Transportation service by water across the Isthmus of Panama competes with railroad transportation in the United States, and especially with the service rendered by our transcontinental railroad lines, all of which are members of the Association of American Railroads.

The railroads have a twofold interest in the Canal and its operations. They are heavy taxpayers, and as such contribute to the subsidies that other transportation agencies are enjoying at the hands of the Federal Government. They constitute also the largest and most widespread transportation agency in the United States and, as I have said, compete for traffic with ships using the Canal in intercoastal trade. In both capacities, that of taxpayers and that of transportation agencies, the railroads have a right to expect the Government to operate the Canal on a sound business basis, in such manner as to eliminate unfair competition and preserve the objectives laid down by Congress in its declaration of national transportation policy.

The Panama Canal was constructed and has already been operated for a dual use: Military defense and commercial. Both uses are important. It would be idle to speculate whether the Canal would have been constructed for defense purposes alone, or for commercial purposes alone. The fact is that both purposes were united in the decision to build the project.

It has been a recognized principle from the beginning that commercial users of the Canal should, by payment of tolls for the privilege of transit, meet their fair share of the costs of Canal construction and operation. The only question imvolved is to determine what are the costs of construction and operation, and what reasonable proportion of those costs should be charged to commercial users.

Operating costs, including maintenance and depreciation, have always been included in the annual costs of the Canal. An interest charge on the capital invested in the Canal has also been included, properly regarded as the annual charge made for the use of such capital. Carrying charges on captial constitute a part of the annual cost of conducting any business enterprise, as much so as current expenditures for maintenance and operation. This principle was adopted and endorsed by the special committee of three independent and neutral experts who recommended the present toll rate in 1937 (S. Doc. No. 23, 75th Cong., 1st sess., February 24, 1937), and has been supported by the Canal authorities for many years, as I shall show.

Mr. Prince in his statement has considered the question of an equitable distribution of Canal costs between the commercial users who pay tolls for the use of the Canal and Government vessels which transit the Canal toll-free. As he explained, we think it reasonable to utilize the realtive use made of the Canal by commercial and Government vessels as a basis for allocating Canal costs, including current operating and maintenance expenditures and an allowance for interest on the net investment in the Canal.

In this way, effect is given to the military value of the Canal, and its value is measured in a reasonable and logical way. Furthermore, such a basis is easy to apply in actual practice and is in line with the general theory of cost accounting developed for the railroads and other transportation agencies.

I have applied these principles to the statistics of Canal operations, and set forth in the annual reports of the Governor of the Panama Canal, and proceed now to outline the results of such a calculation.

The Canal a business enterprise: The committee has before it the question of tolls on the Panama Canal. For a period of years, since March 1, 1938, the toll rate has been 90 cents per net Panama Canal ton. Thus existing toll rates, and the charges resulting from such rates, have remained unchanged for more than 11 years, whereas during the same period the cost of maintaining and operating the Canal has increased substantially. According to the Annual Report of the Panama Canal for 1948 (p. 44), operating expenses have increased more than 90 percent during the past 10 years.

Against this background of greatly increased costs, the question of a fair and reasonable rate of tolls for the future becomes of great importance. The solution rests largely on the answer to certain fundamental questions, foremost of which is the question whether the Government shall obtain a return on its investment in the Canal. On this point, a significant statement was made by Governor F. K. Newcomer of the Panama Canal, in his appearance before this committee on April 19, 1949. He answered the question very clearly as follows:

We look at the Canal as an international public utility that has been built at the expense of the citizens of the United States-that they are entitled to a reasonable return on the money that they have invested here.

This concept of the Canal and its function, which seems to us a sound one, has been recognized and applied by the Canal authorities. for many years. For example, Col. C. S. Ridley, then Governor of the Panama Canal, made the following statement before this committee on March 18, 1937 (hearings on Panama Canal tolls, H. R. 3417, 75th Cong., 1st sess., pp. 9–10):

The principle is now well recognized that the Panama Canal is not to be regarded as a public improvement from which no direct return is to be expected, but it is to be considered and operated as a great utility of international character, constructed and maintained by the United States for the benefit of all nations upon the terms of equality prescribed by treaty, for which all commercial vessels using the Canal may be expected to pay tolls which are commensurate with the costs incurred in the construction, operation, and maintenance of the Canal.

