[Federal Register Volume 81, Number 44 (Monday, March 7, 2016)]
[Rules and Regulations]
[Pages 11907-11942]
[FR Doc No: 2016-04894]

Vol. 81

Monday,

No. 44

March 7, 2016

Part II

Department of Homeland Security

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

 Coast Guard

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

46 CFR Parts 401, 403, and 404

Great Lakes Pilotage Rates--2016 Annual Review and Changes to
Methodology; Final Rule

Federal Register / Vol. 81 , No. 44 / Monday, March 7, 2016 / Rules
and Regulations

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

DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401, 403, and 404

[USCG-2015-0497]
RIN 1625-AC22

Great Lakes Pilotage Rates--2016 Annual Review and Changes to
Methodology

AGENCY: Coast Guard, DHS.

ACTION: Final rule.

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

SUMMARY: The Coast Guard revises its Great Lakes pilotage ratemaking
methodology, adjusts annual pilotage rates based on the new
methodology, and authorizes a temporary surcharge to hire additional
pilots and to pay for necessary training for new and current pilots.
Rates for pilotage services on the Great Lakes were last revised in
February 2015 and by law must be reviewed annually, with any
adjustments to take effect by March 1 of the year for which new rates
are established. The Coast Guard intends for the methodology changes to
be understandable and transparent, and to encourage investment in
pilots, infrastructure, and training while helping ensure safe,
efficient, and reliable service on the Great Lakes. Without the updates
to this methodology and enforcement of these rates, the Coast Guard
believes the pilot associations will not be able to recruit experienced
mariners, retain current pilots, or maintain and upgrade association
infrastructure. Without sufficient registered pilots, current law will
prevent international vessels from transiting the Great Lakes. This
rulemaking promotes the Coast Guard's maritime safety and stewardship
(environmental protection) missions by promoting safe shipping on the
Great Lakes.

DATES: This final rule is effective April 6, 2016.

ADDRESSES: Comments and material received from the public, as well as
documents mentioned in this preamble, are available at http://www.regulations.gov. Insert USCG-2015-0497 in the ``Keyword'' box, then
click ``Search.''

FOR FURTHER INFORMATION CONTACT: If you have questions on this rule,
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:

Executive Summary

    This rulemaking will change the methodology by which the Coast
Guard sets base rates for U.S. Great Lakes registered pilotage service,
set rates according to the new methodology, and impose a temporary
surcharge to offset the costs of hiring and training new pilots. The
Great Lakes pilotage statutes in 46 U.S.C. chapter 93 provide the legal
basis for this rulemaking. The new effective date better aligns with
the opening of the shipping season in early spring than the previous
implementation date in August, which was based on the effective date of
compensation changes in a benchmark union contract, which is no longer
available to the Coast Guard.
    The Coast Guard is revising the current methodology in place since
1995 for two reasons. First, for at least 15 years both pilots and
industry have identified certain methodology issues that perpetuate
inaccuracy in the ratemaking calculations. The pilots asserted these
inaccuracies have led to revenue shortfalls that impede their ability
to provide safe, efficient, and reliable pilotage service. They said
these shortfalls are the primary reason that the associations could not
provide sufficient pilot compensation to attract, hire, and retain
qualified pilots. Furthermore, due to the revenue shortfalls, the
associations lacked funding needed to maintain and update their
infrastructure and provide adequate rest for pilots during the shipping
season. Industry has agreed that there is a shortage of qualified
pilots and said that the decay of association infrastructure
jeopardized the pilots' ability to ensure vessel safety and provide
efficient, reliable service. We believe the current methodology fails
to consider the totality of pilot time necessary to perform a given
pilotage assignment, which often includes long transits to and from the
vessel, resulting in low pilot compensation and overloaded work
assignments.
    Second, the 1995 methodology used a detailed breakdown of union
compensation for merchant marine masters and mates as the benchmark for
setting registered pilotage rates. Only one union's contract had ever
been available to the Coast Guard for the purpose of setting pilotage
rates. That union now regards many of the specific compensation details
of its contract as proprietary information. As such, the union will no
longer provide the entire contract to the Coast Guard and thus, the
Coast Guard can no longer make public a transparent source as the basis
for its annual target compensation projections. Due to the methodology
issues cited by pilots and industry as well as the lack of availability
of reliable and transparent union contracts for benchmark setting
purposes, we are establishing a new standard using publicly available
information to set the benchmark compensation used in each ratemaking.
    Our new methodology sets pilotage rates for the 2016 shipping
season only. We will review and adjust rates each subsequent year. We
are also amending the regulations to provide for future multi-year
rates that would apply for five years unless an interim adjustment is
necessary. We would set base rates in a full ratemaking, and review
those rates each year to make sure they continue to promote safe,
efficient, and reliable pilotage. If the base rate previously set is
not satisfactory for that upcoming year, we would either adjust it or
open a new full ratemaking. By law, a full ratemaking must be completed
at least once every five years.\1\ Multi-year rates allow pilots and
industry to make longer range financial plans.
---------------------------------------------------------------------------

    \1\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    In 2014, the Coast Guard's Great Lakes Pilotage Advisory Committee
(GLPAC) \2\ recommended substantial changes to address stakeholder
issues with the 1995 methodology and adjust ratemaking procedures in
light of the union's position regarding the confidentiality of its
contracts. We have built the new ratemaking methodology around the
GLPAC recommendations, a ``bridge hour'' study completed in 2013, and
numerous past public comments identifying distortions created by the
1995 methodology. The new methodology also addresses issues raised by
St. Lawrence Seaway Pilots Association, Inc., et al. v. U.S. Coast
Guard,\3\ a lawsuit in which the three district pilot associations
successfully challenged the 2014 ratemaking final rule.
---------------------------------------------------------------------------

    \2\ GLPAC is a Federal advisory committee established by
Congress (see 46 U.S.C. 9307) and operating under the Federal
Advisory Committee Act, 5 U.S.C. Appendix 2.
    \3\ 85 F.Supp.3d 197 (D.D.C. 2015).
---------------------------------------------------------------------------

    In Part IV of this final rule, we describe our new methodology
which is consistent with the methodology we proposed in the NPRM. It
follows a series of steps that are structured similarly to the steps
found in the 1995 methodology. Step 1 reviews and recognizes each
association's audited expenses. Step 2 projects each association's
future operating expenses, adjusting for inflation or deflation. Step 3
projects the number of pilots required to meet each district's peak
pilotage demand, with consideration given to the

actual time it takes a pilot to complete each assignment. Step 4 sets
target pilot compensation using a compensation benchmark. Step 5
projects each association's return on investment by adding the
operating expenses from Step 2 and the total target pilot compensation
from Step 4, and multiplying the result by the preceding year's average
annual rate of return for new issues of high grade corporate
securities. Step 6 calculates each association's revenue needs by
adding the operating expenses from Step 2, the total target pilot
compensation from Step 4, and the projected return on investment from
Step 5. Step 7 calculates initial base rates based on the preceding
steps. Step 8 adjusts the Step 7 initial rates, if necessary and
reasonable to do so for supportable circumstances, and sets final
rates.
    This final rule makes several changes from our notice of proposed
rulemaking (NPRM). First, the NPRM proposed splitting a particularly
long pilotage assignment on the St. Lawrence River into two more
manageable segments by creating a new pilot change point. At the
request of both pilots and industry, we are not making this change in
this final rule. Instead, we will defer any action until we can further
assess where the new change point can best be located, and until pilot
staffing can be increased to handle the larger number of assignments
that shorter pilot transits will cause. Second, in response to public
comments, we increased our projection for 2016 target pilot
compensation, reduced our pilotage association revenue projection for
2016 (based on our review of 2014 revenue audits and 2015 vessel
traffic data), and increased the number of pilots we expect to be
available for service in 2016. Third, in response to public comments we
increased from 5 to 9 the number of shipping seasons included in our
multi-year historical vessel traffic calculations, which we use to
estimate future traffic.
    In Part V of this preamble, the Coast Guard uses the new
methodology to calculate base rates for the 2016 shipping season, as
follows:
    Step 1 of the new methodology accepts our independent accountant's
final findings on each association's 2013 expenses.
    Step 2 projects 2016 operating expenses and adjusts them for
inflation, using actual inflation data for 2014 and 2015 and the
Federal Reserve target inflation rate as a proxy for actual 2016
inflation.
    Step 3 finds that, based on figures from the 2007-2015 shipping
seasons, 54 pilots are required to fulfill pilotage demand, up from the
36 pilots we authorized for 2015. Based on association projections, we
expect 37 pilots to be available in 2016, 48 at the beginning of 2017,
and the balance to be added later in 2017.
    Step 4 sets each pilot's target compensation at $326,114, with a
total target compensation of $12,066,225 for the 37 pilots. We set
these targets after identifying 2013 Canadian Great Lakes Pilotage
Authority (GLPA) compensation, with adjustments for currency exchange
and inflation, as the best benchmark for our 2016 rates.
    Steps 5 and 6 calculate each association's return on investment and
needed revenue.
    Step 7 calculates initial base rates.
    Finally, Step 8 affirms the Step 7 rates without adjustment, but
also authorizes a temporary surcharge totaling $1,650,000, to cover the
anticipated costs of hiring additional pilots and necessary training
for new and current pilots.
    This rule is not economically significant under Executive Order
12866. It affects 36 U.S. Great Lakes pilots, 3 pilot associations, and
the owners and operators of an average of 126 vessels that transit the
Great Lakes on an average 396 visits to various ports annually. We
estimate that the new rates will result in shippers paying pilot
associations $1,865,025, or roughly 12 percent more in 2016 than we
estimate they did in 2015. We estimate that the authorized temporary
surcharge will add $1,650,000 in costs, for a total 2016 cost increase
of $3,515,025 over 2015. Because we must review and if necessary adjust
rates each year, we analyze these as single year costs and do not
annualize them over 10 years. This rule does not affect the Coast
Guard's budget or increase Federal spending. We summarize our
regulatory analyses in Part VII.

Table of Contents for Preamble

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

I. Abbreviations

APA American Pilots Association
BLS U.S. Bureau of Labor Statistics
CAD Canadian dollar
CFR Code of Federal Regulations
CPA Certified public accountant
CPI-U Consumer Price Index
DHS Department of Homeland Security
FR Federal Register
GLP Great Lakes Pilotage
GLPA Canadian Great Lakes Pilotage Authority
GLPAC Great Lakes Pilotage Advisory Committee
GLPMS Great Lakes Electronic Pilot Management System
NAICS North American Industry Classification System
NPRM Notice of proposed rulemaking
NTSB National Transportation Safety Board
OMB Office of Management and Budget
Pub. L. Public Law
RA Regulatory analysis
RegNeg Regulatory negotiated rulemaking
SANS Ship Arrival Notification System
Sec.  Section symbol
The Act Great Lakes Pilotage Act of 1960
U.S.C. United States Code
USD U.S. dollar

II. Basis and Purpose

    The legal basis of this rulemaking is the Great Lakes Pilotage Act
of 1960 (``the Act''),\4\ which requires U.S. vessels operating ``on
register'' \5\ 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.\6\ 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.'' \7\ We limit the allowable costs of providing this service
by ensuring that all allowable expenses are necessary and reasonable
for providing pilotage services on the Great Lakes. We believe the
public is best served by a safe, efficient, and reliable pilotage
service. The goal of our methodology and billing scheme is to generate
sufficient revenue for the pilots to provide the service we require.
The Act requires that 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 has delegated authority under the
Act to the Coast Guard.\8\
---------------------------------------------------------------------------

    \4\ Pub. L. 86-555, 74 Stat. 259, as amended; currently codified
as 46 U.S.C. Chapter 93.
    \5\ ``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.
    \6\ 46 U.S.C. 9302(a)(1).
    \7\ See 46 U.S.C. 9303(f) for all of the Act's pilotage
ratemaking requirements discussed in this paragraph.
    \8\ DHS Delegation No. 0170.1, para. II (92.f).
---------------------------------------------------------------------------

    The purpose of this rule is to change our annual Great Lakes
pilotage ratemaking methodology, set new rates using that methodology,
and authorize a temporary hiring and training surcharge.

