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This formula resulted from Congressional hearings in 1948 and 1949 when the Canal Company sought another tolls increase. The hearings were held pursuant to H. Res. 44, 81st Cong., 1st Sess., directing the Merchant Marine & Fisheries Committee to study the proper accounting and allocation of costs for the Canal and "to recommend to the Congress concerning what elements of cost should be properly used in the future as the basis of a policy to be followed in establishing and levying tolls for the use of the Panama Canal for transit purposes." The Committee agreed with a major contention of shipping companies that the tolls were being unfairly assessed with costs associated with construction, including interest on construction, and passed subsection (e) of section 412 providing that "Capital investment for interest purposes shall not include any interest during construction." The shipping companies proposed that 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 of providing all facilities and services necessary to the operation of the Canal and for its employees and for their families." 1 The Committee report noted that the tolls formula was designed to implement recommendations by the President and Budget Bureau that "tolls for commercial ships should be related to transit costs, including interest on Government investment in the Canal and a fair share of the net cost of health, sanitation, and civil government . . ."2 Nowhere in the tolls formula or legislative history is there authority or intent to assess against tolls costs of lands, excavations, titles, treaties, etc. This fact is abundantly clear from Congressional hearings subsequent to the tolls formula and from the numerous bills introduced to authorize the actions now taken by the Canal Company contrary to law and without lawful authority.

Canal Zone Governor and Canal Company President Seybold testified before the Merchant Marine and Fisheries Committee on June 9, 1954:

"The Company's charter, as amended by Public Law 841, has also been construed as not permitting the amortization or depreciation of assets formerly classified as not depreciable. These assets include the channel and harbors, breakwaters, excavation and fill for dams and spillways, locks excavation 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 or 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." 4

In 1956 a bill was introduced to authorize precisely what the Panama Canal Company has done without lawful authority. The hearings on this bill 5 are critical to a full understanding of the unlawfulness of the assessment of nondepreciable items against tolls.

The Committee was considering two bills, H.R. 5732, to repeal subsection (e) of the tolls formula in order to assess interest on construction against tolls, and, more important, H.R. 5733, which would have amended the tolls formula

1 Investigation of Panama Canal Tolls, Hearings before Special Subcommittee to Investigate Panama Canal Tolls, Committee on Merchant Marine and Fisheries, House of Representatives, 81st Cong., 1st Sess. on H.Res. 44 (March-June 1948) pp. 41, 90.

2 Report 2935 Merchant Marine and Fisheries Committee, House of Representatives, 81st Cong., 2d Sess. (Aug. 16, 1950) (hereafter Report), p. 2.

3 Report, p. 5 states: "It is generally agreed that in calculating the toll rate there should be excluded from the capital base all investment in equipment and structures, of business operations which are not directly related to the operation of the Canal, all health, sanitation, and civil government facilities and equipment."

4 Operations of the Panama Canal Company and Canal Zone Government, Hearings before Panama Canal Subcommittee of Merchant Marine and Fisheries Committee, House of Representatives, 83rd Cong., 2d Sess. (June-July 1954).

5 Interest During Construction and Amortization of Investment in Panama Canal, Hearings before Panama Canal Subcommittee, Merchant Marine and Fisheries Committee, House of Representatives, 84th Cong., 2d Sess. (1956) (hereafter 1956 Hearings).

to allow recovery of "amortization of any fixed assets which are classifiable as non-depreciable." A representative of the Comptroller General testified that "These assets amounted to approximately $343 million as of June 30, 1955, and consisted of costs of excavation and fills of channels, harbors, basins, dams, spillways, interest during construction, and other tangible and intangible construction costs." 6 Included were "such items of costs as lands, titles, and treaty rights, excavations and fills for channels, harbors, and so forth, and interest capitalized during construction." These are the same items and same amount which the Canal Company is now depreciating and assessing against tolls. The Canal Company acknowledged "The recovery of this amount through amortization clearly requires authorizing legislation, which the subject bill would provide."

"8

The Canal Company Secretary testified that "there is no provision in the law for amortization of a nondepreciable asset. This bill would provide for such amortization." 9 He conceded that the 1950 legislation "was undoubtedly enacted on the theory that those assets were nondepreciable." Further the write-off would be retroactive to the commencement of the Canal because the tolls "have actually paid for it in the past." 10 Yet the Canal Company, without lawful authority in the first place, is writing-off the costs prospectively and giving no credit for past payments through tolls.

Neither H.R. 5732 nor H.R. 5733 were passed by Congress. The Congress never enacted those tolls formula changes into law. The Canal Company is circumventing the law by depreciating the items without authority and assessing these costs against tolls. Canal Secretary Whitman testified in 1956: we feel that the question of what burden shall be placed on tolls is not an administrative matter but is a question of policy for the Congress. Our part is only to apply the law as written." 11

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We agree. Until the Congress re-writes the tolls formula, the Canal Company has no lawful authority to depreciate or amortize lands, excavations, titles, treaties, etc., and assess these so-called "costs" against the tolls.