Note that Governor Ridley specifically included the cost of construction in his list of costs chargeable to commercial users. The cost of construction, a capital cost, is met by an annual interest charge on such capital cost.

The special committee of experts, in their report to which I have already referred, covered the same point in a statement (p. 84) which has already been quoted by Mr. Prince. That statement was to the effect that the Panama Canal enterprise as a whole should be selfsupporting.

Annual reports of the Governor of the Panama Canal, which contain a wealth of information regarding the physical and financial operations of the Canal, have accepted and applied the same concept of the Canal as a business enterprise, so operated as to produce the closest possible balance between receipts and expenditures. Thus the annual report for 1948 (p. 113), the latest report now available, describes the Canal as of a quasi-business nature, and refers to other industries in the corporate field as being comparable. The same thought was expressed by Governor Newcomer to this committee on

April 19, as I have already pointed out, when he denominated the Canal as an "international public utility." I shall later show in connection with the international character of the Canal that it is utilized by the commercial shipping of foreign nations to a greater degree than by American shipping.

Annual reports of the Canal include tabulations of revenues and expenses that supply a clear picture of its financial status. Such a tabulation, at page 142 of the 1948 report, includes receipts and expenditures for the whole period of operation, from 1914 to 1948, inclusive. An interest return on that net investment in the Canal is included in the tabulation as an element of annual cost. This inclusion of an interest charge is wholly justified, because it is an actual cost, and so long as the United States continues to have a public debt it is a direct and out-of-pocket money cost. To eliminate interest as one of the elements of cost on which Canal tolls are calculated would merely shift that cost from the domestic and foreign commercial users to the taxpayers of the United States, including, of course, the railroads.

I have drawn on the tabulation in the 1948 report for the calculations I shall submit. Before doing this, I would like to refer again, briefly, to the so-called dual-purpose nature of the Canal. The Panama Canal serves both the national security and the requirements of the commerce of the United States and many foreign nations. These are the two purposes, or functions, which led to its construction. The problem is to determine the current operating and capital costs of the Canal attributable to the two functions on a basis that will be reasonable and equitable. We have already suggested a basis for doing this-the relative use of the Canal by commercial users and by the Government. By commercial use I mean the transit by ships of all nations which pay tolls for the privilege. Government use includes the toll-free transit of military, naval, and other Government vessels of the United States, government vessels of the Republic of Panama, and war vessels of the Republic of Colombia, to which transit privileges are granted under special treaty provisions.

Allocation of Canal costs, 1914-48: In order to allocate Canal costs on the basis of use, it is necessary to adjust the standard financial statistics included in the Panama Canal reports in only one respect. The adjustment consists of crediting to Canal operations the amount of toll exemptions on Government transits. This amount is calculated and published each year in the Panama Canal report.

I submit two tabulations of receipts and expenses, which apply the method of cost allocation I have briefly described. Table 1 applies the method of the whole period of Canal operation to date, 1914 to 1948. That period includes both the First and Second World Wars. Table 2 applies the same method of cost allocation to the latest 10year period, 1939 to 1948, which includes the Second World War. This table more fully reflects recent and current costs and operating conditions. All the years shown are fiscal years.

As already stated, the annual report for 1948, page 142, includes statistics for the years from 1914 to 1948, inclusive. The same report, page 43, shows the approximate value of tolls which the toll-free vessels would have paid in 1948, at the prescribed rates, if tolls had been charged against them. A corresponding calculation appears in each of the preceding annual reports, with the exception of only 2

years, 1940 and 1941. The aggregate amount of such toll exemption for earlier years I have tabulated by combining the annual amounts drawn off from each report. Including an estimate by me for the two missing years, the aggregate of such toll exemptions for the 35-year period 1914 to 1948 was $64,543,000.