III. Background

    We published the notice of proposed rulemaking (NPRM) for this
rulemaking on September 10, 2015, and in response to a request we
extended the NPRM's initial 60-day comment period by 30 days.\9\ A
total of 90 days were available for public comment, encompassing
September 10, 2015 through December 9, 2015. We also held a public
meeting on September 17, 2015, in Romulus, MI.
---------------------------------------------------------------------------

    \9\ NPRM at 80 FR 54484, comment period extension at 80 FR 69179
(November 9, 2015).
---------------------------------------------------------------------------

    This rule directly affects the pilots, their three pilotage
associations, and the owners and operators of Great Lakes vessels
engaged in foreign trade on U.S. Great Lakes waters. It does not affect
U.S. and Canadian ``lakers,'' which account for most commercial
shipping on the Great Lakes.\10\ It indirectly affects shipping agents
who act on behalf of the owners and operators, Great Lakes ports, port
workers, and businesses that import or export goods on affected vessels
(``shippers''). We refer to pilots and pilot associations as
``pilots,'' and vessel owners and operators, shipping agents, ports,
port workers, and shippers collectively as ``industry.''
---------------------------------------------------------------------------

    \10\ 46 U.S.C. 9302. A ``laker'' is a commercial cargo vessel
especially designed for and generally limited to use on the Great
Lakes.
---------------------------------------------------------------------------

    We divide the U.S. waters of the Great Lakes and the St. Lawrence
Seaway (``the Great Lakes system,'' or ``the system'') into three
pilotage districts, each containing two or three areas. We certify a
private association to operate a pool of pilots in each district. We
set rates that each association may charge vessel owners and operators,
but we do not control the actual compensation each pilot receives. The
actual compensation is a function of vessel traffic in the system and
is determined by each association, which has its own business structure
and compensation system.
    District One comprises areas 1 and 2, the U.S. waters of the St.
Lawrence River and Lake Ontario. District Two comprises areas 4 and 5,
the U.S. waters of Lake Erie, the Detroit River, Lake St. Clair, and
the St. Clair River. District Three comprises areas 6, 7, and 8, the
U.S. waters of the St. Mary's River, Sault Ste. Marie Locks, and Lakes
Huron, Michigan, and Superior. Because only Canadian pilots serve area
3, Canada's Welland Canal, we do not set rates for that area. Pursuant
to the Act, the President has designated Areas 1, 5, and 7 as waters in
which a vessel must fully engage a pilot to navigate the vessel at all
times. The President left Areas 2, 4, 6, and 8 undesignated. In
undesignated waters the Act requires only that a vessel have a pilot
``on board and available to direct the navigation of the vessel at the
discretion of and subject to the customary authority of the master.''
\11\
---------------------------------------------------------------------------

    \11\ 46 U.S.C. 9302(a)(1)(B).
---------------------------------------------------------------------------

    The Act requires us to review rates and adjust them, if necessary,
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.\12\ The 1995 methodology for a full ratemaking every
5 years appeared in 46 CFR part 404, appendix A, and the methodology
for annual review and adjustment appeared in part 404, appendix C.
Appendix B contained definitions and formulas applicable to both
methodologies. We have not used the appendix C methodology since the
2011 ratemaking, and instead we have conducted a full appendix A
ratemaking each year.
---------------------------------------------------------------------------

    \12\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

IV. Discussion of Ratemaking Methodology Changes

    We adopt the methodology changes proposed in the NPRM, and a
thorough discussion of the methodology is available in that
document.\13\ The following discussion focuses on the new methodology's
principle features and any changes made from the NPRM to this final
rule. In the NPRM, we also proposed to amend Sec.  401.450 to add a
pilot change point at Iroquois Lock but, based on public comments
discussed elsewhere in this preamble, we decided not to finalize the
proposed addition.
---------------------------------------------------------------------------

    \13\ The NPRM's discussion begins at 80 FR 54486, col. 2.
---------------------------------------------------------------------------

    Reasons for changing the methodology. This rule changes the
ratemaking methodology that has been in effect since 1995 and, using
the new methodology, sets pilotage rates for 2016. We changed the
methodology for two reasons.
    First, for at least 15 years both pilots and industry have
identified certain methodology issues that, they assert, perpetuate
systemic inaccuracies in the ratemaking calculations. The pilots say
these inaccuracies led to annual revenue shortfalls that impede their
ability to provide safe, efficient, and reliable pilotage service.
Pilotage associations believed those distortions resulted in low rates.
They also believed that actual association revenue chronically fell
short of the revenue targets that, under the 1995 methodology, we
projected based on anecdotal industry information. The Director of
Great Lakes Pilotage has reviewed his data for 2005 through 2014 and
estimates that, over this period, the three pilotage associations
cumulatively fell short of revenue projections by $20 million. As a
result, the pilotage associations could not provide sufficient
compensation to attract and retain qualified pilots, leading to pilot
shortages and associated traffic delays. In turn, these shortages meant
that each pilot had to carry an excessive workload and forego needed
rest and training.
    The pilotage associations also said the revenue shortfalls left
them unable to maintain and update association infrastructure or
provide the essential training and professional development
opportunities recommended by the American Pilots Association (APA). For
their part, industry commenters believed that pilot shortages
jeopardized the safety of their vessels, and meant that the pilots
could not provide efficient or reliable service, particularly at the
beginning and end of shipping seasons when peak vessel traffic and
frequent bad weather often delay vessel movement.
    Second, the 1995 methodology used a detailed breakdown of union
compensation for merchant marine masters and mates, as the benchmark
for setting registered pilotage rates. Only one union's contract has
ever been available to the Coast Guard for this purpose. That union now
regards many of the specific compensation details of its contract as
proprietary information. The union will not provide the entire contract
to the Coast Guard and thus, the Coast Guard cannot use the existing
methodology and make public a transparent source for our target pilot
compensation figure. Therefore, we are adopting a new method for
determining which publicly available compensation information best
serves as a benchmark for this year's target compensation. That
benchmark could change from one ratemaking to the next, as
circumstances change.
    Advisory committee recommendations. In 2009 we solicited and
received public comments to better understand stakeholder perceptions
of the 1995 methodology,\14\ and referred

those comments to GLPAC, the stakeholder group that advises us on Great
Lakes pilotage matters.\15\ Ever since, we have worked closely with
GLPAC to improve the methodology.
---------------------------------------------------------------------------

    \14\ 74 FR 35838 (July 21, 2009).
    \15\ GLPAC is established by statute and operates under the
Federal Advisory Committee Act. See footnote 1.
---------------------------------------------------------------------------

    We built the new methodology around a set of recommendations GLPAC
made at its public meetings in July 2014.\16\ We give GLPAC
recommendations significant weight because the Act requires any GLPAC
recommendation to be endorsed by at least all but one of GLPAC's seven
members.\17\ Moreover, with the exception of one member with a
background in finance or accounting who is nominated unanimously by the
other members, GLPAC's members are evenly divided between pilot and
industry representatives, and therefore we consider any recommendation
to represent a consensus of pilot and industry members. The Act does
not authorize GLPAC positions for any foreign vessel owners and
operators or their Canadian agents. However, we believe GLPAC's
industry representatives' interests are sufficiently aligned with, and
therefore representative of the interests of, affected foreign vessel
owners. These stakeholders also consistently attend GLPAC meetings and
raise their concerns for GLPAC's full consideration during each
meeting's public comment period.
---------------------------------------------------------------------------

    \16\ See full transcript in our docket and also available at
http://www.facadatabase.gov. Under 46 U.S.C. 9307(d)(1), the Coast
Guard ``shall, whenever practicable, consult with the Committee
before taking any significant action relating to Great Lakes
pilotage.''
    \17\ All of the Act's provisions relating to GLPAC appear in 46
U.S.C. 9307.
---------------------------------------------------------------------------

    Timing of new rates and future ratemakings. The new pilotage rates
will apply from the anticipated opening of the 2016 shipping season,
which is a change from the union contract-based August 1 date we used
in the 1995 methodology.
    The new rates apply only for the 2016 shipping season. We will
review and adjust rates as appropriate in the subsequent years. This
will allow all stakeholders to gain familiarity with the new
methodology and evaluate its ability to set more accurate rates.
However, we are amending the regulations to authorize multi-year rates
that would apply for five years. We would set base rates in a full
ratemaking, and review those rates each year to make sure they continue
to promote safe, efficient, and reliable pilotage. If they do not do so
satisfactorily, we would either adjust them or open a new full
ratemaking. Multi-year rates allow both pilots and industry to make
longer range financial plans.
    Changes to specific sections.
    46 CFR 401.405, 401.407, and 401.410. These sections contained
pilotage rate tables and additional charges. Under the 1995
methodology, most designated-water rates applied to specific transits,
for example $2,637 for the transit on Lake Erie between Toledo and
Southeast Shoal. However, most undesignated-water rates were hourly,
for example $934 for 6 hours of pilotage service on Lake Erie. This
mixed approach complicated the otherwise simple transaction of paying
for a pilot's service. Instead, as we proposed in the NPRM, new Sec.
401.405 replaces old Sec. Sec.  401.407 and 401.410 and sets hourly
rates for specified portions of the Great Lakes. This aligns with
GLPAC's 2014 recommendation, by a 5-1 vote, that all rates be
hourly.\18\ It simplifies billing, and recognizes that each hour that a
vessel uses a pilot draws down on a limited pool of available pilots.
The rates differ between the NPRM and the final rule because of changes
in the number of pilots expected to be working in 2016, based on the
latest projections we have received from the pilotage associations.
Further, we increased the historic time period for calculating pilotage
demand from the 4 years proposed in the NPRM to 9 years in the final
rule, as discussed later in this preamble.
---------------------------------------------------------------------------

    \18\ Transcript, ``United States Coast Guard--Great Lakes
Pilotage Advisory Committee--Thursday, July 24, 2014'' (7/24/2014),
p. 16. Discussion of this change, referred to by GLPAC members as
``re-baselining'' of rates, begins on July 23, 2014. See Transcript
(7/23/2014), ``United States Coast Guard--Great Lakes Pilotage
Advisory Committee--Wednesday, July 23, 2014,'' p. 277. Discussion
resumes: Transcript, ``United States Coast Guard--Great Lakes
Pilotage Advisory Committee--Thursday, July 24, 2014'' (7/24/2014),
p. 5.
---------------------------------------------------------------------------

    46 CFR 401.420 and 401.428. We amend Sec.  401.420 (charges for a
vessel's canceling, delaying, or interrupting pilotage service) and
Sec.  401.428 (charges for picking up or discharging a pilot other than
at a pilot change point designated in Sec.  401.450) to base those
charges on the applicable new hourly rates.
    We specify that billing under Sec.  401.420 precludes any
additional pilotage charge for the time in question. We discard Sec.
401.428's old per diem allowance for a pilot who is picked up or
discharged at a point other than a designated change point. Instead, if
the pilot is kept aboard for the convenience of or at the request of
the ship, the pilot's association can bill the vessel at hourly rates
for the extra time involved, plus reasonable travel costs. If the pilot
is kept aboard for circumstances outside of the ship's control, for
example because a pilot boat is out of service, the association can
bill the vessel only for reasonable travel costs. Both sections define
``reasonable travel costs'' as covering travel to and from the pilot's
base.
    Finally, these sections allow pilotage associations to charge for
delays caused by weather, traffic and ice in the colder and busier
months at the beginning and end of shipping seasons. All these
amendments are the same as those we proposed in the NPRM.
    46 CFR 403.120. As we proposed, we remove this section, concerning
notes to financial reports, because these notes are not needed under
our current financial reporting system.
    46 CFR 403.300. Accurate rates depend on accurate expense and
revenue information for each pilotage association. In the past, we had
difficulty validating the accuracy of this information, because some
associations did not use a uniform financial reporting system. This
section now requires each association to use the current Coast Guard-
approved and provided financial reporting system to certify their
financial data annually. These changes are the same as those we
proposed in the NPRM. We continue to require an annual audit prepared
by an independent certified public accountant.
    46 CFR 403.400. As we proposed to do, we remove language suggesting
that pilot transaction records must be submitted on paper. Electronic
reporting will become available in the near future, making paper
reporting under our current transaction reporting optional but not
mandatory.
    46 CFR 404.1. We remove redundant language summarizing each section
in part 404, state that the goal of part 404 is to maximize the
transparency and simplicity of our ratemaking, and state that rates
must promote safe, efficient, and reliable pilotage service. We
continue to require annual association expense audits, but now we also
require annual revenue audits, as GLPAC recommended in July 2014.\19\
We first used revenue audits in 2015 and expect them to promote
transparency and better alignment between our revenue projections and
actual revenue. We also provide for a full ratemaking to establish base
pilotage rates at least once every 5 years, with annual rate reviews in
the interim years and rate adjustments if changed circumstances warrant
them.

