Mr. SNYDER. Yes. What goes through your mind when you are thinking about longterm stability? I hope it is perpetuity. Mr. TOLAN. Well, yes, sir. That is exactly right. Mr. SNYDER. On Page 4 you mention the toll increase was one factor causing this decline. In response to Mrs. Sullivan, I think you referred to the depressed economy. Are there any other factors? Mr. TOLAN. The service needs of the customers. We are a customerservice organization and if the customers requirements change, we have to take those factors into consideration. Competitors' modes of transportation; that is another factor. Also, pricing by competitive modes of transportation. All of those things, I think, sir, can be considered "other factors." Mr. SNYDER. Can you give us a percentage breakdown as between toll-increase responsibility to economy responsibility? Mr. TOLAN. I am afraid I cannot, sir. Mr. SNYDER. In other words, you cannot say how many ships would not go through because of a toll, as opposed to the present economy? Mr. TOLAN. For the industry and for Sea-Land Mr. SNYDER. I think all you can talk about is Sea-Land, I would assume. Mr. TOLAN. I made an honest attempt to see if we could identify it and we could not come before the committee and frankly say this was a percentage that was a consequence of any one of these single items. Mr. SNYDER. I was wondering if that $12 million lawyer that you have sitting there could tell if the present law forbids depreciation of present assets? There has been some reference to it this morning. Mr. McELLIGOTT. Well, I believe, Congressman Snyder, that the law as it exists does not permit depreciation of excavations, titles, treaties and like items. One of the reasons I feel that way, especially as to tolls, is the way the statute reads. It does not refer to costs of construction. It refers to costs of operating and maintaining the canal. Second, there have been a number of attempts to pass legislation to allow that very activity to occur and the Congress has never passed legislation. I know it was done, for example, in 1955. I believe it was also done right up into the 1960's, perhaps even later. So it seems to me that what former Governor Seybold said in his letter, that legislation was needed to do that, is indeed accura e; and since the legislation has not been passed, we feel that it is in proper to depreciate or amortize those items. Mr. SNYDER. Since there is a lack of statutory authority, do we conclude then it could well be illegal? Mr. McELLIGOTT. I do believe there is a question of illegality, yes, sir. Mr. SNYDER. Have you thought about litigating the issue? Mr. SNYDER. Well, it would seem like you high-priced guys would come up with something. Mr. McELLIGOTT. I think those fees are total corporate legal expenses and not just our firm. Mr. SNYDER. I think that is right. Mr. Tolan, you indicate that the company would have profited by $100,000 had it not been for this new depreciation aspect factor. On the next page, page 17, you are projecting-I just want to see if you are right-that without this factor, profits of $2 million would have been derived. Do you mean between the years, fiscal years, 1974 and 1977? The $2 million is for what period? If you go back up in that paragraph, you were talking about 1974-1977. Mr. TOLAN. Counsel is explaining this to me, sir. Mr. SNYDER. He should have prepared that statement with those big fees. He ought to come to my hometown and practice law. He would find out how to skimp around a little bit. Mr. TOLAN. The $8.3 million depreciation from 1974 to 1977 in the aggregate was $33.2 million, which we say if they had not been accumulated would have resulted in a profit over that same period of $2 million. Mr. SNYDER. $2 million for that same period? Mr. TOLAN. Yes. [The following memorandum was submitted by counsel to Mr. Tolan pursuant to request of minority professional staff member.] MR. NICHOLAS NONNEN MACHER, Merchant Marine and Fisheries Committee, House of Representatives, Suite 1332, Washington, D.C. Re: Panama Canal DEAR MR. NONNENMACHER: Enclosed is a Memorandum entitled "Depreciation of Excavations, Titles, Treaties, Etc." It is divided into three sections: A-Excerpts from hearings and reports in 1949-50, showing that the excavations, treaties, titles, etc. were deemed nondepreciable both before and after reorganization of the Panama Canal enterprise; B-Excerpts in chronological sequence from House and Senate Committee hearings and reports, where the Canal Company and GAO acknowledged the need for legislation and the Congress refused to pass it; and C-Excerpts from letters, documents, testimony, etc. since April 1972, when the Canal Company implemented the accounting changes without authorization. The following conclusions from