Rates for Pilotage on the Great Lakes, 12082-12104 [05-4586]

Agencies

• Coast Guard
• DEPARTMENT OF HOMELAND SECURITY

[Federal Register Volume 70, Number 46 (Thursday, March 10, 2005)]
[Rules and Regulations]
[Pages 12082-12104]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-4586]



[[Page 12081]]

-----------------------------------------------------------------------

Part III





Department of Homeland Security





-----------------------------------------------------------------------



Coast Guard



-----------------------------------------------------------------------



46 CFR Part 401



Rates for Pilotage on the Great Lakes; Interim Rule

Federal Register / Vol. 70, No. 46 / Thursday, March 10, 2005 / Rules 
and Regulations

[[Page 12082]]


-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Part 401

[USCG-2002-11288]
RIN 1625-AA38 (Formerly RIN 2115-AG30)


Rates for Pilotage on the Great Lakes

AGENCY: Coast Guard, Department of Homeland Security.

ACTION: Interim rule; request for comments.

-----------------------------------------------------------------------

SUMMARY: The Coast Guard is changing the rates for pilotage on the 
Great Lakes. The last full-rate adjustment for pilotage on the Great 
Lakes became effective in August 2001, and a partial-rate adjustment 
became effective January 12, 2004. This change is necessary both to 
generate sufficient revenues for allowable expenses and to ensure that 
the pilots receive target compensation.

DATES: This interim rule is effective April 11, 2005. Comments and 
related material must reach the Docket Management Facility on or before 
June 8, 2005.

ADDRESSES: You may submit comments identified by Coast Guard docket 
number USCG-2002-11288 to the Docket Management Facility at the U.S. 
Department of Transportation. To avoid duplication, please use only one 
of the following methods:
    (1) Web site: https://dms.dot.gov.
    (2) Mail: Docket Management Facility, U.S. Department of 
Transportation, 400 Seventh Street, SW., Washington, DC 20590-0001.
    (3) Fax: 202-493-2251.
    (4) Delivery: Room PL-401 on the Plaza level of the Nassif 
Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 
p.m., Monday through Friday, except Federal holidays. The telephone 
number is 202-366-9329.
    (5) Federal eRulemaking Portal: http: //www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, 
call Paul Wasserman, Director, Great Lakes Pilotage, Office of 
Waterways Management Plans and Policy (G-MWP), U.S. Coast Guard, 
telephone 202-267-2856 or e-mail him at pwasserman@comdt.uscg.mil. If 
you have questions on viewing or submitting material to the docket, 
call Andrea M. Jenkins, Program Manager, Docket Operations, telephone 
202-366-0271.

SUPPLEMENTARY INFORMATION:

I. Preamble Organization

    This preamble is organized as follows:

II. Public Participation and Request for Comments
    A. Submitting comments
    B. Viewing comments and documents
    C. Privacy Act
III. Public Meeting
IV. Program History
V. Discussion of Comments
    A. General
    B. Significance
    C. Immediate Rate Implementation
    D. New Data for Calculation of Rate
    E. Adjustment for Lost Revenue
    F. Expenses
    1. General
    2. Source Documentation
    3. Legal Fees
    4. Non-Recurring Expenses
    5. Lobbying Expenses
    6. Subsistence Payments
    7. Travel Expenses
    8. Business Promotions
    G. Health Insurance Premiums for Retired Pilots
    H. Accounts Receivable
    I. Pilotage Dues
    J. Investment Base
    K. Inflation Rate
    L. 401(k) Plans
    M. Number of Pilots Needed
    N. Delay and Detention
    O. Target Pilot Compensation
    1. The 54-Day Multiplier
VI. Discussion of the Rule
    A. Ratemaking Process and Methodology
    B. PART 1: PILOTAGE RATE CHARGES--SUMMARIZED
    C. PART 2: CALCULATING THE RATE MULTIPLIER
    1. Step 1: Projection of Operating Expenses
    i. Submission of Financial Information
    ii. Determination of Recognized Expenses
    iii. Social Security and Medicare Expenses
    iv. Reimbursed Expenses
    v. Not Recognized Expenses
    vi. Reclassified Expenses
    vii. Undocumented Expenses
    viii. Foreseeable Circumstances
    ix. Adjustment for Inflation
    x. Projection of Operating Expenses
    2. Step 2: Projection of Target Pilot Compensation
    i. Determination of Target Pilot Compensation
    ii. Determination of Number of Pilots Needed
    ii. Projection of Target Pilot Compensation
    3. Step 3: Projection of Revenue
    i. Projection of Revenue
    ii. Calculation of Investment Base
    3. Step 5 Determination of Target Rate of Return on Investment
    4. Step 6 Adjustment Determination
    i. Projected Rate of Return on Investment
    ii. Revenue Needed Adjustment Determination
    5. Step 7: Adjustment of Pilotage Rates
VII. Regulatory Evaluation
VIII. Small Entities
IX. Assistance for Small Entities
X. Collection of Information
XI. Federalism
XII. Undated Mandates Reform Act
XIII. Taking of Private Property
XIV. Civil Justice Reform
XV. Protection of Children
XVI. Indian Tribal Governments
XVII. Energy Effects
XVIII. Technical Standards
XIX. Environment

Public Participation and Request for Comments

    We encourage you to participate in this rulemaking by submitting 
comments and related materials. All comments received will be posted, 
without change, to https://dms.dot.gov and will include any personal 
information you have provided. We have an agreement with the Department 
of Transportation (DOT) to use the Docket Management Facility. Please 
see DOT's ``Privacy Act'' paragraph below.
    Submitting comments: If you submit a comment, please include your 
name and address, identify the docket number for this rulemaking (USCG-
2002-11288), indicate the specific section of this document to which 
each comment applies, and give the reason for each comment. You may 
submit your comments and material by electronic means, mail, fax, or 
delivery to the Docket Management Facility at the address under 
ADDRESSES; but please submit your comments and material by only one 
means. If you submit them by mail or delivery, submit them in an 
unbound format, no larger than 8\1/2\ by 11 inches, suitable for 
copying and electronic filing. If you submit them by mail and would 
like to know that they reached the Facility, please enclose a stamped, 
self-addressed postcard or envelope. We will consider all comments and 
material received during the comment period. We may change this rule in 
view of them.
    Viewing comments and documents: To view comments, as well as 
documents mentioned in this preamble as being available in the docket, 
go to https://dms.dot.gov at any time and conduct a simple search using 
the docket number. You may also visit the Docket Management Facility in 
room PL-401 on the Plaza level of the Nassif Building, 400 Seventh 
Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through 
Friday, except Federal holidays.
    Privacy Act: Anyone can search the electronic form of all comments 
received into any of our dockets by the name of the individual 
submitting the comment (or signing the comment, if submitted on behalf 
of an association, business, labor union, etc.). You may review the 
Department of Transportation's Privacy Act Statement in the Federal 
Register published on

[[Page 12083]]

April 11, 2000 (65 FR 19477), or you may visit https://dms.dot.gov.

