Coast Guard, DHS.
Notice of proposed rulemaking.
In accordance with the Great Lakes Pilotage Act of 1960, the Coast Guard proposes new base pilotage rates and surcharges for the 2018 shipping season. Additionally, the Coast Guard is proposing several changes to the Great Lakes pilotage ratemaking methodology. These additional proposed changes include creating clear delineation between the Coast Guard's annual rate adjustments and the Coast Guard's requirement to conduct a full ratemaking every five years; the adoption of a revised compensation benchmark; reorganization of the text regarding the staffing model for calculating the number of pilots needed; and certain editorial changes.
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We are not planning to hold a public meeting but will consider doing so if public comments indicate a meeting would be helpful. We would issue a separate
Pursuant to the Great Lakes Pilotage Act of 1960 (“the Act”),
In this NPRM, we are proposing to make modifications to the ratemaking methodology and proposing new pilotage rates for 2018 based on the new proposed methodology. The proposed modifications to the ratemaking methodology consist of a new compensation benchmark, organizational changes, and clarifications. We are proposing a new compensation benchmark to comply with a recent court decision holding that the Coast Guard had not adequately justified the previous benchmark, established in the 2016 rulemaking, which set compensation at the level of Canadian wages plus ten percent.
As part of our annual review, we are proposing in this NPRM new rates for the 2018 shipping season. Based on the ratemaking model discussed in this NPRM, we are proposing the rates shown in Table 1.
This proposed rule is not economically significant under E.O. 12866. This proposed rule would impact 49 U.S. Great Lakes pilots, 3 pilot associations, and the owners and operators of an average of 215 oceangoing vessels that transit the Great Lakes annually. The estimated overall annual regulatory economic impact of this rate change is a net increase of $1,162,401 in payments made by shippers from the 2017 shipping season. Because we must review, and, if necessary, adjust rates each year, we analyze these as single year costs and do not annualize them over 10 years. This rule does not affect the Coast Guard's budget or increase Federal spending. Section IX of this preamble discusses the regulatory impact analyses of this proposed rule.
The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960 (“the Act”), which requires U.S. vessels operating “on register” and foreign merchant 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.
Pursuant to the Great Lakes Pilotage Act, the Coast Guard, in conjunction with the Canadian Great Lakes Pilotage Authority, regulates shipping practices and pilotage rates on the Great Lakes. Under Coast Guard regulations, all U.S. vessels sailing on register and all non-Canadian, foreign merchant vessels (often referred to as “salties”), are required to engage U.S. or Canadian pilots during their transit through regulated waters. United States and Canadian “lakers,” which account for most commercial shipping on the Great Lakes, are not subject to the Act.
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 the Great Lakes Pilotage Office (“the Director”) to operate a pilotage pool. The Saint Lawrence Seaway Pilotage Association provides pilotage services in District One, which includes all U.S. waters of the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association provides pilotage services in District Two, which includes all U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. Clair River. Finally, the Western Great Lakes Pilotage Association provides pilotage services in District Three, which includes all U.S. waters of the St. Mary's River; Sault Ste. Marie Locks; and Lakes Huron, Michigan, and Superior.
Each pilotage district is further divided into “designated” and “undesignated” areas. Designated areas are classified as such by Presidential Proclamation
Each pilot association is an independent business and is the sole provider of pilotage services in the district in which it operates. Each pilot associations is responsible for funding its own operating expenses, maintaining infrastructure, acquiring and implementing technological advances, training personnel/partners and pilot compensation. We developed a 10-step ratemaking methodology to derive a pilotage rate that covers these expenses based on the estimated amount of traffic. In short, the methodology is designed to measure how much revenue each pilotage association will need to cover expenses and provide competitive compensation to working pilots. The Coast Guard then divides that amount by the historical average traffic transiting through the district. We recognize that in years where traffic is above average, pilot associations will take in more revenue than projected, while in years where traffic is below average, they will take in less. We believe that over the long term, however, this system ensures that infrastructure will be maintained and that pilots will receive adequate compensation and work a reasonable number of hours with adequate rest between assignments to ensure retention of highly-trained personnel.
Over the past 2 years, the Coast Guard has made major adjustments to the Great Lakes pilotage ratemaking methodology. In 2016, we made significant changes to the methodology, moving to an hourly billing rate for pilotage services and changing the compensation benchmark to a more transparent model. In 2017, we added additional steps to the ratemaking methodology, including new steps that will accurately account for the additional revenue produced by the application of weighting factors (discussed in detail in Steps 7 through 9 of this preamble). The current methodology, which was finalized in the August 31, 2017
As stated above, the ratemaking methodology, currently outlined in 46 CFR 404.101 through 404.110, consists of 10 steps that are designed to account for the revenues needed and total traffic expected in each district. The result is an hourly rate (determined separately for each of the areas administered by the Coast Guard).
In Step 1, “Recognize previous operating expenses,” (§ 404.101) we review audited operating expenses from each of the three pilotage associations. This number forms the baseline amount that each association is budgeted. Because of the time delay between when the association submits raw numbers and the Coast Guard receives audited numbers, this number is 3 years behind the projected year of expenses. So in calculating the 2018 rates in this proposal, we are beginning with the audited expenses from calendar year 2015.
