oversight

Postal Reform in Canada: Canada Post Corporation's Universal Service and Ratemaking

Published by the Government Accountability Office on 1997-03-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Briefing Report to the Chairman
                  Subcommittee on the Postal Service
                  Committee on Government Reform
                  and Oversight
                  House of Representatives
March 1997
                  POSTAL REFORM IN
                  CANADA
                  Canada Post
                  Corporation’s
                  Universal Service and
                  Ratemaking




GAO/GGD-97-45BR
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             General Government Division

             B-271661

             March 5, 1997

             The Honorable John H. McHugh
             Chairman, Subcommittee
               on the Postal Service
             Committee on Government
               Reform and Oversight
             House of Representatives

             Dear Mr. Chairman:

             This briefing report responds to your request that we provide certain
             information on Canada’s 1981 postal reform initiative, which created the
             Canada Post Corporation (CPC). Our discussions with your staff revealed
             that knowledge about Canada’s experience with postal reform would be
             useful to the subcommittee’s current efforts to reform the U.S. Postal
             Service. As agreed with the subcommittee, this report, which follows our
             briefing of the Subcommittee on February 25, 1997, presents information
             on selected aspects of (1) universal mail service in Canada, (2) CPC
             ratemaking, and (3) key events affecting CPC since its creation in 1981.


             The Canada Post Corporation Act (CPC Act) established CPC as a Crown
Background   Corporation1 and gave it broad authority to address problems reported to
             exist in the Canadian postal system. However, the CPC Act also provided
             that the Canadian government will select the CPC Board of Directors,
             designate a minister to oversee CPC, and approve proposed CPC regulations.
             The government also is to approve CPC’s 5-year plans and annual operating
             and capital budgets, and CPC is subject to Canada’s antitrust law, which is
             administered by Canada’s Bureau of Competition Policy.

             The CPC Act requires CPC to strive to operate on a self-sustaining financial
             basis. CPC incurred operating losses each year through fiscal year 1988, and
             reported its first profit (totaling Can$96 million, or U.S.$81 million)2 in
             fiscal year 1989. CPC subsequently reported profits in 4 of the 7 fiscal years
             1990 through 1996. In some recent years, CPC paid dividends and, since
             1994, has been subject to federal income tax.



             1
              Crown Corporations are parent corporations or wholly owned subsidiaries owned by the Crown that
             are commercial functions operating for public purposes in areas such as energy, communications, and
             transportation.
             2
             We converted Canadian dollars to U.S. dollars using the average 1989 exchange rate of Can$1.1842 =
             U.S.$1.



             Page 1                                              GAO/GGD-97-45BR Postal Reform in Canada
                   B-271661




                   The CPC Act does not use the term universal service but states that “while
Results in Brief   maintaining basic customary postal service” CPC must consider several
                   factors in carrying out the act’s objectives. One such factor is providing a
                   standard of service that will “meet the needs of the people of Canada and
                   that is similar with respect to communities of the same size.” Although not
                   required by the CPC Act, CPC policy is to provide basic letter mail services
                   at a uniform rate. Under the CPC Act, CPC has the “exclusive privilege” (i.e.,
                   a statutory monopoly) to collect and deliver most letter mail in Canada.
                   This letter mail accounted for about 50 percent of CPC’s operating revenue
                   in fiscal year 1996. Since its creation in 1981, CPC has made some changes
                   that affect the extent of mail service. For example, while taking certain
                   steps to improve mail service, CPC also reduced the frequency of mail
                   delivery to rural areas from 6 to 5 days per week and also gradually
                   reduced the delivery of mail to urban businesses from several times a day
                   to once a day.3 From 1981 through 1994, CPC also converted about
                   50 percent of its post offices to privately owned, franchised operations
                   that offer retail postal services, such as stamp sales and post office box
                   rentals, and also closed some post offices. (See br. section II.)

                   With regard to postal ratemaking, CPC sets some postage rates through
                   regulations. Under the CPC Act, interested parties must be afforded a
                   reasonable opportunity to comment on such regulations, and the
                   regulations are subject to government approval. At the time of our review,
                   CPC used regulations to set postage rates for basic domestic and
                   international single-piece letters and some other categories of mail. CPC
                   sets postage rates for other mail services by agreement, without issuing
                   regulations or obtaining government approval. Under CPC policy, the
                   nonregulated rates must be approved by the CPC Board of Directors or
                   others within CPC, depending on the particular mail service involved. (See
                   br. section III.)

                   Since reform, several key events have affected CPC’s business practices.
                   For example, CPC’s customers raised concerns, and legal challenges were
                   made, regarding CPC’s closure of rural post offices and its conversion of
                   others to private ownership. In 1994, in response, the Canadian
                   government imposed a moratorium on further rural post office closings
                   and conversions. Further, in 1993, the Bureau of Competition Policy
                   reviewed CPC’s plan to acquire a large interest in a competitor, PCL Courier
                   Holdings, Inc. During the review, CPC’s competitors expressed concerns
                   about CPC’s cross-subsidization of the prices of its courier services with

                   3
                    Some portions of northern Canada receive mail service less often than each work day. This situation
                   continued after the 1981 postal reform.



                   Page 2                                               GAO/GGD-97-45BR Postal Reform in Canada
                  B-271661




                  monopoly revenues and whether CPC should compete with the private
                  sector. In response, the Bureau reported that CPC had not cross-subsidized
                  in this case and that it was not within its purview to examine whether a
                  Crown corporation should compete with firms in the private sector
                  because the Competition Act encouraged competition.

                  Additionally, the Canadian government has made several reviews of CPC,
                  some of which have resulted in recommendations for additional
                  government oversight of CPC. At the time of our review, the Minister
                  Responsible for Canada Post was still considering most of the
                  recommendations resulting from the 1995-96 review and had taken action
                  on two of the recommendations (1) continuing the moratorium on post
                  office closings and (2) discontinuing delivery of certain advertising mail.
                  (See br. section IV.)


                  The scope of our review encompassed the period from the creation of CPC
Scope and         in October 1981 through November 1996. We provide information on
Methodology       selected aspects of Canadian laws and practices for universal mail service
                  and ratemaking but do not compare these with those followed in the
                  United States.

                  To accomplish our objectives, we reviewed relevant Canadian legislation
                  and implementing policies and procedures, which we obtained from CPC as
                  well as from the Canadian Treasury Board and Bureau of Competition
                  Policy, entities that have CPC oversight responsibility. We also reviewed a
                  number of government and private studies on Canadian postal reform. For
                  information on court cases involving CPC, we relied on CPC’s summary of
                  these cases. We interviewed various CPC executives and Canadian
                  government officials responsible for overseeing CPC, including the
                  Treasury Board and Bureau of Competition Policy.

                  We did our work from March 1996 through November 1996 in accordance
                  with generally accepted government auditing standards.


                  We provided a draft of this report to the Postmaster General of the U.S.
Agency Comments   Postal Service and to officials of the Canada Post Corporation for
                  comment. We received written comments from the Controller of the U.S.
                  Postal Service dated February 14, 1997, and from officials of the Canada
                  Post Corporation on January 10, 1997. They suggested specific technical




                  Page 3                                  GAO/GGD-97-45BR Postal Reform in Canada
B-271661




changes or updated information, which we have incorporated in the report
where appropriate.


We are sending copies of this briefing report to the Ranking Minority
Member of your Subcommittee, the Chairman and Ranking Minority
Member of the Senate Committee on Governmental Affairs, the U.S. Postal
Service, the Canadian Minister Responsible for CPC, the Canada Post
Corporation, and other interested parties. We will also make copies
available to others on request.

The major contributors to this report are listed in appendix II. Please
contact Michael Motley on (202) 512-8387 if you have any questions about
this report.

Sincerely yours,




J. William Gadsby
Director, Government Business
   Operations Issues




Page 4                                GAO/GGD-97-45BR Postal Reform in Canada
Page 5   GAO/GGD-97-45BR Postal Reform in Canada
Contents



Letter                                                                                             1


Briefing Section I                                                                                 8
                         Briefing Objectives                                                       8
Introduction             Knowledge About Canada’s Postal Reform Would Be Relevant to              10
                           U.S. Postal Reform
                         Selected U.S. Demographics                                               12
                         Selected Canadian Demographics                                           13
                         Selected Statistics for the U.S. and Canadian Postal Systems             14
                         1996 Revenue and Mail Volume by Canadian Market Segments                 16
                         Several Events Led to Canadian Postal Reform                             18
                         CPC’s Mandate Includes Broad Commercial Freedom                          20
                         Factors To Be Considered While Maintaining Service                       22
                         Canadian Government Structure for CPC Oversight                          24
                         CPC’s Corporate Structure and Subsidiaries                               26
                         Scope and Methodology                                                    28

Briefing Section II                                                                               30
                         The CPC Act Requires Mail Service To All Canadians                       30
Universal Mail Service   CPC Has Exclusive Privilege For Letter Mail Delivery                     32
                         CPC Reduced Frequency of Some Deliveries to Reduce Cost                  34
                         Less Frequent Delivery in Remote Areas Continued After Reform            36
                         1986 Corporate Plan Focused on Cutting Costs and Improving               38
                           Service
                         Number of CPC-Owned Post Offices Reduced Between 1985 and                40
                           1996

