Document ID: USCG-2020-0457-0013
Agency: uscg
Document Type: Rule
Title: Great Lakes Pilotage Rates- 2021 Annual Review and Revisions to Methodology
Posted Date: 2021-03-12T05:00Z

[Federal Register Volume 86, Number 47 (Friday, March 12, 2021)]
[Rules and Regulations]
[Pages 14184-14220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05050]

[[Page 14183]]

Vol. 86

Friday,

No. 47

March 12, 2021

Part II

Department of Homeland Security

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Coast Guard

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46 CFR Parts 401 and 404

Great Lakes Pilotage Rates--2021 Annual Review and Revisions to 
Methodology; Final Rule

  Federal Register / Vol. 86, No. 47 / Friday, March 12, 2021 / Rules 
and Regulations  

[[Page 14184]]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[Docket No. USCG-2020-0457]
RIN 1625-AC67

Great Lakes Pilotage Rates--2021 Annual Review and Revisions to 
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the 
Coast Guard is establishing new base pilotage rates for the 2021 
shipping season. This final rule will adjust the pilotage rates to 
account for changes in district operating expenses, an increase in the 
number of pilots, and anticipated inflation. The rule makes one change 
to the ratemaking methodology to account for actual inflation in step 
4. Additionally, the rule excludes legal fees incurred in litigation 
against the Coast Guard regarding ratemaking from necessary and 
reasonable pilot association operating expenses. When combined with the 
changes above, this results in a 7-percent net increase in pilotage 
costs compared to the 2020 season.

DATES: This final rule is effective April 12, 2021.

ADDRESSES: To view documents and comments mentioned in this preamble as 
being available in the docket, go to https://www.regulations.gov, type 
USCG-2020-0457 in the ``SEARCH'' box and click ``SEARCH.'' Click on 
Open Docket Folder on the line associated with this rule.

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

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Methodological and Other Changes
    A. Inflation of Pilot Compensation Calculation in Step 4
    B. Exclusion of Legal Fees Incurred in Lawsuits Against the 
Coast Guard Related to Ratemaking and Regulating From Pilots 
Associations' Approved Operating Expenses
    C. Operation Expenses in Table 3--2018 Recognized Expenses for 
District One
VI. Discussion of Comments
VII. Discussion of Rate Adjustments
    District One
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Two
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Three
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation 
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
VIII. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates
    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
BLS Bureau of Labor Statistics
CFR Code of Federal Regulations
CPA Certified Public Accountant
CPI Consumer Price Index
DHS Department of Homeland Security
Director U.S. Coast Guard's Director of the Great Lakes Pilotage
EAJA Equal Access to Justice Act
ECI Employment Cost Index
FOMC Federal Open Market Committee
FR Federal Register
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
I.R.C. Internal Revenue Code
LPA Lakes Pilots Association
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
Pilots Working Pilots
SBA Small Business Administration
SLSPA St. Lawrence Seaway Pilots' Association
Sec.  Section
The Act Great Lakes Pilotage Act of 1960
The Coalition The Shipping Federation of Canada, the American Great 
Lakes Ports Association, and the United States Great Lakes Shipping 
Association
U.S.C. United States Code
User's Coalition The Shipping Federation of Canada, the American 
Great Lakes Ports Association, and the United States Great Lakes 
Shipping Association
WGLPA Western Great Lakes Pilot Association

II. Executive Summary

    Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\ 
the Coast Guard regulates pilotage for oceangoing vessels on the Great 
Lakes and St. Lawrence Seaway--including setting the rates for pilotage 
services and adjusting them on an annual basis for the upcoming 
shipping season. Shipping season begins when the locks are opened in 
the St. Lawrence Seaway, which allows traffic access to and from the 
Atlantic Ocean. The opening of the locks varies annually depending on 
the waterway conditions, but is generally in March or April. The rates, 
which for the 2020 season range from $337 to $758 per pilot hour 
(depending on which of the specific six areas pilotage service is 
provided), are paid by shippers to pilot associations. The three pilot 
associations, which are the exclusive U.S. source of registered pilots 
on the Great Lakes, use this revenue to cover operating expenses, 
maintain infrastructure, compensate applicant and registered pilots, 
acquire and implement technological advances, train new personnel, and 
allow partners to participate in professional development.
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    \1\ Title 46 of the United States Code (U.S.C.) Chapter 93; 
Public Law 86-555, 74 Stat. 259, as amended.
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    To compute the rate for pilotage services, we have been modifying 
our methodology, originally introduced in 2016, each year since then, 
in

[[Page 14185]]

accordance with our statutory requirements and regulations. Our 
ratemaking methodology calculates the revenue needed for each pilotage 
association (operating expenses, compensation for the number of pilots, 
and anticipated inflation), and then divides that amount by the 
expected demand for pilotage services over the course of the coming 
year, to produce an hourly rate. This process is currently effected 
through a 10-step methodology, which is explained in detail in the 
Summary of Ratemaking Methodology in Section IV of the preamble to this 
final rule.
    As part of our annual review, in this final rule we are 
implementing new pilotage rates for 2021 based on the existing 
methodology. The result is an increase in rates for two areas, a 
decrease for three areas, and no change in the remaining area when 
compared to the 2020 rates. In the 2021 ratemaking NPRM, we estimated a 
4 percent increase in pilotage rates from the 2020 rates. In the 2021 
ratemaking final rule, the pilotage rates for 2021 are about 7 percent 
more than the 2020 rates. These changes are due to a combination of 
five factors:
    (1) A decrease in the amount of money needed for the working 
capital fund;
    (2) adjusting pilot compensation for inflation;
    (3) the net addition of two working pilots (``pilots'') at the 
beginning of the 2021 shipping season;
    (4) an increase in total operating expenses for District One 
compared to the previous year; and
    (5) an increase in the average hours of traffic for each area.
    This increase in the average hours of traffic resulted in lower 
hourly rates despite a net increase in the amount of revenue needed by 
the pilot associations, because, when calculating the base hourly 
rates, the total revenue needed is divided by the average hours of 
traffic annually (see Step 7 of the ratemaking process). The Coast 
Guard uses a 10-year average when calculating traffic, to smooth out 
variations in traffic caused by global economic conditions, such as 
those caused by the COVID-19 pandemic.
    In addition, the Coast Guard is implementing one methodological 
change to the inflation calculation for pilot compensation in step 4, 
to account for actual inflation. And, finally, this rule will disallow 
legal fees for litigation against the Coast Guard regarding the 
ratemakings as redeemable operating expenses. These changes are further 
discussed in Sections V and VI of this preamble.
    Based on the ratemaking model discussed in this final rule, we are 
implementing the rates shown in Table 1.

                     Table 1--Current, Proposed, and Final Pilotage Rates on the Great Lakes
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                                                                  Final 2020     Proposed 2021      Final 2021
                Area                            Name            pilotage rate    pilotage rate    pilotage rate
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District One: Designated............  St. Lawrence River.....             $758             $757             $800
District One: Undesignated..........  Lake Ontario...........              463              428              498
District Two: Designated............  Navigable waters from                618              577              580
                                       Southeast Shoal to
                                       Port Huron, MI.
District Two: Undesignated..........  Lake Erie..............              586              566              566
District Three: Designated..........  St. Marys River........              632              584              586
District Three: Undesignated........  Lakes Huron, Michigan,               337              335              337
                                       and Superior.
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    This rule will impact 54 United States registered pilots, 3 pilot 
associations, and the owners and operators of an average of 279 
oceangoing vessels that transit the Great Lakes annually. This rule is 
not economically significant under Executive Order 12866 and does not 
affect the Coast Guard's budget or increase Federal spending. The 
overall annual regulatory economic impact of this rate change is a net 
increase of $2,064,622 in projected payments made by consumers of 
pilotage services during the 2020 shipping season. Because the Coast 
Guard must review, and, if necessary, adjust rates each year, we 
analyze these as single-year costs and do not annualize them over 10 
years. Section VIII of this preamble provides the regulatory impact 
analyses of this rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960,\2\ which requires foreign merchant vessels and U.S. vessels 
operating ``on register,'' meaning U.S. vessels engaged in foreign 
trade, to use U.S. or Canadian pilots while transiting the U.S. waters 
of the St. Lawrence Seaway and the Great Lakes system.\3\ For United 
States registered pilots, the Act requires the Secretary to ``prescribe 
by regulation rates and charges for pilotage services, giving 
consideration to the public interest and the costs of providing the 
services.'' \4\ The Act requires that rates be established or reviewed 
and adjusted each year, not later than March 1.\5\ The Act also 
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, in consideration of the public 
interest and the costs of providing the services, adjusted.\6\ The 
Secretary's duties and authority under the Act have been delegated to 
the Coast Guard.\7\
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    \2\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as 
amended.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ 46 U.S.C. 9303(f).
    \5\ Id.
    \6\ Id.
    \7\ Department of Homeland Security (DHS) Delegation No. 0170.1, 
para. II (92.f).
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    The purpose of this final rule is to establish new pilotage rates 
for the 2021 shipping season. The Coast Guard believes that the new 
rates will continue to promote our goals in title 46 of the Code of 
Federal Regulations (CFR), part 404.1, for pilot retention, to ensure 
safe, efficient, and reliable pilotage services in order to facilitate 
maritime commerce throughout the Great Lakes and Saint Lawrence River 
System, and to provide adequate funds to upgrade and maintain 
infrastructure.

IV. Background

    Pursuant to the Act, the Coast Guard, in conjunction with the 
Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping 
practices and rates on the Great Lakes. Under Coast Guard regulations, 
all vessels engaged in foreign trade (often referred to as ``salties'') 
are required to engage U.S. or Canadian pilots during their transit 
through the regulated waters.\8\ United States and Canadian ``lakers,'' 
which account for most commercial shipping

[[Page 14186]]

on the Great Lakes, are not affected.\9\ Generally, vessels are 
assigned a U.S. or Canadian registered pilot depending on the order in 
which they transit a particular area of the Great Lakes and do not 
choose the pilot they receive. If a vessel is assigned a U.S. pilot, 
that pilot will be assigned by the pilotage association responsible for 
the particular district in which the vessel is operating, and the 
vessel operator will pay the pilotage association for the pilotage 
services. The Canadian GLPA establishes the rates for Canadian working 
pilots.
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    \8\ See 46 CFR 401.
    \9\ The Coast Guard uses the term ``laker'' to identify 
commercial cargo vessels especially designed for and generally 
limited to use on the Great Lakes. These vessels are excluded from 
the requirement to use a pilot in the Great Lakes in 46 U.S.C. 
9302(f).
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are 
divided into three pilotage districts. Pilotage in each district is 
provided by an association certified by the Coast Guard's Director of 
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool. 
The Saint Lawrence Seaway Pilotage Association provides pilotage 
services in District One, which includes all U.S. waters of the St. 
Lawrence River and Lake Ontario. The Lakes Pilotage Association 
provides pilotage services in District Two, which includes all U.S. 
navigable waters from Southeast Shoal to Port Huron, MI, including all 
the U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and 
the St. Clair River. Finally, the Western Great Lakes Pilotage 
Association provides pilotage services in District Three, which 
includes all U.S. waters of the St. Marys River, including the Sault 
Ste. Marie Locks; and Lakes Huron, Michigan, and Superior.
    Each pilotage district is further divided into ``designated'' and 
``undesignated'' areas, which is depicted in Table 2 below. Designated 
areas, classified as such by Presidential Proclamation, are waters in 
which pilots must, at all times, be fully engaged in the navigation of 
vessels in their charge.\10\ Undesignated areas, on the other hand, are 
open bodies of water not subject to the same pilotage requirements. 
While working in undesignated areas, pilots must ``be on board and 
available to direct the navigation of the vessel at the discretion of 
and subject to the customary authority of the master.'' \11\ For these 
reasons, pilotage rates in designated areas can be significantly higher 
than those in undesignated areas.
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    \10\ Presidential Proclamation 3385, Designation of restricted 
waters under the Great Lakes Pilotage Act of 1960, December 22, 
1960.
    \11\ 46 U.S.C. 9302(a)(1)(B).

                            Table 2--Areas of the Great Lakes and St. Lawrence Seaway
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      District         Pilotage association           Designation           Area No.\12\       Area name \13\
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One.................  Saint Lawrence Seaway  Designated..................               1  St. Lawrence River.
                       Pilotage Association.
                                             Undesignated................               2  Lake Ontario.
Two.................  Lake Pilotage          Designated..................               5  Navigable waters from
                       Association.                                                         Southeast Shoal to
                                                                                            Port Huron, MI.
                                             Undesignated................               4  Lake Erie.
Three...............  Western Great Lakes    Designated..................               7  St. Marys River.
                       Pilotage Association.
                                             Undesignated................               6  Lakes Huron and
                                                                                            Michigan.
                                                                                        8  Lake Superior.
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    Each pilot association is an independent business and is the sole 
provider of pilotage services in the district in which it operates. 
Each pilot association is responsible for funding its own operating 
expenses, maintaining infrastructure, compensating pilots and applicant 
pilots, acquiring and implementing technological advances, and training 
personnel and partners. The Coast Guard developed a 10-step ratemaking 
methodology to derive a pilotage rate, based on the estimated amount of 
traffic, which covers these expenses. The methodology is designed to 
measure how much revenue each pilotage association will need to cover 
expenses and provide compensation to working pilots. Since the Coast 
Guard cannot guarantee demand for pilotage services, target pilot 
compensation for working pilots is a goal. The actual demand for 
service dictates the actual compensation for the working pilots. We 
then divide that amount by the historic 10-year average for pilotage 
demand. We recognize that, in years where traffic is above average, 
pilot associations will accrue more revenue than projected, while in 
years where traffic is below average, they will take in less. We 
believe that over the long term, however, this system ensures that 
infrastructure will be maintained and that pilots will receive adequate 
compensation and work a reasonable number of hours, with adequate rest 
between assignments, to ensure retention of highly trained personnel.
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    \12\ Area 3 is the Welland Canal, which is serviced exclusively 
by the Canadian GLPA and, accordingly, is not included in the U.S. 
pilotage rate structure.
    \13\ The areas are listed by name at 46 CFR 401.405.
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    Over the past 4 years, the Coast Guard has made adjustments to the 
Great Lakes pilotage ratemaking methodology. In 2016, we made 
significant changes to the methodology, moving to an hourly billing 
rate for pilotage services and changing the compensation benchmark to a 
more transparent model. In 2017, we added additional steps to the 
ratemaking methodology, including new steps that accurately account for 
the additional revenue produced by the application of weighting factors 
(discussed in detail in Steps 7 through 9 for each district, in Section 
VII of this preamble). In 2018, we revised the methodology by which we 
develop the compensation benchmark, based upon U.S. mariners rather 
than Canadian working pilots. The current methodology, which was 
finalized in the Great Lakes Pilotage Rates--2020 Annual Review and 
Revisions to Methodology final rule (Volume 85 of the Federal Register 
(FR) at Page 20088), published April 9, 2020, is designed to accurately 
capture all of the costs and revenues associated with Great Lakes 
pilotage requirements and produce an hourly rate that adequately and 
accurately compensates pilots and covers expenses. The current 
methodology is summarized in the section below.

Summary of Ratemaking Methodology

    As stated above, the ratemaking methodology, outlined in 46 CFR 
404.101 through 404.110, consists of 10 steps that are designed to 
account for the revenues needed and total traffic expected in each 
district. The result is an hourly rate, determined separately

[[Page 14187]]

for each of the areas administered by the Coast Guard.
    In Step 1, ``Recognize previous operating expenses,'' (Sec.  
404.101) the Director reviews audited operating expenses from each of 
the three pilotage associations. Operating expenses include all 
allowable expenses minus wages and benefits. This number forms the 
baseline amount that each association is budgeted. Because of the time 
delay between when the association submits raw numbers and the Coast 
Guard receives audited numbers, this number is 3 years behind the 
projected year of expenses. So, in calculating the 2021 rates in this 
rule, we begin with the audited expenses from the 2018 shipping season.
    While each pilotage association operates in an entire district, the 
Coast Guard tries to determine costs by area. Thus, with regard to 
operating expenses, we allocate certain operating expenses to 
designated areas, and certain operating expenses to undesignated areas. 
In some cases, we can allocate the costs based on where they are 
actually accrued. For example, we can allocate the costs for insurance 
for applicant pilots who operate in undesignated areas only. In other 
situations, such as general legal expenses, expenses are distributed 
between designated and undesignated waters on a pro rata basis, based 
upon the proportion of income forecasted from the respective portions 
of the district.
    In Step 2, ``Project operating expenses, adjusting for inflation or 
deflation,'' (Sec.  404.102) the Director develops the 2021 projected 
operating expenses. To do this, we apply inflation adjustors for 3 
years to the operating expense baseline received in Step 1. The 
inflation factors are from the Bureau of Labor Statistics' (BLS) 
Consumer Price Index (CPI) for the Midwest Region, or, if not 
available, the Federal Open Market Committee (FOMC) median economic 
projections for Personal Consumption Expenditures (PCE) inflation. This 
step produces the total operating expenses for each area and district.
    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103) 
the Director calculates how many pilots are needed for each district. 
To do this, we employ a ``staffing model,'' described in Sec.  401.220, 
paragraphs (a)(1) through (a)(3), to estimate how many pilots will be 
needed to handle shipping during the beginning and close of the season. 
This number is helpful in providing guidance to the Director in 
approving an appropriate number of credentials for pilots.
    For the purpose of the ratemaking calculation, we determine the 
number of pilots provided by the pilotage associations (see Sec.  
404.103), which is what we use to determine how many pilots need to be 
compensated via the pilotage fees collected.
    In the first part of Step 4, ``Determine target pilot compensation 
benchmark,'' (Sec.  404.104) the Director determines the revenue needed 
for pilot compensation in each area and district. For the 2020 
ratemaking, the Coast Guard updated the benchmark compensation model in 
accordance with Sec.  404.104(b), switching from using the American 
Maritime Officers Union 2015 aggregated wage and benefit information to 
the 2019 compensation benchmark. Based on our experience over the past 
two ratemakings, the Coast Guard has determined that the level of 
target pilot compensation for those years provides an appropriate level 
of compensation for American Great Lakes pilots. The Coast Guard, 
therefore, will not seek alternative benchmarks for target compensation 
for future ratemakings at this time and will, instead, simply adjust 
the amount of target pilot compensation for inflation. This benchmark 
has advanced the Coast Guard's goals of safety through rate and 
compensation stability while also promoting recruitment and retention 
of qualified U.S. pilots.
    In order to further this goal, for the 2021 ratemaking, the Coast 
Guard is also changing the way inflation is calculated in this step, to 
account for actual inflation instead of predicted inflation. See the 
Discussion of Methodological and Other Changes at Section V of this 
preamble for a detailed description of the changes.
    In the second part of Step 4, set forth in Sec.  404.104(c), the 
Director determines the total compensation figure for each district. To 
do this, the Director multiplies the compensation benchmark by the 
number of pilots for each area and district (from Step 3), producing a 
figure for total pilot compensation.
    In Step 5, ``Project working capital fund,'' (Sec.  404.105) the 
Director calculates a value that is added to pay for needed capital 
improvements and other non-recurring expenses, such as technology 
investments and infrastructure maintenance. This value is calculated by 
adding the total operating expenses (derived in Step 2) to the total 
pilot compensation (derived in Step 4), and multiplying that figure by 
the preceding year's average annual rate of return for new issues of 
high-grade corporate securities. This figure constitutes the ``working 
capital fund'' for each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106) the Director 
simply adds up the totals produced by the preceding steps. The 
projected operating expense for each area and district (from Step 2) is 
added to the total pilot compensation (from Step 4) and the working 
capital fund contribution (from Step 5). The total figure, calculated 
separately for each area and district, is the ``needed revenue.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107) the 
Director calculates an hourly pilotage rate to cover the needed revenue 
as calculated in Step 6. This step consists of first calculating the 
10-year hours of traffic average for each area. Next, the revenue 
needed in each area (calculated in Step 6) is divided by the 10-year 
hours of traffic average to produce an initial base rate.
    An additional element, the ``weighting factor,'' is required under 
Sec.  401.400. Pursuant to that section, ships pay a multiple of the 
``base rate,'' as calculated in Step 7, by a number ranging from 1.0 
(for the smallest ships, or ``Class I'' vessels) to 1.45 (for the 
largest ships, or ``Class IV'' vessels). As this significantly 
increases the revenue collected, we need to account for the added 
revenue produced by the weighting factors to ensure that shippers are 
not overpaying for pilotage services. We do this in the next step.
    In Step 8, ``Calculate average weighting factors by Area,'' (Sec.  
404.108) the Director calculates how much extra revenue, as a 
percentage of total revenue, has historically been produced by the 
weighting factors in each area. We do this by using a historical 
average of the applied weighting factors for each year since 2014 (the 
first year the current weighting factors were applied).
    In Step 9, ``Calculate revised base rates,'' (Sec.  404.109) the 
Director modifies the base rates by accounting for the extra revenue 
generated by the weighting factors. We do this by dividing the initial 
pilotage rate for each area (from Step 7) by the corresponding average 
weighting factor (from Step 8), to produce a revised rate.
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110) often 
referred to informally as ``Director's adjustment'' or ``Director's 
discretion,'' the Director reviews the revised base rates (from Step 9) 
to ensure that they meet the goals set forth in the Act and 46 CFR 
404.1(a), which include promoting efficient, safe, and reliable 
pilotage service on the Great Lakes; generating sufficient revenue for 
each pilotage association to reimburse necessary and reasonable 
operating expenses; compensating trained and rested pilots

[[Page 14188]]

fairly; and providing appropriate profit for improvements.
    After the base rates are set, Sec.  401.401 permits the Coast Guard 
to apply surcharges. We did not propose any surcharges in the notice of 
proposed rulemaking (NPRM) (85 FR 68210, October 27, 2020), and the 
Coast Guard will not be imposing surcharges in the 2021 ratemaking.