Public Meeting

    We do not now plan to hold a public meeting. But you may submit a 
request for one to the Docket Management Facility at the address under 
ADDRESSES explaining why one would be beneficial. If we determine that 
one would aid this rulemaking, we will hold one at a time and place 
announced by a later notice in the Federal Register.

Program History

    The U.S. waters of the Great Lakes and St. Lawrence Seaway to Snell 
Lock is divided into three pilotage districts which are further divided 
into Areas. Each district is administered by an Association (any 
organization that holds or held a Certificate of Authorization issued 
by the Director of Great Lakes Pilotage to operate a pilotage pool on 
the Great Lakes). District One, which contains Areas 1 and 2, includes 
all U.S. waters of the St. Lawrence River between the international 
boundary at St. Regis and a line at the head of the river running (at 
approximately 127[deg] True) between Carruthers Point Light and South 
Side Light extended to the New York shore. District Two, containing 
Areas 4 and 5, includes all U.S. waters of Lake Erie westward of a line 
running (at approximately 026[deg] True) from Sandusky Pierhead Light 
at Cedar Point to Southeast Shoal Light; all waters contained within 
the arc of a circle of one mile radius eastward of Sandusky Pierhead 
Light; the Detroit River; Lake St. Clair; the St. Clair River, and 
northern approaches thereto south of latitude 43[deg]05'30'' N. 
District Three, containing Areas 6, 7, and 8, includes all U.S. waters 
of the St. Mary's River, Sault Ste. Marie Locks and approaches thereto 
between latitude 45[deg]59' N at the southern approach and longitude 
84[deg]33' W at the northern approach.
    The Great Lakes Pilotage Act of 1960 requires foreign flag vessels 
and U.S. flag vessels in foreign trade to use a federal Great Lakes 
Registered Pilot while transiting the St. Lawrence Seaway and the Great 
Lakes system. 46 U.S.C. Chapter 93. The Coast Guard is responsible for 
administering this pilotage program, which includes setting rates for 
pilotage service.
    The Coast Guard pilotage regulations require annual reviews of 
pilotage rates and the creation of a new rate at least once every five 
years, or sooner, if the annual review shows a need. 49 CFR part 404. 
In order to facilitate this process, each pilot association must 
provide annual financial reports to the Coast Guard. The Coast Guard 
contract accountant uses these reports, in connection with annual 
reviews of each association's records, to prepare independent financial 
reports. The Coast Guard uses these reports in its annual evaluation of 
whether a rate adjustment is necessary and appropriate.
    The last full-rate adjustment became effective in August 2001, and 
a partial-rate adjustment became effective on January 12, 2004. The 
2004 partial-rate adjustment was based on calculations using 2001 
financial data.
    The rates in this interim rule are based on data from the 
``Independent Accountant's Reports on Applying Agreed Upon Procedures, 
Financial Statement Analysis, Supplementary Financial Information and 
Report of Findings and Recommendations 31 December 2002'' for each 
District and the 2003 AMO union contracts. The Coast Guard followed the 
ratemaking analyses and methodology in 46 CFR part 404 and Appendix A 
to that part.
    To determine whether projected traffic under the current rate 
structure is adequate to raise enough revenue to cover all costs and 
permit the pilots to earn target pilot compensation, the rate-setting 
methodology looks at projected and target pilot compensation, necessary 
and reasonable operating expenses, return on investment, and revenue 
projections. (Target pilot compensation is set based on the American 
Maritime Officers' (AMO) union contract.)
    The last full-rate adjustment became effective August 13, 2001. On 
January 23, 2003, the Coast Guard published a notice of proposed 
rulemaking (NPRM) using 2001 financial information. 68 FR 3202. That 
NPRM recommended a 25 percent average increase in pilotage rates. This 
recommended increase was based on a number of factors, including an 
approximately 20 percent increase in the AMO union contract, an 
adjustment for inflation, and other increased costs. The public was 
afforded many opportunities to comment--there were two public meetings 
and an extended comment period.
    The Coast Guard got comments from the pilots, the Great Lakes 
maritime community, and other agencies that raised issues that had not 
been addressed by the Coast Guard in earlier ratemakings. These 
comments included the impact of pilotage rates on foreign flag shipping 
in the Great Lakes, the method for calculating components of the rate 
multiplier, target pilot compensation, and projection of revenues and 
expenses.
    In response, the Coast Guard issued an interim rule that 
established a partial rate adjustment of five percent to implement the 
uncontested parts of the rate increase in time for the 2004 season, and 
allow the Coast Guard time to evaluate the remaining open issues. 68 FR 
69564, Dec. 12, 2003. Corrections to this interim rule were published 
the following January. 69 FR 128, Jan. 2, 2004, and 69 FR 533, Jan. 6, 
2004.
    This interim rule will resolve the remaining rate calculation 
issues raised by the January 2003 NPRM. We will calculate a full rate 
adjustment using the methodology in 46 CFR part 404.
    The rates in this interim rule are based on data from the 
``Independent Accountant's Reports on Applying Agreed Upon Procedures, 
Financial Statement Analysis, Supplementary Financial Information and 
Report of Findings and Recommendations 31 December 2002'' for each 
District and the 2003 AMO union contracts. The Coast Guard followed the 
ratemaking analyses and methodology in 46 CFR part 404 and Appendix A 
to that part.

Discussion of Comments

    Significant rules often require additional staffing and review of 
each document in the rulemaking process. The Coast Guard's plan to 
issue an SNPRM, provide time for public comment, and then issue the 
rate change cannot be completed before the end of the 2004 navigation 
season. Because of the amount of time already consumed in developing 
this full-rate calculation and to ensure that a new rate is not delayed 
beyond the start of the 2005 navigation season, the Coast Guard has 
decided to issue the full-rate calculation as an interim rule with an 
effective date just before the start of the 2005 navigation season. 
Issuing an interim rule will allow us to receive and evaluate comments 
and make any necessary changes, while at the same time, allow the new 
rates to become effective in time for the 2005 season.

General

    The Coast Guard received 27 comments in response to the December 
2003 interim rule. Many of these comments expressed concerns about the 
calculations done for the partial-rate adjustment in the interim rule; 
about what expenses were allowed; and about the monthly multiplier used 
to calculate the target pilot compensation. We received comments from 
individual pilots, pilots' Associations, and from the Great Lakes 
Pilotage User Group, which includes the Shipping Federation of Canada 
and its members, the U.S. Great Lakes Shipping Association, the Chamber 
of Maritime Commerce, and

[[Page 12084]]

the American Great Lakes Ports Association, Inc.
    To the extent that NPRM comments have previously been addressed in 
the December 2003 IR, no further responses have been made to comments 
in the NPRM. However, certain issues raised in the NPRM, were deferred 
in the IR for further review and response in SNPRM/IR. Those issues 
have been included in preamble of this document.

