46 CFR Parts 401, 403, and 404

DEPARTMENT OF TRANSPORTATION

Coast Guard

46 CFR Parts 401, 403, and 404

[CGD 92-072]

RIN 2115-AE45

Great Lakes Pilotage Rate Methodology

AGENCY: Coast Guard, DOT.

ACTION: Notice of proposed rulemaking and hearing.

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SUMMARY: The Coast Guard proposes to amend the Great Lakes Pilotage

Regulations by establishing new procedures for determining Great Lakes

pilotage rates, and revising the financial reporting requirements

mandated for Great Lakes pilot associations. The proposed methodology

would adopt methods which have proven effective in ratemaking

methodologies used by regulators of other public service industries.

This notice of proposed rulemaking (NPRM) does not propose a change to

the existing Great Lakes pilotage rates and charges, but proposes to

standardize the methodology by which those rates would be determined in

the future.

DATES: Comments must be received on or before July 11, 1994.

A public hearing will be held on May 20, 1994. Details regarding

the place and time of this hearing are discussed below under ``Request

for Comments.''

ADDRESSES: Comments may be mailed to the Executive Secretary, Marine

Safety Council (G-LRA-2/3406) (CGD 92-072), U.S. Coast Guard

Headquarters, 2100 Second Street, SW., Washington, DC 20593-0001, or

may be delivered to Room 3406 at the above address between 8 a.m. and 3

p.m., Monday through Friday, except Federal holidays. The telephone

number is (202) 267-1477. Comments on collection of information

requirements must also be mailed to the Office of Information and

Regulatory Affairs, Office of Management and Budget, 725 17th Street

NW., Washington, DC 20503, ATTN: Desk Officer, U.S. Coast Guard.

The Executive Secretary maintains the public docket for this

rulemaking. Comments will become part of this docket and will be

available for inspection or copying at room 3406, U.S. Coast Guard

Headquarters.

As discussed below under ``Request for Comments,'' the Coast Guard

intends to conduct a public hearing regarding this NPRM. The public

hearing will be held in room 769 of the Federal Building, 1240 E. 9th

Street, Cleveland, OH 44199.

FOR FURTHER INFORMATION CONTACT: Mr. Scott A. Poyer, Project Manager,

Office of Marine Safety, Security and Environmental Protection, (G-MVP/

12), room 1210, U.S. Coast Guard Headquarters, 2100 Second Street, SW.,

Washington, DC 20593-0001, (202) 267-6249.

SUPPLEMENTARY INFORMATION:

Request for Comments

The Coast Guard encourages interested persons to participate in

this rulemaking by submitting written data, views or arguments. Persons

submitting comments should include their name and address, identify

this rulemaking (CGD 92-072) and the specific section of this rule to

which each comment applies, and give a reason for each comment. The

Coast Guard requests that all comments and attachments be submitted in

an unbound format suitable for copying and electronic filing. If not

practical, a second copy of any bound material is requested. Persons

wanting acknowledgment of receipt of comments should enclose a stamped,

self-addressed postcard or envelope.

The Coast Guard will consider all comments received during the

comment period. It may change this proposal in view of the comments.

The Coast Guard intends to conduct a public hearing on May 20, 1994

in room 769 of the Federal Building, 1240 E. 9th Street, Cleveland, OH

44199. The hearing will begin at 9 a.m. and last until all comments

have been heard, or until 5 p.m., whichever is earlier. The purpose of

this hearing is to gather information relating to this rulemaking and

to permit responses by interested persons to material filed in this

docket.

Drafting Information

The principal persons involved in drafting this rule are: Mr. Scott

A. Poyer, Project Manager, Office of Marine Safety, Security and

Environmental Protection, Mr. David Richards, Project Consultant,

Department of Transportation (DOT) Office of International Aviation,

and Mr. Nicholas Grasselli, Project Counsel, Office of Chief Counsel.

Background and Purpose

Under the Great Lakes Pilotage Act of 1960 (Pub. L. 86-555, 46

U.S.C. 9301 et seq.), vessels of the United States operating on

register and foreign vessels must engage a U.S. or Canadian registered

pilot when traversing the waters of the Great Lakes. The Great Lakes

Pilotage Act, as amended, vests the Secretary of Transportation with

responsibility for setting pilotage rates. The Great Lakes Pilotage Act

49 U.S.C. 9303 provides that the Secretary shall prescribe by

regulation rates and charges for pilotage services, giving

consideration to the public interest and the costs of providing the

services. This authority, except for the authority to enter into,

revise or amend arrangements with Canada, has been delegated to the

Commandant of the Coast Guard by 49 CFR 1.46 (a).

Currently, the navigable waters of the Great Lakes are divided into

eight pilotage areas. United States registered pilots, along with their

Canadian counterparts, provide pilotage services in areas 1, 2, 4, 5,

6, 7, and 8. Pilotage area 3 (the Welland Canal) is currently a wholly-

Canadian area where only Canadian pilots provide services. Pilotage

areas 2, 4, 6, and 8 are ``undesignated waters.'' Pilotage areas 1, 5,

and 7 are ``designated waters.'' Pilots are required to direct

navigation of vessels in designated waters. Pilots are required to be

on board and available to direct navigation in undesignated waters. The

seven U.S. pilotage areas are grouped together into three pilotage

districts. District 1 consists of areas 1 and 2. District 2 consists of

areas 4 and 5. District 3 consists of areas 6, 7, and 8. Each district

has its own pilot association.

Section 9305 of the Pilotage Act provides that the Secretary of

Transportation, subject to the concurrence of the Secretary of State,

may make agreements with the appropriate agency of Canada to prescribe

joint or identical rates and charges. The latest Memorandum of

Arrangements between Canada and the United States specifies that the

Secretary of Transportation and the Minister of Transport will arrange

for the establishment of regulations imposing identical rates. In the

past, consultations resulted in nominally identical U.S. and Canadian

rates. Not only are generally uniform rates required by the agreement

with Canada, but they are also important from the standpoint of

predictable costs for vessels requiring pilotage. However, there are

differences in the cost bases and in the operating organizations of the

U.S. and Canadian pilots, particularly with regard to pilot

compensation. These differences need to be taken into account in

reaching identical U.S. and Canadian rates. Therefore, the proposed

methodology, like its predecessor, would not translate directly into

new rates, but rather would form the basis for proposals to be

negotiated with Canada.

On December 7, 1988, the Department of Transportation published the

Great Lakes Pilotage Study Final Report (1988 DOT Pilotage Study). The

study revealed weaknesses in accounting for the expenses incurred by

the pilot associations and the need to formally establish the factors

used in establishing pilotage rates. On April 25, 1990, the Coast Guard

published a final rule (55 FR 17580) establishing improved audit

requirements and general guidelines and procedures to be followed in

ratemaking (CGD 92-072). In May, 1990, the Inspector General (IG) for

the Department of Transportation initiated an audit of Coast Guard

oversight of Great Lakes pilotage. The final report of the audit (Audit

of the U.S. Coast Guard's Oversight and Management of the Great Lakes

Pilotage Program), detailing further issues affecting the basis for

Great Lakes pilotage rates, was issued on December 14, 1990.

On August 2, 1991, a DOT Task Force was formed to: (1) Develop an

interim rate adjustment; and (2) establish a new pilotage ratemaking

methodology. On June 5, 1992, an interim rate increase was published

(CGD 89-104). This rate adjustment was designed to increase the revenue

received by the pilots, pending development of a permanent rate

methodology.

Copies of any of the published material listed above may be

obtained by contacting Mr. Scott A. Poyer, as indicated in FOR FURTHER

INFORMATION CONTACT.

Discussion of Proposed Amendments

This NPRM proposes a new methodology for setting pilotage rates on

the Great Lakes. This NPRM would replace the general guidelines of the

existing methodology, set forth in 46 CFR Part 404, with more detailed

and specific steps to be followed when setting Great Lakes Pilotage

rates. It would also make correlative changes to the accounting and

reporting requirements set forth in 46 CFR part 403.

This NPRM would not change the current Great Lakes pilotage rates

and charges contained in 46 CFR 401.400-401.428. This NPRM proposes to

change the methodology by which those rates would be determined during

Great Lakes pilotage ratemaking proceedings.

In summary, the proposed ratemaking methodology would provide that

the Director of Great Lakes Pilotage (the Director), determine the

timing for reviews of pilotage rates. Interested parties would be able

to petition the Director for a review at any time. However, the

Director would decide, under applicable law, if a review is warranted.

If the Director determined that a review is warranted, he or she would

accomplish this review by following the steps detailed in this

rulemaking.

Basically, these steps involve the projection of operating expenses

(including pilot compensation) and revenues (using the current rate

schedule), based on the anticipated demand for pilotage services, by

pilotage area for the succeeding navigation period. Interest expense on

the debt of the pilot organizations, and allowances for federal income

taxes and the capital invested in the pilot organizations would be

subtracted from this projected operating profit or loss. Ideally,

projected revenues received under the existing rate schedule would be

sufficient to cover projected operating expenses, interest, and

allowances.

If a rate adjustment appeared warranted, the Director would

calculate a new hourly rate schedule for basic pilotage service in each

pilotage area by dividing the sum of the projected costs (operating

expenses, interest expense, and tax and return allowances) by the

projected hours of pilotage service. The Coast Guard would publish any

proposed rate adjustments in a NPRM inviting comments on the changes.

That NPRM, and any subsequent comments on it, would then form the basis

for negotiations on pilotage rates between the United States and

Canada. Once these negotiations resulted in an agreement to change

pilotage rates, the Coast Guard would publish a rule establishing a new

rate schedule.

This NPRM also proposes to change the financial reporting

requirements for pilot associations to more closely comport to

ratemaking needs. The proposed changes to the reporting requirements,

while an integral part of the ratemaking process, should be considered

independently from any proposed ratemaking provisions. This NPRM also

proposes to add a certification requirement.

The proposals contained in the discussion section of this preamble

are presented in two parts. Part A of this section discusses proposed

revisions to the ratemaking methodology. Part B addresses proposed

revisions to the financial reporting requirements. The order of

discussion in this preamble differs from the order of presentation in

the regulations. The revisions to the ratemaking methodology are

discussed first because an understanding of the methodology is

important to an understanding of the proposed changes to the financial

reporting requirements, and because the changes to the proposed

methodology are more extensive than the changes to the financial

reporting requirements.

Adoption of Public Service Rate Methodology

The Pilotage Act (46 U.S.C. 9303) provides, in part, that the rates

and charges for pilotage services shall be fair and equitable, giving

due consideration to the public interest and the reasonable cost and

expense of providing and maintaining such facilities and arrangements

as are required for the efficient performance of pilotage services.

Because the provision of service by the pilot organizations

contains many of the characteristics and requirements of a public

utility, this NPRM proposes to employ basic utility ratemaking

procedures in setting pilotage rates and charges. Basic utility

ratemaking concepts include the non-discriminatory treatment of users,

operational and economic efficiency through the use of ratemaking

standards, and other general public policies.

This NPRM describes the general financial structure of public

service rates and proposes to apply this structure to the three U.S.

pilot organizations providing pilotage services on the Great Lakes,

with several economic standards applied to cost elements and specific

application and designation of revenue categories.

1. General Public Service Rate Structure and Definitions

Public service rates are generally defined rates with established

economic standards, most often based upon an allowed return on

investment. Shown below is a basic structure for such rates:

Public Service Rate Structure Using Rate of Return Standards

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Line Description

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1................................ Adjusted Operating Revenue.

2. less.......................... Adjusted Operating Expense.

3. equals........................ Adjusted Operating Profit (Loss).

4. less.......................... Adjusted Interest Expense.

5. equals........................ Adjusted Earnings Before Tax.

6. less.......................... Federal Tax Allowance.

7. equals........................ Net Income.

8................................ Return Element (Net Income plus

Interest).

9. divided by.................... Investment Base (Separately

determined).

10. equals....................... Return on Investment (ROI).

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This NPRM defines the elements of this basic structure for Great

Lakes Pilotage Rates below.

1. Adjusted Operating Revenue: Adjusted Operating Revenue is the

sum of all operating revenues received by the pilot organizations for

their pilotage services, less revenues from ancillary pilotage services

that are offset against operating expenses, discussed below.

2. Adjusted Operating Expense: Adjusted Operating Expense is the

sum of all operating expenses incurred by the pilot organizations for

their pilotage services, less the sum of all disallowed expenses,

discussed below.

3. Adjusted Operating Profit (Loss): Adjusted Operating Profit

(Loss) is the Adjusted Operating Revenue, less the Adjusted Operating

Expense.

4. Adjusted Interest Expense: Adjusted Interest Expense is the

reported pilot association interest expense on operations, adjusted to

exclude any interest expense attributable to non-pilotage operations.

5. Adjusted Earnings Before Tax: Adjusted Earnings Before Tax is

the Adjusted Operating Profit (Loss), less the Adjusted Interest

Expense.

6. Federal Tax Allowance: The Federal Tax Allowance is the Federal

statutory tax on Earnings Before Tax, for those pilot organizations

subject to federal tax.

7. Adjusted Net Income: Adjusted Net Income is the Adjusted

Earnings Before Tax, less the Federal Tax Allowance.

8. Return Element: The Return Element is the Adjusted Net Income,

plus Adjusted Interest Expense. The return element can be considered

the sum of the return to equity capital (the net income) and the return

to debt (the interest expense). Both interest expense and net income

must be summed to determine the return to the combined debt and equity

investment, below.

9. Investment Base: The Investment Base is the net capital invested

in the pilot organization, including both equity and debt. Should

capital be invested in other than pilotage operations, that capital and

related revenues and expenses would be excluded from the rate base. The

investment base is defined below.

10. Return on Investment: The Return on Investment (ROI) is the

Return Element, divided by the Investment Base, and expressed as a

percent.

Putting actual data into the format described above would generate

the pilot organizations' actual financial performance for a past

period. This NPRM proposes to establish prospective rates, however, and

therefore propose several additional regulatory adjustments. These

adjustments include establishing a prospective return to investment,

adjusting for inflation, and projecting the need for pilotage services.

These adjustments are described in Part A.

2. Investment Base

The Investment Base is the recognized capital investment in the

useful assets employed by the pilot groups. In general, it is the sum

of available cash and the net value of real assets, less the value of

land. This NPRM proposes to establish the investment base through the

use of the balance sheet accounts, as amended by material supplied in

the Notes to the Financial Statement, discussed below. Below are the

accounts and methodology this NPRM proposes to use. The account numbers

are taken from the accounting revisions in Part B.

