[Federal Register Volume 82, Number 168 (Thursday, August 31, 2017)]
[Rules and Regulations]
[Pages 41466-41496]
[FR Doc No: 2017-18411]

Vol. 82

Thursday,

No. 168

August 31, 2017

Part II

Department of Homeland Security

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Coast Guard

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46 CFR Parts 401, 403, and 404

Great Lakes Pilotage Rates--2017 Annual Review; Final Rule

Federal Register / Vol. 82 , No. 168 / Thursday, August 31, 2017 /
Rules and Regulations

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2016-0268]
RIN 1625-AC34

Great Lakes Pilotage Rates--2017 Annual Review

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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SUMMARY: In this final rule, the Coast Guard is setting new rates for
the 2017 shipping season for pilotage services on the Great Lakes. The
Coast Guard is also updating its methodology for setting these rates.
These updates to the methodology will incorporate the income generated
from weighting factors into the ratemaking methodology used to set
rates in this and future rulemakings. The Coast Guard believes that the
new rates will continue to encourage pilot retention, ensure safe,
efficient, and reliable pilotage services on the Great Lakes, and
provide adequate funds to upgrade and maintain infrastructure.

DATES: This final rule is effective October 2, 2017.

FOR FURTHER INFORMATION CONTACT: For information about this document
call or email Todd Haviland, Director, Great Lakes Pilotage, Coast
Guard; telephone<PHONE_NUMBER>, email<EMAIL_ADDRESS>
Executive Summary

    This final rule amends the Coast Guard's Great Lakes pilotage
regulations by revising the current methodology by which the Coast
Guard sets base rates for U.S. pilotage service on the Great Lakes, as
well as revises the pilotage rates for the remaining portion of the
2017 shipping season. The new methodology adjusts target pilot
compensation by inflation, incorporates revenue derived from weighting
factor charges into the ratemaking model, and eliminates the provision
that the hourly pilotage rate for designated waters could not rise
above twice the rate for undesignated waters. We believe that the new
methodology will continue to encourage pilot retention, ensure safe,
efficient, and reliable pilotage services on the Great Lakes, and
provide adequate funds to upgrade and maintain infrastructure.
    In addition to the changes in ratemaking methodology, this final
rule makes several other additions to Great Lakes Pilotage regulations.
It adds new language to billing practices for cancellation charges,
clarifying that the minimum charge for canceling the request for a
pilot is four hours plus reasonable travel expenses. The final rule
also inserts a new mandatory change point at the Iroquois Lock point,
ensuring that pilots are adequately rested on this stretch of water.
Finally, we have made some textual changes to the regulations to better
convey their intent, renaming the ``return on investment'' as ``working
capital fund,'' and renaming the 2016 final rule staffing model as the
``seasonal staffing model.''
    Based on comments received, several items proposed in the NPRM were
not adopted in this final rule. The Coast Guard has chosen not to adopt
the 2107 NPRM staffing model, based on compelling arguments that this
model did not accurately reflect the unpredictable workload of Great
Lakes pilots. Furthermore, we did not move forward on our proposal to
move the deadline for audited financial reports from April to January,
based on commenters' arguments that this practice would impose hardship
out of proportion to its benefit.
    Based on updated financial information, increased pilot
compensation, the new weighting factor calculations, and other changes
to the ratemaking methodology, the revised Great Lakes pilotage rates
are being lowered in most areas. We believe that this is a needed
correction to better align our projected revenues with the pilot
associations' actual collections, as evidence shows that pilotage
revenue significantly exceeded what was projected in 2016, even
factoring in above-average traffic. The changes in the rates are as
follows:

                                      Table E-1--Changes in Pilotage Rates
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                                                                     Previous
                                                                     pilotage      New pilotage     Change per
                              Area                                 charges  per     charges per      hour  ($)
                                                                     hour  ($)       hour  ($)
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St. Lawrence River..............................................             580             601             +21
Lake Ontario....................................................             398             408             +10
Navigable waters from Southeast Shoal to Port Huron, MI.........             684             580            -104
Lake Erie.......................................................             448             429             -19
St. Mary's River................................................             528             514             -14
Lakes Huron, Michigan, and Superior.............................             264             218             -46
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SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Abbreviations
II. Regulatory History
III. Basis and Purpose
IV. Discussion of Comments and Changes
V. Regulatory Analyses
    A. Regulatory Planning and Review
    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates Reform Act
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Abbreviations

APA American Pilots Association
CFR Code of Federal Regulations
DHS Department of Homeland Security
FR Federal Register
GLPA Great Lakes Pilotage Authority
GLPAC Great Lakes Pilotage Advisory Committee
MM&P International Organization of Masters, Mates & Pilots
MOU Memorandum of Understanding
NPRM Notice of proposed rulemaking
RA Regulatory analysis
Sec.  Section symbol
SNPRM Supplemental notice of proposed rulemaking
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code

II. Regulatory History

    The Coast Guard published a notice of proposed rulemaking (NPRM)
for this final rule on October 19, 2016 (81 FR 72011), covering a range
of issues including revised operational expenses,

a proposed new methodology for calculating pilotage numbers, the
addition of a mandatory change point at Iroquois Lock, and revised base
pilotage rates. In response, we received 21 public comment letters,
covering a diverse range of subjects and providing a substantial amount
of information. Subsequently, on April 5, the Coast Guard issued a
supplemental notice of proposed rulemaking (SNPRM) proposing to add two
additional steps to the ratemaking methodology, which would incorporate
the additional revenues collected under 46 CFR 404.100 (the ``weighting
factors'') into the ratemaking model. We received 11 public comment
letters on the SNPRM.
    The Coast Guard received numerous comments in response to the
issues raised in the NPRM and SNPRM. These commenters have largely come
from Great Lakes maritime shipping stakeholders--both the pilots that
perform pilotage services as well as the shipping companies that pay
the pilotage fees--as well as other interested parties. We have closely
analyzed all of the comment letters and have, where appropriate,
incorporated ideas and suggestions from the comments into the analysis
of our final rule.

III. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (the Act),\1\ which requires U.S. vessels operating ``on
register'' \2\ and foreign vessels to use U.S. or Canadian registered
pilots while transiting the U.S. waters of the St. Lawrence Seaway and
the Great Lakes system.\3\ For the U.S.-registered Great Lakes pilots,
the Act requires the Secretary to ``prescribe by regulation rates and
charges for pilotage services, giving consideration to the public
interest and the costs of providing the services.'' \4\ We limit the
allowable costs of providing this service by ensuring that all
allowable expenses are necessary and reasonable for providing pilotage
services on the Great Lakes. We believe the public is best served by a
safe, efficient, and reliable pilotage service. The goal of our
methodology and billing scheme is to generate sufficient revenue for
the pilots to provide the service we require. The Act requires that
base rates be established by a full ratemaking at least once every 5
years, and in years when base rates are not established, they must be
reviewed and, if necessary, adjusted. The Secretary has delegated
authority under the Act to the Coast Guard.\5\
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    \1\ Public Law 86-555, 74 Stat. 259, as amended; currently
codified as 46 U.S.C. Chapter 93.
    \2\ ``On register'' means that the vessel's certificate of
documentation has been endorsed with a registry endorsement, and
therefore, may be employed in foreign trade or trade with Guam,
American Samoa, Wake, Midway, or Kingman Reef. 46 U.S.C. 12105, 46
CFR 67.17.
    \3\ 46 U.S.C. 9302(a)(1).
    \4\ See 46 U.S.C. 9303(f) for all of the Act's pilotage
ratemaking requirements discussed in this paragraph.
    \5\ DHS Delegation No. 0170.1, para. II (92.f).
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    The purpose of this rule is to change our annual Great Lakes
pilotage ratemaking methodology, set new rates using that methodology,
authorize a temporary hiring and training surcharge, and make several
other adjustments. For more information on the goals and proposals in
this rulemaking, see the discussion section in the NPRM \6\ and
SNPRM.\7\
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    \6\ 81 FR 72011 (October 19, 2016).
    \7\ 82 FR 2115 (May 5, 2017).
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IV. Discussion of Comments and Changes

    In this section, the Coast Guard reviews the comments received, and
provides responses accordingly. In instances where multiple commenters
provided insight into similar issues, we have grouped those comments
into general categories. Wherever possible, we have attempted to
provide citations to the particular comment referenced, and have tried
to verify any data provided by the commenter. We have divided the
comments up into four general categories: (1) General policy issues;
(2) Rate calculation issues; (3) Incorporation of the weighting factors
into the ratemaking methodology; and (4) Items for future
consideration. These general categories have been further subdivided by
issue, as discussed below.

A. General Policy Issues

    The most frequently cited issue, raised by numerous commenters,
concerned the costs of pilotage. In the NPRM, we proposed a variety of
increases in pilotage rates. However, in the subsequent SNPRM, we
proposed accounting for the weighting factor and thus lowered hourly
pilotage rates accordingly. Numerous commenters, generally aligned with
entities that ship goods or pay for shipping on the Great Lakes, made
statements on the recent increases in the cost of pilotage over the
last several years. For example, one commenter \8\ stated that the
proposed increase to U.S. pilotage rates constitutes a 15 percent
increase, with a total increase of 99 percent since 2014, and that this
is on top of a 94 percent increase already imposed on shippers since
2006. Other commenters \9\ cited different, albeit similar figures,
stating that pilotage costs have increased by 40 percent over three
years, and cited the NPRM as saying that pilotage costs now constituted
19 percent of total voyage costs on the Saint Lawrence Seaway.
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    \8\ See docket # USCG-2016-0268-0039, p.1.
    \9\ Docket # USCG-2016-0268-0019, p.1; docket # USCG-2016-0268-
0020, p.1.
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    We acknowledge that the some pilotage rates have increased in the
past few years. In our revisions to the methodology, we have eliminated
several ancillary fees and changed the billing scheme to meet our goal
of aligning projected revenues with the actual association collections.
We agree that the total revenues needed by the 3 U.S. Great Lakes Pilot
Associations has increased about 40 percent over the past three years
if we include the temporary surcharges, after many years of the pilot
associations being unable to collect the amount of money our
projections indicated would be appropriate. The additional pilots added
to ensure continued safe, efficient and reliable pilotage service are
the primary reason for the recent rate increases. It is important to
note, however, that we have revised the temporary surcharges
requirements so the revenues collected for the temporary surcharges
will be removed from the expense base of future rates to ensure that
the shippers do not pay for the same expense twice. After carefully
considering the comments and measuring and assigning values to the
variables addressed in the ratemaking methodology, we believe the
resultant pilotage rates are fair.
    One commenter \10\ argued that high pilotage rates were threatening
the competitiveness of the St. Lawrence Seaway and Great Lakes system
of shipping cargo, and that if the proposed rate increases for 2017
were instituted, shippers may reach a ``tipping point'' where they
choose alternate means to ship cargo. The commenter did not provide
supporting documentation for this assertion, and we disagree with this
statement. Our data indicates that demand for pilotage service in 2016
was greater than 2015 and that demand for pilotage service through June
2017 is trending around 20 percent higher than the 10-year average for
the 2017 shipping season.
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    \10\ Docket # USCG-2016-0268-0034, p.1.
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    Other commenters argued that the recent increases in pilotage rates
were necessary. One commenter stated that the recent, comparatively
large increases were needed to correct inadequate increases in the
past, arguing that ``recent seemingly disproportionate increases [in
pilotage rates] would have been unnecessary as they could have

