[Federal Register Volume 84, Number 91 (Friday, May 10, 2019)]
[Rules and Regulations]
[Pages 20551-20578]
[FR Doc No: 2019-09657]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[USCG-2018-0665]
RIN 1625-AC49

Great Lakes Pilotage Rates--2019 Annual Review and Revisions to
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the
Coast Guard is establishing new base pilotage rates and surcharges for
the 2019 shipping season. This rule will adjust the pilotage rates to
account for a rolling ten-year average for traffic, and result in an
increase in pilotage rates due to an adjustment for anticipated
inflation, changes in operating expenses, surcharges for applicant
pilots, and an addition of two pilots.

DATES: This rule is effective June 10, 2019.

FOR FURTHER INFORMATION CONTACT: For information about this document,
call or email Mr. Brian Rogers, Commandant (CG-WWM-2), Coast Guard;
telephone<PHONE_NUMBER>, email [email protected], or fax 202-372-
1914.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Comments
    A. Operating Expenses
    a. Medical Benefits Paid to Retired Pilots
    b. Calculation of Applicant Pilot Costs
    c. Reimbursement for Direct-Billed Pilot Boat Costs
    d. Housing Allowances
    e. Capital Expenses
    f. Legal Fees
    B. Surcharge Offsets
    C. Continued Use of Surcharges
    D. Target Compensation
    a. Questions Relating the Interim Compensation Benchmark
    i. Inflation Adjustments From 2015-2018
    ii. Use of a 270-Day Multiplier and Guaranteed Overtime Figure
    b. Comparisons With Other U.S. Pilots
    E. Manning and Traffic Figures
    a. Manning
    b. Use of Bridge Hours and Average Traffic Figures
    c. Calculation of 2017 Traffic Figure for District 3
    F. Working Capital Fund
    G. Use of the Martin Report
    H. Other Issues Concerning Ratemaking Procedures
    a. Over-Realization of Pilotage Revenue
    b. Disparity of Rates Between U.S. and Canadian Pilotage
I. Out-of-Scope Issues
    J. Issues Resulting From Litigation
VI. Discussion of Current Rate Adjustments
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    K. Surcharges
VII. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates Reform Act
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Abbreviations

AMO American Maritime Officers
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
FOIA Freedom of Information Act
FOMC Federal Open Market Committee
FR Federal Register
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
ICR Information Collection Request
LIBOR London Interbank Offered Rate
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OIRA Office of Information and Regulatory Affairs
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code
USD United States dollars
WGLPA Western Great Lakes Pilot Association

II. Executive Summary

    Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\
the Coast Guard regulates pilotage for oceangoing vessels on the Great
Lakes--including setting the rates for pilotage services and adjusting
them on an annual basis. The rates, which during the 2018 shipping year
ranged from $271 to $653 per pilot hour (depending on the specific area
where pilotage service is provided), are paid by shippers to pilot
associations. The three pilot associations are the exclusive U.S.
source of registered pilots on the Great Lakes. The pilot associations
use this revenue to cover operating expenses, maintain infrastructure,
compensate working pilots, and train new pilots. Since 2016, the Coast
Guard has used a ratemaking methodology that was developed in
accordance with our statutory requirements and regulations. This
ratemaking methodology calculates the revenue needed for each pilotage
association (including operating expenses, compensation, and
infrastructure needs), and then divides that amount by the 10-year
average of shipping traffic to produce an hourly rate. This process is
currently effected through a 10-step methodology and supplemented with
surcharges, which are explained in detail in this rulemaking.
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    \1\ Title 46 United States Code (U.S.C.) Chapter 93; Public Law
86-555, 74 Stat. 259, as amended.
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    In this final rule, the Coast Guard is establishing new pilotage
rates for 2019 based on the existing ratemaking methodology. As
proposed in the notice of proposed rulemaking (NPRM), the Coast Guard
is adjusting the rates to account for 2019 inflation, the addition of
two working pilots, and updated historic traffic data. Based on the
comments to the NPRM, the Coast Guard is also adjusting the operating
expenses and correcting previous traffic data, which is discussed in
Section V below. The result of these changes is an overall increase in
the rates, as shown in Table 1.

                           Table 1--Current and New Pilotage Rates on the Great Lakes
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                                                                   2018 Pilotage   Proposed 2019    Final 2019
                 Area                             Name                 rate        pilotage rate   pilotage rate
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District One: Designated..............  St. Lawrence River......            $653            $698            $733
District One: Undesignated............  Lake Ontario............             435             492             493
District Two: Undesignated............  Lake Erie...............             497             530             531
District Two: Designated..............  Navigable waters from                593             632             603
                                         Southeast Shoal to Port
                                         Huron, MI.
District Three: Undesignated..........  Lakes Huron, Michigan,               271             304             306
                                         and Superior.
District Three: Designated............  St. Mary's River........             600             602             594
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    This final rule is not economically significant under Executive
Order 12866. This rule impacts 51 United States Great Lakes pilots, 3
pilot associations, and the owners and operators of an average of 256
oceangoing vessels that transit the Great Lakes annually. The estimated
overall annual regulatory economic impact of this rate change is a net
increase of $2,831,743 in payments made by shippers from the 2018
shipping season. Because the Coast Guard must review, and, if
necessary, adjust rates each year, the rates are analyzed as single
year costs and are not annualized over 10 years. This rule does not
affect the Coast Guard's budget or increase Federal spending. Section
VII of this preamble provides the regulatory impact analyses of this
final rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (``the Act''),\2\ which requires U.S. vessels operating on
register and foreign vessels to use U.S. or Canadian registered pilots
while transiting the U.S. waters of the St. Lawrence Seaway and the
Great Lakes system.\3\ For the U.S. registered Great Lakes pilots
(``pilots''), the Act requires the Secretary to ``prescribe by
regulation rates and charges for pilotage services, giving
consideration to the public interest and the costs of providing the
services.'' \4\ The Act requires that rates be established or reviewed
and adjusted each year, no later than March 1. The Act requires that
base rates be established by a full ratemaking at least once every five
years, and in years when base rates are not established, the rates must
be reviewed and, if necessary, adjusted. The Secretary's duties and
authority under the Act have been delegated to the Coast Guard.\5\
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    \2\ 46 U.S.C. chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ 46 U.S.C. 9303(f).
    \5\ Department of Homeland Security (DHS) Delegation No. 0170.1,
para. II (92.f).
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    This final rule establishes new pilotage rates and surcharges for
the 2019 shipping season. The Coast Guard believes that the new rates
will promote pilot retention, ensure safe, efficient, and reliable
pilotage services on the Great Lakes, and provide adequate funds to
upgrade and maintain infrastructure.

IV. Background

    Pursuant to the Great Lakes Pilotage Act of 1960, the Coast Guard,
in conjunction with the Canadian Great Lakes Pilotage Authority,
regulates shipping practices and rates on the Great Lakes. Under Coast
Guard regulations, all vessels engaged in foreign trade (often referred
to as ``salties'') are required to engage U.S. or Canadian pilots
during their transit through the regulated waters.\6\ United States and
Canadian ``lakers,'' which account for most commercial shipping on the
Great Lakes, are not affected.\7\ Generally, vessels are assigned a
U.S. or Canadian pilot depending on the order in which they transit a
particular area of the Great Lakes and do not choose the pilot they
receive. If a vessel is assigned a U.S. pilot, that pilot will be
assigned by the pilotage association responsible for the particular
district in which the vessel is operating, and the vessel operator will
pay the pilotage association for the pilotage services.
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    \6\ See 46 CFR part 401.
    \7\ 46 U.S.C. 9302(f). A ``laker'' is a commercial cargo vessel
especially designed for and generally limited to use on the Great
Lakes.
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are
divided into three pilotage districts. Pilotage in each district is
provided by an association certified by the Coast Guard's Director of
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool.
The Saint Lawrence Seaway Pilotage Association provides

pilotage services in District One, which includes all U.S. waters of
the St. Lawrence River and Lake Ontario. The Lakes Pilotage Association
provides pilotage services in District Two, which includes all U.S.
waters of Lake Erie, the Detroit River, Lake St. Clair, and the St.
Clair River. The Western Great Lakes Pilotage Association provides
pilotage services in District Three, which includes all U.S. waters of
the St. Mary's River; Sault Ste. Marie Locks; and Lakes Huron,
Michigan, and Superior.
    Each pilotage district is further divided into ``designated'' and
``undesignated'' areas. Designated areas are classified as such by
Presidential Proclamation \8\ to be waters in which pilots must, at all
times, be fully engaged in the navigation of vessels in their charge.
Undesignated areas, on the other hand, are open bodies of water, and
thus are not subject to the same pilotage requirements. While working
in those undesignated areas, pilots must ``be on board and available to
direct the navigation of the vessel at the discretion of and subject to
the customary authority of the master.'' \9\ For pilotage purposes,
rates in designated areas are significantly higher than those in
undesignated areas for these reasons.
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    \8\ Presidential Proclamation 3385, Designation of Restricted
Waters Under the Great Lakes Pilotage Act of 1960, December 22,
1960.
    \9\ 46 U.S.C. 9302(a)(1)(B).