While each pilotage association operates in an entire district, we further break down the costs by area. Thus, with regard to operating expenses, we allocate certain operating expenses to undesignated areas, and certain expenses to designated areas. In some cases (
In Step 2, “Project operating expenses, adjusting for inflation or deflation,” (§ 404.102) we develop the 2018 projected operating expenses. To do this, we apply inflation adjustors for 3 years to the operating expense baseline received in Step 1. The inflation factors used are from the Bureau of Labor Statistics' Consumer Price Index for the Midwest Region, or if not available, the Federal Open Market Committee (FOMC) median economic projections for Personal Consumption Expenditures (PCE) inflation. This step produces the total operating expenses for each area and district.
In Step 3, “Determine number of pilots needed,” (§ 404.103) we calculate how many pilots are needed for each district. To do this, we employ a “staffing model,” described in § 404.103(a) through (c), to estimate how many pilots would be needed to handle shipping during the beginning and close of the season. This number is helpful in providing guidance to the Director of the Coast Guard Great Lakes Pilotage Office in approving an appropriate number of credentials for pilots.
For the purpose of the ratemaking calculation, we determine the number of working pilots provided by the pilotage associations (see § 404.103(d)) which is what we use to determine how many pilots need to be compensated via the pilotage fees collected.
In Step 4, “Determine target pilot compensation benchmark,” (§ 404.104) we determine the revenue needed for pilot compensation in each area and district. This step contains two processes. In the first process, we calculate the total compensation for each pilot using a “compensation benchmark.” Next, we multiply the individual pilot compensation by the number of working pilots for each area and district (from Step 3), producing a figure for total pilot compensation. Because pilots are paid by the associations, but the costs of pilotage is divided up by area for accounting purposes, we assign a certain number of pilots for the designated areas and a certain number of pilots for the undesignated areas for purposes of determining the revenues needed for each area. To make the determination of how many pilots to assign, we use the staffing model designed to determine
In Step 5, “Project working capital fund,” (§ 404.105) we calculate a return on investment by adding the total operating expenses (derived in Step 2) and the total pilot compensation (derived in Step 4), and multiply that figure by the preceding year's average annual rate of return for new issues of high-grade corporate securities. This figure constitutes the “working capital fund” for each area and district.
In Step 6, “Project needed revenue,” (§ 404.106) we simply add up the totals produced by the preceding steps. For each area and district, we add the projected operating expense (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). The total figure, calculated separately for each area and district, is the “revenue needed.”
In Step 7, “Initially calculate base rates,” (§ 404.107) we calculate an hourly pilotage rate to cover the revenue needed calculated in step 6. This step consists of first calculating the 10-year traffic average for each area. Next, we divide the revenue needed in each area (calculated in Step 6) by the 10-year traffic average to produce an initial base rate.
An additional element, the “weighting factor,” is required under § 401.400. Pursuant to that section, ships pay a multiple of the “base rate” as calculated in Step 7 by a number ranging from 1.0 (for the smallest ships, or “Class I” vessels) to 1.45 (for the largest ships, or “Class IV” vessels). As this significantly increases the revenue collected, we need to account for the added revenue produced by the weighting factors to ensure that shippers are not overpaying for pilotage services.
In Step 8, “Calculate average weighting factors by area,” (§ 404.108) we calculate how much extra revenue, as a percentage of total revenue, has historically been produced by the weighting factors in each area. We do this by using a historical average of applied weighting factors for each year since 2014 (the first year the current weighting factors were applied).
In Step 9, “Calculate revised base rates,” (§ 404.109) we modify the base rates by accounting for the extra revenue generated by the weighting factors. We do this by simply dividing the initial pilotage rate for each area (from Step 7) by the corresponding average weighting factor (from Step 8), to produce a revised rate.
In Step 10, “Review and finalize rates,” (§ 404.110) often referred to informally as “director's discretion,” we review the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and 46 CFR 404.1(a), which include promoting efficient, safe, and reliable pilotage service on the Great Lakes; generating sufficient revenue for each pilotage association to reimburse necessary and reasonable operating expenses; compensating pilots fairly, who are trained and rested; and providing appropriate profit for improvements. Because it is our goal to be as transparent as possible in our ratemaking procedure, we use this step sparingly to adjust rates.
Finally, after the base rates are set, § 401.401 permits the Coast Guard to apply surcharges. Currently, we use surcharges to pay for the training of new pilots, rather than incorporating training costs into the overall “revenue needed” that is used in the calculation of the base rates. In recent years, we have allocated $150,000 per applicant pilot to be collected via surcharges. This amount is calculated as a percentage of total revenue for each district, and that percentage is applied to each bill. When the total amount of the surcharge has been collected, the pilot associations are prohibited from collecting further surcharges. Thus, in years where traffic is heavier than expected, shippers early in the season could pay more than shippers employing pilots later in the season, after the surcharge cap has been met.
