[Federal Register Volume 83, Number 108 (Tuesday, June 5, 2018)]
[Rules and Regulations]
[Pages 26162-26193]
[FR Doc No: 2018-11969]

Vol. 83

Tuesday,

No. 108

June 5, 2018

Part II

Department of Homeland Security

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Coast Guard

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46 CFR Parts 401 and 404

 Great Lakes Pilotage Rates--2018 Annual Review and Revisions to
Methodology; Final Rule

Federal Register / Vol. 83 , No. 108 / Tuesday, June 5, 2018 / Rules
and Regulations

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[Docket No. USCG-2017-0903]
RIN 1625-AC40

Great Lakes Pilotage Rates--2018 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 2018 shipping season. Additionally, the Coast Guard is making
several changes to the Great Lakes pilotage ratemaking methodology.
These additional changes include creating clear delineation between the
Coast Guard's annual rate adjustments and the Coast Guard's requirement
to conduct a full ratemaking every 5 years; the adoption of a revised
compensation benchmark; reorganization of the text regarding the
staffing model for calculating the number of pilots needed; and certain
editorial changes.

DATES: This rule will be effective July 5, 2018.

FOR FURTHER INFORMATION CONTACT: For information about this document,
call or email Mr. Todd Haviland, Director, Great Lakes Pilotage,
Commandant (CG-WWM-2), Coast Guard; telephone<PHONE_NUMBER>, email
[email protected], or fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background and Comment Topics
V. Discussion of Comments and Changes to Methodology
    A. Rationale for Change in Compensation Benchmark
    1. Challenges With Canadian Comparison
    2. Comparison With U.S. Pilotage Associations
    B. Revised Compensation Benchmark Issues
    1. Use of AMO 2015 Aggregate Rate
    2. Overtime Compensation
    3. Calculation of Number of Days in Pay
    C. Inflation Adjustment Factor for Adjustment Years
    D. Staffing Model Relocation and Calculations
    E. Working Capital Fund Basis and Use
    F. Use of 10-Year Traffic Baseline
    G. Calculation of Surcharges and Incorporation Into Operating
Costs
    H. Other Issues Relating to Pilotage Oversight
    1. Unnecessary Pilot Orders for Use of Tugs
    2. Mechanisms To Prevent or Discourage Delays
    3. Delays Related to Labor Disputes
    4. Over-Realization of Revenues
VI. Discussion of Rate Adjustments
    A. Step 1--Recognition of Operating Expenses
    B. Step 2--Projection of Operating Expenses
    C. Step 3--Estimate Number of Working Pilots
    D. Step 4--Determine Target Pilot Compensation
    E. Step 5--Calculate Working Capital Fund
    F. Step 6--Calculate Revenue Needed
    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 Union
CATEX Unique Categorical Exclusions for the U.S. Coast Guard
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
ECI Employment Cost Index
FOMC Federal Open Market Committee
FR Federal Register
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
RA Regulatory analysis
SBA Small Business Administration
Sec.  Section Symbol
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code

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 in the 2017 shipping year
ranged from $218 to $601 per pilot hour (depending on the specific area
where pilotage service is provided), are paid by shippers to pilot
associations. The three pilot associations that are the exclusive
source of United States registered pilots on the Great Lakes use this
revenue to cover operating expenses, maintain infrastructure,
compensate working pilots, and train new pilots. We have developed a
ratemaking methodology in accordance with our statutory requirements
and regulations. Our ratemaking methodology calculates the revenue
needed for each pilotage association (including operating expenses,
compensation, and infrastructure needs), and then divides that amount
by the expected shipping traffic over the course of the year 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 the notice of proposed rulemaking (NPRM) published on January
18, 2018.\2\
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    \1\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
    \2\ Great Lakes Pilotage Rates--2018 Annual Review and Revisions
to Methodology, 83 FR 2581, January 18, 2018.
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    In this final rule, the Coast Guard is modifying the ratemaking
methodology and establishing new pilotage rates for 2018 based on the
new methodology. The modifications to the ratemaking methodology
consist of a new compensation benchmark, updates and revisions to
annually adjusted figures such as inflation rates and traffic volumes,
organizational changes, and clarifications. In this final rule, we are
establishing a new compensation benchmark based on input from the
American Maritime Officers Union (AMO) 2015 contracts. Also, based on
comments to the proposed rule that the Coast Guard received, we are
changing the inflation adjustment index from the Consumer Price Index
(CPI) to the Employment Cost Index (ECI). Additionally, from an
organizational standpoint, we are moving, but not changing, the
requirements of the staffing model from their current location in title
46 of the Code of Federal Regulations (CFR) 404.103 (as part of ``Step
3'' of the ratemaking process), to the general regulations governing
pilotage in 46 CFR 401.220(a). For clarification purposes, we are
setting forth separate regulatory paragraphs detailing the differences
between how we undertake an annual adjustment of the pilotage rates,
and a

full reassessment of the rates, which must be undertaken once every 5
years.
    As part of our annual review, we are setting new rates for the 2018
shipping season. Based on the ratemaking model discussed in this final
rule, we are establishing the rates shown in Table 1.

                           Table 1--Previous and New Pilotage Rates on the Great Lakes
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                                                                  Final 2017     Proposed 2018      Final 2018
               Area                            Name             pilotage rate    pilotage  rate   pilotage rate
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District One: Designated..........  St. Lawrence River.......              601              622              653
District One: Undesignated........  Lake Ontario.............              408              424              435
District Two: Undesignated........  Lake Erie................              429              454              497
District Two: Designated..........  Navigable waters from                  580              553              593
                                     Southeast Shoal to Port
                                     Huron, MI.
District Three: Undesignated......  Lakes Huron, Michigan,                 218              253              271
                                     and Superior.
District Three: Designated........  St. Mary's River.........              514              517              600
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    This final rule is not economically significant under Executive
Order 12866. This rule impacts 49 U.S. Great Lakes pilots, 7 applicant
pilots, 3 pilot associations, and the owners and operators of
approximately 215 oceangoing vessels that transit the Great Lakes
annually. The estimated overall annual regulatory economic impact of
this rate change is a net increase of $2,830,061 in payments made by
shippers from the 2017 shipping season. Because we must review, and, if
necessary, adjust rates each year, we analyze these as single year
costs and do not annualize them over 10 years. This rule does not
affect the Coast Guard's budget or increase Federal spending. In
Section VII of this preamble, we discuss the regulatory impact analyses
of this final rule.

III. Basis and Purpose

    The legal basis of this final rule is the Great Lakes Pilotage Act
of 1960 (``the Act''), which requires U.S. vessels operating ``on
register'' and foreign merchant 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, not later than March 1. The Act also
requires that base rates be established by a full ratemaking at least
once every 5 years, and in years when base rates are not established,
they must be reviewed and, if necessary, adjusted. The Secretary's
duties and authority under the Act have been delegated to the Coast
Guard.\5\
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    \3\ See 46 U.S.C. 9301(2) and 9302(a)(1).
    \4\ See 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 changes to the methodology in
projecting pilotage rates, as well as revised pilotage rates and
surcharges. Our goals for this and future rates are to ensure safe,
efficient, and reliable pilotage services on the Great Lakes, and to
provide adequate funds to maintain infrastructure. Additionally, we
believe that the new methodology will increase transparency and
predictability in the ratemaking process and help complete annual rate
adjustments in a timely manner.

IV. Background and Comment Topics

    Pursuant to the Act, the Coast Guard, in conjunction with the
Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping
practices and pilotage rates on the Great Lakes. Under Coast Guard
regulations, all U.S. vessels sailing on register, and all non-
Canadian, foreign merchant vessels (often referred to as ``salties''),
are required to engage U.S. or Canadian pilots during their transit
through regulated waters. United States and Canadian ``lakers,'' which
account for most commercial shipping on the Great Lakes, are not
subject to the Act.\6\ 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. For a more
thorough summary of the background of Great Lakes Pilotage, see the
summary in the 2018 pilotage rate NPRM (2018 NPRM).\7\
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    \6\ See 46 U.S.C. 9302. A ``laker'' is a commercial cargo vessel
especially designed for, and generally limited to, use on the Great
Lakes.
    \7\ 83 FR 2581, at 2583.
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    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).
    Steps 1 and 2 of the ratemaking methodology concern accounting for
the operating expenses of the pilotage associations. In Step 1,
``Recognize previous operating expenses'' (Sec.  404.101), the Coast
Guard reviews audited operating expenses from each of the three
pilotage associations. This number forms the baseline amount that each
association is budgeted. In Step 2, ``Project operating expenses,
adjusting for inflation or deflation'' (Sec.  404.102), we develop the
2018 projected operating expenses. To do this, we apply inflation
adjustors for 3 years to the operating expense baseline received in
Step 1. The inflation factors used in Step 2 are multiplied by the
baseline from Step 1. These inflation factors are from the Bureau of
Labor Statistics CPI for the Midwest Region, or, if those factors were
not available, from the Federal Open Market Committee (FOMC) median
economic projections for Personal Consumption Expenditures (PCE)
inflation (See Section V.C. for a policy discussion about inflation
adjustments). This step produces the total operating expenses for each
area and district. We did not receive comments on the operating
expenses portion of the methodology this year.
    In Step 3, ``Determine number of pilots needed'' (Sec.  404.103),
the Coast Guard calculates how many pilots are needed for each
district. To do this, we employ a ``staffing model,'' described in
Sec.  404.103(a) through (c), to estimate how

many pilots would be needed to handle shipping at the start and close
of the season. This number is helpful in providing guidance to the
Director of the Coast Guard Great Lakes Pilotage Office in approving an
appropriate number of credentials for pilots.
    For the purpose of the ratemaking calculation, the Coast Guard
determines the number of working pilots provided by the pilotage
associations (see Sec.  404.103(d)), which is what we use to determine
how many pilots need to be compensated via the pilotage fees collected.
We compare that number against the number provided by the staffing
model, and we use the lesser of the two as the final result for Step 3.
    In Step 4, ``Determine target pilot compensation benchmark'' (Sec.
404.104), the Coast Guard 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.'' In the 2018 NPRM, we
proposed using a new benchmark based on the AMO-provided daily
aggregate rates for first mates. We received numerous comments on the
propriety and accuracy of that figure, which are addressed in the
discussion below. We also proposed a system for adjusting that
benchmark for inflation in future years. With regard to that proposal,
we received comments on how to best account for inflation, which we
address in Section V.C of this preamble.
    Next, the Coast Guard multiplies 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 to determine the revenues needed for each area.
    In Step 5, ``Project working capital fund'' (Sec.  404.105), we
calculate a return on investment by adding the total operating expenses
(from Step 2) and the total pilot compensation (from 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. We
received comments on the calculation and use of the working capital
fund, which we address in Section V.E of this preamble.
    In Step 6, ``Project needed revenue'' (Sec.  404.106), we add 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), we
calculate an hourly pilotage rate to cover the revenue needed (from
Step 6). We first calculate the 10-year traffic average for each area.
Next, we divide the revenue needed in each area (from Step 6) by the
10-year traffic average to produce an initial base rate. We received
comments on the propriety of the 10-year average traffic baseline
figure, which we address in Section V.F of this preamble.
    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 factor ranging from 1.0 (for
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest
ships, or ``Class IV'' vessels). Because this significantly increases
the revenue collected, we need to account for the added revenue
produced by the weighting factors to ensure that the formula doesn't
require shippers to overpay for pilotage services.
    In Step 8, ``Calculate average weighting factors by area'' (Sec.
404.108), we calculate 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,'' we review 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; fairly
compensating pilots who are trained and rested; and providing
appropriate profit to allow for infrastructure improvements. Because we
want to be as transparent as possible in our ratemaking procedure, we
use this step sparingly to adjust rates. The Coast Guard is not using
this discretion in this final rule.
    Finally, after the base rates are set, under Sec.  401.401 the
Coast Guard considers whether surcharges are necessary this year.
Currently, we use surcharges to allow the pilotage associations to
collect extra money to pay for the training of new pilots, rather than
incorporating training costs into the overall ``revenue needed'' that
is used in the calculation of the base rates. In recent years, the
Coast Guard has 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 that employ
pilots early in the season could pay more than shippers that employ
pilots later in the season, after the surcharge cap has been met. We
received comments on the method by which surcharges are collected and
on the amounts collected, which we address in Section V.G of this
preamble.

