utilities must make reasonable assumptions in order to approximate accurate utility costs. Id. at 8. The Public Representative does not believe that “the perfection of theory” should be “the enemy of good attribution” and concludes that distribution keys are acceptable so long as the cost drivers accurately reflect causation for any given component. Id. at 9-10. The Postal Service disagrees with the Public Representative’s use of distribution keys and maintains that the rationale for distributing volume-variable costs is “very different” from the rationale used to distribute all inframarginal costs. Postal Service Reply Comments at 25. The Postal Service describes the distribution of costs as following “a causal path,” which “produces a meaningful cost measurement.” Id. In contrast, it describes the distribution of inframarginal costs as “arbitrary” and “non-causal,” which “produces an undefined and misleading cost measure.” Id. GCA criticizes the Public Representative’s justification of the use of distribution keys to allocate inframarginal costs and argues that “mere variability does not establish the required causal connection” between inframarginal costs and products. GCA Reply Comments at 1-2. GCA further contends that to assign common costs, “one is content to rely on accounting conventions which are not meant to, and cannot, establish causal relationships.” Id. On reply, UPS argues that Proposal One uses the existing identifiers of causation (cost drivers and distribution keys as developed by the Postal Service) to allocate inframarginal costs. UPS Reply Comments at 14-16. UPS claims that attributing average variable costs using distribution keys in a multi-product enterprise is analogous to attributing average variable cost in a single-product enterprise, and provides a reliable way to attribute cost drivers among multiple products. Id. at 17.
not accrued in the same proportion as volume-variable costs. This is demonstrated in Figure IV-1 below. Figure IV-1 Component Marginal Cost Curve Figure IV-1 represents the marginal costs for a cost component with three products as represented by the three areas separated by vertical bars. The first product is responsible for six units of the cost driver; the second product is responsible for six units of the cost driver; and the third product is responsible for eight units of the cost driver. The blue rectangular area at the bottom represents volume-variable costs, and the green area on top represents inframarginal costs. Under the current cost attribution system, the area in blue is attributed to products in the proportions shown above as volume-variable costs. Under Proposal One, the inframarginal costs would be attributed in the same proportions, even though Figure IV-1 demonstrates that those costs were not incurred in the same proportion as volume-variable costs. This illustrates a key characteristic of volume-variable costs: they are the minimal marginal costs that are incurred at every level of cost driver and can therefore be attributed by a distribution key. Furthermore, there are multiple ways in which cost drivers can be ordered. The Postal Service does not precisely know the order in which it handled each product. Returning to the hypothetical in Figure IV-1, it is entirely possible that the product that is responsible for eight units of the cost driver is the first product handled, which would change the amount of inframarginal costs “incurred” by each product. The uncertainty associated with the order of cost drivers renders the pre-existing distribution keys inaccurate for the purpose of allocating inframarginal costs.
use of incremental costs allocates those inframarginal costs that have reliably identified causal relationships to products, the Commission finds that the use of incremental costs represents a significant improvement over the existing methodology pursuant to section 3652(e)(2). Application of Legal Standard to Proposal One Statutory Requirements As discussed in multiple instances above, section 3622(c)(2) requires that costs be attributed through “reliably identified causal relationships.” See 39 U.S.C. § 3622(c)(2). Further, section 3652(e)(2) requires that the Commission also find that a proposed methodology remedies a significant inaccuracy or significantly improves the quality, accuracy, or completeness of Postal Service data or the attribution of costs or revenues to products, or, in the judgment of the Commission, is otherwise necessitated by the public interest. 39 U.S.C. § 3652(e)(2). As discussed above, the first issue concerning the acceptance of Proposal One is whether the relationship between inframarginal costs and products is both causal and reliably identifiable. The issue of causality is a question in the abstract about relationships but may be answered with both logical and empirical arguments. The question of reliable identification is one that can only be answered empirically. The second issue concerning the acceptance of Proposal One is whether it meets the criteria of section 3652(e)(2). For Proposal One to meet these criteria, it must, at a minimum, be an improvement to the established methodology. Commission Analysis of the Reliably Identified Causal Relationships Several commenters argue against the idea that inframarginal costs have a reliably identified causal relationship with products. Amazon and Panzar maintain that
