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

Federal RegisterMar 12, 2021

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[Docket No. USCG-2020-0457]

RIN 1625-AC67

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

AGENCY:

Coast Guard, DHS.

ACTION:

Final rule.

SUMMARY:

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

DATES:

This final rule is effective April 12, 2021.

ADDRESSES:

To view documents and comments mentioned in this preamble as being available in the docket, go to

https://www.regulations.gov,

type USCG-2020-0457 in the “SEARCH” box and click “SEARCH.” Click on Open Docket Folder on the line associated with this rule.

FOR FURTHER INFORMATION CONTACT:

For information about this document, call or email Mr. Brian Rogers, Commandant (CG-WWM-2), Coast Guard; telephone 202-372-1535, email

Brian.Rogers@uscg.mil,

or fax 202-372-1914.

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations

II. Executive Summary

III. Basis and Purpose

IV. Background

V. Discussion of Methodological and Other Changes

A. Inflation of Pilot Compensation Calculation in Step 4

B. Exclusion of Legal Fees Incurred in Lawsuits Against the Coast Guard Related to Ratemaking and Regulating From Pilots Associations' Approved Operating Expenses

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

VI. Discussion of Comments

VII. Discussion of Rate Adjustments

District One

A. Step 1: Recognize Previous Operating Expenses

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

C. Step 3: Estimate Number of Working Pilots

D. Step 4: Determine Target Pilot Compensation Benchmark

E. Step 5: Project Working Capital Fund

F. Step 6: Project Needed Revenue

G. Step 7: Calculate Initial Base Rates

H. Step 8: Calculate Average Weighting Factors by Area

I. Step 9: Calculate Revised Base Rates

J. Step 10: Review and Finalize Rates

District Two

A. Step 1: Recognize Previous Operating Expenses

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

C. Step 3: Estimate Number of Working Pilots

D. Step 4: Determine Target Pilot Compensation Benchmark

E. Step 5: Project Working Capital Fund

F. Step 6: Project Needed Revenue

G. Step 7: Calculate Initial Base Rates

H. Step 8: Calculate Average Weighting Factors by Area

I. Step 9: Calculate Revised Base Rates

J. Step 10: Review and Finalize Rates

District Three

A. Step 1: Recognize Previous Operating Expenses

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

C. Step 3: Estimate Number of Working Pilots

D. Step 4: Determine Target Pilot Compensation Benchmark

E. Step 5: Project Working Capital Fund

F. Step 6: Project Needed Revenue

G. Step 7: Calculate Initial Base Rates

H. Step 8: Calculate Average Weighting Factors by Area

I. Step 9: Calculate Revised Base Rates

J. Step 10: Review and Finalize Rates

VIII. Regulatory Analyses

A. Regulatory Planning and Review

B. Small Entities

C. Assistance for Small Entities

D. Collection of Information

E. Federalism

F. Unfunded Mandates

G. Taking of Private Property

H. Civil Justice Reform

I. Protection of Children

J. Indian Tribal Governments

K. Energy Effects

L. Technical Standards

M. Environment

I. Abbreviations

APA American Pilots' Association

BLS Bureau of Labor Statistics

CFR Code of Federal Regulations

CPA Certified Public Accountant

CPI Consumer Price Index

DHS Department of Homeland Security

Director U.S. Coast Guard's Director of the Great Lakes Pilotage

EAJA Equal Access to Justice Act

ECI Employment Cost Index

FOMC Federal Open Market Committee

FR Federal Register

GLPA Great Lakes Pilotage Authority (Canadian)

GLPAC Great Lakes Pilotage Advisory Committee

GLPMS Great Lakes Pilotage Management System

I.R.C. Internal Revenue Code

LPA Lakes Pilots Association

NAICS North American Industry Classification System

NPRM Notice of proposed rulemaking

OMB Office of Management and Budget

PCE Personal Consumption Expenditures

Pilots Working Pilots

SBA Small Business Administration

SLSPA St. Lawrence Seaway Pilots' Association

§ Section

The Act Great Lakes Pilotage Act of 1960

The Coalition The Shipping Federation of Canada, the American Great Lakes Ports Association, and the United States Great Lakes Shipping Association

U.S.C. United States Code

User's Coalition The Shipping Federation of Canada, the American Great Lakes Ports Association, and the United States Great Lakes Shipping Association

WGLPA Western Great Lakes Pilot Association

II. Executive Summary

Pursuant to the Great Lakes Pilotage Act of 1960 (“the Act”),

the Coast Guard regulates pilotage for oceangoing vessels on the Great Lakes and St. Lawrence Seaway—including setting the rates for pilotage services and adjusting them on an annual basis for the upcoming shipping season. Shipping season begins when the locks are opened in the St. Lawrence Seaway, which allows traffic access to and from the Atlantic Ocean. The opening of the locks varies annually depending on the waterway conditions, but is generally in March or April. The rates, which for the 2020 season range from $337 to $758 per pilot hour (depending on which of the specific six areas pilotage service is provided), are paid by shippers to pilot associations. The three pilot associations, which are the exclusive U.S. source of registered pilots on the Great Lakes, use this revenue to cover operating expenses, maintain infrastructure, compensate applicant and registered pilots, acquire and implement technological advances, train new personnel, and allow partners to participate in professional development.

Title 46 of the United States Code (U.S.C.) Chapter 93; Public Law 86-555, 74 Stat. 259, as amended.

To compute the rate for pilotage services, we have been modifying our methodology, originally introduced in 2016, each year since then, 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 demand for pilotage services over the course of the coming year, to produce an hourly rate. This process is currently effected through a 10-step methodology, which is explained in detail in the Summary of Ratemaking Methodology in Section IV of the preamble to this final rule.

As part of our annual review, in this final rule we are implementing new pilotage rates for 2021 based on the existing methodology. The result is an increase in rates for two areas, a decrease for three areas, and no change in the remaining area when compared to the 2020 rates. In the 2021 ratemaking NPRM, we estimated a 4 percent increase in pilotage rates from the 2020 rates. In the 2021 ratemaking final rule, the pilotage rates for 2021 are about 7 percent more than the 2020 rates. These changes are due to a combination of five factors:

(1) A decrease in the amount of money needed for the working capital fund;

(2) adjusting pilot compensation for inflation;

(3) the net addition of two working pilots (“pilots”) at the beginning of the 2021 shipping season;

(4) an increase in total operating expenses for District One compared to the previous year; and

(5) an increase in the average hours of traffic for each area.

This increase in the average hours of traffic resulted in lower hourly rates despite a net increase in the amount of revenue needed by the pilot associations, because, when calculating the base hourly rates, the total revenue needed is divided by the average hours of traffic annually (see Step 7 of the ratemaking process). The Coast Guard uses a 10-year average when calculating traffic, to smooth out variations in traffic caused by global economic conditions, such as those caused by the COVID-19 pandemic.

In addition, the Coast Guard is implementing one methodological change to the inflation calculation for pilot compensation in step 4, to account for actual inflation. And, finally, this rule will disallow legal fees for litigation against the Coast Guard regarding the ratemakings as redeemable operating expenses. These changes are further discussed in Sections V and VI of this preamble.

Based on the ratemaking model discussed in this final rule, we are implementing the rates shown in Table 1.

Table 1—Current, Proposed, and Final Pilotage Rates on the Great Lakes

Area

Name

Final 2020

pilotage rate

Proposed 2021

pilotage rate

Final 2021

pilotage rate

District One: Designated

St. Lawrence River

$758

$757

$800

District One: Undesignated

Lake Ontario

463

428

498

District Two: Designated

Navigable waters from Southeast Shoal to Port Huron, MI

618

577

580

District Two: Undesignated

Lake Erie

586

566

District Three: Designated

St. Marys River

632

584

586

District Three: Undesignated

Lakes Huron, Michigan, and Superior

337

335

337

This rule will impact 54 United States registered pilots, 3 pilot associations, and the owners and operators of an average of 279 oceangoing vessels that transit the Great Lakes annually. This rule is not economically significant under Executive Order 12866 and does not affect the Coast Guard's budget or increase Federal spending. The overall annual regulatory economic impact of this rate change is a net increase of $2,064,622 in projected payments made by consumers of pilotage services during the 2020 shipping season. Because the Coast Guard must review, and, if necessary, adjust rates each year, we analyze these as single-year costs and do not annualize them over 10 years. Section VIII of this preamble provides the regulatory impact analyses of this rule.

III. Basis and Purpose

The legal basis of this rulemaking is the Great Lakes Pilotage Act of 1960,

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.

For United States registered pilots, the Act requires the Secretary to “prescribe by regulation rates and charges for pilotage services, giving consideration to the public interest and the costs of providing the services.”

The Act requires that rates be established or reviewed and adjusted each year, not later than March 1.

The Act also requires that base rates be established by a full ratemaking at least once every 5 years, and, in years when base rates are not established, they must be reviewed and, if necessary, in consideration of the public interest and the costs of providing the services, adjusted.

The Secretary's duties and authority under the Act have been delegated to the Coast Guard.

46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as amended.

46 U.S.C. 9302(a)(1).

46 U.S.C. 9303(f).

Id.

Department of Homeland Security (DHS) Delegation No. 0170.1, para. II (92.f).

The purpose of this final rule is to establish new pilotage rates for the 2021 shipping season. The Coast Guard believes that the new rates will continue to promote our goals in title 46 of the Code of Federal Regulations (CFR), part 404.1, for pilot retention, to ensure safe, efficient, and reliable pilotage services in order to facilitate maritime commerce throughout the Great Lakes and Saint Lawrence River System, and to provide adequate funds to upgrade and maintain infrastructure.

IV. Background

Pursuant to the Act, the Coast Guard, in conjunction with the Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping practices and rates on the Great Lakes. Under Coast Guard regulations, all vessels engaged in foreign trade (often referred to as “salties”) are required to engage U.S. or Canadian pilots during their transit through the regulated waters.

United States and Canadian “lakers,” which account for most commercial shipping

on the Great Lakes, are not affected.

Generally, vessels are assigned a U.S. or Canadian registered pilot depending on the order in which they transit a particular area of the Great Lakes and do not choose the pilot they receive. If a vessel is assigned a U.S. pilot, that pilot will be assigned by the pilotage association responsible for the particular district in which the vessel is operating, and the vessel operator will pay the pilotage association for the pilotage services. The Canadian GLPA establishes the rates for Canadian working pilots.

See 46 CFR 401.

The Coast Guard uses the term “laker” to identify commercial cargo vessels especially designed for and generally limited to use on the Great Lakes. These vessels are excluded from the requirement to use a pilot in the Great Lakes in 46 U.S.C. 9302(f).

The U.S. waters of the Great Lakes and the St. Lawrence Seaway are divided into three pilotage districts. Pilotage in each district is provided by an association certified by the Coast Guard's Director of the Great Lakes Pilotage (“the Director”) to operate a pilotage pool. The Saint Lawrence Seaway Pilotage Association provides pilotage services in District One, which includes all U.S. waters of the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association provides pilotage services in District Two, which includes all U.S. navigable waters from Southeast Shoal to Port Huron, MI, including all the U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and the St. Clair River. Finally, the Western Great Lakes Pilotage Association provides pilotage services in District Three, which includes all U.S. waters of the St. Marys River, including the Sault Ste. Marie Locks; and Lakes Huron, Michigan, and Superior.

Each pilotage district is further divided into “designated” and “undesignated” areas, which is depicted in Table 2 below. Designated areas, classified as such by Presidential Proclamation, are waters in which pilots must, at all times, be fully engaged in the navigation of vessels in their charge.

