18366 Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations

Reduction Act and have been assigned

OMB control number 2070–0091.

List of Subjects in 40 CFR Part 763

Environmental protection, Asbestos,

Asbestos in schools (AHERA),

Hazardous substances, Reporting and

recordkeeping requirements, State and

local governments, Worker protection.

Dated: March 30, 1995.

Jane Saginaw,

Regional Administrator, Region VI.

[FR Doc. 95–8873 Filed 4–10–95; 8:45 am]

BILLING CODE 6560–50–F

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Coast Guard

46 CFR Parts 401, 403, and 404

[OST Docket No. 50248]

[CGD 92–072]

RIN 2105–AC21

Great Lakes Pilotage Rate

Methodology

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule; request for

comments.

SUMMARY: The Department of

Transportation (the Department) is

amending the regulations concerning

Great Lakes pilotage by amending the

procedures for determining Great Lakes

pilotage rates, and revising the financial

reporting requirements mandated for

Great Lakes pilot associations. The

purpose of these changes is to improve

the ratemaking process. This final rule

does not change the existing Great Lakes

pilotage rates and charges.

DATES: This rule is effective on June 12,

1995. Comments must be received on or

before May 11, 1995. Late-filed

comments will be considered only to

the extent practicable.

ADDRESSES: Comments should be sent,

preferably in triplicate, to Docket Clerk,

OST Docket No. 50248, U.S. Department

of Transportation, 400 7th St. SW., room

PL–401, Washington, DC 20590.

Comments will be available for

inspection at this address from 9 a.m. to

5:30 p.m., Monday through Friday.

Commenters who wish the receipt of

their comments to be acknowledged

should include a stamped, selfaddressed postcard with their

comments. The Docket Clerk will datestamp the postcard and mail it back.

Unless otherwise indicated, documents

referred to in this preamble are also

available for inspection or copying at

this address. Comments should not be

sent to the Coast Guard docket.

FOR FURTHER INFORMATION CONTACT:

Scott A. Poyer, Project Manager,

Merchant Vessel Personnel Division,

Office of Marine Safety, Security and

Environmental Protection (G-MVP/12)

room 1210, U.S. Coast Guard

Headquarters, 2100 Second Street, SW.,

Washington, DC 20593–0001, (202) 267–

6102, or Steven B. Farbman, Office of

the Assistant General Counsel for

Regulation and Enforcement, 400 7th St.

SW., room 10424, Washington, DC

20590, (202) 366–9306.

Regulatory History

On December 7, 1988, the Department

of Transportation published the Great

Lakes Pilotage Study Final Report (1988

DOT Pilotage Study). The study

revealed weaknesses in accounting for

the expenses incurred by the pilot

associations and the need to formally

establish the factors used in establishing

pilotage rates. On April 25, 1990, the

Coast Guard published a final rule (55

FR 17580) establishing improved audit

requirements and general guidelines

and procedures to be followed in

ratemaking (CGD 92–072).

In May 1990, the Inspector General

(IG) for the Department of

Transportation initiated an audit of

Coast Guard oversight of Great Lakes

pilotage. The final report of the audit

(Audit of the U.S. Coast Guard’s

Oversight and Management of the Great

Lakes Pilotage Program), detailing

further issues affecting the basis for

Great Lakes pilotage rates, was issued

on December 14, 1990.

On August 2, 1991, a DOT Task Force

was formed to: (1) Develop an interim

rate adjustment; and (2) establish a new

pilotage ratemaking methodology. On

June 5, 1992, an interim rate increase

was published (CGD 89–104). The DOT

Task Force then developed a new

pilotage ratemaking methodology,

which the Coast Guard published in a

notice of proposed rulemaking (NPRM)

(59 FR 17303) dated April 12, 1994.

The NPRM proposed to amend the

Great Lakes pilotage regulations by

establishing new procedures for

determining Great Lakes pilotage rates

and revising the financial reporting

requirements mandated for Great Lakes

pilot associations (CGD 92–072). The

NPRM also announced a public hearing

that was held in Cleveland, OH on May

20, 1994. The comment period for the

NPRM ended on July 11, 1994.

In response to the NPRM and the

public hearing, the Coast Guard

received 31 comments and two requests

for additional public meetings to

explain the proposals contained in the

NPRM. In the Federal Register (59 FR

18774) on April 20, 1994, the Coast

Guard announced that it would conduct

two public meetings. The first public

meeting was held in Chicago, IL on May

3, 1994. The second public meeting was

held in Massena, NY on May 5, 1994.

The Coast Guard also received one

request to extend the comment period

for the NPRM. Because the comment

period for the NPRM was 90 days, the

Coast Guard determined that there was

sufficient time to submit comments.

Therefore, the comment period was not

extended.

Background and Purpose

Under the Great Lakes Pilotage Act of

1960 (Pub. L. 86–555, 46 U.S.C. 9301 et

seq.) (the Act), vessels of the United

States operating on register and foreign

vessels must engage a U.S. or Canadian

registered pilot when traversing the

waters of the Great Lakes. The Act vests

the Secretary of Transportation with

responsibility for setting pilotage rates.

Section 9303 of the Act provides that

the Secretary shall prescribe by

regulation rates and charges for pilotage

services, giving consideration to the

public interest and the costs of

providing the services. This authority,

except for the authority to enter into,

revise or amend arrangements with

Canada, has been delegated to the

Commandant of the Coast Guard by 49

CFR 1.46(a). This authority has been

further delegated to the Director, Great

Lakes Pilotage (the Director).

Currently, the navigable waters of the

Great Lakes are divided into eight

pilotage areas. United States registered

pilots, along with their Canadian

counterparts, provide pilotage services

in areas 1, 2, 4, 5, 6, 7, and 8. Pilotage

area 3 (the Welland Canal) is currently

a wholly-Canadian area where only

Canadian pilots provide services.

