Great Lakes Pilotage Rates-2020 Annual Review and Revisions to Methodology
| Published date | 09 April 2020 |
| Citation | 85 FR 20088 |
| Record Number | 2020-06968 |
| Section | Rules and Regulations |
| Court | Coast Guard,Homeland Security Department |
Federal Register, Volume 85 Issue 69 (Thursday, April 9, 2020)
[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Rules and Regulations]
[Pages 20088-20120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06968]
[[Page 20087]]
Vol. 85
Thursday,
No. 69
April 9, 2020
Part III Department of Homeland Security----------------------------------------------------------------------- Coast Guard-----------------------------------------------------------------------46 CFR Parts 401, 403 and 404 Great Lakes Pilotage Rates--2020 Annual Review and Revisions to
Methodology; Final Rule
Federal Register / Vol. 85 , No. 69 / Thursday, April 9, 2020 / Rules
and Regulations
[[Page 20088]]
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DEPARTMENT OF HOMELAND SECURITY
Coast Guard
46 CFR Parts 401, 403, and 404
[USCG-2019-0736]
RIN 1625-AC56
Great Lakes Pilotage Rates--2020 Annual Review and Revisions to
Methodology
AGENCY: Coast Guard, DHS.
ACTION: Final rule.
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SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the
Coast Guard is establishing new base pilotage rates for the 2020
shipping season. This final rule will adjust the pilotage rates to
account for changes in district operating expenses, an increase in the
number of pilots, and anticipated inflation. The Coast Guard estimates
that this final rule will result in a 1 percent net increase in
pilotage costs, compared to the 2019 season. In addition, the Coast
Guard is clarifying the rules related to the working capital fund.
DATES: This final rule is effective May 11, 2020.
ADDRESSES: To view documents mentioned in this preamble as being
available in the docket, go to https://www.regulations.gov, type USCG-
2019-0736 in the ``SEARCH'' box and click ``SEARCH.'' Click on Open
Docket Folder on the line associated with this rule.
FOR FURTHER INFORMATION CONTACT: For information about this document,
call or email Mr. Brian Rogers, Commandant (CG-WWM-2), Coast Guard;
telephone 202-372-1535, email [email protected], or fax 202-372-
1914.
SUPPLEMENTARY INFORMATION:
Table of Contents for Preamble
I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Methodological and Other Changes
VI. Discussion of Comments
VII. Discussion of Rate Adjustments
District One
A. Step 1: Recognize Previous Operating Expenses
B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
C. Step 3: Estimate Number of Working Pilots
D. Step 4: Determine Target Pilot Compensation Benchmark
E. Step 5: Project Working Capital Fund
F. Step 6: Project Needed Revenue
G. Step 7: Calculate Initial Base Rates
H. Step 8: Calculate Average Weighting Factors by Area
I. Step 9: Calculate Revised Base Rates
J. Step 10: Review and Finalize Rates
District Two
A. Step 1: Recognize Previous Operating Expenses
B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
C. Step 3: Estimate Number of Working Pilots
D. Step 4: Determine Target Pilot Compensation Benchmark
E. Step 5: Project Working Capital Fund
F. Step 6: Project Needed Revenue
G. Step 7: Calculate Initial Base Rates
H. Step 8: Calculate Average Weighting Factors by Area
I. Step 9: Calculate Revised Base Rates
J. Step 10: Review and Finalize Rates
District Three
A. Step 1: Recognize Previous Operating Expenses
B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
C. Step 3: Estimate Number of Working Pilots
D. Step 4: Determine Target Pilot Compensation Benchmark
E. Step 5: Project Working Capital Fund
F. Step 6: Project Needed Revenue
G. Step 7: Calculate Initial Base Rates
H. Step 8: Calculate Average Weighting Factors by Area
I. Step 9: Calculate Revised Base Rates
J. Step 10: Review and Finalize Rates
K. Surcharges
VIII. Regulatory Analyses
A. Regulatory Planning and Review
B. Small Entities
C. Assistance for Small Entities
D. Collection of Information
E. Federalism
F. Unfunded Mandates
G. Taking of Private Property
H. Civil Justice Reform
I. Protection of Children
J. Indian Tribal Governments
K. Energy Effects
L. Technical Standards
M. Environment
I. Abbreviations
AMOU American Maritime Officers Union
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
ECI Employment Cost Index
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
FOMC Federal Open Market Committee
FR Federal Register
GAO Government Accountability Office
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
GLPO U.S. Coast Guard Great Lakes Pilotage Office
IRS Internal Revenue Service
JTR Joint Travel Rates
LPA Lakes Pilots Association
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
RA Regulatory analysis
REC Record of Environmental Consideration
RFA Regulatory Flexibility Act
SBA Small Business Administration
Sec. Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
SLSPA Saint Lawrence Seaway Pilots' Association
U.S.C. United States Code
USD United States dollars
WLPA Western Great Lakes Pilot Association
II. Executive Summary
Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\
the Coast Guard regulates pilotage for oceangoing vessels on the Great
Lakes and St. Lawrence Seaway--including setting the rates for pilotage
services and adjusting them on an annual basis. The rates, which
currently range from $306 to $733 per pilot hour (depending on in which
of the specific six areas pilotage service is provided), are paid by
shippers to three U.S. pilot associations (each responsible for one of
the three Districts). The three pilot associations, which are the
exclusive U.S. source of registered pilots on the Great Lakes, use this
revenue to cover operating expenses, maintain infrastructure,
compensate working pilots, and train new pilots.
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\1\ Title 46 of the United States Code (U.S.C.) Chapter 93;
Public Law 86-555, 74 Stat. 259, as amended.
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To compute the rate for pilotage services, we use a ratemaking
methodology that we have developed since 2016, in accordance with our
statutory requirements and regulations. Our ratemaking methodology
calculates the revenue needed for each pilotage association (operating
expenses, an increase in the number of pilots, and anticipated
inflation), and then divides that amount by the expected shipping
traffic over the course of the coming year, to produce an hourly rate.
This process is currently effected through a 10-step methodology, which
is explained in detail in section IV of the preamble to this final
rule.
In this final rule, as part of our annual review, we are
establishing new pilotage rates for 2020 based on the existing
ratemaking methodology. The result is an increase in rates for five
areas and a decrease in the rate for the one remaining area. These
changes are due
[[Page 20089]]
to a combination of four factors: (1) An increase in total operating
expenses for the associations compared to the previous year,\2\ (2) an
increase in the amount of money needed for the working capital fund,
(3) inflation of pilot compensation by 2 percent, and (4) the net
addition of one working pilot at the beginning of the 2020 shipping
season in District Two. In addition, in this final rule, the Coast
Guard made two adjustments to the operating expenses based on public
comment, which increased the final rates from those published in the
notice of proposed rulemaking (NPRM). In the final rule we adjusted the
operating expenses to include the 3 percent shared council fee which we
incorrectly deducted in the NPRM; and added a surcharge adjustment for
District 2 and District 3 to account for the differences between their
accrued training expenses and the amount of money they collected via
the surcharge in 2017. Based on the ratemaking model discussed in this
final rule, we are finalizing the rates shown in table 1.
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\2\ Operating expenses decreased for the District One:
Undesignated area, the District Two: Undesignated area, and the
District Three: Undesignated Lake Superior area. Operating expenses
increased for the District One: Designated area, the District Two:
Designated area, the District Three: Designated area, and the
District Three: Undesignated Lakes Huron and Michigan area.
Table 1--Current and New Pilotage Rates on the Great Lakes
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Final 2019 Proposed 2020 Final 2020
Area Name pilotage rate pilotage rate pilotage rate
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District One: Designated............. St. Lawrence River...... $733 $757 $758
District One: Undesignated........... Lake Ontario............ 493 462 463
District Two: Designated............. Navigable waters from 603 602 618
Southeast Shoal to Port
Huron, MI.
District Two: Undesignated........... Lake Erie............... 531 573 586
District Three: Designated........... St. Mary's River........ 594 621 632
District Three: Undesignated......... Lakes Huron, Michigan, 306 327 337
and Superior.
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This final rule will impact 52 U.S. Great Lakes pilots, the 3 pilot
associations, and the owners and operators of an average of 266
oceangoing vessels that transit the Great Lakes annually. This final
rule is not economically significant under Executive Order 12866 and
will not affect the Coast Guard's budget or increase Federal spending.
The estimated overall annual regulatory economic impact of this rate
change is a net increase of $279,845, which is a 1 percent net increase
in estimated payments made by shippers from the 2019 shipping season.
Because the Coast Guard must review, and, if necessary, adjust rates
each year, we analyze these as single-year costs and do not annualize
them over 10 years. Section VIII of this preamble provides the
regulatory impact analyses of this final rule.
III. Basis and Purpose
The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (``the Act''),\3\ which requires foreign vessels and U.S.
vessels operating ``on register,'' meaning those U.S. vessels engaged
in foreign trade to use U.S. or Canadian registered pilots while
transiting the U.S. waters of the St. Lawrence Seaway and the Great
Lakes system.\4\ For the U.S. registered Great Lakes pilots
(``pilots''), the Act requires the Secretary to ``prescribe by
regulation rates and charges for pilotage services, giving
consideration to the public interest and the costs of providing the
services.'' \5\ The Act requires that rates be established or reviewed
and adjusted each year, no later than March 1.\6\ The Act requires that
base rates be established by a full ratemaking at least once every 5
years, and in years when base rates are not established, they must be
reviewed and, if necessary, adjusted.\7\ The Secretary's duties and
authority under the Act have been delegated to the Coast Guard.\8\
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\3\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
\4\ 46 U.S.C. 9302(a)(1).
\5\ 46 U.S.C. 9303(f).
\6\ Ibid.
\7\ Ibid.
\8\ Department of Homeland Security (DHS) Delegation No. 0170.1,
para. II (92.f).
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This final rule establishes new pilotage rates for the 2020
shipping season. The Coast Guard believes that the new rates will
continue to promote pilot retention, ensure safe, efficient, and
reliable pilotage services on the Great Lakes, and provide adequate
funds to upgrade and maintain infrastructure.
IV. Background
Pursuant to the Act, the Coast Guard, in conjunction with the
Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping
practices and rates on the Great Lakes and the St. Lawrence Seaway.
Under Coast Guard regulations, all vessels engaged in foreign trade
(often referred to as ``salties'') are required to engage U.S. or
Canadian pilots during their transit through the regulated waters.\9\
U.S. and Canadian ``lakers,'' which account for most commercial
shipping on the Great Lakes, are not affected.\10\ Generally, vessels
are assigned a U.S. or Canadian pilot depending on the order in which
they transit a particular area of the Great Lakes, and do not choose
the pilot they receive. If a vessel is assigned a U.S. pilot, that
pilot will be assigned by the pilotage association responsible for the
particular district in which the vessel is operating, and the vessel
operator will pay the pilotage association for the pilotage services.
The Canadian GLPA establishes the rates for Canadian registered pilots.
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\9\ See title 46 of the Code of Federal Regulations (CFR) part
401.
\10\ 46 U.S.C. 9302(f). A ``laker'' is a commercial cargo vessel
especially designed for and generally limited to use on the Great
Lakes.
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The U.S. waters of the Great Lakes and the St. Lawrence Seaway are
divided into three pilotage districts. Pilotage in each district is
provided by an association certified by the Coast Guard's Director of
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool.
The Saint Lawrence Seaway Pilotage Association provides pilotage
services in District One, which includes all U.S. waters of the St.
Lawrence River and Lake Ontario. The Lakes Pilotage Association
provides pilotage services in District Two, which includes all U.S.
waters of Lake Erie, the Detroit River, Lake St. Clair, and the St.
Clair River. Finally, the Western Great Lakes Pilotage Association
provides pilotage services in District Three, which includes all U.S.
waters of the St. Mary's River; Sault Ste. Marie Locks; and Lakes
Huron, Michigan, and Superior.
Each pilotage district is further divided into ``designated'' and
[[Page 20090]]
``undesignated'' areas, which is depicted in table 2 below. Designated
areas, classified as such by Presidential Proclamation, are waters in
which pilots must, at all times, be fully engaged in the navigation of
vessels in their charge.\11\ Undesignated areas, on the other hand, are
open bodies of water not subject to the same pilotage requirements.
While working in undesignated areas, pilots must ``be on board and
available to direct the navigation of the vessel at the discretion of
and subject to the customary authority of the master.'' \12\ For these
reasons, pilotage rates in designated areas can be significantly higher
than those in undesignated areas.
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\11\ Presidential Proclamation 3385, Designation of restricted
waters under the Great Lakes Pilotage Act of 1960, December 22,
1960. 25 FR 13681 (December 24, 1960).
\12\ 46 U.S.C. 9302(a)(1)(B).
\13\ Area 3 is the Welland Canal, which is serviced exclusively
by the Canadian GLPA and, accordingly, is not included in the United
States pilotage rate structure.
\14\ The areas are listed by name, see 46 CFR 401.405.
Table 2--Areas of the Great Lakes and St. Lawrence Seaway
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District Pilotage association Designation Area No.\13\ Area name \14\
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One.................. Saint Lawrence Seaway Designated............. 1 St. Lawrence River.
Pilotage Association. Undesignated........... 2 Lake Ontario.
Two.................. Lake Pilotage Designated............. 5 Navigable waters from
Association. Southeast Shoal to
Port Huron, MI.
Undesignated........... 4 Lake Erie.
Three................ Western Great Lakes Designated............. 7 St. Mary's River.
Pilotage Association. Undesignated........... 6 Lakes Huron and
Undesignated........... 8 Michigan.
Lake Superior.
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Each pilot association is an independent business and is the sole
provider of pilotage services in the district in which it operates.
Each pilot association is responsible for funding its own operating
expenses, maintaining infrastructure, acquiring and implementing
technological advances, training personnel or partners, and pilot
compensation. Through a public rulemaking procedure, and with input
from Great Lakes Pilots Advisory Committee (GLPAC), the Coast Guard
developed a 10-step ratemaking methodology, based on a historic 10-year
average of actual traffic, to derive a pilotage rate that covers these
expenses. The methodology is designed to measure how much revenue each
pilotage association would need to cover expenses and provide
competitive compensation to working pilots. We then divide that amount
by the historic 10-year average for pilotage demand, as estimated by
using historic pilotage work hours. We recognize that, in years where
traffic is above average, pilot associations will accrue more revenue
than projected, while in years where traffic is below average, they
will take in less. We believe that over the long term, however, this
system ensures that infrastructure will be maintained and that pilots
will receive adequate compensation and work a reasonable number of
hours, with adequate rest between assignments to ensure retention of
highly trained personnel.
Over the past 4 years, the Coast Guard made several adjustments to
the Great Lakes pilotage ratemaking methodology. In 2016, we made
significant changes to the methodology, moving to an hourly billing
rate for pilotage services and changing the compensation benchmark to a
more transparent model. In 2017, we added additional steps to the
ratemaking methodology, including new steps that better account for the
additional revenue produced by the application of weighting factors
(discussed in detail in Steps 7 through 9 below, in this section of the
preamble). In 2018, we revised the methodology by which we develop the
compensation benchmark, based upon U.S. mariners rather than Canadian
registered pilots. The current methodology, which was finalized in the
Great Lakes Pilotage Rates--2019 Annual Review and Revisions to
Methodology final rule (84 (FR 20551, May 10, 2019), is designed to
accurately capture all of the costs and revenues associated with Great
Lakes pilotage requirements and produce an hourly rate that adequately
and accurately compensates pilots and covers expenses. The current
methodology is summarized in the section below.
Summary of Ratemaking Methodology
As stated above, the ratemaking methodology, outlined in 46 CFR
404.101 through 404.110, consists of 10 steps that are designed to
account for the revenues needed and total traffic expected in each
district. The result is an hourly rate, determined separately for each
of the areas administered by the Coast Guard.
In Step 1, ``Recognize previous operating expenses,'' (Sec.
404.101), the Director reviews audited operating expenses from each of
the three pilotage associations. This number forms the baseline amount
that each association is budgeted. Because of the time delay between
when the association submits raw numbers and when the Coast Guard
receives audited numbers, this number is 3 years behind the projected
year of expenses. In calculating the 2020 rates in this proposal, the
Coast Guard is beginning with the audited expenses from the 2017
shipping season.
While each pilotage association operates in an entire district, the
Coast Guard determines costs by area. Thus, with regard to operating
expenses, we allocate certain operating expenses to undesignated areas,
and certain operating expenses to designated areas. In some cases
(e.g., insurance for applicant pilots who operate in undesignated areas
only), we can allocate the costs based on where they are actually
accrued. In other situations (e.g., general legal expenses), expenses
are distributed between designated and undesignated waters on a pro
rata basis, based upon the proportion of income forecast from the
respective portions of the district.
In Step 2, ``Project operating expenses, adjusting for inflation or
deflation,'' (Sec. 404.102), the Director develops the 2020 projected
operating expenses. To do this, we apply inflation adjustors for 3
years to the operating expense baseline received in Step 1. The
inflation factors used are from the Bureau of Labor Statistics' (BLS)
Consumer Price Index (CPI) for the Midwest Region, or, if not
available, the Federal Open Market Committee (FOMC) median economic
projections for Personal Consumption Expenditures (PCE) inflation. This
step produces the total operating expenses for each area and district.
[[Page 20091]]
In Step 3, ``Estimate number of working pilots,'' (Sec. 404.103),
the Director calculates how many pilots are needed for each district.
To do this, we employ a ``staffing model,'' described in Sec. 401.220,
paragraphs (a)(1) through (a)(3), to estimate how many pilots would be
needed to handle shipping during the beginning and close of the season.
This number is helpful in providing guidance to the Director in
approving an appropriate number of credentials for pilots.
For the purpose of the ratemaking calculation, we determine the
number of working pilots provided by the pilotage associations (see
Sec. 404.103), which is what we use to determine how many pilots need
to be compensated via the pilotage fees collected.
In Step 4, ``Determine target pilot compensation benchmark,''
(Sec. 404.104), the Director determines the revenue needed for pilot
compensation in each area and District. This step contains two
processes. In previous years, in the first process, we calculated the
total compensation for each pilot using a ``compensation benchmark.''
Next, we multiplied the individual pilot compensation by the number of
working pilots for each area and district (from Step 3), producing a
figure for total pilot compensation. Because pilots are paid by the
associations, but the costs of pilotage is divided by area for
accounting purposes, we assigned a certain number of pilots for the
designated areas and a certain number of pilots for the undesignated
areas to determine the revenues needed for each area. To make the
determination of how many pilots to assign, we used the staffing model
designed to determine the total number of pilots described in Step 3,
above.
In the past, as explained more fully below, the Coast Guard used
two different benchmarks to calculate target pilot compensation: AMOU
contract data and Canadian pilot compensation. The Coast Guard does not
believe either benchmark is appropriate at this time. Instead, the
Coast Guard has determined that the target compensation used in the
2019 ratemaking is an appropriate level of compensation for Great Lakes
pilots because it serves the public interest and achieves the Coast
Guard's goals of safety through rate and compensation stability while
also promoting recruitment and retention of qualified United States
registered pilots.
Prior to 2016, the Coast Guard based the compensation benchmark on
data provided by the AMOU regarding its contract for first mates on the
Great Lakes. However, in 2016 the AMOU elected to no longer provide
this data to the Coast Guard, and thus, in the 2016 ratemaking (81 FR
11907, March 7, 2016) we used average compensation for a Canadian pilot
plus a 10-percent adjustment. As a result of a legal challenge filed by
the shipping industry, the court found that the Coast Guard did not
adequately support the 10-percent addition to the Canadian GLPA
benchmark, and thus its use was deemed arbitrary and capricious.