                           Table 2--Areas of the Great Lakes and Saint Lawrence Seaway
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          District            Pilotage association       Designation        Area No.\10\       Area name \11\
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One........................  Saint Lawrence Seaway  Designated...........               1  St. Lawrence River.
                              Pilotage Association.
                                                    Undesignated.........               2  Lake Ontario.
Two........................  Lake Pilotage          Designated...........               5  Navigable waters from
                              Association.                                                  Southeast Shoal to
                                                                                Port Huron, MI.
                                                    Undesignated.........               4  Lake Erie.
Three......................  Western Great Lakes    Designated...........               7  St. Mary's River.
                              Pilotage Association.
                                                    Undesignated.........               6  Lakes Huron and
                                                                                Michigan.
                                                    Undesignated.........               8  Lake Superior.
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    Each pilot association is an independent business and is the sole
provider of pilotage services in the district in which it operates.
Each pilot association is responsible for funding its own operating
expenses, maintaining infrastructure, acquiring and implementing
technological advances, training personnel or partners and pilot
compensation. The Coast Guard developed a 10-step ratemaking
methodology to derive a pilotage rate that covers these expenses based
on the estimated amount of traffic. The methodology is designed to
measure how much revenue each pilotage association will need to cover
expenses and provide competitive compensation to working pilots. The
Coast Guard then divides that amount by the historical average traffic
transiting through the district.
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    \10\ Area 3 is the Welland Canal, which is serviced exclusively
by the Canadian GLPA and, accordingly, is not included in the United
States pilotage rate structure.
    \11\ The areas are listed by name in the Code of Federal
Regulations, see 46 CFR 401.405.
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    Over the past three years, the Coast Guard has made adjustments to
the Great Lakes pilotage ratemaking methodology. In 2016, we made
significant changes to the methodology, moving to an hourly billing
rate for pilotage services and changing the compensation benchmark to a
more transparent model. In 2017, we added additional steps to the
ratemaking methodology, including new steps that accurately account for
the additional revenue produced by the application of weighting factors
(discussed in detail in Steps 7 through 9 of this preamble). In 2018,
we revised the methodology by which we develop the compensation
benchmark, based upon the rate of U.S. mariners rather than Canadian
registered pilots. The 2018 methodology, which was finalized in the
June 5, 2018 final rule (83 FR 26162) and is the current methodology,
is designed to accurately capture all of the costs and revenues
associated with Great Lakes pilotage requirements and produce an hourly
rate that adequately and accurately compensates pilots and covers
expenses. The current methodology is summarized in the section below.

Summary of Ratemaking Methodology

    As stated above, the ratemaking methodology, currently outlined in
46 CFR 404.101 through 404.110, consists of 10 steps that are designed
to account for the revenues needed and total traffic expected in each
district. The result is an hourly rate, determined separately for each
of the areas administered by the Coast Guard.
    In Step 1, ``Recognize previous operating expenses,'' (Sec.
404.101), the Director reviews audited operating expenses from each of
the three pilotage associations. This number forms the baseline amount
that each association is budgeted. Because of the time delay between
when the association submits raw numbers and the Coast Guard receives
audited numbers, this number is three years behind the projected year
of expenses. In calculating the 2019 rates, the Coast Guard used the
audited expenses from fiscal year 2016.
    While each pilotage association operates in an entire district, the
Coast Guard determines costs by area. Thus, with regard to operating
expenses, the Coast Guard allocates certain operating expenses to
undesignated areas, and certain expenses to designated areas. In some
cases (e.g., insurance for applicant pilots who operate in undesignated
areas only), we allocate based on where they are actually accrued. In
other situations (e.g., general legal expenses), expenses are
distributed between designated and undesignated waters on a pro rata
basis, based upon the proportion of income forecasted from the
respective portions of the district.
    In Step 2, ``Project operating expenses, adjusting for inflation or
deflation,'' (Sec.  404.102), the Director develops the 2019 projected
operating expenses. To do this, we apply inflation adjustors for three
years to the operating expense baseline received in Step 1. The
inflation factors used are from the Bureau of Labor Statistics (BLS)
Consumer Price Index (CPI) for the Midwest Region, or, if not
available, the Federal Open Market Committee (FOMC) median economic
projections for Personal Consumption Expenditures (PCE) inflation. This
step produces the

total operating expenses for each area and district.
    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103),
the Director calculates how many pilots are needed for each district.
To do this, we employ a ``staffing model,'' described in Sec.  401.220,
paragraphs (a)(1) through (3), to estimate how many pilots would be
needed to handle shipping during the beginning and close of the season.
This number is helpful in providing guidance to the Director in
approving an appropriate number of credentials for pilots.
    For the purpose of the ratemaking calculation, we determine the
number of working pilots provided by the pilotage associations (see
Sec.  404.103) which is what we use to determine how many pilots need
to be compensated via the pilotage fees collected.
    In Step 4, ``Determine target pilot compensation benchmark,''
(Sec.  404.104), the Director determines the revenue needed for pilot
compensation in each area and district. This step contains two
processes. In the first process, we calculate the total compensation
for each pilot using a ``compensation benchmark.'' Next, we multiply
the individual pilot compensation by the number of working pilots for
each area and district (from Step 3), producing a figure for total
pilot compensation. Because pilots are paid by the associations, but
the costs of pilotage are divided up by area for accounting purposes,
we assign a certain number of pilots for the designated areas and a
certain number of pilots for the undesignated areas for purposes of
determining the revenues needed for each area. To make the
determination of how many pilots to assign, we use the staffing model
designed to determine the total number of pilots described in Step 3,
above.
    In the second process of Step 4, set forth in Sec.  404.104(c), the
Director determines the total compensation figure for each District. To
do this, the Director multiplies the compensation benchmark by the
number of working pilots for each area and district (from Step 3),
producing a figure for total pilot compensation.
    In Step 5, ``Project working capital fund,'' (Sec.  404.105), the
Director calculates a value that is added to pay for needed capital
improvements. This value is calculated by adding the total operating
expenses (derived in Step 2) and the total pilot compensation (derived
in Step 4), and multiplying that figure by the preceding year's average
annual rate of return for new issues of high-grade corporate
securities. This figure constitutes the ``working capital fund'' for
each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106), the
Director adds up the totals produced by the preceding steps. For each
area and district, we add the projected operating expense (from Step
2), the total pilot compensation (from Step 4), and the working capital
fund contribution (from Step 5). The total figure, calculated
separately for each area and district, is the ``revenue needed.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107), the
Director calculates an hourly pilotage rate to cover the revenue
needed, as calculated in step 6. This step consists of first
calculating the 10-year traffic average for each area. Next, we divide
the revenue needed in each area (calculated in Step 6) by the 10-year
traffic average to produce an initial base rate.
    An additional element, the ``weighting factor,'' is required under
Sec.  401.400. Pursuant to that section, ships pay a multiple of the
``base rate'' as calculated in Step 7 by a number ranging from 1.0 (for
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest
ships, or ``Class IV'' vessels). As this significantly increases the
revenue collected, we need to account for the added revenue produced by
the weighting factors to ensure that shippers are not overpaying for
pilotage services.
    In Step 8, ``Calculate average weighting factors by area,'' (Sec.
404.108), the Director calculates how much extra revenue, as a
percentage of total revenue, has historically been produced by the
weighting factors in each area. We do this by using a historical
average of applied weighting factors for each year since 2014, the
first year the current weighting factors were applied.
    In Step 9, ``Calculate revised base rates,'' (Sec.  404.109), we
modify the base rates by accounting for the extra revenue generated by
the weighting factors. We do this by dividing the initial pilotage rate
for each area (from Step 7) by the corresponding average weighting
factor (from Step 8), to produce a revised rate.
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110), often
referred to informally as ``Director's discretion,'' the Director
reviews the revised base rates (from Step 9) to ensure that they meet
the goals set forth in the Act and 46 CFR 404.1(a), which include
promoting efficient, safe, and reliable pilotage service on the Great
Lakes; generating sufficient revenue for each pilotage association to
reimburse necessary and reasonable operating expenses; compensating
pilots fairly and providing appropriate funds for infrastructure and
training. The Coast Guard also uses various factors to ensure that the
rate is set in the public interest and will continue to encourage
robust traffic in the Great Lakes. The Martin Study is one factor the
Coast Guard considered when setting rates for shipping, but Coast Guard
also recognizes that it is not a comprehensive analysis of all economic
factors.\12\
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    \12\ Martin Associates, ``Analysis of Great Lakes Pilotage Costs
on Great Lakes Shipping and the Potential Impact of Increases in
U.S. Pilotage Charges,'' page 33. Available at http://www.regulations.gov, USCG-2018-0665-0005.
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    Finally, after the base rates are set, Sec.  401.401 permits the
Coast Guard to apply surcharges. Currently, we use surcharges to pay
for the training of new pilots rather than incorporating training costs
into the overall ``revenue needed'' used in the calculation of the base
rates. In recent years, we have allocated $150,000 per applicant pilot
to be collected via surcharges. This amount is calculated as a
percentage of total revenue for each district, and that percentage is
applied to each bill. When the total amount of the surcharge has been
collected, the pilot associations are prohibited from collecting
further surcharges. Thus, in years where traffic is heavier than
expected, shippers early in the season could pay more than shippers
employing pilots later in the season, after the surcharge cap has been
met.

V. Discussion of Comments

    In response to the October 17, 2018, NPRM (83 FR 52355), the Coast
Guard received five comment letters. These included one comment from
the three Great Lakes pilot associations,\13\ one comment from the law
firm Thompson Coburn, which represents the interests of the Shipping
Federation of Canada, the American Great Lakes Ports Association, and
the United States Great Lakes Shipping Association (hereinafter
``User's Coalition''),\14\ a comment from the president of the St.
Lawrence Seaway Pilots' Association,\15\ a comment from the president
of the Lakes Pilots Association,\16\ and a comment from the president
of the Western Great Lakes Pilot Association.\17\ As each of these
commenters touched on numerous issues, for each response below, we note
which commenters raised the specific points addressed. In situations
where multiple commenters

raised similar issues, we attempt to provide one response to those
issues.
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    \13\ USCG-2018-0665-0008, available at http://www.regulations.gov.
    \14\ USCG-2018-0665-0010.
    \15\ USCG-2018-0665-0009.
    \16\ USCG-2018-0665-0007.
    \17\ USCG-2018-0665-0006.
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A. Operating Expenses