V. Discussion of Methodological and Other Changes

    In the 2021 ratemaking NPRM, the Coast Guard proposed one 
methodological change to Step 4 of the ratemaking model and two policy 
changes. In consideration of the comments, this final rule only adopts 
the change to the way we calculate inflation of pilot compensation in 
Step 4 and the exclusion of legal fees associated with lawsuits against 
the Coast Guard's ratemaking and oversight requirements from pilot 
association operating expenses. Additionally, this final rule makes 
corrections to District One's operating expenses. This rule does not 
make any changes to the staffing model, for the reasons discussed in 
Section VI, Discussion of Comments.

A. Inflation of Pilot Compensation Calculation in Step 4

    As proposed in the NPRM, this rule changes the inflation 
calculation in Sec.  404.104(b) for interim ratemakings so that the 
previous year's target compensation value will first be adjusted by 
actual inflation using the Employment Cost Index (ECI) inflation value. 
With this change, we will update the previous year's target 
compensation value for actual inflation using ECI inflation values in 
each ratemaking. This ensures that any differences between the 
predicted inflation rate and the actual inflation rate will not be 
compounded with each ratemaking when the predicted PCE value is higher 
or lower than actual inflation. We will then multiply the ECI-adjusted 
target compensation for past years by the predicted future inflation 
value from the PCE to account for future inflation.
    The BLS ECI only provides historic data; consequently, we use PCE 
data, in accordance with Sec.  404.104(b), as the PCE provides 
estimates of future inflation for the upcoming shipping season. The PCE 
is a reflection of the Government's best prediction of what will 
happen, and the Coast Guard will continue to use it as our predicted 
inflation value in Step 4 of the ratemaking.
    For 2020, the actual ECI inflation is 3.5 percent, which is 1.5 
percent greater than the predicted PCE inflation of 2 percent.\14\ The 
difference between using the 2020 predicted PCE inflation rates and 
historic ECI actual inflation data in Sec.  401.104(b) results in a 1.5 
percent increase for 2021 target pilot compensation versus continuing 
to use the predicted PCE inflation value. In some years, however, it is 
possible that the actual ECI inflation will be lower than the predicted 
PCE inflation, resulting in a lower value for target pilot compensation 
than if we had continued to use the PCE inflation.
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    \14\ U.S. BLS ECI Q3 2020 data for Total Compensation for 
Private Industry Workers in the Transportation and Material Moving 
Sector (Series ID: CIU2010000520000A). The third quarter data was 
the most recently available data at the time of analysis for this 
final rule, available at https://www.bls.gov/news.release/archives/eci_10302020.pdf in Table 5 on page 10. The NPRM used the Q1 value 
of 3.4 percent, which is available at https://www.bls.gov/news.release/archives/eci_04302020.pdf in Table 5 on page 10.
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B. Exclusion of Legal Fees Incurred in Lawsuits Against the Coast Guard 
Related to Ratemaking and Regulating From Pilot Associations' Approved 
Operating Expenses

    This final rule excludes legal fees incurred in litigation against 
the Coast Guard in relation to the ratemaking and oversight 
requirements in 46 U.S.C. 9303, 9304, and 9305 from approved pilot 
associations' operating expenses used in the calculation of pilotage 
rates. As we proposed in the NPRM, this exclusion will be added to 
Sec.  404.2, ``Procedure and criteria for recognizing association 
expenses,'' in paragraph (b)(6).
    Excluding these legal fees from operating expenses in the 
ratemaking and regulatory function is consistent with ``giving 
consideration to the public interest and the costs of providing the 
services,'' \15\ because it places the burden of paying the legal fees 
on the Coast Guard, as the responsible party, when the pilots prevail 
on the merits, rather than the shipping companies that have no choice 
but to pay the set rate for pilotage services. Our reasoning is 
discussed further in Section VI of this preamble, Discussion of 
Comments.
---------------------------------------------------------------------------

    \15\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    Our process to exclude the legal fees in our annual ratemaking will 
be as follows. First, the unreimbursed pilot associations' legal fees 
incurred in litigation against the Coast Guard will be identified as an 
individual line item in the operating expenses. Second, we will remove 
the same amount by way of a Director's adjustment in a later step. To 
clarify, any pilot association's legal fees associated with intervening 
on the Coast Guard's defense in a ratemaking lawsuit will continue to 
be included as an approved operating expense and will not be removed by 
way of a Director's adjustment.
    When a pilot association's legal fees are reimbursed fully or 
partially by way of the Equal Access to Justice Act (EAJA) or 
settlement, then the operating expense amount will be reduced to 
represent only the unreimbursed dollar amount, and that same dollar 
amount will be excluded by a Director's adjustment. Only the 
outstanding cost of legal fees incurred in litigation against the Coast 
Guard related to ratemaking and oversight will be listed, representing 
the true cost to the association. Listing the dollar amount of 
unreimbursed legal expenses and removing it from the operating expenses 
will provide transparency to the pilot associations of the exact amount 
of legal fees excluded by this change.

C. Operation Expenses in Table 3--2018 Recognized Expenses for District 
One

    The St. Lawrence Seaway Pilots' Association (SLSPA), District One, 
comment from Captain Boyce,\16\ Association President, described 
several errors in the NPRM's Table 3--2018 Recognized Expenses For 
District One.\17\ He commented that the rate calculation did not 
include 2018 operating expenses for the following allowable items: (1) 
Applicant pilot salaries, (2) a down payment for a pilot boat, (3) loan 
payments for the new pilot boat, and (4) dock repairs. Per our 
requirements in Sec.  404.101, the Coast Guard uses a third-party 
auditing firm to produce financial reports for the pilot associations. 
We contracted CohnReznick (a professional services firm that 
specializes in accounting, taxes, and advising) to create the 2018 
financial reports, and used them to establish the rates in the 2021 
NPRM. We asked CohnReznick to review the District One 2018 expense 
report and SLSPA comment to verify the four missing operating expenses 
raised by the commenter and provide us with updated numbers.
---------------------------------------------------------------------------

    \16\ https://www.regulations.gov/document?D=USCG-2020-0457-0005.
    \17\ Table 3 can be found in the proposed rule published at 85 
FR 68219 (October 27, 2020).
---------------------------------------------------------------------------

    The commenter asserted that applicant salaries were improperly 
excluded from expenses and makes the following points: (1) For 
apprentice pilots, as K-1 partners, compensation is not recorded as an 
expense by generally accepted accounting principles (GAAP) accounting 
standards, although it clearly fits within what is, and has been, 
recognized as an allowable expense in the ratemaking; (2) the NPRM 
shows the applicant salary amount by adding then

[[Page 14189]]

subtracting them from the expenses in the Director's adjustments in 
Table 3, which, in itself, has no net effect; and (3) the net result is 
that $594,521 needs to be added to the expenses.
    The Coast Guard agrees with the commenter that applicant pilot 
salaries are necessary expenses that we should have included in the 
operating expense base of the NPRM. However, we would have adjusted 
them to reasonable amounts. As the commenter notes, in Table 3 of the 
NPRM, the salaries were added in but immediately deducted. The 
applicant salaries were not otherwise included in the expense base, so 
we should not have deducted them from the ratemaking. Applicant 
salaries are considered reasonable and necessary expenses, subject to 
Director's adjustments, under our existing ratemaking process and per 
Sec.  404.2(a). CohnReznick provided an updated applicant salary 
expense of $594,331 for the total applicant salaries for District One. 
We will use the value verified by the auditor, per our requirement in 
Sec.  404.101. In this rule, we are removing the deduction for 
applicant pilot salaries in the District One expenses, thus allowing 
$594,331 for applicant pilot salaries as operating expenses, before any 
Director's adjustments, to ensure the amount included in the total 
operating expenses is reasonable. The Director's adjustments to the 
applicant salaries, originally proposed in the NPRM and adopted in this 
final rule, include a deduction to bring the total salaries down to an 
amount determined reasonable by the Director, and a deduction for the 
amount of applicant salary surcharges the association received in 2018 
under that year's ratemaking (see Section VII of this preamble).
    In addition, the SLSPA comment noted that District One had 
operating expenses in 2018 related to the purchase of a new pilot boat, 
a dock project, and pilot boat loan expenses. The commenter included a 
spreadsheet detailing the expenses and errors in District One's 
operating expenses and asserted that the NPRM's Table 3--2018 
Recognized Expenses for District One did not cover their mortgaged 
infrastructure and dock project. We inquired with CohnReznick, and they 
confirmed that the pilot boat, the loan on the pilot boat, and the dock 
project were not included in the original report used to develop the 
NPRM; therefore, they were not included in the operational expenses in 
Table 3.
    It is within our regulatory authority to consider these 
infrastructure costs as operating expenses. The regulations in 46 CFR 
404.1(a) state that the goal of the ratemaking is to reimburse pilot 
associations' ``necessary and reasonable operating expenses, fairly 
compensate trained and rested pilots, and provide an appropriate profit 
to use for improvements.'' Additionally, Sec.  404.2(a) requires the 
Director to review all reported expenses and determine if they are both 
necessary for providing pilotage service and reasonable in amount. 
Under Sec.  404.2(b) criteria for determining if an expense is 
necessary and reasonable, these capital expenses are not otherwise 
excluded from being considered necessary and reasonable operating 
expenses in this rule. The costs for purchasing a new pilot boat, loan 
costs associated with the new pilot boat, and dock maintenance are 
necessary for pilotage services because the pilots use the pilot boats 
and docks in their daily business. It is necessary to maintain their 
infrastructure to be able to perform their duties efficiently. For the 
same reasons, these infrastructure expenses are also necessary and 
reasonable in amount when compared to similar expenses paid by others 
in the maritime or other comparable industry. Therefore, our regulatory 
framework requires the Coast Guard to allow these expenses in the year 
they were paid.
    Additionally, current Coast Guard regulations do not require these 
costs be paid out of the pilot association's working capital fund. The 
section covering the working capital fund is 46 CFR 403.110, which 
states that pilot associations may only spend the working capital funds 
on items such as infrastructure improvements, major pilot boat repairs, 
and property acquisition. There is no requirement that they must use 
the working capital fund for these expenses. The commenter and district 
reported these as expenses for 2018, not working capital funds. As 
such, we do not have the regulatory authority to require District One 
to use the working capital fund to pay for these purchases rather than 
including them as operational expenses.
    This final rule includes the infrastructure costs in District One's 
operational expenses for 2018. These updated numbers are reflected in 
Table 3 in this preamble under ``Capital Expenses.'' CohnReznick, our 
auditor, provided us verified numbers for these expenses.
    The SLSPA comment also stated that in the NPRM's Table 3--2018 
Recognized Expenses for District One,\18\ the CPA deduction for dues 
and subscriptions of $6,600 is incorrect and should be added back into 
total operating expenses. In their inspection of the CPA's report for 
2018, the SLSPA found that the CPA did not deduct $6,600 for dues and 
subscriptions, meaning this is an allowable expense, in their opinion. 
The Coast Guard verified that this CPA deduction was not in the audit 
report and, therefore, the deduction in the NPRM was unsupported. In 
Table 3 of this rule's preamble, we removed the $6,600 CPA deduction, 
thus allowing the $6,600 operating expense for dues and subscriptions 
for District 1. However, in future rulemakings the Coast Guard will be 
working with the auditors to identify which dues and subscriptions fees 
should be counted as necessary and reasonable operating expenses and 
which should be considered pilot compensation.
---------------------------------------------------------------------------

    \18\ Table 3 can be found in the proposed rule published at 85 
FR 68219 (October 27, 2020).
---------------------------------------------------------------------------

VI. Discussion of Comments

    In response to the October 27, 2020 NPRM (85 FR 68210), the Coast 
Guard received seven comment letters as well as a duplicate comment 
submission. These letters included one comment from the Great Lakes 
Pilots, which represents the interests of the three Great Lake pilot 
associations (``Great Lakes Pilots' comment''); a comment from the 
Shipping Federation of Canada, the American Great Lakes Ports 
Association, and the United States Great Lakes Shipping Association 
(``the User's Coalition'' or ``the Coalition''); a comment from the 
American Pilots' Association (``APA''); a comment from the president of 
the St. Lawrence Seaway Pilots' Association (``SLSPA''); a comment from 
the president of the Lakes Pilots Association (``LPA''); a comment from 
the president of the Western Great Lakes Pilot Association (``WGLPA''); 
and a comment made by Captain John Swartout, a pilot working for 
District Three. As each of these commenters touched on numerous issues, 
for each response below we note which commenter raised the specific 
points addressed. In situations where multiple commenters raised 
similar issues, we attempt to provide one response to those issues.

1. Inflation of Pilot Compensation Calculation in Step 4

    We received several comments on the proposed changes in the 2021 
NPRM to Step 4 of the ratemaking, which adjusts target pilot 
compensation to account for inflation. In prior ratemakings, the Coast 
Guard adjusted the existing target pilot compensation to account for 
inflation, following the procedures outlined in Sec.  404.104(b), which 
requires that the U.S. Federal Reserve's PCE price index be used when 
data from the U.S. BLS

[[Page 14190]]

ECI data is not available. In the 2021 NPRM, the Coast Guard proposed 
that the previous year's target compensation value would first be 
adjusted by the difference between predicted PCE inflation value and 
actual ECI inflation value, to ensure that the target compensation 
value accounts for actual inflation. We would then multiply this 
adjusted target compensation value by the predicted future inflation 
value from the PCE to account for future inflation.
    Comments from Captain Swartout,\19\ WGLPA,\20\ and the Great Lakes 
Pilots' comment \21\ stated that they agreed with Coast Guard's 
approach to adjust the 2020 target compensation (the previous year's 
target compensation) adjusted by the difference between predicted PCE 
inflation value and actual ECI inflation value. However, they believed 
that the Coast Guard should also adjust the 2018 and 2019 target 
compensation values by the ECI inflation index. The Great Lakes Pilots' 
comment went on to state that the ``correct'' target pilot compensation 
figures can be calculated by applying the ECI inflation value to the 
2018 and 2019 rates, and calculates a target compensation value of 
$388,900. They stated that, in the 2018 final rule, the Coast Guard 
``promised'' to use the ECI but instead used the PCE, causing incorrect 
numbers.
---------------------------------------------------------------------------

    \19\ https://www.regulations.gov/document?D=USCG-2020-0457-0005.
    \20\ https://www.regulations.gov/document?D=USCG-2020-0457-0006.
    \21\ https://www.regulations.gov/document?D=USCG-2020-0457-0012.
---------------------------------------------------------------------------

    The Coast Guard disagrees with the implication that the target 
compensation values were incorrectly or illogically calculated. These 
values were calculated following the methodology outlined in Sec.  
404.104(b), which states that, when ECI data is not available, the 
Coast Guard will use the PCE. The Coast Guard followed this approach in 
the 2018, 2019, and 2020 ratemakings, using the method that was 
codified in the CFR at the time. Based on comments provided in the 2020 
proposed ratemaking, the Coast Guard reviewed the methodology used to 
inflate target pilot compensation and proposed a modified approach for 
the 2021 ratemaking. This modified approach is consistent with our past 
approach of updating the previous year's target compensations in our 
ratemakings. Therefore, this final rule does not adjust the previous 
years' target compensations, because they were set according to the 
regulations in place at the time, and changing them now would be akin 
to retroactive rulemaking. We would have had to propose regulations 
allowing us to adjust target compensations from multiple prior years in 
order to update the 2018 and 2019 target compensations. The Coast Guard 
does not plan to recalculate target compensation for previous years, as 
it has been our consistent approach to only update the previous year's 
target compensation when calculating the next year's target 
compensation.
    The Coast Guard received a comment from the User's Coalition on the 
inflation rate of 3.4 percent, which was used to calculate the 
inflation adjustment for target pilot compensation in the NPRM. The 
commenter stated that the highest inflation rate they could find was 
1.4 percent and suggested that the Coast Guard follow the Bureau of 
Labor Statistics' recommended guidelines for ``use of the consumer 
price index for escalation.'' These guidelines include identifying the 
CPI series, reference period, frequency, and establishing and 
adjustment formula.
    The Coast Guard believes this commenter misunderstands the BLS's 
CPI, which measures inflation of consumer prices for goods and 
services, for the ECI, which measures the cost of employment and 
includes factors such as employee wages and benefits. The Coast Guard 
currently uses the CPI in Step 2 of the ratemaking, where we use the 
annual change in average inflation, which was 1.5 percent in 2019. 
While we cite this data in footnote 32 of the NPRM (and footnote 30 of 
this final rule), including a link where the user may download the data 
themselves, we do agree with the commenter that we could provide more 
citation information. Therefore, in this rule, we added the BLS series 
ID to that footnote, as well as additional clarification on which 
numbers we are using. With regards to the 3.4 percent inflation rate in 
Step 4, that data was first-quarter data from the ECI index for private 
industry workers in the transportation and moving materials sector. In 
this final rule, we use 3.5 percent, from third-quarter data. The 
information for this series, including the series ID and a link to 
download the data, is found in footnote 35 of the NPRM (and footnote 14 
of this final rule). However, in an effort to increase transparency, we 
have also added more information on the reference period covered by 
this data.

