2668
 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 6
14                             Friday, October 10, 1997
15
16              The above-entitled matter came on for hearing,
17    pursuant to notice, at 9:33 a.m.
18
19    BEFORE:
20              HON. EDWARD J. GLEIMAN, CHAIRMAN
21              HON. GEORGE W. HALEY, VICE CHAIRMAN
22              HON. W. H. "TREY" LeBLANC, III, COMMISSIONER
23              HON. GEORGE A. OMAS, COMMISSIONER
24              HON. H. EDWARD QUICK, JR., COMMISSIONER
25

                                                              2669
 1    APPEARANCES:
 2    On behalf of the Newspaper Association of America:
 3              WILLIAM B. BAKER, ESQUIRE
 4              ALAN R. JENKINS, ESQUIRE
 5              Wiley, Rein & Fielding
 6              1776 K Street, NW
 7              Washington, DC  20006
 8              (202) 429-7255
 9              fax (202) 429-7049
10
11              ROBERT J. BRINKMANN, ESQUIRE
12              Newspaper Association of America
13              529 14th Street, NW, Suite 440
14              Washington, DC
15              (202) 638-4792
16              fax (202) 783-4649
17
18    On behalf of the Alliance of Nonprofit Mailers:
19              JOEL T. THOMAS, ESQUIRE
20              11326 Dockside Circle
21              Reston, VA  20191
22              (703) 476-4646
23              fax (703) 620-2338
24
25

                                                              2670
 1    APPEARANCES:  [continued]
 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              ANTHONY ALVERNO, ESQUIRE
 9              DAVID RUBIN, ESQUIRE
10              KENNETH N. HOLLIES, ESQUIRE
11              SCOTT L. REITER, ESQUIRE
12              United States Postal Service
13              475 L'Enfant Plaza West, SW
14              Washington, DC  20260
15
16    On behalf of Hallmark Cards, Incorporated:
17              DAVID F. STOVER, ESQUIRE
18              2070 S. Columbus Street, Suite 1B
19              Arlington, VA  22206
20              (703) 998-2568
21              fax (703) 998-2987
22
23
24
25

                                                              2671
 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, DC  20044
 8              (202) 626-6608
 9              fax (202) 626-6780
10
11    On behalf of Readers Digest Association, Parcel Shippers
12    Association:
13              TIMOTHY J. MAY, ESQUIRE
14              Patton Boggs, LLP
15              2550 M Street, NW
16              Washington, DC  20037
17              (202) 457-6050
18
19    On behalf of the National Postal Policy Council, Inc.:
20              MICHAEL F. CAVANAUGH, ESQUIRE
21              National Postal Policy Council, Inc.
22              1800 Diagonal Road, Suite 600
23              Alexandria, VA  22314
24
25

                                                              2672
 1    APPEARANCES:  [continued]
 2    On behalf of the American Bankers Association:
 3              IRVING D. WARDEN, ESQUIRE
 4              American Bankers Association
 5              1120 Connecticut Avenue, NW
 6              Washington, DC  20036
 7              (202) 663-5027
 8              fax (202) 828-4548
 9
10    On behalf of the Direct Marketers Association:
11              DANA T. ACKERLY, II, ESQUIRE
12              DAVID L. MEYER, ESQUIRE
13              MICHAEL D. BERGMAN, ESQUIRE
14              Covington & Burling
15              1201 Pennsylvania Avenue, NW
16              Washington, DC  20016
17              (202) 662-5296
18              fax (202) 778-5296
19
20
21
22
23
24
25

                                                              2673
 1    APPEARANCES:  [continued]
 2    On behalf of Nashua Photo, Inc.; District Photo, Inc.;
 3    Mystic Color Lab; Seattle FilmWorks, Inc.; ValPak Direct
 4    Marketing Systems, Inc.; ValPak Dealers' Association; Carol
 5    Wright Promotions:
 6              WILLIAM J. OLSON, ESQUIRE
 7              ALAN WOLL, ESQUIRE
 8              William J. Olson, P.C.
 9              8180 Greensboro Drive, Suite 1070
10              McLean, VA  22102-3823
11              (703) 356-5070
12              fax (703) 356-5085
13
14    On behalf of American Business Press:
15              DAVID STRAUS, ESQUIRE
16              Thompson Coburn
17              700 14th Street, NW, Suite 900
18              Washington, DC  20005
19              (202) 508-1013
20              fax (202) 508-1010
21
22
23
24
25

                                                              2674
 1    APPEARANCES:  [continued]
 2    On behalf of the United Parcel Service:
 3              JOHN E. McKEEVER, ESQUIRE
 4              Schnader Harrision Segal & Lewis LLP
 5              1600 Market Street, Suite 3600
 6              Philadelphia, PA  19103
 7              (215) 751-2200
 8              fax (215) 751-2205
 9
10    On behalf of the Major Mailers Association:
11              RICHARD LITTELL, ESQUIRE
12              1220 19th Street, NW, Suite 400
13              Washington, DC  20036
14              (202) 466-8260
15
16    On behalf of ADVO, Inc.:
17              JOHN M. BURZIO, ESQUIRE
18              THOMAS W. McLAUGHLIN, ESQUIRE
19              Burzio & McLauglin
20              1054 31st Street, NW, Suite 540
21              Washington, DC  20007
22              (202) 965-4555
23              fax (202) 965-4432
24
25

                                                              2675
 1    APPEARANCES:  [continued]
 2    On behalf of Time Warner, Inc.:
 3              JOHN M. BURZIO, ESQUIRE
 4              TIMOTHY L. KEEGAN, ESQUIRE
 5              1054 31st Street, NW, Suite 540
 6              Washington, DC  20007
 7              (202) 965-4555
 8              fax (202) 965-4432
 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, DC  20005
15              (202) 962-4814
16              fax (202) 962-8300
17
18    On behalf of the Office of Consumer Advocate:
19              SHELLEY S. DREIFUSS, ESQUIRE
20              KENNETH E. RICHARDSON, ESQUIRE
21              Office of the Consumer Advocate
22              Postal Rate Commission
23              1333 H Street, NW, Suite 300
24              Washington, DC  20268
25

                                                              2676
 1    APPEARANCES:  [continued]
 2    On behalf of the Dow Jones & Company, Inc.:
 3              SAM BEHRENDS, ESQUIRE
 4              LeBoeuf, Lamb, Greene & Macrae
 5              1875 Connecticut Avenue, NW
 6              Washington, DC  20009
 7              (202) 986-8018
 8              fax (202) 986-8102
 9
10    On behalf of David B. Popkin:
11              DAVID B. POPKIN
12              P.O. Box 528
13              Englewood, NJ  07631-0528
14              (201) 569-2212
15              fax (201) 569-2864
16
17    On behalf of the Association of Alternate Postal Systems:
18              BONNIE S. BLAIR, ESQUIRE
19              Thompson Coburn
20              700 14th Street, NW, Suite 900
21              Washington, DC  20005
22              (202) 508-1003
23              fax (202) 508-1010
24
25

                                                              2677
 1    APPEARANCES:  [continued]
 2    On behalf of the Mail Order Association of America:
 3              DAVID C. TODD, ESQUIRE
 4              Patton Boggs, LLP
 5              2550 M Street, NW
 6              Washington, DC  20037
 7              (202) 457-6410
 8              fax (202) 457-6513
 9
10    On behalf of the Magazine Publishers of America:
11              JAMES R. CREGAN, ESQUIRE
12              Magazine Publishers of America
13              1211 Connecticut Avenue, NW, Suite 610
14              Washington, DC  20036
15              (202) 296-7277
16              fax (202) 296-0343
17
18    On behalf of Edison Electric Institute:
19              R. BRIAN CORCORAN, ESQUIRE
20              Oliver & Oliver, P.C.
21              1090 Vermont Avenue, NW, Suite 800
22              Washington, D.C.  20005
23              (202) 371-5656
24              fax (202) 289-8113
25

                                                              2678
 1    APPEARANCES:  [continued]
 2    On behalf of the Florida Gift Fruit Shippers Association:
 3              M.W. WELLS, JR., ESQUIRE
 4              Maxwell W. Wells, Jr., P.A.
 5              105 E. Robinson Street, Suite 201
 6              Orlando, FL  32801
 7              (407) 422-8250
 8              fax (407) 422-8262
 9
10    On behalf of RIAA, AMMA, Recording Industry Association of
11    America, and Advertising Mail Marketing Association:
12              N. FRANK WIGGINS, ESQUIRE
13              Venable, Baetjer, Howard & Civiletti, L.L.P.
14              1201 New York Avenue, NW
15              Washington, D.C.
16              (202) 962-4957
17
18    On behalf of the National Federation of Nonprofits:
19              GEROGE MILLER, ESQUIRE
20              CAROLYN EMIGH, ESQUIRE
21              LENOARD MEREWITZ, ESQUIRE
22              Nonprofit Service Group
23              815 15th Street, NW, Suite 822
24              Washington, D.C.  20005
25              (202) 628-4380

                                                                 i
 1                           C O N T E N T S
 2    WITNESS               DIRECT    CROSS    REDIRECT    RECROSS
 3    PETER HUME
 4      BY MR. COOPER        2681                                 
 5      BY MR. RICHARDSON              2697                       
 6      BY MR. WELLS                   2931                       
 7      BY MR. OLSON                   2935                       
 8      BY MR. BAKER                   2954                       
 9      BY MR. EMIGH                   3006                       
10      BY MS. DREIFUSS                3037                       
11      BY MR. MAY                     3048                       
12      BY MR. WIGGINS                 3082                       
13      BY MR. OLSON                   3103                       
14
15    PRESIDING OFFICER'S RULINGS                             PAGE
16    To Deny the Motion to Strike Portions of the
17      Testimony of Witness Moeller filed on
18      September 26, 1997 by the Newspaper
19      Association of America                                2680
20
21    DOCUMENTS TRANSCRIBED INTO THE RECORD:                  PAGE
22    Designation of Written Cross-Examination
23      of Peter Hume                                         2684
24    Designation of Written Cross-Examination
25      of Joseph D. Moeller                                  2715

                                                                ii
 1                           E X H I B I T S
 2    EXHIBITS AND/OR TESTIMONY               IDENTIFIED  RECEIVED
 3    Direct Testimony and Exhibits
 4      of Peter Hume, Exhibit No.
 5      USPS-T-18                                2682       2682  
 6    Designation of Written Cross-
 7      Examination of Peter Hume                           2683  
 8    Direct Testimony and Exhibits
 9      of Joseph D. Moeller, Exhibit
10      No. USPS-T-36                            2712       2712  
11    Designation of Written Cross-
12      Examination of Joseph D.
13      Moeller                                             2714  
14    Cross-Examination Exhibit No.
15      NFN-XE-1                                 3024             
16
17
18
19
20
21
22
23
24
25

                                                              2679
 1                        P R O C E E D I N G S
 2                                                     [9:33 a.m.]
 3              CHAIRMAN GLEIMAN:  Good morning.
 4              Today's hearings to receive evidence in docket
 5    R97-1 continue.  Today we will hear from Postal Service
 6    witnesses Hume and Moeller.
 7              As I mentioned yesterday, I intend to recess
 8    today's hearing at 4:30 so that those who have a religious
 9    holiday that starts this evening will have an opportunity to
10    get home in a timely manner.
11              On the table in front of the room are copies of
12    ruling number 42 which was issued early this morning.
13              It schedules the appearance of Postal Service
14    witnesses presenting supplemental testimony and sets dates
15    for perfecting written objections to the receipt of
16    testimony sponsoring library references into evidence.
17              It also directs the Postal Service to provide by
18    October 14th a current list of all those library references
19    it intends to move into evidence.
20              The Newspaper Association of America's motion to
21    strike portions of the testimony of Postal Service witness
22    Moeller filed on September 26th is still pending.  NAA
23    contends that witness Moeller relies on a library reference
24    not sponsored by any Postal Service witness.
25              NAA filed its motion to protect its -- its right

                                                              2680
 1    to obtain relief but recognized in its motion that Presiding
 2    Officer's Rule No. 20 ruled against a similar motion filed
 3    by Nashua-District-Mystic-Seattle.
 4              Consistent with that ruling, I am denying the NAA
 5    motion to strike without prejudice to subsequent requests to
 6    obtain procedural relief.
 7              The Postal Service has now provided as
 8    supplemental testimony a sponsor for the library reference
 9    on which witness Moeller relied.  If NAA wishes procedural
10    relief, it is to file a new motion by October the 16th.
11              Mr. Reporter, please index this ruling in the
12    front of today's transcript.
13                             [Presiding Officer's Ruling to Deny
14                             the Motion to Strike Portions of
15                             the Testimony of Witness Moeller
16                             filed on September 26, 1997 by the
17                             Newspaper Association of America.]
18              CHAIRMAN GLEIMAN:  Does any party have a
19    procedural matter to raise before we begin?  I'm almost
20    afraid to ask that question anymore.
21              [No response.]
22              CHAIRMAN GLEIMAN:  It doesn't -- it doesn't appear
23    that there are any procedural matters.
24              So, Mr. Cooper, would you identify your witness so
25    that I can swear him in?

                                                              2681
 1              MR. COOPER:  Yes.  I'm Richard Cooper for the
 2    Postal Service, and the Postal Service calls Peter Hume to
 3    the stand.
 4              CHAIRMAN GLEIMAN:  Mr. Hume, before you sit down,
 5    I'll keep you from having to bounce up and down there.
 6    Whereupon,
 7                             PETER HUME,
 8    a witness, was called for examination by counsel for the
 9    United States Postal Service and, having been first duly
10    sworn, was examined and testified as follows:
11              CHAIRMAN GLEIMAN:  Thank you.
12              Please be seated.
13                         DIRECT EXAMINATION
14              BY MR. COOPER:
15         Q    Mr. Hume, I'm handing you two copies of a document
16    entitled "Direct Testimony of Peter Hume on Behalf of the
17    United States Postal Service," which is designated
18    USPS-T-18.  Are you familiar with this document?
19         A    I am.
20         Q    Was it prepared by you or under your direct
21    supervision?
22         A    It was.
23         Q    If you were to giving testimony orally today, is
24    this the testimony that you would give?
25         A    It is.

                                                              2682
 1              I have one typographical correction.  On page 14,
 2    at line 23, there is a missing right parenthesis.  It says,
 3    copied herewith as my work paper five.  There should be a
 4    close parenthesis before the period.
 5              It is not a substantial change, of course.
 6              BY MR. COOPER:
 7         Q    With that change, is this the testimony that you
 8    would give?
 9         A    It is.
10              MR. COOPER:  I have made the corresponding changes
11    on the copies that I will hand to the reporter, and I ask
12    that this testimony be admitted into evidence?
13              CHAIRMAN GLEIMAN:  Are there any objections?
14              [No response.]
15              CHAIRMAN GLEIMAN:  Hearing none, Mr. Hume's
16    testimony and exhibits are received into evidence, and I
17    direct that they be accepted into evidence.  As is our
18    practice, they will not be transcribed into the record.
19                             [Direct Testimony and Exhibits of
20                             Peter Hume, Exhibit No. USPS-T-18
21                             were marked for identification and
22                             received into evidence.]
23              CHAIRMAN GLEIMAN:  Mr. Hume, have you had an
24    opportunity to examine the packet of designated written
25    cross examination that was made available to you earlier

                                                              2683
 1    today?
 2              THE WITNESS:  I have.
 3              CHAIRMAN GLEIMAN:  If these questions were asked
 4    of you today, would your answers be the same as those you
 5    previously provided in writing?
 6              THE WITNESS:  They would.
 7              CHAIRMAN GLEIMAN:  That being the case, I'm going
 8    to provide two copies of the designated written cross
 9    examination of witness Hume to the reporter, and I direct
10    that they be accepted into evidence and transcribed into the
11    record at this point.
12                             [Designation of Written
13                             Cross-Examination of Peter Hume was
14                             received into evidence and
15                             transcribed into the record.]
16
17
18
19
20
21
22
23
24
25

                                                              2697
 1              CHAIRMAN GLEIMAN:  Does any participant have
 2    additional written cross examination for witness Hume?
 3              [No response.]
 4              CHAIRMAN GLEIMAN:  There doesn't appear to be any.
 5              Only one participant, the Office of the Consumer
 6    Advocate, has requested oral cross examination of this
 7    witness.
 8              Does anyone else wish to cross examine the
 9    witness?
10              [No response.]
11              CHAIRMAN GLEIMAN:  Mr. Richardson, could you begin
12    on behalf of OCA?
13              MR. RICHARDSON:  Thank you, Mr. Chairman.
14                          CROSS EXAMINATION
15              BY MR. RICHARDSON:
16         Q    Good morning, Mr. Hume.
17         A    Good morning.
18         Q    Mr. Hume, I'd like to discuss with you essentially
19    your Exhibit 18-A, B, and C, those three exhibits, and start
20    with the point that your testimony refers, at page five, to
21    the fact that you have testified previously on this subject
22    in docket numbers MC95-1 and MC96-2.  Is that correct?
23         A    That's true.
24         Q    And you rely to a large extent on your testimony
25    in those cases as a basis for your testimony in this case. 

                                                              2698
 1    Is that correct?
 2         A    Yes.
 3         Q    As a matter of fact, on page eight of your
 4    testimony, at lines 22 and 23, you state, "With the details
 5    of my previous filings available from the record," you will
 6    focus on modifications to your previous testimony.  Is that
 7    correct?
 8         A    Yes.
 9         Q    And when you say "available from the record,"
10    you're referring to the records in those previous cases, are
11    you not?
12         A    Yes.
13         Q    Not the record in this case?
14         A    From the previous cases, yes.
15         Q    Thank you.
16              Now, I would like to focus on these Exhibits 18-A,
17    B, and C.
18              Now, they're rather complicated, so if I could
19    just for a moment go through with you the -- the overall
20    points which you are making with that exhibit.
21              Since -- would you agree that Exhibits A, B, and C
22    are each doing approximately the same thing and that if we
23    go through Exhibit A, we will pretty much cover the points
24    of B and C in a general manner?
25         A    Yes.

                                                              2699
 1         Q    And as I understand it, that for instance, Exhibit
 2    A, in essence, calculates the effective unit cost of mail
 3    delivery of various classes of mail.  Is that correct?
 4         A    That's the intention, yes.
 5         Q    And those effective unit costs which are shown in
 6    column I, for instance, on page six of Exhibit A, 18-A --
 7    I'll be referring to that column for a few of my questions
 8    -- is that the operative column that's important in this
 9    exhibit, Exhibit 18-A, page six, column I, entitled
10    "Effective Unit Cost."
11         A    That column does, indeed, contain the results for
12    first-class.
13         Q    And I know, in response to one of the
14    interrogatories, you indicated that it's the figures from
15    that column which are then carried over by witness Daniels
16    into her Exhibit 29-C, pages one with respect to Exhibit
17    18-A and page two with Exhibit 18-B and page three with
18    Exhibit 18-C.  Is that correct?
19         A    Yes.
20         Q    And those are used to develop work-sharing
21    discounts?
22         A    Yes.
23         Q    Are these numbers used by any other witness in the
24    Postal Service?
25         A    I -- I couldn't answer that with certainty.

                                                              2700
 1         Q    But you --
 2         A    Witness Daniel is the one who compiles a
 3    tabulation which adds up the costs across the cost segments
 4    that I'm aware of.  The costs are eventually used by
 5    numerous witnesses, I would say.
 6         Q    Eventually, after witness Daniel's calculation
 7    with those numbers.  You do not provide these numbers
 8    directly to another witness as far as you can recall?
 9         A    What I do is I produce this testimony with these
10    tables, and I know that witness Daniel uses the numbers in
11    these tables.  If there are other witnesses that do, I do
12    not know specifically of those witnesses.
13         Q    And now, this particular column I in this exhibit
14    on page six calculates the effective unit cost.
15              Now, that is, as I understand it, the base unit
16    cost weighted with the DPS or the effect of delivery point
17    sequencing cost.  Is that correct?
18         A    Yes.  And it includes the piggybacks --
19         Q    It includes --
20         A    -- related to delivery.
21         Q    The interesting thing on this exhibit is that you
22    start with the same base unit cost for non-automated
23    pre-sort letters of 5.313 cents in line three and for
24    automated letters on line five, for the same cost, and
25    carrier route letters on line 12 is also the same unit cost

                                                              2701
 1    of 5.313 cents per piece, and also on those same lines, the
 2    delivery point sequencing unit cost is also the same for
 3    those, at 3.335 cents.  Is that correct?
 4         A    Yes.
 5         Q    However, when you carry those over and calculate
 6    the effective unit cost, you have a different cost for
 7    non-automated pre-sort letters, for the automated letters,
 8    and for the carrier route letters.  Is that correct?
 9         A    Yes.
10         Q    And someone looking at this would say, well, these
11    letters are physically the same, they -- they could be the
12    same, and we're talking about delivering letters, how could
13    the cost of delivering a letter that is physically the same
14    vary by as much as almost a half-a-cent each, where you
15    conclude that the costs are different.
16              Would you clarify for the record why those are
17    different?
18              For instance, let's focus on the -- the automated
19    rate, your effective unit cost, you show a 3.711-cent cost,
20    which is a lower cost than the non-automated pre-sort
21    letters which are on line three by about four-tenths of a
22    cent or a little more than four-tenths of a cent.
23              Could you explain why what seemingly are the same
24    physical letters that -- and the -- why the cost of delivery
25    would vary for two letters that seem to be similar?

                                                              2702
 1         A    The two costs you mentioned first, the 5.313 and
 2    the 3.335, relate to two different kinds of letters.  The
 3    first kind are letters which are not subject to DPS, and the
 4    carrier will receive those in his conventional fashion, as
 5    he would before DPS.
 6              The ones which are costed at 3.335 represent the
 7    DPS letters, and in office work, in particular, the
 8    productivity for handling those letters is substantially
 9    higher, as reflected by the difference in cost between the
10    five cents and the three cents, essentially a two-cent
11    difference.
12              That difference reflects the economies of handling
13    DPS mail during office work.  Even though the letters are
14    individually the same, the DPS letters do not have to be
15    handled individually in the office.
16         Q    And so the difference is related to the impact of
17    the office or, if not, the street delivery?
18         A    It's the office work which is sharing the
19    difference which is reflected in my work papers in the cost
20    development.
21         Q    And the impact of the amount of DPS utilized is
22    taken into account in weighting these figures on your
23    exhibit?  For instance, in weighting you show the
24    percentages of DPS on the "A" lines -- line 3A and 5A and
25    12A, is that correct?

                                                              2703
 1         A    I do indeed, yes.
 2         Q    Now those are percentages of DPS, as I understand
 3    it?
 4         A    Well, fractions of DPS on this particular
 5    presentation.  If we look at the basic letters that you are
 6    focusing on, then the .81 is 81 percent DPS.
 7         Q    And that .81 is multiplied by the unit cost of
 8    DPS --
 9         A    Yes.
10         Q    Plus the same procedure is done with the base unit
11    costs, and they are added together to give you a total
12    effective unit cost, is that correct?
13         A    That's correct.
14         Q    Now for instance on line 5A, where you referred to
15    the .810, that is a percentage figure or a proportion of
16    what number?  DPS is a proportion of what?
17         A    It is an average value reflecting the proportion
18    of letter mail that the carrier handles which has been
19    delivered to him with DPS processing.
20         Q    That is the proportion over the entire Postal
21    Service of all DPS mail handled by letter carriers?
22         A    For all those units which are affected.
23         Q    And these are 1998 test year percentages or
24    proportions, correct?
25         A    Yes.

                                                              2704
 1         Q    Could you tell me where you obtained those
 2    proportions and how you obtained them?
 3         A    I obtained those proportions from Library
 4    Reference Document 129.
 5         Q    And was that prepared by you?
 6         A    No.
 7         Q    Was it prepared under your direction?
 8         A    No.
 9              MR. COOPER:  For clarity of the record and for the
10    information of the Commission, I would point out that this
11    library reference can be discussed with Witness Smith.  It
12    is within the scope of his offered testimony.
13              CHAIRMAN GLEIMAN:  Thank you, Mr. Cooper.
14              THE WITNESS:  Maybe I could add one thing there.
15              As I indicated in my testimony, this development
16    was based on similar developments in two previous cases, and
17    in both of those cases the proportions of DPS, which is a
18    very significant factor in determining delivery costs, were
19    provided to me, and those tend to vary depending on the year
20    in question and on the class of mail in question, and it is
21    not the purpose of my testimony to determine those
22    variations.
23              That is an operational matter.
24              BY MR. RICHARDSON:
25         Q    And those numbers could vary up or down from year

                                                              2705
 1    to year, is that correct?
 2         A    Yes.  There was no DPS in '93.  Now there is quite
 3    a lot.
 4         Q    That is because it was not utilized at that time.
 5         A    Yes.
 6              MR. RICHARDSON:  Mr. Chairman, could I inquire of
 7    Postal Service counsel whether or not they intend to enter
 8    Library Reference 129 into the record at this time or in
 9    this proceeding?  It may be premature.  I understand that.
10              CHAIRMAN GLEIMAN:  We can make that inquiry but if
11    counsel is unable to respond we have given them the 14th as
12    a date by which they should submit a list of what they do
13    intend to offer.
14              Mr. Cooper, can you help us at this point?
15              MR. COOPER:  It is my understanding that if this
16    library reference is to be offered it will be offered in
17    conjunction with the testimony of Witness Smith and I would
18    like to reserve a definitive answer until later, since that
19    is not my witness.
20              CHAIRMAN GLEIMAN:  Certainly.  We understand.
21              We will know by the 14th, of course.  That's
22    correct?
23              MR. COOPER:  That's our intention -- God and the
24    electricians at Postal Service Headquarters willing.
25              CHAIRMAN GLEIMAN:  Thank you.

                                                              2706
 1              MR. RICHARDSON:  Thank you, Mr. Chairman.
 2              BY MR. RICHARDSON:
 3         Q    Mr. Hume, if you would just clarify for me then,
 4    on your testimony on page 11 on line 15 going over to 16,
 5    you state, "There are no data on the distribution of DPS
 6    levels" and from your testimony just now it is my
 7    understanding that you are saying that you did use the data
 8    from Library Reference 129.
 9              Perhaps I am misunderstanding your testimony.
10              Would you explain that, please?
11         A    The modification two in my testimony -- that is
12    the difference between what I do in this development
13    compared with the previous development and deals almost
14    entirely with this issue.
15              It's one that arises because there is DPS mail in
16    the mail stream in the base year, and such as not the case
17    in 1973, which was the base year of the former case.
18              Now, as you had noticed yourself, I develop two
19    costs for a particular class of mail, one with DPS and one
20    without DPS, and those costs are developed from the CRA
21    which reflects ongoing data measurements for the base year,
22    so that if we look for the base year '93, as I did in the
23    previous testimony, the base year delivery costs reflect no
24    DPS because it was not in the field at that time.
25              For '96, there is DPS in the field, and therefore,

                                                              2707
 1    there is some effect of DPS, but I don't really know what it
 2    is.
 3         Q    I see.  Thank you.
 4         A    So, what I'm doing is attempting to model my way
 5    around that difficulty.
 6              MR. RICHARDSON:  I see.  Thank you very much.
 7              I have no further questions, Mr. Chairman.
 8              CHAIRMAN GLEIMAN:  Is there any follow-up cross
 9    examination?
10              [No response.]
11              CHAIRMAN GLEIMAN:  Questions from the bench?
12              [No response.]
13              CHAIRMAN GLEIMAN:  Mr. Hume, I'm just curious.  Do
14    you know when the last time the Postal Service did a
15    street-time study, when it was?  Not an update but a
16    flat-out study.
17              THE WITNESS:  I'd really need to know what you
18    really mean by street-time study there.
19              CHAIRMAN GLEIMAN:  Has the Postal Service done a
20    study of cost associated with the delivery of certain types
21    of mail in the past eight years?
22              THE WITNESS:  The studies reported by witness
23    Nelson the other day were the most recent studies that I am
24    aware of.
25              CHAIRMAN GLEIMAN:  Did those studies pre-date the

                                                              2708
 1    advent of detached labels, or do you know that?
 2              THE WITNESS:  To my knowledge, detached labels
 3    have been around for some time, and these studies, the ones
 4    witness Nelson reported, were performed just last year.
 5              CHAIRMAN GLEIMAN:  Well, I'm going to go back and
 6    look at witness Nelson's studies some more, but I didn't see
 7    anything in there, and I didn't see anything in your
 8    testimony that spoke to cost differentials on detached label
 9    or other type of saturation mail, and the reason I ask this
10    question, just so that people not get some incorrect
11    impression, is that my understanding is that the overall
12    thrust of the Postal Service's efforts now are to move mail
13    into automation categories, and it seems to me that there is
14    a great deal of mail out there that could move into those
15    categories, and I was wondering, as I said, whether anyone
16    had done any studies to determine what the costs were,
17    because if you don't have the underlying cost you can't find
18    what the savings might be as a consequence of moving the
19    mail into the possibility of being delivery point sequenced.
20              THE WITNESS:  I need hardly mention that doing
21    field studies of delivery work is particularly difficult.
22              If you follow carriers around, you tend to
23    interfere what they're -- with what they're doing, and it's
24    also very non-productive, because most of the time they are
25    doing the same thing, they are delivery first-class letters,

                                                              2709
 1    and the things that most people are concerned with don't
 2    happen that frequently.
 3              So, these are necessarily time-consuming expensive
 4    studies, and that is one, I think, fairly good reason why
 5    they are not performed very frequently.
 6              CHAIRMAN GLEIMAN:  Why do you say that most of the
 7    time they're delivering first-class letters?
 8              THE WITNESS:  Because there are more first-class
 9    letters to be delivered than there are most other classes.
10              CHAIRMAN GLEIMAN:  What do you mean by "most of
11    the time"?  Forty percent of the time?  Fifty percent of the
12    time?  Ninety percent of the time?  Can you give me a
13    percentage of the time that they use that they're delivering
14    first-class letters and not anything else?
15              THE WITNESS:  I couldn't give you an estimate of
16    that.  I am basing my figures on the fact that there is more
17    first-class volume than there is volume of any other of the
18    classes, and --
19              CHAIRMAN GLEIMAN:  So, you would -- you would --
20    "most," then, would in some way relate to the proportion of
21    first-class mail in the total mail stream.
22              THE WITNESS:  That was my supposition there, yes. 
23    I wasn't trying to make a big point of it.  I was pointing
24    out mainly that it's difficult to do these studies.
25              CHAIRMAN GLEIMAN:  Thank you.

                                                              2710
 1              Is there any followup as consequence questions
 2    from the bench?
 3              [No response.]
 4              CHAIRMAN GLEIMAN:  If not, that brings us to
 5    redirect.
 6              Mr. Cooper, would you like some time?
 7              MR. COOPER:  Just five minutes.
 8              CHAIRMAN GLEIMAN:  Five minutes it is.
 9              [Recess.]
10              CHAIRMAN GLEIMAN:  Mr. Cooper, do you have any
11    redirect?
12              MR. COOPER:  No, we do not.
13              CHAIRMAN GLEIMAN:  If there is no redirect and
14    there is nothing further, I want to thank you, Mr. Hume.  We
15    appreciate your appearance here today and your contributions
16    to the record, and if there's nothing further that you have
17    to offer, you're excused.
18              THE WITNESS:  Thank you, Mr. Chairman.
19              CHAIRMAN GLEIMAN:  Thank you, sir.
20              [Witness excused.]
21              CHAIRMAN GLEIMAN:  Mr. Alverno, are you prepared
22    to call your next witness?
23              MR. ALVERNO:  Thank you, Mr. Chairman.  The Postal
24    Service calls Joseph Moeller to the stand.
25              CHAIRMAN GLEIMAN:  Mr. Moeller, could you please

                                                              2711
 1    stand and raise your right hand?
 2    Whereupon,
 3                         JOSEPH D. MOELLER,
 4    a witness, was called for examination by counsel for the
 5    United States Postal Service and, having been first duly
 6    sworn, was examined and testified as follows:
 7              CHAIRMAN GLEIMAN:  Please be seated.
 8              MR. ALVERNO:  May I proceed?
 9              CHAIRMAN GLEIMAN:  You can proceed.
10              MR. ALVERNO:  Okay.
11                         DIRECT EXAMINATION
12              BY MR. ALVERNO:
13         Q    Please introduce yourself.
14         A    My name is Joseph D. Moeller.
15         Q    And where are you employed?
16         A    I'm employed at the Postal Service headquarters. 
17    I'm an economist in the pricing office.
18         Q    And earlier I handed you two copies of a document
19    entitled "Direct Testimony of Joseph Moeller on Behalf of
20    the U.S. Postal Service," marked as USPS-T-36.  These copies
21    are now with the reporter.  Did you have a chance to examine
22    them?
23         A    Yes, I did.
24         Q    And was this testimony prepared by you or under
25    your direction?

