Document ID: USCG-2015-0497-0085
Agency: uscg
Document Type: Rule
Title: Great Lakes Pilotage Rates- 2016 Annual Review and Changes to Methodology
Posted Date: 2016-03-07T05:00Z

[Federal Register Volume 81, Number 44 (Monday, March 7, 2016)]
[Rules and Regulations]
[Pages 11907-11942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04894]

[[Page 11907]]

Vol. 81

Monday,

No. 44

March 7, 2016

Part II

Department of Homeland Security

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 Coast Guard

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46 CFR Parts 401, 403, and 404

Great Lakes Pilotage Rates--2016 Annual Review and Changes to 
Methodology; Final Rule

  Federal Register / Vol. 81 , No. 44 / Monday, March 7, 2016 / Rules 
and Regulations  

[[Page 11908]]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2015-0497]
RIN 1625-AC22

Great Lakes Pilotage Rates--2016 Annual Review and Changes to 
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: The Coast Guard revises its Great Lakes pilotage ratemaking 
methodology, adjusts annual pilotage rates based on the new 
methodology, and authorizes a temporary surcharge to hire additional 
pilots and to pay for necessary training for new and current pilots. 
Rates for pilotage services on the Great Lakes were last revised in 
February 2015 and by law must be reviewed annually, with any 
adjustments to take effect by March 1 of the year for which new rates 
are established. The Coast Guard intends for the methodology changes to 
be understandable and transparent, and to encourage investment in 
pilots, infrastructure, and training while helping ensure safe, 
efficient, and reliable service on the Great Lakes. Without the updates 
to this methodology and enforcement of these rates, the Coast Guard 
believes the pilot associations will not be able to recruit experienced 
mariners, retain current pilots, or maintain and upgrade association 
infrastructure. Without sufficient registered pilots, current law will 
prevent international vessels from transiting the Great Lakes. This 
rulemaking promotes the Coast Guard's maritime safety and stewardship 
(environmental protection) missions by promoting safe shipping on the 
Great Lakes.

DATES: This final rule is effective April 6, 2016.

ADDRESSES: Comments and material received from the public, as well as 
documents mentioned in this preamble, are available at http://www.regulations.gov. Insert USCG-2015-0497 in the ``Keyword'' box, then 
click ``Search.''

FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, 
call or email Mr. Todd Haviland, Director, Great Lakes Pilotage, 
Commandant (CG-WWM-2), Coast Guard; telephone 202-372-2037, email 
Todd.A.Haviland@uscg.mil, or fax 202-372-1914.

SUPPLEMENTARY INFORMATION:

Executive Summary

    This rulemaking will change the methodology by which the Coast 
Guard sets base rates for U.S. Great Lakes registered pilotage service, 
set rates according to the new methodology, and impose a temporary 
surcharge to offset the costs of hiring and training new pilots. The 
Great Lakes pilotage statutes in 46 U.S.C. chapter 93 provide the legal 
basis for this rulemaking. The new effective date better aligns with 
the opening of the shipping season in early spring than the previous 
implementation date in August, which was based on the effective date of 
compensation changes in a benchmark union contract, which is no longer 
available to the Coast Guard.
    The Coast Guard is revising the current methodology in place since 
1995 for two reasons. First, for at least 15 years both pilots and 
industry have identified certain methodology issues that perpetuate 
inaccuracy in the ratemaking calculations. The pilots asserted these 
inaccuracies have led to revenue shortfalls that impede their ability 
to provide safe, efficient, and reliable pilotage service. They said 
these shortfalls are the primary reason that the associations could not 
provide sufficient pilot compensation to attract, hire, and retain 
qualified pilots. Furthermore, due to the revenue shortfalls, the 
associations lacked funding needed to maintain and update their 
infrastructure and provide adequate rest for pilots during the shipping 
season. Industry has agreed that there is a shortage of qualified 
pilots and said that the decay of association infrastructure 
jeopardized the pilots' ability to ensure vessel safety and provide 
efficient, reliable service. We believe the current methodology fails 
to consider the totality of pilot time necessary to perform a given 
pilotage assignment, which often includes long transits to and from the 
vessel, resulting in low pilot compensation and overloaded work 
assignments.
    Second, the 1995 methodology used a detailed breakdown of union 
compensation for merchant marine masters and mates as the benchmark for 
setting registered pilotage rates. Only one union's contract had ever 
been available to the Coast Guard for the purpose of setting pilotage 
rates. That union now regards many of the specific compensation details 
of its contract as proprietary information. As such, the union will no 
longer provide the entire contract to the Coast Guard and thus, the 
Coast Guard can no longer make public a transparent source as the basis 
for its annual target compensation projections. Due to the methodology 
issues cited by pilots and industry as well as the lack of availability 
of reliable and transparent union contracts for benchmark setting 
purposes, we are establishing a new standard using publicly available 
information to set the benchmark compensation used in each ratemaking.
    Our new methodology sets pilotage rates for the 2016 shipping 
season only. We will review and adjust rates each subsequent year. We 
are also amending the regulations to provide for future multi-year 
rates that would apply for five years unless an interim adjustment is 
necessary. We would set base rates in a full ratemaking, and review 
those rates each year to make sure they continue to promote safe, 
efficient, and reliable pilotage. If the base rate previously set is 
not satisfactory for that upcoming year, we would either adjust it or 
open a new full ratemaking. By law, a full ratemaking must be completed 
at least once every five years.\1\ Multi-year rates allow pilots and 
industry to make longer range financial plans.
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    \1\ 46 U.S.C. 9303(f).
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    In 2014, the Coast Guard's Great Lakes Pilotage Advisory Committee 
(GLPAC) \2\ recommended substantial changes to address stakeholder 
issues with the 1995 methodology and adjust ratemaking procedures in 
light of the union's position regarding the confidentiality of its 
contracts. We have built the new ratemaking methodology around the 
GLPAC recommendations, a ``bridge hour'' study completed in 2013, and 
numerous past public comments identifying distortions created by the 
1995 methodology. The new methodology also addresses issues raised by 
St. Lawrence Seaway Pilots Association, Inc., et al. v. U.S. Coast 
Guard,\3\ a lawsuit in which the three district pilot associations 
successfully challenged the 2014 ratemaking final rule.
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    \2\ GLPAC is a Federal advisory committee established by 
Congress (see 46 U.S.C. 9307) and operating under the Federal 
Advisory Committee Act, 5 U.S.C. Appendix 2.
    \3\ 85 F.Supp.3d 197 (D.D.C. 2015).
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    In Part IV of this final rule, we describe our new methodology 
which is consistent with the methodology we proposed in the NPRM. It 
follows a series of steps that are structured similarly to the steps 
found in the 1995 methodology. Step 1 reviews and recognizes each 
association's audited expenses. Step 2 projects each association's 
future operating expenses, adjusting for inflation or deflation. Step 3 
projects the number of pilots required to meet each district's peak 
pilotage demand, with consideration given to the

[[Page 11909]]

actual time it takes a pilot to complete each assignment. Step 4 sets 
target pilot compensation using a compensation benchmark. Step 5 
projects each association's return on investment by adding the 
operating expenses from Step 2 and the total target pilot compensation 
from Step 4, and multiplying the result by the preceding year's average 
annual rate of return for new issues of high grade corporate 
securities. Step 6 calculates each association's revenue needs by 
adding the operating expenses from Step 2, the total target pilot 
compensation from Step 4, and the projected return on investment from 
Step 5. Step 7 calculates initial base rates based on the preceding 
steps. Step 8 adjusts the Step 7 initial rates, if necessary and 
reasonable to do so for supportable circumstances, and sets final 
rates.
    This final rule makes several changes from our notice of proposed 
rulemaking (NPRM). First, the NPRM proposed splitting a particularly 
long pilotage assignment on the St. Lawrence River into two more 
manageable segments by creating a new pilot change point. At the 
request of both pilots and industry, we are not making this change in 
this final rule. Instead, we will defer any action until we can further 
assess where the new change point can best be located, and until pilot 
staffing can be increased to handle the larger number of assignments 
that shorter pilot transits will cause. Second, in response to public 
comments, we increased our projection for 2016 target pilot 
compensation, reduced our pilotage association revenue projection for 
2016 (based on our review of 2014 revenue audits and 2015 vessel 
traffic data), and increased the number of pilots we expect to be 
available for service in 2016. Third, in response to public comments we 
increased from 5 to 9 the number of shipping seasons included in our 
multi-year historical vessel traffic calculations, which we use to 
estimate future traffic.
    In Part V of this preamble, the Coast Guard uses the new 
methodology to calculate base rates for the 2016 shipping season, as 
follows:
    Step 1 of the new methodology accepts our independent accountant's 
final findings on each association's 2013 expenses.
    Step 2 projects 2016 operating expenses and adjusts them for 
inflation, using actual inflation data for 2014 and 2015 and the 
Federal Reserve target inflation rate as a proxy for actual 2016 
inflation.
    Step 3 finds that, based on figures from the 2007-2015 shipping 
seasons, 54 pilots are required to fulfill pilotage demand, up from the 
36 pilots we authorized for 2015. Based on association projections, we 
expect 37 pilots to be available in 2016, 48 at the beginning of 2017, 
and the balance to be added later in 2017.
    Step 4 sets each pilot's target compensation at $326,114, with a 
total target compensation of $12,066,225 for the 37 pilots. We set 
these targets after identifying 2013 Canadian Great Lakes Pilotage 
Authority (GLPA) compensation, with adjustments for currency exchange 
and inflation, as the best benchmark for our 2016 rates.
    Steps 5 and 6 calculate each association's return on investment and 
needed revenue.
    Step 7 calculates initial base rates.
    Finally, Step 8 affirms the Step 7 rates without adjustment, but 
also authorizes a temporary surcharge totaling $1,650,000, to cover the 
anticipated costs of hiring additional pilots and necessary training 
for new and current pilots.
    This rule is not economically significant under Executive Order 
12866. It affects 36 U.S. Great Lakes pilots, 3 pilot associations, and 
the owners and operators of an average of 126 vessels that transit the 
Great Lakes on an average 396 visits to various ports annually. We 
estimate that the new rates will result in shippers paying pilot 
associations $1,865,025, or roughly 12 percent more in 2016 than we 
estimate they did in 2015. We estimate that the authorized temporary 
surcharge will add $1,650,000 in costs, for a total 2016 cost increase 
of $3,515,025 over 2015. Because we must review and if necessary adjust 
rates each year, we analyze these as single year costs and do not 
annualize them over 10 years. This rule does not affect the Coast 
Guard's budget or increase Federal spending. We summarize our 
regulatory analyses in Part VII.

Table of Contents for Preamble

I. Abbreviations
II. Basis and Purpose
III. Background
IV. Discussion of Ratemaking Methodology Changes
V. Discussion of NPRM Comments
VI. Discussion of Rate Changes
VII. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates Reform Act
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Abbreviations

APA American Pilots Association
BLS U.S. Bureau of Labor Statistics
CAD Canadian dollar
CFR Code of Federal Regulations
CPA Certified public accountant
CPI-U Consumer Price Index
DHS Department of Homeland Security
FR Federal Register
GLP Great Lakes Pilotage
GLPA Canadian Great Lakes Pilotage Authority
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Electronic Pilot Management System
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OMB Office of Management and Budget
Pub. L. Public Law
RA Regulatory analysis
RegNeg Regulatory negotiated rulemaking
SANS Ship Arrival Notification System
Sec.  Section symbol
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code
USD U.S. dollar

II. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960 (``the Act''),\4\ which requires U.S. vessels operating ``on 
register'' \5\ and foreign vessels to use U.S. or Canadian registered 
pilots while transiting the U.S. waters of the St. Lawrence Seaway and 
the Great Lakes system.\6\ For the U.S. registered Great Lakes pilots 
(``pilots''), the Act requires the Secretary to ``prescribe by 
regulation rates and charges for pilotage services, giving 
consideration to the public interest and the costs of providing the 
services.'' \7\ We limit the allowable costs of providing this service 
by ensuring that all allowable expenses are necessary and reasonable 
for providing pilotage services on the Great Lakes. We believe the 
public is best served by a safe, efficient, and reliable pilotage 
service. The goal of our methodology and billing scheme is to generate 
sufficient revenue for the pilots to provide the service we require. 
The Act requires that rates be established or reviewed and adjusted 
each year, not later than March 1. The Act requires that base rates be

[[Page 11910]]

established by a full ratemaking at least once every 5 years, and in 
years when base rates are not established, they must be reviewed and, 
if necessary, adjusted. The Secretary has delegated authority under the 
Act to the Coast Guard.\8\
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    \4\ Pub. L. 86-555, 74 Stat. 259, as amended; currently codified 
as 46 U.S.C. Chapter 93.
    \5\ ``On register'' means that the vessel's certificate of 
documentation has been endorsed with a registry endorsement, and 
therefore, may be employed in foreign trade or trade with Guam, 
American Samoa, Wake, Midway, or Kingman Reef. 46 U.S.C. 12105, 46 
CFR 67.17.
    \6\ 46 U.S.C. 9302(a)(1).
    \7\ See 46 U.S.C. 9303(f) for all of the Act's pilotage 
ratemaking requirements discussed in this paragraph.
    \8\ DHS Delegation No. 0170.1, para. II (92.f).
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    The purpose of this rule is to change our annual Great Lakes 
pilotage ratemaking methodology, set new rates using that methodology, 
and authorize a temporary hiring and training surcharge.

III. Background

    We published the notice of proposed rulemaking (NPRM) for this 
rulemaking on September 10, 2015, and in response to a request we 
extended the NPRM's initial 60-day comment period by 30 days.\9\ A 
total of 90 days were available for public comment, encompassing 
September 10, 2015 through December 9, 2015. We also held a public 
meeting on September 17, 2015, in Romulus, MI.
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    \9\ NPRM at 80 FR 54484, comment period extension at 80 FR 69179 
(November 9, 2015).
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    This rule directly affects the pilots, their three pilotage 
associations, and the owners and operators of Great Lakes vessels 
engaged in foreign trade on U.S. Great Lakes waters. It does not affect 
U.S. and Canadian ``lakers,'' which account for most commercial 
shipping on the Great Lakes.\10\ It indirectly affects shipping agents 
who act on behalf of the owners and operators, Great Lakes ports, port 
workers, and businesses that import or export goods on affected vessels 
(``shippers''). We refer to pilots and pilot associations as 
``pilots,'' and vessel owners and operators, shipping agents, ports, 
port workers, and shippers collectively as ``industry.''
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    \10\ 46 U.S.C. 9302. A ``laker'' is a commercial cargo vessel 
especially designed for and generally limited to use on the Great 
Lakes.
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    We divide the U.S. waters of the Great Lakes and the St. Lawrence 
Seaway (``the Great Lakes system,'' or ``the system'') into three 
pilotage districts, each containing two or three areas. We certify a 
private association to operate a pool of pilots in each district. We 
set rates that each association may charge vessel owners and operators, 
but we do not control the actual compensation each pilot receives. The 
actual compensation is a function of vessel traffic in the system and 
is determined by each association, which has its own business structure 
and compensation system.
    District One comprises areas 1 and 2, the U.S. waters of the St. 
Lawrence River and Lake Ontario. District Two comprises areas 4 and 5, 
the U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and 
the St. Clair River. District Three comprises areas 6, 7, and 8, the 
U.S. waters of the St. Mary's River, Sault Ste. Marie Locks, and Lakes 
Huron, Michigan, and Superior. Because only Canadian pilots serve area 
3, Canada's Welland Canal, we do not set rates for that area. Pursuant 
to the Act, the President has designated Areas 1, 5, and 7 as waters in 
which a vessel must fully engage a pilot to navigate the vessel at all 
times. The President left Areas 2, 4, 6, and 8 undesignated. In 
undesignated waters the Act requires only that a vessel have a pilot 
``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\
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    \11\ 46 U.S.C. 9302(a)(1)(B).
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    The Act requires us to review rates and adjust them, if necessary, 
by March 1 of each year, employing a ``full ratemaking . . . at least 
once every 5 years,'' and an annual review and adjustment in the 
intervening years.\12\ The 1995 methodology for a full ratemaking every 
5 years appeared in 46 CFR part 404, appendix A, and the methodology 
for annual review and adjustment appeared in part 404, appendix C. 
Appendix B contained definitions and formulas applicable to both 
methodologies. We have not used the appendix C methodology since the 
2011 ratemaking, and instead we have conducted a full appendix A 
ratemaking each year.
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    \12\ 46 U.S.C. 9303(f).
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IV. Discussion of Ratemaking Methodology Changes

    We adopt the methodology changes proposed in the NPRM, and a 
thorough discussion of the methodology is available in that 
document.\13\ The following discussion focuses on the new methodology's 
principle features and any changes made from the NPRM to this final 
rule. In the NPRM, we also proposed to amend Sec.  401.450 to add a 
pilot change point at Iroquois Lock but, based on public comments 
discussed elsewhere in this preamble, we decided not to finalize the 
proposed addition.
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    \13\ The NPRM's discussion begins at 80 FR 54486, col. 2.
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    Reasons for changing the methodology. This rule changes the 
ratemaking methodology that has been in effect since 1995 and, using 
the new methodology, sets pilotage rates for 2016. We changed the 
methodology for two reasons.
    First, for at least 15 years both pilots and industry have 
identified certain methodology issues that, they assert, perpetuate 
systemic inaccuracies in the ratemaking calculations. The pilots say 
these inaccuracies led to annual revenue shortfalls that impede their 
ability to provide safe, efficient, and reliable pilotage service. 
Pilotage associations believed those distortions resulted in low rates. 
They also believed that actual association revenue chronically fell 
short of the revenue targets that, under the 1995 methodology, we 
projected based on anecdotal industry information. The Director of 
Great Lakes Pilotage has reviewed his data for 2005 through 2014 and 
estimates that, over this period, the three pilotage associations 
cumulatively fell short of revenue projections by $20 million. As a 
result, the pilotage associations could not provide sufficient 
compensation to attract and retain qualified pilots, leading to pilot 
shortages and associated traffic delays. In turn, these shortages meant 
that each pilot had to carry an excessive workload and forego needed 
rest and training.
    The pilotage associations also said the revenue shortfalls left 
them unable to maintain and update association infrastructure or 
provide the essential training and professional development 
opportunities recommended by the American Pilots Association (APA). For 
their part, industry commenters believed that pilot shortages 
jeopardized the safety of their vessels, and meant that the pilots 
could not provide efficient or reliable service, particularly at the 
beginning and end of shipping seasons when peak vessel traffic and 
frequent bad weather often delay vessel movement.
    Second, the 1995 methodology used a detailed breakdown of union 
compensation for merchant marine masters and mates, as the benchmark 
for setting registered pilotage rates. Only one union's contract has 
ever been available to the Coast Guard for this purpose. That union now 
regards many of the specific compensation details of its contract as 
proprietary information. The union will not provide the entire contract 
to the Coast Guard and thus, the Coast Guard cannot use the existing 
methodology and make public a transparent source for our target pilot 
compensation figure. Therefore, we are adopting a new method for 
determining which publicly available compensation information best 
serves as a benchmark for this year's target compensation. That 
benchmark could change from one ratemaking to the next, as 
circumstances change.
    Advisory committee recommendations. In 2009 we solicited and 
received public comments to better understand stakeholder perceptions 
of the 1995 methodology,\14\ and referred

[[Page 11911]]

those comments to GLPAC, the stakeholder group that advises us on Great 
Lakes pilotage matters.\15\ Ever since, we have worked closely with 
GLPAC to improve the methodology.
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    \14\ 74 FR 35838 (July 21, 2009).
    \15\ GLPAC is established by statute and operates under the 
Federal Advisory Committee Act. See footnote 1.
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    We built the new methodology around a set of recommendations GLPAC 
made at its public meetings in July 2014.\16\ We give GLPAC 
recommendations significant weight because the Act requires any GLPAC 
recommendation to be endorsed by at least all but one of GLPAC's seven 
members.\17\ Moreover, with the exception of one member with a 
background in finance or accounting who is nominated unanimously by the 
other members, GLPAC's members are evenly divided between pilot and 
industry representatives, and therefore we consider any recommendation 
to represent a consensus of pilot and industry members. The Act does 
not authorize GLPAC positions for any foreign vessel owners and 
operators or their Canadian agents. However, we believe GLPAC's 
industry representatives' interests are sufficiently aligned with, and 
therefore representative of the interests of, affected foreign vessel 
owners. These stakeholders also consistently attend GLPAC meetings and 
raise their concerns for GLPAC's full consideration during each 
meeting's public comment period.
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    \16\ See full transcript in our docket and also available at 
http://www.facadatabase.gov. Under 46 U.S.C. 9307(d)(1), the Coast 
Guard ``shall, whenever practicable, consult with the Committee 
before taking any significant action relating to Great Lakes 
pilotage.''
    \17\ All of the Act's provisions relating to GLPAC appear in 46 
U.S.C. 9307.
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    Timing of new rates and future ratemakings. The new pilotage rates 
will apply from the anticipated opening of the 2016 shipping season, 
which is a change from the union contract-based August 1 date we used 
in the 1995 methodology.
    The new rates apply only for the 2016 shipping season. We will 
review and adjust rates as appropriate in the subsequent years. This 
will allow all stakeholders to gain familiarity with the new 
methodology and evaluate its ability to set more accurate rates. 
However, we are amending the regulations to authorize multi-year rates 
that would apply for five years. We would set base rates in a full 
ratemaking, and review those rates each year to make sure they continue 
to promote safe, efficient, and reliable pilotage. If they do not do so 
satisfactorily, we would either adjust them or open a new full 
ratemaking. Multi-year rates allow both pilots and industry to make 
longer range financial plans.
    Changes to specific sections.
    46 CFR 401.405, 401.407, and 401.410. These sections contained 
pilotage rate tables and additional charges. Under the 1995 
methodology, most designated-water rates applied to specific transits, 
for example $2,637 for the transit on Lake Erie between Toledo and 
Southeast Shoal. However, most undesignated-water rates were hourly, 
for example $934 for 6 hours of pilotage service on Lake Erie. This 
mixed approach complicated the otherwise simple transaction of paying 
for a pilot's service. Instead, as we proposed in the NPRM, new Sec.  
401.405 replaces old Sec. Sec.  401.407 and 401.410 and sets hourly 
rates for specified portions of the Great Lakes. This aligns with 
GLPAC's 2014 recommendation, by a 5-1 vote, that all rates be 
hourly.\18\ It simplifies billing, and recognizes that each hour that a 
vessel uses a pilot draws down on a limited pool of available pilots. 
The rates differ between the NPRM and the final rule because of changes 
in the number of pilots expected to be working in 2016, based on the 
latest projections we have received from the pilotage associations. 
Further, we increased the historic time period for calculating pilotage 
demand from the 4 years proposed in the NPRM to 9 years in the final 
rule, as discussed later in this preamble.
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    \18\ Transcript, ``United States Coast Guard--Great Lakes 
Pilotage Advisory Committee--Thursday, July 24, 2014'' (7/24/2014), 
p. 16. Discussion of this change, referred to by GLPAC members as 
``re-baselining'' of rates, begins on July 23, 2014. See Transcript 
(7/23/2014), ``United States Coast Guard--Great Lakes Pilotage 
Advisory Committee--Wednesday, July 23, 2014,'' p. 277. Discussion 
resumes: Transcript, ``United States Coast Guard--Great Lakes 
Pilotage Advisory Committee--Thursday, July 24, 2014'' (7/24/2014), 
p. 5.
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    46 CFR 401.420 and 401.428. We amend Sec.  401.420 (charges for a 
vessel's canceling, delaying, or interrupting pilotage service) and 
Sec.  401.428 (charges for picking up or discharging a pilot other than 
at a pilot change point designated in Sec.  401.450) to base those 
charges on the applicable new hourly rates.
    We specify that billing under Sec.  401.420 precludes any 
additional pilotage charge for the time in question. We discard Sec.  
401.428's old per diem allowance for a pilot who is picked up or 
discharged at a point other than a designated change point. Instead, if 
the pilot is kept aboard for the convenience of or at the request of 
the ship, the pilot's association can bill the vessel at hourly rates 
for the extra time involved, plus reasonable travel costs. If the pilot 
is kept aboard for circumstances outside of the ship's control, for 
example because a pilot boat is out of service, the association can 
bill the vessel only for reasonable travel costs. Both sections define 
``reasonable travel costs'' as covering travel to and from the pilot's 
base.
    Finally, these sections allow pilotage associations to charge for 
delays caused by weather, traffic and ice in the colder and busier 
months at the beginning and end of shipping seasons. All these 
amendments are the same as those we proposed in the NPRM.
    46 CFR 403.120. As we proposed, we remove this section, concerning 
notes to financial reports, because these notes are not needed under 
our current financial reporting system.
    46 CFR 403.300. Accurate rates depend on accurate expense and 
revenue information for each pilotage association. In the past, we had 
difficulty validating the accuracy of this information, because some 
associations did not use a uniform financial reporting system. This 
section now requires each association to use the current Coast Guard-
approved and provided financial reporting system to certify their 
financial data annually. These changes are the same as those we 
proposed in the NPRM. We continue to require an annual audit prepared 
by an independent certified public accountant.
    46 CFR 403.400. As we proposed to do, we remove language suggesting 
that pilot transaction records must be submitted on paper. Electronic 
reporting will become available in the near future, making paper 
reporting under our current transaction reporting optional but not 
mandatory.
    46 CFR 404.1. We remove redundant language summarizing each section 
in part 404, state that the goal of part 404 is to maximize the 
transparency and simplicity of our ratemaking, and state that rates 
must promote safe, efficient, and reliable pilotage service. We 
continue to require annual association expense audits, but now we also 
require annual revenue audits, as GLPAC recommended in July 2014.\19\ 
We first used revenue audits in 2015 and expect them to promote 
transparency and better alignment between our revenue projections and 
actual revenue. We also provide for a full ratemaking to establish base 
pilotage rates at least once every 5 years, with annual rate reviews in 
the interim years and rate adjustments if changed circumstances warrant 
them.