Valpak Reply Comments at 25. The Postal Service suggests that incremental costs should be “used to determine if a product’s revenue exceeds its total cost.” Postal Service Reply Comments at 34. Using incremental costs for attribution need not alter the Postal Service’s pricing strategy, nor should it. While each product’s attributable cost will be equal to its incremental cost, marginal costs should remain the Postal Service’s basis for setting prices, with the application of appropriate markups to ensure that each product covers its incremental costs and provides an appropriate share of institutional costs. Effectively, the average price of a product should meet or exceed the product’s average incremental cost (the incremental cost divided by the number of pieces). This would result in products having a cost coverage of 100 percent or greater. In addition, the calculation of avoided costs associated with worksharing discounts is not altered by the attribution of incremental costs. Unit avoidable costs should be based on marginal costs that are worksharing-related, and therefore exclude inframarginal or fixed costs. The instant docket has presented an opportunity to evaluate the Postal Service’s costing methodologies and revise them. The Commission appreciates UPS’s efforts to seek new and improved ways to attribute postal costs. Based on the evidence provided and information available, the Commission is unable to adopt Proposal One because it lacks the requisite showing under section 3622(c)(2) that inframarginal costs can be attributed through reliably identified causal relationships. Because Proposal One does not demonstrate such relationships, it cannot be an improvement over the existing methodology pursuant to section 3652(e)(2). Based on the Commission’s findings that incremental costs can be linked to products through reliably identified causal relationships and that the use of an incremental costs methodology represents a significant improvement from the current attribution methodology, the Commission must require the Postal Service to attribute
Table V-1 Proposal Two Cost Impacts ($ Millions) Initial Proposal Two Updated Proposal Two Mail Classes Attributable Costs under Current Methodology “Hidden” Variable Costs Attributable Costs under Proposal Two % of Current Costs “Hidden” Variable Costs Attributable Costs under Proposal Two % of Current Costs Market Dominant 28,205 2,649 30,854 109% 1,072 29,277 104% Competitive 10,970 725 11,695 107% 388 11,358 104% Total 39,175 3,374 42,549 109% 1,460 40,635 104% Summary of Initial and Reply Comments Hidden Variable Costs Methodological Assumptions Commenters criticize methodological assumptions that Neels relies upon in his analysis of Postal Service’s costs. Specifically, commenters question Neels’s reliance on McBride’s classification of the CRA cost components and Neels’s treatment of the Postal Service as a single-product firm. Reliance on McBride’s Analysis of Cost Components Commenters criticize analysis because it utilizes a previous analysis conducted by McBride that relies on McBride’s own classification of costs, which has not been critically reviewed and for which he expressed reservations. Postal Service Comments at 29; Bradley Comments at 39-40. As Bradley points out, McBride’s analysis includes “a classification of costs made by neither the Postal Service nor the [Commission].” Bradley Comments at 39. Additionally, Bradley states that McBride’s analysis of cost components has never been critically reviewed and, as a result, Bradley
Criticisms of Neels’s Approach Commenters assert that many of regressions produce anomalous or implausible results. Thompson Comments at 9; Amazon Comments at 20-21; PR Comments at 41. For example, Thompson notes that 31 of the 37 regressions (that Neels interprets as revealing hidden variable costs) predict negative fixed costs, which Neels interprets as “not conceptually plausible.” Thompson Comments at 8 (citing Neels Report at 44). Several commenters express their concerns that Neels selectively uses his regression results. Specifically, Thompson asserts that Neels arbitrarily replaces the regressions that produce implausible results with alternative regressions lacking a constant term, “forcing the result that these cost components have no ‘truly’ fixed costs.” Id. Similarly, the Public Representative states that he analyzed cost components that were estimated to have negative intercepts statistically different from zero. PR Comments at 41. The Public Representative examined the attributable costs of these cost components and found that none of these components actually had attributable costs. Id. The Public Representative asserts that “[i]t is safe to conclude that the component[-]level regressions do not produce meaningful component-level results.” Id. After excluding 37 regressions that Neels interpreted as revealing hidden variable costs, Amazon and Thompson state that 17 of the remaining 47 component-level regressions have a negative slope coefficient. Amazon Comments at 109; Thompson Comments at 8-9. Amazon and Thompson note that UPS reported that 8 of these 17 regressions are statistically significant and that 11 of the 17 regressions are “strongly negative.” Amazon Comments at 109; Thompson Comments at 9 (citing Neels Report at 38-39). While Neels discounts these anomalous results as “statistical noise,” Amazon and Thompson assert that the cause of these counterintuitive results appear to be more