2. Always Rounding Up in the Staffing Model

    In the NPRM, we proposed to always round up the final number in the 
staffing model, in Sec.  401.220(a)(2), rather than round to the 
nearest integer when determining the maximum number of pilots. Our 
justification for this proposed change was based on previous comments 
and submissions from members of Great Lakes Pilotage Advisory Committee 
(GLPAC) stating that, due to the nature of associations' presidential 
duties, the president is expected to spend less time engaged in 
piloting vessels. None of the commenters who commented on this change 
agreed that rounding up in the staffing model was the best way to fill 
the staffing problem. In response, we will forego making any changes to 
the staffing model in this final rule to gather more information on the 
best way to address this issue, based on concerns raised by the 
commenters.
    Commenter Captain Swartout \22\ suggested that rounding up in the 
staffing model is not sufficient because the result is random, 
inconsistent, and a matter of chance whether a district gets an 
additional pilot or not. For example, there is a significant difference 
between rounding 15.1 up to 16 and rounding 15.9 up to 16. In both 
cases, 16 pilots are authorized, but in the first instance, nine-tenths 
of a pilot is authorized for assisting in administrative work, and in 
the second instance, only one-tenth of a pilot is. Captain Swartout 
also noted his continued concern with pilots being expected to work 
more hours than industry standards and noted that the rounding will not 
solve this. He suggested, as an alternative, to add one additional 
pilot to the staffing model for administrative work, even after 
rounding up. The Coast Guard agrees that we need to consider other 
alternatives to better the staffing model. As stated above, we will not 
be implementing the change in this ratemaking in order to conduct more 
research.
---------------------------------------------------------------------------

    \22\ https://www.regulations.gov/document?D=USCG-2020-0457-0005.
---------------------------------------------------------------------------

    The APA comment \23\ affirmed that there is always one pilot ``off 
the roles'' in each association. Similarly, the SLSPA \24\ emphasized 
it is impossible to operate as a president and pilot a vessel at the 
same time and with no opportunity to rest. The APA urged the Coast 
Guard to consider authorizing an additional pilot for each district, 
whose principal duties would be to serve as an ``operations pilot.'' 
They said pilots on ships, as well as dispatchers and transportation 
coordinators, need operational support readily available in real time 
from a seasoned and experienced piloting professional. This 
professional is currently the association president or the suggested 
extra

[[Page 14191]]

``operations pilot.'' The APA comment explained that piloting expertise 
is necessary to perform these duties, and that the president pilot 
should be replaced with a pilot, not administrative staff. The 
president is unable to delegate certain administrative duties that keep 
him from piloting a vessel.
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    \23\ https://www.regulations.gov/document?D=USCG-2020-0457-0007.
    \24\ https://www.regulations.gov/document?D=USCG-2020-0457-0010.
---------------------------------------------------------------------------

    The Coast Guard is considering these suggestions and additional 
information on the duties that an operational pilot and association 
president typically perform. Based on this information, we understand 
that having a ``pilot off the roles'' is a best practice in the state 
and local pilots' associations. Since we did not propose this, we will 
plan to address it during a future GLPAC meeting before we consider 
proposing it in a subsequent rule.
    The Great Lakes Pilots' comment asserted that providing only a 
fractional pilot authorization, rather than a full pilot authorization 
to handle these administrative and other operational duties, while 
helpful, does not accord with the reality of the time spent on these 
functions. They explained that rounding up one year will be of no help 
in future years if that pilot is, for example, eliminated the next year 
due to differences in rounding results. The commenter proposed that the 
operations pilot slot added this year should be made permanent, so that 
pilots can be added as needed in the future without concern that 
application of the rounding approach could limit the pilots' ability to 
efficiently administer their operations. For some of the reasons 
mentioned by the commenter, we agree that the rounding up method in the 
staffing model needs more consideration before we adopt a change. The 
Coast Guard did not propose making the rounding up permanent in the 
NPRM, but we may consider this option and its effects on the ratemaking 
in a future rulemaking.
    The User's Coalition comment claimed that rounding up in the 
staffing model was an arbitrary change to increase pilot counts. The 
commenter suggested that an administrative position could be filled at 
a much lower cost than an additional pilot, thus freeing up the 
president's time. We know that pilot association presidents are often 
pulled away from their pilotage duties by tasks they cannot delegate, 
leaving less time for them to engage in piloting a vessel. The Coast 
Guard does not possess sufficient qualitative data to determine this 
estimated amount of time. However, the Coast Guard will take this 
suggestion into consideration when determining a way forward.
    The SLSPA comment described a throttling effect on traffic flow 
caused by the Great Lakes Pilotage Association's ability to handle 
traffic, and requested eight pilots in area one and five pilots in area 
two on the assignment list during the season. The commenter noted that 
this number will be higher depending on Canadian GLPA staffing. In 
order to accommodate 10 days restorative rest per month, the SLSPA 
stated it needs to have 19.5, rounded up to 20, fully registered 
pilots. They also requested one additional operations pilot, bringing 
the total to 21.
    As per 46 CFR 401.220, the Director determines the base number of 
pilots needed by dividing each area's peak pilotage demand data by its 
pilot work cycle. The pilot work cycle standard includes any time that 
the Director finds to be a necessary and reasonable component of 
ensuring that a pilotage assignment is carried out safely, efficiently, 
and reliably for each area. These components may include, but are not 
limited to: (1) The amount of time a pilot provides pilotage service; 
(2) the amount of time available to a vessel's master to provide 
pilotage service; (3) the pilot's travel time, measured from the 
pilot's base to and from an assignment's starting and ending points; 
(4) administrative time for a pilot who serves as a pilot association's 
president; (5) rest between assignments, as required by Sec.  401.451; 
(6) the 10 days' recuperative rest per month from April 15 through 
November 15 each year, provided that lesser rest allowances are 
approved by the Director at the pilotage association's request, if 
necessary to provide pilotage without interruption through that period; 
and (7) time for pilotage-related training.
    The Coast Guard is willing to bring up this staffing issue during a 
future GLPAC meeting. The additional operational pilot requested 
appears to be the SLSPA's suggested alternative in lieu of the NPRM's 
proposed rounding up in the staffing model. We will consider this 
alternative in developing a future rulemaking, but are not adopting any 
changes to the staffing model at this time, in order to conduct more 
research. Additionally, the Coast Guard plans to reconsider the 
recuperative rest requirements in a future ratemaking, but we did not 
propose any rest requirement-related changes in the NPRM that preceded 
this final rule.

3. Legal Fees Incurred in Lawsuits Against the Coast Guard's Ratemaking 
and Oversight Requirements

    The Coast Guard received several comments on the exclusion of these 
legal fees. Comments from Captain John Swartout and the APA mentioned 
that they successfully sued the Coast Guard for being arbitrary and 
capricious in the regulatory exclusion of legal fees incurred in 
litigation against the U.S. Government in our 2016 final rule. Comments 
from these pilots requested that we explain the difference between the 
2016 rulemaking attempt and this year's exclusion of legal fees against 
the Coast Guard, and explain why we are no longer recognizing 
litigation expenses for actions against the Coast Guard as an allowable 
and recognizable expense. The APA comment also referenced the preamble 
of our proposed rule for the 2003 Great Lakes pilotage ratemaking. The 
relevant part of the 2003 ratemaking said this: ``The Coast Guard 
reviewed all legal fees using the guidelines of necessity and 
reasonableness in 46 CFR 404.5. Only reasonable and necessary legal 
fees were approved as part of the expense base. No legal fees were 
allowed in connection with lobbying. Legal fees for litigation against 
the Government were allowed as long as there was no court proceeding in 
which there had been a finding of bad faith on the part of the pilot 
organizations.'' 68 FR 69566, Dec. 12, 2003. In addition, the APA 
requested that we continue to use the bad faith test for deciding 
whether to recognize legal fees for litigation against the Coast Guard.
    In 2016, we excluded legal expenses incurred in litigation against 
the U.S. Government from approved operating expenses (81 FR 11908, 
11914, Mar. 7, 2016). However, the change in this final rule is limited 
to litigation against the Coast Guard and its agents as related to the 
Great Lakes pilotage ratemaking and oversight requirements. We narrowed 
the language from the 2016 final rule because we do not want to capture 
legal fees incurred against other agencies, states, or local 
governments in this exclusion. The procedural error in the 2016 
ratemaking was that we did not acknowledge or explain the proposed 
change in the NPRM or properly respond to comments in the 2016 final 
rule. The decision in the 2019 case stated, ``The Court takes no 
position on the relative wisdom of the policy. A rule excluding legal 
fees incurred against the U.S. government may well be a rational 
policy. But the process by which the Coast Guard enacted it was 
arbitrary and capricious.'' St. Lawrence Seaway Pilots Association v. 
U.S. Coast Guard, 357 F.Supp.3d 30, 38 (D.D.C. 2019).
    The NPRM to this final rule explains the reason for the change, and 
we elaborate further in this preamble in our response to the comments 
received. Legal fees incurred in litigation against the Coast Guard are 
reasonable and

[[Page 14192]]

necessary if the pilot association prevails in its litigation. In 
addition, the reasonableness of legal fees depends on the amount of 
those fees. The Coast Guard believes that fees awarded as reimbursement 
for pilots and pilots' associations under the EAJA, or by terms of 
settlement by the party responsible for the error, will provide 
reasonable reimbursements for the pilot associations when they prevail. 
Excluding legal expenses incurred in litigation against the Coast Guard 
and its agents, as related to the ratemaking and oversight 
requirements, from the ratemaking equation ensures that the shippers do 
not have to pay for either non-prevailing lawsuits or the Coast Guard's 
potential errors. By not allowing these legal fees to be recovered in 
the ratemaking operating expenses, pilot associations' will have the 
option to seek recuperation of legal fees under the EAJA and settlement 
negotiations, where a judge or the limits of the EAJA can determine 
fair legal fee reimbursement. We believe this is a more equitable 
approach to ensuring that the necessary costs of providing services are 
covered than the Coast Guard allowing any and all legal fees to be 
included, without regard to whether the pilots prevailed on any of the 
merits of the lawsuit.
    We agree with the APA comment that pilots' legal fees should be 
excluded from expenses where there is a finding of bad faith, but the 
bad faith exclusion mentioned in the 2003 ratemaking NPRM preamble was 
not written into our regulations. Before the changes made by this 2021 
ratemaking, all legal fees incurred in litigation against the Coast 
Guard were included as operational expenses in the ratemaking, 
regardless of bad faith. The Coast Guard does not have the explicit 
authority that the APA suggests, to exclude bad faith proceedings from 
operating expenses. We did not propose a bad faith legal fee exclusion 
because it could be seen as an arbitrary exclusion and also as an 
unattainable administrative burden for the Coast Guard. We review the 
legal fees incurred in litigation against the Coast Guard as a lump sum 
for each district 3 years after the fees are paid. If only part of a 
case is determined to be in bad faith, we would be in the impossible 
position of determining what portion of the legal costs would count 
toward a bad faith exclusion. Additionally, we would have no way to 
exclude legal fees in cases when the pilots do not prevail on some or 
any of the merits of the case, or where the ratemaking is determined to 
be legally sound. This alternative would leave the Coast Guard open to 
the same concerns we raised in the NPRM, such as the policy against 
charging a party not responsible for the ratemaking and charging the 
ratepayers even if the pilots do not prevail on the merits. Therefore, 
in this final rule, we are excluding this legal fee category 
altogether, leaving the determination of legal fee reimbursement to the 
courts.
    Captain John Swartout commented that his district, WGLPA (District 
Three), is fast approaching the $7 million threshold of being eligible 
for the EAJA, and the other districts will not be far behind, meaning 
they would not be eligible for reimbursement once they reach that 
threshold. He acknowledges, however, that all three districts are 
currently eligible for reimbursement under the EAJA. As mentioned 
previously, pilots may continue to seek reimbursement under settlement 
negotiations if they do not qualify under the EAJA for any reason.
    Captain Swartout also argued that the ratepayers--not the 
taxpayers--benefit when the pilots sue over the Coast Guard's 
occasional failure to make rates with due regard to the public interest 
and the cost of providing service, in accordance with the 
Administrative Procedure Act, so it is reasonable that the ratepayers, 
not the taxpayers, should be ``on the hook'' for the cost. However, the 
commenter fails to acknowledge that the pilot associations usually 
first seek reimbursement from the Coast Guard for their legal fees when 
they prevail on the merits. In other words, the taxpayers were already 
footing that bill, by way of the Coast Guard paying through terms set 
by the court or settlement, before the changes made by this final rule. 
The EAJA is intended to benefit taxpayers, like the pilots and their 
associations, by helping them cover legal expenses to challenge 
unlawful government actions.
    The Great Lakes Pilots' comment assert that the EAJA cap on 
reimbursement of legal fees is much lower than their actual legal 
expenses, estimating their reimbursement to be 25 cents for every 
dollar. This comment, as well as comments from the APA and John 
Swartout, claimed that we aim to erect barriers to disincentivize 
pilots from suing the Coast Guard on meritorious claims.
    As we noted in the NPRM, traditional jurisprudence and case law 
says that a party shall bear its own litigation costs. Generally, there 
is no right to be fully reconstituted for legal expenses, especially by 
someone who is not responsible for the injury. The purpose of excluding 
these legal fees from the ratemaking is to move the financial 
responsibility of meritorious claims onto the Coast Guard and off the 
shippers. The Coast Guard agrees that litigation is a legitimate way to 
ensure agency compliance with mandates and statutes. The exclusion of 
legal fees does not take away any rights of action that pilots have 
against the Coast Guard related to the ratemaking or oversight 
requirements. The Coast Guard can continue to be held accountable via 
judicial review. There are remedies to recover legal fees from the 
Coast Guard for meritorious claims, which pilots have pursued in the 
past. Forcing the shippers to incur legal fees above what the EAJA or 
settlement covers, or when pilots do not prevail on the merits, is not 
in the public interest or necessary for the costs of providing 
services.
    In his comment, Captain Swartout further asserted that the rate is 
the proper funding source for all costs of pilotage, including 
necessary legal fees, arguing that litigation is necessary to ensure 
the financial viability of service providers. He contended that the 
legal fees incurred in a year ``doesn't permanently inflate the rate, 
paying dividends on past expenses, as the Coast Guard seems to imply'' 
because rates are based on expenses that are 3 years old.
    The legal fee exclusion in this final rule simply repositions the 
legal fees to be reimbursed by the party responsible, via the EAJA or 
terms of settlement, when the pilots prevail. The amount of legal fees 
we exclude in the 2021 ratemaking is approximately 0.1 percent of the 
total revenue generated each year by the pilot associations. Therefore, 
when the operating expense adjustment is factored into the ratemaking 
methodology, it has a very small effect on the final rates. We do not 
assert that there is a permanent inflation, or dividend, as a result of 
the legal expenses incurred by pilot associations in a given year. The 
Coast Guard believes that a 0.1 percent operational expense adjustment 
for legal fees eligible for reimbursement by the Coast Guard when 
pilots prevail on some of the merits will not have any adverse impact 
on future funding for pilot associations and pilot recruitment and 
retention. The reimbursement of eligible legal fees under the EAJA and 
settlement negotiations are often available as soon as the parties 
prevail on the merits, whereas, under the previous scheme, it took 3 
years for the expended legal fees to factor into the ratemaking.
    The Great Lakes Pilots' comment contested our exclusion of the 
legal fees by noting that business entities regularly recover legal 
expenses from their customers by including them in the prices and rates 
they charge for their

[[Page 14193]]

products and services. The comment recited the Director's requirement 
in Sec.  404.2(a) to recognize pilot association expenses that are 
``both necessary for providing pilotage service, and reasonable as to 
its amount when compared to similar expenses paid by others in the 
maritime or other comparable industry, or when compared with Internal 
Revenue Service guidelines.'' The commenter requested that the Coast 
Guard address the deductibility of legal fees under Sec.  404.2(a) and 
the Internal Revenue Code (I.R.C.), which says that professional fees 
are deductible if they qualify as ``ordinary and necessary'' expenses 
under Sec.  162 I.R.C. (26 U.S.C. 165), covering business expenses, or 
Sec.  212 I.R.C. (26 U.S.C. 212), covering expenses related to the 
production of income.
    The main reason the legal fee expense is not necessary or 
reasonable to include in operational expenses is that the costs are 
reimbursable when the pilots prevail by the responsible party--the 
Coast Guard. As noted in this preamble, the EAJA and settlement terms 
often reimburse the pilots' legal fees when the pilots prevail. In 
those cases, a court can determine a reasonable amount of legal fees to 
include. Traditional jurisprudence also says that the litigant is the 
bearer of his or her own legal expenses. ``In the United States, the 
prevailing litigant is ordinarily not entitled to collect a reasonable 
attorneys' fee from the loser.'' Alyeska Pipeline Service Co. v. 
Wilderness Soc'y, 421 U.S. 240, 247 (1975). Additionally, when the 
pilot association does not prevail on the merits, the legal fees 
associated with that lawsuit are, arguably, per the court's 
determination, not necessary for the safeguarding or production of 
their income. If pilots are not victorious on any of the merits, those 
legal fees inflate the shipper's rates. Unlike other businesses and 
jurisdictions, shippers on the Great Lakes cannot choose to purchase 
from another firm or choose not to purchase the service at all when 
they disagree with a firm's business practices. Among these and the 
other reasons cited in this preamble, the legal fees incurred in 
lawsuits against the Coast Guard are distinguishable from the I.R.C. 
provisions provided by the commenter.
    The User's Coalition supported the legal fee exclusion but urged 
the Coast Guard to go further and exclude all pilot associations' legal 
fees related to ratesetting, including instances where pilots intervene 
as defendants in support of the Coast Guard in a shipper-initiated 
lawsuit. In cases where shippers initiate litigation against the Coast 
Guard, the pilots often have a legitimate interest in, and will likely 
be affected by, the outcome of the lawsuit. Thus, the court typically 
allows the pilots to intervene in the case to protect their own 
interests. However, the Coast Guard does not have the same 
justification to exclude these intervener legal expenses because they 
are not eligible for reimbursement under the EAJA or settlement from 
the Coast Guard. These legal fees incurred by pilot associations are 
not otherwise reimbursed by a more responsible party, so we must 
consider these costs of providing services in the rates, per our 
statutory mandate.
    The Coalition also suggested that allowing intervener pilot legal 
fees would force vessel operators to finance legal advocacy in support 
of the Coast Guard's position on any future ratemaking challenge, 
incentivizing pilot associations to come to the Coast Guard's aid 
without financial constraint. The Coalition also alleged that the Coast 
Guard is creating a financial disincentive for our policies to be 
challenged by industry stakeholders, impeding stakeholders' legitimate 
rights to participate in the rulemaking process and go to court to 
resolve disagreements. The User's Coalition will have all the same 
legal causes of action against the Coast Guard as before. The exclusion 
of legal fees is intended to be a small benefit to the shippers by 
taking that financial responsibility out of the rates and placing it on 
the responsible regulatory agency; it is not intended nor predicted to 
be an incentive for pilots to come to the Coast Guard's defense.
    The Great Lakes Pilots' comment requested we include all the legal 
expenses the pilots incurred in the 2016 ratemaking lawsuit where they 
successfully intervened on the Coast Guard's side in a shipper-
initiated lawsuit. The comment stated that we need to correct the legal 
fee amounts disallowed for Districts One and Three's 2018 legal 
expenses. In District One, $12,905 was disallowed per Table 3--
Recognized Expenses for District One,\25\ but the comment asserted that 
District One only paid $9,988 in 2018 for the pilot-initiated 
litigation on the 2016 ratemaking. The commenter asked where the Coast 
Guard obtained the higher number of $12,905. The comment further stated 
that District Three was disallowed $18,321 per Table 28--Recognized 
Expenses for District Three,\26\ but paid only $9,227 for the 2017 
litigation against the Coast Guard in the pilot-initiated suit. The 
commenter stated the higher disallowance was because the Coast Guard 
improperly disallowed $9,093 for 2017 intervener litigation fees that 
District Three paid on the shipper-initiated lawsuit. The comment 
asserted that the Director's adjustment disallowance should be limited 
to $9,988 for District One and $9,227 for District Three, even if the 
rule is validly adopted.
---------------------------------------------------------------------------

    \25\ Table 3 in the proposed rule is published at 85 FR 68219 
(October 27, 2020).
    \26\ Table 28 in the proposed rule is published at 85 FR 68229-
68230 (October 27, 2020).
---------------------------------------------------------------------------

    Per our regulations, a third-party auditor provided the amounts of 
legal fees incurred in litigation against the Coast Guard for use in 
the NPRM. Our auditor reviewed the operating expenses in response to 
this comment and did not identify any allowable intervener litigation 
fees for District One. For that reason, for 2018 operating expenses in 
District One, the final rule will continue to remove $12,905 in Coast 
Guard litigation fees via Director's adjustment, which is the same 
number used in the NPRM.
    The commenter is correct that, with this change, pilot intervener 
legal fees incurred in the 2016 ratemaking shipper-initiated lawsuit 
should be included as approved operating expenses in the year they were 
incurred. In this case, District Three incurred intervener legal fees 
in 2018 which should not have been excluded in the NPRM. The 2018 
operating expenses of $18,321 reported to us during the NPRM stage did 
not distinguish between intervener legal fees and ratemaking lawsuits 
initiated by the pilots against the Coast Guard. We are correcting the 
Director's adjustments in the NPRM's District Three's 2018 expense 
table to only exclude litigation fees against the Coast Guard in this 
final rule. For 2018 operating expenses in District Three, the final 
rule will remove $9,227 in Coast Guard litigation fees by Director's 
adjustment, which allows intervener legal fees in the amount of $9,094 
($18,321-$9,227). These updated numbers are reflected in Table 28 in 
this preamble.

4. Applicant Pilot Compensation Request for Comments for Consideration 
in a Future Ratemaking

    The Coast Guard received many helpful comments in response to our 
request for comments on setting the reimbursable cost associated with 
apprentice pilot salaries at a set amount based on a percentage of the 
previous year's target pilot compensation. As we stated in the NPRM, we 
will consider these comments and suggestions in a future rulemaking. 
This final rule does not make any methodological changes to

[[Page 14194]]

the ratemaking for apprentice pilot compensation from what we proposed 
in the NPRM.