Pilotage areas 2, 4, 6, and 8 are

‘‘undesignated waters.’’ Pilotage areas 1,

5, and 7 are ‘‘designated waters.’’ Pilots

are required to direct navigation of

vessels in designated waters. Pilots are

required to be on board and available to

direct navigation in undesignated

waters. The seven U.S. pilotage areas are

grouped together into three pilotage

districts. District 1 consists of areas 1

and 2. District 2 consists of areas 4 and

5. District 3 consists of areas 6, 7, and

8. Each district has its own pilot

association.

Section 9305 of the Pilotage Act

provides that the Secretary of

Transportation, subject to the

concurrence of the Secretary of State,

may make agreements with the

appropriate agency of Canada to

prescribe joint or identical rates and
Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations 18367

charges. The latest Memorandum of

Arrangements between the United

States and Canada, dated January 18,

1977, specifies that the Secretary of

Transportation of the United States of

America and the Minister of Transport

of Canada will establish regulations

imposing identical rates. A copy of this

Memorandum of Arrangements is

available in the docket and may also be

obtained by writing to Mr. Scott Poyer

at the address listed under FOR FURTHER

INFORMATION CONTACT, above. In the

past, consultations between the United

States and Canada resulted in nominally

identical U.S. and Canadian rates.

However, there are differences in the

cost bases and in the operating

organizations of the U.S. and Canadian

pilots, particularly with regard to pilot

compensation. These differences need

to be taken into account in reaching

identical U.S. and Canadian rates. As a

result, the ratemaking methodology

contained in this final rule would not

translate directly into new rates, but

rather would form the basis for

proposals to be negotiated with Canada.

Discussion of Comments and Changes

Although the Coast Guard issued the

NPRM under authority delegated to the

Commandant by the Secretary, the

Secretary is issuing the final rule. Under

49 CFR 1.43(a), the Secretary may

exercise powers and duties delegated or

assigned to officials other than the

Secretary.

Because the Secretary is issuing this

final rule, the Department is

consolidating Coast Guard Docket No.

92–072 into OST Docket No. 50248. All

further pleadings should be filed in the

new docket at the docket address listed

above.

The Coast Guard received 31

comments on the NPRM. Twenty

comments were from Great Lakes Pilots,

Great Lakes Pilot Associations, or

employees of these associations. Six

comments were from shippers, ports,

and associations representing the Great

Lakes maritime industry. Five

comments were from unions or

professional organizations that represent

pilots. Some of the comments addressed

issues that were not the subject of this

rulemaking. The Department is

responding only to those comments

relating to this rulemaking.

All comments were carefully

considered, and in response to the

comments significant changes have been

made to the proposals that were

published in the NPRM. The NPRM

proposed changes to 46 CFR part 403,

which deals with accounting and

financial reporting requirements, and 46

CFR part 404, which details ratemaking

procedures.

Most of the comments criticized the

NPRM for being overly complex and

unwieldy. In response to this criticism,

the regulations that were proposed in

the NPRM have been cut by

approximately two thirds, with no

sacrifice of fairness or substance.

Accounting requirements have been

streamlined for easier use, financial

reporting requirements have been

reduced, and the proposed ratemaking

methodology has been revised to make

it less complex.

The NPRM elements that received the

strongest objections from the public

were proposals to change the way

pilotage rates are charged on the Great

Lakes. Almost everyone who

commented on the proposed rule

objected to the proposals to create a

class of ‘‘ancillary services’’ and to

recalculate point-to-point pilotage

charges based on hourly fees. These

proposals were found in Step 7 of

appendix A to part 404. The majority of

commenters felt that the proposals for

hourly pilotage fees would degrade

safety by creating an incentive for

vessels to go faster in order to avoid or

reduce pilotage costs. Commenters also

objected to labeling some pilotage

services such as docking and undocking

as ‘‘ancillary services’’ and allowing fees

for these services to be set purely at the

discretion of the Director. There were

concerns that purely discretionary rates

would not be predictable for shippers or

pilots.

In response to the comments from

pilots, shippers, unions and most other

commenters, the NPRM proposal to

charge fees on an hourly basis has been

modified. The Department agrees with

the expressed concerns regarding undue

complexity and possible disincentives

for operational safety, and has therefore

rewritten Step 7 of appendix A to part

404. This final rule retains the current

method for charging pilotage rates to

various users, which specifies charges

for specific travel segments. If concerns

are raised in the future regarding the

equity of the way in which pilotage

rates are charged, this issue may be

reopened. However, no changes will be

made without a proceeding that

provides for public involvement.

There were many objections from

pilots and shippers to the proposal that

the timing of rate reviews be determined

by the Director of Great Lakes Pilotage.

Several alternatives were suggested, but

most comments indicated that it would

be more appropriate if a rate review

were conducted at least every one, two,

or three years in order to keep pilotage

rates current. The Department agrees

with these comments. The provision in

46 CFR 404.1(b), which gave the

Director authority to determine the

timing of rate reviews, has been revised

in response to the public comments

received. Section 404.1(b) now requires

the Director to conduct a detailed audit

of pilot association expenses and use

the ratemaking procedures in appendix

A of part 404 to set base pilotage rates

at least once every five years. The

Director of Great Lakes Pilotage will

initiate the new methodology as soon as

possible after the effective date of this

rule using the most current audit reports

available. If interested parties request

reviews more often than once every five

years, the Director can review the

request, and conduct a special audit and

ratemaking if the Director concludes

that a reasonable basis for conducting a

review has been established.

In the intervening years between the

five-year or special audits, pilotage rates

proposed for coordination with Canada

will be reviewed annually using a

simplified procedure detailed in

appendix C to part 404. This annual

review procedure addresses public

comments that a less complicated

ratemaking process would be faster and

less burdensome on all parties.

During the regular five-year audit of

the Great Lakes pilot associations and

the corresponding rate review, the

Director will calculate an ‘‘expense

multiplier’’ for each pilot association

using the most recent regular and/or

special audit data. This expense

multiplier is the ratio of all other

expenses, including a return element, to

pilot compensation expense in unit cost

terms for the base period analyzed.

