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 Department of Homeland Security Coast Guard 46 CFR Parts 401 and 404
[USCG-2017-0903]
RIN 1625-AC40
 AGENCY: Coast Guard, DHS.
 ACTION: Notice of proposed rulemaking.
 SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the Coast Guard proposes new base pilotage rates and surcharges for the 2018 shipping season. Additionally, the Coast Guard is proposing several changes to the Great Lakes pilotage ratemaking methodology. These additional proposed changes include creating clear delineation between the Coast Guard's annual rate adjustments and the Coast Guard's requirement to conduct a full ratemaking every five years; the adoption of a revised compensation benchmark; reorganization of the text regarding the staffing model for calculating the number of pilots needed; and certain editorial changes.
 DATES: Comments and related material must be submitted to the online docket via 
                        *https://www.regulations.gov,*
                         or reach the Docket Management Facility, on or before February 20, 2018.
 ADDRESSES: You may submit comments identified by docket number USCG-2017-0903 using the Federal eRulemaking Portal at 
                        *https://www.regulations.gov.*
                         See the “Public Participation and Request for Comments” portion of the 
                        **SUPPLEMENTARY INFORMATION**
                         section of this document for further instructions on submitting comments.
 FOR FURTHER INFORMATION CONTACT: For information about this document, call or 
                        ( print page 2582)
                        email Mr. Michael Moyers, Great Lakes Pilotage, Commandant (CG-WWM-2), Coast Guard; telephone 202-372-1553, email 
                        *Michael.S.Moyers@uscg.mil,*
                         or fax 202-372-1914.


SUPPLEMENTARY INFORMATION:  Table of Contents for Preamble I. Public Participation and Request for Comments II. Abbreviations III. Executive Summary IV. Basis and Purpose V. Background VI. Discussion of Proposed Methodological and Other Changes A. Codification of Compensation Inflation Adjustment B. Relocation of Staffing Model Regulations C. Additional Changes to Ratemaking Steps 3 and 4 D. Delineation of Full Ratemakings and Annual Adjustments E. Other Miscellaneous Changes VII. Revised Compensation Benchmark VIII. Discussion of Proposed Rate Adjustments A. Step 1: Recognition of Operating Expenses B. Step 2: Projection of Operating Expenses C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation E. Step 5: Calculate Working Capital Fund F. Step 6: Calculate Revenue Needed 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 IX. Regulatory Analyses A. Regulatory Planning and Review B. Small Entities C. Assistance for Small Entities D. Collection of Information E. Federalism F. Unfunded Mandates Reform Act G. Taking of Private Property H. Civil Justice Reform I. Protection of Children J. Indian Tribal Governments K. Energy Effects L. Technical Standards M. Environment I. Public Participation and Request for Comments We view public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation. We encourage you to submit comments through the Federal eRulemaking Portal at 
                    *https://www.regulations.gov.*
                     If your material cannot be submitted using 
                    *https://www.regulations.gov,*
                     contact the person in the 
                    **FOR FURTHER INFORMATION CONTACT**
                     section of this proposed rule for alternate instructions. Documents mentioned in this proposed rule, and all public comments, are available in our online docket at 
                    *https://www.regulations.gov,*
                     and can be viewed by following that website's instructions. Additionally, if you go to the online docket and sign up for email alerts, you will be notified when comments are posted or a final rule is published. We accept anonymous comments. All comments received will be posted without change to 
                    *https://www.regulations.gov*
                     and will include any personal information you have provided. For more about privacy and the docket, visit 
                    *https://www.regulations.gov/​privacyNotice.* We are not planning to hold a public meeting but will consider doing so if public comments indicate a meeting would be helpful. We would issue a separate 
                    **Federal Register**
                     notice to announce the date, time, and location of such a meeting. II. Abbreviations APA American Pilots Association AMOU American Maritime Officers Union CATEX Unique Categorical Exclusions for the U.S. Coast Guard CFR Code of Federal Regulations CPA Certified public accountant DHS Department of Homeland Security FOMC Federal Open Market Committee FR Federal Register GLPA Great Lakes Pilotage Authority (Canadian) GLPAC Great Lakes Pilotage Advisory Committee GLPMS Great Lakes Pilotage Management System NAICS North American Industry Classification System NPRM Notice of proposed rulemaking OMB Office of Management and Budget PCE Personal Consumption Expenditures RA Regulatory analysis SBA Small Business Administration § Section symbol The Act Great Lakes Pilotage Act of 1960 U.S.C. United States Code III. 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—including setting the rates for pilotage services and adjusting them on an annual basis. The rates, which currently range from $218 to $601 per pilot hour (depending on the specific area where pilotage service is provided), are paid by shippers to pilot associations. The three pilot associations, which are the exclusive source of registered pilots on the Great Lakes, use this revenue to cover operating expenses, maintain infrastructure, compensate working pilots, and train new pilots. We have developed a ratemaking methodology in accordance with our statutory requirements and regulations. Our ratemaking methodology calculates the revenue needed for each pilotage association (including operating expenses, compensation, and infrastructure needs), and then divides that amount by the expected shipping traffic over the course of the year to produce an hourly rate. This process is currently effected through a 10-step methodology and supplemented with surcharges, which are explained in detail in this notice of proposed rulemaking (NPRM). In this NPRM, we are proposing to make modifications to the ratemaking methodology and proposing new pilotage rates for 2018 based on the new proposed methodology. The proposed modifications to the ratemaking methodology consist of a new compensation benchmark, organizational changes, and clarifications. We are proposing a new compensation benchmark to comply with a recent court decision holding that the Coast Guard had not adequately justified the previous benchmark, established in the 2016 rulemaking, which set compensation at the level of Canadian wages plus ten percent.[2]
                    
                     From an organizational standpoint, we propose to move the discussion of the staffing model from its current location in title 46 of the Code of Federal Regulation (CFR) 404.103 (as part of “Step 3” of the ratemaking process), to the general regulations governing pilotage in 46 CFR 401.220(a). For clarification purposes, we are proposing to set forth separate regulatory paragraphs detailing the differences between how we undertake an annual adjustment of the pilotage rates, and a full reassessment of the rates, which must be undertaken once every 5 years. As part of our annual review, we are proposing in this NPRM new rates for the 2018 shipping season. Based on the ratemaking model discussed in this NPRM, we are proposing the rates shown in Table 1.
                    ( print page 2583) Table 1—Current and Proposed Pilotage Rates on the Great Lakes
Area
2017 pilotage rate
Proposed 2018 pilotage rateSt. Lawrence River
$601
$622Lake Ontario
408
424Navigable waters from Southeast Shoal to Port Huron, MI
580
553Lake Erie
429
454St. Mary's River
514
517Lakes Huron, Michigan, and Superior
218
253
 This proposed rule is not economically significant under E.O. 12866. This proposed rule would impact 49 U.S. Great Lakes pilots, 3 pilot associations, and the owners and operators of an average of 215 oceangoing vessels that transit the Great Lakes annually. The estimated overall annual regulatory economic impact of this rate change is a net increase of $1,162,401 in payments made by shippers from the 2017 shipping season. Because we must review, and, if necessary, adjust rates each year, we analyze these as single year costs and do not annualize them over 10 years. This rule does not affect the Coast Guard's budget or increase Federal spending. Section IX of this preamble discusses the regulatory impact analyses of this proposed rule. IV. Basis and Purpose The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960 (“the Act”), which requires U.S. vessels operating “on register” and foreign merchant vessels to use U.S. or Canadian registered pilots while transiting the U.S. waters of the St. Lawrence Seaway and the Great Lakes system.[3]
                    
                     For the U.S. Registered Great Lakes Pilots (“pilots”), the Act requires the Secretary to “prescribe by regulation rates and charges for pilotage services, giving consideration to the public interest and the costs of providing the services.” [4]
                    
                     The Act requires that rates be established or reviewed and adjusted each year, not later than March 1. The Act requires that base rates be established by a full ratemaking at least once every 5 years, and in years when base rates are not established, they must be reviewed and, if necessary, adjusted. The Secretary's duties and authority under the Act have been delegated to the Coast Guard.[5]
                    
                     The purpose of this NPRM is to propose new changes to the methodology in projecting pilotage rates as well as revised pilotage rates and surcharges. Our goals for this and all future rates are to ensure safe, efficient, and reliable pilotage services on the Great Lakes, and provide adequate funds to maintain infrastructure. Additionally, we believe that the new methodology will increase transparency and predictability in the ratemaking process and ensure that annual adjustments of rates are completed in a timely manner. V. Background Pursuant to the Great Lakes Pilotage Act, the Coast Guard, in conjunction with the Canadian Great Lakes Pilotage Authority, regulates shipping practices and pilotage rates on the Great Lakes. Under Coast Guard regulations, all U.S. vessels sailing on register and all non-Canadian, foreign merchant vessels (often referred to as “salties”), are required to engage U.S. or Canadian pilots during their transit through regulated waters. United States and Canadian “lakers,” which account for most commercial shipping on the Great Lakes, are not subject to the Act.[6]
                    
                     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 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 Director of the Great Lakes Pilotage Office (“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 “undesignated” areas. Designated areas are classified as such by Presidential Proclamation [7]
                    
                     to be waters in which pilots must, at all times, be fully engaged in the navigation of vessels in their charge. Undesignated areas, on the other hand, are open bodies of water, and thus are not subject to the same pilotage requirements. While working in those 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.” [8]
                    
                     As such, pilotage rates in designated areas are higher than those in undesignated areas. 
 
 Table 2—Areas of the Great Lakes and Saint Lawrence Seaway
District
Pilotage association
Designation
Area number 9
Area name 10One
Saint Lawrence Seaway Pilotage Association
Designated
                             Undesignated
1
                             2
St. Lawrence River.
                             Lake Ontario.Two
Lake Pilotage Association
Designated
5
Navigable waters from Southeast Shoal to Port Huron, MI.Undesignated
4
Lake Erie.Three
Western Great Lakes Pilotage Association
Designated
                             Undesignated 
                             Undesignated
7
                             6 
                             8
St. Mary's River. 
                             Lakes Huron and 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 associations is responsible for funding its own operating expenses, maintaining infrastructure, acquiring and implementing technological advances, training personnel/partners and pilot compensation. We developed a 10-step ratemaking methodology to derive a pilotage rate that covers these expenses based on the estimated amount of traffic. In short, the methodology is designed to measure how much revenue each pilotage association will need to cover expenses and provide competitive compensation to working pilots. The Coast Guard then divides that amount by the historical average traffic transiting through the district. We recognize that in years where traffic is above average, pilot associations will take in 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 2 years, the Coast Guard has made major 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 will accurately account for the additional revenue produced by the application of weighting factors (discussed in detail in Steps 7 through 9 of this preamble). The current methodology, which was finalized in the August 31, 2017 
                    **Federal Register**
                     (82 FR 41466), is designed to accurately capture all 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 Coast Guard summarizes the current methodology in the section below. Summary of Ratemaking Methodology As stated above, the ratemaking methodology, currently 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) we review 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 the Coast Guard receives audited numbers, this number is 3 years behind the projected year of expenses. So in calculating the 2018 rates in this proposal, we are beginning with the audited expenses from calendar year 2015. While each pilotage association operates in an entire district, we further break down the costs by area. Thus, with regard to operating expenses, we allocate certain operating expenses to undesignated areas, and certain 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 forecasted from the respective portions of the district. In Step 2, “Project operating expenses, adjusting for inflation or deflation,” (§ 404.102) we develop the 2018 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' Consumer Price Index 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. In Step 3, “Determine number of pilots needed,” (§ 404.103) we calculate how many pilots are needed for each district. To do this, we employ a “staffing model,” described in § 404.103(a) through (c), 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 of the Coast Guard Great Lakes Pilotage Office 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(d)) 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) we determine the revenue needed for pilot compensation in each area and district. This step contains two processes. In the first process, we calculate the total compensation for each pilot using a “compensation benchmark.” Next, we multiply 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 up by area for accounting purposes, we assign a certain number of pilots for the designated areas and a certain number of pilots for the undesignated areas for purposes of determining the revenues needed for each area. To make the determination of how many pilots to assign, we use the staffing model designed to determine 
                    ( print page 2585)
                    the total number of pilots, described in Step 3, above. In Step 5, “Project working capital fund,” (§ 404.105) we calculate a return on investment by adding the total operating expenses (derived in Step 2) and the total pilot compensation (derived in Step 4), and multiply that figure by the preceding year's average annual rate of return for new issues of high-grade corporate securities. This figure constitutes the “working capital fund” for each area and district. In Step 6, “Project needed revenue,” (§ 404.106) we simply add up the totals produced by the preceding steps. For each area and district, we add the projected operating expense (from Step 2), 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 “revenue needed.” In Step 7, “Initially calculate base rates,” (§ 404.107) we calculate an hourly pilotage rate to cover the revenue needed calculated in step 6. This step consists of first calculating the 10-year traffic average for each area. Next, we divide the revenue needed in each area (calculated in Step 6) by the 10-year traffic average 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 need to 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) we calculate 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 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) we modify the base rates by accounting for the extra revenue generated by the weighting factors. We do this by simply 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,” we review the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and 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 pilots fairly, who are trained and rested; 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. Finally, after the base rates are set, § 401.401 permits the Coast Guard to apply surcharges. Currently, we use surcharges to pay for the training of new pilots, rather than incorporating training costs into the overall “revenue needed” that is used in the calculation of the base rates. In recent years, we have allocated $150,000 per applicant pilot to be collected via surcharges. This amount is calculated as a percentage of total revenue for each district, and that percentage is applied to each bill. When the total amount of the surcharge has been collected, the pilot associations are prohibited from collecting further surcharges. Thus, in years where traffic is heavier than expected, shippers early in the season could pay more than shippers employing pilots later in the season, after the surcharge cap has been met. VI. Discussion of Proposed Methodological and Other Changes For 2018, we are proposing a number of changes to the ratemaking methodology. These changes are both revisions to the rate-setting process, as well as organizational changes that will simplify and streamline rate-setting procedures in future years. While we realize that yearly adjustments of the ratemaking methodology can lead to unpredictability, we believe that modest modifications to the ratemaking methodology in order to improve accuracy, simplify its steps, and make it more transparent complies with our statutory requirement to consider public interest and the costs of providing pilotage services. These proposed changes are intended to provide rate stability and predictability beneficial to the U.S. Great Lakes pilot associations, shippers, cruise ships, and voluntary employment of U.S. registered pilots.[11]
                    
