advantage of using much longer alternative routes. Unless tolls are handled rationally with only moderate increases, however, this situation will change and the economic commitment made to Panama in the proposed treaties may become an empty promise.

Vessels carrying bulk commodities to or from the United States and the Far East via the Panama Canal are particularly toll sensitive and any increases in charges may well price these commodities out of present markets unless they are carried on very large slow-speed bulkers around the Horn or eastward over the South Atlantic and around the Cape of Good Hope, say to Japan, where they can be laid down cheaper.

We respectfully urge this committee to examine carefully the economic projections which have been made.

Senator Sparkman and gentlemen, let me interpolate for a moment. It would be very unfortunate if my observations and my expressions to the Senate about tolls were to be construed as opposition to the treaty. All I can say is that if the combined wisdom of four Presidents and magnificent Secretaries of State and two-thirds of the Congress says that this treaty is an honorable, good, and decent thing for this country to do, it darn well is going to be that. Let me get that clear.

I think the concern that I am about to express possibly can be taken care of in implementing legislation.

The canal has been most useful to world commerce. In fiscal year 1977, for instance, which closed just last September 30, only a few months ago, 122.9 million long tons of commercial cargo traversed its 51 miles between the two great oceans. This cargo figures importantly in the commerce of the United States and that of our Central and South American neighbors and friends.

CANAL TRAFFIC, TOLLS REVENUE INCREASE

The long-term trend has been for canal traffic and tolls revenue to increase continually, although the deficits experienced in fiscal year 1975 and 1976 demonstrate the relevance of world economic conditions to canal usage.

The canal can handle considerably more traffic than it presently handles. Projections submitted to this committee last year by Secretary of Transportation Brock Adams show transits increasing from 13,201 in 1976 to approximately 21,300 in the year 2000, out of a theoretical canal capacity of 26,800.

But we suggest that if such projections are to be realized, the toll structure must be characterized by reasonable stability and a rational procedure must be established for their adjustment, when necessary.

ALASKAN CRUDE OIL PASSAGE THROUGH CANAL

One very favorable recent development in canal transits and toll revenue of course has arisen from the startup of passage through the canal of Alaskan crude oil from the North Slope. From the passage of the very first tanker shuttling North Slope oil through the canal from very large crude carriers anchored off Balboa to gulf ports on the 31st of August of last year through the end of November, $2,327,

000 in new toll revenue has been generated by this activity. It is projected, and I think very actively, that it will generate new revenue, with $36.5 million annual from this source.

Unfortunately, this movement through the canal may be relatively short-lived, depending on the availability in future years of alternative pipeline transportation. There are some who think that will never happen because of the strong environmental opposition in California to transferring the tremendous quantities of crude at Long Beach into a pipeline constructed to the refineries and terminals in Oklahoma and Texas.

COMMERCIAL ATTRACTIVENESS OF REASONABLE TOLLS

Despite these generally optimistic statistics on Alaska oil, we cannot emphasize too strongly the fact that the continued commercial attractiveness of the canal to American- and foreign-flag vessels alike depends to a considerable degree on keeping tolls reasonable. If, on the other hand, tolls are permitted to escalate sharply, as has been suggested, I think, rather cavalierly-like by Ambassadors Bunker and Linowitz, freight surcharges will become necessary and much of the cargo now moving through the canal will either cease to move or shippers will seek alternative routes. Indeed, some U.S.- and foreignflag operators in reaction to a series of toll increases in recent years totaling more than 50 percent on a cumulative basis are already redirecting their vessels carrying Atlantic coast and gulf cargoes to distant Far Eastern ports by way of the Suez Canal or indeed down through the South Atlantic around the Cape of Good Hope. That is the way a lot of the good coal is going now.

Our intercoastal and east coast-Orient trades are particularly susceptible to shipper reaction to higher costs, and if tolls are unreasonably increased, cargo will increasingly find its way across the continental United States by rail.

ALTERNATIVE ROUTES

Mr. Chairman and Senators, one can say what is the difference. That is still in the American economy. American workers operate the railroads. American workers drive the trucks. Why not do it?

