[Federal Register Volume 83, Number 201 (Wednesday, October 17, 2018)]
[Proposed Rules]
[Pages 52355-52375]
[FR Doc No: 2018-22513]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[USCG-2018-0665]
RIN 1625-AC49

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

AGENCY: Coast Guard, DHS.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the
Coast Guard is proposing new base pilotage rates and surcharges for the
2019 shipping season. This rule would adjust the pilotage rates to
account for anticipated traffic, an increase in the number of pilots,
anticipated inflation, and surcharges for applicant pilots. The result
is an increase in pilotage rates, due to adjustment for inflation and
the addition of two pilots.

DATES: Comments and related material must be received by the Coast
Guard on or before November 16, 2018.

ADDRESSES: You may submit comments identified by docket number USCG-
2018-0665 using the Federal eRulemaking Portal at https://www.regulations.gov. See the ``Public Participation and Request for
Comments'' portion of the SUPPLEMENTARY INFORMATION section for further
instructions on submitting comments.

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

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Public Participation and Request for Comments
II. Abbreviations
III. Executive Summary
IV. Basis and Purpose
V. Background
VI. Discussion of Proposed Methodological and Other Changes
VII. Discussion of Proposed Rate Adjustment
    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 Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    K. Surcharges
VIII. 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. Public Participation and Request for Comments

    The Coast Guard views public participation as essential to
effective rulemaking, and will consider all comments and material
received during the comment period. Your comment can help shape the
outcome of this rulemaking. If you submit a comment, please include the
docket number for this rulemaking, indicate the specific section of
this document to which each comment applies, and provide a reason for
each suggestion or recommendation.
    We encourage you to submit comments through the Federal eRulemaking
Portal at https://www.regulations.gov. If your material cannot be
submitted using https://www.regulations.gov, contact the person in the
FOR FURTHER INFORMATION CONTACT section of this proposed rule for
alternate instructions. Documents mentioned in this proposed rule, and
all public comments, are available in our online docket at https://www.regulations.gov, and can be viewed by following that website's
instructions. Additionally, if you visit the online docket and sign up
for email alerts, you will be notified when comments are posted or a
final rule is published.
    We accept anonymous comments. All comments received will be posted
without change to https://www.regulations.gov and will include any
personal information you have provided. For more about privacy and the
docket, visit https://www.regulations.gov/privacyNotice.
    We do not plan to hold a public meeting, but we will consider doing
so if public comments indicate a meeting would be helpful. We would
issue a separate Federal Register notice to announce the date, time,
and location of such a meeting.

II. Abbreviations

APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
CPA Certified public accountant
DHS Department of Homeland Security
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
NTSB National Transportation Safety Board
OMB Office of Management and Budget
PCE Personal Consumption Expenditures
RA Regulatory analysis
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
U.S.C. United States Code
USD United States dollars

III. 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 currently range from $271 to
$653 per pilot hour (depending on the specific area where pilotage
service is provided), are paid by shippers to pilot associations. The
three pilot associations, which are the exclusive U.S. source of
registered pilots on the Great Lakes, use this revenue to cover
operating expenses, maintain infrastructure, compensate working pilots,
and train new pilots. We use a ratemaking methodology that we have
developed since 2016 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 this notice of proposed rulemaking (NPRM).
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    \1\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
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    In this NPRM, we are proposing new pilotage rates for 2019 based on
the existing methodology. As part of our annual review, we are
proposing in this NPRM new rates for the 2019 shipping season. Based on
the ratemaking model discussed in this NPRM, we are proposing the rates
shown in table 1. The result is an increase in rates, due to

adjustment for inflation and the addition of two pilots.

                         Table 1--Current and Proposed Pilotage Rates on the Great Lakes
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                                                                                Final 2018       Proposed 2019
                    Area                                  Name                pilotage rate      pilotage rate
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District One: Designated...................  St. Lawrence River...........               $653               $698
District One: Undesignated.................  Lake Ontario.................                435                492
District Two: Undesignated.................  Lake Erie....................                497                530
District Two: Designated...................  Navigable waters from                        593                632
                                              Southeast Shoal to Port
                                              Huron, MI.
District Three: Undesignated...............  Lakes Huron, Michigan, and                   271                304
                                              Superior.
District Three: Designated.................  St. Mary's River.............                600                602
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    This proposed rule is not economically significant under Executive
Order 12866. This proposed rule would impact 51 U.S. Great Lakes
pilots, 3 pilot associations, and the owners and operators of an
average of 256 oceangoing vessels that transit the Great Lakes
annually. The estimated overall annual regulatory economic impact of
this rate change is a net increase of $2,066,143 in payments made by
shippers from the 2018 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. Section
VIII of this preamble provides the regulatory impact analyses of this
proposed rule.

IV. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (``the Act''),\2\ which requires U.S. vessels operating ``on
register'' and foreign vessels to use U.S. or Canadian registered
pilots while transiting the U.S. waters of the St. Lawrence Seaway and
the Great Lakes system.\3\ For the U.S. registered Great Lakes pilots
(``pilots''), the Act requires the Secretary to ``prescribe by
regulation rates and charges for pilotage services, giving
consideration to the public interest and the costs of providing the
services.'' \4\ The Act requires that rates be established or reviewed
and adjusted each year, not later than March 1. The Act 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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    \2\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ 46 U.S.C. 9303(f).
    \5\ Department of Homeland Security (DHS) Delegation No. 0170.1,
para. II (92.f).
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    The purpose of this NPRM is to propose new pilotage rates and
surcharges for the 2019 shipping season. The Coast Guard believes that
the new rates would promote pilot retention, ensure safe, efficient,
and reliable pilotage services on the Great Lakes, and provide adequate
funds to upgrade and maintain infrastructure.

V. Background

    Pursuant to the Great Lakes Pilotage Act of 1960, the Coast Guard,
in conjunction with the Canadian Great Lakes Pilotage Authority,
regulates shipping practices and rates on the Great Lakes. Under the
Coast Guard regulations, all vessels engaged in foreign trade (often
referred to as ``salties'') are required to engage U.S. or Canadian
pilots during their transit through the regulated waters.\6\ United
States and Canadian ``lakers,'' which account for most commercial
shipping on the Great Lakes, are not affected.\7\ Generally, vessels
are assigned a U.S. or Canadian pilot depending on the order in which
they transit a particular area of the Great Lakes and do not choose the
pilot they receive. If a vessel is assigned a U.S. pilot, that pilot
will be assigned by the pilotage association responsible for the
particular district in which the vessel is operating, and the vessel
operator will pay the pilotage association for the pilotage services.
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    \6\ See 46 CFR part 401.
    \7\ 46 U.S.C. 9302(f). A ``laker'' is a commercial cargo vessel
especially designed for and generally limited to use on the Great
Lakes.
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are
divided into three pilotage districts. Pilotage in each district is
provided by an association certified by the Coast Guard's Director of
the Great Lakes Pilotage (``the Director'') to operate a pilotage pool.
The Saint Lawrence Seaway Pilotage Association provides pilotage
services in District One, which includes all U.S. waters of the St.
Lawrence River and Lake Ontario. The Lakes Pilotage Association
provides pilotage services in District Two, which includes all U.S.
waters of Lake Erie, the Detroit River, Lake St. Clair, and the St.
Clair River. Finally, the Western Great Lakes Pilotage Association
provides pilotage services in District Three, which includes all U.S.
waters of the St. Mary's River; Sault Ste. Marie Locks; and Lakes
Huron, Michigan, and Superior.
    Each pilotage district is further divided into ``designated'' and
``undesignated'' areas. Designated areas are classified as such by
Presidential Proclamation \8\ to be waters in which pilots must, at all
times, be fully engaged in the navigation of vessels in their charge.
Undesignated areas, on the other hand, are open bodies of water, and
thus are not subject to the same pilotage requirements. While working
in those undesignated areas, pilots must ``be on board and available to
direct the navigation of the vessel at the discretion of and subject to
the customary authority of the master.'' \9\ For pilotage purposes,
rates in designated areas are significantly higher than those in
undesignated areas for these reasons.
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    \8\ Presidential Proclamation 3385, Designation of restricted
waters under the Great Lakes Pilotage Act of 1960, December 22,
1960.
    \9\ 46 U.S.C. 9302(a)(1)(B).

