[Federal Register Volume 84, Number 210 (Wednesday, October 30, 2019)]
[Proposed Rules]
[Pages 58099-58125]
[FR Doc No: 2019-23510]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2019-0736]
RIN 1625-AC56

Great Lakes Pilotage Rates--2020 Annual Review and Revisions to
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Notice of proposed rulemaking.

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

SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the
Coast Guard is proposing new base pilotage rates for the 2020 shipping
season. This proposed rule would adjust the pilotage rates to account
for changes in district operating expenses, an increase in the number
of pilots, and anticipated inflation. The net result of decreased
operating expenses for the associations compared to the previous year,
inflation of pilot compensation, and the addition of one working pilot
at the beginning of the 2020 shipping season is a 3 percent increase in
pilotage rates. In addition, the Coast Guard is not proposing any
surcharges for the 2020 shipping season, which would result in a 1
percent net decrease in pilotage costs compared to the 2019 season,
when combined with the changes above. The Coast Guard is also proposing
to clarify the rules related to the working capital fund.

DATES: Comments and related material must be received by the Coast
Guard on or before November 29, 2019.

ADDRESSES: You may submit comments identified by docket number USCG-
2019-0736 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_ADDRESS>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
    District One:
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fxund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Two:
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    District Three:
    A. Step 1: Recognize Previous Operating Expenses
    B. Step 2: Project Operating Expenses, Adjusting for Inflation
or Deflation
    C. Step 3: Estimate Number of Working Pilots
    D. Step 4: Determine Target Pilot Compensation Benchmark
    E. Step 5: Project Working Capital Fund
    F. Step 6: Project Needed Revenue
    G. Step 7: Calculate Initial Base Rates
    H. Step 8: Calculate Average Weighting Factors by Area
    I. Step 9: Calculate Revised Base Rates
    J. Step 10: Review and Finalize Rates
    K. Surcharges
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
    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 you cannot submit your
material by using https://www.regulations.gov, call or email 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, will be 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 if 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
submissions in response to this document, see DHS's Correspondence
System of Records notice (84 FR 48645, September 26, 2018)..
    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

AMOU American Maritime Officers Union
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
CPA Certified public accountant
CPI Consumer Price Index
DHS Department of Homeland Security
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 and St. Lawrence Seaway -- including setting the rates for
pilotage services and adjusting them on an annual basis. The rates,
which currently range from $306 to $733 per pilot hour (depending on
which of the specific six areas 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 coming year to produce an hourly rate. This process is currently
effected through a 10-step methodology which is explained in detail in
this notice of proposed rulemaking (NPRM).
---------------------------------------------------------------------------

    \1\ Title 46 of the United States Code (U.S.C.) Chapter 93;
Public Law 86-555, 74 Stat. 259, as amended.
---------------------------------------------------------------------------

    In this NPRM, as part of our annual review, we are proposing new
pilotage rates for 2020 based on the existing methodology. The result
is an increase in rates for four areas, and a decrease in rates for the
remaining two areas. These changes are due to a combination of four
factors: (1) Decreased total operating expenses for the associations
compared to the previous year,\2\ (2) an increase in the amount of
money needed for the working capital fund, (3) inflation of pilot
compensation by 2 percent, and (4) the net addition of one working
pilot at the beginning of the 2020 shipping season in District Two.
Based on the ratemaking model discussed in this NPRM, we are proposing
the rates shown in Table 1.
---------------------------------------------------------------------------

    \2\ Operating expenses decreased for the District One:
Undesignated area and all of District Two. They increased for the
District One: Designated area and all of District Three.

                         Table 1--Current and Proposed Pilotage Rates on the Great Lakes
----------------------------------------------------------------------------------------------------------------
                                                                                Final 2019     Proposed 2020
                     Area                                    Name                pilotage rate    pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated.....................  St. Lawrence River.............             $733             $757
District One: Undesignated...................  Lake Ontario...................              493              462
District Two: Designated.....................  Navigable waters from Southeast              603              602
                                                Shoal to Port Huron, MI.
District Two: Undesignated...................  Lake Erie......................              531              573
District Three: Designated...................  St. Mary's River...............              594              621
District Three: Undesignated.................  Lakes Huron, Michigan, and                   306              327
                                                Superior.
----------------------------------------------------------------------------------------------------------------

    This proposed rule would impact 52 U.S. Great Lakes pilots, 3 pilot
associations, and the owners and operators of an average of 266
oceangoing vessels that transit the Great Lakes annually. This proposed
rule is not economically significant under Executive Order 12866 and
would not affect the Coast Guard's budget or increase Federal spending.
The estimated overall annual regulatory economic impact of this rate
change is a net decrease of $225,658 in estimated payments made by
shippers from the 2019 shipping season. Because the Coast Guard must
review, and, if necessary, adjust rates each year, we analyze these as
single-year costs and do not annualize them over 10 years. 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''),\3\ which requires foreign vessels and U.S.
vessels operating ``on register, meaning '' those U.S. vessels engaged
in foreign trade, to use U.S. or Canadian registered pilots while
transiting the U.S. waters of the St. Lawrence Seaway and the Great
Lakes system.\4\ 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.'' \5\ The Act requires that rates be established or reviewed
and adjusted each year, not later than March 1.\6\ 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.\7\ The Secretary's duties and
authority under the Act have been delegated to the Coast Guard.\8\
---------------------------------------------------------------------------

    \3\ 46 U.S.C. Chapter 93; Public Law 86-555, 74 Stat. 259, as
amended.
    \4\ 46 U.S.C. 9302(a)(1).
    \5\ 46 U.S.C. 9303(f).
    \6\ Id.
    \7\ Id.
    \8\ Department of Homeland Security (DHS) Delegation No. 0170.1,
para. II (92.f).
---------------------------------------------------------------------------

    The purpose of this NPRM is to propose new pilotage rates for the
2020 shipping season. The Coast Guard believes that the new rates would
continue to 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 Act, the Coast Guard, in conjunction with the
Canadian Great Lakes Pilotage Authority (GLPA), regulates shipping
practices and rates on the Great Lakes. Under Coast Guard regulations,
all vessels engaged in foreign trade (often referred to as ``salties'')
are required to engage U.S. or Canadian pilots during their transit
through the regulated waters.\9\ U.S. and Canadian ``lakers,'' which
account for most commercial shipping on the Great Lakes, are not
affected.\10\ 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. The Canadian GLPA

establishes the rates for Canadian registered pilots.
---------------------------------------------------------------------------

    \9\ See title 46 of the Code of Federal Regulations (CFR) part
401.
    \10\ 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.
---------------------------------------------------------------------------

    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, which is depicted in Table 2 below. Designated
areas, classified as such by Presidential Proclamation, are waters in
which pilots must, at all times, be fully engaged in the navigation of
vessels in their charge.\11\ Undesignated areas, on the other hand, are
open bodies of water not subject to the same pilotage requirements.
While working in 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.'' \12\ For these
reasons, pilotage rates in designated areas can be significantly higher
than those in undesignated areas.
---------------------------------------------------------------------------

    \11\ Presidential Proclamation 3385, Designation of restricted
waters under the Great Lakes Pilotage Act of 1960, December 22,
1960.
    \12\ 46 U.S.C. 9302(a)(1)(B).

