Great Lakes Pilotage Rates-2017 Annual Review, 41466-41496 [2017-18411]

Download as PDF 41466 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations DEPARTMENT OF HOMELAND SECURITY 202–372–2037, email todd.a.haviland@ uscg.mil. Coast Guard Executive Summary This final rule amends the Coast Guard’s Great Lakes pilotage regulations by revising the current methodology by which the Coast Guard sets base rates for U.S. pilotage service on the Great Lakes, as well as revises the pilotage rates for the remaining portion of the 2017 shipping season. The new methodology adjusts target pilot compensation by inflation, incorporates revenue derived from weighting factor charges into the ratemaking model, and eliminates the provision that the hourly pilotage rate for designated waters could not rise above twice the rate for undesignated waters. We believe that the new methodology will continue to encourage pilot retention, ensure safe, efficient, and reliable pilotage services on the Great Lakes, and provide adequate funds to upgrade and maintain infrastructure. In addition to the changes in ratemaking methodology, this final rule makes several other additions to Great Lakes Pilotage regulations. It adds new language to billing practices for cancellation charges, clarifying that the minimum charge for canceling the request for a pilot is four hours plus reasonable travel expenses. The final rule also inserts a new mandatory change point at the Iroquois Lock point, ensuring that pilots are adequately 46 CFR Parts 401, 403, and 404 [USCG–2016–0268] RIN 1625–AC34 Great Lakes Pilotage Rates—2017 Annual Review Coast Guard, DHS. Final rule. AGENCY: ACTION: In this final rule, the Coast Guard is setting new rates for the 2017 shipping season for pilotage services on the Great Lakes. The Coast Guard is also updating its methodology for setting these rates. These updates to the methodology will incorporate the income generated from weighting factors into the ratemaking methodology used to set rates in this and future rulemakings. The Coast Guard believes that the new rates will continue to encourage pilot retention, ensure safe, efficient, and reliable pilotage services on the Great Lakes, and provide adequate funds to upgrade and maintain infrastructure. DATES: This final rule is effective October 2, 2017. FOR FURTHER INFORMATION CONTACT: For information about this document call or email Todd Haviland, Director, Great Lakes Pilotage, Coast Guard; telephone SUMMARY: rested on this stretch of water. Finally, we have made some textual changes to the regulations to better convey their intent, renaming the ‘‘return on investment’’ as ‘‘working capital fund,’’ and renaming the 2016 final rule staffing model as the ‘‘seasonal staffing model.’’ Based on comments received, several items proposed in the NPRM were not adopted in this final rule. The Coast Guard has chosen not to adopt the 2107 NPRM staffing model, based on compelling arguments that this model did not accurately reflect the unpredictable workload of Great Lakes pilots. Furthermore, we did not move forward on our proposal to move the deadline for audited financial reports from April to January, based on commenters’ arguments that this practice would impose hardship out of proportion to its benefit. Based on updated financial information, increased pilot compensation, the new weighting factor calculations, and other changes to the ratemaking methodology, the revised Great Lakes pilotage rates are being lowered in most areas. We believe that this is a needed correction to better align our projected revenues with the pilot associations’ actual collections, as evidence shows that pilotage revenue significantly exceeded what was projected in 2016, even factoring in above-average traffic. The changes in the rates are as follows: TABLE E–1—CHANGES IN PILOTAGE RATES Previous pilotage charges per hour ($) Area St. Lawrence River ...................................................................................................................... Lake Ontario ................................................................................................................................ Navigable waters from Southeast Shoal to Port Huron, MI ........................................................ Lake Erie ...................................................................................................................................... St. Mary’s River ........................................................................................................................... Lakes Huron, Michigan, and Superior ......................................................................................... SUPPLEMENTARY INFORMATION: asabaliauskas on DSKBBXCHB2PROD with RULES Table of Contents for Preamble I. Abbreviations II. Regulatory History III. Basis and Purpose IV. Discussion of Comments and Changes V. Regulatory Analyses A. Regulatory Planning and Review B. Small Entities C. Assistance for Small Entities D. Collection of Information E. Federalism F. Unfunded Mandates Reform Act G. Taking of Private Property H. Civil Justice Reform VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 I. Protection of Children J. Indian Tribal Governments K. Energy Effects L. Technical Standards M. Environment I. Abbreviations APA American Pilots Association CFR Code of Federal Regulations DHS Department of Homeland Security FR Federal Register GLPA Great Lakes Pilotage Authority GLPAC Great Lakes Pilotage Advisory Committee MM&P International Organization of Masters, Mates & Pilots PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 New pilotage charges per hour ($) 580 398 684 448 528 264 601 408 580 429 514 218 Change per hour ($) +21 +10 ¥104 ¥19 ¥14 ¥46 MOU Memorandum of Understanding NPRM Notice of proposed rulemaking RA Regulatory analysis § Section symbol SNPRM Supplemental notice of proposed rulemaking The Act Great Lakes Pilotage Act of 1960 U.S.C. United States Code II. Regulatory History The Coast Guard published a notice of proposed rulemaking (NPRM) for this final rule on October 19, 2016 (81 FR 72011), covering a range of issues including revised operational expenses, E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations a proposed new methodology for calculating pilotage numbers, the addition of a mandatory change point at Iroquois Lock, and revised base pilotage rates. In response, we received 21 public comment letters, covering a diverse range of subjects and providing a substantial amount of information. Subsequently, on April 5, the Coast Guard issued a supplemental notice of proposed rulemaking (SNPRM) proposing to add two additional steps to the ratemaking methodology, which would incorporate the additional revenues collected under 46 CFR 404.100 (the ‘‘weighting factors’’) into the ratemaking model. We received 11 public comment letters on the SNPRM. The Coast Guard received numerous comments in response to the issues raised in the NPRM and SNPRM. These commenters have largely come from Great Lakes maritime shipping stakeholders—both the pilots that perform pilotage services as well as the shipping companies that pay the pilotage fees—as well as other interested parties. We have closely analyzed all of the comment letters and have, where appropriate, incorporated ideas and suggestions from the comments into the analysis of our final rule. asabaliauskas on DSKBBXCHB2PROD with RULES III. Basis and Purpose The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960 (the Act),1 which requires U.S. vessels operating ‘‘on register’’ 2 and foreign vessels to use U.S. or Canadian registered pilots while transiting the U.S. waters of the St. Lawrence Seaway and the Great Lakes system.3 For the U.S.-registered Great Lakes 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.’’ 4 We limit the allowable costs of providing this service by ensuring that all allowable expenses are necessary and reasonable for providing pilotage services on the Great Lakes. We believe the public is best served by a safe, efficient, and reliable pilotage service. The goal of our methodology and billing scheme is to generate sufficient revenue for the pilots to provide the service we require. The 1 Public Law 86–555, 74 Stat. 259, as amended; currently codified as 46 U.S.C. Chapter 93. 2 ‘‘On register’’ means that the vessel’s certificate of documentation has been endorsed with a registry endorsement, and therefore, may be employed in foreign trade or trade with Guam, American Samoa, Wake, Midway, or Kingman Reef. 46 U.S.C. 12105, 46 CFR 67.17. 3 46 U.S.C. 9302(a)(1). 4 See 46 U.S.C. 9303(f) for all of the Act’s pilotage ratemaking requirements discussed in this paragraph. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 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. The Secretary has delegated authority under the Act to the Coast Guard.5 The purpose of this rule is to change our annual Great Lakes pilotage ratemaking methodology, set new rates using that methodology, authorize a temporary hiring and training surcharge, and make several other adjustments. For more information on the goals and proposals in this rulemaking, see the discussion section in the NPRM 6 and SNPRM.7 IV. Discussion of Comments and Changes In this section, the Coast Guard reviews the comments received, and provides responses accordingly. In instances where multiple commenters provided insight into similar issues, we have grouped those comments into general categories. Wherever possible, we have attempted to provide citations to the particular comment referenced, and have tried to verify any data provided by the commenter. We have divided the comments up into four general categories: (1) General policy issues; (2) Rate calculation issues; (3) Incorporation of the weighting factors into the ratemaking methodology; and (4) Items for future consideration. These general categories have been further subdivided by issue, as discussed below. A. General Policy Issues The most frequently cited issue, raised by numerous commenters, concerned the costs of pilotage. In the NPRM, we proposed a variety of increases in pilotage rates. However, in the subsequent SNPRM, we proposed accounting for the weighting factor and thus lowered hourly pilotage rates accordingly. Numerous commenters, generally aligned with entities that ship goods or pay for shipping on the Great Lakes, made statements on the recent increases in the cost of pilotage over the last several years. For example, one commenter 8 stated that the proposed increase to U.S. pilotage rates constitutes a 15 percent increase, with a total increase of 99 percent since 2014, and that this is on top of a 94 percent increase already imposed on shippers since 2006. Other commenters 9 cited 5 DHS Delegation No. 0170.1, para. II (92.f). FR 72011 (October 19, 2016). 7 82 FR 2115 (May 5, 2017). 8 See docket # USCG–2016–0268–0039, p.1. 9 Docket # USCG–2016–0268–0019, p.1; docket # USCG–2016–0268–0020, p.1. 6 81 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 41467 different, albeit similar figures, stating that pilotage costs have increased by 40 percent over three years, and cited the NPRM as saying that pilotage costs now constituted 19 percent of total voyage costs on the Saint Lawrence Seaway. We acknowledge that the some pilotage rates have increased in the past few years. In our revisions to the methodology, we have eliminated several ancillary fees and changed the billing scheme to meet our goal of aligning projected revenues with the actual association collections. We agree that the total revenues needed by the 3 U.S. Great Lakes Pilot Associations has increased about 40 percent over the past three years if we include the temporary surcharges, after many years of the pilot associations being unable to collect the amount of money our projections indicated would be appropriate. The additional pilots added to ensure continued safe, efficient and reliable pilotage service are the primary reason for the recent rate increases. It is important to note, however, that we have revised the temporary surcharges requirements so the revenues collected for the temporary surcharges will be removed from the expense base of future rates to ensure that the shippers do not pay for the same expense twice. After carefully considering the comments and measuring and assigning values to the variables addressed in the ratemaking methodology, we believe the resultant pilotage rates are fair. One commenter 10 argued that high pilotage rates were threatening the competitiveness of the St. Lawrence Seaway and Great Lakes system of shipping cargo, and that if the proposed rate increases for 2017 were instituted, shippers may reach a ‘‘tipping point’’ where they choose alternate means to ship cargo. The commenter did not provide supporting documentation for this assertion, and we disagree with this statement. Our data indicates that demand for pilotage service in 2016 was greater than 2015 and that demand for pilotage service through June 2017 is trending around 20 percent higher than the 10-year average for the 2017 shipping season. Other commenters argued that the recent increases in pilotage rates were necessary. One commenter stated that the recent, comparatively large increases were needed to correct inadequate increases in the past, arguing that ‘‘recent seemingly disproportionate increases [in pilotage rates] would have been unnecessary as they could have 10 Docket E:\FR\FM\31AUR2.SGM # USCG–2016–0268–0034, p.1. 31AUR2 41468 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES been accommodated over time.’’ 11 Another commenter argued that the concern over pilotage costs was disingenuous, stating that the vast majority of shippers’ pilotage cost results from Canadian pilotage, which is entirely unaffected by the U.S. pilotage rates.12 We agree that the recent increases in pilotage rates since 2015 have been warranted. We are well aware that for many years the Coast Guard’s methodology for calculating pilotage rates produced rates that failed to raise the target revenue. We have had years where actual revenue was above the target revenue, but below the revenue that we would have projected given the actual demand. In 2016, revenue was higher even than what we would have expected given the demand. While 2016 appears to be an outlier in that regard, it is our goal is to develop a methodology that aligns our projections with the actual amount of revenue the pilot associations generate based upon the realized demand for pilotage service. We believe that the methodology outlined in this final rule is a substantial improvement that will, on average, produce revenues that will cover operating expenses, pay for infrastructure maintenance and the training of new pilots, and offer compensation levels and a workload that will allow the pilot associations to recruit and retain pilots without producing excessive revenue to the detriment of shippers. We are willing to consider future adjustments as necessary to ensure revenue alignment. As discussed below, we believe that compensation levels are currently at a level that is effectively enticing pilots to join and stay in the workforce, and we are not substantially adjusting that in this final rule. Difference in Pilotage Charges Between the United States and Canada Several commenters complained that the cost of similar pilotage services differed depending on whether ships were assigned a U.S. or Canadian pilot, and that such differences were contrary to arrangements between the United States and Canada regarding cooperation in management of pilotage in the Great Lakes system. One commenter said that pilotage costs are much higher when the vessel is assigned a U.S. pilot, stating that ‘‘[f]or example, the pilotage expense for a Class 4 vessel transiting from Thunder Bay to St. Lambert costs $39,490 when a Canadian pilot is used, and $29,327 11 Docket 12 Docket # USCG–2016–0268–0037, p.1. # USCG–2016–0268–0028, p.2. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 more when a U.S. pilot provides pilotage services.’’ 13 The commenter argued that such a disparity is contrary to the 2013 Memorandum of Understanding (MOU) between the U.S. and the Canadian Great Lakes Pilotage Authority (GLPA), which states that the parties ‘‘intend to arrange for the establishment of regulations imposing comparable rates and charges.’’ 14 While the Coast Guard acknowledges that the rates for pilotage services are not identical, our rates for each given segment of a voyage are based upon an analysis of the historical pilotage hours and associated costs necessary to provide service on that segment. We cannot say how the Canadian GLPA determined the charges for corresponding voyage segments. We note that U.S. and Canadian pilots have different funding structures, infrastructure obligations, and compensation packages. There are other instances where U.S. pilotage rates are substantially lower than Canadian rates—for example, a harbor move on Lake Superior for a Class 2 vessel would cost $2,616.73 under Canadian rates, while the same move would cost only $607.20 under U.S. rates (both prices are in U.S. dollars). While some may argue the pilotage rates should be identical, we believe that the rates must primarily cover the cost of operating expenses, infrastructure maintenance, and fair compensation, which is how we have developed the current methodology. We are not offering an opinion as to how differences in infrastructure and compensation funding may alter the rate calculations by the Canadian association. Finally, we also note that article 9 states that the MOU ‘‘is not an international agreement and does not give rise to any international legal rights or obligations.’’ The MOU is a nonbinding agreement on cooperation between the Coast Guard and GLPA. The primary purpose of this document is to ensure an equitable share of work between the U.S. and Canadian registered pilots and coordinated pilotage service throughout the System. We interpret comparable rates to mean that the Coast Guard and GLPA will establish rates to cover costs incurred for providing pilotage service in the various areas, even though those costs may be different due to varying fee structures, distribution, labor costs, or other factors. For these reasons, while 13 Docket # USCG–2016–0268–0033, p.12. # USCG–2016–0268–0033, p.12, citing ‘‘Memorandum of Understanding, Great Lakes Pilotage, between the United States Coast Guard and the Great Lakes Pilotage Authority,’’ Art. 7. 14 Docket PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 we acknowledge there are differences in the rates paid by the shipping companies, we still believe that basing the rates on the methodology described in this rulemaking is the most effective way to fund the U.S. Great Lakes pilot associations and necessary infrastructure. Recruitment and Retention of Pilots One of the main goals of raising pilotage fees in recent Coast Guard rulemakings has been to reduce pilot attrition and attract new pilots to the region, ensuring a healthy number of mariners capable of handling the shipping traffic safely and with minimal delays. In the 2016 final rule, we stated that, ‘‘the [methodology established in the mid-1990s failed] to consider the totality of pilot time necessary to perform a given pilotage assignment, which often includes long transits to and from the vessel, resulting in low pilot compensation and overloaded work assignments.’’ 15 We received numerous comments from both pilots and shippers concerning pilot retention and attrition. Many commenters urged the Coast Guard to study pilot recruitment and retention factors, including the compensation of individual pilots, to determine the extent of the pilot retention problem and methods for combating low pilot retention. In response, we note that we have recently undertaken a target pilot compensation study, which we hope may help inform future rulemakings. Pilots and pilot associations also offered comments pertaining to retention and attrition. The Western Great Lakes Pilots Association 16 presented a series of letters from pilots, including resignation letters and previous docket comments, explaining why they were resigning from the Association. These comments cited various reasons, including the risk of a downturn in traffic,17 and a lack of guaranteed time with their families.18 Similarly, other pilotage associations stated that Great Lakes pilots were paid substantially less than other U.S. marine pilots, and noted that certain pilots had left the Great Lakes for less prestigious positions in other areas.19 The Coast Guard has recognized the pilotage recruitment and retention 15 81 FR at 11908 (March 7, 2016). # USCG–2016–0268–0027. 17 Docket # USCG–2016–0268–0027, letter from Bruce Dunlap, Paul Radtke. 18 Docket # USCG–2016–0268–0027, letter from Karl Hardesty, Rick Montoya. 19 Docket # USCG–2016–0268–0027, letters from the Associated Branch Pilots of New Orleans, Association of Maryland Pilots. 16 Docket E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES challenges in the Great Lakes, but believes that the changes we have implemented in recent rulemakings have addressed those concerns. We note that while over the preceeding 10 years 31 pilots in the Great Lakes region voluntarily left pilot positions, only one pilot has left voluntarily in the past 3 years, a rate which is comparable to the extremely low voluntary quit rate for other U.S. pilotage associations. We believe that the new compensation levels, workload, ratemaking structures, and improvements to the billing scheme introduced in recent rulemakings have reduced attrition, and we are working closely with all stakeholders to ensure that wages, working conditions, and infrastructure concerns are addressed to increase the likelihood that well-trained pilots will remain with their associations until retirement. Using Other Pilot Compensation as a Benchmark for GL Pilot Compensation Many commenters suggested that the Coast Guard should be using salaries for other U.S. pilots as a benchmark, rather than Canadian salaries, and noted that U.S. pilots in other areas often make far more in compensation. One commenter, the President of the Associated Branch Pilots for the Port of New Orleans, noted that the average pilot compensation for a pilot in that association was $459,051, and stated that a $312,000 target compensation level ‘‘would leave the Great Lakes pilots among the lowest paid pilots in America.’’ 20 One commenter noted that using other U.S. pilot groups as a benchmark would make a comparison simpler, as the target compensation for many American pilots is set by state rate commissions and is publically available.21 Similarly, one commenter stated that the Great Lakes pilot associations compete with other American associations for recruits, and thus those associations would be a more appropriate benchmark for compensation.22 Several commenters 23 provided figures on the total compensation of pilots in some other American systems, stating that those figures were often significantly over $400,000 annually per pilot, which is higher than the compensation target the Coast Guard has set for Great Lakes pilots. Conversely, the Great Lakes Shippers Association argued that the Coast Guard should not use the compensation of other American pilots as a basis for computing target compensation. The 20 Docket # USCG–2016–0268–0003, p.1. # USCG–2016–0268–0028, p.6. 22 Docket # USCG–2016–0268–0028, p.6. 23 Docket # USCG–2016–0268–0028, p.7. 21 Docket VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 shipping association, as part of its comments on the use of a compensation benchmark,24 stated that the Coast Guard should not equalize pilot compensation across disparate geographies.25 The commenter argued that shipping is an inherently local affair, and that pilots are experts in particular bodies of water, so a comparison to other pilotage association would not necessarily be accurate. The commenter stated that Great Lakes pilotage ‘‘differs significantly from pilotage anywhere else in the United States as it includes vast stretches of open, unobstructed water that require little or no pilot input, as well as being subject to an abbreviated, rather than year-round, shipping season.’’ 26 The commenter also stated that there are both historical and practical reasons that local pilotage boards and commissions set rates locally, and that given differing barriers to entry, differing duration and intensity of pilotage duties, and other local factors means that ‘‘the value and cost of pilotage services in one location differs significantly in degree and kind from the value and cost of pilotage services in another location.’’ 27 We recognize that there are a wide variety of factors that could be used for justifying both more and less compensation than pilots in other U.S. jurisdictions or Canadian pilots. While we believe, at this time, that a comparison with Canadian Great Lakes pilots offers the closest analogue, we are fully aware that there are still significant differences in the U.S. and Canadian compensation work schedules and compensation schemes, and as such, we intend to undertake a compensation study to better understand the wide array of factors at work. While that study should inform a future ratemaking, we believe that the current compensation target is a reasonable and comparable level because it is based on pilots that do substantially similar work on the same bodies of water. Our goal is to establish a target pilot compensation benchmark that promotes recruitment and retention without posing undue financial burden on shipping companies. We will ensure that we maintain transparency in our processes and calculations to establish and refine this benchmark. 24 We discuss the issue of the general use of a 10year compensation benchmark in a separate section, but the commenter included their comments on the specific number for pilot compensation under that heading. 25 Docket # USCG–2016–0268–0033, p.26–27. 26 Docket # USCG–2016–0268–0033, p.28. 27 Docket # USCG–2016–0268–0033, p.27. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 41469 10-Year Compensation Benchmark One item addressed in the NPRM was new language in § 404.104 that would allow the Director to set compensation to a benchmark for a 10-year period. We stated that, when setting the compensation benchmark, we would set it based on the most relevant available non-proprietary information such as wage and benefit information from other pilotage groups (in the current case, based on Canadian Great Lakes pilot compensation cited in the 2016 NPRM). Subsequently, for a period of up to 10 years, the target compensation number would simply be adjusted for inflation. We noted that this would promote target compensation stability and rate predictability. As seen in the NPRM, where the Coast Guard noted a significant change in the relative value of the Canadian dollar that could have changed the target compensation figure significantly, resetting the compensation benchmark repeatedly could lead to large swings in year-to-year targets and have negative effects on the stability of pilot earnings. Having reviewed the various comments on this issue as well as considered the ratemaking methodology generally, we believe that using a compensation benchmark to establish annual adjustments in target compensation is an efficient means to ensure rate stability. We believe that, at any time after a compensation benchmark is established, there may be grounds to review it. Use of a compensation benchmark promotes rate and compensation stability, while providing the Coast Guard with the flexibility to make improvements over time based on market conditions. For this reason, we are finalizing the proposed language in § 404.104. Several commenters mentioned the compensation benchmark, but instead of discussing the use of a compensation benchmark generally, they discussed the inputs into the current compensation benchmark. One commenter argued that the Coast Guard should not base the compensation benchmark on the average compensation for other U.S. pilots. We note that this was never the proposal, and we merely proposed to use a benchmark. In the NPRM, we wrote that ‘‘the compensation benchmark would be based on the most relevant available non-propriety information such as wage and benefit information from other pilotage groups’’ [emphasis added].28 We note that despite the use of that example of what a particular compensation benchmark 28 81 E:\FR\FM\31AUR2.SGM FR 72027 (December 19, 2016). 31AUR2 41470 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES could be, we did not propose to use another U.S. pilot group outside of the Great Lakes to establish target pilot compensation in our rulemaking. In the 2017 NPRM, the Coast Guard did not propose to set a new compensation benchmark, but instead merely proposed continuing to use the 2016 target compensation figure in its calculations, which was based on the comparison with Canadian salaries. As discussed in the NPRM, we believe that the use of a compensation benchmark is a better method for starting the calculation for the compensation of pilots, as opposed to undertaking a complete re-evaluation of the compensation structure for U.S. pilots each year. The primary rationale is the promotion of workforce stability, which is necessary for the system to provide safe, efficient, and reliable pilotage. The Great Lakes pilotage system needs target pilot compensation stability to achieve and maintain workforce stability. As is common practice in many sectors of employment, levels of compensation that are highly volatile can lead to difficulty attracting and retaining qualified employees. Given the high skill levels and lengthy training requirements required of Great Lakes pilots, as well as the dynamic nature of the commodities trade that makes up much of the shipping traffic in the area, we do not believe that a full re-evaluation of compensation every year is conducive to maintaining a system of safe and reliable pilotage. Request To Study Additional Items Many commenters,29 citing the high cost of pilotage, requested that the Coast Guard undertake additional studies of various related issues. Specifically, these commenters almost uniformly requested that the Coast Guard conduct additional research into (1) pilot recruitment and retention factors; (2) the role of pilotage rates on modal shift and Seaway competitiveness; and (3) efficiencies that can be achieved by streamlining the pilotage system. The Coast Guard realizes that these issues are important, and may warrant more in-depth study. To that effect, the Coast Guard has commissioned a compensation study and an economic impact study to better inform our ratemaking process. Until these studies are completed, we are proceeding with the ratemaking methodology we describe in this final rule. We remain open to persons providing information about these important issues, and note that such information can always be 29 See, e.g., docket # USCG–2016–0268–0019, p. 2; Docket # USCG–2016–0268–0020, p. 2. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 provided to the Coast Guard or to the Great Lakes Pilotage Advisory Committee (GLPAC) outside the context of a particular ratemaking action. Audit Deadline Another item the Coast Guard discussed in its NPRM was a proposal to adjust § 403.300(c) to require submission of an unqualified audit by January 31 of each year, rather than the existing requirement that it be submitted on April 1. Our goal was to expedite the availability of audit information so it could be used in the publication of the NPRM by the next summer. The net result would be to reduce the delay between the actual expenses and their recoupment from 3 to 2 years. We requested comment on whether such a deadline would be feasible. One commenter 30 supported the proposal, stating that they ‘‘favor any measures that reduce the lag between receipt of actual revenue and expense data and rate-setting decisions.’’ The commenter stated the Coast Guard should use the most recently available data to determine the target revenue. They argued that the Coast Guard should set up systems to document the invoices and source forms sent in throughout the shipping season, and then tally this information and use it as a point of validation when setting the target revenue in the following year’s NPRM. The commenter also stated that the pilots have indicated they can produce monthly revenue reports for Coast Guard use, and that this information can be used to inform the Coast Guard’s decision to terminate a surcharge or to revise rates to account for an over-generation of revenue. However, most comments, including those from the 3 U.S. Great Lakes pilot associations on this issue, took the opposite stance. These comments were unanimously opposed to the proposed January 31 deadline stating that preparing audited financial statements by that date would be infeasible due to the tight time constraints, or if required, would be extremely expensive. Commenters noted that the requirement to provide numbers by this earlier date would require extensive effort and significantly increase costs, and we did not receive any recommendations for an alternate date. Based on the feedback we received, we are not making any changes to the audit deadline at this time. We agree that we would like to reduce the lag time between the revenue and expense audits and the information we use for our rulemakings. However, based upon the comments from the pilot associations, at this time we do not believe that the reported costs of accelerating the reporting date to January 31 would be worth the reported increase in expense. We do note, however, that we will seek further input on this topic at a future GLPAC meeting. Surcharge Shutoff Provision In the NPRM, the Coast Guard proposed adding a requirement to the surcharge regulation in § 401.401. We proposed that once a pilot association collects the amount of money allowable for recoupment, the pilot association’s authorization to collect that surcharge would terminate for the remainder of the shipping season. We proposed this to prevent surcharge receipts from exceeding the target amount, which will eliminate the need to make subsequent adjustments to the operating expenses for the following year. One commenter 31 stated that the ‘‘Industry Commenters support this proposal.’’ The commenter suggested the Coast Guard should verify that the surcharge funds are only used for the purposes as outlined by the Coast Guard. The commenter stated that the ratepayers ‘‘paid over $667,000 in excessive training fees collected by the pilot associations’’ in 2015. They also stated it is in the ratepayers’ interests that the Coast Guard not allow excessive fees, as there is no mechanism currently in place to repay these funds to the ratepayers. The commenter also recommended that the Coast Guard verify that the training fees are properly applied to training new pilots in each District,32 and suggested the Coast Guard could achieve this by requiring the inclusion of the training fee information as a separate line item in the financial statements. Based on the comments we received, we are finalizing the additions to the surcharge provision in § 401.401. We also note that the existing audit requirements for operating expenses include a line item for training expenses, so that it is clear how much money is expended for that purpose. Because of the three-year delay in the use of audited expenses, the training costs, which were introduced in the 2015 ratemaking for the Saint Lawrence Seaway Pilots Association, will be incorporated into, and adjusted for, the operating expenses for the 2018 ratemaking. The surcharge was expanded to the Lake Pilots Association and Western Great Lakes Pilots 31 Docket 30 Docket PO 00000 # USCG–2016–0268–0033, p. 25. Frm 00006 Fmt 4701 Sfmt 4700 32 Docket E:\FR\FM\31AUR2.SGM # USCG–2016–0268–0033, p. 24. # USCG–2016–0268–0033, p. 25. 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations Association in 2016. Therefore, these expenses will not be addressed until the 2019 Annual Rulemaking for these two associations. Iroquois Lock Finally, in the NPRM, we proposed adding a mandatory change point at the Iroquois Lock. While we did receive comments as to how this would affect the total number of pilots needed for the rate-setting calculations (which is discussed below), we did not receive any comments on the merits of the idea itself. We are therefore finalizing this provision without change in this final rule. B. Rate Calculation Issues In this section, we discuss the comments related to the specific ratemaking at issue for 2017, as well as lay out the method by which we arrived at the final 2017 rates. The ratemaking process is specified in 46 CFR 404, 101 through 110. Each section below corresponds to one of the sections in the CFR. 1. Recognition of Operating Expenses Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year’s operating expenses (§ 404.101). We reviewed the independent accountant’s financial reports for each association’s 2014 expenses and revenues.33 In the NPRM, we accepted the final findings on the 2014 audit of association expenses, and presented the recognized expenses for each District. We received information with regard to lobbying expenses associated with American Pilots Association (APA) dues. We attributed 15 percent of APA dues to legal fees in the NPRM. This should have been 5 percent.34 We have adjusted the operating expenses to reflect this change. We received comments from the three U.S. Great Lakes Pilot Associations regarding the exclusion of legal fees from recognized operating expenses. Specifically, in our review of the 2014 operating expenses, we did not recognize certain legal expenses from K&L Gates, totaling $47,256. The commenters stated that they did not understand why these expenses were not recognized and requested that we reclassify these expenses as allowable fees. We disagree that these K&L Gates legal fees should be included. We disallowed the fees for K&L Gates because we could not determine whether or not these funds were used for lobbying or legal services. Per the requirements in paragraph 404.2(b)(6), lobbying fees are not allowable expenses for reimbursement. We contacted the pilot associations to request additional documentation that these fees were associated with legal services and not lobbying, but we did not receive any documentation to show which costs were attributable to legal services, and which were attributable to lobbying work. In addition, the three pilot associations requested that we recognize legal expenses in the amount of $75,049 incurred in their litigation against the Coast Guard regarding the 2014 final rule. This amount represents the difference between legal fees incurred 41471 and the amount the Coast Guard paid in its settlement with the pilot associations. Pursuant to § 404.2(6), expenses incurred against the United States are not recoupable as recognized operating expenses. The pilots argue that this section of the regulations was improperly adopted in the 2016 final rule. We do not believe that the 2017 Annual Rulemaking is the appropriate venue to address the procedural aspects of the 2016 final rule. A commenter from the Lakes Pilots Association noted that certain operating expenses, relating to the payment of applicant pilot salaries, had been omitted from the operating expenses of District Two. Specifically, the commenter noted that payment of training salaries should be considered as an operating expense instead of treated as pilot compensation. We agree that as applicant pilots are not counted as pilots for the purposes of calculating general pilot compensation, and this occurred prior to the use of surcharges to pay for applicant pilot salaries, these salaries should be recognized as an operating expense. The surcharge provision for funding applicant pilots did not impact rates until 2015 and the 2014 Annual Rulemaking did not provide funding for this activity. Therefore, we added the amount, $281,588, to the operating expenses of District Two to recoup the 2014 expense incurred in training applicant pilots that year. The recognized expenses for the various Districts are as follows: TABLE 1—RECOGNIZED EXPENSES FOR DISTRICT ONE District One Designated asabaliauskas on DSKBBXCHB2PROD with RULES Operating Expenses: Other Pilotage Costs: Pilot subsistence/travel ......................................................................................................... Applicant Pilot subsistence/travel ......................................................................................... License insurance ................................................................................................................. Applicant Pilot license insurance .......................................................................................... Payroll taxes ......................................................................................................................... Applicant Pilot payroll taxes ................................................................................................. Other ..................................................................................................................................... Total other pilotage costs .............................................................................................. Pilot Boat and Dispatch Costs: Pilot boat expense ................................................................................................................ Dispatch expense ................................................................................................................. Payroll taxes ......................................................................................................................... 33 These reports are available in the docket for this rulemaking, see Docket # USCG–2016–0268– 0056 through 0058. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 34 Docket PO 00000 Undesignated St. Lawrence River Reported expenses for 2014 Lake Ontario $302,547 0 20,231 0 78,067 0 479 $228,222 12,996 22,480 1,760 64,130 0 378 $530,769 12,996 42,711 1,760 142,197 0 857 401,324 329,966 731,290 130,741 0 9,797 103,173 0 7,732 233,914 0 17,529 # USCG–2016–0268–0037, p. 2. Frm 00007 Fmt 4701 Sfmt 4700 Total E:\FR\FM\31AUR2.SGM 31AUR2 41472 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 1—RECOGNIZED EXPENSES FOR DISTRICT ONE—Continued District One Designated Undesignated St. Lawrence River Reported expenses for 2014 Lake Ontario Total Total pilot and dispatch costs ....................................................................................... Administrative Expenses: Legal—general counsel ........................................................................................................ Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. Insurance .............................................................................................................................. Employee benefits ................................................................................................................ Payroll taxes ......................................................................................................................... Other taxes ........................................................................................................................... Travel .................................................................................................................................... Depreciation/auto leasing/other ............................................................................................ Interest .................................................................................................................................. APA Dues ............................................................................................................................. Utilities .................................................................................................................................. Salaries ................................................................................................................................. Accounting/Professional fees ............................................................................................... Pilot Training ......................................................................................................................... Applicant Pilot training .......................................................................................................... Other ..................................................................................................................................... 140,538 110,905 251,443 2,173 8,783 12,794 21,829 7,570 5,281 7,262 648 48,094 13,713 12,444 8,916 52,121 5,142 6,427 0 8,866 1,505 6,932 10,098 17,226 5,974 4,167 5,731 512 31,820 10,821 11,996 418 41,130 4,058 5,074 0 6,546 3,678 15,715 22,892 39,055 13,544 9,448 12,993 1,160 79,914 24,534 24,440 9,334 93,251 9,200 11,501 0 15,412 Total Administrative Expenses ...................................................................................... 222,063 164,008 386,071 Total Operating Expenses (Other Costs + Pilot Boats + Admin) .......................... Proposed Adjustments (Independent CPA): Pilot subsistence/travel ......................................................................................................... Payroll taxes ......................................................................................................................... Applicant Pilot payroll taxes ................................................................................................. 763,925 604,879 1,368,804 ¥15,712 ¥87 0 ¥12,401 ¥68 2,347 ¥28,113 ¥155 2,347 Total CPA Adjustments ................................................................................................. Proposed Adjustments (Director): APA Dues ............................................................................................................................. 2015 Surcharge Adjustment * ............................................................................................... Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. ¥15,799 ¥10,122 ¥25,921 ¥622 ¥92,766 ¥8,783 ¥12,794 ¥600 ¥72,887 ¥6,932 ¥10,098 ¥1,222 ¥165,653 ¥15,715 ¥22,892 Total Director’s Adjustments ......................................................................................... ¥114,965 ¥90,517 ¥205,482 Total Operating Expenses (OpEx + Adjustments) ................................................. 633,161 504,240 1,137,401 * District One collected $493,682 with an authorized 10 percent surcharge in 2015. The adjustment represents the difference between the collected amount and the authorized amount of $328,029 authorized in the 2015 final rule. TABLE 2—RECOGNIZED EXPENSES FOR DISTRICT TWO District Two Undesignated asabaliauskas on DSKBBXCHB2PROD with RULES Operating Expenses: Other Pilotage Costs: Applicant pilot salaries .......................................................................................................... Pilot subsistence/travel ......................................................................................................... Applicant Pilot subsistence/travel ......................................................................................... License insurance ................................................................................................................. Applicant Pilot license insurance .......................................................................................... Payroll taxes ......................................................................................................................... Applicant Pilot payroll taxes ................................................................................................. Other ..................................................................................................................................... Total other pilotage costs .............................................................................................. Pilot Boat and Dispatch Costs: Pilot boat expense ................................................................................................................ Dispatch expense ................................................................................................................. Employee benefits ................................................................................................................ Payroll taxes ......................................................................................................................... VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 Designated Lake Erie Reported expenses for 2014 SES to Port Huron Total $112,635 148,424 9,440 52,888 5,738 76,903 8,344 1,053 $168,953 222,635 14,160 79,333 8,608 115,354 12,516 1,579 $281,588 371,059 23,600 132,221 14,346 192,257 20,860 2,632 415,425 623,138 1,038,563 173,145 10,080 72,662 8,472 259,718 15,120 108,992 12,707 432,863 25,200 181,654 21,179 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations 41473 TABLE 2—RECOGNIZED EXPENSES FOR DISTRICT TWO—Continued District Two Undesignated Designated Lake Erie Reported expenses for 2014 SES to Port Huron Total Total pilot and dispatch costs ....................................................................................... Administrative Expenses: Legal—general counsel ........................................................................................................ Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. Office rent ............................................................................................................................. Insurance .............................................................................................................................. Employee benefits ................................................................................................................ Payroll taxes ......................................................................................................................... Other taxes ........................................................................................................................... Depreciation/auto leasing/other ............................................................................................ Interest .................................................................................................................................. APA Dues ............................................................................................................................. Utilities .................................................................................................................................. Salaries ................................................................................................................................. Accounting/Professional fees ............................................................................................... Pilot Training ......................................................................................................................... Other ..................................................................................................................................... 264,359 396,537 660,896 2,680 4,984 8,371 26,275 9,909 23,002 5,001 21,179 17,784 3,298 8,664 15,429 46,008 9,410 0 11,343 4,020 7,476 12,557 39,413 14,863 34,504 7,501 31,769 26,677 4,948 12,996 23,144 69,013 14,115 0 17,012 6,700 12,460 20,928 65,688 24,772 57,506 12,502 52,948 44,461 8,246 21,660 38,573 115,021 23,525 0 28,355 Total Administrative Expenses ...................................................................................... 213,337 320,008 533,345 Total Operating Expenses (Other Costs + Pilot Boats + Admin) .......................... Proposed Adjustments (Independent CPA): Depreciation/auto leasing/other ............................................................................................ 893,121 1,339,683 2,232,804 3,322 4,982 8,304 Total CPA Adjustments ................................................................................................. Proposed Adjustments (Director): APA Dues ............................................................................................................................. 2015 Surcharge Adjustment * ............................................................................................... Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. 3,322 4,982 8,304 ¥433 ¥85,782 ¥4,984 ¥8,371 ¥650 ¥128,672 ¥7,476 ¥12,557 ¥1,083 ¥214,454 ¥12,460 ¥20,928 Total Director’s Adjustments ......................................................................................... ¥99,570 ¥149,355 ¥248,926 Total Operating Expenses (OpEx + Adjustments) ................................................. 796,873 1,195,310 1,992,183 * D2 collected $540,284 with an authorized 10 percent surcharge in 2015. The adjustment represents the difference between the collected amount and the authorized amount of $325,830 authorized in the 2015 final rule. TABLE 3—RECOGNIZED EXPENSES FOR DISTRICT THREE District Three Undesignated Reported expenses for 2014 Lakes Huron, Michigan and Superior asabaliauskas on DSKBBXCHB2PROD with RULES Operating Expenses: Other Pilotage Costs: Pilot subsistence/travel ......................................................................................................... Applicant pilot subsistence/travel ......................................................................................... License insurance ................................................................................................................. Payroll taxes ......................................................................................................................... Applicant pilot payroll taxes .................................................................................................. Other ..................................................................................................................................... Designated Total St. Mary’s River $424,935 24,608 14,304 110,567 9,082 12,268 $141,645 8,203 4,768 36,856 3,027 4,090 $566,580 32,811 19,072 147,423 12,109 16,358 Total other pilotage costs .............................................................................................. Pilot Boat and Dispatch Costs: Pilot boat costs ..................................................................................................................... Dispatch costs ...................................................................................................................... Payroll taxes ......................................................................................................................... 595,764 198,589 794,353 593,360 133,787 31,432 197,787 44,596 10,477 791,147 178,383 41,909 Total pilot and dispatch costs ....................................................................................... Administrative Expenses: Legal—general counsel ........................................................................................................ Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. 758,579 252,860 1,011,439 15,386 15,900 23,422 5,129 5,300 7,807 20,515 21,200 31,229 VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 41474 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 3—RECOGNIZED EXPENSES FOR DISTRICT THREE—Continued District Three Undesignated Designated Reported expenses for 2014 Lakes Huron, Michigan and Superior Total St. Mary’s River Office rent ............................................................................................................................. Insurance .............................................................................................................................. Employee benefits ................................................................................................................ Other taxes ........................................................................................................................... Depreciation/auto leasing/other ............................................................................................ Interest .................................................................................................................................. APA Dues ............................................................................................................................. Dues and subscriptions ........................................................................................................ Utilities .................................................................................................................................. Salaries ................................................................................................................................. Accounting/Professional fees ............................................................................................... Pilot Training ......................................................................................................................... Other ..................................................................................................................................... 7,425 11,050 113,890 129 28,802 2,858 20,235 3,975 33,083 95,577 27,492 0 9,318 2,475 3,683 37,964 43 9,601 953 6,745 1,325 11,028 31,859 9,164 0 3,106 9,900 14,733 151,854 172 38,403 3,811 26,980 5,300 44,111 127,436 36,656 0 12,424 Total Administrative Expenses ...................................................................................... 408,542 136,182 544,727 Total Operating Expenses (Other Costs + Pilot Boats + Admin) .......................... Proposed Adjustments (Independent CPA): Pilot subsistence/Travel ........................................................................................................ Payroll taxes ......................................................................................................................... Pilot boat costs ..................................................................................................................... Legal—shared counsel (K&L Gates) .................................................................................... Dues and subscriptions ........................................................................................................ Other expenses .................................................................................................................... 1,762,885 587,631 2,350,516 ¥15,595 5,949 ¥62,748 ¥1,590 ¥3,975 ¥375 ¥5,198 1,983 ¥20,916 ¥530 ¥1,325 ¥125 ¥20,793 7,932 ¥83,664 ¥2,120 ¥5,300 ¥500 Total CPA Adjustments ................................................................................................. Proposed Adjustments (Director): APA Dues ............................................................................................................................. Surcharge Adjustment * ........................................................................................................ Legal—shared counsel (K&L Gates) .................................................................................... Legal—Coast Guard litigation .............................................................................................. ¥78,334 ¥26,111 ¥104,445 ¥1,012 ¥216,734 ¥14,310 ¥23,422 ¥1,012 ¥72,245 ¥4,770 ¥7,807 ¥2,024 ¥288,979 ¥19,080 ¥31,229 Total Director’s Adjustments ......................................................................................... ¥255,478 ¥85,834 ¥341,312 Total Operating Expenses (OpEx + Adjustments) ................................................. 1,429,073 475,687 1,904,760 * D3 collected $615,929 with an authorized 10 percent surcharge in 2015. The adjustment represents the difference between the collected amount and the authorized amount of $326,950 authorized in the 2015 final rule. 2. Projection of Operating Expenses Step 2 in our ratemaking methodology requires that the Coast Guard project next year’s operating expenses, and adjust for inflation or deflation (§ 404.102). In the NPRM, we adjusted for inflation and projected expenses for 2017 using the Bureau of Labor Statistics’ data from the Consumer Price Index for the Midwest Region of the United States 35 and reports from the Federal Reserve.36 We did not receive any comments on this step and thus are adjusting operating expenses for inflation as described in § 404.102. We do note that, based on updated information from the Bureau of Labor Statistics, the 2016 inflation modification has been adjusted to 0.8%. TABLE 4—CALCULATION OF PROJECTED EXPENSES Area 2 (Undesignated) asabaliauskas on DSKBBXCHB2PROD with RULES District One Total 2015 2016 2017 Area 1 (Designated) Total Operating Expenses (Step 1) ................................................................................. Inflation Modification (@¥0.5%) ............................................................................ Inflation Modification (@0.8%) ............................................................................... Inflation Modification (@2.1%) ............................................................................... $633,161 ¥3,166 5,040 13,336 $504,240 ¥2,521 4,014 10,620 $1,137,401 ¥5,687 9,054 23,956 Adjusted 2016 Operating Expenses ......................................................................... 648,371 516,353 1,164,724 35 Available at https://www.bls.gov/regions/ midwest/data/consumerpriceindexhistorical_ midwest_table.pdf. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 36 Available at https://www.federalreserve.gov/ monetarypolicy/fomcprojtabl20160316.htm. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations Area 4 (Undesignated) District Two Total 2015 2016 2017 Area 5 (Designated) 41475 Total Operating Expenses (Step 1) ................................................................................. Inflation Modification (@¥0.5%) ............................................................................ Inflation Modification (@0.8%) ............................................................................... Inflation Modification (@2.1%) ............................................................................... 796,874 ¥3,984 6,343 16,784 1,195,310 ¥5,977 9,515 25,176 1,992,183 ¥9,961 15,858 41,960 Adjusted 2016 Operating Expenses ......................................................................... 816,016 1,224,024 2,040,040 Areas 6 and 8 (Undesignated) District Three Total Operating Expenses (Step 1) ................................................................................. Inflation Modification (@¥0.5%) ............................................................................ Inflation Modification (@0.8%) ............................................................................... Inflation Modification (@2.1%) ............................................................................... 