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.”

For these reasons, pilotage rates in designated areas can be significantly higher than those in undesignated areas.

Presidential Proclamation 3385,

Designation of restricted waters under the Great Lakes Pilotage Act of 1960,

December 22, 1960.

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.

Area name

One

Saint Lawrence Seaway Pilotage Association

Designated

St. Lawrence River.

Undesignated

Lake Ontario.

Two

Lake Pilotage Association

Designated

Navigable waters from Southeast Shoal to Port Huron, MI.

Undesignated

Lake Erie.

Three

Western Great Lakes Pilotage Association

Designated

St. Marys River.

Undesignated

Lakes Huron and Michigan.

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 will need to cover expenses and provide compensation to working pilots. Since the Coast Guard cannot guarantee demand for pilotage services, target pilot compensation for working pilots is a goal. The actual demand for service dictates the actual compensation for the working pilots. We then divide that amount by the historic 10-year average for pilotage demand. We recognize that, in years where traffic is above average, pilot associations will accrue more revenue than projected, while in years where traffic is below average, they will take in less. We believe that over the long term, however, this system ensures that infrastructure will be maintained and that pilots will receive adequate compensation and work a reasonable number of hours, with adequate rest between assignments, to ensure retention of highly trained personnel.

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.

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 VII of this preamble). In 2018, we revised the methodology by which we develop the compensation benchmark, based upon U.S. mariners rather than Canadian working pilots. The current methodology, which was finalized in the Great Lakes Pilotage Rates—2020 Annual Review and Revisions to Methodology final rule (Volume 85 of the

Federal Register

(FR) at Page 20088), published April 9, 2020, is designed to accurately capture all of the costs and revenues associated with Great Lakes pilotage requirements and produce an hourly rate that adequately and accurately compensates pilots and covers expenses. The current methodology is summarized in the section below.

Summary of Ratemaking Methodology

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

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 rule, we begin with the audited expenses from the 2018 shipping season.

While each pilotage association operates in an entire district, the Coast Guard tries to determine costs by area. Thus, with regard to operating expenses, we allocate certain operating expenses to designated areas, and certain operating expenses to undesignated areas. In some cases, we can allocate the costs based on where they are actually accrued. For example, we can allocate the costs for insurance for applicant pilots who operate in undesignated areas only. In other situations, such as general legal expenses, expenses are distributed between designated and undesignated waters on a

pro rata

basis, based upon the proportion of income forecasted from the respective portions of the district.

In Step 2, “Project operating expenses, adjusting for inflation or deflation,” (§ 404.102) the Director develops the 2021 projected operating expenses. To do this, we apply inflation adjustors for 3 years to the operating expense baseline received in Step 1. The inflation factors are from the Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) for the Midwest Region, or, if not available, the Federal Open Market Committee (FOMC) median economic projections for Personal Consumption Expenditures (PCE) inflation. This step produces the total operating expenses for each area and district.

In Step 3, “Estimate number of working pilots,” (§ 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 will be needed to handle shipping during the beginning and close of the season. This number is helpful in providing guidance to the Director in approving an appropriate number of credentials for pilots.

For the purpose of the ratemaking calculation, we determine the number of pilots provided by the pilotage associations (see § 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 2015 aggregated wage and benefit information to the 2019 compensation benchmark. Based on our experience over the past two ratemakings, the Coast Guard has determined that the level of target pilot compensation for those years provides an appropriate level of compensation for American Great Lakes pilots. The Coast Guard, therefore, will not seek alternative benchmarks for target compensation for future ratemakings at this time and will, instead, simply adjust the amount of target pilot compensation for inflation. This benchmark has advanced the Coast Guard's goals of safety through rate and compensation stability while also promoting recruitment and retention of qualified U.S. pilots.

In order to further this goal, for the 2021 ratemaking, the Coast Guard is also changing the way inflation is calculated in this step, to account for actual inflation instead of predicted inflation. See the Discussion of Methodological and Other Changes at Section V of this preamble for a detailed description of the changes.

In the second part of Step 4, set forth in § 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 adjustment” or “Director's discretion,” the Director reviews the revised base rates (from Step 9) to ensure that they meet the goals set forth in the Act and 46 CFR 404.1(a), which include promoting efficient, safe, and reliable pilotage service on the Great Lakes; generating sufficient revenue for each pilotage association to reimburse necessary and reasonable operating expenses; compensating trained and rested pilots

fairly; and providing appropriate profit for improvements.

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

V. Discussion of Methodological and Other Changes

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

A. Inflation of Pilot Compensation Calculation in Step 4

As proposed in the NPRM, this rule changes the inflation calculation in § 404.104(b) for interim ratemakings so that the previous year's target compensation value will first be adjusted by actual inflation using the Employment Cost Index (ECI) inflation value. With this change, we will update the previous year's target compensation value for actual inflation using ECI inflation values in each ratemaking. This ensures that any differences between the predicted inflation rate and the actual inflation rate will not be compounded with each ratemaking when the predicted PCE value is higher or lower than actual inflation. We will then multiply the ECI-adjusted target compensation for past years by the predicted future inflation value from the PCE to account for future inflation.

The BLS ECI only provides historic data; consequently, we use PCE data, in accordance with § 404.104(b), as the PCE provides estimates of future inflation for the upcoming shipping season. The PCE is a reflection of the Government's best prediction of what will happen, and the Coast Guard will continue to use it as our predicted inflation value in Step 4 of the ratemaking.

For 2020, the actual ECI inflation is 3.5 percent, which is 1.5 percent greater than the predicted PCE inflation of 2 percent.

The difference between using the 2020 predicted PCE inflation rates and historic ECI actual inflation data in § 401.104(b) results in a 1.5 percent increase for 2021 target pilot compensation versus continuing to use the predicted PCE inflation value. In some years, however, it is possible that the actual ECI inflation will be lower than the predicted PCE inflation, resulting in a lower value for target pilot compensation than if we had continued to use the PCE inflation.

U.S. BLS ECI Q3 2020 data for Total Compensation for Private Industry Workers in the Transportation and Material Moving Sector (Series ID: CIU2010000520000A). The third quarter data was the most recently available data at the time of analysis for this final rule, available at

https://www.bls.gov/news.release/archives/eci_10302020.pdf

in Table 5 on page 10. The NPRM used the Q1 value of 3.4 percent, which is available at

https://www.bls.gov/news.release/archives/eci_04302020.pdf

in Table 5 on page 10.

B. Exclusion of Legal Fees Incurred in Lawsuits Against the Coast Guard Related to Ratemaking and Regulating From Pilot Associations' Approved Operating Expenses

This final rule excludes legal fees incurred in litigation against the Coast Guard in relation to the ratemaking and oversight requirements in 46 U.S.C. 9303, 9304, and 9305 from approved pilot associations' operating expenses used in the calculation of pilotage rates. As we proposed in the NPRM, this exclusion will be added to § 404.2, “Procedure and criteria for recognizing association expenses,” in paragraph (b)(6).

Excluding these legal fees from operating expenses in the ratemaking and regulatory function is consistent with “giving consideration to the public interest and the costs of providing the services,”

because it places the burden of paying the legal fees on the Coast Guard, as the responsible party, when the pilots prevail on the merits, rather than the shipping companies that have no choice but to pay the set rate for pilotage services. Our reasoning is discussed further in Section VI of this preamble, Discussion of Comments.

46 U.S.C. 9303(f).

Our process to exclude the legal fees in our annual ratemaking will be as follows. First, the unreimbursed pilot associations' legal fees incurred in litigation against the Coast Guard will be identified as an individual line item in the operating expenses. Second, we will remove the same amount by way of a Director's adjustment in a later step. To clarify, any pilot association's legal fees associated with intervening on the Coast Guard's defense in a ratemaking lawsuit will continue to be included as an approved operating expense and will not be removed by way of a Director's adjustment.

When a pilot association's legal fees are reimbursed fully or partially by way of the Equal Access to Justice Act (EAJA) or settlement, then the operating expense amount will be reduced to represent only the unreimbursed dollar amount, and that same dollar amount will be excluded by a Director's adjustment. Only the outstanding cost of legal fees incurred in litigation against the Coast Guard related to ratemaking and oversight will be listed, representing the true cost to the association. Listing the dollar amount of unreimbursed legal expenses and removing it from the operating expenses will provide transparency to the pilot associations of the exact amount of legal fees excluded by this change.

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

The St. Lawrence Seaway Pilots' Association (SLSPA), District One, comment from Captain Boyce,

Association President, described several errors in the NPRM's Table 3—2018 Recognized Expenses For District One.

He commented that the rate calculation did not include 2018 operating expenses for the following allowable items: (1) Applicant pilot salaries, (2) a down payment for a pilot boat, (3) loan payments for the new pilot boat, and (4) dock repairs. Per our requirements in § 404.101, the Coast Guard uses a third-party auditing firm to produce financial reports for the pilot associations. We contracted CohnReznick (a professional services firm that specializes in accounting, taxes, and advising) to create the 2018 financial reports, and used them to establish the rates in the 2021 NPRM. We asked CohnReznick to review the District One 2018 expense report and SLSPA comment to verify the four missing operating expenses raised by the commenter and provide us with updated numbers.

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

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

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

subtracting them from the expenses in the Director's adjustments in Table 3, which, in itself, has no net effect; and (3) the net result is that $594,521 needs to be added to the expenses.

The Coast Guard agrees with the commenter that applicant pilot salaries are necessary expenses that we should have included in the operating expense base of the NPRM. However, we would have adjusted them to reasonable amounts. As the commenter notes, in Table 3 of the NPRM, the salaries were added in but immediately deducted. The applicant salaries were not otherwise included in the expense base, so we should not have deducted them from the ratemaking. Applicant salaries are considered reasonable and necessary expenses, subject to Director's adjustments, under our existing ratemaking process and per § 404.2(a). CohnReznick provided an updated applicant salary expense of $594,331 for the total applicant salaries for District One. We will use the value verified by the auditor, per our requirement in § 404.101. In this rule, we are removing the deduction for applicant pilot salaries in the District One expenses, thus allowing $594,331 for applicant pilot salaries as operating expenses, before any Director's adjustments, to ensure the amount included in the total operating expenses is reasonable. The Director's adjustments to the applicant salaries, originally proposed in the NPRM and adopted in this final rule, include a deduction to bring the total salaries down to an amount determined reasonable by the Director, and a deduction for the amount of applicant salary surcharges the association received in 2018 under that year's ratemaking (see Section VII of this preamble).

In addition, the SLSPA comment noted that District One had operating expenses in 2018 related to the purchase of a new pilot boat, a dock project, and pilot boat loan expenses. The commenter included a spreadsheet detailing the expenses and errors in District One's operating expenses and asserted that the NPRM's Table 3—2018 Recognized Expenses for District One did not cover their mortgaged infrastructure and dock project. We inquired with CohnReznick, and they confirmed that the pilot boat, the loan on the pilot boat, and the dock project were not included in the original report used to develop the NPRM; therefore, they were not included in the operational expenses in Table 3.