the Memorandum appear proper: (1) Legislation to depreciate or amortize these nondepreciable items clearly is necessary; (2) the Congress has failed or refused to pass legislation; (3) the accounting changes are prompted by treaty negotiations; (4) depreciation of these items, if authorized, should be retroactive to 1914; (5) any accrued depreciation since 1914 should reduce the net of the U.S. investment for interest purposes; (6) the Canal Company simply by-passed the Legislative Committee (Merchant Marine & Fisheries) in implementing the policy changes without authority; and (7) because the changes are unauthorized, amounts previously and presently collected from tolls by the Canal Company for this depreciation should be returned to tolls payers by crediting the amounts against FY 1976 and FY 1977 expenses. On April 15, 1976, Press Secretary Nessen contended that the Panama Canal has a "useful life" of 30-50 years. According to reports of this interview in the April 16 Journal of Commerce, this timetable "reflects the facts that the canal's equipment is starting to wear out, that an ever-increasing number of ships are too large to pass through it and that shipping patterns are changing, making it less vital." One need only review the annual budgets of the Canal Company to know that millions of dollars are being spent each year to maintain and replace equipment. If shipping patterns are changing, one cause is the repeated increases in tolls through rate increases and rules changes. These policies are. forcing general cargo vessels and shippers to seek alternative means of transportation-the Suez Canal, the Trans-Siberian Railroad, and landbridge, whether U.S. or Canada now or Mexico in the future. Obsolescence of the Panama Canal for general cargo vessels is not physical obolescence, but financial obsolescence. I know of few, if any, modern general cargo vessels-including containerships, LASH and SEABEE vessels-which cannot transit the Panama Canal. Indeed the most modern of these vessels, including Sea-Land's SL-7's are constructed to accommodate the capacities of the Panama Canal. They are designated "Panamax vessels". The Merchant Marine and Fisheries Committee has the power and responsibility to control the practices of the Canal Company and thus control the level of tolls. It can exercise that power, and preclude or minimize new tolls increases; or its can refuse to exercise that power, and permit the continued deterioration of the canal transits and tonnages and the eventual elimination of use of the canal by the American merchant marine. I am available to discuss this Memorandum with you or with other members of the staff or of the Committee at your convenience. Very truly yours, Enclosure. RAGAN & MASON, MEMORANDUM DEPRECIATION OF EXCAVATIONS, TITLES, TREATIES, ETC. The Panama Canal Company in Fiscal Year 1974 began depreciating or amortizing excavations, titles, and treaty rights of the Panama Canal. The Canal Company valued these items at $332 million, assigned a 40-year economic life to them, and has been charging against revenues the sum of $8.3 million annually since FY 1974. The Canal Company's net loss in FY 1974, including these charges, was $11,798,000, and in FY 1975 was $8,219,000. At the same time, the Canal Company receives, and charges against revenues, interest on the United States investment in the Canal. Interest for FY 1975 was $14,820,000, and is projected at $16,578,000 for FY 1976 and $17,474,000 for FY 1977. The figure used for net U.S. investment and thus for interest is $319 million, a figure virtually the same each year. The major portion of the net U.S. inventment is the excavations, etc. which are being amortized since FY 1974. Yet the Canal Company does not reduce the net investment by the $8.3 million in depreciation or amortization paid each year on the same items. Thus carriers are assessed twice on the same items-depreciation of excavations, etc. ($8.3 million each year) and interest on the same items as if they were not amortized or depreciated ($14-$17 million annually). This memorandum traces the history of the Canal Company's efforts to obtain legislation to authorize depreciation of excavations, etc., the refusal of the Congress to pass legislation, and the depreciation of the items without legislation. A. 1950 legislation and hearings 1. The 1950 legislation (64 Stat. 1038), establishing the Panama Canal Company, also set forth the tolls formula, whereby "Tolls shall be prescribed at rates calculated to cover, as nearly as practicable, all costs of maintaining and operating the Panama Canal, together with the facilities and appurtenances related thereto, including interest and depreciation, and an appropriate share of the net costs of operation of the agency known as the Canal Zone Government." The tolls formula did not provide for costs associated with constructing the Canal. 