[Federal Register Volume 68, Number 239 (Friday, December 12, 2003)]
[Rules and Regulations]
[Pages 69564-69578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30711]



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Part III





Department of Homeland Security





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Coast Guard



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46 CFR Parts 401 and 404



Rates for Pilotage on the Great Lakes; Interim Rule

  Federal Register / Vol. 68, No. 239 / Friday, December 12, 2003 / 
Rules and Regulations  

[[Page 69564]]


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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Parts 401 and 404

[USCG-2002-11288]
RIN 1625-AA38 (Formerly RIN 2115-AG30)


Rates for Pilotage on the Great Lakes

AGENCY: Coast Guard, DHS.

ACTION: Interim rule with request for comments.

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SUMMARY: This interim rule provides a partial rate adjustment for 
pilotage on the Great Lakes. We last adjusted the rates for pilotage on 
the Great Lakes in July 2001. The partial rate adjustment is being 
implemented while the Coast Guard completes its evaluation of issues 
raised in response to the NPRM and calculates a full rate adjustment.

DATES: This interim rule is effective January 12, 2004. Comments and 
related material must reach the Docket Management Facility on or before 
February 10, 2004.

ADDRESSES: You may submit comments identified by Coast Guard docket 
number USCG-2002-11288 to the Docket Management Facility at the U.S. 
Department of Transportation. To avoid duplication, please use only one 
of the following methods:
    (1) Web site: http://dms.dot.gov.
    (2) Mail: Docket Management Facility, U.S. Department of 
Transportation, 400 Seventh Street, SW., Washington, DC 20590-0001.
    (3) Fax: 202-493-2251.
    (4) Delivery: Room PL-401 on the Plaza level of the Nassif 
Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 
p.m., Monday through Friday, except Federal holidays. The telephone 
number is 202-366-9329.
    (5) Federal eRulemaking Portal: http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, 
call Paul Wasserman, Director, Office of Great Lakes Pilotage, (G-MW-
1), Coast Guard, telephone 202-267-2856 or e-mail him at 
[email protected]. If you have questions on viewing or 
submitting material to the docket, call Andrea M. Jenkins, Program 
Manager, Docket Operations, telephone 202-366-0271.

SUPPLEMENTARY INFORMATION:

Public Participation and Request for Comments

    We encourage you to participate in this rulemaking by submitting 
comments and related materials. All comments received will be posted, 
without change, to http://dms.dot.gov and will include any personal 
information you have provided. We have an agreement with the Department 
of Transportation (DOT) to use the Docket Management Facility. Please 
see DOT's ``Privacy Act'' paragraph below.
    Submitting comments: If you submit a comment, please include your 
name and address, identify the docket number for this rulemaking (USCG-
2002-11288), indicate the specific section of this document to which 
each comment applies, and give the reason for each comment. You may 
submit your comments and material by electronic means, mail, fax, or 
delivery to the Docket Management Facility at the address under 
ADDRESSES; but please submit your comments and material by only one 
means. If you submit them by mail or delivery, submit them in an 
unbound format, no larger than 8\1/2\ by 11 inches, suitable for 
copying and electronic filing. If you submit them by mail and would 
like to know that they reached the Facility, please enclose a stamped, 
self-addressed postcard or envelope. We will consider all comments and 
material received during the comment period. We may change this rule in 
view of them.
    Viewing comments and documents: To view comments, as well as 
documents mentioned in this preamble as being available in the docket, 
go to http://dms.dot.gov at any time and conduct a simple search using 
the docket number. You may also visit the Docket Management Facility in 
room PL-401 on the Plaza level of the Nassif Building, 400 Seventh 
Street SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through 
Friday, except Federal holidays.
    Privacy Act: Anyone can search the electronic form of all comments 
received into any of our dockets by the name of the individual 
submitting the comment (or signing the comment, if submitted on behalf 
of an association, business, labor union, etc.). You may review the 
Department of Transportation's Privacy Act Statement in the Federal 
Register published on April 11, 2000 (65 FR 19477), or you may visit 
http://dms.dot.gov.