Significance

    Issue: We received several comments on the Coast Guard's 
determination that this rulemaking was not significant under Executive 
Order 12866. Three comments expressed agreement with the determination 
of ``not significant'' but stated the rule ``would have a substantial 
impact on the type and quality of pilotage services'' and ``* * * the 
pilots concur with the decision in the interim rate notice of the Coast 
Guard, the Department of Homeland Security, and the Office of 
Management and Budget that this proposed rate adjustment is not 
significant under section 3(f) of Executive Order 12866. (68 FR 
69568).'' Similarly, the pilots concurred with the statement in the 
NPRM that, ``[w]hile these adjustments to pilotage rates may seem 
relatively large they actually represent a small change to the overall 
cost of moving these vessels through the St. Lawrence Seaway System.'' 
(68 FR 3213).
    One comment, disagreeing with the ``not significant'' 
determination, repeated from its earlier comments that the proposed 
rate increase was a ``significant regulatory action,'' under Executive 
Order 12866 and thus requires an economic analysis of its impact.
    Response: Although this rulemaking is not economically significant 
under Executive Order 12866, OMB has determined that it is a 
significant rulemaking action and has reviewed it under that Order.
    The Coast Guard contracted for an economic analysis of rate changes 
for pilotage on the Great Lakes and it is available for review in the 
docket. An analysis of the changes in this interim rule is set out in 
the Regulatory Evaluation of this preamble.

Immediate Rate Implementation

    Issue: In the 2003 interim rule, we said we planned to publish a 
supplemental notice of proposed rulemaking (SNPRM) with an opportunity 
to comment before effecting a permanent rate adjustment during the 
Spring 2004. Numerous comments urged the Coast Guard to issue new 
pilotage rates as an interim rule, effective immediately. One comment 
stated that the pilotage pools are working on an expense base that is 
nearly a decade old. Another comment said that the last rate adjustment 
in pilotage rates for the Great Lakes went into effect in August 2001. 
The comment further stated that ``it has been almost three years since 
those rates have been adjusted, even though Federal regulations require 
the Coast Guard to perform an annual review and adjustment of the 
rates.'' One comment stated this rate is long overdue and an interim 
final rule should be in place before the start of the 2004 navigation 
season.
    Some comments urged the Coast Guard not to follow the December 12, 
2003, interim rule with an SNPRM, stating that an SNPRM, which is not 
effective immediately, but rather subject to public comment, would 
delay the effective date of any further rule and serve no purpose 
except delay. Another comment stated the Coast Guard should issue the 
rate now as an interim final rule, effective immediately, while 
continuing to accept comments. One comment stated that a delay in the 
rate serves as a subsidy to foreign shipping companies, who have 
tripled their freight rates over the 2003 shipping season.
    One comment stated that the ``most glaring point is that it is now 
the second month of 2004 and we are addressing these comments to a 
docket established in 2002 despite the fact that the Coast Guard is 
required to routinely review and establish pilotage rates on an annual 
basis. One of the purposes of an annual review is to adjust rates 
periodically on an incremental basis that avoids the impact and 
political fallout of large adjustments.''
    One comment stated it is within the Coast Guard's administrative 
authority to issue this rate as an interim final rule, effective 
immediately, receive further comments, and later adjust the rule, if 
necessary.
    Response: Although the NPRM and the 2003 interim rule were not 
``significant'' under Executive Order 12866,this interim rule is 
``significant.'' Significant rules often require additional staffing 
and review of each document in the rulemaking process. The Coast 
Guard's plan to issue an SNPRM, provide time for public comment, and 
then issue the rate change cannot be completed before the end of the 
2004 navigation season. Because of the amount of time already consumed 
in developing this full-rate calculation and to ensure that a new rate 
is not delayed beyond the start of the 2005 navigation season, the 
Coast Guard has decided to issue the full-rate calculation as an 
interim rule with an effective date just before the start of the 2005 
navigation season. The Coast Guard received comments on both the NPRM 
and 2003 interim rule. Issuing an interim rule will allow us to receive 
and evaluate additional comments and make any necessary changes before 
finalizing the rates, while at the same time, allowing the new rates to 
become effective in time for the 2005 season.

New Data for Calculation of Rate

    Issue: Several comments urged the Office of Great Lakes Pilotage 
``to issue an interim final rate using current rate and revenue figures 
for each of the three districts.''
    One comment supported using updated data and believed it would 
result in a more accurate rate setting. However, the comment urged the 
Coast Guard ``to make the new data (including the AMO union contract 
and 2002 audits) available to the public and provide adequate time for 
comment.''
    Another comment stated that the Coast Guard should use the most 
current figures available. The pilots asked that use of the most 
current figures not be used as a reason to recalculate, and, therefore, 
substantially delay the rate.
    One comment also stated that ``U.S. laker mate and master 
compensation is currently more than 16 percent higher than target pilot 
compensation.'' The comment suggested that ``the Coast Guard mitigate 
this chronic inequity as much as possible by always using the latest 
available AMO union contract and the expense figures in every rate it 
enacts.''
    Response: In calculating the proposed rate in the NPRM, and the 
partial rate in the interim rule, the Coast Guard used data from the 
2002 AMO union contracts and the 2001 independent accountant's reports 
for each District. In the December 2003, interim rule, we said we were 
considering using the data from the 2003 AMO union contracts for our 
full-rate calculation. We also proposed using the most current (2002) 
expense and revenue figures from each of the three Districts for the 
full-rate calculation. We specifically requested comments on whether we 
should use the newer data to calculate the full-rate adjustment.
    The comments on this issue supported using updated data because it 
would result in a more accurate rate setting, and requested that the 
new data be made available to the public with adequate time for 
comment. The Coast Guard agrees with this rationale.

[[Page 12085]]

    In calculating this full-rate adjustment, the Coast Guard used the 
data from the 2003 AMO union contract and the 2002 independent 
accountant's reports for each District. These materials are available 
for review in the public docket.

Adjustment for Lost Revenue

    Issue: One comment requested that an adjustment be added to this 
rate so that the pilots would be reimbursed for monies lost because 
this rate was not in effect at the beginning of the 2003 navigation 
season.
    Response: Although the regulations provide for some adjustments 
during calculation of pilotage rates, those adjustments relate to 
correcting erroneous amounts and classifications of expenses and 
revenues; determining and using an inflation adjustment; and an 
adjustment mechanism for ``foreseeable circumstances.'' The type of 
adjustment suggested by the comment to recover monies for services 
prior to establishment of the new rate is not allowed by the current 
regulations. The Coast Guard has not included any adjustment for 
services provided by the pilots prior to the establishment of the new 
rate. The regulations do not provide for retroactive application of 
rates or prospective adjustments to fees paid by shippers or earned by 
pilots.

