[Federal Register Volume 61, Number 91 (Thursday, May 9, 1996)]
[Rules and Regulations]
[Pages 21081-21084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11499]



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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

46 CFR Parts 403 and 404

[OST Docket No. 50248]
RIN 2105-AC21


Great Lakes Pilotage Rate Methodology

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule.

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SUMMARY: The Department of Transportation (the Department) is 
responding to comments to a final rule published April 11, 1995, 
establishing new procedures and methodology for determining Great Lakes 
pilotage rates and making corresponding changes to the financial 
reporting requirements required of Great Lakes pilot associations. 
Based on these comments, the Department has made minor changes to the 
rule. This final rule does not change the existing Great Lakes pilotage 
rates and charges.

EFFECTIVE DATE: This rule is effective on June 10, 1996.

ADDRESSES: Unless otherwise indicated, documents referred to in this 
preamble are available for inspection or copying at the office of the 
Docket Clerk, OST Docket No. 50248, U.S. Department of Transportation, 
400 7th St. SW., room PL-401, Washington, DC 20590 from 9 a.m. to 5:30 
p.m., Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Scott A. Poyer, Project Manager, St. 
Lawrence Seaway Development Corporation, 400 Seventh St. SW, Room 5421, 
Washington, DC 20590, 1-800-785-2779, 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.

SUPPLEMENTARY INFORMATION:

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 which 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 and the Department determined that there was 
sufficient time to submit comments. Therefore, the comment period was 
not extended.
    On April 11, 1995, the Department published a final rule with 
request for comments (60 FR 18366) (1995 final rule) establishing 
improved procedures for determining Great Lakes pilotage rates, and 
revised financial reporting requirements mandated for Great Lakes pilot 
associations. The comment period ended on May 11, 1995. Although the 
Coast Guard issued the NPRM under authority delegated to the Commandant 
by the Secretary, the Secretary issued the 1995 final rule. On December 
11, 1995, the Secretary transferred authority to administer the Great 
Lakes Pilotage Act of 1960 (Public Law 86-555, 46 U.S.C. 9301 et seq.) 
(the Act) to the Administrator of the SLSDC. Nevertheless, the 
Secretary is issuing this final rule. Under 49 CFR 1.43(a), the 
Secretary may exercise powers and duties delegated or assigned to 
officials other than the Secretary.
    Several commenters requested that the comment period for the 
rulemaking be extended. Because all late-filed comments were 
considered, and because this rulemaking has already been the subject of 
extensive public comment, the Department determined that there was 
sufficient time to submit comments regarding this 1995 final rule. 
Therefore, the comment period was not extended.

Background and Purpose

    Under 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(f) 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.
    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

[[Page 21082]]

``undesignated waters.'' Pilotage areas 1, 5, and 7 are ``designated 
waters.'' Pilots are required to direct the navigation of vessels in 
designated waters. Pilots are required to be on board and available to 
direct the navigation of vessels 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 Act provides that the Secretary of 
Transportation, subject to the concurrence of the Secretary of State, 
may make arrangements with the appropriate agency of Canada to 
prescribe joint or identical rates and 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 Scott A. 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 takes 
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

