Document ID: USCG-2015-0497-0001
Agency: uscg
Document Type: Proposed Rule
Title: NPRM:  Great Lakes Pilotage Rates: Annual Review and Changes to Methodology (Federal Register Publication)
Posted Date: 2015-09-10T04:00Z

[Federal Register Volume 80, Number 175 (Thursday, September 10, 2015)]
[Proposed Rules]
[Pages 54484-54507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-22895]

[[Page 54484]]

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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: Notice of proposed rulemaking; public meeting.

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SUMMARY: The Coast Guard proposes revisions to the annual ratemaking 
methodology (``procedural changes'') and several Great Lakes pilotage 
regulations, and proposes new base pilotage rates and surcharges 
(``rate changes''), using that proposed revised methodology. The 
changes would take effect 30 days after publication of a final rule. 
Rates for pilotage services on the Great Lakes were last revised in 
February 2015 and by law must be reviewed annually. The Coast Guard 
intends for the proposed revised methodology 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. In addition, the Coast Guard announces a public 
meeting on September 17, 2015, at which the public may ask questions 
about the proposals and comment on them. This rulemaking promotes the 
Coast Guard's maritime safety and stewardship (environmental 
protection) missions by promoting safe shipping on the Great Lakes.

DATES: Comments and related material must either be submitted to the 
online docket via www.regulations.gov on or before November 9, 2015 or 
reach the Docket Management Facility by that date. The public meeting 
will be held on September 17, 2015, from 1:00 p.m. to 4:00 p.m., but 
may end sooner depending on the extent to which the public has 
questions or comments.

ADDRESSES: The September 17, 2015 public meeting will be held at the 
Detroit Metro Airport Marriott, 30559 Flynn Dr., Romulus, MI 48174 
(telephone 734-729-7555 or Marriott.com). Submit written comments using 
one of the listed methods, and see SUPPLEMENTARY INFORMATION for more 
information on public comments.
     Online--http://www.regulations.gov following Web site 
instructions.
     Fax--202-493-2251.
     Mail or hand deliver--Docket Management Facility (M-30), 
U.S. Department of Transportation, West Building Ground Floor, Room 
W12-140, 1200 New Jersey Avenue SE., Washington, DC 20590-0001. Hand 
delivery hours: 9 a.m. to 5 p.m., Monday through Friday, except Federal 
holidays (telephone 202-366-9329).

FOR FURTHER INFORMATION CONTACT: If you have questions on this proposed 
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. If you have questions on 
viewing or submitting material to the docket, call Ms. Cheryl Collins, 
Program Manager, Docket Operations, telephone 202-366-9826.

SUPPLEMENTARY INFORMATION: 

Executive Summary

    The purpose of this rulemaking is to amend the Coast Guard's Great 
Lakes pilotage regulations by revising the current methodology by which 
the Coast Guard sets base rates for U.S. pilotage service. The legal 
basis for the rulemaking is provided by Great Lakes pilotage statutes 
in 46 U.S.C. chapter 93. The proposed changes would take effect 30 days 
after publication of a final rule; this would coincide closely with the 
start of the 2016 shipping season and be several months earlier than in 
past rulemakings, which set changes that took effect on August 1 of 
each year.
    The Coast Guard is proposing a complete revision of the current 
methodology for two reasons. First, over many years both pilots and 
industry have identified certain methodology issues that they believe 
significantly distort ratemaking calculations. Pilot associations 
believe those distortions result in low rates that contribute to their 
difficulty in retaining pilots and attracting applicant pilots. Second, 
only one union's contract data has ever been made available to the 
Coast Guard for the purpose of determining the benchmark for pilot 
compensation. The union now regards that data as proprietary and will 
no longer disclose it to the Coast Guard. The union is not subject to 
our Great Lakes pilotage regulatory oversight and therefore we respect 
and accept their decision. However, as a result of this decision, the 
Coast Guard no longer has access to the detailed breakdown of 
compensation calculations that our current methodology relies on, and 
the public cannot review the union's calculations or the manner in 
which we apply those calculations in setting pilotage rates. Therefore, 
we have decided we must select another benchmark for our ratemaking 
purposes. In 2014, the Coast Guard's Great Lakes Pilotage Advisory 
Committee (GLPAC) recommended significant changes to address 
stakeholder issues with the current methodology and to adapt to the 
unavailability of benchmark contract data.\1\ This rulemaking would 
build a new ratemaking methodology around the GLPAC recommendations, 
the 2013 Bridge Hour Study, and numerous comments we have received over 
the past decade from previous rulemakings to revise this proposed 
methodology. Also, we believe the proposed methodology addresses the 
issues raised with the 2014 Appendix A Final Rule lawsuit, St. Lawrence 
Seaway Pilots Association, Inc., et al., v. U.S. Coast Guard.\2\ The 
pilots successfully challenged the 2014 Appendix A Final Rule and their 
recommendation for target pilot compensation is discussed in this 
proposed rule.
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    \1\ See 46 U.S.C. 9307.
    \2\ Docket No. 1:14-cv-00392-TSC.
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    As is done in the current ratemaking methodology, the proposed new 
methodology would follow a series of steps, which we describe in Part 
V. Step 1 reviews and recognizes previous operating expenses based on 
audits of records provided by the pilot associations. Step 2 projects 
each association's future operating expenses, adjusting for inflation 
or deflation. Step 3 projects the number of pilots needed based on each 
area's peak pilotage demand data and the pilot work cycle. Step 4 sets 
target pilot compensation using a compensation benchmark. Step 5 
projects each association's return on investment by adding the 
projected adjusted operating expenses from Step 2 and the total target 
pilot compensation from Step 4 and multiplying by the preceding year's 
average annual rate of return for new issues of high grade corporate 
securities. Step 6 calculates each association's needed revenue by 
adding the projected adjusted 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.
    In Part VI, the Coast Guard uses the proposed methodology described 
in Part V to calculate proposed base rates for the 2016 shipping 
season.
    In Step 1 we propose accepting the independent accountant's final 
findings

[[Page 54485]]

from the 2013 audits of each association's expenses.
    In Step 2 we project next year's operating expenses and adjust 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.
    In Step 3, we determine that 50 pilots are needed next year, up 
from the 36 pilots we currently authorize. This number is based on data 
for four shipping seasons, 2010 through 2013, instead of the normal 
five seasons, because we do not have reliable source data for 2009 or 
2014. The number is also based average pilot assignment cycle time 
based on our 2013 Bridge Hour Definition and Methodology Final Report 
though we intend to use Great Lakes Pilotage Management System (GLPMS) 
source data in the future.
    In Step 4 we propose individual target pilot compensation of 
$312,500 and total target pilot compensation for 42 pilots of 
$13,125,000. Though we find that 50 pilots are needed over the period 
for which 2016 base rates would be in effect, based on our best current 
information we project there to be only 42 fully working and fully 
compensated pilots (``working pilots'') in 2016. The figures were set 
after considering various possible compensation benchmarks, including 
the compensation figures proposed by the pilot associations, and 
selecting 2013 Canadian Great Lakes Pilotage Authority (GLPA) 
registered pilot compensation as the most appropriate benchmark.
    In Steps 5 and 6 we calculate the return on investment and project 
each pilot association's needed revenue.
    In Step 7, we calculate initial base rates using the multi-year 
base period used above, covering the 2010 through 2013 shipping 
seasons.
    Finally, in Step 8, we finalize the Step 7 rates, but propose 
imposing a temporary surcharge of $300,000 per district in 2016. The 
surcharge would reimburse pilot associations for the anticipated 
expenses of providing necessary training for current pilots and 
applicant pilots.
    In addition to the proposed methodology revisions and proposed 2016 
rates, we also propose an additional location for beginning and ending 
pilot assignments (a ``change point'') at Iroquois Lock. This would 
enhance safety by mitigating fatigue associated with long pilotage runs 
of 10 hours or more in the St. Lawrence River.
    The proposed rule would not be economically significant under E.O. 
12866. It would affect 36 U.S. Great Lakes pilots, 3 pilot 
associations, and the owners and operators of an average of 126 vessels 
that journey the Great Lakes on an average 396 visits to various ports 
annually. The Coast Guard estimates that the proposed rate changes 
would result in shippers paying pilot associations a net 2016 shipping 
season increase from 2015 of $6,521,205. The proposed $6,521,205 
represents a roughly 50% increase over the revenue the 2015 Appendix A 
Final Rule should generate. The Coast Guard also proposes authorizing 
temporary surcharges to reimburse pilot associations for training 
costs. These surcharges would add an estimated $900,000 in costs, for a 
total 2016 cost increase from 2015 of $7,421,205. Since the Coast Guard 
must review and prescribe rates for Great Lakes Pilotage annually, the 
effects are estimated as single year costs rather than annualized over 
a ten-year period. This rulemaking would not result in a change to 
Coast Guard's budget and it would not increase Federal spending. A 
summary of the regulatory analysis can be found in Part VII.

Table of Contents for Preamble

I. Public Participation and Request for Comments
II. Abbreviations
III. Basis and Purpose
IV. Background
V. Discussion of Proposed Procedural Changes
    A. Summary
    B. Discussion of Methodology
VI. Discussion of Proposed 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. Public Participation and Request for Comments

    We encourage you to submit comments (or related material) on this 
rulemaking. We will consider all submissions and may adjust our final 
action based on your comments. Comments should be marked with docket 
number USCG-2015-0497 and should provide a reason for each suggestion 
or recommendation. You should provide personal contact information so 
that we can contact you if we have questions regarding your comments; 
but please note that all comments will be posted to the online docket 
without change and that any personal information you include can be 
searchable online (see the Federal Register Privacy Act notice 
regarding our public dockets, 73 FR 3316, Jan. 17, 2008).
    Mailed or hand-delivered comments should be in an unbound 8\1/2\ x 
11 inch format suitable for reproduction. The Docket Management 
Facility will acknowledge receipt of mailed comments if you enclose a 
stamped, self-addressed postcard or envelope with your submission.
    Documents mentioned in this proposed rule and all public comments 
are in our online docket at http://www.regulations.gov and can be 
viewed by following the Web site's instructions. You can also view the 
docket at the Docket Management Facility (see the mailing address under 
ADDRESSES) between 9 a.m. and 5 p.m., Monday through Friday, except 
Federal holidays.
    On September 17, 2015, members of the public are invited to attend 
a meeting in Detroit, Michigan, at which we will answer questions and 
take comments on this NPRM. See DATES and ADDRESSES for further 
information on the meeting. A transcript of the meeting will be 
prepared and placed in the docket for this rulemaking.