2. The legislation did provide that "Capital investment for interest purposes shall not include any interest during construction." (now section 412(e) of Title II of Canal Zone Code). The Senate Report on the bill (Sen. Rep. No. 2531, 81st Cong., 2d Sess. to accompany H.R. 8677), explained the elimination of interest on construction costs as follows: "This principle is the same as is followed by the Tennensee Valley Author ity in fixing their rates for power, and other similar Government projects. This means that the Government continues to include the Panama Canal as one of the capital assets of the United States of America. It is valuable as part of the national defense of our country and has proved itself as an asset for commercial purposes. By so recognizing the national defense aspects, interest on construction costs can be deducted from current maintenance charges for the purpose of fixing tolls." Thus Congress clearly distinguished between costs of maintenance and costs of construction in setting tolls. The House Report (Rep. No. 2935, 81st Cong. 2d Sess., 8/16/50) provided: "The President would be authorized to transfer the Panama Canal and related facilities, equipment, assets, liabilities, official records, etc., to the Panama Railroad Company, which would be renamed "The Panama Canal Company' The Company would be permitted to retain and utilize toll revenues, and would be expected to return to the Treasury, interest at average Government rates (currently about 2.3 percent) in the Government's net investment in the Company." Neither the legislation nor any Committee report nor any other document authorized, or revealed a legislative intent to authorize, liquidation of the United States investment, through the depreciation of excavations, titles, treaties, etc. 3. The hearings preceding the 1950 legislation produced a number of computations about past revenues and expenses of the Panama Canal operation, including a computation by a steamship industry witness that “*** if interest paid on United States funds be excluded, transit tolls paid by commercial vessels, plus tolls forgiven on Government vessels, have exceeded all construction and improvement costs and all operating costs for transit purposes by about $2,000,000 to date." (Hearings, p. 90). Others challenged the computations (Hearings, pp. 117–25). A witness, General Steese, long experienced in Panama Canal matters; testified that the Canal cost about $382 million of appropriated funds; that Canal accounting was adjusted in 1936 or 1937 with a report stating that "no provision had yet been made for amortization of this investment"; that the Canar operation had already paid back three-fourths of the money appropriated for construction and other investments but this was considered interest and not amortization (Hearings, pp. 4, 6): "*** the cash that went out of the Treasury and the cash that went in, if you strike a balance you will find that about three-fourths of that original $382,000,000 has been returned to the Treasury in cash, but as an accounting matter we consider that that was just interest on the money and not amortization. *** The United States Treasury never sets up amortization. When the money is gone it is gone, and on that basis the Treasury has gotten back about three-fourths of its original cash. On a commercial accounting basis they have gotten nothing back, but they have had almost 3 percent [annually] on the total amount, not only on what they appropriated but on the interest that accumulated during the construction program, which they never appropriate. * There are those two standpoints, which are a technical matter for the accountants." (Hearings, p. 6). Prior to the totals formula in the 1950 legislation, tolls were set a specific rates, No special legal requirement for interest from tolls existed. But since fiscal year 1920 a potential capital interest return, calculated at 3% of the capital cost of the Canal during constuction and subsequent capital additions, was considered an unrecorded charge to expenses and assessed against tolls (Hearings, p. 118), and, as General Steese testified, was considered, for accounting purposes, interest and not amortization. Mr. Bailey, President of the National Federation of American Shipping, proposed a tolls formula which, excepting interest, was quite close to the language finally adopted: "The future tolls schedule at Panama should reflect rates sufficient to pay all operating expenses properly allocable to transit operation, including maintenance, depreciation of all expendable parts, and a proper charge for the expense 1 Investigation of Panama Canal