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Here is one way to depreciate the debt, the excavations, and it will be a nice tidy package when we give the canal to the Panamanians. These things, Mr. Snyder, have to be faced very bluntly.

Mr. SNYDER. Well, revenue kept coming in, as you indicated, and I did not know why they found it necessary to make these changes. I cannot help but think the treaty had something to do with it, our treaty negotiations. It had some effect upon the change in the accounting procedures. Nor am I convinced that no one in that whole operation got any directive, any information, any direct contact other than Ambassador Ward's speech, which both Mr. Steers and Mr. Kujawa specifically mentioned as the motivating factor insofar as their cranking in the treaty factor.

To me that is inconceivable. I hope these hearings have produced that effect on others.

I thank you for your testimony. It has been very helpful.
Mr. METCALFE. Thank you very much.

Mr. COFFEY. Mr. Chairman, may I make a comment?
Mr. METCALFE. We have our quorum call right now.

Mr. COFFEY. I gave an account of a response to Mr. Snyder's questions dealing with the acounts receivable with the Republic.

According to my notes, the information on that was in response to a question asked by Mrs. Sullivan and was given by Governor Parfitt and another witness during the end of the morning session.

Mr. SNYDER. We have asked for unanimous consent for that to be amplified by the Governor.

Mr. METCALFE. Thank you very much.

Mr. Hubbard, any questions?

Mr. HUBBARD. Mr. Chairman, thank you very much.

Due to the quorum call and because of the concise and informative statement given by Mr. Reynolds, I have no questions, but I congratulate him on his presentation.

Mr. REYNOLDS. You are very kind, sir.

Mr. METCALFE. I would like to express the Chair's appreciation for your testimony. You have added a great deal to these hearings, and we do appreciate your candor and your presentation.

The meeting will stand in recess until 2 o'clock, at which time Mrs. Sullivan will then chair the hearings.

Thank you all very kindly.

[Whereupon, at 12:17 p.m., the subcommittee recessed, to reconvene at 2 o'clock, the same day.]

AFTERNOON SESSION

Mrs. SULLIVAN [presiding]. The subcommittee will come to order. I apologize for being late. We are waiting for a vote, but there are too many members that want to talk on the floor, so I decided to start these hearings.

Our witness this afternoon is Mr. David Tolan, executive vice president and general manager of the Caribbean/Latin American/Domestic Division of Sea-Land Service, Inc.

Mr. Tolan, do you want to condense your statement? I think if I recall your testimony is quite long.

STATEMENT OF DAVID J. TOLAN, EXECUTIVE VICE PRESIDENT AND GENERAL MANAGER, CARIBBEAN/LATIN AMERICAN/DOMESTIC DIVISION, SEA-LAND SERVICE, INC., ACCOMPANIED BY NICHOLAS J. ZITO, DIRECTOR OF REGULATORY ACCOUNTING, AND KENNETH N. TICE, PRICING MANAGER, DOMESTIC CENTRAL AMERICAN SERVICES, AND PAUL G. McELLIGOTT, ESQ., ATTORNEY FOR SEA-LAND

Mr. TOLAN. Madam Chairman, distinguished members of the committee, appearing with me this afternoon on my extreme left is Mr. Nicholas Zito, director of regulatory accounting for Sea-Land; on my immediate left is Mr. Kenneth Tice, pricing manager, Domestic/Central American Services; and on my right, Mr. Paul McElligott, our Washington counsel.

We may say that we subscribe very much to the remarks and concur with them of Mr. Reynolds this morning of the American Institute of Merchant Shipping with respect to the operation of the canal, the able leadership of Governor Parfitt and the competency and dedication of the entire staff of the Canal Zone and the government and particular recognition should be given to the outstanding job that everyone did in the accomplishment of moving the backlog of vessels that built up. I think it taxed all their resources and they devoted all their energies to doing it and they cleared up what could have been a monumental delay during the stoppage in March of this year.

At the outset, Sea-Land wishes to express its sincere appreciation to the members of the Merchant Marine and Fisheries Committee and to this Subcommittee for their expression of concern and interest over the recent changes in tolls and changes in measurement rules for vessels transiting the Panama Canal. These expressions of interest, and the determination by the Committee to study in depth the Panama Canal Company's tolls structure and policies through these hearings, in our opinion were instrumental in the decision by President Ford not approve the proposed on-deck cargo measurement rule. The on-deck rule would have significantly worsened the existing discrimination. against containerships in the present rules, substantially increasing tolls for containership transits, and threatening continuation of containership services using the Canal, which are marginal in nature and highly susceptible to competition from overland modes.