                            Table 2--Areas of the Great Lakes and St. Lawrence Seaway
----------------------------------------------------------------------------------------------------------------
      District         Pilotage association           Designation           Area No. \13\      Area name \14\
----------------------------------------------------------------------------------------------------------------
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. The Coast Guard developed a 10-step ratemaking
methodology to derive a pilotage rate that covers these expenses based
on the estimated amount of traffic. The methodology is designed to
measure how much revenue each pilotage association would need to cover
expenses and provide competitive compensation to working pilots. We
then divide that amount by the historic 10-year average for pilotage
demand. We recognize that in years where traffic is above average,
pilot associations will accrue 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 would 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.
---------------------------------------------------------------------------

    \13\ 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.
    \14\ The areas are listed by name in the Code of Federal
Regulations, see 46 CFR 401.405.
---------------------------------------------------------------------------

    Over the past 4 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 U.S. mariners rather than Canadian registered
pilots. The current methodology, which was finalized in the Great Lakes
Pilotage Rates--2019 Annual Review and Revisions to Methodology final
rule (84 FR 20551), published May 10, 2019, 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, 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 2020 rates in this proposal, we are
beginning with the audited expenses from the 2017 shipping season.
    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 2020 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' (BLS)
Consumer Price Index (CPI) for the Midwest Region, or, if not
available, the Federal Open Market Committee (FOMC) median economic
projections for Personal Consumption Expenditures (PCE) inflation. This
step produces the total operating expenses for each area and district.
    In Step 3, ``Estimate number of working pilots,'' (Sec.  404.103)
the Director calculates how many pilots are needed for each district.
To do this, we employ a ``staffing model,'' described in Sec.  401.220,
paragraphs (a)(1) through (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 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 previous years, in the first process, we calculated the
total compensation for each pilot using a ``compensation benchmark.''
Next, we multiplied 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 by area for
accounting purposes, we assigned a certain number of pilots for the
designated areas and a certain number of pilots for the undesignated
areas to determine the revenues needed for each area. To make the
determination of how many pilots to assign, we used the staffing model
designed to determine the total number of pilots, described in Step 3,
above.
    For the 2020 ratemaking, the Coast Guard is proposing to update the
benchmark compensation model in accordance with Sec.  404.104(b),
switching from using the American Maritime Officers Union (AMOU) 2015
aggregated wage and benefit information, to using the 2019 compensation
benchmark. Prior to 2016, the Coast Guard based the compensation
benchmark on data provided by the AMOU regarding its contract for first
mates on the Great Lakes. However, in 2016 the AMOU elected to no
longer provide this data to the Coast Guard, and thus, in the 2016
ratemaking, we used average compensation for a Canadian pilot plus a 10
percent adjustment. As a result of a legal challenge filed by the
shipping industry, the court found that the Coast Guard did not
adequately support the 10 percent addition to the Canadian GLPA
benchmark, and thus its use was deemed arbitrary and capricious. The
Coast Guard then based the 2018 benchmark on data provided by the AMOU
regarding its contract for first mates on the Great Lakes in the 2011
to 2015 period, and adjusted it for inflation using FOMC median
economic projections for PCE inflation. We used the information
provided by the AMOU because it was the most recent publicly available
information to which we had access. This benchmark has successfully
achieved the Coast Guard's goals of safety through rate and
compensation stability while also promoting recruitment and retention
of qualified United States registered pilots. Therefore, the Coast
Guard proposes to use this as the compensation benchmark for future
rates.
    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) to the total pilot compensation (derived
in Step 4), and multiplying that figure by the preceding year's average
annual rate of return for new issues of high-grade corporate
securities. This figure constitutes the ``working capital fund'' for
each area and district.
    In Step 6, ``Project needed revenue,'' (Sec.  404.106) the Director
simply adds up the totals produced by the preceding steps. The
projected operating expense for each area and district (from Step 2) is
added to 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 ``needed revenue.''
    In Step 7, ``Calculate initial base rates,'' (Sec.  404.107) the
Director calculates an hourly pilotage rate to cover the needed revenue
as calculated in Step 6. This step consists of first calculating the
10-year hours of traffic average for each area. Next, the revenue
needed in each area (calculated in Step 6) is divided by the 10-year
hours of 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 the 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 modifies the base rates by accounting for the extra revenue
generated by the weighting factors. We do this by dividing the initial
pilotage rate for each area (from Step 7) by the corresponding average
weighting factor (from Step 8), to produce a revised rate.
    In Step 10, ``Review and finalize rates,'' (Sec.  404.110) often
referred to informally as ``director's discretion,'' the Director
reviews the revised base rates (from Step 9) to ensure that they meet
the goals set forth in the Act and 46 CFR 404.1(a), which include
promoting efficient, safe, and reliable pilotage service on the Great
Lakes; generating sufficient revenue for each pilotage association to
reimburse necessary and reasonable operating expenses; compensating
trained and rested pilots fairly; 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.
    After the base rates are set, Sec.  401.401 permits the Coast Guard
to apply surcharges. We previously used surcharges to pay for the
training of new pilots, rather than incorporating training costs into
the overall ``needed revenue'' used in the calculation of the base
rates. The surcharge accelerates the reimbursement of certain necessary
and reasonable expense. Last year, we applied a surcharge to account
for the associations' expenses for the Applicant Trainee and Apprentice
Pilots, which included providing a stipend, lodging, training, and per
diem. We implemented these surcharges because of a large number of
pending pilot retirements, and a large amount of recruitment at the
pilot associations. Without the surcharge, the associations would have
been reimbursed for expenses associated with training new pilots 3
years later via the rate. However, any pilot who retired prior to that
3-year date would not have been reimbursed. Therefore, we applied a
surcharge to ensure that these pilots would not have to incur the costs
of training their replacements. As the vast majority of registered
pilots are not anticipated to reach the regulatory required retirement
age of 70 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.

