Great Lakes Pilotage Rate Methodology

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

Coast Guard

46 CFR Parts 401, 403, and 404

[OST Docket No. 50248]

[CGD 92-072]

RIN 2105-AC21

Great Lakes Pilotage Rate Methodology

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule; request for comments.

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SUMMARY: The Department of Transportation (the Department) is amending

the regulations concerning Great Lakes pilotage by amending the

procedures for determining Great Lakes pilotage rates, and revising the

financial reporting requirements mandated for Great Lakes pilot

associations. The purpose of these changes is to improve the ratemaking

process. This final rule does not change the existing Great Lakes

pilotage rates and charges.

DATES: This rule is effective on June 12, 1995. Comments must be

received on or before May 11, 1995. Late-filed comments will be

considered only to the extent practicable.

ADDRESSES: Comments should be sent, preferably in triplicate, to Docket

Clerk, OST Docket No. 50248, U.S. Department of Transportation, 400 7th

St. SW., room PL-401, Washington, DC 20590. Comments will be available

for inspection at this address from 9 a.m. to 5:30 p.m., Monday through

Friday. Commenters who wish the receipt of their comments to be

acknowledged should include a stamped, self-addressed postcard with

their comments. The Docket Clerk will date-stamp the postcard and mail

it back. Unless otherwise indicated, documents referred to in this

preamble are also available for inspection or copying at this address.

Comments should not be sent to the Coast Guard docket.

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

Merchant Vessel Personnel Division, 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)

267-6102, or Steven B. Farbman, Office of the Assistant General Counsel

for Regulation and Enforcement, 400 7th St. SW., room 10424,

Washington, DC 20590, (202) 366-9306.

Regulatory History

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). The DOT Task Force then developed a new pilotage

ratemaking methodology, which the Coast Guard published in a notice of

proposed rulemaking (NPRM) (59 FR 17303) dated April 12, 1994.

The NPRM proposed 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 (CGD 92-072). The NPRM also announced a public

hearing that was held in Cleveland, OH on May 20, 1994. The comment

period for the NPRM ended on July 11, 1994.

In response to the NPRM and the public hearing, the Coast Guard

received 31 comments and two requests for additional public meetings to

explain the proposals contained in the NPRM. In the Federal Register

(59 FR 18774) on April 20, 1994, the Coast Guard announced that it

would conduct two public meetings. The first public meeting was held in

Chicago, IL on May 3, 1994. The second public meeting was held in

Massena, NY on May 5, 1994.

The Coast Guard also received one request to extend the comment

period for the NPRM. Because the comment period for the NPRM was 90

days, the Coast Guard determined that there was sufficient time to

submit comments. Therefore, the comment period was not extended.

Background and Purpose

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

U.S.C. 9301 et seq.) (the Act), 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 Act

vests the Secretary of Transportation with responsibility for setting

pilotage rates. Section 9303 of the Act 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). This authority has

been further delegated to the Director, Great Lakes Pilotage (the

Director).

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 [[Page 18367]] charges. The latest

Memorandum of Arrangements between the United States and Canada, dated

January 18, 1977, specifies that the Secretary of Transportation of the

United States of America and the Minister of Transport of Canada will

establish regulations imposing identical rates. A copy of this

Memorandum of Arrangements is available in the docket and may also be

obtained by writing to Mr. Scott Poyer at the address listed under FOR

FURTHER INFORMATION CONTACT, above. In the past, consultations between

the United States and Canada resulted in nominally identical U.S. and

Canadian rates.

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. As a

result, the ratemaking methodology contained in this final rule would

not translate directly into new rates, but rather would form the basis

for proposals to be negotiated with Canada.

Discussion of Comments and Changes

Although the Coast Guard issued the NPRM under authority delegated

to the Commandant by the Secretary, the Secretary is issuing the final

rule. Under 49 CFR 1.43(a), the Secretary may exercise powers and

duties delegated or assigned to officials other than the Secretary.

Because the Secretary is issuing this final rule, the Department is

consolidating Coast Guard Docket No. 92-072 into OST Docket No. 50248.

All further pleadings should be filed in the new docket at the docket

address listed above.

The Coast Guard received 31 comments on the NPRM. Twenty comments

were from Great Lakes Pilots, Great Lakes Pilot Associations, or

employees of these associations. Six comments were from shippers,

ports, and associations representing the Great Lakes maritime industry.