II. Abbreviations

AMOU American Maritime Officers Union
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
GLPA Great Lakes Pilotage Authority (Canadian)
CPA Certified public accountant
E.O. Executive Order
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
LPA Laurentian Pilotage Authority (Canadian)
MISLE Marine Information for Safety and Law Enforcement
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
OMB Office of Management and Budget
Sec.  Section symbol
U.S.C. United States Code
USD United States dollars

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act 
of 1960 (``the Act''),\3\ which requires U.S. vessels operating ``on 
register'' \4\ and

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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.\5\ 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.'' \6\ The Act requires that rates be established or reviewed 
and adjusted each year, not later than March 1.\7\ The Act requires 
that base rates be established by a full ratemaking at least once every 
5 years, and in years when base rates are not established, they must be 
reviewed and, if necessary, adjusted.\8\ The Secretary's duties and 
authority under the Act have been delegated to the Coast Guard.\9\
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    \3\ Public Law 86-555, 74 Stat. 259, as amended; currently 
codified as 46 U.S.C. Chapter 93.
    \4\ ``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.
    \5\ 46 U.S.C. 9302(a)(1).
    \6\ 46 U.S.C. 9303(f).
    \7\ Id.
    \8\ Id.
    \9\ DHS Delegation No. 0170.1, para. II (92.f).
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    The purpose of this notice of proposed rulemaking (NPRM) is to 
propose revisions to the annual ratemaking methodology and several 
Great Lakes pilotage regulations; to propose the addition of a new 
pilot change point; and to propose new base pilotage rates and 
surcharges, using the proposed revised ratemaking methodology.

IV. Background

    The vessels affected by this NPRM are those engaged in foreign 
trade upon the U.S. waters of the Great Lakes. United States and 
Canadian ``lakers,'' which account for most commercial shipping on the 
Great Lakes, are not affected.\10\
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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. The vessels affected by this rule are commonly known as 
``salties.''
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are 
divided into three pilotage districts. Pilotage in each district is 
provided by an association certified by the Coast Guard Director of 
Great Lakes Pilotage (``the Director'') to operate a pilotage pool. The 
Coast Guard does not control the actual compensation that pilots 
receive. The actual compensation is determined by each of the three 
district associations, which use different compensation practices.
    District One, consisting of Areas 1 and 2, includes all U.S. waters 
of the St. Lawrence River and Lake Ontario. District Two, consisting of 
Areas 4 and 5, includes all U.S. waters of Lake Erie, the Detroit 
River, Lake St. Clair, and the St. Clair River. District Three, 
consisting of Areas 6, 7, and 8, includes all U.S. waters of the St. 
Mary's River; Sault Ste. Marie Locks, and Lakes Huron, Michigan, and 
Superior. Area 3 is the Welland Canal, which is serviced exclusively by 
the Canadian GLPA and, accordingly, is not included in the United 
States pilotage rate structure. Areas 1, 5, and 7 have been designated 
by Presidential Proclamation, pursuant to the Act, to be waters in 
which pilots must, at all times, be fully engaged in the navigation of 
vessels in their charge. Areas 2, 4, 6, and 8 have not been so 
designated because they are open bodies of water. While working in 
those undesignated areas, pilots must ``be on board and available to 
direct the navigation of the vessel at the discretion of and subject to 
the customary authority of the master.'' \11\
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    \11\ 46 U.S.C. 9302(a)(1)(B).
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    The Coast Guard is required \12\ to establish new pilotage rates 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. Currently, the methodology for an ``every 5 years'' full 
ratemaking appears in 46 CFR part 404, appendix A, and the methodology 
for annual review and adjustment appears in part 404, appendix C. 
Definitions and formulas applicable to both methodologies appear in 
part 404, appendix B. 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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V. Discussion of Proposed Changes to Ratemaking Methodology

    As we do each year, the NPRM for the 2016 ratemaking proposes new 
rates. In addition, this year's NPRM must also propose procedural 
changes to the ratemaking methodology, for two reasons.
    First, each year our ratemakings draw pilot and industry comments 
urging fundamental changes in our current ratemaking methodology.\13\ 
Based on our review of such comments over many years, we understand 
that these stakeholders believe the current methodology is 
unnecessarily complex and based on an inaccurate understanding of how 
pilotage actually operates within the Great Lakes system. The 
stakeholders believe the methodology produces improper rates, and wide 
annual rate variations that frustrate long term planning. In response, 
in 2009 we solicited public comments to better understand stakeholder 
perceptions of the ratemaking methodology,\14\ and promised to refer 
those comments to the Great Lakes Pilotage Advisory Committee 
(GLPAC),\15\ a stakeholder group that advises us on Great Lakes 
pilotage matters, for GLPAC's review and recommendations. Ever since, 
we have worked closely with GLPAC to identify ways in which the 
methodology might be improved.
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    \13\ The current methodology was first proposed in 1989 (54 FR 
11930), and made final in 1995 (60 FR 18366). It has not been 
significantly amended in the subsequent 20 years. For a discussion 
of the most recent cycle of public comments on our ratemaking 
methodology, and Coast Guard responses to those comments, see the 
2015 final rule, 80 FR 10365 (Feb. 26, 2015), beginning at p. 10366, 
col. 3.
    \14\ 74 FR 35838 (July 21, 2009).
    \15\ Statutorily mandated by 46 U.S.C. 9307 and operating 
pursuant to the Federal Advisory Committee Act, 5 U.S.C. Appendix 2.
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    Second, we seek to ensure a safe, efficient, and reliable pilotage 
system for the Great Lakes and to eliminate possible barriers to 
achieving that goal. According to the pilot associations, the variance 
between projected revenue and actual revenue represents a significant 
challenge, because failure to achieve published revenue projections 
deprives them of the resources they need to provide safe, efficient, 
and reliable pilotage service. The associations cite challenges in 
making capital investments, recruiting and retaining adequately 
qualified pilots, achieving professional development and training 
schedules recommended by the American Pilots Association, updating 
technology, and achieving target compensation goals. The associations 
say that as a result, several experienced pilots have left the system, 
and that other desirable mariners have been discouraged from applying 
to become pilots. In this rulemaking, we propose specific regulatory 
changes intended to address these issues.
    The procedural changes we propose here were discussed in general at 
GLPAC's public meetings on July 23 and 24, 2014. Many of the specific 
changes we propose in this NPRM were submitted for GLPAC consideration 
at those meetings, and GLPAC unanimously recommended them for 
adoption.\16\ We consider GLPAC recommendations to have significant 
weight because the three pilot associations members represent pilots' 
interest and three U.S. shipping agent members represent owners. 
Although foreign citizens may not serve on GLPAC and therefore the 
foreign vessel

[[Page 54487]]

owners are not GLPAC members, we believe the U.S. shipping agents are 
aware of and can adequately represent their interests. Also, the 
foreign vessel owners can and do to attend GLPAC meetings and raise 
their concerns 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.''
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    Please note that we propose making the following procedural and 
rate changes effective 30 days after publication of a final rule, 
almost half a year earlier than the August 1 effective date we have 
used in previous rulemakings. We specifically request comments on this 
proposed change. The change is justified for two reasons. First, the 
traditional August 1 date was tied to the August 1 effective date for 
annual changes in benchmark union contract rates. As we subsequently 
discuss, we are no longer using the contract in question and hence 
there is no inherent reason why we should continue following the 
traditional practice. Second, annual Great Lakes pilotage rate 
adjustments are required by law \17\ to be set by March 1 of the year 
in which those adjustments take effect. By applying the normal 
Administrative Procedure Act effective date, 30 days following 
publication of a final rule,\18\ we will ensure that new rates will be 
announced prior to the usual early spring opening of the annual Great 
Lakes shipping season, and take effect near the opening date, thereby 
providing a single rate scheme for all shipping traffic affected by the 
adjusted rates.
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    \17\ 46 U.S.C. 9303(f).
    \18\ 5 U.S.C. 553(d).
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    We propose the following procedural changes. Please note that, for 
each of the amended sections in the following discussion, we propose 
extensive rewording in the interest of greater clarity and to remove 
unnecessary verbiage.
    46 CFR 401.405, 401.407, and 401.410. These sections contain rate 
tables and additional charges for specified Great Lakes waters. These 
rates and charges are subject to our annual rate reviews and revisions. 
Currently, the rate tables calculate rates differently for each area. 
Most of the pilotage costs charged in designated waters are for 
transits between two specified points. For example, as shown in current 
Sec.  401.407(b), the current charge for transiting Lake Erie between 
Toledo and Southeast Shoal is $2,637. However, in undesignated waters, 
most of the pilotage charges are set at an hourly rate. For example, 
current Sec.  401.407(a) shows that the cost for 6 hours of pilotage 
service on the undesignated waters of Lake Erie is $934. In addition, 
rates are set in designated and undesignated waters for miscellaneous 
services like vessel docking or undocking, cancellation of service, or 
the use of pilot boarding points other than those specified in Sec.  
401.450.
    This mixed approach complicates an otherwise simple transaction of 
paying for a pilot's service, either when the pilot is piloting on a 
vessel's bridge, or is at the vessel master's disposal to provide 
piloting. We propose eliminating the mixed approach in favor of 
setting, for each district, one hourly rate for designated waters, and 
another hourly rate for undesignated waters. Those rates would be 
different for each district based on differences across the districts 
in the infrastructure maintained by each district association (for 
example, differences in numbers and types of pilot boat, or in office 
arrangements) and in the distances that pilots must travel to and from 
assignments.
    Currently, some rates published in 46 CFR part 401 are based on 
hours, and others are based on the distance between two geographical 
points. GLPAC recommended re-baselining this billing scheme by a 5-1 
vote in July 2014, and we propose doing so by basing all rates on 
hours.\19\ In addition to simplifying billing, an hourly-based approach 
recognizes the scarcity of pilots as a resource, and charges shippers 
for drawing on the limited number of these trained professionals.
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    \19\ 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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    Proposed Sec.  401.405 would set each district's new base hourly 
rates. The proposed changed to Sec.  401.405 would replace the current 
text in Sec. Sec.  401.407 and 401.410 so those section would be 
removed.
    46 CFR 401.420 and 401.428. We propose amending 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), 
and basing those charges on the applicable hourly rates we would 
specify in Sec.  401.405. Billing under Sec.  401.420 would preclude 
any additional charges for pilotage service during the hours in 
question.
    We would not retain Sec.  401.428's current 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 would bill the 
vessel for the extra time involved, at the Sec.  401.405 hourly rates, 
in addition to 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 pilot would bill the vessel only for 
reasonable travel costs. Finally, we would specify that for both 
sections, the ``reasonable travel costs'' cover travel to and from the 
pilot's base.
    In both sections we propose maintaining a similar calendar-based 
authorization for delays and charges associated with weather, traffic 
and ice. These are expected conditions at the beginning and end of the 
season; thus, our rate structure allows them as acceptable charges 
after November 30th or before May 1st each year.
    46 CFR 401.450. We propose adding the Iroquois Lock in the St. 
Lawrence Seaway as a new pilot change point, joining those currently 
listed in this section. The St. Lawrence Seaway transit often requires 
pilots to spend more than ten hours aboard a vessel. Such long 
assignments contribute to pilot fatigue, and have led the National 
Transportation Safety Board to recommend that we amend our Great Lakes 
pilotage regulations to promulgate ``hours-of-service rules that 
prevent fatigue resulting from extended hours of service, insufficient 
rest within a 24-hour period, and disruption of circadian rhythms.'' 
\20\ We currently authorize a pilot to request a new pilot at the 
Iroquois Lock for overnight assignments, but our proposed addition of 
the Iroquois Lock as a permanent pilot change point would further help 
mitigate the problem of long assignments in the St. Lawrence Seaway. We 
would closely monitor the impact of the proposed change on the number 
of pilots needed in District One.
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    \20\ Letter of June 29, 2015, Christopher A. Hart, Chairman of 
the National Transportation Safety Board to Adm. Paul F. Zukunft, 
Commandant, U.S. Coast Guard.
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    46 CFR 403.120. We propose removing this section, which discusses 
notes to financial reports. Under our current financial reporting 
system those notes are not necessary.
    46 CFR 403.300. The accuracy of our pilotage rates depends on the 
accuracy of our information on each pilotage association's expenses and 
revenue. In the past, we have had difficulty