VI. Discussion of Proposed Methodological and Other Changes

    For 2020, the Coast Guard is proposing no new methodological
changes to the ratemaking model. We believe that the methodology laid
out in the 2019 Annual Review would produce rates for the 2020 shipping
season that would 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. The purpose of the working capital fund is to
ensure that associations have a way to set aside money to pay for high
cost items and infrastructure improvements. The Coast Guard is
proposing changes in this proposed rule to codify the procedures
related to the use of funds and accounting requirements related to the
working capital fund.
    The Coast Guard is proposing two changes to the regulatory text
related to the working capital fund, formerly called ``return on
investment.'' In 46 CFR 404.106, the Coast Guard proposes to change the
words ``return on investment'' to ``working capital fund,'' as that is
the current name for that fund. This change was made in the Great Lakes
Pilotage Rates 2017 Annual Review final rule (82 FR 41466, August 31,
2017), but the entry was overlooked in that rule. Prior to 2017, the
working capital fund described in 46 CFR 404.105 was called ``return on
investment.'' In the Great Lakes Pilotage Rates 2017 Annual Review
final rule (82 FR 41466, August 31, 2017), the Coast Guard changed the
name of that fund to the ``working capital fund.'' However, the 2017
final rule did not change a reference to ``return on investment'' in 46
CFR 404.106. This proposed change corrects that oversight so that 46
CFR 404.105 and 46 CFR 404.106 will use consistent terminology. In
addition, the Coast Guard proposes to incorporate into regulations the
policy currently being followed by the pilots associations regarding
these funds. The Coast Guard proposes to add text to 46 CFR 403.110
requiring each pilot association set aside, in a separate account, an
amount at least equal to the amount calculated in Step 5 of the
ratemaking, and place restrictions on how those funds are expended.
Under the proposed rule, pilot associations can only apply these funds
in the working capital fund account to capital projects, infrastructure
improvements, infrastructure maintenance, and non-recurring technology
purchases that are necessary for providing pilotage services. The pilot
associations may grow the working capital fund over successive shipping
seasons for a future significant purchase, including for a down payment
on a purchase that would also be financed in part. If needed, pilot
associations could request a waiver from the requirements from the
Director. We invite interested parties to provide their input and
recommendations on this issue.

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 2020. We
propose to conduct the 2020 ratemaking as an ``interim year,'' as was
done in 2019, rather than a full ratemaking as was conducted in 2018.
Thus, the Coast Guard proposes to adjust the compensation benchmark
pursuant to Sec.  404.104(b) for this purpose, rather than Sec.
404.104(a).
    This section discusses the proposed rate changes using the
ratemaking steps provided in 46 CFR part 404. We will detail all ten
steps of the ratemaking procedure for each of the three districts to
show how we arrived at the proposed new rates.

District One

A. Step 1: Recognize Previous Operating Expenses
    Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\15\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
costs are applied to the designated or undesignated 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 accrued by the pilot associations generally, for
example, such as employee benefits, the cost is divided between the
designated and undesignated areas on a pro rata basis. The recognized
operating expenses for District One is shown in Table 3.
---------------------------------------------------------------------------

    \15\ These reports are available in the docket for this
rulemaking (see Docket #USCG-2019-0736).
---------------------------------------------------------------------------

    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 3 years to reimburse. The
rationale for using surcharges to cover these expenses, rather than
including the costs as operating expenses, was so these non-recurring
costs could be recovered in a more timely fashion, and 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 3 years, the Coast Guard added a $150,000
surcharge per applicant pilot, beginning in 2016, to recoup those costs
in the year incurred. Now that these issues are no longer a concern, we
are not proposing any surcharges for the 2020 shipping season.
    We also propose to deduct 3 percent of the ``shared counsel''
expenses, as stated in the auditor's reports for each district to
account for lobbying expenditures. Pursuant to 46 CFR 404.2(c)(3),
lobbying expenses are not permitted to be recouped as operating
expenses.

    For District One, we do not propose any Director's adjustments,
other than the surcharge adjustment 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 where indicated under the ADDRESSES portion of the
preamble.

                               Table 3--2017 Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2017                    --------------------------------
                                                                   St. Lawrence                        Total
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Subsistence/Travel--Pilot...............................        $440,456        $293,637        $734,093
        Certified Public Accountant (CPA) Deduction.............            -189            -126            -315
        Subsistence/Travel--Trainee.............................          22,008          14,672          36,680
        License Insurance--Pilots...............................          48,620          32,413          81,033
        License Insurance--Trainee..............................               0               0               0
        Payroll Taxes--Pilots...................................         137,788          91,858         229,646
        Payroll Taxes--Trainee..................................             705             470           1,175
        Training--Full Pilots Continuing Education..............          32,197          21,464          53,661
        Cell and Internet Allowance--Pilots.....................          24,312          16,208          40,520
        Cell and Internet Allowance--Applicants.................           2,210           1,474           3,684
        Other...................................................             675             450           1,125
                                                                 -----------------------------------------------
            Total Other Pilotage Costs..........................         708,782         472,520       1,181,302
Pilot Boat and Dispatch Costs:
    Pilot Boat Expense..........................................         297,942         198,628         496,570
    Dispatch Expense............................................          50,100          33,400          83,500
    Payroll Taxes...............................................          19,706          13,137          32,843
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         367,748         245,165         612,913
Administrative Expenses:
    Legal--General Counsel......................................           2,098           1,399           3,497
    Legal--Shared Counsel (K&L Gates)...........................          26,835          17,890          44,725
    CPA Adjustment..............................................          -5,020          -3,347          -8,367
    Office Rent.................................................               0               0               0
    Insurance...................................................          21,593          14,395          35,988
    Employee Benefits...........................................           7,720           5,146          12,866
    Payroll Taxes...............................................           6,665           4,444          11,109
    Other Taxes.................................................          70,942          47,294         118,236
    Travel......................................................           4,091           2,728           6,819
    Depreciation/Auto Leasing/other.............................          94,944          63,296         158,240
    Interest....................................................          35,143          23,428          58,571
    Dues and Subscriptions......................................          19,471          12,981          32,452
    Utilities...................................................          18,479          12,320          30,799
    Salaries....................................................          69,953          46,636         116,589
    Accounting/Professional Fees................................           6,111           4,074          10,185
        Pilot Training..........................................               0               0               0
        Applicant Pilot Training................................               0               0               0
    Other.......................................................          26,338          17,559          43,897
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         405,363         270,243         675,606
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats        1,481,893         987,928       2,469,821
             + Admin)...........................................
Proposed Adjustments (Director):
    Total Director's Adjustments................................               0               0               0
                                                                 -----------------------------------------------
        Total Operating Expenses (OpEx + Adjustments)...........       1,481,893         987,928       2,469,821
----------------------------------------------------------------------------------------------------------------