Five comments were from unions or professional organizations that

represent pilots. Some of the comments addressed issues that were not

the subject of this rulemaking. The Department is responding only to

those comments relating to this rulemaking.

All comments were carefully considered, and in response to the

comments significant changes have been made to the proposals that were

published in the NPRM. The NPRM proposed changes to 46 CFR part 403,

which deals with accounting and financial reporting requirements, and

46 CFR part 404, which details ratemaking procedures.

Most of the comments criticized the NPRM for being overly complex

and unwieldy. In response to this criticism, the regulations that were

proposed in the NPRM have been cut by approximately two thirds, with no

sacrifice of fairness or substance. Accounting requirements have been

streamlined for easier use, financial reporting requirements have been

reduced, and the proposed ratemaking methodology has been revised to

make it less complex.

The NPRM elements that received the strongest objections from the

public were proposals to change the way pilotage rates are charged on

the Great Lakes. Almost everyone who commented on the proposed rule

objected to the proposals to create a class of ``ancillary services''

and to recalculate point-to-point pilotage charges based on hourly

fees. These proposals were found in Step 7 of appendix A to part 404.

The majority of commenters felt that the proposals for hourly pilotage

fees would degrade safety by creating an incentive for vessels to go

faster in order to avoid or reduce pilotage costs. Commenters also

objected to labeling some pilotage services such as docking and

undocking as ``ancillary services'' and allowing fees for these

services to be set purely at the discretion of the Director. There were

concerns that purely discretionary rates would not be predictable for

shippers or pilots.

In response to the comments from pilots, shippers, unions and most

other commenters, the NPRM proposal to charge fees on an hourly basis

has been modified. The Department agrees with the expressed concerns

regarding undue complexity and possible disincentives for operational

safety, and has therefore rewritten Step 7 of appendix A to part 404.

This final rule retains the current method for charging pilotage rates

to various users, which specifies charges for specific travel segments.

If concerns are raised in the future regarding the equity of the way in

which pilotage rates are charged, this issue may be reopened. However,

no changes will be made without a proceeding that provides for public

involvement.

There were many objections from pilots and shippers to the proposal

that the timing of rate reviews be determined by the Director of Great

Lakes Pilotage. Several alternatives were suggested, but most comments

indicated that it would be more appropriate if a rate review were

conducted at least every one, two, or three years in order to keep

pilotage rates current. The Department agrees with these comments. The

provision in 46 CFR 404.1(b), which gave the Director authority to

determine the timing of rate reviews, has been revised in response to

the public comments received. Section 404.1(b) now requires the

Director to conduct a detailed audit of pilot association expenses and

use the ratemaking procedures in appendix A of part 404 to set base

pilotage rates at least once every five years. The Director of Great

Lakes Pilotage will initiate the new methodology as soon as possible

after the effective date of this rule using the most current audit

reports available. If interested parties request reviews more often

than once every five years, the Director can review the request, and

conduct a special audit and ratemaking if the Director concludes that a

reasonable basis for conducting a review has been established.

In the intervening years between the five-year or special audits,

pilotage rates proposed for coordination with Canada will be reviewed

annually using a simplified procedure detailed in appendix C to part

404. This annual review procedure addresses public comments that a less

complicated ratemaking process would be faster and less burdensome on

all parties.

During the regular five-year audit of the Great Lakes pilot

associations and the corresponding rate review, the Director will

calculate an ``expense multiplier'' for each pilot association using

the most recent regular and/or special audit data. This expense

multiplier is the ratio of all other expenses, including a return

element, to pilot compensation expense in unit cost terms for the base

period analyzed. When target pilot compensation is determined for a

prospective annual rate period, total economic costs can be easily

determined by increasing such pilot compensation by the multiplier. Use

of this ratio avoids the need to recalculate other expenses and the

return element each year in order to review the rates. Moreover, since

this review procedure focuses on changes in unit costs, i.e., total

economic costs per bridge hour, between the base period and the new

rate period, the need to project revenues for the new period is also

avoided. Finally, this calculation will not change the rate structure;

it will merely change proposed rates uniformly by the percentage change

in unit costs.

