amount of the annuity payable to Panama from $250,000 in gold coin of the United States to B/430,000 as defined in the concurrent monetary agreement establishing the gold Balboa at 9871⁄2 milligrams of gold of 0.900 fineness. The treaty also gave the United States the option to pay the annuity in any coin or currency provided the amount paid was equivalent to B/430,000 as defined in the agreement. 12 10. The 1955 treaty, among other provisions, increased the annuity to B/1,930,000 as defined in the 1936 monetary agreement, with the same provision as that contained in the 1936 treaty authorizing payment in any coin or currency provided the amount paid is equivalent to B/1,930,000 as defined in the 1936 monetary agreement. In a Memorandum of Understandings Reached accompanying the 1955 treaty, the United States undertook, among other things, to take certain actions in reference to employment of Panamanians in the Canal Zone" and to construct a bridge over the Canal at Balboa.14 11. A treaty with Colombia, concluded April 6, 1914, for the settlement of differences arising out of events on the Isthmus of Panama in November 1903, includes a provision for free transit through the Canal of Colombian naval vessels. 15 The Tolls Formula 12. Section 411 of Title 2 of the Canal Zone Code authorizes the Company to prescribe, and from time to time change, the tolls that shall be levied for the use of the Panama Canal. The statute requires six months' notice of changes in toll rates, and a public hearing during that period. The rates become effective only on approval by the President of the United States, whose action is final. 13. Section 412 of Title 2 of the Canal Zone Code provides the formula for tolls." Under the statutory formula, tolls for use of the Panama Canal are required to be prescribed at rates calculated to cover, as nearly as practicable, all costs of maintaining and operating the Panama Canal and the facilities and appurtenances related thereto, including interest, depreciation, and an appropriate share of the net costs of operation of the Canal Zone Government. The Canal Zone Government, an independent agency of the United States, is responsible for the administration of the civil government, education, health services, and sanitation functions of the Canal Zone. The Governor of the Canal Zone is ex officio President of the Panama Canal Company.18 14. The facilities and appurtenances related to the maintenance and operation of the Panama Canal referred to in the statutory formula include docks, harbor terminals, oil handling plants, retail stores, dry and cold storage plants, housing for employees, and electric power, water, and telephone systems. These operations have been characterized by the Supreme Court1 and by the Congressional committees responsible for Panama Canal affairs as auxiliaries used to aid in the management and operation of the Canal. The elements of the tolls formula provided by section 412 are given content and meaning by the provisions of sections 62 and 70 of Title 2 of the Canal Zone Code, establishing the financial structure of the Company and prescribing certain of its financial obligations, including provisions: -defining the investment of the United States in the Company;"1 -requiring payment of interest on the investment;*1 12Article VII; see C.Z. Code, Appendix IX, § 38. "Item 1; see C.Z. Code, Appendix IX, § 138. Item 5; see C.Z. Code, Appendix IX, § 142. 1542 Stat. 2122. 16For full text of § 411 see Appendix A, para. 23. 17For full text of § 412 see Appendix A, para. 23. 18 Appendix A, paras. 12-13, 21-22. 19New York ex rel. Rogers v. Graves, 299 U.S. 401, 406 (1937). 20H. Rept. No. 2396, 80th Cong., pp. 1-2; S. Rept. No. 1401, 80th Cong., pp. 1-2. 212 C.Z. Code § 62. -prescribing certain elements included in the net cost of Canal Zone Government;11 --requiring reimbursement of the Treasury for the net cost of Canal Zone Government;" -requiring reimbursement of the Treasury for the annuity paid by the United States under Article XIV of the 1903 treaty as modified by Article VII of the 1936 treaty;" and -requiring payment of excess funds into the Treasury." 15. Other provisions of Title 2 of the Canal Zone Code that directly bear on the determination of costs required to be recovered from toll revenues include provisions: -describing the powers of the Company;" -requiring reimbursement of other government agencies for certain costs incurred on behalf of the company,25 -prescribing wage and employment practices; and -excluding from the interest base the cost of construction of the bridge over the canal at Balboa." Construction and Application of the Tolls Formula 16. In considering the legislation that resulted in the enactment of the tolls formula, and other provisions of the Canal Zone Code governing the operation of the Panama Canal, the House Committee on Merchant Marine and Fisheries observed that: "The appropriate toll policy can hardly be decided upon and administered without businesstype accounts, similar to those of public utilities, upon which to rely for the basic financial and operating data."28 The Company has established such accounts pursuant to accounting policies adopted by the Board of Directors." The Company has also adopted pricing policies applicable to the auxiliary operations which provide revenues used by the Company to defray operating expenses that otherwise would be paid from tolls. 