mercial vessels using the Panama Canal do not pay more than their share of the cost of operation of the Canal for transit purposes. Transfer of the facilities as proposed by section 2 of the bill would result in a decrease in the net business revenues of the Canal of approximately $1,500,000 a year. Although the business operations of the Canal are conducted separately from operating activities pertaining directly to the transiting of vessels and government of the Canal Zone, they are treated as part of the over-all operations for accounting purposes, and are included in determining whether the fixed capital charge of 3 percent per annum has been earned on the total capital investment of the Canal. Obviously, transfer of the facilities in question would have a serious effect upon the financial operations of the Canal and the policy to be followed with respect to the fixing of tolls. Pursuant to authority contained in House Resolution 44, considered and agreed to on February 28, 1949, the Committee on Merchant Marine and Fisheries is now engaged in a full and complete study and analysis of the financial operation of the Panama Canal for the purpose of recommending to the Congress 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 Canal for transit purposes. One of the items being studied by the committee is the proper accounting and allocation of costs attributable to the business operations conducted under the supervision of the Governor General of the Panama Canal by the various business units of the Panama Canal and Panama Railroad Company. The President of the United States has found it to be consistent with the public interest to postpone until September 1, 1949, the effective date of a proclamation increasing tolls for the use of the Panama Canal in order that the Congress may have adequate opportunity for consideration of the committee's report. We believe that transfer to the Panama Railroad Company of the facilities referred to in section 2 would complicate and render more difficult the task of the committee engaged in the study under House Resolution 44, and we respectfully urge that the provisions authorizing the transfer of such facilities be deleted from the bill. Mr. O'TOOLE. Thank you very much, Mr. Krebs, for your statement. Are there any questions? Mr. MILLER. I would like to ask one question: I notice on page 2 of your statement, Mr. Krebs, you say that $1,500,000 a year of profits would be accounted for differently if this new act were adopted. In other words, I assume that those profits would be transferred to the Panama Canal Company rather than going into the general fund in the operation of the property? Mr. KREBS. That is correct. Actually that figure for 1948 was $1,559,478.71. The statement of mine was based on the fact that the figure for the year of operation, the fiscal year ended 1948, would be approximately that much. The operations have continued to show profits, and it is my recollection that there has not been any decrease in the net revenue derived from the operation, particularly of that line, for several years. Mr. MILLER. Well, you assume that they are operating at a profit? Mr. KREBS. Yes. Mr. MILLER. Then perhaps you could explain to us, because there must be some purpose behind this proposition, why is it proposed by the people who are advocating it? Mr. KREBS. I know of no other reason other than that stated by Mr. Burdick, and that is, in the opinion of the General Accounting Office and perhaps the Bureau of the Budget, these operations could be conducted more efficiently by the Panama Railroad Company rather than The Panama Canal. Mr. MILLER. All right; then we come to the last thing that I would like to get my mind clear on: Does the Panama Line Company itself— and it is government-owned, is it not? Mr. KREBS. The Panama Railroad Company? Mr. MILLER. Yes. Mr. KREBS. It is a Government-owned corporation. Mr. MILLER. Does not that profit go into the whole picture just as much as that derived from any other operation? Mr. KREBS. The profits from the Panama Railroad Company, as I understand, are covered into the Treasury. However, and I think this is probably what your question has reference to, any profits from the Panama Railroad Company are not included in the revenue derived by the Panama Canal in determining whether or not the fixed charge of 3 percent has been earned on the net capital investment in the Panama Canal. The Panama Railroad Company files a separate report with respect to its operations, and its operations are separate and distinct from those of the Panama Canal. That is my understanding of the situation. Mr. MILLER. As I understand it, the Panama Railroad Company not only runs the Panama line, that is, the shipping company, you might say; it is the official communication chain between the continental United States and the Canal Zone, but in addition it runs the only railroad; does it not? Mr. KREBS. Yes. Mr. MILLER. On the line? Mr. KREBS. Yes. Mr. MILLER. It is very vitally tied in with the whole economics of the area. Now, just at first thought, at first blush, I do not see how you could divorce the Panama Canal Company, which is Government-owned, from the operations of the Canal, which is Governmentowned; the two are absolutely interdependent; are they not? Mr. KREBS. They are related, yes, and I believe that the Panama Canal, at the present time, is charged for any services which the Panama Railroad Company might render in connection with the operation. Mr. MILLER. Would it not also seem logical that if the Panama Canal Railroad Company is operating at a profit and that profit goes into the general funds of the Treasury, that that operation should be considered in this picutre of determining the over-all profit, in respect to a proper return or a proper rate which the Canal charges as much as the other operations to which you are making reference here? Mr. KREBS. Mr. Miller, it may be that is one of the things that this subcommittee which is now studying the whole Panama Canal situation would suggest. As it is now the operations and revenue derived from the Panama Railroad Company's operation, are not included in revenues which are derived from the operation of the Panama Canal. They are accounted for separately; separate reports are filed with respect to the two operations. Mr. MILLER. I could see frankly, if they are operating at a loss it might be very much to the disadvantage, I mean, to your disadvantage to have this money dumped into their lap; but on the other hand, if they are operating at a profit you might be better off to have all the funds, that is, the other profits, as well as this $1,500,000 taken into the full over-all picture. Mr. KREBS. If that is the situation it may be that this committee would recommend that that be done. However, at the present time they are treated separately for accounting purposes. Therefore, with revenue from the Panama Canal, with business operations which are operating at a profit, would perhaps provide a possible basis for suggesting that tolls should be increased in order for the Canal to earn this 3 percent on the net capital investment. Mr. MILLER. One more question along that line: Suppose that any new rate that is recommended and adopted, any profits that were made by the Panama line, Panama Railroad, or whatever the company's name is, were figured into the picture, so far as determining the rate, with the other earning on the Canal property, you would not