Well, the problem is a little different. The decline in transits that would result would place a greater and greater burden on those operators and cargoes for which there is no alternative to using the canal. The land and mini bridges, of course, become more attractive to shippers of goods, to the detriment of a strong U.S. merchant marine and to the detriment of an economically viable canal.

Those Members of Congress and the public who appreciate the need for a strong U.S. merchant marine should be aware that Americanflag vessels, as a group, would tend to lose more cargo than foreignflag vessels if the canal is priced out of their reach and they are forced into trades in which they are noncompetitive.

A great many of the American-flag ships which use the canal are container ships. The average container ship presently pays about $20,000 to transit the canal, which is roughly equivalent to an average

day's operating costs. On shorter voyages, such as between the west coast of South America and North Atlantic ports, where the percentage increase in voyage time by an alternative route down around the Horn is the greatest, the impact is obviously impractical. It just could not be done.

Turning to the proposed treaties, we see that the canal faces two distinct time periods. You gentlemen know, as well as I do, the language in the second treaty, and there is no point in my repeating it. Certainly no one could take exception to the most reasonable statements contained in the second, neutrality, treaty.

However, the administration of the canal after the year 2000 will be an irrelevant matter if its handling during the remainder of this century results in the diversion of traffic to alternative routes and the emergence of new supply patterns not requiring the canal. It is for this reason that we intend to concentrate on the period prior to the second millennium and address particularly those provisions of the main treaty which provide for payments to the Republic of Panama.

PAYMENTS TO PANAMA

As we know, article III (5) calls for the annual payment of $10 million to reimburse Panama for providing the services that Senator Sarbanes so perceptively inquired about a little while ago. Article XIII 4 (a), (b), and (c) call for payments to Panama of 30 cents per Panama Canal ton transiting the canal, plus a fixed annuity of $10 million and another $10 million if it is earned; and if it is not earned, of course, that second $10 million accumulates for future years. So, it becomes an obligation of tolls.

Now, Ambassadors Bunker and Linowitz have repeatedly emphasized that none of these payments are going to be borne by U.S. taxpayers, a position which ignores the fact that U.S. consumers who are also taxpayers will indeed pay a very considerable portion of the payments since two-thirds of the cargo passing through the canal and which will bear the additional cost either originates here or is destined for here.

There are those gentlemen who hold the view that since the conclusion of the Panama Canal Treaty was accomplished to attain most significant international objectives of our Nation, it is the entire Nation which should bear the costs during the transition period. It probably does seem a little illogical and irrelevant to vessel users of the canal whose ships fly the flags of all nations other than our own that they should be asked to pay through increased toll rates the price of the United States improving its relations with her neighbors to the South, the price of improving her credibility in the family of nations throughout the world, and the price of removing from her posture as a great and good nation one of the last taints of colonialism remaining on this Earth.

On the other hand, I recognize that it is equally illogical and unrealistic to expect that the American people through you, its trustees in this matter, are going to approve in a sense giving the Republic of Panama the canal, and then saying, look, we are going to give you $60 million a year for the privilige of having it. That is ridiculous. You can't do it.

The disquiet shared by all the users of the canal, both U.S.-flag and others, arises from the obvious expectations that they are about to be asked to bear very significant additional financial burdens beyond those they are required to bear today.

IMPACT OF OVERBURDENED TOLLS

We have all heard predictions from the State Department that tolls may be increased anywhere from 25 percent to 46 percent and different witnesses have come up with different figures. Our inquiries as to the basis for these calculations have led us to believe that the U.S. Government has given insufficient attention to the canal's financial situation. I would therefore like to present a few suggestions for mitigating what we believe could be a very detrimental, if not fatal, impact on the future of the canal resulting from overburdened tolls.

The problem and our suggestions for possible mitigation become clear if we superimpose the treaty payment obligations on the canal financial results as though the treaty had been in effect for the last fiscal year ending the 30th of September.

I hasten to predict, or to anticipate, Senator Sarbanes' very perceptive analysis of this, and I say that this is a very rough approximation. If we pay $10 million to Panama for the sanitation, police, and other services, General Parfitt said that we are going to save $18 million, so there would be an $8 million saving. I appreciate that.