It is within our regulatory authority to consider these infrastructure costs as operating expenses. The regulations in 46 CFR 404.1(a) state that the goal of the ratemaking is to reimburse pilot associations' “necessary and reasonable operating expenses, fairly compensate trained and rested pilots, and provide an appropriate profit to use for improvements.” Additionally, § 404.2(a) requires the Director to review all reported expenses and determine if they are both necessary for providing pilotage service and reasonable in amount. Under § 404.2(b) criteria for determining if an expense is necessary and reasonable, these capital expenses are not otherwise excluded from being considered necessary and reasonable operating expenses in this rule. The costs for purchasing a new pilot boat, loan costs associated with the new pilot boat, and dock maintenance are necessary for pilotage services because the pilots use the pilot boats and docks in their daily business. It is necessary to maintain their infrastructure to be able to perform their duties efficiently. For the same reasons, these infrastructure expenses are also necessary and reasonable in amount when compared to similar expenses paid by others in the maritime or other comparable industry. Therefore, our regulatory framework requires the Coast Guard to allow these expenses in the year they were paid.

Additionally, current Coast Guard regulations do not require these costs be paid out of the pilot association's working capital fund. The section covering the working capital fund is 46 CFR 403.110, which states that pilot associations may only spend the working capital funds on items such as infrastructure improvements, major pilot boat repairs, and property acquisition. There is no requirement that they must use the working capital fund for these expenses. The commenter and district reported these as expenses for 2018, not working capital funds. As such, we do not have the regulatory authority to require District One to use the working capital fund to pay for these purchases rather than including them as operational expenses.

This final rule includes the infrastructure costs in District One's operational expenses for 2018. These updated numbers are reflected in Table 3 in this preamble under “Capital Expenses.” CohnReznick, our auditor, provided us verified numbers for these expenses.

The SLSPA comment also stated that in the NPRM's Table 3—2018 Recognized Expenses for District One,

the CPA deduction for dues and subscriptions of $6,600 is incorrect and should be added back into total operating expenses. In their inspection of the CPA's report for 2018, the SLSPA found that the CPA did not deduct $6,600 for dues and subscriptions, meaning this is an allowable expense, in their opinion. The Coast Guard verified that this CPA deduction was not in the audit report and, therefore, the deduction in the NPRM was unsupported. In Table 3 of this rule's preamble, we removed the $6,600 CPA deduction, thus allowing the $6,600 operating expense for dues and subscriptions for District 1. However, in future rulemakings the Coast Guard will be working with the auditors to identify which dues and subscriptions fees should be counted as necessary and reasonable operating expenses and which should be considered pilot compensation.

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

VI. Discussion of Comments

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

1. Inflation of Pilot Compensation Calculation in Step 4

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

ECI data is not available. In the 2021 NPRM, the Coast Guard proposed that the previous year's target compensation value would first be adjusted by the difference between predicted PCE inflation value and actual ECI inflation value, to ensure that the target compensation value accounts for actual inflation. We would then multiply this adjusted target compensation value by the predicted future inflation value from the PCE to account for future inflation.

Comments from Captain Swartout,

WGLPA,

and the Great Lakes Pilots' comment

stated that they agreed with Coast Guard's approach to adjust the 2020 target compensation (the previous year's target compensation) adjusted by the difference between predicted PCE inflation value and actual ECI inflation value. However, they believed that the Coast Guard should also adjust the 2018 and 2019 target compensation values by the ECI inflation index. The Great Lakes Pilots' comment went on to state that the “correct” target pilot compensation figures can be calculated by applying the ECI inflation value to the 2018 and 2019 rates, and calculates a target compensation value of $388,900. They stated that, in the 2018 final rule, the Coast Guard “promised” to use the ECI but instead used the PCE, causing incorrect numbers.

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

https://www.regulations.gov/document?D=USCG-2020-0457-0006.

https://www.regulations.gov/document?D=USCG-2020-0457-0012.

The Coast Guard disagrees with the implication that the target compensation values were incorrectly or illogically calculated. These values were calculated following the methodology outlined in § 404.104(b), which states that, when ECI data is not available, the Coast Guard will use the PCE. The Coast Guard followed this approach in the 2018, 2019, and 2020 ratemakings, using the method that was codified in the CFR at the time. Based on comments provided in the 2020 proposed ratemaking, the Coast Guard reviewed the methodology used to inflate target pilot compensation and proposed a modified approach for the 2021 ratemaking. This modified approach is consistent with our past approach of updating the previous year's target compensations in our ratemakings. Therefore, this final rule does not adjust the previous years' target compensations, because they were set according to the regulations in place at the time, and changing them now would be akin to retroactive rulemaking. We would have had to propose regulations allowing us to adjust target compensations from multiple prior years in order to update the 2018 and 2019 target compensations. The Coast Guard does not plan to recalculate target compensation for previous years, as it has been our consistent approach to only update the previous year's target compensation when calculating the next year's target compensation.

The Coast Guard received a comment from the User's Coalition on the inflation rate of 3.4 percent, which was used to calculate the inflation adjustment for target pilot compensation in the NPRM. The commenter stated that the highest inflation rate they could find was 1.4 percent and suggested that the Coast Guard follow the Bureau of Labor Statistics' recommended guidelines for “use of the consumer price index for escalation.” These guidelines include identifying the CPI series, reference period, frequency, and establishing and adjustment formula.

The Coast Guard believes this commenter misunderstands the BLS's CPI, which measures inflation of consumer prices for goods and services, for the ECI, which measures the cost of employment and includes factors such as employee wages and benefits. The Coast Guard currently uses the CPI in Step 2 of the ratemaking, where we use the annual change in average inflation, which was 1.5 percent in 2019. While we cite this data in footnote 32 of the NPRM (and footnote 30 of this final rule), including a link where the user may download the data themselves, we do agree with the commenter that we could provide more citation information. Therefore, in this rule, we added the BLS series ID to that footnote, as well as additional clarification on which numbers we are using. With regards to the 3.4 percent inflation rate in Step 4, that data was first-quarter data from the ECI index for private industry workers in the transportation and moving materials sector. In this final rule, we use 3.5 percent, from third-quarter data. The information for this series, including the series ID and a link to download the data, is found in footnote 35 of the NPRM (and footnote 14 of this final rule). However, in an effort to increase transparency, we have also added more information on the reference period covered by this data.

2. Always Rounding Up in the Staffing Model

In the NPRM, we proposed to always round up the final number in the staffing model, in § 401.220(a)(2), rather than round to the nearest integer when determining the maximum number of pilots. Our justification for this proposed change was based on previous comments and submissions from members of Great Lakes Pilotage Advisory Committee (GLPAC) stating that, due to the nature of associations' presidential duties, the president is expected to spend less time engaged in piloting vessels. None of the commenters who commented on this change agreed that rounding up in the staffing model was the best way to fill the staffing problem. In response, we will forego making any changes to the staffing model in this final rule to gather more information on the best way to address this issue, based on concerns raised by the commenters.

Commenter Captain Swartout

suggested that rounding up in the staffing model is not sufficient because the result is random, inconsistent, and a matter of chance whether a district gets an additional pilot or not. For example, there is a significant difference between rounding 15.1 up to 16 and rounding 15.9 up to 16. In both cases, 16 pilots are authorized, but in the first instance, nine-tenths of a pilot is authorized for assisting in administrative work, and in the second instance, only one-tenth of a pilot is. Captain Swartout also noted his continued concern with pilots being expected to work more hours than industry standards and noted that the rounding will not solve this. He suggested, as an alternative, to add one additional pilot to the staffing model for administrative work, even after rounding up. The Coast Guard agrees that we need to consider other alternatives to better the staffing model. As stated above, we will not be implementing the change in this ratemaking in order to conduct more research.

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

The APA comment

affirmed that there is always one pilot “off the roles” in each association. Similarly, the SLSPA

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

“operations pilot.” The APA comment explained that piloting expertise is necessary to perform these duties, and that the president pilot should be replaced with a pilot, not administrative staff. The president is unable to delegate certain administrative duties that keep him from piloting a vessel.

https://www.regulations.gov/document?D=USCG-2020-0457-0007.

https://www.regulations.gov/document?D=USCG-2020-0457-0010.

The Coast Guard is considering these suggestions and additional information on the duties that an operational pilot and association president typically perform. Based on this information, we understand that having a “pilot off the roles” is a best practice in the state and local pilots' associations. Since we did not propose this, we will plan to address it during a future GLPAC meeting before we consider proposing it in a subsequent rule.

The Great Lakes Pilots' comment asserted that providing only a fractional pilot authorization, rather than a full pilot authorization to handle these administrative and other operational duties, while helpful, does not accord with the reality of the time spent on these functions. They explained that rounding up one year will be of no help in future years if that pilot is, for example, eliminated the next year due to differences in rounding results. The commenter proposed that the operations pilot slot added this year should be made permanent, so that pilots can be added as needed in the future without concern that application of the rounding approach could limit the pilots' ability to efficiently administer their operations. For some of the reasons mentioned by the commenter, we agree that the rounding up method in the staffing model needs more consideration before we adopt a change. The Coast Guard did not propose making the rounding up permanent in the NPRM, but we may consider this option and its effects on the ratemaking in a future rulemaking.

The User's Coalition comment claimed that rounding up in the staffing model was an arbitrary change to increase pilot counts. The commenter suggested that an administrative position could be filled at a much lower cost than an additional pilot, thus freeing up the president's time. We know that pilot association presidents are often pulled away from their pilotage duties by tasks they cannot delegate, leaving less time for them to engage in piloting a vessel. The Coast Guard does not possess sufficient qualitative data to determine this estimated amount of time. However, the Coast Guard will take this suggestion into consideration when determining a way forward.

The SLSPA comment described a throttling effect on traffic flow caused by the Great Lakes Pilotage Association's ability to handle traffic, and requested eight pilots in area one and five pilots in area two on the assignment list during the season. The commenter noted that this number will be higher depending on Canadian GLPA staffing. In order to accommodate 10 days restorative rest per month, the SLSPA stated it needs to have 19.5, rounded up to 20, fully registered pilots. They also requested one additional operations pilot, bringing the total to 21.

As per 46 CFR 401.220, the Director determines the base number of pilots needed by dividing each area's peak pilotage demand data by its pilot work cycle. The pilot work cycle standard includes any time that the Director finds to be a necessary and reasonable component of ensuring that a pilotage assignment is carried out safely, efficiently, and reliably for each area. These components may include, but are not limited to: (1) The amount of time a pilot provides pilotage service; (2) the amount of time available to a vessel's master to provide pilotage service; (3) the pilot's travel time, measured from the pilot's base to and from an assignment's starting and ending points; (4) administrative time for a pilot who serves as a pilot association's president; (5) rest between assignments, as required by § 401.451; (6) the 10 days' recuperative rest per month from April 15 through November 15 each year, provided that lesser rest allowances are approved by the Director at the pilotage association's request, if necessary to provide pilotage without interruption through that period; and (7) time for pilotage-related training.

The Coast Guard is willing to bring up this staffing issue during a future GLPAC meeting. The additional operational pilot requested appears to be the SLSPA's suggested alternative in lieu of the NPRM's proposed rounding up in the staffing model. We will consider this alternative in developing a future rulemaking, but are not adopting any changes to the staffing model at this time, in order to conduct more research. Additionally, the Coast Guard plans to reconsider the recuperative rest requirements in a future ratemaking, but we did not propose any rest requirement-related changes in the NPRM that preceded this final rule.