All these amendments are the same as those we proposed in the NPRM.
---------------------------------------------------------------------------

    \19\ Transcript (7/23/2014), p. 180.
---------------------------------------------------------------------------

    46 CFR 404.2. This section formerly appeared as Sec.  404.5. We
amend the section so that, instead of using union contract mariner
benefit cost data, we state that we will recognize all association-paid
pilot benefits, including medical and pension benefits and profit
sharing, as appropriate components of a pilot's compensation. These
changes are the same as those we proposed in the NPRM.
    46 CFR 404.100. This section formerly appeared as Sec.  404.10. We
replace the redundant ratemaking overview that section provided with
new general rules for setting base rates and reviewing or adjusting
them in interim years. We provide for multi-year rates, as GLPAC
recommended in July 2014.\20\ These rates apply for 5 years, but we
will review them each year to make sure they continue to promote safe,
efficient, and reliable pilotage service. If we think we must adjust
them to meet that goal, we would use one of two methods to do so.
First, we could apply an automatic annual adjustment provided for in
the previous full ratemaking in anticipation of economic trends over
the multi-year term. Alternatively, we could base the adjustment on
changes in the Bureau of Labor Statistics (BLS) (Consumer Price Index
(CPI-U). If neither method adequately met the need for adjustment, we
would open a new full ratemaking. These amendments are the same as
those we proposed in the NPRM.
---------------------------------------------------------------------------

    \20\ Transcript (7/23/2014), p. 274. Discussion begins on p.
258.
    \21\ Transcript (7/23/2014), p. 255. Discussion begins on p.
237.
    \22\ Transcript (7/23/2014), p. 255. Discussion begins on p.
237.
    \23\ Transcript (7/23/2014), p. 200. Discussion begins on p.
192.
---------------------------------------------------------------------------

    Ratemaking methodology. We replace the 1995 appendix A methodology
with new Sec. Sec.  404.101 through 404.108, and eliminate old appendix
B (definitions and formulas) and appendix C (annual rate reviews, which
we have not conducted since 2011) because they are no longer needed.
These are the same changes we proposed in the NPRM, with some
exceptions as noted in the discussion. Figure 1 compares the old and
new regulatory structure.

                        Figure 1--Treatment of Appendix A Steps in 46 CFR 404.101-404.108
----------------------------------------------------------------------------------------------------------------
           Appendix A step                      Change                              Comments
----------------------------------------------------------------------------------------------------------------
1....................................  Omit...................  Unnecessary summary of substeps.
1.A..................................  Omit...................  Move substance to Sec.   404.2.
1.B..................................  Reword and move........  Move substance to new Sec.   404.101 and move
                                                                 Step 1.B's second sentence to Sec.   404.2.
1.C..................................  Reword and move........  Add similar language to Sec.   404.102.
1.D..................................  Reword and move........  Add similar language to Sec.   404.102.
2....................................  Omit...................  Unnecessary summary of substeps.
2.A..................................  Reword and move........  Add similar language to Sec.   404.104.
2.B..................................  Reword and move........  Add similar language to Sec.   404.103.
2.C..................................  Reword and move........  Add similar language to Sec.   404.104.
3....................................  Omit...................  Unnecessary summary of substep 3.A.
3.A..................................  Reword and move........  Cover substance in Sec.   404.106.
4....................................  Omit...................  Per recommendation approved by GLPAC.\21\
5....................................  .......................  Add similar language to Sec.   404.105.
6....................................  Reword and move........  Per recommendation approved by GLPAC.\22\ Add
                                                                 similar language to Sec.   404.106.
7, except last sentence of first       Reword and move........  Add similar language to Sec.   404.107.
 paragraph.
7, last sentence of first paragraph..  Reword and move........  Add similar language to Sec.   404.108.
----------------------------------------------------------------------------------------------------------------

    In the discussion that follows, we explain how the new methodology
replaces each Step of the 1995 methodology. Our calculations for 2016
rates, using the new methodology, appear in Part VI of this preamble.
    46 CFR 404.101--Recognize previous operating expenses. Like old
Steps 1.A and 1.B this section describes how we recognize the
appropriateness of past pilot association costs, based on independent
third party audits.
    46 CFR 404.102--Project operating expenses, adjusting for inflation
or deflation. Like old Steps 1.C and 1.D this section describes how we
calculate an association's projected base non-compensation operating
expenses. We will continue to apply a cost change factor for inflation
or deflation to any recognized expense that could be affected by
inflation or deflation, based on BLS Midwest Region CPI-U changes.
    This rule sets base rates for 2016, using pilot association expense
data from 2013, the last full year for which reported and audited
financial information is available. Under old Step 1.C, we would have
applied a cost change factor for only the next year, 2014, and would
have ignored the inflation that took place in 2015 and 2016. In 2014,
GLPAC recommended that we take the subsequent years into account,\23\
and we now do so in the new methodology using BLS data, or if not
available, then the target inflation rate set by the Federal Reserve as
a proxy for the Midwest Region CPI-U.
    46 CFR 404.103--Determine number of pilots needed. Like old Step
2.B this projects how many pilots the system will need in the next
shipping season. To project the total demand for pilot time, we broaden
the old ``bridge hour'' standard to include not only the hours a pilot
is on the vessel's bridge, but also the total average time a pilot
spends in preparing for and returning from each pilot assignment, along
with a ``recuperative rest'' allowance of up to 10 days per month in
non-peak months, as GLPAC recommended.\24\ Moreover, instead of
projecting future demand based on anecdotal information about future
shipping trends, we use a multi-year average of actual past data, as
GLPAC recommended in 2014.\25\ We also follow GLPAC's recommendation
\26\ that we project demand based on the number of pilots that would
have been needed to provide safe, efficient and reliable pilot service
per district. Our NPRM proposed including data from the previous five
shipping seasons in the

multi-year average but excluding outlier years that could distort
demand trends, substituting available and reliable data from other
years. However, in response to public comments, we have decided to omit
the outlier-exclusion provision, and also to lengthen the multi-year
period to include data for the 9 full shipping seasons between 2007
through 2015, using data from our current financial reporting system,
which provides a good source of valid data. We instituted that system
in 2006, but we exclude 2006 because we have only partial season data
for that year. By 2017, we will have reliable data from 10 full
shipping seasons (2007-2016), and thereafter each year we will use data
from the most recent 10 seasons.
---------------------------------------------------------------------------

    \24\ Transcript (7/24/2014), p. 240. Discussion begins on p.
225. The seven non-peak months run from mid-April to mid-November.
Recuperative rest would be available ``up to'' 10 days per month
during those months, dependent on actual traffic patterns and the
need to provide reliable pilotage service. Our goal is to regulate
the pilotage system to maximize the likelihood of providing the full
10 days per month.
    \25\ Transcript (7/23/2014), p. 258. Discussion begins on p.
255.
    \26\ Transcript (7/23/2014), p. 237. Discussion begins on p.
201.
---------------------------------------------------------------------------

    If the result of our demand calculation is a fractional number, we
will round it up or down, as seems most reasonable, to the next whole
pilot.
    In addition to projecting the number of pilots needed, we will also
project the number of pilots we expect to be actually working full-time
and fully compensated during the first shipping season of the new base
period. This becomes an important factor in the next section.
    46 CFR 404.104--Determine target pilot compensation. Like old Steps
2.A and 2.C this determines individual and overall target compensation,
but it changes the old methodology in three respects.
    First, instead of different target figures for undesignated and
designated waters, we will set a single figure for each district.
Second, instead of using union contracts as our compensation benchmark,
we will use the most appropriate reliable benchmark that is available
to the public. Third, instead of basing target compensation on each
district's pilot needs, we will base them on the number of pilots we
expect to be available for full-time and fully-compensated work in the
upcoming season, since actual pilotage availability may be lower than
needed, as is the case under the current methodology.
    46 CFR 404.105--Project return on investment. At GLPAC's
recommendation \27\ we deleted old Steps 5 and 6, used to calculate a
pilotage association's return on investment, as needless steps that
only complicated but did not change the final projection. We continue
to project the return on investment by adding operating expenses and
target pilot compensation, and multiplying the sum by the preceding
year's average annual rate of return for new high grade corporate
securities.
---------------------------------------------------------------------------

    \27\ Transcript (7/23/2014), p. 255. Discussion begins on p.
237.
---------------------------------------------------------------------------

    46 CFR 404.106--Project needed revenue. As just stated, we have
deleted the Step 6 procedure for projecting each association's needed
revenue for the next year. Instead, we calculate base revenue needs by
adding projected base operating expenses, total base target pilot
compensation, and base return on investment. This is a more transparent
procedure and it adequately projects an association's needed revenue.
    46 CFR 404.107--Initially calculate base rates. Like old Step 7, we
initially set base rates for the designated and undesignated waters of
each district, subject to modification or finalization under Sec.
404.108. We do this by dividing projected needed revenue by available
and reliable data for actual hours worked by pilots in each district's
designated and undesignated waters during the multi-year base period.
In some years and in some districts, this could produce significantly
higher rates for designated waters than for undesignated waters,
creating unnecessary financial risk to the pilot associations by
focusing revenue generation too narrowly in designated waters at the
expense of undesignated waters. To ensure safe, efficient, and reliable
pilotage in all Great Lakes waters whether designated or undesignated,
we therefore will apply a ratio to adjust the balance between rates,
limiting the designated-water rate to no more than twice the
undesignated-water rate while maintaining the same overall revenue.
This will correct the undesirable rate imbalance, without affecting the
total needed revenue projected for each district.
    46 CFR 404.108--Review and finalize rates. Like another provision
of old Step 7, we will adjust the initial base rates for supportable
circumstances, which include factors defined in current U.S.-Canadian
agreements relating to Great Lakes pilotage.\28\ To ensure we do not
abuse this discretion, we state that any modification to the initial
rates must be necessary and reasonable, as well as justified by
supportable circumstances. We will continue to submit proposed
adjustments for public comment, which may result in our abandoning or
modifying the adjustment. Any adjustment will be subject to Sec.
404.107's limitation on the disparity between rates for designated and
undesignated waters.
---------------------------------------------------------------------------

    \28\ The current Memorandum of Understanding can be viewed at
http://www.uscg.mil/hq/cg5/cg552/docs/2013%20MOU%20English.PDF.
---------------------------------------------------------------------------

V. Discussion of NPRM Comments

    In the following discussion, in general the numbers used to refer
to specific commenters are keyed to their docket numbers. Many late
comments were docketed as a single entry, so those comments are labeled
with the letter codes AA through AW (those codes appear next to each
separate comment in the single docketed entry). So, commenter 4's
submission is docketed as USCG-2015-0497-0004. We received submissions
from 75 commenters on the NPRM, from the individuals and groups (or
their associations or representatives) shown in Figure 2. In addition,
we received emails from two shipping agents and a shipper, all
requesting clarification (which we supplied by email) as to how rates
would be charged under the new regulations, and a request on behalf of
shipping agents for an extension of the comment period, which we
granted.

                        Figure 2--Comment Sources
------------------------------------------------------------------------
        Commenter's affiliation                    Docket Nos.
------------------------------------------------------------------------
Current GLPAC member...................  AF.
Elected officials......................  AG, AR, AU.
Environmental advocacy groups..........  AD.
Former GLPAC member....................  27.
Great Lakes pilot association            52, 62.
 presidents as a group (``the
 presidents' group'').
Great Lakes pilot association            54, 56, 59, 60, AC.
 presidents as individuals.
Import or export shippers..............  10, 12, 15, 16, 19, 20, 21, 22,
                                          23, 25, 28, 30, 31, 32, 33,
                                          41, 47, 50, 51.
International ports and shippers         Two comments submitted: 53, AW.
 coalition.