When target pilot compensation is

determined for a prospective annual rate

period, total economic costs can be

easily determined by increasing such

pilot compensation by the multiplier.

Use of this ratio avoids the need to

recalculate other expenses and the

return element each year in order to

review the rates. Moreover, since this

review procedure focuses on changes in

unit costs, i.e., total economic costs per

bridge hour, between the base period

and the new rate period, the need to

project revenues for the new period is

also avoided. Finally, this calculation

will not change the rate structure; it will

merely change proposed rates uniformly

by the percentage change in unit costs.

Most pilots, and organizations

representing pilots, commented on the

NPRM’s proposal to continue the

Department policy of maintaining

income comparability between Great

Lakes Registered Pilots, and masters/

chief mates on Great Lakes vessels. This

policy was established as a result of the
18368 Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations

1988 DOT Pilotage Study, which

examined many alternatives and

selected the master/chief mate target for

pilot compensation. Commenters

believed pilots should earn more than

masters/chief mates. Among the many

alternatives proposed by commenters

were: Comparability with State pilots;

comparability with Canadian pilots;

automatic cost-of-living allowances;

overtime bonuses; and work hour/travel

time/rest time adjustments. No single

alternative appeared to represent a

consensus. After considering all the

alternatives, the Department is keeping

the pilot compensation methodology

proposed in the NPRM. This is fully

consistent with the recommendation in

the 1988 DOT Pilotage Study, which

states, ‘‘The study team believes that

pilot compensation should be tied to the

local economy. The use of local masters

and mates pay scales has the important

impact of tying pilot compensation to

regional industry pay levels. Salaries of

pilots, like those of teachers, physicians,

lawyers, and other professionals, are

tied to the fluctuations of supply and

demand for their services in their

particular locality. In this fashion, Great

Lakes pilots share in the fortunes of the

Great Lakes.’’ Commenters offered no

new information that alters this

assessment.

There were several objections from

Great Lakes Pilot Associations and their

employees to the proposed new 46 CFR

part 403, as published in the NPRM.

Commenters objected that this part was

unduly burdensome for small pilot

associations and should be eliminated

in order to streamline the regulations,

and reduce costs to the pilot

associations. After careful

consideration, and in light of the lesser

requirements of the procedures for the

annual reviews of base pilotage rates,

the Department agrees with the public

comments and has greatly streamlined

part 403. Specific account numbers and

detailed account descriptions have been

removed in favor of a requirement that

financial records of the association be

kept in accordance with generally

accepted accounting principles.

Associations are required to complete

and retain annual financial statements

and an audit by a certified public

accountant. However, reporting

requirements have been reduced to

require that audits only be forwarded to

the Director once every five years, or by

special request. At the same time,

associations must keep in mind that

answers challenging proposed cost

disallowances or other applications of

the ratemaking methodology, as well as

ad hoc requests for rate reviews, must

be based on full and adequate financial

records.

Two commenters from two of the

three Great Lakes Pilot Associations

objected to the proposed requirement

that the financial records of the

associations be retained for a period of

ten years, and proposed an alternative

three-year requirement that would

conform to Internal Revenue Service

(IRS) requirements. The Department

does not agree. The Department does

not use the financial records of the pilot

association for the same purpose as the

IRS. On several occasions the Director

has accessed historical data to ensure

that only reasonable expenses have been

included in ratemaking calculations. For

this reason, the Department is adopting

the proposed requirement regarding the

10-year retention of financial records.

The Department anticipates

implementing all the rate reviews under

the methodologies adopted in this

rulemaking proceeding through

additional public procedures. Following

a review, the Department will publish

its tentative findings and any proposed

rate changes, and it will request the

comment of interested parties on the

calculations. (Comments seeking

reconsideration of our rate methodology

will not be addressed through this

process.) The Department will then seek

to coordinate any proposed change in

rates, as modified by any warranted

corrections, with Canadian authorities.

Following the coordination process, the

Department will establish final rates to

be effective for the designated future

rate period. Both the proposed and final

rate documents will be served on the

pilot associations and other interested

persons requesting in writing to be

placed on the service list in this docket;

both documents will also be published

in the Federal Register.

Although the Coast Guard received no

comments on the section pertaining to

the uniform pilot’s source form, the

Department is making a slight

modification to clarify that the format

for source forms is approved by the

Director of Great Lakes Pilotage and

issued by the pilot associations. The

‘‘Pilot’s Source Form—Great Lakes

Pilotage,’’ referred to in the NPRM, is

not an official United States

Government form.

The Department is also removing

several subparts as part of our

streamlining of the accounting

regulations. Subparts B, C, D, and G, as

contained in the NPRM, have been

eliminated, and subparts E, F, and H

have been redesignated subparts B, C,

and D, respectively.

There were several objections from

employees and representatives of the

District 3 pilot association to the

proposed revision to 46 CFR 404.05,

which provided that profit sharing

expenses not be recognized for

ratemaking purposes. Commenters

argued that profit sharing for employees

of the District 3 pilot association is part

of their recognized pension plan, and

employees of this association would be

unfairly penalized if this proposal were

adopted. The Department agrees and has

changed the wording of the proposed

paragraph to allow reasonable profit

sharing expenses for non-pilot

employees only. Profit sharing that

benefits pilots will be considered part of

pilot compensation.

Several comments from both pilots

and shippers, as part of the overall

objection to the complexity of the

proposal, argued that the marketequivalent Return-on-Investment (ROI)

provisions of 46 CFR 404.5(a)(4), Step 5

of appendix A, and the formulas

contained in appendix B should not be

included. Some members of the public

objected to allowing a return on the

capital that pilots had invested in their

pilot associations on the grounds that

this would encourage pilots to make

investments that were unrelated to

pilotage, and thereby increase pilotage

fees. Other commenters believed that

the ROI provisions made the ratemaking

formula in appendix A too complicated.

The Department carefully considered

these comments and believes that we

have significantly reduced the

proposal’s complexity and burden.

However, a return element is an

important component of cost-based rate

methodologies. Rates that have been set

without a return element have been

vulnerable to legal challenge and do not

meet the goals of the investigations and

audits that underlie this rulemaking.