[[Page 54488]]

validating the accuracy of this information, because some associations 
did not use a uniform financial reporting system. Therefore, we would 
require each association to use the current Coast Guard-approved and 
provided financial reporting system to certify their financial data 
annually. Currently, we approve the GLPMS for this purpose. We would 
continue to require an annual audit prepared by an independent 
certified public accountant.
    46 CFR 403.400. Currently, this section details how forms must be 
filled out to report pilot transaction records. Although GLPMS allows 
for paper reporting, in the near future it will also provide an 
electronic reporting feature. Therefore we would amend the section to 
remove language that could suggest paper reporting is required. We 
accept reports made in any medium supported by our currently-approved 
financial reporting system.
    46 CFR 404.1. Currently, this section explains the purpose of part 
404, and summarizes ratemaking procedures that are described in the 
part 404 appendices. Because the remainder of part 404 would describe 
our procedures in detail, we propose removing these provisions. 
Instead, Sec.  404.1 would state that our intention is to provide 
maximum ratemaking transparency and simplicity. It would state that 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 reserve to use for improvements. The section would provide 
for the annual audit of association expenses, which we have conducted 
for many years. It would also require annual audits of association 
revenue. Revenue audits promote transparency and help us gauge, and if 
necessary adjust, the way in which we try to align our revenue 
projections with an association's actual revenue. GLPAC endorsed 
revenue audits in July 2014,\21\ and they were first used in our 2015 
ratemaking.
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    \21\ Transcript (7/23/2014), p. 180.
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    The section would also provide for a full ratemaking to establish 
base pilotage rates at least once every five years, with annual rate 
reviews and adjustments in the interim years, in accordance with the 
procedures described in part 404.
    46 CFR 404.2. We would close the numbering gap between current 
Sec. Sec.  404.1 and 404.5, and redesignate Sec.  404.5 as Sec.  404.2. 
Section 404.5 currently describes which pilot association expenses can 
or cannot be recognized as appropriate to recover through the charging 
of pilotage rates. New Sec.  404.2 would do the same thing, and make no 
substantive changes except with respect to the recognition of pilot 
benefits as an element of pilot compensation. Current Sec.  404.5 
states that the amounts paid for benefits will be recognized to the 
extent benefits are included in ``the most recent union contract for 
first mates on Great Lakes vessels.'' Sufficiently detailed and 
itemized access to relevant union contracts is no longer available for 
Coast Guard or public review. Therefore, instead of linking benefits to 
union contracts, we would recognize pilot compensation as covering all 
association-paid pilot benefits, including medical and pension benefits 
and profit sharing.
    46 CFR 404.100. We propose redesignating current Sec.  404.10 as 
Sec.  404.100. Section 404.10 currently provides a general introduction 
to the part 404 appendices on ratemaking methodology, but it contains 
no substantive requirements. It also currently describes the seven 
areas of the Great Lakes that are covered by the three pilotage 
districts, but since that information already appears in part 401, 
subpart D, it need not be repeated. We would replace this current 
content with general rules for the conduct of full ratemakings and rate 
reviews.
    Currently, and as we have done since 2012, each year we conduct a 
full appendix A ratemaking to establish base pilotage rates. However, 
we believe establishing base rates for multi-year periods would produce 
more predictable rates for both pilots and industry. GLPAC recommended 
this approach in July 2014.\22\
---------------------------------------------------------------------------

    \22\ Transcript (7/23/2014), p. 274. Discussion begins on p. 
258.
---------------------------------------------------------------------------

    Under our proposed multi-year approach, we would conduct full 
ratemakings to establish base rates at least once every 5 years, with 
base rate reviews and necessary adjustments in interim years.\23\ In 
the interim years the Director would review the existing rates to 
ensure that they continue to promote safe, efficient, and reliable 
pilotage service. If interim-year adjustments are needed, they would be 
set either through automatic annual adjustments, pre-set during the 
previous full ratemaking in anticipation of economic trends over the 
multi-year term; or to reflect U.S. Bureau of Labor Statistics (BLS) 
Consumer Price Index (CPI-U); or, if neither of those methods would 
produce appropriate adjustments, through a new full ratemaking. Reviews 
and adjustments would be proposed for public comment.
---------------------------------------------------------------------------

    \23\ Per 46 U.S.C. 9303(f), full ratemakings are required at 
least once every 5 years, with reviews and adjustments of the base 
rate in the intervening years.
---------------------------------------------------------------------------

    For a transitional period over the next several years, we would 
conduct annual reviews of the rate and change the base rates, as 
needed, to ensure the new methodology's efficacy. This would also allow 
time for the pilots and industry to become familiar with the new 
ratemaking methodology (including the new hourly billing scheme). 
Following the transitional period, we would propose interim-year 
adjustments using any of the three methods described in the preceding 
paragraph.
    Ratemaking methodology. We propose simplifying the current appendix 
A ratemaking methodology, and replacing it with new Sec. Sec.  404.101 
through 404.108. In part, the new sections are similar to the ``Steps'' 
described in appendix A, but they would depart from those Steps in 
significant respects. We also propose removing current appendix B 
(ratemaking definitions and formulas) and appendix C (annual rate 
reviews; which has not been used since 2011) as these are no longer 
necessary. Table 1 shows how we propose to change appendix A's Steps in 
the new regulatory text.

                   Table 1--Proposed Treatment of Appendix A Steps in 446 CFR 404.101-404.108
----------------------------------------------------------------------------------------------------------------
           Appendix A step                           Proposed 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.

[[Page 54489]]

 
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 \24\
5....................................  ..........................................  Add similar language to Sec.
                                                                                     404.105.
6....................................  Reword and move...........................  Per recommendation approved
                                                                                    by GLPAC.\25\ Add similar
                                                                                    language to Sec.   404.106.
7, except last sentence of first       Reword and move...........................  Add similar language to Sec.
 paragraph.                                                                          404.107.
7, last sentence of first paragraph..  Reword and move...........................  Add similar language to Sec.
                                                                                     404.108.
----------------------------------------------------------------------------------------------------------------

    In the discussion that follows, we explain how our proposed new 
methodology would replace each Step of the appendix A methodology. Our 
calculations for 2016 rates, using the proposed methodology, appear in 
Part VI.
---------------------------------------------------------------------------

    \24\ Transcript (7/23/2014), p. 255. Discussion begins on p. 
237.
    \25\ Id.
---------------------------------------------------------------------------

    46 CFR 404.101--Recognize previous operating expenses. Section 
404.101 would correspond generally to current Steps 1.A and 1.B (pilot 
association submission of financial information and Coast Guard 
recognition of costs). We would describe our criteria for recognizing 
costs in Sec.  404.2. The section proposes that the recognition of 
costs be based on independent third party audits, as has been the case 
for many years.
    46 CFR 404.102--Project operating expenses, adjusting for inflation 
or deflation. Section 404.102 would correspond to current Steps 1.C and 
1.D and describe, as those Steps do, how we calculate an association's 
projected base non-compensation operating expenses. As we do today, we 
would apply a cost change factor for inflation or deflation, based on 
BLS Midwest Region CPI-U changes, to any of the operating expenses 
recognized under Sec.  404.101 that could be affected by inflation or 
deflation.
    This NPRM proposes base rates to take effect in 2016. It considers 
audited pilot association expenses from 2013, the last full year for 
which reported and audited financial information is available. Current 
Step 1.C allows us to apply a cost change factor only for the first 
year after that (2014). This does not take into account consumer price 
index changes in subsequent years (2015 and 2016). In July 2014 GLPAC 
recommended that we take the subsequent years into account,\26\ and we 
propose doing so, using BLS, and the target inflation rate set by the 
Federal Reserve as a proxy for the Midwest Region CPI-U if BLS 
projection data is unavailable.
---------------------------------------------------------------------------

    \26\ Transcript (7/23/2014), p. 200. Discussion begins on p. 
192.
---------------------------------------------------------------------------

    46 CFR 404.103--Determine number of pilots needed. Section 404.103 
would correspond to current Step 2.B, which determines how many pilots 
are needed based on our projections of the bridge hours that pilots 
will serve during the upcoming shipping season. Because bridge hours 
represent only the time that a pilot is on board a vessel and providing 
basic pilotage service, pilots frequently have commented in previous 
years' ratemaking rules that we should also take into account necessary 
demands on pilot time that go beyond bridge hours. They have also 
commented that Step 2.B does not specify sources for our bridge hour 
projections and that inaccurate projections distort the rest of our 
ratemaking calculations. We agree and propose changing how we calculate 
the number of pilots needed.
    Instead of projecting future bridge hours to calculate the number 
of pilots needed, we would rely on an average of actual past data, as 
recommended by GLPAC in July 2014.\27\ Also as recommended by 
GLPAC,\28\ we would identify the number of pilots needed to meet each 
shipping season's peak pilotage demand periods without interruption to 
service. To do this, we would determine each area's peak demand over an 
historical multi-year base period, and the pilot assignment cycle time 
to determine how many pilots would have been needed to meet that peak 
demand. For both determinations, we use averages to compensate for 
normal year-to-year fluctuation in traffic and pilot availability over 
the historical multi-year base period. We would divide the peak demand 
figures by the per-pilot cycle time to determine the number of pilots 
needed to meet peak demand.
---------------------------------------------------------------------------

    \27\ Transcript (7/23/2014), p. 258. Discussion begins on p. 
255.
    \28\ Transcript (7/23/2014), p. 237. Discussion begins on p. 
201.
---------------------------------------------------------------------------

    Historical multi-year base period. Normally, the base period would 
cover the five most recent full shipping seasons, and our data source 
would be pilot association entries in a system approved under proposed 
Sec.  403.300. Using a five year period should give us a reliable 
picture of recent Great Lakes traffic trends, and taking data from an 
approved system should ensure the use of consistent data across the 
three districts.
    If within the five most recent seasons data are unavailable or 
unreliable, we would consider substituting available and reliable data 
from another past shipping season or from a source other than an 
approved system, such as pilot association submitted data or Canadian 
GLPA data. Examples of unavailable or unreliable data are situations 
where data have not been recorded in an approved system, or come from 
an outlier year in which traffic was abnormally low or high and so 
could significantly distort our calculations. Generally, a traffic 
distortion of significant proportion, one that we would not expect be 
replicated within the next decade, would form the basis of this 
determination. That year's NPRM would explain, for public comment, our 
determination that normal data sources are unavailable or unreliable, 
and our selection of an alternate source. We specifically request 
public comment on whether there is an objective standard that we can 
and should use in each annual ratemaking, to determine whether a 
particular shipping season should be treated as an ``outlier.''
    For our first historical multi-year base period, we do not think we 
have sufficient reliable data for five recent

