# Great Lakes Pilotage Rates-2021 Annual Review and Revisions to Methodology > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-23407 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** October 27, 2020 - **Citation:** 85 FR 68210 ## Text DEPARTMENT OF HOMELAND SECURITY Coast Guard 46 CFR Parts 401 and 404 [USCG-2020-0457] RIN 1625-AC67 Great Lakes Pilotage Rates—2021 Annual Review and Revisions to Methodology AGENCY: Coast Guard, DHS. ACTION: Notice of proposed rulemaking; request for comments. SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the Coast Guard is proposing new base pilotage rates for the 2021 shipping season. This proposed rule would adjust the pilotage rates to account for changes in district operating expenses, an increase in the number of pilots, and anticipated inflation. Additionally, this proposed rule would make one change to the ratemaking methodology to account for actual inflation, in step 4, and two policy changes. The first policy change would be to always round up numbers, as opposed to rounding to the nearest whole integer, in the staffing model. The second policy change would be to exclude litigation fees incurred in litigation against the Coast Guard regarding ratemaking from necessary and reasonable pilot association operating expenses. The Coast Guard estimates that this proposed rule would result in a 4-percent net increase in pilotage costs compared to the 2020 season. Finally, the Coast Guard is requesting comments on how apprentice pilots (a mariner with a limited registration) should be compensated in future rulemakings. DATES: Comments and related material must be received by the Coast Guard on or before November 27, 2020. ADDRESSES: You may submit comments identified by docket number USCG-2020-0457 using the Federal eRulemaking Portal at https://www.regulations.gov. See the “Public Participation and Request for Comments” portion of the SUPPLEMENTARY INFORMATION section for further instructions on submitting comments. FOR FURTHER INFORMATION CONTACT: For information about this document, call or email Mr. Brian Rogers, Commandant (CG-WWM-2), Coast Guard; telephone 202-372-1535, email Brian.Rogers@uscg.mil, or fax 202-372-1914. SUPPLEMENTARY INFORMATION: Table of Contents for Preamble I. Public Participation and Request for Comments II. Abbreviations III. Executive Summary IV. Basis and Purpose V. Background VI. Discussion of Proposed Methodological and Other Changes A. Inflation of Pilot Compensation Calculation in Step 4 B. Changes to Rounding in the Staffing Model C. Exclusion of Legal Fees Incurred in Lawsuits Against the Coast Guard Related To Ratemaking and Regulating From Pilots Associations' Approved Operating Expenses D. Request for Comments on Changes to Apprentice Pilot Compensation for Consideration in a Future Rulemaking VII. Coast Guard's Authority To Remedy Harms From Past Ratemakings in Response to 2020 D.C. Appellate Court Opinion A. Coast Guard's Authority To Remedy Harms From Past Ratemakings B. Does remedying harms from past ratemakings comport with our statutory mandate? VIII. Discussion of Proposed Rate Adjustment District One A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates District Two A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Registered Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates District Three A. Step 1: Recognize Previous Operating Expenses B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation C. Step 3: Estimate Number of Working Pilots D. Step 4: Determine Target Pilot Compensation Benchmark E. Step 5: Project Working Capital Fund F. Step 6: Project Needed Revenue G. Step 7: Calculate Initial Base Rates H. Step 8: Calculate Average Weighting Factors by Area I. Step 9: Calculate Revised Base Rates J. Step 10: Review and Finalize Rates IX. Regulatory Analyses A. Regulatory Planning and Review B. Small Entities C. Assistance for Small Entities D. Collection of Information E. Federalism F. Unfunded Mandates G. Taking of Private Property H. Civil Justice Reform I. Protection of Children J. Indian Tribal Governments K. Energy Effects L. Technical Standards M. Environment I. Public Participation and Request for Comments The Coast Guard views public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation. We encourage you to submit comments through the Federal eRulemaking Portal at https://www.regulations.gov. If you cannot submit your material by using https://www.regulations.gov, call or email the person in the FOR FURTHER INFORMATION CONTACT section of this proposed rule for alternate instructions. Documents mentioned in this proposed rule, and all public comments, will be available in our online docket at https://www.regulations.gov, and can be viewed by following that website's instructions. Additionally, if you visit the online docket and sign up for email alerts, you will be notified when comments are posted or if a final rule is published. We accept anonymous comments. All comments received will be posted without change to https://www.regulations.gov and will include any personal information you have provided. For more about privacy and submissions in response to this document, see DHS's Correspondence System of Records notice (84 FR 48645, September 26, 2018). We do not plan to hold a public meeting, but we will consider doing so if we determine from public comments that a meeting would be helpful. We would issue a separate Federal Register notice to announce the date, time, and location of such a meeting. II. Abbreviations AMOU American Maritime Officers Union APA American Pilots Association BLS Bureau of Labor Statistics CAD Canadian dollars CFR Code of Federal Regulations CPA Certified public accountant CPI Consumer Price Index DHS Department of Homeland Security Director U.S. Coast Guard's Director of the Great Lakes Pilotage EAJA Equal Access to Justice Act FOMC Federal Open Market Committee FR Federal Register GLPA Great Lakes Pilotage Authority (Canadian) GLPMS Great Lakes Pilotage Management System NAICS North American Industry Classification System NPRM Notice of proposed rulemaking OMB Office of Management and Budget PCE Personal Consumption Expenditures Pilots Working pilots SBA Small Business Administration § Section The Act Great Lakes Pilotage Act of 1960 U.S.C. United States Code III. Executive Summary Pursuant to the Great Lakes Pilotage Act of 1960 (“the Act”), 1 the Coast Guard regulates pilotage for oceangoing vessels on the Great Lakes and St. Lawrence Seaway—including setting the rates for pilotage services and adjusting them on an annual basis. The rates, which for the 2020 season range from $337 to $758 per pilot hour (depending on which of the specific six areas pilotage service is provided), are paid by shippers to pilot associations. The three pilot associations, which are the exclusive U.S. source of registered pilots on the Great Lakes, use this revenue to cover operating expenses, maintain infrastructure, compensate applicant and registered pilots, acquire and implement technological advances, train new personnel, and allow partners to participate in professional development. 1 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as amended. To compute the rate for pilotage services, we use a ratemaking methodology that we have developed since 2016, in accordance with our statutory requirements and regulations. Our ratemaking methodology calculates the revenue needed for each pilotage association (operating expenses, compensation for the number of pilots, and anticipated inflation), and then divides that amount by the expected shipping traffic over the course of the coming year, to produce an hourly rate. This process is currently effected through a 10-step methodology, which is explained in detail in the Summary of Ratemaking Methodology in section V of the preamble to this notice of proposed rulemaking (NPRM). As part of our annual review, in this NPRM we are proposing new pilotage rates for 2021 based on the existing methodology. The result is a decrease in rates for all areas. These changes are due to a combination of four factors: (1) A decrease in the amount of money needed for the working capital fund, (2) adjusting pilot compensation for inflation, (3) the net addition of three working pilots (“pilots”) at the beginning of the 2021 shipping season in District One, and (4) an increase in the average hours of traffic for each area. This increase in the average hours of traffic resulted in lower hourly rates despite a net increase in the amount of revenue needed by the pilot association, because when calculating the base hourly rates the total revenue needed is divided by the average hours of traffic annually (see Step 7 of the ratemaking process). The proposed rates for 2021 do not account for the impacts COVID-19 may have on shipping traffic in the Great Lakes, because we use the most recent 10-years of complete data in our average traffic calculations. For this proposed ratemaking, that means the years 2010 through 2019. The rates for 2022 will take into account the impact of COVID-19 on shipping traffic, because that ratemaking will include 2020 traffic data. The Coast Guard uses a 10-year average when calculating traffic to smooth out variations in traffic caused by global economic conditions, such as those caused by the COVID-19 pandemic. In addition, the Coast Guard proposes one methodological change to the way we calculate the inflation of pilot compensation to account for actual inflation; modifying the way we round the numbers used in the staffing model (82 Federal Register (FR) at 41466 and table 6 at 41480, August 31, 2017); and disallowing legal fees used in litigation against the Coast Guard regarding the ratemaking rulemakings as redeemable operating expenses. Last, the Coast Guard is requesting comments, for consideration in a future rulemaking, on whether apprentice pilot compensation should be calculated by using a percentage of the target pilot compensation. These proposed changes are discussed in detail in Section VI of this preamble. Based on the ratemaking model discussed in this NPRM, we are proposing the rates shown in table 1. Table 1—Current and Proposed Pilotage Rates on the Great Lakes Area Name Final 2020 pilotage rate Proposed 2021 pilotage rate District One: Designated St. Lawrence River $758 $757 District One: Undesignated Lake Ontario 463 428 District Two: Designated Navigable waters from Southeast Shoal to Port Huron, MI 618 577 District Two: Undesignated Lake Erie 586 566 District Three: Designated St. Marys River 632 584 District Three: Undesignated Lakes Huron, Michigan, and Superior 337 335 This proposed rule would impact 55 U.S. Great Lakes pilots, 3 pilot associations, and the owners and operators of an average of 279 oceangoing vessels that transit the Great Lakes annually. This proposed rule is not economically significant under Executive Order 12866 and would not affect the Coast Guard's budget or increase Federal spending. The estimated overall annual regulatory economic impact of this rate change is a net increase of $1,059,966 in estimated payments made by shippers during the 2020 shipping season. Because the Coast Guard must review, and, if necessary, adjust rates each year, we analyze these as single-year costs and do not annualize them over 10 years. Section IX of this preamble provides the regulatory impact analyses of this proposed rule. IV. Basis and Purpose The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960 (“the Act”), 2 which requires foreign merchant vessels and U.S. vessels operating “on register,” meaning U.S. vessels engaged in foreign trade, to use U.S. or Canadian pilots while transiting the U.S. waters of the St. Lawrence Seaway and the Great Lakes system. 3 For U.S. Great Lakes pilots, the Act requires the Secretary to “prescribe by regulation rates and charges for pilotage services, giving consideration to the public interest and the costs of providing the services.” 4 The Act requires that rates be established or reviewed and adjusted each year, not later than March 1. 5 The Act also requires that base rates be established by a full ratemaking at least once every 5 years, and, in years when base rates are not established, they must be reviewed and, if necessary, adjusted. 6 The Secretary's duties and authority under the Act have been delegated to the Coast Guard. 7 2 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as amended. 3 46 U.S.C. 9302(a)(1). 4 46 U.S.C. 9303(f). 5 Id. 6 Id. 7 Department of Homeland Security (DHS) Delegation No. 0170.1, para. II (92.f). The purpose of this NPRM is to propose new pilotage rates for the 2021 shipping season. The Coast Guard believes that the new rates would continue to promote pilot retention, ensure safe, efficient, and reliable pilotage services in order to facilitate maritime commerce throughout the Great Lakes and Saint Lawrence River System, and provide adequate funds to upgrade and maintain infrastructure. V. Background Pursuant to the Act, the Coast Guard, in conjunction with the Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping practices and rates on the Great Lakes. Under Coast Guard regulations, all vessels engaged in foreign trade (often referred to as “salties”) are required to engage U.S. or Canadian pilots during their transit through the regulated waters. 8 U.S. and Canadian “lakers,” which account for most commercial shipping on the Great Lakes, are not affected. 9 Generally, vessels are assigned a U.S. or Canadian pilot depending on the order in which they transit a particular area of the Great Lakes and do not choose the pilot they receive. If a vessel is assigned a U.S. pilot, that pilot will be assigned by the pilotage association responsible for the particular district in which the vessel is operating, and the vessel operator will pay the pilotage association for the pilotage services. The Canadian GLPA establishes the rates for Canadian working pilots. 