Briefing Section III                                                                              42
                         The CPC Act Provides for Regulated and Nonregulated Rates                42
Postal Ratemaking        Detailed Criteria and Methods for Ratemaking Not Prescribed in           44
                           Act
                         Process for Approval of Regulated Rates                                  46
                         Process for Approval of Nonregulated Rates                               48
                         Basic Letter Rates and Public Comments Received, 1982-1995               50
                         CPC’s Income (Loss) Since Its First Profitable Year                      52




                         Page 6                               GAO/GGD-97-45BR Postal Reform in Canada
                        Contents




Briefing Section IV                                                                               54
                        Historical Perspective: Key Events Affecting CPC’s Business               54
Key Events Affecting      Practices
CPC                     CPC’s Maintenance of “Basic Customary Postal Service”                     56
                        Concerns About Financial Accountability                                   60
                        Concerns About Pricing and Competitive Practices                          62
                        Government Requested and Conducted a Review of CPC                        64
                        Recommendations by the 1996 CPC Mandate Review                            66

Appendix I                                                                                        68

Information on
Governance and
Postal Ratemaking of
Canada Post
Corporation and the
U.S. Postal Service
Appendix II                                                                                       69

Major Contributors to
This Briefing Report




                        Abbreviations

                        CEO        Chief Executive Officer
                        CPC        Canada Post Corporation
                        CPI        Consumer Price Index
                        FAA        Financial Administration Act
                        GDP        Gross Domestic Product
                        GIC        Governor in Council
                        MEC        Management Executive Committee
                        POD        Post Office Department
                        USPS       United States Postal Service


                        Page 7                                GAO/GGD-97-45BR Postal Reform in Canada
Briefing Section I

Introduction




      GAO            Briefing Objectives


                     To present information on
                         Universal mail service
                         CPC ratemaking in Canada
                         Key events affecting CPC




                              Page 8              GAO/GGD-97-45BR Postal Reform in Canada
                      Briefing Section I
                      Introduction




Briefing Objectives   The objectives of our review were to obtain information on selected
                      aspects of (1) universal mail service in Canada, (2) Canada Post
                      Corporation (CPC) ratemaking, and (3) key events affecting CPC since 1981.




                      Page 9                                 GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section I
                Introduction




GAO   Knowledge About Canada's Postal Reform
      Would Be Relevant to U.S. Postal Reform

       CPC has operated 15 years with both
       increased commercial freedom and the
       obligation to maintain "basic customary
       postal service"
       Proposed U.S. postal reform would
        give USPS greater operating flexibility
        keep universal service requirement




                Page 10              GAO/GGD-97-45BR Postal Reform in Canada
                           Briefing Section I
                           Introduction




Knowledge About Canada’s   In June 1996, Chairman John McHugh, Subcommittee on the Postal
Postal Reform Would Be     Service, House Committee on Government Reform and Oversight,
Useful to U.S. Postal      introduced the Postal Reform Act of 1996 (H.R. 3717). The Subcommittee
                           held four hearings on the proposed legislation between July and
Reform                     September 1996. That proposal, among other things, would have given the
                           U.S. Postal Service more flexibility in setting postal rates and introducing
                           new products and services. Also, if this bill had been enacted, the
                           requirement for providing mail service to all communities, and at uniform
                           rates for certain letter mail, would have remained intact. In January 1997,
                           Chairman McHugh reintroduced a similar bill (H.R. 22).

                           Although there are differences between the two countries and their postal
                           systems, knowledge about Canada’s experience with postal reform would
                           be relevant to ongoing postal reform efforts in the United States. CPC was
                           created as a Crown corporation in October 1981 to provide it with
                           commercial freedom in delivering and maintaining customary postal
                           services.




                           Page 11                                 GAO/GGD-97-45BR Postal Reform in Canada
                          Briefing Section I
                          Introduction




GAO   Selected U.S. Demographics

      Cities with populations ranging from
      1 million to over 5 million people.                Population: 263.8M
                                                         Square miles: 3.7M
                                                         GDP: U.S.$6.738T




                 Legend
                   Over 5,000,000 population
                   1,000,000 - 5,000,000 population




                          Source: CIA World Fact Book.


                          The United States and Canada are similar in geographic size, both having
                          just under 4 million square miles. However, as of July 1995, the U.S.
                          population was 264 million, or about 9 times Canada’s 28 million
                          population. Also, the U.S. economy was about 10 times larger than
                          Canada’s.




                          Page 12                               GAO/GGD-97-45BR Postal Reform in Canada
                         Briefing Section I
                         Introduction




GAO   Selected Canadian Demographics


      Cities with populations ranging                   Population: 28.4M
      from 1 million to 5 million people.
                                                        Square miles: 3.8M
                                                        GDP: U.S.$639.8B




                 Legend
                    Over 5,000,000 population
                    1,000,000 - 5,000,000 population




                         Source: CIA World Fact Book.


                         The Gross Domestic Product (GDP)—presented using purchasing power
                         parity, a standard method used when comparing the size of two countries’
                         economies—of the United States was about U.S.$6.7 trillion, compared
                         with about U.S.$640 billion for Canada.




                         Page 13                               GAO/GGD-97-45BR Postal Reform in Canada
                             Briefing Section I
                             Introduction




GAO   Selected Statistics for the U.S. and
      Canadian Postal Systems
                                                  Canada                        United States

                                       1981                 1996            1981                1996

      Volume (billions of pieces)       6.5                  11.8           110.1              182.7

      Revenue (billions of dollars      1.3                   3.6           20.9                 56.6
      U.S.)

      Number of employees (full         62,600             63,500           670,200          886,000
      and part time)

      Post offices and other retail     8,275               7,604           39,457            38,212
      outlets




                             Note: CPC revenue for 1981 was converted to U.S. dollars using the 1981 average rate of exchange
                             of Can$1.1990 = U.S.$1. The 1996 revenue was converted using the Dec. 30, 1996, rate of
                             exchange of Can$1.3698 = U.S.$1.

                             Source: CPC and USPS data.




                             Page 14                                           GAO/GGD-97-45BR Postal Reform in Canada
                              Briefing Section I
                              Introduction




Selected Statistics for the   The postal systems of the United States and Canada differ greatly in size
U.S. and Canadian Postal      and resources. For example, in 1996, the United States Postal Service
Systems                       (USPS) had approximately 14 times the number of postal employees and 5
                              times the number of post offices and other retail outlets, as compared with
                              CPC.


                              CPC’s mail volume totaled 11.8 billion pieces in the fiscal year ending
                              March 30, 1996.4 In contrast, USPS had 182.7 billion pieces in the fiscal year
                              ending September 30, 1996. By comparison, since 1981, CPC’s mail volume
                              has grown by about 82 percent, compared to a 66-percent growth in the
                              USPS’ mail volume over approximately the same period.


                              Revenues in fiscal year 1996 totaled U.S.$3.6 billion for CPC, compared to
                              U.S.$56.6 billion for USPS. USPS revenues were 16 times that of CPC’s.

                              The total number of postal employees for CPC, which includes about 9,300
                              employed by Purolator, was about the same in 1996 as it was in 1981. USPS
                              experienced a 32-percent growth in the number of its employees in about
                              the same period.

                              CPC and USPS both have slightly reduced the number of retail outlets that
                              provide products and services to the public during the same period.




                              4
                               CPC’s mail volume and revenue includes that of Purolator Courier, Ltd., which CPC acquired in 1993.



                              Page 15                                              GAO/GGD-97-45BR Postal Reform in Canada
                                 Briefing Section I
                                 Introduction




GAO   1996 Revenue and Mail Volume by
      Canadian Market Segments
      Percentage comparison
      70


      60
                                                                                        56.8


      50
                46.9

                          39.8
      40

                                             30.6
      30


      20
                                                                            16.3


      10                                                                                                    8.2

                                                         2.5
       0
                                                                                                                          0

             Can$2.3       4.7             Can$1.5       .3               Can$.8         6.7             Can$.4
              billion    billion            billion    billion             billion     billion            billion
                         pieces                        pieces                          pieces
              Communications and            Physical distribution             Advertising                         Other
              information transfer



                        Revenue (total Can$4.9 billion, U.S.$3.6 billion): individual amounts do not sum to total due to rounding.

                        Volume (total 11.8 billion pieces): individual amounts do not sum to total due to rounding.




                                 Source: CPC.




                                 Page 16                                                         GAO/GGD-97-45BR Postal Reform in Canada
                              Briefing Section I
                              Introduction




1996 Revenue and Volume       CPC   groups its products and services into three primary market segments:
by Canadian Market
Segments                  •   Communications and information transfer, which is hard-copy letter mail
                              and electronic services.
                          •   Physical distribution, which is expedited delivery and parcel services.
                          •   Advertising, which includes addressed and unaddressed letter mail as well
                              as publications.

                              CPC’s reported total revenue was Can$4.9 billion (U.S.$3.6 billion) from
                              11.8 billion pieces of mail, of all types, for its fiscal year that ended
                              March 30, 1996. Of this total revenue, information transfer and
                              communications generated Can$2.3 billion (U.S.$1.7 billion) from 4.7
                              billion pieces; physical distribution generated Can$1.5 billion (U.S.$1.1
                              billion) from 300 million pieces; and advertising generated Can$805 million
                              (U.S.$588 million) from 6.7 billion pieces. CPC reported that other revenue
                              sources generated Can$373 million (U.S.$272 million).5




                              5
                              Conversion to U.S. dollars is calculated using the Dec. 30, 1996, rate of exchange of Can$1.3698 =
                              U.S.$1.