Construction of Investment Base

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Account No. Description

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Recognized assets:

+10999............................. Total current assets

-29999............................. Total current liabilities

+20100............................. Current notes payable

+13999............................. Total property and equipment (Net)

-12000............................. Land

+15000............................. Total other assets

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Total recognized assets

Non-recognized assets:

+11999............................. Total investments and special funds

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Total Non-recognized assets

Total Recognized and Non-Recognized Assets

Recognized sources of funds:

+39999............................. Total stockholders equity

+26000............................. Long-term debt

+20100............................. Current notes payable

+24500............................. Advances from affiliated companies

+26100-500......................... Long-term obligations--Capital

leases

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Total recognized sources

Non-Recognized sources of funds:

+26600............................. Pension liability

+26800............................. Other non-current liabilities

+27000............................. Deferred Federal income taxes

+27200............................. Other deferred credits

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Total Non-recognized sources

Total Recognized and Non-Recognized Sources

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The proposed Investment Base is the Recognized Assets, multiplied

by the ratio of Recognized Sources of Funds to Total Sources of Funds.

Recognized assets are adjusted by this ratio to ensure that the assets

are not encumbered by outstanding liabilities. The non-recognized

sources of funds are available only because they have not been

demanded; they represent costs that have been incurred, but not paid.

Notes to the Financial Statement and Other Informational Notes

All matters which may materially influence interpretations or

conclusions drawn from the financial statement with regard to the

financial condition or earnings position are required to be clearly and

completely stated as footnotes to the financial statement (46 CFR Part

403.)

Part A: Proposed Methodology

In summary, the basic steps to be followed in the proposed Great

Lakes pilotage ratemaking methodology would be as follows: (1)

Projection of operating expenses, including target pilot compensation;

(2) projection of operating revenues at current rates, including

revenues from ancillary services; (3) calculation of investment base;

(4) determination of target rate of return on investment; (5)

substitution of data into the basic utility rate structure; and (6)

adjustment of the basic pilotage rate schedule if necessary, subject to

the requirements of the Memorandum of Arrangements between the United

States and Canada. The details of each of these steps can be found in

Appendix A of the proposed amendments to 46 CFR part 404.

General Ratemaking Provisions

The Director would continue to determine, under applicable law,

when reviews of Great Lakes pilotage rates would be conducted. In

addition, this NPRM proposes to allow an interested party or parties to

petition the Director for a review, provided that sufficient

justification is included in the request. This would allow the Director

to react to changing circumstances which might affect pilotage rates.

The Coast Guard invites comment on whether rate reviews should be

conducted at fixed intervals, and if so, what the timing of the

intervals should be.

This NPRM proposes that each of the seven U.S. pilotage areas be

treated as separate cost centers for ratemaking calculations. This is

because each area consists of either designated or undesignated waters,

and the target pilot compensation would be different for each.

Part A.1. Derivation of Return on Investment and Adjustment for

Inflation

Return on Investment

The proposed rate schedule, based on average costs per pilotage

hour as developed below, are in part determined by the permitted rate

of return on investment (ROI). This is calculated by dividing the sum

of return to debt (interest expense) and the return to equity (net

income), by the investment base. Revenues received must be sufficiently

high to create sufficient net income, when added to interest expense

and the sum divided by the investment base, to equal the allowed rate

of return on investment.

The ROI for any industry can vary significantly depending solely on

the mix of debt to equity capital. Many public service ratemaking

authorities determine the allowable ROI using an artificial debt/equity

ratio. This is generally done to encourage equity capital investment in

an industry, since the return to equity is generally set higher than

the return to debt. Since such a mechanism is neither feasible nor

necessary in the case of pilotage services, this NPRM does not propose

to establish any ROI standard based on a specified debt/equity ratio,

but would accept the debt/equity ratio of each of the pilot

organizations as reported.

This NPRM proposes to set the allowed rate of return to equity

capital at the most recent return on stockholder's equity for a

representative cross-section of transportation industry companies,

including maritime companies, with a minimum rate equal to the interest

rate incurred by the associations for debt capital, and a maximum rate

of 20.0 percent. Alternate proposed rate of return to capital

percentages should contain reasonable support for their selection over

this NPRM's proposal. For example, under this NPRM's proposed

methodology, the computed ROI standard for pilotage rates, assuming a

50/50 debt/equity ratio, an implicit interest rate of 14 percent on

debt capital and a 20 percent return to equity capital, would be 17.0

percent (.50 times .14, plus .50 times .20 = .170, or 17.0 percent.)

The average hourly charge for pilotage services would be set to

generate sufficient revenues to cover operating expense and the return

on investment allowance (including Federal taxes, if any).

Adjustment for Inflation

This NPRM proposes to project annual inflation factors to the

succeeding navigation season, reflecting the gradual increase in cost

throughout the season. These inflation factors would be applied to the

actual costs of the pilot organizations, other than for pilot

compensation, in computing the rate necessary to achieve the target

ROI. The factors would not be applied to pilot compensation costs,

which are estimated separately.

This NPRM proposes to project the actual annual experienced changes

in the average costs per pilot assignment for each pilotage area after

the initial two years of cost inflation under this NPRM's proposed rate

methodology. The initial two years of cost adjustment would be based on

the preceding year's change in the North Central Region's Consumer

Price Index, as calculated by the U.S. Bureau of Labor Statistics.

Costs not subject to inflation (depreciation, for example) would not be

adjusted for this initial period. Alternate methods of cost projection

proposed during the comment period of this rule would be carefully

considered.

Part A.2. Recognition of Costs for Ratemaking Purposes

Virtually all regulated rates contain economic incentives,

penalties, or limits. This NPRM has already mentioned one such standard

sometimes used, an artificial debt/equity ratio for return on

investment. This NPRM proposes one explicit economic standard for Great

Lakes pilotage ratemakings--recognition of lease expenses only to the

extent that they either: (a) Approximate open market costs (for those

leased assets with readily available markets); or (b) approximate

ownership cost (for those leased assets with limited alternative

markets, or which were obtained through transaction with affiliated

companies.)

This NPRM also proposes to place expenses that appear excessive

under greater scrutiny than in the past. Regulators may disallow

expenses, subject to appeal by the pilot associations, as excessive or

unrelated to the provision of pilotage services.

Finally, while the Coast Guard is unaware of the use of other than

the straight-line method of recording depreciation expense by the pilot

organizations, this NPRM does not propose to recognize, for rate-

setting purposes, depreciation expenses on other than a straight-line

basis.

Recognition of Lease Expenses

Economic organizations lease equipment or other assets for a number

of operational or financial reasons. This NPRM proposes no general

objection to the leasing of assets. However, lease transactions, and

lease transactions with related companies in particular, are subject to

two general guidelines in public ratesetting. The first guideline

allows recognition of lease expense with no adjustment should the lease

terms generally approximate the market conditions for the leased asset.

The second guideline allows the recognition of lease expenses only to

the extent that the lease cost approximates the cost of owning the

asset.

This NPRM proposes to recognize lease costs to the extent that they

generally approximates open market costs, subject to the condition that

a readily available alternative supplier for the leased asset exists.

Should there be no readily available alternate supplier, recognition of

lease costs would be limited to the approximate cost of ownership,

including a return to capital. Since related-party transactions by

definition are not open market transactions, this NPRM proposes to

generally apply the more stringent guideline to all related-party

transactions. (See 14 CFR 399.43, for example).

This NPRM proposes to amend the financial reporting requirements to

require that lease costs be recorded in accordance with the Financial

Accounting Standards Board (FASB) publication FASB-13, including

subsequent rulings on this subject by the FASB.

Part A.3. Ancillary Charges

Several charges have traditionally been levied for ancillary

pilotage services, such as docking/undocking and moving to an

anchorage, as well as penalty charges, such as for delay or

cancellation. Revenues received for these services have been included

as part of the overall revenues received by the pilot organizations in

estimating the need for rate changes. However, accepting these revenues

as general revenues does not tie the revenues received to the provision

of a service or the incursion of a cost. For example, overhead costs

(non-pilot compensation costs) are incurred in assigning a pilot.

Should that order be later cancelled, the revenue received from the

cancellation charge is reported as cancellation charge revenue, but is

not linked to the overhead cost of assigning the pilot.

This NPRM proposes to link revenues received for ancillary services

to the cost of services provided through the use of revenue offset

methodology. Under this method, revenues received from charges for

ancillary services are ``offset'' against the direct expenses of

providing that service. In the above example, overhead costs would be

reduced by the revenues received for the cancellation charge, other

costs (pilot compensation costs for example) would be unaffected. The

total amount of revenue received (needed) or expenses recognized under

revenue offset methodology is unchanged. However, as discussed below,

this NPRM proposes to set the charges for ancillary services separately

from the basic pilotage rates in this NPRM. In addition, this NPRM also

proposes to equalize ancillary charges between districts. For equity,

as well as for economic reasons, a docking charge at Duluth should be

equal to one at Chicago, Detroit, or Buffalo. This NPRM will discuss

these charges in turn.

Docking/Undocking and Harbor Movement Charges

The current docking/undocking charges in undesignated waters are

$297, $256, and $271, for Districts 1 through 3, respectively.

Districts 1 and 3 also have a direct charge for a moveage in a harbor,

at $580 and $531, respectively. For comparability, during the next

ratemaking the Coast Guard would propose to set the docking/undocking

charge at the same level for all three districts (e.g. at $250),

subject to supported comment for establishment at any other level, or

for differentiation between districts. This NPRM does not propose to

adjust this charge for inflation, but may change the level of the

charge from time to time upon review of the Director. In similar

fashion, during the next ratemaking the Coast Guard would propose to

set the charge for moveage in a harbor for all three districts at twice

the docking charge, (e.g. $500), under the presumption that a moveage

requires both an undocking (or lifting anchor) and a docking

(anchorage). This adjustment is again subject to supported comment as

to level and applicability. Again, this NPRM does not propose to adjust

this charge for inflation, but may change the level of the charge from

time to time upon review of the Director.

Revenue received for docking/undocking and moveage within a harbor

would be offset against revenues required for pilot compensation.

Delay Charges

Delay charges, per hour, whether for trip interruption or departure

or moveage delays, would be set at the rate determined in the pilot

compensation phase, below, as adjusted for ship size. The maximum basic

rate for any 24 hour period would be the per hour delay charge, as

adjusted for ship size, times 16 hours. Delay charges would not be

imposed for interruption caused by ice, weather, or traffic (except

from December 1 through April 8 of each year), and would also not be

imposed in undesignated waters if a trip, though delayed, is still

completed within the minimum 6 hour period under 401.410(a). Revenues

received for delay charges would be offset against revenues required

for pilot compensation.

Cancellation Charges

If a pilot reports for duty and the order is cancelled, the ship

would pay the minimum basic pilot compensation charge for a six-hour

period, unadjusted for ship size; if the order is cancelled, and the

pilot has started travel but not arrived, the minimum charge would also

apply. If the cancellation is more than six hours after the pilot

reports to the designated boarding point, the ship would pay the

minimum basic pilot compensation charge for six-hour period, plus delay

charges for each hour or fraction of an hour over six hours, subject to

the maximum basic rate for delay charges (the delay charge per hour

times 16 hours for any 24 hour period.) Revenues received for

cancellation charges would be offset against operating expenses.

Lock Passage Charges

As for docking/undocking and moveage, this NPRM proposes that the

fee for lock passage should be the same for all three districts. During

the next ratemaking the Coast Guard would propose to set the lock

transit charge at the same level for all three districts (e.g. $150),

subject to supported comment for establishment at any other level, or

for differentiation between districts. This NPRM does not propose to

adjust this charge for inflation, but may change the level of the

charge from time to time upon review of the Director. Revenues received

for lock passage charges would be offset against revenues required for

pilot compensation.

Part A.4. Development and Application of Hourly Pilotage Charges

The operating expenses recognized under this NPRM's proposed

methodology are broken into two major components, pilot compensation

costs and non-pilot operating costs. The projected non-pilot operating

costs for the ensuing navigation season, including the constructed

amount necessary to bring the pilot organizations to the ROI standard,

would be divided by the sum of the estimated pilotage hours for both

designated and undesignated waters, by District. This standard charge

per hour would be applied on a per hour basis for each supplied

pilotage hour, whether in designated or undesignated waters.

Total pilot compensation costs for designated and undesignated

waters are derived from the target pilot compensation for masters and

first mates, times the number of needed pilots. The pilot compensation

cost per hour for designated and undesignated waters is this

constructed cost, divided by the pilot hours projected in designated or

undesignated waters. Target pilot compensation and the number of needed

pilots is developed below.

The sum of non-pilot operating costs per hour and pilot

compensation costs per hour (for designated and undesignated waters

separately) is the total cost per hour to be charged for pilotage

services.

Target Pilot Compensation

The Coast Guard and Department policy is to maintain income

comparability between pilots providing international regulated pilot

services and private masters and first mates operating domestic vessels

on the Great Lakes with similar responsibilities. This NPRM proposes to

continue the current income comparability policy of using as target

compensation for pilots in undesignated waters the compensation of

first mates on U.S. Great Lakes vessels. Target compensation for pilots

providing service in designated waters would continue to be comparable

to masters on Great Lakes vessels, but this NPRM proposes to set the

target at 150% of the compensation of first mates, rather than

attempting to determine the actual average compensation of Great Lakes

masters. While the Coast Guard would periodically review this estimate,

available data indicate that this average premium has remained

reasonably stable, is relatively simple to administer, and avoids

costly sampling of individual master's contracts, which are not

publicly available.

This NPRM lists below those items proposed to be included as part

of the pilot compensation portion of the rate schedule. Line items here

included would be removed from the cost pools included in direct

operating expenses to preclude double counting.

Target Pilot Compensation Designated and Undesignated Waters

Undesignated Waters--First Mate Compensation Component

1. Contractual daily rate @ 260 days: Medical allowance, Pension

allowance, Holiday pay, Overtime pay, Winter close-down allowance.

2. Additions to compensation: F.I.C.A., Workmen's compensation

allowance, Total.

Designated Waters--150 Percent of First Mate Compensation

This NPRM proposes to exclude profit sharing as a component of

pilot compensation expense, since this is a voluntary contribution by

the employer paid from profits, similar in form to the return element

proposed to be paid the pilot organizations (which may be distributed

as a bonus). Profit sharing expense, which may have been included in

past rate-setting as an expense item in the pilot associations expense

accounts, would be disallowed.