Expenses

    General. The Coast Guard received comments concerning particular 
types of expense items. Some comments disagreed with the Coast Guard's 
reclassification of an expense as pilot compensation or disagreed with 
amounts which had been disallowed and removed from the expense base. 
These expense issues are discussed individually below.
    Some comments related to particular expense items in previous rate 
calculations and reviews of Association financial statements. This 
section of the preamble does not discuss specific expense items 
incurred prior to those in the 2002 financial statements. We do, 
however, generally discuss various types of expenses and whether or not 
these expenses are normally recognized and allowed and how these types 
of expenses were treated in calculating this full-rate adjustment.
    In determining whether expenses should be allowed, the Coast Guard 
applied the guidelines for recognition of expenses set out in 46 CFR 
404.5(a)(1) and (a)(2). Under 46 CFR 404.5(a)(1), each expense item is 
evaluated to determine if it is necessary for the provision of pilotage 
service, and if so, what dollar amount is reasonable for that expense 
item. Criteria for determining reasonableness of expense items are set 
out in 46 CFR 404.5(a)(2), which requires that each expense item be 
measured against one or more of the following: Comparable or similar 
expenses paid by others in the maritime industry; comparable or similar 
expenses paid by other industries; or, U.S. Internal Revenue Service 
guidelines.

Source Documentation

    Issue: Two comments stated that ``source documentation'' should be 
made available to the public so it can determine if the Coast Guard 
correctly applied the ratemaking analyses and methodology found in 
Appendix A to 46 CFR part 403 in the regulations. One comment asked 
that the amount and nature of legal expenses incurred by two Districts, 
as well as travel expenses and the amounts invoiced for services 
provided before August 13, 2001, for these Districts, be made public 
and available for comment before an SNPRM is published.
    Response: The Coast Guard disagrees. Under 46 CFR 403.105(b), each 
Association is required to maintain ``all books, records and memoranda 
in a manner that will permit audit and examination by the Director or 
the Director's representatives.'' Section 403.105 does not require that 
individual source documents be submitted to the Coast Guard or made 
available to the public. However, any financial statements, data, and 
other materials the Coast Guard used in calculating the rate in this 
interim rule are in the docket for this rulemaking and are available 
for inspection and copying at the address and web site found in the 
ADDRESSES section.

Legal Fees

    Issue: In response to the December 2003, interim rule, one comment 
stated the Coast Guard must establish a methodology for determining the 
appropriate amount of legal fees to justify inclusion of such fees into 
the expense base.
    Response: The Coast Guard disagrees. Legal fees necessary for the 
provision of pilotage in reasonable amounts for the expense items 
submitted are allowed if they are substantiated as set out in 46 CFR 
404.5. In 2002, all legal fees submitted as expenses were recognized 
and allowed.

Non-Recurring Expenses

    Issue: In the interim rule, the Coast Guard discussed recurring and 
non-recurring expenses in conjunction with Erie Leasing Inc., and said 
it would review those issues before calculating a full-rate adjustment.
    Response: It has done so. Erie Leasing Inc., was an affiliate 
company owned by the Lakes Pilot Association in District Two. It 
provided support services to the pilot association through its rental 
and leasing of pilot boats, automobiles, and office space. Erie Leasing 
Inc., no longer exists. It was dissolved in 2001 and its assets were 
sold off. Since District Two has divested itself of Erie Leasing and 
because we used the 2002 financial data, there are no leasing expense 
issues in the current calculation.
    Issue: One comment stated that only recurring expenses should be 
included in the expense base. Another comment stated that ``including 
non-recurring costs will artificially inflate rates for pilotage 
services * * * and that the Coast Guard must perform the critical 
analysis to assure the segregation of those costs from the expense 
base.'' Another comment stated that the Coast Guard should remove non-
recurring legal expenses from the expense base.
    Response: Pilot Associations may incur unusually large expenses in 
a single year which will not recur in subsequent years. These expenses 
may be related to leasing of pilot boats or to the cost of operation or 
maintenance of purchased pilot boats, or to legal fees related to 
litigation, or other occasional expenses. All expenses, recurring and 
non-recurring, are subject to the same criteria in 46 CFR 404.5.
    In these cases, the regulations do not prohibit the inclusion of 
non-recurring expenses in the expense base. Any expense, recurring or 
non-recurring, if recognized as necessary for the provision of pilotage 
services, and if reasonable in amount, is an allowable item in the 
expense base.

Lobbying Expenses

    Issue: One comment asserted that the Coast Guard had not removed 
all lobbying expenses from the expense base used in the partial-rate 
calculation.
    Response: This comment is incorrect. Under 46 CFR 404.5(a)(8)(ii), 
lobbying expenses are one of five specific expenses that are not 
recognized as expenses for ratemaking purposes. In the 2002 expense 
base submissions used in this calculation, the lobbying expenses for 
Districts One and Three were removed from their legal fee expense item. 
District Two confirmed that they had no lobbying expenses in 2002.

Subsistence Payments

    Issue: One comment said the Coast Guard, ``needs to allow 
subsistence expenses in the rate base'' and since

[[Page 12086]]

they provided the Office of Great Lakes Pilotage documentation in the 
form of source forms and dispatch sheets, that the full amount should 
be allowed in the expense base.
    One comment said pilots should be allowed subsistence based on the 
number of days worked which the District does substantiate as to time, 
place, and purpose (dispatching forms and source forms are submitted to 
the Director on a monthly basis). Further, the comment stated this 
methodology is acceptable for IRS purposes. IRS Rev. Proc. 2002-63. 
Sec. 3.03 states, ``[s]uch allowance may be paid with respect to the 
number of days away from home in connection with the performance of 
services as an employee * * *.'' The subsistence payments are paid 
separately and clearly identified as such. In addition, the Association 
can provide substantiation as to time, place, and purpose.
    Response: Subsistence expenses are already accounted for, either 
directly or indirectly. For 2002, in District One, subsistence (per 
diem and travel) was reimbursed based upon adequately prepared and 
documented contemporaneous log entries and reported on a per trip 
basis. Any amount over $75 was documented as required by IRS Code 
requirements for substantiation of travel-related expenses. All 
District One travel expenses were allowed.
    District Two paid their pilots a daily meals and incidental expense 
allowance of $38 per day, based on days available, approximately 265 
days per pilot. This amount was not a reimbursement for expenses 
actually incurred and was disallowed because the Department of 
Transportation guidance incorporating the Federal Travel Regulations in 
41 CFR part 301-11 do not permit payments based on days available for 
travel. Internal Revenue Service Regulations 1.62-2(c) and Rev. Proc. 
2001-47 allow for ``reasonable business practice'' in reimbursement of 
per diem costs. Using Federal Travel Regulations' established 
allowances for Transportation workers daily meals and expenses in 41 
CFR part 301-11, the per diem allowance was recalculated allowing per 
diem for each pilot for 200 travel days, which included days engaged in 
pilotage, travel between assignments, and down time at remote locations 
awaiting dispatch. The 200 days was based on the number of days worked 
according to a schedule provided by the Association.
    In District Three, the pilots reported their per diem expenses to 
the Association but did not get reimbursed for them directly. Instead, 
pilot per diem was calculated according to a schedule provided by the 
Association, using the number of days worked. This per diem allowance 
approximated 200 travel days per pilot. Temporarily registered pilots 
were paid a per diem allowance. All pilots were reimbursed for actual 
hotel and temporary lodging expenses.

