Great Lakes Pilotage Rates-2020 Annual Review and Revisions to Methodology, 20088-20120 [2020-06968]

Download as PDF 20088 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations DEPARTMENT OF HOMELAND SECURITY Coast Guard 46 CFR Parts 401, 403, and 404 [USCG–2019–0736] RIN 1625–AC56 Great Lakes Pilotage Rates—2020 Annual Review and Revisions to Methodology Coast Guard, DHS. Final rule. AGENCY: ACTION: In accordance with the Great Lakes Pilotage Act of 1960, the Coast Guard is establishing new base pilotage rates for the 2020 shipping season. This final rule will adjust the pilotage rates to account for changes in district operating expenses, an increase in the number of pilots, and anticipated inflation. The Coast Guard estimates that this final rule will result in a 1 percent net increase in pilotage costs, compared to the 2019 season. In addition, the Coast Guard is clarifying the rules related to the working capital fund. DATES: This final rule is effective May 11, 2020. ADDRESSES: To view documents mentioned in this preamble as being available in the docket, go to https:// www.regulations.gov, type USCG–2019– 0736 in the ‘‘SEARCH’’ box and click ‘‘SEARCH.’’ Click on Open Docket Folder on the line associated with this rule. FOR FURTHER INFORMATION CONTACT: For information about this document, call or email Mr. Brian Rogers, Commandant (CG–WWM–2), Coast Guard; telephone 202–372–1535, email Brian.Rogers@ uscg.mil, or fax 202–372–1914. SUPPLEMENTARY INFORMATION: SUMMARY: khammond on DSKJM1Z7X2PROD with RULES2 Table of Contents for Preamble I. Abbreviations II. Executive Summary III. Basis and Purpose IV. Background V. Discussion of Methodological and Other Changes VI. Discussion of Comments VII. Discussion of Rate Adjustments District One A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates District Two A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates District Three A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates K. Surcharges VIII. Regulatory Analyses A. Regulatory Planning and Review B. Small Entities C. Assistance for Small Entities D. Collection of Information E. Federalism F. Unfunded Mandates G. Taking of Private Property H. Civil Justice Reform I. Protection of Children J. Indian Tribal Governments K. Energy Effects L. Technical Standards M. Environment I. Abbreviations AMOU American Maritime Officers Union APA American Pilots Association BLS Bureau of Labor Statistics CAD Canadian dollars ECI Employment Cost Index CFR Code of Federal Regulations CPA Certified public accountant CPI Consumer Price Index DHS Department of Homeland Security FOMC Federal Open Market Committee FR Federal Register GAO Government Accountability Office GLPA Great Lakes Pilotage Authority (Canadian) GLPAC Great Lakes Pilotage Advisory Committee GLPMS Great Lakes Pilotage Management System GLPO U.S. Coast Guard Great Lakes Pilotage Office IRS Internal Revenue Service JTR Joint Travel Rates PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 LPA Lakes Pilots Association NAICS North American Industry Classification System NPRM Notice of proposed rulemaking NTSB National Transportation Safety Board OMB Office of Management and Budget PCE Personal Consumption Expenditures RA Regulatory analysis REC Record of Environmental Consideration RFA Regulatory Flexibility Act SBA Small Business Administration § Section symbol SLSMC Saint Lawrence Seaway Management Corporation SLSPA Saint Lawrence Seaway Pilots’ Association U.S.C. United States Code USD United States dollars WLPA Western Great Lakes Pilot Association II. Executive Summary Pursuant to the Great Lakes Pilotage Act of 1960 (‘‘the Act’’),1 the Coast Guard regulates pilotage for oceangoing vessels on the Great Lakes and St. Lawrence Seaway—including setting the rates for pilotage services and adjusting them on an annual basis. The rates, which currently range from $306 to $733 per pilot hour (depending on in which of the specific six areas pilotage service is provided), are paid by shippers to three U.S. pilot associations (each responsible for one of the three Districts). The three pilot associations, which are the exclusive U.S. source of registered pilots on the Great Lakes, use this revenue to cover operating expenses, maintain infrastructure, compensate working pilots, and train new pilots. To compute the rate for pilotage services, we use a ratemaking methodology that we have developed since 2016, in accordance with our statutory requirements and regulations. Our ratemaking methodology calculates the revenue needed for each pilotage association (operating expenses, an increase in the number of pilots, and anticipated inflation), and then divides that amount by the expected shipping traffic over the course of the coming year, to produce an hourly rate. This process is currently effected through a 10-step methodology, which is explained in detail in section IV of the preamble to this final rule. In this final rule, as part of our annual review, we are establishing new pilotage rates for 2020 based on the existing ratemaking methodology. The result is an increase in rates for five areas and a decrease in the rate for the one remaining area. These changes are due 1 Title 46 of the United States Code (U.S.C.) Chapter 93; Public Law 86–555, 74 Stat. 259, as amended. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations to a combination of four factors: (1) An increase in total operating expenses for the associations compared to the previous year,2 (2) an increase in the amount of money needed for the working capital fund, (3) inflation of pilot compensation by 2 percent, and (4) the net addition of one working pilot at the beginning of the 2020 shipping season in District Two. In addition, in 20089 surcharge adjustment for District 2 and District 3 to account for the differences between their accrued training expenses and the amount of money they collected via the surcharge in 2017. Based on the ratemaking model discussed in this final rule, we are finalizing the rates shown in table 1. this final rule, the Coast Guard made two adjustments to the operating expenses based on public comment, which increased the final rates from those published in the notice of proposed rulemaking (NPRM). In the final rule we adjusted the operating expenses to include the 3 percent shared council fee which we incorrectly deducted in the NPRM; and added a TABLE 1—CURRENT AND NEW PILOTAGE RATES ON THE GREAT LAKES Area khammond on DSKJM1Z7X2PROD with RULES2 District District District District District District One: Designated ....... One: Undesignated ... Two: Designated ....... Two: Undesignated ... Three: Designated ..... Three: Undesignated Final 2019 pilotage rate Name 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 ................................... This final rule will impact 52 U.S. Great Lakes pilots, the 3 pilot associations, and the owners and operators of an average of 266 oceangoing vessels that transit the Great Lakes annually. This final rule is not economically significant under Executive Order 12866 and will not affect the Coast Guard’s budget or increase Federal spending. The estimated overall annual regulatory economic impact of this rate change is a net increase of $279,845, which is a 1 percent net increase in estimated payments made by shippers from the 2019 shipping season. Because the Coast Guard must review, and, if necessary, adjust rates each year, we analyze these as single-year costs and do not annualize them over 10 years. Section VIII of this preamble provides the regulatory impact analyses of this final rule. giving consideration to the public interest and the costs of providing the services.’’ 5 The Act requires that rates be established or reviewed and adjusted each year, no later than March 1.6 The Act requires that base rates be established by a full ratemaking at least once every 5 years, and in years when base rates are not established, they must be reviewed and, if necessary, adjusted.7 The Secretary’s duties and authority under the Act have been delegated to the Coast Guard.8 This final rule establishes new pilotage rates for the 2020 shipping season. The Coast Guard believes that the new rates will continue to promote pilot retention, ensure safe, efficient, and reliable pilotage services on the Great Lakes, and provide adequate funds to upgrade and maintain infrastructure. III. Basis and Purpose The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960 (‘‘the Act’’),3 which requires foreign vessels and U.S. vessels operating ‘‘on register,’’ meaning those U.S. vessels engaged in foreign trade to use U.S. or Canadian registered pilots while transiting the U.S. waters of the St. Lawrence Seaway and the Great Lakes system.4 For the U.S. registered Great Lakes pilots (‘‘pilots’’), the Act requires the Secretary to ‘‘prescribe by regulation rates and charges for pilotage services, Pursuant to the Act, the Coast Guard, in conjunction with the Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping practices and rates on the Great Lakes and the St. Lawrence Seaway. Under Coast Guard regulations, all vessels engaged in foreign trade (often referred to as ‘‘salties’’) are required to engage U.S. or Canadian pilots during their transit through the regulated waters.9 U.S. and Canadian ‘‘lakers,’’ which account for most commercial shipping on the Great Lakes, are not affected.10 Generally, 2 Operating expenses decreased for the District One: Undesignated area, the District Two: Undesignated area, and the District Three: Undesignated Lake Superior area. Operating expenses increased for the District One: Designated area, the District Two: Designated area, the District Three: Designated area, and the District Three: Undesignated Lakes Huron and Michigan area. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 IV. Background 3 46 U.S.C. Chapter 93; Public Law 86–555, 74 Stat. 259, as amended. 4 46 U.S.C. 9302(a)(1). 5 46 U.S.C. 9303(f). 6 Ibid. 7 Ibid. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 Proposed 2020 pilotage rate $733 493 603 531 594 306 $757 462 602 573 621 327 Final 2020 pilotage rate $758 463 618 586 632 337 vessels are assigned a U.S. or Canadian pilot depending on the order in which they transit a particular area of the Great Lakes, and do not choose the pilot they receive. If a vessel is assigned a U.S. pilot, that pilot will be assigned by the pilotage association responsible for the particular district in which the vessel is operating, and the vessel operator will pay the pilotage association for the pilotage services. The Canadian GLPA establishes the rates for Canadian registered pilots. The U.S. waters of the Great Lakes and the St. Lawrence Seaway are divided into three pilotage districts. Pilotage in each district is provided by an association certified by the Coast Guard’s Director of the Great Lakes Pilotage (‘‘the Director’’) to operate a pilotage pool. The Saint Lawrence Seaway Pilotage Association provides pilotage services in District One, which includes all U.S. waters of the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association provides pilotage services in District Two, which includes all U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. Clair River. Finally, the Western Great Lakes Pilotage Association provides pilotage services in District Three, which includes all U.S. waters of the St. Mary’s River; Sault Ste. Marie Locks; and Lakes Huron, Michigan, and Superior. Each pilotage district is further divided into ‘‘designated’’ and 8 Department of Homeland Security (DHS) Delegation No. 0170.1, para. II (92.f). 9 See title 46 of the Code of Federal Regulations (CFR) part 401. 10 46 U.S.C. 9302(f). A ‘‘laker’’ is a commercial cargo vessel especially designed for and generally limited to use on the Great Lakes. E:\FR\FM\09APR2.SGM 09APR2 20090 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations ‘‘undesignated’’ areas, which is depicted in table 2 below. Designated areas, classified as such by Presidential Proclamation, are waters in which pilots must, at all times, be fully engaged in the navigation of vessels in their charge.11 Undesignated areas, on the other hand, are open bodies of water not subject to the same pilotage requirements. While working in undesignated areas, pilots must ‘‘be on board and available to direct the navigation of the vessel at the discretion of and subject to the customary authority of the master.’’ 12 For these reasons, pilotage rates in designated areas can be significantly higher than those in undesignated areas. khammond on DSKJM1Z7X2PROD with RULES2 TABLE 2—AREAS OF THE GREAT LAKES AND ST. LAWRENCE SEAWAY Area No.13 Area name 14 District Pilotage association Designation One .......... Two .......... Saint Lawrence Seaway Pilotage Association. Lake Pilotage Association ............................ Designated ................ Undesignated ............ Designated ................ 1 2 5 Three ....... Western Great Lakes Pilotage Association Undesignated ............ Designated ................ Undesignated ............ Undesignated ............ 4 7 6 8 Each pilot association is an independent business and is the sole provider of pilotage services in the district in which it operates. Each pilot association is responsible for funding its own operating expenses, maintaining infrastructure, acquiring and implementing technological advances, training personnel or partners, and pilot compensation. Through a public rulemaking procedure, and with input from Great Lakes Pilots Advisory Committee (GLPAC), the Coast Guard developed a 10-step ratemaking methodology, based on a historic 10year average of actual traffic, to derive a pilotage rate that covers these expenses. The methodology is designed to measure how much revenue each pilotage association would need to cover expenses and provide competitive compensation to working pilots. We then divide that amount by the historic 10-year average for pilotage demand, as estimated by using historic pilotage work hours. We recognize that, in years where traffic is above average, pilot associations will accrue more revenue than projected, while in years where traffic is below average, they will take in less. We believe that over the long term, however, this system ensures that infrastructure will be maintained and that pilots will receive adequate compensation and work a reasonable number of hours, with adequate rest between assignments to ensure retention of highly trained personnel. Over the past 4 years, the Coast Guard made several adjustments to the Great Lakes pilotage ratemaking methodology. In 2016, we made significant changes to the methodology, moving to an hourly billing rate for pilotage services and 11 Presidential Proclamation 3385, Designation of restricted waters under the Great Lakes Pilotage Act of 1960, December 22, 1960. 25 FR 13681 (December 24, 1960). VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 changing the compensation benchmark to a more transparent model. In 2017, we added additional steps to the ratemaking methodology, including new steps that better account for the additional revenue produced by the application of weighting factors (discussed in detail in Steps 7 through 9 below, in this section of the preamble). In 2018, we revised the methodology by which we develop the compensation benchmark, based upon U.S. mariners rather than Canadian registered pilots. The current methodology, which was finalized in the Great Lakes Pilotage Rates—2019 Annual Review and Revisions to Methodology final rule (84 (FR 20551, May 10, 2019), is designed to accurately capture all of the costs and revenues associated with Great Lakes pilotage requirements and produce an hourly rate that adequately and accurately compensates pilots and covers expenses. The current methodology is summarized in the section below. Summary of Ratemaking Methodology As stated above, the ratemaking methodology, outlined in 46 CFR 404.101 through 404.110, consists of 10 steps that are designed to account for the revenues needed and total traffic expected in each district. The result is an hourly rate, determined separately for each of the areas administered by the Coast Guard. In Step 1, ‘‘Recognize previous operating expenses,’’ (§ 404.101), the Director reviews audited operating expenses from each of the three pilotage associations. This number forms the baseline amount that each association is budgeted. Because of the time delay 12 46 U.S.C. 9302(a)(1)(B). 3 is the Welland Canal, which is serviced exclusively by the Canadian GLPA and, 13 Area PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 St. Lawrence River. Lake Ontario. Navigable waters from Southeast Shoal to Port Huron, MI. Lake Erie. St. Mary’s River. Lakes Huron and Michigan. Lake Superior. between when the association submits raw numbers and when the Coast Guard receives audited numbers, this number is 3 years behind the projected year of expenses. In calculating the 2020 rates in this proposal, the Coast Guard is beginning with the audited expenses from the 2017 shipping season. While each pilotage association operates in an entire district, the Coast Guard determines costs by area. Thus, with regard to operating expenses, we allocate certain operating expenses to undesignated areas, and certain operating expenses to designated areas. In some cases (e.g., insurance for applicant pilots who operate in undesignated areas only), we can allocate the costs based on where they are actually accrued. In other situations (e.g., general legal expenses), expenses are distributed between designated and undesignated waters on a pro rata basis, based upon the proportion of income forecast from the respective portions of the district. In Step 2, ‘‘Project operating expenses, adjusting for inflation or deflation,’’ (§ 404.102), the Director develops the 2020 projected operating expenses. To do this, we apply inflation adjustors for 3 years to the operating expense baseline received in Step 1. The inflation factors used are from the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI) for the Midwest Region, or, if not available, the Federal Open Market Committee (FOMC) median economic projections for Personal Consumption Expenditures (PCE) inflation. This step produces the total operating expenses for each area and district. accordingly, is not included in the United States pilotage rate structure. 14 The areas are listed by name, see 46 CFR 401.405. E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations In Step 3, ‘‘Estimate number of working pilots,’’ (§ 404.103), the Director calculates how many pilots are needed for each district. To do this, we employ a ‘‘staffing model,’’ described in § 401.220, paragraphs (a)(1) through (a)(3), to estimate how many pilots would be needed to handle shipping during the beginning and close of the season. This number is helpful in providing guidance to the Director in approving an appropriate number of credentials for pilots. For the purpose of the ratemaking calculation, we determine the number of working pilots provided by the pilotage associations (see § 404.103), which is what we use to determine how many pilots need to be compensated via the pilotage fees collected. In Step 4, ‘‘Determine target pilot compensation benchmark,’’ (§ 404.104), the Director determines the revenue needed for pilot compensation in each area and District. This step contains two processes. In previous years, in the first process, we calculated the total compensation for each pilot using a ‘‘compensation benchmark.’’ Next, we multiplied the individual pilot compensation by the number of working pilots for each area and district (from Step 3), producing a figure for total pilot compensation. Because pilots are paid by the associations, but the costs of pilotage is divided by area for accounting purposes, we assigned a certain number of pilots for the designated areas and a certain number of pilots for the undesignated areas to determine the revenues needed for each area. To make the determination of how many pilots to assign, we used the staffing model designed to determine the total number of pilots described in Step 3, above. In the past, as explained more fully below, the Coast Guard used two different benchmarks to calculate target pilot compensation: AMOU contract data and Canadian pilot compensation. The Coast Guard does not believe either benchmark is appropriate at this time. Instead, the Coast Guard has determined that the target compensation used in the 2019 ratemaking is an appropriate level of compensation for Great Lakes pilots because it serves the public interest and achieves the Coast Guard’s goals of safety through rate and compensation stability while also promoting recruitment and retention of qualified United States registered pilots. Prior to 2016, the Coast Guard based the compensation benchmark on data provided by the AMOU regarding its contract for first mates on the Great Lakes. However, in 2016 the AMOU elected to no longer provide this data to VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 the Coast Guard, and thus, in the 2016 ratemaking (81 FR 11907, March 7, 2016) we used average compensation for a Canadian pilot plus a 10-percent adjustment. As a result of a legal challenge filed by the shipping industry, the court found that the Coast Guard did not adequately support the 10-percent addition to the Canadian GLPA benchmark, and thus its use was deemed arbitrary and capricious. American Great Lakes Ports Association v. Zukunft, 296 F.Supp 3d 27, 46–48 (D.D.C. 2017). The Coast Guard then based the 2018 benchmark on data provided by the AMOU regarding its contract for first mates on the Great Lakes in the 2011 to 2015 period, and adjusted it for inflation using FOMC median economic projections for PCE inflation. We used the information provided by the AMOU because it was the most recent publicly available information to which we had access. For the 2019 ratemaking, the Coast Guard did not have access to current AMOU contract data and our research did not yield a better compensation benchmark; therefore, target pilot compensation was determined by taking the 2018 number and adjusting it for inflation. For the 2020 ratemaking, the situation with regard to compensation benchmarks has not changed. The Coast Guard still lacks access to current AMOU contract data and, as discussed in prior rulemakings, the Coast Guard does not believe that other American or Canadian pilot compensation data is appropriate to use as a benchmark at this time. The Coast Guard, however, has determined that based on its experience over the past two ratemakings that the level of target pilot compensation for those years provides an appropriate level of compensation for American Great Lakes pilots. The Coast Guard therefore, will not, at this time, seek alternative benchmarks for target compensation and for 2020 and future ratemakings will instead simply adjust the amount of target pilot compensation for inflation. This benchmark successfully achieves the Coast Guard’s goals of safety through rate and compensation stability while also promoting recruitment and retention of qualified United States registered pilots. Therefore, the Coast Guard uses this as the compensation benchmark for future rates. In the second process of Step 4, set forth in § 404.104(c), the Director determines the total compensation figure for each District. To do this, the Director multiplies the compensation benchmark by the number of working pilots for each area and district (from PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 20091 Step 3), producing a figure for total pilot compensation. In Step 5, ‘‘Project working capital fund,’’ (§ 404.105), the Director calculates a value that is added to pay for future unidentified expenses. For example, these expenses can be unforeseen facility repairs, infrastructure purchases, technology procurements, or training. This value is calculated by adding the total operating expenses (derived in Step 2) to the total pilot compensation (derived in Step 4), and multiplying that figure by the preceding year’s average annual rate of return for new issues of high-grade corporate securities using Moody’s Seasoned Aaa Corporate Bond Yield data. This figure constitutes the ‘‘working capital fund’’ for each area and district. In Step 6, ‘‘Project needed revenue,’’ (§ 404.106), the Director simply adds up the totals produced by the preceding steps. The projected operating expense for each area and district (from Step 2) is added to the total pilot compensation (from Step 4) and the working capital fund contribution (from Step 5). The total figure, calculated separately for each area and district, is the ‘‘needed revenue.’’ In Step 7, ‘‘Calculate initial base rates,’’ (§ 404.107), the Director calculates an hourly pilotage rate to cover the needed revenue as calculated in Step 6. This step consists of first calculating the average hours of traffic over 10 years for each area. Next, the revenue needed in each area (calculated in Step 6) is divided by the average hours of traffic over 10 years to produce an initial base rate. An additional element, the ‘‘weighting factor,’’ is required under § 401.400. Pursuant to that section, ships pay a multiple of the ‘‘base rate’’ as calculated in Step 7 by a number ranging from 1.0 (for the smallest ships, or ‘‘Class I’’ vessels) to 1.45 (for the largest ships, or ‘‘Class IV’’ vessels). As this significantly increases the revenue collected, we account for the added revenue produced by the weighting factors to ensure that shippers are not overpaying for pilotage services. In Step 8, ‘‘Calculate average weighting factors by Area,’’ (§ 404.108), the Director calculates how much extra revenue, as a percentage of total revenue, has historically been produced by the weighting factors in each area. We do this by using a historical average of the applied weighting factors for each year since 2014 (the first year the current weighting factors were applied). In Step 9, ‘‘Calculate revised base rates,’’ (§ 404.109), the Director modifies the base rates by accounting for the E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 20092 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations extra revenue generated by the weighting factors. We do this by dividing the initial pilotage rate for each area (from Step 7) by the corresponding average weighting factor (from Step 8), to produce a revised rate. In Step 10, ‘‘Review and finalize rates,’’ (§ 404.110), often referred to informally as ‘‘Director’s discretion,’’ the Director reviews the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and in 46 CFR 404.1(a), which include promoting efficient, safe, and reliable pilotage service on the Great Lakes; generating sufficient revenue for each pilotage association to reimburse necessary and reasonable operating expenses; compensating trained and rested pilots fairly; and providing appropriate profit for improvements. Because it is our goal to be as transparent as possible in our ratemaking procedure, we use this step sparingly to adjust rates. After the base rates are set, § 401.401 permits the Coast Guard to apply surcharges. We previously used surcharges to pay for the training of new pilots, rather than incorporating training costs into the overall ‘‘needed revenue’’ used in the calculation of the base rates. The surcharge accelerates the reimbursement of certain necessary and reasonable expenses. Last year, we applied a surcharge to account for the associations’ expenses for the Applicant Trainee and Apprentice Pilots, which included providing a stipend, lodging, training, transportation, and per diem. We implemented these surcharges for a few years because of a large number of pending pilot retirements, and a large amount of recruitment at the pilot associations. Without the surcharge, the associations would have been reimbursed for expenses associated with training new pilots 3 years later via the rate. However, any pilot who retired prior to that 3 year date would not have been reimbursed. Therefore, we applied a surcharge to facilitate the training of these replacements in last year’s final rule. As the vast majority of registered pilots are not anticipated to reach the regulatory required retirement age of 70 in the next 20 years, we believe that pilot associations are now able to plan for the costs associated with retirements without relying on the Coast Guard to impose surcharges. Therefore, in this year’s final rule we are not imposing surcharges. V. Discussion of Methodological and Other Changes For 2020, the Coast Guard implemented no new methodological changes to the ratemaking model. We VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 believe that the methodology laid out in the 2019 Annual Review (84 FR 20551) will produce rates for the 2020 shipping season that will ensure safe, efficient, and reliable pilotage services are available on the Great Lakes in order to facilitate maritime commerce. In previous years and in this current rulemaking, several commenters have raised issues regarding the working capital fund.15 The purpose of the working capital fund is to ensure that associations have a way to set aside money to pay for high cost items and infrastructure improvements. The Coast Guard is making changes in this final rule to codify the procedures related to the use of funds and accounting requirements related to the working capital fund. In this final rule, the Coast Guard is finalizing two changes to the regulatory text related to the working capital fund, formerly called ‘‘return on investment.’’ In 46 CFR 404.106, we are changing the words ‘‘return on investment’’ to ‘‘working capital fund,’’ as that is the current name for that fund. Prior to 2017, the working capital fund described in 46 CFR 404.105 was called ‘‘return on investment.’’ In the Great Lakes Pilotage Rates 2017 Annual Review final rule (82 FR 41466, August 31, 2017), the Coast Guard changed the name of that fund to the ‘‘working capital fund,’’ but the 2017 final rule did not change a reference to ‘‘return on investment’’ in 46 CFR 404.106. This change corrects that oversight, so both 46 CFR 404.105 and 46 CFR 404.106 will use consistent terminology. In addition, the Coast Guard is incorporating into regulations the industry practice currently followed by the pilots associations regarding these funds. We are adding text to 46 CFR 403.110 requiring each pilot association set aside, in a separate account, an amount at least equal to the amount calculated in Step 5 of the ratemaking, and place restrictions on how those funds are expended. Under the final rule, pilot associations can only apply the funds in the working capital fund account to capital projects, infrastructure improvements, infrastructure maintenance, training, and non-recurring technology purchases that are necessary for providing pilotage services. The pilot associations may grow the working capital fund over successive shipping seasons for a future significant purchase, including for a down payment on a purchase that 15 See the dockets for the 2019 ratemaking (https://www.regulations.gov/docket?D=USCG2018-0665) and the 2018 ratemaking (https:// www.regulations.gov/docket?D=USCG-2017-0903) for more information. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 would also be financed in part. If needed, pilot associations could request a waiver from the requirements from the Director. VI. Discussion of Comments In response to the October 30, 2019 NPRM (84 FR 58099), the Coast Guard received six comment letters as well as a duplicate comment submission. These included one comment from the law firm K&L Gates (hereinafter ‘‘District Lawyers’’), which represents the interests of the three Great Lake pilot associations; a comment from the Shipping Federation of Canada, the American Great Lakes Ports Association, and the United States Great Lakes Shipping Association (hereinafter ‘‘the User’s Coalition’’ or ‘‘the Coalition’’); a comment from the president of the St. Lawrence Seaway Pilots’ Association (hereinafter ‘‘SLSPA’’); a comment from the president of the Lakes Pilots Association (hereinafter ‘‘LPA’’); a comment from the president of the Western Great Lakes Pilot Association (hereinafter ‘‘WLPA’’); and a comment made by Captain John Swartout, a pilot working for District Three. As each of these commenters touched on numerous issues, for each response below we note which commenters raised the specific points addressed. In situations where multiple commenters raised similar issues, we attempt to provide one response to those issues. A. Operating Expenses The first step of the ratemaking process outlines the criteria for evaluating operating expenses. Each expense must be necessary for providing pilotage service and reasonable in amount. The allowable operating expenses must comply with both criteria to recoup any costs for a given pilotage association. To do so, pilotage associations submit financial statements to third party auditors contracted by the Coast Guard. The third party auditors create financial reports for the Coast Guard to determine the allowable operating expenses. We use these expenses to establish pilotage rates. We received several comments, discussed below, from pilot associations and persons representing such interests requesting changes to these adjustments. 1. Legal Fees Commenters from pilots’ associations and shipping and port interests addressed legal fees and, in particular, the 2016 rulemaking concerning the exclusion of legal expenses for suits against the U.S. government or its agents, and the subsequent case contesting that exclusion. E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations Two commenters contended that prior years’ legal fees were improperly denied, and referred to St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 3d 30 (D.D.C. 2019). In that case, the court held that the Coast Guard improperly promulgated 46 CFR 404.2(b)(6) in the 2016 rulemaking that excluded any and all expenses associated with legal action against the U.S. government or its agents. The Coast Guard disagrees with the commenters. In that case, the court went to great lengths to discuss the remedy for the pilots associations, and noted concerns about rates that were already paid. St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019), citing Am. Great Lakes Ports Ass’n v. Zukunft, 301 F.Supp.3d 99, 103–04 (D.D.C. 2018) (noting disruptive effect of upending already-paid pilotage rates) and St. Lawrence Seaway Pilots Ass’n, 85 F.Supp.3d, 197, 208 (D.D.C. 2015) (noting remedial difficulty of ordering pilots’ entitlement to future payments and recognizing that remedial decision regarding 2014 rates likely impacts the propriety and validity of the 2015 rates). The court held the following: ‘‘At the hearing, Plaintiffs clarified they seek a vacatur of 46 CFR 404.2(b)(6) to prevent the Coast Guard from excluding legal fees in future rate settings, and do not seek to disturb any past rates. See Hr’g Tr. 12:7–13:3. With the benefit of this clarification, the remedial decision is simple: Vacatur is the presumptive remedy for arbitrary and capricious agency action, see 5 U.S.C. 706(2) (A court shall ‘‘set aside agency action . . . found to be . . . arbitrary [and] capricious’’), and there is no risk of disruption. The Court will therefore vacate 46 CFR 404.2(b)(6).’’ St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019). The court’s holding was prospective, not retroactive, based upon the clarification of the Pilots Association at the hearing on the matter. The regulation has been removed from the CFR, and the Coast Guard has not denied any legal fees based on that vacated rule since the court’s decision was handed down. The Coast Guard will not disturb past rate setting, in accordance with the court’s ruling. One commenter stated that the Coast Guard had a meritorious position regarding the denial of legal fees against the U.S. government and suggested that a clarification of legal fees be included in the final rule. The Coast Guard presently takes no position on this comment. That part of the 2016 rule with respect to 46 CFR 404.2(b)(6) was VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 vacated because it was a change in policy that was not effected in accordance with the Administrative Procedure Act’s notice and comment requirements and the court found the Coast Guard’s actions were arbitrary and capricious. The court in the 2019 case stated, ‘‘The Court takes no position on the relative wisdom of the policy. A rule excluding legal fees incurred against the U.S. government may well be a rational policy. But the process by which the Coast Guard enacted it was arbitrary and capricious.’’ St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019). The Coast Guard did not include any language regarding legal fees in the final rule as there was nothing in the NPRM proposing any change. Any change in policy regarding future legal fees will be accomplished in accordance with the legally required notice and comment procedures in order for all parties to be heard on the matter. 2. Housing Allowances There were two comments regarding the housing allowance not being considered an operating expense. The first commenter stated that ‘‘[f]or the CG to determine that a mariner must live in the region where they work is unreasonable’’ 16, and that specifically in District Three there is a ‘‘tour de role’’ dispatch system to prevent a pilot from working all over the district. The same commenter stated that, in not allowing a housing allowance, ‘‘we [the pilot association] would be very severely handicapped on recruiting new Pilots into our District. Forcing a Pilot to move his family will undoubtedly cause some potential applicants to decide not to pursue a career in our District.’’ 17 The Coast Guard disagrees with the first statement. Determining where to live is an individual’s right and lifestyle decision. The Western Great Lakes Pilots association, the source of this comment, has multiple tours-de-role and holds meetings before the season. During these meetings, each registered pilot determines which port to work out of for the season. We expect the registered pilot to pay for housing during the season, which is consistent with Internal Revenue Service (IRS) regulations as discussed below. For example, if a registered pilot chooses to live in Virginia but elects to be dispatched out of Chicago for the season, the registered pilot will not be reimbursed for any housing in Chicago during the season because this dwelling is not a necessary expense for the 16 USCG–2019–0736–0002. 17 Id. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 20093 shippers to reimburse. However, if the pilot is dispatched out of Port Huron, reasonable travel costs from Chicago and hotel bills in Port Huron may be considered for inclusion in the operating expenses. The shippers do not have to fund lifestyle choices. Additionally, the commenter did not provide any evidence or data to support the claim that not allowing a housing allowance will cause a recruitment and retention crisis. The same commenter also stated that the housing allowance provides a great savings to the industry and should be continued. Another commenter echoed this comment. ‘‘In the interests of efficient pilotage, Districts 2 and 3 have found that it is often more cost effective for pilots to lease an apartment or other dwelling rather than paying for a hotel.’’ 18 The Coast Guard neither agrees nor disagrees with this comment, as the commenter provided no evidence to justify this claim. We suggest the commenter address this issue at a future GLPAC meeting and/or work with the stakeholders who pay for pilotage service to submit a joint letter for further consideration. In general, hotel bills should be 50 miles outside the pilot’s tour-de-role port for the season in order to be considered reasonable and necessary and implemented into the rate. This 50-mile radius is per the IRS.19 B. Target Compensation We received several comments on the Coast Guard’s use of the Federal Reserve’s projected Personal Consumption Expenditure (PCE) data in Step 4 of the ratemaking, as opposed to using historic Bureau of Labor Statics (BLS) Employment Cost Index (ECI) data. In Step 4, we adjust the existing target pilot compensation to account for inflation, following the procedures outlined in § 404.104(b), which require that PCE data only be used when ECI data is not available. In this ratemaking, we are inflating the 2019 pilot compensation to 2020 dollars, which 18 USCG–2019–0736–0005. 19 IRS Tax Topics, Topic No. 511 Business Travel Expenses, https://www.irs.gov/taxtopics/tc511. (last visited 2/28/2020 Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals or lodging in Milwaukee because that’s your tax home. Your travel on weekends to your family home in Chicago isn’t for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located. E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 20094 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations requires forecasted inflation data for 2020. The BLS ECI only provides historic data. Consequently, no 2020 ECI data was available at the time we conducted the analysis to support this rulemaking, and no 2020 ECI data will be available until April 30th 2020, which is after the 2020 shipping season begins. Therefore, we used the PCE data, in accordance with § 404.104(b), as the PCE provides estimates of inflation for 2020. As noted by commenters, for the past several years, the PCE inflation value has been about 1 percent lower than the ECI value, resulting in a lower target compensation value than if we had used the ECI value. Two commenters suggested that Coast Guard should use the ECI to readjust previous target compensation values to account for the difference between the predicted PCE value and the actual ECI value that published. The commenters raised several concerns with the use of the PCE, which are discussed below. Several commenters noted that, while a full calendar year worth of ECI data was not available for 2019, at the time the NPRM was published, some 2019 data was available, and they said this data should have been used in the 2020 ratemaking.20 21 22 However, the commenters are missuderstanding the reason the Coast Guard uses the PCE data in the ratemaking instead of the most recent ECI data. The reason we did not use the ECI data is not because of a lack of a full year’s worth of 2019 inflation data, but rather because the ECI did not have any 2020 inflation data available. Another commenter stated that, while the PCE index is published more frequently than the ECI, this does not make it a better inflation index. The commenter also stated that data which ‘‘measure the wrong metrics’’ should not be used just because it is newer.23 The Coast Guard disagrees with both points made by the commenter. We are using the PCE because it provides an estimate of forecasted 2020 inflation data. Using the most recent ECI data does not address the issue that the ECI does not provide an estimate of forecasted inflation, and as part of the ratemaking process under steps 2 and 4, the Coast Guard requires an estimate of future inflation. Again, we are not using the PCE because it is published more frequently than the ECI, but, rather, because it provides necessary information that the ECI does not. 20 USCG–2019–0736–0003 p. 3. p. 5. 22 USCG–2019–0736–0002 p. 5. 23 USCG–2019–0736–0006, p.2. 21 USCG–2019–0736–0002 VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 Two commenters stated that they believe the ECI is more appropriate to use to inflate pilot compensation than the PCE, because ‘‘[the ECI] is based on wage and benefit costs, rather than general goods and prices,’’ 24 and noted that the Coast Guard has previously acknowledged this point in the 2018 ratemaking rule (83 FR 26162).25 26 The Coast Guard agrees that the ECI is a better index to use to inflate pilot compensation, which is why § 404.104(b) requires that PCE data be used only when ECI data is unavailable. It is also important to note that the statement in the 2018 ratemaking discussed differences between the ECI and the CPI,27 not the ECI and the PCE, as stated by the commenter. The statement quoted by the commenter does not accurately reflect the components of the PCE which differ from the CPI, and include the cost of employer provided health insurance.28 One commenter stated that they believe the use of the ‘‘2019 ECI data to project 2020 [pilot compensation data] would be more accurate than using improperly low PCE data.’’ The commenter provided no reasoning for why they believe historic ECI data is a better predictor of future inflation than the forecasted PCE data, nor did they provide any reasoning as to why only one year of historic data should be used. The forecasted PCE inflation data is generated by the Federal Reserve, which is responsible for setting monetary policy in the United States, and thus influencing inflation. The Federal Reserve bases these estimates on predictions of economic growth, the unemployment rate, other economic data, and the future policy path the Federal Reserve expects to take to meet its goals of maximizing employment and setting stable prices. The PCE is a reflection of the government’s best prediction of what will happen, whereas the ECI is a reflection of what has already happened. As stated above, the Coast Guard is using the best available data, the PCE data to inflate target pilot compensation, as required by § 404.104(b), and is not changing how target pilot compensation is calculated for this final rule. However, we will review this issue, and 24 USCG–2019–0736–0005, p. 3. p. 3. 26 USCG–2019–0736–0003, p. 2. 27 As stated in the 2018 Final Ratemaking (83 FR 26162 at 26171), ‘‘[The Coast Guard] agree[s] with the commenters that, for the purposes of inflating compensation costs, the ECI provides a better gauge of compensation inflation than the CPI does’’. 28 https://www.bls.gov/opub/btn/archive/ differences-between-the-consumer-price-index-andthe-personal-consumption-expenditures-priceindex.pdf, page 2. 25 USCG–2019–0736–0005, PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 if we determine that any changes are needed, we will propose them as part of a future rulemaking. 1. Inflation Calculation One commenter stated they believe pilot compensation is significantly below the market rate when compared with the salaries of other pilots across the United States. The commenter also discussed a multi-year compensation study the Coast Guard mentioned in the 2018 rule, and that the 2020 NPRM makes no mention of this study. The commenter stated that, as this study continues, the pilots are continually being undercompensated. While the Coast Guard commissioned a study to analyze methodologies to determine pilot compensation, we decided not to finalize this study. The compensation study was a backup in the event that we failed to identify a compensation standard that remedied the recruitment and retention issues identified in previous rulemakings, and discussed during previous GLPAC meetings. The current compensation benchmark addresses our goals of promoting the recruitment and retention of highly qualified mariners and experienced U.S. registered pilots. Therefore, completion of this compensation study is no longer necessary. 2. Staffing Model The LPA, District Lawyers, and the SLSPA made comments regarding the staffing model and the fact that each District needs to have one pilot added to the staffing model to account for the president of the association’s workload. Since 2016, when Coast Guard developed this staffing model, the duties and responsibilities of the pilot association presidents have expanded. For example, we expect the pilot president to attend numerous meetings and conferences throughout the year, provide additional financial and traffic information to increase transparency and accountability, oversee and ensure the integrity of the association training program, evaluate technology, and coordinate with the American Pilots Association (APA) to implement and share best practices. The Coast Guard agrees that if a pilot association president is spending half or more of their time on administrative issues that the staffing model should account for that time. Therefore, we will review this issue and any data supporting the amount of time the association presidents spend on administrative issues and tasks. If we determine that any changes should be made to the E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations staffing model, we will propose them as part of a future rulemaking. khammond on DSKJM1Z7X2PROD with RULES2 C. Target Pilot Compensation The User’s Coalition made several comments in regards to this step. They commented that ‘‘Since at least 2015, the GLPO’s ratemaking activities have repeatedly yielded revenues far above the target revenues fixed as representing a level necessary to cover pilot compensation and other recognized expense items.’’ The Coast Guard disagrees with this statement. The only way for the associations to generate additional revenue is from the increase in ship traffic going through the system. Although the Coast Guard has seen increased traffic volumes over what was estimated in recent years, this is due to the Canadian domestic fleet using U.S. pilots, demand for global commodities (steel and grain), tankers shipping petroleum products, cruise ships, and winter demand (ordering pilots while the locks are closed for maintenance) on Lake Erie, Lake Huron, and Lake Michigan. The Coast Guard has no control or influence over any of the aforementioned activities. The variables in global commodities are complex and difficult to predict. Supply of many commodities can be forecasted from the analysis of data, but data regarding consumption is much more difficult to estimate. Some countries carefully guard commodities produced and stored within their borders, making certain market predictions even harder. Civil unrest and government sanctions can cause huge swings in the commodities markets. The use of the 10-year average may cause the average to lag short-term trends, but it reduces fluctuations in predicted traffic levels and results in a more stable rate on a year-to-year basis. This helps the associations and the shippers plan for upcoming years while reducing variables. The Coast Guard welcomes any validated information the commenter can provide as to the exact amount of pilotage demand each year, as well as the number of vessels that will be transporting commodities and needing pilotage service, along with the recent demand for pilots in the cruise industry. The User’s Coalition also made a comment regarding the figure for target pilot compensation, and stated that the 2019 compensation number was ‘‘adopted’’ and used as a benchmark. The Coast Guard used the 2019 number because it was clear that this number has had the desired effect of promoting recruitment of highly qualified mariners and retention of experienced U.S. registered pilots. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 The Coalition also commented that this is the third year in which the U.S. Coast Guard Great Lakes Pilotage Office (GLPO) has set a benchmark compensation figure for Great Lakes pilots by reference to available data concerning the compensation of U.S. first mates subject to negotiated contracts between vessel owners and the AMOU. The Coast Guard disagrees with this statement. As explained above in Summary of Ratemaking Methodology, Step 4, the Coast Guard does not have access to information from the AMOU contract. In 2018, the best available information that we had was the pre2016 contract data and that was adjusted for inflation.Target compensation for the 2020 rate is not being calculated with regard to 2020 union contract data. We are using the 2019 figure as a base because we believe that this is the proper target compensation benchmark for Great Lakes pilots. This compensation benchmark enables the Coast Guard to meet its statutory requirement to set pilotage rates giving consideration to the public interest and the costs of providing pilotage services. We are ensuring the provision of safe, reliable, and efficient pilotage services by correcting the recruitment and retention issues discussed in previous rulemakings without increasing the costs of pilotage services to an unreasonable level. D. Initial Base Rates One commenter stated that, for several years, the Coast Guard’s use of a 10-year average severely understates likely upcoming bridge hours because of low traffic volumes in the period of depressed international economic activity caused by the economic recession in 2008–12. The Coast Guard disagrees that the 10year average should not be used. We believe that the 10-year average in is the public interest, because this approach provides rate stability. These stable and predictable rates allows shippers and pilots to forecast revenues. In Step 7 of the ratemaking methodology, the Coast Guard calculates an hourly pilotage rate to generate the revenue needed by each district. This step requires an estimate of the expected hours of traffic. To derive this estimate, the Coast Guard takes the average of the previous 10 years of traffic in each area on the Great Lakes. The use of the historical traffic figure was unanimously recommended by the GLPAC in 2014, and we believe that it is the best tool to estimate traffic. While in recent years, high levels of traffic have been greater than the historical average, we also note that in PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 20095 some years the level of traffic has been lower than average. The use of the 10year average may cause the average to lag short-term trends, but it reduces fluctuations in predicted traffic levels and results in a more stable rate on a year-to-year basis. No commenter has suggested a different time period for calculating the historical average that would produce better predictions or prevent wildly fluctuating rates. While we are open to suggestions as to how to better predict total traffic, we would encourage the commenters to raise these suggestions at the GLPAC, as we are currently continuing to follow its recommendation on this subject. The User’s Coalition suggested that, to minimize the inflation effect on hourly rates that is caused by use of inaccurate bridge hour projections, the Coast Guard either base its projections on the most recent previous year actuals, or derive projections by collecting upcoming year forecast data from affected stakeholders, including the Seaway Authority, U.S. and Canadian pilots, vessel operators, ports and terminals, shipping agents and other knowledgeable sources. The Coast Guard disagrees. Although we have seen increased traffic volumes over what was estimated in recent years, this is mainly due to the Canadian domestic fleet using U.S registered pilots. If the Coast Guard only used the previous year’s numbers, there would be large annual variations in the rates, which would not be in the public’s interest. We welcome any information or the suggested resources the commenter can provide as to the exact number of Canadian domestic vessels that will be using pilots each year, as well as the number of vessels that will be transporting commodities and requiring pilotage service. In addition, the Coast Guard has historically been unable to accurately forecast the international shipping trends that can be impacted by highly variable factors; e.g., global weather impacting the supply and demand for grain in the United States, Canada, and overseas, and the imposition or removal of tariffs on a global basis. This inability to accurately forecast demand led to the decision to rely on historical data instead. The User’s Coalition has not proposed a specific source of forecasting the demand for pilotage services that would be consistently more accurate than using historical data. E. Working Capital Fund There were three comments made by the User’s Coalition, the SLSPA, and the District Lawyers regarding the working capital fund. The User’s Coalition stated that this fund is misnamed, and that it E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 20096 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations is a recognized expense. The Coast Guard disagrees with the statement that it is considered a recognized expense. The working capital fund is intended to provide the pilots associations with working capital for future expenses associated with capital improvements, technology investments, and future training needs, with the goal of eliminating the need for surcharges (as was accomplished this year). The fund is structured so that the pilots associations can demonstrate credit worthiness when seeking funds from a financial institution for needed infrastructure projects. Recognized expenses are those operating expenses that are deemed necessary and reasonable. The working capital fund is meant to provide the associations with capital that is in addition to the money needed to cover its standard operating expenses and pilot compensation. Its use is to fund infrastructure and technology improvement projects. Regarding the suggestion for renaming the working capital fund, the Coast Guard is willing to discuss an alternative name at a future GLPAC meeting. The District Lawyers commented that the fund improperly fails to include a return on investment. The Coast Guard disagrees with this statement. In 2016, we created this fund to provide credit worthiness for pilot associations to have access to capital that would enable them to provide safe, efficient, and reliable service. In previous years, the goal of the precursor of the working capital fund, named the ‘‘return on investment’, was to provide a return to monies invested by the pilots in associations. The amount of the money invested (the investment base) by pilots was relatively small, and thus the return on that investment was small in absolute terms. However, when the Coast Guard recalibrated the return on investment (renamed the working capital fund) to be based on the total income of the associations, rather than simply the money invested in capital improvements (as was the case prior to 2016), the goal was to increase infrastructure spending by providing a more substantial pool of available funds. The goal of the working capital fund is not to provide a windfall for the associations, but to improve maritime safety. The working capital fund does this by supporting capital projects, infrastructure improvements and maintenance, non-recurring technology purchases, and training that is necessary for providing safe, efficient, and reliable pilotage. As with all other expenses, the funds applied must be reasonable in amount. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 The SLSPA commented that the working capital fund provides a basis to reinvest into the system or make up for minor shortfalls in revenue. The Coast Guard agrees in part. The working capital fund is a funding mechanism that allows for the associations to have cash on hand for future and/or unidentified expenses to improve pilotage service, and in some cases prevent delays that would occur from failing equipment, and for assets that are needed to continuously pilot vessels through the system. The Coast Guard disagrees that the working capital fund can make up for minor shortfalls in revenue. The fund cannot be used for the compensation of pilots during unexpected low traffic years. applicant pilot is a reasonable expense. Therefore, we are not reimbursing the entire difference to the District. Instead, we are including a surcharge offset of $158,308, which is the difference between the approved surcharge amount of $300,000 and the amount collected by the district of $141,692. For both Districts, the surcharge offset amount approved by the Coast Guard differs from the amount the commenters requested, as the commenters adjusted these differences to account for inflation and the working capital fund adjustments. However, these adjustments are already included as part of the 10-step ratemaking methodology and do not need to be completed for each individual operating expense. F. Surcharge Offsets The Coast Guard received two comments regarding the amount of surcharges 29 collected in 2017. The commenters stated that, because the 2017 rate did not take effect until October, the districts were only able to collect a small portion of the training surcharge approved for that year. The commenters requested that the difference between what was collected via the rate and the amount spent on training in 2017 be accounted for in this rule as operating expenses—specifically that $174,087 be added to the operating expenses for District 2 and $291,72 be added to the operating expenses for District 3. The Coast Guard agrees that the difference between the amount collected via the surcharge in 2017 and the amount spent on training in 2017 needs to be included as an operating expenses. Therefore, we included a surcharge offset in the operating expenses for both Districts 2 and 3 in this final rule. Specifically, in 2017, District 3 spent $647,606 on the salary and benefits for 7 applicant pilots, and collected $382,297 via the surcharge. The Coast Guard added a surcharge adjustment of $265,309 for District 3 ($647,606– $382,297) to account for the difference between training expense and training funds from the surcharge. District 2 spent $1,829,671 on the salary and benefits for 2 applicant pilots, and collected $141,692 in training surcharges. The Coast Guard does not believe that spending $914,836 per G. Surcharges 29 Surcharge is money that is paid upfront by the shipper in addition to the rate in order to meet an immediate need for the pilots. When calculating the rate, Coast Guard uses the operating expenses from three years prior as one of the factors to determine how much the shippers will pay via the rate. The surcharge offset or adjustment is the money collected or not collected three years prior that is either taken out or added to the rate via the methodology. