On behalf of American Business Press:
19              STEPHEN FELDMAN, ESQUIRE
20              Ramsey, Cook, Looper & Kurlander
21              c/o Thompson Coburn
22              700 14th Street, NW, Suite 900
23              Washington, D.C.  20005
24              (202) 508-1022
25              fax (202) 508-1010

                                                             18558
 1    APPEARANCES:  [continued]
 2    On behalf of Douglas F. Carlson:
 3              DOUGLAS F. CARLSON
 4              P.O. Box 12574
 5              Berkeley, CA  94712-3574
 6              (510) 597-9995
 7
 8    On behalf of the Alliance of Non Profit Mailers:
 9              DAVID M. LEVY, ESQUIRE
10              Sidley & Austin
11              1722 I Street, NW
12              Washington, D.C.  20006-3704
13              (202) 736-8214
14
15    On behalf of the National Association of Presort Mailers:
16              HENRY HART, ESQUIRE
17              Hazel & Thomas
18              P.O. Box 820
19              Alexandria, VA  22313
20              (703) 838-5153
21              fax (703) 836-8062
22
23
24
25

                                                             18559
 1    APPEARANCES:  [continued]
 2    On behalf of Brooklyn Union Gas Company:
 3              MICHAEL HALL, ESQUIRE
 4              Cullen & Dykman
 5              1225 19th Street, NW
 6              Washington, D.C.  20036
 7              (202) 223-8890
 8
 9    On behalf of Niagara Telephone Company:
10              TIMOTHY E. WELCH, ESQUIRE
11              Hill & Welch
12              1330 New Hampshire Avenue, NW, Suite 113
13              Washington, D.C.  20036
14              (202) 775-0070
15              fax (202) 775-9026
16
17    On behalf of the Coalition of Religious Press Associations:
18              JOHN STAPERT
19              Associated Church Press
20              18653 N. 41st Place
21              Phoenix, AZ  85024-3759
22              (602) 569-6371
23              fax (602) 569-6180
24
25

                                                             18560
 1    APPEARANCES:  [continued]
 2    On behalf of the Greeting Card Association:
 3              ALAN R. SWENDIMAN, ESQUIRE
 4              Jackson & Campbell, P.C.
 5              1120 20th Street, NW, Suite 300 South
 6              Washington, D.C.  20036-3437
 7              (202) 457-1645
 8              fax (202) 457-1617
 9
10    On behalf of LabOne, Inc., Osborn Laboratories, Inc., and
11    Clinical Reference Laboratory, Inc.:
12              JOSEPH C. BENAGE, ESQUIRE
13              Hillix, Brewer, Hoffhaus, Whittaker & Wright
14              2420 Pershing Road
15              Kansas City, MO  64108-2574
16              (816) 221-0355
17              fax (816) 421-2896
18
19
20
21
22
23
24
25

                                                                 i
 1                           C O N T E N T S
 2    WITNESS                  DIRECT   CROSS   REDIRECT   RECROSS
 3    M. RICHARD PORRAS
 4      BY MR. REITER          18565                              
 5      BY MR. LEVY                     18601                     
 6      BY MR. RICHARDSON               18637                     
 7      BY MR. LEVY                     18731                     
 8    JOHN T. PICKETT
 9      BY MS. DOCHEK          18754                              
10      BY MR. WELLS                    18785                     
11      BY MR. BERGIN                   18827                     
12      BY MR. WELLS                    18841                     
13      BY MR. FELDMAN                  18842                     
14    JAMES D. YOUNG
15      BY MS. DUCHEK          18849                              
16      BY MR. WELLS                    18865                     
17      BY MR. BERGIN                   18921                     
18      BY MR. FELDMAN                  18937                     
19    MICHARL R. McGRANE
20      BY MR. REITER          18945                              
21      BY MR. MAY                      18972                     
22      BY MR. WIGGINS                  18982                     
23      BY MR. McKEEVER                 18997                     
24    JEFFERY W. LEWIS
25      BY MR. REITER          19013                              

                                                                ii
 1                     C O N T E N T S [continued]
 2    WITNESS                  DIRECT   CROSS   REDIRECT   RECROSS
 3    JULIE F. RIOS
 4      BY MR. HOLLIES         19028                              
 5      BY MR. McKEEVER              19039/19054                  
 6    TIMOTHY D. ELLARD
 7      BY MR. TIDWELL        19056                               
 8      BY MS. DREIFUSS                 19173                     
 9
10    DOCUMENTS TRANSCRIBED INTO THE RECORD:                  PAGE
11    Rebuttal Testimony and Exhibits of M. Richard
12      Porras, USPS-RT-11                                   18567
13    Cross-Examination Exhibit No. ANM-XE-1                 18635
14    Cross-Examination Exhibit No. ANM-XE-2                 18636
15    Cross-Examination Exhibit No. OCA-XE-1                 18660
16    Cross-Examination Exhibit No. OCA-XE-2                 18664
17    Cross-Examination Exhibit No. PO-XE-1                  18730
18    Rebuttal Testimony and Exhibits of John T. 
19      Pickett, USPS-RT-2                                   18757
20    Rebuttal Testimony and Exhibits of James D. 
21      Young, USPS-RT-3                                     18851
22    Rebuttal Testimony and Exhibits of Michael
23      R. McGrane, USPS-RT-12                               18947
24    Cross-Examination Exhibit No. RIAA/USPS-XE-1           18996
25    Cross-Examination Exhibit No. UPS-McGRANE-XE-1         19011

                                                               iii
 1    DOCUMENTS TRANSCRIBED INTO THE RECORD:  [continued]     PAGE
 2    Rebuttal Testimony and Exhibits of Jeffery W.
 3      Lewis, USPS-RT-9                                     19015
 4    Rebuttal Testimony and Exhibits of Julie F.
 5      Rios, USPS-RT-10                                     19030
 6    Rebuttal Testimony and Exhibits of Timothy
 7      D. Ellard, USPS-RT-14                                19058
 8
 9                           E X H I B I T S
10    EXHIBITS AND/OR TESTIMONY               IDENTIFIED  RECEIVED
11    Rebuttal Testimony and Exhibits of 
12      M. Richard Porras, USPS-RT-11            18566      18566 
13    Cross-Examination Exhibit No.
14      ANM-XE-1                                 18630      18634 
15    Cross-Examiniation Exhibit No.
16      ANM-XE-2                                 18631      18634 
17    Cross-Examination Exhibit No.
18      OCA-XE-1                                 18647      18659 
19    Cross-Examination Exhibit No.
20      OCA-XE-2                                 18655      18663 
21    Cross-Examination Exhibit No.
22      PO-XE-1                                  18720      18729 
23    Rebuttal Testimony and Exhibits of 
24     John T. Pickett, USPS-RT-2                18755      18755 
25

                                                                iv
 1                     E X H I B I T S [continued]
 2    EXHIBITS AND/OR TESTIMONY               IDENTIFIED  RECEIVED
 3    Rebuttal Testimony and Exhibits of 
 4      James D. Young, USPS-RT-3                18849      18849 
 5    Rebuttal Testimony and Exhibits of
 6      Michael R. McGrane, USPS-RT-12           18946      18946 
 7    Cross-Examination Exhibit No.
 8      RIAA/USPS-XE-1                           18988            
 9    Cross-Examination Exhibit No.
10      UPS-McGRANE-XE-1                         19010            
11    Rebuttal Testimony and Exhibits of
12      Jeffery W. Lewis, USPS-RT-9              19014      19014 
13    Rebuttal Testimony and Exhibits of
14      Julie F. Rios, USPS-RT-10                19029      19029 
15    Rebuttal Testimony and Exhibits of
16      Timothy D. Ellard, USPS-RT-14            19057      19057 
17
18
19
20
21
22
23
24
25

                                                             18561
 1                        P R O C E E D I N G S
 2                                                     [9:31 a.m.]
 3              CHAIRMAN GLEIMAN:  Good morning.
 4              We continue hearings to receive testimony in
 5    rebuttal to direct cases of participants other than the
 6    Postal Service.
 7              We're scheduled to receive testimony of United
 8    States Postal Service Witnesses Porras, Pickett, Young,
 9    McGrane, Lewis, Rios, and Ellard and CTC Distribution
10    Services Witness Clark, who was originally scheduled to
11    appear after Witness Porras but has been rescheduled and
12    will appear at the last -- as the last witness on tomorrow,
13    Friday, March the 20th.
14              On March 12th, the Office of the Consumer Advocate
15    submitted a motion asking that official notice be taken of
16    certain Postal Service reports, specifically financial and
17    operating statements from AP1 1996 through AP5 1998 and the
18    1997 annual report of the Postal Service.
19              The motion is essentially unopposed, and I will
20    grant it.
21              OCA contends that it is appropriate to take
22    official notice of regular filed reports pursuant to the
23    Commission's rules, such as financial and operating
24    statements.  These documents are matters peculiarly within
25    the general knowledge of the Commission as an expert body.

                                                             18562
 1              Similarly, the Postal Service annual report is
 2    largely self-authenticating.
 3              The Alliance of Non-Profit Mailers filed a reply
 4    supporting the OCA motion.  It notes these documents are
 5    public records which can be accepted into evidence under the
 6    Federal Rules of Evidence.
 7              The Postal Service also filed a reply which
 8    recognizes that these documents are of the type which the
 9    Commission may take official notice.
10              The Postal Service includes the caveat that the
11    Commission should recognize that the weight due information
12    contained in these documents must be determined with due
13    regard to the nature of the documents.
14              Let me assure the Postal Service that the
15    Commission will exercise care to accord the proper weight
16    that these documents deserve.
17              During yesterday's hearing, I requested that
18    responses to a Postal Service motion to strike a portion of
19    the rebuttal testimony of Magazine Publishers of America
20    Witness Cohen be filed by noon today.
21              Late yesterday afternoon, a joint opposition to
22    that motion was submitted by eight parties.
23              Additionally, the Magazine Publishers of America
24    submitted a work paper providing additional explanatory
25    information on the development of a table appearing at page

                                                             18563
 1    13 of Witness Cohen's testimony.
 2              I want to thank counsel for responding so
 3    promptly.  Cooperation is tremendously important if we're to
 4    complete this round of hearings as scheduled and conclude
 5    the development of the evidentiary record.
 6              I will deny the Postal Service motion to strike.
 7              The Postal Service contends that the referenced
 8    portion of Witness Cohen's testimony is not true rebuttal
 9    because it reiterates a point made in direct testimony filed
10    by Witnesses Cohen and Stralberg.
11              The Postal Service also contends that Witness
12    Cohen failed to provide adequate documentation for the table
13    on page 13 of her testimony.
14              Witness Cohen's testimony addresses a point raised
15    by United Parcel Service Witness Sellick.  Rebuttal to that
16    testimony is permissible, and the Postal Service itself has
17    submitted rebuttal testimony which tends to support its
18    initial filing at the same time it controverts points raised
19    by intervenors.
20              My ruling striking a portion of Witness Degen's
21    rebuttal testimony was not premised on the fact that Degen
22    argues that the analysis in the testimony he filed as part
23    of the Postal Service direct case is valid.  A vast majority
24    of his rebuttal testimony makes that argument and it remains
25    in the record.

                                                             18564
 1              My ruling yesterday hinged on Degen's use of
 2    information withheld from other participants.
 3              I commented yesterday that the calculations
 4    contained in Witness Cohen's Table 1 did not seem to be
 5    thoroughly explained.  By submitting the work-paper fully
 6    detailing the derivation of the table, NPA appears to have
 7    met the Postal Service concern on that point.
 8              Obviously, it would have been more helpful had the
 9    information been made available on the date that the Cohen
10    testimony was filed.  However, it does not appear that any
11    participant will have been prejudiced by the delay in
12    providing the information.
13              Should it appear that this work-paper, as
14    clarified by reasonable cross examination, does not
15    adequately explain the reference table, I will entertain a
16    renewed motion to strike.
17              Does any participant have a procedural matter to
18    raise before we begin this morning?
19              [No response.]
20              CHAIRMAN GLEIMAN:  If not, then, Mr. Reiter, could
21    you please identify your first witness so that I can swear
22    him in?
23              MR. REITER:  Yes, Mr. Chairman.  Our next witness
24    is Richard Porras.
25              CHAIRMAN GLEIMAN:  Mr. Porras, if you could please

                                                             18565
 1    stand and raise your right hand.
 2    Whereupon,
 3                         M. RICHARD PORRAS,
 4    a rebuttal witness, was called by counsel for the United
 5    States Postal Service and, having first been duly sworn, was
 6    examined and testified as follows:
 7              CHAIRMAN GLEIMAN:  Please be seated.
 8              Counsel, you may proceed to introduce the witness'
 9    testimony.
10                         DIRECT EXAMINATION
11              BY MR. REITER:
12         Q    Mr. Porras, I will hand you a copy of a document
13    entitled "Rebuttal Testimony of M. Richard Porras on Behalf
14    of United States Postal Service," which has been designated
15    USPS-RT-11.  Was this testimony prepared by you or under
16    your direction?
17         A    Yes.
18         Q    And if you were to testify here orally today,
19    would your testimony be the same?
20         A    Yes.
21              MR. REITER:  Thank you.
22              Mr. Chairman, I will hand two copies of his
23    testimony to the reporter and ask that it be accepted into
24    evidence.
25              CHAIRMAN GLEIMAN:  Are there any objections?

                                                             18566
 1              [No response.]
 2              CHAIRMAN GLEIMAN:  Hearing none, the testimony and
 3    exhibits of Witness Porras are received into evidence, and I
 4    direct that they be transcribed into the record at this
 5    point.
 6                             [Rebuttal Testimony and Exhibits of
 7                             M. Richard Porras, USPS-RT-11, was
 8                             received into evidence and
 9                             transcribed into the record.]
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                             18601
 1              CHAIRMAN GLEIMAN:  Two participants requested oral
 2    examination of Witness Porras, the Alliance of Non-Profit
 3    Mailers and the Office of the Consumer Advocate.
 4              Does any other party wish to cross examine this
 5    witness?
 6              [No response.]
 7              CHAIRMAN GLEIMAN:  Mr. Levy, are you prepared at
 8    this point to proceed?
 9              MR. LEVY:  Yes, Mr. Chairman.
10              CHAIRMAN GLEIMAN:  If that is the case, would you
11    please begin?
12              MR. LEVY:  Thank you.
13                          CROSS EXAMINATION
14              BY MR. LEVY:
15         Q    Mr. Porras, good morning.
16         A    Good morning.
17         Q    I'm David Levy for the Alliance of Non-Profit
18    Mailers, and I want to ask some questions about projected
19    loss amounts.
20              The Postal Service, in Fiscal Year 1995, made a
21    profit, didn't it?
22         A    Yes, it did.
23         Q    Approximately 1.7 billion?
24         A    Approximately $1.8 billion.
25         Q    And it also made a profit in Fiscal Year '96?

                                                             18602
 1         A    Yes.
 2         Q    And how much was that amount?
 3         A    Approximately $1.6 billion.
 4         Q    So, about 200 million less than the year before?
 5         A    Yes.
 6         Q    And in Fiscal Year '97, the Postal Service made a
 7    profit?
 8         A    Of 1 billion 264.
 9         Q    And that's about how much less than the year
10    before?
11         A    Approximately -- a little over $300 million.
12         Q    And if we -- in Fiscal Year 1998, if the same
13    trend continued, what would the Postal Service's profits be?
14         A    I'm not looking at the same trend to continue.
15         Q    I understand.  I'm just asking for the arithmetic,
16    so we can talk about the deviation.
17         A    I'm not sure I can take any number.  I don't know
18    what that's relative to.
19         Q    All right.
20              Now, the Postal Service told the Commission at the
21    beginning of this rate case that it would lose over $2.4
22    billion in Fiscal Year 1998 unless the Commission allowed a
23    rate increase.
24         A    We said that we had a revenue deficiency of $2.4
25    billion.  The actual projected loss was between 1.3 and 1.4

                                                             18603
 1    billion dollars.  Then, on top of that, we added a
 2    contingency, and on top of that, of course, you have the
 3    prior year loss recovery.
 4         Q    And how much of the 2.4 is the prior year loss
 5    recovery?
 6         A    At the time we did the filing, it was about, I
 7    believe, 440 million.  Our -- my rebuttal, written
 8    testimony, it's $370 million.
 9         Q    The Postal Service is still asking the Commission
10    to accept the 2.4 billion value?
11         A    Yes.
12         Q    As well as its individual components?
13         A    I'm not sure I understand the question on
14    individual components.
15         Q    I'm not sure I do either.  I'll withdraw it.
16              On what date did Fiscal Year 1998 begin?
17         A    For the Postal Service, the Government, we have --
18    we use two years to manage, but the official fiscal year
19    starts October 1, 1998.
20         Q    And that's the test year in the rate --
21         A    Excuse me, '97.
22         Q    And that's the test year in the rate case?
23         A    Yes, it is.
24         Q    And that period -- the rate case test year will
25    end on September 30, 1998?

                                                             18604
 1         A    Yes.
 2         Q    And so we are nearly halfway through the test
 3    year?
 4         A    Yes, we're just about halfway through it.
 5         Q    And through the first five accounting periods of
 6    the test year, how much money did the Postal Service make,
 7    surplus?
 8         A    I can look it up.  I brought the AP5 results. 
 9    Year to date, we have, to AP5, a net income of
10    $1,155,000,000.
11         Q    Now, Accounting Period 6 ended in late February? 
12    Is that correct?
13         A    Somewhere in that time-frame.
14         Q    And what's your best estimate of how much the
15    Postal Service gained or lost during that accounting period?
16         A    AP6?
17         Q    Yes.
18         A    We had a plan, I believe, to lose $70 million, and
19    we made approximately 78 million for the AP, so we did
20    better than planned by about 148 million.  So, on a
21    year-to-date basis, we're a little over $1.2 billion net
22    income.
23         Q    And would you tell me again, in the $2.4 billion
24    loss that you originally projected, how much of that was
25    projected to be a current loss?

                                                             18605
 1         A    At the time we did this, it was between 1.3 and
 2    1.4 billion dollar loss.
 3         Q    So, if the Postal Service were to suffer that loss
 4    by the end of the test year, it would have to lose
 5    approximately $2.5 billion between February 28th and
 6    September 30th?
 7         A    If I go back -- I'm not sure I understand that
 8    question.  If I -- because I'm dealing with the test year. 
 9    That's the numbers we have in there in terms of the losses,
10    and hypothetically, that says that we changed prices October
11    1st.
12              You're talking to me in two different time-frames. 
13    One's an actual year, what's going on here.  In terms of the
14    test year, that's what we have in there.  I'm not sure I
15    fully understand that question.
16         Q    The $2.4 billion loss -- is that based on before
17    rates or after rates?
18         A    The revenue deficiency is before rates, but it
19    includes -- it's not a loss, by the way, going back to
20    correct that.  The $1.4 billion -- 1.3 to 1.4 -- in the
21    hypothetical test year was our estimate for the entire year
22    without changing rates.
23         Q    Okay, 1.4.
24              Now, without changing rates, so far in the test
25    year the Postal Service has earned a surplus of about --

                                                             18606
 1         A    Year to date, we have $1.2 billion net income.
 2         Q    So assume for -- assume that the rates currently
 3    in effect remain in effect through the end of the test year. 
 4    Do you follow that assumption?
 5         A    Okay.
 6         Q    In order for the Postal Service to lose $1.4
 7    billion by the end of the test year under the existing
 8    rates, it would have to lose if my math is right
 9    approximately $2.5 billion from February 28 through
10    September 30.
11         A    Um-hum.
12         Q    Is that correct?
13         A    Yes, but let me clarify a point in terms of the
14    total year just to make certain we're on the same wavelength
15    to understand the question.  When you go back and take my
16    written testimony, I've gone back and said if you took all
17    of the underruns that the Postal Service has today --
18    because I think it's important to take the -- half the year
19    and understand what's going on there -- and then what we're
20    projecting for end of the year, I said in my written
21    rebuttal testimony that the cost at this point would be less
22    by $638 million, and I've identified all of those particular
23    underruns of cost.
24              Now at the same time I've said that we've got some
25    other things that have hit the Postal Service that are going

                                                             18607
 1    to now increase those costs on an annual basis.  First of
 2    all, the year 2000.  We had in our estimate $45 million. 
 3    It's now up to 300 additional dollars.  And I'm going to
 4    clarify a few points on that in a moment, but that's where
 5    costs that we're projecting now to be spent between now and
 6    the end of the year, the $45 million that we had originally
 7    was insufficient.
 8              The second one is the transportation.  We have an
 9    estimate that's going to go up by $115 million.  If you take
10    those two items combined, that would reduce the deficit that
11    we talked about by $195 million.
12         Q    Mr. Porras, between February 28 and September 30,
13    do you think the Postal Service is going to have a deficit
14    during those accounting periods of $2.5 billion?
15         A    We have adjusted for what I just went through.  We
16    have plans in place to spend money to manage a number of
17    major programs in the Postal Service.  I think Bill Tayman
18    covered those particular programs.  Those moneys are to be
19    spent the rest of the year.  Those are the moneys we've
20    talked about for investments in the organization to improve
21    service, to improve our customer satisfaction,
22    infrastructure changes, and cost reductions for the future.
23              A lot of those programs have contracts signed
24    already.  We now have processes in place to have managers
25    accountable.  We've put program managers in charge of a

                                                             18608
 1    number of these programs.  The way that they're set up is
 2    that the moneys are going to be spent between now and the
 3    end of the year.  I think we're going to be very close to
 4    that number.
 5         Q    My question is a simple one.  Do you believe that
 6    the Postal Service is going to suffer a deficit of $2.5
 7    billion between February 28 and September 30 of this year?
 8         A    If I go back to my 200 million, take that away for
 9    a moment, that would get you to a little less number.  The
10    program managers have told us -- now I can't get out here
11    and say they're going to spend it exactly the way they've
12    said, but they told us they're going to spend that money. 
13    So I have to assume that we're going to end up with these
14    losses for the rest of the year.
15              Now some of these program managers may not spend
16    that money this year.  I don't know that.  But they're going
17    to -- it may carry over to next year.  It's going to get
18    spent.
19         Q    Mr. Porras, you're a CPA, aren't you?
20         A    No, I'm not.  I'm an MBA.
21         Q    As an MBA, you are aware of the different between
22    a cash flow statement and an income statement?
23         A    Yes, I am.
24         Q    And you understand the difference between a cash
25    outflow and a loss?

                                                             18609
 1         A    Yes.
 2         Q    Is your testimony that all of these program
 3    investments you just talked about are to be booked as losses
 4    in the current fiscal year?
 5         A    They're investments, and the investments have more
 6    cash and expense outflow.  These are not -- a lot of these
 7    are not just purely capital investments.  You take the
 8    priority redesign project, for example.  What I'm talking
 9    about are the major expense portions which not only have a
10    cash flow, but the expense flows exactly with that.  That
11    will hit your books.
12         Q    Of all of these cash outflows you're talking
13    about, are there benefits -- are the benefits of those
14    expenditures going to cease at the end of the fiscal year?
15         A    Oh, no, these are investments for the future. 
16    That's my point.  You're making expense investments today --
17    you may in fact get a little bit of revenues, for example,
18    delivery confirmation, priority redesign, but when you take
19    the additional revenues, the additional costs, the first
20    year or so, in fact the first couple of years, you're losing
21    a little bit of money.
22              Now, you'll make it up in the future.  It's like
23    other types of investments.  The difference, though, this is
24    an expense or cash investment.  And they flow together. 
25    They don't go differently.

                                                             18610
 1         Q    The Postal Service expects that these investments
 2    will glean benefits over a number of years into the future?
 3         A    Absolutely.
 4         Q    If I were a private business, and I make an
 5    investment in year 1 that is expected to yield benefits in
 6    year 1 through 10, is it customary to treat the entire
 7    expenditure as a cost of year 1, or does one amortize it
 8    over the full period?
 9         A    It depends.  Now we follow generally accounting
10    principles, and these are laid out to us in particular
11    financial accounting standards.  We follow those completely. 
12    You don't have a choice.  It depends what type of expense
13    you have.  Okay?  It depends.
14              Now do we give you one example where you can see
15    it clearly, which we went through the last time I was here,
16    was when we had the refinancing of our debt, and we took a
17    hit in 1993.  We had no choice.  We had to write off the 857
18    million, I believe.  Yet it gave us a $2.2 billion benefit
19    over 20 years.
20              I had no choice.  I had to book it the way I was
21    told to book it.  We have external auditors, outside
22    auditors that go through these things.  I don't have a
23    choice to do what I want.  We've got to comply with
24    generally accepted accounting principles.  I don't have a
25    choice.

                                                             18611
 1         Q    Let me ask you a different question.  Of all of
 2    the expenditures of the type we are discussing -- that is,
 3    expenditures planned to be made in this fiscal year that are
 4    projected to have benefits beyond the end of the fiscal
 5    year --
 6         A    Most of the major --
 7         Q    I'm sorry, I haven't finished my question.
 8         A    Okay, I'm sorry.
 9         Q    Of all those expenditures that you have included
10    in the $1.4 billion loss projection for the test year, how
11    many of those expenditures are expected to produce benefits
12    over a period of multiple years?
13         A    I don't know if I could go to the specifics.  I
14    would basically conclude that generally most of them, even
15    if I take for example -- and let me give you a good example
16    here -- if I take the year 2000, and we have to do that or
17    we are going to have some problems with our financial
18    systems, our payroll systems -- I think that's of benefit to
19    the organization, of course, because we have to pay our
20    employees.  We have got to do some things.
21              I would say that generally gives you a benefit in
22    the future.  We have got some infrastructure changes going
23    on like point of service.  That is in infrastructure.
24              You will have benefits to your infrastructure in
25    the future, so almost every major program we have carries --

                                                             18612
 1    I mean I don't know if we have too many that just happen for
 2    one year and go away.  Everything we basically do is --
 3    carries over in the Postal Service like any other business.
 4         Q    Okay.  Of all the expenditures included in the
 5    $1.4 billion projection that are expected to have benefits
 6    over multiple years into the future, how many of those
 7    dollars have you expensed 100 percent or recognized 100
 8    percent in the test year?
 9         A    I am not sure I have that answer, but let me
10    clarify a point, because some of these programs have capital
11    expenditures along with expenditures with them, and we do
12    with the capital portion spread that over a depreciated
13    period, the time life of the equipment or whatever it is.
14              We are talking -- it's an expense portion and
15    these are unique.  For example, delivery confirmation,
16    priority redesign -- these are different than the capital
17    type investments we have made in the past.
18              I don't have the detail for every single one of
19    the programs, to answer that question.
20         Q    Well, would you repeat the names of those two
21    examples?
22         A    What I said was delivery confirmation and Priority
23    Mail redesign.
24         Q    And you expect that the money you are spending
25    this year on delivery confirmation and the other program

                                                             18613
 1    will have benefits beyond the end of the year?
 2         A    Absolutely.
 3         Q    If you were to take those kinds of expenditures
 4    included in the $1.4 billion figure and spread them out over
 5    the expected life of the benefits, how much would it change
 6    the $1.4 billion figure?
 7         A    I could not do what you said to do.  These are
 8    operating expenses associated with these programs.  You
 9    can't do that.  That is just making up mathematics.
10         Q    So your accounting includes -- treats as operating
11    expenses cash flows that produce benefits over multiple
12    years?
13         A    Like any other business.
14         Q    And do you have any order of magnitude of how much
15    of the $1.4 billion includes current cash flows that are
16    expected to produce multiple year benefits?
17         A    The increases in most of the expenses that we have
18    for the major programs will carry over, so I would end up
19    saying most of that -- if I understand your question --
20    gives you benefits in the future.
21         Q    The Postal Service is allowed to borrow money,
22    isn't it?
23         A    Yes, it is.
24         Q    What is its current debt ceiling?
25         A    The current debt ceiling is $15 billion.

                                                             18614
 1         Q    And how much are its outstanding borrowings below
 2    that debt ceiling?
 3         A    How much are we below it?
 4         Q    Yes.
 5         A    I would have to look it up but I believe we are
 6    about $8 billion, I believe.
 7         Q    Does the Postal Service make investments whose
 8    expected benefits are anticipated to be less than the
 9    expected costs?
10         A    Could you repeat that, please?
11         Q    Yes.  Does the Postal Service make investments
12    whose expected benefits are anticipated to be less than the
13    expected costs of the investment?
14         A    I think every organization and the Postal Service
15    included makes a number of investments that may not have an
16    immediate ROI, if that is your question --
17         Q    No, it is not.  I mean over the life of the
18    investment -- present value.
19         A    Yes.  I am giving you an example.
20              We have a lot of projects that will give you a
21    negative cash flow, a negative net present value.
22              You have got a lot of infrastructure type projects
23    you may do to support your organization for the future -- a
24    facility type project of replacement because of safety and
25    health and all those kind of things, you may get a negative

                                                             18615
 1    present value.
 2              Not every single investment will give you an
 3    immediate ROI.  You have got others to improve service. 
 4    Call Centers, for example, is anther project that we are in
 5    a pilot with.  That project will be going before the Board
 6    at their next meeting for an expansion of it.
 7              You may not be able to look at an ROI because it's
 8    an inservice improvement in terms of customer satisfaction.
 9         Q    Well, does the Postal Service -- then the Postal
10    Service currently makes investments -- let me back up.
11              When you say the Postal Service makes investments
12    that don't have a positive ROI, are you including the
13    savings or costs avoided by those investments?
14         A    A lot of these programs and investments we make,
15    we do reduce some cost when there is cost associated with
16    that, but the net could be a negative ROI or some of them
17    have positive.
18              We have a lot of them that are positive ROIs --
19    our automation program, equipment programs, those kinds of
20    things are very good examples where we get positive return
21    on investments.
22         Q    Well, of the expenditures that you say need to be
23    financed by your proposed revenue requirement to be spent
24    this year, which of those are expected to have a negative
25    ROI?

                                                             18616
 1         A    Those that -- and when I say that tied to service
 2    improvement, Call Center is a good example.
 3              You will get some customer satisfaction.  Maybe
 4    customers will use the Postal Service more, but you can't
 5    quantify that.  I can't sit here and say revenue will go up
 6    one percent or this is going to happen, so we call that an
 7    infrastructure investment.
 8              The Associate Office infrastructure system -- we
 9    laid out a communications network -- those are very, very
10    large projects -- so that we can take our point of service,
11    which is our new cash registers.  That will not be in ROI in
12    terms of the organization.  It is an infrastructure change
13    in the organization.
14              Other things can then be done that will be applied
15    to that that in fact we may get some additional returns.
16              Let me give you a specific example, just for a
17    moment.  Take point of service new cash registers.  That
18    project is based on us having updated technology so we can
19    serve the customer better.
20              We have plans in place in the future -- it is not
21    even in this particular rate case, but I am thinking out
22    there five, six, seven years what I am going to do to make
23    the accounting and the payroll systems more efficient, so we
24    are going to be looking at taking that infrastructure and
25    how do we reduce some costs of account.

                                                             18617
 1              I have no idea yet.  I was just talking to you
 2    about some of the thoughts I am going through with my staff
 3    to look at how we make the Postal Service more efficient.
 4         Q    Sir, could you confine your answer to the question
 5    I asked, which was about the projects that were included in
 6    the $1.4 billion?
 7         A    This is included in there, but I am trying to
 8    relate it to you because you are asking me can I give you a
 9    yes/no answer and they're not.  They're kind of technical
10    kind of things.
11         Q    Does the Postal Service think these projects, like
12    point of service investments, will increase customer demand?
13         A    There's partially -- they're looking at they could
14    increase customer demand, mostly because we want to get
15    customer satisfaction so that when you come in a post office
16    we can handle your business and let you go do whatever else
17    you wanted to do.
18         Q    Does the Postal Service expect that increased
19    customer happiness in a post office will ultimately increase
20    its demand?
21         A    There are studies that say that may happen.
22         Q    Does the Postal Service think that some of its
23    other expenditures that you say have a negative ROI may
24    cut -- avoid other costs?
25         A    I think there's a lot of that that goes on.

                                                             18618
 1         Q    Would the Postal Service deliberately make an
 2    investment where it doesn't think that the present value of
 3    the increased demand or the avoided costs exceeds the
 4    amount -- the present value of the cost of the investment?
 5         A    I hope we not only will do it, we'll continue to
 6    do it.  I can go back and give you examples of asbestos. 
 7    We've got to do some investments.  You've got a bad roof --
 8         Q    Let's stop with asbestos.
 9         A    Okay.  You're just talking these programs.
10         Q    Let's talk with asbestos.  Asbestos removal avoids
11    costs like liability?
12         A    No, the added -- the cost to do it, I'm not going
13    to maybe get a return.  You're asking am I getting a return. 
14    I'm saying there's going to be investments that you're not
15    going to get a return, you have to do them for safety and
16    health and other reasons.
17         Q    I think we're talking -- we've got a definitional
18    problem.  When you remove asbestos, you're avoiding
19    potential future liability?
20         A    But it may -- initially I'm spending more money,
21    and I'm not sure it's going to do that.
22         Q    Yes or no, please.
23         A    I don't know.  It's a possibility that it could.
24         Q    You wouldn't include that avoided future liability
25    in your ROI calculations?

                                                             18619
 1         A    No, because you can't just -- you can't estimate
 2    it.
 3         Q    Okay.  If you were to, in the broader sense of an
 4    expected return, to include avoided liabilities of those
 5    kinds, even if you can't measure them precisely, does the
 6    Postal Service make investments that it doesn't think will
 7    cover their costs?
 8         A    As I said before, there are some when it's
 9    infrastructure, some service improvements.  It may not cover
10    its cost.  I think I've answered that.
11         Q    Even when you include avoided liabilities that you
12    can't measure precisely and even when you include customer
13    satisfaction that may result in increased demand?
14         A    We note them.  We say it.  But we don't include
15    them in our calculated cash flows or the calculation of the
16    net present value in most cases.
17         Q    If you were to include them, does the Postal
18    Service deliberately make investments that don't pay --
19    aren't expected to pay for themselves in the long run,
20    either by any kind of avoided costs or increased revenues?
21         A    If I included all those kind of what I call
22    intangible benefits, the answer would be absolutely not,
23    everything that we do is for a benefit.
24         Q    If the benefits of the project are expected in the
25    broad sense to exceed the costs, then the Postal Service

                                                             18620
 1    ought to be able to cover the cost of borrowing money to pay
 2    for it, shouldn't it?
 3         A    Yes, but you've got to look at it over time. 
 4    These are not linear and they're not all in one year. 
 5    You've got to measure that over time.
 6         Q    Well, over time the Postal Service can borrow
 7    money, can't it?
 8         A    Yes.
 9         Q    Does the Postal Service have a -- has adopted a
10    policy of paying for these multiyear benefit investments out
11    of current cash flow?
12         A    The Board -- and let me cover a couple of
13    policies, since you've asked me this question.
14         Q    Sir, before you talk about policy, could you
15    answer the question?  I won't stop you from explaining after
16    that.
17         A    We use multi policies and choices in terms of what
18    we're going to pay for to invest.  I won't say we do one or
19    the other.  We use multi type policies.  In the past at one
20    time we decided we weren't going to borrow.  Today we
21    borrow.  In this particular instance, what's in the rate
22    case today, with all these major programs, the Board and the
23    senior management of the Postal Service said we will file a
24    rate change to help us finance these programs.  That's the
25    policy.  That's what we're going in terms of this rate

                                                             18621
 1    filing today.
 2         Q    But if the increased revenue were disallowed, you
 3    could finance the amounts out of borrowing, couldn't you?
 4         A    I'm not sure about that.
 5         Q    Well, have you done any calculation to indicate
 6    that you couldn't?
 7         A    Again, the policy that we're driving to is to do
 8    this.  I mean, we're looking at all the major capital
 9    investments in the future.  These are expense investments. 
10    Remember, since these are expense investments, we have
11    borrowed for capital.  Now we're talking about operating
12    expenses.  We have not borrowed other than in a few
13    instances for operating purposes, long term.  We have a line
14    of credit today where we can manage pay period to pay
15    period, but we have not borrowed operating expenses for the
16    long-term investments of the Postal Service.  We have not
17    done that.
18         Q    Is it your testimony, sir, that the Postal Service
19    couldn't finance the investments you say are necessary in
20    the test year by debt whose life is matched to the expected
21    life of the benefits produced by the investments?
22         A    The way they're accounted for today, they would be
23    an operating investment, and we do not do that.  And the
24    answer is no, we have to manage our large capital
25    investments, and we would not do that.

                                                             18622
 1         Q    Sir, I don't think I asked you how it's accounted
 2    for today.  I asked you could the Postal Service do it.
 3         A    I said the way it's accounted for, we could not do
 4    that.  The answer is no the way it's accounted for.
 5         Q    Let me make sure I understand that.  You are
 6    saying that if an expenditure is accounted for on your books
 7    as an expense rather than a capital investment, you cannot
 8    borrow money whose maturity equals the expected payoff of
 9    the investment even if as a matter of economic reality the
10    investment is likely to have a payoff over several years?
11         A    We have the maximum borrowing of $3 billion on an
12    annual basis -- $2 billion for capital, $1 billion for
13    operating expenses.
14              We have not done that.  We have a long-term
15    capital budget of $17 billion.  It's about $3.5 billion
16    year.  We have plans in place to help finance that through
17    working capital depreciation, through long-term borrowing,
18    and depreciation and those kind of things.
19         Q    Sir, I am not asking you again about your plans. 
20    I am asking you about whether you could do what I just asked
21    in the last question.
22         A    I think I cannot answer that in isolation.  I
23    think you have got to look at it in totally managing the
24    Postal Service and you are trying to make me answer that as
25    one particular issue and I can't.

                                                             18623
 1              I have got to look at the total business of the
 2    Postal Service, the total debt of the Postal Service, the
 3    total capital investments of the Postal Service, the total
 4    expenditures of the Postal Service -- can't do it the way
 5    you are saying.
 6         Q    So you can't tell me as you sit here whether you
 7    could or you couldn't borrow money as I have just described?
 8         A    I said based on everything I said I would say no.
 9         Q    Is this a law that prohibits you from doing it?
10         A    Again, I said based on everything.  We have the
11    limit on the law in terms of the maximums, the billion
12    dollars and the $2 billion.
13         Q    And those maximums would prevent you from the
14    borrowing that I have described?
15         A    Again, I mean you are asking Management and me to
16    make choices that I am not even sure why I am having this
17    discussion, why we have to make these choices or what are
18    these choices, and why should Management have to make this
19    choice?  I am not sure I understand it.
20              CHAIRMAN GLEIMAN:  Mr. Porras, excuse me.
21              He is not asking you, as I understand it, to make
22    a decision for the Postal Service.  He is asking you a
23    question and you have an obligation to respond to the
24    question, and the question is could you --
25              THE WITNESS:  And my answer --

                                                             18624
 1              CHAIRMAN GLEIMAN:  It isn't will you.  It isn't is
 2    it a good idea or anything else.  It is could you, are you
 3    allowed under the existing law to do something, and I think
 4    you have an obligation to respond to the question.
 5              THE WITNESS:  My answer to that -- in that
 6    isolated instance I just don't know.
 7              BY MR. LEVY:
 8         Q    Have you ever tried to find out?
 9         A    No.
10              MR. REITER:  Mr. Chairman, could I ask Mr. Levy to
11    clarify the last question -- find out what?  I didn't follow
12    that.
13              MR. LEVY:  What he said he didn't know in response
14    to my previous question.
15              BY MR. LEVY:
16         Q    Does that change your answer, sir?
17         A    No.
18         Q    Thank you.  Now let's go back to my original line
19    of questioning.
20              You are unable to say as you sit here that the
21    Postal Service will suffer a deficit in the sense of your
22    own accounts as that term is defined.
23         A    I don't understand that question.  Sorry.
24         Q    The Postal Service produces for each accounting
25    period a statement of income and loss, doesn't it?

                                                             18625
 1         A    Yes.
 2         Q    And in producing those statements, you have
 3    certain definitions of what constitutes income and what
 4    constitutes loss?
 5         A    Yes.
 6         Q    Using that definition, do you expect the Postal
 7    Service to lose $2.5 billion between February 28th and
 8    September 30th of this year?
 9         A    It goes back to my -- I thought I answered that
10    but I will clarify that again.
11              In my testimony I show that we will be better by a
12    couple hundred million dollars.  I said that we have
13    programs in place -- we have created accountability for the
14    program managers.  They have told us that they are going to
15    spend these monies.  The monies are planned to be spent the
16    rest of the year, and my answer to that, based on that
17    information, we could lose that amount of money the rest of
18    the year.
19         Q    I'm sorry.  I am not sure I heard an answer to my
20    question.  Using the definition of income and loss not in
21    your testimony but as those terms as defined in the
22    financial and operating statements for each accounting
23    period, do you sitting here state that the Postal Service is
24    going to be losing $2.5 billion between February 28th and
25    September 30th -- using that definition?

                                                             18626
 1         A    Using what I said in my testimony I have already
 2    said it won't be $2.5 billion.  That's -- that's what
 3    bothers me with what you are saying.
 4         Q    Please listen to my question again.  I am focusing
 5    on the period between February 28th and September 30th.
 6         A    Right.
 7         Q    And I am using the definition of income and loss
 8    not as those terms are defined in your testimony but as
 9    those terms are defined in the Postal Service's financial
10    and operating statements.
11              Do you follow that assumption?
12         A    And I -- if I go back -- sorry for doing this, but
13    I have got to go back -- that our plans assume a rate
14    change, so I don't see us -- you know, in the hypothetical
15    test year we got the $2.4 billion of revenue deficiency plus
16    the $1.4.  From actual -- if you are talking about our
17    fiscal year, in our plans we do have a price change in
18    there.  We do have plans to spend these monies with the
19    programs.
20              I have said in my written testimony I think we are
21    going to be slightly below by a couple hundred million
22    dollars because of the reductions we had in terms of less
23    expenditures, adding back some of the others.
24         Q    Sir, I don't think I heard an answer to my
25    question.

                                                             18627
 1              Do you understand that the Postal Rate Commission
 2    in theory has the right to deny your request for rate
 3    changes?
 4         A    I understand that.
 5         Q    Assume hypothetically that they decide for
 6    whatever reason not to approve the rate changes and that the
 7    current existing rates stay in effect through the end of the
 8    fiscal year.
 9              Do you understand that assumption, sir?
10         A    Yes.
11         Q    If that assumption holds and if we use the
12    definition of financial -- of income and loss in the
13    financial and operating statements, focusing on the period
14    from February 28th through September 30th, would you expect
15    that the Postal Service would suffer a loss as large as $2.5
16    billion?
17         A    And I will go back to my answer -- accepting these
18    adjustments I made in here and if the program managers, who
19    have assured us they are going to spend these monies, we
20    could have a loss that is of that magnitude.
21         Q    Now, let me go to a different line of question
22    then.  The Postal Service -- I want to focus on accounting
23    periods 10 through 13.  Those are the accounting periods
24    when the Postal Service traditionally loses the most money?
25         A    Yes, the seasonality of the business.

                                                             18628
 1         Q    The loss projections that the Postal Service has
 2    offered the Commission in this case reflect that
 3    seasonality?
 4         A    I'm not -- is this the one we've sent over in
 5    terms of the accounting period spreads?  Can I see the
 6    document just to make certain we're talking about the same
 7    document?
 8         Q    I'm not asking about a document.  I'm asking a
 9    more general question.  You expect that the loss you project
10    for the test year -- let me back up.  You would expect that
11    if there were no rate increase before the end of the test
12    year, that the loss would be concentrated in accounting
13    periods 10 through 13?
14         A    I'd have to look, but we've included a price
15    change, and we would have losses.  If we went to the
16    hypothetical test year, I did not do a spread of that.  I
17    don't know what that would be.
18         Q    I'm not asking for numbers.  I'm asking for a
19    qualitative answer.  If there were no rate increase before
20    the end of the test year, you would expect the Postal
21    Service to suffer the greatest losses during accounting
22    periods 10 through 13, wouldn't you?
23         A    Well, let me clarify this.  When you say test
24    year, I think about the hypothetical test year, and I assume
25    prices change on October 1.  If you're talking about our

                                                             18629
 1    actual fiscal year, if that's what you are talking about,
 2    what we have in the plan today?
 3         Q    I'm talking about no price changes.
 4         A    For this actual fiscal year?
 5         Q    Either the Government or the Postal Service fiscal
 6    year, whichever you prefer.
 7         A    Okay, but the test year does have a price change
 8    in there.  I just need to clarify.  That's a different
 9    question, I think.
10         Q    No price changes.  I'm assuming no price change in
11    my question.
12         A    We assume losses the latter part of the year.
13         Q    Heaviest in the latter part of the year?
14         A    Yes.
15         Q    Now, the $2.4 billion loss figure that you've put
16    in this case is a before rates figure, isn't it?  Is that
17    earlier?
18         A    Go back to what we had as the estimated loss in
19    the test year, it's about $1.3 to $1.4 billion.
20         Q    And that assumes no rate changes during the test
21    year, right?
22         A    Right, and it included a contingency and a
23    provision for prior year loss recovery.
24         Q    And that's what bumps it up to $2.4 billion?
25         A    Revenue deficiency; yes.

                                                             18630
 1         Q    Of the $1.4 billion component of that, how much
 2    did the Postal Service project would occur during accounting
 3    periods 10 through 13, approximately?
 4         A    I don't believe we did those calculations.
 5         Q    Well, as you sit here now, approximately what
 6    would be the break down of that $1.4 billion between
 7    accounting periods 10 to 13 and the other accounting
 8    periods?
 9         A    I did not do those calculations.  I just don't
10    know what that is.
11         Q    The Postal Service has in recent years projected
12    large deficits during accounting periods 10 to 13 as well,
13    hasn't it?
14         A    The Postal Service has had not only projected but
15    we've had losses with the seasonality of the business, the
16    latter part of the year.
17              MR. LEVY:  Mr. Chairman, I would like to have
18    marked as cross examination exhibit one, an one page
19    document marked USPS projected earnings.
20              CHAIRMAN GLEIMAN:  Mr. Levy, can we make that
21    ANM-XE-1?  I'm prepared to -- okay.
22                             [Cross-Examination Exhibit No.
23                             ANM-XE-1 was marked for
24                             identification.]
25              BY MR. LEVY:

                                                             18631
 1         Q    Mr. Porras, do you recognize the numbers on
 2    Cross-Examination ANM-XE-1?
 3         A    I mean these are estimates and it has a number of
 4    the Postal Service plan.  I cannot verify those were the
 5    actual plan numbers.
 6         Q    Would you accept them subject to check?  I would
 7    be happy to show you a photocopy?
 8         A    No problem at all.
 9         Q    And assuming these are in fact as I have
10    represented them, then the Postal Service projected that for
11    Fiscal Year '96 it would lose approximately $1.26 billion,
12    is that correct?
13         A    $1,262,000,000.
14         Q    And in Fiscal Year 1997, again, for the same four
15    accounting periods, it projected a loss of $900 million, is
16    that correct?
17         A    Yes.
18              MR. LEVY:  Now, Mr. Chairman, I would like to pass
19    out Cross-Examination Exhibit No. 2.
20              CHAIRMAN GLEIMAN:  Certainly.
21                             [Cross-Examiniation Exhibit No.
22                             ANM-XE-2 was marked for
23                             identification.]
24              BY MR. LEVY:
25         Q    Mr. Porras, I am going to walk you through these

                                                             18632
 1    columns one by one.  Would you first, in the second exhibit,
 2    would you first confirm that the first two columns of the
 3    second exhibit are identical to the two columns of the first
 4    exhibit?
 5         A    Confirmed.
 6         Q    And would you confirm that the third column of the
 7    second exhibit, actual result, or would you accept subject
 8    to check, that those are in fact the Postal Service's actual
 9    results for the same -- for those accounting periods
10    indicated?
11         A    We'll accept those subject to check.
12         Q    And would you confirm that the column marked
13    improvement over plan, at least based on an eyeball
14    inspection, is the difference between the second and third
15    columns?
16         A    Yes.
17         Q    And that the final column, actual loss divided by
18    plan loss, is the actual result column divided by the US
19    plan -- USPS plan column?
20         A    I confirm that is the calculation done.  I would
21    never do that, but I can say that is what it is.
22         Q    Mr. Porras, who at the Postal Service signed off
23    on the Postal Service's projected earnings for Fiscal Year
24    '96 and '97 shown in the two exhibits?
25         A    In terms of the -- you are talking the plan or the

                                                             18633
 1    actuals?
 2         Q    The plan.
 3         A    The plan goes to the Board of Governors.  The
 4    management signs off on it.  The Board of Governors signs
 5    off on it.  We use an extensive process, and I am not going
 6    to spend your time going through this, under Customer
 7    Perfect, which is a management cycle, there's a lot of
 8    management input, a lot of management debate, and a lot of
 9    projections and programs included in that.
10         Q    And that is essentially the same review process
11    that resulted in the Postal Service's test year loss
12    projection of $2.4 billion?
13         A    Loss projection of the $1.3 to $1.4 billion?
14         Q    Yes.
15         A    Part of it was in that -- has been through that
16    process.
17              MR. LEVY:  Thank you.  That's all I have, Mr.
18    Porras.
19              Thank you, Mr. Chairman.
20              CHAIRMAN GLEIMAN:  Mr. Richardson.
21              MR. LEVY:  I'm sorry.  I would move those two
22    exhibits into evidence.
23              MR. REITER:  Mr. Chairman, I would object to that.
24              If Mr. Levy had wanted to do that, he should have
25    provided them to us ahead of time.  We could have actually

                                                             18634
 1    authenticated the numbers.  Mr. Porras accepted them either
 2    subject to check or by eyeballing them.  I don't think the
 3    proper foundation's been laid for them at this point.
 4              CHAIRMAN GLEIMAN:  Well, in light of the fact that
 5    they were accepted subject to check, and if they turn out
 6    not to be the right numbers, and the source is indicated --
 7    and I have to assume that just as witnesses are providing us
 8    full and truthful responses, that counsel attempt to provide
 9    equally full and truthful presentations of Postal Service
10    numbers that come out of Postal Service publications -- I'm
11    going to direct that they be transcribed into the record and
12    admitted into evidence at this point.
13              If you choose to follow this ruling with a written
14    motion objecting, I will consider it.
15                             [Cross-Examination Exhibit Nos.
16                             ANM-XE-1 and ANM-XE-2 were received
17                             into evidence and transcribed into
18                             the record.]
19
20
21
22
23
24
25

                                                             18637
 1              CHAIRMAN GLEIMAN:  Mr. Richardson?
 2              MR. RICHARDSON:  Thank you, Mr. Chairman.
 3                          CROSS EXAMINATION
 4              BY MR. RICHARDSON:
 5         Q    Good morning, Mr. Porras.
 6         A    Good morning.
 7         Q    Before I begin the questions I was going to ask,
 8    I'd like to follow up on a couple of questions that Mr. Levy
 9    asked you and your responses.  You were discussing the
10    program year 2000 expenditures that you've added to the
11    estimates and that appear in one of your exhibits, and just
12    for clarification, you indicated that those are amounts that
13    you expect to expend this year.  Is that correct?  That your
14    program managers have said that that's what they intend to
15    spend this year?
16         A    That's correct.
17         Q    I thought you suggested that if they couldn't
18    spend it this year, that they would spend it next year in
19    any event.
20         A    Let me give you a clarification on the year 2000,
21    and just so it's clear, I was very concerned when I
22    initially got the number of $45 million, and I had talked to
23    a number of First Class mailers, talked to outside
24    organizations, including reading about the Federal
25    Government's estimates, which were over a billion dollars,

                                                             18638
 1    and I just concluded that number was just too low.
 2              I sat down with Mike Coughlin, who's our Deputy
 3    Postmaster General, and said Mike, we've got to get a
 4    process in place to really look at this year 2000.  We went
 5    out with our vice-president of information systems and we
 6    contacted an outside firm to come in who's worked with other
 7    postal administrations to help us and give us some real
 8    estimates or more accurate estimates in terms of what needed
 9    to be done, how much would that cost us, and we had in fact
10    about the same amount of money -- I believe 45 million for
11    1998, another 40 million for 1999 -- and when they came
12    back, the estimate was over $600 million in total, and
13    including -- which we haven't even included in these
14    numbers, are a contingency of 25 percent, so we've actually
15    had an outside firm to do this.
16              I've sat down with the vice-president and the
17    program manager staff and the outside consulting group
18    that's working with us, and that is their estimate.
19              Funny, I think I mentioned it last week at a
20    postal forum to a group of customers we were having lunch
21    with, and they were shocked at our $45 million number and
22    that they said the estimate that we had was probably
23    reasonable, because they've gone through extensive costs
24    themselves and will go through extensive costs for the year
25    2000 conversions that have to take place.

                                                             18639
 1         Q    Now to be clear, though, the estimate you have for
 2    1998 is $298 million in your Exhibit 11-E.  Is that the
 3    amount that you're estimating for 1998 for the test year?
 4         A    That's the additional cost of that, besides the
 5    $45 million we had in the original test year.  So the total
 6    costs, you have to add them together.
 7         Q    And the entire amount is now expected to be spent
 8    in the test year in 1998 before October 1.
 9         A    That's what we've been told.
10         Q    I was concerned where you suggested that if they
11    couldn't spend it this year, they would spend it next year,
12    and that perhaps you thought they may not be able to spend
13    it all this year because it is only a few months away.
14         A    I don't know at this time.  The program managers
15    have said that that's their estimate.  As much as last week
16    they said they thought they pretty much were going to spend
17    that money.
18         Q    And you agree that if it weren't going to be spent
19    in the test year then it would not be appropriate to include
20    it in the test year estimate?
21         A    I think it will be spent.  I have some beliefs
22    about that -- some of these, if you know that monies are
23    going to in fact be spent in 1999 and you know it's going to
24    be spent -- there's contracts signed -- you should account
25    for it.

                                                             18640
 1              I don't know if I am disagreeing in terms of the
 2    whole ratemaking process but I just feel that you ought to
 3    be accounting for these things.
 4         Q    You mean you believe that expenses that will be
 5    incurred in the 1999 fiscal year ought to be included in the
 6    1998 test year?
 7         A    I believe that the test year -- you are asking me
 8    for my personal beliefs on this -- that that is a
 9    hypothetical year.
10              The Postal Service though has to managed over
11    time.  Part of what my testimony said in terms of the
12    contingency and part of not making the adjustment in the
13    revenue requirement, I mean we are talking about
14    implementing rates differently than what is in the test
15    year, number one, and 1999 has to in fact be considered in
16    anything that we do.
17              I mean there's a lot of unknowns out there.  We
18    have got the labor settlement coming up.
19              What I said is if you can identify the costs in
20    1998 they should be included.
21         Q    So you have included some expenses you plan to
22    make in 1998 and 1999 in the 1998 test year?
23         A    No.
24         Q    Is that your testimony?
25         A    No, that is not my testimony.

                                                             18641
 1              What we have is the estimate for the '98 portion
 2    of that.  We have got another $300 million in 1999
 3    additional or total cost would be over $600 million over
 4    three years.
 5              We have included what we were told was the 1998's
 6    estimate in the rate case.
 7         Q    And there was some discussion about your investing
 8    $3.5 billion per year in your investment program over the
 9    next five years and those are investment dollars, I gather,
10    for capital expenditures as opposed to expenses?  Is that
11    correct?
12         A    If I said that, I need to clarify that point.
13              What I meant to say was that the $3.3 to $3.4
14    billion is the cash flow associated with our capital
15    program.  Our capital program over the next five years is
16    $17 billion, so I believe for example next year at this
17    point we have a capital preliminary plan that may be over $5
18    billion, but the cash flow from the -- what we call capital
19    expenditures cash flow will be about the $3.5 billion
20    rounded.
21         Q    The other programs that are included in your rate
22    filing -- there is a whole category of other programs which
23    I believe Mr. Tayman testified to and I believe they amount
24    to about $2.5 billion additional over and above --
25    additional expenses for the 1998 test year over and above

                                                             18642
 1    the 1997 test year.
 2              Are you familiar with that group of, quote, "other
 3    programs" expenditures generally?
 4         A    That's part of the programs I have been talking
 5    about.
 6         Q    And do some of those other programs include
 7    capital expenditures as opposed to expenses?
 8         A    They have no capital included in the calculations
 9    of the dollars associated, what's in the rate change.
10              There's capital associated with that over time and
11    there's -- if we of course have some depreciation associated
12    with that, it would be in there, but you have some projects.
13              Let me give you a particular example.  If you take
14    Call Centers.  What we have shown you is the operating
15    expense portion and some of the contracting expense. 
16    There's another couple hundred million that's not shown in
17    the rate case because that is under the capital category.
18         Q    I see.  Thank you.  Turning to another area of my
19    questions, as the Comptroller I assume you are familiar with
20    the financial and operating statements of the Postal Service
21    that Mr. Levy has discussed with you already?
22         A    Yes.
23         Q    And those are filed with the Commission every
24    accounting period, every four week period, is that correct?
25         A    We send them to the Commission.