                     Additionally, in this section, we discuss several other proposed changes to the Great Lakes pilotage regulations, which, while related to the annual ratemakings, are not limited to the specific methodological steps. A. Codification of Compensation Inflation Adjustment One change we are proposing in this NPRM is to add regulatory text to § 404.104 that would automatically adjust the pilot compensation figure for inflation annually. Under the current regulations, while pilot compensation is determined in Step 4 annually, there is no specific provision that it will change with inflation. This issue is often raised in comments. For example, in the 2016 Great Lakes pilotage rate adjustment final rule,[12]
                    
                     we set target pilot compensation at $326,114 annually. Then, in the 2017 NPRM,[13]
                    
                     we proposed leaving that amount unchanged. This prompted comments stating that leaving the nominal target compensation of pilots unchanged undermined the Coast Guard's stated goal of compensation stability, because the pilots' earning power would not keep up with regional inflation. In the 2017 final rule, we increased the target compensation number by the inflation rate, to the current level of $332,963.[14]
                    
                     In that rule, we stated that “we intend to adjust the compensation figure for inflation annually in future ratemaking actions, the same way that operating expenses are adjusted for inflation.” [15] Based on these considerations, we propose to add regulatory text to § 404.104 to make the adjustment for inflation automatic. This would serve a variety of interests. First, it would improve consistency in our ratemaking procedures. While the operating expenses are automatically adjusted for inflation, compensation is not. This proposed change would treat the two types of expenses equally. Additionally, because the revenue for the working capital fund is based in part on compensation (see the discussion in the Background section of this Preamble), automatically adjusting pilot compensation for inflation would have a similar effect on contributions to the working capital fund. Automatically adjusting pilot compensation for inflation would improve transparency and efficiency in our ratemaking procedures. Also, replacing the current process with an automatic and predictable inflationary adjustment would increase predictability. As previously stated, we believe this predictability benefits the 
                    ( print page 2586)
                    U.S. registered pilots who provide the service and those stakeholders who employ the pilots. Given variations in traffic, compensation as a pilot is uncertain, and we believe that this proposed change would reduce some of the uncertainty related to target pilot compensation. It would also increase the efficiency of the ratemaking process by making the inflation adjustment automatic, so that we would be better able to process our annual ratemaking in a timely fashion. To implement this increase, we propose adding regulatory text to § 404.104 stating that the Director will adjust the previous year's individual target pilot compensation level by BLS CPI for the Midwest Region, or if that is unavailable, the FOMC median economic projections for PCE inflation [16]
                    
                    . See proposed § 404.104(b). The BLS CPI tracks the changes in prices of all goods and services purchased for consumption by urban households. The BLS releases CPI data monthly, for the previous month. The FOMC PCE inflation tracks the projected change in prices of goods and services purchased by consumers throughout the US economy for the current and future years. We note that this would occur only in years in which we conduct an annual review of pilotage rates, and not in years when we conduct a “full ratemaking, because in those years the target compensation figure is reset and no inflation adjustment is needed.” [17]
                    
                     We invite comment on the effect of this proposal as well as the particular inflation index chosen to implement it. B. Relocation of Staffing Model Regulations Another change that we propose in this NPRM is to relocate the “staffing model” regulatory text, currently located in § 404.103(a) through (c). We are not proposing to adjust or modify the regulatory text, but simply move it to § 401.220(a), “Registration of pilots,” rather than keep it as part of the ratemaking methodology text. For the reasons below, we believe that this change will both improve the clarity of the regulations and improve the regulatory process. The staffing model informs the Coast Guard's administration of the Great Lakes Pilotage program, but is distinct from the ratemaking methodology. Specifically, the staffing model provides guidance to the Director on implementing the requirement currently in § 401.220(a), which requires the Director to determine the number of pilots needed to assure adequate and efficient pilotage service in the United States waters of the Great Lakes and to provide for equitable participation of United States Registered Pilots with Canadian Registered Pilots. The current way in which § 404.103, entitled “Ratemaking Step 3: Determine number of pilots needed,” is written produces two distinct sets of numbers. In § 404.103(a) through (c), we employ a “staffing model” to determine the number of pilots needed in each district to provide safe and reliable pilotage services in periods of high seasonal demand. This staffing model produces a number of pilots for each district that we believe is needed to minimize delays and allow for some instances of double pilotage (that is, where two pilots are employed on a vessel simultaneously because of particularly hazardous conditions). In the 2017 final rule, the staffing model produced a figure of 54 total pilots on the Great Lakes: 17 for District One, 15 for District Two, and 22 for District Three.[18] The Director of the Great Lakes Pilotage Office is required in § 404.103(d) to project the number of pilots expected to be working in the current year based on the numbers provided by the pilotage associations, as well as the number of applications for pilot positions.[19]
                    
                     As shown by the calculations used in the next, and all subsequent steps of the ratemaking process, the pilot numbers derived under § 404.103(d), not those from the staffing model text in paragraphs (a)-(c), were used to calculate the pilotage rates. The reason that the numbers produced by the text in paragraphs (a)-(c) are not used in the ratemaking is because while the staffing model is related to the annual ratemaking methodology, it is only through its impact on the number derived in paragraph (d). Instead, the function of the staffing model is to provide guidance to the Director regarding the number of pilots needed. While the number of pilots needed, as ascertained by the Director, certainly has an impact on the number of working pilots, the two numbers are not necessarily identical. We also note that, over the past several years, the number of pilots actually working has been significantly lower than the amount the staffing model suggests are needed. While the staffing model itself does not directly affect the ratemaking, the fact that the text appears in § 404.103, rather than as a modifier to § 401.220(a), creates some confusion. To begin, we note that inclusion of the staffing model text in the annual ratemaking section implies that we reevaluate the staffing model every year as part of the annual ratemaking procedure. While this is incorrect, it has led to confusion about the role of the staffing model, and significant resources have been expended by commenters in past years regarding its use and application. We believe part 401 is the best place to locate the staffing model text as it contains many similar items pertaining to pilotage that, while they affect the ratemaking process, are not part of it and do not need to be reanalyzed on an annual basis. Finally, we note that the movement of the staffing model to § 401.220(a) would have an organizational impact on future pilotage rate regulatory actions. In the past, we included detailed, and sometimes repetitive, calculations of the staffing model in our annual ratemaking publication. However, if we move the staffing model text to part 401, and do not make any changes to the inputs or staffing methodology, we would not include a full analysis of the staffing model in each regulatory document. Instead, we propose to simply certify that the number of pilots working under Step 3 of the ratemaking process was less than or equal to the number of pilots authorized by the regulations in § 401.220. However, in circumstances where the staffing model produced a changed result in the number of pilots needed to ensure safe and reliable pilotage, we would include an analysis of the number of pilots recommended by the staffing model in the proposed rule. In this year's ratemaking, we note that the staffing model analysis remains unchanged from 2017, and for that reason is not repeated here. For the reasons stated above, we propose moving the current staffing model text, located in § 404.103(a) through (c) to § 401.220(a), where it will be renumbered as § 401.220(a)(1) through (a)(3). The existing text would not be changed in any way other than being relocated, and we are not proposing any changes to the staffing model in this ratemaking. C. Additional Changes to Ratemaking Steps 3 and 4 Additionally, we are proposing a change to the remaining text of § 404.103. Specifically, we propose to remove the words “during the first year of the period for which base rates are being established” from § 404.103(d). This phrase, carried over from previous 
                    ( print page 2587)
                    years, does not apply under the current methodology where base rates are established annually. We believe that this change would help to improve clarity and regulatory efficiency in future annual ratemakings. Finally, we are proposing to change the name of the section. The section, currently titled, “Determine number of pilots needed,” is misleading, as the number of pilots needed to ensure safe and reliable pilotage is determined by the Director in § 401.220(a). Thus, we propose to change the section heading to “Estimate number of working pilots,” to more accurately reflect what we are doing in this step of the ratemaking process. In a related matter, we are also proposing a change to § 404.104 to explicitly establish the relationship between the staffing model and the annual ratemaking. While in the past, the number of pilots has been below the number derived from the staffing model, there is no regulatory text indicating that this is a limiting factor. To eliminate this ambiguity, we propose to add text to § 404.104, “Ratemaking step 4: Determine target pilot compensation,” that would limit the total number of working pilots for ratemaking purposes to the maximum number allowed by the staffing model. This does not prohibit pilotage associations from hiring more pilots than the staffing model suggests are needed to handle peak traffic (if, for example, pilots wanted to work fewer hours for less pay, and the Director approved), but it would limit pilotage rates by preventing those extra pilots from being considered in the ratemaking calculations. D. Delineation of Full Ratemakings and Annual Adjustments In this NPRM, we are proposing an organizational change to the regulations in part 404 to better delineate the full ratemaking procedure from the interim ratemaking procedure. Pursuant to the Act, we are required to establish new pilotage rates by March 1 of each year.[20]
                    
                     However, the Act sets forth two types of ratemaking procedures. The Act states that the Coast Guard must establish base pilotage rates by a “full ratemaking” at least once every 5 years, and that it must “conduct annual reviews of such base pilotage rates, and make adjustments to such base rates, in each intervening year.” [21]
                    
                     In order to more clearly effect the Act's mandate, we propose to include in the regulatory text sections that differentiate between a “full ratemaking” and an “interim ratemaking.” We would announce, in the NPRM of each annual ratemaking, whether we were conducting a full or interim ratemaking procedure (while the Act requires that the Coast Guard perform a full ratemaking at least once every 5 years, we note that it may occur more frequently if circumstances warrant). We note that the existing regulatory text in part 404 already contains a provision that considers the difference between a full ratemaking and an interim ratemaking. Existing § 404.100, “Ratemaking and annual reviews in general,” states that once every 5 years, the Director establishes base pilotage rates by a full ratemaking pursuant to §§ 404.101 through 404.110, and that in “interim years,” the Director may adjust rates according to one of several methods (either automatic adjustments, annual adjustments for inflation, or a new full ratemaking).[22]
                    
