Document ID: USCG-2016-0268-0059
Agency: uscg
Document Type: Rule
Title: Great Lakes Pilotage Rates- 2017 Annual Review
Posted Date: 2017-08-31T04:00Z

[Federal Register Volume 82, Number 168 (Thursday, August 31, 2017)]
[Rules and Regulations]
[Pages 41466-41496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18411]

[[Page 41465]]

Vol. 82

Thursday,

No. 168

August 31, 2017

Part II

Department of Homeland Security

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Coast Guard

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46 CFR Parts 401, 403, and 404

Great Lakes Pilotage Rates--2017 Annual Review; Final Rule

  Federal Register / Vol. 82 , No. 168 / Thursday, August 31, 2017 / 
Rules and Regulations  

[[Page 41466]]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2016-0268]
RIN 1625-AC34

Great Lakes Pilotage Rates--2017 Annual Review

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In this final rule, the Coast Guard is setting new rates for 
the 2017 shipping season for pilotage services on the Great Lakes. The 
Coast Guard is also updating its methodology for setting these rates. 
These updates to the methodology will incorporate the income generated 
from weighting factors into the ratemaking methodology used to set 
rates in this and future rulemakings. The Coast Guard believes that the 
new rates will continue to encourage pilot retention, ensure safe, 
efficient, and reliable pilotage services on the Great Lakes, and 
provide adequate funds to upgrade and maintain infrastructure.

DATES: This final rule is effective October 2, 2017.

FOR FURTHER INFORMATION CONTACT: For information about this document 
call or email Todd Haviland, Director, Great Lakes Pilotage, Coast 
Guard; telephone 202-372-2037, email todd.a.haviland@uscg.mil.

Executive Summary

    This final rule amends the Coast Guard's Great Lakes pilotage 
regulations by revising the current methodology by which the Coast 
Guard sets base rates for U.S. pilotage service on the Great Lakes, as 
well as revises the pilotage rates for the remaining portion of the 
2017 shipping season. The new methodology adjusts target pilot 
compensation by inflation, incorporates revenue derived from weighting 
factor charges into the ratemaking model, and eliminates the provision 
that the hourly pilotage rate for designated waters could not rise 
above twice the rate for undesignated waters. We believe that the new 
methodology will continue to encourage pilot retention, ensure safe, 
efficient, and reliable pilotage services on the Great Lakes, and 
provide adequate funds to upgrade and maintain infrastructure.
    In addition to the changes in ratemaking methodology, this final 
rule makes several other additions to Great Lakes Pilotage regulations. 
It adds new language to billing practices for cancellation charges, 
clarifying that the minimum charge for canceling the request for a 
pilot is four hours plus reasonable travel expenses. The final rule 
also inserts a new mandatory change point at the Iroquois Lock point, 
ensuring that pilots are adequately rested on this stretch of water. 
Finally, we have made some textual changes to the regulations to better 
convey their intent, renaming the ``return on investment'' as ``working 
capital fund,'' and renaming the 2016 final rule staffing model as the 
``seasonal staffing model.''
    Based on comments received, several items proposed in the NPRM were 
not adopted in this final rule. The Coast Guard has chosen not to adopt 
the 2107 NPRM staffing model, based on compelling arguments that this 
model did not accurately reflect the unpredictable workload of Great 
Lakes pilots. Furthermore, we did not move forward on our proposal to 
move the deadline for audited financial reports from April to January, 
based on commenters' arguments that this practice would impose hardship 
out of proportion to its benefit.
    Based on updated financial information, increased pilot 
compensation, the new weighting factor calculations, and other changes 
to the ratemaking methodology, the revised Great Lakes pilotage rates 
are being lowered in most areas. We believe that this is a needed 
correction to better align our projected revenues with the pilot 
associations' actual collections, as evidence shows that pilotage 
revenue significantly exceeded what was projected in 2016, even 
factoring in above-average traffic. The changes in the rates are as 
follows:

                                      Table E-1--Changes in Pilotage Rates
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                                                                     Previous
                                                                     pilotage      New pilotage     Change per
                              Area                                 charges  per     charges per      hour  ($)
                                                                     hour  ($)       hour  ($)
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St. Lawrence River..............................................             580             601             +21
Lake Ontario....................................................             398             408             +10
Navigable waters from Southeast Shoal to Port Huron, MI.........             684             580            -104
Lake Erie.......................................................             448             429             -19
St. Mary's River................................................             528             514             -14
Lakes Huron, Michigan, and Superior.............................             264             218             -46
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SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations
II. Regulatory History
III. Basis and Purpose
IV. Discussion of Comments and Changes
V. 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

APA American Pilots Association
CFR Code of Federal Regulations
DHS Department of Homeland Security
FR Federal Register
GLPA Great Lakes Pilotage Authority
GLPAC Great Lakes Pilotage Advisory Committee
MM&P International Organization of Masters, Mates & Pilots
MOU Memorandum of Understanding
NPRM Notice of proposed rulemaking
RA Regulatory analysis
Sec.  Section symbol
SNPRM Supplemental notice of proposed rulemaking
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code

II. Regulatory History

    The Coast Guard published a notice of proposed rulemaking (NPRM) 
for this final rule on October 19, 2016 (81 FR 72011), covering a range 
of issues including revised operational expenses,

[[Page 41467]]

a proposed new methodology for calculating pilotage numbers, the 
addition of a mandatory change point at Iroquois Lock, and revised base 
pilotage rates. In response, we received 21 public comment letters, 
covering a diverse range of subjects and providing a substantial amount 
of information. Subsequently, on April 5, the Coast Guard issued a 
supplemental notice of proposed rulemaking (SNPRM) proposing to add two 
additional steps to the ratemaking methodology, which would incorporate 
the additional revenues collected under 46 CFR 404.100 (the ``weighting 
factors'') into the ratemaking model. We received 11 public comment 
letters on the SNPRM.
    The Coast Guard received numerous comments in response to the 
issues raised in the NPRM and SNPRM. These commenters have largely come 
from Great Lakes maritime shipping stakeholders--both the pilots that 
perform pilotage services as well as the shipping companies that pay 
the pilotage fees--as well as other interested parties. We have closely 
analyzed all of the comment letters and have, where appropriate, 
incorporated ideas and suggestions from the comments into the analysis 
of our final rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960 (the Act),\1\ which requires U.S. vessels operating ``on 
register'' \2\ 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, 
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\ We limit the 
allowable costs of providing this service by ensuring that all 
allowable expenses are necessary and reasonable for providing pilotage 
services on the Great Lakes. We believe the public is best served by a 
safe, efficient, and reliable pilotage service. The goal of our 
methodology and billing scheme is to generate sufficient revenue for 
the pilots to provide the service we require. The Act requires that 
base rates be established by a full ratemaking at least once every 5 
years, and in years when base rates are not established, they must be 
reviewed and, if necessary, adjusted. The Secretary has delegated 
authority under the Act to the Coast Guard.\5\
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    \1\ Public Law 86-555, 74 Stat. 259, as amended; currently 
codified as 46 U.S.C. Chapter 93.
    \2\ ``On register'' means that the vessel's certificate of 
documentation has been endorsed with a registry endorsement, and 
therefore, may be employed in foreign trade or trade with Guam, 
American Samoa, Wake, Midway, or Kingman Reef. 46 U.S.C. 12105, 46 
CFR 67.17.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ See 46 U.S.C. 9303(f) for all of the Act's pilotage 
ratemaking requirements discussed in this paragraph.
    \5\ DHS Delegation No. 0170.1, para. II (92.f).
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    The purpose of this rule is to change our annual Great Lakes 
pilotage ratemaking methodology, set new rates using that methodology, 
authorize a temporary hiring and training surcharge, and make several 
other adjustments. For more information on the goals and proposals in 
this rulemaking, see the discussion section in the NPRM \6\ and 
SNPRM.\7\
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    \6\ 81 FR 72011 (October 19, 2016).
    \7\ 82 FR 2115 (May 5, 2017).
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IV. Discussion of Comments and Changes

    In this section, the Coast Guard reviews the comments received, and 
provides responses accordingly. In instances where multiple commenters 
provided insight into similar issues, we have grouped those comments 
into general categories. Wherever possible, we have attempted to 
provide citations to the particular comment referenced, and have tried 
to verify any data provided by the commenter. We have divided the 
comments up into four general categories: (1) General policy issues; 
(2) Rate calculation issues; (3) Incorporation of the weighting factors 
into the ratemaking methodology; and (4) Items for future 
consideration. These general categories have been further subdivided by 
issue, as discussed below.

A. General Policy Issues

    The most frequently cited issue, raised by numerous commenters, 
concerned the costs of pilotage. In the NPRM, we proposed a variety of 
increases in pilotage rates. However, in the subsequent SNPRM, we 
proposed accounting for the weighting factor and thus lowered hourly 
pilotage rates accordingly. Numerous commenters, generally aligned with 
entities that ship goods or pay for shipping on the Great Lakes, made 
statements on the recent increases in the cost of pilotage over the 
last several years. For example, one commenter \8\ stated that the 
proposed increase to U.S. pilotage rates constitutes a 15 percent 
increase, with a total increase of 99 percent since 2014, and that this 
is on top of a 94 percent increase already imposed on shippers since 
2006. Other commenters \9\ cited different, albeit similar figures, 
stating that pilotage costs have increased by 40 percent over three 
years, and cited the NPRM as saying that pilotage costs now constituted 
19 percent of total voyage costs on the Saint Lawrence Seaway.
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    \8\ See docket # USCG-2016-0268-0039, p.1.
    \9\ Docket # USCG-2016-0268-0019, p.1; docket # USCG-2016-0268-
0020, p.1.
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    We acknowledge that the some pilotage rates have increased in the 
past few years. In our revisions to the methodology, we have eliminated 
several ancillary fees and changed the billing scheme to meet our goal 
of aligning projected revenues with the actual association collections. 
We agree that the total revenues needed by the 3 U.S. Great Lakes Pilot 
Associations has increased about 40 percent over the past three years 
if we include the temporary surcharges, after many years of the pilot 
associations being unable to collect the amount of money our 
projections indicated would be appropriate. The additional pilots added 
to ensure continued safe, efficient and reliable pilotage service are 
the primary reason for the recent rate increases. It is important to 
note, however, that we have revised the temporary surcharges 
requirements so the revenues collected for the temporary surcharges 
will be removed from the expense base of future rates to ensure that 
the shippers do not pay for the same expense twice. After carefully 
considering the comments and measuring and assigning values to the 
variables addressed in the ratemaking methodology, we believe the 
resultant pilotage rates are fair.
    One commenter \10\ argued that high pilotage rates were threatening 
the competitiveness of the St. Lawrence Seaway and Great Lakes system 
of shipping cargo, and that if the proposed rate increases for 2017 
were instituted, shippers may reach a ``tipping point'' where they 
choose alternate means to ship cargo. The commenter did not provide 
supporting documentation for this assertion, and we disagree with this 
statement. Our data indicates that demand for pilotage service in 2016 
was greater than 2015 and that demand for pilotage service through June 
2017 is trending around 20 percent higher than the 10-year average for 
the 2017 shipping season.
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    \10\ Docket # USCG-2016-0268-0034, p.1.
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    Other commenters argued that the recent increases in pilotage rates 
were necessary. One commenter stated that the recent, comparatively 
large increases were needed to correct inadequate increases in the 
past, arguing that ``recent seemingly disproportionate increases [in 
pilotage rates] would have been unnecessary as they could have

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been accommodated over time.'' \11\ Another commenter argued that the 
concern over pilotage costs was disingenuous, stating that the vast 
majority of shippers' pilotage cost results from Canadian pilotage, 
which is entirely unaffected by the U.S. pilotage rates.\12\
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    \11\ Docket # USCG-2016-0268-0037, p.1.
    \12\ Docket # USCG-2016-0268-0028, p.2.
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    We agree that the recent increases in pilotage rates since 2015 
have been warranted. We are well aware that for many years the Coast 
Guard's methodology for calculating pilotage rates produced rates that 
failed to raise the target revenue. We have had years where actual 
revenue was above the target revenue, but below the revenue that we 
would have projected given the actual demand. In 2016, revenue was 
higher even than what we would have expected given the demand. While 
2016 appears to be an outlier in that regard, it is our goal is to 
develop a methodology that aligns our projections with the actual 
amount of revenue the pilot associations generate based upon the 
realized demand for pilotage service. We believe that the methodology 
outlined in this final rule is a substantial improvement that will, on 
average, produce revenues that will cover operating expenses, pay for 
infrastructure maintenance and the training of new pilots, and offer 
compensation levels and a workload that will allow the pilot 
associations to recruit and retain pilots without producing excessive 
revenue to the detriment of shippers. We are willing to consider future 
adjustments as necessary to ensure revenue alignment. As discussed 
below, we believe that compensation levels are currently at a level 
that is effectively enticing pilots to join and stay in the workforce, 
and we are not substantially adjusting that in this final rule.
Difference in Pilotage Charges Between the United States and Canada
    Several commenters complained that the cost of similar pilotage 
services differed depending on whether ships were assigned a U.S. or 
Canadian pilot, and that such differences were contrary to arrangements 
between the United States and Canada regarding cooperation in 
management of pilotage in the Great Lakes system. One commenter said 
that pilotage costs are much higher when the vessel is assigned a U.S. 
pilot, stating that ``[f]or example, the pilotage expense for a Class 4 
vessel transiting from Thunder Bay to St. Lambert costs $39,490 when a 
Canadian pilot is used, and $29,327 more when a U.S. pilot provides 
pilotage services.'' \13\ The commenter argued that such a disparity is 
contrary to the 2013 Memorandum of Understanding (MOU) between the U.S. 
and the Canadian Great Lakes Pilotage Authority (GLPA), which states 
that the parties ``intend to arrange for the establishment of 
regulations imposing comparable rates and charges.'' \14\
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    \13\ Docket # USCG-2016-0268-0033, p.12.
    \14\ Docket # USCG-2016-0268-0033, p.12, citing ``Memorandum of 
Understanding, Great Lakes Pilotage, between the United States Coast 
Guard and the Great Lakes Pilotage Authority,'' Art. 7.
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    While the Coast Guard acknowledges that the rates for pilotage 
services are not identical, our rates for each given segment of a 
voyage are based upon an analysis of the historical pilotage hours and 
associated costs necessary to provide service on that segment. We 
cannot say how the Canadian GLPA determined the charges for 
corresponding voyage segments. We note that U.S. and Canadian pilots 
have different funding structures, infrastructure obligations, and 
compensation packages. There are other instances where U.S. pilotage 
rates are substantially lower than Canadian rates--for example, a 
harbor move on Lake Superior for a Class 2 vessel would cost $2,616.73 
under Canadian rates, while the same move would cost only $607.20 under 
U.S. rates (both prices are in U.S. dollars). While some may argue the 
pilotage rates should be identical, we believe that the rates must 
primarily cover the cost of operating expenses, infrastructure 
maintenance, and fair compensation, which is how we have developed the 
current methodology. We are not offering an opinion as to how 
differences in infrastructure and compensation funding may alter the 
rate calculations by the Canadian association.
    Finally, we also note that article 9 states that the MOU ``is not 
an international agreement and does not give rise to any international 
legal rights or obligations.'' The MOU is a non-binding agreement on 
cooperation between the Coast Guard and GLPA. The primary purpose of 
this document is to ensure an equitable share of work between the U.S. 
and Canadian registered pilots and coordinated pilotage service 
throughout the System. We interpret comparable rates to mean that the 
Coast Guard and GLPA will establish rates to cover costs incurred for 
providing pilotage service in the various areas, even though those 
costs may be different due to varying fee structures, distribution, 
labor costs, or other factors. For these reasons, while we acknowledge 
there are differences in the rates paid by the shipping companies, we 
still believe that basing the rates on the methodology described in 
this rulemaking is the most effective way to fund the U.S. Great Lakes 
pilot associations and necessary infrastructure.
Recruitment and Retention of Pilots
    One of the main goals of raising pilotage fees in recent Coast 
Guard rulemakings has been to reduce pilot attrition and attract new 
pilots to the region, ensuring a healthy number of mariners capable of 
handling the shipping traffic safely and with minimal delays. In the 
2016 final rule, we stated that, ``the [methodology established in the 
mid-1990s failed] to consider the totality of pilot time necessary to 
perform a given pilotage assignment, which often includes long transits 
to and from the vessel, resulting in low pilot compensation and 
overloaded work assignments.'' \15\
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    \15\ 81 FR at 11908 (March 7, 2016).
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    We received numerous comments from both pilots and shippers 
concerning pilot retention and attrition. Many commenters urged the 
Coast Guard to study pilot recruitment and retention factors, including 
the compensation of individual pilots, to determine the extent of the 
pilot retention problem and methods for combating low pilot retention. 
In response, we note that we have recently undertaken a target pilot 
compensation study, which we hope may help inform future rulemakings.
    Pilots and pilot associations also offered comments pertaining to 
retention and attrition. The Western Great Lakes Pilots Association 
\16\ presented a series of letters from pilots, including resignation 
letters and previous docket comments, explaining why they were 
resigning from the Association. These comments cited various reasons, 
including the risk of a downturn in traffic,\17\ and a lack of 
guaranteed time with their families.\18\ Similarly, other pilotage 
associations stated that Great Lakes pilots were paid substantially 
less than other U.S. marine pilots, and noted that certain pilots had 
left the Great Lakes for less prestigious positions in other areas.\19\
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    \16\ Docket # USCG-2016-0268-0027.
    \17\ Docket # USCG-2016-0268-0027, letter from Bruce Dunlap, 
Paul Radtke.
    \18\ Docket # USCG-2016-0268-0027, letter from Karl Hardesty, 
Rick Montoya.
    \19\ Docket # USCG-2016-0268-0027, letters from the Associated 
Branch Pilots of New Orleans, Association of Maryland Pilots.
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    The Coast Guard has recognized the pilotage recruitment and 
retention

