[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Rules and Regulations]
[Pages 20088-20120]
[FR Doc No: 2020-06968]

Vol. 85

Thursday,

No. 69

April 9, 2020

Part III

 Department of Homeland Security

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

 Coast Guard

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

46 CFR Parts 401, 403 and 404

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

Federal Register / Vol. 85 , No. 69 / Thursday, April 9, 2020 / Rules
and Regulations

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

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: Final rule.

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

SUMMARY: In accordance with the Great Lakes Pilotage Act of 1960, the
Coast Guard is establishing new base pilotage rates for the 2020
shipping season. This final rule will adjust the pilotage rates to
account for changes in district operating expenses, an increase in the
number of pilots, and anticipated inflation. The Coast Guard estimates
that this final rule will result in a 1 percent net increase in
pilotage costs, compared to the 2019 season. In addition, the Coast
Guard is clarifying the rules related to the working capital fund.

DATES: This final rule is effective May 11, 2020.

ADDRESSES: To view documents mentioned in this preamble as being
available in the docket, go to https://www.regulations.gov, type USCG-
2019-0736 in the ``SEARCH'' box and click ``SEARCH.'' Click on Open
Docket Folder on the line associated with this rule.

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. Abbreviations
II. Executive Summary
III. Basis and Purpose
IV. Background
V. Discussion of Methodological and Other Changes
VI. Discussion of Comments
VII. Discussion of Rate Adjustments
    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 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 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. Abbreviations

AMOU American Maritime Officers Union
APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
ECI Employment Cost Index
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
GAO Government Accountability Office
GLPA Great Lakes Pilotage Authority (Canadian)
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Pilotage Management System
GLPO U.S. Coast Guard Great Lakes Pilotage Office
IRS Internal Revenue Service
JTR Joint Travel Rates
LPA Lakes Pilots Association
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
REC Record of Environmental Consideration
RFA Regulatory Flexibility Act
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
SLSPA Saint Lawrence Seaway Pilots' Association
U.S.C. United States Code
USD United States dollars
WLPA Western Great Lakes Pilot Association

II. Executive Summary

    Pursuant to the Great Lakes Pilotage Act of 1960 (``the Act''),\1\
the Coast Guard regulates pilotage for oceangoing vessels on the Great
Lakes 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 in which
of the specific six areas pilotage service is provided), are paid by
shippers to three U.S. pilot associations (each responsible for one of
the three Districts). 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.
---------------------------------------------------------------------------

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

    To compute the rate for pilotage services, 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 (operating
expenses, an increase in the number of pilots, and anticipated
inflation), 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 section IV of the preamble to this final
rule.
    In this final rule, as part of our annual review, we are
establishing new pilotage rates for 2020 based on the existing
ratemaking methodology. The result is an increase in rates for five
areas and a decrease in the rate for the one remaining area. These
changes are due

to a combination of four factors: (1) An increase in 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. In addition, in this final rule, the Coast
Guard made two adjustments to the operating expenses based on public
comment, which increased the final rates from those published in the
notice of proposed rulemaking (NPRM). In the final rule we adjusted the
operating expenses to include the 3 percent shared council fee which we
incorrectly deducted in the NPRM; and added a surcharge adjustment for
District 2 and District 3 to account for the differences between their
accrued training expenses and the amount of money they collected via
the surcharge in 2017. Based on the ratemaking model discussed in this
final rule, we are finalizing the rates shown in table 1.
---------------------------------------------------------------------------

    \2\ Operating expenses decreased for the District One:
Undesignated area, the District Two: Undesignated area, and the
District Three: Undesignated Lake Superior area. Operating expenses
increased for the District One: Designated area, the District Two:
Designated area, the District Three: Designated area, and the
District Three: Undesignated Lakes Huron and Michigan area.

                           Table 1--Current and New Pilotage Rates on the Great Lakes
----------------------------------------------------------------------------------------------------------------
                                                                   Final 2019     Proposed 2020     Final 2020
                 Area                            Name             pilotage rate   pilotage rate    pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated.............  St. Lawrence River......            $733             $757            $758
District One: Undesignated...........  Lake Ontario............             493              462             463
District Two: Designated.............  Navigable waters from                603              602             618
                                        Southeast Shoal to Port
                                        Huron, MI.
District Two: Undesignated...........  Lake Erie...............             531              573             586
District Three: Designated...........  St. Mary's River........             594              621             632
District Three: Undesignated.........  Lakes Huron, Michigan,               306              327             337
                                        and Superior.
----------------------------------------------------------------------------------------------------------------

    This final rule will impact 52 U.S. Great Lakes pilots, the 3 pilot
associations, and the owners and operators of an average of 266
oceangoing vessels that transit the Great Lakes annually. This final
rule is not economically significant under Executive Order 12866 and
will 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 increase of $279,845, which is a 1 percent net increase
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 final rule.

III. 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, no 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\ Ibid.
    \7\ Ibid.
    \8\ Department of Homeland Security (DHS) Delegation No. 0170.1,
para. II (92.f).
---------------------------------------------------------------------------

    This final rule establishes new pilotage rates for the 2020
shipping season. The Coast Guard believes that the new rates will
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.

IV. 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 and the St. Lawrence Seaway.
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. 25 FR 13681 (December 24, 1960).
    \12\ 46 U.S.C. 9302(a)(1)(B).
    \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, see 46 CFR 401.405.

                            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
                                                Undesignated...........               8   Michigan.
                                                                                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 or partners, and pilot
compensation. Through a public rulemaking procedure, and with input
from Great Lakes Pilots Advisory Committee (GLPAC), the Coast Guard
developed a 10-step ratemaking methodology, based on a historic 10-year
average of actual traffic, to derive a pilotage rate that covers these
expenses. 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, as estimated by
using historic pilotage work hours. 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 will be maintained and that pilots
will receive adequate compensation and work a reasonable number of
hours, with adequate rest between assignments to ensure retention of
highly trained personnel.
    Over the past 4 years, the Coast Guard made several 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 better account for the
additional revenue produced by the application of weighting factors
(discussed in detail in Steps 7 through 9 below, in this section of the
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, 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 when the Coast Guard
receives audited numbers, this number is 3 years behind the projected
year of expenses. In calculating the 2020 rates in this proposal, the
Coast Guard is beginning with the audited expenses from the 2017
shipping season.
    While each pilotage association operates in an entire district, the
Coast Guard determines costs by area. Thus, with regard to operating
expenses, we allocate certain operating expenses to undesignated areas,
and certain operating 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 forecast 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.
    In the past, as explained more fully below, the Coast Guard used
two different benchmarks to calculate target pilot compensation: AMOU
contract data and Canadian pilot compensation. The Coast Guard does not
believe either benchmark is appropriate at this time. Instead, the
Coast Guard has determined that the target compensation used in the
2019 ratemaking is an appropriate level of compensation for Great Lakes
pilots because it serves the public interest and achieves the Coast
Guard's goals of safety through rate and compensation stability while
also promoting recruitment and retention of qualified United States
registered pilots.
    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 (81 FR
11907, March 7, 2016) 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.
American Great Lakes Ports Association v. Zukunft, 296 F.Supp 3d 27,
46-48 (D.D.C. 2017). 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.
    For the 2019 ratemaking, the Coast Guard did not have access to
current AMOU contract data and our research did not yield a better
compensation benchmark; therefore, target pilot compensation was
determined by taking the 2018 number and adjusting it for inflation.
    For the 2020 ratemaking, the situation with regard to compensation
benchmarks has not changed. The Coast Guard still lacks access to
current AMOU contract data and, as discussed in prior rulemakings, the
Coast Guard does not believe that other American or Canadian pilot
compensation data is appropriate to use as a benchmark at this time.
The Coast Guard, however, has determined that based on its experience
over the past two ratemakings that the level of target pilot
compensation for those years provides an appropriate level of
compensation for American Great Lakes pilots. The Coast Guard
therefore, will not, at this time, seek alternative benchmarks for
target compensation and for 2020 and future ratemakings will instead
simply adjust the amount of target pilot compensation for inflation.
This benchmark successfully achieves 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 uses 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 future
unidentified expenses. For example, these expenses can be unforeseen
facility repairs, infrastructure purchases, technology procurements, or
training. 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
using Moody's Seasoned Aaa Corporate Bond Yield data. 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
average hours of traffic over 10 years for each area. Next, the revenue
needed in each area (calculated in Step 6) is divided by the average
hours of traffic over 10 years 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 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 in 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 expenses. 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,
transportation, and per diem. We implemented these surcharges for a few
years 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 facilitate the
training of these replacements in last year's final rule. 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. Therefore, in this year's final rule we are not
imposing surcharges.