                     However, after adopting the new ratemaking methodology in 2016, we do not currently have a regulatory provision for implementing the interim ratemaking other than conducting a full ratemaking analysis. With the new methodology, adopted in 2016, refined in 2017, and with the additional changes proposed for 2018, we believe that the ratemaking procedures generally defined in this part can be used in both full and interim ratemaking years, with certain differences, as described below. The only substantive difference between a full and interim ratemaking concerns Step 4 of the ratemaking procedure, “Determine target pilot compensation.” This step of the ratemaking analysis, in which the total compensation for pilots is determined, comprises the majority of the revenue total needed to operate Great Lakes pilotage. In past ratemaking actions, we received numerous comments and substantial amounts of data when considering the “benchmark” for pilot compensation. Even in years where we did not propose adjusting the compensation benchmark, we received substantial data about ways in which it could be adjusted. However, we do not believe that it is in the interest of Great Lakes shipping to calculate a new benchmark compensation level every year. Such a system could lead to substantial volatility regarding compensation. This, in turn, could lead to the pilot recruitment and retention problems that affected the Great Lakes region prior to the ratemaking methodology changes introduced in the past few years. For these reasons, we are proposing regulatory language in part 404 to clarify that the benchmark pilot compensation would only be reconsidered during “full ratemaking” years, which occur at least once every 5 years. Conversely, during “interim years,” we would not consider changes to the benchmark pilot compensation. Instead, during those years, we would adjust the target compensation according to Bureau of Labor Statistics' Consumer Price Index for the Midwest Region, or if that is not available, the FOMC median economic projections for PCE inflation, allowing compensation to stay in line with inflation. We believe that this system would simplify ratemaking procedures in interim years and better effect the statutory mandate in section 9303(f) of the Act. In this NPRM, we have proposed regulatory changes to § 404.100(b) and (c), as well as in § 404.104(a) and (b), that would enact these changes to the methodology. E. Other Miscellaneous Changes We propose several minor editorial changes in this NPRM. In section 404.107, we propose renaming Step 7, currently titled, “Initially calculate base rates” to “Calculate initial base rates” for style purposes and to make an accompanying edit to the text by changing the words “initially calculates base rates” to “calculates initial base rates” in the text of that section. We also propose to adjust the reference to the staffing model in Step 7 to account for its relocation in text (proposed section 401.220(a)). VII. Revised Compensation Benchmark In this NPRM, the Coast Guard is proposing a new compensation benchmark for pilots on the Great Lakes. It is doing so to comply with a court decision holding that the Coast Guard's existing compensation benchmark, which based on the salaries of Canadian Great Lakes pilot salaries plus a 10% increase, was arbitrary and capricious. We are following the court's decision and are moving to implement a new benchmark in this proposed rule. When the Coast Guard adopted the existing compensation benchmark in the 2016 annual adjustment, we recognized that the number was based on somewhat uncertain data, and have undertaken a comprehensive, multi-year analysis of pilot compensation practices to develop a more appropriate benchmark.[23]
                    
                     However, as we do not expect to be able to make any proposals based on this study until at least the 2020 rate adjustment, and we cannot continue to 
                    ( print page 2588)
                    use the existing model, there is a need for an interim benchmark level to be developed on short notice and with limited time to gather new data. Therefore, the Coast Guard is proposing a new compensation benchmark based, in part, on the previous model of compensation that was used by the Coast Guard prior to the new ratemaking methodology introduced in the 2016 annual ratemaking.[24]
                    
                     Under the previous methodology, each year the Coast Guard gathered contract information from the American Maritime Officers Union (AMOU), and used details from their contracts to estimate rates for Great Lakes pilots. Ultimately, however, the AMOU stopped providing information to the Coast Guard, which was one basis for moving to other models. However, in the context of the previous rate adjustments, the AMOU did provide information up through the 2015 calendar year. Given that in this document, we have proposed to develop a new benchmark compensation level every 5 years, and then index that number for inflation each year in between, we believe the most efficient solution for an interim compensation benchmark is to derive a compensation figure using the 2015 AMOU data, and then apply inflationary adjustments to that data to arrive at an equivalent level for the 2018 shipping season. We note that this method is different than using data for the 2018 AMOU contracts, for which there is no public information and which this proposed compensation benchmark does not utilize. Because the interim benchmark proposed in this NPRM is explicitly based on the terms of the AMOU contract as they existed in 2015, we note that comments that relate to AMOU contract information from years other than 2015 would not be relevant to this proposed compensation benchmark and will not be considered. However, we do request comments on whether we have correctly applied the terms of the 2015 contract, or used correct data, to the calculation of target pilot compensation under this proposed model and note that we may adjust the interim compensation benchmark if we receive validated data relating to total compensation pursuant to the 2015 AMOU contract terms that improves our understanding of that contract. The data we are using, provided in a letter from the AMOU from October 4, 2013,[25]
                    
                     consists of “daily aggregate rates” for two contracts between Great Lakes shipping companies for the services of AMOU mates.[26]
                    
                     These numbers were provided to the Coast Guard as a public comment to be used as a basis for compensation in the 2014 ratemaking procedure. These daily aggregate rates include daily wages, vacation pay, pension plan contributions, and medical plan contributions for AMOU officers. The relevant 2015 numbers include a $1,142.06 aggregate rate for Agreement A,[27]
                    
                     and $1,124.72 aggregate rate for Agreement B,[28]
                    
                     which are the amounts used to calculate the compensation for pilots on designated waters. We note that the while the 2014 ratemaking methodology calculated different compensation targets for pilots in undesignated areas and those in designated areas, the ratemaking methodology used today calculates a single wage rate, so only the numbers used in designated waters would be relevant. We explain how we propose to translate this information into a proposed annual pilot compensation benchmark below. Despite the fact that the aggregated data in the 2013 AMOU letter is not broken down into specific costs, we believe that the data points provided are generally accurate. Prior to 2014, the Coast Guard received confidential copies of the AMOU contracts with detailed breakdowns of compensation components including wages, medical costs, defined contribution and defined benefit pension costs. The latest contract we have covered the 2011 through the 2015 shipping seasons, which is one reason we believe that basing our interim benchmark on the 2015 season is a reasonable measure, as we have the underlying contract for that season. Using the estimated out-year figures set forth in the 2011 contract, and applying the detailed compensation methodology used in the 2012 Great Lakes Pilotage annual ratemaking final rule,[29]
                    
                     we were able to calculate aggregate figures that were within 1% of the figures provided in the 2013 AMOU letter.[30] In the notice of proposed rulemaking for the 2014 Great Lakes pilotage annual rate adjustment, we described how we use the daily aggregate rates to develop a total pilot compensation figure. The annual rates included the “daily wage rate, vacation pay, pension plan contributions, and medical plan contributions.” [31]
                    
                     We stated that “because we are interested in annual compensation, we must convert these to daily rates. We use a 270-day multiplier which reflects an average 30-day month, over the 9 months of the average shipping season.” [32]
                    
                     Subsequently, “[w]e apportion the compensation provided by each agreement according to the percentage of tonnage represented by companies under each agreement.” [33] After publication of the 2014 Final Rule, the Coast Guard was sued by the three American pilotage associations, in part, because the AMOU aggregate data it had used to calculate the 2014 compensation figures did not include a seasonal bonus component. In that case, the Coast Guard relied on previous aggregate data figures provided by the AMOU in 2012, instead of using the figures provided by the AMOU in its October 4, 2013 public comment, where the AMOU stated that the previous figures were inaccurate. While the court found that the use of the old figures was arbitrary, the use of AMOU aggregate data generally was not disputed.[34]
                    
                     Instead, it was the use of the disavowed aggregate data that was not supported. We intend to correct this by basing our interim methodology on the new figures provided by the AMOU for the year 
                    ( print page 2589)
                    2015, which were also contained in the 2013 letter. To apply the 2015 aggregate data figures to the current ratemaking methodology, we need only use the figures for designated waters. Prior to the 2016 ratemaking, the Coast Guard calculated separate compensation figures for designated and undesignated waters—compensating pilots assigned to designated waters an equivalent rate to masters, while compensating pilots assigned to undesignated waters the equivalent rate of AMOU mates, who are paid considerably less. However, in 2016, the Coast Guard ended the practice of calculating separate compensation figures for pilots on the Great Lakes. In the 2016 Great Lakes pilotage NPRM, we stated that “we see no reasonable basis for discriminating between the target compensation of pilots on the basis of the distinction between designated or undesignated waters. In any waters and in any district, pilots need the same skills, and therefore we propose a single individual target compensation figure across all three districts.” [35]
                    
                     As all pilots must be trained to navigate the more-complex designated waters, we believe it is appropriate that they receive the level of compensation associated with that task. Because of these factors, we believe we can develop an interim benchmark compensation level based on the 2015 AMOU aggregate data for wages in designated waters that has been publically provided. Based on our calculations, the new benchmark compensation figure would be $319,617 per pilot. The numbers are derived as follows: In the first step of calculating the interim compensation benchmark, shown as Table 3 below, we multiply the daily aggregate rates for Agreement A and Agreement B by 270, the estimated number of days in the shipping season, to derive a seasonal average compensation figure. Table 3—Calculation of Seasonal Rates by agreement
Aggregate daily rate
Seasonal
                             compensation 
                             (aggregate 
                             daily rate × 270)Agreement A
$1,142.06
$308,356Agreement B
1,124.72
303,674
 Next, as stated above, we apportion the compensation provided by each agreement according to the percentage of tonnage represented by companies under each agreement. As shown in Table 4 below, approximately 70% of cargo was carried under the Agreement A contract, while approximately 30% of cargo was carried under the Agreement B contract. Table 4—Weighted Average of Each Agreement
Tonnage
% Tonnage 
                             (total tonnage/1,215,811)Agreement A
361,385
29.7237811Agreement B
854,426
70.2762189Total tonnage
1,215,811
100
 Third, we develop an average of compensation based on the total compensation under the two contracts, weighting each contract by its percentage of total tonnage. Based on this calculation, we have developed a figure of $305,066 (rounded) for total compensation in 2015. Table 5—Calculation of Averaged Compensation
% Tonnage
Weighted
                             compensation 
                             (seasonal 
                             compensation 
                             × % tonnage) 
                             (rounded)Agreement A—weighted
29.7237811
$91,655Agreement B—weighted
70.2762189
213,411Total compensation (Agreement A + B)
100
305,066
 
 
 Finally, we adjust that figure for inflation. As we propose to do in our overall ratemaking methodology, we use the BLS Consumer Price Index for the Midwest region to inflate to 2016, and FOMC median economic projections for PCE inflation to inflate the total compensation to 2017 and 2018. Based on three years of inflation adjustments, we arrive at the proposed 2018 target compensation figure, which is $319,617 annually. Table 6—Inflation Adjustments—2015 to 2018
Inflation
                             (%)
Target
                             compensation2015 Target Pilot Compensation

$305,0662016 Inflation Adjustment 36
0.8
307,5072017 Inflation Adjustment 37
1.9
313,3502018 Inflation Adjustment
2.0
319,617
 VIII. Discussion of Proposed Rate Adjustments In this NPRM,
                    
                     based on the proposed updated methodology described in the previous section, we are proposing new pilotage rates for 2018. This section discusses the proposed rate changes using the ratemaking steps provided in 46 CFR part 404, as they would be written according to the proposed revisions discussed above. Here we will detail each step of the ratemaking procedure to show how we arrived at the proposed new rates. The 2018 ratemaking is an “annual review,” rather than a full ratemaking. Thus, for this purpose, we propose using the annual review methodology in § 404.104. A. Step 1: Recognition of Operating Expenses Step 1 in our ratemaking methodology requires that we review and recognize the previous year's operating expenses (§ 404.101). To do this, we begin by reviewing the independent accountant's financial reports for each association's 2015 expenses and revenues.[38]
                    
