U.S. Postal Service: Improving Ratemaking Data Quality Through Postal Service Actions and Postal Reform Legislation
Published: 2005-07-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1999, the congressionally requested Data Quality Study (the Study) found opportunities to improve ratemaking data quality. The U.S. Postal Service (USPS) agreed to make improvements, but concerns remained that it is still unclear, from an overall perspective, what actions USPS has taken to improve data quality. Ratemaking data quality has also factored into congressional deliberations to reform postal laws. Thus, questions remain about USPS's actions to improve ratemaking data quality and how proposed legislation will address long-standing issues in this area. GAO was asked to (1) describe key USPS actions that were responsive to the Study to improve the quality of ratemaking data and (2) discuss possible implications of postal reform legislation for ratemaking data quality. GAO did not assess the extent to which USPS's actions affected data quality. In its comments, USPS disagreed with GAO's finding on the need to reform the ratemaking structure. USPS also differed on GAO's finding that the legislation would likely lead to improving ratemaking data quality. It said "breakthrough improvements" would be unlikely without a significant increase in costs. GAO believes reform of the ratemaking structure is needed, but the outcome would depend on its implementation. Further, the legislative changes would likely lead to data quality improvements over time and at some cost.
section_title: What GAO Found
paragraphs: USPS took several key actions that it reported were responsive to the Study's findings. USPS reported that these actions increased the accuracy and precision of ratemaking data. First, USPS changed the In-Office Cost System to improve the quality of data on mail handled by postal employees and the activities they are performing. Personnel costs represent more than three-quarters of USPS costs; therefore, information on postal employees' handling of mail is necessary for ratemaking purposes. USPS made similar changes to the Revenue, Pieces, and Weight System, which produces data on the revenue, volume, and weight of each type of mail. Second, replacing ratemaking data that had been collected in the 1980s, USPS conducted the City Carrier Street Time Study to gather more complete and consistent data on letter carrier activities. Third, to increase the precision of ratemaking data, USPS collected a larger quantity of data. Fourth, USPS revised documentation of the Transportation Cost System, which the Study had criticized as inadequate. Proposed postal reform legislation (H.R. 22 and S. 662) would create new oversight mechanisms and enhanced regulatory authority over the quality of ratemaking data. The legislation would transform the Postal Rate Commission into a new postal regulator that would prescribe what ratemaking data USPS must report annually, review these data, and determine whether USPS had complied with ratemaking requirements. The regulator could initiate proceedings to improve the quality of ratemaking data. To carry out its expanded duties, the regulator would have enhanced authority, including the authority to subpoena; the authority to order USPS to take actions to comply with laws and regulations; and the authority to impose sanctions for noncompliance. The legislation would address persistent problems under the existing ratemaking structure, which has enabled long-standing deficiencies in ratemaking data quality and unresolved methodological issues to persist. The legislation would eliminate key disincentives for ratemaking data quality, including the litigious ratemaking process, the break-even requirement that creates incentives to shift costs from one type of mail to another, and the lack of adequate oversight mechanisms to address data quality issues. Under the current structure, regulatory oversight is generally conducted during rate cases that only USPS can initiate. The legislation would provide mechanisms for regular oversight of ratemaking data and enhance the regulator's authority so that the necessary transparency, oversight, and accountability could take place. Thus, the legislation would likely lead to improvements in the quality of ratemaking data over time and at some cost. However, if the legislation is enacted, the outcome would likely depend on how the regulator would use its discretion to define and implement the new ratemaking structure. Key implementation questions would remain, including what regulatory criteria and requirements would apply to ratemaking data.

section_title: Letter
paragraphs: The quality of data used to set postal rates has been a long-standing  concern of Congress and postal stakeholders, including the U.S. Postal  Service (USPS); the independent Postal Rate Commission (PRC), which  reviews USPS proposals to change domestic postal rates; USPS  competitors; and mailers, including businesses and the general public.  Postal rates are critical to USPS’s financial viability because USPS is  intended to be self-supporting from postal operations and is mandated to  break even over time. Ratemaking data are the variety of data that are  used to establish postal rates. A key statutory ratemaking requirement is  that each class of mail or type of service must bear the direct and indirect  postal costs attributable to that class or type, plus that portion of all other  USPS costs reasonably assignable to that class or type. USPS accounting  systems collect detailed data, but do not collect sufficient data for  ratemaking purposes. For example, USPS accounting systems collect data  on the sales of postage stamps, but do not track how stamps are used to  send different subclasses of mail (e.g., stamped First-Class Letters and  Sealed Parcels, or Parcel Post items). Similarly, USPS accounting systems  track employee time and payroll costs, but do not track employee time and  payroll costs spent on handling each subclass of mail (e.g., time spent  manually sorting mail into the order it is to be delivered). Thus, USPS has  established data collection systems that gather additional data needed to  compile data specific to each subclass of mail. These data collection  systems are highly complex, in part because USPS uses many different  postal operations and work methods, and in part because original data  collection is expensive and difficult. Further, these data collection systems  are highly controversial, in part because there are multiple options to  collect and analyze the data, and in part because the current ratemaking  process gives various stakeholders an incentive to disagree over options  that produce somewhat different results—thereby affecting postal rates.  The statutory ratemaking process requires PRC proceedings called rate  cases, which enable any stakeholder to review and comment on USPS  proposals, including the supporting data and analysis. PRC then is  required to issue a decision with recommended rates, which generally has  included PRC’s assessment of the supporting ratemaking data.
In 1995, after the PRC Chairman and others raised concerns about the  quality of ratemaking data in the 1994 rate case, the former House  Subcommittee on the Postal Service, Committee on Government Reform  and Oversight, requested a Data Quality Study (the Study). The Study’s  report was issued in 1999 and found opportunities to improve the quality  of ratemaking data. USPS agreed to implement improvements and has  released information on its follow-up actions. However, concerns  remained that it is still not clear, from an overall perspective, what specific  actions USPS has taken to improve ratemaking data quality.
Further, the quality of ratemaking data has factored into ongoing  congressional deliberations to reform the nation’s postal laws to enable  USPS to better address its formidable financial, operational, and human  capital challenges. Congress has considered comprehensive postal reform  legislation over the past decade that, among other things, would provide  USPS with more flexibility to establish postal rates. This flexibility would  be balanced by enhanced regulatory authority and oversight to protect  USPS customers and competitors, including new oversight mechanisms  for the quality of ratemaking data. This legislation is being considered in  the 109th Congress (H.R. 22 and S. 662, 109th Cong., 1st Sess., both of  which are entitled the Postal Accountability and Enhancement Act), and  was reported by USPS’s Senate oversight committee on July 14, 2005, and  passed by the House on July 26, 2005, but has not yet been enacted.
Thus, important questions remain about USPS’s actions to improve the  quality of ratemaking data and how proposed legislation will address long- standing issues in this area. Accordingly, as agreed with your staff, our  objectives were to (1) describe key USPS actions that were responsive to  the Study to improve the quality of ratemaking data and (2) discuss  possible implications of postal reform legislation for ratemaking data  quality.