                              Page 17                                               GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section I
                Introduction




GAO   Several Events Led to Canadian Postal
      Reform

       Labor union strikes interrupted delivery
       service
       Customers dissatisfied with postal
       services
       Annual postal deficits up to Can$500
       million
       Insufficient letter-mail rate revenue to
       fund universal services


                Source: CPC; Campbell, Robert M, The Politics of the Post: Canada’s Postal System from Public
                Service to Privatization, (Broadview Press, 1994).




                Page 18                                            GAO/GGD-97-45BR Postal Reform in Canada
                         Briefing Section I
                         Introduction




Several Events Led to    In the 1970s, Canadians had grown increasingly frustrated with the postal
Canadian Postal Reform   system. This period was marked by labor strikes and service disruptions
                         caused by, among other things, postal mechanization. Postal employee
                         unions were concerned over employees’ limited collective bargaining
                         rights in areas such as technology change. Labor-management relations
                         were constrained by having to ensure comparability of wages and
                         conditions of postal employees with those of certain other government
                         employees. Customer dissatisfaction with the reliability of postal services
                         was a continuing problem.

                         The former Post Office Department was generating annual operating
                         deficits, totaling about Can$500 million (U.S.$428 million)6 in 1980, that
                         were being funded by the government through annual appropriations.

                         By 1981, the 17-cent first-class stamp was well below the level needed to
                         cover the cost of providing universal service to all Canadians, and this
                         underpricing was contributing significantly to the deficit.




                         6
                          Conversion to U.S. dollars is calculated using the 1980 average exchange rate of Can$1.1693 = U.S.$1.



                         Page 19                                               GAO/GGD-97-45BR Postal Reform in Canada
              Briefing Section I
              Introduction




GAO   CPC's Mandate Includes Broad
      Commercial Freedom
       CPC has "commercial freedom" to
       address
        labor-management relations
        customer service
        operating deficits
       CPC Act defines three objectives to be
       achieved by CPC




              Page 20              GAO/GGD-97-45BR Postal Reform in Canada
                         Briefing Section I
                         Introduction




CPC’s Mandate Includes   According to CPC and other documents we reviewed, members of
Broad Commercial         Parliament wanted CPC to have the “commercial freedom” and tools to
Freedom                  (1) repair labor-management relations, (2) improve customer service, and
                         (3) eliminate operating deficits. After some debate on how the law should
                         be written to give CPC this commercial freedom, the CPC Act simply
                         provides the corporation with the “capacity, and subject to this Act, the
                         rights, powers, and privileges of a natural person.” According to CPC,
                         Parliament provided CPC with this broad authority rather than providing a
                         long list of specific powers, so that CPC would be free to develop new
                         businesses not mentioned in the legislation and not contemplated at the
                         time of reform.

                         The CPC Act provides three broadly defined objectives of CPC. The
                         objectives are to (1) establish and provide a postal service to collect,
                         transmit, and deliver messages, information, funds, and goods both in and
                         outside of Canada; (2) provide products and services that CPC believes are
                         necessary or incidental to its postal service; and (3) provide to or on
                         behalf of various governmental entities, including Canadian government
                         departments and corporations, or to any person, services that CPC believes
                         can be conveniently provided in the course of carrying out CPC’s
                         objectives.




                         Page 21                                GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section I
                Introduction




GAO   Factors To Be Considered While
      Maintaining Service
       Improve products and services
       Operate on self-sustaining basis
       Provide mail security
       Use CPC employees to achieve
       objectives
       Maintain corporate identity




                Page 22              GAO/GGD-97-45BR Postal Reform in Canada
                                Briefing Section I
                                Introduction




Factors to Be Considered        Under the CPC Act, CPC is to “have regard to” five factors in carrying out its
While Maintaining Service       legislative objectives. CPC is to consider these factors, which are
                                summarized below, while maintaining “basic customary postal service”:

                            •   Improve and extend CPC products and services in light of developments in
                                the field of communications.
                            •   Conduct operations on a self-sustaining basis while providing a standard
                                of service that will meet the needs of Canada’s people and that is similar
                                for communities of the same size.
                            •   Conduct CPC operations to best provide mail security.
                            •   Use human resources both to attain CPC objectives and to ensure the
                                commitment of CPC employees to those objectives.
                            •   Maintain a corporate identity program, approved by the Governor in
                                Council (GIC),7 that reflects CPC’s role as an institution of the Government
                                of Canada.




                                7
                                 GIC is a special committee of the Cabinet with responsibility for approving government regulations,
                                including regulations for postal rate changes. GIC provides oversight of CPC.



                                Page 23                                              GAO/GGD-97-45BR Postal Reform in Canada
                                              Briefing Section I
                                              Introduction




GAO Canadian Government Structure for CPC
         Oversight
                                        Parliament                                                   Judiciary

                                                                          Prime Minister



                                                                              Cabinet



                                                                         Governor in Council
                                                                      (Special Cabinet committee)
                                                                       approves CPC's corporate
                                                                                 plan
   Department of Finance               Treasury Board                       and regulations
     Minister implements          (Special Cabinet committee)
                                                                                                                 Minister of Consumer
 Financial Administration Act           approves CPC's
                                      annual budgets and              The Minister Responsible                            and
                                    reviews corporate plans                      for                               Corporate Affairs
                                                                           Canada Post                                  Canada
                                                                            Corporation

         Assistant                  Deputy Secretary of
       Deputy Minister                Treasury Board                             CPC                             Bureau of Competition
          Finance                                                         Chairman and the                              Policy
                                                                   Board of Directors (9 members),                     enforces
                                                                                 and                                Competition Act
                       Crown Corporation                                    President/CEO
                           Directorate
                         analyzes CPC's
                      budgets and corporate
                           plan before
                            approval




                                              Source: CPC; Canadian Treasury Board.




                                              Page 24                                                GAO/GGD-97-45BR Postal Reform in Canada
                      Briefing Section I
                      Introduction




Canadian Government   CPC is owned by the Canadian government and, through the CPC Act and
Structure for CPC     other laws, the government can influence CPC policies and operations in
Oversight             several ways. Under the CPC Act, GIC appoints the CPC board chairman and
                      president, and approves CPC’s corporate plans and regulations. A minister,
                      whom the Prime Minister designates as responsible for the corporation,
                      appoints the remaining nine directors, with the GIC’s approval, and each
                      director holds office for a term not to exceed 3 years.

                      In addition to the CPC Act, CPC is subject to Canada’s Financial
                      Administration Act (FAA) and Competition Act. FAA governs spending and
                      administration of all federal agencies, and contains specific provisions
                      including, among other things, the requirement for an annual financial
                      audit applicable to CPC and other Crown corporations. Under this act, the
                      Minister of Finance and the Treasury Board, a special committee of the
                      Cabinet, must approve CPC’s annual capital and operating budgets. A
                      Crown Corporation Directorate assists the minister and board with their
                      oversight responsibilities.

                      The Competition Act is Canada’s antitrust law that applies to all private
                      businesses as well as to Crown corporations regarding those activities
                      open to competition. The purpose of the act is to maintain and encourage
                      competition in order to promote the efficiency and adaptability of the
                      Canadian economy. The act prohibits practices such as abuse of
                      dominance, predatory pricing, and price discrimination. The act is
                      administered and enforced by the Bureau of Competition Policy.




                      Page 25                                GAO/GGD-97-45BR Postal Reform in Canada
                                       Briefing Section I
                                       Introduction




GAO     CPC's Corporate Structure and
        Subsidiaries
                                             The Minister
                                            Responsible for
                                                CPC


                                              Chairman of
                                               the Board


                                             President/CEO




  National VP                  Senior VP                         Senior VP                         VP Human         Four subsidiaries
    Sales                     Marketing &                   Electronic Products                    Resources            wholly or
                                Product                         & Services                                            partly owned
                              Development                                                                               by CPC



                Senior VP                     Senior VP &                             VP
                Operations                   Chief Financial                      Administration
                                                 Officer




      Management Executive Committee                                                                            Four active subsidiaries




                                       Source: CPC.




                                       Page 26                                                        GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section I
                            Introduction




CPC’s Corporate Structure   The CPC Act established a Board of Directors for CPC, consisting of a
and Subsidiaries            chairman, the president, and nine other directors. The CPC Act states that
                            “the Board shall direct and manage the affairs of the Corporation and may
                            for such purposes exercise all the powers and perform all the duties of the
                            Corporation.” The board is assisted by CPC’s Management Executive
                            Committee (MEC). The Committee comprises the president, also known as
                            the chief executive officer (CEO), and the most senior managers in the
                            Corporation to direct the day-to-day management of postal operations. At
                            present, seven managers, in addition to the president/CEO, serve on MEC.