                     For accounting purposes, the financial reports divide expenses into designated and undesignated areas. In certain instances, for example, 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 that accrued to the pilot associations generally, for example, insurance, the cost is divided between the designated and undesignated areas on a 
                    *pro rata*
                     basis. The recognized operating expenses for the three districts are laid out in Tables 7 through 9. Table 7—2015 Recognized Expenses for District One
Reported expenses for 2015
Designated
Undesignated
TotalSt. Lawrence
                             River
Lake OntarioOperating Expenses:Other Pilotage Costs:Pilot subsistence/travel
$344,718
$267,669
$612,387Applicant Pilot subsistence/travel
59,992
88,313
148,305License insurance
26,976
26,976
53,952Applicant Pilot license insurance
0
2,271
2,271Payroll taxes
97,531
61,656
159,187Applicant Pilot payroll taxes
8,200
12,583
20,783Other
5,679
5,341
11,020Total other pilotage costs
543,096
464,809
1,007,905Pilot Boat and Dispatch Costs:Pilot boat expense
134,400
106,064
240,464Dispatch expense
0
0
0Payroll taxes
9,688
7,645
17,333Total pilot and dispatch costs
144,088
113,709
257,797Administrative Expenses:Legal—general counsel
12,388
9,733
22,121Legal—shared counsel (K&L Gates)
904
710
1,614Legal—USCG litigation
0
0
0Insurance
16,261
12,832
29,093Employee benefits
8,752
6,907
15,659Payroll taxes
5,628
4,441
10,069Other taxes
9,447
7,455
16,902Travel
795
627
1,422Depreciation/auto leasing/other
55,850
31,763
87,613Interest
12,337
9,736
22,073( print page 2591)Dues and subscriptions
15,867
15,513
31,380Utilities
9,573
461
10,034Salaries
56,126
44,291
100,417Accounting/Professional fees
5,254
4,146
9,400Pilot Training
0
0
0Applicant Pilot training
0
0
0Other
9,118
6,446
15,564Total Administrative Expenses
218,300
155,061
373,361Total Operating Expenses (Other Costs + Pilot Boats + Admin)
905,484
733,579
1,639,063Proposed Adjustments (Independent certified public accountant (CPA)):Pilot subsistence/travel
0
−2,943
−2,943Payroll taxes
0
0
0Applicant Pilot payroll taxes
0
0
0TOTAL CPA ADJUSTMENTS
0
−2,943
−2,943Proposed Adjustments (Director):Legal—general counsel (corrected number)
904
710
1,614Legal—general counsel (corrected number)
−12,388
−9,733
−22,121Legal—shared counsel (K&L Gates) (corrected number)
12,388
9,733
22,121Legal—shared counsel (K&L Gates) (corrected number)
−904
−710
−1,614Legal—shared counsel—3% lobbying fee (K&L Gates)
−371
−292
−663TOTAL DIRECTOR'S ADJUSTMENTS
−371
−292
−663Total Operating Expenses (OpEx + Adjustments)
905,113
730,344
1,635,457
 Table 8—2015 Recognized Expenses for District Two
Reported expenses for 2015
Undesignated
Designated
TotalLake Erie
SES to Port HuronOperating Expenses:Other Pilotage Costs:Pilot subsistence/travel
$163,276
$244,915
$408,191Applicant Pilot subsistence/travel
0
0
0License insurance
6,798
10,196
16,994Applicant Pilot license insurance
0
0
0Payroll taxes
53,242
79,863
133,105Applicant Pilot payroll taxes
0
0
0Other
457
686
1,143Total other pilotage costs
223,773
335,660
559,433Pilot Boat and Dispatch Costs:Pilot boat expense
175,331
262,997
438,328Dispatch expense
9,000
13,500
22,500Employee benefits
74,855
112,282
187,137Payroll taxes
9,724
14,585
24,309Total pilot and dispatch costs
268,910
403,364
672,274Administrative Expenses:Legal—general counsel
10,282
15,422
25,704Legal—shared counsel (K&L Gates)
8,346
12,520
20,866Legal—USCG litigation
0
0
0Office rent
26,275
39,413
65,688Insurance
10,618
15,926
26,544Employee benefits
23,930
35,896
59,826Workman's compensation—pilots
47,636
71,453
119,089Payroll taxes
5,428
8,141
13,569Other taxes
29,220
43,830
73,050Depreciation/auto leasing/other
19,757
29,636
49,393Interest
4,159
6,238
10,397APA Dues
11,827
17,741
29,568Utilities
15,850
23,775
39,625Salaries
51,365
77,048
128,413Accounting/Professional fees
10,721
16,081
26,802( print page 2592)Pilot Training
0
0
0Other
11,775
17,662
29,437Total Administrative Expenses
287,189
430,782
717,971Total Operating Expenses (Other Costs + Pilot Boats + Admin)
779,872
1,169,806
1,949,678Proposed Adjustments (Independent CPA):Pilot boat costs
−444
−666
−1,110TOTAL CPA ADJUSTMENTS
−444
−666
−1,110Proposed Adjustments (Director):Legal—shared counsel 3% lobbying fee (K&L Gates)
−250
−376
−626TOTAL DIRECTOR'S ADJUSTMENTS
−250
−376
−626Total Operating Expenses (OpEx + Adjustments)
779,178
1,168,764
1,947,942
 Table 9—2015 Recognized Expenses for District Three
Reported expenses for 2015
Undesignated
Designated
TotalLakes Huron
                             and Michigan 
                             and Lake 
                             Superior
St. Mary's RiverOperating Expenses:Other Pilotage Costs:Pilot subsistence/travel
$457,393
$152,465
$609,858Applicant pilot subsistence/travel
0

0License insurance
16,803
5,601
22,404Payroll taxes
160,509
53,503
214,012Applicant pilot payroll taxes
0

0Other
1,546
515
2,061Total other pilotage costs
636,251
212,084
848,335Pilot Boat and Dispatch Costs:Pilot boat costs
488,246
162,748
650,994Dispatch costs
128,620
42,873
171,493Employee benefits
12,983
4,327
17,310Payroll taxes
14,201
4,734
18,935Total pilot and dispatch costs
644,050
214,682
858,732Administrative Expenses:Legal—general counsel
16,798
5,599
22,397Legal—shared counsel (K&L Gates)
18,011
6,004
24,015Legal—USCG litigation
0

0Office rent
6,372
2,124
8,496Insurance
12,227
4,076
16,303Employee benefits
93,646
31,215
124,861Payroll Taxes
9,963
3,321
13,284Other taxes
1,333
445
1,778Depreciation/auto leasing/other
29,111
9,703
38,814Interest
3,397
1,132
4,529APA Dues
22,736
7,579
30,315Utilities
32,716
10,906
43,622Salaries
84,075
28,025
112,100Accounting/Professional fees
19,696
6,565
26,261Pilot Training
26,664
8,888
35,552Other
25,228
8,409
33,637Total Administrative Expenses
401,973
133,991
535,964Total Operating Expenses (Other Costs + Pilot Boats + Admin)
1,682,274
560,757
2,243,031Proposed Adjustments (Independent CPA):Pilot subsistence/Travel
−67,933
−22,645
−90,578Payroll taxes
−14,175
−4,725
−18,901Other expenses
−4,058
−1,353
−5,411TOTAL CPA ADJUSTMENTS
−86,166
−28,723
−114,890( print page 2593)Proposed Adjustments (Director):Legal—shared counsel 3% lobbying fee (K&L Gates)
−540
−180
−720TOTAL DIRECTOR'S ADJUSTMENTS
−540
−180
−720Total Operating Expenses (OpEx + Adjustments)
1,595,565
531,854
2,127,420* 
                        *Values may not sum due to rounding. District 3 provided the Coast Guard data for Areas 6, 7, and 8. However, the Coast Guard combined areas 6 and 8 to present the operating expenses by designated and undesignated areas.*
 B. Step 2: Projection of Operating Expenses Having ascertained the recognized 2015 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 calculated inflation using the Bureau of Labor Statistics' data from the Consumer Price Index for the Midwest Region of the United States [39]
                    
                     and reports from the
                    
                     Federal Reserve. Based on that information,
                    
                     the calculations for
                    
                     Step 1 are as follows: Table 10—Adjusted Operating Expenses for District One
Designated
Undesignated
TotalTotal Operating Expenses (Step 1)
$905,113
$730,344
$1,635,4572016 Inflation Modification (@0.8%) 40
7,241
5,843
13,0842017 Inflation Modification (@1.9%) 41
17,335
13,988
31,3232018 Inflation Modification (@2.0%) 42
18,594
15,004
33,598Adjusted 2018 Operating Expenses
948,283
765,179
1,713,462
 Table 11—Adjusted Operating Expenses for District Two
Undesignated
Designated
TotalTotal Operating Expenses (Step 1)
$779,178
$1,168,764
$1,947,9422016 Inflation Modification (@0.8%)
6,233
9,350
15,5832017 Inflation Modification (@1.9%)
14,923
22,384
37,3072018 Inflation Modification (@2.0%)
16,007
24,010
40,017Adjusted 2018 Operating Expenses
816,341
1,224,508
2,040,849
 Table 12—Adjusted Operating Expenses for District Three
Undesignated
Designated
TotalTotal Operating Expenses (Step 1)
$1,595,565
$531,854
$2,127,4202016 Inflation Modification (@0.8%)
12,765
4,255
17,0202017 Inflation Modification (@1.9%)
30,558
10,186
40,7442018 Inflation Modification (@2.0%)
32,778
10,926
43,704Adjusted 2018 Operating Expenses
1,671,666
557,221
2,228,888
 C. Step 3: Estimate Number of Working Pilots In accordance with the proposed text in § 404.103, we estimated the number of working pilots in each district. Based on input from the Saint Lawrence Seaway Pilots Association, we estimate that there will be 17 working pilots in 2018 in District One. Based on input from the Lakes Pilots Association, we estimate there will be 14 working pilots in 2018 in District Two. Based on input from the Western Great Lakes Pilots Association, we estimate there will be 18 working pilots in 2018 in District Three. Furthermore, based on the staffing model employed to develop the total number of pilots needed, we assign a certain number of pilots to designated waters, and a certain number to undesignated waters. These numbers are 
                    ( print page 2594)
                    used to determine the amount of revenue needed in their respective areas. Table 13—Authorized Pilots
District One
District Two
District ThreeMaximum number of pilots (per § 401.220(a)) 43
17
15
222018 Authorized pilots (total)
17
14
18Pilots assigned to designated areas
10
7
4Pilots assigned to undesignated areas
7
7
14
 D. Step 4: Determine Target Pilot Compensation In this step,
                    
                     we determine the total pilot compensation for each area. Because we are proposing a “full ratemaking” this year, we propose to follow the procedure outlined in paragraph (a) of § 404.104, which requires us to develop a benchmark after considering the most relevant currently available non-proprietary information. In accordance with the discussion in Section VII above, the proposed compensation benchmark for 2018 is $319,617 per pilot. Next, we certify that the number of pilots estimated for 2018 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, 15 pilots for District Two, and 22 pilots for District Three,[44]
                    
                     which is more than or equal to the numbers of working pilots provided by the pilot associations. Thus, in accordance with proposed § 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 each district, as shown in Table 14. Table 14—Target Pilot Compensation for District One
Designated
Undesignated
TotalTarget Pilot Compensation
$319,617
$319,617
$319,617Number of Pilots
10
7
17Total Target Pilot Compensation
$3,196,170
$2,237,319
$5,433,489
 Table 15—Target Pilot Compensation for District Two
Undesignated
Designated
TotalTarget Pilot Compensation
$319,617
$319,617
$319,617Number of Pilots
7
7
14Total Target Pilot Compensation
$2,237,319
$2,237,319
$4,474,638
 Table 16—Target Pilot Compensation for District Three
Undesignated
Designated
TotalTarget Pilot Compensation
$319,617
$319,617
$319,617Number of Pilots
14
4
18Total Target Pilot Compensation
$4,474,638
$1,278,468
$5,753,106
 E. Step 5: Calculate Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add 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, that number is 3.67 percent.[45]
                    
                     By multiplying the two figures, we get the working capital fund contribution for each area, as shown in Table 17. 
 