Also, in order to negotiate with the

Canadians we must have rates that can

withstand scrutiny as to their

conformity to sound ratemaking

principles. The Department believes it is

only fair to allow pilots a return on the

capital they invest. The Department also

believes that sufficient safeguards

against excessive investment are in

place because 46 CFR 404.5(a)(4)

specifically stipulates that capital that is

not necessary and reasonable for the

provision of pilotage services will not be

allowed for ratemaking purposes.

Final Rule With Request for Comments

The Department is issuing this

document as a final rule but is also

providing an opportunity for comment.

This rulemaking document is within the

scope of the NPRM. The primary

purposes of the final rule have not

changed from the NPRM stage: to
Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations 18369

standardize the financial reporting of

Great Lakes pilotage associations, and to

clarify the methodology to be used in

future ratemakings. We believe that we

have responded to all the concerns

expressed in the comments to the

NPRM. Nevertheless, we want to give

the public an additional opportunity to

present its views to us, given the

changes that we have made to the

NPRM. Accordingly, even though the

final rule will be effective on June 12,

1995, we will consider any new matters

presented to us during the 30-day

comment period. We will make

revisions to this rule if we believe they

are warranted.

Executive Order 12866

This rule is a significant regulatory

action under section 3(f) of Executive

Order 12866 and has been reviewed by

the Office of Management and Budget

under that order. It is significant under

the regulatory policies and procedures

of the Department of Transportation (44

FR 11040; February 26, 1979) because a

rulemaking affecting the setting of

pilotage rates is controversial and of

significant interest to the public.

The Department expects the economic

impact of this rule to be minimal. This

rule does not represent a significant

departure from the current ratemaking

process, and there are no expected

increases in costs. Therefore, a full

regulatory evaluation is not necessary.

Small Entities

Under the Regulatory Flexibility Act

(5 U.S.C. 601 et seq.), the Department

must consider whether this final rule

will have a significant economic impact

on a substantial number of small

entities. ‘‘Small entities’’ include

independently owned and operated

small businesses that are not dominant

in their field and that otherwise qualify

as ‘‘small business concerns’’ under

section 3 of the Small Business Act (15

U.S.C. 632). This final rule should have

little or no impact on small entities that

pay pilotage rates or that receive income

from pilotage rates. Because it expects

the impact of this proposal to be

minimal, the Department certifies under

5 U.S.C. 605(b) of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) that

this final rule will not have a significant

economic impact on a substantial

number of small entities.

Collection of Information

This rule contains collection-ofinformation requirements. The

Department has submitted the

requirements to the Office of

Management and Budget (OMB) for

review under section 3504(h) of the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.), and OMB has approved

them. The part numbers are parts 401

and 403 and the corresponding OMB

approval number is OMB Control

Number 2115–0616.

Federalism

The Department has analyzed this

final rule under the principles and

criteria contained in Executive Order

12612, and has determined that this rule

does not have sufficient federalism

implications to warrant the preparation

of a Federalism Assessment. Under 49

CFR 1.46(a) the Secretary delegates to

the Commandant of the authority to

carry out the Great Lakes Pilotage Act of

1960, as amended, except the authority

to enter into, revise, or amend

arrangements with Canada.

State action addressing pilotage

regulation is preempted by 46 U.S.C.

9306, which provides that a State or

political subdivision of a State may not

regulate or impose any requirement on

pilotage on the Great Lakes.

Environment

The Department considered the

environmental impact of this final rule

and concluded that under section 2.B.2

of Commandant Instruction M16475.1B,

this rule is categorically excluded from

further environmental documentation.

The rule is procedural in nature because

it deals exclusively with ratemaking and

accounting procedures. Therefore, this

is included in the categorical exclusion

in subsection 2.B.2.1,—Administrative

actions or procedural regulations and

policies that clearly do not have any

environmental impact. A Categorical

Exclusion Determination has been

placed in the docket.

List of Subjects in 46 CFR Parts 401,

403, and 404

Administrative Practice and

Procedure, Great Lakes, Navigation

(water), Penalties, Reporting and

Recordkeeping Requirements, Seamen.

For the reasons set out in the

preamble, the Department proposes to

amend parts 401, 403, and 404 of title

46 of the Code of Federal Regulations as

follows:

PART 401—[AMENDED]

1. The authority citation for part 401

is revised to read as follows:

Authority: 46 U.S.C. 6101, 7701, 8105,

9303, 9304; 49 CFR 1.45, 1.46. 46 CFR

401.105 also issued under the authority of 44

U.S.C. 3507.

2. In § 401.110 the introductory text of

paragraph (a) and paragraph (a)(9) are

revised, and paragraph (a)(16) is added

to read as follows:

§ 401.110 Definitions.

(a) As used in this chapter:

* * * * *

(9) Director means Director, Great

Lakes Pilotage. Communications with

the Director may be sent to the

following address: Director, Great Lakes

Pilotage (G–MVP–7), 2100 2nd St., SW.,

Washington, DC 20593.

* * * * *

(16) Association means any

organization that holds or held a

Certificate of Authorization issued by

the Director of Great Lakes Pilotage to

operate a pilotage pool on the Great

Lakes.

3.–4. Part 403 is revised to read as

follows:

PART 403—GREAT LAKES PILOTAGE

UNIFORM ACCOUNTING SYSTEM

Subpart A—General

Sec.

403.100 Applicability of system of accounts

and reports.

403.105 Records.

403.110 Accounting entities.

403.115 Accounting period.

403.120 Notes to financial statements.

Subpart B—Inter-Association Settlements

403.200 General.

Subpart C—Reporting Requirements

403.300 Financial reporting requirements.

Subpart D—Source Forms

403.400 Uniform pilot’s source form.

Authority: 46 U.S.C. 8105, 9303, 9304; 49

CFR 1.46.

Subpart A—General

§ 403.100 Applicability of system of

accounts and reports.

