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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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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Address Correction Requested
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)