Public Meeting

    We do not now plan to hold a public meeting. But you may submit a 
request for one to the Docket Management Facility at the address under 
ADDRESSES explaining why one would be beneficial. If we determine that 
one would aid this rulemaking, we will hold one at a time and place 
announced by a later notice in the Federal Register.

Regulatory History

    On January 23, 2003, the Coast Guard published an NPRM in the 
Federal Register [68 FR 3202] proposing to set new rates for pilotage 
on the Great Lakes. A public meeting was held January 31, 2003, in 
Cleveland, OH.
    On April 1, 2003, the Coast Guard published in the Federal Register 
[68 FR 15697] a correction to the NPRM and extended the NPRM comment 
period through May 1, 2003. This notice also announced another public 
meeting that was held April 14, 2003, in Washington, DC.
    On May 14, 2003, the Coast Guard published in the Federal Register 
[68 FR 25899] a notice of availability and a request for public comment 
on a Review of Bridge-Hour Standards for American Pilots on the Great 
Lakes, dated March 4, 2003.

Program History

    In 1996, we established the current methodology for setting rates 
for pilotage on the Great Lakes.
    In July 2001, we last adjusted the rates for pilotage on the Great 
Lakes. A year later, as a result of litigation, we temporarily revised 
the rates in District Two, Area 5, until the current rulemaking is 
completed. That temporary rule expires on December 24, 2003, and this 
interim rule contains new rates for Area 5.

Discussion of Comments

General

    During the comment periods, the Coast Guard received 149 comments 
mostly expressing concerns about the implementation of the proposed 
rates and the process used in determining the proposed rates. There 
were also a number of requests to extend the comment period. Comments 
were received from pilots, pilot associations, cruise ship and ferry 
operators, small businesses on the Great Lakes, port authorities from 
the U.S. and Canada, and domestic and foreign shipping corporations.
    Some of these comments stated that a rate adjustment is long 
overdue. Some of these comments also asked that future rate reviews 
take place in a timely manner. Another comment stated that the Coast 
Guard has a legal and moral responsibility to move forward immediately 
on the 2003 rate adjustment.
    One comment wanted more time to complete the Great Lakes Pilotage 
Advisory Committee's membership so

[[Page 69565]]

that the committee could comment on the NPRM.

Schedule for Interim Rule Publication

    Numerous comments stated that the Coast Guard should implement the 
proposed new rate immediately or at least by the start of the 2003 
shipping season. Other comments stated if that was not possible, that 
the proposed rate should be implemented until corrections can be made.
    Many other comments, however, expressed concern that our proposed 
interim rule publication date of February 14, 2003, was before the end 
of the comment period deadline. One stated because of the proximity of 
the NPRM's comment period deadline (March 10, 2003) to the planned IR 
publication date (February 14, 2003) that comments would not have been 
given full consideration. Several port authorities stated that 
implementing an interim rule would violate companies' ``right to have 
their views fairly considered.''
    One comment stated that a ``hasty implementation'' of the proposed 
rate increases would violate the rulemaking provisions of the 
Administrative Procedures Act (APA; 5 U.S.C. 553) as well as the 
requirement that the Coast Guard consider the public's interest (46 
U.S.C. 9303(f)).
    One comment stated that the rush to institute an interim rule would 
result in significant defects in the ratemaking process.
    Requests for Extension and Public Meetings. Some comments asked 
that the comment period be extended. One said the additional extension 
would provide time for ample scrutiny and the ability to make necessary 
adjustments before a final rate is established. Another comment stated 
that if the comment period is extended an interim rate is needed until 
the final rule is completed.
    Another comment stated that placing the independent accountants' 
reports for Districts One, Two, and Three in the docket five days after 
the publication of the NPRM did not allow for an extensive review of 
those documents. Other comments stated that additional public meetings 
are needed to provide stakeholders sufficient time to analyze the 
rulemaking and to prepare and submit comments.
    We understand the early concerns about not having enough time to 
respond to the NPRM. However, because two public meetings were held 
(January 31, 2003, and April 14, 2003), and the comment period was 
extended through May 1, 2003, the Coast Guard has provided an adequate 
opportunity for those wishing to respond to the NPRM and for those 
needing to review the independent accountant's reports. We do not plan 
on holding a public meeting on this interim rule.