                                                             18643
 1         Q    Now I have the operating statement here for
 2    Accounting Period 5.  I see you have one on your table.  Is
 3    there any particular period that you have there?  What is
 4    that?
 5         A    I have AP -- I have Accounting Period 5 here.
 6         Q    Fine.  It will just be easier to have a discussion
 7    with you about that.
 8              I notice that this includes references to
 9    budget -- the variation to budget is referenced but it does
10    not seem to include anywhere a budget for the year or in the
11    raw numbers except with respect to revenues on page 5-A of
12    this particular Accounting Period 5 report.  It does refer
13    to the budget numbers for revenues.
14              Is there anyplace in these financial statements
15    that include the budget for expenses?
16         A    If you look on page -- the following page, page 6,
17    we have personnel compensation, transportation, supplies and
18    services in those line items.  Those are to budget of the
19    expense side.
20         Q    That has variation to budget, but I don't see any
21    heading which says "budget."  It compares the actual to the
22    variation, so it could be calculated, is that how it would
23    be determined?
24         A    Right.  Just because of the space requirements on
25    the page, in some cases, we will put actual budget percent

                                                             18644
 1    change to budget.  In some cases, because we want to put
 2    last year's data, we'll put actual percent or dollar change
 3    to budget variance in that, but you could calculate those
 4    very simply.
 5         Q    Is there any place where the budget for the entire
 6    year is set forth, prospectively or retroactively, in these
 7    statements that you know of?
 8         A    We don't include the total budget in this report
 9    here.  We have it in other reports.
10         Q    Is there another report that you make to the
11    Commission that would include that budget routinely?
12         A    We show the -- I believe we sent the package that
13    was prepared to the Board of Governors when they approved
14    the budget that was submitted.
15         Q    And when is that in terms of the fiscal year, what
16    part of the year?
17         A    It's normally in September, sometimes in October.
18         Q    For that particular year beginning within a week
19    or two or a few weeks?
20         A    Yes, normally beginning October 1, when we do the
21    Government fiscal year, but for Postal, we are on a little
22    bit slightly different schedule.
23         Q    Now, is that budget changed once it's approved by
24    the Board of Governors?
25         A    We do not change the budget once it's approved by

                                                             18645
 1    the Board of Governors.
 2         Q    So as earnings may change over the course of the
 3    year and vary from the budget, you don't update the budget
 4    during the course of the 13 accounting periods?
 5         A    That's correct.  We will update forecasts but not
 6    the budget.
 7         Q    Do the forecasts appear anywhere in these
 8    financial or operating statements?
 9         A    No.
10         Q    Do they appear anywhere else, in any specific
11    filing you make with the Commission on a regular basis?
12         A    We don't do those regularly.
13         Q    Are they public, the updated forecasts?
14         A    We don't do those regularly at all.
15         Q    Have you updated them for this fiscal year?
16         A    Part of my rebuttal here included our update for
17    what information we had at this point.
18         Q    You mean the detailed numbers where you have
19    several million dollars adjusting for various things, such
20    as interest expense and COLA's and things of that nature?
21         A    Correct.
22         Q    Apparently you didn't answer my question, I don't
23    believe.  Are those updated adjustments to the budget
24    public?
25         A    We don't make any adjustments to the budget.

                                                             18646
 1         Q    Well, your forecasts, if you make a forecast.
 2         A    Well, in this particular case here, we in fact
 3    showed where we thought adjustments we had.  Sometimes we'll
 4    go make presentations to different mailer organizations or
 5    to the Board, and we'll say based on what we know today,
 6    here's where we think we may end the year.
 7         Q    Does your testimony represent the latest forecasts
 8    of the Postal Service?
 9         A    This is the latest update that we have at this
10    time.
11              MR. RICHARDSON:  Mr. Chairman, may I approach the
12    witness?  I have a cross examination exhibit I'd like to
13    show him.
14              CHAIRMAN GLEIMAN:  Certainly.
15              BY MR. RICHARDSON:
16         Q    Mr. Porras, I'd just like to identify this for
17    you.  This is, I believe, the information --
18              CHAIRMAN GLEIMAN:  Mr. Richardson, excuse me.  Can
19    we mark this OCA-XE-1?
20              MR. RICHARDSON:  Yes.
21              CHAIRMAN GLEIMAN:  For purposes of record
22    identification.
23              MR. RICHARDSON:  And I'll provide two copies to
24    the Reporter.
25              CHAIRMAN GLEIMAN:  Thank you.

                                                             18647
 1                             [Cross-Examination Exhibit No.
 2                             OCA-XE-1 was marked for
 3                             identification.]
 4              BY MR. RICHARDSON:
 5         Q    Mr. Porras, this is the interrogatory of OCA to
 6    the U.S. Postal Service, which I spoke to your counsel about
 7    yesterday.  Are you familiar with this document?
 8         A    Yes, I am.
 9         Q    This is the response, the Postal Service response
10    to an OCA interrogatory requesting the budget numbers of the
11    Postal Service which are of the type referenced by Chief
12    Financial Officer Riley at his public meetings with the
13    Board of Governors, when he is reporting the earnings of the
14    Postal Service for each accounting period.
15              If you'll refer to page two of the cross
16    examination exhibit, it's entitled U.S. Postal Service FY'98
17    Operating Plan.  Would you, please, explain to me how this
18    relates to the budget estimates which are included in the
19    financial and operating statements we've just discussed?
20         A    This is the accounting periods' plan of revenues
21    and expenses and net incomes that are eventually put in here
22    on the current period, so they go into this report as we do
23    an accounting period to date.
24         Q    When you say "here," you mean the financial and
25    operating statement report?

                                                             18648
 1         A    Right, into the financial and operating statement
 2    report, the plans go there, and we include of course the
 3    actuals in here so we can see how we are doing to plan.
 4         Q    The line in the exhibit, net income loss,
 5    represents the budget numbers which are used in calculating
 6    the financial and operating statement variance to budget?
 7         A    It's the accounting period portion of that net
 8    income, yes, that's in the plan.
 9         Q    Under this operating plan or budget, I guess it's
10    an interchangeable term in that respect; correct?
11         A    That's correct.  This is the budget of the Postal
12    Service.
13         Q    And you show there for the total for the net
14    income, after conversion to the Government fiscal year, of a
15    loss of $228 million for the year; is that correct?
16         A    That's correct.
17         Q    And as I understand it from the response to the
18    interrogatory, this assumes that rates will become effective
19    -- would not be effective until the fourth quarter of FY'98;
20    is that correct?
21         A    Approximately June 1 is included in this plan.
22         Q    That was my next question, as to what is the
23    fourth quarter in your jargon.
24         A    We use June 1 in our financial plan.
25         Q    Just so the record is clear on some of these dates

                                                             18649
 1    as to what accounting periods relate to, accounting period
 2    five, I notice on the financial and operating statements,
 3    ended January 30, 1998.  By my calendar, that was a Friday. 
 4    Is that the date of the accounting periods' end?
 5         A    The accounting periods are normally 28 day periods
 6    and that's why we have 13 of them.
 7         Q    And so it's a Friday, it just happens to be a
 8    Friday?
 9         A    They are always Fridays, and that's exactly the
10    way they end, so their time frames are always ended on a
11    particular Friday.
12              MR. RICHARDSON:  Mr. Chairman, may I approach the
13    witness?  I would like him to just read something into the
14    record?
15              COMMISSIONER HALEY:  Sure, you may do so.
16              MR. RICHARDSON:  Thank you.
17              THE WITNESS:  I can't see this.  I am going to
18    need my glasses.  This is a calendar?
19              MR. RICHARDSON:  Yes.
20              THE WITNESS:  I can normally read a calendar but I
21    might have to borrow somebody's reading glasses, but I could
22    see the dates circles.
23              BY MR. RICHARDSON:
24         Q    Mr. Porras, all I wanted to do was clarify the
25    ending day of the accounting periods.  I am sure it's public

                                                             18650
 1    knowledge but just for the record I had started with January
 2    30th and circled that date on that calendar and then moved
 3    four weeks through the year.
 4         A    Right.
 5         Q    And I just wanted you for clarification just to
 6    read the ending date of each of the accounting periods or I
 7    would be happy to do it.
 8         A    Well, we do publish schedules of these.  We put
 9    them in the Postal Bulletins.  We announce them to our
10    employees so -- although I do not think they need to know
11    but they know their paydays -- and these tie, by the way, to
12    two pay periods, and we pay our employees every two weeks
13    and that is why we have this.
14              Since at one time over 80 percent of our costs
15    were associated with salaries and benefits, the Postal
16    Service does get a lot of data this way and manages this
17    way, and I think we have all heard Postmaster Generals come
18    in and say you manage by 13 periods but let me give you the
19    dates that are here.
20              AP-6 ended February 27th.  AP-7 is March 27th. 
21    AP-8 is April 24th.  AP-9 is May 22nd.  June the 19th is
22    AP-10.  I feel like I am taking an eye exam -- I apologize.
23              AP-11 ends July 17th.  AP-12 is August 14th. 
24    AP-13 is September 11th and included in this period here is
25    we do have to convert back to a Government fiscal year to do

                                                             18651
 1    our annual reporting.
 2              I do have to stipulate -- I may have read the date
 3    wrong because I just cannot see them very clearly.
 4         Q    Thank you, Mr. Porras -- and the difference
 5    between the end of the Accounting Period 13, which would end
 6    on September 11th through to the first of October would be
 7    the correction period, is that correct?
 8         A    It's not a correction period.  We refer to it in
 9    the Postal Service as Accounting Period 14 and we actually
10    make the revenues, expense, adjustments and those kind of
11    things during that period.
12         Q    You indicated to Mr. Levy that the Accounting
13    Period 6 numbers, net income numbers are available now.  Are
14    those numbers public?
15         A    We have sent -- I am not sure we have completed
16    this report.  We have sent them out to the leadership and
17    other individuals in the organization.
18         Q    So they are complete?
19         A    They are complete and they are putting this book
20    together now.  I am not sure when it is going to be issued.
21              We try to do this before the end of the next
22    accounting period and we have got a schedule for that.
23         Q    And for instance then Accounting Period 7, which
24    ends March 27th, when would you expect to have those numbers
25    available for release?

                                                             18652
 1         A    We normally have them internally about one week
 2    after and then the financial portion -- there's other things
 3    that we extract also and normally within the month of the --
 4    or what is in the accounting period after the end of the
 5    previous accounting period we have that data available.
 6         Q    Within the four-week period?
 7         A    Right.
 8         Q    Can you tell me when the Accounting Period 7
 9    numbers would be available then?  You said they'd be
10    available internally after a week, but when would you expect
11    them to be available to this Commission if it requested that
12    data?
13         A    Well, I think the bottom line P&L is normally a
14    week later.  If you want the detail of this, it normally
15    takes us three to four weeks later to get this.
16         Q    And then Accounting Period 8, which ends on April
17    24, a week after that would be May 1.  Two weeks after that
18    would be May 8.  You would expect perhaps by May 8 they
19    might be available for Accounting Period 8?
20         A    Correct.  Barring no systems problems or anything
21    else they should be available.
22         Q    Thank you.
23              CHAIRMAN GLEIMAN:  Mr. Richardson, do you have a
24    sense of how much longer you're going to go?
25              MR. RICHARDSON:  I don't believe it'll be very

                                                             18653
 1    long.
 2              CHAIRMAN GLEIMAN:  Well, we'll wait until you
 3    finish before we take our break.
 4              Just let me mention at this point, though, because
 5    I know that we have a long list of witnesses today, and
 6    there are a variety of parties who plan to cross-examine
 7    other witnesses, that it is my guess that we may get through
 8    Postal Service Witness Young, who is our third witness,
 9    before lunch.  I have my doubts about that, but we will
10    probably -- it's highly unlikely that we're going to get
11    beyond Witness Young before the lunch break.
12              So to the extent anyone is here because they are
13    focused on witnesses McGrane, Lewis, Rios, or Ellard, they
14    can pretty much be assured that they don't have to be around
15    in the hearing room until after lunch.
16              Mr. Richardson, I apologize for the interruption.
17              BY MR. RICHARDSON:
18         Q    Mr. Porras, on page 11 of your testimony, lines 15
19    through 19, you state in addition to FY 1997 actual results
20    a number of other changes have occurred that affect test
21    year accrued costs.  In total, these changes have a
22    relatively minor impact, and for that reason I would argue
23    that there is no compelling reason to make the adjustments,
24    particularly when the numerous problems associated with
25    updating are considered.

                                                             18654
 1              Are the changes you're referring to those that
 2    appear in your Exhibit 11-B which show a total net change of
 3    $194,950,000?
 4         A    Yes.
 5         Q    And those are the amounts which you consider
 6    relatively minor impact, if there was a reduction in
 7    estimated expenditures of about $195 million, that that
 8    would be a relatively minor impact in the revenue
 9    requirement?
10         A    In the aggregate, yes.
11         Q    Is it your testimony the Commission should not
12    make that adjustment in its revenue requirement?
13         A    That's correct.
14         Q    Because it's too minor?
15         A    Part of it is that, and part of it is -- I just
16    believe the revenue requirement -- what we asked for is a
17    4-1/2-percent price change -- is very, very reasonable.
18         Q    The -- also on 11-B, your Exhibit 11-B, you have a
19    footnote 10 which refers to test year after rate expenses. 
20    It's also applied to before rate expenses?
21         A    I'm not sure.
22         Q    The footnote 10 applies to the totals column on
23    that exhibit.
24         A    Correct.
25         Q    And is there any reason why it wouldn't apply to

                                                             18655
 1    before rate expenses?  That's the amount that you're asking
 2    the Commission to establish its rate adjustments on.
 3         A    The only -- I really don't know that, but I would
 4    speculate, because of the volume variability issue, that
 5    that's why that's in there, but I'm not sure.
 6              MR. RICHARDSON:  Mr. Chairman, I have another
 7    document here which I would like to have marked for cross
 8    examination, OCA Cross-Examination Exhibit 2.
 9              CHAIRMAN GLEIMAN:  Sure.
10              MR. RICHARDSON:  I'll distribute it.
11              CHAIRMAN GLEIMAN:  You can distribute it.
12                             [Cross-Examination Exhibit No.
13                             OCA-XE-2 was marked for
14                             identification.]
15              BY MR. RICHARDSON:
16         Q    Mr. Porras, this is a copy of a Internet report
17    which we just picked up yesterday, and I apologize for not
18    having made it available to your counsel.  We just actually
19    found out about it yesterday, and I just wanted to ask you a
20    brief question on it.
21              This relates to a report of Postmaster General
22    Runyon's comments that he made in Las Vegas relating to the
23    rate case, and there is a clarification, I suppose, that
24    needs to be made.
25              It quotes him as saying we have a $17 million

                                                             18656
 1    capital investment program down there in the second
 2    paragraph, if you see that.  I presume that's a
 3    typographical error and it should be $17 billion.
 4         A    Absolutely.
 5         Q    Also in that article, it indicates that --
 6    Postmaster General indicates that it's important to
 7    implement the rates beginning in June.  Is that consistent
 8    with your testimony here?
 9         A    In the plan that we have, the financial plan, the
10    budget plan, we had June 1st there.  I think I've got to
11    reiterate what Mr. Runyon says, that that's really a Board
12    decision.
13         Q    And when you say June, is that a flexible date,
14    sometime during that accounting period, or would it be June
15    1st?
16         A    In our budget plan, we use June 1st, but it's
17    definitely flexible.  It's something that -- the Board will
18    make that decision on an implementation date.
19         Q    What is the lead time you need once the decision
20    is made in terms of this Commission, if it issued a decision
21    on May 9th or 10th?  Then the Board presumably would require
22    two or three weeks as a minimum to reach a final decision. 
23    What type of lead time would management need to implement a
24    rate increase?
25         A    That's a very, very good question.  When we first

                                                             18657
 1    did the plan, we were hoping that we could get a decision
 2    back in nine months, and I understand that we went through
 3    that last time, and I know -- but I had to say this, why the
 4    June 1st date.
 5              We have a lot of -- of course, if we got a
 6    decision back from the Rate Commission mid-May, the next
 7    Board meeting is June.  We would have to talk to the Board
 8    at that time.  Whether they would have enough information to
 9    make a decision, I don't know.  They could have a special
10    meeting.
11              I want to make a point, though, because I think
12    it's very, very important.  I don't know the particulars of
13    all of our systems.  I've had some internal people say we
14    need 30 days.
15              But we met with the customers last week, and we
16    had, to me, a tremendous lunch with them, and we went over
17    why we needed the rate change and really emphasized the
18    investments of the future, and I'm saying me -- Mike Riley
19    and myself having lunch with a number of customers, and they
20    were adamant about we need some time to change our systems,
21    and you need to be sensitive to us on those issues, and what
22    I'm saying is I think, whatever time-frame we have internal,
23    we have to also be aware of what the customers' issues are
24    and try to work together, and I believe the Board will, in
25    fact, consider all of those things.

                                                             18658
 1         Q    That would be more like a matter of weeks or maybe
 2    two or three months, just my layman's thinking on that.  I
 3    would assume that's what it would require.
 4         A    It would be a Board decision.  They're going to
 5    have to look at that.  Some of our internal people, as I've
 6    said, have told me some of their systems may take 30 days. 
 7    I just don't know that at this point.
 8              I should add, too -- and believe me, I'm not
 9    trying to be -- one of the comments were, gee, if we could
10    give you a price discount, could you do them a lot faster,
11    and then they kind of got upset with us, but really, the
12    systems -- we all need to be sensitive to those systems, and
13    they are important for us to understand.
14         Q    Would those be within the terms of the
15    Commission's decision?
16         A    No, and my lawyer's looking at me, and I
17    apologize.  But I'm being frank in terms of a conversation
18    we had with the customers, and the bottom line is they said
19    you need to give us some time to change our systems.
20              CHAIRMAN GLEIMAN:  While Mr. Richardson is
21    deciding whether he has some other questions he wants to
22    ask, let me ask you, you just said the Board makes the
23    decision.  You did mean to say the Governors make the
24    decision.
25              THE WITNESS:  The Governors, yes.

                                                             18659
 1              CHAIRMAN GLEIMAN:  I just wanted to make sure that
 2    the people who sent me the letter were the proper people.
 3              THE WITNESS:  The Governors will make the
 4    decision.
 5              CHAIRMAN GLEIMAN:  By the way, we can give you a
 6    decision in nine months if you want.
 7              Mr. Richardson, do you have more questions?
 8              MR. RICHARDSON:  No, those are all the questions I
 9    have, Mr. Chairman.  I do want to move the introduction into
10    evidence of these two cross-examination exhibits.  Although
11    the interrogatory which is Cross-Examination Exhibit No. 1
12    is really part of a group of interrogatories that we had
13    asked and which have not yet been designated and intend to
14    designate sometime next week.  It's --
15              CHAIRMAN GLEIMAN:  Would you like to move it into
16    evidence now or simply have it transcribed into the record
17    at this point, inasmuch as you're going to move it into
18    evidence as part of a package next week?
19              MR. RICHARDSON:  Excuse me.  I think that would be
20    preferable.
21              CHAIRMAN GLEIMAN:  We'll direct that OCA-XE-1 be
22    transcribed into the record at this point.
23                             [Cross-Examination Exhibit No.
24                             OCA-XE-1 was received into evidence
25                             and transcribed into the record.]

                                                             18662
 1              CHAIRMAN GLEIMAN:  And what's your intention with
 2    respect to Cross-Examination Exhibit No. 2?
 3              MR. RICHARDSON:  I would move that into evidence
 4    also.
 5              MR. REITER:  Just a clarification, since mine
 6    weren't marked.  Which one was 2?
 7              CHAIRMAN GLEIMAN:  No. 2 is the newspaper article
 8    or Media Central printout live from the National Postal
 9    Forum, Don't Count on a Rate Delay, dated 3/19, Catalog Age
10    Weekly.
11              MR. REITER:  And I'm not sure that other than the
12    statements Mr. Porras made specifically about some of the
13    things in here that we've authenticated the entire document.
14              CHAIRMAN GLEIMAN:  I'm not sure I understand what
15    you mean by authenticate.  I mean --
16              MR. REITER:  I am objecting to it being designated
17    into evidence because we have not authenticated most of this
18    document.  Mr. Porras was asked about one or two statements
19    he in fact needed to correct, one of the statements in this
20    document.  I think that to the extent Mr. Porras has
21    testified as to what he knows about these matters, that
22    that's sufficient evidence for the record.
23              CHAIRMAN GLEIMAN:  I misunderstood.  I thought you
24    were suggesting that it was a doctored document or
25    something.  You weren't?

                                                             18663
 1              MR. REITER:  No, I did not say that.
 2              CHAIRMAN GLEIMAN:  Mr. Richardson, would you be
 3    satisfied for your purposes, since you didn't ask about each
 4    and every line in this one-page press report, that it be
 5    included as a -- that it just be transcribed into the record
 6    rather than admitted into evidence?
 7              MR. RICHARDSON:  That would be satisfactory, Mr.
 8    Chairman.  I would ask, if the Postal Service would have a
 9    copy of the Postmaster General's remarks, could provide that
10    to OCA.
11              CHAIRMAN GLEIMAN:  Do you think you could avail
12    us?
13              MR. REITER:  I will look into it.  I don't know if
14    we have those.
15                             [Cross-Examination Exhibit
16                             No. OCA-XE-2 was received into
17                             evidence and transcribed into the
18                             record.]
19
20
21
22
23
24
25

                                                             18665
 1              CHAIRMAN GLEIMAN:  I am convinced he was speaking
 2    extemporaneously.
 3              If there's nothing further, Mr. Richardson, then
 4    we're at the point where we'll do some followup if someone's
 5    got some followup.
 6              Mr. Levy, do you have any followup?
 7              If not, we're going to take our ten-minute
 8    midmorning break now, and when we come back I believe there
 9    may be a few questions from the bench.
10              [Recess.]
11              CHAIRMAN GLEIMAN:  Mr. Porras, the Postal Service
12    filed a response to the OCA motion on official notice on
13    March the 17th.  I mentioned these documents earlier on --
14    the accounting period documents and the Annual Report of the
15    Postmaster General.
16              In the second paragraph of the motion or the
17    response as it were it reads as follows, "Generally in these
18    proceedings facts are presented, explained, and evaluated in
19    the context of expert opinions."
20              Are you an expert who can give us some opinions?
21              THE WITNESS:  I am one of the senior officers of
22    the Postal Service.  I think I have a lot of input and I
23    think I can in fact give you my opinions.
24              CHAIRMAN GLEIMAN:  It then goes on to say, "The
25    information from these documents" -- and I am not concerned

                                                             18666
 1    about the accounting period reports here, I am just focusing
 2    on the Postmaster General's Annual Report -- "The
 3    information from these documents upon which OCA wishes to
 4    rely is not presented in such context" -- and that is in the
 5    context of expert opinions.
 6              I am going to give you a copy of the Postmaster
 7    General's Annual Report -- "The Annual Report of the United
 8    States Postal Service," as it is titled here, for 1997.
 9              Could you tell me if there is something in there
10    that we shouldn't pay attention to because it is not
11    authenticated or we shouldn't rely on it in the absence of
12    expert opinions or are there any numbers anywhere in there
13    that we should not take notice of and rely heavily on?
14              MR. REITER:  Mr. Chairman, since I am the one who
15    wrote what you quoted to Mr. Porras, perhaps I should
16    clarify it, and I apologize if it wasn't clear.
17              That sentence you read was referring to the
18    financial and operating statements.
19              CHAIRMAN GLEIMAN:  Okay.  In that case then, I
20    just want to make sure that I understand correctly.  It's
21    the Postal Service's position that we can take notice of the
22    audited Annual Report of the United States Postal Service?
23              MR. REITER:  Yes.  There was absolutely no
24    intention in that document to indicate otherwise and I
25    apologize if that was not clear.

                                                             18667
 1              CHAIRMAN GLEIMAN:  Okay.  I just get confused
 2    sometimes.  I think it's better to ask questions than to
 3    continue my usual confused state.
 4              Mr. Porras, you have heard of RPW, haven't you?
 5              THE WITNESS:  Yes -- Revenue Pieces and Weight.
 6              CHAIRMAN GLEIMAN:  Is it an important part of the
 7    Service's financial data collection and planning system?
 8              THE WITNESS:  It's an important part of it, yes.
 9              CHAIRMAN GLEIMAN:  Can you tell us what the status
10    is of the inspection service report on the RPW?  It was
11    mentioned in the most recent semi-annual Report of
12    Inspection Service?
13              THE WITNESS:  No, I can't.
14              CHAIRMAN GLEIMAN:  You haven't seen it?
15              THE WITNESS:  I don't believe I have.  If I have,
16    I don't recall.
17              CHAIRMAN GLEIMAN:  Can you tell us anything about
18    the report, whether Westat did some studies for the
19    Inspection Service?
20              THE WITNESS:  No.
21              CHAIRMAN GLEIMAN:  Do you use the RPW?
22              THE WITNESS:  I use it but I don't manage the
23    program itself.  It is on another side of the house.  They
24    don't report to me.
25              CHAIRMAN GLEIMAN:  And if the Inspection Service

                                                             18668
 1    or some outside party is critical of a report that you used
 2    for financial planning would it be your expectation that
 3    someone on the other side of the shop, wherever that is,
 4    would let you know about that so that you might take that
 5    into account?
 6              THE WITNESS:  I am aware of the report.  I just
 7    don't recall if I have even seen the final or the Inspection
 8    Service Report.
 9              CHAIRMAN GLEIMAN:  Let me ask you a few questions
10    about the operating budget for FY '98, as I understand it.
11              Now some of this is material that was touched on
12    in one way, shape or form earlier today, but I need to get
13    it in context of my mindset so that I can understand a
14    little bit better.
15              The operating budget for Fiscal Year '98
16    anticipates a loss of $228 million, is that correct?
17              THE WITNESS:  That's correct.
18              CHAIRMAN GLEIMAN:  The budget assumes that the
19    rates go into effect, the new rates go into effect on June
20    the 1st?
21              THE WITNESS:  That's correct.
22              CHAIRMAN GLEIMAN:  The Postal Service filing in
23    R97 indicates the annual increase in net income from new
24    rates is $2.4 billion, is that correct?
25              THE WITNESS:  The total revenue requirement made

                                                             18669
 1    up, yes, $2.4 billion.  It was a revenue deficiency.
 2              CHAIRMAN GLEIMAN:  The annual increase in net
 3    income from new rates is $2.4 billion in the rate case, yes
 4    or no?
 5              THE WITNESS:  I'm not -- that's -- I am not sure
 6    that is -- what we said was the $2.4 is the revenue
 7    deficiency.  I am not sure that's net income.  That is why I
 8    am having trouble understanding your question.
 9              I am not being difficult about it.  I just --
10              CHAIRMAN GLEIMAN:  Okay.  The Postal Service's R97
11    filing anticipates a net deficit for the test year of $2.4
12    billion and it proposes an array of rates and fees which
13    when projected out based on volume projections would give
14    the Postal Service the money to cover that projected
15    deficit, is that not correct?
16              THE WITNESS:  I am going to clarify my answer,
17    which is yes, but it has to be clarified.
18              We had a projected loss --
19              CHAIRMAN GLEIMAN:  I understand.
20              THE WITNESS:  Okay --
21              CHAIRMAN GLEIMAN:  But I am just asking you
22    about --
23              THE WITNESS:  If you include the contingency in
24    the revenue requirement, that is true.
25              CHAIRMAN GLEIMAN:  Let's, you know, not muddy the

                                                             18670
 1    waters.  It was $1.4 plus a contingency plus a revenue
 2    requirement.  The bottom line number was $2.4.
 3              THE WITNESS:  The revenue deficiency, yes.
 4              CHAIRMAN GLEIMAN:  And if you divided that by 12
 5    it comes out to how much -- $2.4 billion divided by 12?  Two
 6    hundred million a month?
 7              THE WITNESS:  $200 million a month.
 8              CHAIRMAN GLEIMAN:  So basically $200 million a
 9    month, okay.  Are we in agreement so far?
10              THE WITNESS:  Yes.  Yes.
11              CHAIRMAN GLEIMAN:  Now, if new rates are
12    implemented on June 1st, they should add about $800 million
13    to the Postal Service during this year?
14              THE WITNESS:  That's correct.
15              CHAIRMAN GLEIMAN:  If this is so, this implies
16    that budget forecasts -- that the budget would forecast
17    about a $1 billion deficit without new rates for the fiscal
18    year; yes?
19              THE WITNESS:  With the $228 and the --
20              CHAIRMAN GLEIMAN:  And the $800 in additional
21    revenue from the new rates that would go into effect on June
22    1st, that would give you a $1 billion deficit, without
23    rates?
24              THE WITNESS:  Without rates, yes.
25              CHAIRMAN GLEIMAN:  Now, tell me how much net

                                                             18671
 1    income from the new rates is included in the FY'98 budget? 
 2    Is the $800 million?
 3              THE WITNESS:  It was somewhere -- $800 or $900
 4    million.  I don't recall the exact number but it was
 5    somewhere in that amount.
 6              CHAIRMAN GLEIMAN:  This means that you anticipate
 7    a flat line in terms of the same amount of additional
 8    revenue each month under the increased rates that you didn't
 9    take into account, that you were putting those rates into
10    effect on June 1st, which is -- I will mischaracterize what
11    you said before -- it's kind of the Summer slump season, and
12    then you just threw out $900 million, so maybe you
13    anticipate more revenue in these Summer months?
14              THE WITNESS:  You asked me whether it was $800
15    million exactly.  I don't recall.  Let me go back just to
16    clarify the point.  Let's take your $800 million.  We added
17    revenues in, in AP-10, 11, 12 and 13.  Now, it's not a
18    slump, it's the seasonality of the business, and that's why
19    each AP may be slightly different in terms of what mail
20    volumes you would have, and that's what we did.
21              CHAIRMAN GLEIMAN:  For accounting periods 10, 11,
22    12 and 13, how much revenue from the new rates did you
23    include in your budget?
24              THE WITNESS:  I said I thought it was
25    approximately $900 million.  I may not be exact.  I can

                                                             18672
 1    verify exactly what the number was.  I just don't recall.
 2              CHAIRMAN GLEIMAN:  So, unlike past years where you
 3    have had a down turn, a seasonal down turn in the Summer,
 4    this year you are going to have a seasonal up turn in the
 5    Summer?
 6              THE WITNESS:  In the past, we have had rate
 7    increases that were included earlier in the year and they
 8    were incorporated in the latter part of the year exactly the
 9    way this is.  If you are asking what's different, it's the
10    early part of the years.  If you go back to the last rate
11    change we had, which was in January, you had the revenues
12    going up at that time, which carried over into the latter
13    part of the year.
14              CHAIRMAN GLEIMAN:  I think we are talking at cross
15    purposes.  I want you to listen very carefully to me.  This
16    rate case calls for $2.4 billion in additional revenue for
17    the Postal Service.  Don't talk to me about whether it's
18    part of PYL or the contingency or part of deficit from
19    costs.  There is $2.4 billion in additional revenue in the
20    rate case as filed.  Do we agree?
21              THE WITNESS:  Right.
22              CHAIRMAN GLEIMAN:  And if there were no
23    seasonality in the Postal Service, you would expect to get
24    $200 million a month in new revenue under the new rates as
25    proposed by the Postal Service; is that not correct?

                                                             18673
 1              THE WITNESS:  On average, yes.
 2              CHAIRMAN GLEIMAN:  If there were no seasonality
 3    and no changes, as the economists say, ceteris paribus, all
 4    things equal, you'd get $200 million a month?
 5              THE WITNESS:  Correct.
 6              CHAIRMAN GLEIMAN:  But we know that all things are
 7    not equal, that there is seasonality, and that perhaps in
 8    November and December, you would get more new revenues than
 9    $200 million a month out of this rate adjustment that's been
10    proposed, and maybe in the Summer, you would get less than
11    $200 million a month?
12              THE WITNESS:  Correct.  That's the point I was
13    trying to make.
14              CHAIRMAN GLEIMAN:  But yet you've told me that
15    it's going to be $800 or $900 million in additional revenue
16    for those four Summer months or four accounting periods,
17    however you want to characterize them?
18              THE WITNESS:  Well, if you are asking me the exact
19    calculation, my staff went through and estimated the mail
20    volumes for each of those periods and then figured out the
21    average price change.  You are acting or making it sound as
22    if I'm making up some numbers.  Those were done based on
23    calculated volumes.  I'm not sure I understand your point.
24              CHAIRMAN GLEIMAN:  Do you agree that under normal
25    circumstances, revenue is up in accounting periods two,

                                                             18674
 1    three, four, each year?
 2              THE WITNESS:  Yes.
 3              CHAIRMAN GLEIMAN:  Seasonality?
 4              THE WITNESS:  Yes.
 5              CHAIRMAN GLEIMAN:  Above the average?
 6              THE WITNESS:  Yes.
 7              CHAIRMAN GLEIMAN:  For the year.  Do you agree
 8    that in most years for accounting periods 10, 11, 12 and 13,
 9    that you are below the average for the year?
10              THE WITNESS:  Yes.
11              CHAIRMAN GLEIMAN:  The question I asked you was a
12    simple question.  It was assuming you put those rates into
13    effect on June 1st, how much net income would there be
14    during June, July, August and September together, from the
15    new rates that were put into effect?
16              You've just told me that the Summer months are
17    generally below average, the average, but a moment ago, you
18    told me that in effect, this Summer, we are going to be
19    above average because there's going to be $900 million in
20    net revenue from the rate increase.
21              I'm willing to accept that but I just want to make
22    sure that we are talking on the same plane.
23              THE WITNESS:  I think we are.  I was talking about
24    we take the seasonality of the volumes in revenue.  On top
25    of that, why I say -- maybe I used a poor choice of words --

                                                             18675
 1    on top of our baseline, we've added a price change to that
 2    and calculated it based on the seasonality, what that would
 3    be.
 4              I'm not saying that we are going to get more mail
 5    volume than normal.
 6              CHAIRMAN GLEIMAN:  I didn't ask you about mail
 7    volume.  I asked you about net revenue, net income from
 8    implementing the rates on June 1st.  How much additional
 9    money is the Postal Service going to have in its coffers as
10    a consequence of raising rates on June 1st until the end of
11    the year?
12              It's a simple question.  I want a simple answer.
13              Give me a number.
14              THE WITNESS:  I think I estimated 800 to 900
15    million.  I really don't remember the number.  I apologize
16    for that.
17              CHAIRMAN GLEIMAN:  Well, let's use the 900 million
18    number.  If you're going to get 900 million in additional
19    revenue, and I think that 900 million number is a little
20    high, and I would be receptive to a corrected number being
21    submitted after this hearing today --
22              THE WITNESS:  For discussion purposes we can use
23    the 800.  That's fine with me.
24              CHAIRMAN GLEIMAN:  Fine.  So we've got 900 million
25    in new revenue, according to you, and we've got a projected

                                                             18676
 1    deficit when we put those rates into effect in June 1 of 228
 2    million.  Right?
 3              THE WITNESS:  Yes.
 4              CHAIRMAN GLEIMAN:  228 million, and the 900
 5    million in new revenue, if you didn't have that new revenue,
 6    it would give you a deficit for the year of $1.128 billion. 
 7    Is that correct?
 8              THE WITNESS:  Yes.
 9              CHAIRMAN GLEIMAN:  Now, turning back to your R97
10    or the Postal Service's R97 filing, it had a before rates
11    deficit of $1.4 billion excluding the contingency and PYL. 
12    Can you reconcile the difference between 1.128 and 1.4? 
13    Which number is correct?
14              THE WITNESS:  Well, when we go --
15              CHAIRMAN GLEIMAN:  Or are either of them correct?
16              THE WITNESS:  Well, you're using two different
17    periods of time here, and let me go back in the test --
18              CHAIRMAN GLEIMAN:  No, sir, I am not using two
19    different periods of time.  I'm using your rate case and
20    your projected revenue for the test year.
21              THE WITNESS:  But, Mr. Gleiman, the test year
22    shows revenues taking effect on October 1, and looking at
23    that, we have projected before that that we would have a
24    loss that was close to $1.3 billion to $1.4 billion.  We
25    have now come back with my rebuttal and said that may be

                                                             18677
 1    less by a couple hundred million dollars.
 2              CHAIRMAN GLEIMAN:  So that's how you reconcile it. 
 3    Your rebuttal testimony now tells us that all things being
 4    equal, putting rates into effect on June 1, that rather than
 5    a 1.4 you'll have a $1.1 billion budget -- deficit?  In the
 6    absence.
 7              THE WITNESS:  We had $228 million loss.
 8              CHAIRMAN GLEIMAN:  And it's changing.
 9              THE WITNESS:  In the rates.
10              CHAIRMAN GLEIMAN:  And in the absence of putting
11    the rates into effect, you would have a 1.1 rather than a
12    $1.4 billion deficit.
13              THE WITNESS:  Yes.
14              CHAIRMAN GLEIMAN:  Okay.  Now we've reconciled
15    that.  Now we can move on.  But I would be interested in if
16    indeed that $900 million number that we used for this
17    example is a correct number.  I have difficulty
18    understanding how this summer is going to be different than
19    other summers.
20              THE WITNESS:  And it's not.  I apologize.  I just
21    don't recall the exact calculation, but the staff did in
22    fact do it, and they did it by the amount of volumes that
23    were estimated for each period.
24              CHAIRMAN GLEIMAN:  Well, it does become rather
25    critical, because you see if in fact the number is what you

                                                             18678
 1    might expect it to be, which would be something less than
 2    the 12-month average, then your deficit would be much less
 3    than 1.1.  For example, if it was $700 million in new
 4    revenue that you were anticipating rather than 900, then
 5    your deficit would only be $900 million without rates as
 6    opposed to the 1.4.  So this is a critical number for us,
 7    because we need to understand how much or I need to
 8    understand, maybe others don't, but I need to understand
 9    what the real deficit would be without rates.  And at this
10    figure that I think is somewhat high of 900 million then it
11    comports with your rebuttal testimony.
12              On the other hand, if the seasonally adjusted
13    volumes are as they have been or seasonal volumes are as
14    they have been in the past, then that number would be 700,
15    maybe even only 600 million, in which case your deficit sans
16    rates would be substantially smaller at the end of this year
17    than either the 1.4 you originally projected or the 1.1
18    you're now saying we're going to have.
19              Now, returning to the FY '98 budget, through
20    Accounting Period 5 the Postal Service's net income is $136
21    million higher than planned.  That's 330 million greater
22    than the same period last year.  Do we agree on that?
23              THE WITNESS:  Yes.
24              CHAIRMAN GLEIMAN:  Now you have a copy of the
25    Postal Service's institutional response to OCA Interrogatory

                                                             18679
 1    120.
 2              I believe it was marked as Cross-Examination
 3    Exhibit Number -- OCA Number 1.  For anybody who would like
 4    a copy of it, there are more copies over on the table but I
 5    don't think that it is necessary that you have it to follow
 6    this.
 7              Inasmuch as that OCA cross-examination exhibit is
 8    going to find its way into the record as designated written
 9    cross, institutional cross, I am not going to attempt to
10    move it into the record at this point in time.
11              Number 120 lays out budgeted net income for each
12    accounting period in FY '98.  You have the copy, right?
13              THE WITNESS:  Yes.
14              CHAIRMAN GLEIMAN:  Do I understand correctly that
15    you had a hand in developing the material contained in this
16    response?
17              THE WITNESS:  Well, let me -- the summary of this
18    information, this is done through a number of managers in
19    the field, headquarters.  People make their plan spreads of
20    the revenues and expenses.  That is what this is, a summary
21    of the revenue and expense plan spreads, and that ends up in
22    my people do the consolidation of this data.
23              CHAIRMAN GLEIMAN:  So then you had a hand in
24    putting -- your people, your staff had a hand in putting it
25    together and I would assume, knowing the good manager that

                                                             18680
 1    you are, that you reviewed all this?
 2              THE WITNESS:  We review quite a bit and we have a
 3    lot of debates with the program managers and people who put
 4    their plan spreads together, yes.
 5              CHAIRMAN GLEIMAN:  Okay.  Now will you notice that
 6    on there that beginning at Accounting Period 9, which
 7    coincidentally is just after a 10-month recommended decision
 8    would be issued by the Commission, net losses are projected
 9    to exceed $158 million every accounting period and range as
10    high as $378 million in Accounting Period 13?
11              THE WITNESS:  That's correct.
12              CHAIRMAN GLEIMAN:  The losses for those five
13    accounting periods total $1.3 billion, correct?
14              THE WITNESS:  Close to that number.
15              CHAIRMAN GLEIMAN:  This is $1.2 billion greater
16    than the same period in FY '97.  Also, this $1.3 billion
17    cumulative loss for those accounting periods exists despite
18    the fact that the budget that you are looking at assumes
19    that rate increases are going to go into effect in
20    Accounting Period 10.  Is that correct?
21              THE WITNESS:  That's correct.
22              CHAIRMAN GLEIMAN:  Okay.  Could you please explain
23    the basis for the large negative net income estimates?
24              THE WITNESS:  Sure.  Let me start off too by the
25    point you made in terms of last year and how well we are

                                                             18681
 1    doing compared to last year --
 2              CHAIRMAN GLEIMAN:  I just want -- I don't want to
 3    talk about that.  I want to talk about an explanation of the
 4    large negative net income estimates that you have in this
 5    U.S. Postal Service FY 1998 operating plan --
 6              THE WITNESS:  Okay.  It goes back to our
 7    discussion or the discussion I had earlier and part of what
 8    was in Mr. Tayman's testimony and myself that we have a lot
 9    of programs, a lot of investment monies and a lot of that is
10    being planned to be spent in the remainder of the year, the
11    latter part of the year.
12              We have some major, major projects and programs
13    that we have underway.  Some of those started a year ago. 
14    Some started a little bit later.
15              We now have contracts in place.  We now have
16    program managers responsible for these particular programs. 
17    They have told us -- we have gone back and talked to them --
18    that they are going to spend these monies and this plan
19    reflects those particular assumptions.
20              CHAIRMAN GLEIMAN:  Does any benefit accrue to
21    managers who don't spend all the money that they have
22    committed to you that they are going to spend?
23              THE WITNESS:  Hopefully all of our managers
24    understand just don't spend money uselessly or waste of
25    monies, but in these terms of these programs the benefits

                                                             18682
 1    that we lose by not spending the money are more important.
 2              We made corporate decisions.  We have had --
 3              CHAIRMAN GLEIMAN:  I didn't ask you that.  I asked
 4    you whether any of the managers stood to benefit by not
 5    spending all of the money that they have told you for
 6    purposes of your appearance here today that they are going
 7    to spend.
 8              THE WITNESS:  I am not sure I understand that.  If
 9    you are talking from an incentive standpoint, if you are
10    talking about missing a program schedule or -- there's -- we
11    are now tracking up in one of our conference rooms, we are
12    tracking the schedules of each of these programs, trying to
13    get these managers to be accountable to do what they said
14    they were going to do.
15              If they underrun the budgets a little bit this
16    year or I am not sure what the benefit is in terms of a --
17              CHAIRMAN GLEIMAN:  Did you mention the word
18    "incentive" before?
19              THE WITNESS:  Yes.
20              CHAIRMAN GLEIMAN:  Thank you.  So the large
21    negative net incomes are due to the spending programs that
22    you have in place for capital and other types of
23    investments?
24              THE WITNESS:  Primarily the operating investments.
25              CHAIRMAN GLEIMAN:  Now budget expenses, budgeted

                                                             18683
 1    expenses during the last five accounting periods of FY '98
 2    are much greater than actual expenses for the same period in
 3    '97, as I pointed out a moment ago.
 4              The '98 expenses are in fact 11 percent greater
 5    than in '97.
 6              In your long experience with the Postal Service,
 7    do you recall total expenses exceeding SPLY, Same Period
 8    Last Year, by so great a percentage?
 9              THE WITNESS:  I had, and I almost believe it was
10    one time before this Rate Commission explained how our
11    expenses went up 10.8 percent bottom line with the OBRAs and
12    that --
13              CHAIRMAN GLEIMAN:  Other than OBRAs and years when
14    there was substantial inflation --
15              THE WITNESS:  Yes, let me just clarify the point
16    though, in terms of the program costs so far this year, even
17    though we are showing bottom line and we are doing slightly
18    better than planned, we are over SPLY -- Same Period Last
19    Year -- by 22 percent.
20              CHAIRMAN GLEIMAN:  Let me try again.  In your long
21    experience with the Postal Service do you recall total
22    expenses exceeding SPLY by such a great percentage, the
23    percentage being 11 percent?
24              THE WITNESS:  I have got to go back -- and I
25    know -- you've just got to give me the time to explain that

                                                             18684
 1    we have put a lot of processes in place in this
 2    organization --
 3              CHAIRMAN GLEIMAN:  I understand that.  You have
 4    told us that.  That is on the record -- and you will have an
 5    opportunity, I promise you, to talk about that with me in a
 6    few minutes.
 7              THE WITNESS:  Okay -- my point is I am not
 8    convinced we have process in place that we could spend that
 9    money.
10              My experience has shown we have not spent --
11              CHAIRMAN GLEIMAN:  I'll get -- I'll get --
12              THE WITNESS:  -- that amount of money.
13              CHAIRMAN GLEIMAN:  I'll get to that question later
14    on.  In your long experience with the Postal Service, do you
15    recall expenses exceeding SPLY by such a great percentage,
16    11 percent?
17              THE WITNESS:  No.
18              CHAIRMAN GLEIMAN:  Okay.  Thank you.
19              Thank you.  Have you had discussions or exchanged
20    written documents with your staff about the likelihood of
21    the Postal Service ending the fiscal year with a net income
22    better than budgeted or than your revised rate case
23    estimate?  That is the estimate included in your rebuttal
24    testimony shows assuming either or both of the following
25    scenarios, a rate increase in FY'98 or no rate increase in

                                                             18685
 1    '98?
 2              Did you understand my question?  I'll do it again.
 3              THE WITNESS:  Please do it again.
 4              CHAIRMAN GLEIMAN:  Have you had any discussions or
 5    exchanged any memoranda with your staff about the likelihood
 6    of the Postal Service ending the fiscal year with a net
 7    income that's either better than what was in the budget or
 8    then the figure in your revised rate case estimate, your
 9    rebuttal testimony, that is, assuming either one of the
10    following scenarios; no rate increase in '98 or rate
11    increase in '98?
12              THE WITNESS:  We've had discussions in terms of
13    program management performance and if the program managers
14    are managing those programs and are they in fact going to
15    expend those monies.  We've gone back and had that dialogue,
16    and as you have that dialogue, it could affect your bottom
17    line and we do have that kind of discussion.
18              I don't recall sending a memo out to them or
19    anything like that to discuss that.
20              CHAIRMAN GLEIMAN:  Or seeing a memo that was sent
21    to you?
22              THE WITNESS:  Right.  I don't recall that.
23              CHAIRMAN GLEIMAN:  All right.  Have you or any
24    other financial management officials discussed the same
25    subject with members of the Board of Governors, either the

                                                             18686
 1    management members or the non-management members?
 2              THE WITNESS:  I have not.  Mr. Riley may have.  I
 3    have not.
 4              CHAIRMAN GLEIMAN:  I hope that the letter we sent
 5    provokes some discussion.  I'd like to think it did.
 6              Now, you get a chance here to say what you want to
 7    say.
 8              THE WITNESS:  Can I ask you one question?  You
 9    mentioned something about a letter.  I have no idea what you
10    are talking about.
11              CHAIRMAN GLEIMAN:  Oh.  We collectively sent a
12    letter to the Board of Governors.
13              THE WITNESS:  Okay.
14              CHAIRMAN GLEIMAN:  I mean, if you are real
15    interested and you aren't aware of the existence of it, I'm
16    prepared to --
17              THE WITNESS:  No, I am aware of that.  I'm sorry. 
18    Yes, I am.
19              CHAIRMAN GLEIMAN:  I really got worried there for
20    a minute.
21              THE WITNESS:  No, no.  I'm sorry.  I thought you
22    just said another letter was sent over.  I apologize.
23              CHAIRMAN GLEIMAN:  No, no.  No other letters have
24    been sent over.  We know when not to waste another piece of
25    paper.

                                                             18687
 1              You are a respected financial official by all
 2    accounts.  I think my colleagues would agree that you are.
 3              THE WITNESS:  Thank you.
 4              CHAIRMAN GLEIMAN:  Now, separate and apart from
 5    your recommendation on the revenue requirement, please give
 6    me your own personal opinion about FY'98.  Do you believe
 7    that the Postal Service will actually lose $1.3 billion in
 8    the last five accounting periods of this year, assuming that
 9    rates are put into effect in June, or that the Postal
10    Service will lose upwards of $2 billion, assuming there is
11    no rate increase this year?
12              Here's where you get to say all those things you
13    want to say.
14              THE WITNESS:  I guess first of all, I appreciate
15    your asking me that question.
16              CHAIRMAN GLEIMAN:  And I promise not to interrupt.
17              THE WITNESS:  I think the Postal Service -- well,
18    let me say this.  The Postal Service has been very, very
19    successful managing, staying the course, laying out a
20    strategic direction for the organization.  One of the things
21    that we did was laid out a management process called
22    customer perfect, which has driven us to lay out and do the
23    things that make sense for this organization.
24              We've also created what we call a management
25    cycle, where we are laying out to the established process,

                                                             18688
 1    the sub-goals, the indicators and the targets for this
 2    organization.
 3              We then deploy those.  We have come up with four
 4    particular strategies that are in our strategic plan.  I
 5    believe for the first time, we are working together to
 6    address these things.  I say that with 35 years of
 7    experience.
 8              I had mentioned to you when I was here the last
 9    time about one of the major strategies of the organization
10    had to be to go after the prior year loss recovery, which we
11    were not making up.  We added some other particular
12    strategies to improve service, to increase customer
13    satisfaction, to improve our infrastructure and to lower our
14    costs by investments so that we can be a very strong Postal
15    Service in the future.
16              I believe we are now heading in that direction. 
17    One of the things we have done simultaneously is we wanted
18    to make people accountable.
19              You mentioned the incentive system.  Our incentive
20    system is not to just pay monies to people, it's to make
21    them think differently about the decisions they make and how
22    they manage.
23              Let me just give you an example, and you are going
24    to give me just two seconds, and then I'll stop.
25              CHAIRMAN GLEIMAN:  I'm going to let you go on as

                                                             18689
 1    long as you want.
 2              THE WITNESS:  Because a few years ago, we had the
 3    ice storm and the blizzard and all these things that
 4    affected us, and I'm reading the Washington Post, gee, the
 5    Postal Service ran out of tire chains.  In the past, we
 6    would have bought tire chains to last for the next 40 years. 
 7    Now, we are trying to manage it almost like we manage our
 8    own personal finances, where we are saying if it makes
 9    sense, you spend that extra money for the inventory.  If you
10    don't, you don't.
11              None of us in this room go out and buy five car
12    batteries and keep them in our garage so when our battery
13    goes dead -- we are trying to get the Postal Service
14    managers to think this way in terms of managing this
15    organization, and I think we've been very, very successful.
16              One of the other things we have done through our
17    customer perfect and our management cycle is this thing
18    called "review."  We are trying to create more
19    accountability in this organization.  As late as this week,
20    I've had a conversation with Mr. Runyon.  We have all these
21    programs laid out on the wall.  We have schedules.  We show
22    if it's green or red.  Red means it's behind plan.  We are
23    saying why, why are you behind plan.
24              When we talk about some of these investments and
25    we say it adds costs, when you delay it, it's not an

                                                             18690
 1    incentive because you are cutting out future revenues, for
 2    example, if you delay priority redesign or if you do
 3    delivery confirmation, you are actually hurting yourself,
 4    not benefitting yourself.  You may save a few bucks this
 5    year but in the future, you are going to lose some revenues. 
 6    You are going to hurt yourself.
 7              Part of our incentive program, why we have a
 8    reserve account, is to get people to think long term so they
 9    don't make the narrow focused short term decisions and
10    affect themselves.
11              Just because you benefit this year, you don't get
12    the full pay out of an incentive system.  Now, with that, if
13    you were to ask me three or four years ago, would this
14    organization be geared up to spend this amount of money for
15    programs, I would say here and agree with you, absolutely
16    not, but I can't say that today because we have new
17    executive positions.  We have a program manager position. 
18    We've gotten some of these programs, 40 or 50 people
19    managing these programs.
20              Now, they are massive and we need to admit that. 
21    If you take the point of service, it's the largest cash
22    register project probably in the world.  Now, I can't tell
23    you here they are going to do it every month but they have
24    told us, and they are being accountable, including going
25    back to the Board, because the Board wants more

                                                             18691
 1    accountability with us also, if you say you are going to do
 2    these programs, do them and do them in the time frame,
 3    because you are in fact going to have some longer term
 4    benefits to the organization.
 5              In the past, I would have said to you, I don't
 6    think we can spend this money.  Today, I cannot do that. 
 7    I'm looking at a totally different organization today.  We
 8    are doing what we said.  I was in this room and Mr. LeBlanc,
 9    you and I had a heck of a discussion the last time, just
10    about going back and capturing the prior year's loss
11    recoveries.  I walked out of here saying that we already had
12    started that effort.  I was going to convince the senior
13    managers, the Board of Governors, that we in fact had to do
14    that.
15              I think I was quite successful doing that.  I've
16    sat here and sat with the management of this organization,
17    pushing back, raising holy hell in some cases, trying to get
18    them to say we've got to set this direction, we've got to do
19    the things that makes more sense for this organization.
20              My bottom line -- I sat there, by the way, and
21    have all these debates, including pushing back on Mr. Runyon
22    and the other senior managers, so I can say I've been into
23    that battle and the heat of that.  So, today my bottom line
24    is the program managers are going to expend this money.  We
25    have the processes in place to let them do that.  I think

                                                             18692
 1    it's going to get done.
 2              CHAIRMAN GLEIMAN:  Okay?
 3              THE WITNESS:  Thank you.
 4              CHAIRMAN GLEIMAN:  You ran out of tire chains.  We
 5    ran out of time.  That was MC95.  I think we issued the
 6    decision three days late because of all that weather.
 7              It sounds to me like you've implemented a
 8    management-by-objectives system over there with your red
 9    lozenges and your green diamonds I would bet.
10              THE WITNESS:  It's actually following the Baldrige
11    criteria, but I'm saying this, it really makes you manage in
12    an integrated system.
13              CHAIRMAN GLEIMAN:  I think it was about 28 years
14    ago that when I worked for Secretary Richardson, then
15    Secretary Weinberger at HEW that we had that kind of system
16    in place.  It worked reasonably well.  I wish you well with
17    it.  It's good to know that you're doing that.  And I don't
18    doubt any of what you've said about your effort to convince
19    people, to convert people to the importance of good
20    management controls.
21              Well, let's talk about some particulars for a
22    minute.  You mention that, you know, three or four years ago
23    you didn't think the Postal Service was geared up to spend
24    this money, but now you think they are.  Do you think they
25    were geared up to spend it a year ago?