17. The policies have been regularly and fully disclosed to the Congress either in the course of presentation of the annual budget programs required to be approved by the Congress by the Government Corporation Control Act," or in reports and testimony presented to the committees of Congress having jurisdiction over Panama Canal matters. 112 C.Z. Code § 62. "The provisions of the 1936 and 1955 treaties concerning the amount of the annuity and the agreement of March 2, 1936, defining the gold content of the Balboa have been construed to require payment of a greater number of dollars to equal the annuity established by the treaties whenever the dollar is devalued by the United States. Accordingly, following devaluation of the dollar in 1972 and 1973, the equivalency of the B/430,000 has been established at $518,718, which the Panama Canal Company reimburses the Treasury. See paras. 9-10 and Appendix A, paras. 6–7. "2 C.Z. Code § 70. 242 C.Z. Code §§ 65-66. #2 C.Z. Code § 69. 2 C.Z. Code §§ 141-201. "2 C.Z. Code § 471; see para. 23 infra. **See H. Rept. No. 1304, 81st Cong., Page 6, quoted in H. Rept. No. 2935, 81st Cong., Page 3. "See Appendix C. "See Appendix A, para. 23. "31 U.S.C. § 841 et seq. 18. After the adoption of the tolls formula in 1950, the General Accounting Office took the position that the formula required allocation of a fixed share of the net cost of Canal Zone Government to the supporting activities of the Company so as to require an increase in the prices charged by such activities and a resultant surplus in toll revenues over and above operating expenses. The Company disagreed with this construction of the statute. In 1955 certain steamship lines brought suit against the Company to require the Company to prescribe lower rates of tolls based on the accounting changes proposed by the General Accounting Office. The District Court dismissed the complaint," but the Court of Appeals reversed the District Court." The Supreme Court reversed the Court of Appeals, holding that the controversy was not appropriate for judicial action in that the decision to act or not to act to prescribe new tolls was a matter for agency discretion and that the construction of the tolls formula in the statute was itself an exercise of discretion." 19. Following the decision of the Supreme Court in the Grace Line case, a bill was introduced in the 86th Congress "To require Panama Canal tolls to be prescribed in accordance with the tolls formula provided in section 412 of Title 2 of the Canal Zone Code and pursuant to the provisions of the Administrative Procedure Act." At the hearings on the bill, one of the attorneys for the plaintiffs in the Grace Line suit testified that the bill was an outgrowth of the decision of the Supreme Court in that suit and that the objective of the bill was to authorize the courts to enforce the tolls formula of section 412 of Title 2 of the Canal Zone Code on the basis of the construction of the statute urged by the plaintiffs in the Grace Line suit. 20. At the hearings on the bill, the Company presented its construction of the tolls formula and the rationale of its pricing policy" based on that construction in the light of the issues and decision in the Grace Line case." The General Accounting Office concurred in the validity of the Company's policies but recommended amendment of section 412 in such manner as to adopt expressly the Company's construction of the statute." 21. Following the hearing on H.R. 8983, that bill was tabled and H.R. 10968 was introduced to ratify the accounting policy of the Company as recommended by the General Accounting Office. In an unnumbered report dated June 9, 1960, the Panama Canal Subcommittee of the Merchant Marine and Fisheries Committee of the House of Representatives reached the conclusion that: "After examining the language of Section 412(b) of title 2 of the Canal Zone Code (of 1934), which establishes the formula for imposition of tolls, and after considering its legislative history and the views of the General Accounting Office, the Subcommittee is of the opinion that the present practice of the Panama Canal Company in allocating the major part of overhead of supporting services to the account of tolls is proper and is in full compliance with the law as it now reads. "Accordingly, there is no need for enactment of this bill since it would merely spell out in greater detail what is in the Subcommittee's view the present requirement of law."40 "Grace Line v. Panama Canal Company, 143 F. Supp. 539 (S.D.N.Y., 1956). "Grace Line v. Panama Canal Company, 243 F. 2d 844 (2d Cir. 1957). Panama Canal Company v. Grace Line, 356 U.S. 309 (1958). "H.R. 8983, 86th Congress. "Hearings before the Subcommittee on Panama Canal of the Committee on Merchant Marine & Fisheries, House of Representatives, 86th Congress, on H.R. 8983 and H.R. 10968, pp. 18-23. "For text of pricing policy, see Appendix A, para. 37. "Hearings on H.R. 8983 and H.R. 10968, 86th Cong., supra., pp. 2–17, 119–124. *Hearings on H.R. 8983 and H.R. 10968, 86th Cong., supra., pp. 48-64. The report is quoted in a note following 2 C.Z. Code is § 412 in the annotated edition of the Canal Zone Code. Miscellaneous Statutes 22. Pursuant to commitments made in the 1955 treaty with the Republic of Panama, Congress has enacted a number of statutory provisions directly affecting the cost of maintaining and operating the Panama Canal. 