8 See 46 CFR part 401. 9 46 U.S.C. 9302(f). A “laker” is a commercial cargo vessel especially designed for and generally limited to use on the Great Lakes. The U.S. waters of the Great Lakes and the St. Lawrence Seaway are divided into three pilotage districts. Pilotage in each district is provided by an association certified by the Coast Guard's Director of the Great Lakes Pilotage (“the Director”) to operate a pilotage pool. The Saint Lawrence Seaway Pilotage Association provides pilotage services in District One, which includes all U.S. waters of the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association provides pilotage services in District Two, which includes all U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. Clair River. Finally, the Western Great Lakes Pilotage Association provides pilotage services in District Three, which includes all U.S. waters of the St. Marys River; Sault Ste. Marie Locks; and Lakes Huron, Michigan, and Superior. Each pilotage district is further divided into “designated” and “undesignated” areas, which is depicted in table 2 below. Designated areas, classified as such by Presidential Proclamation, are waters in which pilots must, at all times, be fully engaged in the navigation of vessels in their charge. 10 Undesignated areas, on the other hand, are open bodies of water not subject to the same pilotage requirements. While working in undesignated areas, pilots must “be on board and available to direct the navigation of the vessel at the discretion of and subject to the customary authority of the master.” 11 For these reasons, pilotage rates in designated areas can be significantly higher than those in undesignated areas. 10 Presidential Proclamation 3385, Designation of restricted waters under the Great Lakes Pilotage Act of 1960, December 22, 1960. 11 46 U.S.C. 9302(a)(1)(B). Table 2—Areas of the Great Lakes and St. Lawrence Seaway District Pilotage association Designation Area No. 12 Area name 13 One Saint Lawrence Seaway Pilotage Association Designated Undesignated 1 2 St. Lawrence River. Lake Ontario. Two Lake Pilotage Association Designated Undesignated 5 4 Navigable waters from Southeast Shoal to Port Huron, MI. Lake Erie. Three Western Great Lakes Pilotage Association Designated 7 St. Marys River. Undesignated 6 Lakes Huron and Michigan. Undesignated 8 Lake Superior. Each pilot association is an independent business and is the sole provider of pilotage services in the district in which it operates. Each pilot association is responsible for funding its own operating expenses, maintaining infrastructure, compensating pilots and applicant pilots, acquiring and implementing technological advances, and training personnel and partners. The Coast Guard developed a 10-step ratemaking methodology to derive a pilotage rate, based on the estimated amount of traffic, which covers these expenses. The methodology is designed to measure how much revenue each pilotage association would need to cover expenses and provide competitive compensation goals to working pilots. We then divide that amount by the historic 10-year average for pilotage demand. We recognize that in years where traffic is above average, pilot associations will accrue more revenue than projected, while in years where traffic is below average, they will take in less. We believe that over the long term, however, this system ensures that infrastructure would 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. 12 Area 3 is the Welland Canal, which is serviced exclusively by the Canadian GLPA and, accordingly, is not included in the U.S. pilotage rate structure. 13 The areas are listed by name at 46 CFR 401.405. Over the past 4 years, the Coast Guard has made adjustments to the Great Lakes pilotage ratemaking methodology. In 2016, we made significant changes to the methodology, moving to an hourly billing rate for pilotage services and changing the compensation benchmark to a more transparent model. In 2017, we added additional steps to the ratemaking methodology, including new steps that accurately account for the additional revenue produced by the application of weighting factors (discussed in detail in Steps 7 through 9 for each district, in Section VIII of this preamble). In 2018, we revised the methodology by which we develop the compensation benchmark, based upon U.S. mariners rather than Canadian working pilots. The current methodology, which was finalized in the Great Lakes Pilotage Rates-2020 Annual Review and Revisions to Methodology final rule (85 FR 20088), published April 9, 2020, is designed to accurately capture all of the costs and revenues associated with Great Lakes pilotage requirements and produce an hourly rate that adequately and accurately compensates pilots and covers expenses. The current methodology is summarized in the section below. Summary of Ratemaking Methodology As stated above, the ratemaking methodology, outlined in 46 CFR 404.101 through 404.110, consists of 10 steps that are designed to account for the revenues needed and total traffic expected in each district. The result is an hourly rate, determined separately for each of the areas administered by the Coast Guard. In Step 1, “Recognize previous operating expenses,” (§ 404.101) the Director reviews audited operating expenses from each of the three pilotage associations. Operating expenses include all allowable expenses minus wages and benefits. This number forms the baseline amount that each association is budgeted. Because of the time delay between when the association submits raw numbers and the Coast Guard receives audited numbers, this number is 3 years behind the projected year of expenses. So, in calculating the 2021 rates in this proposal, we begin with the audited expenses from the 2018 shipping season. While each pilotage association operates in an entire district, the Coast Guard tries to determine costs by area. Thus, with regard to operating expenses, we allocate certain operating expenses to designated areas, and certain operating expenses to undesignated areas. In some cases, we can allocate the costs based on where they are actually accrued. For example, we can allocate the costs for insurance for applicant pilots who operate in undesignated areas only. In other situations, such as general legal expenses, expenses are distributed between designated and undesignated waters on a pro rata basis, based upon the proportion of income forecasted from the respective portions of the district. In Step 2, “Project operating expenses, adjusting for inflation or deflation,” (§ 404.102) the Director develops the 2020 projected operating expenses. To do this, we apply inflation adjustors for 3 years to the operating expense baseline received in Step 1. The inflation factors are from the Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) for the Midwest Region, or, if not available, the Federal Open Market Committee (FOMC) median economic projections for Personal Consumption Expenditures (PCE) inflation. This step produces the total operating expenses for each area and district. In Step 3, “Estimate number of working pilots,” (§ 404.103) the Director calculates how many pilots are needed for each district. To do this, we employ a “staffing model,” described in § 401.220, paragraphs (a)(1) through (a)(3), 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 in approving an appropriate number of credentials for pilots. For the purpose of the ratemaking calculation, we determine the number of pilots provided by the pilotage associations (see § 404.103), which is what we use to determine how many pilots need to be compensated via the pilotage fees collected. In the first part of Step 4, “Determine target pilot compensation benchmark,” (§ 404.104) the Director determines the revenue needed for pilot compensation in each area and district. For the 2020 ratemaking, the Coast Guard updated the benchmark compensation model in accordance with § 404.104(b), switching from using the American Maritime Officers Union (AMOU) 2015 aggregated wage and benefit information, to the 2019 compensation benchmark. Based on our experience over the past two ratemakings, the Coast Guard has determined that the level of target pilot compensation for those years provides an appropriate level of compensation for American Great Lakes pilots. The Coast Guard, therefore, will not, at this time, seek alternative benchmarks for target compensation for future ratemakings and will instead simply adjust the amount of target pilot compensation for inflation. This benchmark has advanced the Coast Guard's goals of safety through rate and compensation stability while also promoting recruitment and retention of qualified U.S. pilots. In order to further this goal, for the 2021 ratemaking, the Coast Guard is proposing to change the way inflation is calculated in this step to account for actual inflation instead of predicted inflation. See the Discussion of Proposed Methodological and Other Changes at section VI of this preamble for a detailed description of the changes proposed. In the second part of Step 4, set forth in § 404.104(c), the Director determines the total compensation figure for each district. To do this, the Director multiplies the compensation benchmark by the number of pilots for each area and District (from Step 3), producing a figure for total pilot compensation. In Step 5, “Project working capital fund,” (§ 404.105) the Director calculates a value that is added to pay for needed capital improvements and other non-recurring expenses, such as technology investments and infrastructure maintenance. This value is calculated by adding the total operating expenses (derived in Step 2) to the total pilot compensation (derived in Step 4), and multiplying that figure by the preceding year's average annual rate of return for new issues of high-grade corporate securities. This figure constitutes the “working capital fund” for each area and district. In Step 6, “Project needed revenue,” (§ 404.106) the Director simply adds up the totals produced by the preceding steps. The projected operating expense for each area and district (from Step 2) is added to the total pilot compensation (from Step 4) and the working capital fund contribution (from Step 5). The total figure, calculated separately for each area and district, is the “needed revenue.” In Step 7, “Calculate initial base rates,” (§ 404.107) the Director calculates an hourly pilotage rate to cover the needed revenue as calculated in Step 6. This step consists of first calculating the 10-year hours of traffic average for each area. Next, the revenue needed in each area (calculated in Step 6) is divided by the 10-year hours of traffic average to produce an initial base rate. An additional element, the “weighting factor,” is required under § 401.400. Pursuant to that section, ships pay a multiple of the “base rate” as calculated in Step 7 by a number ranging from 1.0 (for the smallest ships, or “Class I” vessels) to 1.45 (for the largest ships, or “Class IV” vessels). As this significantly increases the revenue collected, we need to account for the added revenue produced by the weighting factors to ensure that shippers are not overpaying for pilotage services. We do this in the next step. In Step 8, “Calculate average weighting factors by area,” (§ 404.108) the Director calculates how much extra revenue, as a percentage of total revenue, has historically been produced by the weighting factors in each area. We do this by using a historical average of the applied weighting factors for each year since 2014 (the first year the current weighting factors were applied). In Step 9, “Calculate revised base rates,” (§ 404.109) the Director modifies the base rates by accounting for the extra revenue generated by the weighting factors. We do this by dividing the initial pilotage rate for each area (from Step 7) by the corresponding average weighting factor (from Step 8), to produce a revised rate. In Step 10, “Review and finalize rates,” (§ 404.110) often referred to informally as “Director's discretion,” the Director reviews the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and 46 CFR 404.1(a), which include promoting efficient, safe, and reliable pilotage service on the Great Lakes; generating sufficient revenue for each pilotage association to reimburse necessary and reasonable operating expenses; compensating trained and rested pilots fairly; and providing appropriate profit for improvements. After the base rates are set, § 401.401 permits the Coast Guard to apply surcharges. As stated in the 2020 rulemaking, as the vast majority of working pilots are not anticipated to reach the regulatory required retirement age of 70 in the next 20 years, we continue to believe that the pilot associations are now able to plan for the costs associated with retirements without relying on the Coast Guard to impose surcharges. VI. Discussion of Proposed Methodological and Other Changes For 2021, the Coast Guard is proposing one methodological change to the ratemaking model and two policy changes. The proposed changes, discussed in detail below, include changes to how we calculate inflation of pilot compensation in step 4, how we round numbers in the staffing model, and the proposed exclusion of legal expenses associated with lawsuits against the Coast Guard's ratemaking rulemakings from operating expenses. For consideration in a future rulemaking, we are also requesting comments on how to calculate compensation for apprentice pilots. A. Inflation of Pilot Compensation Calculation in Step 4 Based on public comments received on the 2020 proposed rule, the Coast Guard is proposing to change the inflation calculation in Step 4 of the ratemaking. This step discusses the use of the Federal Reserve's projected PCE data, as opposed to using historic BLS ECI data. Currently in Step 4, we adjust the