                                                              2712
 1         A    Yes, it was.
 2         Q    And do you have any changes or corrections to
 3    make?
 4         A    I have no changes to make, but I would note that
 5    the package did include revisions that were filed on October
 6    3rd of 1997.
 7         Q    And if you were to testify orally today, would
 8    your testimony be the same?
 9         A    Yes.
10              MR. ALVERNO:  Mr. Presiding Officer, I ask that
11    the direct testimony of Joseph Moeller on behalf of the U.S.
12    Postal Service, marked as USPS-T-36, be received as evidence
13    at this time.
14              CHAIRMAN GLEIMAN:  Are there any objections?
15              [No response.]
16              CHAIRMAN GLEIMAN:  Hearing none, Mr. Moeller's
17    testimony and exhibits are received into evidence, and I
18    direct that they be accepted into evidence.  As is our
19    practice, they will not be transcribed.
20                                  [Direct Testimony and Exhibits
21                                  of Joseph D. Moeller, Exhibit
22                                  No. USPS-T-36 were marked for
23                                  identification and received
24                                  into evidence.]
25              CHAIRMAN GLEIMAN:  Mr. Moeller, have you had an

                                                              2713
 1    opportunity to examine the packet of designated written
 2    cross examination that was made available earlier today?
 3              THE WITNESS:  Yes, and I found a few things that
 4    -- responses that were not mine and a couple of things that
 5    were not designated.  So, I have pulled those from the
 6    packet.
 7              I can read which ones --
 8              CHAIRMAN GLEIMAN:  Would you let us know which you
 9    pulled from the packet?
10              THE WITNESS:  MM -- I'm sorry -- MMA/USPS-T-36-7
11    -- that was a question that wasn't designated, and it was
12    redirected to witness Moden in any event, and
13    MMA/USPS-T-36-8, which was also redirected to witness Moden,
14    and there were also some interrogatories that were
15    originally directed to me but had been redirected to the
16    Postal Service for response.
17              Those are NAA/USPS-T-36-21, US -- I'm sorry --
18    UPS/USPS-36 -- actually, that one -- that was never directed
19    to me, that's just a institutional response -- ValPak/Carol
20    Wright/USPS-T-36-11, ValPak/Carol Wright/USPS-T-36-12, and
21    ValPak/Carol Wright/USPS-T-36-14.
22              CHAIRMAN GLEIMAN:  Thank you.
23              Mr. Alverno, have you made the corrections in the
24    copies that the reporter has been given?
25              MR. ALVERNO:  Yes, we have.

                                                              2714
 1              CHAIRMAN GLEIMAN:  And you have given those copies
 2    to the reporter.
 3              MR. ALVERNO:  Yes, we have.
 4              CHAIRMAN GLEIMAN:  The copies having been given to
 5    the reporter, the designated written cross examination of
 6    witness Moeller is -- is -- I direct that it be accepted
 7    into evidence and transcribed into the record at this point.
 8                                  [Designation of Written
 9                                  Cross-Examination of Joseph D.
10                                  Moeller was received into
11                                  evidence and transcribed into
12                                  the record.]
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                              2922
 1              CHAIRMAN GLEIMAN:  Does any participant have
 2    additional written cross examination for this witness?
 3              [No response.]
 4              CHAIRMAN GLEIMAN:  There doesn't appear to be any.
 5              Ten participants have requested oral cross
 6    examination of witness Moeller -- and we'll see how our
 7    random alphabet generator did today in coming up with the
 8    list of cross examiners -- Advertising Mail Marketing
 9    Association, Florida Gift Fruit Shippers, Mail Order
10    Association of America, Nashua-District et. al, National
11    Federal of Non-Profits, the Newspaper Association of
12    America, the Office of the Consumer Advocate, Parcel
13    Shippers Association, the Recording Industry Association of
14    America, and ValPak Direct Marketing Systems et. al.
15              Does any other participant have oral cross
16    examination for this witness?
17              [No response.]
18              CHAIRMAN GLEIMAN:  There doesn't appear to be
19    anyone else.
20              I'm not sure -- Mr. Wiggins, are you here on
21    behalf of AMMA this morning?  I couldn't see which hat you
22    had on this morning.
23              MR. WIGGINS:  I -- I have both hats on, but this
24    one comes first, Mr. Chairman.
25              CHAIRMAN GLEIMAN:  You can begin when you are

                                                              2923
 1    ready.
 2              And while he's readying himself, Mr. Moeller, in
 3    the event you haven't ever counted it up, there were 91
 4    documents that were either produced by you or sent to you
 5    during the course of these proceedings, so far.
 6              THE WITNESS:  That explains all that paper, I
 7    guess.
 8                          CROSS EXAMINATION
 9              BY MR. WIGGINS:
10         Q    Mr. Moeller, I am Frank Wiggins here for the AMMA.
11              Do you have AMMA-1 to you handy?
12         A    Yes.
13         Q    In your responses to our inquiries 1-D and E, you
14    refer us to Witness Thress.  Is that simply deference or do
15    you contend that he is the better informed person to whom we
16    should inquire on those subjects?
17         A    I think I referred you to him because he explains
18    how the three billion pieces was estimated and I think he
19    talks in there about some of the assumptions he had made.
20         Q    He does indeed.  But my question is whether you
21    consider yourself sufficiently informed to elaborate on the
22    questions that we propounded.
23         A    I am vaguely familiar with what was built into it
24    but he would certainly be able to do a step-by-step better
25    than I could.

                                                              2924
 1         Q    You are not comfortable explaining why it is that
 2    the Postal Service believes that those three billion pieces
 3    proposed to migrate are eligible for entry or will be
 4    eligible for entry as automation five-digit pieces?  That
 5    was really the thrust of our inquiry.
 6         A    Like I said, I think I understand some of the
 7    inputs into his --
 8         Q    I am not trying to press you into something you
 9    are not comfortable with.
10         A    I think it was -- I remember the general outline
11    of it and I thought it was the right approach to take.
12         Q    What would be the appropriate rate adjustment were
13    it the case if somebody could persuade either you or
14    Mr. Thress or whoever ought to be persuaded that something
15    less than those three billion pieces were eligible for entry
16    at the five-digit automation class?  What adjustments to the
17    rates that you propose would be appropriate?
18         A    Oh, my, I have no idea what the adjustment to the
19    rates would be.  You mean, if I were given a forecast, an
20    alternative forecast?
21         Q    Correct.  Suppose none of those three billion
22    pieces were to migrate, that all of them were to remain at
23    the basic automation level at which they now reside, what
24    adjustment would you make in your calculation of rates?
25         A    I can't speak to that.  Any adjustment I would

                                                              2925
 1    make would have to be approved by the Board of Governors
 2    before we filed it again anyway.
 3         Q    Do you have your page 24 of your workpaper 1
 4    handy?
 5         A    Yes.
 6         Q    That is the place at which you calculate the
 7    adjustment that is appropriate.
 8         A    Right.
 9         Q    In anticipation of those three billion pieces, is
10    it not?
11         A    That's the page where I make a cost adjustment
12    that is a final adjustment to Witness Patelunas' costs to
13    account for the fact that the costs before the adjustment
14    provided by Witness Patelunas has embedded in it the
15    assumption that these migrating pieces take on the cost of
16    the average piece in that regular subclass.  But obviously
17    these are very low-cost pieces and if we did not make the
18    final adjustment, the regular subclass would have been
19    inappropriately tagged with $226 million in costs and the
20    carrier route subclass would have had costs too high by 32
21    million.
22         Q    Thirty-two million, yeah.  So you make that
23    adjustment in anticipation of a migration; is that right?
24         A    Yes.
25         Q    Isn't it equally right that were the migration not

                                                              2926
 1    to take place you would simply reverse the adjustments that
 2    you have made on that page of your workpapers?
 3         A    If someone were to tell me that there were no
 4    pieces that were going to take advantage of this lower rate
 5    up there in five-digit automation, then that figure M there
 6    on the upper right-hand side of that page would be zero and
 7    that would probably calculate to no cost adjustment.  But
 8    there would be no cost adjustment necessary because
 9    Patelunas' costs would not have had that volume up in that
10    subclass to begin with.
11         Q    You would simply rip that page out of your
12    workpaper and revert to --
13         A    Then we would have like a missing page.  It would
14    be 23 and 25.
15         Q    That would be another correction that you would
16    have to make.
17         A    Yeah, I'd have to renumber the pages.
18         Q    Look at page 20 of your testimony if you would,
19    please.
20         A    Okay.
21         Q    Do you have that?
22         A    Yes, I do.
23         Q    You there explain, rather briskly, I must say, why
24    it is that you recommend a decrease from 100 percent, as it
25    is now, to 80 percent in the passthrough for destination

                                                              2927
 1    entry or drop shipping.  Could you elaborate?  You say a
 2    greater passthrough would result in a larger increase in
 3    basic rates.  Is that really the core of it?
 4         A    That's one of the reasons.
 5         Q    Are there others?
 6         A    Well, this paragraph says that it is also intended
 7    to keep the discounts basically where they are today.
 8         Q    It also says that the savings due to destination
 9    entry have increased, correct?  I left a few words out.
10         A    Yeah, you did.  The savings to the destination
11    entry, unlike most other work sharing discounts, have
12    increased.
13         Q    But -- but those savings have increased; is that
14    right?
15         A    The measurement of those savings are greater than
16    the measurement of those savings in parcel -- in the
17    classification reform case.
18         Q    Right.  And so in keeping the discounts at the
19    same levels, right, which is what you say you are doing
20    here?
21         A    Generally.
22         Q    You are passing through less of a cost saving than
23    previously was passed through?
24         A    The passthrough was lower than the passthrough
25    that was applied to the savings as measured in

                                                              2928
 1    classification reform.
 2         Q    Which in a sense, though the dollar amount, the
 3    take-home pay, if you would, for what the Postal Service is
 4    paying people to engage in these work-saving activities, the
 5    dollar amount remains constant but the benefit in some sense
 6    is being diminished?
 7              The Postal Service is saving more and the mailer
 8    benefitting proportionately less?
 9         A    I think whatever savings there are in actuality
10    out there are going to be the same the day before the
11    discounts change as the day after the discounts or these new
12    rates would go into place.  I mean, this is just a
13    measurement of what we think those savings are.  It's not --
14    nothing's going to change in terms of how much we save
15    necessarily.
16         Q    What do you mean then in saying, and I'm leaving
17    out those few words again, that the savings due to
18    destination entry have increased?
19         A    I probably should have said I'm speaking of the
20    measured savings there, the measured savings -- I mean, day
21    to day it saves one amount one day and the same amount the
22    next day presumably -- maybe I'm nitpicking here, I'm sorry,
23    but --
24         Q    You're not intimating that the measurement devices
25    are --

                                                              2929
 1         A    No.
 2         Q    No good.
 3         A    Oh, no; never do that.
 4         Q    Would the Postal Service have a problem if there
 5    were evidence presented to it that the mailers affected
 6    would prefer to have a 100-percent passthrough of those
 7    savings even though it would result, as you point out, in a
 8    push-up effect in other rates for the subclasses affected?
 9         A    My understanding is that you all -- all the other
10    parties are free to propose whatever rate design they would
11    recommend.
12         Q    I appreciate that, but I'm asking what your
13    response, your institutional response to that would be.
14         A    I can't speak for the Postal Service and how they
15    would react to that proposal.
16         Q    Oh, but you're the rate guy, right?
17         A    I'm the rate guy.
18         Q    As a rate guy, how would you feel about that?
19         A    Well, I like the rates I proposed, because I
20    was -- so I would probably not like that.  But that doesn't
21    mean that the institution wouldn't look at the entire
22    package of rates proposed by a party and objectively look at
23    it and see if it suited our needs and the customer needs
24    more appropriately.  But for now I'm going with my rates.
25         Q    You're the rate guy, and they're your rates.  I

                                                              2930
 1    understand that.
 2              Could you turn to page 28 of your testimony,
 3    please?
 4         A    Um-hum.
 5         Q    And you're remarking here on the fact that the
 6    elimination of letter-flat differential in the basic ECR
 7    category has certain effects, and you say among them, and
 8    I'm quoting now, it does not result in a cross-subsidy of
 9    nonletters by letters.  You performed an implicit
10    contribution calculation to reach that conclusion, did you?
11         A    No, as a matter of fact, I didn't do an implicit
12    calculation.  I think in the footnote I just mentioned that
13    intuitively the ECR subclass has such a high cost coverage
14    that it's hard to imagine how not passing through a
15    differential at that tier would cause nonletters to go below
16    cost.
17         Q    I think that it is pretty intuitively obvious, but
18    you didn't actually do the calculation?
19         A    No.
20         Q    Did you do implicit coverage calculations for any
21    of the other rate coverages, particularly the discounts, for
22    example, that are above 100 percent?  Did you calculate
23    implicit coverages in those cells?
24         A    I did not calculate implicit coverages.
25              MR. WIGGINS:  Mr. Chairman, I have nothing

                                                              2931
 1    further.
 2              CHAIRMAN GLEIMAN:  Mr. Wells.
 3              MR. WELLS:  Thank you, Mr. Chairman.
 4                          CROSS EXAMINATION
 5              BY MR. WELLS:
 6         Q    Mr. Moeller, I'm Maxwell Wells of the Florida Gift
 7    Fruit Shippers Association.
 8              CHAIRMAN GLEIMAN:  Mr. Wells, could you pull the
 9    mike a teeny bit closer?  Or turn it on?  That's an
10    alternative too.
11              BY MR. WELLS:
12         Q    Would you look at page 10 of your testimony,
13    please, sir?
14              There at line 5 you talk about the Postal Service
15    desire to moderate rate increases.  Is that a desire that
16    you developed or is that an institutional desire?
17         A    As I said in a response to one interrogatory, that
18    was the general direction I received from my management.
19         Q    And at the bottom of the page you say the need to
20    temporarily increase any one rate category -- and that
21    similarly is the instruction you received from management?
22         A    Generally though we were talking about existing
23    rate categories.
24         Q    Then on page 13, line 14, you refer to two reasons
25    for holding the surcharge to 10 cents, the first to mitigate

                                                              2932
 1    the impact of a potential increase in rates on customers. 
 2    Is that your desire to mitigate or is that also the
 3    instructions you received from your management?
 4         A    Again, that's a general direction from management.
 5         Q    Is this to be applied only to standard A mail or
 6    to all categories of mail?
 7         A    It actually applies only to the commercial
 8    subclasses of standard mail.
 9         Q    Does it apply to any other class of mail?
10         A    I'm not familiar with the rate design of the other
11    classes to know what they were told or what they were
12    generally indicated that they should have as their maximum
13    increase.
14         Q    Were you told that this institutional
15    determination of the desire to mitigate would be limited to
16    the commercial aspects of standard A mail?
17         A    Well, that just became obvious as things started
18    piecing together that the nonprofit subclasses by virtue of
19    the costs and the required markup by virtue of the Revenue
20    Forgone Reform Act would have their increases forced above
21    10 percent.
22         Q    Was it your understanding that this mitigation
23    would not apply to Fourth Class mail?
24         A    Again I don't know what the percentage maximum
25    increase there was limited to.

                                                              2933
 1         Q    And on page 17 you refer to general guidelines. 
 2    Are these general guidelines the ones that you've just been
 3    referring to that came to you from Postal Service
 4    management?
 5         A    Can you give me a line?  I can't seem to find it.
 6         Q    Two.
 7         A    Line 2.  Yes, that's the same guideline.
 8         Q    And again your reference to the guideline on line
 9    11 is similarly the direction that you received from Postal
10    Service management and is not a guideline that you
11    personally developed.
12         A    Well, that next sentence goes on to say they're
13    kind of linked.  That 80-percent limit aids in achieving the
14    percentage rate increase or rate change guideline of 10
15    percent.  So they're tied together, but --
16         Q    But the guideline was given to you rather than
17    developed by you; is that right?
18         A    It was probably in conjunction with my discussions
19    with various people who have control over me.
20         Q    All right.
21         A    Management.
22         Q    On page 30 you refer here to the continuation of
23    destination entry discount to continue to encourage mailer
24    drop shipping.  Is that a Postal Service desire to continue
25    mailer drop shipment?

                                                              2934
 1         A    I think it's everyone's desire to have
 2    work-sharing done at a level that benefits customers and the
 3    Postal Service.
 4         Q    And drop shipping mail closer to the point of
 5    delivery benefits the Postal Service, doesn't it?
 6         A    I think it benefits everyone.  The less
 7    processing -- if the mailer can take on some work and get a
 8    discount for it and we avoid some work, that's a good thing.
 9         Q    Do you believe that this concept of encouragement
10    of destination entry discount and the encouragement of
11    mailer drop shipments is applicable to all classes of mail?
12         A    Again, I'm limited here to standard A. 
13    Work-sharing as a general principle is something that should
14    be considered wherever it makes sense.
15         Q    And mailer drop shipment would be encouraged in
16    all classes of mail.  Is that your understanding?
17         A    No.
18         Q    Are you going to discourage mailer drop shipment
19    for any class of mail?
20         A    I'm just speaking to standard A.  Let's just get
21    back to that.  I mean, I'm not speaking for any other
22    classes of mail.
23         Q    And in your discussions with management, was there
24    ever any suggestion that mailer drop shipment encouragement
25    would not apply to any other class of mail?

                                                              2935
 1         A    My discussions regarding this filing were limited
 2    to what I'm testifying to, which is standard A.
 3              MR. WELLS:  Thank you, Mr. Moeller.
 4              No further questions, Mr. Chairman.
 5              CHAIRMAN GLEIMAN:  Thank you, Mr. Wells.
 6              Mail Order Association of America.
 7              I don't see anyone representing that group in the
 8    room.
 9              That brings us to Nashua District et al.
10              MR. OLSON:  Thank you, Mr. Chairman.
11                          CROSS EXAMINATION
12              BY MR. OLSON:
13         Q    Mr. Moeller, William Olson representing Nashua,
14    Mystic, District, and Seattle, and I want to ask you to turn
15    first to your response to NDMS-T-36-4.
16         A    Okay.
17         Q    And particularly sub-part B where we talked about
18    the numbers that witness Crum provided to you and whether
19    those numbers took into account the fact that -- the issue
20    of machinability of some of these parcels.  Do you recall
21    that?
22         A    I recall the question, yes.
23         Q    Okay.  And your response says that the -- if -- if
24    I can paraphrase it -- says that the lower costs of
25    machinable parcels and the higher costs of non-machinable

                                                              2936
 1    parcels are averaged together in the costs that were given
 2    to you, correct?  Is that a fair summary?
 3         A    I don't think I say anything about the other
 4    parcels in there, but I -- I -- I guess that goes without
 5    saying.  I'm just -- this answer specifically just says
 6    that, to the extent parcels are -- are machinable, the cost
 7    effects of that machinability are baked into witness Crum's
 8    cost figures.
 9         Q    So, they're averaged together.  Rather than
10    presenting you with separate numbers for machinable parcels
11    and non-machinable parcels, he averaged them together,
12    correct?
13         A    It's the cost of all those pieces, regardless of
14    how they're processed.
15         Q    Okay.
16              And -- and that's really what we were trying to
17    get at in the -- in the question, because the question was,
18    is it not true that the failure to provide you with that
19    kind of information about the costs of -- of -- of
20    processing machinable versus non-machinable parcels makes it
21    impossible to build those kind of incentives into the rate
22    structure in your proposal, correct?
23         A    I'm trying to figure which comes first.
24              I mean we knew we were going to have a residual
25    shape surcharge, and we had not considered any

                                                              2937
 1    machinability, separate rate for machinable pieces, because
 2    we were looking for a simple rate structure, as simple as it
 3    can be, and -- but there is incentive for people to produce
 4    machinable parcels, and that is the -- the easier mail prep
 5    and eligibility that these pieces receive when they are
 6    prepared as machinable parcels.
 7              So, I think, even though there may not be a
 8    separate rate for machinability, there are preparation
 9    requirements that encourage pieces to be -- to meet the
10    machinable parcel definition.
11         Q    Can you elaborate on that?  I'm not sure I
12    understand what you mean.  It's not a lower rate but,
13    rather, there's some other benefit.  What's the other
14    benefit?
15         A    If you're a machinable parcel, it's my
16    understanding that the preparation guidelines for pieces
17    that are described or claimed to be machinable parcels by
18    the mailer, they can make them up to BMC, which -- rather
19    than three-digit separations.
20              There are many fewer separations to make if you're
21    a machinable parcel, because you'd make it up to BMC, and
22    you'd qualify for the three-/five-digit rate.
23         Q    Okay.
24              For people who are, for example, drop-shipping to
25    SCFs, that would have no benefit, I take it.

                                                              2938
 1         A    I'm not sure of the regulations, but I don't think
 2    you can drop-ship something that's only pre-sorted to BMC. 
 3    You can't drop-ship it deeper into the system.  I'm not
 4    positive, but that would seem to make sense to me.
 5         Q    You don't think you can drop-ship Standard A
 6    parcels to an SCF?  Is that --
 7         A    Oh, you can if you've prepared them in a way that
 8    that makes sense, but if it's prepared to BMC --
 9         Q    Oh, no, it wouldn't be prepared to BMCs if it's
10    drop-shipped to an SCF.  It would be prepared to SCFs,
11    correct?
12         A    No.  Pre-sorted is what I was speaking of, rather
13    than prepared.
14              If it's pre-sorted to BMC, you wouldn't want it
15    entered deeper into the system, just as if something is a
16    five-digit automation, you don't -- or -- or three-digit
17    automation, you don't want it entered at DDU, because then
18    it has to go back up.
19              That's why there are no DDU discounts in the
20    regular subclass, for instance.
21         Q    But for Standard A parcels that are pre-sorted for
22    and prepared for SCF entry, that are for -- that are to
23    destine within that SCF, there would be no benefit to them,
24    correct, from machinability in this non-cost way that you're
25    discussing?

                                                              2939
 1         A    I believe that's correct.
 2         Q    And irrespective of -- of whether the chicken or
 3    the egg came first on the decision to go with an exceedingly
 4    simple surcharge, isn't it true that the fact that you don't
 5    have the costs from witness Crum or from another source on
 6    the costs of machinable parcels versus non-machinable
 7    parcels make it impossible for you, sitting here today, for
 8    example, to tell me the -- the cost difference of those
 9    parcels and -- and the rate implications.
10         A    Obviously, he's the only that would speak to those
11    costs, and I think there was a discussion yesterday about
12    the -- the cost of machinable versus other pieces, if I
13    remember correctly, but I can't recite it.
14         Q    I couldn't -- I couldn't understand it or recite
15    it.  I haven't yet read it, but I will.  But I -- all I'm
16    trying to say is, if you don't have the costs, you can't
17    develop rates based on machinability, correct?
18         A    I don't generally offer -- I mean propose
19    discounts that -- that don't -- that there is nothing to
20    point to, no.
21         Q    Do you ever propose increases where there is
22    nothing -- no, I'm sorry, strike that.
23              Let me ask you to look at your response to
24    ValPak/Carol Wright T-35-22.
25         A    I'm sorry.  What was the number?

                                                              2940
 1         Q    T-35-22.  I believe that is your response, if I'm
 2    --
 3         A    Well, 35 --
 4         Q    Or 36-22, I'm sorry.
 5         A    Okay.
 6         Q    There you talk about how savings due to
 7    destination entry are calculated on a per-pound basis,
 8    correct?
 9         A    The numbers that I'm given are savings on a pound
10    basis, yes.
11         Q    Okay.  Do those savings, to your knowledge,
12    reflect both savings from transportation as well as from
13    mail processing?
14         A    That's my understanding.
15         Q    Okay.  Do you recall the source of those?  Library
16    reference 111?  Is that the source?
17         A    That's the source.
18         Q    Okay.  And do you recall the approximate
19    percentage of the mail that was transportation versus mail
20    processing?  If you don't, I can suggest something and ask
21    you -- I can -- as I understand it, it's about 80 percent
22    transportation, about 20 mail processing.  Does that sound
23    reasonable to you?
24         A    That's what you say.
25         Q    Okay.  Well, for purposes of the question, let's

                                                              2941
 1    assume that, okay?
 2         A    Okay.
 3         Q    Transportation costs, the 80-percent item, the
 4    big-ticket item here in the costs avoided --
 5         A    Uh-huh.
 6         Q    -- are distributed generally according to cube,
 7    aren't they?
 8         A    I hate to -- to beg off on this, but I'm not a
 9    transportation cost person to know how those costs are
10    distributed.
11         Q    Well, let me ask you to assume that, too.
12         A    Okay.
13         Q    Okay.  And if they are, can you tell me why the --
14    the savings of -- the transportation cost savings due to
15    destination entry are calculated on a pound basis instead of
16    a cube basis?
17         A    Like I say, I'm not sure why -- how the costs are
18    distributed.  I know that the discount that I propose has to
19    be off of some rate that's already in the -- in the
20    schedule, and the rates that are there are piece rates and
21    they are pound rates.
22              So, if you're going to discount off of those
23    rates, it would be on a piece or a pound basis.  In this
24    case, these have been calculated on a per-pound basis for
25    ease of use in proposing these rates.  I don't know how I

                                                              2942
 1    would do a cube -- how we would administer a discount that
 2    regards the cube of the piece.
 3         Q    Well, the point that I'm getting at is, if you're
 4    looking at a parcel and you're saying that the parcel is
 5    less dense than other pieces and therefore has greater cube
 6    and therefore has greater transportation costs associated
 7    with that cube to build up the costs, isn't it reasonable to
 8    expect that, when you look at destination entry, that you
 9    would take into account that the costs avoided from
10    transportation, which are distributed by cube, are the -- is
11    the proper method to knock off the costs that are avoided
12    rather than using pounds?
13              Now, that's probably the worst question I've ever
14    asked, but do you -- do you get the drift?
15         A    Well, are you asking that -- would it be more
16    appropriate to give a discount for drop-ship based on the
17    shape such that letter drop-ship discounts should be lower
18    than -- I mean we want to have a -- we want to have a -- a
19    uniform simple rate structure that gives drop-ship discounts
20    for all pieces.
21         Q    Right.  And -- and currently there is a drop-ship
22    discount which is a -- based on pounds, and it is for
23    letters, flats, and parcels, correct?
24         A    That's correct.
25         Q    Okay.

                                                              2943
 1         A    Well, I back -- I can amend that response.
 2              It's based on pounds when it's above the
 3    break-point weight.  There is a conversion when the piece
 4    weighs less than 3.3 ounces in order to give the discount --
 5    since that's a piece-rated piece, you want the discount to
 6    be off of that rate.
 7              It's a piece rate, so you want a piece discount
 8    off of it.  So, there needs to be some conversion of those
 9    pound-related savings to piece-related --
10         Q    Right.
11         A    -- and the assumption built into the rate design
12    is that those letters or non-letters weigh 3.3 ounces.
13         Q    Right.  You've explained that in response to a
14    number of interrogatories, I think.  So, I -- I'm aware of
15    that.
16              But I guess what I'm saying is, is it fair to
17    impose a surcharge on a parcel on the theory that it has
18    greater density and, therefore, greater transportation costs
19    and, yet, when considering drop-ship discounts, not to
20    reflect the real cost savings that are incurred because that
21    same parcel does have greater density?
22         A    I think, first of all, you said less density -- or
23    you said greater density and greater transportation costs,
24    but I'll assume you meant less density, greater
25    transportation costs for --

                                                              2944
 1         Q    Yes.
 2         A    -- parcels.
 3         Q    Thank you.
 4         A    I think this gets back to the simplicity issue,
 5    and just as we don't have different destination entry
 6    discounts for letters versus non-letters, which there may be
 7    some cube difference there, we don't plan to have different
 8    drop-ship discounts based on shape, be it parcel or flat.
 9         Q    Well, you are proposing a parcel surcharge in this
10    docket, correct?
11         A    Yes.
12         Q    So if fairness and equity is one of the criteria
13    of the Act you can understand why I had asked you the
14    question, can't you?
15              I am trying to get to a consistent approach, one
16    that if you are going to build the costs up based on parcels
17    having greater cube, then it seems to me fairness and equity
18    might require some looking at the fact that 80 percent of
19    the cost savings by destination entry are due to
20    transportation, and if we are going to take a look at cost
21    savings from destination entry we ought to give account to
22    the fact that the parcels are saving much more than average.
23         A    Well, to the extent that's true and to the extent
24    that parcels are drop shipped deep into the system -- I am
25    not sure they even are -- I fall back on the fact that that

                                                              2945
 1    buildup of costs you are talking about is a significant
 2    buildup of costs.
 3              It's a large amount and we pass through a very
 4    small amount of it, so that is my effort at fairness and
 5    equity there is that, and add this to the list, to the
 6    extent they are denied or their drop ship discounts are
 7    perhaps lower than they would be if you had distinct drop
 8    ship discounts by shape then at least they are not having
 9    their rates pushed up by 100 percent passthrough of Witness
10    Crum's large cost difference.
11         Q    Which you have taken as a given that Witness
12    Crum's testimony with respect to his belief as to what that
13    cost difference is, you have accepted that number from
14    Witness Crum?
15         A    I have seen that number in his testimony.  I saw
16    it in the parcel classification reform case.
17         Q    Well, it was a different number there.
18         A    Well, it was different but it had one thing in
19    common -- they had one significant thing in common, that
20    they were large numbers.
21         Q    Okay.  Let me ask you to take a look at your
22    response to NDMS-36-1.
23         A    Okay.
24         Q    We asked you about the average cost of a Standard
25    A ECR parcel in this question and an average revenue of a

                                                              2946
 1    Standard A parcel, and you referred to Witness Crum's
 2    response to certain other interrogatories, correct?
 3         A    Yes.
 4         Q    Those interrogatories, of course, don't have those
 5    numbers in them, but they refer to the CD ROM version of
 6    Library Reference H-108 as amended, where supposedly some of
 7    those numbers are, correct?
 8         A    I know -- I accept that it -- I don't have it in
 9    front of me, but I'll accept your --
10         Q    Okay -- which I am still trying to extract, I'll
11    add, so I can't ask you with respect to the specifics of the
12    numbers but in subpart (c) you say what percentage 10 cents
13    is of the difference between revenues and costs is not
14    relevant to the rate design, and by that I take it to mean
15    not relevant to your parcel surcharge, correct, or the
16    amount of your parcel surcharge?
17         A    That's correct.
18         Q    Okay, and as a matter of fact, wouldn't it be
19    accurate to just take the first part of that sentence off
20    and just say that the difference between per piece -- I'm
21    sorry, the difference between average cost and average
22    revenue is not relevant to your parcel surcharge?
23         A    The parcel surcharge was developed by applying a
24    passthrough to the cost difference as measured by Witness
25    Crum.

                                                              2947
 1              There was nothing involved in the rate design that
 2    suggested it should be done here, what is suggested here, as
 3    far as comparing the revenue per piece and the cost per
 4    piece.
 5              It is strictly a recognition of a cost difference.
 6         Q    No, I understand that you didn't do it.  As a
 7    matter of fact, that is what I am trying to point out, and I
 8    am trying to get to your sentence, where you say that the --
 9    I think this is what the sentence can be fairly interpreted
10    to mean, and I am asking if this is a reasonable rendition,
11    that the difference between the average revenue of a
12    Standard A parcel and the average cost of a Standard A
13    parcel is not relevant to setting the parcel surcharge in
14    the way that you did it, the way that you set it, correct?
15         A    The way I said it, no.  I think this issue came to
16    attention because people somehow feel that perhaps that
17    revenue is below the cost and that troubles people and they
18    want it recognized in the rate structure.  The way the
19    surcharge was developed though was a measure of the cost
20    difference between flats and these pieces and a small
21    passthrough applied to that cost difference.
22         Q    Have you ever looked at the average revenue of,
23    say, a standard A regular parcel and compared it to the
24    average cost of a standard A regular parcel?
25         A    Well, as a matter of fact, Witness Crum and I

                                                              2948
 1    discussed this yesterday because it did come up and you can
 2    use some of the information in the tables in his testimony,
 3    too, to get such figures and so, yes, I have.
 4              To answer your question, I have looked at that
 5    based on my discussion with him yesterday.
 6         Q    Good thing he came first as a witness.
 7              Do you consider that comparison -- do you stick by
 8    your statement that that comparison is not relevant in
 9    setting the parcel surcharge?
10         A    It's not relevant to how the surcharge is
11    proposed.  I would imagine that if some people saw these
12    figures and if the revenue was lower than the cost, that
13    would bolster the argument that you should have a surcharge.
14         Q    And hypothetically if the revenues were larger
15    than the costs that would -- it would indicate the reverse? 
16    Again, I'm saying hypothetically.
17         A    No, hypothetically it would not --
18         Q    It would not indicate that?
19         A    -- necessarily say that you would do that.  The
20    point of the surcharge isn't to assure cost coverage or that
21    the revenues exceed the costs; it is to recognize cost
22    differences between these two groupings of mail.
23              I am not sure but I think in R90 when the
24    letter/nonletter differential was put into place, I am not
25    sure it was done because it was a feeling nonletters were

                                                              2949
 1    not necessarily covering their cost.  So I don't think a
 2    distinction in the rate has as a requirement for that
 3    distinction that the piece which happens to be incurring a
 4    push-up on its rates is not covering its cost.
 5         Q    Right, but to the extent that there has been an
 6    interest in creating a standard A parcel surcharge merely
 7    because of a perception that the parcels on average were not
 8    covering costs, at least those people would no longer
 9    necessarily be as enthusiastic about a parcel surcharge,
10    wouldn't you say?
11         A    If that is the sole reason someone thinks you
12    should have a surcharge and, hypothetically if they were to
13    find that, indeed, those pieces aren't covering -- or those
14    pieces are covering their cost, then maybe that individual
15    may not think it's necessary.
16         Q    Thank you for that admission.
17              Let me ask you to take a look at your response to
18    NAA-3.
19         A    Okay.
20         Q    We started talking about this before when you said
21    my analysis of cost savings of destination entry of parcels
22    could be added to the list of reasons why you propose a low
23    shape passthrough, I wonder if you might go through some of
24    those reasons and give me your thoughts as to why -- as to
25    your rationale for a relatively low shape passthrough there.