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 We received several comments regarding the removal of surcharges. Beginning in 2016, the Coast Guard began implementing surcharges on shipping rates to encourage the recruitment and training of new pilots on the Great Lakes. Unlike pilot compensation, reasonable and necessary costs relating to the compensation and training of applicant pilots are fully reimbursable as operating expenses. However, the Coast Guard used surcharges so that pilot associations could receive the money needed to provide immediate funding for achieving the goal of hiring and training new pilots. This goal has been accomplished,30 and currently the average pilot’s age is under 50. In District One, 56 percent of registered pilots are under the age of 50. In District Two, 69 percent are under the age of 50, and in District Three, 44 percent are under the age of 50. This is more than adequate for retirement planning purposes. One commenter specifically stated that District Three very much needs the surcharge. The Coast Guard disagrees. In 2015, District Three only had 5 out of 20 registered pilots under the age of 50. In 2019 that number doubled to 10 out of 19, which is more than enough to properly plan for applicant pilots and retirement via the rate. H. Other Comments The User’s Coalition submitted several comments that we will address individually. The Coalition stated that the U.S. Great Lakes Pilot Associations are a government-sustained monopoly. The Coast Guard disagrees; the U.S. Great Lakes Pilot Associations are federally-regulated monopolies. It should be noted that all pilotage associations throughout the United E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations States are government-regulated monopolies. The User’s Coalition stated that the rates are dictated by the Coast Guard. The Coast Guard disagrees. The rates are derived via a 10-step methodology outlined in the Code of Federal Regulations. We comply with notice and comment procedure outlined in the Administrative Procedure Act. In fact, in a recent report, the Government Accountability Office (GAO) stated that while individual stakeholders may not agree with the specific inputs and assumptions used by the Coast Guard, the current process is generally transparent and provides an opportunity for informed stakeholder feedback.31 The GAO report also stated that coupled with the rulemaking requirements that incorporate public review and comments, we found that the existing mechanisms represent a fairly transparent system of pilotage ratesetting as compared to the process used by some coastal states.32 The User’s Coalition stated that, over the past five rate-setting cycles, the overall costs of U.S. pilotage to ratepayers (and, ultimately, to ports, cargo interests, and shore-based maritime interests) have risen substantially. The Coast Guard agrees that the overall cost of U.S. pilotage to ratepayers has risen. There are two primary reasons for this increase. The first reason is that, because of an error in the methodology and billing scheme from the mid 90’s and up until 2016, shippers were provided an unintended 20–40% ‘‘discount.’’ This discount prevented the pilot associations from generating and collecting the revenues we determined were necessary to provide safe, efficient, and reliable pilotage service. In 2016, we addressed this issue and removed the discount. The second reason is the cost of added pilots, which has increased needed revenues. Since 2016, we have added 18 working pilots to the System in order to preserve and promote maritime safety, minimize delays, and provide for recuperative rest. The User’s Coalition stated that there is an absence of current, reality-based (as opposed to speculative or theoretical) data in the ratemaking process for critical elements, such as pilotage expenses, traffic volume or bridge-hour forecasts, and pilot compensation. The Coast Guard disagrees with this statement. The Coast Guard employs a third party auditing firm to generate financial reports to evaluate pilotage expenses for the 31 https://www.gao.gov/products/GAO-19-493. 32 Id. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 annual rulemaking. We include these reports with the appropriate rulemaking docket. Forecasts are predictions of future events and are by nature speculative or theoretical, but our forecasts are based on objective, historical data. In addition, our Bridge Hour Study examined the actual number of hours pilots spent completing all parts of a pilotage assignment in the various Areas to determine how many assignments a pilot could complete in a given time period. This audited and studied data 33 is empirical and reality based, not theoretical. The ability to use current data is somewhat limited by the time required to complete a full notice and comment ratemaking. The GAO report published June 2019, titled Stakeholders’ Views on Issues and Options for Managing the Great Lakes Pilotage Program,34 states ‘‘that the Coast Guard is currently performing this independent function as its rate-setting process includes many of the characteristics identified as a best practice, such as a defined methodology, clear data submission and review process, and the absence of any direct material interest in the outcome of the rate determinations.’’ The report goes on to say that, ‘‘While individual stakeholders may not agree with the specific inputs and assumptions used by the Coast Guard, the current process is generally transparent and provides an opportunity for informed stakeholder feedback and identification of any grounds on which they can choose to take legal action.’’ The User’s Coalition stated that there is a lack of assertive Coast Guard supervision and control. The Coast Guard disagrees. The Coast Guard develops clear and timely regulations, policy, and direction to three U.S. pilot associations to provide safe, efficient, and reliable pilotage service to U.S. vessels operating under registry and foreign vessels transiting the Saint Lawrence and Great Lakes System. This regime of regulation, policy, and direction provides supervision and control. The commenter also failed to provide specific examples or data to support this claim. The User’s Coalition raised questions about the difference between U.S. and Canadian pilotage cost structures. The commenter stated that ‘‘sample 33 United States Coast Guard, Bridge Hour Definition and Methology Study: Final Report, (25 June 2013) https://www.dco.uscg.mil/Portals/9/ DCO%20Documents/Office%20of% 20Waterways%20and%20Ocean%20Policy/ Pilotage%20Study%20Final%20Report%2028% 20JUN%202013.pdf?ver=2017-06-08-082809-570. 34 https://www.gao.gov/products/GAO-19-493. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 20097 comparisons of the costs of U.S. versus Canadian pilotage on the same or similar voyages by the same or similar vessels show that U.S. pilotage costs are often nearly twice as high as those of the Canadian counterparts.’’ The Coast Guard is aware that the United States and Canada do not charge for service in identical ways. One significant difference is that the United States has three different Districts that must each support themselves, whereas the Canadian GLPA operates as a unified whole. This means that there may be a level of cross-subsidization among Canadian pilots that is impossible to replicate on the American side, which could result in higher rates in some areas and lower rates in others. Comparisons on a single voyage, such as what the Users Coalition did in the comment, where one system uses ancillary fees such as docking, anchoring, short notice dispatching and the other system does not, cannot provide the Coast Guard with the comprehensive information needed to determine if there is a system-wide problem with rates or if we are merely seeing an atypical incident. Taken as a whole, the revenues earned by the U.S. system of pilotage across the Great Lakes are comparable to the revenues earned by the Canadian system. This is further complicated by the fact that Canadians provide the exclusive source of pilotage services in parts of the system. The User’s Coalition also stated that there is a failure to develop, obtain, and maintain accurate information on recruitment, retention, and attrition issues as they affect the availability and compensation of qualified pilots. The Coast Guard disagrees with this statement. Coast Guard personnel in the Office of Waterways and Ocean Policy (CG–WWM) monitor recruitment, retention, and attrition issues by following the hiring and training of new pilots and conducting exit interviews with departing pilots. The commenter failed to articulate or provide any examples or data to support their statement. The User’s Coalition stated that the past record of significant, consistent revenue overruns justifies an adjustment in methodology. Failure to make this adjustment will once again result in an artificial increase in pilotage costs, in contravention of 46 U.S.C. 9303(f), and exacerbate the current misalignment of U.S. and Canadian pilotage costs. The Coast Guard disagrees with this comment. Consistent increases in pilotage demand does not justify an adjustment. Since the commenter provided no further evidence to justify E:\FR\FM\09APR2.SGM 09APR2 khammond on DSKJM1Z7X2PROD with RULES2 20098 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations the statement, no further action will be taken. The Coast Guard also disagrees that there is a current misalignment of U.S. and Canadian pilotage cost. As the commenter provided no evidence to support this claim, no further action will be taken. In addition, we note that these increases in demand do not equate to any increased cost to the User’s Coalition, and, further, because the demand increases bridge hours, it could be argued that these ‘‘consistent revenue overruns’’ actually decrease the rate over the long run, due to the way bridge hours are used in the 10-Step ratemaking methodology. To estimate the initial base rate, we divide the total estimated revenue needed for each area by the total estimated bridge hours. The User’s Coalition stated that prior years’ comments on this recurring issue have been dismissed without analysis or discussion by GLPO as ‘‘not a highly salient issue. . . .’’ (83 FR 26175), and the observation that pilotage rates had not reached ‘‘. . . levels that threaten the economic viability of Great Lakes shipping.’’ Id. The Coast Guard disagrees that issues have been dismissed without analysis or discussion. The User’s Coalition comment lacks context. The Coast Guard noted that the over-realization was not a highly salient issue in the 2018 final rule because the overrealization was caused by two factors, one of which had been corrected previously. The lack of incorporation of weighting factor fees into the ratemaking methodology was revised per the suggestion of industry commenters in the 2018 rulemaking. The second factor was demand for pilotage services, which was higher than predicted—a point discussed at length in the sections entitled ‘‘Target Pilot Compensation’’ and ‘‘Initial Base Rate’’ above. The commenter’s second quote is a reference to the conclusion of an independent study the Coast Guard commissioned analyzing the secondary economic impact of pilotage rates, hardly a dismissal without analysis. The GAO recently completed a comprehensive ‘‘stem-to-stern’’ review of the GLPO,35 assessing a plethora of recurring issues, and decided not to recommend any changes to the GLPO. The court has settled some of the issues and is reviewing the legality of other issues. We have and will continue to comply with the court’s decision(s). The User’s Coalition stated that revenue overruns are paid for in real money in a system that has yet to provide relief for overcharges to ratepayers or redress to other interests 35 https://www.gao.gov/products/GAO-19-493. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 affected by non-service-related, government-dictated prices, and that the results of the past several navigation seasons on the Lakes describe a situation of considerable economic waste. The Coast Guard disagrees with this statement. All charges paid were for actual services provide by the pilots to vessels; there were no non-servicerelated charges. If vessel owners and operators believe they have been charged in error, we provide a billing dispute mechanism that allows shippers adequate time to submit billing disputes for consideration. As the commenter provided no evidence of an overcharge to ratepayers, nor any evidence of ‘‘considerable economic waste,’’ no further action will be taken. This commenter implies that the User’s coalition has exclusive rights to the Great Lakes/Saint Lawrence River System. The User’s Coalition is not entitled to revenues generated by the Canadian domestic fleet, cruise ships, and/or tankers shipping petroleum products that are not represented by the coalition. These waters are for all law abiding mariners to enjoy and utilize for commercial purposes. We will ensure that all modes of international and domestic traffic are treated fairly. The Lakes Pilots Association (LPA) commented on changing the number of days in the season to 365 days. The Coast Guard disagrees. The 270 day season applies to the AMOU contracts. We are no longer utilizing those contracts to determine target pilot compensation. Therefore, the 365-day argument does not apply. We have identified a standard that corrected the historic recruitment and retention issues as previously discussed. One commenter suggested that the Coast Guard did not adequately explain why we expect the total costs generated in 2020 to be less than the total pilotage revenue in 2019, despite proposing higher pilotage rates for 4 of the 6 areas in 2020. They stated that the NPRM did not provide any explanation for the reduction in pilotage services, and that we should not claim that the final rule will ‘‘result in an overall reduction in pilotage costs’’.36 The Coast Guard disagrees. In the NPRM, we did not state that we expect a decrease in pilotage costs. Rather, we estimated the total expected revenue in 2020 and compared that value to the estimated 2019 revenue. This value is a reflection of the pilotage rates, as well as other factors, such as operating expenses and surcharges (if there are any). In the NPRM, we estimated that the total revenue generated in 2020 36 USCG–2019–0736–0007, PO 00000 Frm 00012 Fmt 4701 p. 4. Sfmt 4700 would be less than the total estimated revenue generated in 2019 for two reasons: (1) A reduction in operating expenses for some districts driven by large one-time capital purchases made in 2016, and (2) the removal of surcharges. The latter is the main driver in reducing the expected revenue between 2019 and 2020. Neither of these revenue components is a reflection of traffic or pilotage hours. In addition, the cost of the surcharges is not included in the rate, but is included in the total revenue calculations, meaning that the removal of the surcharges does not impact the rates, but does decrease the estimated total revenue. Table 44 in the preamble of this rule provides a comparison of the revenue components between 2019 and 2020, and demonstrates that these changes are mainly driven by the removal of the surcharges. It should be noted that, in this final rule, the Coast Guard modified operating expenses for all three districts based on public comment, and, as a result, we now estimate that revenues generated in 2020 will be $279,845 greater than those generated in 2019. VII. Discussion of Rate Adjustments In this final rule, based on the current methodology described in the previous section of this preamble, the Coast Guard is establishing new pilotage rates for 2020. We conducted the 2020 ratemaking as an ‘‘interim year,’’ as was done in 2019, rather than a full ratemaking as was conducted in 2018. Thus, the Coast Guard is adjusting the compensation benchmark pursuant to § 404.104(b) for this purpose, rather than § 404.104(a). In this section, we discuss the rate changes using the ratemaking steps provided in 46 CFR part 404 detailing all ten steps of the ratemaking procedure for each of the three districts to show how we arrived at the new rates. District One A. Step 1: Recognize Previous Operating Expenses Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year’s operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant’s financial reports for each association’s 2017 expenses and revenues.37 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. In certain instances, costs are applied to the 37 These reports are available in the docket for this rulemaking (see Docket # USCG–2019–0736). E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations designated or undesignated area based on where they were actually accrued. For example, costs for ‘‘Applicant pilot license insurance’’ in District One are assigned entirely to the undesignated areas, as applicant pilots work exclusively in those areas. For costs accrued by the pilot associations generally, such as employee benefits, the cost is divided between the designated and undesignated areas on a pro rata basis. The recognized operating expenses for District One are shown in table 3. As noted above, in 2016 the Coast Guard began authorizing surcharges to cover the training costs of applicant pilots. The surcharges were intended to reimburse pilot associations for training applicants in a more timely fashion than if those costs were listed as operating expenses, which would have required 3 years to reimburse. The rationale for using surcharges to cover these expenses rather than including the costs as operating expenses was so these nonrecurring costs could be recovered in a more timely fashion and so that retiring pilots would not have to cover the costs of training their replacements. Because operating expenses incurred are not actually recouped for a period of 3 20099 years, the Coast Guard added a $150,000 surcharge per applicant pilot beginning in 2016 to recoup those costs in the year incurred. Now that these issues are no longer a concern, we are not issuing any surcharges for the 2020 shipping season. For District One, we are not implementing any Director’s adjustments other than the lobbying expenses described above. Other adjustments have been made by the auditors and are explained in the auditor’s reports, which are available in the docket for this rulemaking where indicated under the ADDRESSES portion of the preamble. TABLE 3—2017 RECOGNIZED EXPENSES FOR DISTRICT ONE District One Reported expenses for 2017 Operating Expenses: Other Pilotage Costs: Subsistence/Travel—Pilot ..................................................................................................... Certified Public Accountant (CPA) Deduction ...................................................................... Subsistence/Travel—Trainee ............................................................................................... License Insurance—Pilots .................................................................................................... License Insurance—Trainee ................................................................................................. Payroll Taxes—Pilots ........................................................................................................... Payroll Taxes—Trainee ........................................................................................................ Training—Full Pilots Continuing Education .......................................................................... Cell and Internet Allowance—Pilots ..................................................................................... Cell and Internet Allowance—Applicants ............................................................................. Other ..................................................................................................................................... Undesignated St. Lawrence River Lake Ontario Total $440,456 ¥189 22,008 48,620 0 137,788 705 32,197 24,312 2,210 675 $293,637 ¥126 14,672 32,413 0 91,858 470 21,464 16,208 1,474 450 $734,093 ¥315 36,680 81,033 0 229,646 1,175 53,661 40,520 3,684 1,125 708,782 472,520 1,181,302 297,942 50,100 19,706 198,628 33,400 13,137 496,570 83,500 32,843 Total Pilot and Dispatch Costs ...................................................................................... Administrative Expenses: Legal—General Counsel ...................................................................................................... Legal—Shared Counsel (K&L Gates) .................................................................................. Office Rent ............................................................................................................................ Insurance .............................................................................................................................. Employee Benefits ................................................................................................................ Payroll Taxes ........................................................................................................................ Other Taxes .......................................................................................................................... Travel .................................................................................................................................... Depreciation/Auto Leasing/other .......................................................................................... Interest .................................................................................................................................. Dues and Subscriptions ....................................................................................................... Utilities .................................................................................................................................. Salaries ................................................................................................................................. Accounting/Professional Fees .............................................................................................. Pilot Training ......................................................................................................................... Applicant Pilot Training ......................................................................................................... Other ..................................................................................................................................... 367,748 245,165 612,913 2,098 26,835 0 21,593 7,720 6,665 70,942 4,091 94,944 35,143 19,471 18,479 69,953 6,111 0 0 26,338 1,399 17,890 0 14,395 5,146 4,444 47,294 2,728 63,296 23,428 12,981 12,320 46,636 4,074 0 0 17,559 3,497 44,725 0 35,988 12,866 11,109 118,236 6,819 158,240 58,571 32,452 30,799 116,589 10,185 0 0 43,897 Total Administrative Expenses ...................................................................................... Total Operating Expenses (Other Costs + Pilot Boats + Admin) .......................... 410,383 1,486,913 273,590 991,275 683,973 2,478,188 Adjustments (Director): Total Director’s Adjustments ......................................................................................... 0 0 0 Total Operating Expenses (OpEx + Adjustments) ................................................. 1,486,913 991,275 2,478,188.00 Total Other Pilotage Costs ............................................................................................ Pilot Boat and Dispatch Costs: Pilot Boat Expense ............................................................................................................... Dispatch Expense ................................................................................................................. Payroll Taxes ........................................................................................................................ khammond on DSKJM1Z7X2PROD with RULES2 Designated VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 20100 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2017 operating expenses in Step 1, the next step is to estimate the current year’s operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation for 2017 to 2018 using the BLS data from the CPI for the Midwest Region of the United States.38 Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2019 and 2020 inflation modification.39 40 Based on that information, the calculations for Step 2 are as follows: TABLE 4—ADJUSTED OPERATING EXPENSES FOR DISTRICT ONE District One Designated Total Operating Expenses (Step 1) ............................................................................................. 2018 Inflation Modification (@1.9%) ........................................................................................... 2019 Inflation Modification (@1.8%) ........................................................................................... 2020 Inflation Modification (@2%) .............................................................................................. Adjusted 2020 Operating Expenses ..................................................................................... C. Step 3: Estimate Number of Working Pilots TABLE 5—AUTHORIZED PILOTS Item In accordance with the text in § 404.103, we estimate the number of working pilots in each district. We determine the number of working pilots based on data provided by the Saint Lawrence Seaway Pilots Association (SLSPA). Using these numbers, we estimate there will be 17 working pilots in 2020 in District One. Furthermore, based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466), we assign a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 5. These numbers are used to determine the amount of revenue needed in their respective areas. $1,486,913 28,251 27,273 30,849 1,573,286 District One Maximum number of pilots (per § 401.220(a)) 41 .......... 2020 Authorized pilots (total) Pilots assigned to designated areas ................................. Pilots assigned to undesignated areas ....................... 17 17 10 7 D. Step 4: Determine Target Pilot Compensation Benchmark In this step, we determine the total pilot compensation for each area. As we are conducting an interim ratemaking this year, we follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. Because we do not have a value for the employment cost index for 2020, we Undesignated $991,275 18,834 18,182 20,566 1,048,857 Total $2,478,188 47,085 45,455 51,415 2,622,143 multiply the 2019 compensation benchmark of $359,887 by the Median PCE Inflation value of 2.0 percent.42 Based on the projected 2020 inflation estimate, the compensation benchmark for 2020 is $367,085 per pilot. Next, we verify that the number of pilots estimated for 2020 is less than or equal to the number permitted under the staffing model in § 401.220(a). The staffing model suggests that the number of pilots needed is 17 pilots for District One, which is more than or equal to the numbers of working pilots provided by the pilot associations. In accordance with § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of working pilots for District One, as shown in table 6. TABLE 6—TARGET COMPENSATION FOR DISTRICT ONE District One Designated khammond on DSKJM1Z7X2PROD with RULES2 Target Pilot Compensation .......................................................................................................... Number of Pilots .......................................................................................................................... Total Target Pilot Compensation .......................................................................................... 38 The 2018 inflation rate is available at https:// www.bls.gov/regions/midwest/data/consumer priceindexhistorical_midwest_table.pdf. Specifically the CPI is defined as ‘‘All Urban Consumers (CPI–U), All Items, 1982–4=100’’. Downloaded June 12, 2019. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 39 The 2019 CPI data was not available at the time of analysis, December 2019. 40 The 2019 and 2020 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/ files/fomcprojtabl20190320.pdf. We used the PCE median inflation value found in table 1. Downloaded June 12, 2019. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 $367,085 10 $3,670,850 Undesignated $367,085 7 $2,569,595 Total $367,085 17 $6,240,445 41 For a detailed calculation, refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). 42 https://www.federalreserve.gov/monetary policy/files/fomcprojtabl20190320.pdf. E:\FR\FM\09APR2.SGM 09APR2 20101 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add together the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year’s average annual rate of return for new issues of high-grade corporate securities. Using Moody’s data, the number is 3.93 percent.43 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 7. TABLE 7—WORKING CAPITAL FUND CALCULATION FOR DISTRICT ONE District One Designated Undesignated Total Adjusted Operating Expenses (Step 2) ....................................................................................... Total Target Pilot Compensation (Step 4) ................................................................................... Total 2020 Expenses (Step 2 + Step 4) ...................................................................................... $1,573,286 3,670,850 5,244,136 $1,048,857 2,569,595 3,618,452 $2,622,143 6,240,445 8,862,588 Working Capital Fund (Total Expenses × 3.93%) ................................................................ 206,095 142,205 348,300 F. Step 6: Project Needed Revenue In this step, we add together all of the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). We show these calculations in table 8. TABLE 8—REVENUE NEEDED FOR DISTRICT ONE District One Designated Undesignated Total Adjusted Operating Expenses (Step 2, See Table 4) ................................................................. Total Target Pilot Compensation (Step 4, See Table 6) ............................................................. Working Capital Fund (Step 5, See Table 7) .............................................................................. $1,573,286 3,670,850 206,095 $1,048,857 2,569,595 142,205 $2,622,143 6,240,445 348,300 Total Revenue Needed ........................................................................................................ 5,450,231 3,760,657 9,210,888 G. Step 7: Calculate Initial Base Rates Having determined the revenue needed for each area in the previous six steps to develop an hourly rate, we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the average hours of traffic over 10 years in District One, using the total time on task or pilot bridge hours.44 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 9. TABLE 9—TIME ON TASK FOR DISTRICT ONE TABLE 9—TIME ON TASK FOR DISTRICT ONE—Continued [Hours] [Hours] District One District One Year Year Designated 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 .......... .......... .......... .......... .......... .......... .......... .......... .......... .......... Designated Undesignated 6,943 7,605 5,434 5,743 6,810 5,864 4,771 5,045 4,839 3,511 8,445 8,679 6,217 6,667 6,853 5,529 5,121 5,377 5,649 3,947 Average 5,657 Undesignated 6,248 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. We present the calculations for each area in table 10. TABLE 10—INITIAL RATE CALCULATIONS FOR DISTRICT ONE Designated khammond on DSKJM1Z7X2PROD with RULES2 Revenue needed (Step 6) ....................................................................................................................................... 43 Moody’s Seasoned Aaa Corporate Bond Yield, average of 2018 monthly data (2019 data was not available at the time of analysis, December 2019). The Coast Guard uses the most recent year of complete data. Moody’s is taken from Moody’s Investors Service, which is a bond credit rating business of Moody’s Corporation. Bond ratings are VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 based on creditworthiness and risk. The rating of ‘‘Aaa’’ is the highest bond rating assigned with the lowest credit risk. See https://fred.stlouisfed.org/ series/AAA. (June 12, 2019). 44 To calculate the time on task for each district, the Coast Guard uses billing data from the Great Lakes Pilotage Management System (GLPMS). We PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 $5,450,231 Undesignated $3,760,657 pull the data from the system filtering by district, year, job status (we only include closed jobs), and flagging code (we only include U.S. jobs). After we have downloaded the data, we remove any overland transfers from the dataset, if necessary, and sum the total bridge hours, by area. We then subtract any non-billable delay hours from the total. E:\FR\FM\09APR2.SGM 09APR2 20102 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 10—INITIAL RATE CALCULATIONS FOR DISTRICT ONE—Continued Designated Undesignated Average time on task (hours) .................................................................................................................................. 5,657 6,248 Initial rate (Step 6÷Average Time on Task) ..................................................................................................... 963 602 H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 11 and 12.45 undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculate the average TABLE 11—AVERAGE WEIGHTING FACTOR FOR DISTRICT ONE, DESIGNATED AREAS Vessel class/year Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) Number of transits Weighting factor Weighted transits (A) (B) (A × B) ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. 31 41 31 28 54 285 295 185 352 559 50 28 50 67 86 271 251 214 285 393 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 1.45 31 41 31 28 54 327.75 339.25 212.75 404.8 642.85 65 36.4 65 87.1 111.8 392.95 363.95 310.3 413.25 569.85 Total ...................................................................................................................................... 3,556 ........................ 4,528 Average weighting factor (weighted transits/number of transits) .................................. ........................ 1.27 ........................ TABLE 12—AVERAGE WEIGHTING FACTOR FOR DISTRICT ONE, UNDESIGNATED AREAS khammond on DSKJM1Z7X2PROD with RULES2 Vessel class/year Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) Weighting factor Weighted transits (A) (B) (A × B) ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. 45 To calculate the number of transits by vessel class, we use the billing data from GLPMS (2019 data was not available at the time of analysis, VerDate Sep<11>2014 Number of transits 17:14 Apr 08, 2020 Jkt 250001 December 2019), filtering by district, year, job status (we only include closed jobs), and flagging code (we PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 25 28 18 19 22 238 263 169 290 352 60 42 28 45 63 289 269 222 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 25 28 18 19 22 273.7 302.45 194.35 333.5 404.8 78 54.6 36.4 58.5 81.9 419.05 390.05 321.9 only include U.S. jobs). We then count the number of jobs by vessel class and area. E:\FR\FM\09APR2.SGM 09APR2 20103 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 12—AVERAGE WEIGHTING FACTOR FOR DISTRICT ONE, UNDESIGNATED AREAS—Continued Vessel class/year Number of transits Weighting factor Weighted transits (A) (B) (A × B) Class 4 (2017) ............................................................................................................................. Class 4 (2018) ............................................................................................................................. 285 382 1.45 1.45 413.25 553.9 Total ...................................................................................................................................... 3,109 ........................ 4,028 Average weighting factor (weighted transits/number of transits) .................................. ........................ 1.30 ........................ I. Step 9: Calculate Revised Base Rates factors are considered; the total cost of pilotage would be equal to the revenue needed. To do this, we divide the initial In this step, we revise the base rates so that once the impact of the weighting base rates, calculated in Step 7, by the average weighting factors calculated in Step 8, as shown in table 13. TABLE 13—REVISED BASE RATES FOR DISTRICT ONE Initial rate (Step 7) Area District One: Designated .............................................................................................................. District One: Undesignated .......................................................................................................... J. Step 10: Review and Finalize Rates and reliable pilotage, the Director considers whether the rates incorporate appropriate compensation for pilots to handle heavy traffic periods and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the rates will cover operating In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish that the rates do meet the goal of ensuring safe, efficient $963 602 Average weighting factor (Step 8) 1.27 1.30 Revised Rate (Initial rate ÷ average weighting factor) $758 463 expenses and infrastructure costs, and takes average traffic and weighting factors into consideration. Based on this information, the Director is not making any alterations to the rates in this step. We modified the text in § 401.405(a) to reflect the final rates shown in table 14. TABLE 14—FINAL RATES FOR DISTRICT ONE Name District One: Designated ................................. District One: Undesignated ............................. St. Lawrence River ......................................... Lake Ontario ................................................... District Two A. Step 1: Recognize Previous Operating Expenses khammond on DSKJM1Z7X2PROD with RULES2 Final 2019 pilotage rate Area Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year’s operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant’s financial reports for each association’s 2017 expenses and revenues.46 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. In certain instances, costs are applied to the designated or undesignated area based on where they were actually incurred. 46 These reports are available in the docket for this rulemaking (see Docket No. USCG–2019–0736). VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 For example, costs for ‘‘Applicant pilot license insurance’’ in District One are assigned entirely to the undesignated areas, as applicant pilots work exclusively in those areas. For costs accrued by the pilot associations generally, such as employee benefits, for example, the cost is divided between the designated and undesignated areas on a pro rata basis. The recognized operating expenses for District Two are shown in table 15, below. In addition to the surcharge adjustment and lobbying expenses described for District One in Section VII A. of this preamble, Step 1: Recognize previous operating expenses, and the adjustments made by the auditor, as explained in the auditor’s reports (available in the docket where indicated in the ADDRESSES portion of this PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 $733 493 Proposed 2020 pilotage rate $757 462 Final 2020 pilotage rate $758 463 document), the Director is finalizing two adjustments to District Two’s operating expenses. The first is to disallow $120,350 in ‘‘housing allowance’’ expenses. The Coast Guard agrees with the IRS that an employer-provided housing allowance is a fringe benefit, and we consider it to be employee compensation. In addition, the Coast Guard expects those appointed as registered pilots to live in the region in which they are employed. We expect that, if a pilot chooses to live outside their region of employment, they should have to pay for their accommodations, and this cost should not be passed on to the shippers via the rate. Therefore, we are not including any housing allowance the district chooses to E:\FR\FM\09APR2.SGM 09APR2 20104 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations provide their pilots in the ratemaking calculation. The second Director’s adjustment is a $158,308 surcharge adjustment to account for the difference between in the amount the district spent on applicant pilot wages and benefits in 2017 to cover the training costs for two applicant pilots, and the amount actually collected via the surcharge. In total, District Two spent $1,829,671 on applicant pilot compensation for two applicant pilots and received $141,692 via the surcharge in 2017. However, as stated in Section VI.F of this preamble, the Coast Guard does not believe that spending $914,836 per applicant pilot is fair and reasonable, and, therefore, we are only recognizing applicant pilot compensation of $150,000 per applicant pilot, or $300,000 in total for the district. As a result, the Coast Guard is including a $158,308 surcharge adjustment ($300,000¥$141,692) in the recognized expenses for District Two. We allocated this adjustment to each area based on their proportional bridge hours in 2017 (see table 21 for bridge hours). TABLE 15—2017 RECOGNIZED EXPENSES FOR DISTRICT TWO District Two Designated Reported expenses for 2017 Undesignated Lake Erie Operating Expenses: Other Pilotage Costs: Subsistence/Travel—Pilots ................................................................................................... Subsistence/Travel—Applicants ........................................................................................... Housing Allowance—Pilots ................................................................................................... Housing Allowance—Applicants ........................................................................................... Winter Meeting Allowance .................................................................................................... Telecommunication Allowance ............................................................................................. Payroll taxes—Pilots ............................................................................................................. Payroll taxes—Applicants ..................................................................................................... License Insurance ................................................................................................................ Training ................................................................................................................................. $116,402 52,212 30,212 17,928 8,280 11,662 57,126 26,025 8,326 2,079 $174,602 78,317 45,318 26,892 12,420 17,493 85,688 39,038 12,490 3,119 $291,004 130,529 75,530 44,820 20,700 29,155 142,814 65,063 20,816 5,198 330,252 495,377 825,629 217,514 ¥34,860 0 78,680 12,230 326,272 ¥52,291 0 118,020 18,344 543,786 ¥87,151 0 196,700 30,574 Total Pilot and Dispatch Costs ...................................................................................... Cost Affiliated Entity Expenses: Office Rent ............................................................................................................................ CPA Adjustment ................................................................................................................... 273,564 410,345 683,909 26,275 ¥4,742 39,413 ¥7,113 65,688 ¥11,855 Total Affiliated Entity Expense ...................................................................................... Administrative Expenses: Legal—General Counsel ...................................................................................................... Legal—Shared Counsel (K&L Gates) .................................................................................. Employee benefits—Admin employees ................................................................................ Workman’s Compensation—Pilots ....................................................................................... Payroll taxes—Admin Employees ........................................................................................ Insurance .............................................................................................................................. Other Taxes .......................................................................................................................... Admin Travel ........................................................................................................................ Depreciation/Auto Lease/Other ............................................................................................ Interest .................................................................................................................................. CPA Adjustment ................................................................................................................... Dues and subscriptions ........................................................................................................ CPA Adjustment ................................................................................................................... Utilities .................................................................................................................................. Salaries—Admin employees ................................................................................................ Accounting ............................................................................................................................ Other ..................................................................................................................................... 21,533 32,300 53,833 3,505 15,604 79,534 48,663 6,872 10,844 12,065 6,316 24,168 21,526 ¥20,920 10,760 ¥581 6,277 60,568 14,507 13,936 5,258 23,405 119,301 72,994 10,308 16,265 18,097 9,475 36,251 32,288 ¥31,379 16,140 ¥871 9,415 90,852 21,761 20,904 8,763 39,009 198,835 121,657 17,180 27,109 30,162 15,791 60,419 53,814 ¥52,299 26,900 ¥1,452 15,692 151,420 36,268 34,840 Total Administrative Expenses ...................................................................................... 313,644 470,464 784,108 Total Operating Expenses (Other Costs + Pilot Boats + Admin) .......................... Adjustments (Director): Housing allowance for Pilots ................................................................................................ Housing allowance for Applicants ........................................................................................ Surcharge Adjustment ................................................................................................... 938,993 1,408,486 2,347,479 ¥30,212 ¥17,928 72,554 ¥45,318 ¥26,892 85,754 ¥75,530 ¥44,820 158,308 Total Other Pilotage Costs ............................................................................................ Pilot Boat and Dispatch Costs: Pilot Boat Cost ...................................................................................................................... CPA Adjustment ................................................................................................................... Dispatch Expense ................................................................................................................. Employee Benefits ................................................................................................................ Payroll Taxes ........................................................................................................................ khammond on DSKJM1Z7X2PROD with RULES2 Total Southeast shoal to Port Huron VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations 20105 TABLE 15—2017 RECOGNIZED EXPENSES FOR DISTRICT TWO—Continued District Two Designated Reported expenses for 2017 Undesignated Lake Erie Total Southeast shoal to Port Huron Total Director’s Adjustments .................................................................................. 24,414 13,544 37,958 Total Operating Expenses (OpEx + Adjustments) ......................................... 963,407 1,422,030 2,385,437 B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2017 operating expenses in Step 1, the next step is to estimate the current year’s operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation for 2017 to 2018 using the BLS data from the CPI for the Midwest Region of the United States.47 Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2019 and 2020 inflation modification.48 49 Based on that information, the calculations for Step 1 are as follows in table 16: TABLE 16—ADJUSTED OPERATING EXPENSES FOR DISTRICT TWO District Two Item Undesignated Total 2018 2019 2020 Designated Total Operating Expenses (Step 1) ............................................................................................. Inflation Modification (@1.9%) ........................................................................................... Inflation Modification (@1.8%) ........................................................................................... Inflation Modification (@2%) .............................................................................................. $963,407 18,305 17,671 19,988 $1,422,030 27,019 26,083 29,503 $2,385,437 45,324 43,754 49,491 Adjusted 2020 Operating Expenses ..................................................................................... 1,019,371 1,504,635 2,524,006 C. Step 3: Estimate Number of Working Pilots In accordance with the text in § 404.103, we estimate the number of working pilots in each district. We determine the number of working pilots based on input from the LPA. Using these numbers, we estimate that there will be 15 working pilots in 2020 in District Two. Furthermore, based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466), we assign a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 17. These numbers are used to determine the amount of revenue needed in their respective areas. multiply the 2019 compensation benchmark of $359,887 by the Median Item District Two PCE Inflation value of 2.0 percent.51 Based on the projected 2020 inflation Maximum number of pilots (per estimate, the compensation benchmark § 401.220(a)) 50 ..................... 15 for 2020 is $367,085 per pilot. 2020 Authorized pilots (total) ... 15 Next, we verify that the number of Pilots assigned to designated areas ..................................... 7 pilots estimated for 2020 is less than or equal to the number permitted under Pilots assigned to undesignated areas ..................................... 8 the staffing model in § 401.220(a). The staffing model suggests that the number of pilots needed is 15 pilots for District D. Step 4: Determine Target Pilot Two, which is more than or equal to the Compensation Benchmark numbers of working pilots provided by In this step, we determine the total the pilot associations.52 pilot compensation for each area. As we Thus, in accordance with are conducting an interim ratemaking § 404.104(c), we use the revised target this year, we follow the procedure individual compensation level to derive outlined in paragraph (b) of § 404.104, the total pilot compensation by which adjusts the existing multiplying the individual target compensation benchmark by inflation. compensation by the estimated number Because we do not have a value for the of working pilots for District Two, as employment cost index for 2020, we shown in table 18. TABLE 17—AUTHORIZED PILOTS TABLE 18—TARGET COMPENSATION FOR DISTRICT TWO khammond on DSKJM1Z7X2PROD with RULES2 Undesignated Target Pilot Compensation .......................................................................................................... 47 USCG–2019–0736–0003, p. 3. p. 5. 49 USCG–2019–0736–0002, p. 5. 50 For a detailed calculation refer to the Great Lakes Pilotage Rates—2017 Annual Review final 48 USCG–2019–0736–0002, VerDate Sep<11>2014 19:11 Apr 08, 2020 Jkt 250001 rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). 51 https://www.federalreserve.gov/monetary policy/files/fomcprojtabl20190320.pdf. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 $367,085 Designated $367,085 Total $367,085 52 See table 6 of the Great Lakes Pilotage Rates— 2017 Annual Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The methodology of the staffing model is discussed at length in the final rule (see pages 41476–41480 for a detailed analysis of the calculations). E:\FR\FM\09APR2.SGM 09APR2 20106 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 18—TARGET COMPENSATION FOR DISTRICT TWO—Continued Undesignated Designated Total Number of Pilots .......................................................................................................................... 8 7 15 Total Target Pilot Compensation .......................................................................................... $2,936,680 $2,569,595 $5,506,275 E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add together the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year’s average annual rate of return for new issues of high-grade corporate securities. Using Moody’s data, the number is 3.93 percent.53 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 19. TABLE 19—WORKING CAPITAL FUND CALCULATION FOR DISTRICT TWO District Two Item Undesignated Designated Total Adjusted Operating Expenses (Step 2) ....................................................................................... Total Target Pilot Compensation (Step 4) ................................................................................... $1,019,371 2,936,680 $1,504,635 2,569,595 $2,524,006 5,506,275 Total 2020 Expenses (Step 2 + Step 4) .............................................................................. 3,956,051 4,074,230 8,030,281 Working Capital Fund (Total Expenses × 3.93%) ........................................................ 155,473 160,117 315,590 F. Step 6: Project Needed Revenue In this step, we add together all of the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). We show these calculations in table 20. TABLE 20—REVENUE NEEDED FOR DISTRICT TWO District Two Undesignated Total Adjusted Operating Expenses (Step 2, See Table 16) ............................................................... Total Target Pilot Compensation (Step 4, See Table 18) ........................................................... Working Capital Fund (Step 5, See Table 19) ............................................................................ $1,019,371 2,936,680 155,473 $1,504,635 2,569,595 160,117 $2,524,006 5,506,275 315,590 Total Revenue Needed ........................................................................................................ 4,111,524 4,234,347 8,345,871 G. Step 7: Calculate Initial Base Rates Having determined the needed revenue for each area in the previous six steps to develop an hourly rate, we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the average hours of traffic over 10 years in District Two, using the total time on task or pilot bridge hours.54 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 21. khammond on DSKJM1Z7X2PROD with RULES2 Designated TABLE 21—TIME ON TASK FOR DISTRICT TWO [Hours] Year Undesignated 2018 .......... 2017 .......... 2016 .......... 2015 .......... 2014 .......... 2013 .......... 2012 .......... 2011 .......... 2010 .......... 2009 .......... Average 6,150 5,139 6,425 6,535 7,856 4,603 3,848 3,708 5,565 3,386 5,322 Designated 6,655 6,074 5,615 5,967 7,001 4,750 3,922 3,680 5,235 3,017 5,192 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. The calculations for each area are set forth in table 22. TABLE 22—INITIAL RATE CALCULATIONS FOR DISTRICT TWO Item Undesignated Revenue needed (Step 6) ....................................................................................................................................... 53 USCG–2019–0736–0005, VerDate Sep<11>2014 p. 3. 17:14 Apr 08, 2020 54 USCG–2019–0736–0002 Jkt 250001 PO 00000 Frm 00020 Fmt 4701 p. 5. Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 $4,111,524 Designated $4,234,347 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations 20107 TABLE 22—INITIAL RATE CALCULATIONS FOR DISTRICT TWO—Continued Item Undesignated Designated Average time on task (hours) .................................................................................................................................. 5,322 5,192 Initial rate (Step 6÷Average Time on Task) ............................................................................................................ 773 816 H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculated the average weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 23 and 24.55 TABLE 23—AVERAGE WEIGHTING FACTOR FOR DISTRICT TWO, UNDESIGNATED AREAS Vessel class/year Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) Number of transits Weighting factor Weighted transits (A) (B) (A × B) ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. 31 35 32 21 37 356 354 380 222 123 20 0 9 12 3 636 560 468 319 196 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 1.45 31 35 32 21 37 409.4 407.1 437 255.3 141.45 26 0 11.7 15.6 3.9 922.2 812 678.6 462.55 284.20 Total ...................................................................................................................................... 3,814 ........................ 5,023 Average weighting factor (weighted transits/number of transits) .................................. ........................ 1.32 ........................ TABLE 24—AVERAGE WEIGHTING FACTOR FOR DISTRICT TWO, DESIGNATED AREAS khammond on DSKJM1Z7X2PROD with RULES2 Vessel class/year Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) Weighting factor Weighted transits (A) (B) (A × B) ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. 55 USCG–2019–0736–0006, VerDate Sep<11>2014 Number of transits 20 15 28 15 42 237 217 224 127 153 8 8 4 4 14 359 340 281 185 p.2. 17:14 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 20 15 28 15 42 272.55 249.55 257.6 146.05 175.95 10.4 10.4 5.2 5.2 18.2 520.55 493 407.45 268.25 20108 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 24—AVERAGE WEIGHTING FACTOR FOR DISTRICT TWO, DESIGNATED AREAS—Continued Vessel class/year Number of transits Weighting factor Weighted transits (A) (B) (A × B) Class 4 (2018) ............................................................................................................................. 379 1.45 549.55 Total ...................................................................................................................................... 2,660 ........................ 3,510 Average weighting factor (weighted transits/number of transits) .................................. ........................ 1.32 ........................ I. Step 9: Calculate Revised Base Rates factors are considered, the total cost of pilotage would be equal to the revenue needed. To do this, we divide the initial In this step, we revise the base rates so that once the impact of the weighting base rates, calculated in Step 7, by the average weighting factors calculated in Step 8, as shown in table 25. TABLE 25—REVISED BASE RATES FOR DISTRICT TWO Initial rate (Step 7) Area District Two: Designated .............................................................................................................. District Two: Undesignated .......................................................................................................... J. Step 10: Review and Finalize Rates and reliable pilotage, the Director considers whether the rates incorporate appropriate compensation for pilots to handle heavy traffic periods, and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the rates will cover operating In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish that the rates do meet the goal of ensuring safe, efficient $816 773 Average weighting factor (Step 8) 1.32 1.32 Revised rate (initial rate ÷ average weighting factor) $618 586 expenses and infrastructure costs, and takes average traffic and weighting factors into consideration. Based on this information, the Director is not making any alterations to the rates in this step. We modified the text in § 401.405(a) to reflect the final rates shown in table 26. TABLE 26—FINAL RATES FOR DISTRICT TWO Name District Two: Designated ................................. Navigable waters from Southeast Shoal to Port Huron, MI. Lake Erie ........................................................ District Two: Undesignated ............................. District Three A. Step 1: Recognize Previous Operating Expenses khammond on DSKJM1Z7X2PROD with RULES2 Final 2019 pilotage rate Area Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year’s operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant’s financial reports for each association’s 2017 expenses and revenues.56 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. In certain instances, costs are applied to the undesignated or designated area based on where they were actually accrued. 