[Federal Register Volume 81, Number 202 (Wednesday, October 19, 2016)]
[Proposed Rules]
[Pages 72011-72034]
[FR Doc No: 2016-25254]

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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: Notice of proposed rulemaking.

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SUMMARY: The Coast Guard proposes new base pilotage rates and
surcharges using the methodology instituted in 2016. The changes would
take effect 30 days after publication of a final rule. Rates for
pilotage services on the Great Lakes were last revised in March 2016
and, by law, must be reviewed annually.

DATES: Comments and related material must be submitted to the online
docket via www.regulations.gov on or before December 19, 2016. Requests
for a public meeting must be submitted by November 18, 2016.

ADDRESSES: You may submit comments identified by docket number USCG-
2016-0268 using the Federal eRulemaking Portal at http://www.regulations.gov. See the ``Public Participation and Request for
Comments'' portion of the SUPPLEMENTARY INFORMATION section for further
instructions on submitting comments.

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

SUPPLEMENTARY INFORMATION:

Table of Contents for Preamble

I. Public Participation and Request for Comments
II. Abbreviations
III. Basis and Purpose
IV. Background
V. Discussion of Proposed Rate Changes
    A. District One
    B. District Two
    C. District Three
    D. Other Changes Affecting Ratemaking
    E. Surcharges
VI. Regulatory Analyses
    A. Regulatory Planning and Review

    B. Small Entities
    C. Assistance for Small Entities
    D. Collection of Information
    E. Federalism
    F. Unfunded Mandates Reform Act
    G. Taking of Private Property
    H. Civil Justice Reform
    I. Protection of Children
    J. Indian Tribal Governments
    K. Energy Effects
    L. Technical Standards
    M. Environment

I. Public Participation and Request for Comments

    We view public participation as essential to effective rulemaking,
and will consider all comments and material received during the comment
period. Your comment can help shape the outcome of this rulemaking. If
you submit a comment, please include the docket number for this
rulemaking, indicate the specific section of this document to which
each comment applies, and provide a reason for each suggestion or
recommendation.
    We encourage you to submit comments through the Federal eRulemaking
Portal at http://www.regulations.gov. If your material cannot be
submitted using http://www.regulations.gov, contact the person in the
FOR FURTHER INFORMATION CONTACT section of this document for alternate
instructions. Documents mentioned in this notice, and all public
comments, are in our online docket at http://www.regulations.gov and
can be viewed by following that Web site's instructions. Additionally,
if you go to the online docket and sign up for email alerts, you will
be notified when comments are posted or a final rule is published.
    We accept anonymous comments. All comments received will be posted
without change to http://www.regulations.gov and will include any
personal information you have provided. For more about privacy and the
docket, you may review a Privacy Act notice regarding the Federal
Docket Management System in the March 24, 2005, issue of the Federal
Register (70 FR 15086).
    We are not planning to hold a public meeting but will consider
doing so if public comments indicate a meeting would be helpful. We
would issue a separate Federal Register notice to announce the date,
time, and location of such a meeting.

II. Abbreviations

APA American Pilots Association
BLS Bureau of Labor Statistics
CAD Canadian dollars
CFR Code of Federal Regulations
CPA Certified public accountant
GLPA Great Lakes Pilotage Authority (Canadian)
GLPMS Great Lakes Pilotage Management System
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OMB Office of Management and Budget
RA Regulatory analysis
SBA Small Business Administration
Sec.  Section symbol
SLSMC Saint Lawrence Seaway Management Corporation
U.S.C. United States Code
USD United States dollars

III. 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
(``pilots''), the Act requires the Secretary to ``prescribe by
regulation rates and charges for pilotage services, giving
consideration to the public interest and the costs of providing the
services.'' \4\ The Act requires that rates be established or reviewed
and adjusted each year, not later than March 1. The Act requires that
base rates be established by a full ratemaking at least once every 5
years, and in years when base rates are not established, they must be
reviewed and, if necessary, adjusted. The Secretary's duties and
authority under the Act have been delegated to the Coast Guard.\5\
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    \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\ 46 U.S.C. 9303(f).
    \5\ DHS Delegation No. 0170.1, para. II (92.f).
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    The purpose of this notice of proposed rulemaking (NPRM) is to
propose new base pilotage rates and surcharges for training and propose
new methodology in projecting pilotage rates. This includes proposals
to adjust the surcharge provision to stop collecting funds once the
assigned value has been recovered for the season; modify the
regulations to review pilot compensation once every 10 years, with
cost-of-living adjustments added annually between reviews; rename
Return on Investment as Working Capital Fund to better clarify the
intent of this step; and move the audit deadline from April to January
of each year in order to capture expenses in the rate sooner and to
eliminate 1 year from the current 3-year lag in expenses being
recognized in the rate. The new methodology in proposing rates changes
pilot demand from peak to seasonal.
    In addition to these changes to the ratemaking process, the Coast
Guard proposes adding pilots to support a mandatory change point on the
Saint Lawrence River between Iroquois Lock and the area of Ogdensburg,
NY. We further propose to amend the regulation regarding delays so that
cancellation charges can be assessed in an appropriate manner. Finally,
we are seeking public comment on how we should proceed with weighting
factors.

IV. Background

    The vessels affected by this NPRM are those engaged in foreign
trade upon the U.S. waters of the Great Lakes. United States and
Canadian ``lakers,'' which account for most commercial shipping on the
Great Lakes, are not affected.\6\
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    \6\ 46 U.S.C. 9302. A ``laker'' is a commercial cargo vessel
especially designed for and generally limited to use on the Great
Lakes.
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    The U.S. waters of the Great Lakes and the St. Lawrence Seaway are
divided into three pilotage districts. Pilotage in each district is
provided by an association certified by the Coast Guard Director of
Great Lakes Pilotage (``the Director'') to operate a pilotage pool. The
Coast Guard does not control the actual compensation that pilots
receive. The actual compensation is determined by the district
associations, each of which uses different compensation practices.
    District One, consisting of Areas 1 and 2, includes all U.S. waters
of the St. Lawrence River and Lake Ontario. District Two, consisting of
Areas 4 and 5, includes all U.S. waters of Lake Erie, the Detroit
River, Lake St. Clair, and the St. Clair River. District Three,
consisting of Areas 6, 7, and 8, includes all U.S. waters of the St.
Mary's River; Sault Ste. Marie Locks; and Lakes Huron, Michigan, and
Superior. Area 3 is the Welland Canal, which is serviced exclusively by
the Canadian Great Lakes Pilotage Authority (GLPA) and, accordingly, is
not included in the United States pilotage rate structure.
    Areas 1, 5, and 7 have been designated by Presidential Proclamation
\7\ to be waters in which pilots must, at all times, be fully engaged
in the navigation of vessels in their charge. Areas 2, 4, 6, and 8 have
not been so designated because they are open bodies of water. While
working in

those undesignated areas, pilots must ``be on board and available to
direct the navigation of the vessel at the discretion of and subject to
the customary authority of the master.'' \8\
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    \7\ Presidential Proclamation 3385, Designation of restricted
waters under the Great Lakes Pilotage Act of 1960, December 22,
1960.
    \8\ 46 U.S.C. 9302(a)(1)(B).
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    The Coast Guard is required to establish new pilotage rates by
March 1 of each year, employing a full ratemaking at least once every 5
years and an annual review and adjustment in the intervening years.\9\
The Coast Guard will continue to review rates annually until we can
stabilize the rates and ensure pilotage association revenues are in
line with projections.
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    \9\ 46 U.S.C. 9303(f).
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    In 2016, we revised our ratemaking methodology to improve the
ratemaking process. Some of the changes proposed in this document
further refine the 2016 methodology.

V. Discussion of Proposed Rate Changes

    We propose new rates, and surcharges under 46 CFR 401.401, for
2017. This section discusses the proposed rates using the ratemaking
steps provided in 46 CFR part 404. We reviewed the independent
accountant's financial reports for each association's 2014 expenses and
revenues. Those reports, which include pilot comments on draft versions
and the accountant's response to those comments, appear in the
docket.\10\ This year, we have reorganized the layout of this proposed
rule to address the ratemaking steps for each pilotage district
individually. This is only a formatting change to make the proposed
rule easier to follow. We begin with District One, and some
explanations in the section on District One will apply to similar
changes in the other Districts.
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    \10\ See ``Summary--Independent Accountant's Report on Pilot
Association Expenses, with Pilot Association Comments and
Accountant's Responses.''
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A. District One

    Recognize previous year's operating expenses (Sec.  404.101).
First, we reviewed and accepted the accountant's final findings on the
2014 audit of association expenses.
    Table 1 shows District One's recognized expenses.

