ATTACHMENT D.-STATEMENT OF OPERATIONS FOR FISCAL YEAR ENDING JUNE 30, 1975-CANAL OPERATION 1 Allocated on operating cost relationship: G. & A., $41,066,447; interest, $14,820,124; total, $55,886,571. $55,886,571 +$180,690,171-30.93 percent. Allocated on revenue relationship: Net cost for Canal Zone Government is $23,515; $23,515,948÷$253,685,445= 9.27 percent. Mrs. SULLIVAN. Fine, Mr. Tolan. You brought up some very potent points. Some of those points I agree with, some I do not. I called the attention of Governor Parfitt and Mr. Steers-I think they are still in the committee room-yes, they are here-I called their attention to the statements of Mr. Tolan with respect to the way these accounting changes have been made. I wonder, Governor, if you would study these statements on accounting changes and then give us your answer to them and the arguments against Mr. Tolan's ideas just as quickly as you can and send it to the committee. [The material referred to, sent by the Panama Canal Company, is as follows:] SUPPLEMENTARY COMMENTS OF PHILIP L. STEERS, JR., FINANCIAL VICE The following represents my observations and comments, as requested by Mrs. Sullivan, on that portion of the statement of David J. Tolan of Sea-Land Service, Inc., made at hearings held April 7, 1976, which addressed the "Financial Aspects of Canal Operations”. Before discussing the details of Mr. Tolan's statement, it is essential that the inter-relationship of the waterway, the Panama Canal Company, the Canal Zone Government and the Canal Zone itself be fully understood. The waterway is the basic reason d'etre for the Canal Zone, the Canal Zone Government, and the Panama Canal Company. To the extent that the scope of these entities is expanded to directly serve other agencies, establishments, or individuals, appropriate recoveries of cost are made. Any residual costs must be associated directly or indirectly with the waterway as the price of operating in the Canal Zone's geographic and political environment. The benefits of the waterway accrue worldwide. There is no rationale by which the United States taxpayer should be singled out to subsidize such benefits. Equity demands that they be paid for by the users. By structuring toll rates to recover all associated costs, both direct and indirect, the U.S. taxpayer will, through the prices he pays for goods which transit the Canal, be bearing costs proportionate to the benefits he receives. Treasury Secretary Simon, in testimony before the House Appropriations Committee in January, supported the time recognition of costs. His observations were addressed to government costs and revenues, but are equally applicable to an entity such as the Canal. He referred to "the natural tendency for those at all levels of government to want to claim revenues too early and expenditures too late, thereby postponing the day of reckoning." He also referred to "the sharp and painful adjustments that must occur to a local government when things are continually swept under the rug until eventually the rug will cover no more. With each sweeping, future fiscal flexibility is curtailed one more notch." It is in the context of the foregoing that the following observations and comments are structured. ACCOUNTING TECHNIQUES Depreciation of lands, excavations, titles, treaties, etc. The implication that the fiscal year 1975 net loss of $8.2 million was caused by assessing against tolls some $8.3 million of depreciation on assets not previously depreciated is erroneous. The tolls rate in effect for all but one week of fiscal year 1975 was structured to recover this $8.3 million, and that amount was properly recorded as a cost. Had the decision to depreciate assets not previously depreciated not been made, the Company's revenues and expenses both would have been some $8.3 million lower, and the recorded net loss of $8.2 million would have been virtually unchanged. The accounting change was not arbitrary. It was supported not only by one of the country's leading public accounting firms with vast experience in rateregulated utilities, but also by the General Accounting Office. The value selected was not arbitrary since it was based on accounting records. The period selected was not arbitrary, but rather was a carefully selected midpoint between the Company's optimum of rapid recovery and the user's optimum of minimized cost. A few simple questions should lay to rest once and for all the controversy surrounding the institution of depreciation on assets previously not depreciated. Should the United States be forever burdened with its investment in the Canal, or should recovery be made from users? Are investors in the Canal, i.e., the United States taxpayers, somehow less entitled to recover their investment than, say, investors in Sea-Land? Reserve for bad debts Here again, a question must be asked. Who should bear the cost of bad debts? Such debts stem from the fact that the Panama Canal Company and Canal Zone Government operate in the geographic and political environment of the Canal Zone. Were it not for the waterway, there would be no presence to incur the bad debts. Certainly they are not incurred for the benefit of the United States taxpaying public. They are incurred to continue a climate in which the waterway can operate, and thus are a proper cost to be borne by tolls. Interest The Company agrees with the rationale that it would be equitable for it to earn interest on its deposits with the U.S. Treasury, and is on record as supporting proposed legislation which would bring this about. It does not agree that unearned interest should be added to the U.S. Government's net direct investment in the Canal for two reasons. First, such technique would create an "asset" that has no value on which the Company would have to pay interest. Additionally, it would do away with an important feature of the existing financial structure of the Company which provides for the ultimate recovery of unearned interest from the user, and would replace it with an involuntary additional investment in the Company by the U.S. taxpayer. The final suggestion that interest be waived entirely also proposes a transfer of financial responsibility from the Canal user to the U.S. taxpayer and, therefore, unless such transfer is desirable for reasons not perceived by the Company, should probably not be implemented. Adequate Funding of Canal Company/Canal Zone Government Activities and Programs and Assessing Against Tolls Only an Appropriate Share of the Net Cost of the Canal Zone Government. Because the material offered by Sea-Land under these two separate headings overlaps, they are best responded to in combination. It is believed that adequate historical background and full support for the Company's practices in recovering the net cost of Canal Zone Government are contained in the Company's answer to question IIB (8). In elaboration of the penultimate paragraph of that answer, it is noted that the Company's cost based rates which are structured to recover a share of General Corporate Expense are, by definition clearly recovering a portion of the Net Cost of Canal Zone Government since the latter is an element of the Company's General Corporate Expenses. Thus, tolls contribute to but cannot be considered as covering the total Net Cost of Canal Zone Government. The Sea-Land discussion under the above headings concerning the extent to which certain Canal Zone Government activities are "funded" requires explanation. All Canal Zone Government activities initially have been fully funded through appropriations. To the extent that these activities perform direct quantifiable services for or on behalf of individuals, government agencies, or other entities, a charge for those services is made. The difference between the cost of conducting Canal Zone Government activities and the charges that are made for direct quantifiable services comprises the Net Cost of Canal Zone Government, which is an appropriate cost to the Company in lieu of the taxes with which a commercial firm would be burdened elsewhere. It is noted (as detailed in the answer to question II A (6)) that the net cost of Canal Zone Government has remained as a relatively steady proportion of Company expenses over the last ten years, varying from 14.6% to 16.7% and averaging 15.8%. With regard to the unrecovered costs identified with the retail units ($3 million) and food units ($536,000), it is appropriate to call attention to the following statements contained in Senate Report 2375, 84th Congress, Second Session, June 27, 1956. They are equally valid today. "** Because the employee is a captive market, it is obvious that there should be some equitable procedure for fixing prices of goods. “* * * Also *** it is clear that the employee should not be penalized for residing at the Canal Zone at the convenience of his employer. * * "** the differential is not to be considered in determining how he fares economically as compared with his Stateside equivalent. "**** American industrial practice generally is not to charge the employee whom it must provision abroad with the full cost of transportation and handling of goods to distant lands. The same policy should prevail at the Canal. . "* prices must be adjusted up or down as might be required not ✦ ✦ on the basis of cost elements in the acquisition and distribution, but on the basis of what prices must actually be to give the Canal employees equality." |