                           Table 2--Areas of the Great Lakes and Saint Lawrence Seaway
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       District          Pilotage association         Designation         Area No.\10\        Area name \11\
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One..................  Saint Lawrence Seaway    Designated.............               1  St. Lawrence River.
                        Pilotage Association.   Undesignated...........               2  Lake Ontario.
Two..................  Lake Pilotage            Designated.............               5  Navigable waters from
                        Association.                                                      Southeast Shoal to
                                                                                Port Huron, MI.
                                                Undesignated...........               4  Lake Erie.
Three................  Western Great Lakes      Designated.............               7  St. Mary's River.
                        Pilotage Association.   Undesignated...........               6  Lakes Huron and
                                                                                Michigan.
                                                Undesignated...........               8  Lake Superior.
----------------------------------------------------------------------------------------------------------------

    Each pilot association is an independent business and is the sole
provider of pilotage services in the district in which it operates.
Each pilot association is responsible for funding its own operating
expenses, maintaining infrastructure, acquiring and implementing
technological advances, training personnel/partners and pilot
compensation. We developed a 10-step ratemaking methodology to derive a
pilotage rate that covers these expenses based on the estimated amount
of traffic. In short, the methodology is designed to measure how much
revenue each pilotage association will need to cover expenses and
provide competitive compensation to working pilots. The Coast Guard
then divides that amount by the historical average traffic transiting
through the district. We recognize that in years where traffic is above
average, pilot associations will take in more revenue than projected,
while in years where traffic is below average, they will take in less.
We believe that over the long term, however, this system ensures that
infrastructure will be maintained and that pilots will receive adequate
compensation and work a reasonable number of hours with adequate rest
between assignments to ensure retention of highly-trained personnel.
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    \10\ Area 3 is the Welland Canal, which is serviced exclusively
by the Canadian GLPA and, accordingly, is not included in the United
States pilotage rate structure.
    \11\ The areas are listed by name in the Code of Federal
Regulations, see 46 CFR 401.405.
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    Over the past 3 years, the Coast Guard has made adjustments to the
Great Lakes pilotage ratemaking methodology. In 2016, we made
significant changes to the methodology, moving to an hourly billing
rate for pilotage services and changing the compensation benchmark to a
more transparent model. In 2017, we added additional steps to the
ratemaking methodology, including new steps that accurately account for
the additional revenue produced by the application of weighting factors
(discussed in detail in Steps 7 through 9 of this preamble). In 2018,
we revised the methodology by which we develop the compensation
benchmark, based upon the rate of U.S. mariners, rather than Canadian
registered pilots. The 2018 methodology, which was finalized in the
June 5, 2018 final rule (83 FR 26162) and is the current methodology,
is designed to accurately capture all of the costs and revenues
associated with Great Lakes pilotage requirements and produce an hourly
rate that adequately and accurately compensates pilots and covers
expenses. The current methodology is summarized in the section below.

Summary of Ratemaking Methodology

    As stated above, the ratemaking methodology, currently outlined in
46 CFR 404.101 through 404.110, consists of 10 steps that are designed
to account for the revenues needed and total traffic expected in each
district. The result is an hourly rate (determined separately for each
of the areas administered by the Coast Guard).
    In Step 1, ``Recognize previous operating expenses,'' (Sec.
404.101) the Director reviews audited operating expenses from each of
the three pilotage associations. This number forms the baseline amount
that each association is budgeted. Because of the time delay between
when the association submits raw numbers and the Coast Guard receives
audited numbers, this number is 3 years behind the projected year of
expenses. So in calculating the 2019 rates in this proposal, we are
beginning with the audited expenses from fiscal year 2016.
    While each pilotage association operates in an entire district, the
Coast Guard tries to determine costs by area. Thus, with regard to
operating expenses, we allocate certain operating expenses to
undesignated areas, and certain expenses to designated areas. In some
cases (e.g., insurance for applicant pilots who operate in undesignated
areas only), we can allocate the costs based on where they are actually
accrued. In other situations (e.g., general legal expenses), expenses
are distributed between designated and undesignated waters on a pro
rata basis, based upon the proportion of income forecasted from the
respective portions of the district.
    In Step 2, ``Project operating expenses, adjusting for inflation or
deflation,'' (Sec.  404.102) the Director develops the 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 are from the Bureau of Labor Statistics'
Consumer Price Index for the Midwest Region, or if not available, the
Federal Open Market Committee (FOMC) median economic projections for
Personal Consumption Expenditures (PCE) inflation. This step produces
the total operating expenses for each area and district.
    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103)
the Director calculates how many pilots are needed for each district.
To do this, we employ a ``staffing model,'' described in Sec.  401.220,
paragraphs (a)(1) through (a)(3), to estimate how many pilots would be
needed to handle shipping during the beginning and close of the season.
This number is helpful in providing guidance to the Director of the
Coast Guard Great Lakes Pilotage Office in approving an appropriate
number of credentials for pilots.
    For the purpose of the ratemaking calculation, we determine the
number of working pilots provided by the pilotage associations (see
Sec.  404.103) which is what we use to determine how many pilots need
to be compensated via the pilotage fees collected.
    In Step 4, ``Determine target pilot compensation benchmark,''
(Sec.  404.104) the Director determines the revenue needed for pilot
compensation in each area and district. This step contains two
processes. In the first process, we calculate the total compensation
for each pilot using a ``compensation benchmark.'' Next, we multiply
the individual pilot compensation by the number of working pilots for
each area and district (from Step 3), producing a figure for total
pilot compensation.

Because pilots are paid by the associations, but the costs of pilotage
is divided up by area for accounting purposes, we assign a certain
number of pilots for the designated areas and a certain number of
pilots for the undesignated areas for purposes of determining the
revenues needed for each area. To make the determination of how many
pilots to assign, we use the staffing model designed to determine the
total number of pilots, described in Step 3, above.
    In the second process of Step 4, set forth in Sec.  404.104(c), the
Director determines the total compensation figure for each District. To
do this, the Director multiplies the compensation benchmark by the
number of working pilots for each area and district (from Step 3),
producing a figure for total pilot compensation.
    In Step 5, ``Project working capital fund,'' (Sec.  404.105) the
Director calculates a value that is added to pay for needed capital
improvements. This value is calculated by adding the total operating
expenses (derived in Step 2) and the total pilot compensation (derived
in Step 4), and multiply that figure by the preceding year's average
annual rate of return for new issues of high-grade corporate
securities. This figure constitutes the ``working capital fund'' for
each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106) the Director
simply adds up the totals produced by the preceding steps. For each
area and district, we add the projected operating expense (from Step
2), the total pilot compensation (from Step 4), and the working capital
fund contribution (from Step 5). The total figure, calculated
separately for each area and district, is the ``revenue needed.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107) the
Director calculates an hourly pilotage rate to cover the revenue needed
calculated in Step 6. This step consists of first calculating the 10-
year traffic average for each area. Next, we divide the revenue needed
in each area (calculated in Step 6) by the 10-year traffic average to
produce an initial base rate.
    An additional element, the ``weighting factor,'' is required under
Sec.  401.400. Pursuant to that section, ships pay a multiple of the
``base rate'' as calculated in Step 7 by a number ranging from 1.0 (for
the smallest ships, or ``Class I'' vessels) to 1.45 (for the largest
ships, or ``Class IV'' vessels). As this significantly increases the
revenue collected, we need to account for the added revenue produced by
the weighting factors to ensure that shippers are not overpaying for
pilotage services.
    In Step 8, ``Calculate average weighting factors by area,'' (Sec.
404.108) the Director calculates how much extra revenue, as a
percentage of total revenue, has historically been produced by the
weighting factors in each area. We do this by using a historical
average of applied weighting factors for each year since 2014 (the
first year the current weighting factors were applied).
    In Step 9, ``Calculate revised base rates,'' (Sec.  404.109) the
Director calculates how much extra revenue, as a percentage of total
revenue, has historically been produced by the weighting factors in
each area. We do this by using a historical average of applied
weighting factors for each year since 2014 (the first year the current
weighting factors were applied).
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110) often
referred to informally as ``director's discretion,'' the Director
reviews the revised base rates (from Step 9) to ensure that they meet
the goals set forth in the Act and 46 CFR 404.1(a), which include
promoting efficient, safe, and reliable pilotage service on the Great
Lakes; generating sufficient revenue for each pilotage association to
reimburse necessary and reasonable operating expenses; compensating
pilots fairly, who are trained and rested; and providing appropriate
profit for improvements. Because it is our goal to be as transparent as
possible in our ratemaking procedure, we use this step sparingly to
adjust rates.
    Finally, after the base rates are set, Sec.  401.401 permits the
Coast Guard to apply surcharges. Currently, we use surcharges to pay
for the training of new pilots, rather than incorporating training
costs into the overall ``revenue needed'' that is used in the
calculation of the base rates. In recent years, we have allocated
$150,000 per applicant pilot to be collected via surcharges. This
amount is calculated as a percentage of total revenue for each
district, and that percentage is applied to each bill. When the total
amount of the surcharge has been collected, the pilot associations are
prohibited from collecting further surcharges. Thus, in years where
traffic is heavier than expected, shippers early in the season could
pay more than shippers employing pilots later in the season, after the
surcharge cap has been met.