                                  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--USCG 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 + Admin)....         763,925         604,879       1,368,804
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....................................................          -1,867          -1,799          -3,666
    2015 Surcharge Adjustment *.................................         -92,766         -72,887        -165,653
    Legal--shared counsel (K&L Gates)...........................          -8,783          -6,932         -15,715
    Legal--USCG litigation......................................         -12,794         -10,098         -22,892
                                                                 -----------------------------------------------
        TOTAL DIRECTOR'S ADJUSTMENTS............................        -116,209         -91,717        -207,926
                                                                 -----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)...................         631,917         503,040       1,134,957
----------------------------------------------------------------------------------------------------------------
* District One collected $493,682 with an authorized 10% 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.

    Project next year's operating expenses, adjusting for inflation or
deflation (Sec.  404.102). We based our inflation adjustments on the
Bureau of Labor Statistics' (BLS) data from the Consumer Price Index
for the Midwest Region of the United States,\11\ and reports from the
Federal Reserve.\12\ The adjustments for District One are shown in
Table 2.
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    \11\ Available at http://data.bls.gov/timeseries/CUUR0200SA0?data_tool=Xgtable
    \12\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm

                                   Table 2--Inflation Adjustment, District One
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                                                                           District One
                                                                 --------------------------------      Total
                                                                    Designated     Undesignated
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $631,917        $503,040      $1,134,957
2015 Inflation Modification (@-0.5%)............................          -3,160          -2,515          -5,675
2016 Inflation Modification (@2.2%).............................          13,833          11,012          24,844
2017 Inflation Modification (@2.1%).............................          13,494          10,742          24,237
                                                                 -----------------------------------------------
    Adjusted 2017 Operating Expenses............................         656,084         522,279       1,178,363
----------------------------------------------------------------------------------------------------------------

    Determine number of pilots needed (Sec.  404.103). To determine the
number of pilots needed for 2017, we reviewed the historic number of
annual assignments in each area going back to 2007. Our demand model
from the 2016 final rule allows pilots 10 days of recuperative rest
each month between mid-April and mid-November, in order to better
mitigate long-term fatigue. A U.S. registered pilot may spend several
days in various ports in between assignments, which is not considered
recuperative rest.
    In 2016, we examined peak staffing primarily through an analysis of
the maximum number of trips needed through designated waters at the end
of each season. We propose modifying our pilotage demand calculation to
focus instead on the pilot work cycle, including elements such as
travel, rest, pilot boat time, and other items in addition to time on
the bridge of the ship, and 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. The rest standards apply from
April 15 through November 15 of each shipping season, which are non-
peak periods. Thus, of the 270 days of the shipping season,\13\ a pilot
would be available for assignment on 200 of those days.\14\ During the
opening and closing of the season, however, we expect all of the
working pilots to be available. This is critical at the end of the
season to prevent a ship from getting stuck in the system due to lock
maintenance schedules. We invite comment on these assumptions and how
this model might impact operations and the recruitment and retention of
pilots.
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    \13\ Nine months per shipping season x 30 days per month.
    \14\ Two-hundred and seventy days per season minus 70 days rest
(7 non-peak months x 10 days rest per month).
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    Tables 3 through 7 examine our proposed staffing model. We begin
our analysis with the pilot assignment cycle first discussed in the
2016 rulemaking.\15\ The pilot assignment cycle outlines the time
needed to perform an assignment from beginning to end. This is shown in
Table 3.
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    \15\ 81 FR 11932, Figure 14.

            Table 3--Pilot Assignment Cycle for District One
------------------------------------------------------------------------
                                                   District One
                                         -------------------------------
         Pilot assignment cycle               Area 1          Area 2
                                              (hours)         (hours)
------------------------------------------------------------------------
Average Through Transit Time \*\........            10.8            11.0

Travel..................................             3.2             4.6
Delay...................................             0.7             0.9
Admin...................................             0.5             0.5
Total Assignment........................            15.2            17.0
Mandatory Rest..........................              10              10
Pilot Cycle (hours/assignment)..........            25.2            27.0
------------------------------------------------------------------------
* Updated since 2016 to reflect average through transit time based on
  current speed and other conditions as provided by pilot associations.

    Using this data, we calculate the maximum number of assignments a
pilot could conduct each year under perfect conditions with demand
evenly distributed throughout the shipping season. This information
follows in Table 4.

      Table 4--Calculation of Maximum Assignments for District One
------------------------------------------------------------------------
                                                   District One
            Pilot assignments            -------------------------------
                                              Area 1          Area 2
------------------------------------------------------------------------
Seasonal Availability Goal (hours)......           4,800           4,800
Pilot Cycle (hours/assignment)..........            25.2              27
Max Assignments per Pilot...............             190             178
------------------------------------------------------------------------

    Our model uses this maximum figure to calculate a projected number
of assignments for each pilot in the 2017 shipping season. At this
time, we can neither track assignments electronically nor track
individual pilot cycle times. Additionally, the projected number of
assignments per pilot reflects only actual assignments and does not
include time the pilot is standing by and waiting for the next
assignment. This calculation is detailed in Table 5.

        Table 5--Projected Assignments per Pilot in District One
------------------------------------------------------------------------
                                                   District One
          Assignments per pilot          -------------------------------
                                          Area 1 (hours)  Area 2 (hours)
------------------------------------------------------------------------
Max Assignments per Pilots..............             190             178
Efficiency Adjustment *.................             0.5             0.5
Projected Assignments per Pilot.........              95              89
------------------------------------------------------------------------
* Recommended starting ratio per the 2013 bridge hour study (on page
  23), available in the docket.

    Next, we examine the historic number of assignments over the last
nine shipping seasons, by Area, in District One. This will inform our
final pilot strength calculation. The number of pilot assignments is
detailed in Table 6.

         Table 6--Historic Number of Assignments in District One
------------------------------------------------------------------------
                                                   District One
     Historic number of assignments      -------------------------------
                                              Area 1          Area 2
------------------------------------------------------------------------
2007....................................             708             558
2008....................................             632             480
2009....................................             361             434
2010....................................             518             591
2011....................................             500             634
2012....................................             479             632
2013....................................             490             598
2014....................................             612             637
2015....................................             593             589
Average Assignments.....................             544             573
------------------------------------------------------------------------

    Finally, using the historic average number of assignments from the
last nine shipping seasons (Table 6) and the projected assignments per
pilot (Table 5), we are able to calculate the projected need for pilot
strength for District One. This calculation is in Table 7. In all
districts, when the calculation results in a fraction of a pilot, we
round pilot

numbers up to the nearest whole pilot. We do this to avoid shortening
our demand calculation and also to compensate for the role of the
district presidents as both working pilots and representatives of their
associations. 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.

            Table 7--Projected Pilots Needed in District One
------------------------------------------------------------------------
                                                   District One
              Pilots needed              -------------------------------
                                          Area 1 (hours)  Area 2 (hours)
------------------------------------------------------------------------
Historic Average Assignments............             544             573
Projected Assignments per Pilot.........              95              89
Projected Pilots Needed (unrounded).....            5.71            6.44
Projected Pilots Needed (rounded).......               6               7
------------------------------------------------------------------------

    Based on these tables, District One has a projected pilot need of
13 pilots for the 2017 season.
Proposed Mandatory Change Point Affecting Pilot Need
    However, we also propose to add a mandatory change point in the
vicinity of Iroquois Lock. In the 2016 NPRM, we proposed making
Iroquois Lock a mandatory change point to enhance safety by mitigating
fatigue on long pilotage runs. 80 FR 54487. However, we did not
implement that proposal because the GLPA and Saint Lawrence Seaway
Pilots Association informed us that they needed additional time to
recruit, hire, and train additional pilots to implement this change. We
propose adding the language, ``The Saint Lawrence River between
Iroquois Lock and the area of Ogdensburg, NY, at the opening of the
2017 shipping season,'' to the list of mandatory change points in
section 401.450. The transit between Snell Lock and Cape Vincent takes
about 11 hours under ideal circumstances. We want to limit a U.S.
registered pilot's assignment to 8 hours in designated waters in order
to mitigate fatigue. Establishing this mandatory change point allows us
to accomplish this goal.
    Establishing this change point will increase the number of
assignments and pilots needed in Area 1. Currently, about 40 percent of
the assignments change at Iroquois Lock due to the night relief working
rules or a slow moving vessel. We have historically counted this as one
assignment even though two pilots are used to complete this assignment.
For the purposes of calculating the number of additional assignments,
we assume that 40 percent of trips currently switch pilots, while 60
percent will require a new pilot assignment. The historical average
number of pilot assignments in District One, Area 1, is 544 per year
(Table 6). If 60 percent of these will require an additional pilot
assignment due to the new change point, 326 additional pilot
assignments will be needed.\16\ From Table 5, pilots in this area
average 95 assignments per season, resulting in the need for an
additional 3.4 pilots to cover the additional assignments. Again, we
round the calculated number of pilots needed to the next whole pilot to
help ensure an adequate supply of pilots available for assignment.
---------------------------------------------------------------------------