                                                              2950
 1              And it might be useful to just go through.  Did
 2    you apply the criteria of the act to choosing your
 3    relatively low shape passthrough?
 4         A    I am confused on which shape passthrough you are
 5    talking about.
 6         Q    On the parcel surcharge.  I'm sorry.
 7         A    Oh, okay.  And the question regarding the parcel
 8    surcharge passthrough was?
 9         Q    Did you apply the criteria of the rate setting
10    provisions or the classification section -- classification
11    setting section of the act or both?
12         A    I think, as a whole, the rates we've proposed,
13    which includes the parcel surcharge are -- I have to choose
14    the right -- you guys are the lawyers; I don't know what the
15    exact term is.  But they are consistent with the act.
16         Q    Did you go through the -- well, let's just take
17    3622-B for a second and walk through it real quick.  Did you
18    consider fairness, fair and equitable, when you came up with
19    the parcel surcharge?  I think that's in your testimony,
20    correct?
21         A    Yes.
22         Q    Value of service?
23         A    I think -- I mean, I am confused on what some of
24    these criteria are for, actually.  I think that most of
25    these speak toward Dr. O'Hara's work in setting -- proposing

                                                              2951
 1    cost coverages or markups for these subclasses.  I didn't --
 2         Q    Let me ask you, do you think the standard A parcel
 3    surcharge that you are proposing is a rate category or
 4    subclass or something else?
 5         A    It's not a subclass.  I'm not sure how to define a
 6    rate category.  There's different ways of maybe splitting up
 7    the rates and saying individual rates or categories are.  Is
 8    SCF entry a category or is basic SCF entry, basic automation
 9    letters SCF entry a category?  So it's either a category or
10    something else.
11         Q    And do you believe if it's a rate category you
12    should apply all of the factors of the act?
13         A    Again, I say that our proposal is consistent with
14    the act.  Whether I go through on a checklist and look at
15    each individual one and see if it applies to this particular
16    part of the proposal, that's -- I'm not sure if that was
17    something that was supposed to be done.  I can tell you I
18    did not sit down with a checklist and cross off each of
19    these things with respect to every individual rate cell
20    here.
21         Q    But did you check off each of the criterion of
22    3622-B with respect to the parcel surcharge as you developed
23    your proposal?
24         A    I think I said I did not go through a checklist on
25    each individual element of the rates for these subclasses.

                                                              2952
 1         Q    Including the parcel surcharge?  That's all I'm
 2    trying to establish.
 3         A    Yes, but I really don't want that to be couched in
 4    some way that says I didn't consider the act in proposing
 5    these rates.
 6         Q    No, I think your testimony is clear.
 7              Did you consider simplicity of structure?
 8         A    Yes.
 9         Q    With respect to the parcel surcharge?
10         A    Yes.
11         Q    And how?
12         A    Well, there's probably a sentence in my testimony
13    that would speak to this.  Maybe on page 11.  That's where
14    it starts.
15              Page 12, line 17, the Postal Service proposes a
16    simple per-piece surcharge within the existing nonletter
17    rate structure as opposed to completely replacing the rate
18    designs for standard regular and enhanced carrier route mail
19    with separate rate structures for flats and the remaining
20    pieces and nonletters that are not flat-shaped.
21         Q    So you're saying that in having one surcharge for
22    parcels of all sorts, that -- and then a relatively low
23    passthrough of that cost-based differential that you took
24    from Witness Crum that that met your -- the criteria of
25    simplicity of structure?

                                                              2953
 1         A    Proposing the surcharge in that manner is
 2    consistent with simplicity of rate structure.
 3              MR. OLSON:  I have nothing else.  Thank you, Mr.
 4    Chairman.
 5              CHAIRMAN GLEIMAN:  Thank you, Mr. Olson.
 6              Before we go on to the next party who wishes to
 7    cross examine, I think we're going to take a 10-minute break
 8    at this point.
 9              I noticed that the representative of the Mail
10    Order Association of America is here.  Mr. Todd, do you wish
11    to cross examine the witness?
12              MR. TODD:  I do not at this time.  If I do
13    anything, it will be followup.
14              CHAIRMAN GLEIMAN:  Thank you.
15              Mr. Todd indicated that he wanted to reserve his
16    rights for followup.
17              If someone is here from the National Federation of
18    Nonprofits -- doesn't appear to be -- if they show up before
19    the 10 minutes, they'll be next.  If not, then we'll move on
20    to the Newspaper Association of America.
21              Thank you.
22              [Recess.]
23              CHAIRMAN GLEIMAN:  Mr. Cooper, did we lose the
24    witness?  We could probably get through the cross
25    examination very quickly if we started asking the questions

                                                              2954
 1    now.
 2              Per our discussion, Mr. Baker, you're next, and
 3    after lunch, we're going to pick up with the National
 4    Federal of Non-Profits.
 5                          CROSS EXAMINATION
 6              BY MR. BAKER:
 7         Q    Good morning, Mr. Moeller.
 8         A    Good morning.
 9         Q    For the record, I'm Bill Baker, appearing for the
10    Newspaper Association of America.
11              And your task was a simple one, wasn't it, Mr.
12    Moeller?  Your job was to set the rates that the
13    government's going to charge in order to recover from
14    Standard A mail the amount of revenue set by Dr. O'Hara.  Is
15    that right?
16         A    My job was to propose the rates that the Postal
17    Service wanted to achieve that objective.
18         Q    The Postal Service is still an agency of the
19    government, isn't it?
20         A    I don't know the distinction of what the
21    relationship with the Federal Government is.
22         Q    And the rates that you present for Standard A
23    commercial, regular and ECR, are interrelated with one
24    another, are they not?
25         A    The rates for --

                                                              2955
 1         Q    -- commercial, regular and ECR, and the rate
 2    categories within them are interrelated to some degree.
 3         A    They are two distinct subclasses.  In the rate
 4    design for those two distinct subclasses, I am mindful of
 5    rate relationships between those two subclasses.
 6         Q    And in establishing the rates for each subclass in
 7    turn, you made use, did you not, of a spreadsheet that would
 8    allow you to adjust cost differentials and pass-throughs and
 9    actual rates so they all work out nicely.  Is that correct?
10         A    There were two spreadsheets filed which underlie
11    my work papers for Standard A commercial and nonprofit.
12         Q    Uh-huh.  And was the one for commercial mail 202?
13         A    The library reference with the diskette for those
14    spreadsheets was library reference 202.
15         Q    And in setting the rates for any particular
16    subclass or any particular rate category within a subclass,
17    if you adjusted one factor in your spreadsheet, that could
18    lead to implications elsewhere in the same subclass as
19    rates.  Is that right?
20         A    Individual decisions that need to be made in the
21    rate design that are entered into that spreadsheet could
22    have an effect of changing other cells in that spreadsheet.
23         Q    And just to illustrate the point, could you turn
24    to your answer to NAA-38?
25              And if you've had a chance to look that over, here

                                                              2956
 1    we had asked you what might happen if you pass through a
 2    greater percentage of the shape differential and Standard A
 3    regular other at a particular level, might that have a
 4    particular pass-through effect elsewhere.  Is that right?
 5         A    The question asks --
 6         Q    Uh-huh.
 7         A    -- about a particular pass-through, one that's not
 8    involved in this --
 9         Q    Uh-huh.
10         A    -- the rate design, as a matter of fact.
11         Q    Uh-huh.
12         A    But yes, it asks sort of a hypothetical what-if.
13         Q    Right.
14              And the sentence that was particularly of interest
15    to me right now was about halfway in your answer, where you
16    said, presumably, the -- the question posed would result in
17    an even lower proposed rate for five-digit automation, and
18    then you added, but may cause other rates to change in some
19    other manner, essentially.
20         A    Right.
21         Q    And that simply illustrates the point here that,
22    if you make an adjustment at one place in the spreadsheet,
23    some other things could happen elsewhere that need to be
24    taken into account.  Is that right?
25         A    That's correct.

                                                              2957
 1         Q    Is this kind of like a bowl of Jello, where you
 2    push one place and it jiggles somewhere else?
 3         A    Well, I don't know if you've taken the opportunity
 4    to play with the spreadsheet, but it's fun, and you can --
 5    you can -- the rate design formula is set up in a way that
 6    has these inputs into it that you can play to your heart's
 7    content with different pass-throughs, different pound rates,
 8    whatever, to -- to see what the outcome of that is.
 9         Q    And it's true enough, then, that when you do --
10    you change one thing, something else will change, changes
11    flow throughout and can have effects elsewhere in the
12    spreadsheet.
13         A    Can have effects.  Sometimes there's no effect.
14         Q    And the -- my Jello bowl would -- or your
15    spreadsheet is library reference 202, which is diskette
16    form.
17         A    Yes.
18         Q    And if I put your -- that diskette in my computer
19    and ran the appropriate program and push print, would I get
20    your work sheet one, work papers one?
21         A    I don't know if you're familiar with Excel, but
22    there are a number of work sheets within that spreadsheet
23    that are tabbed at the bottom of the screen if you were to
24    call up the file --
25         Q    Uh-huh.

                                                              2958
 1         A    -- and it is set up that, if you were to click on
 2    one of those particular pages of the work papers and hit
 3    print, in most cases you would get what's on that page.
 4         Q    Uh-huh.  So, is it possible to print out your work
 5    papers from library reference 202 if you know what you're
 6    doing?
 7         A    I hope so.
 8         Q    Okay.
 9         A    I believe it should be.
10         Q    Actually, we were able to do so, and I just wanted
11    you to confirm that.  If you do it right, the work papers
12    and the diskette amount to the same thing.
13         A    Just for point of interest, there are a few pages
14    that have -- a few of those sheets that have three
15    individual pages on them.  In those cases, it's usually the
16    -- the calculation of the revenue like before rates or after
17    rates.
18         Q    Okay.
19              I'd like to move to a subject -- and you kind of
20    got into a little bit with counsel for Nashua-District,
21    etcetera, and in doing so, I'd like you to turn to your
22    answer to ValPak/Carol Wright number one, and in that
23    question, you were -- had been asked whether principles of
24    Ramsey pricing had -- were relevant to your rate design, and
25    as I understand your answer, your question to the specific

                                                              2959
 1    question was a no or close to a no.  Is that right?
 2         A    I don't apply the principles --
 3         Q    Okay.
 4         A    -- in my rate design.
 5         Q    And then you state -- go on to state, in the last
 6    sentence of the answer, that the relevant guidelines to be
 7    followed are -- in Standard A subclasses -- were described
 8    throughout your testimony, correct?
 9              Now, I did not notice in your testimony a specific
10    reference to the statutory factors found in 36-22.  Did I
11    overlook them or did you not -- or did you specifically
12    state them or not?
13         A    Well, if you're speaking of them in the context of
14    how Ramsey pricing would be used --
15         Q    No.  I'm thinking in terms of the context of what
16    you were thinking of, what operational -- what guidelines
17    and considerations were in your mind as you set the rates.
18         A    Well, I think, if you were to read through the
19    testimony, you will find that there are references to
20    fairness and equity and simplicity and effect on mailers in
21    terms of rate shock --
22         Q    Uh-huh.
23         A    -- those type of things.
24         Q    So, the -- in designing your rates, you do try to
25    take into account the statutory factors.

                                                              2960
 1         A    Not the ones that involve, you know, the cost
 2    coverage issues, but --
 3         Q    And did you, in fact, attempt to apply the ones
 4    you felt appropriate in designing these rates?
 5         A    Again, I come back to my -- you described it as a
 6    bowl of Jello.  I should have taken issue with that.  It
 7    sounds demeaning in some way.  But --
 8         Q    I like Jello, actually.
 9         A    There are a number of items in -- in there, number
10    of inputs, number of calculations, number of outputs, and on
11    the whole, when you look at that package of rates and the
12    rate relationships in there and the various decisions, I
13    feel comfortable, and the Postal Service does, that they are
14    consistent with the act.
15         Q    I want to look at some other things that you
16    mentioned in your testimony and answers that were guidelines
17    apparently to what you did.
18              Was one of them the concern about the relationship
19    between ECR basic letters and standard regulation automation
20    five-digit letters?
21         A    There was -- I kept an eye on that rate
22    relationship because I felt that it was important that it
23    come out the way it did.
24         Q    Right, and the point is it was important in the
25    final rates that the rate for the standard regular

                                                              2961
 1    automation five-digit were less than the rate for the ECR
 2    basic letter rate?
 3         A    If that could be achieved without violating any
 4    other number of guidelines that were involved in the rate
 5    design, that would be a good outcome.
 6         Q    And that outcome was desirable from the point of
 7    view of the institution because of operational
 8    considerations that I believe Mr. Moden has addressed as
 9    well?
10         A    That was a desirable outcome, yes.
11         Q    In response to NAA-12 where it said that you were
12    advised by your management that an upper limit of a 10
13    percent rate increase was appropriate, do you recall that?
14         A    Well, let me find it here.
15              That question discusses that 10 percent guideline,
16    yes.
17         Q    And I believe you stated this morning that you
18    don't know whether all the other pricing witnesses were
19    given a similar constraint by management?
20         A    I assume there was direction on some constraint. 
21    Whether it was similar to the 10 percent, if you are talking
22    about the actual figure, I don't know that.
23              I would imagine that there was concern from
24    management about rate increases.
25         Q    The 10 percent guideline that you heard was --

                                                              2962
 1    affected Standard A?
 2         A    Yes, it -- that particular figure was directed at
 3    me regarding Standard A, commercial subclasses.
 4         Q    Do you in fact know whether any witness has
 5    testified to a higher constraint on his rates -- 16 percent
 6    or 11 percent figure, as far as that witness's rates?
 7         A    I know that there are other witnesses that have
 8    higher, or at least one witness who has a higher maximum.
 9         Q    If you look at each combination of discount and
10    destination entry point as a separate rate cell, you did not
11    quite meet the 10 percent in all cases, did you?
12         A    That's correct.  The 10 percent was the
13    nondestination entered pieces.
14         Q    Did you receive any instruction from management as
15    to the size of any rate decreases?
16         A    Well, it's nice that we are in a world where we
17    actually think about those kind of things.
18              I don't remember a specific guideline on the
19    amount of a decrease.
20         Q    I noticed in ValPak/Carol Wright-2 you added that,
21    you said that efficient component pricing is also an
22    important principle to be applied in rate design, correct?
23         A    Yes, but I am just thinking I should have added to
24    my previous response the fact that I was not given a
25    specific figure doesn't mean that when the people reviewing

                                                              2963
 1    the rates I was suggesting we propose, that they wouldn't
 2    have objected if they saw something that was in their mind
 3    too large of a decrease.
 4         Q    Okay -- and no on did so.
 5         A    No one stopped me from doing anything.
 6         Q    Okay.  Back to efficient component pricing.
 7              Is that also a principle that you would attempt to
 8    apply as you felt appropriate in rate design?
 9         A    My response to (b) says that I think it is an
10    important principle for design of rates.
11         Q    It is one that you keep in mind as you do it?
12         A    That's correct.
13         Q    Okay, and is the notion of lowest combined cost
14    between mailers and the Postal Service another principle
15    that you keep in mind in designing rates?
16         A    Yes.
17         Q    Okay.  I want to move then from sort of principles
18    to actual inputs.
19              One of the inputs you had was Dr. O'Hara's
20    institutional cost assignment, correct?
21         A    Dr. O'Hara gave us target coverages that our rates
22    should achieve.
23         Q    Did you feel free to go back to him and say I
24    really should be achieving more or less than what you told
25    me?

                                                              2964
 1         A    I don't recall ever going back to him and saying
 2    this is too high or this is too low.
 3              I mean it was an interactive process and we all
 4    discussed a lot of things, various implications of various
 5    cost coverages.
 6         Q    Okay.  Another input to you was also Witness
 7    Daniel's cost estimates, correct?
 8         A    Witness Daniel has an exhibit in her testimony
 9    that summarizes cost inputs from many cost witnesses that I
10    use, yes.
11         Q    Did Dr. Tolley provide you with volume
12    projections?
13         A    Yes.
14         Q    Okay.  You also in your work papers make use of
15    billing determinants.  Are those also an input to you that
16    you took as pretty much a given as what the billing
17    determinants were in the base year?
18         A    The billing determinants are what the billing
19    determinants are.
20         Q    I want to -- we touched briefly on a subject I'm
21    returning to now, and that's the rate for enhanced carrier
22    route basic letters.  How did -- and the concern here is the
23    crossover between the ECR basic letters and the standard
24    regular automation five-digit letter rate; correct?
25         A    That's the concern about -- right.

                                                              2965
 1         Q    Okay.
 2         A    Okay.
 3         Q    And counsel for AMMH spoke about -- talked to you
 4    about it earlier today -- the migration of pieces.
 5         A    Yes.
 6         Q    Is that crossover concern a reason why you did not
 7    pass through any of the cost difference between letters and
 8    flats at the ECR basic level?
 9         A    I imagine that's addressed specifically --
10         Q    Look at OCA 25, I think subpart G.
11              Have you had a chance to review that?
12         A    Yes, I have.
13         Q    It's a lengthy answer, but let me see if I can --
14    if you would agree with the proposition that in this case
15    you chose to not recognize the letter-flat difference at the
16    ECR basic level because you believed it was more important
17    to set the ECR letter rate high enough that letters would
18    migrate into the automation category of regular.  Is that
19    correct?
20         A    Well, I think this answer speaks for itself.
21         Q    Um-hum.
22         A    I mean, I hate to -- it was very carefully worded,
23    and I don't want to attempt to do something --
24         Q    Um-hum.
25         A    And not state it --

                                                              2966
 1         Q    Um-hum.
 2         A    Correctly as it is here.
 3         Q    Um-hum.
 4         A    The effect of having a zero-percent passthrough at
 5    that basic tier --
 6         Q    Um-hum.
 7         A    Is that it produces a letter rate which comports
 8    with this rate relationship objective --
 9         Q    Which is important to the Postal Service in this
10    case.
11         A    Yes.
12         Q    Yes.  That's all I wanted to get.
13              I'd like you to move to a different subject and
14    turn to page 16 of your testimony, and I direct your
15    attention particularly to lines 17 and 18.
16         A    Okay.
17         Q    And here you mention there are significant changes
18    in costing methodology that other witnesses are proposing
19    that the cost differential supporting many of the existing
20    discounts have changed significantly.  Is that right?
21         A    That's what it says.
22         Q    Right.  And as a result of that you are proposing
23    some what you call unconventional passthroughs; is that
24    correct?
25         A    That's correct.

                                                              2967
 1         Q    And if you turn to page 48 of your testimony that
 2    was revised I guess last Friday you present there
 3    passthroughs both as filed and as they now are given updated
 4    cost information; correct?
 5         A    The second column are the passthroughs that are
 6    implicit given that the rates are not changing but the costs
 7    have been revised.
 8         Q    Okay.  Right.  That's what you mean by implicit.
 9              And the regular subclass presort letter category
10    where the as-filed passthrough was 165 percent and is now
11    167, is that an example of the unconventional passthrough?
12         A    That would be an unconventional passthrough; yes.
13         Q    Is the reason for these unconventional
14    passthroughs the new mail processing cost testimony of
15    Professor Bradley?
16         A    I don't know which specific changes in the cost
17    methodology flow through to these particular costs for these
18    particular passthroughs to know what's driving them.
19         Q    Um-hum.
20         A    All I know is that there were significant changes
21    and that was one of them, or the volume variability study
22    was one of them.
23         Q    Which affected mail processing costs.
24         A    I assume so.
25         Q    Um-hum.

                                                              2968
 1         A    I mean, that can --
 2         Q    Um-hum.  These unconventional passthroughs are
 3    mostly in regular subclass; correct?
 4         A    As opposed to ECR?
 5         Q    Yes.
 6         A    Yes.  But as we discussed before, they may
 7    indirectly affect ECR insofar as they set the automation
 8    five-digit letter rate, which has an influence on what you
 9    proposed for the ECR basic letter rate; correct?
10         Q    The result of these passthrough decisions affect
11    that five-digit letter automation rate.
12         A    Um-hum.  Yes.
13         Q    Yes.
14         A    Like you said, it's a bowl of Jello, and
15    everything has the effect of changing things.
16         Q    Okay.
17              Now, in NAA-10, we asked what if the new mail
18    processing methodology of Professor Bradley was not accepted
19    by this commission, and you may turn to that -- it might be
20    helpful if you could turn to that.
21         A    Well, you'll have to forgive me.  I didn't catch
22    which one it was.
23         Q    NAA-10.
24         A    Okay.  I see that question.
25         Q    Okay.  And we asked you, okay, what if the

                                                              2969
 1    commission does not accept the -- the -- Professor Bradley's
 2    testimony, and I understand that you cannot tell us what
 3    rates you might have proposed if you had not had that, but
 4    what I would like you to review with me is the tendencies.
 5              I take it that one tendency that you state in the
 6    answer is that pre-sort-related cost differentials would get
 7    smaller.  Is that correct?
 8         A    The answer specifically says --
 9         Q    Well --
10         A    -- that it's not --
11         Q    I mean increase.  I -- I misspoke.  That if we
12    have greater volume -- mail processing volume variability,
13    the tendency would be to increase the pre-sort cost savings.
14         A    You have greater volume variability?
15         Q    Yes.  If you had greater volume variability, then
16    would the costs avoided to the Postal Service be larger or
17    smaller from pre-sortation?
18         A    Well, I probably shouldn't get into the whole
19    volume variability thing, but if it's closer to 100 percent
20    volume variable, I think it's the opposite of what you were
21    saying.  The greater the volume variability -- I don't know. 
22    I -- I -- I defer to the volume variability people.
23         Q    Do you think the direction -- do you -- do you
24    --can you tell me whether, in the event the commission did
25    not accept Professor Bradley's changes and reverted to the

                                                              2970
 1    prior methodologies, would -- and we had no change in your
 2    proposed rates, so we're keeping your proposed rates -- do
 3    you know whether that would make the pass-throughs in
 4    standard regular closer to conventional percentages or still
 5    more unconventional?
 6         A    I can't speculate what --
 7         Q    Okay.
 8         A    -- undoing Dr. Bradley's work would do to my
 9    pass-throughs.
10         Q    Okay.
11              I want to move on and talk about the pre-sort
12    tree, and so, could you turn to NAA-8?
13         A    Okay.
14         Q    This is the Jello bowl, right?
15         A    This is part of it.
16         Q    In graphical form.  All right.
17              I want to just go through this and make sure I
18    understand it right.
19              Now, you have here presented in NAA-8 the pre-sort
20    trees for Standard A regular and Standard A ECR, correct?
21         A    Yes.
22         Q    And let's look at the bottom or part B of your
23    answer, which is the pre-sort 2-E for Standard A ECR.  As I
24    understand the exhibit, the numbers you've put in brackets
25    are the current rate differences in today's rates.  Is that

                                                              2971
 1    right?
 2         A    That's what the response says, yes.
 3         Q    Okay.  And the numbers outside the box are the
 4    proposed rate differences -- differences, not actual levels
 5    but differences.
 6         A    Outside of the box or above non-vertical lines are
 7    proposed rate differences.
 8         Q    And the numbers inside the box are the cost
 9    differences presented in this proceeding.
10         A    That's correct.
11         Q    All right.  This is all very abstract, but for
12    example, let's look at the difference between ECR basic
13    letters and ECR high-density letters.  Today, this table,
14    assuming it's correct, shows that the rate difference is 0.8
15    cents, correct?
16         A    Yes.
17         Q    And the proposal is to increase that rate
18    differential to 2.1 cents, correct?
19         A    That's the rate difference proposed.
20         Q    Yes.  And until you revised your testimony on
21    October 1st, I think it was, or 3rd, that proposed rate
22    difference represented a 100-percent pass-through of the
23    newly calculated cost difference of 2.1 cents, correct?
24         A    I'll look at my work papers.  Yes.
25         Q    And in fact, now it's about 95 percent, I believe,

                                                              2972
 1    if you looked at page 48 of your testimony.  Well, no, it
 2    won't show -- it does show it there, but I believe the
 3    difference is closer to 95 percent of the cost difference
 4    now, implicit.
 5         A    The implicit.
 6         Q    Uh-huh.
 7         A    Yes.  It's 95 percent.
 8         Q    Do you recall from MC95-1 what the cost difference
 9    was between the basic and high-density ECR letters?
10         A    I don't recall on the top of my head.
11         Q    Would you accept subject to check that it was
12    approximately .8 cents?
13         A    I will accept your --
14         Q    Yes.  And that would -- and thus the rate that's
15    currently charged would reflect a 100-percent pass-through
16    of that difference if that was, in fact, the number.
17         A    If, as you say, the cost difference is .8 cents
18    and the rate difference is .8 cents currently, then that's
19    100 percent pass-through.
20         Q    Do you know why the cost difference has increased
21    to 2.1 or 2.2 cents in this proceeding from where it was two
22    years ago?
23         A    I think I address this in my testimony where I
24    describe -- just bear with me here a second.  Yes, on page
25    29 of my testimony, I -- I mention that the costs which I

                                                              2973
 1    use have as an input a cost study --
 2         Q    Uh-huh.
 3         A    -- that -- and it -- that is different from the
 4    MC95 cost study.
 5         Q    And it was different because it included a
 6    different category of costs -- right? -- included mail
 7    process costs as well as just -- as delivery costs.  In the
 8    prior study, it depended solely on delivery costs, correct?
 9         A    I believe that's what my testimony --
10         Q    That's your understanding of what -- what was
11    going on.
12         A    Yes.
13         Q    Did you give any consideration in your rate design
14    to phasing in this increase in cost over time by a
15    less-than-100-percent pass-through at this -- in this -- in
16    this case?
17         A    No.
18         Q    Why not?
19         A    Well, the rates produced by choosing the
20    pass-throughs that -- that were chosen and put into the
21    spreadsheet resulted in rates that met the general
22    guidelines that -- that I was following and met the approval
23    of management and they were proposed.
24         Q    Well, suppose there were an error of some kind in
25    the estimated cost differences between ECR, basic, and

                                                              2974
 1    high-density saturation or the -- well, ECR, basic, and
 2    high-density -- and that the correct cost estimate showed a
 3    smaller difference between the two, a smaller cost
 4    difference.
 5              Would the tendency of that be to move the basic
 6    and high-density rates closer together?
 7         A    Well, there's a hypothetical here that I can't
 8    address.  I mean I don't know what that cost change would
 9    be.
10         Q    Right.
11         A    I -- I show that, in other circumstances, the
12    pass-throughs that were --
13         Q    Uh-huh.
14         A    -- implied by the cost changes were still
15    acceptable or still --
16         Q    Uh-huh.  Right.
17              THE REPORTER:  Were still what?
18              THE WITNESS:  Acceptable.
19              BY MR. BAKER:
20         Q    But if the cost difference was smaller and you
21    kept the proposed rate, then you would have a pass-through
22    of greater than 100 percent.
23         A    Well, I think we can look at what actually
24    happened if you want to see that sometimes the pass-throughs
25    do increase, sometimes they decrease, depends on what the

                                                              2975
 1    change in the --
 2         Q    Right.  And the assumption here was that the cost
 3    difference was smaller rather than bigger.
 4         A    I would imagine you don't even need a hypothetical
 5    situation for that if you were to go to one of the actual
 6    ones that happened and showed that -- that, where the
 7    implicit pass-through or the implied pass-through increased,
 8    it was probably because that cost differential narrowed.
 9         Q    Uh-huh.  That's the direction, mathematically.
10         A    Yes.
11         Q    Okay.
12              Maybe holding your finger at -- on NAA-8 and just
13    -- I would quote from your testimony at page 29, where you
14    state that there was a 72-percent pass-through between
15    high-density and saturation non-letters by virtue of the
16    pre-sort tree in this case, and you state on page 29 that
17    that 72-percent pass-through is driven by the other -- two
18    other pass-throughs in your pre-sort tree, correct?
19         A    The pass-throughs on the side of the tree that
20    involve non-letters --
21         Q    Uh-huh.
22         A    -- and the different tiers within ECR --
23         Q    Uh-huh.
24         A    Those pass-throughs fall out from the other
25    pass-through decisions.

                                                              2976
 1         Q    Right.
 2              So, in particular, if I'm looking at -- on the
 3    bottom of NAA-8, right side of the pre-sort tree, there's a
 4    figure of 1.2, which is the proposed rate difference between
 5    saturation and high-density, correct?
 6         A    Yes.
 7         Q    And that number happened because you had already
 8    fixed the corresponding differential on the left side of the
 9    pre-sort tree for letters -- correct? -- and the shape
10    differentials?
11         A    Yes.
12         Q    Okay.
13              Why did you fix the letter rates first?
14         A    Well, I am using the fundamental rate design
15    process and formula that was used in the decision for MC95-1
16    and that's the way that was set up.  You have to choose one
17    or the other and since that was what had been used, I
18    continued to use --
19         Q    The letters.
20         A    The letters, yes.
21         Q    You could have started with the nonletters, if you
22    had wanted to, and worked back the other way?
23         A    I suppose I could have rewritten the formulas to
24    have the other passthroughs solved for rather than the
25    nonletter passthroughs.

                                                              2977
 1         Q    There is another instance we are going to come to
 2    shortly where you did rewrite the formula, isn't there?
 3         A    Yeah, I'm not saying that it wasn't worthy of some
 4    change.
 5         Q    And you could have fixed the nonletters and the
 6    letter rate passthroughs first and then let the shape
 7    differential fall out, could you not?
 8         A    Something has to fall out.  I am not sure how many
 9    of the shape passthroughs would fall out.  I mean, I would
10    have to play with that bowl of Jell-O to find out.
11         Q    I want to just comment that we found your
12    workpapers the most clear of any of the Postal Service
13    witnesses and I hope that doesn't hurt your career.  But I
14    still wondered when you responded to MASA-2 that you were
15    deriving -- achieving a reasonably simple and understandable
16    rate structure, if you were jesting?
17         A    What does that response say?
18         Q    It was MASA-2.
19         A    No, I'm not joking.
20         Q    Okay.
21         A    Okay.
22         Q    Now, I want to move on to the subject of the pound
23    rate for ECR mail, commercial ECR mail.  And as we all know,
24    that is part of one of the rate elements above the break
25    point in ECR rate design, correct?

                                                              2978
 1         A    Yes.
 2         Q    Do you -- turning just briefly to the
 3    below-the-break-point part of the ECR rate design, do you
 4    happen to have a figure of what the percentage increase is
 5    to the minimum per piece rate below the break point?
 6         A    There are several rates that --
 7         Q    Okay, for nonletters?
 8         A    For nonletters, and this is in the workpapers,
 9    which density tier?
10         Q    Saturation.
11         A    Saturation nonletter minimum per piece rate is
12    proposed to increase 2.9 percent.
13         Q    Okay, and at the basic level?
14         A    The basic level, the nonletter rate is proposed to
15    increase 5.8 percent.
16         Q    Which page of your workpaper are you referring to?
17         A    Page 31 of Workpaper 1.
18         Q    Okay.  Okay.
19              Now, let's take a look at -- you proposed
20    different pound rates for standard regular and for standard
21    ECR, correct?
22         A    Yes.
23         Q    And in standard regular, is the current rate today
24    67 cents per pound?
25         A    For regular, I believe it is 67.7.