    The first step of the ratemaking process entails establishing the
allowable operating expenses for each pilotage district, and allowing
pilot associations to recoup any costs that are considered reasonable
and necessary for operation of a pilotage association. To do so,
pilotage associations submit accounting statements to independent
auditors, and then the audited reports are forwarded to the Coast Guard
for additional review. We received several comments from pilot
associations and persons representing such interests requesting changes
to these adjustments, which are discussed below.
a. Medical Benefits Paid to Retired Pilots
    The Coast Guard received one comment concerning an adjustment made
for payments to retired pilots. In the NPRM, we proposed to disallow
$90,600 of requested charges for payments of health benefits for
retired pilots. In doing so, we stated that ``we consider health
benefits to be `compensation,' and compensation paid to pilots cannot
be recouped as operating expenses.'' \18\ One commenter \19\ stated
that, because the payments were made on behalf of retired pilots who
were not among the 13 allowed pilots, the amount should not be
considered as pilot compensation and should be construed as a
reimbursable operating expense. The commenter also noted that such a
payment had been allowed in a 2005 Interim Rule.\20\
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    \18\ Great Lakes Pilotage Rates--2019 Annual Review and
Revisions to Methodology (October 17, 2018), 83 FR 52355 at 52361.
    \19\ USCG-2018-0665-0007.
    \20\ 70 FR 12082, 12086 (March 10, 2005).
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    Upon examining the enclosed Federal Register citation to the 2005
interim final rule and reviewing the regulatory text, the Coast Guard
confirms its proposal to disallow payments of health benefits and
reaffirms here that medical expenses paid on behalf on pilots should be
considered pilot compensation, and not an operating expense. Section
404.2 requires that medical and pension benefits for pilots be treated
as pilot compensation; i.e., not as an allowable operating expense. The
reasoning in the 2005 Federal Register Interim Rule does not apply
here. In the 2005 Interim Rule, which was predicated on pre-2016
regulations, the Coast Guard based the decision to expense certain
medical costs on the specific contours of the American Maritime
Officers (AMO) union contracts that formed the basis of the 2005
compensation benchmark. Such reasoning, even if it were permissible
under the current regulations, does not apply to the 2016 operating
expenses at issue in this year. Instead of basing our compensation on
the AMO contract, the Coast Guard based the 2016 compensation benchmark
on Canadian compensation figures.
b. Calculation of Applicant Pilot Costs
    One commenter stated that District 3 had misstated its medical
expenses in its report to the auditors.\21\ The commenter argued that
it had submitted an aggregated medical expense of $77,060, and that the
auditors had incorrectly allocated all of that sum as costs associated
with pilots. The commenter stated that, in fact, $60,031 of that sum
was paid as medical expenses for applicant pilots, while only $17,030
(numbers are rounded to the nearest dollar) were paid as partner
compensation. They claimed that they had submitted a spreadsheet to the
auditors with the correct disaggregated information, but that the
auditors had failed to use it.
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    \21\ USCG-2018-0665-0008, p. 2-3.
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    The Coast Guard agrees with this comment. The Coast Guard consulted
with the auditors, who re-examined the information provided to them by
District 3. The auditors agreed that information disaggregating the
medical expense items had been overlooked, and that the medical
expenses of the District 3 applicant pilots had been understated by a
total of $60,031. For that reason, the Coast Guard is adding that
figure to the total applicant medical expenses for District 3 (see
Table 5 below).
    In a related note, the adjustment to applicant pilot compensation
for District 3 effects the Director's adjustment for District 2
applicant pilot expenses. In the NPRM, the Coast Guard proposed to make
a substantial adjustment to the District 2 request for reimbursement of
$571,248 for two applicant pilots, as that request was not supported by
audited financial statements.\22\ Instead of permitting $571,248 for
two applicant pilots, we proposed allowing an operating expense of
$257,566, or $128,783 per applicant pilot, which was equivalent to the
amount paid by District 3 to applicant pilots, resulting in a proposed
Director's adjustment of $313,681. However, as we have adjusted the
allowance for District 3 applicants by $60,031 for the reasons
described above, a similar adjustment is required for the two District
2 applicants. For that reason, we are finalizing a positive $60,031
Director's adjustment for District 2 applicant pilot benefits, in
addition to the negative $313,681 adjustment to wages originally
proposed, for a total negative adjustment of $253,650 (see Table 5
below).
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    \22\ See 83 FR 52355, at 52361.
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    One commenter provided comments on the District 2 applicant pilot
adjustment, and we believe the above change addresses their comment.
The commenter stated that in the NPRM, ``the proposed rule training
expenses have been denied merely on the ground that they are higher
than purported (and incorrectly stated) District 3 expenses.'' \23\
While the commenter is incorrect that the Coast Guard did not approve
the stated figures merely because they were high,\24\ we agree with the
commenter that the District 3 expenses were inaccurately stated.
However, we disagree with the commenter's argument that the District 2
applicant expenses should be accepted at face value. We note that all
operating expenses must be ``reasonable in their amounts'' pursuant to
section 404.2(c)(1). District 2 asserted, in their letter to the Coast
Guard,\25\ that they paid applicant pilots $285,624.23 each in wages
alone, a number far larger than the applicant salaries of the other
Districts and nearly on par with full pilots, which the Coast Guard
provided a targeted compensation level of $326,114 (a figure which
included full benefits) for 2016. In the NPRM, we stated that ``because
this number is far out of line from wages paid to applicant pilots in
other districts, as well as the Coast Guard's estimate[s] . . . the
Director proposes only allowing a portion of these expenses to be
recouped as reasonable operating expenses.'' \26\ We remain unpersuaded
that $285,624.23 is a reasonable wage for an applicant pilot.
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    \23\ USCG-2018-0665-0008, p.8.
    \24\ In the NPRM, we stated that we had received inaccurate
information on applicant expenses originally, and the unaudited
assertion made in response to Coast Guard inquiries was not
believed. See 83 FR 52355, at 52361.
    \25\ USCG-2018-0665-0001.
    \26\ 83 FR 52355, at 52361.
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c. Reimbursement for Direct-Billed Pilot Boat Costs
    One commenter suggested that the auditor's adjustment for direct-
billed pilot boat runs should be reduced. In the NPRM, the Coast Guard
noted an auditor's adjustment for $92,056 of direct-billed boat and
discharge costs.\27\ In District 3, ordinary pilot boat costs are
billed to the Western Great Lakes

Pilot Association (WGLPA), and are considered a reimbursable operating
expense. However, when a pilot boat is operated for the convenience of
the vessel, the cost is billed directly to the vessel and paid to the
associations, which reimburse the pilot boat. Thus, the pilotage
association cannot claim that cost as a reimbursable operating expense,
as that would constitute double-billing. For this reason, the auditor
disallowed the recoupment of those fees as operating costs. However,
one commenter \28\ argued that the auditor erred. Because of that
$92,056 billed to the shippers, the Canadian Great Lakes Pilotage
Authority (GLPA) had received $37,754 more in revenues from those
services than it had paid in costs, and the WGLPA suffered an
equivalent shortfall. The WGLPA requested that it be allowed to recoup
the $37,754 shortfall as reimbursable operating expenses.
---------------------------------------------------------------------------

    \27\ See item D3-16-02, 83 FR 52355, at 52362.
    \28\ USCG-2018-0665-0006, p.3.
---------------------------------------------------------------------------

    After consideration of the comment, the Coast Guard does not agree
that this expense should be included with operating costs. The cost for
pilotage boat services was $92,056, which was paid by the shippers at
that time. As the commenter stated, while the revenues from $92,056
were split approximately evenly between the GLPA and WGLPA, the WGLPA
paid a much larger percentage of the $92,056 in costs, resulting in a
$37,754 shortfall for the WGLPA and an equivalent windfall for the
GLPA. While the WGLPA is correct that it suffered a loss from this
inequitable split, we do not believe that the shortfall should be made
up by permitting the WGLPA to bill an additional $37,754 to the
shippers, who have already paid the costs for the pilot boat services
in full.
d. Housing Allowances
    In the NPRM, the Coast Guard proposed to disallow $36,900 in
housing allowance expenditures for the District 3 operating expenses.
As we did not have documentation of monies spent, we requested that the
association ``provide the receipts that could help to determine if
these are recoverable operating expenses.'' \29\ We also note that the
Director is legally prohibited from permitting undocumented expenses
pursuant to 46 CFR 404.2(c)(1).
---------------------------------------------------------------------------

    \29\ 83 FR 52355, at 52362.
---------------------------------------------------------------------------

    One comment addressed the amount of money paid for housing. This
commenter \30\ argued that the total sum amounted to $820 per month for
5 pilots, and that this amount was paid to the pilots so they could
rent apartments in the De Tour/Sault St. Marie area instead of using
hotels when required to stay overnight. The commenter argued that the
cost of a hotel in the area is about $95 per night, and that using
hotels could cost over $2,000 per month per pilot. While hotel receipts
would satisfy the Coast Guard's need for ``receipts,'' the commenter
argues using hotels would not be a cost-effective method for housing
pilots. The Coast Guard believes that this commenter has placed too
much emphasis on the Coast Guard's use of the word ``receipts'' and
misinterpreted the requirements of 46 CFR 404.2(c)(1), which prohibits
the recoupment of ``undocumented expenses.'' That provision requires
documentation of money spent, and does not permit the reimbursement of
an ``allowance.'' For example, the Coast Guard would accept leases and
documentation of money paid for apartments as an allowable operating
expense, assuming it found the expense necessary and reasonable
pursuant to section 404.2(a). However, we cannot reimburse an allowance
paid to pilots as an operating expense. We require verification for all
payments with proper documentation clearly demonstrating that the money
was spent on allowable and reasonable expenses. For these reasons, we
are denying the request to recoup the housing allowance as an operating
expense.\31\
---------------------------------------------------------------------------

    \30\ USCG-2018-0665-0006, p. 4.
    \31\ We note that the commenter describes a situation in which
the pilots maintain apartments in the metro area (DeTour/Sault St
Marie) in which they work. Under IRS guidance, one cannot claim
lodging expenses in the city in which they work.
---------------------------------------------------------------------------

e. Capital Expenses
    One commenter stated they submitted costs for ``infrastructure'' to
the Coast Guard, and that ``discussions with the Coast Guard at the
time indicated the submitted data was sufficient for ratemaking
purposes,'' but that the ``NPRM shows no contemplation of removing
these funds.'' \32\ This comment refers to the ``Capital Acquisitions''
item referred in Section X of the document entitled St. Lawrence Seaway
Pilots Association--Independent Accountant's Report on Applying Agreed-
Upon Procedures.'' \33\ That document describes three properties in New
York used by the St. Lawrence Seaway Pilots Association for operational
needs. The document stated that the Coast Guard would approve $466,940
in operating costs to cover cash outlays made in 2016 to acquire these
properties.\34\
---------------------------------------------------------------------------

    \32\ USCG-2018-0665-0009, p.1.
    \33\ USCG-2018-0665-0002, p.30.
    \34\ USCG-2018-0665-0002, p.8, note 2.
---------------------------------------------------------------------------