At least two other substantial cost items have been improperly assessed against tolls. The tolls formula provides that tolls shall cover as nearly as practicable "an appropriate share of the net costs of operation of the agency known as the Canal Zone Government." The Canal Company in fiscal 1973 established a reserve for bad debts which added $1.5 million in additional costs which were assessed against tolls. Reserves for bad debts have nothing to do with tolls, transits, or shipping companies' using the Canal. Indeed it is impossible for bad debts to be associated with Canal transits because shipping companies must establish in advance bank accounts which the Canal Company can draw upon for payment of any tolls due. Thus, tolls are prepaid. Assessing reserves for bad debts against tolls is not "appropriate" under the tolls formula. This single item of $1.5 million for bad debts is greater than the entire loss for fiscal 1973. Eliminating this inappropriate and unlawful assessment would place the Canal Company in a profitable position and preclude any tolls increase.

Another $4.1 million in expeness (to increase to $5 million for fiscal 1975) comes from the operations of the S.S. CRISTOBAL. This vessel carries passengers and cargo from New Orleans to Panama, including cargo which is diverted from West Coast ports by lengthy overland rail transportation at additional cost to the Government. Sea-Land provides direct commercial water service between Pacific ports and Panama with the capability of carrying the same commodities. The CRISTOBAL competes with U.S. commercial carriers operating between New Orleans and Panama and with carriers such as SeaLand who provide services from areas where cargoes carried by the CRISTOBAL originate. Assessing expenses of the CRISTOBAL against tolls enables the CRISTOBAL to operate in a loss position thereby undercutting competing commercial carriers while at the same time forcing these competing carriers to subsidize the CRISTOBAL through tolls payments. These expenses in no way are "appropriate" within the tolls formula.

61956 Hearings, p. 26. See also letter of Canal Governor Seybold, p. 21 of 1956 Hearings.

71956 Hearings, p. 38.

$1956 Hearings, p. 22. Letter of Governor Seybold to Speaker Rayburn.

9 1956 Hearings, p. 26.

10 1956 Hearings, p. 29. (Testimony of witness from Comptroller General's office.)

1956 Hearings, p. 3.

Sea-Land, therefore, urges the Comptroller General to determine that the new assessments of the Canal Company are not authorized by law, and to find that the tolls increase should not be implemented pending Congressional review and passage of the necessary legislation. We will be happy to provide any additional information desired and answer any questions concerning the above statement.

Very truly yours,

PAUL J. MCELLIGOTT, ESQ.

Ragan & Mason, The Farragut Building 900 Seventeenth Street, N.W.

Washington, D.C.

RAGAN & MASON,
PAUL J. MCELLIGOTT.

U.S. GENERAL ACCOUNTING OFFICE,
Washington, D. C., July 27, 1974.

DEAR MR. MCELLIGOTT: This is to acknowledge receipt of your letter of July 1, 1974, concerning the Panama Canal tolls increase. The matter which you raise with regard to the authority to amortize certain depreciation expenses, the reserve for bad debts, and the operations of the SS CRISTOBAL will be thoroughly considered in our review of the matter.

Sincerely yours,

JAMES E. MASTERSON, Assistant General Counsel.

Mr. SNYDER. Is it your contention that the Panama Canal Company should be divorced from the Canal Zone Government?

In your statement you indicate that the transit income provided a net profit of $71 million. That would seem to back up that kind of a thought.

Is that what you had in mind?

Mr. TOLAN. No, sir.

I think what we are trying to demonstrate is that where the mandate is an equitable share, that it is not an equitable share. We do not feel it is the way it is being handled now; and we attempted to show that dramatically by segregating what we identify as expenses with regard to the transit versus the administrative expenses of the canal.

Mr. SNYDER. In other words, you do not say divorce the two, but you say the proportionate share is too much; they are picking up the whole deficit out of this toll situation, and you do not think that is proper?

Mr. TOLAN. That is correct, sir.

Mr. SNYDER. Thank you very much.

Mr. TOLAN. Thank you very much for your time.

Mrs. SULLIVAN. We thank you very much, Mr. Tolan. We thank you and your association for presenting your side of this problem, and I hope that we have gotten something out of it.

Mr. TOLAN. Thank you very much for your courtesy in hearing us. Mrs. SULLIVAN. Thank you.

For presentation of the next testimony, I want the labor organizations to come forward, I am going to bring five of you up to the table at one time.

Mr. Al Graham, Mr. Gerald Oster, Mr. Mauge, Mr. Steve Koczak, and Mr. Elwin Lewis.

I think you can bring another chair up to the table.

Since there are so many of you here and since yesterday we did stay until 6 o'clock and cannot tonight, I would like a spokesman

for the labor groups who are from the Canal Zone to lead off, and then if one spokesman would give the testimony and then if each of the other two from the Canal Zone would just give us a few minutes of your ideas, we can have time to do some questioning and discussion. I would appreciate your cooperation.