existing target pilot compensation to account for inflation, following the procedures outlined in § 404.104(b), which require that PCE data only be used when ECI data is not available. In each year's ratemaking, the Coast Guard projects future values that requires forecasted inflation data. The BLS ECI only provides historic data; consequently we use PCE data, in accordance with § 404.104(b), as the PCE provides estimates of future inflation. The forecasted PCE inflation data is generated by the Federal Reserve. The Federal Reserve is responsible for setting monetary policy in the United States, which in turn influences inflation. The Federal Reserve bases these estimates on predictions of economic growth, the unemployment rate, other economic data, and the future policy path the Federal Reserve expects to take to meet its goals of maximizing employment and setting stable prices. The PCE is a reflection of the government's best prediction of what will happen, and the Coast Guard will continue to use it as our predicted inflation value in Step 4 of the ratemaking. However, as the Coast Guard updates the previous year's target compensation value for inflation in each ratemaking, any differences between the predicted inflation rate and the actual inflation rate will be compounded with each ratemaking, if the predicted PCE value is continually higher or lower than actual inflation. Therefore, for this ratemaking, the Coast Guard is proposing to modify the way inflation is calculated in Step 4 of the ratemaking to account for the difference between the predicted inflation and actual inflation. In this NPRM, the Coast Guard is proposing that the previous year's target compensation value would first be adjusted by the difference between predicted PCE inflation value and actual ECI inflation value, to ensure the target compensation value accounts for actual inflation. We would then multiply this adjusted target compensation value by the predicted future inflation value from the PCE to account for future inflation. For 2020, the actual ECI inflation is 3.4 percent, which is 1.4 percent greater than the predicted PCE inflation of 2 percent. Therefore, this proposed use of the difference between predicted PCE inflation rates and historic ECI inflation data to account for actual inflation in § 401.104(b) would result in a 1.4 percent increase for the 2021 pilotage fees versus continuing to use the predicted PCE inflation value. In some years, however, it is possible that the actual ECI inflation will be lower than the predicted PCE inflation, resulting in a decrease for the pilotage fees. B. Changes to Rounding in the Staffing Model The first policy change is to how we round numbers in the staffing model in 46 CFR 401.220(a)(2). This proposed rule would amend the text to always round up in the staffing model, instead of rounding to the nearest whole integer. We are proposing this change in response to three comments we received on the proposed rule, “Great Lakes Pilotage Rates—2020 Annual Review and Revisions to Methodology” (84 FR 58099, Oct. 30, 2019), which are posted within docket number USCG-2019-0736. The St. Lawrence Seaway Pilot's Association asserted that the regulatory burden on the three pilotage associations has increased substantially. The commenter suggested that rounding in the staffing model does not account for the administrative time and effort required of the three associations' Presidents and therefore one additional pilot per district is necessary to cover the President's pilotage duties. Lakes Pilots Association, Inc. also stated that the staffing model should include an additional pilot in the rate for administrative work of the president and committee members. Another commenter, on behalf of all pilots within the three pilot associations, made similar assertions that the pilot associations' presidents are spending more time at meetings, conferences, traveling, and facilitating communication between the pilots and Coast Guard. They requested that we authorize an administrative position for each district to account for these increased duties and prevent delays in responsiveness to the Coast Guard. We rejected the proposal to add an “administrative pilot” because this is not consistent with industry standards. According to our discussions with the American Pilots Association (APA), aside from the largest pilot groups, many state and local groups recognize that the pool president continues to work as a pilot. However, due to the presidential duties, the president is expected to spend less time engaged in piloting vessels. Rounding up in the staffing model would account for extra staff or extra time spent by the pilot associations' presidents, including attending meetings and conferences, providing additional financial and traffic information to increase transparency and accountability, overseeing and ensuring the integrity of the association training program, evaluating technology, and coordinating with the APA to implement and share best practices. Rounding up in the staff model is also consistent with industry standards, as is it not possible to have a portion of a person. Therefore, if the staffing model requires 8.1 pilots for an area, 9 pilots are actually needed. In addition, we currently estimate how many pilots each district needs for the upcoming year without taking into account the administrative work that takes the president of each association away from their role as a Great Lakes pilot. We believe rounding up is prudent with regard to maritime safety to help ensure enough pilots are allocated to each district to cover the extra hours the association's president spends engaged in the non-pilot tasks and administrative work discussed above. In sum, rounding down in the staffing model could result in too few pilots allocated to a district which, when coupled with the president's spending less time serving as pilot, may adversely impact recuperative rest goals for working pilots that are essential for safe navigation. The Coast Guard agrees that, where the pilot associations' presidents are spending an increased amount of their time on administrative issues, the staffing model should account for that time and allow for additional staff to assist. In light of the information presented by the pilot association's comments, the Coast Guard is proposing to always round up the final number, rather than round to the nearest integer when determining the maximum number of pilots in the staffing model. For the 2021 ratemaking, this proposed change to the rounding in the staffing model would allow each association one additional pilot that would not have otherwise been allowed. C. Exclusion of Legal Fees Incurred in Lawsuits Against the Coast Guard Related To Ratemaking and Regulating From Pilots Associations' Approved Operating Expenses This is the second policy change. The Coast Guard is proposing to exclude legal fees incurred in litigation against the Coast Guard in relation to the ratemaking and oversight requirements in Title 46 of the United States Code (U.S.C.) at sections 9303, 9304, and 9305 from approved pilot associations' operating expenses used in the calculation of pilotage rates. We believe causing the shippers to pay for the pilots' litigation expenses against the Coast Guard's annual ratemaking is an undue burden, because the shippers are not responsible for the ratemaking and the pilots can be reimbursed through other means. The Coast Guard acknowledges that many legal fees are appropriately included in the operating expenses of the pilot associations, and that excluding legal fees incurred in lawsuits against the Coast Guard related to ratemaking is a departure from our past policies. The regulations will still provide for the inclusion of the legal fees needed for the pilots to run their businesses, defend their licenses, and to protect their interests when the shippers litigate. To clarify, pilot associations who intervene as defendants alongside the Coast Guard in a shipper-initiated lawsuit related to the ratemaking would be able to continue to include those legal fees in their operating expenses, because they are not incurred in a lawsuit against the Coast Guard. As the U.S. District Court recently noted, “each year, it seems, either the shipping companies or the associations that supply the pilots sue the Coast Guard to challenge aspects of the rulemaking. The shippers perennially complain that the rates are too high, while the pilots gripe that they are too low.” 14 The pilots have an incentive to sue the Coast Guard annually on the ratemaking, regardless of the outcome of the case, because the costs associated with the lawsuit will inflate the pilot's associations operating expenses, and, in turn, increase their annual rates. Regardless of outcome, those legal fees go into the calculations that, ultimately, the shipper pays. From the shippers' perspective, shippers are generally paying legal fees for pilots to try and obtain higher fees from the shippers. 14 Am. Great Lake Ports Ass'n v. Coast Guard, 443 F. Supp. 3d 44, 47 (D.D.C. Mar. 10, 2020). The Coast Guard is proposing to remove this expense from the ratemaking calculation, noting that under the Equal Access to Justice Act (EAJA), 28 U.S.C. 2412, the Coast Guard can reimburse pilots if they prevail on the merits. This more equitable solution places the burden of paying legal fees on the Coast Guard when the pilots prevail in such litigation. Excluding legal fees incurred by suing the Coast Guard from the operating expenses on the annual ratemaking is a change consistent with giving consideration to the public interest and the costs of providing the services, as the pilots would be eligible for reimbursement from the Coast Guard if their challenge prevails. Additionally, shippers become a party in interest when the pilots sue the Coast Guard. In some cases, shipping companies have intervened as defendants in legal challenges to the ratemakings. Under the present scheme, pilots are reimbursed for their legal expenses when they sue the Coast Guard, irrespective of whether they win or lose. But it is not the Government that bears the expense—shippers pay the pilots' legal expenses, in the form of higher pilotage rates, when those legal expenses are included in the operating expenses. The general proposition in the American system of jurisprudence is that litigants bears their own expenses for the litigation. “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.” 15 Under this jurisprudence, the shippers, as a party in interest, should not continue to bear the legal expenses each time the pilots sue the Coast Guard in relation to the ratemaking and regulation, because the shippers are not responsible for the ratemaking and regulatory function. 15 Alyeska Pipeline Service Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975). The pilots have alternative remedies to recoup their legal fees in lawsuits against the Coast Guard related to the ratemaking and oversight requirements. Under the EAJA, a prevailing party in a suit where the government agency is an opposing party can apply for its legal fees under certain conditions. To be considered a prevailing party entitled to an award of attorney fees under the EAJA, it is sufficient if the claimant prevails on an important matter that directly benefits them, but they need not prevail on all issues. 16 One D.C. Circuit Court of Appeals opinion, Select Milk Producers, Inc. v. Johanns, affirmed that plaintiffs were prevailing parties entitled to attorney fees under the EAJA even where the plaintiff secured a preliminary injunction but a subsequent change in regulation rendered the case moot. 17 Plaintiffs can also become a prevailing party if they enter a favorable settlement agreement under a court's consent decree. 18 If the prevailing party is awarded legal fees, the government agency, in this case the Coast Guard, pays those fees. Similarly, if a case involving the Coast Guard settles, attorney fees can be included as a term of the settlement. 16 Ctr. for Food Safety v. Burwell, 126 F. Supp. 3d 114, 120 (D.D.C. 2015) (citing Tex. State Teachers Ass'n v. Garland Indep. Sch. Dist., 489 U.S. 782, 790 (1989) (“At the same time, however, a plaintiff need not prevail on the “central issue” in the litigation to be a prevailing party under the EAJA; it is sufficient for a party to prevail on an “important matter” in the course of litigation, even when that party “does not prevail on all issues.' ”). 17 400 F. 3d 939, 195 (D.C. Cir. 2005). 18 Buckhannon Bd. & Care Home Inc. v. W. Va. Dep't of Health and Human Res., 532 U.S. 598, 604 (2001). Excluding these legal fees from operating expenses in the ratemaking and regulatory function is consistent with “giving consideration to the public interest and the costs of providing the services,” 19 as it would place the burden of paying the legal fees on the Coast Guard as the regulatory agency, rather than the shipping companies that pay for pilotage services. The Coast Guard finds that continuing to allow these legal expenses to be included in the operating expenses is not necessary for the costs of providing services, because the legal fees incurred by the pilot associations are eligible for reimbursement through settlement negotiations or through the EAJA, when the pilots prevail on the merits. For these reasons, we do not believe that excluding these narrowly defined legal expenses from operating expenses when the pilots sue the Coast Guard will have a deleterious effect on the safe, efficient operation of pilots or otherwise militate against the public interest in the regulation of pilotage services. 