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California Association of Port Authorities.
California Legislature, 1955.
California State Junior Chamber of Commerce.
Northern California Ports & Terminals Bureau, Inc.
Pacific Coast Association of Port Authorities.
Rice Growers Association of California, Sacramento, Calif.
Western Traffic Conference.


American Association of Port Authorities.
Intercoastal Lumber Distributors Association, Inc., New York.
North Atlantic Ports Association, Inc.

WASHINGTON 5, D. C., March 22, 1956. Hon. WARREN G. MANGUSON,

United States Senate, Washington, D. C. MY DEAR SENATOR MAGNUSON : Pursuant to my conversation with you on Tuesday after the hearings on S. 2167, I am writing you this letter on the problem of the compensation of Panama Canal pilots under the present version of S. 2167. As I informed you at that time these pilots, who are members of Local No. 30 of the International Organization of Masters, Mates, and Pilots, have been held by the United States District Court in Panama to be required under present law to receive compensation in accordance with the rates and practices in the maritime industry. The provisions of law under which their compensation should be fixed are sections 205 of the Federal Employees Pay Act of 1945 (59 Stat. 295, as amended, 5 U. S. C. 913) and section 202 (8) of the Classification Act of 1949 (63 Sta. 954, as amended, 5 U. S. C. 1082 (8)).

Under the provisions of section 6 (b) (5) of the proposed “clean bill” to substitute for S. 2167 the corporation would have full power to "fix their compensation" as it sees fit. It is this provision in S. 2167 which the pilots would like qualified so as to preserve the compensation requirements presently granted to them by the Congress. They have had much difficulty in getting the Company to meet these legal requirements and have had to file suits in court in order to get relief. For this reason it is doubly important to these people that S. 2167 contain provisions similar to the present law mentioned above. I suggest that a proviso be added after the word "employees" on line 10 of page 7 of the proposed “clean bill” to the following effect.

Provided, however, That pilots of vessels transiting the Panama Canal shall have their compensation fixed by wage boards and shall be paid wage board overtime and the rates and practices in the maritime industry of the

United States. The pilots are of the opinion that this suggested proviso would preserve for them the compensation which they have struggled so long and with such difficulty to obtain. When I discussed the matter with you on Tuesday I understood that you agreed that a change in the compensation of the pilots was not an objective of the hill and that you would go along with language which would preserve for them their present rights. I am sure that all of the pilots will greatly appreciate your cooperation in this matter as they have full confidence in you. With best wishes, Sincerely yours,


Counsel for Panama Canal Pilots. (The following additional correspondence, statements, etc., also were received for inclusion in the record : Letter from the Governor of the Canal Zone, dated May 18, 1956, in response to certain questions addressed to him by Senator Magnuson, and including further comments on the committee print; letter from Senator Magnuson to the Director of the Budget, dated March 28, 1956, and reply of the Director, Mr. Percival Brundage, dated April 9, 1956; letter from Robert


E. Mayer, president, Pacific American Steamship Association, dated March 30, 1956; letter from Committee on Panama Canal Tolls, dated April 3, 1956; letter from the American Merchant Marine Institute, Inc., dated April 9, 1956; letters from Henry P. Chandler, dated April 27, 1956, and May 28, 1956; and letter, under date of April 13, 1956, from James A. Campbell, national president, American Federation of Government Employees, enclosing a statement for the record of R. M. Lovelady, national vice president of the federation. The letters, etc., are as follows:)



Balbou Heights, C. Z., May 18, 1956. Hon. WARREN G. MAGNUSON,

United States Senate, Washington, D.C. MY DEAR SENATOR MAGNUSON: On behalf of the Panama Canal Company and the Canal Zone Government there are submitted herewith for insertion in the record of your hearings on the bill S. 2167, to make certain changes in the administration of the Panama Canal Company, and for other purposes :

(a) Data responsive to the points raised in your letter of April 5, 1956. The question or comment in your letter is quoted preceding the corresponding answer in each case, in the order presented in your letter.