This NPRM proposes to add a F.I.C.A. allowance and a workmen's

compensation allowance to pilot compensation to ensure comparability

between pilot groups, and to properly reflect the allocated cost of

pilot services. Allowances listed here would be transferred from

general pilot association costs (if included there), or added to the

cost pools (if not currently included in general association costs).

This NPRM proposes to require these costs to be separately identified

and reported in either the financial statement or by special report

(See Part B).

Number of Required Pilots

The Coast Guard and Department policies have set the minimum number

of pilots needed by establishing specific minimum annual pilot hours

for designated and undesignated waters (1,000 and 1,800 hours per

pilot, respectively) for a pilot to receive comparable compensation

discussed above. The required number of pilots for any succeeding

navigation season was determined by dividing a projection of the number

of pilot hours required in designated and undesignated waters, by

District, by the minimum standard annual pilot hours. This required

number of pilots, for both designated and undesignated services and

individually rounded upward, was then multiplied by the target income

per pilot (above) to determine the revenue necessary under the rate.

This NPRM proposes to continue this policy and methodology in

determining the number of pilots and the necessary pilot comparability

income to be included in the rate schedule.

Pilot Compensation Charges Per Hour

The target pilot compensation, by District and by designated

(Master) and undesignated (First Mate) compensation, would then be

divided by the estimated pilotage hours in designated or undesignated

waters to construct an average hourly cost per hour for pilot

compensation in designated or undesignated waters.

Total Pilotage Charges Per Hour

Pilot compensation charges per hour, for designated and

undesignated waters separately, would be added to the average cost for

non-pilot compensation expenses per hour. The sum of these average

costs, for designated and undesignated waters separately, would be the

average cost per pilotage hour to be recovered under the rate, subject

to the adjustment for vessel size, below.

Part A.5. Adjustment of Pilotage Charges for Vessel Size

It is accepted belief and practice that pilotage of larger vessels

deserves a higher level of compensation than that for smaller vessels.

The current rate schedule uses a vessel size multiplier to increase the

charge for larger vessels, and, presumably, the pilot compensation. (46

CFR 401.400) Also, maintaining shipping in the Great Lakes is a public

benefit and goal, and is supported by government agencies. As smaller

ships carry less cargo and are more affected by pilotage cost on a per-

ton basis, a differential in cost (or lesser increase) is likely to

encourage the continuation of their service.

Based on this perceived public interest, this NPRM proposes to

continue to use these vessel-size rate multipliers for the proposed

rates for all three districts. However, the average base rate derived

above must be adjusted for such multiplication, since the average base

rate is an unweighted charge. This NPRM proposes to adjust the base

rate to reflect a ship weighting factor of 1.0 by dividing the average

base rate by the average ship weighting factor derived from pilot

billings. For 1990 the average weighted ship sailing, for designated

and undesignated waters was as follows:

Weighted Ship Sailing Factor, C.Y. 1990

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

District

District1 2 District3

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

Designated waters...................... 1.269 1.279 1.330

Undesignated waters.................... 1.268 1.303 1.309

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

This NPRM proposes to adjust the hourly charge for pilot services

by dividing the average total pilotage charge by the average vessel

weighting factor for the preceding year.

For illustrative purposes only, this adjustment to the pilotage

charge per hour is shown below. (In the example, the hourly rates are

derived from the interim rate increase published in the Federal

Register on June 5, 1992 (CGD 89-104) to calculate charges on an hourly

basis.) For District 1, Area 1, ship factor 1.0 would equal the average

cost per hour of $166, divided by the average ship weighting factor of

1.269, or $131. Ship factor 1.3 would be $131 times 1.3, or $170. For

ease of calculation this NPRM proposes to continue to use hourly rates

rounded to the nearest dollar.

Example

Adjustment of Average Pilotage Charge per Hour--To Ship Weighting Factor

1.0

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

Unadjusted

average Average Ship factor

pilotage ship 1.0--adjusted

charge/ weighting pilotage

hour factor charge/hour

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

District 1:

Area I.......................... $166 1.269 $131

Area II......................... 96 1.268 76

District 2:

Area IV......................... 83 1.303 64

Area V.......................... 150 1.279 117

District 3:

Area VI......................... 87 1.309 67

Area VII........................ 179 1.330 135

Area VIII....................... 90 1.309 69

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

Part A.6. Application of the Pilotage Charges to Vessel Trips

The required pilotage charges per pilot hour are determined above.

Most trips and sailings, however, are provided between relatively few

points, in part due to pilot changeover, and in part due to ship

movements involving mostly the larger trading ports. For simplicity and

operational efficiency, this NPRM proposes to fix the pilotage charges

for selected sailings and trips, based upon average transit time as

reported in pilot source forms. This NPRM proposes that the average

time for sailings served more than ten times per year in each direction

would adequately define the necessary pilot time for these repeated

sailings, exclusive of delay and demurrage. This NPRM proposes to

multiply the average time for these repeated sailings by the adjusted

pilotage charge for Ship Factor 1 to construct a base charge for these

sailings. These base charges would be published in matrix form, by

district.

This NPRM proposes to base the pilotage charges for sailings to

less-served points upon the actual time spent in pilotage (subject to

minimum and incremental hourly charges, below), multiplied by the

adjusted pilotage charge per hour. Charges listed in matrix form and

computed time-based charges would be subject to the vessel-size

multiplier, as in the current rate schedule.

This NPRM also proposes, for less-served points, to continue a

minimum six-hour pilotage charge, but with additional charges added in

three hour increments. This NPRM's proposal to use three hour

increments represents a reduction from the six hour increments in the

current rate schedule, to more closely match the services performed.

Part B: Financial Reporting

Summary of Changes to Reporting Requirements

As indicated in Part A, several changes are proposed to the

accounting regulations and reporting requirements under the Great Lakes

Pilotage Regulations. In order to facilitate ratemaking, this NPRM

proposes to require more detailed financial reporting from each pilot

association.

This NPRM proposes that each pilot association report financial

data in a standard format prescribed by the Director, and that

financial statements of each association be signed by an officer of

that association to verify accuracy. In addition, 46 CFR part 403 would

be renumbered and reorganized to bring this part into conformance with

current regulatory guidelines on the numbering and organization of

regulations.

This NPRM proposes that the general ledger account numbers in part

403 be expanded from four digits to five digits, and placed in

Appendices A and B to part 403. This proposed change would allow

greater flexibility in making future changes to the system of accounts.

In addition, the definitions of profit and loss accounts currently

found in 46 CFR 403.9 would be deleted because this section does not

add any significant information to the uniform accounting system.

This NPRM proposes that the straight line depreciation method would

be consistently used by all pilotage associations. Using this method

would evenly allocate the acquisition costs over the useful life of

assets subject to depreciation. It would also minimize the annual

fluctuation of operating expenses and their effect over the ratemaking

calculations.

This NPRM proposes that the recording of lease costs be guided by

the Financial Accounting Standards Board (FASB) publication FASB-13 and

subsequent pronouncements on this subject by the FASB. This proposed

change would differentiate capital leases from operating leases,

updating the Great Lakes pilotage accounting standards in conformance

with current accounting practices.

Under the current regulations (46 CFR part 403), all pilot

associations maintain the same general system of accounts. However, no

two associations currently report financial information in the same

format, leading to inconsistencies between associations. This NPRM

proposes an adjustment to the system of accounts. This change would

facilitate ratemaking calculations, and would put pilot associations on

a comparable footing for ratemaking calculations.

Corporations are required by law to pay certain expenses (e.g.,

Federal Insurance Contribution Act (FICA) and Workmen's Compensation).

However, for unincorporated associations, these expenses are paid by

the individual members, and are not shown on the association's

financial statement. If these expenses are not considered in the

ratemaking calculations for unincorporated associations, a lower level

of compensation for those pilots would be shown, as compared to

compensation for their counterparts in associations organized as

corporations. This NPRM proposes that each unincorporated pilot

association report this financial information, now separately reported,

in notes to the association's financial statement. Only reported items

would be considered in ratemaking calculations for all pilot

associations. The Director would not impute such items. This change

would put pilot associations with different organizations on a

comparable footing for ratemaking calculations.

This NPRM proposes to require that financial information which is

currently reported on a quarterly basis be reported on a semiannual

basis, and to update the address for the Director. This proposed change

to the financial reporting requirements would ease the burden on pilot

associations, without affecting the ratemaking process or oversight of

the pilot associations.

This NPRM proposes that profit and loss accounts be reported

semiannually in accordance with the charter of accounts proposed in

Appendix B to part 403.

This NPRM proposes standardized reporting, by account number, for

financial data now submitted in summarized, unnumbered fashion. The

proposed revisions and additions to the reporting requirements are

necessary to examine selected costs for reasonableness (lease and

interest costs, etc.); to specifically list expenses that would be

included in pilot compensation costs (e.g., pension and health costs,

etc.); and to provide identification for costs not currently listed as

incurred in some districts (e.g., pilot insurance, FICA, retirement).

For ratemaking purposes, more detailed information is needed than

that supplied in the current financial statements to determine the

reasonableness of capital lease agreements and the depreciable lives

and residual value of selected assets. This NPRM proposes that all

matters which may materially influence interpretations or conclusions

drawn from the financial statements of pilot associations with regard

to the financial condition or earnings position of the association

would have to be clearly and completely stated as footnotes to the

financial statement.

This NPRM proposes to continue the requirement that all financial

records, including information on lease transactions, be maintained and

be readily available to the Director's auditors for 10 years.

This NPRM does not propose any significant changes to the form of

Inter-Association Settlement Statements. However, comments on whether

it is necessary to retain this section, or any other suggested changes,

are specifically requested.

Regulatory Evaluation

This proposal is a significant regulatory action under Executive

Order 12866, and significant under the Department of Transportation

Regulatory Policies and Procedures (44 FR 11040, February 26, 1979).

The Coast Guard considers this proposed regulation to be significant

because a rulemaking affecting the setting of pilotage rates is

controversial and of significant interest to the public.

The primary purpose of this rulemaking is to standardize the

financial reporting of Great Lakes pilot associations and to clarify

the methodology to be used in future ratemakings. The methodology

proposed is expected to have a minimal impact on pilotage rates. Since

the effect of the rulemaking on pilotage rates is expected to be

minimal, a full Regulatory Evaluation is unnecessary.

Small Entities

Under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the

Coast Guard must consider whether this proposal, if adopted, will have

a significant economic impact on a substantial number of small

entities. ``Small entities'' include independently owned and operated

small businesses that are not dominant in their field and that

otherwise qualify as ``small business concerns'' under section 3 of the

Small Business Act (15 U.S.C. 632). Because this proposal does not

affect the overall level of pilotage rates, this proposal should have

little or no impact on small entities which pay pilotage rates, or

receive income from pilotage rates. Because it expects the impact of

this proposal to be minimal, the Coast Guard certifies under 5 U.S.C.

605(b) that this proposal, if adopted, will not have a significant

economic impact on a substantial number of small entities.

Collection of Information

Under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.), the

Office of Management and Budget (OMB) reviews each proposed rule that

contains a collection of information requirement to determine whether

the practical value of the information is worth the burden imposed by

its collection. Collection of information requirements include

reporting, recordkeeping, notification, and other, similar

requirements.

This proposal contains collection of information requirements in

the additions to 46 CFR part 403. The following particulars apply:

DOT No.: 2115.

OMB Control No.: 2115-0022.

Administration: U.S. Coast Guard.

Title: Great Lakes Pilotage Rate Methodology.

Need for Information: The information is necessary for ratemaking

calculations and for the proper financial oversight of the Great Lakes

pilot associations. However, pilot associations currently report

financial information as required by 46 CFR part 403. This proposal

merely amends the existing reporting requirements by separating several

existing summary accounts into their individual components, and

requiring that the financial reporting of all accounts be done in a

standardized format.

Proposed Use of Information: The reported data would be used in

Great Lakes pilotage ratemaking calculations, and for the proper

financial oversight of the Great Lakes pilot associations.

Frequency of Response: The Balance Sheet, and the Profit and Loss

Statement, which are currently required quarterly, would be required

semiannually. Revenue and Traffic Statements would be required monthly.

Burden Estimate: No change from the current burden.

Respondents: Each Great Lakes pilot association (there are

currently three).

Form(s): Designated by the Director, Great Lakes Pilotage.

Average Burden Hours Per Respondent: No change to the current

burden hours.

The Coast Guard has submitted the requirements to OMB for review

under section 3504(h) of the Paperwork Reduction Act. Persons

submitting comments on the requirements should submit their comments

both to OMB and to the Coast Guard where indicated under ADDRESSES.

Federalism

The Coast Guard has analyzed this proposed rule in accordance with

the principles and criteria contained in Executive Order 12612 and has

determined that this proposed rule does not have sufficient federalism

implications to warrant the preparation of a Federalism Assessment.

Under 49 CFR 1.46(a) the Secretary delegates to the Commandant of the

Coast Guard the authority to carry out the Great Lakes Pilotage Act of

1960, as amended, except the authority to enter into, revise, or amend

arrangements with Canada.

Furthermore, since vessel traffic in the Great Lakes tends to move

between U.S. ports in the national marketplace, pilotage regulations

for the Great Lakes is a matter for which regulations should be of

national scope to avoid unreasonably burdensome variances. State action

addressing the same subject matter is preempted by 46 U.S.C. 9306,

which provides that a State or political subdivision of a State may not

regulate or impose any requirement on pilotage on the Great Lakes.

Environment

The Coast Guard considered the environmental impact of this NPRM

and concluded that under section 2.B.2 of Commandant Instruction

M16475.1B, this rule is categorically excluded from further

environmental documentation. The rule is procedural in nature because

it deals exclusively with ratemaking and accounting procedures.

Therefore, this is included in the categorical exclusion in subsection

2.B.2.1--Administrative actions or procedural regulations and policies

which clearly do not have any environmental impact. A Categorical

Exclusion Determination is available in the docket for inspection or

copying where indicated under ADDRESSES.

List of Subjects in 46 CFR Parts 401, 403, and 404

Administrative Practice and Procedure, Great Lakes,

Navigation(water), Penalties, Reporting and Recordkeeping Requirements,

Seamen.

For the reasons set out in the preamble, the Coast Guard proposes

to amend parts 401, 403, and 404 of title 46 of the Code of Federal

Regulations as follows:

PART 401--[AMENDED]

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

follows:

Authority: 46 U.S.C. 2103, 6101, 7701, 9303, 9304; 49 CFR 1.45,

1.46. 46 CFR 401.105 also issued under the authority of 44 U.S.C.