VI. Discussion of Proposed Methodological and Other Changes

    For 2019, the Coast Guard is not proposing any new methodological
changes to the ratemaking model. We believe that the revised
methodology laid out in the 2018 Annual Review will produce rates for
the 2019 shipping season that will ensure safe and reliable pilotage
services are available on the Great Lakes.
    In previous years, several commenters have raised issues regarding
the working capital fund. While the Coast Guard is not proposing
specific changes in this NPRM (for example, in the text of part 401),
we note that we are working with stakeholders to develop the necessary
policy framework. These include measures relating to financial
segregation of working capital fund, proper disbursement, and
accounting, to ensure these monies are appropriately accounted for and
utilized. This issue was an agenda item for the September 2018 Great
Lakes Pilotage Advisory Committee Meeting. We also invite interested
parties to provide their input and recommendations on the issue. We
seek to ensure that the working capital fund is an appropriate vehicle
to pay for needed capital expenses.
    We are also proposing to correct a typographical error in the
regulatory text of section 104. Currently, Sec.  404.104(c) contains a
reference to Sec.  404.103(d), which before the publication of the 2018
final rule (83 FR 26162), contained the calculation for the estimated
number of pilots. The 2018 final rule amended section 103 so that the
calculation is now located in Sec.  404.103, not 404.103(d), and so we
propose to correct the reference in section 104 to point to the correct
section.

VII. Discussion of Proposed Rate Adjustments

    In this NPRM, based on the current methodology described in the
previous section, we are proposing new pilotage rates for 2019. This
section discusses the proposed rate changes using the ratemaking steps
provided in 46 CFR part 404. We will detail each step of the ratemaking
procedure to show how we arrived at the proposed new rates.
    We propose to conduct the 2019 ratemaking as an ``interim year,''
rather than a full ratemaking, such as was conducted in 2018. Thus, for
this purpose, the Coast Guard proposes to adjust the compensation
benchmark pursuant to Sec.  404.104(b) rather than Sec.  404.104(a).

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 so, we begin by reviewing the independent accountant's
financial reports for each association's 2016

expenses and revenues.\12\ 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
laid out in tables 3 through 5.
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    \12\ These reports are available in the docket for this
rulemaking (see Docket # USCG-2018-0665).
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    As noted above, in 2016, the Coast Guard began authorizing
surcharges to cover the training costs of applicant pilots. The
surcharges were intended to reimburse pilot associations for training
applicants in a more timely fashion than if those costs were listed as
operating expenses, which would have required three years to reimburse.
The rationale for using surcharges to cover these expenses, rather than
including the costs as operating expenses, was so that retiring pilots
would not have to cover the costs of training their replacements.
Because operating expenses incurred are not actually recouped for a
period of three years, beginning in 2016, the Coast Guard added a
$150,000 surcharge per applicant pilot to recoup those costs in the
year incurred. To ensure that the ratepayers are not double-billed for
the same expense(s), we need to deduct the amount collected via
surcharges from the operating expenses. For that reason, the Coast
Guard is proposing a ``surcharge adjustment from 2016'' as part of its
proposed adjustment for each pilotage district. This surcharge
adjustment reflects the additional monies that were collected by the
surcharge collected that year. We note that in 2016, there was no
mechanism to prevent the collection of surcharges above the authorized
amounts, and so the amounts we propose to deduct from each
association's operating expenses are equal to the actual amount of
surcharges collected in the 2016 shipping season, which are in excess
of $150,000 per applicant pilot.
    We also propose to deduct 3 percent of the ``shared counsel''
expenses for each district, to account for lobbying expenditures.
Pursuant to 33 CFR 404.2(c)(3), lobbying expenses are not permitted to
be recouped as operating expenses.
    For each of the analyses of the operating expenses below, we
explain why we are proposing to make the Director's adjustments, other
than the surcharge adjustments and lobbying expenses, described above.
Other adjustments have been made by the auditors and are explained in
the auditor's reports, which are available in the docket for this
rulemaking. Numbers by the entries are references to descriptions in
the auditor's reports.

                               Table 3--2016 Recognized Expenses for District One
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                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2016                    --------------------------------
                                                                   St. Lawrence                        Total
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Costs relating to pilots:
    Pilot subsistence/travel....................................        $421,749        $336,384        $758,133
    Subsistence/Travel--Pilots (D1-16-01).......................         -70,224         -34,846        -105,070
    License insurance...........................................          40,464          28,269          68,733
    Payroll taxes...............................................         111,279          90,179         201,458
    Payroll taxes--Pilots (D1-16-03)............................               0          -2,509          -2,509
    Training....................................................          17,198          13,717          30,915
    Training--Pilots (D1-16-04).................................            -594               0            -594
    Other.......................................................             842             672           1,514
                                                                 -----------------------------------------------
        Total costs relating to pilots..........................         520,714         431,866         952,580
----------------------------------------------------------------------------------------------------------------
Applicant Pilots:
    Wages.......................................................          70,700          90,000         160,700
    Wages (D1-16-02)............................................               0          28,054          28,054
    Subsistence/Travel..........................................               0         146,219         146,219
    Subsistence/Travel--Trainees (D1-16-02).....................         -12,283         -20,589         -32,872
    Benefits....................................................               0               0               0
    Payroll taxes...............................................           8,039          11,123          19,162
    Payroll taxes--Trainees (D1-16-03)..........................               0          -5,115          -5,115
    Surcharge Offset--Director's Adjustment.....................        -318,117        -253,649        -571,766
                                                                 -----------------------------------------------
        Total applicant pilot costs.............................        -251,661          -3,957        -255,618
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Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         209,800         167,335         377,135
    Dispatch expense............................................          51,240          31,705          82,945
    Payroll taxes...............................................          16,007          12,767          28,774
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         277,047         211,807         488,854
----------------------------------------------------------------------------------------------------------------
Administrative Expenses:
    Legal--general counsel......................................           4,565           3,641           8,206
    Legal--shared (K&L Gates) (D1-16-05)........................          20,558          16,397          36,955
    Legal--shared (K&L Gates) (D1-16-05)........................            -713            -713          -1,426

    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -617            -492          -1,109
     (Director's Adjustment)....................................
    Office rent.................................................               0               0               0
    Insurance...................................................          21,869          17,443          39,312
    Employee benefits--Admin....................................           9,428           7,519          16,947
    Payroll taxes--Admin........................................           6,503           5,187          11,690
    Other taxes.................................................         274,503         218,941         493,444
    Admin Travel................................................           2,346           1,871           4,217
    Depreciation/Auto leasing/Other.............................          65,971          52,618         118,589
    Interest....................................................          20,688          16,501          37,189
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          29,687          13,959          43,646
    Dues and Subscriptions (incl. APA) (D1-16-05)...............          -1,079          -1,079          -2,158
    Utilities...................................................          12,318           9,578          21,896
    Salaries--Admin.............................................          65,401          52,163         117,564
    Accounting/Professional fees................................           5,479           3,921           9,400
    Other.......................................................          23,456          18,708          42,164
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         560,363         436,163         996,526
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,106,463       1,075,879       2,182,342
----------------------------------------------------------------------------------------------------------------

    In District One, we do not propose any additional Director's
adjustments.