American Great Lakes Ports Association v. Zukunft, 296 F.Supp 3d 27,
46-48 (D.D.C. 2017). The Coast Guard then based the 2018 benchmark on
data provided by the AMOU regarding its contract for first mates on the
Great Lakes in the 2011 to 2015 period, and adjusted it for inflation
using FOMC median economic projections for PCE inflation. We used the
information provided by the AMOU because it was the most recent
publicly available information to which we had access.
For the 2019 ratemaking, the Coast Guard did not have access to
current AMOU contract data and our research did not yield a better
compensation benchmark; therefore, target pilot compensation was
determined by taking the 2018 number and adjusting it for inflation.
For the 2020 ratemaking, the situation with regard to compensation
benchmarks has not changed. The Coast Guard still lacks access to
current AMOU contract data and, as discussed in prior rulemakings, the
Coast Guard does not believe that other American or Canadian pilot
compensation data is appropriate to use as a benchmark at this time.
The Coast Guard, however, has determined that based on its experience
over the past two ratemakings that the level of target pilot
compensation for those years provides an appropriate level of
compensation for American Great Lakes pilots. The Coast Guard
therefore, will not, at this time, seek alternative benchmarks for
target compensation and for 2020 and future ratemakings will instead
simply adjust the amount of target pilot compensation for inflation.
This benchmark successfully achieves the Coast Guard's goals of safety
through rate and compensation stability while also promoting
recruitment and retention of qualified United States registered pilots.
Therefore, the Coast Guard uses this as the compensation benchmark for
future rates.
In the second process of Step 4, set forth in Sec. 404.104(c), the
Director determines the total compensation figure for each District. To
do this, the Director multiplies the compensation benchmark by the
number of working pilots for each area and district (from Step 3),
producing a figure for total pilot compensation.
In Step 5, ``Project working capital fund,'' (Sec. 404.105), the
Director calculates a value that is added to pay for future
unidentified expenses. For example, these expenses can be unforeseen
facility repairs, infrastructure purchases, technology procurements, or
training. This value is calculated by adding the total operating
expenses (derived in Step 2) to the total pilot compensation (derived
in Step 4), and multiplying that figure by the preceding year's average
annual rate of return for new issues of high-grade corporate securities
using Moody's Seasoned Aaa Corporate Bond Yield data. This figure
constitutes the ``working capital fund'' for each area and district.
In Step 6, ``Project needed revenue,'' (Sec. 404.106), the
Director simply adds up the totals produced by the preceding steps. The
projected operating expense for each area and district (from Step 2) is
added to the total pilot compensation (from Step 4) and the working
capital fund contribution (from Step 5). The total figure, calculated
separately for each area and district, is the ``needed revenue.''
In Step 7, ``Calculate initial base rates,'' (Sec. 404.107), the
Director calculates an hourly pilotage rate to cover the needed revenue
as calculated in Step 6. This step consists of first calculating the
average hours of traffic over 10 years for each area. Next, the revenue
needed in each area (calculated in Step 6) is divided by the average
hours of traffic over 10 years to produce an initial base rate.
An additional element, the ``weighting factor,'' is required under
Sec. 401.400. Pursuant to that section, ships pay a multiple of the
``base rate'' as calculated in Step 7 by a number ranging from 1.0 (for
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest
ships, or ``Class IV'' vessels). As this significantly increases the
revenue collected, we account for the added revenue produced by the
weighting factors to ensure that shippers are not overpaying for
pilotage services.
In Step 8, ``Calculate average weighting factors by Area,'' (Sec.
404.108), the Director calculates how much extra revenue, as a
percentage of total revenue, has historically been produced by the
weighting factors in each area. We do this by using a historical
average of the applied weighting factors for each year since 2014 (the
first year the current weighting factors were applied).
In Step 9, ``Calculate revised base rates,'' (Sec. 404.109), the
Director modifies the base rates by accounting for the
[[Page 20092]]
extra revenue generated by the weighting factors. We do this by
dividing the initial pilotage rate for each area (from Step 7) by the
corresponding average weighting factor (from Step 8), to produce a
revised rate.
In Step 10, ``Review and finalize rates,'' (Sec. 404.110), often
referred to informally as ``Director's discretion,'' the Director
reviews the revised base rates (from Step 9) to ensure that they meet
the goals set forth in the Act and in 46 CFR 404.1(a), which include
promoting efficient, safe, and reliable pilotage service on the Great
Lakes; generating sufficient revenue for each pilotage association to
reimburse necessary and reasonable operating expenses; compensating
trained and rested pilots fairly; and providing appropriate profit for
improvements. Because it is our goal to be as transparent as possible
in our ratemaking procedure, we use this step sparingly to adjust
rates.
After the base rates are set, Sec. 401.401 permits the Coast Guard
to apply surcharges. We previously used surcharges to pay for the
training of new pilots, rather than incorporating training costs into
the overall ``needed revenue'' used in the calculation of the base
rates. The surcharge accelerates the reimbursement of certain necessary
and reasonable expenses. Last year, we applied a surcharge to account
for the associations' expenses for the Applicant Trainee and Apprentice
Pilots, which included providing a stipend, lodging, training,
transportation, and per diem. We implemented these surcharges for a few
years because of a large number of pending pilot retirements, and a
large amount of recruitment at the pilot associations. Without the
surcharge, the associations would have been reimbursed for expenses
associated with training new pilots 3 years later via the rate.
However, any pilot who retired prior to that 3 year date would not have
been reimbursed. Therefore, we applied a surcharge to facilitate the
training of these replacements in last year's final rule. As the vast
majority of registered pilots are not anticipated to reach the
regulatory required retirement age of 70 in the next 20 years, we
believe that pilot associations are now able to plan for the costs
associated with retirements without relying on the Coast Guard to
impose surcharges. Therefore, in this year's final rule we are not
imposing surcharges.
V. Discussion of Methodological and Other Changes
For 2020, the Coast Guard implemented no new methodological changes
to the ratemaking model. We believe that the methodology laid out in
the 2019 Annual Review (84 FR 20551) will produce rates for the 2020
shipping season that will ensure safe, efficient, and reliable pilotage
services are available on the Great Lakes in order to facilitate
maritime commerce.
In previous years and in this current rulemaking, several
commenters have raised issues regarding the working capital fund.\15\
The purpose of the working capital fund is to ensure that associations
have a way to set aside money to pay for high cost items and
infrastructure improvements. The Coast Guard is making changes in this
final rule to codify the procedures related to the use of funds and
accounting requirements related to the working capital fund.
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\15\ See the dockets for the 2019 ratemaking (https://www.regulations.gov/docket?D=USCG-2018-0665) and the 2018 ratemaking
(https://www.regulations.gov/docket?D=USCG-2017-0903) for more
information.
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In this final rule, the Coast Guard is finalizing two changes to
the regulatory text related to the working capital fund, formerly
called ``return on investment.'' In 46 CFR 404.106, we are changing the
words ``return on investment'' to ``working capital fund,'' as that is
the current name for that fund. Prior to 2017, the working capital fund
described in 46 CFR 404.105 was called ``return on investment.'' In the
Great Lakes Pilotage Rates 2017 Annual Review final rule (82 FR 41466,
August 31, 2017), the Coast Guard changed the name of that fund to the
``working capital fund,'' but the 2017 final rule did not change a
reference to ``return on investment'' in 46 CFR 404.106. This change
corrects that oversight, so both 46 CFR 404.105 and 46 CFR 404.106 will
use consistent terminology.
In addition, the Coast Guard is incorporating into regulations the
industry practice currently followed by the pilots associations
regarding these funds. We are adding text to 46 CFR 403.110 requiring
each pilot association set aside, in a separate account, an amount at
least equal to the amount calculated in Step 5 of the ratemaking, and
place restrictions on how those funds are expended. Under the final
rule, pilot associations can only apply the funds in the working
capital fund account to capital projects, infrastructure improvements,
infrastructure maintenance, training, and non-recurring technology
purchases that are necessary for providing pilotage services. The pilot
associations may grow the working capital fund over successive shipping
seasons for a future significant purchase, including for a down payment
on a purchase that would also be financed in part. If needed, pilot
associations could request a waiver from the requirements from the
Director.
VI. Discussion of Comments
In response to the October 30, 2019 NPRM (84 FR 58099), the Coast
Guard received six comment letters as well as a duplicate comment
submission. These included one comment from the law firm K&L Gates
(hereinafter ``District Lawyers''), which represents the interests of
the three Great Lake pilot associations; a comment from the Shipping
Federation of Canada, the American Great Lakes Ports Association, and
the United States Great Lakes Shipping Association (hereinafter ``the
User's Coalition'' or ``the Coalition''); a comment from the president
of the St. Lawrence Seaway Pilots' Association (hereinafter ``SLSPA'');
a comment from the president of the Lakes Pilots Association
(hereinafter ``LPA''); a comment from the president of the Western
Great Lakes Pilot Association (hereinafter ``WLPA''); and a comment
made by Captain John Swartout, a pilot working for District Three. As
each of these commenters touched on numerous issues, for each response
below we note which commenters raised the specific points addressed. In
situations where multiple commenters raised similar issues, we attempt
to provide one response to those issues.
A. Operating Expenses
The first step of the ratemaking process outlines the criteria for
evaluating operating expenses. Each expense must be necessary for
providing pilotage service and reasonable in amount. The allowable
operating expenses must comply with both criteria to recoup any costs
for a given pilotage association. To do so, pilotage associations
submit financial statements to third party auditors contracted by the
Coast Guard. The third party auditors create financial reports for the
Coast Guard to determine the allowable operating expenses. We use these
expenses to establish pilotage rates. We received several comments,
discussed below, from pilot associations and persons representing such
interests requesting changes to these adjustments.
1. Legal Fees
Commenters from pilots' associations and shipping and port
interests addressed legal fees and, in particular, the 2016 rulemaking
concerning the exclusion of legal expenses for suits against the U.S.
government or its agents, and the subsequent case contesting that
exclusion.
[[Page 20093]]
Two commenters contended that prior years' legal fees were
improperly denied, and referred to St. Lawrence Seaway Pilots
Association v. U. S. Coast Guard, 357 F.Supp 3d 30 (D.D.C. 2019). In
that case, the court held that the Coast Guard improperly promulgated
46 CFR 404.2(b)(6) in the 2016 rulemaking that excluded any and all
expenses associated with legal action against the U.S. government or
its agents.
The Coast Guard disagrees with the commenters. In that case, the
court went to great lengths to discuss the remedy for the pilots
associations, and noted concerns about rates that were already paid.
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp
3d 30, 38 (D.D.C. 2019), citing Am. Great Lakes Ports Ass'n v. Zukunft,
301 F.Supp.3d 99, 103-04 (D.D.C. 2018) (noting disruptive effect of
upending already-paid pilotage rates) and St. Lawrence Seaway Pilots
Ass'n, 85 F.Supp.3d, 197, 208 (D.D.C. 2015) (noting remedial difficulty
of ordering pilots' entitlement to future payments and recognizing that
remedial decision regarding 2014 rates likely impacts the propriety and
validity of the 2015 rates).
The court held the following: ``At the hearing, Plaintiffs
clarified they seek a vacatur of 46 CFR 404.2(b)(6) to prevent the
Coast Guard from excluding legal fees in future rate settings, and do
not seek to disturb any past rates. See Hr'g Tr. 12:7-13:3. With the
benefit of this clarification, the remedial decision is simple: Vacatur
is the presumptive remedy for arbitrary and capricious agency action,
see 5 U.S.C. 706(2) (A court shall ``set aside agency action . . .
found to be . . . arbitrary [and] capricious''), and there is no risk
of disruption. The Court will therefore vacate 46 CFR 404.2(b)(6).''
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp
3d 30, 38 (D.D.C. 2019).
The court's holding was prospective, not retroactive, based upon
the clarification of the Pilots Association at the hearing on the
matter. The regulation has been removed from the CFR, and the Coast
Guard has not denied any legal fees based on that vacated rule since
the court's decision was handed down. The Coast Guard will not disturb
past rate setting, in accordance with the court's ruling.
One commenter stated that the Coast Guard had a meritorious
position regarding the denial of legal fees against the U.S. government
and suggested that a clarification of legal fees be included in the
final rule. The Coast Guard presently takes no position on this
comment. That part of the 2016 rule with respect to 46 CFR 404.2(b)(6)
was vacated because it was a change in policy that was not effected in
accordance with the Administrative Procedure Act's notice and comment
requirements and the court found the Coast Guard's actions were
arbitrary and capricious. The court in the 2019 case stated, ``The
Court takes no position on the relative wisdom of the policy. A rule
excluding legal fees incurred against the U.S. government may well be a
rational policy. But the process by which the Coast Guard enacted it
was arbitrary and capricious.'' St. Lawrence Seaway Pilots Association
v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019). The Coast
Guard did not include any language regarding legal fees in the final
rule as there was nothing in the NPRM proposing any change. Any change
in policy regarding future legal fees will be accomplished in
accordance with the legally required notice and comment procedures in
order for all parties to be heard on the matter.
2. Housing Allowances
There were two comments regarding the housing allowance not being
considered an operating expense. The first commenter stated that
``[f]or the CG to determine that a mariner must live in the region
where they work is unreasonable'' \16\, and that specifically in
District Three there is a ``tour de role'' dispatch system to prevent a
pilot from working all over the district. The same commenter stated
that, in not allowing a housing allowance, ``we [the pilot association]
would be very severely handicapped on recruiting new Pilots into our
District. Forcing a Pilot to move his family will undoubtedly cause
some potential applicants to decide not to pursue a career in our
District.'' \17\ The Coast Guard disagrees with the first statement.
Determining where to live is an individual's right and lifestyle
decision. The Western Great Lakes Pilots association, the source of
this comment, has multiple tours-de-role and holds meetings before the
season. During these meetings, each registered pilot determines which
port to work out of for the season. We expect the registered pilot to
pay for housing during the season, which is consistent with Internal
Revenue Service (IRS) regulations as discussed below. For example, if a
registered pilot chooses to live in Virginia but elects to be
dispatched out of Chicago for the season, the registered pilot will not
be reimbursed for any housing in Chicago during the season because this
dwelling is not a necessary expense for the shippers to reimburse.
However, if the pilot is dispatched out of Port Huron, reasonable
travel costs from Chicago and hotel bills in Port Huron may be
considered for inclusion in the operating expenses. The shippers do not
have to fund lifestyle choices. Additionally, the commenter did not
provide any evidence or data to support the claim that not allowing a
housing allowance will cause a recruitment and retention crisis.
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\16\ USCG-2019-0736-0002.
\17\ Id.
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The same commenter also stated that the housing allowance provides
a great savings to the industry and should be continued. Another
commenter echoed this comment. ``In the interests of efficient
pilotage, Districts 2 and 3 have found that it is often more cost
effective for pilots to lease an apartment or other dwelling rather
than paying for a hotel.'' \18\ The Coast Guard neither agrees nor
disagrees with this comment, as the commenter provided no evidence to
justify this claim. We suggest the commenter address this issue at a
future GLPAC meeting and/or work with the stakeholders who pay for
pilotage service to submit a joint letter for further consideration. In
general, hotel bills should be 50 miles outside the pilot's tour-de-
role port for the season in order to be considered reasonable and
necessary and implemented into the rate. This 50-mile radius is per the
IRS.\19\
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\18\ USCG-2019-0736-0005.
\19\ IRS Tax Topics, Topic No. 511 Business Travel Expenses,
https://www.irs.gov/taxtopics/tc511. (last visited 2/28/2020
Generally, your tax home is the entire city or general area where
your main place of business or work is located, regardless of where
you maintain your family home. For example, you live with your
family in Chicago but work in Milwaukee where you stay in a hotel
and eat in restaurants. You return to Chicago every weekend. You may
not deduct any of your travel, meals or lodging in Milwaukee because
that's your tax home. Your travel on weekends to your family home in
Chicago isn't for your work, so these expenses are also not
deductible. If you regularly work in more than one place, your tax
home is the general area where your main place of business or work
is located.
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B. Target Compensation
We received several comments on the Coast Guard's use of the
Federal Reserve's projected Personal Consumption Expenditure (PCE) data
in Step 4 of the ratemaking, as opposed to using historic Bureau of
Labor Statics (BLS) Employment Cost Index (ECI) data. In Step 4, we
adjust the existing target pilot compensation to account for inflation,
following the procedures outlined in Sec. 404.104(b), which require
that PCE data only be used when ECI data is not available. In this
ratemaking, we are inflating the 2019 pilot compensation to 2020
dollars, which
[[Page 20094]]
requires forecasted inflation data for 2020. The BLS ECI only provides
historic data. Consequently, no 2020 ECI data was available at the time
we conducted the analysis to support this rulemaking, and no 2020 ECI
data will be available until April 30th 2020, which is after the 2020
shipping season begins. Therefore, we used the PCE data, in accordance
with Sec. 404.104(b), as the PCE provides estimates of inflation for
2020. As noted by commenters, for the past several years, the PCE
inflation value has been about 1 percent lower than the ECI value,
resulting in a lower target compensation value than if we had used the
ECI value. Two commenters suggested that Coast Guard should use the ECI
to readjust previous target compensation values to account for the
difference between the predicted PCE value and the actual ECI value
that published. The commenters raised several concerns with the use of
the PCE, which are discussed below.
Several commenters noted that, while a full calendar year worth of
ECI data was not available for 2019, at the time the NPRM was
published, some 2019 data was available, and they said this data should
have been used in the 2020 ratemaking.20 21 22 However, the
commenters are missuderstanding the reason the Coast Guard uses the PCE
data in the ratemaking instead of the most recent ECI data. The reason
we did not use the ECI data is not because of a lack of a full year's
worth of 2019 inflation data, but rather because the ECI did not have
any 2020 inflation data available.
---------------------------------------------------------------------------
\20\ USCG-2019-0736-0003 p. 3.
\21\ USCG-2019-0736-0002 p. 5.
\22\ USCG-2019-0736-0002 p. 5.
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Another commenter stated that, while the PCE index is published
more frequently than the ECI, this does not make it a better inflation
index. The commenter also stated that data which ``measure the wrong
metrics'' should not be used just because it is newer.\23\ The Coast
Guard disagrees with both points made by the commenter. We are using
the PCE because it provides an estimate of forecasted 2020 inflation
data. Using the most recent ECI data does not address the issue that
the ECI does not provide an estimate of forecasted inflation, and as
part of the ratemaking process under steps 2 and 4, the Coast Guard
requires an estimate of future inflation. Again, we are not using the
PCE because it is published more frequently than the ECI, but, rather,
because it provides necessary information that the ECI does not.
---------------------------------------------------------------------------
\23\ USCG-2019-0736-0006, p.2.
---------------------------------------------------------------------------
Two commenters stated that they believe the ECI is more appropriate
to use to inflate pilot compensation than the PCE, because ``[the ECI]
is based on wage and benefit costs, rather than general goods and
prices,'' \24\ and noted that the Coast Guard has previously
acknowledged this point in the 2018 ratemaking rule (83 FR 26162).\25\
\26\ The Coast Guard agrees that the ECI is a better index to use to
inflate pilot compensation, which is why Sec. 404.104(b) requires that
PCE data be used only when ECI data is unavailable. It is also
important to note that the statement in the 2018 ratemaking discussed
differences between the ECI and the CPI,\27\ not the ECI and the PCE,
as stated by the commenter. The statement quoted by the commenter does
not accurately reflect the components of the PCE which differ from the
CPI, and include the cost of employer provided health insurance.\28\
---------------------------------------------------------------------------
\24\ USCG-2019-0736-0005, p. 3.