19 46 U.S.C. 9303(f). As such, we believe that repositioning the financial responsibility for legal fees on the proper entity by removing them from pilots' operating expenses is an equitable resolution that comports with our statutory mandate to give consideration to both the public interest and the costs of providing the services. Our process to exclude the legal fees in our annual ratemaking would be as follows. First, the unreimbursed pilot associations' legal fees incurred in litigation against the Coast Guard would be identified as an individual line item in the operating expenses. Second, we would remove the same amount by way of a Director's adjustment in a later step. If the pilot association is not reimbursed at all by the EAJA or other settlement means, then the full unreimbursed cost of legal fees for that year would be listed as an operating expense, and then the same dollar amount would be excluded by a Director's adjustment. Where a pilot association's legal fees are reimbursed fully or partially by way of the EAJA or settlement, then the operating expense amount would be reduced to represent only the unreimbursed dollar amount, and that same dollar amount would be excluded by a Director's adjustment. Only the outstanding cost of legal fees incurred in litigation against the Coast Guard related to ratemaking and oversight would be listed, representing the true cost to the association. Listing the dollar amount of unreimbursed legal expenses and removing it from the operating expenses would provide transparency to the pilot associations of the exact amount of legal fees excluded by this proposed change. D. Request for Comments on Changes to Apprentice Pilot Compensation for Consideration in a Future Rulemaking For consideration in a future ratemaking, we are requesting comments on how we calculate compensation for apprentice pilots and pilots with a limited registration. We are requesting comments on setting the reimbursable cost associated with apprentice pilot salaries at a set amount based on a percentage of the previous year's target pilot compensation. This reimbursable cost would be included in the approved operating expenses for pilotage associations. Apprentice pilot salaries are currently based on a Director's adjustment made in the 2019 rulemaking, which adjusted these salaries to approximately 36 percent of target pilot compensation. The Coast Guard is requesting comments on setting all future apprentice pilot salaries at a rate equivalent to 36 percent of target pilot compensation. This would align the compensation practices for apprentice pilots across all three districts. The Coast Guard believes setting this benchmark for apprentice pilot salaries would help recruit highly qualified mariners to join and remain with the pilot associations by providing apprentice pilots with the ability to earn an equitable income during the training process, which can last from 6 to 48 months. This could also ensure that the pilot associations have sufficient personnel to continue providing service, despite retirements and unscheduled turn-over. We would like to hear any comments, suggestions, or questions you have pertaining to the Coast Guard's proposed recommendation to set future apprentice pilot salaries at an amount equivalent to 36 percent of the target pilot compensation. If you disagree with this proposed percentage, please address your concerns and provide a substitute amount or percentage along with your rationale supporting the proposed substitution. If you agree with the proposed percentage for different reasons than the Coast Guard noted above, please explain your rationale and reasoning. VII. Coast Guard's Authority To Remedy Harms From Past Ratemakings in Response to 2020 D.C. Appellate Court Opinion In American Great Lakes Ports Association, et al., v. Shultz, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the District Court's decision with regard to the remedy in the challenge to the 2016 pilotage rates. 20 The D.C. Circuit agreed that the District Court properly decided not to vacate the 2016 rates, noting the “numerous disruptive consequences that would follow from vacating the 2016 Rule.” 21 The D.C. Circuit Court further affirmed that the precise amount of any funds that would be needed to recoup and redistribute funds was unknown, since there would be no operative 2016 rate. 22 Finally, the Circuit Court urged the Coast Guard, in this annual rate review, to “consider if it has the statutory authority to remedy the harms from the 2016 Rule and if doing so would comport with its mandate to consider `the public interest and the costs of providing services' 46 U.S.C. 9303(f).” 23 20 Am. Great Lakes Ports Ass'n. v. Shultz, 962 F. 3d 510 (D.C. Cir. June 16, 2020). 21 Id. at 519-520. 22 Id. at 516. 23 Am. Great Lakes Ports Ass'n. v. Shultz, 962 F. 3d at 520. A. Coast Guard's Authority To Remedy Harms From Past Ratemakings First, the Coast Guard's longstanding position is that it has no statutory authority to retroactively recalculate rates. The District Court, in American Great Lakes Ports Assoc. v. Zukunft, confirmed that no such statutory authority existed. 24 Therefore, the question is whether the Act authorizes discretionary prospective rate adjustments to correct for or offset in part a past error. The relevant authority in § 9303(f) states “[t]he Secretary shall prescribe by regulation rates and charges for pilotage services, giving consideration to the public interest and the costs of providing the services. The Secretary shall establish new pilotage rates by March 1 of each year.” 25 While the statute does not allow the Coast Guard to retroactively re-calculate rates, based on the broad grant of authority in the statute, the Coast Guard believes that the statute grants the Coast Guard discretion to consider the impact of past rates in setting annual rates that are just and reasonable to ensure the public safety and reliability of the pilotage services while also covering the allowable and reasonable costs of those services. 24 Am. Great Lakes Ports Ass'n v. Zukunft, 301 F. Supp. 3d 99, 104 (D.D.C. Mar. 13, 2018). 25 See 46 U.S.C. 9303(f). This authority has been delegated to the Coast Guard through DHS Delegation No. 0170.1, para. II (92.f). Within the existing methodology, the Coast Guard includes an allowance for the discretionary adjustment of rates. In Step 10, “Review and finalize rates,” (§  404.110), often referred to informally as Director's discretion, the Director of the Great Lakes Pilotage reviews the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and in 46 CFR 404.1(a), which include promoting efficient, safe, and reliable pilotage service on the Great Lakes; generating sufficient revenue for each pilotage association to reimburse necessary and reasonable operating expenses; compensating trained and rested pilots fairly; and providing appropriate capital for improvements. The Coast Guard has yet to exercise this discretion under the 2016 methodology, and generally believes that its discretion is properly limited to circumstances of clear error or mistake resulting in an unjust rate or extraordinary circumstances. The annual ratemaking ensures that the consequences of any error is limited in time. The 2016 methodology, as currently implemented, has survived legal challenge and is producing stable rates based on, among other factors, an ever-increasing amount of historical data. The consideration of the impact of past rates includes the consequences of any identified errors. The Coast Guard clarifies that its longstanding policy against calculating retroactive rates does not prevent its estimation of correcting for past rates when reliable information for doing so is available, and it is in the public interest and provides for the cost of services. In considering whether to exercise our discretion to adjust current rates for issues in past rates, the Coast Guard takes a retrospective look for extraordinary circumstances associated with past rates that the Coast Guard concludes were both unjust and unreasonable. B. Does remedying harms from past ratemakings comport with our statutory mandate? Next, the Coast Guard will consider whether remedying any portion of the identified harms from the 2016 ratemaking final rule in this ratemaking is appropriate. More specifically, the Coast Guard will consider whether a prospective rate adjustment aligns with our mandate to consider the public interest and the costs of providing services per 46 U.S.C. 9303(f). Consistent with its longstanding position; 26 that is, that adjusting rates annually to correct for past events will tend to result in greater swings in the rate from year to year, as the rates constantly seek to correct for possible miscalculations used in past ratemakings, the Coast Guard is generally of the view that exercising its discretion to consider adjustments based on possible past errors should be limited to clear error or extraordinary circumstances. 27 The Coast Guard strives to accurately project demand for pilotage services and required revenue each year, generally resulting in incremental changes and rate stability. We believe this is in the public interest, as it provides greater predictability to both shipping companies and the pilots and promotes public confidence in the Coast Guard. 28 26 Memorandum of Points and Authorities in Reply to Plaintiffs' Opposition at par. III.B, Am. Great Lakes Ports Ass'n. v. Zukunft, 301 F. Supp. 3d 99 (D.D.C. Mar. 13, 2018) (Civil Action No.: 16-1019) 2017 WL 632501. 27 Memorandum of Points and Authorities in Reply to Plaintiffs' Opposition at 3, par. III.B, Am. Great Lakes Ports Ass'n. v. Zukunft, 301 F. Supp. 3d 99 (D.D.C. Mar. 13, 2018) (Civil Action No.: 16-1019) 2017 WL 632501. 28 Id. The Coast Guard exercises discretion to adjust the final rates in step 10, to produce adequate revenue for the upcoming year. Ensuring the rates are adjusted to sufficiently cover all the approved operating expenses is consistent with our mandate to consider the public interest and safety of navigating through the Great Lakes. Having considered all of the information before it carefully, the Coast Guard does not intend to make a prospective change in the 2021 rates to correct for 2016 errors for the following three reasons. One: By the time the 2021 final rule publishes, 5 years will have passed since the 2016 pilotage rates final rule was issued and implemented. Since then, the Coast Guard has improved its ratemaking methodology to remove the arbitrary calculations that led to the harm identified in the opinions of the D.C. district court and the D.C. Circuit. The passage of time weighs against a rate adjustment, and even more significantly, we cannot calculate the actual error in 2016 because of the inherent difficulty of determining what the correct target compensation should have been. As the D.C. District Court opinion noted, with regard to target pilot compensation, there was evidence in the record to support either a higher or a lower target compensation, and the Coast Guard could, on remand, have supported the 10-percent adjustment. 29 Therefore, it is not a simple arithmetic exercise to determine what the 2016 rates should have been; indeed it is unclear on the existing record whether they should have been higher or lower or that some should have been higher and some lower. Due to the changes in the methodology, the Coast Guard has no data from subsequent years on which to estimate with reasonable reliability what the 2016 rate would have been without the consideration of factors found to be arbitrary or insufficiently justified by the courts. Because the target compensation adjustment could have been lower or higher than our 10-percent estimate, we cannot adjust the weighting factors to produce a number without acting arbitrarily or risking being perceived as arbitrary. Determining how to make all the necessary corrections would be resource intensive, and likely controversial and disruptive to the current participants in the market for pilotage services, and we believe that our resources are better devoted to getting this year's rates correct and published in a timely fashion without adjustment for the 2016 errors. The Coast Guard does not believe that, to date, either the pilots or the shippers have convincingly showed a methodology for correcting the 2016 rate that reliably produces a just and reasonable rate. 29 Am. Great Lakes Ports Ass'n v. Zukunft, 301 F. Supp. 3d at 103 (D.D.C. Mar. 13, 2018). Two: Also related to the passage of significant time, pilot turnover and changes in operators render a remedial rate adjustment to compensate for circumstances 5 years ago less equitable and less in the public interest because the remedy may not benefit those who were actually disadvantaged by the ratemaking. As we stated in the 2020 ratemaking proposed rule, we found that 457 unique vessels used pilotage services during the years 2016 through 2018. 30 Of these vessels, 420 were foreign-flagged vessels and 37 were U.S.-flagged vessels. In 2016, 245 unique vessels used pilotage services compared with 287 unique vessels in 2019. In addition, of those 287 vessels only 63 percent used pilotage services in both 2016 and 2019. The number of unique vessels that transit the area is an indication that any changes made for the 2021 ratemaking period would be unlikely to reach all those who were disadvantaged by the 2016 ratemaking. 