(b) Comment on the clean bill enclosed with your letter. The enclosed material requires no additional explanation. I should like to emphasize, however, that as a whole I do not consider the “clean bill" any improvement over S. 2167 except for the one correction that would continue the present dual office of Governor and operating head of the Company. Our comments in opposition to S. 2167, already in your record, still apply generally to the clean bill.

In particular it is my definite opinion that the attempted statement of a consumer pricing provision in section 6, on page 6, of the clean bill, besides being unnecessary, is unsound in conception and drafting, would be controversial, troublesome and, in fact, unworkable in practice, and would create more problems than it would solve.

It is requested that this letter be inserted in the record with the enclosed
Sincerely yours,

Governor of the Canal Zone,
President, Panama Canal Company.


ING ON S. 2167

(Questions are quoted verbatim from and in the order presented in Senator Magnuson's letter of April 5, 1956, and are followed by the corresponding answers in each case.)

Question: "In your testimony you state the primary mission of the canal enterprise is to operate and maintain the waterway for the dual purpose of serving both national defense and transoceanic commerce. Elsewhere you review the chain of management command from the stockholder to the Board of Directors, to the Governor, to the division heads, all of whom serve at the pleasure of the stockholder, who is the Secretary of the Army.

(a) With this organizational structure in mind would you state your views as to which of the two purposes of the canal enterprise is of primary importance?

(6) Would you please review for the committee the manner in which any commercial control of the canal by nonmilitary personnel is reflected in

canal management?”. Answer: The primary mission of the Panama Canal enterprise is to operate and maintain the waterway for the transiting of ships from one ocean to the other and this primary mission has the dual purpose of serving both national defense and interoceanic commerce.

As already stated in our written report and testimony, which of the two purposes is the more important is a fruitless question. It is preferred not to speculate with personal views as to primary importance.

The present organizational structure of the enterprise is admirably suited to the stated primary mission serving the dual purpose. Both the Canal Zone Government and the Panama Canal Company are civilian agencies. They are not part of the Department of Defense or of the Department of the Army. Yet they have the benefit of high-level coordination by the civilian officer of the Government, the Secretary of the Army, who, acting as the personal representative of the President of the United States and not as head of the Department of the Army, can best provide the desirable continuity of interest, authority and responsibility throughout periods of war and peace.

The statement in the question is of course inaccurate that all the officers mentioned serve at the pleasure of the stockholder. The members of the Board of Directors, other than the Governor of the Canal Zone, so serve, but none of the other officials do. The Governor of the Canal Zone, who by law is ex officio President of the Panama Canal Company and a member of the Board of Directors, is appointed for a 4-year term by the President of the United States with Senate confirmation. The vice president, comptroller, and secretary, who are general officers of the Company, are elected by the Board of Directors. All bureau and division heads and all other employees of the Company are appointed by the president of the Company and their tenure status is the same as that of other Federal employees, under, for example, the Civil Service Act and the Veterans' Preference Act, which apply to the canal agencies.

The management of the Panama Canal Company is vested by law in the Board of Directors. The present “nonmilitary” members, having wide prominence in private business, are in the majority. They include an accountant, oilcompany executive, actuarial consultant, banker, realtor, and two lawyers, all well known in their major and other varied fields. In addition, the Secretary of the Army and the Assistant Secretary are also civilians with important and prominent backgrounds in private business. The other members include the Secretary's administrative assistant, a civilian with many years' service on the Board; two former Governors of the Canal Zone, who are retired Army officers; and, of course, the current Governor.

In the operating organization, which supplements the management of the Company by the predominantly “nonmilitary" Board, the Governor-President, the Vice President, the Marine Director, and the Engineering and Construction Director are the only military personnel who are in top operating or staff management positions of the Panama Canal Company. For example, the Governor's assistants, the Comptroller, the Secretary of the Company, the General Counsel, the Chief of the Executive Planning Staff, the Personnel Director, the Supply and Employee Service Director, and the Transportation and Terminals Director are all civilians. And this is true of their staffs and employees in turn. Out of the nearly 3,000 United States citizen employees of the Panama Canal Company, only 9 are military officers on detached duty. These include the 4. memtioned above, the 2 port captains and the Industrial Division Chief and his assistant who are Navy officers, and the head of the Power-conversion project, an Army officer.