1,429,073 ¥7,145 11,375 30,099 475,687 ¥2,378 3,786 10,019 1,904,760 ¥9,523 15,162 40,118 Adjusted 2016 Operating Expenses ......................................................................... asabaliauskas on DSKBBXCHB2PROD with RULES Total 2015 2016 2017 Area 7 (Designated) 1,463,402 487,114 1,950,516 3. Calculation of Number of Pilots Step 3 in our ratemaking methodology requires that the Coast Guard determine the number of pilots needed to complete all assignments (§ 404.103). In the NPRM, we proposed to modify our pilotage demand calculation to focus on the pilot work cycle, including elements such as travel, rest, pilot boat time, and other items in addition to the time spent on the bridge of a ship. Based on the comments received, we have determined that transitioning to this model, in which all traffic is treated equally for the purpose of determining the number of pilots needed, would result in traffic delays, overwork of pilots, and possible compromises to safety on the Great Lakes. For these reasons, we are not finalizing the proposed changes to § 404.103. It is important to note that Step 3 produces two different sets of numbers associated with the respective sections of § 404.103. The first number, described in paragraphs (a) through (c), is used to establish the number of pilots the Coast Guard believes are needed to provide safe and efficient pilotage service in each area. This number provides guidance to pilot associations and the Director of Great Lakes Pilotage in making determinations about hiring decisions and the authorization of new pilots. The second number, described in paragraph (d), is based on the number of persons applying for pilot positions under 46 CFR 401. For purposes of setting Great Lakes pilotage rates in § 401.405, only the number derived from the 404.103(d) analysis is used in the ratemaking calculations. Most commenters provided comments on the model used to determine the number of pilots needed. In the NPRM, the Coast Guard proposed replacing the existing staffing model, which we call the 2016 final rule staffing model, with a model that analyzed shipping traffic VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 throughout the entire shipping season, and which we are calling the 2017 NPRM staffing model.37 We stated that we were proposing to modify the pilotage demand calculation to incorporate the ‘‘number of assignments we reasonably expect pilots to be able to complete during the 9-month shipping season instead of during peak pilotage demand.’’ (See 81 FR 72014–5). While we recognized that during the opening and closing of the season, there are significant spikes in traffic that necessitate far more pilotage services, the Coast Guard believed that this seasonal peak would be adequately covered by the fact that pilots would work an extra 10 days (30 percent) per month during those months to cover the increased traffic. The functional result of the proposed change to the staffing model was to reduce the total number of pilots needed to service the Great Lakes system by 5, from a total of 54 under the previous staffing model to a total of 49 under the proposed new staffing model. We received a large number of comments, especially from pilots, regarding how this change in modeling could affect their workload, lifestyle, stress levels, and overall retention rates, as discussed below. The 2017 NPRM staffing model had a number of substeps and we received comment on nearly all of these substeps. The substeps and associated comments are discussed below. Substep 1: Calculate Pilot Cycle The first step of the process is to determine how long it takes for a pilot to undertake a full piloting cycle, that is, to board a ship, provide pilotage 37 We note that commenters often refer to these models as the ‘‘peak’’ and ‘‘average’’ staffing models, although we feel such nomenclature is imprecise, as both models are designed to accommodate traffic at higher-than-average demand periods. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 services, disembark, rest, travel back to a port location, and complete any administrative tasks associated with providing pilotage service. We used the ‘‘Average-Through Transit Time’’ between change points 38 for an area or assignment segment that is impacted by a mandatory change point, and then added additional time for travel, delay, administrative needs, and mandatory rest, to come up with the total amount of time for a ‘‘Pilot Cycle.’’ One commenter 39 suggested that the Coast Guard had made an error in its calculation of the number of pilots needed as a result of the addition of the Iroquois Lock. As noted, in the NPRM, the Coast Guard proposed to add a mandatory change point to District One, Area 1, at the Iroquois Lock. We proposed this additional change point to enhance safety on long segments, noting that the transit time between Snell Lock and Cape Vincent takes about 11 hours under ideal circumstances, and that we wanted to limit a U.S.-registered pilot’s assignment time to 8 hours in designated waters to mitigate fatigue.40 As a result of adding this change point, we modified how we calculated the number of pilots for the Designated Waters of District One (St. Lawrence River). The commenter noted that while the Coast Guard had increased the number of pilot assignments to account for the mandatory change point at Iroquois Lock, it had not adjusted the AverageThrough Transit Time to account for the shorter trips due to the change point. The commenter asserted that instead of using a figure of 10.8 hours, the Coast Guard should replace that figure with a transit time of 6 hours. This change 38 The Average-Through Transit Time is the number of hours it takes for a vessel to fully transit through an area. 39 Docket #USCG–2016–0268–0033, p. 14. 40 81 FR 72016 (December 19, 2016). E:\FR\FM\31AUR2.SGM 31AUR2 asabaliauskas on DSKBBXCHB2PROD with RULES 41476 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations would have the effect of lowering the Pilot Cycle to 20.0 hours (from the current 25.2) and the number of additional pilots needed from 3.4 to 2.7. The commenter recommended this new figure be incorporated into the Coast Guard’s calculations. We believe that this comment is justified, and that under conditions where we are calculating transit through times for a single pilot, this would be a reasonable change. However, we are not adopting the 2017 NPRM staffing model, but we are retaining the 2016 final rule staffing model. In such a model, we calculate transit through the Iroquois Lock using double pilotage, where the fatigue issue is mitigated by a second pilot. For that reason, under double pilotage, pilots do not have to change at the Iroquois Lock, and we can continue to use the full 10.8 hour average through transit time. One commenter 41 stated the NPRM inconsistently relied on bridge hours and cycle time in determining the number of pilots needed in each District, and that instead of using the Average-Through Transit Time as a basis for the pilot cycle, we should use an average trip time. The commenter gave an example for District Two Area 4. The NPRM uses cycle time analysis to determine that District Two, Area 4 needs seven pilots to handle the historic average assignments in this area. These seven pilots should complete an average of 73 assignments with an AverageThrough Transit Time of 17 hours each. The commenter stated the total time on task for this District would be 8,687 hours. However, this figure would differ from the Coast Guard’s calculation of average traffic, used to calculate revenue, which found the average time on task as 5,174 hours per year using the average number of bridge hours from 2007 to 2015. The commenter stated that the Coast Guard’s ‘‘inconsistent reliance on bridge hours raises the hourly rate in the undesignated waters of District Two from $319 to $537.’’ 42 The commenter stated that the Coast Guard cannot rely on cycle time to increase the projected number of pilots needed and then use the bridge hours to calculate the hourly rate. We acknowledge that we use different bridge hour inputs when calculating the Average-Through Transit Time and the calculation for the expected traffic. For staffing purposes, we are assuming that each assignment will go between the mandatory change points in a given pilotage district to ensure that we have enough pilots to handle traffic. This is a situation where efficiency and safety are in conflict. We believe the safety concerns associated with having too few pilots outweigh the financial burden on the rate payers. The methodology established in the 1990s used a similar bridge hour standard in multiple steps throughout the ratemaking process. This caused problems with recruitment and retention, revenue shortfalls, lack of training, and a resistance to infrastructure investment and maintenance. We intentionally decided to only include a historic bridge hour input in determining the hourly rate for services and use the number of assignments (assuming that each assignment would be average maximum time between two change points) for staffing. However, we realize that this system of basing the pilot cycle on the transit through time, as opposed to the average trip time, is better suited to the 2016 final rule staffing model, rather than the 2017 NPRM staffing model. As we stated in the 2016 final rule, it makes sense to use the full transit through time for conditions at the opening and close of the season, as a high percentage of trips during that time are through transit trips to ensure the pilot associations are sufficiently staffed to provide adequately rested pilots during the time of the season when the conditions are most challenging. Conversely, when calculating the total revenues we expect the associations to collect, we use the historic traffic data, which provides a more accurate accounting of revenue. Unlike the issue of staffing of vessels, it does not make a difference when revenue is collected during the shipping season. As the commenter points out, the transition from 2016 final rule staffing model to the 2017 NPRM staffing model, without reevaluating the full ratemaking methodology, can cause these types of logical discrepancies. This is one reason that we are not adopting the 2017 NPRM staffing model in the final rule, and are instead relying on the 2016 final rule staffing model to determine an adequate capacity. Substep 2: Calculate Maximum Number of Assignments per Pilot In the next part of the 2017 NPRM staffing model, we divided the Seasonal Availability (the total amount of time which we expect a pilot to be available, which is 4,800 hours, or 200 days 43) by the Pilot Cycle to calculate a theoretical maximum number of assignments per 43 This 41 Docket 42 Docket #USCG–2016–0268–0033, p. 17. #USCG–2016–0268–0033, p. 17. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 number is based on a 270-day shipping season, with an allowed 10 days off each non-peak month. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 pilot. We realize that this number is highly theoretical, and assumes no shipping delays, inclement weather conditions, traffic, administrative issues, and that a new ship is readily available each time a pilot arrives at port. As seen below, the number of actual assignments a pilot can perform during the shipping season is much lower. Substep 3: Calculate Estimated Number of Assignments per Pilot In the third step, we multiplied the theoretical maximum number of assignments per pilot by an ‘‘efficiency factor’’ of 50 percent, which is based upon the Coast Guard’s 2013 ‘‘Bridge Hour and Methodology Study Final Report,’’ 44 to arrive at a total number of projected assignments per pilot. We received comments criticizing the efficiency factors from a variety of sources. One commenter stated that it was ‘‘nothing more than a placeholder number from a study rejected by both pilots and industry at GLPAC.’’ 45 The commenter requested that the Coast Guard abandon its existing methodology for determining the number of pilots needed in an area. In its place, the commenter suggested the Coast Guard determine the number of pilots needed by either directly using the recent average number of assignments per pilot, or by increasing the efficiency ratio in each District to bring the anticipated number of assignments up to average levels. The commenter did not specify what the ‘‘recent average number of assignments per pilot’’ was, or what change to the efficiency ratio would be needed to achieve this. However, the commenter suggested that the Coast Guard could gather information that would allow us to more directly determine average pilot assignments by using invoices and source forms provided by pilots.46 While we understand the concept of this proposal, we do not agree that the historic average of assignments is a useful tool for the following reasons. The mid-1990s methodology excluded many of the pilot assignment cycle time inputs to determine a seasonal workload. Additionally, the goal of providing 10 days of recuperative rest for 7 months of the season was introduced in the 2016 Annual Rulemaking, in response to National Transportation Safety Board recommendations, letters from Congress asking us to address recruitment and 44 Available in the docket, see Docket #USCG– 2016–0268–0059. 45 Docket #USCG–2016–0268–0037, p. 3. 46 Docket #USCG–2016–0268–0033, p. 19. E:\FR\FM\31AUR2.SGM 31AUR2 asabaliauskas on DSKBBXCHB2PROD with RULES Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations retention, and a recommendation from the July 2014 GLPAC meeting. For these reasons, we do not expect the historical average of assignments per pilot to be an accurate reflection of the estimated future counts based on the current staffing model. We may consider using historical data in a future rulemaking if we compile sufficient data to make an accurate comparison. We believe the efficiency factor of 0.5 is supported by the Bridge Hour and Methodology Study Final Report. In response to concerns about the methodology used to calculate shipping rates, GLPAC unanimously recommended that an independent party conduct a comprehensive review of the methodology established in the mid-1990s to calculate pilotage rates. GLPAC reviewed the scope of the study, entitled ‘‘Bridge Hour and Methodology Study Final Report,’’ expanded the study’s scope, and unanimously approved the scope of the study. This included one-on-one meetings with all of the stakeholders, two focus groups, and additional GLPAC meetings. Based on the study’s findings, the Coast Guard developed the efficiency factor. The study recommended that we consider an efficiency factor between 0.4 and 0.6 for staffing. However, we provided additional guidance with regard to mandatory change points and required rest between assignments in 2014, incorporated changes based upon recommendations from the National Transportation Safety Board in 2015, and implemented significant changes to the methodology in 2016 Annual Rulemaking. While the various stakeholders rejected the final recommendations of the study for different reasons, none of the criticisms of the study accused its final recommendations of being a ‘‘placeholder.’’ One group did not think the study went far enough to recommend changes that were outside of the scope of the study. Another group did not think the study went far enough to guarantee time off for the pilots or establish an acceptable compensation standard. While we are not using the efficiency factor in this final rule, we continue to believe that a 0.5 efficiency factor would be reasonable if it were being used in a staffing model. One commenter 47 stated that the Coast Guard had used incorrect assumptions regarding efficiency, cycle time, recuperative rest, and transition planning in calculating the total average time it takes for a pilot to complete an assignment. Using as an example the Coast Guard’s calculations for District 47 Docket #USCG–2016–0268–0033, p. 16. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 Three Area 2 (which in the NPRM is listed as ‘‘Area 7’’), in which the Coast Guard calculated that the number of projected assignments per pilot was 112, the commenter said that ‘‘assuming that these pilots can only take one assignment per day (based on the estimated 21.5 hour shipping time), each pilot in [Area 7] will only work 41 percent of a 270-day shipping season. This figure is unrealistically low.’’ 48 We disagree with the assertions that we used incorrect assumptions that resulted in an unrealistically low value. Even though the shipping season is 270 days, we only expect the pilots to be on the tour-de-role for 200 days a season (noting that they receive 10 days off per month for seven of the nine months of the season) so the correct comparison would be the number of days worked to the number of days available for assignment which is 56 percent (112 assignments/200 days). This does not seem unrealistically low, as the total cycle time is often over one day. Furthermore, we know that the demand for pilot services is not spread uniformly across the entire season, and there will be times when a pilot is idle for substantial periods of time between assignments. It is quite rare that a pilot returns after an assignment and is immediately able to start a new assignment, and that usually only occurs when there is a backlog of ships awaiting pilots. Simply put, all of this represents inherent inefficiencies in the system and, for these reasons, an efficiency factor of 50 percent is appropriate. Substep 4: Calculate Total Number of Pilots Needed per Area Having determined the number of assignments that a pilot can reasonably be expected to handle in a shipping season, we move to calculate how many pilots are needed to handle the amount of traffic. To do this, we divided the measured number of actual assignments (averaged over a 10-year period) by the estimated number of assignments per pilot to estimate the total number of pilots needed for a segment within an area. This produces a figure of how many pilots are needed to handle the total amount of traffic in an area. Because of the detailed manner in which calculations of pilots are carried out, the raw calculations often end up suggesting a fractional number of pilots. In the NPRM, we stated that, ‘‘when the calculation [of total pilots needed] results in a fraction of a pilot, we round pilot numbers up to the nearest whole pilot. We do this to avoid shortening our 48 Docket PO 00000 #USCG–2016–0268–0033, p. 16. Frm 00013 Fmt 4701 Sfmt 4700 41477 demand calculation and also to compensate for the role of the district presidents as both working pilots and representatives of their associations. We believe the rounding is justified to meet the needs of the staffing model and also to ensure the presidents of the pilot associations are able to effectively engage in meetings and communications with stakeholders throughout the Great Lakes region and the Coast Guard.’’ (81 FR 72016–7). Several commenters argued that our rounding convention, in which we rounded up to the nearest whole number rather than rounding up or down, unnecessarily increased the number of pilots. One commenter argued that the Coast Guard’s stated rationale in the 2017 NPRM for rounding up in all situations is flawed. The commenter suggested that the Coast Guard should not build in time for meetings and outreach activities into the pilot numbers, and stated that if the pilot associations believe those are essential elements of officer functions, they should instead adjust their distribution practices to encourage those functions.49 The commenter also stated that other aspects of the staffing model already ensure that association officers have time for other duties, citing the efficiency adjustment of 50 percent. We disagree that the efficiency factor is the proper forum in which to address a pilot’s ancillary duties, such as acting as an association president. The ability of a pilot president to engage in the running of the association, respond to Coast Guard inquiries, and attend necessary meetings further takes away from his ability to provide pilotage service. The efficiency factor adjustment is designed to determine how efficiently a pilot can undertake piloting activities, and does not address these other required activities. The commenter also argued that the method by which the Coast Guard rounded up pilot numbers in the 2017 NPRM deviates from the 2016 NPRM.50 In the 2017 NPRM, we proposed to round up ‘‘when the calculations resulted in a fractional pilot.’’ 51 We agree that the 2017 NPRM staffing model is different from that used in 2016. In 2016, we established the standard to round the number of pilots up or down, ‘‘as seems most reasonable,’’ using a demand number that generally allocated more pilots than needed at times of lesser traffic. This is because, under the 2016 Final Rule 49 Docket #USCG–2016–0268–0033, p. 15, footnote 7. 50 Docket #USCG–2016–0268–0033, p. 14. 51 81 FR at 72015–6. E:\FR\FM\31AUR2.SGM 31AUR2 41478 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES Staffing Model, there was less of a safety concern of rounding down by a fractional pilot. We proposed a different staffing model in the 2017 NPRM, using the pilot assignment cycle to determine the actual number of pilots needed for the duration of the shipping season. Under this model, rounding down would be more likely to result in an inadequate number of properly-rested pilots available, and could result in safety concerns and traffic delays. However, as stated above, we believe that in maintaining the 2016 final rule staffing model, this issue with the rounding can be resolved. The Coast Guard also received a comment that it had applied unnecessary rounding to the Iroquois Lock calculation, resulting in an overestimate of the number of pilots needed. The commenter wrote, ‘‘According to GPLO calculations, without rounding, District One would need a total of 9.11 pilots to handle anticipated demand in District One, Area 1. With rounding, GLPO proposes that 11 pilots are needed.’’ 52 We believe the coalition’s calculations are incorrect. In the NPRM, we calculated that District One, Area 1, would need a total of 9.11 pilots (3.4 + 5.71), for the increased number of assignments due to the mandatory change point at Iroquois Lock. However, this was rounded up to 10 not 11. This is shown in Table 9 of the NPRM, where we stated that the total number of pilots required for the designated waters of District One, Area 1, is 10.53 In evaluating this comment, however, we did discover one issue with our rounding convention. While the text of paragraph 404.103(c) reads, in part, ‘‘[t]he number of pilots needed in each district is calculated by totaling the area results by district and rounding them to the nearest whole integer,’’ the Coast Guard made an error in its rounding calculations by rounding the number of pilots in each area, rather than in each district. There are circumstances where this could have resulted in an increase of an extra pilot (if, for example, two areas required 0.7 pilots). We have corrected this mistake in the final rule and are rounding by district. Reasons To Abandon 2017 NPRM Staffing Model Several commenters discussed the proposed change from 2016 final rule staffing model to the 2017 NPRM staffing model in general terms, without referring to specific portions of the calculations. 52 Docket 53 81 #USCG–2016–0268–0033, page 15. FR at 72017 (December 19, 2016). One commenter, a Great Lakes pilot, argued that the number of pilots proposed in the 2017 calculations would fall short of what is needed to provide safe, efficient, and reliable pilotage.54 The commenter stated that reviewing bridge hours worked in District Three over the course of the 2016 shipping season would show that pilots there had worked extra hours to keep ships moving. Furthermore, the commenter suggested that cruise ships, which are run on a much tighter schedule than cargo ships, might abandon the area if a lack of pilots caused persistent delays. However, the commenter did not provide specific recommendations on how we should modify the staffing model’s methodology or suggest different inputs. We received comments from the Western Great Lakes Pilot Association President which suggested that using an average staffing model, as proposed in the 2017 NPRM, would result in unacceptable delays for cruise ships. We recognize that the various types of vessels that employ U.S. and Canadian registered pilots have different tolerances for delays due to the lack of pilot availability. One method to address the varying tolerance for delays is through adjusting the regulations that deal with dispatching. The current system is to strictly assign pilots on a first-come, first-serve basis. We plan to discuss this issue during the next GLPAC meeting to investigate whether that standard should be modified, and the potential implications such modifications would have on the System and hourly pilotage rates. For many of the reasons the commenters described above, we realize that there are flaws with the 2017 NPRM staffing model. Based upon the comments received, particularly those that highlighted the variations in traffic throughout the season and the inconsistencies in the use of average trips vs. through time, we have concluded that our data does not support using the 2017 NPRM staffing model. For those reasons, we have decided to not to adopt the 2017 NPRM staffing model, and continue to use the 2016 final rule staffing model. We note, however, that in the NPRM, we proposed to adjust the wording of 46 CFR 404.104 by replacing the word ‘‘peak’’ with the word ‘‘seasonal.’’ While we are not adopting the proposed new staffing model, we believe that ‘‘seasonal’’ is a more appropriate term to use, as instances of high demand often occur at various points in the seasons, VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 54 Docket PO 00000 #USCG–2016–0268–0021, p. 1. Frm 00014 Fmt 4701 Sfmt 4700 and so are maintaining that textual change in the final rule. We agree with both shippers and pilots that the proposed 2017 NPRM staffing model may not achieve the required goals of promoting safe and efficient pilotage, and that averaging traffic through an entire season may not adequately account for mid-season variations in demand. In this final rule, we maintain the staffing model we adopted in the 2016 final rule. Even though we have used the label ‘‘peak demand’’ for the 2016 staffing model, we believe some have misinterpreted this label. This model uses the pilot assignment cycle and average lateseasonal traffic demand over the past 10 shipping seasons to establish the number of pilots necessary to move that traffic. We did not establish staffing levels to eliminate delays throughout the season by reviewing 10 years of historic traffic and ensuring that sufficient pilots would be on the tourde-role throughout the season to eliminate delays. We believe our approach provides sufficient pilots to deal with the opening of the Seaway and the late season rush, in addition to other high-traffic periods, in a safe and reliable manner while also accounting for mid-season demand variations and providing the pilots with sufficient opportunity to achieve 10 days of recuperative rest during 7 months of the season. We are willing to evaluate potential adjustments to this model in the future if we receive specific delay tolerances from those stakeholders concerned about this issue. We discussed staffing during the previous GLPAC meeting and plan to discuss staffing and delay tolerance during future meetings. Calculation of Pilotage Need Under the 2016 Final Rule Staffing Model Using the 2016 final rule model, we have recalculated the number of pilots needed for each district. First, we note that use of this model considers the extensive use of double pilotage during the opening and closing of the shipping season. This is because, during the opening and closing of the season, the aids to navigation may not be in place, the weather can be volatile and extreme, sea smoke and fog appear with little notice, and ice conditions routinely present unique challenges to navigation. It is also during these periods that the pilots are working diligently to ensure all vessels exit the system before the locks close. For these reasons, we tend to authorize double pilotage during the opening and closing in designated waters for District One and District Two. District Three tends to engage in day- E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations time only navigation on the St. Marys River in lieu of utilizing two pilots. Double pilot usage in District Three occurs about 30 percent of the time during the opening and closing of the System. Our staffing model is designed to move the average amount of ships (calculated using a 10-year average model) into and out of the system during these times. Additionally, we note that the use of double pilotage avoids concern about how the proposed rule’s modeling system dealt with the inclusion of the new mandatory change point at the Iroquois Lock. Several commenters had noted that while the Coast Guard had mandated the change, it had not updated its models to account for a shorter average transit through time the change would produce. However, during periods of double pilotage, because there are two pilots onboard 41479 that can share the duty, there is no need to do a pilot change at the Iroquois Lock. Substep 1: Determine the Pilot Cycle Time Similar to the 2017 NPRM staffing model, we start the 2016 final rule staffing model by calculating the pilot cycle time, as shown the tables below: TABLE 5a—CALCULATION OF PILOT ASSIGNMENT CYCLE, DISTRICT ONE District One Area 1 Area 2 Time on Bridge or Available (hrs) ................................................................................................................... Travel and Pilot Boat Transit (hrs) .................................................................................................................. Delay (hrs) ....................................................................................................................................................... Admin (hrs) ...................................................................................................................................................... Mandatory Rest ............................................................................................................................................... 10.8 3.2 .7 .5 10 11 4.6 .9 .5 10 Total Pilot Assignment Cycle (hrs) ........................................................................................................... 25.2 27.0 District Two is unique in the fact that the mandatory change points do not align with the border of designated and undesignated waters. The mandatory change point is located at Detroit, but the boundary for designated and undesignated waters occurs at the Southeast Shoal of Lake Erie. We based the average through transit for each of these segments, as follows: TABLE 5b—CALCULATION OF PILOT ASSIGNMENT CYCLE, DISTRICT TWO Between Area 4 and Detroit District Two Between Detroit and Port Huron Time on Bridge or Available (hrs) ................................................................................................................... Travel and Pilot Boat Transit (hrs) .................................................................................................................. Delay (hrs) ....................................................................................................................................................... Admin (hrs) ...................................................................................................................................................... Mandatory Rest ............................................................................................................................................... 17 4.6 .7 .5 10 6.5 3.2 .4 .5 10 Total Pilot Assignment Cycle (hrs) ........................................................................................................... 32.8 20.6 District Three is unique in that steelimporting vessels transit to Chicago/ Burns Harbor while grain-exporting vessels depart from Duluth and Thunder Bay. During the opening and closing of the shipping season, the System experiences numerous vessels that make an inbound or outbound transit in ballast. TABLE 5c—CALCULATION OF PILOT ASSIGNMENT CYCLE, DISTRICT THREE District Three Area 6 Area 7 Area 8 22.5 2.4 1 0.5 10 7.1 3.6 0.3 0.5 10 21.6 3.7 3.3 0.5 10 Total Pilot Assignment Cycle (hrs) ........................................................................... asabaliauskas on DSKBBXCHB2PROD with RULES Time on Bridge or Available (hrs) ................................................................................... Travel and Pilot Boat Transit (hrs) .................................................................................. Delay (hrs) ....................................................................................................................... Admin (hrs) ...................................................................................................................... Mandatory Rest ............................................................................................................... 36.4 21.5 39.1 Substep 2: Determination of Average Late Season Demand We then determine the average lateseason traffic demand over the base period, as shown in table 6. This VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 number is derived by dividing the number of assignments by the number of days in the corresponding pilot cycle. Numbers for designated areas are doubled due to the need for double PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 pilotage during late peak seasonal period, as described above. Table 6 also shows the number of pilots that would be authorized using the traffic information from 2007–2016. E:\FR\FM\31AUR2.SGM 31AUR2 41480 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 6—10-YEAR AVERAGE OF TRAFFIC DEMAND AND PILOT REQUIREMENTS AT THE CLOSING OF THE SEASON, 2007–2016 Area 1 (designated) District One Average late-season assignments per day ..................................................................................................... Average Pilot Cycle Time (hours) ................................................................................................................... Total Hours Needed (Assignments * Cycle Time) .......................................................................................... Total Hours Needed for double pilotage transit (designated only) ................................................................. Number of pilots needed to meet the average seasonal demand (total hours/24) ........................................ Pilots Needed for total district .................................................................................................................. 5 25.2 126 252 10.5 Average late-season assignments per day ..................................................................................................... Average Pilot Cycle Time (hours) ................................................................................................................... Total Hours Needed (Assignments * Cycle Time) .......................................................................................... Total Hours Needed for double pilotage transit (designated only) ................................................................. Number of pilots needed to meet the average seasonal demand (total hours/24) ........................................ Pilots Needed for total district .................................................................................................................. Area 6 (undesignated) District Three Average late-season assignments per day ..................................................................... Average Pilot Cycle Time (hours) ................................................................................... Total Hours Needed (Assignments * Cycle Time) .......................................................... Total Hours Needed for double pilotage transit (designated only) ................................. Number of pilots needed to meet the average seasonal demand (total hours/24) ........ Pilots Needed ........................................................................................................... Based on the above analysis, we have determined that there is a need for a total of 54 pilots. The breakdown, as shown in the above table, is 17 pilots in District One, 15 pilots in District Two, and 22 pilots in District Three. The Coast Guard will keep these numbers in mind in future regulatory actions. asabaliauskas on DSKBBXCHB2PROD with RULES Calculation of Projected Pilot Numbers As stated above, paragraph 404.103(d) produces a separate number of pilots, which is used for the Great Lakes pilotage ratemaking procedure. That section requires the Director of Great Lakes Pilotage to determine the number of pilots expected to be fully working and compensated based on the number of persons applying become U.S. Great Lakes registered pilots, and on information provided by the district’s pilotage association. In the NPRM, the Coast Guard projected that there would be 17 pilots in District One, 13 pilots in District Two, and 15 pilots in District Three, for a total of 45 pilots. 55 District Three prefers day-time navigation only during the opening and closing of the System and these pilots use double pilotage approximately 30 percent of the time at the opening and closing of the season. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Fmt 4701 Sfmt 4700 5 20.6 103 206 8.6 (164 + 206)/24 = 15.41 = 15 (rounded) Area 7 (designated) 5 21.5 107.5 55 139.75 5.8 Area 8 (undesignated) 5 39.1 195.5 N/A 8.1 (182 + 139.75 + 195.5)/24 = 21.55 = 22 (rounded) as a reason to justify the addition of more pilots than required by its calculations.’’ The commenter stated that the Coast Guard proposes adding 1 additional pilot in District Two and 4 additional pilots in District Three, but the Coast Guard does not impose age limitations on pilots. The commenter stated the Coast Guard also does not specify the retirement commitments of the current pilots within the next 2 years. The commenter recommended that instead of speculating about the age impacts on pilot rosters, the Coast Guard should train additional pilots based on the retirement transition plans. We disagree. The regulations allow a registered pilot to work until the age of 70. Just because a pilot can keep his full registration until age 70, doesn’t mean that all of the pilots will work until that age. In the past several years, a number of pilots have retired prior to age 70. While we are in close contact with the US pilot associations to plan for future retirements, we do not feel it is prudent to assume that all of the current pilots will work until age 70. #USCG–2016–0268–0033, p. 18. Frm 00016 Area 5 Between Detroit and Port Huron 5 32.8 164 N/A 6.8 5 36.4 182 N/A 7.6 In the NPRM, after determining the number of pilots needed in each district in Step 3, the Coast Guard proposed adding additional applicant pilots in District Two and District Three. The Coast Guard believes these applicant pilots are necessary to prepare for future retirements, given the long training periods associated with new pilots. Currently, 4 of the pilots in District Two are over 62 years of age, and 6 of the pilots in District Three are over 61 years of age. These pilots represent nearly 30 percent of the pilot strength in each of these districts. Waiting until these pilots retire to replace them will result in significant delays and may denigrate safety, because the pilot association will be short-staffed. These pilots are needed in addition to the existing shortage of pilots (District Two is one pilot short of the needed number, while District Three is seven pilots short). Therefore, the Coast Guard proposed authorizing a surcharge in 2017 to fund these additional applicant pilots. We received several comments on this issue. One commenter 56 stated that the ‘‘NPRM arbitrarily introduces pilot age 56 Docket 6 27.0 162 ............................ 6.8 (252 + 162)/24 = 17.25 = 17 (rounded) Area 4 to Detroit (designated and undesignated) District Two Area 2 (undesignated) E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES Once commenter 57 stated that the ‘‘Lakes Pilots Association agrees with the number of pilots in the proposed rates of 13 working pilots and 2 training pilots.’’ The commenter stated the Lakes Pilot Association will require 15 pilots to service future traffic and provide adequate rest in the future. The Lakes Pilot Association noted in 2018, that it will look for 14 full time pilots and 1 trainee and will be at 15 full time pilots in 2019. We agree with the assessment that there is a need for 13 working pilots and 2 training pilots for the 2017 shipping season. We cannot comment on 2018 and 2019 at this time. Based on our analysis of the pilotage numbers and the comments received, we have not modified the number of working pilots for 2017. Both the 2017 NPRM staffing model and the 2016 final rule staffing model produce more pilots than the 3 U.S. pilot associations have fully trained. Therefore, when we established 45 working pilots in the NPRM, we knew that the system needed more time to acquire and train the additional pilots. We will continue to monitor and work with the pilot associations to ensure that the associations continue to make progress toward our staffing goals. The final numbers for the 2017 Step 3 calculations are 17 pilots for District One, 13 pilots for District Two, and 15 pilots for District Three, for a total of 45 pilots. Pursuant to 46 CFR 404.104, these are the numbers we will be using in our rate calculations. 4. Calculation of Target Compensation Step 4 in our ratemaking methodology requires that the Coast Guard determine the target pilot compensation (§ 404.104). In the 2016 final rule, the Coast Guard used the Canadian pilot compensation as the benchmark for the U.S. pilot compensation, and then made an adjustment for foreign exchange differences and inflation. The Coast Guard then increased the U.S. target pilot compensation by 10 percent over the projected GLPA figure to account for the differences in the status of U.S. and Canadian pilots and the different compensation systems in place in the two countries. In the 2017 NPRM, the Coast Guard proposed keeping the target pilot compensation at the 2016 levels. In this section, we discuss comments relating to our calculations to get to the target compensation as discussed in the 2016 final rule and the 2017 NPRM, which uses the Canadian salary plus 10 percent as the target. In the section regarding setting a compensation benchmark above, we separately 57 Docket #USCG–2016–0268–0035, p. 1. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 discussed the issue of using different compensation benchmarks, such as the compensation packages for pilots in other U.S. Associations or salaries of first mates or other crewmembers. For the reasons described in that section, we continue to believe that the benchmark established in the 2016 final rule, based on Canadian pilot salaries plus a 10 percent differential to calculate the value of certain benefits, is an appropriate level of compensation. In this section, we discuss the specific comments related to the calculation of the compensation benchmark. Several commenters suggested that the use of Canadian pilot salaries was an inappropriate yardstick by which to base U.S. salaries. One commenter argued that it was inappropriate because U.S. and Canadian pilot associations cannot recruit workers from the same pool of individuals.58 Another commenter suggested that the older way in which the Coast Guard determined compensation, by basing its estimate on the wages paid to U.S. Masters and Mates, was more appropriate, asserting that the functions of these personnel are essentially the same as U.S. pilots, and that using this system avoids the complications of comparing compensation across national boundaries.59 Several pilot associations argued that the Coast Guard should base Great Lakes compensation figures on the salaries earned by other U.S. pilot associations. Several commenters provided figures, noting that in other areas, U.S. pilots earned upwards of $450,000 per year. One commenter 60 provided figures showing the projected compensation for pilots in various U.S. pilot associations, which ranged from a low of $399,708 per year to a high of $493,692. Other commenters echoed the argument that the Great Lakes pilots are among the lowest-paid U.S. pilots. In some regions governed by local pilotage associations, compensation figures appear to be much higher than those proposed by the Coast Guard. It is unclear why some U.S. pilot associations receive compensation levels much higher than that of Canadian pilots or U.S. masters and mates, based on the alternative sources of information that we have.61 As many organizations that set pilotage rates do not make public what methodology they are using to derive pilotage rates, we do 58 Docket #USCG–2016–0268–0031, p. 1. #USCG–2016–0268–0033, p.20. 60 Docket #USCG–2016–0268–0028, p. 6–7. 61 These sources include information from the Great Lakes Pilotage Authority as well as information regarding compensation submitted by other U.S. pilotage associations. 59 Docket PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 41481 not have sufficient information or a basis to raise pilotage rates on the Great Lakes to determine if these levels of compensation are appropriate for Great Lakes pilotage. We note, again, that we are undertaking a compensation study to better determine an appropriate compensation benchmark, and will present the results of such a study in a public forum should it provide a better basis for setting compensation levels. Even for those commenters who agreed that the comparison between U.S. and Canadian Great Lakes pilots was the most apt, we received comments that our calculations erred in a variety of ways. Many commenters offered statements regarding the calculations of Canadian pilots’ average total compensation, arguing that in certain areas, the Coast Guard had overestimated or underestimated the total amount, or made errors in its conversion of the value of Canadian compensation to American currency. In the NPRM, we recognized that the most challenging portion of our target compensation analysis was the conversion of Canadian benefits into equivalent United States benefits, and many commenters argued that we had underestimated total compensation in a variety of ways. One commenter argued that the Coast Guard underestimated Canadian compensation by averaging the compensation of four contract and three apprentice pilots, along with 49 fulltime, regular Canadian pilots, into the compensation total.62 That commenter stated that the compensation for U.S. full-time, regular pilots should be based on the salaries of Canadian full-time, regular pilots only. By excluding those contract and apprentice pilots, the commenter calculated that the base compensation should have been $291,035, rather than the $268,552 used in the NPRM, meaning that the Coast Guard should increase the total compensation target by over 8 percent. While we agree with the commenter that contract and apprentice pilots should not have been included in the calculations of pilot salaries, we disagree with the commenter’s assertion that they were included in our calculations. The Coast Guard did not base its calculations on the annual report the commenter cited, but received information from the GLPA directly. When the GLPA provided the Coast Guard with the information regarding Canadian compensation, it did not include these contract and apprentice pilots. 62 Docket E:\FR\FM\31AUR2.SGM #USCG–2016–0268–0028, p. 2–3. 31AUR2 asabaliauskas on DSKBBXCHB2PROD with RULES 41482 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations Another commenter 63 argued that U.S. pilots should be paid substantially more than Canadian pilots due to working more days per year. This commenter stated that that the Canadian Great Lakes Pilot Association’s work schedule is 178 days per year, and that the U.S. pilot compensation needs to be adjusted to reflect an additional 12.4 percent difference in time on duty. We disagree that target pilot compensation needs to be adjusted by 12.4 percent. While our staffing model assumes that the pilots will be on the tour-de-role for 200 days of the season, we do not make a 1-to-1 comparison between time spent on duty in the Canadian sector and time spent on the tour-de-role. Our methodology was designed to approximate the annual average compensation for Canadian pilots, not an attempt to match their hourly pay rate. One issue that arose regarding compensation figures is the conversion from Canadian to U.S. currency. Comments from the Great Lakes Shippers Association requested the Coast Guard to recalculate the baseline compensation figure using updated exchange rate figures. The commenter stated that the Coast Guard’s ‘‘decision in the 2017 NPRM to disregard fluctuations in the U.S./Canadian exchange rate is inconsistent with the 2016 NPRM.’’ 64 The commenter requested that the Coast Guard provide analysis and reasoning for this change from the past practice. The commenter also stated that if the exchange rates are relevant in one direction the exchange rates should be relevant in the other direction, arguing that not including this fluctuation in the exchange rate ‘‘fails to reconcile the emphasis on perceived parity between U.S. and Canadian pilot compensation with the negative impact of increased U.S. dollar strength on Canadian pilots.’’ Shipping industry comments requested that exchange rates be used to recalculate compensation on a regular basis. The comment suggested that the Coast Guard should adhere to this methodology if the Coast Guard chooses to use Canadian compensation as the benchmark. The shipping association comments requested that, given the decline in exchange rates between the U.S. and Canadian dollars, the Coast Guard dramatically lower the target compensation. The commenter stated that ‘‘assuming a 1.329 average exchange rate and 2 percent inflation per year, U.S. pilot compensation in 63 Docket 64 Docket #USCG–2016–0268–0038, p. 4. #USCG–2016–0268–0033, p. 20. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 2017 would be $240,149’’.65 The commenter stated that this compensation figure is 3.4 percent higher than the 2015 projected compensation levels in designated waters of $232,237, which was the last year the Coast Guard used U.S. Mates and Masters as the U.S. target pilot compensation. We acknowledge that the exchange rate had changed substantially, and that our original translation of Canadian benefits to U.S. dollars is based on the 2014 exchange rate. This rate has fluctuated significantly in recent years, for example, changing from 1.149 CAD:1 USD in 2014 to 1.329 CAD:1 USD in 2015.66 If the goal of the Coast Guard were to have U.S. pilot salaries mirror, as closely as possible, the value of Canadian pilots’ salaries each year, it would make sense to re-baseline the compensation figure using updated exchange rates each year. One downside of this approach, however, would be tremendous volatility in pilot compensation as the currency fluctuated from year to year. As we noted in our discussion of why we proposed a compensation benchmark in the NPRM, large swings in compensation, based on external factors such as currency fluctuations, are something the Coast Guard believes are highly detrimental to retaining talented pilots and maintaining safe and efficient pilotage. Other commenters wanted the Coast Guard to revisit its calculation of compensation and increase it, citing a number of factors. One commenter 67 argued that the 10 percent factor used to adjust the Canadian pilot compensation to American pilot target compensation is too low. The commenter identified 10 ways that the Canadian pilot positions differ from American pilot positions, and argued that each of these identified differences works to the disadvantage of the American pilots with respect to compensation. The commenter suggested setting U.S. pilot compensation at Canadian compensation plus 25 percent, rather than 10 percent, but then stated that this would still be too low given the differences. The commenter 68 further stated the difference in healthcare and pension costs alone exceeds the 10 percent factor and supports the need for at least a 25 percent factor.69 The commenter stated the pension compensation between the 65 Docket #USCG–2016–0268–0033, p. 21. https://www.irs.gov/individuals/ international-taxpayers/yearly-average-currencyexchange-rates. 67 Docket #USCG–2016–0268–0028, p. 4. 68 Docket #USCG–2016–0268–0028, p. 4. 69 Docket #USCG–2016–0268–0028. p. 4. 66 See PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 American and Canadian pilots is different: The Canadian pilots are government employees who contribute to a defined benefit pension plan that is subsidized by the Canadian government, but the American pilots have no defined government plans and must cover the costs of retirement themselves. The commenter submitted data on the annual pension contributions from a randomly selected group of GLPA pilots. The commenter did note that the typical Canadian pilot contributes an average of $10,000–16,000 annually to a pension plan, while an American pilot might contribute ‘‘multiple times that amount, receiving no contribution from his government, and not being eligible for any similar lifetime governmentsponsored defined pension plan.’’ The commenter stated the difference an American pilot would need to contribute to a pension alone requires a factor greater than 10 percent to adjust target compensation. They also stated that data from the International Organization of Masters, Mates & Pilots (MM&P) American labor union indicates the pension contribution for a pilot would be $61,992 annually for a plan similar to the Canadian defined benefit pension plan. The same commenter also stated the healthcare compensation is different between American and Canadian pilots, and further supports a factor higher than 10 percent. The commenter noted a Canadian pilot pays no out-of-pocket expenses for dental or general healthcare coverage, while an American pilot typically pays $25,000 annually for a reasonably comprehensive healthcare plan. The commenter cited that the MM&P Pilot Membership Health plan annual cost is $28,965 and an American pilot association includes $30,000 annually per pilot for healthcare. Further, American pilots must pay for long-term disability insurance while Canadian pilots have no out-of-pocket costs for long-term disability coverage. For these reasons, the commenter requested ‘‘the Coast Guard to revise its factor to at least 25 percent and perhaps more in order to achieve its goal of equivalency’’.70 Despite the importance of these issues, this information does not relate to an issue that the Coast Guard proposed to address in the 2017 ratemaking process. In 2016, the Coast Guard conducted a substantial rebaselining of the compensation benchmark, and considered these issues closely, arriving at the $326,114 annual compensation figure. In the 2017 ratemaking, it was not our intention to 70 Docket E:\FR\FM\31AUR2.SGM #USCG–2016–0268–0028, p. 5. 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations reanalyze all of these issues, and we did not propose a change in the value we established in 2016. Much like recalculating U.S. pilot salaries on the fluctuating U.S.-Canada exchange rate, recalculating these issues on an annual basis could produce an extraordinary amount of volatility in both the shipping rates and the overall compensation levels, which is why we proposed using a 10-year compensation benchmark rather than recalculating the target compensation on an annual basis. As we stated in the NPRM, we do not believe it is in the public interest to introduce such volatility into the market based on these difficult-to-calculate and predict forces. We believe that the system needs target pilot compensation stability in order to achieve and maintain workforce stability, and that this concern strongly supports using a consistent compensation benchmark. For that reason, while we consider all of these factors to be valid concerns, we are not utilizing them in this rulemaking. We did receive one comment on the compensation figure that did not involve re-examining the benchmark. This commenter suggested that the 2016 figure should be adjusted for inflation so that pilots would continue to receive the same income in real terms. We agree 41483 with this commenter. To remain stable in real terms, such a benchmark would need be adjusted for inflation on an annual basis. This will achieve the Coast Guard’s goal of maintaining stability in real (as opposed to nominal) compensation. For this reason, we are adjusting the 2017 target compensation by the Midwest Consumer Price Index of 2.1 percent, for a total figure of $332,963 per year. We intend to adjust the compensation figure for inflation annually in future ratemaking actions, the same way that operating expenses are adjusted for inflation. Based on the analysis, the calculations for step 4 are as follows: TABLE 7—CALCULATIONS OF TOTAL COMPENSATION Area 2 (undesignated) District One Area 1 (designated) Total Target Pilot Compensation .............................................................................................. Number of Pilots (step 3) ................................................................................................ $332,963 10 $332,963 7 $332,963 17 Total pilot compensation .......................................................................................... $3,329,630 $2,330,741 $5,660,371 Area 4 (undesignated) District Two Area 5 (designated) Total Target Pilot Compensation .............................................................................................. Number of Pilots (step 3) ................................................................................................ $332,963 6 $332,963 7 $332,963 13 Total pilot compensation .......................................................................................... $1,997,778 $2,330,741 $4,328,519 Area (undesignated) District Three Area (designated) Total Target Pilot Compensation .............................................................................................. Number of Pilots (step 3) ................................................................................................ $332,963 11 $332,963 4 $332,963 15 Total pilot compensation .......................................................................................... $3,662,593 $1,331,852 $4,994,445 asabaliauskas on DSKBBXCHB2PROD with RULES 5. Working Capital Fund Step 5 in our ratemaking methodology requires that the Coast Guard determine the working capital fund (proposed § 404.105). In the NPRM, we proposed changing the term for this step from ‘‘Project return on investment’’ to ‘‘Determine working capital fund.’’ Even though we proposed changing the name of the step, we did not propose changing the calculation. The Coast Guard described the calculation of the working capital fund in the NPRM.71 We calculated the working capital fund by multiplying the 2014 average rate of return for new issues of high-grade corporate securities, using the Moody’s AAA bond rate information to determine the average annual rate of return for new issues of high-grade corporate securities, and Total Expenses from step 4 of the ratemaking analysis. The 2014 average annual rate of return for new issues of 71 81 FR 72014–5. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 high-grade corporate securities was 4.16 percent.72 This figure is added to the total revenue needed in the next stage. One commenter stated the Coast Guard is not using the working capital fund to attract capital, and that this fund is better described as ‘‘cash reserves for operating expenses.’’ Similarly, the commenter 73 stated the Coast Guard failed to address why the pilotage should cover any expenses beyond direct expenses. The commenter stated that working capital fund is inappropriate under conventional regulatory ratemaking principles, and the rate payers should only pay for all operating expenses via the rates and surcharges. The commenter requested the Coast Guard eliminate the working capital fund. In its place, the Coast Guard should review and approve 72 Based on Moody’s AAA corporate bonds, which can be found at: https:// research.stlouisfed.org/fred2/series/AAA/ downloaddata?cid=119. 73 Docket #USCG–2016–0268–0033, p. 23. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 projects for funding with surcharges, ‘‘assuming surcharges are structured in a manner that permits close preapproved scrutiny to ensure the expenditure adds value to pilotage services and the surcharge is terminated when the specific need is met.’’ 74 The commenter stated he or she prefers the use of surcharges as it provides more clarity in the use of the funds than a working capital fund. We disagree that the working capital fund should be abolished and that infrastructure improvements should only be paid for with surcharges. We believe that surcharges are a poor method for paying for infrastructure projects, which are often capitalintensive, with large upfront costs. It would be risky to try and recover these large upfront costs through surcharges due to general volatility in shipping levels, which might not cover the fixed costs of infrastructure. Using surcharges 74 Docket E:\FR\FM\31AUR2.SGM #USCG–2016–0268–0033, p. 23. 31AUR2 41484 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations for infrastructure projects would also increase volatility in shipping charges, which is not desirable. That is why the working capital fund is not structured to be a ‘‘cash reserve’’ for infrastructure projects. Instead, it is structured so that the pilot associations can demonstrate credit worthiness when seeking funds from a financial institution for needed infrastructure projects, and those projects can produce a return on investment at a rate commensurate to repay a financial institution. While we acknowledge that, currently, capital improvements are funded via surcharges, it is our belief that the working capital fund should allow us to limit the need for surcharges in the future. TABLE 8—WORKING CAPITAL FUND CALCULATION Area 2 (undesignated) District One Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ............................................................... Total 2017 Expenses (lines 1+2) ..................................................................................... Multiply by Moody’ High Grade Security Rate (4.16%) .................................................. $648,371 3,329,630 3,978,001 165,485 Area 4 (undesignated) District Two Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ....................................................................... Total 2017 Expenses (lines 1+2) ............................................................................. Multiply by Moody’ High Grade Security Rate (4.16%) .................................................. Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ....................................................................... Total 2017 Expenses (lines 1+2) ............................................................................. Multiply by Moody’ High Grade Security Rate (4.16%) .................................................. 