To address these objectives, we identified key USPS actions taken that  were responsive to the Study by reviewing the Study’s report that  prioritized its findings; reviewing USPS and PRC documents, including  USPS progress reports that prioritized actions and PRC documents that  summarized concerns about data quality; and interviewing USPS officials  responsible for collecting ratemaking data. We focused our work primarily  on USPS’s key actions to enhance three of its five major data collection  systems used for ratemaking because the Study’s report noted that these  systems had opportunities for improvement. These three systems include  the In-Office Cost System (IOCS), which produces data on the time postal  employees spend handling each subclass of mail in postal facilities; the  Revenue, Pieces, and Weight (RPW) system, which produces data on the  revenue, volume, and weight of each subclass of mail; and the  Transportation Cost System (TRACS), which produces data on long- distance transportation of mail subclasses using trucks, airplanes, and  freight trains. We also focused our work on another USPS key action to  conduct a new special study to replace four USPS special studies because  the Study’s report identified that the four special studies had opportunities  for improvement. USPS’s new special study is called the City Carrier Street  Time Study (CCSTS), which produced data on the activities of city  carriers—that is, letter carriers who deliver mail in highly populated urban  and suburban areas where most deliveries are made to the door, curbside  mailboxes, centrally located mailboxes, or cluster boxes. To gain an  understanding of how the ratemaking data are collected, we visited USPS  facilities in the Capital Metro area to observe data collection operations  and interviewed employees collecting the data, their supervisors, and  management. We did not assess the extent to which USPS’s actions  affected the quality of these ratemaking data. To discuss the implications  of proposed legislation, we reviewed proposed postal reform legislation,  current postal laws and regulations, and other documents. See appendix I  for more details on our objectives, scope, and methodology.
We requested comments on a draft of this report from PRC and USPS. PRC  provided written comments that are also discussed later in this report and  reproduced as appendix II. USPS provided comments via e-mail that are  discussed later in this report. We conducted our review at USPS  headquarters in Washington, D.C., and the Capital Metro area from June  2004 through July 2005 in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: USPS is an independent establishment of the executive branch mandated  to provide postal services to bind the nation together through the  personal, educational, literary, and business correspondence of the  people. Established by the Postal Reorganization Act of 1970, USPS is one  of the largest organizations in the nation; in fiscal year 2004, USPS  reported revenues of $69 billion and expenses of $66 billion. USPS handles  more than 200 billion pieces of mail annually.
The Postal Reorganization Act of 1970 shifted postal ratemaking authority  from Congress to USPS and the independent PRC. When USPS wishes to  change domestic postal rates and fees, it must submit its proposed  changes and supporting material—including supporting ratemaking data  on USPS costs, revenues, and mail volumes—to PRC. By law, PRC must  hold a proceeding referred to as a “rate case.” Any interested party can  participate in a rate case by filing a notice of intervention with PRC. The  notice enables the party to submit material to PRC, as well as ask written  questions of USPS. PRC also provides an opportunity for public hearings  in which USPS witnesses appear and can be cross-examined by PRC and  other interested parties. PRC generally must issue a recommended  decision on postal rates and fees within 10 months of the inception of a  rate case. USPS Governors may approve, allow under protest, reject, or  modify PRC’s recommended decision.
Proposed postal rates must be sufficient for USPS to meet its mandate to  break even, which requires that postal rates and fees shall provide  sufficient revenues so that USPS’s total estimated income and  appropriations will equal as nearly as practicable USPS’s total estimated  costs. In addition, each class of mail or type of postal service is required  by law to cover its direct and indirect costs (attributable costs), as well as  make a reasonable contribution to covering overhead costs (institutional  costs). PRC has long interpreted this requirement to apply to subclasses  of mail.
USPS maintains data collection systems to help attribute USPS costs to  various subclasses of mail, in part because USPS employees typically  handle multiple subclasses of mail every workday. Such cost attribution is  critical because USPS personnel costs represent more than three-quarters  of USPS costs. In fiscal year 2004, USPS personnel costs included about  $22 billion for clerks and mail handlers at mail processing and retail  facilities, about $18 billion for carriers on city routes (predominantly in  highly populated urban areas and their suburbs), about $5 billion for  carriers on rural routes (predominantly in rural areas and suburbs not  covered by city routes), and about $2 billion for postmasters, among other  things. USPS also collects ratemaking data on the revenue, cost, and  volume of each subclass of mail.
About 900 USPS employees called data collectors gather ratemaking data  on a full-time basis and about 2,000 USPS employees collect ratemaking  data on a part-time basis in addition to their other duties. These personnel  use laptop computers and digital scales to record ratemaking data at  postal facilities located across the nation (see fig. 1). USPS has estimated  that it budgeted about $73 million for the administration and collection of  ratemaking data in fiscal year 2005.
Although the quality of ratemaking data has long been recognized as  critical, as the Study’s report noted, there are no definitive quality  standards for postal ratemaking data. The Study concluded that the quality  of data accepted by any given regulatory or antitrust entity is negotiated  between the regulator and the company or companies subject to that  regulation. According to the Study, data quality is a subjective issue that  regulators judge in every rate review process, with the quality of data  accepted by regulators depending on the availability of data, the  cost/benefit of collecting additional data, and the seriousness of the issue  under review.
For the purpose of the Study, the criteria for the quality of ratemaking data  were defined as having data that are “sufficiently complete” and  “sufficiently accurate” for ratemaking, considering the costs involved in  providing such data. Sufficiently complete data were defined as having  enough of the necessary detail to enable the determination of each  applicable rate. Sufficiently accurate data were defined as “free enough  from error” to be used for this purpose. Error in this context referred to  both “sampling error” (i.e., data precision associated with random error of  data collected from randomly sampled employees or pieces of mail) and  other sources of error (i.e., systematic error).
The contractor that conducted the Study, A.T. Kearney, primarily focused  on the five major data collection systems used for ratemaking, as well as  some special studies used for this purpose. The Study found opportunities  for improvement in three of the five data collection systems. The Study  also reviewed the economic and statistical concepts that USPS uses for  ratemaking and estimated the precision of key cost data for certain  subclasses of mail, among other things. The Study specifically focused on  data used to establish rates for subclasses of mail. The Study did not  perform extensive field testing and data gathering, attempt to quantify the  extent to which systematic error is present in ratemaking data, or review  the ratemaking process. “In general, within the scope of the Study, the quality of the data provided by the Postal  Service for rate making has been sufficiently complete and accurate to calculate subclass  costs, and thus, enable subclass rates to be based on reasonably reliable data, considering  the costs to collect the data. This conclusion is based on the Study team’s assessment that  the Postal Service asks the appropriate economic questions, uses the best available data,  and applies an economically sound approach grounded in activity based concepts to  calculate its subclass costs with reasonable statistical accuracy. This assessment is based  on extensive economic, statistical and simulation analyses contained in the Study’s  supporting Technical Reports.”
At the same time, the Study’s report concluded that “improvements and  enhancements can—and must—be made to ensure future data provided  for rate making will be sufficiently complete and accurate.” The report  stated that “The Study team has concerns regarding the quality of certain  best available data used by the Postal Service to calculate its subclass  costs. In some instances, these best available data were used regardless of  their inherent level of error or their obsolescence.” Specifically, the report  noted opportunities for improvement in three major data collection  systems used for ratemaking as well as the need to replace ratemaking  data from special studies that had been collected in the 1980s. USPS  generally agreed with the Study’s findings.
Over the past decade, Congress has debated comprehensive proposals to  reform the nation’s postal laws that would, among other things, transform  the ratemaking structure and mechanisms for oversight of ratemaking data  quality. In the last session of Congress, proposed postal reform legislation  was reported by USPS’s oversight committees (H.R. 4341 and S. 2468,  108th Cong., 2nd Sess., which were both entitled the Postal Accountability  and Enhancement Act), but no further action was taken. The legislation  has been reintroduced in the current session (H.R. 22 and S. 662, which are  both entitled the Postal Accountability and Enhancement Act) but has not  yet been enacted.