                               Table 4--2016 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2016                    --------------------------------
                                                                                SES to Port        Total
                                                                     Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Pilot-related expenses:
    Pilot subsistence/travel....................................        $131,956        $197,935        $329,891
    Pilot subsistence/travel CPA Adjustment (D2-16-01)..........         -44,955         -67,433        -112,388
    License insurance...........................................          10,095          15,142          25,237
    License Insurance CPA Adjustment (D2-16-03).................            -635            -953          -1,588
    Payroll taxes...............................................          77,306         115,958         193,264
                                                                 -----------------------------------------------
        Total Pilot-related expenses............................         173,767         260,649         434,416
----------------------------------------------------------------------------------------------------------------
Expenses related to applicant pilots:
    Wages (from supplemental form)..............................         228,499         342,749         571,248
    Wages--Director's Adjustment................................        -125,472        -188,209        -313,681
    Benefits (from supplemental form)...........................           9,736          14,605          24,341
    Applicant pilot Subsistence/Travel..........................          43,905          65,858         109,763
    Applicant Pilot subsistence/travel CPA Adjustment (D2-16-02)         -14,940         -22,410         -37,350
    Housing Allowance CPA Adjustment (D2-16-02).................          14,940          22,410          37,350
    Payroll taxes...............................................          15,144          22,717          37,861
    2016 Surcharge Offset Director's Adjustment.................        -158,640        -277,106        -435,746
                                                                 -----------------------------------------------
        Total applicant pilot expenses..........................          13,172         -19,386          -6,214
----------------------------------------------------------------------------------------------------------------
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         205,572         308,359         513,931
    Dispatch expense............................................           8,520          12,780          21,300
    Employee benefits...........................................          75,405         113,107         188,512
    Payroll taxes...............................................          10,305          15,457          25,762
                                                                 -----------------------------------------------
    Total pilot and dispatch costs..............................         299,802         449,703         749,505
----------------------------------------------------------------------------------------------------------------
Administrative Expenses:
    Office rent.................................................          26,275          39,413          65,688
    Office Rent CPA Adjustment (D2-16-08).......................           4,766           7,150          11,916
    Legal--general counsel......................................           1,624           2,437           4,061
    Legal--shared counsel (K&L Gates)...........................          13,150          19,725          32,875
    Legal--shared counsel CPA Adjustment (D2-16-04).............            -526            -789          -1,315

    Legal--shared counsel 3% lobbying fee (K&L Gates)                       -395            -592            -987
     (Director's Adjustment)....................................
    Employee Benefits--Admin Employees..........................          59,907          89,861         149,768
    Employee benefits (Director's Adjustment)...................         -30,200         -60,400         -90,600
    Workman's compensation--pilots..............................          74,561         111,841         186,402
    Payroll taxes--admin employees..............................           5,688           8,532          14,220
    Insurance...................................................          10,352          15,529          25,881
    Other taxes.................................................           9,149          13,723          22,872
    Administrative Travel.......................................          18,205          27,307          45,512
    Administrative Travel (D2-16-06)............................            -153            -229            -382
    Depreciation/auto leasing/other.............................          39,493          59,239          98,732
    Depreciation/Auto leasing/Other CPA Adjustment (D2-16-03)...            -221            -332            -553
    Interest....................................................           6,224           9,336          15,560
    APA Dues....................................................          17,145          25,717          42,862
    APA Dues CPA Adjustment (D2-16-04)..........................            -815          -1,223          -2,038
    Utilities...................................................          16,748          25,121          41,869
    Salaries....................................................          55,426          83,139         138,565
    Accounting/Professional fees................................          12,520          18,780          31,300
    Other.......................................................         128,093         192,139         320,232
    Other CPA Adjustment (D2-16-07).............................            -221            -332            -553
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         435,975         638,861       1,074,836
                                                                 -----------------------------------------------
            Total Operating Expenses............................         922,716       1,329,827       2,252,543
----------------------------------------------------------------------------------------------------------------

    In District Two, we propose two additional Director's adjustments.
First, we note that we initially received inaccurate information from
District Two regarding applicant pilot wages.\13\ In response to our
inquiries, District Two provided updated information about wages and
benefits paid to applicant pilots and asserted that wages for two
applicant pilots were $571,248 combined. Because this number is far out
of line from wages paid to applicant pilots in other districts, as well
as the Coast Guard's estimate of approximately $150,000 per pilot to
pay for wages, benefits, and training, the Director proposes only
allowing a portion of these expenses to be recouped as reasonable
operating expenses. Therefore, we propose an adjustment of -$313,681 to
the allowed recoupable operating expenses for District Two. This
results in a total wage of $257,567, or approximately $128,783 per
applicant, which is equal to the wages for applicant pilots in District
Three. Given that the Coast Guard estimated the total cost for each
applicant pilot to be $150,000, we believe this is a reasonable
adjustment and the Director will allow the full amount.
---------------------------------------------------------------------------

    \13\ District Two initially reported paying $1,772,213 in
compensation to 5 applicant pilots, although they were authorized
only two applicants in 2016. See docket # USCG-2018-0665-0003, p. 8.
---------------------------------------------------------------------------

    We also deducted a total of $90,600 from the employee benefits
costs of District Two. This is based on a note from the auditor that
this money had been used for ``health insurance expenses . . . paid to
retired pilots who performed pilotage services for the District in
2016.'' \14\ While pilot associations are free to hire additional
pilots to assist with workloads, money paid to them comes from the
general monies used to pay pilot compensation. Unlike payroll taxes, we
consider health benefits to be ``compensation,'' and compensation paid
to pilots cannot be recouped as operating expenses, as health care
expenses were part of the calculations of the compensation benchmark
rate set forth in the 2018 final rule.
---------------------------------------------------------------------------

    \14\ Docket # USCG-2018-0665-0003, p. 8.

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

        Total Pilotage Costs....................................         562,527         179,733         742,260
----------------------------------------------------------------------------------------------------------------
Applicant Pilots:
    Wages.......................................................         610,433         162,267         772,700
    Benefits....................................................         100,234          26,644         126,878
    Subsistence/travel..........................................         170,089          45,214         215,303
    Payroll taxes...............................................          50,561          13,440          64,001
    Training....................................................          11,642           3,095          14,737
    Surcharge Adjustment........................................      -1,106,339        -235,673      -1,342,012
                                                                 -----------------------------------------------
        Total applicant pilotage costs..........................        -163,380          14,987        -148,393
----------------------------------------------------------------------------------------------------------------
Pilot Boat and Dispatch Costs:
    Pilot boat costs............................................         580,822         154,396         735,218
    Pilot boat costs (D3-16-02).................................         -72,724         -19,332         -92,056
    Dispatch costs..............................................         146,220          38,868         185,088
    Employee benefits...........................................           6,517           1,733           8,250
    Payroll taxes...............................................          15,745           4,186          19,931
                                                                 -----------------------------------------------
        Total pilot boat and dispatch costs.....................         676,580         179,851         856,431
----------------------------------------------------------------------------------------------------------------
Administrative Expenses:
    Legal--general counsel......................................          22,196           5,900          28,096
    Legal--shared counsel (K&L Gates)...........................          34,020           9,043          43,063
    Legal--shared counsel 3% (Director's Adjustment)............          -1,021            -271          -1,292
    Office rent.................................................           6,978           1,855           8,833
    Insurance...................................................          14,562           3,871          18,433
    Employee benefits...........................................         103,322          27,465         130,787
    Payroll Taxes (administrative employees)....................           6,540           1,739           8,279
    Other taxes.................................................           1,338             356           1,694
    Depreciation/auto leasing/other.............................          46,016          12,232          58,248
    Interest....................................................           2,775             738           3,513
    APA Dues....................................................          24,760           6,582          31,342
    Utilities...................................................          38,763          10,304          49,067
    Administrative Salaries.....................................          94,371          25,086         119,457
    Accounting/Professional fees................................          31,877           8,474          40,351
    Pilot Training..............................................          35,516           9,441          44,957
    Other.......................................................          13,619           3,621          17,240
    Other expenses (D3-16-03)...................................          -2,054            -546          -2,600
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         473,578         125,890         599,468
                                                                 -----------------------------------------------
            Total Operating Expenses............................       1,549,305         500,461       2,049,766
----------------------------------------------------------------------------------------------------------------

    For District Three, the Director proposes to disallow $36,900 in
``housing allowance'' expenditures. At this time, we do not know if
these funds were for properties that were available to all of the
association partners/members (and thus recoverable as operating
expenses) or if these funds were used for properties that were
exclusively used by a single member and his family (and therefore not
recoverable as operating expenses). We invite the pilot association to
provide the receipts that could help to determine if these are
recoverable operating expenses.

B. Step 2: Projection of Operating Expenses

    Having identified the recognized 2016 operating expenses in Step 1,
the next step is to estimate the current year's operating expenses by
adjusting those expenses for inflation over the 3-year period. We
calculated inflation using the Bureau of Labor Statistics' data from
the Consumer Price Index for the Midwest Region of the United States
\15\ and reports from the Federal Reserve.\16\ Based on that
information, the calculations for Step 1 are as follows:
---------------------------------------------------------------------------

    \15\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf.
    \16\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf.