Tolls, Hearings before the Special Subcommittee to Investigate Panama Canal Tolls of the Committee on Merchant Marine and Fisheries, House of Representatives, 81st Cong., 1st Sess., on H. Res. 44, March-June, 1949. of providing all facilities and services necessary to the operation of the Canal and for its employees and for their families." (Hearings, p. 41). He later further explained his proposals: "Congressman THOMPSON. "Your basis for establishing tolls would take into consideration present operation. I assume that it would also take into consideration obsolescence, or reserves for depreciation, the ordinary business figures that you see in balance sheets, reserve for replacements, and so on." Mr. BAILEY. "Quite correct. We think there should be a reserve against all the expendable parts of the Canal, which is what I believe is being done at present. They set up a reserve for the reviewing of expendable parts. You cannot expend the ditch itself. I understand a proper reserve is being set up against those, and that is a businesslike way of operating, and all the costs of operation and maintenance and the maintenance of reserves to renew these parts when they require renewal are a part of the operation as we see it, Mr. Chairman." (Hearings, p. 50; emphasis added here and hereafter.) The accounting system established by Canal authorities even prior to 1948, considering the Canal a business enterprise, "includes in the accounts all revenues properly applicable to Canal activities, and charges against total revenue the net expenses, including charges for depreciation and interest on the capital invested, but excluding any charge to amortize the investment." (Hearings, p. 118.) Thus the practice of the Canal operators' testimony suggesting a proper tolls formula and other changes passed in 1950 did not include--and do not authorize— amortizing or depreciating titles, treaties, excavations, etc. B. Subsequent Congressional Hearings Acknowledging or Denying Lack of Auority to Depreciate or Amortize Nondepreciable Items 1. 1953-Repeatedly the Congress and the Canal Company acknowledged the lack of statutory authority to amortize or depreciate excavations, etc., and the need for legislation. No law ever passed. The 1950 legislation establishing the tolls formula and authorizing separate entities-the Panama Canal Company and Canal Zone Government-was followed in 1951 by the reorganization of the Canal operation into the above two entities effective July 1, 1951. In 1953, in response to a Congressional inquiry whether tolls were adequate, J. S. Seybold, President of the Canal Company, sent a letter to the Speaker of the House, finding tolls adequate and stating: 2 the tolls rates that have been in effect since 1938 are still sufficient to cover all operating costs, including interest and depreciation, as required by the tolls statutes. *** "In computing the tolls requirements for purposes of this study the Company has made what it believes to be an adequate allowance for depreciation giving due consideration to the factors of obsolescence and potential inadequacy of the capital assets includable in the tolls base. Estimates of the service lives used for the principal classes of plant and equipment have been approved by independent engineering consultants. A depreciation rate of 1 percent per annum from date of service has been used for the investment in the channel, harbors, lock structures, dams, breakwaters and similar long-lived facilities. Including this accrual the annual depreciation requirements of the Company are presently approximately $9 million. * ** "No depreciation or return on the capital value of interest during the 1904-14 construction period has been included in the study because the legislative history of the present tolls statute clearly indicates the intent of Congress to exclude this item entirely from the tolls base. Likewise no provision has been made for amortization of lands and treaty rights because of lack of statutory authority, although these assets have been included in the investment for interest purposes." (Emphasis added.) 2. 1954-The Panama Canal Subcommittee held hearings on Canal operations in June and July 1954.3 General Seybold, Governor of the Canal Zone and President, Panama Canal Company accompanied by Mr. Steers, Deputy to the Comptroller, testified (Hearings, pp. 8, 10): This quote and account is taken from the opinion of the Supreme Court in the Grace Line case, 356 U.S. 309, 314 (1958), which provides the text of President Seybold's letter. 3 Operations of the Panama Canal Company and Canal Zone Government, Hearings before Subcommittee No. 3-Panama Canal of the Committee on Merchant Marine and Fisheries, House of Representatives, 83d Cong., 26 Sess., June-July, 1954. |