V. Discussion of Methodological and Other Changes

    For 2020, the Coast Guard implemented no new methodological changes
to the ratemaking model. We believe that the methodology laid out in
the 2019 Annual Review (84 FR 20551) will produce rates for the 2020
shipping season that will ensure safe, efficient, and reliable pilotage
services are available on the Great Lakes in order to facilitate
maritime commerce.
    In previous years and in this current rulemaking, several
commenters have raised issues regarding the working capital fund.\15\
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 making changes in this
final rule to codify the procedures related to the use of funds and
accounting requirements related to the working capital fund.
---------------------------------------------------------------------------

    \15\ See the dockets for the 2019 ratemaking (https://www.regulations.gov/docket?D=USCG-2018-0665) and the 2018 ratemaking
(https://www.regulations.gov/docket?D=USCG-2017-0903) for more
information.
---------------------------------------------------------------------------

    In this final rule, the Coast Guard is finalizing two changes to
the regulatory text related to the working capital fund, formerly
called ``return on investment.'' In 46 CFR 404.106, we are changing the
words ``return on investment'' to ``working capital fund,'' as that is
the current name for that fund. 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,'' but the 2017 final rule did not change a
reference to ``return on investment'' in 46 CFR 404.106. This change
corrects that oversight, so both 46 CFR 404.105 and 46 CFR 404.106 will
use consistent terminology.
    In addition, the Coast Guard is incorporating into regulations the
industry practice currently followed by the pilots associations
regarding these funds. We are adding 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 final
rule, pilot associations can only apply the funds in the working
capital fund account to capital projects, infrastructure improvements,
infrastructure maintenance, training, 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.

VI. Discussion of Comments

    In response to the October 30, 2019 NPRM (84 FR 58099), the Coast
Guard received six comment letters as well as a duplicate comment
submission. These included one comment from the law firm K&L Gates
(hereinafter ``District Lawyers''), which represents the interests of
the three Great Lake pilot associations; a comment from the Shipping
Federation of Canada, the American Great Lakes Ports Association, and
the United States Great Lakes Shipping Association (hereinafter ``the
User's Coalition'' or ``the Coalition''); a comment from the president
of the St. Lawrence Seaway Pilots' Association (hereinafter ``SLSPA'');
a comment from the president of the Lakes Pilots Association
(hereinafter ``LPA''); a comment from the president of the Western
Great Lakes Pilot Association (hereinafter ``WLPA''); and a comment
made by Captain John Swartout, a pilot working for District Three. As
each of these commenters touched on numerous issues, for each response
below we note which commenters raised the specific points addressed. In
situations where multiple commenters raised similar issues, we attempt
to provide one response to those issues.

A. Operating Expenses

    The first step of the ratemaking process outlines the criteria for
evaluating operating expenses. Each expense must be necessary for
providing pilotage service and reasonable in amount. The allowable
operating expenses must comply with both criteria to recoup any costs
for a given pilotage association. To do so, pilotage associations
submit financial statements to third party auditors contracted by the
Coast Guard. The third party auditors create financial reports for the
Coast Guard to determine the allowable operating expenses. We use these
expenses to establish pilotage rates. We received several comments,
discussed below, from pilot associations and persons representing such
interests requesting changes to these adjustments.
1. Legal Fees
    Commenters from pilots' associations and shipping and port
interests addressed legal fees and, in particular, the 2016 rulemaking
concerning the exclusion of legal expenses for suits against the U.S.
government or its agents, and the subsequent case contesting that
exclusion.