3507.

2. In Sec. 401.110 the introductory text of paragraph (a) and

paragraph (a)(9) are revised, and paragraph (a)(16) is added to read as

follows:

Sec. 401.110 Definitions.

(a) As used in this chapter:

* * * * *

(9) Director means Director, Great Lakes Pilotage. Communications

with the Director may be sent to the following address: Director, Great

Lakes Pilotage, Commandant (G-MVP), 2100 2d Street, SW., Washington, DC

20593.

* * * * *

(16) Association means any organization which holds or held a

Certificate of Authorization issued by the U.S. Coast Guard to operate

a pilotage pool on the Great Lakes.

3. Part 403 is revised to read as follows:

PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM

Subpart A--General

Sec.

403.100 Applicability of system of accounts and reports.

403.105 Waivers from this system of accounts and reports.

403.110 General description of system of accounts and reports.

403.115 System of accounts coding.

403.120 Records.

403.125 Accounting entities.

403.130 Interpretation of accounts.

403.135 Address for reports and correspondence.

Subpart B--General Accounting Policies

403.200 Bases of allocation between pool and nonpool operations.

403.205 Accounting period.

403.210 Liability accruals.

403.215 Federal income tax accruals.

403.220 Delayed items.

403.225 Estimated items.

403.230 Improvements, additions and betterments.

403.235 Accounting for transactions in gross amounts.

403.240 Valuation of assets.

403.245 Establishment of reserves.

403.250 Depreciation and amortization.

403.255 Contingent assets and contingent liabilities.

403.260 Notes to financial statements.

Subpart C--Balance Sheet

403.300 General.

403.305 Balance sheet account groupings.

Subpart D--Profit and Loss Classifications

403.400 General.

Subpart E--Inter-Association Settlements

403.500 General.

Subpart F--Reporting Requirements

403.600 Financial reporting requirements.

403.605 Operating budgets.

Subpart G--Bonds

403.700 Fidelity bonds.

Subpart H--Source Forms

403.800 Uniform pilot's source form.

Appendix A to Part 403--Balance Sheet

Appendix B to Part 403--Profit and Loss

Appendix C to Part 403--Settlement Statement

Authority: 46 U.S.C. 2103, 9303, 9304; 49 CFR 1.46.

Subpart A--General

Sec. 403.100 Applicability of system of accounts and reports.

Each Association shall keep its books of account, records and

memoranda, and make reports to the Director in accordance with the

system of accounts prescribed in Appendices A, B and C of this part.

These financial records shall be prepared in accordance with the

guidelines of the Generally Accepted Accounting Principles (GAAP)

issued by the Financial Accounting Standards Board (FASB). These

guidelines are available by writing to the Director, Great Lakes

Pilotage at the address listed in Sec. 401.110(a)(9) of this chapter.

The Director reserves the right, however, to expand or otherwise modify

this system of accounts and reports in accordance with this rule.

Sec. 403.105 Waivers from the system of accounts and reports.

The Director may grant a waiver from any provision of the system of

accounts or reports prescribed in this part upon his or her own

initiative or upon written request from any Association, provided that

such a waiver is in the public interest. Each request for waiver must

expressly demonstrate that: existing peculiarities or unusual

circumstances warrant a departure from a required procedure or

technique prescribed herein; a specifically defined alternative

procedure or technique will result in a substantially equivalent or

more accurate portrayal of operating results or financial condition,

consistent with the principles embodied in this part; and the

application of such alternative procedure will maintain or improve

uniformity in substantive results between Associations.

Sec. 403.110 General description of system of accounts and reports.

(a) The Uniform System of Accounts required by this part permits

limited contraction or expansion to reflect the varying needs and

capabilities of different Associations without impairing basic

accounting comparability between Associations.

(b) Under the Uniform System of Accounts, both balance sheet and

profit and loss accounts and account groupings are designed, in

general, to embrace all activities, both pool and nonpool, in which the

Association engages. Except for transactions which are of sufficient

magnitude to distort current year operating results, prior year

transactions are recorded in the same accounts as current year

transactions of a like nature.

(c) In order to afford each Association flexibility to establish

ledger and subsidiary accounts to meet its individual needs, a minimum

number of accounts are prescribed in the Uniform System of Accounts.

Each Association, in maintaining its accounting records, must use the

prescribed chart of accounts. If additional accounts are necessary, the

new accounts must be consistent with the prescribed chart of accounts

classification.

Sec. 403.115 System of accounts coding.

A five digit control number is assigned for each balance sheet and

profit and loss account. Each account is numbered sequentially, within

blocks, designating basic balance sheet and profit and loss

classifications.

Sec. 403.120 Records.

(a) The general books of account and all books, records, and

supporting memoranda shall be maintained in such manner as to provide,

at any time, full information relating to any account. Supporting

memoranda must provide sufficient information to verify the nature and

character of each entry and its proper classification under the

prescribed Uniform System of Accounts.

(b) Each Association shall maintain all records necessary to show

the history of, or facts regarding, each accounting or financial

transaction. These records include but are not limited to, organization

tables and charts, internal accounting manuals and revisions, minutes

books, stock books, reports, cost distributions and other accounting

work sheets, correspondence, and memoranda.

(c) Each Association shall maintain all books, records and

memoranda in a manner that will readily permit audit and examination by

the Director or the Director's representatives at any time. All books,

records and memoranda shall be protected from loss, theft, or damage by

fire, flood or otherwise, and shall be retained for 10 years unless

otherwise authorized by the Director.

Sec. 403.125 Accounting entities.

Each Association shall be a separate accounting entity. However,

the records shall be maintained with sufficient particularity to

allocate items to each pilotage pool operation or nonpool operation and

to support the equitable proration of items which are common to two or

more pilotage pools.

Sec. 403.130 Interpretation of accounts.

Questions concerning accounts or reports required by this part

should be submitted to the Director.

Sec. 403.135 Address for reports and correspondence.

Reports, statements, and correspondence required by this part shall

be submitted to the Director at the address listed in

Sec. 401.110(a)(9) of this chapter.

Subpart B--General Accounting Policies

Sec. 403.200 Bases of allocation between pool and nonpool operations.

(a) Profit and loss items and assets common to two or more pools or

to nonpool operations shall be allocated equitably to each pool and to

nonpool operations.

(b) Changes in methods of allocating items between pools shall only

be made as of the beginning of each calendar year.

Sec. 403.205 Accounting period.

(a) Each Association subject to this part shall maintain its

accounts on a calendar year basis unless otherwise approved by the

Director.

(b) Each Association shall keep its financial accounts and records

on a full accrual basis. All transactions, as nearly as may reasonably

be ascertained, shall be reflected in the Association's books for the

accounting period, matching revenues earned with the costs attaching

thereto.

(c) Expenses incurred during the current accounting year which

demonstrably benefit operations to be performed during subsequent

accounting years to a significant extent shall be deferred and

amortized.

Sec. 403.210 Liability accruals.

Charges shall be made against income and accruals made for only

those liabilities for which a definitely demonstrable obligation

exists. Where a definite obligation has been incurred and the precise

liability has not been determined, an estimate may be made of the

currently existing liability on such actuarial or other bases as can be

justified from available information, provided that balances are

reevaluated and adjusted at least once each accounting year.

Sec. 403.215 Federal income tax accruals.

(a) All income taxes shall be accrued by proportionate charges or

credits to income each accounting period in such manner as will

allocate the charges for taxes, or the tax credits for losses, to the

periods in which the related profits or losses respectively, are

reflected.

(b) The accrual of income taxes for each accounting period requires

that each Association take up in its accounts an amount equivalent to

the actual tax liability applicable to the period as computed or

estimated on the basis of income tax laws and regulations then in

effect, except where the Association computes depreciation for tax

purposes at rates which differ from straight-line depreciation based

upon the estimated life of the asset. In all cases, regardless of the

amount of depreciation which is reported to Federal, State, and local

tax authorities for tax purposes, each Associations' financial reports

to the Director shall reflect adjustment of cost to reflect straight-

line depreciation.

Sec. 403.220 Delayed items.

(a) All items affecting net income, including income adjustments,

shall be recorded in appropriate profit and loss accounts and reflected

on the income statement and shall not be entered directly to retained

earnings.

(b) Items applicable to operations occurring prior to the current

accounting year which were not recorded in the books of account shall

be included in the same accounts which would have been charged or

credited if the items had not been delayed; except that if any delayed

item is relatively so large in amount that its inclusion in the

accounts for a single year would materially distort the affected

accounts, it shall be included in profit and loss classification 69000

``Miscellaneous.''

Sec. 403.225 Estimated items.

(a) If a transaction has occurred but the amount involved is not

precisely determinable, the amount shall be estimated, included in the

proper accounts and, where significant, noted for financial statement

purposes.

Sec. 403.230 Improvements, additions and betterments.

(a) As a general rule, expenditures for additions, betterments or

improvements, which increase the productive capacity of units of

property or equipment, shall be capitalized rather than charged

directly against income of the period in which incurred. Expenditures

of insignificant amount may be expensed as incurred rather than

capitalized, provided their inclusion as individual items or when

aggregated for like items, will not distort current operating results.

(b) The costs to be capitalized shall include all costs directly

incurred by reason of the acquisition of the capital item, including

transportation and installation costs.

Sec. 403.235 Accounting for transactions in gross amounts.

(a) All assets and liabilities shall be stated in balance sheet

presentations in gross values, provided that all depreciation,

provisions for uncollectible accounts, and other valuation reserves

shall be offset against the class of asset to which related.

(b) The cost of Treasury Certificates or other tax notes, which are

to be surrendered to the United States Treasury, rather than

independently sold, in satisfying Federal income tax liabilities, may

be offset against accrued Federal income tax liabilities provided both

the gross income tax liability and the value of the tax notes are

reflected on the face of the balance sheet. The offset of other

government securities or other assets against Federal income tax

liabilities is prohibited.

Sec. 403.240 Valuation of assets.

All assets shall be recorded at cost to the Association and shall

not be adjusted to reflect changes in market value except that items

which have been expensed from current inventories, and are recovered,

may be returned to inventory at estimated value with contra credit to

the expense accounts initially charged.

Sec. 403.245 Establishment of reserves.

(a) Provisions for reserves covering transactions or conditions

which do not diminish assets or result in demonstrable liability to the

Association, with corresponding diminution in stockholder equity during

the period over which accrued, shall not be charged against income but

shall be charged directly against balance sheet account 39100

``Unappropriated retained earnings.''

(b) All reserves shall be classified in balance sheet presentations

in terms of their inherent impact upon the Association's financial

condition as either valuation of assets (offsetting the assets to which

related), accrued liabilities, or appropriations of retained earnings.

Sec. 403.250 Depreciation and amortization.

(a) Assets of a type possessing prolonged service lives

significantly longer than one year, and which are generally repaired

and reused shall be written off against operations through periodic

depreciation or amortization charges from the date first placed in

regular service. Assets of a type which are recurrently expended and

replaced, rather than repaired and reused, shall not be depreciated or

amortized but shall be charged to expense as issued for use.

(b) Assets of a type which are subject to depreciation shall not be

classified as current assets but shall be carried in property and

equipment or other appropriate noncurrent asset account

classifications. Assets of a type which are recurrently expended and

replaced shall be classified as current assets.

(c) Depreciation shall be calculated and reported to the Director

using the straight-line depreciation method.

Sec. 403.255 Contingent assets and contingent liabilities.

Contingent assets and contingent liabilities shall not be included

in the body of the balance sheet but shall be explained in the

footnotes.

Sec. 403.260 Notes to financial statements.

(a) All matters which are not clearly identified in the body of the

financial statements of the Association, but which may materially

influence interpretations or conclusions that may reasonably be drawn

in regard to financial condition or earnings position of the

Association, shall be clearly and completely stated as footnotes to the

financial statements.

(b) Financial items which are not otherwise required to be reported

in the Association financial statements, but which may affect

ratemaking calculations, are required to be reported to the Director in

the notes to the financial statements. Any financial items that are not

reported to the Director will not be imputed by the Director during

ratemaking procedures contained in part 404 of this chapter.

Subpart C--Balance Sheet

Sec. 403.300 General.

(a) The balance sheet accounts are designed to show the financial

conditions of the Association as of a given date, reflecting the asset

and liability balances carried forward subsequent to the closing or

constructive closing of the Association's books of account.

(b) The balance sheet accounts prescribed in this system of

accounts are listed in appendix A of this part.

Sec. 403.305 Balance sheet account groupings.

(a) Current Assets. (1) Each Association shall include in this

classification all resources which may reasonably be expected to be

realized in cash or sold or consumed within one year, including but not

limited to:

(i) Unrestricted cash;

(ii) Assets that are readily convertible into cash; or

(iii) Assets held for current receivables and claims against others

to the extent settlement is reasonably assured.

(2) Securities of investment and special fund accounts at date of

acquisition need not be reclassified until disposition.

(3) Inventories of all materials, supplies, lubricating oils, motor

fuels, and expendable spares shall be physically verified at least

annually. Differences between the inventory account and the actual

physical inventory due to shortage, overage, shrinkage, etc. shall be

adjusted by charges or credits to the appropriate expense account.

(4) Items of general current asset characteristics which are not

expected to be realized or consumed within one year may be included in

this classification provided the noncurrent portion is not substantial

in amount and classification as a current item will not impair the

significance of working capital.

(b) Investments and special funds. (1) Each Association shall

include in this classification long-term investments in securities of

others exclusive of United States Government securities, including:

(i) Securities which are not readily marketable;

(ii) Funds set aside for specific purposes or involving

restrictions preventing current use;

(iii) Contract performance deposits and other securities

receivable; or

(iv) Funds not available for current operations.

(2) Investments in United States Government securities shall be

included in the current assets account group.

(3) Investments in securities of others shall be recorded at cost

exclusive of amounts paid for accrued interest or dividends.

(c) Property and equipment. (1) All investments of the Association

in land and units of tangible property and equipment shall be included

within this general classification.

(2) The property and equipment records shall be maintained so as to

identify property with each pool operation, with nonpool operations,

and joint pool or nonpool operations. Property used by two or more

pools or nonpool operations will be maintained to permit an equitable

proration of depreciation, amortization, and repair and maintenance

cost.

(3) Operating and nonoperating property and equipment shall be

accounted for separately as follows:

(i) Investment in property and equipment shall be recorded at total

cost including all expenditures applicable to acquisition, other costs

of a preliminary nature, costs incidental to placing in position and

conditioning for operation, and costs of additions, betterments,

improvements and modifications.