As we recently testified, comprehensive postal reform legislation  continues to be needed in order to address the continuing financial,  operational, governance, and human capital challenges that threaten  USPS’s long-term ability to provide high-quality, universal postal service at  affordable rates. USPS’s core business of First-Class Mail is declining;  compensation and benefits costs are rising; and USPS is burdened with  roughly $70 billion to $80 billion in financial liabilities and obligations,  most of which are for unfunded retiree health benefits. We and the  President’s Commission on the United States Postal Service (Presidential  Commission)—which was established by President George W. Bush in  2002 to examine the future of USPS and develop recommendations to  ensure the viability of postal services in the United States—have reported  that comprehensive postal reform legislation is needed to minimize the  risk of a significant taxpayer bailout or dramatic rate increases. Because  comprehensive postal reform legislation has not been enacted and USPS  continues to face formidable competition, cost, and other challenges, its  transformation efforts and long-term outlook remain on our High-Risk  List. In this regard, we have reported that USPS progress is hindered by  limited flexibility and incentives for success, including limited flexibility to  establish postal rates and poor incentives for providing quality ratemaking  data.
section_title: USPS Took Action to Improve the Quality of Ratemaking Data
paragraphs: USPS took several key actions that it reported were responsive to the  Study’s findings. USPS reported that these actions increased the accuracy  and precision of ratemaking data. These USPS actions are summarized  below:    First, USPS made changes to IOCS and RPW to more accurately determine  subclasses of mail in the postal system, including data on the revenue,  volume, and weight of each subclass of mail, as well as to collect better  information on the activities that postal employees are performing.
Second, USPS conducted CCSTS to replace ratemaking data that had  previously been collected in the 1980s, using a different data collection  approach to collect more complete and consistent data on carrier delivery  activities.
Third, USPS substantially increased the quantity of data collected by RPW  and TRACS to increase the precision of ratemaking data.
Fourth, USPS revised and expanded its documentation of TRACS, which  the Study had criticized as inadequate.
subsections: section_title: USPS Made Changes to IOCS and RPW to More Accurately Determine Subclasses of Mail
paragraphs: USPS made changes to two major data collection systems used for  ratemaking—IOCS and RPW—that USPS reported were responsive to the  Study, in order to more accurately determine subclasses of mail in the  postal system, including data on the revenue, volume, and weight of  subclass of mail, as well as to collect better information on the activities  that postal employees are performing. According to USPS, the changes to  the data collection methods for IOCS and RPW were among the most  significant since these data systems were established more than 30 years  ago. To implement the changes, USPS undertook detailed pilot testing  over a multiyear period, which required substantial efforts on the part of  both USPS staff and contractors.
IOCS and RPW data are critical to postal ratemaking because these data  are needed to estimate the costs for USPS to handle each subclass of mail.  Although USPS timekeeping systems record the amount of employee time  spent in each operation or work center, those systems do not track the  subclasses of mail that employees handle, and also do not track the  activities they are performing. USPS employees typically handle multiple  subclasses of mail each workday, such as letter carriers preparing their  mail for delivery by manually sorting piles of mail into pigeonholes  corresponding to each address on their route. USPS has reported that  letter carriers spend 2 to 3 hours each workday in the office, with much of  that time spent manually sorting mail (see fig. 2). For example, USPS has  estimated that carriers manually sort about 44 billion flat-sized pieces of  mail each year, including such mail as catalogs, magazines, and large  envelopes. This activity incurs substantial costs because letter carriers  represent about 4 in 10 USPS career employees. To understand how much  time is required for letter carriers to manually sort each subclass of mail  and perform other duties in the office, at randomly selected times  throughout the year, IOCS records the characteristics of mail that  randomly sampled carriers are handling and the activities these carriers  are performing. IOCS uses similar procedures to collect data from postal  employees working to sort and route mail at mail processing and other  facilities (see fig. 3), as well as postal employees working to provide  window service and perform other activities at post offices and other retail  facilities (see fig. 4).
Once IOCS produces data on the time employees spend handling each  subclass of mail in various postal operations, these data are combined  with other data, such as data on employee wages and benefits, to yield  cost data (i.e., the in-office personnel costs attributable to each subclass of  mail). USPS incurred $28 billion in personnel costs in fiscal year 2004 for  employees working in postal facilities (i.e., mail processing, retail, delivery  unit, and other facilities), which represented more than one-third of USPS  costs for the fiscal year. In addition, IOCS provides data for the calculation  of some indirect costs that are related to mail handling activities, such as  mail processing equipment costs.
USPS data collectors gather IOCS data in person at USPS facilities across  the country. These data collectors gather information from sampled USPS  employees about their activities and about the mail that they are handling  (see figs. 5 and 6). Some IOCS data are gathered by data collectors via  telephone interviews, generally from smaller facilities where it would not  be cost-effective to collect data in person. IOCS data collection is a major  effort, with more than 750,000 observations/interviews conducted  annually. USPS has reported that it budgeted nearly $15 million to collect  IOCS data in fiscal year 2005.
The Study had concluded that opportunities existed to improve the quality  of ratemaking data collected by IOCS, stating that such action should be a  “first priority.” USPS reported that it was responsive to this finding by  modifying the IOCS data collection instrument to more accurately record  the subclasses of mail and to collect better information on the activities  that postal employees are performing. In addition, according to USPS, the  redesigned IOCS instrument better aligns clerk and mail handler activities  with current postal operations, and thus improves the division of certain  postal costs into cost pools. Formerly, the data collector recorded the  mail subclass on the basis of observations of certain characteristics of  each sampled mail piece, such as its shape, weight, and markings (see fig.  7). This approach was revised so the data collector records detailed  characteristics of the mail piece, including its shape, weight, and markings.  After IOCS data are collected, these data are uploaded to a mainframe  computer. Then, USPS uses a computer program to analyze the combined  IOCS data on mail piece characteristics and determine the subclass for  each mail piece.
Because IOCS obtains information on postal employee activities using  both in-person observation and interviewing and telephone interviewing,  USPS redesigned the IOCS data collection instrument with a standard  script to obtain information from postal employees in a more consistent  manner. Previously, the IOCS data collection instrument listed the needed  information but did not provide a script that asked questions in a  standardized manner. Scripting questionnaires has long been considered a  best practice and is the norm for surveys conducted by other  organizations.
On the basis of pilot tests, USPS officials told us that the new IOCS  approach categorized mail pieces more accurately because it relies less on  the data collector’s judgment and more on objective criteria built into the  computer program that determines the mail subclass on the basis of the  characteristics of each mail piece. USPS officials also said that pilot  testing helped improve the script for IOCS data collection. These pilot  tests are described below:  IOCS verification studies: USPS pilot tested new versions of the IOCS  data collection instrument, recording characteristics of actual mail pieces  that were being handled by sampled USPS employees. These mail pieces  were photocopied and sent to a USPS contractor who checked to see if the  mail subclasses could be correctly categorized according to the  information that was recorded. USPS staff double-checked this work. The  results were used to test three versions of the instrument in an iterative  manner, with each version being tested and the accuracy improving each  time.
IOCS comparison studies: USPS recorded mail piece characteristics from  predeveloped examples (not actual mail) using different versions of the  IOCS data collection instrument. USPS compared the results and reported  that the final revised version of the instrument resulted in more accurate  mail subclass determinations than the previous versions.
In addition to changing IOCS, USPS made some similar changes to the  RPW data collection instrument to better estimate the revenue, volume,  and weight of each subclass. Although USPS separately tracks postage  revenues, postage stamps and postage meters can be used to send any  subclass of mail. Therefore, data collectors observe sampled mail pieces at  USPS facilities, and, for each mail piece, gather data on its characteristics,  including the revenue (i.e., the amount of postage) and weight. RPW data  are used to calculate the revenue, volume, and weight of each subclass of  mail.
