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price indices, and officials of that service have assured us that the language will have the result that is intended by both the employees groups who must live under the consumer index, and those who must pay through tolls the general cost of operation of the canal. For that reason, we as representatives of industry feel that it is necessary that we state very clearly in this record what was intended by the language. We hope that representatives of the employees will make a similar statement and that if they do, and the proposal seems proper, your committee in reporting this bill out can make a clear statement of the legislative intent.
It is our intent to accomplish through this language that employees in the Canal Zone should live with a consumer price index equal to that in Washington, D. C. By that, we mean that assuming the Bureau of Labor Statistics in its method of operation indicates a typical family in Washington, D. C., living on a certain middle bracket salary and finds that that family is required to spend X dollars per week to provide itself with all of the things that is in its so-called market basket, our intent is simply that after the BLS survey, the language of this proposed legislation would require the Administrator/Governor to establish a consumer price index in the zone, which would permit the same size, so-called typical family in the zone to provide itself with a typical zone market basket for the same number of dollars per week that the other family provided itself with in Washington, D. C.
By way of elaboration, we might point out, for instance, that certain commodities might be more expensive in the zone and others cheaper than in Washington, D. C. We would expect that the result of this BLS survey would, under the terms of this proposed legislation, indicate to the Administrator that he must so adjust the price of the cheaper commodities in the canal and the more expensive commodities in the canal on some basis so as to provide the employee with the same total gross living cost as if he were residing in Washington, D. C.
The CHAIRMAN. Do you mean by that the same X number of dollars?
Mr. MAYER. Yes, sir.
The CHAIRMAN. Suppose he bought more of the expensive commodities in the canal and less of the cheaper commodities. Wouldn't it have to be higher?
Mr. MAYER. We would agree that the balance should be assumed in the tolls formula. In other words, we don't feel the employee should be penalized. I think the next paragraph might answer it.
In other words, as we do not feel that the employee should be penalized because he must purchase certain commodities which are more expensive in the Canal Zone because they are not produced there; similarly, we do not feel that he should expect to profit by the fact that certain other commodities are available much cheaper there than they would be in Washington, D. C. We are seeking a rounding off of all of the commodities in his market basket so that he will pay just as much to live in the Canal Zone as does the same man living in Washington, D. C., but no more.
The mechanics of accomplishing that are the only major difficulty according to BLS, and they think that this language about does it. They may have by now some slight proposals for changes.
The CHAIRMAN. I don't quite understand. You put the same items in the market basket for one living here as one living there and then you determine the average price in both places. That wouldn't necessarily come out the same.
Mr. MAYER. The trouble is that there is no such thing as an identical, as they call, market basket. I am new at this market basket thing as regards BLS. There is no such thing as an identical one in Panama and Washington, because obviously a person's purchases in Panama differ from those in Washington. So they will balance them back and forth and they will so adjust all of the prices in Panama so that the man with this same family on the same job as his counterpart in Washington, will spend the same dollars.
The CHAIRMAN. That is if he buys from the Canal Zone.
Mr. MAYER. That's right, which they do in most of the commodities.
The CHAIRMAN. You couldn't do that with outside buying.
The CHAIRMAN. You are talking about purchases
Mr. MAYER. At the commissary.
Mr. BOURBON. There will be a statement later on, Senator, from the Bureau of Labor Statistics.
The CHAIRMAN. Very well.
Mr. MAYER. The next item of importance in the bill of a fiscal nature is that limiting retained income to the needs for 1 year. The proposal in this item is to limit, to the needs for 1 year, the extent to which the Company may retain profits for working capital, plant replacement, and expansion. This is Recommendation No. 1 in the GAO Audit Report for the year ending June 30, 1953. (H. Doc. 473, 83d Cong., 2d Sess., page 30.)
The GAO recommendation follows:
(1) Cash requirements for capital expansion. We recommend that section 253, title 2 of the Canal Zone Code be amended by adding the words "for the ensuing year" after the phrase "reasonable requirements for authorized plant replacement and expansion" in the first sentence. This would limit the Company to retention of only such funds considered necessary for capital expansion for the ensuing year.