    Two commenters contended that prior years' legal fees were
improperly denied, and referred to St. Lawrence Seaway Pilots
Association v. U. S. Coast Guard, 357 F.Supp 3d 30 (D.D.C. 2019). In
that case, the court held that the Coast Guard improperly promulgated
46 CFR 404.2(b)(6) in the 2016 rulemaking that excluded any and all
expenses associated with legal action against the U.S. government or
its agents.
    The Coast Guard disagrees with the commenters. In that case, the
court went to great lengths to discuss the remedy for the pilots
associations, and noted concerns about rates that were already paid.
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp
3d 30, 38 (D.D.C. 2019), citing Am. Great Lakes Ports Ass'n v. Zukunft,
301 F.Supp.3d 99, 103-04 (D.D.C. 2018) (noting disruptive effect of
upending already-paid pilotage rates) and St. Lawrence Seaway Pilots
Ass'n, 85 F.Supp.3d, 197, 208 (D.D.C. 2015) (noting remedial difficulty
of ordering pilots' entitlement to future payments and recognizing that
remedial decision regarding 2014 rates likely impacts the propriety and
validity of the 2015 rates).
    The court held the following: ``At the hearing, Plaintiffs
clarified they seek a vacatur of 46 CFR 404.2(b)(6) to prevent the
Coast Guard from excluding legal fees in future rate settings, and do
not seek to disturb any past rates. See Hr'g Tr. 12:7-13:3. With the
benefit of this clarification, the remedial decision is simple: Vacatur
is the presumptive remedy for arbitrary and capricious agency action,
see 5 U.S.C. 706(2) (A court shall ``set aside agency action . . .
found to be . . . arbitrary [and] capricious''), and there is no risk
of disruption. The Court will therefore vacate 46 CFR 404.2(b)(6).''
St. Lawrence Seaway Pilots Association v. U. S. Coast Guard, 357 F.Supp
3d 30, 38 (D.D.C. 2019).
    The court's holding was prospective, not retroactive, based upon
the clarification of the Pilots Association at the hearing on the
matter. The regulation has been removed from the CFR, and the Coast
Guard has not denied any legal fees based on that vacated rule since
the court's decision was handed down. The Coast Guard will not disturb
past rate setting, in accordance with the court's ruling.
    One commenter stated that the Coast Guard had a meritorious
position regarding the denial of legal fees against the U.S. government
and suggested that a clarification of legal fees be included in the
final rule. The Coast Guard presently takes no position on this
comment. That part of the 2016 rule with respect to 46 CFR 404.2(b)(6)
was vacated because it was a change in policy that was not effected in
accordance with the Administrative Procedure Act's notice and comment
requirements and the court found the Coast Guard's actions were
arbitrary and capricious. The court in the 2019 case stated, ``The
Court takes no position on the relative wisdom of the policy. A rule
excluding legal fees incurred against the U.S. government may well be a
rational policy. But the process by which the Coast Guard enacted it
was arbitrary and capricious.'' St. Lawrence Seaway Pilots Association
v. U. S. Coast Guard, 357 F.Supp 3d 30, 38 (D.D.C. 2019). The Coast
Guard did not include any language regarding legal fees in the final
rule as there was nothing in the NPRM proposing any change. Any change
in policy regarding future legal fees will be accomplished in
accordance with the legally required notice and comment procedures in
order for all parties to be heard on the matter.
2. Housing Allowances
    There were two comments regarding the housing allowance not being
considered an operating expense. The first commenter stated that
``[f]or the CG to determine that a mariner must live in the region
where they work is unreasonable'' \16\, and that specifically in
District Three there is a ``tour de role'' dispatch system to prevent a
pilot from working all over the district. The same commenter stated
that, in not allowing a housing allowance, ``we [the pilot association]
would be very severely handicapped on recruiting new Pilots into our
District. Forcing a Pilot to move his family will undoubtedly cause
some potential applicants to decide not to pursue a career in our
District.'' \17\ The Coast Guard disagrees with the first statement.
Determining where to live is an individual's right and lifestyle
decision. The Western Great Lakes Pilots association, the source of
this comment, has multiple tours-de-role and holds meetings before the
season. During these meetings, each registered pilot determines which
port to work out of for the season. We expect the registered pilot to
pay for housing during the season, which is consistent with Internal
Revenue Service (IRS) regulations as discussed below. For example, if a
registered pilot chooses to live in Virginia but elects to be
dispatched out of Chicago for the season, the registered pilot will not
be reimbursed for any housing in Chicago during the season because this
dwelling is not a necessary expense for the shippers to reimburse.
However, if the pilot is dispatched out of Port Huron, reasonable
travel costs from Chicago and hotel bills in Port Huron may be
considered for inclusion in the operating expenses. The shippers do not
have to fund lifestyle choices. Additionally, the commenter did not
provide any evidence or data to support the claim that not allowing a
housing allowance will cause a recruitment and retention crisis.
---------------------------------------------------------------------------

    \16\ USCG-2019-0736-0002.
    \17\ Id.
---------------------------------------------------------------------------

    The same commenter also stated that the housing allowance provides
a great savings to the industry and should be continued. Another
commenter echoed this comment. ``In the interests of efficient
pilotage, Districts 2 and 3 have found that it is often more cost
effective for pilots to lease an apartment or other dwelling rather
than paying for a hotel.'' \18\ The Coast Guard neither agrees nor
disagrees with this comment, as the commenter provided no evidence to
justify this claim. We suggest the commenter address this issue at a
future GLPAC meeting and/or work with the stakeholders who pay for
pilotage service to submit a joint letter for further consideration. In
general, hotel bills should be 50 miles outside the pilot's tour-de-
role port for the season in order to be considered reasonable and
necessary and implemented into the rate. This 50-mile radius is per the
IRS.\19\
---------------------------------------------------------------------------

    \18\ USCG-2019-0736-0005.
    \19\ IRS Tax Topics, Topic No. 511 Business Travel Expenses,
https://www.irs.gov/taxtopics/tc511. (last visited 2/28/2020
Generally, your tax home is the entire city or general area where
your main place of business or work is located, regardless of where
you maintain your family home. For example, you live with your
family in Chicago but work in Milwaukee where you stay in a hotel
and eat in restaurants. You return to Chicago every weekend. You may
not deduct any of your travel, meals or lodging in Milwaukee because
that's your tax home. Your travel on weekends to your family home in
Chicago isn't for your work, so these expenses are also not
deductible. If you regularly work in more than one place, your tax
home is the general area where your main place of business or work
is located.
---------------------------------------------------------------------------

B. Target Compensation

    We received several comments on the Coast Guard's use of the
Federal Reserve's projected Personal Consumption Expenditure (PCE) data
in Step 4 of the ratemaking, as opposed to using historic Bureau of
Labor Statics (BLS) Employment Cost Index (ECI) data. In Step 4, we
adjust the existing target pilot compensation to account for inflation,
following the procedures outlined in Sec.  404.104(b), which require
that PCE data only be used when ECI data is not available. In this
ratemaking, we are inflating the 2019 pilot compensation to 2020
dollars, which

requires forecasted inflation data for 2020. The BLS ECI only provides
historic data. Consequently, no 2020 ECI data was available at the time
we conducted the analysis to support this rulemaking, and no 2020 ECI
data will be available until April 30th 2020, which is after the 2020
shipping season begins. Therefore, we used the PCE data, in accordance
with Sec.  404.104(b), as the PCE provides estimates of inflation for
2020. As noted by commenters, for the past several years, the PCE
inflation value has been about 1 percent lower than the ECI value,
resulting in a lower target compensation value than if we had used the
ECI value. Two commenters suggested that Coast Guard should use the ECI
to readjust previous target compensation values to account for the
difference between the predicted PCE value and the actual ECI value
that published. The commenters raised several concerns with the use of
the PCE, which are discussed below.
    Several commenters noted that, while a full calendar year worth of
ECI data was not available for 2019, at the time the NPRM was
published, some 2019 data was available, and they said this data should
have been used in the 2020 ratemaking.20 21 22 However, the
commenters are missuderstanding the reason the Coast Guard uses the PCE
data in the ratemaking instead of the most recent ECI data. The reason
we did not use the ECI data is not because of a lack of a full year's
worth of 2019 inflation data, but rather because the ECI did not have
any 2020 inflation data available.
---------------------------------------------------------------------------

    \20\ USCG-2019-0736-0003 p. 3.
    \21\ USCG-2019-0736-0002 p. 5.
    \22\ USCG-2019-0736-0002 p. 5.
---------------------------------------------------------------------------

    Another commenter stated that, while the PCE index is published
more frequently than the ECI, this does not make it a better inflation
index. The commenter also stated that data which ``measure the wrong
metrics'' should not be used just because it is newer.\23\ The Coast
Guard disagrees with both points made by the commenter. We are using
the PCE because it provides an estimate of forecasted 2020 inflation
data. Using the most recent ECI data does not address the issue that
the ECI does not provide an estimate of forecasted inflation, and as
part of the ratemaking process under steps 2 and 4, the Coast Guard
requires an estimate of future inflation. Again, we are not using the
PCE because it is published more frequently than the ECI, but, rather,
because it provides necessary information that the ECI does not.
---------------------------------------------------------------------------