Mr. Graham, I think your testimony that I have here is brief enough so that you can just read through your complete statement, and then we will begin some questioning.

STATEMENT OF ALFRED J. GRAHAM, PRESIDENT, CANAL ZONE CENTRAL LABOR UNION & METAL TRADES COUNCIL, AFL-CIO

Mr. GRAHAM. Madam Chairman, my name is Alfred J. Graham, president, Canal Zone Central Labor Union & Metal Trades Council, AFL-CIO. I would like to thank you for this opportunity to testify before the Panama Canal Subcommittee.

Madam Chairman, as you well know, the Panama Canal enterprise has just gone through the most serious episode in its history. I will attempt to show what series of events led to this action by Company/government employees and what can be done by government officials to prevent any similar reoccurrence.

In 1973, the Panama Canal Company/Canal Zone Government decided to implement the coordinated Federal wage system. The Canal Zone was, by law, exempted from the CFWS, but the Company/government implemented it administratively. The effect of this order was to downgrade 1,300 or more blue-collar United States and Panamanian employees. Then to add insult to injury the Company/government notified the unions that the entire law would not be implemented but only parts of the law. Naturally, the parts to be implemented were the sections advantageous to the Company/ government. The labor unions vigorously objected, and through the intervention of the Secretary of the Army the entire law was implemented. This was the beginning of the downturn in Company/ government employee morale.

This was followed by a renewed effort on the part of the U.S. State Department to accelerate Panama/United States treaty talks. Company/government employees were naturally apprehensive. As a result of the State Department policy of secrecy, which exists to this day, employee morale sank lower. The Panama Canal began to attract attention in the American press. So-called intellectual news magazines and newspapers proceeded to print stories about the country club zonia. The American people were told that the zonian was overpaid, underworked, and lived in the lap of luxury. U.S. shipping lobbies parroted this same lie whenever the matter of a toll increase came up. We read about all the golf courses we have, and all the swimming pools and other luxuries. It was naturally omitted that most of the pools and golf courses on the Canal Zone are on military bases and that there are only four golf courses on Panama Canal land and six swimming pools to service all U.S. and non-U.S. employees over a 50-mile area. It is also omitted that over 300 housing units are comparable to slum dwellings in the United States. A picture is painted of the U.S. citizen employee as a fellow who

gets up around 10 a.m., makes himself a rum and coke and only then drops out to the job to see if the natives are doing their job. He cracks his whip a few times and then breaks for a 2-hour lunch break followed by a hard afternoon of golfing, swimming, drinking, or boating. It must seem incredible to anyone reading this trash that when only 700 American employees called in sick the Panama Canal closed. What is the true picture of a U.S. citizen Company/government employee?

They are a very select group of top-rated professional, skilled, and dedicated Americans. Because of the Panama Canal's hiring requirements they are probably the finest people in their field that have ever been located in one place. Are they loyal Americans?

Yes, even our much maligned second and third generation employees. The Department of State passes out the line that some zonians have been down there so long that they don't know that there is a United States. I can assure you they know there is a United States, and Iwo Jima and France and Germany and Korea and Vietnam because they have died in all these places. To their credit they don't know about Canada, Sweden, and other such havens for draft evaders who, at the present time, are getting a better deal from the U.S. Government than the zonian is.

How does the zonian reply to such slanted news reporting? He can't. He does not have access to the U.S. press, so his morale drops a little more.

Other attempts by the Company/government to remove benefits include an attempt to remove the Canal Zone police, firemen, and schoolteachers from the Washington, D.C., pay scale. Add 10 days to the Canal Zone teachers work year without paying them for the added days. Attempts to downgrade telephone workers and armature winders, and on and on.

Then the Company/Government by instruction of Mr. Victor V. Veysey placed proposals before us that were preposterous. How any competent manager could place proposals on wages such as those presented to the Panama Canal employees boggles the mind. This has to be a clear case of arrogance of power. This arrogance of power was further displayed by Mr. Veysey when organized labor on the highest level met with him and the Secretary of the Army and requested the withdrawal of these proposals. Their answer was "No". The Canal Zone labor unions informed Mr. Veysey that they were losing control of their membership and if he did not take some kind of positive action to remove these proposals, the Panama Canal could close. He ignored the labor unions and the Panama Canal closed. After the canal was closed, he changed his mind or somebody did it for him, but most of his proposal was withdrawn. The employee hears loud screaming about them being law breakers, but we ask this: "Why did the Department of the Army push good loyal and dedicated employees into such a position that he had to commit an unlawful act in order to save what little he has left ?"

Why didn't Mr. Veysey listen to responsible union leadership that knew how low employee morale was, and were trying to prevent a confrontation? It must be remembered that the Panama Canal employees were not asking for more benefits. They were only trying to