The board of directors has not paid a dividend since 1950. The main reason for retaining large amounts of cash has been to finance major long-term capital construction and replacement programs. Hence cash has been accumulated over a period of several years prior to the time that actual payments are required. At present the most important construction programs are those for housing replacement, largely completed, and converting the electrical system from 25- to 60-cycle, requiring several years for completion.
The Company's charter provides for obtaining appropriations for capital needs and operating losses. Thus it is not necessary to retain funds for financing long-term construction programs; funds can be obtained as needed.
The payment of dividends reduces the Company's interest base. Nonpayment of dividends thus increases the Company's interest expenses and places an unnecessary burden on the Company's customers, mainly ship operators. The CHAIRMAN. Does the Company retain a certain reserve? Mr. MAYER. Yes; they do.
The CHAIRMAN. And they don't pay those into the Treasury?
Mr. MAYER. Yes, they do at times, periodically. In November 1954, after this GAO recommendation was issued, I mean in fairness some time afterward, they declared a $10 million liquidating dividend, which reduced the capital base upon which tolls must earn interest by $10 million.
The CHAIRMAN. But they could under present law or present regulations keep all of the profits conceivably as long as they wanted to? Mr. MAYER. No. There is a limitation on them.
The CHAIRMAN. What is the limitation in time?
Mr. MAYER. It is not measured in time or dollars. It simply says that the board of directors will, I think annually, adjudge their requirements for expansion and capital investment and then everything that is left over beyond that remit to the Treasury.
The CHAIRMAN. Suppose they adjudge their expansion program and their replacements and all of these other things, planned for many, many years ahead. They could conceivably never create a dividend. Mr. MAYER. That was the complaint of the GAO in 1951.
The CHAIRMAN. It would be like a Panamanian shipping company? Mr. MAYER. That's right.
The CHAIRMAN. Like a Panamanian oil company. They would never declare it until they wanted to.
Mr. MAYER. Our only suggestion is that they cut it to 1 year. In other words, that they plan for expansion for 1 year. We understand there is opposition to this. The significance of it, of course, is that we have to pay interest on everything that is retained. If it were remitted back to the Treasury, it would cut down the net direct investment upon which we pay 2.9 percent interest.
The CHAIRMAN. What do you mean by "we pay"?
Mr. MAYER. The tolls payers in total are required to pay.
The CHAIRMAN. So the more they keep, the more we have to pay?
The CHAIRMAN. What has been the average term in the Treasury? How long does it take generally speaking? Do they hold it for 1 year, 2, or 3 years?
Mr. MAYER. I think that the $10 million dividend in November 1954 was the first one since the reorganization, but I will have to defer to GAO or Company people for that.
Interest is important
The CHAIRMAN. In most cases it has been over a year?
Mr. MAYER. They took in $35 million in tolls; $8 million was required for interest. There were other revenues of the Company, steamship line revenues, railroad, hotels.
The CHAIRMAN. That is about 25 percent?
Mr. MAYER. That is not upon the tolls amount. That is upon the construction cost of the canal still remaining. It is computed at 2.94 percent.
The CHAIRMAN. $8 million paid in is only about 25 percent of the total collected in tolls.
Mr. MAYER. It is about that, yes.
The significance of interest is indicated by the Canal Company's Income statement for the year ending June 30, 1954 (p. 47, 1954 annual report), wherein it is shown that interest charges for that year were $8.8 million. Any reduction of the capital base through liquidating dividends reduces the annual interest burden. In November of 1954, the Company declared a $10 million liquidating dividend, which simply means that it paid that amount into the United States Treas
ury, and reduced the capital base by the amount. This dividend reduced by $250,000 the amount of interest that must be earned through tolls.
The CHAIRMAN. You say here when they declared the $10 million dividend, and reduced the capital base by that amount, that the dividend reduced by a quarter million dollars the amount of interest that must be earned in that year through tolls?
Mr. MAYER. That's right.
The CHAIRMAN. What is the total capital? What do you list the total capital base at now on the canal? I had those figures in the Appropriations Committee but I have forgotten; $275 million, I believe. We will get that.