    \23\ USCG-2019-0736-0006, p.2.
---------------------------------------------------------------------------

    Two commenters stated that they believe the ECI is more appropriate
to use to inflate pilot compensation than the PCE, because ``[the ECI]
is based on wage and benefit costs, rather than general goods and
prices,'' \24\ and noted that the Coast Guard has previously
acknowledged this point in the 2018 ratemaking rule (83 FR 26162).\25\
\26\ The Coast Guard agrees that the ECI is a better index to use to
inflate pilot compensation, which is why Sec.  404.104(b) requires that
PCE data be used only when ECI data is unavailable. It is also
important to note that the statement in the 2018 ratemaking discussed
differences between the ECI and the CPI,\27\ not the ECI and the PCE,
as stated by the commenter. The statement quoted by the commenter does
not accurately reflect the components of the PCE which differ from the
CPI, and include the cost of employer provided health insurance.\28\
---------------------------------------------------------------------------

    \24\ USCG-2019-0736-0005, p. 3.
    \25\ USCG-2019-0736-0005, p. 3.
    \26\ USCG-2019-0736-0003, p. 2.
    \27\ As stated in the 2018 Final Ratemaking (83 FR 26162 at
26171), ``[The Coast Guard] agree[s] with the commenters that, for
the purposes of inflating compensation costs, the ECI provides a
better gauge of compensation inflation than the CPI does''.
    \28\ https://www.bls.gov/opub/btn/archive/differences-between-the-consumer-price-index-and-the-personal-consumption-expenditures-price-index.pdf, page 2.
---------------------------------------------------------------------------

    One commenter stated that they believe the use of the ``2019 ECI
data to project 2020 [pilot compensation data] would be more accurate
than using improperly low PCE data.'' The commenter provided no
reasoning for why they believe historic ECI data is a better predictor
of future inflation than the forecasted PCE data, nor did they provide
any reasoning as to why only one year of historic data should be used.
The forecasted PCE inflation data is generated by the Federal Reserve,
which is responsible for setting monetary policy in the United States,
and thus influencing inflation. The Federal Reserve bases these
estimates on predictions of economic growth, the unemployment rate,
other economic data, and the future policy path the Federal Reserve
expects to take to meet its goals of maximizing employment and setting
stable prices. The PCE is a reflection of the government's best
prediction of what will happen, whereas the ECI is a reflection of what
has already happened.
    As stated above, the Coast Guard is using the best available data,
the PCE data to inflate target pilot compensation, as required by Sec.
404.104(b), and is not changing how target pilot compensation is
calculated for this final rule. However, we will review this issue, and
if we determine that any changes are needed, we will propose them as
part of a future rulemaking.
1. Inflation Calculation
    One commenter stated they believe pilot compensation is
significantly below the market rate when compared with the salaries of
other pilots across the United States. The commenter also discussed a
multi-year compensation study the Coast Guard mentioned in the 2018
rule, and that the 2020 NPRM makes no mention of this study. The
commenter stated that, as this study continues, the pilots are
continually being undercompensated.
    While the Coast Guard commissioned a study to analyze methodologies
to determine pilot compensation, we decided not to finalize this study.
The compensation study was a backup in the event that we failed to
identify a compensation standard that remedied the recruitment and
retention issues identified in previous rulemakings, and discussed
during previous GLPAC meetings. The current compensation benchmark
addresses our goals of promoting the recruitment and retention of
highly qualified mariners and experienced U.S. registered pilots.
Therefore, completion of this compensation study is no longer
necessary.
2. Staffing Model
    The LPA, District Lawyers, and the SLSPA made comments regarding
the staffing model and the fact that each District needs to have one
pilot added to the staffing model to account for the president of the
association's workload. Since 2016, when Coast Guard developed this
staffing model, the duties and responsibilities of the pilot
association presidents have expanded. For example, we expect the pilot
president to attend numerous meetings and conferences throughout the
year, provide additional financial and traffic information to increase
transparency and accountability, oversee and ensure the integrity of
the association training program, evaluate technology, and coordinate
with the American Pilots Association (APA) to implement and share best
practices. The Coast Guard agrees that if a pilot association president
is spending half or more of their time on administrative issues that
the staffing model should account for that time. Therefore, we will
review this issue and any data supporting the amount of time the
association presidents spend on administrative issues and tasks. If we
determine that any changes should be made to the

staffing model, we will propose them as part of a future rulemaking.

C. Target Pilot Compensation

    The User's Coalition made several comments in regards to this step.
They commented that ``Since at least 2015, the GLPO's ratemaking
activities have repeatedly yielded revenues far above the target
revenues fixed as representing a level necessary to cover pilot
compensation and other recognized expense items.'' The Coast Guard
disagrees with this statement. The only way for the associations to
generate additional revenue is from the increase in ship traffic going
through the system. Although the Coast Guard has seen increased traffic
volumes over what was estimated in recent years, this is due to the
Canadian domestic fleet using U.S. pilots, demand for global
commodities (steel and grain), tankers shipping petroleum products,
cruise ships, and winter demand (ordering pilots while the locks are
closed for maintenance) on Lake Erie, Lake Huron, and Lake Michigan.
The Coast Guard has no control or influence over any of the
aforementioned activities. The variables in global commodities are
complex and difficult to predict. Supply of many commodities can be
forecasted from the analysis of data, but data regarding consumption is
much more difficult to estimate. Some countries carefully guard
commodities produced and stored within their borders, making certain
market predictions even harder. Civil unrest and government sanctions
can cause huge swings in the commodities markets. The use of the 10-
year average may cause the average to lag short-term trends, but it
reduces fluctuations in predicted traffic levels and results in a more
stable rate on a year-to-year basis. This helps the associations and
the shippers plan for upcoming years while reducing variables. The
Coast Guard welcomes any validated information the commenter can
provide as to the exact amount of pilotage demand each year, as well as
the number of vessels that will be transporting commodities and needing
pilotage service, along with the recent demand for pilots in the cruise
industry.
    The User's Coalition also made a comment regarding the figure for
target pilot compensation, and stated that the 2019 compensation number
was ``adopted'' and used as a benchmark. The Coast Guard used the 2019
number because it was clear that this number has had the desired effect
of promoting recruitment of highly qualified mariners and retention of
experienced U.S. registered pilots.
    The Coalition also commented that this is the third year in which
the U.S. Coast Guard Great Lakes Pilotage Office (GLPO) has set a
benchmark compensation figure for Great Lakes pilots by reference to
available data concerning the compensation of U.S. first mates subject
to negotiated contracts between vessel owners and the AMOU. The Coast
Guard disagrees with this statement. As explained above in Summary of
Ratemaking Methodology, Step 4, the Coast Guard does not have access to
information from the AMOU contract. In 2018, the best available
information that we had was the pre-2016 contract data and that was
adjusted for inflation.Target compensation for the 2020 rate is not
being calculated with regard to 2020 union contract data. We are using
the 2019 figure as a base because we believe that this is the proper
target compensation benchmark for Great Lakes pilots. This compensation
benchmark enables the Coast Guard to meet its statutory requirement to
set pilotage rates giving consideration to the public interest and the
costs of providing pilotage services. We are ensuring the provision of
safe, reliable, and efficient pilotage services by correcting the
recruitment and retention issues discussed in previous rulemakings
without increasing the costs of pilotage services to an unreasonable
level.