                                                             18693
 1              THE WITNESS:  We -- in fact, that's another
 2    excellent question.
 3              CHAIRMAN GLEIMAN:  Just a yes or no.
 4              THE WITNESS:  I need to clarify that, please. 
 5    We --
 6              CHAIRMAN GLEIMAN:  Clarify a year -- I just asked
 7    a simple question.
 8              THE WITNESS:  But I think it's important because I
 9    was part of a team of officers that wanted to look at -- you
10    know, we're committing to do all these programs, and we were
11    finding we weren't doing them.  We weren't spending the
12    money.  We even brought in an outside consulting group which
13    told me what was our problems with program management.  And
14    so yes, we were geared up a year ago.  Yes, we've underspent
15    some money --
16              CHAIRMAN GLEIMAN:  Okay.  That's good.
17              THE WITNESS:  But we're addressing the issue.
18              CHAIRMAN GLEIMAN:  Good.  You were geared up a
19    year ago.  Okay.
20              Let's go back a couple years.  In FY '96 the
21    Postal Service spent $203 million on ADP supplies and
22    services.  Would you accept that subject to check?
23              THE WITNESS:  Okay.
24              CHAIRMAN GLEIMAN:  For FY '97 the Postal Service
25    budgeted $426 million for ADP supplies and services.  Would

                                                             18694
 1    you accept that subject to check?
 2              THE WITNESS:  Yes.
 3              CHAIRMAN GLEIMAN:  But in FY '97, the year -- a
 4    year ago -- less than a year ago -- not three or four years
 5    ago -- the Postal Service only spent $156 million of the
 6    budgeted $426 million on ADP supplies and services.  Would
 7    you accept that subject to check?
 8              THE WITNESS:  Yes.
 9              CHAIRMAN GLEIMAN:  Now your testimony estimates --
10    excuse me, skip the year.  Let's look at the current year. 
11    For FY '98.  The rate filing estimated that you were going
12    to spend $721 million on ADP supplies and services.  Does
13    that number sound familiar?
14              THE WITNESS:  I think that's correct.
15              CHAIRMAN GLEIMAN:  Okay.  Now your testimony,
16    rebuttal testimony, estimates an increase of yet another
17    $298 million for FY '98 on top of the original FY '98
18    estimate of $721 million, for a total planned budgeted ADP
19    expenditure for the FY '98 of $1.019 billion.  Is that
20    correct?
21              THE WITNESS:  That's correct.
22              CHAIRMAN GLEIMAN:  Do you have any idea of how
23    much money has been spent on ADP supplies and services
24    through Accounting Period 5?
25              THE WITNESS:  No, I don't.

                                                             18695
 1              CHAIRMAN GLEIMAN:  Would you like to know?  Would
 2    you like to know?
 3              THE WITNESS:  Well, I look at it differently.
 4              CHAIRMAN GLEIMAN:  Would you like to know the
 5    number?
 6              THE WITNESS:  I'm not sure.  Fine, if you want to
 7    share that with me, but I'll give you what I look at.
 8              CHAIRMAN GLEIMAN:  I didn't ask you what you
 9    looked at.
10              THE WITNESS:  Okay.
11              CHAIRMAN GLEIMAN:  I asked you whether you knew
12    the number.  You said you didn't.  And I asked you whether
13    you would like to know.  If you're not interested in how
14    much they've spent out of the $1.019 billion that's been
15    budgeted, we'll stop here and go on to another line of
16    questions.
17              THE WITNESS:  No, I am very interested.  I am very
18    interested.  You're looking at the one line item.  I like to
19    look at the bottom-line programs.
20              CHAIRMAN GLEIMAN:  I understand.
21              THE WITNESS:  And that's what we look at.
22              CHAIRMAN GLEIMAN:  Okay.
23              Well, you know, when you get to the bottom line,
24    it's the sum of everything above the bottom line.  You're
25    telling me that we shouldn't look above the bottom line.  If

                                                             18696
 1    that's the case, then -- and I suspect that you and some of
 2    your colleagues might be perfectly happy to just walk out of
 3    here with $2.4 billion and split it up any way you want
 4    ratewise, I know.  But that's not the way the process works. 
 5    You don't look only at the bottom line.  You look above the
 6    bottom line.  So today we'll look above the bottom line.
 7              Looking above the bottom line through Accounting
 8    Period 5, you've spent $56 million out of the now $1.019
 9    billion that you say you're going to spend this year on ADP. 
10    Could you first describe why your estimate has grown so much
11    from $200 million to $426 million to $721 million for the
12    current year of a few weeks or months ago and now to $1.01
13    billion for the current year?
14              THE WITNESS:  Yes, let me clarify that point. 
15    When we do the rate categories, we tie in the total
16    expenditures of the project under ADP.  When you're looking
17    at a line in terms of our current performance, that may not
18    be the total program cost.  You have to go pull it out of
19    supplies and services, and I don't think we're looking at
20    the same thing, because I could -- I don't have it with me,
21    but I can go back and show you the total program cost, which
22    some of it may be -- for example, priority redesign is a
23    supplies and service cost.
24              CHAIRMAN GLEIMAN:  Well, I'll tell you what.
25              THE WITNESS:  And your category here it may be

                                                             18697
 1    ADP.  I just don't know.
 2              CHAIRMAN GLEIMAN:  I just took this out of Postal
 3    Service documents.  You know, I don't know, maybe I have
 4    different Postal Service documents than you.  But I have a
 5    feeling that we'll be ripe for a lunch break in a little
 6    bit, and you during the lunch break can go get those
 7    documents or numbers that you don't have and come back and
 8    you can show me what the real figure is both in terms of the
 9    total -- if you wish to do this.  It's not a directive by
10    any stretch of the imagination.
11              But if you want to show me that indeed there's a
12    whole bunch more ADP supply and service money squirreled
13    away on a whole bunch of other lines, which will raise the 1
14    billion and some odd cents figure, and then show me that
15    there's a whole lot of expenditures squirreled away on all
16    these other lines that show that this -- a greater
17    percentage of this increased amount than $56 million is of
18    1.019 billion has actually been spent, I'll be delighted to
19    accept that information.
20              THE WITNESS:  But give me one minute, though,
21    because I've got to clarify your point about squirreled
22    away.  You know as well as I do --
23              CHAIRMAN GLEIMAN:  I didn't mean that in a
24    pejorative sense.
25              THE WITNESS:  Okay.

                                                             18698
 1              CHAIRMAN GLEIMAN:  It's included in other
 2    programs.
 3              THE WITNESS:  No.  No.  We manage -- the Postal
 4    Service's internal management uses slightly different line
 5    items to manage our organization than what we report over
 6    here in the rate case.  Those categories -- we make the
 7    adjustments for them.  The number that I've seen bottom line
 8    at this point I think it was through A.P. 5, we were about
 9    $50 million below the plan for these programs at this time.
10              CHAIRMAN GLEIMAN:  By the way, I think that these
11    figures, this $56 million, it comes out of your accounting
12    period reports, which as I understand it are not prepared
13    specifically for the Postal Rate Commission.
14              THE WITNESS:  They are not.
15              CHAIRMAN GLEIMAN:  And which the Postal Rate
16    Commission gets sometimes four weeks late, sometimes four
17    months late.  But that's neither here nor there, I guess. 
18    But be assured, these are numbers that come out of your
19    accounting period reports.  I don't know what you use your
20    accounting period reports for, if not management.
21              THE WITNESS:  Let me give you another example. 
22    When you say programs in your definition you include
23    transportation.  In our internal management, transportation
24    is a separate line item.  We don't include it under program
25    cost.  In your ADP, yours is broader than ours that we're

                                                             18699
 1    managing day to day with.  That's all I'm saying.
 2              CHAIRMAN GLEIMAN:  It's not my -- sir --
 3              THE WITNESS:  I have to do a tremendous
 4    reconciliation for you to do that.
 5              CHAIRMAN GLEIMAN:  Well, you may have to do it. 
 6    It's not my program.  It's not my definition.  It's not my
 7    line.  And it's not my document.  These are the numbers, the
 8    documents, the programs, and the definitions that are used
 9    by the United States Postal Service.  If you're telling me
10    that we're being given information that's different than
11    what we ought to be given, then I really -- I mean, I'm just
12    flabbergasted, because I don't know how to assess all the
13    financial data you've given us.  But let's try and move on a
14    little bit here.
15              How much do you plan to spend accounting period by
16    accounting period between now and the end of the year on ADP
17    supplies and services, which is a line in the Postal Service
18    document.  The line currently has $1.019 budgeted and $56
19    million spent.
20              THE WITNESS:  I don't have that detail with me,
21    that information.
22              CHAIRMAN GLEIMAN:  Do you believe it's possible to
23    efficiently spend approximately $1 billion on ADP supplies
24    and services in the remainder of the year?
25              THE WITNESS:  I go back, when the system is geared

                                                             18700
 1    up, the plans are in place to spend this money.
 2              CHAIRMAN GLEIMAN:  Do you know whether there are
 3    any knowledgeable individuals or individuals lacking
 4    knowledge in the U.S. Postal Service management team, who
 5    have expressed doubt as to whether you can spend $1.019
 6    billion on ADP supplies and services in the remainder of
 7    this year?
 8              THE WITNESS:  That question is so broad.  There's
 9    one great thing about the Postal Service.  We have a diverse
10    organization with a lot of diverse views, and there's always
11    going to be an opinion different than --
12              CHAIRMAN GLEIMAN:  Let's limit it to
13    knowledgeable.
14              THE WITNESS:  That's what I'm talking about.  I
15    consider the senior officers very knowledgeable and they
16    challenge and question the same way you did to me.  I don't
17    know if they have spoke to specific program managers or not. 
18    We have and they've told us they are going to spend the
19    monies.
20              CHAIRMAN GLEIMAN:  More then three-quarters of the
21    way through FY'97, at the point in time when it sent in the
22    R-97-1 rate case filing, the Service overestimated its ADP
23    services and supplies' expenses for that year by 173
24    percent, and you are now telling me that you've got
25    something in place this year that you didn't have in place

                                                             18701
 1    three or four years ago, but that was in place last year
 2    maybe, which should instill in me confidence in your revised
 3    $1 billion estimate?
 4              You've spent five percent of this $1 billion
 5    through accounting period five.  You've got 95 percent of
 6    that money to spend between now and the end of the year or
 7    between accounting period five and the end of the year, and
 8    you, please, tell me again why it is I should be confident
 9    that after last year's performance and the year before, and
10    the growth from year to year in the ADP budget, that I
11    should have some confidence that you can spend 95 percent
12    between AP-6 and AP-13?
13              THE WITNESS:  I'll go back and repeat some of the
14    same things I've said.  A lot of these projects and programs
15    today, we now have contracts in place.  I mean, contracts
16    have been signed.  We're gearing up to spend the monies.
17              CHAIRMAN GLEIMAN:  There are a few people who are
18    my age and maybe a teeny bit older who remember how things
19    used to be in the Federal Government when agencies used to
20    spend all that money in the last quarter of the year.  I
21    guess that's what we are looking at with the Postal Service.
22              If you were able to do this, and I don't know that
23    you will be able to do it, I hope not to see stories such as
24    those we used to see about the Pentagon and some other
25    agencies around town, are you familiar with library

                                                             18702
 1    reference H-10, explanation of cost reductions in other
 2    programs?
 3              THE WITNESS:  I have reviewed that.
 4              CHAIRMAN GLEIMAN:  There are a series of three
 5    exhibits at the back that list each and every program
 6    described in the document, and the estimated cost increases
 7    in FY'97, in the test year.  I've left copies on your
 8    counsel's desk.  There are copies on the table near the
 9    door.  I'm going to provide a copy to you.
10              MR. RICHARDSON:  Mr. Chairman, just for
11    information, this is part of the record.  When I was cross
12    examining Witness Tayman, I entered library reference H-10
13    into the record.
14              CHAIRMAN GLEIMAN:  Thank you.  I appreciate that. 
15    I'm not going to enter this into the record.  I think we
16    actually may have known that, just for purposes of asking a
17    few questions here.
18              How many of the 81 test year programs did you
19    review for your rebuttal testimony?
20              THE WITNESS:  I'm sorry?
21              CHAIRMAN GLEIMAN:  How many of the 81 programs did
22    you review for your rebuttal testimony?
23              THE WITNESS:  I had my staff go back and talk to
24    program managers and they've gone back, I think, pretty much
25    and reviewed every single one of these or had discussions

                                                             18703
 1    with just about every one of them.
 2              CHAIRMAN GLEIMAN:  Can you give me in more detail
 3    how you went about this?
 4              Was a memo sent out to all the program managers,
 5    inviting them to meetings with your staff?  Did you do a
 6    telephone survey?  Did you catch the heads of the programs
 7    or were they out sick or on travel or whatever and maybe you
 8    caught somebody further down the line?
 9              How did this process work?
10              THE WITNESS:  Okay.  The process ties back to what
11    I said before in terms of the whole -- the management cycle,
12    the part of our review process, and we did a number of
13    different things, just not one particular thing.
14              First of all, I think we went out with a mid-year,
15    asking the program managers and the managers to give us an
16    update on everything.
17              CHAIRMAN GLEIMAN:  When?
18              THE WITNESS:  Oh, I can't recall -- maybe a month
19    and a half ago or so.
20              We also have had discussions with the big
21    program -- the program managers that have these large, large
22    programs, asking them to look at it, and if you will look at
23    my rebuttal, for example, you see where I got a letter
24    back -- I remember that -- in terms of the MTE, the Mail
25    Transport Equipment Project, where they said we are going to

                                                             18704
 1    be delayed, and so I also have asked my staff to go back and
 2    personally talk to all the program managers.
 3              They are also making commitments to Mr. Runyon and
 4    the senior officers of the Postal Service -- that is up
 5    there on that board -- and we have gone up and helped
 6    monitor that.  In fact, we helped set up that board.  We
 7    also have a Vice President, Darrah Porter, whose job now is
 8    to manage these projects overall to make certain that
 9    program managers are in place and they are doing the things
10    that they are doing, so it is a number of different things.
11              CHAIRMAN GLEIMAN:  So you are confident that you
12    did a systematic review and that each and every program
13    manager was contacted?
14              THE WITNESS:  Yes.  Let me --
15              CHAIRMAN GLEIMAN:  By the way, let me ask you, I
16    mean that was my summation of that you said, that it was
17    done and done well in terms of reviewing the 81 programs.
18              In either the Baldridge setup or the MBO setup,
19    the Management By Objectives setup that I referred to, do
20    you know whether the textbook approach provides an
21    opportunity to either adjust milestones or modify goals or
22    once you commit to something are you locked in and you have
23    to do it regardless?
24              THE WITNESS:  Well, eventually you get back to the
25    management cycle where you do the established again, and

                                                             18705
 1    there is an opportunity to do that but you try to hold
 2    every -- that is what the review process is all about is you
 3    are holding people accountable on an ongoing basis and --
 4              CHAIRMAN GLEIMAN:  But the milestones and the
 5    goals are not immutable, is that right?
 6              THE WITNESS:  Unless there's a dramatic kind of
 7    change -- and that's possible.  You have got to have, of
 8    course, sometimes some flexibility.
 9              I did want to --
10              CHAIRMAN GLEIMAN:  So it is conceivable then that
11    some of these firm commitments that were made, you know, we
12    wouldn't want it to happen, but it is conceivable that there
13    could be some changes?
14              THE WITNESS:  Yes, and I think the perfect example
15    is that Mail Transport Equipment -- now I need to clarify
16    one point also.
17              These programs that a lot of the cost reduction
18    projects and that, we not only go back and talk to the
19    program managers, they go out and talk to the field people,
20    these that apply to the field --
21              CHAIRMAN GLEIMAN:  You don't know that first-hand,
22    though?
23              THE WITNESS:  Well, I know they go talk to them. 
24    I don't know what their discussions are but they do actually
25    have meetings and go over all of these programs with them.

                                                             18706
 1              CHAIRMAN GLEIMAN:  I'll take your word for it that
 2    it was done systematically and thoroughly.
 3              Can you tell me how many of the listed programs
 4    have been cancelled?
 5              THE WITNESS:  No, I cannot tell you that.
 6              CHAIRMAN GLEIMAN:  Can you tell me how many of the
 7    listed programs have been deferred?
 8              THE WITNESS:  I do know like the Mail Transport
 9    Equipment has been delayed and that is in my rebuttal
10    testimony to you.
11              CHAIRMAN GLEIMAN:  You are not aware of any others
12    that have been deferred?
13              THE WITNESS:  No, not at this point.
14              CHAIRMAN GLEIMAN:  All right.  Which programs are
15    now estimated to have lower costs than in the R97 filing?
16              THE WITNESS:  Which ones?  Nobody has given me
17    anything that reflects lower costs at this point other than
18    the Mail Transport Equipment that I showed you.
19              CHAIRMAN GLEIMAN:  So it's conceivable that some
20    others have lower costs, but that information just hasn't
21    been given to you?
22              THE WITNESS:  Correct.
23              CHAIRMAN GLEIMAN:  In Docket MC97-5, that's the
24    docket for the Postal Service's request for professional
25    packaging, the Postal Service stated that a number of POS 1,

                                                             18707
 1    I think they're called, POS terminals, were to be installed
 2    in FY '98.  And then we learned that there was a figure that
 3    was less than the originally proposed level of installation
 4    in FY '98.  Has the Postal Service lowered its estimate of
 5    expenses for the POS 1 terminal installation for the test
 6    year?
 7              THE WITNESS:  I received a letter for 1997 where
 8    they in fact told me that they were going to under, I
 9    believe the number was like 18 million.  This year we have
10    not gotten any change because of the expenditure number at
11    all.  I do know that they are going to prepare an investment
12    analysis exception report, because on the capital side we
13    are going to overspend.
14              CHAIRMAN GLEIMAN:  That would mean that you would
15    get more POS 1 terminals installed than you thought in this
16    year?
17              THE WITNESS:  No.  To continue, the project -- we
18    do have a deployment plan and --
19              CHAIRMAN GLEIMAN:  Well, we are talking about this
20    year.
21              THE WITNESS:  Yeah, I am talking 1998.  In fact,
22    1998.
23              CHAIRMAN GLEIMAN:  Well, what has the capital
24    investment plan got -- I mean I asked you if that meant you
25    were going to have more terminals that you were going to buy

                                                             18708
 1    and install this year than originally planned.  The capital
 2    investment plan or proposal for the future doesn't have
 3    anything to do with this year, does it?
 4              THE WITNESS:  Yeah, I -- excuse me, I
 5    misunderstood.  But I am talking about part of what we
 6    already have committed.  We need some more money because it
 7    is costing us more than we had thought originally from the
 8    capital side of the house, and we will be going back to the
 9    Board with that explanation.  We do have a deployment
10    schedule that they are working on.  I have not received any
11    notice from them that the number will be different at this
12    point.
13              CHAIRMAN GLEIMAN:  When MC97-5 was filed, the
14    Postal Service indicated that these terminals, which were
15    crucial to this packaging proposal, would be installed in
16    3500 facilities that -- of a particular type.  These are
17    facilities that met some demographic conditions, because we
18    wouldn't want to offer services in places where people don't
19    make a lot of money or anything like that.  We just want to
20    offer these services to the American public in the high
21    income areas.
22              We found out right toward the end of the case, in
23    a Postal Service document, that only 3,084 of the facilities
24    were going to get POS 1 terminals, and we were told that the
25    reason was that there just weren't going to be as many POS 1

                                                             18709
 1    terminals available in FY '98.  Did you cut back on the cost
 2    of the POS 1 terminals in this list of 81 programs?
 3              THE WITNESS:  I don't know if they made the
 4    adjustment last year that tied into the rate case, I really
 5    don't know that.  They did have less expenditures in 1997,
 6    and that they told us that, and it would be affected in the
 7    '98.  I really don't know that.
 8              CHAIRMAN GLEIMAN:  Okay.  Let's try International
 9    Service Centers being installed as scheduled.  Are they on
10    schedule?
11              THE WITNESS:  They may be, they are pretty close,
12    I understand.
13              CHAIRMAN GLEIMAN:  Okay.  Corporate Call
14    Management Program on schedule?
15              THE WITNESS:  That's going to the Board next
16    month.  They are gearing up to sign contracts so it could,
17    in fact, be pretty close to schedule.
18              CHAIRMAN GLEIMAN:  Geared up?  The contracts are
19    going to the Board?
20              THE WITNESS:  No, no.  The approval of the
21    project.  If the Board approves expanding it, we have got
22    the test going in Denver, which has added a lot of cost, but
23    this expanded nationwide.
24              CHAIRMAN GLEIMAN:  When was it supposed to go to
25    the Board?

                                                             18710
 1              THE WITNESS:  I don't recall the exact date.
 2              CHAIRMAN GLEIMAN:  Can you tell us which programs
 3    are currently behind or ahead of schedule, and how much,
 4    more or less, is expected to be spent on them in FY '98 than
 5    estimated in the rate filing?
 6              THE WITNESS:  I don't have that information with
 7    me.  As I mentioned previously, from what I had seen before,
 8    we were about $50 million at that point below.  I have not
 9    had any other information other than what I have in my
10    rebuttal testimony that we are going to be delayed on those
11    programs.
12              CHAIRMAN GLEIMAN:  Your testimony provides us with
13    a list, and I use the words in quote, "Known", close quote,
14    Changes for FY '98 Test Year Accrued Costs.  It is Exhibit
15    11-B.  Now, some of these changes reflect the fact that
16    estimates have been replaced by actuals.  For example,
17    COLAs, health benefits, POD workers comp., et cetera.
18              Now, as I understand it, these types of items are
19    outside the control of the Postal Service pretty much.  On
20    the other hand, some of these changes are simply revised
21    estimates such as the Transportation Program that you spoke
22    to and the ADP Supply and Services Program which I spoke to. 
23    They are very much subject, these other programs, ADP and
24    Transportation, are very much subject to the control of the
25    Postal Service, is that not correct?

                                                             18711
 1              THE WITNESS:  Correct.
 2              CHAIRMAN GLEIMAN:  Now, I would like to read your
 3    comments at page 6 and 7 of your testimony.  I don't have a
 4    line number and I apologize.  And I will quote, hopefully
 5    correctly, "Updated information does not receive the
 6    thorough analysis and review by interested parties that the
 7    ratemaking process provides for original estimates.  It
 8    seems unfair for Intervenors to spend months evaluating the
 9    Postal Service's estimates only to have them changed after
10    the fact."
11              Do you think these comments are applicable to both
12    types of revisions, those outside of the U.S. Postal
13    Service's control and those subject to the U.S. Postal
14    Service's control?
15              THE WITNESS:  I do believe that, yes.
16              CHAIRMAN GLEIMAN:  Don't you think there is a
17    difference in kind between the controlled and the
18    uncontrolled changes?
19              THE WITNESS:  I just don't think we ought to
20    adjust for them.
21              CHAIRMAN GLEIMAN:  Could you possibly see how some
22    mailer might view it as unfair to pay higher rates than
23    indicated in the rate filing because there was a lower
24    uncontrolled cost which wasn't taken account of?
25              THE WITNESS:  But I think we have to look at it

                                                             18712
 1    bottom line.
 2              CHAIRMAN GLEIMAN:  I didn't ask you that.  I asked
 3    you whether you could see how some mailer might be exercised
 4    at paying a rate that was higher than that mailer might
 5    otherwise have to rate pay because this Commission did not
 6    take notice of a change in an uncontrolled cost?
 7              THE WITNESS:  Again I would say not to make a
 8    change.
 9              CHAIRMAN GLEIMAN:  I didn't ask you whether you
10    were recommending a change or not.  I asked you whether you
11    thought some mailer somewhere might be happy or unhappy at
12    the prospect of paying higher rates than might otherwise be
13    warranted if you took into account the change.
14              THE WITNESS:  I guess I'm still just having
15    problems understanding that comment.
16              CHAIRMAN GLEIMAN:  If you were a mailer, would you
17    like to pay higher rates than were indicated by the cost to
18    the Postal Service?  Would you be happy at that?
19              THE WITNESS:  I guess I would have to look at it
20    over time.  You're asking me a very complex question.
21              CHAIRMAN GLEIMAN:  Well --
22              THE WITNESS:  Trying to relate it back to one line
23    item.
24              CHAIRMAN GLEIMAN:  That's a good answer.  I'm
25    going to use that answer when I get criticized when we issue

                                                             18713
 1    a recommended decision and somebody's unhappy because their
 2    rates are higher than what they would like them to be.  I'm
 3    going to remind them that Witness Porras said to look at it
 4    over time and don't be upset.
 5              THE WITNESS:  Well, and I'll go back to the -- Mr.
 6    Porras said back in two previous rate cases that we thought
 7    17 and 25-percent price changes were way out of line, and we
 8    were going to manage this organization to keep the prices
 9    under inflation, and the Board has now directed that to the
10    senior management of the Postal Service.  We're very
11    concerned about price changes with our customers.
12              CHAIRMAN GLEIMAN:  I have no idea what you're
13    talking about when you talk about 25 and 17 percent.
14              THE WITNESS:  For some classes of mail, and we are
15    committed to keep our costs down.
16              CHAIRMAN GLEIMAN:  Let's -- you know, what I like
17    to -- I like to keep things in the context of current
18    history, which is AE -- After Ed --
19              [Laughter.]
20              Which is from February 23 on of 19 and 94.
21              THE WITNESS:  And you know I cannot let you get
22    away with that, because I've got to look at the total Postal
23    Service, and we need to do that.  We need to look beyond
24    just one year.  And then, you know, I know you're going
25    to --

                                                             18714
 1              CHAIRMAN GLEIMAN:  I was giving you -- I was
 2    giving you four years to look at.
 3              THE WITNESS:  Yeah, but I would want to go back to
 4    the 1980s, because -- if you let me do that, I'll do that,
 5    because I think we really made some mistakes.  We made some
 6    net incomes and we reversed the organization.
 7              CHAIRMAN GLEIMAN:  Well, I'll tell you what. 
 8    There's a gentleman who comes here and participates in every
 9    rate case from Niagara Telephone who tells us about local
10    mail that used to be available to him way back when in the
11    forties, and it may have been into the fifties, I don't
12    recall.  And, you know, everybody wants to set their own
13    bench mark about how far back we go.  If we're going to look
14    at it over time, let's look at it prospectively, because
15    that's really what we're dealing with, the financial
16    well-being of an institution that's important to all of us,
17    not only as employees and regulators but as users of the
18    mail.
19              THE WITNESS:  I agree with you.  We need to look
20    prospectively and learn from some of our mistakes of the
21    past.
22              CHAIRMAN GLEIMAN:  Your review in your rebuttal
23    testimony focused only on certain selected expenses.  Why
24    didn't you take into account other important factors such as
25    productivity and mail volume and actual revenue-per-piece

                                                             18715
 1    changes?
 2              THE WITNESS:  We did look at the revenues, and
 3    they were pretty essentially on --
 4              CHAIRMAN GLEIMAN:  Revenue per piece was --
 5              THE WITNESS:  I didn't get into the revenue per
 6    piece.
 7              CHAIRMAN GLEIMAN:  That's --
 8              THE WITNESS:  I mean, the bottom-line revenues
 9    were pretty close.
10              CHAIRMAN GLEIMAN:  Let me try again.  Why did you
11    not take into account other important factors such as
12    productivity, mail volume, or actual revenue per piece?
13              THE WITNESS:  We did look at the mail volumes and
14    the revenues and thought that would be pretty close to what
15    we had originally estimated.  The productivity -- I'm not
16    sure we looked at that individually.  I'm not sure --
17              CHAIRMAN GLEIMAN:  Did you look at revenue per
18    piece?
19              THE WITNESS:  I did not.
20              CHAIRMAN GLEIMAN:  Do you know -- you didn't look
21    at it, and you're the rebuttal witness.  Okay.
22              Now you told Mr. Levy that the Service now has
23    accountable managers in place who are committed to spending,
24    and I think that you both agreed that the spending involved
25    somewhere between -- somewhere around $2-1/2 billion give or

                                                             18716
 1    take a couple of shekels on a number of projects between now
 2    and the end of the year.  Now if these managers don't spend
 3    all that money, the Service is going to have a smaller
 4    deficit.  Is that not in fact the case?
 5              THE WITNESS:  I'm not sure if I understand that.
 6              CHAIRMAN GLEIMAN:  If the managers don't spend all
 7    the money that you said they were going to spend, the Postal
 8    Service deficit is going to be smaller than it would
 9    otherwise be.
10              THE WITNESS:  If you're looking in only terms of
11    1998 --
12              CHAIRMAN GLEIMAN:  That's what I'm looking at.
13              THE WITNESS:  Those --
14              CHAIRMAN GLEIMAN:  That's what we're --
15              THE WITNESS:  Investments will affect the future.
16              CHAIRMAN GLEIMAN:  Here talking about.
17              THE WITNESS:  You have to look beyond 1998 with
18    those investments.  If you don't spend the money in 1998,
19    the deficit would be less.
20              CHAIRMAN GLEIMAN:  It's conceivable if a whole lot
21    less money wasn't spent, you might even come up with a
22    surplus.  Is that not correct?
23              THE WITNESS:  I don't see that.
24              CHAIRMAN GLEIMAN:  If no money was spent between
25    now and the end of the year on any of these programs, would

                                                             18717
 1    there be a surplus at the end of the year?
 2              THE WITNESS:  We have contracts in place, and
 3    that's why I say that we do in fact have contracts in place
 4    and money is being spent.  I was talking about if you spend
 5    a little less than what you had anticipated.
 6              CHAIRMAN GLEIMAN:  Well, if you spent even a
 7    little less than that amount, is it conceivable that you can
 8    get to the point where the Postal Service has a surplus?
 9              THE WITNESS:  I don't see that at this time.
10              CHAIRMAN GLEIMAN:  It's not -- okay.  You don't
11    see it.  It's not conceivable.  That's fine.
12              Are bonuses for the current year based on -- in
13    part on the Postal Service's situation financially at the
14    end of the year?
15              THE WITNESS:  Can you repeat that?  I'm sorry, I
16    missed the first part.
17              CHAIRMAN GLEIMAN:  Are bonuses for Postal Service
18    employees and officials based at least in part on meeting
19    financial plan for the rest of the year?
20              THE WITNESS:  No, the incentive system, which we
21    call economic value added, is predicated on positive EVA
22    performance.  It has nothing to do with the plan.  We must
23    have positive EVA results.
24              CHAIRMAN GLEIMAN:  What are the EVA results?  I
25    think there are three legs or something like that of EVA.

                                                             18718
 1              THE WITNESS:  Well, the calculation, and everybody
 2    has to excuse me for a moment, in terms of calculating the
 3    pool of money, we can have a plan -- if we hit the plan
 4    deficit today, there's no money to give out in bonuses,
 5    period, because you have to do a positive EVA.  So you
 6    create a pool of money, and then what you do is take that
 7    money and apply it one-third, one-third, to the three
 8    voices, voice of the customer, voice of the employee, voice
 9    of the business.  If in fact we have negative results, the
10    payout is zero.  So we have to have positive EVA or there's
11    no money that we will give to any employees.
12              CHAIRMAN GLEIMAN:  One of those legs was the
13    business which means the financial picture at the end of the
14    year?
15              THE WITNESS:  Right.  That's what creates the pool
16    for the other bonuses.
17              CHAIRMAN GLEIMAN:  So if you spend less money on
18    capital equipment, even though you are one of these highly
19    accountable managers, the pool of bonus money increases?
20              THE WITNESS:  Capital is done based on over time
21    and the depreciation and that, cost of capital.  That's not
22    directly into the account, the way you said that.
23              CHAIRMAN GLEIMAN:  I don't want to belabor the
24    point but you've been telling us for the past couple of
25    hours, three of us who have cross examined you, that you

                                                             18719
 1    have all this commitment to spend all this money, whether
 2    it's a capital investment or a program investment.  Let's
 3    get out of the capital game and let's look at the program
 4    investment.
 5              If you don't spend all the program money in one or
 6    another of the areas that one or another of these new
 7    accountable managers has agreed to, then there's going to be
 8    more money left at the end of the year than would have
 9    otherwise have been the case; right?
10              THE WITNESS:  That's correct.
11              CHAIRMAN GLEIMAN:  Therefore, the base from which
12    the bonus pool is drawn is going to be larger?
13              THE WITNESS:  It could be but again, you have to
14    look, as I said before, we don't give you 100 percent pay
15    out.  This year, for example, you only get 40 percent.
16              CHAIRMAN GLEIMAN:  I understand.
17              THE WITNESS:  If you short change yourself and
18    kill an investment that's going to give you a savings in the
19    future, you're going to hurt yourself.
20              CHAIRMAN GLEIMAN:  But if you are a short timer,
21    you don't care.
22              THE WITNESS:  That goes back to the accountability
23    and all of the other goals and managing the programs to
24    support them and you have to do those things.
25              CHAIRMAN GLEIMAN:  You've never heard the phrase

                                                             18720
 1    "take the money and run?"
 2              THE WITNESS:  Yes, I have.  I've heard it.
 3              CHAIRMAN GLEIMAN:  I'm almost done.  I'm going to
 4    hand you what I've marked as Presiding Officer's
 5    Cross-Examination Exhibit No. 1.  I'm going to ask for some
 6    help from one of the staff people to make sure that folks
 7    over here at counsel's table get copies.
 8                             [Presiding Officer's
 9                             Cross-Examination Exhibit No. XE-1
10                             was marked for identification.]
11              CHAIRMAN GLEIMAN:  Now, this is a page that comes
12    out of the electronic version of your workpapers furnished
13    to the Commission, the document was entitled Docket R97-1
14    Revenue Requirement Updating Strategy for Rebuttal
15    Testimony.
16              Would you like a moment to read through the
17    document?
18              THE WITNESS:  I'm reading it.  I've not seen this
19    before.
20              CHAIRMAN GLEIMAN:  It was in your workpapers.
21              THE WITNESS:  I just do not recall reviewing it. 
22    I did go through the workpapers, too.  I just don't recall
23    this.
24              CHAIRMAN GLEIMAN:  I am just interested in the
25    first three paragraphs, by the way.

                                                             18721
 1              THE WITNESS:  That's almost the whole page.
 2              CHAIRMAN GLEIMAN:  You will be pleased that I'm
 3    only interested in the first three.
 4              THE WITNESS:  Okay.
 5              CHAIRMAN GLEIMAN:  Let me know when you are ready.
 6              THE WITNESS:  Oh, I'm ready.
 7              CHAIRMAN GLEIMAN:  Okay.  Now paragraph 1 says
 8    that the revenue requirement will be updated for known and
 9    quantifiable actual elements.  It then lists them and we
10    know that the items on the list reduce expenses by $556.6
11    million.  Okay?  Are you with me?
12              THE WITNESS:  Okay.
13              CHAIRMAN GLEIMAN:  The first sentence in paragraph
14    2 states, quote -- and this is a strategy document -- that
15    is outside the quote, Mr. Reporter.  We have to make it
16    clear what this document is.
17              But paragraph 2 states, "Provide updated
18    information on cost increases to offset the decreases
19    included under number 1."  Is that not correct?
20              THE WITNESS:  I cannot see that statement you just
21    made.
22              CHAIRMAN GLEIMAN:  Look at the first sentence of
23    paragraph 2.
24              THE WITNESS:  Paragraph -- I'm sorry, paragraph 1
25    or 2?

                                                             18722
 1              CHAIRMAN GLEIMAN:  Paragraph 2, number 2, second
 2    paragraph on the page, the first sentence.
 3              THE WITNESS:  Okay, yes, I see that.
 4              CHAIRMAN GLEIMAN:  It seems that this strategy
 5    document is advising that the Service should include in your
 6    testimony selected lists of revised cost estimates that are
 7    within the control of the Postal Service to offset known and
 8    generally uncontrolled cost decreases.
 9              Would you care to comment?
10              THE WITNESS:  No.  I think we just showed costs,
11    whether they were in our control or not, that came down, and
12    particular costs, and you know, I really use the year 2000. 
13    I know that is a management problem.  It's an organization
14    problem, but every organization -- you could almost say that
15    is universal -- is going to address that issue and has to
16    address that issue.
17              As I mentioned to you, we have underestimated that
18    and all we were doing was just showing you the major cost
19    increases we had.
20              CHAIRMAN GLEIMAN:  So then you are saying that it
21    was not the strategy of the Postal Service to offset known
22    decreases by locating some increases, as is indicated under
23    paragraph 2?
24              THE WITNESS:  We did have a major -- a couple of
25    major increases and we wanted to show those.

                                                             18723
 1              CHAIRMAN GLEIMAN:  Look at the last sentence of
 2    paragraph 2 -- in order to balance back to the original
 3    revenue requirement an argument will be made for an increase
 4    in the contingency from 1 to 2 percent.
 5              Now you have only argued for an increase in the
 6    contingency, as I recall from your rebuttal testimony, to
 7    one and a half percent.  How do you feel about a strategy
 8    that tries to wipe out known quantifiable minuses with --
 9    I'll give you the benefit of the doubt -- known or unknown
10    but perhaps quantifiable increases, and then tries to come
11    up with some way to balance out by upping the contingency?
12              THE WITNESS:  Let me clarify what I said in my
13    rebuttal -- I have to do that because it ties back to your
14    comment.
15              CHAIRMAN GLEIMAN:  Okay.
16              THE WITNESS:  I said not to make any changes, and
17    I know I am going to -- I hate to say what I am going to say
18    but I said if you thought you had to, here's a way to do it,
19    but my recommendation is not to make any changes.
20              CHAIRMAN GLEIMAN:  But your alternative is if you
21    make those changes you have to take into account these other
22    things that I am showing you, and we are sitting here with a
23    document that says find enough offsets -- find enough
24    increases to offset those decreases.
25              It doesn't say find all the increases and all the

                                                             18724
 1    decreases.  It says find enough to offset.
 2              MR. REITER:  Mr. Chairman, could you tell me where
 3    you are reading from?  That would help us, I think -- where
 4    it says that.
 5              CHAIRMAN GLEIMAN:  I'll read the sentence again: 
 6    "Provide updated information on cost increases to offset the
 7    decreases included under Number 1."
 8              That is fairly plain English from where I come
 9    from.
10              THE WITNESS:  Again, we were looking at did we
11    have any particular costs that were majorly going up.  We
12    weren't trying to go through every single line item.  In
13    fact, when you look at the bottom line, there's a difference
14    of the $195 million.
15              CHAIRMAN GLEIMAN:  That's fine.  I understand.
16              Look at paragraph three.  In the middle of
17    paragraph three, there's a sentence, or slightly below the
18    middle of paragraph three, there's a sentence that starts
19    with the phrase "a complete revenue..." can you find that
20    sentence?  Counsel, can you find that sentence?  Let's all
21    get on the same score card here.
22              MR. REITER:  I see that.  Thank you.
23              THE WITNESS:  I see that.
24              CHAIRMAN GLEIMAN:  Mr. Porras, do you see that
25    sentence?

                                                             18725
 1              THE WITNESS:  Yes, I do.
 2              CHAIRMAN GLEIMAN:  Do you want to read it into the
 3    record or should I read it into the record?
 4              THE WITNESS:  You can read it.  That's fine.
 5              CHAIRMAN GLEIMAN:  This is a Postal Service
 6    strategy document.
 7              MR. REITER:  Mr. Chairman, I don't know that's
 8    been established.
 9              CHAIRMAN GLEIMAN:  Are you suggesting that someone
10    else inserted this document into the electronic version of
11    Witness Porras' workpapers?
12              MR. REITER:  I have no idea, and I think that's
13    part of the problem here.  I've never seen this document. 
14    Mr. Porras told you he never saw this document.  Somehow,
15    yes, it was in that electronic version.  That is one of the
16    problems with providing electronic versions, that sometimes
17    it's impossible to know exactly what is on there.
18              You've made a presumption about the status of this
19    document.  It's been labeled electronic version.  It was not
20    filed as an electronic version of anything.
21              CHAIRMAN GLEIMAN:  I will entertain a motion and
22    arguments from the Postal Service that this is either not a
23    Postal Service document or was not considered by officials
24    developed a strategy for rebuttal on the issue of the
25    revenue requirement.

                                                             18726
 1              MR. REITER:  I appreciate that.
 2              CHAIRMAN GLEIMAN:  The Commission will
 3    consequently give appropriate weight based on the arguments
 4    that you submit in a motion.
 5              MR. REITER:  Thank you.
 6              THE WITNESS:  I could say here, I just read this
 7    sentence, nobody talked to me personally about this
 8    statement at all, period.
 9              CHAIRMAN GLEIMAN:  This is a statement.  It's not
10    a direction to anybody.  It's a statement.  I think we ought
11    to read it into the record.
12              The complete revenue requirement update would be
13    time consuming.  Let's take a moment out for an editorial
14    comment.  We don't disagree on that, do we?
15              THE WITNESS:  All right.
16              CHAIRMAN GLEIMAN:  I finally found something we
17    agree on.  Let me continue the sentence now.  And, would
18    probably result in a further reduction in test year costs. 
19    Do we agree on that half of the sentence?
20              THE WITNESS:  I think I showed you -- again,
21    nobody showed me this particular comment, but I could look
22    at what we said in terms of my rebuttal, and that's the net
23    is $195 million less expenses.  I mean, that does show you
24    do have a difference of about $200 million, regardless of
25    what this is implying or saying.

                                                             18727
 1              CHAIRMAN GLEIMAN:  One last question.  When Mr.
 2    Richardson was cross examining you on behalf of OCA, you
 3    said something to the effect that rebuttal figures reflect
 4    an update for what we had or have.  I don't remember whether
 5    it was "had" or "have," at this point.  Did you say that? 
 6    Do you recall saying that?
 7              THE WITNESS:  Yes, I said something to that
 8    effect.
 9              CHAIRMAN GLEIMAN:  Is it conceivable that if this
10    case went on another two or three months beyond the expected
11    and required deadline of ten months, that we might have more
12    at that point which would result in further adjustments?
13              THE WITNESS:  We could have adjustments -- of
14    course.  That's true in any case.  You could have ups or
15    downs for that matter.
16              CHAIRMAN GLEIMAN:  I recognize that.  There could
17    be other adjustments.  That's all I have.  I think my
18    colleagues may have a couple of questions and perhaps we can
19    get through that and then we can let you get together with
20    your lawyers for the rebuttal phase during what -- oh, we
21    have to do some follow up.  I'm sorry, Mr. Levy.  Please, I
22    apologize.
23              COMMISSIONER LeBLANC:  Mr. Levy?
24              CHAIRMAN GLEIMAN:  Mr. Levy, before you ask your
25    follow-up questions, I recognize that you have concerns

                                                             18728
 1    about this document that I have read from that came from the
 2    electronic version of USPS-RT-Exhibit 11-B and C.XLS.  I
 3    would like to have this document transcribed into the record
 4    and entered into evidence subject, of course, to the
 5    objection that you lodged earlier.
 6              MR. REITER:  Do you need further written
 7    explanation of that, Mr. Chairman?  Is that what you said
 8    earlier?
 9              CHAIRMAN GLEIMAN:  I think that if you want to
10    make some arguments about this document not being a Postal
11    Service document or not being a document that anybody
12    considered, or whatever, and that therefore we should give
13    it little or no weight, that you should put those arguments
14    in writing.  We only have what the Postal Service sends us.
15              MR. REITER:  Just so it's clear, I am objecting to
16    your entering it into evidence.
17              CHAIRMAN GLEIMAN:  I understand that.
18              MR. REITER:  I just wanted to clarify that part of
19    it.
20              CHAIRMAN GLEIMAN:  I understand that, and I am
21    going to direct that this document, Presiding Officer's
22    Cross-Examination Exhibit No. 1 be transcribed into the
23    record and entered into evidence at this point, and I am
24    giving two copies to the reporter, and it is done with the
25    understanding that the Postal Service has their reserved --

                                                             18729
 1    has objected and reserved its right to file a motion with
 2    regard to that objection.
 3                             [Cross-Examination Exhibit No.
 4                             PO-XE-1 was received into evidence
 5                             and trascribed into the record.]
 6
 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                             18731
 1              CHAIRMAN GLEIMAN:  Is there a comment or a
 2    clarification that anyone wishes to make at this point in
 3    time?
 4              Mr. Levy, you had some follow-up questions.
 5              MR. LEVY:  Yes, thank you, Mr. Chairman.
 6                      FURTHER CROSS EXAMINATION
 7              BY MR. LEVY:
 8         Q    Mr. Porras, you were asked some questions by
 9    Chairman Gleiman about the attachment to the response to
10    OCA-USPS-120, the fiscal year 1998 operating plan.  Do you
11    recall that?
12         A    Yes.
13         Q    And you were asked some questions about a $228
14    million loss; do you recall that?
15         A    Yes.
16         Q    Now each of the entries in this document were made
17    when?  Each of the plan projections were made when?
18         A    We normally make those during the first part of
19    the year as we are spreading all of the budgets, whether
20    it's personnel cost, whether it's program cost, by the
21    particular accounting periods.  So we are normally doing
22    that the first part of the year.
23         Q    So approximately what dates would that encompass?
24         A    Well, sometimes we have gone as far as Christmas
25    or even later, but it's normally the first part of the year.

                                                             18732
 1         Q    So these numbers were prepared before the filing
 2    of this rate case?
 3         A    No.  The budget just got approved in October. 
 4    Once you get the budget approved, then you spread it over
 5    the 13 periods, so it's definitely after.
 6         Q    Okay.  I want to follow up on another question
 7    that the Chairman asked you.  It was the question that
 8    prompted a rather long answer, and the question was, do you
 9    really think that the Postal Service will lose in the order
10    of 2-1/2 billion during the remainder of the year if it
11    doesn't get a rate increase?  Do you recall that question?
12         A    I don't recall him saying that amount of money. 
13    He mentioned this amount of money that added up here, these
14    four particular periods and their losses was the number that
15    he used.
16         Q    Do you recall him saying whether -- do you really
17    think the Postal Service will lose two plus billion dollars
18    for the rest of the test year if it doesn't get a rate
19    increase?
20         A    I don't recall that.  I recall these four periods
21    and he added up those.  I don't know.
22         Q    Let me ask you a question directly then.  You have
23    already spoken in response to Chairman Gleiman your reasons
24    why you believe that Postal Service management has improved
25    over the past years, and why these expenditures that are

                                                             18733
 1    planned are desirable because they are going to have good
 2    results.  I am not asking you to repeat that.
 3              I am asking you a bottom-line question:  Do you,
 4    sir, believe, really think that the Postal Service is going
 5    to lose $2-1/2 billion from the end of February through the
 6    end of the year if it doesn't get a rate increase?
 7              MR. REITER:  Mr. Chairman, could I ask Mr. Levy to
 8    clarify the source of that number?  I think that would help.
 9              CHAIRMAN GLEIMAN:  Certainly.
10              MR. LEVY:  Yes.  I don't want to put words in
11    Chairman Gleiman's head, but when I cross examined the
12    witness, the -- I think we determined that based on the
13    amount by which the Postal Service was above plan so far
14    this year, they would need to lose that amount of money in
15    order to reach the targeted $1.4 billion that was projected
16    for at the beginning of the case, before the rate increases,
17    before you added in the contingency and the prior year loss. 
18    But my question isn't premised on the source of the number. 
19    I'm asking him whether he really thinks the Postal Service
20    is going to lose that amount during the rest of the year if
21    it doesn't get a rate increase.
22              THE WITNESS:  My response to that, I think that is
23    the same question you asked me this morning, was that I show
24    that we would be $200 million better.  We have the processes
25    in place that that amount of money could in fact be spent.

                                                             18734
 1              BY MR. LEVY:
 2         Q    Your answer to my question was that you had the
 3    processes in place that the money could have been spent.  My
 4    question isn't whether something could happen; it is whether
 5    it is likely to happen.
 6              Do you really think that the Postal Service is
 7    going to lose 2-1/2 billion?
 8         A    I've got to say that based on the plans in place,
 9    we could lose up to the about 2.2 billion.  I mean I have to
10    say that.
11         Q    Do you understand the difference between something
12    could happen and something is likely to happen?
13         A    Oh, absolutely I understand that.  I can do
14    financial projections.  What I cannot do is management's
15    behavior and management response to issues.  What I'm trying
16    to say is I can sit here and predict, but if management
17    decides, and we've got processes in place to do things, I've
18    got to make the assumption that will get done.
19         Q    You worked in the Postal Service for approximately
20    35 years?
21         A    Yes.
22         Q    And I assume you talked to the Postmaster General
23    and the Board of Governors on occasion?
24         A    Yes.
25         Q    Do you think that it is likely that the behavior

                                                             18735
 1    of those individuals and other important decision-makers is
 2    going to cause the Postal Service to lose $2-1/2 billion in
 3    the rest of the year?
 4         A    It's not the behavior.  It's that we have approved
 5    programs and projects to spend that amount of money.  And
 6    let me just -- and I apologize for doing this, because I've
 7    got to put this in context.  I was here in 1994 where I said
 8    we were going to lose close to the $1.3 billion, and I was
 9    being challenged that the loss was going to be a lot more. 
10    And I said, you know, I could project that, but we have put
11    some processes in place to turn things around.
12              This case here, it's an investment.  It's not
13    waste of money.  It's an investment.  Do I think those
14    investment monies are going to be spent?  They will be
15    spent.
16              What I was trying to say earlier to you is they
17    may carry over to '99, but I at this point have no other
18    data to tell me they will not be spent.
19         Q    Let me try one more time.
20              We have a test year in this case, don't we?
21         A    Yes, we do.
22         Q    That test case was chosen by the Postal Service,
23    wasn't it?
24         A    Yes, it was.
25         Q    During that test year, as a result of the

                                                             18736
 1    contracts that are in place, the discretionary spending that
 2    hasn't been locked down, and anything else that is within or
 3    without the control of the Postal Service, it is your
 4    testimony, as you sit here and look at the Commission, that
 5    you believe it is likely the Postal Service is going to lose
 6    $2-1/2 billion during the rest of the year.  And I would
 7    like a yes-or-no answer before you give any explanation.
 8         A    I just -- I think it will be slightly less, I said
 9    that, than the $2.4 billion.  The answer is just slightly
10    less than the 2.4.
11         Q    How much less?
12         A    I showed in my testimony 2 billion.  I cannot tell
13    you whether or not -- I just cannot tell you that, whether
14    or not those program managers -- they have said they are
15    going to spend this money.  I cannot tell you whether they
16    are going to do it.  We have got processes in place to
17    assure they do what they said they were going to do.
18         Q    If you can't tell us whether they're going to do
19    it, they are going to spend that money, then how is the
20    Postal Service -- how is the Commission to know whether they
21    are going to spend that money?
22         A    Well, it goes back, these programs, a number of
23    them have gone to the Board of Governors, they have been
24    approved, there's contracts in place.  That's why my
25    bottom-line testimony says don't make the change.  I mean

                                                             18737
 1    we've got these things in place to get them done.  I'm
 2    saying to you from my knowledge of what I have seen over the
 3    last couple of years, the processes that are in place, that
 4    these can be spent.
 5              I don't know at this point whether they will or
 6    not.  They have told us, they have assured us that the
 7    programs are in place.  Where they didn't feel comfortable,
 8    they told us that, and that's what you saw with that one
 9    program.
10         Q    Do you think the Commission should base, as a
11    matter of policy, should base its revenue requirement that
12    it approves on what can be spent or what is likely to be
13    spent during the test year?
14         A    Oh, I think -- I think the whole process is that
15    evaluation, and our point is that I think we have proven it. 
16    I told you that we have contracts.  We have identified those
17    costs in the test year.  I think we have made -- shown over
18    the last few years that we are trying to stay the course for
19    this organization.  I believe what the Commission has to do
20    is say is management assured in terms of the processes they
21    have in place to do what they say they are going to do.
22              I know this is a long answer.  I'll go back to Mr.
23    LeBlanc and my discussion before about you've said it on the
24    prior year loss recovery, you haven't shown that.  We now
25    can say we have shown it because we went after that issue.

                                                             18738
 1              I believe in this Postal Service when we make up
 2    our mind that we are going to do something, we do it.
 3              I have to answer in that context.  I apologize for
 4    going so long with you.
 5              MR. LEVY:  Mr. Chairman, I would ask the reporter
 6    reread the question and the witness be directed to give a
 7    yes-or-no answer.
 8              CHAIRMAN GLEIMAN:  Can you ask the question over
 9    again and save us a moment?
10              MR. LEVY:  I think so.
11              BY MR. LEVY:
12         Q    Do you believe that the Commission should base its
13    revenue requirement determination in this case on what the
14    Postal Service can spend during the test year, or what the
15    Postal Service is likely -- I'm sorry, let me back up.
16              Do you believe that the Commission should base its
17    revenue requirement determination in this case on what the
18    Postal Service can spend during the test year, or what it is
19    likely to spend during the test year?  And I would like a
20    yes-or-no answer to that question.
21         A    There's two questions in that, and they both are
22    yes.  For once, I'll say yes, but there was two questions.
23              MR. LEVY:  I think to proceed any further would be
24    to beat a dead horse and I will not.
25              CHAIRMAN GLEIMAN:  Just -- I know that you didn't

                                                             18739
 1    have a specific number in mind when you were asking the
 2    question, but just to make sure the record is fairly clear
 3    on this point, Mr. Porras told me that the budget assumed,
 4    and wasn't sure of the exact number, something on the order
 5    of $900 million in new revenue, that is rate case revenue,
 6    from June 1 through the end of the year, and with that
 7    revenue, the Postal Service was still going to have a
 8    deficit at the end of the year of $228 million.
 9              Without that new revenue, that $900 million, which
10    as I indicated, I think is a suspect figure, I think it is
11    way, way on the high side, given the seasonality of the mail
12    and the fact that we will be dealing with the Summer, but a
13    worse case scenario, accepting his figure, is that without a
14    rate increase, the Postal Service would only have a deficit
15    at the end of the year of $1.1 billion, not the $1.4 that
16    they thought.
17              As I said, that suspect number gets smaller and
18    closer to probably what it should be, the smaller the
19    deficit gets without a rate increase, and that assumes they
20    are going to spend all the money.
21              The numbers just don't sort out for me.  I think
22    my colleague may have a clarification or follow up question
23    that he wants to ask.
24              COMMISSIONER LeBLANC:  Mr. Porras, I guess it's my
25    time to beat a dead horse.  You keep talking about contracts

                                                             18740
 1    in the future and what they are worth.  Let me back it down
 2    a minute so I can understand just one way of putting it.
 3              If you will take a vice president, and I believe
 4    his approval rate is about $6 million.  You go up to Mr.
 5    Henderson, it's about $7.5.  You go up to the PMG, I think
 6    it's $10 million.  Anything over $10 million goes to the
 7    Board.  That's close.  It may be a little different now.
 8              THE WITNESS:  The vice president's level is $5
 9    million.
10              COMMISSIONER LeBLANC:  Okay, it's $5 million,
11    $7.5, $10, whatever it may be.  At each phase, at each step,
12    if XYZ corporation comes in and they sign a contract or if
13    they commit, that individual or the Board, Mr. Henderson or
14    the PMG or whomever it is, what happens?  Is that contract
15    not tracked?  Is it not followed through on?
16              I get the feeling that everybody is talking about
17    they don't know what the contracts are worth.  Well, if you
18    sign a contract, you ought to know what that contract is
19    worth, number one, and number two, how then can you not
20    project it into the future as to knowing that okay, I have
21    committed for the next five years, seven years or ten years
22    at $25 million a year to do -- whether it's ADP or whatever
23    it may be, whether it's highway transportation, it can be
24    anything; is that not tracked?
25              THE WITNESS:  Yes, and let me clarify that point. 