[[Page 54490]]

shipping seasons, and therefore we propose using only four seasons' 
data, as we explain in Part VI.
    Base seasonal work standard. This standard is intended to ensure 
that we consider all the time reasonably needed for a pilot to provide 
safe, efficient, and reliable pilotage service. We start by recognizing 
that pilots must provide pilotage whenever traffic demands it, and that 
the timing of this traffic is often unpredictable. Current regulations 
ensure only a minimum 10-hour rest period between a pilot's 
assignments.\29\ Historically, peak traffic demand is concentrated at 
the beginning of a shipping season, to handle the traffic buildup 
created by the previous season's closure, and at the end of the season, 
when vessels seek to complete their voyages before closure. During 
these peak periods, pilots are often on assignment nearly continuously. 
However, even in off-peak months, pilots frequently provide pilotage 
over many weeks without any significant rest, which over time threatens 
to degrade their ability to provide safe service. The pilots, GLPAC, 
and the Coast Guard agree that proper rest is an important concern to 
address.
---------------------------------------------------------------------------

    \29\ 46 CFR 401.451.
---------------------------------------------------------------------------

    In July 2014, GLPAC recommended that we ``take a serious look'' at 
scheduling monthly 10 day recuperative rest periods for pilots.\30\ We 
believe a reasonable goal is to provide each pilot with 10 days' 
recuperative rest each month during the off-peak months of the season, 
if it is possible to do so and still meet traffic demands safely, 
efficiently, and reliably. A typical shipping season runs 270 or more 
days of availability; 10 days scheduled time off each month is line 
with other pilot associations that require pilot availability of 180-
200 days per year. Many pilot associations work a multi-team concept of 
2 weeks on followed by 2 weeks off but we find this problematic because 
of the compressed shipping season in the Great Lakes. Thus, we propose 
building into our base seasonal work standard only 200 workdays per 
pilot per season. The 70-day difference should facilitate a 10-day 
recuperative rest period for each pilot in each of the seven months 
(mid-April to mid-November) between peak traffic periods.
---------------------------------------------------------------------------

    \30\ 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.
---------------------------------------------------------------------------

    In addition, we would determine, based on our analysis of best 
available data \31\ and for each area, the reasonably necessary average 
work cycle associated with each pilot assignment. We propose including 
in the work cycle not only the pilot assignment itself (``bridge 
hours''), but also time for pilot travel time from the pilot's home or 
other base to and from assignments (including time spent on pilot boats 
to and from assignments), vessel delays and detention, the 10-hour 
mandatory rest between assignments,\32\ and administrative time for 
district association presidents who also serve as pilots.\33\
---------------------------------------------------------------------------

    \31\ Figures for 2016 are based on analysis from the June 28, 
2013 Bridge Hour Definition and Methodology Final Report conducted 
for the Coast Guard by MicroSystems Integration, Inc., available in 
the docket and at http://www.uscg.mil/hq/cg5/cg552/pilotage.asp. 
This analysis is detailed in Appendix B, on page B-10 and presented 
in the Part VI calculations for proposed Sec.  404.103.
    \32\ 46 CFR 401.451. Note that this is not the same rest 
allowance as the previously-discussed 10 days' recuperative rest per 
month.
    \33\ This time is necessary to ensure effective and efficient 
association management and communication with industry and the Coast 
Guard.
---------------------------------------------------------------------------

    Adjustment of results. Dividing peak demand figures by per-pilot 
assignment figures usually will result in a fractional number that we 
would round either up or down, as seems most reasonable, to the nearest 
whole integer. Area totals would be added to determine each district's 
needed pilots. We could also make reasonable and necessary adjustments 
to take into account anticipated supportable circumstances that could 
affect the district's need for pilotage over the years for which base 
pilotage rates are being established.
    Needed vs. projected working pilots. In addition to showing the 
number of pilots needed in each district, we would 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 for 
which rates are being established. This projection becomes a key 
component of our calculations under proposed Sec.  404.104. We believe 
the projection will closely match the first shipping season's actual 
pilot population, because our regulatory role gives us accurate data on 
the number of current applicant pilots and on the progress of those 
applicants through the application, training, and certificating 
processes,\34\ and because the continuous communication between the 
Coast Guard and the pilot association ensures that we are aware of its 
near-term hiring expectations.
---------------------------------------------------------------------------

    \34\ These processes are described in 46 CFR part 401, subpart 
B, and are sufficiently time-consuming that the number of new pilots 
likely to enter the system in the year for which base rates are 
being established can be ascertained with reasonable accuracy when 
we issue the NPRM proposing those rates. The NPRM's projections, of 
course, can be modified in the final rule, in response to public 
comments on the NPRM.
---------------------------------------------------------------------------

    46 CFR 404.104--Determine target pilot compensation. This step 
would correspond to current Steps 2.A (individual target compensation) 
and 2.C (total target compensation) except in three respects.
    First, Step 2.A sets two different target compensation figures, one 
for undesignated waters and the other for designated waters. Although 
we propose (in Sec.  401.405) to set different rates for each 
district's designated and undesignated waters, we see no reasonable 
basis for discriminating between the target compensation of pilots on 
the basis of the distinction between designated or undesignated waters. 
In any waters and in any district, pilots need the same skills, and 
therefore we propose a single individual target pilot compensation 
figure across all three districts.
    Second, as we explained in discussing Sec.  404.2, our compensation 
benchmark can no longer rely (as it does under Step 2.A) on contract 
compensation information that now is treated as proprietary and 
therefore not fully available for Coast Guard or public review. 
Instead, we propose considering only the most relevant current data 
that are available for Coast Guard and public review. Sources for such 
data may vary from one full ratemaking to another, and for supportable 
circumstances we would be able to make reasonable and necessary 
adjustments to the data. We review the sources we considered for this 
NPRM in Part VI.
    Third, we propose changing the way in which Step 2.C determines 
total pilot compensation in each district, which currently is to 
multiply individual target pilot compensation by the number of pilots 
needed. That assumes that a district has a full complement of pilots to 
share the district's target compensation, and it incorrectly increases 
the district's total compensation when not fully staffed. This may act 
as a disincentive for the district to reach the full complement that we 
think necessary for providing safe, efficient, and reliable pilotage. 
Instead, we propose multiplying individual target pilot compensation by 
the number of pilots we project, in Sec.  404.103, to be working full 
time \35\ and compensated fully in the first shipping season of the new 
base period for which rates are being established.
---------------------------------------------------------------------------

    \35\ At various times during the season, typically during 
seasonal peaks, associations engage contract registered pilots to 
temporarily increase staffing and meet traffic demand requirements.
---------------------------------------------------------------------------

    46 CFR 404.105--Project return on investment. Currently, appendix A

[[Page 54491]]

contains three complex steps related to a district association's return 
on investment: Steps 4 (calculation of investment base), 5 
(determination of target rate of return on investment), and 6 
(adjustment determination). In July 2014, GLPAC recommended eliminating 
Steps 4 and 6 entirely, as being unclear and having minimal effect on 
the final rates, and revising Step 5 as we now propose.\36\ We would 
project an association's return on investment by taking the sum of 
operating expenses from Sec.  404.102 and target pilot compensation 
from Sec.  404.104, and multiplying that sum by the preceding year's 
average annual rate of return for new high grade corporate securities 
(the same multiplier used in Step 5).
---------------------------------------------------------------------------

    \36\ Transcript (7/23/2014), p. 255. Discussion begins on p. 
237.
---------------------------------------------------------------------------

    46 CFR 404.106--Project needed revenue. As discussed in connection 
with proposed Sec.  404.105, we are not replicating the current Step 6 
procedure for projecting each association's needed revenue for the next 
year. Instead, we propose calculating base needed revenue by adding 
projected base operating expenses from proposed Sec.  404.102, the 
total base target pilot compensation from proposed Sec.  404.104, and 
the base return on investment from proposed Sec.  404.105. We believe 
this is a more transparent procedure and that it adequately projects an 
association's needed revenue.
    46 CFR 404.107--Initially calculate base rates. This would 
correspond to current Step 7 of appendix A and initially set base rates 
for the designated and undesignated waters of each district, subject to 
modification or finalization under proposed Sec.  404.108.
    Currently, Step 7 takes projected revenue needed and divides it by 
projected revenue. The resulting rate multiplier is the percentage by 
which rates should be changed, subject to adjustment as explained in 
the last sentence of Step 7's first paragraph (we propose discussing 
that adjustment in Sec.  404.108). This bases the rate multiplier on a 
calculation that depends on the accuracy of our revenue projection.
    Instead, we propose initially calculating rates by dividing the 
projected needed revenue (Sec.  404.106) by available and reliable data 
for actual hours worked by pilots in each district's designated and 
undesignated waters during a multi-year base period. We would average 
this data to compensate for normal traffic fluctuation from one season 
to another.
    As we propose for Sec.  404.103, the base period would normally 
consist of the five most recent full shipping seasons. Normally, our 
data source would be pilot association entries in the GLPMS, or another 
system we would approve under proposed Sec.  403.300. If, within the 
five most recent seasons, data are unavailable or unreliable, we would 
substitute available and reliable data from another past shipping 
season or from a source other than GLPMS, including pilot association 
data or Canadian GLPA data. For example, if data has not been recorded 
in a system approved under Sec.  403.300, or comes from an outlier year 
in which traffic was abnormally low or high it could significantly 
distort our calculations; we would look to an alternative source of 
available shipping data.
    In some years and in some districts, dividing needed revenue by the 
multi-year average hours could produce significantly higher rates for 
designated waters than for undesignated waters. This imbalance could 
create 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 propose applying a ratio to adjust the balance between rates, 
limiting the designated-water rate to no more than twice the 
undesignated-water rate. This would correct the undesirable rate 
imbalance, without affecting the total needed revenue projected for 
each district.
    46 CFR 404.108--Review and finalize rates. This would correspond to 
the last sentence in the first paragraph of appendix A's Step 7, which 
for ``supportable circumstances'' permits discretionary adjustments to 
initial rate calculations. Supportable circumstances include factors 
defined in current U.S.-Canadian agreements relating to Great Lakes 
pilotage.\37\ Pilots and industry have commented unfavorably on past 
exercises of ``Step 7 discretion.'' We propose specifying that any 
modification to the initial rates set under Sec.  404.107 must be 
necessary and reasonable, as well as justified by supportable 
circumstances. Under proposed Sec.  404.100, we would continue to 
submit any proposed adjustment for public comment, which could result 
in our omitting or modifying the proposed adjustment. Any adjustment 
would be subject to Sec.  404.107's limitation on the disparity between 
rates for designated and undesignated waters.
---------------------------------------------------------------------------

    \37\ The Memorandum of Understanding can be viewed at http://www.uscg.mil/hq/cg5/cg552/docs/2013%20MOU%20English.PDF
---------------------------------------------------------------------------

VI. Discussion of Proposed Rate Changes

    We propose new rates and 46 CFR 401.401 surcharges 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.\38\
---------------------------------------------------------------------------

    \38\ See ``Summary--Independent Accountant's Report on Pilot 
Association Expenses, with Pilot Association Comments and 
Accountant's Responses.''
---------------------------------------------------------------------------

    The following discussion applies the proposed ratemaking 
methodology that is discussed in section V of this preamble.
    Recognize previous year's operating expenses (proposed Sec.  
404.101). We reviewed and accepted the accountant's final findings on 
the 2013 audits of association expenses.
    Tables 2 through 4 show each association's recognized expenses.

