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[1001] On January 12, 2000 the United States Postal Service submitted its request for a recommended decision on changes in rates and fees, and for certain mail classification changes.¹ The Request was docketed as R2000-1, and noticed in Order No. 1279. The Commission heard the case en banc, with Chairman Edward J. Gleiman serving as presiding officer. The 78 participants sponsored 178 pieces of testimony from 120 witnesses that was received during 40 days of hearings.

[1002] The Postal Service supports its Request with testimony that projects its costs forward from fiscal year 1998 (base year), and estimates that at existing rates, it will suffer an operating loss in fiscal year 2001 (test year) of $1.719 billion. It requests rates that will allow it to generate $2.788 billion additional revenues, of which $0.268 billion will go to offsetting 1/9 of its accumulated prior years losses, $1.680 billion will be used as a contingency against unforeseen events/costs.

[1003] During this case, the Commission issued four Notices of Inquiry, asking any interested party to comment or provide evidence on a specific issue, and 21 Presiding Officer Information Requests asking a particular participant (most frequently the Postal Service) to provide explanations or analyses to clarify its evidence. In several instances the Commission went further, and it issued five orders that resulted in the Postal Service providing evidence on a specific topic.

[1004] Order No. 1289, Requesting the Submission of Evidence on Periodicals Processing Costs, was issued March 28, 2000. This order presented analyses developed from information provided in response to a Presiding Officer's Information Request showing that the costs of processing Periodicals mail, even after adjusting for inflation, had been steadily rising since 1993, and that the cost of processing flat shaped pieces sharply rose in base year 1998. The order directed the Postal Service to provide evidence explaining these phenomena. Witnesses O'Tormey and Unger presented testimony on these topics.

[1005] Order No. 1291, Directing Witnesses to be Prepared to Answer Questions, was issued on April 6, 2000. It directed Postal Service witnesses who would be appearing to present the Service's direct case the following week to be prepared to respond to questions concerning the impact on test year results of eBillPay, a major new service initiative not mentioned in the Service's Request, that was launched by the Postal Service April 5, 2000. During hearings, witness Tayman responded to questions on this subject.

[1006] On May 26, 2000 Order No. 1294 on the Use of FY 1999 Data was issued. This order followed two notices of inquiry. It directed the Service to present through testimony and exhibits a "basic update" to its test year forecasts that incorporated actual, audited FY 1999 Cost and Revenue Analysis (CRA) data into the cost projection process. The Postal Service complied with this order submitting testimony from witnesses Patelunas, Kay, and Thress. The ramifications of this order have been somewhat controversial, and its justification and impact are discussed in more detail shortly, beginning at para. 1009.

[1007] Order No. 1299, Resolving Procedural Issues Arising from Notice of Inquiry No. 3, was issued July 31, 2000. That notice of inquiry had requested testimony or comments on the proper methodology for projecting revenue from First-Class Mail weighing more than one ounce. The presiding officer certified to the full Commission arguments offered opposing the admission of responsive testimony, and Order No. 1299 denied those objections. As a result, testimony on this topic from Postal Service witness Fronk and OCA witness Callow is part of the evidentiary record in this case.

[1008] Finally, Order No. 1300, Requesting the Designation of a Witness to Discuss an Institutional Response, was issued August 18, 2000. The Postal Service had undertaken to provide written responses to questions concerning the causes of the increased cost of processing Standard B Special Mail between FY 1998 and FY 1999. The questions were initially posed to witness Patelunas, who had been unable to answer while on the witness stand. Following a practice allowed by the Commission, the Service submitted an "institutional" response; that is, a statement from the institution, rather than from a witness already under oath and available to respond to further clarifying questions. In this instance, further clarification was needed, and the Service was directed to identify a witness that could sponsor the written responses and answer additional questions on the subject. The Postal Service then undertook a further review of this issue, and provided additional testimony from witness Degen on this topic.

[1009] The use of actual FY 1999 cost data. The most significant procedural issue in this case involves the use of updated cost information. The Commission Rules require Postal Service rate requests to provide projections based on "the total actual accrued costs during the most recent fiscal year for which they are reasonably available." Rule 54(f)(1). FY 1999 had been over for almost four months when the Request was filed, and a significant amount of 1999 data was available. Nevertheless, consistent with Rule 54(c)(1), Postal Service estimates of test year costs were based on the costs incurred in fiscal year (FY) 1998, since its final audited 1999 CRA costs had not yet been issued.