D. Initial Base Rates

    One commenter stated that, for several years, the Coast Guard's use
of a 10-year average severely understates likely upcoming bridge hours
because of low traffic volumes in the period of depressed international
economic activity caused by the economic recession in 2008-12.
    The Coast Guard disagrees that the 10-year average should not be
used. We believe that the 10-year average in is the public interest,
because this approach provides rate stability. These stable and
predictable rates allows shippers and pilots to forecast revenues. In
Step 7 of the ratemaking methodology, the Coast Guard calculates an
hourly pilotage rate to generate the revenue needed by each district.
This step requires an estimate of the expected hours of traffic. To
derive this estimate, the Coast Guard takes the average of the previous
10 years of traffic in each area on the Great Lakes. The use of the
historical traffic figure was unanimously recommended by the GLPAC in
2014, and we believe that it is the best tool to estimate traffic.
While in recent years, high levels of traffic have been greater than
the historical average, we also note that in some years the level of
traffic has been lower than average. The use of the 10-year average may
cause the average to lag short-term trends, but it reduces fluctuations
in predicted traffic levels and results in a more stable rate on a
year-to-year basis. No commenter has suggested a different time period
for calculating the historical average that would produce better
predictions or prevent wildly fluctuating rates. While we are open to
suggestions as to how to better predict total traffic, we would
encourage the commenters to raise these suggestions at the GLPAC, as we
are currently continuing to follow its recommendation on this subject.
    The User's Coalition suggested that, to minimize the inflation
effect on hourly rates that is caused by use of inaccurate bridge hour
projections, the Coast Guard either base its projections on the most
recent previous year actuals, or derive projections by collecting
upcoming year forecast data from affected stakeholders, including the
Seaway Authority, U.S. and Canadian pilots, vessel operators, ports and
terminals, shipping agents and other knowledgeable sources. The Coast
Guard disagrees. Although we have seen increased traffic volumes over
what was estimated in recent years, this is mainly due to the Canadian
domestic fleet using U.S registered pilots. If the Coast Guard only
used the previous year's numbers, there would be large annual
variations in the rates, which would not be in the public's interest.
We welcome any information or the suggested resources the commenter can
provide as to the exact number of Canadian domestic vessels that will
be using pilots each year, as well as the number of vessels that will
be transporting commodities and requiring pilotage service. In
addition, the Coast Guard has historically been unable to accurately
forecast the international shipping trends that can be impacted by
highly variable factors; e.g., global weather impacting the supply and
demand for grain in the United States, Canada, and overseas, and the
imposition or removal of tariffs on a global basis. This inability to
accurately forecast demand led to the decision to rely on historical
data instead. The User's Coalition has not proposed a specific source
of forecasting the demand for pilotage services that would be
consistently more accurate than using historical data.

E. Working Capital Fund

    There were three comments made by the User's Coalition, the SLSPA,
and the District Lawyers regarding the working capital fund. The User's
Coalition stated that this fund is misnamed, and that it

is a recognized expense. The Coast Guard disagrees with the statement
that it is considered a recognized expense. The working capital fund is
intended to provide the pilots associations with working capital for
future expenses associated with capital improvements, technology
investments, and future training needs, with the goal of eliminating
the need for surcharges (as was accomplished this year). The fund is
structured so that the pilots associations can demonstrate credit
worthiness when seeking funds from a financial institution for needed
infrastructure projects.
    Recognized expenses are those operating expenses that are deemed
necessary and reasonable. The working capital fund is meant to provide
the associations with capital that is in addition to the money needed
to cover its standard operating expenses and pilot compensation. Its
use is to fund infrastructure and technology improvement projects.
Regarding the suggestion for renaming the working capital fund, the
Coast Guard is willing to discuss an alternative name at a future GLPAC
meeting.
    The District Lawyers commented that the fund improperly fails to
include a return on investment. The Coast Guard disagrees with this
statement. In 2016, we created this fund to provide credit worthiness
for pilot associations to have access to capital that would enable them
to provide safe, efficient, and reliable service. In previous years,
the goal of the precursor of the working capital fund, named the
``return on investment', was to provide a return to monies invested by
the pilots in associations. The amount of the money invested (the
investment base) by pilots was relatively small, and thus the return on
that investment was small in absolute terms. However, when the Coast
Guard recalibrated the return on investment (renamed the working
capital fund) to be based on the total income of the associations,
rather than simply the money invested in capital improvements (as was
the case prior to 2016), the goal was to increase infrastructure
spending by providing a more substantial pool of available funds. The
goal of the working capital fund is not to provide a windfall for the
associations, but to improve maritime safety. The working capital fund
does this by supporting capital projects, infrastructure improvements
and maintenance, non-recurring technology purchases, and training that
is necessary for providing safe, efficient, and reliable pilotage. As
with all other expenses, the funds applied must be reasonable in
amount.
    The SLSPA commented that the working capital fund provides a basis
to reinvest into the system or make up for minor shortfalls in revenue.
The Coast Guard agrees in part. The working capital fund is a funding
mechanism that allows for the associations to have cash on hand for
future and/or unidentified expenses to improve pilotage service, and in
some cases prevent delays that would occur from failing equipment, and
for assets that are needed to continuously pilot vessels through the
system. The Coast Guard disagrees that the working capital fund can
make up for minor shortfalls in revenue. The fund cannot be used for
the compensation of pilots during unexpected low traffic years.

F. Surcharge Offsets

    The Coast Guard received two comments regarding the amount of
surcharges \29\ collected in 2017. The commenters stated that, because
the 2017 rate did not take effect until October, the districts were
only able to collect a small portion of the training surcharge approved
for that year. The commenters requested that the difference between
what was collected via the rate and the amount spent on training in
2017 be accounted for in this rule as operating expenses--specifically
that $174,087 be added to the operating expenses for District 2 and
$291,72 be added to the operating expenses for District 3.
---------------------------------------------------------------------------

    \29\ Surcharge is money that is paid upfront by the shipper in
addition to the rate in order to meet an immediate need for the
pilots. When calculating the rate, Coast Guard uses the operating
expenses from three years prior as one of the factors to determine
how much the shippers will pay via the rate. The surcharge offset or
adjustment is the money collected or not collected three years prior
that is either taken out or added to the rate via the methodology.
---------------------------------------------------------------------------