Boundary Act Treaty

    Several comments stated that the proposed rates violate the 
Boundary Act Treaty of 1910 that stipulates Canadian boundary waters 
are to be treated with fairness and equity. Comments from the Shipping 
Federation of Canada and the Thunder Bay Port Authority stated that the 
proposed rate violates the spirit of the Boundary Act Treaty of 1910. 
The Coast Guard disagrees. The treaty between Great Britain and the 
United States established boundaries and mandated free and open 
navigation for the vessels of both Canada and the U.S. The treaty 
further called upon national regulations to apply equally to the 
citizens and vessels of the other party. While the treaty was silent 
with respect to Great Lakes pilotage rates, the proposed rates, 
nonetheless, do not discriminate against Canadian vessels since they 
will apply equally across the board to all prospective carriers.

Beyond the Scope of the Rulemaking

    Two comments asked that a surcharge be added as part of the final 
rule to allow pilots to recoup the portion of the rate that has been 
lost since the start of the 2003 shipping season.
    One comment stated that pilotage should be returned to the auspices 
of the St. Lawrence Seaway Development Corporation (SLSDC).
    One comment from a pilots' association stated that shipping 
companies should be required to open their books to give full and 
complete disclosure.
    Two comments stated the delay in enacting the new rate before the 
start of the 2003 shipping season continues the ``essential 
punishment'' of Great Lakes pilots by denying them the compensation 
they are ``justly'' due.
    All of these comments raise issues and concerns, resolution of 
which is beyond the scope of this rulemaking.

Classification of Rulemaking

    Some comments questioned the appropriateness of the Coast Guard's 
characterizing this rulemaking as non-significant because the NPRM 
proposed to increase Great Lakes pilotage rates an average of 26 
percent. Some comments claimed that the cost of pilotage could 
constitute over 30 percent of the total cost of a typical vessel 
transit into and out of the Great Lakes and thus, the Coast Guard's 
proposed rate increase was both significant and substantial. Other 
comments stated that the cost of pilotage is only 2 percent or less of 
the total cost of Great Lakes transits, and that pilotage fees are an 
insignificant portion of total vessel costs for operating in the Great 
Lakes. The Canadian Marine Pilots' Association commented that the cost 
of pilotage as a percentage cost of shipping in the Great Lakes is 2 
percent or less.
    One comment stated that the rulemaking should be a ``significant 
action'' under the regulatory procedures of DOT (now DHS) & OMB because 
it involves Canadian businesses and the Canadian government.
    We disagree. This rulemaking is not ``OMB'' significant under 
Executive Order 12866 and is categorized as ``non-significant/
substantive''. OMB and DHS have reviewed and agreed with the Coast 
Guard's determination that the rulemaking is substantive, but not 
significant.

Methodology Used in NPRM

    Some comments suggested that the ``significant increase'' in the 
proposed rates was due to a change in the Coast Guard's interpretation 
of the ratemaking methodology. The Coast Guard's approach to conducting 
the rate review was consistent with that used in prior years and the 
proposed rate increase in the NPRM was not attributable to a change in 
application of the ratemaking methodology.

Difference in U.S. and Canadian Rates

    Several comments suggested that the proposed 26 percent rate 
increase would further increase the difference between U.S. and 
Canadian pilotage rates and that the Memorandum of Arrangement (MOA) 
between the United States and Canada calls for identical rates.
    The two countries are aware of the differences in pilotage rates 
and are working together to minimize and resolve these differences.

