Great Lakes Pilotage Rate Methodology

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

46 CFR Parts 403 and 404

[OST Docket No. 50248]

RIN 2105-AC21

Great Lakes Pilotage Rate Methodology

AGENCY: Office of the Secretary, DOT.

ACTION: Final rule.

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

SUMMARY: The Department of Transportation (the Department) is

responding to comments to a final rule published April 11, 1995,

establishing new procedures and methodology for determining Great Lakes

pilotage rates and making corresponding changes to the financial

reporting requirements required of Great Lakes pilot associations.

Based on these comments, the Department has made minor changes to the

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

rates and charges.

EFFECTIVE DATE: This rule is effective on June 10, 1996.

ADDRESSES: Unless otherwise indicated, documents referred to in this

preamble are available for inspection or copying at the office of the

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

400 7th St. SW., room PL-401, Washington, DC 20590 from 9 a.m. to 5:30

p.m., Monday through Friday.

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

Lawrence Seaway Development Corporation, 400 Seventh St. SW, Room 5421,

Washington, DC 20590, 1-800-785-2779, 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.

SUPPLEMENTARY INFORMATION:

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 which 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 and the Department determined that there was

sufficient time to submit comments. Therefore, the comment period was

not extended.

On April 11, 1995, the Department published a final rule with

request for comments (60 FR 18366) (1995 final rule) establishing

improved procedures for determining Great Lakes pilotage rates, and

revised financial reporting requirements mandated for Great Lakes pilot

associations. The comment period ended on May 11, 1995. Although the

Coast Guard issued the NPRM under authority delegated to the Commandant

by the Secretary, the Secretary issued the 1995 final rule. On December

11, 1995, the Secretary transferred authority to administer the Great

Lakes Pilotage Act of 1960 (Public Law 86-555, 46 U.S.C. 9301 et seq.)

(the Act) to the Administrator of the SLSDC. Nevertheless, the

Secretary is issuing this final rule. Under 49 CFR 1.43(a), the

Secretary may exercise powers and duties delegated or assigned to

officials other than the Secretary.

Several commenters requested that the comment period for the

rulemaking be extended. Because all late-filed comments were

considered, and because this rulemaking has already been the subject of

extensive public comment, the Department determined that there was

sufficient time to submit comments regarding this 1995 final rule.

Therefore, the comment period was not extended.

Background and Purpose

Under 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(f) 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.

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

[[Page 21082]]

``undesignated waters.'' Pilotage areas 1, 5, and 7 are ``designated

waters.'' Pilots are required to direct the navigation of vessels in

designated waters. Pilots are required to be on board and available to

direct the navigation of vessels 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 Act provides that the Secretary of

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

may make arrangements with the appropriate agency of Canada to

prescribe joint or identical rates and 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 Scott A. 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 takes

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

The Department received nine comments and thirteen endorsements of

one of the nine comments. Comments came from one Great Lakes pilot

association, three Great Lakes Registered Pilots, one professional

association representing pilots, one professional association

representing vessel operators and steamship agents on the Great Lakes,

one labor organization, one professional auditor, and the comptroller

of one Great Lakes pilot association with thirteen endorsements by

individual members of that association. Some of the comments addressed

issues that were not the subject of the 1995 final rule. The Department

is responding only to those comments relating to this rulemaking.

Three comments were generally supportive of the 1995 final rule and

characterized it as an improvement over the NPRM, but with some areas

that still need improvement. These comments were made by one pilot

group, one professional organization representing pilots, and one labor

organization. Six comments objected to the 1995 final rule because it

was considered to be confusing, not viable, or not in concurrence with

the DOT IG's intentions. These comments were made by one professional

organization representing vessel agents, one professional auditor,

three Great Lakes Registered pilots, and one comptroller of a Great

Lakes pilot association with thirteen endorsements. The Department

believes most of the methodology presented in the 1995 final rule

represents a workable compromise between the disparate interests

involved. Therefore, the ratemaking methodology presented in the 1995

final rule is substantially retained in this final rule.

Four commenters objected to what they perceived as the 1995 final

rule's ``elimination of annual audits.'' The two types of audits

discussed in the Great Lakes pilotage regulations (i.e., audits by

pilot associations, and audits by the Director) are discussed in 46 CFR

Secs. 403.300(b) and 404.1(b). Commenters believed that the amended

wording of these sections eliminated a requirement that pilot

associations and/or the Director conduct annual audits of the pilot

associations. Commenters believed the elimination of these annual audit

requirements would weaken financial oversight of pilot associations and

encourage spending abuse.

In fact, the 1995 final rule did not eliminate annual audits. Pilot

associations were still required to obtain an annual audit by an

independent certified public accountant.