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

The Coast Guard received several comments on the exclusion of these legal fees. Comments from Captain John Swartout and the APA mentioned that they successfully sued the Coast Guard for being arbitrary and capricious in the regulatory exclusion of legal fees incurred in litigation against the U.S. Government in our 2016 final rule. Comments from these pilots requested that we explain the difference between the 2016 rulemaking attempt and this year's exclusion of legal fees against the Coast Guard, and explain why we are no longer recognizing litigation expenses for actions against the Coast Guard as an allowable and recognizable expense. The APA comment also referenced the preamble of our proposed rule for the 2003 Great Lakes pilotage ratemaking. The relevant part of the 2003 ratemaking said this: “The Coast Guard reviewed all legal fees using the guidelines of necessity and reasonableness in 46 CFR 404.5. Only reasonable and necessary legal fees were approved as part of the expense base. No legal fees were allowed in connection with lobbying. Legal fees for litigation against the Government were allowed as long as there was no court proceeding in which there had been a finding of bad faith on the part of the pilot organizations.” 68 FR 69566, Dec. 12, 2003. In addition, the APA requested that we continue to use the bad faith test for deciding whether to recognize legal fees for litigation against the Coast Guard.

In 2016, we excluded legal expenses incurred in litigation against the U.S. Government from approved operating expenses (81 FR 11908, 11914, Mar. 7, 2016). However, the change in this final rule is limited to litigation against the Coast Guard and its agents as related to the Great Lakes pilotage ratemaking and oversight requirements. We narrowed the language from the 2016 final rule because we do not want to capture legal fees incurred against other agencies, states, or local governments in this exclusion. The procedural error in the 2016 ratemaking was that we did not acknowledge or explain the proposed change in the NPRM or properly respond to comments in the 2016 final rule. The decision in the 2019 case stated, “The Court takes no position on the relative wisdom of the policy. A rule excluding legal fees incurred against the U.S. government may well be a rational policy. But the process by which the Coast Guard enacted it was arbitrary and capricious.”

St. Lawrence Seaway Pilots Association

U.S. Coast Guard,

357 F.Supp.3d 30, 38 (D.D.C. 2019).

The NPRM to this final rule explains the reason for the change, and we elaborate further in this preamble in our response to the comments received. Legal fees incurred in litigation against the Coast Guard are reasonable and

necessary if the pilot association prevails in its litigation. In addition, the reasonableness of legal fees depends on the amount of those fees. The Coast Guard believes that fees awarded as reimbursement for pilots and pilots' associations under the EAJA, or by terms of settlement by the party responsible for the error, will provide reasonable reimbursements for the pilot associations when they prevail. Excluding legal expenses incurred in litigation against the Coast Guard and its agents, as related to the ratemaking and oversight requirements, from the ratemaking equation ensures that the shippers do not have to pay for either non-prevailing lawsuits or the Coast Guard's potential errors. By not allowing these legal fees to be recovered in the ratemaking operating expenses, pilot associations' will have the option to seek recuperation of legal fees under the EAJA and settlement negotiations, where a judge or the limits of the EAJA can determine fair legal fee reimbursement. We believe this is a more equitable approach to ensuring that the necessary costs of providing services are covered than the Coast Guard allowing any and all legal fees to be included, without regard to whether the pilots prevailed on any of the merits of the lawsuit.

We agree with the APA comment that pilots' legal fees should be excluded from expenses where there is a finding of bad faith, but the bad faith exclusion mentioned in the 2003 ratemaking NPRM preamble was not written into our regulations. Before the changes made by this 2021 ratemaking, all legal fees incurred in litigation against the Coast Guard were included as operational expenses in the ratemaking, regardless of bad faith. The Coast Guard does not have the explicit authority that the APA suggests, to exclude bad faith proceedings from operating expenses. We did not propose a bad faith legal fee exclusion because it could be seen as an arbitrary exclusion and also as an unattainable administrative burden for the Coast Guard. We review the legal fees incurred in litigation against the Coast Guard as a lump sum for each district 3 years after the fees are paid. If only part of a case is determined to be in bad faith, we would be in the impossible position of determining what portion of the legal costs would count toward a bad faith exclusion. Additionally, we would have no way to exclude legal fees in cases when the pilots do not prevail on some or any of the merits of the case, or where the ratemaking is determined to be legally sound. This alternative would leave the Coast Guard open to the same concerns we raised in the NPRM, such as the policy against charging a party not responsible for the ratemaking and charging the ratepayers even if the pilots do not prevail on the merits. Therefore, in this final rule, we are excluding this legal fee category altogether, leaving the determination of legal fee reimbursement to the courts.

Captain John Swartout commented that his district, WGLPA (District Three), is fast approaching the $7 million threshold of being eligible for the EAJA, and the other districts will not be far behind, meaning they would not be eligible for reimbursement once they reach that threshold. He acknowledges, however, that all three districts are currently eligible for reimbursement under the EAJA. As mentioned previously, pilots may continue to seek reimbursement under settlement negotiations if they do not qualify under the EAJA for any reason.

Captain Swartout also argued that the ratepayers—not the taxpayers—benefit when the pilots sue over the Coast Guard's occasional failure to make rates with due regard to the public interest and the cost of providing service, in accordance with the Administrative Procedure Act, so it is reasonable that the ratepayers, not the taxpayers, should be “on the hook” for the cost. However, the commenter fails to acknowledge that the pilot associations usually first seek reimbursement from the Coast Guard for their legal fees when they prevail on the merits. In other words, the taxpayers were already footing that bill, by way of the Coast Guard paying through terms set by the court or settlement, before the changes made by this final rule. The EAJA is intended to benefit taxpayers, like the pilots and their associations, by helping them cover legal expenses to challenge unlawful government actions.

The Great Lakes Pilots' comment assert that the EAJA cap on reimbursement of legal fees is much lower than their actual legal expenses, estimating their reimbursement to be 25 cents for every dollar. This comment, as well as comments from the APA and John Swartout, claimed that we aim to erect barriers to disincentivize pilots from suing the Coast Guard on meritorious claims.

As we noted in the NPRM, traditional jurisprudence and case law says that a party shall bear its own litigation costs. Generally, there is no right to be fully reconstituted for legal expenses, especially by someone who is not responsible for the injury. The purpose of excluding these legal fees from the ratemaking is to move the financial responsibility of meritorious claims onto the Coast Guard and off the shippers. The Coast Guard agrees that litigation is a legitimate way to ensure agency compliance with mandates and statutes. The exclusion of legal fees does not take away any rights of action that pilots have against the Coast Guard related to the ratemaking or oversight requirements. The Coast Guard can continue to be held accountable via judicial review. There are remedies to recover legal fees from the Coast Guard for meritorious claims, which pilots have pursued in the past. Forcing the shippers to incur legal fees above what the EAJA or settlement covers, or when pilots do not prevail on the merits, is not in the public interest or necessary for the costs of providing services.

In his comment, Captain Swartout further asserted that the rate is the proper funding source for all costs of pilotage, including necessary legal fees, arguing that litigation is necessary to ensure the financial viability of service providers. He contended that the legal fees incurred in a year “doesn't permanently inflate the rate, paying dividends on past expenses, as the Coast Guard seems to imply” because rates are based on expenses that are 3 years old.

The legal fee exclusion in this final rule simply repositions the legal fees to be reimbursed by the party responsible, via the EAJA or terms of settlement, when the pilots prevail. The amount of legal fees we exclude in the 2021 ratemaking is approximately 0.1 percent of the total revenue generated each year by the pilot associations. Therefore, when the operating expense adjustment is factored into the ratemaking methodology, it has a very small effect on the final rates. We do not assert that there is a permanent inflation, or dividend, as a result of the legal expenses incurred by pilot associations in a given year. The Coast Guard believes that a 0.1 percent operational expense adjustment for legal fees eligible for reimbursement by the Coast Guard when pilots prevail on some of the merits will not have any adverse impact on future funding for pilot associations and pilot recruitment and retention. The reimbursement of eligible legal fees under the EAJA and settlement negotiations are often available as soon as the parties prevail on the merits, whereas, under the previous scheme, it took 3 years for the expended legal fees to factor into the ratemaking.

The Great Lakes Pilots' comment contested our exclusion of the legal fees by noting that business entities regularly recover legal expenses from their customers by including them in the prices and rates they charge for their

products and services. The comment recited the Director's requirement in § 404.2(a) to recognize pilot association expenses that are “both necessary for providing pilotage service, and reasonable as to its amount when compared to similar expenses paid by others in the maritime or other comparable industry, or when compared with Internal Revenue Service guidelines.” The commenter requested that the Coast Guard address the deductibility of legal fees under § 404.2(a) and the Internal Revenue Code (I.R.C.), which says that professional fees are deductible if they qualify as “ordinary and necessary” expenses under § 162 I.R.C. (26 U.S.C. 165), covering business expenses, or § 212 I.R.C. (26 U.S.C. 212), covering expenses related to the production of income.

The main reason the legal fee expense is not necessary or reasonable to include in operational expenses is that the costs are reimbursable when the pilots prevail by the responsible party—the Coast Guard. As noted in this preamble, the EAJA and settlement terms often reimburse the pilots' legal fees when the pilots prevail. In those cases, a court can determine a reasonable amount of legal fees to include. Traditional jurisprudence also says that the litigant is the bearer of his or her own legal expenses. “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser.”

Alyeska Pipeline Service Co.

Wilderness Soc'y,

421 U.S. 240, 247 (1975). Additionally, when the pilot association does not prevail on the merits, the legal fees associated with that lawsuit are, arguably, per the court's determination, not necessary for the safeguarding or production of their income. If pilots are not victorious on any of the merits, those legal fees inflate the shipper's rates. Unlike other businesses and jurisdictions, shippers on the Great Lakes cannot choose to purchase from another firm or choose not to purchase the service at all when they disagree with a firm's business practices. Among these and the other reasons cited in this preamble, the legal fees incurred in lawsuits against the Coast Guard are distinguishable from the I.R.C. provisions provided by the commenter.

The User's Coalition supported the legal fee exclusion but urged the Coast Guard to go further and exclude all pilot associations' legal fees related to ratesetting, including instances where pilots intervene as defendants in support of the Coast Guard in a shipper-initiated lawsuit. In cases where shippers initiate litigation against the Coast Guard, the pilots often have a legitimate interest in, and will likely be affected by, the outcome of the lawsuit. Thus, the court typically allows the pilots to intervene in the case to protect their own interests. However, the Coast Guard does not have the same justification to exclude these intervener legal expenses because they are not eligible for reimbursement under the EAJA or settlement from the Coast Guard. These legal fees incurred by pilot associations are not otherwise reimbursed by a more responsible party, so we must consider these costs of providing services in the rates, per our statutory mandate.

The Coalition also suggested that allowing intervener pilot legal fees would force vessel operators to finance legal advocacy in support of the Coast Guard's position on any future ratemaking challenge, incentivizing pilot associations to come to the Coast Guard's aid without financial constraint. The Coalition also alleged that the Coast Guard is creating a financial disincentive for our policies to be challenged by industry stakeholders, impeding stakeholders' legitimate rights to participate in the rulemaking process and go to court to resolve disagreements. The User's Coalition will have all the same legal causes of action against the Coast Guard as before. The exclusion of legal fees is intended to be a small benefit to the shippers by taking that financial responsibility out of the rates and placing it on the responsible regulatory agency; it is not intended nor predicted to be an incentive for pilots to come to the Coast Guard's defense.