As with IOCS, USPS modified RPW so that the subclass of mail could be  determined more accurately through computerized analysis of detailed  mail piece characteristics that are observed and recorded (see fig. 8).  USPS pilot tested the new RPW approach, collecting RPW data in selected  areas over a 1-year period using both the old and new data collection  instruments. USPS compared the recorded data from these side-by-side  tests and received feedback from field staff to refine the instrument, going  through approximately 15 to 20 versions of the instrument. USPS has  reported that this pilot testing method was the first of its kind for a major  ratemaking data system.
section_title: USPS Conducted CCSTS to Replace Ratemaking Data That Had Been Collected in the 1980s
paragraphs: USPS conducted a new study called CCSTS to help attribute costs of city  carriers—that is, letter carriers who deliver mail in highly populated urban  and suburban areas where most deliveries are made to the door, curbside  mailboxes, centrally located mailboxes, or cluster boxes. Data on city  carrier delivery activities are needed for ratemaking because carriers  typically deliver multiple subclasses of mail. USPS incurred about $13  billion in employee costs for the street activities of city carriers in fiscal  year 2004, which represented about one-fifth of USPS costs (see fig. 9).  CCSTS replaced four special studies on city carrier street activities that  had been conducted in the 1980s. The Study had criticized these special  studies as outdated and imprecise. PRC and others had also criticized the  age of the data collected by these special studies and the methodology of  the studies. Recognizing the need for better data in this area, USPS  conducted CCSTS in 2002. USPS has reported that CCSTS provided both  more current and precise data, as well as a better methodological  framework for analyzing city carrier costs than the four special studies  that CCSTS replaced. USPS also has reported that CCSTS will be less  costly to update than the four special studies that CCSTS replaced,  thereby facilitating further updating of CCSTS in the future.
In developing CCSTS, USPS reported that it was mindful of several  drawbacks of the four former special studies of city carrier street  activities. First, USPS stated that the former special studies yielded  inconsistent and incomplete data, explaining that they selectively  reviewed different aspects of city carrier street activity, collected data at  different times, and used different data collection methods. Therefore,  USPS designed CCSTS as a single study to collect more complete and  consistent data on all city carrier street activities. Second, the former  special studies collected data that were not well suited for use with  advanced data analysis techniques needed to produce ratemaking data.  Therefore, USPS designed CCSTS to be compatible with advanced data  analysis techniques. Third, the former special studies generated imprecise  ratemaking data for the costs of certain mail subclasses, largely because  the expense of those studies had limited the quantity of data that was  collected. Therefore, USPS designed CCSTS to collect a larger quantity of  data so that its data would be more precise.
To develop CCSTS, USPS conducted a pilot study that tested CCSTS on a  smaller scale. USPS used the pilot study results to refine CCSTS, which  was conducted in May and June 2002. CCSTS randomly sampled over 160  ZIP Codes nationwide and recorded data during a 2-week period on the  activities of more than 3,500 city carriers delivering mail to addresses in  these ZIP Codes. USPS analyzed CCSTS data using advanced data analysis  techniques involving econometric models and performing statistical tests  to estimate how changes in mail volume affected city carrier street time  and the associated costs. As a result of using CCSTS to replace the four  former special studies, USPS reported that it attributed a somewhat higher  percentage of city carrier street time costs to specific subclasses of mail  (37 percent, up from 30 percent), thus diminishing the remaining  institutional costs (63 percent, down from 70 percent). To understand why  most carrier costs continue to be categorized as institutional, it is  important to note that the universal service commitment to provide mail  delivery requires carriers to traverse their routes each day, regardless of  whether a particular subclass or volume of mail is being delivered.
section_title: USPS Took Actions to Improve the Precision of Ratemaking Data
paragraphs: The Study had raised concerns about the precision of ratemaking data,  which are affected by the quantity of data collected from randomly  sampled postal employees and pieces of mail, as well as by the precision  of data on city carrier delivery activities. USPS reported that it took  responsive actions by increasing the quantity of ratemaking data collected  by RPW and TRACS, which are two of the five major data collection  systems used for ratemaking. TRACS randomly samples long-distance mail  transportation segments, such as airplane flights, truck trips, and trips of  freight trains that carry mail. Data collectors observe a random sample of  mail for each segment and record its characteristics, including the  subclass of mail. TRACS data are used to help attribute about $4 billion in  USPS long-distance transportation costs (see fig. 10). According to USPS,  the large increase in the quantity of RPW and TRACS data has improved  the precision of ratemaking data. Increasing data precision can be  particularly beneficial to the quality of cost, revenue, and volume data for  subclasses of mail with smaller volumes.
First, USPS increased the number of RPW tests from about 56,000 in fiscal  year 2003 to about 136,000 in fiscal year 2004—an increase of 142  percent. USPS also revised the RPW sampling methodology, which  according to USPS, resolved some technical issues identified by the Study  and further contributed to data precision. According to USPS, these  changes improved the precision of all RPW data as well as the precision of  key ratemaking data for each subclass of mail. Second, USPS increased  the number of transportation segments randomly sampled by TRACS each  fiscal year from about 10,000 in fiscal year 2000 to about 17,000 in fiscal  year 2004—an increase of 65 percent. USPS also reallocated the quantity  of data collected for each mode of transportation (i.e., air, highway, and  rail) to further increase the precision of subclass cost data. According to  USPS, this change was responsive to the Study, which had found that the  limited quantity of TRACS data collected for the highway transportation  mode resulted in less precise ratemaking cost data, particularly for some  subclasses of mail, such as Regular Rate Periodicals (e.g., news  magazines) and Parcel Post.
In addition, as previously described, USPS designed CCSTS to yield more  precise data by collecting a larger quantity of data than the data that  CCSTS replaced. USPS noted that this change was responsive to the Study,  which found that the four former special studies were highly imprecise.
section_title: USPS Took Actions to Enhance TRACS Documentation
paragraphs: USPS revised, updated, and expanded the documentation for TRACS,  which USPS reported was responsive to the Study and was an area that  USPS recognized needed improvement. According to USPS, the revised  TRACS documentation improved the transparency and administration of  this data collection system. The Study’s report had found TRACS  documentation to be deficient, particularly with respect to the  documentation of TRACS sampling and estimation methodology.  Consequently, the Study’s team reported that, within the Study’s time  frame (June 1997 through April 1999), the team did not have the  opportunity to understand some parts of the sampling design. The Study’s  report observed that the availability of improved documentation of TRACS  estimation procedures is important and noted the need for clear and  complete documentation on the TRACS sample design. The report further  noted that once the TRACS sample design is completed, USPS should  evaluate and adjust the sample to improve the precision of TRACS data.
USPS proceeded to expand TRACS sampling and estimation  documentation and rewrote the handbook for TRACS data collection. The  redone documentation was used in the 2000 rate proceedings, providing  greater transparency of this data collection system, and was commended  by PRC. USPS further revised TRACS documentation for the 2005 rate  case. In addition, as previously described in this report, USPS also  evaluated and adjusted the TRACS sample to improve the precision of  TRACS data. Thus, USPS reported that the revised TRACS documentation  enhanced the transparency and administration of this system.
section_title: Proposed Statutory Changes Could Lead to Better Ratemaking Data
paragraphs: The Presidential Commission and we have found that major changes are  needed to the ratemaking process. In particular, the Presidential  Commission found that the current ratemaking process is far too  cumbersome and time consuming, with rate changes taking as long as 18  months. The Presidential Commission concluded that the current  ratemaking process creates “an impossible situation for an institution  charged with the responsibility of acting in a businesslike manner.” Our  past work also reached a similar conclusion that “major changes are  needed in this area,” and that improvements in the postal ratemaking  structure will be a “fundamental component of a comprehensive  transformation.”