\25\ USCG-2019-0736-0005, p. 3.
\26\ USCG-2019-0736-0003, p. 2.
\27\ As stated in the 2018 Final Ratemaking (83 FR 26162 at
26171), ``[The Coast Guard] agree[s] with the commenters that, for
the purposes of inflating compensation costs, the ECI provides a
better gauge of compensation inflation than the CPI does''.
\28\ https://www.bls.gov/opub/btn/archive/differences-between-the-consumer-price-index-and-the-personal-consumption-expenditures-price-index.pdf, page 2.
---------------------------------------------------------------------------
One commenter stated that they believe the use of the ``2019 ECI
data to project 2020 [pilot compensation data] would be more accurate
than using improperly low PCE data.'' The commenter provided no
reasoning for why they believe historic ECI data is a better predictor
of future inflation than the forecasted PCE data, nor did they provide
any reasoning as to why only one year of historic data should be used.
The forecasted PCE inflation data is generated by the Federal Reserve,
which is responsible for setting monetary policy in the United States,
and thus influencing inflation. The Federal Reserve bases these
estimates on predictions of economic growth, the unemployment rate,
other economic data, and the future policy path the Federal Reserve
expects to take to meet its goals of maximizing employment and setting
stable prices. The PCE is a reflection of the government's best
prediction of what will happen, whereas the ECI is a reflection of what
has already happened.
As stated above, the Coast Guard is using the best available data,
the PCE data to inflate target pilot compensation, as required by Sec.
404.104(b), and is not changing how target pilot compensation is
calculated for this final rule. However, we will review this issue, and
if we determine that any changes are needed, we will propose them as
part of a future rulemaking.
1. Inflation Calculation
One commenter stated they believe pilot compensation is
significantly below the market rate when compared with the salaries of
other pilots across the United States. The commenter also discussed a
multi-year compensation study the Coast Guard mentioned in the 2018
rule, and that the 2020 NPRM makes no mention of this study. The
commenter stated that, as this study continues, the pilots are
continually being undercompensated.
While the Coast Guard commissioned a study to analyze methodologies
to determine pilot compensation, we decided not to finalize this study.
The compensation study was a backup in the event that we failed to
identify a compensation standard that remedied the recruitment and
retention issues identified in previous rulemakings, and discussed
during previous GLPAC meetings. The current compensation benchmark
addresses our goals of promoting the recruitment and retention of
highly qualified mariners and experienced U.S. registered pilots.
Therefore, completion of this compensation study is no longer
necessary.
2. Staffing Model
The LPA, District Lawyers, and the SLSPA made comments regarding
the staffing model and the fact that each District needs to have one
pilot added to the staffing model to account for the president of the
association's workload. Since 2016, when Coast Guard developed this
staffing model, the duties and responsibilities of the pilot
association presidents have expanded. For example, we expect the pilot
president to attend numerous meetings and conferences throughout the
year, provide additional financial and traffic information to increase
transparency and accountability, oversee and ensure the integrity of
the association training program, evaluate technology, and coordinate
with the American Pilots Association (APA) to implement and share best
practices. The Coast Guard agrees that if a pilot association president
is spending half or more of their time on administrative issues that
the staffing model should account for that time. Therefore, we will
review this issue and any data supporting the amount of time the
association presidents spend on administrative issues and tasks. If we
determine that any changes should be made to the
[[Page 20095]]
staffing model, we will propose them as part of a future rulemaking.
C. Target Pilot Compensation
The User's Coalition made several comments in regards to this step.
They commented that ``Since at least 2015, the GLPO's ratemaking
activities have repeatedly yielded revenues far above the target
revenues fixed as representing a level necessary to cover pilot
compensation and other recognized expense items.'' The Coast Guard
disagrees with this statement. The only way for the associations to
generate additional revenue is from the increase in ship traffic going
through the system. Although the Coast Guard has seen increased traffic
volumes over what was estimated in recent years, this is due to the
Canadian domestic fleet using U.S. pilots, demand for global
commodities (steel and grain), tankers shipping petroleum products,
cruise ships, and winter demand (ordering pilots while the locks are
closed for maintenance) on Lake Erie, Lake Huron, and Lake Michigan.
The Coast Guard has no control or influence over any of the
aforementioned activities. The variables in global commodities are
complex and difficult to predict. Supply of many commodities can be
forecasted from the analysis of data, but data regarding consumption is
much more difficult to estimate. Some countries carefully guard
commodities produced and stored within their borders, making certain
market predictions even harder. Civil unrest and government sanctions
can cause huge swings in the commodities markets. The use of the 10-
year average may cause the average to lag short-term trends, but it
reduces fluctuations in predicted traffic levels and results in a more
stable rate on a year-to-year basis. This helps the associations and
the shippers plan for upcoming years while reducing variables. The
Coast Guard welcomes any validated information the commenter can
provide as to the exact amount of pilotage demand each year, as well as
the number of vessels that will be transporting commodities and needing
pilotage service, along with the recent demand for pilots in the cruise
industry.
The User's Coalition also made a comment regarding the figure for
target pilot compensation, and stated that the 2019 compensation number
was ``adopted'' and used as a benchmark. The Coast Guard used the 2019
number because it was clear that this number has had the desired effect
of promoting recruitment of highly qualified mariners and retention of
experienced U.S. registered pilots.
The Coalition also commented that this is the third year in which
the U.S. Coast Guard Great Lakes Pilotage Office (GLPO) has set a
benchmark compensation figure for Great Lakes pilots by reference to
available data concerning the compensation of U.S. first mates subject
to negotiated contracts between vessel owners and the AMOU. The Coast
Guard disagrees with this statement. As explained above in Summary of
Ratemaking Methodology, Step 4, the Coast Guard does not have access to
information from the AMOU contract. In 2018, the best available
information that we had was the pre-2016 contract data and that was
adjusted for inflation.Target compensation for the 2020 rate is not
being calculated with regard to 2020 union contract data. We are using
the 2019 figure as a base because we believe that this is the proper
target compensation benchmark for Great Lakes pilots. This compensation
benchmark enables the Coast Guard to meet its statutory requirement to
set pilotage rates giving consideration to the public interest and the
costs of providing pilotage services. We are ensuring the provision of
safe, reliable, and efficient pilotage services by correcting the
recruitment and retention issues discussed in previous rulemakings
without increasing the costs of pilotage services to an unreasonable
level.
D. Initial Base Rates
One commenter stated that, for several years, the Coast Guard's use
of a 10-year average severely understates likely upcoming bridge hours
because of low traffic volumes in the period of depressed international
economic activity caused by the economic recession in 2008-12.
The Coast Guard disagrees that the 10-year average should not be
used. We believe that the 10-year average in is the public interest,
because this approach provides rate stability. These stable and
predictable rates allows shippers and pilots to forecast revenues. In
Step 7 of the ratemaking methodology, the Coast Guard calculates an
hourly pilotage rate to generate the revenue needed by each district.
This step requires an estimate of the expected hours of traffic. To
derive this estimate, the Coast Guard takes the average of the previous
10 years of traffic in each area on the Great Lakes. The use of the
historical traffic figure was unanimously recommended by the GLPAC in
2014, and we believe that it is the best tool to estimate traffic.
While in recent years, high levels of traffic have been greater than
the historical average, we also note that in some years the level of
traffic has been lower than average. The use of the 10-year average may
cause the average to lag short-term trends, but it reduces fluctuations
in predicted traffic levels and results in a more stable rate on a
year-to-year basis. No commenter has suggested a different time period
for calculating the historical average that would produce better
predictions or prevent wildly fluctuating rates. While we are open to
suggestions as to how to better predict total traffic, we would
encourage the commenters to raise these suggestions at the GLPAC, as we
are currently continuing to follow its recommendation on this subject.
The User's Coalition suggested that, to minimize the inflation
effect on hourly rates that is caused by use of inaccurate bridge hour
projections, the Coast Guard either base its projections on the most
recent previous year actuals, or derive projections by collecting
upcoming year forecast data from affected stakeholders, including the
Seaway Authority, U.S. and Canadian pilots, vessel operators, ports and
terminals, shipping agents and other knowledgeable sources. The Coast
Guard disagrees. Although we have seen increased traffic volumes over
what was estimated in recent years, this is mainly due to the Canadian
domestic fleet using U.S registered pilots. If the Coast Guard only
used the previous year's numbers, there would be large annual
variations in the rates, which would not be in the public's interest.
We welcome any information or the suggested resources the commenter can
provide as to the exact number of Canadian domestic vessels that will
be using pilots each year, as well as the number of vessels that will
be transporting commodities and requiring pilotage service. In
addition, the Coast Guard has historically been unable to accurately
forecast the international shipping trends that can be impacted by
highly variable factors; e.g., global weather impacting the supply and
demand for grain in the United States, Canada, and overseas, and the
imposition or removal of tariffs on a global basis. This inability to
accurately forecast demand led to the decision to rely on historical
data instead. The User's Coalition has not proposed a specific source
of forecasting the demand for pilotage services that would be
consistently more accurate than using historical data.
E. Working Capital Fund
There were three comments made by the User's Coalition, the SLSPA,
and the District Lawyers regarding the working capital fund. The User's
Coalition stated that this fund is misnamed, and that it
[[Page 20096]]
is a recognized expense. The Coast Guard disagrees with the statement
that it is considered a recognized expense. The working capital fund is
intended to provide the pilots associations with working capital for
future expenses associated with capital improvements, technology
investments, and future training needs, with the goal of eliminating
the need for surcharges (as was accomplished this year). The fund is
structured so that the pilots associations can demonstrate credit
worthiness when seeking funds from a financial institution for needed
infrastructure projects.
Recognized expenses are those operating expenses that are deemed
necessary and reasonable. The working capital fund is meant to provide
the associations with capital that is in addition to the money needed
to cover its standard operating expenses and pilot compensation. Its
use is to fund infrastructure and technology improvement projects.
Regarding the suggestion for renaming the working capital fund, the
Coast Guard is willing to discuss an alternative name at a future GLPAC
meeting.
The District Lawyers commented that the fund improperly fails to
include a return on investment. The Coast Guard disagrees with this
statement. In 2016, we created this fund to provide credit worthiness
for pilot associations to have access to capital that would enable them
to provide safe, efficient, and reliable service. In previous years,
the goal of the precursor of the working capital fund, named the
``return on investment', was to provide a return to monies invested by
the pilots in associations. The amount of the money invested (the
investment base) by pilots was relatively small, and thus the return on
that investment was small in absolute terms. However, when the Coast
Guard recalibrated the return on investment (renamed the working
capital fund) to be based on the total income of the associations,
rather than simply the money invested in capital improvements (as was
the case prior to 2016), the goal was to increase infrastructure
spending by providing a more substantial pool of available funds. The
goal of the working capital fund is not to provide a windfall for the
associations, but to improve maritime safety. The working capital fund
does this by supporting capital projects, infrastructure improvements
and maintenance, non-recurring technology purchases, and training that
is necessary for providing safe, efficient, and reliable pilotage. As
with all other expenses, the funds applied must be reasonable in
amount.
The SLSPA commented that the working capital fund provides a basis
to reinvest into the system or make up for minor shortfalls in revenue.
The Coast Guard agrees in part. The working capital fund is a funding
mechanism that allows for the associations to have cash on hand for
future and/or unidentified expenses to improve pilotage service, and in
some cases prevent delays that would occur from failing equipment, and
for assets that are needed to continuously pilot vessels through the
system. The Coast Guard disagrees that the working capital fund can
make up for minor shortfalls in revenue. The fund cannot be used for
the compensation of pilots during unexpected low traffic years.
F. Surcharge Offsets
The Coast Guard received two comments regarding the amount of
surcharges \29\ collected in 2017. The commenters stated that, because
the 2017 rate did not take effect until October, the districts were
only able to collect a small portion of the training surcharge approved
for that year. The commenters requested that the difference between
what was collected via the rate and the amount spent on training in
2017 be accounted for in this rule as operating expenses--specifically
that $174,087 be added to the operating expenses for District 2 and
$291,72 be added to the operating expenses for District 3.
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\29\ Surcharge is money that is paid upfront by the shipper in
addition to the rate in order to meet an immediate need for the
pilots. When calculating the rate, Coast Guard uses the operating
expenses from three years prior as one of the factors to determine
how much the shippers will pay via the rate. The surcharge offset or
adjustment is the money collected or not collected three years prior
that is either taken out or added to the rate via the methodology.
---------------------------------------------------------------------------
The Coast Guard agrees that the difference between the amount
collected via the surcharge in 2017 and the amount spent on training in
2017 needs to be included as an operating expenses. Therefore, we
included a surcharge offset in the operating expenses for both
Districts 2 and 3 in this final rule. Specifically, in 2017, District 3
spent $647,606 on the salary and benefits for 7 applicant pilots, and
collected $382,297 via the surcharge. The Coast Guard added a surcharge
adjustment of $265,309 for District 3 ($647,606-$382,297) to account
for the difference between training expense and training funds from the
surcharge. District 2 spent $1,829,671 on the salary and benefits for 2
applicant pilots, and collected $141,692 in training surcharges. The
Coast Guard does not believe that spending $914,836 per applicant pilot
is a reasonable expense. Therefore, we are not reimbursing the entire
difference to the District. Instead, we are including a surcharge
offset of $158,308, which is the difference between the approved
surcharge amount of $300,000 and the amount collected by the district
of $141,692. For both Districts, the surcharge offset amount approved
by the Coast Guard differs from the amount the commenters requested, as
the commenters adjusted these differences to account for inflation and
the working capital fund adjustments. However, these adjustments are
already included as part of the 10-step ratemaking methodology and do
not need to be completed for each individual operating expense.
G. Surcharges
We received several comments regarding the removal of surcharges.
Beginning in 2016, the Coast Guard began implementing surcharges on
shipping rates to encourage the recruitment and training of new pilots
on the Great Lakes. Unlike pilot compensation, reasonable and necessary
costs relating to the compensation and training of applicant pilots are
fully reimbursable as operating expenses. However, the Coast Guard used
surcharges so that pilot associations could receive the money needed to
provide immediate funding for achieving the goal of hiring and training
new pilots. This goal has been accomplished,\30\ and currently the
average pilot's age is under 50. In District One, 56 percent of
registered pilots are under the age of 50. In District Two, 69 percent
are under the age of 50, and in District Three, 44 percent are under
the age of 50. This is more than adequate for retirement planning
purposes. One commenter specifically stated that District Three very
much needs the surcharge. The Coast Guard disagrees. In 2015, District
Three only had 5 out of 20 registered pilots under the age of 50. In
2019 that number doubled to 10 out of 19, which is more than enough to
properly plan for applicant pilots and retirement via the rate.
H. Other Comments
The User's Coalition submitted several comments that we will
address individually. The Coalition stated that the U.S. Great Lakes
Pilot Associations are a government-sustained monopoly. The Coast Guard
disagrees; the U.S. Great Lakes Pilot Associations are federally-
regulated monopolies. It should be noted that all pilotage associations
throughout the United
[[Page 20097]]
States are government-regulated monopolies.
The User's Coalition stated that the rates are dictated by the
Coast Guard. The Coast Guard disagrees. The rates are derived via a 10-
step methodology outlined in the Code of Federal Regulations. We comply
with notice and comment procedure outlined in the Administrative
Procedure Act. In fact, in a recent report, the Government
Accountability Office (GAO) stated that while individual stakeholders
may not agree with the specific inputs and assumptions used by the
Coast Guard, the current process is generally transparent and provides
an opportunity for informed stakeholder feedback.\31\ The GAO report
also stated that coupled with the rulemaking requirements that
incorporate public review and comments, we found that the existing
mechanisms represent a fairly transparent system of pilotage rate-
setting as compared to the process used by some coastal states.\32\
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\31\ https://www.gao.gov/products/GAO-19-493.
\32\ Id.
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The User's Coalition stated that, over the past five rate-setting
cycles, the overall costs of U.S. pilotage to ratepayers (and,
ultimately, to ports, cargo interests, and shore-based maritime
interests) have risen substantially. The Coast Guard agrees that the
overall cost of U.S. pilotage to ratepayers has risen. There are two
primary reasons for this increase. The first reason is that, because of
an error in the methodology and billing scheme from the mid 90's and up
until 2016, shippers were provided an unintended 20-40% ``discount.''
This discount prevented the pilot associations from generating and
collecting the revenues we determined were necessary to provide safe,
efficient, and reliable pilotage service. In 2016, we addressed this
issue and removed the discount. The second reason is the cost of added
pilots, which has increased needed revenues. Since 2016, we have added
18 working pilots to the System in order to preserve and promote
maritime safety, minimize delays, and provide for recuperative rest.
The User's Coalition stated that there is an absence of current,
reality-based (as opposed to speculative or theoretical) data in the
ratemaking process for critical elements, such as pilotage expenses,
traffic volume or bridge-hour forecasts, and pilot compensation. The
Coast Guard disagrees with this statement. The Coast Guard employs a
third party auditing firm to generate financial reports to evaluate
pilotage expenses for the annual rulemaking. We include these reports
with the appropriate rulemaking docket. Forecasts are predictions of
future events and are by nature speculative or theoretical, but our
forecasts are based on objective, historical data. In addition, our
Bridge Hour Study examined the actual number of hours pilots spent
completing all parts of a pilotage assignment in the various Areas to
determine how many assignments a pilot could complete in a given time
period. This audited and studied data \33\ is empirical and reality
based, not theoretical. The ability to use current data is somewhat
limited by the time required to complete a full notice and comment
ratemaking. The GAO report published June 2019, titled Stakeholders'
Views on Issues and Options for Managing the Great Lakes Pilotage
Program,\34\ states ``that the Coast Guard is currently performing this
independent function as its rate-setting process includes many of the
characteristics identified as a best practice, such as a defined
methodology, clear data submission and review process, and the absence
of any direct material interest in the outcome of the rate
determinations.'' The report goes on to say that, ``While individual
stakeholders may not agree with the specific inputs and assumptions
used by the Coast Guard, the current process is generally transparent
and provides an opportunity for informed stakeholder feedback and
identification of any grounds on which they can choose to take legal
action.''
---------------------------------------------------------------------------
\33\ United States Coast Guard, Bridge Hour Definition and
Methology Study: Final Report, (25 June 2013) https://www.dco.uscg.mil/Portals/9/DCO%20Documents/Office%20of%20Waterways%20and%20Ocean%20Policy/Pilotage%20Study%20Final%20Report%2028%20JUN%202013.pdf?ver=2017-06-08-082809-570.
\34\ https://www.gao.gov/products/GAO-19-493.
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The User's Coalition stated that there is a lack of assertive Coast
Guard supervision and control. The Coast Guard disagrees. The Coast
Guard develops clear and timely regulations, policy, and direction to
three U.S. pilot associations to provide safe, efficient, and reliable
pilotage service to U.S. vessels operating under registry and foreign
vessels transiting the Saint Lawrence and Great Lakes System. This
regime of regulation, policy, and direction provides supervision and
control. The commenter also failed to provide specific examples or data
to support this claim.