been accommodated over time.'' \11\ Another commenter argued that the
concern over pilotage costs was disingenuous, stating that the vast
majority of shippers' pilotage cost results from Canadian pilotage,
which is entirely unaffected by the U.S. pilotage rates.\12\
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    \11\ Docket # USCG-2016-0268-0037, p.1.
    \12\ Docket # USCG-2016-0268-0028, p.2.
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    We agree that the recent increases in pilotage rates since 2015
have been warranted. We are well aware that for many years the Coast
Guard's methodology for calculating pilotage rates produced rates that
failed to raise the target revenue. We have had years where actual
revenue was above the target revenue, but below the revenue that we
would have projected given the actual demand. In 2016, revenue was
higher even than what we would have expected given the demand. While
2016 appears to be an outlier in that regard, it is our goal is to
develop a methodology that aligns our projections with the actual
amount of revenue the pilot associations generate based upon the
realized demand for pilotage service. We believe that the methodology
outlined in this final rule is a substantial improvement that will, on
average, produce revenues that will cover operating expenses, pay for
infrastructure maintenance and the training of new pilots, and offer
compensation levels and a workload that will allow the pilot
associations to recruit and retain pilots without producing excessive
revenue to the detriment of shippers. We are willing to consider future
adjustments as necessary to ensure revenue alignment. As discussed
below, we believe that compensation levels are currently at a level
that is effectively enticing pilots to join and stay in the workforce,
and we are not substantially adjusting that in this final rule.
Difference in Pilotage Charges Between the United States and Canada
    Several commenters complained that the cost of similar pilotage
services differed depending on whether ships were assigned a U.S. or
Canadian pilot, and that such differences were contrary to arrangements
between the United States and Canada regarding cooperation in
management of pilotage in the Great Lakes system. One commenter said
that pilotage costs are much higher when the vessel is assigned a U.S.
pilot, stating that ``[f]or example, the pilotage expense for a Class 4
vessel transiting from Thunder Bay to St. Lambert costs $39,490 when a
Canadian pilot is used, and $29,327 more when a U.S. pilot provides
pilotage services.'' \13\ The commenter argued that such a disparity is
contrary to the 2013 Memorandum of Understanding (MOU) between the U.S.
and the Canadian Great Lakes Pilotage Authority (GLPA), which states
that the parties ``intend to arrange for the establishment of
regulations imposing comparable rates and charges.'' \14\
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    \13\ Docket # USCG-2016-0268-0033, p.12.
    \14\ Docket # USCG-2016-0268-0033, p.12, citing ``Memorandum of
Understanding, Great Lakes Pilotage, between the United States Coast
Guard and the Great Lakes Pilotage Authority,'' Art. 7.
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    While the Coast Guard acknowledges that the rates for pilotage
services are not identical, our rates for each given segment of a
voyage are based upon an analysis of the historical pilotage hours and
associated costs necessary to provide service on that segment. We
cannot say how the Canadian GLPA determined the charges for
corresponding voyage segments. We note that U.S. and Canadian pilots
have different funding structures, infrastructure obligations, and
compensation packages. There are other instances where U.S. pilotage
rates are substantially lower than Canadian rates--for example, a
harbor move on Lake Superior for a Class 2 vessel would cost $2,616.73
under Canadian rates, while the same move would cost only $607.20 under
U.S. rates (both prices are in U.S. dollars). While some may argue the
pilotage rates should be identical, we believe that the rates must
primarily cover the cost of operating expenses, infrastructure
maintenance, and fair compensation, which is how we have developed the
current methodology. We are not offering an opinion as to how
differences in infrastructure and compensation funding may alter the
rate calculations by the Canadian association.
    Finally, we also note that article 9 states that the MOU ``is not
an international agreement and does not give rise to any international
legal rights or obligations.'' The MOU is a non-binding agreement on
cooperation between the Coast Guard and GLPA. The primary purpose of
this document is to ensure an equitable share of work between the U.S.
and Canadian registered pilots and coordinated pilotage service
throughout the System. We interpret comparable rates to mean that the
Coast Guard and GLPA will establish rates to cover costs incurred for
providing pilotage service in the various areas, even though those
costs may be different due to varying fee structures, distribution,
labor costs, or other factors. For these reasons, while we acknowledge
there are differences in the rates paid by the shipping companies, we
still believe that basing the rates on the methodology described in
this rulemaking is the most effective way to fund the U.S. Great Lakes
pilot associations and necessary infrastructure.
Recruitment and Retention of Pilots
    One of the main goals of raising pilotage fees in recent Coast
Guard rulemakings has been to reduce pilot attrition and attract new
pilots to the region, ensuring a healthy number of mariners capable of
handling the shipping traffic safely and with minimal delays. In the
2016 final rule, we stated that, ``the [methodology established in the
mid-1990s failed] to consider the totality of pilot time necessary to
perform a given pilotage assignment, which often includes long transits
to and from the vessel, resulting in low pilot compensation and
overloaded work assignments.'' \15\
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    \15\ 81 FR at 11908 (March 7, 2016).
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    We received numerous comments from both pilots and shippers
concerning pilot retention and attrition. Many commenters urged the
Coast Guard to study pilot recruitment and retention factors, including
the compensation of individual pilots, to determine the extent of the
pilot retention problem and methods for combating low pilot retention.
In response, we note that we have recently undertaken a target pilot
compensation study, which we hope may help inform future rulemakings.
    Pilots and pilot associations also offered comments pertaining to
retention and attrition. The Western Great Lakes Pilots Association
\16\ presented a series of letters from pilots, including resignation
letters and previous docket comments, explaining why they were
resigning from the Association. These comments cited various reasons,
including the risk of a downturn in traffic,\17\ and a lack of
guaranteed time with their families.\18\ Similarly, other pilotage
associations stated that Great Lakes pilots were paid substantially
less than other U.S. marine pilots, and noted that certain pilots had
left the Great Lakes for less prestigious positions in other areas.\19\
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    \16\ Docket # USCG-2016-0268-0027.
    \17\ Docket # USCG-2016-0268-0027, letter from Bruce Dunlap,
Paul Radtke.
    \18\ Docket # USCG-2016-0268-0027, letter from Karl Hardesty,
Rick Montoya.
    \19\ Docket # USCG-2016-0268-0027, letters from the Associated
Branch Pilots of New Orleans, Association of Maryland Pilots.
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    The Coast Guard has recognized the pilotage recruitment and
retention

challenges in the Great Lakes, but believes that the changes we have
implemented in recent rulemakings have addressed those concerns. We
note that while over the preceeding 10 years 31 pilots in the Great
Lakes region voluntarily left pilot positions, only one pilot has left
voluntarily in the past 3 years, a rate which is comparable to the
extremely low voluntary quit rate for other U.S. pilotage associations.
We believe that the new compensation levels, workload, ratemaking
structures, and improvements to the billing scheme introduced in recent
rulemakings have reduced attrition, and we are working closely with all
stakeholders to ensure that wages, working conditions, and
infrastructure concerns are addressed to increase the likelihood that
well-trained pilots will remain with their associations until
retirement.
Using Other Pilot Compensation as a Benchmark for GL Pilot Compensation
    Many commenters suggested that the Coast Guard should be using
salaries for other U.S. pilots as a benchmark, rather than Canadian
salaries, and noted that U.S. pilots in other areas often make far more
in compensation. One commenter, the President of the Associated Branch
Pilots for the Port of New Orleans, noted that the average pilot
compensation for a pilot in that association was $459,051, and stated
that a $312,000 target compensation level ``would leave the Great Lakes
pilots among the lowest paid pilots in America.'' \20\ One commenter
noted that using other U.S. pilot groups as a benchmark would make a
comparison simpler, as the target compensation for many American pilots
is set by state rate commissions and is publically available.\21\
Similarly, one commenter stated that the Great Lakes pilot associations
compete with other American associations for recruits, and thus those
associations would be a more appropriate benchmark for
compensation.\22\ Several commenters \23\ provided figures on the total
compensation of pilots in some other American systems, stating that
those figures were often significantly over $400,000 annually per
pilot, which is higher than the compensation target the Coast Guard has
set for Great Lakes pilots.
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    \20\ Docket # USCG-2016-0268-0003, p.1.
    \21\ Docket # USCG-2016-0268-0028, p.6.
    \22\ Docket # USCG-2016-0268-0028, p.6.
    \23\ Docket # USCG-2016-0268-0028, p.7.
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    Conversely, the Great Lakes Shippers Association argued that the
Coast Guard should not use the compensation of other American pilots as
a basis for computing target compensation. The shipping association, as
part of its comments on the use of a compensation benchmark,\24\ stated
that the Coast Guard should not equalize pilot compensation across
disparate geographies.\25\ The commenter argued that shipping is an
inherently local affair, and that pilots are experts in particular
bodies of water, so a comparison to other pilotage association would
not necessarily be accurate. The commenter stated that Great Lakes
pilotage ``differs significantly from pilotage anywhere else in the
United States as it includes vast stretches of open, unobstructed water
that require little or no pilot input, as well as being subject to an
abbreviated, rather than year-round, shipping season.'' \26\ The
commenter also stated that there are both historical and practical
reasons that local pilotage boards and commissions set rates locally,
and that given differing barriers to entry, differing duration and
intensity of pilotage duties, and other local factors means that ``the
value and cost of pilotage services in one location differs
significantly in degree and kind from the value and cost of pilotage
services in another location.'' \27\
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    \24\ We discuss the issue of the general use of a 10-year
compensation benchmark in a separate section, but the commenter
included their comments on the specific number for pilot
compensation under that heading.
    \25\ Docket # USCG-2016-0268-0033, p.26-27.
    \26\ Docket # USCG-2016-0268-0033, p.28.
    \27\ Docket # USCG-2016-0268-0033, p.27.
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    We recognize that there are a wide variety of factors that could be
used for justifying both more and less compensation than pilots in
other U.S. jurisdictions or Canadian pilots. While we believe, at this
time, that a comparison with Canadian Great Lakes pilots offers the
closest analogue, we are fully aware that there are still significant
differences in the U.S. and Canadian compensation work schedules and
compensation schemes, and as such, we intend to undertake a
compensation study to better understand the wide array of factors at
work. While that study should inform a future ratemaking, we believe
that the current compensation target is a reasonable and comparable
level because it is based on pilots that do substantially similar work
on the same bodies of water. Our goal is to establish a target pilot
compensation benchmark that promotes recruitment and retention without
posing undue financial burden on shipping companies. We will ensure
that we maintain transparency in our processes and calculations to
establish and refine this benchmark.
10-Year Compensation Benchmark
    One item addressed in the NPRM was new language in Sec.  404.104
that would allow the Director to set compensation to a benchmark for a
10-year period. We stated that, when setting the compensation
benchmark, we would set it based on the most relevant available non-
proprietary information such as wage and benefit information from other
pilotage groups (in the current case, based on Canadian Great Lakes
pilot compensation cited in the 2016 NPRM). Subsequently, for a period
of up to 10 years, the target compensation number would simply be
adjusted for inflation. We noted that this would promote target
compensation stability and rate predictability. As seen in the NPRM,
where the Coast Guard noted a significant change in the relative value
of the Canadian dollar that could have changed the target compensation
figure significantly, resetting the compensation benchmark repeatedly
could lead to large swings in year-to-year targets and have negative
effects on the stability of pilot earnings.
    Having reviewed the various comments on this issue as well as
considered the ratemaking methodology generally, we believe that using
a compensation benchmark to establish annual adjustments in target
compensation is an efficient means to ensure rate stability. We believe
that, at any time after a compensation benchmark is established, there
may be grounds to review it. Use of a compensation benchmark promotes
rate and compensation stability, while providing the Coast Guard with
the flexibility to make improvements over time based on market
conditions. For this reason, we are finalizing the proposed language in
Sec.  404.104.
    Several commenters mentioned the compensation benchmark, but
instead of discussing the use of a compensation benchmark generally,
they discussed the inputs into the current compensation benchmark. One
commenter argued that the Coast Guard should not base the compensation
benchmark on the average compensation for other U.S. pilots. We note
that this was never the proposal, and we merely proposed to use a
benchmark. In the NPRM, we wrote that ``the compensation benchmark
would be based on the most relevant available non-propriety information
such as wage and benefit information from other pilotage groups''
[emphasis added].\28\ We note that despite the use of that example of
what a particular compensation benchmark