Economic Impact Analysis (EIA) of Great Lakes Pilotage

    Some comments stated that the proposed increase in pilotage fees 
would ``chase'' vessels out of the Lakes. Another comment stated that 
the Coast Guard failed to examine how rate increases would affect users 
and the economy of the Great Lakes region. Several comments stated that 
a full regulatory evaluation should be done before issuing a rule.
    The Coast Guard has contracted with Martin Associates to perform a 
full economic review of the Great Lakes basin. The report should be 
completed by February, 2004, and the results will be considered before 
we calculate the

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full rate adjustment. When completed, a copy of this EIA will be made 
part of the public docket.
    The EIA will provide an economic overview of the Great Lakes. It 
will explore the value of maritime commerce, generally, and, more 
specifically, look at the foreign trade shipping industry on both sides 
of the Great Lakes. It will develop a demand elasticity curve for 
pilotage services on board foreign-trade vessels on the Great Lakes. It 
will explore how, and at what point, an increase in pilotage rates 
might have a negative impact on shippers' decisions to send vessels 
into the Great Lakes system. This EIA will also address pilotage fees 
as a percentage of the total costs incurred by vessels operating in the 
Great Lakes.

Expenses Allowed

    Legal fees. Numerous comments raised concerns about the amount of 
legal fees approved by the Coast Guard as part of the pilots' expense 
base. Some stated that the expenses incurred by the pilots pursuing 
judicial review of the Coast Guard's 2001 rates were neither reasonable 
nor necessary and were not directly related to pilotage.
    Some comments questioned whether the Coast Guard had properly 
assessed the reasonableness of pilots' legal expenses. Some comments 
stated that a formula used in the 1999 rate review to judge the 
reasonableness of the legal expenses should have been used in the NPRM. 
The Coast Guard did not use an industry standard index to determine the 
reasonableness of the legal fees. The only time a standard was used was 
in the 1999 rate review. That standard is not sufficiently related to 
the pilotage industry or a similar regulated industry and was not used 
in calculating the proposed rates in the NPRM or the rates contained in 
this interim rule.
    One comment stated that it was inappropriate for the Coast Guard to 
have approved for inclusion in the expense base legal fees paid by 
District Three in connection with a labor dispute. This comment stated 
that by allowing this expense the Office of Great Lakes Pilotage is 
publicly supporting a party in a labor dispute. The comment also 
disagrees with the decision to approve a percentage of the legal fees 
paid by District Three to Preston and Gates, because that percentage 
represented lobbying fees. The Coast Guard disagrees that allowing 
legal fees paid by a pilotage association to a law firm in connection 
with a litigation which involves a labor issue, represents support for 
a party in a labor dispute. The existing ratemaking methodology 
recognizes all reasonable and necessary legal fees with the exception 
of lobbying fees.
    If the expense is necessary to conduct pilotage business and is 
reasonable in amount, the regulations allow its inclusion. The 
regulation does not distinguish between litigated matters involving a 
labor issue or union and other matter related to pilotage. With respect 
to the issue of whether all lobbyist fees were removed from the expense 
base, the Coast Guard will re-examine all of the legal fees in 
accordance with the regulatory requirements to ensure that only 
appropriate fees were allowed.
    One comment suggested that all legal fees be removed from the rate 
calculation. To do that, the Coast Guard first would need to change the 
ratemaking regulations. The Coast Guard disagrees with the suggestion 
and, in any event, such a change is not within the scope of this 
rulemaking.
    The Coast Guard reviewed all legal fees using the guidelines of 
necessity and reasonableness contained in 46 CFR 404.5. Only reasonable 
and necessary legal fees were approved as part of the expense base. No 
legal fees were allowed in connection with lobbying. Legal fees for 
litigation against the Government were allowed as long as there was no 
court proceeding in which there had been a finding of bad faith on the 
part of the pilot organizations.
    Recovery of Legal Fees Under Equal Access to Justice Act (EAJA). 
Some comments stated that the pilots recovered a portion of their legal 
fees under the Equal Access to Justice Act (EAJA) and that recovery was 
not taken into consideration by the Coast Guard.
    With respect to the comments regarding recovery of legal fees under 
the EAJA, only the pilots in District 1 have recovered fees under the 
EAJA. They recovered approximately $14,000 and the Coast Guard did not 
allow that amount to be included in their expense base.