                                                              2979
 1         Q    Okay, and the proposed rate for standard regular
 2    is 65?
 3         A    Yes.
 4         Q    That's a small reduction?
 5         A    Yes.
 6         Q    And in ECR, the current pound rate is 66.3 cents?
 7         A    Yes.
 8         Q    And your proposed or new rate is 53 cents,
 9    correct?
10         A    Yes.
11         Q    And is that reduction about 12, 13 percent or so?
12         A    You can do the math.
13         Q    Now, OCA-24 conveniently asked you to calculate
14    rate changes at current -- certain ounce increments.  Do you
15    recall that interrogatory?
16         A    Yes, I have it here.
17         Q    And it has many pages of tables where all the
18    rates are presented at certain ounce levels and ask you to
19    calculate the increases and decreases that result from your
20    rate schedule, correct?
21         A    Yes.  That's the --
22         Q    And if you could turn to the one, two, three,
23    fourth sheet labeled Four-Ounce Pieces?
24         A    Okay.
25         Q    And here we are talking about enhanced carrier

                                                              2980
 1    route pound rated pieces, correct?
 2         A    Yes.
 3         Q    Okay.  And let's see.  And the numbers to the left
 4    side of the page are current rates and the numbers to the
 5    right side of the page are proposed rates and the column on
 6    the far right side shows the percent change, correct?
 7         A    Yes.
 8         Q    Okay.  And at these four-ounce pieces, I note for
 9    example that, let's see, an ECR saturation pound rate piece
10    that is entered at the destination SCF, which is the third
11    group of rows, sees a rate reduction of about 1.38 percent. 
12    Did I read that correctly?
13         A    You said saturation?
14         Q    Saturation.
15         A    Yes.
16         Q    And if we turn to the next page where it -- the
17    rates were presented for a six-ounce piece, that same
18    reduction falls -- becomes an 8.77 rate decrease, correct?
19         A    That's what it says, yes.
20         Q    Same rate category.
21              And if we turn to the very next page at the eight
22    ounce weight increment, the rate reduction becomes 12.46
23    percent, correct?
24         A    Correct.
25         Q    And while the rates were presented here as the

                                                              2981
 1    weight increments get higher, the percentage decrease would
 2    become steeper, correct?
 3         A    That's correct.
 4         Q    And have you worked out the math to the 15 ounce
 5    increment?
 6         A    That particular increment?  I may have somewhere
 7    along the line.  I don't have it here.
 8         Q    Would it surprise you if the reduction at that
 9    level were around 18 percent?
10         A    No.
11         Q    Have you calculated the dollar value from the
12    reduction in the pound rate?  I know it is possible in your
13    work papers, but did you?
14         A    In the course of developing the work papers and
15    coming up with the proposal, there were times when I put
16    different pound rates in and by doing that I was able to see
17    generally what the effect of doing that was.
18         Q    So you tried different pound rates to see what
19    happened?
20         A    I tried a lot of different rates and rate inputs
21    just to see what would happen.
22         Q    Okay, and would you calculate -- if you wish to
23    calculate the dollar value from the reduction of the pound
24    rate, would you do so by comparing page 7 of work paper 1
25    with page 28 of your work paper 1?

                                                              2982
 1         A    Page 7 and page --
 2         Q    28.
 3         A    No.
 4         Q    You would not?  What would you do?
 5         A    Well, it's hard to do because, like you said,
 6    there's -- you don't choose one thing in isolation of
 7    anything else happening.
 8              When you do put in a different pound rate, that
 9    doesn't mean the revenue from the pound rated pieces
10    necessarily goes down by the amount of the reduction in the
11    pound rate times those pounds.
12         Q    I understand that, but if I wish to know the
13    reduction of revenue from pound rated pieces without taking
14    into account any volume effects, would I add the revenue
15    from the pound rated piece charge plus the pound charge
16    before rates and compare that with after rates?
17         A    If you wanted to get a total revenue change from
18    pound rated pieces, you would be getting the effect of all
19    the rate proposed changes.
20         Q    Well, I am wondering, what could I get, could I
21    add lines 12 and 16 of work paper 7, and would that give me
22    total revenue from pound rated pieces under current rates,
23    before rates?
24         A    No, because those -- that is before any drop ship
25    discounts are applied.

                                                              2983
 1         Q    So I would need to take those into account as
 2    well.
 3         A    And they are embedded in those lines down below.
 4         Q    Okay, so -- so is it possible to calculate the
 5    total revenue lost from this rate reduction from the work
 6    papers?
 7         A    You could put in a higher pound rate and see what
 8    the effect -- and that in isolation of any other decisions,
 9    which like you said, nothing -- just as the work papers are
10    linked in a way that things change when you change one
11    input, the rate designer also takes into consideration,
12    doesn't usually look at one particular change in isolation.
13    They might do something else.
14         Q    So back to the question I started this line with.
15              Do you know what the dollar value or revenue
16    reduction to the Postal Service is from the pound rate
17    decrease that you are proposing, including of course the
18    increase in the piece element of that charge?
19         A    No, because I can't really look at that in
20    isolation.
21              I would choose not to look at it in isolation.
22              If the pound rate were suddenly proposed to be
23    higher, that presumably would have other effects like
24    changing in the pass-through of the letter flat
25    differential.

                                                              2984
 1              I think we have been there before.  One can do
 2    something in isolation like that to see what the effect is,
 3    but I haven't done that.
 4         Q    So you have no idea how much that figure would be?
 5         A    Well, I think we are coming back to the start of
 6    your cross examination of this topic where I said that by
 7    playing with the pound rate I got a feel for how sensitive
 8    it was to different pound rates, and I might mention that
 9    these rather dramatic decreases that you are highlighting
10    here, there's not a lot of heavy volume out there that
11    causes that percentage rate reduction to mean a lot in terms
12    of revenue, total revenue reduction.
13              So it is not as sensitive as one might think, and
14    again, if you get into the spreadsheet, that is one of the
15    things that might surprise you as you start putting things
16    in, that you can change that pound rate without necessarily
17    changing the other rates that dramatically.
18         Q    Were there approximately 7.45 billion pieces of
19    ECR pound rated mail in the base year?
20         A    Workpaper page?
21         Q    Seven.  I am looking at Workpaper 1, page 7, line
22    12.
23         A    Pound-rated pieces, yes.
24         Q    And it is -- is it -- those pieces would all be
25    receiving, if they weigh about three-and-a-half or more

                                                              2985
 1    ounces, that portion of those pieces that weigh four ounces
 2    or more would be receiving a rate decrease if they stayed in
 3    the system, correct?
 4         A    Does this get back to the OCA response?  Is that
 5    what you are referring to?
 6         Q    No, I am just trying to get a sense of the number
 7    of pieces in the system that might see the rate decrease. 
 8    We start with the number of pound-rated pieces in the base
 9    year of 7.45 billion pieces and I am saying to the extent
10    they, those pieces, weighed at an increment that receives a
11    rate decrease, those pieces, were they still in the system,
12    would see a decrease as well.  Those pieces would be
13    beneficiaries of the rate decrease.
14              I sense you lost me.
15         A    Yeah, I lost --
16         Q    I'm asking if the universe of potential rate
17    beneficiaries here of the pound rate starts with the 7.45
18    billion?
19         A    No.  It's a subset of that, I suppose, because
20    like we discussed, lowering the pound rate causes a push-up
21    in the piece rate for pound-rated mail.  So if you are just
22    above the break point weight or some degree beyond the break
23    point weight, there is a range of weights in there where the
24    push-up on that piece rate has a greater effect on you than
25    the lowering of the pound rate.

                                                              2986
 1         Q    I understand that and we went through that with
 2    the OCA-24 numbers.  And we can look to see the effect on
 3    any particular rate category.  That's a good place to look
 4    to see the net effect, right?
 5         A    That's why I asked you if you were referring back
 6    to that one, yes.
 7         Q    Would you turn to OCA-2?
 8         A    Okay.
 9         Q    This presents the pound rate formula, does it not? 
10    About half way through your response?
11         A    Yes.  I was asked to express it as a mathematical
12    expression and that's what's there.
13         Q    Okay.  And I want to go painfully through the
14    factors in the equation and ask you which was an input from
15    somewhere and which you selected.  And the first one is the
16    revenue requirement from postage and that, generally
17    speaking, is an input from Dr. O'Hara, correct?
18         A    Well, let me get to the actual formula in my
19    workpapers which is at page -- for example, we will use the
20    one for the regular subclass, I guess.  The revenue
21    requirement?
22         Q    Right.
23         A    It's derived by taking the volume variable costs,
24    test year before rates and applying a markup to that cost.
25         Q    Right.  And the markup is from Dr. O'Hara so, in a

                                                              2987
 1    sense, that is a given to you.  That is not something you
 2    selected; that was an input to you, was it not?
 3         A    The only reason I am hesitating is because that
 4    number there on that page is not the number that --
 5         Q    There is a certain iterative process, iteration to
 6    the process?
 7         A    Thank you.  Yes.
 8         Q    Okay.  You start with a given and then you make
 9    your adjustments and you have to adjust it at the end,
10    right?
11         A    That number there is with an eye towards the
12    coverage target given to me by Dr. O'Hara.
13         Q    Right.  And the D, which the value of the
14    discounts mailers claim comes out of your workpapers as a
15    result of your passthroughs and cost differentials in your
16    various calculations, correct?  That's one you calculate,
17    you generate that number?
18         A    Yes.
19         Q    Okay.  B sub R, is that an input from billing
20    determinants?
21         A    It says page 4 is the source.  That sounds like a
22    billing or a -- well, it's actually the volume forecast for
23    FY '98 before rates which has an input to that, the billing
24    determinants.
25         Q    Well, that's an input to you; that's not something

                                                              2988
 1    you particularly -- that's one where -- was that totally
 2    given to you or was there some iteration on your part?
 3         A    Well, the test year before rates volume forecast
 4    is given to me.
 5         Q    Okay.
 6              The next character is a little "i" which is the
 7    basic per piece rate for pound-rated pieces.  And my
 8    understanding is that in your proposal that was an output,
 9    correct?
10         A    That's correct.
11         Q    Okay.  The next, BP, is the break point and, if I
12    understand correctly, you selected that and then refined it
13    in the iterative process?
14         A    I selected that and then the rates which are
15    output have an implied break point that is carried out to
16    more digits.
17         Q    And your selection was not to change the existing
18    break point to the extent you could?
19         A    That's correct.
20         Q    P is the pound rate.  And in this instance, you
21    departed from the way the Commission has set the pound rate
22    in the past by selecting it, correct?
23         A    The pound rate is an input to my use of the
24    formula.
25         Q    You selected it and it as your input, your choice?

                                                              2989
 1         A    Yeah.
 2         Q    And the V sub R P and the VP are, again, inputs to
 3    you, correct?
 4         A    They grow out of the volume forecast for the FY
 5    '98 before rates.
 6         Q    And you changed the way the pound rate formula
 7    worked in two respects and let me see if I state them both. 
 8    One is you reduce the revenue requirement by the residual
 9    shaped surcharge that is new to this case?
10         A    That's correct.
11         Q    And you selected the pound rate, okay?
12         A    Yes.
13         Q    Now I want to focus, you've used the word
14    "selected" for the pound rate in a number of your answers. 
15    I want to focus on what you meant by that.  You did not
16    calculate it from cost information in the way we calculate
17    cost differences and discounts from measures of costs
18    voided, did you?
19         A    It is not a calculated number, no.
20         Q    Why did you pick 53 cents?  Why not 58 cents or 43
21    cents?
22         A    In my testimony I say that it is similar to the
23    pound rate reduction that we proposed in classification
24    reform.
25         Q    Um-hum.

                                                              2990
 1         A    And to me the cost information suggests that --
 2    the cost information and the intuitive arguments and the
 3    other things that I put forth in the discussion of the pound
 4    rate argue for a lower pound rate.  And that pound rate
 5    there can be put in without doing violation to any other
 6    objectives of the rate design.  So I felt that it was a
 7    reasonable pound rate to choose.
 8         Q    Well, you tried several others.  You mentioned
 9    previously you had tried some other pound rates just to kind
10    of see what would happen.
11         A    I'm sure I put other numbers in there just to make
12    sure -- if nothing else to make sure that the thing was
13    functioning correctly.
14         Q    And you settled on 53.
15         A    Yes.
16         Q    As to the piece rate part of the pound charge,
17    pound rated pieces charge, now historically that has been
18    set by the Commission so that the saturation level, the
19    piece-related presort discounts offset the piece charge so
20    it works out to be zero; is that right?
21         A    I'm not sure how much tradition is actually there;
22    that's the way it was --
23         Q    That's the way it was done.  And here, however, it
24    popped out of the formula.  It was an output from the
25    formula.

                                                              2991
 1         A    Correct.
 2         Q    Okay.  You did not attempt to build the piece
 3    charge up by adding up piece-related costs, did you?  You
 4    did not sit down and say what should the piece charge be and
 5    add it up?
 6         A    The piece charge is an output of the formula.
 7         Q    Output.  Okay.  Did you anywhere compare that
 8    piece charge output with piece-related costs?
 9         A    Yes.
10         Q    Where?
11         A    The differentials between the piece rates --
12         Q    Um-hum.
13         A    For pound-rated mail --
14         Q    Um-hum.
15         A    For the various tiers differ by the cost
16    difference between those tiers as presented in the work
17    paper.
18         Q    So the differences between the tiers were related
19    to some cost information, but the base rate, if you will,
20    itself, was an output, not a calculation.
21         A    It was an output --
22         Q    Not a calculation.
23         A    Not a calculation.
24         Q    Yes.  Okay.  So neither the pound rate nor the
25    piece rate was calculated based on measured costs; correct?

                                                              2992
 1         A    They were not calculated based on measured costs,
 2    but I would get back to the point I think you're trying to
 3    draw a distinction between the current piece rate of zero
 4    for saturation mail and somehow suggesting that that is
 5    based on --
 6         Q    Well, I'm not --
 7         A    Some sort of cost basis.
 8         Q    I'm just asking -- I'm just asking questions. 
 9    Okay.
10         A    I just wanted to clarify that I didn't think that
11    that was a departure in any way --
12         Q    Um-hum.
13         A    From previous.
14         Q    You summarize or state -- my word summarize --
15    your reasons for selecting the pound rate that you did in
16    your testimony.  I wanted to ask you just a question or two,
17    one of which was, you mentioned in both subclasses the
18    parcel surcharge was one reason that if that were adopted
19    the pound rate wasn't quite as necessary as it might have
20    been before.  Is that one way of --
21         A    That's one --
22         Q    A fair characterization of what you say?
23         A    The advent of a nonstandard or a residual shape
24    surcharge takes away the -- one of the historic bases for
25    the pound rate, that it is to act as a proxy in some respect

                                                              2993
 1    for changing shape mix as weight increases.
 2         Q    Um-hum.  And that reason to the extent it has
 3    merit would lose its force if the Commission chooses not to
 4    adopt that proposal; correct?
 5         A    It might in the regular subclass.
 6         Q    Um-hum.
 7         A    It would not in enhanced carrier route.
 8         Q    You also refer to the analysis that's found in
 9    library reference 182 that is now going to be sponsored by
10    Mr. McGrane.  At what point in the preparation of your
11    testimony did you review a draft of that?
12         A    I can't tell you what -- what day things happened. 
13    It's all a blur.  It's a whirlwind of activity.
14         Q    And in response to NAA-41, you stated that you
15    believe the reference was reliable for the purposes for
16    which it was used, which was, as I gather, one of several
17    factors that you thought about that kind of led you to the
18    same conclusion, correct?  Okay.
19         A    Yes.
20         Q    Do you regard that library reference as a
21    definitive study of the effect of weight on costs in
22    standard mail?
23         A    I think you asked that exact same question last
24    time we were up here doing this.  I think, for the purpose
25    it is used, it is -- it is a study of the effect of weight

                                                              2994
 1    on costs.
 2              Definitive -- I don't know what you mean by
 3    definitive.  It's one of those issues that we've been --
 4    that have been chased around for years and years and been
 5    trying to get our hands around it, and this is what I think
 6    to be a very good effort at that and --
 7         Q    Do you --
 8         A    -- reasonable results.
 9         Q    Do you regard it as the final word?  Would you
10    suggest after this case is over that this matter warrants
11    further study?
12         A    I would imagine almost everything we do is subject
13    to improvement or to take a look at it to see if there's a
14    better way of doing something.
15              My industrial engineering background was that way. 
16    There was always a better way, always a better process,
17    always something better.  So, I'm not inclined to say that
18    anything is the definitive study.
19         Q    You really do not know how standard mail costs are
20    affected by weight, do you?  You may have an idea, but you
21    don't really know.  I'm trying to see if there's a
22    distinction of your level of knowledge here.
23         A    If knowing means you have a definitive study, if
24    that's what knowing means, then -- then I say I have an
25    idea.

                                                              2995
 1         Q    Are you familiar with the first-class rate
 2    structure?
 3         A    Yes.
 4         Q    And as a consumer, do you ever mail a two-ounce
 5    letter?
 6         A    I am familiar with it primarily as a consumer,
 7    yes.
 8         Q    And when you do, you pay an extra 23 cents,
 9    correct?
10         A    For the -- for the second ounce, yes.
11         Q    Yes, for the second ounce.  And for each ounce
12    beyond that, you would still pay another 23 cents until you
13    hit the ceiling of the -- the subclass, correct?
14         A    Yes.
15         Q    Okay.
16              To your knowledge, does the Postal Service have
17    information on the effect of weight on first-class costs?
18         A    I'm not aware of any study presented in this case
19    regarding that.  I imagine somewhere along the line there
20    has been some study that attempted to get a feel for that
21    issue.
22         Q    You don't know.  That's just something -- you just
23    don't know.
24         A    About the history?  I know -- I know in the
25    history there have been, but as far as contemporaneous -- I

                                                              2996
 1    mean as of now, I don't -- I don't -- I'm not familiar with
 2    any study that's currently in play.
 3         Q    Do you have any knowledge or understanding of what
 4    the institutional cost contribution is in first-class mail
 5    by weight increment?
 6         A    No.
 7         Q    Do you have that knowledge for standard mail?
 8         A    No.
 9         Q    Okay.
10              Another reason that you stated for the pound rate
11    reduction was to make ECR rates for heavier pieces -- and
12    your word was more competitive.  Do you recall that?
13         A    I think you're referring to that list of maybe
14    five points?
15         Q    Yes.  That's, I think, the fifth reason -- the
16    fifth reason of the five.
17         A    Let's see exactly what words I use there.
18              I say the rate structure should be sensitive to
19    and priced competitively with the alternatives.
20         Q    Priced competitively with the alternatives.
21              In AAPS-6, you state that you are not aware of a
22    distinction made by the Postal Service between ECR letters
23    and flats as to whether one or the other type faces greater
24    competition; is that correct?
25         A    Which one was it again?  I remember that answer.

                                                              2997
 1         Q    AAPS-6.
 2         A    I'm not aware of a distinction between ECR letters
 3    and flats.
 4         Q    So as far as your testimony is concerned, letters
 5    and flats face equal competition in ECR?
 6         A    I'm not aware of any distinction between --
 7         Q    What about parcels?
 8         A    I would put letters, flats, nonletters, parcels,
 9    residual shaped pieces all in the same group.  I'm not --
10         Q    In NAA-28 to you, we asked you to tell us what you
11    knew about the rates charged by other advertising media. 
12    Would you turn to that?
13         A    Yes.
14         Q    And in your answer, you referred to materials you
15    looked at in preparation of your testimony in docket MC95-1;
16    is that correct?
17         A    Yes.
18         Q    That was more than two-and-a-half years ago,
19    correct?
20         A    I guess so, yes.  It doesn't seem that log but,
21    yes, I guess it has been.
22         Q    Did you make any effort to look for more current
23    information?
24         A    I think I may have logged onto some web sites to
25    see if there were advertising rates.  I think I got on

                                                              2998
 1    your -- does NAA have a web site?
 2         Q    My client does maintain a web site, yes.
 3         A    I remember getting on there and looking at various
 4    things and I couldn't find any.  I thought maybe there were
 5    some sort of rate schedules on there but I couldn't find
 6    any.
 7         Q    So the extent of your knowledge of newspaper rates
 8    is that of about two to three years ago?
 9         A    I have not become familiar with the newspaper
10    pricing structure, you know, the rate structure, to a great
11    degree, no.
12         Q    Do you regard the Postal Service as competing with
13    newspapers in the preprint market?
14         A    I would think if we are not competing, you
15    wouldn't be here asking me these questions.
16         Q    So the answer is yes?
17         A    I think there is some market there we both serve
18    and people might go back and forth between them.
19         Q    Well, I hear from time to time the Postmaster
20    General and others state that the Postal Service wants to
21    act more like a business.  And I must say I am surprised
22    that its pricing witness on this issue doesn't seem to have
23    looked at any of the alleged competitors' prices for more
24    than two years.
25              Should I be surprised at that?

                                                              2999
 1         A    I guess you shouldn't be surprised in that this is
 2    not a big part of the argument for lowering the pound rate. 
 3    I even preface this response saying that the rates for other
 4    advertising media were an additional consideration in the
 5    pound rate proposal and this is not to say that Postal rates
 6    must mirror non-Postal alternatives.  So given that, it
 7    shouldn't surprise you that I didn't get every rate
 8    structure of every newspaper to try to mirror their rates.
 9         Q    And returning to your answer to 28, I notice that
10    you said rates were by pages not ounces in the newspaper
11    rates that you surveyed at that time.  Did you consider
12    charging by pages rather than by ounces?
13         A    No.
14         Q    You also in that answer refer to an article from
15    Optimum Delivery, also dating from April of '95.  Do you
16    regard the Postal Service as competing with the alternate
17    delivery industry?
18         A    I think they view us as a competitor.
19         Q    Does the Postal Service view them as a competitor?
20         A    I think in the same way we do with the newspapers
21    in that, yes, there is a -- we're talking about delivery of
22    high density advertising here and there are several ways an
23    advertiser can achieve that and we may be one of the
24    options, the newspapers may be another option and alternate
25    delivery may be yet another option.

                                                              3000
 1         Q    Are you familiar with the company Alternate Postal
 2    Delivery or APD?
 3         A    I am not well familiar -- I am not familiar with
 4    it.
 5         Q    Have you heard of it?
 6         A    It sounds familiar.
 7         Q    Would you -- if I were to state, represent that it
 8    may be the largest alternate delivery company in the
 9    country, would you have any reason -- would that sound right
10    to you?
11         A    I would accept that.
12         Q    You mentioned you logged onto web sites.  Did you
13    happen to consider logging onto the Securities and Exchange
14    Commission's Edgar Database to check out what it might have
15    to say about Alternate Postal Delivery Corporation?
16         A    I didn't get on that web site, no.
17         Q    And if you had done so recently, let me suggest
18    subject to check that you would see that -- find a filing
19    that reports APD's net income for the past six months of
20    being about approximately $49,000 --
21              MR. ALVERNO:  Objection.  That's not in evidence
22    at this time.  The question assumes the facts not in
23    evidence and therefore it's misleading.
24              MR. BAKER:  I asked him to check subject to check,
25    Mr. Chairman.

                                                              3001
 1              MR. ALVERNO:  I don't think he is equipped to
 2    go -- to go and do research on SEC filings.
 3              CHAIRMAN GLEIMAN:  I am going to let the question
 4    stand.  The witness' testimony and responses to
 5    interrogatories talk in terms of setting rates at least in
 6    some small way to reflect what's perceived as a competitive
 7    market.  I didn't hear Mr. Baker do anything other than
 8    throw a number out and ask if somebody would be surprised
 9    about something.  And I am going to let it go at this point,
10    Mr. Alverno.
11              MR. BAKER:  Is there a pending question?
12              I was asking the court reporter if there was a
13    question pending.
14              BY MR. BAKER:
15         Q    Well, let me proceed in a different way then.
16              COMMISSIONER LeBLANC:  Mr. Baker, will you pull it
17    in a little bit?
18              BY MR. BAKER:
19         Q    Assume, please, that APD's net income for the
20    first half of the year was approximately $49,000.  Do you
21    think that's a fact that would be relevant to the
22    Commission's consideration of this rate proposal for the
23    pound rate?
24         A    I don't presume to know what or to speak for the
25    Commission at least in saying what they should consider when

                                                              3002
 1    they look at the pound rate proposal.
 2         Q    Was it -- I take it then it was not something that
 3    you thought you needed to consider in proposing the rate.
 4         A    I did not think -- I did not -- well, obviously I
 5    didn't do it.  I didn't consider a net income of any --
 6         Q    Okay.
 7         A    Alternate delivery firm.
 8         Q    Okay.  Do you expect the rate reduction for
 9    pound-rated pieces to generate additional volume?
10         A    Such an outcome wouldn't surprise me if the pound
11    rate were reduced.
12         Q    Have you had any conversations with mailers where
13    they have urged you to lower the pound rate so that they
14    could have more pieces, more volume at the pound rated
15    levels?
16         A    Well, we, the Postal Service, especially marketing
17    systems, hears from a lot of mailers about a lot of things.
18         Q    Um-hum.
19         A    And it wouldn't surprise me if people who might
20    want a lower pound rate would have expressed that notion.
21         Q    Did they express it to you?
22         A    Only in the context with other people involved.  I
23    mean, it wasn't a one-on-one Joe Moeller, this is what we
24    think you should do.  No.
25         Q    Is it reasonable to expect that some of the

                                                              3003
 1    additional volume might come from catalog mailers?
 2         A    I would see where maybe they would have a decision
 3    to make about adding pages to their catalog, and if that
 4    additional weight implied by those additional pages was
 5    offset by what they perceived as a marketing advantage of
 6    getting that additional advertising to their customer, then
 7    that might increase the volume.
 8         Q    It is reasonable to think that -- expect that
 9    additional volume might come from saturation mailers?
10         A    That's also a possibility.
11         Q    Did you review any market research on whether
12    there'd be additional volumes of heavy-weight pieces?
13         A    No.
14         Q    No.  And have you reviewed or seen the document
15    entitled Finding Common Ground that was recently released by
16    your employer, which was a report of a blue-ribbon committee
17    on postal reform?
18         A    I saw an announcement of it in the paper --
19         Q    Um-hum.
20         A    But I did not read the report.
21         Q    And are you aware that on pages 31 and 32 of that
22    report the chairman of ADVO, Mr. Kamerschen, is quoted as
23    saying that Postal Service rates, quote, must be more
24    competitive for heavier-weight ad pieces?
25         A    Again, I didn't see the report.

                                                              3004
 1         Q    So you're not aware of that.
 2         A    I'm not aware of his statement.
 3         Q    Would it surprise you if he had said that?
 4         A    No.
 5              MR. BAKER:  Mr. Chairman, I have no more
 6    questions.  Thank you.
 7              CHAIRMAN GLEIMAN:  Thank you, Mr. Baker.
 8              I think that this looks like a good point to break
 9    for lunch.  As I indicated earlier today and in the
10    preceding two days, I want to try and finish up by 4:30 this
11    afternoon.  Before we break for lunch, if I could just get a
12    rough guesstimate from the remaining parties in terms of how
13    much time they might have for cross examination.
14              Mr. May, simply because you're the closest to me,
15    ballpark?
16              MR. MAY:  Twenty minutes.
17              CHAIRMAN GLEIMAN:  Okay.  Mr. Wiggins?
18              MR. WIGGINS:  Less than half an hour, I believe.
19              CHAIRMAN GLEIMAN:  Mr. Olson?
20              MR. OLSON:  Twenty, perhaps.
21              CHAIRMAN GLEIMAN:  I don't think I missed -- oh,
22    I'm sorry, Ms. Dreifuss?
23              MS. DREIFUSS:  About a half hour.
24              CHAIRMAN GLEIMAN:  A half an hour.  Okay.
25              Let's come back at -- it's 12:30 -- let's come

                                                              3005
 1    back at quarter to two.  I think we ought to be able to do
 2    things by then.
 3              MR. MAY:  You have the nonprofits also.
 4              CHAIRMAN GLEIMAN:  I understand, but there's no
 5    one in the room that I can ask now.  Thank you, you know,
 6    for reminding me.  I appreciate it.
 7              Come back at quarter to two then, and we'll pick
 8    up at that point.  If the nonprofit federation is here, then
 9    they'll be first in the dock.  If not, then we'll go to OCA.
10              [Whereupon, at 12:35 p.m., the hearing was
11    recessed, to reconvene at 1:45 p.m., this same day.]
12
13
14
15
16
17
18
19
20
21
22
23
24
25

                                                              3006
 1                          AFTERNOON SESSION
 2                                                     [1:44 p.m.]
 3              CHAIRMAN GLEIMAN:  The National Federation of
 4    Nonprofits -- turn on the mike and identify yourself for the
 5    record.
 6              MS. EMIGH:  Carolyn Emigh, representing the
 7    National Federation of Nonprofits, and with me is our
 8    technical expert, Leonard Merevitz.
 9              CHAIRMAN GLEIMAN:  Whenever you are ready, you can
10    start cross examining the witness.
11              MS. EMIGH:  Thank you, Mr. Chairman.
12    Whereupon,
13                           JOSEPH MOELLER,
14    the witness on the stand at the time of the recess, having
15    been previously duly sworn, was further examined and
16    testified as follows:
17                          CROSS EXAMINATION
18              BY MS. EMIGH:
19         Q    Mr. Moeller, is it fair to say that you are the
20    rate design witness for Standard A mail, both commercial and
21    nonprofit?
22         A    Yes.
23         Q    Would you accept subject to check that Dr. Tolley
24    uses as his base year for forecasting 1996, Quarter 3
25    through 1997, Quarter 2?

                                                              3007
 1         A    I'll accept that subject to check.
 2         Q    Okay.  I hope we're not wrong on that.
 3              Is this a postal fiscal year or a Government
 4    fiscal year?
 5         A    It sounds like it is four quarters of data.  I
 6    don't know if it is -- if those quarters are postal or
 7    Government quarters or whatever.
 8         Q    Would you accept subject to check that it is the
 9    Government fiscal year?
10         A    But how could it be if it is two quarters of one
11    year and then two quarters of the next year?
12         Q    1996 Quarter 3 through 1997 Quarter 2 --
13              [Discussion off the record.]
14              BY MS. EMIGH:
15         Q    What is the test year in this rate case?
16         A    The test year is 1998, Government fiscal year '98.
17         Q    Government fiscal year 1998, so we are talking
18    about a Government fiscal year for the test year.
19         A    Yes.  That is my understanding.
20         Q    Do you happen to know the period of time over
21    which a cost revenue analysis is performed?  In other words,
22    is a CRA performed for a Government fiscal year or the
23    postal fiscal year?
24         A    You know, I don't know that.  I know that they are
25    for a fiscal year.  I am not sure which one it is, as a

                                                              3008
 1    matter of fact.
 2         Q    But in any case, it's for a 12 month period?
 3         A    Which one are we talking about, which report?
 4         Q    The cost revenue analysis, CRA.
 5         A    Yes -- I don't know which one is that.  I have
 6    seen RPW in both formats, but I am not sure about CRA.
 7         Q    But in any case the Cost Revenue Analysis is for a
 8    year, a 12 month period?
 9         A    It's for a year.
10         Q    Can you define for us a base year?
11         A    I imagine it has different meanings to different
12    people.
13              In my case it is the --
14         Q    Really, what I am interested in is the period of
15    time that it covers.
16         A    It covers a year.
17         Q    It covers a year and what about the TYBR, Test
18    Year Before Rates?
19         A    That is the test year.
20         Q    That covers a year too?
21         A    Yes.
22         Q    And what about TYAF, Test Year After Rates?
23         A    TYAR tests the same period, applying the other,
24    the proposed rates to --
25         Q    But the same period, one year?

                                                              3009
 1         A    Yes.
 2         Q    Is it true that almost always when the Postal
 3    Service forecasts volumes, costs, and revenues in a postal
 4    rate case that the Postal Service is looking at a one year
 5    period?
 6         A    I can't say -- almost always?  They --
 7         Q    Frequently?
 8         A    Certainly the forecasts are often for a year
 9    period.
10         Q    Would you explain why so many of the analyses that
11    the Postal Service does for a rate case uses a 12 month
12    period?
13         A    Well, I guess it's just because there is such a
14    thing as a fiscal year and they are usually measuring cost
15    and revenues or whatever in terms of their fiscal year.
16         Q    Does it have anything to do with seasonality of
17    volumes?  In other words, is mail volume constant for each
18    month?  Does it vary at all over a 12 month period?
19         A    I am not sure if that -- that is why the world has
20    decided to look at fiscal years, but certainly there is
21    seasonality with -- seasonality is something that can happen
22    within that year.
23         Q    So not only are there ups and downs in volume by
24    month but to some extent certain costs also will vary by
25    month?