could be, we did not propose to use another U.S. pilot group outside of
the Great Lakes to establish target pilot compensation in our
rulemaking. In the 2017 NPRM, the Coast Guard did not propose to set a
new compensation benchmark, but instead merely proposed continuing to
use the 2016 target compensation figure in its calculations, which was
based on the comparison with Canadian salaries.
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    \28\ 81 FR 72027 (December 19, 2016).
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    As discussed in the NPRM, we believe that the use of a compensation
benchmark is a better method for starting the calculation for the
compensation of pilots, as opposed to undertaking a complete re-
evaluation of the compensation structure for U.S. pilots each year. The
primary rationale is the promotion of workforce stability, which is
necessary for the system to provide safe, efficient, and reliable
pilotage. The Great Lakes pilotage system needs target pilot
compensation stability to achieve and maintain workforce stability. As
is common practice in many sectors of employment, levels of
compensation that are highly volatile can lead to difficulty attracting
and retaining qualified employees. Given the high skill levels and
lengthy training requirements required of Great Lakes pilots, as well
as the dynamic nature of the commodities trade that makes up much of
the shipping traffic in the area, we do not believe that a full re-
evaluation of compensation every year is conducive to maintaining a
system of safe and reliable pilotage.
Request To Study Additional Items
    Many commenters,\29\ citing the high cost of pilotage, requested
that the Coast Guard undertake additional studies of various related
issues. Specifically, these commenters almost uniformly requested that
the Coast Guard conduct additional research into (1) pilot recruitment
and retention factors; (2) the role of pilotage rates on modal shift
and Seaway competitiveness; and (3) efficiencies that can be achieved
by streamlining the pilotage system.
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    \29\ See, e.g., docket # USCG-2016-0268-0019, p. 2; Docket #
USCG-2016-0268-0020, p. 2.
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    The Coast Guard realizes that these issues are important, and may
warrant more in-depth study. To that effect, the Coast Guard has
commissioned a compensation study and an economic impact study to
better inform our ratemaking process. Until these studies are
completed, we are proceeding with the ratemaking methodology we
describe in this final rule. We remain open to persons providing
information about these important issues, and note that such
information can always be provided to the Coast Guard or to the Great
Lakes Pilotage Advisory Committee (GLPAC) outside the context of a
particular ratemaking action.
Audit Deadline
    Another item the Coast Guard discussed in its NPRM was a proposal
to adjust Sec.  403.300(c) to require submission of an unqualified
audit by January 31 of each year, rather than the existing requirement
that it be submitted on April 1. Our goal was to expedite the
availability of audit information so it could be used in the
publication of the NPRM by the next summer. The net result would be to
reduce the delay between the actual expenses and their recoupment from
3 to 2 years. We requested comment on whether such a deadline would be
feasible.
    One commenter \30\ supported the proposal, stating that they
``favor any measures that reduce the lag between receipt of actual
revenue and expense data and rate-setting decisions.'' The commenter
stated the Coast Guard should use the most recently available data to
determine the target revenue. They argued that the Coast Guard should
set up systems to document the invoices and source forms sent in
throughout the shipping season, and then tally this information and use
it as a point of validation when setting the target revenue in the
following year's NPRM. The commenter also stated that the pilots have
indicated they can produce monthly revenue reports for Coast Guard use,
and that this information can be used to inform the Coast Guard's
decision to terminate a surcharge or to revise rates to account for an
over-generation of revenue.
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    \30\ Docket # USCG-2016-0268-0033, p. 25.
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    However, most comments, including those from the 3 U.S. Great Lakes
pilot associations on this issue, took the opposite stance. These
comments were unanimously opposed to the proposed January 31 deadline
stating that preparing audited financial statements by that date would
be infeasible due to the tight time constraints, or if required, would
be extremely expensive. Commenters noted that the requirement to
provide numbers by this earlier date would require extensive effort and
significantly increase costs, and we did not receive any
recommendations for an alternate date.
    Based on the feedback we received, we are not making any changes to
the audit deadline at this time. We agree that we would like to reduce
the lag time between the revenue and expense audits and the information
we use for our rulemakings. However, based upon the comments from the
pilot associations, at this time we do not believe that the reported
costs of accelerating the reporting date to January 31 would be worth
the reported increase in expense. We do note, however, that we will
seek further input on this topic at a future GLPAC meeting.
Surcharge Shutoff Provision
    In the NPRM, the Coast Guard proposed adding a requirement to the
surcharge regulation in Sec.  401.401. We proposed that once a pilot
association collects the amount of money allowable for recoupment, the
pilot association's authorization to collect that surcharge would
terminate for the remainder of the shipping season. We proposed this to
prevent surcharge receipts from exceeding the target amount, which will
eliminate the need to make subsequent adjustments to the operating
expenses for the following year.
    One commenter \31\ stated that the ``Industry Commenters support
this proposal.'' The commenter suggested the Coast Guard should verify
that the surcharge funds are only used for the purposes as outlined by
the Coast Guard. The commenter stated that the ratepayers ``paid over
$667,000 in excessive training fees collected by the pilot
associations'' in 2015. They also stated it is in the ratepayers'
interests that the Coast Guard not allow excessive fees, as there is no
mechanism currently in place to repay these funds to the ratepayers.
The commenter also recommended that the Coast Guard verify that the
training fees are properly applied to training new pilots in each
District,\32\ and suggested the Coast Guard could achieve this by
requiring the inclusion of the training fee information as a separate
line item in the financial statements.
---------------------------------------------------------------------------

    \31\ Docket # USCG-2016-0268-0033, p. 24.
    \32\ Docket # USCG-2016-0268-0033, p. 25.
---------------------------------------------------------------------------

    Based on the comments we received, we are finalizing the additions
to the surcharge provision in Sec.  401.401. We also note that the
existing audit requirements for operating expenses include a line item
for training expenses, so that it is clear how much money is expended
for that purpose. Because of the three-year delay in the use of audited
expenses, the training costs, which were introduced in the 2015
ratemaking for the Saint Lawrence Seaway Pilots Association, will be
incorporated into, and adjusted for, the operating expenses for the
2018 ratemaking. The surcharge was expanded to the Lake Pilots
Association and Western Great Lakes Pilots

Association in 2016. Therefore, these expenses will not be addressed
until the 2019 Annual Rulemaking for these two associations.
Iroquois Lock
    Finally, in the NPRM, we proposed adding a mandatory change point
at the Iroquois Lock. While we did receive comments as to how this
would affect the total number of pilots needed for the rate-setting
calculations (which is discussed below), we did not receive any
comments on the merits of the idea itself. We are therefore finalizing
this provision without change in this final rule.

B. Rate Calculation Issues

    In this section, we discuss the comments related to the specific
ratemaking at issue for 2017, as well as lay out the method by which we
arrived at the final 2017 rates. The ratemaking process is specified in
46 CFR 404, 101 through 110. Each section below corresponds to one of
the sections in the CFR.
1. Recognition of Operating Expenses
    Step 1 in our ratemaking methodology requires that the Coast Guard
review and recognize the previous year's operating expenses (Sec.
404.101). We reviewed the independent accountant's financial reports
for each association's 2014 expenses and revenues.\33\ In the NPRM, we
accepted the final findings on the 2014 audit of association expenses,
and presented the recognized expenses for each District.
---------------------------------------------------------------------------

    \33\ These reports are available in the docket for this
rulemaking, see Docket # USCG-2016-0268-0056 through 0058.
---------------------------------------------------------------------------

    We received information with regard to lobbying expenses associated
with American Pilots Association (APA) dues. We attributed 15 percent
of APA dues to legal fees in the NPRM. This should have been 5
percent.\34\ We have adjusted the operating expenses to reflect this
change.
---------------------------------------------------------------------------

    \34\ Docket # USCG-2016-0268-0037, p. 2.
---------------------------------------------------------------------------

    We received comments from the three U.S. Great Lakes Pilot
Associations regarding the exclusion of legal fees from recognized
operating expenses. Specifically, in our review of the 2014 operating
expenses, we did not recognize certain legal expenses from K&L Gates,
totaling $47,256. The commenters stated that they did not understand
why these expenses were not recognized and requested that we reclassify
these expenses as allowable fees. We disagree that these K&L Gates
legal fees should be included. We disallowed the fees for K&L Gates
because we could not determine whether or not these funds were used for
lobbying or legal services. Per the requirements in paragraph
404.2(b)(6), lobbying fees are not allowable expenses for
reimbursement. We contacted the pilot associations to request
additional documentation that these fees were associated with legal
services and not lobbying, but we did not receive any documentation to
show which costs were attributable to legal services, and which were
attributable to lobbying work.
    In addition, the three pilot associations requested that we
recognize legal expenses in the amount of $75,049 incurred in their
litigation against the Coast Guard regarding the 2014 final rule. This
amount represents the difference between legal fees incurred and the
amount the Coast Guard paid in its settlement with the pilot
associations. Pursuant to Sec.  404.2(6), expenses incurred against the
United States are not recoupable as recognized operating expenses. The
pilots argue that this section of the regulations was improperly
adopted in the 2016 final rule. We do not believe that the 2017 Annual
Rulemaking is the appropriate venue to address the procedural aspects
of the 2016 final rule.
    A commenter from the Lakes Pilots Association noted that certain
operating expenses, relating to the payment of applicant pilot
salaries, had been omitted from the operating expenses of District Two.
Specifically, the commenter noted that payment of training salaries
should be considered as an operating expense instead of treated as
pilot compensation. We agree that as applicant pilots are not counted
as pilots for the purposes of calculating general pilot compensation,
and this occurred prior to the use of surcharges to pay for applicant
pilot salaries, these salaries should be recognized as an operating
expense. The surcharge provision for funding applicant pilots did not
impact rates until 2015 and the 2014 Annual Rulemaking did not provide
funding for this activity. Therefore, we added the amount, $281,588, to
the operating expenses of District Two to recoup the 2014 expense
incurred in training applicant pilots that year.
    The recognized expenses for the various Districts are as follows:

                                  Table 1--Recognized Expenses for District One
----------------------------------------------------------------------------------------------------------------
                                                                           District One
                                                                 --------------------------------
                                                                    Designated     Undesignated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                   St. Lawrence
                                                                       River       Lake Ontario
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Pilot subsistence/travel....................................        $302,547        $228,222        $530,769
    Applicant Pilot subsistence/travel..........................               0          12,996          12,996
    License insurance...........................................          20,231          22,480          42,711
    Applicant Pilot license insurance...........................               0           1,760           1,760
    Payroll taxes...............................................          78,067          64,130         142,197
    Applicant Pilot payroll taxes...............................               0               0               0
    Other.......................................................             479             378             857
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         401,324         329,966         731,290
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         130,741         103,173         233,914
    Dispatch expense............................................               0               0               0
    Payroll taxes...............................................           9,797           7,732          17,529
                                                                 -----------------------------------------------

        Total pilot and dispatch costs..........................         140,538         110,905         251,443
Administrative Expenses:
    Legal--general counsel......................................           2,173           1,505           3,678
    Legal--shared counsel (K&L Gates)...........................           8,783           6,932          15,715
    Legal--Coast Guard litigation...............................          12,794          10,098          22,892
    Insurance...................................................          21,829          17,226          39,055
    Employee benefits...........................................           7,570           5,974          13,544
    Payroll taxes...............................................           5,281           4,167           9,448
    Other taxes.................................................           7,262           5,731          12,993
    Travel......................................................             648             512           1,160
    Depreciation/auto leasing/other.............................          48,094          31,820          79,914
    Interest....................................................          13,713          10,821          24,534
    APA Dues....................................................          12,444          11,996          24,440
    Utilities...................................................           8,916             418           9,334
    Salaries....................................................          52,121          41,130          93,251
    Accounting/Professional fees................................           5,142           4,058           9,200
    Pilot Training..............................................           6,427           5,074          11,501
    Applicant Pilot training....................................               0               0               0
    Other.......................................................           8,866           6,546          15,412
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         222,063         164,008         386,071
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          763,925         604,879       1,368,804
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Pilot subsistence/travel....................................         -15,712         -12,401         -28,113
    Payroll taxes...............................................             -87             -68            -155
    Applicant Pilot payroll taxes...............................               0           2,347           2,347
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................         -15,799         -10,122         -25,921
Proposed Adjustments (Director):
    APA Dues....................................................            -622            -600          -1,222
    2015 Surcharge Adjustment *.................................         -92,766         -72,887        -165,653
    Legal--shared counsel (K&L Gates)...........................          -8,783          -6,932         -15,715
    Legal--Coast Guard litigation...............................         -12,794         -10,098         -22,892
                                                                 -----------------------------------------------
        Total Director's Adjustments............................        -114,965         -90,517        -205,482
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         633,161         504,240       1,137,401
----------------------------------------------------------------------------------------------------------------
* District One collected $493,682 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $328,029 authorized in the 2015 final
  rule.

                                  Table 2--Recognized Expenses for District Two
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                                SES to Port
                                                                     Lake Erie         Huron
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Applicant pilot salaries....................................        $112,635        $168,953        $281,588
    Pilot subsistence/travel....................................         148,424         222,635         371,059
    Applicant Pilot subsistence/travel..........................           9,440          14,160          23,600
    License insurance...........................................          52,888          79,333         132,221
    Applicant Pilot license insurance...........................           5,738           8,608          14,346
    Payroll taxes...............................................          76,903         115,354         192,257
    Applicant Pilot payroll taxes...............................           8,344          12,516          20,860
    Other.......................................................           1,053           1,579           2,632
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         415,425         623,138       1,038,563
Pilot Boat and Dispatch Costs:
    Pilot boat expense..........................................         173,145         259,718         432,863
    Dispatch expense............................................          10,080          15,120          25,200
    Employee benefits...........................................          72,662         108,992         181,654
    Payroll taxes...............................................           8,472          12,707          21,179
                                                                 -----------------------------------------------

        Total pilot and dispatch costs..........................         264,359         396,537         660,896
Administrative Expenses:
    Legal--general counsel......................................           2,680           4,020           6,700
    Legal--shared counsel (K&L Gates)...........................           4,984           7,476          12,460
    Legal--Coast Guard litigation...............................           8,371          12,557          20,928
    Office rent.................................................          26,275          39,413          65,688
    Insurance...................................................           9,909          14,863          24,772
    Employee benefits...........................................          23,002          34,504          57,506
    Payroll taxes...............................................           5,001           7,501          12,502
    Other taxes.................................................          21,179          31,769          52,948
    Depreciation/auto leasing/other.............................          17,784          26,677          44,461
    Interest....................................................           3,298           4,948           8,246
    APA Dues....................................................           8,664          12,996          21,660
    Utilities...................................................          15,429          23,144          38,573
    Salaries....................................................          46,008          69,013         115,021
    Accounting/Professional fees................................           9,410          14,115          23,525
    Pilot Training..............................................               0               0               0
    Other.......................................................          11,343          17,012          28,355
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         213,337         320,008         533,345
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats          893,121       1,339,683       2,232,804
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Depreciation/auto leasing/other.............................           3,322           4,982           8,304
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................           3,322           4,982           8,304
Proposed Adjustments (Director):
    APA Dues....................................................            -433            -650          -1,083
    2015 Surcharge Adjustment *.................................         -85,782        -128,672        -214,454
    Legal--shared counsel (K&L Gates)...........................          -4,984          -7,476         -12,460
    Legal--Coast Guard litigation...............................          -8,371         -12,557         -20,928
                                                                 -----------------------------------------------
        Total Director's Adjustments............................         -99,570        -149,355        -248,926
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......         796,873       1,195,310       1,992,183
----------------------------------------------------------------------------------------------------------------
* D2 collected $540,284 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $325,830 authorized in the 2015 final
  rule.

                                 Table 3--Recognized Expenses for District Three
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------
                                                                   Undesignated     Designated
                   Reported expenses for 2014                    --------------------------------      Total
                                                                   Lakes Huron,
                                                                   Michigan and     St. Mary's
                                                                     Superior          River
----------------------------------------------------------------------------------------------------------------
Operating Expenses:
Other Pilotage Costs:
    Pilot subsistence/travel....................................        $424,935        $141,645        $566,580
    Applicant pilot subsistence/travel..........................          24,608           8,203          32,811
    License insurance...........................................          14,304           4,768          19,072
    Payroll taxes...............................................         110,567          36,856         147,423
    Applicant pilot payroll taxes...............................           9,082           3,027          12,109
    Other.......................................................          12,268           4,090          16,358
                                                                 -----------------------------------------------
        Total other pilotage costs..............................         595,764         198,589         794,353
Pilot Boat and Dispatch Costs:
    Pilot boat costs............................................         593,360         197,787         791,147
    Dispatch costs..............................................         133,787          44,596         178,383
    Payroll taxes...............................................          31,432          10,477          41,909
                                                                 -----------------------------------------------
        Total pilot and dispatch costs..........................         758,579         252,860       1,011,439
Administrative Expenses:
    Legal--general counsel......................................          15,386           5,129          20,515
    Legal--shared counsel (K&L Gates)...........................          15,900           5,300          21,200
    Legal--Coast Guard litigation...............................          23,422           7,807          31,229

    Office rent.................................................           7,425           2,475           9,900
    Insurance...................................................          11,050           3,683          14,733
    Employee benefits...........................................         113,890          37,964         151,854
    Other taxes.................................................             129              43             172
    Depreciation/auto leasing/other.............................          28,802           9,601          38,403
    Interest....................................................           2,858             953           3,811
    APA Dues....................................................          20,235           6,745          26,980
    Dues and subscriptions......................................           3,975           1,325           5,300
    Utilities...................................................          33,083          11,028          44,111
    Salaries....................................................          95,577          31,859         127,436
    Accounting/Professional fees................................          27,492           9,164          36,656
    Pilot Training..............................................               0               0               0
    Other.......................................................           9,318           3,106          12,424
                                                                 -----------------------------------------------
        Total Administrative Expenses...........................         408,542         136,182         544,727
                                                                 -----------------------------------------------
            Total Operating Expenses (Other Costs + Pilot Boats        1,762,885         587,631       2,350,516
             + Admin)...........................................
Proposed Adjustments (Independent CPA):
    Pilot subsistence/Travel....................................         -15,595          -5,198         -20,793
    Payroll taxes...............................................           5,949           1,983           7,932
    Pilot boat costs............................................         -62,748         -20,916         -83,664
    Legal--shared counsel (K&L Gates)...........................          -1,590            -530          -2,120
    Dues and subscriptions......................................          -3,975          -1,325          -5,300
    Other expenses..............................................            -375            -125            -500
                                                                 -----------------------------------------------
        Total CPA Adjustments...................................         -78,334         -26,111        -104,445
Proposed Adjustments (Director):
    APA Dues....................................................          -1,012          -1,012          -2,024
    Surcharge Adjustment *......................................        -216,734         -72,245        -288,979
    Legal--shared counsel (K&L Gates)...........................         -14,310          -4,770         -19,080
    Legal--Coast Guard litigation...............................         -23,422          -7,807         -31,229
                                                                 -----------------------------------------------
        Total Director's Adjustments............................        -255,478         -85,834        -341,312
                                                                 -----------------------------------------------
            Total Operating Expenses (OpEx + Adjustments).......       1,429,073         475,687       1,904,760
----------------------------------------------------------------------------------------------------------------
* D3 collected $615,929 with an authorized 10 percent surcharge in 2015. The adjustment represents the
  difference between the collected amount and the authorized amount of $326,950 authorized in the 2015 final
  rule.

2. Projection of Operating Expenses
    Step 2 in our ratemaking methodology requires that the Coast Guard
project next year's operating expenses, and adjust for inflation or
deflation (Sec.  404.102). In the NPRM, we adjusted for inflation and
projected expenses for 2017 using the Bureau of Labor Statistics' data
from the Consumer Price Index for the Midwest Region of the United
States \35\ and reports from the Federal Reserve.\36\ We did not
receive any comments on this step and thus are adjusting operating
expenses for inflation as described in Sec.  404.102. We do note that,
based on updated information from the Bureau of Labor Statistics, the
2016 inflation modification has been adjusted to 0.8%.
---------------------------------------------------------------------------

    \35\ Available at https://www.bls.gov/regions/midwest/data/consumerpriceindexhistorical_midwest_table.pdf.
    \36\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm.