National associations of pilots........  38, 49.
Pilot from outside the Great Lakes       AH.
 system.
Pilots or former pilots................  29, 44, 45, 46; a single
                                          submission from 4 pilots, 55A,
                                          55B, 55C, and 55D; 57, 58, 61,
                                          AA, AE, AL, AO, AP, AQ, AS,
                                          AT, AV.
Pilot service providers (for example     34, 43, AK, AN.
 accountants for the pilotage
 associations).
Ports and port workers (for example      4, 5, 8, 9, 18, 24, 26, 35, 36,
 stevedores).                             37, 39, 42, 48, AB, AM.
Regional businessman...................  AJ.
State pilot association outside the      40.
 Great Lakes system.
Vessel operator........................  6.
------------------------------------------------------------------------

    Of the 75 comments we received, 14, or almost one-fifth, of the
comments were submitted after the published date for closing the
comment period, December 9, 2015.\29\ After careful consideration, we
have chosen to consider them because of the importance and complexity
in changes of this particular rulemaking.
---------------------------------------------------------------------------

    \29\ This figure does not include 35 comments received on Dec.
22, 2015, but dated before the comment period closed and apparently
lost in transmission.
---------------------------------------------------------------------------

    Our responses to some of the comments indicate that the action we
are taking this year is subject to possible future modification. For
example, using Canadian Great Lakes pilot compensation, suitably
adjusted to recognize differences in the benefits the U.S. and Canadian
systems provide is considered as the benchmark for setting our own
target compensation. In each of those cases, we invite the public to
submit formal comments on next year's NPRM, and the Director of Great
Lakes Pilotage will accept comments and data informally submitted at
any time (see FOR FURTHER INFORMATION CONTACT).
    The following discussion treats, in alphabetical order, these major
topics raised by the comments, and concludes with a discussion of
miscellaneous comments.

 Adequacy of pilot compensation
 Compensation benchmark
 Director's ratemaking discretion
 Effective date and implementation date of the rule
 Factors included in pilot compensation
 General reaction to the NPRM
 Goals of the ratemaking process
 Hourly rates
 Impact of rates on pilotage safety, efficiency, and
reliability
 Information provided by commenters
 New pilot change point
 Pilot hiring and retention
 Pilot responsibility for cost control
 Projecting the number of pilots needed
 Recognized pilotage association costs
 Recuperative rest for pilots
 Reliability and completeness of Coast Guard data
 ``Runaway costs''
 Stakeholder representation in the ratemaking process
 Traffic projections and use of multi-year historical traffic
data
 Miscellaneous issues

    Adequacy of pilot compensation. The ports and shippers coalition,
in comment 53, responded to our question asking if our target pilot
compensation was adequate, or if we should adopt the higher targets
proposed by the pilots. They answered that our proposed target
improperly depended on the use of the Canadian benchmark, implying that
all the proposed targets were too high. They also said a Canadian
benchmark is inappropriate because Canadian pilots perform more of
their work in designated waters than do U.S. pilots, who perform a
higher proportion of their work in ``less demanding'' undesignated
waters.
    Response: We thank the coalition for its input. After considering
all the comments, we continue to find the Canadian GLPA benchmark to be
appropriate. We do not agree with the coalition's implication that our
proposed compensation targets were too high, and that use of Canadian
GLPA pilots' compensation is inappropriate.
    As we stated in the NPRM, GLPA pilots provide service that is
almost identical to the service provided by U.S. Great Lakes pilots.
With the exception of Area 3, the GLPA provides pilotage service in the
same waters as U.S. pilots do; in fact, whether a GLPA or U.S. pilot is
assigned to a vessel is a matter of chance. We rejected the Laurentian
pilots as not being a comparable benchmark because the Laurentian
pilots work exclusively in designated waters. Consequently, we do not
think it is accurate to say that ``Canadian'' pilots perform a higher
percentage of their work on designated waters. The difference between
the amount of work performed in designated waters by U.S. pilots and
GLPA pilots is minimal.
    Moreover, we do not agree with the argument that the noted
disparities between work done by Canadian and U.S. pilots warrant
comparing U.S. compensation to a different system, such as the BLS data
suggested by the ports and shippers association. As we stated in the
NPRM, BLS data for masters, mates, and pilots cover officers whose
duties and responsibilities are substantially different from those of a
U.S. Great Lakes pilot. Unlike a Great Lakes pilot, most officers
covered by the BLS data are not directly responsible for the safe
navigation of vessels of any tonnage through designated waters.
Further, the BLS data is skewed downward by the higher number of lower
wage mates, who do not hold the same licenses as masters and pilots.
Between U.S. and Canadian pilots, however, the impact on overall
pilotage services is the same wherever a pilot happens to be. If a
pilot is assigned to undesignated waters, the pilot is still ``at
work'' or ``on assignment'' and therefore is unavailable for assignment
to designated waters, and the pilot helps to ensure the safe navigation
of the vessel regardless of the circumstances or waters navigated.
Finally, a Canadian pilot's compensation is in no way dependent on the
proportion of the pilot's assignments in designated or undesignated
waters. Canadian pilots earn an annual salary that is affected neither
by that proportion, nor, indeed, by varying traffic demand. Also, all
U.S. registered pilots are qualified to provide service in both
designated and undesignated waters within each pilotage district.
Therefore, we do not think the distinction between assignments in
designated or undesignated waters should have any bearing on a pilot's
compensation.
    Compensation benchmark. After analyzing a number of possible
benchmarks for setting target compensation for the pilots, our NPRM
proposed adopting the compensation of

Canadian Great Lakes pilots as our benchmark for this year's target
compensation.\30\ It also proposed setting the compensation for U.S.
pilots by adjusting the Canadian compensation figure upward by 10
percent, in recognition of the different benefits available to Canadian
pilots and their U.S. counterparts. We received several comments on the
benchmark and benchmark adjustment, some indicating it is insufficient
and some indicating it is overly generous.
---------------------------------------------------------------------------

    \30\ See 80 FR at 54497.
---------------------------------------------------------------------------

    A national pilot association said, in comment 38, that for too long
the Coast Guard set pilot rates too low, in an effort only to keep
pilotage costs as low as possible. The association generally welcomed
our proposals but found that the proposed adjustment of 10 percent to
the Canadian benchmark insufficiently accounts for differences between
the two nations' compensation systems, and that it is skewed because
the Canadian compensation data include compensation for both fully
qualified and apprentice pilots. It provided data in support of a
benchmark adjustment of almost 37 percent, not 10 percent. The group of
pilotage association presidents, in comment 52, supported these
comments and also recommended using other U.S. pilots' compensation
figures, which are generally significantly higher, as the benchmark.
    Response: As we explained in our NPRM,\31\ we did consider using
other compensation schemes, including those for U.S. masters, mates,
and pilots, as our compensation benchmark, and we believe our selection
of Canadian Great Lakes pilot compensation as the best benchmark for
2016 was correct.
---------------------------------------------------------------------------

    \31\ NPRM, 80 FR 54484 at 54497, col. 2.
---------------------------------------------------------------------------

    We appreciate the data the association reported in support of the
almost 37 percent benchmark adjustment it suggested, but we do not find
it persuasive. The commenter admits that determining this differential
is subjective and they primarily base this value on the cost of living
difference between Detroit, MI and Windsor, ON, which are not
necessarily indicative of the regional economy. We do not think the 15
percent COLA differentiator between Detroit, MI and Windsor, ON is
relevant--a single comparison point should not be utilized to establish
the regional comparison. Also, the U.S. cost of the Masters, Mates, and
Pilots Membership Health Plan is only a single option of healthcare and
benefit packages that are also not necessarily indicative of the
regional economy.
    We will re-evaluate the association's data before we propose new
rates for 2017, at which time the public will be able to comment on
their validity and whether the impact of so large an adjustment would
require a phase-in, in the interest of avoiding too large a one-year
rate increase. We find that our new target compensation for 2016 is
fair and justifiable.
    The ports and shippers coalition, in comment 53, responded to our
question asking if the 10 percent adjustment to Canadian Great Lakes
pilotage data is appropriate. The coalition said it is not, and that it
abuses our discretion, because it ignores the facts that Canadian
pilots perform more work in designated waters than U.S. pilots do, and
that they are government employees. The coalition doubted that the
Canadian data require adjustment once ``comparability adjustments are
rationally applied.'' They also said it is ``legally and logically
defective'' to set rates by ``working backward'' from individual pilot
compensation figures to set future target compensation. Instead, they
said we should simply cover reasonable pilotage costs, including the
costs of providing reasonable pilot compensation.
    Response: We acknowledge that this adjustment is an approximation
based on several statements made at the 2014 GLPAC meetings,\32\ which
were not challenged at the time by industry representatives. We have
based our benchmark adjustment on the best data available when we
published the NPRM, and believe the new methodology covers reasonable
pilotage costs and pilot compensation. Our NPRM specifically requested
public comment on the appropriateness of a 10 percent adjustment.\33\
Two commenters provided arguments or data in support of a higher
adjustment, but we have not been able to validate the data or analyze
the commenters' arguments within the time frame statutorily allowed for
this year's ratemaking. We are taking them under advisement for
possible action in the 2017 ratemaking. As we explain previously in
this discussion, we do not think the proportion of pilot time spent in
designated or undesignated waters has any bearing on the comparability
of U.S. and Canadian Great Lakes pilot compensation.
---------------------------------------------------------------------------

    \32\ Transcript, GLPAC meeting, July 24, 2014, pp. 43-45.
    \33\ NPRM, 80 FR 54484 at 54498, col. 3.
---------------------------------------------------------------------------

    The same coalition, in comment 53, responded to our question asking
if Canadian Great Lakes pilot compensation provides the best benchmark
for U.S. rates, and if there is a better benchmark. They said that the
systemic differences between the Canadian and U.S. systems make the
Canadian compensation an unreliable benchmark, and that, instead, we
should continue basing our target compensation on the compensation of
first mates on U.S.-flagged Great Lakes vessels. They said the union
contract information we previously used is still available, as the
union's late comment on the 2014 rulemaking showed, and as the court in
our recent litigation said we should have used. They also suggested we
could use data from the Marine Engineers Beneficial Association or from
the Bureau of Labor Statistics.
    Response: For reasons described above, we disagree the with ports
and shippers association that the work of Canadian pilots is so
different from U.S. pilots that Canadian salaries do not constitute an
appropriate benchmark. We continue to view the Canadian pilots'
compensation, suitably adjusted, as the best benchmark for our target
compensation because, unlike U.S. pilots in other pilotage systems,
pilots in the two Great Lakes systems perform comparable work under
comparable conditions. We agree the union provided contract data for
the 2014 rulemaking, but the limited data provided are not sufficient
or publicly available and therefore, we cannot continue to depend on
them reliably in the future. Furthermore, the Marine Engineers
Beneficial Association and Bureau of Labor Statistics data could be
generally informative, but we do not think they reflect comparable
compensation for comparable work in comparable conditions that we
believe is the best standard for selecting a benchmark. Under that
standard, we continue to think the Canadian Great Lakes pilotage
salaries provide the best benchmark available for this year's rate
setting.
    Director's ratemaking discretion. In comment 38, a national pilot
association said that our proposed 46 CFR 404.104 gives the Great Lakes
Pilotage Director unfettered discretion to determine the adequacy of
pilot compensation, which is bad public policy and leaves the door open
to abuse by future Directors. The association recommended that,
instead, the Coast Guard should add a regulatory requirement for
setting target compensation at a comparable level for comparable work
in a comparable community.
    Response: We understand and respect the association's concern, but
because all Coast Guard exercises of ratemaking discretion are subject
to notice-and-comment rulemaking procedures, any exercise of our
discretion must first be

