...

through the systematic reduction of the base upon which interest charges are computed and collected through tolls. . . . [W]e believe that these costs should be amortized over the estimated useful life of the canal. In the case of the locks and chambers, this has been established as 100 years from August 14, 1914, the date the canal was opened to traffic. We believe this same pattern should be followed with respect to the canal itself.

"Our review of the operations of the Panama Canal Agency disclosed that the income of the agency from 1914 to 1951 was adequate to cover depreciation or amortization of assets previously considered nondepreciable, to provide adequate provisions for depreciation on other assets, and to leave a surplus of approximately $24 million. The Company agrees that the income was sufficient to cover these costs and leave a substantial surplus. Consequently, we believe it would be inequitable to require future customers to pay for depreciation or amortization for the first 37 years, which, although not recorded, has been recovered through tolls. Thus, we recommend that provisions be made for the amortization or depreciation commencing with the opening of the canal or the date the asset was placed in service, if later than that date, and the writing off against income earned during that period of the amortization and depreciation which had accrued to July 1, 1951."

Again, at pages 29-30, the witness from the Comptroller General's Office testified that "The tolls would pay it for the future. They have actually paid it for the past. . . ."; and the amortization will continually “reduce the amount on which interest is computed and paid to the Treasury and reduce the amount that must be recovered from the tolls." Repeatedly (Hearings, pp. 29-33) Committee questions sought assurances that the changes would not force tolls increases.

Mr. Newman of GAO testified: "We have to change the basic legislation." Congressman Davidson agreed (Hearings, p. 33).

Steamship witnesses opposed the legislation (Hearings, pp. 37-41), testifying that "self-liquidation is not required in the law, nor is there any legislative history to indicate it. The purpose of Public Law 841 was not that the canal should be self-liquidating, but rather that it should be self-sustaining, which indeed it has been." Further, to "depreciate these assets would violate fundamental principles of accounting, and ratemaking." The steamship witness requested the Committee to withhold any action on the bill pending Senate consideration of a bill addressed to a number of fiscal and managerial reforms of canal operations and costs.

The following observations, highly relevant today between Committee Counsel Mr. Zincke and carrier witness Mr. Dewey appear at page 41 of the Hearings:

Mr. ZINCKE. "Mr. Dewey, in view of the wave of anti-colonialism that exists in the world today, have you any opinion as to the attitude or the probable attitude of either Panama, the United Nations, or the United Nations successor, to continued occupancy of the Canal Zone by the United States at a time when the United States total investment had been recovered?

Mr. DEWEY. "Mr. Zincke, our association and our colleagues in the industry have given considerable though to that aspect of writing off the entire investment in the Panama Canal. We do not pose as any foreign policy experts, but it does seem that if you write off the entire investment through this amortization schedule you do set the stage for later years when those who are reaching out for an excuse to make it embarrassing for the United States to retain its present position at the canal, you make it possible for those parties to argue that the United States has recovered its entire equity at the canal and therefore that the only thing remaining, perhaps, is the vested right itself.

"I do not know if that answers the question you had, but it certainly sets the stage for setting up the canal for grabs.

"Mr. Counsel, I might add one comment to what I have already said on this subject. Dr. Richard J. Alfaro, President of the Panamanian Delegation to the United Nations, in November 1946 addressed the General Assembly in the following language, and I quote:

"The strip of land known as the Panama Canal Zone has neither annexed, ceded nor leased, nor has its sovereignty been transferred by Panama to the United States. The United States administers this strip of land by virtue of a very specified stipulation in Article II of the Treaty (in) 1903, which

reads as follows:

""The Republic of Panama grants to the United States the use, occupation, and supervision of a zone of land and of lands covered with water for the construction,' etc."

"Now, if Dr. Alfaro is correctly quoted, he leaves out several fundamental aspects of our tenure at the canal. He leaves out the words 'in perpetuity' after the granting phrase, a very important element of absolute title. And he substitutes the word 'supervision' for 'control,' another very important differ

ence.

"It just seems to me that there are individuals in a position of authority who look upon our tenure at the canal as something that is transitory, and to write off any investments the United States may have, is something to which this committee ought to give serious consideration to."

Mr. ZINCKE. "Mr. Chairman, I offer for the record a cartoon appearing in a Spanish language publication, La Hora, August 8, 1955. It depicts General Nasser of Egypt calling President Arias of Panama on the telephone and saying, 'I already have my canal. How about you?'"