[[Page 41469]]

challenges in the Great Lakes, but believes that the changes we have 
implemented in recent rulemakings have addressed those concerns. We 
note that while over the preceeding 10 years 31 pilots in the Great 
Lakes region voluntarily left pilot positions, only one pilot has left 
voluntarily in the past 3 years, a rate which is comparable to the 
extremely low voluntary quit rate for other U.S. pilotage associations. 
We believe that the new compensation levels, workload, ratemaking 
structures, and improvements to the billing scheme introduced in recent 
rulemakings have reduced attrition, and we are working closely with all 
stakeholders to ensure that wages, working conditions, and 
infrastructure concerns are addressed to increase the likelihood that 
well-trained pilots will remain with their associations until 
retirement.
Using Other Pilot Compensation as a Benchmark for GL Pilot Compensation
    Many commenters suggested that the Coast Guard should be using 
salaries for other U.S. pilots as a benchmark, rather than Canadian 
salaries, and noted that U.S. pilots in other areas often make far more 
in compensation. One commenter, the President of the Associated Branch 
Pilots for the Port of New Orleans, noted that the average pilot 
compensation for a pilot in that association was $459,051, and stated 
that a $312,000 target compensation level ``would leave the Great Lakes 
pilots among the lowest paid pilots in America.'' \20\ One commenter 
noted that using other U.S. pilot groups as a benchmark would make a 
comparison simpler, as the target compensation for many American pilots 
is set by state rate commissions and is publically available.\21\ 
Similarly, one commenter stated that the Great Lakes pilot associations 
compete with other American associations for recruits, and thus those 
associations would be a more appropriate benchmark for 
compensation.\22\ Several commenters \23\ provided figures on the total 
compensation of pilots in some other American systems, stating that 
those figures were often significantly over $400,000 annually per 
pilot, which is higher than the compensation target the Coast Guard has 
set for Great Lakes pilots.
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    \20\ Docket # USCG-2016-0268-0003, p.1.
    \21\ Docket # USCG-2016-0268-0028, p.6.
    \22\ Docket # USCG-2016-0268-0028, p.6.
    \23\ Docket # USCG-2016-0268-0028, p.7.
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    Conversely, the Great Lakes Shippers Association argued that the 
Coast Guard should not use the compensation of other American pilots as 
a basis for computing target compensation. The shipping association, as 
part of its comments on the use of a compensation benchmark,\24\ stated 
that the Coast Guard should not equalize pilot compensation across 
disparate geographies.\25\ The commenter argued that shipping is an 
inherently local affair, and that pilots are experts in particular 
bodies of water, so a comparison to other pilotage association would 
not necessarily be accurate. The commenter stated that Great Lakes 
pilotage ``differs significantly from pilotage anywhere else in the 
United States as it includes vast stretches of open, unobstructed water 
that require little or no pilot input, as well as being subject to an 
abbreviated, rather than year-round, shipping season.'' \26\ The 
commenter also stated that there are both historical and practical 
reasons that local pilotage boards and commissions set rates locally, 
and that given differing barriers to entry, differing duration and 
intensity of pilotage duties, and other local factors means that ``the 
value and cost of pilotage services in one location differs 
significantly in degree and kind from the value and cost of pilotage 
services in another location.'' \27\
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    \24\ We discuss the issue of the general use of a 10-year 
compensation benchmark in a separate section, but the commenter 
included their comments on the specific number for pilot 
compensation under that heading.
    \25\ Docket # USCG-2016-0268-0033, p.26-27.
    \26\ Docket # USCG-2016-0268-0033, p.28.
    \27\ Docket # USCG-2016-0268-0033, p.27.
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    We recognize that there are a wide variety of factors that could be 
used for justifying both more and less compensation than pilots in 
other U.S. jurisdictions or Canadian pilots. While we believe, at this 
time, that a comparison with Canadian Great Lakes pilots offers the 
closest analogue, we are fully aware that there are still significant 
differences in the U.S. and Canadian compensation work schedules and 
compensation schemes, and as such, we intend to undertake a 
compensation study to better understand the wide array of factors at 
work. While that study should inform a future ratemaking, we believe 
that the current compensation target is a reasonable and comparable 
level because it is based on pilots that do substantially similar work 
on the same bodies of water. Our goal is to establish a target pilot 
compensation benchmark that promotes recruitment and retention without 
posing undue financial burden on shipping companies. We will ensure 
that we maintain transparency in our processes and calculations to 
establish and refine this benchmark.
10-Year Compensation Benchmark
    One item addressed in the NPRM was new language in Sec.  404.104 
that would allow the Director to set compensation to a benchmark for a 
10-year period. We stated that, when setting the compensation 
benchmark, we would set it based on the most relevant available non-
proprietary information such as wage and benefit information from other 
pilotage groups (in the current case, based on Canadian Great Lakes 
pilot compensation cited in the 2016 NPRM). Subsequently, for a period 
of up to 10 years, the target compensation number would simply be 
adjusted for inflation. We noted that this would promote target 
compensation stability and rate predictability. As seen in the NPRM, 
where the Coast Guard noted a significant change in the relative value 
of the Canadian dollar that could have changed the target compensation 
figure significantly, resetting the compensation benchmark repeatedly 
could lead to large swings in year-to-year targets and have negative 
effects on the stability of pilot earnings.
    Having reviewed the various comments on this issue as well as 
considered the ratemaking methodology generally, we believe that using 
a compensation benchmark to establish annual adjustments in target 
compensation is an efficient means to ensure rate stability. We believe 
that, at any time after a compensation benchmark is established, there 
may be grounds to review it. Use of a compensation benchmark promotes 
rate and compensation stability, while providing the Coast Guard with 
the flexibility to make improvements over time based on market 
conditions. For this reason, we are finalizing the proposed language in 
Sec.  404.104.
    Several commenters mentioned the compensation benchmark, but 
instead of discussing the use of a compensation benchmark generally, 
they discussed the inputs into the current compensation benchmark. One 
commenter argued that the Coast Guard should not base the compensation 
benchmark on the average compensation for other U.S. pilots. We note 
that this was never the proposal, and we merely proposed to use a 
benchmark. In the NPRM, we wrote that ``the compensation benchmark 
would be based on the most relevant available non-propriety information 
such as wage and benefit information from other pilotage groups'' 
[emphasis added].\28\ We note that despite the use of that example of 
what a particular compensation benchmark

[[Page 41470]]

could be, we did not propose to use another U.S. pilot group outside of 
the Great Lakes to establish target pilot compensation in our 
rulemaking. In the 2017 NPRM, the Coast Guard did not propose to set a 
new compensation benchmark, but instead merely proposed continuing to 
use the 2016 target compensation figure in its calculations, which was 
based on the comparison with Canadian salaries.
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    \28\ 81 FR 72027 (December 19, 2016).
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    As discussed in the NPRM, we believe that the use of a compensation 
benchmark is a better method for starting the calculation for the 
compensation of pilots, as opposed to undertaking a complete re-
evaluation of the compensation structure for U.S. pilots each year. The 
primary rationale is the promotion of workforce stability, which is 
necessary for the system to provide safe, efficient, and reliable 
pilotage. The Great Lakes pilotage system needs target pilot 
compensation stability to achieve and maintain workforce stability. As 
is common practice in many sectors of employment, levels of 
compensation that are highly volatile can lead to difficulty attracting 
and retaining qualified employees. Given the high skill levels and 
lengthy training requirements required of Great Lakes pilots, as well 
as the dynamic nature of the commodities trade that makes up much of 
the shipping traffic in the area, we do not believe that a full re-
evaluation of compensation every year is conducive to maintaining a 
system of safe and reliable pilotage.
Request To Study Additional Items
    Many commenters,\29\ citing the high cost of pilotage, requested 
that the Coast Guard undertake additional studies of various related 
issues. Specifically, these commenters almost uniformly requested that 
the Coast Guard conduct additional research into (1) pilot recruitment 
and retention factors; (2) the role of pilotage rates on modal shift 
and Seaway competitiveness; and (3) efficiencies that can be achieved 
by streamlining the pilotage system.
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    \29\ See, e.g., docket # USCG-2016-0268-0019, p. 2; Docket # 
USCG-2016-0268-0020, p. 2.
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    The Coast Guard realizes that these issues are important, and may 
warrant more in-depth study. To that effect, the Coast Guard has 
commissioned a compensation study and an economic impact study to 
better inform our ratemaking process. Until these studies are 
completed, we are proceeding with the ratemaking methodology we 
describe in this final rule. We remain open to persons providing 
information about these important issues, and note that such 
information can always be provided to the Coast Guard or to the Great 
Lakes Pilotage Advisory Committee (GLPAC) outside the context of a 
particular ratemaking action.
Audit Deadline
    Another item the Coast Guard discussed in its NPRM was a proposal 
to adjust Sec.  403.300(c) to require submission of an unqualified 
audit by January 31 of each year, rather than the existing requirement 
that it be submitted on April 1. Our goal was to expedite the 
availability of audit information so it could be used in the 
publication of the NPRM by the next summer. The net result would be to 
reduce the delay between the actual expenses and their recoupment from 
3 to 2 years. We requested comment on whether such a deadline would be 
feasible.
    One commenter \30\ supported the proposal, stating that they 
``favor any measures that reduce the lag between receipt of actual 
revenue and expense data and rate-setting decisions.'' The commenter 
stated the Coast Guard should use the most recently available data to 
determine the target revenue. They argued that the Coast Guard should 
set up systems to document the invoices and source forms sent in 
throughout the shipping season, and then tally this information and use 
it as a point of validation when setting the target revenue in the 
following year's NPRM. The commenter also stated that the pilots have 
indicated they can produce monthly revenue reports for Coast Guard use, 
and that this information can be used to inform the Coast Guard's 
decision to terminate a surcharge or to revise rates to account for an 
over-generation of revenue.
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    \30\ Docket # USCG-2016-0268-0033, p. 25.
---------------------------------------------------------------------------

    However, most comments, including those from the 3 U.S. Great Lakes 
pilot associations on this issue, took the opposite stance. These 
comments were unanimously opposed to the proposed January 31 deadline 
stating that preparing audited financial statements by that date would 
be infeasible due to the tight time constraints, or if required, would 
be extremely expensive. Commenters noted that the requirement to 
provide numbers by this earlier date would require extensive effort and 
significantly increase costs, and we did not receive any 
recommendations for an alternate date.
    Based on the feedback we received, we are not making any changes to 
the audit deadline at this time. We agree that we would like to reduce 
the lag time between the revenue and expense audits and the information 
we use for our rulemakings. However, based upon the comments from the 
pilot associations, at this time we do not believe that the reported 
costs of accelerating the reporting date to January 31 would be worth 
the reported increase in expense. We do note, however, that we will 
seek further input on this topic at a future GLPAC meeting.
Surcharge Shutoff Provision
    In the NPRM, the Coast Guard proposed adding a requirement to the 
surcharge regulation in Sec.  401.401. We proposed that once a pilot 
association collects the amount of money allowable for recoupment, the 
pilot association's authorization to collect that surcharge would 
terminate for the remainder of the shipping season. We proposed this to 
prevent surcharge receipts from exceeding the target amount, which will 
eliminate the need to make subsequent adjustments to the operating 
expenses for the following year.
    One commenter \31\ stated that the ``Industry Commenters support 
this proposal.'' The commenter suggested the Coast Guard should verify 
that the surcharge funds are only used for the purposes as outlined by 
the Coast Guard. The commenter stated that the ratepayers ``paid over 
$667,000 in excessive training fees collected by the pilot 
associations'' in 2015. They also stated it is in the ratepayers' 
interests that the Coast Guard not allow excessive fees, as there is no 
mechanism currently in place to repay these funds to the ratepayers. 
The commenter also recommended that the Coast Guard verify that the 
training fees are properly applied to training new pilots in each 
District,\32\ and suggested the Coast Guard could achieve this by 
requiring the inclusion of the training fee information as a separate 
line item in the financial statements.
---------------------------------------------------------------------------

    \31\ Docket # USCG-2016-0268-0033, p. 24.
    \32\ Docket # USCG-2016-0268-0033, p. 25.
---------------------------------------------------------------------------

    Based on the comments we received, we are finalizing the additions 
to the surcharge provision in Sec.  401.401. We also note that the 
existing audit requirements for operating expenses include a line item 
for training expenses, so that it is clear how much money is expended 
for that purpose. Because of the three-year delay in the use of audited 
expenses, the training costs, which were introduced in the 2015 
ratemaking for the Saint Lawrence Seaway Pilots Association, will be 
incorporated into, and adjusted for, the operating expenses for the 
2018 ratemaking. The surcharge was expanded to the Lake Pilots 
Association and Western Great Lakes Pilots

[[Page 41471]]

Association in 2016. Therefore, these expenses will not be addressed 
until the 2019 Annual Rulemaking for these two associations.
Iroquois Lock
    Finally, in the NPRM, we proposed adding a mandatory change point 
at the Iroquois Lock. While we did receive comments as to how this 
would affect the total number of pilots needed for the rate-setting 
calculations (which is discussed below), we did not receive any 
comments on the merits of the idea itself. We are therefore finalizing 
this provision without change in this final rule.

B. Rate Calculation Issues

    In this section, we discuss the comments related to the specific 
ratemaking at issue for 2017, as well as lay out the method by which we 
arrived at the final 2017 rates. The ratemaking process is specified in 
46 CFR 404, 101 through 110. Each section below corresponds to one of 
the sections in the CFR.
1. Recognition of 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). We reviewed the independent accountant's financial reports 
for each association's 2014 expenses and revenues.\33\ In the NPRM, we 
accepted the final findings on the 2014 audit of association expenses, 
and presented the recognized expenses for each District.
---------------------------------------------------------------------------

    \33\ These reports are available in the docket for this 
rulemaking, see Docket # USCG-2016-0268-0056 through 0058.
---------------------------------------------------------------------------

    We received information with regard to lobbying expenses associated 
with American Pilots Association (APA) dues. We attributed 15 percent 
of APA dues to legal fees in the NPRM. This should have been 5 
percent.\34\ We have adjusted the operating expenses to reflect this 
change.
---------------------------------------------------------------------------

    \34\ Docket # USCG-2016-0268-0037, p. 2.
---------------------------------------------------------------------------

    We received comments from the three U.S. Great Lakes Pilot 
Associations regarding the exclusion of legal fees from recognized 
operating expenses. Specifically, in our review of the 2014 operating 
expenses, we did not recognize certain legal expenses from K&L Gates, 
totaling $47,256. The commenters stated that they did not understand 
why these expenses were not recognized and requested that we reclassify 
these expenses as allowable fees. We disagree that these K&L Gates 
legal fees should be included. We disallowed the fees for K&L Gates 
because we could not determine whether or not these funds were used for 
lobbying or legal services. Per the requirements in paragraph 
404.2(b)(6), lobbying fees are not allowable expenses for 
reimbursement. We contacted the pilot associations to request 
additional documentation that these fees were associated with legal 
services and not lobbying, but we did not receive any documentation to 
show which costs were attributable to legal services, and which were 
attributable to lobbying work.
    In addition, the three pilot associations requested that we 
recognize legal expenses in the amount of $75,049 incurred in their 
litigation against the Coast Guard regarding the 2014 final rule. This 
amount represents the difference between legal fees incurred and the 
amount the Coast Guard paid in its settlement with the pilot 
associations. Pursuant to Sec.  404.2(6), expenses incurred against the 
United States are not recoupable as recognized operating expenses. The 
pilots argue that this section of the regulations was improperly 
adopted in the 2016 final rule. We do not believe that the 2017 Annual 
Rulemaking is the appropriate venue to address the procedural aspects 
of the 2016 final rule.
    A commenter from the Lakes Pilots Association noted that certain 
operating expenses, relating to the payment of applicant pilot 
salaries, had been omitted from the operating expenses of District Two. 
Specifically, the commenter noted that payment of training salaries 
should be considered as an operating expense instead of treated as 
pilot compensation. We agree that as applicant pilots are not counted 
as pilots for the purposes of calculating general pilot compensation, 
and this occurred prior to the use of surcharges to pay for applicant 
pilot salaries, these salaries should be recognized as an operating 
expense. The surcharge provision for funding applicant pilots did not 
impact rates until 2015 and the 2014 Annual Rulemaking did not provide 
funding for this activity. Therefore, we added the amount, $281,588, to 
the operating expenses of District Two to recoup the 2014 expense 
incurred in training applicant pilots that year.
    The recognized expenses for the various Districts are as follows:

                                  Table 1--Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                           District One
                                                                 --------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                   St. Lawrence
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Pilot subsistence/travel....................................        $302,547        $228,222        $530,769
    Applicant Pilot subsistence/travel..........................               0          12,996          12,996
    License insurance...........................................          20,231          22,480          42,711
    Applicant Pilot license insurance...........................               0           1,760           1,760
    Payroll taxes...............................................          78,067          64,130         142,197
    Applicant Pilot payroll taxes...............................               0               0               0
    Other.......................................................             479             378             857
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         401,324         329,966         731,290
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         130,741         103,173         233,914
    Dispatch expense............................................               0               0               0
    Payroll taxes...............................................           9,797           7,732          17,529
                                                                 -----------------------------------------------

[[Page 41472]]

 
        Total pilot and dispatch costs..........................         140,538         110,905         251,443
Administrative Expenses:
    Legal--general counsel......................................           2,173           1,505           3,678
    Legal--shared counsel (K&L Gates)...........................           8,783           6,932          15,715
    Legal--Coast Guard litigation...............................          12,794          10,098          22,892
    Insurance...................................................          21,829          17,226          39,055
    Employee benefits...........................................           7,570           5,974          13,544
    Payroll taxes...............................................           5,281           4,167           9,448
    Other taxes.................................................           7,262           5,731          12,993
    Travel......................................................             648             512           1,160
    Depreciation/auto leasing/other.............................          48,094          31,820          79,914
    Interest....................................................          13,713          10,821          24,534
    APA Dues....................................................          12,444          11,996          24,440
    Utilities...................................................           8,916             418           9,334
    Salaries....................................................          52,121          41,130          93,251
    Accounting/Professional fees................................           5,142           4,058           9,200
    Pilot Training..............................................           6,427           5,074          11,501
    Applicant Pilot training....................................               0               0               0
    Other.......................................................           8,866           6,546          15,412
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         222,063         164,008         386,071
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          763,925         604,879       1,368,804
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Pilot subsistence/travel....................................         -15,712         -12,401         -28,113
    Payroll taxes...............................................             -87             -68            -155
    Applicant Pilot payroll taxes...............................               0           2,347           2,347
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................         -15,799         -10,122         -25,921
Proposed Adjustments (Director):
    APA Dues....................................................            -622            -600          -1,222
    2015 Surcharge Adjustment *.................................         -92,766         -72,887        -165,653
    Legal--shared counsel (K&L Gates)...........................          -8,783          -6,932         -15,715
    Legal--Coast Guard litigation...............................         -12,794         -10,098         -22,892
                                                                 -----------------------------------------------
        Total Director's Adjustments............................        -114,965         -90,517        -205,482
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         633,161         504,240       1,137,401
----------------------------------------------------------------------------------------------------------------
* District One collected $493,682 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $328,029 authorized in the 2015 final
  rule.

