Document ID: USCG-2018-0665-0012
Agency: uscg
Document Type: Rule
Title: Great Lakes Pilotage Rates- 2019 Annual Review and Revisions to Methodology
Posted Date: 2019-05-10T04:00Z

[Federal Register Volume 84, Number 91 (Friday, May 10, 2019)]
[Rules and Regulations]
[Pages 20551-20578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09657]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[USCG-2018-0665]
RIN 1625-AC49

Great Lakes Pilotage Rates--2019 Annual Review and Revisions to 
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the 
Coast Guard is establishing new base pilotage rates and surcharges for 
the 2019 shipping season. This rule will adjust the pilotage rates to 
account for a rolling ten-year average for traffic, and result in an 
increase in pilotage rates due to an adjustment for anticipated 
inflation, changes in operating expenses, surcharges for applicant 
pilots, and an addition of two pilots.

DATES: This rule is effective June 10, 2019.

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

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Comments
    A. Operating Expenses
    a. Medical Benefits Paid to Retired Pilots
    b. Calculation of Applicant Pilot Costs
    c. Reimbursement for Direct-Billed Pilot Boat Costs
    d. Housing Allowances
    e. Capital Expenses
    f. Legal Fees
    B. Surcharge Offsets
    C. Continued Use of Surcharges
    D. Target Compensation
    a. Questions Relating the Interim Compensation Benchmark
    i. Inflation Adjustments From 2015-2018
    ii. Use of a 270-Day Multiplier and Guaranteed Overtime Figure
    b. Comparisons With Other U.S. Pilots
    E. Manning and Traffic Figures
    a. Manning
    b. Use of Bridge Hours and Average Traffic Figures
    c. Calculation of 2017 Traffic Figure for District 3
    F. Working Capital Fund
    G. Use of the Martin Report
    H. Other Issues Concerning Ratemaking Procedures
    a. Over-Realization of Pilotage Revenue
    b. Disparity of Rates Between U.S. and Canadian Pilotage
I. Out-of-Scope Issues
    J. Issues Resulting From Litigation
VI. Discussion of Current Rate Adjustments
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    K. Surcharges
VII. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates Reform Act
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Abbreviations

AMO American Maritime Officers
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
FOIA Freedom of Information Act
FOMC Federal Open Market Committee
FR Federal Register
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
ICR Information Collection Request
LIBOR London Interbank Offered Rate
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OIRA Office of Information and Regulatory Affairs
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code
USD United States dollars
WGLPA Western Great Lakes Pilot Association

[[Page 20552]]

II. Executive Summary

    Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\ 
the Coast Guard regulates pilotage for oceangoing vessels on the Great 
Lakes--including setting the rates for pilotage services and adjusting 
them on an annual basis. The rates, which during the 2018 shipping year 
ranged from $271 to $653 per pilot hour (depending on the specific area 
where pilotage service is provided), are paid by shippers to pilot 
associations. The three pilot associations are the exclusive U.S. 
source of registered pilots on the Great Lakes. The pilot associations 
use this revenue to cover operating expenses, maintain infrastructure, 
compensate working pilots, and train new pilots. Since 2016, the Coast 
Guard has used a ratemaking methodology that was developed in 
accordance with our statutory requirements and regulations. This 
ratemaking methodology calculates the revenue needed for each pilotage 
association (including operating expenses, compensation, and 
infrastructure needs), and then divides that amount by the 10-year 
average of shipping traffic to produce an hourly rate. This process is 
currently effected through a 10-step methodology and supplemented with 
surcharges, which are explained in detail in this rulemaking.
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    \1\ Title 46 United States Code (U.S.C.) Chapter 93; Public Law 
86-555, 74 Stat. 259, as amended.
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    In this final rule, the Coast Guard is establishing new pilotage 
rates for 2019 based on the existing ratemaking methodology. As 
proposed in the notice of proposed rulemaking (NPRM), the Coast Guard 
is adjusting the rates to account for 2019 inflation, the addition of 
two working pilots, and updated historic traffic data. Based on the 
comments to the NPRM, the Coast Guard is also adjusting the operating 
expenses and correcting previous traffic data, which is discussed in 
Section V below. The result of these changes is an overall increase in 
the rates, as shown in Table 1.

                           Table 1--Current and New Pilotage Rates on the Great Lakes
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                                                                   2018 Pilotage   Proposed 2019    Final 2019
                 Area                             Name                 rate        pilotage rate   pilotage rate
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District One: Designated..............  St. Lawrence River......            $653            $698            $733
District One: Undesignated............  Lake Ontario............             435             492             493
District Two: Undesignated............  Lake Erie...............             497             530             531
District Two: Designated..............  Navigable waters from                593             632             603
                                         Southeast Shoal to Port
                                         Huron, MI.
District Three: Undesignated..........  Lakes Huron, Michigan,               271             304             306
                                         and Superior.
District Three: Designated............  St. Mary's River........             600             602             594
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    This final rule is not economically significant under Executive 
Order 12866. This rule impacts 51 United States Great Lakes pilots, 3 
pilot associations, and the owners and operators of an average of 256 
oceangoing vessels that transit the Great Lakes annually. The estimated 
overall annual regulatory economic impact of this rate change is a net 
increase of $2,831,743 in payments made by shippers from the 2018 
shipping season. Because the Coast Guard must review, and, if 
necessary, adjust rates each year, the rates are analyzed as single 
year costs and are not annualized over 10 years. This rule does not 
affect the Coast Guard's budget or increase Federal spending. Section 
VII of this preamble provides the regulatory impact analyses of this 
final rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960 (``the Act''),\2\ which requires U.S. vessels operating on 
register and foreign vessels to use U.S. or Canadian registered pilots 
while transiting the U.S. waters of the St. Lawrence Seaway and the 
Great Lakes system.\3\ For the U.S. registered Great Lakes pilots 
(``pilots''), the Act requires the Secretary to ``prescribe by 
regulation rates and charges for pilotage services, giving 
consideration to the public interest and the costs of providing the 
services.'' \4\ The Act requires that rates be established or reviewed 
and adjusted each year, no later than March 1. The Act requires that 
base rates be established by a full ratemaking at least once every five 
years, and in years when base rates are not established, the rates must 
be reviewed and, if necessary, adjusted. The Secretary's duties and 
authority under the Act have been delegated to the Coast Guard.\5\
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    \2\ 46 U.S.C. chapter 93; Public Law 86-555, 74 Stat. 259, as 
amended.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ 46 U.S.C. 9303(f).
    \5\ Department of Homeland Security (DHS) Delegation No. 0170.1, 
para. II (92.f).
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    This final rule establishes new pilotage rates and surcharges for 
the 2019 shipping season. The Coast Guard believes that the new rates 
will promote pilot retention, ensure safe, efficient, and reliable 
pilotage services on the Great Lakes, and provide adequate funds to 
upgrade and maintain infrastructure.

IV. Background

    Pursuant to the Great Lakes Pilotage Act of 1960, the Coast Guard, 
in conjunction with the Canadian Great Lakes Pilotage Authority, 
regulates shipping practices and rates on the Great Lakes. Under Coast 
Guard regulations, all vessels engaged in foreign trade (often referred 
to as ``salties'') are required to engage U.S. or Canadian pilots 
during their transit through the regulated waters.\6\ United States and 
Canadian ``lakers,'' which account for most commercial shipping on the 
Great Lakes, are not affected.\7\ Generally, vessels are assigned a 
U.S. or Canadian pilot depending on the order in which they transit a 
particular area of the Great Lakes and do not choose the pilot they 
receive. If a vessel is assigned a U.S. pilot, that pilot will be 
assigned by the pilotage association responsible for the particular 
district in which the vessel is operating, and the vessel operator will 
pay the pilotage association for the pilotage services.
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    \6\ See 46 CFR part 401.
    \7\ 46 U.S.C. 9302(f). A ``laker'' is a commercial cargo vessel 
especially designed for and generally limited to use on the Great 
Lakes.
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are 
divided into three pilotage districts. Pilotage in each district is 
provided by an association certified by the Coast Guard's Director of 
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool. 
The Saint Lawrence Seaway Pilotage Association provides

[[Page 20553]]

pilotage services in District One, which includes all U.S. waters of 
the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association 
provides pilotage services in District Two, which includes all U.S. 
waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. 
Clair River. The Western Great Lakes Pilotage Association provides 
pilotage services in District Three, which includes all U.S. waters of 
the St. Mary's River; Sault Ste. Marie Locks; and Lakes Huron, 
Michigan, and Superior.
    Each pilotage district is further divided into ``designated'' and 
``undesignated'' areas. Designated areas are classified as such by 
Presidential Proclamation \8\ to be waters in which pilots must, at all 
times, be fully engaged in the navigation of vessels in their charge. 
Undesignated areas, on the other hand, are open bodies of water, and 
thus are not subject to the same pilotage requirements. While working 
in those undesignated areas, pilots must ``be on board and available to 
direct the navigation of the vessel at the discretion of and subject to 
the customary authority of the master.'' \9\ For pilotage purposes, 
rates in designated areas are significantly higher than those in 
undesignated areas for these reasons.
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    \8\ Presidential Proclamation 3385, Designation of Restricted 
Waters Under the Great Lakes Pilotage Act of 1960, December 22, 
1960.
    \9\ 46 U.S.C. 9302(a)(1)(B).

                           Table 2--Areas of the Great Lakes and Saint Lawrence Seaway
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          District            Pilotage association       Designation        Area No.\10\       Area name \11\
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One........................  Saint Lawrence Seaway  Designated...........               1  St. Lawrence River.
                              Pilotage Association.
                                                    Undesignated.........               2  Lake Ontario.
Two........................  Lake Pilotage          Designated...........               5  Navigable waters from
                              Association.                                                  Southeast Shoal to
                                                                                            Port Huron, MI.
                                                    Undesignated.........               4  Lake Erie.
Three......................  Western Great Lakes    Designated...........               7  St. Mary's River.
                              Pilotage Association.
                                                    Undesignated.........               6  Lakes Huron and
                                                                                            Michigan.
                                                    Undesignated.........               8  Lake Superior.
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    Each pilot association is an independent business and is the sole 
provider of pilotage services in the district in which it operates. 
Each pilot association is responsible for funding its own operating 
expenses, maintaining infrastructure, acquiring and implementing 
technological advances, training personnel or partners and pilot 
compensation. The Coast Guard developed a 10-step ratemaking 
methodology to derive a pilotage rate that covers these expenses based 
on the estimated amount of traffic. The methodology is designed to 
measure how much revenue each pilotage association will need to cover 
expenses and provide competitive compensation to working pilots. The 
Coast Guard then divides that amount by the historical average traffic 
transiting through the district.
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    \10\ Area 3 is the Welland Canal, which is serviced exclusively 
by the Canadian GLPA and, accordingly, is not included in the United 
States pilotage rate structure.
    \11\ The areas are listed by name in the Code of Federal 
Regulations, see 46 CFR 401.405.
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    Over the past three years, the Coast Guard has made adjustments to 
the Great Lakes pilotage ratemaking methodology. In 2016, we made 
significant changes to the methodology, moving to an hourly billing 
rate for pilotage services and changing the compensation benchmark to a 
more transparent model. In 2017, we added additional steps to the 
ratemaking methodology, including new steps that accurately account for 
the additional revenue produced by the application of weighting factors 
(discussed in detail in Steps 7 through 9 of this preamble). In 2018, 
we revised the methodology by which we develop the compensation 
benchmark, based upon the rate of U.S. mariners rather than Canadian 
registered pilots. The 2018 methodology, which was finalized in the 
June 5, 2018 final rule (83 FR 26162) and is the current methodology, 
is designed to accurately capture all of the costs and revenues 
associated with Great Lakes pilotage requirements and produce an hourly 
rate that adequately and accurately compensates pilots and covers 
expenses. The current methodology is summarized in the section below.

Summary of Ratemaking Methodology

    As stated above, the ratemaking methodology, currently outlined in 
46 CFR 404.101 through 404.110, consists of 10 steps that are designed 
to account for the revenues needed and total traffic expected in each 
district. The result is an hourly rate, determined separately for each 
of the areas administered by the Coast Guard.
    In Step 1, ``Recognize previous operating expenses,'' (Sec.  
404.101), the Director reviews audited operating expenses from each of 
the three pilotage associations. This number forms the baseline amount 
that each association is budgeted. Because of the time delay between 
when the association submits raw numbers and the Coast Guard receives 
audited numbers, this number is three years behind the projected year 
of expenses. In calculating the 2019 rates, the Coast Guard used the 
audited expenses from fiscal year 2016.
    While each pilotage association operates in an entire district, the 
Coast Guard determines costs by area. Thus, with regard to operating 
expenses, the Coast Guard allocates certain operating expenses to 
undesignated areas, and certain expenses to designated areas. In some 
cases (e.g., insurance for applicant pilots who operate in undesignated 
areas only), we allocate based on where they are actually accrued. In 
other situations (e.g., general legal expenses), expenses are 
distributed between designated and undesignated waters on a pro rata 
basis, based upon the proportion of income forecasted from the 
respective portions of the district.
    In Step 2, ``Project operating expenses, adjusting for inflation or 
deflation,'' (Sec.  404.102), the Director develops the 2019 projected 
operating expenses. To do this, we apply inflation adjustors for three 
years to the operating expense baseline received in Step 1. The 
inflation factors used are from the Bureau of Labor Statistics (BLS) 
Consumer Price Index (CPI) for the Midwest Region, or, if not 
available, the Federal Open Market Committee (FOMC) median economic 
projections for Personal Consumption Expenditures (PCE) inflation. This 
step produces the