                            At the time of our review, CPC wholly or partly owned four active
                            subsidiaries through which it markets its products and services in
                            domestic and international markets. Canada Post Systems Management
                            Limited, a wholly owned subsidiary, markets CPC’s management system
                            and postal technology to other postal administrations. It had contracts to
                            provide these services in several countries, including Germany, Italy,
                            Sweden, New Zealand, South Africa, and Argentina. A second wholly
                            owned subsidiary, Canada Post Holdings Limited (and its subsidiaries),
                            holds a 75-percent controlling interest in PCL Courier Holdings, Inc.,
                            which owns all the shares of Purolator Courier Limited. Purolator provides
                            overnight delivery services.

                            Two CPC subsidiaries are involved with a consortium, called “UBI,” formed
                            by CPC and six other companies. UBI is developing interactive television
                            technology to include home shopping, bill payment, home-energy
                            management, messaging, games, and yellow pages.




                            Page 27                                GAO/GGD-97-45BR Postal Reform in Canada
               Briefing Section I
               Introduction




GAO   Scope and Methodology

      Covered period since 1981 Canadian
      postal reform
      Reviewed Canadian legislation, CPC
      reports, and various government studies
      Interviewed CPC and other Canadian
      government official




               Page 28              GAO/GGD-97-45BR Postal Reform in Canada
                        Briefing Section I
                        Introduction




Scope and Methodology   The scope of our review encompassed the period from the creation of CPC
                        in October 1981 through November 1996. We provide information on
                        selected aspects of Canadian laws and practices for universal mail service
                        and ratemaking but do not compare these with those followed in the
                        United States.

                        To accomplish our objectives, we reviewed relevant Canadian legislation
                        and implementing policies and procedures, which we obtained from CPC as
                        well as from the Canadian Treasury Board and Bureau of Competition
                        Policy, which have CPC oversight responsibility. We also reviewed a
                        number of government and private studies on Canadian postal reform. For
                        information on court cases involving CPC, we relied on CPC’s summary of
                        these cases.

                        We interviewed various CPC executives and Canadian government officials
                        responsible for overseeing CPC, including the Treasury Board and Bureau
                        of Competition Policy.




                        Page 29                                GAO/GGD-97-45BR Postal Reform in Canada
Briefing Section II

Universal Mail Service




      GAO        The CPC Act Requires Mail Service to
                 All Canadians
                      The CPC Act requires
                        "Basic customary postal service" to be
                        provided
                        Standard of service to be similar for
                        "communities of the same size"
                      The CPC Act does not require uniform
                      rates




                               Page 30              GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section II
                            Universal Mail Service




The CPC Act Requires Mail   The term “universal service” is not used in the CPC Act nor was it used in
Service to All Canadians    the Post Office Act of 1867, which the CPC Act superseded. However, the
                            CPC Act requires CPC to maintain basic mail service to all Canadians by
                            providing that

                            “While maintaining basic customary postal service, the Corporation, in carrying out its
                            objects, shall have regard to...(b) the need to conduct its operations on a self-sustaining
                            financial basis while providing a standard of service that will meet the needs of the people
                            of Canada and that is similar with respect to communities of the same size.” [Underscoring
                            supplied.]


                            Further, the CPC Act does not require that letter or any other mail service
                            be provided to all communities at a uniform rate. Nevertheless, CPC has
                            provided a uniform letter rate as part of its universal service. At the time of
                            postal reform, the former Post Office Department also provided a uniform
                            letter rate.




                            Page 31                                         GAO/GGD-97-45BR Postal Reform in Canada
               Briefing Section II
               Universal Mail Service




GAO   CPC Has Exclusive Privilege for Letter
      Mail Delivery
      The CPC Act retained exclusive privilege
      from former Post Office Act
      Exclusive privilege definition: CPC has
      sole and exclusive privilege of collecting,
      transmitting, and delivering letters
      Exemptions to exclusive privilege
      Exclusive privilege revenue totaled about
      50 percent of CPC's FY 1996 operating
      revenue




               Page 32                  GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section II
                            Universal Mail Service




CPC Has Exclusive           As was the case under the former Post Office Act, the CPC Act provides for
Privilege for Letter Mail   the sole and exclusive privilege of delivering most letter mail. This
Delivery                    privilege is also referred to as the statutory mail monopoly. Newspapers,
                            magazines, books, catalogs, or goods are not included in the letter
                            monopoly. In addition, there are a number of exceptions to exclusive
                            privilege, including letters of an urgent nature, which are transmitted by
                            messenger for a fee of at least 3 times the 50-gram letter rate.

                            The CPC Act also provides CPC with authority to issue regulations defining a
                            letter for the purposes of the act. These regulations define a letter as one
                            or more messages or information in any form not exceeding 500 grams.8
                            They include 13 exceptions to the exclusive privilege, including those
                            originally listed in the CPC Act.

                            According to CPC, about 50 percent of its operating revenue in fiscal year
                            1996 was from services covered by the statutory monopoly.




                            8
                             Letter Definition Regulations. Canada Post Corporation Act and Regulations Manual (94-03).



                            Page 33                                             GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section II
                Universal Mail Service




GAO   CPC Reduced Frequency of Some
      Deliveries to Reduce Cost
      In 1982, mail delivery reduced from 6 to
      5 days per week in rural areas
      Over time, multiple daily deliveries to
      businesses reduced to once a day
      In 1986, on-time delivery standards
      relaxed




                Page 34                  GAO/GGD-97-45BR Postal Reform in Canada
                        Briefing Section II
                        Universal Mail Service




CPC Reduced Frequency   CPC used its flexibility under the CPC Act to make certain changes in mail
of Some Deliveries to   service delivery intended to reduce its operating costs and permit it to
Reduce Cost             become self-sufficient. In some cases, certain changes began before CPC
                        was established. For example, in the late 1970s, the former Post Office
                        Department reduced mail delivery to urban centers from 6 to 5 days a
                        week, eliminating Saturday delivery. In 1982, CPC also reduced the
                        frequency of mail delivery from 6 to 5 days a week in rural areas.
                        According to CPC officials, this was not a sweeping, immediate change but
                        was evolutionary. In 1996, CPC’s policy was to deliver mail 5 days a week
                        (Monday through Friday) throughout all portions of Canada except certain
                        difficult-to-serve communities in northern Canada (discussed later in this
                        section).

                        The former Post Office Department had delivered mail up to 5 times a day
                        to some businesses in urban areas, such as Toronto. CPC gradually reduced
                        delivery to all businesses to once a day. The last multiple deliveries to
                        businesses in an urban area (Winnipeg) were in 1992.

                        To further reduce operating cost, in the 1980s, CPC changed its on-time
                        delivery standards for basic letter mail from 1 to 2 days for local areas, 2 to
                        3 days within a province, and 3 to 4 days for national mail. This change in
                        delivery standards had been recommended in a 1985 report on the
                        government’s review of CPC’s mandate.9 According to CPC, its customers
                        were more interested in having CPC improve the reliability of mail delivery
                        than the speed of delivery. CPC arranged for independent measures of its
                        delivery performance. These measurements showed that 2-, 3-, and 4-day
                        on-time delivery performance for basic letter mail service improved from
                        87, 84, and 89 percent, respectively, to 97 percent for all three standards
                        between 1988 and 1996. CPC also provides overnight letter mail delivery
                        service. However, this is a different category of service and is available at
                        a higher price than that for CPC’s basic letter service.




                        9
                        Alan R. Marchment, Chairman, Report of the Review Committee on the Mandate and Productivity of
                        Canada Post Corporation, (Canadian Government Publishing Centre, Nov. 1985), p. 19.



                        Page 35                                           GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section II
                Universal Mail Service




GAO   Less Frequent Delivery in Remote
      Areas Continued After Reform
      Before and after reform, frequency of mail
      delivery to about 200 remote northern
      communities varied
       CPC does not apply usual delivery
       standards due to limited access
       Northern Air Stage Program provides
       contract mail delivery
         Can$15.6 million remote area subsidy
         for 1997




                Page 36                  GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section II
                            Universal Mail Service




Less Frequent Delivery in   Compared with other places in Canada, CPC provides mail delivery less
Remote Areas Continued      frequently to about 200 remote northern Canada communities. Delivery to
After Reform                some of those communities can be as infrequently as once a week. Like
                            the former Post Office Department, CPC does not apply normal delivery
                            standards to these areas because of limited access caused by infrequent
                            air flights, circuitous routes, long distances, and uncertain weather
                            conditions.

                            CPC maintains the Northern Air Stage Program to provide contract mail
                            delivery of parcels containing perishable objects and foodstuffs to remote
                            areas. This service has been provided since the late 1960s. Parcels, letters,
                            and other materials are transported to more than 60,000 addresses in the
                            200 communities that are without road access and are spread over more
                            than 70 percent of Canada’s land mass. According to CPC, the postage paid
                            by commercial shippers of parcels in these areas does not fully cover the
                            cost involved, and the Canadian government appropriates money to cover
                            the difference.