[1010] The Commission has a long-standing practice of updating to capture known and certain changes that have a significant impact on test year results. Therefore, at the earliest stage of this case, even before the initial prehearing conference, the Commission focused attention on the potential problems of developing rates based on FY 1998 costs; costs representing a period ending some sixteen months before the Request was filed. Notice of Inquiry No. 1 Concerning Base Year Data, issued February 2, 2000 described these problems and announced that participants should be prepared to discuss this issue at the prehearing conference scheduled for February 16, 2000. Written comments could be submitted one week later, on February 23, 2000. The notice suggested that participants focus on the potential obsolescence of the FY 1998 data, especially in light of the implementation in FY 1999 of the new rates and classifications established in Docket No. R97-1. At the same time, it cautioned participants to bear in mind that substituting actual FY 1999 results for the Service's estimates would be a complex, large scale undertaking.

[1011] The general tenor of both the oral and written comments provided in response to Notice of Inquiry No. 1 was that theoretically it would be preferable to estimate test year costs using actual FY 1999 CRA costs, rather than the estimates of FY 1999 costs based on projections from FY 1998 results used by the Service. However, many of those commenting suggested that it would be wise to wait until the actual results were published so that potential disruption could be balanced against the likelihood of improved results.

[1012] On April 4, 2000, the Postal Service filed its FY 1999 CRA Report and the supporting Cost Segments and Components Report as USPS-LRI275 and 276.² The Commission promptly issued Notice of Inquiry No. 2 Concerning Base Year Data which provided participants with comparisons of these actual FY 1999 costs with the originally filed estimates of FY 1999 costs based on FY 1998 data. Notice of Inquiry No. 2 again asked participants to comment on the appropriate use of the actual FY 1999 cost data.

[1013] In Order No. 1294 the Commission reviewed both its own obligations under the law, and participants' comments in response to Notice of Inquiry No. 2. It then determined that at least to some degree, it should use actual FY 1999 CRA results in developing this Opinion and Recommended Decision.

[1014] The Commission identified its two primary obligations: To identify and analyze the most reliable evidence so that it could accurately estimate the Postal Service's revenue needs and develop the most fair rates to generate those revenues; and to provide all interested persons the opportunity to fully and fairly participate in the ratemaking process. No participant argued that the Postal Service's initial filing should be adopted with no use of actual 1999 cost data. All of the participants' comments espoused the use of actual FY 1999 CRA data to one degree or another, and only two, the Coalition of Religious Press Associations and United Parcel Service, suggested that FY 1999 should be substituted as the base year for all analyses in the case.

[1015] The Commission noted that all of the participants responding to the notice of inquiry had recognized that actual costs are a more accurate representation of FY 1999 experience than estimates developed by rolling forward FY 1998 costs. It agreed that its decision would be improved to the extent it could use actual FY 1999 CRA cost results. It also agreed with the majority of those responding that it might not be feasible to completely revise the Postal Service request and other participant's evidence to make FY 1999 the base year for all estimates. It determined that the minimum appropriate improvement would be achieved by what has been called the "basic update" under which actual FY 1999 costs would be substituted for the estimates of FY 1999 presented by Postal Service witnesses Kashani and Tayman. The Service was directed to rollforward actual FY 1999 costs to the test year. In doing so, the Service was encouraged to update such other portions of its request as it choose. Order No. 1294, at 35.

[1016] The Commission directed the presiding officer to establish a revised procedural schedule that would allow the Postal Service six weeks to perform the basic update. The revised schedule provided for technical conferences and discovery on the basic update, and also afforded all participants, including the Postal Service, time to develop and present other changes to reflect actual FY 1999 results. P.O. Ruling R2000-1/71 at 12.

[1017] The Postal Service submitted a request for reconsideration of Order No. 1294 that restated two concerns it had raised in its responses to Notice of Inquiry No. 2. The Service contended that it would be unable to develop "a complete replacement of the base year and a subsequent roll-forward to produce new test year estimates." U.S. Postal Service Motion for Reconsideration of Order No. 1294 (June 2, 2000) at 6. The Commission had acknowledged that concern by demurring from establishing a new base year. The Service also predicted that it would not be able to provide the requested basic update using information on FY 99 costs, or refinements in its rollforward format, in the time allotted. Furthermore, it characterized the practical effect of Order No. 1294 as nullifying much of its direct case and thereby denying it due process.