                                                             18741
 1    The Board approves the project.  They approve the program
 2    and they approve capital spending levels associated and we
 3    show them the expense levels associated with the programs.
 4              After it's approved -- they don't approve the
 5    contract.  They approve the program.  Then you put contracts
 6    in place to achieve, in some of the cases, to achieve what
 7    you are going to achieve.  In some cases -- maybe I'm not
 8    being clear here.
 9              Once you go back and you get the approval, you
10    start laying out contracts to get things done.  For example,
11    we are saying --
12              COMMISSIONER LeBLANC:  No, no.  I think you are
13    missing my point here.  What I'm trying to get out is let's
14    suppose it's ADP or whatever it may be.  Somebody accepts
15    the fact that the United States Postal Service is going to
16    spend X million of dollars.
17              THE WITNESS:  Right.  I understand that.
18              COMMISSIONER LeBLANC:  The Board signs off on that
19    or Mr. Winters or somebody signs off on that contract.  Now,
20    as an accounting individual, somebody then ought to say,
21    okay, $25 million in a year, you divide 25 by 12, you are
22    going to spend X dollars per month, and you ought to be able
23    to track whether you spend X dollars per month.
24              THE WITNESS:  The capital or contract costs are
25    normally not a problem.  It's the operating variances that

                                                             18742
 1    try the expenses.  Let me give you example one.  It's volume
 2    related, the priority mail redesign contract.  That contract
 3    says we will spend $1.7 billion, I believe, and this is
 4    expense money -- over ten years.  It's volume variable.
 5              Now, we signed a contract that we are going to pay
 6    them for providing service to us.  Now, the contractor may
 7    have some gearing up problems.  We are monitoring the
 8    contracts.  It may not ramp up at the same speed that we
 9    say.  That's what we are trying to hold the managers
10    accountable to do, to try to make certain that gets done.
11              In other cases, it may happen sooner than we
12    expected.
13              COMMISSIONER LeBLANC:  The Chairman's time, I
14    guess.
15              CHAIRMAN GLEIMAN:  Let me understand something. 
16    You keep talking about the Governors having approved this,
17    that and the other.  To paraphrase my colleague here to my
18    right, I'm not an accountant, but am I correct you don't
19    book those expenses when the Governors approve a capital
20    investment project or any other type of project, that they
21    are booked when you make a contract commitment?
22              THE WITNESS:  No.  That's called the capital
23    commitment.  Let's say the Board approves -- let me make up
24    a number, $100 million project.
25              CHAIRMAN GLEIMAN:  We don't need a number.  We

                                                             18743
 1    just need to know when it shows up on the balance sheet.
 2              THE WITNESS:  Let's say it's the construction of a
 3    project, until it's actually completed.  If it's an expense
 4    project, it happens right away, but if it's capital, you
 5    show it as a capital commitment, so you know that I signed a
 6    contract for $100 million.
 7              CHAIRMAN GLEIMAN:  The Board approves an
 8    expenditure for automated mail sorting equipment.
 9              THE WITNESS:  Right.
10              CHAIRMAN GLEIMAN:  The Board approves a contract
11    for -- let's back away from that one, get away from anything
12    that would be a capital investment that would be
13    depreciated.  The Board approves a contract for ADP services
14    to fix the Year 2000 problem for the Postal Service.  The
15    Board meets today and they approve an expenditure of $289
16    million.
17              THE WITNESS:  Right.
18              CHAIRMAN GLEIMAN:  Do you book that as an expense
19    right then and there?
20              THE WITNESS:  No, it's when the services are
21    provided.  Now, that may be geared up to 65 subcontracts or
22    other contracts, but the answer is no.
23              CHAIRMAN GLEIMAN:  Don't muddy the water.  It's
24    not booked when the Governors approve it?
25              THE WITNESS:  No.

                                                             18744
 1              CHAIRMAN GLEIMAN:  Is it booked when you sign the
 2    contract?
 3              THE WITNESS:  No.
 4              CHAIRMAN GLEIMAN:  It's booked when you have the
 5    outlays?
 6              THE WITNESS:  The service is rendered, for the
 7    contract you just explained.
 8              CHAIRMAN GLEIMAN:  How long does the contracting
 9    take usually?  When the Board approves something, do people
10    run downstairs, have a contract in their hand and then run
11    out and sign it, like that, and the next day, there's
12    somebody in there doing the work?
13              THE WITNESS:  In some cases, contracts are signed
14    right away.  Others, there could be some delay.  It could be
15    a few months' delay before a contract is signed.
16              CHAIRMAN GLEIMAN:  I have no further attempts to
17    clarify and understand.
18              COMMISSIONER LeBLANC:  I have to come back, Mr.
19    Porras.  Let me take an example.  Let's suppose that there
20    is a company, XYZ Corporation, and they have got a widget,
21    here we come to the widgets again, and this widget is
22    inserted on all the automation equipment throughout the
23    Postal Service, a retrofit of some kind, and there's a
24    contract signed for $100 million.
25              Now, if I'm understanding you right, you are

                                                             18745
 1    effectively on a cash basis, is what you are telling me,
 2    because you don't do anything, you don't book it, you don't
 3    -- even though the Governors have signed off on that
 4    contract to commit to $100 million, that is not in any way,
 5    shape or form spent or booked until that first widget is put
 6    on that piece of equipment and you get a bill from somebody
 7    that says, okay, now, we have finished one quarter of them,
 8    you owe us $25 million, and then it is put on the books?
 9              THE WITNESS:  If it's capital, that's when it goes
10    on -- well, yes.  That portion will go on the books,
11    although you are tracking the capital commitments in terms
12    of your balance sheet as an asset, let's say, that you are
13    going to depreciate, that's when it becomes put into use, if
14    it's capital equipment.
15              Let me give you -- you are shaking your head and
16    this is so common, I just want to be patient -- you need to
17    be patient with me.
18              You have a building.  The Board approves $100
19    million building.  That building will not be built for five
20    years.
21              We pick up the capital commitment of $100 million. 
22    Now the payment schedule, we signed a contract with somebody
23    to go out and do the design, build the building.  The flow
24    of that will take place over five years.
25              When we finally pay the final payment and we start

                                                             18746
 1    using the building, the building becomes in use, it's then
 2    put on your balance sheet, and that is just standard
 3    accounting what we are talking about.
 4              Now if it is an expense contract for services,
 5    even though we signed a contract -- for example, we just
 6    signed -- we have agreed to buy a bunch of supplies and we
 7    have signed a contract that we are going to buy $100 million
 8    of supplies.  That doesn't go on our books at that point,
 9    okay?  It's when we receive and use the supplies that in
10    fact we start going through our P&L, so these are all
11    standards.
12              I mean you are kind of frowning at me, and to --
13              [Laughter.]
14              THE WITNESS:  -- and I apologize --
15              CHAIRMAN GLEIMAN:  He is looking at me frowning. 
16    I am not frowning.  I am just shaking my head in wonderment.
17              THE WITNESS:  Why?  You can't understand that?
18              CHAIRMAN GLEIMAN:  Well, you know, I'm just not as
19    smart as a lot of other people around town.  What can I tell
20    you?
21              THE WITNESS:  Well, let me give you one more
22    example --
23              CHAIRMAN GLEIMAN:  Let me ask you one more
24    question.
25              THE WITNESS:  Just give me one more example,

                                                             18747
 1    though, please -- because --
 2              CHAIRMAN GLEIMAN:  Sure.
 3              THE WITNESS:  -- because I want to be clear here.
 4              I spent $100 million for those and let's give you
 5    a good example.  What I said before -- those tire chains. 
 6    That is not an expense.  Once I buy it and they deliver it
 7    to me, okay?  -- the contract's signed. Six months later it
 8    gets delivered to me.  I put it in inventory on my balance
 9    sheet.
10              Now you as a user start using it -- that's when it
11    runs through my P&L.
12              I mean these are --
13              CHAIRMAN GLEIMAN:  Let me -- let me just make sure
14    I understand, going back to my good old ADP supplies and
15    services, that billion dollars and change that is laying
16    there, $56 million of which you have spent so far.
17              Somewhere between now and the end of this year,
18    end of the test year, you are going to spend -- you are
19    going to take $950 million on Postal Service money out of
20    the coffers and give it to somebody for supplies that are
21    delivered.  We are not talking here about you are going to
22    make contracts or the board is going to approve.
23              For it to count this year, it's going to be spent
24    this year.
25              THE WITNESS:  Right.  That is exactly right.

                                                             18748
 1              CHAIRMAN GLEIMAN:  You are going to get almost a
 2    billion dollars worth of supplies and services between now
 3    and the end of the year.
 4              THE WITNESS:  Right.
 5              CHAIRMAN GLEIMAN:  After only spending $56
 6    million, okay?  I just wanted to make sure I wasn't'
 7    confused and this wasn't carrying over to next year.
 8              Do you have any idea how much of that you have
 9    already contracted for?
10              THE WITNESS:  I think most of it has been
11    contracted.  I mentioned the Call Centers have not been but
12    that's going before board -- part of the Call Centers is
13    ADP.  That's why I'm saying we have got a little difference.
14              CHAIRMAN GLEIMAN:  Well, wait a minute.  Call
15    Centers hasn't gone before the board yet?
16              THE WITNESS:  The second portion.  The initial one
17    in Denver -- and that is what I said before -- the
18    additional expansion of that pilot will be going --
19              CHAIRMAN GLEIMAN:  So it is going to go before the
20    board and then you are going to have a contract modification
21    so it's got to go to the board and it's got to go through
22    the contract modification.
23              The board hasn't approved it yet.  The next
24    meeting is, oh, in a couple, three weeks, I guess.
25              THE WITNESS:  It's in the April schedule.

                                                             18749
 1              CHAIRMAN GLEIMAN:  It's in the April schedule and
 2    the board approves it and then you will sign a contract or
 3    modify an existing contract and that is how you will spend
 4    some of that money during this current year?
 5              THE WITNESS:  Yes, and they have it planned over
 6    the next three years, I believe, in terms of the outflows of
 7    the monies, so you have only got what we have here is the
 8    1998 portion.  That includes the current project and the
 9    expansion of the project.
10              CHAIRMAN GLEIMAN:  So there's a whole lot of
11    contracts just waiting there for the board to approve
12    expenditures or, you know --
13              THE WITNESS:  They have already approved a lot of
14    the major ones.
15              CHAIRMAN GLEIMAN:  Okay.  I just wanted to make
16    sure I understood that that money actually had to go out the
17    door this year for it to count in this rate case.
18              COMMISSIONER LeBLANC:  Just to make sure everybody
19    is on the same sheet of music, as the Chairman just said,
20    once it goes out, then it is booked into the rate case for
21    the portion that is going to be spent this year.
22              THE WITNESS:  It's in the rate case.  That's
23    correct.
24              COMMISSIONER LeBLANC:  All right.  Well, then let
25    me come back to something I was going to ask earlier but I

                                                             18750
 1    got sidetracked with it.
 2              It goes back to -- and I wasn't going to ask it
 3    but I'll bring it up now.  Then how do you adjust for the
 4    cost of the UPS strike?  It's a little bit different but
 5    it's not different.
 6              You have got that cost in there and we are hearing
 7    through the grapevine and some of the postal press that you
 8    received I think the figure was $150 million extra in
 9    revenue -- well, then what did you do with the cost?  I mean
10    it has to go in tandem some kind of way.
11              THE WITNESS:  Yes, but I guess we -- we --
12              COMMISSIONER LeBLANC:  Did you book that in this? 
13    Did you book that in '97?
14              THE WITNESS:  Costs were in fact booked in '97.
15              COMMISSIONER LeBLANC:  Then they will roll
16    forward?
17              THE WITNESS:  No.  I think we just -- you know, we
18    did not plan on it in the rate case and they weren't in
19    there at all.
20              COMMISSIONER LeBLANC:  Thank you.  Thank you, Mr.
21    Chairman.
22              CHAIRMAN GLEIMAN:  We don't want to beat a dead
23    horse but we have got somebody who is probably getting a
24    little hoarse at this point.
25              THE WITNESS:  Yes.

                                                             18751
 1              CHAIRMAN GLEIMAN:  So I think we will break for
 2    lunch now and come back at two o'clock and during that
 3    period to help your digestive system your counsel can talk
 4    with you about the need for redirect.
 5              THE WITNESS:  Thank you.
 6              MR. REITER:  Just to clarify, Mr. Chairman, we
 7    will be ready for redirect after lunch.
 8              CHAIRMAN GLEIMAN:  I would like that to be the
 9    case.  I don't know whether you will or not.  Are you asking
10    me or telling me?
11              MR. REITER:  I am asking you whether --
12              CHAIRMAN GLEIMAN:  I would like you to be.
13              MR. REITER:  That is the next procedural stage.
14              CHAIRMAN GLEIMAN:  Yes.
15              MR. REITER:  Thank you.
16              [Whereupon, at 12:59 p.m., the hearing was
17    recessed, to reconvene at 2:00 p.m., this same day.]
18
19
20
21
22
23
24
25

                                                             18752
 1                          AFTERNOON SESSION
 2                                                     [2:00 p.m.]
 3    Whereupon,
 4                         M. RICHARD PORRAS,
 5    the witness on the stand at the time of the recess, having
 6    been previously duly sworn, was further examined and
 7    testified as follows:
 8              CHAIRMAN GLEIMAN:  Before we begin this afternoon,
 9    I have one housekeeping matter.  Earlier this week I granted
10    NNA a motion to compel a response to its request for
11    admission No. 1 to the Postal Service, and I directed that
12    the answer be provided by close of business yesterday.
13              To the best of our ability to determine, we have
14    not seen a response, and if during the next break, and there
15    will be one, or two or three today, before we're out of
16    here, I'd appreciate it if counsel could obtain the status
17    of progress being made on providing the answer to NNA's
18    request for admissions No. 1.
19              MR. REITER:  We'll do that, Mr. Chairman.
20              CHAIRMAN GLEIMAN:  I appreciate it.
21              Mr. Reiter, the ball's in your court.
22              Mr. REITER:  We have no redirect.
23              [Laughter.]
24              CHAIRMAN GLEIMAN:  I'm only -- the only reason I'm
25    sorry about that, it means that, you know, you could have

                                                             18753
 1    left earlier and not had to hang around here today.
 2              Mr. Porras, we really do appreciate your
 3    appearance here today and your willingness to put up with at
 4    least the Bench's questions, and your contributions to the
 5    record.  And if there's nothing further, sir, you're
 6    excused.
 7              THE WITNESS:  Thank you very much.
 8              [Witness excused.]
 9              CHAIRMAN GLEIMAN:  Ms. Duchek, if you could
10    introduce your witness, I'll swear him in.
11              MS. DUCHEK:  Thank you, Mr. Chairman.
12              The Postal Service calls John T. Pickett.
13              CHAIRMAN GLEIMAN:  You know, I found out that I've
14    been here too long, because I can't remember -- I know I've
15    seen the faces before on the witness stand, but I can't
16    remember which docket I've seen them in, and it seems to me
17    like I've sworn everybody in at least once or twice already. 
18    But apparently we haven't gotten you yet, Mr. Pickett, on
19    this one.
20    Whereupon,
21                          JOHN T. PICKETT,
22    a rebuttal witness, was called for examination by counsel
23    for the United States Postal Service and, having been first
24    duly sworn, was examined and testified as follows:
25              CHAIRMAN GLEIMAN:  You'll be pleased to know at

                                                             18754
 1    the outset that I don't have any questions for you.
 2              [Laughter.]
 3              COMMISSIONER LeBLANC:  He's also been known to
 4    lie, so you've got to watch him.
 5              THE WITNESS:  Can I go now?
 6              CHAIRMAN GLEIMAN:  I didn't say no one had any
 7    questions for you.  I don't have any questions for you.
 8                         DIRECT EXAMINATION
 9              BY MS. DUCHEK:
10         Q    Mr. Pickett, I'm handing you two copies of a
11    document entitled Rebuttal Testimony of John T. Pickett on
12    behalf of United States Postal Service.
13              This document has been designated as USPS-RT-2. 
14    Are you familiar with this document?
15         A    Yes, I am.
16         Q    Was it prepared by you or under your supervision?
17         A    Yes, it was.
18         Q    Do you have any corrections to make?
19         A    Yes, I do.
20         Q    Would you please go through them one by one.
21         A    Okay.  On page 10, line 2, the citation to page
22    22/11826 should read 22/823.
23              On line 13, about -- near the end of the line,
24    "periodicals" should be capitalized, or the "p" in
25    "periodicals" should be capitalized.

                                                             18755
 1              Turning to Exhibit 2-C, at the very end of the
 2    document, Mr. Wells was kind enough to point out this
 3    morning under the second column where it says zero percent,
 4    in the line where the FACCAT is 3, the number 9 should be
 5    changed to 3.
 6              Moving across that same row, the percentage 29
 7    should be 10.
 8              And then down along the total rows for all
 9    facilities the number 350 should be 344, and the number 21
10    percent should be 20 percent.
11         Q    With those changes, if you were to testify orally
12    today, would this still be your testimony?
13         A    Yes, it would.
14              MS. DUCHEK:  Mr. Chairman, the two copies include
15    the changes Mr. Pickett just read into the record, and I
16    will take the two copies, hand them to the reporter, and I
17    ask that Mr. Pickett's rebuttal testimony be entered into
18    the record of this proceeding.
19              CHAIRMAN GLEIMAN:  Are there any objections?
20              Hearing none, Mr. Pickett's testimony and exhibits
21    are received into evidence, and I direct it be transcribed
22    into the record at this point.
23                             [Rebuttal Testimony and Exhibits of
24                             John T. Pickett, USPS-RT-2, was
25                             received into evidence and

                                                             18756
 1                             transcribed into the record.]
 2
 3
 4
 5
 6
 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                             18785
 1              CHAIRMAN GLEIMAN:  Three participants requested
 2    oral cross-examination:  the Alliance of Nonprofit Mailers,
 3    Florida Gift Fruit Shippers, and McGraw-Hill and Companies.
 4              Does any other participant wish to cross-examine
 5    the witness?
 6              Mr. Levy, Alliance of Nonprofit Mailers?
 7              It appears that Mr. Levy is taking a pass.
 8              MS. DUCHEK:  Mr. Chairman, Mr. Levy informed me
 9    that he had nothing for Mr. Pickett.
10              CHAIRMAN GLEIMAN:  I guess, Mr. Pickett, you and
11    the others are lucky.  Both Mr. Levy and I burned out this
12    morning.
13              [Laughter.]
14              If that is the case, Mr. Wells, you can begin your
15    cross-examination when you're ready.
16              MR. WELLS:  Thank you, Mr. Chairman.
17                          CROSS EXAMINATION
18              BY MR. WELLS:
19         Q    Mr. Pickett, turn your testimony to page 6, if you
20    will.
21         A    Okay.
22         Q    And at lines 11 through 15, will you confirm that
23    TRACS samples highway, air, and rail transportation?
24         A    Yes, it does.
25         Q    You refer to a 3.7 million increase.  Am I correct

                                                             18786
 1    that the air portion of that is 1.353, rail is 2.331, and
 2    water is .106?
 3         A    I don't have those numbers in front of me, but
 4    I'll accept them subject to check, sure.
 5         Q    Do these increases in the rail and air portions of
 6    the total increase give further evidence of some problem
 7    with how TRACS analyzes transportation costs?
 8         A    I don't believe so, no.
 9         Q    All right.
10              On line 17, you talk about higher volume
11    variabilities.  Did you make any analysis or determination
12    concerning the variability of cost with changes in mail
13    volume?
14         A    I'm sorry.  Are you on page 7, line 17?
15         Q    Page 6, line 17.
16         A    Okay.  Sorry.  No, I haven't done any analysis of
17    that, no.
18         Q    Do you know if Mr. Bradley made any analysis to
19    determine variability of cost with changes in mail volume?
20         A    No.  His analysis was the variability of cost with
21    respect to cubic foot miles of transportation capacity.
22         Q    Turn, if you will, to your Exhibit 2-A.
23         A    Okay, I have it.
24         Q    For Fiscal Year '95 and base year '95, what are
25    the differences in period of time covered by those two?

                                                             18787
 1         A    They're the same Government Fiscal Year, October 1
 2    through September 30, '94 through '95.
 3         Q    Fiscal Year '95 and base year '95 are the same
 4    period.
 5         A    Yes.
 6         Q    For the same period, why is there a difference in
 7    the amounts in the two columns?
 8         A    The Fiscal Year '95 column deals -- uses the
 9    volume variabilities that were, I think, pretty much in
10    place since Docket R94-1.  The base year '95 number is from
11    Docket MC97-2, which some people call the parcels re-class
12    case, and in that case, we introduced new highway
13    variabilities, and just glancing at this, there is a minor
14    change in air, but I'm not, as I'm sitting here, sure what
15    that change might have been.  But the big change was in the
16    highway variabilities.
17         Q    Is that variability change reflected on page 2 of
18    your Exhibit 2-A?
19         A    Yes, it is.
20         Q    In the third line, where it increased from 69.6
21    percent to 79.48 percent?
22         A    That's correct.
23         Q    Now, the first figure, the 69.6 percent, was
24    derived from what source?
25         A    It's the ratio of the volume variable cost,

                                                             18788
 1    996,896, to total cost, 1,432,363, the two numbers above it.
 2         Q    Well, where did the numbers of total attributable
 3    volume variable costs derive from?
 4         A    For the fiscal year -- this is true for both '95
 5    and '96 -- when the Postal Service sends over the CRA report
 6    and the cost segments and components to the Commission, it
 7    sends over what I call the transportation model, which is
 8    sometimes referred to when it appears in a rate case as the
 9    cost segment 14-B work-papers.
10         Q    All right.
11         A    So, those two columns were provided in the normal
12    course of reporting.
13              The column base year '95 was filed as B
14    work-papers in Docket MC97-2, and the column base year '96
15    was filed as part of the B work-papers in Alexandrovich's
16    testimony in this case.
17         Q    Okay.
18              The Fiscal Year '95 attribution percentage comes
19    from the CRA.
20         A    Yes.  Well, it comes from the model that feeds the
21    CRA.  That's the way I think of it.  And the only reason
22    --you looked at me kind of funny.  The only reason I say
23    that I don't have much to do with the actual production of
24    the CRA itself.  The transportation model kind of stands
25    alone separately from that, and I deal with just the model,

                                                             18789
 1    the transportation model.
 2         Q    Well, on page 1 of that Exhibit 2-A, the numbers
 3    that appear there in Fiscal Year '95, base year '95, Fiscal
 4    Year '96, and base year '96 -- what is the source of those
 5    numbers?
 6         A    The same source.
 7         Q    The CRA?
 8         A    Well, the transportation work-papers that support
 9    the CRA.
10         Q    All right.
11              On page 7, line 9, would you provide the record
12    with your definition of the word "containers" as you use
13    that word here?
14         A    Generally, when I use the term "container," I'm
15    thinking about things like BMC over-the-road containers,
16    APCs, wire-tainers, and I'm not sure if, in this discussion,
17    I also refer -- I think I separately refer to pallets and
18    Postal Paks.
19         Q    What about trays and sacks?
20         A    Well -- in this section, I don't think I refer --I
21    include them in the discussion, no.
22         Q    You do not include them?
23         A    I do not.
24         Q    Does TRACS include trays and sacks when it expands
25    the quantity of mail in a tray or a sack?

                                                             18790
 1         A    Sort of by definition, yes.  You can't expand the
 2    size of the tray unless you've got a tray.
 3         Q    Is there a reason that you did not address trays
 4    and sacks in your testimony?
 5         A    No, not that I can think of.
 6         Q    On line 10, you say that this is to account for
 7    the space that mail actually takes up on a truck, which is
 8    greater than the actual cubic volume of mail.  How do you
 9    define space that mail actually takes up on the truck?
10         A    The space as it's -- essentially, the floor space.
11         Q    The what?
12         A    The floor space and the vertical space above it. 
13    The effective cube utilization of the truck is affected by
14    how the mail is containerized.
15         Q    Well, how is that greater than -- how is the space
16    that mail actually takes up on the truck different from the
17    actual cubic volume of mail?
18         A    Let's take for an example a Postal Pak that's
19    half-full.  Well, the cubic volume of mail is the actual
20    --half the space of the Postal Pak, and the cubic volume of
21    space that it uses on the truck is the entire space the
22    Postal Pak takes up on the truck.
23         Q    The entire cubic space?
24         A    Yes.
25         Q    Including the empty space above it.

                                                             18791
 1         A    Yes.
 2         Q    So, when you say space that mail actually takes up
 3    on the truck, do you mean that to include what the mail
 4    occupied together with the unoccupied space above it.
 5         A    Yes.
 6         Q    So, are you including empty space within this
 7    terminology, space that mail actually takes up?
 8         A    Yes.
 9         Q    If a container is the sack and if it is a
10    partially filled sack, does the actual cubic volume of mail
11    expand to the capacity of the sack?
12         A    Yes.
13         Q    So, the actual cubic volume of mail is a
14    meaningless term.
15         A    I don't follow you.
16         Q    Well, you don't measure -- you expand it up to the
17    size of -- the maximum size that the sack could contain,
18    correct?
19         A    Right.
20         Q    And if there's one sack on the floor of the
21    vehicle, you would expand that up to the entire height of
22    the truck.
23         A    True.
24         Q    And if there were three sacks stacked on top of
25    one other, those three sacks combined would measure that

                                                             18792
 1    empty space.
 2         A    That's right.
 3         Q    What is the rationale of including empty,
 4    unoccupied space in determining space utilized by actual
 5    mail?
 6         A    The rationale is that, basically, that space can't
 7    be used for anything essentially on the next stop.  As
 8    you're loading the mail, once you've put a container on the
 9    truck for that destination, you've occupied that space.
10         Q    The floor space.
11         A    The floor space.  And that's the way it's treated
12    in the field.
13         Q    If a container is an OTR -- that's an
14    over-the-road BMC container, right?
15         A    Right.
16         Q    -- is partially filled, how is the actual contents
17    of that OTR measured?
18         A    Well, first of all, it might not -- I mean we'd
19    take a sample of the container.
20         Q    I assume that the OTR is a sample.
21         A    Right.
22         Q    How is the cubic volume of mail actually in the
23    OTR measured?
24         A    We ask the data collectors to collect what
25    percentage of mail occupies that container by item type.

                                                             18793
 1         Q    That's by --
 2         A    Sacks --=
 3         Q    -- class of mail.
 4         A    -- loose pieces.  No, sacks, loose pieces, and
 5    various kinds of trays.
 6         Q    If the OTR had 15 pieces of parcel post mail loose
 7    in the OTR, you would sample one piece, wouldn't you?
 8         A    If that's all it had in it?
 9         Q    Had 15 pieces of parcel post, but the sample would
10    be to measure one piece.
11         A    That's true.
12         Q    And they would not measure the other 14 pieces.
13         A    No.
14         Q    How would they determine the percentage of the OTR
15    that was occupied by parcels?
16         A    Well, if there's nothing else in the OTR, all of
17    it is occupied by parcels.  That's the way TRACS treats it,
18    because that OTR is not going to get unloaded to get topped
19    off.  That space is taken.
20         Q    If an OTR was loaded with 15 parcels, one try and
21    one sack, how do they ascribe total cube for parcels?
22         A    It varies.  The data collectors have an option. 
23    They can -- depending on the particular situation in the
24    test, they can either specify percentages of the load or
25    actual numbers of the load, and the rationale behind that is

                                                             18794
 1    that they're under some time constraint to get this mail
 2    sampled, collect their data, and get it back into the
 3    system, and sometimes it's easier for them to use
 4    percentages, and sometimes they use numbers.
 5         Q    If they determine through their estimate that a
 6    third of the ORT was parcels and a third was sack and a
 7    third freight, then the entire cube of the ORT would be
 8    assigned to each one of them.
 9         A    A third, a third, a third, yes.
10         Q    Would this mail actually occupy less floor space
11    if it were bed-loaded?
12         A    Probably not.
13         Q    You mean bed-loaded doesn't take up less space
14    than a container?
15         A    I think I misunderstood you.  It would take up
16    less space if it were bed-loaded.  But if it isn't, it is
17    taking up what space it is taking up, and that's -- the
18    purpose of TRACS is to report what is actually happening. 
19    So when we see a BMC container that is taking up floor
20    space, we don't sort of philosophize about whether it could
21    have, would have, should have, it is what it is, is what we
22    do.
23         Q    What are the reasons for a partially filled
24    container?
25         A    There's a list of them in my testimony starting on

                                                             18795
 1    the bottom of page 7.
 2         Q    In A you said the loads settle.
 3         A    Sure.
 4         Q    How often does that occur?
 5         A    I couldn't tell you.  I mean what I can tell you,
 6    just to give you an example, a lot of BMC transportation
 7    nowadays uses Postal Pak loaders.  Postal Paks are these big
 8    corrugated boxes on pallets and those get loaded by a
 9    conveyor belt and as the conveyer belt feeds this big box,
10    the box kind of tilts forward and it fills up to the extent
11    that the machinery can fill it, and then the machine cuts
12    off and that Postal Pak is loaded onto a truck.  Now, when
13    the truck is going down the road, that Postal Pak, which has
14    not been systematically loaded, it has been loaded by this
15    machine, those contents are going to settle.  So when we
16    take a TRACS test, they are not going to be sticking up to
17    the top of the Postal Pak.
18         Q    On page 8, you talk about partially loaded at
19    dispatch time.  Is there other available mail that could be
20    loaded in that container?
21         A    I think sort of, by definition, that there isn't. 
22    What I am trying to say is that at dispatch time, you don't
23    have the option of doing anything but taking that mail and
24    putting it on a truck, unless you want to delay it.
25         Q    But even if there was mail stacked up waiting to

                                                             18796
 1    be loaded, you wouldn't load it, you would meet the dispatch
 2    time?
 3         A    No.  If mail were stacked up ready to be loaded at
 4    dispatch time, it would be loaded, by definition.
 5         Q    All right.  And if you waited to load that
 6    available mail, then you are going to delay the dispatch
 7    time, is that right?
 8         A    I don't understand your question.
 9         Q    Well, at dispatch time a container is partially
10    loaded and there is additional mail in the stream waiting to
11    be loaded but you would not hold the container to load that
12    mail, you would dispatch the container?
13         A    Yes.
14         Q    So it could have been loaded but for the Postal
15    Service's time scheduling?
16         A    Well, I don't know how -- I mean my mental picture
17    of what you are describing says that it could not have been
18    loaded.  If it could have been loaded, it would have been
19    loaded.  And it wasn't loaded, so they dispatched the
20    container.
21         Q    We are talking about intra-BMC transportation,
22    aren't we?
23         A    Any transportation, it works that way.
24         Q    Well, let's look at intra-BMC and the container is
25    loaded at the BMC.

                                                             18797
 1         A    Right.
 2         Q    And the container is loaded from a spinoff chute
 3    from the computer track.
 4         A    Okay.
 5         Q    And if there is mail piled up on the unloading
 6    chute waiting to go in the container, it could be, except
 7    for the fact that you pull the container to meet a dispatch
 8    time.
 9         A    Correct.
10         Q    Is that right?
11         A    Yes.
12         Q    If partially loaded containers are a frequent
13    occurrence -- are they?
14         A    Well, I don't know what frequent is.  I imagine
15    TRACS would -- well, TRACS wouldn't even tell you that
16    necessarily.  I couldn't tell you.
17         Q    TRACS doesn't tell you how often it occurs?
18         A    No.
19         Q    Would partial loading of containers convert to a
20    more efficient utilization of vehicle space if the contents
21    were bed-loaded?
22         A    Could be and pretty much my recollection from 10
23    years ago is you would see more of that, but you don't
24    today.
25         Q    Even though the bed-loading would be a more

                                                             18798
 1    efficient utilization of a trailer, the Postal Service uses
 2    the containers for other reasons?
 3         A    It would be -- it could be a more efficient
 4    utilization of the trailer, however it would be a much less
 5    efficient utilization of the labor in the plant on both
 6    ends, the origin and the destination.
 7         Q    Do you have any studies to identify or quantify
 8    that difference?
 9         A    No, I don't, but -- well, actually I don't have
10    any studies, but I think the IMHS program is partly
11    predicted on that.
12              I would also say that -- I don't want to -- I mean
13    to me it is obvious on its face when you go to a BMC these
14    days you see one forklift driver handling multiple shoots of
15    loaders, loading trucks really fast, whereas before you
16    would see a mail handler with an extendable conveyer going
17    all the way into the truck, laboriously stacking one stack
18    or one parcel or one tray after another on the floor and
19    he'd be in there for several hours.
20              On the other end of it, I was recently -- I think
21    it was in Dallas, a Dallas PMDC, and I asked about the
22    loading and unloading time.  The dock supervisor told me
23    that to unload a bedloaded truck would take several hours. 
24    To unload a truck loaded with postal packs takes under a
25    half an hour, so there's a lot of benefits to this

                                                             18799
 1    containerization, partly just in terms of getting the stuff
 2    off the truck and into the system and getting it processed.
 3         Q    Processing the mail at origin and destination is
 4    one thing but efficient utilization of the capacity of the
 5    truck would be enhanced by bedloading the material?
 6         A    Could be enhanced by bedloading the material.
 7         Q    is the scheduling time, the time for departure,
 8    the controlling factor as to when the container is full for
 9    loading?
10         A    Well, there are dispatch times, yes, and that's --
11    the dispatch times are determined by the various mail
12    processing schedules on the route.
13         Q    And the dispatch time is the controlling time to
14    determine when a container is full to be loaded on the
15    vehicle?
16         A    Yes.
17         Q    Than again on page 8 you say that weight may be a
18    factor in partial loading.  Explain how weight affects
19    partial loading of a container.
20         A    Okay.  This again -- this is -- part of this
21    section of my testimony is based on my recent tour of
22    facilities.  A lot of these container issues have been
23    coming up during the case and I thought that while I am out
24    at facilities I should ask people.
25              So I saw this one -- think it was an APC, which is

                                                             18800
 1    not as big as a BMC container but a little more user
 2    friendly, and the postal employee was pushing this APC away
 3    from the sorting equipment and I said why are you doing
 4    that?  Why don't you wait to fill it up?  He said it's so
 5    filled and it's so heavy that I can't push it.  I have to
 6    push it now just to get it out of here.
 7         Q    You indicate that safety is the consideration but
 8    an example you just gave safety was not the consideration. 
 9    It's the physical inability of this weak employee to push a
10    container.
11         A    No, it's not, because you are talking to somebody
12    who has had disk surgery so I can understand when somebody
13    knows enough not to want to injure themselves pushing a
14    heavy load.
15         Q    So your one example of an all purpose container
16    being too heavy is the only example you know of where weight
17    is a factor in determining the extent to which a container
18    is loaded?
19         A    It is the one time that I have asked, yes.
20         Q    And you know of no other times?
21         A    No, I haven't asked everybody I have seen whether
22    it's too heavy or not, no.
23         Q    Do OTRs become too heavy?
24         A    I imagine they do in some circumstances.
25         Q    That is pure speculation on your part, isn't it?

                                                             18801
 1         A    All I know is I have tried to push one and they
 2    can be very heavy so -- then again, I am an economist and I
 3    don't move mail every day so --
 4         Q    Aren't OTRs moved around through mechanical
 5    devices?
 6         A    Sometimes they are and a lot of BMCs -- I think
 7    you are talking about the towveyer lines?  -- they are built
 8    into the floor.  A lot of them have welded those over.  They
 9    don't operate in some of the BMCs, so in some cases they are
10    and in some cases they are pulled along.  In some cases they
11    are pushed.
12         Q    At what weight does an OTR become too heavy?
13         A    I think that is a subjective judgment for the
14    person pushing it.
15         Q    And you do not have any idea as to how frequently
16    that occurs?
17         A    No.
18         Q    Nor do you have any idea that it has ever
19    occurred?
20         A    Oh, I do.  I know -- well, on OTR?
21         Q    On OTR.
22         A    No.
23         Q    Then at line 14, you say that once it becomes too
24    heavy, that he starts loading another one.  Does that space
25    become available for use by other mail?

                                                             18802
 1         A    Which space?
 2         Q    The empty space in that container.
 3         A    The first one or the second one?
 4         Q    The first one.
 5         A    No.  That will be dispatched.  As I understand it,
 6    it was dispatched to the dock.
 7         Q    If a container is only partially loaded, at the
 8    time of loading, is that empty space such that it could be
 9    loaded with other mail?
10         A    Could you repeat that?  Sorry.
11         Q    If a container is only partially loaded, is the
12    empty space available for loading by other mail?
13         A    Not unless it's returned to some place where mail
14    is being processed, and my understanding is it wouldn't be,
15    it would be moved out.
16         Q    If there were other mail available to be loaded,
17    but dispatch time required it to be taken away, the empty
18    space could have been loaded with other mail?
19         A    It could have but it was not.
20         Q    The failure to fully load the container is
21    controlled by the need to meet the scheduled vehicle
22    departure time?
23         A    I wouldn't say it's a failure but it is controlled
24    by the dispatch time, and that's controlled by the vehicle
25    departure time.

                                                             18803
 1         Q    Is there any other reason for removing a partially
 2    filled container?
 3         A    I don't know.
 4         Q    At the bottom of page eight, there it's talking
 5    about the expansion process of TRACS.  TRACS expands the
 6    quantity of mail in a container up to the size of the
 7    container?
 8         A    Right.
 9         Q    Even though the container is not fully used for
10    transportation of mail?
11         A    Well, by being on the truck, it's fully used for
12    the transportation of mail.
13         Q    If the container has empty space in it, then the
14    TRACS program expands and assigns the empty space to mail
15    that is actually there?
16         A    It's either the TRACS program or the data
17    collector on site.
18         Q    The data collector is inputting data for the TRACS
19    program, isn't it?
20         A    Yes, and he has the option of entering what we
21    call either a relative percentage, which is -- let me give
22    you an example.  Let's say a container is half filled with
23    parcels and nothing else.  He could enter 50 percent.  The
24    TRACS program, the computer programs, would expand that to
25    100 percent, or he could enter 100 percent and the TRACS

                                                             18804
 1    program would leave it alone.
 2         Q    Do you mean that the clerical enters the notation
 3    if there is a half full container, that he would record it
 4    as being 100 percent full?
 5         A    He had that option, yes.
 6         Q    Isn't that inflating the data?
 7         A    No, it's just recording what's using the
 8    container.  It's doing the same thing the computer program
 9    does.
10         Q    If there is a container that is not subject to
11    being stacked one on top of another, is the space above the
12    container useable space?
13         A    If the container is not subject to being stacked? 
14    What do you mean by that?
15         Q    If the container is such that it could not be
16    stacked one on top of another, is the space above the
17    container then unusable space?
18         A    It's treated as unusable space.
19         Q    It's treated as unusable space?
20         A    Theoretically, you could go in and somehow or
21    other rig the inside of a truck to hold mail up there, but
22    we don't do that.
23         Q    The mail that is below this unusable space is
24    being charged with occupying it?
25         A    Yes.

                                                             18805
 1         Q    What is your rationale for doing that?
 2         A    Because we can't use that space as a matter of
 3    practice.
 4         Q    If the mail in the vehicle were bed loaded, it
 5    could be bed loaded all the way to the top, couldn't it?
 6         A    Yes, it could.
 7         Q    And that would be a more efficient use of the
 8    space in the vehicle?
 9         A    Could be.
10         Q    Any circumstance when it would not be?
11         A    I'm just reluctant to say always or never, so I
12    can't think of one off the top of my head.
13         Q    The use of containers is for the convenience of
14    the Postal Service, not of the mailer?
15         A    I don't know about the word "convenience."  I
16    think it's for the overall efficiency of the Postal Service
17    and for expediting the mail through and between facilities. 
18    That's why we use containers.
19         Q    Does the mailer request that it be containerized?
20         A    I can think of circumstances where they do.  I
21    recall Dow Jones asking for a container discount years ago,
22    so there are circumstances where the mailers want to be able
23    to use -- they don't want to be dragging sacks around, a lot
24    of them.  They want to be able to use pallets.  They want to
25    be able to use whatever containers.  These containers are

                                                             18806
 1    very expensive.
 2         Q    Do you know of any circumstance when a mailer has
 3    requested that his parcels or mail be deposited into a OTR?
 4         A    Into an OTR?  No.  You mean by the Postal Service?
 5         Q    Where the mailer requests it.
 6         A    Mailers request containers from us all the time. 
 7    They put the mail in OTR's or APC's to some extent.  I know
 8    the people that manage our mail equipment inventory aren't
 9    real happy about that, but if you walk into a printing
10    plant, you'll see Postal rolling stock in there.
11         Q    Where the mailer has loaded it in there, not the
12    Postal Service?
13         A    Yes.
14         Q    Intra-BMC transportation, what is the extent of
15    wiretainers?
16         A    I don't know.
17         Q    Do you know if they are used at all in intra-BMC
18    transportation?
19         A    I just don't know.
20         Q    What is the extent of the use of pallets in
21    intra-BMC transportation?
22         A    I don't know the relative percentages.
23         Q    If a pallet is used, does it require the use of a
24    forklift to unload it?
25         A    Can you repeat that?

                                                             18807
 1         Q    If a pallet is used in intra-BMC transportation,
 2    does the presence of the loaded pallet require a forklift
 3    for the pallet to be removed from the vehicle?
 4         A    No.
 5         Q    How else do you get the pallet off?
 6         A    A hand truck.
 7         Q    You unload the pallet onto hand trucks?
 8         A    No, no.  The hand truck is like a forklift except
 9    it's manual.  There's another device, I forget what the name
10    of it is, but it's not a forklift and it's not a hand truck,
11    but it is like a hand truck, like a riding mower.  You bring
12    it in behind it.
13         Q    That's a hydraulic, manually operated forklift?
14         A    Yes.  They don't call it a forklift, there's a
15    distinction between those things.
16         Q    But it serves the same purpose?
17         A    Some of the same purposes; yes.
18         Q    As far as lifting a pallet off the floor, it
19    serves the same purpose?
20         A    Off the floor, yes.
21         Q    Is there any requirement of other loading on
22    intra-BMC vehicles that require a forklift at a destination
23    facility?
24         A    Can you repeat that again?  You lost me.
25         Q    Is there any container used in intra-BMC

                                                             18808
 1    transportation that requires the use of a forklift at the
 2    destination facility?
 3         A    I'm not -- well, I know that when you stack
 4    wiretainers or pallets, if you want to remove the top half
 5    of the stack, you need a forklift.
 6         Q    But you don't know if a wiretainer is used in
 7    intra-BMC transportation?
 8         A    I'm tempted to say I'm certain they are, because
 9    you see them in facilities, but I can't think of an instance
10    where I've seen them, but I've seen them all over the place
11    in the Postal Service.  I can't imagine why they wouldn't
12    use it.
13         Q    Now going back to bed-loaded mail, I believe we
14    agreed that if you bed-loaded it, you could then stack it
15    higher.
16         A    Yes, you can.
17         Q    And thus use the available space on the interior
18    of the vehicle.
19         A    Yes.
20         Q    And bed-loading would maximize the utilization of
21    the space in the vehicle?
22         A    What do you mean by maximize?
23         Q    Well, it would use up the available space inside
24    the vehicle.
25         A    Well, within limits, yes.

                                                             18809
 1         Q    On an intra-BMC transportation that is sampled at
 2    TRACS, is the vertical space above a bed-loaded parcel
 3    expanded to the height of the trailer?
 4         A    Yes, it is.
 5         Q    Why?
 6         A    Because that parcel takes up the floor space.
 7         Q    Takes up floor space, but is there a reason why
 8    other mail wasn't placed on top of it?
 9         A    Because it wasn't available at the time.
10         Q    At the time of the departure to meet the service
11    standard?
12         A    For whatever reason that departure was
13    established, yes.
14         Q    If there were two parcels side by side, could one
15    have been stacked on top of the other?
16         A    Could have been.
17         Q    But it wasn't.
18         A    But it wasn't.
19         Q    So those two parcels get charged with twice the
20    cubic feet?
21         A    Yes.
22         Q    Is a consequence of expanding for empty space
23    above a bed-loaded parcel that the parcel is then charged
24    with the utilization of empty space that it did not use?
25         A    That's a long one.  Can you try that again?

                                                             18810
 1         Q    You say a parcel that's bed-loaded on the floor of
 2    the vehicle is charged with the utilization of empty space
 3    to the height of the vehicle, and is the consequence of that
 4    charging of that piece of mail with the utilization of empty
 5    space that it did not use?
 6         A    It's charging it with the utilization of empty
 7    space that no one can use.
 8         Q    On page 11, under your Section 4, you explain
 9    these, quote, weighting, end quote, factors.  Is it correct
10    that, from your testimony, that the imbalance in sampling,
11    sampling is 70 percent on the in-bound and 30 percent on the
12    outbound; is that right?
13         A    Those numbers ring a bell, yes.
14         Q    So if there is an imbalance, the weighting is such
15    that the sampling is equalized inbound and outbound.  That's
16    the example you give; is that right?
17         A    It's not that the sampling is equalized; it's that
18    the sample totals are adjusted in such a way that you
19    represent the population according to the proportions that
20    things occur in the population.
21         Q    Well, where there's an inbound movement, there's
22    an outbound movement, so they're one to one, right?
23         A    Generally, that's true, but there are some
24    exceptions yes.
25         Q    And you say that the total effects of the

                                                             18811
 1    occurrence of these movements in the population which --
 2    would be one to one?
 3         A    No, that's not what I'm saying.  All I'm saying in
 4    this part of my testimony is that when we sample 70 percent
 5    on one type of movement and 30 percent on the other, if
 6    those movements occur with the same frequency in total, the
 7    samples get re-weighted to reflect that frequency.  So just
 8    because we sampled 30 percent doesn't mean that it
 9    represents 30 percent of, in essence, the mail in the
10    distribution key.  That gets adjusted.  There is a
11    compensation for that.
12         Q    The number of samples is weighted; is that right?
13         A    Well -- the number of samples -- the samples
14    itself are weighted.
15         Q    Well, but they're weighted -- if they're inbound,
16    they're weighted higher than they are if they were outbound,
17    or the reverse of that -- if they were outbound, they're
18    weighted higher because the incidence of sampling is lower?
19         A    That's right.
20         Q    And it's weighted in order to equalize the
21    sampling with the occurrences?
22         A    Basically that's right.
23         Q    And assume, if you will, that the transportation
24    outbound is equal to and offset by a comparable
25    transportation inbound, then the objective of the weighting

                                                             18812
 1    is to make it one to one?
 2         A    No.  We don't assume anything.  What we do is we
 3    sample the entire population of regular contracts as they
 4    occur at every destination and on every day, and we take
 5    that total, whatever it is, whether it's one to one or 1,000
 6    to one to 999, and that's what we control to.  So to the
 7    extent that there are not one to one movements, that's also
 8    reflected in this expansion process.
 9         Q    Is the weighting designed to address any bias that
10    might result or be in existence because of an imbalance in
11    utilization inbound or outbound?
12         A    No.
13         Q    Assume if you will that the mail flow analysis is
14    such that the ratio of cubic feet of one class of mail is
15    four to one to another class of mail.
16         A    Okay.
17         Q    Is there any explanation of how TRACS develops a
18    ratio of only one to one for those two classes of mail?
19         A    Other than to say that all TRACS records is what
20    the data collectors see.  If the data collectors don't see
21    something, it doesn't show up in the TRACS sample.
22              Having seen many TRACS tests and I'm aware of the
23    criticisms of TRACS, I can't think of anything that I've
24    seen that indicates a systematic under-representation or
25    over-representation of any particular class of mail, and I

                                                             18813
 1    have looked.
 2              There are circumstances -- and this happens, for
 3    example, on an air test, where I have observed a data
 4    collector -- an experienced data collector who is about to
 5    make a mistake, and I correct him.
 6              Now, that's going to happen no matter, you know,
 7    what data system you're talking about.  People are human. 
 8    But I don't see any systematic bias in terms of how the data
 9    -- the items are being sampled in TRACS or the containers
10    from which they're being sampled or anything like that, no.
11         Q    Beginning at the bottom of page 12 -- actually, at
12    the top of page 13 -- you use a terminology of route trip
13    destination days and a terminology of route segments.  Would
14    you please distinguish those term terminologies?
15         A    Okay.  A route segment is a movement -- or a leg,
16    sometimes called that -- is a movement between any two
17    points, say between Washington BMC and Merrifield.  A route
18    trip destination day is Merrifield on a certain contract, on
19    a certain trip in that contract, on a certain day.
20         Q    Well, a route trip destination is the end of a
21    route segment.  Is that correct?
22         A    Well, it's -- on a particular day, yes.
23         Q    On a particular day --
24         A    Right.
25         Q    -- a route trip destination is the end of a route

                                                             18814
 1    segment.
 2         A    Or segments.
 3         Q    Or segments?
 4         A    That's the point of this part of the testimony, is
 5    to point out that, if mail is off-loaded at Merrifield on
 6    Thursday and that contract route trip is selected for
 7    sampling and that mail got on the truck in Baltimore and the
 8    truck went Baltimore, Washington BMC, Merrifield, TRACS
 9    samples that mail and recognizes the mail got on in
10    Baltimore.
11              So, it's not just the trip from Washington to
12    Merrifield; it's the whole route trip.
13         Q    You say the mail got on in Baltimore?
14         A    I'm talking hypothetically.  I don't know that a
15    contract actually does this route.
16         Q    And then it went to the Washington BMC?
17         A    Correct.
18         Q    And then it went to Merrifield?
19         A    Could have.
20         Q    And it's sampled in Merrifield?
21         A    Well, let me give you another example.
22         Q    Please do, because what you've given me is not an
23    intra-BMC movement.
24         A    It could be.  It absolutely could be.
25         Q    From the Baltimore BMC to the Washington BMC could

                                                             18815
 1    be intra-BMC?
 2         A    No.  From the Baltimore PMDC to the Merrifield
 3    facility could be on an intra-BMC contract.  There's a
 4    distinction here between trips that are on contracts and how
 5    the contracts get classified.
 6              Just because a contract falls in that account,
 7    that intra-BMC account, doesn't necessarily mean that all
 8    the trips on that contract move to or from a BMC or that all
 9    the destinations or origins on that contract, all the stops,
10    are one stop away from a BMC.
11              Let me give you another example.
12              I was at a TRACS test in Easton, Maryland, which
13    is on the eastern shore, and a truck was running from
14    Baltimore to Easton to Salisbury, which is farther down on
15    the eastern shore, and if we had done the TRACS test in
16    Salisbury, the mail that was being tested in Salisbury --
17    there would be a differentiation between mail that
18    originated in Easton and mail that originated in Baltimore,
19    and that's the clarification this section of my testimony
20    makes.
21         Q    When mail is sampled on an intra-BMC movement --
22         A    Okay.
23         Q    -- it's sampled either as in-bound or out-bound
24    mail.  Is that right?
25         A    Correct.

                                                             18816
 1         Q    And if it's on an out-bound mail, is there any
 2    distance involved beyond the originating BMC, the
 3    destinating BMC?
 4         A    I'm not sure I follow the question.  You've got me
 5    confused.
 6         Q    Well, if mail originates and goes to a BMC, is
 7    sorted, and then goes out-bound to a destinating SCF and is
 8    sampled at the destinating SCF, the mileage factor would
 9    begin with the destination BMC, wouldn't it?
10         A    If that's where it got on the truck, yes.
11         Q    So, any mileage before it got to the destination
12    BMC would not be taken into account.
13         A    Not for that mail, but for any other mail that got
14    on before and got off at that SCF, it would be.
15         Q    Assume if you will that we have an intra-BMC
16    contract that goes from BMC to SCF A to SCF B, and each of
17    these facilities are 50 miles apart.  And that this contract
18    calls for a return from B -- SCF B to SCF A to BMC at a
19    round-trip cost of $200.
20              If the sampling occurs on the outbound portion at
21    SCF A, does TRACS assign a transportation cost for the
22    sampled mail?
23         A    The sampled mail gets treated at a cost of a
24    dollar per -- well, a dollar per mile depending on the size
25    of the truck would be per cubic foot mile.

                                                             18817
 1              It's a 200-mile -- well, I hate to do this to you,
 2    but the outbound trip would probably represent one route
 3    trip in TRACS, and an inbound trip would represent another
 4    route trip in TRACS.  So it kind of complicates things.
 5         Q    But my assumption stipulated was that the round
 6    trip had a total cost of $200.  So that --
 7         A    Okay.
 8         Q    The outbound trip has a cost of $100 and the
 9    inbound trip has a cost of $100.
10         A    Okay.
11         Q    And that the cost between the BMC and Point A is
12    $50.
13              My question is, does TRACS assign a transportation
14    cost to the sample mail on the outbound movement at SCF A?
15         A    It in effect treats the cost of the outbound
16    movement as $50.  Is that what you're asking?
17         Q    It assigns a cost of $50 to the sampled mail?
18         A    Well, it's based on a cost per cubic foot mile,
19    but $50 is what's used.  Or more -- actually what's used is
20    the total cost of the route trip divided by the cubic foot
21    miles on each trip.
22         Q    You mean the total cost of the round trip divided
23    by the cubic foot miles of the round trip.  Is that what
24    you're telling me?
25         A    I'm a little -- the reason I keep double-clutching

                                                             18818
 1    here, if you will, is that TRACS doesn't -- you wouldn't see
 2    a round trip like this.  You would see an outbound trip and
 3    an inbound trip.  And TRACS samples those separately.  So on
 4    the outbound trip in your example TRACS would effectively
 5    assign $50 to the -- well, essentially the cost of the whole
 6    trip would be the same on a per mile basis.  Put it that
 7    way.
 8         Q    The cost --
 9         A    $50 for the first part, $50 for the second part.
10         Q    The cost of the entire trip, combined trip, would
11    be equal on a per mile basis.
12         A    In the example you gave me, yes, by definition.
13         Q    Now how does TRACS determine cost on the basis of
14    floor space unloaded at the point of sampling?
15         A    It assesses how much floor space is empty, how
16    much is assigned to unloaded mail, and how much is assigned
17    to loaded mail.
18         Q    Well, how --
19         A    And then it assigns, roughly speaking -- I'm not
20    talking about the exact calculation -- but it assigns the
21    space occupied by the unloaded mail to the unloaded mail and
22    a proportionate share of the empty space.
23         Q    The empty space is allocated according to the
24    space of unloaded compared to the space of the loaded?
25         A    That's right.

                                                             18819
 1         Q    Is the cost of the entire outbound trip
 2    considered?
 3         A    In the sense that it goes into the calculation of
 4    the cost per cubic foot miles, yes.
 5         Q    It goes in there only to take the total contract
 6    cost and divide it by the total cubic foot miles, right?
 7         A    Not -- no, it is the cost of the trip, it is not
 8    the cost of the total contract, as I understand it.
 9         Q    The contract cost of the trip is divided by the
10    cubic foot miles of the trip to determine the cost per cubic
11    foot mile, is that right?
12         A    Basically, yes.
13         Q    And if a truck goes out and retraces its route
14    going back to the BMC, those two trips would be the same,
15    wouldn't they?
16         A    By definition, yes.
17         Q    Is the cost of the entire outbound movement taken
18    into consideration when the sampling occurs at the first
19    stop on the outbound movement?
20         A    No.
21         Q    Is the cost of the return movement, the return
22    trip, taken into consideration in determining the cost of --
23    transportation cost for the mail unloaded and sampled at the
24    first outbound point?
25         A    Implicitly, it is.

                                                             18820
 1         Q    What?
 2         A    Implicitly, it is.
 3         Q    How?
 4         A    The costs of the transportation that is being
 5    provided, those costs include -- basically, some of them are
 6    fuel and labor and some of them are capital costs and they
 7    are spread over the whole contract route.  So if you could
 8    include, for example, more mileage or more stops in a
 9    contract, you can lower your cost per mile.  So the costs of
10    that whole round trip that you are describing are jointly
11    determined.
12         Q    But the entire cost is then broken down to a cost
13    per cubic foot mile, is that right?
14         A    That's right.
15         Q    And my question, is the cost of the return trip,
16    the inbound portion, taken into account, in any manner, in
17    allocating or determining the transportation cost for mail
18    unloaded at the first stop on the outbound movement?
19         A    Implicitly, it is.  Because the cost per cubic
20    foot mile is affected by how far that truck goes in total.
21         Q    You mean it is reduced?
22         A    It is -- well, yes, it is reduced.
23         Q    If the sampling occurs at the second SCF on the
24    outbound movement, is there any difference in the manner in
25    which the costs are allocated?

