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making the rum unfit as beverage, as required by Federal Law. Furthermore, it is denatured under the eyes of the insular gager. This denatured bay rum is not subject to the tax applicable to rectifiers of beverage spirits.

Our records are completely open to Government officials. Our operations have always been completely open to the insular gager.

So far as customs duties are concerned we have never shipped a drop to the United States, either of straight beverage rum or of bay rum, that did not comply with the Federal laws limiting customs exemption to those products that contain a specified minimum value added in the Virgin Islands, 80 percent prior to 1954 and 50 percent since the revised organic act. Account of the Cuban rum

A Cuban rum was referred to by the witness. Towards the end of World War II we brought approximately 5,000 barrels of rum produced in Cuba. This was in paraffin-lined barrels, and was purchased at a distress price because the containers were leaking and the product was running up excessive storage charges.

A. H. Riise, Inc., managed by my brother, passed this rum through a rectifying still and cleaned it. Then this rum was kept in two special, large galvanized warehouses in the central part of St. Thomas, away from the Riise distillery in the western part of St. Thomas. It was kept under lock and key under the control of my brother and the insular gager who verifies the proof of products sold locally. And it was kept and used solely and exclusively for sale in the local nearby market. It was not shipped to the United States, as was so recklessly charged by the witness before your committee.

This Cuban rum was no secret. Everyone knew about it. We paid the Virgin Islands 6 percent ad valorem duty. My brother bought it at a favorable price, and it took a number of years, 8 years or so, to use up this supply. Local and nearby market

The local and nearby market where Riise sells its products is well known in the islands, and must have been well known to the witness who appeared before you and who falsely charged shipment to the United States. All the Riise rectified rum is sold in this market, and we have built up large sales of flavored rums. We use caramel, sherry, punch flavors. Tourists frequently ask why the rum they buy in the United States does not taste the same. Our banana rums are now in great demand and the Mountain Top Hotel features its banana daiquiris.

The local and nearby market includes not only our Riise retail sales but also wholesale sales to other liquor stores in the islands. It includes extensive sales to vessels of all sorts—the large cruise ships that come in, freighters that bring bauxite in and out, vessels moving back and forth among the Caribbean Islands and taking our products to the British and French islands.

We also sell bulk rums, a good grade but less expensive, particularly in demand in the Virgin Islands, the nearby islands, and by freighter crews.

We also sell bay rum in the local market and to the shipping trade.

The local bay rum is different and is used not only as a shaving lotion but also as a mouth wash, since we don't put in the bitter denaturants required by Federal law for shipments to the U.S. continent.

In this market, in addition to the rums, we sell a number of other cordial products, made in large part out of alcohol purchased from Publicker Industries in Philadelphia, with, of course, the addition of flavors.

This local and nearby market is entirely separate and distinct from the market in exports to the continental United States. This is an elementary fact and is of critical importance insofar as requirements of law are concerned. Charge of alleged personal profit from use of highway funds

A witness charged that large sums of public money were used to pave the Skyline Drive, which is a little needed road, but which benefited the Paiewonsky family since they were able to sell at enormous profits a considerable acreage fronting on Skyline Drive.

Facts.-Senator Hodge has already informed the committee that he voted for the road on Skyline Drive, at Governor Merwin's request to provide access to the Governor's residence at Dorothea Estate.

This paving project was not even begun until late 1960. The Paiewonsky family has not owned any property on Skyline Drive for more than 2 years. It was sold before this paving was authorized. This is a matter of public record which could have been ascertained in moments by anyone seeking to provide responsible testimony, Charge as to alleged misuse of tax exemption

The witness charged that Riise Chemicals & Distillers Corp. received a 75 percent income tax exemption to permit production of chemicals, and that we never produced any such chemicals.

Facts. The first fact is that we never received a tax exemption certificate because we never got into chemical production. This could have been verified by a telephone call to the office of the government secretary who administers tax exemptions and has the certificates on public file.

The second fact is that the reason why we could never get into chemical production is that VICORP could never meet its obligation under our 1954 contract to supply us with water.