                           Table 6--2016 Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,106,463      $1,075,879      $2,182,342
2017 Inflation Modification (@1.7%).............................          18,810          18,290          37,100
2018 Inflation Modification (@2.1%).............................          23,631          22,978          46,609
2019 Inflation Modification (@2.1%).............................          24,127          23,460          47,587
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,173,031       1,140,607       2,313,638
----------------------------------------------------------------------------------------------------------------

                              Table 7--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $922,716      $1,329,827      $2,252,543
2017 Inflation Modification (@1.7%).............................          15,686          22,607          38,293
2018 Inflation Modification (@2.1%).............................          19,706          28,401          48,107
2019 Inflation Modification (@2.1%).............................          20,120          28,998          49,118
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................         978,228       1,409,833       2,388,061
----------------------------------------------------------------------------------------------------------------

                             Table 8--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,549,305        $500,461      $2,049,766
2017 Inflation Modification (@1.7%).............................          26,338           8,508          34,846
2018 Inflation Modification (@2.1%).............................          33,089          10,688          43,777
2019 Inflation Modification (@2.1%).............................          33,783          10,913          44,696
                                                                 -----------------------------------------------
    Adjusted 2019 Operating Expenses............................       1,642,515         530,570       2,173,085
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots

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

                                           Table 9--Authorized Pilots
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \17\...........              17              15              22
2019 Authorized pilots (total)..................................              17              14              20
Pilots assigned to designated areas.............................              10               7               4
Pilots assigned to undesignated areas...........................               7               7              16
----------------------------------------------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation

    In this step, we determine the total pilot compensation for each
area. Because we are proposing an ``interim'' ratemaking this year, we
propose to follow the procedure outlined in paragraph (b) of Sec.
404.104, which adjusts the existing compensation benchmark by
inflation. Because we do not have a value for the employment cost index
for 2019, we multiply last year's compensation benchmark by the Median
PCE Inflation of 2.1 percent.\18\ Based on the projected 2019 inflation
estimate, the proposed compensation

benchmark for 2019 is $359,887 per pilot.
---------------------------------------------------------------------------

    \17\ For a detailed calculation of the staffing model, see 82 FR
41466, table 6 at 41480 (August 31, 2017).
    \18\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180613.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2019 is
less than or equal to the number permitted under the staffing model in
Sec.  401.220(a). The staffing model suggests that the number of pilots
needed is 17 pilots for District One, 15 pilots for District Two, and
22 pilots for District Three,\19\ which is more than or equal to the
numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \19\ See Table 6 of the 2017 final rule, 82 FR 41466 at 41480
(August 31, 2017). The methodology of the staffing model is
discussed at length in the final rule (see pages 41476-41480 for a
detailed analysis of the calculations).
---------------------------------------------------------------------------

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

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

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

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

E. Step 5: Calculate Working Capital Fund

    Next, we calculate the working capital fund revenues needed for
each area. First, we add the figures for projected operating expenses
and total pilot compensation for each area. Next, we find the preceding
year's average annual rate of return for new issues of high grade
corporate securities. Using Moody's data, that number is 3.74
percent.\20\ By multiplying the two figures, we get the working capital
fund contribution for each area, as shown in tables 13-15.
---------------------------------------------------------------------------

    \20\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2017
monthly data. The Coast Guard uses the most recent complete year of
data. See http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                           Table 13--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,173,031      $1,140,607      $2,313,638
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       4,771,901       3,659,816       8,431,717
----------------------------------------------------------------------------------------------------------------
Working Capital Fund (3.74%)....................................         178,469         136,877         315,346
----------------------------------------------------------------------------------------------------------------

                           Table 14--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $978,228      $1,409,833      $2,388,061
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       3,497,437       3,929,042       7,426,479
----------------------------------------------------------------------------------------------------------------
Working Capital Fund (3.74%)....................................         130,804         146,946         277,750
----------------------------------------------------------------------------------------------------------------

                          Table 15--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,642,515        $530,570      $2,173,085
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
                                                                 -----------------------------------------------
    Total 2019 Expenses.........................................       7,400,707       1,970,118       9,370,825
----------------------------------------------------------------------------------------------------------------
Working Capital Fund (3.74%)....................................         276,786          73,682         350,468
----------------------------------------------------------------------------------------------------------------

F. Step 6: Calculate Revenue Needed

    In this step, we add up all the expenses accrued to derive the
total revenue needed for each area. These expenses include the
projected operating expenses (from Step 2), the total pilot
compensation (from Step 4), and the working capital fund contribution
(from Step 5). The calculations are shown in tables 15-17.

                                    Table 15--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,173,031      $1,140,607      $2,313,638
Total Target Pilot Compensation (Step 4)........................       3,598,870       2,519,209       6,118,079
Working Capital Fund (Step 5)...................................         178,469         136,877         315,346
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       4,950,370       3,796,693       8,747,063
----------------------------------------------------------------------------------------------------------------

                                    Table 16--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $978,228      $1,409,833      $2,388,061
Total Target Pilot Compensation (Step 4)........................       2,519,209       2,519,209       5,038,418
Working Capital Fund (Step 5)...................................         130,804         146,946         277,750
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       3,628,241       4,075,988       7,704,229
----------------------------------------------------------------------------------------------------------------

                                   Table 17--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,642,515        $530,570      $2,173,085
Total Target Pilot Compensation (Step 4)........................       5,758,192       1,439,548       7,197,740
Working Capital Fund (Step 5)...................................         276,786          73,682         350,468
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       7,677,493       2,043,800       9,721,293
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates

    Having determined the revenue needed for each area in the previous
six steps, we divide that number by the expected number of hours of
traffic to develop an hourly rate. Step 7 is a two-part process. In the
first part, we calculate the 10-year average of traffic in each
district. Because we are calculating separate figures for designated
and undesignated waters, there are two parts for each calculation. The
calculations are shown in tables 18-20.

                 Table 18--Time on Task for District One
------------------------------------------------------------------------
                  Year                      Designated     Undesignated
------------------------------------------------------------------------
2017....................................            7605            8679
2016....................................            5434            6217
2015....................................            5743            6667
2014....................................            6810            6853
2013....................................            5864            5529
2012....................................            4771            5121
2011....................................            5045            5377
2010....................................            4839            5649
2009....................................            3511            3947
2008....................................            5829            5298
Average.................................            5545            5934
------------------------------------------------------------------------

                 Table 19--Time on Task for District Two
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2017....................................            5139            6074
2016....................................            6425            5615
2015....................................            6535            5967
2014....................................            7856            7001
2013....................................            4603            4750
2012....................................            3848            3922
2011....................................            3708            3680
2010....................................            5565            5235
2009....................................            3386            3017
2008....................................            4844            3956
Average.................................            5191            4922
------------------------------------------------------------------------

                Table 20--Time on Task for District Three
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2017....................................           26183            3798
2016....................................           23421            2769
2015....................................           22824            2696
2014....................................           25833            3835
2013....................................           17115            2631
2012....................................           15906            2163
2011....................................           16012            1678
2010....................................           20211            2461
2009....................................           12520            1820
2008....................................           14287            2286
Average.................................           19431            2614
------------------------------------------------------------------------

    Next, we derive the initial hourly rate by dividing the revenue
needed by the average number of hours for each area. This produces an
initial rate needed to produce the revenue needed for each area,
assuming the amount of traffic is as expected. The calculations for
each area are set forth in tables 21-23.

          Table 21--Initial Rate Calculations for District One
------------------------------------------------------------------------
                                        Designated        Undesignated
------------------------------------------------------------------------
Revenue needed (Step 6)...........         $4,950,370         $3,796,693
Average time on task (hours)......              5,545              5,934
Initial rate......................                893                640
------------------------------------------------------------------------

          Table 22--Initial Rate Calculations for District Two
------------------------------------------------------------------------
                                       Undesignated        Designated
------------------------------------------------------------------------
Revenue needed (Step 6)...........         $3,628,241         $4,075,988
Average time on task (hours)......              5,191              4,922
Initial rate......................                699                828
------------------------------------------------------------------------

         Table 23--Initial Rate Calculations for District Three
------------------------------------------------------------------------
                                       Undesignated        Designated
------------------------------------------------------------------------
Revenue needed (Step 6)...........         $7,677,493         $2,043,800
Average time on task (hours)......             19,431              2,614
Initial rate......................                395                782
------------------------------------------------------------------------

H. Step 8: Calculate Weighting Factors by Area

    In this step, we calculate the average weighting factor for each
designated and undesignated area. We collect the weighting factors, set
forth in 46 CFR 401.400, for each vessel trip. Using this database, we
calculate the average weighting factor for each area using the data
from each vessel transit from 2014 onward, as shown in tables 24-29.