[[Page 11912]]

All these amendments are the same as those we proposed in the NPRM.
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    \19\ Transcript (7/23/2014), p. 180.
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    46 CFR 404.2. This section formerly appeared as Sec.  404.5. We 
amend the section so that, instead of using union contract mariner 
benefit cost data, we state that we will recognize all association-paid 
pilot benefits, including medical and pension benefits and profit 
sharing, as appropriate components of a pilot's compensation. These 
changes are the same as those we proposed in the NPRM.
    46 CFR 404.100. This section formerly appeared as Sec.  404.10. We 
replace the redundant ratemaking overview that section provided with 
new general rules for setting base rates and reviewing or adjusting 
them in interim years. We provide for multi-year rates, as GLPAC 
recommended in July 2014.\20\ These rates apply for 5 years, but we 
will review them each year to make sure they continue to promote safe, 
efficient, and reliable pilotage service. If we think we must adjust 
them to meet that goal, we would use one of two methods to do so. 
First, we could apply an automatic annual adjustment provided for in 
the previous full ratemaking in anticipation of economic trends over 
the multi-year term. Alternatively, we could base the adjustment on 
changes in the Bureau of Labor Statistics (BLS) (Consumer Price Index 
(CPI-U). If neither method adequately met the need for adjustment, we 
would open a new full ratemaking. These amendments are the same as 
those we proposed in the NPRM.
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    \20\ Transcript (7/23/2014), p. 274. Discussion begins on p. 
258.
    \21\ Transcript (7/23/2014), p. 255. Discussion begins on p. 
237.
    \22\ Transcript (7/23/2014), p. 255. Discussion begins on p. 
237.
    \23\ Transcript (7/23/2014), p. 200. Discussion begins on p. 
192.
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    Ratemaking methodology. We replace the 1995 appendix A methodology 
with new Sec. Sec.  404.101 through 404.108, and eliminate old appendix 
B (definitions and formulas) and appendix C (annual rate reviews, which 
we have not conducted since 2011) because they are no longer needed. 
These are the same changes we proposed in the NPRM, with some 
exceptions as noted in the discussion. Figure 1 compares the old and 
new regulatory structure.

                        Figure 1--Treatment of Appendix A Steps in 46 CFR 404.101-404.108
----------------------------------------------------------------------------------------------------------------
           Appendix A step                      Change                              Comments
----------------------------------------------------------------------------------------------------------------
1....................................  Omit...................  Unnecessary summary of substeps.
1.A..................................  Omit...................  Move substance to Sec.   404.2.
1.B..................................  Reword and move........  Move substance to new Sec.   404.101 and move
                                                                 Step 1.B's second sentence to Sec.   404.2.
1.C..................................  Reword and move........  Add similar language to Sec.   404.102.
1.D..................................  Reword and move........  Add similar language to Sec.   404.102.
2....................................  Omit...................  Unnecessary summary of substeps.
2.A..................................  Reword and move........  Add similar language to Sec.   404.104.
2.B..................................  Reword and move........  Add similar language to Sec.   404.103.
2.C..................................  Reword and move........  Add similar language to Sec.   404.104.
3....................................  Omit...................  Unnecessary summary of substep 3.A.
3.A..................................  Reword and move........  Cover substance in Sec.   404.106.
4....................................  Omit...................  Per recommendation approved by GLPAC.\21\
5....................................  .......................  Add similar language to Sec.   404.105.
6....................................  Reword and move........  Per recommendation approved by GLPAC.\22\ Add
                                                                 similar language to Sec.   404.106.
7, except last sentence of first       Reword and move........  Add similar language to Sec.   404.107.
 paragraph.
7, last sentence of first paragraph..  Reword and move........  Add similar language to Sec.   404.108.
----------------------------------------------------------------------------------------------------------------

    In the discussion that follows, we explain how the new methodology 
replaces each Step of the 1995 methodology. Our calculations for 2016 
rates, using the new methodology, appear in Part VI of this preamble.
    46 CFR 404.101--Recognize previous operating expenses. Like old 
Steps 1.A and 1.B this section describes how we recognize the 
appropriateness of past pilot association costs, based on independent 
third party audits.
    46 CFR 404.102--Project operating expenses, adjusting for inflation 
or deflation. Like old Steps 1.C and 1.D this section describes how we 
calculate an association's projected base non-compensation operating 
expenses. We will continue to apply a cost change factor for inflation 
or deflation to any recognized expense that could be affected by 
inflation or deflation, based on BLS Midwest Region CPI-U changes.
    This rule sets base rates for 2016, using pilot association expense 
data from 2013, the last full year for which reported and audited 
financial information is available. Under old Step 1.C, we would have 
applied a cost change factor for only the next year, 2014, and would 
have ignored the inflation that took place in 2015 and 2016. In 2014, 
GLPAC recommended that we take the subsequent years into account,\23\ 
and we now do so in the new methodology using BLS data, or if not 
available, then the target inflation rate set by the Federal Reserve as 
a proxy for the Midwest Region CPI-U.
    46 CFR 404.103--Determine number of pilots needed. Like old Step 
2.B this projects how many pilots the system will need in the next 
shipping season. To project the total demand for pilot time, we broaden 
the old ``bridge hour'' standard to include not only the hours a pilot 
is on the vessel's bridge, but also the total average time a pilot 
spends in preparing for and returning from each pilot assignment, along 
with a ``recuperative rest'' allowance of up to 10 days per month in 
non-peak months, as GLPAC recommended.\24\ Moreover, instead of 
projecting future demand based on anecdotal information about future 
shipping trends, we use a multi-year average of actual past data, as 
GLPAC recommended in 2014.\25\ We also follow GLPAC's recommendation 
\26\ that we project demand based on the number of pilots that would 
have been needed to provide safe, efficient and reliable pilot service 
per district. Our NPRM proposed including data from the previous five 
shipping seasons in the

[[Page 11913]]

multi-year average but excluding outlier years that could distort 
demand trends, substituting available and reliable data from other 
years. However, in response to public comments, we have decided to omit 
the outlier-exclusion provision, and also to lengthen the multi-year 
period to include data for the 9 full shipping seasons between 2007 
through 2015, using data from our current financial reporting system, 
which provides a good source of valid data. We instituted that system 
in 2006, but we exclude 2006 because we have only partial season data 
for that year. By 2017, we will have reliable data from 10 full 
shipping seasons (2007-2016), and thereafter each year we will use data 
from the most recent 10 seasons.
---------------------------------------------------------------------------

    \24\ Transcript (7/24/2014), p. 240. Discussion begins on p. 
225. The seven non-peak months run from mid-April to mid-November. 
Recuperative rest would be available ``up to'' 10 days per month 
during those months, dependent on actual traffic patterns and the 
need to provide reliable pilotage service. Our goal is to regulate 
the pilotage system to maximize the likelihood of providing the full 
10 days per month.
    \25\ Transcript (7/23/2014), p. 258. Discussion begins on p. 
255.
    \26\ Transcript (7/23/2014), p. 237. Discussion begins on p. 
201.
---------------------------------------------------------------------------

    If the result of our demand calculation is a fractional number, we 
will round it up or down, as seems most reasonable, to the next whole 
pilot.
    In addition to projecting the number of pilots needed, we will also 
project the number of pilots we expect to be actually working full-time 
and fully compensated during the first shipping season of the new base 
period. This becomes an important factor in the next section.
    46 CFR 404.104--Determine target pilot compensation. Like old Steps 
2.A and 2.C this determines individual and overall target compensation, 
but it changes the old methodology in three respects.
    First, instead of different target figures for undesignated and 
designated waters, we will set a single figure for each district. 
Second, instead of using union contracts as our compensation benchmark, 
we will use the most appropriate reliable benchmark that is available 
to the public. Third, instead of basing target compensation on each 
district's pilot needs, we will base them on the number of pilots we 
expect to be available for full-time and fully-compensated work in the 
upcoming season, since actual pilotage availability may be lower than 
needed, as is the case under the current methodology.
    46 CFR 404.105--Project return on investment. At GLPAC's 
recommendation \27\ we deleted old Steps 5 and 6, used to calculate a 
pilotage association's return on investment, as needless steps that 
only complicated but did not change the final projection. We continue 
to project the return on investment by adding operating expenses and 
target pilot compensation, and multiplying the sum by the preceding 
year's average annual rate of return for new high grade corporate 
securities.
---------------------------------------------------------------------------

    \27\ Transcript (7/23/2014), p. 255. Discussion begins on p. 
237.
---------------------------------------------------------------------------

    46 CFR 404.106--Project needed revenue. As just stated, we have 
deleted the Step 6 procedure for projecting each association's needed 
revenue for the next year. Instead, we calculate base revenue needs by 
adding projected base operating expenses, total base target pilot 
compensation, and base return on investment. This is a more transparent 
procedure and it adequately projects an association's needed revenue.
    46 CFR 404.107--Initially calculate base rates. Like old Step 7, we 
initially set base rates for the designated and undesignated waters of 
each district, subject to modification or finalization under Sec.  
404.108. We do this by dividing projected needed revenue by available 
and reliable data for actual hours worked by pilots in each district's 
designated and undesignated waters during the multi-year base period. 
In some years and in some districts, this could produce significantly 
higher rates for designated waters than for undesignated waters, 
creating unnecessary financial risk to the pilot associations by 
focusing revenue generation too narrowly in designated waters at the 
expense of undesignated waters. To ensure safe, efficient, and reliable 
pilotage in all Great Lakes waters whether designated or undesignated, 
we therefore will apply a ratio to adjust the balance between rates, 
limiting the designated-water rate to no more than twice the 
undesignated-water rate while maintaining the same overall revenue. 
This will correct the undesirable rate imbalance, without affecting the 
total needed revenue projected for each district.
    46 CFR 404.108--Review and finalize rates. Like another provision 
of old Step 7, we will adjust the initial base rates for supportable 
circumstances, which include factors defined in current U.S.-Canadian 
agreements relating to Great Lakes pilotage.\28\ To ensure we do not 
abuse this discretion, we state that any modification to the initial 
rates must be necessary and reasonable, as well as justified by 
supportable circumstances. We will continue to submit proposed 
adjustments for public comment, which may result in our abandoning or 
modifying the adjustment. Any adjustment will be subject to Sec.  
404.107's limitation on the disparity between rates for designated and 
undesignated waters.
---------------------------------------------------------------------------

    \28\ The current Memorandum of Understanding can be viewed at 
http://www.uscg.mil/hq/cg5/cg552/docs/2013%20MOU%20English.PDF.
---------------------------------------------------------------------------

V. Discussion of NPRM Comments

    In the following discussion, in general the numbers used to refer 
to specific commenters are keyed to their docket numbers. Many late 
comments were docketed as a single entry, so those comments are labeled 
with the letter codes AA through AW (those codes appear next to each 
separate comment in the single docketed entry). So, commenter 4's 
submission is docketed as USCG-2015-0497-0004. We received submissions 
from 75 commenters on the NPRM, from the individuals and groups (or 
their associations or representatives) shown in Figure 2. In addition, 
we received emails from two shipping agents and a shipper, all 
requesting clarification (which we supplied by email) as to how rates 
would be charged under the new regulations, and a request on behalf of 
shipping agents for an extension of the comment period, which we 
granted.

                        Figure 2--Comment Sources
------------------------------------------------------------------------
        Commenter's affiliation                    Docket Nos.
------------------------------------------------------------------------
Current GLPAC member...................  AF.
Elected officials......................  AG, AR, AU.
Environmental advocacy groups..........  AD.
Former GLPAC member....................  27.
Great Lakes pilot association            52, 62.
 presidents as a group (``the
 presidents' group'').
Great Lakes pilot association            54, 56, 59, 60, AC.
 presidents as individuals.
Import or export shippers..............  10, 12, 15, 16, 19, 20, 21, 22,
                                          23, 25, 28, 30, 31, 32, 33,
                                          41, 47, 50, 51.
International ports and shippers         Two comments submitted: 53, AW.
 coalition.

[[Page 11914]]

 
National associations of pilots........  38, 49.
Pilot from outside the Great Lakes       AH.
 system.
Pilots or former pilots................  29, 44, 45, 46; a single
                                          submission from 4 pilots, 55A,
                                          55B, 55C, and 55D; 57, 58, 61,
                                          AA, AE, AL, AO, AP, AQ, AS,
                                          AT, AV.
Pilot service providers (for example     34, 43, AK, AN.
 accountants for the pilotage
 associations).
Ports and port workers (for example      4, 5, 8, 9, 18, 24, 26, 35, 36,
 stevedores).                             37, 39, 42, 48, AB, AM.
Regional businessman...................  AJ.
State pilot association outside the      40.
 Great Lakes system.
Vessel operator........................  6.
------------------------------------------------------------------------

    Of the 75 comments we received, 14, or almost one-fifth, of the 
comments were submitted after the published date for closing the 
comment period, December 9, 2015.\29\ After careful consideration, we 
have chosen to consider them because of the importance and complexity 
in changes of this particular rulemaking.
---------------------------------------------------------------------------

    \29\ This figure does not include 35 comments received on Dec. 
22, 2015, but dated before the comment period closed and apparently 
lost in transmission.
---------------------------------------------------------------------------

    Our responses to some of the comments indicate that the action we 
are taking this year is subject to possible future modification. For 
example, using Canadian Great Lakes pilot compensation, suitably 
adjusted to recognize differences in the benefits the U.S. and Canadian 
systems provide is considered as the benchmark for setting our own 
target compensation. In each of those cases, we invite the public to 
submit formal comments on next year's NPRM, and the Director of Great 
Lakes Pilotage will accept comments and data informally submitted at 
any time (see FOR FURTHER INFORMATION CONTACT).
    The following discussion treats, in alphabetical order, these major 
topics raised by the comments, and concludes with a discussion of 
miscellaneous comments.

 Adequacy of pilot compensation
 Compensation benchmark
 Director's ratemaking discretion
 Effective date and implementation date of the rule
 Factors included in pilot compensation
 General reaction to the NPRM
 Goals of the ratemaking process
 Hourly rates
 Impact of rates on pilotage safety, efficiency, and 
reliability
 Information provided by commenters
 New pilot change point
 Pilot hiring and retention
 Pilot responsibility for cost control
 Projecting the number of pilots needed
 Recognized pilotage association costs
 Recuperative rest for pilots
 Reliability and completeness of Coast Guard data
 ``Runaway costs''
 Stakeholder representation in the ratemaking process
 Traffic projections and use of multi-year historical traffic 
data
 Miscellaneous issues

    Adequacy of pilot compensation. The ports and shippers coalition, 
in comment 53, responded to our question asking if our target pilot 
compensation was adequate, or if we should adopt the higher targets 
proposed by the pilots. They answered that our proposed target 
improperly depended on the use of the Canadian benchmark, implying that 
all the proposed targets were too high. They also said a Canadian 
benchmark is inappropriate because Canadian pilots perform more of 
their work in designated waters than do U.S. pilots, who perform a 
higher proportion of their work in ``less demanding'' undesignated 
waters.
    Response: We thank the coalition for its input. After considering 
all the comments, we continue to find the Canadian GLPA benchmark to be 
appropriate. We do not agree with the coalition's implication that our 
proposed compensation targets were too high, and that use of Canadian 
GLPA pilots' compensation is inappropriate.
    As we stated in the NPRM, GLPA pilots provide service that is 
almost identical to the service provided by U.S. Great Lakes pilots. 
With the exception of Area 3, the GLPA provides pilotage service in the 
same waters as U.S. pilots do; in fact, whether a GLPA or U.S. pilot is 
assigned to a vessel is a matter of chance. We rejected the Laurentian 
pilots as not being a comparable benchmark because the Laurentian 
pilots work exclusively in designated waters. Consequently, we do not 
think it is accurate to say that ``Canadian'' pilots perform a higher 
percentage of their work on designated waters. The difference between 
the amount of work performed in designated waters by U.S. pilots and 
GLPA pilots is minimal.
    Moreover, we do not agree with the argument that the noted 
disparities between work done by Canadian and U.S. pilots warrant 
comparing U.S. compensation to a different system, such as the BLS data 
suggested by the ports and shippers association. As we stated in the 
NPRM, BLS data for masters, mates, and pilots cover officers whose 
duties and responsibilities are substantially different from those of a 
U.S. Great Lakes pilot. Unlike a Great Lakes pilot, most officers 
covered by the BLS data are not directly responsible for the safe 
navigation of vessels of any tonnage through designated waters. 
Further, the BLS data is skewed downward by the higher number of lower 
wage mates, who do not hold the same licenses as masters and pilots. 
Between U.S. and Canadian pilots, however, the impact on overall 
pilotage services is the same wherever a pilot happens to be. If a 
pilot is assigned to undesignated waters, the pilot is still ``at 
work'' or ``on assignment'' and therefore is unavailable for assignment 
to designated waters, and the pilot helps to ensure the safe navigation 
of the vessel regardless of the circumstances or waters navigated. 
Finally, a Canadian pilot's compensation is in no way dependent on the 
proportion of the pilot's assignments in designated or undesignated 
waters. Canadian pilots earn an annual salary that is affected neither 
by that proportion, nor, indeed, by varying traffic demand. Also, all 
U.S. registered pilots are qualified to provide service in both 
designated and undesignated waters within each pilotage district. 
Therefore, we do not think the distinction between assignments in 
designated or undesignated waters should have any bearing on a pilot's 
compensation.
    Compensation benchmark. After analyzing a number of possible 
benchmarks for setting target compensation for the pilots, our NPRM 
proposed adopting the compensation of

[[Page 11915]]

Canadian Great Lakes pilots as our benchmark for this year's target 
compensation.\30\ It also proposed setting the compensation for U.S. 
pilots by adjusting the Canadian compensation figure upward by 10 
percent, in recognition of the different benefits available to Canadian 
pilots and their U.S. counterparts. We received several comments on the 
benchmark and benchmark adjustment, some indicating it is insufficient 
and some indicating it is overly generous.
---------------------------------------------------------------------------

    \30\ See 80 FR at 54497.
---------------------------------------------------------------------------

    A national pilot association said, in comment 38, that for too long 
the Coast Guard set pilot rates too low, in an effort only to keep 
pilotage costs as low as possible. The association generally welcomed 
our proposals but found that the proposed adjustment of 10 percent to 
the Canadian benchmark insufficiently accounts for differences between 
the two nations' compensation systems, and that it is skewed because 
the Canadian compensation data include compensation for both fully 
qualified and apprentice pilots. It provided data in support of a 
benchmark adjustment of almost 37 percent, not 10 percent. The group of 
pilotage association presidents, in comment 52, supported these 
comments and also recommended using other U.S. pilots' compensation 
figures, which are generally significantly higher, as the benchmark.
    Response: As we explained in our NPRM,\31\ we did consider using 
other compensation schemes, including those for U.S. masters, mates, 
and pilots, as our compensation benchmark, and we believe our selection 
of Canadian Great Lakes pilot compensation as the best benchmark for 
2016 was correct.
---------------------------------------------------------------------------

    \31\ NPRM, 80 FR 54484 at 54497, col. 2.
---------------------------------------------------------------------------

