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 promi-. nence 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? "(b) 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 appli

cation 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.

(b) 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 had retained cash from operations of its predecessor organization and because expenses given effect in the determination of net income included depreciation

charges and other non fund transactions, which involved no expenditure of funds. Depreciation is limited to the recovery of the original cost of the depreciable properties. The cost of plant expansion and the cost of plant replacement when greater than original cost must be provided from earnings or from new capital. If earnings are returned to the Treasury, it is inevitable that appropriations must ultimately be sought to finance capital expenditures. If the Company is permitted to withhold cash only to the extent of foreseeable requirements for plant replacement and expansion for 1 year, it will have to seek appropriations sooner, and thereafter more frequently, than would be the case if the flexibility provided by the present law continues to be authorized.

Limiting cash requirements for Company expansion for 1 year would go beyond the intent of Congress in the Government Corporation Control Act, which declared it to be the policy to bring Government corporations and their transactions under annual scrutiny by the Congress and provide current financial control thereof. Section 104 of this act states that the provisions of the section shall not be construed as affecting the existing authority of any wholly owned Government corporation to make contracts or other commitments without reference to fiscal-year limitations. Limiting cash requirements for Company expenditures for one year would seriously jeopardize the ability of the Company to make commitments without fiscal-year limitations.

The Company's opposition to the proposal to limit its authority to retain funds beyond a single year's requirements is of course stated in detail in its written report and testimony already in the record.

Question: "In your testimony you concluded that the business 'activities cannot possibly pay their own way' under the self-support formula in S. 2167; that these activities are needed to maintain the canal; and that unless the tolls formula provides that such loses be absorbed by tolls, there is an 'unwarranted subsidy to the ships using the canal.'

"In order to clarify the scope of the various business enterprises, would you please furnish the following information:

"(a) Marine terminals: (1) What percentage of revenues comes from outside sources-i. e., other than Company/Government? (estimate only, fiscal 1954)? (2) What are the wharfage, dockage, and demurrage rates now charged? (3) What is your opinion as to the amount by which such charges could be increased for outside users?" [Reference numbers supplied.]

Answer: (1) The percentage of total revenue from outside sources (other than Company/Government) in fiscal year 1954 was 87 percent. This includes wharfage, cargo handling, and marine bunkering operations.

(2) Wharfage charges are those made against a vessel for occupying a berth alongside Company wharves or piers. The charge is based on the length of the vessel and has no relation to cargo. The present basic rate is $0.25 per lineal foot per 24-hour day with certain reductions for vessels occupying berths for short periods.

The Company has no dockage rate. It is noted that in several Pacific coast ports a dockage charge is made for the account of the vessel on a net or gross registered tonnage basis. This would be comparable (except for the basis-length of vessel versus tonnage of vessel) to our wharfage charge. In some Pacific coast ports, such as Los Angeles and Seattle, a wharfage charge for the account of the cargo (on a per-ton basis) is made in addition to the dockage charge. This wharfage charge is not comparable to ours. The Company makes no wharfage or dockage charge as such for the account of the cargo.

The Company makes no marine terminal demurrage charges; however, storage charges are applied to in-transit cargo, for the account of the carrier; and to local cargo, for the account of the cargo, as follows:

(3) The Company is recovering all costs including administrative expense applicable to the terminals operation plus a reasonable margin of income. It is not considered indicated to further increase the rates. It is entirely probable that any material increase would result in some loss of business.

Question: "(b) Vessel repair: (1) What percentage of revenue (estimate, fiscal 1954) comes from customers outside the Company/Government? (2) Do you repair Panama Line vessels there? (3) If not, why not? (4) Would it be more economical or feasible to transfer this facility to the Navy, and pay Navy rates to repair Company dredges and barges? (5) What percentage of work there is done for the military services? (6) Are charges to them on the same basis as to private shipping?" [Reference numbers supplied.]

(In

Answer: (1) In fiscal year 1954, total work amounted to $3,216,425, of which $1,961,494 were revenues from customers outside the Company/Government. These revenues equaled 61 percent of the total work done in that year. fiscal year 1955 outside revenues amounted to $1,478,430 or 53 percent of total work done.)

(2) and (3) Limited repairs are made to Panama Line vessels in the Canal Zone, namely, those which can be accomplished in the amount of turnaround time available and for which the price is competitive with repair work done in Stateside repair shops. In fiscal year 1955 12 repair jobs, amounting to $8,795.96, were done for the Panama Line in the Canal Zone.

(4) This question cannot be readily answered without being given some basic assumptions. The answer is almost certainly in the negative, particularly considering the incongruity of suggesting that the Navy enter into this type of ship-repair operation wherein 25 percent of their effort would be for repair of military plant, 40 to 50 percent for Company/Government work, and 30 to 35 percent for commercial shipping.

This figure is at slight variance with fiscal year 1954 annual report because of change in treatment of cost of maintenance of Balboa defense plant.

(6) Charges to the Navy are the same as to commercial shipping. Question: "(c) Steamship line: Does the Department of Defense view the Panama Line as competition with private industry? If so, does it intend to recommend the service be supplied by outside contractors, as is being done in other industrial service fields? If not, how does the Panama Line differ from the Government enterprises which the Secretary has recently notified Congress he intends to return to private contractors?"

Answer: The Panama Line is not part of or under the control of the Department of Defense and presumably is not within the scope of any review by that Department of the fields mentioned. The Panama Canal does not, of course, presume to represent the views of the Department of Defense.

The relationship between private American-flag shipping and the restricted operation of the Panama Line has been described by the General Accounting Office as follows:

"Information secured from private steamship operators who have ships sailing regularly from the port of New York on routes which transit the Panama Canal shows that through cargo is preferred to cargo which necessitates time-consuming and otherwise expensive stops en route. Consequently the Panama Line, which serves the Canal Zone and the Republic of Panama, is not considered competitive in the commercial field as it permits the private operators to better serve their primary interests at their regular ports of call." (General Accounting Office Report on Survey of Duplication of Government Activities and Related Facilities in the Canal Zone, September 24, 1953).

The Hoover Commission recommends that MSTS should ship its cargo between New York and the Canal Zone on the Panama Company operated Panama Line.

Question: "In the company letter furnished the Hoover Commission Transportation Committee on October 1, 1954, mention is made of a study being made to determine the feasability of reducing the line's equipment and service to meet