6. Calculation of Needed Revenue Step 6 in our ratemaking methodology requires that the Coast Guard determine the projected revenue for the next year $516,353 2,330,741 2,847,094 118,439 Area 5 (designated) 816,016 1,997,778 2,813,794 117,054 Areas 6 and 8 (undesignated) District Three Area 1 (designated) 1,224,024 2,330,741 3,554,765 147,878 Area 7 (designated) 1,463,402 3,662,593 5,125,995 213,241 (§ 404.106). The needed revenue is determined by adding the proposed § 404.102 operating expense, the proposed § 404.104 total target 487,114 1,331,852 1,818,966 75,669 Total $1,164,724 5,660,371 6,825,095 283,924 Total 2,040,040 4,328,519 6,368,559 264,932 Total 1,950,516 4,994,445 6,944,961 288,910 compensation, and the proposed § 404.105 working capital fund. We did not receive any comments related to this step. TABLE 9—CALCULATION OF NEEDED REVENUE Area 1 (designated) District One Area 2 (undesignated) Total Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ....................................................................... Working Capital Fund (Step 5) ........................................................................................ $648,371 3,329,630 165,485 $516,353 2,330,741 118,439 $1,164,724 5,660,371 283,924 Total Revenue Needed ............................................................................................ 4,143,486 2,965,533 7,109,019 Area 4 (undesignated) District Two Area 5 (designated) Total Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ....................................................................... Working Capital Fund (Step 5) ........................................................................................ 816,016 1,997,778 117,054 1,224,024 2,330,741 147,878 2,040,040 4,328,519 264,932 Total Revenue Needed ............................................................................................ 2,930,848 3,702,643 6,633,491 Areas 6 and 8 (undesignated) District Three Area 7 (designated) Total asabaliauskas on DSKBBXCHB2PROD with RULES Adjusted Operating Expenses (Step 2) ........................................................................... Total Target Pilot Compensation (Step 4) ....................................................................... Working Capital Fund (Step 5) ........................................................................................ 1,463,402 3,662,593 213,241 487,114 1,331,852 75,669 1,950,516 4,994,445 288,910 Total Revenue Needed ............................................................................................ 5,339,236 1,894,635 7,233,871 7. Projection of Future Revenue and Calculation of Initial Base Rates Step 7 in our ratemaking methodology requires that the Coast Guard make the VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 initial base rate calculations. To make our initial base rate calculations, we first establish a multi-year base period from which we can draw available and PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 reliable data on actual pilot hours worked in each district’s designated and undesignated waters. In the NPRM, we proposed using data covering 2007 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations through 2015. We then calculated the new rates by dividing each association’s projected needed revenue, from § 404.106, by the average number of bridge hours and rounding to the 41485 nearest whole number. We did not receive comments on this step. TABLE 10a—CALCULATION OF AVERAGE TRAFFIC Area 2 (undesignated) Area 1 (designated) ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ............................ 6,667 6,853 5,529 5,121 5,377 5,649 3,947 5,298 5,929 ............................ 5,743 6,810 5,864 4,771 5,045 4,839 3,511 5,829 6,099 Average ........................................................................................................................................................ 5,597 5,390 District One 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 Area 4 (undesignated) Area 5 (designated) ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ............................ 6,535 7,856 4,603 3,848 3,708 5,565 3,386 4,844 6,223 ............................ 5,967 7,001 4,750 3,922 3,680 5,235 3,017 3,956 6,049 Average ........................................................................................................................................................ 5,174 4,842 District Two 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 Areas 6 and 8 (undesignated) Area 7 (designated) ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ................................................................................................................................................................. ............................ 22,824 25,833 17,115 15,906 16,012 20,211 12,520 14,287 24,811 ............................ 2,696 3,835 2,631 2,163 1,678 2,461 1,820 2,286 5,944 Average ........................................................................................................................................................ 18,835 2,835 District Three 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 TABLE 10b—CALCULATION OF INITIAL BASE RATES Area 2 (undesignated) District One Revenue Needed (Step 6) ............................................................................................................................... Average traffic .................................................................................................................................................. Initial hourly rate .............................................................................................................................................. Area 4 (undesignated) District Two asabaliauskas on DSKBBXCHB2PROD with RULES $2,965,533 5,597 $530 Revenue Needed (Step 6) ............................................................................................................................... Average traffic .................................................................................................................................................. Initial hourly rate .............................................................................................................................................. $2,930,848 5,174 $566 Areas 6 and 8 (undesignated) District Three Revenue Needed (Step 6) ............................................................................................................................... Average traffic .................................................................................................................................................. Initial hourly rate .............................................................................................................................................. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM $5,339,236 18,835 $283 31AUR2 Area 1 (designated) $4,143,486 5,390 $769 Area 5 (designated) $3,702,643 4,842 $765 Area 7 (designated) $1,894,635 2,835 $668 41486 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations asabaliauskas on DSKBBXCHB2PROD with RULES 75 82 FR 16542, April 5, 2017. #USCG–2016–0268–0028, p. 9. 77 Docket #USCG–2016–0268–0033, p. 29. 78 Docket #USCG–2016–0268–0033, Exhibit I, Weighting Factor Data. 79 Docket #USCG–2016–0268–0033, p. 31. 76 Docket VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 contributing to the difficulty attracting and retaining pilots. One commenter 77 stated that the Coast Guard’s revenue projections would not be accurate if we did not include weighting factors to reflect vessel size. The commenter suggested that since the rates in the NPRM do not reflect weighting factors, the Coast Guard overstates the rates needed to generate the pilotage revenue. The actual pilotage charges include a weighting factor multiplier and additional charges. If the actual traffic is equal to the expected demand, then the pilot associations would receive revenue above the target revenue. The commenter provided an example using a 1.25 weighting factor, which is close to the 1.26 average weighting factor provided in GLPA data.78 The commenter argued that if an average weighting factor of 1.25 for all traffic were applied for the 2017 shipping season, the pilot associations would receive pilotage rates sufficient to reach the $20.4 million target revenue, plus an additional 25 percent in weighting factor revenue, plus any additional amount charged to vessel operators.79 The commenter stated that they support the Coast Guard’s proposed third alternative for weighting factors, and suggested we use an average weighting factor from either the current navigation season or the last full year of available data in order to project revenues for the next ratemaking. The commenter suggested we use an average weighting factor between 1.2 and 1.3. The argument that not including the revenue from the weighting factors into our calculation of total revenue would throw off the calculations made intrinsic sense. Under the new methodology introduced in 2016, pilotage is billed on an hourly basis, and if actual revenues were approximately 25 percent higher than traffic would suggest they should be, then the weighting factors would appear to be the cause of that discrepancy. Under its own initiative, the Coast Guard examined the initial revenue reports from the 2016 shipping season from all three districts, and compared that to an average of weighting factor charges collected through the Great Lakes Pilotage Management System. The resulting comparison showed that the actual revenues were substantially higher than predicted—even given the higher-than-average traffic in 2016. The difference in expected revenue tracked closely, but not exactly, with the calculated average weighting factor in each District. This meant that shippers were paying approximately $5 million more annually in shipping charges than the needed revenue figure would suggest. It is important to note that noncompulsory pilotage did not significantly change the disparity between projected and collected revenues. Even though the three pilot associations generated in excess of $3 million for providing non-compulsory service, once we removed the bridge hours for those efforts, the revenues still revealed a $5 million difference.80 With this new information, the Coast Guard decided that there was an urgent need to address the extra revenues being brought in by the weighting factors in the 2017 ratemaking. To that end, we issued an SNPRM to address the weighting factors and to propose a modification to the methodology. Our intention, as stated in the SNPRM, is to establish a methodology that aligns projected revenues with actual collections. In the SNPRM, we proposed a twostep process for accounting for the fees generated by the weighting factors. First, in a step we proposed to designate Step 8, we would calculate the average actual weighting factor in each area by using a weighted average of each class of vessels. We would create a rolling multi-year average of that number beginning with 2014, the year the weighting factors were set to current levels. Then, in Step 9, we would divide the initial base rate for each area, calculated in Step 7, by the weighting factor derived in Step 8, to produce a final shipping rate. This would have the effect of incorporating the additional revenues brought in by the weighting factors into the revenue model used to set rates. As expected, this led to significant reductions in pilotage fees, between the NPRM and SNPRM, across all three districts, as expressed in the table below. 80 District 1 had 920 hours of non-compulsory pilotage that generated $619,218. Removing those hours and revenues leaves 98 percent of projected pilotage service and 122 percent of projected revenues. District 2 had 1,920 hours of noncompulsory pilotage that generated $1,674,256. Removing those hours and revenues leaves 101 percent of projected pilotage service and 133 8. Calculation of an Average Weighting Factor In the NPRM, the Coast Guard sought public comment on how we should handle weighting factors in 46 CFR 401.400, which outlines the calculations for determining the weighting factors for a vessel subject to compulsory pilotage. This calculation determines which multiplication factor will be applied to the pilotage fees. The Coast Guard presented three options and requested public comment on which option should be implemented for future ratemakings. After receiving public comments on the NPRM, the Coast Guard decided to seek additional comments on this issue in a Supplemental Notice of Proposed Rulemaking.75 The first option was to maintain the status quo. This would maintain the collection of the current weighting factors and continue to exclude this revenue from the ratemaking calculation. The second option was to remove weighting factors completely from the regulations and charge every vessel equally for pilotage service because a ship’s dimensions have little impact on the experience and skill level of the pilot providing the service. We note that this option could mean simply charging every vessel the current ‘‘base rate,’’ or it could mean adjusting the rates for vessels so all vessels pay the current average weighted rate. The third option was to incorporate weighting factors into the ratemaking through an additional step that examines and projects their impact on the revenues of the pilot associations. This might enable us to better forecast revenue, but it would add another variable to the projections in the ratemaking methodology. One commenter said that they ‘‘strongly urge the Coast Guard to maintain the status quo on weighting factors, at least until actual data suggest that changes are necessary and appropriate.’’ 76 The commenter stated that the pilots have consistently failed to reach the target pilot compensation over the last decade, with the weighting factors included, and therefore changing the weighting factors would risk further percent of projected revenues. District 3 had 2,745 hours of non-compulsory pilotage that generated $1,030,570. Removing those hours and revenues leaves 111 percent of projected pilotage service and 135 percent of projected revenues. Based on this analysis, we do not believe the non-compulsory pilotage significantly altered the measured disparity between traffic and revenue. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations 41487 TABLE 11—COMPARISON OF HOURLY PILOTAGE RATES Pilotage charges per hour (per 2016 final rule) Area St. Lawrence River .................................................................................................... Lake Ontario .............................................................................................................. Navigable waters from Southeast Shoal to Port Huron, MI ...................................... Lake Erie .................................................................................................................... St. Mary’s River ......................................................................................................... Lakes Huron, Michigan, and Superior ....................................................................... We solicited comments on this revision of methodology, and received an additional nine comment letters on this issue, which are addressed below. Several commenters expressed concern that pilot salaries on the Great Lakes were already too low, and that by incorporating the weighting factors into the revenue analysis, we would jeopardize safety on the Great Lakes as more pilots would leave the system. We respectfully disagree with this analysis. As explained in great detail in the NPRM and this final rule, we have significantly raised pilot compensation in recent years. In 2016, we raised target pilot compensation to $326,114 annually. Despite proposing no change in the 2017 NPRM, we have agreed with commenters who argued that this should be increased by inflation, to a total of $332,963. For the reasons described above, we believe this salary has been shown to dramatically reduce the recruitment and retention problems the Great Lakes pilots experienced in the past. Incorporating the revenue generated by the weighting factors into our analysis allows the Coast Guard to set a pilotage rate that achieves that outcome. Several commenters made the argument that the Coast Guard’s analysis was procedurally defective as a matter of law due to the way we undertook them. These commenters suggested that the Coast Guard used unaudited revenue figures to arrive at the revised analysis in the SNPRM, and that the use of those figures violated the requirement in 46 CFR 404.1(b), which states that annual reviews of pilotage association expenses and revenue will NPRM proposed charges per hour $580 398 684 448 528 264 be based on audited data, and that data from completed reviews will be used in ratemaking. We disagree with the commenters, and believe that they have fundamentally misinterpreted how the Coast Guard arrived at the SNPRM’s proposal to adjust weighting factors. As described above, the Coast Guard’s analysis of the weighting factors was not the result of the over-generation of revenue by the pilot associations. Rather, we were spurred to examine them by the commenters’ logical arguments that the weighting factor produces revenue that goes to the pilot associations, and that by not accounting for that revenue, our ratemaking model was flawed. Mathematical logic suggested that if the weighting factors added, on average, 28 percent to the total fees collected that were not accounted for in the ratemaking model, then the pilot associations would be collecting 28 percent more revenues than would be expected given the amount of traffic measured. We are aware that the commenters had made this argument in past years, but we had not accepted it. What was different this year is that it was the first year where the pilotage rates had been set under the new ratemaking model, adopted in the 2016 final rule. In previous years, where the old ratemaking model was used, data had always shown that actual revenues fell short of anticipated revenues. However, for the first time in 2017 there was data—the preliminary 2016 revenue numbers—that could be used to determine a rough estimate of the magnitude of any revenue surplus. When we compared the preliminary SNPRM proposed charges per hour $757 522 720 537 661 280 $601 408 580 429 514 218 revenue numbers from 2016 to see if they bore out this hypothesis, we found that the numbers were similar. We are cognizant that traffic on the Great Lakes experienced a sharp rise in 2016, and that there would be a commensurate increase in revenues, but as expected, the increase in revenues far outpaced the increase in traffic. We noted, however, that there were still some discrepancies in the figures. While the mathematics of the weighting factor would indicate that revenues would run approximately 28 percent higher, the revenue figures showed slightly lower numbers. We requested comments on this discrepancy in the SNPRM, but did not receive comments that would explain or correct it. Whatever the cause, we did not base the weighting factor reduction proposed in the SNPRM on those unaudited numbers. Doing so would have resulted in a slightly lower reduction than what was proposed, but on the actual calculated average of the billed weighting factors. We did not base the reduction on the preliminary, unaudited revenues provided by the pilot associations precisely because they were preliminary and unaudited. Given the comments received, the Coast Guard does not see any reason to deviate from the weighting factors analysis in this final rule. We used the same multi-year rolling average standard for this calculation as we used for historic pilotage demand. Since the current weighting factors came into place in 2014, we used the data between 2014 and 2016 and will expand this data set until we reach our 10-year goal. They are calculated as follows: asabaliauskas on DSKBBXCHB2PROD with RULES TABLE 12—CALCULATION OF AVERAGE WEIGHTING FACTORS Number of transits Vessel class District One: Undesignated (Area 2): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 71 670 130 780 31AUR2 Weighting factor 1.00 1.15 1.30 1.45 Multiplier 71 770.5 169 1,131 41488 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 12—CALCULATION OF AVERAGE WEIGHTING FACTORS—Continued Vessel class Number of transits Weighting factor Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. District One: Designated (Area 1): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. 1,651 ........................ ........................ ........................ 2,141.5 1.30 103 765 128 736 1.00 1.15 1.30 1.45 103 879.75 166.4 1,067.2 Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. District Two: Undesignated (Area 4): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. 1,732 ........................ ........................ ........................ 2,216.35 1.28 63 678 20 980 1.00 1.15 1.30 1.45 63 779.7 26 1,421 Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. District Two: Designated (Area 5): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. 1,741 ........................ ........................ ........................ 2,289.7 1.32 98 1,090 29 1,664 1.00 1.15 1.30 1.45 98 1,253.5 37.7 2,412.8 Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. District Three: Undesignated (Areas 6 and 8): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. 2,881 ........................ ........................ ........................ 3,802 1.32 244 1,237 43 1,801 1.00 1.15 1.30 1.45 244 1,422.55 55.9 2,611.45 Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. District Three: Designated (Area 7): Class 1 .................................................................................................................................. Class 2 .................................................................................................................................. Class 3 .................................................................................................................................. Class 4 .................................................................................................................................. 3,325 ........................ ........................ ........................ 4,333.9 1.30 105 540 10 757 1.00 1.15 1.30 1.45 105 621 13 1,097.65 Total Transits ................................................................................................................. Average Weighting Factor ............................................................................................. 1,412 ........................ ........................ ........................ 1,836.65 1.30 Step 9: Calculation of Revised Rate In this penultimate step, we calculate the revised rate by incorporating the Multiplier average weighting factor into the initial rate. The revised rate is calculated as follows: TABLE 13—CALCULATION OF REVISED RATE Initial rate (Step 7) Average weighting factor (Step 8) Revised rate (Step 9) District One asabaliauskas on DSKBBXCHB2PROD with RULES District One Designated ............................................................................................................... District One Undesignated ........................................................................................................... $769 530 1.28 1.30 $601 408 765 566 1.32 1.32 580 429 668 283 1.30 1.30 514 218 District Two District Two Designated ............................................................................................................... District Two Undesignated ........................................................................................................... District Three District Three Designated ............................................................................................................ District Three Undesignated ........................................................................................................ VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations Step 10: Review and Finalize Rates Section 401.10, often known as ‘‘Director’s discretion,’’ allows the Coast Guard to adjust rates to ensure they meet the goal of providing safe and reliable pilotage. In the NPRM, we did not propose to use this discretion in our ratemaking, and we are not using it in this ratemaking. While we received comments suggesting we add language limiting the use of our discretion, we do not feel such language is necessary or appropriate to include in this final rule as the current methodology provides a fair and transparent means to meet the goals outlined in 46 CFR 404.1(a). Surcharge Calculation After the pilotage rates have been determined, the Coast Guard can authorize the pilot associations to impose a surcharge. In the NPRM, we proposed a 5 percent surcharge for District Two and a 15 percent surcharge for District Three to cover training expenses for nine applicant pilots. We proposed this number based on historical pilot costs, stipends, per diems, and training costs, which are approximately $150,000 per pilot per shipping season. We continue to find that allowing associations to recoup necessary and reasonable training expenses, both to help achieve a full complement of needed pilots and to ensure skill maintenance and development for current pilots, will facilitate safe, efficient, and reliable pilotage. Thus we are imposing a necessary and reasonable temporary surcharge, as authorized by 46 CFR 401.401. Based upon our records and communications with the various pilot associations, for 2017, we anticipate that there will be two applicant pilots in District Two, and seven applicant pilots in District Three. We received one comment on this subject, stating that the surcharge adjustment of $150,000 was not enough for District Two, and that the amount for that district should be set instead at $250,000 to properly recover costs.81 The same commenter, in a separate comment, also wrote that the 2014 41489 applicant pilot salaries were $281,588.00 and the benefits were $96,613.00.82 However, we were unable to confirm these assertions, because the commenter did not provide sufficient documentation with the comment. Any difference between the actual and assumed cost may be included in a future rulemaking. Again, we will determine which incurred expenses are necessary and reasonable, and ensure that the shippers are not double-charged for these same expenses. Based on historic pilot costs, the stipend, per diem, and training costs, we continue to believe that the total costs for each applicant pilot are approximately $150,000 per shipping season. Thus, we estimate that the training expenses that each association will incur will be approximately $300,000 in District Two and $1,050,000 in District Three. Table 14 derives the proposed percentage surcharge for each district by comparing this estimate to each district’s projected needed revenue. TABLE 14—SURCHARGE CALCULATIONS District Two Projected Needed Revenue (§ 404.106) ............................................................................................................................................. Anticipated Training Expenses ............................................................................................................................................................ Surcharge Needed * ............................................................................................................................................................................. $6,663,002 $300,000 5% District Three Projected Needed Revenue (§ 404.106) ............................................................................................................................................. Anticipated Training Expenses ............................................................................................................................................................ Surcharge Needed * ............................................................................................................................................................................. $7,262,089 $1,050,000 15% * Surcharge rounded up to the nearest whole percent. asabaliauskas on DSKBBXCHB2PROD with RULES V. Regulatory Analyses We developed this final 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 81 Docket #USCG–2016–0268–0031. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 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. 82 Docket PO 00000 As this rule is not a significant regulatory action, this rule is exempt from the requirements of Executive Order 13771. See OMB’s Memorandum ‘‘Guidance Implementing Executive Order 13771, Titled ‘Reducing Regulation and Controlling Regulatory Costs’ ’’ (April 5, 2017). A regulatory analysis (RA) follows. We developed an analysis of the costs and benefits of the rule to ascertain its probable impacts on industry. Table 15 summarizes the regulatory changes that are expected to have no costs, and any qualitative benefits associated with them. The table also includes changes that affect portions of the methodology for calculating the base pilotage rates. #USCG–2016–0268–0032. Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 41490 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 15—REGULATORY CHANGES WITH NO COST OR COSTS CAPTURED IN THE RATE CHANGE Changes Description Basis for no costs Benefits Mandatory change point on the Saint Lawrence River between Iroquois Lock and the area of Ogdensburg, NY. Mandatory change point on the Saint Lawrence River between Iroquois Lock and the area of Ogdensburg, NY, that would become effective with the implementation of this final rule. The addition of the change point will not require capital expenses. The only cost is for the new pilots, who are accounted for in the base pilotage rates and training surcharges. Cancellation charges ..................... Amending the cancellation charge provision in § 401.120(b) to ensure it explicitly states that the minimum charge for a cancellation is 4 hours plus necessary and reasonable travel expenses for the travel that occurs. Clarification of existing text and current practice. Surcharge provision ....................... Adding a requirement to the surcharge regulation in § 401.401 to stop collecting funds once the assigned value has been recovered for the season. Renaming Return on Investment as Working Capital Fund. Ensures the goal surcharge amount built into the year’s rulemaking will not be surpassed, and prevents additional costs on industry. Clarifies the intent of the fund but does not change the method of calculation. Costs are included in the total revenues. Pilot staffing costs are accounted for in the base pilotage rates. Staffing additional pilots will help meet the increased demand for pilots to handle the additional assignments anticipated to be caused by the new change point. Additional pilots due to this change point should also serve to mitigate any potential delays and any potential fatigue that would occur from high pilotage demand without them. —Clarifies the current language to eliminate any potential confusion on the minimum charge for cancellations. —Clarification of the minimum charge ensures the recognition of pilots as a limited resource and encourages efficient use. Prevents excess amounts from being recouped from industry via the following year’s rule. Rename Return on Investment ...... Set Pilot compensation for a 10year period. Weighting Factors .......................... Addition of new language in § 404.104 that allows the Director to set compensation for a 10-year period to a compensation benchmark. Additional step in the ratemaking that accounts for the weighting factors. Table 16 summarizes the affected population, costs, and benefits of the regulatory requirements that are Impacts the base pilotage rates, but does not impact the revenue projections. Clarifies the intent of this fund. Promotes target compensation stability and rate predictability. Factors the impact of extra revenue generated by the weighting factors into the ratemaking analysis. expected to have associated costs as a result of the rate change. TABLE 16—REGULATORY ECONOMIC IMPACTS OF RATE CHANGE Description Affected population Costs Benefits Rate Changes ..... asabaliauskas on DSKBBXCHB2PROD with RULES Change Under the Great Lakes Pilotage Act of 1960, the Coast Guard is required to review and adjust base pilotage rates annually. Owners and operators of 230 vessels journeying the Great Lakes system annually. $3,222,703 —New rates cover an association’s necessary and reasonable operating expenses. —Provides fair compensation, adequate training, and sufficient rest periods for pilots. —Ensures the association makes enough money to fund future improvements. The Coast Guard is required to review and adjust pilotage rates on the Great Lakes annually. See Sections II and III of this preamble for detailed discussions of the Coast Guard’s 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 are adjusting the pilotage rates for the VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 2017 shipping season to generate sufficient revenues for each district to reimburse their 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 rule will lead to an increase in the cost per unit of service to shippers in all three districts, PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 and result in an estimated annual cost increase to shippers. In addition to the increase in payments that would be incurred by shippers in all three districts from the previous year as a result of the rate changes, we propose authorizing a temporary surcharge to allow the pilotage associations to recover training expenses that would be incurred in 2017. For 2017, we anticipate that there E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations will be no applicant pilots in District One, two applicant pilots in District Two, and seven applicant pilots in District Three. With a training cost of $150,000 per pilot, we estimate that Districts Two and Three will incur $300,000 and $1,050,000 in training expenses, respectively. These temporary surcharges would generate a combined $1,350,000 in revenue for the pilotage associations. Therefore, after accounting for the implementation of the temporary surcharges across all three districts, the payments made by shippers during the 2017 shipping season are estimated to be approximately $3,222,703 more than the payments that were estimated in 2016 (table 18).83 41491 The purpose of this rulemaking is to propose new base pilotage rates and surcharges for training. The last full ratemaking was concluded in 2016. Table 17 summarizes the changes in the RA from the NPRM to the final rule. These changes were the result of public comments received after publication of the NPRM and SNPRM. TABLE 17—SUMMARY OF CHANGES FROM NPRM TO FINAL RULE Element of the analysis NPRM Final rule Resulting change in RA Target Pilot Compensation. Operating expenses $326,114 ............................................... $332,963 ............................................... Incorrectly omitted payment of applicant pilot salaries from D2 operating expenses. Proposed to modify 46 CFR 404.103 to change the calculation to focus on pilot work cycle. Staffing model found 54 pilots are needed in the Great Lakes system. Attributed 15% of APA dues to legal fees. Corrected for this error, added amount of $281,588 to operating expenses in District Two. Leaving 46 CFR 404.103 as is. Staffing model found 49 pilots are needed in the Great Lakes system. Data indirectly affects the calculation of projected revenues. Data indirectly affects the calculation of projected revenues. Did not account for weighting factors ... Incorporates weighting base rates. Staffing Model ........ APA dues ............... Weighting factors ... asabaliauskas on DSKBBXCHB2PROD with RULES The shippers affected by these rate changes are those owners and operators of domestic vessels operating on register (employed in foreign trade) and owners and operators of 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 to have pilots by 46 U.S.C. 9302. However, these U.S.and Canadian-flagged lakers may voluntarily choose to have a pilot. We used 2013 through 2015 billing information from the Great Lakes Pilotage Management System (GLPMS) to estimate the average annual number of vessels affected by the rate adjustment. The GLPMS tracks data related to managing and coordinating the dispatch of pilots on the Great Lakes and billing in accordance with the services. Using that period, we found that a total of 407 unique vessels used pilotage services over the years 2013 VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 factors into through 2015. These vessels had a pilot dispatched to the vessel and billing information was recorded in the GLPMS. The number of invoices per vessel ranged from a minimum of 1 invoice per year to a maximum of 65 invoices per year. Of these vessels, 383 were foreign-flagged vessels and 24 were U.S.-flagged. The U.S.-flagged vessels were not operating on register and are not required to have a pilot per 46 U.S.C. 9302, but they can voluntarily choose to have a pilot. U.S.-flagged vessels may opt to have a pilot for varying reasons such as unfamiliarity with designated waters and ports, or for insurance purposes. Vessel traffic is affected by numerous factors and varies from year to year. Therefore, rather than the total number of vessels over the time period, an average of the unique vessels using pilotage services from 2013 through 2015 is the best representation of vessels estimated to be affected by this rule’s rate. From 2013 through 2015, an average of 230 vessels used pilotage services annually.84 On average, 219 of these vessels are foreign-flagged vessels and 11 are U.S.-flagged vessels that voluntarily opt into the pilotage service. Costs temporary surcharges applied to traffic in Districts One, Two, and Three. Affected Population 83 Total payments across all three districts are equal to the increase in payments incurred by shippers as a result of the rate changes plus the Corrected to attribute 5% of APA dues to legal fees. No impact on RA. Revenue is based on the expected 45 working pilots that will be working during the 2017 season, which is less than the projected needed pilots. Data directly affects operating expenses, which indirectly affects the calculation of projected revenues. No impact on RA. Affects the calculation of the base rates, but not the projected revenues. 84 Some vessels entered the Great Lakes multiple years, affecting the average number of unique vessels utilizing pilotage services in any given year. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 The rate changes would generate costs on industry in the form of higher payments for shippers. We calculate the cost in two ways in this RA, as the total cost to shippers and as a percentage of vessel operating costs. Total Cost to Shippers We estimate the effect of the rate changes on shippers by comparing the total projected revenues needed to cover costs in 2016 with the total projected revenues to cover costs in 2017, including any temporary surcharges authorized by the Coast Guard. The Coast Guard sets pilotage rates so that the pilot associations receive enough revenue to cover their necessary and reasonable expenses. The shippers pay these rates when they have a pilot as required by 46 U.S.C. 9302, or when U.S.-flagged vessels not operating on register voluntarily choose to have a pilot. Therefore, the aggregate payments of the shippers to the pilot associations are equal to the projected necessary revenues for the pilot associations. The revenues each year represent the total costs that shippers must pay for pilotage services, and the change in the revenues from the previous year is the additional cost to shippers from this rulemaking. E:\FR\FM\31AUR2.SGM 31AUR2 41492 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations The effect of the rate changes on shippers is estimated from the district pilotage projected revenues and the surcharges described in this preamble. We estimate that for the 2017 shipping season, the projected revenue needed for all three districts is $20,976,381. Temporary surcharges on traffic in District Two and District Three would be applied for the duration of the 2017 season in order for the pilotage associations to recover training expenses incurred for applicant pilots. We estimate that the pilotage associations require an additional $300,000 and $1,050,000 in revenue for applicant training expenses in Districts Two and Three, respectively. This is an additional cost to shippers of $1,350,000 during the 2017 shipping season. Adding the projected revenue to the surcharges, we estimate the pilotage associations’ total projected needed revenue for 2017 would be $22,326,381. The 2017 projected revenues for the districts are from table 9 of this preamble. To estimate the additional cost to shippers from this rule, we compare the 2017 total projected revenues to the 2016 projected revenues. In the 2016 rulemaking,85 we estimated the total projected revenue needed for 2016, including surcharges, is $19,103,678. This is the best approximation of 2016 revenues as, at the time of this publication, we do not have audited data available for the 2016 shipping season to revise these projections. Table 18 shows the revenue projections for 2016 and 2017 and details the additional cost increases to shippers by area and district as a result of the rate changes and temporary surcharges on traffic in Districts One, Two, and Three. TABLE 18—EFFECT OF THE RULE BY AREA AND DISTRICT [$U.S.; Non-discounted] Revenue needed in 2016 Area 2016 temporary surcharge Total 2016 projected revenue Revenue needed in 2017 2017 Temporary surcharge Total 2017 projected revenue Additional costs of this rule Total, District One ........ Total, District Two ........ Total, District Three ..... $5,354,945 5,629,641 6,469,092 $450,000 300,000 900,000 $5,804,945 5,929,641 7,369,092 $7,109,019 6,633,491 7,233,871 $0 300,000 1,050,000 $7,109,019 6,933,491 8,283,871 $1,304,074 1,003,850 914,779 System Total ......... 17,453,678 1,650,000 19,103,678 20,976,381 1,350,000 22,326,381 3,222,703 The resulting difference between the projected revenue in 2016 and the projected revenue in 2017 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 in this rule on shippers varies by area and district. The rate changes, after taking into account the increase in pilotage rates and the addition of temporary surcharges, would lead to affected shippers operating in District One, District Two, and District Three experiencing an increase in payments of $1,304,074, $1,003,850, and $914,779, respectively, from the previous year. The overall adjustment in payments would be an increase in payments by shippers of $3,222,703 across all three districts (a 17 percent increase over 2016, including surcharges). Because the Coast Guard must review and prescribe rates for Great Lakes Pilotage annually, the effects are estimated as single year costs rather than annualized over a 10-year period. Table 19 shows the difference in revenue by component from 2016 to 2017.86 The majority of the increase in revenue is due to the addition of 8 pilots that were authorized in the 2016 rule. These eight pilots trained during 2016 are full-time working pilots during the 2017 shipping season. These pilots will be compensated at the target compensation established in the 2016 final rule, plus inflation ($332,963 per pilot). The addition of these pilots to full working status accounts for $2,663,704 of the increase. The remaining amount is attributed to inflation of operating expenses, working capital fund, and differences in the surcharges from 2016. TABLE 19—DIFFERENCE IN REVENUE BY COMPONENT Revenue needed in 2016 Revenue component Revenue needed in 2017 Difference (2017 revenue ¥2016 Revenue) $4,677,518 12,066,226 709,934 $5,155,280 14,983,335 837,766 $477,762 2,917,109 127,832 Total Revenue Needed, without Surcharge ....................................................... Surcharge .................................................................................................................. 17,453,678 1,650,000 20,976,381 1,350,000 3,522,703 ¥300,000 Total Revenue Needed, with Surcharge ............................................................ asabaliauskas on DSKBBXCHB2PROD with RULES Adjusted Operating Expenses ................................................................................... Total Target Pilot Compensation ............................................................................... Working Capital Fund ................................................................................................ 19,103,678 22,326,381 3,222,703 To estimate the impact of U.S. pilotage costs on the foreign vessels affected by the rate adjustment, we 85 2016 projected revenues are from the 2016 rulemaking, 81 FR 11937, Figures 31 and 32. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 looked at the pilotage costs as a percentage of a vessel’s costs for an entire voyage. The part of the trip on the Great Lakes using a pilot is only a portion of the whole trip. The affected vessels are often traveling from a foreign port, and the days without a pilot on the total trip often exceed the days a pilot is needed. 86 The 2016 projected revenues are from the 2016 rulemaking, 81 FR 11934, Figures 24 and 28. The Pilotage Rates as a Percentage of Vessel Operating Costs 2017 projected revenues are from Table 106 of this NPRM. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations To estimate this impact, we used 2013 through 2015 vessel arrival data from the Coast Guard’s Ship Arrival Notification System and pilotage billing data from the GLPMS. A random sample of 50 arrivals was taken from GLPMS data. To estimate the impact of pilotage costs on the costs of an entire trip, we estimated the length of each one-way trip. We used the vessel name and the date of the arrival to find the last port of call before entering the Great Lakes system. The date of the departure from this port was used as the start date of the trip. To find the end date of the trip we used GLPMS data to find all the pilotage charges associated with this vessel during this trip in the Great Lakes system. The last pilotage charge before beginning the trip to exit the system was used as the end date of the one-way trip. We estimated the total operating cost by multiplying the number of days for each trip by the 2015 average daily operating cost and added this to the total pilotage costs from GLPMS for each trip. In 2015 the average daily operating costs, excluding fixed costs, for Great Lakes bulkers and tankers ranged roughly from $5,191 to $7,879.87 The total pilotage charges for each trip were updated to the 2016 rates using the average rate increases in the Great Lakes Pilotage Rates 2013–2016 Annual Review and Adjustments final rules.88 The total updated pilotage charges for each trip were then divided by the total operating cost of the trip. We found that for a vessel’s one-way trips, the U.S. pilotage costs could account for approximately 16.9 percent 89 of the total operating costs for a foreign vessel’s voyage using 2016 rates. We also estimated the impact of the rate increase in this rule. We took the same 50 trips and updated the pilotage costs to the 2017 rates, an average increase of 20 percent, excluding surcharges. With this rule’s rates for 2017, pilotage costs are estimated to account for 19.6 percent of total operating costs, or a 2.7 percentage point increase 90 over the current cost. The total operating costs do not include the fixed costs of the vessels. If these costs were included in the total costs, the pilotage rates as a percentage of total costs would be lower. Benefits This 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 ensuring rates cover an association’s operating expenses; provide fair pilot compensation, adequate training, and sufficient rest periods for pilots; and ensures the association makes enough money 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, which would help reduce delays caused by pilot shortages. The amendment of the cancellation charge in § 401.120(b) will prevent confusion and help ensure that it explicitly states that the minimum charge for a cancellation is 4 hours. The limitation to the surcharge regulation in § 401.401 would prevent excess amounts from being recouped via the following year’s rule. The changes to § 404.104 will promote target 41493 compensation stability and rate predictability. B. Small Entities Under the Regulatory Flexibility Act, 5 U.S.C. 601–612, we have considered whether this rule would have a significant economic effect 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 people. For the rule, we reviewed recent company size and ownership data for the vessels identified in GLPMS and we reviewed business revenue and size data provided by publicly available sources such as MANTA 91 and ReferenceUSA.92 As described in Section VI.A of this preamble, Regulatory Planning and Review, we found that a total of 407 unique vessels used pilotage services from 2013 through 2015. These vessels are owned by 119 entities. We found that of the 119 entities that own or operate vessels engaged in trade on the Great Lakes affected by this rule, 104 are foreign entities that operate primarily outside of the United States. The remaining 15 entities are U.S. entities. We compared the revenue and employee data found in the company search to the Small Business Administration’s (SBA) Table of Small Business Size Standards 93 to determine how many of these companies are small entities. Table 20 shows the NAICS codes of the U.S. entities and the small entity standard size established by the SBA. TABLE 20—NAICS CODES AND SMALL ENTITIES SIZE STANDARDS Description Small business size standard Site Preparation Contractors ..................................................................................................... Boat Dealers .............................................................................................................................. Coastal & Great Lakes Freight Transportation ......................................................................... Inland Water Freight Transportation .......................................................................................... Inland Water Passenger Transportation .................................................................................... Scenic & Sightseeing Transportation, Water ............................................................................ Marine Cargo Handling .............................................................................................................. $15 million. $32.5 million. 750 employees. 750 employees. 500 employees. $7.5 million. $38.5 million. NAICS asabaliauskas on DSKBBXCHB2PROD with RULES 238910 441222 483113 483211 483212 487210 488320 ...................................... ...................................... ...................................... ...................................... ...................................... ...................................... ...................................... 87 ‘‘Ship operating costs: Current and future trends,’’ Richard Grenier, Moore Stephens LLP, December 2015. The 2015 weighted average operating cost is estimated at $5,191 for a handysize bulker, $5,771 for a handymax bulker, and $7,879 for a product tanker. These costs include only the costs of operating and do not include any fixed costs of the vessels, such as amortization of vessel construction costs. The operating costs include crew wages, provisions, other crew costs, lubricating oils and store costs, spares, repair and maintenance, P&I insurance, marine insurance, registration costs, management fees, and sundry expenses. VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 88 The average percentage changes in the rates for 2013–2016, were 1.87 percent, 2.5 percent, 10 percent, and 12 percent, respectively. 89 For the random sample of 50 arrivals, the average of the pilotage costs as a percentage of the total operating costs was 16.9 percent. The percentages ranged from a low of 3.2 percent to a high of 35.2 percent. 90 19.6 percent of total operating costs in 2017 ¥16.9 percent of total operating costs in 2016 = 2.7 percent incremental increase of pilotage costs as a percentage of total operating costs. 91 See https://www.manta.com/. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 92 See https://resource.referenceusa.com/. https://www.sba.gov/contracting/ getting-started-contractor/make-sure-you-meet-sbasize-standards/table-small-business-size-standards. SBA has established a Table of Small Business Size Standards, which is matched to NAICS industries. 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 considered in order to remain classified as a small business for SBA and Federal contracting programs. 93 Source: E:\FR\FM\31AUR2.SGM 31AUR2 41494 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations TABLE 20—NAICS CODES AND SMALL ENTITIES SIZE STANDARDS—Continued Small business size standard NAICS Description 488330 ...................................... 488510 ...................................... Navigational Services to Shipping ............................................................................................. Freight Transportation Arrangement ......................................................................................... asabaliauskas on DSKBBXCHB2PROD with RULES The entities all exceed the SBA’s small business standards for small businesses. Further, these U.S. entities operate U.S.-flagged vessels and are not required to have pilots as required by 46 U.S.C. 9302, because they are not engaged in foreign commerce. In addition to the owners and operators of vessels affected by this rule, there are three U.S. entities affected by the rule that receive revenue from pilotage services. These are 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 industry classification and small-entity size standards described above, but they have fewer than 500 employees; combined, they have approximately 65 employees. We expect no adverse effect to these entities from this rule because all associations receive enough revenue to balance the projected expenses associated with the projected number of bridge hours and pilots. We did not find any small not-forprofit organizations that are independently owned and operated and are not dominant in their fields. We did not find any small governmental jurisdictions with populations of fewer than 50,000 people. Based on this analysis, we found this rulemaking, if promulgated, would not affect a substantial number of 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 want to assist small entities in understanding this rule so that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please consult Mr. Todd Haviland, Director, Great Lakes Pilotage, Commandant (CG–WWM–2), Coast Guard; telephone 202–372–2037, email VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 Todd.A.Haviland@uscg.mil, or fax 202– 372–1914. 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 rule will call 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 the 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 that order 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, the rule is consistent with the principles of PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 $38.5 million. $15 million. federalism and preemption requirements in Executive Order 13132. While it is well settled that States may not regulate in categories in which Congress intended the Coast Guard to be the sole source of a vessel’s obligations, the Coast Guard recognizes the key role that State and local governments may have in making regulatory determinations. Additionally, for rules with implications and preemptive effect, Executive Order 13132 specifically directs agencies to consult with State and local governments during the rulemaking process. If you believe this rule has implications for federalism under Executive Order 13132, please contact the person listed in the FOR FURTHER INFORMATION section of this preamble. F. Unfunded Mandates Reform Act 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. Though this rule will not result in such an 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 will not create an environmental risk to health or risk to safety that might disproportionately affect children. E:\FR\FM\31AUR2.SGM 31AUR2 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations J. Indian Tribal Governments This rule does not have tribal implications under Executive Order 13175 (‘‘Consultation and Coordination with Indian Tribal Governments’’) because it would 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. 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. asabaliauskas on DSKBBXCHB2PROD with RULES 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 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321–4370f), and have determined that it 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 supporting this determination is available in the docket where indicated in the ADDRESSES section of this preamble. This rule is categorically excluded under paragraphs 34(a), regulations which are editorial or VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 procedural, of the Coast Guard’s NEPA Implementing Procedures and Policy for Considering Environmental Impacts, COMDTINST M16475.1D. List of Subjects 46 CFR Part 401 Administrative practice and procedure, Great Lakes, Navigation (water), Penalties, Reporting and recordkeeping requirements, Seamen. 46 CFR Part 404 Great Lakes, Navigation (water), Seamen. For the reasons discussed in the preamble, the Coast Guard amends 46 CFR parts 401 and 404 as follows: PART 401—GREAT LAKES PILOTAGE REGULATIONS 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). ■ 2. Revise § 401.401 to read as follows: § 401.401 To facilitate safe, efficient, and reliable pilotage, and for good cause, the Director may authorize surcharges on any rate or charge authorized by this subpart. Surcharges must be proposed for prior public comment and may not be authorized for more than 1 year. Once the approved amount has been received, the pilot association is not authorized to collect any additional funds under the surcharge authority and must cease such collections for the remainder of that shipping season. ■ 3. Revise § 401.405 to read as follows: § 401.405 Pilotage rates and charges. (a) The hourly rate for pilotage service on— (1) The St. Lawrence River is $601; (2) Lake Ontario is $408; (3) Lake Erie is $429; (4) The navigable waters from Southeast Shoal to Port Huron, MI is $580; (5) Lakes Huron, Michigan, and Superior is $218; and (6) The St. Mary’s River is $514. * * * * * ■ 4. Revise § 401.420 to read as follows: § 401.420 Cancellation, delay, or interruption in rendition of services. * * * * * (b) When an order for a U.S. pilot’s service is cancelled, the vessel can be charged for the pilot’s reasonable travel expenses for travel that occurred to and PO 00000 Frm 00031 Fmt 4701 from the pilot’s base, and the greater of— (1) Four hours; or (2) The time of cancellation and the time of the pilot’s scheduled arrival, or the pilot’s reporting for duty as ordered, whichever is later. * * * * * ■ 5. Revise § 401.450 as follows: ■ a. Redesignate paragraphs (b) through (j) as paragraphs (c) through (k), respectively; and ■ b. Add new paragraph (b) to read as follows: § 401.450 Sfmt 4700 Pilotage change points. * * * * * (b) The Saint Lawrence River between Iroquois Lock and the area of Ogdensburg, NY, beginning October 2, 2017; PART 404—GREAT LAKES PILOTAGE RATEMAKING 6. 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). ■ Surcharges. 41495 7. Amend § 404.101(a) as follows: § 404.100 Ratemaking and annual reviews in general. (a) The Director establishes base pilotage rates by a full ratemaking pursuant to § 404.101–404.110 of this part, conducted at least once every 5 years and completed by March 1 of the first year for which the base rates will be in effect. Base rates will be set to meet the goal specified in § 404.1(a) of this part. ■ 8. Amend § 404.103 as follows: ■ a. In paragraph (a), following the words ‘‘dividing each area’s’’ remove the word ‘‘peak’’ and add, in its place, the word ‘‘seasonal’’; and ■ b. Revise paragraph (b) to read as follows: § 404.103 Ratemaking step 3: Determine number of pilots needed. * * * * * (b) Pilotage demand and the base seasonal work standard are based on available and reliable data, as so deemed by the Director, for a multi-year base period. The multi-year period is the 10 most recent full shipping seasons, and the data source is a system approved under 46 CFR 403.300. Where such data are not available or reliable, the Director also may use data, from additional past full shipping seasons or other sources, that the Director determines to be available and reliable. * * * * * ■ 9. Revise § 404.104 to read as follows: E:\FR\FM\31AUR2.SGM 31AUR2 41496 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Rules and Regulations § 404.104 Ratemaking step 4: Determine target pilot compensation benchmark. 12. Revise § 404.107 to read as follows: ■ At least once every 10 years, the Director will set a base target pilot compensation benchmark using the most relevant available non-proprietary information. In years in which a base compensation benchmark is not set, target pilot compensation will be adjusted for inflation using the CPI for the Midwest region or a published predetermined amount. The Director determines each pilotage association’s total target pilot compensation by multiplying individual target pilot compensation by the number of pilots projected under § 404.103(d) of this part. § 404.105 [Amended] 10. In the section heading of § 404.105, remove the words ‘‘return on investment’’ and add, in their place, the words ‘‘working capital fund.’’ ■ 11. In the first sentence of § 404.105, remove the words ‘‘return on investment’’ and add, in their place, the words ‘‘working capital fund.’’ asabaliauskas on DSKBBXCHB2PROD with RULES ■ VerDate Sep<11>2014 18:58 Aug 30, 2017 Jkt 241001 § 404.107 Ratemaking step 7: Initially calculate base rates. The Director initially calculates base hourly rates by dividing the projected needed revenue from § 404.106 of this part by averages of past hours worked in each district’s designated and undesignated waters, using available and reliable data for a multi-year period set in accordance with § 404.103(b) of this part. ■ 13. Revise § 404.108 to read as follows: § 404.108 Ratemaking step 8: Calculate average weighting factors by Area. The Director calculates the average weighting factor for each area by computing the 10-year rolling average of weighting factors applied in that area, beginning with the year 2014. If less than 10 years of data are available, the Director calculates the average weighting factor using data from each year beginning with 2014. ■ 14. Add new § 404.109 to read as follows: PO 00000 Frm 00032 Fmt 4701 Sfmt 9990 § 404.109 Ratemaking step 9: Calculate revised base rates. The Director calculates revised base rates for each area by dividing the initial base rate (from Step 7) by the average weighting factor (from Step 8) to produce a revised base rate for each area. ■ 15. Add new § 404.110 to read as follows: § 404.110 Ratemaking step 10: Review and finalize rates. The Director reviews the base pilotage rates calculated in § 404.109 of this part to ensure they meet the goal set in § 404.1(a) of this part, and either finalizes them or first makes necessary and reasonable adjustments to them based on requirements of Great Lakes pilotage agreements between the United States and Canada, or other supportable circumstances. Dated: August 24, 2017. Michael D. Emerson, Director, Marine Transportation Systems, U.S. Coast Guard. [FR Doc. 2017–18411 Filed 8–30–17; 8:45 am] BILLING CODE 9110–04–P E:\FR\FM\31AUR2.SGM 31AUR2