(ii) Upon disposal by sale, retirement, abandonment, dismantling,

or otherwise, of equipment depreciated on a unit basis, the Association

shall:

(A) Credit the account in which the property or equipment is

carried with the cost thereof;

(B) Charge the depreciation and maintenance reserves with the

related reserve balance applicable to the property disposed of;

(C) Charge the cash proceeds of the sale or the value of salvaged

material to the appropriate asset accounts; and

(D) When the sales price or salvage value less the cost of

dismantling differs from the cost of the property less accrued

depreciation and maintenance reserves, the difference shall be recorded

in the appropriate capital gain or loss accounts.

(iii) Upon disposal by sale, retirement, abandonment, dismantling,

or otherwise, of equipment depreciated on a group basis, the

Association shall credit the account in which the property or equipment

is carried, and charge the related depreciation reserve with the

original cost thereof, less any salvage realized, regardless of the age

of the item. No gain or loss is recognized on the retirement of

individual items of property or equipment depreciated on a group basis.

(iv) When property or equipment owned by the Association is applied

as part payment of the purchase price of new property or equipment, the

new property or equipment shall be recorded at its full purchase price,

provided an excessive allowance is not made for assets traded-in, in

lieu of price adjustments or discounts on the purchase price of assets

acquired. The difference between the depreciated cost of assets applied

as payment and the amount allowed therefor shall be treated as

retirement gain or loss.

(v) The Association shall maintain property and equipment records

setting forth the description of all property and equipment recorded in

balance sheet classification 12000-13000, Property and Equipment. With

respect to each unit or group of property or equipment, the record

shall show the description, location, date of acquisition, the original

cost, the cost of additions and betterments, the cost of parts retired,

rates of depreciation, residual values not subject to depreciation, and

the date of retirement or other disposition.

(d) Property and equipment depreciation and maintenance reserves.

(1) Each Association shall include in this balance sheet classification

the accumulation of all provisions for losses occurring in property or

equipment from use and obsolescence. For example, it shall include

accumulated depreciation established to record current and cumulative

cost expiration of assets being depreciated due to wear and tear from

use and the action of time and the elements which are not replaced by

current repairs; as well as losses in capacity for use or service

occasioned by obsolescence, supersession, discoveries, change in

popular demand, or the requirement of public authority. Residual values

and rates for accrual of depreciation and maintenance shall be

calculated using the straight-line depreciation method.

(2) Depreciation shall be calculated from the date on which a

building, structure or unit of property is placed in service, and shall

cease on the date such property is disposed of by sale, retirement,

abandonment, or dismantling, or when the difference between the cost

and residual value shall have been charged to expense.

(3) Land owned or held in perpetuity; expenditures on uncompleted

units of property and equipment during construction or manufacture; and

items classified as current assets are not subject to depreciation.

(e) Other assets. (1) Each Association shall include in this

classification all debit balances in general clearing accounts,

including charges held in suspense pending receipt of information

necessary for final disposition, prepayments chargeable against

operations over a period of years, capitalized expenditures of an

organizational or developmental character, property acquisition

adjustments, and the cost of patents, copyrights, and miscellaneous

intangibles.

(2) Deferred charges having a definite time incidence shall be

amortized over the periods to which they apply.

(f) Current liabilities. (1) Each Association shall include in this

classification all debts or obligations for which liquidation or

payment is reasonably expected to require the use, within one year, of

existing resources of a type which are properly classifiable as current

assets, or the creation of other current liabilities. Current

liabilities shall include payables incurred in the acquisition of

materials, collections received in advance of performance of services,

debts accruing from expenses incurred from operations, and other

liabilities that are regularly and ordinarily subject to current

liquidation.

(2) Lease costs shall be recorded in accordance with the guidelines

of the Financial Accounting Standards Board (FASB) publication number

13, and subsequent pronouncements on this subject by the FASB. Lease

costs payable on demand within one year, including the portion of long-

term debt due within one year of the balance sheet date, shall be

recorded in balance sheet account 20100.

(g) Noncurrent liabilities. (1) Each Association shall include in

this classification all debts or obligations for which liquidation or

payment is not reasonably expected to require the use, within one year,

of existing resources of a type which are properly classifiable as

current assets, or the creation of current liabilities. Noncurrent

liabilities include mortgages, bonds and debentures maturing more than

one year from the date of the balance sheet, or other obligations not

payable within 12 months. This classification shall reflect the

principal amount or par value of debt securities issued or other long-

term debt assumed by the Association. Discount and expenses on long-

term debt shall be recorded in the Deferred Charges balance sheet

group. Premiums on long-term debt shall be recorded in the Deferred

Credits balance sheet account group.

(2) In cases where debt coming due within 12 months is to be

refunded, or where payment is to be made from assets of a type not

properly classifiable as current, the amount payable shall not be

removed from this classification.

(3) Gains or losses on liquidation of bonds, debentures, or other

debt securities of the Association shall be entered in profit and loss

classification 47000 ``Other Income,'' or 69000 ``Miscellaneous.''

Gains and losses or adjustments to liabilities applicable to expenses

incurred in operations shall be entered in the expense accounts

initially charged.

(h) Deferred credits. (1) Each Association shall include in this

classification all credit balances in general clearing accounts,

including credits held in suspense pending receipt of information

necessary for final disposition and premiums on long-term debt

securities of the Association.

(2) Deferred credits having a definite time incidence shall be

amortized over the periods to which they apply.

(i) Stockholder's equity (Capital). (1) Each Association shall

include in this classification all items which record the aggregate

interest of Association members in assets owned by the Association.

(2) The general classification ``Stockholder's Equity (Capital)''

shall be subdivided between that portion representing direct

contributions of the members (Paid-In Capital) and that portion

representing income retained from operations of the Association

(Retained Earnings).

(3) The ``Paid-In Capital'' classification shall be subdivided

between membership shares and ``Other Paid-In Capital.'' Membership

shares shall include par or stated value of shares issued or the cash

value of the consideration actually received, in cases of shares having

no par or stated value. ``Other Paid-In Capital,'' shall include the

excess (premium) or deficiency (discount) of each value of the

consideration received from the issue of any shares having par or

stated value, donations by stockholders, adjustments of capital

resulting from reorganization or recapitalization, and gains or losses

from reacquisition and resale or retirement of the Association's

shares.

(4) The ``Retained Earnings'' balance sheet classification shall

reflect the balance of net profits, income, and gains of the

Association from the date of formation. In cases where a deficit has

been absorbed by a reduction of ``Other Paid-In Capital'' as a result

of a restatement of shares or retained earnings, a new Retained

Earnings account shall be established, dated to show that it runs from

the effective date of the restatement. This date shall be disclosed in

financial statements until such time as the effective date no longer

possesses special significance.

Subpart D--Profit and Loss Classifications

Sec. 403.400 General.

(a) Each Association shall keep profit and loss accounts in

accordance with the Chart of Profit and Loss Accounts in appendix B to

this part. The profit and loss accounts are designed to reflect,

through natural groupings, the elements entering into income or loss

accruing to the proprietary interests during each accounting period.

(b) The system of accounts in appendix B to this part provides for

the coordinated grouping of all revenues and expenses in terms of both

major objectives and functional activities.

Subpart E--Inter-Association Settlements

Sec. 403.500 General.

Each Association that shares revenues and expenses with the

Canadian Great Lakes Pilotage Authority (GLPA) shall submit settlement

statements completed in the format shown in Appendix C to this part.

The Memorandum of Arrangements (MOA) between the United States and

Canada provides that settlement of accounts between United States pools

and Canadian pools shall be effected on an interim basis as of the end

of each month with an annual settlement as of December 31 of each year.

Payments on account shall be made by the 15th of the following month on

a net balance basis.

Subpart F--Reporting requirements

Sec. 403.600 Financial reporting requirements.

(a) Each Association shall file semiannually with the Director the

following financial statements:

(1) Balance Sheet.

(2) Profit and Loss Statement.

(b) The financial statements shall list each active account,

including subsidiary accounts, in the Uniform System of Accounts in

Appendices A and B of this part.

(c) The financial statements shall be prepared for the six months

ending June 30, and December 31, unless otherwise authorized in writing

by the Director. An officer of the Association shall certify the

accuracy of the financial statements.

(d) Each Association shall furnish the Director a copy of all

settlement statements, including monthly settlement statements.

(e) The financial statements, together with any other required

statistical data, shall be submitted to the Director within 30 days of

the end of the reporting period, unless otherwise authorized by the

Director.

(f) Each Association shall furnish the Director, by April 1 of each

year, an unqualified long form audit report for the preceding year

prepared by an Independent Certified Public Accountant. The audit shall

conform to the Generally Accepted Auditing Standards promulgated by the

American Institute of Certified Public Accountants.

(g) Each Association shall furnish the Director with monthly

revenue and traffic reports listing data on a monthly and year-to-date

basis.

Sec. 403.605 Operating budgets.

(a) Each Association shall prepare and submit to the Director, by

the 31st day of January each year, an estimated operating budget for

the forthcoming operating season.

(b) Estimates of revenue shall be itemized to reflect the principal

sources of income, with pilotage income segregated from other classes

of income.

(c) Estimates of expenses shall be on a calendar year basis, with

adequate explanation of any unusual or nonrecurring items.

(d) Those items of expenses includable in Inter-Association

settlement statements shall be segregated and supported by required

detail.

Subpart G--Bonds

Sec. 403.700 Fidelity bonds.

(a) Each Association shall maintain a fidelity bond to indemnify

against loss of money or other property through fraudulent or dishonest

acts by employees.

(b) The Officers of each Association shall annually fix the amount

and character of fidelity bonds required of those persons handling or

having custody of funds or other liquid assets.

(c) The Director shall be advised of the amount and period of

coverage.

Subpart H--Source Forms

Sec. 403.800 Uniform pilot's source form.

(a) The ``Pilot's Source Form-Great Lakes Pilotage'' shall be used

by all Great Lakes pilotage districts. This form shall be issued to

pilots by authorized United States pilotage pools and changes shall not

be made in the format thereof unless authorized by the Director.

(b) Pilots shall complete forms in detail as soon as possible after

completion of assignment and return the entire set to the dispatching

office, together with adequate support for reimbursable travel expense.

(c) Upon receipt by the Association, the forms shall be completed

by insertion of rates and charges as specified in part 401 of this

chapter.

(d) Copies of the form shall be distributed as follows:

(i) Original to accompany invoice;

(ii) First copy to Director for statistical purposes;

(iii) Second copy to billing office for accounting record;

(iv) Third copy to pilot's own Association for pilot's personal

record;

(v) Fourth copy to corresponding Canadian Association or agency for

office use.

Associations shall account by number for all pilot source forms

issued.

Appendix A to Part 403--Balance Sheet

Chart of balance sheet accounts.

Current Assets

Account No. and Title

10100 Cash

10130 Cash--Payroll

10140 Cash--Special Deposits

10160 Petty Cash

10170 Cash--Temporary Investments

10200 Accounts Receivable--Pilotage

10210 Accounts Receivable--Pilot Boat

10220 Accounts Receivable--Other

10240 Allowance for Bad Debts

10300 Notes Receivable

10310 Notes Receivable from Affiliates

10320 Interest Receivable

10410 Prepaid Insurance

10420 Prepaid Fuel

10500 Advances to Pilots

10530 Advances to Employees

10550 Advances to Affiliated Companies

10560 Other Prepaid and Advances

10600 Materials and Supplies

10700 Deferred Federal Income Tax

10800 Other Current Assets

Investments and Special Funds

11000 Investment in Securities

11100 Notes Receivable

11200 Advance and Investment in Affiliated Companies

11300 Special Funds

11400 Other Long-Term Investments

Property and Equipment

12000 Land

12100 Buildings and Structures

12150 Accumulated Depreciation--Buildings

12200 Machinery and Equipment

12250 Accumulated Depreciation--Machinery and Equipment

12300 Furniture and Fixtures

12350 Accumulated Depreciation--Furniture and Fixtures

12400 Automobiles

12450 Accumulated Depreciation--Automobiles

12500 Computers and Software

12550 Accumulated Depreciation--Computer and Software

13000 Capital Leases--Pilot Boats

13050 Accumulated Depreciation--Pilot Boats

13100 Leased Automobiles

13150 Accumulated Depreciation--Leased Automobiles

13500 Leasehold Improvements

13550 Accumulated Depreciation--Leasehold Improvements

Deferred Charges

14000 Long-Term Prepayments

14300 Deferred Federal Income Tax

15000 Other Assets

Current Liabilities

20000 Accounts Payable--Trade

20100 Notes Payable

20120 Current Portion--Capital Lease Obligations

20130 Current Portion--Other Long-Term Debts

20140 Deferred Income Tax

20200 Interest

20300 Due Pilots

20400 Due Employees

21000 Federal Income Tax

21100 State Income Tax

21200 City Income Tax

21300 FICA Tax Payable

21400 Federal Unemployment Tax

21500 State Unemployment Tax

22000 Accrued Payroll--Pilots

23000 Accrued Payroll--Employees

24000 Accrued Interest

24100 Accrued Taxes

24200 Accrued Vacation

24210 Sick Leave

24300 Accrued Pension

24400 Accrued Workmen's Compensation

24500 Advances from Affiliated Companies

24600 Dividends

24700 Other Current Liabilities

Non-Current Liabilities

26000 Long-Term Debt

26100 Capital Lease Obligations--Pilot Boats

26400 Capital Lease Obligations--Automobiles

26500 Capital Lease Obligations--Other

26600 Pension Liabilities

26700 Advances from Affiliated Companies

26800 Other Non-Current Liabilities

Deferred Credits

27000 Deferred Income Tax Liabilities

27100 Deferred Gain on Sale of Assets

27200 Other Deferred Credits

Stockholders' Equity (Capital)

30000 Pilots' Capital (Partnership)

31000 Common Stock

32000 Preferred Stock

33000 Paid-in Capital in Excess of Par-Common Stock

34000 Paid-in Capital in Excess of Par-Preferred Stock

36000 Treasury Stock

38000 Prior Year Adjustments

39000 Appropriations of Retained Earnings

39100 Unappropriated Retained Earnings

Description and classification of balance sheet accounts.

(a) Current assets.

(1) 10100 Cash.

Record here increases and decreases in cash (deposits and

payments of funds) which are available for general operating

business activities.

(2) 10130 Cash--Payroll.

Record here increases and decreases in cash (deposits and

payments of funds) which are assigned for payroll transactions.

(3) 10140 Cash--Special Deposits.