                                   Table 4--Calculation of Projected Expenses
----------------------------------------------------------------------------------------------------------------
                                                                 Area 2            Area 1
                       District One                          (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................          $633,161          $504,240        $1,137,401
2015 Inflation Modification (@-0.5%)......................            -3,166            -2,521            -5,687
2016 Inflation Modification (@0.8%).......................             5,040             4,014             9,054
2017 Inflation Modification (@2.1%).......................            13,336            10,620            23,956
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................           648,371           516,353         1,164,724
----------------------------------------------------------------------------------------------------------------

                                                                 Area 4            Area 5
                       District Two                          (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................           796,874         1,195,310         1,992,183
2015 Inflation Modification (@-0.5%)......................            -3,984            -5,977            -9,961
2016 Inflation Modification (@0.8%).......................             6,343             9,515            15,858
2017 Inflation Modification (@2.1%).......................            16,784            25,176            41,960
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................           816,016         1,224,024         2,040,040
----------------------------------------------------------------------------------------------------------------

                                                              Areas 6 and 8        Area 7
                      District Three                         (Undesignated)     (Designated)          Total
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1).........................         1,429,073           475,687         1,904,760
2015 Inflation Modification (@-0.5%)......................            -7,145            -2,378            -9,523
2016 Inflation Modification (@0.8%).......................            11,375             3,786            15,162
2017 Inflation Modification (@2.1%).......................            30,099            10,019            40,118
                                                           -----------------------------------------------------
    Adjusted 2016 Operating Expenses......................         1,463,402           487,114         1,950,516
----------------------------------------------------------------------------------------------------------------

3. Calculation of Number of Pilots
    Step 3 in our ratemaking methodology requires that the Coast Guard
determine the number of pilots needed to complete all assignments
(Sec.  404.103). In the NPRM, we proposed to modify our pilotage demand
calculation to focus on the pilot work cycle, including elements such
as travel, rest, pilot boat time, and other items in addition to the
time spent on the bridge of a ship. Based on the comments received, we
have determined that transitioning to this model, in which all traffic
is treated equally for the purpose of determining the number of pilots
needed, would result in traffic delays, overwork of pilots, and
possible compromises to safety on the Great Lakes. For these reasons,
we are not finalizing the proposed changes to Sec.  404.103.
    It is important to note that Step 3 produces two different sets of
numbers associated with the respective sections of Sec.  404.103. The
first number, described in paragraphs (a) through (c), is used to
establish the number of pilots the Coast Guard believes are needed to
provide safe and efficient pilotage service in each area. This number
provides guidance to pilot associations and the Director of Great Lakes
Pilotage in making determinations about hiring decisions and the
authorization of new pilots. The second number, described in paragraph
(d), is based on the number of persons applying for pilot positions
under 46 CFR 401. For purposes of setting Great Lakes pilotage rates in
Sec.  401.405, only the number derived from the 404.103(d) analysis is
used in the ratemaking calculations.
    Most commenters provided comments on the model used to determine
the number of pilots needed. In the NPRM, the Coast Guard proposed
replacing the existing staffing model, which we call the 2016 final
rule staffing model, with a model that analyzed shipping traffic
throughout the entire shipping season, and which we are calling the
2017 NPRM staffing model.\37\ We stated that we were proposing to
modify the pilotage demand calculation to incorporate the ``number of
assignments we reasonably expect pilots to be able to complete during
the 9-month shipping season instead of during peak pilotage demand.''
(See 81 FR 72014-5). While we recognized that during the opening and
closing of the season, there are significant spikes in traffic that
necessitate far more pilotage services, the Coast Guard believed that
this seasonal peak would be adequately covered by the fact that pilots
would work an extra 10 days (30 percent) per month during those months
to cover the increased traffic.
---------------------------------------------------------------------------

    \37\ We note that commenters often refer to these models as the
``peak'' and ``average'' staffing models, although we feel such
nomenclature is imprecise, as both models are designed to
accommodate traffic at higher-than-average demand periods.
---------------------------------------------------------------------------

    The functional result of the proposed change to the staffing model
was to reduce the total number of pilots needed to service the Great
Lakes system by 5, from a total of 54 under the previous staffing model
to a total of 49 under the proposed new staffing model. We received a
large number of comments, especially from pilots, regarding how this
change in modeling could affect their workload, lifestyle, stress
levels, and overall retention rates, as discussed below.
    The 2017 NPRM staffing model had a number of substeps and we
received comment on nearly all of these substeps. The substeps and
associated comments are discussed below.
Substep 1: Calculate Pilot Cycle
    The first step of the process is to determine how long it takes for
a pilot to undertake a full piloting cycle, that is, to board a ship,
provide pilotage services, disembark, rest, travel back to a port
location, and complete any administrative tasks associated with
providing pilotage service. We used the ``Average-Through Transit
Time'' between change points \38\ for an area or assignment segment
that is impacted by a mandatory change point, and then added additional
time for travel, delay, administrative needs, and mandatory rest, to
come up with the total amount of time for a ``Pilot Cycle.''
---------------------------------------------------------------------------

    \38\ The Average-Through Transit Time is the number of hours it
takes for a vessel to fully transit through an area.
---------------------------------------------------------------------------

    One commenter \39\ suggested that the Coast Guard had made an error
in its calculation of the number of pilots needed as a result of the
addition of the Iroquois Lock. As noted, in the NPRM, the Coast Guard
proposed to add a mandatory change point to District One, Area 1, at
the Iroquois Lock. We proposed this additional change point to enhance
safety on long segments, noting that the transit time between Snell
Lock and Cape Vincent takes about 11 hours under ideal circumstances,
and that we wanted to limit a U.S.-registered pilot's assignment time
to 8 hours in designated waters to mitigate fatigue.\40\ As a result of
adding this change point, we modified how we calculated the number of
pilots for the Designated Waters of District One (St. Lawrence River).
---------------------------------------------------------------------------

    \39\ Docket #USCG-2016-0268-0033, p. 14.
    \40\ 81 FR 72016 (December 19, 2016).
---------------------------------------------------------------------------

    The commenter noted that while the Coast Guard had increased the
number of pilot assignments to account for the mandatory change point
at Iroquois Lock, it had not adjusted the Average-Through Transit Time
to account for the shorter trips due to the change point. The commenter
asserted that instead of using a figure of 10.8 hours, the Coast Guard
should replace that figure with a transit time of 6 hours. This change

would have the effect of lowering the Pilot Cycle to 20.0 hours (from
the current 25.2) and the number of additional pilots needed from 3.4
to 2.7. The commenter recommended this new figure be incorporated into
the Coast Guard's calculations.
    We believe that this comment is justified, and that under
conditions where we are calculating transit through times for a single
pilot, this would be a reasonable change. However, we are not adopting
the 2017 NPRM staffing model, but we are retaining the 2016 final rule
staffing model. In such a model, we calculate transit through the
Iroquois Lock using double pilotage, where the fatigue issue is
mitigated by a second pilot. For that reason, under double pilotage,
pilots do not have to change at the Iroquois Lock, and we can continue
to use the full 10.8 hour average through transit time.
    One commenter \41\ stated the NPRM inconsistently relied on bridge
hours and cycle time in determining the number of pilots needed in each
District, and that instead of using the Average-Through Transit Time as
a basis for the pilot cycle, we should use an average trip time. The
commenter gave an example for District Two Area 4. The NPRM uses cycle
time analysis to determine that District Two, Area 4 needs seven pilots
to handle the historic average assignments in this area. These seven
pilots should complete an average of 73 assignments with an Average-
Through Transit Time of 17 hours each. The commenter stated the total
time on task for this District would be 8,687 hours. However, this
figure would differ from the Coast Guard's calculation of average
traffic, used to calculate revenue, which found the average time on
task as 5,174 hours per year using the average number of bridge hours
from 2007 to 2015. The commenter stated that the Coast Guard's
``inconsistent reliance on bridge hours raises the hourly rate in the
undesignated waters of District Two from $319 to $537.'' \42\ The
commenter stated that the Coast Guard cannot rely on cycle time to
increase the projected number of pilots needed and then use the bridge
hours to calculate the hourly rate.
---------------------------------------------------------------------------

    \41\ Docket #USCG-2016-0268-0033, p. 17.
    \42\ Docket #USCG-2016-0268-0033, p. 17.
---------------------------------------------------------------------------

    We acknowledge that we use different bridge hour inputs when
calculating the Average-Through Transit Time and the calculation for
the expected traffic. For staffing purposes, we are assuming that each
assignment will go between the mandatory change points in a given
pilotage district to ensure that we have enough pilots to handle
traffic. This is a situation where efficiency and safety are in
conflict. We believe the safety concerns associated with having too few
pilots outweigh the financial burden on the rate payers. The
methodology established in the 1990s used a similar bridge hour
standard in multiple steps throughout the ratemaking process. This
caused problems with recruitment and retention, revenue shortfalls,
lack of training, and a resistance to infrastructure investment and
maintenance. We intentionally decided to only include a historic bridge
hour input in determining the hourly rate for services and use the
number of assignments (assuming that each assignment would be average
maximum time between two change points) for staffing.
    However, we realize that this system of basing the pilot cycle on
the transit through time, as opposed to the average trip time, is
better suited to the 2016 final rule staffing model, rather than the
2017 NPRM staffing model. As we stated in the 2016 final rule, it makes
sense to use the full transit through time for conditions at the
opening and close of the season, as a high percentage of trips during
that time are through transit trips to ensure the pilot associations
are sufficiently staffed to provide adequately rested pilots during the
time of the season when the conditions are most challenging.
Conversely, when calculating the total revenues we expect the
associations to collect, we use the historic traffic data, which
provides a more accurate accounting of revenue. Unlike the issue of
staffing of vessels, it does not make a difference when revenue is
collected during the shipping season.
    As the commenter points out, the transition from 2016 final rule
staffing model to the 2017 NPRM staffing model, without reevaluating
the full ratemaking methodology, can cause these types of logical
discrepancies. This is one reason that we are not adopting the 2017
NPRM staffing model in the final rule, and are instead relying on the
2016 final rule staffing model to determine an adequate capacity.
Substep 2: Calculate Maximum Number of Assignments per Pilot
    In the next part of the 2017 NPRM staffing model, we divided the
Seasonal Availability (the total amount of time which we expect a pilot
to be available, which is 4,800 hours, or 200 days \43\) by the Pilot
Cycle to calculate a theoretical maximum number of assignments per
pilot. We realize that this number is highly theoretical, and assumes
no shipping delays, inclement weather conditions, traffic,
administrative issues, and that a new ship is readily available each
time a pilot arrives at port. As seen below, the number of actual
assignments a pilot can perform during the shipping season is much
lower.
---------------------------------------------------------------------------

    \43\ This number is based on a 270-day shipping season, with an
allowed 10 days off each non-peak month.
---------------------------------------------------------------------------

Substep 3: Calculate Estimated Number of Assignments per Pilot
    In the third step, we multiplied the theoretical maximum number of
assignments per pilot by an ``efficiency factor'' of 50 percent, which
is based upon the Coast Guard's 2013 ``Bridge Hour and Methodology
Study Final Report,'' \44\ to arrive at a total number of projected
assignments per pilot.
---------------------------------------------------------------------------

    \44\ Available in the docket, see Docket #USCG-2016-0268-0059.
---------------------------------------------------------------------------