However, the Department agrees that the wording of the audit

requirements was not as clear as it could have been. To make this

requirement more clear, the language of section 403.300(b) has been

amended to reinforce the requirement that pilot associations be audited

by an independent CPA every year, and to require that the audit results

be forwarded to the Director every year. Section 404.1(b) has been

amended to reinforce the requirement that the Director review the

annual association audits every year, and conduct a thorough audit of

pilot association expenses at a minimum of once every five years.

One commenter stated that certification of financial reports by an

association officer, as required by 46 CFR Sec. 403.300(a)(3), is

redundant and ``prejudicial'' to the association's regular financial

reporting. The Department does not understand how certification of

financial documents could in any way be ``prejudicial,'' and the

commenter did not elaborate on this point. The Department agrees that

there is a certain amount of redundancy in requiring an association

officer such as a Treasurer, to review the work of a bookkeeper or

accountant who prepares the financial reports. However, this redundancy

is standard procedure in most well-managed businesses, and is an

important safeguard against waste, fraud, and abuse. For these reasons,

section 403.300(a)(3) is retained.

One commenter objected to section 404.5(a)(2) which requires the

Director to determine the reasonableness of pilot association expenses

by comparing them to comparable expenses paid by others in the maritime

industry. The commenter believes that there are no industries on the

Great Lakes comparable to Great Lakes pilotage, as pilotage is ``vastly

different'' from other industries. The department disagrees. The

commenter did not elaborate on how pilotage was different from all

other industries. Pilots operate in the same marketplace as other

maritime industries on the Great Lakes, and incur many of the same

types of expenses. The Department does not believe there is any basis

for the claim that pilotage expenses cannot be compared with anything

else; therefore section 404.5(a)(2) is retained.

One commenter stated that the provisions of 46 CFR Sec. 404.5(a)(5)

are unclear, inappropriate, and unfair. This section requires that

profits, but not losses, from non-pilotage transactions be included in

ratemaking calculations. The Department designed this section as a

disincentive to pilot association speculation in non-pilotage related

businesses, since the Department does not consider these types of

transactions to be in the public interest. As such, section 404.5(a)(5)

accomplishes its intended objective, and is therefore retained.

One commenter objected to 46 CFR Sec. 404.5(a)(8)(ii), which

provides that lobbying expenses will not be allowed for ratemaking

purposes. The Department has no objection to pilot associations who

wish to expend money for lobbying purposes. However, it does not seem

reasonable to make others, i.e., those members of the public who pay

pilotage rates, pay for these expenses. Therefore, section

404.5(a)(8)(ii) is retained.

Four sets of comments from pilots and their representatives

questioned the

[[Page 21083]]

methods used to compute pilot compensation targets and pilot work hour

targets, which are used to set the number of pilots for ratemaking

purposes. These methods are contained in Step 2 of Appendix A to Part

404, and section 404.5(a). This section continues the Department policy

of maintaining income comparability between Great Lakes Registered

Pilots, and masters/chief mates on Great Lakes vessels, and the

Department's pilot work hour targets of 1000 hours in designated waters

and 1800 hours in undesignated waters. These policies were established

as a result of the 1988 DOT Pilotage Study, which examined many

alternatives and selected the master/chief mate targets and the work

hour targets. Commenters believed pilots should earn more than masters/

chief mates, and/or pilots should work fewer hours. Commenters proposed

several alternatives including income comparability with State pilots,

and inclusion of travel time in the calculation of pilot work hours.

After considering all the alternatives, the Department is keeping this

section of the final rule unchanged. 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 the 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. Therefore Step 2 of Appendix A to Part 404, and section

404.5(a) are retained.

One commenter objected to the Return on Investment (ROI) provisions

detailed in Step 5 of Appendix A to Part 404. The commenter believed a

ROI is not applicable or feasible for Great Lakes pilot associations

because: (a) Pilot associations have no inventory, or investment in

inventory, and accounts receivable are systematically collected within

a 12 month period; (b) the value of fixed assets on the organizations'

balance sheets is immaterial and all equipment is leased from related

parties; (c) there is no stockholder's equity in two associations and

in the third association it is not owned by all the pilots; and (d) the

ROI would not have a significant impact on pilotage rates. As stated by

the Department in the 1995 final rule, 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. If, as the commenter

asserts, it is true that pilot associations have little or no capital

investments, then it is true that the return on these investments will

be small. However, this does not invalidate the principle that pilots

should receive a return on the capital they invest. Whether their

capital be small or large, individuals who invest in a business have a

right to expect a return on that capital. Therefore the ROI provisions

of section 404.5(a)(4), step 5 of appendix A, and the formulas

contained in appendix B are retained.

Two commenters believe the 1995 final rule should address the

business structure of pilot associations. Currently two pilot

associations are structured as partnerships and one pilot association

is structured as a corporation. One commenter believes that the rule

should better equalize for the differences in association structure.