5. Coast Guard's Authority To Remedy Harms From Past Ratemakings in 
Response to 2020 D.C. Appellate Court Opinion

    In the NPRM, we responded to the D.C. Circuit Court's request to 
``consider if it [the Coast Guard] has the statutory authority to 
remedy the harms from the 2016 Rule and if doing so would comport with 
its mandate to consider `the public interest and the costs of providing 
services' 46 U.S.C. 9303(f).'' \27\ We concluded that, while we may 
have the authority to do so, it does not comport with our mandate to 
make the adjustment in this ratemaking, for three main reasons 
discussed in the NPRM. The Great Lakes Pilots' comment was in general 
agreement with the agency's approach to the Court of Appeals' opinion 
and did not believe any adjustment going forward was warranted.
---------------------------------------------------------------------------

    \27\ Am. Great Lakes Ports Ass'n. v. Shultz, 962 F.3d 510, 520 
(D.C. Cir. June 16, 2020).
---------------------------------------------------------------------------

    Based on our response in the NPRM, Captain John Swartout opined 
that when the pilots sue the Coast Guard and win, no matter how long 
pilotage rates are impaired before the court makes a final ruling, the 
Coast Guard is certainly not going to make the pilots whole. The 
commenter makes an improper assumption that we would never attempt to 
remedy past ratemakings. The Coast Guard explained in the NPRM that our 
decision is limited to the case of the 2016 ratemaking, where we had no 
operative rate from which to make a correction in the 2021 proposed 
rule. We believe we have the authority to remedy errors from past 
ratemakings when we have reliable information and there is a continuing 
extraordinary and unjust circumstance.
    The User's Coalition comment did not propose that the Coast Guard 
retroactively recalculate rates but asked for a flexible path forward 
to achieve full repayment over time, through credits in this rule and 
in future ratemaking procedures or such other methodology. The 
Coalition asserted the weighting factor is known and the amounts billed 
by the pilot associations and the money collected are available, and 
included an Exhibit detailing one method to calculate the overpayment 
of pilotage fees for 2016.
    However, in addition to omitting the weighting factors, the Coast 
Guard erred in the 2016 ratemaking calculation of target pilot 
compensation, and the correct number could have been higher or lower 
than the target pilot compensation used. Consequently, adjusting the 
rates merely to correct for weighting factors, without a 2016 target 
pilot compensation, would not provide a ``correct'' operative rate for 
2016, as the commenter suggests. Therefore, adjusting rates through a 
Director's adjustment now is not in accordance with our mandate to 
consider the costs of providing services for 2021. Neither the Coast 
Guard nor commenters have identified a continuing unjust circumstance 
caused by the 2016 ratemaking warranting a remedy at this stage.
    The Coalition also challenged our assertion that it is difficult to 
identify those advantaged by the ratemaking by stating that 80 percent 
of the traffic is produced by 20 percent of the system users, and all 
major clients continue to send ships to the area. The User's Coalition 
noted that the St. Lawrence Seaway keeps records of every ship and its 
owner sailing in the area for at least 10 years, including 2016 and 
2017. The Coalition asked us how the fact that some of the potential 
recipients of the unlawfully paid funds cannot be determined renders 
all of the monies unrecoverable, including by those who are identified 
and able to seek recovery.
    Despite the fact that some of the shippers may be identifiable for 
remedy, the Coast Guard does not plan to pursue a remedy at this time 
for other reasons, also cited in the NPRM. We do not have an operative 
rate for the 2016 shipping season to determine a proper remedy to 
return to the identifiable shippers. Nor could we also give full 
consideration to the costs of providing pilotage services if we modify 
the rates according to the User's Coalition's request. We believe the 
risk of underfunding pilotage rates for years to come would have a 
negative impact on the Great Lake's pilot associations' abilities to 
safely meet the shipping demands and maintain their infrastructure. 
Therefore, the fact that we can identify some users of the 2016 rate is 
not sufficient to overcome our mandate to consider the public interest 
and covering the costs of services.
    In response to the Coast Guard's assertion that we do not want to 
risk underfunding pilots for upcoming rates through a potential remedy, 
the User's Coalition asked what happened to the millions of dollars 
collected by the pilot associations, over and above those operational 
expenses incurred in 2016 and 2017, as a result of the agency's 
remanded ratemaking. The Coast Guard is not able to answer the 
commenter's question because we do not require pilot associations to 
report the source of funds they use to pay for certain items or 
services. Because we do not have an operative rate to use for 2016, we 
do not know exactly how much the pilots collected over operational 
expenses. Without a clear way to determine that number, a remedy now 
would be arbitrary. In addition, the Coast Guard made errors in 
calculating pilotage rates for the 2013, 2014, and 2015, all of which 
resulted in the pilots receiving less revenue than was required by the 
methodology in place at the time. Reducing future rates to account for 
alleged over-generation of revenue based on the 2016 rates without also 
correcting those errors would be inconsistent with our mandate to 
consider the public interest and covering the costs of services.

6. Other Pilot Staffing and Compensation Comments Unrelated to Proposed 
Changes

    The Great Lakes Pilots requested that the Coast Guard undertake a 
more comprehensive assessment of compensation, as opposed to interim 
ratemakings, to align Great Lakes pilots' compensation with pilots of 
other jurisdictions. The Great Lakes Pilots also requested information 
about the compensation study the Coast Guard initiated but did not have 
completed. The Coast Guard commissioned a study to analyze 
methodologies to determine pilot compensation, but decided not to 
finalize this study. The compensation study was a backup in the event 
that we failed to identify a compensation standard that remedied the 
recruitment and retention issues identified in previous rulemakings, 
and discussed during previous GLPAC meetings. The current compensation 
benchmark addresses our goals of promoting the recruitment and 
retention of highly qualified mariners and experienced United States 
registered pilots.
    The LPA requested only 16 pilots, as per the existing staffing 
model, without rounding up, to keep up with pilotage demand. Since the 
Coast Guard is no longer adopting the rounding-up method in the 
staffing model, the LPA's district, District Two, will be authorized a 
maximum of 15 pilots for the 2021 shipping season under this rule. In 
the NPRM, District Two was authorized a maximum of 16 pilots instead of 
15, primarily because of the proposed rounding up in the staffing 
model. The comments were generally unsupportive of the rounding up in 
the staffing model; many commenters suggested alternative changes to 
the staffing model, which we will consider in a future rulemaking. The 
LPA also provided suggestions for calculating apprentice pilot 
compensation, urging us to adopt a

[[Page 14195]]

consistent approach. We will consider those suggestions when developing 
a future rulemaking.
    The comment from the WGLPA provided information on how many 
registered pilots and apprentice pilots on limited registrations they 
have, as well as estimates on how many pilots they expect to hire in 
2021. The WGLPA stated they have 17 fully registered pilots and 7 
apprentice pilots operating on limited registrations because they had 3 
unexpected retirements in 2020. The WGLPA expects to hire 2-to-4 
apprentice pilots in 2021, in line with the 3 they hired in 2020, and 
the 4 in 2019. The WGLPA comment also noted that if a pilot in their 
district logs approximately 1,000 hours per year as ``bridge hours,'' 
and if the level of traffic in 2021 matches the traffic level in 2019, 
they will need 3 more pilots. To offset unavoidable attrition or 
retirement, they believe that 27 is the appropriate number for the 
``Proposed Maximum Number of Pilots'' for District Three.
    The information provided by the commenter will be helpful in 
considering alternatives to always rounding up in the staffing model. 
In the NPRM, we authorized 22 fully registered pilots for the WGLPA, 
with the maximum number of allowed pilots capped at 23 fully registered 
pilots. Without adopting the proposed change to always round up in the 
staffing model, District Three is still authorized 22 pilots in this 
rule, and the cap will remain at 22 pilots. These pilot numbers 
represent the maximum for fully registered pilots and temporary 
registrations, but do not include limited registrations for apprentice 
pilots. If the District only has 17 fully registered pilots, they will 
be able to hire 5 additional fully registered pilots in the 2021 
season. District Three may have additional apprentice pilots on the 
roles and continue to hire new apprentice pilots, as approved by the 
Director.
    The WGLPA comment also contained information contrary to our 
statement in the 2021 NPRM, Summary of Ratemaking Methodology, Step 10, 
where we said: ``As stated in the 2020 rulemaking, as the vast majority 
of working pilots are not anticipated to reach the regulatory required 
retirement age of 70 in the next 20 years, we continue to believe that 
the pilot associations are now able to plan for the costs associated 
with retirements without relying on the Coast Guard to impose 
surcharges.'' \28\ The WGLPA asserted that 65 percent of their fully 
registered pilots will reach 70 in the next 20 years, and it is 
unrealistic to expect them all to work until 70. We anticipate that, 
with the ability to hire up to 5 more fully registered pilots in 2021, 
the WGLPA will have a lower rate of planned retirement in the upcoming 
years.
---------------------------------------------------------------------------

    \28\ 85 FR 68210 at 68214, October 27, 2020.
---------------------------------------------------------------------------

    The SLSPA asserted that the current staffing model is based on old 
traffic patterns, with a rush at the beginning and the end of each 
season, but now, due to cruise ships and tankers, shipping is linear 
throughout the year, with a rush at the end. The comment suggested that 
pilots lack meaningful rest as a result of the November 15 end of the 
restorative rest requirement. We thank the commenter for raising this 
issue. The Coast Guard believes that this is a valid concern and 
requests more information on this point. The current staffing model is 
based on the historic increased need for pilots at the start and close 
of the season, and that, by staffing to meet that need, it allows 
pilots to take approximately 10 days of restorative rest each month 
during the 7-month mid-season period.
    We are currently monitoring traffic patterns. If the commenter's 
assertion proves accurate, this would cause us to reevaluate the 
staffing model. While, at this time, we are still gathering data, we 
welcome additional data and suggestions for alternative staffing models 
in light of changes in traffic patterns. We also welcome more 
information and suggestions at a GLPAC meeting on how to improve our 
recuperative rest requirements to better serve current traffic 
patterns. We may consider this information in a future rulemaking.
    The SLSPA requested that bridge hours associated with voluntary or 
non-compulsory vessels should be removed from the ratemaking 
methodology because additional revenues generated from servicing this 
traffic has associated bridge hours with it. The commenter asserted 
that these hours go into the ratemaking methodology as part of the 10-
year traffic average, in the denominator of the hourly rate equation, 
thereby reducing the rates for the next 10 years, benefitting foreign 
shipping. Our use of historical traffic figures was unanimously 
recommended by the GLPAC in 2014, without distinction between voluntary 
and required pilotage services. If there is interest and additional 
information for why the current methodology is not producing sufficient 
revenue for the associations, the Coast Guard is willing to bring this 
issue up at the next GLPAC meeting in 2021.
    The User's Coalition comment noted that Canadian lakers have been 
hiring U.S. and Canadian registered pilots to assist with navigation 
due to a lack of crew expertise, but expected this to be temporary and 
eventually resolve itself. The Coalition asked the Coast Guard to: (1) 
Work with the three U.S. Great Lakes pilot associations to identify and 
bring on part-time contract pilots, if possible; and (2) initiate a 
dialogue with the GLPA and Canadian-flagged vessel operators to assess 
their staffing situation and better predict future pilot demand. As the 
commenter noted, this is expected to be temporary and eventually 
resolve itself. The Coast Guard welcomes additional information from 
the commenter as to the exact amount of voluntary pilotage demand each 
year from Canada, as well as a reasonable way to address it in the 
ratemaking. In order to better predict future pilot demand, the Coast 
Guard would need to predict the demand for global commodities (steel 
and grain), tankers shipping petroleum products, cruise ships, and 
winter demand (ordering pilots while the locks are closed for 
maintenance) on Lakes Erie, Huron, and Michigan. The Coast Guard has no 
control or influence over any of these activities, and the variables in 
global commodities are complex and difficult to predict even if we do 
discuss the matter with Canadian operators. However, we desire to 
increase our dialogue with all parties involved to address the 
potential issues identified by the commenter.
    Additionally, the User's Coalition requested we make individual 
pilot compensation available to the public, as it was prior to 2016, as 
a way to review our progress toward pilot recruitment and retention, 
reportedly caused by inadequate pilot compensation. The Coast Guard 
previously cited substantial privacy concerns and being unaware of 
where individual pilot compensation is made public, but the commenter 
does not think that these are supportable concerns. This comment did 
not request any changes to the ratemaking methodology and is not 
related to changes proposed in the NPRM. The Coast Guard is not 
inclined to add a regulatory requirement for pilot associations to 
publicly report the compensation of their pilots, because that number 
is not included in the expense base or methodology. Because those 
values are not used in the ratemaking, we believe that a requirement to 
report pilot compensation is not in the public interest or necessary to 
provide for the costs of services. Progress toward pilot retention can 
be reviewed through other means, such as pilot turnover and the

[[Page 14196]]

ability to fill pilot vacancies for fully registered pilots and 
apprentice pilots.

7. Other Ratemaking Comments Unrelated to Proposed Changes

    The User's Coalition comment asserted that it is unfair to spread 
the unusual costs associated with pilotage demand in winter months over 
all users in the annual ratemaking process. The Coalition suggested 
that winter operators should be allowed to enter into their own 
financial arrangement with the pilot associations for off-season 
service. The costs of providing services in the winter months may be 
higher than the typical shipping season, but they are necessary costs 
to provide pilotage service on the Great Lakes. Per 46 U.S.C. 9303(f), 
the Coast Guard is required to set the rates for U.S. pilots operating 
in the Great Lakes considering the costs of providing services. We did 
not propose this course of action; therefore, we do not plan to 
implement it in this final rule. We will include this on the agenda for 
discussion during a future GLPAC meeting before determining the merits 
of such a proposal.

VII. Discussion of Rate Adjustments

    In this final rule, based on the two changes to the existing 
methodology described in Section V of this preamble, we are 
implementing new pilotage rates for 2021. We are conducting this 2021 
ratemaking as an ``interim year,'' as was done in 2020, rather than a 
full ratemaking, as was conducted in 2018. Thus, the Coast Guard will 
adjust the compensation benchmark pursuant to Sec.  404.104(b) for this 
purpose, rather than Sec.  404.104(a).
    This section discusses the rate changes using the ratemaking steps 
provided in 46 CFR part 404, incorporating the changes discussed in 
Section V. We will detail all 10 steps of the ratemaking procedure for 
each of the 3 districts to show how we arrive at the new rates.

District One

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2018 expenses and 
revenues.\29\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. For costs accrued by 
the pilot associations generally, such as employee benefits, for 
example, the cost is divided between the designated and undesignated 
areas on a pro rata basis.
---------------------------------------------------------------------------

    \29\ These reports are available in the docket for this 
rulemaking (see Docket # USCG-2019-0736).
---------------------------------------------------------------------------

    As noted above, in 2016 the Coast Guard began authorizing 
surcharges to cover the training costs of applicant pilots. The 
surcharges were intended to reimburse pilot associations for training 
applicants in a more timely fashion than if those costs were listed as 
operating expenses, which would have required 3 years to reimburse. The 
rationale for using surcharges to cover these expenses, rather than 
including the costs as operating expenses, was to allow these non-
recurring costs to be recovered in a more timely fashion and prevent 
retiring pilots from having to cover the costs of training their 
replacements. Because operating expenses incurred are not actually 
recouped for a period of 3 years, the Coast Guard added a $150,000 
surcharge per applicant pilot, beginning in 2016, to recoup those costs 
in the year incurred. Although the districts did not collect any 
surcharges for the 2020 shipping season, they did collect a surcharge 
for the 2018 season, which is deducted by Director's adjustments 
reflected in the operating expenses of the districts.
    For District One, we finalized several Director's adjustments. 
District One had two applicant pilots during the 2018 season. In total, 
the District paid these two pilots $594,331, or $297,166 each. The 
Coast Guard believes this amount is above what is necessary and 
reasonable for retention and recruitment. In the 2019 NPRM, the Coast 
Guard proposed to make an adjustment to District Two's request for 
reimbursement of $571,248 for two applicant pilots ($285,624 per 
applicant). Instead of permitting $571,248 for two applicant pilots, we 
proposed allowing $257,566, or $128,783 per applicant pilot, based on 
discussions with other pilot associations at the time. This standard 
was utilized in the final rule for 2019 and was not opposed. To 
determine this percentage, we reached out to several of the pilot 
associations throughout the United States to see what percentage they 
pay their applicant pilots, then factored in the sea time and 
experience required to become an applicant pilot on the Great Lakes. 
Finally, we discussed the percentage with the president of each 
association to determine if it was fair and reasonable. The Coast Guard 
will continue to use the same ratio of applicant-to-target compensation 
for all districts. For 2019, this was approximately 36 percent of 
$359,887 which was the target pilot compensation value for 2019 
($128,783 / $359,887 = 35.78 percent). The Coast Guard is using the 
rounded-up value of 36.0 percent of target compensation as the 
benchmark for applicant pilot compensation, for a 2021 target pilot 
compensation of $132,151 ($367,085 x .36). This allows adjustments to 
applicant pilot compensation to fluctuate in line with target 
compensation.
    The other Director's adjustments to expenses occurred because 
District One did not break out any costs associated with applicant 
pilots after the audit, and included these costs as part of pilotage 
costs. For transparency, the Coast Guard has included the applicant 
pilot costs as Director's adjustments. We then deducted the same amount 
to avoid any double counting of these costs, with the exception of the 
applicant salary costs. We did not deduct applicant salary costs, as 
these costs were reported in the audit as part of pilot salaries, which 
are not included in operating expenses. Therefore, these costs are 
included as a Director's adjustment. The costs associated with 
applicant expenses are necessary and reasonable for district operations 
and are, therefore, implemented in the rate.
    A Director's adjustment has also been finalized for the amount 
collected using the 2018 surcharge. A final Director's adjustment is 
made for the amount of Coast Guard litigation legal fees. Other 
adjustments have been made by the auditors and are explained in the 
auditor's reports, which are available in the docket for this 
rulemaking where indicated under the ADDRESSES section of the preamble.

[[Page 14197]]

                               Table 3--2018 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated
              Reported operating expenses for 2018               --------------------------------
                                                                   St. Lawrence                        Total
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Pilotage Costs:
    Subsistence/travel--Pilot...................................        $799,507        $533,005      $1,332,512
    License insurance--Pilots...................................          45,859          30,573          76,432
    Payroll taxes--Pilots.......................................         202,848         135,232         338,080
    Other.......................................................          15,474          10,316          25,790
                                                                 -----------------------------------------------
        Total Other Pilotage Costs..............................       1,063,688         709,126       1,772,814
Pilot Boat and Dispatch Costs:
    Pilot Boat Expense (Operational)............................         267,420         178,280         445,700
    Dispatch Expense............................................          55,280          36,853          92,133
    Payroll Taxes...............................................          19,100          12,733          31,833
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         341,800         227,866         569,666
Administrative Expenses:
    Legal--general counsel......................................           8,550           5,700          14,250
    Legal--shared counsel (K&L Gates)...........................          34,607          23,071          57,678
    Legal--USCG Litigation......................................           7,743           5,162          12,905
    Office Rent.................................................               0               0               0
    Insurance...................................................          24,423          16,282          40,705
    Employee benefits...........................................           8,064           5,376          13,440
    Other taxes.................................................          50,963          33,976          84,939
    Real Estate taxes...........................................          22,280          14,853          37,133
    Depreciation/auto leasing/other.............................         101,140          67,426         168,566
    Interest....................................................          28,270          18,846          47,116
    APA Dues....................................................          26,416          17,610          44,026
    Dues and subscriptions......................................           3,960           2,640           6,600
    Utilities...................................................          21,887          14,591          36,478
    Travel......................................................           4,314           2,876           7,190
    Salaries....................................................          74,763          49,842         124,605
    Payroll Tax.................................................           7,323           4,882          12,205
    Accounting/Professional fees................................           7,800           5,200          13,000
    Pilot Training..............................................               0               0               0
    Other.......................................................          21,276          14,184          35,460
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         453,779         302,517         756,296
Capital Expenses:
    Dock........................................................         128,749          85,832         214,581
    Pilot Boat..................................................         128,911          85,941         214,852
    Infrastructure Loan Payment.................................         106,458          70,972         177,430
                                                                 -----------------------------------------------
        Total Capital Expenses..................................         364,118         242,745         606,863
                                                                 -----------------------------------------------
        Total Operating Expenses (Other Costs + Pilot Boats +          2,223,385       1,482,254       3,705,639
         Admin + Capital Expenses)..............................
Adjustments (Director):
    Director's Adjustment (Applicant Salaries)..................         356,599         237,732         594,331
    Director's Adjustment (Applicant Salaries) Deduction (Salary       (198,018)       (132,012)       (330,030)
     Adjustment)................................................
    Director's Adjustment (Applicant License insurance).........           8,093           5,395          13,488
    Director's Adjustment (Applicant License insurance)                  (8,093)         (5,395)        (13,488)
     Deduction..................................................
    Director's Adjustment (Applicant Health insurance)..........          10,336           6,891          17,227
    Director's Adjustment (Applicant Health insurance) Deduction        (10,336)         (6,891)        (17,227)
    Director's Adjustment (Applicant Expenses)..................          94,989          63,326         158,315
    Director's Adjustment (Applicant Expenses) Deduction........        (94,989)        (63,326)       (158,315)
    Director's Adjustment (Applicant payroll tax)...............          29,694          19,796          49,490
    Director's Adjustment (Applicant payroll tax) Deduction.....        (29,694)        (19,796)        (49,490)
    Director's Adjustment Surcharge Collected in 2018...........       (144,770)       (144,770)       (289,540)
    Director's Adjustment Legal--USCG Litigation................         (7,743)         (5,162)        (12,905)
                                                                 -----------------------------------------------
        Total Director's Adjustments............................           6,068        (44,212)        (38,144)
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......       2,229,453       1,438,042       3,667,495
----------------------------------------------------------------------------------------------------------------

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

    Having identified the recognized 2018 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation using the BLS data from the CPI for the Midwest 
Region of the United States for the 2019

[[Page 14198]]

inflation rate.\30\ Because the BLS does not provide forecasted 
inflation data, we use economic projections from the Federal Reserve 
for the 2019 and 2020 inflation modification.\31\ Based on that 
information, the calculations for Step 2 are as follows:
---------------------------------------------------------------------------

    \30\ The 2019 inflation rate is available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. For this analysis we 
use the average to average percentage change as presented in the 
table on page 1. Specifically, the CPI is defined as ``All Urban 
Consumers (CPI-U), All Items, 1982-4=100'' (BLS Series ID 
CUUR0200SA0). Downloaded June 11, 2020.
    \31\ The 2020 and 2021 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200916.pdf. We used the PCE median inflation value 
found in table 1, Downloaded December 11, 2020.

