U.S. Postal Service: Improving Ratemaking Data Quality Through	 
Postal Service Actions and Postal Reform Legislation (28-JUL-05, 
GAO-05-820).							 
                                                                 
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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-820 					        
    ACCNO:   A31560						        
  TITLE:     U.S. Postal Service: Improving Ratemaking Data Quality   
Through Postal Service Actions and Postal Reform Legislation	 
     DATE:   07/28/2005 
  SUBJECT:   Agency missions					 
	     Data collection					 
	     Data integrity					 
	     Federal agency reorganization			 
	     Internal controls					 
	     Performance measures				 
	     Postal rates					 
	     Postal service					 
	     Proposed legislation				 
	     USPS Data Quality Study				 

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GAO-05-820

United States Government Accountability Office

GAO

                       Report to Congressional Requesters

July 2005

U.S. POSTAL SERVICE

  Improving Ratemaking Data Quality through Postal Service Actions and Postal
                               Reform Legislation

GAO-05-820

[IMG]

July 2005

U.S. POSTAL SERVICE

Improving Ratemaking Data Quality through Postal Service Actions and Postal
Reform Legislation

  What GAO Found

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.

                 United States Government Accountability Office

Contents

      Letter                                                                1 
                                     Results in Brief                       4 
                                        Background                          6 
                USPS Took Action to Improve the Quality of Ratemaking Data 11 
                Proposed Statutory Changes Could Lead to Better Ratemaking 
                                           Data                            26 
                            Agency Comments and Our Evaluation             38 
    Appendix I              Objectives, Scope, and Methodology             
Appendix II           Comments from the Postal Rate Commission          
Appendix III               Selected Ratemaking Requirements in Proposed 
                                Postal Reform Legislation                  

  Tables

Table 1: Proposed Requirements for USPS to Report Ratemaking Data

Table 2: Proposed Statutory Requirements for the USPS Inspector General to
Audit Ratemaking Data and Data Collection Systems

Table 3: Proposed Compliance Review of USPS Annual Reports

Table 4: Proposed Authorization for Regulatory Proceedings to Improve Data
Quality

Table 5: Proposed Authority for the New Postal Regulator and Related
Provisions

                                       30

                                     33 34

                                       35

                                       36

  Figures

Figure 1: USPS Data Collector Using a Laptop Computer and Digital Scale to
Record Ratemaking Data at a Postal Facility 8

Figure 2: USPS Letter Carrier Activities at Postal Facilities 13 Figure 3:
USPS Employees Handling and Sorting Mail in Postal Facilities 14

Figure 4: USPS Clerks Performing Retail Activities 14

Figure 5: USPS Data Collector Gathering Ratemaking Data from a Letter
Carrier Manually Sorting Mail into Pigeonholes for Delivery 16

Figure 6: USPS Data Collector Gathering Ratemaking Data from a USPS Clerk
Manually Sorting Mail at a Postal Facility 17 Figure 7: Some Mail Piece
Characteristics Used to Determine the Subclass of Mail 18 Figure 8: Laptop
Computer and Digital Scale Used to Record Ratemaking Data, Including Mail
Piece Characteristics 21 Figure 9: USPS City Carriers Performing Delivery
Activities on the Street 22 Figure 10: Long-distance Transportation of
Mail Using Trucks and Airplanes 24

Abbreviations

CCSTS City Carrier Street Time Study
IOCS In-Office Cost System
MODS Management Operating Data System
PRC Postal Rate Commission
RPW Revenue, Pieces, and Weight
TRACS Transportation Cost System
USPS United States Postal Service

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.

United States Government Accountability Office Washington, DC 20548

July 28, 2005

The Honorable Tom Davis
Chairman, Committee on Government Reform
House of Representatives

The Honorable John M. McHugh
The Honorable Dan Burton
House of Representatives

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 mail1 or type of service2 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.3 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

1The four major classes of mail are: First-Class Mail (mainly bills, bill
payments, correspondence, advertising, and Priority Mail); Standard Mail
(mainly bulk advertising and direct mail solicitations); Periodicals
(mainly magazines and local newspapers); and Package Services Mail (e.g.,
parcels, merchandise, catalogs, media mail, library mail, and books).
Another class of mail is Expedited Mail (i.e., Express Mail).