This breach by VICORP deprived us of opportunity for the chemicals business which was part of the reason why we bought the distillery. In addition it required us to shift to a salt water fermentation process. This meant we had to buy brandnew and different equipment. We could not use the equipment we had already bought and installed, equipment that cost us $150,000 and is still standing idle in our distillery. VICORP-Riise Long-Term Agreement for Purchase of Molasses

In 1949 Congress required the Government to discontinue its operation of the St. Croix distillery where it had for 13 years produced “Government House Rum." The price realizable by VICORP for its molasses fell to 2 to 3 cents per gallon. This byproduct of sugarcane was a glut on the market; the supplies far exceeded the needs of the farmers of the Skeoch distillery producing “Cruzan” rum.

VICORP was interested in lifting up the market for its molasses and sought to sell the molasses to our family. We had no way to use the molasses except by processing through the distillery.

Starting in late 1949, the A. H. Riise Distillers Corp. leased the distillery from VICORP on short-term leases which provided for purchasing VICORP's current molasses crop. Between 1949 and 1953, we bought molasses at prices between 5 and 10 cents per gallon.

At this time the distillery consisted basically of the original equipment, which had been subject to very active use during the war years. The Paiewonsky interests made a crude rum at St. Croix and refined it in their distillery in St. Thomas.

By deed dated December 4, 1954, and delivered in March 1955, VICORP sold the distillery to Kiise Distilleries for $60,000, as is. This was the fair market value of the depreciated facilities as determined by a unanimous arbitration board. A simultaneous agreement also dated December 4, 1954, and approved March 10, 1955, provided for the sale of molasses and 30,000 gallons of water daily. Paragraph 1 provides:

1. VICORP agrees to sell and RIISE agrees to buy seventy percent (70 percent) of the total amount of molasses produced annually as the result of VICORP's sugar mill operation. It is further agreed and understood that before the above percentage applies an amount not to exceed 30,000 gallons of molasses shall be negotiated annually during the months of December and January preceding the crop season.

I may state here that the 30,000 gallons was being withheld for the farmers if they should wish for use as cattle feed.

If the parties cannot agree upon the price of molasses on or before January 31 of each year, then the price shall be determined by arbitration, RIISE and VICORP shall each appoint one arbitrator, which two arbitrators shall select a third arbitrator who shall be chairman. The price fixed and determined by the Board of Arbitration shall be final and conclusive and binding on the parties hereto.

These parties annually agreed, prior to the 1957 crop, at a price which was 2 cents below the delivered price of molasses at St. Croix based on the world market.

At this time the relevant world market price, that is, the Puerto Rican price, was 5 cents per gallon. The tanker cost of molasses from Puerto Rico to St. Croix, plus other charges, was approximately 4 cents per gallon, resulting in a price of 9 cents at St. Croix. The parties agreed to a price of 7 cents. · This agreement was favorable to VICORP. It received 2 cents more than the Puerto Rico price, whereas it would have had to incur substantial costs, between 5 and 6 cents per gallon, if it had sought to move the molasses to Puerto Rico. This formula meant a benefit of 7 to 8 cents for VICORP, and only 2 cents for Riise.

The contract provided for arbitration when the parties could not agree. The only year when the parties could not agree was 1957. As a result of the Suez crisis in the fall of 1956, the world market price of molasses skyrocketed and gyrated.

As of the time of the negotiation for the 1957 sugar crop, the speculators had loosened their hold a little and the price had declined from 30 to 17 cents per gallon. Riise agreed to Judge Snyder, proposed by VICORP as the third arbitrator. The arbitration board set the price at 10 cents per gallon. One arbitrator felt the price should be a cent and a half per gallon higher.

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In subsequent years the world market stabilized and the parties were able to agree on prices for the current sugar crop in accordance with their previous practice. In 1961 the parties entered into a new agreement, which reduced the writing the customary approach of the parties, land VICORP dropped its water obligation from 30,000 to 10,000 gallons. The contract incorporated this in a contract formula.

In the years 1958–60, the price obtained by VICORP ranged between 7 and 10 cents per gallon. As I stated Saturday, the 7-cent price was paid in a year when we bought over a million gallons on the outside for about 3 cents f.o.b. British islands, and 9 cents delivered in St. Croix.