Other Expenses

    One comment stated that the non-recurring costs of leasing 
equipment paid by District Two to Erie Leasing, Inc., should be 
disallowed because the District Two Association terminated many of 
these leases at the end of the season. During 2001, District Two paid 
Erie Leasing $62,950 in lease costs for the rental of two pilot boats. 
Under 46 CFR 404.5(a)(3), lease costs for both operating and capital 
leases are recognized for ratemaking purposes to the extent that they 
conform to market rates. In the absence of a comparable market, lease 
costs are recognized for ratemaking purposes to the extent that they 
conform to depreciation plus an allowance for return on investment 
(computed as if the asset had been purchased with equity capital). The 
portion of lease costs that exceed these standards is not recognized 
for ratemaking purposes. In this case, with the cost of the pilot boats 
being $315,000, a market return of 7.04 percent, and a depreciation 
amount of $9,450, the result is an allowable lease expense of $31,626 
($315,000 x 7.04% = $22,176 + $9,450 = $31,626). District Two's expense 
base was thus reduced by the excessive lease fee amount of $28,124 
($59,750 rental fee -$31,626 allowable fee = $28,124). The Coast Guard 
will review the issue of recurring and non-recurring costs before 
calculating a full rate adjustment.
    One comment stated that the $14,289 for health insurance for 
retired pilots included in the District Two expense base should be 
disallowed. The Coast Guard is reviewing this issue and will make a 
determination before calculating the full rate adjustment. Because of 
its de minimus impact on the rate it was left in the expense base for 
calculating the partial rate adjustment.
    This same comment stated that the augmentation of the District Two 
and District Three expense bases to allow for employer contributions to 
employee 401(k) plans was not calculated correctly. This comment stated 
that the employer should have to contribute based upon daily 
compensation only that would include no contribution for overtime or 
extra work days. Under the 2001 American Maritime Officers Union (AMOU) 
contract, employers are required to make matching contributions to 
employee 401(k) plans in an amount equal to 50 percent of the 
employee's contribution, to a maximum of 5 percent of a participating 
employee's compensation. The Coast Guard will review this issue before 
calculating the full rate adjustment, but the District Two and Three 
expense bases have not been changed for calculation of the partial rate 
adjustment.
    Another comment stated that the independent accountant made two 
mistakes in identifying and classifying expenses--misstating by $23,000 
the total reimbursement for meal expenses allowed pilots in District 
Three, and subtracting the cost of the employer's portion of taxes from 
pilot compensation and adding them to operating expenses. The comment 
stated the actual amount adjusted in each case does not correlate with 
the current rates and limitations for the calculations of FICA and 
Medicare. The Coast Guard is reviewing these issues, and adjustments,

[[Page 69567]]

if appropriate, will be made in calculating the full rate adjustment. 
However, we have not made any changes in calculating the partial rate 
adjustment.
    Another comment stated that the Coast Guard should have disallowed 
any payments by District Two to Erie Leasing, Inc., because that 
company refused to open up its books for the Coast Guard. The Coast 
Guard disagrees. There is no basis to deny expenses based upon another 
company's refusal to open its books, even when the service entity (Erie 
Leasing) is directly or indirectly related by beneficial ownership to 
the pilot association.
    Some comments expressed the opinion that there is an insufficiency 
of accountability for continuing education training funds in the three 
districts. They recommended that training programs submitted by a pilot 
association and approved by the Coast Guard should be published as a 
part of this docket so that industry can assure itself that this money 
is spent appropriately and that the training plan meets ``certain 
criteria.'' They also suggested that a third party should hold the 
training funds instead of the pilot associations. The Coast Guard 
disagrees. The public docket used for this rulemaking is not an 
appropriate place for pilot associations to file their training plans. 
The Coast Guard does not see any benefit to placing the training funds 
in the hands of third parties, nor could such an action be properly 
included within the scope of this rulemaking.