The Great Lakes Pilots' comment requested we include all the legal expenses the pilots incurred in the 2016 ratemaking lawsuit where they successfully intervened on the Coast Guard's side in a shipper-initiated lawsuit. The comment stated that we need to correct the legal fee amounts disallowed for Districts One and Three's 2018 legal expenses. In District One, $12,905 was disallowed per Table 3—Recognized Expenses for District One,

but the comment asserted that District One only paid $9,988 in 2018 for the pilot-initiated litigation on the 2016 ratemaking. The commenter asked where the Coast Guard obtained the higher number of $12,905. The comment further stated that District Three was disallowed $18,321 per Table 28—Recognized Expenses for District Three,

but paid only $9,227 for the 2017 litigation against the Coast Guard in the pilot-initiated suit. The commenter stated the higher disallowance was because the Coast Guard improperly disallowed $9,093 for 2017 intervener litigation fees that District Three paid on the shipper-initiated lawsuit. The comment asserted that the Director's adjustment disallowance should be limited to $9,988 for District One and $9,227 for District Three, even if the rule is validly adopted.

Table 3 in the proposed rule is published at 85 FR 68219 (October 27, 2020).

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

Per our regulations, a third-party auditor provided the amounts of legal fees incurred in litigation against the Coast Guard for use in the NPRM. Our auditor reviewed the operating expenses in response to this comment and did not identify any allowable intervener litigation fees for District One. For that reason, for 2018 operating expenses in District One, the final rule will continue to remove $12,905 in Coast Guard litigation fees via Director's adjustment, which is the same number used in the NPRM.

The commenter is correct that, with this change, pilot intervener legal fees incurred in the 2016 ratemaking shipper-initiated lawsuit should be included as approved operating expenses in the year they were incurred. In this case, District Three incurred intervener legal fees in 2018 which should not have been excluded in the NPRM. The 2018 operating expenses of $18,321 reported to us during the NPRM stage did not distinguish between intervener legal fees and ratemaking lawsuits initiated by the pilots against the Coast Guard. We are correcting the Director's adjustments in the NPRM's District Three's 2018 expense table to only exclude litigation fees against the Coast Guard in this final rule. For 2018 operating expenses in District Three, the final rule will remove $9,227 in Coast Guard litigation fees by Director's adjustment, which allows intervener legal fees in the amount of $9,094 ($18,321-$9,227). These updated numbers are reflected in Table 28 in this preamble.

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

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

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

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

In the NPRM, we responded to the D.C. Circuit Court's request to “consider if it [the Coast Guard] has the statutory authority to remedy the harms from the 2016 Rule and if doing so would comport with its mandate to consider `the public interest and the costs of providing services' 46 U.S.C. 9303(f).”

We concluded that, while we may have the authority to do so, it does not comport with our mandate to make the adjustment in this ratemaking, for three main reasons discussed in the NPRM. The Great Lakes Pilots' comment was in general agreement with the agency's approach to the Court of Appeals' opinion and did not believe any adjustment going forward was warranted.

Am. Great Lakes Ports Ass'n.

Shultz,

962 F.3d 510, 520 (D.C. Cir. June 16, 2020).

Based on our response in the NPRM, Captain John Swartout opined that when the pilots sue the Coast Guard and win, no matter how long pilotage rates are impaired before the court makes a final ruling, the Coast Guard is certainly not going to make the pilots whole. The commenter makes an improper assumption that we would never attempt to remedy past ratemakings. The Coast Guard explained in the NPRM that our decision is limited to the case of the 2016 ratemaking, where we had no operative rate from which to make a correction in the 2021 proposed rule. We believe we have the authority to remedy errors from past ratemakings when we have reliable information and there is a continuing extraordinary and unjust circumstance.

The User's Coalition comment did not propose that the Coast Guard retroactively recalculate rates but asked for a flexible path forward to achieve full repayment over time, through credits in this rule and in future ratemaking procedures or such other methodology. The Coalition asserted the weighting factor is known and the amounts billed by the pilot associations and the money collected are available, and included an Exhibit detailing one method to calculate the overpayment of pilotage fees for 2016.

However, in addition to omitting the weighting factors, the Coast Guard erred in the 2016 ratemaking calculation of target pilot compensation, and the correct number could have been higher or lower than the target pilot compensation used. Consequently, adjusting the rates merely to correct for weighting factors, without a 2016 target pilot compensation, would not provide a “correct” operative rate for 2016, as the commenter suggests. Therefore, adjusting rates through a Director's adjustment now is not in accordance with our mandate to consider the costs of providing services for 2021. Neither the Coast Guard nor commenters have identified a continuing unjust circumstance caused by the 2016 ratemaking warranting a remedy at this stage.

The Coalition also challenged our assertion that it is difficult to identify those advantaged by the ratemaking by stating that 80 percent of the traffic is produced by 20 percent of the system users, and all major clients continue to send ships to the area. The User's Coalition noted that the St. Lawrence Seaway keeps records of every ship and its owner sailing in the area for at least 10 years, including 2016 and 2017. The Coalition asked us how the fact that some of the potential recipients of the unlawfully paid funds cannot be determined renders all of the monies unrecoverable, including by those who are identified and able to seek recovery.

Despite the fact that some of the shippers may be identifiable for remedy, the Coast Guard does not plan to pursue a remedy at this time for other reasons, also cited in the NPRM. We do not have an operative rate for the 2016 shipping season to determine a proper remedy to return to the identifiable shippers. Nor could we also give full consideration to the costs of providing pilotage services if we modify the rates according to the User's Coalition's request. We believe the risk of underfunding pilotage rates for years to come would have a negative impact on the Great Lake's pilot associations' abilities to safely meet the shipping demands and maintain their infrastructure. Therefore, the fact that we can identify some users of the 2016 rate is not sufficient to overcome our mandate to consider the public interest and covering the costs of services.

In response to the Coast Guard's assertion that we do not want to risk underfunding pilots for upcoming rates through a potential remedy, the User's Coalition asked what happened to the millions of dollars collected by the pilot associations, over and above those operational expenses incurred in 2016 and 2017, as a result of the agency's remanded ratemaking. The Coast Guard is not able to answer the commenter's question because we do not require pilot associations to report the source of funds they use to pay for certain items or services. Because we do not have an operative rate to use for 2016, we do not know exactly how much the pilots collected over operational expenses. Without a clear way to determine that number, a remedy now would be arbitrary. In addition, the Coast Guard made errors in calculating pilotage rates for the 2013, 2014, and 2015, all of which resulted in the pilots receiving less revenue than was required by the methodology in place at the time. Reducing future rates to account for alleged over-generation of revenue based on the 2016 rates without also correcting those errors would be inconsistent with our mandate to consider the public interest and covering the costs of services.

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

The Great Lakes Pilots requested that the Coast Guard undertake a more comprehensive assessment of compensation, as opposed to interim ratemakings, to align Great Lakes pilots' compensation with pilots of other jurisdictions. The Great Lakes Pilots also requested information about the compensation study the Coast Guard initiated but did not have completed. The Coast Guard commissioned a study to analyze methodologies to determine pilot compensation, but decided not to finalize this study. The compensation study was a backup in the event that we failed to identify a compensation standard that remedied the recruitment and retention issues identified in previous rulemakings, and discussed during previous GLPAC meetings. The current compensation benchmark addresses our goals of promoting the recruitment and retention of highly qualified mariners and experienced United States registered pilots.

The LPA requested only 16 pilots, as per the existing staffing model, without rounding up, to keep up with pilotage demand. Since the Coast Guard is no longer adopting the rounding-up method in the staffing model, the LPA's district, District Two, will be authorized a maximum of 15 pilots for the 2021 shipping season under this rule. In the NPRM, District Two was authorized a maximum of 16 pilots instead of 15, primarily because of the proposed rounding up in the staffing model. The comments were generally unsupportive of the rounding up in the staffing model; many commenters suggested alternative changes to the staffing model, which we will consider in a future rulemaking. The LPA also provided suggestions for calculating apprentice pilot compensation, urging us to adopt a

consistent approach. We will consider those suggestions when developing a future rulemaking.

The comment from the WGLPA provided information on how many registered pilots and apprentice pilots on limited registrations they have, as well as estimates on how many pilots they expect to hire in 2021. The WGLPA stated they have 17 fully registered pilots and 7 apprentice pilots operating on limited registrations because they had 3 unexpected retirements in 2020. The WGLPA expects to hire 2-to-4 apprentice pilots in 2021, in line with the 3 they hired in 2020, and the 4 in 2019. The WGLPA comment also noted that if a pilot in their district logs approximately 1,000 hours per year as “bridge hours,” and if the level of traffic in 2021 matches the traffic level in 2019, they will need 3 more pilots. To offset unavoidable attrition or retirement, they believe that 27 is the appropriate number for the “Proposed Maximum Number of Pilots” for District Three.

The information provided by the commenter will be helpful in considering alternatives to always rounding up in the staffing model. In the NPRM, we authorized 22 fully registered pilots for the WGLPA, with the maximum number of allowed pilots capped at 23 fully registered pilots. Without adopting the proposed change to always round up in the staffing model, District Three is still authorized 22 pilots in this rule, and the cap will remain at 22 pilots. These pilot numbers represent the maximum for fully registered pilots and temporary registrations, but do not include limited registrations for apprentice pilots. If the District only has 17 fully registered pilots, they will be able to hire 5 additional fully registered pilots in the 2021 season. District Three may have additional apprentice pilots on the roles and continue to hire new apprentice pilots, as approved by the Director.

The WGLPA comment also contained information contrary to our statement in the 2021 NPRM, Summary of Ratemaking Methodology, Step 10, where we said: “As stated in the 2020 rulemaking, as the vast majority of working pilots are not anticipated to reach the regulatory required retirement age of 70 in the next 20 years, we continue to believe that the pilot associations are now able to plan for the costs associated with retirements without relying on the Coast Guard to impose surcharges.”

The WGLPA asserted that 65 percent of their fully registered pilots will reach 70 in the next 20 years, and it is unrealistic to expect them all to work until 70. We anticipate that, with the ability to hire up to 5 more fully registered pilots in 2021, the WGLPA will have a lower rate of planned retirement in the upcoming years.

85 FR 68210 at 68214, October 27, 2020.

The SLSPA asserted that the current staffing model is based on old traffic patterns, with a rush at the beginning and the end of each season, but now, due to cruise ships and tankers, shipping is linear throughout the year, with a rush at the end. The comment suggested that pilots lack meaningful rest as a result of the November 15 end of the restorative rest requirement. We thank the commenter for raising this issue. The Coast Guard believes that this is a valid concern and requests more information on this point. The current staffing model is based on the historic increased need for pilots at the start and close of the season, and that, by staffing to meet that need, it allows pilots to take approximately 10 days of restorative rest each month during the 7-month mid-season period.

We are currently monitoring traffic patterns. If the commenter's assertion proves accurate, this would cause us to reevaluate the staffing model. While, at this time, we are still gathering data, we welcome additional data and suggestions for alternative staffing models in light of changes in traffic patterns. We also welcome more information and suggestions at a GLPAC meeting on how to improve our recuperative rest requirements to better serve current traffic patterns. We may consider this information in a future rulemaking.

The SLSPA requested that bridge hours associated with voluntary or non-compulsory vessels should be removed from the ratemaking methodology because additional revenues generated from servicing this traffic has associated bridge hours with it. The commenter asserted that these hours go into the ratemaking methodology as part of the 10-year traffic average, in the denominator of the hourly rate equation, thereby reducing the rates for the next 10 years, benefitting foreign shipping. Our use of historical traffic figures was unanimously recommended by the GLPAC in 2014, without distinction between voluntary and required pilotage services. If there is interest and additional information for why the current methodology is not producing sufficient revenue for the associations, the Coast Guard is willing to bring this issue up at the next GLPAC meeting in 2021.