30 Great Lakes Pilotage Rates—2020 Annual Review and Revisions to Methodology, 84 FR 58099 at 58120, Oct. 30, 2019. Three: Using the discretionary adjustment in step 10 to correct for potential overcharges in past years, by lowering the pilotage rates from the result of the multi-step process, risks imposing rates below the level needed to adequately fund operational expenses. In fact, imposing a remedy through even a small, discretionary adjustment to the 2021 rate could disadvantage or harm pilots or shipping companies unjustly for the upcoming year, and the harms likely outweigh the uncertain benefits. As we have seen in the past, when the rates or actual traffic volume do not produce predicted revenue, pilot attrition increases, which leads to fewer qualified pilots and the additional costs of training new pilots, which can take from 6 months to 48 months. VIII. Discussion of Proposed Rate Adjustments In this NPRM, based on the proposed changes to the existing methodology described in the previous section, we are proposing new pilotage rates for 2021. We propose to conduct the 2021 ratemaking as an “interim year,” as was done in 2020, rather than a full ratemaking as was conducted in 2018. Thus, the Coast Guard proposes to adjust the compensation benchmark pursuant to § 404.104(b) for this purpose, rather than § 404.104(a). This section discusses the proposed rate changes using the ratemaking steps provided in 46 CFR part 404, incorporating the proposed changes discussed in section VI. We will detail all 10 steps of the ratemaking procedure for each of the 3 districts to show how we arrive at the proposed new rates. District One A. Step 1: Recognize Previous Operating Expenses Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year's operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant's financial reports for each association's 2018 expenses and revenues. 31 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. In certain instances, costs are applied to the designated or undesignated area based on where they were actually accrued. 31 These reports are available in the docket for this rulemaking (see Docket #USCG-2019-0736). As noted above, in 2016 the Coast Guard began authorizing surcharges to cover the training costs of applicant pilots. The surcharges were intended to reimburse pilot associations for training applicants in a more timely fashion than if those costs were listed as operating expenses, which would have required 3 years to reimburse. The rationale for using surcharges to cover these expenses, rather than including the costs as operating expenses, was so these non-recurring costs could be recovered in a more timely fashion, and so that retiring pilots would not have to cover the costs of training their replacements. Because operating expenses incurred are not actually recouped for a period of 3 years, the Coast Guard added a $150,000 surcharge per applicant pilot, beginning in 2016, to recoup those costs in the year incurred. Although the districts did not collect any surcharges for the 2020 shipping season, they did collect a surcharge for the 2018 season, which will need to be reflected in the operating expenses of the districts. For District One, we propose several Director's adjustments. District One had two applicant pilots during the 2018 season. In total, the District paid these two pilots $594,521, or $297,261 each. The Coast Guard believes this amount is above what is necessary and reasonable for retention and recruitment. In the 2019 NPRM, the Coast Guard proposed to make an adjustment to District Two's request for reimbursement of $571,248 for two applicant pilots ($285,624 per applicant). Instead of permitting $571,248 for two applicant pilots, we proposed allowing $257,566, or $128,783 per applicant pilot based on discussions with other pilot associations at the time. This standard went into the final rule for 2019 and was not opposed. To determine this percentage, we reached out to several of the pilot associations throughout the United States to see what percentage they pay their applicant pilots, then factored in the sea time and experience required to become an applicant pilot on the Great Lakes. Finally, we discussed the percentage with the presidents of each association to determine if it was fair and reasonable. If we adopt this methodology, the Coast Guard would continue to use the same ratio of applicant-to-target compensation for all districts. For 2019, this was approximately 36 percent ($128,783 ÷ $359,887 = 35.78 percent), so the Coast Guard is proposing to use the rounded up value of 36.0 percent of target compensation as the benchmark for applicant pilot compensation, for a 2021 target pilot compensation of $132,151 ($367,085 × .36). This allows adjustments to applicant pilot compensation to fluctuate in line with target compensation. The other Director's adjustments to expenses occurred because District One did not break out any costs associated with applicant pilots after the audit, and included these costs as part of pilotage costs. For transparency, the Coast Guard has included the applicant pilot costs as Director's adjustments and has then deducted the same amount to avoid any double counting of these costs. These costs are necessary and reasonable for district operations and should, therefore, be implemented in the rate. A Director's adjustment has also been proposed for the amount collected using the 2018 surcharge. A final Director's adjustment is proposed for the amount of Coast Guard litigation legal fees. Other adjustments have been made by the auditors and are explained in the auditor's reports, which are available in the docket for this rulemaking where indicated under the Public Participation and Request for Comments portion of the preamble. Table 3—2018 Recognized Expenses for District One Reported operating expenses for 2018 District one Designated St. Lawrence River Undesignated Lake Ontario Total Pilotage Costs: Subsistence/travel—Pilot $799,507 $533,005 $1,332,512 License insurance—Pilots 45,859 30,573 76,432 Payroll taxes—Pilots 202,848 135,232 338,080 Other 15,474 10,316 25,790 Total Other Pilotage Costs 1,063,688 709,126 1,772,814 Pilot Boat and Dispatch Costs: Pilot Boat Expense 267,420 178,280 445,700 Dispatch Expense 55,280 36,853 92,133 Payroll Taxes 19,100 12,733 31,833 Total Pilot and Dispatch Costs 341,800 227,866 569,666 Administrative Expenses: Legal—general counsel 8,550 5,700 14,250 Legal—shared counsel (K&L Gates) 34,607 23,071 57,678 Legal—USCG Litigation 7,743 5,162 12,905 Office Rent 0 0 0 Insurance 24,423 16,282 40,705 Employee benefits 8,064 5,376 13,440 Other taxes 50,963 33,976 84,939 Real Estate taxes 22,280 14,853 37,133 Depreciation/auto leasing/other 101,140 67,426 168,566 Interest 28,270 18,846 47,116 APA Dues 26,416 17,610 44,026 Dues and subscriptions 3,960 2,640 6,600 CPA DEDUCTION (3,960) (2,640) (6,600) Utilities 21,887 14,591 36,478 Travel 4,314 2,876 7,190 Salaries 74,763 49,842 124,605 Pay Roll Tax 7,323 4,882 12,205 Accounting/Professional fees 7,800 5,200 13,000 Pilot Training 0 0 0 Other 21,276 14,184 35,460 Total Administrative Expenses 449,819 299,877 749,696 Total Operating Expenses (Other Costs + Pilot Boats + Admin) 1,855,307 1,236,869 3,092,176 Proposed Adjustments (Director): Directors Adjustment (Applicant Salaries) 356,712 237,809 594,521 Directors Adjustment (Applicant Salaries) Deduction (356,712) (237,809) (594,521) Directors Adjustment (Applicant Salaries) Deduction (Salary Adjustment) (132,088) (198,132) (330,220) Directors Adjustment (Applicant License insurance) 2,540 1,693 4,233 Directors Adjustment (Applicant License insurance) Deduction (2,540) (1,693) (4,233) Directors Adjustment (Applicant Health insurance) 10,336 6,891 17,227 Directors Adjustment (Applicant Health insurance) Deduction (10,336) (6,891) (17,227) Directors Adjustment (Applicant Expenses) 93,296 62,197 155,493 Directors Adjustment (Applicant Expenses) Deduction (93,296) (62,197) (155,493) Directors Adjustment (Applicant payroll tax) 30,944 20,629 51,573 Directors Adjustment (Applicant payroll tax) Deduction (30,944) (20,629) (51,573) Directors Adjustment Surcharge Collected in 2018 (144,770) (144,770) (289,540) Directors Adjustment Legal—USCG Litigation (7,743) (5,162) (12,905) Total Director's Adjustments (284,601) (348,064) (632,665) Total Operating Expenses (OpEx + Adjustments) 1,570,706 888,805 2,459,511 B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2018 operating expenses in Step 1, the next step is to estimate the current year's operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation using the BLS data from the CPI for the Midwest Region of the United States for the 2019 inflation rate. 32 Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2019 and 2020 inflation modification. 33 Based on that information, the calculations for Step 2 are as follows: 32 The 2019 inflation rate is available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the CPI is defined as “All Urban Consumers (CPI-U), All Items, 1982-4 = 100”. Downloaded June 11, 2020. 33 The 2020 and 2021 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf. We used the PCE median inflation value found in table 1, Downloaded June 11, 2020. Table 4—Adjusted Operating Expenses for District One District one Designated Undesignated Total Total Operating Expenses (Step 1) $1,570,706 $888,805 $2,459,511 2019 Inflation Modification (@1.5%) 23,561 13,332 36,893 2020 Inflation Modification (@0.8%) 12,754 7,217 19,971 2021 Inflation Modification (@1.6%) 25,712 14,550 40,262 Adjusted 2021 Operating Expenses 1,632,733 923,904 2,556,637 C. Step 3: Estimate Number of Registered Pilots In accordance with the text in § 404.103, we estimate the number of registered pilots in each district. We determine the number of registered pilots based on data provided by the Saint Lawrence Seaway Pilots Association. Using these numbers, we estimate that there will be 18 registered pilots in 2021 in District One. Based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466), and our proposed changes to that staffing model, we assigned a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 5. These numbers are used to determine the amount of revenue needed in their respective areas. Table 5—Authorized Pilots Item District one Proposed Maximum number of pilots (per § 401.220(a)) 34 18 2021 Authorized pilots (total) 18 Pilots assigned to designated areas 11 Pilots assigned to undesignated areas 7 D. Step 4: Determine Target Pilot Compensation Benchmark In this step, we determine the total pilot compensation for each area. As we are proposing an “interim” ratemaking this year, we propose to follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. As stated in Section VI.A of the preamble, we are proposing to use a two-step process to adjust target pilot compensation for inflation. The first step adjusts the 2019 target compensation benchmark of $367,085 value by 1.4 percent for a total adjusted value of $372,224. This adjustment accounts for the difference between the predicted 2020 Median PCE inflation value of 2 percent and the actual 2020 ECI inflation value of 3.4 percent. 35 36 Because we do not have a value for the ECI for 2021, we multiply the adjusted 2020 compensation benchmark of $372,224 by the Median PCE inflation value of 1.60 percent. 37 Based on the projected 2021 inflation estimate, the proposed compensation benchmark for 2021 is $378,180 per pilot. 34 For a detailed calculation, refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). 35 U.S. Bureau of Labor Statistics Employment Cost Index (ECI) Q1 2020 data for Total Compensation for Private Industry Workers in the Transportation and Material Moving Sector (Series ID: CIU2010000520000A). The first quarter data was the most recently available data at the time of analysis for this NPRM. The Coast Guard will use updated 2020 ECI data in the final rule. https://www.bls.gov/news.release/archives/eci_01312020.pdf. 36 In Step 2 of the ratemaking, the Coast Guard uses the Federal Reserve's predicted PCE inflation rate of 0.8% to inflate operating expenses to 2020 dollars. This value differs from the ECI Q1 inflation rate of 3.4%. The reason for the large deviation between the values is the timing of each dataset. The ECI data is only for Q1 of 2020 (January-March) and therefore does not capture the impact of COVID-19. The PCE inflation predictions are from the June 2020 and account for the impacts of the pandemic on the U.S. economy. 37 The Federal Reserve, Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, June 2020, (June 10, 2020, 2:00 p.m.), https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf. Table 6—Target Pilot Compensation 2020 Target Compensation $367,085 Difference between Q12020 ECI Inflation Rate (3.4%) and the 2020 PCE Predicted Inflation Rate (2.0%) 1.400% Adjusted 2020 Compensation $372,224 2020 to 2021 Inflation Factor 1.60% 2021 Target Compensation $378,180 Next, we certify that the number of pilots estimated for 2021 is less than or equal to the number permitted under the proposed changes to the staffing model in § 401.220(a). The proposed changes to the staffing model suggest that the number of pilots needed is 18 pilots for District One, which is more than or equal to 18, the number of registered pilots provided by the pilot associations. In accordance with § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of registered pilots for District One, as shown in table 7. Table 7—Target Compensation for District One District One Designated Undesignated Total Target Pilot Compensation $378,180 $378,180 $378,180 Number of Pilots 11 7 18 Total Target Pilot Compensation 4,159,980 2,647,260 6,807,240 E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year's average annual rate of return for new issues of high-grade corporate securities. Using Moody's data, the number is 3.3875 percent. 38 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 8. 38 Moody's Seasoned Aaa Corporate Bond Yield, average of 2019 monthly data. The Coast Guard uses the most recent year of complete data. Moody's is taken from Moody's Investors Service, which is a bond credit rating business of Moody's Corporation. Bond ratings are based on creditworthiness and risk. The rating of “Aaa” is the highest bond rating assigned with the lowest credit risk. See https://fred.stlouisfed.org/series/AAA. (June 11, 2020) Table 8—Working Capital Fund Calculation for District One District one Designated Undesignated Total Adjusted Operating Expenses (Step 2) $1,632,733 $923,904 $2,556,637 Total Target Pilot Compensation (Step 4) 4,159,980 2,647,260 6,807,240 Total 2021 Expenses 5,792,713 3,571,164 9,363,877 Working Capital Fund (3. 