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, RAGAN & MASON, Enclosure. 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 1 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 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): 2 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. "Since the date of reorganization became effective, first priority has been given to a study of the value of properties transferred to the Company as required by the law. A preliminary appraisal and inventory of the properties so transferred has been completed and firm policies governing the valuation of the properties as well as the rates of depreciation and obsolescence have been developed. "The Company's charter, as amended by Public Law 841, has been construed as not permitting the amortization or depreciation of assets formerly classified as not depreciable. These asseets include the channel and harbors, breakwaters, excavation and fill for dams and spillways, locks excavations and fill, and the excavation for the drydock at Cristobal. "The cost of these facilities, exclusive of interest during construction, has been tentatively determined to be about $273 million and accrued depreciation at the transfer date at the rate of 1 percent per annum has been tentatively computed at $92 million. In addition, non-depreciable assets representing the acquisition of rights, powers, privileges, and lands in the Canal Zone, in which approximately $13 million has been invested, are currently neither amortized nor depreciated. "Legislation to authorize the depreciation and amortization of these assets has been submitted to the Congress. Application of generally accepted accounting principles would require the depreciation or amortization of these assets to provide the Company with funds for the replacement of obsolete plant." (Emphasis added.) Later in the same hearings at p. 39 the following colloquy occurred between Congressman Allen and Governor Seybold: Mr. ALLEN. "Just to make sure we do not overlook anything, having in mind that this is an investigation into the operation of Public Law 841 of the 81st Congress, do you have any recommendations as to changes in that law which might be beneficial, coming out of your experience in the zone?" Gov. SEYBOLD. "I think I can best speak to that, Mr. Chairman, by reference to the two bits of legislation we have before your committee at the present time, namely, a matter of the amortization of nondepreciable assets and interest during construction; which I believe have been referred to your committee. At least they have been referred to the Congress this session. "The first legislation, the amortization of the nondepreciable assets, has the recommendation of both management and the Board of Directors of this Company. Also, it was requested by another committee of Congress. Mr. ALLEN. "I take it that the submission of these two matters will require determination of congressional policy; and whatever that is, you are content to follow it?" 4 Gov. SEYBOLD. "Yes, sir." (Emphasis added). Governor Seybold further testified (Hearings, p. 40): "In the usual accounting terminology, net direct investment is not depreciable and cannot be related to gross depreciable assets upon which depreciation is accured." Representatives of the Comptroller General's Office testified concerning suggested changes in Canal accounts, including (Hearings, p. 61): "The law should be amended to permit and require the recovery in the tolls rate of depreciation or amortization of fixed property classified as nondepreciable in the amount of $310 million." A witness for the steamship industry supported depreciation of all itemsboth depreciable and nondepreciable-provided interest was eliminated on pre-1951 investment, an equal division of Canal Zone Government costs between the Panama Canal Company and Canal Zone Government, and appointment of two members of the shipping industry to the Canal Company's Board of Directors (Hearings, p. 74-75, 81-82). The witness noted that depreciation of nondepreciable items would be inconsistent with regulations of the Internal Revenue Service (Hearings, p. 81). 3. 1955 * Congress did not pass this legislation. We have no record that either bill was ever reported out of committee. A. HOUSE MERCHANT MARINE AND FISHERIES COMMITTEE MARCH 1955 Б The following discussion between Congressman Allen and Governor Seybold appears at page 20 of these hearings: Mr. ALLEN. "It seems to me that there was also at least an area of disagreement between the General Accounting Office and the operators at one point, at least, as to what items in the canal should be depreciated and what items were nondepreciables. Once more, the amount of depreciation found itself in the rate base." Governor SEYBOLD. "Of course there was introduced in the last session, as I think you are aware, a bill to authorize us to depreciate or amortize some of the properties of the Company then carried on the books as nondepreciable. That specific bill was never acted on the last session, but it will be presented again at this session. That was presented at the request of the Appropriations Committee of the House at that time." The CHAIRMAN. "Just to clear that up for me, what was suggested?" Governor SEYBOLD. "In determining the value and in the accounting system, when the Panama Canal Company was formed, there were certain costs which were considered in accounting as nondepreciable. Those were actually the cut itself, with the theory being that that cut would remain there forever and ever and it was not taken on the books as depreciable. We did not have to return to the Treasury the depreciation on the costs of the cut. The feeling in certain quarters is, and again I don't want to present both sides but it came out of the appropriations hearings of that year, that the Culebra Cut is not nondepreciable. It is depreciable economically, because it will only have an economic value for so many years. Maybe it is 100 and maybe it is 50. It was the thought of the committee at that time that we have authorization to place that on the books as depreciable, or amortize it, either way, so that the Treasury of the United States and the people of the United States would get back their capital investment from the Panama Canal which, actually, they put in. "As I say, that legislation was before the Congress in the last session and is presented this time, too. That would, of course, increase the interest bearing burden on the company at the present time. As time went on, of course, as you depreciate it, the amount of interest is reduced so that the annual payments would finally drop down. Presently it would cost you more." As a point of comparison, Congressman Allen noted at page 70 of the March 1955 hearings that "It looks to me as though there is about $300,000 a year of interest charge that is on money that is not available in cash and which is being used by the Government in other places," referring to Canal Company deposits with the Treasury. Mr. Noble, Canal Company Comptroller replied: "We would be very happy if some arrangement could be worked out whereby we would get credit on those funds we have to accumulate and hold in reserve. But under the present statutes we do have that authority." In 1976, the Canal Company continues to allege it needs legislation to receive interest on its deposits; but it amortizes and depreciates nondepreciables without legislation. A statement submitted for the record by the Canal Company contains the following discussions at pages 102-103 of the hearings: "The Company introduced proposed legislation in the 2d session of the 83d Congress partly at the request of the Appropriations Committee of both Houses. This legislation would authorize the inclusion in the tolls base of: "1. Provisions for amortization of nondepreciable fixed assets of the Canal, and "2. Interest on the Government's investment in interest capitalized during the construction period. "Authority to recover depreciation on the channel and certain other fixed assets was also proposed in the legislation. These assets had been classified as nondepreciable by the former Panama Canal Agency, but no ware considered depreciable by management. The bills were not reported out of committee and have recently been reintroduced in the present session. If enacted into law 5 Study of the Operations of the Panama Canal Company and Canal Zone Government, Hearings before the Committee on Merchant Marine and Fisheries, House of Representatives, 84th Cong., 1st Sess., March, 1955. |