[[Page 20554]]

total operating expenses for each area and district.
    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103), 
the Director calculates how many pilots are needed for each district. 
To do this, we employ a ``staffing model,'' described in Sec.  401.220, 
paragraphs (a)(1) through (3), to estimate how many pilots would be 
needed to handle shipping during the beginning and close of the season. 
This number is helpful in providing guidance to the Director in 
approving an appropriate number of credentials for pilots.
    For the purpose of the ratemaking calculation, we determine the 
number of working pilots provided by the pilotage associations (see 
Sec.  404.103) which is what we use to determine how many pilots need 
to be compensated via the pilotage fees collected.
    In Step 4, ``Determine target pilot compensation benchmark,'' 
(Sec.  404.104), the Director determines the revenue needed for pilot 
compensation in each area and district. This step contains two 
processes. In the first process, we calculate the total compensation 
for each pilot using a ``compensation benchmark.'' Next, we multiply 
the individual pilot compensation by the number of working pilots for 
each area and district (from Step 3), producing a figure for total 
pilot compensation. Because pilots are paid by the associations, but 
the costs of pilotage are divided up by area for accounting purposes, 
we assign a certain number of pilots for the designated areas and a 
certain number of pilots for the undesignated areas for purposes of 
determining the revenues needed for each area. To make the 
determination of how many pilots to assign, we use the staffing model 
designed to determine the total number of pilots described in Step 3, 
above.
    In the second process of Step 4, set forth in Sec.  404.104(c), the 
Director determines the total compensation figure for each District. To 
do this, the Director multiplies the compensation benchmark by the 
number of working pilots for each area and district (from Step 3), 
producing a figure for total pilot compensation.
    In Step 5, ``Project working capital fund,'' (Sec.  404.105), the 
Director calculates a value that is added to pay for needed capital 
improvements. This value is calculated by adding the total operating 
expenses (derived in Step 2) and the total pilot compensation (derived 
in Step 4), and multiplying that figure by the preceding year's average 
annual rate of return for new issues of high-grade corporate 
securities. This figure constitutes the ``working capital fund'' for 
each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106), the 
Director adds up the totals produced by the preceding steps. For each 
area and district, we add the projected operating expense (from Step 
2), the total pilot compensation (from Step 4), and the working capital 
fund contribution (from Step 5). The total figure, calculated 
separately for each area and district, is the ``revenue needed.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107), the 
Director calculates an hourly pilotage rate to cover the revenue 
needed, as calculated in step 6. This step consists of first 
calculating the 10-year traffic average for each area. Next, we divide 
the revenue needed in each area (calculated in Step 6) by the 10-year 
traffic average to produce an initial base rate.
    An additional element, the ``weighting factor,'' is required under 
Sec.  401.400. Pursuant to that section, ships pay a multiple of the 
``base rate'' as calculated in Step 7 by a number ranging from 1.0 (for 
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest 
ships, or ``Class IV'' vessels). As this significantly increases the 
revenue collected, we need to account for the added revenue produced by 
the weighting factors to ensure that shippers are not overpaying for 
pilotage services.
    In Step 8, ``Calculate average weighting factors by area,'' (Sec.  
404.108), the Director calculates how much extra revenue, as a 
percentage of total revenue, has historically been produced by the 
weighting factors in each area. We do this by using a historical 
average of applied weighting factors for each year since 2014, the 
first year the current weighting factors were applied.
    In Step 9, ``Calculate revised base rates,'' (Sec.  404.109), we 
modify the base rates by accounting for the extra revenue generated by 
the weighting factors. We do this by dividing the initial pilotage rate 
for each area (from Step 7) by the corresponding average weighting 
factor (from Step 8), to produce a revised rate.
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110), often 
referred to informally as ``Director's discretion,'' the Director 
reviews the revised base rates (from Step 9) to ensure that they meet 
the goals set forth in the Act and 46 CFR 404.1(a), which include 
promoting efficient, safe, and reliable pilotage service on the Great 
Lakes; generating sufficient revenue for each pilotage association to 
reimburse necessary and reasonable operating expenses; compensating 
pilots fairly and providing appropriate funds for infrastructure and 
training. The Coast Guard also uses various factors to ensure that the 
rate is set in the public interest and will continue to encourage 
robust traffic in the Great Lakes. The Martin Study is one factor the 
Coast Guard considered when setting rates for shipping, but Coast Guard 
also recognizes that it is not a comprehensive analysis of all economic 
factors.\12\
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    \12\ Martin Associates, ``Analysis of Great Lakes Pilotage Costs 
on Great Lakes Shipping and the Potential Impact of Increases in 
U.S. Pilotage Charges,'' page 33. Available at http://www.regulations.gov, USCG-2018-0665-0005.
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    Finally, after the base rates are set, Sec.  401.401 permits the 
Coast Guard to apply surcharges. Currently, we use surcharges to pay 
for the training of new pilots rather than incorporating training costs 
into the overall ``revenue needed'' used in the calculation of the base 
rates. In recent years, we have allocated $150,000 per applicant pilot 
to be collected via surcharges. This amount is calculated as a 
percentage of total revenue for each district, and that percentage is 
applied to each bill. When the total amount of the surcharge has been 
collected, the pilot associations are prohibited from collecting 
further surcharges. Thus, in years where traffic is heavier than 
expected, shippers early in the season could pay more than shippers 
employing pilots later in the season, after the surcharge cap has been 
met.

V. Discussion of Comments

    In response to the October 17, 2018, NPRM (83 FR 52355), the Coast 
Guard received five comment letters. These included one comment from 
the three Great Lakes pilot associations,\13\ one comment from the law 
firm Thompson Coburn, which represents the interests of the Shipping 
Federation of Canada, the American Great Lakes Ports Association, and 
the United States Great Lakes Shipping Association (hereinafter 
``User's Coalition''),\14\ a comment from the president of the St. 
Lawrence Seaway Pilots' Association,\15\ a comment from the president 
of the Lakes Pilots Association,\16\ and a comment from the president 
of the Western Great Lakes Pilot Association.\17\ As each of these 
commenters touched on numerous issues, for each response below, we note 
which commenters raised the specific points addressed. In situations 
where multiple commenters

[[Page 20555]]

raised similar issues, we attempt to provide one response to those 
issues.
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    \13\ USCG-2018-0665-0008, available at http://www.regulations.gov.
    \14\ USCG-2018-0665-0010.
    \15\ USCG-2018-0665-0009.
    \16\ USCG-2018-0665-0007.
    \17\ USCG-2018-0665-0006.
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A. Operating Expenses

    The first step of the ratemaking process entails establishing the 
allowable operating expenses for each pilotage district, and allowing 
pilot associations to recoup any costs that are considered reasonable 
and necessary for operation of a pilotage association. To do so, 
pilotage associations submit accounting statements to independent 
auditors, and then the audited reports are forwarded to the Coast Guard 
for additional review. We received several comments from pilot 
associations and persons representing such interests requesting changes 
to these adjustments, which are discussed below.
a. Medical Benefits Paid to Retired Pilots
    The Coast Guard received one comment concerning an adjustment made 
for payments to retired pilots. In the NPRM, we proposed to disallow 
$90,600 of requested charges for payments of health benefits for 
retired pilots. In doing so, we stated that ``we consider health 
benefits to be `compensation,' and compensation paid to pilots cannot 
be recouped as operating expenses.'' \18\ One commenter \19\ stated 
that, because the payments were made on behalf of retired pilots who 
were not among the 13 allowed pilots, the amount should not be 
considered as pilot compensation and should be construed as a 
reimbursable operating expense. The commenter also noted that such a 
payment had been allowed in a 2005 Interim Rule.\20\
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    \18\ Great Lakes Pilotage Rates--2019 Annual Review and 
Revisions to Methodology (October 17, 2018), 83 FR 52355 at 52361.
    \19\ USCG-2018-0665-0007.
    \20\ 70 FR 12082, 12086 (March 10, 2005).
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    Upon examining the enclosed Federal Register citation to the 2005 
interim final rule and reviewing the regulatory text, the Coast Guard 
confirms its proposal to disallow payments of health benefits and 
reaffirms here that medical expenses paid on behalf on pilots should be 
considered pilot compensation, and not an operating expense. Section 
404.2 requires that medical and pension benefits for pilots be treated 
as pilot compensation; i.e., not as an allowable operating expense. The 
reasoning in the 2005 Federal Register Interim Rule does not apply 
here. In the 2005 Interim Rule, which was predicated on pre-2016 
regulations, the Coast Guard based the decision to expense certain 
medical costs on the specific contours of the American Maritime 
Officers (AMO) union contracts that formed the basis of the 2005 
compensation benchmark. Such reasoning, even if it were permissible 
under the current regulations, does not apply to the 2016 operating 
expenses at issue in this year. Instead of basing our compensation on 
the AMO contract, the Coast Guard based the 2016 compensation benchmark 
on Canadian compensation figures.
b. Calculation of Applicant Pilot Costs
    One commenter stated that District 3 had misstated its medical 
expenses in its report to the auditors.\21\ The commenter argued that 
it had submitted an aggregated medical expense of $77,060, and that the 
auditors had incorrectly allocated all of that sum as costs associated 
with pilots. The commenter stated that, in fact, $60,031 of that sum 
was paid as medical expenses for applicant pilots, while only $17,030 
(numbers are rounded to the nearest dollar) were paid as partner 
compensation. They claimed that they had submitted a spreadsheet to the 
auditors with the correct disaggregated information, but that the 
auditors had failed to use it.
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    \21\ USCG-2018-0665-0008, p. 2-3.
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    The Coast Guard agrees with this comment. The Coast Guard consulted 
with the auditors, who re-examined the information provided to them by 
District 3. The auditors agreed that information disaggregating the 
medical expense items had been overlooked, and that the medical 
expenses of the District 3 applicant pilots had been understated by a 
total of $60,031. For that reason, the Coast Guard is adding that 
figure to the total applicant medical expenses for District 3 (see 
Table 5 below).
    In a related note, the adjustment to applicant pilot compensation 
for District 3 effects the Director's adjustment for District 2 
applicant pilot expenses. In the NPRM, the Coast Guard proposed to make 
a substantial adjustment to the District 2 request for reimbursement of 
$571,248 for two applicant pilots, as that request was not supported by 
audited financial statements.\22\ Instead of permitting $571,248 for 
two applicant pilots, we proposed allowing an operating expense of 
$257,566, or $128,783 per applicant pilot, which was equivalent to the 
amount paid by District 3 to applicant pilots, resulting in a proposed 
Director's adjustment of $313,681. However, as we have adjusted the 
allowance for District 3 applicants by $60,031 for the reasons 
described above, a similar adjustment is required for the two District 
2 applicants. For that reason, we are finalizing a positive $60,031 
Director's adjustment for District 2 applicant pilot benefits, in 
addition to the negative $313,681 adjustment to wages originally 
proposed, for a total negative adjustment of $253,650 (see Table 5 
below).
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    \22\ See 83 FR 52355, at 52361.
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    One commenter provided comments on the District 2 applicant pilot 
adjustment, and we believe the above change addresses their comment. 
The commenter stated that in the NPRM, ``the proposed rule training 
expenses have been denied merely on the ground that they are higher 
than purported (and incorrectly stated) District 3 expenses.'' \23\ 
While the commenter is incorrect that the Coast Guard did not approve 
the stated figures merely because they were high,\24\ we agree with the 
commenter that the District 3 expenses were inaccurately stated. 
However, we disagree with the commenter's argument that the District 2 
applicant expenses should be accepted at face value. We note that all 
operating expenses must be ``reasonable in their amounts'' pursuant to 
section 404.2(c)(1). District 2 asserted, in their letter to the Coast 
Guard,\25\ that they paid applicant pilots $285,624.23 each in wages 
alone, a number far larger than the applicant salaries of the other 
Districts and nearly on par with full pilots, which the Coast Guard 
provided a targeted compensation level of $326,114 (a figure which 
included full benefits) for 2016. In the NPRM, we stated that ``because 
this number is far out of line from wages paid to applicant pilots in 
other districts, as well as the Coast Guard's estimate[s] . . . the 
Director proposes only allowing a portion of these expenses to be 
recouped as reasonable operating expenses.'' \26\ We remain unpersuaded 
that $285,624.23 is a reasonable wage for an applicant pilot.
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    \23\ USCG-2018-0665-0008, p.8.
    \24\ In the NPRM, we stated that we had received inaccurate 
information on applicant expenses originally, and the unaudited 
assertion made in response to Coast Guard inquiries was not 
believed. See 83 FR 52355, at 52361.
    \25\ USCG-2018-0665-0001.
    \26\ 83 FR 52355, at 52361.
---------------------------------------------------------------------------

c. Reimbursement for Direct-Billed Pilot Boat Costs
    One commenter suggested that the auditor's adjustment for direct-
billed pilot boat runs should be reduced. In the NPRM, the Coast Guard 
noted an auditor's adjustment for $92,056 of direct-billed boat and 
discharge costs.\27\ In District 3, ordinary pilot boat costs are 
billed to the Western Great Lakes

[[Page 20556]]

Pilot Association (WGLPA), and are considered a reimbursable operating 
expense. However, when a pilot boat is operated for the convenience of 
the vessel, the cost is billed directly to the vessel and paid to the 
associations, which reimburse the pilot boat. Thus, the pilotage 
association cannot claim that cost as a reimbursable operating expense, 
as that would constitute double-billing. For this reason, the auditor 
disallowed the recoupment of those fees as operating costs. However, 
one commenter \28\ argued that the auditor erred. Because of that 
$92,056 billed to the shippers, the Canadian Great Lakes Pilotage 
Authority (GLPA) had received $37,754 more in revenues from those 
services than it had paid in costs, and the WGLPA suffered an 
equivalent shortfall. The WGLPA requested that it be allowed to recoup 
the $37,754 shortfall as reimbursable operating expenses.
---------------------------------------------------------------------------

    \27\ See item D3-16-02, 83 FR 52355, at 52362.
    \28\ USCG-2018-0665-0006, p.3.
---------------------------------------------------------------------------

    After consideration of the comment, the Coast Guard does not agree 
that this expense should be included with operating costs. The cost for 
pilotage boat services was $92,056, which was paid by the shippers at 
that time. As the commenter stated, while the revenues from $92,056 
were split approximately evenly between the GLPA and WGLPA, the WGLPA 
paid a much larger percentage of the $92,056 in costs, resulting in a 
$37,754 shortfall for the WGLPA and an equivalent windfall for the 
GLPA. While the WGLPA is correct that it suffered a loss from this 
inequitable split, we do not believe that the shortfall should be made 
up by permitting the WGLPA to bill an additional $37,754 to the 
shippers, who have already paid the costs for the pilot boat services 
in full.
d. Housing Allowances
    In the NPRM, the Coast Guard proposed to disallow $36,900 in 
housing allowance expenditures for the District 3 operating expenses. 
As we did not have documentation of monies spent, we requested that the 
association ``provide the receipts that could help to determine if 
these are recoverable operating expenses.'' \29\ We also note that the 
Director is legally prohibited from permitting undocumented expenses 
pursuant to 46 CFR 404.2(c)(1).
---------------------------------------------------------------------------

    \29\ 83 FR 52355, at 52362.
---------------------------------------------------------------------------

    One comment addressed the amount of money paid for housing. This 
commenter \30\ argued that the total sum amounted to $820 per month for 
5 pilots, and that this amount was paid to the pilots so they could 
rent apartments in the De Tour/Sault St. Marie area instead of using 
hotels when required to stay overnight. The commenter argued that the 
cost of a hotel in the area is about $95 per night, and that using 
hotels could cost over $2,000 per month per pilot. While hotel receipts 
would satisfy the Coast Guard's need for ``receipts,'' the commenter 
argues using hotels would not be a cost-effective method for housing 
pilots. The Coast Guard believes that this commenter has placed too 
much emphasis on the Coast Guard's use of the word ``receipts'' and 
misinterpreted the requirements of 46 CFR 404.2(c)(1), which prohibits 
the recoupment of ``undocumented expenses.'' That provision requires 
documentation of money spent, and does not permit the reimbursement of 
an ``allowance.'' For example, the Coast Guard would accept leases and 
documentation of money paid for apartments as an allowable operating 
expense, assuming it found the expense necessary and reasonable 
pursuant to section 404.2(a). However, we cannot reimburse an allowance 
paid to pilots as an operating expense. We require verification for all 
payments with proper documentation clearly demonstrating that the money 
was spent on allowable and reasonable expenses. For these reasons, we 
are denying the request to recoup the housing allowance as an operating 
expense.\31\
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    \30\ USCG-2018-0665-0006, p. 4.
    \31\ We note that the commenter describes a situation in which 
the pilots maintain apartments in the metro area (DeTour/Sault St 
Marie) in which they work. Under IRS guidance, one cannot claim 
lodging expenses in the city in which they work.
---------------------------------------------------------------------------

e. Capital Expenses
    One commenter stated they submitted costs for ``infrastructure'' to 
the Coast Guard, and that ``discussions with the Coast Guard at the 
time indicated the submitted data was sufficient for ratemaking 
purposes,'' but that the ``NPRM shows no contemplation of removing 
these funds.'' \32\ This comment refers to the ``Capital Acquisitions'' 
item referred in Section X of the document entitled St. Lawrence Seaway 
Pilots Association--Independent Accountant's Report on Applying Agreed-
Upon Procedures.'' \33\ That document describes three properties in New 
York used by the St. Lawrence Seaway Pilots Association for operational 
needs. The document stated that the Coast Guard would approve $466,940 
in operating costs to cover cash outlays made in 2016 to acquire these 
properties.\34\
---------------------------------------------------------------------------