 Table 17—Working Capital Fund Contribution for District One
Designated
Undesignated
TotalAdjusted Operating Expenses (Step 2)
$948,283
$765,179
$1,713,462Total Target Pilot Compensation (Step 4)
3,196,170
2,237,319
5,433,489Total 2018 Expenses
4,144,453
3,002,498
7,146,951Working Capital Fund Contribution (Total 2018 Expenses × 3.67%)
152,101
110,192
262,293
 Table 18—Working Capital Fund Contribution for District Two
Undesignated
Designated
TotalAdjusted Operating Expenses (Step 2)
$816,341
$1,224,508
$2,040,849Total Target Pilot Compensation (Step 4)
2,237,319
2,237,319
4,474,638Total 2018 Expenses
3,053,660
3,461,827
6,515,487Working Capital Fund Contribution (Total 2018 Expenses × 3.67%)
112,069
127,049
239,118
 Table 19—Working Capital Fund Contribution for District Three
Undesignated
Designated
TotalAdjusted Operating Expenses (Step 2)
$1,671,666
$557,221
$2,228,887Total Target Pilot Compensation (Step 4)
4,474,638
1,278,468
5,753,106Total 2018 Expenses
6,146,304
1,835,689
7,981,993Working Capital Fund Contribution (Total 2018 Expenses × 3.67%)
225,569
67,370
292,939
 F. Step 6: Calculate Revenue Needed We add up all 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). The calculations are shown in Table 20. Table 20—Revenue Needed for District One
Designated
Undesignated
TotalAdjusted Operating Expenses (Step 2)
$948,283
$765,179
$1,713,462Total Target Pilot Compensation (Step 4)
3,196,170
2,237,319
5,433,489Return on Investment (Step 5)
152,101
110,192
262,293Total Revenue Needed
4,296,554
3,112,690
7,409,244
 Table 21—Revenue Needed for District Two
Undesignated
Designated
TotalAdjusted Operating Expenses (Step 2)
$816,341
$1,224,508
$2,040,849Total Target Pilot Compensation (Step 4)
2,237,319
2,237,319
4,474,638Return on Investment (Step 5)
112,069
127,049
239,118Total Revenue Needed
3,165,729
3,588,876
6,754,605
 Table 22—Revenue Needed for District Three
Undesignated
Designated
TotalAdjusted Operating Expenses (Step 2)
$1,671,666
$557,221
$2,228,888Total Target Pilot Compensation (Step 4)
4,474,638
1,278,468
5,753,106Return on Investment (Step 5)
225,569
67,370
292,939Total Revenue Needed
6,371,873
1,903,059
8,274,933
 
 
 G. Step 7: Calculate Initial Base Rates Having determined the revenue needed for each area in the previous six steps, we divide that number by the expected number of hours of traffic to develop an hourly rate. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in each district. Because we are calculating separate figures for designated and undesignated waters, there are two parts for each calculation. The calculations are shown in Tables 23 through 25. Table 23—Time on Task for District One
Year
Undesignated
Designated2016
6,217
5,4342015
6,667
5,7432014
6,853
6,8102013
5,529
5,8642012
5,121
4,7712011
5,377
5,0452010
5,649
4,8392009
3,947
3,5112008
5,298
5,8292007
5,929
6,099Average
5,659
5,395
 Table 24—Time on Task for District Two
Year
Undesignated
Designated2016
6,425
5,6152015
6,535
5,9672014
7,856
7,0012013
4,603
4,7502012
3,848
3,9222011
3,708
3,6802010
5,565
5,2352009
3,386
3,0172008
4,844
3,9562007
6,223
6,049Average
5,299
4,919
 Table 25—Time on Task for District Three
Year
Undesignated
Designated2016
23,421
2,7692015
22,824
2,6962014
25,833
3,8352013
17,115
2,6312012
15,906
2,1632011
16,012
1,6782010
20,211
2,4612009
12,520
1,8202008
14,287
2,2862007
24,811
5,944Average
19,294
2,828
 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 needed 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 Tables 26 through 28. Table 26—Rate Calculations for District One
Designated
UndesignatedRevenue needed (Step 6)
$4,296,554
$3,112,690Average time on task
5,395
5,659Initial rate
796
550
 Table 27—Rate Calculations for District Two
Designated
UndesignatedRevenue needed (Step 6)
$3,588,876
$3,165,729Average time on task
4,919
5,299Initial rate
730
597
 Table 28—Rate Calculations for District Three
Designated
UndesignatedRevenue needed (Step 6)
$1,903,059
$6,371,873Average time on task
2,828
19,294Initial rate
673
330
 H. Step 8: Calculate 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 29 through 34. Table 29—Average Weighting Factor for Area 1
[District 1, designated]
Vessel class/year
Number of transits
Weighting 
                             factor
Weighted 
                             transitsClass 1 (2014)
31
1.00
31Class 1 (2015)
41
1.00
41Class 1 (2016)
31
1.00
31Class 2 (2014)
285
1.15
327.75Class 2 (2015)
295
1.15
339.25Class 2 (2016)
185
1.15
212.75Class 3 (2014)
50
1.30
65( print page 2597)Class 3 (2015)
28
1.30
36.4Class 3 (2016)
50
1.30
65Class 4 (2014)
271
1.45
392.95Class 4 (2015)
251
1.45
363.95Class 4 (2016)
214
1.45
310.3Total
1,732

2,216.35Average weighting factor (weighted transits/number of transits)

1.28
 Table 30—Average Weighting Factor for Area 2
[District 1, undesignated]
Vessel class/year
Number of transits
Weighting 
                             factor
Weighted 
                             transitsClass 1 (2014)
25
1.00
25Class 1 (2015)
28
1.00
28Class 1 (2016)
18
1.00
18Class 2 (2014)
238
1.15
273.7Class 2 (2015)
263
1.15
302.45Class 2 (2016)
169
1.15
194.35Class 3 (2014)
60
1.30
78Class 3 (2015)
42
1.30
54.6Class 3 (2016)
28
1.30
36.4Class 4 (2014)
289
1.45
419.05Class 4 (2015)
269
1.45
390.05Class 4 (2016)
222
1.45
321.9Total
1,651

2,141.6Average weighting factor (weighted transits/number of transits)

1.30
 Table 31—Average Weighting Factor for Area 4
[District 2, designated]
Vessel class/year
Number of transits
Weighting 
                             factor
Weighted 
                             transitsClass 1 (2014)
20
1.00
20Class 1 (2015)
15
1.00
15Class 1 (2016)
28
1.00
28Class 2 (2014)
237
1.15
272.55Class 2 (2015)
217
1.15
249.55Class 2 (2016)
224
1.15
257.6Class 3 (2014)
8
1.30
10.4Class 3 (2015)
8
1.30
10.4Class 3 (2016)
4
1.30
5.2Class 4 (2014)
359
1.45
520.55Class 4 (2015)
340
1.45
493Class 4 (2016)
281
1.45
407.45Total
1,741

2,289.7Average weighting factor (weighted transits/number of transits)

1.32
 Table 32—Average Weighting Factor for Area 5
[District 2, undesignated]
Vessel class/year
Number of transits
Weighting
                             factor
Weighted
                             transitsClass 1 (2014)
31
1.00
31Class 1 (2015)
35
1.00
35Class 1 (2016)
32
1.00
32Class 2 (2014)
356
1.15
409.4Class 2 (2015)
354
1.15
407.1( print page 2598)Class 2 (2016)
380
1.15
437Class 3 (2014)
20
1.30
26Class 3 (2015)
0
1.30
0Class 3 (2016)
9
1.30
11.7Class 4 (2014)
636
1.45
922.2Class 4 (2015)
560
1.45
812Class 4 (2016)
468
1.45
678.6Total
2,881

3,802Average weighting factor (weighted transits/number of transits)

1.32
 Table 33—Average Weighting Factor for Areas 6 and 8
[District 3, undesignated]
Vessel class/year
Number of transits
Weighting
                             factor
Weighted
                             transitsArea 6:Class 1 (2014)
45
1.00
45Class 1 (2015)
56
1.00
56Class 1 (2016)
136
1.00
136Class 2 (2014)
274
1.15
315.1Class 2 (2015)
207
1.15
238.05Class 2 (2016)
236
1.15
271.4Class 3 (2014)
15
1.30
19.5Class 3 (2015)
8
1.30
10.4Class 3 (2016)
10
1.30
13Class 4 (2014)
394
1.45
571.3Class 4 (2015)
375
1.45
543.75Class 4 (2016)
332
1.45
481.4Total for Area 6
2,088

2,700.9Area 8:Class 1 (2014)
3
1.00
3Class 1 (2015)
0
1.00
0Class 1 (2016)
4
1.00
4Class 2 (2014)
177
1.15
203.55Class 2 (2015)
169
1.15
194.35Class 2 (2016)
174
1.15
200.1Class 3 (2014)
3
1.30
3.9Class 3 (2015)
0
1.30
0Class 3 (2016)
7
1.30
9.1Class 4 (2014)
243
1.45
352.35Class 4 (2015)
253
1.45
366.85Class 4 (2016)
204
1.45
295.8Total for Area 8
1,237

1,633Combined total
3,325

4,333.9Average weighting factor (weighted transits/number of transits)

1.30
 Table 34—Average Weighting Factor for Area 7
[District 3, designated]
Vessel class/year
Number of transits
Weighting
                             factor
Weighted
                             transitsClass 1 (2014)
27
1.00
27Class 1 (2015)
23
1.00
23Class 1 (2016)
55
1.00
55Class 2 (2014)
221
1.15
254.15Class 2 (2015)
145
1.15
166.75Class 2 (2016)
174
1.15
200.1Class 3 (2014)
4
1.30
5.2Class 3 (2015)
0
1.30
0Class 3 (2016)
6
1.30
7.8( print page 2599)Class 4 (2014)
321
1.45
465.45Class 4 (2015)
245
1.45
355.25Class 4 (2016)
191
1.45
276.95Total
1,412

1,836.65Average weighting factor (weighted transits/number of transits)