Most pilots, and organizations representing pilots, commented on

the NPRM's proposal to continue the Department policy of maintaining

income comparability between Great Lakes Registered Pilots, and

masters/chief mates on Great Lakes vessels. This policy was established

as a result of the [[Page 18368]] 1988 DOT Pilotage Study, which

examined many alternatives and selected the master/chief mate target

for pilot compensation. Commenters believed pilots should earn more

than masters/chief mates. Among the many alternatives proposed by

commenters were: Comparability with State pilots; comparability with

Canadian pilots; automatic cost-of-living allowances; overtime bonuses;

and work hour/travel time/rest time adjustments. No single alternative

appeared to represent a consensus. After considering all the

alternatives, the Department is keeping the pilot compensation

methodology proposed in the NPRM. This is fully consistent with the

recommendation in the 1988 DOT Pilotage Study, which states, ``The

study team believes that pilot compensation should be tied to the local

economy. The use of local masters and mates pay scales has the

important impact of tying pilot compensation to regional industry pay

levels. Salaries of pilots, like those of teachers, physicians,

lawyers, and other professionals, are tied to the fluctuations of

supply and demand for their services in their particular locality. In

this fashion, Great Lakes pilots share in the fortunes of the Great

Lakes.'' Commenters offered no new information that alters this

assessment.

There were several objections from Great Lakes Pilot Associations

and their employees to the proposed new 46 CFR part 403, as published

in the NPRM. Commenters objected that this part was unduly burdensome

for small pilot associations and should be eliminated in order to

streamline the regulations, and reduce costs to the pilot associations.

After careful consideration, and in light of the lesser requirements of

the procedures for the annual reviews of base pilotage rates, the

Department agrees with the public comments and has greatly streamlined

part 403. Specific account numbers and detailed account descriptions

have been removed in favor of a requirement that financial records of

the association be kept in accordance with generally accepted

accounting principles. Associations are required to complete and retain

annual financial statements and an audit by a certified public

accountant. However, reporting requirements have been reduced to

require that audits only be forwarded to the Director once every five

years, or by special request. At the same time, associations must keep

in mind that answers challenging proposed cost disallowances or other

applications of the ratemaking methodology, as well as ad hoc requests

for rate reviews, must be based on full and adequate financial records.

Two commenters from two of the three Great Lakes Pilot Associations

objected to the proposed requirement that the financial records of the

associations be retained for a period of ten years, and proposed an

alternative three-year requirement that would conform to Internal

Revenue Service (IRS) requirements. The Department does not agree. The

Department does not use the financial records of the pilot association

for the same purpose as the IRS. On several occasions the Director has

accessed historical data to ensure that only reasonable expenses have

been included in ratemaking calculations. For this reason, the

Department is adopting the proposed requirement regarding the 10-year

retention of financial records.

The Department anticipates implementing all the rate reviews under

the methodologies adopted in this rulemaking proceeding through

additional public procedures. Following a review, the Department will

publish its tentative findings and any proposed rate changes, and it

will request the comment of interested parties on the calculations.

(Comments seeking reconsideration of our rate methodology will not be

addressed through this process.) The Department will then seek to

coordinate any proposed change in rates, as modified by any warranted

corrections, with Canadian authorities. Following the coordination

process, the Department will establish final rates to be effective for

the designated future rate period. Both the proposed and final rate

documents will be served on the pilot associations and other interested

persons requesting in writing to be placed on the service list in this

docket; both documents will also be published in the Federal Register.

Although the Coast Guard received no comments on the section

pertaining to the uniform pilot's source form, the Department is making

a slight modification to clarify that the format for source forms is

approved by the Director of Great Lakes Pilotage and issued by the

pilot associations. The ``Pilot's Source Form--Great Lakes Pilotage,''

referred to in the NPRM, is not an official United States Government

form.

The Department is also removing several subparts as part of our

streamlining of the accounting regulations. Subparts B, C, D, and G, as

contained in the NPRM, have been eliminated, and subparts E, F, and H

have been redesignated subparts B, C, and D, respectively.

There were several objections from employees and representatives of

the District 3 pilot association to the proposed revision to 46 CFR

404.05, which provided that profit sharing expenses not be recognized

for ratemaking purposes. Commenters argued that profit sharing for

employees of the District 3 pilot association is part of their

recognized pension plan, and employees of this association would be

unfairly penalized if this proposal were adopted. The Department agrees

and has changed the wording of the proposed paragraph to allow

reasonable profit sharing expenses for non-pilot employees only. Profit

sharing that benefits pilots will be considered part of pilot

compensation.