                       Table 24--Average Weighting Factor for District 1, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              41               1              41
Class 1 (2016)..................................................              31               1              31
Class 1 (2017)..................................................              28               1              28
Class 2 (2014)..................................................             285            1.15          327.75
Class 2 (2015)..................................................             295            1.15          339.25
Class 2 (2016)..................................................             185            1.15          212.75
Class 2 (2017)..................................................             352            1.15           404.8
Class 3 (2014)..................................................              50             1.3              65
Class 3 (2015)..................................................              28             1.3            36.4
Class 3 (2016)..................................................              50             1.3              65
Class 3 (2017)..................................................              67             1.3            87.1
Class 4 (2014)..................................................             271            1.45          392.95
Class 4 (2015)..................................................             251            1.45          363.95
Class 4 (2016)..................................................             214            1.45           310.3
Class 4 (2017)..................................................             285            1.45          413.25
                                                                 -----------------------------------------------
    Total.......................................................            2464  ..............          3149.5
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.28  ..............
----------------------------------------------------------------------------------------------------------------

                      Table 25--Average Weighting Factor for District 1, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              25               1              25
Class 1 (2015)..................................................              28               1              28
Class 1 (2016)..................................................              18               1              18
Class 1 (2017)..................................................              19               1              19
Class 2 (2014)..................................................             238            1.15           273.7
Class 2 (2015)..................................................             263            1.15          302.45
Class 2 (2016)..................................................             169            1.15          194.35
Class 2 (2017)..................................................             290            1.15           333.5
Class 3 (2014)..................................................              60             1.3              78
Class 3 (2015)..................................................              42             1.3            54.6
Class 3 (2016)..................................................              28             1.3            36.4
Class 3 (2017)..................................................              45             1.3            58.5
Class 4 (2014)..................................................             289            1.45          419.05
Class 4 (2015)..................................................             269            1.45          390.05
Class 4 (2016)..................................................             222            1.45           321.9
Class 4 (2017)..................................................             285            1.45          413.25
                                                                 -----------------------------------------------
    Total.......................................................            2290  ..............         2965.75
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.30  ..............
----------------------------------------------------------------------------------------------------------------

                      Table 26--Average Weighting Factor for District 2, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              31               1              31
Class 1 (2015)..................................................              35               1              35
Class 1 (2016)..................................................              32               1              32
Class 1 (2017)..................................................              21               1              21
Class 2 (2014)..................................................             356            1.15           409.4
Class 2 (2015)..................................................             354            1.15           407.1
Class 2 (2016)..................................................             380            1.15             437
Class 2 (2017)..................................................             222            1.15           255.3
Class 3 (2014)..................................................              20             1.3              26
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               9             1.3            11.7
Class 3 (2017)..................................................              12             1.3            15.6
Class 4 (2014)..................................................             636            1.45           922.2
Class 4 (2015)..................................................             560            1.45             812
Class 4 (2016)..................................................             468            1.45           678.6
Class 4 (2017)..................................................             319            1.45          462.55
                                                                 -----------------------------------------------

    Total.......................................................            3455  ..............         4556.45
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.32  ..............
----------------------------------------------------------------------------------------------------------------

                       Table 27--Average Weighting Factor for District 2, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              20               1              20
Class 1 (2015)..................................................              15               1              15
Class 1 (2016)..................................................              28               1              28
Class 1 (2017)..................................................              15               1              15
Class 2 (2014)..................................................             237            1.15          272.55
Class 2 (2015)..................................................             217            1.15          249.55
Class 2 (2016)..................................................             224            1.15           257.6
Class 2 (2017)..................................................             127            1.15          146.05
Class 3 (2014)..................................................               8             1.3            10.4
Class 3 (2015)..................................................               8             1.3            10.4
Class 3 (2016)..................................................               4             1.3             5.2
Class 3 (2017)..................................................               4             1.3             5.2
Class 4 (2014)..................................................             359            1.45          520.55
Class 4 (2015)..................................................             340            1.45             493
Class 4 (2016)..................................................             281            1.45          407.45
Class 4 (2017)..................................................             185            1.45          268.25
                                                                 -----------------------------------------------
    Total.......................................................            2072  ..............          2724.2
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.31  ..............
----------------------------------------------------------------------------------------------------------------

                      Table 28--Average Weighting Factor for District 3, Undesignated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Area 6:
    Class 1 (2014)..............................................              45               1              45
    Class 1 (2015)..............................................              56               1              56
    Class 1 (2016)..............................................             136               1             136
    Class 1 (2017)..............................................             148               1             148
    Class 2 (2014)..............................................             274            1.15           315.1
    Class 2 (2015)..............................................             207            1.15          238.05
    Class 2 (2016)..............................................             236            1.15           271.4
    Class 2 (2017)..............................................             264            1.15           303.6
    Class 3 (2014)..............................................              15             1.3            19.5
    Class 3 (2015)..............................................               8             1.3            10.4
    Class 3 (2016)..............................................              10             1.3              13
    Class 3 (2017)..............................................              19             1.3            24.7
    Class 4 (2014)..............................................             394            1.45           571.3
    Class 4 (2015)..............................................             375            1.45          543.75
    Class 4 (2016)..............................................             332            1.45           481.4
    Class 4 (2017)..............................................             367            1.45          532.15
                                                                 -----------------------------------------------
        Total for Area 6........................................           2,886  ..............        3,709.35
----------------------------------------------------------------------------------------------------------------
Area 8:
    Class 1 (2014)..............................................               3               1               3
    Class 1 (2015)..............................................               0               1               0
    Class 1 (2016)..............................................               4               1               4
    Class 1 (2017)..............................................               4               1               4
    Class 2 (2014)..............................................             177            1.15          203.55
    Class 2 (2015)..............................................             169            1.15          194.35
    Class 2 (2016)..............................................             174            1.15           200.1
    Class 2 (2017)..............................................             151            1.15          173.65
    Class 3 (2014)..............................................               3             1.3             3.9
    Class 3 (2015)..............................................               0             1.3               0
    Class 3 (2016)..............................................               7             1.3             9.1
    Class 3 (2017)..............................................              18             1.3            23.4
    Class 4 (2014)..............................................             243            1.45          352.35
    Class 4 (2015)..............................................             253            1.45          366.85

    Class 4 (2016)..............................................             204            1.45           295.8
    Class 4 (2017)..............................................             269            1.45          390.05
                                                                 -----------------------------------------------
        Total for Area 8........................................           1,679  ..............          2224.1
                                                                 -----------------------------------------------
            Combined total......................................           4,565  ..............        5,933.45
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.30  ..............
----------------------------------------------------------------------------------------------------------------

                       Table 29--Average Weighting Factor for District 3, Designated Areas
----------------------------------------------------------------------------------------------------------------
                                                                     Number of       Weighting       Weighted
                        Vessel class/year                            transits         factor         transits
----------------------------------------------------------------------------------------------------------------
Class 1 (2014)..................................................              27               1              27
Class 1 (2015)..................................................              23               1              23
Class 1 (2016)..................................................              55               1              55
Class 1 (2017)..................................................              62               1              62
Class 2 (2014)..................................................             221            1.15          254.15
Class 2 (2015)..................................................             145            1.15          166.75
Class 2 (2016)..................................................             174            1.15           200.1
Class 2 (2017)..................................................             170            1.15           195.5
Class 3 (2014)..................................................               4             1.3             5.2
Class 3 (2015)..................................................               0             1.3               0
Class 3 (2016)..................................................               6             1.3             7.8
Class 3 (2017)..................................................              14             1.3            18.2
Class 4 (2014)..................................................             321            1.45          465.45
Class 4 (2015)..................................................             245            1.45          355.25
Class 4 (2016)..................................................             191            1.45          276.95
Class 4 (2017)..................................................             234            1.45           339.3
                                                                 -----------------------------------------------
    Total.......................................................            1892  ..............        2,451.65
----------------------------------------------------------------------------------------------------------------
Average weighting factor (weighted transits/number of transits).  ..............            1.30  ..............
----------------------------------------------------------------------------------------------------------------

I. Step 9: Calculate Revised Base Rates

    In this step, we revise the base rates so that once the impact of
the weighting factors are considered, the total cost of pilotage will
be equal to the revenue needed. To do this, we divide the initial base
rates, calculated in Step 7, by the average weighting factors
calculated in Step 8, as shown in table 30.