The User's Coalition raised questions about the difference between
U.S. and Canadian pilotage cost structures. The commenter stated that
``sample comparisons of the costs of U.S. versus Canadian pilotage on
the same or similar voyages by the same or similar vessels show that
U.S. pilotage costs are often nearly twice as high as those of the
Canadian counterparts.'' The Coast Guard is aware that the United
States and Canada do not charge for service in identical ways. One
significant difference is that the United States has three different
Districts that must each support themselves, whereas the Canadian GLPA
operates as a unified whole. This means that there may be a level of
cross-subsidization among Canadian pilots that is impossible to
replicate on the American side, which could result in higher rates in
some areas and lower rates in others. Comparisons on a single voyage,
such as what the Users Coalition did in the comment, where one system
uses ancillary fees such as docking, anchoring, short notice
dispatching and the other system does not, cannot provide the Coast
Guard with the comprehensive information needed to determine if there
is a system-wide problem with rates or if we are merely seeing an
atypical incident. Taken as a whole, the revenues earned by the U.S.
system of pilotage across the Great Lakes are comparable to the
revenues earned by the Canadian system. This is further complicated by
the fact that Canadians provide the exclusive source of pilotage
services in parts of the system.
The User's Coalition also stated that there is a failure to
develop, obtain, and maintain accurate information on recruitment,
retention, and attrition issues as they affect the availability and
compensation of qualified pilots. The Coast Guard disagrees with this
statement. Coast Guard personnel in the Office of Waterways and Ocean
Policy (CG-WWM) monitor recruitment, retention, and attrition issues by
following the hiring and training of new pilots and conducting exit
interviews with departing pilots. The commenter failed to articulate or
provide any examples or data to support their statement.
The User's Coalition stated that the past record of significant,
consistent revenue overruns justifies an adjustment in methodology.
Failure to make this adjustment will once again result in an artificial
increase in pilotage costs, in contravention of 46 U.S.C. 9303(f), and
exacerbate the current misalignment of U.S. and Canadian pilotage
costs. The Coast Guard disagrees with this comment. Consistent
increases in pilotage demand does not justify an adjustment. Since the
commenter provided no further evidence to justify
[[Page 20098]]
the statement, no further action will be taken. The Coast Guard also
disagrees that there is a current misalignment of U.S. and Canadian
pilotage cost. As the commenter provided no evidence to support this
claim, no further action will be taken. In addition, we note that these
increases in demand do not equate to any increased cost to the User's
Coalition, and, further, because the demand increases bridge hours, it
could be argued that these ``consistent revenue overruns'' actually
decrease the rate over the long run, due to the way bridge hours are
used in the 10-Step ratemaking methodology. To estimate the initial
base rate, we divide the total estimated revenue needed for each area
by the total estimated bridge hours.
The User's Coalition stated that prior years' comments on this
recurring issue have been dismissed without analysis or discussion by
GLPO as ``not a highly salient issue. . . .'' (83 FR 26175), and the
observation that pilotage rates had not reached ``. . . levels that
threaten the economic viability of Great Lakes shipping.'' Id. The
Coast Guard disagrees that issues have been dismissed without analysis
or discussion. The User's Coalition comment lacks context. The Coast
Guard noted that the over-realization was not a highly salient issue in
the 2018 final rule because the over-realization was caused by two
factors, one of which had been corrected previously. The lack of
incorporation of weighting factor fees into the ratemaking methodology
was revised per the suggestion of industry commenters in the 2018
rulemaking. The second factor was demand for pilotage services, which
was higher than predicted--a point discussed at length in the sections
entitled ``Target Pilot Compensation'' and ``Initial Base Rate'' above.
The commenter's second quote is a reference to the conclusion of an
independent study the Coast Guard commissioned analyzing the secondary
economic impact of pilotage rates, hardly a dismissal without analysis.
The GAO recently completed a comprehensive ``stem-to-stern'' review of
the GLPO,\35\ assessing a plethora of recurring issues, and decided not
to recommend any changes to the GLPO. The court has settled some of the
issues and is reviewing the legality of other issues. We have and will
continue to comply with the court's decision(s).
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\35\ https://www.gao.gov/products/GAO-19-493.
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The User's Coalition stated that revenue overruns are paid for in
real money in a system that has yet to provide relief for overcharges
to ratepayers or redress to other interests affected by non-service-
related, government-dictated prices, and that the results of the past
several navigation seasons on the Lakes describe a situation of
considerable economic waste. The Coast Guard disagrees with this
statement. All charges paid were for actual services provide by the
pilots to vessels; there were no non-service-related charges. If vessel
owners and operators believe they have been charged in error, we
provide a billing dispute mechanism that allows shippers adequate time
to submit billing disputes for consideration. As the commenter provided
no evidence of an overcharge to ratepayers, nor any evidence of
``considerable economic waste,'' no further action will be taken.
This commenter implies that the User's coalition has exclusive
rights to the Great Lakes/Saint Lawrence River System. The User's
Coalition is not entitled to revenues generated by the Canadian
domestic fleet, cruise ships, and/or tankers shipping petroleum
products that are not represented by the coalition. These waters are
for all law abiding mariners to enjoy and utilize for commercial
purposes. We will ensure that all modes of international and domestic
traffic are treated fairly.
The Lakes Pilots Association (LPA) commented on changing the number
of days in the season to 365 days. The Coast Guard disagrees. The 270
day season applies to the AMOU contracts. We are no longer utilizing
those contracts to determine target pilot compensation. Therefore, the
365-day argument does not apply. We have identified a standard that
corrected the historic recruitment and retention issues as previously
discussed.
One commenter suggested that the Coast Guard did not adequately
explain why we expect the total costs generated in 2020 to be less than
the total pilotage revenue in 2019, despite proposing higher pilotage
rates for 4 of the 6 areas in 2020. They stated that the NPRM did not
provide any explanation for the reduction in pilotage services, and
that we should not claim that the final rule will ``result in an
overall reduction in pilotage costs''.\36\
---------------------------------------------------------------------------
\36\ USCG-2019-0736-0007, p. 4.
---------------------------------------------------------------------------
The Coast Guard disagrees. In the NPRM, we did not state that we
expect a decrease in pilotage costs. Rather, we estimated the total
expected revenue in 2020 and compared that value to the estimated 2019
revenue. This value is a reflection of the pilotage rates, as well as
other factors, such as operating expenses and surcharges (if there are
any). In the NPRM, we estimated that the total revenue generated in
2020 would be less than the total estimated revenue generated in 2019
for two reasons: (1) A reduction in operating expenses for some
districts driven by large one-time capital purchases made in 2016, and
(2) the removal of surcharges. The latter is the main driver in
reducing the expected revenue between 2019 and 2020. Neither of these
revenue components is a reflection of traffic or pilotage hours. In
addition, the cost of the surcharges is not included in the rate, but
is included in the total revenue calculations, meaning that the removal
of the surcharges does not impact the rates, but does decrease the
estimated total revenue. Table 44 in the preamble of this rule provides
a comparison of the revenue components between 2019 and 2020, and
demonstrates that these changes are mainly driven by the removal of the
surcharges. It should be noted that, in this final rule, the Coast
Guard modified operating expenses for all three districts based on
public comment, and, as a result, we now estimate that revenues
generated in 2020 will be $279,845 greater than those generated in
2019.
VII. Discussion of Rate Adjustments
In this final rule, based on the current methodology described in
the previous section of this preamble, the Coast Guard is establishing
new pilotage rates for 2020. We conducted the 2020 ratemaking as an
``interim year,'' as was done in 2019, rather than a full ratemaking as
was conducted in 2018. Thus, the Coast Guard is adjusting the
compensation benchmark pursuant to Sec. 404.104(b) for this purpose,
rather than Sec. 404.104(a).
In this section, we discuss the rate changes using the ratemaking
steps provided in 46 CFR part 404 detailing all ten steps of the
ratemaking procedure for each of the three districts to show how we
arrived at the new rates.
District One
A. Step 1: Recognize Previous Operating Expenses
Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\37\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
costs are applied to the
[[Page 20099]]
designated or undesignated area based on where they were actually
accrued. For example, costs for ``Applicant pilot license insurance''
in District One are assigned entirely to the undesignated areas, as
applicant pilots work exclusively in those areas. For costs accrued by
the pilot associations generally, such as employee benefits, the cost
is divided between the designated and undesignated areas on a pro rata
basis. The recognized operating expenses for District One are shown in
table 3.
---------------------------------------------------------------------------
\37\ These reports are available in the docket for this
rulemaking (see Docket # USCG-2019-0736).
---------------------------------------------------------------------------
As noted above, in 2016 the Coast Guard began authorizing
surcharges to cover the training costs of applicant pilots. The
surcharges were intended to reimburse pilot associations for training
applicants in a more timely fashion than if those costs were listed as
operating expenses, which would have required 3 years to reimburse. The
rationale for using surcharges to cover these expenses rather than
including the costs as operating expenses was so these non-recurring
costs could be recovered in a more timely fashion and so that retiring
pilots would not have to cover the costs of training their
replacements. Because operating expenses incurred are not actually
recouped for a period of 3 years, the Coast Guard added a $150,000
surcharge per applicant pilot beginning in 2016 to recoup those costs
in the year incurred. Now that these issues are no longer a concern, we
are not issuing any surcharges for the 2020 shipping season.
For District One, we are not implementing any Director's
adjustments other than the lobbying expenses described above. Other
adjustments have been made by the auditors and are explained in the
auditor's reports, which are available in the docket for this
rulemaking where indicated under the ADDRESSES portion of the preamble.
Table 3--2017 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
District One
-----------------------------------------------
Designated Undesignated
Reported expenses for 2017 --------------------------------
St. Lawrence Total
River Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Subsistence/Travel--Pilot................................... $440,456 $293,637 $734,093
Certified Public Accountant (CPA) Deduction................. -189 -126 -315
Subsistence/Travel--Trainee................................. 22,008 14,672 36,680
License Insurance--Pilots................................... 48,620 32,413 81,033
License Insurance--Trainee.................................. 0 0 0
Payroll Taxes--Pilots....................................... 137,788 91,858 229,646
Payroll Taxes--Trainee...................................... 705 470 1,175
Training--Full Pilots Continuing Education.................. 32,197 21,464 53,661
Cell and Internet Allowance--Pilots......................... 24,312 16,208 40,520
Cell and Internet Allowance--Applicants..................... 2,210 1,474 3,684
Other....................................................... 675 450 1,125
-----------------------------------------------
Total Other Pilotage Costs.............................. 708,782 472,520 1,181,302
Pilot Boat and Dispatch Costs:
Pilot Boat Expense.......................................... 297,942 198,628 496,570
Dispatch Expense............................................ 50,100 33,400 83,500
Payroll Taxes............................................... 19,706 13,137 32,843
-----------------------------------------------
Total Pilot and Dispatch Costs.......................... 367,748 245,165 612,913
Administrative Expenses:
Legal--General Counsel...................................... 2,098 1,399 3,497
Legal--Shared Counsel (K&L Gates)........................... 26,835 17,890 44,725
Office Rent................................................. 0 0 0
Insurance................................................... 21,593 14,395 35,988
Employee Benefits........................................... 7,720 5,146 12,866
Payroll Taxes............................................... 6,665 4,444 11,109
Other Taxes................................................. 70,942 47,294 118,236
Travel...................................................... 4,091 2,728 6,819
Depreciation/Auto Leasing/other............................. 94,944 63,296 158,240
Interest.................................................... 35,143 23,428 58,571
Dues and Subscriptions...................................... 19,471 12,981 32,452
Utilities................................................... 18,479 12,320 30,799
Salaries.................................................... 69,953 46,636 116,589
Accounting/Professional Fees................................ 6,111 4,074 10,185
Pilot Training.............................................. 0 0 0
Applicant Pilot Training.................................... 0 0 0
Other....................................................... 26,338 17,559 43,897
-----------------------------------------------
Total Administrative Expenses........................... 410,383 273,590 683,973
Total Operating Expenses (Other Costs + Pilot Boats 1,486,913 991,275 2,478,188
+ Admin)...........................................
-----------------------------------------------
Adjustments (Director):
Total Director's Adjustments............................ 0 0 0
-----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)....... 1,486,913 991,275 2,478,188.00
----------------------------------------------------------------------------------------------------------------
[[Page 20100]]
B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
Having identified the recognized 2017 operating expenses in Step 1,
the next step is to estimate the current year's operating expenses by
adjusting those expenses for inflation over the 3-year period. We
calculate inflation for 2017 to 2018 using the BLS data from the CPI
for the Midwest Region of the United States.\38\ Because the BLS does
not provide forecasted inflation data, we use economic projections from
the Federal Reserve for the 2019 and 2020 inflation modification.\39\
\40\ Based on that information, the calculations for Step 2 are as
follows:
---------------------------------------------------------------------------
\38\ The 2018 inflation rate is available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the CPI
is defined as ``All Urban Consumers (CPI-U), All Items, 1982-
4=100''. Downloaded June 12, 2019.
\39\ The 2019 CPI data was not available at the time of
analysis, December 2019.
\40\ The 2019 and 2020 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf. We used the PCE median inflation value
found in table 1. Downloaded June 12, 2019.
Table 4--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
District One
-----------------------------------------------
Designated Undesignated Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)............................... $1,486,913 $991,275 $2,478,188
2018 Inflation Modification (@1.9%)............................. 28,251 18,834 47,085
2019 Inflation Modification (@1.8%)............................. 27,273 18,182 45,455
2020 Inflation Modification (@2%)............................... 30,849 20,566 51,415
Adjusted 2020 Operating Expenses............................ 1,573,286 1,048,857 2,622,143
----------------------------------------------------------------------------------------------------------------
C. Step 3: Estimate Number of Working Pilots
In accordance with the text in Sec. 404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on data provided by the Saint Lawrence Seaway
Pilots Association (SLSPA). Using these numbers, we estimate there will
be 17 working pilots in 2020 in District One. Furthermore, based on the
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR
41466), we assign a certain number of pilots to designated waters and a
certain number to undesignated waters, as shown in table 5. These
numbers are used to determine the amount of revenue needed in their
respective areas.
Table 5--Authorized Pilots
------------------------------------------------------------------------
Item District One
------------------------------------------------------------------------
Maximum number of pilots (per Sec. 401.220(a)) \41\... 17
2020 Authorized pilots (total).......................... 17
Pilots assigned to designated areas..................... 10
Pilots assigned to undesignated areas................... 7
------------------------------------------------------------------------
D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------
\41\ For a detailed calculation, refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------
In this step, we determine the total pilot compensation for each
area. As we are conducting an interim ratemaking this year, we follow
the procedure outlined in paragraph (b) of Sec. 404.104, which adjusts
the existing compensation benchmark by inflation. Because we do not
have a value for the employment cost index for 2020, we multiply the
2019 compensation benchmark of $359,887 by the Median PCE Inflation
value of 2.0 percent.\42\ Based on the projected 2020 inflation
estimate, the compensation benchmark for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------
\42\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------
Next, we verify that the number of pilots estimated for 2020 is
less than or equal to the number permitted under the staffing model in
Sec. 401.220(a). The staffing model suggests that the number of pilots
needed is 17 pilots for District One, which is more than or equal to
the numbers of working pilots provided by the pilot associations. In
accordance with Sec. 404.104(c), we use the revised target individual
compensation level to derive the total pilot compensation by
multiplying the individual target compensation by the estimated number
of working pilots for District One, as shown in table 6.
Table 6--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
District One
-----------------------------------------------
Designated Undesignated Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation....................................... $367,085 $367,085 $367,085
Number of Pilots................................................ 10 7 17
Total Target Pilot Compensation............................. $3,670,850 $2,569,595 $6,240,445
----------------------------------------------------------------------------------------------------------------
[[Page 20101]]
E. Step 5: Project Working Capital Fund
Next, we calculate the working capital fund revenues needed for
each area. First, we add together the figures for projected operating
expenses and total pilot compensation for each area. Next, we find the
preceding year's average annual rate of return for new issues of high-
grade corporate securities. Using Moody's data, the number is 3.93
percent.\43\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in table 7.
---------------------------------------------------------------------------
\43\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018
monthly data (2019 data was not available at the time of analysis,
December 2019). The Coast Guard uses the most recent year of
complete data. Moody's is taken from Moody's Investors Service,
which is a bond credit rating business of Moody's Corporation. Bond
ratings are based on creditworthiness and risk. The rating of
``Aaa'' is the highest bond rating assigned with the lowest credit
risk. See https://fred.stlouisfed.org/series/AAA. (June 12, 2019).
Table 7--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
District One
-----------------------------------------------
Designated Undesignated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................ $1,573,286 $1,048,857 $2,622,143
Total Target Pilot Compensation (Step 4)........................ 3,670,850 2,569,595 6,240,445
Total 2020 Expenses (Step 2 + Step 4)........................... 5,244,136 3,618,452 8,862,588
-----------------------------------------------
Working Capital Fund (Total Expenses x 3.93%)............... 206,095 142,205 348,300
----------------------------------------------------------------------------------------------------------------
F. Step 6: Project Needed Revenue
In this step, we add together all of the expenses accrued to derive
the total revenue needed for each area. These expenses include the
projected operating expenses (from Step 2), the total pilot
compensation (from Step 4), and the working capital fund contribution
(from Step 5). We show these calculations in table 8.
Table 8--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
District One
-----------------------------------------------
Designated Undesignated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 4)............... $1,573,286 $1,048,857 $2,622,143
Total Target Pilot Compensation (Step 4, See Table 6)........... 3,670,850 2,569,595 6,240,445
Working Capital Fund (Step 5, See Table 7)...................... 206,095 142,205 348,300
-----------------------------------------------
Total Revenue Needed........................................ 5,450,231 3,760,657 9,210,888
----------------------------------------------------------------------------------------------------------------
G. Step 7: Calculate Initial Base Rates
Having determined the revenue needed for each area in the previous
six steps to develop an hourly rate, we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the average hours of traffic over 10 years
in District One, using the total time on task or pilot bridge
hours.\44\ Because we calculate separate figures for designated and
undesignated waters, there are two parts for each calculation. We show
these values in table 9.
---------------------------------------------------------------------------
\44\ To calculate the time on task for each district, the Coast
Guard uses billing data from the Great Lakes Pilotage Management
System (GLPMS). We pull the data from the system filtering by
district, year, job status (we only include closed jobs), and
flagging code (we only include U.S. jobs). After we have downloaded
the data, we remove any overland transfers from the dataset, if
necessary, and sum the total bridge hours, by area. We then subtract
any non-billable delay hours from the total.
Table 9--Time on Task for District One
[Hours]
------------------------------------------------------------------------
District One
Year -------------------------------
Designated Undesignated
------------------------------------------------------------------------
2018.................................... 6,943 8,445
2017.................................... 7,605 8,679
2016.................................... 5,434 6,217
2015.................................... 5,743 6,667
2014.................................... 6,810 6,853
2013.................................... 5,864 5,529
2012.................................... 4,771 5,121
2011.................................... 5,045 5,377
2010.................................... 4,839 5,649
2009.................................... 3,511 3,947
-------------------------------
Average............................. 5,657 6,248
------------------------------------------------------------------------
Next, we derive the initial hourly rate by dividing the revenue
needed by the average number of hours for each area. This produces an
initial rate, which is necessary to produce the revenue needed for each
area, assuming the amount of traffic is as expected. We present the
calculations for each area in table 10.