56 These reports are available in the docket for this rulemaking (see Docket # USCG–2019–0736). VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 For example, costs for ‘‘Applicant pilot license insurance’’ in District One are assigned entirely to the undesignated areas, as applicant pilots work exclusively in those areas. For costs accrued by the pilot associations generally, for example, employee benefits, the cost is divided between the designated and undesignated areas on a pro rata basis. The recognized operating expenses for District Three are shown in table 27. In addition to the surcharge adjustment and lobbying expenses described for District One in Section VII A. of this preamble, Step 1: Recognize previous operating expenses and the adjustments made by the auditor, as explained in the auditor’s reports, which are available in the docket for this rulemaking where indicated in the PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 Proposed 2020 pilotage rate Final 2020 pilotage rate $603 $602 $618 531 573 586 ADDRESSES portion of this document, the Director is finalizing two adjustments to District Three’s operating expenses, listed as Director’s adjustments. The first disallows $32,800 in ‘‘housing allowance’’ expenses. The Coast Guard agrees with the IRS that an employer-provided housing allowance is a fringe benefit, and we consider it to be employee compensation. In addition, we expect those appointed as registered pilots pilot to live in the region in which they are employed. We expect that, if a pilot chooses to live outside their region of employment, they should have to pay for their accommodations, and this cost should not be passed on to the shippers via the rate. Therefore, we are not including any housing allowance the district chooses to E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations provide their pilots in the ratemaking calculation. The second Director’s adjustment is a $265,309 surcharge adjustment to account for the difference between the amount the district spent on applicant pilot wages and benefits in 2017 to cover the training costs for seven applicant pilots, and the amount actually collected via the 2017 surcharge. In total, District Three spent $647,606 on applicant pilot compensation for seven applicant pilots and received $382,297 via the surcharge 20109 in 2017. As a result, we are including a $265,309 surcharge adjustment ($647,606—$382,297) in the recognized expenses for District Three. We allocated this adjustment to each area based on their proportional bridge hours in 2017 (See table 33 for bridge hours). TABLE 27—2017 RECOGNIZED EXPENSES FOR DISTRICT THREE District Three Undesignated 57 Reported expenses for 2017 Operating Expenses: Other Pilotage Costs: Subsistence/Travel—Pilot ................................................................. CPA Adjustment ............................................................................... Subsistence/Travel—Applicant ......................................................... Payroll Taxes—Pilots ....................................................................... Payroll Taxes—Applicants ................................................................ License Insurance—Pilots ................................................................ Training—Pilots ................................................................................ Training—Applicants ......................................................................... Housing Allowance ........................................................................... Winter Meeting ................................................................................. Cell Phone Allowance ...................................................................... Other Pilotage Costs ........................................................................ CPA Adjustment ............................................................................... Designated (Area 7) Undesignated 58 (Area 8) Lakes Huron and Michigan St. Mary’s River Lake Superior Total $237,036 ¥11,178 90,123 124,088 25,553 15,631 25,830 16,325 18,382 14,795 26,186 49,252 ¥3,699 $93,461 ¥4,407 35,535 48,927 10,075 6,163 10,185 6,437 7,248 5,834 10,325 19,420 ¥1,446 $92,458 ¥4,360 35,154 48,402 9,967 6,097 10,075 6,368 7,170 5,771 10,214 19,211 ¥1,431 $422,955 ¥19,945 160,812 221,417 45,595 27,891 46,090 29,130 32,800 26,400 46,725 87,883 ¥6,576 628,324 247,757 245,096 1,121,177 397,610 ¥27,756 99,705 9,351 3,927 156,774 ¥10,944 39,313 3,687 1,548 155,092 ¥10,826 38,891 3,648 1,532 709,476 ¥49,526 177,909 16,686 7,007 Total Pilot and Dispatch Costs .................................................. Administrative Expenses: Legal—General Counsel .................................................................. Legal—Shared Counsel ................................................................... Office Rent ........................................................................................ Insurance .......................................................................................... Employee benefits ............................................................................ Workers Compensation .................................................................... Payroll Taxes .................................................................................... Other Taxes ...................................................................................... Admin Travel .................................................................................... Depreciation/Auto Leasing/Other ..................................................... Interest .............................................................................................. APA Dues ......................................................................................... Utilities .............................................................................................. Admin Salaries ................................................................................. Accounting/Professional Fees .......................................................... Other ................................................................................................. 482,837 190,378 188,337 861,552 32,149 18,730 4,733 3,715 76,093 1,513 6,408 1,034 676 50,959 2,262 20,544 5,335 64,004 34,390 6,170 12,676 7,385 1,866 1,465 30,003 597 2,527 408 267 20,093 892 8,100 2,103 25,236 13,560 2,433 12,540 7,306 1,846 1,449 29,681 590 2,500 403 264 19,877 882 8,013 2,081 24,966 13,414 2,407 57,365 33,421 8,445 6,629 135,777 2,700 11,435 1,845 1,207 90,929 4,036 36,657 9,519 114,206 61,364 11,010 Total Administrative Expenses .................................................. 328,715 129,611 128,219 586,545 1,439,876 567,746 561,652 2,569,274 ¥18,382 116,056 ¥7,248 33,197 ¥7,170 116,056 ¥32,800 265,309 Total Director’s Adjustments ..................................................... 97,674 25,949 108,886 232,509 Total Operating Expenses (OpEx + Adjustments) ............. 1,537,550 593,695 670,538 2,801,783 Total Other Pilotage Costs ........................................................ Pilot Boat and Dispatch Costs: Pilot boat costs ................................................................................. CPA Adjustment ............................................................................... Dispatch costs .................................................................................. Payroll taxes ..................................................................................... Dispatch Employee Benefits ............................................................ khammond on DSKJM1Z7X2PROD with RULES2 (Area 6) Total Operating Expenses (Other Costs + Pilot Boats + Admin) ............................................................................ Adjustments (Director): Housing Allowance ........................................................................... Surcharge Adjustment ...................................................................... VerDate Sep<11>2014 19:11 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 20110 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2017 operating expenses in Step 1, the next step is to estimate the current year’s operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation for 2017 to 2018 using the BLS data from the CPI for the Midwest Region of the United States.59 Because the BLS does not provide forecast inflation data, we use economic projections from the Federal Reserve for the 2019 and 2020 inflation modification.60, 61 Based on that information, the calculations for Step 1 are as follows: TABLE 28—ADJUSTED OPERATING EXPENSES FOR DISTRICT THREE District Three Undesignated Total 2018 2019 2020 Designated Total Operating Expenses (Step 1) ............................................................................................. Inflation Modification (@1.9%) ........................................................................................... Inflation Modification (@1.8%) ........................................................................................... Inflation Modification (@2%) .............................................................................................. $2,208,088 41,954 40,501 45,811 $593,695 11,280 10,890 12,317 $2,801,783 53,234 51,391 58,128 Adjusted 2020 Operating Expenses ..................................................................................... 2,336,354 628,182 2,964,536 C. Step 3: Estimate Number of Working Pilots In accordance with the text in § 404.103, we estimate the number of working pilots in each district. We determine the number of working pilots based on input from the Western Great Lakes Pilots Association. Using these numbers, we estimate that there will be 20 working pilots in 2020 in District Three. Furthermore, based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466), we assign a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 29. These numbers are used to determine the amount of revenue needed in their respective areas. TABLE 29—AUTHORIZED PILOTS District Three Maximum number of pilots (per § 401.220(a)) 62 .......... 2020 Authorized pilots (total) Pilots assigned to designated areas ................................. Pilots assigned to undesignated areas ....................... 22 20 4 16 D. Step 4: Determine Target Pilot Compensation Benchmark In this step, we determine the total pilot compensation for each area. As we are conducting an ‘‘interim’’ ratemaking this year, we are following the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. Because we do not have a value for the employment cost index for 2020, we multiply the 2019 compensation benchmark of $359,887 by the Median PCE Inflation value of 2.0 percent.63 Based on the projected 2020 inflation estimate, the compensation benchmark for 2020 is $367,085 per pilot. Next, we verify that the number of pilots estimated for 2020 is less than or equal to the number permitted under the staffing model in § 401.220(a). The staffing model suggests that the number of pilots needed for District Three is 22 pilots,64 which is more than or equal to the numbers of working pilots provided by the pilot associations. Thus, in accordance with § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of working pilots for District Three, as shown in table 30. TABLE 30—TARGET COMPENSATION FOR DISTRICT THREE District Three Undesignated Total Target Pilot Compensation .......................................................................................................... Number of Pilots .......................................................................................................................... $367,085 16 $367,085 4 $367,085 20 Total Target Pilot Compensation .......................................................................................... $5,873,360 $1,468,340 $7,341,700 E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add together the figures for projected operating expenses and total khammond on DSKJM1Z7X2PROD with RULES2 Designated 57 The undesignated areas in District Three (areas 6 and 8) are treated separately in table 27. In table 28 and subsequent tables, both undesignated areas are combined and analyzed as a single undesignated area. 58 For a detailed calculation, refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 pilot compensation for each area. Next, we find the preceding year’s average annual rate of return for new issues of high grade corporate securities. Using Moody’s data, the number is 3.93 59 USCG–2019–0736–0003, p. 3. p. 5. 61 USCG–2019–0736–0002, p. 5. 62 For a detailed calculation refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). 63 https://www.federalreserve.gov/monetary policy/files/fomcprojtabl20190320.pdf. 60 USCG–2019–0736–0002, PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 percent.65 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 31. 64 See table 6 of the Great Lakes Pilotage Rates— 2017 Annual Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The methodology of the staffing model is discussed at length in the final rule (see pages 41476–41480 for a detailed analysis of the calculations). 65 USCG–2019–0736–0005, p. 3. E:\FR\FM\09APR2.SGM 09APR2 20111 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 31—WORKING CAPITAL FUND CALCULATION FOR DISTRICT THREE District Three Undesignated Designated Total Adjusted Operating Expenses (Step 2) ....................................................................................... Total Target Pilot Compensation (Step 4) ................................................................................... $2,336,354 5,873,360 $628,182 1,468,340 $2,964,536 7,341,700 Total 2020 Expenses (Step 2 + Step 4) ...................................................................................... 8,209,714 2,096,522 10,306,236 Working Capital Fund (Total Expenses × 3.93%) ....................................................................... 322,642 82,393 405,035 F. Step 6: Project Needed Revenue In this step, we add together all of the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). We show these calculations in table 32. TABLE 32—REVENUE NEEDED FOR DISTRICT THREE District Three Undesignated Designated Total Adjusted Operating Expenses (Step 2, See Table 28) ............................................................... Total Target Pilot Compensation (Step 4, See Table 30) ........................................................... $2,336,354 5,873,360 $628,182 1,468,340 $2,964,536 7,341,700 Working Capital Fund (Step 5, See Table 31) ............................................................................ 322,642 82,393 405,035 Total Revenue Needed ................................................................................................................ 8,532,356 2,178,915 10,711,271 G. Step 7: Calculate Initial Base Rates Having determined the revenue needed for each area in the previous six steps to develop an hourly rate, we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the average hours of traffic over 10 years in District Three, using the total time on task or pilot bridge hours.66 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 33. TABLE 33—TIME ON TASK FOR DISTRICT THREE (HOURS) District Three Year Undesignated 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 Designated ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... ......................................................................................................................................................................... 19,967 20,955 23,421 22,824 25,833 17,115 15,906 16,012 20,211 12,520 3,455 2,997 2,769 2,696 3,835 2,631 2,163 1,678 2,461 1,820 Average ............................................................................................................................................................ 19,476 2,651 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. The calculations for each area are set forth in table 34. khammond on DSKJM1Z7X2PROD with RULES2 TABLE 34—INITIAL RATE CALCULATIONS FOR DISTRICT THREE Undesignated Revenue needed (Step 6) ....................................................................................................................................... Average time on task (hours) .................................................................................................................................. 66 USCG–2019–0736–0002, VerDate Sep<11>2014 p. 5. 17:14 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 $8,532,356 19,476 Designated $2,178,915 2,651 20112 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 34—INITIAL RATE CALCULATIONS FOR DISTRICT THREE—Continued Undesignated Initial rate .......................................................................................................................................................... H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculate the average $438 Designated $822 weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 35 and 36.67 TABLE 35—AVERAGE WEIGHTING FACTOR FOR DISTRICT THREE, UNDESIGNATED AREAS Vessel class/year khammond on DSKJM1Z7X2PROD with RULES2 Area 6: Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) Number of transits Weighting factor Weighted transits (A) (B) (A × B) ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... ...................................................................................................................... 45 56 136 148 103 274 207 236 264 169 15 8 10 19 9 394 375 332 367 337 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 1.45 45 56 136 148 103 315.1 238.05 271.4 303.6 194.35 19.5 10.4 13 24.7 11.7 571.3 543.75 481.4 532.15 488.65 Total for Area 6 ............................................................................................................. Area 8: Class 1 (2014) ...................................................................................................................... Class 1 (2015) ...................................................................................................................... Class 1 (2016) ...................................................................................................................... Class 1 (2017) ...................................................................................................................... Class 1 (2018) ...................................................................................................................... Class 2 (2014) ...................................................................................................................... Class 2 (2015) ...................................................................................................................... Class 2 (2016) ...................................................................................................................... Class 2 (2017) ...................................................................................................................... Class 2 (2018) ...................................................................................................................... Class 3 (2014) ...................................................................................................................... Class 3 (2015) ...................................................................................................................... Class 3 (2016) ...................................................................................................................... Class 3 (2017) ...................................................................................................................... Class 3 (2018) ...................................................................................................................... Class 4 (2014) ...................................................................................................................... Class 4 (2015) ...................................................................................................................... Class 4 (2016) ...................................................................................................................... Class 4 (2017) ...................................................................................................................... Class 4 (2018) ...................................................................................................................... 3,504 ........................ 4,507.05 3 0 4 4 0 177 169 174 151 102 3 0 7 18 7 243 253 204 269 188 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 1.45 3 0 4 4 0 203.55 194.35 200.1 173.65 117.3 3.9 0 9.1 23.4 9.1 352.35 366.85 295.8 390.05 272.6 Total for Area 8 ............................................................................................................. 1,976 ........................ 2623.1 Combined total ....................................................................................................... 5,480 ........................ 7,130.15 Average weighting factor (weighted transits/number of transits) ................... ........................ 1.30 ........................ 67 USCG–2019–0736–0006, VerDate Sep<11>2014 p.2 19:11 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations 20113 TABLE 36—AVERAGE WEIGHTING FACTOR FOR DISTRICT THREE, DESIGNATED AREAS Vessel class per year Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class Class 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) (2014) (2015) (2016) (2017) (2018) Number of transits Weighting factor Weighted transits (A) (B) (A × B) ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. 27 23 55 62 47 221 145 174 170 126 4 0 6 14 6 321 245 191 234 225 1 1 1 1 1 1.15 1.15 1.15 1.15 1.15 1.3 1.3 1.3 1.3 1.3 1.45 1.45 1.45 1.45 1.45 27 23 55 62 47 254.15 166.75 200.1 195.5 144.9 5.2 0 7.8 18.2 7.8 465.45 355.25 276.95 339.3 326.25 Total ...................................................................................................................................... 2,296 ........................ 2,977 Average weighting factor (weighted transits per number of transits) ........................... ........................ 1.30 ........................ I. Step 9: Calculate Revised Base Rates factors are considered, the total cost of pilotage would be equal to the revenue needed. To do this, we divide the initial In this step, we revise the base rates so that once the impact of the weighting base rates, calculated in Step 7, by the average weighting factors calculated in Step 8, as shown in table 37. TABLE 37—REVISED BASE RATES FOR DISTRICT THREE Initial rate (Step 7) Area District Three: Designated ........................................................................................................... District Three: Undesignated ....................................................................................................... J. Step 10: Review and Finalize Rates In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish that the rates do meet the goal of ensuring safe, efficient, and reliable pilotage, the Director considers whether the rates incorporate appropriate compensation for pilots to handle heavy traffic periods and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the rates will cover operating $822 438 Average weighting factor (Step 8) 1.30 1.30 Revised rate (initial rate ÷ average weighting factor) $632 337 expenses and infrastructure costs, and takes average traffic and weighting factors into consideration. Based on this information, the Director is not making any alterations to the rates in this step. We modified the text in § 401.405(a) to reflect the final rates shown in table 38. khammond on DSKJM1Z7X2PROD with RULES2 TABLE 38—FINAL RATES FOR DISTRICT THREE Final 2019 pilotage rate Area Name District Three: Designated .............................. District Three: Undesignated .......................... St. Mary’s River .............................................. Lakes Huron, Michigan, and Superior ........... K. Surcharges The Coast Guard is not implementing any surcharges in this ratemaking. As stated earlier, we previously used VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 surcharges to pay for the training of new pilots, rather than incorporating training costs into the overall ‘‘needed revenue’’ that is used in the calculation of the PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 $594 306 Proposed 2020 pilotage rate $621 327 Final 2020 pilotage rate $632 337 base rate, because the surcharge accelerates the reimbursement of certain necessary and reasonable expense. For the 2019 ratemaking, this E:\FR\FM\09APR2.SGM 09APR2 20114 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations reimbursement needed to be accelerated because of the large number of registered pilots retiring, and the large number of new pilots being trained to replace them. As the vast majority of registered pilots are not anticipated to retire in the next 20 years, the Coast Guard believes that pilot associations are now able to plan for the costs associated with retirements without relying on the Coast Guard to impose surcharges. VIII. Regulatory Analyses We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on these statutes or Executive orders. A. Regulatory Planning and Review Executive Orders 12866 (Regulatory Planning and Review) and 13563 (Improving Regulation and Regulatory Review) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Executive Order 13771 (Reducing Regulation and Controlling Regulatory Costs) directs agencies to reduce regulation and control regulatory costs and provides that ‘‘for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.’’ The Office of Management and Budget (OMB) has not designated this rule a significant regulatory action under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. Because this rule is not a significant regulatory action, this rule is exempt from the requirements of Executive Order 13771. See the OMB Memorandum titled ‘‘Guidance Implementing Executive Order 13771, titled ‘‘Reducing Regulation and Controlling Regulatory Costs’ ’’ (April 5, 2017). A regulatory analysis (RA) follows. The purpose of this final rule is to establish new base pilotage rates. The Great Lakes Pilotage Act of 1960 requires that rates be established or reviewed and adjusted each year. The Act requires that base rates be established by a full ratemaking at least once every five years, and in years when base rates are not established, they must be reviewed and, if necessary, adjusted. The last full ratemaking was concluded in June of 2018.68 The Coast Guard estimates an increase in cost of approximately $279,845 to industry as a result of the change in revenue needed in 2020 compared to the revenue needed in 2019. This is a 1 percent net increase in estimated payments made by shippers from the 2019 shipping season. Table 39 summarizes changes with no cost impacts or where the cost impacts are captured in the final rate change. Table 40 summarizes the affected population, costs, and benefits of the final rate change. The Coast Guard estimates an increase in cost of approximately $279,845 to industry as a result of the change in revenue needed in 2020 compared to the revenue needed in 2019. This is a 1 percent net increase in estimated payments made by shippers from the 2019 shipping season. khammond on DSKJM1Z7X2PROD with RULES2 TABLE 39—CHANGES WITH NO COSTS OR COST CAPTURED IN THE FINAL RATE Change Description Affected population Basis for no cost Benefits Working capital fund requirements. The Coast Guard is adding regulatory text to § 403.110 requiring the pilotage associations keep money allocated to the working capital fund in a separate account and limit the use of the funds to infrastructure expenses. The 3 pilotage associations .. All three districts opened accounts for the working capital fund in response to a policy letter sent by the Coast Guard in November, 2018; therefore, there is no additional cost as a result of this rulemaking. In addition, based on discussion with the associations, the cost to open these accounts was negligible, as each association was able to open a bank account online with their existing financial institutions with minimal effort. Recordkeeping associated with the new bank accounts may be conducted simultaneously with the recordkeeping for the existing accounts, as all accounts are with the same financial institution. In addition, the associations must already report and keep records on their infrastructure expense as part of their reporting requirements under § 403.105. Provides increased transparency and oversight of how the money in the working capital fund is spent and how much each association has allocated for infrastructure expenses. 68 Great Lakes Pilotage Rates—2018 Annual Review and Revisions to Methodology (83 FR 26162), published June 5, 2018. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations 20115 TABLE 39—CHANGES WITH NO COSTS OR COST CAPTURED IN THE FINAL RATE—Continued Change Description Affected population Basis for no cost Benefits Address inconsistent terms. The Coast Guard is replacing the text in § 404.106, ‘‘return on investment’’ with ‘‘working capital fund’’. The 3 pilotage associations .. Creates consistency across the CFR and reduces confusion. Target pilot The Coast Guard is changing compensation. the base pilot compensation benchmark in § 401.405(a) to the 2019 compensation benchmark after adjusting for inflation. Owners and operators of 266 vessels journeying the Great Lakes system annually, 52 U.S. Great Lakes pilots, and 3 pilotage associations. The Coast Guard previously renamed the ‘‘return on investment’’ as the ‘‘working capital fund’’ in the Great Lakes Pilotage Rates 2017 Annual Review final rule (82 FR 41466); however, this text was not modified in that rulemaking. Pilot compensation costs are accounted for in the base pilotage rates. This compensation target achieves the Coast Guard’s goals of safety through rate and compensation stability, while promoting recruitment and retention of qualified U.S. registered pilots. TABLE 40—ECONOMIC IMPACTS DUE TO RATE CHANGES Change Description Rate and surcharge changes. Affected population Under the Great Lakes Pilotage Act of 1960, the Coast Guard is required to review and adjust base pilotage rates annually. Table 41 summarizes the changes in the regulatory analysis from the NPRM to the final rule. The Coast Guard made these changes as a result of public comments received after publication of the NPRM. The Coast Guard did not receive any comments on the regulatory analysis itself, but did receive comments on the operating expenses Costs Benefits Owners and operators of 266 Increase of $279,845 due to vessels transiting the Great change in revenue needed Lakes system annually, 52 for 2020 ($28, 268,030) U.S. Great Lakes pilots, from revenue needed for and 3 pilotage associations. 2019 ($27,988,185) as shown in Table 41 below. that affected the calculation of projected revenues. In the final rule, the Coast Guard made two adjustments to the operating expenses based on public comment: (1) We adjusted the operating expenses to include the 3 percent shared council fee which we incorrectly deducted in the NPRM; and (2) we added a surcharge adjustment for Promotes safe, efficient, and reliable pilotage service on the Great Lakes. Provides fair compensation, adequate training, and sufficient rest periods for pilots. New rates cover an association’s necessary and reasonable operating expenses. Ensures the association receives sufficient revenues to fund future improvements. District 2 and District 3 to account for the differences between their accrued training expenses and the amount of money they collected via the surcharge. An in-depth discussion of these comments is located in Section VI of the preamble, Discussion of Comments. khammond on DSKJM1Z7X2PROD with RULES2 TABLE 41—SUMMARY OF CHANGES FROM NPRM TO FINAL RULE Element of the analysis NPRM Final rule Resulting change in RA Operating Expenses (Step 1). Incorrectly deducted 3% shared council expenses from the operating expenses for all districts. Did not include required surcharge adjustments for District 2 and District 3. Removes deduction for all three districts. Data affects the calculation of projected revenues. The Coast Guard is required to review and adjust pilotage rates on the Great Lakes annually. See Sections III and IV of this preamble for detailed discussions of the legal basis and purpose for this rulemaking and for background VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 Includes a $158,308 surcharge adjustment for District 2 and a $265,309 surcharge adjustment for District 3. information on Great Lakes pilotage ratemaking. Based on our annual review for this rulemaking, we adjusted the pilotage rates for the 2020 shipping season to generate sufficient revenues for each district to reimburse its PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 necessary and reasonable operating expenses, fairly compensate trained and rested pilots, and provide an appropriate working capital fund to use for improvements. The rate changes in this final rule will increase the rates for E:\FR\FM\09APR2.SGM 09APR2 20116 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations five areas (District One: Designated, all of District Two, and all of District Three), and decrease the rates for the remaining area (District One: Undesignated). In addition, the final rule will not implement a surcharge. These changes lead to a net increase in the cost of service to shippers. However, because the rates will increase for most areas and decrease for one, the change in per unit cost to each individual shipper will be dependent on their area of operation, and if they previously paid a surcharge. A detailed discussion of our economic impact analysis follows. khammond on DSKJM1Z7X2PROD with RULES2 Affected Population This final rule will impact U.S. Great Lakes pilots, the three pilot associations, the Saint Lawrence Seaway Pilotage Association, the Lakes Pilotage Association, and the Western Great Lakes Pilotage, and the owners and operators of oceangoing vessels that transit the Great Lakes annually. We estimate that there will be 52 pilots working during the 2020 shipping season. The shippers affected by these rate changes are the owners and operators of domestic vessels operating ‘‘on register’’ (engaged in foreign trade) and owners and operators of nonCanadian foreign vessels on routes within the Great Lakes system. These owners and operators must have pilots or pilotage service as required by 46 U.S.C. 9302. There is no minimum tonnage limit or exemption for these vessels. The statute applies only to commercial vessels and not to recreational vessels. U.S.-flagged vessels not operating on register and Canadian ‘‘lakers,’’ which account for most commercial shipping on the Great Lakes, are not required by 46 U.S.C. 9302 to have pilots. However, these U.S.- and Canadian-flagged lakers may voluntarily choose to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged may opt to have a pilot for varying reasons, such as unfamiliarity with designated waters and ports, or for insurance purposes. The Coast Guard used billing information from the years 2016 through 2018 from the Great Lakes Pilotage Management System (GLPMS) to estimate the average annual number of vessels affected by the rate VerDate Sep<11>2014 19:11 Apr 08, 2020 Jkt 250001 adjustment.69 The GLPMS tracks data related to managing and coordinating the dispatch of pilots on the Great Lakes, and billing in accordance with the services. As described in Step 7 of the methodology, we use a 10-year average to estimate the traffic. However, when we reviewed 10 years of the most recent billing data, we found that the data included vessels that have not used pilotage services in recent years. Therefore, we used 3 years of the most recent billing data to estimate the affected population. Using 3 years of billing data is a better representation of the vessel population currently using pilotage services and, therefore, mostly likely be impacted by this rulemaking. We found that 457 unique vessels used pilotage services during the years 2016 through 2018. That is, these vessels had a pilot dispatched to the vessel, and billing information was recorded in the GLPMS. Of these vessels, 420 were foreign-flagged vessels and 37 were U.S.-flagged vessels. As previously stated, U.S.-flagged vessels not operating on register are not required to have a registered pilot per 46 U.S.C. 9302, but can voluntarily choose to have one. Numerous factors affect vessel traffic, which varies from year to year. Therefore, rather than using the total number of vessels over the time period, we took an average of the unique vessels using pilotage services from the years 2016 through 2018 as the best representation of vessels estimated to be affected by the rates in this rulemaking. From 2016 through 2018, an average of 266 vessels used pilotage services annually.70 On average, 248 of these vessels were foreign-flagged vessels and 18 were U.S.-flagged vessels that voluntarily opted into the pilotage service. Total Cost to Shippers The rate changes from this final rule will result in a net increase in the cost of service to shippers. However, because the rates will increase for five areas and decrease for one, the change in per unit 69 2019 GLPMS was not available at the time of analysis, December 2019. 70 Some vessels entered the Great Lakes multiple times in a single year, affecting the average number of unique vessels utilizing pilotage services in any given year. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 cost to each individual shipper is dependent on their area of operation, and if they previously paid a surcharge. The Coast Guard estimates the effect of the rate changes on shippers by comparing the total projected revenues needed to cover costs in 2019 with the total projected revenues to cover costs in 2020, including any temporary surcharges we have authorized.71 We set pilotage rates so that pilot associations receive enough revenue to cover their necessary and reasonable expenses. Shippers pay these rates when they have a pilot, as required by 46 U.S.C. 9302. Therefore, the aggregate payments of shippers to pilot associations are equal to the projected necessary revenues for pilot associations. The revenues each year represent the total costs that shippers must pay for pilotage services. The change in revenue from the previous year is the additional cost to shippers discussed in this rule. The impacts of the rate changes on shippers are estimated from the district pilotage projected revenues (shown in tables 8, 20, and 32 of this preamble). The Coast Guard estimates that for the 2020 shipping season, the projected revenue needed for all three districts is $28,268,030. To estimate the change in cost to shippers from this rule, the Coast Guard compared the 2020 total projected revenues to the 2019 projected revenues. Because we review and prescribe rates for the Great Lakes Pilotage annually, the effects are estimated as a single-year cost rather than annualized over a 10-year period. In the 2019 rulemaking, we estimated the total projected revenue needed for 2019, including surcharges, as $27,988,185.72 This is the best approximation of 2019 revenues, as, at the time of this publication, we do not have enough audited data available for the 2019 shipping season to revise these projections. Table 42 shows the revenue projections for 2019 and 2020 and details the additional cost increases to shippers by area and district as a result of the rate changes on traffic in Districts One, Two, and Three. 71 While the Coast Guard implemented a surcharge in 2019, we are not implementing any surcharges for 2020. 72 84 FR 20551, see table 36. E:\FR\FM\09APR2.SGM 09APR2 20117 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 42—EFFECT OF THE RULE BY AREA AND DISTRICT [$U.S.; Non-discounted] Revenue needed in 2019 Area 2019 temporary surcharge Total 2019 projected revenue Revenue needed in 2020 2020 temporary surcharge Total 2020 projected revenue Percentage change from previous year Change in costs of this rule Total, District One ............. Total, District Two ............. Total, District Three ........... $9,271,852 7,864,224 9,802,109 $300,000 150,000 600,000 $9,571,852 8,014,224 10,402,109 $9,210,888 8,345,871 10,711,271 $0 0 0 $9,210,888 8,345,871 10,711,271 ¥$360,964 331,647 309,162 ¥4 4 3 System Total .............. 26,938,185 1,050,000 27,988,185 28,268,030 0 28,268,030 279,845 1 The resulting difference between the projected revenue in 2019 and the projected revenue in 2020 is the annual change in payments from shippers to pilots as a result of the rate change imposed by this rule. The effect of the rate change to shippers varies by area and district. The rate changes, after taking into account the change in pilotage rates, will lead to affected shippers operating in District One experiencing a decrease in payments of $360,964 over the previous year. District Table 43 shows the difference in revenue by revenue-component from 2019 to 2020, and presents each revenue-component as a percentage of the total revenue needed. In both 2019 and 2020, the largest revenuecomponent was pilotage compensation (66 percent of total revenue needed in 2019 and 68 percent of total revenue needed in 2020), followed by operating expenses (27 percent of total revenue needed in 2019 and 29 percent of total revenue 2020). Two and District Three will experience an increase in payments of $331,647 and $309,162 respectively, when compared with 2019. The overall adjustment in payments will be an increase in payments by shippers of $279,845 across all three districts (a 1percent increase when compared with 2019). Again, because the Coast Guard reviews and sets rates for Great Lakes Pilotage annually, we estimate the impacts as single-year costs rather than annualizing them over a 10-year period. TABLE 43—DIFFERENCE IN REVENUE BY COMPONENT Percentage of total revenue needed in 2019 (percent) Revenue needed in 2019 Revenue-component Adjusted Operating Expenses .................................................. Total Target Pilot Compensation .............................................. Working Capital Fund ............................................................... Total Revenue Needed, without Surcharge .............................. Surcharge .................................................................................. Total Revenue Needed, with Surcharge ................................... $7,565,310 18,354,237 1,018,638 26,938,185 1,050,000 27,988,185 27 66 4 96 4 100 Percentage of total revenue needed in 2020 (percent) Revenue needed in 2020 $8,110,685 19,088,420 1,068,925 28,268,030 0 28,268,030 29 68 4 100 0 100 Difference (2020 revenue– 2019 revenue) Percentage change from previous year (percent) $545,375 734,183 50,287 1,329,845 ¥1,050,000 279,845 7 4 5 5 ¥100 1 Note: Totals may not sum due to rounding. Table 44 presents the percentage change in revenue by area and revenuecomponent, excluding surcharges, as they are applied at the district level.73 The majority of the increase in revenue is due to inflation of operating expenses, and the net addition of one additional pilot. The target compensation for each pilot is $367,085; therefore, the net addition of this pilot to full working status accounts for $367,085 of the increase in the revenue needed. The change in revenue also accounts for the inflation of pilotage compensation and the removal of surcharges to cover the cost of applicant pilot training expenses. The total difference in the revenues needed in 2019 compared to the revenues needed in 2020 is $279,845, which takes into account the effect of increasing compensation for the other 51 pilots. The remaining amount is attributed to increases in the working capital fund. TABLE 44—DIFFERENCE IN REVENUE BY COMPONENT AND AREA khammond on DSKJM1Z7X2PROD with RULES2 Area District District District District District District One: Designated ............... One: Undesignated ........... Two: Undesignated ........... Two: Designated ............... Three: Undesignated ........ Three: Designated ............ Total target pilot compensation Working capital fund 2019 (A) (B¥A) ÷ B (B) $1,467,171 1,335,997 1,072,441 1,455,988 1,703,896 529,817 $1,573,286 1,048,857 1,019,371 1,504,635 2,336,354 628,182 73 The 2019 projected revenues are from the Great Lakes Pilotage Rates—2019 Annual Review and VerDate Sep<11>2014 Total revenue needed Adjusted operating expenses 17:14 Apr 08, 2020 Jkt 250001 7 ¥27 ¥5 3 27 16 2020 Percentage change 2019 2020 Percentage change (C) (D) (D¥C) ÷ D (E) (F) $3,598,870 2,519,209 2,519,209 2,519,209 5,758,192 1,439,548 $3,670,850 2,569,595 2,936,680 2,569,595 5,873,360 1,468,340 $199,095 151,510 141,152 156,225 293,260 77,396 $206,095 142,205 155,473 160,117 322,642 82,393 2 2 14 2 2 2 Revisions to Methodology final rule (84 FR 20551) PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 2019 2020 Percentage change (F¥E) ÷ F (G = A + C + E) (H = B + D + F) (H¥G) ÷ H 3 ¥7 9 2 9 6 $5,265,136 4,006,716 3,732,802 4,131,422 7,755,348 2,046,761 $5,450,231 3,760,657 4,111,524 4,234,347 8,532,356 2,178,915 3 ¥7 9 2 9 6 tables 15–17. The 2020 projected revenues are from tables 8, 20, and 32 of this final rule. E:\FR\FM\09APR2.SGM 09APR2 20118 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations Benefits This final rule allows the Coast Guard to meet the requirements in 46 U.S.C. 9303 to review the rates for pilotage services on the Great Lakes. The rate changes will promote safe, efficient, and reliable pilotage service on the Great Lakes by: (1) Ensuring that rates cover an association’s operating expenses; (2) providing fair pilot compensation, adequate training, and sufficient rest periods for pilots; and (3) ensuring pilot associations produce enough revenue to fund future improvements. The rate changes will also help recruit and retain pilots, which will ensure a sufficient number of pilots to meet peak shipping demand, helping reduce delays caused by pilot shortages. B. Small Entities Under the Regulatory Flexibility Act, 5 U.S.C. 601–612, we have considered whether this final rule will have a significant economic impact on a substantial number of small entities. The term ‘‘small entities’’ comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. For this rule, the Coast Guard considered the potential impact to vessel owners and operators, the three pilotage associations, as well as any other entities that may be impacted by the rule, such as not-for-profit organizations and governmental jurisdictions. First, we reviewed recent company ownership data for the vessels identified in the GLPMS, and then reviewed their business revenue and employment size data provided by publicly available sources such as Manta74 and ReferenceUSA.75 As described in Section VIII.A of this preamble, Regulatory Planning and Review, we found that a total of 457 unique vessels used pilotage services from 2016 through 2018. These vessels are owned by 55 entities. We found that, of the 55 entities that own or operate vessels engaged in trade on the Great Lakes that would be affected by this rule, 43 are foreign entities that operate primarily outside the United States, and we do not consider the impact on these entities under the Regulatory Flexibility Act (RFA).76 The remaining 12 entities are U.S. entities. For each entity, we compared the revenue and employee data found in the company search described above to the Small Business Administration’s (SBA) small business threshold as defined in the SBA’s ‘‘Table of Size Standards’’ for small businesses to determine how many of these companies are small entities.77 Table 45 shows the North American Industry Classification System (NAICS) codes of the U.S. entities and the small entity standard size established by the SBA. TABLE 45—NAICS CODES AND SMALL ENTITIES SIZE STANDARDS NAICS 211120 238910 488330 523910 532411 551111 561510 928110 Description .............. .............. .............. .............. .............. .............. .............. .............. Small entity size standard Crude Petroleum Extraction ..................................................................................................... Site Preparation Contractors .................................................................................................... Navigational Services to Shipping ............................................................................................ Miscellaneous Intermediation ................................................................................................... Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing .................. Offices of Bank Holding Companies ........................................................................................ Travel Agencies ........................................................................................................................ National Security ....................................................................................................................... Of the 12 U.S. entities, 10 exceed the SBA’s small business standards for small entities. To estimate the potential impact on the 2 small entities, the Coast Guard used their 2018 invoice data to estimate their pilotage costs in 2020. We increased their 2018 costs to account for the changes in pilotage rates resulting from this rule and the Great Lakes Pilotage Rates—2019 Annual Review and Revisions to Methodology final rule (84 FR 20551). We estimated the change in cost to these entities resulting from this rule by subtracting their estimated 2019 costs from their estimated 2020 costs. We then compared the estimated change in pilotage costs between 2019 and 2020 with each firm’s annual 1,250 employees. $15.0 million. $38.5 million. $38.5 million. $32.5 million. $20.5 million. $20.5 million. Population of 50,000 People. revenue and compared their total estimated 2020 pilotage costs to their annual revenue. In both cases, the change in their estimated pilotage expenses were below 1 percent of their annual revenue. Table 46 presents the calculation of these cost estimates for both entities. TABLE 46—ESTIMATED 2020 PILOTAGE COSTS FOR SMALL ENTITIES Entity 2018 pilotage expenses Estimated change in pilotage costs between 2018 and 2019 78 Estimated 2019 pilotage expenses Estimated change in pilotage costs between 2019 and 2020 Estimated 2020 pilotage expenses Estimated change in pilotage expenses from 2019 to 2020 (%) (%) (a) (b) (c) = (a) × (1 + (b)) (d) (e) = (c) × (1 + (d)) (f) = (e) ¥ (c) khammond on DSKJM1Z7X2PROD with RULES2 Small Entity A .......... $4,754 74 See 11 https://www.manta.com/. https://resource.referenceusa.com/. 76 The RFA (5 U.S.C. 601(3)) refers to the Small Business Act for the definition of a small business. The Small Business Act in turn allows the SBA Administrator to specify detailed definitions or standards by which a business may be determined to be small, under 15 U.S.C. 632(a)(2)(A). Under this authority, the SBA defines a small business at 13 CFR 121.105(a)(1), which states that, ‘‘Except for 75 See VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 $5,277 1 small agricultural cooperatives, a business concern eligible for assistance from SBA as a small business is a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.’’ Therefore, we do not include impact on foreign entities in our impact analysis under the RFA. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 $5,330 $53 77 See: https://www.sba.gov/document/support— table-size-standards. SBA has established a ‘‘Table of Size Standards’’ for small businesses that sets small business size standards by NAICS code. A size standard, which is usually stated in number of employees or average annual receipts (‘‘revenues’’), represents the largest size that a business (including its subsidiaries and affiliates) may be in order to remain classified as a small business for SBA and Federal contracting programs. E:\FR\FM\09APR2.SGM 09APR2 20119 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations TABLE 46—ESTIMATED 2020 PILOTAGE COSTS FOR SMALL ENTITIES—Continued Entity 2018 pilotage expenses Estimated change in pilotage costs between 2018 and 2019 78 Estimated 2019 pilotage expenses Estimated change in pilotage costs between 2019 and 2020 Estimated 2020 pilotage expenses Estimated change in pilotage expenses from 2019 to 2020 (%) (%) (a) (b) (c) = (a) × (1 + (b)) (d) (e) = (c) × (1 + (d)) (f) = (e) ¥ (c) Small Entity B .......... 148,389 11 khammond on DSKJM1Z7X2PROD with RULES2 In addition to the owners and operators discussed above, three U.S. entities that receive revenue from pilotage services will be affected by this final rule: The three pilot associations that provide and manage pilotage services within the Great Lakes districts. Two of the associations operate as partnerships, and one operates as a corporation. These associations are designated with the same NAICS code and small-entity size standards described above, but have fewer than 500 employees. Combined, they have approximately 65 employees in total and, therefore, are designated as small entities. The Coast Guard expects no adverse effect on these entities from this final rule because the three pilot associations will receive enough revenue to balance the projected expenses associated with the projected number of bridge hours (time on task) and pilots. Finally, the Coast Guard did not find any small not-for-profit organizations that are independently owned and operated and are not dominant in their fields that will be impacted by this rule. We did not find any small governmental jurisdictions with populations of fewer than 50,000 people that will be impacted by this rule. Based on this analysis, we conclude this rulemaking will not affect a substantial number of small entities, nor have a significant economic impact on any of the affected entities. Based on our analysis, this rule will have a less-than 1 percent annual impact on 2 small entities; therefore, the Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities. C. Assistance for Small Entities Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104– 121, we offer to assist small entities in understanding this rule so that they can better evaluate its effects on them and participate in the rulemaking. The Coast Guard will not retaliate against small 78 84 FR 20551, see table 37 VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 164,712 1 entities that question or complain about this rule or any policy or action of the Coast Guard. Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency’s responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1– 888–REG–FAIR (1–888–734–3247). D. Collection of Information This final rule calls for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520). This rule will not change the burden in the collection currently approved by OMB under OMB Control Number 1625–0086, Great Lakes Pilotage Methodology. E. Federalism A rule has implications for federalism under Executive Order 13132 (Federalism) if it has a substantial direct effect on States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under Executive Order 13132 and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132. Our analysis follows. Congress directed the Coast Guard to establish ‘‘rates and charges for pilotage services.’’ See 46 U.S.C. 9303(f). This regulation is issued pursuant to that statute and is preemptive of State law as specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a ‘‘State or political subdivision of a State may not regulate or impose any requirement on pilotage on the Great Lakes.’’ As a result, States or local governments are expressly prohibited from regulating within this category. Therefore, this final rule is consistent with the fundamental PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 166,359 1,647 federalism principles and preemption requirements described in Executive Order 13132. F. Unfunded Mandates The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531–1538, requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Although this rule will not result in such expenditure, we do discuss the effects of this rule elsewhere in this preamble. G. Taking of Private Property This rule will not cause a taking of private property or otherwise have taking implications under Executive Order 12630 (Governmental Actions and Interference with Constitutionally Protected Property Rights). H. Civil Justice Reform This rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988 (Civil Justice Reform) to minimize litigation, eliminate ambiguity, and reduce burden. I. Protection of Children We have analyzed this rule under Executive Order 13045 (Protection of Children from Environmental Health Risks and Safety Risks). This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children. J. Indian Tribal Governments This rule does not have tribal implications under Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments), because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. E:\FR\FM\09APR2.SGM 09APR2 20120 Federal Register / Vol. 85, No. 69 / Thursday, April 9, 2020 / Rules and Regulations 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. khammond on DSKJM1Z7X2PROD with RULES2 L. Technical Standards The National Technology Transfer and Advancement Act, codified as a note to 15 U.S.C. 272, directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through OMB, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies. This rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards. M. Environment We have analyzed this rule under Department of Homeland Security Management Directive 023–01, Rev. 1, associated implementing instructions, and Environmental Planning COMDTINST 5090.1 (series), which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321–4370f), and have made a determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. A Record of Environmental Consideration (REC) supporting this determination is available in the docket. For instructions on locating the docket, see the ADDRESSES portion of this preamble. This rule is categorically excluded under paragraphs A3 and L54 of Appendix A, Table 1 of DHS Instruction Manual 023–01, Rev. 1.79 Paragraph A3 pertains to the promulgation of rules, issuance of rulings or interpretations, 79 https://www.dhs.gov/sites/default/files/ publications/DHS_InstructionManual023-01-00101Rev01_508compliantversion.pdf. VerDate Sep<11>2014 17:14 Apr 08, 2020 Jkt 250001 and the development and publication of policies, orders, directives, notices, procedures, manuals, advisory circulars, and other guidance documents of the following nature: (a) Those of a strictly administrative or procedural nature; (b) those that implement, without substantive change, statutory or regulatory requirements; or (c) those that implement, without substantive change, procedures, manuals, and other guidance documents; and d) those that interpret or amend an existing regulation without changing its environmental effect. Paragraph L54 pertains to regulations which are editorial or procedural. This rule involves: (1) Clarifying the rules related to the working capital fund, (2) adjusting the base pilotage rates, and (3) eliminating surcharges for administering the 2020 shipping season in accordance with applicable statutory and regulatory mandates pursuant to the Great Lakes Pilotage Act of 1960. List of Subjects 46 CFR Part 401 Administrative practice and procedure, Great Lakes; Navigation (water), Penalties, Reporting and recordkeeping requirements, Seamen 46 CFR Part 403 Great Lakes, Navigation (water), Reporting and recordkeeping requirements, Seamen, Uniform System of Accounts 46 CFR Part 404 Great Lakes, Navigation (water), Seamen. For the reasons discussed in the preamble, the Coast Guard amends 46 CFR parts 401, 403, and 404 as follows: PART 401—GREAT LAKES PILOTAGE REGULATIONS 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. Amend § 401.405 by revising paragraph (a) to read as follows: (5) Lakes Huron, Michigan, and Superior is $337; and (6) The St. Mary’s River is $632. * * * * * PART 403—GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM 3. The authority citation for part 403 continues to read as follows: ■ Authority: 46 U.S.C. 2103, 2104(a), 9303, 9304; Department of Homeland Security Delegation No. 0170.1(II)(92.a), (92.f). 4. Amend § 403.110 by: a. Designating the text as paragraph (a); and ■ b. Adding paragraph (b). The addition reads as follows: ■ ■ § 403.110 Accounting entities. * * * * * (b) Each Association will maintain a separate account called the ‘‘Working Capital Fund.’’ Each Association will deposit into the working capital fund an amount each year at least equal to the amount calculated in Step 5, 46 CFR 404.105. Working capital funds may only be used for infrastructure improvements and infrastructure maintenance necessary to provide safe, efficient, and reliable pilot service such as pilot boat replacements, major repairs to pilot boats, non-recurring technology purchases necessary for providing pilot services, or for the acquisition of real property for use as a dispatch center, office space, or pilot lodging. The Director may grant exceptions to the requirements of this paragraph (403.110(b)) upon request by an Association. PART 404—GREAT LAKES PILOTAGE RATEMAKING 5. The authority citation for part 404 continues to read as follows: ■ Authority: 46 U.S.C. 2103, 2104(a), 9303, 9304; Department of Homeland Security Delegation No. 0170.1(II)(92.a), (92.f). § 404.106 [Amended] ■ § 401.405 Pilotage rates and charges. (a) The hourly rate for pilotage service on— (1) The St. Lawrence River is $758; (2) Lake Ontario is $463; (3) Lake Erie is $586; (4) The navigable waters from Southeast Shoal to Port Huron, MI is $618; PO 00000 Frm 00034 Fmt 4701 Sfmt 9990 6. Amend § 404.106 by removing the words ‘‘return on investment’’ and adding their place ‘‘working capital fund’’. ■ Dated: March 30, 2020. R.V. Timme, Rear Admiral, U.S. Coast Guard, Assistant Commandant for Prevention Policy. [FR Doc. 2020–06968 Filed 4–8–20; 8:45 am] BILLING CODE 9110–04–P E:\FR\FM\09APR2.SGM 09APR2