Question: "In your statement regarding the matter of tolls you state 'At the time of the enactment of the law in 1950 (Public Law 841) it was generally assumed that the tolls would be increased.' Further along in your testimony you state 'The Company does not regard that theory (that the formula in Public Law 841, if properly administered, requires a decrease in tolls) as a proper construction of the existing law.'

(a) Is it fair to assume from these two statements that a tolls hearing will only be called by you when an increase in the rates is called for?

(6) Has the Board of Directors ever prescribed a toll since Public Law 841 was passed?

"(c) Having in mind the GAO audit report for 1954, wherein evidence is presented showing the logic of a tolls reduction at the present time, do you intend to call tolls hearing in the near future? If not, what basis do you

use for making this decision?" Answer: (a) The Panama Canal Company will propose either a decrease or increase in rates of tolls, in the manner prescribed by the statute, whenever the Company on the basis of its continuing studies and of its interpretation and application of the governing law, concludes that changes are indicated and necessary in order for it to conform to its fiscal burdens and objectives and arrives at proposed new specific rates of tolls embodying changes, either up or down. The Company's position on this point is further detailed in its written report on S. 2167 which the subcommittee chairman, at the hearing, advised would be inserted in the record in full.

(6) Changes in the rates of tolls have been proposed since the 1951 reorganization. Public Law 841 continued existing rates of tolls then in effect until changed by the Company as provided by the statute. For the reasons clearly detailed in the Company's written report and at the hearings on S. 2167, no change in the rates of tolls under the statute is yet required or indicated.

(c) The Company does not agree with the suggestion that the General Accounting Office's 1954 audit report presents evidence showing any logic indicating that the rates of tolls should be reduced at the present time. On the contrary, the Company rejects the theories of and arbitrary computations in the audit report. The Company's reasons for this position and its basis for concluding that no increase or decrease in tolls rates are indicated at the present time and therefore that no tolls hearing will be called in the very near future, are covered in detail in its written report and testimony already in the record.

Question: "Having in mind your statement that the only relationship between canal management and the national transportation policy is the matter of tolls, would you object to removing the tolls making function from the Board of Directors of the canal and placing it in a separate agency of the Government outside of the Defense Establishment?”

Answer: The Company's specific statement was that the interests of the canal users in tolls rates is recognized in the statutory requirement for a public hearing, that the policies of the Company and its financial status as bearing on the adequacy of the rates of tolls are subject to annual review by the Bureau of the Budget and the General Accounting Office and by the Congress on the basis of the annual budget program and audit reports, and that “in the case of specific changes proposed by the Company, after the required 6 months' notice and public hearing, the broad interest of the United States in terms of national transportation policy or otherwise is further protected by the requirement that the proposed changes shall be subjected to the review and approval of the President of the United States."

With reference to the statement of the question in terms of placing the tollsmaking function in a separate agency "outside of the Defense Establishment,” it should be recorded that the Panama Canal Company is not now within or a part of the Defense Establishment.

The Company would recommend strongly against any removal of its function under the tolls statute to a separate agency. For reasons indicated in the Company's written report, Panama Canal tolls fixing is not analogous to the rate fixing or other activities of private business with which such administrative or regulatory agencies as the Interstate Commerce Commission are concerned. It seems clear beyond question that so long as the Company is given the responsibility of operating the enterprise on a self-sustaining basis under fiscal formulas and burdens prescribed by statute, the authority to interpret, administer, and apply those statutory provisions should remain in the Company and not in another agency that would have such authority without commensurate responsibility. In this respect, the present law is soundly conceived.

Question: "In your testimony you suggest that 'any adjustment (decrease) in tolls would benefit special interests. I would appreciate it if you would state your views as to whether an increase in tolls would be a detriment to the same special interests.

"In your answer to the above, would you state whether or not the Board of Directors are actually required to take into account the benefits or detriments to tolls payers in the matter of both scheduling tolls hearings and deciding upon a toll rate. That is to say, is the Board of Directors under any statutory mandate to consider the effect upon the users of this transportation facility as in the Interstate Commerce Commission in arriving at the rates domestic carriers can charge their customers ?"