    \32\ USCG-2018-0665-0009, p.1.
    \33\ USCG-2018-0665-0002, p.30.
    \34\ USCG-2018-0665-0002, p.8, note 2.
---------------------------------------------------------------------------

    While the Coast Guard originally believed that these outlays would 
be covered by money brought in from Step 5 of the ratemaking process, 
we now believe, based on the comment and contemporaneous communication 
with the association, that this should be considered an operating 
expense. While future capital acquisitions may or may not be considered 
operating expenses due to the existence of the working capital fund 
(see the ``working capital fund'' discussion below for more detailed 
discussion on treatment of capital expenses), we note that the working 
capital fund was not in effect at the time of these acquisitions. It 
was only in 2017 that Step 5 of the ratemaking process was identified 
as the working capital fund, and until that point, it had been 
characterized as a ``return on investment.'' Based on that, we believe 
it within the purview of the Coast Guard to identify which capital 
expenses are considered reasonable and necessary pursuant to the 
guidelines in Sec.  404.2, and we believe that these purchases are 
within those guidelines. For that reason, we are adding the $466,940 
property acquisition cost to the allowable operating expenses of 
District 1.
f. Legal Fees
    One commenter suggested that the Coast Guard had erroneously made a 
Director's adjustment of $1,292 for legal fees for District 3, and that 
adjustment should be removed.\35\ The commenter stated that only 
$15,208.09 of its reported legal fees were for ``general activities,'' 
and that it had already excluded 3 percent of that amount from its 
requested operating expenses as related to lobbying. The Coast Guard 
has examined the commenter's calculations and agrees the Director's 
adjustment was unneeded, and has thus removed it.
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    \35\ USCG-2018-0665-0006, p.3.
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B. Surcharge Offsets

    Beginning in 2016, the Coast Guard began implementing surcharges on 
shipping rates to encourage the recruitment and training of new pilots 
on the Great Lakes. Unlike pilot compensation, costs relating to the 
compensation and training of applicant pilots are fully reimbursable as 
operating expenses. However, the Coast Guard used surcharges so that 
pilot associations could receive the money needed to cover the costs of 
recruiting and training pilots in the year they were incurred, rather 
than wait three years until such costs could be reimbursed as ordinary 
operating expenses. As such, the surcharges act as an ``advance'' on

[[Page 20557]]

the reimbursed operating expenses. This year, 2019, is the first year 
in which we can view the incurred operating expenses for applicant 
pilots in 2016, and deduct from operating expenses the actual amounts 
collected in surcharges. We note that in the 2017 rulemaking, we 
modified the surcharge provision to limit the amount collected to 
$150,000 per applicant pilot. However, in 2016, the year to which these 
calculations apply, there was no cap on the amount of surcharges, and 
the amounts collected therefore totaled far more than the surcharge 
percentage was anticipated to collect.
    In the NPRM, the Coast Guard included a ``surcharge offset'' line, 
which corresponded to the actual amount collected in surcharges in the 
2016 shipping season.\36\ We received several comments on this issue, 
although some of the commenters appeared to misunderstand what the 
surcharge adjustment was for or the basis on which it was calculated. 
One commenter provided information about pilot costs from 2017, stating 
that ``the Coast Guard should have audited data showing that District 
Three's surcharge revenue for 2017 was only $382,297.24 of the $600,000 
projected applicant pilot cost.'' \37\ The commenter's statement refers 
to the wrong year--the ``surcharge offset'' should be equal to the 
amount actually collected by surcharges in the year of expenses being 
analyzed (which for this rule is 2016, not 2017). We will analyze 
surcharge offsets for subsequent years at the appropriate time, when we 
consider that year's operating expenses for purposes of rate 
calculation.
---------------------------------------------------------------------------

    \36\ See NPRM, 83 FR 52355, at 52359 for additional discussion.
    \37\ USCG-2018-0665-0006, p.5.
---------------------------------------------------------------------------

    One commenter stated that ``the proposed rule also errs in stating 
that the $150,000 per pilot surcharge amounts were intended to be hard 
estimates or caps on the amount of reasonable training expenditures, so 
that any amounts expended beyond that should now be disallowed.'' \38\ 
While the Coast Guard is uncertain about what statements in the 
proposed rule the commenter is referring to, we agree that there was no 
hard limit on how much could be spent on training and stipends for 
applicant pilots, so long as the expenses were considered to be 
reasonable and necessary pursuant to the requirements in Sec.  
404.2(a). The commenter goes on to state that the NPRM ``proposes to 
deduct from each association's operating expenses not only any 
surcharges collected in excess of $150,000 per applicant pilot, id. . . 
.'' 39 40 We disagree with the commenter, and note the 
``surcharge offset'' is equal to the actual dollar amount collected as 
surcharges in the 2016 shipping season. The ``surcharge offset'' is 
unrelated to whether certain operating costs are deemed necessary and 
reasonable.
---------------------------------------------------------------------------

    \38\ USCG-2018-0665-0008, p.5.
    \39\ It is unclear what the commenter is citing here, as the 
previous citation was to the 2016 GLPAC Public Meeting.
    \40\ USCG-2018-0665-0008, p. 7.
---------------------------------------------------------------------------

C. Continued Use of Surcharges

    In the NPRM, the Coast Guard suggested that we might not continue 
to use surcharges in future years to cover costs relating to applicant 
pilots, and instead revert to a system where all costs associated with 
applicant pilots would be reimbursed through the operating expense 
provisions. Noting that the ``vast majority of registered pilots are 
not scheduled to retire in the next 20 years,'' \41\ the Coast Guard 
invited comments on discontinuing the surcharge practice that has been 
in effect the last three years. We received several responses to this 
suggestion, all of which opposed the idea. One commenter argued that 
``while there has been progress in hiring new pilots nothing suggests 
that these new hires, many of which have been made to expand the 
pilotage pool rather than to replace departing pilots, have operated to 
reduce the need to train replacement pilots for the next two decades.'' 
\42\ Another commenter stated that ``[m]uch as we dislike surcharges--
we think the Coast Guard should keep the status quo until it is ready 
to propose a better solution.'' \43\
---------------------------------------------------------------------------

    \41\ 83 FR 52355, at 52370.
    \42\ USCG-2018-0665-0008, p.5.
    \43\ USCG-2018-0665-0006, p.5.
---------------------------------------------------------------------------

    Based on the comments received, it appears that various interests 
on the pilot side support the continued application of surcharges. 
While no change was proposed for 2019, the Coast Guard will take this 
stated preference into consideration as we prepare the 2020 ratemaking 
deliberations.

D. Target Compensation

    In the NPRM, the Coast Guard established the target compensation 
benchmark by multiplying the previous year's compensation benchmark by 
the estimated inflation for 2018, giving a total of $359,887 per pilot 
for 2019. We received numerous comments pertaining to this calculation, 
which are described below.
a. Questions Relating to the Interim Compensation Benchmark
i. Inflation Adjustments From 2015-2018
    One commenter raised questions about the use of AMO contracts in 
the ``interim compensation'' benchmark that the Coast Guard established 
in the 2018 ratemaking rule.\44\ The commenter argued that the Coast 
Guard's failure to use the actual wage adjustment rates received by the 
AMO from 2015-2018 was a mistake, and caused the compensation figure to 
be too low, and demonstrated calculations that would use the contracted 
increases from the AMO 2015 onward contract to arrive at target 
compensation figure approximately $10,000 above what the Coast Guard 
calculated for 2018. This commenter misunderstands the nature of the 
interim compensation benchmark, which was tied to the AMO contracts in 
place from 2011-2015. To summarize, the interim compensation benchmark 
sought to match the daily AMO compensation level from 2015, apply it to 
the 270-day working season for Great Lakes pilots, and then adjust that 
number for inflation. It did not seek to match the contract 
stipulations from 2015 onward, because the Coast Guard did not have 
access to the underlying contract documents for that period. We 
discussed the interim compensation benchmark more thoroughly in the 
2018 NPRM and final rule. In those documents, we described the interim 
compensation benchmark as being based on the 2015 AMO rate--and then 
adjusted for inflation using public inflation data to achieve an 
equivalent real value for 2018. We stated that we would not use the 
more recent data on AMO contracts, as we did not have access to the 
underlying documents. As we still lack that data and have not proposed 
changing the basis for the compensation benchmark, we cannot adopt the 
commenter's assertion that we should use contract data from the 2015-
2019 AMO contracts.
---------------------------------------------------------------------------

    \44\ USCG-2018-0665-0008, p.2-3.
---------------------------------------------------------------------------

ii. Use of a 270-Day Multiplier and Guaranteed Overtime Figure
    One commenter \45\ raised an issue relating to how we translated 
the daily wage rate from the AMO contract to a yearly compensation for 
purposes of setting the interim compensation benchmark in 2018. As 
described in the 2018 ratemaking, the Coast Guard multiplied the daily 
rate, as calculated using the AMO contracts, by 270 to get the yearly 
compensation figure. We

[[Page 20558]]

used the figure of 270 days because that is the number of days in the 
Great Lakes shipping season. However, the commenter argued that the 
Coast Guard should have multiplied the daily rate by 200, which is the 
number of days a Great Lakes pilot is actually expected to work under 
our staffing model, which would result in significantly lower target 
compensation. The commenter stated that the lower figure ``reflected 
the reality of the Coast Guard's imposition of a required 10-day per 
month rest requirement for U.S. pilots.'' \46\ The commenter also took 
issue with the Coast Guard's incorporation of the ``guaranteed 
overtime'' figure that was incorporated into the rate, stating that the 
``Coast Guard accepted this figure at face value and incorporated it in 
its entirety . . . with no reported inquiry into the validity of this 
figure.\47\
---------------------------------------------------------------------------

    \45\ USCG-2018-0665-0010, p. 4.
    \46\ USCG-2018-0665-0010, p. 4.
    \47\ USCG-2018-0665-0010, p. 5.
---------------------------------------------------------------------------

    While the Coast Guard understands the commenter's arguments that 
these actions by the Coast Guard led to significantly higher target 
compensation figures, we stand by the reasoning in doing so as 
articulated in the 2018 final rule. In responding to a similar comment 
to the 2018 NPRM, we stated that ``while we believe the industry 
commenters' suggestion of multiplying the aggregate daily wage by 200, 
rather than 270, has merit, we have decided that in the interests of 
recruiting and retaining a suitable number of experienced pilots, a 
multiplier of 270 is the preferable course of action. The Coast Guard 
also noted ``[w]hile we have considered the argument that it would be 
more efficient to pay pilots less or have fewer of them to generate 
lower shipping rates, we believe the effect on safety and reliability 
warrant a multiplier of 270.'' \48\ With regard to the additional 
overtime figure, we adopted it because the commenter who provided the 
overtime figures had firsthand knowledge of the contract between the 
AMO and the shippers.\49\ If the commenter has information about this 
contract that could be shared which would cause the Coast Guard to 
question the validity of the overtime figure, we would be open to 
receiving it. However, as no additional information has been supplied, 
we will continue to use the best information we have to calculate the 
target compensation, which at this time includes the overtime figure.
---------------------------------------------------------------------------

    \48\ 83 FR 26171.
    \49\ 83 FR 26169.
---------------------------------------------------------------------------

b. Comparisons With Other U.S. Pilots
    One commenter argued that ``the proposed 2019 target compensation 
also continues to lag [behind] the compensation of other U.S. pilots by 
a considerable margin.'' The commenter went on to argue that ``the 
pilots stand ready to assist the Coast Guard in [studying pilot 
compensation]'' and ``urge the Coast Guard to review the information 
they [the pilots] have provided, which they believe supports a higher 
compensation level.'' \50\ The Coast Guard notes that the past 
information provided by the pilot associations contains recent total 
compensation information for selected pilot groups in other regions. 
However, because target compensation and actual compensation are quite 
different (in recent years, actual compensation has been significantly 
higher than target compensation due to higher-than-expected shipping 
demand), we cannot directly compare the two. We would welcome 
submission of actual pilot compensation data for Great Lakes pilots in 
recent years to improve our analysis, and will raise it as an issue in 
a future Great Lakes Pilotage Advisory Committee meeting.
---------------------------------------------------------------------------

    \50\ USCG-2018-0665-0008, p. 3.
---------------------------------------------------------------------------

E. Manning and Traffic Figures

a. Manning
    Several commenters raised issues relating to the calculation of the 
number of pilots needed, given anticipated traffic on the Great Lakes 
(the staffing model). In the 2019 NPRM, using that model, we left the 
maximum number of pilots at 54 total, although for 2019 we proposed 
authorizing only 51 pilots, an increase of two pilots over the 
authorized number for 2018. Based on the comments received, the Coast 
Guard is not making changes to the staffing model at this time, but 
note the concerns of the commenters, as discussed below.
    One commenter argued that ``with the growth of tanker and cruise 
ship traffic, vessel transit frequency no longer subsides during the 
summer period. The result is pilots being unable to realize the 
restorative rest stated as a goal in the manning models and needed for 
continued safe operation.'' \51\ The Coast Guard believes this is 
potentially a valid point. The current staffing model is based on the 
historic increased need for pilots at the start and close of the 
season, and that by staffing to meet that need, it allows pilots to 
take approximately 10 days of restorative rest each month during the 
seven-month mid-season period. We are currently monitoring traffic 
patterns, and if the commenter's assertion proves accurate, it would 
cause us to reevaluate the staffing model. While at this time we are 
still gathering data, we would appreciate additional data and 
suggestions for alternative staffing models in light of changes in 
traffic patterns.
---------------------------------------------------------------------------

    \51\ USCG-2018-0665-0009, p. 2.
---------------------------------------------------------------------------

    Another commenter criticized the Coast Guard's use of rounding up 
the number of pilots authorized to operate in a district as a means of 
calculating the administrative time required of each association's 
president.\52\ The commenter suggests that the Coast Guard ``devise a 
better method'' to account for the president's administrative duties. 
We disagree with the commenter's suggestion. We note that, because we 
are calculating the number of full-time pilots, we must round to the 
nearest whole number in any event. Furthermore, because administrative 
time varies widely, it is difficult to assign a concrete number to that 
duty. We continue to believe that upward rounding of the number of 
pilots needed is appropriate given that the association president is 
both a pilot providing service and the lead administrator for the 
association. We, however, encourage the commenter to suggest an 
alternative method for calculating administrative time.
---------------------------------------------------------------------------

    \52\ USCG-2018-0665-0006, p. 5.
---------------------------------------------------------------------------

b. Use of Bridge Hours and Average Traffic Figures
    One commenter raised questions about the validity and consistency 
of various calculations used in the Coast Guard's ratemaking 
methodology. Specifically, the commenter stated that the ``use of 
inconsistent time periods for varying data sets--e.g., a ten-year 
rolling average of historical traffic volume data against three-year or 
one-year data for determining expense levels or pilot staffing needs'' 
\53\ was a pressing concern. We believe that the commenter has 
mischaracterized the Coast Guard's data collection and aggregation 
efforts, and we will attempt to explain them here.
---------------------------------------------------------------------------

    \53\ USCG-2018-0665-0010, p. 2.
---------------------------------------------------------------------------