B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
    Having identified the recognized 2017 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
calculate inflation using the BLS data from the CPI for the Midwest
Region of the United States for the 2018 inflation rate.\16\ Because
the BLS does not provide forecasted inflation data, we use economic
projections from the Federal Reserve for the 2019 and 2020 inflation
modification.\17\ Based on that information, the calculations for Step
2 are as follows:
---------------------------------------------------------------------------

    \16\ The 2018 inflation rate is available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf. Specifically the CPI
is defined as ``All Urban Consumers (CPI-U), All Items, 1982-
4=100''. Downloaded June 12, 2019.
    \17\ The 2019 and 2020 inflation rates are available at https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf. We used the PCE median inflation value
found in table 1, Downloaded June 12, 2019.

                              Table 4--Adjusted Operating Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,481,893        $987,928      $2,469,821
2018 Inflation Modification (@1.9%).............................          28,156          18,771          46,927
2019 Inflation Modification (@1.8%).............................          27,181          18,121          45,302
2020 Inflation Modification (@2%)...............................          30,745          20,496          51,241
Adjusted 2020 Operating Expenses................................       1,567,975       1,045,316       2,613,291
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots
    In accordance with the text in Sec.  404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on data provided by the Saint Lawrence Seaway
Pilots Association. Using these numbers, we estimate that there will be
17 working pilots in 2020 in District One. Furthermore, based on the
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR
41466), we assign a certain number of pilots to designated waters and a
certain number to undesignated waters, as shown in Table 5. These
numbers are used to determine the amount of revenue needed in their
respective areas.

                       Table 5--Authorized Pilots
------------------------------------------------------------------------
                          Item                             District One
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \18\...              17
2020 Authorized pilots (total)..........................              17
Pilots assigned to designated areas.....................              10
Pilots assigned to undesignated areas...................               7
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \18\ For a detailed calculation, refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each
area. As 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 2020, we multiply the 2019 compensation benchmark of $359,887 by
the Median PCE Inflation value of 2.0 percent.\19\ Based on the
projected 2020 inflation estimate, the proposed compensation benchmark
for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \19\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2020 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, which is more than or equal to
the numbers of working pilots provided by the pilot associations. In
accordance with Sec.  404.104(c), we use the revised target individual
compensation level to derive the total pilot compensation by
multiplying the individual target compensation by the estimated number
of working pilots for District One, as shown in Table 6.

                                  Table 6--Target Compensation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085
Number of Pilots................................................              10               7              17
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $3,670,850      $2,569,595      $6,240,445
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund
    Next, we calculate the working capital fund revenues needed for
each area. First, we add together 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, the number is 3.93
percent.\20\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in Table 7.
---------------------------------------------------------------------------

    \20\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018
monthly data. The Coast Guard uses the most recent year of complete
data. Moody's is taken from Moody's Investors Service, which is a
bond credit rating business of Moody's Corporation. Bond ratings are
based on creditworthiness and risk. The rating of ``Aaa'' is the
highest bond rating assigned with the lowest credit risk. See
https://fred.stlouisfed.org/series/AAA. (June 12, 2019)

                           Table 7--Working Capital Fund Calculation for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,567,975      $1,045,316      $2,613,291
Total Target Pilot Compensation (Step 4)........................       3,670,850       2,569,595       6,240,445
                                                                 -----------------------------------------------
    Total 2018 Expenses.........................................       5,238,825       3,614,911       8,853,736
                                                                 -----------------------------------------------
        Working Capital Fund (3.93%)............................         205,886         142,066         347,952
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue
    In this step, we add together all of 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). We show these calculations in Table 8.

                                    Table 8--Revenue Needed for District One
----------------------------------------------------------------------------------------------------------------
                                                                                District One
                                                                 -----------------------------------------------
                                                                    Designated     Undesignated        Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 4)...............      $1,567,975      $1,045,316      $2,613,291
Total Target Pilot Compensation (Step 4, See Table 6)...........       3,670,850       2,569,595       6,240,445
Working Capital Fund (Step 5, See Table 7)......................         205,886         142,066         347,952
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,444,711       3,756,977       9,201,688
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates
    Having determined the revenue needed for each area in the previous
six steps, to develop an hourly rate we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the 10-year average of traffic in District
One, using the total time on task or pilot bridge hours.\21\ Because we
calculate separate figures for designated and undesignated waters,
there are two parts for each calculation. We show these values in Table
9.
---------------------------------------------------------------------------

    \21\ To calculate the time on task for each district, the Coast
Guard uses billing data from the Great Lakes Pilotage Management
System (GLPMS). We pull the data from the system filtering by
district, year, job status (we only include closed jobs), and
flagging code (we only include U.S. jobs). After we have downloaded
the data, we remove any overland transfers from the dataset, if
necessary, and sum the total bridge hours, by area. We then subtract
any non-billable delay hours from the total.

                 Table 9--Time on Task for District One
                                 [Hours]
------------------------------------------------------------------------
                                                   District One
                  Year                   -------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
2018....................................           6,943           8,445
2017....................................           7,605           8,679
2016....................................           5,434           6,217
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
2009....................................           3,511           3,947
                                         -------------------------------
    Average.............................           5,657           6,248
------------------------------------------------------------------------

    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, which is necessary to produce the revenue needed for each
area, assuming the amount of traffic is as expected. We present the
calculations for each area in Table 10.

          Table 10--Initial Rate Calculations for District One
------------------------------------------------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
Needed revenue (Step 6).................      $5,444,711      $3,756,977

Average time on task (hours)............           5,657           6,248
Initial rate............................            $962            $601
------------------------------------------------------------------------

H. Step 8: Calculate Average 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 11 and
12.\22\
---------------------------------------------------------------------------

    \22\ To calculate the number of transits by vessel class, we use
the billing data from GLPMS, filtering by district, year, job status
(we only include closed jobs), and flagging code (we only include
U.S. jobs). We then count the number of jobs by vessel class and
area.