    We appreciate the data the association reported in support of the 
almost 37 percent benchmark adjustment it suggested, but we do not find 
it persuasive. The commenter admits that determining this differential 
is subjective and they primarily base this value on the cost of living 
difference between Detroit, MI and Windsor, ON, which are not 
necessarily indicative of the regional economy. We do not think the 15 
percent COLA differentiator between Detroit, MI and Windsor, ON is 
relevant--a single comparison point should not be utilized to establish 
the regional comparison. Also, the U.S. cost of the Masters, Mates, and 
Pilots Membership Health Plan is only a single option of healthcare and 
benefit packages that are also not necessarily indicative of the 
regional economy.
    We will re-evaluate the association's data before we propose new 
rates for 2017, at which time the public will be able to comment on 
their validity and whether the impact of so large an adjustment would 
require a phase-in, in the interest of avoiding too large a one-year 
rate increase. We find that our new target compensation for 2016 is 
fair and justifiable.
    The ports and shippers coalition, in comment 53, responded to our 
question asking if the 10 percent adjustment to Canadian Great Lakes 
pilotage data is appropriate. The coalition said it is not, and that it 
abuses our discretion, because it ignores the facts that Canadian 
pilots perform more work in designated waters than U.S. pilots do, and 
that they are government employees. The coalition doubted that the 
Canadian data require adjustment once ``comparability adjustments are 
rationally applied.'' They also said it is ``legally and logically 
defective'' to set rates by ``working backward'' from individual pilot 
compensation figures to set future target compensation. Instead, they 
said we should simply cover reasonable pilotage costs, including the 
costs of providing reasonable pilot compensation.
    Response: We acknowledge that this adjustment is an approximation 
based on several statements made at the 2014 GLPAC meetings,\32\ which 
were not challenged at the time by industry representatives. We have 
based our benchmark adjustment on the best data available when we 
published the NPRM, and believe the new methodology covers reasonable 
pilotage costs and pilot compensation. Our NPRM specifically requested 
public comment on the appropriateness of a 10 percent adjustment.\33\ 
Two commenters provided arguments or data in support of a higher 
adjustment, but we have not been able to validate the data or analyze 
the commenters' arguments within the time frame statutorily allowed for 
this year's ratemaking. We are taking them under advisement for 
possible action in the 2017 ratemaking. As we explain previously in 
this discussion, we do not think the proportion of pilot time spent in 
designated or undesignated waters has any bearing on the comparability 
of U.S. and Canadian Great Lakes pilot compensation.
---------------------------------------------------------------------------

    \32\ Transcript, GLPAC meeting, July 24, 2014, pp. 43-45.
    \33\ NPRM, 80 FR 54484 at 54498, col. 3.
---------------------------------------------------------------------------

    The same coalition, in comment 53, responded to our question asking 
if Canadian Great Lakes pilot compensation provides the best benchmark 
for U.S. rates, and if there is a better benchmark. They said that the 
systemic differences between the Canadian and U.S. systems make the 
Canadian compensation an unreliable benchmark, and that, instead, we 
should continue basing our target compensation on the compensation of 
first mates on U.S.-flagged Great Lakes vessels. They said the union 
contract information we previously used is still available, as the 
union's late comment on the 2014 rulemaking showed, and as the court in 
our recent litigation said we should have used. They also suggested we 
could use data from the Marine Engineers Beneficial Association or from 
the Bureau of Labor Statistics.
    Response: For reasons described above, we disagree the with ports 
and shippers association that the work of Canadian pilots is so 
different from U.S. pilots that Canadian salaries do not constitute an 
appropriate benchmark. We continue to view the Canadian pilots' 
compensation, suitably adjusted, as the best benchmark for our target 
compensation because, unlike U.S. pilots in other pilotage systems, 
pilots in the two Great Lakes systems perform comparable work under 
comparable conditions. We agree the union provided contract data for 
the 2014 rulemaking, but the limited data provided are not sufficient 
or publicly available and therefore, we cannot continue to depend on 
them reliably in the future. Furthermore, the Marine Engineers 
Beneficial Association and Bureau of Labor Statistics data could be 
generally informative, but we do not think they reflect comparable 
compensation for comparable work in comparable conditions that we 
believe is the best standard for selecting a benchmark. Under that 
standard, we continue to think the Canadian Great Lakes pilotage 
salaries provide the best benchmark available for this year's rate 
setting.
    Director's ratemaking discretion. In comment 38, a national pilot 
association said that our proposed 46 CFR 404.104 gives the Great Lakes 
Pilotage Director unfettered discretion to determine the adequacy of 
pilot compensation, which is bad public policy and leaves the door open 
to abuse by future Directors. The association recommended that, 
instead, the Coast Guard should add a regulatory requirement for 
setting target compensation at a comparable level for comparable work 
in a comparable community.
    Response: We understand and respect the association's concern, but 
because all Coast Guard exercises of ratemaking discretion are subject 
to notice-and-comment rulemaking procedures, any exercise of our 
discretion must first be

[[Page 11916]]

proposed for public comment, which can highlight any perceived abuse of 
that discretion on our part. We believe that we will always need to 
exercise our discretion to determine what is comparable, but we will 
ensure that any modification made to the initial rates is necessary and 
reasonable, as well as justified by supportable circumstances.
    The ports and shippers coalition, in comment 53, said we should 
eliminate the Director's ability to make reasonable and necessary 
discretionary adjustments to initially-calculated rates, for 
supportable circumstances such as carrying out pilotage agreements 
between the U.S. and Canada. The coalition said this discretion is open 
to abuse and that the exercise of this discretion in the past has been 
widely criticized by stakeholders. The coalition also said that, if we 
retain the discretionary tool, we should expressly limit its use to 
circumstances in which we fully take into account the adjustment's 
economic impact and the public interest.
    Response: We acknowledge the past criticism of our use of 
discretionary adjustments, and as the coalition pointed out, at least 
in the recent past those adjustments have benefitted the pilots. 
However, in general we made those adjustments to offset the unintended 
consequences of our old ratemaking methodology. Even with adjustments, 
it is clear that pilot revenue still has consistently fallen below our 
targets. Had we not made those adjustments, we think it likely that the 
pilot associations would have had even more trouble attracting and 
retaining pilots, and maintaining infrastructure, than they did.
    No matter how well crafted a permanent rate setting methodology may 
be, it is bound to produce inequities when it cannot accommodate 
unforeseeable circumstances. We think it is essential for the 
methodology to include a tool that provides the ability to respond to 
those circumstances. We note that any proposed adjustment is fully made 
public in that year's NPRM, and we will carefully consider any public 
comments raising concerns as to a proposed adjustment's necessity and 
reasonableness.
    We also note that we are required, by various statutes and 
Executive Orders, to consider the economic impact of any rulemaking, 
and statutorily required to consider the public interest as well as the 
costs of providing the services in setting rates. Therefore, although 
we agree with the coalition that our discretion should be exercised 
subject to these controls, we do not think additional regulatory 
language is necessary at this time.
    The association presidents, as a group in their comment 52, said 
the Director enjoys overly broad discretion to adjust compensation 
benchmarks, and that a good standard for the exercise of that 
discretion would be ``comparable compensation for comparable work in a 
comparable community.''
    Response: For the reasons we have stated, we disagree that this 
discretion is overly broad. We generally agree with the association 
presidents that comparable compensation for comparable work in a 
comparable community is a good standard, but we do not believe 
explicitly stating this standard is necessary to achieve that result. 
We believe the regulatory language in this rule and public comment 
input will ensure that any modification made to the initial rates is 
necessary and reasonable, as well as justified by supportable 
circumstances.
    One association president in comment 56 said proposed Sec.  404.108 
is unclear as to how agreements with Canada could have any impact in 
adjusting U.S. rates, when despite comparable language over the past 
two decades, no such agreement has ever led to an adjustment.
    Response: Promoting alignment with international agreements is just 
one of the supportable circumstances that could warrant an adjustment 
where it is found appropriate. Our 2016 rates move us closer to the 
``comparable'' compensation called for by the current U.S.-Canada 
agreement.\34\ Past agreements called for ``identical'' rates, which 
could never be achieved given the acknowledged differences in how the 
two pilotage systems operate, and therefore in the past it was not 
possible to use our discretion in a way that could make our rates 
``identical'' to Canadian rates.
---------------------------------------------------------------------------

    \34\ Memorandum of Understanding, Great Lakes Pilotage Between 
the United States Coast Guard and the Great Lakes Pilotage 
Authority, Sept. 19, 2013, para. 7.
---------------------------------------------------------------------------

    Effective date and implementation date of the rule. The national 
pilots association that submitted comment 49 said the proposed 2016 
rates should be implemented at the beginning of the 2016 shipping 
season. The pilots association said there is no longer any reason for 
an August 1 implementation date, which was linked to the benchmark 
union contracts we no longer use in setting rates. The association also 
said that in the past the Coast Guard has violated its statutory 
requirement to ``establish new pilotage rates by March 1 of each 
year.'' \35\ The presidents of the pilots associations, as a group and 
in their comment 52, supported these comments.
---------------------------------------------------------------------------

    \35\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    Response: We agree that there is no longer any reason to implement 
rates on August 1, rather than as close as possible to the start of the 
annual shipping season. However, we do not agree with the association's 
interpretation of the statutory requirement, which Congress added in 
2006.\36\ The statute requires that we establish new pilotage rates by 
March 1. It is our understanding that the 2006 legislation was intended 
only to change the Coast Guard's previous practice of reviewing rates 
at irregular intervals, and to mandate annual reviews. We note that by 
2006 we had set August 1 implementation dates on several occasions, and 
that therefore had Congress sought a rate implementation date of March 
1, Congress would have included explicit language to that effect in the 
statute.
---------------------------------------------------------------------------

    \36\ Public Law 109-241, sec. 302.
---------------------------------------------------------------------------

    The purpose of making a rule ``effective'' by March 1, but 
deferring rate implementation until August 1, was to give all parties 
clear and settled information, at the beginning of the shipping season, 
on a significant cost factor that would change as the season 
progressed. We no longer see any reason to defer rate implementation 
until August and believe an implementation date at the beginning of the 
shipping season is reasonable under the new methodology. This ensures 
that the new rates can be charged from the beginning of the shipping 
season, which usually occurs in late March.
    The ports and shippers coalition, in comment 53, responded to our 
question as to when new rates should be implemented; they said they 
should have 90 days in accordance with common marine industry contract 
requirements.
    Response: We believe that 30 days is a reasonable amount of time to 
prepare for the new rates. In light of our inability to continue using 
the union contracts which went into effect each August 1, and given the 
statutory requirement that rate adjustments must be set by March 1 of 
each year, henceforth we will implement new rates with the opening of 
the shipping season or as soon thereafter as possible.
    Factors included in pilot compensation. The ports and shippers 
coalition, in comment 53, said that, as independent contractors, pilots 
should bear some of the risk of unforeseeable events like accidents or 
weather conditions that cause vessel delays and detention, and 
therefore should not be

[[Page 11917]]

compensated at full base rates for time lost to those conditions.
    Response: We generally disagree. Pilot time is lost when it is 
wasted due to delay or detention, and the pilot associations cannot 
make up the resulting lost revenue. Pilot compensation would suffer as 
a result if they were paid at less than full rates, and the lost 
revenue could degrade the ability of pilot associations to bear the 
cost of the investments needed to support pilotage service whenever it 
is needed. However, we note that pilots do bear some risk under the 
cancellation and delay provisions in Sec.  401.420; we discuss comments 
on those provisions later in this preamble.
    A pilot said in comment 55B that compensation for delay and 
detention should be paid not only when the event is for the vessel's 
convenience, but for any event that is not caused by the pilot.
    Response: Pilots and pilot associations are responsible for their 
own actions and the maintenance of necessary infrastructure, and cannot 
bill for any delay or detention reasonably attributable to them. 
Industry is responsible for other delays including those not 
necessarily for the convenience of the vessel.\37\
---------------------------------------------------------------------------

    \37\ Except as specified in 46 CFR 401.420(c) with respect to 
ice, weather, and traffic delays. An example of a chargeable delay 
would be caused by the unavailability of staffing at a dock, such 
that the vessel cannot dock. This delay would not be ``for the 
convenience of the vessel,'' but nevertheless would needlessly 
consume scarce pilotage resources. This aligns with vessel 
chartering contracts that require payment regardless of the actual 
status of the vessel during the charter agreement.
---------------------------------------------------------------------------

    Pilot 55B ``applaud[ed]'' our recognition that compensation data 
should be adjusted for inflation.
    Response: We agree that such adjustments are essential components 
of fair compensation under current conditions.
    With respect to the ``compensation for interruption'' provisions of 
proposed Sec.  401.420(c), the president of an association in comment 
56 asked what constitutes a traffic interruption, and what difference 
it makes whether such an interruption occurs during May through 
November or at other times.
    Response: Section 401.420(c) deals with interruptions to a vessel's 
transit that are caused by ice, weather, or traffic disruptions from 
May through November. We proposed relieving vessels of liability for 
such disruptions during those months because they are during the non-
peak traffic period. We agree that a pilot's time is lost to these 
disruptions regardless of when they take place, but outside of peak 
traffic periods the impact of that loss of time on the overall force of 
available pilots is less, and the resultant vessel stoppage reduces the 
need for pilot assignments. Conversely, the opportunity costs for pilot 
time during the peak traffic periods at the beginning and end of the 
shipping season, which also coincide with most winter weather 
conditions, are much higher. We note that this comment was the only one 
to raise this particular point, and we will continue to consider the 
issue carefully in the future.
    General reaction to the NPRM. Pilot service provider in comment 34 
said that the pilots have ``suffered over the past two decades because 
of a ratemaking mechanism that fails, chronically and often by a very 
wide margin, to produce the revenue that it promises.'' The commenter 
said the whole pilotage system has suffered as a result, and that the 
``shipping industry should THANK the Coast Guard, not criticize it, for 
finally recognizing that the system is broken, and taking the 
initiative to fix it'' (emphasis in the original).
    Response: We agree with the commenter and have proposed regulatory 
amendments precisely to address the concerns the commenter raised.
    A pilot service provider in comment 43 pointed out that we ``lost a 
critical tool in arriving at an equitable payscale'' when benchmark 
union contracts became unavailable for the Coast Guard's use in setting 
rates. The commenter ``commend[ed]'' our ``pro-active work'' in 
devising a new procedure for ensuring fairer pilot compensation.
    Response: While we agree that our longstanding use of benchmark 
union contracts was an accepted and generally useful tool for setting 
rates, we think the new procedure is more flexible and will work as 
well, or better, over time. The new methodology relies on publicly 
available and current data to set a benchmark for each ratemaking, and 
allows us to choose the most appropriate benchmarks available.
    The national pilot association in comment 49 expressed support for 
our proposals because they responsibly meet our obligation to 
``encourage investment in pilots, infrastructure, and training while 
helping to ensure safe, efficient, and reliable'' pilotage service.
    Response: We think the investments cited by the association are 
indispensable components of providing safe, efficient, and reliable 
pilotage service, and we think this rule promotes those investments in 
the interests of all system stakeholders.
    The ports and shippers coalition, in comment AW, said the Coast 
Guard may have been overly ambitious in proposing both the methodology 
changes and new rates based on those changes in the same rulemaking. It 
said our proposed changes are flawed and need to be refined. It 
therefore proposed extending the 2015 rates into 2016, which it said 
should ``be generously remunerative'' to the pilots.
    Response: We disagree with these assertions and believe that the 
new rates are necessary and reasonable for safe, efficient, and 
reliable pilotage on the Great Lakes. Failure to implement these 
important revisions will continue to delay the addition of pilots and 
the investment in important infrastructure to sustain the pilotage 
system on the Great Lakes.
    The president of a pilot association in comment 59 said our 
methodology and rates were fair and should be adopted.
    Response: For all the reasons we cite elsewhere in this discussion, 
we agree with the commenter.
    The presidents of the pilot associations, as a group and in their 
comment 62, pointed out that the Coast Guard has full discretion to set 
pilotage rates, and that the Coast Guard must ensure first and foremost 
that the rates we set promote the safety, efficiency, and reliability 
of the regulated entities' operations. They said that the shippers 
coalition was mistaken in its assertion that we failed to give 
sufficient attention to their ``public interest.'' The presidents 
pointed out that our statutory mandate is to consider, without 
limitation, the ``public interest,'' and shared our interpretation of 
that interest as extending to that of every American or any foreign 
person who might be affected by our ratemakings. The presidents said 
that, had Congress intended to limit the ``public interest'' to the 
interest of persons directly affected by the Great Lakes system, it 
knew how to do so by speaking in plain terms.
    Response: We agree that the economic interests of Great Lakes ports 
and shippers must be considered as one of many interests in the context 
of our statutory mandate to consider the public interest in general.
    The ports and shippers coalition, in comment AW, said that 
industry's interests are ``congruent'' with those of the pilots, that 
our rates should fairly compensate the pilots without imposing 
unreasonable costs that can harm the viability of Great Lakes shipping, 
and that our proposals do not meet these goals.
    Response: We think the coalition correctly identifies the goals of 
our

[[Page 11918]]

ratemaking, and we agree that the interests of all the principal 
stakeholders are ``congruent,'' but we do not agree that we have failed 
to achieve the best possible balance between these two rate setting 
goals. We believe the rate in this rule balances fair compensation for 
pilots while taking into account the necessary costs of providing 
shipping services.
    Hourly rates. The ports and shippers coalition, in comment 53, 
opposed our proposed use of hourly charges for all routes, instead of 
the current point-to-point charges for routes in designated waters. 
They said that fixed charges for those routes provide cost certainty 
for shippers and impose discipline on pilots, whose financial interests 
are served by navigating those routes in the most expeditious manner.
    Response: We acknowledge that fixed routes provide greater cost 
certainty for shippers, but this certainty needs to be balanced against 
interests of safety because the speed with which a pilot transits a 
route should be dictated by circumstances. We do not think the risk of 
an overly expeditious passage should be borne by the environmental 
safety of Great Lakes waters and by public safety, both of which could 
be jeopardized as a result. We also think this risk is contrary to the 
interest of shippers in the safe passage of their vessels.
    A pilot in comment 55B and a president of a pilot association in 
comment 54 said that the hourly compensation standard should recognize 
that not all hours are billable.
    Response: We believe the current rate adequately addresses hours 
that are appropriate for billing. It is unclear to us from these 
comments what non-billable hours these commenters had in mind and how 
we should take them into account in setting rates. We invite them, and 
others, to provide us with additional information for consideration in 
2017 and beyond.
    Impact of rates on pilotage safety, efficiency, and reliability. An 
environmental group in comment AD said the low compensation and poor 
working conditions under which U.S. Great Lakes pilots work puts safety 
at risk, and therefore, threatens the Great Lakes environment, and that 
Congress clearly intended our ratemaking to take the public interest in 
such matters into account. A regional businessman in comment AJ also 
said that the regional economy depends on safe shipping and 
environmental protection of the Lakes.
    Response: We agree with both commenters. A vessel's safety is 
clearly a concern for pilots, vessel operators, shippers, and the 
general public. Ultimately, we think an unsafe system could provide 
shippers with incentives to shift their operations to other ports or 
other transportation modes.
    A pilot service provider in comment 43 cited studies \38\ showing 
that ``more than 80 percent of maritime property damage claims and more 
than 90 percent of collisions'' are due to the irregularity of master 
or pilot work schedules and the pressure of the responsibility these 
individuals bear, leading to insomnia and ``near continuous fatigue,'' 
``often accompanied by intense stress and punctuated by large sudden 
shots of adrenalin.'' A pilot association president in comment 60 made 
very similar comments.
---------------------------------------------------------------------------

    \38\ According to the commenter, this quotation appears in J.A. 
Barber's Naval Ship Handler's Guide.
---------------------------------------------------------------------------

    Response: As is true for all transportation modes, chronic fatigue 
from irregular work schedules and insufficient rest periods can 
cumulatively increase the safety risks for maritime transportation. 
These increased risks are in no one's interest, and they also lead to 
pilotage service that is neither efficient nor reliable. The 
recuperative rest period is intended to ensure that, in addition to 
required rest periods between assignments, pilots have sufficient off-
assignment time during the season so they can avoid chronic fatigue.
    The national pilot association in comment 49 noted that shipping 
agents for foreign vessel operators have long demanded Coast Guard 
action to address the ``untenable situation'' in which pilot shortages 
and aging infrastructure can lead to expensive vessel movement delays. 
The association said that only in 2015 did the Coast Guard begin 
rectifying the severe pilot association revenue shortfall over the past 
decade, and commended the Coast Guard for continuing this rectification 
with our proposals for 2016. A pilot service provider in comment AN 
made similar comments.
    Response: We agree and think the pilot association correctly 
understands that increased pilot compensation is warranted if it leads 
to a pilotage system that is safer, more efficient, and more reliable 
for all stakeholders.
    Information provided by commenters. A pilot in comment 55C said 
that his association's staffing will be decreased by upcoming 
retirements, and that the association has aging infrastructure that 
must be modernized.
    Response: We acknowledge this information, which advises us of 
conditions that threaten this association's ability to provide safe, 
efficient, and reliable pilotage. Our changes in this rule were 
intended to mitigate such conditions.
    The president of a pilot association in comment 54 said his 
district will have significant unforeseen dispatch costs in 2016.
    Response: We agree that this commenter will incur dispatching costs 
from the beginning of the 2016 shipping season, including the 
acquisition of necessary facilities and technology. Previously, this 
service was provided by Canada. Data for those costs were not available 
in sufficient detail to be included in the 2016 rate but can be 
evaluated for reimbursement in a future rulemaking.
    A U.S. pilot from a different system in comment AH said that pilots 
in his association earn over $459,000 a year and also receive medical 
and pension benefits, and that compensation for Great Lakes pilots 
contributes to hiring and retention difficulty.
    Response: We thank the commenter for this information. We find that 
our use of Canadian Great Lakes pilot compensation, suitably adjusted, 
is the best benchmark for our target compensation because pilots in the 
two systems perform comparable work under comparable conditions. We 
have no publicly available information on how rates are set in other 
U.S. pilotage systems, and therefore, we cannot analyze whether the 
figure cited by this commenter would make a better benchmark for our 
system, though we invite public input and data on this topic for our 
consideration in future ratemakings. We agree that low compensation in 
comparison with that of U.S. pilots elsewhere probably contributes to 
hiring and retention problems. Our rule is intended to mitigate that 
disparity.
    New pilot change point. Our NPRM proposed adding a new pilot change 
point to break up overly long pilotage assignments in the St. Lawrence 
Seaway. The national pilot association in comment 38 said we should not 
add the new change point until pilot associations reach full staffing 
in 2017, because until then an additional change point would only 
require additional workload and travel time for an already over-
stretched pilot work force. The ports and shippers coalition, in 
comment 53, said that this rulemaking is not the right venue to discuss 
a new pilot change point, which deserves more discussion and a thorough 
investigation.
    Response: We agree that this issue requires more study and the 
addition of more pilots to handle the increased number of pilotage legs 
created by the