The Committe also asked the opinion of the IRS on the legislation. The reply (Hearings, p. 43):

"The Treasury Department is generally in accord with the principle of recoving the Government's investment in income-producing enterprises. However, we do not have sufficient information to make comment on the merits of the provisions of the bill for the depreciation of fixed assets which, before July 1, 1951, were treated as nondepreciable."

b. SENATE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

The package of reforms cited by the steamship company witness before the Panama Canal Subcommittee was included in a bill S.2167. The bill would have transferred the administration of the Canal Company and Canal Zone Government to the Secretary of Commerce, would have established various costs, pricing and reserve policies, and make changes in the tolls formula. The Committee Report 9 on the bill noted recommendations by GAO (Report, p. 25) including:

"4. That in addition to depreciation now being paid into the United States Treasury on depreciable assets of the Canal Company, the Company be required to pay depreciation on the so-called nondepreciable assets, í.e., the nonwasting assets such as lands, excavations, channels, harbors, spillways, etc."

"9. That there be a requirement in the tolls formula for amortizing the net direct investment of the Government in the Panama Canal Company." In rejecting both recommendations, the Committee stated:

4. Description of "Nondepreciables”

"An individual in dealing with the Internal Revenue Bureau may not under its rules depreciate nonwasting assets (regulation 118, par. 39.23 (1)2, Internal Revenue Code). To have the Government enjoy this same privilege when it is in juxtaposition with a private interest is inconsistent. The theory behind the rules applies equally to the government as to the individual. If depreciation were required to be paid on the nonwasting Government assets at the canal, the result would be that after full depreciation had been paid, then the Government would have its initial investment, plus the assets, in the same condition as at the outset. This is the precise result that the above rule is designed to prevent. To reason that it must be done in this case because it may be necessary for the United States Government to abandon its canal operations and holdings in the zone seems to question the sovereignty of the United States in the zone. The committee did not consider this proper." (Report, p. 27) "9. Amortization"

"The committee declined to accept this suggestion even though they are considerably attracted to it. The General Accounting Office in its testimony before the committee made a very strong case for such amortization, and in fact we understand that the entire proposal is not unattractive to intercoastal and offshore cargoes, which move through the canal, and which pay the costs of this utility.

• Transferring Administration of Panama Canal Company to the Secretary of Commerce, Senate Committee on Interstate and Foreign Commerce, Report No. 2375 to accompany S.2167, 84th Cong., 2d Sess., June 27, 1956.

79-367-77- -23

"The attractiveness comes about by reason of the fact that there is coupled with the suggestion for amortization one that the present net direct investment be reduced by the amount that would represent amortization in the years previous to 1951. This is on the basis that the Company made sufficient income during those years to amortize but failed to do it, and on the basis that that failure is not the fault of the current management or of the tolls payers. This retroactive application of amortization would thus take off some $126 milion if it were at $3 million per year for the 43 years since 1914 when the canal started operation. The $3 million per year is arrived at by reason of the fact that the original investment at that time was computed at about $300 million. This would put the amortization on a 100-year schedule.

"The reason, however, that the committe did not accept this suggestion is because it would impose upon the commerce passing through the canal the immediate burden of a regular annual additional corporate charge—i.e., an amount to be paid back to the Treasury for amortization. That in itself is not objectionable, but what the committee cannot consent to at this time is establishing this additional corporate cost based upon a net direct investment of the Government concerning which there is a long standing controversy. Further evidence of the fact that the amount of the net direct investment is subject to attack is the following language and particularly that which the committee has underscored, taken from page 40 of the 1952 GAO audit of the Panama Canal, House Document No. 207, 83d Congress (printed document erroneously bears fiscal year ending June 30, 1953-should be 1952):

"Primarily because of major deficiencies in the accounting polices and practices of the Panama Canal agency and the consequent lack of reliable financial and operating data, the information contained in this report is generally restricted to operations during the year ended June 30, 1952, and the financial position of the entities at that date. Furthermore, there is not sufficient information readily available to indicate the extent to which prior operations of the Panama Canal agency have recovered, through tolls and other revenues, the cost of its activities or to determine the full effect of property and other adjustments required to put the accounts on the sound, realistic basis contemplated by the recent reorganization.