Proposed postal reform legislation being considered in the 109th Congress  (H.R. 22 and S. 662, 109th Cong., 1st Sess.) would create new oversight  mechanisms and enhanced regulatory authority over the quality of  ratemaking data. The postal regulator would be required to prescribe what  ratemaking data USPS must annually report and review that data in order  to determine whether USPS had complied with the requirements of the  new ratemaking structure. The postal regulator would be provided with  the authority to initiate proceedings to improve the quality of ratemaking  data; the authority to subpoena USPS documents and officials; the  authority to order USPS to take appropriate actions to comply with laws  and its regulations; and the authority to impose sanctions for  noncompliance, including fines for deliberate noncompliance. The postal  regulator could obtain court orders to enforce its subpoenas, orders, and  sanctions. The proposed legislative changes would address persistent  problems under the existing statutory ratemaking structure, which, as we  have reported, has enabled long-standing deficiencies in ratemaking data  quality and unresolved methodological issues to persist. Thus, the  proposed legislative changes would likely lead to improvements in the  quality of ratemaking data. However, if postal reform legislation is  enacted, the outcome would likely depend on how the postal regulator  would use its discretion to define and implement the new ratemaking  structure. Key implementation questions would remain, including what  regulatory criteria and requirements would apply to ratemaking data.
subsections: section_title: Major Changes Are Needed to the Ratemaking Process
paragraphs: The Presidential Commission concluded that for USPS to operate in a  more businesslike fashion, its managers must have greater flexibility to  manage and innovate, including in the ratemaking area. However, the  Presidential Commission also stated that with this latitude comes the need  for enhanced oversight from an independent postal regulator endowed  with broad authority. Thus, the Presidential Commission concluded that  the current ratemaking process should be abolished and replaced with a  more streamlined structure that continues to impose rigorous ratemaking  standards through independent regulatory oversight that would ensure  that the outcome cannot be unduly influenced through the selective  provision of information to the regulator. The Presidential Commission  stated that the postal regulator must have access to the most reliable and  current information possible to ensure financial transparency and enable  the postal regulator to make fully informed determinations. To this end,  the Presidential Commission recommended that the postal regulator have  the authority to request accurate and complete financial information from  USPS, including through the use of subpoena powers, if necessary.
We have also reported on how the statutory structure has led to persistent  problems and issues regarding the quality of ratemaking data. Specifically,  we found that the current ratemaking structure has poor incentives that  impede progress in improving data quality, including the incentives  described below:    Poor incentives to provide quality data: Current law gives USPS  opportunities to seek advantage in litigious rate cases by controlling what  data are collected and how they are analyzed and reported. PRC cannot  subpoena USPS or order USPS to collect or update data. For example, the  Study found that key ratemaking data had not been updated for many  years, but these data were used regardless of their obsolescence.
Poor incentives for resolving recurring issues: Statutory due process  rules have enabled parties to repeatedly litigate complex data quality and  cost attribution issues that have previously been considered. In addition,  as we have reported, the zero-sum nature of the break-even requirement  provides powerful incentives for parties to repeatedly attempt to shift  postal costs in ways that serve their self-interests. Specifically, we have  reported that when USPS proposes changes to domestic postal rates and  fees, USPS (1) projects its “revenue requirement” for the “test year” (a  fiscal year representative of the period of time when the new rates will go  into effect), based on the total estimated costs plus a provision for  contingencies, and a provision, if applicable, for the recovery of prior  years’ losses and (2) proposes rates and fees that are estimated to raise  sufficient revenues to meet USPS’s revenue requirement. Thus, as the  Institute of Public Administration reported more than a decade ago, “The  current ratemaking structure is premised on the concept of a static pie,  which represents the revenue requirement, and focuses on who is going to  pay what share of the money (i.e., ratemaking is treated as a zero-sum  game).” The institute further reported that various interest groups have  been organized that represent certain classes of mail in rate cases. These  groups typically advocate cost attribution methods that are in their  immediate self-interest, such as alternative methods that would result in  fewer costs attributed to the class of mail they represent. USPS and  private delivery firms have taken opposing positions on cost attribution  methods for subclasses of mail, such as Priority Mail and Parcel Post. As a  result, the same cost attribution issues have been debated for many years.  Cost attribution issues are often a key reason why rate cases are so  lengthy and litigious because these issues are complex and their  disposition can directly affect postal rates. Although cost attribution issues  are central to postal ratemaking, we have reported that the need to  address such issues in every rate proceeding is inconsistent with providing  USPS with greater flexibility to change rates under a streamlined  ratemaking process.
Poor incentives to appropriate cost attribution: USPS has a disincentive  to maximize the attribution of costs to specific subclasses of mail that  must cover their costs because USPS loses pricing flexibility as more costs  are attributed. Because ratemaking data and analyses of these data are  necessary to attribute costs, the quality of ratemaking data can affect the  degree of cost attribution. In this regard, the PRC Chairman recently  testified that the proposed postal regulator should have the means to  examine all of the costs currently treated as institutional to assure  Congress, USPS, and the public that all costs that can be attributed, are  attributed. He concluded that “I believe there is room for improvement  and would welcome the responsibility and authority to achieve it.”
section_title: Proposed Requirements for Reporting Ratemaking Data
subsections: section_title: USPS Reporting
paragraphs: The postal regulator would be required to issue regulations prescribing  what ratemaking data USPS would be required to report (see table 1).  Despite the quantity of material submitted in rate cases, PRC has reported  that its ability to carry out its responsibilities has been hindered in some  rate cases because of deficiencies in the completeness and accuracy of  ratemaking data provided by USPS. For example, PRC reported that its  ability to consider USPS proposed rates in the 1994 rate case was hindered  because the supporting ratemaking data were deficient. PRC said USPS  omitted data that had previously been provided in rate cases, such as new  or updated studies of the sort that were necessary to develop rates for  worksharing discounts that mailers receive in exchange for performing  activities that are estimated to reduce USPS costs. As a result, PRC  reported it was unable to develop worksharing discounts that tracked the  associated USPS cost savings, which PRC reported should be based on  current data to set appropriate discounts. PRC said that the absence of  these studies was particularly significant because USPS operations had  been in a state of major transition since the past rate case, but the former  worksharing cost studies—and the worksharing discounts that had  resulted—reflected former mail processing methods. In this regard, the  proposed legislation would specifically require USPS to provide  worksharing data on an annual basis—a requirement not included in  current law. Further, the proposed legislation would provide the postal  regulator with enhanced authority to obtain these data if USPS does not  initially provide them. Specifically, the postal regulator would be provided  with subpoena power and the power to obtain court orders to compel  USPS compliance with the reporting requirements—powers not provided  to PRC by current law. The proposals for enhanced regulatory authority  are discussed further later in this report.
