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Scott Thompson’s declaration cited in Postal Regulatory Commission ruling on proposed change in US Postal Service costing methodologies
The Postal Regulatory Commission (PRC) has declined to adopt proposals by United Parcel Service (UPS) to change the US Postal Service’s costing methodologies. The PRC’s Order extensively cites a declaration by Bates White Partner Scott Thompson, submitted on behalf of Amazon Fulfillment Services, Inc. (AFSI), a subsidiary of Amazon.com.
In October 2015, UPS submitted several proposals to change the US Postal Service’s cost accounting methodologies, alleging that under existing procedures, the Postal Service was misclassifying a significant amount of variable costs. AFSI asked Dr. Thompson to evaluate one of the UPS proposals and to report on the reliability of the methodology UPS’ expert used to identify variable costs allegedly “hidden” in some Postal Service cost components. Dr. Thompson submitted a declaration to the PRC on behalf of Amazon.
In his declaration, Dr. Thompson identified conceptual and statistical problems in the report submitted on behalf of UPS. He asserted that the report’s conclusions were unreliable from an econometric perspective for three reasons: the results were highly dependent on outliers, the methodology used only eight data points for each category of costs, and the analysis ignored confounding factors. Dr. Thompson also described why the UPS expert’s approach was biased toward finding hidden variable costs. His declaration opined that a balanced inquiry would also look for fixed costs “hidden” in cost components currently treated as variable and showed that doing so using the UPS methodology would find significant fixed costs currently treated as variable. Thus, the UPS report’s methodology could not be viewed as a reliable method for determining the presence or magnitude of allegedly hidden variable costs.
In addition, Dr. Thompson wrote that a second UPS proposal to allocate “inframarginal” costs to mail products cannot reliably be implemented because inframarginal costs cannot be distinguished from fixed costs in a reliable manner.
On September 9, the PRC issued an order (revised October 19) declining to adopt the UPS proposals. Citing Dr. Thompson’s work, the Commission found that the UPS analysis did not reliably identify the presence of hidden variable costs, and thus the proposal did not represent an improvement over current methodology. For more information, read the PRC Order.