    The Department received nine comments and thirteen endorsements of 
one of the nine comments. Comments came from one Great Lakes pilot 
association, three Great Lakes Registered Pilots, one professional 
association representing pilots, one professional association 
representing vessel operators and steamship agents on the Great Lakes, 
one labor organization, one professional auditor, and the comptroller 
of one Great Lakes pilot association with thirteen endorsements by 
individual members of that association. Some of the comments addressed 
issues that were not the subject of the 1995 final rule. The Department 
is responding only to those comments relating to this rulemaking.
    Three comments were generally supportive of the 1995 final rule and 
characterized it as an improvement over the NPRM, but with some areas 
that still need improvement. These comments were made by one pilot 
group, one professional organization representing pilots, and one labor 
organization. Six comments objected to the 1995 final rule because it 
was considered to be confusing, not viable, or not in concurrence with 
the DOT IG's intentions. These comments were made by one professional 
organization representing vessel agents, one professional auditor, 
three Great Lakes Registered pilots, and one comptroller of a Great 
Lakes pilot association with thirteen endorsements. The Department 
believes most of the methodology presented in the 1995 final rule 
represents a workable compromise between the disparate interests 
involved. Therefore, the ratemaking methodology presented in the 1995 
final rule is substantially retained in this final rule.
    Four commenters objected to what they perceived as the 1995 final 
rule's ``elimination of annual audits.'' The two types of audits 
discussed in the Great Lakes pilotage regulations (i.e., audits by 
pilot associations, and audits by the Director) are discussed in 46 CFR 
Secs. 403.300(b) and 404.1(b). Commenters believed that the amended 
wording of these sections eliminated a requirement that pilot 
associations and/or the Director conduct annual audits of the pilot 
associations. Commenters believed the elimination of these annual audit 
requirements would weaken financial oversight of pilot associations and 
encourage spending abuse.
    In fact, the 1995 final rule did not eliminate annual audits. Pilot 
associations were still required to obtain an annual audit by an 
independent certified public accountant.
    However, the Department agrees that the wording of the audit 
requirements was not as clear as it could have been. To make this 
requirement more clear, the language of section 403.300(b) has been 
amended to reinforce the requirement that pilot associations be audited 
by an independent CPA every year, and to require that the audit results 
be forwarded to the Director every year. Section 404.1(b) has been 
amended to reinforce the requirement that the Director review the 
annual association audits every year, and conduct a thorough audit of 
pilot association expenses at a minimum of once every five years.
    One commenter stated that certification of financial reports by an 
association officer, as required by 46 CFR Sec. 403.300(a)(3), is 
redundant and ``prejudicial'' to the association's regular financial 
reporting. The Department does not understand how certification of 
financial documents could in any way be ``prejudicial,'' and the 
commenter did not elaborate on this point. The Department agrees that 
there is a certain amount of redundancy in requiring an association 
officer such as a Treasurer, to review the work of a bookkeeper or 
accountant who prepares the financial reports. However, this redundancy 
is standard procedure in most well-managed businesses, and is an 
important safeguard against waste, fraud, and abuse. For these reasons, 
section 403.300(a)(3) is retained.
    One commenter objected to section 404.5(a)(2) which requires the 
Director to determine the reasonableness of pilot association expenses 
by comparing them to comparable expenses paid by others in the maritime 
industry. The commenter believes that there are no industries on the 
Great Lakes comparable to Great Lakes pilotage, as pilotage is ``vastly 
different'' from other industries. The department disagrees. The 
commenter did not elaborate on how pilotage was different from all 
other industries. Pilots operate in the same marketplace as other 
maritime industries on the Great Lakes, and incur many of the same 
types of expenses. The Department does not believe there is any basis 
for the claim that pilotage expenses cannot be compared with anything 
else; therefore section 404.5(a)(2) is retained.
    One commenter stated that the provisions of 46 CFR Sec. 404.5(a)(5) 
are unclear, inappropriate, and unfair. This section requires that 
profits, but not losses, from non-pilotage transactions be included in 
ratemaking calculations. The Department designed this section as a 
disincentive to pilot association speculation in non-pilotage related 
businesses, since the Department does not consider these types of 
transactions to be in the public interest. As such, section 404.5(a)(5) 
accomplishes its intended objective, and is therefore retained.
    One commenter objected to 46 CFR Sec. 404.5(a)(8)(ii), which 
provides that lobbying expenses will not be allowed for ratemaking 
purposes. The Department has no objection to pilot associations who 
wish to expend money for lobbying purposes. However, it does not seem 
reasonable to make others, i.e., those members of the public who pay 
pilotage rates, pay for these expenses. Therefore, section 
404.5(a)(8)(ii) is retained.
    Four sets of comments from pilots and their representatives 
questioned the

[[Page 21083]]