Table 10--Initial Rate Calculations for District One
------------------------------------------------------------------------
Designated Undesignated
------------------------------------------------------------------------
Revenue needed (Step 6)................. $5,450,231 $3,760,657
[[Page 20102]]
Average time on task (hours)............ 5,657 6,248
-------------------------------
Initial rate (Step 6/Average Time on 963 602
Task)..............................
------------------------------------------------------------------------
H. Step 8: Calculate Average Weighting Factors by Area
In this step, we calculate the average weighting factor for each
designated and undesignated area. We collect the weighting factors, set
forth in 46 CFR 401.400, for each vessel trip. Using this database, we
calculate the average weighting factor for each area using the data
from each vessel transit from 2014 onward, as shown in tables 11 and
12.\45\
---------------------------------------------------------------------------
\45\ To calculate the number of transits by vessel class, we use
the billing data from GLPMS (2019 data was not available at the time
of analysis, December 2019), filtering by district, year, job status
(we only include closed jobs), and flagging code (we only include
U.S. jobs). We then count the number of jobs by vessel class and
area.
Table 11--Average Weighting Factor for District One, Designated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class/year transits factor transits
(A) (B) (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014).................................................. 31 1 31
Class 1 (2015).................................................. 41 1 41
Class 1 (2016).................................................. 31 1 31
Class 1 (2017).................................................. 28 1 28
Class 1 (2018).................................................. 54 1 54
Class 2 (2014).................................................. 285 1.15 327.75
Class 2 (2015).................................................. 295 1.15 339.25
Class 2 (2016).................................................. 185 1.15 212.75
Class 2 (2017).................................................. 352 1.15 404.8
Class 2 (2018).................................................. 559 1.15 642.85
Class 3 (2014).................................................. 50 1.3 65
Class 3 (2015).................................................. 28 1.3 36.4
Class 3 (2016).................................................. 50 1.3 65
Class 3 (2017).................................................. 67 1.3 87.1
Class 3 (2018).................................................. 86 1.3 111.8
Class 4 (2014).................................................. 271 1.45 392.95
Class 4 (2015).................................................. 251 1.45 363.95
Class 4 (2016).................................................. 214 1.45 310.3
Class 4 (2017).................................................. 285 1.45 413.25
Class 4 (2018).................................................. 393 1.45 569.85
-----------------------------------------------
Total....................................................... 3,556 .............. 4,528
-----------------------------------------------
Average weighting factor (weighted transits/number of .............. 1.27 ..............
transits)..............................................
----------------------------------------------------------------------------------------------------------------
Table 12--Average Weighting Factor for District One, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class/year transits factor transits
(A) (B) (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014).................................................. 25 1 25
Class 1 (2015).................................................. 28 1 28
Class 1 (2016).................................................. 18 1 18
Class 1 (2017).................................................. 19 1 19
Class 1 (2018).................................................. 22 1 22
Class 2 (2014).................................................. 238 1.15 273.7
Class 2 (2015).................................................. 263 1.15 302.45
Class 2 (2016).................................................. 169 1.15 194.35
Class 2 (2017).................................................. 290 1.15 333.5
Class 2 (2018).................................................. 352 1.15 404.8
Class 3 (2014).................................................. 60 1.3 78
Class 3 (2015).................................................. 42 1.3 54.6
Class 3 (2016).................................................. 28 1.3 36.4
Class 3 (2017).................................................. 45 1.3 58.5
Class 3 (2018).................................................. 63 1.3 81.9
Class 4 (2014).................................................. 289 1.45 419.05
Class 4 (2015).................................................. 269 1.45 390.05
Class 4 (2016).................................................. 222 1.45 321.9
[[Page 20103]]
Class 4 (2017).................................................. 285 1.45 413.25
Class 4 (2018).................................................. 382 1.45 553.9
-----------------------------------------------
Total....................................................... 3,109 .............. 4,028
-----------------------------------------------
Average weighting factor (weighted transits/number of .............. 1.30 ..............
transits)..............................................
----------------------------------------------------------------------------------------------------------------
I. Step 9: Calculate Revised Base Rates
In this step, we revise the base rates so that once the impact of
the weighting factors are considered; the total cost of pilotage would
be equal to the revenue needed. To do this, we divide the initial base
rates, calculated in Step 7, by the average weighting factors
calculated in Step 8, as shown in table 13.
Table 13--Revised Base Rates for District One
----------------------------------------------------------------------------------------------------------------
Revised Rate
Average (Initial rate
Area Initial rate weighting average
(Step 7) factor (Step weighting
8) factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................ $963 1.27 $758
District One: Undesignated...................................... 602 1.30 463
----------------------------------------------------------------------------------------------------------------
J. Step 10: Review and Finalize Rates
In this step, the Director reviews the rates set forth by the
staffing model and ensures that they meet the goal of ensuring safe,
efficient, and reliable pilotage. To establish that the rates do meet
the goal of ensuring safe, efficient and reliable pilotage, the
Director considers whether the rates incorporate appropriate
compensation for pilots to handle heavy traffic periods and whether
there is a sufficient number of pilots to handle those heavy traffic
periods. The Director also considers whether the rates will cover
operating expenses and infrastructure costs, and takes average traffic
and weighting factors into consideration. Based on this information,
the Director is not making any alterations to the rates in this step.
We modified the text in Sec. 401.405(a) to reflect the final rates
shown in table 14.
Table 14--Final Rates for District One
----------------------------------------------------------------------------------------------------------------
Final 2019 Proposed 2020 Final 2020
Area Name pilotage rate pilotage rate pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated.............. St. Lawrence River...... $733 $757 $758
District One: Undesignated............ Lake Ontario............ 493 462 463
----------------------------------------------------------------------------------------------------------------
District Two
A. Step 1: Recognize Previous Operating Expenses
Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\46\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
costs are applied to the designated or undesignated area based on where
they were actually incurred. For example, costs for ``Applicant pilot
license insurance'' in District One are assigned entirely to the
undesignated areas, as applicant pilots work exclusively in those
areas. For costs accrued by the pilot associations generally, such as
employee benefits, for example, the cost is divided between the
designated and undesignated areas on a pro rata basis. The recognized
operating expenses for District Two are shown in table 15, below.
---------------------------------------------------------------------------
\46\ These reports are available in the docket for this
rulemaking (see Docket No. USCG-2019-0736).
---------------------------------------------------------------------------
In addition to the surcharge adjustment and lobbying expenses
described for District One in Section VII A. of this preamble, Step 1:
Recognize previous operating expenses, and the adjustments made by the
auditor, as explained in the auditor's reports (available in the docket
where indicated in the ADDRESSES portion of this document), the
Director is finalizing two adjustments to District Two's operating
expenses. The first is to disallow $120,350 in ``housing allowance''
expenses. The Coast Guard agrees with the IRS that an employer-provided
housing allowance is a fringe benefit, and we consider it to be
employee compensation. In addition, the Coast Guard expects those
appointed as registered pilots to live in the region in which they are
employed. We expect that, if a pilot chooses to live outside their
region of employment, they should have to pay for their accommodations,
and this cost should not be passed on to the shippers via the rate.
Therefore, we are not including any housing allowance the district
chooses to
[[Page 20104]]
provide their pilots in the ratemaking calculation.
The second Director's adjustment is a $158,308 surcharge adjustment
to account for the difference between in the amount the district spent
on applicant pilot wages and benefits in 2017 to cover the training
costs for two applicant pilots, and the amount actually collected via
the surcharge. In total, District Two spent $1,829,671 on applicant
pilot compensation for two applicant pilots and received $141,692 via
the surcharge in 2017. However, as stated in Section VI.F of this
preamble, the Coast Guard does not believe that spending $914,836 per
applicant pilot is fair and reasonable, and, therefore, we are only
recognizing applicant pilot compensation of $150,000 per applicant
pilot, or $300,000 in total for the district. As a result, the Coast
Guard is including a $158,308 surcharge adjustment ($300,000-$141,692)
in the recognized expenses for District Two. We allocated this
adjustment to each area based on their proportional bridge hours in
2017 (see table 21 for bridge hours).
Table 15--2017 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
District Two
-----------------------------------------------
Undesignated Designated Total
Reported expenses for 2017 -----------------------------------------------
Southeast
Lake Erie shoal to Port
Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Subsistence/Travel--Pilots.................................. $116,402 $174,602 $291,004
Subsistence/Travel--Applicants.............................. 52,212 78,317 130,529
Housing Allowance--Pilots................................... 30,212 45,318 75,530
Housing Allowance--Applicants............................... 17,928 26,892 44,820
Winter Meeting Allowance.................................... 8,280 12,420 20,700
Telecommunication Allowance................................. 11,662 17,493 29,155
Payroll taxes--Pilots....................................... 57,126 85,688 142,814
Payroll taxes--Applicants................................... 26,025 39,038 65,063
License Insurance........................................... 8,326 12,490 20,816
Training.................................................... 2,079 3,119 5,198
-----------------------------------------------
Total Other Pilotage Costs.............................. 330,252 495,377 825,629
Pilot Boat and Dispatch Costs:
Pilot Boat Cost............................................. 217,514 326,272 543,786
CPA Adjustment.............................................. -34,860 -52,291 -87,151
Dispatch Expense............................................ 0 0 0
Employee Benefits........................................... 78,680 118,020 196,700
Payroll Taxes............................................... 12,230 18,344 30,574
-----------------------------------------------
Total Pilot and Dispatch Costs.......................... 273,564 410,345 683,909
Cost Affiliated Entity Expenses:
Office Rent................................................. 26,275 39,413 65,688
CPA Adjustment.............................................. -4,742 -7,113 -11,855
-----------------------------------------------
Total Affiliated Entity Expense......................... 21,533 32,300 53,833
Administrative Expenses:
Legal--General Counsel...................................... 3,505 5,258 8,763
Legal--Shared Counsel (K&L Gates)........................... 15,604 23,405 39,009
Employee benefits--Admin employees.......................... 79,534 119,301 198,835
Workman's Compensation--Pilots.............................. 48,663 72,994 121,657
Payroll taxes--Admin Employees.............................. 6,872 10,308 17,180
Insurance................................................... 10,844 16,265 27,109
Other Taxes................................................. 12,065 18,097 30,162
Admin Travel................................................ 6,316 9,475 15,791
Depreciation/Auto Lease/Other............................... 24,168 36,251 60,419
Interest.................................................... 21,526 32,288 53,814
CPA Adjustment.............................................. -20,920 -31,379 -52,299
Dues and subscriptions...................................... 10,760 16,140 26,900
CPA Adjustment.............................................. -581 -871 -1,452
Utilities................................................... 6,277 9,415 15,692
Salaries--Admin employees................................... 60,568 90,852 151,420
Accounting.................................................. 14,507 21,761 36,268
Other....................................................... 13,936 20,904 34,840
-----------------------------------------------
Total Administrative Expenses........................... 313,644 470,464 784,108
-----------------------------------------------
Total Operating Expenses (Other Costs + Pilot Boats 938,993 1,408,486 2,347,479
+ Admin)...........................................
Adjustments (Director):
Housing allowance for Pilots................................ -30,212 -45,318 -75,530
Housing allowance for Applicants............................ -17,928 -26,892 -44,820
Surcharge Adjustment.................................... 72,554 85,754 158,308
-----------------------------------------------
[[Page 20105]]
Total Director's Adjustments........................ 24,414 13,544 37,958
-----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)... 963,407 1,422,030 2,385,437
----------------------------------------------------------------------------------------------------------------
B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
Having identified the recognized 2017 operating expenses in Step 1,
the next step is to estimate the current year's operating expenses by
adjusting those expenses for inflation over the 3-year period. We
calculate inflation for 2017 to 2018 using the BLS data from the CPI
for the Midwest Region of the United States.\47\ Because the BLS does
not provide forecasted inflation data, we use economic projections from
the Federal Reserve for the 2019 and 2020 inflation
modification.48 49 Based on that information, the
calculations for Step 1 are as follows in table 16:
---------------------------------------------------------------------------
\47\ USCG-2019-0736-0003, p. 3.
\48\ USCG-2019-0736-0002, p. 5.
\49\ USCG-2019-0736-0002, p. 5.
Table 16--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
District Two
Item -----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)............................... $963,407 $1,422,030 $2,385,437
2018 Inflation Modification (@1.9%)............................. 18,305 27,019 45,324
2019 Inflation Modification (@1.8%)............................. 17,671 26,083 43,754
2020 Inflation Modification (@2%)............................... 19,988 29,503 49,491
-----------------------------------------------
Adjusted 2020 Operating Expenses............................ 1,019,371 1,504,635 2,524,006
----------------------------------------------------------------------------------------------------------------
C. Step 3: Estimate Number of Working Pilots
In accordance with the text in Sec. 404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on input from the LPA. Using these numbers, we
estimate that there will be 15 working pilots in 2020 in District Two.
Furthermore, based on the seasonal staffing model discussed in the 2017
ratemaking (see 82 FR 41466), we assign a certain number of pilots to
designated waters and a certain number to undesignated waters, as shown
in table 17. These numbers are used to determine the amount of revenue
needed in their respective areas.
Table 17--Authorized Pilots
------------------------------------------------------------------------
District
Item Two
------------------------------------------------------------------------
Maximum number of pilots (per Sec. 401.220(a)) \50\...... 15
2020 Authorized pilots (total)............................. 15
Pilots assigned to designated areas........................ 7
Pilots assigned to undesignated areas...................... 8
------------------------------------------------------------------------
D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------
\50\ For a detailed calculation refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------
In this step, we determine the total pilot compensation for each
area. As we are conducting an interim ratemaking this year, we follow
the procedure outlined in paragraph (b) of Sec. 404.104, which adjusts
the existing compensation benchmark by inflation. Because we do not
have a value for the employment cost index for 2020, we multiply the
2019 compensation benchmark of $359,887 by the Median PCE Inflation
value of 2.0 percent.\51\ Based on the projected 2020 inflation
estimate, the compensation benchmark for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------
\51\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------
Next, we verify that the number of pilots estimated for 2020 is
less than or equal to the number permitted under the staffing model in
Sec. 401.220(a). The staffing model suggests that the number of pilots
needed is 15 pilots for District Two, which is more than or equal to
the numbers of working pilots provided by the pilot associations.\52\
---------------------------------------------------------------------------
\52\ See table 6 of the Great Lakes Pilotage Rates--2017 Annual
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The
methodology of the staffing model is discussed at length in the
final rule (see pages 41476-41480 for a detailed analysis of the
calculations).
---------------------------------------------------------------------------
Thus, in accordance with Sec. 404.104(c), we use the revised
target individual compensation level to derive the total pilot
compensation by multiplying the individual target compensation by the
estimated number of working pilots for District Two, as shown in table
18.
Table 18--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation....................................... $367,085 $367,085 $367,085
[[Page 20106]]
Number of Pilots................................................ 8 7 15
-----------------------------------------------
Total Target Pilot Compensation............................. $2,936,680 $2,569,595 $5,506,275
----------------------------------------------------------------------------------------------------------------
E. Step 5: Project Working Capital Fund
Next, we calculate the working capital fund revenues needed for
each area. First, we add together the figures for projected operating
expenses and total pilot compensation for each area. Next, we find the
preceding year's average annual rate of return for new issues of high-
grade corporate securities. Using Moody's data, the number is 3.93
percent.\53\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in table 19.
---------------------------------------------------------------------------
\53\ USCG-2019-0736-0005, p. 3.
Table 19--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
District Two
Item -----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................ $1,019,371 $1,504,635 $2,524,006
Total Target Pilot Compensation (Step 4)........................ 2,936,680 2,569,595 5,506,275
-----------------------------------------------
Total 2020 Expenses (Step 2 + Step 4)....................... 3,956,051 4,074,230 8,030,281
-----------------------------------------------
Working Capital Fund (Total Expenses x 3.93%)........... 155,473 160,117 315,590
----------------------------------------------------------------------------------------------------------------
F. Step 6: Project Needed Revenue
In this step, we add together all of the expenses accrued to derive
the total revenue needed for each area. These expenses include the
projected operating expenses (from Step 2), the total pilot
compensation (from Step 4), and the working capital fund contribution
(from Step 5). We show these calculations in table 20.
Table 20--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
District Two
-----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 16).............. $1,019,371 $1,504,635 $2,524,006
Total Target Pilot Compensation (Step 4, See Table 18).......... 2,936,680 2,569,595 5,506,275
Working Capital Fund (Step 5, See Table 19)..................... 155,473 160,117 315,590
-----------------------------------------------
Total Revenue Needed........................................ 4,111,524 4,234,347 8,345,871
----------------------------------------------------------------------------------------------------------------
G. Step 7: Calculate Initial Base Rates
Having determined the needed revenue for each area in the previous
six steps to develop an hourly rate, we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the average hours of traffic over 10 years
in District Two, using the total time on task or pilot bridge
hours.\54\ Because we calculate separate figures for designated and
undesignated waters, there are two parts for each calculation. We show
these values in table 21.
---------------------------------------------------------------------------
\54\ USCG-2019-0736-0002 p. 5.
Table 21--Time on Task for District Two
[Hours]
------------------------------------------------------------------------
Year Undesignated Designated
------------------------------------------------------------------------
2018.................................... 6,150 6,655
2017.................................... 5,139 6,074
2016.................................... 6,425 5,615
2015.................................... 6,535 5,967
2014.................................... 7,856 7,001
2013.................................... 4,603 4,750
2012.................................... 3,848 3,922
2011.................................... 3,708 3,680
2010.................................... 5,565 5,235
2009.................................... 3,386 3,017
Average............................... 5,322 5,192
------------------------------------------------------------------------
Next, we derive the initial hourly rate by dividing the revenue
needed by the average number of hours for each area. This produces an
initial rate, which is necessary to produce the revenue needed for each
area, assuming the amount of traffic is as expected. The calculations
for each area are set forth in table 22.
Table 22--Initial Rate Calculations for District Two
------------------------------------------------------------------------
Item Undesignated Designated
------------------------------------------------------------------------
Revenue needed (Step 6)................. $4,111,524 $4,234,347
[[Page 20107]]
Average time on task (hours)............ 5,322 5,192
-------------------------------
Initial rate (Step 6/Average Time on 773 816
Task)..................................
------------------------------------------------------------------------
H. Step 8: Calculate Average Weighting Factors by Area
In this step, we calculate the average weighting factor for each
designated and undesignated area. We collect the weighting factors, set
forth in 46 CFR 401.400, for each vessel trip. Using this database, we
calculated the average weighting factor for each area using the data
from each vessel transit from 2014 onward, as shown in tables 23 and
24.\55\
---------------------------------------------------------------------------
\55\ USCG-2019-0736-0006, p.2.
Table 23--Average Weighting Factor for District Two, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class/year transits factor transits
(A) (B) (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014).................................................. 31 1 31
Class 1 (2015).................................................. 35 1 35
Class 1 (2016).................................................. 32 1 32
Class 1 (2017).................................................. 21 1 21
Class 1 (2018).................................................. 37 1 37
Class 2 (2014).................................................. 356 1.15 409.4
Class 2 (2015).................................................. 354 1.15 407.1
Class 2 (2016).................................................. 380 1.15 437
Class 2 (2017).................................................. 222 1.15 255.3
Class 2 (2018).................................................. 123 1.15 141.45
Class 3 (2014).................................................. 20 1.3 26
Class 3 (2015).................................................. 0 1.3 0
Class 3 (2016).................................................. 9 1.3 11.7
Class 3 (2017).................................................. 12 1.3 15.6
Class 3 (2018).................................................. 3 1.3 3.9
Class 4 (2014).................................................. 636 1.45 922.2
Class 4 (2015).................................................. 560 1.45 812
Class 4 (2016).................................................. 468 1.45 678.6
Class 4 (2017).................................................. 319 1.45 462.55
Class 4 (2018).................................................. 196 1.45 284.20
-----------------------------------------------
Total....................................................... 3,814 .............. 5,023
-----------------------------------------------
Average weighting factor (weighted transits/number of .............. 1.32 ..............
transits)..............................................