Travel Expenses

    Issue: One comment objected to the Coast Guard reclassifying $8,600 
of travel expense as pilot compensation. The comments stated these 
amounts represented reimbursement to pilots for attendance at board of 
directors meetings as well as meetings regarding other District Two 
business (insurance, etc.) and were reimbursements for travel expense 
and not compensation to the pilots.
    Response: Under IRS regulation 1.62-2(c)(5), reimbursement for 
travel costs that are not regularly reported as expenses to employers 
(a non-accountable plan) are fully taxable to the employee and subject 
to FICA and income tax withholding. The $8,600 travel expense relates 
to an adjustment made to District Two's financial position as noted in 
the 2003 interim rule. District Two reported a travel expense of 
$8,600, which was reclassified as pilot compensation. These amounts 
represented unaccounted for payments by the Association to pilots for 
attendance at board of directors meetings as well as other District Two 
business meetings. In this case, pilots were given cash to conduct 
their travel without a requirement to account for the use of the money 
or to repay amounts not expended in connection with business. 
Accordingly, these amounts were properly considered compensation and 
not expenses.
    With respect to the 2002 financial reports, the Coast Guard 
adjusted and reclassified travel expenses reported by District One and 
District Three. In District One, $10,500, and in District Three, 
$146,907, in pilot travel expenses, were reclassified as operating 
expenses from pilot compensation.

Business Promotions

    Issue: One comment stated the Director, Great Lakes Pilotage, 
incorrectly disallowed a 2001 business promotion expense of $74 as 
unrelated to the provision of pilotage services. District Two provides 
services in addition to pilotage to lakers (vessels that operate 
entirely within the Great Lakes system). The revenue from lakers was 
$8,126 for 2001. District Two advertises and promotes this service as a 
means of generating revenue to offset total boat expenses.
    Response: The Coast Guard disagrees. Although the comment related 
to 2001 expenses, the 2002 independent accountant's report disallowed 
similar expenses and the Coast Guard adopted the recommendation. The 
regulations in Sec.  404.5(a)(5) state that, ``[f]or ratemaking 
purposes, the revenues and expenses generated from Association 
transactions that are not directly related to the provision of pilotage 
services are included in ratemaking calculations as long as the 
revenues exceed the expenses from these transactions.'' However, the 
promotional advertisement did not advertise the specific service to be 
provided, but rather contained only the name of the Association. The 
business promotion expenses were not specifically related to offering 
services other than pilotage, but were incurred generally to create 
goodwill in the community; therefore, the expenses will not be 
recognized.

Health Insurance Premiums for Retired Pilots

    Issue: One comment stated that the Office of Great Lakes Pilotage 
needs to continue to allow health insurance paid to two individual 
retired pilots in the expense base.
    Response: Under 46 CFR 404.5(a)(6), medical, pension, and other 
benefits paid to pilots, or for the benefit of pilots, by the 
Association are treated as pilot compensation. The amount recognized 
for each of these benefits is the cost of these benefits in the most 
recent AMO union contract for first mates on Great Lakes vessels. The 
AMO union contract has been used since the ratemaking methodology was 
amended effective June 12, 1995. The AMO union contract was used in the 
1997 and 2001 final rulemaking and the 2003 interim rule. The AMO union 
contract also represents most first mates and masters working on the 
Great Lakes. To remain consistent, we will continue to use the AMO 
union contracts as the basis in our calculations of target pilot 
compensation. That contract allows for lifetime health insurance for 
all active and retired first mates, and the cost of health insurance 
for retired pilots is not otherwise provided for as ``target 
compensation'' in the calculated compensation base. Therefore, these 
costs are properly included in the expense base. In District Two, 
$19,494 for health insurance for retirees was added to the expense base 
from pilot compensation.

[[Page 12087]]

Accounts Receivable

    Issue: One comment asked whether accounts receivable should be 
included in the revenue base.
    Response: Accounts receivable is included in revenue on the accrual 
basis of accounting when calculating the revenue base. All three 
Districts use the accrual system, including accounts receivable in the 
revenue base in accordance with generally acceptable accounting 
principles.

Pilotage Dues

    Issue: One comment stated that only 15 percent of the American 
Pilots Association dues expense should have been disallowed for 
lobbying in 2001, and that 85 percent of the dues amount should have 
been added back into the expense base for District Two. The comment 
stated, ``it is absolutely necessary that pilots belong to professional 
organizations which keep them informed of current changes in the 
pilotage industry. This is not compensation to the pilots. These dues 
are reasonable and proper business expenses.''
    Response: All of the American Pilots Association dues expenses were 
not prohibited as lobbying expenses; they were reclassified as pilot 
compensation. American Pilots Association dues are not an expense. 
Union pilots who work for domestic shipping companies must pay their 
own dues and the amounts paid by the pilotage organizations for the 
benefit of pilots have been correctly reclassified as pilot 
compensation, the use of which to pay dues is discretionary and 
personal to the pilots.
    As set out in 46 CFR 404.5(a)(6), medical, pension, and other 
benefits paid to pilots, or for the benefit of pilots, are treated as 
pilot compensation. Because union dues are ``other benefits,'' they 
have been consistently treated as such and have, therefore, been 
properly classified as compensation. No provision for the payment of 
union dues by employers is provided for in the current AMO union 
contract. The allowability of the lobbying expense portion of the dues 
is therefore not an issue.
    In this computation, pilotage dues of $26,210 and $6,600 from 
District Three; $15,840 from District Two; and $13,970 from District 
One were all removed from the expense base and reclassified as pilot 
compensation.