                            In 1989, the revenue from postage paid by these shippers covered about 40
                            percent of related CPC costs, and the government’s appropriation for this
                            service was Can $17 million (U.S.$14 million) during that year. In 1986, the
                            government planned to reduce the subsidy by Can$1 million
                            (U.S.$720,000) each year until it was eliminated in 2006. However, in 1991,
                            after a study of the program, the government decided to (1) provide an
                            annual appropriation of about Can$15 million (U.S.$13 million); (2) restrict
                            the range of products to be transported (primarily nutritional food
                            supplies); and (3) provide the service to communities with no year-round
                            surface transportation. The government’s appropriation for this service is
                            budgeted at Can$15.6 million (U.S.$11.4 million) for fiscal year 1997.10




                            10
                             Conversion to U.S. dollars is calculated using the Dec. 30, 1996, rate of exchange of Can$1.3698 =
                            U.S.$1. Conversion of 1986, 1989, and 1991 Canadian dollars to U.S. dollars is calculated using the 1986
                            average exchange rate of Can$1.3896 = U.S.$1; the 1989 average exchange rate of Can$1.1842 = U.S.$1;
                            and the 1991 average exchange rate of Can$1.1460 = U.S.$1.



                            Page 37                                               GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section II
                Universal Mail Service




GAO   1986 Corporate Plan Focused on
      Cutting Costs and Improving Service
       Largest CPC rural post offices would be
       converted to private retail outlets
       Other post offices would be consolidated
       or closed
       Various changes to be made to improve
       service
         privately owned outlets were to have
         longer operating hours and a wider
         range of services




                Page 38                  GAO/GGD-97-45BR Postal Reform in Canada
                           Briefing Section II
                           Universal Mail Service




1986 Corporate Plan        Before reform, the former Post Office Department owned and operated
Focused on Cutting Costs   post offices but also had “sub-post offices” that private parties owned and
and Improving Service      operated on a commission basis. In 1986, CPC developed, and the Canadian
                           government approved, a plan which, among other things, provided for CPC
                           to make greater use of the private sector to market its retail services. CPC
                           had continued to incur operating deficits well into the 1980s. In 1984, the
                           newly elected government focused greater attention on CPC’s economic
                           goals. Subsequently, the Treasury Board and Finance Minister worked
                           closely with CPC in the formulation of its 1986 strategic plan to devise ways
                           to reduce costs and improve postal services. The resulting 1986 CPC
                           corporate plan formalized operational goals that included long-range,
                           cost-cutting measures as well as certain service improvements.

                           Among other initiatives, the plan proposed to expand private sector
                           involvement by transforming the large rural post office network to private
                           ownership over a 10-year period (1986-1995). The largest of these post
                           offices were to be transformed into privately owned retail outlets, with the
                           anticipated benefits of both reducing operating costs and improving
                           service. Other rural post offices were to be consolidated with other post
                           offices, or closed.

                           CPC intended that these changes would improve customer service. Under
                           the plan, the privately owned outlets, typically located in existing
                           commercial operations like pharmacies and grocery stores, would have
                           longer operating hours each day, operate 7 days a week, offer a wider
                           range of services, and be more conveniently located. Further, the
                           commercial operators were to meet more stringent requirements for
                           training, equipment, and service hours than were the existing privately
                           owned sub-post offices.




                           Page 39                                 GAO/GGD-97-45BR Postal Reform in Canada
                               Briefing Section II
                               Universal Mail Service




GAO   Number of CPC-Owned Post Offices
      Reduced Between 1985 and 1996
      Number of outlets
      7,000


      6,000               5,868


      5,000

                                                                     4,175
      4,000
                                                                                    3,331
      3,000

                                         2,206
      2,000


      1,000


          0
                                  1985                                       1996
                             Total 8,074                                Total 7,506

                    CPC-owned outlets

                    Private outlets




                               Source: CPC. Canada Post Corporation: Standards of Service and Network Operations. Prepared by
                               CPC for the Mandate Review.




                               Page 40                                              GAO/GGD-97-45BR Postal Reform in Canada
                           Briefing Section II
                           Universal Mail Service




Number of CPC-Owned Post   CPC increased the number of postal retail outlets owned by the private
Offices Reduced Between    sector, from 2,206 in 1985 to 3,331 in 1996, or about 50 percent. At the
1985 and 1996              same time, the total number of outlets owned by CPC decreased from 5,868
                           to 4,175, or 29 percent. Along with converting post offices to private
                           ownership, CPC closed some post offices during this same period, reducing
                           the total number of outlets from 8,074 to 7,506, or 7 percent. Most of these
                           post office closures and conversions took place prior to February 1994,
                           when the government placed a moratorium on CPC’s conversion program.
                           CPC also increased the number of businesses where customers could
                           purchase postage stamps, from about 6,300 in 1986 to about 11,000 in 1996,
                           or 75 percent.




                           Page 41                                GAO/GGD-97-45BR Postal Reform in Canada
Briefing Section III

Postal Ratemaking




      GAO              The CPC Act Provides for Regulated
                       and Nonregulated Rates
                       Regulated: Domestic and international
                       single-piece letters, international printed
                       matter, literature to the blind, and some
                       registered mail products
                       Nonregulated: All bulk mail discounts off
                       the basic letter rate, parcel rates, and
                       certain other rates
                       Most CPC rates set without regulations
                       and government approval


                                Source: CPC.




                                Page 42              GAO/GGD-97-45BR Postal Reform in Canada
                           Briefing Section III
                           Postal Ratemaking




The CPC Act Provides for   The CPC Act provides general authority for CPC to issue regulations, with
Regulated and              the approval of GIC, for the efficient operations of its business and for
Nonregulated Rates         carrying out the purposes and provisions of the act. Specifically, with
                           regard to postal ratemaking, the act provides authority for CPC to issue
                           regulations prescribing rates of postage and providing postage discounts
                           on mailable matter prepared in the manner prescribed by the regulations.

                           In 1996, the only postal rates established by regulation—regulated
                           rates—were those for basic domestic and international single-piece letters;
                           international printed matter, including newspapers and periodicals;
                           literature for the blind; and some registered mail products.

                           The CPC Act allows CPC to set certain postage rates by agreement rather
                           than by issuing regulations—nonregulated rates. Such agreements may
                           relate to (1) variations of postage rates based on bulk mailings or the
                           preparation of the mail in a manner that facilitates processing or (2) the
                           provision of experimental services for periods not exceeding 3 years.
                           Based on these provisions, CPC has, over time, sought and received
                           government approval to remove numerous rate categories from the
                           regulatory process. Consequently, most of CPC’s postal rates have been
                           established without issuing regulations and without government approval.
                           Such rates cover letters submitted in bulk to CPC with certain preparation
                           by the mailer to facilitate processing; “courier” (overnight or urgent
                           delivery) services; unaddressed advertising mail; and parcels.




                           Page 43                                GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section III
                Postal Ratemaking




GAO   Detailed Criteria and Methods for
      Ratemaking Not Prescribed in Act
      The CPC Act contains few ratemaking
      provisions
      CPC has established pricing objectives/
      principles and taken other steps to comply
      with the Competition Act




                Page 44                GAO/GGD-97-45BR Postal Reform in Canada
                             Briefing Section III
                             Postal Ratemaking




Detailed Criteria and        The CPC Act provides that postage rates issued by regulation must be “fair
Methods for Ratemaking       and reasonable and consistent so far as possible with providing a revenue,
Not Prescribed in Act        together with any revenue from other sources, sufficient to defray the
                             costs incurred by the corporation in the conduct of its operations. . .” CPC
                             has established a pricing policy that is intended to comply with both the
                             CPC Act and the antitrust provisions of the Competition Act. CPC’s overall
                             pricing objectives are to

                         •   achieve a 12-percent return on equity;11
                         •   ensure that prices for products covered by its monopoly are not
                             cross-subsidizing nonmonopoly prices; and
                         •   ensure that universal basic letter rates are being extended to its customers
                             within Canada, in compliance with the social obligation to provide
                             nondiscriminatory and affordable access to a national and international
                             system of letter mail.

                             CPC follows certain principles in developing postal rates: nonregulated
                             products will be priced to maximize their contribution in a competitive
                             environment, government-subsidized services will be priced according to
                             appropriate government policy, all rates will comply with the Competition
                             Act, and CPC’s basic customary service obligation will be taken into
                             account. Other principles include providing uniform basic letter rates and
                             limiting such rates to the level necessary to compensate for inflation, as
                             measured by the Consumer Price Index (CPI).

                             CPC has used an independent auditing firm to help ensure that the
                             corporation is properly allocating and distributing costs for ratemaking
                             purposes and is in compliance with the Competition Act. CPC considers its
                             detailed cost and revenue data to be commercially sensitive and, therefore,
                             has only released data for “bundled” product categories to the general
                             public.




                             11
                              Return on Shareholders Equity is defined as net income (after interest, taxes, and dividends) divided
                             by the corporation’s equity (capital less any deficit). The Canadian government is the only shareholder
                             of the corporation. The CPC Act authorizes the corporation to issue to the Minister Responsible for
                             CPC shares of the corporation, which are held in trust for Her Majesty in right of Canada.



                             Page 45                                               GAO/GGD-97-45BR Postal Reform in Canada
                                      Briefing Section III
                                      Postal Ratemaking




GAO          Process for Approval of Regulated
             Rates
               CPC's
Management Executive Committee (MEC)
   submits proposed rate regulations



                CPC's                                         After final Board               Crown Corporation
          Board of Directors'                            approval, regulations are             Directorate staff
     approves proposed regulations                         submitted through the          analyze CPC's proposal for
                                                       Minister Responsible for CPC             Treasury Board
                                                        to GIC; GIC has 60 days to        and Finance Minister, which
                                                             approve or reject             then provide input to GIC
Proposed regulations published in Canada                   proposed regulations
Gazette; 60-day comment period provided




     CPC reviews public comments



                                                             After GIC approval,
                                                       rates published within 23 days




                                      Source: CPC and the Canadian Treasury Board.




