Senator STENNIS. Without going back over it in detail, you are actually offering now a 15-year contract, according to the lines of your statement here?

Mr. McGANNEY. We would be glad to have a 15-year contract, but our understanding is that the limitation of the service contract under the law is 5 years.

Senator STENNIS. Five years?

Mr. McGANNEY. So we are willing to gamble on 5 years.
Senator STENNIS. But you will take a 5-year contract and-
Mr. McGANNEY. And give options for the other.

Senator STENNIS. Yes. So far as you are concerned, you can make it 15 years

Mr. McGANNEY. Yes, sir.

Senator STENNIS. By way of options or understandings or whatever device might be used?

Mr. McGANNEY. Yes sir; that is right.

Senator STENNIS. All right.

Now, by the way, this Southern Pacific name, that is the Southern Pacific Railway?

Mr. McGANNEY. Yes. The Southern Pacific Pipe Lines, Inc., is a wholly owned subsidiary of the Southern Pacific Railway, the railroad. Senator STENNIS. You operate through these lines here instead of actually hauling it by rail?

Mr. McGANNEY. Yes. We found, Mr. Chairman, that it was very much more advantageous to move petroleum products by pipeline than by rail. The operating ratio of pipeline is in the thirties, whereas the operating ratio of a railroad is anywhere from 75 to 80.

Senator STENNIS. Yes. That is where you have the advantage of experience, too.

Mr. McGANNEY. That is right, sir.

Senator STENNIS. Who represents the Navy on this matter?

STATEMENT OF EARLE E. CORLISS, BUREAU OF YARDS AND DOCKS, DEPARTMENT OF THE NAVY

Mr. CORLISS. My name is Earle Corliss of the Bureau of Yards and Docks.

Senator STENNIS. We had the general explanation of this the other day, but we have not had anything specific.

Let me ask you a preliminary question. If you contract for this with these gentlemen you pay this bill per year out of your maintenance and operation funds; is that right?

Mr. CORLISS. Yes, sir.

Senator STENNIS. All right. What do you have to say specifically in answer to this proposal?

Mr. CORLISS. Mr. Chairman, the present nearest pipeline through which we could accept deliveries of jet engine aircraft fuel is nearly 200 miles away.

The pipeline which we propose is 95 miles long. There is no set of circumstances under which any commercial enterprise could even come close to the prices which the Navy could enjoy the benefit of with its own pipeline under those circumstances.

Senator STENNIS. Well, that is very stoutly contradicted here, as I understand the figures.

Mr. CORLISS. Well, Mr. Chairman, this has about 2 years

Senator STENNIS. You are talking about the Navy. This committee thinks in terms of the Department of Defense in matters of this kind. Mr. CORLISS. Yes, sir.

Senator STENNIS. There is no chance to save money if we are going to separate the Navy from the Air Force. Your proposal covers both? Mr. McGANNEY. Yes, sir.

I might add, Senator, that the Air Force has been pressing us vigorously for the last 2 years to try to find a way to build to Castle, but the volume is just not there unless we have the two.

Senator STENNIS. All right. Excuse me now. I did not want to stop this gentleman unnecessarily. But do you have any figures here in answer to the figures represented, the total figures involved, or are you speaking just for the Navy?

Mr. CORLISS. I am prepared to speak in either direction.
Senator STENNIS. You speak for the whole thing?

Mr. CORLISS. Let me speak of the sequence of things which have happened.

We have met on a number of occasions with the Southern Pacific Pipe Line Co.

Senator STENNIS. Yes.

Mr. CORLISS. Their most recent proposal up to this time. which I have not seen, represented a cost of 98 cents per barrel of product delivered to Lemoore.

Senator STENNIS. Pardon me, you have not seen this proposal that is presented here by this gentleman?

Mr. CORLISS. No, sir.

Mr. STENNIS. I think we had just better take a recess. There is no use for us to sit here and argue about this thing when you have not had a chance to study it.

Mr. CORLISS. I would be delighted to study this, sir.

Senator STENNIS. Do you have any questions, Senator Cannon?
Senator CANNON. I have a number of questions.

Senator STENNIS. You go ahead and develop it and we will just skin the figures until we have had a chance to study it.

Senator CANNON. All right.

On this tax writeoff you read for me the 60–2 Bureau of the Budget Bulletin, have they recognized in other cases or do you know, that the tax writeoff is a proper consideration in determining the costs?

Mr. McGANNEY. Senator, I do not know. The fact is that it was only within the last 3 or 4 weeks that we learned of this Bureau of the Budget directive.

It came out through the action of Congressman Mahon introducing it completely in the House hearing on this proposal. which was the first we knew about it, although we have been contending for the last 2 years that the Air Force and the Navy should recognize the fact that we are giving this money all back to the Government in income tax. We had no backing for it until this directive came out.

Senator CANNON. So you do not know whether they have recognized that the inclusion of the tax, or exclusion, whichever way you look at it, is a proper item in comparing whether the private contractor could furnish it at a comparable cost to the in-house cost?

Mr. McGANNEY. I do not know that, Senator. All I can add to what I said is that I do know that the Secretary of Defense, Secretary Gates, issued a letter to the services directing them to follow this Budget Bureau directive.

Senator CANNON. Well, I am glad to hear that, and I think that should properly be done because certainly if the services can be furnished through a private contractor, private enterprise, at comparable costs, then my personal feeling is that that should be done.

In arriving at your figures, you indicated that if private enterprise builds the line it would benefit the local governmental subdivisions, which I recognize as true.

May I ask you this: Have you deducted those costs first in determining how much your tax would be to the Federal Government by reason of this increased operation?

Mr. McGANNEY. They were included in our expenses; yes, sir.

Senator Cannon. Did you also include your amortization, the cost of the project, in determining what your tax would be to arrive at this formula?

Mr. McGANNEY. No, we did not, sir; and I will tell you the reason for that is that we are in a rather unusual situation probably.

This line will cost in the neighborhood of $612 million, as we propose it. We happen to have the $62 million in the treasury, so we will not borrow any money nor will we pay any interest until after

taxes.

The Bureau of Internal Revenue does not permit us to deduct interest until after we pay it, so that the income subject to tax does not include amortization nor interest on our money.

So that the income tax, that is one reason why the income tax, is as large as it is on this project.

Senator CANNON. All right.

Now, does it include depreciation writeoff?

Mr. McGANNEY. It includes depreciation; yes, sir.

Senator CANNON. On how fast a schedule?

Mr. McGANNEY. At the declining balance basis.

Senator CANNON. I see.

Mr. McGANNEY. The depreciation under the Interstate Commerce regulations would be 3.31, but under the declining balance would be 6.62, so we have greater depreciation in the first several years, and we run out of depreciation altogether for tax purposes in the 12th year, and thereafter we have to credit it back.

Senator CANNON. In other words, you did not attempt to write off this on a 5-year basis, but on a 12-year basis this declining depreciation 12-year basis total?

Mr. McGANNEY. Yes, sir.

Senator CANNON. I do not know which one of you gentlemen can answer this, if the Navy went ahead with its own line, does that still leave the problem of furnishing fuel to Castle as it now is? In other words, must the Air Force still pay for their haulage in there as they are presently doing?

Mr. McGANNEY. I would say yes to that question, sir, definitely. Mr. CORLISS. Yes.

Senator CANNON. In other words, the Navy line from Estero Bay to Lemoore does not help solve Castle Air Force Base's problem of getting their fuel in?