object to this provision then, under those circumstances? Mr. KREBS. I could not say at this time whether we would or whether we would not. One of the chief objections that the shipping industry has had to the present system is that it feels that there are certain costs which are being allocated at the present time to the transiting of vessels through the Canal which should not be allocated to that operation. Therefore, it is suggested that the entire operation of the Panama Railroad Company and the Panama Canal be thrown together, and to us at this point it would seem to be of a dubious procedure, and it will have to be examined more thoroughly and gone into before it could be determined whether or not that was the proper procedure to be followed with respect to the fixing of tolls. Mr. MILLER. But your only objection to this merger is based solely on the fear that it might give an improper accounting picture in respect to the 3 percent return on the Canal investment, whatever the policy might be. In any event, your objection is directed to that point, to the accounting feature. Mr. KREBS. To the accounting, and to the possibility that it would provide a base for increasing the present tolls. Mr. MILLER. Increasing or maintaining rates that would otherwise be less, and that is your only concern with the suggestion, and if that feature of it were taken care of you would not care how the accounting was done; is that right? Mr. KREBS. That is correct. What we are concerned with is that in making the rates, the vessels transiting the Canal do not bear more than their fair share of the cost. Mr. MILLER. Thank you. That is all I have. Mr. WICKERSHAM. I would like to ask one question, Mr. Krebs: What objection or what answer does Mr. Burdick make to the suggestion, if you have discussed it with him? Mr. KREBS. No, I have not. Mr. WICKERSHAM. Could I ask Mr. Burdick if he has a ready answer to that suggestion? Mr. BURDICK. I have no prepared statement, because I had not anticipated a question of that kind would be raised. I would like to make a brief statement on that, however, with the approval of the committee. Mr. O'TOOLE. Yes. Mr. BURDICK. First, I would say that the Panama Canal and the Panama Railroad do not have any immediate intention to transfer all of these activities. But if there are certain efficiencies of operation we might find that there are several advantages and that it would be desirable in the interest of efficiency to immediately transfer some of them. Secondly is the question of this authority already existing in the President, who at the present time has authority to make most of the transfers we are talking about. Mr. MILLER. Your suggestion is that the President has the authority now? Mr. BURDICK. He can do so, and in most of these cases. The third thing relates to the question of profits. The Merchant Marine and Fisheries Committee is now starting on a study to determine recommendations to the Congress for the basis of toll charges. In the past the practice has been to make the Canal self-supporting and in doing that they have determined upon the capitalization of the Canal, that is, the net amount of money that the Government today has in the Canal enterprise to meet the needs commercial traffic, and attempted to set rates which would produce operating expenses, plus the carrying charges, of 3 persent on the amount invested. Now with respect to the railroad operations and other activities, as Mr. Krebs has pointed ont, those profits do go into the Treasury in the form of dividends, and the railroad has always been self-supporting. However, the capitalization of that division is not included in this capitalization of the Canal enterprise for toll purposes. Therefore if you take the additional divisions and transfer them to the Canal and get the benefit of the revenues you must also take with it the capitalization, which would increase the capitalization for toll purposes, so that as long as the activities, whether they be the Canal or the railroad, are operating at a profit of 3 percent, it makes very little difference as to whether you include all of these activities in one or the other. But you cannot simply take the revenue without taking over the burden as well. Mr. MILLER. As I understand you, that if one of these facilities was transferred from the Canal proper to the Railroad Company, while its earnings would be a loss to the Canal, the capitalization, the investment would come off the capital stock? Mr. BURDICK. There is a provision in the bill, I believe, which increases the capitalization-at least if it is not in the bill, it would be in one of the provisions of the act reincorporating the Panama Railroad Co.-which increases the capitalization to the extent of any of these activities that are taken over; there is a provision for evaluating those activities. And, as I said a moment ago, your committee is studying this whole question, and regardless of what is done here it is free to recommend what should be included in the capital structure of the whole property. I see no conflict between the bills at all, and no reason for delayed action on this bill. Mr. O'TOOLE. Mr. Krebs, did you have any further statement? Mr. KREBS. I would like to say, Mr. Chairman, of course, that we do not agree with Mr. Burdick that the President now has the authority to transfer these facilities to the Panama Railroad Company. It is true, as Mr. Burdick indicated in his statement, that there is provision in the present section of the law under which the President does have now authority to establish, maintain, and operate, through the Panama Railroad Company, certain facilities similar to those which it is proposed to transfer, but I cannot find any authority in the section which would authorize or permit the President to transfer facilities or property, such as is proposed by this section 2, to the Panama Railroad Company. It is a restatement of this section, a restatement of the present law as he indicates, but it goes beyond restating the law, because it does specifically authorize the President to transfer certain physical facilities to the Panama Railroad Company. If I may say one thing further, it is true that this committee does have this whole subject under investigation, yet, at the same time Mr. Burdick has pointed out that they do not contemplate any immediate transfer of these facilities. Our position is that the status quo can very well be maintained at the present time pending the completion of this study and investigation of the whole problem by the Committee on Merchant Marine and Fisheries. Mr. Burdick has indicted no immediate need or necessity for this authority which he has requested, so I do not see why it would not be quite possible to maintain the status quo pending the completion of this study and investigation which is now being conducted. Mr. O'TOOLE. Is there any further rebuttal, Mr. Burdick? Mr. BURDICK. No; other than to repeat the fact that we see no reason whatever for delaying this legislation, and that it should be enacted. It will not control your committee or the Congress in any way in establishing the basis for tolls. We say that this authority should be clarified so that if the President and the various agencies of the Government determine that an operation can be performed more economically and more efficiently by one organization than the other it should be transferred, and transferred as soon as that determination is made. |