[1018] The Commission did not act on this request. If the production of actual FY 99 cost data in usable formats, the so-called basic update, had proved to be an insuperable task, and the schedule established in P. O. Ruling R2000-1/71 could not reasonably be adjusted to accommodate the needs of participants, then the concerns expressed by the Service would have been realized, and additional action would have been necessary.

[1019] To its credit, the Postal Service successfully responded to Order No. 1294. At the end of the six weeks allotted to prepare the basic update that would substitute actual FY 1999 CRA costs for the estimates used in its Request, it reported:³

As suggested, the Postal Service has been able to incorporate actual FY 1999 CRA and accounting data ("the basic update"), as well as to incorporate updates for as many other factors as practicable in the time available. These factors include inflation in labor and benefit expenses and non-personnel costs; changes in workers compensation costs, breakthrough productivity, Periodicals initiatives, e-commerce revenue and expenses, reductions in advertising expenses, and increases in expedited supplies.

[1020] In the following weeks, the Service provided appropriate supporting documentation for this update, made its witnesses available for technical conferences, and responded to written discovery. The Commission expresses its appreciation for the Postal Service's ability both to complete the update, and to provide voluminous materials, under very tight deadlines, in response to questions from participants and the Commission. See Postal Service Brief at I7, fn. 11. As a result, the Commission has been able to improve its test year projections by using actual FY 1999 cost data.

[1021] On brief, the Service again suggests that the use of actual FY 99 costs in preference to estimates of those costs based on FY 98 operating results would be a denial of its due process rights. Id. at I-13. This is an extremely important allegation. The Commission views providing due process to all participants as an absolute obligation, see § 3624, and the Postal Service's views on this issue are particularly important as it may be called upon to defend the Governors' acceptance of Commission recommendations in court. Therefore, the Service's contention has been thoroughly considered.

[1022] To correctly evaluate the Service's charge, it is important to understand what is, and what is not, involved in substituting actual FY 99 costs for estimates of those costs based on FY 98 operating results in the context of an omnibus rate case.

· To estimate the Postal Service's needs in a future test year, the Commission compares projected costs with projected revenues. This involves three types of actual data.

· Estimates of volumes in the test year are made using econometric models that forecast changes to actual volumes in a recent year. Those volume estimates are used to estimate costs and revenues.

· The actual costs in a recent year are "rolled forward" through each intermediate year to the test year, incorporating the annual effect of numerous change factors such as the estimated volumes, projected wage rates and other expenses, and the impact of planned management initiatives.

· Revenues are developed by applying actual billing determinants in a recent year to estimated volumes. Billing determinants are the distribution of volume to rate cells within each subclass.

[1023] From this it can be seen that changing the "actual costs in a recent year" that are rolled forward will almost certainly have an important impact. Notwithstanding that, it is only one of the many factors that goes into projecting Postal Service test year results. The Commission knew that it was making a major adjustment, and it did so only after carefully weighing whether the change was necessary to provide a recommended decision that would be accurate and fair to all those affected by changes in postal rates.

[1024] To project accurate results, the data that are rolled forward into the test year should, to the extent possible, reflect current operations. More importantly, they should reflect existing rates and classifications. Rate and classification changes often lead to substantially altered relative shares of volumes, costs, and billing determinants in the mailstream, causing projections based on outdated historical results to be inaccurate. For example, a new discount that attracts a substantial volume of (relatively heavy, and therefore relatively expensive) parcel mail may significantly change both costs and billing determinants. Therefore, it is particularly important that when costs and volumes data from different years are used together, that a single set of rates and classifications be in place during both years, since volumes, costs and billing determinants all change to different degrees when rates and classifications are varied.

[1025] In an ideal world, test year projections in a rate case would reflect actual volumes, costs, and billing determinants from a single recent year, a year in which existing rates and classifications were in effect. A superficial reading of the Postal Service Brief might leave the impression that its initial filing in this case incorporates unified projections from such a consistent, reliable base. In fact, that is not the case.

[1026] The Postal Service Request submitted to the Commission in January is supported by projections of costs based primarily on cost data from FY 1998. However its volume projections are based on FY 1999 data. And finally, the Postal Service uses billing determinants taken from a hybrid year that includes two quarters of actual data from FY 1999, and two quarters of adjusted data from FY 1998.