                      Table 11--Average Weighting Factor for District One, 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 1 (2018)..................................................              54               1              54
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 2 (2018)..................................................             559            1.15          642.85
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 3 (2018)..................................................              86             1.3           111.8
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
Class 4 (2018)..................................................             393            1.45          569.85
                                                                 -----------------------------------------------
    Total.......................................................           3,556  ..............           4,528
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.27  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                     Table 12--Average Weighting Factor for District One, 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 1 (2018)..................................................              22               1              22
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 2 (2018)..................................................             352            1.15           404.8
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 3 (2018)..................................................              63             1.3            81.9
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
Class 4 (2018)..................................................             382            1.45           553.9
                                                                 -----------------------------------------------
    Total.......................................................           3,109  ..............           4,028
                                                                 -----------------------------------------------

        Average weighting factor (weighted transits/number of     ..............            1.30  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

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 would
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 13.

                                  Table 13--Revised Base Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                                Revised rate
                                                                                Average     (initial rate/
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor  (Step     weighting
                                                                                8)            factor)
----------------------------------------------------------------------------------------------------------------
District One: Designated........................................            $962            1.27            $757
District One: Undesignated......................................             601            1.30             462
----------------------------------------------------------------------------------------------------------------

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 considers whether the proposed rates incorporate appropriate
compensation for pilots to handle heavy traffic periods and whether
there is a sufficient number of pilots to handle those heavy traffic
periods. The Director also considers whether the proposed rates would
cover operating expenses and infrastructure costs, and takes 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 shown in Table 14.

                                 Table 14--Proposed Final Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                                Final 2019     Proposed 2020
                     Area                                    Name                pilotage rate    pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated.....................  St. Lawrence River.............             $733             $757
District One: Undesignated...................  Lake Ontario...................              493              462
----------------------------------------------------------------------------------------------------------------

District Two

A. Step 1: Recognize Previous Operating Expenses
    Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\23\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
costs are applied to the designated or undesignated area based on where
they were actually incurred. 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 accrued by the pilot associations generally, such as
employee benefits, for example, the cost is divided between the
designated and undesignated areas on a pro rata basis. The recognized
operating expenses for District Two are shown in Table 15.
---------------------------------------------------------------------------

    \23\ These reports are available in the docket for this
rulemaking (see Docket No. USCG-2019-0736).
---------------------------------------------------------------------------

    In addition to the surcharge adjustment and lobbying expenses
described for District One in Section VII A. Step 1: Recognize previous
operating expenses, and the adjustments made by the auditors, as
explained in the auditors' reports (available in the docket where
indicated in the ADDRESSES portion of this document), the Director is
proposing one adjustment to District Two's operating expenses. The
Director proposes an adjustment to disallow $120,350 in ``housing
allowance'' expenses. The Coast Guard agrees with the Internal Revenue
Service (IRS) that an employer-provided housing allowance is a fringe
benefit, and we consider it to be employee compensation. In addition,
we expect those appointed as registered pilots to live in the region in
which they are employed. We expect that if a pilot chooses to live
outside their region of employment, they should have to pay for their
accommodations, and this cost should not be passed on to the shippers
via the rate. Therefore, we propose not including any housing allowance
the district chooses to provide their pilots in the ratemaking
calculation.

                               Table 15--2017 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2017                    --------------------------------
                                                                                Southeast         Total
                                                                     Lake Erie     Shoal to Port
                                                                                Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Subsistence/Travel--Pilots..............................        $116,402        $174,602        $291,004
        Subsistence/Travel--Applicants..........................          52,212          78,317         130,529
        Housing Allowance--Pilots...............................          30,212          45,318          75,530
        Housing Allowance--Applicants...........................          17,928          26,892          44,820
        Winter Meeting Allowance................................           8,280          12,420          20,700
        Telecommunication Allowance.............................          11,662          17,493          29,155
        Payroll taxes--Pilots...................................          57,126          85,688         142,814
        Payroll taxes--Applicants...............................          26,025          39,038          65,063
        License Insurance.......................................           8,326          12,490          20,816
        Training................................................           2,079           3,119           5,198
                                                                 -----------------------------------------------
            Total Other Pilotage Costs..........................         330,252         495,377         825,629
Pilot Boat and Dispatch Costs:
    Pilot Boat Cost.............................................         217,514         326,272         543,786
    CPA Adjustment..............................................         -34,860         -52,291         -87,151
    Dispatch Expense............................................               0               0               0
    Employee Benefits...........................................          78,680         118,020         196,700
    Payroll Taxes...............................................          12,230          18,344          30,574
                                                                 -----------------------------------------------
        Total Pilot and Dispatch Costs..........................         273,564         410,345         683,909
Cost Affiliated Entity Expenses:
        Office Rent.............................................          26,275          39,413          65,688
        CPA Adjustment..........................................          -4,742          -7,113         -11,855
                                                                 -----------------------------------------------
        Total Affiliated Entity Expense.........................          21,533          32,300          53,833
Administrative Expenses:
    Legal--General Counsel......................................           3,505           5,258           8,763
    Legal--Shared Counsel (K&L Gates)...........................          15,604          23,405          39,009
    CPA Adjustment..............................................          -7,086         -10,630         -17,716
    Employee benefits--Admin employees..........................          79,534         119,301         198,835
    Workman's Compensation--Pilots..............................          48,663          72,994         121,657
    Payroll taxes--Admin Employees..............................           6,872          10,308          17,180
    Insurance...................................................          10,844          16,265          27,109
    Other Taxes.................................................          12,065          18,097          30,162
    Admin Travel................................................           6,316           9,475          15,791
    Depreciation/Auto Lease/Other...............................          24,168          36,251          60,419
    Interest....................................................          21,526          32,288          53,814
    CPA Adjustment..............................................         -20,920         -31,379         -52,299
    Dues and subscriptions......................................          10,760          16,140          26,900
    CPA Adjustment..............................................            -581            -871          -1,452
    Utilities...................................................           6,277           9,415          15,692
    Salaries--Admin employees...................................          60,568          90,852         151,420
    Accounting..................................................          14,507          21,761          36,268
    Other.......................................................          13,936          20,904          34,840
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         306,558         459,834         766,392
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          931,907       1,397,856       2,329,763
             + Admin)...........................................
Proposed Adjustments (Director):
    Housing allowance for Pilots................................         -30,212         -45,318         -75,530
    Housing allowance for Applicants............................         -17,928         -26,892         -44,820
                                                                 -----------------------------------------------
        Total Director's Adjustments............................         -48,140         -72,210        -120,350
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         883,767       1,325,646       2,209,413
----------------------------------------------------------------------------------------------------------------

B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
    Having identified the recognized 2017 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
calculate inflation using the BLS data from the CPI for the Midwest
Region of the United States for the 2018 inflation rate. \24\ Because
the BLS does not provide forecasted inflation data, we use economic
projections from the Federal Reserve for the 2019 and 2020

inflation modification.\25\ Based on that information, the calculations
for Step 1 are as follows:
---------------------------------------------------------------------------

    \24\ See footnote 13.
    \25\ See footnote 14.