Another benefit of the proposed reporting requirements would likely be  the end of a long-standing methodological dispute in which USPS prepares  two sets of cost data for each regulatory proceeding—one according to its  preferred methodology for analyzing mail processing costs, and one  according to PRC’s preferred methodology for analyzing these costs. The  different methods produce different estimates for USPS savings resulting  from worksharing discounts that currently apply to three-quarters of total  mail volume, and thus the choice of analysis method could affect these  discounts. The current statutory ratemaking structure allows this dispute  to continue because it provides due process by enabling all interested  parties to raise whatever issues they wish, regardless of how many times  the same issues may have been considered in the past. USPS can  repeatedly raise issues by building them into its initial proposals for  changes to postal rates. For example, USPS has repeatedly submitted  proposed rates based on its preferred analysis method for mail processing  costs into its rate proposals, even though PRC has repeatedly rejected  USPS’s method. In each rate proceeding, USPS also submitted parallel  data using the PRC analysis method, and both sets of data were  considered by PRC and other stakeholders participating in the rate cases.  The proposed requirements could resolve similar situations by mandating  that the postal regulator issue regulations for how USPS cost, revenue, and  rate data are to be analyzed in order to demonstrate compliance with  ratemaking requirements, including newly proposed statutory  requirements for worksharing discounts (see app. III for a listing of  proposed ratemaking requirements). In this regard, the House bill is the  most specific in that it requires the postal regulator to prescribe  methodologies for analyzing ratemaking data. Further, both bills would  eliminate current statutory rules for due process and stakeholder  involvement in rate proceedings; the postal regulator would be given the  flexibility to establish new rules in this area under its regulatory authority.
section_title: Auditing by the Inspector General
paragraphs: The proposed legislation would require the USPS Inspector General to  audit the ratemaking data included in the USPS annual reports (see table  2). For example, under the House bill, the USPS Inspector General would  be required to regularly audit USPS data collection systems and  procedures used to prepare the annual reports. In contrast to the proposed  requirements for regular Inspector General oversight of these USPS data  collection systems, the current ratemaking structure relies on ad hoc  regulatory oversight conducted during rate cases that only USPS can  initiate. Specifically, since the Postal Reorganization Act of 1970 was   enacted, USPS has initiated 13 rate cases in the past 34 years, including the  2005 rate case. For example, the 2005 rate case was preceded by the 2001  rate case that resulted in a negotiated settlement, which resulted in limited  regulatory review of USPS ratemaking data and its data collection  systems. When USPS filed the 2005 rate case, it requested expedited  review to consider a proposed settlement, which, if accepted, could again  result in limited regulatory review of USPS ratemaking data and data  collection systems.
Thus, the case-by-case approach to reviewing ratemaking data quality  under the current ratemaking structure, combined with the infrequency of  these reviews, has limited oversight of USPS ratemaking data and its data  collection systems that generate these data. When oversight has occurred,  the 10-month statutory deadline for rate cases, combined with the time  and expense of litigating data quality issues, has limited the scope and  depth of the data quality issues reviewed in rate cases. In our view, such  limited external oversight is one reason why problems with the quality of  ratemaking data have persisted. For example, in the 1994 rate case, PRC  called for an examination of USPS costing systems used for ratemaking,  especially IOCS, citing methodological concerns, reductions in the  quantity of ratemaking data that USPS collected, and major changes in  USPS operations, among other things. In spring 1995, then PRC Chairman  Edward Gleiman testified before the former House Subcommittee on the  Postal Service about his concerns regarding the quality of ratemaking data.  This led to the Chairman of that Subcommittee, Representative John M.  McHugh, requesting the Data Quality Study. The request for the Study, its  progress, and USPS follow-up have been the subjects of continuing  congressional oversight over the past decade. The Study validated the  need for improving IOCS and other USPS data collection systems and  special ratemaking studies. To USPS’s credit, USPS reports making major  efforts that were responsive to the Study. However, the congressional  oversight provided by the Study was not envisioned by the Postal  Reorganization Act of 1970, which separated Congress from the  ratemaking process. The Study was a unique event that required  extraordinary involvement by Congress, USPS, PRC, and the contractor  that conducted the Study.
Under the proposed legislation, the postal regulator would be required to  annually review USPS ratemaking data reports and determine whether  USPS had complied with the requirements of the new ratemaking  structure (see table 3). In cases of noncompliance, the postal regulator  would be required to order USPS to take appropriate action. Regulatory  compliance reviews would be a critical element of the new ratemaking  structure, which is intended to balance increased USPS ratemaking  flexibility with enhanced transparency, oversight, and accountability.
Specifically, under the proposed legislation, the postal regulator would be  charged with developing a new, streamlined ratemaking process that  provides USPS with additional flexibility. The mandated compliance  reviews would (1) verify that USPS rates are in compliance with applicable  requirements on an annual basis and (2) require regulatory action to  correct any instances of noncompliance. For example, the proposed  legislation would require each USPS competitive product (e.g., Express  Mail and Priority Mail) to cover its attributable costs. In order for the  postal regulator to verify compliance with this cost-coverage requirement,  data would be needed on the attributable costs and revenues of each USPS  competitive product. The quality of this ratemaking data would be vital  because the regulator would be required to address instances of  noncompliance through certain actions, such as ordering USPS to adjust  the rate of a competitive product that was not covering its costs or even to  discontinue providing the loss-making product.
In contrast with current law, which depends on having USPS initiate rate  cases for regulatory action to occur, the proposed compliance process  triggers annual regulatory action based on actual results for each fiscal  year. For example, under current law, the requirement that each subclass  of mail cover its costs is addressed in rate cases—which can be years  apart from each other. Because postal revenues and costs change over  time, a subclass of mail may not cover its costs in some years between rate  cases. This situation may not be addressed until the next rate case. As  previously described, the proposed legislation specifies that if a subclass  of mail fails to cover its annual costs as required, the postal regulator  would be required to order USPS to take appropriate action to come into  compliance. The postal regulator would have the specific authority to  order USPS to change the postal rates for that subclass of mail so that its  revenues would begin to cover its costs.
section_title: Proposed Requirements for Data Quality Proceedings
paragraphs: Proposed postal reform legislation would authorize the postal regulator to  initiate proceedings to improve the quality of ratemaking data, including  data on the attribution of costs and revenues to postal products (see table  4). This mechanism would be needed because the legislation would  abolish the current statutory ratemaking process, which has been the  primary mechanism for oversight of data quality issues. Authorizing the  postal regulator to initiate data quality proceedings as needed would shift  from reactive oversight in USPS-initiated rate proceedings to proactive  oversight by the postal regulator.
The proposed statutory mechanism to consider data quality and related  cost attribution issues has a number of potential benefits, including the  following:    Providing a mechanism for considering data quality issues with  adequate time and attention: In rate cases, PRC reviews comprehensive  proposals, voluminous documents, and complex issues, leaving limited  time to consider data quality and related cost attribution issues. As USPS’s  General Counsel has acknowledged, it is difficult for rate case participants  to handle cost attribution issues involving ratemaking data and other  issues within the statutory 10-month time frame for rate cases.
Revisiting data quality issues as needed: Data quality is a moving target  as postal operations, data needs, and data collection technologies evolve  over time. Thus, it is natural for data quality issues and opportunities for  improvement to arise over time.
section_title: Proposed Enhancement of Regulatory Authority and Enforcement Powers
paragraphs: Providing the postal regulator with enhanced authority and enforcement  powers is consistent with the overall intent of the proposed postal reform  legislation to balance providing USPS with greater pricing flexibility with  enhancing transparency, oversight, and accountability to protect USPS  customers and competitors. Under the proposed postal legislation, the  postal regulator would be provided with enhanced authority and  enforcement powers compared with those of PRC. Specifically, the postal  regulator would be provided with the authority to order USPS to take  appropriate actions to comply with laws and its regulations and could  impose sanctions for noncompliance, including fines for deliberate  noncompliance (see table 5).
Regulatory orders could result from the required annual compliance  reviews of ratemaking data conducted by the postal regulator, previously  discussed, or from complaints that could be initiated by the regulator or  any interested party. The federal courts would enforce the postal  regulator’s orders and sanctions. The postal regulator would be provided  with subpoena power. The regulator’s subpoenas would be enforced by  federal courts, which could punish noncompliance as a contempt of court. “Past Postal Rate Commission decisions have frequently contained requests for additional  data and analysis in specific areas. Sometimes these requests were honored but all too  often they have been ignored. Under the existing statute the Commission does not have the  authority to compel USPS to collect specific data or perform needed studies.”
section_title: Possible Implications of Proposed Postal Reform Legislation for the Quality of Ratemaking Data
paragraphs: The proposed legislative changes previously described would address  persistent problems under the existing statutory structure, which, as we  have reported, has enabled long-standing deficiencies in ratemaking data  quality and unresolved methodological issues to persist. Under the  current structure, regulatory oversight is conducted during rate cases that  only USPS can initiate, which has limited the frequency, scope, and depth  of oversight of USPS ratemaking data and its data collection systems that  generate these data. The legislation would eliminate key disincentives for  ratemaking data quality, including the litigious ratemaking process (which  provides incentives for USPS and others to gain an advantage through the  collection and analysis of ratemaking data), the break-even requirement  that creates incentives to shift costs from one subclass of mail to another,  and the lack of adequate oversight mechanisms to address data quality  issues. The legislation also would enhance regulatory authority so that the  necessary transparency, oversight, and accountability can take place  regarding ratemaking data quality. Thus, the proposed legislative changes  would likely lead to improvements in the quality of ratemaking data over  time and at some cost.