3.875%) 196,228 120,973 317,201 F. Step 6: Project Needed Revenue In this step, we add all the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). We show these calculations in table 9. Table 9—Revenue Needed for District One District one Designated Undesignated Total Adjusted Operating Expenses (Step 2, see table 4) $1,632,733 $923,904 $2,556,637 Total Target Pilot Compensation (Step 4, see table 6) 4,159,980 2,647,260 6,807,240 Working Capital Fund (Step 5, see table 8) 196,228 120,973 317,201 Total Revenue Needed 5,988,941 3,692,137 9,681,078 G. Step 7: Calculate Initial Base Rates Having determined the revenue needed for each area in the previous six steps, to develop an hourly rate we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District One, using the total time on task or pilot bridge hours. 39 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 10. 39 To calculate the time on task for each district, the Coast Guard uses billing data from the Great Lakes Pilotage Management System (GLPMS). We pull the data from the system filtering by district, year, job status (we only include closed jobs), and flagging code (we only include U.S. jobs). After we have downloaded the data, we remove any overland transfers from the dataset, if necessary, and sum the total bridge hours, by area. We then subtract any non-billable delay hours from the total. Table 10—Time on Task for District One [Hours] Year District one Designated Undesignated 2019 8,232 8,405 2018 6,943 8,445 2017 7,605 8,679 2016 5,434 6,217 2015 5,743 6,667 2014 6,810 6,853 2013 5,864 5,529 2012 4,771 5,121 2011 5,045 5,377 2010 4,839 5,649 Average 6,129 6,694 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. We present the calculations for each area in table 11. Table 11—Initial Rate Calculations for District One Designated Undesignated Needed revenue (Step 6) $5,988,941 $3,692,137 Average time on task (hours) 6,129 6,694 Initial rate $977 $552 H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculate the average weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 12 and 13. 40 40 To calculate the number of transits by vessel class, we use the billing data from GLPMS, filtering by district, year, job status (we only include closed jobs), and flagging code (we only include U.S. jobs). We then count the number of jobs by vessel class and area. Table 12—Average Weighting Factor for District One, Designated Areas Vessel class/year Number of transits Weighting factor Weighted transits Class 1 (2014) 31 1 31 Class 1 (2015) 41 1 41 Class 1 (2016) 31 1 31 Class 1 (2017) 28 1 28 Class 1 (2018) 54 1 54 Class 1 (2019) 72 1 72 Class 2 (2014) 285 1.15 327.75 Class 2 (2015) 295 1.15 339.25 Class 2 (2016) 185 1.15 212.75 Class 2 (2017) 352 1.15 404.8 Class 2 (2018) 559 1.15 642.85 Class 2 (2019) 378 1.15 434.7 Class 3 (2014) 50 1.3 65 Class 3 (2015) 28 1.3 36.4 Class 3 (2016) 50 1.3 65 Class 3 (2017) 67 1.3 87.1 Class 3 (2018) 86 1.3 111.8 Class 3 (2019) 122 1.3 158.6 Class 4 (2014) 271 1.45 392.95 Class 4 (2015) 251 1.45 363.95 Class 4 (2016) 214 1.45 310.3 Class 4 (2017) 285 1.45 413.25 Class 4 (2018) 393 1.45 569.85 Class 4 (2019) 730 1.45 1,058.5 Total 4,858 6,252 Average weighting factor (weighted transits/number of transits) 1.29 Table 13—Average Weighting Factor for District One, Undesignated Areas Vessel class/year Number of transits Weighting factor Weighted transits Class 1 (2014) 25 1 25 Class 1 (2015) 28 1 28 Class 1 (2016) 18 1 18 Class 1 (2017) 19 1 19 Class 1 (2018) 22 1 22 Class 1 (2019) 30 1 30 Class 2 (2014) 238 1.15 273.7 Class 2 (2015) 263 1.15 302.45 Class 2 (2016) 169 1.15 194.35 Class 2 (2017) 290 1.15 333.5 Class 2 (2018) 352 1.15 404.8 Class 2 (2019) 366 1.15 420.9 Class 3 (2014) 60 1.3 78 Class 3 (2015) 42 1.3 54.6 Class 3 (2016) 28 1.3 36.4 Class 3 (2017) 45 1.3 58.5 Class 3 (2018) 63 1.3 81.9 Class 3 (2019) 58 1.3 75.4 Class 4 (2014) 289 1.45 419.05 Class 4 (2015) 269 1.45 390.05 Class 4 (2016) 222 1.45 321.9 Class 4 (2017) 285 1.45 413.25 Class 4 (2018) 382 1.45 553.9 Class 4 (2019) 326 1.45 472.7 Total 3,889 5,027 Average weighting factor (weighted transits/number of transits) 1.29 I. Step 9: Calculate Revised Base Rates In this step, we revise the base rates so that once the impact of the weighting factors is considered; the total cost of pilotage will be equal to the revenue needed. To do this, we divide the initial base rates calculated in Step 7 by the average weighting factors calculated in Step 8, as shown in table 14. Table 14—Revised Base Rates for District One Area Initial rate (step 7) Average weighting factor (step 8) Revised rate (initial rate ÷ average weighting factor) District One: Designated $977 1.29 $757 District One: Undesignated 552 1.29 428 J. Step 10: Review and Finalize Rates In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish this, the Director considers whether the proposed rates incorporate appropriate compensation for pilots to handle heavy traffic periods and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the proposed rates would cover operating expenses and infrastructure costs, including average traffic and weighting factions. Based on the financial information submitted by the pilots, the Director is not proposing any alterations to the rates in this step. We propose to modify the text in § 401.405(a) to reflect the final rates shown in table 15. Table 15—Proposed Final Rates for District One Area Name Final 2020 pilotage rate Proposed 2021 pilotage rate District One: Designated St. Lawrence River $758 $757 District One: Undesignated Lake Ontario 463 427 District Two A. Step 1: Recognize Previous Operating Expenses Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year's operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant's financial reports for each association's 2018 expenses and revenues. 41 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. For costs accrued by the pilot associations generally, such as employee benefits, for example, the cost is divided between the designated and undesignated areas on a pro rata basis. The recognized operating expenses for District Two are shown in table 16. 41 These reports are available in the docket for this rulemaking (see Docket No. USCG-2019-0736). For District Two, we propose three Director's adjustments: (1) For the amount collected from the 2018 surcharge; (2) for the amount in Coast Guard litigation legal fees; and (3) for the amount paid to the District's applicant pilot. District Two had one applicant pilot during the 2018 season and paid $334,659 in salary. The Coast Guard believes this amount is above what is necessary and reasonable for retention and recruitment. In the 2019 NPRM, the Coast Guard proposed to make an adjustment to District Two's request for reimbursement of $571,248 for two applicant pilots ($285,624 per applicant). Instead of permitting $571,248 for two applicant pilots, we proposed allowing $257,566, or $128,783 per applicant pilot. This proposal went into the final rule for 2019 and was not opposed. Going forward, the Coast Guard will continue to use the same ratio of applicant to target compensation. For 2019, this was approximately 36 percent ($128,783 ÷ $359,887 = 35.78 percent), so the Coast Guard is proposing to use the rounded up value of 36.0 percent of target compensation as the benchmark for applicant pilot compensation, for a 2021 target pilot compensation of $132,151 ($367,085 × .36). This allows adjustments to applicant pilot compensation to fluctuate in line with target compensation. Other adjustments made by the auditors are explained in the auditors' reports (available in the docket where indicated in the Public Participation and Request for Comments portion of this document). Table 16—2018 Recognized Expenses for District Two Reported operating expenses for 2018 District two Undesignated Lake Erie Designated Southeast Shoal to Port Huron Total Other Pilotage Costs: Subsistence/Travel—Pilots $115,073 $172,608 $287,681 CPA DEDUCTION (3,457) (5,185) (8,642) Hotel/Lodging Cost 50,464 75,696 126,160 License Insurance 138 207 345 Payroll taxes 82,960 124,441 207,401 Other 860 1,291 2,151 Total Other Pilotage Costs 246,038 369,058 615,096 Applicant Pilot Costs: Applicant Salaries 133,864 200,795 334,659 Applicant Health Insurance 18,691 28,036 46,727 Applicant Payroll Tax 4,496 6,745 11,241 Applicant Subsistence 9,872 14,807 24,679 Total Applicant Pilot Cost 166,923 250,383 417,306 Pilot Boat and Dispatch Costs: Pilot Boat Cost 206,998 310,496 517,494 Employee Benefits 80,906 121,358 202,264 Payroll Taxes 12,523 18,785 31,308 Total Pilot and Dispatch Costs 300,427 450,639 751,066 Administrative Expenses: Legal—general counsel 35,711 53,567 $89,278 Legal—shared counsel (K&L Gates) 17,037 25,555 42,592 Legal—USCG litigation 2,185 3,277 5,462 Office rent 33,326 49,988 83,314 Insurance 20,357 30,536 50,893 Employee Benefits 89,999 134,999 224,998 Other taxes 25,620 38,430 64,050 Real Estate taxes 6,066 9,099 15,165 Depreciation/Auto lease/Other 29,392 44,087 73,479 Interest 586 880 1,466 APA dues 13,703 20,554 34,257 Dues and Subscriptions 676 1,015 1,691 Utilities 19,413 29,119 48,532 Salaries—Admin employees 53,170 79,755 132,925 Payroll taxes 5,558 8,338 13,896 Accounting 14,276 21,414 35,690 Pilot Training 14,434 21,414 35,848 Other 15,310 22,966 38,276 Total Administrative Expenses 396,819 594,993 991,812 Total Operating Expenses (Other Costs + Pilot Boats + Admin) 1,110,207 1,665,073 2,775,280 Proposed Adjustments (Director): Directors Adjustment Surcharge Collected in 2018 (65,962) (65,962) (131,924) Directors Adjustment Applicant Pilot Salary (66,828) (135,680) (202,508) Proposed Legal Fee Removal—USCG Litigation (2,185) (3,277) (5,462) Total Director's Adjustments (134,975) (204,919) (339,894) Total Operating Expenses (OpEx + Adjustments) 975,232 1,460,154 2,435,386 B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2019 operating expenses in Step 1, the next step is to estimate the current year's operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation using the BLS data from the CPI for the Midwest Region of the United States for the 2019 inflation rate. 42 Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2020 and 2021 inflation modification. 43 Based on that information, the calculations for Step 1 are as follows: 42 Supra footnote 29, at 30. 43 Supra footnote 30, at 32. Table 17—Adjusted Operating Expenses for District Two Item District two Undesignated Designated Total Total Operating Expenses (Step 1) $975,232 $1,460,154 $2,435,386 2019 Inflation Modification (@1.5%) 14,628 21,902 36,530 2020 Inflation Modification (@0.8%) 7,919 11,856 19,775 2021 Inflation Modification (@1.6%) 15,964 23,903 39,867 Adjusted 2021 Operating Expenses 1,013,743 1,517,815 2,531,558 C. Step 3: Estimate Number of Working Pilots In accordance with the text in § 404.103, we estimate the number of working pilots in each district. We determine the number of registered pilots based on data provided by the Lakes Pilots Association. Using these numbers, we estimate that there will be 15 registered pilots in 2021 in District Two. Furthermore, based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466) and our proposed changes to that staffing model, we assign a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 18. These numbers are used to determine the amount of revenue needed in their respective areas. Table 18—Authorized Pilots Item District two Proposed Maximum number of pilots (per § 401.220(a)) 44 16 2021 Authorized pilots (total) 15 Pilots assigned to designated areas 7 Pilots assigned to undesignated areas 8 D. Step 4: Determine Target Pilot Compensation Benchmark 44 For a detailed calculation refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). In this step, we determine the total pilot compensation for each area. As we are proposing an “interim” ratemaking this year, we propose to follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. As stated in Section VI.A of the preamble, we are proposing to use a two-step process to adjust target pilot compensation for inflation. The first step adjusts the 2019 target compensation benchmark of $367,085 by 1.4 percent, for a total adjusted value of $372,224. This adjustment accounts for the difference between the predicted 2020 Median PCE inflation value of 2 percent and the actual 2020 ECI inflation value of 3.4 percent. 45 46 Because we do not have a value for the employment cost index for 2021, we multiply the adjusted 2020 compensation benchmark of $372,224 by the Median PCE inflation value of 1.60 percent. 47 Based on the projected 2021 inflation estimate, the proposed compensation benchmark for 2021 is $378,180 per pilot (see table 6 for calculations). 45 U.S. Bureau of Labor Statistics Employment Cost Index (ECI) Q1 2020 data for Total Compensation for Private Industry Workers in the Transportation and Material Moving Sector (Series ID: CIU2010000520000A). The first quarter data was the most recently available data at the time of analysis for this NPRM. The Coast Guard will use updated 2020 ECI data in the final rule. https://www.bls.gov/news.release/archives/eci_01312020.pdf. 46 In Step 2 of the ratemaking, the Coast Guard uses the Federal Reserve's predicted PCE inflation rate of 0.8% to inflate operating expenses to 2020 dollars. This value differs from the ECI Q1 inflation rate of 3.4%. The reason for the large deviation between the values is the timing of each dataset. The ECI data is only for Q1 of 2020 (January-March) and therefore does not capture the impact of COVID-19. The PCE inflation predictions are from the June 2020 and account for the impacts of the pandemic on the US economy. 