----------------------------------------------------------------------------------------------------------------
Table 24--Average Weighting Factor for District Two, Designated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class/year transits factor transits
(A) (B) (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014).................................................. 20 1 20
Class 1 (2015).................................................. 15 1 15
Class 1 (2016).................................................. 28 1 28
Class 1 (2017).................................................. 15 1 15
Class 1 (2018).................................................. 42 1 42
Class 2 (2014).................................................. 237 1.15 272.55
Class 2 (2015).................................................. 217 1.15 249.55
Class 2 (2016).................................................. 224 1.15 257.6
Class 2 (2017).................................................. 127 1.15 146.05
Class 2 (2018).................................................. 153 1.15 175.95
Class 3 (2014).................................................. 8 1.3 10.4
Class 3 (2015).................................................. 8 1.3 10.4
Class 3 (2016).................................................. 4 1.3 5.2
Class 3 (2017).................................................. 4 1.3 5.2
Class 3 (2018).................................................. 14 1.3 18.2
Class 4 (2014).................................................. 359 1.45 520.55
Class 4 (2015).................................................. 340 1.45 493
Class 4 (2016).................................................. 281 1.45 407.45
Class 4 (2017).................................................. 185 1.45 268.25
[[Page 20108]]
Class 4 (2018).................................................. 379 1.45 549.55
-----------------------------------------------
Total....................................................... 2,660 .............. 3,510
-----------------------------------------------
Average weighting factor (weighted transits/number of .............. 1.32 ..............
transits)..............................................
----------------------------------------------------------------------------------------------------------------
I. Step 9: Calculate Revised Base Rates
In this step, we revise the base rates so that once the impact of
the weighting factors are considered, the total cost of pilotage would
be equal to the revenue needed. To do this, we divide the initial base
rates, calculated in Step 7, by the average weighting factors
calculated in Step 8, as shown in table 25.
Table 25--Revised Base Rates for District Two
----------------------------------------------------------------------------------------------------------------
Revised rate
Average (initial rate
Area Initial rate weighting average
(Step 7) factor (Step weighting
8) factor)
----------------------------------------------------------------------------------------------------------------
District Two: Designated........................................ $816 1.32 $618
District Two: Undesignated...................................... 773 1.32 586
----------------------------------------------------------------------------------------------------------------
J. Step 10: Review and Finalize Rates
In this step, the Director reviews the rates set forth by the
staffing model and ensures that they meet the goal of ensuring safe,
efficient, and reliable pilotage. To establish that the rates do meet
the goal of ensuring safe, efficient and reliable pilotage, the
Director considers whether the rates incorporate appropriate
compensation for pilots to handle heavy traffic periods, and whether
there is a sufficient number of pilots to handle those heavy traffic
periods. The Director also considers whether the rates will cover
operating expenses and infrastructure costs, and takes average traffic
and weighting factors into consideration. Based on this information,
the Director is not making any alterations to the rates in this step.
We modified the text in Sec. 401.405(a) to reflect the final rates
shown in table 26.
Table 26--Final Rates for District Two
----------------------------------------------------------------------------------------------------------------
Final 2019 Proposed 2020 Final 2020
Area Name pilotage rate pilotage rate pilotage rate
----------------------------------------------------------------------------------------------------------------
District Two: Designated.............. Navigable waters from $603 $602 $618
Southeast Shoal to Port
Huron, MI.
District Two: Undesignated............ Lake Erie............... 531 573 586
----------------------------------------------------------------------------------------------------------------
District Three
A. Step 1: Recognize Previous Operating Expenses
Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\56\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
costs are applied to the undesignated or designated area based on where
they were actually accrued. For example, costs for ``Applicant pilot
license insurance'' in District One are assigned entirely to the
undesignated areas, as applicant pilots work exclusively in those
areas. For costs accrued by the pilot associations generally, for
example, employee benefits, the cost is divided between the designated
and undesignated areas on a pro rata basis. The recognized operating
expenses for District Three are shown in table 27.
---------------------------------------------------------------------------
\56\ These reports are available in the docket for this
rulemaking (see Docket # USCG-2019-0736).
---------------------------------------------------------------------------
In addition to the surcharge adjustment and lobbying expenses
described for District One in Section VII A. of this preamble, Step 1:
Recognize previous operating expenses and the adjustments made by the
auditor, as explained in the auditor's reports, which are available in
the docket for this rulemaking where indicated in the ADDRESSES portion
of this document, the Director is finalizing two adjustments to
District Three's operating expenses, listed as Director's adjustments.
The first disallows $32,800 in ``housing allowance'' expenses. The
Coast Guard agrees with the IRS that an employer-provided housing
allowance is a fringe benefit, and we consider it to be employee
compensation. In addition, we expect those appointed as registered
pilots pilot to live in the region in which they are employed. We
expect that, if a pilot chooses to live outside their region of
employment, they should have to pay for their accommodations, and this
cost should not be passed on to the shippers via the rate. Therefore,
we are not including any housing allowance the district chooses to
[[Page 20109]]
provide their pilots in the ratemaking calculation.
The second Director's adjustment is a $265,309 surcharge adjustment
to account for the difference between the amount the district spent on
applicant pilot wages and benefits in 2017 to cover the training costs
for seven applicant pilots, and the amount actually collected via the
2017 surcharge. In total, District Three spent $647,606 on applicant
pilot compensation for seven applicant pilots and received $382,297 via
the surcharge in 2017. As a result, we are including a $265,309
surcharge adjustment ($647,606--$382,297) in the recognized expenses
for District Three. We allocated this adjustment to each area based on
their proportional bridge hours in 2017 (See table 33 for bridge
hours).
Table 27--2017 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
District Three
----------------------------------------------------
Undesignated Designated Undesignated
Reported expenses for 2017 \57\ (Area 6) (Area 7) \58\ (Area 8) Total
----------------------------------------------------
Lakes Huron and St. Mary's
Michigan River Lake Superior
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Subsistence/Travel--Pilot............... $237,036 $93,461 $92,458 $422,955
CPA Adjustment.......................... -11,178 -4,407 -4,360 -19,945
Subsistence/Travel--Applicant........... 90,123 35,535 35,154 160,812
Payroll Taxes--Pilots................... 124,088 48,927 48,402 221,417
Payroll Taxes--Applicants............... 25,553 10,075 9,967 45,595
License Insurance--Pilots............... 15,631 6,163 6,097 27,891
Training--Pilots........................ 25,830 10,185 10,075 46,090
Training--Applicants.................... 16,325 6,437 6,368 29,130
Housing Allowance....................... 18,382 7,248 7,170 32,800
Winter Meeting.......................... 14,795 5,834 5,771 26,400
Cell Phone Allowance.................... 26,186 10,325 10,214 46,725
Other Pilotage Costs.................... 49,252 19,420 19,211 87,883
CPA Adjustment.......................... -3,699 -1,446 -1,431 -6,576
-------------------------------------------------------------------
Total Other Pilotage Costs.......... 628,324 247,757 245,096 1,121,177
Pilot Boat and Dispatch Costs:
Pilot boat costs........................ 397,610 156,774 155,092 709,476
CPA Adjustment.......................... -27,756 -10,944 -10,826 -49,526
Dispatch costs.......................... 99,705 39,313 38,891 177,909
Payroll taxes........................... 9,351 3,687 3,648 16,686
Dispatch Employee Benefits.............. 3,927 1,548 1,532 7,007
-------------------------------------------------------------------
Total Pilot and Dispatch Costs...... 482,837 190,378 188,337 861,552
Administrative Expenses:
Legal--General Counsel.................. 32,149 12,676 12,540 57,365
Legal--Shared Counsel................... 18,730 7,385 7,306 33,421
Office Rent............................. 4,733 1,866 1,846 8,445
Insurance............................... 3,715 1,465 1,449 6,629
Employee benefits....................... 76,093 30,003 29,681 135,777
Workers Compensation.................... 1,513 597 590 2,700
Payroll Taxes........................... 6,408 2,527 2,500 11,435
Other Taxes............................. 1,034 408 403 1,845
Admin Travel............................ 676 267 264 1,207
Depreciation/Auto Leasing/Other......... 50,959 20,093 19,877 90,929
Interest................................ 2,262 892 882 4,036
APA Dues................................ 20,544 8,100 8,013 36,657
Utilities............................... 5,335 2,103 2,081 9,519
Admin Salaries.......................... 64,004 25,236 24,966 114,206
Accounting/Professional Fees............ 34,390 13,560 13,414 61,364
Other................................... 6,170 2,433 2,407 11,010
-------------------------------------------------------------------
Total Administrative Expenses....... 328,715 129,611 128,219 586,545
-------------------------------------------------------------------
Total Operating Expenses (Other 1,439,876 567,746 561,652 2,569,274
Costs + Pilot Boats + Admin)...
Adjustments (Director):
Housing Allowance....................... -18,382 -7,248 -7,170 -32,800
Surcharge Adjustment.................... 116,056 33,197 116,056 265,309
-------------------------------------------------------------------
Total Director's Adjustments........ 97,674 25,949 108,886 232,509
-------------------------------------------------------------------
Total Operating Expenses (OpEx + 1,537,550 593,695 670,538 2,801,783
Adjustments)...................
----------------------------------------------------------------------------------------------------------------
[[Page 20110]]
B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
---------------------------------------------------------------------------
\57\ The undesignated areas in District Three (areas 6 and 8)
are treated separately in table 27. In table 28 and subsequent
tables, both undesignated areas are combined and analyzed as a
single undesignated area.
\58\ For a detailed calculation, refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------
Having identified the recognized 2017 operating expenses in Step 1,
the next step is to estimate the current year's operating expenses by
adjusting those expenses for inflation over the 3-year period. We
calculate inflation for 2017 to 2018 using the BLS data from the CPI
for the Midwest Region of the United States.\59\ Because the BLS does
not provide forecast inflation data, we use economic projections from
the Federal Reserve for the 2019 and 2020 inflation
modification.60, 61 Based on that information, the
calculations for Step 1 are as follows:
---------------------------------------------------------------------------
\59\ USCG-2019-0736-0003, p. 3.
\60\ USCG-2019-0736-0002, p. 5.
\61\ USCG-2019-0736-0002, p. 5.
Table 28--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
District Three
-----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)............................... $2,208,088 $593,695 $2,801,783
2018 Inflation Modification (@1.9%)............................. 41,954 11,280 53,234
2019 Inflation Modification (@1.8%)............................. 40,501 10,890 51,391
2020 Inflation Modification (@2%)............................... 45,811 12,317 58,128
-----------------------------------------------
Adjusted 2020 Operating Expenses............................ 2,336,354 628,182 2,964,536
----------------------------------------------------------------------------------------------------------------
C. Step 3: Estimate Number of Working Pilots
In accordance with the text in Sec. 404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on input from the Western Great Lakes Pilots
Association. Using these numbers, we estimate that there will be 20
working pilots in 2020 in District Three. Furthermore, based on the
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR
41466), we assign a certain number of pilots to designated waters and a
certain number to undesignated waters, as shown in table 29. These
numbers are used to determine the amount of revenue needed in their
respective areas.
Table 29--Authorized Pilots
------------------------------------------------------------------------
District Three
------------------------------------------------------------------------
Maximum number of pilots (per Sec. 401.220(a)) \62\... 22
2020 Authorized pilots (total).......................... 20
Pilots assigned to designated areas..................... 4
Pilots assigned to undesignated areas................... 16
------------------------------------------------------------------------
D. Step 4: Determine Target Pilot Compensation Benchmark
In this step, we determine the total pilot compensation for each
area. As we are conducting an ``interim'' ratemaking this year, we are
following the procedure outlined in paragraph (b) of Sec. 404.104,
which adjusts the existing compensation benchmark by inflation. Because
we do not have a value for the employment cost index for 2020, we
multiply the 2019 compensation benchmark of $359,887 by the Median PCE
Inflation value of 2.0 percent.\63\ Based on the projected 2020
inflation estimate, the compensation benchmark for 2020 is $367,085 per
pilot.
---------------------------------------------------------------------------
\62\ For a detailed calculation refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
\63\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------
Next, we verify that the number of pilots estimated for 2020 is
less than or equal to the number permitted under the staffing model in
Sec. 401.220(a). The staffing model suggests that the number of pilots
needed for District Three is 22 pilots,\64\ which is more than or equal
to the numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------
\64\ See table 6 of the Great Lakes Pilotage Rates--2017 Annual
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The
methodology of the staffing model is discussed at length in the
final rule (see pages 41476-41480 for a detailed analysis of the
calculations).
---------------------------------------------------------------------------
Thus, in accordance with Sec. 404.104(c), we use the revised
target individual compensation level to derive the total pilot
compensation by multiplying the individual target compensation by the
estimated number of working pilots for District Three, as shown in
table 30.
Table 30--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
District Three
-----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation....................................... $367,085 $367,085 $367,085
Number of Pilots................................................ 16 4 20
-----------------------------------------------
Total Target Pilot Compensation............................. $5,873,360 $1,468,340 $7,341,700
----------------------------------------------------------------------------------------------------------------
E. Step 5: Project Working Capital Fund
Next, we calculate the working capital fund revenues needed for
each area. First, we add together the figures for projected operating
expenses and total pilot compensation for each area. Next, we find the
preceding year's average annual rate of return for new issues of high
grade corporate securities. Using Moody's data, the number is 3.93
percent.\65\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in table 31.
---------------------------------------------------------------------------
\65\ USCG-2019-0736-0005, p. 3.
[[Page 20111]]
Table 31--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
District Three
-----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................ $2,336,354 $628,182 $2,964,536
Total Target Pilot Compensation (Step 4)........................ 5,873,360 1,468,340 7,341,700
-----------------------------------------------
Total 2020 Expenses (Step 2 + Step 4)........................... 8,209,714 2,096,522 10,306,236
-----------------------------------------------
Working Capital Fund (Total Expenses x 3.93%)................... 322,642 82,393 405,035
----------------------------------------------------------------------------------------------------------------
F. Step 6: Project Needed Revenue
In this step, we add together all of the expenses accrued to derive
the total revenue needed for each area. These expenses include the
projected operating expenses (from Step 2), the total pilot
compensation (from Step 4), and the working capital fund contribution
(from Step 5). We show these calculations in table 32.
Table 32--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
District Three
-----------------------------------------------
Undesignated Designated Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 28).............. $2,336,354 $628,182 $2,964,536
Total Target Pilot Compensation (Step 4, See Table 30).......... 5,873,360 1,468,340 7,341,700
-----------------------------------------------
Working Capital Fund (Step 5, See Table 31)..................... 322,642 82,393 405,035
-----------------------------------------------
Total Revenue Needed............................................ 8,532,356 2,178,915 10,711,271
----------------------------------------------------------------------------------------------------------------
G. Step 7: Calculate Initial Base Rates
Having determined the revenue needed for each area in the previous
six steps to develop an hourly rate, we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the average hours of traffic over 10 years
in District Three, using the total time on task or pilot bridge
hours.\66\ Because we calculate separate figures for designated and
undesignated waters, there are two parts for each calculation. We show
these values in table 33.
---------------------------------------------------------------------------
\66\ USCG-2019-0736-0002, p. 5.
Table 33--Time on Task for District Three (Hours)
------------------------------------------------------------------------
District Three
Year -------------------------------
Undesignated Designated
------------------------------------------------------------------------
2018.................................... 19,967 3,455
2017.................................... 20,955 2,997
2016.................................... 23,421 2,769
2015.................................... 22,824 2,696
2014.................................... 25,833 3,835
2013.................................... 17,115 2,631
2012.................................... 15,906 2,163
2011.................................... 16,012 1,678
2010.................................... 20,211 2,461
2009.................................... 12,520 1,820
-------------------------------
Average............................. 19,476 2,651
------------------------------------------------------------------------
Next, we derive the initial hourly rate by dividing the revenue
needed by the average number of hours for each area. This produces an
initial rate, which is necessary to produce the revenue needed for each
area, assuming the amount of traffic is as expected. The calculations
for each area are set forth in table 34.
Table 34--Initial Rate Calculations for District Three
------------------------------------------------------------------------
Undesignated Designated
------------------------------------------------------------------------
Revenue needed (Step 6)................. $8,532,356 $2,178,915
Average time on task (hours)............ 19,476 2,651
-------------------------------
[[Page 20112]]
Initial rate........................ $438 $822
------------------------------------------------------------------------
H. Step 8: Calculate Average Weighting Factors by Area
In this step, we calculate the average weighting factor for each
designated and undesignated area. We collect the weighting factors, set
forth in 46 CFR 401.400, for each vessel trip. Using this database, we
calculate the average weighting factor for each area using the data
from each vessel transit from 2014 onward, as shown in tables 35 and
36.\67\
---------------------------------------------------------------------------
\67\ USCG-2019-0736-0006, p.2
Table 35--Average Weighting Factor for District Three, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class/year transits factor transits
(A) (B) (A x B)
----------------------------------------------------------------------------------------------------------------
Area 6:
Class 1 (2014).............................................. 45 1 45
Class 1 (2015).............................................. 56 1 56
Class 1 (2016).............................................. 136 1 136
Class 1 (2017).............................................. 148 1 148
Class 1 (2018).............................................. 103 1 103
Class 2 (2014).............................................. 274 1.15 315.1
Class 2 (2015).............................................. 207 1.15 238.05
Class 2 (2016).............................................. 236 1.15 271.4
Class 2 (2017).............................................. 264 1.15 303.6
Class 2 (2018).............................................. 169 1.15 194.35
Class 3 (2014).............................................. 15 1.3 19.5
Class 3 (2015).............................................. 8 1.3 10.4
Class 3 (2016).............................................. 10 1.3 13
Class 3 (2017).............................................. 19 1.3 24.7
Class 3 (2018).............................................. 9 1.3 11.7
Class 4 (2014).............................................. 394 1.45 571.3
Class 4 (2015).............................................. 375 1.45 543.75
Class 4 (2016).............................................. 332 1.45 481.4
Class 4 (2017).............................................. 367 1.45 532.15
Class 4 (2018).............................................. 337 1.45 488.65
-----------------------------------------------
Total for Area 6........................................ 3,504 .............. 4,507.05
Area 8:
Class 1 (2014).............................................. 3 1 3
Class 1 (2015).............................................. 0 1 0
Class 1 (2016).............................................. 4 1 4
Class 1 (2017).............................................. 4 1 4
Class 1 (2018).............................................. 0 1 0
Class 2 (2014).............................................. 177 1.15 203.55
Class 2 (2015).............................................. 169 1.15 194.35
Class 2 (2016).............................................. 174 1.15 200.1
Class 2 (2017).............................................. 151 1.15 173.65
Class 2 (2018).............................................. 102 1.15 117.3
Class 3 (2014).............................................. 3 1.3 3.9
Class 3 (2015).............................................. 0 1.3 0
Class 3 (2016).............................................. 7 1.3 9.1
Class 3 (2017).............................................. 18 1.3 23.4
Class 3 (2018).............................................. 7 1.3 9.1
Class 4 (2014).............................................. 243 1.45 352.35
Class 4 (2015).............................................. 253 1.45 366.85
Class 4 (2016).............................................. 204 1.45 295.8
Class 4 (2017).............................................. 269 1.45 390.05
Class 4 (2018).............................................. 188 1.45 272.6
-----------------------------------------------
Total for Area 8........................................ 1,976 .............. 2623.1
-----------------------------------------------
Combined total...................................... 5,480 .............. 7,130.15
-----------------------------------------------
Average weighting factor (weighted transits/ .............. 1.30 ..............
number of transits)............................