Agencies

[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Rules and Regulations]
[Pages 20088-20120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06968]



[[Page 20087]]

Vol. 85

Thursday,

No. 69

April 9, 2020

Part III





 Department of Homeland Security





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





 Coast Guard





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





46 CFR Parts 401, 403 and 404





 Great Lakes Pilotage Rates--2020 Annual Review and Revisions to 
Methodology; Final Rule

Federal Register / Vol. 85 , No. 69 / Thursday, April 9, 2020 / Rules 
and Regulations

[[Page 20088]]


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

DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2019-0736]
RIN 1625-AC56


Great Lakes Pilotage Rates--2020 Annual Review and Revisions to 
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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

SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the 
Coast Guard is establishing new base pilotage rates for the 2020 
shipping season. This final rule will adjust the pilotage rates to 
account for changes in district operating expenses, an increase in the 
number of pilots, and anticipated inflation. The Coast Guard estimates 
that this final rule will result in a 1 percent net increase in 
pilotage costs, compared to the 2019 season. In addition, the Coast 
Guard is clarifying the rules related to the working capital fund.

DATES: This final rule is effective May 11, 2020.

ADDRESSES: To view documents mentioned in this preamble as being 
available in the docket, go to https://www.regulations.gov, type USCG-
2019-0736 in the ``SEARCH'' box and click ``SEARCH.'' Click on Open 
Docket Folder on the line associated with this rule.

FOR FURTHER INFORMATION CONTACT: For information about this document, 
call or email Mr. Brian Rogers, Commandant (CG-WWM-2), Coast Guard; 
telephone 202-372-1535, email [email protected], or fax 202-372-
1914.

SUPPLEMENTARY INFORMATION: 

Table of Contents for Preamble

I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Methodological and Other Changes
VI. Discussion of Comments
VII. Discussion of Rate Adjustments
    District One
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Two
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Three
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    K. Surcharges
VIII. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Abbreviations

AMOU American Maritime Officers Union
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
ECI Employment Cost Index
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
FOMC Federal Open Market Committee
FR Federal Register
GAO Government Accountability Office
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
GLPO U.S. Coast Guard Great Lakes Pilotage Office
IRS Internal Revenue Service
JTR Joint Travel Rates
LPA Lakes Pilots Association
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
RA Regulatory analysis
REC Record of Environmental Consideration
RFA Regulatory Flexibility Act
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
SLSPA Saint Lawrence Seaway Pilots' Association
U.S.C. United States Code
USD United States dollars
WLPA Western Great Lakes Pilot Association

II. Executive Summary

    Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\ 
the Coast Guard regulates pilotage for oceangoing vessels on the Great 
Lakes and St. Lawrence Seaway--including setting the rates for pilotage 
services and adjusting them on an annual basis. The rates, which 
currently range from $306 to $733 per pilot hour (depending on in which 
of the specific six areas pilotage service is provided), are paid by 
shippers to three U.S. pilot associations (each responsible for one of 
the three Districts). The three pilot associations, which are the 
exclusive U.S. source of registered pilots on the Great Lakes, use this 
revenue to cover operating expenses, maintain infrastructure, 
compensate working pilots, and train new pilots.
---------------------------------------------------------------------------

    \1\ Title 46 of the United States Code (U.S.C.) Chapter 93; 
Public Law 86-555, 74 Stat. 259, as amended.
---------------------------------------------------------------------------

    To compute the rate for pilotage services, we use a ratemaking 
methodology that we have developed since 2016, in accordance with our 
statutory requirements and regulations. Our ratemaking methodology 
calculates the revenue needed for each pilotage association (operating 
expenses, an increase in the number of pilots, and anticipated 
inflation), and then divides that amount by the expected shipping 
traffic over the course of the coming year, to produce an hourly rate. 
This process is currently effected through a 10-step methodology, which 
is explained in detail in section IV of the preamble to this final 
rule.
    In this final rule, as part of our annual review, we are 
establishing new pilotage rates for 2020 based on the existing 
ratemaking methodology. The result is an increase in rates for five 
areas and a decrease in the rate for the one remaining area. These 
changes are due

[[Page 20089]]

to a combination of four factors: (1) An increase in total operating 
expenses for the associations compared to the previous year,\2\ (2) an 
increase in the amount of money needed for the working capital fund, 
(3) inflation of pilot compensation by 2 percent, and (4) the net 
addition of one working pilot at the beginning of the 2020 shipping 
season in District Two. In addition, in this final rule, the Coast 
Guard made two adjustments to the operating expenses based on public 
comment, which increased the final rates from those published in the 
notice of proposed rulemaking (NPRM). In the final rule we adjusted the 
operating expenses to include the 3 percent shared council fee which we 
incorrectly deducted in the NPRM; and added a surcharge adjustment for 
District 2 and District 3 to account for the differences between their 
accrued training expenses and the amount of money they collected via 
the surcharge in 2017. Based on the ratemaking model discussed in this 
final rule, we are finalizing the rates shown in table 1.
---------------------------------------------------------------------------

    \2\ Operating expenses decreased for the District One: 
Undesignated area, the District Two: Undesignated area, and the 
District Three: Undesignated Lake Superior area. Operating expenses 
increased for the District One: Designated area, the District Two: 
Designated area, the District Three: Designated area, and the 
District Three: Undesignated Lakes Huron and Michigan area.