    While the Coast Guard originally believed that these outlays would
be covered by money brought in from Step 5 of the ratemaking process,
we now believe, based on the comment and contemporaneous communication
with the association, that this should be considered an operating
expense. While future capital acquisitions may or may not be considered
operating expenses due to the existence of the working capital fund
(see the ``working capital fund'' discussion below for more detailed
discussion on treatment of capital expenses), we note that the working
capital fund was not in effect at the time of these acquisitions. It
was only in 2017 that Step 5 of the ratemaking process was identified
as the working capital fund, and until that point, it had been
characterized as a ``return on investment.'' Based on that, we believe
it within the purview of the Coast Guard to identify which capital
expenses are considered reasonable and necessary pursuant to the
guidelines in Sec.  404.2, and we believe that these purchases are
within those guidelines. For that reason, we are adding the $466,940
property acquisition cost to the allowable operating expenses of
District 1.
f. Legal Fees
    One commenter suggested that the Coast Guard had erroneously made a
Director's adjustment of $1,292 for legal fees for District 3, and that
adjustment should be removed.\35\ The commenter stated that only
$15,208.09 of its reported legal fees were for ``general activities,''
and that it had already excluded 3 percent of that amount from its
requested operating expenses as related to lobbying. The Coast Guard
has examined the commenter's calculations and agrees the Director's
adjustment was unneeded, and has thus removed it.
---------------------------------------------------------------------------

    \35\ USCG-2018-0665-0006, p.3.
---------------------------------------------------------------------------

B. Surcharge Offsets

    Beginning in 2016, the Coast Guard began implementing surcharges on
shipping rates to encourage the recruitment and training of new pilots
on the Great Lakes. Unlike pilot compensation, costs relating to the
compensation and training of applicant pilots are fully reimbursable as
operating expenses. However, the Coast Guard used surcharges so that
pilot associations could receive the money needed to cover the costs of
recruiting and training pilots in the year they were incurred, rather
than wait three years until such costs could be reimbursed as ordinary
operating expenses. As such, the surcharges act as an ``advance'' on

the reimbursed operating expenses. This year, 2019, is the first year
in which we can view the incurred operating expenses for applicant
pilots in 2016, and deduct from operating expenses the actual amounts
collected in surcharges. We note that in the 2017 rulemaking, we
modified the surcharge provision to limit the amount collected to
$150,000 per applicant pilot. However, in 2016, the year to which these
calculations apply, there was no cap on the amount of surcharges, and
the amounts collected therefore totaled far more than the surcharge
percentage was anticipated to collect.
    In the NPRM, the Coast Guard included a ``surcharge offset'' line,
which corresponded to the actual amount collected in surcharges in the
2016 shipping season.\36\ We received several comments on this issue,
although some of the commenters appeared to misunderstand what the
surcharge adjustment was for or the basis on which it was calculated.
One commenter provided information about pilot costs from 2017, stating
that ``the Coast Guard should have audited data showing that District
Three's surcharge revenue for 2017 was only $382,297.24 of the $600,000
projected applicant pilot cost.'' \37\ The commenter's statement refers
to the wrong year--the ``surcharge offset'' should be equal to the
amount actually collected by surcharges in the year of expenses being
analyzed (which for this rule is 2016, not 2017). We will analyze
surcharge offsets for subsequent years at the appropriate time, when we
consider that year's operating expenses for purposes of rate
calculation.
---------------------------------------------------------------------------

    \36\ See NPRM, 83 FR 52355, at 52359 for additional discussion.
    \37\ USCG-2018-0665-0006, p.5.
---------------------------------------------------------------------------

    One commenter stated that ``the proposed rule also errs in stating
that the $150,000 per pilot surcharge amounts were intended to be hard
estimates or caps on the amount of reasonable training expenditures, so
that any amounts expended beyond that should now be disallowed.'' \38\
While the Coast Guard is uncertain about what statements in the
proposed rule the commenter is referring to, we agree that there was no
hard limit on how much could be spent on training and stipends for
applicant pilots, so long as the expenses were considered to be
reasonable and necessary pursuant to the requirements in Sec.
404.2(a). The commenter goes on to state that the NPRM ``proposes to
deduct from each association's operating expenses not only any
surcharges collected in excess of $150,000 per applicant pilot, id. . .
.'' 39 40 We disagree with the commenter, and note the
``surcharge offset'' is equal to the actual dollar amount collected as
surcharges in the 2016 shipping season. The ``surcharge offset'' is
unrelated to whether certain operating costs are deemed necessary and
reasonable.
---------------------------------------------------------------------------

    \38\ USCG-2018-0665-0008, p.5.
    \39\ It is unclear what the commenter is citing here, as the
previous citation was to the 2016 GLPAC Public Meeting.
    \40\ USCG-2018-0665-0008, p. 7.
---------------------------------------------------------------------------

C. Continued Use of Surcharges

    In the NPRM, the Coast Guard suggested that we might not continue
to use surcharges in future years to cover costs relating to applicant
pilots, and instead revert to a system where all costs associated with
applicant pilots would be reimbursed through the operating expense
provisions. Noting that the ``vast majority of registered pilots are
not scheduled to retire in the next 20 years,'' \41\ the Coast Guard
invited comments on discontinuing the surcharge practice that has been
in effect the last three years. We received several responses to this
suggestion, all of which opposed the idea. One commenter argued that
``while there has been progress in hiring new pilots nothing suggests
that these new hires, many of which have been made to expand the
pilotage pool rather than to replace departing pilots, have operated to
reduce the need to train replacement pilots for the next two decades.''
\42\ Another commenter stated that ``[m]uch as we dislike surcharges--
we think the Coast Guard should keep the status quo until it is ready
to propose a better solution.'' \43\
---------------------------------------------------------------------------

    \41\ 83 FR 52355, at 52370.
    \42\ USCG-2018-0665-0008, p.5.
    \43\ USCG-2018-0665-0006, p.5.
---------------------------------------------------------------------------

    Based on the comments received, it appears that various interests
on the pilot side support the continued application of surcharges.
While no change was proposed for 2019, the Coast Guard will take this
stated preference into consideration as we prepare the 2020 ratemaking
deliberations.

D. Target Compensation

    In the NPRM, the Coast Guard established the target compensation
benchmark by multiplying the previous year's compensation benchmark by
the estimated inflation for 2018, giving a total of $359,887 per pilot
for 2019. We received numerous comments pertaining to this calculation,
which are described below.
a. Questions Relating to the Interim Compensation Benchmark
i. Inflation Adjustments From 2015-2018
    One commenter raised questions about the use of AMO contracts in
the ``interim compensation'' benchmark that the Coast Guard established
in the 2018 ratemaking rule.\44\ The commenter argued that the Coast
Guard's failure to use the actual wage adjustment rates received by the
AMO from 2015-2018 was a mistake, and caused the compensation figure to
be too low, and demonstrated calculations that would use the contracted
increases from the AMO 2015 onward contract to arrive at target
compensation figure approximately $10,000 above what the Coast Guard
calculated for 2018. This commenter misunderstands the nature of the
interim compensation benchmark, which was tied to the AMO contracts in
place from 2011-2015. To summarize, the interim compensation benchmark
sought to match the daily AMO compensation level from 2015, apply it to
the 270-day working season for Great Lakes pilots, and then adjust that
number for inflation. It did not seek to match the contract
stipulations from 2015 onward, because the Coast Guard did not have
access to the underlying contract documents for that period. We
discussed the interim compensation benchmark more thoroughly in the
2018 NPRM and final rule. In those documents, we described the interim
compensation benchmark as being based on the 2015 AMO rate--and then
adjusted for inflation using public inflation data to achieve an
equivalent real value for 2018. We stated that we would not use the
more recent data on AMO contracts, as we did not have access to the
underlying documents. As we still lack that data and have not proposed
changing the basis for the compensation benchmark, we cannot adopt the
commenter's assertion that we should use contract data from the 2015-
2019 AMO contracts.
---------------------------------------------------------------------------

    \44\ USCG-2018-0665-0008, p.2-3.
---------------------------------------------------------------------------

ii. Use of a 270-Day Multiplier and Guaranteed Overtime Figure
    One commenter \45\ raised an issue relating to how we translated
the daily wage rate from the AMO contract to a yearly compensation for
purposes of setting the interim compensation benchmark in 2018. As
described in the 2018 ratemaking, the Coast Guard multiplied the daily
rate, as calculated using the AMO contracts, by 270 to get the yearly
compensation figure. We

used the figure of 270 days because that is the number of days in the
Great Lakes shipping season. However, the commenter argued that the
Coast Guard should have multiplied the daily rate by 200, which is the
number of days a Great Lakes pilot is actually expected to work under
our staffing model, which would result in significantly lower target
compensation. The commenter stated that the lower figure ``reflected
the reality of the Coast Guard's imposition of a required 10-day per
month rest requirement for U.S. pilots.'' \46\ The commenter also took
issue with the Coast Guard's incorporation of the ``guaranteed
overtime'' figure that was incorporated into the rate, stating that the
``Coast Guard accepted this figure at face value and incorporated it in
its entirety . . . with no reported inquiry into the validity of this
figure.\47\
---------------------------------------------------------------------------

    \45\ USCG-2018-0665-0010, p. 4.
    \46\ USCG-2018-0665-0010, p. 4.
    \47\ USCG-2018-0665-0010, p. 5.
---------------------------------------------------------------------------

    While the Coast Guard understands the commenter's arguments that
these actions by the Coast Guard led to significantly higher target
compensation figures, we stand by the reasoning in doing so as
articulated in the 2018 final rule. In responding to a similar comment
to the 2018 NPRM, we stated that ``while we believe the industry
commenters' suggestion of multiplying the aggregate daily wage by 200,
rather than 270, has merit, we have decided that in the interests of
recruiting and retaining a suitable number of experienced pilots, a
multiplier of 270 is the preferable course of action. The Coast Guard
also noted ``[w]hile we have considered the argument that it would be
more efficient to pay pilots less or have fewer of them to generate
lower shipping rates, we believe the effect on safety and reliability
warrant a multiplier of 270.'' \48\ With regard to the additional
overtime figure, we adopted it because the commenter who provided the
overtime figures had firsthand knowledge of the contract between the
AMO and the shippers.\49\ If the commenter has information about this
contract that could be shared which would cause the Coast Guard to
question the validity of the overtime figure, we would be open to
receiving it. However, as no additional information has been supplied,
we will continue to use the best information we have to calculate the
target compensation, which at this time includes the overtime figure.
---------------------------------------------------------------------------