However, if postal reform legislation is enacted, the outcome would likely  depend on how the postal regulator would use its discretion to define and  implement the new ratemaking structure. Key implementation questions  would remain, including what regulatory criteria and requirements would  apply to ratemaking data. Should the legislation be enacted,  implementation will be critical to achieving the intended results because  the legislation would provide the postal regulator with great flexibility to  establish the new ratemaking structure and implement provisions relating  to data quality. This flexibility would enable the postal regulator to deal  with changing circumstances, but it also creates substantial uncertainty  and risks. Key implementation questions might include the following:    What criteria would the new postal regulator use for evaluating the quality,  completeness, and accuracy of ratemaking data?
To what extent can USPS costs be rationally attributed to postal products  and services, in accordance with sound economic principles?
How would the postal regulator balance the need for high-quality  ratemaking data with the time and expense involved in obtaining the data?
How would any proceedings to improve the quality of ratemaking data be  structured by the postal regulator? How could USPS and other  stakeholders participate in such proceedings?
Could the postal regulator use its enhanced authority over ratemaking  data to require USPS to collect and/or update specific ratemaking data? If  so, would that include regulatory authority over the quantity of data  collected and the methods of data collection (e.g., in-person data  collection v. telephone data collection)?
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the Chairman  of the Postal Rate Commission in a letter dated July 18, 2003, and the  Controller and Vice President of the U.S. Postal Service via e-mail on the  same date. Their comments are summarized below, and the PRC  Chairman’s comments are reproduced as appendix II. In addition, PRC and  USPS officials provided technical and clarifying comments, which were  incorporated where appropriate. “In light of the record of success under the current system, the proposed legislation relating  to the requirements for reporting ratemaking data in practice is not likely to lead to the  breakthrough improvements in the quality of the ratemaking data systems without a  significant increase in costs to the stakeholders.  concerned, furthermore, that the  proposed legislative changes may sacrifice the checks and balances and the effective  process of data review and refinement that have evolved under the current system.”
We disagree with USPS’s first comment that the current ratemaking  process has worked “remarkably well” since postal reorganization. We  continue to believe that major changes are needed to the ratemaking  structure.  As described in our report, the current ratemaking structure  has enabled long-standing deficiencies in ratemaking data quality to  persist. Further, we have reported that the ratemaking process is a  litigious, costly, and lengthy process that can delay needed new revenues.  In this regard, USPS’s comments appear to be inconsistent with the April  14, 2005, testimony of the Postmaster General that “today’s ratemaking  process is both costly and time consuming” and needs major change, as  well as the numerous criticisms that USPS has made of the ratemaking  process over the years. We continue to believe that comprehensive postal  reform legislation is urgently needed, including improvements to the  regulation and oversight of postal rates. Second, we believe the need for  reform is not diminished by comparisons of ratemaking data quality with  that of foreign postal administrations, which have different regulatory  environments. Indeed, some foreign countries that are implementing  postal reform are grappling with the need to improve ratemaking data  quality. In our view, it is more appropriate to consider what level of  ratemaking data quality is appropriate for the United States.
Third, regarding USPS’s views about achieving “breakthrough  improvements” in ratemaking data quality, in our view, the proposed  legislative changes would likely lead to improvements in the quality of  ratemaking data over time and at some cost. The extent of such  improvements, and what the associated costs may be, would depend on  how the legislation is implemented.  In our view, enhanced regulatory  authority over ratemaking data would enable the necessary transparency,  oversight, and accountability in this area. Ratemaking data are  fundamental to setting postal rates that touch the lives of all Americans  and affect the financial viability of USPS and the mailing industry. These  data are essential to establishing fair and equitable rates.
In comments on our draft report, the PRC Chairman said that the report  had clearly presented USPS actions taken with respect to the Study  recommendations. He commended USPS for taking steps to improve its  ratemaking data systems and the data upon which postal rates are based.  At the same time, he expressed concerns about ratemaking data quality  and said that USPS can and should be taking more action to improve the  quality of ratemaking data. He also said that the report aptly summarizes  the potential of postal reform legislation to improve ratemaking data  quality.
The PRC Chairman said USPS had not addressed many significant  potential sources of systematic error in its ratemaking data systems,  including IOCS. He explained that USPS had not addressed issues of  systematic error in IOCS data that have been a major concern in prior rate  cases. He also said that IOCS data had become less precise due to  reductions in the quantity of IOCS data implemented prior to the Study. He  also expressed concerns regarding the precision of TRACS data, while  complimenting USPS for improving the precision of RPW data. On another  matter, he expressed concerns regarding the quality of mail processing  data produced by the Management Operating Data System (MODS) that  the Study did not assess. Regarding postal reform, he said that the  proposed legislation reflects a consensus within the postal community that  new tools are needed to increase USPS’s financial transparency. He  concluded that PRC agreed that the proposed legislative changes would  likely lead to improvement in the quality of ratemaking data.
To put PRC comments about the IOCS data precision into context, the  Study found that the reductions in IOCS sample size resulted in a  minimally lower level of precision in overall subclass cost estimates and  made no recommendations on the quantity of IOCS data that should be  collected in the future. However, the Study did raise concerns about the  precision of some ratemaking data, and USPS’s responsive actions are  described in our report. Looking ahead, we encourage USPS and PRC to  work together—as they did during the Study—to better understand  technical issues regarding data precision, using a statistical model that the  Study developed to assess data precision that USPS is working to refine.  More generally, we encourage USPS and PRC to use every opportunity to  maximize progress on improving the quality of ratemaking data, such as  working to improve data quality outside the ratemaking process. As the  Study concluded: “Providing sufficiently complete and accurate data for  ratemaking is an evolutionary process that requires the Postal Service to  continually improve the quality of its ratemaking data and related data  systems.”
Regarding PRC’s comments on MODS data issues, they were outside the  scope of our report, which focused on ratemaking data systems, city  carrier cost data, documentation, and data precision that were assessed by  the Study. These issues are part of a broader set of mail processing cost  issues that PRC and USPS have long disagreed over. Current law allows  this disagreement and others to continue by enabling all interested parties  to raise whatever issues they wish in rate cases, regardless of how many  times the same issues may have been considered in the past. However, as  previously discussed, the legislation would likely lead to resolution of this  long-standing methodological dispute.
We are sending copies of this report to the Ranking Minority Member of  the House Committee on Government Reform, the Chairman and Ranking  Minority Member of the Senate Committee on Homeland Security and  Governmental Affairs, Senator Thomas R. Carper, the Postmaster General,  the Chairman of the Postal Rate Commission, and other interested parties.  We will make copies available to others on request. This report will also be  available on our Web site at no charge at http://www.gao.gov.