Agencies

[Federal Register Volume 82, Number 168 (Thursday, August 31, 2017)]
[Rules and Regulations]
[Pages 41466-41496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18411]

[[Page 41465]]

Vol. 82

Thursday,

No. 168

August 31, 2017

Part II

Department of Homeland Security

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Coast Guard

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46 CFR Parts 401, 403, and 404

Great Lakes Pilotage Rates--2017 Annual Review; Final Rule

Federal Register / Vol. 82 , No. 168 / Thursday, August 31, 2017 /
Rules and Regulations

[[Page 41466]]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2016-0268]
RIN 1625-AC34

Great Lakes Pilotage Rates--2017 Annual Review

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In this final rule, the Coast Guard is setting new rates for
the 2017 shipping season for pilotage services on the Great Lakes. The
Coast Guard is also updating its methodology for setting these rates.
These updates to the methodology will incorporate the income generated
from weighting factors into the ratemaking methodology used to set
rates in this and future rulemakings. The Coast Guard believes that the
new rates will continue to encourage pilot retention, ensure safe,
efficient, and reliable pilotage services on the Great Lakes, and
provide adequate funds to upgrade and maintain infrastructure.

DATES: This final rule is effective October 2, 2017.

FOR FURTHER INFORMATION CONTACT: For information about this document
call or email Todd Haviland, Director, Great Lakes Pilotage, Coast
Guard; telephone 202-372-2037, email todd.a.haviland@uscg.mil.