    \48\ 83 FR 26171.
    \49\ 83 FR 26169.
---------------------------------------------------------------------------

b. Comparisons With Other U.S. Pilots
    One commenter argued that ``the proposed 2019 target compensation
also continues to lag [behind] the compensation of other U.S. pilots by
a considerable margin.'' The commenter went on to argue that ``the
pilots stand ready to assist the Coast Guard in [studying pilot
compensation]'' and ``urge the Coast Guard to review the information
they [the pilots] have provided, which they believe supports a higher
compensation level.'' \50\ The Coast Guard notes that the past
information provided by the pilot associations contains recent total
compensation information for selected pilot groups in other regions.
However, because target compensation and actual compensation are quite
different (in recent years, actual compensation has been significantly
higher than target compensation due to higher-than-expected shipping
demand), we cannot directly compare the two. We would welcome
submission of actual pilot compensation data for Great Lakes pilots in
recent years to improve our analysis, and will raise it as an issue in
a future Great Lakes Pilotage Advisory Committee meeting.
---------------------------------------------------------------------------

    \50\ USCG-2018-0665-0008, p. 3.
---------------------------------------------------------------------------

E. Manning and Traffic Figures

a. Manning
    Several commenters raised issues relating to the calculation of the
number of pilots needed, given anticipated traffic on the Great Lakes
(the staffing model). In the 2019 NPRM, using that model, we left the
maximum number of pilots at 54 total, although for 2019 we proposed
authorizing only 51 pilots, an increase of two pilots over the
authorized number for 2018. Based on the comments received, the Coast
Guard is not making changes to the staffing model at this time, but
note the concerns of the commenters, as discussed below.
    One commenter argued that ``with the growth of tanker and cruise
ship traffic, vessel transit frequency no longer subsides during the
summer period. The result is pilots being unable to realize the
restorative rest stated as a goal in the manning models and needed for
continued safe operation.'' \51\ The Coast Guard believes this is
potentially a valid point. The current staffing model is based on the
historic increased need for pilots at the start and close of the
season, and that by staffing to meet that need, it allows pilots to
take approximately 10 days of restorative rest each month during the
seven-month mid-season period. We are currently monitoring traffic
patterns, and if the commenter's assertion proves accurate, it would
cause us to reevaluate the staffing model. While at this time we are
still gathering data, we would appreciate additional data and
suggestions for alternative staffing models in light of changes in
traffic patterns.
---------------------------------------------------------------------------

    \51\ USCG-2018-0665-0009, p. 2.
---------------------------------------------------------------------------

    Another commenter criticized the Coast Guard's use of rounding up
the number of pilots authorized to operate in a district as a means of
calculating the administrative time required of each association's
president.\52\ The commenter suggests that the Coast Guard ``devise a
better method'' to account for the president's administrative duties.
We disagree with the commenter's suggestion. We note that, because we
are calculating the number of full-time pilots, we must round to the
nearest whole number in any event. Furthermore, because administrative
time varies widely, it is difficult to assign a concrete number to that
duty. We continue to believe that upward rounding of the number of
pilots needed is appropriate given that the association president is
both a pilot providing service and the lead administrator for the
association. We, however, encourage the commenter to suggest an
alternative method for calculating administrative time.
---------------------------------------------------------------------------

    \52\ USCG-2018-0665-0006, p. 5.
---------------------------------------------------------------------------

b. Use of Bridge Hours and Average Traffic Figures
    One commenter raised questions about the validity and consistency
of various calculations used in the Coast Guard's ratemaking
methodology. Specifically, the commenter stated that the ``use of
inconsistent time periods for varying data sets--e.g., a ten-year
rolling average of historical traffic volume data against three-year or
one-year data for determining expense levels or pilot staffing needs''
\53\ was a pressing concern. We believe that the commenter has
mischaracterized the Coast Guard's data collection and aggregation
efforts, and we will attempt to explain them here.
---------------------------------------------------------------------------

    \53\ USCG-2018-0665-0010, p. 2.
---------------------------------------------------------------------------

    The first issue is the use of the historical traffic average
(sometimes referred to as ``actual traffic'') to determine anticipated
traffic volumes, which we implement by using a rolling 10-year average.
The Coast Guard requires an estimate of the amount of traffic in the
upcoming year as part of its ratemaking methodology as this is not
something that can be measured beforehand. To derive this estimate, the

Coast Guard takes the average of the previous 10 years of traffic in
each area on the Great Lakes. The use of the historical traffic figure
was unanimously recommended by the Great Lakes Pilotage Advisory
Committee (GLPAC) in 2014,\54\ and we believe that it is the best tool
we have to estimate traffic. While in recent years high levels of
traffic have been greater than the historical average, we also note
that, not unexpectedly, in some years, the level of traffic has been
lower than average. The use of the 10-year average may cause the
average to lag trends, but it does reduce fluctuations in predicted
traffic levels resulting in a more stable rate on a year to year basis.
While we are open to suggestions as to how to better predict total
traffic, we would encourage the commenters to raise these suggestions
at the GLPAC, as we are currently continuing to follow its
recommendation on this subject.
---------------------------------------------------------------------------

    \54\ See Great Lakes Pilotage Advisory Committee meeting
transcript, July 23, 2014, at p. 254 to 258.
---------------------------------------------------------------------------

    Unlike the traffic prediction, the other factors the commenters
cite (the operating expenses and number of authorized pilots) are
measured numbers, and thus do not require a predictive mechanism. The
operating expenses (the ``three-year'' figure) are direct
reimbursements for actual expenses three years previous. The reason for
the delay is the time it takes to receive, audit, and present those
numbers through the rulemaking process. Similarly, the Director of
Great Lakes Pilotage determines the number of working pilots (the
``one-year'' figure) based on measured training progressions and
retirement announcements. These are not predictions that would require
us to average a previous year's estimates or use some other mechanism
to make predictions. For these reasons, the Coast Guard does not
believe the commenter's concern regarding the different time periods at
issue represents a flaw in the Coast Guard's ratemaking methodology.
c. Calculation of 2017 Traffic Figure for District 3
    One commenter suggested that the Coast Guard had made an error in
its calculation of the total traffic figures for District 3. The
commenter stated that the Coast Guard's 2017 total traffic figures
(26,183 hours in undesignated waters and 3,798 hours in designated
waters) were inaccurate, and that the correct figures for that year
were 20,955 hours in undesignated waters, and 2,997 hours in designated
waters.\55\ In response to this comment, we reviewed the data from 2017
and were unable to replicate the traffic figures cited in the NPRM. We
were, however, able to validate the commenter's figures using the
search parameters they provided. For that reason, we believe that the
information provided by the commenter provides a stronger basis for the
2017 traffic figures, and have made the adjustment accordingly.
---------------------------------------------------------------------------

    \55\ USCG-2018-0665-0006, p. 2.
---------------------------------------------------------------------------

F. Working Capital Fund

    In the NPRM, the Coast Guard requested comments on the utility and
value of the working capital fund and in response, received several
comments and questions regarding its origins, uses, and tax
implications. One commenter stated that while it appreciated that the
working capital fund provides a revenue stream intended to be used for
infrastructure, one problem is that the Coast Guard ``hasn't
established any guidelines or limits on acceptable uses.'' \56\ Another
commenter suggested changes to the way the working capital fund
operates. Currently, the working capital fund ``is structured so that
the pilot associations can demonstrate credit worthiness when seeking
funds from a financial institution for needed infrastructure projects,
and those projects can produce a return on investment at a rate
commensurate to repay a financial institution.'' \57\ The commenter
argued that ``if the reserve fund is used for improvements then it is
not available to provide a return on investment,'' \58\ and recommended
that the interest rate on which the value of the working capital fund
is calculated be dramatically increased (the commenter suggested London
Interbank Offered Rate (LIBOR) + 4 percent). We disagree with this
suggestion, and believe the commenter has misinterpreted the Coast
Guard's intent. In previous years, the goal of the ``return on
investment'' step, the precursor of the working capital fund, was to
provide a return to monies invested by the pilots in associations. The
amount of the money invested (the investment base) by pilots was
relatively small, and thus the return on that investment was small in
absolute terms. However, when we recalibrated the return on investment
(later dubbed the working capital fund) to be based on the total income
of the associations, rather than simply the money invested in capital
improvements, the goal was to increase infrastructure spending by
providing a more substantial pool of available funds.
---------------------------------------------------------------------------

    \56\ USCG-2018-0665-0006, p. 6.
    \57\ 83 FR 26173, citing 82 FR 41466, p. 41484.
    \58\ USCG-2018-0665-0008, p. 4.
---------------------------------------------------------------------------

    The goal of the working capital fund is not to provide a windfall
for the associations. It is to demonstrate that associations can accrue
additional capital, and thus have the resources to invest in
infrastructure, either with the capital on hand or by financing a loan.
It is not designed to provide extra money for associations to
distribute to their shareholders.
    Industry commenters had a very negative view of the working capital
fund. In addition to several concerns about the terminology, the
commenter stated that ``the Coast Guard does not impose safeguards to
require segregation of funds generated as a result of this element'' or
``ensure that such funds are used in a manner consistent with Coast
Guard explanations as to why the [working capital fund] exists.'' \59\
The commenter argued that ``there has been no indication as to why a
``Working Capital'' figure would be the product or function of
multiplying the sum of operating expenses and target pilot compensation
by [AAA bond yields].'' Finally, industry commenters asserted that
``until the Coast Guard establishes exactly what this component of the
pilotage revenue stream is, how it should be rationally computed, and
how it must be used, the correct value of the [working capital fund]
should be set at $0.'' \60\
---------------------------------------------------------------------------

    \59\ USCG-2018-0665-0010, p.7.
    \60\ USCG-2018-0665-0010, p.7.
---------------------------------------------------------------------------

    Based on comments received, it is clear that both pilots and
industry are in favor of clear guidelines for the working capital fund.
To this end, the Coast Guard transmitted a letter to the pilot
associations, dated November 30, 2018 and now available in the
docket,\61\ to establish the uses and restrictions on the working
capital fund. To summarize, 46 U.S.C. 9304 and 46 CFR 401.320 authorize
the Coast Guard to outline how each respective pilotage association
will manage the funds generated by the Working Capital Fund until the
Coast Guard can update regulations or policy concerning the Working
Capital Fund. The Coast Guard's November 30 letter therefore requires
that pilot associations segregate the revenues generated by the working
capital fund step, and provide a report on the status of these funds
annually.\62\ The funds are to be used for

capital expenditures only, and are subject to a reasonableness
standard. We believe that this letter will help to ensure that working
capital fund revenues are used for their intended purposes of
facilitating infrastructure improvements.
---------------------------------------------------------------------------