The User's Coalition comment noted that Canadian lakers have been hiring U.S. and Canadian registered pilots to assist with navigation due to a lack of crew expertise, but expected this to be temporary and eventually resolve itself. The Coalition asked the Coast Guard to: (1) Work with the three U.S. Great Lakes pilot associations to identify and bring on part-time contract pilots, if possible; and (2) initiate a dialogue with the GLPA and Canadian-flagged vessel operators to assess their staffing situation and better predict future pilot demand. As the commenter noted, this is expected to be temporary and eventually resolve itself. The Coast Guard welcomes additional information from the commenter as to the exact amount of voluntary pilotage demand each year from Canada, as well as a reasonable way to address it in the ratemaking. In order to better predict future pilot demand, the Coast Guard would need to predict the demand for global commodities (steel and grain), tankers shipping petroleum products, cruise ships, and winter demand (ordering pilots while the locks are closed for maintenance) on Lakes Erie, Huron, and Michigan. The Coast Guard has no control or influence over any of these activities, and the variables in global commodities are complex and difficult to predict even if we do discuss the matter with Canadian operators. However, we desire to increase our dialogue with all parties involved to address the potential issues identified by the commenter.

Additionally, the User's Coalition requested we make individual pilot compensation available to the public, as it was prior to 2016, as a way to review our progress toward pilot recruitment and retention, reportedly caused by inadequate pilot compensation. The Coast Guard previously cited substantial privacy concerns and being unaware of where individual pilot compensation is made public, but the commenter does not think that these are supportable concerns. This comment did not request any changes to the ratemaking methodology and is not related to changes proposed in the NPRM. The Coast Guard is not inclined to add a regulatory requirement for pilot associations to publicly report the compensation of their pilots, because that number is not included in the expense base or methodology. Because those values are not used in the ratemaking, we believe that a requirement to report pilot compensation is not in the public interest or necessary to provide for the costs of services. Progress toward pilot retention can be reviewed through other means, such as pilot turnover and the

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

7. Other Ratemaking Comments Unrelated to Proposed Changes

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

VII. Discussion of Rate Adjustments

In this final rule, based on the two changes to the existing methodology described in Section V of this preamble, we are implementing new pilotage rates for 2021. We are conducting this 2021 ratemaking as an “interim year,” as was done in 2020, rather than a full ratemaking, as was conducted in 2018. Thus, the Coast Guard will adjust the compensation benchmark pursuant to § 404.104(b) for this purpose, rather than § 404.104(a).

This section discusses the rate changes using the ratemaking steps provided in 46 CFR part 404, incorporating the changes discussed in Section V. We will detail all 10 steps of the ratemaking procedure for each of the 3 districts to show how we arrive at the new rates.

District One

A. Step 1: Recognize Previous Operating Expenses

Step 1 in our ratemaking methodology requires that the Coast Guard review and recognize the previous year's operating expenses (§ 404.101). To do so, we begin by reviewing the independent accountant's financial reports for each association's 2018 expenses and revenues.

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.

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

As noted above, in 2016 the Coast Guard began authorizing surcharges to cover the training costs of applicant pilots. The surcharges were intended to reimburse pilot associations for training applicants in a more timely fashion than if those costs were listed as operating expenses, which would have required 3 years to reimburse. The rationale for using surcharges to cover these expenses, rather than including the costs as operating expenses, was to allow these non-recurring costs to be recovered in a more timely fashion and prevent retiring pilots from having to cover the costs of training their replacements. Because operating expenses incurred are not actually recouped for a period of 3 years, the Coast Guard added a $150,000 surcharge per applicant pilot, beginning in 2016, to recoup those costs in the year incurred. Although the districts did not collect any surcharges for the 2020 shipping season, they did collect a surcharge for the 2018 season, which is deducted by Director's adjustments reflected in the operating expenses of the districts.

For District One, we finalized several Director's adjustments. District One had two applicant pilots during the 2018 season. In total, the District paid these two pilots $594,331, or $297,166 each. The Coast Guard believes this amount is above what is necessary and reasonable for retention and recruitment. In the 2019 NPRM, the Coast Guard proposed to make an adjustment to District Two's request for reimbursement of $571,248 for two applicant pilots ($285,624 per applicant). Instead of permitting $571,248 for two applicant pilots, we proposed allowing $257,566, or $128,783 per applicant pilot, based on discussions with other pilot associations at the time. This standard was utilized in the final rule for 2019 and was not opposed. To determine this percentage, we reached out to several of the pilot associations throughout the United States to see what percentage they pay their applicant pilots, then factored in the sea time and experience required to become an applicant pilot on the Great Lakes. Finally, we discussed the percentage with the president of each association to determine if it was fair and reasonable. The Coast Guard will continue to use the same ratio of applicant-to-target compensation for all districts. For 2019, this was approximately 36 percent of $359,887 which was the target pilot compensation value for 2019 ($128,783 ÷ $359,887 = 35.78 percent). The Coast Guard is using the rounded-up value of 36.0 percent of target compensation as the benchmark for applicant pilot compensation, for a 2021 target pilot compensation of $132,151 ($367,085 × .36). This allows adjustments to applicant pilot compensation to fluctuate in line with target compensation.

The other Director's adjustments to expenses occurred because District One did not break out any costs associated with applicant pilots after the audit, and included these costs as part of pilotage costs. For transparency, the Coast Guard has included the applicant pilot costs as Director's adjustments. We then deducted the same amount to avoid any double counting of these costs, with the exception of the applicant salary costs. We did not deduct applicant salary costs, as these costs were reported in the audit as part of pilot salaries, which are not included in operating expenses. Therefore, these costs are included as a Director's adjustment. The costs associated with applicant expenses are necessary and reasonable for district operations and are, therefore, implemented in the rate.

A Director's adjustment has also been finalized for the amount collected using the 2018 surcharge. A final Director's adjustment is made for the amount of Coast Guard litigation legal fees. Other adjustments have been made by the auditors and are explained in the auditor's reports, which are available in the docket for this rulemaking where indicated under the

ADDRESSES

section of the preamble.

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 (Operational)

267,420

178,280

445,700

Dispatch Expense

55,280

36,853

92,133

Payroll Taxes

19,100

12,733

31,833

Total Pilot and Dispatch Costs

341,800

227,866

569,666

Administrative Expenses:

Legal—general counsel

8,550

5,700

14,250

Legal—shared counsel (K&L Gates)

34,607

23,071

57,678

Legal—USCG Litigation

7,743

5,162

12,905

Office Rent

Insurance

24,423

16,282

40,705

Employee benefits

8,064

5,376

13,440

Other taxes

50,963

33,976

84,939

Real Estate taxes

22,280

14,853

37,133

Depreciation/auto leasing/other

101,140

67,426

168,566

Interest

28,270

18,846

47,116

APA Dues

26,416

17,610

44,026

Dues and subscriptions

3,960

2,640

6,600

Utilities

21,887

14,591

36,478

Travel

4,314

2,876

7,190

Salaries

74,763

49,842

124,605

Payroll Tax

7,323

4,882

12,205

Accounting/Professional fees

7,800

5,200

13,000

Pilot Training

Other

21,276

14,184

35,460

Total Administrative Expenses

453,779

302,517

756,296

Capital Expenses:

Dock

128,749

85,832

214,581

Pilot Boat

128,911

85,941

214,852

Infrastructure Loan Payment

106,458

70,972

177,430

Total Capital Expenses

364,118

242,745

606,863

Total Operating Expenses (Other Costs + Pilot Boats + Admin + Capital Expenses)

2,223,385

1,482,254

3,705,639

Adjustments (Director):

Director's Adjustment (Applicant Salaries)

356,599

237,732

594,331

Director's Adjustment (Applicant Salaries)

Deduction (Salary Adjustment)

(198,018)

(132,012)

(330,030)

Director's Adjustment (Applicant License insurance)

8,093

5,395

13,488

Director's Adjustment (Applicant License insurance)

Deduction

(8,093)

(5,395)

(13,488)

Director's Adjustment (Applicant Health insurance)

10,336

6,891

17,227

Director's Adjustment (Applicant Health insurance)

Deduction

(10,336)

(6,891)

(17,227)

Director's Adjustment (Applicant Expenses)

94,989

63,326

158,315

Director's Adjustment (Applicant Expenses)

Deduction

(94,989)

(63,326)

(158,315)

Director's Adjustment (Applicant payroll tax)

29,694

19,796

49,490

Director's Adjustment (Applicant payroll tax)

Deduction

(29,694)

(19,796)

(49,490)

Director's Adjustment Surcharge Collected in 2018

(144,770)

(289,540)

Director's Adjustment Legal—USCG Litigation

(7,743)

(5,162)

(12,905)

Total Director's Adjustments

6,068

(44,212)

(38,144)

Total Operating Expenses (OpEx + Adjustments)

2,229,453

1,438,042

3,667,495

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

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

inflation rate.

Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2019 and 2020 inflation modification.

Based on that information, the calculations for Step 2 are as follows:

The 2019 inflation rate is available at

https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf.

For this analysis we use the average to average percentage change as presented in the table on page 1

Specifically, the CPI is defined as “All Urban Consumers (CPI-U), All Items, 1982-4=100” (BLS Series ID CUUR0200SA0). Downloaded June 11, 2020.

The 2020 and 2021 inflation rates are available at

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200916.pdf

We used the PCE median inflation value found in table 1,

Downloaded December 11, 2020.

Table 4—Adjusted Operating Expenses for District One

District One

Designated

Undesignated

Total

Total Operating Expenses (Step 1)

$2,229,453

$1,438,042

$3,667,495

2019 Inflation Modification (@1.5%)

33,442

21,571

55,013

2020 Inflation Modification (@1.2%)

27,155

17,515

44,670

2021 Inflation Modification (@1.7%)

38,931

25,111

64,042

Adjusted 2021 Operating Expenses

2,328,981

1,502,239

3,831,220

C. Step 3: Estimate Number of Working Pilots

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

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

Table 5—Authorized Pilots

Item

District One

Maximum number of pilots (per § 401.220(a))

2021 Authorized pilots (total)

Pilots assigned to designated areas

Pilots assigned to undesignated areas

D. Step 4: Determine Target Pilot Compensation Benchmark

In this step, we determine the total pilot compensation for each area. As we are conducting an “interim” ratemaking this year, we will follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. As stated in Section V.A of the preamble, we are using a two-step process to adjust target pilot compensation for inflation. The first step adjusts the 2019 target compensation benchmark of $367,085 by 1.5 percent, for a total adjusted value of $372,591. This adjustment accounts for the difference between the predicted 2020 Median PCE inflation value of 2 percent and the actual 2020 ECI inflation value of 3.5 percent.

33 34

Because we do not have a value for the ECI for 2021, we multiply the adjusted 2020 compensation benchmark of $372,591 by the Median PCE inflation value of 1.70 percent.

Based on the projected 2021 inflation estimate, the compensation benchmark for 2021 is $378,925 per pilot.

U.S. Bureau of Labor Statistics Employment Cost Index (ECI) Q3 2020 data for Total Compensation for Private Industry Workers in the Transportation and Material Moving Sector (Series ID: CIU2010000520000A). The third quarter data was the most recently available data at the time of analysis for this final rule. The data is also available at

https://www.bls.gov/news.release/archives/eci_10302020.pdf

in Table 5 on page 10. The Coast Guard is using the 12 month percentage change for the month ending in Sept 2020.

