The cost of major systems, engineering studies and extraordinary maintenance that can be demonstrated to benefit future periods can be properly deferred and amortized over the periods benefited. This policy is consistent with the cost benefit concept in which the user of a service is charged for all of the costs of providing that service. This concept is particularly applicable to a rate-regulated business such as the Company. In our opinion, this new policy meets all of the standards presented in this report.

Reserves

"Policy. The prospective cost adjusted for the reserve balance of lock overhauls is allocated through an annual provision determined on the basis of a moving average."

The Company incurs substantial obligations for lock overhauls which occur at irregular intervals in varying amounts. Thus, it has for some time carried a reserve for lock overhauls and there has been no substantial change in the accounting pinciple followed. This principle is similar to the one followed in the airline industry in which reserves for recurring aircraft engine maintenance are established against which the costs of actual maintenance, when performed, are charged. The change that has been made has the effect of amortizing any overaccrual or underaccrual for a particular lock overhaul over future accounting periods though the application of a moving average provision rather than recognizing any overaccrual or underaccrual in the operations of the period in which it occurs.

We concur with your change in accounting for lock overhauls in that it achieves a better allocation of overhaul costs between accounting periods and provides more reasonable accounting vis-a-vis the rate-making process for variations between accrued and actual overhaul costs. This type of policy is necessary for a regulated business to ensure that each year's users bear their share of lock overhaul costs and that the cost are properly matched with the revenue realized from the benefits provided. In our opinion, this new policy meets the standards previously established in this report.

"Policy.-Annual provisions to expense are made to establish reserves for probable losses from marine accidents, fire, damage other than fire, public liability, and other casualties."

The Panama Canal Company is precluded by law from obtaining outside insurance coverage to protect it from the risks associated with the costs of these losses. By their nature, such losses are unusual and would distort the cost of providing Canal service in the year(s) of occurrence if provisions were not made annually to reserve for such losses. Under the previous practice of recording these losses in the year of occurrence, the risk of nonrecovery of such costs was borne by the Company. Under the new policy, which recognizes the unpredictability but certainty for such occurrences, the Company is attempting to minimize a risk for which it is not being compensated. Recording annual provisions for these losses achieves a better matching of expenses with related revenues by charging the Canal users each year with their pro rata share of the cost of the losses which will occur. These provisions are comparable to the insurance expense which would be incurred if the Company were permitted to obtain outside insurance coverage. This practice also allows for a reasonable accommodation of the cost of marine accidents and other casualty losses in the rate-making process. In our opinion, this new policy meets the standards previously established in this report.

CONCLUSION

In our opinion, the new accounting policies discussed above, individually and collectively, (1) comply with legal requirements, (2) allow for a reasonable accommodation of all costs in the rate-making process, (3) reflect prudent financial management and (4) adhere to generally accepted accounting principles. The newly established policies are particularly relevant to the requirements of a rate-regulated business and are, therefore, appropriate for the Panama Canal Company.

We appreciate this opportunity to review and comment on your changes in accounting policy.

Very truly yours,

ARTHUR ANDERSEN & Co.

Pt. II-H(5) What is the Canal organization's policy for the recovery of delinquent payments, whether they be delinquent payments from businesses or Government of the Republic of Panama?

Answer: The Canal organization's policy for the recovery of delinquent accounts receivable is to make an intensive effort to collect. It does not consider the delinquent receivables of the Panama Canal Company and Canal Zone Government to be substantial except for certain of the amounts due from the Government of Panama.

Toward effecting collection of the monies due from the Republic of Panama, the following actions are taken:

a. The Comptroller General of Panama is advised of the delinquency monthly at the time the invoices for the current period are transmitted.

b. The U.S. Embassy is advised on a current basis as to the status of the debt.

c. The Board of Directors is advised quarterly as to the status. A member of the Board of Directors is the Assistant Secretary of State for Latin America.

d. The General Accounting Office is appraised of the situation and reviews the status periodically.

e. The Appropriations Committees of the Congress, too, are advised of this situation in their review of the Panama Canal Company budgets.

f. The U.S. Treaty negotiators, too, are advised of this situation. Collection efforts are diplomatically sensitive and all actions to effect collection has been principally through the U.S. State Department.