ST. LAWRENCE SEAWAY TYPE MANAGEMENT
Mr. MAYER. The St. Lawrence seaway type management is the next joint that is covered in the bill. We propose it because it conforms with general practice in Government corporations and because it had this statement says "unanimously," but it is wrong-it had bipartisan congressional support when it was enacted for the St. Lawrence seaway. The General Accounting Office will, we understand, make suggestions for a type of management that will go beyond this, because they have done so in their annual reports. Nevertheless, we feel that the GAO will not object to the institution of this type of management, and might even consider it as an improvement over the present. In view of the studies by that agency of the various Government corporations, and their greater familiarity with management structure in them, we will offer no further comment on this part of the bill.
We come now to another provision in the bill, which is a proposal for a requirement of court review of tolls decisions. Our counsel does say that we are entitled under existing law to have tolls prescribed in accordance with the present formula, and that the courts may compel the Panama Canal Company to do so, but that after the Company has acted we cannot take the Company's decision to the court. We do not believe that those who use the canal should be bound entirely by the decision of a board of directors who are not lawyers. Conversely we don't believe that such a board of directors, which should predominately be made up of men who contribute mainly business experience should have the responsibility of making the final decision on questions, many of which are a matter of law. The right to court review of decisions of quasi-judicial bodies is general in our Government structure. Examples are ICC, FCC, Maritime Board, and others.
This is not to state that such individuals are not qualified to pass on such questions in the first instance, just because they don't happen to be trained in the law. As a matter of fact we feel that when and if this tolls formula is enacted, people in business will be eminently qualified to handle and make determinations on a toll rate. This is because the decision in large part will be based on the fiscal aspects of the canal which are not unlike a business utility. The reason that tolls payers feel that they are entitled to a court review is that it is afforded to other industries with respect to this type of decision.
Users of utilities in general can always have a court review of rate decisions, and this is what we ask for here. In framing this so-called
"clean bill" we have spelled out the jurisdiction very closely with respect to the court on the review, because our present litigation has been tied up for months on that very question. The Canal Company's motion to dismiss our case for lack of jurisdiction was argued in Federal Court on December 29, but as yet we have had no decision. In all probability the case will be taken to the Court of Appeals by the losing party. It would be time-saving to go directly to the Court of Appeals, just as now a party who is dissatisfied with the decision of the FCC, of the FMB, Civil Aeronautics, or Secretary of Agriculture in commodity cases, can go directly from the quasi-judicial body to the Court of Appeals.
We have also inserted in the clean bill a provision that until rates are prescribed-this is an insert to my statement-in accordance with this bill, the rates shall remain whatever is lawful.
That is intended to protect our rights in the present litigation in which we claim that we are entitled to have refunded to us the tolls collected above the formula rate specified in the present law. The GAO report for 1954 shows that under the present law tolls should have been much lower. We are simply trying to get back that unlawful excess, and this lawful clause is to insure that the present legislation does not prejudice our right to do so.
There remains now only the recommendations of the General Accounting Office which have been made in their audit reports, Mr. Chairman, which go above and beyond this bill.
We mentioned earlier in our statement that our legislative proposals are the result of long and numerous conferences with the GAO, which organization we feel is exceptionally well informed on this utility. We stated that this clean bill before you has their approval in substance and that it is in fact the instrument which has the widest possible support of at least three of the interests involved.
We also stated that the GAO, as well as the AFL will undoubtedly have proposals that go above and beyond this bill.
We have the greatest respect for the GAO, as well as the organizations that represent the people at the canal. But we do feel that we must take issue with certain of the recommendations that GAO has made. Further, because we feel that they will find it necessary to comment on them before this committee, we find it necessary to give you the tolls payers' views on them. Because most of them are in the field of accounting, we have asked Mr. C. M. Harmon, secretary and treasurer of the Weyerhaeuser Steamship Co. to comment on all but one of the GAO recommendations. It is my intent to comment only on one, and that is the proposal concerning the increased annuity. By the Treaty of 1955 between the Republic of Panama and the United States, our country agreed to increasing the annual annuity payment from the United States to Panama from its present rate of $430,000 to $1,930,000, an increase of $1.5 million per year.
The tolls formula as it now stands, and as it would remain with the enactment of S. 2167, requires that tolls on commercial cargoes must pay the annuity as it is determined by the original treaty, and as it was amended later when the United States went off the gold standard. Under the present law, however, tolls cannot be made to pay this additional $1.5 million. Legislation would have to be enacted in order to make this a burden on tolls. This additional amount is now paid out of appropriations for the Department of State, with the tolls of