                                                              3010
 1         A    I can't say that for sure but that doesn't seem
 2    unreasonable that that might happen.
 3         Q    Some costs being volume variable, the cost will
 4    vary with the volume, by definition?
 5         A    I think that is the definition.
 6         Q    Does the Postal Rate Commission Rules of Practice
 7    require the Postal Service to file a test year analysis?
 8         A    I am not familiar with the rules of practice. 
 9    That's sort of out of my realm.  The attorneys maybe know
10    exactly what the rules are for the filing.
11         Q    Are you aware that the Commission has rules that
12    prescribe when the test year may begin and when it may end?
13         A    I know generally that there may be some direction
14    given on what an appropriate test year would be.
15         Q    With respect to a beginning and ending point?
16         A    That sounds like a reasonable way of defining what
17    would be an acceptable test year.
18         Q    Maybe you could help us with understanding what
19    billing determinants are.
20         A    Is the question, what are billing determinants? 
21    It is -- I don't know if there is a Postal Service approved
22    definition but my view of it is it's a recasting or a
23    casting of the volume for a particular class or subclass of
24    mail into its various rate components.
25         Q    And what would be some examples of billing

                                                              3011
 1    determinants or rate components, as you call them?  Is
 2    presortation, the mail that's presorted by three or five
 3    digits or carrier route, are those billing determinants?
 4         A    Those are examples of rate categories for which
 5    separate volumes are reported in the billing determinants.
 6         Q    Why do we need billing determinants?
 7         A    Well, I know why I need them.  Is that when I get
 8    a volume forecast, it is usually at a level which is not as
 9    fine as what I might need to calculate the revenues from,
10    say, the proposed rates.  So I use those billing
11    determinants to split that volume out into those components
12    so that the revenue -- total revenue can be calculated.
13         Q    So is it fair to say that you would have to split
14    the revenue out by these billing determinants in order to
15    get the correct revenue for various points during the year?
16         A    Well, I don't know about the various points during
17    the year but, for example, in my workpapers, I take test
18    year after rates volume forecast and distribute that volume
19    to the various rate categories using billing determinants.
20         Q    So to get the correct distribution of volume among
21    the line items or billing determinants or these rate
22    components, this is the analysis, the computation that you
23    go through?  The result you are trying to get at is a
24    correct distribution of volume?
25         A    Yes, so that I can make an approximation of what

                                                              3012
 1    the total revenue will be, I get the volume by rate
 2    category, an estimate of that volume.
 3         Q    And some of the billing determinants, the -- when
 4    the volume is distributed by billing determinants, that
 5    could be different depending on the time of the year?
 6         A    The distribution is going to reflect whatever
 7    billing determinants you use so I am not sure I follow the
 8    question.
 9         Q    And the distribution of volume over these billing
10    determinants or line items or rate components can vary by
11    the volume and volume can vary depending on the season of
12    the year, Christmas, high-mail season.
13         A    The volume can vary by time of the year, yes.
14         Q    And if we were to only look at one billing
15    determinant for one period, we couldn't say that that's
16    going to be the volume for that, hence the revenue, over the
17    whole year?
18         A    When you say you look at one billing determinant,
19    what do you mean by looking at one billing determinant?
20         Q    How about carrier route?
21         A    If I look at the carrier route billing --
22         Q    Or drop ship?
23         A    If I look at those billing determinants?  What are
24    you saying?  I'm sorry, I'm not following.
25         Q    If the -- would the distribution -- if we look at

                                                              3013
 1    one of those determinants for one snap shot during a
 2    12-month period, would that necessarily give us the correct
 3    distribution of volume for that billing determinant if we
 4    just simply multiplied by 12?
 5         A    So that snap shot must be a month snap shot?
 6         Q    A month snap shot.
 7         A    Given that there may be some seasonality, you may
 8    not -- the billing determinant for that particular snap
 9    shot, that mix of mail, may differ somewhat from what it
10    would be if it were an annual figure.
11         Q    So to get -- what you're after, is it not correct,
12    you are trying to get a true reading of revenue for a base
13    year, a 12-month period?
14         A    You are trying to get an estimation of it and
15    there are various ways of getting that estimation.  You want
16    something to distribute that volume and you look around and
17    see what is available to you that you can use and you make
18    the best decision you can on what to use based on what you
19    have and you get an estimate of the volume distribution for
20    that test year period and subsequently by applying the rates
21    you can get an estimate of the test year revenue.
22         Q    What period did you use to analyze billing
23    determinants for commercial standard A mail?
24         A    I think if your question is what billing
25    determinants did I use to distribute the volume --

                                                              3014
 1         Q    What period did you use to analyze the billing
 2    determinants with respect to standard A commercial as
 3    opposed to standard A nonprofit mail?
 4         A    Standard A commercial was quarter one and quarter
 5    two of FY '97, and standard A nonprofit was quarter two of
 6    FY '97.
 7         Q    Why did you use different time periods, two
 8    quarters versus one quarter, for essentially comparable rate
 9    subclasses?
10         A    Well, I'm going to --
11              MR. ALVERNO:  I object.  I mean, this is asked and
12    answered already in Interrogatory NFN No. 2.  I mean, it's
13    precisely the same question.  The witness has given an
14    answer, and the cross exam here is just covering ground
15    that's already been discussed and evaluated by the witness.
16              I wonder if counsel could just get to the point
17    and move along and ask the question that's relevant to that.
18              CHAIRMAN GLEIMAN:  Thank you for ruling, Mr.
19    Alverno.  I'm going to allow the counsel to continue,
20    because my assumption is that the counsel for the Federation
21    is heading in a direction where there will be some
22    questions, and in effect she's laying a predicate for
23    something that's going to come later on.
24              I would ask, because you weren't here earlier,
25    there are some of us who -- we're going to pull the plug at

                                                              3015
 1    4:30 today.  We'd like to finish with Witness Moeller today. 
 2    I know that we're looking at about an hour and a half to two
 3    hours of cross examination from the other four participants
 4    who have not yet had an opportunity to cross examine, and
 5    then there may be questions from the bench, some redirect,
 6    what have you.  But I would respectfully request that you
 7    move along, but by the same token, I'm overruling on the
 8    objection.
 9              MS. EMIGH:  Thank you, Mr. Chairman.  I don't
10    think our questions are going to be much longer than 30
11    minutes, and I'd just -- I think our -- the question that we
12    asked in our interrogatory went to commercial.
13              CHAIRMAN GLEIMAN:  I already ruled.  You don't
14    have to explain.
15              BY MS. EMIGH:
16         Q    Why not use a 12-month period in each instance?
17         A    Well, as a matter of fact, I had flipped to that
18    interrogatory NFN USPS-T-36-2, and part B -- well actually
19    the whole thing, part A says confirm that I used the billing
20    determinants for quarter two '97 as the basis for the rate
21    design, and it asks why did I use one quarter instead of a
22    year.
23              And I respond that in order for the test year
24    volumes by rate category to reflect the mail mixes that
25    occurred after implementation of nonprofit classification

                                                              3016
 1    reform, it was necessary for me to use the most recent and
 2    complete postclassification reform billing determinants
 3    available to distribute the volume to rate category. 
 4    Quarter 2 of FY '97 was the only full quarter of
 5    postclassification reform data for the nonprofit subclasses,
 6    and this was also responded to in the Presiding Officer's
 7    Information Request No. 3, question 19.
 8         Q    I'd like to review with you some facts about the
 9    postal fiscal year.  Is it your understanding that each
10    quarter is about the same length in terms of number of days,
11    or are there different lengths?
12         A    I'm not familiar with the quarters enough to know
13    how they vary.  It wouldn't surprise me if there are several
14    days' difference in them or whatever.
15         Q    Would you accept subject to check that postal
16    fiscal quarters one, two, and three each have 84 days and
17    postal fiscal quarter four has 112 days?
18         A    I'll accept that, subject to check.
19         Q    Is it possible that the reason why postal fiscal
20    quarter four is longer has to do with the seasonality of
21    mail?
22         A    I don't know why it's what it is, the length.
23         Q    Is it possible that another reason for the
24    difference in the number of days in the various quarters in
25    the postal fiscal year is that the summer quarter includes

                                                              3017
 1    four accounting periods, because of the odd number of
 2    accounting periods mail volume is lower in the summer, and
 3    so they add the extra accounting period to the summer
 4    quarter?
 5         A    You know, I don't know why the extra accounting
 6    period was added to that particular quarter.
 7         Q    Is it possible that there are seasonal patterns
 8    other than Christmas that may affect mail volume
 9    perceptibly?  For example, April 15, taxpayers filing their
10    tax returns?
11         A    Sure.
12         Q    Would it be useful information for ratemaking if
13    the mix of determinants for any given subclass do not
14    reflect conditions during a peak volume quarter?
15         A    I think ideally you would want to use a year worth
16    of billing determinants, and that's what's generally done. 
17    Here, as I have explained, that wasn't available to me
18    because doing so would have mixed pre- and
19    postclassification reform data, and I think I get a better
20    mix of mail, a better split made of the test year volume
21    forecast by using pure postclassification reform data.
22         Q    Are you familiar with the process of taking
23    quarterly data and dividing or normalizing the data by the
24    number of days in the quarter?
25         A    Someone could probably do that.  I'm not familiar,

                                                              3018
 1    I've never done that or am familiar with it.
 2         Q    Well, if we divide -- if we took the volume for
 3    one quarter and divided it by the number of days in that
 4    quarter, 84 or 112 depending on -- if we are using Postal
 5    fiscal quarter 1, 2 and 3 or Postal fiscal quarter four,
 6    would that simple division problem yield the average daily
 7    volume?
 8         A    It would, but there are Sundays and holidays in
 9    there so I don't know what purpose you want to use that
10    number for.  But if you are just trying to get an average
11    daily, recognizing that mail isn't always entered on every
12    day of the year --
13         Q    To try to normalize the comparing volume in one
14    quarter with another quarter, because we have the problem of
15    Postal fiscal quarter 4 having 112 days and Postal fiscal
16    quarters 1, 2 and 3 having 84, so if we wanted to compare
17    volume if we do a division, simple division problem, get
18    average daily volume, then we could have apples and apples
19    instead of apples and oranges.
20         A    You can divide the volume for a quarter by the
21    number of days in that quarter to get daily volume.
22         Q    And I -- we -- we've done that.  And, Mr.
23    Chairman, I would like to show the witness and commissioners
24    the results.
25              MR. ALVERNO:  I guess I do have an objection to

                                                              3019
 1    this cross-examination exhibit because it does not seem to
 2    comport with the Commission's rules on providing exhibits to
 3    opposing counsel in advance.
 4              CHAIRMAN GLEIMAN:  Well, that -- if it were a
 5    really complicated cross-examination exhibit, I would
 6    say -- I would rule in your favor.  But this is -- whether
 7    anyone is convinced in time by anything that is in this
 8    cross-examination exhibit is another matter.  But the
 9    mathematical concept is a rather simple one, even one that I
10    can comprehend, so I think we'll allow it.
11              BY MS. EMIGH:
12         Q    I took these data from the Postal Service's
13    quarterly reports that they send to me and a lot of other
14    mailers, revenue, pieces and weight and a very useful
15    document.  I really do appreciate you guys doing that over
16    the years.  And this is for nonprofit ECR, enhanced carrier
17    route.
18         A    Okay.
19         Q    Now, what I did was on the X axis is the average
20    daily volume in millions.  That's 2 million, 4 million, 6
21    million, 8 million pieces.  And on the -- I'm sorry, that
22    was the Y axis is the average daily volume Q, 2, 4, 6, 8, 10
23    million pieces.  And then on the X axis is the time period,
24    fiscal year '93, quarters 1 through 4, fiscal year '94,
25    quarters 1 through 4 and the same for '95, '96 and then we

                                                              3020
 1    have the first -- by now we do have the first three quarters
 2    for fiscal year '97.
 3         A    Okay, yes.
 4         Q    Do you see any volume patterns in this chart?  If
 5    we look at the four bars for each fiscal year?
 6         A    Yes, I see those bars.
 7         Q    Is there a peak at fiscal year '93, quarter one?
 8         A    For that year, there's a peak, yes.
 9         Q    For that year.  And then for fiscal year '94?
10         A    The peak is at quarter 3.
11         Q    At quarter 3.  And for fiscal year '95?
12         A    Quarter 1.
13         Q    Quarter 1.  Fiscal year '96?
14         A    Quarter 1.
15         Q    And fiscal year '97, the first three quarters?
16         A    Quarter 1.
17         Q    Doesn't it seem to you that quarter 1, with the
18    exception of fiscal year '94, is consistently higher than
19    the other courters for the --
20         A    Four out of those five years have quarter 1 as the
21    highest average daily volume for nonprofit ECR.
22         Q    Have you had much experience with nonprofit
23    mailers in the course of your work at the Postal Service?
24         A    I think I remember meeting with you once, as a
25    matter of fact.

                                                              3021
 1         Q    Really?
 2         A    She doesn't remember.  "Really?"
 3              Yes, I've come in contact and I have been on the
 4    phone with Mr. Cassidy.  So I am familiar, certainly, with
 5    nonprofit mailers.
 6         Q    Would you, based on your -- your knowledge, would
 7    you hazard a guess as to why the first -- there is a burst
 8    in the first quarter of volume for nonprofit enhanced -- you
 9    know, it used to be carrier route and then in '97 enhanced
10    carrier route?
11         A    Maybe the notion that people might be generous at
12    that time and you're doing some fundraising activities?
13         Q    Of course, that would be true for nonprofit
14    carrier route and nonprofit other.
15         A    Um-hum, I imagine.
16         Q    Because of the time and other constraints, I
17    didn't do the chart for nonprofit other.  But it is not
18    quite as pronounced.  So therefore, as an economist, we
19    would look for why the difference carrier route and all
20    other rate categories.  And I was just wondering, based on
21    your experience at the Postal Service with nonprofit mail,
22    can you explain that difference?
23         A    Between carrier route and other or just within the
24    year?
25         Q    Why the particular burst in carrier route standard

                                                              3022
 1    A or the old Third Class during the Postal fiscal quarter 1,
 2    the pre-Christmas period.
 3         A    Right.  I don't know why carrier route would
 4    differ so much from the other classes.
 5         Q    Do you know about direct mail fundraising by
 6    nonprofits?
 7         A    Yes, yes.
 8         Q    Can you tell us the difference between prospect
 9    mailings and membership or renewal mailings?
10         A    Prospecting probably goes -- has a more dense
11    distribution because you are trying to get people who are
12    not a member or a contributor, I suppose.  But if you are
13    doing just a list of given current donors or members, that
14    might be a less dense mailing.
15         Q    So for prospect mailings, casting the net to find
16    those relatively few people interested in your cause would
17    be a large volume, would tend to be a larger volume mailing
18    than a renewal mailing to your existing donor base?
19         A    It would be, yes, probably a larger volume
20    mailing.
21         Q    And for the nonprofit mailers, very high volume,
22    the mega charities, would they be selecting the lists to
23    prospect to by carrier route?
24         A    Again, I mean, I'm not intimately familiar with
25    how the nonprofit people go about raising their funds but --

                                                              3023
 1         Q    But through the mail, with your work in the Postal
 2    Service, nonprofit mail, the high volume, big national
 3    charities?
 4         A    Yes, if it is a popular charity, it is probably
 5    going to have a higher density mailing.
 6         Q    But do they select the 50 or so lists that they
 7    are going to prospect to pre-Christmas by carrier route?
 8         A    I don't know.  I don't know how they select their
 9    lists.
10         Q    And therefore when they roll out a
11    million-and-a-half pieces per list they are rolling out by
12    carrier route and therefore the carrier route bursts are
13    these particularly noticeable peaks during the course of
14    four quarters?
15         A    I don't know if that's why that happens.  I don't
16    know if they roll out by carrier route.  I guess I
17    understand the notion that you're presenting that they mail
18    more around that time of the year and that may explain this.
19         Q    But all the nonprofit mailers, the small ones that
20    have no density and the large ones --
21              CHAIRMAN GLEIMAN:  Ms. Emigh, he has indicated
22    that he is not intimately familiar with the fundraising
23    techniques, decisions about how nonprofits mail and I think
24    that question has been asked.
25              Since I have interrupted you, let me ask you if

                                                              3024
 1    you have any objection to our marking this piece that you
 2    have given us as a cross-examination exhibit?  And if you
 3    have no objection, then we are going to mark it NFN-XE-1,
 4    just so we'll know what the questions were concerning.
 5                             [Cross-Examination Exhibit No.
 6                             NFN-XE-1 was marked for
 7                             identification.]
 8              MS. EMIGH:  Thank you, Mr. Chairman.
 9              BY MS. EMIGH:
10         Q    Moving on, would it surprise you to learn that the
11    full year of 1996 had about 24 percent carrier route pieces? 
12    In other words, for the full year of 1996 carrier route was
13    about 24 percent of total nonprofit Third Class volume --
14              MR. ALVERNO:  Objection again.  The fact hasn't
15    bee established as far as this witness is concerned, so it
16    assumes a fact that is not in evidence.
17              I can understand if she wants to ask a
18    hypothetical, but I didn't understand that question to be
19    asked in a hypothetical sense.
20              MS. EMIGH:  May I rephrase that question?
21              CHAIRMAN GLEIMAN:  Certainly.
22              BY MS. EMIGH:
23         Q    What percentage, based on your expertise with
24    nonprofit mail at the Postal Service, what percentage of
25    nonprofit Third Class mail in 1996 was carrier route?

                                                              3025
 1         A    I don't know that number off the top of my head.
 2         Q    Would you accept subject to check that about 24
 3    percent, about a quarter, of all nonprofit Third Class mail
 4    in 1996 was carrier route, paid the carrier route rate?
 5         A    Yes, I'll accept that subject to check.
 6         Q    And for the year test period, that one quarter,
 7    Quarter 2 of 1997, how much of the mail during that one
 8    quarter was enhanced carrier route?
 9         A    Well, let's see -- page 2 of work paper 2 --
10         Q    Would you accept subject to check that it is about
11    19 percent?
12         A    Okay, I'll accept that.
13         Q    Okay.  Well, now we have for a full 12 month
14    period almost one-quarter of all of nonprofit Third Class
15    mail was carrier route, but for the quarter you selected,
16    Quarter 2 of 1997, only about 19 percent was carrier route. 
17    That is about a 26 percent difference.  Do you think that is
18    misleading, to just use the volume for one quarter, Quarter
19    2, versus a quarter -- a carrier route for a whole year?
20         A    I guess I'll go back to my earlier answer, that
21    ideally you would want to use a whole year to have to avoid
22    situations like this, although I thought it was going to be,
23    the way you were laying this out it was actually going to be
24    more dramatic than that.
25         Q    And 26 percent difference isn't dramatic?

                                                              3026
 1         A    Well, 24 percent versus 19 percent, but anyway,
 2    since it doesn't -- carrier route and the other are a
 3    different subclass.
 4              Anyway, back to my other answer.  I'm sorry, I
 5    lost my train of thought.
 6              As I said, ideally you would want to use an entire
 7    year.  I was faced with a situation that using an entire
 8    year was not possible unless I wanted to use figures that
 9    were pre and post reclass which had different makeup
10    characteristics, that would not be the same as test year
11    '98, which is obviously post classification reform.
12              So there was a decision made there and the only
13    decision I think you can make is to use Quarter 2 and while
14    acknowledging that that may be less than ideal it is the
15    only thing you can do because you don't have a full year of
16    post reclass.
17         Q    But price times the number of pieces, the rate
18    times the number of pieces, the rate times volume, yields
19    revenue, is that right?
20         A    Price times volume equals revenue.
21         Q    The rate per piece times the number of pieces
22    gives the revenue, and if the volume -- if you are using,
23    plugging in a number for volume, for "Q" that is low, if you
24    are using a volume number for a carrier route that is low
25    that means that the revenue requirement for standard

                                                              3027
 1    nonprofit is going to have to be made up by charging higher
 2    rates for nonprofit other.
 3         A    No, no, no.  This split between carrier route and
 4    noncarrier route does not come into play in the
 5    determination of the revenue.
 6              Those are two separate subclasses.  Within each of
 7    those subclasses those billing determinants for Quarter 2
 8    are used.  To split the volume up the relative proportion of
 9    carrier route versus other doesn't come into play here at
10    all.
11         Q    There isn't a revenue requirement for nonprofit
12    carrier route and a revenue requirement for nonprofit other?
13         A    There are two separate revenue requirements.
14         Q    And if the revenue, to get the revenue requirement
15    for -- if one class produces less revenue, doesn't it affect
16    the other classes?
17         A    Well, in nonprofit we have a different situation
18    than normal in the commercial side of things in that the
19    revenue requirement is dictated by the costs and the markup
20    which is prescribed by the Revenue Foregone Reform Act. 
21    That is how you determine the revenue requirement for those
22    two individual subclasses.
23              It doesn't have anything to do with billing
24    determinants.
25         Q    But when we are computing revenue, it is a

                                                              3028
 1    function of volume and the rate.
 2         A    Volume times rate equals revenue, yes.
 3         Q    And if we have a revenue requirement for nonprofit
 4    other and a revenue requirement for ECR, Enhanced Carrier
 5    Route, and if we are going to take a volume period for
 6    Enhanced Carrier Route that is abnormally low, that is -- if
 7    you look at the chart, the second quarter is almost always
 8    the lowest volume quarter, going across the fiscal quarters,
 9    so if we are going to take a period for volume where the
10    volume is abnormally low as opposed to normalizing the
11    volume over a longer period -- if not a year, two quarters
12    as you did for commercial -- then the revenue from
13    nonprofits is going to have to come from some other place.
14         A    No, not at all.  The revenue requirement is
15    distinct from what I use for the billing determinants as the
16    billing determinants to split up the volume.  The volume
17    forecast is for a year's period, then that volume forecast
18    is distributed by the only available thing I can distribute
19    it by, and that is postreclass billing determinants, which
20    happen to be for a quarter, but they're percentages.  Within
21    carrier route it's a percentage distribution.  The fact that
22    it's based on a lower volume quarter doesn't affect the
23    revenue requirement in any way.
24         Q    But the distribution -- the distribution over
25    billing determinants we talked about earlier can vary by

                                                              3029
 1    season, by volume, during a high-volume season you have
 2    costs that vary by volume.  So it can't -- the mix, the
 3    distribution of mail over the billing determinants by
 4    quarter can make a difference which quarter you select.
 5         A    The percentage volume mix within that quarter may
 6    be slightly different than the volume mix for another
 7    quarter.
 8         Q    And when you look at these bursts, the first
 9    quarter bursts in enhanced carrier route, that could be a
10    very different distribution over the billing determinants
11    for the first quarter burst than the second quarter troughs.
12         A    Quarter one and quarter two could have identical
13    distributions --
14         Q    But they could also have very different.
15         A    They could.
16         Q    They could.
17         A    That's why it's advantageous if possible to use an
18    entire year, but that wasn't available to me.
19         Q    Let's move on to my last set of questions.  On
20    your Work Paper 2, page 8, and I'd like to ask you about the
21    TYBR, test year before rates, Work Paper 2, page 8.
22         A    Yes.
23         Q    And you have two lines.  The first line reads
24    nonprofit.
25         A    Yes.

                                                              3030
 1         Q    Which I presume is nonprofit other.
 2         A    Actually it's called nonprofit, but it is what
 3    used to be the other part of --
 4         Q    The basic rate in the presort.
 5         A    The noncarrier route portion.
 6         Q    Right.  And then nonprofit, your second line is
 7    nonprofit ECR, which before rates was the carrier route.
 8         A    Correct.  Oh, before reclass --
 9         Q    Before reclass, I'm sorry.
10              Okay.  And then as I -- am I reading this
11    correctly that at lines 1 and 2 that the nonprofit other
12    taking -- subtracting line 7 from line -- or column 7 from
13    column 6 that nonprofit other makes a .75 cents per piece
14    contribution to institutional costs?
15         A    If you're subtracting column 7 from column 6, that
16    would be the contribution per piece.
17         Q    And it's .75 cents.
18         A    That looks like that would be the math.
19         Q    And if we take line 2, the contribution per piece
20    of carrier route, that would be about .033.
21         A    That would be --
22         Q    3.3 cents per piece.
23         A    Yes.
24         Q    And historically is that what we -- what we had
25    was the carrier route making a higher contribution per piece

                                                              3031
 1    to institutional costs than the nonprofit other?
 2         A    I don't know historically --
 3         Q    3.3 cents versus .75.
 4         A    I know that's the way -- it breaks out that way in
 5    commercial sometimes.  I'm not sure that -- of the history
 6    there in terms of the relationship between contribution of
 7    those two groupings.
 8         Q    Well, I mean, this Work Paper 2, page 8, this is
 9    labeled test year before rates.  And I thought this was one
10    of the whole purposes of reclassification was to even up the
11    contribution to institutional costs between the carrier
12    route, which is more work-sharing, where the mailer does
13    more work, than nonprofit other.
14         A    This is merely -- I'm not sure how this ties to
15    the classification reform or what --
16         Q    Well, this is before rates.  This was before --
17         A    This is test year, which is '98, which is before
18    rates but after reclass.
19         Q    Okay.  So after reclass we still have the
20    nonprofit carrier route contributing 3.3 cents per piece to
21    institutional costs, whereas nonprofit other is contributing
22    only .75 cents per piece.  Subtracting column 7 from column
23    6.
24         A    Right, but I'm not -- I'm not sure that can be
25    described as something inconsistent with the goal of

                                                              3032
 1    classification reform.
 2         Q    Let me strike that.
 3         A    Okay.
 4         Q    Let's just stick with your numbers.  So we have
 5    these different contributions to institutional costs per
 6    piece.  Then we look at -- well, where in your work papers
 7    do we see the contribution per piece after rates?  Can it be
 8    calculated from workpaper 2, page 35?
 9         A    Yeah, I was hoping it would be on there but it's
10    the gross contribution, not contribution per piece.
11         Q    If we do the simple -- if we were to do the simple
12    arithmetic, would we get a contribution of 2.4 cents from
13    nonprofit other to institutional costs?
14         A    Again, I'm not doing the math here but I guess
15    that is one of those things --
16         Q    Subject to check, would you --
17         A    I'll accept that.
18         Q    -- 2.4 cents?
19         A    Subject to check, I will accept that.
20         Q    And subject to check, would you accept from
21    workpaper 2, page 35, that the nonprofit ECR contribution
22    per piece to institutional costs is also about 2.4 cents?
23         A    I will accept that subject to check.
24         Q    Well, then, then we have a situation, do we not,
25    where the contribution before rates that -- the before rates

                                                              3033
 1    nonprofit carrier route, enhanced carrier route was
 2    contributing per piece about 4.4 times the contribution of
 3    nonprofit other.  Whereas, now it is contributing about only
 4    one time.  In other words, they're both making about the
 5    same contribution, about 2.4 cents per piece.
 6         A    So they are roughly equal contribution per piece?
 7         Q    Now, whereas before in the test year before rates
 8    you had nonprofit ECR contributing per piece about 4.4 times
 9    more than nonprofit other.  Whereas, after rates, they're
10    making -- there has been this dramatic change.  The
11    contribution of ECR has come way down and the contribution
12    of other has come up dramatically?
13         A    That appears to be the case.
14         Q    Would that have been so dramatic had you used the
15    usual 12-month period?
16         A    I can almost assure you that it would make no
17    difference.  But I am not --
18         Q    I'm sorry, I missed that.  You could almost assure
19    me what?
20         A    One, I didn't have the annual data so we are still
21    arguing over nothing here but those -- that relationship of
22    contribution per piece for those two subclasses is driven by
23    the cost for those two subclasses and the markup that is
24    applied to those two subclasses.  It has nothing to do with
25    the billing determinants.  That dramatic swing has to do

                                                              3034
 1    with the markup that's applied to the cost for those two
 2    subclasses.
 3         Q    But volume is distributed among billing
 4    determinants?
 5         A    Within a subclass, yes.
 6         Q    And volume and therefore the distribution can vary
 7    by season, by quarter?
 8         A    Yes.
 9         Q    Okay, one last question has to do with your
10    testimony on page 33.  Actually, it starts on the bottom of
11    page 32, on line 21.  I was wondering if you could explain
12    just one last thing to us which I don't think involves
13    detailed numbers.
14              On line 21, you say in connection with Docket
15    Number MC96-2, two subclasses, nonprofit and nonprofit
16    enhanced carrier route were established.  Skipping on, as a
17    result, separate markups were set for these two subclasses
18    whereas one was necessary previously.  Regular and ECR serve
19    as the commercial counterparts for nonprofit and nonprofit
20    enhanced carrier route respectively.
21              Okay, now, line 3 here on top of page 33, the
22    effect of the adoption of these two separate markups and the
23    generally low costs for nonprofit mail in the test year --
24    so we have at the top of page 33 that nonprofit mail in the
25    test year is characterized by "generally low costs."  And

                                                              3035
 1    then dropping down on the same page, 33, we have the rubric
 2    C, proposed rate design, one, rate design formula.
 3              Dropping down -- that section begins on line 14
 4    and dropping down to line 19 you say, this resulting
 5    nonprofit coverage coupled with the relatively high costs
 6    for the nonprofit subclass.  And we were curious why at the
 7    top of page 33 you say nonprofit is characterized by
 8    generally low costs and then at the bottom of page 33 you
 9    say that nonprofits have relatively high cost.
10         A    Yeah, I'm speaking at the top of that page what
11    the phenomenon was in classification reform when the
12    costs -- when I say they were low, they were low especially
13    with respect to the costs that were underlying the
14    preclassification reform rates.  So in that proceeding, we
15    were able to lower the rates for almost every nonprofit
16    category.
17              However, by moving forward and getting a new year
18    and a different time period, and I might add different
19    markups, those costs I described there as being relatively
20    high, and that is opposed -- sort of referring to the
21    previous costs that we had for those groupings.
22         Q    But the markup, can't we hold that aside?  That is
23    the markup for institutional costs you are talking about?
24         A    Well, you can't really hold it aside because it's
25    one of the two things that describes the revenue requirement

                                                              3036
 1    or is used to calculate the revenue requirement.
 2         Q    But with respect to attributable costs, what
 3    changed?
 4         A    I'm not here to present the costs for these -- for
 5    these classes of mail.  I -- I am given the costs by another
 6    witness and then I apply the markup that is in compliance
 7    with the Revenue Forgone Act and that's how I get the
 8    revenue requirement.
 9         Q    Who would we ask about the -- to find out about
10    these -- what contributed, what caused generally low costs
11    to become generally high costs?  To become relatively high
12    costs?
13         A    Well, again, that's my characterization and I'm
14    not -- they're still low relative to the commercial costs. 
15    The costs for nonprofit are still low.  They happen to have
16    changed more over this time period and that's what I'm
17    really talking about.
18              I'm trying to explain, you know, the large
19    increase that that subclass is getting and I explained it by
20    saying the relatively high cost.  Alternative wording would
21    have been "due to changes in the costs that have its costs
22    relatively higher than those costs that underlie the current
23    rates."  That's sort of cumbersome but that was the point.
24              MS. EMIGH:  Okay.  Thank you.
25              Thank you, Mr. Chairman.

                                                              3037
 1              CHAIRMAN GLEIMAN:  Ms. Dreifuss?
 2              MS. DREIFUSS:  Thank you, Mr. Chairman.
 3                          CROSS EXAMINATION
 4              BY MS. DREIFUSS:
 5         Q    Good afternoon, Ms. Moeller.
 6         A    Good afternoon.
 7         Q    Could you turn to your response to OCA
 8    Interrogatory 11, please.
 9         A    OCA-11.  Okay.
10         Q    In that interrogatory we reference page 16 of your
11    testimony, where you explain that due to significant changes
12    in costing methodology the cost differential supporting many
13    of the discounts have changed significantly, and then we
14    asked you to summarize the significant changes.
15              In that answer you indicate that one of the more
16    significant changes is the volume variability study
17    described by Witness Bradley.  Is that correct?
18         A    That was my response, yes.
19         Q    Do you know in which direction the change in
20    volume variability goes, whether it goes up or down, because
21    of his study?
22         A    I think there was another question where they were
23    asked, I was asked generally what happens and was it from
24    the OCA?  I think we said generally the presort related cost
25    differences would decrease because of that.