    \61\ USCG-2018-0665-0011.
    \62\ We note that in the letter we stated that there would be an
auditing report required on April 7 each year, and at this time the
Information Collection Request (ICR) for the Great Lakes Pilotage
Ratemaking does not currently cover this information request. The
Coast Guard will amend the current ICR to include this information,
however until the Office of Information and Regulatory Affairs
(OIRA) approves this ICR amendment, we will not enforce this
collection.
---------------------------------------------------------------------------

G. Use of the Martin Report

    The Coast Guard received one comment on the use of the 2017 Martin
Associates report, ``Analysis of Great Lakes Pilotage Costs on Great
Lakes Shipping and the Potential Impact of Increases in U.S. Pilotage
Charges,'' in our regulatory analysis.\63\ The commenter believes the
study should not be used for any part of the rulemaking process because
the study is biased toward industry, relies upon faulty invoice data,
and uses a flawed methodology to estimate the impact of increasing
pilotage rates on vessel traffic and employment in the Great Lakes.
According to the commenter, these alleged faults in the Martin Report
would overestimate the impact on pilotage rates on shipping. The
commenter did not, however, object to using the Martin Report to
support the proposition that the proposed 2019 pilotage rate increases
would not ``have significant secondary economic harms.'' Given the
commenter's conclusion, the Coast Guard will not address the
commenter's concerns here. Nevertheless, the regulatory analysis of
this final rule does not rely upon the Martin Report because the data
used in that report is now several years old and out-of-date to support
our analysis.
---------------------------------------------------------------------------

    \63\ The study is available at http://www.dco.uscg.mil/Our-Organization/Assistant-Commandant-for-Prevention-Policy-CG-5P/Marine-Transportation-Systems-CG-5PW/Office-of-Waterways-and-Ocean-Policy/Office-of-Waterways-and-Ocean-Policy-Great-Lakes-Pilotage-Div/.
---------------------------------------------------------------------------

    One commenter contested the Coast Guard's use of an upper rate
standard, as elucidated in the Martin Report, to determine that the
rates are set ``giving consideration to the public interest'' in
accordance with the Great Lakes Pilotage Act. Referencing the Coast
Guard's response to the commenter in the 2018 Annual Review, that
commenter argued that ``an upper rate standard based on `levels that
threaten the economic viability of Great Lakes Shipping' is not a
useful or responsible standard.'' \64\ The commenter went on to state
that rate increases are resulting ``in negative economic impacts on
ports, agents, other maritime community stakeholders, and the economic
well-being of the region'' without providing support for that position.
While the commenter suggested that data on actual pilot compensation
would assist the Coast Guard in developing an alternative method of
meeting its statutory obligation to give consideration to the public
interest, it was neither clear what that alternative measure would be
nor how pilot compensation data would affect in development of that
alternative. Given the absence of alternative methods, we consider the
use of the Martin Report's estimates on the possible economic impact to
be one tool to gauge the impact of pilotage rates on shipping. Finally,
impact on shipping is not the only consideration for the Coast Guard in
determining the public interest. The protection of the marine
environment from oil spills resulting from groundings and collisions
and the protection of maritime infrastructure, e.g., locks, are also in
the public interest. Professional pilotage services provided for under
this ratemaking reduce the risks of such an incident occurring and
increases the safety of maritime traffic on the Great Lakes.
Consequently, the Coast Guard considers the safety of maritime traffic
on the Great Lakes to be in the public interest.
---------------------------------------------------------------------------

    \64\ USCG-2018-0665-0010, p.3.
---------------------------------------------------------------------------

H. Other Issues Concerning Ratemaking Procedures

a. Over-Realization of Pilotage Revenue
    One commenter raised the issue that actual revenue realizations in
the years 2014-2017 exceeded the target revenues by a considerable
amount. As an example, the commenter noted that, in 2017, $26.5 million
in pilotage revenue was realized, which was far in excess of the stated
target of $21.7 million.\65\ The commenter requested that the Coast
Guard ``validate the real world likelihood of additional over-
realization by using known information on pilotage billings to date for
2018 to assess whether rate increases . . . are, in fact necessary to
achieve revenue targets stated in the Proposed Rule.'' \66\
---------------------------------------------------------------------------

    \65\ USCG-2018-0665-0010, p.5.
    \66\ USCG-2018-0665-0010, p.6.
---------------------------------------------------------------------------

    While the Coast Guard agrees with the commenter that, in several
recent years, realized revenues have exceeded target revenues, we do
not believe this is a systemic or perpetual position. We note that, as
rates are derived by using an average of the most recent 10 years of
traffic, if the traffic in the current year exceeds the average (i.e.,
it is a busier than an average year), pilots will realize more than the
target revenue, and if it is a slower than an average year, pilots will
realize less than the target revenue. Because the last several years
that the commenters cite have seen larger-than-average traffic flows,
additional revenue has been realized.\67\ We also believe that it is
important to clarify that meeting the ``target revenue'' is not a goal
for the Coast Guard in and of itself; the target revenue is just a
marker used by the ratemaking methodology to set rates assuming an
average traffic year. The revenue realized is expected to vary from
``target revenue'' consistent with the manner actual traffic varies
from the projected traffic.
---------------------------------------------------------------------------

    \67\ We also note that the commenters may be including revenue
from non-compulsory pilotage in their realized revenue calculations.
We note that the current methodology does count revenue from this
source in developing the target revenue.
---------------------------------------------------------------------------

    The Coast Guard does agree with the commenter that known
information on 2018 traffic should be incorporated into the 2019
ratemaking calculation. The calculations in this final rule are based
on traffic in a 10-year period of 2009-2018. We note that generally the
most recent year's traffic figures are not included in the NPRM, which
comes out before the end of the previous year's season, but are
included in the final rule of the annual ratemaking.
    The commenter also urged the Coast Guard to ``require Pilot
Association financials to provide individual pilot compensation data,
screened to protect individual pilot identities, as part of the
standard annual financial reports.'' \68\ The commenter suggests that
this information is ``critical in evaluating frequent, but vague and
non-empirical justifications based on recruitment, retention, and
attrition of pilots proffered by the Coast Guard to [increase pilot
compensation].'' \69\ While, as stated above, the Coast Guard believes
this information could be used to more accurately compare the
compensation of Great Lakes pilots to known salaries of pilots in other
pilot associations, we would need more specific suggestions on how this
information would be incorporated into the ratemaking methodology
before considering requiring it.
---------------------------------------------------------------------------

    \68\ USCG-2018-0665-0010, p.6.
    \69\ USCG-2018-0665-0010, p.6.
---------------------------------------------------------------------------

b. Disparity of Rates Between U.S. and Canadian Pilotage
    One commenter raised questions about the difference between U.S.
and Canadian pilotage cost structures. The commenter stated that
``sample comparisons of the costs of U.S. versus Canadian pilotage on
the same or similar voyages by the same or similar vessels show that
U.S. pilotage costs are often nearly twice as high as those of the

Canadian counterparts.'' \70\ The commenter cites a CPCS report, which
contains an example where a vessel was billed $21,054 for an American
pilot and $6,431 for a Canadian pilot, while the two pilots were
simultaneously deployed in a double-pilotage situation.\71\ The
commenter asked why the rates were so different, and what justified the
difference in rates.
---------------------------------------------------------------------------

    \70\ USCG-2018-0665-0010, p.3.
    \71\ USCG-2018-0665-0010, exhibit 3, p.8.
---------------------------------------------------------------------------

    The Coast Guard is aware that the U.S. and Canada do not bill for
service in identical ways. One significant difference between the U.S.
and Canada is that the U.S. has three different Districts that must
each support themselves, whereas the Canadian GLPA operates as a
unified whole. This means that there may be a level of cross-
subsidization among Canadian pilots that is impossible to replicate on
the American side, which could result in higher rates in some areas
(and lower rates in others).\72\ Simple anecdotal comparisons on a
single voyage do not provide the Coast Guard with the comprehensive
information needed to determine if there is a system-wide problem with
rates or if we are merely seeing a rare, if extreme, incident.
---------------------------------------------------------------------------

    \72\ The inability to replicate the possible sharing of costs
across the entire Canadian system is exacerbated by the fact that
only Canadian pilots provide pilotage services in Area 3.
---------------------------------------------------------------------------

I. Out-of-Scope Issues

    Industry commenters provided several comments that are not directly
pertinent to this ratemaking action. These included comments on
pilotage charges assessed early and late in the navigation season,
where charges may accrue while a vessel is not under active navigation.
Industry commenters also requested development of a mechanism for an
alternative provision of pilotage services, as well as a mechanism by
which money collected in previous years under a system found to be
arbitrary by a court could be refunded, such as through a ``negative
surcharge'' or other means. Comments also addressed various issues
relating to labor disputes, disputed instances where a tug is requested
by a pilot, and issues regarding delays caused by various factors
outside a ship's control.
    The Coast Guard is not addressing these comments in this document,
as they are out of the scope of the ratemaking action. We note that
this regulation is narrowly confined to the actual hourly rates charged
in 2019 and the data and calculations used to develop those rates. If
industry commenters wish to address these concerns in a separate
process, they are encouraged to reach out by formal or informal means
to the Great Lakes Pilotage Office or submit a petition for rulemaking
laying out specific changes to the program they would like to see and
include supporting data.

J. Changes Resulting From Litigation

    On February 19, 2019, the United States Court for the District of
Columbia issued an opinion in St. Lawrence Seaway Pilots Association et
al. v. United States Coast Guard.\73\ The District Court held that
paragraph (b)(6) of 33 CFR 404.2, which states that legal fees incurred
in litigation against the Coast Guard cannot be recouped as operating
expenses, had been improperly promulgated, and vacated the provision.
In this final rule we are removing that paragraph from section 404.2.
While we did not propose removing this text in the NPRM, because the
text has been vacated by judicial order after publication of the NPRM,
under 5 U.S.C. 553(b)(B), notice and comment is unnecessary.
---------------------------------------------------------------------------

    \73\ 357 F. Supp. 3d 30.
---------------------------------------------------------------------------

VI. Discussion of Current Rate Adjustments

    In this final rule, based on the current methodology described in
the previous section, the Coast Guard is establishing new pilotage
rates for 2019. This section discusses the rate changes using the
ratemaking steps provided in 46 CFR part 404. We will detail each step
of the ratemaking procedure to show how we arrived at the established
new rates.
    We conducted the 2019 ratemaking as an ``interim year,'' rather
than a full ratemaking. Thus, for this purpose, the Coast Guard will
adjust the compensation benchmark pursuant to Sec.  404.104(b) rather
than Sec.  404.104(a).