For 2018, we are proposing a number of changes to the ratemaking methodology. These changes are both revisions to the rate-setting process, as well as organizational changes that will simplify and streamline rate-setting procedures in future years. While we realize that yearly adjustments of the ratemaking methodology can lead to unpredictability, we believe that modest modifications to the ratemaking methodology in order to improve accuracy, simplify its steps, and make it more transparent complies with our statutory requirement to consider public interest and the costs of providing pilotage services. These proposed changes are intended to provide rate stability and predictability beneficial to the U.S. Great Lakes pilot associations, shippers, cruise ships, and voluntary employment of U.S. registered pilots.
One change we are proposing in this NPRM is to add regulatory text to § 404.104 that would automatically adjust the pilot compensation figure for inflation annually. Under the current regulations, while pilot compensation is determined in Step 4 annually, there is no specific provision that it will change with inflation. This issue is often raised in comments. For example, in the 2016 Great Lakes pilotage rate adjustment final rule,
Based on these considerations, we propose to add regulatory text to § 404.104 to make the adjustment for inflation automatic. This would serve a variety of interests. First, it would improve consistency in our ratemaking procedures. While the operating expenses are automatically adjusted for inflation, compensation is not. This proposed change would treat the two types of expenses equally. Additionally, because the revenue for the working capital fund is based in part on compensation (see the discussion in the Background section of this Preamble), automatically adjusting pilot compensation for inflation would have a similar effect on contributions to the working capital fund.
Automatically adjusting pilot compensation for inflation would improve transparency and efficiency in our ratemaking procedures. Also, replacing the current process with an automatic and predictable inflationary adjustment would increase predictability. As previously stated, we believe this predictability benefits the
To implement this increase, we propose adding regulatory text to § 404.104 stating that the Director will adjust the previous year's individual target pilot compensation level by BLS CPI for the Midwest Region, or if that is unavailable, the FOMC median economic projections for PCE inflation
Another change that we propose in this NPRM is to relocate the “staffing model” regulatory text, currently located in § 404.103(a) through (c). We are not proposing to adjust or modify the regulatory text, but simply move it to § 401.220(a), “Registration of pilots,” rather than keep it as part of the ratemaking methodology text. For the reasons below, we believe that this change will both improve the clarity of the regulations and improve the regulatory process. The staffing model informs the Coast Guard's administration of the Great Lakes Pilotage program, but is distinct from the ratemaking methodology. Specifically, the staffing model provides guidance to the Director on implementing the requirement currently in § 401.220(a), which requires the Director to determine the number of pilots needed to assure adequate and efficient pilotage service in the United States waters of the Great Lakes and to provide for equitable participation of United States Registered Pilots with Canadian Registered Pilots.
The current way in which § 404.103, entitled “Ratemaking Step 3: Determine number of pilots needed,” is written produces two distinct sets of numbers. In § 404.103(a) through (c), we employ a “staffing model” to determine the number of pilots needed in each district to provide safe and reliable pilotage services in periods of high seasonal demand. This staffing model produces a number of pilots for each district that we believe is needed to minimize delays and allow for some instances of double pilotage (that is, where two pilots are employed on a vessel simultaneously because of particularly hazardous conditions). In the 2017 final rule, the staffing model produced a figure of 54 total pilots on the Great Lakes: 17 for District One, 15 for District Two, and 22 for District Three.
The Director of the Great Lakes Pilotage Office is required in § 404.103(d) to project the number of pilots expected to be working in the current year based on the numbers provided by the pilotage associations, as well as the number of applications for pilot positions.
Finally, we note that the movement of the staffing model to § 401.220(a) would have an organizational impact on future pilotage rate regulatory actions. In the past, we included detailed, and sometimes repetitive, calculations of the staffing model in our annual ratemaking publication. However, if we move the staffing model text to part 401, and do not make any changes to the inputs or staffing methodology, we would not include a full analysis of the staffing model in each regulatory document. Instead, we propose to simply certify that the number of pilots working under Step 3 of the ratemaking process was less than or equal to the number of pilots authorized by the regulations in § 401.220. However, in circumstances where the staffing model produced a changed result in the number of pilots needed to ensure safe and reliable pilotage, we would include an analysis of the number of pilots recommended by the staffing model in the proposed rule. In this year's ratemaking, we note that the staffing model analysis remains unchanged from 2017, and for that reason is not repeated here.
For the reasons stated above, we propose moving the current staffing model text, located in § 404.103(a) through (c) to § 401.220(a), where it will be renumbered as § 401.220(a)(1) through (a)(3). The existing text would not be changed in any way other than being relocated, and we are not proposing any changes to the staffing model in this ratemaking.
Additionally, we are proposing a change to the remaining text of § 404.103. Specifically, we propose to remove the words “during the first year of the period for which base rates are being established” from § 404.103(d). This phrase, carried over from previous
Finally, we are proposing to change the name of the section. The section, currently titled, “Determine number of pilots needed,” is misleading, as the number of pilots needed to ensure safe and reliable pilotage is determined by the Director in § 401.220(a). Thus, we propose to change the section heading to “Estimate number of working pilots,” to more accurately reflect what we are doing in this step of the ratemaking process. In a related matter, we are also proposing a change to § 404.104 to explicitly establish the relationship between the staffing model and the annual ratemaking. While in the past, the number of pilots has been below the number derived from the staffing model, there is no regulatory text indicating that this is a limiting factor. To eliminate this ambiguity, we propose to add text to § 404.104, “Ratemaking step 4: Determine target pilot compensation,” that would limit the total number of working pilots for ratemaking purposes to the maximum number allowed by the staffing model. This does not prohibit pilotage associations from hiring more pilots than the staffing model suggests are needed to handle peak traffic (if, for example, pilots wanted to work fewer hours for less pay, and the Director approved), but it would limit pilotage rates by preventing those extra pilots from being considered in the ratemaking calculations.
