to determine an alternative canal at sea level, and for which $23 million apparently went down the drain. I mean it was a good investment, but we determined the fact that we could not build a competitive canal once again. I think that was part of your rationale, was it not? Mr. KUJAWA. Yes, sir, I was involved in that study on the new canal. Part of that, of course, identified the supership, and the economics of the superships in relation to canals. Mr. LEGGETT. And I know we have had suggestions to actually split ships in two, and take them through the canal, and we are thinking about that, but I guess a lot of this has become moot as a result of the high cost of energy. Now, with respect to the sinking fund, that we currently have. what is the amount currently in the fund? Mr. KUJAWA. Zero. Mr. LEGGETT. Zero? Mr. LEGGETT. Now, what happened in 1974? Was there not a deposit made in 1974? Mr. KUJAWA. No, sir. Mr. LEGGETT. I thought that was the date you first decided to write off this depreciation. Mr. KUJAWA. It is, but what the Company has done with the cash that it has over and above the cash it takes to pay for current wages and materials, is to plow that back into new facilities. Mr. LEGGETT. Do they borrow that, in fact, back from the Treasury? Mr. KUJAWA. Under the law they do not have to borrow it back. They keep it if they need it, and generally they have kept it, and reinvested it in the Panama Canal, and that is the way the Panama Canal has been kept in a more modern operating condition over the years. Without that you have a physically wornout facility. Mr. LEGGETT. And in 1975 did you do the same thing? Mr. KUJAWA. Yes, sir, again over and above taking care of its loss, which has a negative effect on the cash flow. The net cash, after paying for all the operating expenses over the years since 1950, with the exception of a few capital payments to the U.S. Treasury, have been plowed back into the canal. Mr. LEGGETT. Plowed back into the canal. Does that increase your depreciation base? Mr. KUJAWA. It starts the process all over again. Mr. LEGGETT. So that is added to the capital base? Mr. KUJAWA. Yes, sir. Mr. LEGGETT. And so it is just one continuous process, and the United States then to this date has not received any net cash? Mr. KUJAWA. It has received some. I think since 1950 it has received some $40 million back, but in comparison there has been somewhere between $100 million and $200 million that has been reinvested. This is a recycling process. Any organization that needs to perpetuate itself goes through this process. You buy equipment, you depreciate it. You get the cash and buy some more equipment, and you keep on going. Mr. LEGGETT. What do you estimate would be the cost today to replace the canal? Do you have any idea at all? Mr. KUJAWA. Somewhere between $2 billion and $3 billion. Mr. LEGGETT. And if the canal were to be, let us say, amortized over a 50-year period with that kind of cost, would the Company tolls be up? Mr. KUJAWA. The tolls would have to be somewhere around 40-percent higher than they are right now. Mr. LEGGETT. That would actually cover your own operations, and would repay your capital cost; is that right? Mr. KUJAWA. It would repay the capital cost restated in current dollars. Mr. LEGGETT. That is all the questions I have. Thank you, Mr. Chairman. Mr. METCALFE. Thank you. Does the distinguished gentleman from Kentucky, Mr. Hubbard, have any questions? Mr. HUBBARD. Thank you, Mr. Chairman. Mr. Chairman, I do not believe I have anything at this time concerning the testimony given and the questions and answers I have heard, as I arrived late. I realize the issue today is not primarily the question of sovereignty, and giving up our rights in the Panama Canal Zone inasmuch as this is a minor factor related perhaps indirectly to testimony today. But, I would certainly point out that my constituents overwhelmingly object to giving up U.S. sovereignty in the Canal Zone, and certainly I am here to confront that primary issue. Thank you, Mr. Chairman. Mr. METCALFE. Thank you, Mr. Hubbard. Thank you very much, Mr. Kujawa, for your testimony. We appreciate your appearance. Mr. SNYDER. Mr. Chairman, I have a unanimous consent request. I ask unanimous consent that Mr. Steers be asked to respond to the question as to when he had received the letter in question dated April 30, 1972. He may do that later for the record. Mr. METCALFE. Without objection, it is so ordered. [The following was received for the record:] PANAMA CANAL COMPANY, Balboa Heights, Canal Zone, April 12, 1976. MR. TERRY MODGLIN, DEAR MR. MODGLIN: Discussion with my people here on the Isthmus indicates that, although earlier drafts had been