Opinion ID: 370472
Heading Depth: 2
Heading Rank: 3

Heading: Assignment of Service Related Costs

Text: 66 The PRC's assignment of service related costs proceeded from differences in service accorded the various classes of mail. The Postal Service Manual commits the Service to different standards of service for different types of mail, based on USPS's perception of customer needs, and transportation and distribution capabilities. 43 For first-class mail and for newspapers (a service category within the second-class regular rate classification, also known as red tag mail 44 ), the Manual requires delivery on the first delivery trip if the mail is received at a distribution facility prior to the cut-off time. 45 For third- and fourth-class parcels, USPS is required to deliver on the next delivery trip all parcels received prior to the cutoff, 46 but the post offices have more flexibility in determining that cutoff. For all other mail, including third-class mail and second-class publications not entitled to red tag service, the regulations provide for delivery not later than the second day after receipt. 47 67 Two witnesses provided the main evidence before the Commission. Postal Service witness Jellison, the Assistant Postmaster General for Mail Processing, testified on the differences in service standards. Jellison first ranked the priorities of treatment given the various classes of mail, in order of decreasing significance: (1) first-class mail, including priority mail and post or postal cards; (2) newspapers or red tag mail; (3) parcels (both third- and fourth-class); (4) ordinary papers (all second-class not entitled to red tag service and controlled circulation); and (5) circulars (fourth-class bound printed matter and all third-class except single piece parcels). Jel lison then characterized first-class and newspapers as preferential because of the requirement of immediate delivery upon receipt at the distribution facility; parcels as borderline preferential; and the other classes as nonpreferential or deferrable because of the ability to defer delivery of that mail for two days after it reached the distribution facility. The witness differentiated the levels of service afforded preferential and nonpreferential mail at each stage of the mail process between receipt and delivery. He asserted that while preferential and nonpreferential mail were often delivered together, deferrability of some classes permitted workload levelling, and avoidance of the need for overtime or part-time employees, at peak periods, with resultant efficiencies. Jellison concluded that because of the deferrability feature, nonpreferential service standards could be met by delivery every other day, as opposed to the current six-day delivery schedule. In his view, were it not for the existence of preferential mail, a three-day delivery system with recipients receiving mail every other work day would be feasible. 48 68 Based on Jellison's conclusion as to the feasibility of a three-day delivery schedule, USPS witness Hume, a private consultant, sought to calculate the costs resulting from the need to maintain six-day delivery to meet preferential service standards. 49 Although transportation and processing costs would likely be affected by initiation of a three-day schedule, Hume focused only on the delivery function. He found that in the other two functions, service related costs either were volume variable (and therefore would be accounted for in the attribution step), or could not be determined with sufficient accuracy from available data. 50 69 Hume estimated the delivery costs that would be incurred in a three-day delivery system, assuming no variations in total mail volume. By subtracting this figure from the projected delivery costs in the six-day delivery system, he obtained the delivery costs occasioned by maintenance of a six-day schedule. Because variable costs would be attributed under either schedule, he then determined the proportion of delivery costs that would be fixed under each system. The difference in fixed costs he assigned as service related costs to the classes receiving preferential service. 70 The PRC approved the methodology proposed by the USPS witnesses. It found that nonpreferential mail is deferrable under the Postal Service's standards and that, in fact, such mail is frequently deferred. 51 It agreed with the Postal Service that it can reasonably be inferred that the preferred classes cause the differential between 3-day and 6-day delivery costs. 52 Adjusting somewhat USPS's calculations, the PRC made an assignment of $1,256 million in test year costs, or 7.14 percent of the total revenue requirement. 53 71 While asserting that, as a first effort, the use of service-related costs was satisfactory, the Commission urged further refinement in three areas: (1) the analysis used in determining the cost differentials resulting from service priorities at the delivery stage; (2) the development of data and methodology to reflect more accurately the actual hierarchy of delivery standards in the assignment of service related costs; and (3) more complete investigation into the possibility of extending service related costs to functions other than delivery. 54 72