                           Table 1--Current and New Pilotage Rates on the Great Lakes
----------------------------------------------------------------------------------------------------------------
                                                                   Final 2019     Proposed 2020     Final 2020
                 Area                            Name             pilotage rate   pilotage rate    pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated.............  St. Lawrence River......            $733             $757            $758
District One: Undesignated...........  Lake Ontario............             493              462             463
District Two: Designated.............  Navigable waters from                603              602             618
                                        Southeast Shoal to Port
                                        Huron, MI.
District Two: Undesignated...........  Lake Erie...............             531              573             586
District Three: Designated...........  St. Mary's River........             594              621             632
District Three: Undesignated.........  Lakes Huron, Michigan,               306              327             337
                                        and Superior.
----------------------------------------------------------------------------------------------------------------

    This final rule will impact 52 U.S. Great Lakes pilots, the 3 pilot 
associations, and the owners and operators of an average of 266 
oceangoing vessels that transit the Great Lakes annually. This final 
rule is not economically significant under Executive Order 12866 and 
will not affect the Coast Guard's budget or increase Federal spending. 
The estimated overall annual regulatory economic impact of this rate 
change is a net increase of $279,845, which is a 1 percent net increase 
in estimated payments made by shippers from the 2019 shipping season. 
Because the Coast Guard must review, and, if necessary, adjust rates 
each year, we analyze these as single-year costs and do not annualize 
them over 10 years. Section VIII of this preamble provides the 
regulatory impact analyses of this final rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960 (``the Act''),\3\ which requires foreign vessels and U.S. 
vessels operating ``on register,'' meaning those U.S. vessels engaged 
in foreign trade to use U.S. or Canadian registered pilots while 
transiting the U.S. waters of the St. Lawrence Seaway and the Great 
Lakes system.\4\ For the U.S. registered Great Lakes pilots 
(``pilots''), the Act requires the Secretary to ``prescribe by 
regulation rates and charges for pilotage services, giving 
consideration to the public interest and the costs of providing the 
services.'' \5\ The Act requires that rates be established or reviewed 
and adjusted each year, no later than March 1.\6\ The Act requires that 
base rates be established by a full ratemaking at least once every 5 
years, and in years when base rates are not established, they must be 
reviewed and, if necessary, adjusted.\7\ The Secretary's duties and 
authority under the Act have been delegated to the Coast Guard.\8\
---------------------------------------------------------------------------

    \3\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as 
amended.
    \4\ 46 U.S.C. 9302(a)(1).
    \5\ 46 U.S.C. 9303(f).
    \6\ Ibid.
    \7\ Ibid.
    \8\ Department of Homeland Security (DHS) Delegation No. 0170.1, 
para. II (92.f).
---------------------------------------------------------------------------

    This final rule establishes new pilotage rates for the 2020 
shipping season. The Coast Guard believes that the new rates will 
continue to promote pilot retention, ensure safe, efficient, and 
reliable pilotage services on the Great Lakes, and provide adequate 
funds to upgrade and maintain infrastructure.

IV. Background

    Pursuant to the Act, the Coast Guard, in conjunction with the 
Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping 
practices and rates on the Great Lakes and the St. Lawrence Seaway. 
Under Coast Guard regulations, all vessels engaged in foreign trade 
(often referred to as ``salties'') are required to engage U.S. or 
Canadian pilots during their transit through the regulated waters.\9\ 
U.S. and Canadian ``lakers,'' which account for most commercial 
shipping on the Great Lakes, are not affected.\10\ Generally, vessels 
are assigned a U.S. or Canadian pilot depending on the order in which 
they transit a particular area of the Great Lakes, and do not choose 
the pilot they receive. If a vessel is assigned a U.S. pilot, that 
pilot will be assigned by the pilotage association responsible for the 
particular district in which the vessel is operating, and the vessel 
operator will pay the pilotage association for the pilotage services. 
The Canadian GLPA establishes the rates for Canadian registered pilots.
---------------------------------------------------------------------------

    \9\ See title 46 of the Code of Federal Regulations (CFR) part 
401.
    \10\ 46 U.S.C. 9302(f). A ``laker'' is a commercial cargo vessel 
especially designed for and generally limited to use on the Great 
Lakes.
---------------------------------------------------------------------------

    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are 
divided into three pilotage districts. Pilotage in each district is 
provided by an association certified by the Coast Guard's Director of 
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool. 
The Saint Lawrence Seaway Pilotage Association provides pilotage 
services in District One, which includes all U.S. waters of the St. 
Lawrence River and Lake Ontario. The Lakes Pilotage Association 
provides pilotage services in District Two, which includes all U.S. 
waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. 
Clair River. Finally, the Western Great Lakes Pilotage Association 
provides pilotage services in District Three, which includes all U.S. 
waters of the St. Mary's River; Sault Ste. Marie Locks; and Lakes 
Huron, Michigan, and Superior.
    Each pilotage district is further divided into ``designated'' and

[[Page 20090]]

``undesignated'' areas, which is depicted in table 2 below. Designated 
areas, classified as such by Presidential Proclamation, are waters in 
which pilots must, at all times, be fully engaged in the navigation of 
vessels in their charge.\11\ Undesignated areas, on the other hand, are 
open bodies of water not subject to the same pilotage requirements. 
While working in undesignated areas, pilots must ``be on board and 
available to direct the navigation of the vessel at the discretion of 
and subject to the customary authority of the master.'' \12\ For these 
reasons, pilotage rates in designated areas can be significantly higher 
than those in undesignated areas.
---------------------------------------------------------------------------

    \11\ Presidential Proclamation 3385, Designation of restricted 
waters under the Great Lakes Pilotage Act of 1960, December 22, 
1960. 25 FR 13681 (December 24, 1960).
    \12\ 46 U.S.C. 9302(a)(1)(B).
    \13\ Area 3 is the Welland Canal, which is serviced exclusively 
by the Canadian GLPA and, accordingly, is not included in the United 
States pilotage rate structure.
    \14\ The areas are listed by name, see 46 CFR 401.405.

                            Table 2--Areas of the Great Lakes and St. Lawrence Seaway
----------------------------------------------------------------------------------------------------------------
       District          Pilotage association         Designation         Area No.\13\        Area name \14\
----------------------------------------------------------------------------------------------------------------
One..................  Saint Lawrence Seaway    Designated.............               1  St. Lawrence River.
                        Pilotage Association.   Undesignated...........               2  Lake Ontario.
Two..................  Lake Pilotage            Designated.............               5  Navigable waters from
                        Association.                                                      Southeast Shoal to
                                                                                          Port Huron, MI.
                                                Undesignated...........               4  Lake Erie.
Three................  Western Great Lakes      Designated.............               7  St. Mary's River.
                        Pilotage Association.   Undesignated...........               6  Lakes Huron and
                                                Undesignated...........               8   Michigan.
                                                                                         Lake Superior.
----------------------------------------------------------------------------------------------------------------

    Each pilot association is an independent business and is the sole 
provider of pilotage services in the district in which it operates. 
Each pilot association is responsible for funding its own operating 
expenses, maintaining infrastructure, acquiring and implementing 
technological advances, training personnel or partners, and pilot 
compensation. Through a public rulemaking procedure, and with input 
from Great Lakes Pilots Advisory Committee (GLPAC), the Coast Guard 
developed a 10-step ratemaking methodology, based on a historic 10-year 
average of actual traffic, to derive a pilotage rate that covers these 
expenses. The methodology is designed to measure how much revenue each 
pilotage association would need to cover expenses and provide 
competitive compensation to working pilots. We then divide that amount 
by the historic 10-year average for pilotage demand, as estimated by 
using historic pilotage work hours. We recognize that, in years where 
traffic is above average, pilot associations will accrue more revenue 
than projected, while in years where traffic is below average, they 
will take in less. We believe that over the long term, however, this 
system ensures that infrastructure will be maintained and that pilots 
will receive adequate compensation and work a reasonable number of 
hours, with adequate rest between assignments to ensure retention of 
highly trained personnel.
    Over the past 4 years, the Coast Guard made several adjustments to 
the Great Lakes pilotage ratemaking methodology. In 2016, we made 
significant changes to the methodology, moving to an hourly billing 
rate for pilotage services and changing the compensation benchmark to a 
more transparent model. In 2017, we added additional steps to the 
ratemaking methodology, including new steps that better account for the 
additional revenue produced by the application of weighting factors 
(discussed in detail in Steps 7 through 9 below, in this section of the 
preamble). In 2018, we revised the methodology by which we develop the 
compensation benchmark, based upon U.S. mariners rather than Canadian 
registered pilots. The current methodology, which was finalized in the 
Great Lakes Pilotage Rates--2019 Annual Review and Revisions to 
Methodology final rule (84 (FR 20551, May 10, 2019), is designed to 
accurately capture all of the costs and revenues associated with Great 
Lakes pilotage requirements and produce an hourly rate that adequately 
and accurately compensates pilots and covers expenses. The current 
methodology is summarized in the section below.

Summary of Ratemaking Methodology

    As stated above, the ratemaking methodology, outlined in 46 CFR 
404.101 through 404.110, consists of 10 steps that are designed to 
account for the revenues needed and total traffic expected in each 
district. The result is an hourly rate, determined separately for each 
of the areas administered by the Coast Guard.
    In Step 1, ``Recognize previous operating expenses,'' (Sec.  
404.101), the Director reviews audited operating expenses from each of 
the three pilotage associations. This number forms the baseline amount 
that each association is budgeted. Because of the time delay between 
when the association submits raw numbers and when the Coast Guard 
receives audited numbers, this number is 3 years behind the projected 
year of expenses. In calculating the 2020 rates in this proposal, the 
Coast Guard is beginning with the audited expenses from the 2017 
shipping season.
    While each pilotage association operates in an entire district, the 
Coast Guard determines costs by area. Thus, with regard to operating 
expenses, we allocate certain operating expenses to undesignated areas, 
and certain operating expenses to designated areas. In some cases 
(e.g., insurance for applicant pilots who operate in undesignated areas 
only), we can allocate the costs based on where they are actually 
accrued. In other situations (e.g., general legal expenses), expenses 
are distributed between designated and undesignated waters on a pro 
rata basis, based upon the proportion of income forecast from the 
respective portions of the district.
    In Step 2, ``Project operating expenses, adjusting for inflation or 
deflation,'' (Sec.  404.102), the Director develops the 2020 projected 
operating expenses. To do this, we apply inflation adjustors for 3 
years to the operating expense baseline received in Step 1. The 
inflation factors used are from the Bureau of Labor Statistics' (BLS) 
Consumer Price Index (CPI) for the Midwest Region, or, if not 
available, the Federal Open Market Committee (FOMC) median economic 
projections for Personal Consumption Expenditures (PCE) inflation. This 
step produces the total operating expenses for each area and district.

[[Page 20091]]

    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103), 
the Director calculates how many pilots are needed for each district. 
To do this, we employ a ``staffing model,'' described in Sec.  401.220, 
paragraphs (a)(1) through (a)(3), to estimate how many pilots would be 
needed to handle shipping during the beginning and close of the season. 
This number is helpful in providing guidance to the Director in 
approving an appropriate number of credentials for pilots.
    For the purpose of the ratemaking calculation, we determine the 
number of working pilots provided by the pilotage associations (see 
Sec.  404.103), which is what we use to determine how many pilots need 
to be compensated via the pilotage fees collected.
    In Step 4, ``Determine target pilot compensation benchmark,'' 
(Sec.  404.104), the Director determines the revenue needed for pilot 
compensation in each area and District. This step contains two 
processes. In previous years, in the first process, we calculated the 
total compensation for each pilot using a ``compensation benchmark.'' 
Next, we multiplied the individual pilot compensation by the number of 
working pilots for each area and district (from Step 3), producing a 
figure for total pilot compensation. Because pilots are paid by the 
associations, but the costs of pilotage is divided by area for 
accounting purposes, we assigned a certain number of pilots for the 
designated areas and a certain number of pilots for the undesignated 
areas to determine the revenues needed for each area. To make the 
determination of how many pilots to assign, we used the staffing model 
designed to determine the total number of pilots described in Step 3, 
above.
    In the past, as explained more fully below, the Coast Guard used 
two different benchmarks to calculate target pilot compensation: AMOU 
contract data and Canadian pilot compensation. The Coast Guard does not 
believe either benchmark is appropriate at this time. Instead, the 
Coast Guard has determined that the target compensation used in the 
2019 ratemaking is an appropriate level of compensation for Great Lakes 
pilots because it serves the public interest and achieves the Coast 
Guard's goals of safety through rate and compensation stability while 
also promoting recruitment and retention of qualified United States 
registered pilots.
    Prior to 2016, the Coast Guard based the compensation benchmark on 
data provided by the AMOU regarding its contract for first mates on the 
Great Lakes. However, in 2016 the AMOU elected to no longer provide 
this data to the Coast Guard, and thus, in the 2016 ratemaking (81 FR 
11907, March 7, 2016) we used average compensation for a Canadian pilot 
plus a 10-percent adjustment. As a result of a legal challenge filed by 
the shipping industry, the court found that the Coast Guard did not 
adequately support the 10-percent addition to the Canadian GLPA 
benchmark, and thus its use was deemed arbitrary and capricious. 
American Great Lakes Ports Association v. Zukunft, 296 F.Supp 3d 27, 
46-48 (D.D.C. 2017). The Coast Guard then based the 2018 benchmark on 
data provided by the AMOU regarding its contract for first mates on the 
Great Lakes in the 2011 to 2015 period, and adjusted it for inflation 
using FOMC median economic projections for PCE inflation. We used the 
information provided by the AMOU because it was the most recent 
publicly available information to which we had access.
    For the 2019 ratemaking, the Coast Guard did not have access to 
current AMOU contract data and our research did not yield a better 
compensation benchmark; therefore, target pilot compensation was 
determined by taking the 2018 number and adjusting it for inflation.
    For the 2020 ratemaking, the situation with regard to compensation 
benchmarks has not changed. The Coast Guard still lacks access to 
current AMOU contract data and, as discussed in prior rulemakings, the 
Coast Guard does not believe that other American or Canadian pilot 
compensation data is appropriate to use as a benchmark at this time. 
The Coast Guard, however, has determined that based on its experience 
over the past two ratemakings that the level of target pilot 
compensation for those years provides an appropriate level of 
compensation for American Great Lakes pilots. The Coast Guard 
therefore, will not, at this time, seek alternative benchmarks for 
target compensation and for 2020 and future ratemakings will instead 
simply adjust the amount of target pilot compensation for inflation. 
This benchmark successfully achieves the Coast Guard's goals of safety 
through rate and compensation stability while also promoting 
recruitment and retention of qualified United States registered pilots. 
Therefore, the Coast Guard uses this as the compensation benchmark for 
future rates.
    In the second process of Step 4, set forth in Sec.  404.104(c), the 
Director determines the total compensation figure for each District. To 
do this, the Director multiplies the compensation benchmark by the 
number of working pilots for each area and district (from Step 3), 
producing a figure for total pilot compensation.
    In Step 5, ``Project working capital fund,'' (Sec.  404.105), the 
Director calculates a value that is added to pay for future 
unidentified expenses. For example, these expenses can be unforeseen 
facility repairs, infrastructure purchases, technology procurements, or 
training. This value is calculated by adding the total operating 
expenses (derived in Step 2) to the total pilot compensation (derived 
in Step 4), and multiplying that figure by the preceding year's average 
annual rate of return for new issues of high-grade corporate securities 
using Moody's Seasoned Aaa Corporate Bond Yield data. This figure 
constitutes the ``working capital fund'' for each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106), the 
Director simply adds up the totals produced by the preceding steps. The 
projected operating expense for each area and district (from Step 2) is 
added to the total pilot compensation (from Step 4) and the working 
capital fund contribution (from Step 5). The total figure, calculated 
separately for each area and district, is the ``needed revenue.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107), the 
Director calculates an hourly pilotage rate to cover the needed revenue 
as calculated in Step 6. This step consists of first calculating the 
average hours of traffic over 10 years for each area. Next, the revenue 
needed in each area (calculated in Step 6) is divided by the average 
hours of traffic over 10 years to produce an initial base rate.
    An additional element, the ``weighting factor,'' is required under 
Sec.  401.400. Pursuant to that section, ships pay a multiple of the 
``base rate'' as calculated in Step 7 by a number ranging from 1.0 (for 
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest 
ships, or ``Class IV'' vessels). As this significantly increases the 
revenue collected, we account for the added revenue produced by the 
weighting factors to ensure that shippers are not overpaying for 
pilotage services.
    In Step 8, ``Calculate average weighting factors by Area,'' (Sec.  
404.108), the Director calculates how much extra revenue, as a 
percentage of total revenue, has historically been produced by the 
weighting factors in each area. We do this by using a historical 
average of the applied weighting factors for each year since 2014 (the 
first year the current weighting factors were applied).
    In Step 9, ``Calculate revised base rates,'' (Sec.  404.109), the 
Director modifies the base rates by accounting for the

[[Page 20092]]

extra revenue generated by the weighting factors. We do this by 
dividing the initial pilotage rate for each area (from Step 7) by the 
corresponding average weighting factor (from Step 8), to produce a 
revised rate.
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110), often 
referred to informally as ``Director's discretion,'' the Director 
reviews the revised base rates (from Step 9) to ensure that they meet 
the goals set forth in the Act and in 46 CFR 404.1(a), which include 
promoting efficient, safe, and reliable pilotage service on the Great 
Lakes; generating sufficient revenue for each pilotage association to 
reimburse necessary and reasonable operating expenses; compensating 
trained and rested pilots fairly; and providing appropriate profit for 
improvements. Because it is our goal to be as transparent as possible 
in our ratemaking procedure, we use this step sparingly to adjust 
rates.
    After the base rates are set, Sec.  401.401 permits the Coast Guard 
to apply surcharges. We previously used surcharges to pay for the 
training of new pilots, rather than incorporating training costs into 
the overall ``needed revenue'' used in the calculation of the base 
rates. The surcharge accelerates the reimbursement of certain necessary 
and reasonable expenses. Last year, we applied a surcharge to account 
for the associations' expenses for the Applicant Trainee and Apprentice 
Pilots, which included providing a stipend, lodging, training, 
transportation, and per diem. We implemented these surcharges for a few 
years because of a large number of pending pilot retirements, and a 
large amount of recruitment at the pilot associations. Without the 
surcharge, the associations would have been reimbursed for expenses 
associated with training new pilots 3 years later via the rate. 
However, any pilot who retired prior to that 3 year date would not have 
been reimbursed. Therefore, we applied a surcharge to facilitate the 
training of these replacements in last year's final rule. As the vast 
majority of registered pilots are not anticipated to reach the 
regulatory required retirement age of 70 in the next 20 years, we 
believe that pilot associations are now able to plan for the costs 
associated with retirements without relying on the Coast Guard to 
impose surcharges. Therefore, in this year's final rule we are not 
imposing surcharges.

V. Discussion of Methodological and Other Changes

    For 2020, the Coast Guard implemented no new methodological changes 
to the ratemaking model. We believe that the methodology laid out in 
the 2019 Annual Review (84 FR 20551) will produce rates for the 2020 
shipping season that will ensure safe, efficient, and reliable pilotage 
services are available on the Great Lakes in order to facilitate 
maritime commerce.
    In previous years and in this current rulemaking, several 
commenters have raised issues regarding the working capital fund.\15\ 
The purpose of the working capital fund is to ensure that associations 
have a way to set aside money to pay for high cost items and 
infrastructure improvements. The Coast Guard is making changes in this 
final rule to codify the procedures related to the use of funds and 
accounting requirements related to the working capital fund.
---------------------------------------------------------------------------

    \15\ See the dockets for the 2019 ratemaking (https://www.regulations.gov/docket?D=USCG-2018-0665) and the 2018 ratemaking 
(https://www.regulations.gov/docket?D=USCG-2017-0903) for more 
information.
---------------------------------------------------------------------------

    In this final rule, the Coast Guard is finalizing two changes to 
the regulatory text related to the working capital fund, formerly 
called ``return on investment.'' In 46 CFR 404.106, we are changing the 
words ``return on investment'' to ``working capital fund,'' as that is 
the current name for that fund. Prior to 2017, the working capital fund 
described in 46 CFR 404.105 was called ``return on investment.'' In the 
Great Lakes Pilotage Rates 2017 Annual Review final rule (82 FR 41466, 
August 31, 2017), the Coast Guard changed the name of that fund to the 
``working capital fund,'' but the 2017 final rule did not change a 
reference to ``return on investment'' in 46 CFR 404.106. This change 
corrects that oversight, so both 46 CFR 404.105 and 46 CFR 404.106 will 
use consistent terminology.
    In addition, the Coast Guard is incorporating into regulations the 
industry practice currently followed by the pilots associations 
regarding these funds. We are adding text to 46 CFR 403.110 requiring 
each pilot association set aside, in a separate account, an amount at 
least equal to the amount calculated in Step 5 of the ratemaking, and 
place restrictions on how those funds are expended. Under the final 
rule, pilot associations can only apply the funds in the working 
capital fund account to capital projects, infrastructure improvements, 
infrastructure maintenance, training, and non-recurring technology 
purchases that are necessary for providing pilotage services. The pilot 
associations may grow the working capital fund over successive shipping 
seasons for a future significant purchase, including for a down payment 
on a purchase that would also be financed in part. If needed, pilot 
associations could request a waiver from the requirements from the 
Director.

VI. Discussion of Comments

    In response to the October 30, 2019 NPRM (84 FR 58099), the Coast 
Guard received six comment letters as well as a duplicate comment 
submission. These included one comment from the law firm K&L Gates 
(hereinafter ``District Lawyers''), which represents the interests of 
the three Great Lake pilot associations; a comment from the Shipping 
Federation of Canada, the American Great Lakes Ports Association, and 
the United States Great Lakes Shipping Association (hereinafter ``the 
User's Coalition'' or ``the Coalition''); a comment from the president 
of the St. Lawrence Seaway Pilots' Association (hereinafter ``SLSPA''); 
a comment from the president of the Lakes Pilots Association 
(hereinafter ``LPA''); a comment from the president of the Western 
Great Lakes Pilot Association (hereinafter ``WLPA''); and a comment 
made by Captain John Swartout, a pilot working for District Three. As 
each of these commenters touched on numerous issues, for each response 
below we note which commenters raised the specific points addressed. In 
situations where multiple commenters raised similar issues, we attempt 
to provide one response to those issues.

A. Operating Expenses

    The first step of the ratemaking process outlines the criteria for 
evaluating operating expenses. Each expense must be necessary for 
providing pilotage service and reasonable in amount. The allowable 
operating expenses must comply with both criteria to recoup any costs 
for a given pilotage association. To do so, pilotage associations 
submit financial statements to third party auditors contracted by the 
Coast Guard. The third party auditors create financial reports for the 
Coast Guard to determine the allowable operating expenses. We use these 
expenses to establish pilotage rates. We received several comments, 
discussed below, from pilot associations and persons representing such 
interests requesting changes to these adjustments.
1. Legal Fees
    Commenters from pilots' associations and shipping and port 
interests addressed legal fees and, in particular, the 2016 rulemaking 
concerning the exclusion of legal expenses for suits against the U.S. 
government or its agents, and the subsequent case contesting that 
exclusion.

[[Page 20093]]

    Two commenters contended that prior years' legal fees were 
improperly denied, and referred to St. Lawrence Seaway Pilots 
Association v. U. S. Coast Guard, 357 F.Supp 3d 30 (D.D.C. 2019). In 
that case, the court held that the Coast Guard improperly promulgated 
46 CFR 404.2(b)(6) in the 2016 rulemaking that excluded any and all 
expenses associated with legal action against the U.S. government or 
its agents.
    The Coast Guard disagrees with the commenters. In that case, the 
court went to great lengths to discuss the remedy for the pilots 
associations, and noted concerns about rates that were already paid. 
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 
3d 30, 38 (D.D.C. 2019), citing Am. Great Lakes Ports Ass'n v. Zukunft, 
301 F.Supp.3d 99, 103-04 (D.D.C. 2018) (noting disruptive effect of 
upending already-paid pilotage rates) and St. Lawrence Seaway Pilots 
Ass'n, 85 F.Supp.3d, 197, 208 (D.D.C. 2015) (noting remedial difficulty 
of ordering pilots' entitlement to future payments and recognizing that 
remedial decision regarding 2014 rates likely impacts the propriety and 
validity of the 2015 rates).
    The court held the following: ``At the hearing, Plaintiffs 
clarified they seek a vacatur of 46 CFR 404.2(b)(6) to prevent the 
Coast Guard from excluding legal fees in future rate settings, and do 
not seek to disturb any past rates. See Hr'g Tr. 12:7-13:3. With the 
benefit of this clarification, the remedial decision is simple: Vacatur 
is the presumptive remedy for arbitrary and capricious agency action, 
see 5 U.S.C. 706(2) (A court shall ``set aside agency action . . . 
found to be . . . arbitrary [and] capricious''), and there is no risk 
of disruption. The Court will therefore vacate 46 CFR 404.2(b)(6).'' 
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp 
3d 30, 38 (D.D.C. 2019).
    The court's holding was prospective, not retroactive, based upon 
the clarification of the Pilots Association at the hearing on the 
matter. The regulation has been removed from the CFR, and the Coast 
Guard has not denied any legal fees based on that vacated rule since 
the court's decision was handed down. The Coast Guard will not disturb 
past rate setting, in accordance with the court's ruling.
    One commenter stated that the Coast Guard had a meritorious 
position regarding the denial of legal fees against the U.S. government 
and suggested that a clarification of legal fees be included in the 
final rule. The Coast Guard presently takes no position on this 
comment. That part of the 2016 rule with respect to 46 CFR 404.2(b)(6) 
was vacated because it was a change in policy that was not effected in 
accordance with the Administrative Procedure Act's notice and comment 
requirements and the court found the Coast Guard's actions were 
arbitrary and capricious. The court in the 2019 case stated, ``The 
Court takes no position on the relative wisdom of the policy. A rule 
excluding legal fees incurred against the U.S. government may well be a 
rational policy. But the process by which the Coast Guard enacted it 
was arbitrary and capricious.'' St. Lawrence Seaway Pilots Association 
v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019). The Coast 
Guard did not include any language regarding legal fees in the final 
rule as there was nothing in the NPRM proposing any change. Any change 
in policy regarding future legal fees will be accomplished in 
accordance with the legally required notice and comment procedures in 
order for all parties to be heard on the matter.
2. Housing Allowances
    There were two comments regarding the housing allowance not being 
considered an operating expense. The first commenter stated that 
``[f]or the CG to determine that a mariner must live in the region 
where they work is unreasonable'' \16\, and that specifically in 
District Three there is a ``tour de role'' dispatch system to prevent a 
pilot from working all over the district. The same commenter stated 
that, in not allowing a housing allowance, ``we [the pilot association] 
would be very severely handicapped on recruiting new Pilots into our 
District. Forcing a Pilot to move his family will undoubtedly cause 
some potential applicants to decide not to pursue a career in our 
District.'' \17\ The Coast Guard disagrees with the first statement. 
Determining where to live is an individual's right and lifestyle 
decision. The Western Great Lakes Pilots association, the source of 
this comment, has multiple tours-de-role and holds meetings before the 
season. During these meetings, each registered pilot determines which 
port to work out of for the season. We expect the registered pilot to 
pay for housing during the season, which is consistent with Internal 
Revenue Service (IRS) regulations as discussed below. For example, if a 
registered pilot chooses to live in Virginia but elects to be 
dispatched out of Chicago for the season, the registered pilot will not 
be reimbursed for any housing in Chicago during the season because this 
dwelling is not a necessary expense for the shippers to reimburse. 
However, if the pilot is dispatched out of Port Huron, reasonable 
travel costs from Chicago and hotel bills in Port Huron may be 
considered for inclusion in the operating expenses. The shippers do not 
have to fund lifestyle choices. Additionally, the commenter did not 
provide any evidence or data to support the claim that not allowing a 
housing allowance will cause a recruitment and retention crisis.
---------------------------------------------------------------------------

    \16\ USCG-2019-0736-0002.
    \17\ Id.
---------------------------------------------------------------------------

    The same commenter also stated that the housing allowance provides 
a great savings to the industry and should be continued. Another 
commenter echoed this comment. ``In the interests of efficient 
pilotage, Districts 2 and 3 have found that it is often more cost 
effective for pilots to lease an apartment or other dwelling rather 
than paying for a hotel.'' \18\ The Coast Guard neither agrees nor 
disagrees with this comment, as the commenter provided no evidence to 
justify this claim. We suggest the commenter address this issue at a 
future GLPAC meeting and/or work with the stakeholders who pay for 
pilotage service to submit a joint letter for further consideration. In 
general, hotel bills should be 50 miles outside the pilot's tour-de-
role port for the season in order to be considered reasonable and 
necessary and implemented into the rate. This 50-mile radius is per the 
IRS.\19\
---------------------------------------------------------------------------

    \18\ USCG-2019-0736-0005.
    \19\ IRS Tax Topics, Topic No. 511 Business Travel Expenses, 
https://www.irs.gov/taxtopics/tc511. (last visited 2/28/2020 
Generally, your tax home is the entire city or general area where 
your main place of business or work is located, regardless of where 
you maintain your family home. For example, you live with your 
family in Chicago but work in Milwaukee where you stay in a hotel 
and eat in restaurants. You return to Chicago every weekend. You may 
not deduct any of your travel, meals or lodging in Milwaukee because 
that's your tax home. Your travel on weekends to your family home in 
Chicago isn't for your work, so these expenses are also not 
deductible. If you regularly work in more than one place, your tax 
home is the general area where your main place of business or work 
is located.
---------------------------------------------------------------------------

B. Target Compensation

    We received several comments on the Coast Guard's use of the 
Federal Reserve's projected Personal Consumption Expenditure (PCE) data 
in Step 4 of the ratemaking, as opposed to using historic Bureau of 
Labor Statics (BLS) Employment Cost Index (ECI) data. In Step 4, we 
adjust the existing target pilot compensation to account for inflation, 
following the procedures outlined in Sec.  404.104(b), which require 
that PCE data only be used when ECI data is not available. In this 
ratemaking, we are inflating the 2019 pilot compensation to 2020 
dollars, which

[[Page 20094]]

requires forecasted inflation data for 2020. The BLS ECI only provides 
historic data. Consequently, no 2020 ECI data was available at the time 
we conducted the analysis to support this rulemaking, and no 2020 ECI 
data will be available until April 30th 2020, which is after the 2020 
shipping season begins. Therefore, we used the PCE data, in accordance 
with Sec.  404.104(b), as the PCE provides estimates of inflation for 
2020. As noted by commenters, for the past several years, the PCE 
inflation value has been about 1 percent lower than the ECI value, 
resulting in a lower target compensation value than if we had used the 
ECI value. Two commenters suggested that Coast Guard should use the ECI 
to readjust previous target compensation values to account for the 
difference between the predicted PCE value and the actual ECI value 
that published. The commenters raised several concerns with the use of 
the PCE, which are discussed below.
    Several commenters noted that, while a full calendar year worth of 
ECI data was not available for 2019, at the time the NPRM was 
published, some 2019 data was available, and they said this data should 
have been used in the 2020 ratemaking.^{20 21 22} However, the 
commenters are missuderstanding the reason the Coast Guard uses the PCE 
data in the ratemaking instead of the most recent ECI data. The reason 
we did not use the ECI data is not because of a lack of a full year's 
worth of 2019 inflation data, but rather because the ECI did not have 
any 2020 inflation data available.
---------------------------------------------------------------------------

    \20\ USCG-2019-0736-0003 p. 3.
    \21\ USCG-2019-0736-0002 p. 5.
    \22\ USCG-2019-0736-0002 p. 5.
---------------------------------------------------------------------------

    Another commenter stated that, while the PCE index is published 
more frequently than the ECI, this does not make it a better inflation 
index. The commenter also stated that data which ``measure the wrong 
metrics'' should not be used just because it is newer.\23\ The Coast 
Guard disagrees with both points made by the commenter. We are using 
the PCE because it provides an estimate of forecasted 2020 inflation 
data. Using the most recent ECI data does not address the issue that 
the ECI does not provide an estimate of forecasted inflation, and as 
part of the ratemaking process under steps 2 and 4, the Coast Guard 
requires an estimate of future inflation. Again, we are not using the 
PCE because it is published more frequently than the ECI, but, rather, 
because it provides necessary information that the ECI does not.
---------------------------------------------------------------------------

    \23\ USCG-2019-0736-0006, p.2.
---------------------------------------------------------------------------

    Two commenters stated that they believe the ECI is more appropriate 
to use to inflate pilot compensation than the PCE, because ``[the ECI] 
is based on wage and benefit costs, rather than general goods and 
prices,'' \24\ and noted that the Coast Guard has previously 
acknowledged this point in the 2018 ratemaking rule (83 FR 26162).\25\ 
\26\ The Coast Guard agrees that the ECI is a better index to use to 
inflate pilot compensation, which is why Sec.  404.104(b) requires that 
PCE data be used only when ECI data is unavailable. It is also 
important to note that the statement in the 2018 ratemaking discussed 
differences between the ECI and the CPI,\27\ not the ECI and the PCE, 
as stated by the commenter. The statement quoted by the commenter does 
not accurately reflect the components of the PCE which differ from the 
CPI, and include the cost of employer provided health insurance.\28\
---------------------------------------------------------------------------

    \24\ USCG-2019-0736-0005, p. 3.
    \25\ USCG-2019-0736-0005, p. 3.
    \26\ USCG-2019-0736-0003, p. 2.
    \27\ As stated in the 2018 Final Ratemaking (83 FR 26162 at 
26171), ``[The Coast Guard] agree[s] with the commenters that, for 
the purposes of inflating compensation costs, the ECI provides a 
better gauge of compensation inflation than the CPI does''.
    \28\ https://www.bls.gov/opub/btn/archive/differences-between-the-consumer-price-index-and-the-personal-consumption-expenditures-price-index.pdf, page 2.
---------------------------------------------------------------------------

    One commenter stated that they believe the use of the ``2019 ECI 
data to project 2020 [pilot compensation data] would be more accurate 
than using improperly low PCE data.'' The commenter provided no 
reasoning for why they believe historic ECI data is a better predictor 
of future inflation than the forecasted PCE data, nor did they provide 
any reasoning as to why only one year of historic data should be used. 
The forecasted PCE inflation data is generated by the Federal Reserve, 
which is responsible for setting monetary policy in the United States, 
and thus influencing inflation. The Federal Reserve bases these 
estimates on predictions of economic growth, the unemployment rate, 
other economic data, and the future policy path the Federal Reserve 
expects to take to meet its goals of maximizing employment and setting 
stable prices. The PCE is a reflection of the government's best 
prediction of what will happen, whereas the ECI is a reflection of what 
has already happened.
    As stated above, the Coast Guard is using the best available data, 
the PCE data to inflate target pilot compensation, as required by Sec.  
404.104(b), and is not changing how target pilot compensation is 
calculated for this final rule. However, we will review this issue, and 
if we determine that any changes are needed, we will propose them as 
part of a future rulemaking.
1. Inflation Calculation
    One commenter stated they believe pilot compensation is 
significantly below the market rate when compared with the salaries of 
other pilots across the United States. The commenter also discussed a 
multi-year compensation study the Coast Guard mentioned in the 2018 
rule, and that the 2020 NPRM makes no mention of this study. The 
commenter stated that, as this study continues, the pilots are 
continually being undercompensated.
    While the Coast Guard commissioned a study to analyze methodologies 
to determine pilot compensation, we decided not to finalize this study. 
The compensation study was a backup in the event that we failed to 
identify a compensation standard that remedied the recruitment and 
retention issues identified in previous rulemakings, and discussed 
during previous GLPAC meetings. The current compensation benchmark 
addresses our goals of promoting the recruitment and retention of 
highly qualified mariners and experienced U.S. registered pilots. 
Therefore, completion of this compensation study is no longer 
necessary.
2. Staffing Model
    The LPA, District Lawyers, and the SLSPA made comments regarding 
the staffing model and the fact that each District needs to have one 
pilot added to the staffing model to account for the president of the 
association's workload. Since 2016, when Coast Guard developed this 
staffing model, the duties and responsibilities of the pilot 
association presidents have expanded. For example, we expect the pilot 
president to attend numerous meetings and conferences throughout the 
year, provide additional financial and traffic information to increase 
transparency and accountability, oversee and ensure the integrity of 
the association training program, evaluate technology, and coordinate 
with the American Pilots Association (APA) to implement and share best 
practices. The Coast Guard agrees that if a pilot association president 
is spending half or more of their time on administrative issues that 
the staffing model should account for that time. Therefore, we will 
review this issue and any data supporting the amount of time the 
association presidents spend on administrative issues and tasks. If we 
determine that any changes should be made to the

[[Page 20095]]

staffing model, we will propose them as part of a future rulemaking.

