[Federal Register Volume 60, Number 69 (Tuesday, April 11, 1995)]
[Rules and Regulations]
[Pages 18366-18373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8572]



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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.

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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, self-addressed postcard with 
their comments. The Docket Clerk will date-stamp 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 [[Page 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 [[Page 18368]] 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 
market-equivalent 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 [[Page 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-of-information 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 Sec. 401.110 the introductory text of paragraph (a) and 
paragraph (a)(9) are revised, and paragraph (a)(16) is added to read as 
follows:


Sec. 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


Sec. 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 Sec. 401.110(a)(9) of this chapter.


Sec. 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. [[Page 18370]] 
    (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.


Sec. 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.


Sec. 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.


Sec. 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


Sec. 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


Sec. 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


Sec. 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.


Sec. 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 
Sec. 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.


Sec. 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: [[Page 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 market-equivalent 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 non-pilotage 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 non-pilot 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.


Sec. 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 
Sec. 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 Sec. 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; [[Page 18372]] 
    (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 market-equivalent 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.      <divide> 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 [[Page 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 Sec. 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]
BILLING CODE 4910-62-P