    The Coast Guard agrees that the difference between the amount
collected via the surcharge in 2017 and the amount spent on training in
2017 needs to be included as an operating expenses. Therefore, we
included a surcharge offset in the operating expenses for both
Districts 2 and 3 in this final rule. Specifically, in 2017, District 3
spent $647,606 on the salary and benefits for 7 applicant pilots, and
collected $382,297 via the surcharge. The Coast Guard added a surcharge
adjustment of $265,309 for District 3 ($647,606-$382,297) to account
for the difference between training expense and training funds from the
surcharge. District 2 spent $1,829,671 on the salary and benefits for 2
applicant pilots, and collected $141,692 in training surcharges. The
Coast Guard does not believe that spending $914,836 per applicant pilot
is a reasonable expense. Therefore, we are not reimbursing the entire
difference to the District. Instead, we are including a surcharge
offset of $158,308, which is the difference between the approved
surcharge amount of $300,000 and the amount collected by the district
of $141,692. For both Districts, the surcharge offset amount approved
by the Coast Guard differs from the amount the commenters requested, as
the commenters adjusted these differences to account for inflation and
the working capital fund adjustments. However, these adjustments are
already included as part of the 10-step ratemaking methodology and do
not need to be completed for each individual operating expense.

G. Surcharges

    We received several comments regarding the removal of surcharges.
Beginning in 2016, the Coast Guard began implementing surcharges on
shipping rates to encourage the recruitment and training of new pilots
on the Great Lakes. Unlike pilot compensation, reasonable and necessary
costs relating to the compensation and training of applicant pilots are
fully reimbursable as operating expenses. However, the Coast Guard used
surcharges so that pilot associations could receive the money needed to
provide immediate funding for achieving the goal of hiring and training
new pilots. This goal has been accomplished,\30\ and currently the
average pilot's age is under 50. In District One, 56 percent of
registered pilots are under the age of 50. In District Two, 69 percent
are under the age of 50, and in District Three, 44 percent are under
the age of 50. This is more than adequate for retirement planning
purposes. One commenter specifically stated that District Three very
much needs the surcharge. The Coast Guard disagrees. In 2015, District
Three only had 5 out of 20 registered pilots under the age of 50. In
2019 that number doubled to 10 out of 19, which is more than enough to
properly plan for applicant pilots and retirement via the rate.

H. Other Comments

    The User's Coalition submitted several comments that we will
address individually. The Coalition stated that the U.S. Great Lakes
Pilot Associations are a government-sustained monopoly. The Coast Guard
disagrees; the U.S. Great Lakes Pilot Associations are federally-
regulated monopolies. It should be noted that all pilotage associations
throughout the United

States are government-regulated monopolies.
    The User's Coalition stated that the rates are dictated by the
Coast Guard. The Coast Guard disagrees. The rates are derived via a 10-
step methodology outlined in the Code of Federal Regulations. We comply
with notice and comment procedure outlined in the Administrative
Procedure Act. In fact, in a recent report, the Government
Accountability Office (GAO) stated that while individual stakeholders
may not agree with the specific inputs and assumptions used by the
Coast Guard, the current process is generally transparent and provides
an opportunity for informed stakeholder feedback.\31\ The GAO report
also stated that coupled with the rulemaking requirements that
incorporate public review and comments, we found that the existing
mechanisms represent a fairly transparent system of pilotage rate-
setting as compared to the process used by some coastal states.\32\
---------------------------------------------------------------------------

    \31\ https://www.gao.gov/products/GAO-19-493.
    \32\ Id.
---------------------------------------------------------------------------

    The User's Coalition stated that, over the past five rate-setting
cycles, the overall costs of U.S. pilotage to ratepayers (and,
ultimately, to ports, cargo interests, and shore-based maritime
interests) have risen substantially. The Coast Guard agrees that the
overall cost of U.S. pilotage to ratepayers has risen. There are two
primary reasons for this increase. The first reason is that, because of
an error in the methodology and billing scheme from the mid 90's and up
until 2016, shippers were provided an unintended 20-40% ``discount.''
This discount prevented the pilot associations from generating and
collecting the revenues we determined were necessary to provide safe,
efficient, and reliable pilotage service. In 2016, we addressed this
issue and removed the discount. The second reason is the cost of added
pilots, which has increased needed revenues. Since 2016, we have added
18 working pilots to the System in order to preserve and promote
maritime safety, minimize delays, and provide for recuperative rest.
    The User's Coalition stated that there is an absence of current,
reality-based (as opposed to speculative or theoretical) data in the
ratemaking process for critical elements, such as pilotage expenses,
traffic volume or bridge-hour forecasts, and pilot compensation. The
Coast Guard disagrees with this statement. The Coast Guard employs a
third party auditing firm to generate financial reports to evaluate
pilotage expenses for the annual rulemaking. We include these reports
with the appropriate rulemaking docket. Forecasts are predictions of
future events and are by nature speculative or theoretical, but our
forecasts are based on objective, historical data. In addition, our
Bridge Hour Study examined the actual number of hours pilots spent
completing all parts of a pilotage assignment in the various Areas to
determine how many assignments a pilot could complete in a given time
period. This audited and studied data \33\ is empirical and reality
based, not theoretical. The ability to use current data is somewhat
limited by the time required to complete a full notice and comment
ratemaking. The GAO report published June 2019, titled Stakeholders'
Views on Issues and Options for Managing the Great Lakes Pilotage
Program,\34\ states ``that the Coast Guard is currently performing this
independent function as its rate-setting process includes many of the
characteristics identified as a best practice, such as a defined
methodology, clear data submission and review process, and the absence
of any direct material interest in the outcome of the rate
determinations.'' The report goes on to say that, ``While individual
stakeholders may not agree with the specific inputs and assumptions
used by the Coast Guard, the current process is generally transparent
and provides an opportunity for informed stakeholder feedback and
identification of any grounds on which they can choose to take legal
action.''
---------------------------------------------------------------------------

    \33\ United States Coast Guard, Bridge Hour Definition and
Methology Study: Final Report, (25 June 2013) https://www.dco.uscg.mil/Portals/9/DCO%20Documents/Office%20of%20Waterways%20and%20Ocean%20Policy/Pilotage%20Study%20Final%20Report%2028%20JUN%202013.pdf?ver=2017-06-08-082809-570.
    \34\ https://www.gao.gov/products/GAO-19-493.
---------------------------------------------------------------------------