Several comments from both pilots and shippers, as part of the

overall objection to the complexity of the proposal, argued that the

market-equivalent Return-on-Investment (ROI) provisions of 46 CFR

404.5(a)(4), Step 5 of appendix A, and the formulas contained in

appendix B should not be included. Some members of the public objected

to allowing a return on the capital that pilots had invested in their

pilot associations on the grounds that this would encourage pilots to

make investments that were unrelated to pilotage, and thereby increase

pilotage fees. Other commenters believed that the ROI provisions made

the ratemaking formula in appendix A too complicated. The Department

carefully considered these comments and believes that we have

significantly reduced the proposal's complexity and burden. However, a

return element is an important component of cost-based rate

methodologies. Rates that have been set without a return element have

been vulnerable to legal challenge and do not meet the goals of the

investigations and audits that underlie this rulemaking. Also, in order

to negotiate with the Canadians we must have rates that can withstand

scrutiny as to their conformity to sound ratemaking principles. The

Department believes it is only fair to allow pilots a return on the

capital they invest. The Department also believes that sufficient

safeguards against excessive investment are in place because 46 CFR

404.5(a)(4) specifically stipulates that capital that is not necessary

and reasonable for the provision of pilotage services will not be

allowed for ratemaking purposes.

Final Rule With Request for Comments

The Department is issuing this document as a final rule but is also

providing an opportunity for comment. This rulemaking document is

within the scope of the NPRM. The primary purposes of the final rule

have not changed from the NPRM stage: to [[Page 18369]] standardize the

financial reporting of Great Lakes pilotage associations, and to

clarify the methodology to be used in future ratemakings. We believe

that we have responded to all the concerns expressed in the comments to

the NPRM. Nevertheless, we want to give the public an additional

opportunity to present its views to us, given the changes that we have

made to the NPRM. Accordingly, even though the final rule will be

effective on June 12, 1995, we will consider any new matters presented

to us during the 30-day comment period. We will make revisions to this

rule if we believe they are warranted.

Executive Order 12866

This rule is a significant regulatory action under section 3(f) of

Executive Order 12866 and has been reviewed by the Office of Management

and Budget under that order. It is significant under the regulatory

policies and procedures of the Department of Transportation (44 FR

11040; February 26, 1979) because a rulemaking affecting the setting of

pilotage rates is controversial and of significant interest to the

public.

The Department expects the economic impact of this rule to be

minimal. This rule does not represent a significant departure from the

current ratemaking process, and there are no expected increases in

costs. Therefore, a full regulatory evaluation is not necessary.

Small Entities

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

Department must consider whether this final rule 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). This final rule should have little or no

impact on small entities that pay pilotage rates or that receive income

from pilotage rates. Because it expects the impact of this proposal to

be minimal, the Department certifies under 5 U.S.C. 605(b) of the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.) that this final rule

will not have a significant economic impact on a substantial number of

small entities.

Collection of Information

This rule contains collection-of-information requirements. The

Department has submitted the requirements to the Office of Management

and Budget (OMB) for review under section 3504(h) of the Paperwork

Reduction Act (44 U.S.C. 3501 et seq.), and OMB has approved them. The

part numbers are parts 401 and 403 and the corresponding OMB approval

number is OMB Control Number 2115-0616.

Federalism

The Department has analyzed this final rule under the principles

and criteria contained in Executive Order 12612, and has determined

that this 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 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.

State action addressing pilotage regulation 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 Department considered the environmental impact of this final

rule 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

that clearly do not have any environmental impact. A Categorical

Exclusion Determination has been placed in the docket.

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 Department 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. 6101, 7701, 8105, 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 (G-MVP-7), 2100 2nd St., SW., Washington, DC 20593.

* * * * *

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

Certificate of Authorization issued by the Director of Great Lakes

Pilotage to operate a pilotage pool on the Great Lakes.

3.-4. 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 Records.