Target Pilot Compensation Issues

    With respect to determining target pilot compensation, several 
comments, including St. Lawrence Seaway Development Corporation, stated 
that the monthly multiplier should be reduced from its current level of 
54 days to either 44 or 45 days to take into consideration vacation 
time actually taken by the pilots. They stated that pilots actually 
take vacation days and paying them for not doing so is a form of double 
dipping that makes a 44 or 45-day number more appropriate. For purposes 
of this interim rule, the Coast Guard has used a multiplier of 44 days. 
The Coast Guard is still reviewing this issue and a final determination 
on the appropriate multiplier will be made before we calculate the full 
rate adjustment. A proposed full rate adjustment will be subject to 
notice and comment in an SNPRM before implementation.
    Numerous comments stated that the Coast Guard in the NPRM 
inappropriately increased the number of pilots needed. Some comments 
focused on the two pilots authorized for District One and the one pilot 
authorized for District Two. Another comment stated that the Coast 
Guard had made a mistake by rounding down the number of pilots in 
District Three, Area 7, to four pilots, and rounding down the total 
number of pilots required in the undesignated waters of Areas 6 and 8 
to 17. The Coast Guard disagrees. The Coast Guard may increase or 
decrease the number of pilots authorized in the Districts as 
circumstances warrant. The number of pilots needed by each District is 
calculated each time the Coast Guard adjusts pilotage rates. The 
calculation shows the number of pilots needed in each Area to 
accommodate the projected vessel traffic. In the NPRM, where the 
calculated number was fractional, the Coast Guard rounded up or down to 
reflect ``a whole person.'' For purposes of this interim rule, the 
Coast Guard has not rounded up or down, but has used the actual 
calculated number, even if that number is fractional. For purposes of 
the interim rule, and for the sake of precision and accuracy in the 
computation, the Coast Guard has not rounded the fractionalized number 
of pilots required. It is up to each Association to determine how many 
pilots to employ to meet the actual shipping demand.
    The Coast Guard will continue to review this step in the 
calculation and when the Coast Guard's review of the Bridge Hour Study 
is completed, we should have clearer guidance on this calculation.

Revenue Issues

    Accounts receivable. One comment stated that the calculation of 
revenue was incorrect because it did not include accounts receivable. 
Before calculating a full rate adjustment, the Coast Guard will address 
inclusion of accounts receivable as part of revenues.

Target Pilot Compensation

    Several comments stated that the Coast Guard had miscalculated the 
target pilot compensation. These comments stated that the target pilot 
compensation should be calculated by first adding all pilot wages and 
benefits together and then multiplying by 1.5, which is the multiplier 
for pilots working in designated waters. The Coast Guard disagrees. The 
Coast Guard has always calculated target pilot compensation in the same 
manner. During the first ratemaking under this methodology, in response 
to comments which provided detailed and persuasive information, 
including W-2 tax information, showing that the most accurate way to 
approximate the total compensation package of a master on the Great 
Lakes, under the union contract, is to take wages and multiply by 1.5 
and then add benefits. See Seaway Regulations and Rules: Great Lakes 
Pilotage Rates, 62 FR 5917, 5920 (February 10, 1997). This 
interpretation was recently upheld. See Lake Pilots Assoc., Inc. v. 
United States Coast Guard, Civil Action No. 01-1721 (RBW) (D.D.C. April 
4, 2003).
    Other comments stated that the Coast Guard does not take into 
consideration all of the benefits received when calculating the total 
compensation package. One area of particular concern is credit for 
vacation pay because it is paid on a 1 for 2 basis. The Coast Guard 
will address this issue when proposing its full rate adjustment, but 
has not changed the calculation for the partial rate adjustment.
    A number of comments from District Two discussed the independent 
accountant's treatment of reimbursed expenses (workers' compensation 
dividends), unrecognized expenses (a portion of the pilot boat leases), 
donations, business promotion, misclassified expenses, undocumented 
expenses, target pilot compensation, benefits, determination of the 
number of pilots, and calculation of the investment base. The Coast 
Guard will review these issues before calculating the full rate 
adjustment, but has not changed the District Two figures for the 
calculation of the partial rate adjustment.
    One comment from a labor union objected to the Coast Guard 
requesting information concerning rates charged by longshoremen. The 
comment stated that the Coast Guard intended to use this, and similar 
other information, in an attempt to charge shippers as much as the 
market would bear for pilotage services. The Coast Guard did request 
public comment on a number of costs included in the total cost of 
shipping, to use as a comparison with the costs of pilotage services. 
In addition, the Coast Guard has contracted for an economic impact 
analysis of pilotage rates on shipping and on the regional economy of 
the Great Lakes basin.