23. One such enactment provided for construction and operation of a bridge over the Canal at Balboa." Although originally all costs of the maintenance and operation of the bridge, as well as construction costs, were excluded from the costs of operation of the Company," by a subsequent enactment the cost of maintaining and operating the bridge, including depreciation but not interest, was made a part of the Company's operating costs." 24. In 1958, Congress enacted detailed legislation implementing the provisions of the 1955 treaty concerning wages and conditions of employment in the Canal Zone." The requirements of the treaty provisions and this legislation have a significant effect on the costs of operating the Panama Canal and its related facilities and appurtenances. 25. General laws of the United States, not incorporated in the Canal Zone Code but applicable to the Company, the Canal Zone Government, the employees of these agencies, or the geographic area of the Canal Zone also have direct or indirect effects on the costs of operating the Company. Such laws, for example, include the following: -The Government Corporation Control Act, 31 U.S.C. §841, et seq. -The Fair Labor Standards Act, 29 U.S.C. §201 et seq. -National Environmental Policy Act, 42 U.S.C. §4321 et seq. -Sections 311 and 312 of the Federal Water Pollution Control Act, as amended, 33 U.S.C. §1321–22. -Occupational Safety and Health Act of 1970, 29 U.S.C. §651-678. Administrative Regulations 26. The rates of tolls for use of the Panama Canal now in effect were prescribed by Proclamation 2247 of August 25, 1937, as amended by Proclamation 2249 of August 31, 1937." 27. Various rules governing payment of tolls and the measurement of vessels for assessment of tolls have been issued by the President of the United States and by the Company." 28. The statute requiring the Company to give notice of changes in rates of toll and to conduct a public hearing within the period of the notice is silent as to the specific content of the notice or the procedures to be followed at the hearing. The Company has adopted and published procedures for rulemaking where a notice and hearing are required by the Canal Zone Code." These rules would be applicable at proceedings for changes in rates of tolls. 41 Act of July 23, 1956, 70 Stat. 596, 2 C.Z. Code, §§471-472. **See 2 C.Z. Code §62(f)(3) for the basis of such exclusion. Act of October 28, 1965, 79 Stat. 1096, 1100. "Act of July 25, 1958, 72 Stat. 405; see 2 C.Z. Code §§141-182. 4535 CFR §133.1. #35 CFR §133.31 et seq. and 35 CFR Part 135. #35 CFR Part 70, 38 F.R. 31177, November 12, 1973. The rules are attached in Appendix B. CANAL TRAFFIC AND TOLL REVENUES 29. During the past decade, the Panama Canal has experienced a significant growth in traffic. During that period, total toll-paying ocean-going commercial transits (vessels of 300 Panama Canal net tons and over or 500 displacement tons and over) have increased from 11,808, or 32.3 per day in 1964, to 13,841, or 37.9 per day in 1973, a 17 percent increase. In terms of Panama Canal net tons (net vessel-tons of one hundred cubic feet each of actual earning capacity—see 2 CZC §412), the increase has been pronounced, with 69.7 million tons recorded in 1964 and 126.3 million tons recorded in 1973, an 81 percent increase. The variance in these two elements of Canal traffic is explained by the rapid growth in ship size since 1964, when the average toll-paying ocean-going commercial transit measured 5,903 net tons. By 1973, this average had grown to 9,125 net tons, a 55 percent increase. During this period, total toll revenues increased 81 percent, from $62.5 million in 1964 to $113.4 million in 1973, with the average toll per tollpaying ocean-going commercial vessel rising from $5,174 to $8,022, an increase of 55 percent. Selected statistics on Panama Canal traffic are shown in Appendix E. 30. This growth in Canal traffic has been heavily influenced by a variety of factors, both economic and political. First, there has been the exceptional expansion in economic development worldwide, particularly in Japan, Europe and the United States. Secondly, Canal traffic has been further increased by the Vietnam conflict, which no longer affects traffic volume, and the unusual growth of Europe-Far East trade through the Canal because of the Suez closure. Revenues have been realized from certain traffic previously associated with Suez routes. In 1973, such revenues approximated $9.5 million, 8.4 percent of total toll revenues. Reopening the Suez Canal would have an immediate negative effect on Panama Canal toll revenues. 31. Current estimates, which assume the continued closure of the Suez Canal, indicate that tollpaying ocean-going commercial transits should rise moderately to 14,337 by 1975, with the trend to larger ships continuing, but at a slower pace. Toll revenues, which are an element of the statutory toll formula, should reach $121.2 million in that fiscal year, an increase of $7.8 million over 1973, as shown in the following tabulation and detailed in Appendix F. 32. In addition to revenues from tolls, the Company derives other revenues from various facilities and services provided to support Canal operations. These revenues, estimated to be $98.9 million for 1975, an increase of $12.4 million over 1973, are reflected as offsets to operating expenses as shown in Exhibit I, Statement of Toll Revenue Deficiency. OPERATING EXPENSES 33. The second element of the statutory tolls formula is the cost of maintaining and operating the Panama Canal, together with related facilities and appurtenances. The details of that cost are shown in Exhibit I and following supporting exhibits for 1973 (actual) and 1975 (projected). |