proposed for public comment, which can highlight any perceived abuse of
that discretion on our part. We believe that we will always need to
exercise our discretion to determine what is comparable, but we will
ensure that any modification made to the initial rates is necessary and
reasonable, as well as justified by supportable circumstances.
    The ports and shippers coalition, in comment 53, said we should
eliminate the Director's ability to make reasonable and necessary
discretionary adjustments to initially-calculated rates, for
supportable circumstances such as carrying out pilotage agreements
between the U.S. and Canada. The coalition said this discretion is open
to abuse and that the exercise of this discretion in the past has been
widely criticized by stakeholders. The coalition also said that, if we
retain the discretionary tool, we should expressly limit its use to
circumstances in which we fully take into account the adjustment's
economic impact and the public interest.
    Response: We acknowledge the past criticism of our use of
discretionary adjustments, and as the coalition pointed out, at least
in the recent past those adjustments have benefitted the pilots.
However, in general we made those adjustments to offset the unintended
consequences of our old ratemaking methodology. Even with adjustments,
it is clear that pilot revenue still has consistently fallen below our
targets. Had we not made those adjustments, we think it likely that the
pilot associations would have had even more trouble attracting and
retaining pilots, and maintaining infrastructure, than they did.
    No matter how well crafted a permanent rate setting methodology may
be, it is bound to produce inequities when it cannot accommodate
unforeseeable circumstances. We think it is essential for the
methodology to include a tool that provides the ability to respond to
those circumstances. We note that any proposed adjustment is fully made
public in that year's NPRM, and we will carefully consider any public
comments raising concerns as to a proposed adjustment's necessity and
reasonableness.
    We also note that we are required, by various statutes and
Executive Orders, to consider the economic impact of any rulemaking,
and statutorily required to consider the public interest as well as the
costs of providing the services in setting rates. Therefore, although
we agree with the coalition that our discretion should be exercised
subject to these controls, we do not think additional regulatory
language is necessary at this time.
    The association presidents, as a group in their comment 52, said
the Director enjoys overly broad discretion to adjust compensation
benchmarks, and that a good standard for the exercise of that
discretion would be ``comparable compensation for comparable work in a
comparable community.''
    Response: For the reasons we have stated, we disagree that this
discretion is overly broad. We generally agree with the association
presidents that comparable compensation for comparable work in a
comparable community is a good standard, but we do not believe
explicitly stating this standard is necessary to achieve that result.
We believe the regulatory language in this rule and public comment
input will ensure that any modification made to the initial rates is
necessary and reasonable, as well as justified by supportable
circumstances.
    One association president in comment 56 said proposed Sec.  404.108
is unclear as to how agreements with Canada could have any impact in
adjusting U.S. rates, when despite comparable language over the past
two decades, no such agreement has ever led to an adjustment.
    Response: Promoting alignment with international agreements is just
one of the supportable circumstances that could warrant an adjustment
where it is found appropriate. Our 2016 rates move us closer to the
``comparable'' compensation called for by the current U.S.-Canada
agreement.\34\ Past agreements called for ``identical'' rates, which
could never be achieved given the acknowledged differences in how the
two pilotage systems operate, and therefore in the past it was not
possible to use our discretion in a way that could make our rates
``identical'' to Canadian rates.
---------------------------------------------------------------------------

    \34\ Memorandum of Understanding, Great Lakes Pilotage Between
the United States Coast Guard and the Great Lakes Pilotage
Authority, Sept. 19, 2013, para. 7.
---------------------------------------------------------------------------

    Effective date and implementation date of the rule. The national
pilots association that submitted comment 49 said the proposed 2016
rates should be implemented at the beginning of the 2016 shipping
season. The pilots association said there is no longer any reason for
an August 1 implementation date, which was linked to the benchmark
union contracts we no longer use in setting rates. The association also
said that in the past the Coast Guard has violated its statutory
requirement to ``establish new pilotage rates by March 1 of each
year.'' \35\ The presidents of the pilots associations, as a group and
in their comment 52, supported these comments.
---------------------------------------------------------------------------

    \35\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    Response: We agree that there is no longer any reason to implement
rates on August 1, rather than as close as possible to the start of the
annual shipping season. However, we do not agree with the association's
interpretation of the statutory requirement, which Congress added in
2006.\36\ The statute requires that we establish new pilotage rates by
March 1. It is our understanding that the 2006 legislation was intended
only to change the Coast Guard's previous practice of reviewing rates
at irregular intervals, and to mandate annual reviews. We note that by
2006 we had set August 1 implementation dates on several occasions, and
that therefore had Congress sought a rate implementation date of March
1, Congress would have included explicit language to that effect in the
statute.
---------------------------------------------------------------------------

    \36\ Public Law 109-241, sec. 302.
---------------------------------------------------------------------------

    The purpose of making a rule ``effective'' by March 1, but
deferring rate implementation until August 1, was to give all parties
clear and settled information, at the beginning of the shipping season,
on a significant cost factor that would change as the season
progressed. We no longer see any reason to defer rate implementation
until August and believe an implementation date at the beginning of the
shipping season is reasonable under the new methodology. This ensures
that the new rates can be charged from the beginning of the shipping
season, which usually occurs in late March.
    The ports and shippers coalition, in comment 53, responded to our
question as to when new rates should be implemented; they said they
should have 90 days in accordance with common marine industry contract
requirements.
    Response: We believe that 30 days is a reasonable amount of time to
prepare for the new rates. In light of our inability to continue using
the union contracts which went into effect each August 1, and given the
statutory requirement that rate adjustments must be set by March 1 of
each year, henceforth we will implement new rates with the opening of
the shipping season or as soon thereafter as possible.
    Factors included in pilot compensation. The ports and shippers
coalition, in comment 53, said that, as independent contractors, pilots
should bear some of the risk of unforeseeable events like accidents or
weather conditions that cause vessel delays and detention, and
therefore should not be

compensated at full base rates for time lost to those conditions.
    Response: We generally disagree. Pilot time is lost when it is
wasted due to delay or detention, and the pilot associations cannot
make up the resulting lost revenue. Pilot compensation would suffer as
a result if they were paid at less than full rates, and the lost
revenue could degrade the ability of pilot associations to bear the
cost of the investments needed to support pilotage service whenever it
is needed. However, we note that pilots do bear some risk under the
cancellation and delay provisions in Sec.  401.420; we discuss comments
on those provisions later in this preamble.
    A pilot said in comment 55B that compensation for delay and
detention should be paid not only when the event is for the vessel's
convenience, but for any event that is not caused by the pilot.
    Response: Pilots and pilot associations are responsible for their
own actions and the maintenance of necessary infrastructure, and cannot
bill for any delay or detention reasonably attributable to them.
Industry is responsible for other delays including those not
necessarily for the convenience of the vessel.\37\
---------------------------------------------------------------------------

    \37\ Except as specified in 46 CFR 401.420(c) with respect to
ice, weather, and traffic delays. An example of a chargeable delay
would be caused by the unavailability of staffing at a dock, such
that the vessel cannot dock. This delay would not be ``for the
convenience of the vessel,'' but nevertheless would needlessly
consume scarce pilotage resources. This aligns with vessel
chartering contracts that require payment regardless of the actual
status of the vessel during the charter agreement.
---------------------------------------------------------------------------

    Pilot 55B ``applaud[ed]'' our recognition that compensation data
should be adjusted for inflation.
    Response: We agree that such adjustments are essential components
of fair compensation under current conditions.
    With respect to the ``compensation for interruption'' provisions of
proposed Sec.  401.420(c), the president of an association in comment
56 asked what constitutes a traffic interruption, and what difference
it makes whether such an interruption occurs during May through
November or at other times.
    Response: Section 401.420(c) deals with interruptions to a vessel's
transit that are caused by ice, weather, or traffic disruptions from
May through November. We proposed relieving vessels of liability for
such disruptions during those months because they are during the non-
peak traffic period. We agree that a pilot's time is lost to these
disruptions regardless of when they take place, but outside of peak
traffic periods the impact of that loss of time on the overall force of
available pilots is less, and the resultant vessel stoppage reduces the
need for pilot assignments. Conversely, the opportunity costs for pilot
time during the peak traffic periods at the beginning and end of the
shipping season, which also coincide with most winter weather
conditions, are much higher. We note that this comment was the only one
to raise this particular point, and we will continue to consider the
issue carefully in the future.
    General reaction to the NPRM. Pilot service provider in comment 34
said that the pilots have ``suffered over the past two decades because
of a ratemaking mechanism that fails, chronically and often by a very
wide margin, to produce the revenue that it promises.'' The commenter
said the whole pilotage system has suffered as a result, and that the
``shipping industry should THANK the Coast Guard, not criticize it, for
finally recognizing that the system is broken, and taking the
initiative to fix it'' (emphasis in the original).
    Response: We agree with the commenter and have proposed regulatory
amendments precisely to address the concerns the commenter raised.
    A pilot service provider in comment 43 pointed out that we ``lost a
critical tool in arriving at an equitable payscale'' when benchmark
union contracts became unavailable for the Coast Guard's use in setting
rates. The commenter ``commend[ed]'' our ``pro-active work'' in
devising a new procedure for ensuring fairer pilot compensation.
    Response: While we agree that our longstanding use of benchmark
union contracts was an accepted and generally useful tool for setting
rates, we think the new procedure is more flexible and will work as
well, or better, over time. The new methodology relies on publicly
available and current data to set a benchmark for each ratemaking, and
allows us to choose the most appropriate benchmarks available.
    The national pilot association in comment 49 expressed support for
our proposals because they responsibly meet our obligation to
``encourage investment in pilots, infrastructure, and training while
helping to ensure safe, efficient, and reliable'' pilotage service.
    Response: We think the investments cited by the association are
indispensable components of providing safe, efficient, and reliable
pilotage service, and we think this rule promotes those investments in
the interests of all system stakeholders.
    The ports and shippers coalition, in comment AW, said the Coast
Guard may have been overly ambitious in proposing both the methodology
changes and new rates based on those changes in the same rulemaking. It
said our proposed changes are flawed and need to be refined. It
therefore proposed extending the 2015 rates into 2016, which it said
should ``be generously remunerative'' to the pilots.
    Response: We disagree with these assertions and believe that the
new rates are necessary and reasonable for safe, efficient, and
reliable pilotage on the Great Lakes. Failure to implement these
important revisions will continue to delay the addition of pilots and
the investment in important infrastructure to sustain the pilotage
system on the Great Lakes.
    The president of a pilot association in comment 59 said our
methodology and rates were fair and should be adopted.
    Response: For all the reasons we cite elsewhere in this discussion,
we agree with the commenter.
    The presidents of the pilot associations, as a group and in their
comment 62, pointed out that the Coast Guard has full discretion to set
pilotage rates, and that the Coast Guard must ensure first and foremost
that the rates we set promote the safety, efficiency, and reliability
of the regulated entities' operations. They said that the shippers
coalition was mistaken in its assertion that we failed to give
sufficient attention to their ``public interest.'' The presidents
pointed out that our statutory mandate is to consider, without
limitation, the ``public interest,'' and shared our interpretation of
that interest as extending to that of every American or any foreign
person who might be affected by our ratemakings. The presidents said
that, had Congress intended to limit the ``public interest'' to the
interest of persons directly affected by the Great Lakes system, it
knew how to do so by speaking in plain terms.
    Response: We agree that the economic interests of Great Lakes ports
and shippers must be considered as one of many interests in the context
of our statutory mandate to consider the public interest in general.
    The ports and shippers coalition, in comment AW, said that
industry's interests are ``congruent'' with those of the pilots, that
our rates should fairly compensate the pilots without imposing
unreasonable costs that can harm the viability of Great Lakes shipping,
and that our proposals do not meet these goals.
    Response: We think the coalition correctly identifies the goals of
our

ratemaking, and we agree that the interests of all the principal
stakeholders are ``congruent,'' but we do not agree that we have failed
to achieve the best possible balance between these two rate setting
goals. We believe the rate in this rule balances fair compensation for
pilots while taking into account the necessary costs of providing
shipping services.
    Hourly rates. The ports and shippers coalition, in comment 53,
opposed our proposed use of hourly charges for all routes, instead of
the current point-to-point charges for routes in designated waters.
They said that fixed charges for those routes provide cost certainty
for shippers and impose discipline on pilots, whose financial interests
are served by navigating those routes in the most expeditious manner.
    Response: We acknowledge that fixed routes provide greater cost
certainty for shippers, but this certainty needs to be balanced against
interests of safety because the speed with which a pilot transits a
route should be dictated by circumstances. We do not think the risk of
an overly expeditious passage should be borne by the environmental
safety of Great Lakes waters and by public safety, both of which could
be jeopardized as a result. We also think this risk is contrary to the
interest of shippers in the safe passage of their vessels.
    A pilot in comment 55B and a president of a pilot association in
comment 54 said that the hourly compensation standard should recognize
that not all hours are billable.
    Response: We believe the current rate adequately addresses hours
that are appropriate for billing. It is unclear to us from these
comments what non-billable hours these commenters had in mind and how
we should take them into account in setting rates. We invite them, and
others, to provide us with additional information for consideration in
2017 and beyond.
    Impact of rates on pilotage safety, efficiency, and reliability. An
environmental group in comment AD said the low compensation and poor
working conditions under which U.S. Great Lakes pilots work puts safety
at risk, and therefore, threatens the Great Lakes environment, and that
Congress clearly intended our ratemaking to take the public interest in
such matters into account. A regional businessman in comment AJ also
said that the regional economy depends on safe shipping and
environmental protection of the Lakes.
    Response: We agree with both commenters. A vessel's safety is
clearly a concern for pilots, vessel operators, shippers, and the
general public. Ultimately, we think an unsafe system could provide
shippers with incentives to shift their operations to other ports or
other transportation modes.
    A pilot service provider in comment 43 cited studies \38\ showing
that ``more than 80 percent of maritime property damage claims and more
than 90 percent of collisions'' are due to the irregularity of master
or pilot work schedules and the pressure of the responsibility these
individuals bear, leading to insomnia and ``near continuous fatigue,''
``often accompanied by intense stress and punctuated by large sudden
shots of adrenalin.'' A pilot association president in comment 60 made
very similar comments.
---------------------------------------------------------------------------