                                          Table 30--Revised Base Rates
----------------------------------------------------------------------------------------------------------------
                                                                                Revised rate
                                                                                Average     (initial rate/
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                8)            factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................            $893            1.28            $698
District One: Undesignated......................................             640            1.30             492
District Two: Undesignated......................................             699            1.32             530
District Two: Designated........................................             828            1.31             632
District Three: Undesignated....................................             395            1.30             304
District Three: Designated......................................             782            1.30             602
----------------------------------------------------------------------------------------------------------------

J. Step 10: Review and Finalize Rates

    In this step, the Director reviews the rates set forth by the
staffing model and ensures that they meet the goal of ensuring safe,
efficient, and reliable pilotage. To establish that the proposed rates
do meet the goal of ensuring safe, efficient and reliable pilotage, the
Director considered whether the proposed rates incorporate appropriate
compensation for pilots to handle heavy traffic periods and whether
there are sufficient pilots to handle those heavy traffic periods.
Also, he considered whether the proposed rates would cover operating
expenses and infrastructure costs, and took average traffic and
weighting factors into consideration. Based on this information, the
Director is not proposing any alterations to the rates in this step. We
propose to modify the text in Sec.  401.405(a) to reflect the final
rates, also shown in table 31.

                                         Table 31--Proposed Final Rates
----------------------------------------------------------------------------------------------------------------
                                                                                Final 2018     Proposed 2019
                     Area                                     Name                 pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated......................  St. Lawrence River..............            $653            $698
District One: Undesignated....................  Lake Ontario....................             435             492
District Two: Undesignated....................  Lake Erie.......................             497             530
District Two: Designated......................  Navigable waters from Southeast              593             632
                                                 Shoal to Port Huron, MI.
District Three: Undesignated..................  Lakes Huron, Michigan, and                   271             304
                                                 Superior.
District Three: Designated....................  St. Mary's River................             600             602
----------------------------------------------------------------------------------------------------------------

K. Surcharges

    Because there are several applicant pilots in 2019, we are
proposing to levy surcharges to cover the costs needed for training
expenses. Consistent with previous years, we are proposing to assign a
cost of $150,000 per applicant pilot. To develop the surcharge, we
multiply the number of applicant pilots by the average cost per pilot
to develop a total amount of training costs needed, and then impose
that amount as a surcharge to all areas in the respective district,
consisting of a percentage of revenue needed. In this year, there are
two applicant pilots for District One, one applicant pilot for District
Two, and four applicant pilots for District Three. The calculations to
develop the surcharges are shown in table 32. We note that while the
percentages are rounded for simplicity, such rounding does not impact
the revenue generated, as surcharges can no longer be collected once
the surcharge total has been attained.
    Additionally, the Coast Guard is considering the necessity of
continuing with the surcharge for applicant pilots in this or future
rulemakings. As the vast majority of registered pilots are not
scheduled to retire in the next 20 years, we believe that pilot
associations are now able to plan for the costs associated with
retirements without relying on the Coast Guard to impose surcharges. We
invite comment on the necessity of continuing this practice.

                                        Table 32--Surcharge Calculations
----------------------------------------------------------------------------------------------------------------
                                                                   District one    District two   District three
----------------------------------------------------------------------------------------------------------------
Number of applicant pilots......................................               2               1               4
Total applicant training costs..................................        $300,000        $150,000        $600,000
Revenue needed (Step 6).........................................      $8,747,063      $7,704,229      $9,721,293
Total surcharge as percentage (total training costs/revenue)....              3%              2%              6%
----------------------------------------------------------------------------------------------------------------

VIII. Regulatory Analyses

    We developed this proposed rule after considering numerous statutes
and Executive orders related to rulemaking. A summary of our analyses
based on these statutes or Executive orders follows.

A. Regulatory Planning and Review

    Executive Orders 12866 (Regulatory Planning and Review) and 13563,
(Improving Regulation and Regulatory Review) direct agencies to assess
the costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. Executive Order 13771 (Reducing Regulation and Controlling
Regulatory Costs) directs agencies to reduce regulation and control
regulatory costs and provides that ``for every one new regulation
issued, at least two prior regulations be identified for elimination,
and that the cost of planned regulations be prudently managed and
controlled through a budgeting process.''
    The Office of Management and Budget (OMB) has not designated this
proposed rule a significant regulatory action under section 3(f) of
Executive Order 12866. Accordingly, OMB has not reviewed it. Because
this proposed rule is not a significant regulatory action, it is exempt
from the requirements of Executive Order 13771. See the OMB's
Memorandum titled, ``Guidance Implementing Executive Order 13771,
titled `Reducing Regulation and Controlling Regulatory Costs' '' (April
5, 2017). A regulatory analysis (RA) follows.
    The purpose of this rulemaking is to propose new base pilotage
rates and surcharges for training. The last full ratemaking was
concluded in June of 2018.
    The Coast Guard is required to review and adjust pilotage rates on
the Great Lakes annually. See sections IV and V of this preamble for
detailed discussions of the legal basis and purpose for this rulemaking
and for background information on Great Lakes pilotage ratemaking.
Based on our annual review for this proposed rulemaking, we propose
adjusting the pilotage rates for the 2019 shipping season to generate
sufficient revenues for each district to reimburse its necessary and
reasonable operating expenses, fairly compensate trained and rested
pilots, and provide an appropriate working capital fund to use for
improvements. The rate changes in this proposed rule would, if
codified, lead to an increase in the cost per unit of service to
shippers in all three districts, and result in an estimated annual cost
increase to shippers. The total payments that would be made by shippers
during the 2019 shipping season are estimated at approximately
$2,066,143 more than the total payments that were estimated in 2018
(table 33).\21\
---------------------------------------------------------------------------

    \21\ Total payments across all three districts are equal to the
increase in payments incurred by shippers as a result of the rate
changes plus the temporary surcharges applied to traffic in
Districts One, Two, and Three.

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

    A detailed discussion of our economic impact analysis follows.
Affected Population
    This proposed rule would impact U.S. Great Lakes pilots, the 3
pilot associations, and the owners and operators of oceangoing vessels
that transit the Great Lakes annually. As discussed in step 3 in
Section VII.C of this preamble, there will be 51 pilots working during
the 2019 shipping season. The shippers affected by these rate changes
are those owners and operators of domestic vessels operating ``on
register'' (employed in foreign trade) and owners and operators of non-
Canadian foreign vessels on routes within the Great Lakes system. These
owners and operators must have pilots or pilotage service as required
by 46 U.S.C. 9302. There is no minimum tonnage limit or exemption for
these vessels. The statute applies only to commercial vessels and not
to recreational vessels. United States-flagged vessels not operating on
register and Canadian ``lakers,'' which account for most commercial
shipping on the Great Lakes, are not required by 46 U.S.C. 9302 to have
pilots. However, these U.S.- and Canadian-flagged lakers may
voluntarily choose to engage a Great Lakes registered pilot. Vessels
that are U.S.-flagged may opt to have a pilot for varying reasons, such
as unfamiliarity with designated waters and ports, or for insurance
purposes.
    We used billing information from the years 2015 through 2017 from
the Great Lakes Pilotage Management System (GLPMS) to estimate the
average annual number of vessels affected by the rate adjustment. The
GLPMS tracks data related to managing and coordinating the dispatch of
pilots on the Great Lakes, and billing in accordance with the services.
In Step 7 of the methodology, we use a 10-year average to estimate the
traffic. We use 3 years of the most recent billing data to estimate the
affected population. When we reviewed 10 years of the most recent
billing data, we found the data included vessels that have not used
pilotage services in recent years. We believe using 3 years of billing
data is a better representation of the vessel population that is
currently using pilotage services and would be impacted by this
rulemaking. We found that 448 unique vessels used pilotage services
during the years 2015 through 2017. That is, these vessels had a pilot
dispatched to the vessel, and billing information was recorded in the
GLPMS. Of these vessels, 418 were foreign-flagged vessels and 30 were
U.S.-flagged. As previously stated, U.S.-flagged vessels not operating
on register are not required to have a registered pilot per 46 U.S.C.
9302, but they can voluntarily choose to have one.
    Vessel traffic is affected by numerous factors and varies from year
to year. Therefore, rather than the total number of vessels over the
time period, an average of the unique vessels using pilotage services
from the years 2015 through 2017 is the best representation of vessels
estimated to be affected by the rate proposed in this NPRM. From the
years 2015 through 2017, an average of 256 vessels used pilotage
services annually.\22\ On average, 241 of these vessels were foreign-
flagged vessels and 15 were U.S.-flagged vessels that voluntarily opted
into the pilotage service.
---------------------------------------------------------------------------

    \22\ Some vessels entered the Great Lakes multiple times in a
single year, affecting the average number of unique vessels
utilizing pilotage services in any given year.
---------------------------------------------------------------------------