2Postal services include such services as post office boxes, money orders,
and delivery confirmation.

339 U.S.C. S:3622(b)(3). PRC has long interpreted this requirement to
apply to subdivisions of mail classes called subclasses. For example,
Parcel Post and Library Mail are subclasses of the Package Services class.

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.4 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.

4A.T. Kearney, Inc., Data Quality Study (Alexandria, VA: Apr. 16, 1999).

Thus, important questions remain about USPS's actions to improve the
quality of ratemaking data and how proposed legislation will address
longstanding 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 longdistance
transportation of mail subclasses using trucks, airplanes, and freight
trains.5 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,

5The Study identified only a few minor concerns regarding the other two
major ratemaking data systems, which are the City Carrier Cost System and
the Rural Carrier Cost System. These systems produce data on the volume of
mail subclasses that are delivered and collected by carriers.

  Results in Brief

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.

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 IOCS to improve the
quality of data on the mail subclasses that are 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 to estimate the costs
of handling each subclass of mail. Similarly, USPS made changes to RPW to
improve the accuracy of data on the subclasses of mail in the postal
system, including data on the revenue, volume, and weight of each subclass
of mail. 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. Data on city carrier delivery activities are needed for
ratemaking because carriers typically deliver multiple subclasses of mail.
Third, USPS substantially increased the quantity of data collected by RPW
and TRACS to increase the precision of ratemaking data. Increasing data
precision can be particularly beneficial to the quality of cost, revenue,
and volume data for subclasses with smaller volumes. Fourth, USPS revised
and expanded its documentation of TRACS, which the Study had criticized as
inadequate. PRC commended the revised documentation, which USPS reported
enhanced the transparency and administration of TRACS.

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 proposed legislation would transform PRC into a new
postal regulator with enhanced authority compared with that of the current
PRC. The postal regulator would be required to issue regulations
prescribing what ratemaking data USPS must report on an annual basis.

The postal regulator would be required to annually review USPS ratemaking
reports in order to determine whether USPS had complied with the
requirements of the new ratemaking structure. In addition, USPS's
Inspector General would be required to regularly audit the data collection
systems and procedures used in collecting information and preparing the
USPS annual reports. Further, the postal regulator would be provided with
the authority to initiate proceedings to improve the quality of ratemaking
data, including data on the attribution of costs and revenues to postal
products. The postal regulator also would be provided with enhanced
authority to carry out its expanded duties, including 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. 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. Under the current structure, regulatory
oversight is generally 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 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 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.

In commenting on the draft report, USPS disagreed with our findings on the
ratemaking structure, stating the current process has worked "remarkably
well" and that the proposed legislation is unlikely to lead to
"breakthrough improvements" in the quality of its ratemaking data systems

Background

without a significant increase in costs. In our view, for the reasons
stated earlier, major changes are needed to the ratemaking structure.
Further, the proposed legislative changes would likely lead to
improvements in ratemaking data quality over time and at some cost. In our
view, the extent of such improvements, and what the associated costs may
be, would depend on how the legislation is implemented.

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 1970,6 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.7 In addition, each class of mail or type of postal service is
required

6The Postal Reorganization Act of 1970 (Pub. L. No. 91-375) reorganized
the former U.S. Post Office Department into the U.S. Postal Service and
created the Postal Rate Commission.

739 U.S.C. S:3621.

by law to cover its direct and indirect costs (attributable costs), as
well as make a reasonable contribution to covering overhead costs
(institutional costs).8 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 2005.9

839 U.S.C. S:3622(b)(3).

9This estimate does not include associated overhead costs, such as travel,
office space and related costs, and computer operations and support, which
USPS reported could not easily be determined; costs associated with
accounting and operational data collection systems that are also used in
ratemaking; and other costs associated with collecting data on
international mail.