    \38\ According to the commenter, this quotation appears in J.A.
Barber's Naval Ship Handler's Guide.
---------------------------------------------------------------------------

    Response: As is true for all transportation modes, chronic fatigue
from irregular work schedules and insufficient rest periods can
cumulatively increase the safety risks for maritime transportation.
These increased risks are in no one's interest, and they also lead to
pilotage service that is neither efficient nor reliable. The
recuperative rest period is intended to ensure that, in addition to
required rest periods between assignments, pilots have sufficient off-
assignment time during the season so they can avoid chronic fatigue.
    The national pilot association in comment 49 noted that shipping
agents for foreign vessel operators have long demanded Coast Guard
action to address the ``untenable situation'' in which pilot shortages
and aging infrastructure can lead to expensive vessel movement delays.
The association said that only in 2015 did the Coast Guard begin
rectifying the severe pilot association revenue shortfall over the past
decade, and commended the Coast Guard for continuing this rectification
with our proposals for 2016. A pilot service provider in comment AN
made similar comments.
    Response: We agree and think the pilot association correctly
understands that increased pilot compensation is warranted if it leads
to a pilotage system that is safer, more efficient, and more reliable
for all stakeholders.
    Information provided by commenters. A pilot in comment 55C said
that his association's staffing will be decreased by upcoming
retirements, and that the association has aging infrastructure that
must be modernized.
    Response: We acknowledge this information, which advises us of
conditions that threaten this association's ability to provide safe,
efficient, and reliable pilotage. Our changes in this rule were
intended to mitigate such conditions.
    The president of a pilot association in comment 54 said his
district will have significant unforeseen dispatch costs in 2016.
    Response: We agree that this commenter will incur dispatching costs
from the beginning of the 2016 shipping season, including the
acquisition of necessary facilities and technology. Previously, this
service was provided by Canada. Data for those costs were not available
in sufficient detail to be included in the 2016 rate but can be
evaluated for reimbursement in a future rulemaking.
    A U.S. pilot from a different system in comment AH said that pilots
in his association earn over $459,000 a year and also receive medical
and pension benefits, and that compensation for Great Lakes pilots
contributes to hiring and retention difficulty.
    Response: We thank the commenter for this information. We find that
our use of Canadian Great Lakes pilot compensation, suitably adjusted,
is the best benchmark for our target compensation because pilots in the
two systems perform comparable work under comparable conditions. We
have no publicly available information on how rates are set in other
U.S. pilotage systems, and therefore, we cannot analyze whether the
figure cited by this commenter would make a better benchmark for our
system, though we invite public input and data on this topic for our
consideration in future ratemakings. We agree that low compensation in
comparison with that of U.S. pilots elsewhere probably contributes to
hiring and retention problems. Our rule is intended to mitigate that
disparity.
    New pilot change point. Our NPRM proposed adding a new pilot change
point to break up overly long pilotage assignments in the St. Lawrence
Seaway. The national pilot association in comment 38 said we should not
add the new change point until pilot associations reach full staffing
in 2017, because until then an additional change point would only
require additional workload and travel time for an already over-
stretched pilot work force. The ports and shippers coalition, in
comment 53, said that this rulemaking is not the right venue to discuss
a new pilot change point, which deserves more discussion and a thorough
investigation.
    Response: We agree that this issue requires more study and the
addition of more pilots to handle the increased number of pilotage legs
created by the

new change point. Therefore we are taking no action on it this year.
    Pilot hiring and retention. Elected officials in comments AG and AI
said that hiring and retaining highly trained and qualified pilots is
essential for protecting the Great Lakes environment. Official AR said
that our rate increases would help hire and retain the high quality
pilots who protect the safety of the Great Lakes environment and hence
the reliability of Great Lakes transportation.
    Response: We agree, and our new rates are intended to promote such
hiring and retention.
    The national pilot association in comment 38 said our proposed
rates do not adequately cover the cost of adding new pilots, over the
potential 5-year lifespan of the new rates.
    Response: The commenter may be correct and we would adjust the
rates should we find the rates need adjustment over the 5-year period.
For 2016 hiring costs, we are authorizing a temporary surcharge to fund
new applicant pilots, and if warranted we could authorize similar
surcharges in future years, if necessary.
    Pilots in comments 29, 44, 45, 46, and AV, as well as a pilot
service provider in comment AK and a port commenter in comment AM, all
said that low pay and high workload are principal causes of pilot
hiring and retention problems. In addition, a pilot in comment 29
compared U.S. Great Lakes pilot compensation and working conditions
unfavorably to those available to their Canadian counterparts, and said
our proposals would ``go a long way'' toward easing hiring and
retention problems, improving pilot training, and helping shore up
pilotage association infrastructure. A pilot in comment 57 said that a
well-compensated pilot will not want to leave his position, and that a
well-compensated pilot in another stable environment will not want to
take a position in the unstable Great Lakes pilotage system. A pilot in
comment 58 said that in the past, target pilot compensation has been
set ``abysmal[ly]'' and in no way has kept up with compensation for
other pilots or other mariners. A pilot in comment 61 said that the
inability of the pilotage associations to hire and retain qualified
pilots is putting the safety, efficiency, and reliability of pilotage
service at significant risk, and said industry should understand this
as well as the pilots do. He said the pilots had long warned industry
that pilot shortages would inevitably result in the sort of delays that
industry had to endure at the beginning of the difficult 2014 shipping
season. A pilot in comment AA said that in 2010 he withdrew his
application to become a Great Lakes pilot because the risk was not
worth it, and that he knows several colleagues who did not apply, for
the same reason. He said that if industry is not willing to pay
increased rates they may lose pilotage service altogether. Pilots in
comments 55A and 55C made similar comments. A pilot association
president in comment AC said his association has difficulty hiring
replacements for several pilots who have left the system or retired, or
who plan to do so in the near future; similar comments came from pilots
in comments 55D, AE, and AV. President AC also said that pilotage costs
are a small fraction of overall shipping costs in the Great Lakes. A
pilot in comment AL said he retired from the system because of low
compensation and lack of time off, and withdrew his application for
another opening when it became clear those conditions had not improved.
A pilot in comment AO said he never would have become a Great Lakes
pilot had he foreseen the low compensation and long hours involved, and
that as a hiring agent found that these issues kept many highly
qualified mariners from signing on as pilots. A pilot in comment AP
said 10 pilots in his association took early retirement to escape the
low compensation and long hours their positions entailed. A pilot in
comment AQ said his job as a pilot was a ``great fit'' but that he
resigned because of low pay and long hours. Pilots in comments AS and
AT welcomed the surcharge that the NPRM proposed to help defray pilot
association hiring and training costs.
    Response: These comments echo comments that pilots and others have
made to us, and to GLPAC, repeatedly over many years. Such comments
highlight the pilot hiring and retention challenges this rule addresses
to ensure that our rates provide the pilotage associations with
sufficient revenue to attract and retain pilots, improve pilot working
conditions, and shore up the infrastructure on which the pilots rely.
    The ports and shippers coalition, in comment 53, said that our
analysis of pilot attraction and retention issues is not founded on
tested data, and that we should explore alternative ways to attract and
retain good pilots, such as up-front apprentice bonuses and living
standard supports. The coalition said we should look into each departed
recruit's or pilot's reasons for leaving the system. In comment AW, the
same coalition said that we have produced no data establishing that
there are difficulties in attracting and retaining qualified pilots, or
that there is a relationship between those difficulties and low
pilotage rates. The coalition said we should produce enough data to
convince the public that there is a problem, that it is caused by low
rates, and that it is not affected by other unrelated factors.
    Response: Our analysis shows that over the last 11 years, 31 pilots
have left the Great Lakes pilotage associations. Of these 31 pilots, 9
went to other unspecified jobs, 5 went to another system outside the
Great Lakes, 5 took mariner positions on board lakers, 1 went back to
deep sea shipping, 1 became a training instructor, 1 went to another
district, 1 took work with a dredging company, and 8 gave no reported
reason for leaving. Figure 3 shows that the number of pilots dropped
from 44 in 2007 to 36 in 2014, a net decrease of 22 percent.

[GRAPHIC] [TIFF OMITTED] TR07MR16.000

    Industry considers pilot understaffing directly responsible for
vessel traffic delays. Figure 4 shows our data for delay hours overall
and by district between 2007 and 2015. This data is pulled from the
Great Lakes Pilotage Management System, an online database shared by
USCG and the Canadian GLPA, as well as the pilot associations.

                                   Figure 4--Great Lakes Delay Hours 2007-2015
----------------------------------------------------------------------------------------------------------------
                                                                                Total delay
                      Year                          District 1      District 2      District 3         hours
----------------------------------------------------------------------------------------------------------------
2007............................................         1295.97           657.1         1231.99         3185.06
2008............................................          1232.4          679.47          1350.3         3262.17
2009............................................          476.13          546.52         1771.05          2793.7
2010............................................         1096.22         1272.05         1377.53          3745.8
2011............................................          824.41          588.05         1501.02         2913.48
2012............................................           656.5          711.01         1152.09          2519.6
2013............................................         2071.72         1064.31         2829.36         5965.39
2014............................................         2702.35          2439.8         7879.62        13021.77
2015............................................         2532.33         1501.05          383.17         4416.55
----------------------------------------------------------------------------------------------------------------

    Figure 5 shows how much these delays cost, which we calculated by
dividing the delay hours shown in Figure 4 by 24 hours and multiplying
the result by the average daily vessel operating costs, excluding the
cost of pilotage during delays.\39\ Delay hours in 2014 included an
estimated 7,200 delay hours due to the ice opening that we removed to
better represent the trend over the years. The figure shows an overall
increasing trend in delay hours and the cost of these hours over the
last 9 years.
---------------------------------------------------------------------------

    \39\ ``Ship operating costs: Current and future trends'',
Richard Grenier, Moore Stephens LLP, December 2015. $5,191 was used
as the daily operating cost as the majority of affected vessels are
handy size bulkers.