But during fiscal 1977, 122.9 million long tons of commercial cargo long tons traversed the canal. These actual tons converted to 134.3 million Panama Canal tons. As you know, Panama Canal tons measure by the cubage of the hull of the vessel, not really by the revenuecarrying capacity. In a container vessel, for instance, with its configuration being what we all know, square boxes cannot be placed everywhere in the bow or the stern of the vessel. So a lot of empty air goes through the canal, but you are paying $1.20 a ton for it. Á laden vessel is considered a vessel that carries 1 ton of cargo, but you pay for the whole thing. A vessel in ballast must have no cargo at all on it.

So you must talk about Panama Canal tons, or 134.3 million tons. Last year that generated $164.7 million in toll fees. Additionally, from ancillary income of $121.7 million, you get a total of $286.4 million.

Senator CASE. Excuse me, please. Where does that $121 million come from?

Mr. REYNOLDS. Which figure, Senator?

Senator CASE. The ancillary income of $121.7 million.

Mr. REYNOLDS. That comes from a combination of direct operating income, such as bunkering, pilotage, line fees, lightage fees, all of those kinds of fees, plus revenue enjoyed by the Zone Government.

Quite frankly, if you analyze these annual statements and I have done it for years, you, as I, will fall off the sled again and again to try to find out what the direct versus the indirect costs are. The commissaries lose money. Some of the other things they do make money, such as housing and so forth. But you end up with a loss.

The point is that the total revenue-forget what it costs, forget that revenue was $121.7 million. You add that to the $164 million

and you get $286.4 million, against which there were expenses, both direct expenses for running the Canal and indirect expenses from the Zone Government, of $281 million. So you obviously end up with a simple profit of $5.4 million, as a very rough approximation.

But we have to hold up a minute. The Canal Company owed that money to the Treasury because the Treasury excused-well, not excused, but deferred a couple of years ago the interest payment because the canal was not making enough money to pay the interest to the Treasury which it owed. So, in effect, in fiscal 1977 we end up even with not a nickel made and not a nicked lost.

Let's see what the situation would have been had the treaty been superimposed on that.

You will recall that there were 134.3 million Panama Canal tons transiting the canal, and it would have been on these that the 30 cents per ton payment to Panama would have been computed. You would then get $40.3 million. An additional $10 million direct annuity would have been paid, which brings us up to $50.3 million. Again, we must add the $10 million which Senator Sarbanes mentioned before. So we now get up to about $60.3 million.

While all of this pro forma exercise was taking place, we see that tolls were being required to bear a cost of $18.1 million in interest charges to the Treasury on a net investment of the United States. These are in the expenses that I mentioned to you, Senator Case. We see that tolls were charged with $22.1 million to make up for the net loss in running the Canal Zone Government. We note that tolls were debited with an annual depreciation charge of $8.3 million in depreciation of the 1903 treaty, in excavation, a practice which was inaugurated just in 1973, after all these years of silence and inaction about those matters.

Admittedly-and I repeat-this little exercise just gives us a rough approximation. But I think it illustrates the point I want to make. We feel that before we engage in a commitment to the Republic of Panama which is going to call for extensive payments on tolls, both on the tonnage that goes through and on annuity payment, we had better relieve the toll burden of the existing problems that it has. The interest to the U.S. Government I have talked about to Ambassador Linowitz a number of times. I understand that implementing legislation will be offered to stop that practice. But the other things that are in these statements that tolls must bear now must be carefully scrutinized and removed, if possible, before we commit the canal to carry the burden to Panama which we must meet, and honorably meet, under the treaty conditions. If we don't, we are going to lose traffic through that canal through business that cannot profitably operate through it or ships that can use alternative routes to go that way.

One last thought occurred to me last night as I was thinking about this. This canal, gentlemen, has served this Nation magnificently through the years. When you think what would have happened in World War II if we didn't have the canal in the war in the Pacific, and the terrible problems in Korea and the war in Vietnam, and if you go back to World War I and add it on, this canal has long since been written off in terms of the national interest.

The last statement that I see that gives the current value of plant equipment, and so forth, the undepreciated value as of the end of