----------------------------------------------------------------------------------------------------------------
[[Page 20113]]
Table 36--Average Weighting Factor for District Three, Designated Areas
----------------------------------------------------------------------------------------------------------------
Number of Weighting Weighted
Vessel class per year transits factor transits
(A) (B) (A x B)
-----------------------------------------------
Class 1 (2014).................................................. 27 1 27
Class 1 (2015).................................................. 23 1 23
Class 1 (2016).................................................. 55 1 55
Class 1 (2017).................................................. 62 1 62
Class 1 (2018).................................................. 47 1 47
Class 2 (2014).................................................. 221 1.15 254.15
Class 2 (2015).................................................. 145 1.15 166.75
Class 2 (2016).................................................. 174 1.15 200.1
Class 2 (2017).................................................. 170 1.15 195.5
Class 2 (2018).................................................. 126 1.15 144.9
Class 3 (2014).................................................. 4 1.3 5.2
Class 3 (2015).................................................. 0 1.3 0
Class 3 (2016).................................................. 6 1.3 7.8
Class 3 (2017).................................................. 14 1.3 18.2
Class 3 (2018).................................................. 6 1.3 7.8
Class 4 (2014).................................................. 321 1.45 465.45
Class 4 (2015).................................................. 245 1.45 355.25
Class 4 (2016).................................................. 191 1.45 276.95
Class 4 (2017).................................................. 234 1.45 339.3
Class 4 (2018).................................................. 225 1.45 326.25
-----------------------------------------------
Total....................................................... 2,296 .............. 2,977
-----------------------------------------------
Average weighting factor (weighted transits per number .............. 1.30 ..............
of transits)...........................................
----------------------------------------------------------------------------------------------------------------
I. Step 9: Calculate Revised Base Rates
In this step, we revise the base rates so that once the impact of
the weighting factors are considered, the total cost of pilotage would
be equal to the revenue needed. To do this, we divide the initial base
rates, calculated in Step 7, by the average weighting factors
calculated in Step 8, as shown in table 37.
Table 37--Revised Base Rates for District Three
----------------------------------------------------------------------------------------------------------------
Revised rate
Average (initial rate
Area Initial rate weighting average
(Step 7) factor (Step weighting
8) factor)
----------------------------------------------------------------------------------------------------------------
District Three: Designated...................................... $822 1.30 $632
District Three: Undesignated.................................... 438 1.30 337
----------------------------------------------------------------------------------------------------------------
J. Step 10: Review and Finalize Rates
In this step, the Director reviews the rates set forth by the
staffing model and ensures that they meet the goal of ensuring safe,
efficient, and reliable pilotage. To establish that the rates do meet
the goal of ensuring safe, efficient, and reliable pilotage, the
Director considers whether the rates incorporate appropriate
compensation for pilots to handle heavy traffic periods and whether
there is a sufficient number of pilots to handle those heavy traffic
periods. The Director also considers whether the rates will cover
operating expenses and infrastructure costs, and takes average traffic
and weighting factors into consideration. Based on this information,
the Director is not making any alterations to the rates in this step.
We modified the text in Sec. 401.405(a) to reflect the final rates
shown in table 38.
Table 38--Final Rates for District Three
----------------------------------------------------------------------------------------------------------------
Final 2019 Proposed 2020 Final 2020
Area Name pilotage rate pilotage rate pilotage rate
----------------------------------------------------------------------------------------------------------------
District Three: Designated............ St. Mary's River........ $594 $621 $632
District Three: Undesignated.......... Lakes Huron, Michigan, 306 327 337
and Superior.
----------------------------------------------------------------------------------------------------------------
K. Surcharges
The Coast Guard is not implementing any surcharges in this
ratemaking. As stated earlier, we previously used surcharges to pay for
the training of new pilots, rather than incorporating training costs
into the overall ``needed revenue'' that is used in the calculation of
the base rate, because the surcharge accelerates the reimbursement of
certain necessary and reasonable expense. For the 2019 ratemaking, this
[[Page 20114]]
reimbursement needed to be accelerated because of the large number of
registered pilots retiring, and the large number of new pilots being
trained to replace them. As the vast majority of registered pilots are
not anticipated to retire in the next 20 years, the Coast Guard
believes that pilot associations are now able to plan for the costs
associated with retirements without relying on the Coast Guard to
impose surcharges.
VIII. Regulatory Analyses
We developed this rule after considering numerous statutes and
Executive orders related to rulemaking. Below we summarize our analyses
based on these statutes or Executive orders.
A. Regulatory Planning and Review
Executive Orders 12866 (Regulatory Planning and Review) and 13563
(Improving Regulation and Regulatory Review) direct agencies to assess
the costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. Executive Order 13771 (Reducing Regulation and Controlling
Regulatory Costs) directs agencies to reduce regulation and control
regulatory costs and provides that ``for every one new regulation
issued, at least two prior regulations be identified for elimination,
and that the cost of planned regulations be prudently managed and
controlled through a budgeting process.''
The Office of Management and Budget (OMB) has not designated this
rule a significant regulatory action under section 3(f) of Executive
Order 12866. Accordingly, OMB has not reviewed it. Because this rule is
not a significant regulatory action, this rule is exempt from the
requirements of Executive Order 13771. See the OMB Memorandum titled
``Guidance Implementing Executive Order 13771, titled ``Reducing
Regulation and Controlling Regulatory Costs' '' (April 5, 2017). A
regulatory analysis (RA) follows.
The purpose of this final rule is to establish new base pilotage
rates. The Great Lakes Pilotage Act of 1960 requires that rates be
established or reviewed and adjusted each year. The Act requires that
base rates be established by a full ratemaking at least once every five
years, and in years when base rates are not established, they must be
reviewed and, if necessary, adjusted. The last full ratemaking was
concluded in June of 2018.\68\ The Coast Guard estimates an increase in
cost of approximately $279,845 to industry as a result of the change in
revenue needed in 2020 compared to the revenue needed in 2019. This is
a 1 percent net increase in estimated payments made by shippers from
the 2019 shipping season. Table 39 summarizes changes with no cost
impacts or where the cost impacts are captured in the final rate
change. Table 40 summarizes the affected population, costs, and
benefits of the final rate change. The Coast Guard estimates an
increase in cost of approximately $279,845 to industry as a result of
the change in revenue needed in 2020 compared to the revenue needed in
2019. This is a 1 percent net increase in estimated payments made by
shippers from the 2019 shipping season.
---------------------------------------------------------------------------
\68\ Great Lakes Pilotage Rates--2018 Annual Review and
Revisions to Methodology (83 FR 26162), published June 5, 2018.
Table 39--Changes With No Costs or Cost Captured in the Final Rate
----------------------------------------------------------------------------------------------------------------
Affected
Change Description population Basis for no cost Benefits
----------------------------------------------------------------------------------------------------------------
Working capital fund The Coast Guard is The 3 pilotage All three Provides increased
requirements. adding regulatory associations. districts opened transparency and
text to Sec. accounts for the oversight of how
403.110 requiring working capital the money in the
the pilotage fund in response working capital
associations keep to a policy fund is spent and
money allocated letter sent by how much each
to the working the Coast Guard association has
capital fund in a in November, allocated for
separate account 2018; therefore, infrastructure
and limit the use there is no expenses.
of the funds to additional cost
infrastructure as a result of
expenses. this rulemaking.
In addition,
based on
discussion with
the associations,
the cost to open
these accounts
was negligible,
as each
association was
able to open a
bank account
online with their
existing
financial
institutions with
minimal effort.
Recordkeeping
associated with
the new bank
accounts may be
conducted
simultaneously
with the
recordkeeping for
the existing
accounts, as all
accounts are with
the same
financial
institution. In
addition, the
associations must
already report
and keep records
on their
infrastructure
expense as part
of their
reporting
requirements
under Sec.
403.105.
[[Page 20115]]
Address inconsistent terms...... The Coast Guard is The 3 pilotage The Coast Guard Creates
replacing the associations. previously consistency
text in Sec. renamed the across the CFR
404.106, ``return ``return on and reduces
on investment'' investment'' as confusion.
with ``working the ``working
capital fund''. capital fund'' in
the Great Lakes
Pilotage Rates
2017 Annual
Review final rule
(82 FR 41466);
however, this
text was not
modified in that
rulemaking.
Target pilot compensation....... The Coast Guard is Owners and Pilot compensation This compensation
changing the base operators of 266 costs are target achieves
pilot vessels accounted for in the Coast Guard's
compensation journeying the the base pilotage goals of safety
benchmark in Sec. Great Lakes rates. through rate and
401.405(a) to system annually, compensation
the 2019 52 U.S. Great stability, while
compensation Lakes pilots, and promoting
benchmark after 3 pilotage recruitment and
adjusting for associations. retention of
inflation. qualified U.S.
registered
pilots.
----------------------------------------------------------------------------------------------------------------
Table 40--Economic Impacts Due to Rate Changes
----------------------------------------------------------------------------------------------------------------
Affected
Change Description population Costs Benefits
----------------------------------------------------------------------------------------------------------------
Rate and surcharge changes...... Under the Great Owners and Increase of Promotes safe,
Lakes Pilotage operators of 266 $279,845 due to efficient, and
Act of 1960, the vessels change in revenue reliable pilotage
Coast Guard is transiting the needed for 2020 service on the
required to Great Lakes ($28, 268,030) Great Lakes.
review and adjust system annually, from revenue Provides fair
base pilotage 52 U.S. Great needed for 2019 compensation,
rates annually. Lakes pilots, and ($27,988,185) as adequate
3 pilotage shown in Table 41 training, and
associations. below. sufficient rest
periods for
pilots. New rates
cover an
association's
necessary and
reasonable
operating
expenses.
Ensures the
association
receives
sufficient
revenues to fund
future
improvements.
----------------------------------------------------------------------------------------------------------------
Table 41 summarizes the changes in the regulatory analysis from the
NPRM to the final rule. The Coast Guard made these changes as a result
of public comments received after publication of the NPRM. The Coast
Guard did not receive any comments on the regulatory analysis itself,
but did receive comments on the operating expenses that affected the
calculation of projected revenues. In the final rule, the Coast Guard
made two adjustments to the operating expenses based on public comment:
(1) We adjusted the operating expenses to include the 3 percent shared
council fee which we incorrectly deducted in the NPRM; and (2) we added
a surcharge adjustment for District 2 and District 3 to account for the
differences between their accrued training expenses and the amount of
money they collected via the surcharge. An in-depth discussion of these
comments is located in Section VI of the preamble, Discussion of
Comments.
Table 41--Summary of Changes from NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
Element of the analysis NPRM Final rule Resulting change in RA
----------------------------------------------------------------------------------------------------------------
Operating Expenses (Step 1).......... Incorrectly deducted 3% Removes deduction for Data affects the
shared council all three districts. calculation of
expenses from the projected revenues.
operating expenses for
all districts.
Did not include Includes a $158,308
required surcharge surcharge adjustment
adjustments for for District 2 and a
District 2 and $265,309 surcharge
District 3. adjustment for
District 3.
----------------------------------------------------------------------------------------------------------------
The Coast Guard is required to review and adjust pilotage rates on
the Great Lakes annually. See Sections III and IV of this preamble for
detailed discussions of the legal basis and purpose for this rulemaking
and for background information on Great Lakes pilotage ratemaking.
Based on our annual review for this rulemaking, we adjusted the
pilotage rates for the 2020 shipping season to generate sufficient
revenues for each district to reimburse its necessary and reasonable
operating expenses, fairly compensate trained and rested pilots, and
provide an appropriate working capital fund to use for improvements.
The rate changes in this final rule will increase the rates for
[[Page 20116]]
five areas (District One: Designated, all of District Two, and all of
District Three), and decrease the rates for the remaining area
(District One: Undesignated). In addition, the final rule will not
implement a surcharge. These changes lead to a net increase in the cost
of service to shippers. However, because the rates will increase for
most areas and decrease for one, the change in per unit cost to each
individual shipper will be dependent on their area of operation, and if
they previously paid a surcharge.
A detailed discussion of our economic impact analysis follows.
Affected Population
This final rule will impact U.S. Great Lakes pilots, the three
pilot associations, the Saint Lawrence Seaway Pilotage Association, the
Lakes Pilotage Association, and the Western Great Lakes Pilotage, and
the owners and operators of oceangoing vessels that transit the Great
Lakes annually. We estimate that there will be 52 pilots working during
the 2020 shipping season. The shippers affected by these rate changes
are the owners and operators of domestic vessels operating ``on
register'' (engaged in foreign trade) and owners and operators of non-
Canadian foreign vessels on routes within the Great Lakes system. These
owners and operators must have pilots or pilotage service as required
by 46 U.S.C. 9302. There is no minimum tonnage limit or exemption for
these vessels. The statute applies only to commercial vessels and not
to recreational vessels. U.S.-flagged vessels not operating on register
and Canadian ``lakers,'' which account for most commercial shipping on
the Great Lakes, are not required by 46 U.S.C. 9302 to have pilots.
However, these U.S.- and Canadian-flagged lakers may voluntarily choose
to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged
may opt to have a pilot for varying reasons, such as unfamiliarity with
designated waters and ports, or for insurance purposes.
The Coast Guard used billing information from the years 2016
through 2018 from the Great Lakes Pilotage Management System (GLPMS) to
estimate the average annual number of vessels affected by the rate
adjustment.\69\ The GLPMS tracks data related to managing and
coordinating the dispatch of pilots on the Great Lakes, and billing in
accordance with the services. As described in Step 7 of the
methodology, we use a 10-year average to estimate the traffic. However,
when we reviewed 10 years of the most recent billing data, we found
that the data included vessels that have not used pilotage services in
recent years. Therefore, we used 3 years of the most recent billing
data to estimate the affected population. Using 3 years of billing data
is a better representation of the vessel population currently using
pilotage services and, therefore, mostly likely be impacted by this
rulemaking. We found that 457 unique vessels used pilotage services
during the years 2016 through 2018. That is, these vessels had a pilot
dispatched to the vessel, and billing information was recorded in the
GLPMS. Of these vessels, 420 were foreign-flagged vessels and 37 were
U.S.-flagged vessels. As previously stated, U.S.-flagged vessels not
operating on register are not required to have a registered pilot per
46 U.S.C. 9302, but can voluntarily choose to have one.
---------------------------------------------------------------------------
\69\ 2019 GLPMS was not available at the time of analysis,
December 2019.
---------------------------------------------------------------------------
Numerous factors affect vessel traffic, which varies from year to
year. Therefore, rather than using the total number of vessels over the
time period, we took an average of the unique vessels using pilotage
services from the years 2016 through 2018 as the best representation of
vessels estimated to be affected by the rates in this rulemaking. From
2016 through 2018, an average of 266 vessels used pilotage services
annually.\70\ On average, 248 of these vessels were foreign-flagged
vessels and 18 were U.S.-flagged vessels that voluntarily opted into
the pilotage service.
---------------------------------------------------------------------------
\70\ Some vessels entered the Great Lakes multiple times in a
single year, affecting the average number of unique vessels
utilizing pilotage services in any given year.
---------------------------------------------------------------------------
Total Cost to Shippers
The rate changes from this final rule will result in a net increase
in the cost of service to shippers. However, because the rates will
increase for five areas and decrease for one, the change in per unit
cost to each individual shipper is dependent on their area of
operation, and if they previously paid a surcharge.
The Coast Guard estimates the effect of the rate changes on
shippers by comparing the total projected revenues needed to cover
costs in 2019 with the total projected revenues to cover costs in 2020,
including any temporary surcharges we have authorized.\71\ We set
pilotage rates so that pilot associations receive enough revenue to
cover their necessary and reasonable expenses. Shippers pay these rates
when they have a pilot, as required by 46 U.S.C. 9302. Therefore, the
aggregate payments of shippers to pilot associations are equal to the
projected necessary revenues for pilot associations. The revenues each
year represent the total costs that shippers must pay for pilotage
services. The change in revenue from the previous year is the
additional cost to shippers discussed in this rule.
---------------------------------------------------------------------------
\71\ While the Coast Guard implemented a surcharge in 2019, we
are not implementing any surcharges for 2020.
---------------------------------------------------------------------------
The impacts of the rate changes on shippers are estimated from the
district pilotage projected revenues (shown in tables 8, 20, and 32 of
this preamble). The Coast Guard estimates that for the 2020 shipping
season, the projected revenue needed for all three districts is
$28,268,030.
To estimate the change in cost to shippers from this rule, the
Coast Guard compared the 2020 total projected revenues to the 2019
projected revenues. Because we review and prescribe rates for the Great
Lakes Pilotage annually, the effects are estimated as a single-year
cost rather than annualized over a 10-year period. In the 2019
rulemaking, we estimated the total projected revenue needed for 2019,
including surcharges, as $27,988,185.\72\ This is the best
approximation of 2019 revenues, as, at the time of this publication, we
do not have enough audited data available for the 2019 shipping season
to revise these projections. Table 42 shows the revenue projections for
2019 and 2020 and details the additional cost increases to shippers by
area and district as a result of the rate changes on traffic in
Districts One, Two, and Three.
---------------------------------------------------------------------------
\72\ 84 FR 20551, see table 36.
[[Page 20117]]
Table 42--Effect of the Rule by Area and District
[$U.S.; Non-discounted]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue 2019 Total 2019 Revenue 2020 Total 2020 Change in Percentage
Area needed in temporary projected needed in temporary projected costs of this change from
2019 surcharge revenue 2020 surcharge revenue rule previous year
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District One............................................. $9,271,852 $300,000 $9,571,852 $9,210,888 $0 $9,210,888 -$360,964 -4
Total, District Two............................................. 7,864,224 150,000 8,014,224 8,345,871 0 8,345,871 331,647 4
Total, District Three........................................... 9,802,109 600,000 10,402,109 10,711,271 0 10,711,271 309,162 3
-------------------------------------------------------------------------------------------------------------------------------
System Total................................................ 26,938,185 1,050,000 27,988,185 28,268,030 0 28,268,030 279,845 1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The resulting difference between the projected revenue in 2019 and
the projected revenue in 2020 is the annual change in payments from
shippers to pilots as a result of the rate change imposed by this rule.
The effect of the rate change to shippers varies by area and district.
The rate changes, after taking into account the change in pilotage
rates, will lead to affected shippers operating in District One
experiencing a decrease in payments of $360,964 over the previous year.
District Two and District Three will experience an increase in payments
of $331,647 and $309,162 respectively, when compared with 2019. The
overall adjustment in payments will be an increase in payments by
shippers of $279,845 across all three districts (a 1-percent increase
when compared with 2019). Again, because the Coast Guard reviews and
sets rates for Great Lakes Pilotage annually, we estimate the impacts
as single-year costs rather than annualizing them over a 10-year
period.