                                  Table 2--Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                               District One
                                                        --------------------------------------------------------
                                                         Area 1 designated        Area 2
               Reported expenses for 2013               -------------------    undesignated
                                                            St. Lawrence   -------------------       Total
                                                               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

[[Page 54492]]

 
        Other..........................................              6,925              5,460             12,385
                                                        --------------------------------------------------------
            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
                                                        --------------------------------------------------------
            Total pilot and dispatch costs.............            140,362            109,307            249,669
    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
                                                        --------------------------------------------------------
            Total Administrative Expenses..............            219,238            172,012            391,250
                                                        --------------------------------------------------------
            Total Operating Expenses (Other Costs +                740,815            531,541          1,272,356
             Pilot Boats + Admin)......................
Proposed Adjustments (Independent CPA).................  .................  .................  .................
    Payroll taxes......................................            (1,855)            (1,750)            (3,605)
                                                        --------------------------------------------------------
        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)
                                                        --------------------------------------------------------
        TOTAL DIRECTOR'S ADJUSTMENTS...................           (57,613)           (45,424)          (103,037)
                                                        --------------------------------------------------------
            Total Operating Expenses (OpEx +                       681,347            484,368          1,165,715
             Adjustments)..............................
----------------------------------------------------------------------------------------------------------------
* 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.

                                  Table 3--Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                               District Two
                                                        --------------------------------------------------------
                                                               Area 4       Area 5 designated
               Reported expenses for 2013                   undesignated   -------------------
                                                        -------------------  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
                                                        --------------------------------------------------------
            Total other pilotage costs.................            168,284            252,427            420,711

[[Page 54493]]

 
    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
                                                        --------------------------------------------------------
            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
        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
                                                        --------------------------------------------------------
            Total Administrative Expenses..............            197,293            295,941            493,234
                                                        --------------------------------------------------------
            Total Operating Expenses (Other Costs +                584,574            876,864          1,461,438
             Pilot 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)
                                                        --------------------------------------------------------
        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)
                                                        --------------------------------------------------------
TOTAL DIRECTOR'S ADJUSTMENTS...........................            (8,766)           (13,149)           (21,915)
                                                        --------------------------------------------------------
            Total Operating Expenses (OpEx +                       566,695            850,043          1,416,738
             Adjustments)..............................
----------------------------------------------------------------------------------------------------------------

                                 Table 4--Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                 Recognizable expenses                                        District Three
----------------------------------------------------------------------------------------------------------------
                                                           Areas 6 and 8    Area 7 Designated
                                                            undesignated   -------------------
                                                        -------------------
               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
                                                        --------------------------------------------------------
            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
                                                        --------------------------------------------------------
            Total pilot and dispatch costs.............            591,473            197,159            788,632

[[Page 54494]]

 
    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
                                                        --------------------------------------------------------
            Total Administrative Expenses..............            374,623            124,876            499,499
                                                        --------------------------------------------------------
            Total Operating Expenses (Other Costs +              1,333,587            444,532          1,778,119
             Pilot 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)
        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)
                                                        --------------------------------------------------------
        TOTAL DIRECTOR'S ADJUSTMENTS...................           (23,094)            (7,699)           (30,793)
                                                        --------------------------------------------------------
            Total Operating Expenses (OpEx +                     1,404,899            468,301          1,873,200
             Adjustments)..............................
----------------------------------------------------------------------------------------------------------------

    Project next year's operating expenses, adjusting for inflation or 
deflation (proposed Sec.  404.102). We based our 2014 and 2015 
inflation adjustments on BLS data from the Consumer Price Index for the 
Midwest Region of the United States,\39\ and projected it for 2016 
based on the target inflation rate set by the Federal Reserve.\40\ The 
adjustments are shown in Tables 5 through 7.
---------------------------------------------------------------------------

    \39\ 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.
    \40\ Further discussion available on the Federal Reserve target 
inflation rate is on their Web site at http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm and 
http://www.federalreserve.gov/faqs/money_12848.htm.

                                   Table 5--Inflation Adjustment, District One
----------------------------------------------------------------------------------------------------------------
                                                                                District 1
                                                        --------------------------------------------------------
                                                             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
                                                        --------------------------------------------------------
    Adjusted 2016 Operating Expenses...................            715,274            508,486          1,223,760
----------------------------------------------------------------------------------------------------------------

[[Page 54495]]

                                   Table 6--Inflation adjustment, District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District 2
                                                        --------------------------------------------------------
                                                            Undesignated        Designated           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
                                                        --------------------------------------------------------
    Adjusted 2016 Operating Expenses...................            594,913            892,370          1,487,283
----------------------------------------------------------------------------------------------------------------

                                  Table 7--Inflation adjustment, District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District 3
                                                        --------------------------------------------------------
                                                            Undesignated        Designated           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
                                                        --------------------------------------------------------
    Adjusted 2016 Operating Expenses...................          1,474,855            491,620          1,966,474
----------------------------------------------------------------------------------------------------------------

    Determine number of pilots needed (proposed Sec.  404.103). We 
first consider if reliable data are available from the five most recent 
full shipping seasons, in this case the 2010-2014 seasons, to populate 
a five-season historical multi-year base period. For the reasons we 
have discussed extensively with stakeholders, we consider 2014 to have 
been an unreliable outlier season, because of an abnormal 17% increase 
in shipping traffic, extended ice conditions,\41\ and associated 
significant delays. The 2014 season also made extensive use of double 
pilotage, the practice of assigning two pilots to a vessel, normally 
because of unusually hazardous conditions such as ice and the seasonal 
removal of aids to navigation. We then consider 2009, the most recent 
season before 2010. Again based on discussions with stakeholders, we 
must consider 2009 to have been an outlier too, because of abnormally 
low traffic from the 2008 global recession.\42\ We then consider if 
reliable source data is available before 2009, and conclude that it is 
not available for years prior to the introduction of GLPMS in 2009. We 
specifically request public comment on other possible sources of 
available and reliable data for shipping seasons prior to 2009. Pending 
receipt of such information, we restrict our multi-year base period to 
the four shipping seasons 2010 through 2013.
---------------------------------------------------------------------------

    \41\ The Canadian Great Lakes Pilotage Authority's Annual Report 
for 2014 states, p. 3: ``Traffic in 2014 increased by 17% over 2013 
mainly due to the significant movement of the 2013 Western Canadian 
grain crop to export markets overseas. The economic recovery of the 
American economy has also accounted for increased trade in the Great 
Lakes corridor.'' The Annual Report also states, p. 7, ``[d]elays 
due to shortages in pilots experienced in 2014 was directly 
attributable to the increase in traffic being serviced by the 
existing pool of pilots as well as a higher level of over carried 
pilots due to the extreme ice conditions experienced at the start of 
the navigation season.''
    \42\ See [Canadian] Great Lakes Pilotage Authority, Annual 
Report 2009, p. 2: ``The world economic recession which began in 
late 2008 and manifested itself in 2009 had a significant effect on 
ship traffic in the St. Lawrence Seaway/Great Lakes Region where 
traffic and cargo volumes decreased by 25% from the previous year.''
---------------------------------------------------------------------------

    Next, we calculate the average cycle time associated with each 
pilot assignment, in each area, over the 2010-2013 base period. In the 
future, we intend to use GLPMS data to track cycle time, but that data 
is not available for 2010 through 2014. We consider our best source for 
that base period's cycle time to be the Bridge Hour Definition and 
Methodology Final Report prepared on the Coast Guard's behalf in June 
2013.\43\ 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. Table 
8 shows the 2013 report's calculation of the pilot work cycle for each 
area.
---------------------------------------------------------------------------

    \43\ 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.

                                                            Table 8--Cycle Time, 2013 Report
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   Total  time
                                                   Trip time      Travel     Pilot boat                                 on       Mandatory      Pilot
                                                     (hrs)        (hrs)       transit    Delay (hrs)  Admin (hrs)   assignment   rest (hrs)   assignment
                                                                               (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
                                                 -------------------------------------------------------------------------------------------------------
    Area 3......................................                                Welland Canal Exclusive to Canadian Pilots
                                                 -------------------------------------------------------------------------------------------------------
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

[[Page 54496]]

 
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 Table 9. Table 9 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 of needed pilots 
for the 2010-2013 time period (38) authorized for the pilot 
associations.

                                         Table 9--Average Peak Traffic Demand and Pilot Requirements, 2010-2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    District 1                      District 2                              District 3
                                         ---------------------------------------------------------------------------------------------------------------
                                              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 assignments per               5               5               5               5               4               4               4
 day....................................
Average number of pilots needed to meet               10               5               5              10               6               8               6
 peak demand (total = 50)...............
Average authorized pilots, 2010-2013                   6               5               4               6               7               4               6
 (total = 38)...........................
Authorized pilots, 2015 (total = 36)....               6               5               4               6               6               4               5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As shown in Table 8, 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 
Table 9 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 Table 9 
shows no doubling in those areas. However, the Table does show a 50% 
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 1.5 days per vessel, not just 1, to move a vessel. 
Therefore, Table 9 shows 6 pilots, not 4, in each of Areas 6 and 8. 
This number will ensure that the four ships shown as moving daily 
through Area 7 could be moved through the undesignated waters at the 
same rate.
    Please note that the addition of Iroquois Lock to the District One 
change points, previously discussed in connection with our proposed 
amendment to Sec.  401.450, could eventually support adding pilots in 
that district, but is not factored into Table 9.
    Based on our Table 9 figures, and as shown in Table 10, we find 
that 50 pilots are needed over the period for which 2016 base rates 
would be in effect, as opposed to the 36 currently authorized pilots 
shown in Table 9. Table 10 also shows that based on our best current 
information we project there to be only 42 fully working and fully 
compensated pilots (``working pilots'') in 2016. Our goal is to help 
the pilot associations close the gap between needed pilots and working 
pilots as soon as possible.

                             Table 10--Pilots Needed; Pilots Projected To Be Working
----------------------------------------------------------------------------------------------------------------
                                                            District One       District Two      District Three
----------------------------------------------------------------------------------------------------------------
Needed pilots, period for which 2016 rates are in                       15                 15                 20
 effect (total = 50)...................................
Working pilots projected for 2016 (total = 42).........                 13                 12                 17
----------------------------------------------------------------------------------------------------------------

    At this time, we see no need to adjust the number of pilots shown 
in Table 10.
    Determine target pilot compensation (proposed Sec.  404.104). Our 
discussion of our calculations under this section contains two 
sections, the first section limited to the Coast Guard's own analysis, 
and the second section discussing target compensation figures proposed 
by the pilot associations.
    Coast Guard analysis and calculations. For this 2016 ratemaking,

[[Page 54497]]

we considered three sources for possible benchmark compensation data 
that provide compensation data for occupations similar to that of a 
Great Lakes pilot. All of these sources provide current and available 
data that is open for public review: Canadian Laurentian Pilotage 
Authority (LPA) pilot compensation data; masters, mates and pilots wage 
data from the BLS, and Canadian GLPA registered pilot compensation. We 
specifically request public comments suggesting any other current, 
reliable, and publicly available sources we should consider in setting 
the 2016 season's target pilot compensation.
    Table 11 presents average recent compensations for each of these 
three sources.
---------------------------------------------------------------------------

    \44\ http://www.glpa-apgl.com/annualReports_e.asp.
    \45\ http://www.pilotagestlaurent.gc.ca/publications_e.asp.
    \46\ http://www.bls.gov/oes--Captains, Mates, and Pilots of 
Water Vessels (http://www.bls.gov/oes/current/naics4_483100.htm--53-
5021).