403.110 Accounting entities.

403.115 Accounting period.

403.120 Notes to financial statements.

Subpart B--Inter-Association Settlements

403.200 General.

Subpart C--Reporting Requirements

403.300 Financial reporting requirements.

Subpart D--Source Forms

403.400 Uniform pilot's source form.

Authority: 46 U.S.C. 8105, 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

guidelines of the Generally Accepted Accounting Principles (GAAP)

issued by the Financial Accounting Standards Board. 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.

Sec. 403.105 Records.

(a) Each Association shall maintain the general books of account

and all books, records, and supporting memoranda 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. [[Page 18370]]

(b) 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. 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. 403.110 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 that are common to two or

more pilotage pools.

Sec. 403.115 Accounting period.

Each Association subject to this part shall maintain its accounts

on a calendar year basis unless otherwise approved by the Director.

Sec. 403.120 Notes to financial statements.

(a) All matters that 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 of the Association, shall

be clearly and completely stated as footnotes to the financial

statements.

(b) Financial items that 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 considered by the Director during

ratemaking procedures contained in part 404 of this chapter.

Subpart B--Inter-Association Settlements

Sec. 403.200 General.

Each Association that shares revenues and expenses with the

Canadian Great Lakes Pilotage Authority (GLPA) shall submit settlement

statements regarding these activities. The settlement statements shall

be completed in accordance with the terms of agreements between the

United States and Canada and guidance from the Director of Great Lakes

Pilotage.

Subpart C--Reporting Requirements

Sec. 403.300 Financial reporting requirements.

(a) General:

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

including subsidiary accounts.

(2) 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.

(3) An officer of the Association shall certify the accuracy of the

financial statements.

(b) Required Reports:

(1) Every five years, or when specially requested by the Director,

each Association shall furnish the Director the Association's annual

financial statements audited in accordance with generally accepted

auditing standards by an independent certified public accountant.

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

settlement statements annually.

Subpart D--Source Forms

Sec. 403.400 Uniform pilot's source form.

(a) Each Association shall record pilotage transactions on a form

approved by the Director. The approved form shall be issued to pilots

by authorized United States pilotage pools.

(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

expenses.

(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:

(1) Original to accompany invoice;

(2) First copy to Director;

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

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

record;

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

office use.

(e) Associations shall account by number for all pilot source forms

issued.

5. 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 analyses and methodology.

Appendix B to Part 404--Ratemaking definitions and formulas.

Appendix C to Part 404--Procedures for Annual Review of Base

Pilotage Rates

Authority: 46 U.S.C. 8105, 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) Great Lakes pilotage rates shall be reviewed and, if necessary,

adjusted annually in accordance with the procedures detailed in

appendix C to this part. At least once every five years the Director

shall complete a thorough audit of pilot association expenses and

establish pilotage rates in accordance with the procedures detailed in

Sec. 404.10. 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 that are questioned. However, subject to the terms and

conditions contained in other provisions of this part, expense items

that 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: [[Page 18371]]

(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). The portion of lease

costs that exceed these standards is 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 that 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 that 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 that 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 expenses;

(ii) Expenses for lobbying;

(iii) Expenses for personal matters;

(iv) Expenses that are not commensurate with the work performed;

and

(v) Any other expenses 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) Reasonable profit sharing for non-pilot employees of pilot

associations will be allowed as an expense for ratemaking purposes.

Profit sharing that benefits pilots will be treated as part of pilot

compensation.

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 a

base pilotage rate. Ratemaking calculations in appendix A of this part

are made using the definitions and formulas contained in appendix B of

this part. Appendix C of this part is a description of the methodology

followed in the development of annual reviews to base pilotage rates.

Pilotage rates actually implemented may vary from the results of the

calculations in appendices A, B and C of this part, 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 Analyses and Methodology

Step 1: Projection of Operating Expenses

(1) The Director projects the amount of vessel traffic annually.

Based upon that projection, the Director forecasts the amount of

fair and reasonable operating expenses that pilotage rates should

recover. This consists of the following phases:

(a) Submission of financial information from each Association;

(b) determination of recognizable expenses;

(c) adjustment for inflation or deflation; and

(d) 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. Each Association

is responsible for providing sufficient data for the Director to

make this determination.

Step 1.C.--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. 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 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.D.--Projection of Operating Expenses

(1) Once all adjustments are made to the recognized operating

expenses, the Director projects these expenses for each pilotage

area. In doing so, the Director takes into account foreseeable

circumstances that 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; [[Page 18372]]

(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 phases is detailed below.