APPENDIX C CHAIRMAN’S INFORMATION REQUESTS AND RESPONSES TO CHAIRMAN’S INFORMATION REQUESTS Chairman’s Information Request Citation Short Form Response to Chairman’s Information Request Citation Short Form Chairman’s Information Request No. 1, November 20, 2015 CHIR No. 1 United Parcel Service, Inc.’s Response to Chairman’s Information Request No. 1, December 15, 2015 UPS Response to CHIR No. 1 Chairman’s Information Request No. 2, November 20, 2015 CHIR No. 2 Responses of the United States Postal Service to Questions 1-4 of Chairman’s Information Request No. 2, December 10, 2015 Postal Service Response to CHIR No. 2 Revised Chairman’s Information Request No. November 24, 2015 CHIR No. 3 United Parcel Service, Inc.’s Response to Chairman’s Information Request No. 3, December 10, 2015 UPS Response to CHIR No. 3 Chairman’s Information Request Citation Short Form Response to Chairman’s Information Request Citation Form Chairman’s Information Request No. 4, December 17, 2015 CHIR No. 4 United Parcel Service, Inc.’s Response to Chairman’s Information Request No. 4, January 8, 2016 UPS Response to CHIR No. 4 Chairman’s Information Request No. 5, December 18, 2015 CHIR No. 5 United Parcel Service, Inc.’s Response to Chairman’s Information Request No. January 8, 2016 UPS Response to CHIR No. 5 Chairman’s Information Request No. 6, December 23, 2015 CHIR No. 6 Response of the United States Postal Service to Question 1 of Chairman’s Information Request No. 6, January 8, 2016 Postal Service Response to CHIR No. 6 Chairman’s Information Request No. 7, February 24, 2016 CHIR No. 7 Responses of the United States Postal Service to Questions 1-3 of Chairman’s Information Request No. 7, March 2, 2016 Postal Service Response to CHIR No. 7
APPENDIX D COMMENTS AND REPLY COMMENTS Commenter Citation Citation Short Form Amazon Fulfillment Services, Inc. (Amazon) Comments of Amazon Fulfillment Services, Inc., January 27, 2016 Amazon Comments Amazon Reply Comments of Amazon Fulfillment Services, Inc., March 25, 2016 Amazon Reply Comments Sander Glick on behalf of Amazon (Glick) Declaration of Sander Glick on Behalf of Amazon Fulfillment Services, Inc., January 27, 2016 Comments John C. Panzar on behalf of Amazon (Panzar) Declaration of John C. Panzar on Behalf of Amazon Fulfillment Services, Inc., January 29, 2016 Panzar Comments Panzar Reply Declaration of John C. Panzar on Behalf of Amazon Fulfillment Services, Inc., March 25, 2016 Panzar Comments T. Thompson on behalf of Amazon (Thompson) Declaration of T. Scott Thompson on Behalf of Amazon Fulfillment Services, Inc., January 27, 2016 Thompson Comments American Catalog Mailers Association (ACMA) Initial Comments of the American Catalog Mailers Association, January 27, 2016 ACMA Comments Greeting Card Association (GCA) Reply Comments of the Greeting Card Association, March 25, 2016 GCA Reply Comments Commenter Citation Citation Form American Catalog Mailers Association, Inc., Alliance of Nonprofit Mailers, Continuity Shippers Association, Envelope Manufacturers Association, Greeting Card Association, National Association of Presort Mailers, Parcel Shippers Association, PSI Systems, Inc., and Stamps.com (Market Dominant Mailers) Comments of American Catalog Mailers Association, Inc., Alliance of Nonprofit Mailers, Continuity Shippers Association, Envelope Manufacturers Association, Greeting Card Association, National Association of Presort Mailers, Parcel Shippers Association, PSI Systems, Inc., and Stamps.com (“Market Dominant Mailers”), January 27, 2016 Market Dominant Mailers Comments
APPENDIX E MOTIONS AND COMMISSION ORDERS ON MOTIONS Filing Motion Commission Order on Motion United States Postal Service (Postal Service) Uncontested Motion of the United States Postal Service for Access to Materials Filed Under Seal by United Parcel Service, October 9, 2015 Order Granting Unopposed Access to Materials Filed Under Seal by United Parcel Service, October 9, 2015 (Order No. 2750) United Parcel Service, Inc. (UPS) United Parcel Service, Inc.’s Uncontested Motion Requesting Continued Access to Non-Public Materials Under Protective Conditions, October 13, 2015 Order Granting Unopposed Request for Continued Access to Non-Public Materials Filed Under Seal, October 15, 2015 (Order No. 2756) Amazon Fulfillment Services, Inc. (Amazon) Unopposed Motion of Amazon Fulfillment Services, Inc., for Access to Materials Under Seal by United Parcel Service, Inc. and United States Postal Service, October 16, 2015 Order Granting Unopposed Motion for Access to Materials Filed Under Seal by United Parcel Service and United States Postal Service, October 19, 2015 (Order No. 2765) Amazon Unopposed Motion of Amazon Fulfillment Services, Inc., for Access by T. Scott Thompson to Materials Filed Under Seal by United Parcel Service, Inc. and United States Postal Service, November 9, 2015 Granting Unopposed Motion for Access to Materials Filed Under Seal by United Parcel Service and United States Postal Service, November 10, 2015 (Order No. 2810) Amazon Unopposed Motion of Amazon Fulfillment Services, Inc., for Access by Ai Deng and Ben Mermelstein to Materials Under Seal by United Parcel Service, Inc. and United States Postal Service, November 16, 2015 Order Granting Unopposed Motion for Access to Materials Filed Under Seal by United Parcel Service and United States Postal Service, November 16, 2015 (Order No. 2818) Amazon Motion of Amazon Fulfillment Services, Inc., for Issuance of Chairman’s Information Request, November 16, 2015 Pertinent questions were incorporated into CHIR No. 1. Postal Service Motion of the United States Postal Service Seeking Issuance of Information Requests to United Parcel Service, November 20, 2015 Pertinent questions were incorporated into CHIR No. 3.