47 The Federal Reserve, Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, June 2020, (June 10, 2020, 2:00 p.m.), https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200610.pdf). Next, we certify that the number of pilots estimated for 2021 is less than or equal to the number permitted under the proposed changes to the staffing model in § 401.220(a). The proposed changes to the staffing model suggest that the number of pilots needed is 16 pilots for District Two, which is more than or equal to 15, the number of registered pilots provided by the pilot associations. 48 48 See table 6 of the Great Lakes Pilotage Rates—2017 Annual Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The methodology of the staffing model is discussed at length in the final rule (see pages 41476-41480 for a detailed analysis of the calculations). Thus, in accordance with § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of registered pilots for District Two, as shown in table 19. Table 19—Target Compensation for District Two Undesignated Designated Total Target Pilot Compensation $378,180 $378,180 $378,180 Number of Pilots 8 7 15 Total Target Pilot Compensation $3,025,440 $2,647,260 $5,672,700 E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year's average annual rate of return for new issues of high-grade corporate securities. Using Moody's data, the number is 3.3875 percent. 49 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 20. 49 See footnote 33. Table 20—Working Capital Fund Calculation for District Two Item District two Undesignated Designated Total Adjusted Operating Expenses (Step 2) $1,013,743 $1,517,815 $2,531,558 Total Target Pilot Compensation (Step 4) 3,025,440 2,647,260 5,672,700 Total Expenses 4,039,183 4,165,075 8,204,258 Working Capital Fund (3.3875%) 136,827 141,092 277,919 F. Step 6: Project Needed Revenue In this step, we add all the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). We show these calculations in table 21. Table 21—Revenue Needed for District Two District two Undesignated Designated Total Adjusted Operating Expenses (Step 2, see Table 17) $1,013,743 $1,517,815 $2,531,558 Total Target Pilot Compensation (Step 4, see Table 19) 3,025,440 2,647,260 5,672,700 Working Capital Fund (Step 5, see Table 20) 136,827 141,092 277,919 Total Revenue Needed 4,176,010 4,306,167 8,482,177 G. Step 7: Calculate Initial Base Rates Having determined the needed revenue for each area in the previous six steps, to develop an hourly rate we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District Two, using the total time on task or pilot bridge hours. 50 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 22. 50 See footnote 34 for more information. Table 22—Time on Task for District Two [Hours] Year Undesignated Designated 2019 6,512 7,715 2018 6,150 6,655 2017 5,139 6,074 2016 6,425 5,615 2015 6,535 5,967 2014 7,856 7,001 2013 4,603 4,750 2012 3,848 3,922 2011 3,708 3,680 2010 5,565 5,235 Average 5,634 5,661 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. The calculations for each area are set forth in table 23. Table 23—Initial Rate Calculations for District Two Item Undesignated Designated Needed revenue (Step 6) $4,176,010 $4,306,167 Average time on task (hours) 5,634 5,661 Initial rate $741 $761 H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculated the average weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 24 and 25. 51 51 Supra footnote 35, at 41. Table 24—Average Weighting Factor for District Two, Undesignated Areas Vessel class/year Number of transits Weighting factor Weighted transits Class 1 (2014) 31 1 31 Class 1 (2015) 35 1 35 Class 1 (2016) 32 1 32 Class 1 (2017) 21 1 21 Class 1 (2018) 37 1 37 Class 1 (2019) 54 1 54 Class 2 (2014) 356 1.15 409.4 Class 2 (2015) 354 1.15 407.1 Class 2 (2016) 380 1.15 437 Class 2 (2017) 222 1.15 255.3 Class 2 (2018) 123 1.15 141.45 Class 2 (2019) 127 1.15 146.05 Class 3 (2014) 20 1.3 26 Class 3 (2015) 0 1.3 0 Class 3 (2016) 9 1.3 11.7 Class 3 (2017) 12 1.3 15.6 Class 3 (2018) 3 1.3 3.9 Class 3 (2019) 1 1.3 1.3 Class 4 (2014) 636 1.45 922.2 Class 4 (2015) 560 1.45 812 Class 4 (2016) 468 1.45 678.6 Class 4 (2017) 319 1.45 462.55 Class 4 (2018) 196 1.45 284.20 Class 4 (2019) 210 1.45 304.5 Total 4,206 5,529 Average weighting factor (weighted transits/number of transits) 1.31 Table 25—Average Weighting Factor for District Two, Designated Areas Vessel class/year Number of transits Weighting factor Weighted transits Class 1 (2014) 20 1 20 Class 1 (2015) 15 1 15 Class 1 (2016) 28 1 28 Class 1 (2017) 15 1 15 Class 1 (2018) 42 1 42 Class 1 (2019) 48 1 48 Class 2 (2014) 237 1.15 272.55 Class 2 (2015) 217 1.15 249.55 Class 2 (2016) 224 1.15 257.6 Class 2 (2017) 127 1.15 146.05 Class 2 (2018) 153 1.15 175.95 Class 2 (2019) 281 1.15 323.15 Class 3 (2014) 8 1.3 10.4 Class 3 (2015) 8 1.3 10.4 Class 3 (2016) 4 1.3 5.2 Class 3 (2017) 4 1.3 5.2 Class 3 (2018) 14 1.3 18.2 Class 3 (2019) 1 1.3 1.3 Class 4 (2014) 359 1.45 520.55 Class 4 (2015) 340 1.45 493 Class 4 (2016) 281 1.45 407.45 Class 4 (2017) 185 1.45 268.25 Class 4 (2018) 379 1.45 549.55 Class 4 (2019) 403 1.45 584.35 Total 3,393 4,467 Average weighting factor (weighted transits/number of transits) 1.32 I. Step 9: Calculate Revised Base Rates In this step, we revise the base rates so that once the impact of the weighting factors are considered, the total cost of pilotage will be equal to the revenue needed. To do this, we divide the initial base rates calculated in Step 7 by the average weighting factors calculated in Step 8, as shown in table 26. Table 26—Revised Base Rates for District Two Area Initial rate (step 7) Average weighting factor (step 8) Revised Rate (initial rate ÷ average weighting factor) District Two: Designated $741 1.31 $566 District Two: Undesignated 761 1.32 577 J. Step 10: Review and Finalize Rates In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish this, the Director considers whether the proposed rates incorporate appropriate compensation for pilots to handle heavy traffic periods, and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the proposed rates would cover operating expenses and infrastructure costs, and takes average traffic and weighting factors into consideration. Based on this information, the Director is not proposing any alterations to the rates in this step. We propose to modify the text in § 401.405(a) to reflect the final rates shown in table 27. Table 27—Proposed Final Rates for District Two Area Name Final 2020 pilotage rate Proposed 2021 pilotage rate District Two: Designated Navigable waters from Southeast Shoal to Port Huron, MI $586 $566 District Two: Undesignated Lake Erie 618 577 District Three A. Step 1: Recognize Previous Operating Expenses Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year's operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant's financial reports for each association's 2018 expenses and revenues. 52 For accounting purposes, the financial reports divide expenses into designated and undesignated areas. For costs accrued by the pilot associations generally, such as employee benefits, for example, the cost is divided between the designated and undesignated areas on a pro rata basis. The recognized operating expenses for District Three are shown in table 28. 52 These reports are available in the docket for this rulemaking (see Docket No. USCG-2019-0736). For District Three, we propose two Director's adjustments. One would be for the amount collected from the 2018 surcharge and the other for the amount of Coast Guard litigation legal fees. Other adjustments made by the auditors are explained in the auditors' reports (available in the docket where indicated in the Public Participation and Request for Comments portion of this document). We would make no adjustments to the District Three compensation for applicant pilots. In the 2019 NPRM, the Coast Guard proposed to make an adjustment to District Three's request for reimbursement of $571,248 for two applicant pilots ($285,624 per applicant). Instead of permitting $571,248 for two applicant pilots, we proposed allowing $257,566, or $128,783 per applicant pilot. This proposal went into the final rule for 2019 and was not opposed. Going forward, the Coast Guard will to continue to use the same ratio of applicant to target compensation for all districts. For 2019, this was approximately 36 percent ($128,783 ÷ $359,887 = 35.78 percent), so the Coast Guard will use 36 percent of target compensation as the benchmark for applicant pilot compensation. This allows adjustments to applicant pilot compensation to fluctuate in line with target compensation. Table 28—2018 Recognized Expenses for District Three Reported expenses for 2018 District three Undesignated 53 (Area 6) Lakes Huron and Michigan Designated (area 7) St. Marys River Undesignated (area 8) Lake Superior Total Operating Expenses: Other Pilotage Costs: Pilot subsistence/travel $208,110 $110,697 $123,980 $442,787 Hotel/Lodging Cost 88,982 47,331 53,011 189,324 License Insurance—Pilots 13,516 7,189 8,052 28,757 Payroll taxes 122,954 65,401 73,249 261,604 Other 19,521 10,383 11,629 41,533 Total Other Pilotage Costs 453,083 241,001 269,921 964,005 Applicant Pilot Costs: Applicant Salaries 183,485 97,598 109,310 390,393 Applicant pilot subsistence/travel 16,411 8,729 9,777 34,917 Applicant Insurance 38,312 20,379 22,823 81,514 Applicant Payroll Tax 16,411 8,729 9,777 34,917 Applicant Total Cost 254,619 135,435 151,687 541,741 Pilot Boat and Dispatch Costs: Pilot boat costs 346,160 184,127 206,223 736,510 Dispatch costs 99,982 53,182 59,563 212,727 Payroll taxes 13,609 7,239 8,108 28,956 Total Pilot and Dispatch Costs 459,751 244,548 273,894 978,193 Administrative Expenses: Legal—general counsel 22,766 12,109 13,563 48,438 Legal—shared counsel (K&L Gates) 19,426 10,333 11,573 41,332 Legal—USCG litigation 8,611 4,580 5,130 18,321 Office rent 4,020 2,138 2,395 8,553 Insurance 11,354 6,040 6,764 24,158 Employee benefits 68,303 36,331 40,691 145,325 Other taxes 131 70 78 279 Depreciation/Auto leasing/Other 57,315 30,487 34,145 121,947 Interest 7 4 4 15 APA Dues 20,628 10,973 12,289 43,890 Dues and subscriptions 3,290 1,750 1,960 7,000 Utilities 31,860 16,947 18,980 67,787 Salaries 60,876 32,381 36,267 129,524 Payroll taxes 5,406 2,875 3,220 11,501 Accounting/Professional fees 8,069 4,292 4,807 17,168 Pilot training 18,586 9,886 11,073 39,545 Other expenses (D3-18-01) 8,907 4,738 5,306 18,951 (D3-18-01) CPA Deduction (2,030) (1,080) (1,210) (4,320) Total Administrative Expenses 347,525 184,854 207,035 739,414 Total Operating Expenses (Other Costs + Pilot Boats + Admin) 1,514,978 805,838 902,537 3,223,353 Proposed Adjustments (Director): Directors Adjustment Surcharge Collected in 2018 (273,168) (273,168) (273,168) (819,504) Proposed Legal Fee Removal—USCG Litigation (8,611) (4,580) (5,130) (18,321) Total Director's Adjustments (281,779) (277,748) (278,298) (837,825) Total Operating Expenses (OpEx + Adjustments) 1,233,199 528,090 624,239 2,385,528 53 The undesignated areas in District Three (areas 6 and 8) are treated separately in table 28. In table 29 and subsequent tables, both undesignated areas are combined and analyzed as a single undesignated area. B. Step 2: Project Operating Expenses, Adjusting for Inflation or Deflation Having identified the recognized 2018 operating expenses in Step 1, the next step is to estimate the current year's operating expenses by adjusting those expenses for inflation over the 3-year period. We calculate inflation using the BLS data from the CPI for the Midwest Region of the United States for the 2019 inflation rate. 54 Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2020 and 2021 inflation modification. 55 Based on that information, the calculations for Step 1 are as follows: 54 Supra footnote 29, at 30. 55 Supra footnote 30, at 31. Table 29—Adjusted Operating Expenses for District Three District three Undesignated Designated Total Total Operating Expenses (Step 1) $1,857,438 $528,090 $2,385,528 2019 Inflation Modification (@1.5%) 27,862 7,921 35,783 2020 Inflation Modification (@0.8%) 15,082 4,288 19,370 2021 Inflation Modification (@1.6%) 30,406 8,645 39,051 Adjusted 2021 Operating Expenses 1,930,788 548,944 2,479,732 C. Step 3: Estimate Number of Working Pilots In accordance with the text in § 404.104(c), we estimate the number of working pilots in each district. We determine the number of registered pilots based on data provided by the Western Great Lakes Pilots Association. Using these numbers, we estimate that there will be 22 registered pilots in 2021 in District Three. Furthermore, based on the seasonal staffing model discussed in the 2017 ratemaking (see 82 FR 41466), and our proposed changes to that staffing model, we assign a certain number of pilots to designated waters and a certain number to undesignated waters, as shown in table 30. These numbers are used to determine the amount of revenue needed in their respective areas. Table 30—Authorized Pilots District three Proposed Maximum number of pilots (per § 401.220(a)) 56 23 2021 Authorized pilots (total) 22 Pilots assigned to designated areas 4 Pilots assigned to undesignated areas 18 D. Step 4: Determine Target Pilot Compensation Benchmark 56 For a detailed calculation, refer to the Great Lakes Pilotage Rates—2017 Annual Review final rule, which contains the staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017). In this step, we determine the total pilot compensation for each area. As we are proposing an “interim” ratemaking this year, we propose to follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. As stated in Section VI.A of the preamble, we are proposing to use a two-step process to adjust target pilot compensation for inflation. The first step adjusts the 2019 target compensation benchmark of $367,085 by 1.4 percent, for a total adjusted value of $372,224. This adjustment accounts for the difference between the predicted 2020 Median PCE inflation value of 2 percent and the actual 2020 ECI inflation value of 3.4 percent. 