                              Table 4--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $2,229,453      $1,438,042      $3,667,495
2019 Inflation Modification (@1.5%).............................          33,442          21,571          55,013
2020 Inflation Modification (@1.2%).............................          27,155          17,515          44,670
2021 Inflation Modification (@1.7%).............................          38,931          25,111          64,042
                                                                 -----------------------------------------------
    Adjusted 2021 Operating Expenses............................       2,328,981       1,502,239       3,831,220
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimate the 
number of registered pilots in each district. We determine the number 
of registered pilots based on data provided by the Saint Lawrence 
Seaway Pilots Association. Using these numbers, we estimate that there 
will be 17 registered pilots in 2021 in District One. Based on the 
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 
41466), we assign a certain number of pilots to designated waters and a 
certain number to undesignated waters, as shown in Table 5. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.
---------------------------------------------------------------------------

    \32\ For a detailed calculation, refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).

                       Table 5--Authorized Pilots
------------------------------------------------------------------------
                          Item                             District One
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \32\...              17
2021 Authorized pilots (total)..........................              17
Pilots assigned to designated areas.....................              10
Pilots assigned to undesignated areas...................               7
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an ``interim'' ratemaking this year, we will 
follow the procedure outlined in paragraph (b) of Sec.  404.104, which 
adjusts the existing compensation benchmark by inflation. As stated in 
Section V.A of the preamble, we are using a two-step process to adjust 
target pilot compensation for inflation. The first step adjusts the 
2019 target compensation benchmark of $367,085 by 1.5 percent, for a 
total adjusted value of $372,591. This adjustment accounts for the 
difference between the predicted 2020 Median PCE inflation value of 2 
percent and the actual 2020 ECI inflation value of 3.5 
percent.33 34 Because we do not have a value for the ECI for 
2021, we multiply the adjusted 2020 compensation benchmark of $372,591 
by the Median PCE inflation value of 1.70 percent.\35\ Based on the 
projected 2021 inflation estimate, the compensation benchmark for 2021 
is $378,925 per pilot.
---------------------------------------------------------------------------

    \33\ U.S. Bureau of Labor Statistics Employment Cost Index (ECI) 
Q3 2020 data for Total Compensation for Private Industry Workers in 
the Transportation and Material Moving Sector (Series ID: 
CIU2010000520000A). The third quarter data was the most recently 
available data at the time of analysis for this final rule. The data 
is also available at https://www.bls.gov/news.release/archives/eci_10302020.pdf in Table 5 on page 10. The Coast Guard is using the 
12 month percentage change for the month ending in Sept 2020.
    \34\ In Step 2 of the ratemaking, the Coast Guard uses the 
Federal Reserve's predicted PCE inflation rate of 1.2 percent to 
inflate operating expenses to 2020 dollars. This value differs from 
the ECI Q3 inflation rate of 3.5 percent. The reason for the 
deviation between the values is what is included in each dataset. 
The PCE is a measure of the Federal Reserve's best prediction of 
future inflation for all goods and services in the U.S. economy, 
whereas the ECI is a measure of historic employment costs. When 
making their economic predictions, the Federal Reserve may be 
considering economic factors that were not relevant at the time the 
ECI data was captured, or that have not yet impacted labor costs. It 
is also important to note that labor costs may be slower to respond 
to changes in supply and demand than other commercial goods and 
services.
    \35\ The Federal Reserve, Table 1. Economic projections of 
Federal Reserve Board members and Federal Reserve Bank presidents, 
under their individual assumptions of projected appropriate monetary 
policy, https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200916.pdf. Downloaded December 11, 2020.

                   Table 6--Target Pilot Compensation
------------------------------------------------------------------------
 
------------------------------------------------------------------------
2020 Target Compensation................................        $367,085
Difference between Q1 2020 ECI Inflation Rate (3.5%) and          1.500%
 the 2020 PCE Predicted Inflation Rate (2.0%)...........
Adjusted 2020 Compensation..............................        $372,591
2020 to 2021 Inflation Factor...........................           1.70%
2021 Target Compensation................................        $378,925
------------------------------------------------------------------------

[[Page 14199]]

    Next, we certify that the number of pilots estimated for 2021 is 
less than or equal to the number permitted under the changes to the 
staffing model in Sec.  401.220(a). The number of pilots needed is 17 
pilots for District One, which is equal to the number of registered 
pilots provided by the pilot associations. In accordance with Sec.  
404.104(c), we use the revised target individual compensation level to 
derive the total pilot compensation by multiplying the individual 
target compensation by the estimated number of registered pilots for 
District One, as shown in Table 7.

                                  Table 7--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $378,925        $378,925        $378,925
Number of Pilots................................................              10               7              17
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $3,789,250      $2,652,475      $6,441,725
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add the figures for projected operating expenses 
and total pilot compensation for each area. Next, we find the preceding 
year's average annual rate of return for new issues of high-grade 
corporate securities. Using Moody's data, the number is 3.3875 
percent.\36\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in Table 8.
---------------------------------------------------------------------------

    \36\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2019 
monthly data. The Coast Guard uses the most recent year of complete 
data. Moody's is taken from Moody's Investors Service, which is a 
bond credit rating business of Moody's Corporation. Bond ratings are 
based on creditworthiness and risk. The rating of ``Aaa'' is the 
highest bond rating assigned with the lowest credit risk. See 
https://fred.stlouisfed.org/series/AAA. (June 11, 2020).

                           Table 8--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $2,328,981      $1,502,239      $3,831,220
Total Target Pilot Compensation (Step 4)........................       3,789,250       2,652,475       6,441,725
Total 2021 Expenses.............................................       6,118,231       4,154,714      10,272,945
Working Capital Fund (3.3875%)..................................         207,255         140,741         347,996
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add all the expenses accrued to derive the total 
revenue needed for each area. These expenses include the projected 
operating expenses (from Step 2), the total pilot compensation (from 
Step 4), and the working capital fund contribution (from Step 5). We 
show these calculations in Table 9.

                                    Table 9--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, see table 4)...............      $2,328,981      $1,502,239      $3,831,220
Total Target Pilot Compensation (Step 4, see table 6)...........       3,789,250       2,652,475       6,441,725
Working Capital Fund (Step 5, see table 8)......................         207,255         140,741         347,996
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       6,325,486       4,295,455      10,620,941
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous 
six steps, to develop an hourly rate we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the 10-year average of traffic in District 
One, using the total time on task or pilot bridge hours.\37\ Because we 
calculate separate figures for designated and undesignated waters, 
there are two parts for each calculation. We show these values in Table 
10.
---------------------------------------------------------------------------

    \37\ To calculate the time on task for each district, the Coast 
Guard uses billing data from the Great Lakes Pilotage Management 
System (GLPMS). We pull the data from the system filtering by 
district, year, job status (we only include closed jobs), and 
flagging code (we only include U.S. jobs). After we have downloaded 
the data, we remove any overland transfers from the dataset, if 
necessary, and sum the total bridge hours, by area. We then subtract 
any non-billable delay hours from the total.

[[Page 14200]]

                 Table 10--Time on Task for District One
                                 [Hours]
------------------------------------------------------------------------
                                                   District One
                  Year                   -------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
2019....................................           8,232           8,405
2018....................................           6,943           8,445
2017....................................           7,605           8,679
2016....................................           5,434           6,217
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
                                         -------------------------------
    Average.............................           6,129           6,694
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. We present the 
calculations for each area in Table 11.

          Table 11--Initial Rate Calculations for District One
------------------------------------------------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
Needed revenue (Step 6).................      $6,325,486      $4,295,455
Average time on task (hours)............           6,129           6,694
Initial rate............................          $1,032            $642
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculate the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in Tables 12 and 
13.\38\
---------------------------------------------------------------------------

    \38\ To calculate the number of transits by vessel class, we use 
the billing data from GLPMS, filtering by district, year, job status 
(we only include closed jobs), and flagging code (we only include 
U.S. jobs). We then count the number of jobs by vessel class and 
area.

                      Table 12--Average Weighting Factor for District One, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              41               1              41
Class 1 (2016)..................................................              31               1              31
Class 1 (2017)..................................................              28               1              28
Class 1 (2018)..................................................              54               1              54
Class 1 (2019)..................................................              72               1              72
Class 2 (2014)..................................................             285            1.15          327.75
Class 2 (2015)..................................................             295            1.15          339.25
Class 2 (2016)..................................................             185            1.15          212.75
Class 2 (2017)..................................................             352            1.15           404.8
Class 2 (2018)..................................................             559            1.15          642.85
Class 2 (2019)..................................................             378            1.15           434.7
Class 3 (2014)..................................................              50             1.3              65
Class 3 (2015)..................................................              28             1.3            36.4
Class 3 (2016)..................................................              50             1.3              65
Class 3 (2017)..................................................              67             1.3            87.1
Class 3 (2018)..................................................              86             1.3           111.8
Class 3 (2019)..................................................             122             1.3           158.6
Class 4 (2014)..................................................             271            1.45          392.95
Class 4 (2015)..................................................             251            1.45          363.95
Class 4 (2016)..................................................             214            1.45           310.3
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             393            1.45          569.85
Class 4 (2019)..................................................             730            1.45          1058.5
                                                                 -----------------------------------------------
    Total.......................................................           4,858  ..............           6,252
                                                                 -----------------------------------------------

[[Page 14201]]

 
        Average weighting factor (weighted transits/number of     ..............            1.29  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                     Table 13--Average Weighting Factor for District One, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              25               1              25
Class 1 (2015)..................................................              28               1              28
Class 1 (2016)..................................................              18               1              18
Class 1 (2017)..................................................              19               1              19
Class 1 (2018)..................................................              22               1              22
Class 1 (2019)..................................................              30               1              30
Class 2 (2014)..................................................             238            1.15           273.7
Class 2 (2015)..................................................             263            1.15          302.45
Class 2 (2016)..................................................             169            1.15          194.35
Class 2 (2017)..................................................             290            1.15           333.5
Class 2 (2018)..................................................             352            1.15           404.8
Class 2 (2019)..................................................             366            1.15           420.9
Class 3 (2014)..................................................              60             1.3              78
Class 3 (2015)..................................................              42             1.3            54.6
Class 3 (2016)..................................................              28             1.3            36.4
Class 3 (2017)..................................................              45             1.3            58.5
Class 3 (2018)..................................................              63             1.3            81.9
Class 3 (2019)..................................................              58             1.3            75.4
Class 4 (2014)..................................................             289            1.45          419.05
Class 4 (2015)..................................................             269            1.45          390.05
Class 4 (2016)..................................................             222            1.45           321.9
Class 4 (2017)..................................................             285            1.45          413.25
Class 4 (2018)..................................................             382            1.45           553.9
Class 4 (2019)..................................................             326            1.45           472.7
                                                                 -----------------------------------------------
    Total.......................................................           3,889  ..............           5,027
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.29  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that, once the impact of 
the weighting factors is considered; the total cost of pilotage will be 
equal to the revenue needed. To do this, we divide the initial base 
rates calculated in Step 7 by the average weighting factors calculated 
in Step 8, as shown in Table 14.

                                  Table 14--Revised Base Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (Initial rate
                              Area                                 Initial rate      weighting         average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................          $1,032            1.29            $800
District One: Undesignated......................................             642            1.29             498
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish this, the Director 
considers whether the proposed rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the proposed rates would 
cover operating expenses and infrastructure costs, including average 
traffic and weighting factions. Based on the financial information 
submitted by the pilots, the Director is not making any alterations to 
the rates in this step. We will modify the text in Sec.  401.405(a) to 
reflect the final rates shown in Table 15.

[[Page 14202]]

                                     Table 15--Final Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2020     Proposed 2021    Final 2021
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated..............  St. Lawrence River......            $758            $757            $800
District One: Undesignated............  Lake Ontario............             463             428             498
----------------------------------------------------------------------------------------------------------------

District Two

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2018 expenses and 
revenues.\39\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. For costs accrued by 
the pilot associations generally, such as employee benefits, for 
example, the cost is divided between the designated and undesignated 
areas on a pro rata basis. The recognized operating expenses for 
District Two are shown in Table 16.
---------------------------------------------------------------------------

    \39\ These reports are available in the docket for this 
rulemaking (see Docket No. USCG-2019-0736).
---------------------------------------------------------------------------

    For District Two, we finalized three Director's adjustments: (1) 
For the amount collected from the 2018 surcharge; (2) for the amount in 
Coast Guard litigation legal fees (allowing intervener fees); and (3) 
for the amount paid to the District's applicant pilot. District Two had 
one applicant pilot during the 2018 season and paid $334,659 in salary. 
The Coast Guard believes this amount is above what is necessary and 
reasonable for retention and recruitment. In the 2019 NPRM, the Coast 
Guard proposed to make an adjustment to District Two's request for 
reimbursement of $571,248 for two applicant pilots ($285,624 per 
applicant). Instead of permitting $571,248 for two applicant pilots, we 
proposed allowing $257,566, or $128,783 per applicant pilot. This 
proposal went into the final rule for 2019 and was not opposed. Going 
forward, the Coast Guard will continue to use the same ratio of 
applicant to target compensation. For 2019, this was approximately 36 
percent of $359,887, which was the target pilot compensation value for 
2019 ($128,783 / $359,887 = 35.78 percent). The Coast Guard is using 
the rounded-up value of 36.0 percent of target compensation as the 
benchmark for applicant pilot compensation, for a 2021 target pilot 
compensation of $132,151 ($367,085 x .36). This allows adjustments to 
applicant pilot compensation to fluctuate in line with target 
compensation. Other adjustments made by the auditors are explained in 
the auditors' reports (available in the docket where indicated under 
the ADDRESSES portion of this document).

                               Table 16--2018 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated
              Reported operating expenses for 2018               --------------------------------
                                                                                     Southeast         Total
                                                                     Lake Erie     Shoal to Port
                                                                                       Huron
----------------------------------------------------------------------------------------------------------------
Other Pilotage Costs:
    Subsistence/Travel--Pilots..................................        $115,073        $172,608        $287,681
    CPA DEDUCTION...............................................         (3,457)         (5,185)         (8,642)
    Hotel/Lodging Cost..........................................          50,464          75,696         126,160
    License Insurance...........................................             138             207             345
    Payroll taxes...............................................          82,960         124,441         207,401
    Other.......................................................             860           1,291           2,151
                                                                 -----------------------------------------------
        Total Other Pilotage Costs..............................         246,038         369,058         615,096
Applicant Pilot Costs:
    Applicant Salaries..........................................         133,864         200,795         334,659
    Applicant Health Insurance..................................          18,691          28,036          46,727
    Applicant Payroll Tax.......................................           4,496           6,745          11,241
    Applicant Subsistence.......................................           9,872          14,807          24,679
                                                                 -----------------------------------------------
        Total Applicant Pilot Cost..............................         166,923         250,383         417,306
Pilot Boat and Dispatch Costs:
    Pilot Boat Cost.............................................         206,998         310,496         517,494
    Employee Benefits...........................................          80,906         121,358         202,264
    Payroll Taxes...............................................          12,523          18,785          31,308
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         300,427         450,639         751,066
Administrative Expenses:
    Legal--general counsel......................................          35,711          53,567          89,278
    Legal--shared counsel (K&L Gates)...........................          17,037          25,555          42,592
    Legal--USCG litigation......................................           2,185           3,277           5,462
    Office rent.................................................          33,326          49,988          83,314
    Insurance...................................................          20,357          30,536          50,893

[[Page 14203]]

 
    Employee Benefits...........................................          89,999         134,999         224,998
    Other taxes.................................................          25,620          38,430          64,050
    Real Estate taxes...........................................           6,066           9,099          15,165
    Depreciation/Auto lease/Other...............................          29,392          44,087          73,479
    Interest....................................................             586             880           1,466
    APA dues....................................................          13,703          20,554          34,257
    Dues and Subscriptions......................................             676           1,015           1,691
    Utilities...................................................          19,413          29,119          48,532
    Salaries--Admin employees...................................          53,170          79,755         132,925
    Payroll taxes...............................................           5,558           8,338          13,896
    Accounting..................................................          14,276          21,414          35,690
    Pilot Training..............................................          14,434          21,414          35,848
    Other.......................................................          15,310          22,966          38,276
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         396,819         594,993         991,812
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats        1,110,207       1,665,073       2,775,280
             + Admin)...........................................
Adjustments (Director):
    Director's Adjustment Surcharge Collected in 2018...........        (65,962)        (65,962)       (131,924)
    Director's Adjustment Applicant Pilot Salary................        (81,003)       (121,505)       (202,508)
    Legal Fee Removal--USCG Litigation..........................         (2,185)         (3,277)         (5,462)
                                                                 -----------------------------------------------
        Total Director's Adjustments............................       (149,150)       (190,744)       (339,894)
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         961,057       1,474,329       2,435,386
----------------------------------------------------------------------------------------------------------------

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

    Having identified the recognized 2019 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation using the BLS data from the CPI for the Midwest 
Region of the United States for the 2019 inflation rate.\40\ Because 
the BLS does not provide forecasted inflation data, we use economic 
projections from the Federal Reserve for the 2020 and 2021 inflation 
modification.\41\ Based on that information, the calculations for Step 
1 are as follows:
---------------------------------------------------------------------------

    \40\ See footnote 30.
    \41\ See footnote 31.

                             Table 17--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $961,057      $1,474,329      $2,435,386
2019 Inflation Modification (@1.5%).............................          14,416          22,115          36,531
2020 Inflation Modification (@1.2%).............................          11,706          17,957          29,663
2021 Inflation Modification (@1.7%).............................          16,782          25,745          42,527
                                                                 -----------------------------------------------
    Adjusted 2021 Operating Expenses............................       1,003,961       1,540,146       2,544,107
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimate the 
number of working pilots in each district. We determine the number of 
registered pilots based on data provided by the Lakes Pilots 
Association. Using these numbers, we estimate that there will be 15 
registered pilots in 2021 in District Two. Furthermore, based on the 
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 
41466), we assign a certain number of pilots to designated waters and a 
certain number to undesignated waters, as shown in Table 18. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.

[[Page 14204]]

                       Table 18--Authorized Pilots
------------------------------------------------------------------------
                          Item                             District Two
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \42\...              15
2021 Authorized pilots (total)..........................              15
Pilots assigned to designated areas.....................               7
Pilots assigned to undesignated areas...................               8
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \42\ For a detailed calculation refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an ``interim'' ratemaking this year, we will 
follow the procedure outlined in paragraph (b) of Sec.  404.104, which 
adjusts the existing compensation benchmark by inflation. As stated in 
Section V.A of the preamble, we are using a two-step process to adjust 
target pilot compensation for inflation. The first step adjusts the 
2019 target compensation benchmark of $367,085 by 1.5 percent, for a 
total adjusted value of $372,591. This adjustment accounts for the 
difference between the predicted 2020 Median PCE inflation value of 2 
percent and the actual 2020 ECI inflation value of 3.5 
percent.43 44 Because we do not have a value for the 
employment cost index for 2021, we multiply the adjusted 2020 
compensation benchmark of $372,591 by the Median PCE inflation value of 
1.70 percent.\45\ Based on the projected 2021 inflation estimate, the 
compensation benchmark for 2021 is $378,925 per pilot (see Table 6 for 
calculations).
---------------------------------------------------------------------------

    \43\ See footnote 33.
    \44\ See footnote 34.
    \45\ See footnote 35.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2021 is 
less than or equal to the number permitted under the changes to the 
staffing model in Sec.  401.220(a). The number of pilots needed is 15 
pilots for District Two, which is more than or equal to 15, the number 
of registered pilots provided by the pilot associations.\46\
---------------------------------------------------------------------------

    \46\ See table 6 of the Great Lakes Pilotage Rates--2017 Annual 
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The 
methodology of the staffing model is discussed at length in the 
final rule (see pages 41476-41480 for a detailed analysis of the 
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised 
target individual compensation level to derive the total pilot 
compensation by multiplying the individual target compensation by the 
estimated number of registered pilots for District Two, as shown in 
Table 19.

