they would have the effect of increasing the Company's fixed charges for interest, depreciation and amortization."

Among the continuing recommendations of the Comptroller General was depreciation of Canal construction costs (Report, p. 9):

"Amend paragraph (b) of section 412, title 2 of the Canal Zone Code, and require that prescribed toll rates be calculated to cover adequate provisions for depreciation or amortization of Canal construction costs (over the estimated useful life of the waterway from 1914, or from the date the asset was placed in service if later than 1914, but in no event to extend beyond 2014)." The report explicitly noted that these charges are excluded from the tolls formula (Report, pp. 17-18):

"Tolls shall be prescribed at a rate or rates calculated to cover, as nearly as practicable, all costs of maintaining and operating the canal, together with the facilities and appurtenances related thereto, including interest, depreciation, and an appropriate share of the net costs of the Canal Zone Government (2 Canal Zone Code 412(b)). Excluded from the formula by specific provision of the code or by omission from section 412(b) are (1) interest on the investment in Canal Zone Government, (2) interest on interest during construction, (3) costs allocable to national defense, and (4) amortization of $340,000,000 for cost of construction and improvement of the waterway. We believe these costs, except interest on interest during construction and costs allocable to national defense, should be included in the formula." Again, at page 27, the Report stated:

"No depreciation or amortization has ever been accumulated against construction costs of $290,000,000 for excavation and fill of channels and harbors, breakwaters, dams and spillways, locks, drydocks, etc. Congressional authorization should be obtained to provide that these items be included as elements of costs in the toll rate calculation."

In July 1955, during hearings on the new treaty with Panama before the Senate Foreign Relations Committee (The Panama Treaty, 84th Cong., 1st Sess., on Executive F, July 15, 18 and 20, 1955), The Panama Canal Company upon request, supplied for the record a description of the Company and fiscal data. The statement, noted (Hearings, p. 69): "The statute does not provide for the amortization of nondepreciable assets."7

Later in the same hearings, a witness (Mr. Mayer) representing steamship companies, testified that toll revenues paid all annual expenses, including depreciation and operation, but not construction and returned $274 million (Hearings, p. 139):

Senator CAPEHART. “It has returned $274 million after all expenses have been paid?"

Mr. MAYER. "Yes, but not the cost of construction."
Senator CAPEHART. "That is not expected."

Further in the same hearings (Hearings, p. 165):

Senator FULBRIGHT. "Do you have any charge in your statement-in your operating expenses-for amortization of the original investment?"

Mr. RUNNESTRAND (Assistant Secretary and Counsel, Panama Canal Company). "No, sir; only for depreciation."

Senator FULBRIGHT. "What does the depreciation apply to; only the improvement?"

Report on Audit of Panama Canal Company and the Canal Zone Government for the Fiscal Year Ended June 30, 1954, House Doc. No. 160, 84th Cong., 1st Sess., May 16, 1955. 7 The statement also noted (Hearings, p. 70):

"Prior to the extensive reorganization of the Panama Canal agencies effective July 1, 1951, the canal was operated on an appropriation fund basis under usual governmental accounting principles, without an interest requirement and without other specific fiscal provisions comparable to those prescribed by statute in the 1951 reorganization. However, applying current fiscal criteria, the tentative computation of overall operating results of the Panama Canal enterprise from inception to July 1, 1951 indicates that the enterprise as a whole recovered during that period all costs and interests on the investment at an average rate of 3 percent per annum.

Mr. RUNNESTRAND. "Only those capital accounts which are under general acounting principles are depreciable. That leaves a large capital investment of, I think, about $280 million of nondepreciable assets that are not amortized. "There is pending legislation under consideration by the substantive committees of Congress as to whether or not amortization should be required." 4. 1956

A. HOUSE PANAMA CANAL SUBCOMMITTEE, APRIL 1956°

These hearings were directed to two bills-H.R. 5732, which would have repealed section 412(e) of title 2 of the Canal Zone Code, to allow interest during canal construction to be included in investment for interest charges against tolls; and H.R. 5733, which would have authorized depreciation or amortization of nondepreciable items at the rate of 1% per year, and would amend the tolls formula in section 412(b) to permit recovery of "amortization of any fixed assets which are classifiable as nondepreciable." Both acts would be deemed effective as of July 1, 1951. The Panama Canal Company took no position on H.R. 5732, but supported H.R. 5733 (Hearings, p. 4) Neither bill was passed

Mr Whitman, Secretary of the Panama Canal Company, testified (Hearings, p. 3):

"The question of what burden should be imposed on the shipping industry in the use of the canal is one that was peculiarly for this committee and for the Congress at the time of the adoption of Public Law 841. The thinking of the committee and of the Congress was thus written into the law. . . . [We] feel that the question of what burden shall be placed on tolls is not an administrative matter but is a question of policy for the Congress. Our part is only to apply the law as written."

The hearings contain at pages 21-24 a letter from Governor Seybold to Speaker Rayburn on the need for the legislation. The letter describes adjustments to be made in Canal Company accounts:

"The principal adjustments fall in three major categories:

(a) The elimination of the cost of defense facilities, excess plant and abandoned projects.