                                  Table 2--Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                                    SES to Port
                                                                     Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Applicant pilot salaries....................................        $112,635        $168,953        $281,588
    Pilot subsistence/travel....................................         148,424         222,635         371,059
    Applicant Pilot subsistence/travel..........................           9,440          14,160          23,600
    License insurance...........................................          52,888          79,333         132,221
    Applicant Pilot license insurance...........................           5,738           8,608          14,346
    Payroll taxes...............................................          76,903         115,354         192,257
    Applicant Pilot payroll taxes...............................           8,344          12,516          20,860
    Other.......................................................           1,053           1,579           2,632
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         415,425         623,138       1,038,563
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         173,145         259,718         432,863
    Dispatch expense............................................          10,080          15,120          25,200
    Employee benefits...........................................          72,662         108,992         181,654
    Payroll taxes...............................................           8,472          12,707          21,179
                                                                 -----------------------------------------------

[[Page 41473]]

 
        Total pilot and dispatch costs..........................         264,359         396,537         660,896
Administrative Expenses:
    Legal--general counsel......................................           2,680           4,020           6,700
    Legal--shared counsel (K&L Gates)...........................           4,984           7,476          12,460
    Legal--Coast Guard litigation...............................           8,371          12,557          20,928
    Office rent.................................................          26,275          39,413          65,688
    Insurance...................................................           9,909          14,863          24,772
    Employee benefits...........................................          23,002          34,504          57,506
    Payroll taxes...............................................           5,001           7,501          12,502
    Other taxes.................................................          21,179          31,769          52,948
    Depreciation/auto leasing/other.............................          17,784          26,677          44,461
    Interest....................................................           3,298           4,948           8,246
    APA Dues....................................................           8,664          12,996          21,660
    Utilities...................................................          15,429          23,144          38,573
    Salaries....................................................          46,008          69,013         115,021
    Accounting/Professional fees................................           9,410          14,115          23,525
    Pilot Training..............................................               0               0               0
    Other.......................................................          11,343          17,012          28,355
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         213,337         320,008         533,345
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          893,121       1,339,683       2,232,804
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Depreciation/auto leasing/other.............................           3,322           4,982           8,304
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................           3,322           4,982           8,304
Proposed Adjustments (Director):
    APA Dues....................................................            -433            -650          -1,083
    2015 Surcharge Adjustment *.................................         -85,782        -128,672        -214,454
    Legal--shared counsel (K&L Gates)...........................          -4,984          -7,476         -12,460
    Legal--Coast Guard litigation...............................          -8,371         -12,557         -20,928
                                                                 -----------------------------------------------
        Total Director's Adjustments............................         -99,570        -149,355        -248,926
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         796,873       1,195,310       1,992,183
----------------------------------------------------------------------------------------------------------------
* D2 collected $540,284 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $325,830 authorized in the 2015 final
  rule.

                                 Table 3--Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                   Lakes Huron,
                                                                   Michigan and     St. Mary's
                                                                     Superior          River
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Pilot subsistence/travel....................................        $424,935        $141,645        $566,580
    Applicant pilot subsistence/travel..........................          24,608           8,203          32,811
    License insurance...........................................          14,304           4,768          19,072
    Payroll taxes...............................................         110,567          36,856         147,423
    Applicant pilot payroll taxes...............................           9,082           3,027          12,109
    Other.......................................................          12,268           4,090          16,358
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         595,764         198,589         794,353
Pilot Boat and Dispatch Costs:
    Pilot boat costs............................................         593,360         197,787         791,147
    Dispatch costs..............................................         133,787          44,596         178,383
    Payroll taxes...............................................          31,432          10,477          41,909
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         758,579         252,860       1,011,439
Administrative Expenses:
    Legal--general counsel......................................          15,386           5,129          20,515
    Legal--shared counsel (K&L Gates)...........................          15,900           5,300          21,200
    Legal--Coast Guard litigation...............................          23,422           7,807          31,229

[[Page 41474]]

 
    Office rent.................................................           7,425           2,475           9,900
    Insurance...................................................          11,050           3,683          14,733
    Employee benefits...........................................         113,890          37,964         151,854
    Other taxes.................................................             129              43             172
    Depreciation/auto leasing/other.............................          28,802           9,601          38,403
    Interest....................................................           2,858             953           3,811
    APA Dues....................................................          20,235           6,745          26,980
    Dues and subscriptions......................................           3,975           1,325           5,300
    Utilities...................................................          33,083          11,028          44,111
    Salaries....................................................          95,577          31,859         127,436
    Accounting/Professional fees................................          27,492           9,164          36,656
    Pilot Training..............................................               0               0               0
    Other.......................................................           9,318           3,106          12,424
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         408,542         136,182         544,727
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats        1,762,885         587,631       2,350,516
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Pilot subsistence/Travel....................................         -15,595          -5,198         -20,793
    Payroll taxes...............................................           5,949           1,983           7,932
    Pilot boat costs............................................         -62,748         -20,916         -83,664
    Legal--shared counsel (K&L Gates)...........................          -1,590            -530          -2,120
    Dues and subscriptions......................................          -3,975          -1,325          -5,300
    Other expenses..............................................            -375            -125            -500
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................         -78,334         -26,111        -104,445
Proposed Adjustments (Director):
    APA Dues....................................................          -1,012          -1,012          -2,024
    Surcharge Adjustment *......................................        -216,734         -72,245        -288,979
    Legal--shared counsel (K&L Gates)...........................         -14,310          -4,770         -19,080
    Legal--Coast Guard litigation...............................         -23,422          -7,807         -31,229
                                                                 -----------------------------------------------
        Total Director's Adjustments............................        -255,478         -85,834        -341,312
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......       1,429,073         475,687       1,904,760
----------------------------------------------------------------------------------------------------------------
* D3 collected $615,929 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $326,950 authorized in the 2015 final
  rule.

2. Projection of Operating Expenses
    Step 2 in our ratemaking methodology requires that the Coast Guard 
project next year's operating expenses, and adjust for inflation or 
deflation (Sec.  404.102). In the NPRM, we adjusted for inflation and 
projected expenses for 2017 using the Bureau of Labor Statistics' data 
from the Consumer Price Index for the Midwest Region of the United 
States \35\ and reports from the Federal Reserve.\36\ We did not 
receive any comments on this step and thus are adjusting operating 
expenses for inflation as described in Sec.  404.102. We do note that, 
based on updated information from the Bureau of Labor Statistics, the 
2016 inflation modification has been adjusted to 0.8%.
---------------------------------------------------------------------------

    \35\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf.
    \36\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm.

                                   Table 4--Calculation of Projected Expenses
----------------------------------------------------------------------------------------------------------------
                                                                 Area 2            Area 1
                       District One                          (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................          $633,161          $504,240        $1,137,401
2015 Inflation Modification (@-0.5%)......................            -3,166            -2,521            -5,687
2016 Inflation Modification (@0.8%).......................             5,040             4,014             9,054
2017 Inflation Modification (@2.1%).......................            13,336            10,620            23,956
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................           648,371           516,353         1,164,724
----------------------------------------------------------------------------------------------------------------

[[Page 41475]]

 
                                                                 Area 4            Area 5
                       District Two                          (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................           796,874         1,195,310         1,992,183
2015 Inflation Modification (@-0.5%)......................            -3,984            -5,977            -9,961
2016 Inflation Modification (@0.8%).......................             6,343             9,515            15,858
2017 Inflation Modification (@2.1%).......................            16,784            25,176            41,960
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................           816,016         1,224,024         2,040,040
----------------------------------------------------------------------------------------------------------------

 
                                                              Areas 6 and 8        Area 7
                      District Three                         (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................         1,429,073           475,687         1,904,760
2015 Inflation Modification (@-0.5%)......................            -7,145            -2,378            -9,523
2016 Inflation Modification (@0.8%).......................            11,375             3,786            15,162
2017 Inflation Modification (@2.1%).......................            30,099            10,019            40,118
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................         1,463,402           487,114         1,950,516
----------------------------------------------------------------------------------------------------------------

3. Calculation of Number of Pilots
    Step 3 in our ratemaking methodology requires that the Coast Guard 
determine the number of pilots needed to complete all assignments 
(Sec.  404.103). In the NPRM, we proposed to modify our pilotage demand 
calculation to focus on the pilot work cycle, including elements such 
as travel, rest, pilot boat time, and other items in addition to the 
time spent on the bridge of a ship. Based on the comments received, we 
have determined that transitioning to this model, in which all traffic 
is treated equally for the purpose of determining the number of pilots 
needed, would result in traffic delays, overwork of pilots, and 
possible compromises to safety on the Great Lakes. For these reasons, 
we are not finalizing the proposed changes to Sec.  404.103.
    It is important to note that Step 3 produces two different sets of 
numbers associated with the respective sections of Sec.  404.103. The 
first number, described in paragraphs (a) through (c), is used to 
establish the number of pilots the Coast Guard believes are needed to 
provide safe and efficient pilotage service in each area. This number 
provides guidance to pilot associations and the Director of Great Lakes 
Pilotage in making determinations about hiring decisions and the 
authorization of new pilots. The second number, described in paragraph 
(d), is based on the number of persons applying for pilot positions 
under 46 CFR 401. For purposes of setting Great Lakes pilotage rates in 
Sec.  401.405, only the number derived from the 404.103(d) analysis is 
used in the ratemaking calculations.
    Most commenters provided comments on the model used to determine 
the number of pilots needed. In the NPRM, the Coast Guard proposed 
replacing the existing staffing model, which we call the 2016 final 
rule staffing model, with a model that analyzed shipping traffic 
throughout the entire shipping season, and which we are calling the 
2017 NPRM staffing model.\37\ We stated that we were proposing to 
modify the pilotage demand calculation to incorporate the ``number of 
assignments we reasonably expect pilots to be able to complete during 
the 9-month shipping season instead of during peak pilotage demand.'' 
(See 81 FR 72014-5). While we recognized that during the opening and 
closing of the season, there are significant spikes in traffic that 
necessitate far more pilotage services, the Coast Guard believed that 
this seasonal peak would be adequately covered by the fact that pilots 
would work an extra 10 days (30 percent) per month during those months 
to cover the increased traffic.
---------------------------------------------------------------------------

    \37\ We note that commenters often refer to these models as the 
``peak'' and ``average'' staffing models, although we feel such 
nomenclature is imprecise, as both models are designed to 
accommodate traffic at higher-than-average demand periods.
---------------------------------------------------------------------------

    The functional result of the proposed change to the staffing model 
was to reduce the total number of pilots needed to service the Great 
Lakes system by 5, from a total of 54 under the previous staffing model 
to a total of 49 under the proposed new staffing model. We received a 
large number of comments, especially from pilots, regarding how this 
change in modeling could affect their workload, lifestyle, stress 
levels, and overall retention rates, as discussed below.
    The 2017 NPRM staffing model had a number of substeps and we 
received comment on nearly all of these substeps. The substeps and 
associated comments are discussed below.
Substep 1: Calculate Pilot Cycle
    The first step of the process is to determine how long it takes for 
a pilot to undertake a full piloting cycle, that is, to board a ship, 
provide pilotage services, disembark, rest, travel back to a port 
location, and complete any administrative tasks associated with 
providing pilotage service. We used the ``Average-Through Transit 
Time'' between change points \38\ for an area or assignment segment 
that is impacted by a mandatory change point, and then added additional 
time for travel, delay, administrative needs, and mandatory rest, to 
come up with the total amount of time for a ``Pilot Cycle.''
---------------------------------------------------------------------------

    \38\ The Average-Through Transit Time is the number of hours it 
takes for a vessel to fully transit through an area.
---------------------------------------------------------------------------

    One commenter \39\ suggested that the Coast Guard had made an error 
in its calculation of the number of pilots needed as a result of the 
addition of the Iroquois Lock. As noted, in the NPRM, the Coast Guard 
proposed to add a mandatory change point to District One, Area 1, at 
the Iroquois Lock. We proposed this additional change point to enhance 
safety on long segments, noting that the transit time between Snell 
Lock and Cape Vincent takes about 11 hours under ideal circumstances, 
and that we wanted to limit a U.S.-registered pilot's assignment time 
to 8 hours in designated waters to mitigate fatigue.\40\ As a result of 
adding this change point, we modified how we calculated the number of 
pilots for the Designated Waters of District One (St. Lawrence River).
---------------------------------------------------------------------------

    \39\ Docket #USCG-2016-0268-0033, p. 14.
    \40\ 81 FR 72016 (December 19, 2016).
---------------------------------------------------------------------------

    The commenter noted that while the Coast Guard had increased the 
number of pilot assignments to account for the mandatory change point 
at Iroquois Lock, it had not adjusted the Average-Through Transit Time 
to account for the shorter trips due to the change point. The commenter 
asserted that instead of using a figure of 10.8 hours, the Coast Guard 
should replace that figure with a transit time of 6 hours. This change

[[Page 41476]]

would have the effect of lowering the Pilot Cycle to 20.0 hours (from 
the current 25.2) and the number of additional pilots needed from 3.4 
to 2.7. The commenter recommended this new figure be incorporated into 
the Coast Guard's calculations.
    We believe that this comment is justified, and that under 
conditions where we are calculating transit through times for a single 
pilot, this would be a reasonable change. However, we are not adopting 
the 2017 NPRM staffing model, but we are retaining the 2016 final rule 
staffing model. In such a model, we calculate transit through the 
Iroquois Lock using double pilotage, where the fatigue issue is 
mitigated by a second pilot. For that reason, under double pilotage, 
pilots do not have to change at the Iroquois Lock, and we can continue 
to use the full 10.8 hour average through transit time.
    One commenter \41\ stated the NPRM inconsistently relied on bridge 
hours and cycle time in determining the number of pilots needed in each 
District, and that instead of using the Average-Through Transit Time as 
a basis for the pilot cycle, we should use an average trip time. The 
commenter gave an example for District Two Area 4. The NPRM uses cycle 
time analysis to determine that District Two, Area 4 needs seven pilots 
to handle the historic average assignments in this area. These seven 
pilots should complete an average of 73 assignments with an Average-
Through Transit Time of 17 hours each. The commenter stated the total 
time on task for this District would be 8,687 hours. However, this 
figure would differ from the Coast Guard's calculation of average 
traffic, used to calculate revenue, which found the average time on 
task as 5,174 hours per year using the average number of bridge hours 
from 2007 to 2015. The commenter stated that the Coast Guard's 
``inconsistent reliance on bridge hours raises the hourly rate in the 
undesignated waters of District Two from $319 to $537.'' \42\ The 
commenter stated that the Coast Guard cannot rely on cycle time to 
increase the projected number of pilots needed and then use the bridge 
hours to calculate the hourly rate.
---------------------------------------------------------------------------

    \41\ Docket #USCG-2016-0268-0033, p. 17.
    \42\ Docket #USCG-2016-0268-0033, p. 17.
---------------------------------------------------------------------------

    We acknowledge that we use different bridge hour inputs when 
calculating the Average-Through Transit Time and the calculation for 
the expected traffic. For staffing purposes, we are assuming that each 
assignment will go between the mandatory change points in a given 
pilotage district to ensure that we have enough pilots to handle 
traffic. This is a situation where efficiency and safety are in 
conflict. We believe the safety concerns associated with having too few 
pilots outweigh the financial burden on the rate payers. The 
methodology established in the 1990s used a similar bridge hour 
standard in multiple steps throughout the ratemaking process. This 
caused problems with recruitment and retention, revenue shortfalls, 
lack of training, and a resistance to infrastructure investment and 
maintenance. We intentionally decided to only include a historic bridge 
hour input in determining the hourly rate for services and use the 
number of assignments (assuming that each assignment would be average 
maximum time between two change points) for staffing.
    However, we realize that this system of basing the pilot cycle on 
the transit through time, as opposed to the average trip time, is 
better suited to the 2016 final rule staffing model, rather than the 
2017 NPRM staffing model. As we stated in the 2016 final rule, it makes 
sense to use the full transit through time for conditions at the 
opening and close of the season, as a high percentage of trips during 
that time are through transit trips to ensure the pilot associations 
are sufficiently staffed to provide adequately rested pilots during the 
time of the season when the conditions are most challenging. 
Conversely, when calculating the total revenues we expect the 
associations to collect, we use the historic traffic data, which 
provides a more accurate accounting of revenue. Unlike the issue of 
staffing of vessels, it does not make a difference when revenue is 
collected during the shipping season.
    As the commenter points out, the transition from 2016 final rule 
staffing model to the 2017 NPRM staffing model, without reevaluating 
the full ratemaking methodology, can cause these types of logical 
discrepancies. This is one reason that we are not adopting the 2017 
NPRM staffing model in the final rule, and are instead relying on the 
2016 final rule staffing model to determine an adequate capacity.
Substep 2: Calculate Maximum Number of Assignments per Pilot
    In the next part of the 2017 NPRM staffing model, we divided the 
Seasonal Availability (the total amount of time which we expect a pilot 
to be available, which is 4,800 hours, or 200 days \43\) by the Pilot 
Cycle to calculate a theoretical maximum number of assignments per 
pilot. We realize that this number is highly theoretical, and assumes 
no shipping delays, inclement weather conditions, traffic, 
administrative issues, and that a new ship is readily available each 
time a pilot arrives at port. As seen below, the number of actual 
assignments a pilot can perform during the shipping season is much 
lower.
---------------------------------------------------------------------------

    \43\ This number is based on a 270-day shipping season, with an 
allowed 10 days off each non-peak month.
---------------------------------------------------------------------------

Substep 3: Calculate Estimated Number of Assignments per Pilot
    In the third step, we multiplied the theoretical maximum number of 
assignments per pilot by an ``efficiency factor'' of 50 percent, which 
is based upon the Coast Guard's 2013 ``Bridge Hour and Methodology 
Study Final Report,'' \44\ to arrive at a total number of projected 
assignments per pilot.
---------------------------------------------------------------------------

    \44\ Available in the docket, see Docket #USCG-2016-0268-0059.
---------------------------------------------------------------------------

    We received comments criticizing the efficiency factors from a 
variety of sources. One commenter stated that it was ``nothing more 
than a placeholder number from a study rejected by both pilots and 
industry at GLPAC.'' \45\ The commenter requested that the Coast Guard 
abandon its existing methodology for determining the number of pilots 
needed in an area. In its place, the commenter suggested the Coast 
Guard determine the number of pilots needed by either directly using 
the recent average number of assignments per pilot, or by increasing 
the efficiency ratio in each District to bring the anticipated number 
of assignments up to average levels. The commenter did not specify what 
the ``recent average number of assignments per pilot'' was, or what 
change to the efficiency ratio would be needed to achieve this. 
However, the commenter suggested that the Coast Guard could gather 
information that would allow us to more directly determine average 
pilot assignments by using invoices and source forms provided by 
pilots.\46\
---------------------------------------------------------------------------

    \45\ Docket #USCG-2016-0268-0037, p. 3.
    \46\ Docket #USCG-2016-0268-0033, p. 19.
---------------------------------------------------------------------------

    While we understand the concept of this proposal, we do not agree 
that the historic average of assignments is a useful tool for the 
following reasons. The mid-1990s methodology excluded many of the pilot 
assignment cycle time inputs to determine a seasonal workload. 
Additionally, the goal of providing 10 days of recuperative rest for 7 
months of the season was introduced in the 2016 Annual Rulemaking, in 
response to National Transportation Safety Board recommendations, 
letters from Congress asking us to address recruitment and