In Step 2 of the ratemaking, the Coast Guard uses the Federal Reserve's predicted PCE inflation rate of 1.2 percent to inflate operating expenses to 2020 dollars. This value differs from the ECI Q3 inflation rate of 3.5 percent. The reason for the deviation between the values is what is included in each dataset. The PCE is a measure of the Federal Reserve's best prediction of future inflation for all goods and services in the U.S. economy, whereas the ECI is a measure of historic employment costs. When making their economic predictions, the Federal Reserve may be considering economic factors that were not relevant at the time the ECI data was captured, or that have not yet impacted labor costs. It is also important to note that labor costs may be slower to respond to changes in supply and demand than other commercial goods and services.

The Federal Reserve, Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy,

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20200916.pdf

. Downloaded December 11, 2020.

Table 6—Target Pilot Compensation

2020 Target Compensation

$367,085

Difference between Q1 2020 ECI Inflation Rate (3.5%) and the 2020 PCE Predicted Inflation Rate (2.0%)

1.500%

Adjusted 2020 Compensation

$372,591

2020 to 2021 Inflation Factor

1.70%

2021 Target Compensation

$378,925

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

Table 7—Target Compensation for District One

District One

Designated

Undesignated

Total

Target Pilot Compensation

$378,925

Number of Pilots

Total Target Pilot Compensation

$3,789,250

$2,652,475

$6,441,725

E. Step 5: Project Working Capital Fund

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

By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in Table 8.

Moody's Seasoned Aaa Corporate Bond Yield, average of 2019 monthly data. The Coast Guard uses the most recent year of complete data. Moody's is taken from Moody's Investors Service, which is a bond credit rating business of Moody's Corporation. Bond ratings are based on creditworthiness and risk. The rating of “Aaa” is the highest bond rating assigned with the lowest credit risk. See

https://fred.stlouisfed.org/series/AAA.

(June 11, 2020).

Table 8—Working Capital Fund Calculation for District One

District One

Designated

Undesignated

Total

Adjusted Operating Expenses (Step 2)

$2,328,981

$1,502,239

$3,831,220

Total Target Pilot Compensation (Step 4)

3,789,250

2,652,475

6,441,725

Total 2021 Expenses

6,118,231

4,154,714

10,272,945

Working Capital Fund (3.3875%)

207,255

140,741

347,996

F. Step 6: Project Needed Revenue

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

Table 9—Revenue Needed for District One

District One

Designated

Undesignated

Total

Adjusted Operating Expenses (Step 2, see table 4)

$2,328,981

$1,502,239

$3,831,220

Total Target Pilot Compensation (Step 4, see table 6)

3,789,250

2,652,475

6,441,725

Working Capital Fund (Step 5, see table 8)

207,255

140,741

347,996

Total Revenue Needed

6,325,486

4,295,455

10,620,941

G. Step 7: Calculate Initial Base Rates

Having determined the revenue needed for each area in the previous six steps, to develop an hourly rate we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District One, using the total time on task or pilot bridge hours.

Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in Table 10.

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)

$6,325,486

$4,295,455

Average time on task (hours)

6,129

6,694

Initial rate

$1,032

$642

H. Step 8: Calculate Average Weighting Factors by Area

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

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)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

Class 3 (2015)

1.3

36.4

Class 3 (2016)

1.3

Class 3 (2017)

1.3

87.1

Class 3 (2018)

1.3

111.8

Class 3 (2019)

122

1.3

158.6

Class 4 (2014)

271

1.45

392.95

Class 4 (2015)

251

1.45

363.95

Class 4 (2016)

214

1.45

310.3

Class 4 (2017)

285

1.45

413.25

Class 4 (2018)

393

1.45

569.85

Class 4 (2019)

730

1.45

1058.5

Total

4,858

6,252

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)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

Class 3 (2015)

1.3

54.6

Class 3 (2016)

1.3

36.4

Class 3 (2017)

1.3

58.5

Class 3 (2018)

1.3

81.9

Class 3 (2019)

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

$1,032

1.29

$800

District One: Undesignated

642

1.29

498

J. Step 10: Review and Finalize Rates

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

Table 15—Final Rates for District One

Area

Name

Final 2020

pilotage rate

Proposed 2021

pilotage rate

Final 2021

pilotage rate

District One: Designated

St. Lawrence River

$758

$757

$800

District One: Undesignated

Lake Ontario

463

428

498

District Two

A. Step 1: Recognize Previous Operating Expenses

pro rata

basis. The recognized operating expenses for District Two are shown in Table 16.

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

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

ADDRESSES

portion of this document).

Table 16—2018 Recognized Expenses for District Two

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

Adjustments (Director):

Director's Adjustment Surcharge Collected in 2018

(65,962)

(131,924)

Director's Adjustment Applicant Pilot Salary

(81,003)

(121,505)

(202,508)

Legal Fee Removal—USCG Litigation

(2,185)

(3,277)

(5,462)

Total Director's Adjustments

(149,150)

(190,744)

(339,894)

Total Operating Expenses (OpEx + Adjustments)

961,057

1,474,329

2,435,386

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

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

Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2020 and 2021 inflation modification.

Based on that information, the calculations for Step 1 are as follows:

See footnote 30.

See footnote 31.

Table 17—Adjusted Operating Expenses for District Two

Item

District Two

Undesignated

Designated

Total

Total Operating Expenses (Step 1)

$961,057

$1,474,329

$2,435,386

2019 Inflation Modification (@1.5%)

14,416

22,115

36,531

2020 Inflation Modification (@1.2%)

11,706

17,957

29,663

2021 Inflation Modification (@1.7%)

16,782

25,745

42,527

Adjusted 2021 Operating Expenses

1,003,961

1,540,146

2,544,107

C. Step 3: Estimate Number of Working Pilots

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

Table 18—Authorized Pilots

Item

District Two

Maximum number of pilots (per § 401.220(a))

2021 Authorized pilots (total)

Pilots assigned to designated areas

Pilots assigned to undesignated areas

D. Step 4: Determine Target Pilot Compensation Benchmark

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).

43 44

Because we do not have a value for the employment cost index for 2021, we multiply the adjusted 2020 compensation benchmark of $372,591 by the Median PCE inflation value of 1.70 percent.

Based on the projected 2021 inflation estimate, the compensation benchmark for 2021 is $378,925 per pilot (see Table 6 for calculations).

See footnote 33.

See footnote 34.

See footnote 35.

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

$378,925

Number of Pilots

Total Target Pilot Compensation

$3,031,400

$2,652,475

$5,683,875

E. Step 5: Project Working Capital Fund

By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in Table 20.

See footnote 36.

Table 20—Working Capital Fund Calculation for District Two

Item

District Two

Undesignated

Designated

Total

Adjusted Operating Expenses (Step 2)

$1,003,961

$1,540,146

$2,544,107

Total Target Pilot Compensation (Step 4)

3,031,400

2,652,475

5,683,875

Total Expenses

4,035,361

4,192,621

8,227,982

Working Capital Fund (3.3875%)

136,698

142,025

278,723

F. Step 6: Project Needed Revenue

Table 21—Revenue Needed for District Two

District Two

Undesignated

Designated

Total

Adjusted Operating Expenses (Step 2, see Table 17)

$1,003,961

$1,540,146

$2,544,107

Total Target Pilot Compensation (Step 4, see Table 19)

3,031,400

2,652,475

5,683,875

Working Capital Fund (Step 5, see Table 20)

136,698

142,025

278,723

Total Revenue Needed

4,172,059

4,334,646

8,506,705

G. Step 7: Calculate Initial Base Rates

Having determined the needed revenue for each area in the previous six steps, to develop an hourly rate, we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District Two, using the total time on task or pilot bridge hours.

Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in Table 22.

See footnote 37.

Table 22—Time on Task for District Two

[Hours]

Year

Undesignated

Designated

2019

6,512

7,715

2018

6,150

6,655

2017

5,139

6,074

2016

6,425

5,615

2015

6,535

5,967

2014

7,856

7,001

2013

4,603

4,750

2012

3,848

3,922

2011

3,708

3,680

2010

5,565

5,235

Average

5,634

5,661

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

Table 23—Initial Rate Calculations for District Two

Item

Undesignated

Designated

Needed revenue (Step 6)

$4,172,059

$4,334,646

Average time on task (hours)

5,634

5,661

Initial rate

$741

$766

H. Step 8: Calculate Average Weighting Factors by Area

See footnote 38.

Table 24—Average Weighting Factor for District Two, Undesignated Areas

Vessel class/year

Number of

transits

Weighting

factor

Weighted

transits

Class 1 (2014)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

Class 3 (2015)

1.3

Class 3 (2016)

1.3

11.7

Class 3 (2017)

1.3

15.6

Class 3 (2018)

1.3

3.9

Class 3 (2019)

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)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

10.4

Class 3 (2015)

1.3

10.4

Class 3 (2016)

1.3

5.2

Class 3 (2017)

1.3

5.2

Class 3 (2018)

1.3

18.2

Class 3 (2019)

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

$766

1.32

$580

District Two: Undesignated

741

1.31

566

J. Step 10: Review and Finalize Rates

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

Table 27—Final Rates for District Two

Area

Name

Final 2020

pilotage rate

Proposed 2021

pilotage rate

Final 2021

pilotage rate

District Two: Designated

Navigable waters from Southeast Shoal to Port Huron, MI

$618

$577

$580

District Two: Undesignated

Lake Erie

586

566

District Three

A. Step 1: Recognize Previous Operating Expenses

pro rata

basis. The recognized operating expenses for District Three are shown in Table 28.

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

For District Three, we finalized two Director's adjustments. One is for the amount collected from the 2018 surcharge, and the other for $9,277, which was the amount the district spent on litigation legal fees against the Coast Guard. The other $9,094 spent by District Three on Coast Guard litigation was for intervener fees, which are allowable expenses. Other adjustments made by the auditors are explained in the auditors' reports (available in the docket where indicated in the

ADDRESSES

portion of this document).

We make no adjustments to the District Three compensation for applicant pilots. In the 2019 NPRM, the Coast Guard proposed to make an adjustment to District Three's request for reimbursement of $571,248 for two applicant pilots ($285,624 per applicant). Instead of permitting $571,248 for two applicant pilots, we proposed allowing $257,566, or $128,783 per applicant pilot. This proposal went into the final rule for 2019 and was not opposed. Going forward, the Coast Guard will continue to use the same ratio of applicant to target compensation for all districts. For 2019, this was approximately 36 percent of $359,887, which was the target pilot compensation value for 2019 ($128,783 ÷ $359,887 = 35.78 percent). The Coast Guard is using 36.0 percent of target compensation as the benchmark for applicant pilot compensation, for a 2021 target pilot compensation of $132,151 ($367,085 × .36). 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

(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

279

Depreciation/Auto leasing/Other

57,315

30,487

34,145

121,947

Interest

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

Adjustments (Director):

Director's Adjustment Surcharge Collected in 2018

(273,168)

(819,504)

Legal Fee Removal—USCG Litigation

(4,337)

(2,307)

(2,584)

(9,227)

Total Director's Adjustments

(277,505)

(275,475)

(275,752)

(828,731)

Total Operating Expenses (OpEx + Adjustments)

1,237,473

530,363

626,785

2,394,622

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

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.

Because the BLS does not provide forecasted inflation data, we use economic projections from the Federal Reserve for the 2020 and 2021 inflation modification.

Based on that information, the calculations for Step 1 are as follows:

See footnote 30.

See footnote 31.