    The first issue is the use of the historical traffic average 
(sometimes referred to as ``actual traffic'') to determine anticipated 
traffic volumes, which we implement by using a rolling 10-year average. 
The Coast Guard requires an estimate of the amount of traffic in the 
upcoming year as part of its ratemaking methodology as this is not 
something that can be measured beforehand. To derive this estimate, the

[[Page 20559]]

Coast Guard takes the average of the previous 10 years of traffic in 
each area on the Great Lakes. The use of the historical traffic figure 
was unanimously recommended by the Great Lakes Pilotage Advisory 
Committee (GLPAC) in 2014,\54\ and we believe that it is the best tool 
we have to estimate traffic. While in recent years high levels of 
traffic have been greater than the historical average, we also note 
that, not unexpectedly, in some years, the level of traffic has been 
lower than average. The use of the 10-year average may cause the 
average to lag trends, but it does reduce fluctuations in predicted 
traffic levels resulting in a more stable rate on a year to year basis. 
While we are open to suggestions as to how to better predict total 
traffic, we would encourage the commenters to raise these suggestions 
at the GLPAC, as we are currently continuing to follow its 
recommendation on this subject.
---------------------------------------------------------------------------

    \54\ See Great Lakes Pilotage Advisory Committee meeting 
transcript, July 23, 2014, at p. 254 to 258.
---------------------------------------------------------------------------

    Unlike the traffic prediction, the other factors the commenters 
cite (the operating expenses and number of authorized pilots) are 
measured numbers, and thus do not require a predictive mechanism. The 
operating expenses (the ``three-year'' figure) are direct 
reimbursements for actual expenses three years previous. The reason for 
the delay is the time it takes to receive, audit, and present those 
numbers through the rulemaking process. Similarly, the Director of 
Great Lakes Pilotage determines the number of working pilots (the 
``one-year'' figure) based on measured training progressions and 
retirement announcements. These are not predictions that would require 
us to average a previous year's estimates or use some other mechanism 
to make predictions. For these reasons, the Coast Guard does not 
believe the commenter's concern regarding the different time periods at 
issue represents a flaw in the Coast Guard's ratemaking methodology.
c. Calculation of 2017 Traffic Figure for District 3
    One commenter suggested that the Coast Guard had made an error in 
its calculation of the total traffic figures for District 3. The 
commenter stated that the Coast Guard's 2017 total traffic figures 
(26,183 hours in undesignated waters and 3,798 hours in designated 
waters) were inaccurate, and that the correct figures for that year 
were 20,955 hours in undesignated waters, and 2,997 hours in designated 
waters.\55\ In response to this comment, we reviewed the data from 2017 
and were unable to replicate the traffic figures cited in the NPRM. We 
were, however, able to validate the commenter's figures using the 
search parameters they provided. For that reason, we believe that the 
information provided by the commenter provides a stronger basis for the 
2017 traffic figures, and have made the adjustment accordingly.
---------------------------------------------------------------------------

    \55\ USCG-2018-0665-0006, p. 2.
---------------------------------------------------------------------------

F. Working Capital Fund

    In the NPRM, the Coast Guard requested comments on the utility and 
value of the working capital fund and in response, received several 
comments and questions regarding its origins, uses, and tax 
implications. One commenter stated that while it appreciated that the 
working capital fund provides a revenue stream intended to be used for 
infrastructure, one problem is that the Coast Guard ``hasn't 
established any guidelines or limits on acceptable uses.'' \56\ Another 
commenter suggested changes to the way the working capital fund 
operates. Currently, the working capital fund ``is structured so that 
the pilot associations can demonstrate credit worthiness when seeking 
funds from a financial institution for needed infrastructure projects, 
and those projects can produce a return on investment at a rate 
commensurate to repay a financial institution.'' \57\ The commenter 
argued that ``if the reserve fund is used for improvements then it is 
not available to provide a return on investment,'' \58\ and recommended 
that the interest rate on which the value of the working capital fund 
is calculated be dramatically increased (the commenter suggested London 
Interbank Offered Rate (LIBOR) + 4 percent). We disagree with this 
suggestion, and believe the commenter has misinterpreted the Coast 
Guard's intent. In previous years, the goal of the ``return on 
investment'' step, the precursor of the working capital fund, was to 
provide a return to monies invested by the pilots in associations. The 
amount of the money invested (the investment base) by pilots was 
relatively small, and thus the return on that investment was small in 
absolute terms. However, when we recalibrated the return on investment 
(later dubbed the working capital fund) to be based on the total income 
of the associations, rather than simply the money invested in capital 
improvements, the goal was to increase infrastructure spending by 
providing a more substantial pool of available funds.
---------------------------------------------------------------------------

    \56\ USCG-2018-0665-0006, p. 6.
    \57\ 83 FR 26173, citing 82 FR 41466, p. 41484.
    \58\ USCG-2018-0665-0008, p. 4.
---------------------------------------------------------------------------

    The goal of the working capital fund is not to provide a windfall 
for the associations. It is to demonstrate that associations can accrue 
additional capital, and thus have the resources to invest in 
infrastructure, either with the capital on hand or by financing a loan. 
It is not designed to provide extra money for associations to 
distribute to their shareholders.
    Industry commenters had a very negative view of the working capital 
fund. In addition to several concerns about the terminology, the 
commenter stated that ``the Coast Guard does not impose safeguards to 
require segregation of funds generated as a result of this element'' or 
``ensure that such funds are used in a manner consistent with Coast 
Guard explanations as to why the [working capital fund] exists.'' \59\ 
The commenter argued that ``there has been no indication as to why a 
``Working Capital'' figure would be the product or function of 
multiplying the sum of operating expenses and target pilot compensation 
by [AAA bond yields].'' Finally, industry commenters asserted that 
``until the Coast Guard establishes exactly what this component of the 
pilotage revenue stream is, how it should be rationally computed, and 
how it must be used, the correct value of the [working capital fund] 
should be set at $0.'' \60\
---------------------------------------------------------------------------

    \59\ USCG-2018-0665-0010, p.7.
    \60\ USCG-2018-0665-0010, p.7.
---------------------------------------------------------------------------

    Based on comments received, it is clear that both pilots and 
industry are in favor of clear guidelines for the working capital fund. 
To this end, the Coast Guard transmitted a letter to the pilot 
associations, dated November 30, 2018 and now available in the 
docket,\61\ to establish the uses and restrictions on the working 
capital fund. To summarize, 46 U.S.C. 9304 and 46 CFR 401.320 authorize 
the Coast Guard to outline how each respective pilotage association 
will manage the funds generated by the Working Capital Fund until the 
Coast Guard can update regulations or policy concerning the Working 
Capital Fund. The Coast Guard's November 30 letter therefore requires 
that pilot associations segregate the revenues generated by the working 
capital fund step, and provide a report on the status of these funds 
annually.\62\ The funds are to be used for

[[Page 20560]]

capital expenditures only, and are subject to a reasonableness 
standard. We believe that this letter will help to ensure that working 
capital fund revenues are used for their intended purposes of 
facilitating infrastructure improvements.
---------------------------------------------------------------------------

    \61\ USCG-2018-0665-0011.
    \62\ We note that in the letter we stated that there would be an 
auditing report required on April 7 each year, and at this time the 
Information Collection Request (ICR) for the Great Lakes Pilotage 
Ratemaking does not currently cover this information request. The 
Coast Guard will amend the current ICR to include this information, 
however until the Office of Information and Regulatory Affairs 
(OIRA) approves this ICR amendment, we will not enforce this 
collection.
---------------------------------------------------------------------------

G. Use of the Martin Report

    The Coast Guard received one comment on the use of the 2017 Martin 
Associates report, ``Analysis of Great Lakes Pilotage Costs on Great 
Lakes Shipping and the Potential Impact of Increases in U.S. Pilotage 
Charges,'' in our regulatory analysis.\63\ The commenter believes the 
study should not be used for any part of the rulemaking process because 
the study is biased toward industry, relies upon faulty invoice data, 
and uses a flawed methodology to estimate the impact of increasing 
pilotage rates on vessel traffic and employment in the Great Lakes. 
According to the commenter, these alleged faults in the Martin Report 
would overestimate the impact on pilotage rates on shipping. The 
commenter did not, however, object to using the Martin Report to 
support the proposition that the proposed 2019 pilotage rate increases 
would not ``have significant secondary economic harms.'' Given the 
commenter's conclusion, the Coast Guard will not address the 
commenter's concerns here. Nevertheless, the regulatory analysis of 
this final rule does not rely upon the Martin Report because the data 
used in that report is now several years old and out-of-date to support 
our analysis.
---------------------------------------------------------------------------

    \63\ The study is available at http://www.dco.uscg.mil/Our-Organization/Assistant-Commandant-for-Prevention-Policy-CG-5P/Marine-Transportation-Systems-CG-5PW/Office-of-Waterways-and-Ocean-Policy/Office-of-Waterways-and-Ocean-Policy-Great-Lakes-Pilotage-Div/.
---------------------------------------------------------------------------

    One commenter contested the Coast Guard's use of an upper rate 
standard, as elucidated in the Martin Report, to determine that the 
rates are set ``giving consideration to the public interest'' in 
accordance with the Great Lakes Pilotage Act. Referencing the Coast 
Guard's response to the commenter in the 2018 Annual Review, that 
commenter argued that ``an upper rate standard based on `levels that 
threaten the economic viability of Great Lakes Shipping' is not a 
useful or responsible standard.'' \64\ The commenter went on to state 
that rate increases are resulting ``in negative economic impacts on 
ports, agents, other maritime community stakeholders, and the economic 
well-being of the region'' without providing support for that position. 
While the commenter suggested that data on actual pilot compensation 
would assist the Coast Guard in developing an alternative method of 
meeting its statutory obligation to give consideration to the public 
interest, it was neither clear what that alternative measure would be 
nor how pilot compensation data would affect in development of that 
alternative. Given the absence of alternative methods, we consider the 
use of the Martin Report's estimates on the possible economic impact to 
be one tool to gauge the impact of pilotage rates on shipping. Finally, 
impact on shipping is not the only consideration for the Coast Guard in 
determining the public interest. The protection of the marine 
environment from oil spills resulting from groundings and collisions 
and the protection of maritime infrastructure, e.g., locks, are also in 
the public interest. Professional pilotage services provided for under 
this ratemaking reduce the risks of such an incident occurring and 
increases the safety of maritime traffic on the Great Lakes. 
Consequently, the Coast Guard considers the safety of maritime traffic 
on the Great Lakes to be in the public interest.
---------------------------------------------------------------------------

    \64\ USCG-2018-0665-0010, p.3.
---------------------------------------------------------------------------

H. Other Issues Concerning Ratemaking Procedures

a. Over-Realization of Pilotage Revenue
    One commenter raised the issue that actual revenue realizations in 
the years 2014-2017 exceeded the target revenues by a considerable 
amount. As an example, the commenter noted that, in 2017, $26.5 million 
in pilotage revenue was realized, which was far in excess of the stated 
target of $21.7 million.\65\ The commenter requested that the Coast 
Guard ``validate the real world likelihood of additional over-
realization by using known information on pilotage billings to date for 
2018 to assess whether rate increases . . . are, in fact necessary to 
achieve revenue targets stated in the Proposed Rule.'' \66\
---------------------------------------------------------------------------

    \65\ USCG-2018-0665-0010, p.5.
    \66\ USCG-2018-0665-0010, p.6.
---------------------------------------------------------------------------

    While the Coast Guard agrees with the commenter that, in several 
recent years, realized revenues have exceeded target revenues, we do 
not believe this is a systemic or perpetual position. We note that, as 
rates are derived by using an average of the most recent 10 years of 
traffic, if the traffic in the current year exceeds the average (i.e., 
it is a busier than an average year), pilots will realize more than the 
target revenue, and if it is a slower than an average year, pilots will 
realize less than the target revenue. Because the last several years 
that the commenters cite have seen larger-than-average traffic flows, 
additional revenue has been realized.\67\ We also believe that it is 
important to clarify that meeting the ``target revenue'' is not a goal 
for the Coast Guard in and of itself; the target revenue is just a 
marker used by the ratemaking methodology to set rates assuming an 
average traffic year. The revenue realized is expected to vary from 
``target revenue'' consistent with the manner actual traffic varies 
from the projected traffic.
---------------------------------------------------------------------------

    \67\ We also note that the commenters may be including revenue 
from non-compulsory pilotage in their realized revenue calculations. 
We note that the current methodology does count revenue from this 
source in developing the target revenue.
---------------------------------------------------------------------------

    The Coast Guard does agree with the commenter that known 
information on 2018 traffic should be incorporated into the 2019 
ratemaking calculation. The calculations in this final rule are based 
on traffic in a 10-year period of 2009-2018. We note that generally the 
most recent year's traffic figures are not included in the NPRM, which 
comes out before the end of the previous year's season, but are 
included in the final rule of the annual ratemaking.
    The commenter also urged the Coast Guard to ``require Pilot 
Association financials to provide individual pilot compensation data, 
screened to protect individual pilot identities, as part of the 
standard annual financial reports.'' \68\ The commenter suggests that 
this information is ``critical in evaluating frequent, but vague and 
non-empirical justifications based on recruitment, retention, and 
attrition of pilots proffered by the Coast Guard to [increase pilot 
compensation].'' \69\ While, as stated above, the Coast Guard believes 
this information could be used to more accurately compare the 
compensation of Great Lakes pilots to known salaries of pilots in other 
pilot associations, we would need more specific suggestions on how this 
information would be incorporated into the ratemaking methodology 
before considering requiring it.
---------------------------------------------------------------------------

    \68\ USCG-2018-0665-0010, p.6.
    \69\ USCG-2018-0665-0010, p.6.
---------------------------------------------------------------------------

b. Disparity of Rates Between U.S. and Canadian Pilotage
    One commenter raised questions about the difference between U.S. 
and Canadian pilotage cost structures. The commenter stated that 
``sample comparisons of the costs of U.S. versus Canadian pilotage on 
the same or similar voyages by the same or similar vessels show that 
U.S. pilotage costs are often nearly twice as high as those of the

[[Page 20561]]

Canadian counterparts.'' \70\ The commenter cites a CPCS report, which 
contains an example where a vessel was billed $21,054 for an American 
pilot and $6,431 for a Canadian pilot, while the two pilots were 
simultaneously deployed in a double-pilotage situation.\71\ The 
commenter asked why the rates were so different, and what justified the 
difference in rates.
---------------------------------------------------------------------------

    \70\ USCG-2018-0665-0010, p.3.
    \71\ USCG-2018-0665-0010, exhibit 3, p.8.
---------------------------------------------------------------------------

    The Coast Guard is aware that the U.S. and Canada do not bill for 
service in identical ways. One significant difference between the U.S. 
and Canada is that the U.S. has three different Districts that must 
each support themselves, whereas the Canadian GLPA operates as a 
unified whole. This means that there may be a level of cross-
subsidization among Canadian pilots that is impossible to replicate on 
the American side, which could result in higher rates in some areas 
(and lower rates in others).\72\ Simple anecdotal comparisons on a 
single voyage do not provide the Coast Guard with the comprehensive 
information needed to determine if there is a system-wide problem with 
rates or if we are merely seeing a rare, if extreme, incident.
---------------------------------------------------------------------------

    \72\ The inability to replicate the possible sharing of costs 
across the entire Canadian system is exacerbated by the fact that 
only Canadian pilots provide pilotage services in Area 3.
---------------------------------------------------------------------------

I. Out-of-Scope Issues

    Industry commenters provided several comments that are not directly 
pertinent to this ratemaking action. These included comments on 
pilotage charges assessed early and late in the navigation season, 
where charges may accrue while a vessel is not under active navigation. 
Industry commenters also requested development of a mechanism for an 
alternative provision of pilotage services, as well as a mechanism by 
which money collected in previous years under a system found to be 
arbitrary by a court could be refunded, such as through a ``negative 
surcharge'' or other means. Comments also addressed various issues 
relating to labor disputes, disputed instances where a tug is requested 
by a pilot, and issues regarding delays caused by various factors 
outside a ship's control.
    The Coast Guard is not addressing these comments in this document, 
as they are out of the scope of the ratemaking action. We note that 
this regulation is narrowly confined to the actual hourly rates charged 
in 2019 and the data and calculations used to develop those rates. If 
industry commenters wish to address these concerns in a separate 
process, they are encouraged to reach out by formal or informal means 
to the Great Lakes Pilotage Office or submit a petition for rulemaking 
laying out specific changes to the program they would like to see and 
include supporting data.