V. Discussion of Comments and Changes to Methodology

    In response to the January 18, 2018, NPRM, we received five
substantive comment letters. We received three comment letters from
organizations representing pilot associations on the Great Lakes: One
comment from the president of the Western Great Lakes Pilots
Association,\8\ one comment from the president of the St. Lawrence
Seaway Pilots' Association,\9\ and one comment from the law firm K&L
Gates, which represents the interests of the three Great Lakes pilot
associations.\10\ We received 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 ``Industry
commenters'').\11\ Additionally, we received one comment from the
AMO.\12\ Each of these commenters touched on numerous issues, and so
for each

response below, we note which commenters raised the specific points
being addressed. In situations where multiple commenters raised similar
issues, we attempt to provide one response to those issues.
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    \8\ Docket number USCG-2017-0903-0004, available at
www.regulations.gov.
    \9\ Docket number USCG-2017-0903-0007, available at
www.regulations.gov.
    \10\ Docket number USCG-2017-0903-0006, available at
www.regulations.gov.
    \11\ Docket number USCG-2017-0903-0008, available at
www.regulations.gov.
    \12\ Docket number USCG-2017-0903-0005, available at
www.regulations.gov.
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    Overall, the issues raised by the commenters fell into eight
categories. The most substantive comments were in regard to the issue
of the proposed interim compensation benchmark, which we address in
Sections V.A and B of this preamble. We also received comments on the
proper measure of inflation by which to adjust compensation figures
annually. Other parts of the ratemaking methodology were raised by
commenters as well, including questions regarding the placement and
application of the staffing model used to calculate the needed number
of pilots, the amount and application of the working capital fund
charges, the use of a 10-year average to calculate expected vessel
traffic, and the collection and calculation of surcharges. Finally,
commenters raised a variety of pilotage issues not directly related to
calculating the 2018 shipping rates. We address each of these items in
the subsections that follow.

A. Rationale for Change in Compensation Benchmark

    The most substantive change proposed in the 2018 NPRM was the
change in the benchmark compensation model, with the proposed switch
from using the GLPA as a baseline to the ``interim benchmark,'' which
uses the AMO \13\ 2015 aggregated wage and benefit information. In the
NPRM, we stated that we proposed this change because, pursuant to
litigation \14\ filed by the industry, a court had found that the Coast
Guard ``failed to justify'' \15\ its decision to apply a 10-percent
addition to the Canadian GLPA benchmark, and thus was arbitrary and
capricious.\16\ As this opinion was handed down in November 2017, the
Coast Guard noted that ``there is a need for an interim benchmark level
to be developed on short notice and with limited time to gather new
data.'' \17\ We based the new benchmark on data provided by the AMO
regarding its contract for first mates on the Great Lakes in the 2011
to 2015 period. We used the information from 2015, adjusting it for
inflation to an equivalent 2018 rate, because it was the most recent
publically-available information to which we had access. We stated that
we proposed to use this benchmark to calculate compensation until we
identify another suitable standard. We are currently conducting a
comprehensive, multi-year analysis of pilot compensation that we hope
will inform a new benchmark. This study will not be available before
the 2020 ratemaking proceeding.
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    \13\ We note that in the NPRM, we referred to the American
Maritime Officers Union as the ``AMOU'', but in their comments, they
referred to themselves as ``AMO''. We use their preferred acronym in
this document except when citing direct quotes that use other
terminology.
    \14\ American Great Lakes Ports Association, et al., v. Admiral
Paul F. Zukunft, Civil Action No. 16-1019, D.C. District Court,
November 3, 2017.
    \15\ American Great Lakes Ports Association, et al., v. Admiral
Paul F. Zukunft, Civil Action No. 16-1019, D.C. District Court,
November 3, 2017, p. 5.
    \16\ 83 FR 2581, at 2587.
    \17\ 83 FR 2581, at 2588.
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    Nearly all commenters made arguments regarding the proposal to
change the compensation benchmark. Many commenters stated that the
Coast Guard should not have stopped using the Canadian compensation
benchmark, but simply should have reanalyzed and adjusted the ten-
percent increase it applied to account for health and pension
differences. Alternatively, some commenters suggested that instead of
using Canadian GLPA or AMO comparative information to establish a
benchmark, the Coast Guard should use the benefit and salary
information for other U.S. pilotage associations. We address these
issues below.
1. Challenges With Canadian Comparison
    In the 2016 ratemaking, the Coast Guard originally established a
benchmark for target pilot compensation based on the total compensation
of Canadian GLPA.\18\ We chose the GLPA because ``Canadian GLPA pilots
provide service that is almost identical to the service provided by
U.S. Great Lakes Pilots.'' \19\ To calculate this benchmark, we started
with the 2013 Canadian GLPA salaries, which we calculated to be
$273,145 in Canadian dollars, or $255,037 U.S.\20\ We then inflated
that amount using Midwest CPI-U data for 2014 and 2015, and Federal
Reserve inflation data for 2016, to arrive at an inflation-adjusted
figure of $267,534.\21\ Next, to match average annual wage increases of
GLPA pilots, we applied an additional 3.5 percent annual real wage
increase factor for each of the 3 years, to arrive at $296,467 as the
final equivalent compensation figure for 2016.\22\ Finally, we
increased that figure by an additional 10 percent to address the
``difference in status between GLPA employees and independent U.S.
pilots,'' \23\ for a final ``GLPA plus 10 percent'' benchmark figure of
$326,114. While we were not certain that a 10 percent adjustment for
these differences was appropriate, we did note that the figure had been
cited in a July 2014 Great Lakes Pilotage Advisory Committee (GLPAC)
meeting as balancing the different status of the U.S. and GLPA pilots.
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    \18\ In this final rule, we refer to the U.S. dollar equivalent
of the combined wages and benefits of Canadian Great Lakes pilots,
using the conversion methodology described above, as the ``Canadian
benchmark,'' although we did not use that terminology in the 2016
ratemaking documents.
    \19\ Great Lakes Pilotage Rates--2016 Annual Review and Changes
to Methodology, Notice of Proposed Rulemaking (September 10, 2015),
80 FR 54484, at 54497.
    \20\ See 81 FR 11908, at 11933 to determine how we arrived at
2013 compensation. We then converted that number to U.S. dollars at
the 2013 exchange rate of 1.071 CAD to USD.
    \21\ See 81 FR 11908, at 11933, Figure 19.
    \22\ See 81 FR 11908, at 11933, Figure 21.
    \23\ 80 FR 54484, at 54498. This referred to the fact that
``GLPA pilots are Canadian government employees and therefore have
guaranteed minimum compensation with increases for high-traffic
periods, retirement, healthcare and vacation benefits, and limited
professional liability. In addition, GLPA pilots have guaranteed
time off while U.S. pilots must be available for service throughout
the shipping season and without any guaranteed time off.'' See 80 FR
54484, at 54497.
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    This GLPA-plus-10-percent benchmark of $326,114 formed the basis
for our target compensation until the 2017 memorandum opinion \24\
found it to be arbitrary and capricious and in violation of the
Administrative Procedure Act. Specifically, the court found that
certain statements made at the 2014 GLPAC meeting did not constitute an
adequate basis for the 10-percent adjustment.\25\ Based on the 2017
memorandum opinion, in the 2018 NPRM, we proposed adopting the interim
benchmark, based on AMO information.\26\ However, several commenters
suggested that we had not responded appropriately to the court's 2017
opinion. These commenters argued that because the court found that only
the 10-percent increase was arbitrary and capricious, the Coast Guard
should replace only that portion. One commenter stated that ``all the
Coast Guard needs to do is return to the administrative record for the
2016 rulemaking, analyze the multiple comments in support of a 25- to
37-percent adjustment, and explain its reasoning for the adjustment it
determines is most appropriate.\27\ Another commenter stated that the
court ``require[d] the Coast Guard to reconsider more carefully the
pilots'

position that the Canadian benchmark compensation should be increased
by 25 to 37 percent to account for differences between the two pilotage
groups, particularly the government health care and pensions received
by the Canadians.'' \28\
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    \24\ American Great Lakes Ports Association, et al., v. Admiral
Paul F. Zukunft, Civil Action No. 16-1019, D.C. District Court,
November 3, 2017, p. 25.
    \25\ American Great Lakes Ports Association, et al., v. Admiral
Paul F. Zukunft, Civil Action No. 16-1019, D.C. District Court,
November 3, 2017, p. 25.
    \26\ 83 FR 2581, at 2587-88.
    \27\ USCG-2017-0903-0004, p. 3.
    \28\ USCG-2017-0903-0006, p. 5.
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    We agree with the commenters that the court found only the 10-
percent addition to be unjustified, and that the Coast Guard would
legally be able to propose using the GLPA wages and benefits as a
starting point to develop a revised benchmark. Indeed, when considering
a revised benchmark for the 2018 ratemaking, we did reanalyze GLPA
compensation. To update our information regarding the value of the
Canadian benchmark, we analyzed the 2016 GLPA annual report to
calculate a new average total compensation figure. Using that
information, and applying the same methodology as we did in the 2016
ratemaking, we calculated that the 2016 GLPA pilot average compensation
was $235,136.\29\ Next, we inflated that amount using 2017 ECI data and
2018 Federal Reserve PCE inflation data,\30\ to arrive at an inflation-
adjusted figure of $247,510. Finally, we applied an additional 3.5
percent annual real wage increase factor for the 2 years, to match the
calculation we performed in 2016 for annual wage increases of GLPA
pilots, to arrive at a final $265,139 equivalent compensation figure
for 2018.
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    \29\ We performed the 2016 calculation as follows: We used 2016
pilot compensation from the GLPA (available in the docket as USCG-
2017-0903) to derive the average Canadian pilot compensation of
approximately $324,252 CAD. To do so, we divided $17,769,000 total
wages and benefits by 54.8 pilots. We then converted that number to
U.S. dollars at the 2016 exchange rate of 1.379 CAD to USD, to
derive a figure of $235,136.
    \30\ ECI for ``total compensation for private industry workers,
transportation and material moving,'' for 12 months ended in
December, is found in Table 5 (p. 71) of the following: https://www.bls.gov/web/eci/echistrynaics.pdf. ECI for 2017 is 3.3 percent.
PCE inflation for 2018 is 1.9 percent, see https://www.federalreserve.gov/monetarypolicy/fomcminutes20171213ep.htm.
---------------------------------------------------------------------------

    Comparing the previously calculated $312,069 (without the 10-
percent increase, in 2018 dollars \31\) Canadian GLP total compensation
with the $265,139 (in 2018 dollars) Canadian GLP compensation
calculated in 2018--using the same methodology--reveals a substantial
problem with using GLPA compensation as a benchmark for U.S.
pilots.\32\ Specifically, the exchange rate between the U.S. and
Canadian dollars underwent a shift of over 25 percent in 3 years, which
caused the benchmark to shift substantially as well. An analysis of the
U.S. to Canadian exchange rates reveals that this rate can fluctuate
substantially, as shown using IRS data \33\ in Table 2.
---------------------------------------------------------------------------

    \31\ This figure is the $296,467 we calculated in 2016, inflated
to 2018 dollars using the ECI and PCE inflation.
    \32\ If we then added 10 percent, the resultant figure would be
$291,653.
    \33\ This information is available at: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates.