Table 29—Adjusted Operating Expenses for District Three

District Three

Undesignated

Designated

Total

Total Operating Expenses (Step 1)

$1,864,259

$530,363

$2,394,622

2019 Inflation Modification (@1.5%)

27,964

7,955

35,919

2020 Inflation Modification (@1.2%)

22,707

6,460

29,167

2021 Inflation Modification (@1.7%)

32,554

9,261

41,815

Adjusted 2021 Operating Expenses

1,947,484

554,039

2,501,523

C. Step 3: Estimate Number of Working Pilots

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

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

Table 30—Authorized Pilots

District Three

Maximum number of pilots (per § 401.220(a))

2021 Authorized pilots (total)

Pilots assigned to designated areas

Pilots assigned to undesignated areas

D. Step 4: Determine Target Pilot Compensation Benchmark

In this step, we determine the total pilot compensation for each area. As we are conducting an “interim” ratemaking this year, we will follow the procedure outlined in paragraph (b) of § 404.104, which adjusts the existing compensation benchmark by inflation. As stated in Section V.A of the preamble, we are using a two-step process to adjust target pilot compensation for inflation. The first step adjusts the 2019 target compensation benchmark of $367,085 by 15 percent, for a total adjusted value of $372,591. This adjustment accounts for the difference between the predicted 2020 Median PCE inflation value of 2 percent and the actual 2020 ECI inflation value of 3.3 percent.

55 56

Because we do not have a value for the ECI for 2021, we multiply the adjusted 2020 compensation benchmark of $372,591 by the Median PCE inflation value of 1.70 percent.

Based on the projected 2020 inflation estimate, the compensation benchmark for 2021 is $378,925 per pilot (see Table 6 for calculations).

See footnote 33.

See footnote 34.

See footnote 35.

which is more than or equal to 22, the number of registered pilots provided by the pilot associations.

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).

Table 31—Target Compensation for District Three

District Three

Undesignated

Designated

Total

Target Pilot Compensation

$378,925

Number of Pilots

Total Target Pilot Compensation

6,820,650

1,515,700

8,336,350

E. Step 5: Project Working Capital Fund

Next, we calculate the working capital fund revenues needed for each area. First, we add the figures for projected operating expenses and total pilot compensation for each area. Next, we find the preceding year's average annual rate of return for new issues of high grade corporate securities. Using Moody's data, the number is 3.3875 percent.

By multiplying the two figures, we obtain the working capital fund contribution for each area, as shown in Table 32.

See footnote 36.

Table 32—Working Capital Fund Calculation for District Three

District Three

Undesignated

Designated

Total

Adjusted Operating Expenses (Step 2)

$1,947,484

$554,039

$2,501,523

Total Target Pilot Compensation (Step 4)

6,820,650

1,515,700

8,336,350

Total Expenses

8,768,134

2,069,739

10,837,873

Working Capital Fund (3.3875)

297,021

70,112

367,133

F. Step 6: Project Needed Revenue

Table 33—Revenue Needed for District Three

District Three

Undesignated

Designated

Total

Adjusted Operating Expenses (Step 2, see Table 29)

$1,947,484

$554,039

$2,501,523

Total Target Pilot Compensation (Step 4, see Table 31)

6,820,650

1,515,700

8,336,350

Working Capital Fund (Step 5, see Table 32)

297,021

70,112

367,133

Total Revenue Needed

9,065,155

2,139,851

11,205,006

G. Step 7: Calculate Initial Base Rates

Having determined the revenue needed for each area in the previous six steps, to develop an hourly rate, we divide that number by the expected number of hours of traffic. Step 7 is a two-part process. In the first part, we calculate the 10-year average of traffic in District Three, using the total time on task or pilot bridge hours.

Because we calculate separate figures for designated and undesignated waters, there are two parts for each calculation. We show these values in Table 34.

See footnote 37.

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)

$9,065,155

$2,139,851

Average time on task (hours)

20,710

2,808

Initial rate

$438

$762

H. Step 8: Calculate Average Weighting Factors by Area

See footnote 38.

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)

Class 1 (2015)

Class 1 (2016)

136

Class 1 (2017)

148

Class 1 (2018)

103

Class 1 (2019)

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)

1.3

19.5

Class 3 (2015)

1.3

10.4

Class 3 (2016)

1.3

Class 3 (2017)

1.3

24.7

Class 3 (2018)

1.3

11.7

Class 3 (2019)

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)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

3.9

Class 3 (2015)

1.3

Class 3 (2016)

1.3

9.1

Class 3 (2017)

1.3

23.4

Class 3 (2018)

1.3

9.1

Class 3 (2019)

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)

Class 1 (2015)

Class 1 (2016)

Class 1 (2017)

Class 1 (2018)

Class 1 (2019)

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)

1.3

5.2

Class 3 (2015)

1.3

Class 3 (2016)

1.3

7.8

Class 3 (2017)

1.3

18.2

Class 3 (2018)

1.3

7.8

Class 3 (2019)

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

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

$762

1.30

$586

District Three: Undesignated

438

1.30

337

J. Step 10: Review and Finalize Rates

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

Table 39—Final Rates for District Three

Area

Name

Final 2020

pilotage rate

Proposed 2021

pilotage rate

Final 2021

pilotage rate

District Three: Designated

St. Marys River

$632

$584

$586

District Three: Undesignated

Lakes Huron, Michigan, and Superior

337

335

337

VIII. Regulatory Analyses

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

A. Regulatory Planning and Review

Executive Orders 12866 (Regulatory Planning and Review) and 13563 (Improving Regulation and Regulatory Review) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The Office of Management and Budget (OMB) has not designated this rule a significant regulatory action under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. A regulatory analysis (RA) follows.

The purpose of this rule is to establish new base pilotage rates. The Great Lakes Pilotage Act of 1960 requires that rates be established or reviewed and adjusted each year. The Act requires that base rates be established by a full ratemaking at least once every five years, and in years when base rates are not established, they must be reviewed and, if necessary, adjusted. The last full ratemaking was concluded in June of 2018.

For this ratemaking, the Coast Guard estimates an increase in cost of approximately $2.06 million to industry as a result of the change in revenue needed in 2021 compared to the revenue needed in 2020.

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

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

Table 40—Changes With No Costs or Cost Captured in the Final Rate Change

Change

Description

Affected population

Basis for no cost or cost captured in the final rate

Benefits

Legal expenses for lawsuits against the Coast Guard in relation to the ratemaking are not allowable operating expenses

The Coast Guard is excluding legal fees for litigation against the Coast Guard from operating expenses for calculation of pilotage rates. This exclusion only applies 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 change, the Coast Guard is also creating 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, 54 United States registered pilots, and 3 pilotage associations

Changes in operating expenses are accounted for in the base pilotage rates. For the 2021 ratemaking, these legal fees total $27,594 for all three districts. After adjusting for inflation and the working capital fund, these expenses are $29,802, or 0.10% of the total revenue needed for 2021. The pilot associations may still be reimbursed for these expenses by the Coast Guard under the EAJA

The change will remove the undue cost to shippers of effectively paying for the pilots' litigation expenses to sue the Coast Guard.

Inflation of target pilot compensation

The Coast Guard is modifying 46 CFR 404.104(b) to change how inflation of pilot compensation is calculated by accounting for the difference between the predicted PCE inflation rated and the actual ECI inflation rate

Owners and operators of 279 vessels journeying the Great Lakes system annually, 54 United States registered Great Lakes pilots, and 3 pilotage associations

Pilot compensation costs are accounted for in the base pilotage rates

This change ensures the Coast Guard will be able to correct any under- or over-estimates in inflation, rather than keeping these errors continuously in the rate.

Table 41—Economic Impacts Due to Changes

Change

Description

Affected population

Costs

Benefits

Rate and surcharge changes

Under the Great Lakes Pilotage Act of 1960, the Coast Guard is required to review and adjust base pilotage rates annually

Owners and operators of 279 vessels transiting the Great Lakes system annually, 54 United States registered Great Lakes pilots, and 3 pilotage associations

Increase of $2,064,622 due to change in revenue needed for 2021 ($30,332,652) from revenue needed for 2020 ($28,268,030), as shown in Table 43 below

New rates cover an association's necessary and reasonable operating expenses. Promotes safe, efficient, and reliable pilotage service on the Great Lakes. Provides fair compensation, adequate training, and sufficient rest periods for pilots. Ensures the association receives sufficient revenues to fund future improvements.

The Coast Guard did not receive any comments on the regulatory analysis itself, but we did receive comments on the operating expenses that affected the calculation of projected revenues. In this final rule, the Coast Guard made six adjustments to the operating expenses (Step 1):

(1) We included intervener legal fees paid by District Three in their operating expenses. These fees were incorrectly deducted via Directors adjustment in the NPRM.

(2) We removed the Director's adjustment deducting District One's applicant pilot salaries.

(3) We removed a CPA deduction of $6,600 for District One's dues and subscriptions, as this deduction was not included in the auditor's report.

(4) We added capital expenses to District One for dock repairs, loan repayment, and the down payment of a new pilot boat.

(5) We adjusted District One's applicant expenses based on new information provided by the CohnReznick.

(6) We redistributed the applicant pilot salary deduction for District Two between the designated and undesignated areas.

In addition to the adjustments made to the operating expenses, we made two other changes that impacted the calculation of projected revenues:

(1) We updated the PCE and ECI inflation data to use the most recently available information.

(2) Based on public comment, we decided not to incorporate the proposed rounding changes to the staffing model in this final rule. As a result of this change, District One will have one less working pilot than was proposed.

Table 42 summarizes the changes in the regulatory analysis from the NPRM to this final rule. The Coast Guard made these changes as a result of public comments received after publication of the NPRM and a review of each district's operating expenses by the Coast Guard and CohnReznick. In addition, the Coast Guard updated the ECI and PCE inflation data to use more recent published datasets, and removed one working pilot from District One. An in-depth discussion of the public comments is located in Section VI of the preamble, Discussion of Comments.

Table 42—Summary of Changes From NPRM to Final Rule

Element of the

analysis

NPRM

Final rule

Impact

Resulting change in RA

Operating Expenses (Step 1)

The Coast Guard deducted $36,688 from total operating expenses for legal fees for litigation against the Coast Guard

Based on public comment, the Coast Guard realized that $9,094 worth of intervener legal fees paid by District Three were erroneously deducted as litigation expenses. We added that amount back into the operating expenses and are deducting $27,594 in this final rule for litigation fees against the Coast Guard

Increased District Three's total operating expenses by $9,094 before inflation and accounting for the working capital fund adjustments

Data affects the calculation of projected revenues.

Operating Expenses (Step 1)

The Coast Guard deducted $594,521 from District One's total operating expenses for applicant pilot salaries

Based on public comment, the Coast Guard removed the Director's adjustment that removed applicant salaries from District One's operating expenses. In addition, based on information provided by CohnReznick, the Coast Guard modified the applicant salary amount from $594,521 to $594,331

Increased District One's total operating expenses by $594,331 before inflation and accounting for the working capital fund adjustments

Data affects the calculation of projected revenues.

Operating Expenses (Step 1)

The Coast Guard deducted $6,600 from District One's total operating expenses for dues and subscriptions

Based on public comment, the Coast Guard removed an erroneous CPA adjustment of $6,600 from District One's operating expenses

Increased District One's total operating expenses by $6,600 before inflation and accounting for the working capital fund adjustments

Data affects the calculation of projected revenues.

Operating Expenses (Step 1)

The NPRM did not include expenses incurred by District One for infrastructure expenditures made in 2018

Based on public comment, the Coast Guard added $606,836 for infrastructure costs to District One's total operating expenses

Increased District One's total operating expenses by $6

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