Executive Summary

This final rule amends the Coast Guard's Great Lakes pilotage
regulations by revising the current methodology by which the Coast
Guard sets base rates for U.S. pilotage service on the Great Lakes, as
well as revises the pilotage rates for the remaining portion of the
2017 shipping season. The new methodology adjusts target pilot
compensation by inflation, incorporates revenue derived from weighting
factor charges into the ratemaking model, and eliminates the provision
that the hourly pilotage rate for designated waters could not rise
above twice the rate for undesignated waters. We believe that the new
methodology will continue to encourage pilot retention, ensure safe,
efficient, and reliable pilotage services on the Great Lakes, and
provide adequate funds to upgrade and maintain infrastructure.
In addition to the changes in ratemaking methodology, this final
rule makes several other additions to Great Lakes Pilotage regulations.
It adds new language to billing practices for cancellation charges,
clarifying that the minimum charge for canceling the request for a
pilot is four hours plus reasonable travel expenses. The final rule
also inserts a new mandatory change point at the Iroquois Lock point,
ensuring that pilots are adequately rested on this stretch of water.
Finally, we have made some textual changes to the regulations to better
convey their intent, renaming the ``return on investment'' as ``working
capital fund,'' and renaming the 2016 final rule staffing model as the
``seasonal staffing model.''
Based on comments received, several items proposed in the NPRM were
not adopted in this final rule. The Coast Guard has chosen not to adopt
the 2107 NPRM staffing model, based on compelling arguments that this
model did not accurately reflect the unpredictable workload of Great
Lakes pilots. Furthermore, we did not move forward on our proposal to
move the deadline for audited financial reports from April to January,
based on commenters' arguments that this practice would impose hardship
out of proportion to its benefit.
Based on updated financial information, increased pilot
compensation, the new weighting factor calculations, and other changes
to the ratemaking methodology, the revised Great Lakes pilotage rates
are being lowered in most areas. We believe that this is a needed
correction to better align our projected revenues with the pilot
associations' actual collections, as evidence shows that pilotage
revenue significantly exceeded what was projected in 2016, even
factoring in above-average traffic. The changes in the rates are as
follows:

Table E-1--Changes in Pilotage Rates
----------------------------------------------------------------------------------------------------------------
Previous
pilotage New pilotage Change per
Area charges per charges per hour ($)
hour ($) hour ($)
----------------------------------------------------------------------------------------------------------------
St. Lawrence River.............................................. 580 601 +21
Lake Ontario.................................................... 398 408 +10
Navigable waters from Southeast Shoal to Port Huron, MI......... 684 580 -104
Lake Erie....................................................... 448 429 -19
St. Mary's River................................................ 528 514 -14
Lakes Huron, Michigan, and Superior............................. 264 218 -46
----------------------------------------------------------------------------------------------------------------

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations
II. Regulatory History
III. Basis and Purpose
IV. Discussion of Comments and Changes
V. Regulatory Analyses
A. Regulatory Planning and Review
B. Small Entities
C. Assistance for Small Entities
D. Collection of Information
E. Federalism
F. Unfunded Mandates Reform Act
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

APA American Pilots Association
CFR Code of Federal Regulations
DHS Department of Homeland Security
FR Federal Register
GLPA Great Lakes Pilotage Authority
GLPAC Great Lakes Pilotage Advisory Committee
MM&P International Organization of Masters, Mates & Pilots
MOU Memorandum of Understanding
NPRM Notice of proposed rulemaking
RA Regulatory analysis
Sec. Section symbol
SNPRM Supplemental notice of proposed rulemaking
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code

II. Regulatory History

The Coast Guard published a notice of proposed rulemaking (NPRM)
for this final rule on October 19, 2016 (81 FR 72011), covering a range
of issues including revised operational expenses,

[[Page 41467]]

a proposed new methodology for calculating pilotage numbers, the
addition of a mandatory change point at Iroquois Lock, and revised base
pilotage rates. In response, we received 21 public comment letters,
covering a diverse range of subjects and providing a substantial amount
of information. Subsequently, on April 5, the Coast Guard issued a
supplemental notice of proposed rulemaking (SNPRM) proposing to add two
additional steps to the ratemaking methodology, which would incorporate
the additional revenues collected under 46 CFR 404.100 (the ``weighting
factors'') into the ratemaking model. We received 11 public comment
letters on the SNPRM.
The Coast Guard received numerous comments in response to the
issues raised in the NPRM and SNPRM. These commenters have largely come
from Great Lakes maritime shipping stakeholders--both the pilots that
perform pilotage services as well as the shipping companies that pay
the pilotage fees--as well as other interested parties. We have closely
analyzed all of the comment letters and have, where appropriate,
incorporated ideas and suggestions from the comments into the analysis
of our final rule.

III. Basis and Purpose

The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (the Act),\1\ which requires U.S. vessels operating ``on
register'' \2\ and foreign vessels to use U.S. or Canadian registered
pilots while transiting the U.S. waters of the St. Lawrence Seaway and
the Great Lakes system.\3\ For the U.S.-registered Great Lakes 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.'' \4\ We limit the
allowable costs of providing this service by ensuring that all
allowable expenses are necessary and reasonable for providing pilotage
services on the Great Lakes. We believe the public is best served by a
safe, efficient, and reliable pilotage service. The goal of our
methodology and billing scheme is to generate sufficient revenue for
the pilots to provide the service we require. 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. The Secretary has delegated
authority under the Act to the Coast Guard.\5\
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\1\ Public Law 86-555, 74 Stat. 259, as amended; currently
codified as 46 U.S.C. Chapter 93.
\2\ ``On register'' means that the vessel's certificate of
documentation has been endorsed with a registry endorsement, and
therefore, may be employed in foreign trade or trade with Guam,
American Samoa, Wake, Midway, or Kingman Reef. 46 U.S.C. 12105, 46
CFR 67.17.
\3\ 46 U.S.C. 9302(a)(1).
\4\ See 46 U.S.C. 9303(f) for all of the Act's pilotage
ratemaking requirements discussed in this paragraph.
\5\ DHS Delegation No. 0170.1, para. II (92.f).
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The purpose of this rule is to change our annual Great Lakes
pilotage ratemaking methodology, set new rates using that methodology,
authorize a temporary hiring and training surcharge, and make several
other adjustments. For more information on the goals and proposals in
this rulemaking, see the discussion section in the NPRM \6\ and
SNPRM.\7\
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\6\ 81 FR 72011 (October 19, 2016).
\7\ 82 FR 2115 (May 5, 2017).
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IV. Discussion of Comments and Changes

In this section, the Coast Guard reviews the comments received, and
provides responses accordingly. In instances where multiple commenters
provided insight into similar issues, we have grouped those comments
into general categories. Wherever possible, we have attempted to
provide citations to the particular comment referenced, and have tried
to verify any data provided by the commenter. We have divided the
comments up into four general categories: (1) General policy issues;
(2) Rate calculation issues; (3) Incorporation of the weighting factors
into the ratemaking methodology; and (4) Items for future
consideration. These general categories have been further subdivided by
issue, as discussed below.

A. General Policy Issues

The most frequently cited issue, raised by numerous commenters,
concerned the costs of pilotage. In the NPRM, we proposed a variety of
increases in pilotage rates. However, in the subsequent SNPRM, we
proposed accounting for the weighting factor and thus lowered hourly
pilotage rates accordingly. Numerous commenters, generally aligned with
entities that ship goods or pay for shipping on the Great Lakes, made
statements on the recent increases in the cost of pilotage over the
last several years. For example, one commenter \8\ stated that the
proposed increase to U.S. pilotage rates constitutes a 15 percent
increase, with a total increase of 99 percent since 2014, and that this
is on top of a 94 percent increase already imposed on shippers since
2006. Other commenters \9\ cited different, albeit similar figures,
stating that pilotage costs have increased by 40 percent over three
years, and cited the NPRM as saying that pilotage costs now constituted
19 percent of total voyage costs on the Saint Lawrence Seaway.
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\8\ See docket # USCG-2016-0268-0039, p.1.
\9\ Docket # USCG-2016-0268-0019, p.1; docket # USCG-2016-0268-
0020, p.1.
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We acknowledge that the some pilotage rates have increased in the
past few years. In our revisions to the methodology, we have eliminated
several ancillary fees and changed the billing scheme to meet our goal
of aligning projected revenues with the actual association collections.
We agree that the total revenues needed by the 3 U.S. Great Lakes Pilot
Associations has increased about 40 percent over the past three years
if we include the temporary surcharges, after many years of the pilot
associations being unable to collect the amount of money our
projections indicated would be appropriate. The additional pilots added
to ensure continued safe, efficient and reliable pilotage service are
the primary reason for the recent rate increases. It is important to
note, however, that we have revised the temporary surcharges
requirements so the revenues collected for the temporary surcharges
will be removed from the expense base of future rates to ensure that
the shippers do not pay for the same expense twice. After carefully
considering the comments and measuring and assigning values to the
variables addressed in the ratemaking methodology, we believe the
resultant pilotage rates are fair.
One commenter \10\ argued that high pilotage rates were threatening
the competitiveness of the St. Lawrence Seaway and Great Lakes system
of shipping cargo, and that if the proposed rate increases for 2017
were instituted, shippers may reach a ``tipping point'' where they
choose alternate means to ship cargo. The commenter did not provide
supporting documentation for this assertion, and we disagree with this
statement. Our data indicates that demand for pilotage service in 2016
was greater than 2015 and that demand for pilotage service through June
2017 is trending around 20 percent higher than the 10-year average for
the 2017 shipping season.
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\10\ Docket # USCG-2016-0268-0034, p.1.
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Other commenters argued that the recent increases in pilotage rates
were necessary. One commenter stated that the recent, comparatively
large increases were needed to correct inadequate increases in the
past, arguing that ``recent seemingly disproportionate increases [in
pilotage rates] would have been unnecessary as they could have

[[Page 41468]]

been accommodated over time.'' \11\ Another commenter argued that the
concern over pilotage costs was disingenuous, stating that the vast
majority of shippers' pilotage cost results from Canadian pilotage,
which is entirely unaffected by the U.S. pilotage rates.\12\
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\11\ Docket # USCG-2016-0268-0037, p.1.
\12\ Docket # USCG-2016-0268-0028, p.2.
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We agree that the recent increases in pilotage rates since 2015
have been warranted. We are well aware that for many years the Coast
Guard's methodology for calculating pilotage rates produced rates that
failed to raise the target revenue. We have had years where actual
revenue was above the target revenue, but below the revenue that we
would have projected given the actual demand. In 2016, revenue was
higher even than what we would have expected given the demand. While
2016 appears to be an outlier in that regard, it is our goal is to
develop a methodology that aligns our projections with the actual
amount of revenue the pilot associations generate based upon the
realized demand for pilotage service. We believe that the methodology
outlined in this final rule is a substantial improvement that will, on
average, produce revenues that will cover operating expenses, pay for
infrastructure maintenance and the training of new pilots, and offer
compensation levels and a workload that will allow the pilot
associations to recruit and retain pilots without producing excessive
revenue to the detriment of shippers. We are willing to consider future
adjustments as necessary to ensure revenue alignment. As discussed
below, we believe that compensation levels are currently at a level
that is effectively enticing pilots to join and stay in the workforce,
and we are not substantially adjusting that in this final rule.
Difference in Pilotage Charges Between the United States and Canada
Several commenters complained that the cost of similar pilotage
services differed depending on whether ships were assigned a U.S. or
Canadian pilot, and that such differences were contrary to arrangements
between the United States and Canada regarding cooperation in
management of pilotage in the Great Lakes system. One commenter said
that pilotage costs are much higher when the vessel is assigned a U.S.
pilot, stating that ``[f]or example, the pilotage expense for a Class 4
vessel transiting from Thunder Bay to St. Lambert costs $39,490 when a
Canadian pilot is used, and $29,327 more when a U.S. pilot provides
pilotage services.'' \13\ The commenter argued that such a disparity is
contrary to the 2013 Memorandum of Understanding (MOU) between the U.S.
and the Canadian Great Lakes Pilotage Authority (GLPA), which states
that the parties ``intend to arrange for the establishment of
regulations imposing comparable rates and charges.'' \14\
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\13\ Docket # USCG-2016-0268-0033, p.12.
\14\ Docket # USCG-2016-0268-0033, p.12, citing ``Memorandum of
Understanding, Great Lakes Pilotage, between the United States Coast
Guard and the Great Lakes Pilotage Authority,'' Art. 7.
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While the Coast Guard acknowledges that the rates for pilotage
services are not identical, our rates for each given segment of a
voyage are based upon an analysis of the historical pilotage hours and
associated costs necessary to provide service on that segment. We
cannot say how the Canadian GLPA determined the charges for
corresponding voyage segments. We note that U.S. and Canadian pilots
have different funding structures, infrastructure obligations, and
compensation packages. There are other instances where U.S. pilotage
rates are substantially lower than Canadian rates--for example, a
harbor move on Lake Superior for a Class 2 vessel would cost $2,616.73
under Canadian rates, while the same move would cost only $607.20 under
U.S. rates (both prices are in U.S. dollars). While some may argue the
pilotage rates should be identical, we believe that the rates must
primarily cover the cost of operating expenses, infrastructure
maintenance, and fair compensation, which is how we have developed the
current methodology. We are not offering an opinion as to how
differences in infrastructure and compensation funding may alter the
rate calculations by the Canadian association.
Finally, we also note that article 9 states that the MOU ``is not
an international agreement and does not give rise to any international
legal rights or obligations.'' The MOU is a non-binding agreement on
cooperation between the Coast Guard and GLPA. The primary purpose of
this document is to ensure an equitable share of work between the U.S.
and Canadian registered pilots and coordinated pilotage service
throughout the System. We interpret comparable rates to mean that the
Coast Guard and GLPA will establish rates to cover costs incurred for
providing pilotage service in the various areas, even though those
costs may be different due to varying fee structures, distribution,
labor costs, or other factors. For these reasons, while we acknowledge
there are differences in the rates paid by the shipping companies, we
still believe that basing the rates on the methodology described in
this rulemaking is the most effective way to fund the U.S. Great Lakes
pilot associations and necessary infrastructure.
Recruitment and Retention of Pilots
One of the main goals of raising pilotage fees in recent Coast
Guard rulemakings has been to reduce pilot attrition and attract new
pilots to the region, ensuring a healthy number of mariners capable of
handling the shipping traffic safely and with minimal delays. In the
2016 final rule, we stated that, ``the [methodology established in the
mid-1990s failed] to consider the totality of pilot time necessary to
perform a given pilotage assignment, which often includes long transits
to and from the vessel, resulting in low pilot compensation and
overloaded work assignments.'' \15\
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\15\ 81 FR at 11908 (March 7, 2016).
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We received numerous comments from both pilots and shippers
concerning pilot retention and attrition. Many commenters urged the
Coast Guard to study pilot recruitment and retention factors, including
the compensation of individual pilots, to determine the extent of the
pilot retention problem and methods for combating low pilot retention.
In response, we note that we have recently undertaken a target pilot
compensation study, which we hope may help inform future rulemakings.
Pilots and pilot associations also offered comments pertaining to
retention and attrition. The Western Great Lakes Pilots Association
\16\ presented a series of letters from pilots, including resignation
letters and previous docket comments, explaining why they were
resigning from the Association. These comments cited various reasons,
including the risk of a downturn in traffic,\17\ and a lack of
guaranteed time with their families.\18\ Similarly, other pilotage
associations stated that Great Lakes pilots were paid substantially
less than other U.S. marine pilots, and noted that certain pilots had
left the Great Lakes for less prestigious positions in other areas.\19\
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\16\ Docket # USCG-2016-0268-0027.
\17\ Docket # USCG-2016-0268-0027, letter from Bruce Dunlap,
Paul Radtke.
\18\ Docket # USCG-2016-0268-0027, letter from Karl Hardesty,
Rick Montoya.
\19\ Docket # USCG-2016-0268-0027, letters from the Associated
Branch Pilots of New Orleans, Association of Maryland Pilots.
---------------------------------------------------------------------------

The Coast Guard has recognized the pilotage recruitment and
retention

[[Page 41469]]

challenges in the Great Lakes, but believes that the changes we have
implemented in recent rulemakings have addressed those concerns. We
note that while over the preceeding 10 years 31 pilots in the Great
Lakes region voluntarily left pilot positions, only one pilot has left
voluntarily in the past 3 years, a rate which is comparable to the
extremely low voluntary quit rate for other U.S. pilotage associations.
We believe that the new compensation levels, workload, ratemaking
structures, and improvements to the billing scheme introduced in recent
rulemakings have reduced attrition, and we are working closely with all
stakeholders to ensure that wages, working conditions, and
infrastructure concerns are addressed to increase the likelihood that
well-trained pilots will remain with their associations until
retirement.
Using Other Pilot Compensation as a Benchmark for GL Pilot Compensation
Many commenters suggested that the Coast Guard should be using
salaries for other U.S. pilots as a benchmark, rather than Canadian
salaries, and noted that U.S. pilots in other areas often make far more
in compensation. One commenter, the President of the Associated Branch
Pilots for the Port of New Orleans, noted that the average pilot
compensation for a pilot in that association was $459,051, and stated
that a $312,000 target compensation level ``would leave the Great Lakes
pilots among the lowest paid pilots in America.'' \20\ One commenter
noted that using other U.S. pilot groups as a benchmark would make a
comparison simpler, as the target compensation for many American pilots
is set by state rate commissions and is publically available.\21\
Similarly, one commenter stated that the Great Lakes pilot associations
compete with other American associations for recruits, and thus those
associations would be a more appropriate benchmark for
compensation.\22\ Several commenters \23\ provided figures on the total
compensation of pilots in some other American systems, stating that
those figures were often significantly over $400,000 annually per
pilot, which is higher than the compensation target the Coast Guard has
set for Great Lakes pilots.
---------------------------------------------------------------------------

\20\ Docket # USCG-2016-0268-0003, p.1.
\21\ Docket # USCG-2016-0268-0028, p.6.
\22\ Docket # USCG-2016-0268-0028, p.6.
\23\ Docket # USCG-2016-0268-0028, p.7.
---------------------------------------------------------------------------

Conversely, the Great Lakes Shippers Association argued that the
Coast Guard should not use the compensation of other American pilots as
a basis for computing target compensation. The shipping association, as
part of its comments on the use of a compensation benchmark,\24\ stated
that the Coast Guard should not equalize pilot compensation across
disparate geographies.\25\ The commenter argued that shipping is an
inherently local affair, and that pilots are experts in particular
bodies of water, so a comparison to other pilotage association would
not necessarily be accurate. The commenter stated that Great Lakes
pilotage ``differs significantly from pilotage anywhere else in the
United States as it includes vast stretches of open, unobstructed water
that require little or no pilot input, as well as being subject to an
abbreviated, rather than year-round, shipping season.'' \26\ The
commenter also stated that there are both historical and practical
reasons that local pilotage boards and commissions set rates locally,
and that given differing barriers to entry, differing duration and
intensity of pilotage duties, and other local factors means that ``the
value and cost of pilotage services in one location differs
significantly in degree and kind from the value and cost of pilotage
services in another location.'' \27\
---------------------------------------------------------------------------

\24\ We discuss the issue of the general use of a 10-year
compensation benchmark in a separate section, but the commenter
included their comments on the specific number for pilot
compensation under that heading.
\25\ Docket # USCG-2016-0268-0033, p.26-27.
\26\ Docket # USCG-2016-0268-0033, p.28.
\27\ Docket # USCG-2016-0268-0033, p.27.
---------------------------------------------------------------------------

We recognize that there are a wide variety of factors that could be
used for justifying both more and less compensation than pilots in
other U.S. jurisdictions or Canadian pilots. While we believe, at this
time, that a comparison with Canadian Great Lakes pilots offers the
closest analogue, we are fully aware that there are still significant
differences in the U.S. and Canadian compensation work schedules and
compensation schemes, and as such, we intend to undertake a
compensation study to better understand the wide array of factors at
work. While that study should inform a future ratemaking, we believe
that the current compensation target is a reasonable and comparable
level because it is based on pilots that do substantially similar work
on the same bodies of water. Our goal is to establish a target pilot
compensation benchmark that promotes recruitment and retention without
posing undue financial burden on shipping companies. We will ensure
that we maintain transparency in our processes and calculations to
establish and refine this benchmark.
10-Year Compensation Benchmark
One item addressed in the NPRM was new language in Sec. 404.104
that would allow the Director to set compensation to a benchmark for a
10-year period. We stated that, when setting the compensation
benchmark, we would set it based on the most relevant available non-
proprietary information such as wage and benefit information from other
pilotage groups (in the current case, based on Canadian Great Lakes
pilot compensation cited in the 2016 NPRM). Subsequently, for a period
of up to 10 years, the target compensation number would simply be
adjusted for inflation. We noted that this would promote target
compensation stability and rate predictability. As seen in the NPRM,
where the Coast Guard noted a significant change in the relative value
of the Canadian dollar that could have changed the target compensation
figure significantly, resetting the compensation benchmark repeatedly
could lead to large swings in year-to-year targets and have negative
effects on the stability of pilot earnings.
Having reviewed the various comments on this issue as well as
considered the ratemaking methodology generally, we believe that using
a compensation benchmark to establish annual adjustments in target
compensation is an efficient means to ensure rate stability. We believe
that, at any time after a compensation benchmark is established, there
may be grounds to review it. Use of a compensation benchmark promotes
rate and compensation stability, while providing the Coast Guard with
the flexibility to make improvements over time based on market
conditions. For this reason, we are finalizing the proposed language in
Sec. 404.104.
Several commenters mentioned the compensation benchmark, but
instead of discussing the use of a compensation benchmark generally,
they discussed the inputs into the current compensation benchmark. One
commenter argued that the Coast Guard should not base the compensation
benchmark on the average compensation for other U.S. pilots. We note
that this was never the proposal, and we merely proposed to use a
benchmark. In the NPRM, we wrote that ``the compensation benchmark
would be based on the most relevant available non-propriety information
such as wage and benefit information from other pilotage groups''
[emphasis added].\28\ We note that despite the use of that example of
what a particular compensation benchmark

[[Page 41470]]

could be, we did not propose to use another U.S. pilot group outside of
the Great Lakes to establish target pilot compensation in our
rulemaking. In the 2017 NPRM, the Coast Guard did not propose to set a
new compensation benchmark, but instead merely proposed continuing to
use the 2016 target compensation figure in its calculations, which was
based on the comparison with Canadian salaries.
---------------------------------------------------------------------------

\28\ 81 FR 72027 (December 19, 2016).
---------------------------------------------------------------------------

As discussed in the NPRM, we believe that the use of a compensation
benchmark is a better method for starting the calculation for the
compensation of pilots, as opposed to undertaking a complete re-
evaluation of the compensation structure for U.S. pilots each year. The
primary rationale is the promotion of workforce stability, which is
necessary for the system to provide safe, efficient, and reliable
pilotage. The Great Lakes pilotage system needs target pilot
compensation stability to achieve and maintain workforce stability. As
is common practice in many sectors of employment, levels of
compensation that are highly volatile can lead to difficulty attracting
and retaining qualified employees. Given the high skill levels and
lengthy training requirements required of Great Lakes pilots, as well
as the dynamic nature of the commodities trade that makes up much of
the shipping traffic in the area, we do not believe that a full re-
evaluation of compensation every year is conducive to maintaining a
system of safe and reliable pilotage.
Request To Study Additional Items
Many commenters,\29\ citing the high cost of pilotage, requested
that the Coast Guard undertake additional studies of various related
issues. Specifically, these commenters almost uniformly requested that
the Coast Guard conduct additional research into (1) pilot recruitment
and retention factors; (2) the role of pilotage rates on modal shift
and Seaway competitiveness; and (3) efficiencies that can be achieved
by streamlining the pilotage system.
---------------------------------------------------------------------------

\29\ See, e.g., docket # USCG-2016-0268-0019, p. 2; Docket #
USCG-2016-0268-0020, p. 2.
---------------------------------------------------------------------------

The Coast Guard realizes that these issues are important, and may
warrant more in-depth study. To that effect, the Coast Guard has
commissioned a compensation study and an economic impact study to
better inform our ratemaking process. Until these studies are
completed, we are proceeding with the ratemaking methodology we
describe in this final rule. We remain open to persons providing
information about these important issues, and note that such
information can always be provided to the Coast Guard or to the Great
Lakes Pilotage Advisory Committee (GLPAC) outside the context of a
particular ratemaking action.
Audit Deadline
Another item the Coast Guard discussed in its NPRM was a proposal
to adjust Sec. 403.300(c) to require submission of an unqualified
audit by January 31 of each year, rather than the existing requirement
that it be submitted on April 1. Our goal was to expedite the
availability of audit information so it could be used in the
publication of the NPRM by the next summer. The net result would be to
reduce the delay between the actual expenses and their recoupment from
3 to 2 years. We requested comment on whether such a deadline would be
feasible.
One commenter \30\ supported the proposal, stating that they
``favor any measures that reduce the lag between receipt of actual
revenue and expense data and rate-setting decisions.'' The commenter
stated the Coast Guard should use the most recently available data to
determine the target revenue. They argued that the Coast Guard should
set up systems to document the invoices and source forms sent in
throughout the shipping season, and then tally this information and use
it as a point of validation when setting the target revenue in the
following year's NPRM. The commenter also stated that the pilots have
indicated they can produce monthly revenue reports for Coast Guard use,
and that this information can be used to inform the Coast Guard's
decision to terminate a surcharge or to revise rates to account for an
over-generation of revenue.
---------------------------------------------------------------------------

\30\ Docket # USCG-2016-0268-0033, p. 25.
---------------------------------------------------------------------------

However, most comments, including those from the 3 U.S. Great Lakes
pilot associations on this issue, took the opposite stance. These
comments were unanimously opposed to the proposed January 31 deadline
stating that preparing audited financial statements by that date would
be infeasible due to the tight time constraints, or if required, would
be extremely expensive. Commenters noted that the requirement to
provide numbers by this earlier date would require extensive effort and
significantly increase costs, and we did not receive any
recommendations for an alternate date.
Based on the feedback we received, we are not making any changes to
the audit deadline at this time. We agree that we would like to reduce
the lag time between the revenue and expense audits and the information
we use for our rulemakings. However, based upon the comments from the
pilot associations, at this time we do not believe that the reported
costs of accelerating the reporting date to January 31 would be worth
the reported increase in expense. We do note, however, that we will
seek further input on this topic at a future GLPAC meeting.
Surcharge Shutoff Provision
In the NPRM, the Coast Guard proposed adding a requirement to the
surcharge regulation in Sec. 401.401. We proposed that once a pilot
association collects the amount of money allowable for recoupment, the
pilot association's authorization to collect that surcharge would
terminate for the remainder of the shipping season. We proposed this to
prevent surcharge receipts from exceeding the target amount, which will
eliminate the need to make subsequent adjustments to the operating
expenses for the following year.
One commenter \31\ stated that the ``Industry Commenters support
this proposal.'' The commenter suggested the Coast Guard should verify
that the surcharge funds are only used for the purposes as outlined by
the Coast Guard. The commenter stated that the ratepayers ``paid over
$667,000 in excessive training fees collected by the pilot
associations'' in 2015. They also stated it is in the ratepayers'
interests that the Coast Guard not allow excessive fees, as there is no
mechanism currently in place to repay these funds to the ratepayers.
The commenter also recommended that the Coast Guard verify that the
training fees are properly applied to training new pilots in each
District,\32\ and suggested the Coast Guard could achieve this by
requiring the inclusion of the training fee information as a separate
line item in the financial statements.
---------------------------------------------------------------------------

\31\ Docket # USCG-2016-0268-0033, p. 24.
\32\ Docket # USCG-2016-0268-0033, p. 25.
---------------------------------------------------------------------------

Based on the comments we received, we are finalizing the additions
to the surcharge provision in Sec. 401.401. We also note that the
existing audit requirements for operating expenses include a line item
for training expenses, so that it is clear how much money is expended
for that purpose. Because of the three-year delay in the use of audited
expenses, the training costs, which were introduced in the 2015
ratemaking for the Saint Lawrence Seaway Pilots Association, will be
incorporated into, and adjusted for, the operating expenses for the
2018 ratemaking. The surcharge was expanded to the Lake Pilots
Association and Western Great Lakes Pilots

[[Page 41471]]

Association in 2016. Therefore, these expenses will not be addressed
until the 2019 Annual Rulemaking for these two associations.
Iroquois Lock
Finally, in the NPRM, we proposed adding a mandatory change point
at the Iroquois Lock. While we did receive comments as to how this
would affect the total number of pilots needed for the rate-setting
calculations (which is discussed below), we did not receive any
comments on the merits of the idea itself. We are therefore finalizing
this provision without change in this final rule.

B. Rate Calculation Issues

In this section, we discuss the comments related to the specific
ratemaking at issue for 2017, as well as lay out the method by which we
arrived at the final 2017 rates. The ratemaking process is specified in
46 CFR 404, 101 through 110. Each section below corresponds to one of
the sections in the CFR.
1. Recognition of 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). We reviewed the independent accountant's financial reports
for each association's 2014 expenses and revenues.\33\ In the NPRM, we
accepted the final findings on the 2014 audit of association expenses,
and presented the recognized expenses for each District.
---------------------------------------------------------------------------

\33\ These reports are available in the docket for this
rulemaking, see Docket # USCG-2016-0268-0056 through 0058.
---------------------------------------------------------------------------

We received information with regard to lobbying expenses associated
with American Pilots Association (APA) dues. We attributed 15 percent
of APA dues to legal fees in the NPRM. This should have been 5
percent.\34\ We have adjusted the operating expenses to reflect this
change.
---------------------------------------------------------------------------

\34\ Docket # USCG-2016-0268-0037, p. 2.
---------------------------------------------------------------------------

We received comments from the three U.S. Great Lakes Pilot
Associations regarding the exclusion of legal fees from recognized
operating expenses. Specifically, in our review of the 2014 operating
expenses, we did not recognize certain legal expenses from K&L Gates,
totaling $47,256. The commenters stated that they did not understand
why these expenses were not recognized and requested that we reclassify
these expenses as allowable fees. We disagree that these K&L Gates
legal fees should be included. We disallowed the fees for K&L Gates
because we could not determine whether or not these funds were used for
lobbying or legal services. Per the requirements in paragraph
404.2(b)(6), lobbying fees are not allowable expenses for
reimbursement. We contacted the pilot associations to request
additional documentation that these fees were associated with legal
services and not lobbying, but we did not receive any documentation to
show which costs were attributable to legal services, and which were
attributable to lobbying work.
In addition, the three pilot associations requested that we
recognize legal expenses in the amount of $75,049 incurred in their
litigation against the Coast Guard regarding the 2014 final rule. This
amount represents the difference between legal fees incurred and the
amount the Coast Guard paid in its settlement with the pilot
associations. Pursuant to Sec. 404.2(6), expenses incurred against the
United States are not recoupable as recognized operating expenses. The
pilots argue that this section of the regulations was improperly
adopted in the 2016 final rule. We do not believe that the 2017 Annual
Rulemaking is the appropriate venue to address the procedural aspects
of the 2016 final rule.
A commenter from the Lakes Pilots Association noted that certain
operating expenses, relating to the payment of applicant pilot
salaries, had been omitted from the operating expenses of District Two.
Specifically, the commenter noted that payment of training salaries
should be considered as an operating expense instead of treated as
pilot compensation. We agree that as applicant pilots are not counted
as pilots for the purposes of calculating general pilot compensation,
and this occurred prior to the use of surcharges to pay for applicant
pilot salaries, these salaries should be recognized as an operating
expense. The surcharge provision for funding applicant pilots did not
impact rates until 2015 and the 2014 Annual Rulemaking did not provide
funding for this activity. Therefore, we added the amount, $281,588, to
the operating expenses of District Two to recoup the 2014 expense
incurred in training applicant pilots that year.
The recognized expenses for the various Districts are as follows:

Table 1--Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
District One
--------------------------------
Designated Undesignated
Reported expenses for 2014 -------------------------------- Total
St. Lawrence
River Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Pilot subsistence/travel.................................... $302,547 $228,222 $530,769
Applicant Pilot subsistence/travel.......................... 0 12,996 12,996
License insurance........................................... 20,231 22,480 42,711
Applicant Pilot license insurance........................... 0 1,760 1,760
Payroll taxes............................................... 78,067 64,130 142,197
Applicant Pilot payroll taxes............................... 0 0 0
Other....................................................... 479 378 857
-----------------------------------------------
Total other pilotage costs.............................. 401,324 329,966 731,290
Pilot Boat and Dispatch Costs:
Pilot boat expense.......................................... 130,741 103,173 233,914
Dispatch expense............................................ 0 0 0
Payroll taxes............................................... 9,797 7,732 17,529
-----------------------------------------------

[[Page 41472]]

Total pilot and dispatch costs.......................... 140,538 110,905 251,443
Administrative Expenses:
Legal--general counsel...................................... 2,173 1,505 3,678
Legal--shared counsel (K&L Gates)........................... 8,783 6,932 15,715
Legal--Coast Guard litigation............................... 12,794 10,098 22,892
Insurance................................................... 21,829 17,226 39,055
Employee benefits........................................... 7,570 5,974 13,544
Payroll taxes............................................... 5,281 4,167 9,448
Other taxes................................................. 7,262 5,731 12,993
Travel...................................................... 648 512 1,160
Depreciation/auto leasing/other............................. 48,094 31,820 79,914
Interest.................................................... 13,713 10,821 24,534
APA Dues.................................................... 12,444 11,996 24,440
Utilities................................................... 8,916 418 9,334
Salaries.................................................... 52,121 41,130 93,251
Accounting/Professional fees................................ 5,142 4,058 9,200
Pilot Training.............................................. 6,427 5,074 11,501
Applicant Pilot training.................................... 0 0 0
Other....................................................... 8,866 6,546 15,412
-----------------------------------------------
Total Administrative Expenses........................... 222,063 164,008 386,071
-----------------------------------------------
Total Operating Expenses (Other Costs + Pilot Boats 763,925 604,879 1,368,804
+ Admin)...........................................
Proposed Adjustments (Independent CPA):
Pilot subsistence/travel.................................... -15,712 -12,401 -28,113
Payroll taxes............................................... -87 -68 -155
Applicant Pilot payroll taxes............................... 0 2,347 2,347
-----------------------------------------------
Total CPA Adjustments................................... -15,799 -10,122 -25,921
Proposed Adjustments (Director):
APA Dues.................................................... -622 -600 -1,222
2015 Surcharge Adjustment *................................. -92,766 -72,887 -165,653
Legal--shared counsel (K&L Gates)........................... -8,783 -6,932 -15,715
Legal--Coast Guard litigation............................... -12,794 -10,098 -22,892
-----------------------------------------------
Total Director's Adjustments............................ -114,965 -90,517 -205,482
-----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)....... 633,161 504,240 1,137,401
----------------------------------------------------------------------------------------------------------------
* District One collected $493,682 with an authorized 10 percent surcharge in 2015. The adjustment represents the
difference between the collected amount and the authorized amount of $328,029 authorized in the 2015 final
rule.

Table 2--Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
District Two
--------------------------------
Undesignated Designated
Reported expenses for 2014 -------------------------------- Total
SES to Port
Lake Erie Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Applicant pilot salaries.................................... $112,635 $168,953 $281,588
Pilot subsistence/travel.................................... 148,424 222,635 371,059
Applicant Pilot subsistence/travel.......................... 9,440 14,160 23,600
License insurance........................................... 52,888 79,333 132,221
Applicant Pilot license insurance........................... 5,738 8,608 14,346
Payroll taxes............................................... 76,903 115,354 192,257
Applicant Pilot payroll taxes............................... 8,344 12,516 20,860
Other....................................................... 1,053 1,579 2,632
-----------------------------------------------
Total other pilotage costs.............................. 415,425 623,138 1,038,563
Pilot Boat and Dispatch Costs:
Pilot boat expense.......................................... 173,145 259,718 432,863
Dispatch expense............................................ 10,080 15,120 25,200
Employee benefits........................................... 72,662 108,992 181,654
Payroll taxes............................................... 8,472 12,707 21,179
-----------------------------------------------

[[Page 41473]]

Total pilot and dispatch costs.......................... 264,359 396,537 660,896
Administrative Expenses:
Legal--general counsel...................................... 2,680 4,020 6,700
Legal--shared counsel (K&L Gates)........................... 4,984 7,476 12,460
Legal--Coast Guard litigation............................... 8,371 12,557 20,928
Office rent................................................. 26,275 39,413 65,688
Insurance................................................... 9,909 14,863 24,772
Employee benefits........................................... 23,002 34,504 57,506
Payroll taxes............................................... 5,001 7,501 12,502
Other taxes................................................. 21,179 31,769 52,948
Depreciation/auto leasing/other............................. 17,784 26,677 44,461
Interest.................................................... 3,298 4,948 8,246
APA Dues.................................................... 8,664 12,996 21,660
Utilities................................................... 15,429 23,144 38,573
Salaries.................................................... 46,008 69,013 115,021
Accounting/Professional fees................................ 9,410 14,115 23,525
Pilot Training.............................................. 0 0 0
Other....................................................... 11,343 17,012 28,355
-----------------------------------------------
Total Administrative Expenses........................... 213,337 320,008 533,345
-----------------------------------------------
Total Operating Expenses (Other Costs + Pilot Boats 893,121 1,339,683 2,232,804
+ Admin)...........................................
Proposed Adjustments (Independent CPA):
Depreciation/auto leasing/other............................. 3,322 4,982 8,304
-----------------------------------------------
Total CPA Adjustments................................... 3,322 4,982 8,304
Proposed Adjustments (Director):
APA Dues.................................................... -433 -650 -1,083
2015 Surcharge Adjustment *................................. -85,782 -128,672 -214,454
Legal--shared counsel (K&L Gates)........................... -4,984 -7,476 -12,460
Legal--Coast Guard litigation............................... -8,371 -12,557 -20,928
-----------------------------------------------
Total Director's Adjustments............................ -99,570 -149,355 -248,926
-----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)....... 796,873 1,195,310 1,992,183
----------------------------------------------------------------------------------------------------------------
* D2 collected $540,284 with an authorized 10 percent surcharge in 2015. The adjustment represents the
difference between the collected amount and the authorized amount of $325,830 authorized in the 2015 final
rule.