In this NPRM, we are proposing an organizational change to the regulations in part 404 to better delineate the full ratemaking procedure from the interim ratemaking procedure. Pursuant to the Act, we are required to establish new pilotage rates by March 1 of each year.
We note that the existing regulatory text in part 404 already contains a provision that considers the difference between a full ratemaking and an interim ratemaking. Existing § 404.100, “Ratemaking and annual reviews in general,” states that once every 5 years, the Director establishes base pilotage rates by a full ratemaking pursuant to §§ 404.101 through 404.110, and that in “interim years,” the Director may adjust rates according to one of several methods (either automatic adjustments, annual adjustments for inflation, or a new full ratemaking).
The only substantive difference between a full and interim ratemaking concerns Step 4 of the ratemaking procedure, “Determine target pilot compensation.” This step of the ratemaking analysis, in which the total compensation for pilots is determined, comprises the majority of the revenue total needed to operate Great Lakes pilotage. In past ratemaking actions, we received numerous comments and substantial amounts of data when considering the “benchmark” for pilot compensation. Even in years where we did not propose adjusting the compensation benchmark, we received substantial data about ways in which it could be adjusted. However, we do not believe that it is in the interest of Great Lakes shipping to calculate a new benchmark compensation level every year. Such a system could lead to substantial volatility regarding compensation. This, in turn, could lead to the pilot recruitment and retention problems that affected the Great Lakes region prior to the ratemaking methodology changes introduced in the past few years.
For these reasons, we are proposing regulatory language in part 404 to clarify that the benchmark pilot compensation would only be reconsidered during “full ratemaking” years, which occur at least once every 5 years. Conversely, during “interim years,” we would not consider changes to the benchmark pilot compensation. Instead, during those years, we would adjust the target compensation according to Bureau of Labor Statistics' Consumer Price Index for the Midwest Region, or if that is not available, the FOMC median economic projections for PCE inflation, allowing compensation to stay in line with inflation. We believe that this system would simplify ratemaking procedures in interim years and better effect the statutory mandate in section 9303(f) of the Act. In this NPRM, we have proposed regulatory changes to § 404.100(b) and (c), as well as in § 404.104(a) and (b), that would enact these changes to the methodology.
We propose several minor editorial changes in this NPRM. In section 404.107, we propose renaming Step 7, currently titled, “Initially calculate base rates” to “Calculate initial base rates” for style purposes and to make an accompanying edit to the text by changing the words “initially calculates base rates” to “calculates initial base rates” in the text of that section. We also propose to adjust the reference to the staffing model in Step 7 to account for its relocation in text (proposed section 401.220(a)).
In this NPRM, the Coast Guard is proposing a new compensation benchmark for pilots on the Great Lakes. It is doing so to comply with a court decision holding that the Coast Guard's existing compensation benchmark, which based on the salaries of Canadian Great Lakes pilot salaries plus a 10% increase, was arbitrary and capricious. We are following the court's decision and are moving to implement a new benchmark in this proposed rule.
When the Coast Guard adopted the existing compensation benchmark in the 2016 annual adjustment, we recognized that the number was based on somewhat uncertain data, and have undertaken a comprehensive, multi-year analysis of pilot compensation practices to develop a more appropriate benchmark.
Therefore, the Coast Guard is proposing a new compensation benchmark based, in part, on the previous model of compensation that was used by the Coast Guard prior to the new ratemaking methodology introduced in the 2016 annual ratemaking.
The data we are using, provided in a letter from the AMOU from October 4, 2013,
Despite the fact that the aggregated data in the 2013 AMOU letter is not broken down into specific costs, we believe that the data points provided are generally accurate. Prior to 2014, the Coast Guard received confidential copies of the AMOU contracts with detailed breakdowns of compensation components including wages, medical costs, defined contribution and defined benefit pension costs. The latest contract we have covered the 2011 through the 2015 shipping seasons, which is one reason we believe that basing our interim benchmark on the 2015 season is a reasonable measure, as we have the underlying contract for that season. Using the estimated out-year figures set forth in the 2011 contract, and applying the detailed compensation methodology used in the 2012 Great Lakes Pilotage annual ratemaking final rule,
In the notice of proposed rulemaking for the 2014 Great Lakes pilotage annual rate adjustment, we described how we use the daily aggregate rates to develop a total pilot compensation figure. The annual rates included the “daily wage rate, vacation pay, pension plan contributions, and medical plan contributions.”
After publication of the 2014 Final Rule, the Coast Guard was sued by the three American pilotage associations, in part, because the AMOU aggregate data it had used to calculate the 2014 compensation figures did not include a seasonal bonus component. In that case, the Coast Guard relied on previous aggregate data figures provided by the AMOU in 2012, instead of using the figures provided by the AMOU in its October 4, 2013 public comment, where the AMOU stated that the previous figures were inaccurate. While the court found that the use of the old figures was arbitrary, the use of AMOU aggregate data generally was not disputed.