                                  Table 2--U.S./Canadian Dollar Exchange Rates
----------------------------------------------------------------------------------------------------------------
            Year                  2012          2013          2014          2015          2016          2017
----------------------------------------------------------------------------------------------------------------
Exchange Rate (USD/CAD).....        1.040         1.071         1.149         1.329         1.379         1.350
----------------------------------------------------------------------------------------------------------------

    This fluctuation reveals a fundamental challenge with using the
GLPA compensation as a benchmark. If we were to continue to use it, we
would have to adjust it every 5 years using the current exchange rate.
As shown, doing so could lead to very substantial fluctuations in the
benchmark, which would not relate to economic conditions in the United
States or to the state of the U.S. labor market. Such an increase in
volatility would be counter to the Coast Guard's goals of rate and
compensation stability and promoting recruitment and retention of
qualified United States registered pilots.
    We note that two commenters representing pilotage associations
argued that the Coast Guard should not have abandoned the Canadian GLPA
compensation benchmark, because using the interim benchmark resulted in
a proposed lower level of compensation.\34\ One commenter stated that
one problem with using the proposed revised benchmark is that it
``reduces the compensation target by at least $20,000 relative to
retaining the GLPA benchmark and adjusting it for another year of
inflation--resulting in the very ``substantial volatility regarding
compensation'' that the Coast Guard says it wants to avoid . . . .''
\35\ We note two flaws with this argument. First, as shown above,
continuing to use the GLPA benchmark would have resulted in a
significant decrease in target compensation, even below the level
derived from the interim benchmark. Second, the Coast Guard believes
the commenters misinterpret the issue of volatility. The fact that the
target compensation can decrease when it is re-benchmarked is a feature
of the system. It would hardly be fair if, upon a showing that the
relevant compensation level had decreased, the Coast Guard resorted to
a new benchmark as part of a scheme to keep compensation rising. We
hope to reduce volatility by selecting a relatively stable compensation
benchmark, but may still reduce target compensation and rates when
warranted by the data.
---------------------------------------------------------------------------

    \34\ USCG-2017-0903-0004, p. 5; USCG-2017-0903-0006, p. 8.
    \35\ USCG-2017-0903-0004, p. 5. Emphasis in original.
---------------------------------------------------------------------------

    In light of the court's opinion, the Coast Guard has also
considered the commenters' assertions that we should re-analyze the
2016 comments on the ``adjustment factor'' that is applied to GLPA
rates, and simply use that number, rather than use the interim
compensation benchmark. One commenter suggested that the Coast Guard
should ``analyze the multiple comments in support of a 25%-37%
adjustment, and explain its reasoning for the adjustment it determines
is most appropriate.'' \36\ Another commenter asserted the D.C.
District Court, in its 2017 opinion, ``require[d] the Coast Guard to
reconsider more carefully the pilot's position that the Canadian
benchmark compensation should be increased by 25-37% to account for
differences between the two pilotage groups, particularly the
government health care and pensions received by Canadians.'' \37\ We
note that the court itself not only suggested that the Coast Guard
should have more closely analyzed the pilots' comments, but also
suggested we consider the option of, ``as the shipping industry
suggested, foregoing an adjustment altogether.'' \38\
---------------------------------------------------------------------------

    \36\ USCG-2017-0903-0004, p. 3.
    \37\ USCG-2017-0903-0006, p. 5.
    \38\ American Great Lakes Ports Association, et al., v. Admiral
Paul F. Zukunft, Civil Action No. 16-1019, D.C. District Court,
November 3, 2017, p. 25.
---------------------------------------------------------------------------

    In analyzing those comments, we found little evidence or data to
warrant the substantial adjustments to arrive at the 25- and 37-percent
figures suggested by the commenters. The 25-percent figure, suggested
by the Great Lakes

Pilots,\39\ was not based on specific information, but instead was
simply asserted in light of the listing of 10 general differences
between U.S. and Canadian pilots (e.g., ``Canadian pilots receive
healthcare benefits as government employees. American pilots pay for
their own healthcare.'' \40\) In the comment by the International
Organization of Masters, Mates, and Pilots, which produced the figure
of 37 percent, we found several questionable assumptions.\41\ First, as
noted in the 2016 final rule, the mathematical basis of adding a 37-
percent premium to the Canadian compensation level in order to arrive
at an equivalent level of compensation for a U.S. pilot requires
increasing the salary proportion of the component by 15 percent to
account for a purported cost of living differential between Detroit,
Michigan, and Windsor, Ontario, resulting in an additional $35,156 in
salary. As we noted in the 2016 final rule, ``we do not think the 15
percent COLA differential between Detroit, MI and Windsor, ON is
relevant--a single comparison point should not be utilized to establish
the regional comparison.'' \42\ The commenter also makes the assumption
that to match $49,716 in Canadian benefits, which includes health
insurance, pension benefits, and tax ``true-ups,'' among other items,
would require U.S. pilots be paid an additional $118,741 (which
includes $43,231 in health insurance costs and $53,000 in pension
contributions). We do not believe that taxation differences should be
taken into account when determining whether compensation is equivalent
for several reasons. First, taxation varies over time and by specific
locality within both the U.S. and Canada. Second, services are received
in exchange for taxes, and it would be unfair to pay an individual more
to compensate for taxes that pay for services they receive. Finally, we
note that tax policy is under the control of neither the USCG nor the
GLPA, but we could control whether the pre-tax compensation is similar.
We also do not accept the commenter's assertion that the pension costs
require such a tremendous increase in compensation. Given that there is
a mathematical basis of pension contributions (i.e., there is no reason
a properly-funded monetary pension should cost more in the United
States than it does in Canada), we do not believe these calculations
are sound. In this particular instance, the commenter stated that
``[f]or pension costs if we had used the MMP pension plan contribution
rate of 18% of wages plus a 5% IRAP the cost would be $61,992. But the
IRS has a cap on the contribution for self-employed individuals at
$53,000 and we will use that number.'' \43\ However, the commenter did
not assert whether the Canadian pension plan is similar to the MMP
pension plan, rendering it impossible to understand why the
contributions needed to fund the two plans are so different.
---------------------------------------------------------------------------

    \39\ This comment is available at www.regulations.gov, docket
number USCG-2015-0497-0052.
    \40\ USCG-2015-0497-0052, p.16. We note that health benefits
were included in the estimate of Canadian compensation used to
create the benchmark.
    \41\ This comment is available at www.regulations.gov, docket
number USCG-2015-0497-0038.
    \42\ 81 FR 11908, at 11915.
    \43\ USCG-2015-0497-0038, p.5. Acronyms were undefined in
original comment, internal citations to U.S. statutes omitted.
---------------------------------------------------------------------------

    Based on our analysis of the substantial changes in the exchange
rate, and the uncertainty regarding the correct comparison of the
Canadian and U.S. compensation systems, we decided not to continue
using the GLPA information as a compensation benchmark. Instead, as
described below, we believe that a comparison with a U.S. system is a
better interim benchmark until the Coast Guard can complete its
compensation study.
2. Comparison With U.S. Pilotage Associations
    Several commenters also repeated a request that, instead of basing
our compensation benchmark on Canadian pilots or U.S. mates, we should
instead base it on a figure derived from the compensation of other U.S.
pilotage organizations. One commenter argued that ``many pilots are
comparably regulated in other U.S. jurisdictions and their rates and
compensation set in open and evidence-based proceedings. The Coast
Guard has never provided a convincing rationale for its failure to
consider or adopt a benchmark based on the compensation of other U.S.
pilots.'' \44\ The commenter also provided examples of other U.S. pilot
compensation, which it noted were considerably higher than any
benchmark the Coast Guard had used in the past. The AMO, on whose
contracts the proposed interim benchmark was based, argued that, rather
than using AMO contracts with U.S. shipping companies as a basis to
determine the target rate of compensation, ``it would make considerably
more sense for the Coast Guard to use publicly available information on
the compensation levels for other independent compulsory pilots
throughout the United States.'' \45\
---------------------------------------------------------------------------

    \44\ USCG-2017-0903-0006, p. 6.
    \45\ USCG-2017-0903-0005, p. 1.
---------------------------------------------------------------------------

    While we agree with the commenters that the final compensation
information of some other U.S. pilots is publicly available, we are
not, at this time, convinced that it is the best benchmark. We note
that there are over 60 pilotage associations in the U.S., with huge
variations in pay structure and levels. For example, in some of our
research involving pilot compensation, we found that pilot compensation
levels that ranged from a low of $173,554 annually \46\ to a high of
$758,922.\47\ Such a wide range does not provide sufficient information
about the proper compensation of Great Lakes pilots on its own.
---------------------------------------------------------------------------

    \46\ https://www.governmentjobs.com/careers/lacity/jobs/1823743/port-pilot-5151?keywords=port%20pilot&pagetype=jobOpportunitiesJobs.
    \47\ See ``NOBRA 2017 Income Disclosure,'' docket # USCG-2017-
0903-0009.
---------------------------------------------------------------------------

    At this time, we do not have sufficient, reliable information
regarding how the baseline average compensation levels of other U.S.
pilotage associations are set, only information on the rate changes
from year to year. While the final compensation levels are public, the
methods by which those compensation levels were benchmarked (as opposed
to adjusted on a year-by-year basis) is not apparent. As we mention
above, the Coast Guard continues to study the compensation structures
of other pilotage systems as part of our comprehensive study, and in
the course of that study, has reached out to numerous pilot
associations and shipping interests as to how compensation levels and
shipping rates are determined, but would certainly welcome input on how
compensation is set and what factors contribute to that determination.
    Further, as noted in the 2018 NPRM, the Coast Guard commissioned a
study to better understand the direct and secondary impacts of the U.S.
pilotage charges. The report is titled ``Analysis of the Great Lakes
Pilotage Costs on Great Lakes Shipping and the Potential Impact of
Increases in U.S. Pilotage Charges'' \48\ and assessed the baseline
economic conditions of maritime commerce on the Great Lakes, quantified
the cost of operating vessels on the Great Lakes, compared the cost of
foreign trade on the Great Lakes to other modes of transportation and
coastal ports, and assessed the impact of changes in

pilotage rates to the Great Lakes shipping industry, including
surrounding ports. This study demonstrated that pilotage costs play a
role in determining the amount of cargo shipped on the Great Lakes.
Because the Coast Guard considers the impact of shipping costs on Great
Lakes pilotage as part of its ratemaking considerations, this study
provided evidence that large increases in pilotage rates could
negatively affect shipping on the Great Lakes. While we recognize that
the study itself is not a comprehensive analysis of all economic
factors, it is one factor that the Coast Guard considered when setting
rates for shipping.
---------------------------------------------------------------------------