Investment Base

    Issue: One comment said the target return on investment should be 
increased from 0.0704 to a ``realistic'' number, which is probably more 
than double this figure.
    Another comment stated that, ``in the rate methodology, we find it 
difficult to accept that investment in assets necessary to provide 
pilotage services is recognized only at a rate of return on investment 
equivalent to high quality bonds. High quality bonds are a safe, 
passive investment requiring no management or risk. That is not the 
case in the pilotage environment in the Great Lakes or in any other 
area.''
    A third comment said, ``we believe a fair return on pilot assets 
would be a minimum of 15 percent to recognize lost opportunity costs 
from alternative available investments for their financial assets.''
    One comment stated that wrong numbers were used for the investment 
base's return on investment for one of the Districts. The comment also 
stated the return on investment should be more than double the 0.0704 
used in the interim rule.
    Response: In calculating the investment base for 2002, we are 
required to use the Investment Base Formula in Appendix B to 46 CFR 
part 404. We must calcualate the investment base to project each 
association return on investment pursuant to 46 CFR part 404, Appendix 
A, Step 4. Under step 5(2) of Appendix A, it states that, ``the allowed 
Return on Investment (ROI) is based on the preceding year's average 
annual rate of return for new issues of high grade corporate 
securities.'' We have used Moody's AAA bond rate for this purpose since 
the methodology was adopted in 1995. Moody's Corporation is a publicly 
traded company (NYSE:MCO) that provides financial services, including 
credit ratings, research, and risk analysis.
    The investment base reported by each District for 2002, and 
reviewed by the independent accountant, was incorporated into the 
independent accountant's report for each District without adjustment. 
These amounts were used for the projection of return on investment and 
in the calculation of this rate.

Inflation Rate

    Issue: One comment stated the inflation rate for the full-rate 
adjustment should be increased to five or six percent instead of the 
two percent found in the interim rule.
    Response: Appendix A to 46 CFR part 404, Step 1.C., ``Adjustment 
for Inflation or Deflation,'' requires an inflation adjustment for 
which we used the preceding year's change in the U.S. Department of 
Labor, Bureau of Labor Statistics, ``Midwest Economy--Consumer 
Prices.'' This is a separate adjustment to expenses and is in addition 
to inflation adjustments to the union contract. The ``Midwest Economy--
Consumer Prices'' index of the North Central Region has been 
traditionally used as part of the ratemaking methodology and it most 
accurately reflects economic changes over time in the Great Lakes 
region. When, as here, several years elapse between rate adjustments, 
the inflation rate will be compounded, that is, the adjustments become 
cumulative. In this ratemaking, we are using an inflation adjustment of 
1.9 percent for each of the years 2003 and 2004 to properly account for 
inflation from the date of the last full ratemaking in 2001.

401(k) Plans

    Issue: Three comments discussed whether 2001 contributions to 
employee 401(k) plans were calculated correctly and how much an 
employer is allowed to contribute to those 401(k) plans. Of those, one 
comment said employer contributions to those 401(k) plans had been 
improperly calculated--that it should be based on a first mate's daily 
pay. Another comment stated that the Coast Guard had correctly 
calculated the employer portion by using a first mate's total pay, 
instead of just their daily pay. Another comment said that all three 
Districts should be allowed to add expenses for contributions, not just 
two of them (Districts Two and Three).
    Response: As of August 1, 2001, the AMO union contracts required 
employers to match employee contributions to a 401(k) plan in an amount 
equal to 42 percent of the employee contribution up to 4.2 percent of 
the employee's compensation. Effective August 1, 2002, the matching 
amount was increased to 50 percent not to exceed 5 percent of employee 
compensation.
    In direct response to the three comments, the Coast Guard, 
consistent with prior years' calculations, has used the AMO union 
contracts for the purposes of computing employer contributions to 
401(k) plans, we have consistently used the AMO union contracts' 
definition of ``compensation'' of a contributing employee--``the 
pilots' wages for time worked, not including benefits.'' We have 
included in total pilot compensation an amount for the first four 
months equal to 42 percent of the pilot's contribution up to 4.2 
percent of a contributing pilot's base wages and for the next five 
months, a 50 percent employer match up to 5 percent of a contributing 
pilot's base wages. This amount is included as a benefit in total pilot 
compensation.

[[Page 12088]]

Number of Pilots Needed

    Issue: A number of comments criticized the Coast Guard's 
determination of the number of pilots needed to provide pilotage 
services for the projected volume of vessel traffic. One comment said 
that the result of not rounding up the number of pilots needed in each 
area separately will be to under-staff each area and delay the ships.
    Response: In the interim rule, we divided the individual bridge-
hour target per pilot (1,000 or 1,800 hours required by 46 CFR part 
404, Appendix A, Step 2B (1) and (2)) into projected bridge hours in 
each area to determine the ``number of pilots needed'' in each area. 
That number is almost never a whole number in any calculation. In the 
partial-rate calculation, we did not round up to the ``next whole 
number'' because to do so would inaccurately inflate the resulting 
target pilot compensation and revenues needed. This number is merely 
one step in the calculation of the rate. It should not be confused with 
the actual number of pilots employed in each area to provide necessary 
pilotage services.
    In this full-rate calculation, again for precision and accuracy in 
computation, we calculated the ``number of pilots needed'' in each area 
to the nearest tenth. We did not round up or down to the nearest whole 
number. As we stated in the interim rule, it is up to each Association 
to determine how many pilots to employ to meet the actual shipping 
demand.

Delay and Detention

    Issue: A number of comments stated that the Coast Guard needs to 
include detention, delay, and travel time in the calculation of bridge 
hours.
    One comment stated American Great Lakes pilots have always counted 
delay, detention, movages, and cancellations (DDMC) when calculating 
bridge hours. Canadian pilots count DDMC as bridge time. Pilots 
throughout the United States count DDMC as bridge time. Delay and 
detention figures have always been included in past rate adjustments.
    Other comments said the Coast Guard has excluded delay and 
detention from projected bridge hours. One comment stated ``prior to 
the 2000 rate, detention and delay was always included in projected 
bridge hours, and the exclusion of detention and delay from projected 
bridge hours was strictly the erroneous interpretation of the previous 
Director of Great Lakes Pilotage.''
    Response: The Coast Guard disagrees that it has improperly 
calculated bridge hours. In this ratemaking, bridge hours are 
determined based upon the same definition that has appeared in the 
regulations since 1995, when the ratemaking methodology was published. 
60 FR 18366, April 11, 1995. That definition appears at Appendix A to 
46 CFR part 404 in (Step 2.B.(1)), ``Determination of Number of Pilots 
Needed,'' and states that ``Bridge hours are the number of hours a 
pilot is aboard a vessel providing basic pilotage service.'' The Coast 
Guard continues to interpret this language to mean actually providing 
pilotage service and not to include delay, detention, and travel time. 
The Coast Guard's interpretation of bridge hours will be reviewed in 
light of the ``Bridge Hour Study'' conducted by RADM Riker USCG Ret. 
That review may result in a separate rulemaking to revise the 
ratemaking analyses and methodology.