                                      Page 46                                           GAO/GGD-97-45BR Postal Reform in Canada
                          Briefing Section III
                          Postal Ratemaking




Process for Approval of   The CPC Act requires that proposed regulations to be issued by CPC be
Regulated Rates           published in the Canada Gazette12 and a reasonable opportunity provided
                          for interested persons to comment on them prior to their approval.

                          According to CPC, it first presents information relating to future postage
                          rates in its corporate plan, which is submitted each year to the Minister
                          Responsible for CPC and the President of the Treasury Board for their
                          review and GIC approval. The approved plan forms the basis for developing
                          specific future postage rate changes. When new postage rates are to be
                          established by regulation, CPC’s MEC presents proposed regulations to the
                          CPC Board of Directors for approval. When approved, the proposed
                          regulations are published in the Canada Gazette; a 60-day period is
                          provided during which interested parties may respond by written
                          comment. The publication includes CPC’s rationale for the new rates but
                          does not include cost data. The CPC Act does not prescribe how the public
                          comments are to be addressed. However, according to CPC officials, they
                          analyze all comments received. The review process is not public, but
                          results of the CPC analysis are provided to the Minister Responsible for CPC.
                          Then, the proposed regulations are sent to the Board of Directors for final
                          approval.

                          After the board’s approval, the regulations are submitted through the
                          Minister Responsible for CPC to GIC, which has 60 days to approve or
                          disapprove of them. The Crown Corporation Directorate reviews the
                          proposed regulations to advise the Treasury Board and the Minister of
                          Finance about the proposal prior to GIC approval. According to Directorate
                          officials, their analysis includes a comparison of the proposed rate
                          increases to changes in the CPI. They said that they do not perform a
                          detailed analysis of CPC’s costs relative to the rates proposed for specific
                          products and services because CPC provides cost data for only broad
                          categories of products and services. If approved, the new rates are
                          published in the Canada Gazette within 23 days.




                          12
                             The Canada Gazette is a government publication, similar to the U.S. Federal Register, in which
                          proposed and final government regulations are made public.



                          Page 47                                               GAO/GGD-97-45BR Postal Reform in Canada
                               Briefing Section III
                               Postal Ratemaking




GAO   Process for Approval of Nonregulated
      Rates
                                        CPC staff submits
                                package of proposed nonregulated
                                     rates for MEC approval




               Generic                                             Nongeneric


           President/CEO                                  Managers with delegated authority
        approves generic rates                               approve nongeneric rates




                MEC briefs
       Minister Responsible for CPC
          and Board of Directors




                               Source: CPC.




                               Page 48                                           GAO/GGD-97-45BR Postal Reform in Canada
                          Briefing Section III
                          Postal Ratemaking




Process for Approval of   CPC’s nonregulated postage rates fall into two categories: generic and
Nonregulated Rates        nongeneric. According to CPC, its procedures for establishing the two
                          categories of postage rates differ slightly, but neither requires Canadian
                          government approval.

                          Generic rates are rates that apply to discounted bulk-business letter mail,
                          advertising mail, parcels, or courier services that are generally available to
                          CPC business customers. CPC develops specific, product-by-product generic
                          rates that are discounted from the basic letter mail postage rate. These
                          rates are available to anyone who meets bulk mail requirements
                          established by CPC regulations. New generic rates must be approved by
                          CPC’s President/CEO in consultation with MEC. The Board of Directors and
                          the Minister are briefed on proposed changes in generic rates, but the
                          President/CEO is authorized to approve such rates. CPC officials said that
                          customer associations are briefed on the proposals to change generic rates
                          about 6 months before the rate changes take effect.

                          Nongeneric postage rates are established through negotiated, confidential
                          agreements that are customized for individual, large-volume business
                          customers. Such agreements are approved by CPC officials below the
                          President/CEO level through authority delegated by the Board of Directors.
                          These agreements are primarily for types of mail other than letters, such
                          as parcels and unaddressed advertising mail.




                          Page 49                                 GAO/GGD-97-45BR Postal Reform in Canada
                  Briefing Section III
                  Postal Ratemaking




GAO   Basic Letter Rates and Public
      Comments Received, 1982-1995
      Date         Cents (Can$)          Cumulative   Public comments
                                           percent
                                          increase
      Jan 1982          30                  Base                9,136

      Feb 1983          32                    7                 2,467

      June 1985         34                   13                 4,000

      Apr 1987          36                   20                  291

      Jan 1988          37                   23                   75

      Jan 1989          38                   27                   45

      Jan 1990          39                   30                   11

      Jan 1991          40                   33                   26

      Jan 1992          42                   40                   24

      Jan 1993          43                   43                    9

      Aug 1995          45                   50                  108




                  Source: CPC.




                  Page 50                                    GAO/GGD-97-45BR Postal Reform in Canada
                         Briefing Section III
                         Postal Ratemaking




Basic Letter Rates and   Through November 1996, CPC had raised the basic letter mail rate 11 times
Public Comments          since 1981. When CPC was created in 1981, the basic letter mail rate was 17
Received, 1982-1995      cents, which CPC officials said was too low to cover the cost of providing
                         letter mail services. Therefore, CPC’s first rate change, in January 1982,
                         raised the basic letter rate by 13 cents to 30 cents, about a 75-percent
                         increase. Subsequently, postage rate for letter mail has increased by 1 or 2
                         cents in each instance.

                         The number of comments received by CPC on proposed rate changes has
                         varied greatly from a high of 9,136 in 1982, at the time of the highest
                         increase since reform, to a low of 9 in 1993. In 1995, the number of
                         comments increased from those of the previous years. In reviewing the
                         most recently proposed rate change, a newly elected government closely
                         scrutinized CPC’s rationale for the rate increase. CPC officials said the closer
                         scrutiny by the Minister Responsible for CPC and the Treasury Board
                         resulted in a 10-month delay in obtaining government approval for the rate
                         increase. They believe that public statements about the increase
                         stimulated public interest, resulting in an increased number of comments.

                         CPC’s pricing plan calls for increasing basic letter mail rates at a rate that is
                         within changes in the CPI. From 1982 to 1996, the basic letter rate had
                         increased a total of 50 percent, while the CPI had increased 71 percent.




                         Page 51                                   GAO/GGD-97-45BR Postal Reform in Canada
                                Briefing Section III
                                Postal Ratemaking




GAO   CPC's Income (Loss) Since Its First
      Profitable Year
       Can$ in millions

      $200
                             149

      $100      96

                                                                 26                       28
                                          14
        $0


      -$100                                                                     -69

                                                  -128
      -$200


      -$300                                                            -270



      -$400
               1989          1990      1991       1992          1993   1994    1995      1996

                First
                profitable
                year



                      Income                           Losses




                                Source: CPC.




                                Page 52                                       GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section III
                            Postal Ratemaking




CPC’s Income (Loss) Since   The Canadian government reformed its postal system in 1981 to, among
Its First Profitable Year   other things, eliminate the annual operating deficits of the former Post
                            Office Department, which were funded by the government. The deficit
                            totaled about Can$500 million (U.S.$417 million*) in 1981.13 CPC made
                            progress in reducing the annual deficits in the 1980s and recorded its first
                            net profit of Can$96 million (U.S.$81 million*) in 1989. CPC reported losses
                            in 3 of the 7 years after 1989. For example, in 1994, corporate restructuring
                            and capital investments led to a loss of Can$270 million
                            (U.S.$198 million*). In 1996, CPC recorded a net profit of Can$28.0 million
                            (U.S.$20 million*). The Canadian government had expected CPC to pay
                            dividends to the government totaling about Can$300 million
                            (U.S.$253 million*) for the 5-year period ending in 1994.11 The corporation
                            paid dividends in only 2 years—Can$60 million (U.S.$51 million*) in 1990
                            and Can$5.7 million (U.S.$4.7 million* in 1992). In addition to paying
                            dividends, since 1994 CPC has been subject to federal income tax. For 1996,
                            CPC estimated that it would pay Can$4.0 million (U.S.$3.0 million*) in
                            federal income tax to the Canadian government.

                            CPC’snet profit in 1989 marked the end of government funding of its
                            operating deficits. The government continues to subsidize mail service for
                            members of Parliament, magazines and newspapers, the blind, and
                            customers in remote areas of Canada. For fiscal year 1996, this
                            government’s appropriation was Can$97 million (U.S.$71 million*).




                            13
                              Conversions to U.S. dollars on this page were calculated using the following average exchange rates:
                            (1)U.S.$417 million (1981 average rate: Can$1.1990 = U.S.$1); (2)U.S.$81 million (1989 average rate:
                            Can$1.1842=U.S.$1); (3)U.S.$198 million (1994 average rate: Can$1.3644=U.S.$1); (4)U.S.$20 million
                            (12/30/96 rate: Can$1.3698=U.S.$1); (5)U.S.$253 million (1989 average rate: Can$1.1842=U.S.$1);
                            (6)U.S.$51 million (1990 average rate: Can$1.1668=U.S.$1) and U.S.$4.7 million (1992 average rate:
                            Can$1.2085=U.S.$1); (7)U.S.$3.0 million (2/30/96 rate: Can$1.3698=U.S.$1); (8)U.S.$71 million (12/30/96
                            rate: Can$1.3698 = U.S.$1).