available from time to time, the Arthur Andersen & Co. report "Accounting for the Cost of Excavations" was formally received by the Panama Canal Company just a few days prior to the March 5, 1974 public hearing conducted by the Company's Tolls Panel in Washington, D.C. Sincerely yours, PHILIP L. STEERS, Jr., Mr. METCALFE. Thank you very much, gentlemen. Our next witness will be Mr. James J. Reynolds, president of the American Institute of Merchant Shipping. Mr. SNYDER. Mr. Reynolds, I want to apologize to you beforehand for seeing some of your material that I used in my previous question. STATEMENT OF JAMES J. REYNOLDS, PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING, ACCOMPANIED BY WILLIAM JOHN COFFEY, SECRETARY-TREASURER, AMERICAN INSTITUTE OF MERCHANT SHIPPING, WASHINGTON, D.C. Mr. REYNOLDS. That could not have been more flattering, Mr. Snyder. Mr. Chairman, I have taken the liberty of bringing to the table with me my associate at AIMS, Mr. William John Coffey, who has been following the problems of the Panama Canal. I have a rather brief statement, Mr. Chairman, and the committee, if you will bear with me, I think the best way is to read it as promptly as I can, and then use that as the basis for questions, and possibly further discussion of this problem. I think my appearance before various subcommittees and the main committee will permit me to refrain from any explanation of what AIMS is, et cetera. While my statement will concentrate primarily on the financial and commercial aspects of the canal, I would be quite remiss if I did not tell you, Mr. Chairman, of the appreciation within our industry for the efforts you have made to inject a voice of reason and decency into the longer range discussions of the canal's future. The canal obviously must continue to be available to serve the needs of the world's commerce. And if properly and effectively operated, it can also help to fulfill the reasonable expectations of our Government, the Republic of Panama and the citizens of both nations. The era of gunboat diplomacy and jingoism is long dead, and it is time that all parties concerned recognized this basic fact. Again, Mr. Chairman, we do appreciate your continuing efforts and those of your subcommittee and the full committee in this area. The Panama Canal has been in operation since 1913 and is without a doubt one of the most efficient and vital organizations ever created by man. In connection with our opposition to the prospective toll increases, changes in measurement, I have never heard one word of criticism of the manner in which the canal is operated as an effective vehicle. Indeed, quite the contrary, and I think the record should make it very clear on that point. While I have some hopefully constructive criticism to offer this morning, I hope that it will in no way becloud the tremendous admiration and respect felt by our industry for the American and Panamanian men and women-from the Secretary of the Army right down through the Company's roster-who through the years have served the Nation and the entire world so long and well. I can imagine for the moment nothing that would reflect disappreciation at this point in the history of the canal. This Nation is fortunate to have a man such as General Parfitt as its Governor, a man of compassion, great efficiency and wisdom. Of course, our industry has a very substantial interest in the canal. U.S. flag vessels account for almost 10 percent of canal transits, tonnage and tolls. The majority of these are containerships, although there are a large number of barge-carrying and combination freighter/passenger ships as well. It is of great significance in pointing out the importance of the Panama Canal that we realize that 60 percent of all cargo that transits the canal one way or the other either originates in or is destined for U.S. ports. For many years the canal's operations were financially stable. As you know, the tolls paid by users must, by law, cover as nearly as is practicable, all costs of maintaining and operating the canal and an appropriate share of the Canal Zone Government's operating costs as well. Under the Canal Zone Code, a formula has long been established for measuring the cargo-carrying, revenue-producing tonnage of a vessel. The tonnage thus computed is then multiplied by the appropriate toll rate, giving the total fee to be paid by each vessel for each transit. This formula, through the years, has proven sound and farsighted. Over the years, as vessels have increased in size and capacity, toll revenues have increased. In fiscal year 1965, for example, the total tolls paid by commercial vessels amounted to $65.5 million. Then years later, they exceeded $143 million. The increase in tolls for each transit paid by vessel operators has been equally dramatic, with an average of $5,000 per transit in 1965, and slightly over $10,000 in 1975. Among our companies there are many vessels of the larger, new type that are transiting the canal regularly, and they pay up to $40,000 per transit of the canal. The total paid by vessel operators for many years exceeded canal costs and, as a result, about $118,5 million was contributed over the years to the U.S. Treasury between 1952 and 1972. In fiscal year 1973, however, the Company reported a small loss, followed by more substantial losses in 1974 and 1975. Additional deficits are predicted for fiscal years 1976 and 1977 as well. The initial loss in 1973 led the Company to propose a toll rate increase of about 20 percent, which was ultimately approved by the President, despite vigorous opposition from shipowners, foreign governments, importers and exporters. This became effective in July, 1974, but despite the very substantial additional revenues which were generated, costs continued to escalate even faster and losses have continued. Tolls and other revenue were up 35.8 million, but the canal sustained a loss of $8.2 million, so costs keep galloping on ahead. In mid-1975, the Company proposed to change many of the rules for computing the tonnage of vessels, changes which were but another thinly disguised rate increase. It was at this point that the subcommittee and the full Committee on Merchant Marine took note of it. As proposed by the Company and submitted to the President in January, 1976, these would have increased transit costs for an average vessel by about ten percent, and for containerships between 25 percent and 52 percent, depending on the vessel itself. It is well to keep in mind those proposed increases would have had a compounding effect because they were obviously put on top of the 20 percent that had already been put in in 1974. If there is going to be another 20 percent that is also going to have a compounding effect, because it is going to be on top of the present measurement changes which the President did approve, plus the 20 percent back in 1974. While I am pleased that President Ford disapproved the most onerous feature of the proposal, namely the containership deck cargo charge, and I deeply appreciate the interest shown by the subcommittee in shedding some very needed light on the entire subject, I believe it was most unfortunate that any of the items was approved or even proposed. The Company, of course, has already indicated that another general rate increase is to be proposed very shortly, and it presumably will be in the range of 20 percent to 25 percent. I hope that the record of these hearings will clearly indicate the inadvisability of taking such a step. I noted yesterday a brief dialogue took place here, and I would like to comment on the President's refusal to approve the above-deck cargo formula, which would have impacted severely on U.S. containerships. Let us set the record straight. This cannot be considered a windfall for containership operators, because they have been, and they still are, bearing the disproportionate share of the total burden. These operators are required to pay tolls on non-revenue-earning space below deck since containers just cannot fill the holds due to their configuration, no matter how artfully marine designers design. them. Thus, the rules already discriminate against containership operators, and the disparity would only have been aggravated if the above-deck rule had been adopted. We believe all vessels should bear their fare share of any transit costs based on revenue-earning capacity, and we certainly endorse Mrs. Sullivan's suggestion that the measurement rules be thoroughly studied in the belief that our view will be confirmed. Given the long record of financial stability, what has gone wrong? First, in 4 years, Company operating expenses have risen from $182 to $260 million. Vessel transits have remained almost level during these same years. Even in a period of serious inflation, a cost increase of 50 percent in 4 years to handle essentially the same number of vessels is excessive. Second, the traditional annual increase in tonnage has simply not occurred in the past 2 years, and may not in fiscal year 1976 either. World economic conditions have had their impact on the activity level of international shipping and the reopening of the Suez Canal has also contributed to the problem. Let me focus on the Suez Canal for a moment. In its first 6 months of operations after reopening in June 1975, the number of vessels transiting the Suez, other than tankers, had reached the levels which |