C. Target Pilot Compensation

    The User's Coalition made several comments in regards to this step. 
They commented that ``Since at least 2015, the GLPO's ratemaking 
activities have repeatedly yielded revenues far above the target 
revenues fixed as representing a level necessary to cover pilot 
compensation and other recognized expense items.'' The Coast Guard 
disagrees with this statement. The only way for the associations to 
generate additional revenue is from the increase in ship traffic going 
through the system. Although the Coast Guard has seen increased traffic 
volumes over what was estimated in recent years, this is due to the 
Canadian domestic fleet using U.S. pilots, demand for global 
commodities (steel and grain), tankers shipping petroleum products, 
cruise ships, and winter demand (ordering pilots while the locks are 
closed for maintenance) on Lake Erie, Lake Huron, and Lake Michigan. 
The Coast Guard has no control or influence over any of the 
aforementioned activities. The variables in global commodities are 
complex and difficult to predict. Supply of many commodities can be 
forecasted from the analysis of data, but data regarding consumption is 
much more difficult to estimate. Some countries carefully guard 
commodities produced and stored within their borders, making certain 
market predictions even harder. Civil unrest and government sanctions 
can cause huge swings in the commodities markets. The use of the 10-
year average may cause the average to lag short-term trends, but it 
reduces fluctuations in predicted traffic levels and results in a more 
stable rate on a year-to-year basis. This helps the associations and 
the shippers plan for upcoming years while reducing variables. The 
Coast Guard welcomes any validated information the commenter can 
provide as to the exact amount of pilotage demand each year, as well as 
the number of vessels that will be transporting commodities and needing 
pilotage service, along with the recent demand for pilots in the cruise 
industry.
    The User's Coalition also made a comment regarding the figure for 
target pilot compensation, and stated that the 2019 compensation number 
was ``adopted'' and used as a benchmark. The Coast Guard used the 2019 
number because it was clear that this number has had the desired effect 
of promoting recruitment of highly qualified mariners and retention of 
experienced U.S. registered pilots.
    The Coalition also commented that this is the third year in which 
the U.S. Coast Guard Great Lakes Pilotage Office (GLPO) has set a 
benchmark compensation figure for Great Lakes pilots by reference to 
available data concerning the compensation of U.S. first mates subject 
to negotiated contracts between vessel owners and the AMOU. The Coast 
Guard disagrees with this statement. As explained above in Summary of 
Ratemaking Methodology, Step 4, the Coast Guard does not have access to 
information from the AMOU contract. In 2018, the best available 
information that we had was the pre-2016 contract data and that was 
adjusted for inflation.Target compensation for the 2020 rate is not 
being calculated with regard to 2020 union contract data. We are using 
the 2019 figure as a base because we believe that this is the proper 
target compensation benchmark for Great Lakes pilots. This compensation 
benchmark enables the Coast Guard to meet its statutory requirement to 
set pilotage rates giving consideration to the public interest and the 
costs of providing pilotage services. We are ensuring the provision of 
safe, reliable, and efficient pilotage services by correcting the 
recruitment and retention issues discussed in previous rulemakings 
without increasing the costs of pilotage services to an unreasonable 
level.

D. Initial Base Rates

    One commenter stated that, for several years, the Coast Guard's use 
of a 10-year average severely understates likely upcoming bridge hours 
because of low traffic volumes in the period of depressed international 
economic activity caused by the economic recession in 2008-12.
    The Coast Guard disagrees that the 10-year average should not be 
used. We believe that the 10-year average in is the public interest, 
because this approach provides rate stability. These stable and 
predictable rates allows shippers and pilots to forecast revenues. In 
Step 7 of the ratemaking methodology, the Coast Guard calculates an 
hourly pilotage rate to generate the revenue needed by each district. 
This step requires an estimate of the expected hours of traffic. To 
derive this estimate, the Coast Guard takes the average of the previous 
10 years of traffic in each area on the Great Lakes. The use of the 
historical traffic figure was unanimously recommended by the GLPAC in 
2014, and we believe that it is the best tool to estimate traffic. 
While in recent years, high levels of traffic have been greater than 
the historical average, we also note that in some years the level of 
traffic has been lower than average. The use of the 10-year average may 
cause the average to lag short-term trends, but it reduces fluctuations 
in predicted traffic levels and results in a more stable rate on a 
year-to-year basis. No commenter has suggested a different time period 
for calculating the historical average that would produce better 
predictions or prevent wildly fluctuating rates. While we are open to 
suggestions as to how to better predict total traffic, we would 
encourage the commenters to raise these suggestions at the GLPAC, as we 
are currently continuing to follow its recommendation on this subject.
    The User's Coalition suggested that, to minimize the inflation 
effect on hourly rates that is caused by use of inaccurate bridge hour 
projections, the Coast Guard either base its projections on the most 
recent previous year actuals, or derive projections by collecting 
upcoming year forecast data from affected stakeholders, including the 
Seaway Authority, U.S. and Canadian pilots, vessel operators, ports and 
terminals, shipping agents and other knowledgeable sources. The Coast 
Guard disagrees. Although we have seen increased traffic volumes over 
what was estimated in recent years, this is mainly due to the Canadian 
domestic fleet using U.S registered pilots. If the Coast Guard only 
used the previous year's numbers, there would be large annual 
variations in the rates, which would not be in the public's interest. 
We welcome any information or the suggested resources the commenter can 
provide as to the exact number of Canadian domestic vessels that will 
be using pilots each year, as well as the number of vessels that will 
be transporting commodities and requiring pilotage service. In 
addition, the Coast Guard has historically been unable to accurately 
forecast the international shipping trends that can be impacted by 
highly variable factors; e.g., global weather impacting the supply and 
demand for grain in the United States, Canada, and overseas, and the 
imposition or removal of tariffs on a global basis. This inability to 
accurately forecast demand led to the decision to rely on historical 
data instead. The User's Coalition has not proposed a specific source 
of forecasting the demand for pilotage services that would be 
consistently more accurate than using historical data.

E. Working Capital Fund

    There were three comments made by the User's Coalition, the SLSPA, 
and the District Lawyers regarding the working capital fund. The User's 
Coalition stated that this fund is misnamed, and that it

[[Page 20096]]

is a recognized expense. The Coast Guard disagrees with the statement 
that it is considered a recognized expense. The working capital fund is 
intended to provide the pilots associations with working capital for 
future expenses associated with capital improvements, technology 
investments, and future training needs, with the goal of eliminating 
the need for surcharges (as was accomplished this year). The fund is 
structured so that the pilots associations can demonstrate credit 
worthiness when seeking funds from a financial institution for needed 
infrastructure projects.
    Recognized expenses are those operating expenses that are deemed 
necessary and reasonable. The working capital fund is meant to provide 
the associations with capital that is in addition to the money needed 
to cover its standard operating expenses and pilot compensation. Its 
use is to fund infrastructure and technology improvement projects. 
Regarding the suggestion for renaming the working capital fund, the 
Coast Guard is willing to discuss an alternative name at a future GLPAC 
meeting.
    The District Lawyers commented that the fund improperly fails to 
include a return on investment. The Coast Guard disagrees with this 
statement. In 2016, we created this fund to provide credit worthiness 
for pilot associations to have access to capital that would enable them 
to provide safe, efficient, and reliable service. In previous years, 
the goal of the precursor of the working capital fund, named the 
``return on investment', was to provide a return to monies invested by 
the pilots in associations. The amount of the money invested (the 
investment base) by pilots was relatively small, and thus the return on 
that investment was small in absolute terms. However, when the Coast 
Guard recalibrated the return on investment (renamed the working 
capital fund) to be based on the total income of the associations, 
rather than simply the money invested in capital improvements (as was 
the case prior to 2016), the goal was to increase infrastructure 
spending by providing a more substantial pool of available funds. The 
goal of the working capital fund is not to provide a windfall for the 
associations, but to improve maritime safety. The working capital fund 
does this by supporting capital projects, infrastructure improvements 
and maintenance, non-recurring technology purchases, and training that 
is necessary for providing safe, efficient, and reliable pilotage. As 
with all other expenses, the funds applied must be reasonable in 
amount.
    The SLSPA commented that the working capital fund provides a basis 
to reinvest into the system or make up for minor shortfalls in revenue. 
The Coast Guard agrees in part. The working capital fund is a funding 
mechanism that allows for the associations to have cash on hand for 
future and/or unidentified expenses to improve pilotage service, and in 
some cases prevent delays that would occur from failing equipment, and 
for assets that are needed to continuously pilot vessels through the 
system. The Coast Guard disagrees that the working capital fund can 
make up for minor shortfalls in revenue. The fund cannot be used for 
the compensation of pilots during unexpected low traffic years.

F. Surcharge Offsets

    The Coast Guard received two comments regarding the amount of 
surcharges \29\ collected in 2017. The commenters stated that, because 
the 2017 rate did not take effect until October, the districts were 
only able to collect a small portion of the training surcharge approved 
for that year. The commenters requested that the difference between 
what was collected via the rate and the amount spent on training in 
2017 be accounted for in this rule as operating expenses--specifically 
that $174,087 be added to the operating expenses for District 2 and 
$291,72 be added to the operating expenses for District 3.
---------------------------------------------------------------------------

    \29\ Surcharge is money that is paid upfront by the shipper in 
addition to the rate in order to meet an immediate need for the 
pilots. When calculating the rate, Coast Guard uses the operating 
expenses from three years prior as one of the factors to determine 
how much the shippers will pay via the rate. The surcharge offset or 
adjustment is the money collected or not collected three years prior 
that is either taken out or added to the rate via the methodology.
---------------------------------------------------------------------------

    The Coast Guard agrees that the difference between the amount 
collected via the surcharge in 2017 and the amount spent on training in 
2017 needs to be included as an operating expenses. Therefore, we 
included a surcharge offset in the operating expenses for both 
Districts 2 and 3 in this final rule. Specifically, in 2017, District 3 
spent $647,606 on the salary and benefits for 7 applicant pilots, and 
collected $382,297 via the surcharge. The Coast Guard added a surcharge 
adjustment of $265,309 for District 3 ($647,606-$382,297) to account 
for the difference between training expense and training funds from the 
surcharge. District 2 spent $1,829,671 on the salary and benefits for 2 
applicant pilots, and collected $141,692 in training surcharges. The 
Coast Guard does not believe that spending $914,836 per applicant pilot 
is a reasonable expense. Therefore, we are not reimbursing the entire 
difference to the District. Instead, we are including a surcharge 
offset of $158,308, which is the difference between the approved 
surcharge amount of $300,000 and the amount collected by the district 
of $141,692. For both Districts, the surcharge offset amount approved 
by the Coast Guard differs from the amount the commenters requested, as 
the commenters adjusted these differences to account for inflation and 
the working capital fund adjustments. However, these adjustments are 
already included as part of the 10-step ratemaking methodology and do 
not need to be completed for each individual operating expense.

G. Surcharges

    We received several comments regarding the removal of surcharges. 
Beginning in 2016, the Coast Guard began implementing surcharges on 
shipping rates to encourage the recruitment and training of new pilots 
on the Great Lakes. Unlike pilot compensation, reasonable and necessary 
costs relating to the compensation and training of applicant pilots are 
fully reimbursable as operating expenses. However, the Coast Guard used 
surcharges so that pilot associations could receive the money needed to 
provide immediate funding for achieving the goal of hiring and training 
new pilots. This goal has been accomplished,\30\ and currently the 
average pilot's age is under 50. In District One, 56 percent of 
registered pilots are under the age of 50. In District Two, 69 percent 
are under the age of 50, and in District Three, 44 percent are under 
the age of 50. This is more than adequate for retirement planning 
purposes. One commenter specifically stated that District Three very 
much needs the surcharge. The Coast Guard disagrees. In 2015, District 
Three only had 5 out of 20 registered pilots under the age of 50. In 
2019 that number doubled to 10 out of 19, which is more than enough to 
properly plan for applicant pilots and retirement via the rate.

H. Other Comments

    The User's Coalition submitted several comments that we will 
address individually. The Coalition stated that the U.S. Great Lakes 
Pilot Associations are a government-sustained monopoly. The Coast Guard 
disagrees; the U.S. Great Lakes Pilot Associations are federally-
regulated monopolies. It should be noted that all pilotage associations 
throughout the United

[[Page 20097]]

States are government-regulated monopolies.
    The User's Coalition stated that the rates are dictated by the 
Coast Guard. The Coast Guard disagrees. The rates are derived via a 10-
step methodology outlined in the Code of Federal Regulations. We comply 
with notice and comment procedure outlined in the Administrative 
Procedure Act. In fact, in a recent report, the Government 
Accountability Office (GAO) stated that while individual stakeholders 
may not agree with the specific inputs and assumptions used by the 
Coast Guard, the current process is generally transparent and provides 
an opportunity for informed stakeholder feedback.\31\ The GAO report 
also stated that coupled with the rulemaking requirements that 
incorporate public review and comments, we found that the existing 
mechanisms represent a fairly transparent system of pilotage rate-
setting as compared to the process used by some coastal states.\32\
---------------------------------------------------------------------------

    \31\ https://www.gao.gov/products/GAO-19-493.
    \32\ Id.
---------------------------------------------------------------------------

    The User's Coalition stated that, over the past five rate-setting 
cycles, the overall costs of U.S. pilotage to ratepayers (and, 
ultimately, to ports, cargo interests, and shore-based maritime 
interests) have risen substantially. The Coast Guard agrees that the 
overall cost of U.S. pilotage to ratepayers has risen. There are two 
primary reasons for this increase. The first reason is that, because of 
an error in the methodology and billing scheme from the mid 90's and up 
until 2016, shippers were provided an unintended 20-40% ``discount.'' 
This discount prevented the pilot associations from generating and 
collecting the revenues we determined were necessary to provide safe, 
efficient, and reliable pilotage service. In 2016, we addressed this 
issue and removed the discount. The second reason is the cost of added 
pilots, which has increased needed revenues. Since 2016, we have added 
18 working pilots to the System in order to preserve and promote 
maritime safety, minimize delays, and provide for recuperative rest.
    The User's Coalition stated that there is an absence of current, 
reality-based (as opposed to speculative or theoretical) data in the 
ratemaking process for critical elements, such as pilotage expenses, 
traffic volume or bridge-hour forecasts, and pilot compensation. The 
Coast Guard disagrees with this statement. The Coast Guard employs a 
third party auditing firm to generate financial reports to evaluate 
pilotage expenses for the annual rulemaking. We include these reports 
with the appropriate rulemaking docket. Forecasts are predictions of 
future events and are by nature speculative or theoretical, but our 
forecasts are based on objective, historical data. In addition, our 
Bridge Hour Study examined the actual number of hours pilots spent 
completing all parts of a pilotage assignment in the various Areas to 
determine how many assignments a pilot could complete in a given time 
period. This audited and studied data \33\ is empirical and reality 
based, not theoretical. The ability to use current data is somewhat 
limited by the time required to complete a full notice and comment 
ratemaking. The GAO report published June 2019, titled Stakeholders' 
Views on Issues and Options for Managing the Great Lakes Pilotage 
Program,\34\ states ``that the Coast Guard is currently performing this 
independent function as its rate-setting process includes many of the 
characteristics identified as a best practice, such as a defined 
methodology, clear data submission and review process, and the absence 
of any direct material interest in the outcome of the rate 
determinations.'' The report goes on to say that, ``While individual 
stakeholders may not agree with the specific inputs and assumptions 
used by the Coast Guard, the current process is generally transparent 
and provides an opportunity for informed stakeholder feedback and 
identification of any grounds on which they can choose to take legal 
action.''
---------------------------------------------------------------------------

    \33\ United States Coast Guard, Bridge Hour Definition and 
Methology Study: Final Report, (25 June 2013) https://www.dco.uscg.mil/Portals/9/DCO%20Documents/Office%20of%20Waterways%20and%20Ocean%20Policy/Pilotage%20Study%20Final%20Report%2028%20JUN%202013.pdf?ver=2017-06-08-082809-570.
    \34\ https://www.gao.gov/products/GAO-19-493.
---------------------------------------------------------------------------

    The User's Coalition stated that there is a lack of assertive Coast 
Guard supervision and control. The Coast Guard disagrees. The Coast 
Guard develops clear and timely regulations, policy, and direction to 
three U.S. pilot associations to provide safe, efficient, and reliable 
pilotage service to U.S. vessels operating under registry and foreign 
vessels transiting the Saint Lawrence and Great Lakes System. This 
regime of regulation, policy, and direction provides supervision and 
control. The commenter also failed to provide specific examples or data 
to support this claim.
    The User's Coalition raised questions about the difference between 
U.S. and Canadian pilotage cost structures. The commenter stated that 
``sample comparisons of the costs of U.S. versus Canadian pilotage on 
the same or similar voyages by the same or similar vessels show that 
U.S. pilotage costs are often nearly twice as high as those of the 
Canadian counterparts.'' The Coast Guard is aware that the United 
States and Canada do not charge for service in identical ways. One 
significant difference is that the United States has three different 
Districts that must each support themselves, whereas the Canadian GLPA 
operates as a unified whole. This means that there may be a level of 
cross-subsidization among Canadian pilots that is impossible to 
replicate on the American side, which could result in higher rates in 
some areas and lower rates in others. Comparisons on a single voyage, 
such as what the Users Coalition did in the comment, where one system 
uses ancillary fees such as docking, anchoring, short notice 
dispatching and the other system does not, cannot provide the Coast 
Guard with the comprehensive information needed to determine if there 
is a system-wide problem with rates or if we are merely seeing an 
atypical incident. Taken as a whole, the revenues earned by the U.S. 
system of pilotage across the Great Lakes are comparable to the 
revenues earned by the Canadian system. This is further complicated by 
the fact that Canadians provide the exclusive source of pilotage 
services in parts of the system.
    The User's Coalition also stated that there is a failure to 
develop, obtain, and maintain accurate information on recruitment, 
retention, and attrition issues as they affect the availability and 
compensation of qualified pilots. The Coast Guard disagrees with this 
statement. Coast Guard personnel in the Office of Waterways and Ocean 
Policy (CG-WWM) monitor recruitment, retention, and attrition issues by 
following the hiring and training of new pilots and conducting exit 
interviews with departing pilots. The commenter failed to articulate or 
provide any examples or data to support their statement.
    The User's Coalition stated that the past record of significant, 
consistent revenue overruns justifies an adjustment in methodology. 
Failure to make this adjustment will once again result in an artificial 
increase in pilotage costs, in contravention of 46 U.S.C. 9303(f), and 
exacerbate the current misalignment of U.S. and Canadian pilotage 
costs. The Coast Guard disagrees with this comment. Consistent 
increases in pilotage demand does not justify an adjustment. Since the 
commenter provided no further evidence to justify

[[Page 20098]]

the statement, no further action will be taken. The Coast Guard also 
disagrees that there is a current misalignment of U.S. and Canadian 
pilotage cost. As the commenter provided no evidence to support this 
claim, no further action will be taken. In addition, we note that these 
increases in demand do not equate to any increased cost to the User's 
Coalition, and, further, because the demand increases bridge hours, it 
could be argued that these ``consistent revenue overruns'' actually 
decrease the rate over the long run, due to the way bridge hours are 
used in the 10-Step ratemaking methodology. To estimate the initial 
base rate, we divide the total estimated revenue needed for each area 
by the total estimated bridge hours.
    The User's Coalition stated that prior years' comments on this 
recurring issue have been dismissed without analysis or discussion by 
GLPO as ``not a highly salient issue. . . .'' (83 FR 26175), and the 
observation that pilotage rates had not reached ``. . . levels that 
threaten the economic viability of Great Lakes shipping.'' Id. The 
Coast Guard disagrees that issues have been dismissed without analysis 
or discussion. The User's Coalition comment lacks context. The Coast 
Guard noted that the over-realization was not a highly salient issue in 
the 2018 final rule because the over-realization was caused by two 
factors, one of which had been corrected previously. The lack of 
incorporation of weighting factor fees into the ratemaking methodology 
was revised per the suggestion of industry commenters in the 2018 
rulemaking. The second factor was demand for pilotage services, which 
was higher than predicted--a point discussed at length in the sections 
entitled ``Target Pilot Compensation'' and ``Initial Base Rate'' above. 
The commenter's second quote is a reference to the conclusion of an 
independent study the Coast Guard commissioned analyzing the secondary 
economic impact of pilotage rates, hardly a dismissal without analysis. 
The GAO recently completed a comprehensive ``stem-to-stern'' review of 
the GLPO,\35\ assessing a plethora of recurring issues, and decided not 
to recommend any changes to the GLPO. The court has settled some of the 
issues and is reviewing the legality of other issues. We have and will 
continue to comply with the court's decision(s).
---------------------------------------------------------------------------

    \35\ https://www.gao.gov/products/GAO-19-493.
---------------------------------------------------------------------------

    The User's Coalition stated that revenue overruns are paid for in 
real money in a system that has yet to provide relief for overcharges 
to ratepayers or redress to other interests affected by non-service-
related, government-dictated prices, and that the results of the past 
several navigation seasons on the Lakes describe a situation of 
considerable economic waste. The Coast Guard disagrees with this 
statement. All charges paid were for actual services provide by the 
pilots to vessels; there were no non-service-related charges. If vessel 
owners and operators believe they have been charged in error, we 
provide a billing dispute mechanism that allows shippers adequate time 
to submit billing disputes for consideration. As the commenter provided 
no evidence of an overcharge to ratepayers, nor any evidence of 
``considerable economic waste,'' no further action will be taken.
    This commenter implies that the User's coalition has exclusive 
rights to the Great Lakes/Saint Lawrence River System. The User's 
Coalition is not entitled to revenues generated by the Canadian 
domestic fleet, cruise ships, and/or tankers shipping petroleum 
products that are not represented by the coalition. These waters are 
for all law abiding mariners to enjoy and utilize for commercial 
purposes. We will ensure that all modes of international and domestic 
traffic are treated fairly.
    The Lakes Pilots Association (LPA) commented on changing the number 
of days in the season to 365 days. The Coast Guard disagrees. The 270 
day season applies to the AMOU contracts. We are no longer utilizing 
those contracts to determine target pilot compensation. Therefore, the 
365-day argument does not apply. We have identified a standard that 
corrected the historic recruitment and retention issues as previously 
discussed.
    One commenter suggested that the Coast Guard did not adequately 
explain why we expect the total costs generated in 2020 to be less than 
the total pilotage revenue in 2019, despite proposing higher pilotage 
rates for 4 of the 6 areas in 2020. They stated that the NPRM did not 
provide any explanation for the reduction in pilotage services, and 
that we should not claim that the final rule will ``result in an 
overall reduction in pilotage costs''.\36\
---------------------------------------------------------------------------

    \36\ USCG-2019-0736-0007, p. 4.
---------------------------------------------------------------------------

    The Coast Guard disagrees. In the NPRM, we did not state that we 
expect a decrease in pilotage costs. Rather, we estimated the total 
expected revenue in 2020 and compared that value to the estimated 2019 
revenue. This value is a reflection of the pilotage rates, as well as 
other factors, such as operating expenses and surcharges (if there are 
any). In the NPRM, we estimated that the total revenue generated in 
2020 would be less than the total estimated revenue generated in 2019 
for two reasons: (1) A reduction in operating expenses for some 
districts driven by large one-time capital purchases made in 2016, and 
(2) the removal of surcharges. The latter is the main driver in 
reducing the expected revenue between 2019 and 2020. Neither of these 
revenue components is a reflection of traffic or pilotage hours. In 
addition, the cost of the surcharges is not included in the rate, but 
is included in the total revenue calculations, meaning that the removal 
of the surcharges does not impact the rates, but does decrease the 
estimated total revenue. Table 44 in the preamble of this rule provides 
a comparison of the revenue components between 2019 and 2020, and 
demonstrates that these changes are mainly driven by the removal of the 
surcharges. It should be noted that, in this final rule, the Coast 
Guard modified operating expenses for all three districts based on 
public comment, and, as a result, we now estimate that revenues 
generated in 2020 will be $279,845 greater than those generated in 
2019.

VII. Discussion of Rate Adjustments

    In this final rule, based on the current methodology described in 
the previous section of this preamble, the Coast Guard is establishing 
new pilotage rates for 2020. We conducted the 2020 ratemaking as an 
``interim year,'' as was done in 2019, rather than a full ratemaking as 
was conducted in 2018. Thus, the Coast Guard is adjusting the 
compensation benchmark pursuant to Sec.  404.104(b) for this purpose, 
rather than Sec.  404.104(a).
    In this section, we discuss the rate changes using the ratemaking 
steps provided in 46 CFR part 404 detailing all ten steps of the 
ratemaking procedure for each of the three districts to show how we 
arrived at the new rates.
District One

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2017 expenses and 
revenues.\37\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. In certain instances, 
costs are applied to the

[[Page 20099]]

designated or undesignated area based on where they were actually 
accrued. For example, costs for ``Applicant pilot license insurance'' 
in District One are assigned entirely to the undesignated areas, as 
applicant pilots work exclusively in those areas. For costs accrued by 
the pilot associations generally, such as employee benefits, the cost 
is divided between the designated and undesignated areas on a pro rata 
basis. The recognized operating expenses for District One are shown in 
table 3.
---------------------------------------------------------------------------

    \37\ These reports are available in the docket for this 
rulemaking (see Docket # USCG-2019-0736).
---------------------------------------------------------------------------

    As noted above, in 2016 the Coast Guard began authorizing 
surcharges to cover the training costs of applicant pilots. The 
surcharges were intended to reimburse pilot associations for training 
applicants in a more timely fashion than if those costs were listed as 
operating expenses, which would have required 3 years to reimburse. The 
rationale for using surcharges to cover these expenses rather than 
including the costs as operating expenses was so these non-recurring 
costs could be recovered in a more timely fashion and so that retiring 
pilots would not have to cover the costs of training their 
replacements. Because operating expenses incurred are not actually 
recouped for a period of 3 years, the Coast Guard added a $150,000 
surcharge per applicant pilot beginning in 2016 to recoup those costs 
in the year incurred. Now that these issues are no longer a concern, we 
are not issuing any surcharges for the 2020 shipping season.
    For District One, we are not implementing any Director's 
adjustments other than the lobbying expenses described above. Other 
adjustments have been made by the auditors and are explained in the 
auditor's reports, which are available in the docket for this 
rulemaking where indicated under the ADDRESSES portion of the preamble.

                               Table 3--2017 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2017                    --------------------------------
                                                                   St. Lawrence                        Total
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Subsistence/Travel--Pilot...................................        $440,456        $293,637        $734,093
    Certified Public Accountant (CPA) Deduction.................            -189            -126            -315
    Subsistence/Travel--Trainee.................................          22,008          14,672          36,680
    License Insurance--Pilots...................................          48,620          32,413          81,033
    License Insurance--Trainee..................................               0               0               0
    Payroll Taxes--Pilots.......................................         137,788          91,858         229,646
    Payroll Taxes--Trainee......................................             705             470           1,175
    Training--Full Pilots Continuing Education..................          32,197          21,464          53,661
    Cell and Internet Allowance--Pilots.........................          24,312          16,208          40,520
    Cell and Internet Allowance--Applicants.....................           2,210           1,474           3,684
    Other.......................................................             675             450           1,125
                                                                 -----------------------------------------------
        Total Other Pilotage Costs..............................         708,782         472,520       1,181,302
Pilot Boat and Dispatch Costs:
    Pilot Boat Expense..........................................         297,942         198,628         496,570
    Dispatch Expense............................................          50,100          33,400          83,500
    Payroll Taxes...............................................          19,706          13,137          32,843
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         367,748         245,165         612,913
Administrative Expenses:
    Legal--General Counsel......................................           2,098           1,399           3,497
    Legal--Shared Counsel (K&L Gates)...........................          26,835          17,890          44,725
    Office Rent.................................................               0               0               0
    Insurance...................................................          21,593          14,395          35,988
    Employee Benefits...........................................           7,720           5,146          12,866
    Payroll Taxes...............................................           6,665           4,444          11,109
    Other Taxes.................................................          70,942          47,294         118,236
    Travel......................................................           4,091           2,728           6,819
    Depreciation/Auto Leasing/other.............................          94,944          63,296         158,240
    Interest....................................................          35,143          23,428          58,571
    Dues and Subscriptions......................................          19,471          12,981          32,452
    Utilities...................................................          18,479          12,320          30,799
    Salaries....................................................          69,953          46,636         116,589
    Accounting/Professional Fees................................           6,111           4,074          10,185
    Pilot Training..............................................               0               0               0
    Applicant Pilot Training....................................               0               0               0
    Other.......................................................          26,338          17,559          43,897
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         410,383         273,590         683,973
            Total Operating Expenses (Other Costs + Pilot Boats        1,486,913         991,275       2,478,188
             + Admin)...........................................
                                                                 -----------------------------------------------
Adjustments (Director):
        Total Director's Adjustments............................               0               0               0
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......       1,486,913         991,275    2,478,188.00
----------------------------------------------------------------------------------------------------------------


[[Page 20100]]

B. Step 2: Project Operating Expenses, Adjusting for Inflation or 
Deflation

    Having identified the recognized 2017 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation for 2017 to 2018 using the BLS data from the CPI 
for the Midwest Region of the United States.\38\ Because the BLS does 
not provide forecasted inflation data, we use economic projections from 
the Federal Reserve for the 2019 and 2020 inflation modification.\39\ 
\40\ Based on that information, the calculations for Step 2 are as 
follows:
---------------------------------------------------------------------------

    \38\ The 2018 inflation rate is available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the CPI 
is defined as ``All Urban Consumers (CPI-U), All Items, 1982-
4=100''. Downloaded June 12, 2019.
    \39\ The 2019 CPI data was not available at the time of 
analysis, December 2019.
    \40\ The 2019 and 2020 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf. We used the PCE median inflation value 
found in table 1. Downloaded June 12, 2019.

                              Table 4--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,486,913        $991,275      $2,478,188
2018 Inflation Modification (@1.9%).............................          28,251          18,834          47,085
2019 Inflation Modification (@1.8%).............................          27,273          18,182          45,455
2020 Inflation Modification (@2%)...............................          30,849          20,566          51,415
    Adjusted 2020 Operating Expenses............................       1,573,286       1,048,857       2,622,143
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimate the 
number of working pilots in each district. We determine the number of 
working pilots based on data provided by the Saint Lawrence Seaway 
Pilots Association (SLSPA). Using these numbers, we estimate there will 
be 17 working pilots in 2020 in District One. Furthermore, based on the 
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 
41466), we assign a certain number of pilots to designated waters and a 
certain number to undesignated waters, as shown in table 5. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.

                       Table 5--Authorized Pilots
------------------------------------------------------------------------
                          Item                             District One
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \41\...              17
2020 Authorized pilots (total)..........................              17
Pilots assigned to designated areas.....................              10
Pilots assigned to undesignated areas...................               7
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \41\ For a detailed calculation, refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an interim ratemaking this year, we follow 
the procedure outlined in paragraph (b) of Sec.  404.104, which adjusts 
the existing compensation benchmark by inflation. Because we do not 
have a value for the employment cost index for 2020, we multiply the 
2019 compensation benchmark of $359,887 by the Median PCE Inflation 
value of 2.0 percent.\42\ Based on the projected 2020 inflation 
estimate, the compensation benchmark for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \42\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we verify that the number of pilots estimated for 2020 is 
less than or equal to the number permitted under the staffing model in 
Sec.  401.220(a). The staffing model suggests that the number of pilots 
needed is 17 pilots for District One, which is more than or equal to 
the numbers of working pilots provided by the pilot associations. In 
accordance with Sec.  404.104(c), we use the revised target individual 
compensation level to derive the total pilot compensation by 
multiplying the individual target compensation by the estimated number 
of working pilots for District One, as shown in table 6.

                                  Table 6--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085
Number of Pilots................................................              10               7              17
    Total Target Pilot Compensation.............................      $3,670,850      $2,569,595      $6,240,445
----------------------------------------------------------------------------------------------------------------


[[Page 20101]]

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add together the figures for projected operating 
expenses and total pilot compensation for each area. Next, we find the 
preceding year's average annual rate of return for new issues of high-
grade corporate securities. Using Moody's data, the number is 3.93 
percent.\43\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in table 7.
---------------------------------------------------------------------------

    \43\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018 
monthly data (2019 data was not available at the time of analysis, 
December 2019). The Coast Guard uses the most recent year of 
complete data. Moody's is taken from Moody's Investors Service, 
which is a bond credit rating business of Moody's Corporation. Bond 
ratings are based on creditworthiness and risk. The rating of 
``Aaa'' is the highest bond rating assigned with the lowest credit 
risk. See https://fred.stlouisfed.org/series/AAA. (June 12, 2019).

                           Table 7--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,573,286      $1,048,857      $2,622,143
Total Target Pilot Compensation (Step 4)........................       3,670,850       2,569,595       6,240,445
Total 2020 Expenses (Step 2 + Step 4)...........................       5,244,136       3,618,452       8,862,588
                                                                 -----------------------------------------------
    Working Capital Fund (Total Expenses x 3.93%)...............         206,095         142,205         348,300
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add together all of the expenses accrued to derive 
the total revenue needed for each area. These expenses include the 
projected operating expenses (from Step 2), the total pilot 
compensation (from Step 4), and the working capital fund contribution 
(from Step 5). We show these calculations in table 8.

                                    Table 8--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 4)...............      $1,573,286      $1,048,857      $2,622,143
Total Target Pilot Compensation (Step 4, See Table 6)...........       3,670,850       2,569,595       6,240,445
Working Capital Fund (Step 5, See Table 7)......................         206,095         142,205         348,300
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,450,231       3,760,657       9,210,888
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous 
six steps to develop an hourly rate, we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the average hours of traffic over 10 years 
in District One, using the total time on task or pilot bridge 
hours.\44\ Because we calculate separate figures for designated and 
undesignated waters, there are two parts for each calculation. We show 
these values in table 9.
---------------------------------------------------------------------------

    \44\ To calculate the time on task for each district, the Coast 
Guard uses billing data from the Great Lakes Pilotage Management 
System (GLPMS). We pull the data from the system filtering by 
district, year, job status (we only include closed jobs), and 
flagging code (we only include U.S. jobs). After we have downloaded 
the data, we remove any overland transfers from the dataset, if 
necessary, and sum the total bridge hours, by area. We then subtract 
any non-billable delay hours from the total.

                 Table 9--Time on Task for District One
                                 [Hours]
------------------------------------------------------------------------
                                                   District One
                  Year                   -------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
2018....................................           6,943           8,445
2017....................................           7,605           8,679
2016....................................           5,434           6,217
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
2009....................................           3,511           3,947
                                         -------------------------------
    Average.............................           5,657           6,248
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. We present the 
calculations for each area in table 10.