methods used to compute pilot compensation targets and pilot work hour 
targets, which are used to set the number of pilots for ratemaking 
purposes. These methods are contained in Step 2 of Appendix A to Part 
404, and section 404.5(a). This section continues the Department policy 
of maintaining income comparability between Great Lakes Registered 
Pilots, and masters/chief mates on Great Lakes vessels, and the 
Department's pilot work hour targets of 1000 hours in designated waters 
and 1800 hours in undesignated waters. These policies were established 
as a result of the 1988 DOT Pilotage Study, which examined many 
alternatives and selected the master/chief mate targets and the work 
hour targets. Commenters believed pilots should earn more than masters/
chief mates, and/or pilots should work fewer hours. Commenters proposed 
several alternatives including income comparability with State pilots, 
and inclusion of travel time in the calculation of pilot work hours. 
After considering all the alternatives, the Department is keeping this 
section of the final rule unchanged. 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 the 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. Therefore Step 2 of Appendix A to Part 404, and section 
404.5(a) are retained.
    One commenter objected to the Return on Investment (ROI) provisions 
detailed in Step 5 of Appendix A to Part 404. The commenter believed a 
ROI is not applicable or feasible for Great Lakes pilot associations 
because: (a) Pilot associations have no inventory, or investment in 
inventory, and accounts receivable are systematically collected within 
a 12 month period; (b) the value of fixed assets on the organizations' 
balance sheets is immaterial and all equipment is leased from related 
parties; (c) there is no stockholder's equity in two associations and 
in the third association it is not owned by all the pilots; and (d) the 
ROI would not have a significant impact on pilotage rates. As stated by 
the Department in the 1995 final rule, 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. If, as the commenter 
asserts, it is true that pilot associations have little or no capital 
investments, then it is true that the return on these investments will 
be small. However, this does not invalidate the principle that pilots 
should receive a return on the capital they invest. Whether their 
capital be small or large, individuals who invest in a business have a 
right to expect a return on that capital. Therefore the ROI provisions 
of section 404.5(a)(4), step 5 of appendix A, and the formulas 
contained in appendix B are retained.
    Two commenters believe the 1995 final rule should address the 
business structure of pilot associations. Currently two pilot 
associations are structured as partnerships and one pilot association 
is structured as a corporation. One commenter believes that the rule 
should better equalize for the differences in association structure. 
The other commenter recommends that the 1995 final rule require all 
associations to adopt the same business structure. At the present time, 
it is Department policy that each pilot association should be permitted 
to adopt the business structure that best suits its needs, and it is 
incumbent on each association to live with the costs and benefits 
inherent in its choice. This policy allows pilots the freedom to run 
their own businesses to the maximum extent practicable, with no 
discernably negative consequences for the public. The Department is not 
aware of any abuses of this policy at the present time. However, if it 
becomes necessary to reverse this policy, this matter would be the 
subject of a future rulemaking, subject to public input and comment.
    One commenter recommends that the Great Lakes pilotage ratemaking 
methodology should be clear and easy to implement, and any future 
changes to the methodology should be made with the participation of the 
pilot associations and a committee of independent and professional 
individuals. The Department agrees. The Department has endeavored to 
make the ratemaking methodology contained in this rule as clear and 
easy as practical. In that regard, three commenters agree that the 
methodology contained in the 1995 final rule is an improvement over the 
methodology proposed in the NPRM. Any changes to the Great Lakes 
pilotage ratemaking methodology that may be the subject of future 
rulemakings will involve input and comments from the pilot associations 
and other members of the public.
    Four commenters believe the 1995 final rule granted the Director of 
Great Lakes Pilotage too much authority and would allow the Director to 
micro-manage activities of the pilot associations of which the Director 
is not sufficiently knowledgeable. The Department disagrees. The 
incumbent Director of Great Lakes Pilotage is extremely knowledgeable 
of pilotage and other maritime activities. He has been involved in the 
performance of Great Lakes Pilotage Act functions for approximately 11 
years. He is a licensed merchant mariner, and the former Head of the 
Navigation Department at the Maritime Institute of Technology and 
Graduate Studies, the advanced training facility of the International 
Organization of Masters, Mates and Pilots. Moreover, every previous 
Director of Great Lakes Pilotage has had an extensive maritime 
background, as well as experience in dealing with merchant mariners and 
pilots. The position description for the Director of Great Lakes 
Pilotage position requires a substantial maritime background. In 
addition, the remaining pilotage staff have extensive maritime 
backgrounds and their positions require maritime, economic, and 
ratesetting knowledge and experience. Therefore, the sections of the 
1995 final rule related to the Director's authority and discretion are 
retained.
    Two commenters believe the U.S. Government should cease oversight 
of Great Lakes Pilotage, including the ratemaking and financial 
oversight regulations contained in this rulemaking. The Department is 
making no changes pursuant to this comment. As stated earlier, the Act 
requires the Secretary to prescribe by regulation rates and charges for 
pilotage services.

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 rulemaking affecting the setting of 
pilotage rates has been controversial and of significant interest to 
the public.

[[Page 21084]]

    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). One commenter believes that this rule 
will have a significant economic impact on a substantial number of 
small entities. However, the commenter did not elaborate on why this 
impact would occur. Since this rule is not a major change from past 
rulemaking practices, and only three pilot associations with a total of 
approximately 40 members will be directly affected by this rule, 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. 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 this rule is categorically excluded from 
further environmental documentation under section 2.B.2 of Commandant 
Instruction M16475.1B. 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 which 
clearly do not have any environmental impact. A Categorical Exclusion 
Determination has been placed in the docket.

List of Subjects in 46 CFR Parts 403 and 404

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

    For reasons set out in the preamble, the Department proposes to 
amend Parts 403 and 404 of Title 46 of the Code of Federal Regulations 
as follows:

PART 403--[AMENDED]

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

    Authority: 46 U.S.C. 8105, 9303, 9304; 49 CFR 1.46.

    2. Section 403.300(b) is revised to read as follows:


Sec. 403.300  Financial reporting requirements.

 * * * * *
    (b) Required Reports:
    (1) By April 1 of each year, each Association shall obtain an 
annual unqualified long form audit report for the preceding year, 
audited and prepared in accordance with generally accepted auditing 
standards by an independent certified public accountant.
    (2) Each Association shall forward their annual unqualified long 
form audit report, and any associated settlement statements, to the 
Director no later than April 7 of each year.

PART 404--[AMENDED]

    3. Section 404.1(b) is revised to read as follows:

    Authority: 46 U.S.C. 8105, 9303, 9304, 49 CFR 1.46.

Sec. 404.1  General ratemaking provisions.

 * * * * *
    (b) Great Lakes pilotage rates shall be reviewed annually in 
accordance with the procedures detailed in Appendix C to this part. The 
Director shall review Association audit reports annually and, at a 
minimum, 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 of this part at least once every 
five years. 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.

    Issued at Washington, DC this 2nd day of May, 1996.
Federico Pena,
Secretary of Transportation.
[FR Doc. 96-11499 Filed 5-8-96; 8:45 am]
BILLING CODE 4910-62-P