J. Changes Resulting From Litigation

    On February 19, 2019, the United States Court for the District of 
Columbia issued an opinion in St. Lawrence Seaway Pilots Association et 
al. v. United States Coast Guard.\73\ The District Court held that 
paragraph (b)(6) of 33 CFR 404.2, which states that legal fees incurred 
in litigation against the Coast Guard cannot be recouped as operating 
expenses, had been improperly promulgated, and vacated the provision. 
In this final rule we are removing that paragraph from section 404.2. 
While we did not propose removing this text in the NPRM, because the 
text has been vacated by judicial order after publication of the NPRM, 
under 5 U.S.C. 553(b)(B), notice and comment is unnecessary.
---------------------------------------------------------------------------

    \73\ 357 F. Supp. 3d 30.
---------------------------------------------------------------------------

VI. Discussion of Current Rate Adjustments

    In this final rule, based on the current methodology described in 
the previous section, the Coast Guard is establishing new pilotage 
rates for 2019. This section discusses the rate changes using the 
ratemaking steps provided in 46 CFR part 404. We will detail each step 
of the ratemaking procedure to show how we arrived at the established 
new rates.
    We conducted the 2019 ratemaking as an ``interim year,'' rather 
than a full ratemaking. Thus, for this purpose, the Coast Guard will 
adjust the compensation benchmark pursuant to Sec.  404.104(b) rather 
than Sec.  404.104(a).

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2016 expenses and 
revenues.\74\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. In certain instances, 
for example, costs are applied to the undesignated or designated area 
based on where they were actually accrued. For example, costs for 
``Applicant pilot license insurance'' in District One are assigned 
entirely to the undesignated areas, as applicant pilots work 
exclusively in those areas. For costs that are accrued to the pilot 
associations generally, for example, pilot insurance, the cost is 
divided between the designated and undesignated areas on a pro rata 
basis. The recognized operating expenses for the three districts are 
laid out in tables 3 through 5.
---------------------------------------------------------------------------

    \74\ These reports are available in the docket for this 
rulemaking (see Docket #USCG-2018-0665).
---------------------------------------------------------------------------

    As noted above, in 2016, the Coast Guard began authorizing 
surcharges to cover the training costs of applicant pilots. The 
surcharges were intended to reimburse pilot associations for training 
applicants in a more timely fashion than if those costs were listed as 
operating expenses, which would have required three years to reimburse. 
The rationale for using surcharges to cover these expenses, rather than 
including the costs as operating expenses, was so that retiring pilots 
would not have to cover the costs of training their replacements. 
Because operating expenses incurred are not actually recouped for a 
period of three years, beginning in 2016, the Coast Guard added a 
$150,000 surcharge per applicant pilot to recoup those costs in the 
year incurred. To ensure that the ratepayers are not double-billed for 
the same expense(s), we deduct the amount collected via surcharges from 
the operating expenses. For that reason, the Coast Guard has 
established a ``surcharge adjustment from 2016'' as part of its 
adjustment for each pilotage district. This surcharge adjustment 
reflects the additional monies that were collected by the surcharge 
that year. We note that in 2016, there was no mechanism to prevent the 
collection of surcharges above the authorized amounts, and so the 
amounts we deducted from each association's operating expenses are 
equal to the actual amount of surcharges collected in the 2016 shipping 
season, which are in excess of $150,000 per applicant pilot.
    The Coast Guard also deducted 3 percent of the ``shared counsel'' 
expenses for each district, to account for lobbying expenditures, which 
we do not consider ``reasonable and necessary'' to conduct operations 
(with the exception of District 3, for reasons described in the 
``Operating Expenses'' section above).
    For each of the analyses of the operating expenses below, we 
explained in the NPRM why we established the Director's adjustments, 
other than the surcharge adjustments and lobbying expenses, described 
above. Other adjustments were made by the auditors and are explained in 
the auditor's reports, which are available in the docket for this 
rulemaking. Numbers by the entries are references to descriptions in 
the auditor's reports. Finally, we note

[[Page 20562]]

that several changes to the NPRM's proposed operating expenses have 
been made as a result of the notice and comment process--described 
above in the ``Operating Costs'' portion of Section V.

                               Table 3--2016 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                          District One                              Designated     Undesignated
-------------------------------------------------------------------------------------------------
                                                                   St. Lawrence                        Total
                   Reported Expenses for 2016                          River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Costs Relating to Pilots:
    Pilot subsistence/travel....................................        $421,749        $336,384        $758,133
    Subsistence/Travel--Pilots (D1-16-01).......................         -70,224         -34,846        -105,070
    License insurance...........................................          40,464          28,269          68,733
    Payroll taxes...............................................         111,279          90,179         201,458
    Payroll taxes--Pilots (D1-16-03)............................               0          -2,509          -2,509
    Training....................................................          17,198          13,717          30,915
    Training--Pilots (D1-16-04).................................            -594               0            -594
    Other.......................................................             842             672           1,514
                                                                 -----------------------------------------------
        Total costs relating to pilots..........................         520,714         431,866         952,580
Applicant Pilots:
    Wages.......................................................          70,700          90,000         160,700
    Wages (D1-16-02)............................................               0          28,054          28,054
    Subsistence/Travel..........................................               0         146,219         146,219
    Subsistence/Travel--Trainees (D1-16-02).....................         -12,283         -20,589         -32,872
    Benefits....................................................               0               0               0
    Payroll taxes...............................................           8,039          11,123          19,162
    Payroll taxes--Trainees (D1-16-03)..........................               0          -5,115          -5,115
    Surcharge Offset--Director's Adjustment.....................        -318,117        -253,649        -571,766
                                                                 -----------------------------------------------
        Total applicant pilot costs.............................        -251,661          -3,957        -255,618
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         209,800         167,335         377,135
    Dispatch expense............................................          51,240          31,705          82,945
    Payroll taxes...............................................          16,007          12,767          28,774
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         277,047         211,807         488,854
Administrative Expenses:
    Legal--general counsel......................................           4,565           3,641           8,206
    Legal--shared (K&L Gates) (D1-16-05)........................          20,558          16,397          36,955
    Legal--shared (K&L Gates) (D1-16-05)........................            -713            -713          -1,426
    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -617            -492          -1,109
     (Director's Adjustment)....................................
    Office rent.................................................               0               0               0
    Insurance...................................................          21,869          17,443          39,312
    Employee benefits--Admin....................................           9,428           7,519          16,947
    Payroll taxes--Admin........................................           6,503           5,187          11,690
    Other taxes.................................................         274,503         218,941         493,444
    Admin Travel................................................           2,346           1,871           4,217
    Depreciation/Auto leasing/Other.............................          65,971          52,618         118,589
    Interest....................................................          20,688          16,501          37,189
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          29,687          13,959          43,646
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          -1,079          -1,079          -2,158
    Utilities...................................................          12,318           9,578          21,896
    Salaries--Admin.............................................          65,401          52,163         117,564
    Accounting/Professional fees................................           5,479           3,921           9,400
    Other.......................................................          23,456          18,708          42,164
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         560,363         436,163         996,526
Capital Expenditures:
    Property Acquisition (Directors Adjustment).................         280,164         186,776         466,940
                                                                 -----------------------------------------------
        Total Operating Expenses................................       1,386,627       1,262,655       2,649,282
----------------------------------------------------------------------------------------------------------------

                               Table 4--2016 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                          District Two                             Undesignated     Designated
-------------------------------------------------------------------------------------------------
                                                                                    SES to Port        Total
                   Reported expenses for 2016                        Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Pilot-related expenses:
    Pilot subsistence/travel....................................        $131,956        $197,935        $329,891
    Pilot subsistence/travel CPA Adjustment (D2-16-01)..........         -44,955         -67,433        -112,388
    License insurance...........................................          10,095          15,142          25,237
    License Insurance CPA Adjustment (D2-16-03).................            -635            -953          -1,588

[[Page 20563]]

 
    Payroll taxes...............................................          77,306         115,958         193,264
                                                                 -----------------------------------------------
        Total Pilot-related expenses............................         173,767         260,649         434,416
Expenses related to applicant pilots:
    Wages (from supplemental form)..............................         228,499         342,749         571,248
    Wages--Director's Adjustment................................        -125,472        -188,209        -313,681
    Benefits (from supplemental form)...........................           9,736          14,605          24,341
    Benefits--Director's Adjustment.............................          60,031               0          60,031
    Applicant pilot Subsistence/Travel..........................          43,905          65,858         109,763
    Applicant Pilot subsistence/travel CPA Adjustment (D2-16-02)         -14,940         -22,410         -37,350
    Housing Allowance CPA Adjustment (D2-16-02).................          14,940          22,410          37,350
    Payroll taxes...............................................          15,144          22,717          37,861
    2016 Surcharge Offset Director's Adjustment.................        -158,640        -277,106        -435,746
                                                                 -----------------------------------------------
        Total applicant pilot expenses..........................          73,203         -19,386          53,817
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         205,572         308,359         513,931
    Dispatch expense............................................           8,520          12,780          21,300
    Employee benefits...........................................          75,405         113,107         188,512
    Payroll taxes...............................................          10,305          15,457          25,762
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         299,802         449,703         749,505
Administrative Expenses:
    Office rent.................................................          26,275          39,413          65,688
    Office Rent CPA Adjustment..................................           4,766           7,150          11,916
    Legal--general counsel......................................           1,624           2,437           4,061
    Legal--shared counsel (K&L Gates)...........................          13,150          19,725          32,875
    Legal--shared counsel CPA Adjustment........................            -526            -789          -1,315
    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -395            -592            -987
     (Director's Adjustment)....................................
    Employee Benefits--Admin Employees..........................          59,907          89,861         149,768
    Employee benefits (Director's Adjustment)...................         -30,200         -60,400         -90,600
    Workman's compensation--pilots..............................          74,561         111,841         186,402
    Payroll taxes--admin employees..............................           5,688           8,532          14,220
    Insurance...................................................          10,352          15,529          25,881
    Other taxes.................................................           9,149          13,723          22,872
    Administrative Travel.......................................          18,205          27,307          45,512
    Administrative Travel (D2-16-06)............................            -153            -229            -382
    Depreciation/auto leasing/other.............................          39,493          59,239          98,732
    Depreciation/Auto leasing/Other CPA Adjustment (D2-16-03)...            -221            -332            -553
    Interest....................................................           6,224           9,336          15,560
    APA Dues....................................................          17,145          25,717          42,862
    APA Dues CPA Adjustment (D2-16-04)..........................            -815          -1,223          -2,038
    Utilities...................................................          16,748          25,121          41,869
    Salaries....................................................          55,426          83,139         138,565
    Accounting/Professional fees................................          12,520          18,780          31,300
    Other.......................................................         128,093         192,139         320,232
    Other CPA Adjustment (D2-16-07).............................            -221            -332            -553
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         466,795         685,092       1,151,887
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,013,567       1,376,058       2,389,625
----------------------------------------------------------------------------------------------------------------

                              Table 5--2016 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                         District Three                            Undesignated     Designated
-------------------------------------------------------------------------------------------------
                                                                    Lakes Huron
                                                                   and Michigan     St. Mary's         Total
                   Reported Expenses for 2016                        and Lake          River
                                                                     Superior
----------------------------------------------------------------------------------------------------------------
Pilotage Costs:
    Pilot subsistence/travel....................................        $378,014        $100,485        $478,499
    Pilot subsistence/Travel (D3-16-01).........................         -50,285         -13,367         -63,652
    Pilot subsistence/Travel director's adjustment (housing                    0         -36,900         -36,900
     allowance).................................................
    License insurance...........................................          21,446           5,701          27,147
    Payroll taxes...............................................         194,159          51,612         245,771
    Other.......................................................          19,193          72,202          91,395
                                                                 -----------------------------------------------

[[Page 20564]]

 
        Total Pilotage Costs....................................         562,527         179,733         742,260
Applicant Pilots:
    Wages.......................................................         610,433         162,267         772,700
    Benefits....................................................         160,265          26,644         186,909
    Subsistence/travel..........................................         170,089          45,214         215,303
    Payroll taxes...............................................          50,561          13,440          64,001
    Training....................................................          11,642           3,095          14,737
    Surcharge Adjustment........................................      -1,106,339        -235,673      -1,342,012
                                                                 -----------------------------------------------
        Total applicant pilotage costs..........................        -103,349          14,987         -88,362
Pilot Boat and Dispatch Costs:
    Pilot boat costs............................................         580,822         154,396         735,218
    Pilot boat costs (D3-16-02).................................         -72,724         -19,332         -92,056
    Dispatch costs..............................................         146,220          38,868         185,088
    Employee benefits...........................................           6,517           1,733           8,250
    Payroll taxes...............................................          15,745           4,186          19,931
                                                                 -----------------------------------------------
        Total pilot boat and dispatch costs.....................         676,580         179,851         856,431
Administrative Expenses:
    Legal--general counsel......................................          22,196           5,900          28,096
    Legal--shared counsel (K&L Gates)...........................          34,020           9,043          43,063
    Office rent.................................................           6,978           1,855           8,833
    Insurance...................................................          14,562           3,871          18,433
    Employee benefits...........................................         103,322          27,465         130,787
    Payroll Taxes (administrative employees)....................           6,540           1,739           8,279
    Other taxes.................................................           1,338             356           1,694
    Depreciation/auto leasing/other.............................          46,016          12,232          58,248
    Interest....................................................           2,775             738           3,513
    APA Dues....................................................          24,760           6,582          31,342
    Utilities...................................................          38,763          10,304          49,067
    Administrative Salaries.....................................          94,371          25,086         119,457
    Accounting/Professional fees................................          31,877           8,474          40,351
    Pilot Training..............................................          35,516           9,441          44,957
    Other.......................................................          13,619           3,621          17,240
    Other expenses (D3-16-03)...................................         -$2,054           -$546         -$2,600
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         474,599         126,161         600,760
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,610,357         500,732       2,111,089
----------------------------------------------------------------------------------------------------------------

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

    Having identified the recognized 2016 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. The 
Coast Guard calculated inflation using the BLS data from the CPI for 
the Midwest Region of the United States \75\ and reports from the 
Federal Reserve.\76\ Based on that information, the calculations for 
Step 1 are as follows:
---------------------------------------------------------------------------

    \75\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the 
Consumer Price Index is defined as ``All Urban Consumers (CPI-U), 
All Items, 1982-4 = 100''. Downloaded January 31, 2019.
    \76\ Available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf. We used the PCE median inflation 
value found in Table 1, Downloaded January 31, 2019.