1.30
 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 will 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 35. Table 35—Revised Base Rates
Area
Initial rate 
                             (Step 7)
Average
                             weighting 
                             factor  
                             (Step 8)
Revised rate 
                             (initial rate/ 
                             average 
                             weighting 
                             factor)District One: Designated
$796
1.28
$622District One: Undesignated
550
1.30
424District Two: Designated
730
1.32
553District Two: Undesignated
597
1.32
424District Three: Designated
673
1.30
517District Three: Undesignated
330
1.30
253
 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. Because, as detailed in the discussion sections of this NPRM, the proposed rates incorporate appropriate compensation for enough pilots to handle heavy traffic periods, would cover operating expenses and infrastructure costs, and have taken average traffic and weighting factors into consideration, we believe that they do meet the goal of ensuring safe, efficient, and reliable pilotage. Thus, we are not proposing any alterations to the rates in this step. The final rates are shown in Table 36, and we propose to modify the text in § 401.405(a) to reflect them. Table 36—Final Rates
Area
Name
2017
                             Pilotage 
                             rate
Proposed 2018 pilotage rateDistrict One: Designated
St. Lawrence River
$601
$622District One: Undesignated
Lake Ontario
408
424District Two: Undesignated
Lake Erie
429
454District Two: Designated
Navigable waters from Southeast Shoal to Port Huron, MI
580
553District Three: Undesignated
Lakes Huron, Michigan, and Superior
218
253District Three: Designated
St. Mary's River
514
517
 K. Surcharges Because there are several applicant pilots in 2018, we are proposing to levy surcharges to cover the costs needed for training expenses. Consistent with previous years, we are proposing to assign a cost of $150,000 per applicant pilot. To develop the surcharge, we multiply the number of applicant pilots by the average cost per pilot to develop a total amount of training costs needed, and then impose that amount as a surcharge to all areas in the respective district, consisting of a percentage of revenue needed. In this year, there are two applicant pilots for District One, one applicant pilot for District Two, and four applicant pilots for District Three. The calculations to develop the surcharges are shown in Table 37. We note that while the percentages are rounded for simplicity, such rounding does not impact the revenue generated, as surcharges can no longer be collected once the surcharge total has been attained.
                    ( print page 2600) Table 37—Surcharge Calculations
District One
District Two
District ThreeNumber of applicant pilots
2
1
4Total applicant training costs
$300,000
$150,000
$600,000Revenue needed (Step 6)
$7,409,244
$6,754,605
$8,274,933Total surcharge as percentage (total training costs/revenue)
4%
2%
7%
 IX. Regulatory Analyses We developed this proposed 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 proposed rule a significant regulatory action under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. Because this proposed rule is not a significant regulatory action, this proposed rule is exempt from the requirements of Executive Order 13771. See OMB's Memorandum titled, “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017 titled `Reducing Regulation and Controlling Regulatory Costs'” (February 2, 2017). A regulatory analysis (RA) follows. The purpose of this rulemaking is to propose new base pilotage rates and surcharges for training. This proposed rule also makes changes to the ratemaking methodology and revises the compensation benchmark. The last full ratemaking was concluded in 2017. Table 38 summarizes the regulatory changes that are expected to have no costs, and any qualitative benefits associated with them. The table also includes proposed changes that affect portions of the methodology for calculating the proposed base pilotage rates. While these proposed changes affect the calculation of the rate, the costs of these changes are captured in the changes to the total revenue as a result of the proposed rate change (summarized in Table 39). Table 38—Regulatory Changes With No Cost or Costs Captured in the Proposed Rate Change
Proposed change
Description
Basis for no costs
BenefitsCodification of compensation inflation adjustment
Add regulatory text to § 404.104 to make the adjustment for inflation automatic
Pilot compensation costs are accounted for in the base pilotage rates
—Pilot compensation would keep up with regional inflation.
                             —Improves consistency, transparency, and efficiency in our ratemaking procedures.Target pilot compensation
—Due to the 2016 court opinion on pilot compensation, the Coast Guard is changing the pilot compensation benchmark
Pilot compensation costs are accounted for in the base pilotage rates
Improves transparency in our ratemaking procedures.Relocation of staffing model regulations
Move the discussion of the staffing model from 46 CFR 404.103 (as part of “Step 3” of the ratemaking process), to the general regulations governing pilotage in § 401.420
We are not proposing to adjust or modify the regulatory text, but simply move it to § 401.220
Improve the clarity of the regulations and improve the regulatory process.Delineation of full ratemakings and annual reviews
Set forth separate regulatory paragraphs detailing the differences between how the Coast Guard undertakes an annual adjustment of the pilotage rates, and a full reassessment of the rates, which must be undertaken once every 5 years
Change only clarifies that the benchmark level compensation will only be reconsidered during “full ratemaking” years
Simplify ratemaking procedures in interim years and better effect the statutory mandate in section 9303(f) of the Great Lakes Pilotage Act.Miscellaneous other changes
—Rename the step currently titled “Initially calculate base rates” to “Calculate initial base rates” for style purposes
                             —Adjust the reference to the staffing model in Step 7 to account for its relocation in text
Minor editorial changes in this NPRM that do not impact total revenues
Provides clarification to regulatory text and the rulemaking.
 
 
 Table 39 summarizes the affected population, costs, and benefits of the rate changes that are expected to have costs associated with them. Table 39—Economic Impacts Due to Rate Changes
Proposed change
Description
Affected population
Costs
BenefitsRate Changes
Under the Great Lakes Pilotage Act of 1960, the Coast Guard is required to review and adjust base pilotage rates annually
Owners and operators of 215 vessels journeying the Great Lakes system annually, 49 U.S. Great Lakes pilots, and 3 pilotage associations
$1,162,401—Due to change in Revenue Needed for 2018 ($23,488,782) from Revenue Needed for 2017 ($22,326,381) as shown in Table 40 below
—New rates cover an association's necessary and reasonable operating expenses.
                             —Provides fair compensation, adequate training, and sufficient rest periods for pilots. 
                             —Ensures the association receives sufficient revenues to fund future improvements.
 The Coast Guard is required to review and adjust pilotage rates on the Great Lakes annually. See sections IV and V 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 proposed rulemaking, we propose adjusting the pilotage rates for the 2018 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 proposed rule would, if codified, lead to an increase in the cost per unit of service to shippers in all three districts, and result in an estimated annual cost increase to shippers. In addition to the increase in payments that would be incurred by shippers in all three districts from the previous year as a result of the proposed rate changes, we propose authorizing a temporary surcharge to allow the pilotage associations to recover training expenses that would be incurred in 2018. For 2018, we anticipate that there will be two applicant pilots in District One, one applicant pilot in District Two, and four applicant pilots in District Three. With a training cost of $150,000 per pilot, we estimate that Districts One, Two, and Three will incur $300,000, $150,000, and $600,000 in training expenses, respectively. These temporary surcharges would generate a combined $1,050,000 in revenue for the pilotage associations. Therefore, after accounting for the implementation of the temporary surcharges across all three districts, the total payments that would be made by shippers during the 2018 shipping season are estimated at approximately $1,162,401 more than the total payments that were estimated in 2017 (Table 40).[46] A detailed discussion of our economic impact analysis follows. Affected Population The shippers affected by these rate changes are those owners and operators of domestic vessels operating “on register” (employed in foreign trade) and owners and operators of 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. United States-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. We used billing information from the years 2014 through 2016 from the Great Lakes Pilotage Management System (GLPMS) to estimate the average annual number of vessels affected by the rate adjustment. The GLPMS tracks data related to managing and coordinating the dispatch of pilots on the Great Lakes, and billing in accordance with the services. We found that a total of 387 vessels used pilotage services during the years 2014 through 2016. That is, these vessels had a pilot dispatched to the vessel, and billing information was recorded in the GLPMS. The number of invoices per vessel ranged from a minimum of 1 invoice per year to a maximum of 108 invoices per year. Of these vessels, 367 were foreign-flagged vessels and 20 were U.S.-flagged. 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 they can voluntarily choose to have one. Vessel traffic is affected by numerous factors and varies from year to year. Therefore, rather than the total number of vessels over the time period, an average of the unique vessels using pilotage services from the years 2014 through 2016 is the best representation of vessels estimated to be affected by the rate proposed in this NPRM. From the years 2014 through 2016, an average of 215 vessels used pilotage services annually.[47]
                    
                     On average, 206 of these vessels were foreign-flagged vessels and 9 were U.S.-flagged vessels that voluntarily opted into the pilotage service. Total Cost to Shippers The rate changes resulting from the new methodology would generate costs to industry in the form of higher payments for shippers. We estimate the effect of the rate changes on shippers by comparing the total projected revenues needed to cover costs in 2017 with the total projected revenues to cover costs in 2018, including any temporary surcharges we have authorized. We set pilotage rates so that pilot associations receive enough revenue to cover their necessary and reasonable expenses. Shippers pay these rates when they 
                    ( print page 2602)
                    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, and the change in revenue from the previous year is the additional cost to shippers discussed in this proposed rule. The impacts of the proposed rate changes on shippers are estimated from the District pilotage projected revenues (shown in Tables 20 through 22 of this preamble) and the proposed surcharges described in section VIII of this preamble. We estimate that for the 2018 shipping season, the projected revenue needed for all three districts is $22,438,782. Temporary surcharges on traffic in Districts One, Two, and Three would be applied for the duration of the 2018 season in order for the pilotage associations to recover training expenses incurred for applicant pilots. We estimate that the pilotage associations would require an additional $300,000, $150,000, and $600,000 in revenue for applicant training expenses in Districts One, Two, and Three, respectively. This would be an additional cost to shippers of $1,050,000 during the 2018 shipping season. Adding the projected revenue of $22,438,782 to the proposed surcharges, we estimate the pilotage associations' total projected revenue needed for 2018 would be $23,488,782. To estimate the additional cost to shippers from this proposed rule, we compare the 2018 total projected revenues to the 2017 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 2017 rulemaking,[48]
                    
                     we estimated the total projected revenue needed for 2017, including surcharges, as $22,326,381. This is the best approximation of 2017 revenues as, at the time of this publication, we do not have enough audited data available for the 2017 shipping season to revise these projections. Table 40 shows the revenue projections for 2017 and 2018 and details the additional cost increases to shippers by area and district as a result of the rate changes and temporary surcharges on traffic in Districts One, Two, and Three. Table 40—Effect of the Proposed Rule by Area and District
[$U.S.; non-discounted]
Area
Revenue needed in 2017
2017
                             Temporary 
                             surcharge
Total 2017 projected
                             revenue
Revenue needed in 2018
2018
                             Temporary 
                             surcharge
Total 2018 projected
                             revenue
Additional costs of this proposed ruleTotal, District One
$7,109,019
$0
$7,109,019
$7,409,244
$300,000
$7,709,244
$600,225Total, District Two
6,633,491
300,000
6,933,491
6,754,605
150,000
6,904,605
(28,886)Total, District Three
7,233,871
1,050,000
8,283,871
8,274,933
600,000
8,874,933
591,062System Total
20,976,381
1,350,000
22,326,381
22,438,782
1,050,000
23,488,782
1,162,401
 The resulting difference between the projected revenue in 2017 and the projected revenue in 2018 is the proposed annual change in payments from shippers to pilots as a result of the rate change that would be imposed by this rule. The effect of the proposed rate change to shippers varies by area and district. The rate changes, after taking into account the increase in pilotage rates and the addition of temporary surcharges, would lead to affected shippers operating in District One and District Three experiencing an increase in payments of $600,225 and $591,062, respectively, over the previous year, and a decrease in payments of $28,886 in District 2. The overall adjustment in payments would be an increase in payments by shippers of approximately $1,162,401 across all three districts (a 5 percent increase over 2017). Again, because we review and set rates for Great Lakes Pilotage annually, the impacts are estimated as single year costs rather than annualized over a 10-year period. Table 41 shows the difference in revenue by component from 2017 to 2018.[49]
                    
                     The majority of the increase in revenue is due to the inflation of operating expenses and to the addition of four pilots who were authorized in the 2017 rule. These four pilots are training this year and will become full-time working pilots at the beginning of the 2018 shipping season. They would be compensated at the target compensation of $319,617 per pilot. The addition of these pilots to full working status accounts for $1,278,468 of the increase ($677,898 when also including the effect of decreasing compensation for 45 pilots). The remaining amount is attributed to decreases in the working capital fund and differences in the surcharges from 2017. Table 41—Difference in Revenue by Component
Revenue component
Revenue needed in 2017
Revenue needed in 2018
Difference (2018 Revenue-2017 Revenue)Adjusted Operating Expenses
$5,155,280
$5,983,199
$827,919Total Target Pilot Compensation
14,983,335
15,661,233
677,898Working Capital Fund
837,766
794,350
(43,416)Total Revenue Needed, without Surcharge
20,976,381
22,438,782
1,462,401Surcharge
1,350,000
1,050,000
(300,000)( print page 2603)Total Revenue Needed, with Surcharge
22,326,381
23,488,782
1,162,401
 Pilotage Rates as a Percentage of Vessel Operating Costs To estimate the impact of U.S. pilotage costs on foreign-flagged vessels that would be affected by the rate adjustment, we looked at the pilotage costs as a percentage of a vessel's costs for an entire voyage. The portion of the trip on the Great Lakes using a pilot is only a portion of the whole trip. The affected vessels are often traveling from a foreign port, and the days without a pilot on the total trip often exceed the days a pilot is needed. To estimate this impact, we used the 2017 study titled, “Analysis of Great Lakes Pilotage Costs on Great Lakes Shipping and the Potential Impact of Increases in U.S. Pilotage Charges.” [50]
                    