          Table 10--Initial Rate Calculations for District One
------------------------------------------------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $5,450,231      $3,760,657

[[Page 20102]]

 
Average time on task (hours)............           5,657           6,248
                                         -------------------------------
    Initial rate (Step 6/Average Time on             963             602
     Task)..............................
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculate the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in tables 11 and 
12.\45\
---------------------------------------------------------------------------

    \45\ To calculate the number of transits by vessel class, we use 
the billing data from GLPMS (2019 data was not available at the time 
of analysis, December 2019), filtering by district, year, job status 
(we only include closed jobs), and flagging code (we only include 
U.S. jobs). We then count the number of jobs by vessel class and 
area.

                      Table 11--Average Weighting Factor for District One, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              41               1              41
Class 1 (2016)..................................................              31               1              31
Class 1 (2017)..................................................              28               1              28
Class 1 (2018)..................................................              54               1              54
Class 2 (2014)..................................................             285            1.15          327.75
Class 2 (2015)..................................................             295            1.15          339.25
Class 2 (2016)..................................................             185            1.15          212.75
Class 2 (2017)..................................................             352            1.15           404.8
Class 2 (2018)..................................................             559            1.15          642.85
Class 3 (2014)..................................................              50             1.3              65
Class 3 (2015)..................................................              28             1.3            36.4
Class 3 (2016)..................................................              50             1.3              65
Class 3 (2017)..................................................              67             1.3            87.1
Class 3 (2018)..................................................              86             1.3           111.8
Class 4 (2014)..................................................             271            1.45          392.95
Class 4 (2015)..................................................             251            1.45          363.95
Class 4 (2016)..................................................             214            1.45           310.3
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             393            1.45          569.85
                                                                 -----------------------------------------------
    Total.......................................................           3,556  ..............           4,528
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.27  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------


                     Table 12--Average Weighting Factor for District One, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              25               1              25
Class 1 (2015)..................................................              28               1              28
Class 1 (2016)..................................................              18               1              18
Class 1 (2017)..................................................              19               1              19
Class 1 (2018)..................................................              22               1              22
Class 2 (2014)..................................................             238            1.15           273.7
Class 2 (2015)..................................................             263            1.15          302.45
Class 2 (2016)..................................................             169            1.15          194.35
Class 2 (2017)..................................................             290            1.15           333.5
Class 2 (2018)..................................................             352            1.15           404.8
Class 3 (2014)..................................................              60             1.3              78
Class 3 (2015)..................................................              42             1.3            54.6
Class 3 (2016)..................................................              28             1.3            36.4
Class 3 (2017)..................................................              45             1.3            58.5
Class 3 (2018)..................................................              63             1.3            81.9
Class 4 (2014)..................................................             289            1.45          419.05
Class 4 (2015)..................................................             269            1.45          390.05
Class 4 (2016)..................................................             222            1.45           321.9

[[Page 20103]]

 
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             382            1.45           553.9
                                                                 -----------------------------------------------
    Total.......................................................           3,109  ..............           4,028
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.30  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that once the impact of 
the weighting factors are considered; the total cost of pilotage would 
be equal to the revenue needed. To do this, we divide the initial base 
rates, calculated in Step 7, by the average weighting factors 
calculated in Step 8, as shown in table 13.

                                  Table 13--Revised Base Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised Rate
                                                                                      Average     (Initial rate
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................            $963            1.27            $758
District One: Undesignated......................................             602            1.30             463
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish that the rates do meet 
the goal of ensuring safe, efficient and reliable pilotage, the 
Director considers whether the rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the rates will cover 
operating expenses and infrastructure costs, and takes average traffic 
and weighting factors into consideration. Based on this information, 
the Director is not making any alterations to the rates in this step. 
We modified the text in Sec.  401.405(a) to reflect the final rates 
shown in table 14.

                                     Table 14--Final Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2019     Proposed 2020    Final 2020
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated..............  St. Lawrence River......            $733            $757            $758
District One: Undesignated............  Lake Ontario............             493             462             463
----------------------------------------------------------------------------------------------------------------

District Two

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2017 expenses and 
revenues.\46\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. In certain instances, 
costs are applied to the designated or undesignated area based on where 
they were actually incurred. For example, costs for ``Applicant pilot 
license insurance'' in District One are assigned entirely to the 
undesignated areas, as applicant pilots work exclusively in those 
areas. For costs accrued by the pilot associations generally, such as 
employee benefits, for example, the cost is divided between the 
designated and undesignated areas on a pro rata basis. The recognized 
operating expenses for District Two are shown in table 15, below.
---------------------------------------------------------------------------

    \46\ These reports are available in the docket for this 
rulemaking (see Docket No. USCG-2019-0736).
---------------------------------------------------------------------------

    In addition to the surcharge adjustment and lobbying expenses 
described for District One in Section VII A. of this preamble, Step 1: 
Recognize previous operating expenses, and the adjustments made by the 
auditor, as explained in the auditor's reports (available in the docket 
where indicated in the ADDRESSES portion of this document), the 
Director is finalizing two adjustments to District Two's operating 
expenses. The first is to disallow $120,350 in ``housing allowance'' 
expenses. The Coast Guard agrees with the IRS that an employer-provided 
housing allowance is a fringe benefit, and we consider it to be 
employee compensation. In addition, the Coast Guard expects those 
appointed as registered pilots to live in the region in which they are 
employed. We expect that, if a pilot chooses to live outside their 
region of employment, they should have to pay for their accommodations, 
and this cost should not be passed on to the shippers via the rate. 
Therefore, we are not including any housing allowance the district 
chooses to

[[Page 20104]]

provide their pilots in the ratemaking calculation.
    The second Director's adjustment is a $158,308 surcharge adjustment 
to account for the difference between in the amount the district spent 
on applicant pilot wages and benefits in 2017 to cover the training 
costs for two applicant pilots, and the amount actually collected via 
the surcharge. In total, District Two spent $1,829,671 on applicant 
pilot compensation for two applicant pilots and received $141,692 via 
the surcharge in 2017. However, as stated in Section VI.F of this 
preamble, the Coast Guard does not believe that spending $914,836 per 
applicant pilot is fair and reasonable, and, therefore, we are only 
recognizing applicant pilot compensation of $150,000 per applicant 
pilot, or $300,000 in total for the district. As a result, the Coast 
Guard is including a $158,308 surcharge adjustment ($300,000-$141,692) 
in the recognized expenses for District Two. We allocated this 
adjustment to each area based on their proportional bridge hours in 
2017 (see table 21 for bridge hours).

                               Table 15--2017 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
                   Reported expenses for 2017                    -----------------------------------------------
                                                                                     Southeast
                                                                     Lake Erie     shoal to Port
                                                                                       Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Subsistence/Travel--Pilots..................................        $116,402        $174,602        $291,004
    Subsistence/Travel--Applicants..............................          52,212          78,317         130,529
    Housing Allowance--Pilots...................................          30,212          45,318          75,530
    Housing Allowance--Applicants...............................          17,928          26,892          44,820
    Winter Meeting Allowance....................................           8,280          12,420          20,700
    Telecommunication Allowance.................................          11,662          17,493          29,155
    Payroll taxes--Pilots.......................................          57,126          85,688         142,814
    Payroll taxes--Applicants...................................          26,025          39,038          65,063
    License Insurance...........................................           8,326          12,490          20,816
    Training....................................................           2,079           3,119           5,198
                                                                 -----------------------------------------------
        Total Other Pilotage Costs..............................         330,252         495,377         825,629
Pilot Boat and Dispatch Costs:
    Pilot Boat Cost.............................................         217,514         326,272         543,786
    CPA Adjustment..............................................         -34,860         -52,291         -87,151
    Dispatch Expense............................................               0               0               0
    Employee Benefits...........................................          78,680         118,020         196,700
    Payroll Taxes...............................................          12,230          18,344          30,574
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         273,564         410,345         683,909
Cost Affiliated Entity Expenses:
    Office Rent.................................................          26,275          39,413          65,688
    CPA Adjustment..............................................          -4,742          -7,113         -11,855
                                                                 -----------------------------------------------
        Total Affiliated Entity Expense.........................          21,533          32,300          53,833
Administrative Expenses:
    Legal--General Counsel......................................           3,505           5,258           8,763
    Legal--Shared Counsel (K&L Gates)...........................          15,604          23,405          39,009
    Employee benefits--Admin employees..........................          79,534         119,301         198,835
    Workman's Compensation--Pilots..............................          48,663          72,994         121,657
    Payroll taxes--Admin Employees..............................           6,872          10,308          17,180
    Insurance...................................................          10,844          16,265          27,109
    Other Taxes.................................................          12,065          18,097          30,162
    Admin Travel................................................           6,316           9,475          15,791
    Depreciation/Auto Lease/Other...............................          24,168          36,251          60,419
    Interest....................................................          21,526          32,288          53,814
    CPA Adjustment..............................................         -20,920         -31,379         -52,299
    Dues and subscriptions......................................          10,760          16,140          26,900
    CPA Adjustment..............................................            -581            -871          -1,452
    Utilities...................................................           6,277           9,415          15,692
    Salaries--Admin employees...................................          60,568          90,852         151,420
    Accounting..................................................          14,507          21,761          36,268
    Other.......................................................          13,936          20,904          34,840
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         313,644         470,464         784,108
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          938,993       1,408,486       2,347,479
             + Admin)...........................................
Adjustments (Director):
    Housing allowance for Pilots................................         -30,212         -45,318         -75,530
    Housing allowance for Applicants............................         -17,928         -26,892         -44,820
        Surcharge Adjustment....................................          72,554          85,754         158,308
                                                                 -----------------------------------------------

[[Page 20105]]

 
            Total Director's Adjustments........................          24,414          13,544          37,958
                                                                 -----------------------------------------------
                Total Operating Expenses (OpEx + Adjustments)...         963,407       1,422,030       2,385,437
----------------------------------------------------------------------------------------------------------------

B. Step 2: Project Operating Expenses, Adjusting for Inflation or 
Deflation

    Having identified the recognized 2017 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation for 2017 to 2018 using the BLS data from the CPI 
for the Midwest Region of the United States.\47\ Because the BLS does 
not provide forecasted inflation data, we use economic projections from 
the Federal Reserve for the 2019 and 2020 inflation 
modification.^{48 49} Based on that information, the 
calculations for Step 1 are as follows in table 16:
---------------------------------------------------------------------------

    \47\ USCG-2019-0736-0003, p. 3.
    \48\ USCG-2019-0736-0002, p. 5.
    \49\ USCG-2019-0736-0002, p. 5.

                             Table 16--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $963,407      $1,422,030      $2,385,437
2018 Inflation Modification (@1.9%).............................          18,305          27,019          45,324
2019 Inflation Modification (@1.8%).............................          17,671          26,083          43,754
2020 Inflation Modification (@2%)...............................          19,988          29,503          49,491
                                                                 -----------------------------------------------
    Adjusted 2020 Operating Expenses............................       1,019,371       1,504,635       2,524,006
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimate the 
number of working pilots in each district. We determine the number of 
working pilots based on input from the LPA. Using these numbers, we 
estimate that there will be 15 working pilots in 2020 in District Two. 
Furthermore, based on the seasonal staffing model discussed in the 2017 
ratemaking (see 82 FR 41466), we assign a certain number of pilots to 
designated waters and a certain number to undesignated waters, as shown 
in table 17. These numbers are used to determine the amount of revenue 
needed in their respective areas.

                       Table 17--Authorized Pilots
------------------------------------------------------------------------
                                                               District
                            Item                                 Two
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \50\......           15
2020 Authorized pilots (total).............................           15
Pilots assigned to designated areas........................            7
Pilots assigned to undesignated areas......................            8
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \50\ For a detailed calculation refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an interim ratemaking this year, we follow 
the procedure outlined in paragraph (b) of Sec.  404.104, which adjusts 
the existing compensation benchmark by inflation. Because we do not 
have a value for the employment cost index for 2020, we multiply the 
2019 compensation benchmark of $359,887 by the Median PCE Inflation 
value of 2.0 percent.\51\ Based on the projected 2020 inflation 
estimate, the compensation benchmark for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \51\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we verify that the number of pilots estimated for 2020 is 
less than or equal to the number permitted under the staffing model in 
Sec.  401.220(a). The staffing model suggests that the number of pilots 
needed is 15 pilots for District Two, which is more than or equal to 
the numbers of working pilots provided by the pilot associations.\52\
---------------------------------------------------------------------------

    \52\ See table 6 of the Great Lakes Pilotage Rates--2017 Annual 
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The 
methodology of the staffing model is discussed at length in the 
final rule (see pages 41476-41480 for a detailed analysis of the 
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised 
target individual compensation level to derive the total pilot 
compensation by multiplying the individual target compensation by the 
estimated number of working pilots for District Two, as shown in table 
18.

                                 Table 18--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085

[[Page 20106]]

 
Number of Pilots................................................               8               7              15
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $2,936,680      $2,569,595      $5,506,275
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add together the figures for projected operating 
expenses and total pilot compensation for each area. Next, we find the 
preceding year's average annual rate of return for new issues of high-
grade corporate securities. Using Moody's data, the number is 3.93 
percent.\53\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in table 19.
---------------------------------------------------------------------------

    \53\ USCG-2019-0736-0005, p. 3.

                           Table 19--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,019,371      $1,504,635      $2,524,006
Total Target Pilot Compensation (Step 4)........................       2,936,680       2,569,595       5,506,275
                                                                 -----------------------------------------------
    Total 2020 Expenses (Step 2 + Step 4).......................       3,956,051       4,074,230       8,030,281
                                                                 -----------------------------------------------
        Working Capital Fund (Total Expenses x 3.93%)...........         155,473         160,117         315,590
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add together all of the expenses accrued to derive 
the total revenue needed for each area. These expenses include the 
projected operating expenses (from Step 2), the total pilot 
compensation (from Step 4), and the working capital fund contribution 
(from Step 5). We show these calculations in table 20.

                                    Table 20--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 16)..............      $1,019,371      $1,504,635      $2,524,006
Total Target Pilot Compensation (Step 4, See Table 18)..........       2,936,680       2,569,595       5,506,275
Working Capital Fund (Step 5, See Table 19).....................         155,473         160,117         315,590
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       4,111,524       4,234,347       8,345,871
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the needed revenue for each area in the previous 
six steps to develop an hourly rate, we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the average hours of traffic over 10 years 
in District Two, using the total time on task or pilot bridge 
hours.\54\ Because we calculate separate figures for designated and 
undesignated waters, there are two parts for each calculation. We show 
these values in table 21.
---------------------------------------------------------------------------

    \54\ USCG-2019-0736-0002 p. 5.

                 Table 21--Time on Task for District Two
                                 [Hours]
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2018....................................           6,150           6,655
2017....................................           5,139           6,074
2016....................................           6,425           5,615
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
2009....................................           3,386           3,017
  Average...............................           5,322           5,192
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. The calculations 
for each area are set forth in table 22.

          Table 22--Initial Rate Calculations for District Two
------------------------------------------------------------------------
                  Item                     Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $4,111,524      $4,234,347

[[Page 20107]]

 
Average time on task (hours)............           5,322           5,192
                                         -------------------------------
Initial rate (Step 6/Average Time on                 773             816
 Task)..................................
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculated the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in tables 23 and 
24.\55\
---------------------------------------------------------------------------

    \55\ USCG-2019-0736-0006, p.2.

                     Table 23--Average Weighting Factor for District Two, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              35               1              35
Class 1 (2016)..................................................              32               1              32
Class 1 (2017)..................................................              21               1              21
Class 1 (2018)..................................................              37               1              37
Class 2 (2014)..................................................             356            1.15           409.4
Class 2 (2015)..................................................             354            1.15           407.1
Class 2 (2016)..................................................             380            1.15             437
Class 2 (2017)..................................................             222            1.15           255.3
Class 2 (2018)..................................................             123            1.15          141.45
Class 3 (2014)..................................................              20             1.3              26
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               9             1.3            11.7
Class 3 (2017)..................................................              12             1.3            15.6
Class 3 (2018)..................................................               3             1.3             3.9
Class 4 (2014)..................................................             636            1.45           922.2
Class 4 (2015)..................................................             560            1.45             812
Class 4 (2016)..................................................             468            1.45           678.6
Class 4 (2017)..................................................             319            1.45          462.55
Class 4 (2018)..................................................             196            1.45          284.20
                                                                 -----------------------------------------------
    Total.......................................................           3,814  ..............           5,023
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------


                      Table 24--Average Weighting Factor for District Two, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              20               1              20
Class 1 (2015)..................................................              15               1              15
Class 1 (2016)..................................................              28               1              28
Class 1 (2017)..................................................              15               1              15
Class 1 (2018)..................................................              42               1              42
Class 2 (2014)..................................................             237            1.15          272.55
Class 2 (2015)..................................................             217            1.15          249.55
Class 2 (2016)..................................................             224            1.15           257.6
Class 2 (2017)..................................................             127            1.15          146.05
Class 2 (2018)..................................................             153            1.15          175.95
Class 3 (2014)..................................................               8             1.3            10.4
Class 3 (2015)..................................................               8             1.3            10.4
Class 3 (2016)..................................................               4             1.3             5.2
Class 3 (2017)..................................................               4             1.3             5.2
Class 3 (2018)..................................................              14             1.3            18.2
Class 4 (2014)..................................................             359            1.45          520.55
Class 4 (2015)..................................................             340            1.45             493
Class 4 (2016)..................................................             281            1.45          407.45
Class 4 (2017)..................................................             185            1.45          268.25

[[Page 20108]]

 
Class 4 (2018)..................................................             379            1.45          549.55
                                                                 -----------------------------------------------
    Total.......................................................           2,660  ..............           3,510
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that once the impact of 
the weighting factors are considered, the total cost of pilotage would 
be equal to the revenue needed. To do this, we divide the initial base 
rates, calculated in Step 7, by the average weighting factors 
calculated in Step 8, as shown in table 25.

                                  Table 25--Revised Base Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (initial rate
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District Two: Designated........................................            $816            1.32            $618
District Two: Undesignated......................................             773            1.32             586
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish that the rates do meet 
the goal of ensuring safe, efficient and reliable pilotage, the 
Director considers whether the rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods, and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the rates will cover 
operating expenses and infrastructure costs, and takes average traffic 
and weighting factors into consideration. Based on this information, 
the Director is not making any alterations to the rates in this step. 
We modified the text in Sec.  401.405(a) to reflect the final rates 
shown in table 26.

                                     Table 26--Final Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2019     Proposed 2020    Final 2020
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District Two: Designated..............  Navigable waters from               $603            $602            $618
                                         Southeast Shoal to Port
                                         Huron, MI.
District Two: Undesignated............  Lake Erie...............             531             573             586
----------------------------------------------------------------------------------------------------------------

District Three

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2017 expenses and 
revenues.\56\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. In certain instances, 
costs are applied to the undesignated or designated area based on where 
they were actually accrued. For example, costs for ``Applicant pilot 
license insurance'' in District One are assigned entirely to the 
undesignated areas, as applicant pilots work exclusively in those 
areas. For costs accrued by the pilot associations generally, for 
example, employee benefits, the cost is divided between the designated 
and undesignated areas on a pro rata basis. The recognized operating 
expenses for District Three are shown in table 27.
---------------------------------------------------------------------------

    \56\ These reports are available in the docket for this 
rulemaking (see Docket # USCG-2019-0736).
---------------------------------------------------------------------------

    In addition to the surcharge adjustment and lobbying expenses 
described for District One in Section VII A. of this preamble, Step 1: 
Recognize previous operating expenses and the adjustments made by the 
auditor, as explained in the auditor's reports, which are available in 
the docket for this rulemaking where indicated in the ADDRESSES portion 
of this document, the Director is finalizing two adjustments to 
District Three's operating expenses, listed as Director's adjustments.
    The first disallows $32,800 in ``housing allowance'' expenses. The 
Coast Guard agrees with the IRS that an employer-provided housing 
allowance is a fringe benefit, and we consider it to be employee 
compensation. In addition, we expect those appointed as registered 
pilots pilot to live in the region in which they are employed. We 
expect that, if a pilot chooses to live outside their region of 
employment, they should have to pay for their accommodations, and this 
cost should not be passed on to the shippers via the rate. Therefore, 
we are not including any housing allowance the district chooses to

[[Page 20109]]

provide their pilots in the ratemaking calculation.
    The second Director's adjustment is a $265,309 surcharge adjustment 
to account for the difference between the amount the district spent on 
applicant pilot wages and benefits in 2017 to cover the training costs 
for seven applicant pilots, and the amount actually collected via the 
2017 surcharge. In total, District Three spent $647,606 on applicant 
pilot compensation for seven applicant pilots and received $382,297 via 
the surcharge in 2017. As a result, we are including a $265,309 
surcharge adjustment ($647,606--$382,297) in the recognized expenses 
for District Three. We allocated this adjustment to each area based on 
their proportional bridge hours in 2017 (See table 33 for bridge 
hours).

                              Table 27--2017 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                District Three
                                             ----------------------------------------------------
                                                Undesignated      Designated      Undesignated
         Reported expenses for 2017             \57\ (Area 6)      (Area 7)       \58\ (Area 8)        Total
                                             ----------------------------------------------------
                                               Lakes Huron and    St. Mary's
                                                  Michigan           River        Lake Superior
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Subsistence/Travel--Pilot...............          $237,036         $93,461           $92,458        $422,955
    CPA Adjustment..........................           -11,178          -4,407            -4,360         -19,945
    Subsistence/Travel--Applicant...........            90,123          35,535            35,154         160,812
    Payroll Taxes--Pilots...................           124,088          48,927            48,402         221,417
    Payroll Taxes--Applicants...............            25,553          10,075             9,967          45,595
    License Insurance--Pilots...............            15,631           6,163             6,097          27,891
    Training--Pilots........................            25,830          10,185            10,075          46,090
    Training--Applicants....................            16,325           6,437             6,368          29,130
    Housing Allowance.......................            18,382           7,248             7,170          32,800
    Winter Meeting..........................            14,795           5,834             5,771          26,400
    Cell Phone Allowance....................            26,186          10,325            10,214          46,725
    Other Pilotage Costs....................            49,252          19,420            19,211          87,883
    CPA Adjustment..........................            -3,699          -1,446            -1,431          -6,576
                                             -------------------------------------------------------------------
        Total Other Pilotage Costs..........           628,324         247,757           245,096       1,121,177
Pilot Boat and Dispatch Costs:
    Pilot boat costs........................           397,610         156,774           155,092         709,476
    CPA Adjustment..........................           -27,756         -10,944           -10,826         -49,526
    Dispatch costs..........................            99,705          39,313            38,891         177,909
    Payroll taxes...........................             9,351           3,687             3,648          16,686
    Dispatch Employee Benefits..............             3,927           1,548             1,532           7,007
                                             -------------------------------------------------------------------
        Total Pilot and Dispatch Costs......           482,837         190,378           188,337         861,552
Administrative Expenses:
    Legal--General Counsel..................            32,149          12,676            12,540          57,365
    Legal--Shared Counsel...................            18,730           7,385             7,306          33,421
    Office Rent.............................             4,733           1,866             1,846           8,445
    Insurance...............................             3,715           1,465             1,449           6,629
    Employee benefits.......................            76,093          30,003            29,681         135,777
    Workers Compensation....................             1,513             597               590           2,700
    Payroll Taxes...........................             6,408           2,527             2,500          11,435
    Other Taxes.............................             1,034             408               403           1,845
    Admin Travel............................               676             267               264           1,207
    Depreciation/Auto Leasing/Other.........            50,959          20,093            19,877          90,929
    Interest................................             2,262             892               882           4,036
    APA Dues................................            20,544           8,100             8,013          36,657
    Utilities...............................             5,335           2,103             2,081           9,519
    Admin Salaries..........................            64,004          25,236            24,966         114,206
    Accounting/Professional Fees............            34,390          13,560            13,414          61,364
    Other...................................             6,170           2,433             2,407          11,010
                                             -------------------------------------------------------------------
        Total Administrative Expenses.......           328,715         129,611           128,219         586,545
                                             -------------------------------------------------------------------
            Total Operating Expenses (Other          1,439,876         567,746           561,652       2,569,274
             Costs + Pilot Boats + Admin)...
Adjustments (Director):
    Housing Allowance.......................           -18,382          -7,248            -7,170         -32,800
    Surcharge Adjustment....................           116,056          33,197           116,056         265,309
                                             -------------------------------------------------------------------
        Total Director's Adjustments........            97,674          25,949           108,886         232,509
                                             -------------------------------------------------------------------
            Total Operating Expenses (OpEx +         1,537,550         593,695           670,538       2,801,783
             Adjustments)...................
----------------------------------------------------------------------------------------------------------------


[[Page 20110]]

B. Step 2: Project Operating Expenses, Adjusting for Inflation or 
Deflation
---------------------------------------------------------------------------

    \57\ The undesignated areas in District Three (areas 6 and 8) 
are treated separately in table 27. In table 28 and subsequent 
tables, both undesignated areas are combined and analyzed as a 
single undesignated area.
    \58\ For a detailed calculation, refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    Having identified the recognized 2017 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation for 2017 to 2018 using the BLS data from the CPI 
for the Midwest Region of the United States.\59\ Because the BLS does 
not provide forecast inflation data, we use economic projections from 
the Federal Reserve for the 2019 and 2020 inflation 
modification.^{60, 61} Based on that information, the 
calculations for Step 1 are as follows:
---------------------------------------------------------------------------

    \59\ USCG-2019-0736-0003, p. 3.
    \60\ USCG-2019-0736-0002, p. 5.
    \61\ USCG-2019-0736-0002, p. 5.

                            Table 28--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $2,208,088        $593,695      $2,801,783
2018 Inflation Modification (@1.9%).............................          41,954          11,280          53,234
2019 Inflation Modification (@1.8%).............................          40,501          10,890          51,391
2020 Inflation Modification (@2%)...............................          45,811          12,317          58,128
                                                                 -----------------------------------------------
    Adjusted 2020 Operating Expenses............................       2,336,354         628,182       2,964,536
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimate the 
number of working pilots in each district. We determine the number of 
working pilots based on input from the Western Great Lakes Pilots 
Association. Using these numbers, we estimate that there will be 20 
working pilots in 2020 in District Three. Furthermore, based on the 
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 
41466), we assign a certain number of pilots to designated waters and a 
certain number to undesignated waters, as shown in table 29. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.

                       Table 29--Authorized Pilots
------------------------------------------------------------------------
                                                          District Three
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \62\...              22
2020 Authorized pilots (total)..........................              20
Pilots assigned to designated areas.....................               4
Pilots assigned to undesignated areas...................              16
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an ``interim'' ratemaking this year, we are 
following the procedure outlined in paragraph (b) of Sec.  404.104, 
which adjusts the existing compensation benchmark by inflation. Because 
we do not have a value for the employment cost index for 2020, we 
multiply the 2019 compensation benchmark of $359,887 by the Median PCE 
Inflation value of 2.0 percent.\63\ Based on the projected 2020 
inflation estimate, the compensation benchmark for 2020 is $367,085 per 
pilot.
---------------------------------------------------------------------------

    \62\ For a detailed calculation refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
    \63\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we verify that the number of pilots estimated for 2020 is 
less than or equal to the number permitted under the staffing model in 
Sec.  401.220(a). The staffing model suggests that the number of pilots 
needed for District Three is 22 pilots,\64\ which is more than or equal 
to the numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \64\ See table 6 of the Great Lakes Pilotage Rates--2017 Annual 
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The 
methodology of the staffing model is discussed at length in the 
final rule (see pages 41476-41480 for a detailed analysis of the 
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised 
target individual compensation level to derive the total pilot 
compensation by multiplying the individual target compensation by the 
estimated number of working pilots for District Three, as shown in 
table 30.

                                Table 30--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085
Number of Pilots................................................              16               4              20
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $5,873,360      $1,468,340      $7,341,700
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add together the figures for projected operating 
expenses and total pilot compensation for each area. Next, we find the 
preceding year's average annual rate of return for new issues of high 
grade corporate securities. Using Moody's data, the number is 3.93 
percent.\65\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in table 31.
---------------------------------------------------------------------------

    \65\ USCG-2019-0736-0005, p. 3.

[[Page 20111]]



                          Table 31--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $2,336,354        $628,182      $2,964,536
Total Target Pilot Compensation (Step 4)........................       5,873,360       1,468,340       7,341,700
                                                                 -----------------------------------------------
Total 2020 Expenses (Step 2 + Step 4)...........................       8,209,714       2,096,522      10,306,236
                                                                 -----------------------------------------------
Working Capital Fund (Total Expenses x 3.93%)...................         322,642          82,393         405,035
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add together all of the expenses accrued to derive 
the total revenue needed for each area. These expenses include the 
projected operating expenses (from Step 2), the total pilot 
compensation (from Step 4), and the working capital fund contribution 
(from Step 5). We show these calculations in table 32.

                                   Table 32--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 28)..............      $2,336,354        $628,182      $2,964,536
Total Target Pilot Compensation (Step 4, See Table 30)..........       5,873,360       1,468,340       7,341,700
                                                                 -----------------------------------------------
Working Capital Fund (Step 5, See Table 31).....................         322,642          82,393         405,035
                                                                 -----------------------------------------------
Total Revenue Needed............................................       8,532,356       2,178,915      10,711,271
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous 
six steps to develop an hourly rate, we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the average hours of traffic over 10 years 
in District Three, using the total time on task or pilot bridge 
hours.\66\ Because we calculate separate figures for designated and 
undesignated waters, there are two parts for each calculation. We show 
these values in table 33.
---------------------------------------------------------------------------

    \66\ USCG-2019-0736-0002, p. 5.

            Table 33--Time on Task for District Three (Hours)
------------------------------------------------------------------------
                                                  District Three
                  Year                   -------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
2018....................................          19,967           3,455
2017....................................          20,955           2,997
2016....................................          23,421           2,769
2015....................................          22,824           2,696
2014....................................          25,833           3,835
2013....................................          17,115           2,631
2012....................................          15,906           2,163
2011....................................          16,012           1,678
2010....................................          20,211           2,461
2009....................................          12,520           1,820
                                         -------------------------------
    Average.............................          19,476           2,651
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. The calculations 
for each area are set forth in table 34.

         Table 34--Initial Rate Calculations for District Three
------------------------------------------------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $8,532,356      $2,178,915
Average time on task (hours)............          19,476           2,651
                                         -------------------------------

[[Page 20112]]

 
    Initial rate........................            $438            $822
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculate the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in tables 35 and 
36.\67\
---------------------------------------------------------------------------

    \67\ USCG-2019-0736-0006, p.2

                    Table 35--Average Weighting Factor for District Three, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
Area 6:
    Class 1 (2014)..............................................              45               1              45
    Class 1 (2015)..............................................              56               1              56
    Class 1 (2016)..............................................             136               1             136
    Class 1 (2017)..............................................             148               1             148
    Class 1 (2018)..............................................             103               1             103
    Class 2 (2014)..............................................             274            1.15           315.1
    Class 2 (2015)..............................................             207            1.15          238.05
    Class 2 (2016)..............................................             236            1.15           271.4
    Class 2 (2017)..............................................             264            1.15           303.6
    Class 2 (2018)..............................................             169            1.15          194.35
    Class 3 (2014)..............................................              15             1.3            19.5
    Class 3 (2015)..............................................               8             1.3            10.4
    Class 3 (2016)..............................................              10             1.3              13
    Class 3 (2017)..............................................              19             1.3            24.7
    Class 3 (2018)..............................................               9             1.3            11.7
    Class 4 (2014)..............................................             394            1.45           571.3
    Class 4 (2015)..............................................             375            1.45          543.75
    Class 4 (2016)..............................................             332            1.45           481.4
    Class 4 (2017)..............................................             367            1.45          532.15
    Class 4 (2018)..............................................             337            1.45          488.65
                                                                 -----------------------------------------------
        Total for Area 6........................................           3,504  ..............        4,507.05
Area 8:
    Class 1 (2014)..............................................               3               1               3
    Class 1 (2015)..............................................               0               1               0
    Class 1 (2016)..............................................               4               1               4
    Class 1 (2017)..............................................               4               1               4
    Class 1 (2018)..............................................               0               1               0
    Class 2 (2014)..............................................             177            1.15          203.55
    Class 2 (2015)..............................................             169            1.15          194.35
    Class 2 (2016)..............................................             174            1.15           200.1
    Class 2 (2017)..............................................             151            1.15          173.65
    Class 2 (2018)..............................................             102            1.15           117.3
    Class 3 (2014)..............................................               3             1.3             3.9
    Class 3 (2015)..............................................               0             1.3               0
    Class 3 (2016)..............................................               7             1.3             9.1
    Class 3 (2017)..............................................              18             1.3            23.4
    Class 3 (2018)..............................................               7             1.3             9.1
    Class 4 (2014)..............................................             243            1.45          352.35
    Class 4 (2015)..............................................             253            1.45          366.85
    Class 4 (2016)..............................................             204            1.45           295.8
    Class 4 (2017)..............................................             269            1.45          390.05
    Class 4 (2018)..............................................             188            1.45           272.6
                                                                 -----------------------------------------------
        Total for Area 8........................................           1,976  ..............          2623.1
                                                                 -----------------------------------------------
            Combined total......................................           5,480  ..............        7,130.15
                                                                 -----------------------------------------------
                Average weighting factor (weighted transits/      ..............            1.30  ..............
                 number of transits)............................
----------------------------------------------------------------------------------------------------------------


[[Page 20113]]


                     Table 36--Average Weighting Factor for District Three, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                      Vessel class per year                          transits         factor         transits
                                                                             (A)             (B)         (A x B)
                                                                 -----------------------------------------------
Class 1 (2014)..................................................              27               1              27
Class 1 (2015)..................................................              23               1              23
Class 1 (2016)..................................................              55               1              55
Class 1 (2017)..................................................              62               1              62
Class 1 (2018)..................................................              47               1              47
Class 2 (2014)..................................................             221            1.15          254.15
Class 2 (2015)..................................................             145            1.15          166.75
Class 2 (2016)..................................................             174            1.15           200.1
Class 2 (2017)..................................................             170            1.15           195.5
Class 2 (2018)..................................................             126            1.15           144.9
Class 3 (2014)..................................................               4             1.3             5.2
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               6             1.3             7.8
Class 3 (2017)..................................................              14             1.3            18.2
Class 3 (2018)..................................................               6             1.3             7.8
Class 4 (2014)..................................................             321            1.45          465.45
Class 4 (2015)..................................................             245            1.45          355.25
Class 4 (2016)..................................................             191            1.45          276.95
Class 4 (2017)..................................................             234            1.45           339.3
Class 4 (2018)..................................................             225            1.45          326.25
                                                                 -----------------------------------------------
    Total.......................................................           2,296  ..............           2,977
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits per number    ..............            1.30  ..............
         of transits)...........................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that once the impact of 
the weighting factors are considered, the total cost of pilotage would 
be equal to the revenue needed. To do this, we divide the initial base 
rates, calculated in Step 7, by the average weighting factors 
calculated in Step 8, as shown in table 37.

                                 Table 37--Revised Base Rates for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (initial rate
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District Three: Designated......................................            $822            1.30            $632
District Three: Undesignated....................................             438            1.30             337
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish that the rates do meet 
the goal of ensuring safe, efficient, and reliable pilotage, the 
Director considers whether the rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the rates will cover 
operating expenses and infrastructure costs, and takes average traffic 
and weighting factors into consideration. Based on this information, 
the Director is not making any alterations to the rates in this step. 
We modified the text in Sec.  401.405(a) to reflect the final rates 
shown in table 38.

                                    Table 38--Final Rates for District Three
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2019     Proposed 2020    Final 2020
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District Three: Designated............  St. Mary's River........            $594            $621            $632
District Three: Undesignated..........  Lakes Huron, Michigan,               306             327             337
                                         and Superior.
----------------------------------------------------------------------------------------------------------------

K. Surcharges

    The Coast Guard is not implementing any surcharges in this 
ratemaking. As stated earlier, we previously used surcharges to pay for 
the training of new pilots, rather than incorporating training costs 
into the overall ``needed revenue'' that is used in the calculation of 
the base rate, because the surcharge accelerates the reimbursement of 
certain necessary and reasonable expense. For the 2019 ratemaking, this

[[Page 20114]]

reimbursement needed to be accelerated because of the large number of 
registered pilots retiring, and the large number of new pilots being 
trained to replace them. As the vast majority of registered pilots are 
not anticipated to retire in the next 20 years, the Coast Guard 
believes that pilot associations are now able to plan for the costs 
associated with retirements without relying on the Coast Guard to 
impose surcharges.