Step 2.A.--Determination of Target Rate of Compensation

(1) Target pilot compensation for pilots providing services in

undesignated waters approximates the 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 received by first

mates.

(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 that 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 consists

of a projection of future vessel traffic and pilotage revenue.

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 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 that is based on a basic regulatory rate structure, and

comparing the results to step 5. This basic regulatory 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

base pilotage rates is necessary. If the projected return on

investment is significantly different from the target return on

investment, the revenues that would be generated by the current

pilotage rates are not equal to the revenues that would need to be

recovered by the pilotage rates.

(3) The base pilotage revenues that are needed are calculated by

determining what change in projected revenue 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 base pilotage rates. The

mechanism for adjusting the base 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 base pilotage rates.

STEP 7: Adjustment of Pilotage Rates

The final step in the Great Lakes pilotage ratemaking

methodology is to adjust base 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 that

may be appropriate.

(2) Pilotage rate adjustments are calculated for each area by

multiplying the existing pilotage rates in each area by the rate

multiplier. The rate multiplier is calculated by inserting the

result from the steps detailed above into the following formula:

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

Line Ratemaking projections

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

1. + Revenue Needed (from step 6)

2. Revenue (from step 3)

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

3. = Rate multiplier

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

Appendix B to Part 404--Ratemaking Definitions and Formulas

The following definitions apply to the ratemaking formula

contained in this appendix.

(1) Operating Revenue--means the sum of all operating revenues

received by the Association for pilotage services, including

revenues such as docking, moveage, delay, detention, cancellation,

and lock transit.

(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 [[Page 18373]] 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 financial data from

the Great Lakes pilot associations, as audited and approved by the

Director. The Investment Base would be calculated as follows:

Description

Recognized Assets:

+Total Current Assets

-Total Current Liabilities

+Current Notes Payable

+Total Property and Equipment (Net)

-Land

+Total Other Assets

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

=Total Recognized Assets

Non-Recognized Assets

+Total Investments and Special Funds

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

=Total Non-Recognized Assets

Total Assets

+Total Recognized Assets

+Total Non-Recognized Assets

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

=Total Assets

Recognized Sources of Funds

+Total Stockholders' Equity

+Long-Term Debt

+Current Notes Payable

+Advances from Affiliated Companies

+Long-Term Obligations-Capital Leases

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

=Total Recognized Sources

Non-Recognized Sources of Funds

+Pension Liability

+Other Non-Current Liabilities

+Deferred Federal Income Taxes

+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.

Appendix C to Part 404--Procedures for Annual Review of Base Pilotage

Rates

The ratemaking methodology detailed in appendix A is used by the

Director to determine base pilotage rates at least once every five

years, as required by Sec. 404.1. In the intervening years the

Director will review, if warranted by cost changes, recalculate base

pilotage rates proposed for coordination with Canada using the

following procedures:

Step 1: Calculate the total economic costs for the base period

(i.e. pilot compensation expense plus all other recognized expenses

plus the return element) and divide by the total bridge hours used

in setting the base period rates;

Step 2: Calculate the ``expense multiplier,'' the ratio of other

expenses and the return element to pilot compensation for the base

period;

Step 3: Calculate an annual ``projection of target pilot

compensation'' using the same procedures found in Step 2 of appendix

A;

Step 4: Increase the projected pilot compensation in Step 3 by

the expense multiplier in Step 2;

Step 5: Adjust the result in Step 4, as required, for inflation

or deflation;

Step 6: Divide the result in Step 5 by projected bridge hours to

determine total unit costs;

Step 7: Divide prospective unit costs in Step 6 by the base

period unit costs in Step 1;

Step 8: Adjust the base period rates by the percentage change in

unit costs in Step 7. For example if the total economic costs per

bridge hour is $30.00 for the base period and $33.00 for the

prospective rate period, then the rates established for the base

period would be increased by 10% to determine the proposed rates for

the prospective rate period, which would then be subject to

negotiation with Canada.

Issued in Washington, DC, this 31st day of March, 1995.

Frederico Pena,

Secretary of Transportation.

[FR Doc. 95-8572 Filed 4-10-95; 8:45 am]

BILLING CODE 4910-62-P