Figure 1: USPS Data Collector Using a Laptop Computer and Digital Scale to
Record Ratemaking Data at a Postal Facility

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.10 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.

The Study's report, issued in April 1999, concluded the following:

"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

10The Study reviewed postal ratemaking in the United States; 10
industrialized countries with postal administrations that have operating
processes similar to USPS; and some U.S. industries subject to regulation,
such as local telecommunications, natural gas, and railroads.

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.11 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.12 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

11Kearney, Data Quality Study: Summary Report, pp. 5-7.

12GAO, U.S. Postal Service: Despite Recent Progress, Postal Reform
Legislation Is Still Needed, GAO-05-453T (Washington, D.C.: Apr. 14,
2005).

  USPS Took Action to Improve the Quality of Ratemaking Data

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.13 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

14

data.

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:

o  	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.

o  	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.

o  	Third, USPS substantially increased the quantity of data collected by
RPW and TRACS to increase the precision of ratemaking data.

13GAO, U.S. Postal Service: Key Elements of Comprehensive Postal Reform,
GAO-04-397T (Washington, D.C.: Jan. 28, 2004); U.S. Postal Service: Bold
Action Needed to Continue Progress on Postal Transformation, GAO-04-108T
(Washington, D.C.: Nov. 5, 2003); President's Commission on the United
States Postal Service, Embracing the Future: Making the Tough Choices to
Preserve Universal Mail Service (Washington, D.C.: July 31, 2003).

14GAO-04-397T and GAO-04-108T.

o  	Fourth, USPS revised and expanded its documentation of TRACS, which
the Study had criticized as inadequate.

USPS Made Changes to IOCS and RPW to More Accurately Determine Subclasses
of Mail

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.15 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

15Carriers also sort some letter mail into the order it is to be
delivered, although USPS automated equipment sorts most letter mail into
delivery order.

window service and perform other activities at post offices and other
retail facilities (see fig. 4).16

Figure 2: USPS Letter Carrier Activities at Postal Facilities

16IOCS also provides data on employee time spent on some special services,
such as window service, time spent with customers purchasing postal money
orders, and delivery confirmation, among other things.

Figure 3: USPS Employees Handling and Sorting Mail in Postal Facilities

Figure 4: USPS Clerks Performing Retail Activities

       Source: (c) 2005 USPS. Used with permission. All rights reserved.

  Providing Express Mail service. Completing a sale. Providing stamp service.

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.

Figure 5: USPS Data Collector Gathering Ratemaking Data from a Letter
Carrier Manually Sorting Mail into Pigeonholes for Delivery

Figure 6: USPS Data Collector Gathering Ratemaking Data from a USPS Clerk
Manually Sorting Mail at a Postal Facility

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.17 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

17USPS costs are divided into cost pools that have common characteristics,
so that, based on analysis of ratemaking data, each cost pool can be
further divided into attributable and institutional costs.

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.

Figure 7: Some Mail Piece Characteristics Used to Determine the Subclass of Mail

       Source: (c) 2005 USPS. Used with permission. All rights reserved.

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
tests18 are described below:

o  	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.

o  	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,

18USPS did not use data collected for pilot tests for ratemaking.

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.19 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.

19RPW data gathered by data collectors are merged with computerized data
on business mailings, such as large mailings of bills, statements,
catalogs, and magazines. These computerized data include information for
each mailing on the subclass, revenue, volume, and weight. USPS refers to
these combined data as RPW data.

Figure 8: Laptop Computer and Digital Scale Used to Record Ratemaking
Data, Including Mail Piece Characteristics

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.

    USPS Conducted CCSTS to Replace Ratemaking Data That Had Been Collected in
    the 1980s

Figure 9: USPS City Carriers Performing Delivery Activities on the Street

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 data20 for the costs of certain mail subclasses, largely
because

20Imprecise data are subject to a relatively high degree of random error,
such as data that are imprecise because they are generated by data
collected from a small random sample.

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.

    USPS Took Actions to Improve the Precision of Ratemaking Data

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.21 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

21The increase in RPW sample size was enabled by USPS's concurrently
merging RPW with an operations-oriented data system called the
Origin-Destination Information System, which also collected data from
sampled pieces of mail.