57 58 Because we do not have a value for the ECI for 2021, we multiply the adjusted 2020 compensation benchmark of $372,224 by the Median PCE inflation value of 1.60 percent. 59 Based on the projected 2020 inflation estimate, the proposed compensation benchmark for 2021 is $378,180 per pilot (see table 6 for calculations). 57 U.S. Bureau of Labor Statistics Employment Cost Index (ECI) Q1 2020 data for Total Compensation for Private Industry Workers in the Transportation and Material Moving Sector (Series ID: CIU2010000520000A). The first quarter data was the most recently available data at the time of analysis for this NPRM. The Coast Guard will use updated 2020 ECI data in the final rule. https://www.bls.gov/news.release/archives/eci_01312020.pdf. 58 In Step 2 of the ratemaking, the Coast Guard uses the Federal Reserve's predicted PCE inflation rate of 0.8% to inflate operating expenses to 2020 dollars. This value differs from the ECI Q1 inflation rate of 3.4%. The reason for the large deviation between the values is the timing of each dataset. The ECI data is only for Q1 of 2020 (January-March) and therefore does not capture the impact of COVID-19. The PCE inflation predictions are from the June 2020 and account for the impacts of the pandemic on the U.S. economy. 59 Supra footnote 33, at 39. Next, we certify that the number of pilots estimated for 2021 is less than or equal to the number permitted under the proposed changes to the staffing model in § 401.220(a). The proposed changes to the staffing model suggest that the number of pilots needed is 23 pilots for District Three, 60 which is more than or equal to 22, the number of registered pilots provided by the pilot associations. 60 See Table 6 of the Great Lakes Pilotage Rates—2017 Annual Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The methodology of the staffing model is discussed at length in the final rule (see pages 41476-41480 for a detailed analysis of the calculations). Thus, in accordance with § 404.104(c), we use the revised target individual compensation level to derive the total pilot compensation by multiplying the individual target compensation by the estimated number of registered pilots for District Three, as shown in table 31. Table 31—Target Compensation for District Three District three Undesignated Designated Total Target Pilot Compensation $378,180 $378,180 $378,180 Number of Pilots 18 4 22 Total Target Pilot Compensation $6,807,240 $1,512,720 $8,319,960 E. Step 5: Project Working Capital Fund Next, we calculate the working capital fund revenues needed for each area. First, we add the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year's average annual rate of return for new issues of high grade corporate securities. Using Moody's data, the number is 3.3875 percent. 61 By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in table 32. 61 Moody's Seasoned Aaa Corporate Bond Yield, average of 2018 monthly data. The Coast Guard uses the most recent complete year of data. See https://fred.stlouisfed.org/series/AAA. (June 12, 2019). Table 32—Working Capital Fund Calculation for District Three District three Undesignated Designated Total Adjusted Operating Expenses (Step 2) $1,930,788 $548,944 $2,479,732 Total Target Pilot Compensation (Step 4) 6,807,240 1,512,720 8,319,960 Total Expenses 8,738,028 2,061,664 10,799,692 Working Capital Fund (3.3875) 296,001 69,839 365,840 F. Step 6: Project Needed Revenue In this step, we add all the expenses accrued to derive the total revenue needed for each area. These expenses include the projected operating expenses (from Step 2), the total pilot compensation (from Step 4), and the working capital fund contribution (from Step 5). The calculations are shown in table 33. Table 33—Revenue Needed for District Three District three Undesignated Designated Total Adjusted Operating Expenses (Step 2, see Table 9) $1,930,788 $548,944 $2,479,732 Total Target Pilot Compensation (Step 4, see Table 31) 6,807,240 1,512,720 8,319,960 Working Capital Fund (Step 5, see Table 32) 296,001 69,839 365,840 Total Revenue Needed 9,034,029 2,131,503 11,165,532 G. Step 7: Calculate Initial Base Rates Having determined the revenue needed for each area in the previous six steps, to develop an hourly rate we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District Three, using the total time on task or pilot bridge hours. 62 Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in table 34. 62 See supra footnote 34, at 40 for more information. Table 34—Time on task for District Three [Hours] Year District three Undesignated Designated 2019 24,851 3,395 2018 19,967 3,455 2017 20,955 2,997 2016 23,421 2,769 2015 22,824 2,696 2014 25,833 3,835 2013 17,115 2,631 2012 15,906 2,163 2011 16,012 1,678 2010 20,211 2,461 Average 20,710 2,808 Next, we derive the initial hourly rate by dividing the revenue needed by the average number of hours for each area. This produces an initial rate, which is necessary to produce the revenue needed for each area, assuming the amount of traffic is as expected. The calculations for each area are set forth in table 35. Table 35—Initial Rate Calculations for District Three Undesignated Designated Revenue needed (Step 6) $9,034,029 $2,131,503 Average time on task (hours) 20,710 2,808 Initial rate $436 $759 H. Step 8: Calculate Average Weighting Factors by Area In this step, we calculate the average weighting factor for each designated and undesignated area. We collect the weighting factors, set forth in 46 CFR 401.400, for each vessel trip. Using this database, we calculate the average weighting factor for each area using the data from each vessel transit from 2014 onward, as shown in tables 36 and 37. 63 63 See supra footnote 35, at 41 for more information. Table 36—Average Weighting Factor for District Three, Undesignated Areas Vessel class/year Number of transits Weighting factor Weighted transits Area 6: Class 1 (2014) 45 1 45 Class 1 (2015) 56 1 56 Class 1 (2016) 136 1 136 Class 1 (2017) 148 1 148 Class 1 (2018) 103 1 103 Class 1 (2019) 173 1 173 Class 2 (2014) 274 1.15 315.1 Class 2 (2015) 207 1.15 238.05 Class 2 (2016) 236 1.15 271.4 Class 2 (2017) 264 1.15 303.6 Class 2 (2018) 169 1.15 194.35 Class 2 (2019) 279 1.15 320.85 Class 3 (2014) 15 1.3 19.5 Class 3 (2015) 8 1.3 10.4 Class 3 (2016) 10 1.3 13 Class 3 (2017) 19 1.3 24.7 Class 3 (2018) 9 1.3 11.7 Class 3 (2019) 9 1.3 11.7 Class 4 (2014) 394 1.45 571.3 Class 4 (2015) 375 1.45 543.75 Class 4 (2016) 332 1.45 481.4 Class 4 (2017) 367 1.45 532.15 Class 4 (2018) 337 1.45 488.65 Class 4 (2019) 334 1.45 484.3 Total for Area 6 4,299 5,497 Area 8: Class 1 (2014) 3 1 3 Class 1 (2015) 0 1 0 Class 1 (2016) 4 1 4 Class 1 (2017) 4 1 4 Class 1 (2018) 0 1 0 Class 1 (2019) 0 1 0 Class 2 (2014) 177 1.15 203.55 Class 2 (2015) 169 1.15 194.35 Class 2 (2016) 174 1.15 200.1 Class 2 (2017) 151 1.15 173.65 Class 2 (2018) 102 1.15 117.3 Class 2 (2019) 120 1.15 138 Class 3 (2014) 3 1.3 3.9 Class 3 (2015) 0 1.3 0 Class 3 (2016) 7 1.3 9.1 Class 3 (2017) 18 1.3 23.4 Class 3 (2018) 7 1.3 9.1 Class 3 (2019) 6 1.3 7.8 Class 4 (2014) 243 1.45 352.35 Class 4 (2015) 253 1.45 366.85 Class 4 (2016) 204 1.45 295.8 Class 4 (2017) 269 1.45 390.05 Class 4 (2018) 188 1.45 272.6 Class 4 (2019) 254 1.45 368.3 Total for Area 8 2,356 3,137 Combined total 6,655 8,634.10 Average weighting factor (weighted transits/number of transits) 1.30 Table 37—Average Weighting Factor for District Three, Designated Areas Vessel class per year Number of transits Weighting factor Weighted transits Class 1 (2014) 27 1 27 Class 1 (2015) 23 1 23 Class 1 (2016) 55 1 55 Class 1 (2017) 62 1 62 Class 1 (2018) 47 1 47 Class 1 (2019) 45 1 45 Class 2 (2014) 221 1.15 254.15 Class 2 (2015) 145 1.15 166.75 Class 2 (2016) 174 1.15 200.1 Class 2 (2017) 170 1.15 195.5 Class 2 (2018) 126 1.15 144.9 Class 2 (2019) 162 1.15 186.3 Class 3 (2014) 4 1.3 5.2 Class 3 (2015) 0 1.3 0 Class 3 (2016) 6 1.3 7.8 Class 3 (2017) 14 1.3 18.2 Class 3 (2018) 6 1.3 7.8 Class 3 (2019) 3 1.3 3.9 Class 4 (2014) 321 1.45 465.45 Class 4 (2015) 245 1.45 355.25 Class 4 (2016) 191 1.45 276.95 Class 4 (2017) 234 1.45 339.3 Class 4 (2018) 225 1.45 326.25 Class 4 (2019) 308 1.45 446.6 Total 2,814 3,659 Average weighting factor (weighted transits per number of transits) 1.30 I. Step 9: Calculate Revised Base Rates In this step, we revise the base rates so that once the impact of the weighting factors are considered, the total cost of pilotage will be equal to the revenue needed. To do this, we divide the initial base rates calculated in Step 7 by the average weighting factors calculated in Step 8, as shown in table 38. Table 38—Revised Base Rates for District Three Area Initial rate (step 7) Average weighting factor (step 8) Revised rate (Initial rate ÷ average weighting factor) District Three: Designated $759 1.30 $584 District Three: Undesignated 436 1.30 335 J. Step 10: Review and Finalize Rates In this step, the Director reviews the rates set forth by the staffing model and ensures that they meet the goal of ensuring safe, efficient, and reliable pilotage. To establish this, the Director considers whether the proposed rates incorporate appropriate compensation for pilots to handle heavy traffic periods and whether there is a sufficient number of pilots to handle those heavy traffic periods. The Director also considers whether the proposed rates would cover operating expenses and infrastructure costs, and takes average traffic and weighting factors into consideration. Based on this information, the Director is not proposing any alterations to the rates in this step. We propose to modify the text in § 401.405(a) to reflect the final rates shown in table 39. Table 39—Proposed Final Rates for District Three Area Name Final 2020 pilotage rate Proposed 2021 pilotage rate District Three: Designated St. Marys River $632 $584 District Three: Undesignated Lakes Huron, Michigan, and Superior 337 335 IX. Regulatory Analyses We developed this proposed rule after considering numerous statutes and Executive orders related to rulemaking. A summary of our analyses based on these statutes or Executive orders follows. A. Regulatory Planning and Review Executive Orders 12866 (Regulatory Planning and Review) and 13563 (Improving Regulation and Regulatory Review) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. 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, it is exempt from the requirements of Executive Order 13771. See the OMB Memorandum titled “Guidance Implementing Executive Order 13771, titled `Reducing Regulation and Controlling Regulatory Costs' ” (April 5, 2017). A regulatory analysis (RA) follows. The purpose of this proposed rule is to establish new base pilotage rates. The Great Lakes Pilotage Act of 1960 requires that rates be established or reviewed and adjusted each year. The Act requires that base rates be established by a full ratemaking at least once every five years, and in years when base rates are not established, they must be reviewed and, if necessary, adjusted. The last full ratemaking was concluded in June of 2018. 64 For this ratemaking, the Coast Guard estimates an increase in cost of approximately $1.06 million to industry as a result of the change in revenue needed in 2021 compared to the revenue needed in 2020. 64 Great Lakes Pilotage Rates—2018 Annual Review and Revisions to Methodology (83 FR 26162), published June 5, 2018. Table 40 summarizes proposed changes with no cost impacts or where the cost impacts are captured in the proposed rate change. Table 41 summarizes the affected population, costs, and benefits of the proposed rate change. Table 40—Proposed Changes With No Costs or Cost Captured in the Proposed Rate Change Change Description Affected population Basis for no cost or cost captured in the rate Benefits Legal expenses for lawsuits against the U.S. Government are not allowable operating expenses The Coast Guard is proposing to exclude legal fees for litigation against the Coast Guard from operating expenses for calculation of pilotage rates. This proposal would only apply to legal fees when pilots associations sue the Coast Guard in relation to the ratemaking and oversight requirement in 46 U.S.C. 9303, 9304 and 9305. As part of this proposed change, the Coast Guard is also proposing to create a new paragraph 46 CFR 404.2(b)(6) which defines legal expenses Owners and operators of 279 vessels journeying the Great Lakes system annually, 55 U.S. Great Lakes pilots, and 3 pilotage associations Changes in operating expenses are accounted for in the base pilotage rates. For the 2020 ratemaking, these legal fees total $36,688 for all three districts. After adjusting for inflation and the working capital fund, these expenses are $39,430, or 0.13% of the total revenue needed for 2021. The pilotage associations may still be reimbursed for these expenses by the Coast Guard under the EAJA The change would remove the undue cost to shippers of effectively paying for the pilots' litigation expenses to sue the Coast Guard. Changes to Staffing Model The Coast Guard is proposing to modify the staffing model at 46 CFR 401.220(a)(3) to round up to the nearest integer, as opposed to the existing method, which rounds to the nearest integer. In total, this would increase the maximum number of allowable pilots by 3 Owners and operators of 279 vessels journeying the Great Lakes system annually, 55 U.S. Great Lakes pilots, and 3 pilotage associations The total number of pilots is accounted for in the base pilotage rates. For the 2021 ratemaking, this proposed change would allow for one additional pilot that would not have otherwise been allowed Rounding up in the staffing model accounts for extra staff or extra time spent by the pilot associations presidents, including attending mandatory meetings with the Coast Guard, complying with [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-23407. Public record. Not legal advice.