    \48\ ``Analysis of Great Lakes Pilotage Costs on Great Lakes
Shipping and the Potential Impact of Increases in U.S. Pilotage
Charges,'' prepared by John C. Martin Associates, LLC, June 28, 2017
(hereinafter the ``2017 Pilotage Cost Analysis'').
---------------------------------------------------------------------------

    To assess the potential impact of the U.S. pilotage charges on the
competitive cost position of the Great Lakes/St. Lawrence Seaway System
and the associated impact on tonnage moving via the Great Lakes ports,
the 2017 Pilotage Cost Analysis considered the actual increases in
pilotage charges between 2015 and 2016, and assuming numerous other
economic factors remained constant,\49\ projected potential impacts in
the event that similar increases in U.S. pilotage charges were to occur
in the following year. While the 2017 rates did not actually increase
in accordance with the model's assumption, and thus the projected
impacts did not actually occur, the study provides evidence of the
Great Lakes/St. Lawrence Seaway System's sensitivity to changes in the
cost of U.S. pilotage, as a percentage of total voyage costs.
---------------------------------------------------------------------------

    \49\ This study is a single sector analysis, which means it
assumes that numerous other factors that affect the cost of
international shipping in the Great Lakes/St. Lawrence Seaway System
are held constant. If the other factors or sectors were not held
constant, but instead were allowed to fluctuate as they actually do,
it is likely that the impact from changing pilotage rates would be
different. It is important to note that the results of a single
sector analysis should not be interpreted as a full regional or
national impact analysis.
---------------------------------------------------------------------------

    The 2017 Pilotage Cost Analysis is informative to our ratemaking
process and supports the notion that there is an upper limit to the
amount that can be charged for pilotage services before shippers
consider diverting cargo to other locations or other modes of
transportation. As pilot compensation costs constitute the bulk of the
input into pilotage fees, the Coast Guard continues to carefully
consider the direct and secondary impacts of our annual rate
adjustments.

B. Revised Compensation Benchmark Issues

    In the preceding subsections, we described why we did not continue
to use the Canadian GLPA data or data from the other U.S. pilotage
associations as the basis for the interim compensation benchmark in the
2018 NPRM. In this section, we respond to comments regarding our choice
to use the 2015 AMO contract information as the basis for the
compensation benchmark instead. We received several comments on the AMO
contract information's validity and how to implement it, which we
address in several subsections that follow. In the first subsection, we
address why we chose the 2015 rate. In the second subsection, we
discuss comments from the AMO about the application of overtime
compensation to the daily aggregate rate. Finally, in the third
subsection, we address industry comments regarding the application of
the daily aggregate rate to the 270-day shipping season on the Great
Lakes.
1. Use of AMO 2015 Aggregate Rate
    In addition to suggestions that we continue using the Canadian GLPA
compensation as a benchmark or that we base our compensation on those
of other U.S. pilotage associations, we received several comments
specifically regarding our decision to make use of the AMO aggregate
daily rates from 2015 (note this is separate from the discussion of
comments, in Section V.B.2., regarding how to apply the AMO aggregate
daily rates). A discussion of the comments regarding use of AMO 2015
aggregate rates and our responses follows.
    One commenter supported the use of AMO data, stating that this
approach was ``a more rational approach to identification of some
analogous field of endeavor against which to test the reasonableness of
pilot compensation levels.'' \50\ The commenter also stated that
comparisons with AMO members aboard U.S.-flag vessels avoid
difficulties, identified above in Section V.A.2, in trying to develop
comparisons across countries. However, the commenter criticized the
Coast Guard's acceptance of the AMO's decision to withhold contract
information and obtain compensation data from other sources, and stated
that the commenters ``lack information necessary to validate the stated
'daily aggregate rates' identified in the NPRM.'' \51\ In response, we
note that (1) we do not have the authority to compel anyone to provide
confidential contract information; (2) we have been working to obtain
other compensation data, and have commissioned a comprehensive review
of that data; and (3) it may be possible for shipping industry
personnel to acquire data about AMO contracts with shipping companies
on their own.
---------------------------------------------------------------------------

    \50\ USCG-2017-0903-0008, p. 4.
    \51\ USCG-2017-0903-0008, p. 5, footnote 5.
---------------------------------------------------------------------------

    One commenter argued that basing the compensation on the 2015 AMO
data was inappropriate. The commenter stated that ``the use of old,
disputed, extrapolated AMOU data does not adhere to the Coast Guard's
own regulations (as proposed) in 404.104,'' \52\ which state that the
Coast Guard will set a compensation benchmark after considering the
most relevant currently available non-proprietary information. The
commenter argued that the information is old (it is from October 2013),
irrelevant (stating that it relates to laker-masters, not pilots), and
proprietary (as actual data from 2018 is not available), and thus
should not be used as a basis for pilot compensation.
---------------------------------------------------------------------------

    \52\ USCG-2017-0903-0004, p. 4.
---------------------------------------------------------------------------

    We disagree with the commenter, and believe that the data supplied
in the October 4, 2013, letter from the AMO describing aggregate daily
rates,\53\ meets the standard in 46 CFR 404.104 of being the ``most
relevant currently-available non-proprietary information'' for the
reasons described below.
---------------------------------------------------------------------------

    \53\ We refer to this document as the ``AMO letter,'' which is
available at www.regulations.gov, docket number USCG-2013-0534-0007.
For a discussion about how the information from the 2013 AMO letter
was extrapolated to derive the 2015 baseline compensation figures,
see Section VII of the 2018 NPRM, entitled ``Revised Compensation
Benchmark,'' 83 FR 2581, at 2587.
---------------------------------------------------------------------------

    First, we believe that the data in the AMO letter is the `most
relevant' information. Notwithstanding AMO's statement that ``. . . the
AMO is disappointed to learn that the U.S. Coast Guard is again
attempting to rely on the use [of] AMO contracts with U.S. shipping
companies on the Great Lakes as a basis to determine the `target rate
of compensation' for U.S.-registered pilots on the Great Lakes,'' for
the reasons described in the NPRM,\54\ we believe that it provides a
highly relevant gauge for how much experienced mariners working on the
Great Lakes are compensated. While AMO's position on the matter are
certainly highly relevant, we still believe that the compensation of
U.S. masters on Great Lakes ships provides a useful proxy for the
compensation of U.S. pilots on Great Lakes ships, and the interim
benchmark methodology is an effective manner to translate the AMO
figure into a useable number for the latter. The interim benchmark is
based on the idea that a Great Lakes pilot should earn, on average,
about 1.5 times the salary of a

first mate,\55\ given the demanding nature of Great Lakes pilotage work
and the experience required. On that basis, the AMO data--which
describes what a first mate earns for a day of work--is highly
relevant, and perhaps the most relevant piece of information
possible.\56\
---------------------------------------------------------------------------

    \54\ See Section entitled ``Revised Compensation Benchmark'', 83
FR 2581, 2587-2590.
    \55\ For a full discussion of how the interim benchmark was
derived, see 83 FR 2581, at 2587-2590.
    \56\ We also note that the commenters' assertion that the AMO
data relates to `laker-masters' is incorrect; it relates to first
mates.
---------------------------------------------------------------------------

    Second, we believe that the data in the AMO letter is currently-
available. We interpret this term to mean ``available at the current
time.'' As the letter has been posted in the public docket for years
and is still available, we believe it meets the definition of
``currently available.'' The purpose of this provision is to prohibit
the use of data that is in existence but not available for public
release.
    Finally, we believe the data in the AMO letter is non-proprietary.
While the AMO asserts that the underlying contract data is proprietary,
and so we did not rely on that information in setting the interim
benchmark, the AMO has publically released the daily aggregate
compensation figure. Indeed, the commenter cites language from our 2016
pilotage rates NPRM (2016 NPRM), the year the AMO stopped making its
information publically available, saying ``the union now regards that
data as proprietary and will no longer disclose it [emphasis added].''
\57\ We consider this an acknowledgement that the earlier data, which
we are using, is not proprietary information. We note that there are
other non-proprietary sources of information, and simply noting that a
data source is non-proprietary does not mean that it necessarily
provides information that the Coast Guard is obligated to incorporate
into its ratemaking calculations. For example, several pilotage
organizations also provided overall information about pilot
compensation without explaining the factors that went into that
information, but for the reasons described above in Section V.A.2., we
did not use that information to determine the target compensation for
Great Lakes pilots.
---------------------------------------------------------------------------

    \57\ USCG-2017-0903-0004, p. 5, citing 80 FR 54484.
---------------------------------------------------------------------------

2. Overtime Compensation
    In the 2018 NPRM, we used the public figures provided by AMO for
its 2014 compensation rate, expressed as a daily aggregate rate, to
determine the target compensation figure for the interim compensation
benchmark. These figures were provided by AMO in its letter to the
Coast Guard in 2013, and represented the most current information we
had to implement this method of computing a benchmark. However, in its
comments on the 2018 NPRM, the AMO indicated that the information it
provided in the 2013 letter was incomplete. Specifically, it stated
that the daily aggregate rates the Coast Guard is using to determine
the benchmark compensation do not take into account ``standard overtime
compensation that is consistently earned by U.S. merchant mariners
under AMO contracts.'' \58\ The AMO stated that the average overtime
for a U.S. credentialed chief mate under AMO contracts is 40 hours per
month, which at the 2018 hourly pay rate would be $60.07 per hour, or
$21,625 for a 9-month period. This was also stated by the pilot
associations, which stated that ``this `overtime' compensation is
planned and expected (by both the shipping companies and the AMO
merchant mariners) [as] part of the AMO-negotiated compensation
package, and represents a guaranteed payment [emphasis added], for an
average of 40 hours per month or more, for overtime work (including
clerical work) that is expected and intended each mate will perform.''
\59\
---------------------------------------------------------------------------

    \58\ USCG-2017-0903-0005, p. 2.
    \59\ USCG-2017-0903-0006, pp. 9-10.
---------------------------------------------------------------------------