                           Table 11--Comparing Pilot Compensation and Wage Information
----------------------------------------------------------------------------------------------------------------
                                                          Average Canadian       Average
                                                          registered pilot   Laurentian pilot   Bureau of Labor
                                                         compensation \44\     compensation     Statistics Wages
                                                                (CAD)           (CAD) \45\         \46\ (USD)
----------------------------------------------------------------------------------------------------------------
2011...................................................           $233,567           $335,864            $73,590
2012...................................................            247,145            347,615             78,030
2013...................................................            268,552            349,022             80,960
2014...................................................            323,641  .................             75,000
Average................................................            268,226            344,167             76,895
----------------------------------------------------------------------------------------------------------------

    We evaluated the suitability of each of these sources as a 
benchmark for setting our target pilot compensation.
    The LPA services all vessels that ultimately transit through the 
Saint Lawrence River and Great Lakes. The majority of their pilotage 
service is provided primarily to vessels that stop in Montreal, which 
are typically larger than vessels that proceed upbound into the Great 
Lakes. The LPA also provides service throughout the year, whereas Great 
Lakes navigation is closed for a portion of the year due to ice 
conditions and lock maintenance. Due to these differences between LPA 
and U.S. Great Lakes pilotage conditions, we find LPA compensation 
information unsuitable as a benchmark for setting target U.S. pilot 
compensation.
    BLS data for masters, mates, and pilots cover officers whose duties 
and responsibilities are different from those of a U.S. Great Lakes 
pilot. For example, unlike U.S. Great Lakes pilots, most of these 
officers are not directly responsible for the safe navigation of 
vessels of any tonnage through restricted waters. Further, this data is 
skewed downward by the higher number of lower wage mates, who do not 
hold the same licenses as masters and pilots. Therefore, we find this 
information is also unsuitable as a benchmark for setting target pilot 
compensation.
    Canadian GLPA pilots provide service that is almost identical to 
the service provided by U.S. Great Lakes pilots. However, unlike the 
U.S. pilots, Canadian GLPA pilots are Canadian government employees and 
therefore have guaranteed minimum compensation with increases for high-
traffic periods, retirement, healthcare and vacation benefits, and 
limited professional liability. In addition, GLPA pilots have 
guaranteed time off while U.S. pilots must be available for service 
throughout the shipping season and without any guaranteed time off; and 
due to historic staffing differences U.S. pilots get less time off than 
GLPA pilots. Nevertheless, because they work under the same conditions, 
months, and vessels (sometimes concurrently) as the U.S. pilots, we 
find that GLPA compensation information is the most suitable available 
benchmark for establishing target pilot compensation.
    The calculations shown in Tables 12 through 14 take the last four 
years of GLPA data (covering actual compensation, 2011 through 2014), 
adjust for foreign exchange differences and inflation,\47\ and project 
future GLPA compensation for 2015 and 2016.
---------------------------------------------------------------------------

    \47\ 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.
---------------------------------------------------------------------------

    Table 12 shows GLPA compensation for 2011 through 2014, adjusted 
for exchange rates in each year.

                          Table 12--Recent History of Canadian GLPA Pilot Compensation
----------------------------------------------------------------------------------------------------------------
                                                          Canadian Great     Average annual      Canadian Great
                                                           Lakes pilot          currency          Lakes pilot
                         Year                              compensation     conversion  (CAD      compensation
                                                              (CAD)             to USD)*             (USD)
----------------------------------------------------------------------------------------------------------------
2014..................................................           $323,641               1.149           $281,672
2013..................................................            268,552               1.071            250,749
2012..................................................            247,145               1.04         237,639,639
2011..................................................            233,567               1.029            226,984
----------------------------------------------------------------------------------------------------------------
*All figures reflect annual average currency conversions for the time periods provided. CAD is divided by the
  listed currency conversion factor to convert to USD. A complete table of these exchange rates is provided by
  the Internal Revenue Service here: http://www.irs.gov/Individuals/International-Taxpayers/Yearly-Average-Currency-Exchange-Rates.

    Table 13 takes the figures from Table 12 and adjusts them for 
inflation in each year, similar to way Tables 5-7 adjust U.S. pilot 
association operating expenses.

[[Page 54498]]

                                                             Table 13--Inflation Adjustments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                2012         2013         2014         2015         2016
                                                                USD  (from   Inflation    Inflation    Inflation    Inflation    Inflation   Total (2016
                             Year                               Table 11)    adjustment   adjustment   adjustment   adjustment   projection      USD)
                                                                              (@3.2%)       (@2%)       (@1.4%)      (@1.5%)      (@2%) *
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014.........................................................     $281,672  ...........  ...........  ...........       $4,225       $5,633     $291,531
2013.........................................................      250,749  ...........  ...........       $3,510        3,761        5,015      263,036
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
See footnote 44 on previous page for supporting inflation data.
*See previous discussion on Federal Reserve target inflation rate for 2016 projections. See also policy statement of the Bank of Canada regarding their
  2% target inflation rate at http://www.bankofcanada.ca/core-functions/monetary-policy/inflation/.

    Using this data, converted to 2016 USD, we then review the 
percentage change in Canadian compensation.

         Table 14--Analysis of Canadian GLPA Pilot Compensation
------------------------------------------------------------------------
                                              Canadian Great
                                                Lakes pilot      Percent
                   Year                        compensation      change
                                              (from Table 12)
------------------------------------------------------------------------
2014......................................            $291,531      10.8
2013......................................              63,036       3.5
2012......................................             254,037       1.7
2011......................................             249,910  ........
------------------------------------------------------------------------

We are basing our target pilot compensation calculations on 2013 GLPA 
compensation. We think 2013 provides more reliable current benchmark 
information than 2014. There is a moderate annual growth in 
compensation between 2011 and 2013, but a significant nearly 11% 
increase in 2014. We believe that increase is attributable to a 17% 
Canadian traffic increase in 2014, compounded by extended ice 
conditions.
    Table 14 shows that, from the 2013 figure of $263,036, we project 
forward an annual 2.6% increase to align with the general trend of 
compensation increases for Canadian pilots. This is an average of the 
increases from 2012 and 2013. Table 15 shows the results of these 
calculations:

Table 15--Projected Increases in Canadian Great Lakes Pilot Compensation
------------------------------------------------------------------------
                                                           Projected
                                                        Canadian  Great
                         Year                             Lakes  pilot
                                                          compensation
                                                          (2016 USD) *
------------------------------------------------------------------------
2016.................................................           $284,091
2015.................................................            276,892
2014.................................................            269,875
2013.................................................            263,036
------------------------------------------------------------------------
*All figures from 2014 forward are projections only for the purposes of
  this rulemaking and do not reflect actual Canadian compensation. Each
  year is increased 2.6% in line with average compensation increases in
  2012 and 2013.

    As previously discussed, the difference in status between GLPA 
employees and independent U.S. pilots creates significant differences 
in their relative compensation. These differences constitute 
supportable circumstances for adjusting U.S. target pilot compensation 
by increasing it 10% over our projected 2016 GLPA compensation figure, 
taking our proposed U.S. individual target pilot compensation to 
$312,500. Although the appropriateness of 10% as an adjustment figure 
was not put to a vote, that figure and no other was cited by several 
speakers at GLPAC's July 2014 meeting \48\ as balancing the different 
status of the U.S. and GLPA pilots. We invite public comment on whether 
the 10% adjustment figure is appropriate for the 2016 rate.
---------------------------------------------------------------------------

    \48\ Transcript (7/24/2014), pp. 43-45.
---------------------------------------------------------------------------

    Table 16 shows the total target compensation for each district, the 
result of multiplying our proposed individual target compensation of 
$312,500 by the number of working pilots shown in Table 10. Our 
proposed total target pilot compensation for 2016 is $13,125,000.

                             Table 16--Total Target Pilot Compensation per District
----------------------------------------------------------------------------------------------------------------
                                                            District One       District Two      District Three
----------------------------------------------------------------------------------------------------------------
Target compensation per pilot..........................           $312,500           $312,500           $312,500
Number of working pilots...............................                 13                 12                 17
Total target pilot compensation (total, all districts =         $4,062,500         $3,750,000         $5,312,500
 $13,125,000)..........................................
----------------------------------------------------------------------------------------------------------------

    At this time, and subject to the public comments that we 
specifically request on this point, we find no economic data that 
supplies supportable circumstances for additional adjustments to target 
pilot compensation.
    Pilot association proposals. Prior to preparing this NPRM, we 
discussed the determination of target pilot compensation with GLPAC and 
with the pilot associations. At its July 2014 meetings, GLPAC 
considered and rejected, by a vote of 4 to 2 with no abstentions, a 
proposed individual target pilot compensation starting at $295,000. We 
interpreted the $295,000 figure to represent total compensation, 
including both wages and benefits.\49\
---------------------------------------------------------------------------

    \49\ Transcript (7/24/2014), p. 45. Discussion begins on p. 20. 
Under 46 U.S.C. 9307(d)(3), GLPAC recommendations require approval 
by ``at least all but one of the members then serving on the 
committee;'' hence a 4-2 vote does not pass. For the Coast Guard's 
grounds for interpreting ``compensation'' to include both wages and 
benefits, and not wages alone, see pp. 43-45 of the transcript.
---------------------------------------------------------------------------

    On May 8, 2015, the pilot associations requested that we consider 
$355,000 as an individual target pilot compensation figure, which they 
said would not guarantee, but might ensure, a sufficient amount to 
attract reasonable pilot

[[Page 54499]]

candidates and retain current pilots. This request was accompanied by 
an enclosure supporting a minimum target figure of almost $394,000.\50\ 
In support of the $394,000 figure, the pilots cite the $295,000 
compensation that a majority (but not the required super-majority) \51\ 
of GLPAC members supported in July 2014. The pilots interpreted the 
$295,000 figure to include wages only, not benefits. To that figure, 
they add the benefit amounts used in our 2012 ratemaking, which ranged 
from $64,678 in undesignated waters to $73,639 in designated waters. 
They then adjust the wage and benefit figures for inflation to arrive 
at a total minimum compensation of approximately $394,000.
---------------------------------------------------------------------------

    \50\ Email, Capt. John Boyce, President, St. Lawrence Seaway 
Pilots Association, to Director, Great Lakes Pilotage, May 8, 2015. 
The actual figure stated in the enclosure to this email is $393,996, 
which we round for convenience to $394,000.
    \51\ 46 U.S.C. 9307(d)(3).
---------------------------------------------------------------------------

    At this time, we decline to adopt either of the pilots' proposed 
amounts. To the extent they rely on the $295,000 compensation figure 
considered, and majority-approved but officially rejected by GLPAC, we 
do not accept the pilots' contention that GLPAC discussed that figure 
in the context of wages only, and not benefits; we believe the 
discussion considered total compensation, both wages and benefits. We 
also note that our proposed individual target pilot compensation, 
$312,500, is 10% higher than what we project as 2016 GLPA individual 
pilot compensation. By contrast, $355,000 would be about 25% higher 
than the GLPA compensation, and $394,000 would be about 39% higher; we 
question whether such large disparities can be justified. We 
specifically request public comment and supporting data on the pilot 
associations' proposal for setting the 2016 individual target pilot 
compensation.
    Determine return on investment (proposed Sec.  404.105). The 2013 
average annual rate of return for new issues of high-grade corporate 
securities was 4.24 percent.\52\ We apply that rate to each district's 
projected total operating and compensation expenses (from Sec. Sec.  
404.102 and 404.104) to determine the allowed return on investment for 
the shipping season, as shown in Table 17.
---------------------------------------------------------------------------

    \52\ Based on Moody's AAA corporate bonds, which can be found 
at: http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                                                     Table 17--Determination of Return on Investment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    District 1                      District 2                      District 3
                                                         -----------------------------------------------------------------------------------------------
                                                            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)................       2,187,500       1,875,000       1,562,500       2,187,500       3,437,500       1,875,000
Total 2016 Expenses.....................................       2,902,774       2,383,486       2,157,413       3,079,870       4,912,355       2,366,620
Return on Investment (4.24%)............................         123,078         101,060          91,474         130,587         208,284         100,345
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Project needed revenue for next year (proposed Sec.  404.106). 
Table 18 shows each association's needed revenue, determined by adding 
the proposed Sec.  404.102 operating expense, the proposed Sec.  
404.104 total target compensation, and the proposed Sec.  404.105 
return on investment. Across all three districts, the projected needed 
revenue for 2016 is $18,557,345, up actual revenue of $10,899,506 
reported in our 2013 audits.