                                 Table 19--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $378,925        $378,925        $378,925
Number of Pilots................................................               8               7              15
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $3,031,400      $2,652,475      $5,683,875
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add the figures for projected operating expenses 
and total pilot compensation for each area. Next, we find the preceding 
year's average annual rate of return for new issues of high-grade 
corporate securities. Using Moody's data, the number is 3.3875 
percent.\47\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in Table 20.
---------------------------------------------------------------------------

    \47\ See footnote 36.

                           Table 20--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,003,961      $1,540,146      $2,544,107
Total Target Pilot Compensation (Step 4)........................       3,031,400       2,652,475       5,683,875
Total Expenses..................................................       4,035,361       4,192,621       8,227,982
Working Capital Fund (3.3875%)..................................         136,698         142,025         278,723
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add all the expenses accrued to derive the total 
revenue needed for each area. These expenses include the projected 
operating expenses (from Step 2), the total pilot compensation (from 
Step 4), and the working capital fund contribution (from Step 5). We 
show these calculations in Table 21.

[[Page 14205]]

                                    Table 21--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, see Table 17)..............      $1,003,961      $1,540,146      $2,544,107
Total Target Pilot Compensation (Step 4, see Table 19)..........       3,031,400       2,652,475       5,683,875
Working Capital Fund (Step 5, see Table 20).....................         136,698         142,025         278,723
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       4,172,059       4,334,646       8,506,705
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the needed revenue for each area in the previous 
six steps, to develop an hourly rate, we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the 10-year average of traffic in District 
Two, using the total time on task or pilot bridge hours.\48\ Because we 
calculate separate figures for designated and undesignated waters, 
there are two parts for each calculation. We show these values in Table 
22.
---------------------------------------------------------------------------

    \48\ See footnote 37.

                 Table 22--Time on Task for District Two
                                 [Hours]
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2019....................................           6,512           7,715
2018....................................           6,150           6,655
2017....................................           5,139           6,074
2016....................................           6,425           5,615
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
                                         -------------------------------
    Average.............................           5,634           5,661
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. The calculations 
for each area are set forth in Table 23.

          Table 23--Initial Rate Calculations for District Two
------------------------------------------------------------------------
                  Item                     Undesignated     Designated
------------------------------------------------------------------------
Needed revenue (Step 6).................      $4,172,059      $4,334,646
Average time on task (hours)............           5,634           5,661
Initial rate............................            $741            $766
------------------------------------------------------------------------

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculate the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in Tables 24 and 
25.\49\
---------------------------------------------------------------------------

    \49\ See footnote 38.

                     Table 24--Average Weighting Factor for District Two, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              35               1              35
Class 1 (2016)..................................................              32               1              32
Class 1 (2017)..................................................              21               1              21
Class 1 (2018)..................................................              37               1              37
Class 1 (2019)..................................................              54               1              54
Class 2 (2014)..................................................             356            1.15           409.4
Class 2 (2015)..................................................             354            1.15           407.1
Class 2 (2016)..................................................             380            1.15             437

[[Page 14206]]

 
Class 2 (2017)..................................................             222            1.15           255.3
Class 2 (2018)..................................................             123            1.15          141.45
Class 2 (2019)..................................................             127            1.15          146.05
Class 3 (2014)..................................................              20             1.3              26
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               9             1.3            11.7
Class 3 (2017)..................................................              12             1.3            15.6
Class 3 (2018)..................................................               3             1.3             3.9
Class 3 (2019)..................................................               1             1.3             1.3
Class 4 (2014)..................................................             636            1.45           922.2
Class 4 (2015)..................................................             560            1.45             812
Class 4 (2016)..................................................             468            1.45           678.6
Class 4 (2017)..................................................             319            1.45          462.55
Class 4 (2018)..................................................             196            1.45          284.20
Class 4 (2019)..................................................             210            1.45           304.5
                                                                 -----------------------------------------------
    Total.......................................................           4,206  ..............           5,529
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.31  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                      Table 25--Average Weighting Factor for District Two, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              20               1              20
Class 1 (2015)..................................................              15               1              15
Class 1 (2016)..................................................              28               1              28
Class 1 (2017)..................................................              15               1              15
Class 1 (2018)..................................................              42               1              42
Class 1 (2019)..................................................              48               1              48
Class 2 (2014)..................................................             237            1.15          272.55
Class 2 (2015)..................................................             217            1.15          249.55
Class 2 (2016)..................................................             224            1.15           257.6
Class 2 (2017)..................................................             127            1.15          146.05
Class 2 (2018)..................................................             153            1.15          175.95
Class 2 (2019)..................................................             281            1.15          323.15
Class 3 (2014)..................................................               8             1.3            10.4
Class 3 (2015)..................................................               8             1.3            10.4
Class 3 (2016)..................................................               4             1.3             5.2
Class 3 (2017)..................................................               4             1.3             5.2
Class 3 (2018)..................................................              14             1.3            18.2
Class 3 (2019)..................................................               1             1.3             1.3
Class 4 (2014)..................................................             359            1.45          520.55
Class 4 (2015)..................................................             340            1.45             493
Class 4 (2016)..................................................             281            1.45          407.45
Class 4 (2017)..................................................             185            1.45          268.25
Class 4 (2018)..................................................             379            1.45          549.55
Class 4 (2019)..................................................             403            1.45          584.35
                                                                 -----------------------------------------------
    Total.......................................................           3,393  ..............           4,467
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that, once the impact of 
the weighting factors are considered, the total cost of pilotage will 
be equal to the revenue needed. To do this, we divide the initial base 
rates calculated in Step 7 by the average weighting factors calculated 
in Step 8, as shown in Table 26.

                                  Table 26--Revised Base Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (Initial rate
                              Area                                 Initial rate      weighting         Average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District Two: Designated........................................            $766            1.32            $580

[[Page 14207]]

 
District Two: Undesignated......................................             741            1.31             566
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish this, the Director 
considers whether the proposed rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods, and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the proposed rates would 
cover operating expenses and infrastructure costs, and takes average 
traffic and weighting factors into consideration. Based on this 
information, the Director is not making any alterations to the rates in 
this step. We will modify the text in Sec.  401.405(a) to reflect the 
final rates shown in Table 27.

                                     Table 27--Final Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2020     Proposed 2021    Final 2021
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District Two: Designated..............  Navigable waters from               $618            $577            $580
                                         Southeast Shoal to Port
                                         Huron, MI.
District Two: Undesignated............  Lake Erie...............             586             566             566
----------------------------------------------------------------------------------------------------------------

District Three

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard 
review and recognize the previous year's operating expenses (Sec.  
404.101). To do so, we begin by reviewing the independent accountant's 
financial reports for each association's 2018 expenses and 
revenues.\50\ For accounting purposes, the financial reports divide 
expenses into designated and undesignated areas. For costs accrued by 
the pilot associations generally, such as employee benefits, for 
example, the cost is divided between the designated and undesignated 
areas on a pro rata basis. The recognized operating expenses for 
District Three are shown in Table 28.
---------------------------------------------------------------------------

    \50\ These reports are available in the docket for this 
rulemaking (see Docket No. USCG-2019-0736).
---------------------------------------------------------------------------

    For District Three, we finalized two Director's adjustments. One is 
for the amount collected from the 2018 surcharge, and the other for 
$9,277, which was the amount the district spent on litigation legal 
fees against the Coast Guard. The other $9,094 spent by District Three 
on Coast Guard litigation was for intervener fees, which are allowable 
expenses. Other adjustments made by the auditors are explained in the 
auditors' reports (available in the docket where indicated in the 
ADDRESSES portion of this document).
    We make no adjustments to the District Three compensation for 
applicant pilots. In the 2019 NPRM, the Coast Guard proposed to make an 
adjustment to District Three's request for reimbursement of $571,248 
for two applicant pilots ($285,624 per applicant). Instead of 
permitting $571,248 for two applicant pilots, we proposed allowing 
$257,566, or $128,783 per applicant pilot. This proposal went into the 
final rule for 2019 and was not opposed. Going forward, the Coast Guard 
will continue to use the same ratio of applicant to target compensation 
for all districts. For 2019, this was approximately 36 percent of 
$359,887, which was the target pilot compensation value for 2019 
($128,783 / $359,887 = 35.78 percent). The Coast Guard is using 36.0 
percent of target compensation as the benchmark for applicant pilot 
compensation, for a 2021 target pilot compensation of $132,151 
($367,085 x .36). This allows adjustments to applicant pilot 
compensation to fluctuate in line with target compensation.

                              Table 28--2018 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                         District Three
                                               -----------------------------------------------------------------
                                                  Undesignated      Designated     Undesignated
          Reported expenses for 2018              \51\ (Area 6)      (Area 7)        (Area 8)
                                               --------------------------------------------------      Total
                                                 Lakes Huron and     St. Marys
                                                    Michigan           River       Lake Superior
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs......................
    Pilot subsistence/travel..................          $208,110        $110,697        $123,980        $442,787
    Hotel/Lodging Cost........................            88,982          47,331          53,011         189,324
    License Insurance--Pilots.................            13,516           7,189           8,052          28,757

[[Page 14208]]

 
    Payroll taxes.............................           122,954          65,401          73,249         261,604
    Other.....................................            19,521          10,383          11,629          41,533
                                               -----------------------------------------------------------------
        Total Other Pilotage Costs............           453,083         241,001         269,921         964,005
Applicant Pilot Costs:
    Applicant Salaries........................           183,485          97,598         109,310         390,393
    Applicant pilot subsistence/travel........            16,411           8,729           9,777          34,917
    Applicant Insurance.......................            38,312          20,379          22,823          81,514
    Applicant Payroll Tax.....................            16,411           8,729           9,777          34,917
                                               -----------------------------------------------------------------
        Applicant Total Cost..................           254,619         135,435         151,687         541,741
Pilot Boat and Dispatch Costs:
    Pilot boat costs..........................           346,160         184,127         206,223         736,510
Dispatch costs................................            99,982          53,182          59,563         212,727
    Payroll taxes.............................            13,609           7,239           8,108          28,956
                                               -----------------------------------------------------------------
        Total Pilot and Dispatch Costs........           459,751         244,548         273,894         978,193
Administrative Expenses:
    Legal--general counsel....................            22,766          12,109          13,563          48,438
    Legal--shared counsel (K&L Gates).........            19,426          10,333          11,573          41,332
    Legal--USCG litigation....................             8,611           4,580           5,130          18,321
                                               -----------------------------------------------------------------
    Office rent...............................             4,020           2,138           2,395           8,553
    Insurance.................................            11,354           6,040           6,764          24,158
    Employee benefits.........................            68,303          36,331          40,691         145,325
    Other taxes...............................               131              70              78             279
    Depreciation/Auto leasing/Other...........            57,315          30,487          34,145         121,947
    Interest..................................                 7               4               4              15
    APA Dues..................................            20,628          10,973          12,289          43,890
    Dues and subscriptions....................             3,290           1,750           1,960           7,000
    Utilities.................................            31,860          16,947          18,980          67,787
    Salaries..................................            60,876          32,381          36,267         129,524
    Payroll taxes.............................             5,406           2,875           3,220          11,501
    Accounting/Professional fees..............             8,069           4,292           4,807          17,168
    Pilot training............................            18,586           9,886          11,073          39,545
    Other expenses (D3-18-01).................             8,907           4,738           5,306          18,951
    (D3-18-01) CPA Deduction..................           (2,030)         (1,080)         (1,210)         (4,320)
                                               -----------------------------------------------------------------
        Total Administrative Expenses.........           347,525         184,854         207,035         739,414
                                               -----------------------------------------------------------------
            Total Operating Expenses (Other            1,514,978         805,838         902,537       3,223,353
             Costs + Pilot Boats + Admin).....
Adjustments (Director):
    Director's Adjustment Surcharge Collected          (273,168)       (273,168)       (273,168)       (819,504)
     in 2018..................................
    Legal Fee Removal--USCG Litigation........           (4,337)         (2,307)         (2,584)         (9,227)
                                               -----------------------------------------------------------------
        Total Director's Adjustments..........         (277,505)       (275,475)       (275,752)       (828,731)
                                               -----------------------------------------------------------------
            Total Operating Expenses (OpEx +           1,237,473         530,363         626,785       2,394,622
             Adjustments).....................
----------------------------------------------------------------------------------------------------------------

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

    \51\ The undesignated areas in District Three (areas 6 and 8) 
are treated separately in table 28. In table 29 and subsequent 
tables, both undesignated areas are combined and analyzed as a 
single undesignated area.
---------------------------------------------------------------------------

    Having identified the recognized 2018 operating expenses in Step 1, 
the next step is to estimate the current year's operating expenses by 
adjusting those expenses for inflation over the 3-year period. We 
calculate inflation using the BLS data from the CPI for the Midwest 
Region of the United States for the 2019 inflation rate.\52\ Because 
the BLS does not provide forecasted inflation data, we use economic 
projections from the Federal Reserve for the 2020 and 2021 inflation 
modification.\53\ Based on that information, the calculations for Step 
1 are as follows:
---------------------------------------------------------------------------

    \52\ See footnote 30.
    \53\ See footnote 31.

[[Page 14209]]

                            Table 29--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,864,259        $530,363      $2,394,622
2019 Inflation Modification (@1.5%).............................          27,964           7,955          35,919
2020 Inflation Modification (@1.2%).............................          22,707           6,460          29,167
2021 Inflation Modification (@1.7%).............................          32,554           9,261          41,815
                                                                 -----------------------------------------------
    Adjusted 2021 Operating Expenses............................       1,947,484         554,039       2,501,523
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.104(c), we estimate the 
number of working pilots in each district. We determine the number of 
registered pilots based on data provided by the Western Great Lakes 
Pilots Association. Using these numbers, we estimate that there will be 
22 registered pilots in 2021 in District Three. Furthermore, based on 
the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 
41466), we assign a certain number of pilots to designated waters and a 
certain number to undesignated waters, as shown in Table 30. These 
numbers are used to determine the amount of revenue needed in their 
respective areas.
---------------------------------------------------------------------------

    \54\ For a detailed calculation, refer to the Great Lakes 
Pilotage Rates--2017 Annual Review final rule, which contains the 
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).

                       Table 30--Authorized Pilots
------------------------------------------------------------------------
                                                          District Three
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \54\...              22
2021 Authorized pilots (total)..........................              22
Pilots assigned to designated areas.....................               4
Pilots assigned to undesignated areas...................              18
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark

    In this step, we determine the total pilot compensation for each 
area. As we are conducting an ``interim'' ratemaking this year, we will 
follow the procedure outlined in paragraph (b) of Sec.  404.104, which 
adjusts the existing compensation benchmark by inflation. As stated in 
Section V.A of the preamble, we are using a two-step process to adjust 
target pilot compensation for inflation. The first step adjusts the 
2019 target compensation benchmark of $367,085 by 15 percent, for a 
total adjusted value of $372,591. This adjustment accounts for the 
difference between the predicted 2020 Median PCE inflation value of 2 
percent and the actual 2020 ECI inflation value of 3.3 
percent.55 56 Because we do not have a value for the ECI for 
2021, we multiply the adjusted 2020 compensation benchmark of $372,591 
by the Median PCE inflation value of 1.70 percent.\57\ Based on the 
projected 2020 inflation estimate, the compensation benchmark for 2021 
is $378,925 per pilot (see Table 6 for calculations).
---------------------------------------------------------------------------

    \55\ See footnote 33.
    \56\ See footnote 34.
    \57\ See footnote 35.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2021 is 
less than or equal to the number permitted under the changes to the 
staffing model in Sec.  401.220(a). The number of pilots needed is 22 
pilots for District Three,\58\ which is more than or equal to 22, the 
number of registered pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \58\ See Table 6 of the Great Lakes Pilotage Rates--2017 Annual 
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The 
methodology of the staffing model is discussed at length in the 
final rule (see pages 41476-41480 for a detailed analysis of the 
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised 
target individual compensation level to derive the total pilot 
compensation by multiplying the individual target compensation by the 
estimated number of registered pilots for District Three, as shown in 
Table 31.

                                Table 31--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $378,925        $378,925        $378,925
Number of Pilots................................................              18               4              22
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................       6,820,650       1,515,700       8,336,350
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for 
each area. First, we add the figures for projected operating expenses 
and total pilot compensation for each area. Next, we find the preceding 
year's average annual rate of return for new issues of high grade 
corporate securities. Using Moody's data, the number is 3.3875 
percent.\59\ By multiplying the two figures, we obtain the working 
capital fund contribution for each area, as shown in Table 32.
---------------------------------------------------------------------------

    \59\ See footnote 36.

[[Page 14210]]

                          Table 32--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,947,484        $554,039      $2,501,523
Total Target Pilot Compensation (Step 4)........................       6,820,650       1,515,700       8,336,350
Total Expenses..................................................       8,768,134       2,069,739      10,837,873
Working Capital Fund (3.3875)...................................         297,021          70,112         367,133
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add all the expenses accrued to derive the total 
revenue needed for each area. These expenses include the projected 
operating expenses (from Step 2), the total pilot compensation (from 
Step 4), and the working capital fund contribution (from Step 5). The 
calculations are shown in Table 33.

                                   Table 33--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, see Table 29)..............      $1,947,484        $554,039      $2,501,523
Total Target Pilot Compensation (Step 4, see Table 31)..........       6,820,650       1,515,700       8,336,350
Working Capital Fund (Step 5, see Table 32).....................         297,021          70,112         367,133
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       9,065,155       2,139,851      11,205,006
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous 
six steps, to develop an hourly rate, we divide that number by the 
expected number of hours of traffic. Step 7 is a two-part process. In 
the first part, we calculate the 10-year average of traffic in District 
Three, using the total time on task or pilot bridge hours.\60\ Because 
we calculate separate figures for designated and undesignated waters, 
there are two parts for each calculation. We show these values in Table 
34.
---------------------------------------------------------------------------

    \60\ See footnote 37.

                Table 34--Time on Task for District Three
                                 [Hours]
------------------------------------------------------------------------
                                                  District Three
                  Year                   -------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
2019....................................          24,851           3,395
2018....................................          19,967           3,455
2017....................................          20,955           2,997
2016....................................          23,421           2,769
2015....................................          22,824           2,696
2014....................................          25,833           3,835
2013....................................          17,115           2,631
2012....................................          15,906           2,163
2011....................................          16,012           1,678
2010....................................          20,211           2,461
                                         -------------------------------
    Average.............................          20,710           2,808
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue 
needed by the average number of hours for each area. This produces an 
initial rate, which is necessary to produce the revenue needed for each 
area, assuming the amount of traffic is as expected. The calculations 
for each area are set forth in Table 35.

         Table 35--Initial Rate Calculations for District Three
------------------------------------------------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $9,065,155      $2,139,851
Average time on task (hours)............          20,710           2,808
Initial rate............................            $438            $762
------------------------------------------------------------------------

[[Page 14211]]

H. Step 8: Calculate Average Weighting Factors by Area

    In this step, we calculate the average weighting factor for each 
designated and undesignated area. We collect the weighting factors, set 
forth in 46 CFR 401.400, for each vessel trip. Using this database, we 
calculate the average weighting factor for each area using the data 
from each vessel transit from 2014 onward, as shown in Tables 36 and 
37.\61\
---------------------------------------------------------------------------

    \61\ See footnote 38.