    \16\ We calculated 544 average assignments per year x .6 will
require a new pilot assignment.
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    Based on these calculations, we propose four additional pilots to
handle the increased number of assignments. The Saint Lawrence Seaway
Pilots Association has communicated that it will have the necessary
number of pilots trained at the beginning of the 2017 season.
Therefore, we are proposing the addition of these pilots in the 2017
rulemaking, resulting in a total number of 17 pilots needed for
District One (13 from Table 7 to handle existing demand, plus 4 to
account for the Iroquois Lock change point).
    We have coordinated with the Saint Lawrence Seaway Management
Corporation (SLSMC), the Great Lakes Pilots Authority, and the Saint
Lawrence Seaway Pilots Association, and concluded that the addition of
the change point will not require capital expenses. The SLSMC will
continue to allow the U.S. and Canadian registered pilots to use the
Iroquois Lock for pilot changes. This avoids the need to purchase a new
pilot boat and dock, as well as additional labor for support staff. If
this changes, we will require District One to provide a plan for
procuring a new pilot boat, dock, and additional support staff needed
for this new change point, so that these costs can be included in a
ratemaking.
    We understand that District One plans to have all applicant pilots
trained and working for the 2017 season. Therefore, Table 8 shows zero
applicants, and consequently, no applicant surcharge for District One.

         Table 8--Pilots Needed; Pilots Projected To Be Working
------------------------------------------------------------------------
                                                           District One
------------------------------------------------------------------------
Needed pilots, period for which 2017 rates are in effect              17
Working pilots projected for 2017.......................              17
Applicant pilots for 2017...............................               0
------------------------------------------------------------------------

    Determine target pilot compensation (Sec.  404.104). In the 2016
ratemaking, we attempted to align the compensation of U.S. registered
pilots with the Canadian registered pilots of the GLPA and set a target
compensation of $326,114. We are proposing to freeze target
compensation for 2017 at the 2016 levels for the following reasons.
First, the methodology used to align target compensation in the 2016
ratemaking used the foreign exchange rate between the Canadian and U.S.
dollar to convert Canadian compensation to United States compensation.
The exchange rate has changed substantially from 1.149CAD:1USD in 2014
to 1.329CAD:1USD in 2015.\17\ This is a change of nearly 20 percent.
The volatility in exchange rates is dependent on factors external to
the ratemaking, and we do not believe it is in the public interest to
lower target pilot compensation by nearly 20 percent based on foreign
exchange. Second, the system needs target pilot compensation stability
in order to achieve and maintain workforce stability. Finally, the most
challenging portion of this analysis is the conversion of Canadian
benefits into roughly equivalent United States benefits. For example,
the U.S. registered pilots invest their own money

to own and operate the pilot associations, whereas the Canadian
registered pilots do not. The Canadian registered pilots have a
defined, government-backed pension, guaranteed time off, sick days,
personal days, and medical benefits that require no out-of-pocket
expenses. Our discussions with stakeholders, including the Canadian
government, pilots, and industry, have highlighted the challenges of
comparing benefits across international boundaries. We are not
convinced that a single conversion from Canadian currency to United
States currency properly accounts for the level of benefits provided to
the Canadian registered pilots. We believe the most appropriate
solution is to launch an independent, third-party study to examine
pilot compensation and recommend a total compensation number. The Coast
Guard is in the early stages of pursuing this study.
---------------------------------------------------------------------------

    \17\ See https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates.
---------------------------------------------------------------------------

    While we await the results of an independent third-party study, we
propose maintaining the 2016 level for target pilot compensation for
this ratemaking. The calculations of target pilot compensation for
District One are displayed in Table 9.

                                 Table 9--District One Target Pilot Compensation
----------------------------------------------------------------------------------------------------------------
                                                                           District One
                                                                 --------------------------------      Total
                                                                    Designated     Undesignated
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $326,114        $326,114        $326,114
Number of Pilots (Step 3).......................................              10               7              17
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $3,261,142      $2,282,799      $5,543,941
----------------------------------------------------------------------------------------------------------------

    Determine working capital fund (proposed Sec.  404.105). We propose
changing the term for this step from ``Project return on investment''
to ``Determine working capital fund'' based on several discussions with
the shippers, ports, and agents. We agree with the shippers, ports, and
agents that this is more than a return on the monies the pilots have
invested in their infrastructure. The intent of this step is to provide
the pilots with working capital for future expenses associated with
capital improvements, technology investments, and future training
needs, with the goal of eliminating the need for surcharges. Even
though we propose changing the name of this step, we do not propose
changing the calculation.
    We calculate the working capital fund by multiplying the 2014
average rate of return for new issues of high-grade corporate
securities and Total Expenses (Adjusted Operating Expenses from Step 2
plus Total Target Pilot Compensation from Step 4). We use the Moody's
AAA bond rate information to determine the average annual rate of
return for new issues of high-grade corporate securities. The 2014
average annual rate of return for new issues of high-grade corporate
securities was 4.16 percent.\18\ The working capital fund calculation
is shown in Table 10.
---------------------------------------------------------------------------

    \18\ Based on Moody's AAA corporate bonds, which can be found
at: http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                             Table 10--District One Working Capital Fund Calculation
----------------------------------------------------------------------------------------------------------------
                                                                           District One
                                                                 --------------------------------      Total
                                                                    Designated     Undesignated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $656,084        $522,279      $1,178,363
Total Target Pilot Compensation (Step 4)........................       3,261,142       2,282,799       5,543,941
Total 2017 Expenses.............................................       3,917,226       2,805,078       6,722,304
Working Capital Fund (4.16%)....................................         162,957         116,691         279,648
----------------------------------------------------------------------------------------------------------------

    Project needed revenue for next year (proposed Sec.  404.106).
Table 11 shows District One's needed revenue, which is determined by
adding the proposed Sec.  404.102 operating expense, the proposed Sec.
404.104 total target compensation, and the proposed Sec.  404.105
working capital fund.

                                            Table 11--Revenue Needed
----------------------------------------------------------------------------------------------------------------
                                                                           District One
                                                                 --------------------------------      Total
                                                                    Designated     Undesignated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $656,084        $522,279      $1,178,363
Total Target Pilot Compensation (Step 4)........................       3,261,142       2,282,799       5,543,941
Working Capital Fund (Step 5)...................................         162,957         116,691         279,648
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       4,080,183       2,921,770       7,001,952
----------------------------------------------------------------------------------------------------------------

    Make initial base rate calculations (proposed Sec.  404.107). To
make our initial base rate calculations, we first establish a multi-
year base period from which we can draw available and reliable data on
actual pilot hours

worked in each district's designated and undesignated waters. For the
2017 rates, we propose using data covering 2007 through 2015. Table 12
shows calculations of the average number of bridge hours over the last
9 shipping seasons.

         Table 12--Hours Worked, 2007 Through 2015, District One
------------------------------------------------------------------------
                                                   District One
                                         -------------------------------
                                            Designated     Undesignated
                                              (hours)         (hours)
------------------------------------------------------------------------
2015....................................           5,743           6,667
2014....................................           6,810           6,853
2013....................................           5,864           5,529
2012....................................           4,771           5,121
2011....................................           5,045           5,377
2010....................................           4,839           5,649
2009....................................           3,511           3,947
2008....................................           5,829           5,298
2007....................................           6,099           5,929
Average.................................           5,390           5,597
------------------------------------------------------------------------

    We are monitoring bridge hours and revenue projections for the
season, and there is a great deal of variation in the system. Through
the end of May 2016, projected bridge hours for the entire shipping
season were up 45 percent in District One compared to the 9-year
average, while revenue projection for the same period was only up 15
percent compared to our projected revenue needed. This suggested that
the District One rate continued to under-generate needed revenue.
However, by the end of July 2016, projected bridge hours for the entire
shipping season were up 8.2 percent as compared to the 9-year average,
and revenue projection was up 16 percent as compared to projected
revenue needed, which suggests slight over-generation of revenue. We
will continue to monitor traffic and revenue projections throughout the
shipping season to see if any additional changes are needed.
    Table 13 calculates new rates by dividing each association's
projected needed revenue, from Sec.  404.106, by the average hours
shown in Table 12 and rounding to the nearest whole number.