                                                                Table 18--Revenue Needed
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    District 1                      District 2                      District 3
                                                         -----------------------------------------------------------------------------------------------
                                                            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)................       2,187,500       1,875,000       1,562,500       2,187,500       3,437,500       1,875,000
Return on Investment (Step 5)...........................         123,078         101,060          91,474         130,587         208,284         100,345
Total Revenue Needed (Total for all districts =                3,025,852       2,484,546       2,248,887       3,210,457       5,120,638       2,466,965
 $18,557,345)...........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Make initial base rate calculations (proposed Sec.  404.107). To 
make our initial base rate calculations, we first establish a multi-
year base period from which available and reliable data for actual 
pilot hours worked in each district's designated and undesignated 
waters can be drawn. As discussed in connection with our calculations 
for proposed Sec.  404.103, and for the same reasons, for 2016 our 
multi-year base period covers the four shipping seasons from 2010 
through 2013.

                                          Table 19--Hours Worked, 2010-2013, Designated and Undesignated Waters
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Pilotage district
                                                         -----------------------------------------------------------------------------------------------
                          Year                                                  D1                              D2                              D3
                                                           D1 Designated   Undesignated    D2 Designated   Undesignated    D3 Designated   Undesignated
                                                          waters (hours)  waters (hours)  waters (hours)  waters (hours)  waters (hours)  waters (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010....................................................           4,839           5,649           5,235           5,565           2,461          20,211
2011....................................................           5,045           5,377           3,680           3,708           1,678          16,012
2012....................................................           4,771           5,121           3,922           3,848           2,163          15,906
2013....................................................           5,864           5,529           4,750           4,603           2,361          17,115

[[Page 54500]]

 
Average.................................................           5,130           5,419           4,397           4,431           2,166          17,311
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 20 calculates new rates by dividing each association's 
projected needed revenue, from Sec.  404.106, by the average hours 
shown in Table 19 and rounding to the nearest whole number.

                                                               Table 20--Rate Calculations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    District 1                      District 2                      District 3
                                                         -----------------------------------------------------------------------------------------------
                                                            Designated     Undesignated    Undesignated     Designated     Undesignated     Designated
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revenue Needed (Step 66)................................      $3,025,852      $2,484,546      $2,248,887      $3,210,457      $5,120,638      $2,466,965
Average time on task 2010-2013..........................           5,130           5,419           4,431           4,397          17,311           2,166
Hourly Rate.............................................            $590            $458            $508            $730            $296          $1,139
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 20 shows that the District 3 rate for designated waters would 
be more than twice the rate for undesignated waters. Therefore, as 
discussed earlier under this proposed section, we apply a ratio to 
adjust the balance between these rates so that the rate for designated 
waters is no more than twice the rate for undesignated waters, as shown 
in Table 21, rounded to the nearest whole number.

           Table 21--District 3--Capped Designated Waters Rate
------------------------------------------------------------------------
                                                 District 3
                                   -------------------------------------
                                        Areas 6, 8
                                       undesignated    Area 7 designated
------------------------------------------------------------------------
Revenue Needed....................         $6,068,890         $1,518,713
Projected Pilotage Demand.........             17,311              2,166
Hourly Rate.......................               $351               $701
------------------------------------------------------------------------

    Review and finalize rates (proposed Sec.  404.108). As we noted in 
our discussion of Table 9 under proposed Sec.  404.103, we are working 
with the pilotage associations to close a significant gap between the 
number of pilots needed and the working pilots we expect to be working 
full-time and fully compensated in 2016. Closing the gap entails 
training new applicant pilots, at considerable expense to the 
associations. Ongoing training for current pilots is also an important 
element of providing safe, efficient, and reliable pilotage service. 
Ordinarily, current training expenses would not be recognized for 
several years, which would reduce funds available for other immediate 
association expenses. We find that the importance of training, both to 
help achieve a full complement of needed pilots and to ensure skill 
maintenance and development for current pilots, is a supportable 
circumstance for imposing a necessary and reasonable temporary 
surcharge for 2016, as authorized by 46 CFR 401.401, allowing each 
association to recoup necessary and reasonable training expenses 
incurred. We anticipate that there will be 2 applicant pilots in each 
district for 2016, as we continue advancing towards our pilot strength 
goals. Based on historic pilot costs, the stipend, per diem, and 
training costs for each applicant pilot are approximately $150,000. 
Thus, we estimate that the training expenses that each association will 
incur will be approximately $300,000. Table 22 derives the proposed 
percentage surcharge for each district by comparing this estimate to 
each district's projected needed revenue.

                                   Table 22--Surcharge Calculation by District
----------------------------------------------------------------------------------------------------------------
                                                             District 1         District 2         District 3
----------------------------------------------------------------------------------------------------------------
Projected Needed Revenue (Sec.   404.106)..............         $5,510,398         $5,459,344         $7,587,603
Anticipated Training Expenses..........................           $300,000           $300,000           $300,000
Surcharge Needed *.....................................                 6%                 6%                 4%
----------------------------------------------------------------------------------------------------------------
* All surcharge calculations are rounded up to the nearest whole percentage.

At the conclusion of the 2016 shipping season, we would account for 
actual surcharge revenue and make adjustments as necessary to the 
operating expenses for the following year.

[[Page 54501]]

VII. Regulatory Analyses

    We developed this proposed rule after considering numerous statutes 
and executive orders (E.O.s) related to rulemaking. Below we summarize 
our analyses based on these statutes or E.O.s.

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 proposed rule has not been designated a ``significant 
regulatory action'' under section 3(f) of Executive Order 12866. 
Accordingly, this proposed rule has not been reviewed by the Office of 
Management and Budget (OMB). We consider all estimates and analysis in 
this Regulatory Analysis to be subject to change in consideration of 
public comments.
    The following table summarizes the affected population, costs, and 
benefits of the proposed rule.

                                Table 23--Summary of Regulatory Economic Impacts
----------------------------------------------------------------------------------------------------------------
                                                           Affected
       Proposed changes              Description          population           Costs              Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes..................  Under the Great Lakes  126 vessels       $7,168,152......  --New rates cover an
                                 Pilotage Act of        journeying the                      association's
                                 1960, Coast Guard is   Great Lakes                         necessary and
                                 required to review     system annually.                    reasonable operating
                                 and adjust base                                            expenses.
                                 pilotage rates                                            --Provides fair
                                 annually.                                                  compensation,
                                                                                            adequate training,
                                                                                            and sufficient rest
                                                                                            periods for pilots.
                                                                                           --Ensures the
                                                                                            association makes
                                                                                            enough money to fund
                                                                                            future improvements.
Procedural Changes............  Proposed changes to    3 pilot           No additional     --Provide maximum
                                 the annual             associations.     cost.             transparency and
                                 ratemaking                                                 simplicity in the
                                 methodology.                                               ratemaking
                                                                                            methodology.
                                                                                           --Make submitting
                                                                                            data easier for
                                                                                            pilots and more
                                                                                            accurate.
----------------------------------------------------------------------------------------------------------------

    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 proposed rulemaking, we 
are adjusting the pilotage rates for the 2016 shipping season to 
generate for each district sufficient revenues to reimburse its 
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 proposed rule would, if 
codified, 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 $6,268,152 across all three 
districts over 2015 payments (Table 24).
    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 proposed rate changes, we propose authorizing a temporary surcharge 
to allow the pilotage associations to recover training expenses that 
would be incurred in 2016. We estimate that each district will incur 
$300,000 in training expenses. These temporary surcharges would 
generate a combined $900,000 in revenue for the pilotage associations 
across all three districts.
    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 $7,168,152 more than the payments that were made in 2015 
(Table 24).\53\
---------------------------------------------------------------------------

    \53\ 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 draft regulatory assessment follows.
    This proposed rulemaking proposes revisions to the annual 
ratemaking methodology (procedural changes), and applies the proposed 
ratemaking methodology to increase Great Lakes pilotage rates and 
surcharges from the current rates set in the 2015 final rule (rate 
changes). The proposed 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.
    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.
    We used 2012-2014 vessel arrival data from the Coast Guard's Ship 
Arrival Notification System (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.
    The procedural changes are the proposed revisions to the annual 
ratemaking methodology and several Great Lakes pilotage regulations. 
These procedural changes are intended to clarify and simplify the 
current methodology, and increase the accuracy

[[Page 54502]]

of collecting information on each pilot association's expenses and 
revenues in order to lower the variance between projected revenue and 
actual revenue. However, 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 2013, as discussed in 
Section VI of this preamble. We projected 2015 revenues using the rate 
increases set in the 2014 and 2015 final rules. The 2014 final rule 
\54\ increased rates by 2.5 percent and the 2015 final rule \55\ 
increased rates by 10 percent. Table 24 shows the 2015 revenue 
projections.
---------------------------------------------------------------------------

    \54\ See 79 FR 12084, Great Lakes Pilotage Rates-2014 Annual 
Review and Adjustment (https://www.federalregister.gov/articles/2014/03/04/2014-04591/great-lakes-pilotage-rates-2014-annual-review-and-adjustment).
    \55\ See 80 FR 10365, Great Lakes Pilotage Rates-2015 Annual 
Review and Adjustment (https://www.federalregister.gov/articles/2015/02/26/2015-04036/great-lakes-pilotage-rates-2015-annual-review-and-adjustment).