To apply the 2015 aggregate data figures to the current ratemaking methodology, we need only use the figures for designated waters. Prior to the 2016 ratemaking, the Coast Guard calculated separate compensation figures for designated and undesignated waters—compensating pilots assigned to designated waters an equivalent rate to masters, while compensating pilots assigned to undesignated waters the equivalent rate of AMOU mates, who are paid considerably less. However, in 2016, the Coast Guard ended the practice of calculating separate compensation figures for pilots on the Great Lakes. In the 2016 Great Lakes pilotage NPRM, we stated that “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 compensation figure across all three districts.”
Because of these factors, we believe we can develop an interim benchmark compensation level based on the 2015 AMOU aggregate data for wages in designated waters that has been publically provided. Based on our calculations, the new benchmark compensation figure would be $319,617 per pilot. The numbers are derived as follows:
In the first step of calculating the interim compensation benchmark, shown as Table 3 below, we multiply the daily aggregate rates for Agreement A and Agreement B by 270, the estimated number of days in the shipping season, to derive a seasonal average compensation figure.
Next, as stated above, we apportion the compensation provided by each agreement according to the percentage of tonnage represented by companies under each agreement. As shown in Table 4 below, approximately 70% of cargo was carried under the Agreement A contract, while approximately 30% of cargo was carried under the Agreement B contract.
Third, we develop an average of compensation based on the total compensation under the two contracts, weighting each contract by its percentage of total tonnage. Based on this calculation, we have developed a figure of $305,066 (rounded) for total compensation in 2015.
Finally, we adjust that figure for inflation. As we propose to do in our overall ratemaking methodology, we use the BLS Consumer Price Index for the Midwest region to inflate to 2016, and FOMC median economic projections for PCE inflation to inflate the total compensation to 2017 and 2018. Based on three years of inflation adjustments, we arrive at the proposed 2018 target compensation figure, which is $319,617 annually.
In this NPRM,
The 2018 ratemaking is an “annual review,” rather than a full ratemaking. Thus, for this purpose, we propose using the annual review methodology in § 404.104.
Step 1 in our ratemaking methodology requires that we review and recognize the previous year's operating expenses (§ 404.101). To do this, we begin by reviewing the independent accountant's financial reports for each association's 2015 expenses and revenues.
Having ascertained the recognized 2015 operating expenses in Step 1, the next step is to estimate the current year's operating expenses by adjusting those expenses for inflation over the 3-year period. We calculated inflation using the Bureau of Labor Statistics' data from the Consumer Price Index for the Midwest Region of the United States
In accordance with the proposed text in § 404.103, we estimated the number of working pilots in each district. Based on input from the Saint Lawrence Seaway Pilots Association, we estimate that there will be 17 working pilots in 2018 in District One. Based on input from the Lakes Pilots Association, we estimate there will be 14 working pilots in 2018 in District Two. Based on input from the Western Great Lakes Pilots Association, we estimate there will be 18 working pilots in 2018 in District Three.
Furthermore, based on the staffing model employed to develop the total number of pilots needed, we assign a certain number of pilots to designated waters, and a certain number to undesignated waters. These numbers are
In this step,
Next, we certify that the number of pilots estimated for 2018 is less than or equal to the number permitted under the staffing model in § 401.220(a). The staffing model suggests that the number of pilots needed is 17 pilots for District One, 15 pilots for District Two, and 22 pilots for District Three,
Thus, in accordance with proposed § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of working pilots for each district, as shown in Table 14.
Next, we calculate the working capital fund revenues needed for each area. First, we add the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year's average annual rate of return for new issues of high grade corporate securities. Using Moody's data, that number is 3.67 percent.
We add up all the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). The calculations are shown in Table 20.
Having determined the revenue needed for each area in the previous six steps, we divide that number by the expected number of hours of traffic to develop an hourly rate. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in each district. Because we are calculating separate figures for designated and undesignated waters, there are two parts for each calculation. The calculations are shown in Tables 23 through 25.
Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate needed to produce the revenue needed for each area, assuming the amount of traffic is as expected. The calculations for each area are set forth in Tables 26 through 28.
In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculate the average weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in Tables 29 through 34.
In this step, we revise the base rates so that once the impact of the weighting factors are considered, the total cost of pilotage will be equal to the revenue needed. To do this, we divide the initial base rates, calculated in Step 7, by the average weighting factors calculated in Step 8, as shown in Table 35.
In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. Because, as detailed in the discussion sections of this NPRM, the proposed rates incorporate appropriate compensation for enough pilots to handle heavy traffic periods, would cover operating expenses and infrastructure costs, and have taken average traffic and weighting factors into consideration, we believe that they do meet the goal of ensuring safe, efficient, and reliable pilotage. Thus, we are not proposing any alterations to the rates in this step. The final rates are shown in Table 36, and we propose to modify the text in § 401.405(a) to reflect them.