Record here cash deposits not of a current nature and restricted

as to general availability.

(4) 10160 Petty Cash Fund.

Record here all cash transactions made out of the petty cash

fund. This fund is established for a fixed amount and periodically

reimbursed for the exact amount necessary to bring it back to the

fixed amount. The fund is used for making small expenditures that

are most conveniently paid in cash, such as postage stamps, shipping

charges, or minor purchases of supplies.

(5) 10170 Cash--Temporary Investments.

Record here the cost of marketable securities and other short-

term negotiable instruments acquired for the purpose of temporarily

investing cash. This account will be charged or credited for

discount or premium to be amortized to profit and loss account 45500

Interest Income.

(6) 10200 Accounts Receivable--Pilotage.

Record here all amounts billed for pilotage services.

(7) 10210 Accounts Receivable--Pilot Boat.

Record here all receivables billed for pilot boat services.

(8) 10220 Accounts Receivable--Other.

Record here all receivables resulting from revenue producing

activities not recorded in accounts 10200 and 10210.

(9) 10240 Allowance for Bad Debts.

Record here estimated losses from uncollectible accounts. An

annual review of the account balance must be made to determine the

amount of uncollectible receivables and the related bad debt expense

at year end.

(10) 10300 Notes Receivable.

Record here amounts due from others on demand or at a future

date not to exceed 12 months. This amount will be in the form of

promissory notes recorded at their current value.

(11) 10310 Notes Receivable from Affiliates.

Record here amounts due from affiliated companies on demand or

at a future date not to exceed 12 months at their current value.

(12) 10320 Interest Receivable.

Record here interest income earned but not yet received, and due

within one year.

(13) 10410 Prepaid Insurance.

Record here amounts paid in advance for insurance premiums that

will be expensed within one year.

(14) 10420 Prepaid Fuel.

Record here amounts paid in advance for fuel to be used and

expensed within one year.

(15) 10500 Advances to Pilots.

Record here amounts paid in advance to pilots, such as wages or

travel advances.

(16) 10530 Advances to Employees.

Record here amounts paid in advance to Employees, such as wages

and travel advances.

(17) 10550 Advances to Affiliated Companies.

Record here short-term advances paid to Affiliated Companies.

(18) 10560 Other Prepaid and Advances.

Record here other prepaid and short-term advances paid to

entities not provided for in other accounts.

(19) 10600 Materials and Supplies.

Record here the cost of materials and supplies on hand at the

balance sheet date, such as motor oil, stationery, and office

supplies.

(20) 10700 Deferred Federal Income Tax.

Record here the difference between actual income tax payable and

income tax expenses for the accounting period. This deferred amount

is due to timing differences.

(21) 10800 Other Current Assets.

Record here other current assets not provided for in other

balance sheet accounts.

(b) Investments and special funds.

(1) 11000 Investment in Securities.

Record here long-term investments in marketable securities, such

as shares of stock or Government securities, at the lower of cost or

market value.

(2) 11100 Notes Receivable.

Record here long-term notes receivable not provided for in

accounts 10300 and 10310.

(3) 11200 Advance and Investment in Affiliated Companies.

Record here long-term investments in, or advances to, affiliated

companies at cost.

(4) 11300 Special Funds.

Record here special funds not of a current nature and restricted

as to general availability. Include items such as cash and

securities deposited with courts of law, employee funds for the

purchase of membership shares, and equipment purchase funds.

(5) 11400 Other Long-Term Investments.

Record here all other long-term investments not recorded in

other investment accounts.

(c) Property and equipment.

(1) 12000 Land.

Record here the total cost of all land owned by the Association.

The cost of land includes: (1) Purchase price; (2) all closing costs

and costs of obtaining clear title, such as commissions, legal fees,

escrow fees, title investigations, and title insurance; (3) all

costs of surveying, clearing, draining, or filling to make the

property suitable for the desired use; and (4) cost of land

improvements that have an indefinite economic life.

(2) 12100 Buildings and Structures.

Record here the total cost of all buildings and structures owned

by the Association. The cost includes the original cost and cost of

any capital improvements incurred after the acquisition date. The

account includes fixtures and equipment built into the structure or

permanently affixed thereto, such as plumbing, heating, and lighting

fixtures.

(3) 12150 Accumulated Depreciation--Buildings.

Record here the accumulated amount of expenses for the portion

of the acquisition cost of buildings which has been used up through

the depreciation process.

(4) 12200 Machinery and Equipment.

Record here the total acquisition costs of all machinery and

equipment, including the necessary costs associated with acquisition

and preparation for use.

(5) 12250 Accumulated Depreciation--Machinery and Equipment.

Record here the accumulated amount of expenses for the portion

of the acquisition costs of machinery and equipment which has been

used up through the depreciation process.

(6) 12300 Furniture and Fixtures.

Record here the total acquisition costs of all furniture and

fixtures, including the necessary costs associated with acquisition

and preparation for use.

(7) 12350 Accumulated Depreciation--Furniture and Fixtures.

Record here the accumulated amount of expenses for the portion

of the acquisition costs of furniture and fixtures which has been

used up through the depreciation process.

(8) 12400 Automobiles.

Record here the total acquisition costs of all automobiles,

including the necessary costs associated with acquisition and

preparation for use.

(9) 12450 Accumulated Depreciation--Automobiles.

Record here the accumulated amount of expenses for the portion

of the acquisition costs of automobiles which has been used up

through the process of depreciation.

(10) 12500 Computers and Software.

Record here the total acquisition costs of all computers and

software, including the necessary costs associated with acquisition

and preparation for use.

(11) 12550 Accumulated Depreciation--Computers and Software.

Record here the accumulated amount of expenses for the portion

of the acquisition costs of computers and software, which has been

used up through the process of depreciation.

(12) 13000 Capital Leases--Pilot Boats.

Record here capital lease assets for pilot boats under capital

lease options.

(13) 13050 Accumulated Depreciation--Pilot Boats.

Record here the accumulated amount of expenses for the portion

of capital leases for pilot boats which has expired for

depreciation.

(14) 13100 Leased Automobiles.

Record here the capital lease assets for automobiles leased

under capital lease options.

(15) 13150 Accumulated Depreciation--Leased Automobiles.

Record here the accumulated amount of expenses for the portion

of capital leases for automobiles which has expired for

depreciation.

(16) 13500 Leasehold Improvements.

Record here total cost to the Association incurred in connection

with modification, conversion, or other improvements to leased

property.

(17) 13550 Accumulated Depreciation--Leasehold Improvements.

Record here the accumulated amount of expenses for the portion

of the acquisition costs of Leasehold Improvements which has been

used up through the process of depreciation.

(d) Deferred charges.

(1) 14000 Long-Term Prepayments.

Record here prepayments of obligations applicable to periods

extending beyond one year, such as payments on leased property and

equipment, and advances for rents, rights or other privileges.

(2) 14300 Deferred Federal Income Tax.

Record here the difference between actual income taxes payable

and income tax expenses for the accounting period. This deferred

amount is due to timing differences. Thus this expense originates in

one accounting period and reverses in future periods. Most timing

differences reduce income taxes that would otherwise be payable

currently (i.e., when accounting income is smaller than taxable

income), but few timing differences increase the amount of income

taxes payable during the current accounting period.

(3) 15000 Other Assets.

Record here assets which were not provided for in other

accounts.

(e) Current liabilities.

(1) 20000 Accounts Payable--Trade.

Record here all accounts payable incurred in the normal course

of business, which are due within one year.

(2) 20100 Notes Payable.

Record here the face value of all notes, drafts, or other

similar evidence of indebtedness, payable on demand or within one

year including the long-term debt due within one year of the balance

sheet date.

(3) 20120 Current Portion--Capital Lease Obligations.

Record here Capital lease obligations due within one year.

(4) 20130 Current Portion--Other Long-Term Debts.

Record here the current portion of other long-term liabilities

due within one year.

(5) 20140 Deferred Income Tax--Current Portion.

Record here accruals for currently payable federal income taxes.

(6) 20200 Interest Payable.

Record here interest payable that is due within one year.

(7) 20300 Due Pilots.

Record here any liabilities due pilots to be paid within one

year.

(8) 20400 Due Employees.

Record here any amounts due employees to be paid within one

year.

(9) 21000 Federal Income Tax.

Record here federal income tax withheld from employees wages and

payable at the balance sheet date.

(10) 21100 State Income Tax.

Record here State income tax withheld from employees wages and

payable at the balance sheet date.

(11) 21200 City Income Tax.

Record here city income tax withheld from employees wages and

payable at the balance sheet date.

(12) 21300 FICA Tax Payable.

Record here social security taxes withheld from employees wages

and accrued, payable at the balance sheet date.

(13) 21400 Federal Unemployment Tax.

Record here Federal unemployment tax (FUTA) accrued and payable

at the balance sheet date.

(14) 21500 State Unemployment Tax.

Record here State unemployment tax (SUTA) accrued and payable at

the balance sheet date.

(15) 22000 Accrued Payroll--Pilots.

Record here the accrued liabilities incurred for pilots payroll,

but not yet paid at the balance sheet date.

(16) 23000 Accrued Payroll--Employees.

Record here accrued liabilities incurred for employees payroll,

but not yet paid at the balance sheet date.

(17) 24000 Accrued Interest.

Record here accrued interest liabilities incurred but not yet

paid at the balance sheet date.

(18) 24100 Accrued Taxes.

Record here accrued tax liabilities incurred but not yet paid at

the balance sheet date.

(19) 24200 Accrued Vacation.

Record here accrued vacation liabilities incurred but not yet

paid at the balance sheet date.

(20) 24210 Accrued Sick Leave.

Record here accrued sick leave liabilities incurred but not yet

paid at the balance sheet date.

(21) 24300 Accrued Pension.

Record here accrued pension plan liabilities incurred but not

yet paid at the balance sheet date.

(22) 24400 Accrued Workmen's Compensation.

Record here accrued workmen's compensation liabilities incurred

but not yet paid at the balance sheet date.

(23) 24500 Advances from Affiliated Companies.

Record here loans, advances, and other obligations received from

entities affiliated with the Association.

(24) 24600 Dividends.

Record here dividends declared by the Association's Board of

Directors, but not yet paid.

(25) 24700 Other Current Liabilities.

Record here all other current liabilities which are not provided

for in other accounts and are due within one year.

(f) Non-current liabilities.

(1) 26000 Long-Term Debt.

Record here the face value or principal amount of debt

securities issued or assumed by the Association which have not been

retired or cancelled and are not payable within 12 months of the

balance sheet date.

(2) 26100 Capital Lease Obligations--Pilot Boats.

Record here long-term obligations from Pilot Boat Capital leases

which are not payable within 12 months of the balance sheet date.

(3) 26400 Capital Lease Obligations--Automobiles.

Record here long-term obligations from automobile lease

agreements not payable within 12 months.

(4) 26500 Capital Lease Obligations--Others.

Record here long-term obligations from other capital leases not

provided for in accounts 26100 and 26400.

(5) 26600 Pension Liabilities.

Record here the Association's liabilities under the employee

pension plan.

(6) 26700 Advances from Affiliated Companies.

Record here the net amount due affiliated companies for notes,

loans and advances.

(7) 26800 Other Non-Current Liabilities.

Record here non-current liabilities not provided for in other

accounts.

(8) 27000 Deferred Income Tax Liabilities.

Record here deferred income tax liabilities (i.e. the difference

between actual income taxes payable and income tax expenses for the

accounting period) not payable within 12 months.

(9) 27100 Deferred Gain On Sale of Assets.

Record here the total gain from sales of assets which will be

amortized over a period of more than 12 months from the balance

sheet date.

(10) 27200 Other Deferred Credits.

Record here credits not provided for elsewhere.

(g) Capital and stockholders' equity.

(1) 30000 Pilots' Capital (Partnership).

Record here the Association's capital contributions made by each

individual partner (pilot). This is an equity account similar to

shareholders' equity in a corporation. Accounting for partnerships

should comply with the legal requirements as set forth by the

Uniform Partnership Act (UPA) (e.g., liquidation payments to

partnership creditors before any distribution to partners) or other

applicable State and Federal laws and regulations, as well as

complying with partnership agreements.

(2) 31000 Common Stock.

Record here the par or stated value of common stock purchased by

stockholders (registered pilots only). Common stock represents the

residual ownership interest in the Association. In addition to

bearing the greatest risk it also carries voting rights, dividend

rights, preemptive rights to purchase stock issued by the

corporation and rights to share in the distribution of assets if the

corporation is liquidated.

(3) 32000 Preferred Stock.

Record here the par or stated value of preferred stock purchased

by stockholders (registered pilots only). Preferred stock carries

certain preferences or priorities not found in common stock, such as

to dividends at a stated percentage of par or stated value, and

assets distribution in the event of liquidation. Shareholders of the

corporation may redeem shares of preferred stock at their option, at

a specific price per share.

(4) 33000 Paid-in Capital in Excess of Par-Common Stock.

Record here paid-in capital in excess of par or stated value of

common stock.

(5) 34000 Paid-in Capital in Excess of Par-Preferred Stock.

Record here paid-in capital in excess of par or stated value of

preferred stock.

(6) 36000 Treasury Stock.

Record here capital stock which has been legally issued, fully

paid for, and subsequently acquired by the Association but not

formally retired.

(7) 38000 Prior Year Adjustments.

Record here all adjustments relating to prior year's operations

that have an effect on the current year's financial statements.

(8) 39000 Appropriations of Retained Earnings.

Record here retained earnings restricted by the Association's

Board of Directors for contingencies and other special purposes.

(9) 39100 Unappropriated Retained Earnings.

Record here net income or loss from operations of the

Association, dividends declared, and any other year-end adjustments.

Appendix B to Part 403--Profit and Loss

Chart of profit and loss accounts.