    The User's Coalition stated that there is a lack of assertive Coast
Guard supervision and control. The Coast Guard disagrees. The Coast
Guard develops clear and timely regulations, policy, and direction to
three U.S. pilot associations to provide safe, efficient, and reliable
pilotage service to U.S. vessels operating under registry and foreign
vessels transiting the Saint Lawrence and Great Lakes System. This
regime of regulation, policy, and direction provides supervision and
control. The commenter also failed to provide specific examples or data
to support this claim.
    The User's Coalition raised questions about the difference between
U.S. and Canadian pilotage cost structures. The commenter stated that
``sample comparisons of the costs of U.S. versus Canadian pilotage on
the same or similar voyages by the same or similar vessels show that
U.S. pilotage costs are often nearly twice as high as those of the
Canadian counterparts.'' The Coast Guard is aware that the United
States and Canada do not charge for service in identical ways. One
significant difference is that the United States has three different
Districts that must each support themselves, whereas the Canadian GLPA
operates as a unified whole. This means that there may be a level of
cross-subsidization among Canadian pilots that is impossible to
replicate on the American side, which could result in higher rates in
some areas and lower rates in others. Comparisons on a single voyage,
such as what the Users Coalition did in the comment, where one system
uses ancillary fees such as docking, anchoring, short notice
dispatching and the other system does not, cannot provide the Coast
Guard with the comprehensive information needed to determine if there
is a system-wide problem with rates or if we are merely seeing an
atypical incident. Taken as a whole, the revenues earned by the U.S.
system of pilotage across the Great Lakes are comparable to the
revenues earned by the Canadian system. This is further complicated by
the fact that Canadians provide the exclusive source of pilotage
services in parts of the system.
    The User's Coalition also stated that there is a failure to
develop, obtain, and maintain accurate information on recruitment,
retention, and attrition issues as they affect the availability and
compensation of qualified pilots. The Coast Guard disagrees with this
statement. Coast Guard personnel in the Office of Waterways and Ocean
Policy (CG-WWM) monitor recruitment, retention, and attrition issues by
following the hiring and training of new pilots and conducting exit
interviews with departing pilots. The commenter failed to articulate or
provide any examples or data to support their statement.
    The User's Coalition stated that the past record of significant,
consistent revenue overruns justifies an adjustment in methodology.
Failure to make this adjustment will once again result in an artificial
increase in pilotage costs, in contravention of 46 U.S.C. 9303(f), and
exacerbate the current misalignment of U.S. and Canadian pilotage
costs. The Coast Guard disagrees with this comment. Consistent
increases in pilotage demand does not justify an adjustment. Since the
commenter provided no further evidence to justify

the statement, no further action will be taken. The Coast Guard also
disagrees that there is a current misalignment of U.S. and Canadian
pilotage cost. As the commenter provided no evidence to support this
claim, no further action will be taken. In addition, we note that these
increases in demand do not equate to any increased cost to the User's
Coalition, and, further, because the demand increases bridge hours, it
could be argued that these ``consistent revenue overruns'' actually
decrease the rate over the long run, due to the way bridge hours are
used in the 10-Step ratemaking methodology. To estimate the initial
base rate, we divide the total estimated revenue needed for each area
by the total estimated bridge hours.
    The User's Coalition stated that prior years' comments on this
recurring issue have been dismissed without analysis or discussion by
GLPO as ``not a highly salient issue. . . .'' (83 FR 26175), and the
observation that pilotage rates had not reached ``. . . levels that
threaten the economic viability of Great Lakes shipping.'' Id. The
Coast Guard disagrees that issues have been dismissed without analysis
or discussion. The User's Coalition comment lacks context. The Coast
Guard noted that the over-realization was not a highly salient issue in
the 2018 final rule because the over-realization was caused by two
factors, one of which had been corrected previously. The lack of
incorporation of weighting factor fees into the ratemaking methodology
was revised per the suggestion of industry commenters in the 2018
rulemaking. The second factor was demand for pilotage services, which
was higher than predicted--a point discussed at length in the sections
entitled ``Target Pilot Compensation'' and ``Initial Base Rate'' above.
The commenter's second quote is a reference to the conclusion of an
independent study the Coast Guard commissioned analyzing the secondary
economic impact of pilotage rates, hardly a dismissal without analysis.
The GAO recently completed a comprehensive ``stem-to-stern'' review of
the GLPO,\35\ assessing a plethora of recurring issues, and decided not
to recommend any changes to the GLPO. The court has settled some of the
issues and is reviewing the legality of other issues. We have and will
continue to comply with the court's decision(s).
---------------------------------------------------------------------------

    \35\ https://www.gao.gov/products/GAO-19-493.
---------------------------------------------------------------------------

    The User's Coalition stated that revenue overruns are paid for in
real money in a system that has yet to provide relief for overcharges
to ratepayers or redress to other interests affected by non-service-
related, government-dictated prices, and that the results of the past
several navigation seasons on the Lakes describe a situation of
considerable economic waste. The Coast Guard disagrees with this
statement. All charges paid were for actual services provide by the
pilots to vessels; there were no non-service-related charges. If vessel
owners and operators believe they have been charged in error, we
provide a billing dispute mechanism that allows shippers adequate time
to submit billing disputes for consideration. As the commenter provided
no evidence of an overcharge to ratepayers, nor any evidence of
``considerable economic waste,'' no further action will be taken.
    This commenter implies that the User's coalition has exclusive
rights to the Great Lakes/Saint Lawrence River System. The User's
Coalition is not entitled to revenues generated by the Canadian
domestic fleet, cruise ships, and/or tankers shipping petroleum
products that are not represented by the coalition. These waters are
for all law abiding mariners to enjoy and utilize for commercial
purposes. We will ensure that all modes of international and domestic
traffic are treated fairly.
    The Lakes Pilots Association (LPA) commented on changing the number
of days in the season to 365 days. The Coast Guard disagrees. The 270
day season applies to the AMOU contracts. We are no longer utilizing
those contracts to determine target pilot compensation. Therefore, the
365-day argument does not apply. We have identified a standard that
corrected the historic recruitment and retention issues as previously
discussed.
    One commenter suggested that the Coast Guard did not adequately
explain why we expect the total costs generated in 2020 to be less than
the total pilotage revenue in 2019, despite proposing higher pilotage
rates for 4 of the 6 areas in 2020. They stated that the NPRM did not
provide any explanation for the reduction in pilotage services, and
that we should not claim that the final rule will ``result in an
overall reduction in pilotage costs''.\36\
---------------------------------------------------------------------------

    \36\ USCG-2019-0736-0007, p. 4.
---------------------------------------------------------------------------

    The Coast Guard disagrees. In the NPRM, we did not state that we
expect a decrease in pilotage costs. Rather, we estimated the total
expected revenue in 2020 and compared that value to the estimated 2019
revenue. This value is a reflection of the pilotage rates, as well as
other factors, such as operating expenses and surcharges (if there are
any). In the NPRM, we estimated that the total revenue generated in
2020 would be less than the total estimated revenue generated in 2019
for two reasons: (1) A reduction in operating expenses for some
districts driven by large one-time capital purchases made in 2016, and
(2) the removal of surcharges. The latter is the main driver in
reducing the expected revenue between 2019 and 2020. Neither of these
revenue components is a reflection of traffic or pilotage hours. In
addition, the cost of the surcharges is not included in the rate, but
is included in the total revenue calculations, meaning that the removal
of the surcharges does not impact the rates, but does decrease the
estimated total revenue. Table 44 in the preamble of this rule provides
a comparison of the revenue components between 2019 and 2020, and
demonstrates that these changes are mainly driven by the removal of the
surcharges. It should be noted that, in this final rule, the Coast
Guard modified operating expenses for all three districts based on
public comment, and, as a result, we now estimate that revenues
generated in 2020 will be $279,845 greater than those generated in
2019.