[[Page 11919]]

new change point. Therefore we are taking no action on it this year.
    Pilot hiring and retention. Elected officials in comments AG and AI 
said that hiring and retaining highly trained and qualified pilots is 
essential for protecting the Great Lakes environment. Official AR said 
that our rate increases would help hire and retain the high quality 
pilots who protect the safety of the Great Lakes environment and hence 
the reliability of Great Lakes transportation.
    Response: We agree, and our new rates are intended to promote such 
hiring and retention.
    The national pilot association in comment 38 said our proposed 
rates do not adequately cover the cost of adding new pilots, over the 
potential 5-year lifespan of the new rates.
    Response: The commenter may be correct and we would adjust the 
rates should we find the rates need adjustment over the 5-year period. 
For 2016 hiring costs, we are authorizing a temporary surcharge to fund 
new applicant pilots, and if warranted we could authorize similar 
surcharges in future years, if necessary.
    Pilots in comments 29, 44, 45, 46, and AV, as well as a pilot 
service provider in comment AK and a port commenter in comment AM, all 
said that low pay and high workload are principal causes of pilot 
hiring and retention problems. In addition, a pilot in comment 29 
compared U.S. Great Lakes pilot compensation and working conditions 
unfavorably to those available to their Canadian counterparts, and said 
our proposals would ``go a long way'' toward easing hiring and 
retention problems, improving pilot training, and helping shore up 
pilotage association infrastructure. A pilot in comment 57 said that a 
well-compensated pilot will not want to leave his position, and that a 
well-compensated pilot in another stable environment will not want to 
take a position in the unstable Great Lakes pilotage system. A pilot in 
comment 58 said that in the past, target pilot compensation has been 
set ``abysmal[ly]'' and in no way has kept up with compensation for 
other pilots or other mariners. A pilot in comment 61 said that the 
inability of the pilotage associations to hire and retain qualified 
pilots is putting the safety, efficiency, and reliability of pilotage 
service at significant risk, and said industry should understand this 
as well as the pilots do. He said the pilots had long warned industry 
that pilot shortages would inevitably result in the sort of delays that 
industry had to endure at the beginning of the difficult 2014 shipping 
season. A pilot in comment AA said that in 2010 he withdrew his 
application to become a Great Lakes pilot because the risk was not 
worth it, and that he knows several colleagues who did not apply, for 
the same reason. He said that if industry is not willing to pay 
increased rates they may lose pilotage service altogether. Pilots in 
comments 55A and 55C made similar comments. A pilot association 
president in comment AC said his association has difficulty hiring 
replacements for several pilots who have left the system or retired, or 
who plan to do so in the near future; similar comments came from pilots 
in comments 55D, AE, and AV. President AC also said that pilotage costs 
are a small fraction of overall shipping costs in the Great Lakes. A 
pilot in comment AL said he retired from the system because of low 
compensation and lack of time off, and withdrew his application for 
another opening when it became clear those conditions had not improved. 
A pilot in comment AO said he never would have become a Great Lakes 
pilot had he foreseen the low compensation and long hours involved, and 
that as a hiring agent found that these issues kept many highly 
qualified mariners from signing on as pilots. A pilot in comment AP 
said 10 pilots in his association took early retirement to escape the 
low compensation and long hours their positions entailed. A pilot in 
comment AQ said his job as a pilot was a ``great fit'' but that he 
resigned because of low pay and long hours. Pilots in comments AS and 
AT welcomed the surcharge that the NPRM proposed to help defray pilot 
association hiring and training costs.
    Response: These comments echo comments that pilots and others have 
made to us, and to GLPAC, repeatedly over many years. Such comments 
highlight the pilot hiring and retention challenges this rule addresses 
to ensure that our rates provide the pilotage associations with 
sufficient revenue to attract and retain pilots, improve pilot working 
conditions, and shore up the infrastructure on which the pilots rely.
    The ports and shippers coalition, in comment 53, said that our 
analysis of pilot attraction and retention issues is not founded on 
tested data, and that we should explore alternative ways to attract and 
retain good pilots, such as up-front apprentice bonuses and living 
standard supports. The coalition said we should look into each departed 
recruit's or pilot's reasons for leaving the system. In comment AW, the 
same coalition said that we have produced no data establishing that 
there are difficulties in attracting and retaining qualified pilots, or 
that there is a relationship between those difficulties and low 
pilotage rates. The coalition said we should produce enough data to 
convince the public that there is a problem, that it is caused by low 
rates, and that it is not affected by other unrelated factors.
    Response: Our analysis shows that over the last 11 years, 31 pilots 
have left the Great Lakes pilotage associations. Of these 31 pilots, 9 
went to other unspecified jobs, 5 went to another system outside the 
Great Lakes, 5 took mariner positions on board lakers, 1 went back to 
deep sea shipping, 1 became a training instructor, 1 went to another 
district, 1 took work with a dredging company, and 8 gave no reported 
reason for leaving. Figure 3 shows that the number of pilots dropped 
from 44 in 2007 to 36 in 2014, a net decrease of 22 percent.

[[Page 11920]]

[GRAPHIC] [TIFF OMITTED] TR07MR16.000

    Industry considers pilot understaffing directly responsible for 
vessel traffic delays. Figure 4 shows our data for delay hours overall 
and by district between 2007 and 2015. This data is pulled from the 
Great Lakes Pilotage Management System, an online database shared by 
USCG and the Canadian GLPA, as well as the pilot associations.

                                   Figure 4--Great Lakes Delay Hours 2007-2015
----------------------------------------------------------------------------------------------------------------
                                                                                                    Total delay
                      Year                          District 1      District 2      District 3         hours
----------------------------------------------------------------------------------------------------------------
2007............................................         1295.97           657.1         1231.99         3185.06
2008............................................          1232.4          679.47          1350.3         3262.17
2009............................................          476.13          546.52         1771.05          2793.7
2010............................................         1096.22         1272.05         1377.53          3745.8
2011............................................          824.41          588.05         1501.02         2913.48
2012............................................           656.5          711.01         1152.09          2519.6
2013............................................         2071.72         1064.31         2829.36         5965.39
2014............................................         2702.35          2439.8         7879.62        13021.77
2015............................................         2532.33         1501.05          383.17         4416.55
----------------------------------------------------------------------------------------------------------------

    Figure 5 shows how much these delays cost, which we calculated by 
dividing the delay hours shown in Figure 4 by 24 hours and multiplying 
the result by the average daily vessel operating costs, excluding the 
cost of pilotage during delays.\39\ Delay hours in 2014 included an 
estimated 7,200 delay hours due to the ice opening that we removed to 
better represent the trend over the years. The figure shows an overall 
increasing trend in delay hours and the cost of these hours over the 
last 9 years.
---------------------------------------------------------------------------

    \39\ ``Ship operating costs: Current and future trends'', 
Richard Grenier, Moore Stephens LLP, December 2015. $5,191 was used 
as the daily operating cost as the majority of affected vessels are 
handy size bulkers.

---------------------------------------------------------------------------

[[Page 11921]]

[GRAPHIC] [TIFF OMITTED] TR07MR16.001

    Figure 6 shows that since 2007, the number of available pilots has 
decreased 22 percent, while delay hours have increased 45 percent. Over 
this period, delays increased by 2,636 hours, or 329 hours per year, 
per pilot loss. Other factors contribute to delays, but clearly pilot 
shortfalls are one important factor.
[GRAPHIC] [TIFF OMITTED] TR07MR16.002

    Pilot associations say they want to reach full staffing, but cannot 
do so because of chronic pilot attraction and retention difficulties. 
We are open to any reasonable proposals for mitigating those 
difficulties, but the remedies suggested by the coalition may not work 
and could take longer than the system can sustain in the face of more 
pilot departures and the inability to replace those pilots. We doubt 
that the coalition's suggestions would be effectual, given the career-
long prospects a recruit or new pilot faces for lower compensation than 
their counterparts in Canada side or in other U.S. ports. The pilots 
have emphasized these issues repeatedly at pilotage summits and GLPAC 
meetings, and we are not aware of evidence that the pilots' emphasis is 
misplaced. Our preceding figures suggest that increased pilot rates are 
the best and quickest way to attract and retain more qualified pilots.
    Pilot responsibility for cost control. The ports and shippers 
coalition, in comment 53, said that the Coast Guard encourages 
inefficiency in the pilotage system, by maintaining three separate 
pilotage district associations instead of a single association as the 
Canadians do. It said we do not adequately pressure the pilotage 
associations to maintain a full staff of pilots, and that each 
association has an incentive to maintain low staff levels because every 
pilot on staff can receive higher compensation. It also said we should 
explore more efficient ways to reduce association overhead. The 
coalition suggested that pilots should bear some of the risk of 
unforeseeable events that cause a

[[Page 11922]]

vessel's delay or detention, and therefore should not be paid base 
rates for those events. A pilot association president in comment 54 
disagreed, and said that a pilot should be responsible only for events 
that are outside the pilot's control (we assume the commenter intended 
to say ``events within the pilot's control'').
    Response: We are interested in, and continually explore, 
efficiencies to keep staffing up and overhead low. We share the 
coalition's concern regarding understaffing of the pilot associations 
and our new methodology focuses pilot compensation on those pilots 
actually expected to be working in a given year, rather than on the 
target for full staffing. This reduces any incentive an association 
might have to understaff.
    Consolidation of the three districts into one continues to be an 
option we consider. However, it should be noted that the three-district 
model predates the Coast Guard's assumption of the system's control 
almost 50 years ago, and GLPAC's authorizing statute specifies that 
three of GLPAC's seven members must represent the presidents of the 
three pilotage districts, which in our view implies that each district 
will have its own association.\40\ Therefore we assume Congress 
recognizes the existing three-association model and would need to amend 
the Act to allow us to change that model. We agree with the pilot 
association president in comment 54 that, contrary to the coalition's 
suggestion that the pilots absorb some of the risk of unforeseeable 
events, it makes more sense to allocate risks so that pilots bear the 
costs only for events that are within their control. This is because 
there is a limited pool of pilots, and the association cannot simply 
add pilots or pilot hours to make up for pilot hours lost to delays 
outside the pilots' control.
---------------------------------------------------------------------------

    \40\ See 46 U.S.C. 9307(b)(2)(A).
---------------------------------------------------------------------------

    Projecting the number of pilots needed. The national pilots 
association in comment 38 said our NPRM's announced goal of having 50 
pilots on hand within the near future is fully justified to keep vessel 
traffic moving and to avoid the pilot fatigue that the National 
Transportation Safety Board (NTSB) has said threatens pilotage safety. 
The association found it ``baffling'' that the same shippers who 
express concern over traffic delays also criticize the costs of adding 
the pilots needed to avoid those delays.
    Response: This final rule increases the 50-pilot goal we announced 
in the NPRM to a new goal of 54 pilots, for reasons we will discuss in 
Part VI of this preamble.\41\ This target is set to ensure we achieve 
our goals of safe, efficient, and reliable pilotage, and we agree that, 
at least in the near future, these goals can be met only by providing 
adequate pilot compensation and rest.
---------------------------------------------------------------------------

    \41\ The 50-pilot figure appears in the NPRM at p. 54496, Table 
10. In Part VI of this preamble, we discuss our reasons for 
increasing the number of pilots needed in our presentation of 
calculations made in accordance with new Sec.  404.103. The 54-pilot 
figure appears in that presentation as Figure 19.
---------------------------------------------------------------------------

    The ports and shippers coalition, in comment 53, said the NPRM's 
proposal that pilot numbers be set high enough to cover peak traffic 
periods should be revised so that peak demand is used only at the 
beginning and end of a shipping season, when delays due to pilot 
shortages are most common, and should rely on alternative tools, such 
as the use of contract part-time pilots, during the non-peak periods.
    Response: Traffic peaks usually are confined to the periods just 
after the opening and just before the closing of a season, but could 
occur at other times as well. Setting pilot numbers high enough to 
accommodate all these peak periods is essential for reducing traffic 
delays during peak periods, and is also essential if we are to provide 
the recuperative monthly rest periods recommended by the NTSB in the 
interests of safety.
    We considered using contract or semi-retired pilots as an 
alternative way to handle traffic peaks. We do not think that is a 
viable alternative because those pilots are unlikely to possess current 
and thorough knowledge of local waters. We consider such knowledge 
essential for safe piloting, especially in the bad weather conditions 
often experienced during peak periods. This kind of specialized 
knowledge takes up to 48 months to acquire and cannot be summoned at 
short notice to address temporary traffic peaks. It is true that other 
pilotage systems outside the Great Lakes sometimes use part-time or 
contract pilots, but those systems cover smaller areas in which those 
pilots more easily can maintain the necessary knowledge without 
impacting safety. The coalition did not propose other alternatives for 
our consideration and we have not identified such alternatives. 
However, we invite the public's input on any alternatives that exist, 
and would carefully consider using those alternatives in future 
ratemakings.
    The president of a pilot association in comment 56 criticized our 
proposed basis for target pilot compensation in Sec.  404.104, by which 
compensation would be set according to the number of pilots actually on 
hand, instead of the number of pilots needed. He said this would be 
unfair to the existing pilots, each of whom has to work harder until 
the association is fully staffed.
    Response: We have authorized a temporary surcharge to assist in 
achieving the goal of hiring and training new pilots and think this is 
a more transparent tool than setting base rates according to ``pilots 
needed,'' which as an industry commenter pointed out could provide an 
incentive for an association to keep pilot strength artificially low.
    Recognized pilotage association costs. The national pilots 
association in comment 38 said that, in proposed 46 CFR 404.2(b)(3) 
regarding transactions not directly related to providing pilotage 
services, we should specify that transactions must be related to the 
provision of ``safe, efficient, and reliable'' pilotage service.
    Response: We agree with the motivation behind this suggestion, but 
we think it unnecessary to add the proposed language. Our proposed 
regulations make it clear that our goal is safe, efficient, and 
reliable pilotage, and we recognize only those expenses that are 
reasonable and necessary for promoting that goal.
    The national pilots association in comment 49, supported by the 
president's group in comment 52, said that our proposed 46 CFR 
404.2(b)(6) disallowance for legal fees associated with actions against 
the U.S. Government and its agents appeared to be in retaliation for 
the pilots' lawsuit against the Coast Guard for our 2014 ratemaking. 
The association said our proposal was contrary to past Coast Guard 
practice, which allowed those fees so long as there was no finding of 
bad faith on the part of the pilots. The president's group, in comment 
52, said disallowing fees is an arbitrary and capricious departure from 
past Coast Guard practice and an illogical departure from customary 
practice in other industries. They said the disallowance may have been 
based on the mistaken assumption that the fees paid to their lawyers 
were for lobbying expenses.
    Response: We disagree. The U.S. Government, through the Coast 
Guard, is the pilots' regulator, and therefore, it is inappropriate for 
the Coast Guard routinely to approve any legal costs for actions 
against the Government or its agents. We note that when court-ordered 
to do so, as we were as part of the settlement ending the 2014 
litigation, we do pay the opposing party's litigation costs. The 
presidents correctly state that we do not recognize lobbying expenses 
for ratemaking purposes.

[[Page 11923]]

    The ports and shippers coalition, in comment 53, opposed our 
recognizing the pilot associations' cost of membership in the American 
Pilots Association (APA), because they did not think it necessary for 
safe, efficient, and reliable Great Lakes pilotage.
    Response: We acknowledge that until recently we did not view APA 
membership as ``necessary,'' but we have since come to realize that the 
APA provides its members with information about best practices and 
pilot training, which we think is essential if pilots are to provide 
safe, efficient, and reliable service on the Great Lakes. The APA 
engages in lobbying, but we have determined that lobbying represents 15 
percent of APA activity and we deduct that amount from the recognized 
expenses accordingly.
    Recuperative rest for pilots. The national pilots association in 
comment 49 said it was pleased with our proposal that pilots be allowed 
up to 10 days' recuperative rest per month in non-peak months, and 
hoped foreign vessel operators will understand the proposal's value to 
them. The presidents' group, in comment 52, also supported the proposal 
as essential for safety and for pilot attraction and retention.
    Response: A pilot's chronic fatigue from irregular work schedules 
and insufficient rest can cumulatively increase the safety risks for 
maritime transportation. Such increases in risk serve no one's 
interest, and they also lead to pilotage service that is neither 
efficient nor reliable. Our recuperative rest requirement is intended 
to ensure that, in addition to required rest periods between 
assignments, pilots have sufficient off-assignment time during the 
season so they can avoid chronic fatigue.
    The president of an association in comment 54 said that each 
district's peak demand period is different from the others, and 
therefore, it makes sense to allow the recuperative rest periods 
between each district's double-pilotage seasons.
    Response: Double pilotage is used mostly at the beginning and end 
of a shipping season, and our recuperative rest periods will take place 
between those times. Peak periods do vary from one district to another, 
but these variances are so small that, at this time, we see no reason 
to set different periods for each district.
    The president of an association in comment 56 said we should amend 
Sec.  404.1 by specifying that, instead of ensuring fair compensation 
for trained and rested pilots, we would ensure a sufficient number of 
well-qualified and well-rested pilots to cover peak demand, and have 10 
days' recuperative rest each month during non-peak months. He also 
asked us to clarify how our proposal would deal with the possibility 
that such rest could be modified to ensure continuous pilot 
availability.
    Response: We do not think we need to specify 10 days' recuperative 
rest each month during non-peak months. Though this is one of the goals 
of this rule, we believe it is necessary to review the results of the 
2016 shipping season under our new staffing model and methodology 
before we establish the duration and timing of the recuperative rest 
periods in regulation. With respect to rest periods being modified to 
provide for continuous pilot availability, we require rested pilots to 
be available for assignment and we are increasing pilot strength to be 
able to fulfill both our recuperative rest guidelines and our 
requirements for rested pilots to be available for assignment.
    Reliability and completeness of Coast Guard data. The ports and 
shippers coalition, in comment 53, said that, unlike other rate-setting 
agencies, the Coast Guard cannot assure the rate-payers that the 
financial data it uses are reliably reported or audited. It said our 
revenue projections failed to take vessel weighting factors and 
differences between specific routes into account, and that these should 
affect our rates. In comment AW, the coalition said that the pilot 
association financial data in the record are ``rudimentary and 
inadequate'' and provide insufficient information for comparing actual 
and projected revenue. It said that until we construct an ``adequate 
data platform,'' our ratemakings ``will continue to be random, 
subjective, and arbitrary.'' It also said our record lacks data or 
analysis to show that, in setting new rates, we have adequately 
considered the needs of safety, the public interest, and relevant 
costs. It said our current accounting systems fail to provide 
sufficient data on which we can reach informed and defensible decisions 
on whether current rates produce adequate revenues.
    Response: We disagree with the coalition's characterization of the 
data. As amended in this rule, Sec.  403.300 requires pilotage 
associations to use a Coast Guard-approved financial reporting system 
that will provide us with more accurate financial data, which should 
facilitate accurate Coast Guard audits of that data. We make those 
audits publicly available in the dockets for our annual rate reviews. 
Over the past few years we have gone to great lengths to ensure that 
the associations follow uniform reporting procedures and use the 
reporting software that we provide. Moreover, we have worked closely 
with our contract auditor to ensure uniform auditing procedures, and in 
recent years we have begun annual pilot association revenue audits to 
help validate the billings they report. However, there is no statutory 
or regulatory requirement that the Coast Guard use the same financial 
reporting or auditing methods used by other rate-setters for other 
purposes.
    We see potential merit in the suggestion that our ratemaking take 
weighting factors into account, and we take it under advisement. Given 
the high variability from year to year in the numbers and types of 
vessels requiring pilotage, we have never considered weighting factors 
in projecting revenue projections of the rate. We do not consider 
specific routes in the rulemaking, only the needed revenue for the 
pilot associations to provide safe, efficient and reliable service. Our 
comparison of needed revenue from year to year reflects the overall 
cost of the pilotage system; some routes may see higher increases than 
others depending on factors including weather, traffic, cargo, and 
destination.
    We do not agree that pilot financial data are unreliable. The data 
provided in the docket readily allows comparisons between projected and 
actual revenues. Our independent accounting firm conducts extensive 
reviews of pilot association financial information, to enable us to 
determine the necessity and reasonableness of association expenses. We 
recently began auditing association revenues, and these audits validate 
association claims that they generate the target revenues set in 
previous ratemakings. We have also posted financial information 
(including information requested by the coalition) on our public Web 
site. We believe we have provided extensive evidence in support of our 
analysis of association expenses and revenues, and that we have fully 
explained how our new methodology and this year's rate increases 
support safe, efficient and reliable pilotage. We have also added 
analyses of the potential economic impact of the ratemaking to support 
our methodology and rate increases.
    Finally, our responses to the comments we received on the NPRM 
demonstrate that we have considered safety needs, relevant costs, and 
the public interest.
    ``Runaway costs.'' Representatives of shippers in comments 10, 12, 
15, 16, 19, 20, 21, 22, 25, 28, 41, 47, 50, and 51 said pilotage rates 
now represent ``runaway costs.'' One of these commenters said that we 
had increased pilotage rates by

[[Page 11924]]

114 percent over the past decade, while simultaneously reducing the 
number of available pilots. Another said these cost increases exceeded 
Consumer Price Index cost increases (23 percent) over the same period.
    Response: We acknowledge that the rates have increased since 2005, 
but by 90 percent, not 114 percent. Of that increase, 21.4 percent 
reflects consumer price index increases.\42\ A 20 percent increase 
occurred over a decade ago (2005) and a 22.6 percent increase took 
place in 2007. Before 2005, there were only two increases in the rate: 
11 percent in 1997 and 3 percent in 2001. Figure 7 below displays the 
average increase or decrease in the rates for each year from 2005 to 
2015. It shows an overall decreasing trend in the average rate 
increases over the last 11 years.
---------------------------------------------------------------------------

    \42\ Average yearly CPI from 2005 and 2015, http://www.bls.gov/cpi/cpid1512.pdf.
[GRAPHIC] [TIFF OMITTED] TR07MR16.003

    Many of the shippers cited the adverse impact the proposed rate 
increases could have on their businesses or on the regional economy in 
general. One said that higher pilotage costs could decrease the 
attractiveness of Great Lakes shipping relative to other transportation 
modes, and that ultimately reduced shipping demand will result in lower 
pilotage revenues, forcing further rate increases and creating a cost 
spiral. Some of the shippers said that, as a regulator, the Coast Guard 
should protect the interests of the consumer from cost increases that 
are unaccompanied by system efficiencies and that threaten the health 
of the Great Lakes economy. The ports and shippers coalition, in 
comment 53, made similar statements and said that we erred in saying 
the proposed rates would not hurt small businesses, because we 
overlooked the ripple effect of rate increases on the small shippers 
and their suppliers who are indirectly affected by those increases.
    Response: We recognize the importance of commerce on the Great 
Lakes and believe the rule achieves the best long-term balance of 
interests. We analyzed the potential impact of the increase in pilot 
rates on Great Lakes shipping. To determine the elasticity of demand 
\43\ for commodities shipped on the Great Lakes we reviewed a 2004 
report by Martin and Associates,\44\ analyzing two principal 
commodities moving through the Great Lakes, import steel and export 
grain. These commodities accounted for 74 percent of the U.S. Great 
Lakes cargo on vessels subject to pilotage requirements. The study 
found that the demand for shipping grain and steel was highly inelastic 
(insensitive) with respect to pilotage rates.\45\
---------------------------------------------------------------------------