[[Page 41477]]

retention, and a recommendation from the July 2014 GLPAC meeting. For 
these reasons, we do not expect the historical average of assignments 
per pilot to be an accurate reflection of the estimated future counts 
based on the current staffing model. We may consider using historical 
data in a future rulemaking if we compile sufficient data to make an 
accurate comparison.
    We believe the efficiency factor of 0.5 is supported by the Bridge 
Hour and Methodology Study Final Report. In response to concerns about 
the methodology used to calculate shipping rates, GLPAC unanimously 
recommended that an independent party conduct a comprehensive review of 
the methodology established in the mid-1990s to calculate pilotage 
rates. GLPAC reviewed the scope of the study, entitled ``Bridge Hour 
and Methodology Study Final Report,'' expanded the study's scope, and 
unanimously approved the scope of the study. This included one-on-one 
meetings with all of the stakeholders, two focus groups, and additional 
GLPAC meetings. Based on the study's findings, the Coast Guard 
developed the efficiency factor. The study recommended that we consider 
an efficiency factor between 0.4 and 0.6 for staffing. However, we 
provided additional guidance with regard to mandatory change points and 
required rest between assignments in 2014, incorporated changes based 
upon recommendations from the National Transportation Safety Board in 
2015, and implemented significant changes to the methodology in 2016 
Annual Rulemaking.
    While the various stakeholders rejected the final recommendations 
of the study for different reasons, none of the criticisms of the study 
accused its final recommendations of being a ``placeholder.'' One group 
did not think the study went far enough to recommend changes that were 
outside of the scope of the study. Another group did not think the 
study went far enough to guarantee time off for the pilots or establish 
an acceptable compensation standard. While we are not using the 
efficiency factor in this final rule, we continue to believe that a 0.5 
efficiency factor would be reasonable if it were being used in a 
staffing model.
    One commenter \47\ stated that the Coast Guard had used incorrect 
assumptions regarding efficiency, cycle time, recuperative rest, and 
transition planning in calculating the total average time it takes for 
a pilot to complete an assignment. Using as an example the Coast 
Guard's calculations for District Three Area 2 (which in the NPRM is 
listed as ``Area 7''), in which the Coast Guard calculated that the 
number of projected assignments per pilot was 112, the commenter said 
that ``assuming that these pilots can only take one assignment per day 
(based on the estimated 21.5 hour shipping time), each pilot in [Area 
7] will only work 41 percent of a 270-day shipping season. This figure 
is unrealistically low.'' \48\
---------------------------------------------------------------------------

    \47\ Docket #USCG-2016-0268-0033, p. 16.
    \48\ Docket #USCG-2016-0268-0033, p. 16.
---------------------------------------------------------------------------

    We disagree with the assertions that we used incorrect assumptions 
that resulted in an unrealistically low value. Even though the shipping 
season is 270 days, we only expect the pilots to be on the tour-de-role 
for 200 days a season (noting that they receive 10 days off per month 
for seven of the nine months of the season) so the correct comparison 
would be the number of days worked to the number of days available for 
assignment which is 56 percent (112 assignments/200 days). This does 
not seem unrealistically low, as the total cycle time is often over one 
day. Furthermore, we know that the demand for pilot services is not 
spread uniformly across the entire season, and there will be times when 
a pilot is idle for substantial periods of time between assignments. It 
is quite rare that a pilot returns after an assignment and is 
immediately able to start a new assignment, and that usually only 
occurs when there is a backlog of ships awaiting pilots. Simply put, 
all of this represents inherent inefficiencies in the system and, for 
these reasons, an efficiency factor of 50 percent is appropriate.
Substep 4: Calculate Total Number of Pilots Needed per Area
    Having determined the number of assignments that a pilot can 
reasonably be expected to handle in a shipping season, we move to 
calculate how many pilots are needed to handle the amount of traffic. 
To do this, we divided the measured number of actual assignments 
(averaged over a 10-year period) by the estimated number of assignments 
per pilot to estimate the total number of pilots needed for a segment 
within an area. This produces a figure of how many pilots are needed to 
handle the total amount of traffic in an area.
    Because of the detailed manner in which calculations of pilots are 
carried out, the raw calculations often end up suggesting a fractional 
number of pilots. In the NPRM, we stated that, ``when the calculation 
[of total pilots needed] results in a fraction of a pilot, we round 
pilot numbers up to the nearest whole pilot. We do this to avoid 
shortening our demand calculation and also to compensate for the role 
of the district presidents as both working pilots and representatives 
of their associations. We believe the rounding is justified to meet the 
needs of the staffing model and also to ensure the presidents of the 
pilot associations are able to effectively engage in meetings and 
communications with stakeholders throughout the Great Lakes region and 
the Coast Guard.'' (81 FR 72016-7).
    Several commenters argued that our rounding convention, in which we 
rounded up to the nearest whole number rather than rounding up or down, 
unnecessarily increased the number of pilots. One commenter argued that 
the Coast Guard's stated rationale in the 2017 NPRM for rounding up in 
all situations is flawed. The commenter suggested that the Coast Guard 
should not build in time for meetings and outreach activities into the 
pilot numbers, and stated that if the pilot associations believe those 
are essential elements of officer functions, they should instead adjust 
their distribution practices to encourage those functions.\49\ The 
commenter also stated that other aspects of the staffing model already 
ensure that association officers have time for other duties, citing the 
efficiency adjustment of 50 percent.
---------------------------------------------------------------------------

    \49\ Docket #USCG-2016-0268-0033, p. 15, footnote 7.
---------------------------------------------------------------------------

    We disagree that the efficiency factor is the proper forum in which 
to address a pilot's ancillary duties, such as acting as an association 
president. The ability of a pilot president to engage in the running of 
the association, respond to Coast Guard inquiries, and attend necessary 
meetings further takes away from his ability to provide pilotage 
service. The efficiency factor adjustment is designed to determine how 
efficiently a pilot can undertake piloting activities, and does not 
address these other required activities.
    The commenter also argued that the method by which the Coast Guard 
rounded up pilot numbers in the 2017 NPRM deviates from the 2016 
NPRM.\50\ In the 2017 NPRM, we proposed to round up ``when the 
calculations resulted in a fractional pilot.'' \51\ We agree that the 
2017 NPRM staffing model is different from that used in 2016. In 2016, 
we established the standard to round the number of pilots up or down, 
``as seems most reasonable,'' using a demand number that generally 
allocated more pilots than needed at times of lesser traffic. This is 
because, under the 2016 Final Rule

[[Page 41478]]

Staffing Model, there was less of a safety concern of rounding down by 
a fractional pilot. We proposed a different staffing model in the 2017 
NPRM, using the pilot assignment cycle to determine the actual number 
of pilots needed for the duration of the shipping season. Under this 
model, rounding down would be more likely to result in an inadequate 
number of properly-rested pilots available, and could result in safety 
concerns and traffic delays. However, as stated above, we believe that 
in maintaining the 2016 final rule staffing model, this issue with the 
rounding can be resolved.
---------------------------------------------------------------------------

    \50\ Docket #USCG-2016-0268-0033, p. 14.
    \51\ 81 FR at 72015-6.
---------------------------------------------------------------------------

    The Coast Guard also received a comment that it had applied 
unnecessary rounding to the Iroquois Lock calculation, resulting in an 
overestimate of the number of pilots needed. The commenter wrote, 
``According to GPLO calculations, without rounding, District One would 
need a total of 9.11 pilots to handle anticipated demand in District 
One, Area 1. With rounding, GLPO proposes that 11 pilots are needed.'' 
\52\
---------------------------------------------------------------------------

    \52\ Docket #USCG-2016-0268-0033, page 15.
---------------------------------------------------------------------------

    We believe the coalition's calculations are incorrect. In the NPRM, 
we calculated that District One, Area 1, would need a total of 9.11 
pilots (3.4 + 5.71), for the increased number of assignments due to the 
mandatory change point at Iroquois Lock. However, this was rounded up 
to 10 not 11. This is shown in Table 9 of the NPRM, where we stated 
that the total number of pilots required for the designated waters of 
District One, Area 1, is 10.\53\
---------------------------------------------------------------------------

    \53\ 81 FR at 72017 (December 19, 2016).
---------------------------------------------------------------------------

    In evaluating this comment, however, we did discover one issue with 
our rounding convention. While the text of paragraph 404.103(c) reads, 
in part, ``[t]he number of pilots needed in each district is calculated 
by totaling the area results by district and rounding them to the 
nearest whole integer,'' the Coast Guard made an error in its rounding 
calculations by rounding the number of pilots in each area, rather than 
in each district. There are circumstances where this could have 
resulted in an increase of an extra pilot (if, for example, two areas 
required 0.7 pilots). We have corrected this mistake in the final rule 
and are rounding by district.
Reasons To Abandon 2017 NPRM Staffing Model
    Several commenters discussed the proposed change from 2016 final 
rule staffing model to the 2017 NPRM staffing model in general terms, 
without referring to specific portions of the calculations.
    One commenter, a Great Lakes pilot, argued that the number of 
pilots proposed in the 2017 calculations would fall short of what is 
needed to provide safe, efficient, and reliable pilotage.\54\ The 
commenter stated that reviewing bridge hours worked in District Three 
over the course of the 2016 shipping season would show that pilots 
there had worked extra hours to keep ships moving. Furthermore, the 
commenter suggested that cruise ships, which are run on a much tighter 
schedule than cargo ships, might abandon the area if a lack of pilots 
caused persistent delays. However, the commenter did not provide 
specific recommendations on how we should modify the staffing model's 
methodology or suggest different inputs.
---------------------------------------------------------------------------

    \54\ Docket #USCG-2016-0268-0021, p. 1.
---------------------------------------------------------------------------

    We received comments from the Western Great Lakes Pilot Association 
President which suggested that using an average staffing model, as 
proposed in the 2017 NPRM, would result in unacceptable delays for 
cruise ships. We recognize that the various types of vessels that 
employ U.S. and Canadian registered pilots have different tolerances 
for delays due to the lack of pilot availability. One method to address 
the varying tolerance for delays is through adjusting the regulations 
that deal with dispatching. The current system is to strictly assign 
pilots on a first-come, first-serve basis. We plan to discuss this 
issue during the next GLPAC meeting to investigate whether that 
standard should be modified, and the potential implications such 
modifications would have on the System and hourly pilotage rates.
    For many of the reasons the commenters described above, we realize 
that there are flaws with the 2017 NPRM staffing model. Based upon the 
comments received, particularly those that highlighted the variations 
in traffic throughout the season and the inconsistencies in the use of 
average trips vs. through time, we have concluded that our data does 
not support using the 2017 NPRM staffing model. For those reasons, we 
have decided to not to adopt the 2017 NPRM staffing model, and continue 
to use the 2016 final rule staffing model.
    We note, however, that in the NPRM, we proposed to adjust the 
wording of 46 CFR 404.104 by replacing the word ``peak'' with the word 
``seasonal.'' While we are not adopting the proposed new staffing 
model, we believe that ``seasonal'' is a more appropriate term to use, 
as instances of high demand often occur at various points in the 
seasons, and so are maintaining that textual change in the final rule.
    We agree with both shippers and pilots that the proposed 2017 NPRM 
staffing model may not achieve the required goals of promoting safe and 
efficient pilotage, and that averaging traffic through an entire season 
may not adequately account for mid-season variations in demand. In this 
final rule, we maintain the staffing model we adopted in the 2016 final 
rule. Even though we have used the label ``peak demand'' for the 2016 
staffing model, we believe some have misinterpreted this label. This 
model uses the pilot assignment cycle and average late-seasonal traffic 
demand over the past 10 shipping seasons to establish the number of 
pilots necessary to move that traffic. We did not establish staffing 
levels to eliminate delays throughout the season by reviewing 10 years 
of historic traffic and ensuring that sufficient pilots would be on the 
tour-de-role throughout the season to eliminate delays. We believe our 
approach provides sufficient pilots to deal with the opening of the 
Seaway and the late season rush, in addition to other high-traffic 
periods, in a safe and reliable manner while also accounting for mid-
season demand variations and providing the pilots with sufficient 
opportunity to achieve 10 days of recuperative rest during 7 months of 
the season. We are willing to evaluate potential adjustments to this 
model in the future if we receive specific delay tolerances from those 
stakeholders concerned about this issue. We discussed staffing during 
the previous GLPAC meeting and plan to discuss staffing and delay 
tolerance during future meetings.
Calculation of Pilotage Need Under the 2016 Final Rule Staffing Model
    Using the 2016 final rule model, we have recalculated the number of 
pilots needed for each district. First, we note that use of this model 
considers the extensive use of double pilotage during the opening and 
closing of the shipping season. This is because, during the opening and 
closing of the season, the aids to navigation may not be in place, the 
weather can be volatile and extreme, sea smoke and fog appear with 
little notice, and ice conditions routinely present unique challenges 
to navigation. It is also during these periods that the pilots are 
working diligently to ensure all vessels exit the system before the 
locks close. For these reasons, we tend to authorize double pilotage 
during the opening and closing in designated waters for District One 
and District Two. District Three tends to engage in day-

[[Page 41479]]

time only navigation on the St. Marys River in lieu of utilizing two 
pilots. Double pilot usage in District Three occurs about 30 percent of 
the time during the opening and closing of the System. Our staffing 
model is designed to move the average amount of ships (calculated using 
a 10-year average model) into and out of the system during these times.
    Additionally, we note that the use of double pilotage avoids 
concern about how the proposed rule's modeling system dealt with the 
inclusion of the new mandatory change point at the Iroquois Lock. 
Several commenters had noted that while the Coast Guard had mandated 
the change, it had not updated its models to account for a shorter 
average transit through time the change would produce. However, during 
periods of double pilotage, because there are two pilots onboard that 
can share the duty, there is no need to do a pilot change at the 
Iroquois Lock.
Substep 1: Determine the Pilot Cycle Time
    Similar to the 2017 NPRM staffing model, we start the 2016 final 
rule staffing model by calculating the pilot cycle time, as shown the 
tables below:

      Table 5a--Calculation of Pilot Assignment Cycle, District One
------------------------------------------------------------------------
            District One                   Area 1            Area 2
------------------------------------------------------------------------
Time on Bridge or Available (hrs)...              10.8                11
Travel and Pilot Boat Transit (hrs).               3.2               4.6
Delay (hrs).........................                .7                .9
Admin (hrs).........................                .5                .5
Mandatory Rest......................                10                10
                                     -----------------------------------
    Total Pilot Assignment Cycle                  25.2              27.0
     (hrs)..........................
------------------------------------------------------------------------

    District Two is unique in the fact that the mandatory change points 
do not align with the border of designated and undesignated waters. The 
mandatory change point is located at Detroit, but the boundary for 
designated and undesignated waters occurs at the Southeast Shoal of 
Lake Erie. We based the average through transit for each of these 
segments, as follows:

      Table 5b--Calculation of Pilot Assignment Cycle, District Two
------------------------------------------------------------------------
                                       Between Area 4    Between Detroit
            District Two                 and Detroit     and Port Huron
------------------------------------------------------------------------
Time on Bridge or Available (hrs)...                17               6.5
Travel and Pilot Boat Transit (hrs).               4.6               3.2
Delay (hrs).........................                .7                .4
Admin (hrs).........................                .5                .5
Mandatory Rest......................                10                10
                                     -----------------------------------
    Total Pilot Assignment Cycle                  32.8              20.6
     (hrs)..........................
------------------------------------------------------------------------

    District Three is unique in that steel-importing vessels transit to 
Chicago/Burns Harbor while grain-exporting vessels depart from Duluth 
and Thunder Bay. During the opening and closing of the shipping season, 
the System experiences numerous vessels that make an inbound or 
outbound transit in ballast.

                         Table 5c--Calculation of Pilot Assignment Cycle, District Three
----------------------------------------------------------------------------------------------------------------
                      District Three                             Area 6            Area 7            Area 8
----------------------------------------------------------------------------------------------------------------
Time on Bridge or Available (hrs).........................              22.5               7.1              21.6
Travel and Pilot Boat Transit (hrs).......................               2.4               3.6               3.7
Delay (hrs)...............................................                 1               0.3               3.3
Admin (hrs)...............................................               0.5               0.5               0.5
Mandatory Rest............................................                10                10                10
                                                           -----------------------------------------------------
    Total Pilot Assignment Cycle (hrs)....................              36.4              21.5              39.1
----------------------------------------------------------------------------------------------------------------

Substep 2: Determination of Average Late Season Demand
    We then determine the average late-season traffic demand over the 
base period, as shown in table 6. This number is derived by dividing 
the number of assignments by the number of days in the corresponding 
pilot cycle. Numbers for designated areas are doubled due to the need 
for double pilotage during late peak seasonal period, as described 
above. Table 6 also shows the number of pilots that would be authorized 
using the traffic information from 2007-2016.

[[Page 41480]]

Table 6--10-Year Average of Traffic Demand and Pilot Requirements at the
                         Closing of the Season,
                                2007-2016
------------------------------------------------------------------------
                                           Area 1            Area 2
            District One                (designated)     (undesignated)
------------------------------------------------------------------------
Average late-season assignments per                  5                 6
 day................................
Average Pilot Cycle Time (hours)....              25.2              27.0
Total Hours Needed (Assignments *                  126               162
 Cycle Time)........................
Total Hours Needed for double                      252  ................
 pilotage transit (designated only).
Number of pilots needed to meet the               10.5               6.8
 average seasonal demand (total
 hours/24)..........................
                                     -----------------------------------
    Pilots Needed for total district      (252 + 162)/24 = 17.25 = 17
                                                   (rounded)
------------------------------------------------------------------------
------------------------------------------------------------------------

 
                                          Area 4 to
                                           Detroit       Area 5 Between
            District Two               (designated and  Detroit and Port
                                        undesignated)         Huron
------------------------------------------------------------------------
Average late-season assignments per                  5                 5
 day................................
Average Pilot Cycle Time (hours)....              32.8              20.6
Total Hours Needed (Assignments *                  164               103
 Cycle Time)........................
Total Hours Needed for double                      N/A               206
 pilotage transit (designated only).
Number of pilots needed to meet the                6.8               8.6
 average seasonal demand (total
 hours/24)..........................
                                     -----------------------------------
    Pilots Needed for total district      (164 + 206)/24 = 15.41 = 15
                                                   (rounded)
------------------------------------------------------------------------

 
                                                                 Area 6            Area 7            Area 8
                      District Three                         (undesignated)     (designated)     (undesignated)
----------------------------------------------------------------------------------------------------------------
Average late-season assignments per day...................                 5                 5                 5
Average Pilot Cycle Time (hours)..........................              36.4              21.5              39.1
Total Hours Needed (Assignments * Cycle Time).............               182             107.5             195.5
Total Hours Needed for double pilotage transit (designated               N/A       \55\ 139.75               N/A
 only)....................................................
Number of pilots needed to meet the average seasonal                     7.6               5.8               8.1
 demand (total hours/24)..................................
                                                           -----------------------------------------------------
    Pilots Needed.........................................    (182 + 139.75 + 195.5)/24 = 21.55 = 22 (rounded)
----------------------------------------------------------------------------------------------------------------

    Based on the above analysis, we have determined that there is a 
need for a total of 54 pilots. The breakdown, as shown in the above 
table, is 17 pilots in District One, 15 pilots in District Two, and 22 
pilots in District Three. The Coast Guard will keep these numbers in 
mind in future regulatory actions.
---------------------------------------------------------------------------

    \55\ District Three prefers day-time navigation only during the 
opening and closing of the System and these pilots use double 
pilotage approximately 30 percent of the time at the opening and 
closing of the season.
---------------------------------------------------------------------------

Calculation of Projected Pilot Numbers
    As stated above, paragraph 404.103(d) produces a separate number of 
pilots, which is used for the Great Lakes pilotage ratemaking 
procedure. That section requires the Director of Great Lakes Pilotage 
to determine the number of pilots expected to be fully working and 
compensated based on the number of persons applying become U.S. Great 
Lakes registered pilots, and on information provided by the district's 
pilotage association. In the NPRM, the Coast Guard projected that there 
would be 17 pilots in District One, 13 pilots in District Two, and 15 
pilots in District Three, for a total of 45 pilots.
    In the NPRM, after determining the number of pilots needed in each 
district in Step 3, the Coast Guard proposed adding additional 
applicant pilots in District Two and District Three. The Coast Guard 
believes these applicant pilots are necessary to prepare for future 
retirements, given the long training periods associated with new 
pilots. Currently, 4 of the pilots in District Two are over 62 years of 
age, and 6 of the pilots in District Three are over 61 years of age. 
These pilots represent nearly 30 percent of the pilot strength in each 
of these districts. Waiting until these pilots retire to replace them 
will result in significant delays and may denigrate safety, because the 
pilot association will be short-staffed. These pilots are needed in 
addition to the existing shortage of pilots (District Two is one pilot 
short of the needed number, while District Three is seven pilots 
short). Therefore, the Coast Guard proposed authorizing a surcharge in 
2017 to fund these additional applicant pilots.
    We received several comments on this issue. One commenter \56\ 
stated that the ``NPRM arbitrarily introduces pilot age as a reason to 
justify the addition of more pilots than required by its 
calculations.'' The commenter stated that the Coast Guard proposes 
adding 1 additional pilot in District Two and 4 additional pilots in 
District Three, but the Coast Guard does not impose age limitations on 
pilots. The commenter stated the Coast Guard also does not specify the 
retirement commitments of the current pilots within the next 2 years. 
The commenter recommended that instead of speculating about the age 
impacts on pilot rosters, the Coast Guard should train additional 
pilots based on the retirement transition plans.
---------------------------------------------------------------------------

    \56\ Docket #USCG-2016-0268-0033, p. 18.
---------------------------------------------------------------------------

    We disagree. The regulations allow a registered pilot to work until 
the age of 70. Just because a pilot can keep his full registration 
until age 70, doesn't mean that all of the pilots will work until that 
age. In the past several years, a number of pilots have retired prior 
to age 70. While we are in close contact with the US pilot associations 
to plan for future retirements, we do not feel it is prudent to assume 
that all of the current pilots will work until age 70.