                                                             18821
 1         A    Well, the costs are allocated to mail, and it
 2    depends on where the mail got on the truck.
 3         Q    Well, for simplification, let's assume that all of
 4    the mail that was unloaded at either point was loaded at the
 5    BMC.
 6         A    Okay.
 7         Q    Would the methodology be the same?
 8         A    Yes.
 9         Q    How would the percent of empty floor space at
10    point A be determined when you were calculating the empty
11    floor space at point B?
12         A    You mean for the mail that got off at B?
13         Q    Yes.
14         A    That started at the BMC.  Well, on the leg between
15    A and B, we would observe the empty floor space.  On the
16    prior leg, we would not observe it and we would apply the
17    average space utilization as to how that enters into the
18    calculation.  It's the best data that we have.  We have
19    nothing else to use, and it is the best information we have
20    for that kind of facility type, FACCAT.
21         Q    Somewhere you said that you could 14 OTRs on a
22    trailer.
23         A    So I am told.
24         Q    You can't stack them?
25         A    No.

                                                             18822
 1         Q    All right.
 2         A    You can, but you are going to hurt.
 3         Q    Let's assume that we have 14 OTRs and that seven
 4    of them are unloaded at point A.
 5         A    Okay.
 6         Q    And the truck then proceeds to point B with the
 7    seven remaining OTRs and at point B it is sampled.  So at
 8    that point, all of the empty space would be assigned to the
 9    mail and unloaded at point B, is that right?
10         A    No.
11         Q    Why not?
12         A    Only the empty space associated with the mileage
13    between A and B would.  Okay.  We would impute empty space
14    for the previous leg, and in your example, there would be an
15    error in that.  However, you can think of other examples
16    where there's nothing on there and it averages out.
17         Q    Is the sampling process and the assignment of
18    transportation cost calculated on the same manner on the
19    inbound movement?
20         A    Yes.
21         Q    Most of your contracts for transportation are for
22    a round -- two trips, an outbound and an inbound trip?
23         A    Right.
24         Q    Is that right?  Do you agree that the entire
25    contract cost inbound and outbound is a joint cost?

                                                             18823
 1         A    Yes.  That's what I meant by saying that the cost
 2    per cubic foot mile is affected by the fact that you have
 3    multiple stops on the trip.
 4              I should also point out that just because the trip
 5    is outbound or inbound doesn't mean that the mail is
 6    outbound or inbound.
 7         Q    But the trip is.
 8         A    The trip is.  That's the sort of way TRACS keeps
 9    track of them.  It's not operationally necessarily
10    one-to-one mapping the operation.
11         Q    Well, intra-BMC mail or mail that was placed on
12    the truck at the BMC, all of the mail on the outbound leg is
13    outbound, isn't it?
14         A    On the first leg, yes.  On the second leg, it
15    depends.
16         Q    Well, if it's mail going from A to B, it's still
17    outbound, isn't it?
18         A    I think we're talking semantics.  All I'm saying
19    is that from A to B, mail can be loaded at A to be brought
20    to B.  TRACS will treat that as outbound mail, but
21    operationally you might think of that some other way. 
22    That's all.
23         Q    It's still outbound from the BMC.
24         A    In TRACS, yes.
25         Q    On page 15 at line 7 you say that the trucks

                                                             18824
 1    arrive full.  What does "full" mean?
 2         A    They were recorded as loaded 100 percent.  In the
 3    judgment of the data collector, when they opened the door,
 4    there was no more room.
 5         Q    You're speaking of floor space.
 6         A    Yes.
 7         Q    You do not mean that it was full of mail.  The
 8    vehicle was not full of mail.
 9         A    It was fully occupied with -- well, with
10    containers or with mail.  But the containers were all
11    carrying mail.  So for my purposes it was full of mail.
12         Q    When you say that the truck was full, you mean
13    that the floor space was occupied either by a container,
14    with or without mail, and bed-loaded mail?
15         A    Or a pallet; right.
16         Q    On line 8 you make in your parenthetic expression
17    there are actually more inbound tests that were full to
18    capacity than outbound tests.
19              Since there are more than twice as many tests on
20    the inbound movement, that's not surprising, is it?
21         A    No.
22         Q    And if you weight these samples as you have
23    previously described, then you get the reverse of that,
24    don't you?
25         A    I don't know.  I haven't done the weighting.

                                                             18825
 1         Q    Referring to your Exhibit 2-C with the corrections
 2    that you make, does this show that on the inbound movement
 3    at the BMC sampling that 77 percent of the vehicles were
 4    less than 90 percent full?
 5         A    I am not sure that I follow where you are getting
 6    the numbers from.
 7         Q    Well, is it correct to say that 23 percent of the
 8    samples were at least 90 percent full?
 9              That is the 16 plus the 7 -- 23.
10         A    Correct.
11         Q    And that necessarily means that on 77 percent of
12    the time the truck was less than 90 percent full?
13         A    That's right.
14         Q    Similarly, on the outbound movement if you look at
15    the initial SCF destination, 56 percent of the vehicles were
16    less than full.
17         A    That's right -- of mail, that's right.
18         Q    That's --
19         A    Full of mail.
20         Q    Full of containers.
21         A    With mail in them.
22         Q    With or without mail in them, right?
23         A    No.  With mail in them.
24         Q    If you have a vehicle that has 14 OTR containers,
25    and one OTR container has mail in it, and that's the OTR

                                                             18826
 1    that is sampled, how is it treated for TRACS?
 2         A    How is what treated for TRACS?
 3         Q    Isn't it treated as -- you don't count the empty
 4    containers then, do you?
 5         A    The empty containers are treated as empty space. 
 6    There is no mail in them.
 7         Q    There is no mail in them?
 8         A    Right.
 9         Q    So isn't the entire truck allocated to the sample
10    that was made?
11         A    That's right.
12         Q    Witness Young says in RT-3 that containerization
13    increases the amount of space used and makes less efficient
14    use of vehicle space with resulting additional costs, and
15    further, that the use of pallets increases transportation
16    capacity requirements.
17              How are these factors and these additional costs
18    handled or analyzed by TRACS?
19         A    In the same way that we have just been talking
20    about.  If you fill up a truck with containerized mail and
21    you are only filling up those containers partially, the
22    truck is full.  It gets dispatched.  TRACS would treat the
23    truck as full.  If you want to send more mail, you have to
24    get another truck or bigger truck or you have to make some
25    accommodation, and that costs more money.  I think that's

                                                             18827
 1    the point Mr. Young was making.
 2         Q    The pallet then, with the additional cost and the
 3    less efficient utilization, it would be reflected in the
 4    same way that a partially filled container was?
 5         A    Yes.
 6              MR. WELLS:  Mr. Chairman, that's all the questions
 7    I have.
 8              CHAIRMAN GLEIMAN:  Mr. Bergin?
 9                          CROSS EXAMINATION
10              BY MR. BERGIN:
11         Q    Good afternoon, Mr. Pickett.
12         A    Good afternoon.
13         Q    For the record, my name is Tim Bergin.  I
14    represent the McGraw-Hill Companies, and I have just a few
15    questions for you.
16              If I could refer you, please, to page ten of your
17    testimony, lines eight and nine.  You state that Intervenor
18    witnesses grossly exaggerate the magnitude of empty space
19    costs?
20         A    Correct.
21         Q    You don't agree with Postal Service Witness Nieto
22    regarding the extent of empty space as measured by TRACS, do
23    you?
24         A    No.
25         Q    Have you reviewed her testimony?

                                                             18828
 1         A    Yes.
 2         Q    I believe she testified that a rough average was
 3    that about 50 percent of all floor space was unused,
 4    according to TRACS?
 5         A    That sounds familiar; yes.
 6         Q    Of course, when you consider it on a cubed basis,
 7    then the percentage of unused capacity is much higher,
 8    depending upon how high on average the trucks are loaded? 
 9    How much vertical space --
10         A    I wouldn't consider it any different.  You might. 
11    I consider -- as I said to Mr. Wells, once the vertical --
12    once like an OTR is in place, the vertical space is unusable
13    to us, so it's occupied for all intents and purposes.
14         Q    But in terms of the cube of the truck, if the
15    truck is 50 percent -- 50 percent of the floor space is
16    being used and the truck is only loaded to one-half of the
17    vertical space, then 75 percent of the cube is unused?
18         A    75 percent of the cube has no mail in it.
19         Q    Pardon?
20         A    It has no mail in it.  It has no containers in it.
21         Q    So in trying to understand what you mean on page
22    ten, lines eight and nine, when you state that the magnitude
23    of empty space cost has been exaggerated, I mean, you don't
24    deny that there is substantial empty space as measured by
25    TRACS?

                                                             18829
 1         A    No.  What I'm saying is the effect of the
 2    algorithm in TRACS to allocate that empty space on mail
 3    sub-classes has been greatly exaggerated.  It really does
 4    not affect sub-class costs much at all, and I think I show
 5    that in my exhibits.  Not only that, the effect goes
 6    opposite to what people claim the effect is.
 7         Q    Let's turn to that for a moment.  You state that
 8    your Exhibit 2B shows the effect of removing the TRACS'
 9    empty space algorithm.
10         A    Right.
11         Q    However, your Exhibit 2B does not remove any costs
12    for empty space, does it?
13         A    Well --
14         Q    I mean you're working with the same volume
15    variable costs as Witness Nieto?
16         A    Right.  I tie it back to the same attributable
17    costs.
18         Q    You distribute that same amount of cost as Witness
19    Nieto?
20         A    That's right.  TRACS does not deal with volume
21    variability at all.
22         Q    So basically you simply distribute the cost of the
23    empty space in a different way, somewhat different way than
24    Witness Nieto?
25         A    In effect, it gets distributed -- I don't know --

                                                             18830
 1    the way I think of it is it's distributed sort of in
 2    proportion to the -- in the same proportions as the cubic
 3    foot miles of mail, of the distribution key that results.
 4         Q    And that is based upon the percentages of mail
 5    that happen to be sampled by TRACS?
 6         A    That's right.
 7         Q    And finally, just to follow up on the discussion
 8    you had a moment ago with Mr. Wells, you were discussing how
 9    empty space which is above mail on a truck is allocated.  I
10    believe you attempted to explain why.
11              It is also true that if half the floor space is
12    used, only half of the floor space, then the empty space
13    allocation will include the 50 percent of the floor space
14    that is unused, correct?
15         A    Well, the empty space allocation that this refers
16    to, this part of my testimony refers to only refers to the
17    floor space part.  That is what the algorithm deals with.
18         Q    Okay.
19         A    Okay.
20         Q    My question to you is what is the rationale for
21    allocating empty space on the 50 percent of the truck that
22    is -- the truck bed that is not containing mail?
23         A    Well, the rationale in TRACS is that if mail
24    received the transportation service that we observe then
25    it's the full cost of that transportation service that needs

                                                             18831
 1    to be allocated to that mail, and that is the way TRACS
 2    keeps track of it.
 3         Q    But you don't disagree with Witness Nieto that
 4    neither TRACS nor the Postal Service in this regard is
 5    making assumptions about cost causality?
 6         A    What it is doing is it is using what it observes
 7    on the truck -- what it observes on the truck and how far
 8    that -- what mail has come off that truck and how far that
 9    mail has been moved on that truck as the key bit of
10    information in terms of deriving cost for those classes of
11    mail that are unloaded.
12         Q    But you wouldn't say that if there were just a
13    few, relatively few items of mail on a large truck that
14    those items of mail caused the cost of the unused capacity
15    on that truck?
16              MS. DUCHEK:  I would like to interject a comment
17    here.  I think I am going to object -- and I could have
18    objected earlier to some of Mr. Wells' questions on the same
19    basis.
20              Mr. Pickett's discussion in his rebuttal testimony
21    of the empty space allocation was directly solely to a very
22    narrow point, which is that certain Intervenor witnesses
23    complained about this and argued either expressly or
24    implicitly that this was affecting their cost.
25              The sole purpose of Mr. Pickett's rebuttal

                                                             18832
 1    testimony here is to show, which I think he has, that that
 2    simply is not the case.  How TRACS allocates empty space
 3    costs, why TRACS has the rationale it does for allocating
 4    empty space costs has been covered repeatedly in this docket
 5    through cross examination of Ms. Nieto, and I think we are
 6    going to be here till quite late this evening if we continue
 7    on down this line.
 8              The parties had their opportunity and in fact did
 9    question Ms. Nieto extensively on this point, and that is
10    not the point to which Mr. Pickett's rebuttal testimony is
11    addressed.
12              MR. BERGIN:  First of all, I don't intend to
13    pursue this indefinitely but I have to disagree.
14              I don't think Mr. Pickett's discussion of the
15    algorithm on page 10 addresses the Intervenors' concerns at
16    all.
17              That was the point of my initial questions and my
18    follow-up questions relate to subjects that Mr. Picket has
19    testified earlier this afternoon.  I'm seeking
20    clarification.
21              CHAIRMAN GLEIMAN:  Well, you know, if you had
22    objected to the questions that Mr. Wells raised that you
23    felt were outside the bounds of appropriate questioning
24    under rebuttal then they wouldn't have been asked and then
25    Mr. Bergin wouldn't have had any questions to follow up on,

                                                             18833
 1    because as it stands now I think that I can't very well
 2    limit his right to seek some clarifications through
 3    follow-up, so I am going to allow him to continue and I know
 4    we will probably be here late tonight and some of us were
 5    late the other night and we are going to be real late
 6    tomorrow night, I'm afraid, but that's just the name of the
 7    game.
 8              BY MR. BERGIN:
 9         Q    Sir, do you have the question in mind?
10         A    No, I lost it.
11         Q    You're not testifying that mail that happens to be
12    on a truck necessarily causes the unused space on that truck
13    which may be ascribed to it by TRACS?
14         A    I'm -- unused space -- what causes unused space? 
15    All I'm testifying to is two things.  One is that the way
16    TRACS allocates that empty space and the way both Dr. Haldi
17    and Merewitz have said to unallocate it doesn't amount to
18    anything in terms of the costs in this case.  The only
19    information that TRACS collects is the mail that's observed.
20              We don't, as Ms. Nieto said, we do not speculate
21    about what might have caused that contract to be sized or
22    routed or anything else.  All we do is take how that
23    contract appears in our routing software, sample it.  The
24    basic assumption is that if the mail got off that truck,
25    that mail received transportation services and that cost of

                                                             18834
 1    that leg has to be in some way attributed to the mail that
 2    was on the truck.  I think that's a pretty straightforward
 3    procedure.  It does not require a data collector to try to
 4    evaluate why the truck was or the contract was configured or
 5    sized or anything.
 6              I don't know anybody who can figure that out.  I
 7    haven't heard anybody who can give me a straight answer
 8    about how they would do it.  I've heard a lot of people
 9    complaining about it, but nobody has given us a straight
10    answer of how a particular contract on a particular day
11    might have been sized or routed.  The most straightforward
12    way that I know of dealing with the cost of that contract is
13    to attribute it to the mail that was on -- that was
14    offloaded from that truck.
15         Q    But you have testified that Postal Service
16    commitments, for example, cause trucks to leave less than
17    fully loaded when they otherwise could have been fully
18    loaded.
19         A    They cause truck schedules to -- they affect the
20    scheduling of the truck.  They can affect all manner of
21    things on the truck.
22         Q    Sure.  As opposed to the mail that's on the truck
23    causing the incidence of unused space.
24         A    Well, the mail on the truck is getting a
25    transportation service that's being provided.  Whether it

                                                             18835
 1    was intended to be provided at some point maybe four years
 2    earlier for some other mail processing schedule, it still
 3    gets that transportation.  It's not going to get a free
 4    ride.  What TRACS does is assigns it the cost of the
 5    transportation.
 6         Q    Well, if the small amount of mail that was on the
 7    truck happened to be the peak load, then obviously the
 8    Postal Service would not be sending out a truck that was 90
 9    percent empty space; correct?
10         A    If the small amount of truck happened to -- in
11    what sense is it a peak load?
12         Q    If that was the maximum load that went on that
13    route for a given week, you wouldn't be sending it out in a
14    truck that large; correct?
15         A    No.
16         Q    And isn't it fair to say that apart from service
17    commitments, the peak load requirements of the Postal
18    Service are responsible for unused space on a truck when
19    it's sampled?
20         A    They're a part of the decision process, but
21    they're not solely responsible for it.  There are a lot of
22    other factors that go into the consideration.
23              MS. DUCHEK:  Could I ask counsel to define -- I'm
24    confused here by what he means by peak load.
25              MR. BERGIN:  That would be the maximum volume of

                                                             18836
 1    mail anticipated to be shipped on a route during a given
 2    period, say a week, that would determine what size of truck
 3    the Postal Service elected to use on that route.
 4              THE WITNESS:  Well, the route and the size of the
 5    truck are interrelated.  I mean, a peak on one point might
 6    not coincide with a peak at another point.  The point I'm
 7    trying to make is that it's not as clear cut an issue as you
 8    are making it out to be.  It's a lot more complicated.
 9              I don't have the volumes to determine when those
10    peaks occur, so I can't really tell you what the causality
11    of the peak is.  What I can tell you is what mail received
12    the transportation service.  I can observe that.  That's the
13    basis for TRACS.
14              The counter example is on a TRACS air test, we
15    know the volume and all TRACS does is tie to that volume. 
16    On highway, we don't know the volume.  We can't even guess
17    at what it's going to be in advance because there's just no
18    volumetric information out there.
19              I don't want to speculate about any particular
20    contract on any particular day, whether it could have or
21    would have been or was meant to be the peak, because we just
22    don't know.  To say that the peak caused something on a
23    particular contract sample in TRACS is, I think,
24    speculative, and I wouldn't support doing it.
25              BY MR. BERGIN:

                                                             18837
 1         Q    Well, is it fair to say then that what you are
 2    saying consistently with Witness Nieto is that there is no
 3    causal connection beyond speculation between the unused
 4    costs and the mail that happens to be sampled?
 5         A    What I'm saying is what I just said, that the cost
 6    of the truck, the services that were provided for the mail
 7    and the truck, are observed, and that's what TRACS records. 
 8    It doesn't record the thought process of the contracting
 9    official or the routing specialist or the transportation or
10    logistics person that might have been working on the
11    contract three years before who is no longer there.
12              It simply records what's being observed.  To my
13    mind, it's the most straightforward way of keeping track of
14    what mail receives the transportation services on the
15    contract.
16         Q    I thought you stated a moment ago that because you
17    had done your analysis removing the empty space algorithm
18    from the TRACS' calculation that the empty space allocation
19    is somehow less significant?
20         A    No.  All I'm saying is that the effect of the
21    empty space allocation algorithm in TRACS has very little
22    impact on the final sub-class costs.  That algorithm, which
23    distributes mail according -- the cost of the empty space
24    according to the mail that's on the truck, it has virtually
25    -- I don't want to say no effect, but it's relatively an

                                                             18838
 1    insignificant effect.  It's not a big deal like Dr. Haldi
 2    made it out to be.
 3         Q    When you say not a big deal, you are referring to
 4    the algorithm itself, not to the allocation of empty space
 5    per se?
 6         A    That's how it's allocated.  To my mind, they are
 7    the same thing.
 8         Q    You have allocated the empty space in a different
 9    way?  I think you stated that earlier.  You haven't taken
10    the empty space out of the calculus?
11         A    I don't know how to do that other than to take the
12    costs and call them institutional, which Dr. Bradley has
13    already demonstrated they aren't.
14         Q    Those costs amount to about 50 percent of the
15    total costs that we are talking about here?
16         A    I don't know that it's the total costs.  That's a
17    percentage of space, roughly.
18         Q    Right.
19         A    That's the number you gave me.
20         Q    Well, subject to check, if you accept that --
21         A    Of some contracts, I don't know which ones you are
22    talking about.  I'm not going to assign a cost number to
23    that.  There's empty space on trucks.  Trucks cost money. 
24    Sometimes we don't use all the space but mail does get
25    transportation service on those trucks and it gets charged

                                                             18839
 1    for it to the extent that it does.  That's TRACS.
 2         Q    If you accept my assumption that on average, the
 3    empty space on these trucks approximate 50 percent, then
 4    that translates into 50 percent of the transportation costs
 5    that are allocated?
 6         A    No, it does not.  No, it does not.
 7         Q    Why do you say that?
 8         A    50 percent on one type of truck may cost more than
 9    50 percent on another kind of truck.  That hasn't been
10    established.
11         Q    Well, if you assume that across contracts, that 50
12    percent is the average on each contract, I'm just trying to
13    establish a principle here, then basically 50 percent of
14    empty space would translate into 50 percent of the costs,
15    which are based on cubic foot miles?
16         A    If I assume something we don't do, the answer to
17    that is yes, but we don't do it, so it's no.
18         Q    Don't do what?
19         A    What you just described.  All we do --
20         Q    I'm making an assumption about the amount of empty
21    space on the trucks.
22         A    Right, and you are assigning costs to them, if I
23    heard you right.
24         Q    Well, I am simply trying to make the point that
25    the amount of empty space affects the amount of costs that

                                                             18840
 1    are allocated, either through TRACS or otherwise.
 2         A    I think we've established that.  And I think the
 3    way we treat it makes very little difference in the subclass
 4    costs.  That's what my testimony is.
 5         Q    But if the amount of empty space is significant,
 6    then the effect on costs will be significant.
 7         A    I can't -- I don't know what you mean by
 8    significant.  I mean, that's just a loaded term.  What I'm
 9    saying is it's not significant.  To the extent that we have
10    a pool of volume variable costs, the allocation of empty
11    space is insignificant, and it's demonstrated in those
12    exhibits in my testimony.
13         Q    But you've simply removed an algorithm that had
14    been used to allocate empty space and you've allocated empty
15    space in a different manner.  And you're saying that the
16    results -- that there is an insignificant difference in the
17    results of these two alternate allocations of empty space.
18         A    Yes.
19         Q    That's not to say that the empty space allocation
20    done one way or the other is insignificant by comparison
21    with allocations of costs for used space.
22         A    Somebody could do the analysis a completely
23    different way and come up with a completely different number
24    and say that it's significant.  That's not what I'm
25    testifying to.  I don't know how any other way to say it.  I

                                                             18841
 1    think I've answered you four or five times.
 2              I don't know anybody else who said anything else
 3    to do with those costs on the case.  I mean, I'm not trying
 4    to respond to what's on the record in the case, and I -- I
 5    mean, Dr. Haldi ends his testimony on TRACS by saying, you
 6    know, the first thing you ought to do is take this
 7    allocation algorithm out.  That's what I did.
 8         Q    If the empty space costs were treated as
 9    institutional, then the volume variable -- remaining volume
10    variable costs would be significantly less.  Is that not
11    correct?
12         A    That's by definition.
13              MR. BERGIN:  I have nothing further, Mr. Chairman.
14              CHAIRMAN GLEIMAN:  Is there any followup?
15              Mr. Wells.
16              MR. WELLS:  Just a couple items, Mr. Chairman.
17                      FURTHER CROSS EXAMINATION
18              BY MR. WELLS:
19         Q    Look at Exhibit 2-B.  For my clarification, did
20    you say that they were distributed on the basis of cubic
21    feet or cubic foot miles?
22         A    These are intra and inter-BMC.  They're all in
23    cubic foot miles.
24         Q    The Parcel Post distribution factors are on the
25    basis of cubic foot miles?

                                                             18842
 1         A    Yes, for those two cost accounts; yes.
 2         Q    All right.  And talking about different sizes of a
 3    truck, the same size of truck is used on a specific route
 4    each day, isn't it?  The size --
 5         A    Yes, by definition.
 6         Q    Doesn't vary.
 7         A    Right.  Well, actually it can, but it's a minor
 8    point.  The contractor's free to provide a bigger truck if
 9    he wants to, but we tie to what's in the contract.
10         Q    And TRACS does not establish volume variability.
11         A    No, no at all.
12         Q    Okay.
13              MR. WELLS:  Nothing further, Mr. Chairman.
14              CHAIRMAN GLEIMAN:  Mr. Feldman.
15              MR. FELDMAN:  Thank you, Mr. Chairman.  Stephen
16    Feldman, American Business Press.
17                          CROSS EXAMINATION
18              BY MR. FELDMAN:
19         Q    A couple of followup questions, Mr. Pickett.
20              You mentioned Postal Paks I think in a response to
21    one of Mr. Wells' questions, and to your knowledge, what
22    kinds of mail currently are within Postal Paks?
23         A    Well, not having looked at the data, I mean
24    there's data in TRACS that would tell you that, but let me
25    tell you where they're loaded, and that can help you out, I

                                                             18843
 1    think.  It's -- Postal Paks are loaded automatically at BMCs
 2    from both the sack sorter and the parcel sorter.  So
 3    whatever mail actually got processed gets loaded into a
 4    Postal Pak.
 5         Q    When you say processed, are you talking about
 6    distribution so that would be parcels -- Standard A,
 7    Standard B mail primarily.
 8         A    Primarily, but there's exceptions to that.
 9         Q    You asked I think it was Mr. Bergin perhaps
10    rhetorically, perhaps not, to give alternative examples to
11    TRACS.
12         A    Rhetorically.
13         Q    Thank you.  Are you familiar -- you're familiar
14    with the phrase "plant load costs"?
15         A    Yes.
16         Q    Do you -- what is your understanding of that term?
17         A    It means different things to different people. 
18    Let me give you the definition in the context of the costs
19    in the proceeding.  Plant load costs are costs of contracts
20    that serve mailers' plants and go -- and essentially start
21    at a mailer's plant and go to a postal facility.  So they're
22    either highway or rail contracts that are like that.
23         Q    Does the Postal Service know on a vehicle-by-
24    vehicle basis what is inside of those trucks insofar as
25    subclass identification is concerned?

                                                             18844
 1         A    The Postal Service -- well, first of all, the
 2    plant load contracts are generally not sampled in TRACS. 
 3    There might be an off occasion where a plant is included on
 4    an interfacility contract and shows up in our routing
 5    software, but the contracts that we're talking about, the
 6    plant load contracts, those costs are distributed based on a
 7    special study.  They're not part of TRACS.  And the only
 8    information we have on their contents is the special study.
 9         Q    Do you know if the special study does involve
10    identification by postal employees of the contents of the
11    trucks as they depart the printing plant?
12         A    I don't know where the sample is taken.  The study
13    itself predates my recent involvement in transportation.
14         Q    Well, then, yes, just to close the line of
15    questioning then, there's been no -- none of the data
16    presented by you or to your knowledge, Ms. Nieto or Mr.
17    Bradley or Mr. Young, is based on any updated study of plant
18    load costs.
19         A    That's correct.
20         Q    Towards the end of Mr. Bergin's cross examination,
21    you and he got into a dialogue about the significance or
22    lack of it thereto of I think it was the cost of empty
23    space.  It wasn't empty space per se.  It was trying to
24    relate cost to empty space.
25         A    Right.

                                                             18845
 1         Q    Okay.  The existence of space as such on a truck
 2    is driven, wouldn't you agree, by the assessments made by
 3    postal managers such as for example Mr. Young as to what the
 4    various needs of facilities around the country are in terms
 5    of transporting the mail?
 6         A    That's safe to say.  Yes.
 7         Q    On page 5 of his direct testimony, Mr. Young
 8    stated, "Generally speaking, a contract contains pairs of
 9    trips.  Each trip pair contains an outbound trip and an
10    inbound trip.  When the BMC processes mail for its service
11    area, it is likely particularly on its peak weekly volume
12    day to dispatch vehicles full, although it is certainly
13    possible that the last dispatch of the day will be less than
14    full."
15              In terms of your discussion with Mr. Bergin about
16    the relation of a peak load day to the need to purchase
17    space on a truck, would you agree that Mr. Young's testimony
18    indicates that peaking requirements for mail on a particular
19    route or routes does drive the decision as to how much space
20    to purchase on a truck?
21         A    It affects the whole -- essentially it affects the
22    whole routing and specifications to the contract -- how much
23    mail you have got to handle, how fast you have got to get it
24    to where it needs to go.  They are all inter-related is the
25    way I look at it.

                                                             18846
 1         Q    Well, the question though was is it the
 2    requirement of the peak day or days that drive the decision
 3    to purchase a certain amount of cubic capacity or space on a
 4    particular route.
 5              MS. DUCHEK:  Perhaps Mr. Feldman would be better
 6    off directing these questions to Mr. Young since he is up
 7    next and this is right out of Mr. Young's testimony.
 8              MR. FELDMAN:  It is out of Mr. Young's testimony
 9    and the only reason I am mentioning this as follow-up is
10    because Mr. Pickett I believe expressed some uncertainty
11    about what peak load meant in this context and contested Mr.
12    Bergin's assumptions that there is a significant cost to
13    empty space.
14              CHAIRMAN GLEIMAN:  I guess there is a two-parter
15    there.
16              One is that he seemed not to understand Mr.
17    Bergin's reference to peak load, and the other has to do
18    with the space cost issue.
19              I think quite frankly the space cost issue got
20    beat to death and I am not sure how much more blood you are
21    going to get out of the turnip.
22              MR. FELDMAN:  I will reserve --
23              CHAIRMAN GLEIMAN:  And I suspect that if you raise
24    the question in the absence of confusion that this witness
25    may have had over Mr. Bergin's presentation of the question

                                                             18847
 1    that there wouldn't be an objection from Postal Service
 2    counsel when you raise it with the next witness.
 3              MR. FELDMAN:  I will try an alternative approach.
 4              CHAIRMAN GLEIMAN:  Proceed.
 5              BY MR. FELDMAN:
 6         Q    Mr. Pickett, do you agree with the statement of
 7    Witness Young that I read to you several minutes ago -- or I
 8    can read it again --
 9         A    Yes, let's start over.
10         Q    I would be delighted to.  "Generally speaking, a
11    contract contains pairs of trips.  Each trip pair contains
12    an outbound trip and an inbound trip.  When the BMC
13    processes mail for its service area, is it likely,
14    particularly on its peak weekly volume day, to dispatch
15    vehicles full, although it is certainly possible that the
16    last dispatch of the day will be less than full."
17              Do you agree with that statement?
18         A    Yes.
19              MR. FELDMAN:  Thank you.  That concludes my
20    follow-up.
21              CHAIRMAN GLEIMAN:  Any further follow-up?
22              There are no questions from the bench.
23              Would you like some time with your witness, Ms.
24    Duchek?
25              MS. DUCHEK:  Mr. Chairman, if we could take 10

                                                             18848
 1    minutes and sort of combine redirect with a short break, we
 2    would appreciate it.
 3              CHAIRMAN GLEIMAN:  I think we can manage that.
 4              MS. DUCHEK:  Thank you.
 5              [Recess.]
 6              CHAIRMAN GLEIMAN:  Ms. Duchek?
 7              MS. DUCHEK:  Mr. Chairman, the Postal Service has
 8    no redirect.
 9              CHAIRMAN GLEIMAN:  If that is the case, then Mr.
10    Pickett, we want to thank you.  We appreciate your
11    appearance here today and your contributions to the record. 
12    If there is nothing further, you are excused.
13              THE WITNESS:  Thank you, Mr. Chairman.
14              [Witness excused.]
15              CHAIRMAN GLEIMAN:  Ms. Duchek, if you would
16    identify your next witness?
17              MS. DUCHEK:  Yes, Mr. Chairman.  The Postal
18    Service calls James D. Young.
19    Whereupon,
20                           JAMES D. YOUNG,
21    a rebuttal witness, was called for examination by counsel
22    for the United States Postal Service and, having been first
23    duly sworn, was examined and testified as follows:
24              CHAIRMAN GLEIMAN:  Please be seated.  Counsel, you
25    can proceed.

                                                             18849
 1                         DIRECT EXAMINATION
 2              BY MS. DUCHEK:
 3         Q    Mr. Young, I'm handing you copies of a document,
 4    two copies of a document, entitled Rebuttal Testimony of
 5    James D. Young on Behalf of United States Postal Service. 
 6    It's been designated USPS-RT-3.  Are you familiar with this
 7    document?
 8         A    Yes, I am.
 9         Q    Was it prepared by you or under your supervision?
10         A    Yes, it was prepared under my direction.
11         Q    Were you to testify orally today, would this still
12    be your testimony?
13         A    Yes, it would be.
14              MS. DUCHEK:  Mr. Chairman, I will hand two copies
15    of the Rebuttal Testimony of James D. Young on Behalf of the
16    United States Postal Service, USPS-RT-3, to the Reporter,
17    and I ask that Mr. Young's testimony be entered into
18    evidence in this proceeding.
19              CHAIRMAN GLEIMAN:  Are there any objections?
20              [No response.]
21              CHAIRMAN GLEIMAN:  Hearing none, Mr. Young's
22    testimony and the exhibits are received into evidence and I
23    direct that they be transcribed into the record at this
24    point.
25                             [Rebuttal Testimony and Exhibits of

                                                             18850
 1                             James D. Young, USPS-RT-3, was
 2                             received into evidence and
 3                             transcribed into the record.]
 4
 5
 6
 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                             18865
 1              CHAIRMAN GLEIMAN:  Three participants have
 2    requested oral cross examination of Witness Young, the
 3    Alliance of Non-Profit Mailers, Florida Gift Fruit Shippers
 4    and McGraw-Hill Companies, Inc.  Alliance of Non-Profit
 5    Mailers apparently has taken a pass, so Mr. Wells, you may
 6    begin on behalf of Florida Gift Fruit Shippers when you are
 7    ready.
 8              MR. WELLS:  Thank you, Mr. Chairman.
 9                          CROSS EXAMINATION
10              BY MR. WELLS:
11         Q    Mr. Young, turn, if you will, to page four of your
12    testimony, at lines five through eight, on line eight and on
13    page six, line eight, you refer to peak weekly volume day. 
14    How is that peak volume determined?
15         A    In the experience of the Postal Service, peak
16    volumes are determined by mail flow patterns or during a
17    given week, and typically what happens is as it indicates
18    here, those peak days are toward the end of the week,
19    typically Wednesday, Thursday and Friday.
20         Q    Is this the peak day of the year?
21         A    Peak day of the week.
22         Q    Of the week?
23         A    Yes, which are typically peak days each week every
24    year.
25         Q    The volume of mail is seasonal, is it not?

                                                             18866
 1         A    To some degree, it is seasonable.  As an example,
 2    you typically will get more mail obviously during the months
 3    of November and December than any other time of the year. 
 4    It usually slacks off some during the Summer.
 5         Q    Is the peak weekly volume determined in the
 6    summertime or November or December?
 7         A    November and December are unique months for the
 8    Postal Service as far as peak is concerned.  Typically, what
 9    will happen is we will increase our transportation capacity,
10    both air and surface, by in excess of 30 percent during the
11    months of November and December, in order to handle the
12    Christmas mail volumes that are typically there.
13              Historically, in the movement of mail, as far as
14    transportation is concerned, you always are going to get --
15    during a week, your volumes will peak out on the Wednesday,
16    Thursday, Friday time window.
17         Q    Is there a time of year when this peak volume is
18    determined?
19         A    Not a specific time of the year, in my experience. 
20    You don't take one accounting period, if that's what you are
21    asking me, and let me just paraphrase it to be sure I
22    understand.
23              You don't take one or two accounting periods of
24    the year and say okay, this is the peak days, if you will,
25    for the entire year, but as you look and gain experience, as

                                                             18867
 1    this testimony here indicates, over time, with the flow of
 2    mail, what you will find is that whether it's Summer or
 3    Winter or Spring or Fall, that typically what happens is
 4    that you will have an increase in volume during a given week
 5    and that will peak out somewhere in the neighborhood of
 6    Friday afternoon as far as BMC's and SCF's are concerned.
 7         Q    So that when you enter into contracts for surface
 8    transportation, you are buying a size of a truck designed to
 9    handle the peak volume other than in November and December?
10         A    Yes, the truck is not really based -- we buy
11    typically tractor-trailer trucks, as you probably know, to
12    transport mail, and we buy those same trucks for the month
13    of December, November/December, but we buy more of them.
14              To answer your question, if I understand it
15    correctly, we buy or lease or put contracts together for
16    trucks based on those peak volume days of the week.
17         Q    In your contract, it provides that same vehicle
18    will be used year round?
19         A    Yes, it does.  Might I add, that makes good
20    business sense to us.
21         Q    Then you contract for additional trips in November
22    and December?
23         A    Yes.
24         Q    Do you determine peak volume to be volume of mail
25    or volume of containers regardless of mail volume?

                                                             18868
 1         A    To be based on volumes of mail that are moving
 2    through the system.
 3              In listening to some of the discussions earlier, I
 4    heard you talk about containers versus mail.  Just to give
 5    you an example of what drives this, using the Washington BMC
 6    as an example, they have there about 280 container runouts
 7    to serve the Washington Bulk Mail Center intra-BMC network. 
 8    And based on historical experiences in mail volumes over
 9    time, you will assign so many of those containers to
10    Norfolk, Virginia, to Richmond, Virginia, to Farmville,
11    Virginia, or Petersburg, Virginia, as the case might be.
12              And what you know will happen is that you'll maybe
13    run 50 containers a day going to Richmond.  That typically
14    will happen day in and day out.  And the majority of them
15    will in fact have a good load of mail in them.  But what
16    will also happen during the months of November and December,
17    when the Christmas volumes begin to come in, is that that
18    number may go up by 30 or 40 percent to each one of those
19    destinations.  And it makes good sense from our perspective
20    then to put some additional trucks in there to carry those
21    additional volumes during that period of time, and that's
22    typically how we move the excess volumes during the year.
23         Q    But those are relatively short-term temporary
24    contracts to handle the extraordinary mail.
25         A    Well, in reality what happens is that the

                                                             18869
 1    contractor that we have year-round contracts with, these are
 2    long-term business partnerships in our view, and typically
 3    what happens is we'll make a modification to those contracts
 4    at Christmastime.  To the extent that that contractor can
 5    take on the additional business and add a truck or two or
 6    three, whatever's appropriate, to an existing contract,
 7    that's what typically happens.
 8         Q    Can you identify the difference between the peak
 9    volume and the average volume?
10         A    I really don't deal a lot in average volumes.  I
11    deal with the mail as we typically know it's going to flow. 
12    And when there's a drop in volume.  Let's just maybe go to
13    that issue just a bit.
14              As I mentioned to you initially, in my experience
15    the Postal Service is going to peak out on a BMC --
16    intra-BMC route, the volume is going to peak toward
17    Wednesday, Thursday, Friday.  Now what will happen on a
18    Saturday, Sunday, and Monday is that yes, we'll have the
19    same type of truck assigned to that contract, but we will
20    cut back on the number of trips that will actually operate
21    on Saturday, Sunday, and Monday, and that's the way in which
22    we're able to address those peak days and at the same time
23    be able to not just run transportation for the sake of
24    running it if you will on Saturday, Sunday, when we're not
25    going to have the volumes that were available on Wednesday,

                                                             18870
 1    Thursday, and Friday.  That's how we address that
 2    fluctuation in volume, if that's what you're getting to.
 3         Q    On lower volume days you reduce the number of
 4    trips.
 5         A    That's correct.
 6         Q    If there is a situation where there is but a
 7    single trip out from the BMC to various routes, you can't do
 8    that, though, can you?
 9         A    If that situation were to exist, but as I
10    visualize the BMCs that I have worked with, we typically
11    don't have coming out of a BMC a single trip to a facility,
12    because in reality what happens is you're running
13    transportation not to very, very small places out of a BMC,
14    but to SCF-type facilities, and making some intermediate
15    stops at these small facilities.  And so almost in all
16    cases, and really I can't think of an example, any case
17    where there's just one trip from a BMC to one of its intra
18    facilities within a 24-hour period -- just as an example,
19    there may be 40 trips a day running from the Washington Bulk
20    Mail Center to Baltimore, an additional 40 trips to the MSC
21    Northern Virginia, Merrifield, I heard you all talking
22    about, 25-30 trips running to Norfolk, Virginia, with some
23    intermediate stops in places like Farmville and Richmond and
24    so forth.
25         Q    On your page 4, lines 9 through 15, you enumerate

                                                             18871
 1    the factors that you consider in purchasing transportation.
 2         A    Yes.
 3         Q    And service commitments, number of containers, on
 4    the busiest day of the week, and the downstream facility
 5    ability.
 6              How do changes in mail volume impact the contracts
 7    for highway transportation?
 8         A    It doesn't necessarily have an immediate impact. 
 9    It's not a system that will respond to a change in mail
10    volume, a downward change especially within one day or some,
11    but typically what will happen is this.
12              As an example, if we have a trip running from the
13    Washington Bulk Mail Center to Norfolk, Virginia, we have
14    the ability to have it stop in places such as Williamsburg
15    and other down-line offices and if we as an example have a
16    half a load that is going to Norfolk and we have maybe three
17    or four containers going to Williamsburg or some other
18    facility that is on that line of travel, we have the ability
19    and we do that quite frequently as a matter of fact, to have
20    that truck made intermediate stops and call those folks at
21    those offices and say, hey, this truck doesn't normally stop
22    at your place but it's going to stop there today -- in order
23    to utilize the space as well as get the mail down-line to
24    the customers in a timely way.
25              Now, you know, back to the point here that you

                                                             18872
 1    were making about commitment to customers and it kind of
 2    goes really back to the discussion you were having earlier.
 3              Our customers expect the postman to come by with
 4    their mail at a certain time of the day and the idea is that
 5    in order for the mailman to get to these individuals' homes
 6    at generally the same time every day, he or she has got to
 7    leave his office and go out and deliver mail.
 8              Now if you take that time and you back out the
 9    transportation time, the local processing time, the
10    processing time at the BMC, the transportation time from the
11    other facility to the BMC, it gives you a window for moving
12    mail and getting it down to the facilities where it is going
13    to be delivered.
14              You were talking earlier about schedules and so
15    forth, but really ultimately what drives schedules and
16    dispatches and pull-down times is in fact the commitments
17    that have been made to the customers in terms of when we
18    will get their mail to them.  Either it's an overnight
19    product or a two-day product, three-day or one or the other
20    product services that we offer, so those things are in fact
21    what drive all of those schedules that you were referring to
22    earlier.
23         Q    In intra-BMC, and if we can if can limit your
24    responses to transportation involving intra-BMC
25    transportation, to what extent are tractor-trailers not

                                                             18873
 1    used?
 2         A    In intra-BMC?
 3         Q    Yes.
 4         A    They are used extensively in intra-BMC
 5    transportation.
 6         Q    And there are very few vehicles other than
 7    tractor-trailers that are used for intra-BMC transportation,
 8    is that right?
 9         A    Yes, that's true for two business reasons.
10              One is that intra-BMC transportation either is
11    long-haul transportation typically, or it is very high
12    volume transportation.
13              As an example, as I mentioned a minute ago, we may
14    have 30, 40 tractor-trailer trips a day running between the
15    Washington BMC and Baltimore, but there is volume there to
16    justify doing that.
17              There may be 30 or 40 trips a day running over to
18    Merrifield, Virginia from the Washington BMC and the volumes
19    justify doing that.
20              In the longer haul, both in the Postal Service and
21    in the private sector, you don't typically run straight
22    trucks, if that is what you are going to, long distances,
23    and there are a lot of operational as well as financial and
24    business reasons for running straight trucks on short-haul
25    operations and tractor-trailers on the longer-haul

                                                             18874
 1    operations.  They are built for it and maybe as you go down
 2    95 in a long trip typically what you will see out there is
 3    tractor-trailers and there are operational and business
 4    reasons that tractor-trailers are using those long-hauls and
 5    use straight trucks as most provide private sector companies
 6    do for the local short-term deliveries.
 7         Q    You listed as one of the factors the downstream
 8    facility ability to handle type and size of highway
 9    equipment.
10              To what extent are downstream facilities served by
11    the intra-BMC transportation not able to handle
12    tractor-trailers?
13         A    Some of the towns that we go into on our intra
14    transportation even though ultimately those trips end up at
15    typically large facilities, they do serve some smaller
16    offices en route in a number of different instances.
17              Two issues you run into.  One is that some of
18    those facilities in these small towns, and we are providing
19    the universal service and we have to hit them all, they have
20    turn-around yards and so forth.  They cannot accommodate
21    45-foot and 53-foot trailers and therefore we have to use a
22    40-footer in there.
23              Also in addition to that, many of these buildings
24    were built many years ago and they have low docks that don't
25    really match up to the truck that is coming in, and the

                                                             18875
 1    issue that we were talking about earlier in terms of the
 2    equipment that is put on the truck, you have to not load
 3    those containers to the maximum that they can be loaded,
 4    because you have got 3 o'clock in the morning one person
 5    down there who is trying to get these containers off a truck
 6    at a dock that is not level to his truck, and we have had
 7    experiences with contract employees as well as our own
 8    employees who have injured themselves in those cases.
 9              So two things in terms of equipment that really
10    drive the type truck that you are going to send down
11    down-line on intra-BMC, one is the ability of the facility's
12    yard and dock to handle the truck that is coming in, and the
13    ability of the employee, the driver, who typically is the
14    only individual out there at two or three o'clock in the
15    morning to get those containers off that truck and on the
16    dock and put them in the post office waiting on the folks to
17    come in about four o'clock and start sorting that mail.
18              So those are the two equipment considerations that
19    have to be taken into account in placing the type of
20    equipment on the intra-BMC trucks.
21         Q    The number of transportation trips to that
22    restrictive type of facility is relatively small, is it not?
23         A    On the intra service I would say that it is
24    relatively small.
25         Q    In intra-BMC, have the number of routes and the

                                                             18876
 1    movements changed very much in the last five years?
 2         A    When you say change, what do you mean?
 3         Q    Well, I mean have you increased the number of
 4    trips or --
 5         A    I would think that they probably have.  They have
 6    increased in the last three, four or five years.
 7         Q    What about the scheduled routes?  Have they
 8    changed significantly?
 9         A    And when -- you mean in terms of the number of
10    trips or something of this kind, is that what you mean?
11         Q    Yes.
12         A    Yes, I think they have changed.  I wouldn't say
13    significantly -- in some instances, and I would say they
14    have changed significantly in some others, and by that I
15    mean this.
16              A route running from the Washington Bulk Mail
17    Center to Farmville, Virginia, it ran three trips, two trips
18    five years ago, 10 years ago and it is still running two or
19    three trips down there a day, but a route running from
20    Baltimore to the Washington BMC in a large metropolitan area
21    such as this, that is an intra route, an intra route from
22    the Washington BMC to Merrifield, Virginia, that's an intra
23    route -- yes, those are changed very dramatically over the
24    time.
25              The reason is this.  You have got an area where

                                                             18877
 1    more and more people are moving in.  The volume goes up. 
 2    The need for service goes up.  New Communities come in and
 3    the old ones have to be served so for those kinds of reasons
 4    in these large metropolitan areas there's been probably a
 5    significant change but there are also examples, as I just
 6    mentioned, to the Farmvilles and the Petersburg, Virginias
 7    where there has not been significant change.
 8         Q    The two instances that you mentioned,
 9    Washing-Baltimore and Washington-Merrifield, to what extent
10    are they also impacted by the addition of preferential mail
11    being carried on the intra-BMC transportation system?
12         A    I have never really looked at that issue as far as
13    intra moving on the Baltimore to Washington BMC or
14    Washington BMC to Merrifield, but I can say this to you.
15              Typically those are BMC routes for the most part,
16    when they are running a short distance that way, and
17    typically you run them from a BMC with BMC type mail on them
18    for those short routes.
19              There are some other routes that maybe run from
20    inter-BMC routes that will run from Washington to St. Louis
21    or some other city that will have some type of preferential
22    mail on them, and we do that in order to utilize the
23    capacity of the truck as much as possible.
24         Q    What about trips, for example, out of the
25    Jacksonville BMC which would serve Lake City and

                                                             18878
 1    Tallahassee?
 2         A    I don't think -- they would not be there to serve
 3    Lake City and Tallahassee.  We have a route that runs from
 4    the Washington Bulk Mail Center to Jacksonville Bulk Mail
 5    Center, and I haven't checked that route recently, but what
 6    could happen and does happen on some of those BMC routes,
 7    once again, in order to move mail and utilize the space,
 8    there might be some mail other than bulk mail that gets on
 9    what we call tailgating a truck.  Maybe we will save ten
10    percent at the end of the truck leaving the Jacksonville BMC
11    and it might pick up some mail coming north and make a stop
12    at Merrifield to drop it off and then come on into the
13    Washington BMC.
14              The same could be true in the reverse, from
15    Washington down to Jacksonville, but now I can give you an
16    example that I'm familiar with.  We have a route that's been
17    running for some time from the Washington BMC, stops in
18    Northern Virginia, stops in Baltimore, and then it goes to
19    St. Louis, Missouri, and the reverse is true.  We save
20    typically about 10 to 15 percent of tailgated space, and
21    make a call before the trip leaves and they tell us that
22    Merrifield will save us ten percent of that truck today,
23    they have some mail they want to put on there.
24              We do have those kinds of situations that develop
25    where there is a little bit of a mix, but typically

                                                             18879
 1    speaking, especially in the short haul high volume areas,
 2    Baltimore, Washington, Washington/Merrifield, what you are
 3    going to get is BMC traffic on those trucks.
 4         Q    That's the reason I cited an example of the
 5    Jacksonville BMC to Lake City, which is an SCF and a smaller
 6    facility and Tallahassee, which is an SCF.  Isn't it typical
 7    that preferential mail would be tailgated on the intra-BMC
 8    truck for those points?
 9         A    When you use the word "typical," I would say that
10    90 percent or better of the mail traveling on BMC trips is
11    in fact BMC type mail and not preferential mail, a high
12    percentage of it is.  What might very well happen, just as I
13    mentioned to you a minute ago, you might have some product
14    coming out of Florida, if you will, that you want to get up
15    to Merrifield, and they will load it on the end of the
16    truck, tailgate it on the end of the truck.  That's
17    typically what happens in my experience.
18         Q    Have you actually had the use of intra-BMC for
19    preferential mail increase to the point where it is now in
20    excess of six percent?
21         A    I'm not in a position to verify that, to confirm
22    that number.
23         Q    On page five, line seven, and referring to the
24    footnote, to what extent does the path and routing of the
25    inbound trip not trace the path and routing of the outbound

                                                             18880
 1    trip?
 2         A    Page five, line six, you said?
 3         Q    It refers to line seven and footnote one.
 4         A    Yes, to give you an exact percentage or number,
 5    I'm not able to do that, but I can tell you what happens in
 6    actual practice.  As we mentioned before, you may very well
 7    have a trip that goes from Washington to Merrifield and
 8    Northern Virginia on an outbound from the Washington Bulk
 9    Mail Center, and you very well can have the return trip that
10    will come back and even maybe stop in Williamsburg or
11    Richmond, Virginia because these people communicate with
12    each other and they know that they either have mail or
13    something there that needs to be picked up and brought back
14    to the BMC.
15              Typically, you can get mail on occasions at these
16    facilities that are not part of the regular scheduled
17    return, and you will detour and pick those up and bring it
18    on back to the bulk mail center.
19         Q    Do you agree that the inbound trip, the return
20    trip to the BMC, will stop at the same places that the
21    outbound trips stopped at and perhaps some additional stops?
22         A    It could or in many cases, especially if you are
23    going out, let's say the last trips of value, as we talk
24    about in here, early in the morning, and you have to return
25    that truck and re-position for the evening's activity,

                                                             18881
 1    sometimes what we happen is it won't stop at any of those
 2    offices on the way back.  It will come straight back to the
 3    bulk mail center, knowing there is not mail or equipment at
 4    any of those places to be picked up.
 5              It can in fact run, as you said, but also it can
 6    come straight back to the bulk mail center on the return as
 7    well, depending on what time of day it is, what the volumes
 8    are and so forth.
 9         Q    Isn't it generally true that the inbound truck
10    will stop at the same places that the outbound truck would?
11         A    If I had to give you a definitive answer, I would
12    say this to you; if we are running a trip 2:00 or 3:00 in
13    the morning out of a bulk mail center and it's going down to
14    Norfolk, it's going to get down there -- if it leaves at
15    3:00, it's about three or four hours to get down there,
16    about three hours to get down there, three, four five, he's
17    going to come straight back to the bulk mail center, if I
18    had to give you an answer.
19              Once again, it does both.  Sometimes the trip goes
20    out and it will re-trace the outbound trip and on other
21    occasions, it will come straight back to the bulk mail
22    center and in still other occasions, it will make some stops
23    that were not outbound or planned to be part of the inbound
24    trip.
25         Q    Again in your testimony you use the term "full." 

                                                             18882
 1    What do you mean when you say the vehicle is full?
 2         A    Can you tell me what line you're on so I can --
 3         Q    Well, in line 9 you use the term "full," in line
 4    10, line 19.
 5         A    Okay.  Hold on one second.  I'm just going to read
 6    this for a second.
 7              The full that's mentioned there on line 9, in that
 8    case when I'm using the term "full," I mean that it is full
 9    of typically containers that are full of mail.  That's what
10    I mean on line 9.
11         Q    You mean is the truck full of containers, or are
12    the containers full of mail?
13         A    I mean that it's full of containers that are full
14    of mail.  And by that I mean this, if you look at what I'm
15    saying here, it says on the peak weekly days, right?  And at
16    the peak time of the weekly days, what I'm referring to
17    here, typically as those 280 runouts that we have at the
18    Washington BMC, you pull them when they're full, and you
19    stage those containers by the outbound dock, and as these
20    trucks become available, you push them on there and they go. 
21    And they're full for the most part, on that particular line
22    10 reference anyway.  And by that I mean full containers on
23    trucks that have 14 containers on them typically is what a
24    40-foot truck will take.  That's what I mean by that.
25         Q    Well, what about on Monday?