Because there are several applicant pilots in 2018, we are proposing to levy surcharges to cover the costs needed for training expenses. Consistent with previous years, we are proposing to assign a cost of $150,000 per applicant pilot. To develop the surcharge, we multiply the number of applicant pilots by the average cost per pilot to develop a total amount of training costs needed, and then impose that amount as a surcharge to all areas in the respective district, consisting of a percentage of revenue needed. In this year, there are two applicant pilots for District One, one applicant pilot for District Two, and four applicant pilots for District Three. The calculations to develop the surcharges are shown in Table 37. We note that while the percentages are rounded for simplicity, such rounding does not impact the revenue generated, as surcharges can no longer be collected once the surcharge total has been attained.
We developed this proposed rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on these statutes or Executive orders.
Executive Orders 12866, “Regulatory Planning and Review,” and 13563, “Improving Regulation and Regulatory Review,” direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs,” directs agencies to reduce regulation and control regulatory costs and provides that “for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”
The Office of Management and Budget (OMB) has not designated this proposed rule a significant regulatory action under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. Because this proposed rule is not a significant regulatory action, this proposed rule is exempt from the requirements of Executive Order 13771. See OMB's Memorandum titled, “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017 titled `Reducing Regulation and Controlling Regulatory Costs'” (February 2, 2017). A regulatory analysis (RA) follows.
The purpose of this rulemaking is to propose new base pilotage rates and surcharges for training. This proposed rule also makes changes to the ratemaking methodology and revises the compensation benchmark. The last full ratemaking was concluded in 2017.
Table 38 summarizes the regulatory changes that are expected to have no costs, and any qualitative benefits associated with them. The table also includes proposed changes that affect portions of the methodology for calculating the proposed base pilotage rates. While these proposed changes affect the calculation of the rate, the costs of these changes are captured in the changes to the total revenue as a result of the proposed rate change (summarized in Table 39).
Table 39 summarizes the affected population, costs, and benefits of the rate changes that are expected to have costs associated with them.
The Coast Guard is required to review and adjust pilotage rates on the Great Lakes annually. See sections IV and V of this preamble for detailed discussions of the legal basis and purpose for this rulemaking and for background information on Great Lakes pilotage ratemaking. Based on our annual review for this proposed rulemaking, we propose adjusting the pilotage rates for the 2018 shipping season to generate sufficient revenues for each district to reimburse its necessary and reasonable operating expenses, fairly compensate trained and rested pilots, and provide an appropriate working capital fund to use for improvements. The rate changes in this 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.
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 2018. For 2018, we anticipate that there will be two applicant pilots in District One, one applicant pilot in District Two, and four applicant pilots in District Three. With a training cost of $150,000 per pilot, we estimate that Districts One, Two, and Three will incur $300,000, $150,000, and $600,000 in training expenses, respectively. These temporary surcharges would generate a combined $1,050,000 in revenue for the pilotage associations. Therefore, after accounting for the implementation of the temporary surcharges across all three districts, the total payments that would be made by shippers during the 2018 shipping season are estimated at approximately $1,162,401 more than the total payments that were estimated in 2017 (Table 40).
A detailed discussion of our economic impact analysis follows.
The shippers affected by these rate changes are those owners and operators of domestic vessels operating “on register” (employed in foreign trade) and owners and operators of non-Canadian foreign vessels on routes within the Great Lakes system. These owners and operators must have pilots or pilotage service as required by 46 U.S.C. 9302. There is no minimum tonnage limit or exemption for these vessels. The statute applies only to commercial vessels and not to recreational vessels. United States-flagged vessels not operating on register and Canadian “lakers,” which account for most commercial shipping on the Great Lakes, are not required by 46 U.S.C. 9302 to have pilots. However, these U.S.- and Canadian-flagged lakers may voluntarily choose to engage a Great Lakes registered pilot. Vessels that are U.S.-flagged may opt to have a pilot for varying reasons, such as unfamiliarity with designated waters and ports, or for insurance purposes.
We used billing information from the years 2014 through 2016 from the Great Lakes Pilotage Management System (GLPMS) to estimate the average annual number of vessels affected by the rate adjustment. The GLPMS tracks data related to managing and coordinating the dispatch of pilots on the Great Lakes, and billing in accordance with the services. We found that a total of 387 vessels used pilotage services during the years 2014 through 2016. That is, these vessels had a pilot dispatched to the vessel, and billing information was recorded in the GLPMS. The number of invoices per vessel ranged from a minimum of 1 invoice per year to a maximum of 108 invoices per year. Of these vessels, 367 were foreign-flagged vessels and 20 were U.S.-flagged. As previously stated, U.S.-flagged vessels not operating on register are not required to have a registered pilot per 46 U.S.C. 9302, but they can voluntarily choose to have one.
Vessel traffic is affected by numerous factors and varies from year to year. Therefore, rather than the total number of vessels over the time period, an average of the unique vessels using pilotage services from the years 2014 through 2016 is the best representation of vessels estimated to be affected by the rate proposed in this NPRM. From the years 2014 through 2016, an average of 215 vessels used pilotage services annually.