[[Page 41481]]

    Once commenter \57\ stated that the ``Lakes Pilots Association 
agrees with the number of pilots in the proposed rates of 13 working 
pilots and 2 training pilots.'' The commenter stated the Lakes Pilot 
Association will require 15 pilots to service future traffic and 
provide adequate rest in the future. The Lakes Pilot Association noted 
in 2018, that it will look for 14 full time pilots and 1 trainee and 
will be at 15 full time pilots in 2019. We agree with the assessment 
that there is a need for 13 working pilots and 2 training pilots for 
the 2017 shipping season. We cannot comment on 2018 and 2019 at this 
time.
---------------------------------------------------------------------------

    \57\ Docket #USCG-2016-0268-0035, p. 1.
---------------------------------------------------------------------------

    Based on our analysis of the pilotage numbers and the comments 
received, we have not modified the number of working pilots for 2017. 
Both the 2017 NPRM staffing model and the 2016 final rule staffing 
model produce more pilots than the 3 U.S. pilot associations have fully 
trained. Therefore, when we established 45 working pilots in the NPRM, 
we knew that the system needed more time to acquire and train the 
additional pilots. We will continue to monitor and work with the pilot 
associations to ensure that the associations continue to make progress 
toward our staffing goals. The final numbers for the 2017 Step 3 
calculations are 17 pilots for District One, 13 pilots for District 
Two, and 15 pilots for District Three, for a total of 45 pilots. 
Pursuant to 46 CFR 404.104, these are the numbers we will be using in 
our rate calculations.
4. Calculation of Target Compensation
    Step 4 in our ratemaking methodology requires that the Coast Guard 
determine the target pilot compensation (Sec.  404.104). In the 2016 
final rule, the Coast Guard used the Canadian pilot compensation as the 
benchmark for the U.S. pilot compensation, and then made an adjustment 
for foreign exchange differences and inflation. The Coast Guard then 
increased the U.S. target pilot compensation by 10 percent over the 
projected GLPA figure to account for the differences in the status of 
U.S. and Canadian pilots and the different compensation systems in 
place in the two countries. In the 2017 NPRM, the Coast Guard proposed 
keeping the target pilot compensation at the 2016 levels.
    In this section, we discuss comments relating to our calculations 
to get to the target compensation as discussed in the 2016 final rule 
and the 2017 NPRM, which uses the Canadian salary plus 10 percent as 
the target. In the section regarding setting a compensation benchmark 
above, we separately discussed the issue of using different 
compensation benchmarks, such as the compensation packages for pilots 
in other U.S. Associations or salaries of first mates or other 
crewmembers. For the reasons described in that section, we continue to 
believe that the benchmark established in the 2016 final rule, based on 
Canadian pilot salaries plus a 10 percent differential to calculate the 
value of certain benefits, is an appropriate level of compensation. In 
this section, we discuss the specific comments related to the 
calculation of the compensation benchmark.
    Several commenters suggested that the use of Canadian pilot 
salaries was an inappropriate yardstick by which to base U.S. salaries. 
One commenter argued that it was inappropriate because U.S. and 
Canadian pilot associations cannot recruit workers from the same pool 
of individuals.\58\ Another commenter suggested that the older way in 
which the Coast Guard determined compensation, by basing its estimate 
on the wages paid to U.S. Masters and Mates, was more appropriate, 
asserting that the functions of these personnel are essentially the 
same as U.S. pilots, and that using this system avoids the 
complications of comparing compensation across national boundaries.\59\
---------------------------------------------------------------------------

    \58\ Docket #USCG-2016-0268-0031, p. 1.
    \59\ Docket #USCG-2016-0268-0033, p.20.
---------------------------------------------------------------------------

    Several pilot associations argued that the Coast Guard should base 
Great Lakes compensation figures on the salaries earned by other U.S. 
pilot associations. Several commenters provided figures, noting that in 
other areas, U.S. pilots earned upwards of $450,000 per year. One 
commenter \60\ provided figures showing the projected compensation for 
pilots in various U.S. pilot associations, which ranged from a low of 
$399,708 per year to a high of $493,692. Other commenters echoed the 
argument that the Great Lakes pilots are among the lowest-paid U.S. 
pilots.
---------------------------------------------------------------------------

    \60\ Docket #USCG-2016-0268-0028, p. 6-7.
---------------------------------------------------------------------------

    In some regions governed by local pilotage associations, 
compensation figures appear to be much higher than those proposed by 
the Coast Guard. It is unclear why some U.S. pilot associations receive 
compensation levels much higher than that of Canadian pilots or U.S. 
masters and mates, based on the alternative sources of information that 
we have.\61\ As many organizations that set pilotage rates do not make 
public what methodology they are using to derive pilotage rates, we do 
not have sufficient information or a basis to raise pilotage rates on 
the Great Lakes to determine if these levels of compensation are 
appropriate for Great Lakes pilotage. We note, again, that we are 
undertaking a compensation study to better determine an appropriate 
compensation benchmark, and will present the results of such a study in 
a public forum should it provide a better basis for setting 
compensation levels.
---------------------------------------------------------------------------

    \61\ These sources include information from the Great Lakes 
Pilotage Authority as well as information regarding compensation 
submitted by other U.S. pilotage associations.
---------------------------------------------------------------------------

    Even for those commenters who agreed that the comparison between 
U.S. and Canadian Great Lakes pilots was the most apt, we received 
comments that our calculations erred in a variety of ways. Many 
commenters offered statements regarding the calculations of Canadian 
pilots' average total compensation, arguing that in certain areas, the 
Coast Guard had overestimated or underestimated the total amount, or 
made errors in its conversion of the value of Canadian compensation to 
American currency. In the NPRM, we recognized that the most challenging 
portion of our target compensation analysis was the conversion of 
Canadian benefits into equivalent United States benefits, and many 
commenters argued that we had underestimated total compensation in a 
variety of ways.
    One commenter argued that the Coast Guard underestimated Canadian 
compensation by averaging the compensation of four contract and three 
apprentice pilots, along with 49 full-time, regular Canadian pilots, 
into the compensation total.\62\ That commenter stated that the 
compensation for U.S. full-time, regular pilots should be based on the 
salaries of Canadian full-time, regular pilots only. By excluding those 
contract and apprentice pilots, the commenter calculated that the base 
compensation should have been $291,035, rather than the $268,552 used 
in the NPRM, meaning that the Coast Guard should increase the total 
compensation target by over 8 percent.
---------------------------------------------------------------------------

    \62\ Docket #USCG-2016-0268-0028, p. 2-3.
---------------------------------------------------------------------------

    While we agree with the commenter that contract and apprentice 
pilots should not have been included in the calculations of pilot 
salaries, we disagree with the commenter's assertion that they were 
included in our calculations. The Coast Guard did not base its 
calculations on the annual report the commenter cited, but received 
information from the GLPA directly. When the GLPA provided the Coast 
Guard with the information regarding Canadian compensation, it did not 
include these contract and apprentice pilots.

[[Page 41482]]

    Another commenter \63\ argued that U.S. pilots should be paid 
substantially more than Canadian pilots due to working more days per 
year. This commenter stated that that the Canadian Great Lakes Pilot 
Association's work schedule is 178 days per year, and that the U.S. 
pilot compensation needs to be adjusted to reflect an additional 12.4 
percent difference in time on duty. We disagree that target pilot 
compensation needs to be adjusted by 12.4 percent. While our staffing 
model assumes that the pilots will be on the tour-de-role for 200 days 
of the season, we do not make a 1-to-1 comparison between time spent on 
duty in the Canadian sector and time spent on the tour-de-role. Our 
methodology was designed to approximate the annual average compensation 
for Canadian pilots, not an attempt to match their hourly pay rate.
---------------------------------------------------------------------------

    \63\ Docket #USCG-2016-0268-0038, p. 4.
---------------------------------------------------------------------------

    One issue that arose regarding compensation figures is the 
conversion from Canadian to U.S. currency. Comments from the Great 
Lakes Shippers Association requested the Coast Guard to recalculate the 
baseline compensation figure using updated exchange rate figures. The 
commenter stated that the Coast Guard's ``decision in the 2017 NPRM to 
disregard fluctuations in the U.S./Canadian exchange rate is 
inconsistent with the 2016 NPRM.'' \64\ The commenter requested that 
the Coast Guard provide analysis and reasoning for this change from the 
past practice. The commenter also stated that if the exchange rates are 
relevant in one direction the exchange rates should be relevant in the 
other direction, arguing that not including this fluctuation in the 
exchange rate ``fails to reconcile the emphasis on perceived parity 
between U.S. and Canadian pilot compensation with the negative impact 
of increased U.S. dollar strength on Canadian pilots.'' Shipping 
industry comments requested that exchange rates be used to recalculate 
compensation on a regular basis. The comment suggested that the Coast 
Guard should adhere to this methodology if the Coast Guard chooses to 
use Canadian compensation as the benchmark.
---------------------------------------------------------------------------

    \64\ Docket #USCG-2016-0268-0033, p. 20.
---------------------------------------------------------------------------

    The shipping association comments requested that, given the decline 
in exchange rates between the U.S. and Canadian dollars, the Coast 
Guard dramatically lower the target compensation. The commenter stated 
that ``assuming a 1.329 average exchange rate and 2 percent inflation 
per year, U.S. pilot compensation in 2017 would be $240,149''.\65\ The 
commenter stated that this compensation figure is 3.4 percent higher 
than the 2015 projected compensation levels in designated waters of 
$232,237, which was the last year the Coast Guard used U.S. Mates and 
Masters as the U.S. target pilot compensation.
---------------------------------------------------------------------------

    \65\ Docket #USCG-2016-0268-0033, p. 21.
---------------------------------------------------------------------------

    We acknowledge that the exchange rate had changed substantially, 
and that our original translation of Canadian benefits to U.S. dollars 
is based on the 2014 exchange rate. This rate has fluctuated 
significantly in recent years, for example, changing from 1.149 CAD:1 
USD in 2014 to 1.329 CAD:1 USD in 2015.\66\ If the goal of the Coast 
Guard were to have U.S. pilot salaries mirror, as closely as possible, 
the value of Canadian pilots' salaries each year, it would make sense 
to re-baseline the compensation figure using updated exchange rates 
each year. One downside of this approach, however, would be tremendous 
volatility in pilot compensation as the currency fluctuated from year 
to year. As we noted in our discussion of why we proposed a 
compensation benchmark in the NPRM, large swings in compensation, based 
on external factors such as currency fluctuations, are something the 
Coast Guard believes are highly detrimental to retaining talented 
pilots and maintaining safe and efficient pilotage.
---------------------------------------------------------------------------

    \66\ See https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates.
---------------------------------------------------------------------------

    Other commenters wanted the Coast Guard to revisit its calculation 
of compensation and increase it, citing a number of factors. One 
commenter \67\ argued that the 10 percent factor used to adjust the 
Canadian pilot compensation to American pilot target compensation is 
too low. The commenter identified 10 ways that the Canadian pilot 
positions differ from American pilot positions, and argued that each of 
these identified differences works to the disadvantage of the American 
pilots with respect to compensation. The commenter suggested setting 
U.S. pilot compensation at Canadian compensation plus 25 percent, 
rather than 10 percent, but then stated that this would still be too 
low given the differences.
---------------------------------------------------------------------------

    \67\ Docket #USCG-2016-0268-0028, p. 4.
---------------------------------------------------------------------------

    The commenter \68\ further stated the difference in healthcare and 
pension costs alone exceeds the 10 percent factor and supports the need 
for at least a 25 percent factor.\69\ The commenter stated the pension 
compensation between the American and Canadian pilots is different: The 
Canadian pilots are government employees who contribute to a defined 
benefit pension plan that is subsidized by the Canadian government, but 
the American pilots have no defined government plans and must cover the 
costs of retirement themselves. The commenter submitted data on the 
annual pension contributions from a randomly selected group of GLPA 
pilots. The commenter did note that the typical Canadian pilot 
contributes an average of $10,000-16,000 annually to a pension plan, 
while an American pilot might contribute ``multiple times that amount, 
receiving no contribution from his government, and not being eligible 
for any similar lifetime government-sponsored defined pension plan.'' 
The commenter stated the difference an American pilot would need to 
contribute to a pension alone requires a factor greater than 10 percent 
to adjust target compensation. They also stated that data from the 
International Organization of Masters, Mates & Pilots (MM&P) American 
labor union indicates the pension contribution for a pilot would be 
$61,992 annually for a plan similar to the Canadian defined benefit 
pension plan.
---------------------------------------------------------------------------

    \68\ Docket #USCG-2016-0268-0028, p. 4.
    \69\ Docket #USCG-2016-0268-0028. p. 4.
---------------------------------------------------------------------------

    The same commenter also stated the healthcare compensation is 
different between American and Canadian pilots, and further supports a 
factor higher than 10 percent. The commenter noted a Canadian pilot 
pays no out-of-pocket expenses for dental or general healthcare 
coverage, while an American pilot typically pays $25,000 annually for a 
reasonably comprehensive healthcare plan. The commenter cited that the 
MM&P Pilot Membership Health plan annual cost is $28,965 and an 
American pilot association includes $30,000 annually per pilot for 
healthcare. Further, American pilots must pay for long-term disability 
insurance while Canadian pilots have no out-of-pocket costs for long-
term disability coverage. For these reasons, the commenter requested 
``the Coast Guard to revise its factor to at least 25 percent and 
perhaps more in order to achieve its goal of equivalency''.\70\
---------------------------------------------------------------------------

    \70\ Docket #USCG-2016-0268-0028, p. 5.
---------------------------------------------------------------------------

    Despite the importance of these issues, this information does not 
relate to an issue that the Coast Guard proposed to address in the 2017 
ratemaking process. In 2016, the Coast Guard conducted a substantial 
re-baselining of the compensation benchmark, and considered these 
issues closely, arriving at the $326,114 annual compensation figure. In 
the 2017 ratemaking, it was not our intention to

[[Page 41483]]

reanalyze all of these issues, and we did not propose a change in the 
value we established in 2016. Much like recalculating U.S. pilot 
salaries on the fluctuating U.S.-Canada exchange rate, recalculating 
these issues on an annual basis could produce an extraordinary amount 
of volatility in both the shipping rates and the overall compensation 
levels, which is why we proposed using a 10-year compensation benchmark 
rather than recalculating the target compensation on an annual basis. 
As we stated in the NPRM, we do not believe it is in the public 
interest to introduce such volatility into the market based on these 
difficult-to-calculate and predict forces. We believe that the system 
needs target pilot compensation stability in order to achieve and 
maintain workforce stability, and that this concern strongly supports 
using a consistent compensation benchmark. For that reason, while we 
consider all of these factors to be valid concerns, we are not 
utilizing them in this rulemaking.
    We did receive one comment on the compensation figure that did not 
involve re-examining the benchmark. This commenter suggested that the 
2016 figure should be adjusted for inflation so that pilots would 
continue to receive the same income in real terms. We agree with this 
commenter. To remain stable in real terms, such a benchmark would need 
be adjusted for inflation on an annual basis. This will achieve the 
Coast Guard's goal of maintaining stability in real (as opposed to 
nominal) compensation. For this reason, we are adjusting the 2017 
target compensation by the Midwest Consumer Price Index of 2.1 percent, 
for a total figure of $332,963 per year. We intend to adjust the 
compensation figure for inflation annually in future ratemaking 
actions, the same way that operating expenses are adjusted for 
inflation.
    Based on the analysis, the calculations for step 4 are as follows:

                                   Table 7--Calculations of Total Compensation
----------------------------------------------------------------------------------------------------------------
                                                                 Area 2            Area 1
                       District One                          (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.................................          $332,963          $332,963          $332,963
Number of Pilots (step 3).................................                10                 7                17
                                                           -----------------------------------------------------
    Total pilot compensation..............................        $3,329,630        $2,330,741        $5,660,371
----------------------------------------------------------------------------------------------------------------

 
                                                                 Area 4            Area 5
                       District Two                          (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.................................          $332,963          $332,963          $332,963
Number of Pilots (step 3).................................                 6                 7                13
                                                           -----------------------------------------------------
    Total pilot compensation..............................        $1,997,778        $2,330,741        $4,328,519
----------------------------------------------------------------------------------------------------------------

 
                                                                  Area              Area
                      District Three                         (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.................................          $332,963          $332,963          $332,963
Number of Pilots (step 3).................................                11                 4                15
                                                           -----------------------------------------------------
    Total pilot compensation..............................        $3,662,593        $1,331,852        $4,994,445
----------------------------------------------------------------------------------------------------------------

5. Working Capital Fund
    Step 5 in our ratemaking methodology requires that the Coast Guard 
determine the working capital fund (proposed Sec.  404.105). In the 
NPRM, we proposed changing the term for this step from ``Project return 
on investment'' to ``Determine working capital fund.'' Even though we 
proposed changing the name of the step, we did not propose changing the 
calculation.
    The Coast Guard described the calculation of the working capital 
fund in the NPRM.\71\ We calculated the working capital fund by 
multiplying the 2014 average rate of return for new issues of high-
grade corporate securities, using the Moody's AAA bond rate information 
to determine the average annual rate of return for new issues of high-
grade corporate securities, and Total Expenses from step 4 of the 
ratemaking analysis. The 2014 average annual rate of return for new 
issues of high-grade corporate securities was 4.16 percent.\72\ This 
figure is added to the total revenue needed in the next stage.
---------------------------------------------------------------------------

    \71\ 81 FR 72014-5.
    \72\ Based on Moody's AAA corporate bonds, which can be found 
at: http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.
---------------------------------------------------------------------------

    One commenter stated the Coast Guard is not using the working 
capital fund to attract capital, and that this fund is better described 
as ``cash reserves for operating expenses.'' Similarly, the commenter 
\73\ stated the Coast Guard failed to address why the pilotage should 
cover any expenses beyond direct expenses. The commenter stated that 
working capital fund is inappropriate under conventional regulatory 
ratemaking principles, and the rate payers should only pay for all 
operating expenses via the rates and surcharges. The commenter 
requested the Coast Guard eliminate the working capital fund. In its 
place, the Coast Guard should review and approve projects for funding 
with surcharges, ``assuming surcharges are structured in a manner that 
permits close pre-approved scrutiny to ensure the expenditure adds 
value to pilotage services and the surcharge is terminated when the 
specific need is met.'' \74\ The commenter stated he or she prefers the 
use of surcharges as it provides more clarity in the use of the funds 
than a working capital fund.
---------------------------------------------------------------------------

    \73\ Docket #USCG-2016-0268-0033, p. 23.
    \74\ Docket #USCG-2016-0268-0033, p. 23.
---------------------------------------------------------------------------

    We disagree that the working capital fund should be abolished and 
that infrastructure improvements should only be paid for with 
surcharges. We believe that surcharges are a poor method for paying for 
infrastructure projects, which are often capital-intensive, with large 
upfront costs. It would be risky to try and recover these large upfront 
costs through surcharges due to general volatility in shipping levels, 
which might not cover the fixed costs of infrastructure. Using 
surcharges

[[Page 41484]]

for infrastructure projects would also increase volatility in shipping 
charges, which is not desirable. That is why the working capital fund 
is not structured to be a ``cash reserve'' for infrastructure projects. 
Instead, it 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. While we acknowledge that, currently, capital 
improvements are funded via surcharges, it is our belief that the 
working capital fund should allow us to limit the need for surcharges 
in the future.