Target Pilot Compensation

The 54-Day Multiplier
    Issue: There were numerous comments to the interim rule that 
opposed the use of 44 days as the multiplier when calculating target 
pilot compensation. One comment expressed concern that the use of the 
44-day multiplier in the interim rule was a proposed change that would 
be carried forward into future rulemaking. Another comment objected to 
the multiplier being reduced from 54 to 44 days on the basis of pilots 
having scheduled time off during the season, with no corresponding 
decrease in bridge hours during the navigation season.
    Still another comment stated the Coast Guard must re-think its 
calculation of target compensation and reinstate the 54-day basis for 
target compensation to reflect the fact that revenue generation is 
based on the average annual compensation of first mates and masters of 
lake ships. One comment stated it was a ``profound'' error to change 
the multiplier from 54 days to 44 days because it reduced the 
calculation of target pilot compensation by 15.27 percent in 
undesignated waters and 16.16 percent in designated waters with no 
corresponding reduction in the work standard (1,800 and 1,000 hours, 
respectively).
    Response: In the 2003 interim rule, the Coast Guard used a 44-day 
multiplier to calculate the partial-rate adjustment. The use of the 44-
day multiplier was a one-time use of that number solely for the 
purposes of the partial-rate calculation. The interim rule did not 
propose a permanent change to the multiplier. The reason we used the 44 
days was because of comments on the NPRM suggesting a reduction in the 
multiplier from 54 to 44 or 45 days, to take into consideration 
vacation time actually taken by the pilots.
    As stated in the interim rule, the Coast Guard used 44 days as the 
multiplier while it reviewed the multiplier issue and made a final 
determination on the appropriate multiplier to use in the full-rate 
calculation. The use of 44 days in the interim rule was not a change to 
the methodology, but rather the highest number we were certain of 
before we completed the review of this issue. We have completed that 
review. We have concluded that 54 days is the correct multiplier, and 
have used that number in this full-rate calculation.
    This is consistent with the current AMO union contract under which 
a first mate who works a full month will receive wages, exclusive of 
benefits, equivalent to 54 times the daily wage rate.
    We have historically used the 54-day multiplier used by AMO in 
their contracts. Under the AMO contracts, this 54-day multiplier is 
broken down as follows:

Average Working Days per Month..................................    30.5
Vacation Days per month.........................................    15.0
Weekend Days per month..........................................     4.0
Holidays per month..............................................     1.5
Bonus per month.................................................     3.0
                                                                 -------
                                                                    54.0
  Basic Calculation.............................................      *
 
*54.0 x Daily Rate = Monthly Wage Rate.


    The purpose of the Coast Guard's ratemaking methodology is to 
ensure that a pilot working 1,800 hours on undesignated waters receives 
the average annual compensation for first mates on U.S. Great Lakes 
vessels based on the most current AMO union contracts and that a pilot 
working 1,000 hours on designated waters receives the average annual 
compensation of masters on U.S. Great Lakes vessels. We believe that 
use of the 54-day multiplier to calculate wages in conjunction with our 
historic methodology of calculating benefits best meets this purpose.

Discussion of the Rule

Ratemaking Process and Methodology

    This section is a description of the analyses performed, and the 
seven-step methodology followed, in the development of the full-rate 
adjustment. The first part summarizes the full-rate changes in this 
interim rule. The second part describes the ratemaking process and 
explains the formulas used in the methodology to show how the full-rate 
adjustment was actually calculated.
    The authority to establish pilotage rates on the Great Lakes 
derives from 46

[[Page 12089]]

U.S.C. 9303(f), which states, in pertinent part, that: ``[t]he 
Secretary shall prescribe by regulation rates and charges for pilotage 
services, giving consideration to the public interest and the costs of 
providing the services.''
    The pilotage regulations require that pilotage rates be reviewed 
annually in accordance with procedures detailed in Appendix C to 46 CFR 
part 404. The Coast Guard reviews Association financial reports 
annually and, at a minimum, the Coast Guard completes a thorough review 
of pilot association expenses, and establishes pilotage rates in 
accordance with the procedures detailed in Sec.  404.10 and Appendix A 
of this part at least once every five years. If the annual review shows 
that pilotage rates are within a reasonable range of their target, no 
adjustment to the rates will be initiated. However, if the annual 
review indicates that an adjustment is necessary, or if it is the fifth 
anniversary of the last full ratemaking, then the Coast Guard will 
establish new pilotage rates using Sec.  404.10 and Appendix A of this 
part.
    The Coast Guard compares projected rates of return on investment to 
target rates of return on investment for each pilotage area to 
determine whether an adjustment to the pilotage rates is necessary. If 
the projected rates of return on investment are lower than the target 
rates of return on investment, the revenues generated by the current 
pilotage rates would be insufficient for the pilots to earn target 
pilot compensation. As the following analysis shows, the difference 
between the projected rates of return on investment and the target 
rates of return on investment, makes an increase appropriate in this 
case. Therefore, the Coast Guard used the methodology contained in 
Appendix A to develop a new rate. The purpose of the ratemaking 
analyses and methodology contained in Appendix A is to arrive at a rate 
multiplier that will make the projected rates of return on investment 
equal to the target rates of return on investment in each pilotage 
Area. Once this is accomplished, the Coast Guard calculates a rate 
multiplier, that when applied to the current rates will increase or 
decrease those rates, generating sufficient revenue to permit the 
pilots to earn target compensation.
    To arrive at the rate multiplier, the Coast Guard first projects 
target pilot compensation, revenue, and reasonable and necessary pilot 
expenses. In a separate calculation, the Coast Guard then calculates 
the investment base for each District to determine the target rate of 
return on investment. Taking into consideration revenues, expenses, and 
returns on investment, the Coast Guard then calculates the projected 
rates of return on investment. The Coast Guard then compares the 
projected rates of return on investment to the target rates of return 
on investment. If there is a difference between the projected rates of 
return on investment and target rates of return on investment, a rate 
adjustment may be appropriate. Finally, to arrive at the appropriate 
rate multiplier, the revenue needed is divided into projected revenue. 
A rate multiplier is calculated individually for each Area. The new 
rates are arrived at by multiplying the rate in each Area by the 
applicable rate multiplier.

Part 1: Pilotage Rate Charges--Summarized

    The pilotage rates for Federal pilots on the Great Lakes contained 
in 46 CFR 401.405, 401.407, and 401.410 have been adjusted in 
accordance with the methodology appearing at 46 CFR part 404. The full-
rate adjustment results in an average increase of 20 percent across all 
Districts over the partial-rate adjustment.