                                                             18883
 1         A    What --
 2         Q    Would the truck be full?
 3         A    From which direction?
 4         Q    Out.
 5         A    Outbound from the BMC?
 6         Q    Yes.
 7         A    It depends on what time you run it.  No. 1,
 8    remember what we said earlier.  We should not be running,
 9    we're not running, a whole lot of trips on Monday morning
10    out of the BMC, and the reason is that there were no
11    collections and very little processing on Sunday, and
12    therefore the mail's not available to load those trucks.  So
13    the trips are cut back significantly.
14         Q    Why don't you use Tuesday instead of Monday then.
15         A    Okay.  Tuesday at what time of the day, going out
16    early in the morning --
17         Q    Whenever your intra-BMC moves.
18         A    Yes.  Tuesday morning they should be pretty close
19    to full, and I'll tell you the reason I'm saying that. 
20    Starting on Monday what happens is you get your inter-BMC
21    traffic that comes in from the rail yards and by highway on
22    Sunday night and Monday morning, and as you start to process
23    that inter-BMC traffic, it's destinating in your
24    intra-service area, and therefore as we get into Monday
25    night and Tuesday morning, the question you're asking, those

                                                             18884
 1    trucks load up, and they should go out fairly well full come
 2    Tuesday morning.  That's in the 12 o'clock to the four or
 3    five o'clock Tuesday morning range.
 4         Q    The trailer is full of containers.
 5         A    That are full of mail.
 6         Q    But the volume of mail is reduced; is that not
 7    correct?
 8         A    I would say it is not as much as it will be on
 9    Friday morning and Thursday morning, but they're fairly full
10    even on Tuesday morning.  Now where you're going to get your
11    dropoff is on Tuesday night and Wednesday, and the reason
12    for that is once again that you've run through your inter
13    traffic, which is your large volume of mail that's going to
14    destinate in this BMC service area.
15         Q    When you say the vehicle is full, are you speaking
16    of the cube of the vehicle?
17         A    Speaking of full containers that fill up the cube
18    of the vehicle to within two feet of the top.  The
19    discussion you were having earlier, the truck's about, what
20    is it, 8 foot 3?  And a container is about 6 foot -- about 6
21    foot tall.  And so you've got about two feet of space up top
22    there that's unusable for all practical purposes.
23         Q    When you say full, are you talking about floor
24    space of the vehicle?
25         A    I'm talking about full containers covering the

                                                             18885
 1    entire floor with 14 containers in a 40-foot truck that on
 2    most days are going to be fairly full.
 3         Q    How do you account for bed-loaded mail?
 4         A    When you say "account for," what do you mean?
 5         Q    Well, I mean, how high is it stacked?
 6         A    Typically we don't move a lot of mail in the intra
 7    service area using bed load -- the conversation you were
 8    having earlier.  And there are some reasons for that.
 9              No. 1, our customers prefer the use of containers,
10    as a matter of fact.  We supply mailers, fruit shippers,
11    others, mailers, with containers, just like they request
12    them, and the reason they want them is, they want to be able
13    to reduce their labor cost in their facilities and move
14    product out fast.  They don't want it stacked on top of each
15    other and get it damaged.  They want it in containers so
16    it's protected.
17              Or, another technique that we're using that John
18    mentioned is this idea of shrink-wrapping on a pallet.  It
19    gives you the ability to move a lot of pieces of whatever it
20    is, mail or boxes, whatever it might be, in a short period
21    of time, which reduces cost to our customers, reduces cost
22    to the Postal Service.
23              And in reality when we talk about transportation
24    cost and this excess capacity issue that we keep going back
25    and forth to, the reality is that if I buy a tractor-trailer

                                                             18886
 1    in a competitive market and I buy a straight truck in a
 2    competitive market, the difference in cost is marginal, is a
 3    marginal difference in the cost between a straight truck in
 4    the same type of operation as a tractor-trailer.  If I'm
 5    running a tractor-trailer here in the metropolitan area, the
 6    difference in cost is going to be in what I pay the employee
 7    and a little bit of a difference in the amount of fuel that
 8    one truck will use versus the other.
 9              When you think about the cost of transportation,
10    it's driven basically by four things:  the cost of the
11    people running the trucks, that is, their wages, fringe
12    benefits, and those types of things, the cost of the fuel in
13    the truck, and the cost of other benefits that have to be
14    taken care of a part of the contract.  The equipment and
15    resulting with the space is not going to be a big driver one
16    way or the other as far as actual contract pricing is
17    concerned.
18         Q    But there is a higher contracting price per mile
19    cost for a 45 foot trailer than there is for a 40 foot
20    trailer, isn't it?
21         A    It depends on where you are using it.
22         Q    On the same route.
23         A    No, not in our business, no; not a marginal
24    difference.
25         Q    You are saying there is no difference.  Is there

                                                             18887
 1    any difference between a 40 foot trailer and a straight
 2    truck?
 3         A    Not a significant difference in the price at which
 4    we are able to buy it.
 5         Q    Is there any difference?
 6         A    There's a marginal difference.
 7         Q    Is there any difference between a 45 foot trailer
 8    and a 40 foot trailer?
 9         A    Not in terms of the price at which I'm able to buy
10    it.
11         Q    You mean you can contract for a 45 foot trailer at
12    the same unit price as a 40 foot trailer?
13         A    Or cheaper.  It's a competitive market, and in my
14    experience, I can buy one just as cheap as the other.
15         Q    On line 18, you refer to the inbound trip being
16    full.  Is it full because of the need to return containers
17    from the downstream facilities to the BMC?
18         A    No, it's really because of where mail flows; maybe
19    to explain a little bit.  What people typically do, as you
20    get near the Wednesday, Thursday, Friday of the week, they
21    get paid or they otherwise do business that's going to
22    generate mail, and they mail it, give it to the postman,
23    take it to the post office, whatever the case may be, in the
24    afternoon.  That mail gets into the local postal facility,
25    using Norfolk or Richmond as an example, and it gets

                                                             18888
 1    processed and gets ready to go to the BMC.
 2              Typically what happens is Norfolk or Richmond or
 3    some of those other towns down in Virginia or Baltimore,
 4    they have a clearance time by which all the mail they are
 5    sending to the Washington Bulk Mail Center has to be ready.
 6              They load those trucks in the late afternoon,
 7    early evening, typically once again, full of mail, because
 8    that's the way mail flows.  People mail it in the day time,
 9    in the afternoon, it gets into the local post office, it's
10    processed to some degree there, and if it's bulk mail, it's
11    going to the BMC.  If it's first class or some other
12    product, priority mail, it's going to the SCF and being
13    processed there.
14              In using the term "full" here, I'm making
15    reference to the fact that mail flows out of origin places
16    in the late afternoon, early evening, as you get on into the
17    night, and typically by 8:00 at night, most of those trips
18    coming from those places to the BMC are gone.
19              I haven't checked it lately but the Washington
20    BMC, when I was there anyway, had a cutoff time.  If you
21    wanted that mail processed and turned around, I think it was
22    2200, last time I was working out there personally.
23              What I'm referring to here and the reason I say
24    these trucks arrive most times with full containers, full
25    trucks, is in that early evening as a result of mail coming

                                                             18889
 1    out of the Norfolk and Richmond area.
 2         Q    Is it your testimony that the volume of mail
 3    outbound from the BMC is no greater than the volume of mail
 4    inbound to the BMC?
 5         A    I don't know the answer to that question.
 6         Q    You don't know that?
 7         A    No.
 8         Q    Would it surprise you to know that the volume of
 9    mail outbound from the BMC is much greater than the inbound
10    volume?
11         A    The volume of mail outbound is greater than the
12    volume of the mail inbound?  I wouldn't -- I can't be
13    surprised or not be surprised because I haven't looked at
14    those numbers lately.
15         Q    Do you know there is a lot of drop shipping,
16    destination BMC drop shipping?
17         A    Yes, I'm familiar with that.
18         Q    Does that increase the outbound intra-BMC
19    movement?
20         A    If you are saying that mailers are bringing mail
21    to the BMC and inserting it into the system at that point
22    rather than inserting it at the origin BMC, I would think
23    that would have some impact on the intra-outbound service
24    from the BMC, but I have not been involved in that as of
25    late and don't know what the impact is.

                                                             18890
 1         Q    But you believe that the volume of mail inbound
 2    and outbound are virtually the same?
 3         A    No, I didn't say I believed that.  What I said was
 4    that in using the term "full" here on line 19 on page five,
 5    I was making reference to the fact that trips coming out of
 6    these origin cities into a BMC and an intra-BMC network, are
 7    typically full in the afternoon/early evening, and that's
 8    because folks in those places are mailing things that are
 9    going into the BMC network.  That's what I said.  I did not
10    say that I thought the volumes were equal in both
11    directions, because I'm not familiar with that right now.
12         Q    Each container that leaves the BMC leaves via an
13    intra-BMC transportation vehicle; is that correct?
14         A    With some exceptions.  As an example, running from
15    Washington BMC to Philadelphia, we use some containerized
16    movements in that corridor and the reason being it's a short
17    haul, 157 miles, and the fact that you are able to get those
18    loads off, because you have pallets that run in that
19    network, so in those cases, which are exceptions typically,
20    we would have some container movements on some of those
21    short haul inter-BMC runs.
22         Q    On every container that moves outbound from the
23    BMC using intra-BMC transportation, is that container
24    returned to the BMC using intra-BMC transportation?
25         A    Typically, it comes back on intra-BMC

                                                             18891
 1    transportation, but what will happen in some instances is
 2    that you may put a temporary contract -- sometimes you get
 3    imbalances of containers and you may have to run something
 4    temporarily to get those containers back in position. 
 5    Sometimes, you do.  It's a rare exception to the rule, but
 6    typically they come back together.
 7         Q    You keep referring to the high volume movement
 8    between the Washington BMC and Baltimore.  Let's go down to
 9    Florida and go from the Jacksonville BMC to Lake City to
10    Tallahassee, neither of which is high volume.
11              Are there any circumstances in which a BMC
12    container would move to Lake City other than by intra-BMC
13    transportation?
14         A    I hadn't really worked Lake City so I can't really
15    say -- use the term "any" or "all" in that case.  I can
16    really give you some examples as it relates to Washington,
17    Philadelphia, New York, Chicago.  I've been to those places
18    and worked at them for periods of time.  Those are the
19    places I can talk to you about in specifics.
20              If we needed to talk about Jacksonville or Lake
21    City, I have some people who can get that information for me
22    in short order.
23         Q    Similarly, between Atlanta, Georgia and Macon,
24    Georgia, the outbound movement is by intra-BMC
25    transportation, isn't it?

                                                             18892
 1         A    It would seem reasonable to me that it would be,
 2    but once again, I can get the information if you need it.
 3         Q    You just don't know?
 4         A    I don't know firsthand as I know Washington
 5    firsthand, but Macon should be an intra-facility associated
 6    with the Atlanta BMC, as we typically structure things, but
 7    I don't know for certainty, but I have an individual, Dan
 8    Starnes, in Atlanta, who can tell me whatever you might need
 9    to know about it.
10         Q    Assume that Macon is a facility served by the
11    Atlanta BMC.  Is there any way for a BMC OTR container
12    transporting intra-BMC mail to get from Atlanta to Macon
13    other than on intra-BMC transportation?
14         A    Can I think of any scenario that's reasonable? 
15    Yes, I can, if that's what your question is.  As I mentioned
16    to you before, we may have a trip, and I can use Washington
17    again as an example, and you can apply this to Atlanta or
18    Jacksonville, we may have an intra-BMC trip leaving the
19    Washington Bulk Mail Center going to St. Louis, Missouri,
20    and he tells me to save him 20 percent of the truck.
21              What I will do, I'm not going to let that 20
22    percent go over to Merrifield, in this case, empty.  I'm
23    going to put four containers on the end of it going to
24    Merrifield and he will take them off, and then he will load
25    his St. Louis mail on there and keep on going.

                                                             18893
 1              Theoretically, I don't have a life experience
 2    answer for your Jacksonville/Lakeland, or your Atlanta/Macon
 3    question, but theoretically, that same thing could in fact
 4    happen in Jacksonville or in Atlanta, if you follow what I'm
 5    saying.
 6         Q    But you don't know that it does happen?
 7         A    And I don't know that it doesn't.
 8         Q    In the footnote you refer to their numerous
 9    one-way trips.  Can you quantify that?
10         A    Where are you now again?
11         Q    I am on page 5 in the footnote.
12         A    Let me go back and find out where my note is.
13              It ties back to line 7 I believe it is.
14         Q    The footnote is mentioned on line 7, that's
15    correct.
16         A    And that ties back to the comments -- let me just
17    read this one second.  I'll be with you in just one second.
18              Okay.  Yes, that's a reference back to testimony
19    that had been given about line hauls and backhauls, and what
20    I was attempting to get to there, that yes, postal
21    transportation on the intra-BMC network -- any one of our
22    networks -- typically has pairs of trips, one going out and
23    one coming back, but they are not necessarily related to
24    each other.
25              Each one has a mission within itself as it relates

                                                             18894
 1    to moving the mail either when the volumes are going out of
 2    the BMC or as we talked about early afternoon or evening
 3    when they are coming back into the BMC, and that is what
 4    that reference is intended to indicate.
 5         Q    And my question relates to your citation of
 6    "numerous one-way trips" and I asked you if you can quantify
 7    "numerous" one-way trips.
 8         A    No, I don't have a number that I can attach to
 9    that.
10         Q    It's a very low number though, isn't it?
11         A    I haven't looked at it and i wouldn't want to
12    comment but I can take a look and give you some information
13    if you need it.
14         Q    If there is a one-way trip out from the BMC, it is
15    carrying OTR containers, isn't it?
16         A    Typically most trips going out from the BMC carry
17    OTR containers so that is probably a valid assumption on
18    your part.
19         Q    And if you take containers out, those containers
20    have to get back to the BMC, don't they?
21         A    They would have to get back to the BMC.
22         Q    So every time there is a one-way trip, there's
23    another one-way trip to get the containers back, is that
24    right?
25         A    Not necessarily.

                                                             18895
 1         Q    If they all go out full and they all come back
 2    full, and you have got one one-way trip delivering OTR, how
 3    do the OTR containers get back from a one-way trip?
 4         A    What can happen and does happen is that -- two
 5    things.  As I mentioned to you earlier, we sometimes will
 6    put a supplemental piece of transportation to move some
 7    containers.
 8              Another thing that will happen -- if I have got a
 9    backlog of containers in Richmond, Virginia, as an example,
10    I have transportation that runs to Richmond.  I have
11    transportation that runs to Farmville and runs to Petersburg
12    and I will say to my Farmville guy, stop by Richmond tonight
13    and pick me up five containers -- stop by Petersburg and
14    tell the Petersburg trip to come by Richmond and pick up
15    five more, and so we get them out of there by a number of
16    different means and just because I send some down does not
17    mean that I have to run a one-way trip back to get them back
18    into the BMC because you have a network out there, and even
19    in a push if I needed to and we have on occasions, we'd have
20    the Norfolk people come by and pick up some of them.
21         Q    What is the reason for a typical one-way trip?
22         A    On intra?
23         Q    Intra-BMC -- reason for a one-way trip.
24         A    If I get 2000 boxes of something at the BMC all of
25    a sudden, which happens sometimes, that need to get to

                                                             18896
 1    Norfolk, I've got nothing coming back, I will get Thompson
 2    Brothers to run a load down there and they won't necessarily
 3    have to come back.
 4         Q    That is a special run.
 5         A    Oh, sure, yes.  I don't normally run one-way trips
 6    in the sense of a contractual one-way trip, but as I
 7    mentioned before and as it says here, each trip it typically
 8    has a return trip, but each one has a driver that made it go
 9    for a business reason.
10         Q    Are these one-way trips used to handle peak
11    volume?
12         A    Not in the sense of peak days of the week, but in
13    the sense that I just mentioned to you.
14              If I get 2000 boxes of something that needs to get
15    to Norfolk, a special shipment, and I may need to call
16    Thompsons right in the middle of the day or whenever, and
17    there is nothing coming back from Norfolk at 11 o'clock in
18    the morning period, and I'll send them down there to get
19    those things down there because two things are going to
20    happen.
21              You know, if there's some kind of perishable
22    product what will happen is the people want them delivered
23    that next day and if I send them down there on the scheduled
24    trip at 3 o'clock tomorrow morning, they will not get them
25    processed and they will sit in the post office there in

                                                             18897
 1    Norfolk for another 24 hours and then we get complaints from
 2    our customers, both the people we are delivering to and the
 3    one we are delivering for, so in a situation like that is
 4    one where I can think of that we might do something like
 5    that, and it has in fact happened before that we have made
 6    those special one-way moves on occasions for some special
 7    requirement that way -- typically unexpected, but having
 8    nothing to do with Wednesday, Thursday and Friday of the
 9    week.
10         Q    An inbound return trip to the BMC would typically
11    carry the same number of containers as the outbound trip,
12    wouldn't it?
13         A    We try to do that, yes.
14         Q    On page six, line six, you refer to the maximum
15    weight of a vehicle.  To what extent do intra-BMC vehicles
16    approach the maximum weight limit?
17         A    Typically, they don't.
18         Q    On line nine, you say there's little difference in
19    cost between a 40 foot trailer and a 45 foot trailer, but
20    there is a cost difference, isn't there?
21         A    That gives you some room for discussion there, but
22    I'm here to tell you, I can give you contract after
23    contract, one by one, for the same price as the other, or
24    even cheaper.  It depends on what the market will bear.
25         Q    If on March 20, 1998 you want to contract for two

                                                             18898
 1    trailers, one, a 40 foot trailer, and one, a 45 foot
 2    trailer, going from Washington, D.C. BMC to Richmond,
 3    Virginia, would the cost be the same for those two trailers?
 4         A    The cost to me?
 5         Q    Yes.
 6         A    Probably so, not a significant difference
 7    whatsoever.
 8         Q    But there would be a difference?
 9         A    Minimal difference if any at all and it could go
10    in either direction.  The 40 footer could cost more than the
11    45, depending on what -- you know, it's a supply and demand
12    kind of a situation.  If I have a contractor with 45 foot
13    trailers sitting in his yard, needing to put them to work,
14    and he's paying a bank note on them, he's going to sell them
15    to me cheap enough for me to get them out on the road and
16    start paying him some money for them.
17              Vice versa, if I have an individual with 40 foot
18    trailers sitting there, he's going to put a price on them
19    that's going to make me want to contract with him.
20              It's a market driven kind of a situation and
21    theoretically, you can say, yes, there's a difference, but
22    in reality, I can show you example after -- we have 16,000
23    contracts out there and I can show you example after example
24    after example where I can buy a 45 footer as cheap as a 40
25    footer or vice versa in any place in this country.

                                                             18899
 1         Q    On line 20 on page six, you say our transportation
 2    costs will increase.  Have you made any study to support
 3    your belief that the costs would increase?
 4         A    Line 20?  If we tried to use extra service --
 5         Q    I'm asking you -- you made a statement, our
 6    transportation costs would increase.  My question is have
 7    you made a study to support your belief that costs would
 8    increase?
 9         A    What I will say to you is that I made that
10    statement in the context of my actual 28 years of experience
11    in buying transportation services and loading trucks and
12    those kinds of things, and I can speak to you based on that
13    experience and explain to you why I believe that if I were
14    to go out and try to handle peak volumes buying extra
15    service, that it would cost me more, and my service would
16    deteriorate.
17              The reason that I'm saying that is this; a
18    contractor has a truck sitting in a yard, as an example, and
19    I go by and want to use it one day, he's got a certain
20    amount of costs that he or she has to recover on that
21    vehicle. Now, if I use it seven days or 365 days a year, he
22    can spread that cost over time and yes, it will increase my
23    cost based on my experience, to go out and use something for
24    one day's worth of work versus using it over time when the
25    cost between the two is really marginal anyway.

                                                             18900
 1              Now, in a network, and that's the other point that
 2    I'd make here, the Postal Service is not like making an
 3    isolated shipment of something for a short period of time,
 4    but we have to get as mentioned in our mission, to be sure
 5    that people are able to have their mail in their homes day
 6    in and day out.  That's the mission.
 7              To try and manage a network with over 250,000
 8    pieces of equipment in it, to manage peak and manage
 9    unexpected activities within a network of that size and
10    complexity by going out and hiring a truck in a spot
11    situation, would in fact make me not be able to meet the
12    needs of my customers on an ongoing basis.
13         Q    On page seven, line two, the sentence that begins
14    there with the word "rather," you are talking about the
15    unused capacity.  Is the cost of unused capacity caused by
16    the mail volume?
17         A    Not in my opinion.
18         Q    Is the cost of the unused capacity a consequence
19    of purchasing transportation for the peak weekly volume day?
20         A    No, I don't think it's a consequence of purchasing
21    for the peak weekly volume day, and I say it for this
22    reason, that we have to have out there a network that can
23    accommodate the peak weekly volume day with a view toward
24    meeting the mission of being reliable, being able to get
25    people their mail day in and day out on a timely value --

                                                             18901
 1    timely fashion, rather.
 2              And also, as I mentioned to you a minute ago,
 3    there's not in my experience, in the marketplace, a bean's
 4    worth of difference between a 45-foot truck, a 40-foot
 5    truck, and one even smaller than that when you really talk
 6    about rate per mile operating a truck and what a supplier is
 7    willing to sell it to me for.  So it only makes sense to me
 8    to buy to meet my peak when I know that there's not going to
 9    be in the marketplace -- you might be able to do some
10    analysis that tells you something a little bit different
11    than that, but in the marketplace as far as contract prices
12    are concerned, it's not going to make a big difference in
13    life one way or the other.
14         Q    Mr. Young, you contract for cubic capacity for
15    your peak day of the week; correct?
16         A    I contract for trucks to move mail with the view
17    toward being able to meet that Wednesday, Thursday, Friday
18    peak.
19         Q    All right.  Now when you do that, is there unused
20    capacity on Monday and Tuesday?
21         A    In some cases there is, and in some others there
22    is not.
23         Q    Well, in the cases that there is unused capacity
24    on Tuesday --
25         A    Okay.

                                                             18902
 1         Q    Is that unused capacity a consequence of your
 2    having purchased the size of a truck to handle your peak
 3    weekly volume?
 4         A    Once again, my answer to that question is, it is a
 5    consequence of me or us putting in place a network that is
 6    capable of not only meeting that peak volume, but also being
 7    reliable, able to handle fluctuations in volume, and
 8    fundamentally once again in the marketplace the price of one
 9    versus the other is not significant.
10         Q    Beginning on line 6 there, you say that truck size
11    is dependent on service requirements.  Please explain that.
12         A    In some instances, as you know, and I think as
13    someone mentioned -- Porras mentioned earlier today -- the
14    Postal Service has implemented certain programs to improve
15    its ability to once again meet its mission of reliable,
16    consistent, high performance to the customer.  And we've
17    instituted some programs that do have some impact on
18    transportation.
19              In the old days, if you will, 15 years ago or so,
20    you'd take mail and you'd sort it and you'd run it down here
21    to the destinating office and you'd have people there
22    sorting mail at 3:00 o'clock in the morning, 4:00 o'clock,
23    2:00 o'clock in the morning, trying to get it ready for the
24    carrier to come in and carry it out.  But due to the
25    introduction of automation into not only the Postal Service

                                                             18903
 1    but in general, you now have mail processing equipment that
 2    can make a finer sort on that mail and reduce the time that
 3    a carrier needs to have it down at his station in order to
 4    get it ready for the street.  Not only reduce the sort time
 5    at the station, but also increase the accuracy of the
 6    delivery.
 7              So in cases like that there has been some need to
 8    increase -- not to increase but to put trucks in there, in
 9    the transportation window, more of them in the
10    transportation window in order to move that mail in a
11    shorter time frame.  And one of the examples that we cite
12    down in this paper is this idea of a two-pass mail where
13    they make a double sort on it, sort it to the station and
14    then down to the carrier.  So some of those types of
15    programs have in fact had an impact not only on the size of
16    the vehicle that we will buy but also on the number of trips
17    that we will run.
18         Q    How do the service requirements affect the truck
19    size for intra-BMC?
20         A    Is that in here, one of the lines here?
21         Q    Line 6.  How is the truck size of a truck used in
22    intra-BMC transportation dependent on service requirements?
23         A    As I mentioned, in some instances we have a
24    shorter transportation window for the mail moving from the
25    BMC down to the delivery or to the SCF for that matter or

                                                             18904
 1    even on down to the delivery unit.  And in some instances we
 2    will put a larger truck in there to accommodate that, or if
 3    the window is shorter, same volume of mail or more, we will
 4    put more trips in to accommodate that same volume.
 5         Q    Well, if you've got a service window of one
 6    o'clock in the morning, how does that affect the truck size?
 7         A    Well, I can't say that I have a service window of
 8    one o'clock in the morning.
 9         Q    Well, if you have a service window at three
10    o'clock in the morning, how does that affect the truck size?
11         A    And I can't say that either.  What I'm saying to
12    you is that in certain instances, due to changes in
13    processing arrangements, the Postal Service has made what we
14    think is a good decision to shorten the transportation
15    window, which is what a lot of companies do, in order to get
16    a finer distribution and have less work down at the station,
17    have a finer sort of the mail, a more accurate sort when it
18    gets down there.  And for those types of reasons, we have in
19    some cases put a larger truck in and in some other cases put
20    more trips in to move the same volume of mail in a shorter
21    period of time.
22              Maybe you had three hours to move mail at one
23    point in time, and maybe now because of processing changes,
24    you have two hours.  And therefore, in order to get the same
25    amount of volume moved, or more volume, you have to put more

                                                             18905
 1    trucks in or a larger truck in.
 2         Q    You're talking about the same number of
 3    containers?
 4         A    Same number of containers that are full of mail.
 5         Q    Whether or not the containers are full of mail;
 6    correct?
 7         A    They were -- typically should be fuller, in that
 8    if you compressed the window for transportation, you have an
 9    opportunity to put more in them, so that should in fact fill
10    them up more.
11              I haven't done a study of that, but intuitively
12    that seems, you know, like what would happen based on my
13    experience.
14         Q    Do you disagree with the contention that the
15    service -- commitment with the service commitment and the
16    need for meeting a dispatch time will reduce the quantity of
17    mail in the containers?  You disagree with that; correct?
18         A    I need you to restate that question.
19         Q    Do you disagree with the contention that the need
20    to make a dispatch time will result in a less-than-full
21    container?
22         A    Dispatch times are not end results.  Dispatch
23    times are put into an operating plan for basically two
24    reasons.  One is that you have to leave at this time in
25    order to get the product to the next place in time for it to

                                                             18906
 1    be whatever has to be done to it.  That's why you have
 2    dispatch time.  So you don't -- dispatch times are driven by
 3    the -- ultimately by the commitment to the customer and the
 4    time it takes to do the things necessary to have the product
 5    capable of being delivered to the customer.  So dispatch
 6    times, you know, you back into dispatch times.  It's not
 7    something you just kind of set in some arbitrary
 8    environment, but you back into them because they're
 9    necessary to get product down to your customer.
10              But also in setting a dispatch time, you set a
11    start-processing time, because typically if I run 100 trucks
12    through the Washington Bulk Mail Center on the inbound dock
13    and they're inter-BMC trucks, they came from other BMCs,
14    what's going to happen is that an intra-BMC network is going
15    to fill up, and those containers by those -- I know it takes
16    me, if it's a containerized truck, going to take me 20
17    minutes to unload it.  If it's a truck that's bed-loaded
18    like we talked about here today and there's sacks in there,
19    1,000 of them, it's going to take me about four hours to get
20    that sucker unloaded.  So that's the idea there of the
21    containerization versus the deck loading.  But I know how
22    long it's going to take me to run that mail through that
23    facility.
24              If it's an automated facility and we've got 12
25    years, 15 years, 20 years worth of history now, 21 years

                                                             18907
 1    worth, 23 years worth of history.  And we know how long it's
 2    going to take you to run it through there and we know when
 3    it's going to come out those SCFs -- into intra-BMC network. 
 4    And what happens is those dispatch times are geared to the
 5    fact that we're going to start unloading these inter-BMC
 6    trucks at 2 o'clock this afternoon and they're going to be
 7    done about 7:00 or 8:00 or 9:00 tonight, and that truck over
 8    there on the intra network is going to be ready to go full
 9    of mail.  And so you tell them to pull it down at this time.
10              And then also you're back in from the customer's
11    side, where he's saying that, okay, in order to get all this
12    mail down to Norfolk and give those folks down there an
13    opportunity to get it ready for the carrier tomorrow
14    morning, we've got to start getting it into Norfolk at 1
15    o'clock this morning, and then flow it in until about 6
16    o'clock in the morning.
17         Q    I hear your response.  Now my question is do you
18    agree with the contention that a dispatch time results in a
19    reduced volume of mail being loaded in a container, and I
20    suggest that may be answered either yes or no.
21         A    It could be either.
22         Q    All right.  So you neither agree with it nor
23    disagree with it.
24         A    It could be either.  And --
25         Q    Okay.

                                                             18908
 1         A    I can explain why if you want me to.
 2         Q    No, you've explained why.  We don't need it
 3    explained again.
 4         A    Okay.
 5         Q    On page 8 you refer to the R84 testimony.  Has the
 6    Postal Service transportation system changed since 1984?
 7         A    That's page 8.  What line was it?
 8         Q    On page 8, in the third line you refer to some
 9    testimony in Docket No. R84-1.  And my question to you is
10    has the transportation provided by the Postal Service
11    changed since 1984?
12         A    It would -- in terms of highway transportation?
13         Q    Has the transportation system, contracting
14    ability, utilization of vehicles changed since 1984?  It
15    either has or it hasn't.  Yes or no.
16         A    And are we talking about highway transportation?
17         Q    I'm talking about highway purchased
18    transportation.
19         A    Okay.  In terms of change, the contracting
20    process, the philosophy about meeting the needs of the
21    customers, and how we drive to do that, that has not changed
22    since 1984.
23         Q    Has the transportation utilization changed?
24         A    I can't answer that question.
25         Q    Okay.  On line 10 you use the term "every day."

                                                             18909
 1         A    Right.
 2         Q    Is it your testimony that intra-BMC contracts call
 3    for seven-days-a-week transportation?
 4         A    On intra-BMC transportation contracts there is a
 5    movement seven days of the week, but there is variations in
 6    the number of trips that would move on a given day, as we
 7    talked about a little earlier.  I may have 10, 20, or 30
 8    trips moving between some facilities on Thursday, Friday,
 9    and Saturday morning, whereas you drop to Sunday, it may be
10    two or three, because there's little or no activity at those
11    facilities down the line.  So we have activity every day to
12    the very best of my knowledge on every intra-BMC contract,
13    but the level of activity changes consistent with the mail
14    that's typically moving in those segments.
15         Q    Is there an intra-BMC contract trip made from
16    Jacksonville to Orlando, Florida, every seven days a week?
17         A    I would have to check to verify that.
18         Q    Is there one from Atlanta to Macon seven days a
19    week?
20         A    I can check and verify.
21         Q    If there's any testimony in here that says that
22    contracts typically are for six days a week, you contend
23    that that testimony is false; right?
24         A    No, I couldn't make that presumption.  And the
25    reason that I couldn't is because I don't have the firsthand

                                                             18910
 1    information to make that call.  But generally speaking we
 2    have movement on intra-BMC contract transportation seven
 3    days a week, and typically what happens is that the volume
 4    of transportation goes up or down to meet the changes in our
 5    experience of mail flows.
 6         Q    On line 11 you say precise scheduling of postal
 7    transportation.
 8         A    That's right.
 9         Q    Is that dispatch and arrival times?
10         A    That is what I am referring to, yes.
11         Q    And are those necessary to meet service
12    requirements?
13         A    Yes, they are, and the reason once again is that
14    we have time that those carriers take the mail out, take so
15    much time to put it through the plants for people to get it
16    ready for the carrier to take it out, and when you add all
17    of that up together those dispatch times for those trucks
18    and the arrival times for those trucks are very very
19    important in order for us to get the mail to the customer
20    and not to mention the fact that we may have people waiting
21    at those down-line offices to sort this mail so that the
22    time sensitivity is very critical in our minds.
23         Q    Is the arrival time precise schedule dependent on
24    mail volume?
25         A    Typically it fits the volume of mail in that most

                                                             18911
 1    of those trucks carry good loads for the reasons that we are
 2    running them.
 3         Q    Does the precise schedule of dispatch and arrival
 4    time change with changes in mail volume?
 5         A    Typically volumes do not change that significantly
 6    in my experience anyway.
 7         Q    Is it your testimony that the volume of mail does
 8    not change?
 9         A    Not in the sense that we need to change the time
10    of a trip.  We may reduce the number of trips.  We may add
11    trips.  We do those kinds of things but not in terms of
12    changing the times typically that trips operate.
13              Now we have got a number of experimental projects
14    that we work in that area that might add some increased
15    flexibility but typically we don't need to change the times
16    of them.
17         Q    Beginning on page 10 you list some changes that
18    have contributed to cost increases, and for each of these I
19    would like for you to explain to me how each change impacts
20    intra-BMC transportation.
21              Let's start with number (a) which is increase in
22    number of facilities.
23         A    What happens in any number of instances is that --
24    in instance we have communities that we serve today and the
25    Postal Service in cases will increase the number of

                                                             18912
 1    facilities in a given area in order to meet shifts in
 2    population.  New communities come on line and we at times
 3    add to even the intra-BMC network in order to accommodate
 4    those changes in the demographics of the community.
 5         Q    Aren't the changes in the intra-BMC transportation
 6    network as a result of the increase in facilities very, very
 7    limited?
 8         A    I would say it is limited.  I don't know about
 9    very limited.
10         Q    What about changes in distribution schemes that
11    you have in (b) -- how does that impact intra-BMC
12    transportation?
13         A    As I mentioned earlier, some of our sorting
14    patterns and schemes, we have changed them to do a finer
15    sort at the BMC, at our SCFs as well, and that does have
16    some impact on the amount of transportation you might buy or
17    even in some cases as we mentioned the size of the vehicle
18    that you might put on a given route.
19         Q    And next is (c), HASPF -- how does that -- that's
20    the hub-and-spoke processing facility for Priority Mail and
21    First Class mail.
22         A    Right.
23         Q    How does that impact intra-BMC transportation?
24         A    In including that one there, if the discussion is
25    limited exclusively to that, I will pull that one back.

                                                             18913
 1         Q    What about (d), EXFC?  How does that impact
 2    intra-BMC --
 3         A    Just like First Class mail, our two-day and
 4    three-day product and our bulk mail product, as I mentioned
 5    earlier we instituted a number of programs in terms of how
 6    we sort and deliver that mail that does have some impact on
 7    the amount of transportation that we might put within a
 8    given network.
 9         Q    You mean it would reduce intra-BMC?
10         A    No, I don't think it would.
11         Q    Would it increase intra-BMC?
12         A    It very well could, yes.
13         Q    It could, but you don't know?
14         A    Not in the sense that I have done a study on it,
15    but I know we have made certain changes in the distribution
16    of mail that will in fact in some instances increase the
17    amount of transportation that we buy.
18         Q    (e) is containerization.  You refer to
19    containerization of automated flat letter mail.  How does
20    that impact intra-BMC?
21         A    Perhaps a better selection of the mail type there
22    would have been appropriate but the same concept is true as
23    it relates to the intra-BMC network as we have talked about,
24    and you have talked with other about.
25              In response to our customer, in response to our

                                                             18914
 1    own work load issues and labor costs, we have moved toward
 2    the use of more containers and other means of transporting a
 3    big volume of mail on a truck rather than bed-loading it,
 4    and so that has had and continues to have some impact on the
 5    amount of transportation that is in a network, including
 6    intra-BMC.
 7         Q    Do trays of automated letter mail use the
 8    intra-BMC transportation system?
 9         A    Not other than the examples that I cited earlier
10    where we would tailgate some of that mail and that is
11    something that does happen within the system.
12         Q    Changes in palletization -- intra-BMC?
13         A    Yes.  Ideally, and I don't know how familiar you
14    are with pallets, ideally in a pallet operation what you
15    would like to see happen is that a mailer would in fact put
16    his or her product on a pallet, shrink wrap it and strap it
17    and put a cap on the top of it so that you can stack them,
18    and you can get two to three of them -- stack them two to
19    three high, and use that truck all the way to the top.
20              But the reality of life is though you work with
21    mailers and other customers to get them to do this, they
22    will stack them a little bit unlevel.  They won't cap them. 
23    Therefore, it limits the ability of the Postal Service to
24    stack pallets and completely utilize the upper cube in the
25    truck.

                                                             18915
 1              But nevertheless we can't throw the customer away,
 2    as it were.  We have got to work with them and what you do
 3    is you get 26 pallets in a 40 foot truck, and it is loaded
 4    about waist high, and that is what you are going to get in
 5    there because they are not stackable in a number of
 6    instances, and that creates the issue of having to put more
 7    transportation in in order to move our mailers' pallets and
 8    various other ones that give them to us and they are not
 9    capped properly, as you would like them to be, but
10    nevertheless you work with the customer.
11         Q    Would it be a correct summary to say that from
12    your testimony that the utilization of pallets and
13    containers have resulted in increased transportation costs?
14         A    I think they have had some impact on it, yes.
15         Q    And then you mention problems with rail service.
16         A    Right.
17         Q    What is the extent to which rail is used for
18    intra-BMC transportation?
19         A    We use it in Florida as a matter of fact -- coming
20    out of -- what is the Florida rail --
21         Q    Jacksonville BMC?
22         A    No, Florida, east coast, right?  Florida East
23    Coast Railroad.  We use them for intra-Florida movements as
24    a matter of fact.
25              As far as the intra-BMC and the rail are

                                                             18916
 1    concerned, we have moved away from the use of rail carriers
 2    to a great degree.
 3              Let's say three years ago we had about 350,000
 4    loads a year that we would ship with rail carriers, and,
 5    true, most of that was inter-BMC but some of it in the West
 6    and Midwest was in fact some of the intra stuff moving
 7    between large -- over long distances.
 8              But what has happened, and I know you have seen it
 9    in the newspapers, is that the railroad companies especially
10    east of the Mississippi River, they have had significant
11    problems in their consolidations and so forth from running
12    the system, and I think even in Mr. Ball's testimony he
13    talked about the problems with the rail carriers in moving
14    his product and they had to shift to highway and that is the
15    impact.
16              That is how it has impacted highway
17    transportation.  Though it is not a major issue, it deserved
18    to be mentioned because it has had some impact.
19         Q    Would I be correct if I told you I understand you
20    to tell me that the use of rail service for intra-BMC
21    transportation is very limited?
22         A    You would be correct.
23         Q    And what is the extent to which rail service is
24    used for inter-BMC transportation?
25         A    As I mentioned, we moved about 350,000 loads with

                                                             18917
 1    them this past 1997.  That is down about 50 percent and what
 2    we do today in order to once again try and meet the needs of
 3    our customers, both mailers and others, that use BMC -- mail
 4    things that go through the BMC is I have in place now
 5    long-haul transportation, maybe using Jacksonville as an
 6    example, Jacksonville to Seattle, Washington, Jacksonville
 7    to Los Angeles, Jacksonville to San Francisco, Atlanta to
 8    Seattle through Denver, Atlanta to Los Angeles and San
 9    Francisco.  We have those kinds of contracts in there now
10    for the inter-BMC transportation.
11              There is almost no destination -- and I can't
12    really think of one really -- where we use exclusively rail
13    anymore, and the reason is the service problems that we have
14    had with them.
15              Now you get a better situation, as you probably
16    know, on the East Coast here dealing with Conrail and some
17    of those folks who are well-established and have real good
18    networks, but once you go west of the Mississippi as far as
19    rail is concerned right now -- and it will get better -- but
20    it's going to take several years for that to happen, the
21    service and even to find your mail is a difficulty.
22              We have had loads out there with the Santa Fe and
23    with the UP that have been lost for periods of time longer
24    than I care to put on the record.
25         Q    Would it be a correct summary to say that rail

                                                             18918
 1    service and inter-BMC is limited and reducing?
 2         A    Is limited?
 3         Q    And reducing.  Getting smaller.
 4         A    When you say that, what do you mean?
 5         Q    Well, I mean that your projection is that next
 6    week will be less than it was last week, your use of rail
 7    service and inter-BMC.
 8         A    That may be true next week, but also what I was
 9    just saying to you is that I fully expect that they are
10    going to recover.  And it's just a matter of a period of
11    time here where they are going through a downsizing and a
12    consolidation process which is causing them difficulties to
13    integrate those big networks.
14              Like, you know, our guys are meeting with the
15    whole rail industry down in Florida right now, but they have
16    a short-term problem.  Maybe in the next three to four
17    years, I figure that they are going to be one of the best
18    opportunities available, not just as a rail service, but as
19    an intermodal service.  And the reality is, in our view,
20    anyway, that as time goes by, we are going to make greater
21    use of intermodal transportation, which will include part
22    rail.
23              So there may be less next week, but a year from
24    now, or two years from now, we are expecting that they are
25    going to recover and we continue to work with them with that

                                                             18919
 1    view in mind, because we see them as a critical player in
 2    the long haul transportation in the intermodal fashion in
 3    the years to come.
 4         Q    During the past two fiscal years of the Postal
 5    Service, is it true that the use of rail service and
 6    inter-BMC transportation has been limited?
 7         A    Yes, for the short-term service problems that they
 8    have had.
 9         Q    And during that same two fiscal year period, has
10    the use of rail also been declining?
11         A    Yes, due to the short-term service problems that
12    they have had.
13         Q    Is piggyback rail service currently used in
14    intra-BMC?
15         A    The only example I can think of, we have a little
16    activity we are doing right now with the Florida East Coast
17    Railroad, that's one that immediately comes to mind.  And
18    there are no doubt some others out in the West, but I can't
19    just rattle them off the top of my head.
20         Q    But you don't know what they are?
21         A    No.
22         Q    Are you using piggyback rail service in inter-BMC?
23         A    Yes, we do.
24         Q    To what extent?
25         A    We moved 154,000 loads with them last year.

                                                             18920
 1         Q    And it also is declining?
 2         A    In the short-term, due to some service issues,
 3    but, as I mentioned previously, we fully expect that they
 4    will be a very good mode of transportation in the next few
 5    years, especially from an intermodal perspective.
 6         Q    And that is something that the Postal Service has
 7    no control over, isn't it?
 8         A    Well, we think we do have some control over it
 9    from --
10         Q    If they don't improve, you won't use it?
11         A    If they don't improve as we expect they will, then
12    certainly we would use them because it would be detrimental
13    to our meeting our customers' needs.  But as we talk with
14    them, with UPS, they use they them quite extensively in
15    intermodal transportation.  We think that the combination of
16    what the Postal Service brings to the table, UPS and J.B.
17    Hunt, Schneider and a few others, that will be enough to
18    keep them very much interested in the piggyback business and
19    it will get better in the next few years.
20              MR. WELLS:  Thank you, Mr. Young.
21              That's all, Mr. Chairman.
22              THE WITNESS:  Thank you.
23              CHAIRMAN GLEIMAN:  Would everybody like to take a
24    seventh inning stretch?  Let's take five minutes.  A quick
25    five minutes.

                                                             18921
 1              [Recess.]
 2              CHAIRMAN GLEIMAN:  Ms. Duchek, are you ready for
 3    redirect now?
 4              MS. DUCHEK:  Yes, I am.
 5              CHAIRMAN GLEIMAN:  No harm in trying.
 6              MS. DUCHEK:  Well, I'm ready with the
 7    understanding, then, that Mr. Feldman and Mr. Bergin have no
 8    questions.
 9              CHAIRMAN GLEIMAN:  Mr. Bergin.
10              MR. BERGIN:  I have just a few.
11                          CROSS EXAMINATION
12              BY MR. BERGIN:
13         Q    Good afternoon, Mr. Young.
14         A    How are you doing?
15         Q    For the record, I'm Tim Bergin, I represent the
16    McGraw-Hill Companies, and there are a few additional points
17    I'd like to cover with you, please.
18         A    Okay.
19              CHAIRMAN GLEIMAN:  Can you pull the mike in a
20    little closer?  Thank you.
21              BY MR. BERGIN:
22         Q    Mr. Young, referring you to page 7, lines 2
23    through 4, your statement that unused capacity is an
24    inherent by-product of the provision of reliable economic
25    service, is my understanding correct that your reasons for

                                                             18922
 1    saying that relate to the fact that Postal Service
 2    transportation is somewhat unique vis a vis transportation
 3    in other sectors?
 4         A    Yes.  In my experience and opinion, it is unique,
 5    and I say that for these reasons.
 6              The Postal Service, dating back to when it was
 7    created, was put in place at a post office and the Postal
 8    Service was put in place to be able for people to be bound
 9    together, if you will, by hard copy communications and
10    products and those things moving between them, and what the
11    Postal Service has attempted to do is to put up a network of
12    transportation that, every day, has the ability to and does,
13    in fact, move mail between origin-destination pairs in order
14    for people to get things or get communications in a
15    time-definite kind of an environment.
16              Now, if you take that and compare it with what
17    typically happens in a private sector freight shipping
18    environment or something of this kind, it is very different
19    in that, as an example -- some of the examples that have
20    been cited here, you may have a freight shipper that wants
21    to move a certain product to a certain series of
22    destinations and he or she will have control of that product
23    and they'll set up a series of trips to move it within a
24    time-frame, and it's moved, and it goes away.
25              But the Postal Service has set up a network and --

                                                             18923
 1    which it really is required to do, in our view, as part of
 2    its mission -- it has the ability on an ongoing basis, day
 3    in and day out, to move products between origin-destination
 4    pairs based on the times that generally people put those
 5    products into the system.
 6              The example that I cited about, you know, mail
 7    intra-BMC, once again -- the same is essentially true
 8    regarding first-class mail.  People mail it in the
 9    afternoon, the evening, and it gets dealt with locally and
10    then gets transported out.
11              Mail coming into that area is processed somewhere
12    else during the early evening, and it comes in, and that
13    kind of a relationship exists, you know, day in and day out
14    as far as mail is concerned, but in a private sector freight
15    environment, it's very different in that it does not have
16    that day-to-day total network kind of a responsibility nor
17    does it match even closely the Postal Service's need for
18    time-definite movement of product via the transportation
19    network.
20              Now, some people think about just in time, is a
21    concept here that's been talked about a lot in the last few
22    years and been implemented in the private sector, but even
23    in a just-in-time environment, based on my knowledge of it
24    anyway, we're not talking about an environment where, if a
25    truck is late 15 minutes, there's an irregularity issued to

                                                             18924
 1    the truck driver, which is what's true in the Postal
 2    Service's transportation network.
 3              Just in time typically refers to the fact that,
 4    okay, I'll get it to you on Friday afternoon not later than
 5    five o'clock and you have that window of time, but with our
 6    transportation network, every truck that's moving moves on a
 7    time-definite schedule with the minor exception of a plant
 8    load movement that might have a bit more flexibility in it
 9    because the mailer might want that kind of flexibility.
10              But all of our normal transportation, scheduled
11    transportation, moves on a time-definite schedule down to
12    the minute, and so, I see that as being very, very different
13    from what you will see in the transportation of freight in
14    the private sector.
15              Some other differences, as we mentioned here, you
16    know, the security issues -- the screening requirements that
17    we have for our drivers are more stringent, if you will,
18    than what you would typically find in a private sector
19    company of freight haulers, if you will.
20         Q    And it's my understanding that your testimony in
21    this regard is consistent with the testimony of your
22    predecessor, Mr. Orlando, in Docket R84-1?
23         A    I think it should be consistent.  I haven't really
24    read his testimony in detail.  I've had an opportunity to
25    briefly look at it, and I don't see where things have

                                                             18925
 1    changed dramatically, so I think it should be very
 2    consistent.
 3         Q    And you do rely upon it on page 8 of your
 4    testimony?  Is that correct?
 5         A    I make reference to it, yes.
 6              MR. BERGIN:  Mr. Chairman, may I approach the
 7    witness?
 8              CHAIRMAN GLEIMAN:  Certainly.
 9              BY MR. BERGIN:
10         Q    Mr. Young, I'd like to show you a copy of Mr.
11    Orlando's testimony in Docket R84-1 and ask you a few
12    questions about that.
13              MS. DUCHEK:  May I have a copy, as well, please?
14              MR. BERGIN:  Certainly.
15              THE WITNESS:  Thank you.
16              BY MR. BERGIN:
17         Q    Mr. Young, I'd like to refer you to page 25 of Mr.
18    Orlando's testimony.  Mr. Orlando on page 25 refers to
19    latent capacity.  Do you see that?
20         A    Yes, I see it.
21         Q    On line 17, he also describes the term as "unused
22    capacity."  My question to you is is my understanding
23    correct that latent capacity and unused capacity, as
24    referred to in Mr. Orlando's testimony, is the same concept
25    as you use on page seven of your testimony?

                                                             18926
 1              MS. DUCHEK:  If I could interject here for a
 2    minute, just so the record is clear.  Mr. Young cited Mr.
 3    Orlando's testimony on page eight of his testimony for the
 4    proposition that there are significant differences between
 5    Postal Service operations and private sector carriers.
 6              If Mr. Bergin wants to pursue a line of
 7    questioning, that's fine, but from his earlier comment, it
 8    made it seem as if Mr. Young was referring to Mr. Orlando
 9    earlier in his discussion on a previous page on another
10    topic and I just want the record to be clear that is not the
11    case.
12              MR. BERGIN:  I would note that --
13              CHAIRMAN GLEIMAN:  I followed you up until the
14    point where you made reference to the previous page, was it
15    Mr. Bergin who was making the reference?
16              MS. DUCHEK:  Mr. Bergin, a question or so back,
17    before he pulled out Mr. Orlando's testimony, was talking to
18    Mr. Young about statements made on page nine of Mr. Young's
19    testimony and then he flipped --
20              MR. BERGIN:  Page seven.
21              MS. DUCHEK:  I'm sorry, page seven.  Then he
22    flipped back to page eight, talking about Mr. Orlando.  I
23    just wanted the record clear what Mr. Orlando's testimony
24    was cited for by Mr. Young.  It wasn't the comments that he
25    made on page seven, it was the comments that he, Mr. Young,

                                                             18927
 1    made on page eight.  I thought the record might be a little
 2    confused because of Mr. Bergin's earlier reference.
 3              CHAIRMAN GLEIMAN:  I think the record is probably
 4    a lot confused, but be that as it may, I also recall that
 5    Mr. Young said that he did a cursory review of Mr. Orlando's
 6    testimony and to the extent that Mr. Bergin is going to ask
 7    questions about it, he probably should limit himself to
 8    those portions of Mr. Orlando's testimony that are
 9    specifically related to the rebuttal testimony of the
10    witness.
11              MR. BERGIN:  I intend to do that, Mr. Chairman.
12              CHAIRMAN GLEIMAN:  Sure.  Well, then, proceed.
13              BY MR. BERGIN:
14         Q    Do you have the question in mind?
15         A    Perhaps you better repeat it.
16         Q    Certainly, a simple foundation question.  Mr.
17    Orlando, on page 25, refers to latent capacity, which he
18    appears to use interchangeably with unused capacity, and I
19    just would like to confirm that it is the same concept that
20    you use on page seven of your rebuttal testimony, where you
21    refer to unused capacity as an inherent by-product of the
22    provision of reliable economic service.
23         A    Conceptually, I don't see a problem here.  I'm
24    just reading through what Jim said.  Let me just mention, he
25    says here on page 25, he uses the terms "latent" and

                                                             18928
 1    "unused," I can't really talk to those two terms
 2    specifically, but let's go to the reasoning that he uses
 3    here.
 4              He says managing the interface between mail
 5    processing and transportation, meeting the needs of our
 6    customers, at lines 11, 12 and 13, without buying to the
 7    peak, not having the flexibility to meet the needs of the
 8    customer, those are basically the same rationales and
 9    reasoning that I offered for what I'm saying today.
10              Whether I use the term "latent" and "unused," you
11    mentioned down here, I can't speak to those words, but
12    conceptually from what I see here, he's saying essentially,
13    as I interpret it anyway, essentially the same thing that
14    I've said to you a little bit earlier, that in order to have
15    a network there that every day meets the needs of the
16    customers, even on the peak days, that it's necessary that
17    we buy transportation to cover those days, and ultimately,
18    financially, I don't think it makes a real big difference, a
19    significant difference at all, really; my personal view of
20    it.
21              The same rationale that he expresses here, the
22    three items that I've circled, I can see my thinking
23    agreeing with that even though I haven't really looked at
24    what he means when he says "latent capacity."  I understand
25    the definition of it, but what he had in mind when he used

                                                             18929
 1    that term, and "unused capacity," I can't comment on that,
 2    but the three reasons that he cites here, those are fine.
 3         Q    Is it fair to say in your view, in light of your
 4    testimony, that unused capacity in your view results from
 5    the Postal Service's obligation to provide prompt, reliable
 6    and efficient services to customers throughout the nation?
 7         A    I think it does.  It's tied to that; yes.
 8         Q    Referring to page 27, lines one through three, of
 9    Mr. Orlando's testimony, do you agree with the statement
10    there that unused capacity is the result of managing
11    transportation from a system-wide perspective and is
12    incurred on behalf of all classes of mail?
13         A    Our discussion here has been limited to the
14    intra-BMC network.  That was the limit of the discussion.  I
15    can see conceptually where what he says here is correct, but
16    there also, as we have talked about today, both with the
17    intra-BMC and the other networks that we have, there are
18    more specific drivers than what he mentions here.  This is
19    kind of an encompassing statement to say system-wide,
20    managing from a system-wide perspective.
21              As we talked about earlier today, you are going to
22    have mail that's going to generate orders at a certain time
23    of the day, which in order to get it to the end customer in
24    the next place where it is going, it has to leave that
25    afternoon and move on.  You are going to have mail coming

                                                             18930
 1    into a destinating area that is going to arrive early
 2    morning, late at night, in that time frame, which must be
 3    processed and sent down line, either intra-BMC, intra-SCF,
 4    whichever network it might be, and those two things,
 5    although they run in pairs, so to speak, they do have some
 6    drivers that are very clear from our standpoint in terms of
 7    meeting the requirements that we set for ourselves with the
 8    customer.
 9              There is a system-wide issue there and I can
10    understand, I think, what he's getting to, but there are
11    also those specific drivers, as I talked about a little bit
12    earlier today.
13         Q    What about the second portion of that statement,
14    that unused capacity is incurred on behalf of all classes of
15    mail?  Do you agree with that portion of the statement?
16         A    Once again, in the big scheme of things, I can say
17    that I do because you are going to have some unused capacity
18    in every network because of those specific drivers that we
19    talked about today.  Once again, the discussion, I guess,
20    and what I have been allowed to comment on is limited to
21    intra-BMC.
22              Any network that we have, given the drivers that
23    we talked about today, you are going to have some capacity
24    in there that is the result of our effort to provide a
25    consistent reliable service day in and day out, which means

                                                             18931
 1    a network designed to meet that commitment every day.
 2         Q    If I could just interject, I do not wish to limit
 3    the discussion to intra-BMC.  I understand that you and Mr.
 4    Wells discussed that aspect of it.  But I'm referring to
 5    your testimony more broadly, which I understand is more
 6    broad than intra-BMC.  And would the answer you just gave
 7    hold if we broadened the scope to cover inter-BMC and
 8    inter-SCF and so forth?
 9         A    You're going to have some differences in intra-SCF
10    and, I mean, just to maybe talk to you about it a little
11    bit.  What you're going to find in intra-SCF is the use of a
12    mixture of tractor-trailer and straight trucks, more of a
13    mixture in that environment, and therefore some of the
14    issues are going to be a bit different in that environment
15    versus an intra-BMC as Mr. Wells was talking about earlier
16    was basically a tractor-trailer-type environment.  So there
17    will be some differences, but once again, you're always
18    going to find some capacity that goes unused because of the
19    drivers that make those trucks move.
20              When mail originates in a place on a given day in
21    the afternoon, it has to be sorted to some degree locally
22    and transported out.  When mail is coming into that same
23    facility or area, it's going to come in there from midnight
24    to early in the morning.  So you've got something that's
25    driving it at point A, if you will, going toward point B,

                                                             18932
 1    and you have mail volumes that at a later time are going to
 2    drive it at point B and make a truck have to move back to
 3    point A.  Do you follow what I'm saying?
 4              So in both cases in order to be reliable, to get
 5    quality service in there every day, which is what the
 6    mission is, you're going to have some capacity that is not
 7    as fully utilized as if I were to be able to sit here and
 8    wait until I get a full load, as a freight shipper does, and
 9    ship it.  Do you follow what I'm saying?  See, I don't have
10    that luxury.  The mission is every day.  There are people
11    looking for the postman to come with the mail at a certain
12    time, generally speaking, and we have to design and have
13    designed, really, a network that's able to meet that, you
14    know, day in and day out.  So that's the difference, if that
15    makes sense to you.
16         Q    I think so.  And if I could refer you to page 27,
17    lines 12 to 15 of Mr. Orlando's testimony, in light of what
18    you've told us this afternoon, do you agree with the
19    statement there that from a systemwide perspective the
20    amount of latent capacity in the entire system at any given
21    time tends to be a constant amount?  Having reference to the
22    statement in your testimony that unused capacity is an
23    inherent byproduct.
24         A    I don't know about it being constant.  When you
25    use the term -- or did you maybe read this close enough to

                                                             18933
 1    know what did he mean when he said it was constant.  I
 2    didn't -- I haven't read it that closely.
 3         Q    Well, you might review the entire paragraph.  I
 4    think he's referring to constant over time and balancing out
 5    over the system.
 6              MS. DUCHEK:  Mr. Chairman, Mr. Young said he
 7    reviewed this testimony very cursorily.  He cited it for a
 8    very specific thing in his testimony.  I think this is
 9    getting really far afield.  Mr. Young has already -- he's
10    saying he's not clear what he meant by the term "constant." 
11    I really think we ought to move on.
12              MR. BERGIN:  I would note, Mr. Chairman, this is
13    my last line of questioning.  I think it's directly related
14    to the testimony that Mr. Young provided in his rebuttal
15    piece.
16              CHAIRMAN GLEIMAN:  How so?
17              MR. BERGIN:  Pardon?
18              CHAIRMAN GLEIMAN:  How so?
19              MR. BERGIN:  Well, Mr. Young has testified that
20    unused capacity is an inherent byproduct of economic,
21    reliable service, and then he tied that into the unique
22    nature of Postal Service transportation vis-a-vis private
23    transportation.  Then on page 8 he cited Mr. Orlando for the
24    point that postal transportation differs from private
25    transportation.  In response to Mr. Wells' question he

                                                             18934
 1    indicated that the situation of postal transportation
 2    fundamentally had not changed since 1984.  So I think I'm
 3    entitled to explore his reference to Mr. Orlando's testimony
 4    in light of its --
 5              CHAIRMAN GLEIMAN:  Well, his reference to Mr.
 6    Orlando's testimony is just that there are significant
 7    differences between our -- the Postal Service's operation
 8    and private-sector carriers, and I don't believe that, you
 9    know, that that means that it opens up every line and
10    paragraph of Mr. Orlando's testimony, which may or may not
11    have validity, given its age, but I think that we are
12    getting somewhat far afield here.
13              MR. BERGIN:  Well, if I could just note one of the
14    key differences between the postal transportation network
15    and other networks according to both Mr. Orlando and Mr.
16    Young is this notion that unused capacity is an inherent
17    aspect of postal transportation.
18              MS. DUCHEK:  But, Mr. Chairman, it's clear from
19    Mr. Young's statement on page 8 that what he -- he gives a
20    list of the differences in -- between private sector and
21    postal operations, and latent capacity isn't anything he
22    discusses in that section.
23              MR. BERGIN:  Well, I disagree.
24              CHAIRMAN GLEIMAN:  Well, I'm not going to have
25    oral arguments or debating societies here today unless I get

                                                             18935
 1    to be in charge of the debate and do all the debating on
 2    both sides.
 3              [Laughter.]
 4              And that's what I get to do when I'm Presiding
 5    Officer.  And I think it is getting far afield.  You asked
 6    him to look at a sentence at page 28 was it?
 7              MR. BERGIN:  27, Mr. Chairman.
 8              COMMISSIONER HALEY:  25.
 9              CHAIRMAN GLEIMAN:  25.  I'm flipping back and
10    forth, lost count.  It was a short sentence that just, you
11    know, related to Mr. Orlando's assertion of some 14 years
12    ago.  It's not an assertion that this witness has made, and,
13    you know, he said there's space on trucks.  I think that's
14    been established ad infinitum.  Whether he agrees that it's
15    constant over time, and he says he's not sure what that term
16    "constant" means, I think that's it, Mr. Bergin.  I think
17    I'd -- if you've got more, you can move on.  If not --
18              MR. BERGIN:  Well, Mr. Chairman, in lieu of
19    pursuing any additional questions in this line, I would move
20    that Mr. Orlando's testimony in Docket R84 be admitted into
21    evidence in this case.  I believe the witness has relied
22    upon it to some degree.  I think it's in the nature -- same
23    situation as when a witness cites a library reference, and
24    further I would note that it is a fairly common procedure to
25    incorporate in the record of one proceeding the testimony

                                                             18936
 1    that is relevant from another proceeding.  I know there's a
 2    deadline for doing that.
 3              CHAIRMAN GLEIMAN:  I'll accept a written motion
 4    from you requesting that we insert Mr. Orlando's testimony
 5    in toto into the record.  However, as an alternative, you
 6    may want to consider finding the specific section of Mr.
 7    Orlando's testimony that Mr. Young refers to on page 8 of
 8    his testimony, where he talks about significant differences
 9    between our operations and private-sector operations, and
10    just move to insert that, because that's more likely to
11    be -- receive a positive response from the Presiding
12    Officer.
13              MS. DUCHEK:  And, Mr. Chairman, if Mr. Bergin so
14    moves, the Postal Service would like to request a chance to
15    respond in writing, and we will do so on an expedited basis.
16              CHAIRMAN GLEIMAN:  I would certainly entertain
17    both Mr. Bergin's request that the Orlando testimony from
18    1984 be inserted and the Postal Service's response thereto,
19    and I suggest that if you want to do that, that you do it in
20    fairly short order.  You ought to consider doing it by close
21    of business tomorrow.
22              MR. BERGIN:  Yes, Mr. Chairman; I think that can
23    be done.
24              CHAIRMAN GLEIMAN:  Okay.  Do you have other
25    cross-examination?