Including this amount as a credit, the Canal Governor's consolidated account of Canal receipts and expenditures for the 35-year period 1914 to 1948 is shown in table 1. All the items, except the credit for toll exemptions, are drawn directly from page 142 of the Canal report for 1948.

TABLE 1.-Revenues, expenses, and deficit applicable to Panama Canal activities, 1914-48

Table 1 includes two items that do not represent actual cash transactions. One is a credit item, the allowance for tolls from which Government vessels are exempted, but which in the table is credited against Canal expenses as a measure of the use of the Canal for defense and general government purposes. The other is a debit item, being the charge for interest on net Canal investment.

As to the interest charge, the annual report for 1948, describing the accounting system under which the Canal operates, states (p. 113) that

subsequent to the fiscal year 1920, a potential capital interest return of 3 percent has been considered as an unrecorded charge to expenses in determining computed surplus or deficit.

This interest charge, the report explains, is in line with general accounting practice and with the accounting methods of the Interstate Commerce Commission. I quote the report (p. 113) on this point as follows:

The activities (of the Canal) being of a quasi-business nature, the accounting system has been adapted to conform as nearly as practicable to the principles and practices approved by the Interstate Commerce Commission and State boards regulating public utilities as well as to procedure followed by comparable industries in the corporate field.

This concept of the Panama Canal as a business enterprise has led the Canal authorities to set up an accounting system which, as pointed out in the annual report for 1948 (p. 143), includes in the accounts all revenues properly applicable to Canal activities, and charges against total revenue the net expenses, including charges for depreciation and interest on the capital invested, but excluding any charge to amortize the investment.

This is the basis I have used in table 1, with the sole exception that I have further credited Canal operations with the amount of tolls not collected on toll-free Government vessels.

Table 1 shows a deficit of $86,948,000 for the 35-year period 1914 to 1948. You will see that figure, Mr. Chairman, at the bottom of the table, one of the final items.

Mr. THOMPSON. Thank you.

Mr. PARMELEE. In itself, such a deficit indicates that the tolls have not in the past been high enough to meet Canal costs. Taking the 35-year period as the basis of calculation, it is possible to relate the deficit to the amount of revenues, and thus ascertain the extent of the deficiency in toll collections for that period.

Cash revenue to June 30, 1948, amounted to $609,016,434. Including the toll value of Government transits, the total revenue figure would be $673,559,434. The deficit for the same period, after allowing a credit for Government use, was $86,948,653, which is 12.9 percent of such total revenue.

This means that tolls in the past, which were at varying rates of from 90 cents to $1.20 per ton for different periods of time, should on the average have been 12.9 percent higher than they actually were, if operating costs were to be fully met. Had the toll rate been 90 cents during the entire time, the percentage of deficiency would have been greater than 12.9 percent.

This calculation does not mean that an increase of merely that percentage in the toll rate for the future would be appropriate, as the operating costs today and those which may be reasonably anticipated for the foreseeable future are on a much higher level than the average cost level for the entire period of past operations of the Canal. Current costs, according to the latest annual report, are 90 percent greater than in 1939.

Allocation of Canal costs, 1939-48: To place the calculation on a basis that brings it closer to present conditions, I have prepared another tabulation, covering operations for the last 10 years of the 35year period, which I submit as table 2. It is set up on the same statistical basis as table 1.

TABLE 2.-Revenues, expenses, and deficit applicable to Panama Canal activities,

Revenues:

Tolls_

Civil revenues.

Business profits..

Total revenues.

1939-48

$145, 342, 596 1, 925, 110 11, 489, 732

158, 757, 438

Table 2 shows that total revenue for the 10-year period 1939 to 1948, including an allowance for toll-free traffic, amounted to $204,808, 611. The deficit for that same 10-year period was $78,879,792, or 38.5 percent of the total revenues.