                            Page 53                                               GAO/GGD-97-45BR Postal Reform in Canada
Briefing Section IV

Key Events Affecting CPC




      GAO              Historical Perspective: Key Events
                       Affecting CPC's Business Practices
                                                       Legal challenges to service changes

                                                            Cost reduction efforts:
                                                            Post office conversions, delivery service changes
                     1981       1984         1985        1986            1989             1990            1994            1995


       Post office    Postal    New          Government    CPC            First profitable   Parliamentary   New              Government
       problems       reform    government   reviewed      developed      year               committee       government       reviewed
       led to                   elected      CPC's         plan                              recommended     elected          CPC's
       reform         CPC                    mandate       to reduce      Experimental       third-party                      mandate
                      created                and           costs          third-party        regulator       Government
                                             recommended                  regulator                          moratorium
                                             third-party                  reviewed                           on post office
                                             regulator                    proposed rates                     closings




                                             Page 54                                              GAO/GGD-97-45BR Postal Reform in Canada
                              Briefing Section IV
                              Key Events Affecting CPC




Historical Perspective: Key   This chart is an overview of key events and government interventions that
Events Affecting CPC’s        have shaped CPC’s business practices since its creation in 1981.
Business Practices
                              These actions include changes made to services since reform, public
                              reactions to those changes and to CPC’s competitiveness, and government
                              involvement in CPC’s activities. For example, of particular concern to
                              customers was CPC’s closure of rural post offices, its conversion of others
                              to private ownership, and its implementation of community mail boxes
                              rather than an expansion of door-to-door mail delivery. These efforts have
                              been criticized by communities, members of the public, and labor unions,
                              and have resulted in a number of legal challenges to and government
                              scrutiny of CPC’s mandate. In response, the Canadian government imposed
                              a moratorium on further rural closings and conversions and a court in
                              Canada has upheld CPC’s decision to use community boxes.

                              In addition, competitors have criticized CPC’s behavior in its competition
                              with private business and have alleged that CPC cross-subsidizes the prices
                              of its competitive products with revenues protected by the CPC Act’s
                              statutory monopoly provision. In response, the government has conducted
                              several government studies of CPC since reform that contained
                              recommendations for additional oversight, such as establishing a
                              third-party regulator to address concerns about CPC’s accountability.




                              Page 55                                GAO/GGD-97-45BR Postal Reform in Canada
              Briefing Section IV
              Key Events Affecting CPC




GAO   CPC's Maintenance of "Basic
      Customary Postal Service"
       In new communities, door-to-door
       delivery replaced with community boxes
       Dissatisfied customers argued
         community boxes were different level
         of service for same-size communities
         mandate to provide "basic customary
         postal service" was violated
       Court upheld CPC's right to decide on
       type of mail delivery




              Page 56                    GAO/GGD-97-45BR Postal Reform in Canada
                          Briefing Section IV
                          Key Events Affecting CPC




CPC’s Maintenance of      CPC’s increased use of “community” mail boxes, rather than door-to-door
“Basic Customary Postal   mail delivery, has prompted concern among some customers,
Service”                  communities, members of the public, and labor unions representing CPC
                          employees. These concerns have resulted in a legal challenge to CPC’s
                          practices and closer government scrutiny of CPC’s mandate.

                          In the mid 1970s, the former Post Office Department introduced a group
                          mail box concept for the delivery of mail.14 In 1986, CPC adopted a new
                          national delivery policy under which there would be no extension of
                          door-to-door delivery in new areas beyond existing routes. Rather, in new
                          areas, mail would be delivered to “community boxes.” According to CPC,
                          the cost to serve each community mail box was Can$28 (U.S.$20) per year
                          compared with Can$113 (U.S.$83)15 per year for service to each door. By
                          March 1995, about 5 million, or 40 percent, of the 12.3 million delivery
                          addresses served by CPC, received door-to-door delivery, while 15 percent
                          received group and community box delivery.

                          Some customers argued that the boxes (1) were less convenient,
                          particularly in the winter months; (2) were less accessible for disabled
                          persons; (3) presented safety concerns; and (4) violated CPC’s mandate to
                          provide similar services to same-size communities. In 1985, a community
                          brought a legal complaint against CPC, saying that use of community mail
                          boxes, instead of door-to-door delivery, violated the concept of “basic
                          customary postal service” required by the CPC Act.16 The court upheld CPC’s
                          decision to use community boxes, and said that CPC’s obligation was only
                          “to have regard to” the factors set out in the act, and that there was no
                          positive duty for it to provide door-to-door delivery.




                          14
                           Group mail boxes were used primarily in rural collection and delivery situations where “clustered”
                          delivery was considered to be a cost-effective delivery mode.
                          15
                            Conversion to U.S. dollars is calculated using the 1985 average exchange rate of Can$1.3659 = U.S.$1.
                          16
                           The Mandate of Canada Post Corporation and Its Development, Prepared for Mandate
                          Review,(Nov. 8, 1995), and other CPC documents.



                          Page 57                                               GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section IV
                Key Events Affecting CPC




GAO   CPC's Maintenance of "Basic
      Customary Postal Service" (cont.)
      Legislation did not define "basic customary
      postal service"
       Post office closures and private
       ownership were challenged in the courts
       Government imposed moratorium on
       further post office closures and franchise
       conversions in 1994




                Page 58                    GAO/GGD-97-45BR Postal Reform in Canada
                          Briefing Section IV
                          Key Events Affecting CPC




CPC’s Maintenance of      Since reform, there have been a number of challenges to CPC’s efforts to
“Basic Customary Postal   convert post offices to private ownership and close others.17 For example,
Service (cont.)           with regard to CPC’s conversions of post offices, in 1988, a postal union
                          filed a complaint in court that CPC had operated outside its authority in
                          creating a franchise outlet in a pharmacy. However, in 1994, the court
                          dismissed the complaint, saying that CPC has the rights, powers, and
                          privileges of a “natural person” to contract with others to act on its behalf
                          in the collection or delivery of letters as long as it does not extend an
                          exclusive license. With regard to closures, in 1991, residents of four rural
                          communities filed a complaint in court to set aside CPC’s decision to
                          convert post offices to private ownership. The court held that CPC’s
                          mandate did not impose a duty to provide a local post office in each
                          community as a basic customary postal service. In another case, a citizens’
                          coalition and the Canadian Postmasters and Assistant Postmasters
                          Association challenged the legality of CPC’s closure of post offices without
                          the issuance of a regulation. The court determined that the CPC Act allows,
                          but does not require, CPC to issue regulations to close post offices.

                          In 1994, in response to customer concerns, the newly elected Canadian
                          government imposed a moratorium on CPC’s post office closure and
                          conversion program. The Minister Responsible for CPC announced that
                          there would be no further closures of rural post offices and that CPC would
                          continue the conversion program in urban areas only after consultation
                          with Postal Service Customer Councils. To offset financial losses caused
                          by the operation of post offices that are not cost effective, the government
                          agreed to make greater use of CPC services offered through its retail
                          network. CPC officials said that they believe the conversions to private
                          ownership did not degrade services and that CPC has adhered to the
                          moratorium on rural closings.




                          17
                           The Mandate of Canada Post Corporation and Its Development, Prepared for the Mandate Review,
                          (Nov. 8, 1995), pp. A1, A2, A3.



                          Page 59                                           GAO/GGD-97-45BR Postal Reform in Canada
               Briefing Section IV
               Key Events Affecting CPC




GAO   Concerns About Financial
      Accountability
      Past government-sponsored reviews of CPC
      recommended a third-party regulator
        1985 review led to experiment with
        third-party regulator (concerns about lack
        of cost data)
        1988 government experimented with
        third-party regulator
        1990 review called for regulator and
        eventual private ownership of CPC (public
        concerns about accountability)




               Page 60                    GAO/GGD-97-45BR Postal Reform in Canada
                           Briefing Section IV
                           Key Events Affecting CPC




Concerns About Financial   The Canadian government has made several reviews of CPC, some of which
Accountability             have resulted in recommendations for additional government oversight of
                           CPC, including establishing a third-party regulator to oversee postal
                           ratesetting. In 1985, a newly elected government requested that the
                           Minister Responsible for CPC conduct an independent review of CPC’s
                           mandate to determine, among other things, whether a third-party regulator
                           should be established.18 The resulting report concluded that CPC did not
                           have sound procedures for determining costs. Further, the Corporation
                           was unlikely to achieve its self-sufficiency goal. The report recommended
                           establishment of an independent third-party rate regulator, but the
                           government did not adopt the recommendation.

                           In 1988, the Minister for Consumer and Corporate Affairs in Canada
                           presented models for third-party regulation of certain CPC activities. The
                           government directed that a newly created Postal Service Review
                           Committee review CPC’s rate and service proposals, request public
                           comments on the proposals, and make recommendations supporting or
                           rejecting CPC’s proposals. In its review of CPC’s 1990 proposed rate
                           changes, the Committee said that CPC had not provided sufficient volume,
                           cost, or revenue data to assess the proposed rates or to determine whether
                           CPC cross-subsidized its competitive product prices with monopoly
                           revenues. Even so, the government approved CPC’s proposed rate
                           regulations. The government later eliminated the Committee.