The other commenter recommends that the 1995 final rule require all

associations to adopt the same business structure. At the present time,

it is Department policy that each pilot association should be permitted

to adopt the business structure that best suits its needs, and it is

incumbent on each association to live with the costs and benefits

inherent in its choice. This policy allows pilots the freedom to run

their own businesses to the maximum extent practicable, with no

discernably negative consequences for the public. The Department is not

aware of any abuses of this policy at the present time. However, if it

becomes necessary to reverse this policy, this matter would be the

subject of a future rulemaking, subject to public input and comment.

One commenter recommends that the Great Lakes pilotage ratemaking

methodology should be clear and easy to implement, and any future

changes to the methodology should be made with the participation of the

pilot associations and a committee of independent and professional

individuals. The Department agrees. The Department has endeavored to

make the ratemaking methodology contained in this rule as clear and

easy as practical. In that regard, three commenters agree that the

methodology contained in the 1995 final rule is an improvement over the

methodology proposed in the NPRM. Any changes to the Great Lakes

pilotage ratemaking methodology that may be the subject of future

rulemakings will involve input and comments from the pilot associations

and other members of the public.

Four commenters believe the 1995 final rule granted the Director of

Great Lakes Pilotage too much authority and would allow the Director to

micro-manage activities of the pilot associations of which the Director

is not sufficiently knowledgeable. The Department disagrees. The

incumbent Director of Great Lakes Pilotage is extremely knowledgeable

of pilotage and other maritime activities. He has been involved in the

performance of Great Lakes Pilotage Act functions for approximately 11

years. He is a licensed merchant mariner, and the former Head of the

Navigation Department at the Maritime Institute of Technology and

Graduate Studies, the advanced training facility of the International

Organization of Masters, Mates and Pilots. Moreover, every previous

Director of Great Lakes Pilotage has had an extensive maritime

background, as well as experience in dealing with merchant mariners and

pilots. The position description for the Director of Great Lakes

Pilotage position requires a substantial maritime background. In

addition, the remaining pilotage staff have extensive maritime

backgrounds and their positions require maritime, economic, and

ratesetting knowledge and experience. Therefore, the sections of the

1995 final rule related to the Director's authority and discretion are

retained.

Two commenters believe the U.S. Government should cease oversight

of Great Lakes Pilotage, including the ratemaking and financial

oversight regulations contained in this rulemaking. The Department is

making no changes pursuant to this comment. As stated earlier, the Act

requires the Secretary to prescribe by regulation rates and charges for

pilotage services.

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 rulemaking affecting the setting of

pilotage rates has been controversial and of significant interest to

the public.

[[Page 21084]]

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). One commenter believes that this rule

will have a significant economic impact on a substantial number of

small entities. However, the commenter did not elaborate on why this

impact would occur. Since this rule is not a major change from past

rulemaking practices, and only three pilot associations with a total of

approximately 40 members will be directly affected by this rule, 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. 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 this rule is categorically excluded from

further environmental documentation under section 2.B.2 of Commandant

Instruction M16475.1B. 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 has been placed in the docket.

List of Subjects in 46 CFR Parts 403 and 404

Administrative practice and procedure, Great Lakes, Navigation

(water), Penalties, Reporting and recordkeeping requirements, Seamen.

For reasons set out in the preamble, the Department proposes to

amend Parts 403 and 404 of Title 46 of the Code of Federal Regulations

as follows:

PART 403--[AMENDED]

1. The authority citation for part 403 continues to read as

follows:

Authority: 46 U.S.C. 8105, 9303, 9304; 49 CFR 1.46.

2. Section 403.300(b) is revised to read as follows:

Sec. 403.300 Financial reporting requirements.

* * * * *

(b) Required Reports:

(1) By April 1 of each year, each Association shall obtain an

annual unqualified long form audit report for the preceding year,

audited and prepared in accordance with generally accepted auditing

standards by an independent certified public accountant.

(2) Each Association shall forward their annual unqualified long

form audit report, and any associated settlement statements, to the

Director no later than April 7 of each year.

PART 404--[AMENDED]

3. Section 404.1(b) is revised to read as follows:

Authority: 46 U.S.C. 8105, 9303, 9304, 49 CFR 1.46.

Sec. 404.1 General ratemaking provisions.

* * * * *

(b) Great Lakes pilotage rates shall be reviewed annually in

accordance with the procedures detailed in Appendix C to this part. The

Director shall review Association audit reports annually and, at a

minimum, 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 of this part at least once every

five years. 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.

Issued at Washington, DC this 2nd day of May, 1996.

Federico Pena,

Secretary of Transportation.

[FR Doc. 96-11499 Filed 5-8-96; 8:45 am]

BILLING CODE 4910-62-P