    We received comments criticizing the efficiency factors from a
variety of sources. One commenter stated that it was ``nothing more
than a placeholder number from a study rejected by both pilots and
industry at GLPAC.'' \45\ The commenter requested that the Coast Guard
abandon its existing methodology for determining the number of pilots
needed in an area. In its place, the commenter suggested the Coast
Guard determine the number of pilots needed by either directly using
the recent average number of assignments per pilot, or by increasing
the efficiency ratio in each District to bring the anticipated number
of assignments up to average levels. The commenter did not specify what
the ``recent average number of assignments per pilot'' was, or what
change to the efficiency ratio would be needed to achieve this.
However, the commenter suggested that the Coast Guard could gather
information that would allow us to more directly determine average
pilot assignments by using invoices and source forms provided by
pilots.\46\
---------------------------------------------------------------------------

    \45\ Docket #USCG-2016-0268-0037, p. 3.
    \46\ Docket #USCG-2016-0268-0033, p. 19.
---------------------------------------------------------------------------

    While we understand the concept of this proposal, we do not agree
that the historic average of assignments is a useful tool for the
following reasons. The mid-1990s methodology excluded many of the pilot
assignment cycle time inputs to determine a seasonal workload.
Additionally, the goal of providing 10 days of recuperative rest for 7
months of the season was introduced in the 2016 Annual Rulemaking, in
response to National Transportation Safety Board recommendations,
letters from Congress asking us to address recruitment and

retention, and a recommendation from the July 2014 GLPAC meeting. For
these reasons, we do not expect the historical average of assignments
per pilot to be an accurate reflection of the estimated future counts
based on the current staffing model. We may consider using historical
data in a future rulemaking if we compile sufficient data to make an
accurate comparison.
    We believe the efficiency factor of 0.5 is supported by the Bridge
Hour and Methodology Study Final Report. In response to concerns about
the methodology used to calculate shipping rates, GLPAC unanimously
recommended that an independent party conduct a comprehensive review of
the methodology established in the mid-1990s to calculate pilotage
rates. GLPAC reviewed the scope of the study, entitled ``Bridge Hour
and Methodology Study Final Report,'' expanded the study's scope, and
unanimously approved the scope of the study. This included one-on-one
meetings with all of the stakeholders, two focus groups, and additional
GLPAC meetings. Based on the study's findings, the Coast Guard
developed the efficiency factor. The study recommended that we consider
an efficiency factor between 0.4 and 0.6 for staffing. However, we
provided additional guidance with regard to mandatory change points and
required rest between assignments in 2014, incorporated changes based
upon recommendations from the National Transportation Safety Board in
2015, and implemented significant changes to the methodology in 2016
Annual Rulemaking.
    While the various stakeholders rejected the final recommendations
of the study for different reasons, none of the criticisms of the study
accused its final recommendations of being a ``placeholder.'' One group
did not think the study went far enough to recommend changes that were
outside of the scope of the study. Another group did not think the
study went far enough to guarantee time off for the pilots or establish
an acceptable compensation standard. While we are not using the
efficiency factor in this final rule, we continue to believe that a 0.5
efficiency factor would be reasonable if it were being used in a
staffing model.
    One commenter \47\ stated that the Coast Guard had used incorrect
assumptions regarding efficiency, cycle time, recuperative rest, and
transition planning in calculating the total average time it takes for
a pilot to complete an assignment. Using as an example the Coast
Guard's calculations for District Three Area 2 (which in the NPRM is
listed as ``Area 7''), in which the Coast Guard calculated that the
number of projected assignments per pilot was 112, the commenter said
that ``assuming that these pilots can only take one assignment per day
(based on the estimated 21.5 hour shipping time), each pilot in [Area
7] will only work 41 percent of a 270-day shipping season. This figure
is unrealistically low.'' \48\
---------------------------------------------------------------------------

    \47\ Docket #USCG-2016-0268-0033, p. 16.
    \48\ Docket #USCG-2016-0268-0033, p. 16.
---------------------------------------------------------------------------

    We disagree with the assertions that we used incorrect assumptions
that resulted in an unrealistically low value. Even though the shipping
season is 270 days, we only expect the pilots to be on the tour-de-role
for 200 days a season (noting that they receive 10 days off per month
for seven of the nine months of the season) so the correct comparison
would be the number of days worked to the number of days available for
assignment which is 56 percent (112 assignments/200 days). This does
not seem unrealistically low, as the total cycle time is often over one
day. Furthermore, we know that the demand for pilot services is not
spread uniformly across the entire season, and there will be times when
a pilot is idle for substantial periods of time between assignments. It
is quite rare that a pilot returns after an assignment and is
immediately able to start a new assignment, and that usually only
occurs when there is a backlog of ships awaiting pilots. Simply put,
all of this represents inherent inefficiencies in the system and, for
these reasons, an efficiency factor of 50 percent is appropriate.
Substep 4: Calculate Total Number of Pilots Needed per Area
    Having determined the number of assignments that a pilot can
reasonably be expected to handle in a shipping season, we move to
calculate how many pilots are needed to handle the amount of traffic.
To do this, we divided the measured number of actual assignments
(averaged over a 10-year period) by the estimated number of assignments
per pilot to estimate the total number of pilots needed for a segment
within an area. This produces a figure of how many pilots are needed to
handle the total amount of traffic in an area.
    Because of the detailed manner in which calculations of pilots are
carried out, the raw calculations often end up suggesting a fractional
number of pilots. In the NPRM, we stated that, ``when the calculation
[of total pilots needed] results in a fraction of a pilot, we round
pilot numbers up to the nearest whole pilot. We do this to avoid
shortening our demand calculation and also to compensate for the role
of the district presidents as both working pilots and representatives
of their associations. We believe the rounding is justified to meet the
needs of the staffing model and also to ensure the presidents of the
pilot associations are able to effectively engage in meetings and
communications with stakeholders throughout the Great Lakes region and
the Coast Guard.'' (81 FR 72016-7).
    Several commenters argued that our rounding convention, in which we
rounded up to the nearest whole number rather than rounding up or down,
unnecessarily increased the number of pilots. One commenter argued that
the Coast Guard's stated rationale in the 2017 NPRM for rounding up in
all situations is flawed. The commenter suggested that the Coast Guard
should not build in time for meetings and outreach activities into the
pilot numbers, and stated that if the pilot associations believe those
are essential elements of officer functions, they should instead adjust
their distribution practices to encourage those functions.\49\ The
commenter also stated that other aspects of the staffing model already
ensure that association officers have time for other duties, citing the
efficiency adjustment of 50 percent.
---------------------------------------------------------------------------

    \49\ Docket #USCG-2016-0268-0033, p. 15, footnote 7.
---------------------------------------------------------------------------

    We disagree that the efficiency factor is the proper forum in which
to address a pilot's ancillary duties, such as acting as an association
president. The ability of a pilot president to engage in the running of
the association, respond to Coast Guard inquiries, and attend necessary
meetings further takes away from his ability to provide pilotage
service. The efficiency factor adjustment is designed to determine how
efficiently a pilot can undertake piloting activities, and does not
address these other required activities.
    The commenter also argued that the method by which the Coast Guard
rounded up pilot numbers in the 2017 NPRM deviates from the 2016
NPRM.\50\ In the 2017 NPRM, we proposed to round up ``when the
calculations resulted in a fractional pilot.'' \51\ We agree that the
2017 NPRM staffing model is different from that used in 2016. In 2016,
we established the standard to round the number of pilots up or down,
``as seems most reasonable,'' using a demand number that generally
allocated more pilots than needed at times of lesser traffic. This is
because, under the 2016 Final Rule

Staffing Model, there was less of a safety concern of rounding down by
a fractional pilot. We proposed a different staffing model in the 2017
NPRM, using the pilot assignment cycle to determine the actual number
of pilots needed for the duration of the shipping season. Under this
model, rounding down would be more likely to result in an inadequate
number of properly-rested pilots available, and could result in safety
concerns and traffic delays. However, as stated above, we believe that
in maintaining the 2016 final rule staffing model, this issue with the
rounding can be resolved.
---------------------------------------------------------------------------

    \50\ Docket #USCG-2016-0268-0033, p. 14.
    \51\ 81 FR at 72015-6.
---------------------------------------------------------------------------

    The Coast Guard also received a comment that it had applied
unnecessary rounding to the Iroquois Lock calculation, resulting in an
overestimate of the number of pilots needed. The commenter wrote,
``According to GPLO calculations, without rounding, District One would
need a total of 9.11 pilots to handle anticipated demand in District
One, Area 1. With rounding, GLPO proposes that 11 pilots are needed.''
\52\
---------------------------------------------------------------------------

    \52\ Docket #USCG-2016-0268-0033, page 15.
---------------------------------------------------------------------------

    We believe the coalition's calculations are incorrect. In the NPRM,
we calculated that District One, Area 1, would need a total of 9.11
pilots (3.4 + 5.71), for the increased number of assignments due to the
mandatory change point at Iroquois Lock. However, this was rounded up
to 10 not 11. This is shown in Table 9 of the NPRM, where we stated
that the total number of pilots required for the designated waters of
District One, Area 1, is 10.\53\
---------------------------------------------------------------------------

    \53\ 81 FR at 72017 (December 19, 2016).
---------------------------------------------------------------------------

    In evaluating this comment, however, we did discover one issue with
our rounding convention. While the text of paragraph 404.103(c) reads,
in part, ``[t]he number of pilots needed in each district is calculated
by totaling the area results by district and rounding them to the
nearest whole integer,'' the Coast Guard made an error in its rounding
calculations by rounding the number of pilots in each area, rather than
in each district. There are circumstances where this could have
resulted in an increase of an extra pilot (if, for example, two areas
required 0.7 pilots). We have corrected this mistake in the final rule
and are rounding by district.
Reasons To Abandon 2017 NPRM Staffing Model
    Several commenters discussed the proposed change from 2016 final
rule staffing model to the 2017 NPRM staffing model in general terms,
without referring to specific portions of the calculations.
    One commenter, a Great Lakes pilot, argued that the number of
pilots proposed in the 2017 calculations would fall short of what is
needed to provide safe, efficient, and reliable pilotage.\54\ The
commenter stated that reviewing bridge hours worked in District Three
over the course of the 2016 shipping season would show that pilots
there had worked extra hours to keep ships moving. Furthermore, the
commenter suggested that cruise ships, which are run on a much tighter
schedule than cargo ships, might abandon the area if a lack of pilots
caused persistent delays. However, the commenter did not provide
specific recommendations on how we should modify the staffing model's
methodology or suggest different inputs.
---------------------------------------------------------------------------

    \54\ Docket #USCG-2016-0268-0021, p. 1.
---------------------------------------------------------------------------