                              Table 6--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,386,627      $1,262,655      $2,649,282
2017 Inflation Modification (@1.7%).............................          23,573          21,465          45,038
2018 Inflation Modification (@1.9%).............................          26,794          24,398          51,192
2019 Inflation Modification (@2.1%).............................          30,177          27,479          57,656
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,467,171       1,335,997       2,803,168
----------------------------------------------------------------------------------------------------------------

[[Page 20565]]

                              Table 7--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,013,567      $1,376,058      $2,389,625
2017 Inflation Modification (@1.7%).............................          17,231          23,393          40,624
2018 Inflation Modification (@1.9%).............................          19,585          26,590          46,175
2019 Inflation Modification (@2.1%).............................          22,058          29,947          52,005
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,072,441       1,455,988       2,528,429
----------------------------------------------------------------------------------------------------------------

                             Table 8--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,610,357        $500,732      $2,111,089
2017 Inflation Modification (@1.7%).............................          27,376           8,512          35,888
2018 Inflation Modification (@1.9%).............................          31,117           9,676          40,793
2019 Inflation Modification (@2.1%).............................          35,046          10,897          45,943
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,703,896         529,817       2,233,713
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimated the 
number of working pilots in each district. Based on input from the 
Saint Lawrence Seaway Pilots Association, we estimate that there will 
be 17 working pilots in 2019 in District One. Based on input from the 
Lakes Pilots Association, we estimate there will be 14 working pilots 
in 2019 in District Two. Based on input from the Western Great Lakes 
Pilots Association, we estimate there will be 20 working pilots in 2019 
in District Three.
    Furthermore, based on the staffing model employed to develop the 
total number of pilots needed, we assign a certain number of pilots to 
designated waters and a certain number to undesignated waters. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.

                                           Table 9--Authorized Pilots
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \77\...........              17              15              22
 
2019 Authorized pilots (total)..................................              17              14              20
Pilots assigned to designated areas.............................              10               7               4
Pilots assigned to undesignated areas...........................               7               7              16
----------------------------------------------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark

    In this step, we determine the total pilot compensation for each 
area. Because this is an ``interim'' ratemaking this year, we follow 
the procedure outlined in paragraph (b) of Sec.  404.104, which adjusts 
the existing compensation benchmark by inflation. Because we do not 
have a value for the employment cost index for 2019, we multiply last 
year's compensation benchmark by the Median PCE Inflation of 2.1 
percent.\78\ Based on the projected 2019 inflation estimate, the 
compensation benchmark for 2019 is $359,887 per pilot.
---------------------------------------------------------------------------

    \77\ For a detailed calculation of the staffing model, see 82 FR 
41466, table 6 on p. 41480 (August 31, 2017).
    \78\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2019 is 
less than or equal to the number permitted under the staffing model in 
Sec.  401.220(a). The staffing model suggests that the number of pilots 
needed is 17 pilots for District One, 15 pilots for District Two, and 
22 pilots for District Three,\79\ which is more than or equal to the 
numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \79\ See Table 6 of the 2017 final rule, 82 FR 41466 at 41480 
(August 31, 2017). The methodology of the staffing model is 
discussed at length in the final rule (see pages 41476-41480 for a 
detailed analysis of the calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised 
target individual compensation level to derive the total pilot 
compensation by multiplying the individual target compensation by the 
estimated number of working pilots for each district, as shown in 
tables 10-12.

                                 Table 10--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................              10               7              17
----------------------------------------------------------------------------------------------------------------
    Total Target Pilot Compensation.............................      $3,598,870      $2,519,209      $6,118,079
----------------------------------------------------------------------------------------------------------------

[[Page 20566]]

                                 Table 11--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................               7               7              14
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $2,519,209      $2,519,209      $5,038,418
----------------------------------------------------------------------------------------------------------------

                                Table 12--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................              16               4              20
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $5,758,192      $1,439,548      $7,197,740
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add the figures for projected operating expenses 
and total pilot compensation for each area. Next, we find the preceding 
year's average annual rate of return for new issues of high grade 
corporate securities. Using Moody's data, that number is 3.93 
percent.\80\ By multiplying the two figures, we get the working capital 
fund contribution for each area, as shown in tables 13-15.
---------------------------------------------------------------------------

    \80\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018 
monthly data. The Coast Guard uses the most recent complete year of 
data. See https://fred.stlouisfed.org/series/AAA. (February 14, 
2019)

                           Table 13--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,467,171      $1,335,997      $2,803,168
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       5,066,041       3,855,206       8,921,247
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         199,095         151,510         350,605
----------------------------------------------------------------------------------------------------------------

                           Table 14--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,072,441      $1,455,988      $2,528,429
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       3,591,650       3,975,197       7,566,847
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         141,152         156,225         297,377
----------------------------------------------------------------------------------------------------------------

                          Table 15--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,703,896        $529,817      $2,233,713
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       7,462,088       1,969,365       9,431,453
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         293,260          77,396         370,656
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add up all the expenses accrued to derive the 
total revenue needed for each area. These expenses include the 
projected operating expenses (from Step 2), the total pilot 
compensation (from Step 4), and the working capital fund contribution 
(from Step 5). The calculations are shown in tables 16 through 18.

[[Page 20567]]

                                    Table 16--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,467,171      $1,335,997      $2,803,168
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
Working Capital Fund (Step 5)...................................         199,095         151,510         350,605
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,265,136       4,006,716       9,271,852
----------------------------------------------------------------------------------------------------------------

                                    Table 17--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,072,441      $1,455,988      $2,528,429
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
Working Capital Fund (Step 5)...................................         141,152         156,225         297,377
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       3,732,802       4,131,422       7,864,224
----------------------------------------------------------------------------------------------------------------

                                   Table 18--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,703,896        $529,817      $2,233,713
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
Working Capital Fund (Step 5)...................................         293,260          77,396         370,656
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       7,755,348       2,046,761       9,802,109
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous 
six steps, the Coast Guard divides that number by the expected number 
of hours of traffic to develop an hourly rate. Step 7 is a two-part 
process. In the first part, we calculate the 10-year average of traffic 
in each district. Because we are calculating separate figures for 
designated and undesignated waters, there are two parts for each 
calculation. The calculations are shown in tables 19 through 21.

                 Table 19--Time on Task for District One
------------------------------------------------------------------------
                  Year                      Designated     Undesignated
------------------------------------------------------------------------
2018....................................           6,943           8,445
2017....................................           7,605           8,679
2016....................................           5,434           6,217
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
2009....................................           3,511           3,947
                                         -------------------------------
    Average.............................           5,657           6,248
------------------------------------------------------------------------

                 Table 20--Time on Task for District Two
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2018....................................           6,150           6,655
2017....................................           5,139           6,074
2016....................................           6,425           5,615
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
2009....................................           3,386           3,017
                                         -------------------------------
    Average.............................           5,322           5,192
------------------------------------------------------------------------

[[Page 20568]]

                Table 21--Time on Task for District Three
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2018....................................          19,967           3,455
2017....................................          20,955           2,997
2016....................................          23,421           2,769
2015....................................          22,824           2,696
2014....................................          25,833           3,835
2013....................................          17,115           2,631
2012....................................          15,906           2,163
2011....................................          16,012           1,678
2010....................................          20,211           2,461
2009....................................          12,520           1,820
                                         -------------------------------
    Average.............................          19,476           2,651
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate needed to produce the revenue needed for each area, 
assuming the amount of traffic is as expected. The calculations for 
each area are set forth in tables 22 through 24.

          Table 22--Initial Rate Calculations for District One
------------------------------------------------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $5,265,136      $4,006,716
Average time on task (hours)............           5,657           6,248
                                         -------------------------------
    Initial rate........................            $931            $641
------------------------------------------------------------------------

          Table 23--Initial Rate Calculations for District Two
------------------------------------------------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $3,732,802      $4,131,422
Average time on task (hours)............           5,322           5,192
                                         -------------------------------
    Initial rate........................            $701            $796
------------------------------------------------------------------------

         Table 24--Initial Rate Calculations for District Three
------------------------------------------------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $7,755,348      $2,046,761
Average time on task (hours)............          19,476           2,651
                                         -------------------------------
    Initial rate........................            $398            $772
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, the Coast Guard calculates the average weighting 
factor for each designated and undesignated area. We collect the 
weighting factors, as set forth in 46 CFR 401.400, for each vessel 
trip. Using this database, we calculate the average weighting factor 
for each area using the data from each vessel transit from 2014 onward, 
as shown in tables 25 through 30.

                       Table 25--Average Weighting Factor for District 1, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              41               1              41
Class 1 (2016)..................................................              31               1              31
Class 1 (2017)..................................................              28               1              28
Class 1 (2018)..................................................              54               1              54
Class 2 (2014)..................................................             285            1.15          327.75
Class 2 (2015)..................................................             295            1.15          339.25
Class 2 (2016)..................................................             185            1.15          212.75
Class 2 (2017)..................................................             352            1.15           404.8
Class 2 (2018)..................................................             559            1.15          642.85
Class 3 (2014)..................................................              50             1.3              65

[[Page 20569]]

 
Class 3 (2015)..................................................              28             1.3            36.4
Class 3 (2016)..................................................              50             1.3              65
Class 3 (2017)..................................................              67             1.3            87.1
Class 3 (2018)..................................................              86            1.30           111.8
Class 4 (2014)..................................................             271            1.45          392.95
Class 4 (2015)..................................................             251            1.45          363.95
Class 4 (2016)..................................................             214            1.45           310.3
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             393            1.45          569.85
                                                                 -----------------------------------------------
    Total.......................................................           3,556  ..............           4,528
                                                                 -----------------------------------------------
    Average weighting factor (weighted transits/number of         ..............            1.27  ..............
     transits)..................................................
----------------------------------------------------------------------------------------------------------------

                      Table 26--Average Weighting Factor for District 1, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              25               1              25
Class 1 (2015)..................................................              28               1              28
Class 1 (2016)..................................................              18               1              18
Class 1 (2017)..................................................              19               1              19
Class 1 (2018)..................................................              22               1              22
Class 2 (2014)..................................................             238            1.15           273.7
Class 2 (2015)..................................................             263            1.15          302.45
Class 2 (2016)..................................................             169            1.15          194.35
Class 2 (2017)..................................................             290            1.15           333.5
Class 2 (2018)..................................................             352            1.15           404.8
Class 3 (2014)..................................................              60             1.3              78
Class 3 (2015)..................................................              42             1.3            54.6
Class 3 (2016)..................................................              28             1.3            36.4
Class 3 (2017)..................................................              45             1.3            58.5
Class 3 (2018)..................................................              63            1.30            81.9
Class 4 (2014)..................................................             289            1.45          419.05
Class 4 (2015)..................................................             269            1.45          390.05
Class 4 (2016)..................................................             222            1.45           321.9
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             382            1.45           553.9
                                                                 -----------------------------------------------
    Total.......................................................           3,109  ..............        4,028.35
                                                                 -----------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.30  ..............
----------------------------------------------------------------------------------------------------------------

                      Table 27--Average Weighting Factor for District 2, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              35               1              35
Class 1 (2016)..................................................              32               1              32
Class 1 (2017)..................................................              21               1              21
Class 1 (2018)..................................................              37               1              37
Class 2 (2014)..................................................             356            1.15           409.4
Class 2 (2015)..................................................             354            1.15           407.1
Class 2 (2016)..................................................             380            1.15             437
Class 2 (2017)..................................................             222            1.15           255.3
Class 2 (2018)..................................................             123            1.15          141.45
Class 3 (2014)..................................................              20             1.3              26
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               9             1.3            11.7
Class 3 (2017)..................................................              12             1.3            15.6
Class 3 (2018)..................................................               3             1.3             3.9
Class 4 (2014)..................................................             636            1.45           922.2
Class 4 (2015)..................................................             560            1.45             812
Class 4 (2016)..................................................             468            1.45           678.6
Class 4 (2017)..................................................             319            1.45          462.55
Class 4 (2018)..................................................             196            1.45           284.2
                                                                 -----------------------------------------------

[[Page 20570]]

 
    Total.......................................................           3,814  ..............           5,023
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                       Table 28--Average Weighting Factor for District 2, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              20               1              20
Class 1 (2015)..................................................              15               1              15
Class 1 (2016)..................................................              28               1              28
Class 1 (2017)..................................................              15               1              15
Class 1 (2018)..................................................              42               1              42
Class 2 (2014)..................................................             237            1.15          272.55
Class 2 (2015)..................................................             217            1.15          249.55
Class 2 (2016)..................................................             224            1.15           257.6
Class 2 (2017)..................................................             127            1.15          146.05
Class 2 (2018)..................................................             153            1.15          175.95
Class 3 (2014)..................................................               8             1.3            10.4
Class 3 (2015)..................................................               8             1.3            10.4
Class 3 (2016)..................................................               4             1.3             5.2
Class 3 (2017)..................................................               4             1.3             5.2
Class 3 (2018)..................................................              14            1.30            18.2
Class 4 (2014)..................................................             359            1.45          520.55
Class 4 (2015)..................................................             340            1.45             493
Class 4 (2016)..................................................             281            1.45          407.45
Class 4 (2017)..................................................             185            1.45          268.25
Class 4 (2018)..................................................             379            1.45          549.55
                                                                 -----------------------------------------------
    Total.......................................................           2,660  ..............         3,509.9
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                      Table 29--Average Weighting Factor for District 3, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Area 6:
    Class 1 (2014)..............................................              45               1              45
    Class 1 (2015)..............................................              56               1              56
    Class 1 (2016)..............................................             136               1             136
    Class 1 (2017)..............................................             148               1             148
    Class 1 (2018)..............................................             103               1             103
    Class 2 (2014)..............................................             274            1.15           315.1
    Class 2 (2015)..............................................             207            1.15          238.05
    Class 2 (2016)..............................................             236            1.15           271.4
    Class 2 (2017)..............................................             264            1.15           303.6
    Class 2 (2018)..............................................             169            1.15          194.35
    Class 3 (2014)..............................................              15             1.3            19.5
    Class 3 (2015)..............................................               8             1.3            10.4
    Class 3 (2016)..............................................              10             1.3              13
    Class 3 (2018)..............................................               9            1.30            11.7
    Class 3 (2017)..............................................              19             1.3            24.7
    Class 4 (2014)..............................................             394            1.45           571.3
    Class 4 (2015)..............................................             375            1.45          543.75
    Class 4 (2016)..............................................             332            1.45           481.4
    Class 4 (2017)..............................................             367            1.45          532.15
    Class 4 (2018)..............................................             337            1.45          488.65
                                                                 -----------------------------------------------
        Total for Area 6........................................           3,504  ..............        4,507.05
                                                                 -----------------------------------------------
Area 8:
    Class 1 (2014)..............................................               3               1               3
    Class 1 (2015)..............................................               0               1               0
    Class 1 (2016)..............................................               4               1               4
    Class 1 (2017)..............................................               4               1               4
    Class 1 (2018)..............................................               0               1               0
    Class 2 (2014)..............................................             177            1.15          203.55
    Class 2 (2015)..............................................             169            1.15          194.35

[[Page 20571]]