Table 3--Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
District Three
--------------------------------
Undesignated Designated
Reported expenses for 2014 -------------------------------- Total
Lakes Huron,
Michigan and St. Mary's
Superior River
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
Pilot subsistence/travel.................................... $424,935 $141,645 $566,580
Applicant pilot subsistence/travel.......................... 24,608 8,203 32,811
License insurance........................................... 14,304 4,768 19,072
Payroll taxes............................................... 110,567 36,856 147,423
Applicant pilot payroll taxes............................... 9,082 3,027 12,109
Other....................................................... 12,268 4,090 16,358
-----------------------------------------------
Total other pilotage costs.............................. 595,764 198,589 794,353
Pilot Boat and Dispatch Costs:
Pilot boat costs............................................ 593,360 197,787 791,147
Dispatch costs.............................................. 133,787 44,596 178,383
Payroll taxes............................................... 31,432 10,477 41,909
-----------------------------------------------
Total pilot and dispatch costs.......................... 758,579 252,860 1,011,439
Administrative Expenses:
Legal--general counsel...................................... 15,386 5,129 20,515
Legal--shared counsel (K&L Gates)........................... 15,900 5,300 21,200
Legal--Coast Guard litigation............................... 23,422 7,807 31,229

[[Page 41474]]

Office rent................................................. 7,425 2,475 9,900
Insurance................................................... 11,050 3,683 14,733
Employee benefits........................................... 113,890 37,964 151,854
Other taxes................................................. 129 43 172
Depreciation/auto leasing/other............................. 28,802 9,601 38,403
Interest.................................................... 2,858 953 3,811
APA Dues.................................................... 20,235 6,745 26,980
Dues and subscriptions...................................... 3,975 1,325 5,300
Utilities................................................... 33,083 11,028 44,111
Salaries.................................................... 95,577 31,859 127,436
Accounting/Professional fees................................ 27,492 9,164 36,656
Pilot Training.............................................. 0 0 0
Other....................................................... 9,318 3,106 12,424
-----------------------------------------------
Total Administrative Expenses........................... 408,542 136,182 544,727
-----------------------------------------------
Total Operating Expenses (Other Costs + Pilot Boats 1,762,885 587,631 2,350,516
+ Admin)...........................................
Proposed Adjustments (Independent CPA):
Pilot subsistence/Travel.................................... -15,595 -5,198 -20,793
Payroll taxes............................................... 5,949 1,983 7,932
Pilot boat costs............................................ -62,748 -20,916 -83,664
Legal--shared counsel (K&L Gates)........................... -1,590 -530 -2,120
Dues and subscriptions...................................... -3,975 -1,325 -5,300
Other expenses.............................................. -375 -125 -500
-----------------------------------------------
Total CPA Adjustments................................... -78,334 -26,111 -104,445
Proposed Adjustments (Director):
APA Dues.................................................... -1,012 -1,012 -2,024
Surcharge Adjustment *...................................... -216,734 -72,245 -288,979
Legal--shared counsel (K&L Gates)........................... -14,310 -4,770 -19,080
Legal--Coast Guard litigation............................... -23,422 -7,807 -31,229
-----------------------------------------------
Total Director's Adjustments............................ -255,478 -85,834 -341,312
-----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)....... 1,429,073 475,687 1,904,760
----------------------------------------------------------------------------------------------------------------
* D3 collected $615,929 with an authorized 10 percent surcharge in 2015. The adjustment represents the
difference between the collected amount and the authorized amount of $326,950 authorized in the 2015 final
rule.

2. Projection of Operating Expenses
Step 2 in our ratemaking methodology requires that the Coast Guard
project next year's operating expenses, and adjust for inflation or
deflation (Sec. 404.102). In the NPRM, we adjusted for inflation and
projected expenses for 2017 using the Bureau of Labor Statistics' data
from the Consumer Price Index for the Midwest Region of the United
States \35\ and reports from the Federal Reserve.\36\ We did not
receive any comments on this step and thus are adjusting operating
expenses for inflation as described in Sec. 404.102. We do note that,
based on updated information from the Bureau of Labor Statistics, the
2016 inflation modification has been adjusted to 0.8%.
---------------------------------------------------------------------------

\35\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf.
\36\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm.

Table 4--Calculation of Projected Expenses
----------------------------------------------------------------------------------------------------------------
Area 2 Area 1
District One (Undesignated) (Designated) Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)......................... $633,161 $504,240 $1,137,401
2015 Inflation Modification (@-0.5%)...................... -3,166 -2,521 -5,687
2016 Inflation Modification (@0.8%)....................... 5,040 4,014 9,054
2017 Inflation Modification (@2.1%)....................... 13,336 10,620 23,956
-----------------------------------------------------
Adjusted 2016 Operating Expenses...................... 648,371 516,353 1,164,724
----------------------------------------------------------------------------------------------------------------

[[Page 41475]]

Area 4 Area 5
District Two (Undesignated) (Designated) Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)......................... 796,874 1,195,310 1,992,183
2015 Inflation Modification (@-0.5%)...................... -3,984 -5,977 -9,961
2016 Inflation Modification (@0.8%)....................... 6,343 9,515 15,858
2017 Inflation Modification (@2.1%)....................... 16,784 25,176 41,960
-----------------------------------------------------
Adjusted 2016 Operating Expenses...................... 816,016 1,224,024 2,040,040
----------------------------------------------------------------------------------------------------------------

Areas 6 and 8 Area 7
District Three (Undesignated) (Designated) Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)......................... 1,429,073 475,687 1,904,760
2015 Inflation Modification (@-0.5%)...................... -7,145 -2,378 -9,523
2016 Inflation Modification (@0.8%)....................... 11,375 3,786 15,162
2017 Inflation Modification (@2.1%)....................... 30,099 10,019 40,118
-----------------------------------------------------
Adjusted 2016 Operating Expenses...................... 1,463,402 487,114 1,950,516
----------------------------------------------------------------------------------------------------------------

3. Calculation of Number of Pilots
Step 3 in our ratemaking methodology requires that the Coast Guard
determine the number of pilots needed to complete all assignments
(Sec. 404.103). In the NPRM, we proposed to modify our pilotage demand
calculation to focus on the pilot work cycle, including elements such
as travel, rest, pilot boat time, and other items in addition to the
time spent on the bridge of a ship. Based on the comments received, we
have determined that transitioning to this model, in which all traffic
is treated equally for the purpose of determining the number of pilots
needed, would result in traffic delays, overwork of pilots, and
possible compromises to safety on the Great Lakes. For these reasons,
we are not finalizing the proposed changes to Sec. 404.103.
It is important to note that Step 3 produces two different sets of
numbers associated with the respective sections of Sec. 404.103. The
first number, described in paragraphs (a) through (c), is used to
establish the number of pilots the Coast Guard believes are needed to
provide safe and efficient pilotage service in each area. This number
provides guidance to pilot associations and the Director of Great Lakes
Pilotage in making determinations about hiring decisions and the
authorization of new pilots. The second number, described in paragraph
(d), is based on the number of persons applying for pilot positions
under 46 CFR 401. For purposes of setting Great Lakes pilotage rates in
Sec. 401.405, only the number derived from the 404.103(d) analysis is
used in the ratemaking calculations.
Most commenters provided comments on the model used to determine
the number of pilots needed. In the NPRM, the Coast Guard proposed
replacing the existing staffing model, which we call the 2016 final
rule staffing model, with a model that analyzed shipping traffic
throughout the entire shipping season, and which we are calling the
2017 NPRM staffing model.\37\ We stated that we were proposing to
modify the pilotage demand calculation to incorporate the ``number of
assignments we reasonably expect pilots to be able to complete during
the 9-month shipping season instead of during peak pilotage demand.''
(See 81 FR 72014-5). While we recognized that during the opening and
closing of the season, there are significant spikes in traffic that
necessitate far more pilotage services, the Coast Guard believed that
this seasonal peak would be adequately covered by the fact that pilots
would work an extra 10 days (30 percent) per month during those months
to cover the increased traffic.
---------------------------------------------------------------------------

\37\ We note that commenters often refer to these models as the
``peak'' and ``average'' staffing models, although we feel such
nomenclature is imprecise, as both models are designed to
accommodate traffic at higher-than-average demand periods.
---------------------------------------------------------------------------

The functional result of the proposed change to the staffing model
was to reduce the total number of pilots needed to service the Great
Lakes system by 5, from a total of 54 under the previous staffing model
to a total of 49 under the proposed new staffing model. We received a
large number of comments, especially from pilots, regarding how this
change in modeling could affect their workload, lifestyle, stress
levels, and overall retention rates, as discussed below.
The 2017 NPRM staffing model had a number of substeps and we
received comment on nearly all of these substeps. The substeps and
associated comments are discussed below.
Substep 1: Calculate Pilot Cycle
The first step of the process is to determine how long it takes for
a pilot to undertake a full piloting cycle, that is, to board a ship,
provide pilotage services, disembark, rest, travel back to a port
location, and complete any administrative tasks associated with
providing pilotage service. We used the ``Average-Through Transit
Time'' between change points \38\ for an area or assignment segment
that is impacted by a mandatory change point, and then added additional
time for travel, delay, administrative needs, and mandatory rest, to
come up with the total amount of time for a ``Pilot Cycle.''
---------------------------------------------------------------------------

\38\ The Average-Through Transit Time is the number of hours it
takes for a vessel to fully transit through an area.
---------------------------------------------------------------------------

One commenter \39\ suggested that the Coast Guard had made an error
in its calculation of the number of pilots needed as a result of the
addition of the Iroquois Lock. As noted, in the NPRM, the Coast Guard
proposed to add a mandatory change point to District One, Area 1, at
the Iroquois Lock. We proposed this additional change point to enhance
safety on long segments, noting that the transit time between Snell
Lock and Cape Vincent takes about 11 hours under ideal circumstances,
and that we wanted to limit a U.S.-registered pilot's assignment time
to 8 hours in designated waters to mitigate fatigue.\40\ As a result of
adding this change point, we modified how we calculated the number of
pilots for the Designated Waters of District One (St. Lawrence River).
---------------------------------------------------------------------------

\39\ Docket #USCG-2016-0268-0033, p. 14.
\40\ 81 FR 72016 (December 19, 2016).
---------------------------------------------------------------------------

The commenter noted that while the Coast Guard had increased the
number of pilot assignments to account for the mandatory change point
at Iroquois Lock, it had not adjusted the Average-Through Transit Time
to account for the shorter trips due to the change point. The commenter
asserted that instead of using a figure of 10.8 hours, the Coast Guard
should replace that figure with a transit time of 6 hours. This change

[[Page 41476]]

would have the effect of lowering the Pilot Cycle to 20.0 hours (from
the current 25.2) and the number of additional pilots needed from 3.4
to 2.7. The commenter recommended this new figure be incorporated into
the Coast Guard's calculations.
We believe that this comment is justified, and that under
conditions where we are calculating transit through times for a single
pilot, this would be a reasonable change. However, we are not adopting
the 2017 NPRM staffing model, but we are retaining the 2016 final rule
staffing model. In such a model, we calculate transit through the
Iroquois Lock using double pilotage, where the fatigue issue is
mitigated by a second pilot. For that reason, under double pilotage,
pilots do not have to change at the Iroquois Lock, and we can continue
to use the full 10.8 hour average through transit time.
One commenter \41\ stated the NPRM inconsistently relied on bridge
hours and cycle time in determining the number of pilots needed in each
District, and that instead of using the Average-Through Transit Time as
a basis for the pilot cycle, we should use an average trip time. The
commenter gave an example for District Two Area 4. The NPRM uses cycle
time analysis to determine that District Two, Area 4 needs seven pilots
to handle the historic average assignments in this area. These seven
pilots should complete an average of 73 assignments with an Average-
Through Transit Time of 17 hours each. The commenter stated the total
time on task for this District would be 8,687 hours. However, this
figure would differ from the Coast Guard's calculation of average
traffic, used to calculate revenue, which found the average time on
task as 5,174 hours per year using the average number of bridge hours
from 2007 to 2015. The commenter stated that the Coast Guard's
``inconsistent reliance on bridge hours raises the hourly rate in the
undesignated waters of District Two from $319 to $537.'' \42\ The
commenter stated that the Coast Guard cannot rely on cycle time to
increase the projected number of pilots needed and then use the bridge
hours to calculate the hourly rate.
---------------------------------------------------------------------------

\41\ Docket #USCG-2016-0268-0033, p. 17.
\42\ Docket #USCG-2016-0268-0033, p. 17.
---------------------------------------------------------------------------

We acknowledge that we use different bridge hour inputs when
calculating the Average-Through Transit Time and the calculation for
the expected traffic. For staffing purposes, we are assuming that each
assignment will go between the mandatory change points in a given
pilotage district to ensure that we have enough pilots to handle
traffic. This is a situation where efficiency and safety are in
conflict. We believe the safety concerns associated with having too few
pilots outweigh the financial burden on the rate payers. The
methodology established in the 1990s used a similar bridge hour
standard in multiple steps throughout the ratemaking process. This
caused problems with recruitment and retention, revenue shortfalls,
lack of training, and a resistance to infrastructure investment and
maintenance. We intentionally decided to only include a historic bridge
hour input in determining the hourly rate for services and use the
number of assignments (assuming that each assignment would be average
maximum time between two change points) for staffing.
However, we realize that this system of basing the pilot cycle on
the transit through time, as opposed to the average trip time, is
better suited to the 2016 final rule staffing model, rather than the
2017 NPRM staffing model. As we stated in the 2016 final rule, it makes
sense to use the full transit through time for conditions at the
opening and close of the season, as a high percentage of trips during
that time are through transit trips to ensure the pilot associations
are sufficiently staffed to provide adequately rested pilots during the
time of the season when the conditions are most challenging.
Conversely, when calculating the total revenues we expect the
associations to collect, we use the historic traffic data, which
provides a more accurate accounting of revenue. Unlike the issue of
staffing of vessels, it does not make a difference when revenue is
collected during the shipping season.
As the commenter points out, the transition from 2016 final rule
staffing model to the 2017 NPRM staffing model, without reevaluating
the full ratemaking methodology, can cause these types of logical
discrepancies. This is one reason that we are not adopting the 2017
NPRM staffing model in the final rule, and are instead relying on the
2016 final rule staffing model to determine an adequate capacity.
Substep 2: Calculate Maximum Number of Assignments per Pilot
In the next part of the 2017 NPRM staffing model, we divided the
Seasonal Availability (the total amount of time which we expect a pilot
to be available, which is 4,800 hours, or 200 days \43\) by the Pilot
Cycle to calculate a theoretical maximum number of assignments per
pilot. We realize that this number is highly theoretical, and assumes
no shipping delays, inclement weather conditions, traffic,
administrative issues, and that a new ship is readily available each
time a pilot arrives at port. As seen below, the number of actual
assignments a pilot can perform during the shipping season is much
lower.
---------------------------------------------------------------------------

\43\ This number is based on a 270-day shipping season, with an
allowed 10 days off each non-peak month.
---------------------------------------------------------------------------

Substep 3: Calculate Estimated Number of Assignments per Pilot
In the third step, we multiplied the theoretical maximum number of
assignments per pilot by an ``efficiency factor'' of 50 percent, which
is based upon the Coast Guard's 2013 ``Bridge Hour and Methodology
Study Final Report,'' \44\ to arrive at a total number of projected
assignments per pilot.
---------------------------------------------------------------------------

\44\ Available in the docket, see Docket #USCG-2016-0268-0059.
---------------------------------------------------------------------------

We received comments criticizing the efficiency factors from a
variety of sources. One commenter stated that it was ``nothing more
than a placeholder number from a study rejected by both pilots and
industry at GLPAC.'' \45\ The commenter requested that the Coast Guard
abandon its existing methodology for determining the number of pilots
needed in an area. In its place, the commenter suggested the Coast
Guard determine the number of pilots needed by either directly using
the recent average number of assignments per pilot, or by increasing
the efficiency ratio in each District to bring the anticipated number
of assignments up to average levels. The commenter did not specify what
the ``recent average number of assignments per pilot'' was, or what
change to the efficiency ratio would be needed to achieve this.
However, the commenter suggested that the Coast Guard could gather
information that would allow us to more directly determine average
pilot assignments by using invoices and source forms provided by
pilots.\46\
---------------------------------------------------------------------------

\45\ Docket #USCG-2016-0268-0037, p. 3.
\46\ Docket #USCG-2016-0268-0033, p. 19.
---------------------------------------------------------------------------

While we understand the concept of this proposal, we do not agree
that the historic average of assignments is a useful tool for the
following reasons. The mid-1990s methodology excluded many of the pilot
assignment cycle time inputs to determine a seasonal workload.
Additionally, the goal of providing 10 days of recuperative rest for 7
months of the season was introduced in the 2016 Annual Rulemaking, in
response to National Transportation Safety Board recommendations,
letters from Congress asking us to address recruitment and

[[Page 41477]]

retention, and a recommendation from the July 2014 GLPAC meeting. For
these reasons, we do not expect the historical average of assignments
per pilot to be an accurate reflection of the estimated future counts
based on the current staffing model. We may consider using historical
data in a future rulemaking if we compile sufficient data to make an
accurate comparison.
We believe the efficiency factor of 0.5 is supported by the Bridge
Hour and Methodology Study Final Report. In response to concerns about
the methodology used to calculate shipping rates, GLPAC unanimously
recommended that an independent party conduct a comprehensive review of
the methodology established in the mid-1990s to calculate pilotage
rates. GLPAC reviewed the scope of the study, entitled ``Bridge Hour
and Methodology Study Final Report,'' expanded the study's scope, and
unanimously approved the scope of the study. This included one-on-one
meetings with all of the stakeholders, two focus groups, and additional
GLPAC meetings. Based on the study's findings, the Coast Guard
developed the efficiency factor. The study recommended that we consider
an efficiency factor between 0.4 and 0.6 for staffing. However, we
provided additional guidance with regard to mandatory change points and
required rest between assignments in 2014, incorporated changes based
upon recommendations from the National Transportation Safety Board in
2015, and implemented significant changes to the methodology in 2016
Annual Rulemaking.
While the various stakeholders rejected the final recommendations
of the study for different reasons, none of the criticisms of the study
accused its final recommendations of being a ``placeholder.'' One group
did not think the study went far enough to recommend changes that were
outside of the scope of the study. Another group did not think the
study went far enough to guarantee time off for the pilots or establish
an acceptable compensation standard. While we are not using the
efficiency factor in this final rule, we continue to believe that a 0.5
efficiency factor would be reasonable if it were being used in a
staffing model.
One commenter \47\ stated that the Coast Guard had used incorrect
assumptions regarding efficiency, cycle time, recuperative rest, and
transition planning in calculating the total average time it takes for
a pilot to complete an assignment. Using as an example the Coast
Guard's calculations for District Three Area 2 (which in the NPRM is
listed as ``Area 7''), in which the Coast Guard calculated that the
number of projected assignments per pilot was 112, the commenter said
that ``assuming that these pilots can only take one assignment per day
(based on the estimated 21.5 hour shipping time), each pilot in [Area
7] will only work 41 percent of a 270-day shipping season. This figure
is unrealistically low.'' \48\
---------------------------------------------------------------------------

\47\ Docket #USCG-2016-0268-0033, p. 16.
\48\ Docket #USCG-2016-0268-0033, p. 16.
---------------------------------------------------------------------------

We disagree with the assertions that we used incorrect assumptions
that resulted in an unrealistically low value. Even though the shipping
season is 270 days, we only expect the pilots to be on the tour-de-role
for 200 days a season (noting that they receive 10 days off per month
for seven of the nine months of the season) so the correct comparison
would be the number of days worked to the number of days available for
assignment which is 56 percent (112 assignments/200 days). This does
not seem unrealistically low, as the total cycle time is often over one
day. Furthermore, we know that the demand for pilot services is not
spread uniformly across the entire season, and there will be times when
a pilot is idle for substantial periods of time between assignments. It
is quite rare that a pilot returns after an assignment and is
immediately able to start a new assignment, and that usually only
occurs when there is a backlog of ships awaiting pilots. Simply put,
all of this represents inherent inefficiencies in the system and, for
these reasons, an efficiency factor of 50 percent is appropriate.
Substep 4: Calculate Total Number of Pilots Needed per Area
Having determined the number of assignments that a pilot can
reasonably be expected to handle in a shipping season, we move to
calculate how many pilots are needed to handle the amount of traffic.
To do this, we divided the measured number of actual assignments
(averaged over a 10-year period) by the estimated number of assignments
per pilot to estimate the total number of pilots needed for a segment
within an area. This produces a figure of how many pilots are needed to
handle the total amount of traffic in an area.
Because of the detailed manner in which calculations of pilots are
carried out, the raw calculations often end up suggesting a fractional
number of pilots. In the NPRM, we stated that, ``when the calculation
[of total pilots needed] results in a fraction of a pilot, we round
pilot numbers up to the nearest whole pilot. We do this to avoid
shortening our demand calculation and also to compensate for the role
of the district presidents as both working pilots and representatives
of their associations. We believe the rounding is justified to meet the
needs of the staffing model and also to ensure the presidents of the
pilot associations are able to effectively engage in meetings and
communications with stakeholders throughout the Great Lakes region and
the Coast Guard.'' (81 FR 72016-7).
Several commenters argued that our rounding convention, in which we
rounded up to the nearest whole number rather than rounding up or down,
unnecessarily increased the number of pilots. One commenter argued that
the Coast Guard's stated rationale in the 2017 NPRM for rounding up in
all situations is flawed. The commenter suggested that the Coast Guard
should not build in time for meetings and outreach activities into the
pilot numbers, and stated that if the pilot associations believe those
are essential elements of officer functions, they should instead adjust
their distribution practices to encourage those functions.\49\ The
commenter also stated that other aspects of the staffing model already
ensure that association officers have time for other duties, citing the
efficiency adjustment of 50 percent.
---------------------------------------------------------------------------

\49\ Docket #USCG-2016-0268-0033, p. 15, footnote 7.
---------------------------------------------------------------------------

We disagree that the efficiency factor is the proper forum in which
to address a pilot's ancillary duties, such as acting as an association
president. The ability of a pilot president to engage in the running of
the association, respond to Coast Guard inquiries, and attend necessary
meetings further takes away from his ability to provide pilotage
service. The efficiency factor adjustment is designed to determine how
efficiently a pilot can undertake piloting activities, and does not
address these other required activities.
The commenter also argued that the method by which the Coast Guard
rounded up pilot numbers in the 2017 NPRM deviates from the 2016
NPRM.\50\ In the 2017 NPRM, we proposed to round up ``when the
calculations resulted in a fractional pilot.'' \51\ We agree that the
2017 NPRM staffing model is different from that used in 2016. In 2016,
we established the standard to round the number of pilots up or down,
``as seems most reasonable,'' using a demand number that generally
allocated more pilots than needed at times of lesser traffic. This is
because, under the 2016 Final Rule

[[Page 41478]]

Staffing Model, there was less of a safety concern of rounding down by
a fractional pilot. We proposed a different staffing model in the 2017
NPRM, using the pilot assignment cycle to determine the actual number
of pilots needed for the duration of the shipping season. Under this
model, rounding down would be more likely to result in an inadequate
number of properly-rested pilots available, and could result in safety
concerns and traffic delays. However, as stated above, we believe that
in maintaining the 2016 final rule staffing model, this issue with the
rounding can be resolved.
---------------------------------------------------------------------------

\50\ Docket #USCG-2016-0268-0033, p. 14.
\51\ 81 FR at 72015-6.
---------------------------------------------------------------------------

The Coast Guard also received a comment that it had applied
unnecessary rounding to the Iroquois Lock calculation, resulting in an
overestimate of the number of pilots needed. The commenter wrote,
``According to GPLO calculations, without rounding, District One would
need a total of 9.11 pilots to handle anticipated demand in District
One, Area 1. With rounding, GLPO proposes that 11 pilots are needed.''
\52\
---------------------------------------------------------------------------

\52\ Docket #USCG-2016-0268-0033, page 15.
---------------------------------------------------------------------------

We believe the coalition's calculations are incorrect. In the NPRM,
we calculated that District One, Area 1, would need a total of 9.11
pilots (3.4 + 5.71), for the increased number of assignments due to the
mandatory change point at Iroquois Lock. However, this was rounded up
to 10 not 11. This is shown in Table 9 of the NPRM, where we stated
that the total number of pilots required for the designated waters of
District One, Area 1, is 10.\53\
---------------------------------------------------------------------------

\53\ 81 FR at 72017 (December 19, 2016).
---------------------------------------------------------------------------

In evaluating this comment, however, we did discover one issue with
our rounding convention. While the text of paragraph 404.103(c) reads,
in part, ``[t]he number of pilots needed in each district is calculated
by totaling the area results by district and rounding them to the
nearest whole integer,'' the Coast Guard made an error in its rounding
calculations by rounding the number of pilots in each area, rather than
in each district. There are circumstances where this could have
resulted in an increase of an extra pilot (if, for example, two areas
required 0.7 pilots). We have corrected this mistake in the final rule
and are rounding by district.
Reasons To Abandon 2017 NPRM Staffing Model
Several commenters discussed the proposed change from 2016 final
rule staffing model to the 2017 NPRM staffing model in general terms,
without referring to specific portions of the calculations.
One commenter, a Great Lakes pilot, argued that the number of
pilots proposed in the 2017 calculations would fall short of what is
needed to provide safe, efficient, and reliable pilotage.\54\ The
commenter stated that reviewing bridge hours worked in District Three
over the course of the 2016 shipping season would show that pilots
there had worked extra hours to keep ships moving. Furthermore, the
commenter suggested that cruise ships, which are run on a much tighter
schedule than cargo ships, might abandon the area if a lack of pilots
caused persistent delays. However, the commenter did not provide
specific recommendations on how we should modify the staffing model's
methodology or suggest different inputs.
---------------------------------------------------------------------------

\54\ Docket #USCG-2016-0268-0021, p. 1.
---------------------------------------------------------------------------

We received comments from the Western Great Lakes Pilot Association
President which suggested that using an average staffing model, as
proposed in the 2017 NPRM, would result in unacceptable delays for
cruise ships. We recognize that the various types of vessels that
employ U.S. and Canadian registered pilots have different tolerances
for delays due to the lack of pilot availability. One method to address
the varying tolerance for delays is through adjusting the regulations
that deal with dispatching. The current system is to strictly assign
pilots on a first-come, first-serve basis. We plan to discuss this
issue during the next GLPAC meeting to investigate whether that
standard should be modified, and the potential implications such
modifications would have on the System and hourly pilotage rates.
For many of the reasons the commenters described above, we realize
that there are flaws with the 2017 NPRM staffing model. Based upon the
comments received, particularly those that highlighted the variations
in traffic throughout the season and the inconsistencies in the use of
average trips vs. through time, we have concluded that our data does
not support using the 2017 NPRM staffing model. For those reasons, we
have decided to not to adopt the 2017 NPRM staffing model, and continue
to use the 2016 final rule staffing model.
We note, however, that in the NPRM, we proposed to adjust the
wording of 46 CFR 404.104 by replacing the word ``peak'' with the word
``seasonal.'' While we are not adopting the proposed new staffing
model, we believe that ``seasonal'' is a more appropriate term to use,
as instances of high demand often occur at various points in the
seasons, and so are maintaining that textual change in the final rule.
We agree with both shippers and pilots that the proposed 2017 NPRM
staffing model may not achieve the required goals of promoting safe and
efficient pilotage, and that averaging traffic through an entire season
may not adequately account for mid-season variations in demand. In this
final rule, we maintain the staffing model we adopted in the 2016 final
rule. Even though we have used the label ``peak demand'' for the 2016
staffing model, we believe some have misinterpreted this label. This
model uses the pilot assignment cycle and average late-seasonal traffic
demand over the past 10 shipping seasons to establish the number of
pilots necessary to move that traffic. We did not establish staffing
levels to eliminate delays throughout the season by reviewing 10 years
of historic traffic and ensuring that sufficient pilots would be on the
tour-de-role throughout the season to eliminate delays. We believe our
approach provides sufficient pilots to deal with the opening of the
Seaway and the late season rush, in addition to other high-traffic
periods, in a safe and reliable manner while also accounting for mid-
season demand variations and providing the pilots with sufficient
opportunity to achieve 10 days of recuperative rest during 7 months of
the season. We are willing to evaluate potential adjustments to this
model in the future if we receive specific delay tolerances from those
stakeholders concerned about this issue. We discussed staffing during
the previous GLPAC meeting and plan to discuss staffing and delay
tolerance during future meetings.
Calculation of Pilotage Need Under the 2016 Final Rule Staffing Model
Using the 2016 final rule model, we have recalculated the number of
pilots needed for each district. First, we note that use of this model
considers the extensive use of double pilotage during the opening and
closing of the shipping season. This is because, during the opening and
closing of the season, the aids to navigation may not be in place, the
weather can be volatile and extreme, sea smoke and fog appear with
little notice, and ice conditions routinely present unique challenges
to navigation. It is also during these periods that the pilots are
working diligently to ensure all vessels exit the system before the
locks close. For these reasons, we tend to authorize double pilotage
during the opening and closing in designated waters for District One
and District Two. District Three tends to engage in day-

[[Page 41479]]

time only navigation on the St. Marys River in lieu of utilizing two
pilots. Double pilot usage in District Three occurs about 30 percent of
the time during the opening and closing of the System. Our staffing
model is designed to move the average amount of ships (calculated using
a 10-year average model) into and out of the system during these times.
Additionally, we note that the use of double pilotage avoids
concern about how the proposed rule's modeling system dealt with the
inclusion of the new mandatory change point at the Iroquois Lock.
Several commenters had noted that while the Coast Guard had mandated
the change, it had not updated its models to account for a shorter
average transit through time the change would produce. However, during
periods of double pilotage, because there are two pilots onboard that
can share the duty, there is no need to do a pilot change at the
Iroquois Lock.
Substep 1: Determine the Pilot Cycle Time
Similar to the 2017 NPRM staffing model, we start the 2016 final
rule staffing model by calculating the pilot cycle time, as shown the
tables below:

Table 5a--Calculation of Pilot Assignment Cycle, District One
------------------------------------------------------------------------
District One Area 1 Area 2
------------------------------------------------------------------------
Time on Bridge or Available (hrs)... 10.8 11
Travel and Pilot Boat Transit (hrs). 3.2 4.6
Delay (hrs)......................... .7 .9
Admin (hrs)......................... .5 .5
Mandatory Rest...................... 10 10
-----------------------------------
Total Pilot Assignment Cycle 25.2 27.0
(hrs)..........................
------------------------------------------------------------------------

District Two is unique in the fact that the mandatory change points
do not align with the border of designated and undesignated waters. The
mandatory change point is located at Detroit, but the boundary for
designated and undesignated waters occurs at the Southeast Shoal of
Lake Erie. We based the average through transit for each of these
segments, as follows:

Table 5b--Calculation of Pilot Assignment Cycle, District Two
------------------------------------------------------------------------
Between Area 4 Between Detroit
District Two and Detroit and Port Huron
------------------------------------------------------------------------
Time on Bridge or Available (hrs)... 17 6.5
Travel and Pilot Boat Transit (hrs). 4.6 3.2
Delay (hrs)......................... .7 .4
Admin (hrs)......................... .5 .5
Mandatory Rest...................... 10 10
-----------------------------------
Total Pilot Assignment Cycle 32.8 20.6
(hrs)..........................
------------------------------------------------------------------------

District Three is unique in that steel-importing vessels transit to
Chicago/Burns Harbor while grain-exporting vessels depart from Duluth
and Thunder Bay. During the opening and closing of the shipping season,
the System experiences numerous vessels that make an inbound or
outbound transit in ballast.

Table 5c--Calculation of Pilot Assignment Cycle, District Three
----------------------------------------------------------------------------------------------------------------
District Three Area 6 Area 7 Area 8
----------------------------------------------------------------------------------------------------------------
Time on Bridge or Available (hrs)......................... 22.5 7.1 21.6
Travel and Pilot Boat Transit (hrs)....................... 2.4 3.6 3.7
Delay (hrs)............................................... 1 0.3 3.3
Admin (hrs)............................................... 0.5 0.5 0.5
Mandatory Rest............................................ 10 10 10
-----------------------------------------------------
Total Pilot Assignment Cycle (hrs).................... 36.4 21.5 39.1
----------------------------------------------------------------------------------------------------------------

Substep 2: Determination of Average Late Season Demand
We then determine the average late-season traffic demand over the
base period, as shown in table 6. This number is derived by dividing
the number of assignments by the number of days in the corresponding
pilot cycle. Numbers for designated areas are doubled due to the need
for double pilotage during late peak seasonal period, as described
above. Table 6 also shows the number of pilots that would be authorized
using the traffic information from 2007-2016.