    The information on guaranteed overtime is new to the Coast Guard.
In the past, when we based our compensation rates on the daily
aggregate rates provided by the AMO, guaranteed overtime was not
included in those calculations. Nor was information on guaranteed
overtime provided to the Coast Guard by the AMO in the ``settlement
agreements'' from 2011,\60\ which listed factors that go into the daily
aggregate wages. These factors included wages, medical plan
contributions, and pension plan contributions. We used this information
to validate the daily aggregate rates provided in the 2013 AMO
letter.\61\ However, this formula did not include a guaranteed overtime
bonus. We note the footnote in the shipping industry's comment that
they ``lack information necessary to validate the stated `daily
aggregate rates' identified in the NPRM and submit that the underlying
calculation of those rates should have been explained. . . .'' \62\ The
Coast Guard agrees that it would be better to have incorporated the new
information into the daily aggregate rates at the proposed rule stage.
However, we cannot now ignore highly relevant information simply
because it was not apparent at the beginning of the rulemaking process,
and we further note that the Coast Guard has been criticized for not
using AMO data provided during the course of the rulemaking process in
the past.\63\ Because it is our goal to base our target compensation on
the actual compensation of mates under the AMO contract, we believe it
is appropriate to include the guaranteed overtime in the daily
aggregate rates. We note that the use of ``overtime'' as part of the
AMO contract terms does not mean there is overtime compensation for
U.S. pilots, and shippers only pay for actual hours worked at the
levels proscribed in the regulatory text.
---------------------------------------------------------------------------

    \60\ These settlement agreements, between the AMO, Key Lakes,
and Mittal Steel (Agreements ``A'' and ``B'', respectively), are not
public information. Therefore, we cannot publicly reveal detailed
information about their contents.
    \61\ See 83 FR 2581, at 2588. The formula to derive the
aggregate daily rate multiplies the wage (including weekend,
holiday, and bonus days) by 1.5, adds a 5-percent 401k contribution,
and adds the medical plan and pension plan contributions.
    \62\ USCG-2017-0903-0008, p. 5, footnote 5.
    \63\ See St. Lawrence Seaway Pilots Association, Inc., et al. v.
United States Coast Guard, No. 14-cv-392, (D.D.C., March 27, 2015),
p. 11-12.
---------------------------------------------------------------------------

    We have modified the overtime number provided by the AMO to account
for the fact that they provided 2018 information. As stated in the 2018
NPRM, we are basing the target compensation on the 2015 AMO contract
information, which contains the last information that is publically
available, and using an inflation index to arrive at a comparable 2018
rate. Because our rates are based on 2015 information, and not 2018
information, we are not using the 2.5 percent annual wage adjustment
figures from 2015 through 2018 that the AMO provides and the Great
Lakes Pilots reiterate, even though they assert that those are the
actual wage increases. While this may be true, it is not relevant for
the purposes of determining the 2015 daily aggregate rate. As stated
above in this section, in order to base the compensation on 2015 rates,
we are adjusting the 2015 rates for inflation to reach a 2018 rather
than tracking contract permutations. To incorporate the 2018 average
overtime figure, we first deflated the hourly overtime rate to 2015,
using the 2.5 percent annual rate \64\ provided by the AMO, to derive
its 2015 value, which is $55.68. We then broke down the 40 hours per
month of overtime into a daily average of 80 minutes over 30 days (or
one and one third hours per day), to arrive a total value of $74.24
($55.68 x 1.3333) in

overtime compensation per day. We then added that value to the provided
daily aggregate rates to provide revised daily aggregate rates of
$1,216.30 for Agreement A, and $1,198.96 for Agreement B.\65\ From that
point, the calculations are similar to those performed in the NPRM, as
shown in Table 3.
---------------------------------------------------------------------------

    \64\ While the 2.5 percent rate is not relevant for calculating
the 2018 aggregate total, it is appropriate for translating the AMO-
provided 2018 dollar figure to an actual 2015 figure, as that was
the actual amount by which it was inflated, per the AMO.
    \65\ $1,142.06 + $74.24 = $1,216.30 for Agreement A; $1,124.72 +
$74.24 = $1,198.96 for Agreement B.

                               Table 3--Calculation of Seasonal Rates by Agreement
----------------------------------------------------------------------------------------------------------------
                                                                                Seasonal compensation
                                                                      Aggregate daily   (aggregate daily  rate x
                                                                            rate                  270)
----------------------------------------------------------------------------------------------------------------
Agreement A........................................................          $1,216.30                  $328,401
Agreement B........................................................           1,198.96                   323,719
----------------------------------------------------------------------------------------------------------------

    Next, we apportion the compensation provided by each agreement
according to the percentage of tonnage represented by companies under
each agreement. As shown in Table 4, approximately 70 percent of cargo
was carried under the Agreement A contract, while approximately 30
percent of cargo was carried under the Agreement B contract.

                                   Table 4--Weighted Average of Each Agreement
----------------------------------------------------------------------------------------------------------------
                                                                                Percentage of tonnage
                                                                          Tonnage            (total tonnage/
                                                                                1,215,811)
----------------------------------------------------------------------------------------------------------------
Agreement A........................................................            361,385                29.7237811
Agreement B........................................................            854,426                70.2762189
                                                                    --------------------------------------------
    Total tonnage..................................................          1,215,811                    100.00
----------------------------------------------------------------------------------------------------------------

    Third, we develop an average of compensation based on the total
compensation under the two contracts, weighting each contract by its
percentage of total tonnage, as shown in Table 5. Based on this
calculation, we developed a figure of $325,110 for total compensation
in 2015.

                                  Table 5--Calculation of Averaged Compensation
----------------------------------------------------------------------------------------------------------------
                                                                                Weighted compensation
                                                                       Percentage of    (seasonal compensation x
                                                                          tonnage        percentage of tonnage)
                                                                                (rounded)
----------------------------------------------------------------------------------------------------------------
Agreement A--weighted..............................................         29.7237811                   $97,613
Agreement B--weighted..............................................         70.2762189                   227,497
                                                                    --------------------------------------------
    Total Compensation (Agreement A + B)...........................             100.00                   325,110
----------------------------------------------------------------------------------------------------------------

3. Calculation of Number of Days in Pay
    As stated above, in the NPRM, we proposed to set the compensation
benchmark by multiplying the aggregate daily rate by 270, the number of
days in the shipping season, to derive a ``seasonal average
compensation figure.'' \66\ Industry commenters argued that the use of
the 270-day figure was inappropriate. They stated that, while ``in past
ratemaking proceedings [the Coast Guard] has used the 270-day
assumption as a basis for extrapolating AMOU compensation data to pilot
compensation . . . the Coast Guard has since (see 2016 final rule)
imposed mandatory rest periods on pilots that limit their working days
each month and has imposed on rate payers additional costs attributable
to increased staffing levels that are, in large part, attributable to
mandatory rest periods.'' \67\ The industry commenters suggest that,
instead of multiplying the daily aggregate rate by 270, the aggregate
rate should be multiplied by only 200, given that the AMO figures are
tied to working days and that Great Lakes pilots are only expected to
work 200 days.\68\
---------------------------------------------------------------------------

    \66\ 83 FR 2581, at 2589.
    \67\ USCG-2017-0903-0008, p. 5, footnote 7.
    \68\ USCG-2017-0903-0008, p. 5.
---------------------------------------------------------------------------

    First, the Coast Guard notes that the industry commenters have
mischaracterized the 10 days of rest that we have incorporated into the
staffing model. Unlike Canadian pilots, AMO mates, or other U.S.
pilots, United States registered pilots do not have guaranteed days off
during the shipping season. Instead, Great Lakes pilots are expected to
be on call and available for work each day during the entire 270-day
season. However, it is our goal that when pilot demand is not at its
highest level (during the 7 months that are not the opening or closing
of the season), pilots are able to rest for 10 days, and we have set
the number of pilots so that there are approximately \1/3\ more pilots
than necessary to handle traffic during these times, allowing an
average pilot 10 days of rest during an average non-peak traffic month.
As we noted in the 2016 NPRM when we proposed this system, ``we propose
building into our base seasonal work standard only 200 workdays per
pilot per season. The 70-day difference should facilitate a 10-day
recuperative rest period for each pilot in each of the seven months
(mid-April to mid-November) between peak traffic periods.'' \69\ As we
noted in that document, ``our goal is to regulate the pilotage system
to maximize the likelihood [emphasis added] for

providing the full 10 days per month.'' \70\
---------------------------------------------------------------------------

    \69\ 80 FR 54484, at 54490.
    \70\ 80 FR 54484, at 54490, footnote 30.
---------------------------------------------------------------------------

    The industry commenters suggest that, like AMO mates, Great Lakes
pilots should be compensated only for days that they are actually
expected to work, and thus that the aggregate daily wage be multiplied
by 200, rather than 270. This calculation would mean that Great Lakes
pilots would receive zero compensation for being ``on call'' during
those additional 70 days of the season.\71\ On the other hand, we
recognize that multiplying the aggregate daily wage by 270 means that
Great Lakes pilots would receive full compensation for days on call,
even if the system is designed so that they are not expected to work
for those days. While neither number is perfect, we acknowledge that
this is a consequence of using the AMO compensation model, which has a
sharp delineation between guaranteed days worked and guaranteed days
off, and of applying it to the Great Lakes pilots, where a day on the
tour-de-roll may not correlate to a day actively undertaking pilotage
duties.
---------------------------------------------------------------------------

    \71\ Or longer, as some recent shipping seasons have lasted
longer than 270 days due to changes in ice patterns on the Great
Lakes. For example, we note that the 2017 shipping season in
District 1 lasted 296 days.
---------------------------------------------------------------------------

    The Coast Guard's mission in regulating pilotage on the Great Lakes
is to ``promote safe, efficient, and reliable pilotage service on the
Great Lakes.'' \72\ However, there is a natural balancing in this
mission. To promote safe pilotage, the Coast Guard strives to attract
the most experienced pilots, and to attract sufficient numbers, so that
each vessel assigned a pilot is assured an experienced, well-rested
pilot. To promote reliable pilotage, we must ensure there are
sufficient numbers of pilots so that a rested pilot is available for
duty at the required location at the required time, even in periods
where traffic is more than expected. Both of these goals recommend that
we hire more pilots, and ensure competitive compensation, thus
advocating for higher pilotage rates. On the other hand, the promotion
of efficient pilotage pulls in the opposite direction. We can lower
pilotage rates by more efficiently utilizing a lower number of pilots--
moving them around more, or giving them less rest--with the
understanding that this may result in less reliable service when
traffic is higher than predicted. Similarly, we can lower
compensation--improving efficiency by hiring less experienced pilots
who will work for less compensation--with the understanding that this
could have consequences for safety.
---------------------------------------------------------------------------

    \72\ See 46 CFR 404.1(a).
---------------------------------------------------------------------------

    While we believe that 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. While 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. In the past,
when compensation levels were lower, the pilot associations asserted
that they had trouble attracting and retaining qualified pilots, and we
believe offering higher compensation will help the pilot associations
attract and retain higher numbers of more experienced pilots.
Furthermore, we continue to note that the Great Lakes pilots' target
compensation is within the range compensation of other U.S. pilotage
associations (although we note we are still gathering data as to how
the compensation and tariff levels of other U.S. pilotage associations
are set). We also note that our economic analysis of shipping on the
Great Lakes, discussed above, demonstrates that pilotage costs remain
low enough to enable a robust trade of commodities.
    Additionally, we point to an issue raised by commenters as an
additional reason to ensure that safety and reliability are emphasized
in the Coast Guard's analysis of Great Lakes pilotage. One commenter
noted that cruise ships are becoming an increasingly important source
of business on the Great Lakes, and that unlike cargo ships, which can
weather delays with relatively little impact, cruise ships are severely
impacted by delays as they cannot keep to their schedules.\73\ We
believe that with cruise ships becoming a large share of business, the
need to minimize delays by having an adequate number of pilots grows in
importance.
---------------------------------------------------------------------------