                       Table 13--Rate Calculations
------------------------------------------------------------------------
                                                   District One
                                         -------------------------------
                                            Designated     Undesignated
------------------------------------------------------------------------
Revenue Needed (Step 6).................      $4,080,183      $2,921,770
Average time on task 2007-2015..........           5,390           5,597
Hourly Rate.............................            $757            $522
------------------------------------------------------------------------

    We now examine the calculations of the other two pilotage districts
for 2017.

B. District Two

    Recognize previous year's operating expenses (Sec.  404.101). We
reviewed and accepted the accountant's final findings on the 2014
audits of association expenses.
    Table 14 shows District Two's recognized expenses.

                                 Table 14--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:
    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..............................         302,790         454,185         756,975
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..........................         264,358         396,538         660,896
Administrative Expenses:
    Legal--general counsel......................................           2,680           4,020           6,700
    Legal--shared counsel (K&L Gates)...........................           4,984           7,476          12,461
    Legal--USCG 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...........................         213,339         320,007         533,346
Total Operating Expenses (Other Costs + Pilot Boats + Admin)....         780,488       1,170,729       1,951,217
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....................................................          -1,300          -1,949          -3,249
    2015 Surcharge Adjustment*..................................         -85,782        -128,672        -214,454
    Legal--shared counsel (K&L Gates)...........................          -4,984          -7,476         -12,461
    Legal--USCG litigation......................................          -8,371         -12,557         -20,928
                                                                 -----------------------------------------------
        TOTAL DIRECTOR'S ADJUSTMENTS............................        -100,436        -150,655        -251,092
                                                                 -----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)...................         683,374       1,025,056       1,708,429
----------------------------------------------------------------------------------------------------------------
* District Two collected $540,284 with an authorized 10% surcharge in 2015. The adjustment represents the
  difference between the collected amount and the $325,830 authorized in the 2015 final rule.

    Project next year's operating expenses, adjusting for inflation or
deflation (Sec.  404.102). We based our inflation adjustments on BLS
data from the Consumer Price Index for the Midwest Region of the United
States,\19\ and reports from the Federal Reserve.\20\ The adjustments
for District Two are shown in Table 15.
---------------------------------------------------------------------------

    \19\ Available at http://data.bls.gov/timeseries/CUUR0200SA0?data_tool=Xgtable.
    \20\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm.

                                  Table 15--Inflation Adjustment, District Two
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................        $683,374      $1,025,056      $1,708,429
2015 Inflation Modification (@-0.5%)............................          -3,417          -5,125          -8,542
2016 Inflation Modification (@2.2%).............................          14,959          22,438          37,398
2017 Inflation Modification (@2.1%).............................          14,593          21,890          36,483
                                                                 -----------------------------------------------
Adjusted 2017 Operating Expenses................................         709,509       1,064,259       1,773,767
----------------------------------------------------------------------------------------------------------------

    Determine number of pilots needed (Sec.  404.103). To determine the
number of pilots needed for 2017 in District Two, we followed the same
steps discussed earlier in this proposed rule for District One. The
resulting calculations follow in Tables 16 through 20.

            Table 16--Pilot Assignment Cycle for District Two
------------------------------------------------------------------------
                                                   District Two
                                         -------------------------------
         Pilot assignment cycle               Area 4          Area 5
                                              (hours)         (hours)
------------------------------------------------------------------------
Average Through Transit Time *..........            17.0             6.5
Travel..................................             4.6             3.2
Delay...................................             0.7             0.4
Admin...................................             0.5             0.5
------------------------------------------------------------------------

Total Assignment........................            22.8            10.6
Mandatory Rest..........................              10              10
Pilot Cycle (hours/assignment)..........            32.8            20.6
------------------------------------------------------------------------
* Updated since 2016 to reflect average through transit time based on
  current speed and other conditions as provided by pilot associations.

      Table 17--Calculation of Maximum Assignments for District Two
------------------------------------------------------------------------
                                                   District Two
            Pilot assignments            -------------------------------
                                              Area 4          Area 5
------------------------------------------------------------------------
Seasonal Availability Goal (hours)......            4800            4800
Pilot Cycle (hours/assignment)..........            32.8            20.6
Max Assignments per Pilot...............             146             233
------------------------------------------------------------------------

        Table 18--Projected Assignments per Pilot in District Two
------------------------------------------------------------------------
                                                   District Two
          Assignments per pilot          -------------------------------
                                              Area 4          Area 5
------------------------------------------------------------------------
Max Assignments per Pilots..............             146             233
Efficiency Adjustment *.................             0.5             0.5
Projected Assignments per Pilot.........              73             117
------------------------------------------------------------------------
* Recommended starting ratio per the 2013 bridge hour study (on page
  23), available in the docket.

        Table 19--Historic Number of Assignments in District Two
------------------------------------------------------------------------
                                                   District Two
     Historic number of assignments      -------------------------------
                                              Area 4          Area 5
------------------------------------------------------------------------
2007....................................             510             866
2008....................................             444             616
2009....................................             290             471
2010....................................             460             821
2011....................................             331             598
2012....................................             351             603
2013....................................             404             693
2014....................................             624            1043
2015....................................             576             946
Average Assignments.....................             443             740
------------------------------------------------------------------------

            Table 20--Projected Pilots Needed in District Two
------------------------------------------------------------------------
                                                   District Two
              Pilots needed              -------------------------------
                                              Area 4          Area 5
------------------------------------------------------------------------
Historic Average Assignments............             443             740
Projected Assignments per Pilot.........              73             117
Projected Pilots Needed (unrounded).....            6.06            6.35
Projected Pilots Needed (rounded).......               7               7
------------------------------------------------------------------------

    We round the calculated number of total pilots for District Two to
the next whole pilot to help ensure that an adequate supply of pilots
is available for assignment. Based on these tables, District Two has a
projected need for 14 pilots for the 2017 season. At the beginning of
the 2017 shipping season, they plan to have 13 working pilots and 2
applicants. We believe the second applicant is necessary to prepare for
future retirements, given the extended training periods associated with
new pilots. Currently, 4 of the pilots in District Two are over 62
years of age. These 4 pilots represent nearly 30 percent of the pilot
strength in this association. Waiting until these pilots retire to
replace them will result in significant delays. Therefore, we propose
authorizing a surcharge in 2017, which we discuss in section ``E.
Surcharges'' later in this preamble, to fund two applicant pilots in
District Two.

         Table 21--Pilots Needed; Pilots Projected To Be Working
------------------------------------------------------------------------
                                                           District Two
------------------------------------------------------------------------
Needed pilots, period for which 2017 rates are in effect              14
Working pilots projected for 2017.......................              13
Applicant pilots for 2017...............................               2
------------------------------------------------------------------------

    Determine target pilot compensation (Sec.  404.104). Similar to our
discussion and proposal for District One, for the 2017 NPRM, we propose
maintaining the 2016 compensation levels. Thus, target pilot
compensation for 2017 would be $326,114. Total target pilot
compensation for District Two is calculated in Table 22.

                                Table 22--District Two Target Pilot Compensation
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $326,114        $326,114        $326,114
Number of Pilots (Step 3).......................................               6               7              13
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $1,956,685      $2,282,799      $4,239,485
----------------------------------------------------------------------------------------------------------------

    Determine working capital fund (proposed Sec.  404.105). The 2014
average annual rate of return for new issues of high-grade corporate
securities was 4.16 percent.\21\ We apply that rate to District Two's
projected total operating and compensation expenses (from Sec. Sec.
404.102 and 404.104) to determine the allowed working capital fund for
the shipping season, as shown in Table 23.
---------------------------------------------------------------------------

    \21\ Based on Moody's AAA corporate bonds, which can be found
at: http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                             Table 23--District Two Working Capital Fund Calculation
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $709,509      $1,064,259      $1,773,767
Total Target Pilot Compensation (Step 4)........................       1,956,685       2,282,799       4,239,485
Total 2017 Expenses.............................................       2,666,194       3,347,059       6,013,252
Working Capital Fund (4.16%)....................................         110,914         139,238         250,151
----------------------------------------------------------------------------------------------------------------

    Project needed revenue for next year (proposed Sec.  404.106).
Table 24 shows District Two's needed revenue, determined by adding the
proposed Sec.  404.102 operating expense, the proposed Sec.  404.104
total target compensation, and the proposed Sec.  404.105 working
capital fund.