                                                             18937
 1              MR. BERGIN:  With that, I have nothing further,
 2    Mr. Chairman.
 3              CHAIRMAN GLEIMAN:  Is there follow-up
 4    cross-examination?  Mr. Feldman?
 5              MR. FELDMAN:  Thank you, Mr. Chairman.
 6                          CROSS-EXAMINATION
 7              BY MR. FELDMAN:
 8         Q    Mr. Young, if you don't mind, on page 9 you
 9    discuss the --
10              CHAIRMAN GLEIMAN:  Mr. Feldman, before you get
11    started, I just want to point out that, to the best of my
12    recollection, and I am not going to do a word search of the
13    laser fiche right now, Mr. Orlando's testimony has been the
14    subject of discussions in this hearing room in this docket
15    earlier on in the proceedings, and there has been
16    opportunity for parties to move that testimony into evidence
17    at that point if they thought it was important.
18              I am making that comment.  It does not prejudice
19    your opportunities, I assure you, but this is not the first
20    time I have heard about Mr. Orlando's testimony in this
21    proceeding.  I just wanted to make reference to that.
22              BY MR. FELDMAN:
23         Q    Mr. Young, on page 9, you reviewed with Mr. Wells
24    the various differences between Postal Service and freight
25    transportation.  On the bottom of page 9 you claimed that on

                                                             18938
 1    a per mile basis you believe that the Postal Service has
 2    bettered inflation and you give several examples of that.  I
 3    just wanted to ask you, have you had an opportunity to
 4    review, in addition to Postal Service cost data, any freight
 5    price data over the last few years so that you could make
 6    that comparison?
 7         A    We look at data, we look at motor freight data, we
 8    look at CPI data.  Not any hard studies that I can pass on
 9    to you, but here on page -- the bottom of page 9, and you go
10    on into page 10, is that where we --
11         Q    Yes, sir.
12         A    Okay.  The way we look at cost, we don't look at
13    the bottom line dollars, but I look at the volume of what I
14    am buying.  As an example, back in 1991, like it mentions
15    here, I think we were doing something in the neighborhood of
16    nine-hundred-and-some-odd-million miles per year.  In '96,
17    we did about a billion-and-two on contract transportation. 
18    And as I look at the change in rate per mile, which is
19    typically how we look at highway transportation, it went
20    from $1.15 to $1.27, and over that period of time that comes
21    out to about -- I think about 1.9 percent per year, if my
22    numbers are correct, from $1.15 to $1.27.  That's about 1.9
23    percent per year.  Which beats the index that was referenced
24    in some previous testimony.
25              And, interestingly, to me, I haven't look at this

                                                             18939
 1    particular index, but if it is the long haul motor freight
 2    index, it typically would have less of a change, the cost
 3    there should be less.  Now, if you look at the Postal
 4    Service's number, the number that I am referring to here,
 5    that includes both long haul and short haul, and so, having
 6    been able to continue to have the network that we have and
 7    costs not go up anymore than 1.9 percent on average for that
 8    period of time, per year for that period of time, it really
 9    beats the index to which they are referring here because of
10    the fact that non-local long haul is really what they are
11    referring to, this particular index here, typically, you are
12    going to get less cost increase there than you will get in
13    local transportation, which is included in our number.
14              So, and just looking at those two numbers, my 1991
15    number, my '96 number, and this freight index that they are
16    referring to here, 1.9 percent per year for that period of
17    time, it seems pretty good to us.
18         Q    You would agree, however, since you refer to an
19    overall increase in highway spending, that USPS has
20    experienced that on a year to year basis, there have been
21    increases certainly in the highway as well as other segments
22    of purchased transportation, have there not been?
23         A    There have been increases geared to the amount of
24    transportation we are buying.
25         Q    Total dollars.

                                                             18940
 1         A    Total dollars that we are buying.  More so than a
 2    1.9 percent increase, which is well below the rate of
 3    inflation for every year that we have been out there.  So if
 4    I look at that, and look at the people that are working in
 5    my group and managing that activity, I say you are doing
 6    real good in that you are beating standards typically
 7    accepted from that perspective, even though the bottom line
 8    dollars, yes, have increased significantly because we are
 9    buying so much more, for all those reasons that are cited
10    down there on pages 10, 11 and 12.
11         Q    Are the percentages, year to year, of increase, in
12    highway spending for the Postal Service significantly above
13    the CPI, year to year, let's say since 1995?
14         A    I don't remember off the top of my head what CPI
15    was for '95, '96.  If you had a number, I can tell you.
16         Q    Has the Postal Service increase, year to year,
17    been more than 3 percent a year, in the highway segment?
18         A    In total dollars spent?
19         Q    No, sir.  In percentages spent.  Paid to
20    contractors.
21         A    You mean in total dollars paid to contractors?
22         Q    That's right.
23         A    It has because we are buying more from
24    contractors.
25         Q    Would you agree that there have been some years

                                                             18941
 1    where the number has increased by 10 percent a year?
 2         A    Because we are buying more from contractors.
 3         Q    I didn't ask you why.  I said yes or no, has it
 4    increased 10 percent in certain years, the cost?
 5         A    The cost of transportation --
 6         Q    Yes.
 7         A    -- has increased 10 percent in year?
 8         Q    Yes.
 9         A    And my answer would still have to be the same.
10         Q    Yes or no?
11         A    Because we are buying more, yes, it has.
12         Q    That is not responsive.  I'll move on to another
13    question.
14         A    Okay.  Fine.
15         Q    Has the volume of mail year to year increased 7 to
16    10 percent in the last five years?
17         A    I don't have the numbers available, I don't have
18    them off the top of my head, what the volume increases have
19    been for the past 7 to 10 years -- I mean the past several
20    years.
21         Q    Thank you.  That's an answer.  Now, so, therefore,
22    you don't know whether or not the increases in total highway
23    spending year to year have matched the volume increases year
24    to year?
25         A    I can't make that comparison, but I can tell you

                                                             18942
 1    why it is going why it is going --
 2         Q    Thank you very much.
 3         A    You're welcome.
 4         Q    Next question.  EXFC, you give that as a reason,
 5    and you discussed it with Mr. Wells, as far as efforts to
 6    put on more transportation capacity in the local network. 
 7    Is there a similar system for Second Class or periodical
 8    mail, to your knowledge?  Yes or no?
 9         A    I am not in a position to answer that specific
10    question related to that.
11         Q    Thank you.  Next question.  Containerization.  Do
12    you have any written or documented study of how
13    containerization of any of the types that you describe on
14    page 12 of your testimony has caused increases in
15    expenditures in highway transportation?
16         A    Not here today.
17         Q    Thank you.  One last question.  When you discuss
18    the changes in distribution schemes resulting in some
19    increase in capacity for transportation and added
20    transportation, is all of that transportation you are
21    referring to purchased transportation or is some of it PVS,
22    Postal Vehicle Service transportation?
23
24
25

                                                             18943
 1                           EVENING SESSION
 2                                                     [6:00 p.m.]
 3              THE WITNESS:  I think it would be some of both.
 4              BY MR. FELDMAN:
 5         Q    Can you identify in your testimony here those
 6    places where your references are to purchased highway
 7    transportation, which was the subject of the testimony that
 8    you are rebutting versus in-house PVS, which is a totally
 9    different cost segment?
10         A    I think it would be some of both in most all the
11    places that we are referring to today.
12         Q    And that would be in particular true of local
13    transportation?
14         A    Particularly true of local transportation.
15         Q    In other words, inter-SCF and inter-BMC is
16    practically all purchased highway or in some cases rail
17    transportation, is it not?
18         A    I wouldn't say practically all.  The reason is
19    that we have intra-BMC transportation running in large
20    metropolitan areas both PVS and contract, and if we need to
21    we can break down how much there is of each running.
22              But just to give you a few examples, in the city
23    of Chicago we have intra-BMC transportation running from the
24    Chicago Bulk Mail Center to a number of different places in
25    Chicago, both contract as well as some of it being run on

                                                             18944
 1    PVS and the same is true in the Washington metropolitan area
 2    as well, and various other large metropolitan areas where
 3    you typically have BMCs and large SCFs that are close by.
 4         Q    Are you aware, Mr. Young, that the rates that
 5    periodical customers pay that are in part distance-based are
 6    derived from cost increases in the purchased transportation
 7    category and not the PVS category?
 8         A    I am not really qualified to comment on that.
 9         Q    I understand that.  I understand.
10              MR. FELDMAN:  I have no more follow-up.
11              CHAIRMAN GLEIMAN:  There are no questions from the
12    bench.
13              MS. DUCHEK:  I just need about two minutes.
14              CHAIRMAN GLEIMAN:  Certainly.  You've got it.
15              [Recess.]
16              MS. DUCHEK:  Mr. Chairman, no redirect.
17              CHAIRMAN GLEIMAN:  If there is no redirect, Mr.
18    Young, then that completes your appearance here today.
19              We appreciate your contributions to our record and
20    your appearance.
21              THE WITNESS:  Thank you.
22              CHAIRMAN GLEIMAN:  If there is nothing further,
23    you are excused.
24              [Witness excused.]
25              CHAIRMAN GLEIMAN:  We may as well dive in and get

                                                             18945
 1    started.
 2              Our next witness appearing on behalf of the United
 3    States Postal Service, Mr. McGrane, is already under oath.
 4              We'll give the attorneys the opportunity to
 5    shuffle around over there.
 6              Mr. Reiter, when you are ready.
 7              MR. REITER:  Our next witness is Michael McGrane.
 8              CHAIRMAN GLEIMAN:  Would you like to introduce his
 9    testimony?  I believe Mr. McGrane is already under oath,
10    although I tend to get confused about which docket we are
11    in.
12    Whereupon,
13                         MICHAEL R. McGRANE,
14    a rebuttal witness, was called for examination by counsel
15    for the United States Postal Service and, having been
16    previously sworn, was examined and testified as follows:
17                         DIRECT EXAMINATION
18              BY MR. REITER:
19         Q    Mr. McGrane, I am handing you a copy of a document
20    entitled, "Rebuttal Testimony of Michael R. McGrane on
21    behalf of the United States Postal Service" designated
22    USPS-RT-12.
23              Was this testimony prepared by you or under your
24    direction?
25         A    Yes, it was/

                                                             18946
 1         Q    And if you were to testify here orally today,
 2    would your testimony be the same?
 3         A    Yes, it would.
 4              MR. REITER:  Thank you.  Mr. Chairman, I will hand
 5    two copies of this document to the reporter.  I note that
 6    they contain the revisions that were filed on March 10th and
 7    I would ask that they be entered into evidence as the
 8    rebuttal testimony of Michael McGrane.
 9              CHAIRMAN GLEIMAN:  Are there any objections?
10              Hearing none, Mr. McGrane's testimony and exhibits
11    are received into evidence and I direct that they be
12    transcribed into the record at this point.
13                             [Rebuttal Testimony and Exhibits of
14                             Michael R. McGrane, USPS-RT-12, was
15                             received into evidence and
16                             transcribed into the record.]
17
18
19
20
21
22
23
24
25

                                                             18972
 1              CHAIRMAN GLEIMAN:  Five participants requested
 2    oral cross examination of this witness:  Florida Gift Fruit
 3    Shippers; Nashua District, et al.; Parcel Shippers
 4    Association; the Recording Industry Association of America;
 5    and United Parcel Service.
 6              It's my understanding that Florida Gift Fruit
 7    Shippers and Nashua do not plan to cross examine the
 8    witness.
 9              Does any other party have oral cross examination? 
10    If not, Mr. May -- the patient Mr. May.
11                          CROSS EXAMINATION
12              BY MR. MAY:
13         Q    Mr. McGrane, this I hope will be brief.
14              On page 1 of your rebuttal testimony -- it's
15    actually page 7, I believe -- of your rebuttal testimony, if
16    you have that, you state that RIA Witness Andrew and PSA
17    Witness Jellison have chosen to compare the revenues and
18    costs of Standard A parcels and flats to evaluate the
19    appropriateness of a residual surcharge.
20              Do you see that section of your testimony?
21         A    Except that it is page 9 in the copy that I am
22    looking at.
23         Q    Excuse me -- all right, page 8 and 9.  Yes.  You
24    then proceed to criticize Witness Andrew's methodology as
25    being, quote, "illogical" and "unfounded" -- do you see

                                                             18973
 1    that?
 2         A    Yes.
 3         Q    Your stated reason for this is that Witness Andrew
 4    uses adjusted costs but not use adjusted revenues to make
 5    the comparison, basically.
 6         A    That's correct.
 7         Q    Now the remainder of your testimony does not
 8    address at all Mr. Jellison's testimony.  It doesn't say
 9    anything about his testimony.
10              Is it your intention to similarly criticize his
11    testimony as you do Mr. Andrew's or did you just
12    gratuitously include Mr. Jellison's -- a reference to his
13    testimony?  If your answer is yes, then I can go home
14    immediately.
15         A    Well, to the best of my understanding Mr. Jellison
16    made the same comparison that Mr. Andrew made.
17         Q    Well, Witness Andrew addressed base year parcel
18    costs by using the 7.3 cent cost reduction that was
19    calculated by Postal Service Witness Crum in his Schedule K,
20    does he not?
21         A    Yes.
22         Q    Mr. Jellison did not do that, did he?
23         A    That may be the case.  I don't have Mr. Jellison's
24    testimony in front of me.
25         Q    Well, let me give it to you because you do

                                                             18974
 1    reference his testimony and presumably you are rebutting his
 2    testimony with this section of your testimony.
 3              CHAIRMAN GLEIMAN:  This is not from 1984, is it?
 4              MR. MAY:  No.  No, this is not --
 5              CHAIRMAN GLEIMAN:  Just making sure.
 6              MR. MAY:  No, this is not BE.
 7              CHAIRMAN GLEIMAN:  Oh --
 8              [Laughter.]
 9              BY MR. MAY:
10         Q    And what I have handed the witness, Mr. Chairman,
11    are excerpts from the transcript, specifically pages 12,969
12    through 12,973, which I believe you will find is the section
13    of Mr. Jellison's testimony to which you referred.  Is that
14    correct?
15         A    It appears to be so, yes.
16         Q    Now, if you will look at the transcript page in
17    front of you -- that is page 12,972 -- is it not the case
18    that Mr. Jellison did not reduce costs by the 7.3 cents
19    calculated by Mr. Crum but, rather, only by 1.4 cents?
20         A    Regardless of the magnitude of the adjustment,
21    making an adjustment for the purpose of the comparison isn't
22    the correct way to do it.
23         Q    Well, would you please answer the question?
24         A    Yes.
25         Q    It's only 1.4 cents, correct?

                                                             18975
 1         A    Yes.
 2         Q    Now, I take it that, based on your testimony, you
 3    believe that the best comparison is that of unadjusted costs
 4    to unadjusted revenues.
 5         A    Yes, that's correct.
 6         Q    And addressing Mr. Jellison's Exhibit A, which is
 7    in front of you, transcript 12,971, which itemizes base year
 8    data supplied by the Postal Service for standard A letters,
 9    flats, and parcels, does not that data show that, for that
10    category of parcels, regular commercial parcels, about which
11    Mr. Jellison was testifying, the costs are 33.1 cents per
12    piece more for parcels than for flats?
13         A    So, you're comparing the 51.3 cents to the 9.7
14    cents?
15         Q    No.  I assume you're familiar with Mr. Jellison's
16    testimony, since you purport to rebut it in this section of
17    your testimony.
18              Mr. Jellison testified exclusively about the cost
19    of -- comparison of the cost of commercial regular standard
20    A parcels and flats, that separate sub-class.  That's his
21    testimony.  He didn't testify about anything else.
22              Now, in that table, which you have in your hand,
23    I'm simply asking you to confirm that that table and Mr.
24    Jellison's testimony shows that the differences in costs
25    between standard A parcels and standard A flats for the

                                                             18976
 1    regular sub-class is 33 cents.  Is that not the case?
 2         A    Yes, it appears to be so.
 3         Q    Un-adjusted revenues for those parcels, on the
 4    other hand, are 22.15 cents more per piece than the revenues
 5    for flats.  Is that not what that also shows?
 6         A    Yes, it does.
 7         Q    Thus, is it not the case that the actual cost
 8    revenue relationships for flats and parcels in that
 9    sub-class shows that, while parcels cost 33.1 cents more per
10    piece to handle than flats, they also earn 22.15 cents more
11    revenue, leaving a difference of only 11 cents.  Is that not
12    correct?
13         A    Yes, those are the numbers, yes.
14         Q    Now, in that calculation of those numbers, Mr.
15    Jellison has not adjusted costs, he has not reduced his cost
16    by the 1.4 cents, right?
17         A    Yes.
18         Q    And so, the difference -- comparing what you say
19    should be compared, the un-adjusted costs and the
20    un-adjusted revenues, we have a difference of 11 cents
21    between parcels and flats in that sub-class.  Is that
22    correct?
23         A    Yes, assuming all the numbers on the table are
24    correct.
25         Q    Well, we got them from the Postal Service.  So, I

                                                             18977
 1    don't know whether that's a safe assumption or not, but that
 2    is our source.
 3              Now, again, directing your attention to Witness
 4    Jellison's Exhibit A, where he lists the costs and revenue
 5    separately for regular standard A and flats and parcels, the
 6    Postal Service data used there show that, in the base year,
 7    parcel costs were 51.3 cents and parcel revenues were 46.45
 8    cents, leaving a shortfall of 4.85 cents per piece.  Is that
 9    correct?
10         A    Yes, assuming your math is correct.  I'm not
11    willing to do it in my right here.
12         Q    Now, assuming the accuracy of the Postal Service
13    data that Mr. Jellison was using, assuming that that's
14    accurate -- and many parties have challenged this data, by
15    the way, but assuming that it's correct, assuming Mr. Crum's
16    correct, that you're all correct, assuming that, is it still
17    not the case that a 5-cent surcharge on regular standard A
18    parcels would produce sufficient revenues to cover 100
19    percent of the attributable costs of regular standard A
20    parcels?
21         A    If that's the objective of the rate design.
22         Q    Yes or no.  Yes or no, it would cover them 100
23    percent according to these numbers, would it not?
24         A    According to these numbers, yes, it would.
25         Q    Now, is it not the case that a five cent surcharge

                                                             18978
 1    is exactly what several of the Commissioners on this
 2    Commission recommended be the surcharge in the bulk small
 3    parcel case?
 4              MR. REITER:  Mr. Chairman, at this point, we
 5    really are beyond the subject of this witness' testimony.
 6              CHAIRMAN GLEIMAN:  Would you care to respond, Mr.
 7    May?
 8              MR. MAY:  I believe it was this witness' testimony
 9    that was challenging Mr. Jellison's section of his
10    testimony.  That's why I asked him, are you challenging Mr.
11    Jellison's testimony.
12              MR. REITER:  The portion that he's challenging is
13    concerning a comparison of revenues and costs that were
14    made, not to ask him about what the Commission said in other
15    cases and what that may --
16              CHAIRMAN GLEIMAN:  Well, in the interest of moving
17    along, and Mr. May is moving at a pretty good clip here, if
18    the witness can answer that question, I don't know the
19    answer to the question because that was B.E.  Let's see if
20    the witness knows, and if he doesn't know, he will tell us
21    he doesn't know.
22              MR. REITER:  I'm not sure it was.
23              MR. MAY:  It wasn't B.E.  It was A.E.
24              CHAIRMAN GLEIMAN:  Did you say the bulk small
25    parcel case?

                                                             18979
 1              MR. MAY:  No, excuse me, in the first
 2    reclassification case, MC-95.
 3              CHAIRMAN GLEIMAN:  I thought you said bulk small
 4    parcel.
 5              MR. MAY:  Thank you for the correction, Mr.
 6    Chairman.
 7              CHAIRMAN GLEIMAN:  That case was before my time.
 8              MR. MAY:  Yes, the first reclassification case,
 9    MC-95.
10              THE WITNESS:  Honestly, I don't recall.
11              BY MR. MAY:
12         Q    Fine.  Mr. Andrew, whose testimony you also rebut,
13    asserted that there was another 5.6 cents of costs that was
14    improperly assigned to parcels for various reasons.  You do
15    not rebut that contention, do you?
16         A    Not specifically in my testimony; no.
17         Q    Now, if he is right on that, if he's right and you
18    haven't rebutted it, then that would be a reduction of at
19    least five cents in the cost, meaning that for the base
20    year, if he's correct, this sub-class of parcels covered at
21    least 100 percent of its attributable costs; would that not
22    be the case if Mr. Andrew is correct?
23         A    Well, first of all, Witness Degen does rebut one
24    portion --
25         Q    2.3 cents.  No one from the Postal Service rebuts

                                                             18980
 1    the 3.3 cents over assignment, do they, to your knowledge? 
 2    You don't and Mr. Degen doesn't.  I'm just asking you to
 3    assume for the sake of discussion that indeed the Postal
 4    Rate Commission finds that Mr. Andrew's contention is
 5    correct, as to that over assignment of costs, then it would
 6    also be the case, would it not, that in fact standard A
 7    parcels covered 100 percent of their attributable costs,
 8    according to that math?  Yes or no?
 9         A    You know, I don't recall specifically at this
10    moment.  I believe Witness Andrew was not talking about
11    regular parcels only, but about the combined ECR and non-ECR
12    for both regular and non-profit.
13         Q    Are you aware that the regular comprises 88.5
14    percent of the total?
15         A    That sounds approximately correct, yes.
16         Q    If it were the case that Mr. Andrew's testimony is
17    believed and it is believed that therefore the costs for
18    standard A parcels have been over attributed by five cents
19    per piece, then does it not follow that that means with no
20    surcharge at all, in the base years standard A parcels were
21    covering 100 percent of their costs?
22         A    Yes, if you make all those assumptions.
23         Q    Well, there is only one assumption that I'm asking
24    you to make and that assumption is the Commission believes
25    Mr. Andrew's testimony is correct.  Is there any other

                                                             18981
 1    assumption I'm asking you to assume in that formulation?
 2         A    Well, but Mr. Andrew's testimony consists of two
 3    separate items, so you have to accept both of them in order
 4    to --
 5         Q    Yes, both his 2.3 cents argument and the 3.3
 6    cents, not having anything to do, mind you, with Mr.
 7    Andrew's adjustment of 7.3 cents.  We are not talking about
 8    that.  We are talking about an entirely separate cost
 9    attribution issue raised by Mr. Andrew, one of 2.3 cents
10    over attribution of costs, and another, 3.3 cents, and you
11    admit yourself that neither you nor anybody else in the
12    Postal Service has rebutted his contention on the 3.3 cents
13    cost over; is that not the case?
14         A    No one specifically rebuts it, but I don't think
15    it will go uncontested in later phases of this --
16         Q    Then I'm back to asking you, apart from the
17    assumption that the Commission gives credibility to Witness
18    Andrew's contention on this 5.6 cents, I'm not asking you to
19    assume anything else that is not in evidence in this case,
20    am I?
21         A    Yes, if you subtract five cents of costs, then --
22         Q    It is paying its way?
23         A    Yes.
24              MR. MAY:  That's all, Mr. Chairman.
25              CHAIRMAN GLEIMAN:  Mr. Wiggins.

                                                             18982
 1              MR. WIGGINS:  Thank you, Mr. Chairman.
 2                          CROSS EXAMINATION
 3              BY MR. WIGGINS:
 4         Q    Mr. McGrane, I'm Frank Wiggins, here today for the
 5    Recording Industry Association of America.  I think you
 6    established with Mr. May that part of the mission of this
 7    rebuttal testimony is to rebut the testimony submitted --
 8    entered into the record under the name RIAA et al. 1 from
 9    Dr. Andrew.
10         A    Yes.
11         Q    And you told Mr. May what parts of the Andrew
12    testimony you didn't deal with.  You didn't deal with the
13    portion of Dr. Andrew's testimony in which he asserts that
14    owing to an error in the calculation of density of parcels,
15    the Postal Service overstates transportation costs by 3.3
16    cents per --
17         A    That's not addressed in my testimony.
18         Q    That's not part of your testimony.  And it equally
19    is not part of your testimony to rebut that portion of Dr.
20    Andrew's testimony in which he asserts that through an error
21    in the distribution of non-MODS office mail processing
22    costs, there is an overstatement of parcel costs of 2.3
23    cents.
24         A    No, I believe that's addressed in Mr. Degen's
25    testimony.

                                                             18983
 1         Q    I understand.  That's tomorrow, though, and this
 2    is still tonight.
 3         A    Yes.
 4         Q    And you don't take up that issue.
 5         A    Yes.
 6         Q    Okay.  You do say that there is an analytic
 7    infirmity in Dr. Andrew's testimony and that he fails
 8    adequately to segregate his apples and his oranges.  Right?
 9         A    That's correct; yes.
10         Q    And you say there are two cures to that infirmity. 
11    One could either compare, as you did with Mr. May with
12    regard to Mr. Jellison's testimony, one could compare
13    unadjusted costs with unadjusted revenues; right?
14         A    Right.  And I believe that's the superior
15    comparison.
16         Q    Okay.  I got that from your testimony.  What I
17    didn't get from your testimony was the punch line.  I never
18    saw the number.  Did I miss it?
19         A    Which number are you referring to?
20         Q    A number that compares the unadjusted costs of
21    flats and parcels with the unadjusted revenues of flats and
22    parcels.
23         A    Well, I believe that all that evidence is on the
24    record already, and --
25         Q    I'm just asking whether it's in your testimony and

                                                             18984
 1    that I've overlooked it.
 2         A    No, I don't believe that those numbers are
 3    specifically side by side somewhere in my testimony.
 4         Q    Witness Andrew calculated by subtracting from 33.4
 5    cents 24.6 cents, 2.3 cents, and 3.3 cents that the maximum
 6    justifiable surcharge would be 3.2 cents.  But that is
 7    comparing an unadjusted revenue number with an adjusted cost
 8    number; correct?
 9         A    Could --
10         Q    That's what you criticize him for.
11         A    I criticize him for comparing the adjusted cost
12    number to the unadjusted revenue --
13         Q    Well, the sum that he comes down to after
14    subtracting out, adding the revenue difference back in and
15    subtracting out the other costs, he says 3.2 cents.  Do you
16    remember that part of his testimony?  It says the maximum
17    surcharge you could justify is 3.2 cents.  Do you remember
18    that?
19         A    Not the specific words or sentence, no.
20         Q    Can you explain to all of us what numbers you
21    would compare if you wanted to compare unadjusted revenues
22    with unadjusted costs?
23         A    Certainly.  You would compare the cost number in
24    table 3 of Witness Crum's Exhibit K with the unit revenue
25    that you can derive from the combinations of table 1 and 2

                                                             18985
 1    of Crum's Exhibit K.
 2         Q    Are those numbers anywhere in your testimony? 
 3    Un-adjusted unit revenue is column 2 of your Table 1, is it
 4    not?
 5         A    Yes.
 6         Q    And do we -- but we don't have an un-adjusted unit
 7    cost number there, correct?
 8         A    No, but it's clearly right at the bottom of Table
 9    3, page 2 of Crum's Exhibit K.
10         Q    Let's just make sure that we have the same number
11    in mind here.  Your number in column 2, the un-adjusted unit
12    revenue number, is 24.6 cents, correct?
13         A    Yes.
14         Q    And you say I need to look at Table 3 of Mr.
15    Crum's Exhibit K?
16         A    Yes, that's correct.
17         Q    And can you give me a line number, a page number
18    or something where I'm going to see the number that you
19    think I ought to be looking at?
20         A    Well, I don't have page numbers here, but I
21    believe it's the second page of Table 3, and there's a line
22    called attributable cost per piece, and then you would
23    compare the flats and the IPP and parcels.
24              MR. REITER:  If it would help, if I could jump in,
25    I think there's a number -- and if I'm not mistaken, this is

                                                             18986
 1    the one you're looking for, page 9, line 16, Mr. McGrane's
 2    testimony.
 3              COMMISSIONER LeBLANC:  That's his original
 4    testimony, Mr. Reiter?
 5              MR. REITER:  No, his rebuttal testimony.
 6              COMMISSIONER LeBLANC:  Okay.  Just to make sure
 7    the record's clear.  Thanks.
 8              MR. WIGGINS:  I'd be happy if the witness could
 9    confirm that.
10              COMMISSIONER LeBLANC:  Do you need the cite again,
11    Mr. McGrane?
12              THE WITNESS:  That would help, but actually, what
13    seems to be occurring is that I have different page
14    numbering on the copy of testimony I have here.
15              COMMISSIONER LeBLANC:  Mr. Wiggins, so we're all
16    on the same sheet of music, would you have an objection if
17    Mr. Reiter --
18              MR. WIGGINS:  Absolutely not.
19              COMMISSIONER LeBLANC:  -- lets him take a look at
20    his copy, and that way we'll be on the --
21              MR. WIGGINS:  Absolutely.
22              THE WITNESS:  Where I have it is on page 10 at
23    line 11, where --
24              COMMISSIONER LeBLANC:  Can you give us some
25    indication so we can all be on there, Mr. McGrane?

                                                             18987
 1              THE WITNESS:  The sentence reads, "The result of
 2    this comparison is that, in the base year, 1996, parcels
 3    cost 40.3 cents per piece more than flats and brought in
 4    24.6 cents per piece more revenue than flats."
 5              MR. WIGGINS:  Let me just make sure -- I'm still
 6    operating under the previous incarnation of this, and I just
 7    want to make sure that I'm tracking -- okay, got it.
 8              COMMISSIONER LeBLANC:  Okay, Mr. Wiggins, are we
 9    back on go now?
10              MR. WIGGINS:  Yes, sir.
11              COMMISSIONER LeBLANC:  Okay.  Thank you.
12              BY MR. WIGGINS:
13         Q    You also testify, Mr. McGrane, that another way,
14    the way you least -- less prefer, for matching up apples and
15    applies instead of apples and oranges, is to compare an
16    adjusted cost number with an adjusted revenue number.
17         A    If you insist on making that comparison, yes, you
18    would have to adjust both the cost and the revenue number.
19         Q    And you purport to show us the outcome of that
20    comparison, don't you, in your Appendices B and C, and then
21    you reflect one of those in your Table 1.
22         A    Yes, that's correct.
23         Q    You reflect Appendix B.  Is that right?
24         A    Yes.  I reflect Appendix B because Appendix B
25    represents the rates on which this case is being built upon.

                                                             18988
 1              MR. WIGGINS:  May I approach the witness, Mr.
 2    Chairman?
 3              COMMISSIONER LeBLANC:  Certainly.
 4                             [Cross-Examination Exhibit No.
 5                             RIAA/USPS-XE-1 was marked for
 6                             identification.]
 7              BY MR. WIGGINS:
 8         Q    I have placed in front of the witness a document
 9    that has been marked as RIAA/USPS-XE-1 that was previously,
10    many days ago, provided to counsel for Mr. McGrane.
11              Have you had a chance to review that, Mr. McGrane?
12         A    Yes, I certainly have.
13         Q    It is a restatement of your Table 1, right?
14         A    Yes, that's correct.
15         Q    And in the fourth column of that restatement,
16    there is a reflection of the two parts of cost difference
17    reduction that you and I talked about at the very onset of
18    this colloquy, which is in Dr. Andrew's testimony that you
19    do not rebut.  Correct?
20         A    Yes, but that doesn't mean that I agree with his
21    statement.
22         Q    Oh, no, I understand.  I am just trying to get
23    sources straight here so we are talking about common
24    ground -- and the 33.4 cent number in column 2 is a number
25    from your Table 1, right?

                                                             18989
 1         A    Yes, and it is also -- yes.
 2         Q    So if one goes from your restated adjusted unit
 3    cost number 33.4, reduce it by the two numbers from Dr.
 4    Andrew's testimony, you get the restated number in column 3
 5    of 27.8 if the arithmetic is right?
 6         A    Yes.
 7         Q    And the next number down in Row 2, the 24.6
 8    number -- that is the unadjusted revenue difference and that
 9    too is a number taken from your table, so you endorse that
10    number, correct?
11         A    Yes.
12         Q    Now the next row down, Row 3, accurately reflects
13    in column 2 the 6.8 cents that you show there, but in the
14    restated column is 4.9 cents.
15              That is the difference -- those two numbers are
16    the difference between your analysis in Appendix B, the 6.8
17    cent number, and Appendix C, the 4.9 cent number, correct?
18         A    Yes, it is the difference between using
19    pre-reclassification rates and post-reclassification rates.
20         Q    Right.  At the top of your Table 1 you say it is
21    the adjusted base year and you also say that on lines 13 and
22    14 of page 11.  You say you are talking about the base year? 
23    Do you have that?
24         A    Well, again, I am having trouble finding the --
25         Q    Oh, I'm sorry, because of the difference in

                                                             18990
 1    pagination.
 2              Look only at your Table 1, would you please?  That
 3    states it clearly enough.
 4              It says at the very top adjusted base year
 5    revenue.
 6         A    Yes.
 7         Q    Is it your impression that Mr. Crum was using base
 8    year numbers?
 9         A    If I recall Witness Crum's testimony correctly,
10    most of his calculations were done using base year numbers
11    and then he makes projections to the test year at the end.
12         Q    You have that testimony in front of you, don't
13    you?
14         A    I only have a very limited portion of it.
15         Q    Do you have Table 1?
16         A    Yes, I have Table 1.
17         Q    What does it say at the top of Table 1, the label
18    there?
19         A    It says FY 1996 Standard Mail A Bulk Regular Rate.
20         Q    I believe if you look at the substances of Mr.
21    Crum's testimony, he tells you that he is using Fiscal Year
22    1996 numbers.  Accept that with me, subject to check, would
23    you please?
24         A    Well, right, yes.  And to the best of my
25    understanding, the base year is consisting of Fiscal Year

                                                             18991
 1    1996 numbers, in terms of volumes and revenues.
 2         Q    And Fiscal Year 1996 is the period beginning on
 3    October 1, 1995 and ending on September 30, 1996, is that
 4    right?
 5         A    Yes.
 6         Q    And give me your impression of when the 4.9 cent
 7    rate that is reflected in your Exhibit C, when was that in
 8    effect, or when did it cease being in effect?
 9         A    Well, reclassification ceased to be in effect July
10    1st of 19 -- or was implemented July 1st, 1996.  But,
11    regardless, if you are comparing the costs and the revenues,
12    the revenues that are in place that the rates on this case
13    will be built upon are the post-reclassification rates.  The
14    rates from two cases prior really aren't germane.
15         Q    Well, I am trying to get a handle -- what we are
16    trying to do, it seems to me, what you criticize Dr. Andrew
17    for not doing, is matching up a series of costs with a
18    series of revenues during a single time period, correct?
19         A    No, I criticized Dr. Andrew for using the
20    adjustment that makes the unit costs for parcels look like
21    they had been mailed in the same pattern for flats, but not
22    doing to the similar adjustment to revenue.
23         Q    I understand.  But in your analysis, you are
24    comparing adjusted unit costs with adjusted unit revenues,
25    are you not?

                                                             18992
 1         A    Yes, I present that, yes.
 2         Q    And it is important, isn't it, for your analysis,
 3    that the adjusted costs be from a period in time which is
 4    the same as the period in time from which you are measuring
 5    the unit revenues, isn't it?  You have to have a temporal
 6    match?
 7         A    But the adjustment in costs are based upon the
 8    cost estimates presented in this case, and the
 9    post-reclassification rates more closely match those
10    adjustments in costs.  The reason that it is appealing to
11    use the Exhibit B rather than the Exhibit C figures is that
12    the adjustment in costs matches the adjustment in revenue
13    most closely, and that shows that the adjustments in costs
14    are equal to the adjustment in revenues, which seems to be
15    the goal of ratemaking, is that you make your revenues
16    equivalent to your costs.
17         Q    Let me put it a slightly different way.  Where did
18    you get the adjusted unit cost number that you use?  Column
19    1 of Table 1.  Where did you find that?
20         A    From Witness Crum's testimony.  It's the
21    application of -- I don't have a page number cite unless --
22    I must cite it in the testimony here.
23         Q    I believe you did.  I think you tell me that it is
24    page 12, isn't it?  Isn't it the Footnote 1 to your Table 1? 
25    And he, in turn, tells us in his testimony where that number

                                                             18993
 1    comes from, and I think if you match up that testimony with
 2    the tables in his testimony, you will see they are Fiscal
 3    Year 1996 numbers, aren't they?  That Mr. Crum is using
 4    here.
 5         A    I don't have Mr. Crum's table in front of me, but
 6    --
 7         Q    Well, accept that for me, subject to you own
 8    check, if you would, please.  And now I need to understand,
 9    if you are using Fiscal Year 1996 numbers, and we said those
10    are the numbers from September 1 -- I'm sorry, October 1 of
11    '95 through September of '96, correct?
12         A    Yes.
13         Q    Wouldn't I want to look -- if I truly were trying
14    to compare apples with apples, wouldn't I want to look at
15    revenues for that same time period?
16         A    If you truly want to compare apples to apples,
17    compare the un-adjusted costs to the un-adjusted revenue.
18         Q    If I wanted to compare adjusted apples with
19    adjusted apples, wouldn't I want to do that in the same time
20    period?
21         A    But -- all the numbers, I accept, are from FY
22    1996, except for the numbers used in Table 7 of Witness
23    Crum's testimony to adjust the numbers, and those
24    adjustments are based upon the evidence presented in this
25    case.

                                                             18994
 1         Q    In October of 1995, which is the beginning point
 2    of Fiscal Year 1996, correct?
 3         A    October 1995, yes.
 4         Q    That's the beginning of fiscal year 1996?
 5         A    Yes.
 6         Q    Were the discounts that are displayed on your
 7    tables 12-C in effect on October 1 of 1995, or were the
 8    discounts that you display on your Exhibit B in effect?
 9         A    In October 1 of 1995 the discounts in Exhibit C
10    were in effect; yes.
11         Q    Right.  And they remained in effect until July 1
12    of 1996 or roughly for three quarters of the fiscal year
13    1996 period.
14         A    Yes.
15         Q    And only after that did the discounts which you
16    display in your Exhibit B come into effect.  Correct?
17         A    Yes.
18              MR. WIGGINS:  Mr. Chairman, I have nothing
19    further.
20              Oh, I do have --
21              CHAIRMAN GLEIMAN:  Too late.
22              MR. WIGGINS:  One thing further, Mr. Chairman.  We
23    have had marked, and I have put in front of the reporter
24    what I've marked as Cross-Examination Exhibit 1.  For the
25    sake of clarity of the record, I'd like to have it entered

                                                             18995
 1    into the record at this point.
 2              CHAIRMAN GLEIMAN:  Transcribed into --
 3              MR. WIGGINS:  Transcribed into the record, not
 4    entered as evidence.
 5              CHAIRMAN GLEIMAN:  I'll direct that RIAA/USPS-XE-1
 6    be transcribed into the record at this point.
 7                             [Cross-Examination Exhibit No.
 8                             RIAA/USPS-XE-1 was transcribed into
 9                             the record.]
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                             18997
 1              CHAIRMAN GLEIMAN:  I didn't mean to say it was too
 2    late for you, it's just too late for us all to be here.
 3              Mr. McKeever.
 4              MR. McKEEVER:  Thank you, Mr. Chairman.
 5              MR. REITER:  Mr. Chairman, before Mr. McKeever
 6    begins, and I'm sorry to interrupt, may I give the witness a
 7    copy of the testimony that has the right page references? 
 8    It might expedite things.
 9              CHAIRMAN GLEIMAN:  Certainly.  And while you're
10    doing that, just let me make a note of something.  Florida
11    Gift Fruit Shippers had earlier indicated that it wished to
12    cross Witness Lewis.  Mr. Wells advises me that he has no
13    cross-examination for Witness Lewis.
14              MR. REITER:  All right.  Thank you for --
15              CHAIRMAN GLEIMAN:  So I don't know whether anyone
16    else does or not, but hopefully we'll be able to move along
17    a little bit more quickly, since we won't have cross of that
18    one witness.
19              Mr. McKeever.
20              MR. McKEEVER:  Thank you, Mr. Chairman.
21                          CROSS EXAMINATION
22              BY MR. McKEEVER:
23         Q    Mr. McGrane, could you turn to page 1 of your
24    testimony, please.
25         A    I have it.

                                                             18998
 1         Q    At lines 17 to 19 there you state that in
 2    Docket R90-1 Mr. Atchison excluded mail preparation costs
 3    from the pool of outgoing costs that DBMC avoids in order to
 4    be conservative.  Is that right?
 5         A    Yes, that's my understanding.
 6         Q    Why do you think that if he wanted to be
 7    conservative he picked those particular costs as opposed to
 8    some other costs to exclude from his calculation of DBMC
 9    avoided costs.
10         A    I can't really speculate as to why he chose those
11    particular costs.
12         Q    Okay.  On lines 10 and 11 of page 1 you state that
13    Mr. Crum included outgoing mail preparation costs at AOs and
14    SCFs as costs that can be avoided by DBMC Parcel Post.  Do
15    you see that?
16         A    Yes, I do.
17         Q    Why did you use the word "can" there?
18         A    Well, you could use the word "are" as well.  I
19    mean --
20         Q    You didn't intend any difference.
21         A    No.
22         Q    Do DBMCs incur -- DBMC parcels incur outgoing mail
23    preparation costs at DBMCs?
24         A    Yes.
25         Q    Okay.  If you turn to page 2 of your testimony at

                                                             18999
 1    lines 1 to 3, you state that mail preparation activities
 2    include opening and dumping sacks and rolling containers,
 3    culling mail, canceling, separating and breaking down mail,
 4    and transporting mail within a facility.  Is that correct?
 5         A    Yes, that's correct.
 6         Q    Do you know if mail preparation activities also
 7    could include occasionally rewrapping parcels that become
 8    unwrapped in transit or during handling?  Is that a mail
 9    preparation activity?
10         A    Yes, that is a mail preparation activity.
11         Q    Anything that prepares the mail for distribution
12    is a mail preparation activity.  Is that right?
13         A    As it's labeled in the IOCS; yes.
14         Q    Okay.  Do you know what separating and breaking
15    down mail consists of?  Can you describe that process for
16    me?
17         A    Well, generally in SCF-like plants as containers
18    are offloaded transportation in an opening-unit-like
19    operation they open the container and they sort the sacks or
20    trays or other mail that's in the container to the various
21    operations in which they're going to be distributed, and
22    they usually refer to that as breaking down the container.
23         Q    Okay.  And that does -- that operation is
24    performed on DBMC parcels at the DBMC.  Is that right?
25         A    Well, at the DBMC it's usually much simpler in

                                                             19000
 1    that you're just unloading the vehicle and directing the
 2    parcels to the parcel-sorting machine so they can be sorted.
 3         Q    They're not separated and broken down?
 4         A    In BMCs it generally consists of moving the
 5    container and then dumping it into the loading mechanism of
 6    the parcel-sorting machine.
 7         Q    Well, I'm not clear, are they separated and broken
 8    down?
 9         A    They could be, you know, if there was a mixture of
10    nonmachineable and machineable parcels.  Yes.
11         Q    Okay.  When DBMC parcels are entered at a DBMC, do
12    the mail preparation activities performed on them include
13    opening and dumping sacks and rolling containers?
14         A    Yes, they have to be removed from their containers
15    in order to be distributed.
16         Q    And they are also transported within the facility. 
17    Is that right?
18         A    Yes.
19         Q    Mr. McGrane, you do agree, don't you, that ASFs
20    sometimes serve the same function as a BMC?
21         A    In some cases they do, yes.
22         Q    Could you turn to page 3 of your testimony,
23    please?  On that page, at line 15, you state that, to adjust
24    Mr. Luciani's adjustment of DBMC costs, you used IOCS data
25    and identified ASFs by finance number and developed separate

                                                             19001
 1    keys for the distribution of volume variable costs for ASFs
 2    and SCFs.  Do you see that?
 3         A    Yes.
 4         Q    Are you aware, Mr. McGrane, that in R90-1, Mr.
 5    Atchison testified that he could not do what you said you
 6    did in this case, because an ASF's finance number is not
 7    --or at least, then, was not unique to the facility?
 8         A    No, I was not aware that he had testified as such.
 9         Q    Okay.
10              When Mr. -- my understanding is that, when Mr.
11    Luciani tried in this case to isolate IOCS tallies for ASFs,
12    the data that we received from the Postal Service was such
13    that the ASF finance numbers were masked or garbled or
14    covered over.
15              When you first worked with the data, did you have
16    to un-mask it or un-garble or do anything in any way so you
17    could have access to that information?  Do you recall?
18         A    Well, the data, in the way that I worked with it,
19    is the same data set that the Postal Service works with the
20    finance number field as it originally appears in the data. 
21    So, I can look directly at the finance number.
22         Q    Well, did you have to do anything special to get
23    access to the number, or are you telling me that you used
24    something other than what was filed in this case?
25         A    Well, I used the 1996 IOCS tape as it's used in

                                                             19002
 1    the Postal Service.  The tape that's released in this case
 2    is -- comes from the same set of data, but it has the
 3    finance numbers masked in a way so that individual
 4    facilities can't be identified.
 5         Q    Okay.  So that the tape that was supplied to the
 6    parties in this case did, in fact, have the ASF finance
 7    numbers masked?  Is that what you just said?
 8         A    Well, yes.  I mean all they are are changed or
 9    randomly coded so that they're different than the actual
10    numbers that are used within the Postal Service, but if I
11    understand the coding process correctly, there's still
12    one-to-one mapping from the original finance numbers to the
13    numbers that were filed in the publicly-available copy.
14         Q    Do you know if the publicly-available copy gives
15    one a key so that one can identify what information is ASF
16    information as opposed to information for other facilities?
17         A    No, I'm not aware if that information was
18    available.
19         Q    Okay.
20              Now, on page 4 to 8 of your testimony -- well,
21    let's maybe go to page 4.  Well, let's go to -- yes, page 4,
22    lines 10 to 11.  The heading there is "Mr. Luciani
23    misunderstood the meaning of ASF parcel post volumes and,
24    therefore, overstates the ASF cost excluded from the
25    avoidance calculation."  Do you see that?

                                                             19003
 1         A    Yes, I do.
 2         Q    And the way I understand your testimony, under
 3    your adjustment or your view of this issue, the best
 4    estimate of ASF costs that you could come up with that
 5    should be excluded from DBMC avoided costs is a little over
 6    a million dollars.  Is that right?
 7         A    That's correct, yes.
 8         Q    Actually, you show, at least in my copy of the
 9    testimony, two different numbers for your outgoing ASF
10    costs.  On page 4, at line 20, you use the number
11    $1,981,000.  Do you see that?
12         A    Yes.
13         Q    If you could turn to page 8, at line 15, you use
14    the number $1,996,000.  Am I reading that wrong, or are you
15    using two different numbers for the -- that should be the
16    same?
17         A    They should be the same.
18         Q    Okay.  Which one is right?
19         A    Well, if you look in Exhibit A, page 2, the number
20    is 100,981 million.
21         Q    And the number in that exhibit is the correct
22    number then?
23         A    Yes.
24         Q    Okay.  Now you have a footnote 1 on pages 5 and 6
25    of your rebuttal testimony and there you indicate that Mr.

                                                             19004
 1    Luciani's Exhibit 4-B shows that, quote, "The unit cost of
 2    processing DBMC Parcel Post in outgoing operations is lower
 3    than intra-BMC Parcel Post by 7.9 cents.
 4              Do you see that?
 5         A    Yes.
 6         Q    Mr. Luciani derived his Exhibit 4-B numbers from
 7    Ms. Daniel's testimony, didn't he?
 8         A    That is my understanding, yes.
 9         Q    And Ms. Daniel's figures don't attempt to take
10    into account any density differences between DBMC Parcel
11    Post and non-DBMC Parcel Post, does it -- do they?
12         A    I am not aware if they do or not.
13         Q    You don't know one way or the other?
14         A    Yes.
15         Q    Could you turn to page 8 of your testimony?
16              At lines 5 to 9, you state that Mr. Luciani shows
17    the volume of inter-BMC Parcel Post originating at ASF
18    service territories to be 46 percent of the total volume of
19    Parcel Post originating in ASF service areas, is that right?
20         A    Yes.
21         Q    Do you have Mr. Luciani's Exhibit 4-B with you?
22         A    I actually left it in my briefcase but --
23         Q    Well, I can either supply you with a copy or
24    whichever one you are more comfortable with.  I do have
25    extra copies which I will distribute in any event to the

                                                             19005
 1    bench and counsel.
 2              CHAIRMAN GLEIMAN:  In the interest of time, why
 3    don't you just distribute your copies.  If Mr. McGrane is
 4    uncomfortable with the copy you give him, he can head for
 5    his briefcase.
 6              BY MR. McKEEVER:
 7         Q    Now can you tell me -- that exhibit does show ASF
 8    volumes, inter-BMC, intra-BMC and DBMC, is that right?
 9         A    Yes, that is correct.
10         Q    Can you tell me how you derived your 46 percent
11    number from those volumes?
12         A    Well, it would be line 6 divided by the sum of
13    lines 6, 13, and 20.
14         Q    Well, I did that and I came up with 34 percent.
15              Do you want a calculator?  It's a pretty simple
16    calculation that could be done in a minute, with a
17    calculator, that is.
18              I would be happy to provide one to you.
19              COMMISSIONER LeBLANC:  Mr. McGrane.
20              MR. McKEEVER:  The Chairman beat me to it.
21              CHAIRMAN GLEIMAN:  Mr. McGrane, be careful.  That
22    calculator when I use it for my checkbook for some reason it
23    always gives me the wrong answer.
24              [Laughter.]
25              [Pause.]