                     We conducted the study to explore additional frameworks and methodologies for assessing the cost of Great Lakes pilot's ratemaking regulations, with a focus on capturing industry and port level economic impacts. The study also included an analysis of the pilotage costs as a percentage of the total voyage costs that we can use in RAs to estimate the direct impact of changes to the pilotage rates. The study developed a voyage cost model that is based on a vessel's daily costs. The daily costs included: Capital repayment costs; fuel costs; operating costs (such as crew, supplies, and insurance); port costs; speed of the vessel; stevedoring rates; and tolls. The daily operating costs were translated into total voyage costs using mileage between the ports for a number of voyage scenarios. In the study, the total voyage costs were then compared to the U.S. pilotage costs. The study found that, using the 2016 rates, the U.S. pilotage charges represent 10 percent of the total voyage costs for a vessel carrying grain, and between 8 percent and 9 percent of the total voyage costs for a vessel carrying steel.[51]
                    
                     We updated the analysis to estimate the percentage U.S. pilotage charges represent using the percentage increase in revenues from the years 2016 to 2018. Since the study used 2016 as the latest year of data, we compared the revenues needed in 2018 and 2017 to the 2016 revenues in order to estimate the change in pilotage costs as a percentage of total voyage costs from 2017 to 2018. Table 42 shows the revenues needed for
                    
                     the
                    
                     years 2016, 2017, and 2018. Table 42—Revenue Needed in 2016, 2017, and 2018
Revenue component
Revenue needed in 2016 52
Revenue needed in 2017 53
Revenue needed in 2018Total Revenue Needed, with Surcharge
$19,103,678
$22,326,381
$23,488,782
 From 2016 to 2017, the total revenues needed increased by 17 percent. From 2017 to 2018, the proposed total revenues needed would increase by 5 percent. From 2016 to 2018, the total revenues needed would increase by 23 percent. While the change in total voyage cost would vary by the trip, vessel class, and whether the vessel is carrying steel or grain, we used these percentages as an average increase to estimate the change in the impact. When we increased the pilotage charges by 17 percent from 2016, we found the U.S. pilotage costs represented an average of 11.3 percent of the total voyage costs. We then increased the base 2016 rates by 23 percent. With this proposed rule's rates for 2018, pilotage costs are estimated to account for 11.8 percent of the total voyage costs, or a 0.5 percent increase over the percentage that U.S. pilotage costs represented of the total voyage in 2017. It is important to note that this analysis is based on a number of assumptions. The purpose of the study was to look at the impact of the U.S. pilotage rates. The study did not include an analysis of the GLPA rates. It was assumed that a U.S. pilot is assigned to all portions of a voyage where he or she could be assigned. In reality, the assignment of a United States or Canadian pilot is based on the order in which a vessel enters the system, as outlined in the Memorandum of Understanding between the GLPA and the Coast Guard. This analysis only looks at the impact of proposed U.S. pilotage cost changes. All other costs were held constant at the 2016 levels, including Canadian pilotage costs, tolls, stevedoring, and port charges. This analysis estimates the impacts of Great Lakes pilotage rates holding all other factors constant. If other factors or sectors were not held constant but, instead, were allowed to adjust or fluctuate, it is likely that the impact of pilotage rates would be different. Many factors that drive the tonnage levels of foreign cargo on the Great Lakes and St. Lawrence Seaway were held constant for this analysis. These factors include, but are not limited to, demand for steel and grain, construction levels in the regions, tariffs, exchange rates, weather conditions, crop production, rail and alternative route pricing, tolls, vessel size restriction on the Great Lakes and St. Lawrence Seaway, and inland waterway river levels. Benefits This proposed rule would allow the Coast Guard to meet the requirements in 
                    ( print page 2604)
                    46 U.S.C. 9303 to review the rates for pilotage services on the Great Lakes. The rate changes would 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 the association produces enough revenue to fund future improvements. The rate changes would also help recruit and retain pilots, which would ensure a sufficient number of pilots to meet peak shipping demand, which would help 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 proposed rule would have a significant economic effect on a substantial number of small entities. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000 people. For the proposed rule, we reviewed recent company size and ownership data for the vessels identified in the GLPMS and we reviewed business revenue and size data provided by publicly available sources such as MANTA [54]
                    
                     and ReferenceUSA.[55]
                    
                     As described in Section IX.A of this preamble, Regulatory Planning and Review, we found that a total of 387 unique vessels used pilotage services from 2014 through 2016. These vessels are owned by 59 entities. We found that of the 59 entities that own or operate vessels engaged in trade on the Great Lakes affected by this proposed rule, 48 are foreign entities that operate primarily outside the United States. The remaining 11 entities are U.S. entities. We compared the revenue and employee data found in the company search to the Small Business Administration's (SBA) Table of Small Business Size Standards [56]
                    
                     to determine how many of these companies are small entities. Table 43 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 43—NAICS Codes and Small Entities Size Standards
NAICS
Description
Small business
                             size standard238910
Site Preparation Contractors
$15 million.483211
Inland Water Freight Transportation
750 employees.483212
Inland Water Passenger Transportation
500 employees.487210
Scenic & Sightseeing Transportation, Water
$7.5 million.488320
Marine Cargo Handling
$38.5 million.488330
Navigational Services to Shipping
$38.5 million.488510
Freight Transportation Arrangement
$15 million.
 The entities all exceed the SBA's small business standards for small businesses. Further, these U.S. entities operate U.S.-flagged vessels and are not required to have pilots as required by 46 U.S.C. 9302. In addition to the owners and operators of vessels affected by this proposed rule, there are three U.S. entities affected by the proposed rule that receive revenue from pilotage services. These are the three pilot associations that provide and manage pilotage services within the Great Lakes districts. Two of the associations operate as partnerships and one operates as a corporation. These associations are designated with the same NAICS industry classification and small-entity size standards described above, but they have fewer than 500 employees; combined, they have approximately 65 employees in total. We expect no adverse effect on these entities from this proposed rule because all associations would receive enough revenue to balance the projected expenses associated with the projected number of bridge hours (time on task) and pilots. We did not find any small not-for-profit organizations that are independently owned and operated and are not dominant in their fields. We did not find any small governmental jurisdictions with populations of fewer than 50,000 people. Based on this analysis, we found this proposed rulemaking, if promulgated, would not affect a substantial number of small entities. Therefore, we certify under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this proposed rule would have a significant economic impact on it, please submit a comment to the Docket Management Facility at the address under 
                    **ADDRESSES**
                    . In your comment, explain why you think it qualifies, and how and to what degree this proposed rule would economically affect it. C. Assistance for Small Entities Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104-121, we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please consult Mr. Mike Moyers, Great Lakes Pilotage, Commandant (CG-WWM-2), Coast Guard; telephone 202-372-1533, email 
                    *Michael.S.Moyers@uscg.mil,*
                     or fax 202-372-1914. The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard. Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business 
                    ( print page 2605)
                    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 proposed rule would call for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). This proposed rule would 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 E.O. 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this proposed rule under E.O. 13132 and have determined that it is consistent with the fundamental federalism principles and preemption requirements as described in E.O. 13132. Our analysis follows. Congress directed the Coast Guard to establish “rates and charges for pilotage services.” 
                    *See*46 U.S.C. 9303(f). This regulation is issued pursuant to that statute and is preemptive of State law as specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a “State or political subdivision of a State may not regulate or impose any requirement on pilotage on the Great Lakes.” As a result, States or local governments are expressly prohibited from regulating within this category. Therefore, the rule is consistent with the principles of federalism and preemption requirements in E.O. 13132. While it is well settled that States may not regulate in categories in which Congress intended the Coast Guard to be the sole source of a vessel's obligations, the Coast Guard recognizes the key role that State and local governments may have in making regulatory determinations. Additionally, for rules with implications and preemptive effect, E.O. 13132 specifically directs agencies to consult with State and local governments during the rulemaking process. If you believe this rule has implications for federalism under E.O. 13132, please contact the person listed in the 
                    **FOR FURTHER INFORMATION**
                     section of this preamble. F. Unfunded Mandates Reform Act The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or Tribal Government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this proposed rule would not result in such an expenditure, we discuss the effects of this proposed rule elsewhere in this preamble. G. Taking of Private Property This proposed rule would not cause a taking of private property or otherwise have taking implications under E.O. 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights. H. Civil Justice Reform This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of E.O. 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. I. Protection of Children We have analyzed this proposed rule under E.O. 13045, Protection of Children from Environmental Health Risks and Safety Risks. This proposed 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 proposed rule does not have tribal implications under E.O. 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. K. Energy Effects We have analyzed this proposed rule under E.O. 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 E.O. because it is not a “significant regulatory action” under E.O. 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under E.O. 13211. 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 proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards. M. Environment We have analyzed this proposed rule under Department of Homeland Security (DHS) Directive 023-01, Revision (Rev) 01, 
                    *Implementation of the National Environmental Policy Act*
                     [DHS Instruction Manual 023-01 (series)] and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary 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 preliminary Record of Environmental Consideration supporting this determination is available in the docket where indicated under the “Public Participation and Request for Comments” section of this preamble. This proposed rule meets the criteria for categorical exclusion (CATEX) under paragraph A3 of Table 1, particularly subparts (a), (b), and (c) in Appendix A of DHS Directive 023-01(series). CATEX A3 pertains to promulgation of rules and procedures that are: (a) Strictly administrative or procedural in nature; (b) that implement, without substantive change, statutory or regulatory requirements; or (c) that implement, without substantive change, procedures, manuals, and other guidance documents. This proposed rule adjusts base pilotage rates and surcharges for administering the 2018 shipping season in accordance with applicable statutory and regulatory mandates, and also proposes several 
                    ( print page 2606)
                    minor changes to the Great Lakes pilotage ratemaking methodology. We seek any comments or information that may lead to the discovery of a significant environmental impact from this proposed rule. List of Subjects 46 CFR Part 401 Administrative practice and procedure
Great Lakes
Navigation (water)
Penalties
Reporting and recordkeeping requirements
Seamen 46 CFR Part 404 Great Lakes
Navigation (water)
Seamen
 For the reasons discussed in the preamble, the Coast Guard proposes to amend 46 CFR parts 401 and 404 as follows: Title 46—Shipping PART 401—GREAT LAKES PILOTAGE REGULATIONS
 1.The authority citation for part 401 continues to read as follows: Authority:
                    46 U.S.C. 2103, 2104(a), 6101, 7701, 8105, 9303, 9304; Department of Homeland Security Delegation No. 0170.1(II)(92.a), (92.d), (92.e), (92.f). 2.Revise paragraph (a) of § 401.220 to read as follows: § 401.220
  (a) The Director shall determine the number of pilots required to be registered in order to assure adequate and efficient pilotage service in the United States waters of the Great Lakes and to provide for equitable participation of United States Registered Pilots with Canadian Registered Pilots in the rendering of pilotage services. The Director determines the number of pilots needed as follows: (1) The Director determines the base number of pilots needed by dividing each area's peak pilotage demand data by its pilot work cycle. The pilot work cycle standard includes any time that the Director finds to be a necessary and reasonable component of ensuring that a pilotage assignment is carried out safely, efficiently, and reliably for each area. These components may include but are not limited to— (i) Amount of time a pilot provides pilotage service or is available to a vessel's master to provide pilotage service; (ii) Pilot travel time, measured from the pilot's base, to and from an assignment's starting and ending points; (iii) Assignment delays and detentions; (iv) Administrative time for a pilot who serves as a pilotage association's president; (v) Rest between assignments, as required by 46 CFR 401.451; (vi) Ten days' recuperative rest per month from April 15 through November 15 each year, provided that lesser rest allowances are approved by the Director at the pilotage association's request, if necessary to provide pilotage without interruption through that period; and (vii) Pilotage-related training. (2) Pilotage demand and the base seasonal work standard are based on available and reliable data, as so deemed by the Director, for a multi-year base period. The multi-year period is the 10 most recent full shipping seasons, and the data source is a system approved under 46 CFR 403.300. Where such data are not available or reliable, the Director also may use data, from additional past full shipping seasons or other sources, that the Director determines to be available and reliable. (3) The number of pilots needed in each district is calculated by totaling the area results by district and rounding them to the nearest whole integer. For supportable circumstances, the Director may make reasonable and necessary adjustments to the rounded result to provide for changes that the Director anticipates will affect the need for pilots in the district over the period for which base rates are being established.
 3.Revise paragraph (a) of § 401.405 to read as follows: (a) The hourly rate for pilotage service on— (1) The St. Lawrence River is $622; (2) Lake Ontario is $424; (3) Lake Erie is $454; (4) The navigable waters from Southeast Shoal to Port Huron, MI is $553; (5) Lakes Huron, Michigan, and Superior is $253; and (6) The St. Mary's River is $517. 
 PART 404—GREAT LAKES PILOTAGE RATEMAKING
 4.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). 5.Revise § 404.100 to read as follows: § 404.100
  (a) The Director establishes base pilotage rates by a full ratemaking pursuant to §§ 404.101 through 404.110 of this part, which is conducted at least once every 5 years and completed by March 1 of the first year for which the base rates will be in effect. Base rates will be set to meet the goal specified in § 404.1(a) of this part. (b) In the interim years preceding the next scheduled full rate review, the Director will adjust base pilotage rates by an interim ratemaking pursuant to §§ 404.101 through 404.110 of this part. (c) Each year, the Director will announce whether the Coast Guard will conduct a full ratemaking or interim ratemaking procedure.
 6.Revise § 404.103 to read as follows: § 404.103
  The Director projects, based on the number of persons applying under 46 CFR part 401 to become U.S. Great Lakes registered pilots, and on information provided by the district's pilotage association, the number of pilots expected to be fully working and compensated.
 7.Revise § 404.104 to read as follows: § 404.104
  (a) In a full ratemaking year, the Director determines base individual target pilot compensation using a compensation benchmark, set after considering the most relevant currently available non-proprietary information. For supportable circumstances, the Director may make necessary and reasonable adjustments to the benchmark. (b) In an interim year, the Director adjusts the previous year's individual target pilot compensation level by the Bureau of Labor Statistics' Consumer Price Index for the Midwest Region, or if that is unavailable, the Federal Open Market Committee median economic projections for Personal Consumption Expenditures inflation. (c) The Director determines each pilotage association's total target pilot compensation by multiplying individual target pilot compensation computed in paragraph (a) or (b) of this section by the number of pilots projected under § 404.103(d) of this part, or § 401.220(a) of this part, whichever is lower.
 8.Revise § 404.107 to read as follows: § 404.107
  (a) The Director calculates initial base hourly rates by dividing the projected needed revenue from § 404.106 of this part by averages of past hours worked in each district's designated and undesignated waters, using available and reliable data for a multi-year period set in accordance with § 401.220(a) of this part.
 Dated: January 11, 2018. Michael D. Emerson, Director, Marine Transportation Systems, U.S. Coast Guard.