Other categories of customers' accounts are not significantly delinquent. The Company is required by Code of Federal Regulations to obtain deposit of cash or securities to guarantee payment of Canal tolls and other vessel charges. There can be no delinquency for these services. Charges to employees are collected by payroll deduction in the few instances when they become delinquent. The rate of loss on charges to other customers (other business customers, other Government agency employees, and miscellaneous individuals and organizations) is very small.

Pt. II-H(6) Approximately what proportion of all accounts receivable of the Canal organization are delinquent in paying its accounts payable?

Answer: a. Accounts receivable. The following tabulation shows the status of the accounts receivable of the Panama Canal Company and Canal Zone Government as of January 31, 1975.

The principal delinquency is monies due from the Republic of Panama, whose indebtedness totals $7.9 million, see attached statement.

The receivables from other U.S. Government agencies and others are considered collectible.

b. Accounts payable. The Canal is not delinquent in paying its accounts payable. It is the policy of the Panama Canal to pay its accounts payable promptly upon receipt of invoices and the service item(s) involved, and when provided by term of purchase to secure all discounts.

12,483.79

281, 961.94

282, 561.94

295, 048.73

700, 307.53

409, 763.50

1, 110, 691.63

PANAMA CANAL COMPANY AND CANAL ZONE GOVERNMENT OUTSTANDING ACCOUNTS RECEIVABLE PANAMA GOVERNMENT BY CALENDAR YEAR

1959-Water processing costs are unpaid for the calendar year with the exception of $25,000.00 which was received in March 1961 and applied as partial payment to the oldest account (January 1959). In column "Other" are such services as Taboga Launch, which averages approximately $2,200.00 per month; transporting mail on the SS CRISTOBAL; medical care furnished tuberculosis patients and members of the National Guard; rental of space in Panama Railroad Station; electric current furnished the Hotel Washington, Fort Delesseps Area and Colon Sump Pump; and Storehouse materials furnished from time to time.

1960-The unpaid accounts here are much the same as those in 1959. In addition, one item in the amount of $19,020.05 covering repairs to garbage and trash collection equipment, remains unpaid.

1961-All accounts were paid with the exception of $3,998.40 for medical services rendered TB patients.

1962-Payment was received for miscellaneous services and supplies furnished from January through June 1962. The Panama Tourist Institute was billed for the Taboga Launch service effective January 1962 and payments were received throughout the year. With the exception of charges for garbage disposal, Colon, the unpaid accounts are mostly for public utilities. Such services as transporting mail on the SS CRISTOBAL, furnishing electric current to areas in Colon, medical care of TB patients, and rental of space in Panama Railroad Station have been discontinued.

1963-Payment was received from the Tourist Institute for Taboga Launch service from January 1963 to August 15, 1963. On August 16, 1963, Panama took over the operation of this service. With the exception of garbage disposal, Colon, the unpaid accounts consist of public utilities, Storehouse stock, storage charges, and labor costs at Summit Magazine.

1964-75-Unpaid accounts in column "Other" include public utilities, Storehouse stock, storage and labor costs at Summit Magazine and handling mail from Panama to Colon. Since 1964 Storehouse stock sales have been kept to a minimum. 1972-During June 1972 Invoice No. C2-13-321 dated February 16, 1970 in the amount of $94,518.71 stated against Instituto Panameno de Turismo was reclassified from Receivable-General to Receivable-Republic of Panama.

1976-No payment was received for water processing costs during February 1976. Water processing costs for October 1975 through February 1976 are unpaid. In accordance with the terms of the loan agreement with the U.S. Aid Mission to Panama, water processing costs are to be paid within ninety days from invoice date. On this basis, the account for October 1975 in the total amount of $138,422.00 is overdue.

Pt. II-I(1) How does the existence of treaty negotiations affect the capital programs of the Canal organization?

Answer: The current treaty negotiations have little effect on the capital programs. The Canal operation is viewed generally an on-going concern and, accordingly, the evaluation of capital projects is within that concept. Capital projects are evaluated on the assumption that Canal operations will continue. Pt. II-I (2) How does the existence of ongoing negotiations affect the planning of the Canal organization, with respect to both the marine services and the jurisdictional services provided?

Answer: The existence of ongoing negotiations has little effect on the planning of the Canal organization because of the uncertainty as to the details to be contained in a final negotiated agreement.