Total Cost to Shippers
    The rate changes resulting from this adjustment to the rates would
add new costs to shippers in the form of higher payments to pilots. We
estimate the effect of the rate changes on shippers by comparing the
total projected revenues needed to cover costs in 2018 with the total
projected revenues to cover costs in 2019, including any temporary
surcharges we have authorized. We set pilotage rates so that pilot
associations receive enough revenue to cover their necessary and
reasonable expenses. Shippers pay these rates when they have a pilot as
required by 46 U.S.C. 9302. Therefore, the aggregate payments of
shippers to pilot associations are equal to the projected necessary
revenues for pilot associations. The revenues each year represent the
total costs that shippers must pay for pilotage services, and the
change in revenue from the previous year is the additional cost to
shippers discussed in this proposed rule.
    The impacts of the proposed rate changes on shippers are estimated
from the District pilotage projected revenues (shown in tables 15
through 17 of this preamble) and the proposed surcharges described in
section VII.K of this preamble. We estimate that for the 2019 shipping
season, the projected revenue needed for all three districts is
$26,172,585. Temporary surcharges on traffic in Districts One, Two, and
Three would be applied for the duration of the 2019 season in order for
the pilotage associations to recover training expenses incurred for
applicant pilots. We estimate that the pilotage associations would
require $300,000, $150,000, and $600,000 in revenue for applicant
training expenses in Districts One, Two, and Three, respectively. This
would represent a total cost of $1,050,000 to shippers during the 2019
shipping season. Adding the projected revenue of $26,172,585 to the
proposed surcharges, we estimate the pilotage associations' total
projected revenue needed for 2019 would be $27,222,585.
    To estimate the additional cost to shippers from this proposed
rule, we compare the 2019 total projected revenues to the 2018
projected revenues. Because we review and prescribe rates for the Great
Lakes Pilotage annually, the effects are estimated as a single year
cost rather than annualized over a 10-year period. In the 2018
rulemaking,\23\ we estimated the total projected revenue needed for
2018, including surcharges, as $25,156,442. This is the best
approximation of 2018 revenues as, at the time of this publication, we
do not have enough audited data available for the 2018 shipping season
to revise these projections. Table 33 shows the revenue projections for
2018 and 2019 and details the additional cost increases to shippers by
area and district as a result of the rate changes and temporary
surcharges on traffic in Districts One, Two, and Three.
---------------------------------------------------------------------------

    \23\ The 2018 projected revenues are from the 2018 Great Lakes
Pilotage Ratemaking final rule (83 FR 26189), Table 41.

                                               Table 33--Effect of the Proposed Rule by Area and District
                                                                 [$U.S.; non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Total 2018                                      Total 2019      Additional
                  Area                    Revenue needed  2018 temporary     projected    Revenue needed  2019 temporary     projected     costs of this
                                              in 2018        surcharge        revenue         in 2019        surcharge        revenue          rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District 1.......................      $7,988,670        $300,000      $8,288,670      $8,747,063        $300,000      $9,047,063        $758,393

Total, District 2.......................       7,230,300         150,000       7,380,300       7,704,229         150,000       7,854,229         473,929
Total, District 3.......................       8,887,472         600,000       9,487,472       9,721,293         600,000      10,321,293         833,821
                                         ---------------------------------------------------------------------------------------------------------------
    System Total........................     $24,106,442      $1,050,000     $25,156,442     $26,172,585      $1,050,000     $27,222,585      $2,066,143
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting difference between the projected revenue in 2018 and
the projected revenue in 2019 is the proposed annual change in payments
from shippers to pilots as a result of the rate change that would be
imposed by this rule. The effect of the proposed rate change to
shippers varies by area and district. The rate changes, after taking
into account the increase in pilotage rates and the addition of
temporary surcharges, would lead to affected shippers operating in
District One, District Two, and District Three experiencing an increase
in payments of $758,393, $473,929, and $833,821, respectively, over the
previous year. The overall adjustment in payments would be an increase
in payments by shippers of $2,066,143 across all three districts (an 8
percent increase over 2018). Again, because we review and set rates for
Great Lakes Pilotage annually, we estimate the impacts as single year
costs rather than annualizing them over a 10-year period.
    Table 34 shows the difference in revenue by component from 2018 to
2019.\24\ The majority of the increase in revenue is due to the
inflation of operating expenses and to the addition of two pilots who
were authorized in the 2018 rule. These two pilots are training in 2018
and will become full-time working pilots at the beginning of the 2019
shipping season. They would be compensated at the target compensation
of $359,887 per pilot. The addition of these pilots to full working
status accounts for $719,774 of the increase ($1,082,472 when also
including the effect of increasing compensation for 49 pilots). The
remaining amount is attributed to increases in the working capital
fund.
---------------------------------------------------------------------------

    \24\ The 2018 projected revenues are from the 2018 final rule
(83 FR 26189), table 41. The 2018 projected revenues are from tables
15-17 of this NPRM.

                                  Table 34--Difference in Revenue by Component
----------------------------------------------------------------------------------------------------------------
                                                                                Difference
                        Revenue component                         Revenue needed  Revenue needed  (2019 revenue-
                                                                      in 2018         in 2019      2018 revenue)
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses.....................................      $5,965,599      $6,874,784        $909,185
Total Target Pilot Compensation.................................      17,271,765      18,354,237       1,082,472
Working Capital Fund............................................         869,078         943,564          74,486
Total Revenue Needed, without Surcharge.........................      24,106,442      26,172,585       2,066,143
Surcharge.......................................................       1,050,000       1,050,000               0
Total Revenue Needed, with Surcharge............................      25,156,442      27,222,585       2,066,143
----------------------------------------------------------------------------------------------------------------

Pilotage Rates as a Percentage of Vessel Operating Costs
    To estimate the impact of U.S. pilotage costs on foreign-flagged
vessels that would be affected by the rate adjustment, we looked at the
pilotage costs as a percentage of a vessel's costs for an entire
voyage. The portion of the trip on the Great Lakes using a pilot is
only a portion of the whole trip. The affected vessels are often
traveling from a foreign port, and the days without a pilot on the
total trip often exceed the days a pilot is needed.
    To estimate this impact, we used the 2017 study titled, ``Analysis
of Great Lakes Pilotage Costs on Great Lakes Shipping and the Potential
Impact of Increases in U.S. Pilotage Charges.'' \25\ We conducted the
study to explore additional frameworks and methodologies for assessing
the cost of Great Lakes pilot's ratemaking regulations, with a focus on
capturing industry and port level economic impacts. The study also
included an analysis of the pilotage costs as a percentage of the total
voyage costs that we can use in RAs to estimate the direct impact of
changes to the pilotage rates.
---------------------------------------------------------------------------

    \25\ The study is available at http://www.dco.uscg.mil/Our-Organization/Assistant-Commandant-for-Prevention-Policy-CG-5P/Marine-Transportation-Systems-CG-5PW/Office-of-Waterways-and-Ocean-Policy/Office-of-Waterways-and-Ocean-Policy-Great-Lakes-Pilotage-Div/.
---------------------------------------------------------------------------

    The study developed a voyage cost model that is based on a vessel's
daily costs. The daily costs included: Capital repayment costs; fuel
costs; operating costs (such as crew, supplies, and insurance); port
costs; speed of the vessel; stevedoring rates; and tolls. The daily
operating costs were translated into total voyage costs using mileage
between the ports for a number of voyage scenarios. In the study, the
total voyage costs were then compared to the U.S. pilotage costs. The
study found that, using the 2016 rates, the U.S. pilotage charges
represent 10 percent of the total voyage costs for a vessel carrying
grain, and between 8 percent and 9 percent of the total voyage costs
for a vessel carrying steel.\26\ We updated the analysis to estimate
the percentage U.S. pilotage charges represent using the percentage
increase in revenues from the years 2016 to 2019. Since the study used
2016 as the latest year of data, we compared the revenues needed in
2019 and 2018 to the 2016 revenues in order to estimate the change in
pilotage costs

as a percentage of total voyage costs from 2018 to 2019. Table 35 shows
the revenues needed for the years 2016, 2017, and 2018.
---------------------------------------------------------------------------

    \26\ Martin Associates, ``Analysis of Great Lakes Pilotage Costs
on Great Lakes Shipping and the Potential Impact of Increases in
U.S. Pilotage Charges,'' page 33. Available at http://www.regulations.gov, USCG-2018-0665-0005.

                             Table 35--Revenue Needed in 2016, 2017, 2018, and 2019
----------------------------------------------------------------------------------------------------------------
                                                  Revenue needed  Revenue needed  Revenue needed  Revenue needed