[[Page 41480]]

Table 6--10-Year Average of Traffic Demand and Pilot Requirements at the
Closing of the Season,
2007-2016
------------------------------------------------------------------------
Area 1 Area 2
District One (designated) (undesignated)
------------------------------------------------------------------------
Average late-season assignments per 5 6
day................................
Average Pilot Cycle Time (hours).... 25.2 27.0
Total Hours Needed (Assignments * 126 162
Cycle Time)........................
Total Hours Needed for double 252 ................
pilotage transit (designated only).
Number of pilots needed to meet the 10.5 6.8
average seasonal demand (total
hours/24)..........................
-----------------------------------
Pilots Needed for total district (252 + 162)/24 = 17.25 = 17
(rounded)
------------------------------------------------------------------------
------------------------------------------------------------------------

Area 4 to
Detroit Area 5 Between
District Two (designated and Detroit and Port
undesignated) Huron
------------------------------------------------------------------------
Average late-season assignments per 5 5
day................................
Average Pilot Cycle Time (hours).... 32.8 20.6
Total Hours Needed (Assignments * 164 103
Cycle Time)........................
Total Hours Needed for double N/A 206
pilotage transit (designated only).
Number of pilots needed to meet the 6.8 8.6
average seasonal demand (total
hours/24)..........................
-----------------------------------
Pilots Needed for total district (164 + 206)/24 = 15.41 = 15
(rounded)
------------------------------------------------------------------------

Area 6 Area 7 Area 8
District Three (undesignated) (designated) (undesignated)
----------------------------------------------------------------------------------------------------------------
Average late-season assignments per day................... 5 5 5
Average Pilot Cycle Time (hours).......................... 36.4 21.5 39.1
Total Hours Needed (Assignments * Cycle Time)............. 182 107.5 195.5
Total Hours Needed for double pilotage transit (designated N/A \55\ 139.75 N/A
only)....................................................
Number of pilots needed to meet the average seasonal 7.6 5.8 8.1
demand (total hours/24)..................................
-----------------------------------------------------
Pilots Needed......................................... (182 + 139.75 + 195.5)/24 = 21.55 = 22 (rounded)
----------------------------------------------------------------------------------------------------------------

Based on the above analysis, we have determined that there is a
need for a total of 54 pilots. The breakdown, as shown in the above
table, is 17 pilots in District One, 15 pilots in District Two, and 22
pilots in District Three. The Coast Guard will keep these numbers in
mind in future regulatory actions.
---------------------------------------------------------------------------

\55\ District Three prefers day-time navigation only during the
opening and closing of the System and these pilots use double
pilotage approximately 30 percent of the time at the opening and
closing of the season.
---------------------------------------------------------------------------

Calculation of Projected Pilot Numbers
As stated above, paragraph 404.103(d) produces a separate number of
pilots, which is used for the Great Lakes pilotage ratemaking
procedure. That section requires the Director of Great Lakes Pilotage
to determine the number of pilots expected to be fully working and
compensated based on the number of persons applying become U.S. Great
Lakes registered pilots, and on information provided by the district's
pilotage association. In the NPRM, the Coast Guard projected that there
would be 17 pilots in District One, 13 pilots in District Two, and 15
pilots in District Three, for a total of 45 pilots.
In the NPRM, after determining the number of pilots needed in each
district in Step 3, the Coast Guard proposed adding additional
applicant pilots in District Two and District Three. The Coast Guard
believes these applicant pilots are necessary to prepare for future
retirements, given the long training periods associated with new
pilots. Currently, 4 of the pilots in District Two are over 62 years of
age, and 6 of the pilots in District Three are over 61 years of age.
These pilots represent nearly 30 percent of the pilot strength in each
of these districts. Waiting until these pilots retire to replace them
will result in significant delays and may denigrate safety, because the
pilot association will be short-staffed. These pilots are needed in
addition to the existing shortage of pilots (District Two is one pilot
short of the needed number, while District Three is seven pilots
short). Therefore, the Coast Guard proposed authorizing a surcharge in
2017 to fund these additional applicant pilots.
We received several comments on this issue. One commenter \56\
stated that the ``NPRM arbitrarily introduces pilot age as a reason to
justify the addition of more pilots than required by its
calculations.'' The commenter stated that the Coast Guard proposes
adding 1 additional pilot in District Two and 4 additional pilots in
District Three, but the Coast Guard does not impose age limitations on
pilots. The commenter stated the Coast Guard also does not specify the
retirement commitments of the current pilots within the next 2 years.
The commenter recommended that instead of speculating about the age
impacts on pilot rosters, the Coast Guard should train additional
pilots based on the retirement transition plans.
---------------------------------------------------------------------------

\56\ Docket #USCG-2016-0268-0033, p. 18.
---------------------------------------------------------------------------

We disagree. The regulations allow a registered pilot to work until
the age of 70. Just because a pilot can keep his full registration
until age 70, doesn't mean that all of the pilots will work until that
age. In the past several years, a number of pilots have retired prior
to age 70. While we are in close contact with the US pilot associations
to plan for future retirements, we do not feel it is prudent to assume
that all of the current pilots will work until age 70.

[[Page 41481]]

Once commenter \57\ stated that the ``Lakes Pilots Association
agrees with the number of pilots in the proposed rates of 13 working
pilots and 2 training pilots.'' The commenter stated the Lakes Pilot
Association will require 15 pilots to service future traffic and
provide adequate rest in the future. The Lakes Pilot Association noted
in 2018, that it will look for 14 full time pilots and 1 trainee and
will be at 15 full time pilots in 2019. We agree with the assessment
that there is a need for 13 working pilots and 2 training pilots for
the 2017 shipping season. We cannot comment on 2018 and 2019 at this
time.
---------------------------------------------------------------------------

\57\ Docket #USCG-2016-0268-0035, p. 1.
---------------------------------------------------------------------------

Based on our analysis of the pilotage numbers and the comments
received, we have not modified the number of working pilots for 2017.
Both the 2017 NPRM staffing model and the 2016 final rule staffing
model produce more pilots than the 3 U.S. pilot associations have fully
trained. Therefore, when we established 45 working pilots in the NPRM,
we knew that the system needed more time to acquire and train the
additional pilots. We will continue to monitor and work with the pilot
associations to ensure that the associations continue to make progress
toward our staffing goals. The final numbers for the 2017 Step 3
calculations are 17 pilots for District One, 13 pilots for District
Two, and 15 pilots for District Three, for a total of 45 pilots.
Pursuant to 46 CFR 404.104, these are the numbers we will be using in
our rate calculations.
4. Calculation of Target Compensation
Step 4 in our ratemaking methodology requires that the Coast Guard
determine the target pilot compensation (Sec. 404.104). In the 2016
final rule, the Coast Guard used the Canadian pilot compensation as the
benchmark for the U.S. pilot compensation, and then made an adjustment
for foreign exchange differences and inflation. The Coast Guard then
increased the U.S. target pilot compensation by 10 percent over the
projected GLPA figure to account for the differences in the status of
U.S. and Canadian pilots and the different compensation systems in
place in the two countries. In the 2017 NPRM, the Coast Guard proposed
keeping the target pilot compensation at the 2016 levels.
In this section, we discuss comments relating to our calculations
to get to the target compensation as discussed in the 2016 final rule
and the 2017 NPRM, which uses the Canadian salary plus 10 percent as
the target. In the section regarding setting a compensation benchmark
above, we separately discussed the issue of using different
compensation benchmarks, such as the compensation packages for pilots
in other U.S. Associations or salaries of first mates or other
crewmembers. For the reasons described in that section, we continue to
believe that the benchmark established in the 2016 final rule, based on
Canadian pilot salaries plus a 10 percent differential to calculate the
value of certain benefits, is an appropriate level of compensation. In
this section, we discuss the specific comments related to the
calculation of the compensation benchmark.
Several commenters suggested that the use of Canadian pilot
salaries was an inappropriate yardstick by which to base U.S. salaries.
One commenter argued that it was inappropriate because U.S. and
Canadian pilot associations cannot recruit workers from the same pool
of individuals.\58\ Another commenter suggested that the older way in
which the Coast Guard determined compensation, by basing its estimate
on the wages paid to U.S. Masters and Mates, was more appropriate,
asserting that the functions of these personnel are essentially the
same as U.S. pilots, and that using this system avoids the
complications of comparing compensation across national boundaries.\59\
---------------------------------------------------------------------------

\58\ Docket #USCG-2016-0268-0031, p. 1.
\59\ Docket #USCG-2016-0268-0033, p.20.
---------------------------------------------------------------------------

Several pilot associations argued that the Coast Guard should base
Great Lakes compensation figures on the salaries earned by other U.S.
pilot associations. Several commenters provided figures, noting that in
other areas, U.S. pilots earned upwards of $450,000 per year. One
commenter \60\ provided figures showing the projected compensation for
pilots in various U.S. pilot associations, which ranged from a low of
$399,708 per year to a high of $493,692. Other commenters echoed the
argument that the Great Lakes pilots are among the lowest-paid U.S.
pilots.
---------------------------------------------------------------------------

\60\ Docket #USCG-2016-0268-0028, p. 6-7.
---------------------------------------------------------------------------

In some regions governed by local pilotage associations,
compensation figures appear to be much higher than those proposed by
the Coast Guard. It is unclear why some U.S. pilot associations receive
compensation levels much higher than that of Canadian pilots or U.S.
masters and mates, based on the alternative sources of information that
we have.\61\ As many organizations that set pilotage rates do not make
public what methodology they are using to derive pilotage rates, we do
not have sufficient information or a basis to raise pilotage rates on
the Great Lakes to determine if these levels of compensation are
appropriate for Great Lakes pilotage. We note, again, that we are
undertaking a compensation study to better determine an appropriate
compensation benchmark, and will present the results of such a study in
a public forum should it provide a better basis for setting
compensation levels.
---------------------------------------------------------------------------

\61\ These sources include information from the Great Lakes
Pilotage Authority as well as information regarding compensation
submitted by other U.S. pilotage associations.
---------------------------------------------------------------------------

Even for those commenters who agreed that the comparison between
U.S. and Canadian Great Lakes pilots was the most apt, we received
comments that our calculations erred in a variety of ways. Many
commenters offered statements regarding the calculations of Canadian
pilots' average total compensation, arguing that in certain areas, the
Coast Guard had overestimated or underestimated the total amount, or
made errors in its conversion of the value of Canadian compensation to
American currency. In the NPRM, we recognized that the most challenging
portion of our target compensation analysis was the conversion of
Canadian benefits into equivalent United States benefits, and many
commenters argued that we had underestimated total compensation in a
variety of ways.
One commenter argued that the Coast Guard underestimated Canadian
compensation by averaging the compensation of four contract and three
apprentice pilots, along with 49 full-time, regular Canadian pilots,
into the compensation total.\62\ That commenter stated that the
compensation for U.S. full-time, regular pilots should be based on the
salaries of Canadian full-time, regular pilots only. By excluding those
contract and apprentice pilots, the commenter calculated that the base
compensation should have been $291,035, rather than the $268,552 used
in the NPRM, meaning that the Coast Guard should increase the total
compensation target by over 8 percent.
---------------------------------------------------------------------------

\62\ Docket #USCG-2016-0268-0028, p. 2-3.
---------------------------------------------------------------------------

While we agree with the commenter that contract and apprentice
pilots should not have been included in the calculations of pilot
salaries, we disagree with the commenter's assertion that they were
included in our calculations. The Coast Guard did not base its
calculations on the annual report the commenter cited, but received
information from the GLPA directly. When the GLPA provided the Coast
Guard with the information regarding Canadian compensation, it did not
include these contract and apprentice pilots.

[[Page 41482]]

Another commenter \63\ argued that U.S. pilots should be paid
substantially more than Canadian pilots due to working more days per
year. This commenter stated that that the Canadian Great Lakes Pilot
Association's work schedule is 178 days per year, and that the U.S.
pilot compensation needs to be adjusted to reflect an additional 12.4
percent difference in time on duty. We disagree that target pilot
compensation needs to be adjusted by 12.4 percent. While our staffing
model assumes that the pilots will be on the tour-de-role for 200 days
of the season, we do not make a 1-to-1 comparison between time spent on
duty in the Canadian sector and time spent on the tour-de-role. Our
methodology was designed to approximate the annual average compensation
for Canadian pilots, not an attempt to match their hourly pay rate.
---------------------------------------------------------------------------

\63\ Docket #USCG-2016-0268-0038, p. 4.
---------------------------------------------------------------------------

One issue that arose regarding compensation figures is the
conversion from Canadian to U.S. currency. Comments from the Great
Lakes Shippers Association requested the Coast Guard to recalculate the
baseline compensation figure using updated exchange rate figures. The
commenter stated that the Coast Guard's ``decision in the 2017 NPRM to
disregard fluctuations in the U.S./Canadian exchange rate is
inconsistent with the 2016 NPRM.'' \64\ The commenter requested that
the Coast Guard provide analysis and reasoning for this change from the
past practice. The commenter also stated that if the exchange rates are
relevant in one direction the exchange rates should be relevant in the
other direction, arguing that not including this fluctuation in the
exchange rate ``fails to reconcile the emphasis on perceived parity
between U.S. and Canadian pilot compensation with the negative impact
of increased U.S. dollar strength on Canadian pilots.'' Shipping
industry comments requested that exchange rates be used to recalculate
compensation on a regular basis. The comment suggested that the Coast
Guard should adhere to this methodology if the Coast Guard chooses to
use Canadian compensation as the benchmark.
---------------------------------------------------------------------------

\64\ Docket #USCG-2016-0268-0033, p. 20.
---------------------------------------------------------------------------

The shipping association comments requested that, given the decline
in exchange rates between the U.S. and Canadian dollars, the Coast
Guard dramatically lower the target compensation. The commenter stated
that ``assuming a 1.329 average exchange rate and 2 percent inflation
per year, U.S. pilot compensation in 2017 would be $240,149''.\65\ The
commenter stated that this compensation figure is 3.4 percent higher
than the 2015 projected compensation levels in designated waters of
$232,237, which was the last year the Coast Guard used U.S. Mates and
Masters as the U.S. target pilot compensation.
---------------------------------------------------------------------------

\65\ Docket #USCG-2016-0268-0033, p. 21.
---------------------------------------------------------------------------

We acknowledge that the exchange rate had changed substantially,
and that our original translation of Canadian benefits to U.S. dollars
is based on the 2014 exchange rate. This rate has fluctuated
significantly in recent years, for example, changing from 1.149 CAD:1
USD in 2014 to 1.329 CAD:1 USD in 2015.\66\ If the goal of the Coast
Guard were to have U.S. pilot salaries mirror, as closely as possible,
the value of Canadian pilots' salaries each year, it would make sense
to re-baseline the compensation figure using updated exchange rates
each year. One downside of this approach, however, would be tremendous
volatility in pilot compensation as the currency fluctuated from year
to year. As we noted in our discussion of why we proposed a
compensation benchmark in the NPRM, large swings in compensation, based
on external factors such as currency fluctuations, are something the
Coast Guard believes are highly detrimental to retaining talented
pilots and maintaining safe and efficient pilotage.
---------------------------------------------------------------------------

\66\ See https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates.
---------------------------------------------------------------------------

Other commenters wanted the Coast Guard to revisit its calculation
of compensation and increase it, citing a number of factors. One
commenter \67\ argued that the 10 percent factor used to adjust the
Canadian pilot compensation to American pilot target compensation is
too low. The commenter identified 10 ways that the Canadian pilot
positions differ from American pilot positions, and argued that each of
these identified differences works to the disadvantage of the American
pilots with respect to compensation. The commenter suggested setting
U.S. pilot compensation at Canadian compensation plus 25 percent,
rather than 10 percent, but then stated that this would still be too
low given the differences.
---------------------------------------------------------------------------

\67\ Docket #USCG-2016-0268-0028, p. 4.
---------------------------------------------------------------------------

The commenter \68\ further stated the difference in healthcare and
pension costs alone exceeds the 10 percent factor and supports the need
for at least a 25 percent factor.\69\ The commenter stated the pension
compensation between the American and Canadian pilots is different: The
Canadian pilots are government employees who contribute to a defined
benefit pension plan that is subsidized by the Canadian government, but
the American pilots have no defined government plans and must cover the
costs of retirement themselves. The commenter submitted data on the
annual pension contributions from a randomly selected group of GLPA
pilots. The commenter did note that the typical Canadian pilot
contributes an average of $10,000-16,000 annually to a pension plan,
while an American pilot might contribute ``multiple times that amount,
receiving no contribution from his government, and not being eligible
for any similar lifetime government-sponsored defined pension plan.''
The commenter stated the difference an American pilot would need to
contribute to a pension alone requires a factor greater than 10 percent
to adjust target compensation. They also stated that data from the
International Organization of Masters, Mates & Pilots (MM&P) American
labor union indicates the pension contribution for a pilot would be
$61,992 annually for a plan similar to the Canadian defined benefit
pension plan.
---------------------------------------------------------------------------

\68\ Docket #USCG-2016-0268-0028, p. 4.
\69\ Docket #USCG-2016-0268-0028. p. 4.
---------------------------------------------------------------------------

The same commenter also stated the healthcare compensation is
different between American and Canadian pilots, and further supports a
factor higher than 10 percent. The commenter noted a Canadian pilot
pays no out-of-pocket expenses for dental or general healthcare
coverage, while an American pilot typically pays $25,000 annually for a
reasonably comprehensive healthcare plan. The commenter cited that the
MM&P Pilot Membership Health plan annual cost is $28,965 and an
American pilot association includes $30,000 annually per pilot for
healthcare. Further, American pilots must pay for long-term disability
insurance while Canadian pilots have no out-of-pocket costs for long-
term disability coverage. For these reasons, the commenter requested
``the Coast Guard to revise its factor to at least 25 percent and
perhaps more in order to achieve its goal of equivalency''.\70\
---------------------------------------------------------------------------

\70\ Docket #USCG-2016-0268-0028, p. 5.
---------------------------------------------------------------------------

Despite the importance of these issues, this information does not
relate to an issue that the Coast Guard proposed to address in the 2017
ratemaking process. In 2016, the Coast Guard conducted a substantial
re-baselining of the compensation benchmark, and considered these
issues closely, arriving at the $326,114 annual compensation figure. In
the 2017 ratemaking, it was not our intention to

[[Page 41483]]

reanalyze all of these issues, and we did not propose a change in the
value we established in 2016. Much like recalculating U.S. pilot
salaries on the fluctuating U.S.-Canada exchange rate, recalculating
these issues on an annual basis could produce an extraordinary amount
of volatility in both the shipping rates and the overall compensation
levels, which is why we proposed using a 10-year compensation benchmark
rather than recalculating the target compensation on an annual basis.
As we stated in the NPRM, we do not believe it is in the public
interest to introduce such volatility into the market based on these
difficult-to-calculate and predict forces. We believe that the system
needs target pilot compensation stability in order to achieve and
maintain workforce stability, and that this concern strongly supports
using a consistent compensation benchmark. For that reason, while we
consider all of these factors to be valid concerns, we are not
utilizing them in this rulemaking.
We did receive one comment on the compensation figure that did not
involve re-examining the benchmark. This commenter suggested that the
2016 figure should be adjusted for inflation so that pilots would
continue to receive the same income in real terms. We agree with this
commenter. To remain stable in real terms, such a benchmark would need
be adjusted for inflation on an annual basis. This will achieve the
Coast Guard's goal of maintaining stability in real (as opposed to
nominal) compensation. For this reason, we are adjusting the 2017
target compensation by the Midwest Consumer Price Index of 2.1 percent,
for a total figure of $332,963 per year. We intend to adjust the
compensation figure for inflation annually in future ratemaking
actions, the same way that operating expenses are adjusted for
inflation.
Based on the analysis, the calculations for step 4 are as follows:

Table 7--Calculations of Total Compensation
----------------------------------------------------------------------------------------------------------------
Area 2 Area 1
District One (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation................................. $332,963 $332,963 $332,963
Number of Pilots (step 3)................................. 10 7 17
-----------------------------------------------------
Total pilot compensation.............................. $3,329,630 $2,330,741 $5,660,371
----------------------------------------------------------------------------------------------------------------

Area 4 Area 5
District Two (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation................................. $332,963 $332,963 $332,963
Number of Pilots (step 3)................................. 6 7 13
-----------------------------------------------------
Total pilot compensation.............................. $1,997,778 $2,330,741 $4,328,519
----------------------------------------------------------------------------------------------------------------

Area Area
District Three (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation................................. $332,963 $332,963 $332,963
Number of Pilots (step 3)................................. 11 4 15
-----------------------------------------------------
Total pilot compensation.............................. $3,662,593 $1,331,852 $4,994,445
----------------------------------------------------------------------------------------------------------------

5. Working Capital Fund
Step 5 in our ratemaking methodology requires that the Coast Guard
determine the working capital fund (proposed Sec. 404.105). In the
NPRM, we proposed changing the term for this step from ``Project return
on investment'' to ``Determine working capital fund.'' Even though we
proposed changing the name of the step, we did not propose changing the
calculation.
The Coast Guard described the calculation of the working capital
fund in the NPRM.\71\ We calculated the working capital fund by
multiplying the 2014 average rate of return for new issues of high-
grade corporate securities, using the Moody's AAA bond rate information
to determine the average annual rate of return for new issues of high-
grade corporate securities, and Total Expenses from step 4 of the
ratemaking analysis. The 2014 average annual rate of return for new
issues of high-grade corporate securities was 4.16 percent.\72\ This
figure is added to the total revenue needed in the next stage.
---------------------------------------------------------------------------

\71\ 81 FR 72014-5.
\72\ Based on Moody's AAA corporate bonds, which can be found
at: https://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.
---------------------------------------------------------------------------

One commenter stated the Coast Guard is not using the working
capital fund to attract capital, and that this fund is better described
as ``cash reserves for operating expenses.'' Similarly, the commenter
\73\ stated the Coast Guard failed to address why the pilotage should
cover any expenses beyond direct expenses. The commenter stated that
working capital fund is inappropriate under conventional regulatory
ratemaking principles, and the rate payers should only pay for all
operating expenses via the rates and surcharges. The commenter
requested the Coast Guard eliminate the working capital fund. In its
place, the Coast Guard should review and approve projects for funding
with surcharges, ``assuming surcharges are structured in a manner that
permits close pre-approved scrutiny to ensure the expenditure adds
value to pilotage services and the surcharge is terminated when the
specific need is met.'' \74\ The commenter stated he or she prefers the
use of surcharges as it provides more clarity in the use of the funds
than a working capital fund.
---------------------------------------------------------------------------

\73\ Docket #USCG-2016-0268-0033, p. 23.
\74\ Docket #USCG-2016-0268-0033, p. 23.
---------------------------------------------------------------------------

We disagree that the working capital fund should be abolished and
that infrastructure improvements should only be paid for with
surcharges. We believe that surcharges are a poor method for paying for
infrastructure projects, which are often capital-intensive, with large
upfront costs. It would be risky to try and recover these large upfront
costs through surcharges due to general volatility in shipping levels,
which might not cover the fixed costs of infrastructure. Using
surcharges

[[Page 41484]]

for infrastructure projects would also increase volatility in shipping
charges, which is not desirable. That is why the working capital fund
is not structured to be a ``cash reserve'' for infrastructure projects.
Instead, it is structured so that the pilot associations can
demonstrate credit worthiness when seeking funds from a financial
institution for needed infrastructure projects, and those projects can
produce a return on investment at a rate commensurate to repay a
financial institution. While we acknowledge that, currently, capital
improvements are funded via surcharges, it is our belief that the
working capital fund should allow us to limit the need for surcharges
in the future.

Table 8--Working Capital Fund Calculation
----------------------------------------------------------------------------------------------------------------
Area 2 Area 1
District One (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... $648,371 $516,353 $1,164,724
Total Target Pilot Compensation (Step 4).............. 3,329,630 2,330,741 5,660,371
Total 2017 Expenses (lines 1+2)........................... 3,978,001 2,847,094 6,825,095
Multiply by Moody' High Grade Security Rate (4.16%)....... 165,485 118,439 283,924
----------------------------------------------------------------------------------------------------------------

Area 4 Area 5
District Two (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... 816,016 1,224,024 2,040,040
Total Target Pilot Compensation (Step 4).................. 1,997,778 2,330,741 4,328,519
Total 2017 Expenses (lines 1+2)....................... 2,813,794 3,554,765 6,368,559
Multiply by Moody' High Grade Security Rate (4.16%)....... 117,054 147,878 264,932
----------------------------------------------------------------------------------------------------------------

Areas 6 and 8 Area 7
District Three (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... 1,463,402 487,114 1,950,516
Total Target Pilot Compensation (Step 4).................. 3,662,593 1,331,852 4,994,445
Total 2017 Expenses (lines 1+2)....................... 5,125,995 1,818,966 6,944,961
Multiply by Moody' High Grade Security Rate (4.16%)....... 213,241 75,669 288,910
----------------------------------------------------------------------------------------------------------------

6. Calculation of Needed Revenue
Step 6 in our ratemaking methodology requires that the Coast Guard
determine the projected revenue for the next year (Sec. 404.106). The
needed revenue is determined by adding the proposed Sec. 404.102
operating expense, the proposed Sec. 404.104 total target
compensation, and the proposed Sec. 404.105 working capital fund. We
did not receive any comments related to this step.

Table 9--Calculation of Needed Revenue
----------------------------------------------------------------------------------------------------------------
Area 1 Area 2
District One (designated) (undesignated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... $648,371 $516,353 $1,164,724
Total Target Pilot Compensation (Step 4).................. 3,329,630 2,330,741 5,660,371
Working Capital Fund (Step 5)............................. 165,485 118,439 283,924
-----------------------------------------------------
Total Revenue Needed.................................. 4,143,486 2,965,533 7,109,019
----------------------------------------------------------------------------------------------------------------

Area 4 Area 5
District Two (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... 816,016 1,224,024 2,040,040
Total Target Pilot Compensation (Step 4).................. 1,997,778 2,330,741 4,328,519
Working Capital Fund (Step 5)............................. 117,054 147,878 264,932
-----------------------------------------------------
Total Revenue Needed.................................. 2,930,848 3,702,643 6,633,491
----------------------------------------------------------------------------------------------------------------

Areas 6 and 8 Area 7
District Three (undesignated) (designated) Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)...................... 1,463,402 487,114 1,950,516
Total Target Pilot Compensation (Step 4).................. 3,662,593 1,331,852 4,994,445
Working Capital Fund (Step 5)............................. 213,241 75,669 288,910
-----------------------------------------------------
Total Revenue Needed.................................. 5,339,236 1,894,635 7,233,871
----------------------------------------------------------------------------------------------------------------

7. Projection of Future Revenue and Calculation of Initial Base Rates
Step 7 in our ratemaking methodology requires that the Coast Guard
make the initial base rate calculations. To make our initial base rate
calculations, we first establish a multi-year base period from which we
can draw available and reliable data on actual pilot hours worked in
each district's designated and undesignated waters. In the NPRM, we
proposed using data covering 2007

[[Page 41485]]

through 2015. We then calculated the new rates by dividing each
association's projected needed revenue, from Sec. 404.106, by the
average number of bridge hours and rounding to the nearest whole
number. We did not receive comments on this step.

Table 10a--Calculation of Average Traffic
------------------------------------------------------------------------
Area 2 Area 1
District One (undesignated) (designated)
------------------------------------------------------------------------
2016................................ ................ ................
2015................................ 6,667 5,743
2014................................ 6,853 6,810
2013................................ 5,529 5,864
2012................................ 5,121 4,771
2011................................ 5,377 5,045
2010................................ 5,649 4,839
2009................................ 3,947 3,511
2008................................ 5,298 5,829
2007................................ 5,929 6,099
-----------------------------------
Average........................... 5,597 5,390
------------------------------------------------------------------------

Area 4 Area 5
District Two (undesignated) (designated)
------------------------------------------------------------------------
2016................................ ................ ................
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
2008................................ 4,844 3,956
2007................................ 6,223 6,049
-----------------------------------
Average........................... 5,174 4,842
------------------------------------------------------------------------

Areas 6 and 8 Area 7
District Three (undesignated) (designated)
------------------------------------------------------------------------
2016................................ ................ ................
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
2008................................ 14,287 2,286
2007................................ 24,811 5,944
-----------------------------------
Average........................... 18,835 2,835
------------------------------------------------------------------------

Table 10b--Calculation of Initial Base Rates
------------------------------------------------------------------------
Area 2 Area 1
District One (undesignated) (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6)............. $2,965,533 $4,143,486
Average traffic..................... 5,597 5,390
Initial hourly rate................. $530 $769
------------------------------------------------------------------------

Area 4 Area 5
District Two (undesignated) (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6)............. $2,930,848 $3,702,643
Average traffic..................... 5,174 4,842
Initial hourly rate................. $566 $765
------------------------------------------------------------------------

Areas 6 and 8 Area 7
District Three (undesignated) (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6)............. $5,339,236 $1,894,635
Average traffic..................... 18,835 2,835
Initial hourly rate................. $283 $668
------------------------------------------------------------------------

[[Page 41486]]

8. Calculation of an Average Weighting Factor
In the NPRM, the Coast Guard sought public comment on how we should
handle weighting factors in 46 CFR 401.400, which outlines the
calculations for determining the weighting factors for a vessel subject
to compulsory pilotage. This calculation determines which
multiplication factor will be applied to the pilotage fees. The Coast
Guard presented three options and requested public comment on which
option should be implemented for future ratemakings. After receiving
public comments on the NPRM, the Coast Guard decided to seek additional
comments on this issue in a Supplemental Notice of Proposed
Rulemaking.\75\
---------------------------------------------------------------------------

\75\ 82 FR 16542, April 5, 2017.
---------------------------------------------------------------------------

The first option was to maintain the status quo. This would
maintain the collection of the current weighting factors and continue
to exclude this revenue from the ratemaking calculation.
The second option was to remove weighting factors completely from
the regulations and charge every vessel equally for pilotage service
because a ship's dimensions have little impact on the experience and
skill level of the pilot providing the service. We note that this
option could mean simply charging every vessel the current ``base
rate,'' or it could mean adjusting the rates for vessels so all vessels
pay the current average weighted rate.
The third option was to incorporate weighting factors into the
ratemaking through an additional step that examines and projects their
impact on the revenues of the pilot associations. This might enable us
to better forecast revenue, but it would add another variable to the
projections in the ratemaking methodology.
One commenter said that they ``strongly urge the Coast Guard to
maintain the status quo on weighting factors, at least until actual
data suggest that changes are necessary and appropriate.'' \76\ The
commenter stated that the pilots have consistently failed to reach the
target pilot compensation over the last decade, with the weighting
factors included, and therefore changing the weighting factors would
risk further contributing to the difficulty attracting and retaining
pilots.
---------------------------------------------------------------------------

\76\ Docket #USCG-2016-0268-0028, p. 9.
---------------------------------------------------------------------------

One commenter \77\ stated that the Coast Guard's revenue
projections would not be accurate if we did not include weighting
factors to reflect vessel size. The commenter suggested that since the
rates in the NPRM do not reflect weighting factors, the Coast Guard
overstates the rates needed to generate the pilotage revenue. The
actual pilotage charges include a weighting factor multiplier and
additional charges. If the actual traffic is equal to the expected
demand, then the pilot associations would receive revenue above the
target revenue. The commenter provided an example using a 1.25
weighting factor, which is close to the 1.26 average weighting factor
provided in GLPA data.\78\ The commenter argued that if an average
weighting factor of 1.25 for all traffic were applied for the 2017
shipping season, the pilot associations would receive pilotage rates
sufficient to reach the $20.4 million target revenue, plus an
additional 25 percent in weighting factor revenue, plus any additional
amount charged to vessel operators.\79\
---------------------------------------------------------------------------

\77\ Docket #USCG-2016-0268-0033, p. 29.
\78\ Docket #USCG-2016-0268-0033, Exhibit I, Weighting Factor
Data.
\79\ Docket #USCG-2016-0268-0033, p. 31.
---------------------------------------------------------------------------

The commenter stated that they support the Coast Guard's proposed
third alternative for weighting factors, and suggested we use an
average weighting factor from either the current navigation season or
the last full year of available data in order to project revenues for
the next ratemaking. The commenter suggested we use an average
weighting factor between 1.2 and 1.3.
The argument that not including the revenue from the weighting
factors into our calculation of total revenue would throw off the
calculations made intrinsic sense. Under the new methodology introduced
in 2016, pilotage is billed on an hourly basis, and if actual revenues
were approximately 25 percent higher than traffic would suggest they
should be, then the weighting factors would appear to be the cause of
that discrepancy. Under its own initiative, the Coast Guard examined
the initial revenue reports from the 2016 shipping season from all
three districts, and compared that to an average of weighting factor
charges collected through the Great Lakes Pilotage Management System.
The resulting comparison showed that the actual revenues were
substantially higher than predicted--even given the higher-than-average
traffic in 2016. The difference in expected revenue tracked closely,
but not exactly, with the calculated average weighting factor in each
District. This meant that shippers were paying approximately $5 million
more annually in shipping charges than the needed revenue figure would
suggest. It is important to note that non-compulsory pilotage did not
significantly change the disparity between projected and collected
revenues. Even though the three pilot associations generated in excess
of $3 million for providing non-compulsory service, once we removed the
bridge hours for those efforts, the revenues still revealed a $5
million difference.\80\
---------------------------------------------------------------------------

\80\ District 1 had 920 hours of non-compulsory pilotage that
generated $619,218. Removing those hours and revenues leaves 98
percent of projected pilotage service and 122 percent of projected
revenues. District 2 had 1,920 hours of non-compulsory pilotage that
generated $1,674,256. Removing those hours and revenues leaves 101
percent of projected pilotage service and 133 percent of projected
revenues. District 3 had 2,745 hours of non-compulsory pilotage that
generated $1,030,570. Removing those hours and revenues leaves 111
percent of projected pilotage service and 135 percent of projected
revenues. Based on this analysis, we do not believe the non-
compulsory pilotage significantly altered the measured disparity
between traffic and revenue.
---------------------------------------------------------------------------

With this new information, the Coast Guard decided that there was
an urgent need to address the extra revenues being brought in by the
weighting factors in the 2017 ratemaking. To that end, we issued an
SNPRM to address the weighting factors and to propose a modification to
the methodology. Our intention, as stated in the SNPRM, is to establish
a methodology that aligns projected revenues with actual collections.
In the SNPRM, we proposed a two-step process for accounting for the
fees generated by the weighting factors. First, in a step we proposed
to designate Step 8, we would calculate the average actual weighting
factor in each area by using a weighted average of each class of
vessels. We would create a rolling multi-year average of that number
beginning with 2014, the year the weighting factors were set to current
levels. Then, in Step 9, we would divide the initial base rate for each
area, calculated in Step 7, by the weighting factor derived in Step 8,
to produce a final shipping rate. This would have the effect of
incorporating the additional revenues brought in by the weighting
factors into the revenue model used to set rates. As expected, this led
to significant reductions in pilotage fees, between the NPRM and SNPRM,
across all three districts, as expressed in the table below.