    \43\ Elasticity of demand for a product is the percentage change 
in the demand for a product or service due to a percentage change in 
the price of that product or service. Demand elasticity is 
considered inelastic if there is little change in the demand for a 
product or service as a result of a price change.
    \44\ ``Analysis of Great Lakes Pilotage Costs on Great Lakes 
Shipping and the Potential Impact of Pilotage Rate Increases'', 
Martin and Associates, 2004.
    \45\ The study compared the least cost routing cost for each 
U.S. inland steel and grain destination by Great Lakes port to the 
next least cost routing using an alternate coastal port and the 
baseline Great Lakes pilotage cost. The study found a range of cost 
savings for 20 Great Lakes ports over coastal ports. These ranges 
were used to draw the conclusion that Great Lakes shipping of grain 
and steel are highly inelastic with respect to pilotage charges.
---------------------------------------------------------------------------

    In addition, the overall impact of an increase in pilotage costs 
should be small and have little effect on a shipper's transportation 
route and mode preferences. A 2011 study by Martin and Associates \46\ 
examined the economic impacts of the Great Lakes and St. Lawrence 
Seaway system. The study showed that in 2010, the system's ports 
handled 322.1 million metric tons of cargo, generating $33.6 billion in 
direct business revenue. Cargo moving on the foreign-flagged vessels 
that are the primary users of mandatory Great Lakes pilotage service 
accounted for $2.3 billion, or approximately 7 percent of the total 
revenue. The study also found that U.S. and Canadian Great Lakes pilots 
generated $91.7 million in direct business revenue. Therefore, pilot 
revenue accounted for less than 0.3 percent of the total direct revenue 
generated in the system. Any increase in this small proportion would be 
distributed over the entire system, thereby diminishing its impact.
---------------------------------------------------------------------------

    \46\ ``The Economic Impacts of the Great Lakes St. Lawrence 
Seaway System'', Martin and Associates, 2011. http://www.marinedelivers.com/sites/default/files/documents/Econ%20Study%20-%20Full%20Report%20Final.pdf.
---------------------------------------------------------------------------

    We are required by statute to set rates with ``consideration to the 
public interest and the costs of providing the [pilotage] services.'' 
\47\ The statute does not limit the ``public interest'' to that of the 
Great Lakes region, or to that of any

[[Page 11925]]

industry, and we therefore interpret the statutory intent to apply to 
the entire nation's public interest. This larger interest, of course, 
includes the public interest in promoting the economic health of all 
the nation's regions including that of the Great Lakes region. We 
believe the measures we proposed in our NPRM achieve the proper balance 
of covering pilotage costs and ensuring safe, efficient, and reliable 
pilotage in the public interest.
---------------------------------------------------------------------------

    \47\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    As to the impact of increases on small businesses, we acknowledge 
the coalition's concern, but the Regulatory Flexibility Act requires 
consideration only of the direct costs of a regulation on a small 
entity that is required to comply with the regulation.\48\ As 
previously explained, pilot revenue accounted for less than 0.3 percent 
of the total direct revenue generated in the Great Lakes and St. 
Lawrence Seaway system and any increase in this small proportion would 
be distributed over the entire system, thereby diminishing its impact. 
It is not clear how this rule could have significant ``ripple 
effects.''
---------------------------------------------------------------------------

    \48\ The courts have held that the RFA requires an agency to 
perform a regulatory flexibility analysis of small entity impacts 
only when a rule directly regulates small entities. See the Small 
Business Administration's ``A Guide for Government Agencies How to 
Comply with the Regulatory Flexibility Act,'' May 2012, page 22. 
https://www.sba.gov/sites/default/files/rfaguide_0512_0.pdf.
---------------------------------------------------------------------------

    Also, we think these comments overlook the adverse regional 
economic impact that lower pilotage rates could have. Lower rates lead 
to lower revenues, and as we have stated, we think chronic low revenues 
are responsible for the pilotage system problems that industry says 
leads to damaging vessel traffic delays. It is those delays that are 
most likely to weaken the competitiveness of the Great Lakes in the 
near future, and our rate increases are intended to forestall that 
impact.
    More importantly, however, and as we previously noted, if we fail 
to implement this methodology and new rates, we believe the pilot 
associations will not be able to recruit experienced mariners and 
retain their registered pilots. Without registered pilots, current law 
would prohibit international vessels from transiting the Great 
Lakes.\49\ This vessel traffic would be forced to use other ports or 
another mode of transportation, resulting in a negative impact on the 
regional economy and the economies of Great Lakes ports.
---------------------------------------------------------------------------

    \49\ See 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    A port commenter in comment 35 said pilotage costs now exceed a 
vessel's total operational costs, or the cost of loading and unloading 
vessels.
    Response: In 2015 the average daily operating costs (excluding 
fixed costs) for Great Lakes bulkers and tankers ranged roughly from 
$5,191 to $7,879.\50\ There may be transits for which pilotage costs 
are more than other operating costs during the time operating on the 
Great Lakes, but this will rarely be the case because pilotage is only 
required in the Great Lakes for a portion of most transits. Moreover, 
all of the vessels for which pilotage is required come from ports 
outside the Great Lakes-Seaway system, and most of their voyage time is 
conducted without a pilot's services.
---------------------------------------------------------------------------

    \50\ ``Ship operating costs: Current and future trends'', 
Richard Grenier, Moore Stephens LLP, December 2015. The 2015 
weighted average operating cost is estimated at $5,191 for a 
handysize bulker, $5,771 for a handymax bulker, and $7,879 for a 
product tanker. We assumed these costs include only the costs of 
operating (such crew costs, repairs and maintenance, insurance, 
administration, and dry docking) and do not include any fixed costs 
of the vessels (such as amortization of vessel construction costs).
---------------------------------------------------------------------------

    To estimate the impact of U.S. pilotage costs on the foreign 
vessels affected by the rate adjustment, we used 2012-2014 vessel 
arrival data from the Coast Guard's Ship Arrival Notification System 
(SANS) and pilotage billing data from the Great Lakes Electronic Pilot 
Management System (GLPMS). A random sample of 50 arrivals was taken 
from SANS data. To estimate the impact of pilotage costs on the costs 
of an entire trip, we estimated the length of each one way trip. We 
used the vessel name and the date of the arrival to find the last port 
of call before entering the Great Lakes system. The date of the 
departure from this port was used as the start date of the trip. To 
find the end date of the trip we used GLPMS data to find all the 
pilotage charges associated with this vessel during this trip in the 
Great Lakes system. The end date of the one way trip was taken as the 
last pilotage charge before beginning the trip to exit the system. We 
estimated the total operating cost by multiplying the number of days 
for each by the 2015 average daily operating cost and added this to the 
total pilotage costs from GLPMS for each trip. The total pilotage 
charges for each trip were updated to the 2015 rates using the average 
rate increases in the Great Lakes Pilotage Rates 2012-2015 Annual 
Review and Adjustments final rules.\51\ The total updated pilotage 
charges for each trip were then divided by the total operating cost of 
the trip. We found that the U.S. pilotage costs could account for up to 
17.2 percent \52\ of the total operating costs for a voyage. We also 
estimated the impact of the rate increase in this final rule. We took 
the same 50 trips and updated the pilotage costs to the proposed 2016 
rates. With this rule's rates for 2016, pilotage costs are estimated to 
account for up to 18.8 percent of total operating costs, or a 1.6 
percent increase \53\ over the current cost. The total operating costs 
do not include the fixed costs of the vessels. If these costs are 
included in the total costs, the pilotage rates as a percentage of 
total costs would be lower.
---------------------------------------------------------------------------

    \51\ The average percentage changes in the rates for 2012-2015, 
were -2.62%, 1.87%, 2.5%, and 10%, respectively.
    \52\ For the random sample of 50 arrivals, the average of the 
pilotage costs as a percentage of the total operating costs was 
17.2%. The percentages ranged from a low of 2.1% to a high of 41.2%.
    \53\ 18.8% of total operating costs in 2016-17.2% of total 
operating costs in 2015 = 1.6% incremental increase of pilotage 
costs as a percentage of total operating costs.
---------------------------------------------------------------------------

    A port commenter in comment 42 said our proposed ratemaking 
methodology is ``decoupled from market realities'' and adds costs 
without adding productivity or accountability. The commenter said we 
should set rates to optimize the availability of ``high quality 
pilots'' with ``minimal impact on vessel schedules and routes,'' and 
with the lowest possible costs not directly related to pilotage. A 
pilot association president in comment 56 said that, in fact, pilotage 
associations are subject to market forces because those forces dictate 
the success of each association's efforts to attract and retain talent, 
and because the Coast Guard is required to set rates with consideration 
to the cost of pilotage service, which itself is subject to market 
forces.
    Response: We agree with the pilot association president in comment 
56 that pilotage associations are not ``decoupled'' from market forces, 
for the reasons the president gave. This rule is intended to promote 
safe, efficient, and reliable Great Lakes pilotage. Pilot associations 
have made it clear that they cannot ensure safe pilotage if continued 
low rates make it impossible to attract and retain high quality pilots, 
maintain adequate infrastructure, and provide decent working 
conditions. Shipping interests have made it clear that they will not 
tolerate delays to vessel schedules, or backups on certain vessel 
routes, that are attributable to pilot shortages. This rule lays out 
the vision of a system in which highly capable pilots want to work on 
the Great Lakes, do so safely, and move traffic efficiently and 
reliably. We think every stakeholder wants to see that vision realized. 
However, achieving that level of efficiency and reliability requires a 
comparable level of compensation to attract and support those pilots.
    The presidents' group, in comment 62, said that the ``runaway 
cost''

[[Page 11926]]

argument is flawed because much of the costs over the past decade came 
in 2005, when a delay of many years in promulgating that year's rate 
increase resulted in a large gap between the pilots' incurring of costs 
and new rates to cover those costs.
    Response: We agree with comment 62's accurate explanation for a 
large part of the cost increases cited by the ports.
    Stakeholder representation in the ratemaking process. A port 
commenter in comment 42 said our ratemaking process does not give 
adequate voice to foreign vessel owners or to companies that import or 
export goods through the Great Lakes.
    Response: We do not agree that our process denies foreign interests 
or U.S. importers and exporters a voice in our ratemaking process. 
Under both the old and the new processes, we make various calculations 
to derive tentative rates that we then propose for broad public 
comment. We analyze and carefully consider the public comments before 
finalizing rates. That process is open to the ``public'' wherever it 
resides, and we regularly receive comments from the stakeholders 
mentioned by this commenter. All stakeholders have the same opportunity 
to participate in the ratemaking process.
    In addition, foreign stakeholders and their representatives 
generally attend GLPAC meetings as members of the public, and are able 
to voice their concerns and opinions during those meetings which 
include discussion of recommendations on the future ratemakings.
    Finally, because Great Lakes pilotage is regulated both by the U.S. 
and Canada, the Coast Guard's Director of Great Lakes Pilotage is in 
nearly daily contact with his Canadian counterpart, and together they 
meet regularly with pilots, port representatives, and U.S. and Canadian 
agents for foreign vessel owners and operators. This, plus the 
attendance and representation of Canadian stakeholders at GLPAC 
meetings, ensures that both the Coast Guard and Canadian officials are 
continually aware of the concerns and views of all pilotage 
stakeholders, and can coordinate a binational response, if necessary.
    The ports and shippers coalition, in comment 53, said that our NPRM 
gave ``undue weight'' to the GLPAC recommendations on which the NPRM's 
proposals are based, because GLPAC is no longer representative of all 
stakeholders, particularly foreign shippers and shipping agents who are 
not directly represented on the committee, and is now a ``pilot-
dominated interest group.'' A current GLPAC member AF, who represents 
port interests, denies this charge and stated he believes the charge is 
``offensive and wrong.''
    Response: We disagree with the coalition. Like all Coast Guard 
committees subject to the Federal Advisory Committee Act, GLPAC 
membership is carefully vetted by the Coast Guard and the Department of 
Homeland Security to ensure a fair balance of stakeholder 
representation.
    Moreover, the statute creating GLPAC specifies that six of its 
seven members must be balanced between pilots on one side and ports, 
shippers, and vessel operators on the other, which we believe ensures 
that the pilots will have adequate, but not dominant, representation on 
the committee.\54\ We reiterate that the great weight we give GLPAC 
recommendations is due in no small part to GLPAC's diverse 
representation and the statutory requirement that any GLPAC 
recommendation be approved by at least all but one of its serving 
members.
---------------------------------------------------------------------------

    \54\ See 46 U.S.C. 9307(b)(2).
---------------------------------------------------------------------------

    As we have already stated, although GLPAC does not include any 
foreign members, GLPAC's meetings are open to the public, including 
foreign citizens. As members of the public, Canadian stakeholders, the 
head of the Canadian Great Lakes pilot authority, members of the 
coalition, and their representatives all routinely attend and voice 
their concerns at those meetings.
    Traffic projections and use of multi-year historical traffic data. 
In comment 52, the presidents' group said it is important to note that, 
when we overestimate the shipping traffic that will take place in the 
upcoming shipping season, actual pilot compensation falls below the 
target compensation we project. They supported using a 5-year traffic 
average to more accurately project future traffic, and including all 
pilot time related to an assignment to help set the number of pilots 
needed.
    Response: We agree that traffic overestimates have been a problem 
in the past and that, as a result, pilot revenue has been less than 
necessary to support pilot attraction and retention efforts and the 
maintenance of necessary pilot association infrastructure. We also 
agree that a multi-year average should produce more reliable estimates 
for future traffic projections. We are lengthening our proposed 5-year 
average to include (starting in 2017) 10 years of data, which should 
reduce even further the rate volatility caused by basing rates on 
traffic projections for the upcoming season, rather than on actual past 
experience.
    The ports and shippers coalition, in comment 53, charged that the 
Coast Guard acted arbitrarily in proposing to exclude 2009 and 2014 
traffic volume data from our 5-year average, because we viewed those 
years as ``outliers'' the inclusion of which would distort that 
average. The coalition pointed out that 2015 is on track to mirror 2014 
traffic volume, and that therefore, 2014 should no longer be considered 
an outlier year. In comment AW, the coalition opposed identifying any 
seasons as outliers, for the purpose of projecting future traffic.
    Response: We agree that 2009 and 2014 traffic volume data should be 
included in our calculations. We have reliable traffic data from 2006 
(covering only part of that season) onward, and therefore, for the 2016 
ratemaking we have 9 years of data available for use in our 
calculations (2007-2015). Because our identification of an ``outlier'' 
year would be subjective, and because a 9-year data set will reduce any 
distortion that an outlier year's data could cause, we have decided 
against excluding outlier years from our calculations, and to consider 
all 9 years' data for this ratemaking. By 2017, we will have reliable 
data from 10 full shipping seasons, 2007-2016, and from then on we will 
use data from the 10 most recent seasons.
    The ports and shippers coalition, in comment 53, responded to our 
question asking if there is an objective standard by which we can 
determine whether a particular shipping season should be considered an 
outlier and excluded from our multi-year historic average traffic 
level. They said there is no typical shipping season, that both 2014 
(which we considered an outlier in the NPRM) and 2015 should be 
included, and that we should rely on industry projections to estimate 
future demand.
    Response: We agree that, at least at this time, we cannot identify 
a ``typical'' season. As already discussed, we agree and have decided 
not to identify or exclude outlier shipping seasons from our 
calculations and to expand our data set to include more years.
    We disagree with the coalition's suggestion that we should rely, 
not on historical traffic data, but on industry projections. That was 
our practice for the past 20 years and we repeatedly found it 
unreliable. It led to significant overestimates of the next season's 
traffic, and consequently to revenue shortfalls and overworked pilots. 
Continued use of such projections would jeopardize the safe, efficient, 
and reliable pilotage service that the Coast

[[Page 11927]]

Guard and all stakeholders see as our goal.
    The ports and shippers coalition, in comment 53, responded to our 
question asking for other sources of traffic data for shipping seasons 
prior to 2009 to help identify outlier years. They said we should 
consult industry sources. A pilot association president in comment 56 
also responded to this question, and said his association could provide 
its data for District Three.
    Response: We thank these commenters for their input, however we 
will not identify or exclude outlier years and thus no longer need 
outlier year data to expand our traffic history data set.
    A pilot in comment 55B welcomed the proposed use of a multi-year 
historical average to predict future traffic demand.
    Response: We agree that this will provide a more objective and 
reliable standard than the industry traffic projections that have 
consistently underestimated the next season's traffic volume.
    Miscellaneous issues. The national pilots association in comment 38 
said we should allow a higher return on investment, given a pilot 
association's management responsibilities and exposure to the risk of 
fluctuating traffic levels.
    Response: We disagree. The rate of return is reasonable given the 
nature of a regulated service that precludes any competition.
    A national pilot association, in comment 38, also said that current 
46 CFR 401.451's existing requirement for a minimum of 10 hours between 
a pilot's assignments should be revised upward to reflect the travel 
time that may be necessary for a pilot to reach home or another place 
where the pilot can sleep between assignments.
    Response: We will take this suggestion under advisement but it is 
outside the scope of this rulemaking, which does not address the 
adequacy of Sec.  401.451's 10-hour requirement.
    A national pilot association in comment 38 said we should add 
regulatory language to provide for surcharges between ratemakings, to 
cover unanticipated pilot association expenses.
    Response: We disagree and believe our current annual rate structure 
is sufficient to identify and authorize the need for surcharges.
    A port commenter in comment 48 said the high cost of pilotage could 
be mitigated by eliminating pilotage requirements in large open 
portions of the Great Lakes or where improved navigational tools can 
offset the need for pilotage.
    Response: U.S. Great Lakes pilotage requirements are set by 
statute. The Coast Guard has no authority to change these requirements, 
and therefore, this comment is outside the scope of this rulemaking.
    The national pilots association in comment 49 said we should 
specify that, in setting target pilot compensation, the Coast Guard 
will consider the need to attract and retain the most qualified persons 
to provide safe, efficient, and reliable pilotage.
    Response: We appreciate this comment but find it unnecessary to add 
the suggested language. Our proposed language for Sec.  404.1(a) makes 
it clear that the guiding principle of our ratemaking is to ensure 
safe, efficient, and reliable pilotage service, and it therefore goes 
without saying that we will encourage the hiring and retention of a 
sufficient number of highly qualified persons to provide that service.
    The presidents' group, in comment 52, supported the use of 
automatic annual rate adjustments between base years.
    Response: We agree and believe this will provide all stakeholders 
with more predictable cost information for the interim years.
    The ports and shippers coalition, in comment 53, said we 
arbitrarily departed from our past practice of not requiring a reserve 
allowance for unforeseeable future needs by proposing that our 2016 
rates include a reserve allowance for each pilot association's 
unforeseeable future needs, which the coalition said is contrary to 
generally-accepted rate setting principles. The coalition said that, in 
the past, we recognized only those reasonable and necessary expenses 
that have already been incurred.
    Response: Our rates have always allowed for a fair return on an 
association's revenue, as one way for the association to fund future 
improvements. However, long-term revenue shortages have led to degraded 
infrastructure that threatens safe, efficient, and reliable pilotage. 
This change will ensure that the pilotage associations can build up 
additional reserves to address current and future infrastructure needs 
before they become critical.
    The coalition, in comment 53, said we should consider an 
alternative regulatory tool, negotiated rulemaking to set rates.
    Response: Negotiated rulemaking committees are typically authorized 
and follow a process set by statute.\55\ The coalition correctly 
pointed out that a negotiated rulemaking brings key stakeholders and 
Federal agencies together to develop a consensus recommendation on a 
particular regulation. We accept their statement that it has been used 
85 times in the past, by various agencies. We agree that negotiated 
rulemaking can be a very useful regulatory instrument in certain 
contexts. However, the negotiated rulemaking process is also long and 
complex involving the creation of, and work by, a formal stakeholder 
committee attempting to achieve consensus, in addition to undergoing 
the standard notice and comment process we already follow. Although 
variations on this process are possible, we do not think that 
negotiated rulemaking could work within the constraints of our 
statutory requirement to set rates annually or that it would provide 
stakeholder input not already gained through GLPAC recommendations and 
input from public comment.
---------------------------------------------------------------------------

    \55\ Negotiated Rulemaking Act, codified as 5 U.S.C. 561-570.
---------------------------------------------------------------------------

    A pilot association president in comment 56 said our regulations 
should include a definitions section to provide discipline and 
transparency.
    Response: We appreciate the commenter's concern but think it's 
unnecessary to add a definitions section. Where the regulation does not 
define its own terms, all its terms have ordinary dictionary 
definitions.
    A pilot association president in comment 56 said we proposed 
setting future pilot needs, and setting target compensation based on 
the projected number of pilots, only for the first year of a multi-year 
ratemaking, but not for the out-years, and that we should also cover 
the out-years, lest associations be forced to cancel recuperative rest 
periods to keep up with growing demand. He suggested revising these 
projections during each annual rate review.
    Response: We agree that this is an important consideration for 
implementation of a multi-year rate, but given our intention to 
continue annual ratemakings in the near future, we see no need for 
action with respect to out-years at this time.
    A pilot association president in comment 56 asked us to clarify 
whether proposed Sec.  404.107(b) was intended to adjust rates only in 
his district's (District Three's) designated waters or in both 
designated and undesignated waters. He also supported our proposed 
harmonization of rates in all the

[[Page 11928]]

undesignated waters of his district, to reduce revenue volatility due 
to shifting traffic patterns.
    Response: We believe an adjustment to rates in a district's 
designated waters rates would also require an adjustment to its 
undesignated waters' rates, since the association must meet the same 
revenue requirements regardless of the waters in which assignments take 
place. We agree the rate harmonization in District Three should reduce 
revenue volatility.
    A pilot association president in comment 56 said that the proposed 
cancellation provisions of Sec.  401.420(b) were ill-adapted to the 
large distances found in District Three, where a pilot might have to 
begin traveling to a pickup point long before the order for his 
services becomes final.
    Response: We agree with the president's comments but are unsure of 
a remedy that would be appropriate across all districts, and we have 
never issued regulations that apply to only one district. We defer 
action on this comment until a future rulemaking and we welcome further 
comment on an appropriate solution for this district based on the 
results of 2016.
    A pilot association president in comment 56 said, with respect to 
the proposed vessel trip delay and pilot detention language in Sec.  
401.420(c), that weather conditions in November often produce these 
delays, and that therefore, we should modify our proposed exception to 
the rule, from May through November, that vessels are responsible for 
compensating a pilot for weather-related delay or detention.
    Response: We will take this suggestion under advisement. We think 
more analysis is required before we adjust the calendar exclusions, and 
we welcome further input from the president on this issue.
    With respect to the ``overcarriage'' provisions of proposed Sec.  
401.428(a), a pilot association president in comment 56 said there is 
confusion between what we meant by ``change points'' in this section 
and what we meant by the term in proposed Sec.  401.450. He interpreted 
the former provisions to relate only to one of the eight change points 
where vessels normally do not stop unless they are changing pilots, and 
that a pilot should be compensated whenever his overcarriage results 
from factors beyond his control.
    Response: ``Overcarriage'' refers to a pilot being kept on board a 
vessel past the normal change point. The change points to which Sec.  
401.428 refers are those listed in Sec.  401.450. We do not agree that 
a pilot should be compensated for any overcarriage for which the pilot 
is not responsible. For example, a pilot would not be responsible for a 
weather delay, but (except at the beginning and end of the season) 
neither would it be fair for the vessel to have to pay for an 
unforeseen weather event.
    A pilot association president in comment 56 said that the vast 
majority of harbor moves in District Three are short jobs that require 
extensive pilot travel, and that because these moves are compensated at 
the lower undesignated waters rate, there is no industry incentive to 
eliminate unnecessary moves. Therefore he favored compensating these 
assignments at the higher designated waters rate.
    Response: We disagree. These moves occur in undesignated waters and 
thus must be billed at the undesignated rate. However, the travel costs 
for these jobs are necessary and reasonable expenses that will be 
reflected in future rates. We welcome further proposals from the 
president for improving the dispatching system to make better use of 
pilot resources.
    A port commenter in comment AB supported the new rates but said we 
need to maintain strict oversight to ensure that the rates are used 
largely to hire and train new pilots and to retain current pilots.
    Response: We monitor the pace at which the pilotage associations 
hire and train pilots, and the overall size of their pilot pools, and 
in each of our annual ratemakings we report to the public on the number 
of pilots currently on hand in each association. We also closely 
monitor the training of all new pilots as a routine part of issuing 
registrations to Great Lakes Pilots. We think this provides the strict 
oversight the commenter requested.