Each Association shall keep its books

of account, records and memoranda,

and make reports to the Director in

accordance with the guidelines of the

Generally Accepted Accounting

Principles (GAAP) issued by the

Financial Accounting Standards Board.

These guidelines are available by

writing to the Director, Great Lakes

Pilotage at the address listed in

§ 401.110(a)(9) of this chapter.

§ 403.105 Records.

(a) Each Association shall maintain

the general books of account and all

books, records, and supporting

memoranda in such manner as to

provide, at any time, full information

relating to any account. Supporting

memoranda must provide sufficient

information to verify the nature and

character of each entry and its proper

classification.
18370 Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations

(b) Each Association shall maintain

all books, records and memoranda in a

manner that will readily permit audit

and examination by the Director or the

Director’s representatives. All books,

records and memoranda shall be

protected from loss, theft, or damage by

fire, flood or otherwise, and shall be

retained for 10 years unless otherwise

authorized by the Director.

§ 403.110 Accounting entities.

Each Association shall be a separate

accounting entity. However, the records

shall be maintained with sufficient

particularity to allocate items to each

pilotage pool operation or nonpool

operation and to support the equitable

proration of items that are common to

two or more pilotage pools.

§ 403.115 Accounting period.

Each Association subject to this part

shall maintain its accounts on a

calendar year basis unless otherwise

approved by the Director.

§ 403.120 Notes to financial statements.

(a) All matters that are not clearly

identified in the body of the financial

statements of the Association, but which

may materially influence interpretations

or conclusions that may reasonably be

drawn in regard to financial condition

or earnings of the Association, shall be

clearly and completely stated as

footnotes to the financial statements.

(b) Financial items that are not

otherwise required to be reported in the

Association financial statements, but

which may affect ratemaking

calculations, are required to be reported

to the Director in the notes to the

financial statements. Any financial

items that are not reported to the

Director will not be considered by the

Director during ratemaking procedures

contained in part 404 of this chapter.

Subpart B—Inter-Association

Settlements

§ 403.200 General.

Each Association that shares revenues

and expenses with the Canadian Great

Lakes Pilotage Authority (GLPA) shall

submit settlement statements regarding

these activities. The settlement

statements shall be completed in

accordance with the terms of

agreements between the United States

and Canada and guidance from the

Director of Great Lakes Pilotage.

Subpart C—Reporting Requirements

§ 403.300 Financial reporting

requirements.

(a) General:

(1) The financial statements shall list

each active account, including

subsidiary accounts.

(2) The financial statements, together

with any other required statistical data,

shall be submitted to the Director within

30 days of the end of the reporting

period, unless otherwise authorized by

the Director.

(3) An officer of the Association shall

certify the accuracy of the financial

statements.

(b) Required Reports:

(1) Every five years, or when specially

requested by the Director, each

Association shall furnish the Director

the Association’s annual financial

statements audited in accordance with

generally accepted auditing standards

by an independent certified public

accountant.

(2) Each Association shall furnish the

Director a copy of all settlement

statements annually.

Subpart D—Source Forms

§ 403.400 Uniform pilot’s source form.

(a) Each Association shall record

pilotage transactions on a form

approved by the Director. The approved

form shall be issued to pilots by

authorized United States pilotage pools.

(b) Pilots shall complete forms in

detail as soon as possible after

completion of assignment and return the

entire set to the dispatching office,

together with adequate support for

reimbursable travel expenses.

(c) Upon receipt by the Association,

the forms shall be completed by

insertion of rates and charges as

specified in part 401 of this chapter.

(d) Copies of the form shall be

distributed as follows:

(1) Original to accompany invoice;

(2) First copy to Director;

(3) Second copy to billing office for

accounting record;

(4) Third copy to pilot’s own

Association for pilot’s personal record;

(5) Fourth copy to corresponding

Canadian Association or agency for

office use.

(e) Associations shall account by

number for all pilot source forms issued.

5. Part 404 is revised to read as

follows:

PART 404—GREAT LAKES PILOTAGE

RATEMAKING

Sec.

404.1 General ratemaking provisions.

404.5 Guidelines for the recognition of

expenses.

404.10 Ratemaking Procedures and

Guidelines.

Appendix A to Part 404—Ratemaking

analyses and methodology.

Appendix B to Part 404—Ratemaking

definitions and formulas.

Appendix C to Part 404—Procedures for

Annual Review of Base Pilotage Rates

Authority: 46 U.S.C. 8105, 9303, 9304; 49

CFR 1.46.

§ 404.1 General ratemaking provisions.

(a) The purpose of this part is to

provide guidelines and procedures for

Great Lakes pilotage ratemaking.

Included in this part are explanations of

the steps followed in developing a

pilotage rate adjustment, the analysis

used, and the guidelines followed in

arriving at the pilotage rates contained

in part 401 of this chapter.

(b) Great Lakes pilotage rates shall be

reviewed and, if necessary, adjusted

annually in accordance with the

procedures detailed in appendix C to

this part. At least once every five years

the Director shall complete a thorough

audit of pilot association expenses and

establish pilotage rates in accordance

with the procedures detailed in

§ 404.10. An interested party or parties

may also petition the Director for a

review at any time. The petition must

present a reasonable basis for

concluding that a review may be

warranted. If the Director determines,

from the information contained in the

petition, that the existing rates may no

longer be reasonable, a full review of the

pilotage rates will be conducted. If the

full review shows that pilotage rates are

within a reasonable range of their target,

no adjustment to the rates will be

initiated.

§ 404.5 Guidelines for the recognition of

expenses.

(a) The following is a listing of the

principal guidelines followed by the

Director when determining whether

expenses will be recognized in the

ratemaking process:

(1) Each expense item included in the

rate base is evaluated to determine if it

is necessary for the provision of pilotage

service, and if so, what dollar amount is

reasonable for that expense item. Each

Association is responsible for providing

the Director with sufficient information

to show the reasonableness of all

expense items. The Director will give

the Association the opportunity to

defend any expenses that are

questioned. However, subject to the

terms and conditions contained in other

provisions of this part, expense items

that the Director determines are not

reasonable and necessary for the

provision of pilotage services will not be

recognized for ratemaking purposes.