The rate changes resulting from the new methodology would generate costs to industry in the form of higher payments for shippers. We estimate the effect of the rate changes on shippers by comparing the total projected revenues needed to cover costs in 2017 with the total projected revenues to cover costs in 2018, including any temporary surcharges we have authorized. We set pilotage rates so that pilot associations receive enough revenue to cover their necessary and reasonable expenses. Shippers pay these rates when they
The impacts of the proposed rate changes on shippers are estimated from the District pilotage projected revenues (shown in Tables 20 through 22 of this preamble) and the proposed surcharges described in section VIII of this preamble. We estimate that for the 2018 shipping season, the projected revenue needed for all three districts is $22,438,782. Temporary surcharges on traffic in Districts One, Two, and Three would be applied for the duration of the 2018 season in order for the pilotage associations to recover training expenses incurred for applicant pilots. We estimate that the pilotage associations would require an additional $300,000, $150,000, and $600,000 in revenue for applicant training expenses in Districts One, Two, and Three, respectively. This would be an additional cost to shippers of $1,050,000 during the 2018 shipping season. Adding the projected revenue of $22,438,782 to the proposed surcharges, we estimate the pilotage associations' total projected revenue needed for 2018 would be $23,488,782. To estimate the additional cost to shippers from this proposed rule, we compare the 2018 total projected revenues to the 2017 projected revenues. Because we review and prescribe rates for the Great Lakes Pilotage annually, the effects are estimated as a single year cost rather than annualized over a 10-year period. In the 2017 rulemaking,
The resulting difference between the projected revenue in 2017 and the projected revenue in 2018 is the proposed annual change in payments from shippers to pilots as a result of the rate change that would be imposed by this rule. The effect of the proposed rate change to shippers varies by area and district. The rate changes, after taking into account the increase in pilotage rates and the addition of temporary surcharges, would lead to affected shippers operating in District One and District Three experiencing an increase in payments of $600,225 and $591,062, respectively, over the previous year, and a decrease in payments of $28,886 in District 2. The overall adjustment in payments would be an increase in payments by shippers of approximately $1,162,401 across all three districts (a 5 percent increase over 2017). Again, because we review and set rates for Great Lakes Pilotage annually, the impacts are estimated as single year costs rather than annualized over a 10-year period.
Table 41 shows the difference in revenue by component from 2017 to 2018.
To estimate the impact of U.S. pilotage costs on foreign-flagged vessels that would be affected by the rate adjustment, we looked at the pilotage costs as a percentage of a vessel's costs for an entire voyage. The portion of the trip on the Great Lakes using a pilot is only a portion of the whole trip. The affected vessels are often traveling from a foreign port, and the days without a pilot on the total trip often exceed the days a pilot is needed.
To estimate this impact, we used the 2017 study titled, “Analysis of Great Lakes Pilotage Costs on Great Lakes Shipping and the Potential Impact of Increases in U.S. Pilotage Charges.”
The study developed a voyage cost model that is based on a vessel's daily costs. The daily costs included: Capital repayment costs; fuel costs; operating costs (such as crew, supplies, and insurance); port costs; speed of the vessel; stevedoring rates; and tolls. The daily operating costs were translated into total voyage costs using mileage between the ports for a number of voyage scenarios. In the study, the total voyage costs were then compared to the U.S. pilotage costs. The study found that, using the 2016 rates, the U.S. pilotage charges represent 10 percent of the total voyage costs for a vessel carrying grain, and between 8 percent and 9 percent of the total voyage costs for a vessel carrying steel.
From 2016 to 2017, the total revenues needed increased by 17 percent. From 2017 to 2018, the proposed total revenues needed would increase by 5 percent. From 2016 to 2018, the total revenues needed would increase by 23 percent. While the change in total voyage cost would vary by the trip, vessel class, and whether the vessel is carrying steel or grain, we used these percentages as an average increase to estimate the change in the impact. When we increased the pilotage charges by 17 percent from 2016, we found the U.S. pilotage costs represented an average of 11.3 percent of the total voyage costs. We then increased the base 2016 rates by 23 percent. With this proposed rule's rates for 2018, pilotage costs are estimated to account for 11.8 percent of the total voyage costs, or a 0.5 percent increase over the percentage that U.S. pilotage costs represented of the total voyage in 2017.
It is important to note that this analysis is based on a number of assumptions. The purpose of the study was to look at the impact of the U.S. pilotage rates. The study did not include an analysis of the GLPA rates. It was assumed that a U.S. pilot is assigned to all portions of a voyage where he or she could be assigned. In reality, the assignment of a United States or Canadian pilot is based on the order in which a vessel enters the system, as outlined in the Memorandum of Understanding between the GLPA and the Coast Guard.
This analysis only looks at the impact of proposed U.S. pilotage cost changes. All other costs were held constant at the 2016 levels, including Canadian pilotage costs, tolls, stevedoring, and port charges. This analysis estimates the impacts of Great Lakes pilotage rates holding all other factors constant. If other factors or sectors were not held constant but, instead, were allowed to adjust or fluctuate, it is likely that the impact of pilotage rates would be different. Many factors that drive the tonnage levels of foreign cargo on the Great Lakes and St. Lawrence Seaway were held constant for this analysis. These factors include, but are not limited to, demand for steel and grain, construction levels in the regions, tariffs, exchange rates, weather conditions, crop production, rail and alternative route pricing, tolls, vessel size restriction on the Great Lakes and St. Lawrence Seaway, and inland waterway river levels.