"The tolls payers have repeatedly asked for some adjustment of that investment in recognition of the national defense value of the canal. They claim that the only recognition of that value is the $50 million reduction of the capital base (on which tolls must pay interest) brought about by the provision of Public Law 841 which eliminated interest during construction from the capital base. Government agencies just as consistently claim to the contrary. This committee feels that there should be no change in the present method of attempting to retire the debt; that there should no change in the present freedom of tolls from paying interest during construction and that there should be no change in any of the other items having the effect of increasing corporate charges until there is some authoritative statement and consequent action on the national defense value of the canal."

S.2167 never came to a vote. (See 102 Congressional Record 11541, 12901, 13901.)

5. 1960

PANAMA CANAL SUBCOMMITTEE, FEBRUARY-MARCH 1960 10

These hearings considered bills, which, among other things, applied the Administrative Procedure Act to hearings and decisions on tolls increases and changes in measurement rules, and one bill requiring supporting activities to pay a greater share of costs, and another requiring tolls to pay for supporting services.

Governor Potter, also President of the Panama Canal Company testified (Hearings, p. 9):

"Neither do the toll rates make any allowance for depreciation or amortization on about $280 million of fixed assets now classified by law as 'nondepreciable."

Governor Potter added (Hearings, p. 14): "The canal is being amortized except for the so-called nondepreciables, $280 million worth of them. They are

10 Panama Canal Toll Formula, Hearings before the Subcommittee on Panama Caral of the Commiteee on Merchant Marine and Fisheries, House of Representatives, 86th Cong., 2d Sess. on H.R. 8983 and H.R. 10968, February-March, 1960.

小

the excavation itself, the land on which the excavation sits, and I believe the locks. They, by act of this Congress, are considered as nondepreciables." 6. 1967

PANAMA CANAL SUBCOMMITTEE, MAY 1967

11

These hearings heard testimony from members of the Atlantic-Pacific Interoceanic Canal Study Commission regarding a bill to authorize a study of a sea-level canal.

The following discussion between Congressman Downing and Mr. Sheffey, Executive Secretary of the Commission, is found at page 36 of the Hearings: Mr. DOWNING. "You are not depreciating your capital investment?”

Mr. STEFFEY. "It's not allowed to charge tolls high enough to amortize itself under the present law."

The hearings also included testimony from the Panama Canal Company, Arthur Andersen & Co. (including Mr. Kujawa), and Stanford Research Institute on the results of a tolls study commenced in 1965 and scheduled for completion in 1968. Acording to Governor Leber, President of the Panama Canal Company, "tentative" conclusions of the tolls study included:

(a) Revenue from tolls can be increased (1) Up to 25 percent with little effect on level of traffic; but (2) Traffic will become progressively smaller as the magnitude of tolls increases in excess of 25 percent." (emphasis added). Ely Brandes of Stanford Research Institute, who since has performed a number of studies of cargo sensitivity to tolls for the Canal Company, testified (Hearings, pp. 129-30):

"Another alternative mode of transport, the railroads must be considered particularly with respect to the U.S. intercoastal trade. Intercoastal shipping has been reduced considerably in the last few decades and only in recent years have container ships given hope for revival of intercoastal shipping through the canal. However, with substantial increases in tolls intercoastal shipping would again be very vulnerable to further inroads by rail transport."

Also, page 131 of the Hearings: ". . . there are more alternatives over the long term than over the short term; furthermore, even for those alternatives which are available over the short term, the availability tends to be limited by various constraints. Thus it appears inevitable that the impact resulting from a given toll increase will be far greater in the long run than in the short run." (Emphasis added).

Mr. Brandes added at page 136: "For intercoastal shipments between the east coast and west coast of the United States the primary alternative is rail transportation. Over the past decade coastal shipment has declined very sharply and only in recent years has there been a slight recovery due to the growth in container ships. However, the comparative edge that intercoastal shipping holds at present is slight, and any sizable shift in cost could have a serious effect on traffic volume."

7. 1973

A. MERCHANT MARINE AND FISHERIES COMMITTEE, APRIL 1973 Previous hearings recognized the need for legislation-legislation never passed by Congress for amortizing or depreciating the nondepreciable items. In April 1973, the Merchant Marine and Fisheries Committee held hearings on Panama Canal treaty negotiations and contemporary activities of the Panama Canal operation. This was the first detailed presentation on Canal operations to the Committee since April 1970. The April 1970 hearings contain no reference to amortization or depreciation of nondepreciable items.