                             Table 16--Adjusted Operating Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $883,767      $1,325,646      $2,209,413
2018 Inflation Modification (@1.9%).............................          16,792          25,187          41,979
2019 Inflation Modification (@1.8%).............................          16,210          24,315          40,525
2020 Inflation Modification (@2%)...............................          18,335          27,503          45,838
Adjusted 2020 Operating Expenses................................         935,104       1,402,651       2,337,755
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots
    In accordance with the text in Sec.  404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on input from the Lakes Pilots Association. Using
these numbers, we estimate that there will be 15 working pilots in 2020
in District Two. Furthermore, based on the seasonal staffing model
discussed in the 2017 ratemaking (see 82 FR 41466), we assign a certain
number of pilots to designated waters and a certain number to
undesignated waters, as shown in Table 17. These numbers are used to
determine the amount of revenue needed in their respective areas.

                       Table 17--Authorized Pilots
------------------------------------------------------------------------
                          Item                             District  Two
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \26\...              15
2020 Authorized pilots (total)..........................              15
Pilots assigned to designated areas.....................               7
Pilots assigned to undesignated areas...................               8
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \26\ For a detailed calculation refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each
area. As 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 2020, we multiply the 2019 compensation benchmark of $359,887 by
the Median PCE Inflation value of 2.0 percent.\27\ Based on the
projected 2020 inflation estimate, the proposed compensation benchmark
for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \27\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2020 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 15 pilots for District Two, which is more than or equal to
the numbers of working pilots provided by the pilot associations.\28\
---------------------------------------------------------------------------

    \28\ See Table 6 of the Great Lakes Pilotage Rates--2017 Annual
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The
methodology of the staffing model is discussed at length in the
final rule (see pages 41476-41480 for a detailed analysis of the
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised
target individual compensation level to derive the total pilot
compensation by multiplying the individual target compensation by the
estimated number of working pilots for District Two, as shown in Table
18.

                                 Table 18--Target Compensation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085
Number of Pilots................................................               8               7              15
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $2,936,680      $2,569,595      $5,506,275
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund
    Next, we calculate the working capital fund revenues needed for
each area. First, we add together 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, the number is 3.93
percent.\29\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in Table 19.
---------------------------------------------------------------------------

    \29\ See footnote 17.

                           Table 19--Working Capital Fund Calculation for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                              Item                               -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $935,104      $1,402,651      $2,337,755
Total Target Pilot Compensation (Step 4)........................       2,936,680       2,569,595       5,506,275
Total 2018 Expenses.............................................       3,871,784       3,972,246       7,844,030
Working Capital Fund (3.93%)....................................         152,161         156,109         308,270
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue
    In this step, we add together all of 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). We show these calculations in Table 20.

                                    Table 20--Revenue Needed for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 16)..............        $935,104      $1,402,651      $2,337,755
Total Target Pilot Compensation (Step 4, See Table 18)..........       2,936,680       2,569,595       5,506,275
Working Capital Fund (Step 5, See Table 19).....................         152,161         156,109         308,270
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       4,023,945       4,128,355       8,152,300
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates
    Having determined the needed revenue for each area in the previous
six steps, to develop an hourly rate, we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the 10-year average of traffic in District
Two, using the total time on task or pilot bridge hours.\30\ Because we
calculate separate figures for designated and undesignated waters,
there are two parts for each calculation. We show these values in Table
21.
---------------------------------------------------------------------------

    \30\ See footnote 18 for more information.

                 Table 21--Time on Task for District Two
                                 [Hours]
------------------------------------------------------------------------
                  Year                     Undesignated     Designated
------------------------------------------------------------------------
2018....................................           6,150           6,655
2017....................................           5,139           6,074
2016....................................           6,425           5,615
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
2009....................................           3,386           3,017
                                         -------------------------------
    Average.............................           5,322           5,192
------------------------------------------------------------------------

    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, which is necessary 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 Table 22.

          Table 22--Initial Rate Calculations for District Two
------------------------------------------------------------------------
                  Item                     Undesignated     Designated
------------------------------------------------------------------------
Needed revenue (Step 6).................      $4,023,945      $4,128,355
Average time on task (hours)............           5,322           5,192
Initial rate............................            $756            $795
------------------------------------------------------------------------

H. Step 8: Calculate Average 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
calculated the average weighting factor for each area using the data
from each vessel transit from 2014 onward, as shown in Tables 23 and
24.\31\
---------------------------------------------------------------------------

    \31\ See footnote 19 for more information.

                     Table 23--Average Weighting Factor for District Two, 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 1 (2018)..................................................              37               1              37
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 2 (2018)..................................................             123            1.15          141.45
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 3 (2018)..................................................               3             1.3             3.9
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
Class 4 (2018)..................................................             196            1.45          284.20
                                                                 -----------------------------------------------
    Total.......................................................           3,814  ..............           5,023
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

                      Table 24--Average Weighting Factor for District Two, 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 1 (2018)..................................................              42               1              42
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 2 (2018)..................................................             153            1.15          175.95
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 3 (2018)..................................................              14             1.3            18.2
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
Class 4 (2018)..................................................             379            1.45          549.55
                                                                 -----------------------------------------------
    Total.......................................................           2,660  ..............           3,510
                                                                 -----------------------------------------------
        Average weighting factor (weighted transits/number of     ..............            1.32  ..............
         transits)..............................................
----------------------------------------------------------------------------------------------------------------

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 would
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 25.