                                                             19006
 1              THE WITNESS:  I believe you are correct, Mr.
 2    McKeever.
 3              BY MR. McKEEVER:
 4         Q    It is really 34.4 percent?
 5         A    Well, 34.3, but I didn't round off the numbers.
 6         Q    34 percent is good enough, is that right?  34
 7    percent?
 8         A    Yes.
 9         Q    Okay, so the 46 percent number in your testimony
10    should be 34 percent?
11         A    Yes.
12         Q    Now if we use that percent, the minimum that
13    should be included in the outgoing cost that DBMC avoids
14    falls from your figure of $918,000 to $686,624 --
15         A    Accepting that the calculation that you did was
16    correct, yes.
17         Q    Yes, I applied that percentage just as you did to
18    the $1,981,000.  Well, okay -- that is not how I did it but
19    that is the right number.
20              If you want to check it, feel free to do so.
21         A    So what was the number?
22         Q    $686,624.
23         A    I don't get exactly the same number but --
24         Q    What do you get?
25         A    -- but it is similar.  1981 times 34.4 you said --

                                                             19007
 1    681, okay.
 2         Q    What did you get?
 3         A    681.
 4         Q    681.  I probably used 34.4 but we are in the same
 5    ball park -- 680,000 let's call it, okay?
 6         A    Yes.
 7         Q    So then the little over a million dollars that
 8    should be taken out of the calculation of DBMC avoided costs
 9    increases to about $1.3 million, is that correct?
10         A    Yes, the minimum.
11         Q    Now, the calculation that we just did, that you
12    did in your testimony, of the percent of originating ASF
13    volume that is inter-BMC assumes that all of such volume
14    goes to the originating ASF's parent BMC, doesn't it?
15         A    Yes, but it also recognizes the fact that there is
16    a possibility that maybe not all of that volume goes to the
17    originating BMC's parent or ASF's parent BMC, but that some
18    of the inter-BMC volume also does go to the ASF's parent
19    BMC.
20         Q    Try me one more time on that.  I'm not sure I
21    caught it.  Could you state that again?  You said it also
22    recognizes something else.
23         A    What you are trying to point out is that there is
24    a possibility that some of the inter-BMC volume does not
25    travel through the ASF's parent BMC, if I understand your

                                                             19008
 1    point.
 2         Q    That's exactly right.  You agree with that, don't
 3    you?
 4         A    But there's also a countervailing phenomenon in
 5    that of the intra-BMC volume that originates at ASF --
 6         Q    Did you say intra or --
 7         A    Intra, yes.
 8         Q    Okay.  Go ahead.
 9         A    Some of that volume also will travel through the
10    ASF's parent BMC, which is the X percent that I reference in
11    my testimony at page eight, line ten.
12         Q    That's not generally the case, is it?  Normally,
13    if a parcel post piece is entered at an ASF for delivery
14    within the service area of the ASF, it's generally not sent
15    to the parent BMC of the ASF, is it?
16         A    Well, but intra-BMC parcel post includes parcels
17    that also designate outside of the ASF surface territory. 
18    For example, the Fargo ASF and the Phoenix ASF all belong to
19    the Denver BMC.  I wouldn't expect that Fargo has direct
20    transportation all the way down to Phoenix.
21         Q    But you do agree that mail entered at an ASF
22    sometimes does not go to that originating ASF's parent BMC;
23    is that correct?
24         A    And I would suspect that it's a small proportion
25    given the likely circumstances that it goes to the next

                                                             19009
 1    nearest BMC and there is 21 other BMC's that inter-BMC
 2    parcels could travel to.
 3         Q    Those situations, to whatever extent they occur,
 4    represent additional instances where an ASF functions as a
 5    BMC; is that correct?
 6         A    In those small portion of instances; yes.
 7         Q    Have you ever studied the size of those instances?
 8         A    Well, I think you can make the logical conclusion
 9    that it's probably near the proportion of 1 to 21, and since
10    you don't know that there's also additional parcels in the
11    intra-BMC mail stream, where the ASF is not functioning as a
12    BMC --
13         Q    With the Chair's permission, I'd like to show you
14    a document that was an attachment to a Postal Service
15    interrogatory to Mr. Luciani.  It is the attachment to
16    USPS-UPS-T4-42.
17              MR. McKEEVER:  If I may, Mr. Chairman.
18              CHAIRMAN GLEIMAN:  Certainly.
19              BY MR. McKEEVER:
20         Q    Now, as I mentioned, Mr. McGrane, this was a
21    document that was produced by the Postal Service in
22    connection with a discovery request directed to Mr. Luciani,
23    and it represents a listing of auxiliary service facilities,
24    their parent BMCs and some of the splits made at the ASF. 
25    That indicates instances where an ASF does not send mail to

                                                             19010
 1    the parent BMC, but rather sends it either directly to
 2    another BMC or to another ASFs, is that correct?
 3         A    That's what it appears to be, yes.
 4              MR. McKEEVER:  Mr. Chairman, that concludes my
 5    cross-examination, except I would like to move that the
 6    document I just provided to Mr. McGrane be transcribed into
 7    the record of today's hearing to make the discussion clear. 
 8    I would mark it as UPS-McGRANE-XE-1.
 9              CHAIRMAN GLEIMAN:  We are talking about the
10    document that has a chart on it that is entitled "Auxiliary
11    Service Facility Outgoing Parcel Splits"?
12              MR. McKEEVER:  Yes, Mr. Chairman.  It is labeled
13    as Attachment to USPS/UPS-T4-42.
14              CHAIRMAN GLEIMAN:  I just wanted to make sure,
15    because you also handed another document earlier.
16              MR. McKEEVER:  Yes.
17              CHAIRMAN GLEIMAN:  I want to make sure we are
18    getting the right one in.  I will direct that it be
19    transcribed into the record.
20                             [Cross-Examination Exhibit No.
21                             UPS-McGRANE-XE-1 was marked for
22                             identification and transcribed into
23                             the record.]
24
25

                                                             19012
 1              MR. McKEEVER:  Thank you, Mr. Chairman.  I have no
 2    further questions.
 3              CHAIRMAN GLEIMAN:  Is there any follow-up? 
 4    Questions from the bench?
 5              [No response.]
 6              CHAIRMAN GLEIMAN:  Would you like some time with
 7    your witness for redirect?
 8              MR. REITER:  Yes, a few minutes, Mr. Chairman.
 9              CHAIRMAN GLEIMAN:  Okay.  When you say a few, you
10    mean just a couple, right?  Because if not, we'll take 10
11    now, and we are going to take a minute break now.
12              MR. REITER:  That would be fine with us if you
13    would like to.
14              CHAIRMAN GLEIMAN:  Okay.  We can take the 10
15    minute break now and go right through after that without any
16    breaks if we possibly can.
17              [Recess.]
18              CHAIRMAN GLEIMAN:  Mr. Reiter?
19              MR. REITER:  Mr. Chairman, we have no redirect.
20              CHAIRMAN GLEIMAN:  It gets better and better, not
21    that I, you know, would want to deny anybody the
22    opportunity, mind you.
23              Mr. McGrane, that being the case, we appreciate
24    your appearance here today, your contributions to our
25    record, and if there's nothing further, you're excused.

                                                             19013
 1              THE WITNESS:  Thank you, Mr. Chairman.
 2              [Witness excused.]
 3              CHAIRMAN GLEIMAN:  Yes, sir.
 4              MR. REITER:  Are we ready for our next witness?
 5              CHAIRMAN GLEIMAN:  We're ready for our next
 6    witness.
 7              MR. REITER:  Who is Jeffery Lewis.
 8              CHAIRMAN GLEIMAN:  Mr. Lewis, before you settle
 9    in, if you could please raise your right hand.
10    Whereupon,
11                          JEFFERY W. LEWIS,
12    a witness, was caled for examination by counsel for the
13    Unites States Postal Service and, having first been duly
14    sworn, was examined and testified as follows:
15              CHAIRMAN GLEIMAN:  Please be seated.
16                         DIRECT EXAMINATION
17              BY MR. REITER:
18         Q    Mr. Lewis, I handed you a copy of a document
19    entitled "Rebuttal Testimony of Jeffery W. Lewis on Behalf
20    of United States Postal Service," designated USPS-RT-9.  Was
21    this testimony prepared by you or under your direction?
22         A    Yes, it was.
23         Q    And if you were to testify here orally today,
24    would your testimony be the same?
25         A    Yes, it would.

                                                             19014
 1              MR. REITER:  Thank you.
 2              Mr. Chairman, I will hand two copies of this
 3    document to the reporter and ask that it be entered into
 4    evidence as the rebuttal testimony of Jeffery Lewis.
 5              CHAIRMAN GLEIMAN:  Are there any objections?
 6              [No response.]
 7              CHAIRMAN GLEIMAN:  Hearing none, Mr. Lewis'
 8    testimony and exhibits are received into evidence, and I
 9    direct that they be transcribed into the record at this
10    point.
11                             [Rebuttal Testimony and Exhibits of
12                             Jeffery W. Lewis, USPS-RT-9, was
13                             received into evidence and
14                             transcribed into the record.]
15
16
17
18
19
20
21
22
23
24
25

                                                             19027
 1              CHAIRMAN GLEIMAN:  As I indicated, we only had one
 2    request for oral cross examination in advance of today and
 3    that was for Florida Gift Fruit Shippers, and I've been
 4    advised that they no longer feel the need to cross examine
 5    Mr. Lewis.
 6              Does any other party wish to cross examine Mr.
 7    Lewis?
 8              [No response.]
 9              CHAIRMAN GLEIMAN:  If not, Mr. Lewis, I want to
10    thank you for your patience, for sitting around here today. 
11    I appreciate your appearing and your contributions to the
12    record.
13              I hope you understand that, sometimes, when we
14    have short deadlines and turn-around times like we've had
15    recently in this case and we've got parties who are located
16    out of town, things take a little bit longer to get to them
17    than we might like, and as a consequence, they sometimes
18    make requests for oral cross and then -- without having had
19    the full opportunity to review testimony, and I think that
20    that's what may have happened in this case, but again, we
21    appreciate your patience with us today, and if there's
22    nothing further, you're excused.
23              THE WITNESS:  Thank you.
24              [Witness excused.]
25              CHAIRMAN GLEIMAN:  Mr. Hollies, call your next

                                                             19028
 1    witness?
 2              MR. HOLLIES:  The Postal Service calls Julie F.
 3    Rios.
 4              CHAIRMAN GLEIMAN:  Ms. Rios, before you settle in,
 5    if I could get you to raise your right hand.
 6    Whereupon,
 7                           JULIE F. RIOS,
 8    a witness, was called for examination by counsel for the
 9    United States Postal Service and, having first been duly
10    sworn, was examined and testified as follows:
11              CHAIRMAN GLEIMAN:  Please be seated.
12                         DIRECT EXAMINATION
13              BY MR. HOLLIES:
14         Q    Ms. Rios, I've handed you a document entitled
15    "Rebuttal Testimony of Julie F. Rios on Behalf of United
16    States Postal Service."  It's also identified as USPS-RT-10. 
17    Can you identify this?
18         A    Yes.
19         Q    Was this testimony prepared by you or under your
20    direction?
21         A    Yes, it was.
22         Q    And were you to testify orally today, would you
23    testimony be the same?
24         A    Yes, it would.
25              MR. HOLLIES:  With that, Mr. Chairman, I'd like to

                                                             19029
 1    hand two copies to the court reporter, and I ask that Ms.
 2    Rios' testimony, USPS-RT-10, be admitted into the record as
 3    evidence and transcribed into the record at this time.
 4              CHAIRMAN GLEIMAN:  Are there any objections?
 5              [No response.]
 6              CHAIRMAN GLEIMAN:  Hearing none, the witness'
 7    testimony and exhibits are -- I direct that the witness'
 8    testimony and exhibits be transcribed into the record and
 9    admitted into evidence at this point in time.
10                             [Rebuttal Testimony and Exhibits of
11                             Julie F. Rios, USPS-RT-10, was
12                             received into evidence and
13                             transcribed into the record.]
14
15
16
17
18
19
20
21
22
23
24
25

                                                             19039
 1              CHAIRMAN GLEIMAN:  One participant, United Parcel
 2    Service, has requested oral examination of the -- oral cross
 3    examination of the witness.
 4              Does any participant have oral cross examination?
 5              [No response.]
 6              CHAIRMAN GLEIMAN:  If not, then, Mr. McKeever --
 7              MR. McKEEVER:  Thank you, Mr. Chairman.
 8                          CROSS EXAMINATION
 9              BY MR. McKEEVER:
10         Q    Ms. Rios, the purpose of your testimony is to
11    rebut or respond to Mr. Luciani's alternative proposals for
12    delivery confirmation service.  Is that correct?
13         A    That's correct.
14         Q    Do you know -- can you describe for me what Mr.
15    Luciani's proposal is?
16         A    Basically, the part of his testimony that I was
17    rebutting was the pricing for priority mail.
18         Q    And could you tell me what he recommends with
19    respect to the pricing for priority mail?
20         A    He was recommending pricing that -- for priority
21    mail the same as it was for standard B.
22         Q    And do you know specifically what that pricing
23    would be?
24         A    At retail or for -- it would be 25 cents and 60
25    cents.

                                                             19040
 1         Q    Okay.
 2              Could you turn to page 2 of your testimony,
 3    please?
 4              Now, I'd like to direct your attention to lines 11
 5    and 14.
 6              There you state that, if Mr. Luciani's proposed
 7    rates and rate structure were implemented, demand for
 8    delivery compensation would be substantially less, thus
 9    jeopardizing the significant customer and internal Postal
10    Service benefits that the service and system were designed
11    to provide.  Do you see that?
12         A    Yes, I do.
13         Q    Now, I take it that the internal Postal Service
14    benefits that you're referring to there include the
15    collection of information needed to accurately monitor,
16    manage, and improve the provision of collection, processing,
17    and delivery services generally, as you state on page 2 of
18    your testimony at lines 23 to 24.  Is that correct?
19         A    Generally and specifically for priority mail.
20         Q    The internal Postal Service benefits, are they
21    confined to benefits having to do only with priority mail?
22         A    No.
23         Q    You are referring to some internal Postal Service
24    benefits other than in the area of priority mail; is that
25    right?

                                                             19041
 1         A    This particular section of my testimony dealt
 2    primarily with priority mail.
 3         Q    Right, but you state there that if Witness
 4    Luciani's proposed rates and rate structure were
 5    implemented, demand for delivery confirmation would be
 6    substantially less, thus jeopardizing the significant
 7    customer and internal Postal Service benefits that the
 8    service and system were designed to provide. Now --
 9         A    There --
10         Q    Go ahead.
11         A    No, go ahead.
12         Q    I take it that the internal Postal Service
13    benefits that the system is designed to provide include
14    those things that are discussed in Mr. Lewis' testimony; is
15    that right?
16         A    There is some of those but another internal
17    benefit of the Postal Service is obviously meeting customer
18    needs and having more customers buy our services.  It's an
19    internal benefit to the Postal Service.
20         Q    I think you indicated at the beginning of your
21    answer that those internal benefits include the benefits
22    that Mr. Lewis described in his testimony; is that correct? 
23    It includes priority mail ones, plus the ones Mr. Lewis
24    describes; is that right?
25         A    This particular section of my testimony most

                                                             19042
 1    directly relates to benefits of priority mail.
 2         Q    So it's not your testimony then that if Mr.
 3    Luciani's fees and rate structure were implemented, all of
 4    the benefits that Mr. Lewis says would occur, would be
 5    jeopardized; is that right?  That is not your testimony?
 6              MR. HOLLIES:  I'm going to object to the form of
 7    the question.  It's compound.  I wonder if counsel would be
 8    willing to break it down?
 9              MR. McKEEVER:  I'm not sure what the two compound
10    elements are, Mr. Chairman.  I'll try to ask it one more
11    time more simply, maybe with less words, if I can.
12              BY MR. McKEEVER:
13         Q    What I'm trying to get at, Ms. Rios, is if you are
14    testifying that if Mr. Luciani's proposals were adopted, the
15    Postal Service would not get any of those benefits that Mr.
16    Lewis says will accrue from the system in question here.
17         A    I would say that's not true.  Those benefits would
18    still be achieved.
19         Q    Okay.  Well, I wanted to be clear, so those
20    benefits are not jeopardized by Mr. Luciani's proposals,
21    right?
22         A    Yes, but right now to say that I can remember
23    every other benefit that Mr. Lewis described, I cannot do
24    that this second.  I don't have his testimony in front of
25    me, to make sure that I would look down the list and say

                                                             19043
 1    there were none that were linked to priority mail.
 2         Q    It's only to the extent that Mr. Lewis describes
 3    something that relates to priority mail in particular that
 4    the benefits that you are referring to there would be
 5    jeopardized; is that right?  Let me try to make it more
 6    concrete.
 7              Mr. Lewis says that this system would benefit the
 8    Postal Service by being useful in their vehicle management
 9    accounting system.  Now, would that use of the system be
10    jeopardized if Mr. Luciani's proposals were adopted?
11         A    No.
12         Q    Mr. Lewis says that the Postal Service would
13    benefit by using this system in connection with its
14    collection box management system.  Would that use of the
15    system be jeopardized if Mr. Luciani's proposals were
16    adopted?
17         A    No.
18         Q    Mr. Lewis says that the system will be used in
19    connection with the Postal Service's enhanced street
20    performance system.  Would that use be jeopardized if Mr.
21    Luciani's proposals were approved?
22         A    No.
23         Q    He says that the system can be used in connection
24    with a carrier emergency alert system.  Would that be
25    jeopardized if Mr. Luciani's proposals were approved?

                                                             19044
 1         A    No.
 2         Q    He says that the system can be used in a variety
 3    of applications in the distribution and transportation
 4    networks to map local map distribution and transportation
 5    networks.  Would that use be jeopardized if Mr. Luciani's
 6    proposals were approved?
 7         A    I am not sure on that one, I don't know enough
 8    about that one.
 9         Q    Okay.  Could you turn to page 3 of your testimony,
10    please?  And I would like to direct your attention in
11    particular to lines 3 and 4.  There you state that the
12    specific proposals for delivery confirmation made in this
13    docket are a crucial beginning to the Postal Service's
14    ability to recoup its investment in this system and should
15    not be modified either as proposed by Witness Luciani or in
16    any other significant way, is that correct?
17         A    Yes.
18         Q    And you also state on page 3, at lines 5 to 7,
19    that adopting Mr. Luciani's proposals could potentially
20    threaten the Postal Service's ability to generate the
21    expected return on its investment, is that correct?
22         A    Yes.
23         Q    Now, one of the Postal Service's proposals for
24    delivery confirmation, one of the two that Mr. Luciani
25    proposes to modify, is that there would be no charge for

                                                             19045
 1    electronic delivery confirmation for bulk priority mail
 2    users, is that correct?
 3         A    That Luciani proposed?
 4         Q    Pardon me?
 5         A    Can you re-do that question?
 6         Q    Yes.  Yes.  Mr. Luciani proposes a change in two
 7    aspects of the Postal Service's delivery confirmation
 8    proposal.  You describe them at the beginning, is that
 9    right?
10         A    I believe so.
11         Q    Okay.  And one of the Postal Service's proposals
12    that he would modify, the Postal Service proposal now, is to
13    charge nothing for electronic delivery confirmation for bulk
14    priority mail users, is that correct?
15         A    Correct.
16         Q    Can you explain to me how providing a service that
17    costs the Postal Service 15 cents to provide, for no charge,
18    providing that service for no charge, will help the Postal
19    Service recoup its investment and generate a return on that
20    investment?
21         A    My responsibility in developing these proposal is
22    to bring to the proposals what does the market place need. 
23    And in the expedited market, and priority mail is a product
24    that is considered by our customers as an expedited product,
25    expedited commercial shippers who use expedited products

                                                             19046
 1    expect delivery confirmation to be included as the total
 2    product.  We have done that for Express Mail and it is
 3    appropriate also for commercial -- Priority Mail service
 4    that is most likely to be used by commercial customers.
 5         Q    Well, my question was, how does the Postal Service
 6    expect to recoup its investment by charging nothing for a
 7    service that Mr. Treworgy says costs it 15 cents.  You say
 8    Mr. Luciani's proposal to charge something would jeopardize
 9    that.  And I am asking you to explain how charging nothing
10    for a service that costs 15 cents somehow or other helps the
11    Postal Service recoup its investment?
12         A    We did market research that supports that
13    hypothesis.
14         Q    So the only answer you can give me is that your
15    market research tells you that customers want it for free,
16    is that right?  Bulk customers want it for free?
17         A    It also talks about volumes associated with it at
18    that price level.
19         Q    That price level being zero, right?
20         A    Being zero.
21         Q    Okay.  Mr. Rios, could you turn to page 5 of your
22    testimony, please?  At lines 11 to 13, you state that
23    delivery confirmation, and I am focusing now on page -- on
24    lines 12 to 13, amount to strategic business decisions
25    regarding the standard features of Priority Mail, is that

                                                             19047
 1    correct?
 2         A    Yes.
 3         Q    Ms. Rios, I define a standard feature of a product
 4    as something that everybody gets when they buy the basic
 5    product.  Do you agree with that definition?
 6         A    Not necessarily.
 7         Q    Pardon me?
 8         A    Not necessarily.
 9         Q    How would you define the standard feature of a
10    product?
11         A    Okay.  When we look at products, we look at
12    different customer segments, and different customer segments
13    have different expectations about standard features in
14    products.
15              What we have found in talking with customers is
16    that the commercial customers have an expectation that is
17    different and that they do have an expectation for Priority
18    Mail that delivery confirmation is part of the base price.
19         Q    Well, it is the case that not everybody who buys
20    Priority Mail could get electronic delivery confirmation, is
21    that correct?
22         A    That is correct.
23         Q    So it is only a standard feature for some
24    customers and not a standard feature for other customers?
25         A    There are a variety of ways to do it and so if a

                                                             19048
 1    customer chose to do it there -- it will be relatively easy
 2    to do it.
 3         Q    Electronic delivery confirmation?
 4         A    Uh-huh.
 5         Q    Okay, could I -- could I --
 6              THE REPORTER:  Electronic delivery confirmation --
 7    should I carry it as a yes?
 8              THE WITNESS:  I said more than yes.
 9              MR. McKEEVER:  Well, and then I said "Electronic
10    delivery confirmation?"
11              MR. HOLLIES:  I believe the problem here is that
12    there was an affirmative answer in the form an "um-hum"
13    which is a little difficult to transcribe.
14              THE WITNESS:  Okay.  I will try not to do that.
15              BY MR. McKEEVER:
16         Q    Now by the way, do all users of Express Mail have
17    delivery confirmation available to them?
18         A    Yes.
19         Q    At a charge or at no charge?
20         A    It is part of the base price of the product.
21         Q    And that is available to all users at no charge,
22    is that right?
23         A    It's part of the base price of the product.
24         Q    It is available to all users at no charge --
25         A    Yes.

                                                             19049
 1         Q    -- is that what that means?
 2         A    Yes.
 3         Q    When you say that?
 4         A    Yes.
 5         Q    Okay.  So in that sense Express Mail is different
 6    from the Priority Mail proposal here, is that correct?
 7         A    Yes, it is.
 8         Q    Okay.  Ms. Rios, again I would like to direct your
 9    attention to page 5 at lines 9 to 13.
10              There you draw an analogy between boxes provided
11    by the Postal Service at no charge for Priority Mail and
12    electronic delivery confirmation for bulk mail Priority Mail
13    users, is that right?
14         A    That's correct.
15         Q    Am I correct that every Postal Service customer is
16    eligible to obtain a Postal Service provided Priority Mail
17    box at no charge?
18         A    That's correct.
19         Q    So I can walk into a post office off the street
20    and get a box for Priority Mail at no extra charge?
21         A    Yes, you may.
22         Q    That is not true in the case of electronic
23    delivery confirmation, is it?  Only some customers can get
24    that for free and others have to pay for it.  They have to
25    use manual delivery confirmation, right?

                                                             19050
 1         A    Not necessarily so.
 2         Q    Well, I guess if I set up the computer links with
 3    the Postal Service in my home, et cetera, then I could get
 4    electronic delivery confirmation for free, is that what you
 5    are telling me?
 6         A    If you meet the requirements, which is send and
 7    receive information electronically, yes, you can get
 8    electronic delivery confirmation for free.
 9         Q    Don't you have to be a bulk user?
10         A    No.  There is no minimum requirements.
11         Q    Okay.  Ms. Rios, could you turn to page 4, please? 
12    At line --
13         A    Which page, excuse me?
14         Q    Page 4, I'm sorry.
15         A    We are going back?
16         Q    Yes.
17         A    Okay.
18         Q    At lines 16 to 18 you state that retail or manual
19    delivery confirmation customers would pay a surcharge in
20    addition to Priority Mail postage, thus benefiting from the
21    ability to access delivery information while paying for the
22    greater costs they impose.  Is that correct?
23         A    Yes.
24         Q    And as we've established, bulk Priority Mail
25    users, on the other hand, will benefit from the ability to

                                                             19051
 1    access delivery info, but would not pay for the greater
 2    costs they impose.  Isn't that correct?
 3         A    Like I say, I'm not really a costing witness.  I'm
 4    not sure how -- I mean, I guess basically the answer to that
 5    is yes, but I'm not a costing witness, I'm not a costing
 6    person here.
 7         Q    Okay.  In order to make you more comfortable, let
 8    me represent to you that Mr. Treworgy said in his testimony
 9    that it cost 15 cents per transaction -- it cost the Postal
10    Service 15 cents per transaction for an electronic Priority
11    Mail delivery confirmation transaction.  So I think you're
12    correct in saying yes.
13              Now again on page 4 at lines 22 to 23 you state
14    and you said that earlier this evening that bulk customers,
15    quote, expect delivery confirmation to be included in the
16    base rate for Priority Mail.
17         A    Um-hum.
18         Q    Now that means the way this proposal is structured
19    that they expect delivery confirmation to be included in the
20    base rate paid by all Priority Mail users; is that right?
21         A    What I'm saying here when I go out and I talk to
22    customers, we segment them by types, and customers,
23    commercial customers who are typically bulk customers say
24    that they have this expectation.
25         Q    Is it the Postal Service's usual policy to give

                                                             19052
 1    certain customers an extra service at no extra charge while
 2    it recovers the cost of that -- providing that service from
 3    customers who don't get it?
 4         A    I am not a pricing expert.  What my responsibility
 5    is is understanding the marketplace needs and designing
 6    service that meets the marketplace needs.
 7              MR. McKEEVER:  I have no further questions, Mr.
 8    Chairman.
 9              CHAIRMAN GLEIMAN:  Is there any followup?
10              I just have one question, Ms. Rios.  I kind of
11    need to understand this.  You said a couple of times that
12    it's the expectation of the commercial customers that
13    delivery confirmation is part of the standard, basic --
14              THE WITNESS:  Um-hum.
15              CHAIRMAN GLEIMAN:  Package of Priority Mail.  When
16    you say that it is their expectation, what do you -- do you
17    mean that this is what they would like to have or that this
18    is what they assume is in there already?
19              THE WITNESS:  When you go into the marketplace,
20    you segment in different ways, and one of the ways you
21    segment it is whether it's expedited or ground parcels, and
22    then whether it's a commercial customer or more of a retail
23    household customer.
24              CHAIRMAN GLEIMAN:  Um-hum.
25              THE WITNESS:  If you look at the segment of

                                                             19053
 1    customers that are in the expedited and the commercial
 2    quadrant --
 3              CHAIRMAN GLEIMAN:  Okay.
 4              THE WITNESS:  They expect when they use expedited
 5    services that delivery confirmation is part of the package.
 6              CHAIRMAN GLEIMAN:  So that's something that they
 7    like to have as part of the package, but it's different than
 8    saying is your expectation that Priority Mail or Express
 9    Mail offered by the U.S. Postal Service has delivery
10    confirmation in it.  I mean, this is not something that they
11    assume is there.  It's kind of a wish list.
12              THE WITNESS:  When we talk to customers we tend to
13    talk to them in general what are your expectations when you
14    have needs in the expedited market and what are your needs
15    for information.  They expect the two things to come
16    together.
17              CHAIRMAN GLEIMAN:  So expectations are -- the word
18    "expectations" as you use it equates with what are your
19    needs?
20              THE WITNESS:  Yes.
21              CHAIRMAN GLEIMAN:  What would you like to have in,
22    you know, the best of all situations.
23              THE WITNESS:  It's basically what others provide
24    in their -- it's a standard -- it's the standard product
25    offering in the marketplace.  That's --

                                                             19054
 1              CHAIRMAN GLEIMAN:  But it's not a standard product
 2    offering with the Postal Service.  I mean, if you went into
 3    somebody and you said would you like to have our Priority
 4    Mail product, they wouldn't assume that it had delivery
 5    confirmation in it -- now.
 6              THE WITNESS:  Not currently.
 7              CHAIRMAN GLEIMAN:  Okay.
 8              THE WITNESS:  Because we do not offer it
 9    currently.
10              CHAIRMAN GLEIMAN:  So it's what they would like to
11    have, not what they assume is there now.
12              I have a problem between expectation and assume,
13    and I just wanted to clarify it in my own mind.  Thank you.
14              I have no further questions.  I don't know whether
15    there are any others from the bench.
16              Mr. McKeever, do you have a followup?
17              MR. McKEEVER:  Yes, Mr. Chairman, I do.
18                      FURTHER CROSS EXAMINATION
19              BY MR. McKEEVER:
20         Q    Ms. Rios, you said that this is patterned on what
21    other providers do in the market?
22         A    Yes.
23         Q    Do you know if other providers charge some users
24    for the service but not others?
25         A    In which marketplace?

                                                             19055
 1         Q    In the marketplace that -- in which Priority Mail
 2    competes.
 3         A    No, the other carriers offer delivery confirmation
 4    as part of the total service.
 5         Q    They treat everybody the same who uses that
 6    product of theirs?
 7         A    I wouldn't say they treat everyone the same.
 8         Q    Well, with respect to delivery confirmation,
 9    that's all we're talking about.
10         A    With -- there's various levels of service
11    offerings.  In basic information I would say yes, they treat
12    each other the same.
13              MR. McKEEVER:  Thank you.
14              CHAIRMAN GLEIMAN:  Is there anything further?
15              If not, that brings us to redirect.
16              Mr. Hollies, would you like some time?
17              MR. HOLLIES:  Yes, we'd like a few minutes to
18    discuss this.  I'd like to ask for ten.
19              CHAIRMAN GLEIMAN:  That's longer than the witness
20    was on the stand, but go ahead, you've got your ten.
21              MR. HOLLIES:  We will be back sooner if we can.
22              [Recess.]
23              MR. HOLLIES:  The Postal Service has no redirect.
24              CHAIRMAN GLEIMAN:  There is no redirect, Ms. Rios,
25    so I want to thank you.  We appreciate your appearance here

                                                             19056
 1    today and your contributions to our record, and if there's
 2    nothing further, you're excused.
 3              [Witness excused.]
 4              CHAIRMAN GLEIMAN:  Mr. Tidwell.
 5              MR. TIDWELL:  The Postal Service calls Timothy
 6    Ellard to the stand.
 7    Whereupon,
 8                         TIMOTHY D. ELLARD,
 9    a witness, was called for examination by counsel for the
10    United States Postal Service and, having been first duly
11    sworn, was examined and testified as follows:
12              CHAIRMAN GLEIMAN:  Counsel?
13                         DIRECT EXAMINATION
14              BY MR. TIDWELL:
15         Q    Mr. Ellard, I have handed you a copy of a document
16    which is entitled the Rebuttal Testimony of Timothy D.
17    Ellard on Behalf of the United States Postal Service.  It
18    has been designated for purposes of this proceeding as
19    USPS-RT-14.  Have you had a chance to review that document?
20         A    Yes, I have.
21         Q    And was it prepared by you or under your
22    supervision?
23         A    It was.
24         Q    Do you have any changes you wish to offer to that
25    document at this time?

                                                             19057
 1         A    Yes.  I have identified two transcription errors,
 2    both on table 7, which is on page 21.  Line 8, the number 14
 3    should be changed to 17; on line 13, 324 should read 314.
 4         Q    With those changes, if you were to give this
 5    testimony orally today, would it be the same?
 6         A    Yes, it would be.
 7              MR. TIDWELL:  Mr. Chairman, with that, the Postal
 8    Service would move that the rebuttal testimony of Mr. Ellard
 9    be entered into the evidentiary record.
10              CHAIRMAN GLEIMAN:  Are there any objections?
11              [No response.]
12              CHAIRMAN GLEIMAN:  Hearing none, Mr. Ellard's
13    testimony and exhibits are received into evidence and I
14    direct that they be transcribed into the record at this
15    point.
16                             [Rebuttal Testimony and Exhibits of
17                             Timothy D. Ellard, USPS-RT-14, was
18                             received into evidence and
19                             transcribed into the record.]
20
21
22
23
24
25

                                                             19173
 1              CHAIRMAN GLEIMAN:  The OCA is the only party that
 2    has requested oral cross examination of the witness.  Does
 3    any other party wish to cross this witness?
 4              [No response.]
 5              CHAIRMAN GLEIMAN:  If not, Ms. Dreifuss, you're
 6    on.
 7                          CROSS EXAMINATION
 8              BY MS. DREIFUSS:
 9         Q    Good evening, Mr. Ellard.
10         A    Good evening.
11         Q    I wanted to ask you some general questions about
12    how the survey was conducted.
13         A    Okay.
14         Q    I would like to start at page A-5, which is found
15    in the appendix.  In the fourth paragraph from the top, you
16    state that, we will maintain the anonymity of our
17    respondents.  No information will be released that in any
18    way will reveal the identity of a respondent.  Is that true? 
19    Do you say that?
20         A    Yes, we do.
21         Q    What types of specific identifying information do
22    you ask of the respondents?
23         A    Identifying information in the sense of
24    identifying information is never asked of the respondent for
25    the study.  However, we do determine whether the respondent

                                                             19174
 1    -- we have gender, we have income, we know their phone
 2    number, but we do not ask the name of the respondent, for
 3    example.  All this information together with the phone
 4    number will be quite identifying.  We do not release the
 5    phone number.
 6         Q    Now, you say you know the income.  Do you ask the
 7    respondent their income?
 8         A    We ask the respondent the income, we get answers
 9    in something well over 80 percent of the cases, and for this
10    study, we impute missing data, which is a standing procedure
11    in statistical operations.
12         Q    So you'll use responses even if they refuse to
13    give their income; is that correct?
14         A    We certainly do.
15         Q    Do you ask specific income, their exact income, or
16    do you give them a range of income?
17         A    I believe that if you look at the income questions
18    -- well, maybe you don't have the income questions, but we
19    ask ranges, and the ranges are readily answered.
20         Q    I see at page A-9 in the appendix, you do indicate
21    that you ask about income groupings.
22         A    Uh-huh.
23         Q    And I presume those are the income groupings that
24    we see in some of the tables in the body of the testimony.
25         A    That's correct.

                                                             19175
 1         Q    And you, again on page A-9, you seem to ask
 2    whether there are children in the household?
 3         A    Yes, we do.
 4         Q    And you ask the ages of the children in the
 5    household?
 6         A    Yes, we do.
 7         Q    On page 10, it looks like you ask about
 8    occupation?
 9         A    That's right.
10         Q    And what you're asking is whether the occupation
11    of the respondent falls into one of those general categories
12    on the left-hand side at the bottom of page 7?
13         A    That's right.
14         Q    I'm sorry, at the bottom of page A-10.
15         A    Yes.
16         Q    And at page 6 of your testimony, lines 3 to 4, you
17    -- do you also ask them about age, sex, geographic region
18    and race?
19         A    We do ask them about age.  We note geographic
20    region.  We do ask about race.
21         Q    Do many of the people that you contact find some
22    of these questions to ask about factors that are just too
23    personal or confidential -- for example, age or race?
24         A    We generally get a relatively low non-response.  I
25    could give you -- if I looked it up, I could find the

                                                             19176
 1    non-response figures.  The one that comes to mind is income,
 2    which is the highest non-response we get, and that seldom
 3    exceeds 15 percent.  You must recall, we've asked this
 4    person a fairly lengthy series of questions, we've
 5    established rapport, we've also established a certain degree
 6    of legitimacy.  We don't simply call you up and say, what's
 7    your income?  The income is at the end of the questionnaire
 8    for the very reason it is the most sensitive question we
 9    ask.
10         Q    I see.  Now, you said that 80 percent of
11    respondents -- I think you gave the figure 80 percent.  Does
12    that mean that the 80 percent will answer all of these
13    questions with regard to age, income, race and so on?
14         A    Most of them will answer all of the questions.  A
15    few of them will select out on a few.  When I said 80
16    percent, I probably was being very conservative.  It's a
17    higher number than that.  And the one most likely not to be
18    answered is the income question.
19         Q    But 80 percent of the respondents answer every
20    question?  Eighty percent or more answer every question; is
21    that right?
22         A    Yes.  A respondent who loses patience with us and
23    walks off is not used.  There are a few of those, but many
24    fewer than you might believe.
25         Q    About how much time does the survey take?

                                                             19177
 1         A    The survey is as described a service, and this
 2    question series is a six-minute question series.  However,
 3    the survey itself generally runs approximately 30 minutes.
 4         Q    Were these questions about postal issues, the ones
 5    that I see presented in your testimony, were they
 6    piggy-backed onto still other survey questions on another
 7    subject or was this the only set of questions asked for the
 8    respondents?
 9         A    No.  I believe as I stated in my testimony, this
10    is a cooperative process.  There can be all sorts of other
11    questions.  However, because we knew we would be using it in
12    a regulatory proceeding, we put these questions first.  So
13    they might have affected other questions in the survey, but
14    the other questions would not have affected them.
15         Q    I see.
16              I guess I'm going to make a comment.  I think from
17    your answer previously, you would tell me that this happens,
18    but frankly, I was surprise that 80 percent or more of the
19    people you contact are willing to give out confidential
20    information, and that they are willing to spend a fairly
21    long period of time with a stranger on the phone. 
22    Nevertheless, you find that you do get as high a response
23    rate as you mentioned a moment ago, 80 percent or more?
24         A    I've been in the business now for 35 years, and I
25    sometimes am surprised, but I make a living at it.

                                                             19178
 1              CHAIRMAN GLEIMAN:  Was that surprise at the
 2    response rate or surprise that you make a living at it?
 3              [Laughter.]
 4              THE WITNESS:  Sometimes both.  But the beauty of
 5    the fact that it works is always reassuring.
 6              BY MS. DREIFUSS:
 7         Q    Those people that are contacted to answer these
 8    questions, had they previously indicated any interest in
 9    participating in a survey?
10         A    Not through us because one of the rules of our
11    process is that this is approximately as close to a random
12    draw as one can encounter in survey research.  We never know
13    their names, much less that they are on our list.
14         Q    In addition, you don't offer any material
15    inducement to them to answer these questions, do you?
16         A    There is no incentive.
17         Q    I expected these answers; I just wanted to be
18    sure.  I wanted to get that out of the way.
19              You number the questions that are presented in
20    your testimony.  Does that reflect the order in which they
21    were asked of the respondent?
22         A    That is precisely the order in which they're
23    asked.
24         Q    Could you turn to page 9 of your testimony,
25    please.  Beginning at line 14, you state that there is an

                                                             19179
 1    indication that mention of an increased price and an
 2    accompanying discount affects respondent perceptions of
 3    convenience of use more negatively than mentioning a
 4    discount without an increase in price.
 5              You said that, correct?
 6         A    I said that, yes.
 7         Q    If we wanted to get an idea of the percentage of
 8    respondents that viewed let's say a two-stamp system in a
 9    positive manner without the negative effect of mentioning a
10    price increase, we would look at the questions that limited
11    the discussion of rates to the 32 cent and 29 cent
12    combination; is that correct?
13         A    It may be correct, but in previous engagements
14    before the Postal Rate Commission, they have been extremely
15    specific that rates that should be used in surveys be rates
16    that are under consideration in the case at hand and that I
17    should not come up with some sort of arbitrary number to
18    place in a survey.
19         Q    Do you believe that your questions about 32 cents
20    and 29 cents are arbitrary questions and arbitrary numbers?
21         A    They aren't pertinent to the rate case at hand.
22         Q    They are not pertinent to the rate case?
23         A    No.
24         Q    The rates 33 cents and 30 cents are pertinent to
25    this rate case only to the extent that the Commission

                                                             19180
 1    actually recommends those figures; is that true?
 2         A    Yes, that's my understanding.
 3         Q    Now, if respondents react negatively to the
 4    mention of a price increase, is it possible to ask them --
 5    well, let me back up just for a second.
 6              You state on page 9 -- this is the phrase you use: 
 7    mentioning a discount.
 8         A    Uh-huh.
 9         Q    Did your interviewers actually use the term
10    "discount"?
11         A    You have the questionnaire and seem to be familiar
12    with it.  I can look it up.  This is what the interviewer
13    said, precisely what the interviewer said.
14         Q    Well, I didn't see the word "discount" when I
15    looked over the questionnaire.  I just wanted to make sure I
16    hadn't overlooked something.
17         A    No.  If it's not there, the interviewer did not
18    say that.
19         Q    Okay.  So if I don't find the word discount, then
20    the word discount was not used?
21         A    That's right.
22         Q    Do you believe that if the 33 cent and 30 cent
23    question were couched in terms of a discount, the word
24    discount was actually used, that that might have changed or
25    reduced the amount of negativity in the responses given to

                                                             19181
 1    that question?
 2         A    I have no reason to believe it or not to believe
 3    it.  I have no evidence.
 4         Q    How did you decide on the actual wording of the
 5    questions that were was used by the interviewers?
 6         A    These are evolutionary.  If you look at previous
 7    research that's presented before the Commission, the
 8    questionnaire that we started with was a questionnaire that
 9    had been used before and presented before, and we tried to
10    essentially follow that and to make minor adjustments as we
11    went along to bring in the final question that we were
12    interested in, and that was the preference or acceptability
13    of the rate.
14         Q    Let's assume hypothetically that CEM, which was
15    the subject of this survey, that CEM were to be recommended
16    by this Commission to the Postal Service and the Postal
17    Service did, indeed, adopt that recommendation and they
18    implemented the rates, and the Postal Service then promoted
19    the service as a discount -- that is, the CEM rate as a
20    discount or a way to save money.
21              Do you think that some of the percentage figures
22    that we see for the 33-30 cent combination might actually be
23    higher if CEM is presented in that light?
24         A    I don't know.  The way the survey proceeded with
25    six questions or ten questions total implied that the more

                                                             19182
 1    people think about this, the less they're going to like it. 
 2    So I would say that, you know, we have here one of these --I
 3    think I've used the term impositions that the government
 4    sometimes produces, you know, the story of the great
 5    oxymoron, "I'm from the government, I'm here to help you." 
 6    This sometimes hits.  People are suspicious of the motives
 7    of the government.  They're suspicious of where this is
 8    coming from, and they just aren't very excited about the
 9    discount.
10         Q    It is true, however, that on page 17 in your table
11    3 --
12         A    Okay.
13         Q    -- that the weighted response rate of those likely
14    to buy and use both stamp denominations is 61 percent.
15         A    Uh-huh.
16         Q    That is, 61 percent would be very likely or
17    somewhat likely to use both the CEM stamp and the regular
18    first class stamp; is that correct?
19         A    That's correct.
20         Q    Did it ever come up in your conversations with the
21    Postal Service whether to present the option to respondents
22    that they might be able to purchase CEM stamps and regular
23    first class stamps in a single stamp booklet and then ask
24    respondents whether they would find such an option
25    convenient and likely to use?

                                                             19183
 1         A    It never came up.
 2         Q    Do you think that if that had been presented as an
 3    option, that you might have seen even higher or greater
 4    interest in using two stamps?
 5         A    I can only speak of my reaction, and that is that
 6    I can't imagine there's enough consistency of usage to
 7    justify such a booklet.  You have to first find some sort of
 8    average level of behavior, or else you'll have a drawer full
 9    of booklets of one set of stamps and empty of the other set.
10         Q    Right.  Well, I know we're just speculating now,
11    but certainly a booklet could reflect the average usage of
12    each.  In other words, it wouldn't need to be a 50/50
13    inclusion of each type of stamp; it could be 20 percent and
14    80 percent, could it not?
15         A    Oh, it could, but average what?
16         Q    Well, presumably the Postal Service might be able
17    to see over time or even do surveys such as this to
18    determine what likely use would be.
19         A    No, averages are measures of central tendency, but
20    there also are measures of dispersion, and I just have the
21    funny dispersion is a key factor here.
22         Q    Could you turn to page 16?  That question
23    concerns, compared with the current system, level of
24    convenience to use different stamp denominations if the
25    reduced rate is approved, and there, 63 percent of

                                                             19184
 1    respondents viewed the level of convenience to use different
 2    stamp denominations as more convenient or about as
 3    convenient.  Is that true?  The weighted average, that is.
 4         A    That's right.
 5         Q    Could you turn to page 20, please?  That question
 6    seems to ask about a preference between the one-stamp
 7    pricing system and the two-stamp pricing system if two-stamp
 8    pricing contributed to some degree to an increase in rates
 9    for regular first-class letters.
10         A    Now you're talking about question 10 at the bottom
11    of the page.
12         Q    Yes.
13         A    Okay.
14         Q    Yes, I am.
15              If the Postal Rate Commission were to determine
16    that it was appropriate to recommend a CEM rate but that
17    this would not result in higher first-class rates for
18    letters, then where would we look to find the preference for
19    the one-stamp or two-stamp system?
20         A    I have an interesting attitude towards question
21    10.
22              Question 10 is a very difficult question to ask
23    people.  We spent a lot of time to make it as balanced and
24    as straightforward as possible, and I was very interested to
25    see how quickly the public understood this question.  I did

                                                             19185
 1    not expect anything but confusion.  But they all headed in
 2    one direction with it.
 3              I would look at question 9, because we had not
 4    brought up the subject.  I think the subject is always
 5    underlying what you call the CEM proposal but not
 6    necessarily in this case.
 7         Q    I think I am right here.  When do you first
 8    introduce the notion that that other stamp price -- that is,
 9    the regular first-class letter rate -- might increase?
10         A    Only on question 10.
11         Q    Only on question 10?
12         A    Yes.
13         Q    I was puzzled by one figure I see in this table at
14    the bottom of page 20.
15         A    Uh-huh.
16         Q    On the extreme right-hand side --
17         A    Uh-huh.
18         Q    -- at the bottom of the page, this is the
19    likelihood of using the two-stamp system, and you divide
20    responses into likely and unlikely.
21         A    Yes.
22         Q    And I see here that the third line down, 46
23    percent indicate that they are unlikely to use the one-stamp
24    system.  Does that mean that they are likely to use the
25    two-stamp system?

                                                             19186
 1         A    Likely and unlikely -- this goes back to an
 2    earlier question, how likely are you to use it, I believe
 3    question 3, but I'll go back and take a look.
 4              Yes, if we look at Table 3 and question 5,
 5    likelihood of buying and using both stamp denominations,
 6    that's where we've identified the people for this cross-tab.
 7              So, if they said they were very or somewhat
 8    likely, they're in the likely, and if they're very or
 9    somewhat unlikely, they're in the unlikely column on the
10    table that you're looking at on page 6 -- on page 20.
11         Q    This is page 20 --
12         A    Yes.
13         Q    -- bottom of the page.
14         A    Now, this -- getting to this is a very elaborate
15    process, and if you don't read tables all the time and you
16    don't look at all the little bits and pieces, but this
17    question was asked only of people who had already, in the
18    previous question, said they preferred the two-stamp system,
19    and it's very clearly spelled out there, so you'll see some
20    things happen.
21              This is a group that's already self-selected
22    itself.
23         Q    The 46 percent for the one-stamp system is 46
24    percent of what?
25         A    It's 46 percent of the people who said they were

                                                             19187
 1    unlikely to us the two-stamp system, who also said they
 2    would prefer the two-stamp system.  It's a very small number
 3    of people.  It's 42 human beings rather than 281 on the
 4    likely side.
 5         Q    If I multiply the 46 percent for the one-stamp
 6    system times the appropriate figure, will I come up with a
 7    different answer than if I multiply the 46 percent in the
 8    unlikely column, 46 percent for the two-stamp system, or
 9    will I come up with different numbers by multiplying 46
10    percent times the respective number of respondents?
11         A    The 46 percent is 46 percent of 44 weighted
12    respondents.
13         Q    And that 44 weighted respondents relates equally
14    to the 46 percent for the one-stamp system and the 46
15    percent for the two-stamp system?
16         A    Well, there just so happens -- if they had divided
17    their answers 90 percent/10 percent, but they made it
18    confusing, because half of them liked one and half of them
19    liked the other, and they both -- it came out to 46 on both
20    sides.
21              MS. DREIFUSS:  I have no other questions, Mr.
22    Chairman.
23              CHAIRMAN GLEIMAN:  Is there any follow up?  I have
24    a couple of questions.  Why did you ask question ten at all? 
25    Before you answer, let me just say that I thought you said

                                                             19188
 1    earlier on that the reason you asked the 33 and 30 cent
 2    question was because it was in the rate case, and I
 3    understood you to say that you -- I use the term advisedly,
 4    may have been admonished at some point in the past to ask
 5    survey questions that were based on the reality of a rate
 6    case.
 7              Is there anything in this rate case, either
 8    proposed by the Postal Service or proposed by one of the
 9    parties that we should increase the basic one ounce rate
10    above 33 cents to pay for the reduced rate stamp, the CEM
11    stamp?
12              THE WITNESS:  Not only is there nothing that I
13    know of but that was never the intent of the question.
14              CHAIRMAN GLEIMAN:  Well, why did you ask it?
15              THE WITNESS:  Because, first, as I say, the
16    question I would focus on is question nine.
17              CHAIRMAN GLEIMAN:  I understand that.  I heard
18    you.
19              THE WITNESS:  As an aside, an important one, this
20    questionnaire is my questionnaire.  When the Postal Service
21    engages me as a witness, I decide -- I would not have asked
22    question ten in any place except as the last question, and I
23    don't consider question ten the important question.
24              CHAIRMAN GLEIMAN:  But you ask it.  Why did you
25    ask it?  If it's not important, they didn't tell you to ask

                                                             19189
 1    it --
 2              THE WITNESS:  The Postal Service requested I ask
 3    this question.
 4              CHAIRMAN GLEIMAN:  The Postal Service requested
 5    it?
 6              THE WITNESS:  Yes.  I had no objection to asking
 7    it.
 8              CHAIRMAN GLEIMAN:  The rest of the survey is yours
 9    but question ten is theirs?
10              THE WITNESS:  They wanted it and I don't object to
11    it.  They can have it.
12              CHAIRMAN GLEIMAN:  I understand.  I just wanted to
13    know why you asked it, because I looked at it and I
14    understood the flow of your questions, and I found it to be
15    a very peculiar question.
16              I might add that I would have loved to have had
17    you here to help us parse the subsets of a questionnaire and
18    survey that the Postal Service did dealing with shipping
19    services, which is before us in another docket, because the
20    subsets of the subsets of the subsets became very confusing.
21              You said that you thought the general view of
22    people is they are distrustful of Government when Government
23    is offering them something.
24              THE WITNESS:  Uh-huh.
25              CHAIRMAN GLEIMAN:  You have done lots of surveys

                                                             19190
 1    and you have done a number of them for the Postal Service. 
 2    Have you done some for other Government agencies also, with
 3    respect to other Government activities?
 4              THE WITNESS:  We have done a lot of things on
 5    general public attitudes, relatively few pieces of work for
 6    Government agencies.
 7              CHAIRMAN GLEIMAN:  What would be your discount
 8    rate to get the Government distrust out of the numbers?
 9              THE WITNESS:  It's much too complex.  It's not a
10    quick adjustment.  You know, you plug in a Government
11    correction factor, there isn't one.
12              CHAIRMAN GLEIMAN:  There isn't one but does your
13    gut tell you that if people didn't distrust the Government,
14    that perhaps the numbers that you came up with in terms of
15    like or dislike, like for the two stamp system, would have
16    been perhaps a little bit higher?
17              THE WITNESS:  Well, we are getting into personal
18    opinion again.
19              CHAIRMAN GLEIMAN:  That's fine.
20              THE WITNESS:  One of the things I do in developing
21    a questionnaire is ask people, people I know.  There was not
22    a lot of enthusiasm among the people I asked for the two
23    stamp system.
24              CHAIRMAN GLEIMAN:  Did you ask them the exact same
25    questions as are in the survey?

                                                             19191
 1              THE WITNESS:  In some cases, yes.
 2              CHAIRMAN GLEIMAN:  And in some cases, no?
 3              THE WITNESS:  Yes.
 4              CHAIRMAN GLEIMAN:  Depending on how you asked the
 5    questions -- did you ask the questions to them in person?
 6              THE WITNESS:  When I was testing the
 7    questionnaire, in some cases, yes.
 8              CHAIRMAN GLEIMAN:  Do you think that your body
 9    language or your delivery might have had an effect on their
10    responses when you were asking --
11              THE WITNESS:  It's entirely possible, but the ones
12    that we have seen here before us were done on telephone by
13    professional interviewers.
14              CHAIRMAN GLEIMAN:  No, I understand that.  I was
15    just wondering about your beginnings of this and how you
16    came up with the questions.
17              I have no further questions.  Does anybody else
18    have any questions?  Follow up from the bench?
19              [No response.]
20              CHAIRMAN GLEIMAN:  If not, then Mr. Tidwell, would
21    you like five minutes?  Five minutes you have.
22              [Recess.]
23              MR. TIDWELL:  No redirect, Mr. Chairman.
24              CHAIRMAN GLEIMAN:  Well, if you don't ask any
25    redirect, then I can't ask any recross, especially this late

                                                             19192
 1    in the day and I did think of another question.
 2              [Laughter.]
 3              CHAIRMAN GLEIMAN:  I would like to ask the
 4    question.
 5              [Laughter.]
 6              CHAIRMAN GLEIMAN:  You know, that is a benefit of
 7    having to sit up here and make a decision or be part of the
 8    decision-making process ultimately.
 9              You are a businessperson.
10              THE WITNESS:  Yes.
11              CHAIRMAN GLEIMAN:  And you do some mailings, I
12    take it?
13              THE WITNESS:  Oh, yes.
14              CHAIRMAN GLEIMAN:  Do you use any mass mailings
15    where you perhaps get discounts for presorting and barcoding
16    or anything like that or drop shipping or -- do you know?
17              THE WITNESS:  Yes, we do.
18              CHAIRMAN GLEIMAN:  You do?  Did it occur to you to
19    ask a question along the lines of the Postal Service gives
20    discounts to large mailers who prepare mail that can go
21    through their automation machines and help them hold down
22    costs.  Do you think that you should benefit when you use
23    envelopes that similarly help the Postal Service hold down
24    its costs?
25              I know that is a little complicated and I haven't

                                                             19193
 1    sat here and worked it out with all my friends and tried it
 2    out on them, but, you know, would that have been a
 3    reasonable question to ask people -- would you like to be
 4    treated the same way that big business people are treated
 5    when you do the same thing for the Postal Service that they
 6    do for the Postal Service, i.e., give them mail that will
 7    save money, help them avoid costs?
 8              THE WITNESS:  I'm afraid I am too familiar with
 9    mail and know the volume requirements for all those
10    services.
11              CHAIRMAN GLEIMAN:  The volume requirements are
12    arbitrary.  The savings accrue on a piece by piece basis.
13              Certain saving accrue on a volume basis according
14    to the Postal Service but the Postal Service changes the
15    thresholds of, you know, the density requirements or the
16    number of pieces you need or whatever to get discounts.
17              Those things change but the point is that there
18    are costs avoided by having mail that zips through these
19    automated mail sorting pieces and doesn't have to be touched
20    by as many human hands.
21              That mail -- that is common.  I mean the costs are
22    avoided by the Postal Service if I drop a certain type of
23    envelope in the mail as opposed to another type of envelope.
24              THE WITNESS:  I would have to spend quite a bit of
25    time asking that question.  I couldn't ask it as one

                                                             19194
 1    question.
 2              CHAIRMAN GLEIMAN:  Do you think you could probably
 3    ask it as a series of nine questions, maybe a couple of
 4    which had multi-parts?
 5              THE WITNESS:  Oh, probably.
 6              CHAIRMAN GLEIMAN:  Okay.  That's all I wanted to
 7    know.  I'll give you another shot, Mr. Tidwell, because that
 8    was unfair of me, but it occurred and I --
 9              MR. TIDWELL:  You, unfair, Mr. Chairman?
10              CHAIRMAN GLEIMAN:  Only in the questions that I
11    asked in terms of the procedure.  I asked it out of order. 
12    Otherwise I am never unfair.
13              MR. TIDWELL:  We will forego any redirect.
14              CHAIRMAN GLEIMAN:  Okay.  That being the case, Mr.
15    Ellard, we want to thank you for being here this evening and
16    for your contributions to our record.
17              You are an interesting person to listen to.  I
18    wish we had a chance to -- maybe we will one of these
19    days -- find an opportunity to talk to you outside of the
20    case setting, so that we can understand a little bit more
21    about what you do.
22              I think it would be educational for us.
23              THE WITNESS:  Thank you.
24              [Witness excused.]
25              CHAIRMAN GLEIMAN:  Thank you.  Have a good

                                                             19195
 1    evening, everyone -- oh, I guess I have to read the long
 2    list, don't I?
 3              This will -- if I can find it.  Goodness -- oh,
 4    yes.
 5              Hearings are adjourned but we will reconvene
 6    tomorrow morning promptly at 9:30 and we will receive
 7    testimony from Magazine Publishers of America Witness Cohen;
 8    Time Warner, Inc. Witness Stralberg; United States Postal
 9    Service Witnesses Degen and Schenk; United Parcel Service
10    Witness Sellick; Mail Order Association Witnesses Prescott
11    and Andrew; and CTC Distribution Service Witness Clark --
12    and if we get out of here at 8:30 tomorrow I will be very
13    happy, but I doubt it.
14              You all have a good evening.
15              [Whereupon, at 8:28 p.m., the hearing was
16    recessed, to reconvene at 9:30 a.m., Friday, March 20,
17    1998.]
18
19
20
21
22
23
24
25