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.22

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.

    USPS Took Actions to Enhance TRACS Documentation

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.

22The reallocation plan was developed with the aid of a statistical model
to estimate data precision. This model had originally been developed for
the Study.

  Proposed Statutory Changes Could Lead to Better Ratemaking Data

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.23 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."24 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."25

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

23The 18-month time frame for rate changes includes time for USPS to
prepare its rate proposal, for PRC to review the proposal and issue its
recommended decision (which the law generally limits to 10 months), and
for USPS to consider PRC's recommended decision and implement new postal
rates.

24President's Commission on the United States Postal Service, Embracing
the Future.

25GAO-04-108T.

structure. Key implementation questions would remain, including what
regulatory criteria and requirements would apply to ratemaking data.

               Major Changes Are Needed to the Ratemaking Process

o

o

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:26

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

26GAO-04-397T and GAO-04-108T.

provides powerful incentives for parties to repeatedly attempt to shift

postal costs in ways that serve their self-interests.27 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' losses28 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)."29 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.30

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

27GAO-04-108T, p. 23.

28USPS did not include a provision for the recovery of prior years' losses
in the 2005 rate case because USPS had no such losses by the end of fiscal
year 2004.

29Institute of Public Administration, Report to the Board of Governors of
the United States Postal Service: The Ratemaking Process for the United
States Postal Service (New York, NY: Oct. 8, 1991), p. 55.

30GAO-04-108T, p. 25.

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."31

    Proposed Requirements for Reporting Ratemaking Data

USPS Reporting

Proposed postal reform legislation would transform PRC into a new postal
regulator mandated to issue regulations for USPS to annually report
ratemaking data that would be audited by the USPS Inspector General and
then reviewed by the regulator. Key provisions include the following:

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.32 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

31Testimony of George Omas, Chairman, Postal Rate Commission, before the
U.S. Senate Committee on Governmental Affairs (Washington, D.C.: Apr. 7,
2004), p. 10.

32Mailer worksharing activities include barcoding mail, presorting mail by
ZIP Code, and transporting mail so it is entered closer to the final
destination. See GAO, U.S. Postal Service: A Primer on Postal Worksharing,
GAO-03-927 (Washington, D.C.: July 31, 2003).

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.

       Table 1: Proposed Requirements for USPS to Report Ratemaking Data

Citation Summary provision

H.R. 22, Sec. 204, S:3652; and S. 662, USPS shall file annual reports with
the Postal Regulatory Commission (the Commission)
Sec. 204, S:3652 no later than 90 days after the end of each fiscal year
that, for all permanent postal

(similar provisions: differences noted in products:
italics)  o  analyze costs, revenues, and rates for all products using
such methodologies as the

Commission shall by regulation prescribe (House bill) in sufficient detail
to demonstrate

that the rates in effect for all products during such year complied with
all applicable

requirements;

o  	provide product information (Senate bill) provide market information
(House bill) and mail volumes, for each market-dominant product; and

o  	provide for each worksharing discount to market-dominant products: (1)
the per-item cost avoided by USPS by virtue of such discount, (2) the
percentage of such per-item cost avoided that the per-item discount
represents, and (3) the per-item contribution made to institutional costs.

For experimental postal products in market tests (e.g., new products being
tested), USPS's annual report may include summary data on the costs,
revenues, and quality of service by market test and service agreement
(Senate bill) and such data as the Commission requires.

The Commission shall, by regulation, prescribe the content and form of the
annual reports, including any nonpublic annex and supporting matter,
giving due consideration to

o  	providing the public with timely (Senate bill) adequate information to
assess the lawfulness of rates charged,

o  avoiding unnecessary or unwarranted administrative effort and expense
by USPS, and

o  protecting the confidentiality of commercially sensitive information.

The Commission shall have access, in accordance with such regulations as
it shall prescribe, to the working papers and any other supporting matter
of USPS and its Inspector General in connection with any information
submitted in the above reports.

Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

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

Auditing by the Inspector General

according to PRC's preferred methodology for analyzing these costs.33 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.

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

33As we have reported, USPS and PRC differ over the level of mail
processing costs that should be attributed, which can affect postal rates,
particularly for types of mail priced at cost (e.g., the Periodicals class
that includes mailed magazines and newspapers). See GAO-04-108T, p. 32.

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.34 The Study
was a unique event that required extraordinary involvement by Congress,
USPS, PRC, and the contractor that conducted the Study.

34Congress directly established postal rates prior to enactment of the
Postal Reorganization Act of 1970 (Pub. L. No. 91-375).

Table 2: Proposed Statutory Requirements for the USPS Inspector General to
Audit Ratemaking Data and Data Collection Systems

Citation Summary provision

H.R. 22, Sec. 204, S:3652(a) 	The USPS Inspector General (USPS IG) must
regularly audit the data collection systems and procedures used in
collecting information and preparing the USPS annual reports (described in
table 1), including any annex to these reports and the required
information relating to worksharing discounts included in the reports. The
results of any such USPS IG audit shall be submitted to USPS and the
Postal Regulatory Commission.

S. 662, Sec. 204, S:3652(a) 	Before submitting an annual report (described
in table 1), including any annex to the report and the required
information relating to worksharing discounts, USPS shall have the
information contained in such report and annex audited by the USPS IG. The
results of any such audit shall be submitted along with the report to
which it pertains.

                               Compliance review

Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

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.

           Table 3: Proposed Compliance Review of USPS Annual Reports

Citation Summary provision

H.R. 22, Sec. 204, S:3653; and S. 662, Sec. After receiving the USPS
annual reports with ratemaking data (see table 1), the Postal 204, S:3653
Regulatory Commission (the Commission) shall promptly provide an
opportunity for (Similar provisions: differences noted comment on such
reports by users of the mails, affected parties, and an officer of the in
italics) Commission who must represent the interests of the general
public. No later than 90

days after receiving these reports, the Commission shall make a written
determination as to whether any rates or fees in effect during the year
(for products individually or collectively) were not in compliance with
applicable laws or regulations.

o  	If no instance of noncompliance is found, the written determination
shall be to that effect.

o  	If a timely written determination of noncompliance is made, the
Commission shall take appropriate remedial (Senate version) action as if a
complaint averring such noncompliance had been duly filed and found to be
justified. (See table 5 for actions that would be available to the
Commission.)

              Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

    Proposed Requirements for Data Quality Proceedings

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.35 Authorizing the
postal regulator to initiate data quality proceedings as needed would
shift

35Some data quality issues have also been considered during classification
cases, which consider establishing or changing the groupings of mail that
are subject to ratemaking requirements, as well as authorizing market
tests of experimental products and negotiated service agreements (39
U.S.C. S:3623 and 39 C.F.R. Part 3001, subpart C). Aside from rate and
classification cases, USPS has opposed separate proceedings on issues of
cost attribution methodology, and PRC has not conducted such proceedings.

from reactive oversight in USPS-initiated rate proceedings to proactive
oversight by the postal regulator.

Table 4: Proposed Authorization for Regulatory Proceedings to Improve Data
Quality

Citation Summary provision

H.R. 22, Sec. 204, S:3652(e)(2); and The Postal Regulatory Commission (the
Commission) may, on its own motion or on request of S. 662, Sec. 204,
S:3652(e)(2) an interested party, initiate proceedings-to be conducted in
accordance with regulations that (same provision in both bills) the
Commission shall prescribe-to improve the quality, accuracy, or
completeness of USPS

data required by the Commission in USPS's annual reports (see table 1)
whenever it shall

appear that

o  	the attribution of costs or revenues to products has become
significantly inaccurate or can be significantly improved;

o  	the quality of service data has become significantly inaccurate or can
be significantly improved; or

o  	such revisions are, in the judgment of the Commission, otherwise
necessitated by the public interest.

Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

The proposed statutory mechanism to consider data quality and related cost
attribution issues has a number of potential benefits, including the
following:

o  	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.

o  	Revisiting data quality issues as needed: Data quality is a moving
target as postal operations, data needs, and data collection technologies
evolve over time.36 Thus, it is natural for data quality issues and
opportunities for improvement to arise over time.

 Proposed Enhancement of Providing the postal regulator with enhanced authority
 and enforcement Regulatory Authority and powers is consistent with the overall
 intent of the proposed postal reform Enforcement Powers legislation to balance
              providing USPS with greater pricing flexibility with

enhancing transparency, oversight, and accountability to protect USPS

36Kearney, Data Quality Study: Summary Report, p. 5.

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).

Table 5: Proposed Authority for the New Postal Regulator and Related Provisions

Citation Summary provision

H.R. 22, Sec. 502; and S. 662, Sec. 602 Subpoena power: The Chairman of
the Postal Regulatory Commission (the Commission),

(same provision in both bills) 	any of the Commissioners designated by the
Chairman, and any administrative law judge appointed by the Commission
could subpoena USPS officers, employees, contractors, and agents to
require attendance, presentation of testimony and production of documents,
and order depositions and responses to written interrogatories. Any
subpoena would require the written concurrence of a majority of
Commissioners then holding office in advance of its issuance.

H.R. 22, Sec. 205, S:3663-3664, Sec. 502; and S. 662, Sec. 205,
S:3663-3664, Sec.

(same provision in both bills)

H.R. 22, Sec. 205, S:3662; and S. 662, Sec. 205, S:3662

(same provision in both bills)

Appellate review: Within 30 days after the Commission issues a final order
or decision, parties that are adversely affected or aggrieved may appeal
to the U.S. Court of Appeals for the District of Columbia.

Enforcement of orders: U.S. district courts have jurisdiction to enforce,
enjoin, and restrain USPS from violating any order issued by the
Commission.

Enforcement of subpoenas: In case of contumacy or failure to obey a
subpoena, upon application of the Commission, the district court of the
United States for the district in which the person to whom the subpoena is
addressed resides or is served may issue an order requiring such person to
appear at any designated place or provide documentary or other evidence.
Any failure to obey the court may be punished by the court as a contempt
thereof.

Regulatory authority for rate and service complaints: When the Commission
finds that rate and service complaints (which also can submitted by an
officer of the Commission representing the interests of the general
public) are justified, it shall order USPS to take such action as the
Commission considers appropriate in order to achieve compliance with the
applicable requirements and to remedy the effects of any noncompliance,
such as ordering unlawful rates to be adjusted to lawful levels, ordering
the cancellation of market tests, ordering USPS to discontinue providing
loss-making products, or requiring USPS to make up for revenue shortfalls
in competitive products.

Regulatory authority to impose fines: In cases of deliberate USPS
noncompliance with regulatory requirements, the Commission may order,
based on the nature, circumstances, extent, and seriousness of the
noncompliance, a fine (in the amount specified by the Commission) for each
incidence of noncompliance. Fines resulting from the provision of
competitive products shall be paid out of the USPS Competitive Products
Fund.a All receipts from fines imposed shall be deposited in the general
fund of the U.S. Treasury.

Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

aThe Competitive Products Fund would fund the costs related to USPS's
competitive products (H.R. 22, Sec. 301; and S. 662, Sec. 401). For a list
of these competitive products, see H.R. 22, Sec. 202, S:3631; and S. 622,
Sec. 202, S:3631.

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.

In contrast to the proposed legislation, PRC has limited authority and
enforcement powers under the current statutory structure. PRC cannot
unilaterally order USPS to take actions to comply with its regulations,
cannot fine USPS, and does not have subpoena power to compel USPS to
provide PRC with documents and data or to compel the testimony of USPS
officials. Absent such explicit statutory authority, PRC has resorted to
repeatedly requesting that USPS take action to improve the quality of
ratemaking data, but its efforts have been met with mixed results. As PRC
Chairman George Omas recently testified:

"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."37

    Possible Implications of Proposed Postal Reform Legislation for the Quality
    of Ratemaking Data

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.38 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

37Testimony of George Omas, Chairman, Postal Rate Commission, before the
U.S. Senate Committee on Governmental Affairs (Washington, D.C.: Apr. 7,
2004), p. 9.