FRAMEWORK OF THE HEARINGS

Hearings on the tolls structure, rates and policies for the Panama Canal are appropriate at this time. The justification for hearings is stronger now that it was in 1948-50, the last time that a detailed analysis of the tolls system was undertaken. A proposed tolls rate increase, the first in the Canal's history, spurred these earlier hearings. Since July, 1974, containerships using the Canal have been subjected to (1) a 19.7 percent rate increase; (2) substantial increases in terminal and handling charges for vessels utilizing such services; (3) a February 1976 tolls increase through reinterpretation of measurement rules; and (4) a March 1976 tolls increase

through changes in measurement rules. The Canal Company has planned another tolls rate increase for 1976 of 21.3 percent assuming approval of all measurement rules changes. Due to the elimination of the on-deck rule from the approved measurement rules changes, the increase is likely to be even greater.

The hearings in the 1940's produced a number of changes in the organization of the entities responsible for Canal operations including changes in tolls structure and policies for the Canal. As a result, the tolls increase proposed in 1948 did not become effective and rates and rules remained stable for another 25 years.

Sea-Land hopes that these hearings, and actions by the Congress and the Canal Company resulting therefrom, will achieve the same result. Sea-Land urges the Committee not to seek temporary or limited remedies, but rather to seek fundamental changes which will provide long-term stability in Canal rates and rules. Longterm stability is in the best interest of the United States foreign and domestic commerce, which comprises 70% of the traffic moving through the Canal, and the carriers, particularly U.S.-flag carriers, operating in that commerce.

SEA-LAND'S SERVICES IN GENERAL AND IN PANAMA

Sea-Land operates U.S.-flag containerships in the foreign and domestic commerce of the United States, serving numerous ports in the United States, Europe, the Mediterranean, the Far East, Central America and the Caribbean area. Sea-Land is one of the few remaining carriers providing regular intercoastal services between the East and West Coasts of the United States. The total number of American flag general cargo vessels in intercoastal service has declined from 155 in 1939 to 15 in 1975. This service is highly competitive with transcontinental rail services, not subject to tolls increases. Assistant Secretary Veysey, discussing the future of the Canal before the Transportation Appropriations Subcommittee in February, 1976, believed the Canal would be "a vital life line in world commerce and in our own intercoastal commerce for a long time." We would like to share Mr. Veysey's optimism, especially insofar as intercoastal commerce is concerned. But, if the recent pattern of tolls increases and rules changes persists for the future, in our pinion, the intercoastal service will be in great jeopardy.

Sea-Land's containerships have been using the Panama Canal since 1962. Transits increased gradually from 1962 until FY 1974, amounting to 102 domestic transits and 4 vessel positioning transits in that year. The Canal Company in July, 1974, increased tolls by about 20 percent. Sea-Land's transits declined to 86 domestic transits and 5 vessel positioning transits in the year following this increase. The tolls increase was one factor causing this decline. Sea-Land regularly uses the Canal in its intercoastal service, its U.S. West Coast/Puerto Rico, Caribbean and Central American services; Sea-Land also provides service between Panama and the Far East, Europe, the Mediterranean, and the Caribbean, as well as the United States.

In addition to commercial cargo in the above services, Sea-Land also provides regular carriage for the United States Military

Services between Panama and the United States. Regular movements of household goods between the United States and Panama are handled for the Panama Canal Company.

Service for Panama is provided every eight days, utilizing five fully containerized vessels. These vessels operate exclusively in the Sea-Land Intercoastal Service and are devoted to handling cargo originating or destined in the United States, Panama, Puerto Rico, and the Caribbean Islands, as well as relay cargo between Europe and the Far East. In addition to Panama cargo, Sea-Land also relies totally on Panama for loading and discharging cargo for Costa Rica.

Presently, Sea-Land has a capital investment in its intrcoastal service of approximately $77 million including a capital investment in Panama devoted exclusively to handling Panama cargo. The investment in Panama includes a container crane having a value of $2.5 million, and 360 container chassis and 331 containers. SeaLand also has a full-time Country Manager domiciled in Panama, and a Panama agent.