The CHAIRMAN. Tell me about this water. Was that 30,000 gallons of water? Mr. PATEWONSKY. Yes, sir. The CHAIRMAN. Where do they get that? Mr. PAIEWONSKY. They have wells in a section of the island, the middle of the island, known as Fair Plain. This has been an installation that has been there for quite some time.

The CHAIRMAN. Where is the saline water plant being built?
Mr. PAIEWONSKY. In St. Thomas.

The CHAIRMAN. Along with the powerplant?
Mr. PAIEWONSKY. Yes. It is a part of the powerplant.

The CHAIRMAN. As a man experienced in business, do you have any feeling as to why the powerplant lost $108,000 last year? Do they charge people a reasonable price or are they subsidizing industry?

Mr. PAIEWONSKY. No, sir; I think the rates for electrical energy in the islands are higher than they are here on the mainland. I think the rate ranges from approximately 8 cents per kilowatt-hour, and for large users it goes down in the various blocks down to about 112 cents or 2 cents.

But I think I do not believe that power is being subsidized. I think the loss might be the result of poor planning and phenomenal growth in the island. The generators are overloaded. The old generators that they had were working constantly, were overloaded. They just stopped.

They had to bring in emergency generators and this cost money. I think that is the reason why the power operation, if it did show a loss, showed a loss. But that loss is not to be attributed to a subsidization of the islands' economy through unrealistic power rates.

The CHAIRMAN. Thank you. Mr. PAIEWONSKY. Alleged inability of newcomers to purchase molasses from VICORP:

Mr. Brauer said he was injured by being unable to buy molasses from VICORP. This claim is exploded by the fact that he was never operating a distillery capable of producing rum from molasses.

VICORP retains 30,000 gallons of molasses for cattle feed and I know that this amount is rarely used up. I am confident that if Mr. Brauer or any other company put forward a legitimate request to buy molasses for distillery use there would have been no difficulty in arranging the purchase, that is, in the small quantities that he required.

If VICORP had approached me to request a reduction in the amount we were required to purchase and to accept I would have been happy to acquiesce. In fact, 1 year we did reduce our take from 70 to 6623 percent of VICORP's supply in order to ease a tight situation for the only other distillery that was capable of using molasses in producing rum. Molasses subsidy and denial of excessive distillery profits

I understand that Governor Merwin has sent to this committee a full explanation of the circumstances of the 1957 molasses subsidy law.

We brought our books before the Governor and showed him that at a molasses price exceeding 7 cents per gallon we could not operate at a profit, and would not undertake to purchase outside molasses at any higher cost. . Under the molasses subsidy law, we brought in about 2 million gallons of molasses purchased at 13 cents per gallon for the most part, and small amounts at higher prices. If we had not brought in this molasses that would have reduced the revenues of the Virgin Islands. The molasses subsidy law was a temporary expedient and it served its purpose well.

The CHAIRMAN. Can you explain that to me now? If the subsidy was 6 cents or more a gallon, was the tax enough to make up that loss? Mr. PAIEWONSKY. Yes, sir.

The CHAIRMAM. How did that work out? Have you some idea of the figures?

Mr. PAIEWONSKY. The Virgin Islands government gets back from the

The CHAIRMAN. Let me read you what I am questioning. If we had not brought in this molasses that would have reduced the revenues of the Virgin Islands.

They paid out the revenues on the subsidy, did they not?
Mr. PAIEWONSKY. Yes, sir.

The CHAIRMAN. And they got back revenues from the manufacture of rum? Mr. PAIEWONSKY. Yes, sir. The CHAIRMAN. What are the relative figures ? Mr. PAIEWONSKY. They paid out approximately $200,000, or there abouts. I am not too sure of the exact total amount of the subsidy over the 2 years. And in return they got back, I think, approximately $11 million.

The CHAIRMAN. That was from the whole crop, not just the subsidized crop; was it?

Mr. PAIEWONSKY. They got back on a matching fund basis approximately $4 million to $5 million a year, and this went over for 2 years. It worked out that the return of internal revenue tax that they got 'back from this subsidized molasses was approximately $11 million, I think, $10 million or $11 million, over the 2- to 3-year period.

The CHAIRMAN. We are not talking about the total returns of molasses. I am only talking about that portion that was subsidized. Mr. PAIEWONSKY. That is what I was talking about; yes, sir. The CHAIRMAN. All right.

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