 
    Class 2 (2016)..............................................             174            1.15           200.1
    Class 2 (2017)..............................................             151            1.15          173.65
    Class 2 (2018)..............................................             102            1.15           117.3
    Class 3 (2014)..............................................               3             1.3             3.9
    Class 3 (2015)..............................................               0             1.3               0
    Class 3 (2016)..............................................               7             1.3             9.1
    Class 3 (2017)..............................................              18             1.3            23.4
    Class 3 (2018)..............................................               7            1.30             9.1
    Class 4 (2014)..............................................             243            1.45          352.35
    Class 4 (2015)..............................................             253            1.45          366.85
    Class 4 (2016)..............................................             204            1.45           295.8
    Class 4 (2017)..............................................             269            1.45          390.05
    Class 4 (2018)..............................................             188            1.45           272.6
                                                                 -----------------------------------------------
        Total for Area 8........................................           1,976  ..............         2,623.1
                                                                 -----------------------------------------------
            Combined total......................................           5,480  ..............        7,130.15
                                                                 -----------------------------------------------
                Average weighting factor (weighted transits/      ..............            1.30  ..............
                 number of transits)............................
----------------------------------------------------------------------------------------------------------------

                       Table 30--Average Weighting Factor for District 3, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              27               1              27
Class 1 (2015)..................................................              23               1              23
Class 1 (2016)..................................................              55               1              55
Class 1 (2017)..................................................              62               1              62
Class 1 (2018)..................................................              47               1              47
Class 2 (2014)..................................................             221            1.15          254.15
Class 2 (2015)..................................................             145            1.15          166.75
Class 2 (2016)..................................................             174            1.15           200.1
Class 2 (2017)..................................................             170            1.15           195.5
Class 2 (2018)..................................................             126            1.15           144.9
Class 3 (2014)..................................................               4             1.3             5.2
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               6             1.3             7.8
Class 3 (2017)..................................................              14             1.3            18.2
Class 3 (2018)..................................................               6             1.3             7.8
Class 4 (2014)..................................................             321            1.45          465.45
Class 4 (2015)..................................................             245            1.45          355.25
Class 4 (2016)..................................................             191            1.45          276.95
Class 4 (2017)..................................................             234            1.45           339.3
Class 4 (2018)..................................................             225            1.45          326.25
                                                                 -----------------------------------------------
    Total.......................................................           2,296  ..............         2,977.6
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.30  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, the Coast Guard revised the base rates so that once 
the impact of the weighting factors are considered, the total cost of 
pilotage will be equal to the revenue needed. To do this, we divide the 
initial base rates, calculated in Step 7, by the average weighting 
factors, calculated in Step 8, as shown in table 31.

                                          Table 31--Revised Base Rates
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (initial rate/
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................            $931            1.27            $733
District One: Undesignated......................................             641            1.30             493
District Two: Undesignated......................................             701            1.32             531
District Two: Designated........................................             796            1.32             603

[[Page 20572]]

 
District Three: Undesignated....................................             398            1.30             306
District Three: Designated......................................             772            1.30             594
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish that the rates do meet 
the goal of ensuring safe, efficient and reliable pilotage, the 
Director considered whether the rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods and whether 
there are sufficient pilots to handle those heavy traffic periods. 
Also, the Director considered whether the rates will cover operating 
expenses and infrastructure costs, and took average traffic and 
weighting factors into consideration. Finally, in giving consideration 
to the public interest, we estimated that the new shipping rates would 
not have a negative impact on the competitive market for regional 
shipping services. Based on this information, the Director is not 
establishing any alterations to the rates in this step. We then 
modified the text in Sec.  401.405(a) to reflect the final rates, also 
shown in table 32.

                                              Table 32--Final Rates
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2018     Proposed 2019    Final 2019
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated..............  St. Lawrence River......            $653            $698            $733
District One: Undesignated............  Lake Ontario............             435             492             493
District Two: Undesignated............  Lake Erie...............             497             530             531
District Two: Designated..............  Navigable waters from                593             632             603
                                         Southeast Shoal to Port
                                         Huron, MI.
District Three: Undesignated..........  Lakes Huron, Michigan,               271             304             306
                                         and Superior.
District Three: Designated............  St. Mary's River........             600             602             594
----------------------------------------------------------------------------------------------------------------

K. Surcharges

    Because there are several applicant pilots in 2019, the Coast Guard 
is levying surcharges to cover the costs needed for training expenses. 
Consistent with previous years, we are assigning a cost of $150,000 per 
applicant pilot. To develop the surcharge, we multiply the number of 
applicant pilots by the average cost per pilot to develop a total 
amount of training costs needed, and then impose that amount as a 
surcharge to all areas in the respective district, consisting of a 
percentage of revenue needed. In this year, there are two applicant 
pilots for District One, one applicant pilot for District Two, and four 
applicant pilots for District Three. The calculations to develop the 
surcharges are shown in table 33. We note that while the percentages 
are rounded for simplicity, such rounding does not impact the revenue 
generated, as surcharges can no longer be collected once the surcharge 
total has been attained.

                                        Table 33--Surcharge Calculations
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Number of applicant pilots......................................               2               1               4
Total applicant training costs..................................        $300,000        $150,000        $600,000
Revenue needed (Step 6).........................................      $9,271,852      $7,864,224      $9,802,109
                                                                 -----------------------------------------------
    Total surcharge as percentage (total training costs/revenue)              3%              2%              6%
----------------------------------------------------------------------------------------------------------------

VII. Regulatory Analyses

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

A. Regulatory Planning and Review

    Executive Orders 12866 (Regulatory Planning and Review) and 13563 
(Improving Regulation and Regulatory Review) direct agencies to assess 
the costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Order 13771 (Reducing Regulation and

[[Page 20573]]

Controlling Regulatory Costs) directs agencies to reduce regulation and 
control regulatory costs and provides that ``for every one new 
regulation issued, at least two prior regulations be identified for 
elimination, and that the cost of planned regulations be prudently 
managed and controlled through a budgeting process.''
    The Office of Management and Budget (OMB) has not designated this 
rule a significant regulatory action under section 3(f) of Executive 
Order 12866. Accordingly, OMB has not reviewed it. Because this rule is 
not a significant regulatory action, this rule is exempt from the 
requirements of Executive Order 13771. See the OMB Memorandum titled, 
``Guidance Implementing Executive Order 13771, titled `Reducing 
Regulation and Controlling Regulatory Costs' '' (April 5, 2017). A 
regulatory analysis follows.
    The purpose of this rulemaking is to establish new base pilotage 
rates and surcharges for training. The Great Lakes Pilotage Act of 1960 
requires that rates be established or reviewed and adjusted each year. 
The Act requires that base rates be established by a full ratemaking at 
least once every five years, and in years when base rates are not 
established, they must be reviewed and, if necessary, adjusted. The 
last full ratemaking was concluded in June of 2018. Table 34 summarizes 
the affected population, costs, and benefits of the rate changes. The 
Coast Guard estimates an increase in cost of approximately $2.83 
million to industry as a result of the change in revenue needed in 2019 
when compared to the revenue needed in 2018.

                                 Table 34--Economic Impacts Due to Rate Changes
----------------------------------------------------------------------------------------------------------------
                                                           Affected
             Change                   Description         population             Costs             Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes....................  Under the Great     Owners and          $2,831,743 Due to   --New rates cover
                                   Lakes Pilotage      operators of 256    change in revenue   an association's
                                   Act of 1960, the    vessels             needed for 2019     necessary and
                                   Coast Guard is      journeying the      ($27,988,185)       reasonable
                                   required to         Great Lakes         from revenue        operating
                                   review and adjust   system annually,    needed for 2018     expenses.
                                   base pilotage       51 U.S. Great       ($25,156,442) as   --Promotes safe,
                                   rates annually.     Lakes pilots, and   shown in Table 36   efficient, and
                                                       3 pilotage          below.              reliable pilotage
                                                       associations.                           service on the
                                                                                               Great Lakes.
                                                                                              --Provides fair
                                                                                               compensation,
                                                                                               adequate
                                                                                               training, and
                                                                                               sufficient rest
                                                                                               periods for
                                                                                               pilots.
                                                                                              --Ensures the
                                                                                               association
                                                                                               receives
                                                                                               sufficient
                                                                                               revenues to fund
                                                                                               future
                                                                                               improvements.
----------------------------------------------------------------------------------------------------------------

    Table 35 summarizes the changes in the regulatory analysis from the 
NPRM to the final rule. The Coast Guard made these changes either as a 
result of public comments received after publication of the NPRM, or to 
incorporate more recent inflation, security, and traffic data that 
became available after the publication of the NPRM. An in-depth 
discussion of these comments is located in Section V of the preamble; 
``Discussion of Comments.''

                              Table 35--Summary of Changes From NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
       Element of the analysis                   NPRM                  Final rule         Resulting change in RA
----------------------------------------------------------------------------------------------------------------
                          Changes Resulting from Public Comments and Errors in the NPRM
----------------------------------------------------------------------------------------------------------------
Operating Expenses (Step 1)..........  Omitted District 1       Corrected this error to  Data affects the
                                        capital expenditures.    account for District 1   calculation of
                                                                 capital expenditures     projected revenues.
                                                                 totaling $466,940.
                                       Omitted the cost of      Corrected this error     .......................
                                        health care benefits     and adjusted the
                                        for applicant pilots     operating expenses to
                                        in both District 2 and   both District 2 and
                                        District 3.              District 3 by $60,031.
                                       Incorrectly deducted     Removed deduction......  .......................
                                        $1,292 from District 3
                                        for legal fees.
                                       As the result of a       Corrected this error...  .......................
                                        mathematical error, we
                                        accidently excluded
                                        $77,051 worth of
                                        District 2
                                        administrative
                                        expenses from the
                                        their total operating
                                        expenses.
                                       Total Operating          Total Operating          .......................
                                        Expenses from Step 1     Expenses from Step 1
                                        (the sum of the totals   (the sum of the totals
                                        from Tables 3-5):        from Tables 3-5):
                                        $6,484,651.              $7,149,996.
Traffic and Transit data.............  Used incorrect 2017      Corrected this error...  No impact on RA.
                                        traffic numbers for                               Affects the
                                        District 3.                                       calculation of the
                                                                                          base rates, but not
                                                                                          the projected
                                                                                          revenues.

[[Page 20574]]

 
Pilotage Costs as a Percentage of      The RA included this     Removed this analysis    Analysis is no longer
 Total Vessel Costs.                    analysis, which          from the RA based on     included in the RA.
                                        calculated pilotage      public comments on the
                                        costs as a percentage    underlying data.
                                        of total voyage costs.
----------------------------------------------------------------------------------------------------------------
                            Changes that Incorporate the Most Recently Available Data
----------------------------------------------------------------------------------------------------------------
Inflation and securities data........  Used inflation and       Uses 2018 data when      Data affects the
                                        securities data          applicable and           calculation of
                                        through 2017, which      available.               projected revenues.
                                        was the most current
                                        year available.
Traffic and Transit data.............  Used traffic and         Uses 2018 data.........  No impact on RA.
                                        transit data through                              Affects the
                                        2017, which was the                               calculation of the
                                        most current year                                 base rates, but not
                                        available.                                        the projected
                                                                                          revenues.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on 
the Great Lakes annually. See Sections III and IV of this preamble for 
detailed discussions of the legal basis and purpose for this rulemaking 
and for background information on Great Lakes pilotage ratemaking. 
Based on our annual review for this rulemaking, we are adjusting the 
pilotage rates for the 2019 shipping season to generate sufficient 
revenues for each district to reimburse its necessary and reasonable 
operating expenses, fairly compensate trained and rested pilots, and 
provide an appropriate working capital fund to use for improvements. 
The rate changes in this rulemaking will lead to an increase in the 
cost per unit of service to shippers in all three districts, and result 
in an estimated annual cost increase to shippers. We estimate this rule 
will increase the total payments made by shippers during the 2019 
shipping season by approximately $2,831,743 when compared with total 
payments that were estimated in 2018, which is an 11 percent increase 
(table 36).\81\
---------------------------------------------------------------------------

    \81\ Total payments across all three districts are equal to the 
increase in payments incurred by shippers as a result of the rate 
changes plus the temporary surcharges applied to traffic in 
Districts One, Two, and Three.
---------------------------------------------------------------------------

    A detailed discussion of our economic impact analysis follows.
Affected Population
    This rule will impact U.S. Great Lakes pilots, the three pilot 
associations, and the owners and operators of oceangoing vessels that 
transit the Great Lakes annually. As discussed in Step 3 in Section 
VI.C of this preamble, there will be 51 pilots working during the 2019 
shipping season. The shippers affected by these rate changes are those 
owners and operators of domestic vessels operating ``on register'' 
(employed in foreign trade) and owners and operators of non-Canadian 
foreign vessels on routes within the Great Lakes system. These owners 
and operators must have pilots or pilotage service as required by 46 
U.S.C. 9302. There is no minimum tonnage limit or exemption for these 
vessels. The statute applies only to commercial vessels and not to 
recreational vessels. U.S.-flagged vessels not operating on register 
and Canadian ``lakers,'' which account for most commercial shipping on 
the Great Lakes, are not required by 46 U.S.C. 9302 to have pilots. 
However, these U.S.- and Canadian-flagged lakers may voluntarily choose 
to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged 
may opt to have a pilot for varying reasons, such as unfamiliarity with 
designated waters and ports, or for insurance purposes.
    The Coast Guard used billing information from the years 2015 
through 2017 from the Great Lakes Pilotage Management System (GLPMS) to 
estimate the average annual number of vessels affected by the rate 
adjustment. The GLPMS tracks data related to managing and coordinating 
the dispatch of pilots on the Great Lakes, and billing in accordance 
with the services. In Step 7 of the methodology, we use a 10-year 
average to estimate the traffic. We use three years of the most recent 
billing data to estimate the affected population. When we reviewed 10 
years of the most recent billing data, we found the data included 
vessels that have not used pilotage services in recent years. We 
believe using three years of billing data is a better representation of 
the vessel population that is currently using pilotage services and 
would be impacted by this rulemaking. We found that 448 unique vessels 
used pilotage services during the years 2015 through 2017. That is, 
these vessels had a pilot dispatched to the vessel, and billing 
information was recorded in the GLPMS. Of these vessels, 418 were 
foreign-flagged vessels and 30 were U.S.-flagged vessels. As previously 
stated, U.S.-flagged vessels not operating on register are not required 
to have a registered pilot per 46 U.S.C. 9302, but they can voluntarily 
choose to have one.
    Numerous factors affect vessel traffic which varies from year to 
year. Therefore, rather than the total number of vessels over the time 
period, an average of the unique vessels using pilotage services from 
the years 2015 through 2017 is the best representation of vessels 
estimated to be affected by the rate in this rulemaking. From 2015 
through 2017, an average of 256 vessels used pilotage services 
annually.\82\ On average, 241 of these vessels were foreign-flagged 
vessels and 15 were U.S.-flagged vessels that voluntarily opted into 
the pilotage service.
---------------------------------------------------------------------------

    \82\ Some vessels entered the Great Lakes multiple times in a 
single year, affecting the average number of unique vessels 
utilizing pilotage services in any given year.
---------------------------------------------------------------------------

Total Cost to Shippers
    The rate changes resulting from this adjustment to the rates will 
add new costs to shippers in the form of higher payments to pilots. The 
Coast Guard estimates the effect of the rate changes on shippers by 
comparing the total projected revenues needed to cover costs in 2018 
with the total projected revenues to cover costs in 2019, including any 
temporary surcharges we have authorized. We set pilotage rates so that 
pilot associations receive enough revenue to cover their necessary and 
reasonable expenses. Shippers pay these rates when they have a pilot as 
required by 46 U.S.C. 9302. Therefore, the aggregate payments of 
shippers to pilot associations are equal to the projected necessary 
revenues for pilot associations. The revenues each year represent the 
total costs that shippers must pay for pilotage services, and the 
change in revenue from the previous year is the additional cost to 
shippers discussed in this rule.