Sea-Land utilizes the facilities of the Panama Canal Company in the very important Panama market and in other services requiring Canal transits. In addition to the Panama Canal terminal facilities, Sea-Land depends heavily on the utilization of the warehouses and transportation services of the Panama Canal Railroad. Thus actions which force Sea-Land and other carriers to reduce transits not only eliminate tolls revenues but also eliminate revenues from ancillary and supporting services. Revenues to the Canal Company for the supporting services from Sea-Land alone amount to about $1.0 million annually.

TOLLS INCREASES THROUGH CHANGES IN RATES AND RULES

The establishment in 1951 of the Panama Canal Company as an entity separate from the Canal Zone Government, and the passage of laws relating to the tolls structure and policies, were described in a Congressional report as "a definite and permanent Panama Canal Company tolls policy." The policy achieved stability. Tolls rates have been stable, measurement rules were not tampered with; yet tonnages, transits and tolls revenues increased regularly. Between FY 1965 and FY 1974 tolls revenues from commercial ocean traffic increased over $54 million or 83 percent without any change in rates or rules. Transits by commercial carriers went from 11,834 to 14,033 and long tons of cargo from 76.5 million to nearly 148 million in the same period.

Since July, 1974, the Canal Company has changed, or attempted to change, toll rates and measurement rules often and substantially. In Sea-Land's opinion, these changes are a contributing cause of the reduction in cargoes and transits in FY 1975, and of the continued reductions in FY 1976. Sea-Land believes that continuation of a policy of repeated increases will further reduce commercial use of the Canal.

1. 1974 TOLLS RATES INCREASE

The July 1974 tolls rate increase of 19.7 percent was approved in full over the objections of Sea-Land, the American Institute of Mer

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chant Shipping (AIMS), the Commonwealth of Puerto Rico and other affected parties. In FY 1975, tolls produced increased revenues of over $22 million. But the increase, Sea-Land believes, was a factor causing a decline of over 400 commercial transits and 7.8 million long tons of commercial cargo.

The Canal Company attributes these declines to circumstances other than the increase, e.g., the worldwide recession, nationalization of mines, increased oil prices, etc. These circumstances likely had some impact on the transit and tonnage reductions. But to attribute no impact to the rate increase is neither realistic nor consistent with studies sponsored by the Canal Company itself.

A study for the Company, revised in February 1974 (Attachment. A), revealed a number of commodities sensitive to tolls increases of 20 percent or less. The tonnages for some of these sensitive commodities-crude petroleum and petroleum products, grains and soybeans, iron and steel manufactureres, and general cargo-declined between FY 1974 and FY 1975.

Further, as this study and other studies for the Canal Company have indicated, the impact of tolls increases may not be reflected in the short term due to existing supply contracts and fixed transportation arrangements which leave shippers with no alternative except to pay higher tolls. The impact is reflected over the longer term. This appears to be the situation for the Canal Company for FY 1976. The Canal Company is not participating in improving economic conditions. Canal transits have been revised downward, and are expected to be less than 13,000 for FY 1976.

Sea-Land itself had fewer Canal transits in the first half of FY 1976 than in the first half of FY 1975, although Sea-Land's total carryings in its services have improved in the same period. World economic conditions cannot shoulder all blame for continuing declines in Canal transits and cargoes.

2. 1974 INCREASES IN TERMINAL CHANGES

Effective August 1, 1974, the Canal Company increased charges for cargo handling and transferring and related services. These increases ran approximately 20 percent per ton on various cargoes, including containerized freight. Charges were also increased for the delivery of bunkers to vessels. As a result, marine terminal operations of the Canal Company show a net income of $2,955,000 for FY 1975, and net incomes of $4,780,000 and $5,300,000 are projected for FY 1976 and FY 1977 respectively.

3. FEBRUARY, 1976, RULES INTERPRETATION INCREASE

On October 10, 1964, the Panama Canal Company, acknowledging that containerships had considerable under-deck space which was not part of the earning capacity of the vessel, issued an interpretation of the measurement rules permitting the deduction of a portion of that space in computing Panama Canal tonnages. This interpretation, supplement No. 2, stated: "A container hold, by virture of inherent design features. has certain unused spaces which are not available for carrying cargo. The space in a container hold between the outboard

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