                                            Table 24--Revenue Needed
----------------------------------------------------------------------------------------------------------------
                                                                           District Two
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................        $709,509      $1,064,259      $1,773,767
Total Target Pilot Compensation (Step 4)........................       1,956,685       2,282,799       4,239,485
Working Capital Fund (Step 5)...................................         110,914         139,238         250,151
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       2,777,108       3,486,296       6,263,403
----------------------------------------------------------------------------------------------------------------

    Make initial base rate calculations (proposed Sec.  404.107). To
make our initial base rate calculations, we first establish a multi-
year base period from which available and reliable data for actual
pilot hours worked in each district's designated and undesignated
waters can be drawn. For the 2017 rates, we propose using data covering
2007

through 2015. Table 25 calculates the average number of bridge hours
over the last 9 shipping seasons.

         Table 25--Hours Worked, 2007 Through 2015, District Two
------------------------------------------------------------------------
                                                   District Two
                                         -------------------------------
                                           Undesignated     Designated
                                              (hours)         (hours)
------------------------------------------------------------------------
2015....................................           6,535           5,967
2014....................................           7,856           7,001
2013....................................           4,603           4,750
2012....................................           3,848           3,922
2011....................................           3,708           3,680
2010....................................           5,565           5,235
2009....................................           3,386           3,017
2008....................................           4,844           3,956
2007....................................           6,223           6,049
AVERAGE.................................           5,174           4,842
------------------------------------------------------------------------

    We are monitoring bridge hours and revenue projections for the
season, and there is a great deal of variation in the system. Through
the end of May 2016, projected bridge hours for the entire shipping
season were up 22 percent in District Two compared to the 9-year
average, and revenue projection was up 17 percent compared to projected
revenue needed. This suggested a robust correlation between traffic and
revenue in District Two. However, by the end of July 2016, projected
bridge hours were down 3.4 percent as compared to the 9-year average,
while revenue projection was up 21 percent compared to projected
revenue needed, which suggests over-generation of revenue. We will
continue to monitor traffic and revenue projections throughout the
shipping season to see if any additional changes are needed.
    Table 26 calculates new rates by dividing District Two's projected
needed revenue, from Sec.  404.106, by the average hours shown in Table
25 and rounding to the nearest whole number.

                       Table 26--Rate Calculations
------------------------------------------------------------------------
                                                   District Two
                                         -------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue Needed (Step 6).................      $2,777,108      $3,486,296
Average time on task 2007-2015..........           5,174           4,842
Hourly Rate.............................            $537            $720
------------------------------------------------------------------------

C. District Three

    Recognize previous year's operating expenses (Sec.  404.101). We
reviewed and accepted the accountant's final findings on the 2014
audits of association expenses.
    Table 27 shows District Three's recognized expenses.

                                Table 27--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          32,810
    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          21,201
    Legal--USCG 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             173
    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         127,437
    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 + Admin)....       1,762,885         587,631       2,350,518
                                                                 -----------------------------------------------
Proposed Adjustments (Independent CPA):
    Pilot subsistence/Travel....................................         -15,595          -5,198         -20,793
    Payroll taxes...............................................           5,949           1,983           7,931
    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....................................................          -3,035          -1,012          -4,047
    Surcharge Adjustment *......................................        -216,734         -72,245        -288,979
    Legal--shared counsel (K&L Gates)...........................         -14,310          -4,770         -19,080
    Legal--USCG litigation......................................         -23,422          -7,807         -31,229
                                                                 -----------------------------------------------
        TOTAL DIRECTOR'S ADJUSTMENTS............................        -257,502         -85,834        -343,335
                                                                 -----------------------------------------------
Total Operating Expenses (OpEx + Adjustments)...................       1,427,050         475,687       1,903,738
----------------------------------------------------------------------------------------------------------------
* District Three collected $615,929 with an authorized 10% 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.

    Project next year's operating expenses, adjusting for inflation or
deflation (Sec.  404.102). We based our inflation adjustments on BLS
data from the Consumer Price Index for the Midwest Region of the United
States,\22\ and reports from the Federal Reserve.\23\ The adjustments
for District Three are shown in Table 28.
---------------------------------------------------------------------------

    \22\ Available at http://data.bls.gov/timeseries/CUUR0200SA0?data_tool=Xgtable.
    \23\ Available at https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160316.htm.

                                 Table 28--Inflation Adjustment, District Three
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Total Operating Expenses (Step 1)...............................      $1,427,050        $475,687      $1,902,738
2015 Inflation Modification (@-0.5%)............................          -7,135          -2,378          -9,514
2016 Inflation Modification (@2.2%).............................          31,238          10,413          41,651
2017 Inflation Modification (@2.1%).............................          30,474          10,158          40,632
                                                                 -----------------------------------------------

    Adjusted 2017 Operating Expenses............................       1,481,627         493,879       1,975,506
----------------------------------------------------------------------------------------------------------------

    Determine number of pilots needed (Sec.  404.103). To determine the
number of pilots needed for 2017 in District Three, we followed the
same steps discussed earlier in this proposed rule for Districts One
and Two. The resulting calculations follow in Tables 29 through 33.

                               Table 29--Pilot Assignment Cycle for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                     Pilot assignment cycle                      -----------------------------------------------
                                                                  Area 6 (hours)  Area 7 (hours)  Area 8 (hours)
----------------------------------------------------------------------------------------------------------------
Average Through Transit Time *..................................            22.5             7.1            21.6
Travel..........................................................             2.4             3.6             3.7
Delay...........................................................               1             0.3             3.3
Admin...........................................................             0.5             0.5             0.5
Total Assignment................................................            26.4            11.5            29.1
Mandatory Rest..................................................              10              10              10
Pilot Cycle (hours/assignment)..................................            36.4            21.5            39.1
----------------------------------------------------------------------------------------------------------------
* Although transit times in Districts One and Two have been updated based on actual conditions, no similar
  change was required to reflect transit times in District Three.

                         Table 30--Calculation of Maximum Assignments for District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                        Pilot assignments                        -----------------------------------------------
                                                                      Area 6          Area 7          Area 8
----------------------------------------------------------------------------------------------------------------
Seasonal Availability Goal (hours)..............................           4,800           4,800           4,800
Pilot Cycle (hours/assignment)..................................            36.4            21.5            39.1
Max Assignments per Pilot.......................................             132             223             123
----------------------------------------------------------------------------------------------------------------

                           Table 31--Projected Assignments per Pilot in District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                      Assignments per pilot                      -----------------------------------------------
                                                                      Area 6          Area 7          Area 8
----------------------------------------------------------------------------------------------------------------
Max Assignments per Pilots......................................             132             223             123
Efficiency Adjustment *.........................................             0.5             0.5             0.5
Projected Assignments per Pilot.................................              66             112              61
----------------------------------------------------------------------------------------------------------------
* Recommended starting ratio per the 2013 bridge hour study (on page 23), available in the docket.

                           Table 32--Historic Number of Assignments in District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                 Historic number of assignments                  -----------------------------------------------
                                                                      Area 6          Area 7          Area 8
----------------------------------------------------------------------------------------------------------------
2007............................................................             681             794             478
2008............................................................             423             309             252
2009............................................................             352             231             275
2010............................................................             547             352             338
2011............................................................             460             228             223
2012............................................................             436             267             243
2013............................................................             464             315             322
2014............................................................             729             426             575
2015............................................................             644             412             421
Average Assignments.............................................             526             370             347
----------------------------------------------------------------------------------------------------------------

                               Table 33--Projected Pilots Needed in District Three
----------------------------------------------------------------------------------------------------------------
                                                                                District Three
                          Pilots needed                          -----------------------------------------------
                                                                      Area 6          Area 7          Area 8
----------------------------------------------------------------------------------------------------------------
Historic Average Assignments....................................             526             370             347
Projected Assignments per Pilot.................................              66             112              61
Projected Pilots Needed (unrounded).............................            7.98            3.32            5.66
Projected Pilots Needed (rounded)...............................               8               4               6
----------------------------------------------------------------------------------------------------------------

    We round the calculated number of pilots needed by Area to the next
whole pilot to help ensure an adequate supply of pilots are available
for assignments. Based on these tables, District Three has a projected
pilot need of 18 pilots for the 2017 season. However, at the beginning
of the 2017 shipping season, they plan to have 15 working and
registered pilots supplemented by 7 applicants. We believe the
applicants are necessary to prepare for future retirements given the
extended training periods associated with new pilots. Currently, 6 of
the pilots who are trained or registered in District Three are over 61
years of age. These 6 pilots represent 30 percent of the current pilot
strength for District Three, which is already less than the 18 pilots
projected to be needed in 2017. If we wait until these pilots retire to
begin replacing them, the system will experience significant delays due
to a lack of available pilots. Therefore, we propose authorizing a
surcharge, which we discuss in section E, below, to fund seven
applicant pilots in District Three.