A. Step 1: Recognize Previous Operating Expenses

    Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2016 expenses and
revenues.\74\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
for example, costs are applied to the undesignated or designated area
based on where they were actually accrued. For example, costs for
``Applicant pilot license insurance'' in District One are assigned
entirely to the undesignated areas, as applicant pilots work
exclusively in those areas. For costs that are accrued to the pilot
associations generally, for example, pilot insurance, the cost is
divided between the designated and undesignated areas on a pro rata
basis. The recognized operating expenses for the three districts are
laid out in tables 3 through 5.
---------------------------------------------------------------------------

    \74\ These reports are available in the docket for this
rulemaking (see Docket #USCG-2018-0665).
---------------------------------------------------------------------------

    As noted above, in 2016, the Coast Guard began authorizing
surcharges to cover the training costs of applicant pilots. The
surcharges were intended to reimburse pilot associations for training
applicants in a more timely fashion than if those costs were listed as
operating expenses, which would have required three years to reimburse.
The rationale for using surcharges to cover these expenses, rather than
including the costs as operating expenses, was so that retiring pilots
would not have to cover the costs of training their replacements.
Because operating expenses incurred are not actually recouped for a
period of three years, beginning in 2016, the Coast Guard added a
$150,000 surcharge per applicant pilot to recoup those costs in the
year incurred. To ensure that the ratepayers are not double-billed for
the same expense(s), we deduct the amount collected via surcharges from
the operating expenses. For that reason, the Coast Guard has
established a ``surcharge adjustment from 2016'' as part of its
adjustment for each pilotage district. This surcharge adjustment
reflects the additional monies that were collected by the surcharge
that year. We note that in 2016, there was no mechanism to prevent the
collection of surcharges above the authorized amounts, and so the
amounts we deducted from each association's operating expenses are
equal to the actual amount of surcharges collected in the 2016 shipping
season, which are in excess of $150,000 per applicant pilot.
    The Coast Guard also deducted 3 percent of the ``shared counsel''
expenses for each district, to account for lobbying expenditures, which
we do not consider ``reasonable and necessary'' to conduct operations
(with the exception of District 3, for reasons described in the
``Operating Expenses'' section above).
    For each of the analyses of the operating expenses below, we
explained in the NPRM why we established the Director's adjustments,
other than the surcharge adjustments and lobbying expenses, described
above. Other adjustments were made by the auditors and are explained in
the auditor's reports, which are available in the docket for this
rulemaking. Numbers by the entries are references to descriptions in
the auditor's reports. Finally, we note

that several changes to the NPRM's proposed operating expenses have
been made as a result of the notice and comment process--described
above in the ``Operating Costs'' portion of Section V.

                               Table 3--2016 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                          District One                              Designated     Undesignated
-------------------------------------------------------------------------------------------------
                                                                   St. Lawrence                        Total
                   Reported Expenses for 2016                          River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Costs Relating to Pilots:
    Pilot subsistence/travel....................................        $421,749        $336,384        $758,133
    Subsistence/Travel--Pilots (D1-16-01).......................         -70,224         -34,846        -105,070
    License insurance...........................................          40,464          28,269          68,733
    Payroll taxes...............................................         111,279          90,179         201,458
    Payroll taxes--Pilots (D1-16-03)............................               0          -2,509          -2,509
    Training....................................................          17,198          13,717          30,915
    Training--Pilots (D1-16-04).................................            -594               0            -594
    Other.......................................................             842             672           1,514
                                                                 -----------------------------------------------
        Total costs relating to pilots..........................         520,714         431,866         952,580
Applicant Pilots:
    Wages.......................................................          70,700          90,000         160,700
    Wages (D1-16-02)............................................               0          28,054          28,054
    Subsistence/Travel..........................................               0         146,219         146,219
    Subsistence/Travel--Trainees (D1-16-02).....................         -12,283         -20,589         -32,872
    Benefits....................................................               0               0               0
    Payroll taxes...............................................           8,039          11,123          19,162
    Payroll taxes--Trainees (D1-16-03)..........................               0          -5,115          -5,115
    Surcharge Offset--Director's Adjustment.....................        -318,117        -253,649        -571,766
                                                                 -----------------------------------------------
        Total applicant pilot costs.............................        -251,661          -3,957        -255,618
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         209,800         167,335         377,135
    Dispatch expense............................................          51,240          31,705          82,945
    Payroll taxes...............................................          16,007          12,767          28,774
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         277,047         211,807         488,854
Administrative Expenses:
    Legal--general counsel......................................           4,565           3,641           8,206
    Legal--shared (K&L Gates) (D1-16-05)........................          20,558          16,397          36,955
    Legal--shared (K&L Gates) (D1-16-05)........................            -713            -713          -1,426
    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -617            -492          -1,109
     (Director's Adjustment)....................................
    Office rent.................................................               0               0               0
    Insurance...................................................          21,869          17,443          39,312
    Employee benefits--Admin....................................           9,428           7,519          16,947
    Payroll taxes--Admin........................................           6,503           5,187          11,690
    Other taxes.................................................         274,503         218,941         493,444
    Admin Travel................................................           2,346           1,871           4,217
    Depreciation/Auto leasing/Other.............................          65,971          52,618         118,589
    Interest....................................................          20,688          16,501          37,189
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          29,687          13,959          43,646
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          -1,079          -1,079          -2,158
    Utilities...................................................          12,318           9,578          21,896
    Salaries--Admin.............................................          65,401          52,163         117,564
    Accounting/Professional fees................................           5,479           3,921           9,400
    Other.......................................................          23,456          18,708          42,164
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         560,363         436,163         996,526
Capital Expenditures:
    Property Acquisition (Directors Adjustment).................         280,164         186,776         466,940
                                                                 -----------------------------------------------
        Total Operating Expenses................................       1,386,627       1,262,655       2,649,282
----------------------------------------------------------------------------------------------------------------

                               Table 4--2016 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                          District Two                             Undesignated     Designated
-------------------------------------------------------------------------------------------------
                                                                                SES to Port        Total
                   Reported expenses for 2016                        Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Pilot-related expenses:
    Pilot subsistence/travel....................................        $131,956        $197,935        $329,891
    Pilot subsistence/travel CPA Adjustment (D2-16-01)..........         -44,955         -67,433        -112,388
    License insurance...........................................          10,095          15,142          25,237
    License Insurance CPA Adjustment (D2-16-03).................            -635            -953          -1,588

    Payroll taxes...............................................          77,306         115,958         193,264
                                                                 -----------------------------------------------
        Total Pilot-related expenses............................         173,767         260,649         434,416
Expenses related to applicant pilots:
    Wages (from supplemental form)..............................         228,499         342,749         571,248
    Wages--Director's Adjustment................................        -125,472        -188,209        -313,681
    Benefits (from supplemental form)...........................           9,736          14,605          24,341
    Benefits--Director's Adjustment.............................          60,031               0          60,031
    Applicant pilot Subsistence/Travel..........................          43,905          65,858         109,763
    Applicant Pilot subsistence/travel CPA Adjustment (D2-16-02)         -14,940         -22,410         -37,350
    Housing Allowance CPA Adjustment (D2-16-02).................          14,940          22,410          37,350
    Payroll taxes...............................................          15,144          22,717          37,861
    2016 Surcharge Offset Director's Adjustment.................        -158,640        -277,106        -435,746
                                                                 -----------------------------------------------
        Total applicant pilot expenses..........................          73,203         -19,386          53,817
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         205,572         308,359         513,931
    Dispatch expense............................................           8,520          12,780          21,300
    Employee benefits...........................................          75,405         113,107         188,512
    Payroll taxes...............................................          10,305          15,457          25,762
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         299,802         449,703         749,505
Administrative Expenses:
    Office rent.................................................          26,275          39,413          65,688
    Office Rent CPA Adjustment..................................           4,766           7,150          11,916
    Legal--general counsel......................................           1,624           2,437           4,061
    Legal--shared counsel (K&L Gates)...........................          13,150          19,725          32,875
    Legal--shared counsel CPA Adjustment........................            -526            -789          -1,315
    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -395            -592            -987
     (Director's Adjustment)....................................
    Employee Benefits--Admin Employees..........................          59,907          89,861         149,768
    Employee benefits (Director's Adjustment)...................         -30,200         -60,400         -90,600
    Workman's compensation--pilots..............................          74,561         111,841         186,402
    Payroll taxes--admin employees..............................           5,688           8,532          14,220
    Insurance...................................................          10,352          15,529          25,881
    Other taxes.................................................           9,149          13,723          22,872
    Administrative Travel.......................................          18,205          27,307          45,512
    Administrative Travel (D2-16-06)............................            -153            -229            -382
    Depreciation/auto leasing/other.............................          39,493          59,239          98,732
    Depreciation/Auto leasing/Other CPA Adjustment (D2-16-03)...            -221            -332            -553
    Interest....................................................           6,224           9,336          15,560
    APA Dues....................................................          17,145          25,717          42,862
    APA Dues CPA Adjustment (D2-16-04)..........................            -815          -1,223          -2,038
    Utilities...................................................          16,748          25,121          41,869
    Salaries....................................................          55,426          83,139         138,565
    Accounting/Professional fees................................          12,520          18,780          31,300
    Other.......................................................         128,093         192,139         320,232
    Other CPA Adjustment (D2-16-07).............................            -221            -332            -553
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         466,795         685,092       1,151,887
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,013,567       1,376,058       2,389,625
----------------------------------------------------------------------------------------------------------------