The following discussion appears at pages 28-29 of the 1973 hearings.

Mr. LEGGETT. "You do not include in that the cost of amortizing the cost of the canal?"

General PARKER. "We have been depreciating a little over half the investment in the canal as a depreciation that goes into the cost of operation every year, $10 million of our costs.

11 Canal Tolls and Route Studies, Hearings before the Subcommittee on Panama Canal of the Committee on Merchant Marine and Fisheries, House of Representatives, 90th Cong., 1st Sess. on H.R. 6791, May, 1967, Serial No. 90-6.

12 Panama Canal Briefings, Hearings before the Committee on Merchant Marine and Fisheries, House of Representatives, 93rd Cong., 1st Sess., April 13, 1973, Serial No. 93-8.

"We are adding an additional element of amortization or depreciation starting in our budget for fiscal 1974 which we will be discussing with the transportation subcommittee of House Appropriation Committee next Monday. We thought that hearing would be behind us before we appeared before you.

"That will add an additional $8 million or $10 million of cost to our operating costs.

"Now, the law requires us to raise tolls if, and only if we are unable to meet expenses. Since we have been able to meet expenses each year, it has not been necessary to come in with a request for tolls.

"Out of the toll rate that was established back in 1914, with a change in measurement in 1938, we have been able to finance the daily operations of the canal as well as the capital improvements necessary to increase its capacity. "We have attempted to follow the desires of Congress in this regard. "Through this fiscal year, we are able to operate on a better than break-even basis, at least we are recovering our costs.

"As I indicated to you in the budget for fiscal year 1974, that we are discussing with the Appropriations Committee on Monday, our operating results for the year will show a deficit in operating margin of $3 million to $4 million as nearly as we can predict right now.

"As a result of that operating deficit, the Board of Directors has directed me to consider whether or not it is appropriate to proceed with a recommendation to raise tolls. We have that under study at the present time."

Mr. LEGGETT. "Would this be the first time tolls were adjusted in recent history?"

General PARKER. "If we should come in with such a recommendation, yes." Apparently, from the above discussion, Governor Parker had no intention of raising the issue of authority to amortize or depreciate nondepreciable items. His prepared statement (Hearings, pp. 54-62) does not even mention the matter. We believe this is the first public mention of taking this action. The comment elicited no questions from the Committee members present-Congressmen Leggett, Kyros, and Breaux.

The Canal Company did propose a rate increase in FY 1974, the first in the Canal's history. The above discussion shows this tolls rate increase was a direct result of the accounting changes, creating new expenses without which the Canal Company would have shown a profit.

B. MERCHANT MARINE AND FISHERIES COMMITTEE, JULY 17, 1973 13

These hearings concerned the importance of the Canal to carriers and commerce, toll structure, and forecasts of Canal capacity and future shipping requirements. The prepared statement and extemporaneous remarks of Governor Parker did not refer to tolls increases or to depreciation or amortization of nondepreciable items. Witnesses from AIMS testified to the adverse effects upon the maritime industry and on commerce of substantial tolls increases (Hearings, pp. 48-50), as did a witness for the American Maritime Administration (Hearings, pp. 59-60, 63-64). Although questions of Governor Parker concerning a tolls study commenced at page 72 and continued thereafter, no reference was made to depreciating nondepreciable items in the Governor's testimony or in the summary of information concerning tolls and alternative tolls policies submitted for the record (Hearings, p. 84). Governor Parker noted a future recommendation to the Canal Company Directors in October 1973 of whether an increase should be made. Governor Parker did testify (Hearings, p. 83):

"You yourself, and your committee are going to have to arrive at some basic conclusions in your own minds as to whether to reaffirm the intent of Congress in what we establish as a tolls rate; that is, whether we continue to just charge established tolls to recover the costs of operating the canal without making significant profit, or without generating other sums which could be used for other purposes, such as payments to Panama.

"Mr. Chairman, that type of question, I think, will be uppermost in the decision process in arriving at this first stage of establishing a new tolls system if one is to be established.

13 Shipping and Canal Operations, Hearing before the Subcommittee on Panama Canal, Committee on Merchant Marine and Fisheries, House of Representatives, 93rd Cong., 1st Sess., July 17, 1973, Serial No. 93-19.