    \73\ USCG-2017-0903-0004, p. 11. We note that the commenter also
requested that the Coast Guard adjust its regulations to allow
pilots to give priority to cruise ships for this reason. While such
a request is outside the scope of the ratemaking procedure, we will
give the idea consideration.
---------------------------------------------------------------------------

C. Inflation Adjustment Factor for Adjustment Years

    In the NPRM, we proposed that in non-benchmark years, the target
compensation for Great Lakes pilots be increased by an inflation factor
to promote predictability and increase the efficiency of the ratemaking
process. All commenters who discussed this issue were supportive of an
automatic increase for inflation. However, several commenters
recommended that the inflation benchmark used was inappropriate. While
we proposed to use the CPI for the Midwest Region,\74\ several
commenters recommended different inflation adjustments.
---------------------------------------------------------------------------

    \74\ Specifically, we proposed to use the Midwest Region CPI or
the Federal Open Market Committee (FOMC) median economic projections
for Personal Consumption Expenditures (PCE) inflation. The PCE
figure would be used for years where CPI data is not available.
---------------------------------------------------------------------------

    One commenter questioned why the Coast Guard expected the CPI for
the Midwest Region to track actual AMO wage increases year after year,
and stated that the AMO contract increased wages at 3 percent per
year.\75\ Another commenter argued that the Coast Guard's method of
``guessing at current AMOU compensation'' using the CPI was inherently
flawed.\76\ In response, we note that the NPRM never proposed that the
compensation rate should track yearly increases in the AMO rate, and
that its intent was to set a compensation benchmark at a rate derived
from the 2015 AMO rate, and then increase that rate by an inflation
factor. The Coast Guard explicitly stated that the goal was not to
track AMO rates developed after 2015,\77\ and thus believes the
commenters' suggestions are not warranted.
---------------------------------------------------------------------------

    \75\ USCG-2017-0903-0006, p. 9.
    \76\ USCG-2017-0903-0004, p. 7.
    \77\ See 83 FR 2581, at 2588.
---------------------------------------------------------------------------

    Several commenters suggested that instead of adjusting the
compensation benchmark by the CPI, we should instead adjust it by the
ECI for the transportation and material moving sector.\78\ One
commenter noted that ``the [ECI] is the more relevant index because
unlike the CPI, it tracks the parameter we're talking about: employment
cost in the transportation sector.'' \79\ We agree with the commenters
that, for the purposes of inflating compensation costs, the ECI
provides a better gauge of compensation inflation than the CPI does.
Our goal is to promote recruitment and retention of skilled pilots, and
that goal is undermined if the wages of Great Lakes pilots increase
less than the wages of other skilled maritime professionals in the
transportation sector as the result of an inflationary gauge that was
not as accurate as possible. Thus, we have substituted the ECI for the
CPI in our annual inflation adjustor for target compensation. We note
that this logic does not apply to the increase in

operating costs, for which we will continue to use CPI as the benchmark
for inflation, because the ECI measures the change in the cost of
labor.
---------------------------------------------------------------------------

    \78\ USCG-2017-0903-0004, p. 9; USCG-2017-0903-0007.
    \79\ USCG-2017-0903-0004, p. 9.
---------------------------------------------------------------------------

    Finally, we note that in instances where BLS ECI or CPI inflation
data is not available, the Coast Guard has historically used the FOMC
median PCE estimates. We have included language to that extent in the
language for 46 CFR 404.102 and 404.104, respectively, to make the
process more transparent. We note that we did not include this as
proposed language in the NPRM, but given that the particular
inflationary gauges used in the rule have been raised as a serious
issue in comments, believe that being more explicit about the exact
figures used in the calculations of both the NPRM and final rule is a
logical outgrowth of that issue.

D. Staffing Model Relocation and Calculations

    In the NPRM, we proposed to relocate the staffing model regulations
from 46 CFR 404.103(a) through (c) to 46 CFR 401.220(a). We did not
propose making any modification to the text of the staffing model. We
stated that the rationale for moving the text was to improve the
clarity of the regulations and simplify the process for preparing the
annual rulemaking documents. Noting that, under the current
organizational scheme, ``Ratemaking Step 3'' produces two sets of pilot
numbers (one produced by the staffing model and a different one used in
the ratemaking calculation), the staffing model text should be moved to
part 401, where other pilotage inputs that inform the ratemaking
process, but are not part of the annual calculation, are located.\80\
---------------------------------------------------------------------------

    \80\ 83 FR 2581, at 2586.
---------------------------------------------------------------------------

    We received one comment from a pilotage organization that protested
this organizational change. The commenter argued that this proposal
allows the Director of Great Lakes Pilotage to conduct the calculations
whenever he or she believes it is necessary, which could allow long
periods of neglect.\81\ We note that, if the commenter believes the
staffing levels are being neglected, the commenter is able to raise
this concern in the many public forums, such as GLPAC meetings, that
are available for input into the ratemaking process. We also note that
analyzing the number of pilots required is not a process currently
conducted once per year, but something that is continuously done. It is
similar to the system for determining the number of applicant pilots,
which, while it informs the methodology, is not part of it. Instead,
those regulations are located in Sec.  401.211 of the Great Lakes
Pilotage Regulations. We believe placing the staffing model text in
part 401 is the best way to ensure transparency in the regulations, and
makes clear that it is the number of working pilots that we authorize
in the regulations--which may not correspond to the number generated by
the staffing model--that is the relevant value for establishing
pilotage rates.
---------------------------------------------------------------------------

    \81\ USCG-2017-0903-0004, p.11.
---------------------------------------------------------------------------

    One commenter stated that the Coast Guard had miscalculated the
number of pilots needed in Districts One and Two, and that we should
add an additional pilot to each of those Districts pursuant to the
staffing model. In the calculations for those Districts, we determined
that 17.25 and 15.41 pilots were needed, which we rounded down to 17
and 15, respectively.\82\ The commenter argued that ``the [staffing]
model contemplates additional duties of the Association Presidents as a
basis for rounding pilot numbers. It is entirely nonsensical to round
down to account for extra workload and duties.'' \83\
---------------------------------------------------------------------------

    \82\ 82 FR 41466, at 41480, Table 6. For District 3, we
calculated 21.55 pilots, which was rounded up to 22.
    \83\ USCG-2017-0903-0007.
---------------------------------------------------------------------------

    We disagree with the commenter's analysis, and believe that the
commenter is referring to a rounding convention that was applicable to
a different staffing model. We did state, in the 2017 pilotage rates
NPRM, that ``[i]n all districts, when the calculation results in a
fraction of a pilot, we round pilot numbers up to the nearest whole
pilot. We do this to avoid shortening our demand calculation and also
to compensate for the role of the district presidents as both working
pilots and representatives of their associations.'' \84\ However, that
statement was made in regard to a proposal to switch from a ``peak
staffing model'' to an ``average staffing model.'' The proposed average
staffing model, which, based on comments we received, was never
finalized, derived the number of pilots from their average workload
during the year. Because a pilot association has responsibilities
beyond pilotage, which takes up some of each pilot's time, the Coast
Guard proposed to round up to account for those responsibilities.
However, this situation does not apply to the staffing model currently
used, which is based on the number of pilots needed at the beginning
and close of the season, when traffic is highest and treacherous
conditions often require double pilotage. Under the current staffing
model, during the first and last months of the season, we expect all
pilots to focus on pilotage duties, while allowing an average of 10
days of rest for pilots during the remaining 7 months. Pilot
association presidents can undertake their administrative
responsibilities during this time, so there is no need to round up, and
a traditional rounding system can be used.
---------------------------------------------------------------------------

    \84\ 81 FR 72011, at 72015-16.
---------------------------------------------------------------------------

E. Working Capital Fund Basis and Use

    One commenter suggested that the Coast Guard eliminate the working
capital fund, or alternatively, that the Coast Guard promulgate
regulations that segregate the working capital funds and govern their
use, and prevent their distribution as compensation. While we did not
propose any modifications to the calculation or use of working capital
funds and are not incorporating them into the 2018 ratemaking procedure
at this late stage, we do believe that some of the ideas expressed by
the commenter merit discussion.
    First, we discuss the commenter's argument that the value of the
working capital fund ``appears to be an entirely arbitrary `adder' that
bears no clear relationship to its supposed function or nomenclature.''
\85\ The commenter stated that ``the term `working capital' is commonly
understood to be a balance sheet measure that is the difference between
current assets and current liabilities.'' The commenter also stated
that the relationship between the amount of money collected pursuant to
Step 5 of the ratemaking process and the infrastructure costs of the
District is unclear. Finally, the commenter raised the point that, in
the past, surcharges had been used to fund infrastructure improvements,
and there should be a mechanism to ensure that it is used for that
purpose.
---------------------------------------------------------------------------

    \85\ USCG-2017-0903-0008, p. 6.
---------------------------------------------------------------------------

    In the 2016 NPRM, we discussed both the purpose of the working
capital fund as well as its name.\86\ In our discussion of why we
proposed to change the name of this step from ``return on investment''
to ``working capital fund,'' we stated that ``the intent of [this
section of the ratemaking methodology is] to provide the pilots with
working capital for future expenses associated with capital
improvements, technology investments, and future training needs, with
the goal of eliminating the need for surcharges [emphasis added].''
\87\ We also agree that there may be merit in a mechanism to ensure
that the funds are set aside for future projects, and will investigate
the need for such regulation and how to best effect it. We encourage
commenters

to engage with the Coast Guard on this issue with additional
information.
---------------------------------------------------------------------------

    \86\ 81 FR 72011, at 72017.
    \87\ 81 FR 72011, at 72017.
---------------------------------------------------------------------------

    The commenter also suggested that the amount of money collected by
the working capital fund calculation was incorrect, and that the Coast
Guard should re-evaluate what is the working capital fund's function
and relationship to pilot-compensation. However, the commenter did not
suggest an alternative value for the fund. In the 2017 final rule, we
stated that the 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.'' \88\ Because the purpose of the working
capital fund is that the pilot associations can demonstrate credit
worthiness when seeking funds from a financial institution for needed
infrastructure projects, the value of the working capital fund
contribution is tied to pilot association revenue and prevailing
corporate interest rate.
---------------------------------------------------------------------------

    \88\ 82 FR 41466, at 41484.
---------------------------------------------------------------------------

    Separate from the amount of the working capital fund, the commenter
suggested that the use of money collected as part of the working
capital fund be clearly bounded, and any unspent money should be
segregated and carried forward from year to year, and not be
distributed as compensation.\89\ The commenter stated that a number of
surcharges have been imposed on rate payers over the years for specific
capital projects and expenses, and so the purpose of the working
capital fund is unclear.
---------------------------------------------------------------------------

    \89\ USCG-2017-0903-0008, p. 6.
---------------------------------------------------------------------------

    Since 2016, when the ratemaking methodology was updated, we have
not used surcharges to finance infrastructure improvements or
maintenance, only to train new pilots. The purpose of the working
capital fund is to demonstrate that pilots can achieve a return on
investment, and thus have the ability to acquire loans to finance
needed capital improvements. In the event that loans are taken out for
this purpose, we would expect the working capital funds to be used to
finance those loans, and so we would not permit the financing expenses
to be counted as operating expenses.
    Currently, there are no requirements for how money collected under
this provision is spent or distributed. However, we agree that the idea
has merit. We believe that the money is meant to secure the financing
for infrastructure improvements, and should not be used as
compensation. While we believe that this ratemaking proceeding is not
the proper venue to determine whether and how the Coast Guard could or
should implement some limitations on the use of working capital fund
money, we will take the idea under advisement.