         Table 34--Pilots Needed; Pilots Projected To Be Working
------------------------------------------------------------------------
                                                          District Three
------------------------------------------------------------------------
Needed pilots, period for which 2017 rates are in effect              18
Working pilots projected for 2017.......................              15
Applicant pilots for 2017...............................               7
------------------------------------------------------------------------

    Determine target pilot compensation (Sec.  404.104). Similar to our
discussion and proposal for Districts One and Two, we propose
maintaining the 2016 compensation levels. Thus, target pilot
compensation for 2017 would be $326,114. Total target pilot
compensation for District Three is calculated in Table 35.

                               Table 35--District Three Target Pilot Compensation
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Target Pilot Compensation.......................................        $326,114        $326,114        $326,114
Number of Pilots (Step 3).......................................              11               4              15
                                                                 -----------------------------------------------
    Total Target Pilot Compensation.............................      $3,587,256      $1,304,457      $4,891,713
----------------------------------------------------------------------------------------------------------------

    Determine working capital fund (proposed Sec.  404.105). The 2014
average annual rate of return for new issues of high-grade corporate
securities was 4.16 percent.\24\ We apply that rate to District Three's
projected total operating and compensation expenses (from Sec. Sec.
404.102 and 404.104) to determine the allowed working capital fund for
the shipping season, as shown in Table 36.
---------------------------------------------------------------------------

    \24\ Based on Moody's AAA corporate bonds, which can be found
at: http://research.stlouisfed.org/fred2/series/AAA/downloaddata?cid=119.

                            Table 36--District Three Working Capital Fund Calculation
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,481,627        $493,879      $1,975,506
Total Target Pilot Compensation (Step 4)........................       3,587,256       1,304,457       4,891,713
Total 2016 Expenses.............................................       5,068,883       1,798,336       6,867,219
Working Capital Fund (4.16%)....................................         210,866          74,811         285,676
----------------------------------------------------------------------------------------------------------------

    Project needed revenue for next year (proposed Sec.  404.106).
Table 37 shows District Three's needed revenue, which is determined by
adding the proposed Sec.  404.102 operating expense, the proposed Sec.
404.104 total target compensation, and the proposed Sec.  404.105
working capital fund.

                                            Table 37--Revenue Needed
----------------------------------------------------------------------------------------------------------------
                                                                          District Three
                                                                 --------------------------------      Total
                                                                   Undesignated     Designated
----------------------------------------------------------------------------------------------------------------
Adjusted Operating Expenses (Step 2)............................      $1,481,627        $493,879      $1,975,506
Total Target Pilot Compensation (Step 4)........................       3,587,256       1,304,457       4,891,713
Working Capital Fund (Step 5)...................................         210,866          74,811         285,676
                                                                 -----------------------------------------------
    Total Revenue Needed........................................       5,279,748       1,873,147       7,152,895
----------------------------------------------------------------------------------------------------------------

    Make initial base rate calculations (proposed Sec.  404.107). To
make our initial base rate calculations, we first establish a multi-
year base period from which available and reliable data for actual
pilot hours worked in each district's designated and undesignated
waters can be drawn. For the 2017 rates, we propose using data covering
2007 through 2015. Table 38 calculates the average number of bridge
hours over the last nine shipping seasons.

        Table 38--Hours Worked, 2007 Through 2015, District Three
------------------------------------------------------------------------
                                                  District Three
                                         -------------------------------
                                           Undesignated     Designated
                                              (hours)         (hours)
------------------------------------------------------------------------
2015....................................          22,824           2,696
2014....................................          25,833           3,835
2013....................................          17,115           2,631
2012....................................          15,906           2,163
2011....................................          16,012           1,678
2010....................................          20,211           2,461
2009....................................          12,520           1,820
2008....................................          14,287           2,286
2007....................................          24,811           5,944
Average.................................          18,835           2,835
------------------------------------------------------------------------

    We are monitoring bridge hours and revenue projections for the
season, and there is a great deal of variation in the system. Through
the end of May 2016, projected bridge hours for the entire shipping
season were down 10 percent in District Three as compared to the 9-year
average, while revenue projection through May 2016 was up 9 percent
compared to projected revenue needed. This suggested that the District
Three rate was over-generating revenue. However, by the end of July
2016, projected bridge hours were up 23 percent as compared to the 9-
year average, and revenue projection was up 19 percent as compared to
projected revenue needed, which suggested a more robust correlation
between traffic and revenue in District Three. We continue to monitor
projections so that we can make changes if needed. In particular, we
are considering removing the maximum ratio between designated and
undesignated charges, which we established last year in Sec.
404.107(b), if it appears to be artificially raising undesignated rates
and lowering designated rates.
    Table 39 calculates new rates by dividing District Three's
projected needed revenue, from Sec.  404.106, by the average hours
shown in Table 38 and rounding to the nearest whole number.

                       Table 39--Rate Calculations
------------------------------------------------------------------------
                                                  District Three
                                         -------------------------------
                                           Undesignated     Designated
------------------------------------------------------------------------
Revenue Needed (Step 6).................      $5,279,748      $1,873,147
Average time on task 2007-2015..........          18,835           2,835
Hourly Rate.............................            $280            $661
------------------------------------------------------------------------

D. Other Changes Affecting Ratemaking

    Review and finalize rates (Sec.  404.108). In addition to the
changes described earlier, we propose five additional changes for 2017
that will equally impact the pilot associations. First, we propose
adding a requirement to the surcharge regulation in Sec.  401.401. We
propose that once a pilot association collects the amount of money
allowable for recoupment, which is designated by the final rule, the
pilot association's authorization to collect a surcharge for the
remainder of that shipping season will terminate. This proposed change
will prevent excess amounts from being recouped and should eliminate
the need to make adjustments to the operating expenses for the
following year. Turning to surcharges for 2017, we find that allowing
associations to recoup necessary and reasonable training expenses, both
to help achieve a full complement of needed pilots and to ensure skill
maintenance and development for current pilots, will facilitate safe,
efficient, and reliable pilotage, and is good cause for imposing a
necessary and reasonable temporary

surcharge, as authorized by 46 CFR 401.401.
    In addition, we propose amending the cancellation charge provision
in Sec.  401.420(b) to ensure that it explicitly states that the
minimum charge for a cancellation is 4 hours plus necessary and
reasonable travel expenses for travel that occurs. Based on the
feedback we received from the pilot associations, we believe the
current language is not specific enough and will continue to cause
confusion, as indicated by inquiries from both pilot associations and
shipping agents. We view this charge as necessary to emphasize that
pilots are a limited resource and encourage their efficient use. We are
also removing ``after that pilot has begun travelling to the designated
pickup place'' from Sec.  401.420(b) to eliminate any confusion about
the 4-hour minimum charge.
    To expedite the recoupment of expenses, we also propose to adjust
Sec.  403.300(c) to require submission of an unqualified audit prepared
in accordance with generally accepted accounting principles and all
accompanying notes by January 31st of each year. This would require the
pilot associations to complete their financial statements by January
24th in order to meet the January 31st deadline. Existing Sec.
403.300(c) requires submission of an unqualified audit by April 1 of
each year. Our goal is to allow our independent auditors to begin work
much sooner and complete work on the third party audit in time for it
to be used for the publication of the proposed rule that summer. This
timeline would remove 1 year from the current 3-year gap between the
actual expenses and their recoupment in the rate. We request comments
regarding the feasibility of completing the required audits by January
31, and if it is not feasible, an explanation as to why and what other
date would be appropriate.
    We also propose the addition of new language in Sec.  404.104 that
would allow the Director to set compensation for a 10-year period to a
compensation benchmark. The compensation benchmark would be based on
the most relevant available non-proprietary information such as wage
and benefit information from other pilotage groups. In the years in
which a compensation benchmark is not set, target pilot compensation
will be adjusted for inflation by using the CPI for the Midwest region
or by a pre-determined amount that would be published prior to use. We
believe this will promote target compensation stability and rate
predictability.
    The proposed changes to Sec. Sec.  403.300(c) and 404.104 should
assist the pilot associations with recruitment and retention and help
the various stakeholders forecast budgets and pricing. These changes
would apply only to the calculation of target pilot compensation; we do
not propose any changes to the formula in which we use target pilot
compensation to calculate the rate.
    Finally, we seek public comment on how we should handle weighting
factors in 46 CFR 401.400, which outlines the calculations for
determining the weighting factors for a vessel subject to compulsory
pilotage. This calculation determines which multiplication factor will
be applied to the pilotage fees. We are not proposing any action in
this proposed rule because we do not have sufficient data to make an
informed decision.
    The first option is to maintain the status quo. This would maintain
the current weighting factors and continue to leave them out of the
ratemaking calculation.
    The second option for weighting factors is to remove them
completely from the regulations and charge every vessel equally for
pilotage service. This aligns with the current compensation model that
a pilot should be compensated equally for their expertise across all
areas of the Great Lakes. The ship's dimensions do not impact the
experience and skill level of the pilot providing the service.
    The third option is to incorporate weighting factors into the
rulemaking through an additional step that examines and projects their
impact on the revenues of the pilot associations. This might enable us
to better forecast revenue, but it would add another variable to the
projections in the rate methodology.
    We request public comment specifically on which of these three
options should be implemented for future ratemakings; in your comment,
please explain why the option should be implemented.