[[Page 41487]]

Table 11--Comparison of Hourly Pilotage Rates
----------------------------------------------------------------------------------------------------------------
Pilotage charges
Area per hour (per NPRM proposed SNPRM proposed
2016 final rule) charges per hour charges per hour
----------------------------------------------------------------------------------------------------------------
St. Lawrence River..................................... $580 $757 $601
Lake Ontario........................................... 398 522 408
Navigable waters from Southeast Shoal to Port Huron, MI 684 720 580
Lake Erie.............................................. 448 537 429
St. Mary's River....................................... 528 661 514
Lakes Huron, Michigan, and Superior.................... 264 280 218
----------------------------------------------------------------------------------------------------------------

We solicited comments on this revision of methodology, and received
an additional nine comment letters on this issue, which are addressed
below. Several commenters expressed concern that pilot salaries on the
Great Lakes were already too low, and that by incorporating the
weighting factors into the revenue analysis, we would jeopardize safety
on the Great Lakes as more pilots would leave the system. We
respectfully disagree with this analysis. As explained in great detail
in the NPRM and this final rule, we have significantly raised pilot
compensation in recent years. In 2016, we raised target pilot
compensation to $326,114 annually. Despite proposing no change in the
2017 NPRM, we have agreed with commenters who argued that this should
be increased by inflation, to a total of $332,963. For the reasons
described above, we believe this salary has been shown to dramatically
reduce the recruitment and retention problems the Great Lakes pilots
experienced in the past. Incorporating the revenue generated by the
weighting factors into our analysis allows the Coast Guard to set a
pilotage rate that achieves that outcome.
Several commenters made the argument that the Coast Guard's
analysis was procedurally defective as a matter of law due to the way
we undertook them. These commenters suggested that the Coast Guard used
unaudited revenue figures to arrive at the revised analysis in the
SNPRM, and that the use of those figures violated the requirement in 46
CFR 404.1(b), which states that annual reviews of pilotage association
expenses and revenue will be based on audited data, and that data from
completed reviews will be used in ratemaking.
We disagree with the commenters, and believe that they have
fundamentally misinterpreted how the Coast Guard arrived at the SNPRM's
proposal to adjust weighting factors. As described above, the Coast
Guard's analysis of the weighting factors was not the result of the
over-generation of revenue by the pilot associations. Rather, we were
spurred to examine them by the commenters' logical arguments that the
weighting factor produces revenue that goes to the pilot associations,
and that by not accounting for that revenue, our ratemaking model was
flawed. Mathematical logic suggested that if the weighting factors
added, on average, 28 percent to the total fees collected that were not
accounted for in the ratemaking model, then the pilot associations
would be collecting 28 percent more revenues than would be expected
given the amount of traffic measured.
We are aware that the commenters had made this argument in past
years, but we had not accepted it. What was different this year is that
it was the first year where the pilotage rates had been set under the
new ratemaking model, adopted in the 2016 final rule. In previous
years, where the old ratemaking model was used, data had always shown
that actual revenues fell short of anticipated revenues. However, for
the first time in 2017 there was data--the preliminary 2016 revenue
numbers--that could be used to determine a rough estimate of the
magnitude of any revenue surplus. When we compared the preliminary
revenue numbers from 2016 to see if they bore out this hypothesis, we
found that the numbers were similar. We are cognizant that traffic on
the Great Lakes experienced a sharp rise in 2016, and that there would
be a commensurate increase in revenues, but as expected, the increase
in revenues far outpaced the increase in traffic.
We noted, however, that there were still some discrepancies in the
figures. While the mathematics of the weighting factor would indicate
that revenues would run approximately 28 percent higher, the revenue
figures showed slightly lower numbers. We requested comments on this
discrepancy in the SNPRM, but did not receive comments that would
explain or correct it. Whatever the cause, we did not base the
weighting factor reduction proposed in the SNPRM on those unaudited
numbers. Doing so would have resulted in a slightly lower reduction
than what was proposed, but on the actual calculated average of the
billed weighting factors. We did not base the reduction on the
preliminary, unaudited revenues provided by the pilot associations
precisely because they were preliminary and unaudited.
Given the comments received, the Coast Guard does not see any
reason to deviate from the weighting factors analysis in this final
rule. We used the same multi-year rolling average standard for this
calculation as we used for historic pilotage demand. Since the current
weighting factors came into place in 2014, we used the data between
2014 and 2016 and will expand this data set until we reach our 10-year
goal. They are calculated as follows:

Table 12--Calculation of Average Weighting Factors
----------------------------------------------------------------------------------------------------------------
Number of Weighting
Vessel class transits factor Multiplier
----------------------------------------------------------------------------------------------------------------
District One: Undesignated (Area 2):
Class 1..................................................... 71 1.00 71
Class 2..................................................... 670 1.15 770.5
Class 3..................................................... 130 1.30 169
Class 4..................................................... 780 1.45 1,131
-----------------------------------------------

[[Page 41488]]

Total Transits.......................................... 1,651 .............. 2,141.5
Average Weighting Factor................................ .............. .............. 1.30
District One: Designated (Area 1):
Class 1..................................................... 103 1.00 103
Class 2..................................................... 765 1.15 879.75
Class 3..................................................... 128 1.30 166.4
Class 4..................................................... 736 1.45 1,067.2
-----------------------------------------------
Total Transits.......................................... 1,732 .............. 2,216.35
Average Weighting Factor................................ .............. .............. 1.28
District Two: Undesignated (Area 4):
Class 1..................................................... 63 1.00 63
Class 2..................................................... 678 1.15 779.7
Class 3..................................................... 20 1.30 26
Class 4..................................................... 980 1.45 1,421
-----------------------------------------------
Total Transits.......................................... 1,741 .............. 2,289.7
Average Weighting Factor................................ .............. .............. 1.32
District Two: Designated (Area 5):
Class 1..................................................... 98 1.00 98
Class 2..................................................... 1,090 1.15 1,253.5
Class 3..................................................... 29 1.30 37.7
Class 4..................................................... 1,664 1.45 2,412.8
-----------------------------------------------
Total Transits.......................................... 2,881 .............. 3,802
Average Weighting Factor................................ .............. .............. 1.32
District Three: Undesignated (Areas 6 and 8):
Class 1..................................................... 244 1.00 244
Class 2..................................................... 1,237 1.15 1,422.55
Class 3..................................................... 43 1.30 55.9
Class 4..................................................... 1,801 1.45 2,611.45
-----------------------------------------------
Total Transits.......................................... 3,325 .............. 4,333.9
Average Weighting Factor................................ .............. .............. 1.30
District Three: Designated (Area 7):
Class 1..................................................... 105 1.00 105
Class 2..................................................... 540 1.15 621
Class 3..................................................... 10 1.30 13
Class 4..................................................... 757 1.45 1,097.65
-----------------------------------------------
Total Transits.......................................... 1,412 .............. 1,836.65
Average Weighting Factor................................ .............. .............. 1.30
----------------------------------------------------------------------------------------------------------------

Step 9: Calculation of Revised Rate
In this penultimate step, we calculate the revised rate by
incorporating the average weighting factor into the initial rate. The
revised rate is calculated as follows:

Table 13--Calculation of Revised Rate
----------------------------------------------------------------------------------------------------------------
Average
Initial rate weighting Revised rate
(Step 7) factor (Step (Step 9)
8)
----------------------------------------------------------------------------------------------------------------
District One
----------------------------------------------------------------------------------------------------------------
District One Designated......................................... $769 1.28 $601
District One Undesignated....................................... 530 1.30 408
----------------------------------------------------------------------------------------------------------------
District Two
----------------------------------------------------------------------------------------------------------------
District Two Designated......................................... 765 1.32 580
District Two Undesignated....................................... 566 1.32 429
----------------------------------------------------------------------------------------------------------------
District Three
----------------------------------------------------------------------------------------------------------------
District Three Designated....................................... 668 1.30 514
District Three Undesignated..................................... 283 1.30 218
----------------------------------------------------------------------------------------------------------------

[[Page 41489]]

Step 10: Review and Finalize Rates
Section 401.10, often known as ``Director's discretion,'' allows
the Coast Guard to adjust rates to ensure they meet the goal of
providing safe and reliable pilotage. In the NPRM, we did not propose
to use this discretion in our ratemaking, and we are not using it in
this ratemaking. While we received comments suggesting we add language
limiting the use of our discretion, we do not feel such language is
necessary or appropriate to include in this final rule as the current
methodology provides a fair and transparent means to meet the goals
outlined in 46 CFR 404.1(a).
Surcharge Calculation
After the pilotage rates have been determined, the Coast Guard can
authorize the pilot associations to impose a surcharge. In the NPRM, we
proposed a 5 percent surcharge for District Two and a 15 percent
surcharge for District Three to cover training expenses for nine
applicant pilots. We proposed this number based on historical pilot
costs, stipends, per diems, and training costs, which are approximately
$150,000 per pilot per shipping season. We continue to find that
allowing associations to recoup necessary and reasonable training
expenses, both to help achieve a full complement of needed pilots and
to ensure skill maintenance and development for current pilots, will
facilitate safe, efficient, and reliable pilotage. Thus we are imposing
a necessary and reasonable temporary surcharge, as authorized by 46 CFR
401.401. Based upon our records and communications with the various
pilot associations, for 2017, we anticipate that there will be two
applicant pilots in District Two, and seven applicant pilots in
District Three.
We received one comment on this subject, stating that the surcharge
adjustment of $150,000 was not enough for District Two, and that the
amount for that district should be set instead at $250,000 to properly
recover costs.\81\ The same commenter, in a separate comment, also
wrote that the 2014 applicant pilot salaries were $281,588.00 and the
benefits were $96,613.00.\82\ However, we were unable to confirm these
assertions, because the commenter did not provide sufficient
documentation with the comment. Any difference between the actual and
assumed cost may be included in a future rulemaking. Again, we will
determine which incurred expenses are necessary and reasonable, and
ensure that the shippers are not double-charged for these same
expenses.
---------------------------------------------------------------------------

\81\ Docket #USCG-2016-0268-0031.
\82\ Docket #USCG-2016-0268-0032.
---------------------------------------------------------------------------

Based on historic pilot costs, the stipend, per diem, and training
costs, we continue to believe that the total costs for each applicant
pilot are approximately $150,000 per shipping season. Thus, we estimate
that the training expenses that each association will incur will be
approximately $300,000 in District Two and $1,050,000 in District
Three. Table 14 derives the proposed percentage surcharge for each
district by comparing this estimate to each district's projected needed
revenue.

Table 14--Surcharge Calculations
------------------------------------------------------------------------

------------------------------------------------------------------------
District Two
------------------------------------------------------------------------
Projected Needed Revenue (Sec. 404.106)............... $6,663,002
Anticipated Training Expenses........................... $300,000
Surcharge Needed *...................................... 5%
------------------------------------------------------------------------
District Three
------------------------------------------------------------------------
Projected Needed Revenue (Sec. 404.106)............... $7,262,089
Anticipated Training Expenses........................... $1,050,000
Surcharge Needed *...................................... 15%
------------------------------------------------------------------------
* Surcharge rounded up to the nearest whole percent.

V. Regulatory Analyses

We developed this final 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. As this rule is not
a significant regulatory action, this rule is exempt from the
requirements of Executive Order 13771. See OMB's Memorandum ``Guidance
Implementing Executive Order 13771, Titled `Reducing Regulation and
Controlling Regulatory Costs' '' (April 5, 2017). A regulatory analysis
(RA) follows.
We developed an analysis of the costs and benefits of the rule to
ascertain its probable impacts on industry.
Table 15 summarizes the regulatory changes that are expected to
have no costs, and any qualitative benefits associated with them. The
table also includes changes that affect portions of the methodology for
calculating the base pilotage rates.

[[Page 41490]]

Table 15--Regulatory Changes With No Cost or Costs Captured in the Rate Change
----------------------------------------------------------------------------------------------------------------
Changes Description Basis for no costs Benefits
----------------------------------------------------------------------------------------------------------------
Mandatory change point on the Saint Mandatory change point The addition of the Staffing additional
Lawrence River between Iroquois Lock on the Saint Lawrence change point will not pilots will help meet
and the area of Ogdensburg, NY. River between Iroquois require capital the increased demand
Lock and the area of expenses. The only for pilots to handle
Ogdensburg, NY, that cost is for the new the additional
would become effective pilots, who are assignments
with the accounted for in the anticipated to be
implementation of this base pilotage rates caused by the new
final rule. and training change point.
surcharges. Additional pilots due
to this change point
should also serve to
mitigate any potential
delays and any
potential fatigue that
would occur from high
pilotage demand
without them.
Cancellation charges................. Amending the Clarification of --Clarifies the current
cancellation charge existing text and language to eliminate
provision in Sec. current practice. any potential
401.120(b) to ensure confusion on the
it explicitly states minimum charge for
that the minimum cancellations.
charge for a --Clarification of the
cancellation is 4 minimum charge ensures
hours plus necessary the recognition of
and reasonable travel pilots as a limited
expenses for the resource and
travel that occurs. encourages efficient
use.
Surcharge provision.................. Adding a requirement to Ensures the goal Prevents excess amounts
the surcharge surcharge amount built from being recouped
regulation in Sec. into the year's from industry via the
401.401 to stop rulemaking will not be following year's rule.
collecting funds once surpassed, and
the assigned value has prevents additional
been recovered for the costs on industry.
season.
Rename Return on Investment.......... Renaming Return on Clarifies the intent of Clarifies the intent of
Investment as Working the fund but does not this fund.
Capital Fund. change the method of
calculation. Costs are
included in the total
revenues.
Set Pilot compensation for a 10-year Addition of new Pilot staffing costs Promotes target
period. language in Sec. are accounted for in compensation stability
404.104 that allows the base pilotage and rate
the Director to set rates. predictability.
compensation for a 10-
year period to a
compensation benchmark.
Weighting Factors.................... Additional step in the Impacts the base Factors the impact of
ratemaking that pilotage rates, but extra revenue
accounts for the does not impact the generated by the
weighting factors. revenue projections. weighting factors into
the ratemaking
analysis.
----------------------------------------------------------------------------------------------------------------

Table 16 summarizes the affected population, costs, and benefits of
the regulatory requirements that are expected to have associated costs
as a result of the rate change.

Table 16--Regulatory Economic Impacts of Rate Change
----------------------------------------------------------------------------------------------------------------
Change Description Affected population Costs Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes.................... Under the Great Owners and $3,222,703 --New rates cover
Lakes Pilotage Act operators of 230 an association's
of 1960, the Coast vessels journeying necessary and
Guard is required the Great Lakes reasonable
to review and system annually. operating
adjust base expenses.
pilotage rates --Provides fair
annually. compensation,
adequate training,
and sufficient
rest periods for
pilots.
--Ensures the
association makes
enough money to
fund future
improvements.
----------------------------------------------------------------------------------------------------------------

The Coast Guard is required to review and adjust pilotage rates on
the Great Lakes annually. See Sections II and III of this preamble for
detailed discussions of the Coast Guard's 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 are
adjusting the pilotage rates for the 2017 shipping season to generate
sufficient revenues for each district to reimburse their 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 rule will lead to an increase in
the cost per unit of service to shippers in all three districts, and
result in an estimated annual cost increase to shippers.
In addition to the increase in payments that would be incurred by
shippers in all three districts from the previous year as a result of
the rate changes, we propose authorizing a temporary surcharge to allow
the pilotage associations to recover training expenses that would be
incurred in 2017. For 2017, we anticipate that there

[[Page 41491]]

will be no applicant pilots in District One, two applicant pilots in
District Two, and seven applicant pilots in District Three. With a
training cost of $150,000 per pilot, we estimate that Districts Two and
Three will incur $300,000 and $1,050,000 in training expenses,
respectively. These temporary surcharges would generate a combined
$1,350,000 in revenue for the pilotage associations. Therefore, after
accounting for the implementation of the temporary surcharges across
all three districts, the payments made by shippers during the 2017
shipping season are estimated to be approximately $3,222,703 more than
the payments that were estimated in 2016 (table 18).\83\
---------------------------------------------------------------------------

\83\ Total payments across all three districts are equal to the
increase in payments incurred by shippers as a result of the rate
changes plus the temporary surcharges applied to traffic in
Districts One, Two, and Three.
---------------------------------------------------------------------------

The purpose of this rulemaking is to propose new base pilotage
rates and surcharges for training. The last full ratemaking was
concluded in 2016. Table 17 summarizes the changes in the RA from the
NPRM to the final rule. These changes were the result of public
comments received after publication of the NPRM and SNPRM.

Table 17--Summary of Changes From NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
Element of the analysis NPRM Final rule Resulting change in RA
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation............ $326,114............... $332,963............... Data indirectly affects
the calculation of
projected revenues.
Operating expenses................... Incorrectly omitted Corrected for this Data indirectly affects
payment of applicant error, added amount of the calculation of
pilot salaries from D2 $281,588 to operating projected revenues.
operating expenses. expenses in District
Two.
Staffing Model....................... Proposed to modify 46 Leaving 46 CFR 404.103 No impact on RA.
CFR 404.103 to change as is. Staffing model Revenue is based on
the calculation to found 49 pilots are the expected 45
focus on pilot work needed in the Great working pilots that
cycle. Staffing model Lakes system. will be working during
found 54 pilots are the 2017 season, which
needed in the Great is less than the
Lakes system. projected needed
pilots.
APA dues............................. Attributed 15% of APA Corrected to attribute Data directly affects
dues to legal fees. 5% of APA dues to operating expenses,
legal fees. which indirectly
affects the
calculation of
projected revenues.
Weighting factors.................... Did not account for Incorporates weighting No impact on RA.
weighting factors. factors into base Affects the
rates. calculation of the
base rates, but not
the projected
revenues.
----------------------------------------------------------------------------------------------------------------

Affected Population
The shippers affected by these rate changes are those owners and
operators of domestic vessels operating on register (employed in
foreign trade) and owners and operators of 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 to have pilots by 46 U.S.C. 9302. However, these U.S.- and
Canadian-flagged lakers may voluntarily choose to have a pilot.
We used 2013 through 2015 billing information from the Great Lakes
Pilotage Management System (GLPMS) to estimate the average annual
number of vessels affected by the rate adjustment. The GLPMS tracks
data related to managing and coordinating the dispatch of pilots on the
Great Lakes and billing in accordance with the services. Using that
period, we found that a total of 407 unique vessels used pilotage
services over the years 2013 through 2015. These vessels had a pilot
dispatched to the vessel and billing information was recorded in the
GLPMS. The number of invoices per vessel ranged from a minimum of 1
invoice per year to a maximum of 65 invoices per year. Of these
vessels, 383 were foreign-flagged vessels and 24 were U.S.-flagged. The
U.S.-flagged vessels were not operating on register and are not
required to have a pilot per 46 U.S.C. 9302, but they can voluntarily
choose to have a pilot. U.S.-flagged vessels may opt to have a pilot
for varying reasons such as unfamiliarity with designated waters and
ports, or for insurance purposes.
Vessel traffic is affected by numerous factors and varies from year
to year. Therefore, rather than the total number of vessels over the
time period, an average of the unique vessels using pilotage services
from 2013 through 2015 is the best representation of vessels estimated
to be affected by this rule's rate. From 2013 through 2015, an average
of 230 vessels used pilotage services annually.\84\ On average, 219 of
these vessels are foreign-flagged vessels and 11 are U.S.-flagged
vessels that voluntarily opt into the pilotage service.
---------------------------------------------------------------------------

\84\ Some vessels entered the Great Lakes multiple years,
affecting the average number of unique vessels utilizing pilotage
services in any given year.
---------------------------------------------------------------------------

Costs
The rate changes would generate costs on industry in the form of
higher payments for shippers. We calculate the cost in two ways in this
RA, as the total cost to shippers and as a percentage of vessel
operating costs.
Total Cost to Shippers
We estimate the effect of the rate changes on shippers by comparing
the total projected revenues needed to cover costs in 2016 with the
total projected revenues to cover costs in 2017, including any
temporary surcharges authorized by the Coast Guard. The Coast Guard
sets pilotage rates so that the pilot associations receive enough
revenue to cover their necessary and reasonable expenses. The shippers
pay these rates when they have a pilot as required by 46 U.S.C. 9302,
or when U.S.-flagged vessels not operating on register voluntarily
choose to have a pilot. Therefore, the aggregate payments of the
shippers to the pilot associations are equal to the projected necessary
revenues for the pilot associations. The revenues each year represent
the total costs that shippers must pay for pilotage services, and the
change in the revenues from the previous year is the additional cost to
shippers from this rulemaking.

[[Page 41492]]

The effect of the rate changes on shippers is estimated from the
district pilotage projected revenues and the surcharges described in
this preamble. We estimate that for the 2017 shipping season, the
projected revenue needed for all three districts is $20,976,381.
Temporary surcharges on traffic in District Two and District Three
would be applied for the duration of the 2017 season in order for the
pilotage associations to recover training expenses incurred for
applicant pilots. We estimate that the pilotage associations require an
additional $300,000 and $1,050,000 in revenue for applicant training
expenses in Districts Two and Three, respectively. This is an
additional cost to shippers of $1,350,000 during the 2017 shipping
season. Adding the projected revenue to the surcharges, we estimate the
pilotage associations' total projected needed revenue for 2017 would be
$22,326,381. The 2017 projected revenues for the districts are from
table 9 of this preamble. To estimate the additional cost to shippers
from this rule, we compare the 2017 total projected revenues to the
2016 projected revenues. In the 2016 rulemaking,\85\ we estimated the
total projected revenue needed for 2016, including surcharges, is
$19,103,678. This is the best approximation of 2016 revenues as, at the
time of this publication, we do not have audited data available for the
2016 shipping season to revise these projections. Table 18 shows the
revenue projections for 2016 and 2017 and details the additional cost
increases to shippers by area and district as a result of the rate
changes and temporary surcharges on traffic in Districts One, Two, and
Three.
---------------------------------------------------------------------------

\85\ 2016 projected revenues are from the 2016 rulemaking, 81 FR
11937, Figures 31 and 32.

Table 18--Effect of the Rule by Area and District
[$U.S.; Non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
2016 Total 2016 2017 Total 2017 Additional
Area Revenue needed temporary projected Revenue needed Temporary projected costs of this
in 2016 surcharge revenue in 2017 surcharge revenue rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District One..................... $5,354,945 $450,000 $5,804,945 $7,109,019 $0 $7,109,019 $1,304,074
Total, District Two..................... 5,629,641 300,000 5,929,641 6,633,491 300,000 6,933,491 1,003,850
Total, District Three................... 6,469,092 900,000 7,369,092 7,233,871 1,050,000 8,283,871 914,779
---------------------------------------------------------------------------------------------------------------
System Total........................ 17,453,678 1,650,000 19,103,678 20,976,381 1,350,000 22,326,381 3,222,703
--------------------------------------------------------------------------------------------------------------------------------------------------------

The resulting difference between the projected revenue in 2016 and
the projected revenue in 2017 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 in this rule on shippers varies by area
and district. The rate changes, after taking into account the increase
in pilotage rates and the addition of temporary surcharges, would lead
to affected shippers operating in District One, District Two, and
District Three experiencing an increase in payments of $1,304,074,
$1,003,850, and $914,779, respectively, from the previous year. The
overall adjustment in payments would be an increase in payments by
shippers of $3,222,703 across all three districts (a 17 percent
increase over 2016, including surcharges). Because the Coast Guard must
review and prescribe rates for Great Lakes Pilotage annually, the
effects are estimated as single year costs rather than annualized over
a 10-year period.
Table 19 shows the difference in revenue by component from 2016 to
2017.\86\ The majority of the increase in revenue is due to the
addition of 8 pilots that were authorized in the 2016 rule. These eight
pilots trained during 2016 are full-time working pilots during the 2017
shipping season. These pilots will be compensated at the target
compensation established in the 2016 final rule, plus inflation
($332,963 per pilot). The addition of these pilots to full working
status accounts for $2,663,704 of the increase. The remaining amount is
attributed to inflation of operating expenses, working capital fund,
and differences in the surcharges from 2016.
---------------------------------------------------------------------------

\86\ The 2016 projected revenues are from the 2016 rulemaking,
81 FR 11934, Figures 24 and 28. The 2017 projected revenues are from
Table 106 of this NPRM.

Table 19--Difference in Revenue by Component
----------------------------------------------------------------------------------------------------------------
Difference (2017
Revenue component Revenue needed in Revenue needed in revenue -2016
2016 2017 Revenue)
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses............................ $4,677,518 $5,155,280 $477,762
Total Target Pilot Compensation........................ 12,066,226 14,983,335 2,917,109
Working Capital Fund................................... 709,934 837,766 127,832
--------------------------------------------------------
Total Revenue Needed, without Surcharge............ 17,453,678 20,976,381 3,522,703
Surcharge.............................................. 1,650,000 1,350,000 -300,000
--------------------------------------------------------
Total Revenue Needed, with Surcharge............... 19,103,678 22,326,381 3,222,703
----------------------------------------------------------------------------------------------------------------

Pilotage Rates as a Percentage of Vessel Operating Costs
To estimate the impact of U.S. pilotage costs on the foreign
vessels affected by the rate adjustment, we looked at the pilotage
costs as a percentage of a vessel's costs for an entire voyage. The
part of the trip on the Great Lakes using a pilot is only a portion of
the whole trip. The affected vessels are often traveling from a foreign
port, and the days without a pilot on the total trip often exceed the
days a pilot is needed.

[[Page 41493]]

To estimate this impact, we used 2013 through 2015 vessel arrival
data from the Coast Guard's Ship Arrival Notification System and
pilotage billing data from the GLPMS. A random sample of 50 arrivals
was taken from GLPMS data. To estimate the impact of pilotage costs on
the costs of an entire trip, we estimated the length of each one-way
trip. We used the vessel name and the date of the arrival to find the
last port of call before entering the Great Lakes system. The date of
the departure from this port was used as the start date of the trip. To
find the end date of the trip we used GLPMS data to find all the
pilotage charges associated with this vessel during this trip in the
Great Lakes system. The last pilotage charge before beginning the trip
to exit the system was used as the end date of the one-way trip. We
estimated the total operating cost by multiplying the number of days
for each trip by the 2015 average daily operating cost and added this
to the total pilotage costs from GLPMS for each trip. In 2015 the
average daily operating costs, excluding fixed costs, for Great Lakes
bulkers and tankers ranged roughly from $5,191 to $7,879.\87\ The total
pilotage charges for each trip were updated to the 2016 rates using the
average rate increases in the Great Lakes Pilotage Rates 2013-2016
Annual Review and Adjustments final rules.\88\ The total updated
pilotage charges for each trip were then divided by the total operating
cost of the trip. We found that for a vessel's one-way trips, the U.S.
pilotage costs could account for approximately 16.9 percent \89\ of the
total operating costs for a foreign vessel's voyage using 2016 rates.
---------------------------------------------------------------------------

\87\ ``Ship operating costs: Current and future trends,''
Richard Grenier, Moore Stephens LLP, December 2015. The 2015
weighted average operating cost is estimated at $5,191 for a
handysize bulker, $5,771 for a handymax bulker, and $7,879 for a
product tanker. These costs include only the costs of operating and
do not include any fixed costs of the vessels, such as amortization
of vessel construction costs. The operating costs include crew
wages, provisions, other crew costs, lubricating oils and store
costs, spares, repair and maintenance, P&I insurance, marine
insurance, registration costs, management fees, and sundry expenses.
\88\ The average percentage changes in the rates for 2013-2016,
were 1.87 percent, 2.5 percent, 10 percent, and 12 percent,
respectively.
\89\ For the random sample of 50 arrivals, the average of the
pilotage costs as a percentage of the total operating costs was 16.9
percent. The percentages ranged from a low of 3.2 percent to a high
of 35.2 percent.
---------------------------------------------------------------------------

We also estimated the impact of the rate increase in this rule. We
took the same 50 trips and updated the pilotage costs to the 2017
rates, an average increase of 20 percent, excluding surcharges. With
this rule's rates for 2017, pilotage costs are estimated to account for
19.6 percent of total operating costs, or a 2.7 percentage point
increase \90\ over the current cost. The total operating costs do not
include the fixed costs of the vessels. If these costs were included in
the total costs, the pilotage rates as a percentage of total costs
would be lower.
---------------------------------------------------------------------------

\90\ 19.6 percent of total operating costs in 2017 -16.9 percent
of total operating costs in 2016 = 2.7 percent incremental increase
of pilotage costs as a percentage of total operating costs.
---------------------------------------------------------------------------

Benefits
This 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 ensuring rates cover an
association's operating expenses; provide fair pilot compensation,
adequate training, and sufficient rest periods for pilots; and ensures
the association makes enough money 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,
which would help reduce delays caused by pilot shortages.
The amendment of the cancellation charge in Sec. 401.120(b) will
prevent confusion and help ensure that it explicitly states that the
minimum charge for a cancellation is 4 hours. The limitation to the
surcharge regulation in Sec. 401.401 would prevent excess amounts from
being recouped via the following year's rule. The changes to Sec.
404.104 will promote target compensation stability and rate
predictability.

B. Small Entities

Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have
considered whether this rule would have a significant economic effect
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
people.
For the rule, we reviewed recent company size and ownership data
for the vessels identified in GLPMS and we reviewed business revenue
and size data provided by publicly available sources such as MANTA \91\
and ReferenceUSA.\92\ As described in Section VI.A of this preamble,
Regulatory Planning and Review, we found that a total of 407 unique
vessels used pilotage services from 2013 through 2015. These vessels
are owned by 119 entities. We found that of the 119 entities that own
or operate vessels engaged in trade on the Great Lakes affected by this
rule, 104 are foreign entities that operate primarily outside of the
United States. The remaining 15 entities are U.S. entities. We compared
the revenue and employee data found in the company search to the Small
Business Administration's (SBA) Table of Small Business Size Standards
\93\ to determine how many of these companies are small entities. Table
20 shows the NAICS codes of the U.S. entities and the small entity
standard size established by the SBA.
---------------------------------------------------------------------------

\91\ See https://www.manta.com/.
\92\ See https://resource.referenceusa.com/.
\93\ Source: https://www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/table-small-business-size-standards. SBA has established a Table of Small
Business Size Standards, which is matched to NAICS industries. 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
considered in order to remain classified as a small business for SBA
and Federal contracting programs.

Table 20--NAICS Codes and Small Entities Size Standards
----------------------------------------------------------------------------------------------------------------
NAICS Description Small business size standard
----------------------------------------------------------------------------------------------------------------
238910................................ Site Preparation Contractors............ $15 million.
441222................................ Boat Dealers............................ $32.5 million.
483113................................ Coastal & Great Lakes Freight 750 employees.
Transportation.
483211................................ Inland Water Freight Transportation..... 750 employees.
483212................................ Inland Water Passenger Transportation... 500 employees.
487210................................ Scenic & Sightseeing Transportation, $7.5 million.
Water.
488320................................ Marine Cargo Handling................... $38.5 million.

[[Page 41494]]

488330................................ Navigational Services to Shipping....... $38.5 million.
488510................................ Freight Transportation Arrangement...... $15 million.
----------------------------------------------------------------------------------------------------------------

The entities all exceed the SBA's small business standards for
small businesses. Further, these U.S. entities operate U.S.-flagged
vessels and are not required to have pilots as required by 46 U.S.C.
9302, because they are not engaged in foreign commerce.
In addition to the owners and operators of vessels affected by this
rule, there are three U.S. entities affected by the rule that receive
revenue from pilotage services. These are 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 industry classification and small-entity size standards
described above, but they have fewer than 500 employees; combined, they
have approximately 65 employees. We expect no adverse effect to these
entities from this rule because all associations receive enough revenue
to balance the projected expenses associated with the projected number
of bridge hours and pilots.
We did not find any small not-for-profit organizations that are
independently owned and operated and are not dominant in their fields.
We did not find any small governmental jurisdictions with populations
of fewer than 50,000 people. Based on this analysis, we found this
rulemaking, if promulgated, would not affect a substantial number of
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 want to assist small
entities in understanding this rule so that they can better evaluate
its effects on them and participate in the rulemaking. If the rule
would affect your small business, organization, or governmental
jurisdiction and you have questions concerning its provisions or
options for compliance, please consult Mr. Todd Haviland, Director,
Great Lakes Pilotage, Commandant (CG-WWM-2), Coast Guard; telephone
202-372-2037, email Todd.A.Haviland@uscg.mil, or fax 202-372-1914. 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 rule will call 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 the 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 that order 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, the rule is consistent with the principles of
federalism and preemption requirements in Executive Order 13132.
While it is well settled that States may not regulate in categories
in which Congress intended the Coast Guard to be the sole source of a
vessel's obligations, the Coast Guard recognizes the key role that
State and local governments may have in making regulatory
determinations. Additionally, for rules with implications and
preemptive effect, Executive Order 13132 specifically directs agencies
to consult with State and local governments during the rulemaking
process. If you believe this rule has implications for federalism under
Executive Order 13132, please contact the person listed in the FOR
FURTHER INFORMATION section of this preamble.

F. Unfunded Mandates Reform Act

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. Though this rule will not result in
such an 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 will
not create an environmental risk to health or risk to safety that might
disproportionately affect children.

[[Page 41495]]

J. Indian Tribal Governments

This rule does not have tribal implications under Executive Order
13175 (``Consultation and Coordination with Indian Tribal
Governments'') because it would 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.

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 and Commandant Instruction M16475.lD, which
guide the Coast Guard in complying with the National Environmental
Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that it
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 supporting this determination is
available in the docket where indicated in the ADDRESSES section of
this preamble. This rule is categorically excluded under paragraphs
34(a), regulations which are editorial or procedural, of the Coast
Guard's NEPA Implementing Procedures and Policy for Considering
Environmental Impacts, COMDTINST M16475.1D.

List of Subjects

46 CFR Part 401

Administrative practice and procedure, Great Lakes, Navigation
(water), Penalties, Reporting and recordkeeping requirements, Seamen.

46 CFR Part 404

Great Lakes, Navigation (water), Seamen.

For the reasons discussed in the preamble, the Coast Guard amends
46 CFR parts 401 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. Revise Sec. 401.401 to read as follows:

Sec. 401.401 Surcharges.

To facilitate safe, efficient, and reliable pilotage, and for good
cause, the Director may authorize surcharges on any rate or charge
authorized by this subpart. Surcharges must be proposed for prior
public comment and may not be authorized for more than 1 year. Once the
approved amount has been received, the pilot association is not
authorized to collect any additional funds under the surcharge
authority and must cease such collections for the remainder of that
shipping season.

0
3. Revise Sec. 401.405 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 $601;
(2) Lake Ontario is $408;
(3) Lake Erie is $429;
(4) The navigable waters from Southeast Shoal to Port Huron, MI is
$580;
(5) Lakes Huron, Michigan, and Superior is $218; and
(6) The St. Mary's River is $514.
* * * * *

0
4. Revise Sec. 401.420 to read as follows:

Sec. 401.420 Cancellation, delay, or interruption in rendition of
services.

* * * * *
(b) When an order for a U.S. pilot's service is cancelled, the
vessel can be charged for the pilot's reasonable travel expenses for
travel that occurred to and from the pilot's base, and the greater of--
(1) Four hours; or
(2) The time of cancellation and the time of the pilot's scheduled
arrival, or the pilot's reporting for duty as ordered, whichever is
later.
* * * * *

0
5. Revise Sec. 401.450 as follows:
0
a. Redesignate paragraphs (b) through (j) as paragraphs (c) through
(k), respectively; and
0
b. Add new paragraph (b) to read as follows:

Sec. 401.450 Pilotage change points.

* * * * *
(b) The Saint Lawrence River between Iroquois Lock and the area of
Ogdensburg, NY, beginning October 2, 2017;

PART 404--GREAT LAKES PILOTAGE RATEMAKING

0
6. 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).

0
7. Amend Sec. 404.101(a) as follows:

Sec. 404.100 Ratemaking and annual reviews in general.

(a) The Director establishes base pilotage rates by a full
ratemaking pursuant to Sec. 404.101-404.110 of this part, conducted at
least once every 5 years and completed by March 1 of the first year for
which the base rates will be in effect. Base rates will be set to meet
the goal specified in Sec. 404.1(a) of this part.

0
8. Amend Sec. 404.103 as follows:
0
a. In paragraph (a), following the words ``dividing each area's''
remove the word ``peak'' and add, in its place, the word ``seasonal'';
and
0
b. Revise paragraph (b) to read as follows:

Sec. 404.103 Ratemaking step 3: Determine number of pilots needed.

* * * * *
(b) Pilotage demand and the base seasonal work standard are based
on available and reliable data, as so deemed by the Director, for a
multi-year base period. The multi-year period is the 10 most recent
full shipping seasons, and the data source is a system approved under
46 CFR 403.300. Where such data are not available or reliable, the
Director also may use data, from additional past full shipping seasons
or other sources, that the Director determines to be available and
reliable.
* * * * *

0
9. Revise Sec. 404.104 to read as follows:

[[Page 41496]]

Sec. 404.104 Ratemaking step 4: Determine target pilot compensation
benchmark.

At least once every 10 years, the Director will set a base target
pilot compensation benchmark using the most relevant available non-
proprietary information. In years in which a base compensation
benchmark is not set, target pilot compensation will be adjusted for
inflation using the CPI for the Midwest region or a published
predetermined amount. The Director determines each pilotage
association's total target pilot compensation by multiplying individual
target pilot compensation by the number of pilots projected under Sec.
404.103(d) of this part.

Sec. 404.105 [Amended]

0
10. In the section heading of Sec. 404.105, remove the words ``return
on investment'' and add, in their place, the words ``working capital
fund.''

0
11. In the first sentence of Sec. 404.105, remove the words ``return
on investment'' and add, in their place, the words ``working capital
fund.''

0
12. Revise Sec. 404.107 to read as follows:

Sec. 404.107 Ratemaking step 7: Initially calculate base rates.

The Director initially calculates base hourly rates by dividing the
projected needed revenue from Sec. 404.106 of this part by averages of
past hours worked in each district's designated and undesignated
waters, using available and reliable data for a multi-year period set
in accordance with Sec. 404.103(b) of this part.

0
13. Revise Sec. 404.108 to read as follows:

Sec. 404.108 Ratemaking step 8: Calculate average weighting factors
by Area.

The Director calculates the average weighting factor for each area
by computing the 10-year rolling average of weighting factors applied
in that area, beginning with the year 2014. If less than 10 years of
data are available, the Director calculates the average weighting
factor using data from each year beginning with 2014.

0
14. Add new Sec. 404.109 to read as follows:

Sec. 404.109 Ratemaking step 9: Calculate revised base rates.

The Director calculates revised base rates for each area by
dividing the initial base rate (from Step 7) by the average weighting
factor (from Step 8) to produce a revised base rate for each area.

0
15. Add new Sec. 404.110 to read as follows:

Sec. 404.110 Ratemaking step 10: Review and finalize rates.

The Director reviews the base pilotage rates calculated in Sec.
404.109 of this part to ensure they meet the goal set in Sec. 404.1(a)
of this part, and either finalizes them or first makes necessary and
reasonable adjustments to them based on requirements of Great Lakes
pilotage agreements between the United States and Canada, or other
supportable circumstances.

Dated: August 24, 2017.
Michael D. Emerson,
Director, Marine Transportation Systems, U.S. Coast Guard.
[FR Doc. 2017-18411 Filed 8-30-17; 8:45 am]
BILLING CODE 9110-04-P

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