VIII. Regulatory Analyses

    We developed this rule after considering numerous statutes and 
Executive orders related to rulemaking. Below we summarize our analyses 
based on these statutes or Executive orders.

A. Regulatory Planning and Review

    Executive Orders 12866 (Regulatory Planning and Review) and 13563 
(Improving Regulation and Regulatory Review) direct agencies to assess 
the costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Order 13771 (Reducing Regulation and Controlling 
Regulatory Costs) directs agencies to reduce regulation and control 
regulatory costs and provides that ``for every one new regulation 
issued, at least two prior regulations be identified for elimination, 
and that the cost of planned regulations be prudently managed and 
controlled through a budgeting process.''
    The Office of Management and Budget (OMB) has not designated this 
rule a significant regulatory action under section 3(f) of Executive 
Order 12866. Accordingly, OMB has not reviewed it. Because this rule is 
not a significant regulatory action, this rule is exempt from the 
requirements of Executive Order 13771. See the OMB Memorandum titled 
``Guidance Implementing Executive Order 13771, titled ``Reducing 
Regulation and Controlling Regulatory Costs' '' (April 5, 2017). A 
regulatory analysis (RA) follows.
    The purpose of this final rule is to establish new base pilotage 
rates. The Great Lakes Pilotage Act of 1960 requires that rates be 
established or reviewed and adjusted each year. The Act requires that 
base rates be established by a full ratemaking at least once every five 
years, and in years when base rates are not established, they must be 
reviewed and, if necessary, adjusted. The last full ratemaking was 
concluded in June of 2018.\68\ The Coast Guard estimates an increase in 
cost of approximately $279,845 to industry as a result of the change in 
revenue needed in 2020 compared to the revenue needed in 2019. This is 
a 1 percent net increase in estimated payments made by shippers from 
the 2019 shipping season. Table 39 summarizes changes with no cost 
impacts or where the cost impacts are captured in the final rate 
change. Table 40 summarizes the affected population, costs, and 
benefits of the final rate change. The Coast Guard estimates an 
increase in cost of approximately $279,845 to industry as a result of 
the change in revenue needed in 2020 compared to the revenue needed in 
2019. This is a 1 percent net increase in estimated payments made by 
shippers from the 2019 shipping season.
---------------------------------------------------------------------------

    \68\ Great Lakes Pilotage Rates--2018 Annual Review and 
Revisions to Methodology (83 FR 26162), published June 5, 2018.

                       Table 39--Changes With No Costs or Cost Captured in the Final Rate
----------------------------------------------------------------------------------------------------------------
                                                           Affected
             Change                   Description         population       Basis for no cost       Benefits
----------------------------------------------------------------------------------------------------------------
Working capital fund              The Coast Guard is  The 3 pilotage      All three           Provides increased
 requirements.                     adding regulatory   associations.       districts opened    transparency and
                                   text to Sec.                            accounts for the    oversight of how
                                   403.110 requiring                       working capital     the money in the
                                   the pilotage                            fund in response    working capital
                                   associations keep                       to a policy         fund is spent and
                                   money allocated                         letter sent by      how much each
                                   to the working                          the Coast Guard     association has
                                   capital fund in a                       in November,        allocated for
                                   separate account                        2018; therefore,    infrastructure
                                   and limit the use                       there is no         expenses.
                                   of the funds to                         additional cost
                                   infrastructure                          as a result of
                                   expenses.                               this rulemaking.
                                                                           In addition,
                                                                           based on
                                                                           discussion with
                                                                           the associations,
                                                                           the cost to open
                                                                           these accounts
                                                                           was negligible,
                                                                           as each
                                                                           association was
                                                                           able to open a
                                                                           bank account
                                                                           online with their
                                                                           existing
                                                                           financial
                                                                           institutions with
                                                                           minimal effort.
                                                                           Recordkeeping
                                                                           associated with
                                                                           the new bank
                                                                           accounts may be
                                                                           conducted
                                                                           simultaneously
                                                                           with the
                                                                           recordkeeping for
                                                                           the existing
                                                                           accounts, as all
                                                                           accounts are with
                                                                           the same
                                                                           financial
                                                                           institution. In
                                                                           addition, the
                                                                           associations must
                                                                           already report
                                                                           and keep records
                                                                           on their
                                                                           infrastructure
                                                                           expense as part
                                                                           of their
                                                                           reporting
                                                                           requirements
                                                                           under Sec.
                                                                           403.105.

[[Page 20115]]

 
Address inconsistent terms......  The Coast Guard is  The 3 pilotage      The Coast Guard     Creates
                                   replacing the       associations.       previously          consistency
                                   text in Sec.                            renamed the         across the CFR
                                   404.106, ``return                       ``return on         and reduces
                                   on investment''                         investment'' as     confusion.
                                   with ``working                          the ``working
                                   capital fund''.                         capital fund'' in
                                                                           the Great Lakes
                                                                           Pilotage Rates
                                                                           2017 Annual
                                                                           Review final rule
                                                                           (82 FR 41466);
                                                                           however, this
                                                                           text was not
                                                                           modified in that
                                                                           rulemaking.
Target pilot compensation.......  The Coast Guard is  Owners and          Pilot compensation  This compensation
                                   changing the base   operators of 266    costs are           target achieves
                                   pilot               vessels             accounted for in    the Coast Guard's
                                   compensation        journeying the      the base pilotage   goals of safety
                                   benchmark in Sec.   Great Lakes         rates.              through rate and
                                     401.405(a) to     system annually,                        compensation
                                   the 2019            52 U.S. Great                           stability, while
                                   compensation        Lakes pilots, and                       promoting
                                   benchmark after     3 pilotage                              recruitment and
                                   adjusting for       associations.                           retention of
                                   inflation.                                                  qualified U.S.
                                                                                               registered
                                                                                               pilots.
----------------------------------------------------------------------------------------------------------------


                                 Table 40--Economic Impacts Due to Rate Changes
----------------------------------------------------------------------------------------------------------------
                                                           Affected
             Change                   Description         population             Costs             Benefits
----------------------------------------------------------------------------------------------------------------
Rate and surcharge changes......  Under the Great     Owners and          Increase of         Promotes safe,
                                   Lakes Pilotage      operators of 266    $279,845 due to     efficient, and
                                   Act of 1960, the    vessels             change in revenue   reliable pilotage
                                   Coast Guard is      transiting the      needed for 2020     service on the
                                   required to         Great Lakes         ($28, 268,030)      Great Lakes.
                                   review and adjust   system annually,    from revenue       Provides fair
                                   base pilotage       52 U.S. Great       needed for 2019     compensation,
                                   rates annually.     Lakes pilots, and   ($27,988,185) as    adequate
                                                       3 pilotage          shown in Table 41   training, and
                                                       associations.       below.              sufficient rest
                                                                                               periods for
                                                                                               pilots. New rates
                                                                                               cover an
                                                                                               association's
                                                                                               necessary and
                                                                                               reasonable
                                                                                               operating
                                                                                               expenses.
                                                                                              Ensures the
                                                                                               association
                                                                                               receives
                                                                                               sufficient
                                                                                               revenues to fund
                                                                                               future
                                                                                               improvements.
----------------------------------------------------------------------------------------------------------------

    Table 41 summarizes the changes in the regulatory analysis from the 
NPRM to the final rule. The Coast Guard made these changes as a result 
of public comments received after publication of the NPRM. The Coast 
Guard did not receive any comments on the regulatory analysis itself, 
but did receive comments on the operating expenses that affected the 
calculation of projected revenues. In the final rule, the Coast Guard 
made two adjustments to the operating expenses based on public comment: 
(1) We adjusted the operating expenses to include the 3 percent shared 
council fee which we incorrectly deducted in the NPRM; and (2) we added 
a surcharge adjustment for District 2 and District 3 to account for the 
differences between their accrued training expenses and the amount of 
money they collected via the surcharge. An in-depth discussion of these 
comments is located in Section VI of the preamble, Discussion of 
Comments.

                              Table 41--Summary of Changes from NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
       Element of the analysis                   NPRM                  Final rule         Resulting change in RA
----------------------------------------------------------------------------------------------------------------
Operating Expenses (Step 1)..........  Incorrectly deducted 3%  Removes deduction for    Data affects the
                                        shared council           all three districts.     calculation of
                                        expenses from the                                 projected revenues.
                                        operating expenses for
                                        all districts.
                                       Did not include          Includes a $158,308
                                        required surcharge       surcharge adjustment
                                        adjustments for          for District 2 and a
                                        District 2 and           $265,309 surcharge
                                        District 3.              adjustment for
                                                                 District 3.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on 
the Great Lakes annually. See Sections III and IV of this preamble for 
detailed discussions of the legal basis and purpose for this rulemaking 
and for background information on Great Lakes pilotage ratemaking. 
Based on our annual review for this rulemaking, we adjusted the 
pilotage rates for the 2020 shipping season to generate sufficient 
revenues for each district to reimburse its necessary and reasonable 
operating expenses, fairly compensate trained and rested pilots, and 
provide an appropriate working capital fund to use for improvements. 
The rate changes in this final rule will increase the rates for

[[Page 20116]]

five areas (District One: Designated, all of District Two, and all of 
District Three), and decrease the rates for the remaining area 
(District One: Undesignated). In addition, the final rule will not 
implement a surcharge. These changes lead to a net increase in the cost 
of service to shippers. However, because the rates will increase for 
most areas and decrease for one, the change in per unit cost to each 
individual shipper will be dependent on their area of operation, and if 
they previously paid a surcharge.
    A detailed discussion of our economic impact analysis follows.
Affected Population
    This final rule will impact U.S. Great Lakes pilots, the three 
pilot associations, the Saint Lawrence Seaway Pilotage Association, the 
Lakes Pilotage Association, and the Western Great Lakes Pilotage, and 
the owners and operators of oceangoing vessels that transit the Great 
Lakes annually. We estimate that there will be 52 pilots working during 
the 2020 shipping season. The shippers affected by these rate changes 
are the owners and operators of domestic vessels operating ``on 
register'' (engaged in foreign trade) and owners and operators of non-
Canadian foreign vessels on routes within the Great Lakes system. These 
owners and operators must have pilots or pilotage service as required 
by 46 U.S.C. 9302. There is no minimum tonnage limit or exemption for 
these vessels. The statute applies only to commercial vessels and not 
to recreational vessels. U.S.-flagged vessels not operating on register 
and Canadian ``lakers,'' which account for most commercial shipping on 
the Great Lakes, are not required by 46 U.S.C. 9302 to have pilots. 
However, these U.S.- and Canadian-flagged lakers may voluntarily choose 
to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged 
may opt to have a pilot for varying reasons, such as unfamiliarity with 
designated waters and ports, or for insurance purposes.
    The Coast Guard used billing information from the years 2016 
through 2018 from the Great Lakes Pilotage Management System (GLPMS) to 
estimate the average annual number of vessels affected by the rate 
adjustment.\69\ The GLPMS tracks data related to managing and 
coordinating the dispatch of pilots on the Great Lakes, and billing in 
accordance with the services. As described in Step 7 of the 
methodology, we use a 10-year average to estimate the traffic. However, 
when we reviewed 10 years of the most recent billing data, we found 
that the data included vessels that have not used pilotage services in 
recent years. Therefore, we used 3 years of the most recent billing 
data to estimate the affected population. Using 3 years of billing data 
is a better representation of the vessel population currently using 
pilotage services and, therefore, mostly likely be impacted by this 
rulemaking. We found that 457 unique vessels used pilotage services 
during the years 2016 through 2018. That is, these vessels had a pilot 
dispatched to the vessel, and billing information was recorded in the 
GLPMS. Of these vessels, 420 were foreign-flagged vessels and 37 were 
U.S.-flagged vessels. As previously stated, U.S.-flagged vessels not 
operating on register are not required to have a registered pilot per 
46 U.S.C. 9302, but can voluntarily choose to have one.
---------------------------------------------------------------------------

    \69\ 2019 GLPMS was not available at the time of analysis, 
December 2019.
---------------------------------------------------------------------------

    Numerous factors affect vessel traffic, which varies from year to 
year. Therefore, rather than using the total number of vessels over the 
time period, we took an average of the unique vessels using pilotage 
services from the years 2016 through 2018 as the best representation of 
vessels estimated to be affected by the rates in this rulemaking. From 
2016 through 2018, an average of 266 vessels used pilotage services 
annually.\70\ On average, 248 of these vessels were foreign-flagged 
vessels and 18 were U.S.-flagged vessels that voluntarily opted into 
the pilotage service.
---------------------------------------------------------------------------

    \70\ Some vessels entered the Great Lakes multiple times in a 
single year, affecting the average number of unique vessels 
utilizing pilotage services in any given year.
---------------------------------------------------------------------------

Total Cost to Shippers
    The rate changes from this final rule will result in a net increase 
in the cost of service to shippers. However, because the rates will 
increase for five areas and decrease for one, the change in per unit 
cost to each individual shipper is dependent on their area of 
operation, and if they previously paid a surcharge.
    The Coast Guard estimates the effect of the rate changes on 
shippers by comparing the total projected revenues needed to cover 
costs in 2019 with the total projected revenues to cover costs in 2020, 
including any temporary surcharges we have authorized.\71\ We set 
pilotage rates so that pilot associations receive enough revenue to 
cover their necessary and reasonable expenses. Shippers pay these rates 
when they have a pilot, as required by 46 U.S.C. 9302. Therefore, the 
aggregate payments of shippers to pilot associations are equal to the 
projected necessary revenues for pilot associations. The revenues each 
year represent the total costs that shippers must pay for pilotage 
services. The change in revenue from the previous year is the 
additional cost to shippers discussed in this rule.
---------------------------------------------------------------------------

    \71\ While the Coast Guard implemented a surcharge in 2019, we 
are not implementing any surcharges for 2020.
---------------------------------------------------------------------------

    The impacts of the rate changes on shippers are estimated from the 
district pilotage projected revenues (shown in tables 8, 20, and 32 of 
this preamble). The Coast Guard estimates that for the 2020 shipping 
season, the projected revenue needed for all three districts is 
$28,268,030.
    To estimate the change in cost to shippers from this rule, the 
Coast Guard compared the 2020 total projected revenues to the 2019 
projected revenues. Because we review and prescribe rates for the Great 
Lakes Pilotage annually, the effects are estimated as a single-year 
cost rather than annualized over a 10-year period. In the 2019 
rulemaking, we estimated the total projected revenue needed for 2019, 
including surcharges, as $27,988,185.\72\ This is the best 
approximation of 2019 revenues, as, at the time of this publication, we 
do not have enough audited data available for the 2019 shipping season 
to revise these projections. Table 42 shows the revenue projections for 
2019 and 2020 and details the additional cost increases to shippers by 
area and district as a result of the rate changes on traffic in 
Districts One, Two, and Three.
---------------------------------------------------------------------------

    \72\ 84 FR 20551, see table 36.

[[Page 20117]]



                                                                        Table 42--Effect of the Rule by Area and District
                                                                                     [$U.S.; Non-discounted]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Revenue          2019         Total 2019        Revenue          2020         Total 2020       Change in      Percentage
                              Area                                   needed in       temporary       projected       needed in       temporary       projected    costs of  this   change  from
                                                                       2019          surcharge        revenue          2020          surcharge        revenue          rule       previous  year
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District One.............................................      $9,271,852        $300,000      $9,571,852      $9,210,888              $0      $9,210,888       -$360,964              -4
Total, District Two.............................................       7,864,224         150,000       8,014,224       8,345,871               0       8,345,871         331,647               4
Total, District Three...........................................       9,802,109         600,000      10,402,109      10,711,271               0      10,711,271         309,162               3
                                                                 -------------------------------------------------------------------------------------------------------------------------------
    System Total................................................      26,938,185       1,050,000      27,988,185      28,268,030               0      28,268,030         279,845               1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting difference between the projected revenue in 2019 and 
the projected revenue in 2020 is the annual change in payments from 
shippers to pilots as a result of the rate change imposed by this rule. 
The effect of the rate change to shippers varies by area and district. 
The rate changes, after taking into account the change in pilotage 
rates, will lead to affected shippers operating in District One 
experiencing a decrease in payments of $360,964 over the previous year. 
District Two and District Three will experience an increase in payments 
of $331,647 and $309,162 respectively, when compared with 2019. The 
overall adjustment in payments will be an increase in payments by 
shippers of $279,845 across all three districts (a 1-percent increase 
when compared with 2019). Again, because the Coast Guard reviews and 
sets rates for Great Lakes Pilotage annually, we estimate the impacts 
as single-year costs rather than annualizing them over a 10-year 
period.
    Table 43 shows the difference in revenue by revenue-component from 
2019 to 2020, and presents each revenue-component as a percentage of 
the total revenue needed. In both 2019 and 2020, the largest revenue-
component was pilotage compensation (66 percent of total revenue needed 
in 2019 and 68 percent of total revenue needed in 2020), followed by 
operating expenses (27 percent of total revenue needed in 2019 and 29 
percent of total revenue 2020).

                                                      Table 43--Difference in Revenue by Component
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Percentage of                   Percentage of                    Percentage
                                                          Revenue needed   total revenue  Revenue needed   total revenue    Difference      change from
                    Revenue-component                         in 2019     needed in 2019      in 2020     needed in 2020  (2020 revenue-   previous year
                                                                             (percent)                       (percent)     2019 revenue)     (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses.............................      $7,565,310              27      $8,110,685              29        $545,375               7
Total Target Pilot Compensation.........................      18,354,237              66      19,088,420              68         734,183               4
Working Capital Fund....................................       1,018,638               4       1,068,925               4          50,287               5
Total Revenue Needed, without Surcharge.................      26,938,185              96      28,268,030             100       1,329,845               5
Surcharge...............................................       1,050,000               4               0               0      -1,050,000            -100
Total Revenue Needed, with Surcharge....................      27,988,185             100      28,268,030             100         279,845               1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Totals may not sum due to rounding.

    Table 44 presents the percentage change in revenue by area and 
revenue-component, excluding surcharges, as they are applied at the 
district level.\73\ The majority of the increase in revenue is due to 
inflation of operating expenses, and the net addition of one additional 
pilot. The target compensation for each pilot is $367,085; therefore, 
the net addition of this pilot to full working status accounts for 
$367,085 of the increase in the revenue needed. The change in revenue 
also accounts for the inflation of pilotage compensation and the 
removal of surcharges to cover the cost of applicant pilot training 
expenses. The total difference in the revenues needed in 2019 compared 
to the revenues needed in 2020 is $279,845, which takes into account 
the effect of increasing compensation for the other 51 pilots. The 
remaining amount is attributed to increases in the working capital 
fund.
---------------------------------------------------------------------------

    \73\ The 2019 projected revenues are from the Great Lakes 
Pilotage Rates--2019 Annual Review and Revisions to Methodology 
final rule (84 FR 20551) tables 15-17. The 2020 projected revenues 
are from tables 8, 20, and 32 of this final rule.

                                                                      Table 44--Difference in Revenue by Component and Area
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  Total revenue needed
                                                     Adjusted   Total target   Working ---------------------------------------------------------------------------------------------------------
                       Area                          operating      pilot      capital                          Percentage                        Percentage                          Percentage
                                                     expenses   compensation    fund       2019        2020       change       2019       2020      change       2019        2020       change
                                                           (A)     (B-A) / B       (B)         (C)         (D)   (D-C) / D        (E)        (F)   (F-E) / F  (G = A + C  (H = B + D   (H-G) / H
                                                                                                                                                                    + E)        + F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
District One: Designated..........................  $1,467,171    $1,573,286         7  $3,598,870  $3,670,850           2   $199,095   $206,095           3  $5,265,136  $5,450,231           3
District One: Undesignated........................   1,335,997     1,048,857       -27   2,519,209   2,569,595           2    151,510    142,205          -7   4,006,716   3,760,657          -7
District Two: Undesignated........................   1,072,441     1,019,371        -5   2,519,209   2,936,680          14    141,152    155,473           9   3,732,802   4,111,524           9
District Two: Designated..........................   1,455,988     1,504,635         3   2,519,209   2,569,595           2    156,225    160,117           2   4,131,422   4,234,347           2
District Three: Undesignated......................   1,703,896     2,336,354        27   5,758,192   5,873,360           2    293,260    322,642           9   7,755,348   8,532,356           9
District Three: Designated........................     529,817       628,182        16   1,439,548   1,468,340           2     77,396     82,393           6   2,046,761   2,178,915           6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 20118]]

Benefits
    This final rule allows the Coast Guard to meet the requirements in 
46 U.S.C. 9303 to review the rates for pilotage services on the Great 
Lakes. The rate changes will promote safe, efficient, and reliable 
pilotage service on the Great Lakes by: (1) Ensuring that rates cover 
an association's operating expenses; (2) providing fair pilot 
compensation, adequate training, and sufficient rest periods for 
pilots; and (3) ensuring pilot associations produce enough revenue to 
fund future improvements. The rate changes will also help recruit and 
retain pilots, which will ensure a sufficient number of pilots to meet 
peak shipping demand, helping reduce delays caused by pilot shortages.

B. Small Entities

    Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have 
considered whether this final rule will have a significant economic 
impact on a substantial number of small entities. The term ``small 
entities'' comprises small businesses, not-for-profit organizations 
that are independently owned and operated and are not dominant in their 
fields, and governmental jurisdictions with populations of less than 
50,000.
---------------------------------------------------------------------------

    \74\ See https://www.manta.com/.
    \75\ See https://resource.referenceusa.com/.
    \76\ The RFA (5 U.S.C. 601(3)) refers to the Small Business Act 
for the definition of a small business. The Small Business Act in 
turn allows the SBA Administrator to specify detailed definitions or 
standards by which a business may be determined to be small, under 
15 U.S.C. 632(a)(2)(A). Under this authority, the SBA defines a 
small business at 13 CFR 121.105(a)(1), which states that, ``Except 
for small agricultural cooperatives, a business concern eligible for 
assistance from SBA as a small business is a business entity 
organized for profit, with a place of business located in the United 
States, and which operates primarily within the United States or 
which makes a significant contribution to the U.S. economy through 
payment of taxes or use of American products, materials or labor.'' 
Therefore, we do not include impact on foreign entities in our 
impact analysis under the RFA.
    \77\ See: https://www.sba.gov/document/support--table-size-
standards. SBA has established a ``Table of Size Standards'' for 
small businesses that sets small business size standards by NAICS 
code. A size standard, which is usually stated in number of 
employees or average annual receipts (``revenues''), represents the 
largest size that a business (including its subsidiaries and 
affiliates) may be in order to remain classified as a small business 
for SBA and Federal contracting programs.
---------------------------------------------------------------------------

    For this rule, the Coast Guard considered the potential impact to 
vessel owners and operators, the three pilotage associations, as well 
as any other entities that may be impacted by the rule, such as not-
for-profit organizations and governmental jurisdictions. First, we 
reviewed recent company ownership data for the vessels identified in 
the GLPMS, and then reviewed their business revenue and employment size 
data provided by publicly available sources such as Manta\74\ and 
ReferenceUSA.\75\ As described in Section VIII.A of this preamble, 
Regulatory Planning and Review, we found that a total of 457 unique 
vessels used pilotage services from 2016 through 2018. These vessels 
are owned by 55 entities. We found that, of the 55 entities that own or 
operate vessels engaged in trade on the Great Lakes that would be 
affected by this rule, 43 are foreign entities that operate primarily 
outside the United States, and we do not consider the impact on these 
entities under the Regulatory Flexibility Act (RFA).\76\ The remaining 
12 entities are U.S. entities. For each entity, we compared the revenue 
and employee data found in the company search described above to the 
Small Business Administration's (SBA) small business threshold as 
defined in the SBA's ``Table of Size Standards'' for small businesses 
to determine how many of these companies are small entities.\77\ Table 
45 shows the North American Industry Classification System (NAICS) 
codes of the U.S. entities and the small entity standard size 
established by the SBA.

         Table 45--NAICS Codes and Small Entities Size Standards
------------------------------------------------------------------------
                                                      Small entity size
          NAICS                   Description              standard
------------------------------------------------------------------------
211120...................  Crude Petroleum           1,250 employees.
                            Extraction.
238910...................  Site Preparation          $15.0 million.
                            Contractors.
488330...................  Navigational Services to  $38.5 million.
                            Shipping.
523910...................  Miscellaneous             $38.5 million.
                            Intermediation.
532411...................  Commercial Air, Rail,     $32.5 million.
                            and Water
                            Transportation
                            Equipment Rental and
                            Leasing.
551111...................  Offices of Bank Holding   $20.5 million.
                            Companies.
561510...................  Travel Agencies.........  $20.5 million.
928110...................  National Security.......  Population of
                                                      50,000 People.
------------------------------------------------------------------------

    Of the 12 U.S. entities, 10 exceed the SBA's small business 
standards for small entities. To estimate the potential impact on the 2 
small entities, the Coast Guard used their 2018 invoice data to 
estimate their pilotage costs in 2020. We increased their 2018 costs to 
account for the changes in pilotage rates resulting from this rule and 
the Great Lakes Pilotage Rates--2019 Annual Review and Revisions to 
Methodology final rule (84 FR 20551). We estimated the change in cost 
to these entities resulting from this rule by subtracting their 
estimated 2019 costs from their estimated 2020 costs. We then compared 
the estimated change in pilotage costs between 2019 and 2020 with each 
firm's annual revenue and compared their total estimated 2020 pilotage 
costs to their annual revenue. In both cases, the change in their 
estimated pilotage expenses were below 1 percent of their annual 
revenue. Table 46 presents the calculation of these cost estimates for 
both entities.

                                               Table 46--Estimated 2020 Pilotage Costs for Small Entities
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Estimated                                Estimated                                Estimated
                                                           change in                                change in                                change in
                Entity                   2018 pilotage  pilotage costs  Estimated 2019 pilotage  pilotage costs  Estimated 2020 pilotage     pilotage
                                           expenses      between 2018           expenses          between 2019           expenses          expenses from
                                                         and 2019 \78\                              and 2020                               2019 to 2020
(%) (%)                                            (a)             (b)    (c) = (a) x (1 + (b))             (d)    (e) = (c) x (1 + (d))     (f) = (e) -
                                                                                                                                                     (c)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small Entity A........................          $4,754              11                   $5,277               1                   $5,330             $53

[[Page 20119]]

 
Small Entity B........................         148,389              11                  164,712               1                  166,359           1,647
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In addition to the owners and operators discussed above, three U.S. 
entities that receive revenue from pilotage services will be affected 
by this final rule: The three pilot associations that provide and 
manage pilotage services within the Great Lakes districts. Two of the 
associations operate as partnerships, and one operates as a 
corporation. These associations are designated with the same NAICS code 
and small-entity size standards described above, but have fewer than 
500 employees. Combined, they have approximately 65 employees in total 
and, therefore, are designated as small entities. The Coast Guard 
expects no adverse effect on these entities from this final rule 
because the three pilot associations will receive enough revenue to 
balance the projected expenses associated with the projected number of 
bridge hours (time on task) and pilots.
---------------------------------------------------------------------------

    \78\ 84 FR 20551, see table 37
---------------------------------------------------------------------------

    Finally, the Coast Guard did not find any small not-for-profit 
organizations that are independently owned and operated and are not 
dominant in their fields that will be impacted by this rule. We did not 
find any small governmental jurisdictions with populations of fewer 
than 50,000 people that will be impacted by this rule. Based on this 
analysis, we conclude this rulemaking will not affect a substantial 
number of small entities, nor have a significant economic impact on any 
of the affected entities.
    Based on our analysis, this rule will have a less-than 1 percent 
annual impact on 2 small entities; therefore, the Coast Guard certifies 
under 5 U.S.C. 605(b) that this rule will not have a significant 
economic impact on a substantial number of small entities.

C. Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement 
Fairness Act of 1996, Public Law 104-121, we offer to assist small 
entities in understanding this rule so that they can better evaluate 
its effects on them and participate in the rulemaking. The Coast Guard 
will not retaliate against small entities that question or complain 
about this rule or any policy or action of the Coast Guard.
    Small businesses may send comments on the actions of Federal 
employees who enforce, or otherwise determine compliance with, Federal 
regulations to the Small Business and Agriculture Regulatory 
Enforcement Ombudsman and the Regional Small Business Regulatory 
Fairness Boards. The Ombudsman evaluates these actions annually and 
rates each agency's responsiveness to small business. If you wish to 
comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR 
(1-888-734-3247).

D. Collection of Information

    This final rule calls for no new collection of information under 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). This rule 
will not change the burden in the collection currently approved by OMB 
under OMB Control Number 1625-0086, Great Lakes Pilotage Methodology.

E. Federalism

    A rule has implications for federalism under Executive Order 13132 
(Federalism) if it has a substantial direct effect on States, on the 
relationship between the National Government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. We have analyzed this rule under Executive Order 13132 and 
have determined that it is consistent with the fundamental federalism 
principles and preemption requirements described in Executive Order 
13132. Our analysis follows.
    Congress directed the Coast Guard to establish ``rates and charges 
for pilotage services.'' See 46 U.S.C. 9303(f). This regulation is 
issued pursuant to that statute and is preemptive of State law as 
specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a ``State or 
political subdivision of a State may not regulate or impose any 
requirement on pilotage on the Great Lakes.'' As a result, States or 
local governments are expressly prohibited from regulating within this 
category. Therefore, this final rule is consistent with the fundamental 
federalism principles and preemption requirements described in 
Executive Order 13132.

F. Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, 
requires Federal agencies to assess the effects of their discretionary 
regulatory actions. In particular, the Act addresses actions that may 
result in the expenditure by a State, local, or tribal government, in 
the aggregate, or by the private sector of $100,000,000 (adjusted for 
inflation) or more in any one year. Although this rule will not result 
in such expenditure, we do discuss the effects of this rule elsewhere 
in this preamble.

G. Taking of Private Property

    This rule will not cause a taking of private property or otherwise 
have taking implications under Executive Order 12630 (Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights).

H. Civil Justice Reform

    This rule meets applicable standards in sections 3(a) and 3(b)(2) 
of Executive Order 12988 (Civil Justice Reform) to minimize litigation, 
eliminate ambiguity, and reduce burden.

I. Protection of Children

    We have analyzed this rule under Executive Order 13045 (Protection 
of Children from Environmental Health Risks and Safety Risks). This 
rule is not an economically significant rule and would not create an 
environmental risk to health or risk to safety that might 
disproportionately affect children.

J. Indian Tribal Governments

    This rule does not have tribal implications under Executive Order 
13175 (Consultation and Coordination with Indian Tribal Governments), 
because it will not have a substantial direct effect on one or more 
Indian tribes, on the relationship between the Federal Government and 
Indian tribes, or on the distribution of power and responsibilities 
between the Federal Government and Indian tribes.

[[Page 20120]]

K. Energy Effects

    We have analyzed this rule under Executive Order 13211 (Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use). We have determined that it is not a 
``significant energy action'' under that order because it is not a 
``significant regulatory action'' under Executive Order 12866 and is 
not likely to have a significant adverse effect on the supply, 
distribution, or use of energy.

L. Technical Standards

    The National Technology Transfer and Advancement Act, codified as a 
note to 15 U.S.C. 272, directs agencies to use voluntary consensus 
standards in their regulatory activities unless the agency provides 
Congress, through OMB, with an explanation of why using these standards 
would be inconsistent with applicable law or otherwise impractical. 
Voluntary consensus standards are technical standards (e.g., 
specifications of materials, performance, design, or operation; test 
methods; sampling procedures; and related management systems practices) 
that are developed or adopted by voluntary consensus standards bodies.
    This rule does not use technical standards. Therefore, we did not 
consider the use of voluntary consensus standards.

M. Environment

    We have analyzed this rule under Department of Homeland Security 
Management Directive 023-01, Rev. 1, associated implementing 
instructions, and Environmental Planning COMDTINST 5090.1 (series), 
which guide the Coast Guard in complying with the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made 
a determination that this action is one of a category of actions that 
do not individually or cumulatively have a significant effect on the 
human environment. A Record of Environmental Consideration (REC) 
supporting this determination is available in the docket. For 
instructions on locating the docket, see the ADDRESSES portion of this 
preamble.
    This rule is categorically excluded under paragraphs A3 and L54 of 
Appendix A, Table 1 of DHS Instruction Manual 023-01, Rev. 1.\79\ 
Paragraph A3 pertains to the promulgation of rules, issuance of rulings 
or interpretations, and the development and publication of policies, 
orders, directives, notices, procedures, manuals, advisory circulars, 
and other guidance documents of the following nature: (a) Those of a 
strictly administrative or procedural nature; (b) those that implement, 
without substantive change, statutory or regulatory requirements; or 
(c) those that implement, without substantive change, procedures, 
manuals, and other guidance documents; and d) those that interpret or 
amend an existing regulation without changing its environmental effect. 
Paragraph L54 pertains to regulations which are editorial or 
procedural. This rule involves: (1) Clarifying the rules related to the 
working capital fund, (2) adjusting the base pilotage rates, and (3) 
eliminating surcharges for administering the 2020 shipping season in 
accordance with applicable statutory and regulatory mandates pursuant 
to the Great Lakes Pilotage Act of 1960.
---------------------------------------------------------------------------

    \79\ https://www.dhs.gov/sites/default/files/publications/DHS_InstructionManual023-01-001-01Rev01_508compliantversion.pdf.
---------------------------------------------------------------------------

List of Subjects

46 CFR Part 401

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

46 CFR Part 403

    Great Lakes, Navigation (water), Reporting and recordkeeping 
requirements, Seamen, Uniform System of Accounts

46 CFR Part 404

    Great Lakes, Navigation (water), Seamen.

    For the reasons discussed in the preamble, the Coast Guard amends 
46 CFR parts 401, 403, and 404 as follows:

PART 401--GREAT LAKES PILOTAGE REGULATIONS

0
 1. The authority citation for part 401 continues to read as follows:

    Authority: 46 U.S.C. 2103, 2104(a), 6101, 7701, 8105, 9303, 
9304; Department of Homeland Security Delegation No. 
0170.1(II)(92.a), (92.d), (92.e), (92.f).

0
 2. Amend Sec.  401.405 by revising paragraph (a) to read as follows:


Sec.  401.405  Pilotage rates and charges.

    (a) The hourly rate for pilotage service on--
    (1) The St. Lawrence River is $758;
    (2) Lake Ontario is $463;
    (3) Lake Erie is $586;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$618;
    (5) Lakes Huron, Michigan, and Superior is $337; and
    (6) The St. Mary's River is $632.
* * * * *

PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM

0
3. The authority citation for part 403 continues to read as follows:

    Authority:  46 U.S.C. 2103, 2104(a), 9303, 9304; Department of 
Homeland Security Delegation No. 0170.1(II)(92.a), (92.f).

0
4. Amend Sec.  403.110 by:
0
a. Designating the text as paragraph (a); and
0
b. Adding paragraph (b).
    The addition reads as follows:


Sec.  403.110   Accounting entities.

* * * * *
    (b) Each Association will maintain a separate account called the 
``Working Capital Fund.'' Each Association will deposit into the 
working capital fund an amount each year at least equal to the amount 
calculated in Step 5, 46 CFR 404.105. Working capital funds may only be 
used for infrastructure improvements and infrastructure maintenance 
necessary to provide safe, efficient, and reliable pilot service such 
as pilot boat replacements, major repairs to pilot boats, non-recurring 
technology purchases necessary for providing pilot services, or for the 
acquisition of real property for use as a dispatch center, office 
space, or pilot lodging. The Director may grant exceptions to the 
requirements of this paragraph (403.110(b)) upon request by an 
Association.

PART 404--GREAT LAKES PILOTAGE RATEMAKING

0
5. The authority citation for part 404 continues to read as follows:

    Authority:  46 U.S.C. 2103, 2104(a), 9303, 9304; Department of 
Homeland Security Delegation No. 0170.1(II)(92.a), (92.f).


Sec.  404.106  [Amended]

0
6. Amend Sec.  404.106 by removing the words ``return on investment'' 
and adding their place ``working capital fund''.

    Dated: March 30, 2020.
R.V. Timme,
Rear Admiral, U.S. Coast Guard, Assistant Commandant for Prevention 
Policy.
[FR Doc. 2020-06968 Filed 4-8-20; 8:45 am]
 BILLING CODE 9110-04-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.