                    Table 36--Average Weighting Factor for District Three, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
                                                     Area 6
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              45               1              45
Class 1 (2015)..................................................              56               1              56
Class 1 (2016)..................................................             136               1             136
Class 1 (2017)..................................................             148               1             148
Class 1 (2018)..................................................             103               1             103
Class 1 (2019)..................................................             173               1             173
Class 2 (2014)..................................................             274            1.15           315.1
Class 2 (2015)..................................................             207            1.15          238.05
Class 2 (2016)..................................................             236            1.15           271.4
Class 2 (2017)..................................................             264            1.15           303.6
Class 2 (2018)..................................................             169            1.15          194.35
Class 2 (2019)..................................................             279            1.15          320.85
Class 3 (2014)..................................................              15             1.3            19.5
Class 3 (2015)..................................................               8             1.3            10.4
Class 3 (2016)..................................................              10             1.3              13
Class 3 (2017)..................................................              19             1.3            24.7
Class 3 (2018)..................................................               9             1.3            11.7
Class 3 (2019)..................................................               9             1.3            11.7
Class 4 (2014)..................................................             394            1.45           571.3
Class 4 (2015)..................................................             375            1.45          543.75
Class 4 (2016)..................................................             332            1.45           481.4
Class 4 (2017)..................................................             367            1.45          532.15
Class 4 (2018)..................................................             337            1.45          488.65
Class 4 (2019)..................................................             334            1.45           484.3
                                                                 -----------------------------------------------
    Total for Area 6............................................           4,299  ..............           5,497
----------------------------------------------------------------------------------------------------------------
                                                     Area 8
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................               3               1               3
Class 1 (2015)..................................................               0               1               0
Class 1 (2016)..................................................               4               1               4
Class 1 (2017)..................................................               4               1               4
Class 1 (2018)..................................................               0               1               0
Class 1 (2019)..................................................               0               1               0
Class 2 (2014)..................................................             177            1.15          203.55
Class 2 (2015)..................................................             169            1.15          194.35
Class 2 (2016)..................................................             174            1.15           200.1
Class 2 (2017)..................................................             151            1.15          173.65
Class 2 (2018)..................................................             102            1.15           117.3
Class 2 (2019)..................................................             120            1.15             138
Class 3 (2014)..................................................               3             1.3             3.9
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               7             1.3             9.1
Class 3 (2017)..................................................              18             1.3            23.4
Class 3 (2018)..................................................               7             1.3             9.1
Class 3 (2019)..................................................               6             1.3             7.8
Class 4 (2014)..................................................             243            1.45          352.35
Class 4 (2015)..................................................             253            1.45          366.85
Class 4 (2016)..................................................             204            1.45           295.8
Class 4 (2017)..................................................             269            1.45          390.05
Class 4 (2018)..................................................             188            1.45           272.6
Class 4 (2019)..................................................             254            1.45           368.3
                                                                 -----------------------------------------------
        Total for Area 8........................................           2,356  ..............           3,137
        Combined total..........................................           6,655  ..............        8,634.10
                                                                 -----------------------------------------------
            Average weighting factor (weighted transits/number    ..............            1.30  ..............
             of transits).......................................
----------------------------------------------------------------------------------------------------------------

[[Page 14212]]

                     Table 37--Average Weighting Factor for District Three, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                      Vessel class per year                          transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              27               1              27
Class 1 (2015)..................................................              23               1              23
Class 1 (2016)..................................................              55               1              55
Class 1 (2017)..................................................              62               1              62
Class 1 (2018)..................................................              47               1              47
Class 1 (2019)..................................................              45               1              45
Class 2 (2014)..................................................             221            1.15          254.15
Class 2 (2015)..................................................             145            1.15          166.75
Class 2 (2016)..................................................             174            1.15           200.1
Class 2 (2017)..................................................             170            1.15           195.5
Class 2 (2018)..................................................             126            1.15           144.9
Class 2 (2019)..................................................             162            1.15           186.3
Class 3 (2014)..................................................               4             1.3             5.2
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               6             1.3             7.8
Class 3 (2017)..................................................              14             1.3            18.2
Class 3 (2018)..................................................               6             1.3             7.8
Class 3 (2019)..................................................               3             1.3             3.9
Class 4 (2014)..................................................             321            1.45          465.45
Class 4 (2015)..................................................             245            1.45          355.25
Class 4 (2016)..................................................             191            1.45          276.95
Class 4 (2017)..................................................             234            1.45           339.3
Class 4 (2018)..................................................             225            1.45          326.25
Class 4 (2019)..................................................             308            1.45           446.6
                                                                 -----------------------------------------------
    Total.......................................................           2,814  ..............           3,659
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits per number    ..............            1.30  ..............
         of transits)...........................................
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that, once the impact of 
the weighting factors are considered, the total cost of pilotage will 
be equal to the revenue needed. To do this, we divide the initial base 
rates calculated in Step 7 by the average weighting factors calculated 
in Step 8, as shown in Table 38.

                                 Table 38--Revised Base Rates for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                                   Revised rate
                                                                                      Average     (Initial rate
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                        8)            factor)
----------------------------------------------------------------------------------------------------------------
District Three: Designated......................................            $762            1.30            $586
District Three: Undesignated....................................             438            1.30             337
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the 
staffing model and ensures that they meet the goal of ensuring safe, 
efficient, and reliable pilotage. To establish this, the Director 
considers whether the proposed rates incorporate appropriate 
compensation for pilots to handle heavy traffic periods and whether 
there is a sufficient number of pilots to handle those heavy traffic 
periods. The Director also considers whether the proposed rates would 
cover operating expenses and infrastructure costs, and takes average 
traffic and weighting factors into consideration. Based on this 
information, the Director is not making any alterations to the rates in 
this step. We will modify the text in Sec.  401.405(a) to reflect the 
final rates shown in Table 39.

                                    Table 39--Final Rates for District Three
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2020     Proposed 2021    Final 2021
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District Three: Designated............  St. Marys River.........            $632            $584            $586
District Three: Undesignated..........  Lakes Huron, Michigan,               337             335             337
                                         and Superior.
----------------------------------------------------------------------------------------------------------------

VIII. Regulatory Analyses

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

[[Page 14213]]

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 costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility.
    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. A regulatory 
analysis (RA) follows.
    The purpose of this rule is to establish new base pilotage rates. 
The Great Lakes Pilotage Act of 1960 requires that rates be established 
or reviewed and adjusted each year. The Act requires that base rates be 
established by a full ratemaking at least once every five years, and in 
years when base rates are not established, they must be reviewed and, 
if necessary, adjusted. The last full ratemaking was concluded in June 
of 2018.\62\ For this ratemaking, the Coast Guard estimates an increase 
in cost of approximately $2.06 million to industry as a result of the 
change in revenue needed in 2021 compared to the revenue needed in 
2020.
---------------------------------------------------------------------------

    \62\ Great Lakes Pilotage Rates-2018 Annual Review and Revisions 
to Methodology (83 FR 26162), published June 5, 2018.
---------------------------------------------------------------------------

    Table 40 summarizes changes with no cost impacts or where the cost 
impacts are captured in the rate change. Table 41 summarizes the 
affected population, costs, and benefits of the rate change.

                    Table 40--Changes With No Costs or Cost Captured in the Final Rate Change
----------------------------------------------------------------------------------------------------------------
                                                                           Basis for no cost
             Change                   Description          Affected        or cost captured        Benefits
                                                          population       in the final rate
----------------------------------------------------------------------------------------------------------------
Legal expenses for lawsuits       The Coast Guard is  Owners and          Changes in          The change will
 against the Coast Guard in        excluding legal     operators of 279    operating           remove the undue
 relation to the ratemaking are    fees for            vessels             expenses are        cost to shippers
 not allowable operating           litigation          journeying the      accounted for in    of effectively
 expenses.                         against the Coast   Great Lakes         the base pilotage   paying for the
                                   Guard from          system annually,    rates. For the      pilots'
                                   operating           54 United States    2021 ratemaking,    litigation
                                   expenses for        registered          these legal fees    expenses to sue
                                   calculation of      pilots, and 3       total $27,594 for   the Coast Guard.
                                   pilotage rates.     pilotage            all three
                                   This exclusion      associations.       districts. After
                                   only applies to                         adjusting for
                                   legal fees when                         inflation and the
                                   pilots                                  working capital
                                   associations sue                        fund, these
                                   the Coast Guard                         expenses are
                                   in relation to                          $29,802, or 0.10%
                                   the ratemaking                          of the total
                                   and oversight                           revenue needed
                                   requirement in 46                       for 2021. The
                                   U.S.C. 9303, 9304                       pilot
                                   and 9305. As part                       associations may
                                   of this change,                         still be
                                   the Coast Guard                         reimbursed for
                                   is also creating                        these expenses by
                                   a new paragraph                         the Coast Guard
                                   46 CFR                                  under the EAJA.
                                   404.2(b)(6),
                                   which defines
                                   legal expenses.
Inflation of target pilot         The Coast Guard is  Owners and          Pilot compensation  This change
 compensation.                     modifying 46 CFR    operators of 279    costs are           ensures the Coast
                                   404.104(b) to       vessels             accounted for in    Guard will be
                                   change how          journeying the      the base pilotage   able to correct
                                   inflation of        Great Lakes         rates.              any under- or
                                   pilot               system annually,                        over-estimates in
                                   compensation is     54 United States                        inflation, rather
                                   calculated by       registered Great                        than keeping
                                   accounting for      Lakes pilots, and                       these errors
                                   the difference      3 pilotage                              continuously in
                                   between the         associations.                           the rate.
                                   predicted PCE
                                   inflation rated
                                   and the actual
                                   ECI inflation
                                   rate.
----------------------------------------------------------------------------------------------------------------

                                    Table 41--Economic Impacts Due to Changes
----------------------------------------------------------------------------------------------------------------
                                                           Affected
             Change                   Description         population             Costs             Benefits
----------------------------------------------------------------------------------------------------------------
Rate and surcharge changes......  Under the Great     Owners and          Increase of         New rates cover an
                                   Lakes Pilotage      operators of 279    $2,064,622 due to   association's
                                   Act of 1960, the    vessels             change in revenue   necessary and
                                   Coast Guard is      transiting the      needed for 2021     reasonable
                                   required to         Great Lakes         ($30,332,652)       operating
                                   review and adjust   system annually,    from revenue        expenses.
                                   base pilotage       54 United States    needed for 2020     Promotes safe,
                                   rates annually.     registered Great    ($28,268,030), as   efficient, and
                                                       Lakes pilots, and   shown in Table 43   reliable pilotage
                                                       3 pilotage          below.              service on the
                                                       associations.                           Great Lakes.
                                                                                               Provides fair
                                                                                               compensation,
                                                                                               adequate
                                                                                               training, and
                                                                                               sufficient rest
                                                                                               periods for
                                                                                               pilots. Ensures
                                                                                               the association
                                                                                               receives
                                                                                               sufficient
                                                                                               revenues to fund
                                                                                               future
                                                                                               improvements.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard did not receive any comments on the regulatory 
analysis itself, but we did receive comments on the operating expenses 
that affected the calculation of projected revenues. In this final 
rule, the Coast Guard made six adjustments to the operating expenses 
(Step 1):
    (1) We included intervener legal fees paid by District Three in 
their operating expenses. These fees were incorrectly deducted via 
Directors adjustment in the NPRM.
    (2) We removed the Director's adjustment deducting District One's 
applicant pilot salaries.
    (3) We removed a CPA deduction of $6,600 for District One's dues 
and subscriptions, as this deduction was not included in the auditor's 
report.
    (4) We added capital expenses to District One for dock repairs, 
loan repayment, and the down payment of a new pilot boat.
    (5) We adjusted District One's applicant expenses based on new 
information provided by the CohnReznick.
    (6) We redistributed the applicant pilot salary deduction for 
District Two between the designated and undesignated areas.

[[Page 14214]]

    In addition to the adjustments made to the operating expenses, we 
made two other changes that impacted the calculation of projected 
revenues:
    (1) We updated the PCE and ECI inflation data to use the most 
recently available information.
    (2) Based on public comment, we decided not to incorporate the 
proposed rounding changes to the staffing model in this final rule. As 
a result of this change, District One will have one less working pilot 
than was proposed.
    Table 42 summarizes the changes in the regulatory analysis from the 
NPRM to this final rule. The Coast Guard made these changes as a result 
of public comments received after publication of the NPRM and a review 
of each district's operating expenses by the Coast Guard and 
CohnReznick. In addition, the Coast Guard updated the ECI and PCE 
inflation data to use more recent published datasets, and removed one 
working pilot from District One. An in-depth discussion of the public 
comments is located in Section VI of the preamble, Discussion of 
Comments.

                              Table 42--Summary of Changes From NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
                                                                                               Resulting change
     Element of the analysis             NPRM             Final rule            Impact               in RA
----------------------------------------------------------------------------------------------------------------
Operating Expenses (Step 1).....  The Coast Guard     Based on public     Increased District  Data affects the
                                   deducted $36,688    comment, the        Three's total       calculation of
                                   from total          Coast Guard         operating           projected
                                   operating           realized that       expenses by         revenues.
                                   expenses for        $9,094 worth of     $9,094 before
                                   legal fees for      intervener legal    inflation and
                                   litigation          fees paid by        accounting for
                                   against the Coast   District Three      the working
                                   Guard.              were erroneously    capital fund
                                                       deducted as         adjustments.
                                                       litigation
                                                       expenses. We
                                                       added that amount
                                                       back into the
                                                       operating
                                                       expenses and are
                                                       deducting $27,594
                                                       in this final
                                                       rule for
                                                       litigation fees
                                                       against the Coast
                                                       Guard.
Operating Expenses (Step 1).....  The Coast Guard     Based on public     Increased District  Data affects the
                                   deducted $594,521   comment, the        One's total         calculation of
                                   from District       Coast Guard         operating           projected
                                   One's total         removed the         expenses by         revenues.
                                   operating           Director's          $594,331 before
                                   expenses for        adjustment that     inflation and
                                   applicant pilot     removed applicant   accounting for
                                   salaries.           salaries from       the working
                                                       District One's      capital fund
                                                       operating           adjustments.
                                                       expenses. In
                                                       addition, based
                                                       on information
                                                       provided by
                                                       CohnReznick, the
                                                       Coast Guard
                                                       modified the
                                                       applicant salary
                                                       amount from
                                                       $594,521 to
                                                       $594,331.
Operating Expenses (Step 1).....  The Coast Guard     Based on public     Increased District  Data affects the
                                   deducted $6,600     comment, the        One's total         calculation of
                                   from District       Coast Guard         operating           projected
                                   One's total         removed an          expenses by         revenues.
                                   operating           erroneous CPA       $6,600 before
                                   expenses for dues   adjustment of       inflation and
                                   and subscriptions.  $6,600 from         accounting for
                                                       District One's      the working
                                                       operating           capital fund
                                                       expenses.           adjustments.
Operating Expenses (Step 1).....  The NPRM did not    Based on public     Increased District  Data affects the
                                   include expenses    comment, the        One's total         calculation of
                                   incurred by         Coast Guard added   operating           projected
                                   District One for    $606,836 for        expenses by         revenues.
                                   infrastructure      infrastructure      $606,836 before
                                   expenditures made   costs to District   inflation and
                                   in 2018.            One's total         accounting for
                                                       operating           the working
                                                       expenses.           capital fund
                                                                           adjustments.
Operating Expenses (Step 1).....  The Coast Guard     The Coast Guard     No impact. Because  None. There is no
                                   calculated that     calculated that     these expenses      impact on
                                   District One        District One        are not included    projected
                                   spent a total of    spent a total of    in the final        revenues or the
                                   $228,526 on         $238,520 on         operating costs     RA.
                                   applicant pilot     applicant pilot     for District One,
                                   expenses,           expenses,           modifying these
                                   excluding           excluding           amounts does not
                                   salaries. To        salaries, based     impact District
                                   increase            on new              One's total
                                   transparency, we    information from    operating costs.
                                   presented these     CohnReznick. To
                                   expenses as         increase
                                   Director's          transparency, we
                                   adjustments in      presented these
                                   Table 3 of the      expenses as
                                   NPRM and then       director's
                                   deducted them to    adjustments in
                                   avoid double        Table 3 of this
                                   counting.           final rule and
                                                       then deducted
                                                       them to avoid
                                                       double counting.
Operating Expenses (Step 1).....  In the NPRM, the    The Coast Guard     This change         None. There is no
                                   Coast Guard         modified the way    reduced the         impact on
                                   attributed 40% of   the Director's      operating           projected
                                   District Two's      adjustment for      expenses for the    revenues or the
                                   applicant salary    applicant           undesignated area   RA.
                                   costs to the        salaries was        by $14,175 and
                                   undesignated area   allocated to a 40/  increased them
                                   and 60% to the      60 split, with      for the
                                   designated area.    40% of the          designated area
                                   However, the        Director's          by $14,175.
                                   Director's          adjustment          Therefore, this
                                   adjustment for      attributed to the   change had no net
                                   applicant           undesignated area   impact on
                                   salaries used a     and 60%             District Two's
                                   33/67% spilt        attributed to the   total operating
                                   between the         designated area.    expenses.
                                   undesignated and
                                   designated areas.
Inflation of Operating Expenses   The Coast Guard     The Coast Guard     Increased total     Data affects the
 (Step 2).                         used a PCE          updated PCE         inflated            calculation of
                                   inflation value     inflation value     operating           projected
                                   of 0.8% for 2020    to 1.2% for 2020    expenses for all    revenues.
                                   and 1.6% for        and 1.7% for        three districts
                                   2021, based on      2021, based on      by $43,779.
                                   the most recent     the most recently
                                   PCE data            published PCE
                                   available at the    data (September
                                   time the NPRM was   2020).
                                   completed. (June
                                   2020 data).
Estimate of Total Number of       Estimated that      There will be a     Decreased the       Data affects the
 Working Pilots (Step 3).          there would be a    net addition of     amount of revenue   calculation of
                                   net addition of     two additional      needed for pilot    projected
                                   three additional    working pilots.     compensation by     revenues.
                                   working pilots.                         $378,925.

[[Page 14215]]

 
Target Pilot Compensation (Step   To calculate        To calculate        Target pilot        Data affects the
 4).                               target pilot        target pilot        compensation        calculation of
                                   compensation, the   compensation, the   decreased by $745   projected
                                   Coast Guard used    Coast Guard used    per pilot, from     revenues.
                                   a Q1 ECI            a Q3 ECI            $378,180 to
                                   inflation value     inflation value     $378,925.
                                   of 3.4% and a       of 3.5% and a
                                   2021 PCE value of   2021 PCE value of
                                   1.6% for 2021,      1.7% for 2021,
                                   based on the most   based on the most
                                   recently            recently
                                   available data at   available data.
                                   the time the NPRM
                                   was completed.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on 
the Great Lakes annually. See Sections III and IV of this preamble for 
detailed discussions of the legal basis and purpose for this rulemaking 
and for background information on Great Lakes pilotage ratemaking. 
Based on our annual review for this rulemaking, we are adjusting the 
pilotage rates for the 2021 shipping season to generate sufficient 
revenues for each district to reimburse its necessary and reasonable 
operating expenses, fairly compensate trained and rested pilots, and 
provide an appropriate working capital fund to use for improvements. 
The rate changes in this final rule will increase the rates for 
District One and decrease them for District Two and the designated area 
of District Three. The rate for District Three's undesignated area will 
not change from 2020. In addition, the rule will not implement a 
surcharge for the training of apprentice pilots as was last implemented 
in the 2019 ratemaking.\63\ These changes lead to a net increase in the 
cost of service to shippers. However, because the rates will increase 
for some areas and decrease for others, the change in per unit cost to 
each individual shipper would be dependent on their area of operation, 
and if they previously paid a surcharge.
---------------------------------------------------------------------------

    \63\ See, 84 FR 20551 (May 10, 2019).
---------------------------------------------------------------------------

    A detailed discussion of our economic impact analysis follows.
Affected Population
    This rule will impact United States registered Great Lakes pilots, 
the 3 pilot associations, and the owners and operators of 279 
oceangoing vessels that transit the Great Lakes annually. We estimate 
that there will be 54 pilots registered during the 2021 shipping 
season. The shippers affected by these rate changes are those owners 
and operators of domestic vessels operating ``on register'' (engaged in 
foreign trade) and owners and operators of non-Canadian foreign vessels 
on routes within the Great Lakes system. These owners and operators 
must have pilots or pilotage service as required by 46 U.S.C. 9302. 
There is no minimum tonnage limit or exemption for these vessels. The 
statute applies only to commercial vessels and not to recreational 
vessels. United States-flagged vessels not operating on register and 
Canadian ``lakers,'' which account for most commercial shipping on the 
Great Lakes, are not required by 46 U.S.C. 9302 to have pilots. 
However, these U.S. and Canadian-flagged lakers may voluntarily choose 
to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged 
may opt to have a pilot for varying reasons, such as unfamiliarity with 
designated waters and ports, or for insurance purposes.
    The Coast Guard used billing information from the years 2017 
through 2019 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. As described in Step 7 of the methodology, we use a 
10-year average to estimate the traffic. We used 3 years of the most 
recent billing data to estimate the affected population. When we 
reviewed 10 years of the most recent billing data, we found the data 
included vessels that have not used pilotage services in recent years. 
We believe using 3 years of billing data is a better representation of 
the vessel population that is currently using pilotage services and 
will be impacted by this rulemaking. We found that 474 unique vessels 
used pilotage services during the years 2017 through 2019. That is, 
these vessels had a pilot dispatched to the vessel and billing 
information was recorded in the GLPMS. Of these vessels, 434 were 
foreign-flagged vessels and 40 were U.S.-flagged vessels. As previously 
stated, U.S.-flagged vessels not operating on register are not required 
to have a registered pilot per 46 U.S.C. 9302, but they can voluntarily 
choose to have one.
    Numerous factors affect vessel traffic, which varies from year to 
year. Therefore, rather than using the total number of vessels over the 
time period, we took an average of the unique vessels using pilotage 
services from the years 2017 through 2019 as the best representation of 
vessels estimated to be affected by the rates in this rulemaking. From 
2017 through 2019, an average of 279 vessels used pilotage services 
annually.\64\ On average, 261 of these vessels were foreign-flagged 
vessels and 18 were U.S.-flagged vessels that voluntarily opted into 
the pilotage service.
---------------------------------------------------------------------------

    \64\ Some vessels entered the Great Lakes multiple times in a 
single year, affecting the average number of unique vessels 
utilizing pilotage services in any given year.
---------------------------------------------------------------------------

Total Cost to Shippers
    The rate changes resulting from this adjustment to the rates will 
result in a net increase in the cost of service to shippers. However, 
the change in per unit cost to each individual shipper would be 
dependent on their area of operation.
    The Coast Guard estimates the effect of the rate changes on 
shippers by comparing the total projected revenues needed to cover 
costs in 2020 with the total projected revenues to cover costs in 2021, 
including any temporary surcharges we have authorized.\65\ We set 
pilotage rates so pilot associations receive enough revenue to cover 
their necessary and reasonable expenses. Shippers pay these rates when 
they have a pilot as required by 46 U.S.C. 9302. Therefore, the 
aggregate payments of shippers to pilot associations are equal to the 
projected necessary revenues for pilot associations. The revenues each 
year represent the total costs that shippers must pay for pilotage 
services. The change in revenue from the previous year is the 
additional cost to shippers discussed in this rule.
---------------------------------------------------------------------------

    \65\ While the Coast Guard implemented a surcharge in 2019, we 
are not implementing any surcharges for 2021.
---------------------------------------------------------------------------

    The impacts of the rate changes on shippers are estimated from the 
district pilotage projected revenues (shown in Tables 9, 21, and 33 of 
this preamble). The Coast Guard estimates that for the 2021 shipping 
season, the projected

[[Page 14216]]

revenue needed for all three districts is $30,332,652.
    To estimate the change in cost to shippers from this rule, the 
Coast Guard compared the 2021 total projected revenues to the 2020 
projected revenues. Because we review and prescribe rates for the Great 
Lakes Pilotage annually, the effects are estimated as a single-year 
cost rather than annualized over a 10-year period. In the 2020 
rulemaking, we estimated the total projected revenue needed for 2020 as 
$28,268,030.\66\ This is the best approximation of 2020 revenues, as, 
at the time of this publication, the Coast Guard does not have enough 
audited data available for the 2020 shipping season to revise these 
projections.\67\ Table 43 shows the revenue projections for 2020 and 
2021 and details the additional cost increases to shippers by area and 
district as a result of the rate changes on traffic in Districts One, 
Two, and Three.
---------------------------------------------------------------------------

    \66\ 85 FR 20088, see table 41.
    \67\ The rates for 2021 do not account for the impacts COVID-19 
may have on shipping traffic and subsequently pilotage revenue, as 
we do not have complete data for 2020. The rates for 2022 will take 
into account the impact of COVID-19 on shipping traffic, because 
that future ratemaking will include 2020 traffic data. However, the 
Coast Guard uses 10-year average when calculating traffic in order 
to smooth out variations in traffic caused by global economic 
conditions, such as those caused by the COVID-19 pandemic.