                           In 1990, a Parliamentary committee responded to public concerns about
                           CPC’s  accountability by conducting a review of CPC.19 The Committee was
                           concerned that the Postal Service Review Committee had been unable to
                           fulfill its mandate because of the lack of CPC data. Among other
                           recommendations, it recommended the establishment of a third-party
                           regulator. The government did not adopt the recommendation.




                           18
                            Alan R. Marchment, Chairman, Report of the Review Committee on the Mandate and Productivity of
                           Canada Post Corporation, (Canadian Government Publishing Centre, Nov. 1985).
                           19
                            House of Commons Issue No. 53. Standing Committee on Consumer and Corporate Affairs and
                           Government Operations. Moving The Mail: Canada’s Postal Service in the 1990s, (Ottawa: Canadian
                           Government Publishing Centre, Apr. 1990).



                           Page 61                                            GAO/GGD-97-45BR Postal Reform in Canada
                Briefing Section IV
                Key Events Affecting CPC




GAO   Concerns About Pricing and
      Competitive Practices
      Competitors allege cross-subsidization of
      prices and unfair competition
       Bureau of Competition Policy
       examination of CPC-Purolator merger
       found no basis for cross-subsidization
       allegations
       Bureau of Competition Policy did not
       address competition issue




                Page 62                    GAO/GGD-97-45BR Postal Reform in Canada
                            Briefing Section IV
                            Key Events Affecting CPC




Concerns About Pricing      In 1993, CPC acquired a competing overnight delivery service courier,
and Competitive Practices   Purolator Courier Limited, which provided CPC with about 40 percent of
                            the small-parcel, express-mail market in Canada. The Bureau of
                            Competition Policy examined the acquisition pursuant to its authority
                            under the Competition Act to approve mergers of Canadian companies.
                            Public comments obtained by the Bureau’s investigators indicated
                            concerns regarding (1) possible cross-subsidizing of CPC’s prices of its
                            courier services and (2) the appropriateness of allowing a Crown
                            corporation to compete with the private sector.

                            Regarding the first concern, the Bureau investigated the
                            cross-subsidization issue and reported it was satisfied that CPC had not
                            cross-subsidized its courier service prices.20 According to the Bureau’s
                            report on the investigation, CPC provided a substantial amount of
                            information on its costs, costing methodology, and the procedures and
                            policies in place to monitor the allocation of costs among its various
                            products. The accuracy of this information was verified by an independent
                            accounting firm.

                            Regarding the second concern, the Bureau determined that it was not in its
                            purview to examine whether a Crown corporation should compete with
                            firms in the private sector because the Competition Act was established to
                            encourage competition.




                            20
                               Bureau of Competition Policy. Backgrounder: “Canada Post Corporation/Purolator Courier, Limited”
                            (n.p), Nov. 1993.



                            Page 63                                             GAO/GGD-97-45BR Postal Reform in Canada
               Briefing Section IV
               Key Events Affecting CPC




GAO   Government Requested and
      Conducted a Review of CPC
      CPC 's Minister conducted mandate
      review during November 1995 - July 1996
        Staff received 440 submissions, 1,084
        letters, and 1,116 telephone calls
        Public meetings held in six Canadian
        cities




               Page 64                    GAO/GGD-97-45BR Postal Reform in Canada
                         Briefing Section IV
                         Key Events Affecting CPC




Government Requested     In November 1995, the Minister Responsible for CPC arranged for a
and Conducted a Review   “Canada Post Mandate Review” because of (1) concerns by competitors
of CPC                   and others about CPC’s mandate and practices and because (2) the
                         government had not reviewed CPC’s mandate since 1985. The review was
                         done by a committee that consisted of a chairman, appointed by the
                         government, and staff who examined various CPC-related financial and
                         policy issues. After soliciting public comments regarding CPC, the review
                         committee staff told us that they received 440 submissions, 1,084 letters,
                         and 1,116 telephone calls with comments. The committee staff obtained
                         additional information at public meetings held in six Canadian cities. Both
                         CPC and the Bureau of Competition provided detailed written comments
                         and analyses to the review committee. The mandate review was completed
                         in July 1996.




                         Page 65                                GAO/GGD-97-45BR Postal Reform in Canada
               Briefing Section IV
               Key Events Affecting CPC




GAO   Recommendations by the 1996 CPC
      Mandate Review
      Make universal service mandate explicit
      Retain post office closing moratorium
      and revise door-to-door service policy
      Revise delivery standards
      Establish rural delivery standards
      Retain exclusive privilege authority but
      no third-party regulator




               Page 66                    GAO/GGD-97-45BR Postal Reform in Canada
                              Briefing Section IV
                              Key Events Affecting CPC




Recommendations by the        In the July 1996 report, the review committee Chairman made many
1996 CPC Mandate Review       recommendations covering a broad range of CPC policies and practices.
                              Regarding universal mail service, he recommended that in any future CPC
                              Act amendments, the obligation to provide universal service at a uniform
                              rate for letter mail be explicitly included. The Chairman also
                              recommended that

                          •   the existing moratorium on post office closings and conversions be
                              retained,
                          •   CPC implement door-to-door service delivery for disabled and elderly
                              customers, and replace community boxes with door-to-door service in
                              those urban areas where some door-to-door delivery already exists, and
                          •   CPC (1) improve the speed and reliability of mail delivery and return to the
                              previous 1-, 2-, and 3-day letter mail delivery standards for urban areas that
                              CPC had relaxed and (2) establish delivery standards for rural areas.


                              Regarding ratemaking, the Chairman recommended that the government
                              retain the CPC exclusive privilege authority in the CPC Act and
                              recommended that CPC and the government vigorously enforce this
                              authority. In addition, several recommendations were made to increase
                              revenues to help offset the cost of service improvements. The Chairman
                              rejected third-party regulation as an option for CPC because, among other
                              reasons, such regulation would require the government to redefine its
                              relationship with CPC, and it would be too time consuming and costly. Also,
                              he recommended that the required government approval of CPC regulations
                              should be retained and CPC should provide at least a year’s advance public
                              notice of any changes in rates, rate discounts, and mail preparation
                              standards for businesses.

                              As of November 1996, the Minister Responsible for CPC was still
                              considering the recommendations, but had accepted two
                              recommendations (1) continuing the moratorium on post office closings
                              and (2) discontinuing delivery of certain advertising mail.




                              Page 67                                 GAO/GGD-97-45BR Postal Reform in Canada
Appendix I

Information on Governance and Postal
Ratemaking of Canada Post Corporation and
the U.S. Postal Service

                                          Canada Post Corporation                                United States Postal Service
Head of postal administration             President/Chief Executive Officer                      Postmaster General/Chief Executive Officer
Government official who selects head of   Governor in Council, a special committee               Postal Governors
postal administration                     of the cabinet
Oversight administration                  Minister Responsible for Canada Post                   Congress and the Postal Rate Commission
Government approval of operating and      Treasury Board and Minister of Finance                 None required
capital budgets
Subject to antitrust laws                 Subject to the Competition Act, with                   Not subject to antitrust laws
                                          respect to those activities open to
                                          competition
Legal financial mandate                   Have regard to the need to operate on a                Operate on break-even basis
                                          self-sustaining financial basis
Financial goal                            CPC plan for 12-percent return on                      Operate on break-even basis
                                          shareholder equity
Postal rates that require governmental    Government must approve basic                          Postal Rate Commission issues
approval                                  single-piece letters (domestic and                     recommended decisions to USPS
                                          international), international printed matter,          Governors on all proposed rates except
                                          literature for the blind, some registered mail)        international rates and nonpostal services;
                                                                                                 Governors may accept or reject decision,
                                                                                                 resubmit proposal, or unanimously modify
                                                                                                 a resubmitted decision
Uniform postal rates                      Not legally required, but provided in                  Legally required and provided by USPS
                                          practice for basic letter mail
Basic letter rate (as of Nov. 1996)       Can $0.45 (U.S. $0.33)a                                U.S. $0.32
Last increase in basic letter rate        1995 from Can $0.43 (U.S. $0.31)a                      1995 from U.S. $0.29
                                                            b
Frequency of mail delivery                5 days/week                                            6 days/week
Delivery standard for local mail          2 business days                                        1 day
                                          a
                                          Conversion to U.S. dollars is calculated using the Dec. 31, 1996, rate of exchange of
                                          Can$1.3698 = U.S.$1.
                                          b
                                              Except in remote northern communities accessible only by air and difficult to serve in winter.



                                          Source: CPC, USPS data.




                                          Page 68                                                  GAO/GGD-97-45BR Postal Reform in Canada
Appendix II

Major Contributors to This Briefing Report


                     Michael E. Motley, Associate Director
General Government   James T. Campbell, Assistant Director
Division             Hazel Bailey, Writer-Editor


                     Arleen L. Alleman, Senior Evaluator
Denver Regional      Rudolfo G. Payan, Senior Evaluator
Office




(240214)             Page 69                                 GAO/GGD-97-45BR Postal Reform in Canada
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