Revenues

Account No. and Title

40100 Pilotage--Designated Waters

40200 Pilotage--Undesignated Waters

40500 Docking/Undocking

40600 Movage

41000 Detention

41200 Cancellation

41300 Delay

42000 Winter Navigation

43000 Dispatching

44000 Pilot Boat Income

45000 Gain(Loss) on Sale of Assets

46000 Interest Income

47000 Other Income

Operating expenses

50100 Registered Pilots' Salaries

50110 Temporarily Registered Pilots' Salaries

50120 Applicant Pilots' Salaries

50200 Pilot Boat Salaries

50500 Dispatching Salaries

51300 Payroll Taxes

51310 FICA

51320 Federal Unemployment Tax

51330 State Unemployment Tax

51400 Retirement Plan Contribution

51500 Workmen's Compensation

50600 Insurance

52150 Depreciation--Buildings

52250 Depreciation--Machinery and Equipment

52450 Depreciation--Automobiles

53050 Depreciation--Pilot Boats

53550 Depreciation--Leasehold Improvements

54000 Travel--Pilots

55000 Fuel

55100 Repairs and Maintenance

56000 Winter Navigation

56100 Canadian Pilot Earnings

59000 Other Operating Expenses

General and Administrative Expenses

60100 Salaries and Wages--Employees

60200 Salaries and Wages--Officers

60300 Payroll Taxes

60310 FICA

60320 Federal Unemployment Tax

60330 State Unemployment Tax

60400 Retirement Plan Contributions

60500 Workmen's Compensation

60600 Insurance

61000 Legal Fees

61100 Accounting and Auditing Fees

61200 Other Professional Fees

62350 Depreciation--Furniture and Fixtures

62550 Depreciation--Computers and Software

63000 Office Rent

63100 Rent

63200 Interest

63300 Donations

63400 Bad Debts

63500 Meetings

64000 Repairs and Maintenance

64100 Medical Insurance

64200 Licenses and Dues

65000 Supplies

65100 Postage

65200 Telephone

65300 Travel

65400 Utilities

65500 Bank Service charges

69000 Miscellaneous

Appendix C to Part 403--Settlement Statement

(a) Monthly settlement statements of the following form are to

be submitted by each Association sharing revenues and expenses with

the Canadian Great Lakes Pilotage Authority:

Settlement Statement

Revenue

[Dollars]

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

Current

month Yearto-date

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

40100-42000Pilotage revenue: ........... ...........

United States pilots...................... ........... ...........

Canadian pilots........................... ........... ...........

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

Total................................... ........... ...........

Operating Expenses

54000Subsistence and travel-pilots............ ........... ...........

60100Salaries and wages-employees............. ........... ...........

63000Rental-office space and equipment........ ........... ...........

65400Heat, light, and power................... ........... ...........

65000Office stationery and supplies........... ........... ...........

64000Repairs and Maintenance.................. ........... ...........

65300Administrative travel.................... ........... ...........

65200Telephone, telegraph, and teletype....... ........... ...........

60600Insurance and bonding.................... ........... ...........

65100Postage and express...................... ........... ...........

65500Bank service charges..................... ........... ...........

69000Other.................................... ........... ...........

63400Bad debt................................. ........... ...........

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

Total................................... ........... ...........

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

Net operating income.................. ........... ...........

Less: Outstanding accounts receivable. ........... ...........

Amount available for distribution..... ........... ...........

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

[Dollars]

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

U.S. Canada Total

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

Total pilotage revenue billed.... ........... ........... ...........

Respective share of amount

available....................... ........... ........... ...........

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

Statement of Account as at------(End of Month)

[Dollars]

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

Canada

U.S. share share Total share

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

Share to date.................... ........... ........... ...........

Boat and taxi charges paid....... ........... ........... ...........

Payments made to................. ........... ........... ...........

(End of month)

Distribution this period......... ........... ........... ...........

Undistributed balance............ ........... ........... ...........

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

(b) Under the Memorandum of Arrangements, the pilotage pool

having the larger amount of cash available for distribution will

make payment of the excess to the United States or Canadian

counterpart pool in the currency of the nationality of the paying

pilotage pool. The following statement will be submitted by the

Associations making net balance payments.

Amount available for distribution--$______

Less applied credit______ (amount) at ____ (rate) ____

Remaining balance ______

(c) Associations making net balance payment will make the

following accounting entry:

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

Account No. Description of Account Debit Credit

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

24500........... Advances from Affiliated ........... ...........

Companies.

10220........... Accounts Receivable--Other.. ........... ...........

10100........... Cash........................ ........... ...........

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

To record settlement of account with Canadian pool for month

ended ________ (month) ____ (day) ____ ____ (year).

(d) Associations receiving net balance payment will make the

following accounting entry:

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

Account No. Description of Account Debit Credit

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

10100........... Cash........................ ........... ...........

24500........... Advances from Affiliated ........... ...........

Companies.

10220........... Accounts Receivable--Other.. ........... ...........

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

To record receipt of settlement from Canadian pool for month

ended ________ (month) ____ (day) ____ ____ (year).

Journal Entries

(a) Accounts 40100 through 42000, Pilotage Revenue, are to be

supported by copies of invoices prepared by issuing offices.

(b) Account 54000, Subsistence and Travel-Pilots, are to be

supported by listings giving the pilot's name and amount. The travel

expenses recorded in this account are only those provided for under

paragraph 4(c) of the United States-Canada MOA and which are

recoverable from operators of vessels.

(c) Account 60100, Salaries and Wages-Employees, are to be

supported by lists showing employees' name, title and salary. Only

employees directly engaged in dispatching and accounting activities

are included.

(d) Account 63000, Office Rent, are to include the agreed amount

of rental for office space and necessary equipment.

(e) Account 65200, Telephone, are to be supported by listing of

supplier and amounts.

(f) Accounts 65000, 64000, 65300, 60600, 65100, 65500, 69000,

and 63400 do not require supporting data.

(g) Journal entries are to be made in corresponding accounts to

record transactions from settlement statements, to record

Association's share of revenue and expenses transferred from other

Associations. The debits and credits will be determined by

multiplying the current month totals shown on the settlement

statement by the Association's pro-rata share and then in turn

multiplying the result by the exchange rate.

4. Part 404 is revised to read as follows:

PART 404--GREAT LAKES PILOTAGE RATEMAKING

Sec.

404.1 General ratemaking provisions.

404.5 Guidelines for the recognition of expenses.

404.10 Ratemaking procedures and guidelines.

Appendix A to Part 404--Ratemaking Methology

Appendix B to Part 404--Ratemaking Definitions and Formulas

Authority: 46 U.S.C. 2103, 9303, 9304; 49 CFR 1.46.

Sec. 404.1 General ratemaking provisions.

(a) The purpose of this part is to provide guidelines and

procedures for Great Lakes pilotage ratemaking. Included in this

part are explanations of the steps followed in developing a pilotage

rate adjustment, the analysis used, and the guidelines followed in

arriving at the pilotage rates contained in part 401 of this

chapter.

(b) The Director determines the timing for reviews of Great

Lakes pilotage rates. These reviews are conducted at his or her

discretion and are intended to determine whether existing Great

Lakes pilotage rates are fair and reasonable, or should be adjusted.

An interested party or parties may also petition the Director for a

review at any time. The petition must present a reasonable basis for

concluding that a review may be warranted. If the Director

determines, from the information contained in the petition, that the

existing rates may no longer be reasonable, a full review of the

pilotage rates will be conducted. If the full review shows that

pilotage rates are within a reasonable range of their target, no

adjustment to the rates will be initiated.

Sec. 404.5 Guidelines for the recognition of expenses.

(a) The following is a listing of the principal guidelines

followed by the Director when determining whether expenses will be

recognized in the ratemaking process:

(1) Each expense item included in the rate base is evaluated to

determine if it is necessary for the provision of pilotage service,

and if so, what dollar amount is reasonable for that expense item.

Each Association is responsible for providing the Director with

sufficient information to show the reasonableness of all expense

items. The Director will give the Association the opportunity to

defend any expenses which are questioned. However, subject to the

terms and conditions contained in other provisions of this part,

expense items which the Director determines are not reasonable and

necessary for the provision of pilotage services will not be

recognized for ratemaking purposes.

(2) In determining reasonableness, each expense item is measured

against one or more of the following:

(i) Comparable or similar expenses paid by others in the

maritime industry,

(ii) Comparable or similar expenses paid by other industries, or

(iii) U.S. Internal Revenue Service guidelines.

(3) Lease costs for both operating and capital leases are

recognized for ratemaking purposes to the extent that they conform

to market rates. In the absence of a comparable market, lease costs

are recognized for ratemaking purposes to the extent that they

conform to depreciation plus an allowance for return on investment

(computed as if the asset had been purchased with equity capital).

Lease costs which exceed these standards are not recognized for

ratemaking purposes.

(4) For each Association, a market-equivalent return-on-

investment is allowed for the net capital invested in the

Association by its members. Assets subject to return on investment

provisions are subject to reasonableness provisions. If an asset or

other investment is not necessary for the provision of pilotage

services, the return element is not allowed for ratemaking purposes.

(5) For ratemaking purposes, the revenues and expenses generated

from Association transactions which are not directly related to the

provision of pilotage services are included in ratemaking

calculations as long as the revenues exceed the expenses from these

transactions. For non-pilotage transactions which result in a net

financial loss for the Association, the amount of the loss is not

recognized for ratemaking purposes. The Director reviews non-

pilotage activities to determine if any adversely impact the

provision of pilotage service, and may make ratemaking adjustments

or take other steps to ensure the provision of pilotage service.

(6) Medical, pension, and other benefits paid to pilots, or for

the benefit of pilots, by the Association are treated as pilot

compensation. The amount recognized for each of these benefits is

the cost of these benefits in the most recent union contract for

first mates on Great Lakes vessels. Any expenses in excess of this

amount are not recognized for ratemaking purposes.

(7) Expense items which are not reported to the Director by the

Association are not considered by the Director in ratemaking

calculations.

(8) Expenses are appropriate and allowable if they are

reasonable, and directly related to pilotage. Each Association must

substantiate its expenses, including legal expenses. In general, the

following are not recognized as reasonable expenses for ratemaking

purposes:

(i) Undocumented fees;

(ii) Fees for lobbying;

(iii) Fees for non-pilotage personal matters;

(iv) Fees which are not commensurate with the work performed;

and

(v) Any other fees not directly related to pilotage.

(9) In any Great Lakes pilotage district where revenues and

expenses from Canadian pilots are commingled with revenues and

expenses from U.S. pilots, Canadian revenues and expenses are not

included in the U.S. calculations for setting pilotage rates.

(10) Profit sharing expenses are not recognized for ratemaking

purposes.

Sec. 404.10 Ratemaking procedures and guidelines.

(a) Appendix A to this part is a description of the types of

analyses performed and the methodology followed in the development

of Great Lakes pilotage rate adjustments. Ratemaking calculations in

Appendix A of this part are made using the definitions and formulas

contained in Appendix B of this part. Pilotage rates actually

implemented may vary from the results of the calculations in

Appendices A and B, because of agreements with Canada requiring

identical rates, or because of other circumstances to be determined

by the Director. Additional analysis may also be performed as

circumstances require. The guidelines contained in Sec. 404.05 are

applied in the steps identified in Appendix A to this part.

(b) A separate ratemaking calculation is made for each of the

following U.S. pilotage areas:

Area 1--the St. Lawrence River;

Area 2--Lake Ontario;

Area 4--Lake Erie;

Area 5--the navigable waters from South East Shoal to Port Huron,

MI;

Area 6--Lakes Huron and Michigan;

Area 7--the St. Mary's River; and

Area 8--Lake Superior.

Appendix A to Part 404--Ratemaking Methodology

Step 1: Projection of Operating Expenses

(1) The first Step in the Great Lakes pilotage ratemaking

methodology is to project the amount of fair and reasonable

operating expenses that basic pilotage rates should recover, as

determined by the Director. This step consists of the following

phases: (a) Submission of financial information from each

Association; (b) determination of recognizable expenses; (c)

adjustment for ancillary revenues; (d) adjustment for inflation or

deflation; and (e) final projection of operating expenses. Each of

these phases is detailed below.

Step 1.A.--Submission of Financial Information

(1) Each Association is responsible for providing detailed

financial information to the Director, in accordance with Part 403

of this chapter.

Step 1.B.--Determination of Recognizable Expenses

(1) The Director determines which Association expenses will be

recognized for ratemaking purposes, using the guidelines for the

recognition of expenses contained in Sec. 404.05 of this chapter.

Each Association is responsible for providing sufficient data for

the Director to make this determination.

Step 1.C.--Adjustment for Ancillary Revenues

(1) Several charges have traditionally been levied for pilotage

services which are additional to basic pilotage service. These

charges are termed ``ancillary charges,'' and are defined as charges

for docking, undocking, moveage, delay, cancellation, and lock

transit. Revenues received from these ancillary charges will be

offset against the operational expenses of the Associations. Rates

for ancillary services will be set separately from basic pilotage

rates. The method for setting ancillary rates is discussed in Step

7.D., below.

Step 1.D.--Adjustment for Inflation or Deflation

(1) In making projections of future expenses, expenses that are

subject to inflationary or deflationary pressures are adjusted.

Costs not subject to inflation or deflation (e.g., depreciation,

long-term leases, pilot compensation, etc.) are not adjusted. The

inclusion of an inflation or deflation adjustment does not imply

that pilotage rates will be automatically adjusted each shipping

season, without a pilotage rate review. The inflation or deflation

adjustment is only made during the expense projection phase of a

full-scale pilotage rate review.

Annual cost inflation or deflation rates will be projected to

the succeeding navigation season, reflecting the gradual increase or

decrease in cost throughout the year.

For ratemaking calculations begun after January 1, 1996, the

actual annual experienced change in the average cost in non-pilot

operational costs per pilot assignment for each pilotage area will

be used to project the inflation or deflation adjustment. For

ratemaking calculations begun prior to January 1, 1996, the

inflation or deflation adjustment will be based on the preceding

year's change in the North Central Region's Consumer Price Index as

calculated by the U.S. Bureau of Labor Statistics.

Step 1.E.--Projection of Operating Expenses

(1) Once all adjustments are made to the recognized operating

expenses, the Director projects these expenses for each pilotage

district. In doing so, the Director takes into account foreseeable

circumstances which could affect the accuracy of the projection. The

Director will determine, as accurately as reasonably practicable,

the ``projection of operating expenses.''

Step 2: Projection of Target Pilot Compensation

(1) The second Step in the Great Lakes pilotage ratemaking

methodology is to project the amount of target pilot compensation

that pilotage rates should provide in each area. This Step consists

of the following phases: (a) Determination of target rate of

compensation; (b) determination of number of pilots needed in each

pilotage area; and (c) multiplication of the target compensation by

the number of pilots needed to project target pilot compensation

needed in each area. Each of these proposed phases is detailed

below.

Step 2.A.--Determination of Target Rate of Compensation

(1) Target pilot compensation for pilots providing services in

undesignated waters is average annual compensation for first mates

on U.S. Great Lakes vessels. The average annual compensation for

first mates is determined based on the most current union contracts,

and includes wages and benefits.