VI. Discussion of Rate Changes

    We proposed new rates and a temporary surcharge (for pilot hiring 
and training) for 2016. We reviewed the independent accountant's 
financial reports for each association's 2013 expenses and revenues. 
Those reports, which include pilot comments on draft versions and the 
accountant's response to those comments, appear in the docket.\56\
---------------------------------------------------------------------------

    \56\ See ``Summary--Independent Accountant's Report on Pilot 
Association Expenses, with Pilot Association Comments and 
Accountant's Responses.''
---------------------------------------------------------------------------

    We are setting new rates, applying our new ratemaking methodology 
as follows:
    Recognize previous year's operating expenses (Sec.  404.101). We 
reviewed and accepted the accountant's final findings on the 2013 
audits of association expenses, as shown in Figures 8 through 10.

                                 Figure 8--Recognized expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                           -----------------------------------------------------
                                                                 Area 1            Area 2
                Reported expenses for 2013                     designated       undesignated
                                                           ------------------------------------       Total
                                                              St. Lawrence
                                                                  River         Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Pilot subsistence/Travel..........................          $281,488          $168,508          $449,996
        License insurance.................................            26,976            25,010            51,986
        Payroll taxes.....................................            65,826            51,244           117,070
        Other.............................................             6,925             5,460            12,385
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total other pilotage costs....................           381,215           250,222           631,437
    Pilot Boat and Dispatch Costs:
        Pilot boat expense................................           131,193           102,077           233,270
        Dispatch expense..................................  ................  ................  ................
        Payroll taxes.....................................             9,169             7,230            16,399
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total pilot and dispatch costs................           140,362           109,307           249,669

[[Page 11929]]

 
    Administrative Expenses:
        Legal--general counsel............................               631               498             1,129
        Legal--shared counsel (K&L Gates).................            12,736            10,040            22,776
        Insurance.........................................            22,525            17,756            40,281
        Employee benefits.................................            11,063             7,868            18,931
        Payroll taxes.....................................             5,190             4,093             9,283
        Other taxes.......................................            22,175            17,486            39,661
        Travel............................................               524               413               937
        Depreciation/auto leasing/other...................            42,285            33,333            75,618
        Interest..........................................            15,151            11,943            27,094
        APA Dues..........................................            13,680            10,830            24,510
        Dues and subscriptions............................               280               220               500
        Utilities.........................................             4,920             3,878             8,798
        Salaries..........................................            54,153            42,691            96,844
        Accounting/Professional fees......................             5,091             4,009             9,100
        Pilot Training....................................  ................  ................  ................
        Other.............................................             8,834             6,954            15,788
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Administrative Expenses.................           219,238           172,012           391,250
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (Other Costs + Pilot            740,815           531,541         1,272,356
             Boats + Admin)...............................
Proposed Adjustments (Independent CPA):
        Payroll taxes.....................................           (1,855)           (1,750)           (3,605)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        TOTAL CPA ADJUSTMENTS.............................           (1,855)           (1,750)           (3,605)
Proposed Adjustments (Director):
    Dues and subscriptions................................             (280)             (220)             (500)
    APA Dues..............................................           (2,052)           (1,625)           (3,677)
    Legal--shared counsel (K&L Gates).....................          (12,736)          (10,040)          (22,776)
    Dock Adjustment *.....................................            11,936             9,409            21,345
    Surcharge Adjustment **...............................          (54,481)          (42,948)          (97,429)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        TOTAL DIRECTOR'S ADJUSTMENTS......................          (57,613)          (45,424)         (103,037)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (OpEx + Adjustments).           681,347           484,368         1,165,715
----------------------------------------------------------------------------------------------------------------
* Based on the discussion without objection in the 2014 GLPAC meeting on this subject, this adjustment allocates
  $21,345 to District 1 to ensure complete recoupment of costs associated with upgrading the dock in Cape
  Vincent. Revenue projection shortfalls, confirmed by the revenue audits, resulted in District 1 not fully
  recouping the costs of the dock through previous rulemakings.
** District One collected $146,424.01 with an authorized 3% surcharge in 2014. The adjustment represents the
  difference between the collected amount and the authorized amount of $48,995 authorized in the 2014 final
  rule.
Note: Numbers may not total due to rounding.

                                 Figure 9--Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                           -----------------------------------------------------
                                                                 Area 4            Area 5
                                                              undesignated       designated
                Reported expenses for 2013                 ------------------------------------
                                                                               Southeast Shoal        Total
                                                                Lake Erie      to Port Huron,
                                                                                     MI
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Pilot subsistence/Travel..........................           $84,164          $126,246          $210,410
        License insurance.................................             6,168             9,252            15,420
        Payroll taxes.....................................            44,931            67,397           112,328
        Other.............................................            33,021            49,532            82,553
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total other pilotage costs....................           168,284           252,427           420,711
    Pilot Boat and Dispatch Costs:
        Pilot boat expense................................           142,936           214,405           357,341
        Dispatch expense..................................             7,080            10,620            17,700
        Employee benefits.................................            60,665            90,997           151,662
        Payroll taxes.....................................             8,316            12,474            20,790
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total pilot and dispatch costs................           218,997           328,496           547,493
    Administrative Expenses:
        Legal--general counsel............................             3,414             5,122             8,536
        Legal--shared counsel (K&L Gates).................             7,304            10,956            18,260
        Legal--USCG litigation............................               231               346               577
        Office rent.......................................            26,275            39,413            65,688
        Insurance.........................................             9,175            13,762            22,937
        Employee benefits.................................            20,586            30,879            51,465

[[Page 11930]]

 
        Payroll taxes.....................................             4,899             7,349            12,248
        Other taxes.......................................            14,812            22,217            37,029
        Depreciation/auto leasing/other...................            22,956            34,434            57,390
        Interest..........................................             3,439             5,159             8,598
        APA Dues..........................................             8,208            12,312            20,520
        Utilities.........................................            14,310            21,465            35,775
        Salaries..........................................            42,633            63,949           106,582
        Accounting/Professional fees......................             9,294            13,940            23,234
        Pilot Training....................................  ................  ................  ................
        Other.............................................             9,757            14,638            24,395
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Administrative Expenses.................           197,293           295,941           493,234
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (Other Costs + Pilot            584,574           876,864         1,461,438
             Boats + Admin)...............................
Proposed Adjustments (Independent CPA):
    Insurance.............................................           (2,362)           (3,544)           (5,906)
    Employee benefits.....................................             (360)             (541)             (901)
    Depreciation/auto leasing/other.......................           (6,391)           (9,587)          (15,978)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        TOTAL CPA ADJUSTMENTS.............................           (9,113)          (13,672)          (22,785)
Proposed Adjustments (Director):
    APA Dues..............................................           (1,231)           (1,847)           (3,078)
    Legal--shared counsel (K&L Gates).....................           (7,304)          (10,956)          (18,260)
    Legal--USCG litigation................................             (231)             (346)             (577)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        TOTAL DIRECTOR'S ADJUSTMENTS......................           (8,766)          (13,149)          (21,915)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (OpEx + Adjustments).           566,695           850,043         1,416,738
----------------------------------------------------------------------------------------------------------------

                                Figure 10--Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                   Recognizable expenses                                       District Three
----------------------------------------------------------------------------------------------------------------
                                                              Areas 6 and 8        Area 7
                                                              undesignated       designated
                                                           ------------------------------------
                Reported Expenses for 2013                    Lakes Huron,                            Total
                                                              Michigan, and   St. Mary's River
                                                                Superior
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Pilot subsistence/Travel..........................          $337,978          $112,660          $450,638
        License insurance.................................            13,849             4,616            18,465
        Payroll taxes.....................................  ................  ................  ................
        Other.............................................            15,664             5,221            20,885
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total other pilotage costs....................           367,491           122,497           489,988
    Pilot Boat and Dispatch Costs:
        Pilot boat expense................................           435,353           145,118           580,471
        Dispatch expense..................................           140,440            46,814           187,254
        Payroll taxes.....................................            15,680             5,227            20,907
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total pilot and dispatch costs................           591,473           197,159           788,632
    Administrative Expenses:
        Legal--general counsel............................               567               189               756
        Legal--shared counsel (K&L Gates).................            20,260             6,754            27,014
        Office rent.......................................             7,425             2,475             9,900
        Insurance.........................................             8,098             2,699            10,797
        Employee benefits.................................           123,002            41,001           164,003
        Payroll taxes.....................................            10,272             3,424            13,696
        Other taxes.......................................             1,383               461             1,844
        Depreciation/auto leasing/other...................            24,237             8,079            32,316
        Interest..........................................             2,403               801             3,204
        APA Dues..........................................            18,895             6,299            25,194
        Dues and subscriptions............................             4,275             1,425             5,700
        Utilities.........................................            32,672            10,891            43,563
        Salaries..........................................            89,192            29,731           118,923
        Accounting/Professional fees......................            20,682             6,894            27,576
        Pilot Training....................................  ................  ................  ................
        Other.............................................            11,260             3,753            15,013
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        Total Administrative Expenses.....................           374,623           124,876           499,499
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr

[[Page 11931]]

 
        Total Operating Expenses (Other Costs + Pilot              1,333,587           444,532         1,778,119
         Boats + Admin)...................................
Proposed Adjustments (Independent CPA):
    Pilot subsistence/Travel..............................           (5,183)           (1,728)           (6,911)
    Payroll taxes.........................................           103,864            34,621           138,485
    Dues and subscriptions................................           (4,275)           (1,425)           (5,700)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        TOTAL CPA ADJUSTMENTS.............................            94,406            31,468           125,874
Proposed Adjustments (Director):
    APA Dues..............................................           (2,834)             (945)           (3,779)
    Legal--shared counsel (K&L Gates).....................          (20,260)           (6,754)          (27,014)
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
TOTAL DIRECTOR'S ADJUSTMENTS..............................          (23,094)           (7,699)          (30,793)
                                                           -----------------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).         1,404,899           468,301         1,873,200
----------------------------------------------------------------------------------------------------------------

    Project next year's operating expenses, adjusting for inflation or 
deflation (Sec.  404.102). We base our 2014 and 2015 inflation 
adjustments on BLS data from the Consumer Price Index for the Midwest 
Region of the United States,\57\ and project it for 2016 based on the 
target inflation rate set by the Federal Reserve,\58\ as shown in 
Figures 11 through 13.
---------------------------------------------------------------------------

    \57\ Available at http://www.bls.gov/data. Select ``One Screen 
Data Search'' under ``All Urban Consumers (Current Series) (Consumer 
Price Index--CPI)''. Then select ``Midwest urban'' from Box 1 and 
``All Items'' from Box 2. Our numbers for 2014 and 2015 are 
generated through this query and formatted to show annual percentage 
changes (available through ``More Formatting'' link).
    \58\ Further discussion available on the Federal Reserve target 
inflation rate is on their Web site at http://www.federalreserve.gov/newsevents/press/monetary/20160127b.htm, 
http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm, and http://www.federalreserve.gov/faqs/money_12848.htm

                                  Figure 11--Inflation Adjustment, District One
----------------------------------------------------------------------------------------------------------------
                                                                                   District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $681,347        $484,368      $1,165,715
2014 Inflation Modification (@1.4%).............................           9,539           6,781          16,320
2015 Inflation Modification (@1.5%).............................          10,363           7,367          17,731
2016 Inflation Modification (@2%)...............................          14,025           9,970          23,995
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Adjusted 2016 Operating Expenses............................         715,274         508,486       1,223,760
----------------------------------------------------------------------------------------------------------------

                                  Figure 12--Inflation Adjustment, District Two
----------------------------------------------------------------------------------------------------------------
                                                                                   District Two
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $566,695        $850,043      $1,416,738
2014 Inflation Modification (@1.4%).............................           7,934          11,901          19,834
2015 Inflation Modification (@1.5%).............................           8,619          12,929          21,549
2016 Inflation Modification (@2%)...............................          11,665          17,497          29,162
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Adjusted 2016 Operating Expenses............................         594,913         892,370       1,487,283
----------------------------------------------------------------------------------------------------------------

                                 Figure 13--Inflation Adjustment, District Three
----------------------------------------------------------------------------------------------------------------
                                                                                  District Three
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,404,899        $468,301      $1,873,200
2014 Inflation Modification (@1.4%).............................          19,669           6,556          26,225
2015 Inflation Modification (@1.5%).............................          21,369           7,123          28,491
2016 Inflation Modification (@2%)...............................          28,919           9,640          38,558
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Adjusted 2016 Operating Expenses................................       1,474,855         491,620       1,966,474
----------------------------------------------------------------------------------------------------------------

[[Page 11932]]

    Determine number of pilots needed (Sec.  404.103). We first 
consider if reliable traffic data are available from up to the 10 most 
recent full shipping seasons. In this case, we have reliable data from 
the Great Lakes Pilotage Management System dating back to 2007. This 
gives us 9 years of data (2007-2015) that we can use for this year's 
ratemaking. Beginning with next year's ratemaking, and for all 
subsequent ratemakings, we should have reliable data for 10 years of 
full shipping seasons.
    Next, we calculate the average cycle time associated with each 
pilot assignment, in each area. In the future, we intend to use Great 
Lakes Electronic Pilot Management System (GLPMS) data to track cycle 
time, but that data is not available for our current base period. Our 
best source for that base period's cycle time is the Bridge Hour 
Definition and Methodology Final Report prepared on our behalf in 
2013.\59\ Although we expect GLPMS data to produce better data in the 
future, the 2013 report relied heavily on pilot input and drafts were 
made widely available to the pilots for their review and comment. 
Figure 14 shows the 2013 report's calculation of the pilot work cycle 
for each area.
---------------------------------------------------------------------------

    \59\ Bridge Hour Definition and Methodology Final Report, 
MicroSystems Integration, Inc. (June 25, 2013), available in the 
docket and at http://www.uscg.mil/hq/cg5/cg552/pilotage.asp. This 
analysis is detailed in Appendix B of the report, on page B-10.

                                                                               Figure 14--Cycle Time, 2013 Report
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                       Total time on                       Pilot
                                        Trip  time     Travel (hrs)     Pilot boat     Delay  (hrs)    Admin  (hrs)     assignment    Mandatory rest    assignment
                                           (hrs)                       transit (hrs)                                       (hrs)           (hrs)       cycle  (hrs)
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
D1:
    Area 1..........................             7.7             2.9             0.3             0.7             0.5            12.1              10            22.1
    Area 2..........................            10.4             4.0             0.6             0.9             0.5            16.4              10            26.4
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Area 3..........................                                            Welland Canal Exclusive to Canadian Pilots
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
D2:
    Area 4..........................            11.1             4.2             0.4             0.7             0.5            16.9              10            26.9
    Area 5..........................             6.1             2.3             0.9             0.4             0.5            10.2              10            20.2
D3:
    Area 6..........................            22.5             1.6             0.8             1.0             0.5            26.4              10            36.4
    Area 7..........................             7.1             1.4             2.2             0.3             0.5            11.5              10            21.5
    Area 8..........................            21.6             1.8             1.9             3.3             0.5            29.1              10            39.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    We then determine the average peak late-season traffic demand over 
the base period, as shown in Figure 15. Figure 15 also shows the 
average number of pilots that would have been needed to meet the peak 
demand, and for comparison purposes shows the average number (39) of 
needed and authorized pilots for 2007-2015.

                                        Figure 15--Average Peak Traffic Demand and Pilot Requirements, 2007-2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             District One                      District Two                              District Three
                                  ----------------------------------------------------------------------------------------------------------------------
                                        Area 1           Area 2           Area 4           Area 5           Area 6           Area 7           Area 8
                                     (designated)    (undesignated)   (undesignated)    (designated)    (undesignated)    (designated)    (undesignated)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average late-season peak                         5                5                5                5                5                5                5
 assignments per day.............
Average number of pilots needed                 10                5                5               10                7               10                7
 to meet peak demand (total = 54)
Average authorized pilots, 2007-                 6                5                4                6                8                4                6
 2015 (total = 39)...............
Authorized pilots, 2015 (total =                 6                5                4                6                6                4                5
 36).............................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As shown in Figure 14, according to the 2013 report cycle time for 
pilots in designated waters is a little over 20 hours. This implies 
that, on average in late seasons over the base period, one pilot could 
move one vessel per day. However, to fully meet peak season demand, the 
pilot associations must be staffed to provide double pilotage, and 
Figure 15 reflects that doubling in the number of pilots needed in the 
designated waters of Areas 1, 5, and 7.
    Except in extreme circumstances, double pilotage is not required in 
the open and undesignated waters of Areas 2, 4, 6, and 8, and Figure 15 
shows no doubling in those areas. However, Figure 14 does show a 50 
percent increase from the one pilot-one vessel standard in undesignated 
Areas 6 and 8, which are located in the large western Great Lakes. 
Areas 6 and 8 are not contiguous, but both flank the designated waters 
of Area 7. Travel times in Areas 6 and 8 are greater than they are in 
the undesignated waters of smaller Lakes Erie and Ontario, and on 
average a pilot needs approximately 1.5 days per vessel, not just 1, to 
move a vessel. Therefore, Figure 15 shows 7 pilots, not 5, in each of 
Areas 6 and 8. This number will ensure that the five ships shown as 
moving daily through Area 7 could be moved through the undesignated 
waters at the same rate.
    Based on our Figure 15 numbers, and as shown in Figure 16, we find 
that 54 pilots are needed over the period for which 2016 base rates 
will be in effect, as opposed to the 36 currently authorized pilots 
shown in Figure 15. Figure 16 also shows that based on our best current 
information we project there will be only 37 fully working and fully 
compensated pilots (``working pilots'') in 2016. This decrease from our 
initial projections in the NPRM is based on feedback from the pilot 
associations. However, we have increased the number of applicants 
funded via surcharge significantly from the NPRM, again based on pilot 
association feedback, to

[[Page 11933]]

help the pilot associations close the gap between needed pilots and 
working pilots as soon as possible.

                            Figure 16--Pilots Needed; Pilots Projected To Be Working
----------------------------------------------------------------------------------------------------------------
                                                                 District One     District Two    District Three
----------------------------------------------------------------------------------------------------------------
Needed pilots, period for which 2016 rates are in effect                    15               15               24
 (total = 54)................................................
Working pilots projected for 2016 (total = 42)...............               12               12               13
----------------------------------------------------------------------------------------------------------------

    Determine target pilot compensation (Sec.  404.104). Coast Guard 
analysis and calculations. For this 2016 ratemaking, we considered 
three possible sources for benchmark compensation data, and we selected 
GLPA data for that benchmark because they provide the most comparable 
compensation for comparable work under comparable conditions. Recent 
GLPA compensation is shown in Figure 17. The compensation in 2013 and 
2014 is increased based on additional information supplied by the GLPA, 
documenting how they compensate full-time, part-time, and contract 
pilots. We believe only compensation associated with fulltime Canadian 
pilots should be used as a basis of comparison to set the benchmark for 
U.S. Registered Pilots.
---------------------------------------------------------------------------

    \60\ http://www.glpa-apgl.com/annualReports_e.asp. Also, see 
GLPA updates posted to the public docket. 2013 and 2014 figures are 
calculated by including only full-time compensation information for 
GLPA pilots. Part-time and contract pilots are excluded from the 
figures.

      Figure 17--Comparing Pilot Compensation and Wage Information
------------------------------------------------------------------------
                                                          Average GLPA
                                                          compensation
                                                           \60\ (CAD)
------------------------------------------------------------------------
2011..................................................          $233,567
2012..................................................           247,145
2013..................................................           273,145
2014..................................................           329,045
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
  Average.............................................           270,726
------------------------------------------------------------------------

    GLPA pilots provide service that is almost identical to the service 
provided by U.S. Great Lakes pilots. However, unlike the U.S. pilots, 
GLPA pilots are government employees with guaranteed minimum 
compensation, increases for high-traffic periods, benefits (retirement, 
healthcare, vacation), limited professional liability, and guaranteed 
time off during the shipping season.
    Figures 18 through 20 show actual GLPA compensation figures for 
2011-2014, adjust for foreign exchange differences and inflation,\61\ 
and project future GLPA compensation for 2015 and 2016.
---------------------------------------------------------------------------

    \61\ Based on Midwest CPI-U from BLS. Available at http://www.bls.gov/data. Select ``One Screen Data Search'' under ``All 
Urban Consumers (Current Series) (Consumer Price Index--CPI)''.). 
Then select ``Midwest urban'' from Box 1 and ``All Items'' from Box 
2. Our numbers for 2011-2014 are generated through this query and 
formatted to show annual percentage changes.
    \62\ All figures reflect annual average currency conversions for 
the time periods provided, using exchange rates provided by the 
Internal Revenue Service. See http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates.