                                    Table 8--Working Capital Fund Calculation
----------------------------------------------------------------------------------------------------------------
                                                                 Area 2            Area 1
                       District One                          (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................          $648,371          $516,353        $1,164,724
    Total Target Pilot Compensation (Step 4)..............         3,329,630         2,330,741         5,660,371
Total 2017 Expenses (lines 1+2)...........................         3,978,001         2,847,094         6,825,095
Multiply by Moody' High Grade Security Rate (4.16%).......           165,485           118,439           283,924
----------------------------------------------------------------------------------------------------------------

 
                                                                 Area 4            Area 5
                       District Two                          (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................           816,016         1,224,024         2,040,040
Total Target Pilot Compensation (Step 4)..................         1,997,778         2,330,741         4,328,519
    Total 2017 Expenses (lines 1+2).......................         2,813,794         3,554,765         6,368,559
Multiply by Moody' High Grade Security Rate (4.16%).......           117,054           147,878           264,932
----------------------------------------------------------------------------------------------------------------

 
                                                              Areas 6 and 8        Area 7
                      District Three                         (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................         1,463,402           487,114         1,950,516
Total Target Pilot Compensation (Step 4)..................         3,662,593         1,331,852         4,994,445
    Total 2017 Expenses (lines 1+2).......................         5,125,995         1,818,966         6,944,961
Multiply by Moody' High Grade Security Rate (4.16%).......           213,241            75,669           288,910
----------------------------------------------------------------------------------------------------------------

6. Calculation of Needed Revenue
    Step 6 in our ratemaking methodology requires that the Coast Guard 
determine the projected revenue for the next year (Sec.  404.106). The 
needed revenue is determined by adding the proposed Sec.  404.102 
operating expense, the proposed Sec.  404.104 total target 
compensation, and the proposed Sec.  404.105 working capital fund. We 
did not receive any comments related to this step.

                                     Table 9--Calculation of Needed Revenue
----------------------------------------------------------------------------------------------------------------
                                                                 Area 1            Area 2
                       District One                           (designated)     (undesignated)         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................          $648,371          $516,353        $1,164,724
Total Target Pilot Compensation (Step 4)..................         3,329,630         2,330,741         5,660,371
Working Capital Fund (Step 5).............................           165,485           118,439           283,924
                                                           -----------------------------------------------------
    Total Revenue Needed..................................         4,143,486         2,965,533         7,109,019
----------------------------------------------------------------------------------------------------------------

 
                                                                 Area 4            Area 5
                       District Two                          (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................           816,016         1,224,024         2,040,040
Total Target Pilot Compensation (Step 4)..................         1,997,778         2,330,741         4,328,519
Working Capital Fund (Step 5).............................           117,054           147,878           264,932
                                                           -----------------------------------------------------
    Total Revenue Needed..................................         2,930,848         3,702,643         6,633,491
----------------------------------------------------------------------------------------------------------------

 
                                                              Areas 6 and 8        Area 7
                      District Three                         (undesignated)     (designated)          Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)......................         1,463,402           487,114         1,950,516
Total Target Pilot Compensation (Step 4)..................         3,662,593         1,331,852         4,994,445
Working Capital Fund (Step 5).............................           213,241            75,669           288,910
                                                           -----------------------------------------------------
    Total Revenue Needed..................................         5,339,236         1,894,635         7,233,871
----------------------------------------------------------------------------------------------------------------

7. Projection of Future Revenue and Calculation of Initial Base Rates
    Step 7 in our ratemaking methodology requires that the Coast Guard 
make the initial base rate calculations. To make our initial base rate 
calculations, we first establish a multi-year base period from which we 
can draw available and reliable data on actual pilot hours worked in 
each district's designated and undesignated waters. In the NPRM, we 
proposed using data covering 2007

[[Page 41485]]

through 2015. We then calculated the new rates by dividing each 
association's projected needed revenue, from Sec.  404.106, by the 
average number of bridge hours and rounding to the nearest whole 
number. We did not receive comments on this step.

                Table 10a--Calculation of Average Traffic
------------------------------------------------------------------------
                                           Area 2            Area 1
            District One               (undesignated)     (designated)
------------------------------------------------------------------------
2016................................  ................  ................
2015................................             6,667             5,743
2014................................             6,853             6,810
2013................................             5,529             5,864
2012................................             5,121             4,771
2011................................             5,377             5,045
2010................................             5,649             4,839
2009................................             3,947             3,511
2008................................             5,298             5,829
2007................................             5,929             6,099
                                     -----------------------------------
  Average...........................             5,597             5,390
------------------------------------------------------------------------

 
                                           Area 4            Area 5
            District Two               (undesignated)     (designated)
------------------------------------------------------------------------
2016................................  ................  ................
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
2008................................             4,844             3,956
2007................................             6,223             6,049
                                     -----------------------------------
  Average...........................             5,174             4,842
------------------------------------------------------------------------

 
                                        Areas 6 and 8        Area 7
           District Three              (undesignated)     (designated)
------------------------------------------------------------------------
2016................................  ................  ................
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
2008................................            14,287             2,286
2007................................            24,811             5,944
                                     -----------------------------------
  Average...........................            18,835             2,835
------------------------------------------------------------------------

              Table 10b--Calculation of Initial Base Rates
------------------------------------------------------------------------
                                           Area 2            Area 1
            District One               (undesignated)     (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6).............        $2,965,533        $4,143,486
Average traffic.....................             5,597             5,390
Initial hourly rate.................              $530              $769
------------------------------------------------------------------------

 
                                           Area 4            Area 5
            District Two               (undesignated)     (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6).............        $2,930,848        $3,702,643
Average traffic.....................             5,174             4,842
Initial hourly rate.................              $566              $765
------------------------------------------------------------------------

 
                                        Areas 6 and 8        Area 7
           District Three              (undesignated)     (designated)
------------------------------------------------------------------------
Revenue Needed (Step 6).............        $5,339,236        $1,894,635
Average traffic.....................            18,835             2,835
Initial hourly rate.................              $283              $668
------------------------------------------------------------------------

[[Page 41486]]

8. Calculation of an Average Weighting Factor
    In the NPRM, the Coast Guard sought public comment on how we should 
handle weighting factors in 46 CFR 401.400, which outlines the 
calculations for determining the weighting factors for a vessel subject 
to compulsory pilotage. This calculation determines which 
multiplication factor will be applied to the pilotage fees. The Coast 
Guard presented three options and requested public comment on which 
option should be implemented for future ratemakings. After receiving 
public comments on the NPRM, the Coast Guard decided to seek additional 
comments on this issue in a Supplemental Notice of Proposed 
Rulemaking.\75\
---------------------------------------------------------------------------

    \75\ 82 FR 16542, April 5, 2017.
---------------------------------------------------------------------------

    The first option was to maintain the status quo. This would 
maintain the collection of the current weighting factors and continue 
to exclude this revenue from the ratemaking calculation.
    The second option was to remove weighting factors completely from 
the regulations and charge every vessel equally for pilotage service 
because a ship's dimensions have little impact on the experience and 
skill level of the pilot providing the service. We note that this 
option could mean simply charging every vessel the current ``base 
rate,'' or it could mean adjusting the rates for vessels so all vessels 
pay the current average weighted rate.
    The third option was to incorporate weighting factors into the 
ratemaking through an additional step that examines and projects their 
impact on the revenues of the pilot associations. This might enable us 
to better forecast revenue, but it would add another variable to the 
projections in the ratemaking methodology.
    One commenter said that they ``strongly urge the Coast Guard to 
maintain the status quo on weighting factors, at least until actual 
data suggest that changes are necessary and appropriate.'' \76\ The 
commenter stated that the pilots have consistently failed to reach the 
target pilot compensation over the last decade, with the weighting 
factors included, and therefore changing the weighting factors would 
risk further contributing to the difficulty attracting and retaining 
pilots.
---------------------------------------------------------------------------

    \76\ Docket #USCG-2016-0268-0028, p. 9.
---------------------------------------------------------------------------

    One commenter \77\ stated that the Coast Guard's revenue 
projections would not be accurate if we did not include weighting 
factors to reflect vessel size. The commenter suggested that since the 
rates in the NPRM do not reflect weighting factors, the Coast Guard 
overstates the rates needed to generate the pilotage revenue. The 
actual pilotage charges include a weighting factor multiplier and 
additional charges. If the actual traffic is equal to the expected 
demand, then the pilot associations would receive revenue above the 
target revenue. The commenter provided an example using a 1.25 
weighting factor, which is close to the 1.26 average weighting factor 
provided in GLPA data.\78\ The commenter argued that if an average 
weighting factor of 1.25 for all traffic were applied for the 2017 
shipping season, the pilot associations would receive pilotage rates 
sufficient to reach the $20.4 million target revenue, plus an 
additional 25 percent in weighting factor revenue, plus any additional 
amount charged to vessel operators.\79\
---------------------------------------------------------------------------

    \77\ Docket #USCG-2016-0268-0033, p. 29.
    \78\ Docket #USCG-2016-0268-0033, Exhibit I, Weighting Factor 
Data.
    \79\ Docket #USCG-2016-0268-0033, p. 31.
---------------------------------------------------------------------------

    The commenter stated that they support the Coast Guard's proposed 
third alternative for weighting factors, and suggested we use an 
average weighting factor from either the current navigation season or 
the last full year of available data in order to project revenues for 
the next ratemaking. The commenter suggested we use an average 
weighting factor between 1.2 and 1.3.
    The argument that not including the revenue from the weighting 
factors into our calculation of total revenue would throw off the 
calculations made intrinsic sense. Under the new methodology introduced 
in 2016, pilotage is billed on an hourly basis, and if actual revenues 
were approximately 25 percent higher than traffic would suggest they 
should be, then the weighting factors would appear to be the cause of 
that discrepancy. Under its own initiative, the Coast Guard examined 
the initial revenue reports from the 2016 shipping season from all 
three districts, and compared that to an average of weighting factor 
charges collected through the Great Lakes Pilotage Management System. 
The resulting comparison showed that the actual revenues were 
substantially higher than predicted--even given the higher-than-average 
traffic in 2016. The difference in expected revenue tracked closely, 
but not exactly, with the calculated average weighting factor in each 
District. This meant that shippers were paying approximately $5 million 
more annually in shipping charges than the needed revenue figure would 
suggest. It is important to note that non-compulsory pilotage did not 
significantly change the disparity between projected and collected 
revenues. Even though the three pilot associations generated in excess 
of $3 million for providing non-compulsory service, once we removed the 
bridge hours for those efforts, the revenues still revealed a $5 
million difference.\80\
---------------------------------------------------------------------------

    \80\ District 1 had 920 hours of non-compulsory pilotage that 
generated $619,218. Removing those hours and revenues leaves 98 
percent of projected pilotage service and 122 percent of projected 
revenues. District 2 had 1,920 hours of non-compulsory pilotage that 
generated $1,674,256. Removing those hours and revenues leaves 101 
percent of projected pilotage service and 133 percent of projected 
revenues. District 3 had 2,745 hours of non-compulsory pilotage that 
generated $1,030,570. Removing those hours and revenues leaves 111 
percent of projected pilotage service and 135 percent of projected 
revenues. Based on this analysis, we do not believe the non-
compulsory pilotage significantly altered the measured disparity 
between traffic and revenue.
---------------------------------------------------------------------------

    With this new information, the Coast Guard decided that there was 
an urgent need to address the extra revenues being brought in by the 
weighting factors in the 2017 ratemaking. To that end, we issued an 
SNPRM to address the weighting factors and to propose a modification to 
the methodology. Our intention, as stated in the SNPRM, is to establish 
a methodology that aligns projected revenues with actual collections.
    In the SNPRM, we proposed a two-step process for accounting for the 
fees generated by the weighting factors. First, in a step we proposed 
to designate Step 8, we would calculate the average actual weighting 
factor in each area by using a weighted average of each class of 
vessels. We would create a rolling multi-year average of that number 
beginning with 2014, the year the weighting factors were set to current 
levels. Then, in Step 9, we would divide the initial base rate for each 
area, calculated in Step 7, by the weighting factor derived in Step 8, 
to produce a final shipping rate. This would have the effect of 
incorporating the additional revenues brought in by the weighting 
factors into the revenue model used to set rates. As expected, this led 
to significant reductions in pilotage fees, between the NPRM and SNPRM, 
across all three districts, as expressed in the table below.

[[Page 41487]]

                                  Table 11--Comparison of Hourly Pilotage Rates
----------------------------------------------------------------------------------------------------------------
                                                          Pilotage charges
                          Area                             per hour  (per     NPRM proposed      SNPRM proposed
                                                          2016 final rule)   charges per hour   charges per hour
----------------------------------------------------------------------------------------------------------------
St. Lawrence River.....................................               $580               $757               $601
Lake Ontario...........................................                398                522                408
Navigable waters from Southeast Shoal to Port Huron, MI                684                720                580
Lake Erie..............................................                448                537                429
St. Mary's River.......................................                528                661                514
Lakes Huron, Michigan, and Superior....................                264                280                218
----------------------------------------------------------------------------------------------------------------

    We solicited comments on this revision of methodology, and received 
an additional nine comment letters on this issue, which are addressed 
below. Several commenters expressed concern that pilot salaries on the 
Great Lakes were already too low, and that by incorporating the 
weighting factors into the revenue analysis, we would jeopardize safety 
on the Great Lakes as more pilots would leave the system. We 
respectfully disagree with this analysis. As explained in great detail 
in the NPRM and this final rule, we have significantly raised pilot 
compensation in recent years. In 2016, we raised target pilot 
compensation to $326,114 annually. Despite proposing no change in the 
2017 NPRM, we have agreed with commenters who argued that this should 
be increased by inflation, to a total of $332,963. For the reasons 
described above, we believe this salary has been shown to dramatically 
reduce the recruitment and retention problems the Great Lakes pilots 
experienced in the past. Incorporating the revenue generated by the 
weighting factors into our analysis allows the Coast Guard to set a 
pilotage rate that achieves that outcome.
    Several commenters made the argument that the Coast Guard's 
analysis was procedurally defective as a matter of law due to the way 
we undertook them. These commenters suggested that the Coast Guard used 
unaudited revenue figures to arrive at the revised analysis in the 
SNPRM, and that the use of those figures violated the requirement in 46 
CFR 404.1(b), which states that annual reviews of pilotage association 
expenses and revenue will be based on audited data, and that data from 
completed reviews will be used in ratemaking.
    We disagree with the commenters, and believe that they have 
fundamentally misinterpreted how the Coast Guard arrived at the SNPRM's 
proposal to adjust weighting factors. As described above, the Coast 
Guard's analysis of the weighting factors was not the result of the 
over-generation of revenue by the pilot associations. Rather, we were 
spurred to examine them by the commenters' logical arguments that the 
weighting factor produces revenue that goes to the pilot associations, 
and that by not accounting for that revenue, our ratemaking model was 
flawed. Mathematical logic suggested that if the weighting factors 
added, on average, 28 percent to the total fees collected that were not 
accounted for in the ratemaking model, then the pilot associations 
would be collecting 28 percent more revenues than would be expected 
given the amount of traffic measured.
    We are aware that the commenters had made this argument in past 
years, but we had not accepted it. What was different this year is that 
it was the first year where the pilotage rates had been set under the 
new ratemaking model, adopted in the 2016 final rule. In previous 
years, where the old ratemaking model was used, data had always shown 
that actual revenues fell short of anticipated revenues. However, for 
the first time in 2017 there was data--the preliminary 2016 revenue 
numbers--that could be used to determine a rough estimate of the 
magnitude of any revenue surplus. When we compared the preliminary 
revenue numbers from 2016 to see if they bore out this hypothesis, we 
found that the numbers were similar. We are cognizant that traffic on 
the Great Lakes experienced a sharp rise in 2016, and that there would 
be a commensurate increase in revenues, but as expected, the increase 
in revenues far outpaced the increase in traffic.
    We noted, however, that there were still some discrepancies in the 
figures. While the mathematics of the weighting factor would indicate 
that revenues would run approximately 28 percent higher, the revenue 
figures showed slightly lower numbers. We requested comments on this 
discrepancy in the SNPRM, but did not receive comments that would 
explain or correct it. Whatever the cause, we did not base the 
weighting factor reduction proposed in the SNPRM on those unaudited 
numbers. Doing so would have resulted in a slightly lower reduction 
than what was proposed, but on the actual calculated average of the 
billed weighting factors. We did not base the reduction on the 
preliminary, unaudited revenues provided by the pilot associations 
precisely because they were preliminary and unaudited.
    Given the comments received, the Coast Guard does not see any 
reason to deviate from the weighting factors analysis in this final 
rule. We used the same multi-year rolling average standard for this 
calculation as we used for historic pilotage demand. Since the current 
weighting factors came into place in 2014, we used the data between 
2014 and 2016 and will expand this data set until we reach our 10-year 
goal. They are calculated as follows:

                               Table 12--Calculation of Average Weighting Factors
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting
                          Vessel class                               transits         factor        Multiplier
----------------------------------------------------------------------------------------------------------------
District One: Undesignated (Area 2):
    Class 1.....................................................              71            1.00              71
    Class 2.....................................................             670            1.15           770.5
    Class 3.....................................................             130            1.30             169
    Class 4.....................................................             780            1.45           1,131
                                                                 -----------------------------------------------

[[Page 41488]]

 
        Total Transits..........................................           1,651  ..............         2,141.5
        Average Weighting Factor................................  ..............  ..............            1.30
District One: Designated (Area 1):
    Class 1.....................................................             103            1.00             103
    Class 2.....................................................             765            1.15          879.75
    Class 3.....................................................             128            1.30           166.4
    Class 4.....................................................             736            1.45         1,067.2
                                                                 -----------------------------------------------
        Total Transits..........................................           1,732  ..............        2,216.35
        Average Weighting Factor................................  ..............  ..............            1.28
District Two: Undesignated (Area 4):
    Class 1.....................................................              63            1.00              63
    Class 2.....................................................             678            1.15           779.7
    Class 3.....................................................              20            1.30              26
    Class 4.....................................................             980            1.45           1,421
                                                                 -----------------------------------------------
        Total Transits..........................................           1,741  ..............         2,289.7
        Average Weighting Factor................................  ..............  ..............            1.32
District Two: Designated (Area 5):
    Class 1.....................................................              98            1.00              98
    Class 2.....................................................           1,090            1.15         1,253.5
    Class 3.....................................................              29            1.30            37.7
    Class 4.....................................................           1,664            1.45         2,412.8
                                                                 -----------------------------------------------
        Total Transits..........................................           2,881  ..............           3,802
        Average Weighting Factor................................  ..............  ..............            1.32
District Three: Undesignated (Areas 6 and 8):
    Class 1.....................................................             244            1.00             244
    Class 2.....................................................           1,237            1.15        1,422.55
    Class 3.....................................................              43            1.30            55.9
    Class 4.....................................................           1,801            1.45        2,611.45
                                                                 -----------------------------------------------
        Total Transits..........................................           3,325  ..............         4,333.9
        Average Weighting Factor................................  ..............  ..............            1.30
District Three: Designated (Area 7):
    Class 1.....................................................             105            1.00             105
    Class 2.....................................................             540            1.15             621
    Class 3.....................................................              10            1.30              13
    Class 4.....................................................             757            1.45        1,097.65
                                                                 -----------------------------------------------
        Total Transits..........................................           1,412  ..............        1,836.65
        Average Weighting Factor................................  ..............  ..............            1.30
----------------------------------------------------------------------------------------------------------------

Step 9: Calculation of Revised Rate
    In this penultimate step, we calculate the revised rate by 
incorporating the average weighting factor into the initial rate. The 
revised rate is calculated as follows:

                                      Table 13--Calculation of Revised Rate
----------------------------------------------------------------------------------------------------------------
                                                                                      Average
                                                                   Initial rate      weighting     Revised rate
                                                                     (Step 7)      factor  (Step     (Step 9)
                                                                                        8)
----------------------------------------------------------------------------------------------------------------
                                                  District One
----------------------------------------------------------------------------------------------------------------
District One Designated.........................................            $769            1.28            $601
District One Undesignated.......................................             530            1.30             408
----------------------------------------------------------------------------------------------------------------
                                                  District Two
----------------------------------------------------------------------------------------------------------------
District Two Designated.........................................             765            1.32             580
District Two Undesignated.......................................             566            1.32             429
----------------------------------------------------------------------------------------------------------------
                                                 District Three
----------------------------------------------------------------------------------------------------------------
District Three Designated.......................................             668            1.30             514
District Three Undesignated.....................................             283            1.30             218
----------------------------------------------------------------------------------------------------------------

[[Page 41489]]

Step 10: Review and Finalize Rates
    Section 401.10, often known as ``Director's discretion,'' allows 
the Coast Guard to adjust rates to ensure they meet the goal of 
providing safe and reliable pilotage. In the NPRM, we did not propose 
to use this discretion in our ratemaking, and we are not using it in 
this ratemaking. While we received comments suggesting we add language 
limiting the use of our discretion, we do not feel such language is 
necessary or appropriate to include in this final rule as the current 
methodology provides a fair and transparent means to meet the goals 
outlined in 46 CFR 404.1(a).
Surcharge Calculation
    After the pilotage rates have been determined, the Coast Guard can 
authorize the pilot associations to impose a surcharge. In the NPRM, we 
proposed a 5 percent surcharge for District Two and a 15 percent 
surcharge for District Three to cover training expenses for nine 
applicant pilots. We proposed this number based on historical pilot 
costs, stipends, per diems, and training costs, which are approximately 
$150,000 per pilot per shipping season. We continue to find that 
allowing associations to recoup necessary and reasonable training 
expenses, both to help achieve a full complement of needed pilots and 
to ensure skill maintenance and development for current pilots, will 
facilitate safe, efficient, and reliable pilotage. Thus we are imposing 
a necessary and reasonable temporary surcharge, as authorized by 46 CFR 
401.401. Based upon our records and communications with the various 
pilot associations, for 2017, we anticipate that there will be two 
applicant pilots in District Two, and seven applicant pilots in 
District Three.
    We received one comment on this subject, stating that the surcharge 
adjustment of $150,000 was not enough for District Two, and that the 
amount for that district should be set instead at $250,000 to properly 
recover costs.\81\ The same commenter, in a separate comment, also 
wrote that the 2014 applicant pilot salaries were $281,588.00 and the 
benefits were $96,613.00.\82\ However, we were unable to confirm these 
assertions, because the commenter did not provide sufficient 
documentation with the comment. Any difference between the actual and 
assumed cost may be included in a future rulemaking. Again, we will 
determine which incurred expenses are necessary and reasonable, and 
ensure that the shippers are not double-charged for these same 
expenses.
---------------------------------------------------------------------------

    \81\ Docket #USCG-2016-0268-0031.
    \82\ Docket #USCG-2016-0268-0032.
---------------------------------------------------------------------------

    Based on historic pilot costs, the stipend, per diem, and training 
costs, we continue to believe that the total costs for each applicant 
pilot are approximately $150,000 per shipping season. Thus, we estimate 
that the training expenses that each association will incur will be 
approximately $300,000 in District Two and $1,050,000 in District 
Three. Table 14 derives the proposed percentage surcharge for each 
district by comparing this estimate to each district's projected needed 
revenue.

                    Table 14--Surcharge Calculations
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                              District Two
------------------------------------------------------------------------
Projected Needed Revenue (Sec.   404.106)...............      $6,663,002
Anticipated Training Expenses...........................        $300,000
Surcharge Needed *......................................              5%
------------------------------------------------------------------------
                             District Three
------------------------------------------------------------------------
Projected Needed Revenue (Sec.   404.106)...............      $7,262,089
Anticipated Training Expenses...........................      $1,050,000
Surcharge Needed *......................................             15%
------------------------------------------------------------------------
* Surcharge rounded up to the nearest whole percent.

V. Regulatory Analyses

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

A. Regulatory Planning and Review

    Executive Orders 12866 (``Regulatory Planning and Review'') and 
13563 (``Improving Regulation and Regulatory Review'') direct agencies 
to assess the costs and benefits of available regulatory alternatives 
and, if regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects, distributive impacts, and equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, of reducing costs, of harmonizing rules, and of 
promoting flexibility. Executive Order 13771 (``Reducing Regulation and 
Controlling Regulatory Costs''), directs agencies to reduce regulation 
and control regulatory costs and provides that ``for every one new 
regulation issued, at least two prior regulations be identified for 
elimination, and that the cost of planned regulations be prudently 
managed and controlled through a budgeting process.''
    The Office of Management and Budget (OMB) has not designated this 
rule a significant regulatory action under section 3(f) of Executive 
Order 12866. Accordingly, OMB has not reviewed it. As this rule is not 
a significant regulatory action, this rule is exempt from the 
requirements of Executive Order 13771. See OMB's Memorandum ``Guidance 
Implementing Executive Order 13771, Titled `Reducing Regulation and 
Controlling Regulatory Costs' '' (April 5, 2017). A regulatory analysis 
(RA) follows.
    We developed an analysis of the costs and benefits of the rule to 
ascertain its probable impacts on industry.
    Table 15 summarizes the regulatory changes that are expected to 
have no costs, and any qualitative benefits associated with them. The 
table also includes changes that affect portions of the methodology for 
calculating the base pilotage rates.

[[Page 41490]]

                 Table 15--Regulatory Changes With No Cost or Costs Captured in the Rate Change
----------------------------------------------------------------------------------------------------------------
               Changes                       Description           Basis for no costs            Benefits
----------------------------------------------------------------------------------------------------------------
Mandatory change point on the Saint    Mandatory change point   The addition of the      Staffing additional
 Lawrence River between Iroquois Lock   on the Saint Lawrence    change point will not    pilots will help meet
 and the area of Ogdensburg, NY.        River between Iroquois   require capital          the increased demand
                                        Lock and the area of     expenses. The only       for pilots to handle
                                        Ogdensburg, NY, that     cost is for the new      the additional
                                        would become effective   pilots, who are          assignments
                                        with the                 accounted for in the     anticipated to be
                                        implementation of this   base pilotage rates      caused by the new
                                        final rule.              and training             change point.
                                                                 surcharges.              Additional pilots due
                                                                                          to this change point
                                                                                          should also serve to
                                                                                          mitigate any potential
                                                                                          delays and any
                                                                                          potential fatigue that
                                                                                          would occur from high
                                                                                          pilotage demand
                                                                                          without them.
Cancellation charges.................  Amending the             Clarification of         --Clarifies the current
                                        cancellation charge      existing text and        language to eliminate
                                        provision in Sec.        current practice.        any potential
                                        401.120(b) to ensure                              confusion on the
                                        it explicitly states                              minimum charge for
                                        that the minimum                                  cancellations.
                                        charge for a                                     --Clarification of the
                                        cancellation is 4                                 minimum charge ensures
                                        hours plus necessary                              the recognition of
                                        and reasonable travel                             pilots as a limited
                                        expenses for the                                  resource and
                                        travel that occurs.                               encourages efficient
                                                                                          use.
Surcharge provision..................  Adding a requirement to  Ensures the goal         Prevents excess amounts
                                        the surcharge            surcharge amount built   from being recouped
                                        regulation in Sec.       into the year's          from industry via the
                                        401.401 to stop          rulemaking will not be   following year's rule.
                                        collecting funds once    surpassed, and
                                        the assigned value has   prevents additional
                                        been recovered for the   costs on industry.
                                        season.
Rename Return on Investment..........  Renaming Return on       Clarifies the intent of  Clarifies the intent of
                                        Investment as Working    the fund but does not    this fund.
                                        Capital Fund.            change the method of
                                                                 calculation. Costs are
                                                                 included in the total
                                                                 revenues.
Set Pilot compensation for a 10-year   Addition of new          Pilot staffing costs     Promotes target
 period.                                language in Sec.         are accounted for in     compensation stability
                                        404.104 that allows      the base pilotage        and rate
                                        the Director to set      rates.                   predictability.
                                        compensation for a 10-
                                        year period to a
                                        compensation benchmark.
Weighting Factors....................  Additional step in the   Impacts the base         Factors the impact of
                                        ratemaking that          pilotage rates, but      extra revenue
                                        accounts for the         does not impact the      generated by the
                                        weighting factors.       revenue projections.     weighting factors into
                                                                                          the ratemaking
                                                                                          analysis.
----------------------------------------------------------------------------------------------------------------

    Table 16 summarizes the affected population, costs, and benefits of 
the regulatory requirements that are expected to have associated costs 
as a result of the rate change.

                              Table 16--Regulatory Economic Impacts of Rate Change
----------------------------------------------------------------------------------------------------------------
             Change                   Description      Affected population       Costs             Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes....................  Under the Great      Owners and               $3,222,703   --New rates cover
                                   Lakes Pilotage Act   operators of 230                      an association's
                                   of 1960, the Coast   vessels journeying                    necessary and
                                   Guard is required    the Great Lakes                       reasonable
                                   to review and        system annually.                      operating
                                   adjust base                                                expenses.
                                   pilotage rates                                            --Provides fair
                                   annually.                                                  compensation,
                                                                                              adequate training,
                                                                                              and sufficient
                                                                                              rest periods for
                                                                                              pilots.
                                                                                             --Ensures the
                                                                                              association makes
                                                                                              enough money to
                                                                                              fund future
                                                                                              improvements.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on 
the Great Lakes annually. See Sections II and III of this preamble for 
detailed discussions of the Coast Guard's 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 2017 shipping season to generate 
sufficient revenues for each district to reimburse their 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 rule 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.
    In addition to the increase in payments that would be incurred by 
shippers in all three districts from the previous year as a result of 
the rate changes, we propose authorizing a temporary surcharge to allow 
the pilotage associations to recover training expenses that would be 
incurred in 2017. For 2017, we anticipate that there

[[Page 41491]]

will be no applicant pilots in District One, two applicant pilots in 
District Two, and seven applicant pilots in District Three. With a 
training cost of $150,000 per pilot, we estimate that Districts Two and 
Three will incur $300,000 and $1,050,000 in training expenses, 
respectively. These temporary surcharges would generate a combined 
$1,350,000 in revenue for the pilotage associations. Therefore, after 
accounting for the implementation of the temporary surcharges across 
all three districts, the payments made by shippers during the 2017 
shipping season are estimated to be approximately $3,222,703 more than 
the payments that were estimated in 2016 (table 18).\83\
---------------------------------------------------------------------------

    \83\ 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.
---------------------------------------------------------------------------

    The purpose of this rulemaking is to propose new base pilotage 
rates and surcharges for training. The last full ratemaking was 
concluded in 2016. Table 17 summarizes the changes in the RA from the 
NPRM to the final rule. These changes were the result of public 
comments received after publication of the NPRM and SNPRM.

                              Table 17--Summary of Changes From NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
       Element of the analysis                   NPRM                  Final rule         Resulting change in RA
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation............  $326,114...............  $332,963...............  Data indirectly affects
                                                                                          the calculation of
                                                                                          projected revenues.
Operating expenses...................  Incorrectly omitted      Corrected for this       Data indirectly affects
                                        payment of applicant     error, added amount of   the calculation of
                                        pilot salaries from D2   $281,588 to operating    projected revenues.
                                        operating expenses.      expenses in District
                                                                 Two.
Staffing Model.......................  Proposed to modify 46    Leaving 46 CFR 404.103   No impact on RA.
                                        CFR 404.103 to change    as is. Staffing model    Revenue is based on
                                        the calculation to       found 49 pilots are      the expected 45
                                        focus on pilot work      needed in the Great      working pilots that
                                        cycle. Staffing model    Lakes system.            will be working during
                                        found 54 pilots are                               the 2017 season, which
                                        needed in the Great                               is less than the
                                        Lakes system.                                     projected needed
                                                                                          pilots.
APA dues.............................  Attributed 15% of APA    Corrected to attribute   Data directly affects
                                        dues to legal fees.      5% of APA dues to        operating expenses,
                                                                 legal fees.              which indirectly
                                                                                          affects the
                                                                                          calculation of
                                                                                          projected revenues.
Weighting factors....................  Did not account for      Incorporates weighting   No impact on RA.
                                        weighting factors.       factors into base        Affects the
                                                                 rates.                   calculation of the
                                                                                          base rates, but not
                                                                                          the projected
                                                                                          revenues.
----------------------------------------------------------------------------------------------------------------

Affected Population
    The shippers affected by these rate changes are those owners and 
operators of domestic vessels operating on register (employed in 
foreign trade) and owners and operators of 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 to have pilots by 46 U.S.C. 9302. However, these U.S.- and 
Canadian-flagged lakers may voluntarily choose to have a pilot.
    We used 2013 through 2015 billing information 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. Using that 
period, we found that a total of 407 unique vessels used pilotage 
services over the years 2013 through 2015. These vessels had a pilot 
dispatched to the vessel and billing information was recorded in the 
GLPMS. The number of invoices per vessel ranged from a minimum of 1 
invoice per year to a maximum of 65 invoices per year. Of these 
vessels, 383 were foreign-flagged vessels and 24 were U.S.-flagged. The 
U.S.-flagged vessels were not operating on register and are not 
required to have a pilot per 46 U.S.C. 9302, but they can voluntarily 
choose to have a pilot. U.S.-flagged vessels may opt to have a pilot 
for varying reasons such as unfamiliarity with designated waters and 
ports, or for insurance purposes.
    Vessel traffic is affected by numerous factors and varies from year 
to year. Therefore, rather than the total number of vessels over the 
time period, an average of the unique vessels using pilotage services 
from 2013 through 2015 is the best representation of vessels estimated 
to be affected by this rule's rate. From 2013 through 2015, an average 
of 230 vessels used pilotage services annually.\84\ On average, 219 of 
these vessels are foreign-flagged vessels and 11 are U.S.-flagged 
vessels that voluntarily opt into the pilotage service.
---------------------------------------------------------------------------

    \84\ Some vessels entered the Great Lakes multiple years, 
affecting the average number of unique vessels utilizing pilotage 
services in any given year.
---------------------------------------------------------------------------

Costs
    The rate changes would generate costs on industry in the form of 
higher payments for shippers. We calculate the cost in two ways in this 
RA, as the total cost to shippers and as a percentage of vessel 
operating costs.
Total Cost to Shippers
    We estimate the effect of the rate changes on shippers by comparing 
the total projected revenues needed to cover costs in 2016 with the 
total projected revenues to cover costs in 2017, including any 
temporary surcharges authorized by the Coast Guard. The Coast Guard 
sets pilotage rates so that the pilot associations receive enough 
revenue to cover their necessary and reasonable expenses. The shippers 
pay these rates when they have a pilot as required by 46 U.S.C. 9302, 
or when U.S.-flagged vessels not operating on register voluntarily 
choose to have a pilot. Therefore, the aggregate payments of the 
shippers to the pilot associations are equal to the projected necessary 
revenues for the pilot associations. The revenues each year represent 
the total costs that shippers must pay for pilotage services, and the 
change in the revenues from the previous year is the additional cost to 
shippers from this rulemaking.