(b) The capitalization of facilities and improvements useful to the company's operations previously expensed.

(c) The establishment of adequate reserves for depreciation and obsolescence. "The existing statute would appear to give adequate authority to make such adjustments in the capital accounts. However, the establishment of depreciation reserves as of the transfer date for certain major capital items previously classified as nondepreciable and the current-accrual of depreciation against such properties is a change in financial policy of such material significance as to indicate the necessity for specific Congressional authorization.

If the legislation is enacted, the company intends to establish depreciation reserves on the following classes of assets transferred to it on July 1, 1951, previously considered to be nondepreciable: Channel and harbors, Breakwaters, Excavation and fill for dams and spillways, Locks excavation and fill, Drydock excavation, Cristobal.

"The cost of these facilities (exclusive of interest during construction) has been tentatively determined to be $273 million and the accrued depreciation at the transfer date, using the rate of 1 percent per annum, has been tentatively computed at $92 million."

Regarding treaties, rights, etc., Governor Seybold's letter stated (Hearings, p. 22):

"After classifying the foregoing assets as depreciable, there would remain approximately $13 million invested in the acquisition of rights, privileges, and lands in the Canal Zone ($15 million if interest during construction is authorized for inclusion in the tolls base under the legislative proposal being submitted separately, the cost of which is properly classified as nondepreciable. The recovery of this amount through amortization clearly requires authorizing

8 Interest During Construction and Amortization of Investment in Panama Canal, Hearings before the Subcommittee on Panama Canal of the Committee on Merchant Marine and Fisheries, House of Representatives, 84th Cong., 2d Sess., on H.R. 5732 and H.R. 5733, April, 1956.

legislation, which the subject bill would provide. There would appear to be no basis for making such amortization retroactive back of the effective date of the reorganization, July 1, 1951. Section 2 would specifically authorize the inclusion of amortization of nondepreciable assets in the tolls base."

The letter noted that House and Senate Appropriations Committees had recommended the legislation in 1954 and 1955. A bill, H.R. 9665, was introduced in the second session of the 83rd Congress, but was not acted on prior to adjournment.

Mr. Whitman of the Canal Company testified (Hearings, pp. 24-26): "Public Law 841 enacted in 1950 provides that tolls for use of the canal will be established at rates that will return certain costs of operation, including depreciation. There is no provision for amortization of nondepreciable assets. "We have invested approximately $619 million in fixed assets, and of that amount approximately $286 million at the time of the reorganization were regarded as nondepreciable assets. Since that time, in the course of the evaluation study which has now been completed by the Company, our accounting staff has concluded that a substantial part of those assets formerly classified as nondepreciable are in fact depreciable under standard accounting principles. Those assets that they now consider depreciable amount to $273 million. They regard $13 million of the assets as nondepreciable under sound accounting principles.

"However, when the legislation was enacted in 1950 the whole $286 million had been classified as nondepreciable, and the legislation was undoubtedly enacted on the theory that those assets were nondepreciable. Therefore, before proceeding to depreciate the $273 million that we now regard as legally depreciable, it was felt that we should submit this matter to your committee for approval before undertaking the adjustment of the accounts to reflect depreciation on the $273 million.

"As I said, there is no provision in the law for amortization of a nondepreciable asset, and the Appropriations Committees and the General Accounting Office have both recommended that the law be amended to provide for amortization of these assets. This bill would provide for such amortization."

*

Mr. ZINCKE. "Mr. Whitman, as I understand your testimony, you stated that at the time Public Law 841 was under consideration, that your organization at least represented to the committee that these assets were nondepreciable and that the action of the committee in reporting out what subsequently became Public Law 841 was based, at least in part, upon that testimony. Is that correct?"

Mr. WHITMAN. "Yes, I think that is correct. Undoubtedly the report was based on that testimony. How much weight or consideration was given to it, I do not know."

Mr. ZINCKE. "But at least there was a representation made that $286 million was nondepreciable, and the formula set out in the bill was set out in the light of that testimony?"

Mr. WHITMAN. "I think that is a fair assumption."

"The fiscal data furnished to the committee showed that of those assets $286 million, or whatever the figure was, were nondepreciable, yes, sir, and that was the basis on which the committee considered the legislation."

Mr. ZINCKE. "And subsequently your accountants changed their mind. May I phrase it that way?"

Mr. WHITMAN. "You may; yes, sir."

Mr. ZINCKE. “And decided they were depreciable?"

Mr. WHITMAN. "Yes, sir."

Mr. ZINCKE. "In the light of that, do you not think we should go back and recast the entire Public Law 841?"

Mr. WHITMAN. "I think perhaps that is the question before the committee; yes, sir."

The witness from the Comptroller General's Office testified that amortization would reduce interest charges, and revenues from the Canal prior to 1951 were more than adequate to recover the derpreciation or amortization of the items at 1% a year (Hearings, pp. 26–27):

"We believe that the enactment of this bill will benefit not only the Government by the return of its investment but will favor the users of the canal

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 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, i.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.

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