                                          Table 24--Revenue Adjustment
----------------------------------------------------------------------------------------------------------------
                                                            2014 Revenue                           Total 2015
                Area                     2013 Revenue        adjustment        2015 Revenue        projected
                                          (audited)            (2.5%)       adjustment  (10%)       revenue
----------------------------------------------------------------------------------------------------------------
D1 Designated.......................         $1,990,865            $49,772           $204,064         $2,244,700
D1 Undesignated.....................          1,415,299             35,382            145,068          1,595,750
                                     ---------------------------------------------------------------------------
    Total, District 1...............          3,406,164             85,154            349,132          3,840,450
D2 Undesignated.....................          1,267,750             31,694            129,944          1,429,388
D2 Designated.......................          1,901,627             47,541            194,917          2,144,085
                                     ---------------------------------------------------------------------------
    Total, District 2...............          3,169,377             79,234            324,861          3,573,473
D3 Undesignated.....................          3,242,971             81,074            332,405          3,656,450
D3 Designated.......................          1,080,994             27,025            110,802          1,218,821
                                     ---------------------------------------------------------------------------
    Total, District 3...............          4,323,965            108,099            443,206          4,875,271
                                     ---------------------------------------------------------------------------
        System Total................        $10,899,506           $272,488         $1,117,199        $12,289,193
----------------------------------------------------------------------------------------------------------------

    Table 25 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.

                                               Table 25--Effect of the Proposed Rule by Area and District
                                                                 [$U.S.; non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                        Additional costs
                                                           Projected revenue  Projected revenue   Total costs 2015      Temporary        or savings of
                           Area                              needed in 2015     needed in 2016      (2016-2015)         surcharge        this proposed
                                                                                                                                              rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
D1 Designated............................................         $2,244,700         $3,025,852           $781,152  .................  .................
D1 Undesignated..........................................          1,595,750          2,484,546            888,796  .................  .................
                                                          ----------------------------------------------------------------------------------------------
    Total, District 1....................................          3,840,450          5,510,398          1,669,948            300,000          1,969,948
D2 Undesignated..........................................          1,429,388          2,248,887            819,499  .................  .................
                                                          ----------------------------------------------------------------------------------------------
D2 Designated............................................          2,144,085          3,210,457          1,066,372  .................  .................
    Total, District 2....................................          3,573,473          5,459,344          1,885,871            300,000          2,185,871
D3 Undesignated..........................................          3,656,450          5,120,638          1,464,188  .................  .................
D3 Designated............................................          1,218,821          2,466,965          1,248,144  .................  .................
                                                          ----------------------------------------------------------------------------------------------
    Total, District 3....................................          4,875,271          7,587,603          2,712,332            300,000          3,012,332
                                                          ----------------------------------------------------------------------------------------------
        System Total.....................................         12,289,193         18,557,345          6,268,152            900,000          7,168,152
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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 proposed rule.
    The effect of the rate change in this proposed 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 $1,669,948, $1,885,871, and 
$2,712,332, respectively, from the previous year.
    In addition to the rate changes, temporary surcharges on traffic in

[[Page 54503]]

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 $300,000 in revenue for the pilotage 
associations in each district, for a total additional revenue of 
$900,000.
    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 NPRM 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 $7,168,152 across all three districts.
    This proposed rule would 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 would 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 procedural changes would 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).

B. Small Entities

    Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have 
considered whether this proposed rule would have a significant economic 
effect on a substantial number of small entities. The term ``small 
entities'' comprises small businesses, not-for-profit organizations 
that are independently owned and operated and are not dominant in their 
fields, and governmental jurisdictions with populations of less than 
50,000 people.
    We expect that entities affected by the proposed 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 the proposed 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 (MISLE) database, and 
we reviewed business revenue and size data provided by publicly 
available sources such as MANTA \56\ and Cortera.\57\ We found that 
large, foreign-owned shipping conglomerates or their subsidiaries owned 
or operated all vessels engaged in foreign trade on the Great Lakes.
---------------------------------------------------------------------------

    \56\ See http://www.manta.com/.
    \57\ See https://www.cortera.com/.
---------------------------------------------------------------------------

    There are three U.S. entities affected by the proposed 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 proposed 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 proposed rule would not have a significant economic effect on a 
substantial number of small entities. If you think that your business, 
organization, or governmental jurisdiction qualifies as a small entity 
and that this proposed rule would have a significant economic effect on 
it, please submit a comment to the Docket Management Facility at the 
address under ADDRESSES. In your comment, explain why you think it 
qualifies, as well as how and to what degree this proposed rule would 
economically affect it.

C. Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement 
Fairness Act of 1996, Public Law 104-121, we want to assist small 
entities in understanding this proposed rule so that they can better 
evaluate its effects on them and participate in the rulemaking. If the 
proposed rule would affect your small business, organization, or 
governmental jurisdiction and you have questions concerning its 
provisions or options for compliance, please consult Mr. Todd Haviland, 
Director, Great Lakes Pilotage, Commandant (CG-WWM-2), Coast Guard; 
telephone 202-372-2037, email Todd.A.Haviland@uscg.mil, or fax 202-372-
1914. The Coast Guard will not retaliate against small entities that 
question or complain about this rule or any policy or action of the 
Coast Guard.
    Small businesses may send comments on the actions of Federal 
employees who enforce, or otherwise determine compliance with, Federal 
regulations to the Small Business and Agriculture Regulatory 
Enforcement Ombudsman and the Regional Small Business Regulatory 
Fairness Boards. The Ombudsman evaluates these actions annually and 
rates each agency's responsiveness to small business. If you wish to 
comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR 
(1-888-734-3247).

D. Collection of Information

    This proposed rule would call for no new collection of information 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) but 
would adjust the burden for an existing COI number 1625-0086, as 
described below.
    Title: Great Lakes Pilotage.
    OMB Control Number: 1625-0086.
    Summary of the Collection of Information: The proposed rule would 
require 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, this proposed rule will 
explicitly add the requirement for the 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 copies of their source forms, or billing

[[Page 54504]]

forms, to the Great Lakes Pilotage Division on a monthly basis. These 
forms are generated by the pilot associations for their own billing 
purposes.
    Need for Information: This information is needed in order to more 
accurately set future rates.
    Proposed Use of Information: We would use this information to 
comply with the statutory and regulatory requirements regarding the 
ratemaking and oversight functions imposed upon the agency.
    Description of Respondents: The respondents are representatives of 
the three U.S. pilotage associations on the Great Lakes authorized by 
the Coast Guard to provide pilotage service, the 42 registered pilots 
we project for 2016, as well as on average the six individuals that 
must fill out Form CG-4509 each year to apply for certification as U.S. 
registered pilots.
    Number of Respondents: The estimated number of respondents 
increases with this proposed rule. We estimate the maximum number of 
respondents affected by this proposed rule to increase from 9 to 51 per 
year. This is the sum of three pilot association representatives, six 
applicant pilots applying for registration by filling out the CG-4509 
and 42 projected registered pilots.
    Frequency of Response: Frequency dictated by marine traffic levels 
and association staffing.
    Burden of Response: We estimate the burden of response will vary by 
type of response, from 15 minutes for a pilot to complete the source 
form to one hour for the pilot association to transmit the source forms 
to the Coast Guard.
    Estimate of Annual Burden: We estimate the total annual burden will 
increase from 19 to 2129.5.
    As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), we will submit a copy of this proposed rule to the Office of 
Management and Budget (OMB) for its review of the collection of 
information.
    We ask for public comment on the proposed collection of information 
to help us determine how useful the information is; whether it can help 
us perform our functions better; whether it is readily available 
elsewhere; how accurate our estimate of the burden of collection is; 
how valid our methods for determining burden are; how we can improve 
the quality, usefulness, and clarity of the information; and how we can 
minimize the burden of collection.
    If you submit comments on the collection of information, submit 
them both to OMB and to the Docket Management Facility where indicated 
under ADDRESSES, by the date under DATES.
    You need not respond to a collection of information unless it 
displays a currently valid control number from OMB. Before the Coast 
Guard could enforce the collection of information requirements in this 
proposed rule, OMB would need to approve the Coast Guard's request to 
collect this information.

E. Federalism

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

F. Unfunded Mandates Reform Act

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

G. Taking of Private Property

    This proposed rule would not cause a taking of private property or 
otherwise have taking implications under E.O. 12630, Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights.

H. Civil Justice Reform

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

I. Protection of Children

    We have analyzed this proposed rule under E.O. 13045, Protection of 
Children from Environmental Health Risks and Safety Risks. This 
proposed rule is not an economically significant rule and would not 
create an environmental risk to health or risk to safety that might 
disproportionately affect children.

J. Indian Tribal Governments

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

K. Energy Effects

    We have analyzed this proposed rule under E.O. 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 E.O. because it is not a ``significant 
regulatory action'' under E.O. 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 E.O. 
13211.

L. Technical Standards

    The National Technology Transfer and Advancement Act (15 U.S.C. 
272,

[[Page 54505]]

note) directs agencies to use voluntary consensus standards in their 
regulatory activities unless the agency provides Congress, through the 
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 
proposed rule does not use technical standards. Therefore, we did not 
consider the use of voluntary consensus standards.

M. Environment

    We have analyzed this proposed rule under Department of Homeland 
Security Management Directive 023-01 and Commandant Instruction 
M16475.lD, which guide the Coast Guard in complying with the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made 
a preliminary determination that this action is one of a category of 
actions that do not individually or cumulatively have a significant 
effect on the human environment. A preliminary environmental analysis 
checklist supporting this determination is available in the docket 
where indicated under the ``Public Participation and Request for 
Comments'' section of this preamble. This proposed rule is 
categorically excluded under section 2.B.2, figure 2-1, paragraph 34(a) 
of the Instruction. Paragraph 34(a) pertains to minor regulatory 
changes that are editorial or procedural in nature. This proposed rule 
adjusts rates in accordance with applicable statutory and regulatory 
mandates. We seek any comments or information that may lead to the 
discovery of a significant environmental impact from this proposed 
rule.

List of Subjects

46 CFR part 401

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

46 CFR Part 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 proposes 
to amend 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, 6101, 7701, 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 $590;
    (2) Lake Ontario is $458;
    (3) Lake Erie is $508;
    (4) The navigable waters from Southeast Shoal to Port Huron, MI is 
$730;
    (5) Lakes Huron, Michigan, and Superior is $351; and
    (6) The St. Mary's River is $701.
    (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.

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 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 paragraph (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.
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, 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); 
or
    (b) Charges for associated hourly charges under Sec.  401.405, as 
well as the pilot's travel expenses as described in paragraph (a) of 
this section, if the situation takes place for the convenience of the 
vessel.
0
7. In Sec.  401.450, redesignate paragraphs (b) through (j) as (c) 
through (k), and add paragraph (b) to read as follows:

Sec.  401.450   Pilot change points.

* * * * *
    (b) Iroquois Lock;
* * * * *

PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM

0
8. 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.d), (92.e), 
(92.f).

Sec.  403.120  [Removed]

0
9. Remove Sec.  403.120.
0
10. 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 
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,

[[Page 54506]]

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
11. 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
12. 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.d), (92.e), 
(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.

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. Sec.  404.101 through 404.108, 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).
    (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). 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;
    (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.

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

[[Page 54507]]

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 five 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).

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, 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, the total target pilot compensation from Sec.  404.104, 
and the projected return on investment from Sec.  404.105.

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 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).
    (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 to ensure they meet the goal set in Sec.  404.1(a), 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 consistently with Sec.  404.107(b).

Gary C. Rasicot,
Director, Marine Transportation Systems, U.S. Coast Guard.
[FR Doc. 2015-22895 Filed 9-8-15; 4:15 pm]
BILLING CODE 9110-04-P