    We received comments from the Western Great Lakes Pilot Association
President which suggested that using an average staffing model, as
proposed in the 2017 NPRM, would result in unacceptable delays for
cruise ships. We recognize that the various types of vessels that
employ U.S. and Canadian registered pilots have different tolerances
for delays due to the lack of pilot availability. One method to address
the varying tolerance for delays is through adjusting the regulations
that deal with dispatching. The current system is to strictly assign
pilots on a first-come, first-serve basis. We plan to discuss this
issue during the next GLPAC meeting to investigate whether that
standard should be modified, and the potential implications such
modifications would have on the System and hourly pilotage rates.
    For many of the reasons the commenters described above, we realize
that there are flaws with the 2017 NPRM staffing model. Based upon the
comments received, particularly those that highlighted the variations
in traffic throughout the season and the inconsistencies in the use of
average trips vs. through time, we have concluded that our data does
not support using the 2017 NPRM staffing model. For those reasons, we
have decided to not to adopt the 2017 NPRM staffing model, and continue
to use the 2016 final rule staffing model.
    We note, however, that in the NPRM, we proposed to adjust the
wording of 46 CFR 404.104 by replacing the word ``peak'' with the word
``seasonal.'' While we are not adopting the proposed new staffing
model, we believe that ``seasonal'' is a more appropriate term to use,
as instances of high demand often occur at various points in the
seasons, and so are maintaining that textual change in the final rule.
    We agree with both shippers and pilots that the proposed 2017 NPRM
staffing model may not achieve the required goals of promoting safe and
efficient pilotage, and that averaging traffic through an entire season
may not adequately account for mid-season variations in demand. In this
final rule, we maintain the staffing model we adopted in the 2016 final
rule. Even though we have used the label ``peak demand'' for the 2016
staffing model, we believe some have misinterpreted this label. This
model uses the pilot assignment cycle and average late-seasonal traffic
demand over the past 10 shipping seasons to establish the number of
pilots necessary to move that traffic. We did not establish staffing
levels to eliminate delays throughout the season by reviewing 10 years
of historic traffic and ensuring that sufficient pilots would be on the
tour-de-role throughout the season to eliminate delays. We believe our
approach provides sufficient pilots to deal with the opening of the
Seaway and the late season rush, in addition to other high-traffic
periods, in a safe and reliable manner while also accounting for mid-
season demand variations and providing the pilots with sufficient
opportunity to achieve 10 days of recuperative rest during 7 months of
the season. We are willing to evaluate potential adjustments to this
model in the future if we receive specific delay tolerances from those
stakeholders concerned about this issue. We discussed staffing during
the previous GLPAC meeting and plan to discuss staffing and delay
tolerance during future meetings.
Calculation of Pilotage Need Under the 2016 Final Rule Staffing Model
    Using the 2016 final rule model, we have recalculated the number of
pilots needed for each district. First, we note that use of this model
considers the extensive use of double pilotage during the opening and
closing of the shipping season. This is because, during the opening and
closing of the season, the aids to navigation may not be in place, the
weather can be volatile and extreme, sea smoke and fog appear with
little notice, and ice conditions routinely present unique challenges
to navigation. It is also during these periods that the pilots are
working diligently to ensure all vessels exit the system before the
locks close. For these reasons, we tend to authorize double pilotage
during the opening and closing in designated waters for District One
and District Two. District Three tends to engage in day-

time only navigation on the St. Marys River in lieu of utilizing two
pilots. Double pilot usage in District Three occurs about 30 percent of
the time during the opening and closing of the System. Our staffing
model is designed to move the average amount of ships (calculated using
a 10-year average model) into and out of the system during these times.
    Additionally, we note that the use of double pilotage avoids
concern about how the proposed rule's modeling system dealt with the
inclusion of the new mandatory change point at the Iroquois Lock.
Several commenters had noted that while the Coast Guard had mandated
the change, it had not updated its models to account for a shorter
average transit through time the change would produce. However, during
periods of double pilotage, because there are two pilots onboard that
can share the duty, there is no need to do a pilot change at the
Iroquois Lock.
Substep 1: Determine the Pilot Cycle Time
    Similar to the 2017 NPRM staffing model, we start the 2016 final
rule staffing model by calculating the pilot cycle time, as shown the
tables below:

      Table 5a--Calculation of Pilot Assignment Cycle, District One
------------------------------------------------------------------------
            District One                   Area 1            Area 2
------------------------------------------------------------------------
Time on Bridge or Available (hrs)...              10.8                11
Travel and Pilot Boat Transit (hrs).               3.2               4.6
Delay (hrs).........................                .7                .9
Admin (hrs).........................                .5                .5
Mandatory Rest......................                10                10
                                     -----------------------------------
    Total Pilot Assignment Cycle                  25.2              27.0
     (hrs)..........................
------------------------------------------------------------------------

    District Two is unique in the fact that the mandatory change points
do not align with the border of designated and undesignated waters. The
mandatory change point is located at Detroit, but the boundary for
designated and undesignated waters occurs at the Southeast Shoal of
Lake Erie. We based the average through transit for each of these
segments, as follows:

      Table 5b--Calculation of Pilot Assignment Cycle, District Two
------------------------------------------------------------------------
                                       Between Area 4    Between Detroit
            District Two                 and Detroit     and Port Huron
------------------------------------------------------------------------
Time on Bridge or Available (hrs)...                17               6.5
Travel and Pilot Boat Transit (hrs).               4.6               3.2
Delay (hrs).........................                .7                .4
Admin (hrs).........................                .5                .5
Mandatory Rest......................                10                10
                                     -----------------------------------
    Total Pilot Assignment Cycle                  32.8              20.6
     (hrs)..........................
------------------------------------------------------------------------

    District Three is unique in that steel-importing vessels transit to
Chicago/Burns Harbor while grain-exporting vessels depart from Duluth
and Thunder Bay. During the opening and closing of the shipping season,
the System experiences numerous vessels that make an inbound or
outbound transit in ballast.

                         Table 5c--Calculation of Pilot Assignment Cycle, District Three
----------------------------------------------------------------------------------------------------------------
                      District Three                             Area 6            Area 7            Area 8
----------------------------------------------------------------------------------------------------------------
Time on Bridge or Available (hrs).........................              22.5               7.1              21.6
Travel and Pilot Boat Transit (hrs).......................               2.4               3.6               3.7
Delay (hrs)...............................................                 1               0.3               3.3
Admin (hrs)...............................................               0.5               0.5               0.5
Mandatory Rest............................................                10                10                10
                                                           -----------------------------------------------------
    Total Pilot Assignment Cycle (hrs)....................              36.4              21.5              39.1
----------------------------------------------------------------------------------------------------------------

Substep 2: Determination of Average Late Season Demand
    We then determine the average late-season traffic demand over the
base period, as shown in table 6. This number is derived by dividing
the number of assignments by the number of days in the corresponding
pilot cycle. Numbers for designated areas are doubled due to the need
for double pilotage during late peak seasonal period, as described
above. Table 6 also shows the number of pilots that would be authorized
using the traffic information from 2007-2016.

Table 6--10-Year Average of Traffic Demand and Pilot Requirements at the
                         Closing of the Season,
                                2007-2016
------------------------------------------------------------------------
                                           Area 1            Area 2
            District One                (designated)     (undesignated)
------------------------------------------------------------------------
Average late-season assignments per                  5                 6
 day................................
Average Pilot Cycle Time (hours)....              25.2              27.0
Total Hours Needed (Assignments *                  126               162
 Cycle Time)........................
Total Hours Needed for double                      252  ................
 pilotage transit (designated only).
Number of pilots needed to meet the               10.5               6.8
 average seasonal demand (total
 hours/24)..........................
                                     -----------------------------------
    Pilots Needed for total district      (252 + 162)/24 = 17.25 = 17
                                                   (rounded)
------------------------------------------------------------------------
------------------------------------------------------------------------

                                          Area 4 to
                                           Detroit       Area 5 Between
            District Two               (designated and  Detroit and Port
                                        undesignated)         Huron
------------------------------------------------------------------------
Average late-season assignments per                  5                 5
 day................................
Average Pilot Cycle Time (hours)....              32.8              20.6
Total Hours Needed (Assignments *                  164               103
 Cycle Time)........................
Total Hours Needed for double                      N/A               206
 pilotage transit (designated only).
Number of pilots needed to meet the                6.8               8.6
 average seasonal demand (total
 hours/24)..........................
                                     -----------------------------------
    Pilots Needed for total district      (164 + 206)/24 = 15.41 = 15
                                                   (rounded)
------------------------------------------------------------------------

                                                                 Area 6            Area 7            Area 8
                      District Three                         (undesignated)     (designated)     (undesignated)
----------------------------------------------------------------------------------------------------------------
Average late-season assignments per day...................                 5                 5                 5
Average Pilot Cycle Time (hours)..........................              36.4              21.5              39.1
Total Hours Needed (Assignments * Cycle Time).............               182             107.5             195.5
Total Hours Needed for double pilotage transit (designated               N/A       \55\ 139.75               N/A
 only)....................................................
Number of pilots needed to meet the average seasonal                     7.6               5.8               8.1
 demand (total hours/24)..................................
                                                           -----------------------------------------------------
    Pilots Needed.........................................    (182 + 139.75 + 195.5)/24 = 21.55 = 22 (rounded)
----------------------------------------------------------------------------------------------------------------

    Based on the above analysis, we have determined that there is a
need for a total of 54 pilots. The breakdown, as shown in the above
table, is 17 pilots in District One, 15 pilots in District Two, and 22
pilots in District Three. The Coast Guard will keep these numbers in
mind in future regulatory actions.
---------------------------------------------------------------------------

    \55\ District Three prefers day-time navigation only during the
opening and closing of the System and these pilots use double
pilotage approximately 30 percent of the time at the opening and
closing of the season.
---------------------------------------------------------------------------

Calculation of Projected Pilot Numbers
    As stated above, paragraph 404.103(d) produces a separate number of
pilots, which is used for the Great Lakes pilotage ratemaking
procedure. That section requires the Director of Great Lakes Pilotage
to determine the number of pilots expected to be fully working and
compensated based on the number of persons applying become U.S. Great
Lakes registered pilots, and on information provided by the district's
pilotage association. In the NPRM, the Coast Guard projected that there
would be 17 pilots in District One, 13 pilots in District Two, and 15
pilots in District Three, for a total of 45 pilots.
    In the NPRM, after determining the number of pilots needed in each
district in Step 3, the Coast Guard proposed adding additional
applicant pilots in District Two and District Three. The Coast Guard
believes these applicant pilots are necessary to prepare for future
retirements, given the long training periods associated with new
pilots. Currently, 4 of the pilots in District Two are over 62 years of
age, and 6 of the pilots in District Three are over 61 years of age.
These pilots represent nearly 30 percent of the pilot strength in each
of these districts. Waiting until these pilots retire to replace them
will result in significant delays and may denigrate safety, because the
pilot association will be short-staffed. These pilots are needed in
addition to the existing shortage of pilots (District Two is one pilot
short of the needed number, while District Three is seven pilots
short). Therefore, the Coast Guard proposed authorizing a surcharge in
2017 to fund these additional applicant pilots.
    We received several comments on this issue. One commenter \56\
stated that the ``NPRM arbitrarily introduces pilot age as a reason to
justify the addition of more pilots than required by its
calculations.'' The commenter stated that the Coast Guard proposes
adding 1 additional pilot in District Two and 4 additional pilots in
District Three, but the Coast Guard does not impose age limitations on
pilots. The commenter stated the Coast Guard also does not specify the
retirement commitments of the current pilots within the next 2 years.
The commenter recommended that instead of speculating about the age
impacts on pilot rosters, the Coast Guard should train additional
pilots based on the retirement transition plans.
---------------------------------------------------------------------------

    \56\ Docket #USCG-2016-0268-0033, p. 18.
---------------------------------------------------------------------------

    We disagree. The regulations allow a registered pilot to work until
the age of 70. Just because a pilot can keep his full registration
until age 70, doesn't mean that all of the pilots will work until that
age. In the past several years, a number of pilots have retired prior
to age 70. While we are in close contact with the US pilot associations
to plan for future retirements, we do not feel it is prudent to assume
that all of the current pilots will work until age 70.