VII. Discussion of Rate Adjustments

    In this final rule, based on the current methodology described in
the previous section of this preamble, the Coast Guard is establishing
new pilotage rates for 2020. We conducted 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 is adjusting the
compensation benchmark pursuant to Sec.  404.104(b) for this purpose,
rather than Sec.  404.104(a).
    In this section, we discuss the rate changes using the ratemaking
steps provided in 46 CFR part 404 detailing all ten steps of the
ratemaking procedure for each of the three districts to show how we
arrived at the 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.\37\ 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, 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 are shown in
table 3.
---------------------------------------------------------------------------

    \37\ 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 issuing any surcharges for the 2020 shipping season.
    For District One, we are not implementing any Director's
adjustments other than the 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
    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...........................         410,383         273,590         683,973
            Total Operating Expenses (Other Costs + Pilot Boats        1,486,913         991,275       2,478,188
             + Admin)...........................................
                                                                 -----------------------------------------------
Adjustments (Director):
        Total Director's Adjustments............................               0               0               0
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......       1,486,913         991,275    2,478,188.00
----------------------------------------------------------------------------------------------------------------

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 for 2017 to 2018 using the BLS data from the CPI
for the Midwest Region of the United States.\38\ Because the BLS does
not provide forecasted inflation data, we use economic projections from
the Federal Reserve for the 2019 and 2020 inflation modification.\39\
\40\ Based on that information, the calculations for Step 2 are as
follows:
---------------------------------------------------------------------------

    \38\ 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.
    \39\ The 2019 CPI data was not available at the time of
analysis, December 2019.
    \40\ 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)...............................      $1,486,913        $991,275      $2,478,188
2018 Inflation Modification (@1.9%).............................          28,251          18,834          47,085
2019 Inflation Modification (@1.8%).............................          27,273          18,182          45,455
2020 Inflation Modification (@2%)...............................          30,849          20,566          51,415
    Adjusted 2020 Operating Expenses............................       1,573,286       1,048,857       2,622,143
----------------------------------------------------------------------------------------------------------------

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 (SLSPA). Using these numbers, we estimate 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)) \41\...              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
---------------------------------------------------------------------------

    \41\ 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 conducting an interim ratemaking this year, we follow
the procedure outlined in paragraph (b) of Sec.  404.104, which adjusts
the existing compensation benchmark by inflation. Because we do not
have a value for the employment cost index for 2020, we multiply the
2019 compensation benchmark of $359,887 by the Median PCE Inflation
value of 2.0 percent.\42\ Based on the projected 2020 inflation
estimate, the compensation benchmark for 2020 is $367,085 per pilot.
---------------------------------------------------------------------------

    \42\ https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf.
---------------------------------------------------------------------------

    Next, we verify 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.\43\ By multiplying the two figures, we obtain the working
capital fund contribution for each area, as shown in table 7.
---------------------------------------------------------------------------

    \43\ Moody's Seasoned Aaa Corporate Bond Yield, average of 2018
monthly data (2019 data was not available at the time of analysis,
December 2019). 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)............................      $1,573,286      $1,048,857      $2,622,143
Total Target Pilot Compensation (Step 4)........................       3,670,850       2,569,595       6,240,445
Total 2020 Expenses (Step 2 + Step 4)...........................       5,244,136       3,618,452       8,862,588
                                                                 -----------------------------------------------
    Working Capital Fund (Total Expenses x 3.93%)...............         206,095         142,205         348,300
----------------------------------------------------------------------------------------------------------------

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)...............      $1,573,286      $1,048,857      $2,622,143
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)......................         206,095         142,205         348,300
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,450,231       3,760,657       9,210,888
----------------------------------------------------------------------------------------------------------------

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 average hours of traffic over 10 years
in District One, using the total time on task or pilot bridge
hours.\44\ Because we calculate separate figures for designated and
undesignated waters, there are two parts for each calculation. We show
these values in table 9.
---------------------------------------------------------------------------

    \44\ 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
------------------------------------------------------------------------
Revenue needed (Step 6).................      $5,450,231      $3,760,657

Average time on task (hours)............           5,657           6,248
                                         -------------------------------
    Initial rate (Step 6/Average Time on             963             602
     Task)..............................
------------------------------------------------------------------------

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.\45\
---------------------------------------------------------------------------

    \45\ To calculate the number of transits by vessel class, we use
the billing data from GLPMS (2019 data was not available at the time
of analysis, December 2019), 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
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
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
                                                                             (A)             (B)         (A x B)
----------------------------------------------------------------------------------------------------------------
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........................................            $963            1.27            $758
District One: Undesignated......................................             602            1.30             463
----------------------------------------------------------------------------------------------------------------

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 rates do meet
the goal of ensuring safe, efficient and reliable pilotage, the
Director considers whether the 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 rates will cover
operating expenses and infrastructure costs, and takes average traffic
and weighting factors into consideration. Based on this information,
the Director is not making any alterations to the rates in this step.
We modified the text in Sec.  401.405(a) to reflect the final rates
shown in table 14.

                                     Table 14--Final Rates for District One
----------------------------------------------------------------------------------------------------------------
                                                                    Final 2019     Proposed 2020    Final 2020
                 Area                             Name             pilotage rate   pilotage rate   pilotage rate
----------------------------------------------------------------------------------------------------------------
District One: Designated..............  St. Lawrence River......            $733            $757            $758
District One: Undesignated............  Lake Ontario............             493             462             463
----------------------------------------------------------------------------------------------------------------

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.\46\ 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, below.
---------------------------------------------------------------------------

    \46\ 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. of this preamble, Step 1:
Recognize previous operating expenses, and the adjustments made by the
auditor, as explained in the auditor's reports (available in the docket
where indicated in the ADDRESSES portion of this document), the
Director is finalizing two adjustments to District Two's operating
expenses. The first is to disallow $120,350 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, the Coast Guard expects 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 are not including any housing allowance the district
chooses to

provide their pilots in the ratemaking calculation.
    The second Director's adjustment is a $158,308 surcharge adjustment
to account for the difference between in the amount the district spent
on applicant pilot wages and benefits in 2017 to cover the training
costs for two applicant pilots, and the amount actually collected via
the surcharge. In total, District Two spent $1,829,671 on applicant
pilot compensation for two applicant pilots and received $141,692 via
the surcharge in 2017. However, as stated in Section VI.F of this
preamble, the Coast Guard does not believe that spending $914,836 per
applicant pilot is fair and reasonable, and, therefore, we are only
recognizing applicant pilot compensation of $150,000 per applicant
pilot, or $300,000 in total for the district. As a result, the Coast
Guard is including a $158,308 surcharge adjustment ($300,000-$141,692)
in the recognized expenses for District Two. We allocated this
adjustment to each area based on their proportional bridge hours in
2017 (see table 21 for bridge hours).

                               Table 15--2017 Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                                District Two
                                                                 -----------------------------------------------
                                                                   Undesignated     Designated         Total
                   Reported expenses for 2017                    -----------------------------------------------
                                                                                Southeast
                                                                     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
    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