E. Surcharges

    Turning to surcharges for 2017, we find that allowing associations
to recoup necessary and reasonable training expenses, both to help
achieve a full complement of needed pilots and to ensure skill
maintenance and development for current pilots, will facilitate safe,
efficient, and reliable pilotage, and is good cause for imposing a
necessary and reasonable temporary surcharge, as authorized by 46 CFR
401.401. For 2017, we anticipate that there will be two applicant
pilots in District Two, and seven applicant pilots in District Three.
Based on historic pilot costs, the stipend, per diem, and training
costs for each applicant pilot are approximately $150,000 per shipping
season. Thus, we estimate that the training expenses that each
association will incur will be approximately $300,000 in District Two
and $1,050,000 in District Three. Table 40 derives the proposed
percentage surcharge for each district by comparing this estimate to
each district's projected needed revenue.

                                   Table 40--Surcharge Calculation by District
----------------------------------------------------------------------------------------------------------------
                                                                   District One    District Two   District Three
----------------------------------------------------------------------------------------------------------------
Projected Needed Revenue (Sec.   404.106).......................      $7,001,952      $6,263,403      $7,152,895
Anticipated Training Expenses...................................              $0        $300,000      $1,050,000
Surcharge Needed *..............................................              0%              5%             15%
----------------------------------------------------------------------------------------------------------------
* All surcharge calculations are rounded up to the nearest whole percentage.

    These surcharges would only be collected until the target amount is
reached. This should eliminate the need to make adjustments to the
operating expenses for the following year. We will ensure that these
expenses are not included in future rulemakings in order to avoid
double billing.

VI. Regulatory Analyses

    We developed this proposed rule after considering numerous statutes
and Executive orders related to rulemaking. Below we summarize our
analyses based on these statutes or Executive orders.

A. Regulatory Planning and Review

    Executive Orders 13563 and 12866 direct agencies to assess the
costs and

benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive effects, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
    This proposed rule has not been designated a ``significant
regulatory action'' under section 3(f) of Executive Order 12866.
Accordingly, this proposed rule has not been reviewed by the Office of
Management and Budget (OMB).
    We developed an analysis of the costs and benefits of the proposed
rule to ascertain its probable impacts on industry. We consider all
estimates and analysis in this Regulatory Analysis (RA) to be subject
to change in consideration of public comments.
    Table 41 summarizes the regulatory changes that are expected to
have no costs, and any qualitative benefits associated with them. The
table also includes proposed changes that affect portions of the
methodology for calculating the proposed base pilotage rates. While
these proposed changes affect the calculation of the rate, the costs of
these changes are captured in the changes to the total revenue as a
result of the proposed rate change (summarized in Table 42).

             Table 41--Regulatory Changes With No Cost or Costs Captured in the Proposed Rate Change
----------------------------------------------------------------------------------------------------------------
         Proposed changes                 Description            Basis for no costs             Benefits
----------------------------------------------------------------------------------------------------------------
Mandatory change point on the      Propose a mandatory        The addition of the       Staffing additional
 Saint Lawrence River between       change point on the        change point will not     pilots will help meet
 Iroquois Lock and the area of      Saint Lawrence River       require capital           the increased demand
 Ogdensburg, NY.                    between Iroquois Lock      expenses. The only cost   for pilots to handle
                                    and the area of            is for the new pilots,    the additional
                                    Ogdensburg, NY that        who are accounted for     assignments anticipated
                                    would become effective     in the base pilotage      to be caused by the new
                                    at the beginning of the    rates and training        change point.
                                    2017 shipping season.      surcharges (Table 43).    Additional pilots due
                                                                                to this change point
                                                                                should also serve to
                                                                                mitigate any potential
                                                                                delays and any
                                                                                potential fatigue that
                                                                                would occur from high
                                                                                pilotage demand without
                                                                                them.
Demand model.....................  Determine pilot demand     Pilot staffing costs are  More accurate estimate
                                    using seasonal demand      accounted for in the      of the number of
                                    instead of peak demand.    base pilotage rates       assignments we
                                                               (Table 43).               reasonably expect
                                                                                pilots to be able to
                                                                                complete during the 9-
                                                                                month shipping season
                                                                                instead of during peak
                                                                                pilotage demand.
Cancellation charges.............  Propose amending the       Clarification of          --Clarifies the current
                                    cancellation charge        existing text and         language to eliminate
                                    provision in Sec.          current practice.         any potential confusion
                                    401.120(b) to ensure it                              on the minimum charge
                                    explicitly states that                               for cancellations.
                                    the minimum charge for a                            --Clarification of the
                                    cancellation is 4 hours                              minimum charge ensures
                                    plus necessary and                                   the recognition of
                                    reasonable travel                                    pilots as a limited
                                    expenses for that travel                             resource and encourages
                                    that occurs.                                         efficient use.
Surcharge provision..............  Propose adding a           Ensures the goal          Prevents excess amounts
                                    requirement to the         surcharge amount built    from being recouped
                                    surcharge regulation in    into the year's           from industry via the
                                    Sec.   401.401 to stop     rulemaking will not be    following year's rule.
                                    collecting funds once      surpassed, and prevents
                                    the assigned value has     additional costs on
                                    been recovered for the     industry.
                                    season.
Audit deadline...................  Propose to adjust Sec.     Adjusts the deadline for  Allows independent
                                    403.300(c) to move the     audit submission, but     auditors to begin work
                                    audit deadline from        does not add additional   sooner and complete the
                                    April 1 to January 31 of   work.                     audit in time for the
                                    each year.                                           proposed rule. This
                                                                                would eliminate 1 year
                                                                                from the current 3-year
                                                                                lag in expenses being
                                                                                recognized in the rate.
Rename Return on Investment......  Propose renaming Return    Clarifies the intent of   Clarifies the intent of
                                    on Investment as Working   the fund but does not     this fund.
                                    Capital Fund.              change the method of
                                                               calculation. Costs are
                                                               included in the total
                                                               revenues.
Set Pilot compensation for a 10-   Propose the addition of    Pilot staffing costs are  Promotes target
 year period.                       new language in Sec.       accounted for in the      compensation stability
                                    404.104 that would allow   base pilotage rates.      and rate
                                    the Director to set                                  predictability.
                                    compensation for a 10-
                                    year period to a
                                    compensation benchmark.
----------------------------------------------------------------------------------------------------------------

    The following table summarizes the affected population, costs, and
benefits of the regulatory requirements that are expected to have costs
associated with them.