(2) In determining reasonableness,

each expense item is measured against

one or more of the following:
Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations 18371

(i) Comparable or similar expenses

paid by others in the maritime industry,

(ii) Comparable or similar expenses

paid by other industries, or

(iii) U.S. Internal Revenue Service

guidelines.

(3) Lease costs for both operating and

capital leases are recognized for

ratemaking purposes to the extent that

they conform to market rates. In the

absence of a comparable market, lease

costs are recognized for ratemaking

purposes to the extent that they conform

to depreciation plus an allowance for

return on investment (computed as if

the asset had been purchased with

equity capital). The portion of lease

costs that exceed these standards is not

recognized for ratemaking purposes.

(4) For each Association, a marketequivalent return-on-investment is

allowed for the net capital invested in

the Association by its members. Assets

subject to return on investment

provisions are subject to reasonableness

provisions. If an asset or other

investment is not necessary for the

provision of pilotage services, the return

element is not allowed for ratemaking

purposes.

(5) For ratemaking purposes, the

revenues and expenses generated from

Association transactions that are not

directly related to the provision of

pilotage services are included in

ratemaking calculations as long as the

revenues exceed the expenses from

these transactions. For non-pilotage

transactions that result in a net financial

loss for the Association, the amount of

the loss is not recognized for ratemaking

purposes. The Director reviews nonpilotage activities to determine if any

adversely impact the provision of

pilotage service, and may make

ratemaking adjustments or take other

steps to ensure the provision of pilotage

service.

(6) Medical, pension, and other

benefits paid to pilots, or for the benefit

of pilots, by the Association are treated

as pilot compensation. The amount

recognized for each of these benefits is

the cost of these benefits in the most

recent union contract for first mates on

Great Lakes vessels. Any expenses in

excess of this amount are not recognized

for ratemaking purposes.

(7) Expense items that are not

reported to the Director by the

Association are not considered by the

Director in ratemaking calculations.

(8) Expenses are appropriate and

allowable if they are reasonable, and

directly related to pilotage. Each

Association must substantiate its

expenses, including legal expenses. In

general, the following are not

recognized as reasonable expenses for

ratemaking purposes:

(i) Undocumented expenses;

(ii) Expenses for lobbying;

(iii) Expenses for personal matters;

(iv) Expenses that are not

commensurate with the work

performed; and

(v) Any other expenses not directly

related to pilotage.

(9) In any Great Lakes pilotage district

where revenues and expenses from

Canadian pilots are commingled with

revenues and expenses from U.S. pilots,

Canadian revenues and expenses are not

included in the U.S. calculations for

setting pilotage rates.

(10) Reasonable profit sharing for nonpilot employees of pilot associations

will be allowed as an expense for

ratemaking purposes. Profit sharing that

benefits pilots will be treated as part of

pilot compensation.

§ 404.10 Ratemaking procedures and

guidelines.

(a) Appendix A to this part is a

description of the types of analyses

performed and the methodology

followed in the development of a base

pilotage rate. Ratemaking calculations in

appendix A of this part are made using

the definitions and formulas contained

in appendix B of this part. Appendix C

of this part is a description of the

methodology followed in the

development of annual reviews to base

pilotage rates. Pilotage rates actually

implemented may vary from the results

of the calculations in appendices A, B

and C of this part, because of

agreements with Canada requiring

identical rates, or because of other

circumstances to be determined by the

Director. Additional analysis may also

be performed as circumstances require.

The guidelines contained in § 404.05 are

applied in the steps identified in

appendix A to this part.

(b) A separate ratemaking calculation

is made for each of the following U.S.

pilotage areas:

Area 1—the St. Lawrence River;

Area 2—Lake Ontario;

Area 4—Lake Erie;

Area 5—the navigable waters from South East

Shoal to Port Huron, MI;

Area 6—Lakes Huron and Michigan;

Area 7—the St. Mary’s River; and

Area 8—Lake Superior.

Appendix A to Part 404—Ratemaking

Analyses and Methodology

Step 1: Projection of Operating Expenses

(1) The Director projects the amount of

vessel traffic annually. Based upon that

projection, the Director forecasts the amount

of fair and reasonable operating expenses that

pilotage rates should recover. This consists of

the following phases:

(a) Submission of financial information

from each Association;

(b) determination of recognizable expenses;

(c) adjustment for inflation or deflation;

and

(d) final projection of operating expenses.

Each of these phases is detailed below.

Step 1.A.—Submission of Financial

Information

(1) Each Association is responsible for

providing detailed financial information to

the Director, in accordance with part 403 of

this chapter.

Step 1.B.—Determination of Recognizable

Expenses

(1) The Director determines which

Association expenses will be recognized for

ratemaking purposes, using the guidelines for

the recognition of expenses contained in

§ 404.05. Each Association is responsible for

providing sufficient data for the Director to

make this determination.

Step 1.C.—Adjustment for Inflation or

Deflation

(1) In making projections of future

expenses, expenses that are subject to

inflationary or deflationary pressures are

adjusted. Costs not subject to inflation or

deflation (e.g., depreciation, long-term leases,

pilot compensation, etc.) are not adjusted.

The inclusion of an inflation or deflation

adjustment does not imply that pilotage rates

will be automatically adjusted each shipping

season. The inflation or deflation adjustment

is only made during the expense projection

phase of a full-scale pilotage rate review.

Annual cost inflation or deflation rates will

be projected to the succeeding navigation

season, reflecting the gradual increase or

decrease in cost throughout the year.

For ratemaking calculations begun after

January 1, 1996, the actual annual

experienced change in operational costs per

pilot assignment for each pilotage area will

be used to project the inflation or deflation

adjustment. For ratemaking calculations

begun prior to January 1, 1996, the inflation

or deflation adjustment will be based on the

preceding year’s change in the North Central

Region’s Consumer Price Index as calculated

by the U.S. Bureau of Labor Statistics.