F. Use of 10-Year Traffic Baseline

    One issue raised by industry commenters concerns the use of a 10-
year moving average to calculate average traffic. The commenters noted
that ``the 10-year average is depressed by the significant reduction of
traffic that occurred in the 2008-2013 period,'' \90\ which was caused
by the global recession of 2008 and 2009. Noting that in years since
2013, traffic has been substantially higher, the commenters assert that
``it [is] rational to assume that 2018 hours will be generally
comparable to levels in the 2014-2017 period.'' \91\ If those traffic
numbers are reached, then actual revenue would be substantially higher
than the ``revenue needed'' under Step 7 of the ratemaking methodology,
and pilots will exceed their target compensation.
---------------------------------------------------------------------------

    \90\ USCG-2017-0903-0008, p. 6.
    \91\ USCG-2017-0903-0008, p. 7.
---------------------------------------------------------------------------

    To rectify this, the industry commenters recommend that instead of
using a 10-year average traffic volume to calculate revenue needed, the
Coast Guard should use a 3-year period instead. This would result in
substantially lower shipping costs, as the total revenue needed
($22,438,782, as identified in Step 7 of the NPRM \92\) would be
divided by 51,607 hours of traffic, rather than the 43,384 hours of
traffic using the 10-year average. Applying this change would lower the
average rate across all areas from $517.21 per hour to $434.80 per
hour, a reduction of approximately 16 percent.
---------------------------------------------------------------------------

    \92\ 83 FR 2581, at 2595. This figure is derived by adding the
totals from Tables 20, 21, and 22. Note that it does not include
revenues from surcharges.
---------------------------------------------------------------------------

    Commenters assert that a 3-year traffic average convention would
make more sense than a 10-year average, as the Coast Guard's other
parts of the ratemaking methodology that feed into the ``Revenue
Needed'' use more recent data.\93\ The commenters note that operating
expenses, used in Step 1 of the ratemaking methodology, are based on
data that is 3 years old, and staffing levels, used in Step 3 of the
ratemaking methodology, are based on current year data. The industry
commenters assert that ``the Coast Guard's chronic underestimation of
revenue in 2014-2016 . . . is [partly] caused by asymmetry in the time
span of data in the Revenue Needed and Time on Task data in Step 7.''
\94\
---------------------------------------------------------------------------

    \93\ We note that ``revenue needed'' is determined by adding
operating expenses, pilot compensation, and working capital fund
contributions, and then dividing by total number of hours. These
numbers are calculated on an area-by-area basis.
    \94\ USCG-2017-0903-0008, p. 7.
---------------------------------------------------------------------------

    While we agree that, for the purposes of the 2018 calculations,
hourly pilotage rates would be lower if we used a 3-year window, we do
not believe that this argument is convincing. Given a normal
distribution of traffic, approximately 5 years out of every 10 will
have traffic above the 10-year average level, and approximately 5 will
have traffic below it. We note that traffic volumes on the Great Lakes
can vary significantly from year to year, and a 10-year average is a
good way to smooth out variations in traffic caused by global economic
conditions. Industry commenters provide data showing actual traffic
numbers from 2007 through 2016; those numbers clearly demonstrate that
traffic can dramatically change from one year to the next.\95\ We do
not see this as support for the industry's assertion that it would be
rational to assume 2018 hours will be generally comparable to the 2014
through 2017 period.
---------------------------------------------------------------------------

    \95\ See, e.g., the change from 2009 to 2010, increasing by over
50% from 28,201 hours to 43,960 hours.
---------------------------------------------------------------------------

    Unlike operating expenses, which do not have wide swings from year
to year, and pilot staffing levels, which can be determined with a high
degree of precision, traffic averages are the hardest part of the
ratemaking inputs to predict. Using a 3-year average would lead to
dramatic swings from year to year, while a 10-year average smooths out
those transitions. For that reason, we have decided to continue using
the 10-year average in our calculations. With regard to the idea that,
in 2018, this number may underestimate traffic, we note that in some
years, the use of the 10-year average overestimated traffic.

G. Calculation of Surcharges and Incorporation Into Operating Costs

    In the NPRM, we proposed to add surcharges totaling $1,050,000 to
subsidize the training of seven applicant pilots. This was based on the
fact that there are seven apprentice pilots, and we use the figure of
$150,000 as an estimate for the total training costs of a pilot (this
includes a stipend). In their comments, industry commenters noted that
they support adequate training for pilot trainees, but stated that
``the content and cost of all elements of the training program must be
put to a

process of public review.'' \96\ The commenter asserted that this
element of the NPRM should be withdrawn and a supplemental NPRM should
be issued to permit public comment on the elements of a training
program.
---------------------------------------------------------------------------

    \96\ USCG-2017-0903-0008, p. 8.
---------------------------------------------------------------------------

    We disagree that industry commenters have not had a chance to
comment on the propriety of the $150,000 figure. This amount has been
used each year since 2016, without change. In the 2016 NPRM, when it
was introduced, we discussed the basis for that figure. We stated that
``[b]ased on historic pilot costs, the stipend, per diem, and training
costs for each applicant pilot are approximately $150,000.'' \97\ More
detail is provided in the financial reports submitted by pilotage
associations. For example, the 2016 financial reports submitted by the
pilotage associations \98\ contain the following line items for
applicant pilots:
---------------------------------------------------------------------------

    \97\ 80 FR 54484, at 54500.
    \98\ Available at www.regulations.gov, docket number USCG-2016-
0268.

 Salaries--Applicant Pilots
 Benefits--Applicant Pilots
 Housing Allowance--Applicant Pilots
 Subsistence/Travel--Applicant Pilots
 Training--Applicant Pilots
 Payroll Taxes--Applicant Pilots

    If it is unclear, the purpose of using surcharges to cover
anticipated pilotage costs, instead of operating expenses, is so that
retiring pilots do not have to pay costs that they will be unable to
recoup, as operating expenses are factored into the ratemaking
calculations only after a 3-year delay.
    We also note that while the $150,000 figure is an approximation of
the amount required to train a new pilot, the number is ultimately
balanced with the actual cost through the modifications of operating
expenses. This means that pilotage associations will provide audited
information relating to pilotage training costs each year as part of
the public ratemaking process. Because operating expenses are analyzed
using a 3-year delay (see Step 1 of the ratemaking process), and 2016
was the first year we authorized a surcharge for training applicant
pilots, these figures will become subject to public review beginning
with the 2019 ratemaking. When actual operating expenses are provided,
pilotage associations will be able to add to their operating costs any
expenditures that exceeded the $150,000 collected surcharge. Similarly,
if they did not spend that much, the excess monies will be deducted
from their authorized operating expenses. In this way, ratepayers will
never pay more or less than the actual cost incurred to train a new
pilot. We note that this would not cause any additional paperwork
costs, because pilot organizations already provide the Coast Guard with
their operating expenses on a yearly basis. As we noted in Section
VII.D below, this rule will not change the burden in the collection
currently approved by OMB under OMB Control Number 1625-0086.
    While the current $150,000 surcharge practice began only in 2016,
the process of providing money up front for training, and then
balancing that later through the accounting of operating expenses, is
one we have used in the past. For example, in 2014, we authorized a 3
percent surcharge in District One to recoup $48,995 in expenses that
the association incurred for training.\99\ However, because realized
traffic in 2014 exceeded projections (and at the time, there was no
mechanism to prevent the over collection of surcharges), we note that
the pilot association collected $146,424.01.\100\ The amount of the
2014 surcharge that exceeded actual training costs was deducted from
operating expenses in the next 2 years. In the 2015 final rule, for
example, we disallowed the $48,314 ``pilot training'' item from the
operating expenses, because pilot training expenses are deducted from
surcharges.\101\ We made a further ``surcharge adjustment'' in the 2016
operating expenses to deduct for the remaining amount of $97,429.\102\
---------------------------------------------------------------------------

    \99\ Great Lakes Pilotage Rates--2014 Annual Review and
Adjustment, final rule, 79 FR 12084, at 12088 (March 4, 2014).
    \100\ See 81 FR 11908 at 11929, Figure 8, footnote.
    \101\ Great Lakes Pilotage Rates--2015 Annual Review and
Adjustment, final rule, 80 FR 10365, at 10370, Table 2 (February 26,
2015).
    \102\ 81 FR 11908, at 11929, Figure 8. In the footnote to the
table, we noted that ``the adjustment represents the difference
between the collected amount and the authorized amount of $48,995
authorized in the 2014 final rule.''
---------------------------------------------------------------------------

    We also received a comment from a pilotage organization relating to
the surcharge provision. Specifically, the commenter argued that, in
some instances, pilot associations do not collect the full amount of
the authorized surcharge during the shipping season. The commenter
pointed out that, because the 2017 rates did not become effective until
later in the season, the pilot associations did not collect the
entirety of the authorized sum. Noting that there is a provision to
stop collecting surcharges when the authorized amount is reached, the
commenter requested that the Coast Guard revise 46 CFR 401.401 to
``protect the pilots from surcharge under-generation in the same way it
protects users from surcharge over-generation.'' \103\ We do not
believe such a mechanism is necessary at this time, and again point to
the mechanism above where collected surcharges and audited training
expenditures are ultimately balanced via adjustment to the operating
expenses. In the case where the collected surcharges did not cover the
actual cost of training a pilot, either because the surcharge was too
low or it was not collected, the pilot association would be able to
include any extra expenses in their allowable operating expenses 3
years later.
---------------------------------------------------------------------------

    \103\ USCG-2017-0903-0004, p. 10.
---------------------------------------------------------------------------

H. Other Issues Relating to Pilotage Oversight

    We received several comments from the shipping industry that did
not relate to the specific ratemaking in this rule, but touched on
areas regulated by the Coast Guard. While we are unable to make changes
to the regulations in this final rule due to the fact that the scope of
the NPRM covered only the proposed 2018 adjustments to pilotage rates,
we acknowledge that some of these matters are important issues and
should be addressed in the appropriate forum.
1. Unnecessary Pilot Orders for Use of Tugs
    One comment concerned situations in which vessel masters or owners
disagreed with pilots on the matter of whether extra tugs were
required. The commenter asserted that there has been a sharp increase
in ``questionable pilot tug callouts'' \104\ and requested that the
Coast Guard implement a procedure whereby protests over these callouts
can be registered with the Captain of the Port or District Commander.
The commenter further requested that, if the tug is ruled unnecessary,
the relevant pilot association be required to reimburse the vessel
owner for the costs of the tug callout. At this time, there is no
mechanism by which a vessel owner can contest such a charge, but we
would welcome additional discussion of this issue at an appropriate
venue.
---------------------------------------------------------------------------

    \104\ USCG-2017-0903-0008, p. 9.
---------------------------------------------------------------------------