                                  Table 25--Revised Base Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                Revised rate
                                                                                Average     (initial rate/
                              Area                                 Initial rate      weighting        average
                                                                     (Step 7)      factor (Step      weighting
                                                                                8)            factor)
----------------------------------------------------------------------------------------------------------------
District Two: Designated........................................            $795            1.32            $602
District Two: Undesignated......................................             756            1.32             573
----------------------------------------------------------------------------------------------------------------

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 considers whether the proposed rates incorporate appropriate
compensation for pilots to handle heavy traffic periods, and whether
there is a sufficient number of pilots to handle those heavy traffic
periods. The Director also considers whether the proposed rates would
cover operating expenses and infrastructure costs, and takes 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 shown in Table 26.

                                 Table 26--Proposed Final Rates for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                Final 2019     Proposed 2020
                     Area                                    Name                pilotage rate    pilotage rate
----------------------------------------------------------------------------------------------------------------
District Two: Undesignated...................  Lake Erie......................             $531             $573
District Two: Designated.....................  Navigable waters from Southeast              603              602
                                                Shoal to Port Huron, MI.
----------------------------------------------------------------------------------------------------------------

District Three

A. Step 1: Recognize Previous Operating Expenses
    Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). To do so, we begin by reviewing the independent accountant's
financial reports for each association's 2017 expenses and
revenues.\32\ For accounting purposes, the financial reports divide
expenses into designated and undesignated areas. In certain instances,
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 accrued by the pilot associations generally, for
example, employee benefits, the cost is divided between the designated
and undesignated areas on a pro rata basis. The recognized operating
expenses for District Three is laid out in Table 27.
---------------------------------------------------------------------------

    \32\ These reports are available in the docket for this
rulemaking (see Docket #USCG-2019-0736).
---------------------------------------------------------------------------

    In addition to the surcharge adjustment and lobbying expenses
described for District One in Section VII A. Step 1: Recognize previous
operating expenses and the adjustments made by the auditors, as
explained in the auditors' reports, which are available in the docket
for this rulemaking where indicated in the ADDRESSES portion of this
document, the Director is proposing one adjustment to District Three's
operating expenses. The Director proposes an adjustment to disallow
$32,800 in ``housing allowance'' expenses. The Coast Guard agrees with
the IRS that an employer-provided housing allowance is a fringe
benefit, and we consider it to be employee compensation. In addition,
we expect those appointed as registered pilots pilot to live in the
region in which they are employed. We expect that if a pilot chooses to
live outside their region of employment, they should have to pay for
their accommodations, and this cost should not be passed on to the
shippers via the rate. Therefore, we propose not including any housing
allowance the district chooses to provide their pilots in the
ratemaking calculation.

                              Table 27--2017 Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                           District Three
                                                  --------------------------------------------------------------
                                                    Undesignated     Designated    Undesignated \34\
            Reported expenses for 2017              \33\ (Area 6)     (Area 7)          (Area 8)
                                                  ---------------------------------------------------    Total
                                                     Lakes Huron     St. Mary's
                                                    and Michigan        River        Lake Superior
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
    Other Pilotage Costs:
        Subsistence/Travel--Pilot................        $237,036         $93,461            $92,458    $422,955
        CPA Adjustment...........................         -11,178          -4,407             -4,360     -19,945
Subsistence/Travel--Applicant....................          90,123          35,535             35,154     160,812
Payroll Taxes--Pilots............................         124,088          48,927             48,402     221,417

Payroll Taxes--Applicants........................          25,553          10,075              9,967      45,595
License Insurance--Pilots........................          15,631           6,163              6,097      27,891
Training--Pilots.................................          25,830          10,185             10,075      46,090
Training--Applicants.............................          16,325           6,437              6,368      29,130
Housing Allowance................................          18,382           7,248              7,170      32,800
Winter Meeting...................................          14,795           5,834              5,771      26,400
Cell Phone Allowance.............................          26,186          10,325             10,214      46,725
Other Pilotage Costs.............................          49,252          19,420             19,211      87,883
CPA Adjustment...................................          -3,699          -1,446             -1,431      -6,576
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Other Pilotage Costs...........         628,324         247,757            245,096   1,121,177
Pilot Boat and Dispatch Costs:
    Pilot boat costs.............................         397,610         156,774            155,092     709,476
    CPA Adjustment...............................         -27,756         -10,944            -10,826     -49,526
    Dispatch costs...............................          99,705          39,313             38,891     177,909
    Payroll taxes................................           9,351           3,687              3,648      16,686
    Dispatch Employee Benefits...................           3,927           1,548              1,532       7,007
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        Total Pilot and Dispatch Costs...........         482,837         190,378            188,337     861,552
Administrative Expenses:
    Legal--General Counsel.......................          32,149          12,676             12,540      57,365
    Legal--Shared Counsel (K&L Gates)............          18,730           7,385              7,306      33,421
    CPA Adjustment...............................          -5,595          -2,206             -2,183      -9,984
    Office Rent..................................           4,733           1,866              1,846       8,445
    Insurance....................................           3,715           1,465              1,449       6,629
    Employee benefits............................          76,093          30,003             29,681     135,777
    Workers Compensation.........................           1,513             597                590       2,700
    Payroll Taxes................................           6,408           2,527              2,500      11,435
    Other Taxes..................................           1,034             408                403       1,845
    Admin Travel.................................             676             267                264       1,207
    Depreciation/Auto Leasing/Other..............          50,959          20,093             19,877      90,929
    Interest.....................................           2,262             892                882       4,036
    APA Dues.....................................          20,544           8,100              8,013      36,657
    Utilities....................................           5,335           2,103              2,081       9,519
    Admin Salaries...............................          64,004          25,236             24,966     114,206
    Accounting/Professional Fees.................          34,390          13,560             13,414      61,364
    Other........................................           6,170           2,433              2,407      11,010
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        Total Administrative Expenses............         323,120         127,405            126,036     576,561
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (Other Costs       1,434,281         565,540            559,469   2,559,290
             + Pilot Boats + Admin)..............
Proposed Adjustments (Director):
    Housing Allowance............................         -18,382          -7,248             -7,170     -32,800
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        Total Director's Adjustments.............         -18,382          -7,248             -7,170     -32,800
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
            Total Operating Expenses (OpEx +            1,415,899         558,292            552,299   2,526,490
             Adjustments)........................
----------------------------------------------------------------------------------------------------------------

B. Step 2: Project Operating Expenses, Adjusting for Inflation or
Deflation
    Having identified the recognized 2017 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
calculate inflation using the BLS data from the CPI for the Midwest
Region of the United States for the 2018 inflation rate.\35\ Because
the BLS does not provide forecasted inflation data, we use economic
projections from the Federal Reserve for the 2019 and 2020 inflation
modification.\36\ Based on that information, the calculations for Step
1 are as follows:
---------------------------------------------------------------------------

    \33\ The undesignated areas in District Three (areas 6 and 8)
are treated separately in Table 27. In Table 28 and subsequent
tables, both undesignated areas are combined and analyzed as a
single undesignated area.
    \34\ See footnote 31.
    \35\ See footnote 13.
    \36\ See footnote 14.