                              Table 5--2016 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                         District Three                            Undesignated     Designated
-------------------------------------------------------------------------------------------------
                                                                    Lakes Huron
                                                                   and Michigan     St. Mary's         Total
                   Reported Expenses for 2016                        and Lake          River
                                                                     Superior
----------------------------------------------------------------------------------------------------------------
Pilotage Costs:
    Pilot subsistence/travel....................................        $378,014        $100,485        $478,499
    Pilot subsistence/Travel (D3-16-01).........................         -50,285         -13,367         -63,652
    Pilot subsistence/Travel director's adjustment (housing                    0         -36,900         -36,900
     allowance).................................................
    License insurance...........................................          21,446           5,701          27,147
    Payroll taxes...............................................         194,159          51,612         245,771
    Other.......................................................          19,193          72,202          91,395
                                                                 -----------------------------------------------

        Total Pilotage Costs....................................         562,527         179,733         742,260
Applicant Pilots:
    Wages.......................................................         610,433         162,267         772,700
    Benefits....................................................         160,265          26,644         186,909
    Subsistence/travel..........................................         170,089          45,214         215,303
    Payroll taxes...............................................          50,561          13,440          64,001
    Training....................................................          11,642           3,095          14,737
    Surcharge Adjustment........................................      -1,106,339        -235,673      -1,342,012
                                                                 -----------------------------------------------
        Total applicant pilotage costs..........................        -103,349          14,987         -88,362
Pilot Boat and Dispatch Costs:
    Pilot boat costs............................................         580,822         154,396         735,218
    Pilot boat costs (D3-16-02).................................         -72,724         -19,332         -92,056
    Dispatch costs..............................................         146,220          38,868         185,088
    Employee benefits...........................................           6,517           1,733           8,250
    Payroll taxes...............................................          15,745           4,186          19,931
                                                                 -----------------------------------------------
        Total pilot boat and dispatch costs.....................         676,580         179,851         856,431
Administrative Expenses:
    Legal--general counsel......................................          22,196           5,900          28,096
    Legal--shared counsel (K&L Gates)...........................          34,020           9,043          43,063
    Office rent.................................................           6,978           1,855           8,833
    Insurance...................................................          14,562           3,871          18,433
    Employee benefits...........................................         103,322          27,465         130,787
    Payroll Taxes (administrative employees)....................           6,540           1,739           8,279
    Other taxes.................................................           1,338             356           1,694
    Depreciation/auto leasing/other.............................          46,016          12,232          58,248
    Interest....................................................           2,775             738           3,513
    APA Dues....................................................          24,760           6,582          31,342
    Utilities...................................................          38,763          10,304          49,067
    Administrative Salaries.....................................          94,371          25,086         119,457
    Accounting/Professional fees................................          31,877           8,474          40,351
    Pilot Training..............................................          35,516           9,441          44,957
    Other.......................................................          13,619           3,621          17,240
    Other expenses (D3-16-03)...................................         -$2,054           -$546         -$2,600
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         474,599         126,161         600,760
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,610,357         500,732       2,111,089
----------------------------------------------------------------------------------------------------------------

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

    Having identified the recognized 2016 operating expenses in Step 1,
the next step is to estimate the current year's operating expenses by
adjusting those expenses for inflation over the 3-year period. The
Coast Guard calculated inflation using the BLS data from the CPI for
the Midwest Region of the United States \75\ and reports from the
Federal Reserve.\76\ Based on that information, the calculations for
Step 1 are as follows:
---------------------------------------------------------------------------

    \75\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the
Consumer Price Index is defined as ``All Urban Consumers (CPI-U),
All Items, 1982-4 = 100''. Downloaded January 31, 2019.
    \76\ Available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf. We used the PCE median inflation
value found in Table 1, Downloaded January 31, 2019.

                              Table 6--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,386,627      $1,262,655      $2,649,282
2017 Inflation Modification (@1.7%).............................          23,573          21,465          45,038
2018 Inflation Modification (@1.9%).............................          26,794          24,398          51,192
2019 Inflation Modification (@2.1%).............................          30,177          27,479          57,656
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,467,171       1,335,997       2,803,168
----------------------------------------------------------------------------------------------------------------

                              Table 7--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,013,567      $1,376,058      $2,389,625
2017 Inflation Modification (@1.7%).............................          17,231          23,393          40,624
2018 Inflation Modification (@1.9%).............................          19,585          26,590          46,175
2019 Inflation Modification (@2.1%).............................          22,058          29,947          52,005
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,072,441       1,455,988       2,528,429
----------------------------------------------------------------------------------------------------------------

                             Table 8--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,610,357        $500,732      $2,111,089
2017 Inflation Modification (@1.7%).............................          27,376           8,512          35,888
2018 Inflation Modification (@1.9%).............................          31,117           9,676          40,793
2019 Inflation Modification (@2.1%).............................          35,046          10,897          45,943
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,703,896         529,817       2,233,713
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

    In accordance with the text in Sec.  404.103, we estimated the
number of working pilots in each district. Based on input from the
Saint Lawrence Seaway Pilots Association, we estimate that there will
be 17 working pilots in 2019 in District One. Based on input from the
Lakes Pilots Association, we estimate there will be 14 working pilots
in 2019 in District Two. Based on input from the Western Great Lakes
Pilots Association, we estimate there will be 20 working pilots in 2019
in District Three.
    Furthermore, based on the staffing model employed to develop the
total number of pilots needed, we assign a certain number of pilots to
designated waters and a certain number to undesignated waters. These
numbers are used to determine the amount of revenue needed in their
respective areas.

                                           Table 9--Authorized Pilots
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \77\...........              17              15              22

2019 Authorized pilots (total)..................................              17              14              20
Pilots assigned to designated areas.............................              10               7               4
Pilots assigned to undesignated areas...........................               7               7              16
----------------------------------------------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark

    In this step, we determine the total pilot compensation for each
area. Because this is an ``interim'' ratemaking this year, we follow
the procedure outlined in paragraph (b) of Sec.  404.104, which adjusts
the existing compensation benchmark by inflation. Because we do not
have a value for the employment cost index for 2019, we multiply last
year's compensation benchmark by the Median PCE Inflation of 2.1
percent.\78\ Based on the projected 2019 inflation estimate, the
compensation benchmark for 2019 is $359,887 per pilot.
---------------------------------------------------------------------------

    \77\ For a detailed calculation of the staffing model, see 82 FR
41466, table 6 on p. 41480 (August 31, 2017).
    \78\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2019 is
less than or equal to the number permitted under the staffing model in
Sec.  401.220(a). The staffing model suggests that the number of pilots
needed is 17 pilots for District One, 15 pilots for District Two, and
22 pilots for District Three,\79\ which is more than or equal to the
numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \79\ See Table 6 of the 2017 final rule, 82 FR 41466 at 41480
(August 31, 2017). The methodology of the staffing model is
discussed at length in the final rule (see pages 41476-41480 for a
detailed analysis of the calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised
target individual compensation level to derive the total pilot
compensation by multiplying the individual target compensation by the
estimated number of working pilots for each district, as shown in
tables 10-12.

                                 Table 10--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................              10               7              17
----------------------------------------------------------------------------------------------------------------
    Total Target Pilot Compensation.............................      $3,598,870      $2,519,209      $6,118,079
----------------------------------------------------------------------------------------------------------------

                                 Table 11--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................               7               7              14
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $2,519,209      $2,519,209      $5,038,418
----------------------------------------------------------------------------------------------------------------

                                Table 12--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $359,887        $359,887        $359,887
Number of Pilots................................................              16               4              20
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $5,758,192      $1,439,548      $7,197,740
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund

    Next, we calculate the working capital fund revenues needed for
each area. First, we add the figures for projected operating expenses
and total pilot compensation for each area. Next, we find the preceding
year's average annual rate of return for new issues of high grade
corporate securities. Using Moody's data, that number is 3.93
percent.\80\ By multiplying the two figures, we get the working capital
fund contribution for each area, as shown in tables 13-15.
---------------------------------------------------------------------------

    \80\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018
monthly data. The Coast Guard uses the most recent complete year of
data. See https://fred.stlouisfed.org/series/AAA. (February 14,
2019)

                           Table 13--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,467,171      $1,335,997      $2,803,168
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       5,066,041       3,855,206       8,921,247
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         199,095         151,510         350,605
----------------------------------------------------------------------------------------------------------------

                           Table 14--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,072,441      $1,455,988      $2,528,429
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       3,591,650       3,975,197       7,566,847
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         141,152         156,225         297,377
----------------------------------------------------------------------------------------------------------------

                          Table 15--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,703,896        $529,817      $2,233,713
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       7,462,088       1,969,365       9,431,453
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         293,260          77,396         370,656
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue

    In this step, we add up all the expenses accrued to derive the
total revenue needed for each area. These expenses include the
projected operating expenses (from Step 2), the total pilot
compensation (from Step 4), and the working capital fund contribution
(from Step 5). The calculations are shown in tables 16 through 18.

                                    Table 16--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,467,171      $1,335,997      $2,803,168
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
Working Capital Fund (Step 5)...................................         199,095         151,510         350,605
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,265,136       4,006,716       9,271,852
----------------------------------------------------------------------------------------------------------------

                                    Table 17--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,072,441      $1,455,988      $2,528,429
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
Working Capital Fund (Step 5)...................................         141,152         156,225         297,377
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       3,732,802       4,131,422       7,864,224
----------------------------------------------------------------------------------------------------------------

                                   Table 18--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,703,896        $529,817      $2,233,713
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
Working Capital Fund (Step 5)...................................         293,260          77,396         370,656
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       7,755,348       2,046,761       9,802,109
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous
six steps, the Coast Guard divides that number by the expected number
of hours of traffic to develop an hourly rate. Step 7 is a two-part
process. In the first part, we calculate the 10-year average of traffic
in each district. Because we are calculating separate figures for
designated and undesignated waters, there are two parts for each
calculation. The calculations are shown in tables 19 through 21.

                 Table 19--Time on Task for District One
------------------------------------------------------------------------
                  Year                      Designated     Undesignated
------------------------------------------------------------------------
2018....................................           6,943           8,445
2017....................................           7,605           8,679
2016....................................           5,434           6,217
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
2009....................................           3,511           3,947
                                         -------------------------------
    Average.............................           5,657           6,248
------------------------------------------------------------------------

                 Table 20--Time on Task for District Two
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2018....................................           6,150           6,655
2017....................................           5,139           6,074
2016....................................           6,425           5,615
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
2009....................................           3,386           3,017
                                         -------------------------------
    Average.............................           5,322           5,192
------------------------------------------------------------------------

                Table 21--Time on Task for District Three
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------