    Once commenter \57\ stated that the ``Lakes Pilots Association
agrees with the number of pilots in the proposed rates of 13 working
pilots and 2 training pilots.'' The commenter stated the Lakes Pilot
Association will require 15 pilots to service future traffic and
provide adequate rest in the future. The Lakes Pilot Association noted
in 2018, that it will look for 14 full time pilots and 1 trainee and
will be at 15 full time pilots in 2019. We agree with the assessment
that there is a need for 13 working pilots and 2 training pilots for
the 2017 shipping season. We cannot comment on 2018 and 2019 at this
time.
---------------------------------------------------------------------------

    \57\ Docket #USCG-2016-0268-0035, p. 1.
---------------------------------------------------------------------------

    Based on our analysis of the pilotage numbers and the comments
received, we have not modified the number of working pilots for 2017.
Both the 2017 NPRM staffing model and the 2016 final rule staffing
model produce more pilots than the 3 U.S. pilot associations have fully
trained. Therefore, when we established 45 working pilots in the NPRM,
we knew that the system needed more time to acquire and train the
additional pilots. We will continue to monitor and work with the pilot
associations to ensure that the associations continue to make progress
toward our staffing goals. The final numbers for the 2017 Step 3
calculations are 17 pilots for District One, 13 pilots for District
Two, and 15 pilots for District Three, for a total of 45 pilots.
Pursuant to 46 CFR 404.104, these are the numbers we will be using in
our rate calculations.
4. Calculation of Target Compensation
    Step 4 in our ratemaking methodology requires that the Coast Guard
determine the target pilot compensation (Sec.  404.104). In the 2016
final rule, the Coast Guard used the Canadian pilot compensation as the
benchmark for the U.S. pilot compensation, and then made an adjustment
for foreign exchange differences and inflation. The Coast Guard then
increased the U.S. target pilot compensation by 10 percent over the
projected GLPA figure to account for the differences in the status of
U.S. and Canadian pilots and the different compensation systems in
place in the two countries. In the 2017 NPRM, the Coast Guard proposed
keeping the target pilot compensation at the 2016 levels.
    In this section, we discuss comments relating to our calculations
to get to the target compensation as discussed in the 2016 final rule
and the 2017 NPRM, which uses the Canadian salary plus 10 percent as
the target. In the section regarding setting a compensation benchmark
above, we separately discussed the issue of using different
compensation benchmarks, such as the compensation packages for pilots
in other U.S. Associations or salaries of first mates or other
crewmembers. For the reasons described in that section, we continue to
believe that the benchmark established in the 2016 final rule, based on
Canadian pilot salaries plus a 10 percent differential to calculate the
value of certain benefits, is an appropriate level of compensation. In
this section, we discuss the specific comments related to the
calculation of the compensation benchmark.
    Several commenters suggested that the use of Canadian pilot
salaries was an inappropriate yardstick by which to base U.S. salaries.
One commenter argued that it was inappropriate because U.S. and
Canadian pilot associations cannot recruit workers from the same pool
of individuals.\58\ Another commenter suggested that the older way in
which the Coast Guard determined compensation, by basing its estimate
on the wages paid to U.S. Masters and Mates, was more appropriate,
asserting that the functions of these personnel are essentially the
same as U.S. pilots, and that using this system avoids the
complications of comparing compensation across national boundaries.\59\
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    \58\ Docket #USCG-2016-0268-0031, p. 1.
    \59\ Docket #USCG-2016-0268-0033, p.20.
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    Several pilot associations argued that the Coast Guard should base
Great Lakes compensation figures on the salaries earned by other U.S.
pilot associations. Several commenters provided figures, noting that in
other areas, U.S. pilots earned upwards of $450,000 per year. One
commenter \60\ provided figures showing the projected compensation for
pilots in various U.S. pilot associations, which ranged from a low of
$399,708 per year to a high of $493,692. Other commenters echoed the
argument that the Great Lakes pilots are among the lowest-paid U.S.
pilots.
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    \60\ Docket #USCG-2016-0268-0028, p. 6-7.
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    In some regions governed by local pilotage associations,
compensation figures appear to be much higher than those proposed by
the Coast Guard. It is unclear why some U.S. pilot associations receive
compensation levels much higher than that of Canadian pilots or U.S.
masters and mates, based on the alternative sources of information that
we have.\61\ As many organizations that set pilotage rates do not make
public what methodology they are using to derive pilotage rates, we do
not have sufficient information or a basis to raise pilotage rates on
the Great Lakes to determine if these levels of compensation are
appropriate for Great Lakes pilotage. We note, again, that we are
undertaking a compensation study to better determine an appropriate
compensation benchmark, and will present the results of such a study in
a public forum should it provide a better basis for setting
compensation levels.
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    \61\ These sources include information from the Great Lakes
Pilotage Authority as well as information regarding compensation
submitted by other U.S. pilotage associations.
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    Even for those commenters who agreed that the comparison between
U.S. and Canadian Great Lakes pilots was the most apt, we received
comments that our calculations erred in a variety of ways. Many
commenters offered statements regarding the calculations of Canadian
pilots' average total compensation, arguing that in certain areas, the
Coast Guard had overestimated or underestimated the total amount, or
made errors in its conversion of the value of Canadian compensation to
American currency. In the NPRM, we recognized that the most challenging
portion of our target compensation analysis was the conversion of
Canadian benefits into equivalent United States benefits, and many
commenters argued that we had underestimated total compensation in a
variety of ways.
    One commenter argued that the Coast Guard underestimated Canadian
compensation by averaging the compensation of four contract and three
apprentice pilots, along with 49 full-time, regular Canadian pilots,
into the compensation total.\62\ That commenter stated that the
compensation for U.S. full-time, regular pilots should be based on the
salaries of Canadian full-time, regular pilots only. By excluding those
contract and apprentice pilots, the commenter calculated that the base
compensation should have been $291,035, rather than the $268,552 used
in the NPRM, meaning that the Coast Guard should increase the total
compensation target by over 8 percent.
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    \62\ Docket #USCG-2016-0268-0028, p. 2-3.
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    While we agree with the commenter that contract and apprentice
pilots should not have been included in the calculations of pilot
salaries, we disagree with the commenter's assertion that they were
included in our calculations. The Coast Guard did not base its
calculations on the annual report the commenter cited, but received
information from the GLPA directly. When the GLPA provided the Coast
Guard with the information regarding Canadian compensation, it did not
include these contract and apprentice pilots.

    Another commenter \63\ argued that U.S. pilots should be paid
substantially more than Canadian pilots due to working more days per
year. This commenter stated that that the Canadian Great Lakes Pilot
Association's work schedule is 178 days per year, and that the U.S.
pilot compensation needs to be adjusted to reflect an additional 12.4
percent difference in time on duty. We disagree that target pilot
compensation needs to be adjusted by 12.4 percent. While our staffing
model assumes that the pilots will be on the tour-de-role for 200 days
of the season, we do not make a 1-to-1 comparison between time spent on
duty in the Canadian sector and time spent on the tour-de-role. Our
methodology was designed to approximate the annual average compensation
for Canadian pilots, not an attempt to match their hourly pay rate.
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    \63\ Docket #USCG-2016-0268-0038, p. 4.
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    One issue that arose regarding compensation figures is the
conversion from Canadian to U.S. currency. Comments from the Great
Lakes Shippers Association requested the Coast Guard to recalculate the
baseline compensation figure using updated exchange rate figures. The
commenter stated that the Coast Guard's ``decision in the 2017 NPRM to
disregard fluctuations in the U.S./Canadian exchange rate is
inconsistent with the 2016 NPRM.'' \64\ The commenter requested that
the Coast Guard provide analysis and reasoning for this change from the
past practice. The commenter also stated that if the exchange rates are
relevant in one direction the exchange rates should be relevant in the
other direction, arguing that not including this fluctuation in the
exchange rate ``fails to reconcile the emphasis on perceived parity
between U.S. and Canadian pilot compensation with the negative impact
of increased U.S. dollar strength on Canadian pilots.'' Shipping
industry comments requested that exchange rates be used to recalculate
compensation on a regular basis. The comment suggested that the Coast
Guard should adhere to this methodology if the Coast Guard chooses to
use Canadian compensation as the benchmark.
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    \64\ Docket #USCG-2016-0268-0033, p. 20.
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    The shipping association comments requested that, given the decline
in exchange rates between the U.S. and Canadian dollars, the Coast
Guard dramatically lower the target compensation. The commenter stated
that ``assuming a 1.329 average exchange rate and 2 percent inflation
per year, U.S. pilot compensation in 2017 would be $240,149''.\65\ The
commenter stated that this compensation figure is 3.4 percent higher
than the 2015 projected compensation levels in designated waters of
$232,237, which was the last year the Coast Guard used U.S. Mates and
Masters as the U.S. target pilot compensation.
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    \65\ Docket #USCG-2016-0268-0033, p. 21.
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    We acknowledge that the exchange rate had changed substantially,
and that our original translation of Canadian benefits to U.S. dollars
is based on the 2014 exchange rate. This rate has fluctuated
significantly in recent years, for example, changing from 1.149 CAD:1
USD in 2014 to 1.329 CAD:1 USD in 2015.\66\ If the goal of the Coast
Guard were to have U.S. pilot salaries mirror, as closely as possible,
the value of Canadian pilots' salaries each year, it would make sense
to re-baseline the compensation figure using updated exchange rates
each year. One downside of this approach, however, would be tremendous
volatility in pilot compensation as the currency fluctuated from year
to year. As we noted in our discussion of why we proposed a
compensation benchmark in the NPRM, large swings in compensation, based
on external factors such as currency fluctuations, are something the
Coast Guard believes are highly detrimental to retaining talented
pilots and maintaining safe and efficient pilotage.
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    \66\ See https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates.
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    Other commenters wanted the Coast Guard to revisit its calculation
of compensation and increase it, citing a number of factors. One
commenter \67\ argued that the 10 percent factor used to adjust the
Canadian pilot compensation to American pilot target compensation is
too low. The commenter identified 10 ways that the Canadian pilot
positions differ from American pilot positions, and argued that each of
these identified differences works to the disadvantage of the American
pilots with respect to compensation. The commenter suggested setting
U.S. pilot compensation at Canadian compensation plus 25 percent,
rather than 10 percent, but then stated that this would still be too
low given the differences.
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    \67\ Docket #USCG-2016-0268-0028, p. 4.
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    The commenter \68\ further stated the difference in healthcare and
pension costs alone exceeds the 10 percent factor and supports the need
for at least a 25 percent factor.\69\ The commenter stated the pension
compensation between the American and Canadian pilots is different: The
Canadian pilots are government employees who contribute to a defined
benefit pension plan that is subsidized by the Canadian government, but
the American pilots have no defined government plans and must cover the
costs of retirement themselves. The commenter submitted data on the