Step 1.D.—Projection of Operating Expenses

(1) Once all adjustments are made to the

recognized operating expenses, the Director

projects these expenses for each pilotage

area. In doing so, the Director takes into

account foreseeable circumstances that could

affect the accuracy of the projection. The

Director will determine, as accurately as

reasonably practicable, the ‘‘projection of

operating expenses.’’

Step 2: Projection of Target Pilot

Compensation

(1) The second step in the Great Lakes

pilotage ratemaking methodology is to project

the amount of target pilot compensation that

pilotage rates should provide in each area.

This step consists of the following phases:

(a) Determination of target rate of

compensation;
18372 Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations

(b) determination of number of pilots

needed in each pilotage area; and

(c) multiplication of the target

compensation by the number of pilots

needed to project target pilot compensation

needed in each area. Each of these phases is

detailed below.

Step 2.A.—Determination of Target Rate of

Compensation

(1) Target pilot compensation for pilots

providing services in undesignated waters

approximates the average annual

compensation for first mates on U.S. Great

Lakes vessels. The average annual

compensation for first mates is determined

based on the most current union contracts,

and includes wages and benefits received by

first mates.

(2) Target pilot compensation for pilots

providing services in designated waters

approximates the average annual

compensation for masters on U.S. Great

Lakes vessels. It is calculated as 150% of the

compensation earned by first mates on U.S.

Great Lakes vessels.

Step 2.B.—Determination of Number of Pilots

Needed

(1) The basis for the number of pilots

needed in each area of designated waters is

established by dividing the projected bridge

hours for that area by 1,000. Bridge hours are

the number of hours a pilot is aboard a vessel

providing basic pilotage service.

(2) The basis for the number of pilots

needed in each area of undesignated waters

is established by dividing the projected

bridge hours for that area by 1,800.

(3) In determining the number of pilots

needed in each pilotage area, the Director is

guided by the results of the calculations in

steps 2.A. and 2.B. However, the Director

may also find it necessary to make

adjustments to these numbers in order to

ensure uninterrupted pilotage service in each

area, or for other reasonable circumstances

that the Director determines are appropriate.

Step 2.C.—Projection of Target Pilot

Compensation

(1) The ‘‘projection of target pilot

compensation’’ is determined separately for

each pilotage area by multiplying the number

of pilots needed in that area by the target

pilot compensation for pilots working in that

area.

Step 3: Projection of Revenue

(1) The third step in the Great Lakes

pilotage ratemaking methodology is to project

the revenue that would be received in each

pilotage area if existing rates were left

unchanged. This consists of a projection of

future vessel traffic and pilotage revenue.

Step 3.A.—Projection of Revenue

(1) The Director generates the most

accurate projections reasonably possible of

the pilotage service that will be required by

vessel traffic in each pilotage area. These

projections are based on historical data and

all other relevant data available. Projected

demand for pilotage service is multiplied by

the existing pilotage rates for that service, to

arrive at the ‘‘projection of revenue.’’

Step 4: Calculation of Investment Base

(1) The fourth step in the Great Lakes

pilotage ratemaking methodology is the

calculation of the investment base of each

Association. The investment base is the

recognized capital investment in the assets

employed by each Association required to

support pilotage operations. In general, it is

the sum of available cash and the net value

of real assets, less the value of land. The

investment base will be established through

the use of the balance sheet accounts, as

amended by material supplied in the Notes

to the Financial Statement. The formula used

in calculating the investment base is detailed

in Appendix B to this part.

Step 5: Determination of Target Rate of

Return on Investment

(1) The fifth step in the Great Lakes

pilotage ratemaking methodology is to

determine the Target Rate of Return on

Investment. For each Association, a marketequivalent return-on-investment (ROI) is

allowed for the recognized net capital

invested in the Association by its members.

(2) The allowed ROI is based on the rate

of the most recent return on stockholder’s

equity for a representative cross section of

transportation industry companies, including

maritime companies, with a minimum rate

equal to the interest rate incurred by the

Associations for debt capital, and a

maximum rate of 20 percent.

(3) Assets subject to return on investment

provisions must be reasonable in both

purpose and amount. If an asset or other

investment is not necessary for the provision

of pilotage services, that portion of the return

element is not allowed for ratemaking

purposes.

Step 6: Adjustment Determination

(1) The next step in the Great Lakes

pilotage ratemaking methodology is to insert

the results from steps 1, 2, 3, and 4 into a

formula that is based on a basic regulatory

rate structure, and comparing the results to

step 5. This basic regulatory rate structure

takes into account revenues, expenses and

return on investment, and is of the following

form:

Line Ratemaking projections

for basic pilotage

1. + Revenue (from step 3)

2. ¥Operating Expenses (from step 1)

3. ¥Pilot Compensation (from step 2)

4. = Operating Profit/(Loss)

5. ¥Interest Expense (from Audit reports)

6. =Earnings Before Tax

7. ¥Federal Tax Allowance

8. = Net Income

9. Return Element (Net Income + Interest)

10. + Investment Base (from step 4)

11. = Return on Investment

(2) The Director will compare the projected

return on investment (as calculated using the

formula above) to the target return on

investment (from step 5), to determine

whether an adjustment to the base pilotage

rates is necessary. If the projected return on

investment is significantly different from the

target return on investment, the revenues that

would be generated by the current pilotage

rates are not equal to the revenues that would

need to be recovered by the pilotage rates.

(3) The base pilotage revenues that are

needed are calculated by determining what

change in projected revenue will make the

target return on investment equal to the

projected return on investment. This

‘‘projection of revenue needed’’ is used in

determining the basis for proposed

adjustments to the base pilotage rates. The

mechanism for adjusting the base pilotage

rates is discussed in Step 7 below. The

required return, tax, and interest elements

may be considered additions to the operating

expenses and pilot compensation

components of the base pilotage rates.