                                                              3038
 1         Q    Right, so his volume variability study tends to
 2    make volume variability lower in this case than if one were
 3    to use the former Segment 3 attribution methodology of the
 4    Commission?
 5         A    I am not familiar with the Segment 3 attribution.
 6         Q    Well, I am talking about the volume variability --
 7    well, the counterpart to what Witness Bradley did.
 8              If one used a traditional methodology instead of
 9    Witness Bradley's methodology, volume variability would be
10    higher --
11         A    Yes.
12         Q    -- that's correct, isn't it?
13         A    Yes.  That's my understanding.
14         Q    And because it would be higher than generally
15    speaking, unit mail processing costs calculated under the
16    Commission's methodology would also tend to be higher. Does
17    that sound right?
18         A    In the absence of any other changes, I guess that
19    would be correct.
20         Q    And would you also agree that with unit mail
21    processing costs generally being somewhat higher under the
22    Commission's attribution methodology that the differentials,
23    let's say for presortation, would tend to be higher under
24    that methodology, is that correct?
25         A    Yes.

                                                              3039
 1         Q    And that probably holds true for the
 2    letter/nonletter differential, is that correct?  That is, if
 3    one were to use the Commission's attribution methodology,
 4    the letter/flat differential would be higher than as
 5    currently presented in Witness Daniel's testimony, is that
 6    correct?
 7         A    I hesitate to say for sure because I know the
 8    volume variability varies by operation type and certainly
 9    operation type varies by shape, so I really don't want to
10    speculate as to what the relationship would be in the
11    letter/flat differential.
12         Q    You do know it to be true for presort
13    differentials; is that correct?
14         A    I think I had acknowledged that somewhere else,
15    that that was a sensible outcome because those presort
16    differentials are usually by shape and then the operations
17    involved are similar and probably have similar volume
18    variability factors.
19         Q    Would it also be a sensible outcome to predict
20    that the letter -- nonletter differential would move in that
21    direction, too, in the same direction that the presort
22    differentials have moved or would move, rather?
23              MR. MAY:  I object to the question, Your Honor.
24              I don't think the witness is competent and he has
25    so said he is not competent to respond to this line of

                                                              3040
 1    inquiry so anything he puts in the record would be pure
 2    speculation.  The data is otherwise available but I object
 3    to this witness being asked to characterize data that he is
 4    not familiar with.
 5              MS. DREIFUSS:  Mr. Chairman, I am just amazed that
 6    Mr. May is able to step inside of the witness' mind and know
 7    what he does or doesn't know.  It's obviously appropriate
 8    for the witness to answer the question and not Mr. May for
 9    him.
10              CHAIRMAN GLEIMAN:  If the witness can answer the
11    question, the witness should and if the witness isn't
12    competent to answer the question, the witness will tell us
13    that he is not competent to answer the question or that he
14    doesn't know the answer to the question.
15              THE WITNESS:  I think I had been asked that
16    question two questions before and I said that I can't make
17    any conclusions for letters versus nonletters because it is
18    my understanding that some of the volume variabilities may
19    vary according to operation which varies by shape.  And I
20    can't reach any conclusions that I would feel comfortable
21    making.
22              BY MS. DREIFUSS:
23         Q    Turn to your response to MASA interrogatory
24    T-36-1, please.
25         A    Okay.

                                                              3041
 1         Q    In your response to part F, the last sentence, you
 2    state that since the costs for the subclasses are reduced,
 3    the cost differentials between automation and nonautomation
 4    categories tend to be reduced; is that correct?
 5         A    That's what I say there.
 6         Q    Now, despite -- let's turn to OCA interrogatory
 7    25, please.
 8         A    Number 24 is so long, I keep paging through it
 9    here.
10         Q    Twenty-five, please.
11         A    Yeah.  There we go.
12         Q    In subpart A, we presented a unit cost
13    differential calculation between basic ECR letters and basic
14    ECR flats and we came up with a number 3.5099.  Do you see
15    that in our question, subpart A?
16         A    Yes, I see that.
17         Q    And we asked you to confirm that number and you
18    did confirm it, did you not?
19         A    I confirmed it using those costs that were
20    available at that time.  If I were asked that question
21    again, you would probably rephrase it to reflect the revised
22    costs presented by Witness Daniel and I believe the 3.5099
23    number would become 2 point something, 2.1679.  And I would
24    confirm that.
25         Q    All right.  I am aware that she revised her -- her

                                                              3042
 1    Appendix 29-C.  Page 2, I guess, is what we are talking
 2    about.
 3         A    Correct.
 4         Q    It appears that the basic ECR nonletter unit cost
 5    was revised significantly.  Is that your understanding too?
 6         A    I believe so.  If you are looking at it and that's
 7    what you say, I'll accept that that was the change.  I think
 8    I just have the after cost so I don't know how much they
 9    changed.
10         Q    All right.  I do understand though that the
11    differential we calculated in subpart A wouldn't be as large
12    as what we presented to you there.  Instead of 3.5099 cents,
13    it would now be 2.1679 cents.
14         A    Okay.
15         Q    We asked you in subpart E whether that
16    differential had doubled since Docket No. MC95-1, and you
17    were not able to confirm that, and you said it was due to
18    changes in the costing methodology.  Is that correct?
19         A    Yes, it's not really an apples-to-apples
20    comparison there that would allow me to confirm that they
21    had doubled.
22         Q    Right.
23         A    And as it turns out, since we're using a revised
24    differential figure, it would not have doubled, so that that
25    answer is -- certainly in light of recent events is correct.

                                                              3043
 1         Q    What are the changes in the costing methodology
 2    that you're talking about there in your answer to subpart E?
 3         A    Well, I think I address it in the testimony, and
 4    I'm sure Witness Daniel could have explained this.  She
 5    actually was a party to it.  Let me find my testimony.
 6              I think on page 29 I describe, starting at line 7,
 7    that study and how it differed from what has been done in
 8    the past.
 9         Q    You did refer us to page 3 of USPS-29-C, and said
10    that that would make for a better comparison to the Docket
11    No. MC95-1 differential.  Is that correct?
12         A    That's correct, and actually the cite I gave you
13    here for -- that was just one of the changes.  It was
14    another change that really led me to tell you to go to page
15    3.
16         Q    Page 3 would be a better comparison to the Docket
17    No. MC95-1 figure.
18         A    Better, but still not a direct comparison, because
19    of the change I did cite here on page 29.
20         Q    Now in what way is the page 3 comparison better
21    than the page 2 comparison?
22         A    I know it has something to do, and the only reason
23    I'm not -- I'm not sure exactly what differences there are,
24    it has something to do with adjusting for drop ship
25    differences, and -- oh, I think I say that in the answer. 

                                                              3044
 1    But anyway there's a normalization or something that goes on
 2    that makes -- is treated similarly in page 3 to the exhibit
 3    that you referred to in classification reform.  That's why
 4    it's a better comparison.
 5         Q    Well, since you said it was a better comparison,
 6    and I note it's a smaller differential --
 7         A    That wasn't my motivation for saying it was a
 8    better comparison.
 9         Q    I did make that my starting point.  I started with
10    page 3 of her Exhibit 29-C, and I came up with a
11    letter-nonletter cost differential of 1.8814 cents, and you
12    could check that.
13         A    That's the new 1.3 or 1.4 -- are you talking about
14    the new number or the old number?
15         Q    It would be the result of her revisions.
16         A    Yes.
17         Q    That's calculated based on the revised page of
18    that appendix.
19         A    Which happens to be very similar to the number
20    that was used here in this interrogatory.
21         Q    Right.  I think it's only about a thousandth of a
22    cent difference.
23         A    Yes.
24         Q    Now how much of the letter/nonletter differential
25    did you decide to pass through in the rates that you

                                                              3045
 1    propose?
 2         A    Probably the best place to summarize this are the
 3    revised pages to my testimony that had the pass-throughs as
 4    filed.  Of course that list on page 48 are only the ones
 5    that changed.  If this one didn't change it won't be on that
 6    page.
 7         Q    Let me stop you for just a moment.  I am not going
 8    to look at anything other than the basic, the basic
 9    letter/nonletter differential.
10         A    Okay.
11         Q    So how much of that did you decide to pass
12    through?
13         A    Zero percent.
14         Q    When the Commission was faced with that same
15    question in Docket Number MC95-1, did they decide to pass
16    through zero in terms of setting the ECR basic
17    letter/nonletter rates?
18         A    They passed through something other than zero to
19    that cost differential to come up with a letter rate and a
20    nonletter rate at the basic tier.
21         Q    Are you aware that they did pass through
22    roughly -- well, I won't even be rough.  They passed through
23    pretty close to 36.7 percent of the calculated differential. 
24    Is that your understanding?
25         A    36.7 percent?  I didn't realize it was a figure

                                                              3046
 1    that distinct.  I thought it was more of a --
 2         Q    You could check this now, or if you have a 95-1
 3    opinion with you, I am looking at Table 5-4.  It is a page
 4    5-264 of the MC95-1 opinion.
 5         A    I didn't bring the opinion, but I see in the work
 6    papers that the letter/flat pass-through was 40 percent, but
 7    that may just be a rounding.
 8         Q    Okay, well anyway, 36 to 40 percent.
 9         A    Yes.
10         Q    It was quite a bit more than zero, we would agree?
11         A    Yes.
12         Q    Did you make any calculations to see what discount
13    might result from passing through roughly let's say 36 to 40
14    percent of the 1.8814 cent differential appearing at page 3
15    of Exhibit 29-C?
16         A    I don't recall if I put that particular
17    pass-through in as I was playing with the rate design
18    formula and the work papers are not -- I may have at one
19    point.
20         Q    I used 36 percent.  I rounded it down to 36
21    percent and I got .67 cents as the resulting discount of a
22    36 percent pass-through.  Does that sound about right?
23         A    I hope that when you put it in the right cell
24    that's what it showed.  That should have been the conclusion
25    there, yes.

                                                              3047
 1         Q    In Docket Number MC95-1, the Postal Service did
 2    present its reasons to the Commission for not passing
 3    through that letter/flat differential, did it not?
 4         A    I think we provided reasons why we had one rate
 5    that would apply to letters and nonletters that weren't
 6    distinct categories proposed, so there was no pass-through
 7    proposed.
 8         Q    I guess it would have the Postal Service's
 9    preference to have the automation carrier route rate set
10    lower than the basic letter rate for ECR, wouldn't it?
11         A    Yes, you would want the automation carrier route
12    rate to be lower than the carrier route basic letter or
13    nonletter rate.
14         Q    And despite that preference, the Commission did
15    set the basic ECR letter rate higher than the five-digit
16    automation rate in the regular subclass, didn't it?
17         A    I'm sorry, I thought you asked me about the auto
18    carrier route rate.
19         Q    I'm sorry, the five-digit automation rate.
20         A    But your previous question, I thought you said
21    auto carrier route.
22         Q    I misspoke.  I meant to talk about the five-digit
23    automation rate in the regular subclass.
24         A    Yes, the recommended five-digit automation rate
25    was higher than the carrier route ECR basic letter rate.

                                                              3048
 1         Q    And the Commission did take into account the
 2    Postal Service's interest in promoting automation of this
 3    mail, did it not?
 4         A    Special consideration to the automation program.
 5         Q    Yes.  Nevertheless, it did decide to pass through
 6    the letter flat differential?
 7         A    On balance, they recommended that passthrough.
 8              MS. DREIFUSS:  Okay, I have no further questions,
 9    Mr. Chairman.
10              CHAIRMAN GLEIMAN:  If the witness is comfortable,
11    I would like to continue now.
12              Parcel Shippers Association, Mr. May?
13                          CROSS EXAMINATION
14              BY MR. MAY:
15         Q    Mr. Moeller, a few questions about the proposed
16    10-cent surcharge on standard A residual pieces.  If you
17    have reference to your response to NAA-5-D, you there state
18    that:
19              A piece with "flat-like" costs will likely meet
20    the definition of a flat, in which case it would be exempt
21    from the surcharge as long as it is prepared in accordance
22    with flat preparation requirements, close quote.
23              Are you saying there in that answer that a parcel,
24    a parcel or what we would call a residual piece which may
25    have "flat-like" costs will be accepted as a flat and avoid

                                                              3049
 1    the surcharge?
 2         A    A residual piece, by definition, is getting the
 3    surcharge.
 4         Q    Well, your answer said that if it had flat-like
 5    costs, it would likely avoid the surcharge.  I am asking you
 6    whether or not a residual piece that has flat-like costs,
 7    whether or not it will receive a surcharge or will it escape
 8    the surcharge?
 9         A    A residual piece, which is defined as being a
10    piece that does not meet the definition of a letter or a
11    flat or is prepared as a parcel will receive the surcharge. 
12    I don't make any claim on the cost of those pieces being
13    flat-like or parcel-like or whatever.  That is just the
14    definition.
15              This answer is merely saying if something has
16    flat-like costs, it is probably a flat.  I mean, it's that
17    simple here, is my comment here.
18         Q    You deny the possibility that I think other --
19    you -- your own testimony seems to reference as well as
20    others, there are at the margins some residual pieces that
21    are virtually indistinguishable from flats?
22         A    I think I say more generally that when you draw a
23    line and you define two different rate categories, you are
24    going to have pieces on either side of that line that may be
25    very similar in costs but that's an outgrowth of having a

                                                              3050
 1    rate structure where you have different rates.
 2         Q    All right but then you are saying that the poor
 3    unfortunate pieces that fall slightly on the other side of
 4    that line are, nevertheless, even though they have flat-like
 5    costs, are going to get a surcharge?  Isn't that what you
 6    are saying?
 7         A    Unless they decide they would rather prepare
 8    themselves as flats.  If they meet the definition of a flat,
 9    they are welcome to make themselves -- to prepare those
10    pieces as flats and avoid the surcharge.
11         Q    You believe that there are separate preparation
12    requirements for flats that are distinct from preparation
13    requirements for parcels in standard A?
14         A    Machinable parcels certainly have --
15         Q    I didn't ask you that.  I asked you whether you
16    believe, since your answer seems to imply it, that there are
17    distinct preparation requirements for flats that are
18    different than the preparation requirements for parcels in
19    standard A?
20         A    There are some parcel preparation rules that are
21    different than the preparation rules for flats.
22         Q    Without respect to machinability.
23         A    If it is a nonmachinable --
24         Q    Disregarding the issue of machinability, are there
25    any distinctly separate preparation requirements for flats

                                                              3051
 1    as opposed to parcels?
 2         A    I -- I am aware of the ones, of the different
 3    preparation for machinable parcels.  I am not aware of
 4    significantly different or different at all preparation
 5    requirements for --
 6         Q    Then how is it this mailer who is at the margin
 7    supposed to take your advice and to prepare, "prepare,"
 8    which is your testimony, prepare his parcel so that it's
 9    like a flat?  How is he supposed to do that if the
10    directions, if the preparation directions in the domestic
11    mail manual are identical?
12         A    I just have -- it appears to me that those pieces
13    that have flat-like costs are probably the ones that are in
14    this area where they could qualify either as machinable
15    parcels or as flats.  And that's what --
16         Q    How would they do that?
17         A    There are some dimensions of pieces, and I think
18    you've been through those before.
19         Q    Yes.
20         A    That meet the definition of a machinable parcel
21    and meet the definition of a flat.  Mailers, from what I can
22    tell, prefer to be defined as machinable parcels, if
23    possible, because then they can avail themselves of these
24    different preparation requirements I was talking about
25    where, by being a machinable parcel, they can prepare their

                                                              3052
 1    mailings to B&Cs, of which there are many fewer than there
 2    are SCFs, which is the group -- the breakout you would have
 3    to make if you were a flat.  So it is advantageous from a
 4    preparation requirement to be declared a machinable parcel
 5    rather than a flat.  It also is -- you also qualify for the
 6    same -- the three five-digit rate by making these B&C
 7    separations as a machinable parcel.  So that's what I'm
 8    referring to.
 9              If someone thinks -- if someone falls in that area
10    where they qualify for either, they are free to make those
11    otherwise machinable parcels up as flats and avoid the
12    surcharge.
13         Q    Well, I don't understand how you can call, I can
14    understand the definition of a parcel might allow you
15    to qualify as a machineable parcel, but I don't understand
16    how your definition of a flat will allow something that is
17    beyond the physical dimensions of a flat even by the least
18    fraction, how it's going to allow that, machineable or not,
19    to be prepared in a way so that it's not deemed to be a
20    parcel.
21         A    Well, I'm not saying that they can -- any piece
22    can decide to go as a flat, only those ones that would meet
23    the flat dimensions.
24         Q    In other words, there are -- you're saying is that
25    there are a lot of pieces that are defined as parcels that

                                                              3053
 1    would also fit the definition of flats.
 2         A    I don't say how many there are.  I know that there
 3    are pieces just by looking at those dimensions it's possible
 4    to have a piece that you could choose, the mailer could
 5    choose to say is a machineable parcel and prepare the mail
 6    in accordance to those preparation requirements, or can say
 7    this is a flat, and make them up according to flat
 8    preparation requirements.
 9         Q    In which event they won't have to pay.  The
10    preparation requirement, that's where you're -- I'd like to
11    know for the record just what those are, what those
12    preparation requirements are.
13              MR. ALVERNO:  Objection.  Asked and answered,
14    because the witness has already identified what that
15    procedure is.
16              CHAIRMAN GLEIMAN:  I'm sorry, you have to speak a
17    little bit slower.
18              MR. ALVERNO:  I'm sorry.  Yes, asked and answered. 
19    The witness said that there were -- the preparation
20    requirement involved separation to 21 BMCs.  So the question
21    has been asked and answered.
22              MR. MAY:  Well, I don't think that's what the
23    witness answered.
24              BY MR. MAY:
25         Q    But is that what the witness meant, that that's

                                                              3054
 1    the sole preparation that you prepare it for 21 BMCs.  Is
 2    that what you meant by preparation requirements?
 3         A    That was the distinction of that difference I was
 4    talking about.  They still -- the mailer has to make up
 5    five-digit containers if they can, and then the next step up
 6    is BMC, and the point was that's an -- that's an easier
 7    separation to make than the separation you would have to
 8    make if you were a flat, which would be to all the SCFs in
 9    the country.
10         Q    But in the other case you had to pay the 10 -- but
11    you have to pay the 10-cent surcharge in order to get that
12    easier separation.
13         A    You'd have to decide do I want the easier prep,
14    and bear this 10-cent surcharge, or do I want the more
15    complicated prep and avoid the surcharge.
16         Q    All right.  Now if you will look at your response
17    to DMA-9, you were asked whether the Postal Service had
18    performed studies that show shape is the factor that
19    differentiates cost of flats from those of nonflats, and
20    your response simply cited Witness Crum's testimony, which
21    describes a study which measures the cost differences.
22              That is your answer, was it not?
23         A    Yes, that's my answer.
24         Q    Now does that study that you cite -- does that
25    show that shape is the cause of the cost difference, or does

                                                              3055
 1    it merely purport to show that on average parcels cost more
 2    than flats, without any explication of the reason why that
 3    might be the case?
 4         A    Well, I think Witness Crum can speak to what --
 5    the specifics of that cost study.  I used the output of that
 6    study as the cost difference between these two groupings of
 7    mail, which I apply low passthrough to.
 8         Q    Well, I don't want to haggle you over it, but the
 9    question the DMA asked you was do you have studies that show
10    that shape is the factor that differentiates the costs of
11    flats from those of nonflats, and you simply answered that
12    by referring to Witness Crum's testimony, so I think we're
13    entitled to believe that you're familiar with what his
14    testimony is, since you have cited it.
15              Now my question is, did Mr. Crum -- did the study
16    that he references simply report the fact that flats cost
17    more than parcels, or did it attempt to establish what it
18    was that caused parcels to be more expensive than flats --
19    for example, shape?
20         A    My use of the study was the cost difference that
21    he found.  Whether he analyzed what's causing that big cost
22    difference wasn't anything I referenced in that study.  I
23    was merely taking the cost difference and using it for
24    ratemaking purposes.
25         Q    I take it then that your answer now is that you

                                                              3056
 1    are not aware of any Postal Service cost studies that have
 2    explained what the cause of the cost difference is and an
 3    explication of why that whatever the cause is causes those
 4    extra costs.  Are you aware of any study?
 5         A    Well, I think that study gives you an idea and I
 6    know that you discussed with Witness Crum various things
 7    that might be influencing it other than shape, and so I
 8    think you were talking to the right person when you were
 9    talking about that, and then the study speaks for itself,
10    and whether or not it does what you say it does or what you
11    guys discussed yesterday.
12         Q    Well, we got here -- let me refresh you -- we got
13    to this point because in one of your answers you stated that
14    the Postal Service has identified the shape, the shape, as
15    the cost-causing factor.
16              I am asking you to point to any study, any study,
17    that the Postal Service has done that identifies shape as
18    the cause of these cost differences, as opposed to simply
19    reporting that there are cost differences.
20         A    I am not sure you could do a study that would get
21    shape, shape alone, absolutely no other thing but shape.
22              I mean you can't control for everything
23    necessarily but I think this one does a pretty good job of
24    controlling for things you can.
25         Q    I take it that means that you have no other study

                                                              3057
 1    to cite?
 2         A    I don't have a study to cite other than this study
 3    addressing this issue of cost differences between flats.
 4         Q    THank you.
 5         A    And parcels.
 6         Q    Well, let me posit when you say -- did that study
 7    isolate for weight, since you are on the point?
 8         A    I know that there was an aspect of it that would
 9    allow you to isolate for weight or take weight out of the
10    picture, and that would be comparing the component of it
11    which is looking at enhanced carrier route, which has a very
12    similar weight per piece, which implies that weight is not
13    driving the difference there.
14         Q    But have you limited your proposed discount to
15    just that category of mail where that factor was isolated?
16         A    No.  Obviously I have proposed the parcel
17    surcharge for all four subclasses.
18         Q    Then I take it your answer is that for the vast,
19    overwhelming majority of the parcels that would be subject
20    to your discount, weight was never taken out of the equation
21    in terms of isolating it, was it?
22         A    I think the easiest way to try to get an idea of
23    the cost difference is to look at the data which you can
24    look at, and that happens to be the grouping of mail where
25    you have a similar weight per piece.

                                                              3058
 1         Q    I am not arguing with you.  I am simply saying but
 2    that happens to be an infinitesimally small fraction of the
 3    population of flats and parcels that we are talking about,
 4    doesn't it?
 5         A    Infinitesimally small seems a little dramatic.
 6              [Laughter.]
 7              BY MR. MAY:
 8         Q    Give me your characterization of that population.
 9         A    I would say that carrier route has fewer parcels
10    as a percentage of nonletters than the regular subclass
11    does.
12         Q    Well, by what dimension?  Do you know that
13    offhand?
14         A    I can tell you what percentage of nonletters in
15    each of those groupings are parcels if you'd like.
16         Q    Well, aren't we talking about something under 10
17    percent of the whole?
18         A    In both subclasses it is --
19         Q    Yes.
20         A    -- is less than 10 percent.
21         Q    So it is the case then, is it not, that at least
22    over 90 percent of the whole universe of parcels and flats
23    that we are talking about did not have the question of
24    weight isolated from the consideration of cost differences?
25         A    90 percent -- I am not sure I followed that from

                                                              3059
 1    the earlier statement.
 2         Q    Well, it is only in the case of, as I think you
 3    just said, it is in the case of ECR where you are able to
 4    study the comparative costs of flats and parcels where
 5    weight had been isolated as a factor since the average
 6    weights of the parcels and the flats were roughly equal,
 7    isn't that what you said?
 8         A    That is what I was saying, but that -- I believe
 9    you discussed with Witness Crum other things regarding
10    weight and how it may affect and to what extent it may
11    affect -- again, I don't want to speak for his cost study.
12              I am telling you what I did with it and talking to
13    you here about the percentages of parcels that are -- or the
14    percentage of nonletters that are parcels in these two
15    subclasses, but I am not sure I can help you talking about
16    the cost study and what it -- the intricacies of it.
17         Q    Well, you have denominated your surcharge as
18    shape-based surcharges, have you not?
19         A    It's a surcharge based on shape.
20         Q    And yet you so far at least have been unable to
21    identify any Postal Service study that proved that shape was
22    the only factor to explain the cost differences other than
23    an analysis of ECR flats and parcels; is that correct?
24         A    I think I did say there was not a study that
25    looked -- that declared weight or declared shape the only

                                                              3060
 1    factor but I know that this study has been analyzed and
 2    there has been discussion and interrogatories about other
 3    things that may be coming into play and Witness Crum has
 4    explained what those things are and answered those questions
 5    and I don't think I can add anything to what he's said.
 6         Q    No, I'm not asking you about anybody else's
 7    testimony other than your own, Mr. Moeller, just your own.
 8              Now, if you will examine your response to the
 9    AAPS-2, you there acknowledge that some residual shaped
10    pieces would experience effective rate increases in excess
11    of 50 percent because of the surcharge, correct?
12         A    That's what I say there, yes.
13         Q    Given the fact that you as well as other Postal
14    Service witnesses have talked about certain residual pieces
15    that are at the edge, that will have costs not significantly
16    different than those of flats, is it your opinion that such
17    a result, a 50 percent increase for such parcels really
18    meets the standards of fairness and equity under the Postal
19    Reorganization Act?
20         A    I do want to find the response where I talked
21    about this.  Bear with me.
22              Yes, DMA-USPS-T-36-3, part A, the very bottom of
23    that first page, I say that the proposed surcharge is more
24    compatible with fairness and equity than is the alternative,
25    which is the absence of any surcharge whatsoever and the

                                                              3061
 1    continuation of a situation where the typical standard mail
 2    A letter or flat is burdened with the higher cost of the
 3    residual shaped pieces.
 4         Q    Well, that -- that is, even though there are going
 5    to be some victims here whose costs are not greater but who
 6    are going to have to pay a 50 percent increase in rates, you
 7    think that it's better that one innocent be hanged than let
 8    99 guilty go free; is that what you are saying?
 9         A    Where is your compassion for those people that are
10    on the other side of the fence that are in the high cost end
11    of the nonletter category?
12         Q    Well, of course, I wouldn't hang any of them.
13         A    Low rates for everybody.
14         Q    If you would have reference to your response to
15    OCA-15-E, now in that response you again acknowledge that
16    the 10-cent surcharge will, of course, result in increases
17    that exceed this, quote, maximum 10 percent increase
18    guideline that was one of the operative principles guiding
19    you when you were deciding how you would meet the cost
20    coverage.  And as we just discussed, that the surcharge will
21    cause some rates to increase by over 50 percent.
22              Now, you do say however that this surcharge should
23    not be viewed as a simple rate increase in this answer but
24    the result of a classification change and should not be
25    viewed as "pure" rate increases such as those which are

                                                              3062
 1    proposed for existing categories of mail.  Isn't that what
 2    you say?
 3              Now, would you please explain why my client, who
 4    ships both Third and Fourth Class parcels should be more
 5    concerned about his 10 percent parcel post increase than his
 6    50 percent standard A increase because I can explain to him
 7    that the latter is not really a pure increase, don't worry,
 8    it's not, Mr. Moeller said it's really not an increase?  Do
 9    you think that's going to fly and that is an acceptable
10    answer?
11         A    Well, it should.
12         Q    Now, let me ask you this.  Why do you call this a
13    classification change?
14         A    Because there is a DMCS language change attached
15    to this.
16         Q    Well, I mean, any time you change the DMCS at all,
17    it's a classification change?
18         A    I'm not sure.  That sounds like a lawyer question
19    but --
20         Q    Well, if you change -- let me ask you this.  If
21    you change the number of pieces that have to be in a bundle,
22    is that a classification change?
23         A    If that's one of the standards that's written into
24    the DMCS, then it's a change in the DMCS.  Is that a
25    classification change?  Again, I'd just -- this is semantics

                                                              3063
 1    there, and I'm not sure --
 2         Q    Well, you've created a new subclass here, have
 3    you?
 4         A    No new subclass.
 5         Q    There is no new cost -- there is no separate cost
 6    coverage requirement for Standard A parcels in the future,
 7    right?
 8         A    No, there is not.
 9         Q    So, by classification change, you don't mean what
10    the Postal Reorganization Act calls classification.
11              MR. ALVERNO:  Objection.  Calls for a legal
12    conclusion.
13              MR. MAY:  Well, I'm asking -- excuse me.  Is that
14    all?
15              Chairman, if -- if, indeed, this witness is going
16    to bandy about terms and make a distinction between a rate
17    change and a classification change, then this -- then he
18    should be prepared to discuss what rate and classifications
19    changes mean under the Postal Reorganization Act.
20              MR. ALVERNO:  I think the -- the witness here is
21    -- is saying that the -- that the -- that the act's criteria
22    are met as far as section 3623 is concerned, and that's
23    something within the scope of his -- of his testimony. 
24    However, to say that the witness is prepared to -- to say
25    what is and what is not a classification change, I believe,

                                                              3064
 1    is something for the lawyers to decide.
 2              MR. MAY:  Well, Mr. Chairman, the -- the witness
 3    is making a distinction here between rate increases, which
 4    he says this isn't just a rate increase, and so, this is why
 5    we shouldn't be concerned that this violates their own
 6    self-imposed 10-percent constraint.  We shouldn't be
 7    concerned about this, because this is not a rate change,
 8    this is --
 9              CHAIRMAN GLEIMAN:  Well --
10              MR. MAY:  -- a classification change.
11              CHAIRMAN GLEIMAN:  Excuse me.  If -- if that's the
12    basis for -- for your pursuing this line of questions --
13              MR. MAY:  It is.
14              CHAIRMAN GLEIMAN:  -- then I am going to side with
15    Mr. Alverno on this one, because you're asking about what
16    the -- what a rate change is, what a classification change
17    is, which is a legal issue, and there are standards written
18    into law, and you're asking -- on the other hand, you're
19    trying to relate to some self-imposed ceiling that I, quite
20    frankly, you know, don't understand the basis for other than
21    what I've read in the general press that the Postal Service
22    puts out about, you know, rate increases should not exceed
23    10 percent.
24              I mean I know there's something in some of the
25    case material that's been filed and all, but I think that

                                                              3065
 1    that really is a -- is a separate issue.
 2              What if it was 50 percent?  What if it was a
 3    half-a-percent?  You know, what relevance is that to a -- a
 4    classification change?  You're the one that tied it to the
 5    10 percent.
 6              MR. MAY:  I'm -- I'm trying to -- the witness is
 7    asked to explain why this is -- this is somehow different
 8    than other rate changes, and he has said it's different
 9    because it's a classification change, and that's his
10    testimony, and I believe -- I'm not asking him what a legal
11    question is, I'm asking him what he means by a
12    classification change that differentiates this from other
13    rate changes, since he's the one who's made -- he's made the
14    distinction.
15              CHAIRMAN GLEIMAN:  Okay.
16              What -- what -- that is slightly different than
17    what you said a moment ago where you brought that 10-percent
18    figure in, and the 10-percent figure is, in my view,
19    irrelevant to -- to the issue, but I think that, in that
20    context, that we should allow the witness to try and answer
21    the question if he can.
22              BY MR. MAY:
23         A    Do you want me to rephrase the question, Mr.
24    Moeller?
25              CHAIRMAN GLEIMAN:  And leave the 10 percent out,

                                                              3066
 1    please.
 2              THE WITNESS:  Well, I could start talking if you
 3    want, because I think I have an idea.
 4              Let's think of it as a structural change rather
 5    than a classification change, and maybe that will take this
 6    issue off the table.
 7              It's recognizing the fact that it's a new rate
 8    element, regardless of whether, legally, it's considered a
 9    classification change or not, and as such, there is more at
10    play than just a rate increase.
11              It's -- it's something designed to -- to recognize
12    what may be a longstanding averaging that's been going on in
13    this non-letter category.
14              MR. MAY:  Thank you.
15              BY MR. MAY:
16         Q    The -- if you would direct your attention to your
17    response to --
18              CHAIRMAN GLEIMAN:  Excuse me.  Before you ask that
19    next question, Mr. --
20              MR. MAY:  Back to the --
21              CHAIRMAN GLEIMAN:  No, no, no.
22              We're going to keep going for a little longer,
23    I'll let you continue, but I just wanted the -- the record
24    to show that I reversed myself on my ruling and that I
25    overruled the Postal Service in -- in the final on that, in

                                                              3067
 1    case it wasn't perfectly clear that I supported Mr. May's
 2    view.
 3              I apologize for the interruption.
 4              MR. MAY:  Back on the record.
 5              BY MR. MAY:
 6         Q    If you will look at your response to PSA-26-1,
 7    36-5, and 37-6, if you look at those collectively --
 8         A    Excuse me.  I got confused on all the numbers.
 9         Q    Okay.
10         A    PSA --
11         Q    -- 26-1 --
12         A    Okay.
13         Q    -- 36-5, 37-6.
14         A    Okay.  We're up to three now?
15         Q    I'm just trying to recapitulate what your response
16    is to see if you agree that -- that based on those, I take
17    it that your testimony is that the Postal Service is unable
18    to provide the following data:  the test year after rates
19    revenues, costs, and cost coverages separately for flats and
20    for residual pieces in any of the eight categories of --
21    that we're talking about in Standard A flats and parcels.
22              Those -- just so that you're clear about the eight
23    categories, I refer to EC -- in the -- to ECR flats, ECR
24    non-profit flats, regular flats, regular non-profit flats,
25    ECR parcels, ECR non-profit parcels, regular parcels, and

                                                              3068
 1    regular non-profit parcels.
 2              Those are the eight categories I refer to, and my
 3    question is, is it your testimony in those responses that
 4    the Postal Service is unable to provide the test year after
 5    rates revenues, costs, and cost coverages separately for
 6    flats and for residual pieces in any of those eight
 7    categories?
 8         A    I think my response there in PSA/USPS-T-36-5 says
 9    a specific comparison of cost coverages is not possible,
10    because the Postal Service did not measure or employ
11    separate cost coverages for flats and for pieces subject to
12    the residual surcharge.
13              I know that you discussed base year costs, and
14    --and in the interrogatory response, you were directed on
15    where you could get some base year information for revenues
16    and cost.
17              I don't like to talk about cost coverages by these
18    small categories, because -- but as far as test year, that's
19    a more difficult task and requires many, many assumptions of
20    mail mix and drop-ship profile and weight per piece that
21    you're probably off better using the base year figures if
22    you want to compare that information.
23         Q    Well, I mean your answer -- for example, 26-1 says
24    the requested costs are not available separately for flats
25    nor separately for residual shape pieces, and you explain

                                                              3069
 1    why, but the -- the fact is you say they're not available. 
 2    Is that not your answer?
 3         A    That's my answer.
 4         Q    Now, since the Postal Service is unable to compute
 5    cost coverages for any of these eight categories in the test
 6    year after rates, isn't it possible that some or all of
 7    these categories are more than paying their own way?
 8         A    If you're saying, if you could measure test after
 9    rates revenue and cost, is it possible that, in light of the
10    residual shape surcharge, there could be a situation where
11    these parcels are covering their cost, that's a possibility.
12         Q    Well, I'm, at this point, going to ask you a
13    question that your colleague, Mr. Crum, has said I should
14    ask you instead of him, and that is, for these eight
15    disparate categories that we're talking about here, doesn't
16    lumping these all together, as you have done, into one big
17    ball and having a single surcharge applying to all eight of
18    these disparate categories -- isn't -- doesn't that tend to
19    obscure the fact that perhaps a different level of surcharge
20    should be charged to each one of these eight separate
21    categories based on the relative degrees of cost difference,
22    all still adding up to the same revenue contribution, since
23    you were given that task of providing revenue, but would it
24    not be possible to have a -- a more cost-based surcharge
25    disaggregated for each one of these eight separate

                                                              3070
 1    categories, rather than lump them all together?
 2         A    As far as there being one surcharge, that -- one
 3    reason for that is the simplicity of it.
 4              I -- I think the study that you're referencing
 5    suggests that there is a big cost difference, probably,
 6    regardless of how you slice this up and that, in each of
 7    these subclasses, there's a big cost difference, and then
 8    when -- when we apply a low pass-through to it, 28 percent
 9    or whatever it -- it works out to be, then you're -- you can
10    be pretty sure that you're having a -- having a surcharge
11    that's fair and -- and not necessarily burdensome to one of
12    those particular subclasses.
13         Q    Well, the -- the possibility, however, of looking
14    at these eight categories on their own cost basis does also
15    suggest the possibility of perhaps mitigating in some
16    circumstances 50-percent increases visited upon parcels that
17    have relatively similar cost characteristics of flats,
18    doesn't it?  Doesn't it create that possibility?
19         A    I think the low pass-through is -- is designed to
20    mitigate in any event.
21              I think you were also discussing with witness Crum
22    the base year costs and revenue and whether those could be
23    calculated by subclass, and I think he pointed to a
24    interrogatory response that would lead one to some
25    information where that can be done, and I think such

                                                              3071
 1    analysis -- from what I understand, such analysis would show
 2    that, even if you were to have separately -- separate
 3    information for these four subclasses, the cost difference
 4    is very high in all four of them, and -- the cost difference
 5    between flats and parcels.
 6              MR. MAY:  I would like that answer stricken,
 7    because it is simply his guesswork at what somebody else may
 8    or may not have said.  I did not ask him about anybody
 9    else's testimony, Mr. Chairman.
10              I asked him about -- a question about the way he
11    applied his surcharge, whether or not he could not have
12    applied a separate surcharge to each of these different
13    eight cost categories, and the witness responds, in part, by
14    alluding to what some other witness may have responded to in
15    an interrogatory.  And frankly I don't -- I'm at a loss to
16    know exactly what he's referring to, but in any event what
17    he's -- it's not competent testimony.
18              CHAIRMAN GLEIMAN:  Mr. May, constructively by your
19    comments you have struck his testimony.  I'm going to leave
20    it in there, and the Commission will give it appropriate
21    weight when it reviews the transcript.
22              MR. MAY:  Okay.
23              BY MR. MAY:
24         Q    Could you look at your response to DMA 3?
25         A    Okay.

