Vol. 142, No. 26 — June 28, 2008

Regulations Amending the Letter Mail Regulations

Statutory authority

Canada Post Corporation Act

Sponsoring agency

Canada Post Corporation

Executive summary

Issue

The Canada Post Corporation Act requires the Corporation to provide universal postal service while establishing rates of postage that are fair, reasonable and sufficient to defray the costs incurred in the conduct of its operations. In doing so, Canada Post delivers mail to all Canadians regardless of where they live, five days a week, and meets specific service standards. To assist it in this endeavour, the Corporation benefits from an exclusive privilege on the collection, transmission and delivery of letters. However, the economic value of the exclusive privilege has declined significantly in recent years.

Driven primarily by electronic substitution such as email and electronic bill presentment and payment, as well as the consolidation of invoices by large companies whereby two or more operating divisions combine separate billings into a single envelope, traditional mail volumes per capita are declining in Canada. Overall, volumes of Transaction Mail, which includes bills, statements, invoices, payments and other letters, decreased by 1.6% in 2007 from the previous year.

While Transaction Mail volumes are decreasing, the Corporation’s cost base continues to rise each year, with the addition of approximately 200 000 new addresses that it must service. For instance, in 2007 delivering to the additional addresses added over $20 million to the Corporation’s annual cost of operations. Moreover, overall costs rose by $230 million or 3.2% from 2006, due largely to wage increases and higher transportation and rural delivery costs.

Under the current Letter Mail Regulations, increases in the domestic basic letter rate—the price for sending a letter weighing up to 30 g anywhere in Canada—are determined in accordance with a price-cap formula, introduced in 2000, set to two-thirds of consumer inflation as reflected by the Consumer Price Index. Although the price-cap has ensured modest and predictable basic letter rate increases for Canadians and provided Canada Post with predictability in planning revenue, it does not adequately reflect Canada Post’s costs in operating the postal service, in particular its rising costs for labour, fuel and transportation.

As one of the largest users of transportation services in Canada, Canada Post is extremely vulnerable to fluctuations in transportation and energy costs. Its fleet of more than 7 000 vehicles uses more than 23 million litres of fuel per year. The price of diesel fuel has increased an estimated 100% since 2005. These higher energy costs are being paid either directly by the Corporation or through higher contracting costs to its transportation suppliers. For example, air freight costs have risen significantly. Energy costs for postal facilities, including processing plants, depots and post offices, are also increasing at an alarming rate.

Two directives issued by the Government on December 13, 2006, have also imposed significant cost pressures. Order in Council P.C. 2006-1531 requires the Corporation to continue its financial contribution to the Publication Assistance Program, which supports the mailing costs of eligible Canadian magazines, non-daily newspapers and periodicals mailed in Canada for delivery in Canada. This contribution amounts to $15 million annually until March 31, 2009. The other directive (Order in Council P.C. 2006-1532) requires Canada Post to restore and maintain traditional rural mail delivery. The costs of implementing the rural mail directive are estimated to exceed $300 million over five years.

Objectives

These amendments to the Letter Mail Regulations, effective January 12, 2009, will establish the rates of postage for domestic letter mail items for the next three years and implement a new rate for certain letter mail items that are box-like or rigid.

An increase in regulated letter mail rates will help to ensure that Canada Post’s costs in meeting these pressures continue to be borne by those using the postal system, rather than through any form of government support or subsidy. The amendments will help Canada Post meet its statutory obligation to conduct its operations on a self-sustaining financial basis and continue to provide an excellent postal service for all Canadians. At the same time, stamp increases would remain modest and predictable. Canada Post is obliged under the Canada Post Corporation Act to ensure that rates are fair and reasonable.

Description

This proposal would prescribe rates for all domestic letter mail items, including the basic letter rate, for the next three years. This would ensure that postal costs remain transparent and predictable for Canadians and Canadian businesses and would provide Canada Post with the financial means it needs to meet its various obligations.