[1027] This recitation should not be interpreted as criticism. The Service presented projections based on what it viewed as the best available data when it prepared its Request. Many Postal Service witnesses attempted to adjust the data to incorporate FY 1999 results into their presentations. See, for example, Tr. 12/4806 (Fronk) "I then needed to make adjustments to these 1998 estimates to account for the increase in the First-Class Mail maximum weight limit from 11 to 13 ounces that took place on January 10, 1999." See also, Tr. 2/395 (Tayman):

I utilized the latest data available to the extent that it made a material difference to the estimates and could be incorporated without compromising the filing date.
In particular, I used actual FY 99 volume and revenue, the November 1999 DRI forecast (which resulted in actual FY 99 inflation factors and COLA unit costs calculations), and actual FY 99 health benefit premium changes. This approach yielded an FY 99 estimate of expenses which was only $8 million different than actual expenses.
I was unable to incorporate actual FY 99 expense data because it was not available in time to update the required models, testimony, and Library References.

[1028] While updating to reflect actual FY 1999 operating results might well have been justified absent extraordinary circumstances, updating was particularly appropriate in this case as the FY 1998 CRA cost data used by the Service was of seriously reduced validity as a base for projections because of one immutable fact. In January 1999, some 3 months after the conclusion of FY 1998, and 3 months into FY 1999, the Postal Service implemented sweeping, disproportionate changes in the rates for all classes of mail, as well as several important classification changes.

[1029] Thus, the Postal Service Request is premised on projections of costs incurred in FY 1998 that reflect expenses for processing, transporting and delivering the mix of mail volumes experienced before rates changed. Its volumes are projected from FY 1999, during which the new, generally higher rates were in effect for almost of the year. The billing determinants used by the Service include year of data during which the new rates were in effect, and year of data from the previous year adjusted in an attempt to reflect the new rates and classifications.

[1030] The current postal rate structure includes numerous rate categories within each subclass designed to pass through cost differences calculated by reference to CRA data. The FY 1998 CRA cost data used in the Service's Request did not reflect the impact of the new rates and classifications. The Commission knew that the FY 1999 cost data would become available at an early stage in the case, and it had to evaluate whether due process permits, or perhaps even requires, that the cost projections initially offered by the Service be adjusted to reflect this more recent, applicable data. See, for example, UPS Brief at 13. The Commission issued two Notices of Inquiry seeking comments from the participants on this question, the first at the earliest stage of proceedings, and the second after the FY 1999 data had been published. As might have been expected, the unit costs actually experienced in FY 1999 by a number of subclasses of mail varied by meaningful amounts from those projected by the Postal Service using FY 1998 cost data.

[1031] Order No. 1294 considered the participants' advice on this question, and concluded that the Commission decision would be improved if actual FY 1999 CRA costs by class and subclass could be substituted for the estimates of 1999 costs included in the Postal Service Request, and rolled forward to the test year. It further held that the Postal Service, or any other participant, should be allowed to offer such additional updates as they deemed appropriate. As noted above, the Postal Service timely filed testimony and supporting library references providing test year cost projections using actual FY 1999 CRA costs.

[1032] The Postal Service suggests throughout its initial brief that it had to replace the base year for its request, and that it could not complete this task. This overstates the situation. Order No. 1294, at 4, specifically did not require that the Service revise its entire case.

[1033] The Service used the same roll-forward methodology that it used in its initial filing to develop FY 1999-based test year costs. Tr. 35/16772 (Patelunas). FY 1999 volumes were already used in the Postal Service request, and the Service filed testimony from witness Thress explaining why additional volume updates could be counter-productive. As a result, no updating of volume data was required. The Service also was relieved of any obligation to provide adjusted FY 1999 billing determinants since it had already filed billing determinants for a hybrid year ( of 1999 and of 2000) during which the January 1999 rate changes were in effect.⁴

[1034] Order No. 1294 gave the Postal Service the opportunity to incorporate such other updates as it believed would more accurately predict test year results. In response, the Postal Service presented testimony suggesting a number of updates to its initial revenue requirement estimates. Some of these changes reduce test year costs while others increase them. In total, the Service has offered testimony indicating that its test year before rates deficit will be more than $450 million higher than it initially forecast. The Commission has evaluated the testimony justifying each new revenue and expense item, just as it evaluates all the other testimony presented in the case. The vast majority of these changes appear valid, and have been included in the Commission's projections of test year results.⁵