   Figure 18--Recent History of Canadian GLPA Pilot Compensation \62\
------------------------------------------------------------------------
                                               GLPA            GLPA
                  Year                     Compensation    Compensation
                                               (CAD)           (USD)
------------------------------------------------------------------------
2014....................................        $329,045        $286,375
2013....................................         273,145         255,037
2012....................................         247,145         237,639
2011....................................         233,567         226,984
------------------------------------------------------------------------

    Figure 19 adjusts these figures for inflation in each year.
---------------------------------------------------------------------------

    \63\ See footnote 64 for supporting inflation data. See also our 
earlier discussion of the Federal Reserve's target inflation rate 
for 2016 projections. See also the Bank of Canada's 2% target 
inflation rate at http://www.bankofcanada.ca/core-functions/monetary-policy/inflation/

                                                          Figure 19--Inflation Adjustments \63\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            2012         2013         2014         2015         2016
                                                         USD  (from      Inflation    Inflation    Inflation    Inflation    Inflation     Total  (2016
                        Year                             Figure 16)      adjustment   adjustment   adjustment   adjustment   projection        USD)
                                                                          (@3.2%)       (@2%)       (@1.4%)      (@1.5%)      (@2%) *
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014................................................          $286,375  ...........  ...........  ...........       $4,296       $5,728         $296,398
2013................................................           255,037  ...........  ...........        3,571        3,826        5,101          267,534
2012................................................           237,639  ...........        4,753        3,327        3,565        4,753          254,036
2011................................................           226,984        7,263        4,540        3,178        3,405        4,540          249,909
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Figure 20 shows the year-on-year percentage change in GLPA 
compensation, converted to 2016 USD.

         Figure 20--Analysis of Canadian GLPA Pilot Compensation
------------------------------------------------------------------------
                                               GLPA           Percent
                  Year                     compensation       change
------------------------------------------------------------------------
2014....................................        $296,398            10.8
2013....................................         267,534             5.3
2012....................................         254,037             1.7
2011....................................         249,910  ..............
------------------------------------------------------------------------

    We base our target pilot compensation on 2013 GLPA compensation, 
because it provides a more reliable benchmark than 2014, which saw a 
sharp rise from the previous trend, probably due to a 17 percent 
Canadian traffic increase in 2014, compounded by extended ice 
conditions.
    Based on 2013 GLPA compensation, Figure 21 shows our projection for 
GLPA's 2016 compensation. Compensation is increased at 3.5 percent 
annually, the average growth rate of Canadian compensation between 2011 
and 2013.

      Figure 21--Projected Increases in Canadian Great Lakes Pilot
                            Compensation \64\
------------------------------------------------------------------------
                                                          Projected GLPA
                          Year                             compensation
                                                           (2016 USD) *
------------------------------------------------------------------------
2016...................................................         $296,467
2015...................................................          286,491
2014...................................................          276,850

[[Page 11934]]

 
2013...................................................          267,534
------------------------------------------------------------------------

    The difference in the status of U.S. and Canadian pilots, and the 
different compensation systems in place in the two countries are 
supportable circumstances for adjusting U.S. target pilot compensation 
by 10 percent over the projected 2016 GLPA figure, taking the U.S. 
target to $326,114, as shown in Figure 22. Several speakers at the 2014 
GLPAC meetings \65\ cited the 10 percent figure, and no other, as an 
appropriate adjustment for those differences. Public comments on the 
NPRM did not provide sufficient basis to adopt the target figures 
recommended by the pilots, $355,000 and almost $394,000. Figure 22 also 
shows total target compensation for each district, which is the 
individual target multiplied by the district's number of working 
pilots.
---------------------------------------------------------------------------

    \64\ Figures are expressed in USD. Each year's compensation 
increases 3.5% in line with average compensation increases in 2012 
and 2013.
    \65\ Transcript (7/24/2014), pp. 43-45.

                             Figure 22--Total Target Pilot Compensation per District
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Target compensation per pilot...................................        $326,114        $326,114        $326,114
Number of working pilots........................................              12              12              13
                                                                 -----------------------------------------------
    District target pilot compensation (total = $12,066,225)....      $3,913,370      $3,913,370      $4,239,485
----------------------------------------------------------------------------------------------------------------

    Determine return on investment (Sec.  404.105). The 2013 average 
annual rate of return for new issues of high-grade corporate securities 
was 4.24 percent,\66\ which as shown in Figure 25 we use in setting 
each district's allowed return on investment.
---------------------------------------------------------------------------

    \66\ Based on Moody's AAA corporate bonds. See http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                                                             Figure 23--Return on Investment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   District One                    District Two                   District Three
                                                         -----------------------------------------------------------------------------------------------
                                                            Designated     Undesignated    Undesignated     Designated     Undesignated     Designated
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)....................        $715,274        $508,486        $594,913        $892,370      $1,474,855        $491,620
Total Target Pilot Compensation (Step 4)................       2,282,799       1,630,571       1,630,571       2,282,799       2,935,028       1,304,457
Total 2016 Expenses.....................................       2,998,074       2,139,057       2,225,484       3,175,170       4,409,882       1,796,077
Return on Investment (4.24%)............................         127,118          90,696          94,361         134,627         186,979          76,154
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Project needed revenue (Sec.  404.106). Figure 24 shows each 
district's 2016 needed revenue. The projected needed revenue for all 
districts is $17,453,678, up from 2015's latest projections of revenue 
of $15,588,653.

                                                                Figure 24--Revenue Needed
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   District One                    District Two                   District Three
                                                         -----------------------------------------------------------------------------------------------
                                                            Designated     Undesignated    Undesignated     Designated     Undesignated     Designated
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)....................        $715,274        $508,486        $594,913        $892,370      $1,474,855        $491,620
Total Target Pilot Compensation (Step 4)................       2,282,799       1,630,571       1,630,571       2,282,799       2,935,028       1,304,457
Return on Investment (Step 5)...........................         127,118          90,696          94,361         134,627         186,979          76,154
                                                         -----------------------------------------------------------------------------------------------
    Total Revenue Needed (Total = $17,453,678)..........       3,125,192       2,229,753       2,319,844       3,309,797       4,596,861       1,872,230
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Set initial base rates (Sec.  404.107). Figure 25 shows how we set 
initial base rates using pilot hours worked in our multi-year base 
period. This year, the base period includes data from the previous nine 
full shipping seasons from 2007 to 2015. By the 2018 ratemaking, we 
will have 10 year's data, and thereafter we will use the most recent 10 
seasons for our base period.

                                         Figure 25--Hours Worked, 2007-2015, Designated and Undesignated Waters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   District One                    District Two                   District Three
                                                         -----------------------------------------------------------------------------------------------
                                                            Designated     Undesignated    Undesignated     Designated     Undesignated     Designated
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015....................................................            5743            6667            6535            5967           22824            2696
2014....................................................            6810            6853            7856            7001           25833            3835
2013....................................................            5864            5529            4603            4750           17115            2631

[[Page 11935]]

 
2012....................................................            4771            5121            3848            3922           15906            2163
2011....................................................            5045            5377            3708            3680           16012            1678
2010....................................................            4839            5649            5565            5235           20211            2461
2009....................................................            3511            3947            3386            3017           12520            1820
2008....................................................            5829            5298            4844            3956           14287            2286
2007....................................................            6099            5929            6223            6049           24811            5944
                                                         -----------------------------------------------------------------------------------------------
    Average.............................................            5390            5597            5174            4842           18835            2835
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Figure 26 shows our new initial rate calculations.

                                                            Figure 26--Rate Calculations \67\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   District One                    District Two                   District Three
                                                         -----------------------------------------------------------------------------------------------
                                                            Designated     Undesignated    Undesignated     Designated     Undesignated     Designated
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Needed (Step 6).................................      $3,125,192      $2,229,753      $2,319,844      $3,309,797      $4,596,861      $1,872,230
Average time on task 2007-2015..........................           5,390           5,597           5,174           4,842          18,835           2,835
Hourly Rate.............................................            $580            $398            $448            $684            $244            $660
--------------------------------------------------------------------------------------------------------------------------------------------------------

    District Three's rate for designated waters would be more than 
twice its rate for undesignated waters. Therefore, as shown in Figure 
27, we apply a ratio to balance those rates so that the rate for 
designated waters is no more than twice the rate for undesignated 
waters while maintaining the same overall revenue requirement for the 
district.
---------------------------------------------------------------------------

    \6\ Rounded.

        Figure 27--District Three--Capped Designated Waters Rate
------------------------------------------------------------------------
                                                 District Three
                                       ---------------------------------
                                           Areas 6, 8         Area 7
                                          undesignated      designated
------------------------------------------------------------------------
Revenue Needed........................       $4,972,265       $1,496,827
Projected Pilotage Demand.............           18,835            2,835
Hourly Rate...........................             $264             $528
------------------------------------------------------------------------

    Review and finalize rates (Sec.  404.108). We are working with the 
pilotage associations to close the gap between the 37 working pilots we 
project for 2016 and the 54 pilots required to fulfill pilotage demand 
by training 11 applicant pilots during 2016. This requires expensive 
recruitment and training for these new pilots and ongoing training for 
the working pilots. Our usual practice of reimbursing training expenses 
only after they are incurred would delay that reimbursement for several 
years and reduce association funds for other vital purposes. This is a 
supportable circumstance for imposing a necessary and reasonable 
temporary 2016 surcharge for 2016 training expenses, which we will 
validate and adjust as necessary during our audit of actual 2016 
association expenses. In the NPRM, we projected that the associations 
would hire 6 new pilots in 2016 at a training cost of $150,000 per 
pilot, for a total training cost of $900,000. We have modified pilot 
strength based on the pilot association's guidance for the number of 
registered and applicant pilots. This changed the revenue required for 
the districts by shifting pilots from our registered pilot estimates to 
applicants paid for by the surcharge. We project that the associations 
will hire 11 new pilots in 2016, at a total training cost of about 
$150,000 per pilot, as shown in Figure 28.

                                  Figure 28--Surcharge Calculation by District
----------------------------------------------------------------------------------------------------------------
                                                                 District One     District Two    District Three
----------------------------------------------------------------------------------------------------------------
Projected Needed Revenue.....................................       $5,354,945       $5,629,641       $6,469,092
Training Surcharge...........................................         $450,000         $300,000         $900,000
Percent Surcharge............................................               8%               5%              14%
----------------------------------------------------------------------------------------------------------------

[[Page 11936]]

VII. Regulatory Analyses

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

A. Regulatory Planning and Review

    Executive Orders 13563 and 12866 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 effects, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    This rule has not been designated a ``significant regulatory 
action'' under section 3(f) of Executive Order 12866. Accordingly, this 
rule has not been reviewed by the Office of Management and Budget 
(OMB).
    We developed an analysis of the costs and benefits of the final 
rule to ascertain its probable impacts on industry. The following 
figure summarizes the affected population, costs, and benefits of the 
final rule.

                                Figure 29--Summary of Regulatory Economic Impacts
----------------------------------------------------------------------------------------------------------------
                                                      Affected
         Category               Description          population          2016 Costs              Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes..............  Under the Great      126 vessels         $3,515,025........  --New rates cover an
                             Lakes Pilotage Act   journeying the                          association's
                             of 1960, Coast       Great Lakes                             necessary and
                             Guard is required    system annually.                        reasonable operating
                             to review and                                                expenses.
                             adjust base                                                 --Provides fair
                             pilotage rates                                               compensation, adequate
                             annually.                                                    training, and
                                                                                          sufficient rest
                                                                                          periods for pilots.
                                                                                         --Ensures the
                                                                                          association makes
                                                                                          enough money to fund
                                                                                          future improvements.
Procedural Changes........  Changes to the       3 pilot             No direct cost for  --Provide maximum
                             annual ratemaking    associations.       procedural          transparency and
                             methodology.                             changes but         simplicity in the
                                                                      indirect costs      ratemaking
                                                                      could be changed    methodology.
                                                                      in annual rate     --Make submitting data
                                                                      changes due to      easier for pilots and
                                                                      procedure           more accurate.
                                                                      revision.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on 
the Great Lakes annually. See Parts III and IV of this preamble for 
detailed discussions of the Coast Guard's legal basis and purpose for 
this rulemaking and for background information on Great Lakes pilotage 
ratemaking. Based on our annual review for this rulemaking, we are 
adjusting the pilotage rates for the 2016 shipping season so pilot 
associations can generate sufficient revenues to reimburse their 
necessary and reasonable operating expenses, fairly compensate trained 
and rested pilots, and provide an appropriate profit to use for 
improvements. The rate changes in this rule would lead to an increase 
in the cost per unit of service to shippers in all three districts, and 
result in an estimated annual cost increase to shippers of 
approximately $1,865,025 across all three districts over 2015 payments 
(Figure 27).
    In addition to the increase in payments that would be incurred by 
shippers in all three districts from the previous year as a result of 
the rate changes, we are authorizing a temporary surcharge to allow the 
pilotage associations to recover training expenses that would be 
incurred in 2016. We estimate that District One will incur $450,000, 
District Two will incur $300,000, and District Three will incur 
$900,000 in training expenses. These temporary surcharges would 
generate a combined $1,650,000 in revenue for the pilotage associations 
across all three districts. Note that in the NPRM, we projected that 
the associations would hire 6 new pilots in 2016 at a training cost of 
$150,000 per pilot, for a total training cost of $900,000. We have 
modified pilot strength based on the pilot association's guidance for 
the number of registered and applicant pilots and project that the 
associations will hire 11 new pilots in 2016.
    Therefore, after accounting for the implementation of the temporary 
surcharges across all three districts, the annual payments made by 
shippers during the 2016 shipping season are estimated to be 
approximately $3,515,025 more than the payments that were made in 2015 
(Figure 27).\68\
---------------------------------------------------------------------------

    \68\ Total payments across all three districts are equal to the 
increase in payments incurred by shippers as a result of the rate 
changes plus the temporary surcharges applied to traffic in 
Districts One, Two, and Three.
---------------------------------------------------------------------------

    A regulatory analysis follows.
    This rulemaking proposes revisions to the annual ratemaking 
methodology (procedural changes), and applies the ratemaking 
methodology to increase Great Lakes pilotage rates and surcharges from 
the current rates set in the 2015 final rule (rate changes). The 
methodology is discussed and applied in detail in Parts V and VI of 
this preamble. The last full ratemaking was concluded in 2015. The last 
annual rate review, conducted under 46 CFR part 404, appendix C, was 
completed early in 2011. Figure 29 summarizes the changes in the 
regulatory analysis (RA) from the NPRM to the final rule. These changes 
were the result of public comments received after publication of the 
NPRM. Figure 30 presents the elements in our analysis that changed 
along with the resultant change in the RA.

[[Page 11937]]

                              Figure 30--Summary of Changes From NPRM to Final Rule
----------------------------------------------------------------------------------------------------------------
       Element of the analysis                   NPRM                  Final rule         Resulting change in RA
----------------------------------------------------------------------------------------------------------------
Number of historic years of demand     5 years of data,         Final rule uses data     Data indirectly affects
 data used to establish the hourly      excluding data from      from 2007-2015, future   the calculation of
 rate.                                  2009.                    ratemakings will use     projected revenues.
                                                                 most recent 10 years
                                                                 of data.
Mandatory change point at Iroquois     Proposed additional      Final rule removes the   No change.
 Lock.                                  change point at          mandatory change point
                                        Iroquois Lock.           at Iroquois Lock.
Target pilot compensation............  $312,500...............  $326,114...............  Data indirectly affects
                                                                                          the calculation of
                                                                                          projected revenues.
Projected revenues...................  2015 revenues projected  2015 revenues projected  Cost increase to
                                        at $12,289,193, 2016     at $15,588,653, 2016     shippers decreases
                                        revenues projected at    revenues projected at    from $6,268,152 to
                                        $18,557,345.             $17,453,678.             $1,865,025.
Pilot strength for registered and      42 registered working    37 registered working    Training expenses
 applicant pilots.                      pilots and 6 applicant   pilots and 11            increased from
                                        pilots in 2016.          applicant pilots in      $900,000 to
                                                                 2016.                    $1,650,000.
----------------------------------------------------------------------------------------------------------------

Affected Population
    The shippers affected by these rate changes are those owners and 
operators of domestic vessels operating on register (employed in 
foreign trade) and owners and operators of foreign vessels on routes 
within the Great Lakes system. These owners and operators must have 
pilots or pilotage service as required by 46 U.S.C. 9302. There is no 
minimum tonnage limit or exemption for these vessels. The statute 
applies only to commercial vessels and not to recreational vessels. 
Owners and operators of other vessels that are not affected by this 
final rule, such as recreational boats and vessels operating within the 
Great Lakes system, may elect to purchase pilotage services. However, 
this election is voluntary and does not affect the Coast Guard's 
calculation of the rate increase and is not a part of our estimated 
cost to shippers.
    We used 2012-2014 vessel arrival data from the Coast Guard's SANS 
to estimate the average annual number of vessels affected by the rate 
adjustment. Using that period, we found that a mean of 126 vessels 
journeyed into the Great Lakes system annually from the years 2012-
2014. These vessels entered the Great Lakes by transiting at least one 
of the three pilotage districts before leaving the Great Lakes system. 
These vessels often make more than one distinct stop, docking, loading, 
and unloading at facilities in Great Lakes ports. Of the total trips 
for the 126 vessels, there were 396 annual U.S. port arrivals before 
the vessels left the Great Lakes system, based on 2012-2014 vessel data 
from SANS.
Costs
    The procedural changes are the revisions to the annual ratemaking 
methodology and several Great Lakes pilotage regulations. The 
procedural changes include all changes to the annual ratemaking 
methodology as discussed in Section IV. These procedural changes are 
intended to clarify and simplify the current methodology, and increase 
the accuracy of collecting information on each pilot association's 
expenses and revenues in order to lower the variance between projected 
revenue and actual revenue. These procedural changes do not impose any 
direct costs, but indirectly affect the annual rate change. We capture 
these indirect impacts of procedural changes in the rate change impact. 
The rate changes resulting from the new methodology would generate 
costs on industry in the form of higher payments for shippers. The 
effect of the rate changes on shippers is estimated from the District 
pilotage revenues. These revenues represent the costs that shippers 
must pay for pilotage services. The Coast Guard sets rates so that 
revenues equal the estimated cost of pilotage for these services.
    We estimate the effect of the rate changes by comparing the total 
projected revenues needed to cover costs in 2015 with the figures for 
2016, plus the temporary surcharges authorized by the Coast Guard. The 
last full year for which we have reported and audited financial 
information for the pilot association expenses is 2014, as discussed in 
Section VI of this preamble. Figure 31 shows the audited revenues and 
the revenue projections.

                                         Figure 31--Revenue Projections
----------------------------------------------------------------------------------------------------------------
                                                2013 Revenue     2014 Revenue                     2016 Projected
                    Area                         (audited)        (audited)       2015 Revenue       revenue
----------------------------------------------------------------------------------------------------------------
D1 Designated...............................       $1,990,865       $2,504,809       $2,725,255       $3,125,192
D1 Undesignated.............................        1,415,299        1,991,313        2,166,567        2,229,753
                                             -------------------------------------------------------------------
    Total, District 1.......................        3,406,164        4,496,122        4,891,822        5,354,945
D2 Undesignated.............................        1,267,750        2,196,822        2,099,600        2,319,844
D2 Designated...............................        1,901,627        3,295,230        3,149,396        3,309,797
                                             -------------------------------------------------------------------
    Total, District 2.......................        3,169,377        5,492,052        5,248,996        5,629,641
D3 Undesignated.............................        3,242,971        5,165,165        4,085,869        4,596,861
D3 Designated...............................        1,080,994        1,721,731        1,361,964        1,872,230
                                             -------------------------------------------------------------------
    Total, District 3.......................        4,323,965        6,886,899        5,447,835        6,469,092
                                             -------------------------------------------------------------------
        System Total........................       10,899,506       16,875,073       15,588,653       17,453,678
----------------------------------------------------------------------------------------------------------------
* Values may not sum due to rounding.

[[Page 11938]]

    Figure 32 details the additional cost increases to shippers by area 
and district as a result of the rate changes and temporary surcharges 
on traffic in Districts One, Two, and Three.

                                                Figure 32--Effect of the Final Rule by Area and District
                                                                 [$U.S.; non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Projected revenue   Projected revenue   Total costs 2015        Temporary       Additional costs
                        Area                            needed in 2015      needed in 2016        (2016-2015)          surcharge      of this final rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
D1 Designated.......................................          $2,725,255          $3,125,192            $399,936
D1 Undesignated.....................................           2,166,567           2,229,753              63,187
                                                     ---------------------------------------------------------------------------------------------------
    Total, District 1...............................           4,891,822           5,354,945             463,123            $450,000            $913,123
D2 Undesignated.....................................           2,099,600           2,319,844             220,244
D2 Designated.......................................           3,149,396           3,309,797             160,401
                                                     ---------------------------------------------------------------------------------------------------
    Total, District 2...............................           5,248,996           5,629,641             380,645             300,000             680,645
D3 Undesignated.....................................           4,085,869           4,596,861             510,992
D3 Designated.......................................           1,361,964           1,872,230             510,267
                                                     ---------------------------------------------------------------------------------------------------
    Total, District 3...............................           5,447,835           6,469,092           1,021,257             900,000           1,921,257
                                                     ---------------------------------------------------------------------------------------------------
        System Total................................          15,588,653          17,453,678           1,865,025           1,650,000           3,515,025
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Values may not sum due to rounding.