The proposed rates are as follows:

The last increase to the basic letter rate was in January 2007, to 52 cents. The proposal would increase the basic letter rate in January 2009 by one cent more than would have been authorized under the price-cap formula. The proposed rate increases for products over 30 g represent a weighted average increase of 2.5% for 2009. On a per-address basis, these proposed rate increases represent an average increase in postage costs of 95 cents annually or 8 cents monthly (or less, if the PERMANENT™ stamp is purchased).

The amendments also set a new rate for letter mail items that exceed 10 mm in thickness and are box-like or rigid. This type of item cannot be processed efficiently or effectively, thereby increasing Canada Post’s processing costs.

The proposed rates for this type of item are as follows:

Canada Post is working with its commercial customers, who are the major mailers of this category of item, to minimize the impact on their businesses while maximizing Canada Post’s ability to sort and deliver the product at the lowest price. This type of product represents less than 0.6% of total mail volume. It is anticipated that some businesses may avail themselves of the opportunity to repackage their goods in order to take advantage of lower pricing options.

Regulatory and non-regulatory options considered

In keeping with its statutory obligation to conduct its operations on a self-sustaining financial basis, Canada Post is working to ensure that its costs are financed by users of the postal service, not taxpayers. Thus, regulation is the preferred approach.

Consideration was given to a reconfiguration of the price cap formula governing the domestic basic letter rate. One option was for rates to increase in accordance with full consumer inflation (rather than two-thirds). Another was to replace the price cap based on consumer inflation with a commercial price cap, i.e. a formula that would reflect increases in the Corporation’s costs of providing the service, such as increases in energy, transportation and labour costs. These options were rejected in favour of a simpler regulatory solution that would provide full transparency and predictability of rates for Canada Post’s customers for three years.

There was no alternative to a regulatory solution for implementing rates for oversized letter mail items that are box-like or rigid.

Benefits and costs

The proposed rate increases, detailed above, are designed to ensure that the Corporation is able to continue to provide an efficient postal service while at the same time meet the objective of the Canada Post Corporation Act to be financially self-sustaining and of the Financial Administration Act to be profitable and pay dividends to the shareholder, the Government of Canada. In doing so, the Corporation is ensuring that the responsibility of sustaining postal services in Canada continues to be borne by the users of the postal system and not taxpayers.

The new rates will be in effect on January 12, 2009. Consumers and businesses will be assured of predictable rates for the next three years, with only modest increases and comparable service levels. Canadian consumers and small businesses will continue to be afforded protection from increases to the basic letter rate through purchase of the PERMANENTÔ stamp, which will always be valued at the current domestic basic letter rate. At the same time, Canada Post will be provided with important financial relief beginning in 2009.

The amendment is expected to have little impact on the competitiveness of Canadian business. All businesses in Canada will be uniformly impacted. Larger businesses can also benefit from incentive rates, which are set at levels lower than the basic letter rate and are not regulated. Even with the new rates, letter mail rates in Canada will continue to compare very favourably with those in other industrialized countries, despite the country’s vast geography, low population density, harsh climate and other factors that impact significantly on the costs associated with providing letter mail service.

Canada Post has a statutory obligation to ensure that postal rates are fair and reasonable. The Corporation remains committed to ensuring its value proposition to Canadians.

Consultation

The Canada Post Corporation Act requires a 60-day consultation period through publication of the regulatory proposal in the Canada Gazette. All representations must be sent to the Minister of Transport. They will be taken into consideration in the preparation of the final regulatory proposal.

Consultations with Canada Post’s commercial customers concerning the implementation of the new oversized letter mail category began in spring 2008. The gazetting process will provide an additional opportunity for these customers to provide their comments on the proposal.

Enforcement

The Letter Mail Regulations are enforced by Canada Post under the Canada Post Corporation Act. No increase in the cost of enforcement is expected as a result of the proposed changes.

Ms. Michelle Gosselin
General Manager
Regulatory Affairs
Canada Post Corporation
2701 Riverside Drive, Suite N0940
Ottawa, Ontario
K1A 0B1
Telephone: 613-734-8207
Fax: 613-734-7207
Email: michelle.gosselin@canadapost.ca