38GAO-04-108T and GAO-04-397T.

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:

o  	What criteria would the new postal regulator use for evaluating the
quality, completeness, and accuracy of ratemaking data?

o  	To what extent can USPS costs be rationally attributed to postal
products and services, in accordance with sound economic principles?

o  	How would the postal regulator balance the need for high-quality
ratemaking data with the time and expense involved in obtaining the data?

o  	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?

o  	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)?

Agency Comments 	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

and Our Evaluation 	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.

USPS's Controller did not comment on the draft report's findings in the
section on key USPS actions to improve the quality of ratemaking data, but
she noted that USPS has a long history of working to improve data quality.
She explained that USPS has worked to develop and improve its data systems
in ways that have been beneficial to improving the overall quality and
reliability of ratemaking data. However, she made some comments that
disagree with the draft report's findings in the section on the possible
implications of postal reform legislation for ratemaking data quality.
First, she said that: "The Postal Service considers that its current
ratemaking process has worked remarkably well for the past 30 years, since
the Postal Service's first postal rate change" under the Postal
Reorganization Act of 1970. Second, she said that USPS ratemaking data
systems produce data of "world-class quality," explaining that "no other
postal system's rates are better or more extensively supported by reliable
and objective financial and operations data." Third, she concluded that:

"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. [USPS is] 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 [email protected]. 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.

Katherine A. Siggerud
Director, Physical Infrastructure Issues

Appendix I: Objectives, Scope, and Methodology

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
longdistance transportation of mail subclasses using trucks, airplanes,
and freight trains.1 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

1The Study identified relatively minor concerns regarding the other two
major data collection systems used for ratemaking, which are the City
Carrier Cost System and the Rural Carrier Cost System. These systems
produce data on the volumes of mail subclasses that are delivered and
collected by carriers.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Comments from the Postal Rate Commission

Appendix II: Comments from the Postal Rate Commission

Appendix II: Comments from the Postal Rate Commission

Appendix II: Comments from the Postal Rate Commission

Appendix II: Comments from the Postal Rate Commission

Appendix II: Comments from the Postal Rate Commission

Appendix III: Selected Ratemaking Requirements in Proposed Postal Reform
Legislation

Citation Summary provision

H.R. 22, Sec. 202, S:3633; and S. 662, Competitive products: The Postal
Regulatory Commission (the Commission) shall issue Sec. 202, S:3633
regulations for competitive products (such as Priority Mail and Express
Mail) to prohibit (similar provisions) 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.

H.R. 22, Sec. 201, S:3622; and S. 662, Sec. 201, S:3622

(somewhat different provisions)

H.R. 22, Sec. 203, S:3641; and S. 662, Sec. 203, S:3641

(same provision in both bills)

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 milliona in any
year, unless the Commission has increased the limit to $50 million;a and
the market test does not exceed 24 months, unless the Commission has
approved an extension of its total duration up to 36 months.

    Appendix III: Selected Ratemaking Requirements in Proposed Postal Reform
                                  Legislation

Citation Summary provision

H.R. 22, Sec. 206, S:3687; and S. 662, Worksharing discounts: The
Commission shall establish rules for worksharing discounts Sec. 201,
S:3622(e) as part of its regulations for regulating market-dominant
products that shall ensure that (same provision in both bills) discounts
do not exceed the cost that USPS avoids as a result of worksharing
activity,

unless

o  	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;

o  	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;

o  	the amount of the discount above costs avoided (1) is necessary to
mitigate rate shock and (2) will be phased out over time; or

o  	the discount is provided in connection with subclasses of mail
consisting exclusively of mail matter of educational, cultural,
scientific, or informational value.

Sources: H.R. 22 and S. 662, 109th Cong., 1st Sess.

aLimits for market tests would be annually adjusted for inflation
according to the change in the Consumer Price Index.

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