Table 43 shows the difference in revenue by revenue-component from
2019 to 2020, and presents each revenue-component as a percentage of
the total revenue needed. In both 2019 and 2020, the largest revenue-
component was pilotage compensation (66 percent of total revenue needed
in 2019 and 68 percent of total revenue needed in 2020), followed by
operating expenses (27 percent of total revenue needed in 2019 and 29
percent of total revenue 2020).
Table 43--Difference in Revenue by Component
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage of Percentage of Percentage
Revenue needed total revenue Revenue needed total revenue Difference change from
Revenue-component in 2019 needed in 2019 in 2020 needed in 2020 (2020 revenue- previous year
(percent) (percent) 2019 revenue) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses............................. $7,565,310 27 $8,110,685 29 $545,375 7
Total Target Pilot Compensation......................... 18,354,237 66 19,088,420 68 734,183 4
Working Capital Fund.................................... 1,018,638 4 1,068,925 4 50,287 5
Total Revenue Needed, without Surcharge................. 26,938,185 96 28,268,030 100 1,329,845 5
Surcharge............................................... 1,050,000 4 0 0 -1,050,000 -100
Total Revenue Needed, with Surcharge.................... 27,988,185 100 28,268,030 100 279,845 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Totals may not sum due to rounding.
Table 44 presents the percentage change in revenue by area and
revenue-component, excluding surcharges, as they are applied at the
district level.\73\ The majority of the increase in revenue is due to
inflation of operating expenses, and the net addition of one additional
pilot. The target compensation for each pilot is $367,085; therefore,
the net addition of this pilot to full working status accounts for
$367,085 of the increase in the revenue needed. The change in revenue
also accounts for the inflation of pilotage compensation and the
removal of surcharges to cover the cost of applicant pilot training
expenses. The total difference in the revenues needed in 2019 compared
to the revenues needed in 2020 is $279,845, which takes into account
the effect of increasing compensation for the other 51 pilots. The
remaining amount is attributed to increases in the working capital
fund.
---------------------------------------------------------------------------
\73\ The 2019 projected revenues are from the Great Lakes
Pilotage Rates--2019 Annual Review and Revisions to Methodology
final rule (84 FR 20551) tables 15-17. The 2020 projected revenues
are from tables 8, 20, and 32 of this final rule.
Table 44--Difference in Revenue by Component and Area
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total revenue needed
Adjusted Total target Working ---------------------------------------------------------------------------------------------------------
Area operating pilot capital Percentage Percentage Percentage
expenses compensation fund 2019 2020 change 2019 2020 change 2019 2020 change
(A) (B-A) / B (B) (C) (D) (D-C) / D (E) (F) (F-E) / F (G = A + C (H = B + D (H-G) / H
+ E) + F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
District One: Designated.......................... $1,467,171 $1,573,286 7 $3,598,870 $3,670,850 2 $199,095 $206,095 3 $5,265,136 $5,450,231 3
District One: Undesignated........................ 1,335,997 1,048,857 -27 2,519,209 2,569,595 2 151,510 142,205 -7 4,006,716 3,760,657 -7
District Two: Undesignated........................ 1,072,441 1,019,371 -5 2,519,209 2,936,680 14 141,152 155,473 9 3,732,802 4,111,524 9
District Two: Designated.......................... 1,455,988 1,504,635 3 2,519,209 2,569,595 2 156,225 160,117 2 4,131,422 4,234,347 2
District Three: Undesignated...................... 1,703,896 2,336,354 27 5,758,192 5,873,360 2 293,260 322,642 9 7,755,348 8,532,356 9
District Three: Designated........................ 529,817 628,182 16 1,439,548 1,468,340 2 77,396 82,393 6 2,046,761 2,178,915 6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 20118]]
Benefits
This final rule allows the Coast Guard to meet the requirements in
46 U.S.C. 9303 to review the rates for pilotage services on the Great
Lakes. The rate changes will promote safe, efficient, and reliable
pilotage service on the Great Lakes by: (1) Ensuring that rates cover
an association's operating expenses; (2) providing fair pilot
compensation, adequate training, and sufficient rest periods for
pilots; and (3) ensuring pilot associations produce enough revenue to
fund future improvements. The rate changes will also help recruit and
retain pilots, which will ensure a sufficient number of pilots to meet
peak shipping demand, helping reduce delays caused by pilot shortages.
B. Small Entities
Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have
considered whether this final rule will have a significant economic
impact on a substantial number of small entities. The term ``small
entities'' comprises small businesses, not-for-profit organizations
that are independently owned and operated and are not dominant in their
fields, and governmental jurisdictions with populations of less than
50,000.
---------------------------------------------------------------------------
\74\ See https://www.manta.com/.
\75\ See http://resource.referenceusa.com/.
\76\ The RFA (5 U.S.C. 601(3)) refers to the Small Business Act
for the definition of a small business. The Small Business Act in
turn allows the SBA Administrator to specify detailed definitions or
standards by which a business may be determined to be small, under
15 U.S.C. 632(a)(2)(A). Under this authority, the SBA defines a
small business at 13 CFR 121.105(a)(1), which states that, ``Except
for small agricultural cooperatives, a business concern eligible for
assistance from SBA as a small business is a business entity
organized for profit, with a place of business located in the United
States, and which operates primarily within the United States or
which makes a significant contribution to the U.S. economy through
payment of taxes or use of American products, materials or labor.''
Therefore, we do not include impact on foreign entities in our
impact analysis under the RFA.
\77\ See: https://www.sba.gov/document/support--table-size-
standards. SBA has established a ``Table of Size Standards'' for
small businesses that sets small business size standards by NAICS
code. A size standard, which is usually stated in number of
employees or average annual receipts (``revenues''), represents the
largest size that a business (including its subsidiaries and
affiliates) may be in order to remain classified as a small business
for SBA and Federal contracting programs.
---------------------------------------------------------------------------
For this rule, the Coast Guard considered the potential impact to
vessel owners and operators, the three pilotage associations, as well
as any other entities that may be impacted by the rule, such as not-
for-profit organizations and governmental jurisdictions. First, we
reviewed recent company ownership data for the vessels identified in
the GLPMS, and then reviewed their business revenue and employment size
data provided by publicly available sources such as Manta\74\ and
ReferenceUSA.\75\ As described in Section VIII.A of this preamble,
Regulatory Planning and Review, we found that a total of 457 unique
vessels used pilotage services from 2016 through 2018. These vessels
are owned by 55 entities. We found that, of the 55 entities that own or
operate vessels engaged in trade on the Great Lakes that would be
affected by this rule, 43 are foreign entities that operate primarily
outside the United States, and we do not consider the impact on these
entities under the Regulatory Flexibility Act (RFA).\76\ The remaining
12 entities are U.S. entities. For each entity, we compared the revenue
and employee data found in the company search described above to the
Small Business Administration's (SBA) small business threshold as
defined in the SBA's ``Table of Size Standards'' for small businesses
to determine how many of these companies are small entities.\77\ Table
45 shows the North American Industry Classification System (NAICS)
codes of the U.S. entities and the small entity standard size
established by the SBA.
Table 45--NAICS Codes and Small Entities Size Standards
------------------------------------------------------------------------
Small entity size
NAICS Description standard
------------------------------------------------------------------------
211120................... Crude Petroleum 1,250 employees.
Extraction.
238910................... Site Preparation $15.0 million.
Contractors.
488330................... Navigational Services to $38.5 million.
Shipping.
523910................... Miscellaneous $38.5 million.
Intermediation.
532411................... Commercial Air, Rail, $32.5 million.
and Water
Transportation
Equipment Rental and
Leasing.
551111................... Offices of Bank Holding $20.5 million.
Companies.
561510................... Travel Agencies......... $20.5 million.
928110................... National Security....... Population of
50,000 People.
------------------------------------------------------------------------
Of the 12 U.S. entities, 10 exceed the SBA's small business
standards for small entities. To estimate the potential impact on the 2
small entities, the Coast Guard used their 2018 invoice data to
estimate their pilotage costs in 2020. We increased their 2018 costs to
account for the changes in pilotage rates resulting from this rule and
the Great Lakes Pilotage Rates--2019 Annual Review and Revisions to
Methodology final rule (84 FR 20551). We estimated the change in cost
to these entities resulting from this rule by subtracting their
estimated 2019 costs from their estimated 2020 costs. We then compared
the estimated change in pilotage costs between 2019 and 2020 with each
firm's annual revenue and compared their total estimated 2020 pilotage
costs to their annual revenue. In both cases, the change in their
estimated pilotage expenses were below 1 percent of their annual
revenue. Table 46 presents the calculation of these cost estimates for
both entities.
Table 46--Estimated 2020 Pilotage Costs for Small Entities
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated
change in change in change in
Entity 2018 pilotage pilotage costs Estimated 2019 pilotage pilotage costs Estimated 2020 pilotage pilotage
expenses between 2018 expenses between 2019 expenses expenses from
and 2019 \78\ and 2020 2019 to 2020
(%) (%) (a) (b) (c) = (a) x (1 + (b)) (d) (e) = (c) x (1 + (d)) (f) = (e) -
(c)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small Entity A........................ $4,754 11 $5,277 1 $5,330 $53
[[Page 20119]]
Small Entity B........................ 148,389 11 164,712 1 166,359 1,647
--------------------------------------------------------------------------------------------------------------------------------------------------------
In addition to the owners and operators discussed above, three U.S.
entities that receive revenue from pilotage services will be affected
by this final rule: The three pilot associations that provide and
manage pilotage services within the Great Lakes districts. Two of the
associations operate as partnerships, and one operates as a
corporation. These associations are designated with the same NAICS code
and small-entity size standards described above, but have fewer than
500 employees. Combined, they have approximately 65 employees in total
and, therefore, are designated as small entities. The Coast Guard
expects no adverse effect on these entities from this final rule
because the three pilot associations will receive enough revenue to
balance the projected expenses associated with the projected number of
bridge hours (time on task) and pilots.
---------------------------------------------------------------------------
\78\ 84 FR 20551, see table 37
---------------------------------------------------------------------------
Finally, the Coast Guard did not find any small not-for-profit
organizations that are independently owned and operated and are not
dominant in their fields that will be impacted by this rule. We did not
find any small governmental jurisdictions with populations of fewer
than 50,000 people that will be impacted by this rule. Based on this
analysis, we conclude this rulemaking will not affect a substantial
number of small entities, nor have a significant economic impact on any
of the affected entities.
Based on our analysis, this rule will have a less-than 1 percent
annual impact on 2 small entities; therefore, the Coast Guard certifies
under 5 U.S.C. 605(b) that this rule will not have a significant
economic impact on a substantial number of small entities.
C. Assistance for Small Entities
Under section 213(a) of the Small Business Regulatory Enforcement
Fairness Act of 1996, Public Law 104-121, we offer to assist small
entities in understanding this rule so that they can better evaluate
its effects on them and participate in the rulemaking. The Coast Guard
will not retaliate against small entities that question or complain
about this rule or any policy or action of the Coast Guard.
Small businesses may send comments on the actions of Federal
employees who enforce, or otherwise determine compliance with, Federal
regulations to the Small Business and Agriculture Regulatory
Enforcement Ombudsman and the Regional Small Business Regulatory
Fairness Boards. The Ombudsman evaluates these actions annually and
rates each agency's responsiveness to small business. If you wish to
comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR
(1-888-734-3247).
D. Collection of Information
This final rule calls for no new collection of information under
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). This rule
will not change the burden in the collection currently approved by OMB
under OMB Control Number 1625-0086, Great Lakes Pilotage Methodology.
E. Federalism
A rule has implications for federalism under Executive Order 13132
(Federalism) if it has a substantial direct effect on States, on the
relationship between the National Government and the States, or on the
distribution of power and responsibilities among the various levels of
government. We have analyzed this rule under Executive Order 13132 and
have determined that it is consistent with the fundamental federalism
principles and preemption requirements described in Executive Order
13132. Our analysis follows.
Congress directed the Coast Guard to establish ``rates and charges
for pilotage services.'' See 46 U.S.C. 9303(f). This regulation is
issued pursuant to that statute and is preemptive of State law as
specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a ``State or
political subdivision of a State may not regulate or impose any
requirement on pilotage on the Great Lakes.'' As a result, States or
local governments are expressly prohibited from regulating within this
category. Therefore, this final rule is consistent with the fundamental
federalism principles and preemption requirements described in
Executive Order 13132.
F. Unfunded Mandates
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538,
requires Federal agencies to assess the effects of their discretionary
regulatory actions. In particular, the Act addresses actions that may
result in the expenditure by a State, local, or tribal government, in
the aggregate, or by the private sector of $100,000,000 (adjusted for
inflation) or more in any one year. Although this rule will not result
in such expenditure, we do discuss the effects of this rule elsewhere
in this preamble.
G. Taking of Private Property
This rule will not cause a taking of private property or otherwise
have taking implications under Executive Order 12630 (Governmental
Actions and Interference with Constitutionally Protected Property
Rights).
H. Civil Justice Reform
This rule meets applicable standards in sections 3(a) and 3(b)(2)
of Executive Order 12988 (Civil Justice Reform) to minimize litigation,
eliminate ambiguity, and reduce burden.
I. Protection of Children
We have analyzed this rule under Executive Order 13045 (Protection
of Children from Environmental Health Risks and Safety Risks). This
rule is not an economically significant rule and would not create an
environmental risk to health or risk to safety that might
disproportionately affect children.
J. Indian Tribal Governments
This rule does not have tribal implications under Executive Order
13175 (Consultation and Coordination with Indian Tribal Governments),
because it will not have a substantial direct effect on one or more
Indian tribes, on the relationship between the Federal Government and
Indian tribes, or on the distribution of power and responsibilities
between the Federal Government and Indian tribes.
[[Page 20120]]
K. Energy Effects
We have analyzed this rule under Executive Order 13211 (Actions
Concerning Regulations That Significantly Affect Energy Supply,
Distribution, or Use). We have determined that it is not a
``significant energy action'' under that order because it is not a
``significant regulatory action'' under Executive Order 12866 and is
not likely to have a significant adverse effect on the supply,
distribution, or use of energy.
L. Technical Standards
The National Technology Transfer and Advancement Act, codified as a
note to 15 U.S.C. 272, directs agencies to use voluntary consensus
standards in their regulatory activities unless the agency provides
Congress, through OMB, with an explanation of why using these standards
would be inconsistent with applicable law or otherwise impractical.
Voluntary consensus standards are technical standards (e.g.,
specifications of materials, performance, design, or operation; test
methods; sampling procedures; and related management systems practices)
that are developed or adopted by voluntary consensus standards bodies.
This rule does not use technical standards. Therefore, we did not
consider the use of voluntary consensus standards.
M. Environment
We have analyzed this rule under Department of Homeland Security
Management Directive 023-01, Rev. 1, associated implementing
instructions, and Environmental Planning COMDTINST 5090.1 (series),
which guide the Coast Guard in complying with the National
Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made
a determination that this action is one of a category of actions that
do not individually or cumulatively have a significant effect on the
human environment. A Record of Environmental Consideration (REC)
supporting this determination is available in the docket. For
instructions on locating the docket, see the ADDRESSES portion of this
preamble.
This rule is categorically excluded under paragraphs A3 and L54 of
Appendix A, Table 1 of DHS Instruction Manual 023-01, Rev. 1.\79\
Paragraph A3 pertains to the promulgation of rules, issuance of rulings
or interpretations, and the development and publication of policies,
orders, directives, notices, procedures, manuals, advisory circulars,
and other guidance documents of the following nature: (a) Those of a
strictly administrative or procedural nature; (b) those that implement,
without substantive change, statutory or regulatory requirements; or
(c) those that implement, without substantive change, procedures,
manuals, and other guidance documents; and d) those that interpret or
amend an existing regulation without changing its environmental effect.
Paragraph L54 pertains to regulations which are editorial or
procedural. This rule involves: (1) Clarifying the rules related to the
working capital fund, (2) adjusting the base pilotage rates, and (3)
eliminating surcharges for administering the 2020 shipping season in
accordance with applicable statutory and regulatory mandates pursuant
to the Great Lakes Pilotage Act of 1960.
---------------------------------------------------------------------------
\79\ https://www.dhs.gov/sites/default/files/publications/DHS_InstructionManual023-01-001-01Rev01_508compliantversion.pdf.
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List of Subjects
46 CFR Part 401
Administrative practice and procedure, Great Lakes; Navigation
(water), Penalties, Reporting and recordkeeping requirements, Seamen
46 CFR Part 403
Great Lakes, Navigation (water), Reporting and recordkeeping
requirements, Seamen, Uniform System of Accounts
46 CFR Part 404
Great Lakes, Navigation (water), Seamen.
For the reasons discussed in the preamble, the Coast Guard amends
46 CFR parts 401, 403, and 404 as follows:
PART 401--GREAT LAKES PILOTAGE REGULATIONS
0
1. The authority citation for part 401 continues to read as follows:
Authority: 46 U.S.C. 2103, 2104(a), 6101, 7701, 8105, 9303,
9304; Department of Homeland Security Delegation No.
0170.1(II)(92.a), (92.d), (92.e), (92.f).
0
2. Amend Sec. 401.405 by revising paragraph (a) to read as follows:
Sec. 401.405 Pilotage rates and charges.
(a) The hourly rate for pilotage service on--
(1) The St. Lawrence River is $758;
(2) Lake Ontario is $463;
(3) Lake Erie is $586;
(4) The navigable waters from Southeast Shoal to Port Huron, MI is
$618;
(5) Lakes Huron, Michigan, and Superior is $337; and
(6) The St. Mary's River is $632.
* * * * *
PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM
0
3. The authority citation for part 403 continues to read as follows:
Authority: 46 U.S.C. 2103, 2104(a), 9303, 9304; Department of
Homeland Security Delegation No. 0170.1(II)(92.a), (92.f).
0
4. Amend Sec. 403.110 by:
0
a. Designating the text as paragraph (a); and
0
b. Adding paragraph (b).
The addition reads as follows:
Sec. 403.110 Accounting entities.
* * * * *
(b) Each Association will maintain a separate account called the
``Working Capital Fund.'' Each Association will deposit into the
working capital fund an amount each year at least equal to the amount
calculated in Step 5, 46 CFR 404.105. Working capital funds may only be
used for infrastructure improvements and infrastructure maintenance
necessary to provide safe, efficient, and reliable pilot service such
as pilot boat replacements, major repairs to pilot boats, non-recurring
technology purchases necessary for providing pilot services, or for the
acquisition of real property for use as a dispatch center, office
space, or pilot lodging. The Director may grant exceptions to the
requirements of this paragraph (403.110(b)) upon request by an
Association.
PART 404--GREAT LAKES PILOTAGE RATEMAKING
0
5. The authority citation for part 404 continues to read as follows:
Authority: 46 U.S.C. 2103, 2104(a), 9303, 9304; Department of
Homeland Security Delegation No. 0170.1(II)(92.a), (92.f).
Sec. 404.106 [Amended]
0
6. Amend Sec. 404.106 by removing the words ``return on investment''
and adding their place ``working capital fund''.
Dated: March 30, 2020.
R.V. Timme,
Rear Admiral, U.S. Coast Guard, Assistant Commandant for Prevention
Policy.
[FR Doc. 2020-06968 Filed 4-8-20; 8:45 am]
BILLING CODE 9110-04-P