                         2004 Area Rate Changes
                              [In percent]
------------------------------------------------------------------------
                                                          Then the rate
                                                          represents a
          If pilotage service is required in:            change over the
                                                        current rate of:
------------------------------------------------------------------------
Area 1 (Designated waters)............................                20
Area 2 (Undesignated waters)..........................                16
Area 4 (Undesignated waters)..........................                26
Area 5 (Designated waters)............................                29
Area 6 (Undesignated waters)..........................                16
Area 7 (Designated waters)............................                16
Area 8 (Undesignated waters)..........................                13
------------------------------------------------------------------------

    Rates for ``Cancellation, delay or interruption in rendering 
services (Sec.  401.420)'' and ``Basic rates and charges for carrying a 
U.S. pilot beyond [the] normal change point, or for boarding at other 
than the normal boarding point (Sec.  401.428)'' are increased by 20 
percent. These charges are the same in every Area.

Part 2: Calculating the Rate Multiplier

    The ratemaking analyses and methodology contained in Appendix A to 
part 404 is comprised of seven steps. These steps are:
    (1) Projection of Operating Expenses;
    (2) Projection of Target Pilot Compensation;
    (3) Projection of Revenue;
    (4) Calculation of Investment Base;
    (5) Determination of Target Rate of Return on Investment;
    (6) Adjustment Determination (Revenue Needed); and
    (7) Adjustment of Pilotage Rates.
    The data used to calculate each of the seven steps comes from the 
2002 independent accountant's reports for each District. The Coast 
Guard also used the most recent union contracts between the AMO and 
vessel owners and operators on the Great Lakes to determine target 
pilot compensation. All documents and records used in this full-rate 
calculation have been placed in the public docket for this rulemaking 
and are available for review at the addresses under ADDRESSES.
    The Coast Guard uses the Appendix A analyses and methodology to 
develop a rate multiplier to adjust pilotage rates in each pilotage 
Area. The following is an explanation of each step of the analyses and 
methodology and how the rate multiplier is calculated.
    Some values may not total due to format rounding for presentation 
in charts and explanations in this section. The rounding does not 
effect the integrity or truncate the real value of all calculations in 
the ratemaking methodology described below.

Step 1: Projection of Operating Expenses

    The Coast Guard projects the amount of vessel traffic annually. 
Based on that projection, the Coast Guard forecasts the amount of fair 
and reasonable operating expenses that pilotage rates should recover.
    To project operating expenses, the Coast Guard obtains financial 
data from each Association. Included in the financial data is a 
detailed listing of all the Association's operating expenses. Based on 
recommendations of an independent accountant, the Coast Guard 
determines the expenses to be used in projecting future expenses. Once 
these expenses are identified and totaled, the Coast Guard makes an 
adjustment to the total for inflation or deflation. The Coast Guard 
then uses the projected annual vessel traffic to project the amount of 
expenses that the rates should recover.
    The steps that follow explain how this is performed:
     Submission of financial information from each Association;
     Determination of recognizable expenses;
     Adjustment for inflation or deflation; and
     Final projection of operating expenses.

[[Page 12090]]

Submission of Financial Information

    (1) Each district Association must provide the Coast Guard with 
detailed annual financial statements in accordance with 46 CFR 404.300.
    This information is reviewed by a Coast Guard-contracted 
independent accounting firm. With this information, the independent 
accounting firm visits the offices of each Association and performs a 
detailed review of all accounts over $75 to confirm the accuracy of the 
financial statements provided by each Association. Using the financial 
statements from the Associations and the information obtained during 
the independent accounting firm's review of each Association's records 
and accounts, the independent accountant compiles this information into 
financial reports for each District.
    (2) This interim rule uses the 2002 independent accountant?s 
reports for each District for the period ending December 31, 2002. 
These reports may be found in the docket.

Determination of Recognized Expenses

    (1) The Coast Guard determines which Association expenses will be 
recognized for ratemaking purposes, using the guidelines for the 
recognition of expenses contained in Sec.  404.5. Each Association is 
responsible for making available to the Coast Guard documentation to 
support the expense figures.
    (2) Expense items which the Coast Guard determines to be necessary 
and reasonable for the provision of pilotage service are recognized for 
ratemaking purposes.
    (3) The following is a summary of the adjustments to expense items 
adopted from the 2002 independent accountant?s reports ending on 
December 31, 2002.

----------------------------------------------------------------------------------------------------------------
                                                                 District one     District two    District three
----------------------------------------------------------------------------------------------------------------
                                         SUMMARY OF EXPENSE ADJUSTMENTS
----------------------------------------------------------------------------------------------------------------
1. Reported Expenses for 2002................................        $658,913       $1,295,595       $1,242,847
2. Expense Adjustments
    Social Security and Medicare Expenses....................          69,025   ...............         136,390
    Reimbursed Expenses:
        Dispatch Service/Parking Fees........................  ...............         (76,671)  ...............
        Pilot Boat Revenue...................................  ...............        (290,508)  ...............
        Canadian Pilot Revenue...............................  ...............  ...............        (161,680)
        Uncollected Pilotage Fees/Bad Debt Expense...........  ...............  ...............          14,190
    Not Recognized Expenses:
        Lobbying Expenses....................................         (21,000)  ...............          (9,000)
        Promotional Expenses.................................  ...............            (882)  ...............
        Promotional/Charitable Expenses......................  ...............  ...............            (471)
    Reclassified Expenses:
    As additional pilot compensation:
        Training Expenses (Paid to members for the training            (2,500)  ...............  ...............
         of unregistered pilots).............................
        American Pilots Association (APA) dues...............         (13,970)         (15,840)  ...............
        Contract Pilotage Fees as operating expense..........        (118,919)  ...............  ...............
        Meeting attendance...................................  ...............          (9,300)         (26,210)
        APA/Masters, Mates, & Pilots dues....................  ...............  ...............          (6,600)
    As operating expenses:
        Insurance Fees.......................................          23,578   ...............  ...............
        Unreimbursed Travel Costs............................          12,076   ...............  ...............
        Pilot travel expense (Reclassified as operating                10,500   ...............         146,907
         expense from pilots' compensation)..................
    Undocumented Expenses:
        Subsistence (Daily meals/incidental expense per diem)  ...............         (17,180)  ...............
                                                              ------------------
3. Total Adjustments.........................................         (41,210)        (410,381)          93,526
                                                              ------------------
        Total Adjusted Expenses for 2002.....................         617,703          885,214        1,336,373
                                                              ------------------
                                   SUMMARY OF PROJECTION OF OPERATING EXPENSES
----------------------------------------------------------------------------------------------------------------
1. Reported Expenses for 2002................................         658,913        1,295,595        1,242,847
    Total Adjustments........................................         (41,210)        (410,381)          93,526
                                                              ------------------
        Total Adjusted Expenses for 2002.....................         617,703          885,214        1,336,373
2. Inflation Adjustments
    (2003)--1.9%.............................................          11,7