[[Page 41492]]

    The effect of the rate changes on shippers is estimated from the 
district pilotage projected revenues and the surcharges described in 
this preamble. We estimate that for the 2017 shipping season, the 
projected revenue needed for all three districts is $20,976,381. 
Temporary surcharges on traffic in District Two and District Three 
would be applied for the duration of the 2017 season in order for the 
pilotage associations to recover training expenses incurred for 
applicant pilots. We estimate that the pilotage associations require an 
additional $300,000 and $1,050,000 in revenue for applicant training 
expenses in Districts Two and Three, respectively. This is an 
additional cost to shippers of $1,350,000 during the 2017 shipping 
season. Adding the projected revenue to the surcharges, we estimate the 
pilotage associations' total projected needed revenue for 2017 would be 
$22,326,381. The 2017 projected revenues for the districts are from 
table 9 of this preamble. To estimate the additional cost to shippers 
from this rule, we compare the 2017 total projected revenues to the 
2016 projected revenues. In the 2016 rulemaking,\85\ we estimated the 
total projected revenue needed for 2016, including surcharges, is 
$19,103,678. This is the best approximation of 2016 revenues as, at the 
time of this publication, we do not have audited data available for the 
2016 shipping season to revise these projections. Table 18 shows the 
revenue projections for 2016 and 2017 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.
---------------------------------------------------------------------------

    \85\ 2016 projected revenues are from the 2016 rulemaking, 81 FR 
11937, Figures 31 and 32.

                                                    Table 18--Effect of the Rule by Area and District
                                                                 [$U.S.; Non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2016         Total 2016                         2017         Total 2017      Additional
                  Area                    Revenue needed     temporary       projected    Revenue needed     Temporary       projected     costs of this
                                              in 2016        surcharge        revenue         in 2017        surcharge        revenue          rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District One.....................      $5,354,945        $450,000      $5,804,945      $7,109,019              $0      $7,109,019      $1,304,074
Total, District Two.....................       5,629,641         300,000       5,929,641       6,633,491         300,000       6,933,491       1,003,850
Total, District Three...................       6,469,092         900,000       7,369,092       7,233,871       1,050,000       8,283,871         914,779
                                         ---------------------------------------------------------------------------------------------------------------
    System Total........................      17,453,678       1,650,000      19,103,678      20,976,381       1,350,000      22,326,381       3,222,703
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting difference between the projected revenue in 2016 and 
the projected revenue in 2017 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 in this rule on shippers varies by area 
and district. The rate changes, after taking into account the increase 
in pilotage rates and the addition of temporary surcharges, would lead 
to affected shippers operating in District One, District Two, and 
District Three experiencing an increase in payments of $1,304,074, 
$1,003,850, and $914,779, respectively, from the previous year. The 
overall adjustment in payments would be an increase in payments by 
shippers of $3,222,703 across all three districts (a 17 percent 
increase over 2016, including surcharges). Because the Coast Guard must 
review and prescribe rates for Great Lakes Pilotage annually, the 
effects are estimated as single year costs rather than annualized over 
a 10-year period.
    Table 19 shows the difference in revenue by component from 2016 to 
2017.\86\ The majority of the increase in revenue is due to the 
addition of 8 pilots that were authorized in the 2016 rule. These eight 
pilots trained during 2016 are full-time working pilots during the 2017 
shipping season. These pilots will be compensated at the target 
compensation established in the 2016 final rule, plus inflation 
($332,963 per pilot). The addition of these pilots to full working 
status accounts for $2,663,704 of the increase. The remaining amount is 
attributed to inflation of operating expenses, working capital fund, 
and differences in the surcharges from 2016.
---------------------------------------------------------------------------

    \86\ The 2016 projected revenues are from the 2016 rulemaking, 
81 FR 11934, Figures 24 and 28. The 2017 projected revenues are from 
Table 106 of this NPRM.

                                  Table 19--Difference in Revenue by Component
----------------------------------------------------------------------------------------------------------------
                                                                                               Difference  (2017
                   Revenue component                     Revenue needed in  Revenue needed in    revenue -2016
                                                                2016               2017             Revenue)
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses............................         $4,677,518         $5,155,280           $477,762
Total Target Pilot Compensation........................         12,066,226         14,983,335          2,917,109
Working Capital Fund...................................            709,934            837,766            127,832
                                                        --------------------------------------------------------
    Total Revenue Needed, without Surcharge............         17,453,678         20,976,381          3,522,703
Surcharge..............................................          1,650,000          1,350,000           -300,000
                                                        --------------------------------------------------------
    Total Revenue Needed, with Surcharge...............         19,103,678         22,326,381          3,222,703
----------------------------------------------------------------------------------------------------------------

Pilotage Rates as a Percentage of Vessel Operating Costs
    To estimate the impact of U.S. pilotage costs on the foreign 
vessels affected by the rate adjustment, we looked at the pilotage 
costs as a percentage of a vessel's costs for an entire voyage. The 
part of the trip on the Great Lakes using a pilot is only a portion of 
the whole trip. The affected vessels are often traveling from a foreign 
port, and the days without a pilot on the total trip often exceed the 
days a pilot is needed.

[[Page 41493]]

    To estimate this impact, we used 2013 through 2015 vessel arrival 
data from the Coast Guard's Ship Arrival Notification System and 
pilotage billing data from the GLPMS. A random sample of 50 arrivals 
was taken from GLPMS data. To estimate the impact of pilotage costs on 
the costs of an entire trip, we estimated the length of each one-way 
trip. We used the vessel name and the date of the arrival to find the 
last port of call before entering the Great Lakes system. The date of 
the departure from this port was used as the start date of the trip. To 
find the end date of the trip we used GLPMS data to find all the 
pilotage charges associated with this vessel during this trip in the 
Great Lakes system. The last pilotage charge before beginning the trip 
to exit the system was used as the end date of the one-way trip. We 
estimated the total operating cost by multiplying the number of days 
for each trip by the 2015 average daily operating cost and added this 
to the total pilotage costs from GLPMS for each trip. In 2015 the 
average daily operating costs, excluding fixed costs, for Great Lakes 
bulkers and tankers ranged roughly from $5,191 to $7,879.\87\ The total 
pilotage charges for each trip were updated to the 2016 rates using the 
average rate increases in the Great Lakes Pilotage Rates 2013-2016 
Annual Review and Adjustments final rules.\88\ The total updated 
pilotage charges for each trip were then divided by the total operating 
cost of the trip. We found that for a vessel's one-way trips, the U.S. 
pilotage costs could account for approximately 16.9 percent \89\ of the 
total operating costs for a foreign vessel's voyage using 2016 rates.
---------------------------------------------------------------------------

    \87\ ``Ship operating costs: Current and future trends,'' 
Richard Grenier, Moore Stephens LLP, December 2015. The 2015 
weighted average operating cost is estimated at $5,191 for a 
handysize bulker, $5,771 for a handymax bulker, and $7,879 for a 
product tanker. These costs include only the costs of operating and 
do not include any fixed costs of the vessels, such as amortization 
of vessel construction costs. The operating costs include crew 
wages, provisions, other crew costs, lubricating oils and store 
costs, spares, repair and maintenance, P&I insurance, marine 
insurance, registration costs, management fees, and sundry expenses.
    \88\ The average percentage changes in the rates for 2013-2016, 
were 1.87 percent, 2.5 percent, 10 percent, and 12 percent, 
respectively.
    \89\ For the random sample of 50 arrivals, the average of the 
pilotage costs as a percentage of the total operating costs was 16.9 
percent. The percentages ranged from a low of 3.2 percent to a high 
of 35.2 percent.
---------------------------------------------------------------------------

    We also estimated the impact of the rate increase in this rule. We 
took the same 50 trips and updated the pilotage costs to the 2017 
rates, an average increase of 20 percent, excluding surcharges. With 
this rule's rates for 2017, pilotage costs are estimated to account for 
19.6 percent of total operating costs, or a 2.7 percentage point 
increase \90\ over the current cost. The total operating costs do not 
include the fixed costs of the vessels. If these costs were included in 
the total costs, the pilotage rates as a percentage of total costs 
would be lower.
---------------------------------------------------------------------------

    \90\ 19.6 percent of total operating costs in 2017 -16.9 percent 
of total operating costs in 2016 = 2.7 percent incremental increase 
of pilotage costs as a percentage of total operating costs.
---------------------------------------------------------------------------

Benefits
    This rule allows 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 ensuring rates cover an 
association's operating expenses; provide fair pilot compensation, 
adequate training, and sufficient rest periods for pilots; and ensures 
the association makes enough money 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, 
which would help reduce delays caused by pilot shortages.
    The amendment of the cancellation charge in Sec.  401.120(b) will 
prevent confusion and help ensure that it explicitly states that the 
minimum charge for a cancellation is 4 hours. The limitation to the 
surcharge regulation in Sec.  401.401 would prevent excess amounts from 
being recouped via the following year's rule. The changes to Sec.  
404.104 will promote target compensation stability and rate 
predictability.

B. Small Entities

    Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have 
considered whether this rule would have a significant economic effect 
on a substantial number of small entities. The term ``small entities'' 
comprises small businesses, not-for-profit organizations that are 
independently owned and operated and are not dominant in their fields, 
and governmental jurisdictions with populations of less than 50,000 
people.
    For the rule, we reviewed recent company size and ownership data 
for the vessels identified in GLPMS and we reviewed business revenue 
and size data provided by publicly available sources such as MANTA \91\ 
and ReferenceUSA.\92\ As described in Section VI.A of this preamble, 
Regulatory Planning and Review, we found that a total of 407 unique 
vessels used pilotage services from 2013 through 2015. These vessels 
are owned by 119 entities. We found that of the 119 entities that own 
or operate vessels engaged in trade on the Great Lakes affected by this 
rule, 104 are foreign entities that operate primarily outside of the 
United States. The remaining 15 entities are U.S. entities. We compared 
the revenue and employee data found in the company search to the Small 
Business Administration's (SBA) Table of Small Business Size Standards 
\93\ to determine how many of these companies are small entities. Table 
20 shows the NAICS codes of the U.S. entities and the small entity 
standard size established by the SBA.
---------------------------------------------------------------------------

    \91\ See http://www.manta.com/.
    \92\ See http://resource.referenceusa.com/.
    \93\ Source: https://www.sba.gov/contracting/getting-started-contractor/make-sure-you-meet-sba-size-standards/table-small-business-size-standards. SBA has established a Table of Small 
Business Size Standards, which is matched to NAICS industries. A 
size standard, which is usually stated in number of employees or 
average annual receipts (``revenues''), represents the largest size 
that a business (including its subsidiaries and affiliates) may be 
considered in order to remain classified as a small business for SBA 
and Federal contracting programs.

                             Table 20--NAICS Codes and Small Entities Size Standards
----------------------------------------------------------------------------------------------------------------
                 NAICS                                 Description                 Small business size standard
----------------------------------------------------------------------------------------------------------------
238910................................  Site Preparation Contractors............  $15 million.
441222................................  Boat Dealers............................  $32.5 million.
483113................................  Coastal & Great Lakes Freight             750 employees.
                                         Transportation.
483211................................  Inland Water Freight Transportation.....  750 employees.
483212................................  Inland Water Passenger Transportation...  500 employees.
487210................................  Scenic & Sightseeing Transportation,      $7.5 million.
                                         Water.
488320................................  Marine Cargo Handling...................  $38.5 million.

[[Page 41494]]

 
488330................................  Navigational Services to Shipping.......  $38.5 million.
488510................................  Freight Transportation Arrangement......  $15 million.
----------------------------------------------------------------------------------------------------------------

    The entities all exceed the SBA's small business standards for 
small businesses. Further, these U.S. entities operate U.S.-flagged 
vessels and are not required to have pilots as required by 46 U.S.C. 
9302, because they are not engaged in foreign commerce.
    In addition to the owners and operators of vessels affected by this 
rule, there are three U.S. entities affected by the 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. We expect no adverse effect to these 
entities from this rule because all associations receive enough revenue 
to balance the projected expenses associated with the projected number 
of bridge hours and pilots.
    We did not find any small not-for-profit organizations that are 
independently owned and operated and are not dominant in their fields. 
We did not find any small governmental jurisdictions with populations 
of fewer than 50,000 people. Based on this analysis, we found this 
rulemaking, if promulgated, would not affect a substantial number of 
small 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, we want to assist small 
entities in understanding this rule so that they can better evaluate 
its effects on them and participate in the rulemaking. If the rule 
would affect your small business, organization, or governmental 
jurisdiction and you have questions concerning its provisions or 
options for compliance, please consult Mr. Todd Haviland, Director, 
Great Lakes Pilotage, Commandant (CG-WWM-2), Coast Guard; telephone 
202-372-2037, email Todd.A.Haviland@uscg.mil, or fax 202-372-1914. The 
Coast Guard will not retaliate against small entities that question or 
complain about this rule or any policy or action of the Coast Guard.
    Small businesses may send comments on the actions of Federal 
employees who enforce, or otherwise determine compliance with, Federal 
regulations to the Small Business and Agriculture Regulatory 
Enforcement Ombudsman and the Regional Small Business 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 will call 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 the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. We have analyzed this rule under that order 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, the rule is consistent with the principles of 
federalism and preemption requirements 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 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. Though this rule will not result in 
such an expenditure, we do discuss the effects of this rule elsewhere 
in this preamble.

G. Taking of Private Property

    This 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 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

    We have analyzed this 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.

[[Page 41495]]

J. Indian Tribal Governments

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

K. Energy Effects

    We have analyzed this 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.

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

    We have analyzed this rule under Department of Homeland Security 
Management Directive 023-01 and Commandant Instruction M16475.lD, which 
guide the Coast Guard in complying with the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that it 
is one of a category of actions that do not individually or 
cumulatively have a significant effect on the human environment. A 
Record of Environmental Consideration supporting this determination is 
available in the docket where indicated in the ADDRESSES section of 
this preamble. This rule is categorically excluded under paragraphs 
34(a), regulations which are editorial or procedural, of the Coast 
Guard's NEPA Implementing Procedures and Policy for Considering 
Environmental Impacts, COMDTINST M16475.1D.

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 parts 401 and 404 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. Revise Sec.  401.401 to read as follows:

Sec.  401.401  Surcharges.

    To facilitate safe, efficient, and reliable pilotage, and for good 
cause, the Director may authorize surcharges on any rate or charge 
authorized by this subpart. Surcharges must be proposed for prior 
public comment and may not be authorized for more than 1 year. Once the 
approved amount has been received, the pilot association is not 
authorized to collect any additional funds under the surcharge 
authority and must cease such collections for the remainder of that 
shipping season.

0
3. Revise Sec.  401.405 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 $601;
    (2) Lake Ontario is $408;
    (3) Lake Erie is $429;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$580;
    (5) Lakes Huron, Michigan, and Superior is $218; and
    (6) The St. Mary's River is $514.
* * * * *

0
4. Revise Sec.  401.420 to read as follows:

Sec.  401.420  Cancellation, delay, or interruption in rendition of 
services.

* * * * *
    (b) When an order for a U.S. pilot's service is cancelled, the 
vessel can be charged for the pilot's reasonable travel expenses for 
travel that occurred to and from the pilot's base, and the greater of--
    (1) Four hours; or
    (2) The time of cancellation and the time of the pilot's scheduled 
arrival, or the pilot's reporting for duty as ordered, whichever is 
later.
* * * * *

0
5. Revise Sec.  401.450 as follows:
0
a. Redesignate paragraphs (b) through (j) as paragraphs (c) through 
(k), respectively; and
0
b. Add new paragraph (b) to read as follows:

Sec.  401.450  Pilotage change points.

* * * * *
    (b) The Saint Lawrence River between Iroquois Lock and the area of 
Ogdensburg, NY, beginning October 2, 2017;

PART 404--GREAT LAKES PILOTAGE RATEMAKING

0
6. 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).

0
7. Amend Sec.  404.101(a) as follows:

Sec.  404.100   Ratemaking and annual reviews in general.

    (a) The Director establishes base pilotage rates by a full 
ratemaking pursuant to Sec.  404.101-404.110 of this part, conducted at 
least once every 5 years and completed by March 1 of the first year for 
which the base rates will be in effect. Base rates will be set to meet 
the goal specified in Sec.  404.1(a) of this part.

0
8. Amend Sec.  404.103 as follows:
0
a. In paragraph (a), following the words ``dividing each area's'' 
remove the word ``peak'' and add, in its place, the word ``seasonal''; 
and
0
b. Revise paragraph (b) to read as follows:

Sec.  404.103  Ratemaking step 3: Determine number of pilots needed.

* * * * *
    (b) Pilotage demand and the base seasonal work standard are based 
on available and reliable data, as so deemed by the Director, for a 
multi-year base period. The multi-year period is the 10 most recent 
full shipping seasons, and the data source is a system approved under 
46 CFR 403.300. Where such data are not available or reliable, the 
Director also may use data, from additional past full shipping seasons 
or other sources, that the Director determines to be available and 
reliable.
* * * * *

0
9. Revise Sec.  404.104 to read as follows:

[[Page 41496]]

Sec.  404.104   Ratemaking step 4: Determine target pilot compensation 
benchmark.

    At least once every 10 years, the Director will set a base target 
pilot compensation benchmark using the most relevant available non-
proprietary information. In years in which a base compensation 
benchmark is not set, target pilot compensation will be adjusted for 
inflation using the CPI for the Midwest region or a published 
predetermined amount. The Director determines each pilotage 
association's total target pilot compensation by multiplying individual 
target pilot compensation by the number of pilots projected under Sec.  
404.103(d) of this part.

Sec.  404.105   [Amended]

0
10. In the section heading of Sec.  404.105, remove the words ``return 
on investment'' and add, in their place, the words ``working capital 
fund.''

0
11. In the first sentence of Sec.  404.105, remove the words ``return 
on investment'' and add, in their place, the words ``working capital 
fund.''

0
12. Revise Sec.  404.107 to read as follows:

Sec.  404.107   Ratemaking step 7: Initially calculate base rates.

    The Director initially calculates base hourly rates by dividing the 
projected needed revenue from Sec.  404.106 of this part by averages of 
past hours worked in each district's designated and undesignated 
waters, using available and reliable data for a multi-year period set 
in accordance with Sec.  404.103(b) of this part.

0
13. Revise Sec.  404.108 to read as follows:

Sec.  404.108   Ratemaking step 8: Calculate average weighting factors 
by Area.

    The Director calculates the average weighting factor for each area 
by computing the 10-year rolling average of weighting factors applied 
in that area, beginning with the year 2014. If less than 10 years of 
data are available, the Director calculates the average weighting 
factor using data from each year beginning with 2014.

0
14. Add new Sec.  404.109 to read as follows:

Sec.  404.109   Ratemaking step 9: Calculate revised base rates.

    The Director calculates revised base rates for each area by 
dividing the initial base rate (from Step 7) by the average weighting 
factor (from Step 8) to produce a revised base rate for each area.

0
15. Add new Sec.  404.110 to read as follows:

Sec.  404.110   Ratemaking step 10: Review and finalize rates.

    The Director reviews the base pilotage rates calculated in Sec.  
404.109 of this part to ensure they meet the goal set in Sec.  404.1(a) 
of this part, and either finalizes them or first makes necessary and 
reasonable adjustments to them based on requirements of Great Lakes 
pilotage agreements between the United States and Canada, or other 
supportable circumstances.

    Dated: August 24, 2017.
Michael D. Emerson,
Director, Marine Transportation Systems, U.S. Coast Guard.
[FR Doc. 2017-18411 Filed 8-30-17; 8:45 am]
BILLING CODE 9110-04-P