                                                              3072
 1         Q    Now you have previously alluded to this answer
 2    today.  That's the one in which you conclude by saying that
 3    the surcharge is, quote, is more compatible with fairness
 4    and equity than is the alternative, which is the absence of
 5    any surcharge whatsoever, and the continuation of a
 6    situation where the typical standard mail A letter or flat
 7    is burdened with the higher costs of the residual shape
 8    pieces, close quote.
 9              Would you explain in what way the standard mail A
10    letter is currently burdened with the higher costs or
11    residual shape pieces -- not the flat, the letter.  Because
12    that's what you said, letter and flats are both burdened.
13         A    Well, currently the residual shape pieces are part
14    of the nonletter category, and there is some averaging
15    between letters and nonletters, so by extension then the
16    letters are being burdened by the cost of the parcels.
17         Q    Let me ask you this.  Would flats have a lesser
18    cost coverage requirement but for the presence of residual
19    shape pieces in the nonletter category?
20         A    Flats by themselves don't have a cost coverage
21    requirement.
22         Q    Exactly.  So what is the consequence to these
23    other categories?  You're talking about flats and letters. 
24    What is the consequence to them of being burdened with this
25    alleged cost difference?  What is the consequence?

                                                              3073
 1         A    I think it's higher rates, and if you look at the
 2    rate design formula, you could see that the revenue that we
 3    anticipate from the residual shape surcharge serves to
 4    reduce the revenue requirement that is to be obtained from
 5    the rest of the subclass.
 6         Q    Well, since there is not a full passthrough of the
 7    cost differential between letters and nonletters --
 8    nonletters to include both flats and parcels -- since there
 9    is not a full passthrough, isn't it the case that it's
10    exclusively letters that are burdened with the asserted
11    higher costs of residual shape pieces?
12         A    No.  I'm speaking in terms of the rate design
13    formula again that getting the revenue to account for this
14    additional cost of the parcels accrues to the piece rates
15    for both nonletters and letters, so by recognizing this cost
16    difference all the other pieces are able to benefit, which
17    implies that in absence of it they are hurt or burdened with
18    the costs of these other pieces.
19         Q    Well, since standard A letters, according to your
20    testimony, are being burdened by the failure to pass through
21    the full cost differential between both flats and parcels, I
22    don't -- I want you to -- I don't understand how it is that
23    you can say that flats are in any way burdened by the
24    parcels, since the flats themselves are being -- part of
25    their costs are being borne by letters.  How is it that

                                                              3074
 1    flats are somehow being damaged by the higher costs of the
 2    parcels?
 3         A    The higher cost of the parcels pump up the costs
 4    of the whole subclass.  If it were a purely letter and flat
 5    subclass, an advertising mail type subclass that didn't have
 6    parcels in it, then the costs would be lower and they
 7    wouldn't be burdened with the higher costs of those parcels.
 8         Q    And in the absence of this surcharge you would be
 9    proposing what, a higher rate for letters, a higher rate for
10    flats, a higher rate for everybody?  Which of those three?
11         A    It's hard to isolate the effect on those pieces,
12    but in general all those pieces would have to have a higher
13    rate if not for the revenue obtained through the residual
14    shape surcharge.
15         Q    And so this higher rate could be, this cost could
16    be absorbed either on the one hand through less than a
17    billion parcels or on the other hand be absorbed by how many
18    billions of pieces are there in standard A?
19         A    Quite a few.  Yes, it would be spread out over a
20    lot of pieces, so -- but nonetheless that's an impact on
21    those pieces.
22         Q    Yes, but does it have anything like the impact of
23    a 50-percent increase, which is the effect of -- which is
24    the impact that your own testimony says it will have on some
25    parcel shippers?  Would it have anything like that impact

                                                              3075
 1    anywhere else?
 2         A    Certainly not as discernable to any one individual
 3    mailer, but on the whole the advertising industry will
 4    benefit for their catalog mail and their letter mail if the
 5    rates are suppressed by virtue of the revenue obtained from
 6    the residual shaped surcharge.
 7         Q    Does the advertising industry know what you're
 8    doing for them in this case?
 9              Let me ask you this.  If you look at your answer
10    to PSA 37-6-C, this is a little complicated, but in that
11    question I asked you to compare whether the costs that
12    standard A letters were bearing because of the failure to
13    pass through more than 40 percent of the cost differential
14    between letters and flats, was more or less than the amount
15    of the burden being borne by flats because of the
16    flat-residual cost differential.
17              Now your response was that it was not possible to
18    determine the amount of the costs of standard A flats being
19    borne by letters and likewise not possible to determine the
20    amount of the costs of residual pieces that were being borne
21    by flats.
22         A    That's correct.  Yes.
23         Q    If the Postal Service does not know this, then why
24    have you chosen to surcharge residual shape in order to
25    alleviate the alleged burden on flats, rather than to

                                                              3076
 1    surcharge both flats and parcels combined to alleviate what
 2    may be an even greater burden on letters.
 3              Why have you singled out parcels for this
 4    correction?  You are going to correct this one thing.  Why
 5    have you done that?
 6         A    Well, I think we started down this road of
 7    recognizing cost differences by shape in Docket Number R90,
 8    and there has been de-averaging there with the two biggest
 9    groups of shapes, letters and nonletters, and we have
10    continued to recognize that.
11              At the same time, that doesn't mean you ignore
12    other averaging that is going on.
13              There is nothing that says recognizing one cost
14    difference due to shape precludes you from doing another
15    recognition of shape.
16         Q    I mean your remedial action here seems to have
17    singled out 7 percent of the class, the subclass, and say
18    we'll fix that 7 percent, a 7 percent where the fixing by
19    your own testimony is going to have a disproportionate
20    impact.  That is, up to 50 percent increases for those
21    affected.
22              I am trying to ask you to explain why you chose
23    that one as opposed to all the other possible remedial
24    actions you could have taken within Standard A subclass.
25         A    The residual shape surcharge was not intended to

                                                              3077
 1    address specifically the letter/nonletter cost difference.
 2              If you are suggesting that an alternative to
 3    residual shape surcharge would be to have no residual shape
 4    surcharge but merely widen the letter/nonletter
 5    differential, that doesn't do anything to take care of this
 6    demonstrated cost difference between two distinct shapes in
 7    the nonletter category.
 8         Q    Well, but question is since the landscape seems to
 9    be littered with all kinds of cases of cost differentials
10    among things in the same subclass, for example a letter
11    going across town, one going to Alaska, parcel, flat,
12    letters and Standard A -- all those things -- what is it
13    that causes you to say let's pick out this one thing,
14    parcels and flats -- let's fix that and let's hit a whole
15    bunch of people with cost increases up to 50 percent?
16              What prompted that?
17         A    The one thing that prompted that, if I could say
18    one thing?
19         Q    Yes.
20         A    35 cents, which is the cost difference that was
21    demonstrated.  That is a big amount of averaging that is
22    going on and we de-average where appropriate and where it
23    can be done, and this one is appropriate.
24         Q    Back to your response to PSA-5, which asked you
25    whether the Postal Service was able to state whether

                                                              3078
 1    Standard A flats would have more or less cost coverage than
 2    Standard A residual shapes after application of the 10 cent
 3    surcharge, and your answer was the Service is unable to
 4    compute cost coverages by rate category.
 5              You do add, however, that "One might suspect,
 6    however, that since the pass-through for the residual shape
 7    surcharge is so low, flats would have a higher implicit cost
 8    coverage than pieces subject to the residual shape
 9    surcharge."
10              Is it not the case that because residual shapes
11    are heavier than flats and therefore contribute more revenue
12    that unless you know the average per piece revenue for the
13    residual shapes compared to flats, you will not know whether
14    the additional amount of revenue earned per piece was more
15    than or less than the amount of the cost differential that
16    was not passed through from the surcharge, will you?
17         A    My response there though says that since the
18    residual shape surcharge is so low, one would suspect that
19    what you are describing would not happen unless these pieces
20    weigh a lot more than the flats.
21         Q    But the point is you don't know, do you ?
22              That is your testimony.  You do not know what the
23    result will be test year after rates.
24         A    I am telling you that we have not computed cost
25    coverage by rate category.

                                                              3079
 1         Q    I'll finish with a hypothetical referred to you by
 2    your colleague when I asked him.
 3              Hypothetically, is it not the case that if, for
 4    example, the cost difference between parcels and flats is 33
 5    cents apiece -- assume that is the cost difference -- and
 6    the revenues earned per piece by a parcel on average is 33
 7    cents more than the revenue earned by a flat -- assume that
 8    is the case -- would you have any justifiable case for
 9    proposing any surcharge on parcels in this proceeding?
10         A    I'm not sure I want to accept the terms of this
11    hypothetical, but what we have done is measured a cost
12    difference that we think is due to shape, at least
13    primarily, and of a passthrough of a very low amount of that
14    cost difference, which --
15              MR. MAY:  Mr. Chairman, this isn't even an attempt
16    to answer the question.
17              BY MR. MAY:
18         Q    Do you want me to repeat the question.
19         A    I'm not sure I understand the hypothetical.
20         Q    Okay, well, here's the hypothetical.  And assume,
21    just for the purpose of the hypothetical, that a parcel
22    costs -- let's take the regular example, the regular rate
23    standard A category for profit.  Let us assume that the
24    parcel costs 33 cents more than the flat to process on
25    average, okay?

                                                              3080
 1         A    Um-hum.
 2         Q    Let us further assume that the amount of revenue
 3    earned by the parcel is 33 cents more than the amount of
 4    revenue earned by the flat.  Now that's the assumption.
 5              Would you, under those circumstances, have a
 6    justifiable case for proposing a surcharge of any amount on
 7    parcels in this proceeding?
 8         A    Again, is this hypothetical holding everything
 9    constant, drop ship, profile, preparation requirements?
10         Q    Yes.
11         A    Everything?
12         Q    Um-hum.
13         A    So the 33 cents additional revenue would be due to
14    what?  If it's holding everything constant, then the rate
15    would be the same.
16         Q    No, hardly, because as you know parcels weigh more
17    than flats.  And there's a -- indeed, I assume you know that
18    in standard A the rates are determined by piece charge and a
19    pound charge.
20         A    Well, I think your hypothetical doesn't apply
21    then.  If they're different weights then why should -- if
22    they're paying the same rate now and --
23         Q    They're not paying the same rate, are they?
24         A    If they're the same piece they are, if they're a
25    parcel and a flat.

                                                              3081
 1         Q    No, I said if the -- listen to the hypothetical
 2    again.  If the average, if the average flat, average flat --
 3    correction.  If the average parcel costs 33 cents more per
 4    piece to process than the average flat but the average
 5    parcel earns 33 cents more revenue than the amount of
 6    revenue earned by the average flat, all other things being
 7    equal, would you have any case for proposing any surcharge
 8    on parcels in this proceeding?
 9         A    I'm just afraid to say.  There's more to it than
10    that.  I think it's oversimplified here and I just hesitate
11    to -- you know, I'm not going to say no --
12              CHAIRMAN GLEIMAN:  Mr. Moeller, I think under the
13    rules, as a hypothetical, you can restate all your concerns
14    to clarify that you're only answering a hypothetical, but
15    you have to answer the question if you can.
16              THE WITNESS:  I'm afraid I can't.  I mean, I
17    don't -- I'm just -- I'm not sure that that would be the
18    case just because this weight thing is bothering me and if
19    the 33 cents was shown to be purely due to weight, the cost
20    difference, then the pound rate would be doing an effective
21    job of recouping that cost difference and you wouldn't need
22    a surcharge.  Perhaps.
23              I think it is more complicated than I can get my
24    head around right now but --
25              MR. MAY:  Well, if he can't give any better answer

                                                              3082
 1    than that, I guess I will have to accept that as the best
 2    answer I'm going to get, Mr. Chairman.
 3              Thank you.  That's all I have.
 4              CHAIRMAN GLEIMAN:  Mr. Moeller, would you like to
 5    take five?
 6              THE WITNESS:  Well, if it means getting
 7    out -- being done by 4:30, I'll forego a break.
 8              CHAIRMAN GLEIMAN:  I'm not sure we'll make it by
 9    4:30 or not.  It may go a little bit longer and you may have
10    to come back in any event one day next week or the following
11    week.  But I don't want to have -- Mr. Reporter,
12    Mr. Counsel, are you all comfortable with continuing?
13              MR. ALVERNO:  I'm comfortable, yes.
14              CHAIRMAN GLEIMAN:  Let's plough ahead then.
15              Mr. Wiggins, I believe the ball is in your court.
16                          CROSS EXAMINATION
17              BY MR. WIGGINS:
18         Q    Good to see you again, Mr. Moeller.
19         A    Thank you.
20         Q    When I talked with Mr. Crum yesterday, he told me
21    that he wasn't aware of the fact that there had been a
22    revision in the definition of the mail pieces to which the
23    surcharge would apply.  He thought it was the same as in
24    MC97-2, that it hadn't changed from that and that it was
25    still just the residual piece category, pieces that were

                                                              3083
 1    defined as not being letters and not being flats.
 2              Your testimony today sounds to me as though you
 3    have a slightly different view and that it may be closer to
 4    the proposed changes to the Domestic Mail Classification
 5    Schedule.  Let me just read to you the definition that it
 6    has of the pieces to which the residual shape surcharge will
 7    apply.  And this is just one of them.  This is for regular. 
 8    They are sprinkled throughout but, trust me, they're the
 9    same.
10              "Regular subclass mail is subject to a surcharge
11    if it is prepared as a parcel or if it is not letter or
12    flat-shaped."
13              That, to my reading, has added an element to the
14    definition from what was at issue in MC97-2, and that is the
15    category of mail pieces prepared as a parcel.  Is that
16    consummate with your view?
17         A    It's a clarification of what is going to be
18    subject to the surcharge.
19         Q    Well, clarification, alteration, it's different.
20         A    The definition in words there is different.
21         Q    Yes.
22              And I think there are a lot of problems,
23    conceptual problems, some of the problems I talked with Mr.
24    Crum about, some of the problems that Mr. May just talked
25    with you about, to this whole notion of a surcharge, but

                                                              3084
 1    --but I think there's a -- a supervening difficulty that
 2    simply has to be cleared up, and that is what in the world
 3    do the words or does the concept "prepared as a parcel"
 4    mean?  Can you help me with that?
 5         A    Sure.  I think there was -- it was understood that
 6    maybe there was going to be some confusion due to some of
 7    the overlapping definitions of these shapes that --
 8         Q    Can I ask you to -- I'm -- I'm not trying to cut
 9    you off, but I -- could I just ask you to pause at that
10    point and make sure I understand what you're saying, and
11    then we'll move forward?
12         A    Okay.
13         Q    When you say overlapping definition of the shapes,
14    what do you mean?
15         A    There are pieces that may meet the definition of a
16    flat and may meet the definition of a machinable parcel.
17         Q    Well, there are -- there are -- you're talking
18    about in terms of dimension and weight?
19         A    Yes.
20         Q    Okay.
21              Indeed, isn't it right that there are pieces that
22    meet the definition of a parcel, machinable or otherwise,
23    that also meet the definition of a flat?  It goes in -- the
24    crossover goes in both directions, in other words.
25         A    Something may be a flat that would -- could be

                                                              3085
 1    defined as machinable parcel, also?
 2         Q    Correct.
 3         A    Yes.  Yes.
 4         Q    In terms of dimension and weight, and that's what
 5    we're talking about, right?
 6         A    I believe so.
 7         Q    Would it be helpful if I showed you a copy of
 8    DMM-CO-50?
 9         A    I'm familiar with it.
10         Q    Okay.  If you have it handy, it might -- I'm
11    really questing after some precision here, because I fear
12    the mischief inherent in the absence of precision.
13              MR. ALVERNO:  This counsel could use a copy of
14    that if you've got one, Mr. Wiggins.
15              MR. WIGGINS:  Sure.
16              MR. ALVERNO:  Thank you.
17              MR. WIGGINS:  Would the bench care to see the
18    document again?
19              CHAIRMAN GLEIMAN:  DMM-CO-50?
20              MR. WIGGINS:  Yes.
21              CHAIRMAN GLEIMAN:  I think I memorized it
22    yesterday,.
23              MR. WIGGINS:  Okay.
24              BY MR. WIGGINS:
25         Q    You sure you don't want a copy?

                                                              3086
 1         A    I have it here unless you've amended it with some
 2    sort of examples or something.
 3         Q    I -- I -- I think that I -- I may have a slightly
 4    more recent version, but I believe the text of it is the
 5    same.  Do you have release 52?
 6         A    Yes.
 7         Q    Excellent.  And -- and the -- the dimensions which
 8    are shown handily in that Exhibit 2.0 --
 9         A    Yes.
10         Q    -- tell you that a parcel may be both smaller, it
11    may be as small as three inches high, six inches long --
12    right? -- which is -- which is smaller than any qualifying
13    flat, correct?
14         A    Well, there are three dimensions involved, but on
15    those dimensions, those are -- those are both lower than the
16    minimum flat minimum.
17         Q    Okay.  But each of -- each of -- each of them has
18    a minimum thickness of a quarter-inch.  So, I wasn't fussing
19    with that.
20         A    Okay.
21         Q    Right?  Okay.  So, the flat -- the parcel, rather,
22    can be smaller than a flat --
23              CHAIRMAN GLEIMAN:  You should note for the record
24    that they're stated differently.  One is stated as a
25    quarter-of-inch and two of them are stated as .025.

                                                              3087
 1              MR. WIGGINS:  Actually, in my copy of it, Mr.
 2    Chairman --
 3              CHAIRMAN GLEIMAN:  Well, you -- I was reading from
 4    copy number 51 --
 5              MR. WIGGINS:  Aha.
 6              CHAIRMAN GLEIMAN:  -- yesterday, and they were
 7    cited that way.
 8              MR. WIGGINS:  You see there's a -- you see there's
 9    -- there's a vice to that.  You must -- you must consult 52. 
10    It -- it has in parentheses the -- it has the -- the .025
11    and one-quarter, but it's the same thing.
12              BY MR. WIGGINS:
13         Q    Anyhow, Mr. Witness, it can -- the -- the parcel
14    can be smaller than a flat, correct, and we -- we just went
15    through those dimensions.  It can also be larger than a
16    flat.  It can be as much as 17 inches high, 34 inches long,
17    and it can be a lot fatter than a flat.  It can be 17 inches
18    fat.
19         A    Yes.
20         Q    But in between the smaller and the larger, it can
21    also meet any of the dimensions of a flat.  Necessarily, the
22    lesser and the greater encompass that which is in the
23    middle, right?  You don't need to be a geometrician to know
24    this, I think.
25              MR. MAY:  But it helps.

                                                              3088
 1              BY MR. WIGGINS:
 2         Q    I mean you can see from the little pictures, can't
 3    you?
 4         A    I can see that -- that the -- that the range of
 5    parcels starts below the range of the flats.
 6         Q    Correct.  And goes above the range of flats, and
 7    therefore, there can be parcels in between that smallest
 8    eligible parcel and that biggest eligible parcel that
 9    encompass every available flat size.
10         A    That's interesting.
11         Q    Isn't that correct?
12         A    I guess that's the way it would be, yes.
13         Q    Yes, I think so, so that in -- in these terms, in
14    the terms of the little pictures in Exhibit 2.0, you can
15    have an absolute overlap between -- just in -- in dimension
16    and weight.
17         A    Wait a minute now.
18         Q    Sure.  I'm not -- this isn't the Tim May
19    hypothetical.  Let's be clear about that.
20         A    No, but I'm looking at the -- at the definition of
21    a flat, and it can be less than a quarter-inch thick.  It
22    has to exceed one of those --
23         Q    No, no, no.  The minimum thickness is a
24    quarter-inch.
25         A    Well, that just doesn't make sense, because you

                                                              3089
 1    can mail a very thin piece of mail --
 2         Q    I can't -- this is a DMM we're expatiating here. 
 3    I mean you can't argue with it.
 4         A    But -- but look at the asterisks.  It says it must
 5    exceed at least one of these letter-size dimensions.
 6         Q    It must exceed.  It must be -- it says the minimum
 7    is a quarter-inch.  I think that's accurate.
 8         A    Okay.
 9         Q    Okay?
10         A    I was confused.
11         Q    Trust me on that.  Okay.  So that -- right? -- you
12    can -- you can -- you can take -- you can make a parcel that
13    is the same size as any mail piece eligible to be treated as
14    a flat, correct?
15         A    Okay.
16         Q    Okay.
17              Now, because of that -- and -- and Mr. Crum
18    testified to -- to this yesterday -- absent something more,
19    you're never going to be able to differentiate by physical
20    observation that which is a flat from that which is a
21    parcel, which makes this whole surcharge thing sort of
22    unmanageable, wouldn't you -- wouldn't you agree?
23         A    I haven't thought about the implementation issues
24    and how the verification will go on this to -- to answer
25    that.  I don't think it's unmanageable.  That sounds a

                                                              3090
 1    little -- I mean a little overstatement of -- of what it
 2    would be.
 3         Q    Well, you have to have something more in the
 4    definition of either a parcel or a flat or you're never
 5    going to be able to tell which one you're doing business
 6    with until you get --
 7         A    -- above three-quarters of an inch thickness.
 8         Q    Well --
 9         A     Then it's clearly not a flat.
10         Q    When you are -- I'm sorry.  When you are dealing
11    with parcels that are within the dimensional domain of
12    flats, which is what I thought we were talking about.
13         A    There is -- there is the -- there is the very
14    small --
15         Q    I'm -- I'm not -- I'm talking the parcels that are
16    within the definitional domain of flats --
17         A    Okay.
18         Q    -- and we just agreed --
19         A    Okay.
20         Q    -- that you can make a parcel --
21         A    Oh, sure.
22         Q    -- okay? -- that will fit every flat size extant,
23    right?  Those are the things that I'd like to limit our
24    conversation to.
25         A    Okay.

                                                              3091
 1         Q    Now, then, how do you know who to charge the dime? 
 2    I mean if I accept the notion that somebody ought to pay a
 3    dime, who ought to pay it?
 4         A    It's that -- that fact that we're talking about
 5    that caused that clarification in the definition which said
 6    "or prepared as a parcel."  That's how you tell.
 7         Q    Doesn't -- doesn't quite get me there yet, unless
 8    you have further explanation --
 9         A    Okay.
10         Q    -- because it seems to me that I can take my mail
11    piece that is otherwise geographically or dimensionally
12    indistinguishable from a flat and I can sneak up to my post
13    office and say flat rate, and I get away with that, right?
14         A    If you prepare it as a flat.
15         Q    Okay.  So that the -- the definitional language
16    ought not to be disjunctive but conjunctive, correct?  It
17    ought to be a piece which is neither a letter nor a flat and
18    is prepared as a parcel, correct?
19         A    Do you want to suggest alternate wording for --
20         Q    Well, I'm trying to get the concept.  I am not
21    trying to dicker with you about this.  I am trying to get
22    the concept because, you see, unless we have some certainty
23    about who you are going to tag with this vicious
24    body-littering assault of yours, as Mr. May would have put
25    it, you are going to be able to do it selectively and you

                                                              3092
 1    are going to say, okay, Wiggins Law Firm, right?  We can't
 2    have that.  We've got to have -- if we are going to indulge
 3    this idea, we've got to have certainty and precision as to
 4    the pieces to which it will apply.
 5         A    Anything that you can do that will help us do that
 6    would be welcome.
 7         Q    Okay, it doesn't apply at all.
 8              CHAIRMAN GLEIMAN:  First off, I would like to note
 9    that the Postal Rate Commission does not write the DMM.
10              MR. WIGGINS:  Well, that's in part why I was
11    inquiring, Mr. Chairman.
12              CHAIRMAN GLEIMAN:  I have to ask you a question,
13    though.
14              MR. WIGGINS:  Yes, sir.
15              CHAIRMAN GLEIMAN:  050, you're talking about
16    machinable parcels?
17              MR. WIGGINS:  I am really more limited than that. 
18    I am just talking about the dimensional characteristics,
19    yes, without getting into the trichotomy of parceldom on the
20    back side.
21              CHAIRMAN GLEIMAN:  You haven't looked at the
22    exclusions or the exceptions or anything like that?
23              MR. WIGGINS:  Yeah?
24              CHAIRMAN GLEIMAN:  In 4.4?  Because I'm getting
25    confused about the overlap too at this point or the extent

                                                              3093
 1    of the overlap.
 2              MR. WIGGINS:  I will certainly cede questioning to
 3    you if you want to the witness right now.
 4              CHAIRMAN GLEIMAN:  No.  I am just asking you
 5    because I want to make sure I am looking at the same part of
 6    the DMM that you are.
 7              MR. WIGGINS:  Okay, I am really focusing at this
 8    point only on the dimensional characteristics.
 9              CHAIRMAN GLEIMAN:  And usually anything that is
10    this confusing is laid at the feet of the Postal Rate
11    Commission.  I just want to make clear we didn't write this
12    section of the DMM.
13              MR. WIGGINS:  I do understand that.
14              BY MR. WIGGINS:
15         Q    And, Mr. Moeller, might that be the answer, that
16    you are seeking a very broad-based authority to move forward
17    with this surcharge that you are then going to define with
18    greater specificity in the DMM so that the Commission will
19    never have the opportunity to know to whom the surcharge
20    will be applied?  Is that the plan?
21         A    I think we are trying to make it clear, especially
22    by that clarification that was added between classification
23    reform and now, and maybe we weren't successful but I
24    thought it was an appropriate addition.
25         Q    Let me just me move just another step down the

                                                              3094
 1    line here and see.
 2              If the thing were rewritten to say a piece that is
 3    not letter-sized and a piece that is not flat-sized which is
 4    prepared as a parcel, okay?  Just suppose that with me.
 5              I think that is a little clearer in articulation
 6    and it is what you mean, isn't it?
 7         A    I just -- I don't want to -- this is a very
 8    complicated, confusing --
 9         Q    It sure got me.
10         A    Yes, and we talk about these things at work and we
11    think about all these nuances and it's easier to do it with
12    the experts who sort of know what the requirements are.
13         Q    I thought that's what I was doing.
14         A    No, I don't write the DMM.
15         Q    I appreciate that.
16              If you will give me my linguistic construction,
17    how would you define "and is prepared as a parcel"?  Do we
18    have to now turn the page over and start looking at some of
19    the things the Chairman was talking about?
20         A    I think we were thinking of the machinable parcel
21    category.
22         Q    So that limitation ought to be imposed on the
23    application of the surcharge?  It should apply only to
24    machinable parcels?
25         A    I'm not prepared to say that at this --

                                                              3095
 1         Q    Mr. Moeller, don't take me wrong, I really am
 2    trying to understand.
 3         A    I'm sure you are.
 4         Q    Look at me.
 5              Are there characteristics of being prepared as a
 6    parcel that I am not going to find on this, either side of
 7    this sheet of paper?
 8         A    Are there characteristics of not being prepared --
 9         Q    No, no, of being prepared as a parcel?  See, I
10    want to know what it means to be prepared as a parcel so I
11    know who is going to get whacked with this dime.  My clients
12    kind of care about that.
13              Let me ask maybe a different question if this is
14    troublesome to you.  Is there somebody else to whom I should
15    talk about this problem?  I tried to talk with Mr. Crum
16    about it, and it was all news to him.  I don't mean to
17    disparage him.  He's a nice fellow and he tried hard, but --
18    but he just didn't know.  And you seem to be -- I don't want
19    to say spinning your wheel, but not moving rapidly forward.
20         A    Well, there are machineable parcel makeup
21    requirements there, and I think that's what we intended when
22    we said or prepared as a parcel.
23         Q    Okay.
24         A    It does not meet the letter definition or the flat
25    definition or is not prepared as a parcel.  I want to