The Committee letter of Feb. 2, 1976, continues as follows:

PART III. ALTERNATIVE FINANCIAL INITIATIVES DESIGNED TO IMPROVE THE FINANCIAL POSITION OF THE CANAL ORGANIZATION

Those concerned with the Panama Canal have conceived of many different alternatives for alleviating the financial difficulties of the waterway. We have listed many of the alternatives which have been brought forward by one source or another. We desire an analysis of each of these twenty alternatives using the following criteria and any other criteria you may wish to cite : (1) The public financial efficiency of the alternative, including its direct and indirect administrative costs to the Canal organization and its impact upon those who would be affected by the alternative.

(2) The public financial equity and the savings or cost of the alternative for each of the following: (a) the Canal organization; (b) Canal users; (c) Canal employees-in the aggregate, and for the U.S. and non-U.S. citizen employees; (d) the U.S. Government; (e) the U.S. taxpayer; (f) the Republic of Panama, including the Government of the Republic and citizens who are not Canal employees.

(3) The international legal or political ramifications which are likely to ensue if the alternative were implemented.

(4) The revisions of domestic U.S. law required for implementation of the alternative.

We hope that the Company/Government will use all appropriate techniques, including macro and microeconomic analysis to adequately assess the alternatives, which are as follows:

[The alternatives raised by the committee and the response of the Panama Canal Company to those alternatives follow:]

A(1) Reducing the tropical differential of U.S. citizen employees. Answer: The tropical differential is a highly emotional issue to the U. S. citizen employees. Any movement to adjust or change the amount of tropical differential or the terms of its application is deeply resented and resisted. As you are aware, a proposal by the Canal Zone Civilian Personnel Policy Coordinating Board (CZCPPCB) which would, along with other pay changes, eliminate the tropical differential for almost all future locally hired U. S. citizens is one of the sensitive actions that triggered employee "job action" resulting in a virtual closing of the Panama Canal.

The Panama Canal is back in full operation at this time based on my firm commitment to recommend and support significant changes to the CZCPPCB proposals. Although my initiative would not alter the tropical differential proposal, I do not feel any further adjustments at this time would be advisable. Pt. III-A (2) Conversion of the wage base for certain positions in the Canal organization from the U.S. to the Canal Zone wage base.

Answer: It was such a proposal as this by the Canal Zone Civilian Personnel Policy Coordinating Board that triggered an unfortunate "sick out" of Canal employees (primarily U. S. citizens). Specifically, the proposal was to convert grades NM-4, 5, and 6 and the M10 Journeyman craft grade to the Canal Zone Wage Base. Present incumbents were to have current rates of pay saved indefinitely. There are approximately 2,200 Panama Canal employees, two-thirds non-U. S. citizens, who would be affected.

As previously mentioned I have proposed to modify the proposals. My recommendation is to apply the change in pay base only to NM-4 and NM-5. Furthermore, pay base changes would be applicable only to employees hired after the effective date. Further adjustments are not recommended at this time. Pt. III-A (3) Provision of transit/marine services and/or jurisdictional services by firms/individuals under contract rather than public employees. Answer: The Company has no objection to contracting for services and currently does so. The Company is continually seeking ways of carrying out its mission of servicing shipping in a dependable, efficient and economical

manner.

Pt. III-A (4) Work incentive bonuses to recognize increased productivity. Answer: The work requirements of the Panama Canal are in most part not conducive to individual means of measurement for incentive pay that would provide a net return, such as lower costs to the Canal. There are over 1,000 occupations represented in the Canal organization. The work volume of the Canal is either beyond its control, such as the number of ships transiting, or of the type generally not readily associable to incentive pay. For example, a policeman, school teacher, truck driver, launch operator, seaman. A possible exception is the handling of cargo on the piers. Most of the output of the Panama Canal results from team efforts to accommodate to workload and in that environment performance does not lend itself to measurement.

Pt. III-B (1) Greater recovery of costs of Canal non-transit activities by raising user charges for such activities, and by charging for licenses and permits.

Answer: The pricing policies for user charges, other than for tolls, in both transit and non-transit activities, consider the cost of the service provided and recognizes that charges should be fair and equitable to both parties. User