This proposed rule would allow the Coast Guard to meet the requirements in
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.
For the proposed rule, we reviewed recent company size and ownership data for the vessels identified in the GLPMS and we reviewed business revenue and size data provided by publicly available sources such as MANTA
The entities all exceed the SBA's small business standards for small businesses. Further, these U.S. entities operate U.S.-flagged vessels and are not required to have pilots as required by 46 U.S.C. 9302.
In addition to the owners and operators of vessels affected by this proposed rule, 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 employees in total. We expect no adverse effect on these entities from this proposed rule because all associations would receive enough revenue to balance the projected expenses associated with the projected number of bridge hours (time on task) and pilots.
We did not find any small not-for-profit organizations that are independently owned and operated and are not dominant in their fields. We did not find any small governmental jurisdictions with populations of fewer than 50,000 people. Based on this analysis, we found this proposed rulemaking, if promulgated, would not affect a substantial number of small entities.
Therefore, we certify under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact 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 impact on it, please submit a comment to the Docket Management Facility at the address under
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. Mike Moyers, Great Lakes Pilotage, Commandant (CG–WWM–2), Coast Guard; telephone 202–372–1533, email
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
This proposed rule would call for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520). This proposed rule would not change the burden in the collection currently approved by OMB under OMB Control Number 1625–0086, Great Lakes Pilotage Methodology.
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 E.O. 13132 and have determined that it is consistent with the fundamental federalism principles and preemption requirements as described in E.O. 13132. Our analysis follows.
Congress directed the Coast Guard to establish “rates and charges for pilotage services.”
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
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.
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.
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.
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.
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.
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.
The National Technology Transfer and Advancement Act, codified as a note to 15 U.S.C. 272, directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through OMB, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (
We have analyzed this proposed rule under Department of Homeland Security (DHS) Directive 023–01, Revision (Rev) 01,
Administrative practice and procedure, Great Lakes, Navigation (water), Penalties, Reporting and recordkeeping requirements, Seamen.
Great Lakes, Navigation (water), Seamen.
For the reasons discussed in the preamble, the Coast Guard proposes to amend 46 CFR parts 401 and 404 as follows:
46 U.S.C. 2103, 2104(a), 6101, 7701, 8105, 9303, 9304; Department of Homeland Security Delegation No. 0170.1(II)(92.a), (92.d), (92.e), (92.f).
(a) The Director shall determine the number of pilots required to be registered in order to assure adequate and efficient pilotage service in the United States waters of the Great Lakes and to provide for equitable participation of United States Registered Pilots with Canadian Registered Pilots in the rendering of pilotage services. The Director determines the number of pilots needed as follows:
(1) 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—
(i) Amount of time a pilot provides pilotage service or is available to a vessel's master to provide pilotage service;
(ii) Pilot travel time, measured from the pilot's base, to and from an assignment's starting and ending points;
(iii) Assignment delays and detentions;
(iv) Administrative time for a pilot who serves as a pilotage association's president;
(v) Rest between assignments, as required by 46 CFR 401.451;
(vi) 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
(vii) Pilotage-related training.
(2) Pilotage demand and the base seasonal work standard are based on available and reliable data, as so deemed by the Director, for a multi-year base period. The multi-year period is the 10 most recent full shipping seasons, and the data source is a system approved under 46 CFR 403.300. Where such data are not available or reliable, the Director also may use data, from additional past full shipping seasons or other sources, that the Director determines to be available and reliable.
(3) 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.
(a) The hourly rate for pilotage service on—
(1) The St. Lawrence River is $622;
(2) Lake Ontario is $424;
(3) Lake Erie is $454;
(4) The navigable waters from Southeast Shoal to Port Huron, MI is $553;
(5) Lakes Huron, Michigan, and Superior is $253; and
(6) The St. Mary's River is $517.
46 U.S.C. 2103, 2104(a), 9303, 9304; Department of Homeland Security Delegation No. 0170.1(II)(92.a), (92.f).
(a) The Director establishes base pilotage rates by a full ratemaking pursuant to §§ 404.101 through 404.110 of this part, which is 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 § 404.1(a) of this part.
(b) In the interim years preceding the next scheduled full rate review, the Director will adjust base pilotage rates by an interim ratemaking pursuant to §§ 404.101 through 404.110 of this part.
(c) Each year, the Director will announce whether the Coast Guard will conduct a full ratemaking or interim ratemaking procedure.
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.
(a) In a full ratemaking year, 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.
(b) In an interim year, the Director adjusts the previous year's individual target pilot compensation level by the Bureau of Labor Statistics' Consumer Price Index for the Midwest Region, or if that is unavailable, the Federal Open Market Committee median economic projections for Personal Consumption Expenditures inflation.
(c) The Director determines each pilotage association's total target pilot compensation by multiplying individual target pilot compensation computed in paragraph (a) or (b) of this section by the number of pilots projected under § 404.103(d) of this part, or § 401.220(a) of this part, whichever is lower.
(a) The Director calculates initial base hourly rates by dividing the projected needed revenue from § 404.106 of this part by averages of past hours worked in each district's designated and undesignated waters, using available and reliable data for a multi-year period set in accordance with § 401.220(a) of this part.