[1035] The Service suggests that there are other aspects of its original filing that it would have liked to revisit, and that it might have discovered other appropriate changes. Postal Service Brief at I-11. It then contends that because it did not have sufficient time or resources to review every conceivable change, the Commission should ignore both the actual FY 1999 cost data, and most of the other cost updates the Service has proposed. This argument is not persuasive. It is always true that in the limited time allowed to conduct postal rate cases there will be issues that could not be completely explored. However as a general rule, those corrections that can be made, should be made. Furthermore, the Service's initial filing included errors, many of which were corrected in the revised test year cost estimates. See, for example, Tr. 35/16794.

[1036] It is accepted practice for the Commission to incorporate known events that significantly effect test year projections. Actual FY 1999 cost data and most of the other revisions suggested by the Service and other participants fit this description.

[1037] The Postal Service argues that updating cost projections to reflect actual FY 1999 results eliminates the foundation for its integrated Request, and virtually nullifies its specific rate proposals. This simply is not the case. A review of Chapter V of this Opinion will show that the Service's proposals are the main focus of the Commission's analysis.

[1038] Omnibus rate cases normally include a number of participant challenges to the Service's cost attribution and allocation methodologies, and when one or more of these challenges are successful the estimates of attributable costs by subclass relied on by Postal Service rate design witnesses may become obsolete. The substitution of actual FY 1999 costs for the estimates initially provided by the Service is only one of several adjustments the Commission is making to the initial Postal Service filing in this case. Several proposals to change existing cost attribution and distribution methods advanced by Postal Service witnesses have been rejected in whole or in part. Nonetheless, the rate testimony sponsored by the Service is understood as being part of an integrated presentation, and it remains both relevant and material even when underlying premises change. For example, the policy reasons for limiting the size of rate increases within specific subclasses remain probative even when the levels of costs attributable to those subclasses are adjusted. As in every past omnibus rate case, all of the enunciated considerations that led to specific Postal Service rate proposals remain before the Commission, and have been carefully evaluated. This practice does not violate the due process rights of the Postal Service.

[1039] The Postal Service is entitled to file a rate request whenever it chooses, and it is entitled to a prompt response to every request for rate changes that it files. Section 3624 allows the Commission 10 months to act on such a request. The broad concept of due process includes attention to producing an accurate and timely decision, as well as to allowing a full and fair opportunity to examine the reliability of opposing evidence. In this case, the substitution of actual FY 1999 costs for estimates based on historical data has improved test year cost projections. The substitution was accomplished using the rollforward and cost allocation methods that were tested as part of the Service's initial filing. All participants had the opportunity to revise their presentations to incorporate or challenge these data, and many did so. It would be unreasonable to ignore this supplemental testimony. Some subclasses and rate categories receive smaller increases as a result of this change, while others face larger increases; however, because the recommended rates reflect actual, recent Postal Service operating experience, they are more equitable than recommendations that ignore those facts.

Supporting workpapers A and B were filed April 5, 2000, as USPS-LR-I277 and 278. Most FY 1999 billing determinants had been submitted on March 31, 2000, as USPS-LRI259, and the remaining billing determinants, for Express Mail and parcel post, were filed on April 19, 2000.

⁴

See P O Ruling R2000-1/110, granting Motion of the United States Postal Service for Clarification or Reconsideration of Presiding Officer's Information Request No. 18. MPA witness Cohen provided supplemental testimony that calculated presortation-related cost differences using adjusted 1999 billing determinants for Periodicals that the Commission utilizes in projecting test year revenues for Periodicals.

⁵

The Commission was particularly concerned about one adjusted expense item, an increase in test year labor expenses developed by assuming increased wage rates resulting from a yet-to-be negotiated labor contract. During hearings, the sponsoring Postal Service witness could not confirm that upper management had authorized that apparent wage policy shift. On August 9, 2000, the Commission wrote to the Postmaster General asking for verification that the testimony was consistent with Postal Service policy. An answer was provided by Richard Strasser, Acting Chief Financial Officer, on September 1, 2000, and the Commission has accepted this projection of increased test year costs. Copies of this correspondence appear in Appendix L.