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

[GRAPHIC] [TIFF OMITTED] TR07MR16.001

    Figure 6 shows that since 2007, the number of available pilots has
decreased 22 percent, while delay hours have increased 45 percent. Over
this period, delays increased by 2,636 hours, or 329 hours per year,
per pilot loss. Other factors contribute to delays, but clearly pilot
shortfalls are one important factor.
[GRAPHIC] [TIFF OMITTED] TR07MR16.002

    Pilot associations say they want to reach full staffing, but cannot
do so because of chronic pilot attraction and retention difficulties.
We are open to any reasonable proposals for mitigating those
difficulties, but the remedies suggested by the coalition may not work
and could take longer than the system can sustain in the face of more
pilot departures and the inability to replace those pilots. We doubt
that the coalition's suggestions would be effectual, given the career-
long prospects a recruit or new pilot faces for lower compensation than
their counterparts in Canada side or in other U.S. ports. The pilots
have emphasized these issues repeatedly at pilotage summits and GLPAC
meetings, and we are not aware of evidence that the pilots' emphasis is
misplaced. Our preceding figures suggest that increased pilot rates are
the best and quickest way to attract and retain more qualified pilots.
    Pilot responsibility for cost control. The ports and shippers
coalition, in comment 53, said that the Coast Guard encourages
inefficiency in the pilotage system, by maintaining three separate
pilotage district associations instead of a single association as the
Canadians do. It said we do not adequately pressure the pilotage
associations to maintain a full staff of pilots, and that each
association has an incentive to maintain low staff levels because every
pilot on staff can receive higher compensation. It also said we should
explore more efficient ways to reduce association overhead. The
coalition suggested that pilots should bear some of the risk of
unforeseeable events that cause a

vessel's delay or detention, and therefore should not be paid base
rates for those events. A pilot association president in comment 54
disagreed, and said that a pilot should be responsible only for events
that are outside the pilot's control (we assume the commenter intended
to say ``events within the pilot's control'').
    Response: We are interested in, and continually explore,
efficiencies to keep staffing up and overhead low. We share the
coalition's concern regarding understaffing of the pilot associations
and our new methodology focuses pilot compensation on those pilots
actually expected to be working in a given year, rather than on the
target for full staffing. This reduces any incentive an association
might have to understaff.
    Consolidation of the three districts into one continues to be an
option we consider. However, it should be noted that the three-district
model predates the Coast Guard's assumption of the system's control
almost 50 years ago, and GLPAC's authorizing statute specifies that
three of GLPAC's seven members must represent the presidents of the
three pilotage districts, which in our view implies that each district
will have its own association.\40\ Therefore we assume Congress
recognizes the existing three-association model and would need to amend
the Act to allow us to change that model. We agree with the pilot
association president in comment 54 that, contrary to the coalition's
suggestion that the pilots absorb some of the risk of unforeseeable
events, it makes more sense to allocate risks so that pilots bear the
costs only for events that are within their control. This is because
there is a limited pool of pilots, and the association cannot simply
add pilots or pilot hours to make up for pilot hours lost to delays
outside the pilots' control.
---------------------------------------------------------------------------

    \40\ See 46 U.S.C. 9307(b)(2)(A).
---------------------------------------------------------------------------

    Projecting the number of pilots needed. The national pilots
association in comment 38 said our NPRM's announced goal of having 50
pilots on hand within the near future is fully justified to keep vessel
traffic moving and to avoid the pilot fatigue that the National
Transportation Safety Board (NTSB) has said threatens pilotage safety.
The association found it ``baffling'' that the same shippers who
express concern over traffic delays also criticize the costs of adding
the pilots needed to avoid those delays.
    Response: This final rule increases the 50-pilot goal we announced
in the NPRM to a new goal of 54 pilots, for reasons we will discuss in
Part VI of this preamble.\41\ This target is set to ensure we achieve
our goals of safe, efficient, and reliable pilotage, and we agree that,
at least in the near future, these goals can be met only by providing
adequate pilot compensation and rest.
---------------------------------------------------------------------------

    \41\ The 50-pilot figure appears in the NPRM at p. 54496, Table
10. In Part VI of this preamble, we discuss our reasons for
increasing the number of pilots needed in our presentation of
calculations made in accordance with new Sec.  404.103. The 54-pilot
figure appears in that presentation as Figure 19.
---------------------------------------------------------------------------

    The ports and shippers coalition, in comment 53, said the NPRM's
proposal that pilot numbers be set high enough to cover peak traffic
periods should be revised so that peak demand is used only at the
beginning and end of a shipping season, when delays due to pilot
shortages are most common, and should rely on alternative tools, such
as the use of contract part-time pilots, during the non-peak periods.
    Response: Traffic peaks usually are confined to the periods just
after the opening and just before the closing of a season, but could
occur at other times as well. Setting pilot numbers high enough to
accommodate all these peak periods is essential for reducing traffic
delays during peak periods, and is also essential if we are to provide
the recuperative monthly rest periods recommended by the NTSB in the
interests of safety.
    We considered using contract or semi-retired pilots as an
alternative way to handle traffic peaks. We do not think that is a
viable alternative because those pilots are unlikely to possess current
and thorough knowledge of local waters. We consider such knowledge
essential for safe piloting, especially in the bad weather conditions
often experienced during peak periods. This kind of specialized
knowledge takes up to 48 months to acquire and cannot be summoned at
short notice to address temporary traffic peaks. It is true that other
pilotage systems outside the Great Lakes sometimes use part-time or
contract pilots, but those systems cover smaller areas in which those
pilots more easily can maintain the necessary knowledge without
impacting safety. The coalition did not propose other alternatives for
our consideration and we have not identified such alternatives.
However, we invite the public's input on any alternatives that exist,
and would carefully consider using those alternatives in future
ratemakings.
    The president of a pilot association in comment 56 criticized our
proposed basis for target pilot compensation in Sec.  404.104, by which
compensation would be set according to the number of pilots actually on
hand, instead of the number of pilots needed. He said this would be
unfair to the existing pilots, each of whom has to work harder until
the association is fully staffed.
    Response: We have authorized a temporary surcharge to assist in
achieving the goal of hiring and training new pilots and think this is
a more transparent tool than setting base rates according to ``pilots
needed,'' which as an industry commenter pointed out could provide an
incentive for an association to keep pilot strength artificially low.
    Recognized pilotage association costs. The national pilots
association in comment 38 said that, in proposed 46 CFR 404.2(b)(3)
regarding transactions not directly related to providing pilotage
services, we should specify that transactions must be related to the
provision of ``safe, efficient, and reliable'' pilotage service.
    Response: We agree with the motivation behind this suggestion, but
we think it unnecessary to add the proposed language. Our proposed
regulations make it clear that our goal is safe, efficient, and
reliable pilotage, and we recognize only those expenses that are
reasonable and necessary for promoting that goal.
    The national pilots association in comment 49, supported by the
president's group in comment 52, said that our proposed 46 CFR
404.2(b)(6) disallowance for legal fees associated with actions against
the U.S. Government and its agents appeared to be in retaliation for
the pilots' lawsuit against the Coast Guard for our 2014 ratemaking.
The association said our proposal was contrary to past Coast Guard
practice, which allowed those fees so long as there was no finding of
bad faith on the part of the pilots. The president's group, in comment
52, said disallowing fees is an arbitrary and capricious departure from
past Coast Guard practice and an illogical departure from customary
practice in other industries. They said the disallowance may have been
based on the mistaken assumption that the fees paid to their lawyers
were for lobbying expenses.
    Response: We disagree. The U.S. Government, through the Coast
Guard, is the pilots' regulator, and therefore, it is inappropriate for
the Coast Guard routinely to approve any legal costs for actions
against the Government or its agents. We note that when court-ordered
to do so, as we were as part of the settlement ending the 2014
litigation, we do pay the opposing party's litigation costs. The
presidents correctly state that we do not recognize lobbying expenses
for ratemaking purposes.

    The ports and shippers coalition, in comment 53, opposed our
recognizing the pilot associations' cost of membership in the American
Pilots Association (APA), because they did not think it necessary for
safe, efficient, and reliable Great Lakes pilotage.
    Response: We acknowledge that until recently we did not view APA
membership as ``necessary,'' but we have since come to realize that the
APA provides its members with information about best practices and
pilot training, which we think is essential if pilots are to provide
safe, efficient, and reliable service on the Great Lakes. The APA
engages in lobbying, but we have determined that lobbying represents 15
percent of APA activity and we deduct that amount from the recognized
expenses accordingly.
    Recuperative rest for pilots. The national pilots association in
comment 49 said it was pleased with our proposal that pilots be allowed
up to 10 days' recuperative rest per month in non-peak months, and
hoped foreign vessel operators will understand the proposal's value to
them. The presidents' group, in comment 52, also supported the proposal
as essential for safety and for pilot attraction and retention.
    Response: A pilot's chronic fatigue from irregular work schedules
and insufficient rest can cumulatively increase the safety risks for
maritime transportation. Such increases in risk serve no one's
interest, and they also lead to pilotage service that is neither
efficient nor reliable. Our recuperative rest requirement is intended
to ensure that, in addition to required rest periods between
assignments, pilots have sufficient off-assignment time during the
season so they can avoid chronic fatigue.
    The president of an association in comment 54 said that each
district's peak demand period is different from the others, and
therefore, it makes sense to allow the recuperative rest periods
between each district's double-pilotage seasons.
    Response: Double pilotage is used mostly at the beginning and end
of a shipping season, and our recuperative rest periods will take place
between those times. Peak periods do vary from one district to another,
but these variances are so small that, at this time, we see no reason
to set different periods for each district.
    The president of an association in comment 56 said we should amend
Sec.  404.1 by specifying that, instead of ensuring fair compensation
for trained and rested pilots, we would ensure a sufficient number of
well-qualified and well-rested pilots to cover peak demand, and have 10
days' recuperative rest each month during non-peak months. He also
asked us to clarify how our proposal would deal with the possibility
that such rest could be modified to ensure continuous pilot
availability.
    Response: We do not think we need to specify 10 days' recuperative
rest each month during non-peak months. Though this is one of the goals
of this rule, we believe it is necessary to review the results of the
2016 shipping season under our new staffing model and methodology
before we establish the duration and timing of the recuperative rest
periods in regulation. With respect to rest periods being modified to
provide for continuous pilot availability, we require rested pilots to
be available for assignment and we are increasing pilot strength to be
able to fulfill both our recuperative rest guidelines and our
requirements for rested pilots to be available for assignment.
    Reliability and completeness of Coast Guard data. The ports and
shippers coalition, in comment 53, said that, unlike other rate-setting
agencies, the Coast Guard cannot assure the rate-payers that the
financial data it uses are reliably reported or audited. It said our
revenue projections failed to take vessel weighting factors and
differences between specific routes into account, and that these should
affect our rates. In comment AW, the coalition said that the pilot
association financial data in the record are ``rudimentary and
inadequate'' and provide insufficient information for comparing actual
and projected revenue. It said that until we construct an ``adequate
data platform,'' our ratemakings ``will continue to be random,
subjective, and arbitrary.'' It also said our record lacks data or
analysis to show that, in setting new rates, we have adequately
considered the needs of safety, the public interest, and relevant
costs. It said our current accounting systems fail to provide
sufficient data on which we can reach informed and defensible decisions
on whether current rates produce adequate revenues.
    Response: We disagree with the coalition's characterization of the
data. As amended in this rule, Sec.  403.300 requires pilotage
associations to use a Coast Guard-approved financial reporting system
that will provide us with more accurate financial data, which should
facilitate accurate Coast Guard audits of that data. We make those
audits publicly available in the dockets for our annual rate reviews.
Over the past few years we have gone to great lengths to ensure that
the associations follow uniform reporting procedures and use the
reporting software that we provide. Moreover, we have worked closely
with our contract auditor to ensure uniform auditing procedures, and in
recent years we have begun annual pilot association revenue audits to
help validate the billings they report. However, there is no statutory
or regulatory requirement that the Coast Guard use the same financial
reporting or auditing methods used by other rate-setters for other
purposes.
    We see potential merit in the suggestion that our ratemaking take
weighting factors into account, and we take it under advisement. Given
the high variability from year to year in the numbers and types of
vessels requiring pilotage, we have never considered weighting factors
in projecting revenue projections of the rate. We do not consider
specific routes in the rulemaking, only the needed revenue for the
pilot associations to provide safe, efficient and reliable service. Our
comparison of needed revenue from year to year reflects the overall
cost of the pilotage system; some routes may see higher increases than
others depending on factors including weather, traffic, cargo, and
destination.
    We do not agree that pilot financial data are unreliable. The data
provided in the docket readily allows comparisons between projected and
actual revenues. Our independent accounting firm conducts extensive
reviews of pilot association financial information, to enable us to
determine the necessity and reasonableness of association expenses. We
recently began auditing association revenues, and these audits validate
association claims that they generate the target revenues set in
previous ratemakings. We have also posted financial information
(including information requested by the coalition) on our public Web
site. We believe we have provided extensive evidence in support of our
analysis of association expenses and revenues, and that we have fully
explained how our new methodology and this year's rate increases
support safe, efficient and reliable pilotage. We have also added
analyses of the potential economic impact of the ratemaking to support
our methodology and rate increases.
    Finally, our responses to the comments we received on the NPRM
demonstrate that we have considered safety needs, relevant costs, and
the public interest.
    ``Runaway costs.'' Representatives of shippers in comments 10, 12,
15, 16, 19, 20, 21, 22, 25, 28, 41, 47, 50, and 51 said pilotage rates
now represent ``runaway costs.'' One of these commenters said that we
had increased pilotage rates by