                                Table 43--Effect of the Rule by Area and District
                                             [$U.S.; non-discounted]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Change in
                              Area                                Revenue needed  Revenue needed   costs of this
                                                                      in 2020         in 2021          rule
----------------------------------------------------------------------------------------------------------------
Total, District One.............................................      $9,210,888     $10,620,941      $1,410,053
Total, District Two.............................................       8,345,871       8,506,705         160,834
Total, District Three...........................................      10,711,271      11,205,006         493,735
                                                                 -----------------------------------------------
    System Total................................................      28,268,030      30,332,652       2,064,622
----------------------------------------------------------------------------------------------------------------

    The resulting difference between the projected revenue in 2020 and 
the projected revenue in 2021 is the annual change in payments from 
shippers to pilots as a result of the rate change imposed by this rule. 
The effect of the rate change to shippers varies by area and district. 
After taking into account the change in pilotage rates, the rate 
changes will lead to affected shippers operating in District One 
experiencing an increase in payments of $1,410,053 over the previous 
year. District Two and District Three will experience an increase in 
payments of $160,834 and $493,735, respectively, when compared with 
2020. The overall adjustment in payments will be an increase in 
payments by shippers of $2,064,622 across all three districts (a 7-
percent increase when compared with 2020). Again, because the Coast 
Guard reviews and sets rates for Great Lakes Pilotage annually, we 
estimate the impacts as single-year costs rather than annualizing them 
over a 10-year period.
    Table 44 shows the difference in revenue-by-revenue-component from 
2020 to 2021 and presents each revenue-component as a percentage of the 
total revenue needed. In both 2020 and 2021, the largest revenue-
component was pilot compensation (68 percent of total revenue needed in 
2020 and 67 percent of total revenue needed in 2021), followed by 
operating expenses (29 percent of total revenue needed in both 2020 and 
2021).

                                                      Table 44--Difference in Revenue by Component
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Percentage of                   Percentage of                    Percentage
                                                          Revenue needed   total revenue  Revenue needed   total revenue    Difference      change from
                    Revenue-component                         in 2020     needed in 2020      in 2021     needed in 2021  (2021 revenue -  previous year
                                                                             (percent)                       (percent)    2020  revenue)     (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses.............................      $8,110,685              29      $8,876,850              29        $766,165               9
Total Target Pilot Compensation.........................      19,088,420              68      20,461,950              67       1,373,530               7
Working Capital Fund....................................       1,068,925               4         993,852               3        (75,073)             (7)
Total Revenue Needed....................................      28,268,030             100      30,332,652             100       2,064,622               7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Totals may not sum due to rounding.

    As stated above, we estimate that there will be a total increase in 
revenue needed by the pilot associations of $2,064,622. This represents 
an increase in revenue needed for target pilot compensation and 
adjusted operating expenses of $1,373,530 and $766,165, respectively, 
and a decrease in the revenue needed for the working capital fund of 
$75,073. The removal of legal fees associated with litigation against 
the Coast Guard will reduce the revenue needed in 2021 by $29,802. This 
number includes adjustments made to the base legal fee amount of 
$27,594 for inflation and the working capital fund. While the shippers 
will no longer reimburse the legal fees associated with litigation via 
the rate under the rule, the pilot associations may still be reimbursed 
for these expenses by the Coast Guard under the EAJA.
    The majority of the increase in revenue needed, $1,373,530, is the 
result of changes to target pilot compensation. These changes are due 
to three factors: (1) The changes to adjust 2020 pilotage compensation 
to account for the difference between actual and predicted inflation; 
(2) the net addition of two additional pilots; and (3) inflation of 
pilotage compensation to adjust target compensation values from 2020 
dollars to 2021 dollars.
    The target compensation is $378,925 per pilot in 2021, compared to 
$367,085 in 2020. The changes to modify the 2020 pilot compensation to 
account for the difference between predicted and actual inflation will 
increase the 2020 target compensation value by 1.5 percent. As shown in 
Table 45, this inflation

[[Page 14217]]

adjustment will increase total compensation by $5,506 per pilot, and 
the total revenue needed by $297,339, when accounting for all 54 
pilots.

  Table 45--Change in Revenue Resulting From the Change to Inflation of
                Pilot Compensation Calculation in Step 4
------------------------------------------------------------------------
 
------------------------------------------------------------------------
2020 Target Compensation................................        $367,085
Adjusted 2020 Compensation ($367,085 x 1.015)...........         372,591
Difference between Adjusted Target 2020 Compensation and           5,506
 Target 2020 Compensation ($372,591-$367,085)...........
Increase in total Revenue for 54 Pilots ($5,506 x 54)...         297,339
------------------------------------------------------------------------

    The addition of two pilots to full registered status accounts for 
$746,837 of the increase in needed revenue. As shown in Table 46, to 
avoid double counting, this value excludes the change in revenue 
resulting from the change to adjust 2020 pilotage compensation to 
account for the difference between actual and predicted inflation.

 Table 46--Change in Revenue Resulting From Adding Two Additional Pilots
------------------------------------------------------------------------
 
------------------------------------------------------------------------
2021 Target Compensation................................        $378,925
Total Number of New Pilots..............................               2
Total Cost of new Pilots ($378,925 x 2).................        $757,850
Difference between Adjusted Target 2020 Compensation and          $5,506
 Target 2020 Compensation ($372,591-$367,085)...........
Increase in total Revenue for 2 Pilots ($5,506 x 2).....         $11,013
Net Increase in total Revenue 2 Pilots ($757,850-               $746,837
 $11,013)...............................................
------------------------------------------------------------------------

    Finally, the remainder of the increase, $329,354, is the result of 
increasing compensation for the other 52 pilots to account for future 
inflation of 1.7 percent in 2021. This will increase total compensation 
by $6,334 per pilot.

 Table 47-- Change in Revenue Resulting From Inflating 2020 Compensation
                                 to 2021
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Adjusted 2020 Compensation..............................        $372,591
2021 Target Compensation ($372,591 x 1.017).............         378,925
Difference between Target 2020 Compensation and Target             6,334
 2020 Compensation ($378,925-$372,591)..................
Increase in total Revenue for 52 Pilots ($6,334 x 52)...         329,354
------------------------------------------------------------------------

    Table 48 presents the percentage change in revenue by area and 
revenue-component, excluding surcharges, as they are applied at the 
district level.\68\
---------------------------------------------------------------------------

    \68\ The 2020 projected revenues are from the Great Lakes 
Pilotage Rates--2020 Annual Review and Revisions to Methodology 
final rule (85 FR 20088) Tables 8, 20, and 32. The 2021 projected 
revenues are from Tables 9, 21, and 33 of this rule.

                                                                      Table 48--Difference in Revenue by Component and Area
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Adjusted operating expenses        Total target pilot compensation            Working capital fund                 Total revenue needed
                                             ---------------------------------------------------------------------------------------------------------------------------------------------------
                    Area                                               Percentage                           Percentage                           Percentage                           Percentage
                                                 2020        2021        change       2020        2021        change       2020        2021        change       2020        2021        change
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
District One: Designated....................  $1,573,286  $2,328,981          32%  $3,670,850  $3,789,250           3%    $206,095    $207,255           1%  $5,450,231  $6,325,486          14%
District One: Undesignated..................   1,048,857   1,502,239          30%   2,569,595   2,652,475           3%     142,205     140,741         (1%)   3,760,657   4,295,455          12%
District Two: Undesignated..................   1,019,371   1,003,961          -2%   2,936,680   3,031,400           3%     155,473     136,698        (14%)   4,111,524   4,172,059           1%
District Two: Designated....................   1,504,635   1,540,146           2%   2,569,595   2,652,475           3%     160,117     142,025        (13%)   4,234,347   4,334,646           2%
District Three: Undesignated................   2,336,354   1,947,484         -20%   5,873,360   6,820,650          14%     322,642     297,021         (9%)   8,532,356   9,065,155           6%
District Three: Designated..................     628,182     554,039         -13%   1,468,340   1,515,700           3%      82,393      70,112        (18%)   2,178,915   2,139,851         (2%)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

B. Small Entities

    Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have 
considered whether this rule will have a significant economic impact on 
a substantial number of small entities. The term ``small entities'' 
comprises small businesses, not-for-profit organizations that are 
independently owned and operated and are not dominant in their fields, 
and governmental jurisdictions with populations of less than 50,000.
    For this rule, the Coast Guard reviewed recent company size and 
ownership data for the vessels identified in the GLPMS, and we reviewed

[[Page 14218]]

business revenue and size data provided by publicly available sources 
such as Manta \69\ and ReferenceUSA.\70\ As described in Section VIII.A 
of this preamble, Regulatory Planning and Review, we found that a total 
of 474 unique vessels used pilotage services from 2017 through 2019. 
These vessels are owned by 49 entities. We found that of the 49 
entities that own or operate vessels engaged in trade on the Great 
Lakes that will be affected by this rule, 38 are foreign entities that 
operate primarily outside the United States, and the remaining 11 
entities are U.S. entities. We compared the revenue and employee data 
found in the company search to the Small Business Administration's 
(SBA) small business threshold as defined in the SBA's ``Table of Size 
Standards'' for small businesses to determine how many of these 
companies are considered small entities.\71\ Table 49 shows the North 
American Industry Classification System (NAICS) codes of the U.S. 
entities and the small entity standard size established by the SBA.
---------------------------------------------------------------------------

    \69\ See https://www.manta.com/.
    \70\ See http://resource.referenceusa.com/.
    \71\ See: https://www.sba.gov/document/support--table-size-standards. SBA has established a ``Table of Size Standards'' for 
small businesses that sets small business size standards by NAICS 
code. A size standard, which is usually stated in number of 
employees or average annual receipts (``revenues''), represents the 
largest size that a business (including its subsidiaries and 
affiliates) may be in order to remain classified as a small business 
for SBA and Federal contracting programs.

         Table 49--NAICS Codes and Small Entities Size Standards
------------------------------------------------------------------------
                                                      Small entity size
          NAICS                   Description              standard
------------------------------------------------------------------------
211120...................  Crude Petroleum           1,250 employees
                            Extraction.
237990...................  Other Heavy and Civil     $39.5 million
                            Engineering
                            Construction.
238910...................  Site Preparation          $16.5 million
                            Contractors.
483212...................  Inland Water Passenger    500 employees
                            Transportation.
487210...................  Scenic and Sightseeing    $8.0 million
                            Transportation, Water.
488330...................  Navigational Services to  $41.5 million
                            Shipping.
523910...................  Miscellaneous             $41.5 million
                            Intermediation.
561599...................  All Other Travel          $22.0 million
                            Arrangement and
                            Reservation Services.
982100...................  National Security.......  Population of <=
                                                      50,000 People
------------------------------------------------------------------------

    Of the 11 U.S. entities, 8 exceed the SBA's small business 
standards for small entities. To estimate the potential impact on the 3 
small entities, the Coast Guard used their 2019 invoice data to 
estimate their pilotage costs in 2021. We increased their 2019 costs to 
account for the changes in pilotage rates resulting from this rule and 
the Great Lakes Pilotage Rates--2020 Annual Review and Revisions to 
Methodology final rule (85 FR 20088). We estimated the change in cost 
to these entities resulting from this rule by subtracting their 
estimated 2020 costs from their estimated 2021 costs, and found the 
average costs to small firms will be approximately $2,146. We then 
compared the estimated change in pilotage costs between 2020 and 2021 
with each firm's annual revenue. In all cases, their estimated pilotage 
expenses were below 1 percent of their annual revenue.
    In addition to the owners and operators discussed above, three U.S. 
entities that receive revenue from pilotage services will be affected 
by this rule. 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 code 
and small-entity size standards described above, but have fewer than 
500 employees. Combined, they have approximately 65 employees in total 
and, therefore, are designated as small entities. The Coast Guard 
expects no adverse effect on these entities from this rule because the 
three pilot associations will receive enough revenue to balance the 
projected expenses associated with the projected number of bridge hours 
(time on task) and pilots.
    Finally, the Coast Guard did not find any small not-for-profit 
organizations that are independently owned and operated and are not 
dominant in their fields that will be impacted by this rule. We did not 
find any small governmental jurisdictions with populations of fewer 
than 50,000 people that will be impacted by this rule. Based on this 
analysis, we conclude this rule will not affect a substantial number of 
small entities, nor have a significant economic impact on any of the 
affected entities.
    Based on our analysis, this rule will have a less than 1 percent 
annual impact on 3 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 offer to assist small 
entities in understanding this rule so that they can better evaluate 
its effects on them and participate in the rulemaking. 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 calls for no new collection of information under the 
Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3520, and will not 
alter or adjust any existing collection of information.

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 Executive Order 13132 
and have determined that it is consistent with the fundamental

[[Page 14219]]

federalism principles and preemption requirements as described in 
Executive Order 13132. Our analysis follows.
    Congress directed the Coast Guard to establish ``rates and charges 
for pilotage services''. See 46 U.S.C. 9303(f). This regulation is 
issued pursuant to that statute and is preemptive of State law as 
specified in 46 U.S.C. 9306. Under 46 U.S.C. 9306, a ``State or 
political subdivision of a State may not regulate or impose any 
requirement on pilotage on the Great Lakes.'' As a result, States or 
local governments are expressly prohibited from regulating within this 
category. Therefore, this rule is consistent with the fundamental 
federalism principles and preemption requirements described in 
Executive Order 13132.
    While it is well settled that States may not regulate in categories 
in which Congress intended the Coast Guard to be the sole source of a 
vessel's obligations, the Coast Guard recognizes the key role that 
State and local governments may have in making regulatory 
determinations. Additionally, for rules with implications and 
preemptive effect, Executive Order 13132 specifically directs agencies 
to consult with State and local governments during the rulemaking 
process.

F. Unfunded Mandates

    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 million (adjusted for 
inflation) or more in any one year. Although 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.

J. Indian Tribal Governments

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

K. Energy Effects

    We have analyzed this rule under Executive Order 13211 (Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use) and 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 (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 final rule under Department of Homeland 
Security Management Directive 023-01, Rev. 1 (DHS Directive 023-01), 
associated implementing instructions, and Environmental Planning 
COMDTINST 5090.1 (series), which guide the Coast Guard in complying 
with the National Environmental Policy Act of 1969 1969 (42 U.S.C. 
4321-4370f), and have made a determination that this action 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 under the ADDRESSES portion of this preamble.
    This final rule meets the criteria for categorical exclusion 
(CATEX) under paragraphs A3 and L54 of Appendix A, Table 1 of DHS 
Instruction Manual 023-001-01, Rev. 1.\72\ Paragraph A3 pertains to the 
promulgation of rules, issuance of rulings or interpretations, and the 
development and publication of policies, orders, directives, notices, 
procedures, manuals, advisory circulars, and other guidance documents 
of the following nature: (a) Those of a strictly administrative or 
procedural nature; (b) those that implement, without substantive 
change, statutory or regulatory requirements; or (c) those that 
implement, without substantive change, procedures, manuals, and other 
guidance documents; and (d) those that interpret or amend an existing 
regulation without changing its environmental effect. Paragraph L54 
pertains to regulations, which are editorial or procedural.
---------------------------------------------------------------------------

    \72\ https://www.dhs.gov/sites/default/files/publications/DHS_Instruction%20Manual%20023-01-001-01%20Rev%2001_508%20Admin%20Rev.pdf.
---------------------------------------------------------------------------

    This rule involves adjusting the pilotage rates to account for 
changes in district operating expenses, an increase in the number of 
pilots, and anticipated inflation. Additionally, this rule makes one 
change to the ratemaking methodology to account for actual inflation 
and excludes certain legal fees incurred in litigation against the 
Coast Guard related to ratemaking and oversight requirements. All of 
these changes are consistent with the Coast Guard's maritime safety 
missions. We did not receive any comments related to the environmental 
impact of this rule.

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:

[[Page 14220]]

PART 401--GREAT LAKES PILOTAGE REGULATIONS

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

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

0
2. Amend Sec.  401.405 by revising paragraphs (a)(1) through (6) to 
read as follows:

Sec.  401.405  Pilotage Rates and Charges

    (a) * * *
    (1) The St. Lawrence River is $800;
    (2) Lake Ontario is $498;
    (3) Lake Erie is $566;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$580;
    (5) Lakes Huron, Michigan, and Superior is $337; and
    (6) The St. Marys River is $586.
* * * * *

PART 404--GREAT LAKES PILOTAGE RATEMAKING

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

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

0
4. Amend Sec.  404.2 by adding paragraph (b)(6) to read as follows:

Sec.  404.2  Procedure and criteria for recognizing association 
expenses.

* * * * *
    (b) * * *
    (6) Legal Expenses. These association expenses are recognizable 
except for any and all expenses associated with legal action against 
the U.S. Coast Guard or its agents in relation to the ratemaking and 
oversight requirements in 46 U.S.C. 9303, 9304 and 9305.
* * * * *

0
5. Amend Sec.  404.104 by revising paragraph (b) to read as follows:

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

* * * * *
    (b) In an interim year, the Director adjusts the previous year's 
individual target pilot compensation level by the Bureau of Labor 
Statistics' Employment Cost Index for the Transportation and Materials 
sector, or if that is unavailable, the Director adjusts the previous 
year's individual target pilot compensation level using a two-step 
process:
    (1) First, the Director adjusts the previous year's individual 
target pilot compensation by the difference between the previous year's 
Bureau of Labor Statistics' Employment Cost Index for the 
Transportation and Materials sector and the Federal Open Market 
Committee median economic projections for Personal Consumption 
Expenditures inflation value used to inflate the previous year's target 
pilot compensation.
    (2) Second, the Director then adjusts that value by the Federal 
Open Market Committee median economic projections for Personal 
Consumption Expenditures inflation for the upcoming year.
* * * * *

    Dated: March 8, 2021.
R.V. Timme,
Rear Admiral, U.S. Coast Guard, Assistant Commandant for Prevention 
Policy.
[FR Doc. 2021-05050 Filed 3-11-21; 8:45 am]
BILLING CODE 9110-04-P