    The resulting difference between the projected revenue in 2015 and 
the projected revenue in 2016 is the annual change in payments from 
shippers to pilots as a result of the rate change. This figure is 
equivalent to the total additional payments from the previous year that 
shippers would incur for pilotage services from this final rule.
    The effect of the rate change in this final rule on shippers varies 
by area and district. The rate changes would lead to affected shippers 
operating in District One, District Two, and District Three 
experiencing an increase in payments of $463,123, $380,645, and 
$1,021,257, respectively, from the previous year.
    In addition to the rate changes, temporary surcharges on traffic in 
District One, District Two, and District Three would be applied for the 
duration of the 2016 season in order for the pilotage associations to 
recover training expenses incurred. We estimate that these surcharges 
would generate an additional $450,000, $300,000, and $900,000 in 
revenue for the pilotage associations in District One, District Two, 
and District Three, respectively, for a total additional revenue of 
$1,650,000.
    To calculate an exact cost or savings per vessel is difficult 
because of the variation in vessel types, routes, port arrivals, 
commodity carriage, time of season, conditions during navigation, and 
preferences for the extent of pilotage services on designated and 
undesignated portions of the Great Lakes system. Some owners and 
operators would pay more and some would pay less, depending on the 
distance travelled and the number of port arrivals by their vessels. 
However, the increase in costs reported earlier in this rulemaking does 
capture the adjustment in payments that shippers would experience from 
the previous year. The overall adjustment in payments, after taking 
into account the increase in pilotage rates and the addition of 
temporary surcharges would be an increase in payments by shippers of 
approximately $3,515,025 across all three districts.
Benefits
    This rule will allow the Coast Guard to meet the requirements in 46 
U.S.C. 9303 to review the rates for pilotage services on the Great 
Lakes. The rate changes will promote safe, efficient, and reliable 
pilotage service on the Great Lakes by ensuring rates cover an 
association's operating expenses; provide fair pilot compensation, 
adequate training, and sufficient rest periods for pilots; and ensures 
the association makes enough money to fund future improvements. The 
rate changes will also help recruit and retain pilots, which will 
ensure a sufficient number of pilots to meet peak shipping demand, 
which would help reduce delays caused by pilot shortages. During the 
2014 shipping season, shippers reported over $5 million in delay 
related costs (lost charter hire and fuel spent idling) from ships 
having to wait for pilots.\69\ The procedural changes will increase the 
accuracy of pilotage data by utilizing a uniform financial reporting 
system (see discussion of 46 CFR 403.300 in Part V of the preamble). 
The procedural changes will also promote greater transparency and 
simplicity in the ratemaking methodology through annual revenue audits 
(see discussion of 46 CFR 404.1 in Part V of the preamble).
---------------------------------------------------------------------------

    \69\ See July 18, 2014 letter from the Shipping Federation of 
Canada and the United States Great Lakes Shipping Association to 
Admiral Zukunft.
---------------------------------------------------------------------------

B. Small Entities

    As required by the Regulatory Flexibility Act,\70\ we have 
considered whether this final rule would 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 people.
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

    We expect that entities affected by this rule would be classified 
under the North American Industry Classification System (NAICS) code 
subsector 483--Water Transportation, which includes the following 6-
digit NAICS codes for freight transportation: 483111--Deep Sea Freight 
Transportation, 483113--Coastal and Great Lakes Freight Transportation, 
and 483211--Inland Water Freight Transportation. According to the Small 
Business Administration's definition, a U.S. company with these NAICS 
codes and employing less than 500 employees is considered a small 
entity.
    For this rule, we reviewed recent company size and ownership data 
for the period 2012 through 2014 in the Coast Guard's Marine 
Information for Safety and Law Enforcement database,

[[Page 11939]]

and we reviewed business revenue and size data provided by publicly 
available sources such as MANTA \71\ and Cortera.\72\ We found that 
large, foreign-owned shipping conglomerates or their subsidiaries owned 
or operated all vessels engaged in foreign trade on the Great Lakes.
---------------------------------------------------------------------------

    \71\ See http://www.manta.com/.
    \72\ See https://www.cortera.com/.
---------------------------------------------------------------------------

    There are three U.S. entities affected by the final rule that 
receive revenue from pilotage services. These are the three pilot 
associations that provide and manage pilotage services within the Great 
Lakes districts. Two of the associations operate as partnerships and 
one operates as a corporation. These associations are designated with 
the same NAICS industry classification and small-entity size standards 
described above, but they have fewer than 500 employees; combined, they 
have approximately 65 total employees. We expect no adverse effect to 
these entities from this final rule because all associations receive 
enough revenue to balance the projected expenses associated with the 
projected number of bridge hours and pilots.
    Therefore, the Coast Guard certifies under 5 U.S.C. 605(b) that 
this rule will not have a significant economic effect on a substantial 
number of small entities.

C. Assistance for Small Entities

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996 \73\ we want to assist small entities in understanding this final 
rule so that they can better evaluate its effects on them and 
participate in the rulemaking. If the final rule would affect your 
small business, organization, or governmental jurisdiction and you have 
questions concerning its provisions or options for compliance, please 
consult Mr. Todd Haviland, Director, Great Lakes Pilotage, Commandant 
(CG-WWM-2), Coast Guard; telephone 202-372-2037, email 
Todd.A.Haviland@uscg.mil, or fax 202-372-1914. The Coast Guard will not 
retaliate against small entities that question or complain about this 
rule or any policy or action of the Coast Guard.
---------------------------------------------------------------------------

    \73\ Public Law 104-121, sec. 213(a).
---------------------------------------------------------------------------

    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 \74\ but adjusts the burden for an 
existing COI number 1625-0086, as described below.
---------------------------------------------------------------------------

    \74\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------

    Title: Great Lakes Pilotage.
    OMB Control Number: 1625-0086.
    Summary of the Collection of Information: The rule requires 
continued submission of data to an electronic collection system, 
identified as the Great Lakes Pilotage Management System, which will 
eventually replace the manual paper submissions currently used to 
collect data on bridge hours, vessel delay, vessel detention, vessel 
cancellation, vessel movage, pilot travel, revenues, pilot 
availability, and related data. Further, the rule requires pilot 
associations to provide copies of their paper source forms, or billing 
forms, until the transfer to electronic submission is available later 
in 2016. The pilot associations currently provide these documents to 
the Coast Guard each month.
    Need for Information: This information is needed in order to more 
accurately set future rates.
    Proposed Use of Information: We use this information to comply with 
the statutory and regulatory requirements for the Coast Guard's 
ratemaking and oversight functions.
    Description of Respondents: The respondents represent the three 
U.S. Great Lakes pilotage associations whose 37 pilots provide pilotage 
service, as well as an estimated 11 applicants for 2016 pilot 
positions.
    Number of Respondents: The rule increases the estimated number of 
respondents from 9 to 51 per year: The 3 pilot association 
representatives, 6 applicants, and 42 current pilots.
    Frequency of Response: Frequency is dictated by marine traffic 
levels and association staffing.
    Burden of Response: We estimate the burden will vary from 15 
minutes for a pilot to complete the source form to one hour for the 
pilot association to transmit those forms to the Coast Guard.
    Estimate of Annual Burden: We estimate the total annual burden will 
increase from 19 to 2,129.5 hours. You need not respond to a collection 
of information unless it displays a currently valid control number from 
OMB. The Coast Guard must have OMB's approval before it can enforce 
collection of information requirements.

E. Federalism

    A rule has implications for federalism under Executive Order 13132, 
Federalism, if it has a substantial direct effect on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. We have analyzed this rule under that order and have 
determined that it is consistent with the fundamental federalism 
principles and preemption requirements described in Executive Order 
13132. Our analysis is explained below.
    Congress directed the Coast Guard to establish ``rates and charges 
for pilotage services.'' \75\ This regulation is issued pursuant to 
that requirement and is preemptive of state law.\76\ Therefore, the 
rule is consistent with the principles of federalism and preemption 
requirements in Executive Order 13132.
---------------------------------------------------------------------------

    \75\ 46 U.S.C. 9303(f).
    \76\ See 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.
---------------------------------------------------------------------------

F. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 \77\ requires Federal 
agencies to assess the effects of their discretionary regulatory 
actions. In particular, the Act addresses actions that may result in 
the expenditure by a State, local, or Tribal Government, in the 
aggregate, or by the private sector of $100,000,000 (adjusted for 
inflation) or more in any one year. Though this rule will not result in 
such an expenditure, we discuss its effects elsewhere in this preamble.
---------------------------------------------------------------------------

    \77\ 2 U.S.C. 1531-1538.
---------------------------------------------------------------------------

G. Taking of Private Property

    This rule does 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. It is not 
an economically significant rule and creates no environmental risk to 
health

[[Page 11940]]

or risk to safety that might disproportionately affect children.

J. Indian Tribal Governments

    This rule has no tribal implications under Executive Order 13175, 
Consultation and Coordination with Indian Tribal Governments, because 
it has no substantial direct effect on one or more Indian tribes, on 
the relationship between the Federal Government and Indian tribes, or 
on the distribution of power and responsibilities between the Federal 
Government and Indian tribes.

K. Energy Effects

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

L. Technical Standards

    The National Technology Transfer and Advancement Act \78\ directs 
agencies to use voluntary consensus standards in their regulatory 
activities unless the agency provides Congress, through OMB, with an 
explanation of why using these standards would be inconsistent with 
applicable law or otherwise impractical. Voluntary consensus standards 
are technical standards (e.g., specifications of materials, 
performance, design, or operation; test methods; sampling procedures; 
and related management systems practices) that are developed or adopted 
by voluntary consensus standards bodies. This rule does not use 
technical standards. Therefore, we did not consider the use of 
voluntary consensus standards.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 272, note.
---------------------------------------------------------------------------

M. Environment

    We have analyzed this rule under Department of Homeland Security 
Management Directive 023-01 and Commandant Instruction M16475.lD, which 
guide the Coast Guard in complying with the National Environmental 
Policy Act of 1969,\79\ and have determined that it is one of a 
category of actions that do not individually or cumulatively have a 
significant effect on the human environment. An environmental analysis 
checklist and categorical exclusion supporting this determination are 
available in the docket. This rule is categorically excluded under 
section 2.B.2, figure 2-1, paragraph 34(a) of the Instruction, which 
pertains to minor regulatory changes that are editorial or procedural 
in nature. This rule adjusts rates in accordance with applicable 
statutory and regulatory mandates.
---------------------------------------------------------------------------

    \79\ 42 U.S.C. 4321-4370f.
---------------------------------------------------------------------------

List of Subjects

46 CFR Part 401

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

46 CFR Part 403

    Great Lakes, Navigation (water), Reporting and recordkeeping 
requirements, Seamen, Uniform System of Accounts.

46 CFR Part 404

    Great Lakes, Navigation (water), Seamen.

    For the reasons discussed in the preamble, the Coast Guard amends 
46 CFR parts 401, 403, and 404 as follows:

Title 46--Shipping

PART 401--GREAT LAKES PILOTAGE REGULATIONS

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

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

0
2. Revise Sec.  401.405 to read as follows:

Sec.  401.405  Pilotage rates and charges.

    (a) The hourly rate for pilotage service on--
    (1) The St. Lawrence River is $580;
    (2) Lake Ontario is $398;
    (3) Lake Erie is $448;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$684;
    (5) Lakes Huron, Michigan, and Superior is $264; and
    (6) The St. Mary's River is $528.
    (b) The pilotage charge is calculated by multiplying the hourly 
rate by the hours or fraction thereof (rounded to the nearest 15 
minutes) that the registered pilot is on the bridge or available to the 
master of the vessel, multiplied by the weighting factor shown in Sec.  
401.400 of this part.

Sec.  401.407  [Removed]

0
3. Remove Sec.  401.407.

Sec.  401.410  [Removed]

0
4. Remove Sec.  401.410.

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

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

    (a) Except as otherwise provided in this section, a vessel can be 
charged as authorized in Sec.  401.405 of this part for the waters in 
which the event takes place, if--
    (1) A U.S. pilot is retained on board while a vessel's passage is 
interrupted;
    (2) A U.S. pilot's departure from the vessel after the end of an 
assignment is delayed, and the pilot is detained on board, for the 
vessel's convenience; or
    (3) A vessel's departure or movage is delayed, for the vessel's 
convenience, beyond the time that a U.S. pilot is scheduled to report 
for duty, or reports for duty as ordered, whichever is later.
    (b) When an order for a U.S. pilot's service is cancelled after 
that pilot has begun traveling to the designated pickup place, the 
vessel can be charged for the pilot's reasonable travel expenses to and 
from the pilot's base; and the vessel can be charged for the time 
between the pilot's scheduled arrival, or the pilot's reporting for 
duty as ordered, whichever is later, and the time of cancellation.
    (c) Between May 1 and November 30, a vessel is not liable for 
charges under paragraphs (a)(1) or (2) of this section, if the 
interruption or detention was caused by ice, weather, or traffic.
    (d) A pilotage charge made under this section takes the place and 
precludes payment of any charge that otherwise could be made under 
Sec.  401.405 of this part.

0
6. Revise Sec.  401.428 to read as follows:

Sec.  401.428  Boarding or discharging a pilot other than at designated 
points.

    For a situation in which a vessel boards or discharges a U.S. pilot 
at a point not designated in Sec.  401.450 of this part, it could incur 
additional charges as follows:
    (a) Charges for the pilot's reasonable travel expenses to or from 
the pilot's base, if the situation occurs for reasons outside of the 
vessel's control, for example for a reason listed in Sec.  401.420(c) 
of this part; or
    (b) Charges for associated hourly charges under Sec.  401.405 of 
this part, as well as the pilot's travel expenses as described in 
paragraph (a), if the situation takes place for the convenience of the 
vessel.

[[Page 11941]]

PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM

0
7. The authority citation for part 403 is revised to read as follows:

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

Sec.  403.120  [Removed]

0
8. Remove Sec.  403.120.

0
9. Revise Sec.  403.300 to read as follows:

Sec.  403.300  Financial reporting requirements.

    (a) Each association must maintain records for dispatching, 
billing, and invoicing, and make them available for Director's 
inspection, using the system currently approved by the Director.
    (b) Each association must submit the compiled financial data and 
any other required statistical data, and written certification of the 
data's accuracy signed by an officer of the association, to the 
Director within 30 days of the end of the annual reporting period, 
unless otherwise authorized by the Director.
    (c) By April 1 of each year, each association must obtain an 
unqualified audit report for the preceding year, audited and prepared 
in accordance with generally accepted accounting standards by an 
independent certified public accountant, and electronically submit that 
report with any associated settlement statements to the Director by 
April 7.

0
10. Revise Sec.  403.400 to read as follows:

Sec.  403.400  Uniform pilot's source form.

    (a) Each association must record pilotage transactions using the 
system currently approved by the Director.
    (b) Each pilot must complete a source form in detail as soon as 
possible after completion of an assignment, with adequate support for 
reimbursable travel expenses.
    (c) Upon receipt, each association must complete the source form by 
inserting the rates and charges specified in 46 CFR part 401.

0
11. Revise part 404 to read as follows:

PART 404--GREAT LAKES PILOTAGE RATEMAKING

Sec.
404.1 General ratemaking provisions.
404.2 Procedure and criteria for recognizing association expenses.
404.3 through 404.99 [Reserved].
404.100 Ratemaking and annual reviews in general.
404.101 Ratemaking step 1: Recognize previous operating expenses.
404.102 Ratemaking step 2: Project operating expenses, adjusting for 
inflation or deflation.
404.103 Ratemaking step 3: Determine number of pilots needed.
404.104 Ratemaking step 4: Determine target pilot compensation.
404.105 Ratemaking step 5: Project return on investment.
404.106 Ratemaking step 6: Project needed revenue.
404.107 Ratemaking step 7: Initially calculate base rates.
404.108 Ratemaking step 8: Review and finalize rates.

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

Sec.  404.1  General ratemaking provisions.

    (a) The goal of ratemaking is to promote safe, efficient, and 
reliable pilotage service on the Great Lakes, by generating for each 
pilotage association sufficient revenue to reimburse its necessary and 
reasonable operating expenses, fairly compensate trained and rested 
pilots, and provide an appropriate profit to use for improvements.
    (b) Annual reviews of pilotage association expenses and revenue 
will be conducted in conjunction with an independent party, and data 
from completed reviews will be used in ratemaking under this part.
    (c) Full ratemakings to establish multi-year base rates and interim 
year reviews and adjustments will be conducted in accordance with Sec.  
404.100 of this part.

Sec.  404.2  Procedure and criteria for recognizing association 
expenses.

    (a) A pilotage association must report each expense item for which 
it seeks reimbursement through the charging of pilotage rates, and make 
supporting information available to the Director. The Director must 
recognize the item as 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 association will 
be given an opportunity to contest any preliminary determination that a 
reported item should not be recognized.
    (b) The Director applies the following criteria to recognize an 
expense item as necessary and reasonable within the meaning of 
paragraph (a) of this section:
    (1) Operating or capital lease costs. Conformity to market rates, 
or in the absence of a comparable market, conformity to depreciation 
plus an allowance for return on investment, computed as if the asset 
had been purchased with equity capital.
    (2) Return-on-investment. A market equivalent return-on-investment 
is allowed for the net capital invested in the association by its 
members, if that investment is necessary for providing pilotage 
service.
    (3) Transactions not directly related to providing pilotage 
services. Revenues and expenses generated from these transactions are 
included in ratemaking calculations as long as the revenues exceed the 
expenses. If these transactions adversely affect providing pilotage 
services, the Director may make rate adjustments or take other steps to 
ensure pilotage service is provided.
    (4) Pilot benefits. Association-paid benefits, including medical 
and pension benefits and profit sharing, are treated as pilot 
compensation.
    (5) Profit sharing for non-pilot association employees. These 
association expenses are recognizable.
    (6) Legal expenses. These association expenses are recognizable 
except for any and all expenses associated with legal action against 
the U.S. government or its agents.
    (c) The Director does not recognize the following expense items as 
necessary and reasonable within the meaning of paragraph (a) of this 
section:
    (1) Unreported or undocumented expenses, and expenses that are not 
reasonable in their amounts or not reasonably related to providing 
safe, efficient, and reliable pilotage service;
    (2) Revenues and expenses from Canadian pilots that are commingled 
with revenues and expenses from U.S. pilots;
    (3) Lobbying expenses; or
    (4) Expenses for personal matters.

Sec. Sec.  404.3 through 404.99   [Reserved]

Sec.  404.100  Ratemaking and annual reviews in general.

    (a) The Director establishes base pilotage rates by a full 
ratemaking pursuant to Sec.  404.101-404.108 of this part, conducted at 
least once every 5 years and completed by March 1 of the first year for 
which the base rates will be in effect. Base rates will be set to meet 
the goal specified in Sec.  404.1(a) of this part.
    (b) In the interim years preceding the next scheduled full rate 
review, the Director will review the existing rates to ensure that they 
continue to meet the goal specified in Sec.  404.1(a) of this part. If 
interim-year adjustments are needed, they will be set according to one 
of the following procedures, selected as the Director deems best suited 
to adjust the rates to meet that goal--
    (1) Automatic annual adjustments, set during the previous full rate 
review in anticipation of economic trends over the term of the rates 
set by that review;

[[Page 11942]]

    (2) Annual adjustments reflecting consumer price changes as 
documented in the U.S. Bureau of Labor Statistics Midwest Region 
Consumer Price Index (CPI-U); or
    (3) A new full ratemaking.

Sec.  404.101  Ratemaking step 1: Recognize previous operating 
expenses.

    The Director uses an independent third party to review each 
pilotage association's expenses, as reported and audited for the last 
full year for which figures are available, and determines which expense 
items to recognize for base ratemaking purposes in accordance with 
Sec.  404.2 of this part.

Sec.  404.102  Ratemaking step 2: Project operating expenses, adjusting 
for inflation or deflation.

    The Director projects the base year's non-compensation operating 
expenses for each pilotage association, using recognized operating 
expense items from Sec.  404.101. Recognized operating expense items 
subject to inflation or deflation factors are adjusted for those 
factors based on the subsequent year's U.S. government consumer price 
index data for the Midwest, projected through the year in which the new 
base rates take effect.

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

    (a) 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) Amount of time a pilot provides pilotage service or is 
available to a vessel's master to provide pilotage service;
    (2) Pilot travel time, measured from the pilot's base, to and from 
an assignment's starting and ending points;
    (3) Assignment delays and detentions;
    (4) Administrative time for a pilot who serves as a pilotage 
association's president;
    (5) Rest between assignments, as required by 46 CFR 401.451;
    (6) Ten 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) Pilotage-related training.
    (b) Peak pilotage demand and the base seasonal work standard are 
based on averaged available and reliable data, as so deemed by the 
Director, for a multi-year base period. Normally, the multi-year period 
is the 10 most recent full shipping seasons, and the data source is a 
system approved under 46 CFR 403.300. Where such data are not available 
or reliable, the Director also may use data, from additional past full 
shipping seasons or other sources, that the Director determines to be 
available and reliable.
    (c) The number of pilots needed in each district is calculated by 
totaling the area results by district and rounding them to the nearest 
whole integer. For supportable circumstances, the Director may make 
reasonable and necessary adjustments to the rounded result to provide 
for changes that the Director anticipates will affect the need for 
pilots in the district over the period for which base rates are being 
established.
    (d) The Director projects, based on the number of persons applying 
under 46 CFR part 401 to become U.S. Great Lakes registered pilots, and 
on information provided by the district's pilotage association, the 
number of pilots expected to be fully working and compensated during 
the first year of the period for which base rates are being 
established.

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

    The Director determines base individual target pilot compensation 
using a compensation benchmark, set after considering the most relevant 
currently available non-proprietary information. For supportable 
circumstances, the Director may make necessary and reasonable 
adjustments to the benchmark. The Director determines each pilotage 
association's total target pilot compensation by multiplying individual 
target pilot compensation by the number of pilots projected under Sec.  
404.103(d) of this part.

Sec.  404.105  Ratemaking step 5: Project return on investment.

    The Director calculates each pilotage association's allowed base 
return on investment by adding the projected adjusted operating 
expenses from Sec.  404.102 and the total target pilot compensation 
from Sec.  404.104 of this part, multiplied by the preceding year's 
average annual rate of return for new issues of high grade corporate 
securities.

Sec.  404.106  Ratemaking step 6: Project needed revenue.

    The Director calculates each pilotage association's base projected 
needed revenue by adding the projected adjusted operating expenses from 
Sec.  404.102 of this part, the total target pilot compensation from 
Sec.  404.104 of this part, and the projected return on investment from 
Sec.  404.105 of this part.

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

    (a) The Director initially calculates base hourly rates by dividing 
the projected needed revenue from Sec.  404.106 of this part by 
averages of past hours worked in each district's designated and 
undesignated waters, using available and reliable data for a multi-year 
period set in accordance with Sec.  404.103(b) of this part.
    (b) If the result of this calculation initially shows an hourly 
rate for the designated waters of a district that would exceed twice 
the hourly rate for undesignated waters, the initial designated-waters 
rate will be adjusted so as not to exceed twice the hourly 
undesignated-waters rate. The adjustment is a reallocation only and 
will not increase or decrease the amount of revenue needed in the 
affected district.

Sec.  404.108  Ratemaking step 8: Review and finalize rates.

    The Director reviews the base pilotage rates initially set in Sec.  
404.107 of this part to ensure they meet the goal set in Sec.  404.1(a) 
of this part, and either finalizes them or first makes necessary and 
reasonable adjustments to them based on requirements of Great Lakes 
pilotage agreements between the United States and Canada, or other 
supportable circumstances. Adjustments will be made consistent with 
Sec.  404.107(b) of this part.

    Dated: 1 March 2016.
J.G. Lantz,
Acting Assistant Commandant for Prevention Policy, U.S. Coast Guard.
[FR Doc. 2016-04894 Filed 3-1-16; 4:15 pm]
 BILLING CODE 9110-04-P