If you have any questions about this report, please contact me at (202)   512-2834 or at siggerudk@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report included Gerald P. Barnes,  Assistant Director; Kenneth E. John; Anna Bonelli; Kevin Bailey; Jay  Cherlow; Karen O’Conor; Richard Rockburn; and Walter Vance.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) describe key U.S. Postal Service (USPS) actions  that were responsive to the 1999 Data Quality Study (the Study) to  improve the quality of ratemaking data and (2) discuss possible  implications of postal reform legislation for ratemaking data quality.
To address the first objective, we identified key USPS actions taken that  USPS reported were responsive to the Study by reviewing the Study’s  report that prioritized its findings; reviewing USPS and Postal Rate  Commission (PRC) documents, including USPS progress reports that  prioritized actions and PRC documents that summarized concerns about  data quality; and interviewing USPS officials responsible for collecting  ratemaking data. We focused our work primarily on USPS’s key actions to  enhance three of its five major data collection systems used for  ratemaking because the Study’s report noted that these systems had  opportunities for improvement. The three systems include the In-Office  Cost System (IOCS), which produces data on the time that postal  employees spend handling each subclass of mail in postal facilities; the  Revenue, Pieces, and Weight (RPW) system, which produces data on the  revenue, volume, and weight of each subclass of mail; and the  Transportation Cost System (TRACS), which produces data on long- distance transportation of mail subclasses using trucks, airplanes, and  freight trains. To put IOCS into context, as previously noted, in fiscal year  2004, USPS incurred about $28 billion in personnel costs for employees  working in postal facilities (mail processing, retail, delivery unit, and other  facilities), which comprised more than one-third of USPS costs of about  $66 billion for the fiscal year. To put TRACS into context, TRACS was used  to help attribute about $4 billion in fiscal year 2004 costs for long-distance  transportation of mail using trucks, airplanes, and freight trains. We also  focused our work on another USPS key action to conduct a new special  study to replace four USPS special studies because the Study’s report  found that data collected by these studies needed improvement. USPS’s  new special study is called the City Carrier Street Time Study (CCSTS),  which produced data on the activities of city carriers—that is, letter  carriers who deliver mail in highly populated urban and suburban areas  where most deliveries are made to the door, curbside mailboxes, centrally  located mailboxes, or cluster boxes. We did not assess the extent to which  USPS’s actions affected the quality of these ratemaking data. Aside from  these ratemaking data, we included some USPS data in this report for  background purposes, such as audited USPS accounting data on total  USPS costs and revenues for fiscal year 2004, data on USPS personnel  costs, and USPS estimates of budgeted costs for collecting ratemaking  data in fiscal year 2005.
We obtained information to describe the key actions taken by USPS by  reviewing relevant documents, including USPS documents previously  listed and additional USPS documents not submitted in rate cases, such as  documentation of IOCS changes that were implemented in October 2004.  We also requested and received USPS documentation of many of the  reported improvements made to IOCS, RPW, and TRACS as well as  interviewed USPS officials responsible for these systems. To gain an  understanding of how the ratemaking data are collected, we visited some  USPS mail processing facilities and post offices located in the Washington,  D.C., area to observe the collection of ratemaking data, including IOCS,  RPW, and TRACS data. These locations were judgmentally selected on the  basis of the availability of USPS data collection personnel and their  geographic proximity to our headquarters in Washington, D.C. Further, at  post offices, we observed activities of letter carriers picking up their mail  and organizing it for delivery, as well as delivering the mail on the street.
To address the second objective, we reviewed proposed postal reform  legislation, current postal laws and regulations, and other documents.  Specifically, we drew from our past work in this area, reviewed the  proposed legislation (H.R. 22 and S. 662, 109th Cong., 1st Sess., both  entitled the Postal Accountability and Enhancement Act) and documents  pertinent to legislative intent, such as records of hearings and past  versions of the legislation with accompanying committee reports. We  reviewed current federal postal laws and regulations, including USPS and  PRC regulations pertinent to ratemaking data quality, and other relevant  documents, including documents submitted in past rate cases and other  PRC proceedings on data quality issues. We also reviewed the report of the  President’s Commission on the United States Postal Service, past studies  of the ratemaking process by other organizations, and books and articles  on ratemaking data quality issues.
We conducted our review at USPS headquarters, in Washington, D.C., and  the Capital Metro area from June 2004 through July 2005.
section_title: Appendix II: Comments from the Postal Rate Commission
section_title: Appendix III: Selected Ratemaking Requirements in Proposed Postal Reform Legislation
paragraphs: Appendix III: Selected Ratemaking  Requirements in Proposed Postal Reform  Legislation Competitive products: The Postal Regulatory Commission (the Commission) shall issue  regulations for competitive products (such as Priority Mail and Express Mail) to prohibit  the subsidization of competitive products by market-dominant products, ensure that each  competitive product covers its attributable costs, and ensure that all competitive products  collectively make a reasonable contribution to USPS institutional costs.
Market-dominant products: The Commission shall by regulation establish a modern  system for regulating rates and classes for market-dominant products (such as First-Class  Mail, Standard Mail, Periodicals, and Special Services (such as post office boxes, money  orders, and delivery confirmation).
House version: In establishing this system, the Commission must take various factors into  account, including the attributable costs for each class of mail or type of mail service, plus  that portion of institutional costs reasonably assignable to such class or type. The average  rate of any subclass of mail cannot increase at an annual rate greater than the  comparable increase in the Consumer Price Index for All Urban Consumers (CPI-U),  unless the Commission has, after notice and opportunity for a public hearing and  comment, determined that such increase is reasonable and equitable and necessary to  enable USPS, under best practices of honest, efficient, and economical management, to  maintain and continue the development of postal services of the kind and quality adapted  to the needs of the United States.
Senate version: In establishing this system, the Commission must take into various factors  into account, including the requirement that each class of mail or type of mail service  cover its attributable costs, plus that portion of institutional costs reasonably assignable to  such class or type. The regulatory system for market-dominant products shall (1) require  the Commission to set annual limitations on the percentage changes in rates based on the  CPI-U unadjusted for seasonal variation over the 12-month period preceding the date  USPS proposes to increase rates and (2) establish procedures whereby rates may be  adjusted on an expedited basis due to unexpected and extraordinary circumstances.
Market tests: USPS may conduct market tests of experimental products provided that the  product is, from the viewpoint of the mail users, significantly different from all products  offered by USPS within the 2-year period preceding the start of the test; the introduction or  continued offering of the product will not create an unfair or otherwise inappropriate  competitive advantage for USPS or any mailer, particularly in regard to small business  concerns; total revenues anticipated, or in fact received, by the tested product do not  exceed $10 million in any year, unless the Commission has increased the limit to $50  million; and the market test does not exceed 24 months, unless the Commission has  approved an extension of its total duration up to 36 months.
Worksharing discounts: The Commission shall establish rules for worksharing discounts  as part of its regulations for regulating market-dominant products that shall ensure that  discounts do not exceed the cost that USPS avoids as a result of worksharing activity,  unless  the discount is (1) associated with a new postal service, a change to an existing postal  service, or a new workshare initiative related to an existing postal service and (2)  necessary to induce mailer behavior that furthers the economically efficient operation of  the Postal Service and the portion of the discount in excess of the cost that the Postal  Service avoids as a result of the workshare activity will be phased out over a limited  period of time;    a reduction in the discount would (1) lead to a loss of volume in the affected category or  subclass of mail and reduce the aggregate contribution to the institutional costs of the  Postal Service from the category or subclass subject to the discount below what it  otherwise would have been if the discount had not been reduced to costs avoided, (2)  result in a further increase in the rates paid by mailers not able to take advantage of the  discount, or (3) impede the efficient operation of the Postal Service;  the amount of the discount above costs avoided (1) is necessary to mitigate rate shock  and (2) will be phased out over time; or  the discount is provided in connection with subclasses of mail consisting exclusively of  mail matter of educational, cultural, scientific, or informational value.