(2) Target pilot compensation for pilots providing services in

designated waters approximates the average annual compensation for

masters on U.S. Great Lakes vessels. It is calculated as 150% of the

compensation earned by first mates on U.S. Great Lakes vessels.

Step 2.B.--Determination of Number of Pilots Needed

(1) The basis for the number of pilots needed in each area of

designated waters is established by dividing the projected bridge

hours for that area by 1,000. Bridge hours are the number of hours a

pilot is aboard a vessel providing basic pilotage service.

(2) The basis for the number of pilots needed in each area of

undesignated waters is established by dividing the projected bridge

hours for that area by 1,800.

(3) In determining the number of pilots needed in each pilotage

area, the Director is guided by the results of the calculations in

steps 2.A. and 2.B. However, the Director may also find it necessary

to make adjustments to these numbers in order to ensure

uninterrupted pilotage service in each area, or for other reasonable

circumstances which the Director determines are appropriate.

Step 2.C.--Projection of Target Pilot Compensation

(1) The ``projection of target pilot compensation'' is

determined separately for each pilotage area by multiplying the

number of pilots needed in that area by the target pilot

compensation for pilots working in that area.

Step 3: Projection of Revenue

(1) The third step in the Great Lakes pilotage ratemaking

methodology is to project the revenue that would be received in each

pilotage area if existing rates were left unchanged. This step

consists of two phases: (a) Projection of future vessel traffic and

pilotage revenue; and (b) adjustment for ancillary revenues.

Step 3.A.--Projection of Revenue

(1) The Director generates the most accurate projections

reasonably possible of the pilotage service that will be required by

vessel traffic in each pilotage area. These projections are based on

historical data and all other relevant data available. Projected

demand for pilotage service is multiplied by the existing pilotage

rates for that service, to arrive at the projection of all pilotage

revenue.

Step 3.B.--Adjustment for Ancillary Revenues

(1) The projection of pilotage revenue from Step 3.A., above, is

adjusted for ancillary revenues (i.e., revenue from docking,

undocking, moveage, delay, cancellation, and lock transit).

Ancillary revenues are subtracted from the projection of all

pilotage revenue because the rates for ancillary services are set

separately from the basic pilotage rates. The method for setting

ancillary charges is discussed in Step 7.D., below.

(2) After adjustment for ancillary revenues, the result is the

projection for revenues which would be generated by basic pilotage

services if existing rates are left unchanged. The results of these

calculations is defined as the ``projection of revenue.''

Step 4: Calculation of Investment Base

(1) The fourth step in the Great Lakes pilotage ratemaking

methodology is the calculation of the investment base of each

Association. The investment base is the recognized capital

investment in the assets employed by each Association required to

support pilotage operations. In general, it is the sum of available

cash and the net value of real assets, less the value of land. The

investment base will be established through the use of the balance

sheet accounts, as amended by material supplied in the Notes to the

Financial Statement. The formula used in calculating the investment

base is detailed in Appendix B to this part.

Step 5: Determination of Target Rate of Return on Investment

(1) The fifth step in the Great Lakes pilotage ratemaking

methodology is to determine the Target Rate of Return on Investment.

For each Association, a market-equivalent return-on-investment (ROI)

is allowed for the recognized net capital invested in the

Association by its members.

(2) The allowed ROI is based on the rate of the most recent

return on stockholder's equity for a representative cross section of

transportation industry companies, including maritime companies,

with a minimum rate equal to the interest rate incurred by the

Associations for debt capital, and a maximum rate of 20 percent.

(3) Assets subject to return on investment provisions must be

reasonable in both purpose and amount. If an asset or other

investment is not necessary for the provision of pilotage services,

that portion of the return element is not allowed for ratemaking

purposes.

Step 6: Adjustment Determination

(1) The next step in the Great Lakes pilotage ratemaking

methodology is to insert the results from steps 1, 2, 3, and 4 into

a formula which is based on a standard utility rate structure, and

comparing the results to step 5. This basic utility rate structure

takes into account revenues, expenses and return on investment, and

is of the following form:

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

Line Ratemaking projections for basic pilotage

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

1. + Revenue (from step 3).

2. - Operating Expenses (from step 1).

3. - Pilot Compensation (from step 2).

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

4. = Operating Profit/(Loss).

5. - Interest Expense (from Audit reports).

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

6. = Earnings Before Tax.

7. - Federal Tax Allowance.

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

8. = Net Income.

9. Return Element (Net Income + Interest).

10. Investment Base (from step 4)

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

11. = Return on Investment.

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

(2) The Director will compare the projected return on investment

(as calculated using the formula above) to the target return on

investment (from step 5), to determine whether an adjustment to the

basic pilotage rates is necessary. If the projected return on

investment is significantly different from the target return on

investment, the revenues which would be generated by the current

pilotage rates are not equal to the revenues which would need to be

recovered by the pilotage rates.

(3) The basic pilotage revenues that are needed are calculated

by substituting in a figure for the projected revenue which will

make the target return on investment equal to the projected return

on investment. This ``projection of revenue needed'' is used in

determining the basis for proposed adjustments to the basic pilotage

rates. The mechanism for adjusting the basic pilotage rates is

discussed in Step 7 below. The required return, tax, and interest

elements may be considered additions to the operating expenses and

pilot compensation components of the hourly charge for basic

pilotage service, which is discussed in Step 7.A. below.

Step 7: Adjustment of Pilotage Rates

(1) The final step in the Great Lakes pilotage ratemaking

methodology is to adjust Great Lakes pilotage rates if the

calculations from Step 6 show that pilotage rates in a pilotage area

should be adjusted, and if the Director determines that it is

appropriate to go forward with a rate adjustment. Rate adjustments

are calculated in accordance with the procedures found in this step.

However, pilotage rates calculated in this step are subject to

adjustment based on requirements of the Memorandum of Arrangements

between the United States and Canada, and other supportable

circumstances which may be appropriate. Pilotage rate adjustments

consist of the following: (a) Calculation of the hourly pilotage

charge; (b) calculation of pilotage charges for unspecified trips;

(c) calculation of pilotage charges for specified trips; (d)

calculation of pilotage charges for ancillary services; and (e)

adjustment of pilotage charges for vessel size. Each of these is

detailed below.

Step 7.A.--Calculation of Hourly Charge

(1) The Director determines a proposed hourly charge for basic

pilotage service in each pilotage area. This hourly charge is used

in the calculation of pilotage rates discussed in Steps 7.B., 7.C.,

and 7.D., below.

(2) The proposed total hourly charge for pilotage service in

each pilotage area consists of two components, i.e., pilot

compensation, and operating expenses.

(3) The pilot compensation component of the hourly charge is

derived by dividing the projected target pilot compensation for each

area, by the estimated pilotage hours (i.e., bridge hours) for that

area. This calculation results in a pilot compensation charge for

each hour of pilotage service in that pilotage area.

(4) The operating expense component of the hourly charge is

derived by dividing the projected operating expenses for each

pilotage district, including the constructed amount necessary to

bring the Associations to the ROI standard, by the estimated

pilotage hours (bridge hours). This calculation results in an

operating expense charge for each hour of pilotage service in that

pilotage district.

(5) The total hourly charge for basic pilotage service in each

pilotage area is derived by adding the pilot compensation charge for

that area to the operating expense charge for the district in which

that area is located. These calculations are adjusted for average

ship size as discussed in Step 7.E., below.

Step 7.B.--Calculation of Charges for Unspecified Trips

(1) For transits which are not specified in Sec. 401.405 and

Sec. 401.410 of this chapter, the Director bases basic pilotage

rates on the hourly charge developed in Step 7.A., above. This

hourly charge for basic pilotage service is assessed for each hour

that a registered pilot is aboard a vessel, subject to a six-hour

minimum each time a pilot is assigned, with three-hour increments

thereafter.

Step 7.C.--Calculation of Charges for Specified Trips

(1) For transits which are specified in Sec. 401.405 and

Sec. 401.410 of this chapter, the Director periodically reviews the

average time for each individual transit, using the travel time in

both directions. This review will be accomplished at least once

every five years. The proposed basic pilotage fee listed for

specified transits in Sec. 401.405 and Sec. 401.410 of this chapter

is based on the result of multiplying the hourly basic pilotage fee

by the average transit time calculated for that transit.

(2) During ratemaking proceedings which occur between periodic

reviews of average vessel transit times, the rates for specified

transits are adjusted as a group. The pilotage rate for specified

transits in each area is adjusted by subtracting the ``projection of

revenue'' from the ``projection of revenue needed'' and dividing by

the ``projection of revenue,'' with the resultant deficit or surplus

expressed in percentage terms, rounded to the nearest whole number.

The proposed basic pilotage rates for specified transits are

determined by multiplying the existing rates by the resultant

percentage.

Step 7.D.--Calculation of Charges for Ancillary Services

(1) Ancillary charges are equalized between districts. These

charges need not be adjusted during every ratemaking. These charges

are reviewed at intervals of not more than five years, during the

periodic review of average vessel transit time for specified trips

discussed in Step 7.C., above. Each of these charges is discussed

below.

(A) Docking, Undocking and Harbor Movement Charges--For

consistency, these charges are set at the same level in all

districts. The charges are determined by the Director, subject to

the requirements of the Memorandum of Arrangements between the

United States and Canada.

(B) Moveage--The charge for moveage in a harbor for all three

districts is twice the docking charge.

(C) Delay Charges--Delay charges, per hour, whether for trip

interruption or departure or moveage delays, are set at the rate

determined in the pilot compensation phase discussed in Step 2

above, as adjusted for ship size. The maximum delay charge for any

24-hour period is the per hour delay charge, as adjusted for ship

size, times 16 hours.

(D) Cancellation Charges--Cancellation charges are set at the

rate determined in the pilot compensation phase discussed in Step 2

above, and are not adjusted for ship size. If the cancellation

occurs less than six hours after the pilot reports, the maximum

charge is the basic pilot compensation charge for a six-hour period.

If the cancellation occurs more than six hours after the pilot

reports, the charge is the basic pilot compensation charge for each

hour or fraction of an hour, to a maximum of 16 hours.

(E) Lock Passage Charges--For consistency, these charges are set

at the same level in all districts. The level will be determined by

the Director, subject to the requirements of the Memorandum of

Arrangements between the United States and Canada.

Step 7.E.--Adjustment for Ship Size

(1) The hourly charge for basic pilotage services discussed in

Step 7.A., above, is adjusted by dividing the basic charge by the

average weighting factor of the preceding year, as determined from

charges adjusted in accordance with Sec. 401.400 of this chapter.

Appendix B to Part 404--Ratemaking Definitions and Formulas

The following definitions apply to the ratemaking formula

contained in this appendix. The account numbers correspond to the

account numbers in Appendix A to part 403 of this chapter.

(1) Operating Revenue--means the sum of all operating revenues

received by the Association for pilotage services, less ancillary

revenues that are offset against operating expenses.

(2) Operating Expense--means the sum of all operating expenses

incurred by the Association for pilotage services, less the sum of

disallowed expenses.

(3) Target Pilot Compensation--means the compensation that

pilots are intended to receive for full time employment. For pilots

providing services in undesignated waters, the target pilot

compensation is the average annual compensation for first mates on

U.S. Great Lakes vessels. For pilots providing services in

designated waters, the target pilot compensation is 150% of the

average annual compensation for first mates on U.S. Great Lakes

vessels.

(4) Operating Profit/(Loss)--means Operating Revenue less

Operating Expense and Target Pilot Compensation.

(5) Interest Expense--means the reported Association interest

expense on operations, as adjusted to exclude any interest expense

attributable to losses from non-pilotage operations.

(6) Earnings Before Tax--means Operating Profit/(Loss), less the

Interest Expense.

(7) Federal Tax Allowance--means the Federal statutory tax on

Earnings Before Tax, for those Associations subject to Federal tax.

(8) Net Income--means the Earnings Before Tax, less the Federal

Tax Allowance.

(9) Return Element (Net Income plus Interest)--means the Net

Income, plus Interest Expense. The return element can be considered

the sum of the return to equity capital (the Net Income), and the

return to debt (the Interest Expense).

(10) Investment Base (separately determined)--means the net

recognized capital invested in the Association, including both

equity and debt. Should capital be invested in other than pilotage

operations, that capital is excluded from the rate base.

(11) Return on Investment--means the Return element, divided by

the Investment Base, and expressed as a percent.

Investment base formula.

(1) Regulatory Investment (Investment Base) is the recognized

capital investment in the useful assets employed by the pilot

groups. In general, it is the sum of available cash and the net

value of real assets, less the value of land. The investment base is

established through the use of the balance sheet accounts, as

amended by material supplied in the Notes to the Financial

Statement.

(2) The Investment Base is calculated using data from the

Uniform System of Accounts described in part 403, as audited and

approved by the Director. Accounts, listed in the Investment Base

formula below, which end in 999 are not separate accounts, but the

summation of the accounts listed in each particular grouping. For

instance, account no. 10999 is not a separate balance sheet account,

it is the summation of all individual balance sheet accounts in the

10000 grouping. The Investment Base would be calculated as follows:

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

Account No. Description

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

Recognized Assets:

10999 + Total Current Assets

29999 - Total Current Liabilities

20100 + Current Notes Payable

13999 + Total Property and Equipment (Net)

12000 - Land

15000 + Total Other Assets

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

= Total Recognized Assets

Non-Recognized Assets:

11999 + Total Investments and Special Funds

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

= Total Non-Recognized Assets

Total Assets:

+ Total Recognized Assets

+ Total Non-Recognized Assets

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

= Total Assets

Recognized Sources of Funds:

39999 + Total Stockholders' Equity

26000 + Long-Term Debt

20100 + Current Notes Payable

24500 + Advances from Affiliated Companies

26100-500 + Long-Term Obligations-Capital Leases

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

= Total Recognized Sources

Non-Recognized Sources of Funds:

26600 + Pension Liability

26800 + Other Non-Current Liabilities

27000 + Deferred Federal Income Taxes

27200 + Other Deferred Credits

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

= Total Non-Recognized Sources

Total Sources of Funds:

+ Total Recognized Sources

+ Total Non-Recognized Sources

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

= Total Sources of Funds

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

(3) Using the figures developed above, the Investment Base is

the Recognized Assets times the ratio of Recognized Sources of Funds

to Total Sources of Funds.

Dated: April 1, 1994.

Robert T. Nelson,

Vice Admiral, U.S. Coast Guard, Acting Commandant.

[FR Doc. 94-8602 Filed 4-11-94; 8:45 am]

BILLING CODE 4910-14-M