STEP 7: Adjustment of Pilotage Rates

The final step in the Great Lakes pilotage

ratemaking methodology is to adjust base

pilotage rates if the calculations from Step 6

show that pilotage rates in a pilotage area

should be adjusted, and if the Director

determines that it is appropriate to go

forward with a rate adjustment. Rate

adjustments are calculated in accordance

with the procedures found in this step.

However, pilotage rates calculated in this

step are subject to adjustment based on

requirements of the Memorandum of

Arrangements between the United States and

Canada, and other supportable circumstances

that may be appropriate.

(2) Pilotage rate adjustments are calculated

for each area by multiplying the existing

pilotage rates in each area by the rate

multiplier. The rate multiplier is calculated

by inserting the result from the steps detailed

above into the following formula:

Line Ratemaking projections

1. + Revenue Needed (from step 6)

2. ÷ Revenue (from step 3)

3. = Rate multiplier

Appendix B to Part 404—Ratemaking

Definitions and Formulas

The following definitions apply to the

ratemaking formula contained in this

appendix.

(1) Operating Revenue—means the sum of

all operating revenues received by the

Association for pilotage services, including

revenues such as docking, moveage, delay,

detention, cancellation, and lock transit.

(2) Operating Expense—means the sum of

all operating expenses incurred by the

Association for pilotage services, less the

sum of disallowed expenses.

(3) Target Pilot Compensation—means the

compensation that pilots are intended to

receive for full time employment. For pilots

providing services in undesignated waters,

the target pilot compensation is the average

annual compensation for first mates on U.S.

Great Lakes vessels. For pilots providing

services in designated waters, the target pilot

compensation is 150% of the average annual
Federal Register / Vol. 60, No. 69 / Tuesday, April 11, 1995 / Rules and Regulations 18373

compensation for first mates on U.S. Great

Lakes vessels.

(4) Operating Profit/(Loss)—means

Operating Revenue less Operating Expense

and Target Pilot Compensation.

(5) Interest Expense—means the reported

Association interest expense on operations,

as adjusted to exclude any interest expense

attributable to losses from non-pilotage

operations.

(6) Earnings Before Tax—means Operating

Profit/(Loss), less the Interest Expense.

(7) Federal Tax Allowance—means the

Federal statutory tax on Earnings Before Tax,

for those Associations subject to Federal tax.

(8) Net Income—means the Earnings Before

Tax, less the Federal Tax Allowance.

(9) Return Element (Net Income plus

Interest)—means the Net Income, plus

Interest Expense. The return element can be

considered the sum of the return to equity

capital (the Net Income), and the return to

debt (the Interest Expense).

(10) Investment Base (separately

determined)—means the net recognized

capital invested in the Association, including

both equity and debt. Should capital be

invested in other than pilotage operations,

that capital is excluded from the rate base.

(11) Return on Investment—means the

Return element, divided by the Investment

Base, and expressed as a percent.

Investment Base Formula

(1) Regulatory Investment (Investment

Base) is the recognized capital investment in

the useful assets employed by the pilot

groups. In general, it is the sum of available

cash and the net value of real assets, less the

value of land. The investment base is

established through the use of the balance

sheet accounts, as amended by material

supplied in the Notes to the Financial

Statement.

(2) The Investment Base is calculated using

financial data from the Great Lakes pilot

associations, as audited and approved by the

Director. The Investment Base would be

calculated as follows:

Description

Recognized Assets:

+Total Current Assets

¥Total Current Liabilities

+Current Notes Payable

+Total Property and Equipment (Net)

¥Land

+Total Other Assets

=Total Recognized Assets

Non-Recognized Assets

+Total Investments and Special

Funds

=Total Non-Recognized Assets

Total Assets

+Total Recognized Assets

+Total Non-Recognized Assets

=Total Assets

Recognized Sources of Funds

+Total Stockholders’ Equity

+ Long-Term Debt

+Current Notes Payable

+ Advances from Affiliated Companies

+ Long-Term Obligations-Capital

Leases

=Total Recognized Sources

Non-Recognized Sources of Funds

+ Pension Liability

+ Other Non-Current Liabilities

+ Deferred Federal Income Taxes

+ Other Deferred Credits

=Total Non-Recognized Sources

Total Sources of Funds

+Total Recognized Sources

+Total Non-Recognized Sources

=Total Sources of Funds

(3) Using the figures developed above, the

Investment Base is the Recognized Assets

times the ratio of Recognized Sources of

Funds to Total Sources of Funds.

Appendix C to Part 404—Procedures for

Annual Review of Base Pilotage Rates

The ratemaking methodology detailed in

appendix A is used by the Director to

determine base pilotage rates at least once

every five years, as required by § 404.1. In the

intervening years the Director will review, if

warranted by cost changes, recalculate base

pilotage rates proposed for coordination with

Canada using the following procedures:

Step 1: Calculate the total economic costs

for the base period (i.e. pilot compensation

expense plus all other recognized expenses

plus the return element) and divide by the

total bridge hours used in setting the base

period rates;

Step 2: Calculate the ‘‘expense multiplier,’’

the ratio of other expenses and the return

element to pilot compensation for the base

period;

Step 3: Calculate an annual ‘‘projection of

target pilot compensation’’ using the same

procedures found in Step 2 of appendix A;

Step 4: Increase the projected pilot

compensation in Step 3 by the expense

multiplier in Step 2;

Step 5: Adjust the result in Step 4, as

required, for inflation or deflation;

Step 6: Divide the result in Step 5 by

projected bridge hours to determine total unit

costs;

Step 7: Divide prospective unit costs in

Step 6 by the base period unit costs in Step

1;

Step 8: Adjust the base period rates by the

percentage change in unit costs in Step 7. For

example if the total economic costs per

bridge hour is $30.00 for the base period and

$33.00 for the prospective rate period, then

the rates established for the base period

would be increased by 10% to determine the

proposed rates for the prospective rate

period, which would then be subject to

negotiation with Canada.

Issued in Washington, DC, this 31st day of

March, 1995.

Frederico Pena,

Secretary of Transportation.

[FR Doc. 95–8572 Filed 4–10–95; 8:45 am]

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