[[Page 20575]]

    The impacts of the rate changes on shippers are estimated from the 
District pilotage projected revenues (shown in tables 15 through 17 of 
this preamble) and the surcharges described in Section VI.K of this 
preamble. The Coast Guard estimates that for the 2019 shipping season, 
the projected revenue needed for all three districts is $26,938,185. 
This $26,938,185 in revenue does not include the temporary surcharges 
on traffic in Districts One, Two, and Three which will be applied for 
the duration of the 2019 season in order for the pilotage associations 
to recover training expenses incurred for applicant pilots. We estimate 
that the pilotage associations will require $300,000, $150,000, and 
$600,000 in revenue for applicant training expenses in Districts One, 
Two, and Three, respectively. This will represent a total cost of 
$1,050,000 to shippers during the 2019 shipping season. Adding the 
projected revenue of $26,938,185 to the surcharges, we estimate the 
pilotage associations' total projected revenue needed for 2019 will be 
$27,988,185.
    To estimate the additional cost to shippers from this rule, the 
Coast Guard compared the 2019 total projected revenues to the 2018 
projected revenues. Because we review and prescribe rates for the Great 
Lakes Pilotage annually, the effects are estimated as a single-year 
cost rather than annualized over a 10-year period. In the 2018 
rulemaking, \83\ we estimated the total projected revenue needed for 
2018, including surcharges, as $25,156,442. This is the best 
approximation of 2018 revenues as, at the time of this publication, we 
do not have enough audited data available for the 2018 shipping season 
to revise these projections. Table 36 shows the revenue projections for 
2018 and 2019 and details the additional cost increases to shippers by 
area and district as a result of the rate changes and temporary 
surcharges on traffic in Districts One, Two, and Three.
---------------------------------------------------------------------------

    \83\ The 2018 projected revenues are from the 2018 Great Lakes 
Pilotage Ratemaking final rule (83 FR 26189), Table 41.

                                                    Table 36--Effect of the Rule by Area and District
                                                                 [$U.S.; non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Total 2018                                      Total 2019      Additional
                  Area                    Revenue needed  2018 Temporary     projected    Revenue needed  2019 Temporary     projected     costs of this
                                              in 2018        surcharge        revenue         in 2019        surcharge        revenue          rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District 1.......................      $7,988,670        $300,000      $8,288,670      $9,271,852        $300,000      $9,571,852      $1,283,182
Total, District 2.......................       7,230,300         150,000       7,380,300       7,864,224         150,000       8,014,224         633,924
Total, District 3.......................       8,887,472         600,000       9,487,472       9,802,109         600,000      10,402,109         914,637
                                         ---------------------------------------------------------------------------------------------------------------
    System Total........................      24,106,442       1,050,000      25,156,442      26,938,185       1,050,000      27,988,185       2,831,743
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting difference between the projected revenue in 2018 and 
the projected revenue in 2019 is the annual change in payments from 
shippers to pilots as a result of the rate change imposed by this rule. 
The effect of the rate change to shippers varies by area and district. 
The rate changes, after taking into account the increase in pilotage 
rates and the addition of temporary surcharges, will lead to affected 
shippers operating in District One, District Two, and District Three 
experiencing an increase in payments of $1,283,182, $633,924, and 
$914,637, respectively, over the previous year. The overall adjustment 
in payments will be an increase in payments by shippers of $2,831,743 
across all three districts (an 11 percent increase over 2018). Again, 
because the Coast Guard reviews and sets rates for Great Lakes Pilotage 
annually, we estimate the impacts as single-year costs rather than 
annualizing them over a 10-year period.
    Table 37 shows the difference in revenue by component from 2018 to 
2019.\84\ The majority of the increase in revenue is due to the 
inflation of operating expenses and to the addition of two pilots who 
were authorized in the 2018 rule. These two pilots were in training in 
2018 and will become full-time working pilots at the beginning of the 
2019 shipping season. The target compensation for these pilots is 
$359,887 per pilot. The addition of these pilots to full working status 
accounts for $719,774 of the increase ($1,082,472 when also including 
the effect of increasing compensation for 49 pilots). The remaining 
amount is attributed to increases in the working capital fund.
---------------------------------------------------------------------------

    \84\ The 2018 projected revenues are from the 2018 final rule 
(83 FR 26189), table 41. The 2019 projected revenues are from tables 
15-17 of this rule.

                                  Table 37--Difference in Revenue by Component
----------------------------------------------------------------------------------------------------------------
                                                                                                    Percentage
                                                  Revenue needed  Revenue needed    Difference     increase from
               Revenue component                     in 2018          in 2019     (2019 Revenue -  previous year
                                                                                   2018 Revenue)        (%)
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses....................      $5,965,599       $7,565,310      $1,599,711              27
Total Target Pilot Compensation................      17,271,765       18,354,237       1,082,472               6
Working Capital Fund...........................         869,078        1,018,638         149,560              17
Total Revenue Needed, without Surcharge........      24,106,442       26,938,185       2,831,743              12
Surcharge......................................       1,050,000        1,050,000               0               0
                                                ---------------------------------
    Total Revenue Needed, with Surcharge.......      25,156,442       27,988,185       2,831,743              11
----------------------------------------------------------------------------------------------------------------

[[Page 20576]]

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

B. Small Entities

    Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, the Coast 
Guard has considered whether this rule will have a significant economic 
impact on a substantial number of small entities. The term ``small 
entities'' comprises small businesses, not-for-profit organizations 
that are independently owned and operated and are not dominant in their 
fields, and governmental jurisdictions with populations of less than 
50,000.
    For the rule, the Coast Guard reviewed recent company size and 
ownership data for the vessels identified in the GLPMS, and we reviewed 
business revenue and size data provided by publicly available sources 
such as Manta \85\ and ReferenceUSA.\86\ As described in Section VII.A 
of this preamble, Regulatory Planning and Review, we found that a total 
of 448 unique vessels used pilotage services from 2015 through 2017. 
These vessels are owned by 57 entities. We found that of the 57 
entities that own or operate vessels engaged in trade on the Great 
Lakes affected by this rule, 47 are foreign entities that operate 
primarily outside the United States. The remaining ten entities are 
U.S. entities. We compared the revenue and employee data found in the 
company search to the Small Business Administration's (SBA) small 
business threshold as defined in the SBA's Table of Small Business Size 
Standards \87\ to determine how many of these companies are small 
entities. Table 38 shows the North American Industry Classification 
System (NAICS) codes of the U.S. entities and the small entity standard 
size established by the SBA.
---------------------------------------------------------------------------

    \85\ See https://www.manta.com/.
    \86\ See http://resource.referenceusa.com/.
    \87\ See: https://www.sba.gov/document/support--table-size-standards. SBA has established a Table of Small Business Size 
Standards, which sets small business sized standards by NAICS code. 
A size standard, which is usually stated in number of employees or 
average annual receipts (``revenues''), represents the largest size 
that a business (including its subsidiaries and affiliates) may be 
considered in order to remain classified as a small business for SBA 
and Federal contracting programs.

         Table 38--NAICS Codes and Small Entities Size Standards
------------------------------------------------------------------------
                                                     Small business size
          NAICS                   Description              standard
------------------------------------------------------------------------
238910...................  Site Preparation          $15 million.
                            Contractors.
483211...................  Inland Water Freight      750 employees.
                            Transportation.
487210...................  Scenic & Sightseeing      $7.5 million.
                            Transportation, Water.
488330...................  Navigational Services to  $38.5 million.
                            Shipping.
488510...................  Freight Transportation    $15 million.
                            Arrangement.
561510...................  Travel Agencies.........  $20.5 million.
------------------------------------------------------------------------

    Of the ten U.S. entities, nine exceed the SBA's small business 
standards for small businesses. To estimate the potential impact on the 
one small entity, the Coast Guard used their 2017 invoice data to 
estimate their pilotage costs in 2019. We increased their 2017 costs to 
account for the changes in pilotage rates resulting from this rule and 
the 2018 final rule (83 FR 26189).\88\ We then estimated the change in 
cost to this entity resulting from this rule by subtracting their 
estimated 2018 costs from their estimated 2019 costs, and compared this 
change with their annual revenue. We also compared their total 
estimated 2019 pilotage cost to their annual revenue and in both cases 
their estimated pilotage cost was below 1 percent of their annual 
revenue. In addition, we do not expect the rule will significantly 
impact any of these ten entities, including the one small entity, 
because these U.S. entities operate U.S.-flagged vessels and are not 
required to have pilots as required by 46 U.S.C. 9302.
---------------------------------------------------------------------------

    \88\ For confidentiality reasons we are unable to provide this 
vessel's 2017 pilotage costs or its estimated 2018 and 2019 pilotage 
costs.
---------------------------------------------------------------------------

    In addition to the owners and operators of vessels affected by this 
rule, there are three U.S. entities that will be affected by this rule 
that receive revenue from pilotage services. These are the three pilot 
associations that provide and manage pilotage services within the Great 
Lakes districts. Two of the associations operate as partnerships, and 
one operates as a corporation. These associations are designated with 
the same NAICS industry classification and small-entity size standards 
described above, but they have fewer than 500 employees; combined, they 
have approximately 65 employees in total, and, therefore, they are 
designated as small entities. The Coast Guard expects no adverse effect 
on these entities from this rule because all associations will receive 
enough revenue to balance the projected expenses associated with the 
projected number of bridge hours (time on task) and pilots.
    The Coast Guard did not find any small not-for-profit organizations 
that are independently owned and operated and are not dominant in their 
fields that will be impacted by this rule. We did not find any small 
governmental jurisdictions with populations of fewer than 50,000 people 
that will be impacted by this rule. Based on this analysis, we conclude 
this rulemaking will not affect a substantial number of small entities, 
nor have a significant economic impact on any of the affected entities.
    Therefore, the Coast Guard certifies under 5 U.S.C. 605(b) that 
this rule will not have a significant economic impact on a substantial 
number of small entities.

C. Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement 
Fairness Act of 1996, Public Law 104-121, the Coast Guard offers to 
assist small entities in understanding this rule so that they can 
better evaluate its effects on them and participate in the rulemaking. 
We will not retaliate against small entities that question or complain 
about this rule or any policy or action of the Coast Guard.

[[Page 20577]]

    Small businesses may send comments on the actions of Federal 
employees who enforce, or otherwise determine compliance with, Federal 
regulations to the Small Business and Agriculture Regulatory 
Enforcement Ombudsman and the Regional Small Business Regulatory 
Fairness Boards. The Ombudsman evaluates these actions annually and 
rates each agency's responsiveness to small business. If you wish to 
comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR 
(1-888-734-3247).

D. Collection of Information

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

E. Federalism

    A rule has implications for federalism under Executive Order 13132 
(Federalism) if it has a substantial direct effect on States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. The Coast Guard has analyzed this final rule under 
Executive Order 13132 and have determined that it is consistent with 
the fundamental federalism principles and preemption requirements 
described in Executive Order 13132. Our analysis follows.
    Congress directed the Coast Guard to establish ``rates and charges 
for pilotage services.'' See 46 U.S.C. 9303(f). This regulation is 
issued pursuant to that statute and is preemptive of State law as 
specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a ``State or 
political subdivision of a State may not regulate or impose any 
requirement on pilotage on the Great Lakes.'' As a result, States or 
local governments are expressly prohibited from regulating within this 
category. Therefore, this rule is consistent with the fundamental 
federalism principles and preemption requirements described in 
Executive Order 13132.
    While it is well settled that States may not regulate in categories 
in which Congress intended the Coast Guard to be the sole source of a 
vessel's obligations, the Coast Guard recognizes the key role that 
State and local governments may have in making regulatory 
determinations. Additionally, for rules with federalism implications 
and preemptive effect, Executive Order 13132 specifically directs 
agencies to consult with State and local governments during the 
rulemaking process. If you believe this rule has implications for 
federalism under Executive Order 13132, please contact the person 
listed in the FOR FURTHER INFORMATION section of this preamble.

F. Unfunded Mandates Reform Act

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

G. Taking of Private Property

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

H. Civil Justice Reform

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

I. Protection of Children

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

J. Indian Tribal Governments

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

K. Energy Effects

    The Coast Guard has analyzed this rule under Executive Order 13211 
(Actions Concerning Regulations That Significantly Affect Energy 
Supply, Distribution, or Use). We have determined that it is not a 
``significant energy action'' under that order because it is not a 
``significant regulatory action'' under Executive Order 12866 and is 
not likely to have a significant adverse effect on the supply, 
distribution, or use of energy, and the Administrator of OMB's Office 
of Information and Regulatory Affairs has not designated it as a 
significant energy action.

L. Technical Standards

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

M. Environment

    The Coast Guard has analyzed this rule under Department of Homeland 
Security Management Directive 023-01and Commandant Instruction 
M16475.lD (COMDTINST M16475.1D), which guide the Coast Guard in 
complying with the National Environmental Policy Act of 1969 (42 U.S.C. 
4321-4370f), and have determined that this action is not likely to have 
a significant effect on the human environment. A Record of 
Environmental Consideration (REC) supporting this determination is 
available in the docket where indicated under the ADDRESSES section of 
this preamble. This rule is categorically excluded under paragraph A3 
of table 1, particularly subparts (a), (b), and (c) in Appendix A of 
DHS Directive 023-01(series). CATEX A3 pertains to promulgation of 
rules and procedures that are: (a) Strictly administrative or 
procedural in nature; (b) that implement, without substantive change, 
statutory or regulatory requirements; or (c) that implement, without 
substantive change, procedures, manuals, and other guidance documents. 
This rule adjusts base pilotage rates and surcharges for administering 
the 2019 shipping season in accordance with applicable statutory and 
regulatory mandates, and also makes technical changes to the Great 
Lakes pilotage ratemaking methodology.

[[Page 20578]]

List of Subjects

46 CFR Part 401

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

46 CFR Part 404

    Great Lakes, Navigation (water), Seamen.

    For the reasons discussed in the preamble, the Coast Guard amends 
46 CFR part 401 as follows:

PART 401--GREAT LAKES PILOTAGE REGULATIONS

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

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

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

Sec.  401.405  Pilotage rates and charges.

    (a) The hourly rate for pilotage service on--
    (1) The St. Lawrence River is $733;
    (2) Lake Ontario is $493;
    (3) Lake Erie is $531;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$603;
    (5) Lakes Huron, Michigan, and Superior is $306; and
    (6) The St. Mary's River is $594.
* * * * *

PART 404--GREAT LAKES PILOTAGERATEMAKING

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

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

Sec.  404.2   [Amended]

0
4. Amend Sec.  404.2 by removing paragraph (b)(6).

Sec.  404.104   [Amended]

0
5. Amend Sec.  404.104 in paragraph (c) by removing the reference 
``Sec.  404.103(d)'' and adding in its place ``Sec.  404.103''.

    Dated: May 6, 2019.
John P. Nadeau,
Admiral, U.S. Coast Guard, Assistant Commandant for Prevention Policy.
[FR Doc. 2019-09657 Filed 5-9-19; 8:45 am]
 BILLING CODE 9110-04-P