                            Table 28--Adjusted Operating Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,968,198        $558,292      $2,526,490
2018 Inflation Modification (@1.9%).............................          37,396          10,608          48,004
2019 Inflation Modification (@1.8%).............................          36,101          10,240          46,341
2020 Inflation Modification (@2%)...............................          40,834          11,583          52,417
Adjusted 2020 Operating Expenses................................       2,082,529         590,723       2,673,252
----------------------------------------------------------------------------------------------------------------

C. Step 3: Estimate Number of Working Pilots
    In accordance with the text in Sec.  404.103, we estimate the
number of working pilots in each district. We determine the number of
working pilots based on input from the Western Great Lakes Pilots
Association. Using these number, we estimate that there will be 20
working pilots in 2020 in District Three. Furthermore, based on the
seasonal staffing model discussed in the 2017 ratemaking (see 82 FR
41466), we assign a certain number of pilots to designated waters and a
certain number to undesignated waters, as shown in Table 29. These
numbers are used to determine the amount of revenue needed in their
respective areas.

                       Table 29--Authorized Pilots
------------------------------------------------------------------------
                                                          District Three
------------------------------------------------------------------------
Maximum number of pilots (per Sec.   401.220(a)) \37\...              22
2020 Authorized pilots (total)..........................              20
Pilots assigned to designated areas.....................               4
Pilots assigned to undesignated areas...................              16
------------------------------------------------------------------------

D. Step 4: Determine Target Pilot Compensation Benchmark
---------------------------------------------------------------------------

    \37\ For a detailed calculation refer to the Great Lakes
Pilotage Rates--2017 Annual Review final rule, which contains the
staffing model. See 82 FR 41466, table 6 at 41480 (August 31, 2017).
---------------------------------------------------------------------------

    In this step, we determine the total pilot compensation for each
area. As 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 2020, we multiply the 2019 compensation benchmark of $359,887 by
the Median PCE Inflation value of 2.0 percent.\38\ Based on the
projected 2020 inflation estimate, the proposed compensation benchmark
for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \38\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we certify that the number of pilots estimated for 2020 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 for District Three is 22 pilots,\39\ which is more than or equal
to the numbers of working pilots provided by the pilot associations.
---------------------------------------------------------------------------

    \39\ See Table 6 of the Great Lakes Pilotage Rates--2017 Annual
Review final rule, 82 FR 41466 at 41480 (August 31, 2017). The
methodology of the staffing model is discussed at length in the
final rule (see pages 41476-41480 for a detailed analysis of the
calculations).
---------------------------------------------------------------------------

    Thus, in accordance with Sec.  404.104(c), we use the revised
target individual compensation level to derive the total pilot
compensation by multiplying the individual target compensation by the
estimated number of working pilots for District Three, as shown in
Table 30.

                                Table 30--Target Compensation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $367,085        $367,085        $367,085
Number of Pilots................................................              16               4              20
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $5,873,360      $1,468,340      $7,341,700
----------------------------------------------------------------------------------------------------------------

E. Step 5: Project Working Capital Fund
    Next, we calculate the working capital fund revenues needed for
each area. First, we add together 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, the number is 3.93
percent.\40\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in Table 31.
---------------------------------------------------------------------------

    \40\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018
monthly data. The Coast Guard uses the most recent complete year of
data. See https://fred.stlouisfed.org/series/AAA. (June 12, 2019)

                          Table 31--Working Capital Fund Calculation for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $2,082,529        $590,723      $2,673,252
Total Target Pilot Compensation (Step 4)........................       5,873,360       1,468,340       7,341,700
Total 2018 Expenses.............................................       7,955,889       2,059,063      10,014,952
Working Capital Fund (3.93%)....................................         312,666          80,921         393,587
----------------------------------------------------------------------------------------------------------------

F. Step 6: Project Needed Revenue
    In this step, we add together all of 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 is shown in Table 32.

                                   Table 32--Revenue Needed for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2, See Table 28)..............      $2,082,529        $590,723      $2,673,252
Total Target Pilot Compensation (Step 4, See Table 30)..........       5,873,360       1,468,340       7,341,700
Working Capital Fund (Step 5, See Table 31).....................         312,666          80,921         393,587
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       8,268,555       2,139,984      10,408,539
----------------------------------------------------------------------------------------------------------------

G. Step 7: Calculate Initial Base Rates
    Having determined the revenue needed for each area in the previous
six steps, to develop an hourly rate, we divide that number by the
expected number of hours of traffic. Step 7 is a two-part process. In
the first part, we calculate the 10-year average of traffic in District
Three, using the total time on task or pilot bridge hours.\41\ Because
we calculate separate figures for designated and undesignated waters,
there are two parts for each calculation. We show these values in Table
33.
---------------------------------------------------------------------------

    \41\ See footnote 18 for more information.

                Table 33--Time on Task for District Three
                                 [Hours]
------------------------------------------------------------------------
                                                  District Three
                  Year                   -------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
2018....................................          19,967           3,455
2017....................................          20,955           2,997
2016....................................          23,421           2,769
2015....................................          22,824           2,696
2014....................................          25,833           3,835
2013....................................          17,115           2,631
2012....................................          15,906           2,163
2011....................................          16,012           1,678
2010....................................          20,211           2,461
2009....................................          12,520           1,820
                                         -------------------------------
    Average.............................          19,476           2,651
------------------------------------------------------------------------

    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, which is necessary 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 Table 34.

         Table 34--Initial Rate Calculations for District Three
------------------------------------------------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue needed (Step 6).................      $8,268,555      $2,139,984
Average time on task (hours)............          19,476           2,651
Initial rate............................            $425            $807
------------------------------------------------------------------------

H. Step 8: Calculate Average 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 35 and
36.\42\
---------------------------------------------------------------------------

    \42\ See footnote 19 for more information

                    Table 35--Average Weighting Factor for District Three, 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 1 (2018)..................................................             103               1             103
Class 2 (2014)..................................................             274            1.15           315.1
Class 2 (2015)..................................................             207            1.15          238.05