# Footnotes

1.
    
                         46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as amended. Back to Citation
 2.
    
                         We have included the court's opinion in the docket at USCG-2017-0903. Back to Citation
 3.
    
                         See 46 U.S.C. 9301(2) and 9302(a)(1). Back to Citation
 4.
    
                         See 46 U.S.C. 9303(f). Back to Citation
 5.
    
                         Department of Homeland Security (DHS) Delegation No. 0170.1, para. II (92.f). Back to Citation
 6.
    
                         See 46 U.S.C. 9302. A “laker” is a commercial cargo vessel especially designed for and generally limited to use on the Great Lakes. Back to Citation
 7.
    
                         Presidential Proc. 3385, 
                        *Designation of restricted waters under the Great Lakes Pilotage Act of 1960,*
                         December 22, 1960. Back to Citation
 8.
    
                         46 U.S.C. 9302(a)(1)(B). Back to Citation
 9.
    
                         Area 3 is the Welland Canal, which is serviced exclusively by the Canadian Great Lakes Pilotage Authority (GLPA) and, accordingly, is not included in the United States pilotage rate structure. 10.
    
                         The areas are listed by name in 46 CFR 401.405. Back to Citation
 11.
    
                         In some cases, U.S.-registered vessels that are not required to use a pilot by law will do so voluntarily for business reasons. Back to Citation
 12.
    
                         See 81 FR 11908 (March 7, 2016). Back to Citation
 13.
    
                         See 81 FR 72011 (October 19, 2016). Back to Citation
 14.
    
                         See 82 FR 41466 (August 31, 2017). Back to Citation
 15.
    
                         
                        *Id.,*
                         at 41483. Back to Citation
 16.
    
                         
                        *https://www.federalreserve.gov/​monetarypolicy/​files/​fomcprojtabl20170920.pdf.* Back to Citation
 17.
    
                         For more information on this topic, see section VI.D. titled, “Delineation of full ratemakings and annual reviews” in this preamble. Back to Citation
 18.
    
                         See 82 FR 41466, at 41484 (August 31, 2018). Back to Citation
 19.
    
                         See, for example, table 7, “Calculations of total compensation,” 82 FR 41466, at 41483 (August 31, 2017). Back to Citation
 20.
    
                         
                        *See*46 U.S.C. 9303(f). Back to Citation
 21.
    
                         
                        *Id.* Back to Citation
 22.
    
                         See 33 CFR 404.100(b)(1) through (b)(3). Back to Citation
 23.
    
                         See 82 FR 41466 (March 8, 2017) at 41469. Back to Citation
 24.
    
                         We note that the 2016 ratemaking significantly overhauled the entire ratemaking process, not just the method for computing the compensation benchmark, and that methodology is still the basis of the current proposed ratemaking process. Back to Citation
 25.
    
                         We refer to this document as the “2013 AMOU letter,” which is available in the docket at USCG-2017-0903, as well as in the docket for the 2014 Great Lakes Pilotage rulemaking, at USCG-2013-0534-0007. Back to Citation
 26.
    
                         We acknowledge that the American pilotage associations sued the Coast Guard and won in a lawsuit on the 2014 ratemaking regarding the inappropriate use of AMOU daily aggregate rate data. However, that was because in that ratemaking, the Coast Guard did not use the updated daily aggregate rate data provided in the October 4, 2013 letter, but instead relied on older data that the AMOU had explicitly disavowed. In this proposal, we are correcting that mistake by using the updated data. The opinion from the 2014 court case is available on the docket at USCG-2017-0903. Back to Citation
 27.
    
                         “Agreement A” refers to the contract between AMOU and vessels operated by Key Lakes, Inc. Back to Citation
 28.
    
                         “Agreement B” refers to the contract between AMOU and vessels operated by Mittal Steel USA, Inc. Back to Citation
 29.
    
                         2012 Rates for Pilotage on the Great Lakes, 77 FR 11752 (February 28, 2012). Back to Citation
 30.
    
                         Because the out-year figures, including those for 2015, were estimates, we would not expect the 2015 numbers as calculated in 2011 and 2013 to match exactly, as component items such as medical cost expenditures often defy exact predictions. We believe that the very close match between our own calculations and the figures provided by AMOU is strong evidence that the AMOU data accurately accounts for the total compensation of Great Lakes masters and thus provides a reasonable facsimile for Great Lakes pilots. Back to Citation
 31.
    
                         Great Lakes Pilotage Rates—2014 Annual Review and Adjustment, notice of proposed rulemaking, 78 FR 48374, at 48381(August 8, 2013). Back to Citation
 32.
    
                         Id. Back to Citation
 33.
    
                         Id., at 48382. Back to Citation
 34.
    
                         This was the information AMOU provided to correct what it alleged was inaccurate data the Coast Guard had proposed using. The aggregate data in the 2013 AMOU letter included a comprehensive wage component, which included work days, weekend days, holidays, and the “seasonal bonus” days. Back to Citation
 35.
    
                         Great Lakes Pilotage Rates—2016 Annual Review and Changes to Methodology, 80 FR 54484, at 54490 (September 10, 2015). Back to Citation
 36.
    
                         Inflation adjustment from 2015 to 2016 calculated from Bureau of Labor Statistics, CPI—All Urban Consumers for Midwest Urban, found at 
                        *https://data.bls.gov/​timeseries/​CUUR0200SA0?​data_​tool=​Xgtable*. 37.
    
                         Inflation to 2017 and 2018 found using Federal Open Market Committee, Summary of Economic Projections, found at 
                        *https://www.federalreserve.gov/​monetarypolicy/​fomcprojtabl20160316.htm*. Back to Citation
 38.
    
                         These reports are available in the docket for this rulemaking (see 
                        *https://www.regulations.gov,*
                         Docket #USCG-2017-0903). Back to Citation
 39.
    
                         Available at 
                        *https://www.bls.gov/​regions/​midwest/​data/​consumerpriceindexhistorical_​midwest_​table.pdf*. Back to Citation
 40.
    
                         See 
                        *https://data.bls.gov/​timeseries/​CUUR0200SA0?​data_​tool=​Xgtable*. Back to Citation
 41.
    
                         See 
                        *https://www.federalreserve.gov/​monetarypolicy/​fomcprojtabl20160316.htm*. Back to Citation
 42.
    
                         See 
                        *https://www.federalreserve.gov/​monetarypolicy/​fomcprojtabl20160316.htm*. Back to Citation
 43.
    
                         For a detailed calculation, see 82 FR 41466, table 6 at 41480 (August 31, 2017). Back to Citation
 44.
    
                         See Table 6 of the 2017 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). Back to Citation
 45.
    
                         Moody's Seasoned Aaa Corporate Bond Yield, average of 2016 monthly data, located at 
                        *http://research.stlouisfed.org/​fred2/​series/​AAA/​downloaddata?​cid=​119.*
                         The Coast Guard uses the most recent complete year of data. Back to Citation
 46.
    
                         Total payments across all three districts are equal to the increase in payments incurred by shippers as a result of the rate changes plus the temporary surcharges applied to traffic in Districts One, Two, and Three. Back to Citation
 47.
    
                         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. Back to Citation
 48.
    
                         The 2017 projected revenues are from the 2017 Great Lakes Pilotage Ratemaking final rule (82 FR 41484 and 41489), Tables 9 and 14. Back to Citation
 49.
    
                         The 2017 projected revenues are from the 2017 final rule (82 FR 41484 and 41489), tables 9 and 14. The 2018 projected revenues are from tables 20-22 of this NPRM. Back to Citation
 50.
    
                         The study is available at 
                        *http://www.dco.uscg.mil/​Our-Organization/​Assistant-Commandant-for-Prevention-Policy-CG-5P/​Marine-Transportation-Systems-CG-5PW/​Office-of-Waterways-and-Ocean-Policy/​Office-of-Waterways-and-Ocean-Policy-Great-Lakes-Pilotage-Div/​.* Back to Citation
 51.
    
                         Martin Associates, “Analysis of Great Lakes Pilotage Costs on Great Lakes Shipping and the Potential Impact of Increases in U.S. Pilotage Charges,” page 33. Back to Citation
 52.
    
                         The 2016 projected revenues are from the 2016 final rule, 81 FR 11938. Figure 32, projected revenue needed in 2016 plus the temporary surcharge ($17,453,678 + $1,650,000 = $19,103,678). Back to Citation
 53.
    
                         The 2017 projected revenues are from the 2017 final rule, 82 FR 41484 and 41489, tables 9 and 14. Back to Citation
 54.
    
                         See 
                        *http://www.manta.com/​.* Back to Citation
 55.
    
                         See 
                        *http://resource.referenceusa.com/​.* Back to Citation
 56.
    
                         Source: 
                        *https://www.sba.gov/​contracting/​getting-started-contractor/​make-sure-you-meet-sba-size-standards/​table-small-business-size-standards.*
                         SBA has established a Table of Small Business Size Standards, which is matched to NAICS industries. A size standard, which is usually stated in number of employees or average annual receipts (“revenues”), represents the largest size that a business (including its subsidiaries and affiliates) may be considered in order to remain classified as a small business for SBA and Federal contracting programs. Back to Citation


[FR Doc. 2018-00781 Filed 1-17-18; 8:45 am] BILLING CODE 9110-04-P