114 percent over the past decade, while simultaneously reducing the
number of available pilots. Another said these cost increases exceeded
Consumer Price Index cost increases (23 percent) over the same period.
    Response: We acknowledge that the rates have increased since 2005,
but by 90 percent, not 114 percent. Of that increase, 21.4 percent
reflects consumer price index increases.\42\ A 20 percent increase
occurred over a decade ago (2005) and a 22.6 percent increase took
place in 2007. Before 2005, there were only two increases in the rate:
11 percent in 1997 and 3 percent in 2001. Figure 7 below displays the
average increase or decrease in the rates for each year from 2005 to
2015. It shows an overall decreasing trend in the average rate
increases over the last 11 years.
---------------------------------------------------------------------------

    \42\ Average yearly CPI from 2005 and 2015, http://www.bls.gov/cpi/cpid1512.pdf.
[GRAPHIC] [TIFF OMITTED] TR07MR16.003

    Many of the shippers cited the adverse impact the proposed rate
increases could have on their businesses or on the regional economy in
general. One said that higher pilotage costs could decrease the
attractiveness of Great Lakes shipping relative to other transportation
modes, and that ultimately reduced shipping demand will result in lower
pilotage revenues, forcing further rate increases and creating a cost
spiral. Some of the shippers said that, as a regulator, the Coast Guard
should protect the interests of the consumer from cost increases that
are unaccompanied by system efficiencies and that threaten the health
of the Great Lakes economy. The ports and shippers coalition, in
comment 53, made similar statements and said that we erred in saying
the proposed rates would not hurt small businesses, because we
overlooked the ripple effect of rate increases on the small shippers
and their suppliers who are indirectly affected by those increases.
    Response: We recognize the importance of commerce on the Great
Lakes and believe the rule achieves the best long-term balance of
interests. We analyzed the potential impact of the increase in pilot
rates on Great Lakes shipping. To determine the elasticity of demand
\43\ for commodities shipped on the Great Lakes we reviewed a 2004
report by Martin and Associates,\44\ analyzing two principal
commodities moving through the Great Lakes, import steel and export
grain. These commodities accounted for 74 percent of the U.S. Great
Lakes cargo on vessels subject to pilotage requirements. The study
found that the demand for shipping grain and steel was highly inelastic
(insensitive) with respect to pilotage rates.\45\
---------------------------------------------------------------------------

    \43\ Elasticity of demand for a product is the percentage change
in the demand for a product or service due to a percentage change in
the price of that product or service. Demand elasticity is
considered inelastic if there is little change in the demand for a
product or service as a result of a price change.
    \44\ ``Analysis of Great Lakes Pilotage Costs on Great Lakes
Shipping and the Potential Impact of Pilotage Rate Increases'',
Martin and Associates, 2004.
    \45\ The study compared the least cost routing cost for each
U.S. inland steel and grain destination by Great Lakes port to the
next least cost routing using an alternate coastal port and the
baseline Great Lakes pilotage cost. The study found a range of cost
savings for 20 Great Lakes ports over coastal ports. These ranges
were used to draw the conclusion that Great Lakes shipping of grain
and steel are highly inelastic with respect to pilotage charges.
---------------------------------------------------------------------------

    In addition, the overall impact of an increase in pilotage costs
should be small and have little effect on a shipper's transportation
route and mode preferences. A 2011 study by Martin and Associates \46\
examined the economic impacts of the Great Lakes and St. Lawrence
Seaway system. The study showed that in 2010, the system's ports
handled 322.1 million metric tons of cargo, generating $33.6 billion in
direct business revenue. Cargo moving on the foreign-flagged vessels
that are the primary users of mandatory Great Lakes pilotage service
accounted for $2.3 billion, or approximately 7 percent of the total
revenue. The study also found that U.S. and Canadian Great Lakes pilots
generated $91.7 million in direct business revenue. Therefore, pilot
revenue accounted for less than 0.3 percent of the total direct revenue
generated in the system. Any increase in this small proportion would be
distributed over the entire system, thereby diminishing its impact.
---------------------------------------------------------------------------

    \46\ ``The Economic Impacts of the Great Lakes St. Lawrence
Seaway System'', Martin and Associates, 2011. http://www.marinedelivers.com/sites/default/files/documents/Econ%20Study%20-%20Full%20Report%20Final.pdf.
---------------------------------------------------------------------------

    We are required by statute to set rates with ``consideration to the
public interest and the costs of providing the [pilotage] services.''
\47\ The statute does not limit the ``public interest'' to that of the
Great Lakes region, or to that of any

industry, and we therefore interpret the statutory intent to apply to
the entire nation's public interest. This larger interest, of course,
includes the public interest in promoting the economic health of all
the nation's regions including that of the Great Lakes region. We
believe the measures we proposed in our NPRM achieve the proper balance
of covering pilotage costs and ensuring safe, efficient, and reliable
pilotage in the public interest.
---------------------------------------------------------------------------

    \47\ 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    As to the impact of increases on small businesses, we acknowledge
the coalition's concern, but the Regulatory Flexibility Act requires
consideration only of the direct costs of a regulation on a small
entity that is required to comply with the regulation.\48\ As
previously explained, pilot revenue accounted for less than 0.3 percent
of the total direct revenue generated in the Great Lakes and St.
Lawrence Seaway system and any increase in this small proportion would
be distributed over the entire system, thereby diminishing its impact.
It is not clear how this rule could have significant ``ripple
effects.''
---------------------------------------------------------------------------

    \48\ The courts have held that the RFA requires an agency to
perform a regulatory flexibility analysis of small entity impacts
only when a rule directly regulates small entities. See the Small
Business Administration's ``A Guide for Government Agencies How to
Comply with the Regulatory Flexibility Act,'' May 2012, page 22.
https://www.sba.gov/sites/default/files/rfaguide_0512_0.pdf.
---------------------------------------------------------------------------

    Also, we think these comments overlook the adverse regional
economic impact that lower pilotage rates could have. Lower rates lead
to lower revenues, and as we have stated, we think chronic low revenues
are responsible for the pilotage system problems that industry says
leads to damaging vessel traffic delays. It is those delays that are
most likely to weaken the competitiveness of the Great Lakes in the
near future, and our rate increases are intended to forestall that
impact.
    More importantly, however, and as we previously noted, if we fail
to implement this methodology and new rates, we believe the pilot
associations will not be able to recruit experienced mariners and
retain their registered pilots. Without registered pilots, current law
would prohibit international vessels from transiting the Great
Lakes.\49\ This vessel traffic would be forced to use other ports or
another mode of transportation, resulting in a negative impact on the
regional economy and the economies of Great Lakes ports.
---------------------------------------------------------------------------

    \49\ See 46 U.S.C. 9303(f).
---------------------------------------------------------------------------

    A port commenter in comment 35 said pilotage costs now exceed a
vessel's total operational costs, or the cost of loading and unloading
vessels.
    Response: In 2015 the average daily operating costs (excluding
fixed costs) for Great Lakes bulkers and tankers ranged roughly from
$5,191 to $7,879.\50\ There may be transits for which pilotage costs
are more than other operating costs during the time operating on the
Great Lakes, but this will rarely be the case because pilotage is only
required in the Great Lakes for a portion of most transits. Moreover,
all of the vessels for which pilotage is required come from ports
outside the Great Lakes-Seaway system, and most of their voyage time is
conducted without a pilot's services.
---------------------------------------------------------------------------

    \50\ ``Ship operating costs: Current and future trends'',
Richard Grenier, Moore Stephens LLP, December 2015. The 2015
weighted average operating cost is estimated at $5,191 for a
handysize bulker, $5,771 for a handymax bulker, and $7,879 for a
product tanker. We assumed these costs include only the costs of
operating (such crew costs, repairs and maintenance, insurance,
administration, and dry docking) and do not include any fixed costs
of the vessels (such as amortization of vessel construction costs).
---------------------------------------------------------------------------

    To estimate the impact of U.S. pilotage costs on the foreign
vessels affected by the rate adjustment, we used 2012-2014 vessel
arrival data from the Coast Guard's Ship Arrival Notification System
(SANS) and pilotage billing data from the Great Lakes Electronic Pilot
Management System (GLPMS). A random sample of 50 arrivals was taken
from SANS data. To estimate the impact of pilotage costs on the costs
of an entire trip, we estimated the length of each one way trip. We
used the vessel name and the date of the arrival to find the last port
of call before entering the Great Lakes system. The date of the
departure from this port was used as the start date of the trip. To
find the end date of the trip we used GLPMS data to find all the
pilotage charges associated with this vessel during this trip in the
Great Lakes system. The end date of the one way trip was taken as the
last pilotage charge before beginning the trip to exit the system. We
estimated the total operating cost by multiplying the number of days
for each by the 2015 average daily operating cost and added this to the
total pilotage costs from GLPMS for each trip. The total pilotage
charges for each trip were updated to the 2015 rates using the average
rate increases in the Great Lakes Pilotage Rates 2012-2015 Annual
Review and Adjustments final rules.\51\ The total updated pilotage
charges for each trip were then divided by the total operating cost of
the trip. We found that the U.S. pilotage costs could account for up to
17.2 percent \52\ of the total operating costs for a voyage. We also
estimated the impact of the rate increase in this final rule. We took
the same 50 trips and updated the pilotage costs to the proposed 2016
rates. With this rule's rates for 2016, pilotage costs are estimated to
account for up to 18.8 percent of total operating costs, or a 1.6
percent increase \53\ over the current cost. The total operating costs
do not include the fixed costs of the vessels. If these costs are
included in the total costs, the pilotage rates as a percentage of
total costs would be lower.
---------------------------------------------------------------------------

    \51\ The average percentage changes in the rates for 2012-2015,
were -2.62%, 1.87%, 2.5%, and 10%, respectively.
    \52\ For the random sample of 50 arrivals, the average of the
pilotage costs as a percentage of the total operating costs was
17.2%. The percentages ranged from a low of 2.1% to a high of 41.2%.
    \53\ 18.8% of total operating costs in 2016-17.2% of total
operating costs in 2015 = 1.6% incremental increase of pilotage
costs as a percentage of total operating costs.
---------------------------------------------------------------------------

    A port commenter in comment 42 said our proposed ratemaking
methodology is ``decoupled from market realities'' and adds costs
without adding productivity or accountability. The commenter said we
should set rates to optimize the availability of ``high quality
pilots'' with ``minimal impact on vessel schedules and routes,'' and
with the lowest possible costs not directly related to pilotage. A
pilot association president in comment 56 said that, in fact, pilotage
associations are subject to market forces because those forces dictate
the success of each association's efforts to attract and retain talent,
and because the Coast Guard is required to set rates with consideration
to the cost of pilotage service, which itself is subject to market
forces.
    Response: We agree with the pilot association president in comment
56 that pilotage associations are not ``decoupled'' from market forces,
for the reasons the president gave. This rule is intended to promote
safe, efficient, and reliable Great Lakes pilotage. Pilot associations
have made it clear that they cannot ensure safe pilotage if continued
low rates make it impossible to attract and retain high quality pilots,
maintain adequate infrastructure, and provide decent working
conditions. Shipping interests have made it clear that they will not
tolerate delays to vessel schedules, or backups on certain vessel
routes, that are attributable to pilot shortages. This rule lays out
the vision of a system in which highly capable pilots want to work on
the Great Lakes, do so safely, and move traffic efficiently and
reliably. We think every stakeholder wants to see that vision realized.
However, achieving that level of efficiency and reliability requires a
comparable level of compensation to attract and support those pilots.
    The presidents' group, in comment 62, said that the ``runaway
cost''

argument is flawed because much of the costs over the past decade came
in 2005, when a delay of many years in promulgating that year's rate
increase resulted in a large gap between the pilots' incurring of costs
and new rates to cover those costs.
    Response: We agree with comment 62's accurate explanation for a
large part of the cost increases cited by the ports.
    Stakeholder representation in the ratemaking process. A port
commenter in comment 42 said our ratemaking process does not give
adequate voice to foreign vessel owners or to companies that import or
export goods through the Great Lakes.
    Response: We do not agree that our process denies foreign interests
or U.S. importers and exporters a voice in our ratemaking process.