                              Table 42--Regulatory Economic Impacts of Rate Change
----------------------------------------------------------------------------------------------------------------
       Proposed change              Description        Affected population       Costs            Benefits
----------------------------------------------------------------------------------------------------------------
Rate Changes.................  Under the Great Lakes  Owners and operators      $2,664,574  --New rates cover an
                                Pilotage Act of        of 230 vessels                        association's
                                1960, the Coast        journeying the                        necessary and
                                Guard is required to   Great Lakes system                    reasonable
                                review and adjust      annually.                             operating expenses.
                                base pilotage rates                                         --Provides fair
                                annually.                                                    compensation,
                                                                                adequate training,
                                                                                and sufficient rest
                                                                                periods for pilots.
                                                                                --Ensures the
                                                                                association makes
                                                                                enough money to
                                                                                fund future
                                                                                improvements.
----------------------------------------------------------------------------------------------------------------

    The Coast Guard is required to review and adjust pilotage rates on
the Great Lakes annually. See Parts III and IV of this preamble for
detailed discussions of the Coast Guard's legal basis and purpose for
this rulemaking and for background information on Great Lakes pilotage
ratemaking. Based on our annual review for this proposed rulemaking, we
are adjusting the pilotage rates for the 2017 shipping season to
generate for each district sufficient revenues to reimburse its
necessary and reasonable operating expenses, fairly compensate trained
and rested pilots, and provide an appropriate working capital fund to
use for improvements. The rate changes in this proposed rule would, if
codified, lead to an increase in the cost per unit of service to
shippers in all three districts, and result in an estimated annual cost
increase to shippers.
    In addition to the increase in payments that would be incurred by
shippers in all three districts from the previous year as a result of
the proposed rate changes, we propose authorizing a temporary surcharge
to allow the pilotage associations to recover training expenses that
would be incurred in 2017. For 2017, we anticipate that there will be
no applicant pilots in District One, two applicant pilots in District
Two, and seven applicant pilots in District Three. With a training cost
of $150,000 per pilot, we estimate that Districts Two and Three will
incur $300,000 and $1,050,000 in training expenses, respectively. These
temporary surcharges would generate a combined $1,350,000 in revenue
for the pilotage associations. Therefore, after accounting for the
implementation of the temporary surcharges across all three districts,
the payments made by shippers during the 2017 shipping season are
estimated to be approximately $2,664,574 more than the payments that
were estimated in 2016 (Table 43).\25\
---------------------------------------------------------------------------

    \25\ Total payments across all three districts are equal to the
increase in payments incurred by shippers as a result of the rate
changes plus the temporary surcharges applied to traffic in
Districts One, Two, and Three.
---------------------------------------------------------------------------

    A draft regulatory analysis follows.
    The purpose of this rulemaking is to propose new base pilotage
rates and surcharges for training. The last full ratemaking was
concluded in 2016.
Affected Population
    The shippers affected by these rate changes are those owners and
operators of domestic vessels operating on register (employed in
foreign trade) and owners and operators of foreign vessels on routes
within the Great Lakes system. These owners and operators must have
pilots or pilotage service as required by 46 U.S.C. 9302. There is no
minimum tonnage limit or exemption for these vessels. The statute
applies only to commercial vessels and not to recreational vessels.
United States-flagged vessels not operating on register and Canadian
``lakers,'' which account for most commercial shipping on the Great
Lakes, are not required to have pilots by 46 U.S.C. 9302. However,
these U.S.- and Canadian-flagged lakers may voluntarily choose to have
a pilot.
    We used 2013-2015 billing information from the GLPMS to estimate
the average annual number of vessels affected by the rate adjustment.
The GLPMS tracks data related to managing and coordinating the dispatch
of pilots on the Great Lakes and billing in accordance with the
services. Using that period, we found that a total of 407 unique
vessels used pilotage services over the years 2013 through 2015. These
vessels had a pilot dispatched to the vessel and billing information
was recorded in the GLPMS. The number of invoices per vessel ranged
from a minimum of 1 invoice per year to a maximum of 65 invoices per
year. Of these vessels, 383 were foreign-flagged vessels and 24 were
U.S.-flagged. The U.S.-flagged vessels are not required to have a pilot
per 46 U.S.C. 9302, but they can voluntarily choose to have a pilot.
U.S.-flagged vessels may opt to have a pilot for varying reasons such
as unfamiliarity with designated waters and ports, or for insurance
purposes.
    Vessel traffic is affected by numerous factors and varies from year
to year. Therefore, rather than the total number of vessels over the
time period, an average of the unique vessels using pilotage services
from 2013 through 2015 is the best representation of vessels estimated
to be affected by this rule's proposed rate. From the years 2013-2015,
an average of 230 vessels used pilotage services annually.\26\ On
average, 219 of these vessels are foreign-flagged vessels and 11 are
U.S.-flagged vessels that voluntarily opt into the pilotage service.
---------------------------------------------------------------------------

    \26\ Some vessels entered the Great Lakes multiple years,
affecting the average number of unique vessels utilizing pilotage
services in any given year.
---------------------------------------------------------------------------

Costs
    The rate changes resulting from the new methodology would generate
costs on industry in the form of higher payments for shippers. We
calculate the cost in two ways in this RA, as the total cost to
shippers and as a percentage of vessel operating costs.
Total Cost to Shippers
    We estimate the effect of the rate changes on shippers by comparing
the total projected revenues needed to cover costs in 2016 with the
total projected revenues to cover costs in 2017, including any
temporary surcharges authorized by the Coast Guard. The Coast Guard
sets pilotage rates so that the pilot associations receive enough
revenue to cover their necessary and reasonable expenses. The shippers
pay these rates when they have a pilot as required by 46 U.S.C. 9302.
Therefore, the aggregate payments of the shippers to the pilot
associations are equal to the projected necessary revenues for the
pilot associations. The revenues each year represent the total costs
that shippers must pay for pilotage services, and the change in the
revenues from the previous year is the additional cost to shippers from
this proposed rulemaking.

    The effect of the rate changes on shippers is estimated from the
District pilotage projected revenues and the proposed surcharges
described in Section V of this preamble. We estimate that for the 2017
shipping season, the projected revenue needed for all three Districts
is $20,418,252. Temporary surcharges on traffic in District Two and
District Three would be applied for the duration of the 2017 season in
order for the pilotage associations to recover training expenses
incurred for applicant pilots. We estimate that the pilotage
associations require an additional $300,000 and $1,050,000 in revenue
for applicant training expenses in Districts Two and Three,
respectively. This is an additional cost to shippers of $1,350,000
during the 2017 shipping season. Adding the projected revenue to the
proposed surcharges, we estimate the pilotage associations' total
projected needed revenue for 2017 would be $21,768,252. The 2017
projected revenues for the districts are from Tables 11, 24, and 37 of
this preamble. To estimate the additional cost to shippers from this
proposed rule, we compare the 2017 total projected revenues to the 2016
projected revenues. Because the Coast Guard must review and prescribe
rates for the Great Lakes Pilotage annually, the effects are estimated
as a single year cost rather than annualized over a 10-year period. In
the 2016 rulemaking,\27\ we estimated the total projected revenue
needed for 2016, including surcharges, is $19,103,678. This is the best
approximation of 2016 revenues as, at the time of this publication, we
do not have enough audited data available for the 2016 shipping season
to revise these projections. Table 43 shows the revenue projections for
2016 and 2017 and details the additional cost increases to shippers by
area and district as a result of the rate changes and temporary
surcharges on traffic in Districts One, Two, and Three.
---------------------------------------------------------------------------

    \27\ 2016 projected revenues are from the 2016 rulemaking, 81 FR
11937, Figures 31 and 32.

                                               Table 43--Effect of the Proposed Rule by Area and District
                                                                 [$U.S.; Non-discounted]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Total 2016                                      Total 2017      Additional
                  Area                    Revenue needed  2016 Temporary     Projected    Revenue needed  2017 Temporary     Projected     costs of this
                                              in 2016        surcharge        revenue         in 2017        surcharge        revenue      proposed rule
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total, District One.....................      $5,354,945        $450,000      $5,804,945      $7,001,953              $0      $7,001,953      $1,197,008
Total, District Two.....................       5,629,641         300,000       5,929,641       6,263,404         300,000       6,563,404         633,763
Total, District Three...................       6,469,092         900,000       7,369,092       7,152,895       1,050,000       8,202,895         833,803
                                         ---------------------------------------------------------------------------------------------------------------
    System Total........................      17,453,678       1,650,000      19,103,678      20,418,252       1,350,000      21,768,252       2,664,574
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Values may not sum due to rounding.

    The resulting difference between the projected revenue in 2016 and
the projected revenue in 2017 is the annual change in payments from
shippers to pilots as a result of the rate change imposed by this
proposed rule. The effect of the rate change in this proposed rule on
shippers varies by area and district. The rate changes, after taking
into account the increase in pilotage rates and the addition of
temporary surcharges, would lead to affected shippers operating in
District One, District Two, and District Three experiencing an increase
in payments of $1,197,008, $633,763, and $833,803, respectively, from
the previous year. The overall adjustment in payments would be an
increase in payments by shippers of approximately $2,664,574 across all
three districts (a 14 percent increase over 2016). Because the Coast
Guard must review and prescribe rates for Great Lakes Pilotage
annually, the effects are estimated as single year costs rather than
annualized over a 10-year period.
    Table 44 shows the difference in revenue by component from 2016 to
2017.\28\ Although per pilot compensation is unchanged from the 2016
final rule, the majority of the increase in revenue is due to the
addition of 8 pilots that were authorized in the 2016 rule. These eight
pilots are currently training this year and will become full-time
working pilots at the beginning of the 2017 shipping season. These
pilots will be compensated at the target compensation established in