                                                              3096
 1    confirm that with someone before I say that that means just
 2    the machineable parcels.
 3         Q    Okay.
 4         A    If that's what that addition meant.  But --
 5              MR. WIGGINS:  Mr. Chairman.
 6              CHAIRMAN GLEIMAN:  Yes, sir.
 7              MR. WIGGINS:  Might we request that a
 8    clarification to that effect be subsequently entered in the
 9    record?
10              CHAIRMAN GLEIMAN:  We certainly might.
11              Mr. Alverno, do you think you could help us out?
12              MR. ALVERNO:  Absolutely.
13              CHAIRMAN GLEIMAN:  Thank you, sir.
14              MR. WIGGINS:  Thank you, Mr. Chairman.
15              CHAIRMAN GLEIMAN:  We all look forward to reading
16    that.
17              BY MR. WIGGINS:
18         Q    Mr. Moeller, would you take a look at your answer
19    to AMMA No. 2, where we ask you whether your after rate
20    volumes assumed no change in the volumes of affected -- mail
21    affected by the surcharge in consequence of the surcharge? 
22    And I'm not -- I guess you answered, because there are some
23    words there.  But can that be answered yes or no?
24         A    The question being again?
25         Q    Did your after rate volumes assume no change in

                                                              3097
 1    volume as a result of application of the surcharge?
 2         A    The volume forecast -- I don't know the correct
 3    word, but had baked into it the fact that there was going to
 4    be a 10-cent surcharge.  So the volume that was resulting
 5    from the volume forecast had that element broken in there,
 6    but there was no separate line item in the volume forecast
 7    for the residual shape pieces.
 8         Q    Take a look at page 13 of your Work Paper 1 to
 9    which you cite costs in that answer.  And in the after rates
10    column the second row labeled percentage residual shape has
11    associated with it footnote 2.
12         A    Yes.
13         Q    And I go down here and see footnote 2, in which,
14    No. 1, you very helpfully cite me the Library Reference 108,
15    without further particularization, which I must say kind of
16    frosted me.
17         A    Sorry.
18         Q    But you go on to say assume residual shape
19    percentage remains constant.  Is it likely that the
20    percentage would remain constant if volume effects of the 10
21    percent -- 50 percent in percentage terms in some cases as
22    Mr. May pointed out to you -- increase were felt?
23              Those things seem inconsistent to me, is what I'm
24    saying.
25         A    This was a situation where we had to put a number

                                                              3098
 1    in there to try to figure out -- I mean to try to
 2    estimate -- obviously we had to come with some estimate of
 3    how much revenue there was going to be, and in absence of
 4    any study that told us precisely what --
 5         Q    Sure.
 6         A    Would happen there, I thought since the nonletter
 7    volume would be suppressed due to a rate increase by
 8    applying that same percentage you would get fewer residual
 9    pieces.  I'm open to the notion that it could possibly be
10    lower than that in reality.
11         Q    Okay.  And in the other piece of the interrogatory
12    answer you say as you said on the stand just a moment ago
13    the volume forecast for standard mail A nonletters
14    incorporates the surcharge.  Do you happen to recall where
15    you looked to establish that that was true?  Could you give
16    a citation to where I could look to see that happen?
17         A    No, that's just based on my discussions with the
18    volume forecasters and they needed to know what the
19    surcharge was going to be when they ran the forecast which
20    implied that it was in some way taken into consideration in
21    the volume of nonletters that were forecasted.
22         Q    Did you actually ask him the question or are you
23    just making an assumption there?
24         A    I believe I reviewed this answer with them.
25         Q    Look at AMMA number 3, would you, please?  You

                                                              3099
 1    there say, and I am looking at the second -- D as it runs
 2    over on the second page.
 3         A    Yes.
 4         Q    And you say there that you don't believe -- I'm
 5    sorry -- that having a smaller number of pieces to which the
 6    surcharge would be applied might have the effect of driving
 7    up other rates, because the revenue contribution would be
 8    smaller, right?  But you go ahead to say you don't think
 9    that would be the effect, given the two numbers you were
10    looking at?  Did you actually do that calculation or is that
11    sort of a --
12         A    I got out the spreadsheet and put in a lower
13    volume and saw that that reduction in revenue did not have
14    the effect of pushing up --
15         Q    You used the $990 million number that is given to
16    you in B?
17         A    Those aren't dollars.  Those aren't dollars, I
18    don't believe.
19         Q    No, no, I'm sorry.  I didn't mean to say dollars. 
20    Those are pieces?
21         A    Yeah.  Scared me for a minute.
22         Q    Well, it's getting to be that time of day for all
23    of us, I'm afraid, Mr. Moeller.
24              You made an eloquent defense of deaveraging in
25    response to a question of two Mr. May put to you.  You said

                                                              3100
 1    we're taking letters out from nonletters and doing
 2    deaveraging is a fair way to describe that, isn't it?
 3              I'm sorry, you have to speak, if you're ready to. 
 4    I didn't mean to rush you.
 5         A    I think if you are describing what I said about
 6    deaveraging letters and nonletters, yes, that's deaveraging
 7    and the rates.
 8         Q    And yet when Mr. May suggested to you that there
 9    be some deaveraging applied in the creation of your
10    surcharge, that there be different segments within however a
11    parcel ends up being defined, that those that are more
12    flat-like, to use your vivid metaphor, those that are very
13    close to the line, the flat line, should perhaps have a
14    smaller surcharge and those that are on the far distant
15    edges of parceldom should perhaps have a larger surcharge,
16    deaveraging.
17              Now, why is it good sometimes and bad other times?
18         A    Well, you could take deaveraging to the extreme
19    and have a different rate for every piece.  I don't think
20    that further deaveraging within that category is necessary
21    at this stage and maybe it will be.  But, for now, we have
22    proposed this surcharge that takes in that group.
23         Q    What conditions would you advance as making it
24    necessary to do further averaging?  You said it might be
25    necessary at sometime in the future.  What conditions would

                                                              3101
 1    make it necessary?
 2         A    It would be advisable, maybe not necessary but
 3    advisable to recognize if there is another level of
 4    averaging going on that involves a significant amount of
 5    volume, just like anywhere in the rate structure.  If there
 6    is something that is arguing or screaming for deaveraging,
 7    you look at that and measure it --
 8         Q    I'm sorry, I didn't mean to cut you off.  Would
 9    your measure of a significant amount of volume be absolute? 
10    That is, some number of pieces?  Or relative to the group at
11    which you are looking?
12              You've got this small, little group of 1.5 percent
13    of the standard mail, right?  If I could show you that half
14    of it was crying out, that would be only .75 percent.  It
15    would be a very small voice in the greater scheme of things
16    but it would be half of this population.
17         A    I think it is a balance of the percentage of that
18    particular subclass of mail versus -- and balancing the
19    absolute number of pieces that are involved.  I can't define
20    it for you any better than that but it's a balancing of
21    those things.
22         Q    The scoundrel's first refuge, the balance.
23              You said to Mr. May that you thought the surcharge
24    was fair in part because it was small in comparison to the
25    costs that it was in part defraying.  Do I have that right? 

                                                              3102
 1    The fact that Mr. Crum measures the cost to be 35 cents and
 2    the surcharge is only a dime, therefore you are only paying
 3    a third of the ticket and that means you don't have to worry
 4    much about fairness?
 5         A    I think it -- it -- it mitigates the effect of
 6    that rate change as much as -- to the extent it does and
 7    that it's fair and it reflects cost differences and for the
 8    subclass it's fair.
 9         Q    So your endorsement of a dime as the right level
10    is dependent if not highly dependent on the accuracy of the
11    costs measured by Mr. Crum?  Is that fair?
12         A    It depends on the costs.  That's what the basis is
13    for the surcharge.
14         Q    Correct, and you don't independently have any way
15    to evaluate the integrity of those cost measurements, do
16    you?
17         A    I think those cost measurements are standing
18    scrutiny just like everyone else's testimony in this case.
19         Q    But they are being defended by Mr. Crum, not by
20    you, is that right?
21         A    That's right.
22              MR. WIGGINS:  Thank you.
23              Mr. Chairman, I am terribly sorry to run on, but I
24    did.
25              CHAIRMAN GLEIMAN:  That's okay.  We have a choice

                                                              3103
 1    to make.  It is whether to stop right here, go another 10
 2    minutes, or perhaps if there is any chance at all that we
 3    can finish up by 5 o'clock to run to 5 o'clock, which is the
 4    absolute latest time that I would go today.
 5              [Recess.]
 6              CHAIRMAN GLEIMAN:  Mr. Olson, we're ready when you
 7    are.
 8              MR. OLSON:  Thank you, Mr. Chairman.
 9                          CROSS EXAMINATION
10              BY MR. OLSON:
11         Q    Mr. Moeller, William Olson, at this time
12    representing ValPak and Carol Wright, with some questions
13    for you, and I ask you if you can turn to page 30 of your
14    testimony.
15         A    Okay.
16         Q    Okay.  And at the end of that section discussing
17    destination entry discounts, you talk about the reason that
18    you reduced the commission's established pass-through of 100
19    percent to your recommended 80 percent, correct?
20         A    Yes.  I say one reason there why that -- why I did
21    that.
22         Q    Okay.  What's the one reason?
23         A    That particular sentence says that, if you did a
24    higher pass-through, that would have a greater revenue
25    leakage to it that would cause a push-up in the other rates

                                                              3104
 1    and you'd have other rates going up more than we wanted them
 2    to.
 3         Q    In other words, up more than 10 percent?
 4         A    Yes.
 5         Q    Okay.
 6              Are there any other reasons that you have besides
 7    that reason in your testimony or -- or now to offer for us
 8    for offering a reduction in the level of pass-through of
 9    drop -- of destination entry discounts?
10         A    The only other thing that's mentioned there is
11    that it -- it results in discounts which are similar to
12    today and --
13         Q    I'm sorry.  I couldn't hear you.
14         A    Oh.  Those -- those -- that pass-through produces
15    discounts which are similar to today's pass -- today's
16    discounts.
17         Q    In the sense that, since those pass-throughs were
18    established, the actual amount of cost savings from
19    destination entry has increased and therefore you can
20    maintain the same absolute amount of discount with a lower
21    level of pass-through.  Is that what you mean?
22         A    The measurement increased.  The reason we went to
23    a 100-percent pass-through or why we proposed a 100-percent
24    pass-through in re-class was that there had been a -- I
25    think a significant reduction at that point in the cost

                                                              3105
 1    savings, and we went all the way up to 100, if I remember
 2    correctly, but in any -- in any event, that's neither here
 3    nor there.  The 80 percent was chosen for the reasons
 4    described in my testimony.
 5         Q    And no other reasons.
 6         A    Those are the reasons unless there's an
 7    interrogatory response where I don't recall where I've said
 8    something else, but if there is, it's been designated.
 9         Q    I don't recall it either, but --
10         A    Okay.
11         Q    -- I'm just trying to identify all the reasons for
12    the record, so we can deal with them now.
13         A    Okay.
14         Q    Correct me if I'm wrong, but once you establish a
15    -- a revenue target for a subclass and a coverage factor for
16    that subclass and when you attempt to mitigate a rate
17    increase for one rate category, that necessarily affect --
18    causes the increasing of rates to some other categories,
19    correct?
20         A    If you decide that you're not going to let one
21    rate go up more than a certain percentage than it otherwise
22    would, that's going to cause one of the rate cells which is
23    probably receiving a lower increase to go up a little.
24         Q    Sure.  But even apart from having a 10-percent cap
25    or anything like that, if you have a subclass with a given

                                                              3106
 1    coverage factor and a given revenue target and you decrease
 2    some rates, for whatever reason, isn't it true you
 3    necessarily increase rates to some other categories within
 4    that subclass?
 5         A    Given that the total revenue is to remain the
 6    same, yes.
 7         Q    Right.
 8              So, as between those different rate categories,
 9    it's something like a zero sum gain, is it not?
10         A    There are push-ups and push-downs on rates that
11    you can do that will result in the same total revenue, so if
12    that's what you mean by zero sum gain, then yes.
13         Q    Okay.  Back to some -- something goes up,
14    something has to go down, and vice versa.
15         A    Yes.
16         Q    Can you explain to me all of the reasons you can
17    think of as to why you would want to mitigate substantial
18    increases for any individual rate category?
19         A    I know in this particular case we're looking at a
20    very low increase overall, and there was an effort made as
21    embodied in the 10-percent guideline I discussed to keep
22    rates for individual cells to bear the brunt of a large
23    increase in the face of the overall subclass increase of
24    being very low.
25         Q    And is avoiding rate shock, let's see, is that

                                                              3107
 1    factor 4, the effect of rate increases I believe, is that
 2    one of the reasons also?
 3         A    Yes, the effect on mailers.
 4         Q    Okay.  Would all of the criteria of 3622B come
 5    into play there, or at least several of them?
 6         A    Several of them would; yes.
 7         Q    And isn't it true that some mailers only use one
 8    rate category or predominantly use one rate category for
 9    their mail?
10         A    I suppose it's possible that there's someone just
11    using one of the many rate categories.
12         Q    If I were to suggest that certain mailers who, for
13    example, send out coupons may use to an extraordinary degree
14    standard A, ECR, SCF entry rates, would that -- that
15    wouldn't surprise you, right, for example?
16         A    That wouldn't surprise me; no.
17         Q    And therefore you look at mitigating substantial
18    increases in one rate category because you realize there are
19    some customers out there for whom individual rate categories
20    are terribly important; is that correct?
21         A    It could be that some mailers' mail is heavily
22    skewed towards one particular category.
23         Q    That's not unusual, is it?
24         A    I'm not really familiar with the disparity of
25    people's mailings.  You've given me an example of one that

                                                              3108
 1    sounds reasonable, and I imagine there are others.
 2         Q    Do you have the view that -- and this follows up
 3    to some degree some questions I asked you before -- but do
 4    you have the view that 3622B should be applied to all of the
 5    rate categories within a subclass, all the criteria of
 6    3622B?
 7         A    I think the entire proposal should be in
 8    accordance with the Act.  I'm not sure which specific
 9    criteria would be applying to individual rate categories.
10         Q    So if you were -- if the Commission were to ask
11    you for your counsel as to whether the Commission should
12    apply all the criteria of 3622B to designing rates within
13    the standard A subclass, what would your counsel be?
14         A    I would think they should rely on their own
15    judgment of how to interpret the act and what they need to
16    use.
17         Q    So you have no view on the topic?
18         A    Not one -- no.
19         Q    You have of course identified some criteria of the
20    act such as factor 4 that you believe should be considered
21    because you recommend it be considered; correct?
22         A    I think maybe I'm describing why the rates are in
23    compliance -- I don't know if that's the right word -- but
24    are consistent with that criterion.
25         Q    Let me ask you to look at the interrogatory

                                                              3109
 1    response to OCA-24 and in your response to OCA-24, this
 2    multipage table to focus on -- if you could have that in one
 3    hand and then look at your response to ValPak-21.
 4              In ValPak-21 we asked you to list each of the
 5    increases in the basic rates which you believe would have
 6    resulted from continuing the destination entry pass-through
 7    at 100 percent or, alternatively, reducing it only down to
 8    90 percent.  Do you recall that?
 9         A    I believe I was asked several scenarios here in
10    this question.
11         Q    Because 30, where we started the cross
12    examination, dealt with increases in the basic rates,
13    correct?  That is the language you used.  That is what you
14    were concerned about, excessive increases in the basic
15    rates, correct?
16         A    Yes, the basic rates meaning the two rates that
17    are spit out of the formula, which then trickled down to all
18    the other rates.
19         Q    And in your response you talk about three
20    different rates.  You talk about regular automation,
21    three/five digit presort flats.  You talk about ECR basic
22    nonletters and ECR basic letters.
23              Are those some of the basic rates that you are
24    talking about?
25         A    Those are some of the rates -- these are examples

                                                              3110
 1    of the rates that would go up.
 2              I think all of the piece rates would go up in
 3    these instances.  I picked these particular examples
 4    because, for instance, that first one then goes above the 10
 5    percent guideline.  I thought that was a good example, and
 6    the other ones just show sort of the magnitude of the
 7    percentage increase that might happen given the
 8    circumstances that are presented in this interrogatory.
 9         Q    Okay, but I want to be clear what you mean in your
10    testimony when you say, "A greater pass-through would
11    require a larger increase in the basic rates."
12         A    Right.
13         Q    Which basic rates do you mean, every line on the
14    rate chart for ECR and for regular that says basic?
15         A    No.  The basic rate there -- small "b" I guess --
16    is as I said the rates that come out of the -- the starting
17    point rates that come out of the formula that then discounts
18    are applied to.
19              If the discounts are held constant, not only do
20    the basic rates -- in this instance one of the basic rates
21    is the nonletter Basic presort rate.  That comes out of the
22    formula.  That would be pushed up as would all the rates
23    that are peeled off of that rate by applying the discounts
24    that are also in the rate design.
25         Q    Okay.  You are not talking about then any

                                                              3111
 1    destination entry basic rates, correct?
 2         A    The push-up on all of those per piece rates would
 3    be offset somewhat by the larger discounts or in some
 4    respect would be offset by the larger drop ship discounts.
 5         Q    I am just again trying to get at which rates you
 6    mean when you say basic rates.
 7              Do you mean Standard A regular, Standard A regular
 8    automation, and Standard A ECR nondestination entry letters
 9    and/or flats as the case may be in basic presort?
10         A    Yes.  The rates before application of any drop
11    ship discounts.  I haven't done the analysis to see what it
12    would have done there.
13         Q    One of those rates happens to be ECR basic
14    letters, correct?
15         A    With no drop ship.
16         Q    With no drop ship discount, okay, exactly.
17              Now that is what you talk about at the end of your
18    response to 21-A, correct?
19         A    Yes.
20         Q    And there you say -- and that is the biggest
21    percentage increase that you fear and try to avoid, correct?
22              You say, "A 100 percent pass-through may have
23    resulted in a proposed increase for ECR basic letters of
24    12.7 percent."  That is with the 100 percent pass-through or
25    11.3 percent with a 90 percent pass-through instead of the

                                                              3112
 1    proposed 9.3 percent increase, correct?
 2         A    Correct.
 3         Q    Okay, first of all, three times in response to
 4    that interrogatory you used the word "may."  Can you tell me
 5    what you meant by that limitation on your response?
 6         A    That's just me acknowledging a couple things. 
 7    One, this is done in isolation so it is sort of accepting
 8    the fact that you would do this in isolation of any other
 9    changes that you might make at the same time and, two, to be
10    careful not to say that these rates would have been proposed
11    because I can't speak for the Board of Governors and whether
12    they would have voted for it.  So it's just sort of a little
13    technicality there, I guess.
14         Q    Let me go back to the first caveat?  What else
15    would change?  Suppose you were to say that you wanted to
16    have a 100 percent destination entry passthrough.  For ECR
17    basic letters, can you tell me what else would change if you
18    decided to go with a 100 percent passthrough?
19         A    I'm not sure anything would change.  Again, it's
20    just a very --
21         Q    It's just a general caveat that you would normally
22    give?  Not necessarily having anything in mind with this?
23         A    Yeah, I didn't think of any other changes that I
24    would recommend making in addition to the hypothetical that
25    is put forth in this question.

                                                              3113
 1         Q    Okay.  Now, let's just deal with that because I
 2    want to explore the magnitude of that increase.  You express
 3    it in percentage terms.  You talk about that under your
 4    proposal there is a 9.3 percent increase.
 5              As I understand it, looking at OCA-24 for ECR
 6    basic letters that the proposed increase is from 15.0 to
 7    16.4 that you are offering, correct?  And that is the 9.3
 8    percent?
 9         A    I don't know where that is in the OCA response. 
10    Oh, here it is, very first page of 24.
11         Q    Yes.
12         A    Yes.
13         Q    If that were to go to the 90 percent passthrough,
14    it would be a recommended rate of going from 16.4 to 16.7 on
15    your proposal or an increase from 9.3 to 11.3; is that
16    correct?
17              I did the math and that's what it comes to.  You
18    didn't give the unit cost increases, you just dealt with
19    percentages but this is what it comes to with units, I
20    believe.
21              MR. ALVERNO:  Is that a question?  I mean -- I
22    guess I'm --
23              BY MR. OLSON:
24         Q    Is that correct?
25         A    I guess I am accepting your calculation subject to

                                                              3114
 1    check.  You are saying the 9.3 percent would be 11.3 percent
 2    because that's in my answer here?
 3         Q    Yes.
 4         A    Now I see what you were referring to.  I was back
 5    on the OCA one again.
 6         Q    You see that your testimony -- I'm sorry, you see
 7    that in the OCA-24 that the current rate is 15.0, you're
 8    proposing 16.4 and that equates to 9.3 percent increase,
 9    correct?
10         A    Correct.
11         Q    Now, let's go to the 90 percent passthrough tier. 
12    Your response to our ValPak interrogatory says that that
13    would go to 11.3 percent increase.  Now, I did the math and
14    it comes to three-tenths of a cent over what you're
15    recommending, or 16.7.  Would you just accept that subject
16    to check?
17         A    Oh, so you've backed out the percentage increase?
18         Q    Yes.
19         A    Okay, yes.  I'll accept that subject to check.
20         Q    Okay.  And that if you were to have a 100 percent
21    passthrough, it would go to 12.7 percent, your response
22    says, and I calculate that as 16.9 cents.  Would you accept
23    subject to check?
24         A    I'll accept that subject to check.
25         Q    Okay, now, let's look at those numbers for just a

                                                              3115
 1    second.  Do you consider the difference between 16.4 or 16.7
 2    and 16.9 cents to be so great that it is unfair to cause
 3    cost-based differences to be passed through to those mailers
 4    who use basic?  Is that such a great number that it causes
 5    you to be shocked and want to ameliorate the rate increase?
 6         A    I think people fight over much smaller increases,
 7    you know, so I think, yes, that could mean a lot to
 8    somebody, especially if, as you stated earlier, that there
 9    are some mailers that are in those particular rate
10    categories and all their mail got a three-tenths-of-a-cent
11    increase, you multiply that times some volume, that's --
12    that's a big amount of money.
13         Q    Okay.
14              So, for rate -- to avoid rate shock, you would
15    like to recommend that the commission not have, let's say, a
16    12.7-percent increase for that basic tier but, rather, it be
17    9.3 percent, correct?
18         A    The rates we've proposed, which we think are the
19    best rates, have that in them.
20         Q    Now, for the DBMC and the DCSF and the DDU basic
21    rates, however, those would all be increased at the
22    per-piece level but then decreased because there would be a
23    greater amount of pass-through of the destination entry
24    savings, correct?  Have you -- is that correct?
25         A    There would be some offsetting.  The -- the

                                                              3116
 1    increase due to the leakage would flow back to these people. 
 2    I'm not sure what -- or these -- these rate cells.  I'm not
 3    sure --
 4         Q    We like to have you think of them as people.
 5         A    I'm not sure exactly the magnitude and how that
 6    would offset.
 7         Q    Okay.
 8              You don't know if that would cause those basic
 9    destination entry tiers to go up or down, for example.
10         A    It -- it's an easy task for someone to check by
11    playing with the -- the work papers.  I haven't done that,
12    and I don't have the ability to do it right here.
13         Q    If it were to result in a reduction of those basic
14    tiers, would that be a factor to consider in considering
15    your proposal that mitigates the effect of this rate
16    increase and adjusts it downward from 12.7 percent to 9.3
17    percent, or should we only look at the basic non-destination
18    entry tier?  Is that the only one we should be concerned
19    about?
20         A    You can concern yourself with any rate category
21    here you want.  I think I've just spelled out why that
22    particular hypothetical of doing those pass-throughs would
23    result in rates for the basic tier, at least, and as we've
24    discussed, I can't tell you what they would be for these
25    other tiers, but that would go above, again, the 10-percent

                                                              3117
 1    guideline that was used in the development of these rates.
 2         Q    I don't want to mix apples and oranges, Mr.
 3    Moeller, but let me suggest that the number that you and Mr.
 4    May were talking about before with respect to the Standard A
 5    regular parcel surcharge for mail that's up to the break
 6    point, non-letter, that's destination SCF entry -- entered,
 7    three-/five-digit, would be, I believe a percentage increase
 8    of 55.56 percent.  Have you ever seen that number?
 9         A    There were a number of interrogatories where I was
10    asked to confirm percentage increases.
11         Q    Okay.
12         A    That may have been one of them.
13         Q    Okay.
14              Do you consider -- do you -- do you see anything
15    inconsistent with being concerned about a 12.7-percent
16    increase such that you reduce it to 9.3 percent but not
17    being apparently as concerned with a 55.56-percent increase?
18         A    Well, you mentioned apples and oranges.  I think
19    you're comparing apples and oranges.  One is to address a
20    longstanding situation in the rates where there's a cost
21    difference between shapes with non-letters and we're
22    recognizing it, and that's going to lead to some larger
23    percentage increases, larger than the ones that we were
24    discussing a moment ago.
25         Q    If changes -- let me go back to the word "may"

                                                              3118
 1    just for a second in your response to our interrogatory.  Is
 2    there any way to know where the effect of mitigation moves
 3    to in your spreadsheet?  In other words, when you take a
 4    rate that should be 16.9 cents and reduce it to 16.4 cents,
 5    are you able to establish who is hurt by that?
 6         A    You can do whatever you need to do to make the
 7    rate come out.  If you have a rate in mind you want to see
 8    in a particular rate cell, and you can -- there are various
 9    ways of making that rate happen.  You can compare the rates
10    before you've made that change and after you've made that
11    change and get an idea of how individual rate cells are
12    affected.
13         Q    And in this case, it's all mailers who do
14    destination entry irrespective of level of presort, correct?
15         A    Are we talking the surcharge again?
16         Q    Yes.  Well, the -- no, no, no.  I'm sorry.  We're
17    back to the destination entry discount reduction of
18    passthrough from 100 to 80 percent.  I was just trying to
19    figure out who the victims are of the mitigation.
20         A    Well, you can see the percentage increases and you
21    might be able to make some assumptions about that.
22         Q    Okay.  Let me turn to the topic of performance
23    very quickly and ask you to look at your response to AAPS-1. 
24    I'll try to do this very quickly.  You talk about a number
25    of attempts to measure service performance, and you say that

                                                              3119
 1    actual measurement of service performance, I believe, is not
 2    required to consider criterion -- the value of service
 3    criterion; is that correct?
 4         A    That's correct.
 5         Q    You're not saying it's of no relevance; you're
 6    just saying it's not required, correct?
 7         A    I'm not -- I'm not saying the value of service is
 8    not relevant; I'm saying that you don't necessarily need a
 9    performance measurement system to get some ideas about value
10    of service that you could use to consider that particular
11    criterion.
12         Q    If you have no data, no objective evidence on
13    value of service, what do you evaluate when you consider
14    that criterion?
15         A    I think we're --
16              MR. ALVERNO:  Objection, because that question is
17    assuming that we have no data and -- or information, I
18    should say, as opposed to data, and I believe that the
19    testimony of Dr. O'Hara would address the qualitative
20    aspects of value of service.
21              MR. OLSON:  I'll be glad to ask that to the
22    witness.
23              BY MR. OLSON:
24         Q    Is it true that you have, as you responded in
25    AAPS-36-1, that although there have been a number of

                                                              3120
 1    attempts to measure service performance for individual
 2    mailers, that -- and there is a goal of developing
 3    nationally representative performance figures, it is my
 4    understanding that none of these efforts culminated in a
 5    performance measurement system?  Is that your testimony?
 6         A    That's my response there, yes.
 7         Q    Okay.  Is that accurate?
 8         A    I researched it and that was what I came up with.
 9         Q    Okay.  Based on that, can we assume that there is
10    no data on which we can evaluate quality of performance or
11    quality or performance?
12         A    There may be something.  Again, Dr. O'Hara may
13    address this.  I think I was specifically talking about
14    nationally representative performance figures.  I am not
15    aware -- I don't -- I'm not setting the cost coverages, so I
16    don't need to consider this necessarily with respect to cost
17    coverages.  Dr. O'Hara does, and --
18         Q    Well, I understand, but you're saying that you
19    know of none, and I'm saying in view of the fact that you
20    know of none, and you've asked, what would you -- what
21    objective evidence -- in the absence of objective evidence,
22    what should the Commission look at in determining how to
23    apply that factor?
24         A    I can't tell --
25              MR. ALVERNO:  Objection, because the absence of

                                                              3121
 1    objective evidence is not in fact the case.  Objective
 2    evidence is different from data.  As I read Dr. -- Dr.
 3    O'Hara's testimony is objective evidence, isn't it?
 4              MR. OLSON:  I'll be glad to pursue this.  That's
 5    fine.  Thank you.
 6              MR. ALVERNO:  How is this within the scope of this
 7    witness' testimony anyway?
 8              CHAIRMAN GLEIMAN:  If the witness is able to
 9    answer, let's let the witness answer.  We may, it seems,
10    perhaps be able to get through with the first round of cross
11    examination.  We obviously aren't going to wrap up tonight
12    and we aren't going to get to any follow-up.  So if the
13    witness can answer, he can answer; and if the witness can't
14    answer, he can't answer.
15              THE WITNESS:  I am just saying that there was no
16    national representative performance figure to use when
17    considering that particular criterion, but I don't -- that's
18    Dr. O'Hara's province, and what he suggests be used to
19    measure value of service is in his testimony.
20              BY MR. OLSON:
21         Q    Okay.  In the absence of nationally representative
22    performance figures, I take it, then, you're saying you have
23    no recommendation as to what the Commission should look at
24    to help determine value of mail service actually provided?
25         A    It's not my testimony to be offering up

                                                              3122
 1    suggestions for that.
 2         Q    Okay.  Well, you're a rate design witness and you
 3    are putting forth important testimony.
 4              Let me go to another topic and talk about the
 5    pound rate with you for a moment, and I'm going to ask you
 6    another hypothetical.  You have discussed the pound rate
 7    several times today, but here is the hypothetical, that the
 8    Postal Service has in its hand an absolutely bulletproof
 9    study which controls for everything under the sun, and it
10    shows that weight costs 20 cents a pound in the ECR regular
11    rate subclass.
12              Do you have that in mind?
13         A    Twenty cents a pound is the cost.
14         Q    Just for the sake of argument, 20 cents.  Twenty
15    cents.
16         A    Okay.  I'm just glad it's not 33 cents.
17         Q    Okay.
18         A    Twenty cents.
19         Q    Yes.  And then for simplicity, let's assume the
20    subclass coverage factor is 200 percent.  I'm asking you as
21    a principle of rate design, would you recommend that in the
22    pound rated portion of the rate schedule, weight be
23    reflected in one of the following ways, and I want to know
24    which you would recommend:  either at cost -- in other
25    words, at 20 cents a pound; cost plus the average coverage

                                                              3123
 1    of 200 percent; or cost minus something; or cost plus
 2    something?  Do you have an opinion on that?
 3         A    No.
 4         Q    You have no opinion about, as a principle of rate
 5    design, how to deal with the issue of the cost of weight if
 6    you knew it?
 7         A    That would be a major change of the inputs that
 8    are available to me, and I would have to consult my manager,
 9    my coworkers and I would want to think about that.  I can't
10    say whether I would say, oh, yes, definitely, you know, you
11    just have a 20 cent pound rate.  Well, no, I mean, I'm not
12    going to say that.  Or we mark it by the cost coverage for
13    the class -- I can't say that.  I mean, there is more
14    involved.  I have to analyze it.
15         Q    So the concept that we would ever know the cost of
16    weight is so startling that it has never been thought of
17    before?
18         A    I have never taken it upon myself to try to come
19    up with a rate design that would entertain the notion of
20    different types of inputs to me.
21              MR. OLSON:  That's all I have, Mr. Chairman.
22              CHAIRMAN GLEIMAN:  Thank you.
23              I think we're going to, in fairness to everybody
24    because I don't think that we could get a round of follow up
25    and questions from the bench and all that, just pull the

                                                              3124
 1    plug right now.
 2              What I would like to know, Mr. Moeller, Mr.
 3    Alverno, and anybody else who had follow-up questions,
 4    whether we can pick up on Tuesday morning before our first
 5    scheduled witness and finish this up?  Are you available?
 6              THE WITNESS:  Yes.
 7              CHAIRMAN GLEIMAN:  Are you available, Mr. Alverno?
 8              MR. ALVERNO:  Yes.
 9              CHAIRMAN GLEIMAN:  Mr. McLaughlin, I know you had
10    some follow up.
11              MR. McLAUGHLIN:  Yes.
12              CHAIRMAN GLEIMAN:  Mr. Baker, you've got some
13    follow up.
14              MR. BAKER:  Yes.
15              CHAIRMAN GLEIMAN:  Okay.  We're all set, then.
16              Everybody have a good weekend.  It's a federal
17    holiday weekend, people are probably rushing to get out of
18    town, so be careful on the roads.
19              [Whereupon, at 4:55 p.m., the hearing was
20    recessed, to reconvene at 9:30 a.m., Tuesday, October 14,
21    1997.]
22
23
24
25

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