2. Mechanisms To Prevent or Discourage Delays
    Industry commenters also raised concerns that they were
experiencing significant charges for pilotage attributable to time on
board vessels that are not in active navigation, but are delayed by
issues beyond the control of the vessel. These issues included items
such as congestion, lack of available pilots at a change point, and
unavailability of pilot boats. The commenters made two suggestions: (1)

The Coast Guard should forbid pilotage charges when vessels are not
under active navigation; or (2) the Coast Guard should develop a
separate, lower rate structure for pilot charges in these
circumstances, possibly including a cap or limit for situations where
the vessel is stopped at anchor. The commenters also noted that these
charges are particularly significant in the parts of the season before
May 1 and after November 30.\105\
---------------------------------------------------------------------------

    \105\ USCG-2017-0903-0008, pp. 8 and 9. The commenter also
stated that in 2016, the Coast Guard removed a $250/hour limitation
on certain charges, but we are uncertain to what the commenter is
referring.
---------------------------------------------------------------------------

    We note that existing regulations in Sec.  401.420 speak to these
situations. In situations where a delay occurs, a pilotage association
cannot charge for pilotage if the delay is caused by the pilotage
association or the pilot (such as in the situation of a lack of a pilot
boat). Delays caused by weather are, however, charged to the vessel
before May 1 or after November 30. We disagree with the commenters that
this provision should be changed. During these ``peak'' periods of the
season, pilot time is a scarce resource, and we want to encourage the
most efficient use of the pilot's time. There is a risk of delay when
using the Great Lakes during parts of the year where delays caused by
ice is common, and we want shippers, who decide when to use the Great
Lakes, to incorporate the risks of those delays into their business
decisions. Excluding fees for weather delays, at times when weather is
a known risk, encourages inefficient use of pilot time and puts
pressure on the system to increase the number of pilots, thus
increasing rates for all.
3. Delays Related to Labor Disputes
    Industry commenters also raised the issue of delays caused by labor
disputes. The commenters stated that there were incidents in which
pilots delayed vessel operations, citing pickets or demonstrations by
labor interests at terminal facilities being used by a vessel required
by law to use pilot services.\106\ The commenters requested that the
Coast Guard establish mechanisms to require pilot associations to
reimburse the vessel operator for any delay costs associated with these
actions.
---------------------------------------------------------------------------

    \106\ USCG-2017-0903-0008, p. 9.
---------------------------------------------------------------------------

    We believe that there is currently no specific regulation that
would require or enable the Coast Guard to impose monetary or damages
for delays associated with a pilot or pilot association refusing
service to a vessel based on labor protests. If a vessel operator
believes this situation is occurring, he or she may use the procedures
in Sec.  401.510, ``Operation without registered pilots,'' to determine
the best course of action. If an owner or operator believes he or she
has accrued monetary damages from an improper delay, that person may
wish to pursue those claims in a civil venue.
4. Over-Realization of Revenues
    Industry commenters raise the issue of over-realization of revenues
on the part of the pilot associations, and said the Coast Guard is
failing to give this matter sufficient attention in the NPRM. The
commenters argued that high U.S. pilotage rates had an adverse effect
on the economy, and were substantively higher than Canadian rates for
similar routes.
    We note that, while we did not write at length on the issue of
over-realization of revenues in the NPRM, it is because it is not a
highly salient issue at this time. In the past, over-realization of
revenues was caused by two factors, as the industry commenters note in
their remarks: The lack of incorporation of weighting factor fees into
the ratemaking methodology (revised per the suggestion of industry
commenters), and a traffic level higher than the 10-year average. As we
stated earlier in this preamble, higher traffic than expected
translating into more revenues than expected is a feature of the pay-
for-service economic model on the Great Lakes, not a shortcoming of the
methodology. Furthermore, we note that, contrary to the commenter's
assertion, we have considered the secondary economic impact of pilotage
rates--the 2017 Pilotage Cost Analysis the commenters cite being an
example of how we analyze them. The results of the study are clear:
although pilotage rates have by necessity increased substantially
(given our focus on increasing the number of pilots and their
compensation to encourage recruitment and retention), they have not
increased to levels that threaten the economic viability of Great Lakes
shipping.

VI. Discussion of Rate Adjustments

    Having made the adjustments to the ratemaking methodology and
inputs as described in the previous section, in this section, we
discuss the revised 2018 ratemaking model used to derive the new
pilotage rates. We note that several of the inputs have changed from
the NPRM because this final rule was developed in 2018, and so various
data points have been updated to include 2017 data that has become
available. These changes include a revision of the Moody's rate for
corporate securities, in Step 5, a revision to the 10-year average
traffic figures, in Step 7, and a revision of the average weighting
factors, in Step 8. Several inflation factors have been similarly
adjusted to incorporate 2017 data and revised estimates. We have
provided citations to all relevant data, where possible.

A. Step 1--Recognition of 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 this, we begin by reviewing the independent
accountant's financial reports for each association's 2015 expenses and
revenues.\107\ 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 accrued to the pilot
associations generally, for example, 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 shown in
Tables 6 through 8.
---------------------------------------------------------------------------

    \107\ These reports are available in the docket for this
rulemaking (see https://www.regulations.gov, Docket # USCG-2017-
0903).

                               Table 6--2015 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2015                    --------------------------------
                                                                   St. Lawrence                        Total
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Pilot subsistence/travel................................        $344,718        $267,669        $612,387
        Applicant Pilot subsistence/travel......................          59,992          88,313         148,305
        License insurance.......................................          26,976          26,976          53,952
        Applicant Pilot license insurance.......................               0           2,271           2,271
        Payroll taxes...........................................          97,531          61,656         159,187
        Applicant Pilot payroll taxes...........................           8,200          12,583          20,783
        Other...................................................           5,679           5,341          11,020
                                                                 -----------------------------------------------
            Total other pilotage costs..........................         543,096         464,809       1,007,905
    Pilot Boat and Dispatch Costs:
        Pilot boat expense......................................         134,400         106,064         240,464
        Dispatch expense........................................               0               0               0
        Payroll taxes...........................................           9,688           7,645          17,333
                                                                 -----------------------------------------------
            Total pilot and dispatch costs......................         144,088         113,709         257,797
    Administrative Expenses:
        Legal--general counsel..................................          12,388           9,733          22,121
        Legal--shared counsel (K&L Gates).......................             904             710           1,614
        Legal--USCG litigation..................................               0               0               0
        Insurance...............................................          16,261          12,832          29,093
        Employee benefits.......................................           8,752           6,907          15,659
        Payroll taxes...........................................           5,628           4,441          10,069
        Other taxes.............................................           9,447           7,455          16,902
        Travel..................................................             795             627           1,422
        Depreciation/auto leasing/other.........................          55,850          31,763          87,613
        Interest................................................          12,337           9,736          22,073
        Dues and subscriptions..................................          15,867          15,513          31,380
        Utilities...............................................           9,573             461          10,034
        Salaries................................................          56,126          44,291         100,417
        Accounting/Professional fees............................           5,254           4,146           9,400
        Pilot Training..........................................               0               0               0
        Applicant Pilot training................................               0               0               0
        Other...................................................           9,118           6,446          15,564
                                                                 -----------------------------------------------
            Total Administrative Expenses.......................         218,300         155,061         373,361
                                                                 -----------------------------------------------
                Total Operating Expenses (Other Costs + Pilot            905,484         733,579       1,639,063
                 Boats + Admin).................................
Adjustments (Independent certified public accountant (CPA)):
    Pilot subsistence/travel....................................               0          -2,943          -2,943
    Payroll taxes...............................................               0               0               0
    Applicant Pilot payroll taxes...............................               0               0               0
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................               0          -2,943          -2,943
Adjustments (Director):
    Legal--general counsel (corrected number)...................             904             710           1,614
    Legal--general counsel (corrected number)...................         -12,388          -9,733         -22,121
    Legal--shared counsel (K&L Gates) (corrected number)........          12,388           9,733          22,121
    Legal--shared counsel (K&L Gates) (corrected number)........            -904            -710          -1,614
    Legal--shared counsel--3% lobbying fee (K&L Gates)..........            -371            -292            -663
                                                                 -----------------------------------------------
        Total Director's Adjustments............................            -371            -292            -663
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         905,113         730,344       1,635,457
----------------------------------------------------------------------------------------------------------------

                               Table 7--2015 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2015                    --------------------------------
                                                                                SES to Port        Total
                                                                     Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Pilot subsistence/travel................................        $163,276        $244,915        $408,191

        Applicant Pilot subsistence/travel......................               0               0               0
        License insurance.......................................           6,798          10,196          16,994
        Applicant Pilot license insurance.......................               0               0               0
        Payroll taxes...........................................          53,242          79,863         133,105
        Applicant Pilot payroll taxes...........................               0               0               0
        Other...................................................             457             686           1,143
                                                                 -----------------------------------------------
            Total other pilotage costs..........................         223,773         335,660         559,433
    Pilot Boat and Dispatch Costs:
        Pilot boat expense......................................         175,331         262,997         438,328
        Dispatch expense........................................           9,000          13,500          22,500
        Employee benefits.......................................          74,855         112,282         187,137
        Payroll taxes...........................................           9,724          14,585          24,309
                                                                 -----------------------------------------------
            Total pilot and dispatch costs......................         268,910         403,364         672,274
    Administrative Expenses:
        Legal--general counsel..................................          10,282          15,422          25,704
        Legal--shared counsel (K&L Gates).......................           8,346          12,520          20,866
        Legal--USCG litigation..................................               0               0               0
        Office rent.............................................          26,275          39,413          65,688
        Insurance...............................................          10,618          15,926          26,544
        Employee benefits.......................................          23,930          35,896          59,826
        Workman's compensation--pilots..........................          47,636          71,453         119,089
        Payroll taxes...........................................           5,428           8,141          13,569
        Other taxes.............................................          29,220          43,830          73,050
        Depreciation/auto leasing/other.........................          19,757          29,636          49,393
        Interest................................................           4,159           6,238          10,397
        APA Dues................................................          11,827          17,741          29,568
        Utilities...............................................          15,850          23,775          39,625
        Salaries................................................          51,365          77,048         128,413
        Accounting/Professional fees............................          10,721          16,081          26,802
        Pilot Training..........................................               0               0               0
        Other...................................................          11,775          17,662          29,437
                                                                 -----------------------------------------------
            Total Administrative Expenses.......................         287,189         430,782         717,971
                                                                 -----------------------------------------------
                Total Operating Expenses (Other Costs + Pilot            779,872       1,169,806       1,949,678
                 Boats + Admin).................................
Adjustments (Independent CPA):
    Pilot boat costs............................................            -444            -666          -1,110
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................            -444            -666          -1,110
Adjustments (Director):
    Legal--shared counsel 3% lobbying fee (K&L Gates)...........            -250            -376            -626
                                                                 -----------------------------------------------
        Total Director's Adjustments............................            -250            -376            -626
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         779,178       1,168,764       1,947,942
----------------------------------------------------------------------------------------------------------------

                              Table 8--2015 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated
                                                                 --------------------------------
                   Reported expenses for 2015                       Lakes Huron
                                                                   and Michigan     St. Mary's         Total
                                                                     and Lake          River
                                                                     Superior