Answer: In the same sense that a decrease in tolls would benefit canal users, an increase in tolls presumably would work to their detriment.

The Board of Directors is required to establish tolls rates which will assure that the enterprise as a whole will be self-sustaining, under the provisions of the Panama Canal Company Act and the tolls statute. Within the latitude permitted by this principle the Board has a duty to consider all relevant factors, including the benefits and detriments of toll rates to users of the canal and to the taxpayers of the United States.

Question: "On page 6, paragraph 4, your testimony states that changing to the St. Lawrence seaway type of management would have 'definite disadvantages.' Your testimony then names one specific disadvantage--i. e., that as written, S. 2167 would create 2 separate positions for the Zone Governor and Canal Administrator, which are but 1 position now, filled by 1 person.

"In the enclosed 'clean bill,' you will note that this has been remedied, and that as it now reads, these 2 positions would be filled by 1 person, as is the situation now. Would this remove your objections to seaway-type management ?”

Answer: The “clean bill" does correct one objection by continuing the dual office of Governor and operating head of the Company. In all other respects the "clean bill” represents no improvement over the original, so far as the Panama Canal Company is concerned.

It is believed that our testimony made no reference to the St. Lawrence seaway agency. It is not intended to be in any way critical of the type of management or organization adopted for that or any other agency. By the same token it is considered that that agency and the Panama Canal Company are not sufficiently alike to establish that the type of management best for one is necessarily the best for the other.

The one correction in the "clean bill” does not remove the Company's objections to the proposed change in management. No advantages whatever are seen in the proposed change. Perhaps the best argument against the change is the conspicuously successful achievements of the present management as detailed in our written report and testimony already in the record on this point. No management or other problems have developed which in any way reflect on the judgment of the Congress in establishing the present form of management in the 1951 reorganization. It has had a sufficient trial period to establish firmly the conclusion that experience provides no reasons for a change.

Question : "On page 8, paragraph 3, you state that limiting cash reserves to 1 year's needs for expansion and capital investment would require a 'resort to annual appropriations to cover capital programs * * *.' Section 246 (b) of the Canal Zone Code provides for appropriations (repayable with interest) for capital improvements if needed; section 254 provides for $10 million emergency fund, which the canal now has on deposit with the Treasury; and section 255 provides for appropriations (repayable without interest) to cover losses.

“(a) For what purposes since 1951 has the canal called on any of these 'outside' sources for funds? Have not such expenditures as the Contractor's Hill work and the revamping of the electrical system come out of operating

income, rather than being financed out of 'outside' sources”? Answer: It has not been necessary for the Panama Canal Company, since the 1951 reorganization, to obtain appropriations for any purpose or to borrow from the emergency fund maintained in the Treasury. All expenditures have been financed from funds available to the Company. These funds consist of working capital in the possession of the Panama Railroad Company at June 30, 1951, augmented by working capital transferred from the Panama Canal on July 1, 1951, and cash generated by the Panama Canal Company as a result of its operations since that date.

The Contractor's Hill and power conversion projects have been financed out of "operating income" as stated in the question, if the term “operating income" is intended merely to distinguish the source of funds from “outside" sources, i. e., if the term means accumulative income or earned surplus and does not mean operating income as it applies to earnings of a specific year during which expenditures were made for the projects.

It cannot properly be said that capital expenditures were financed from “operating income" as that term is commonly construed. The operating income of the Company during its first 4 years of operation, after recovery of direct operating costs, including depreciation, but before paying fixed charges to the Treasury, amounted to $89.4 million. Payments to the Treasury during that period, excluding a $10 million capital repayment, amounted to $75.8 million, leaving a net operating income for the period of $13.6 million. Since capital expenditures during the 4-year period totaled over $27 million, they could not have been wholly financed from operating income. Financing was possible because the Company bad retained cash from operations of its predecessor organization and because expenses given effect in the determination of net income included depreciation

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