Delay and Detention

    Some comments stated that delay and detention should be included as 
bridge hours when calculating the number of pilots needed. As discussed 
elsewhere in this preamble, the Coast Guard's Bridge Hour Study is 
currently under review. This study specifically examines the issue of 
whether delay and detention should be included as bridge hours.

[[Page 69568]]

    One comment stated that just as Districts Two and Three are being 
allowed added expenses for contributions to employees' 401(k) plans, so 
should District One. In the NPRM, because District One does not 
administer a 401(k) or other retirement program as do Districts Two and 
Three, no allowance was permitted. The Coast Guard is reviewing this 
issue, but for this partial rate calculation, we used the same figures 
as in the NPRM.
    This comment also stated that the adjustment for inflation should 
be approximately 5 to 6 percent instead of the 2 percent determined by 
the Coast Guard. The comment stated that because it will be almost two 
years from the measurement year (2001) before the rate goes into 
effect, the pilots should receive twice the inflation. The Coast Guard 
will calculate a new adjustment for inflation when it calculates the 
full rate adjustment.
    The comment also stated that travel expenses for District One were 
incorrectly calculated. According to the comment, travel expenses were 
overstated by $25,380 for Area 1 and understated by $37,075 for Area 2. 
The Coast Guard will review the allocation of travel expenses before 
calculating the full rate adjustment.
    The comment also stated that the Coast Guard's projection of bridge 
hours for 2003, which is similar to those of 2001, is too low. The 
Coast Guard disagrees. The economy has actually performed consistently 
with the projections in the NPRM.

Other Changes

    This rule also corrects the equation used in step 6 of the 
methodology to compute Return on Investment. Currently in the CFR, the 
equation illustrating how to arrive at Return on Investment contains an 
error. The last step of the calculation ``adds'' the Investment Base to 
the Return Element to arrive at the Return on Investment. Adding would 
not produce the Return on Investment. To obtain the Return on 
Investment, it is necessary to divide the Return Element into the 
Investment Base. We have made the appropriate correction to the 
equation in this interim rule by removing the ``+'' and adding, in its 
place, the ``/''.

Discussion of Interim Rule

    This interim rule provides a partial rate adjustment using the 
methodology in 46 CFR part 404, the 2001 expenses and revenues, and the 
2002 American Maritime Officers Union contract.

The Next Steps

    Following the partial rate adjustment in this interim rule, the 
Coast Guard will resolve the remaining rate calculation issues raised 
by the January, 2003, NPRM. We will calculate a full rate adjustment 
using the methodology in 46 CFR Part 404.
    We plan to publish a supplemental notice of proposed rulemaking 
(SNPRM) in February, 2004, with an opportunity to comment before 
effecting a proposed full permanent rate adjustment during the Spring, 
2004.
    In the full rate adjustment calculation, the Coast Guard is 
considering using the figures from the 2003 AMOU contract, to replace 
the 2002 AMOU contract figures that were used to determine the proposed 
rate in the NPRM. The calculations would also include the rate and 
revenue figures from each of the three districts for 2002. The Coast 
Guard specifically requests comments on whether we should use the newer 
figures to calculate the full rate adjustment.

Regulatory Evaluation

    This rule is not a ``significant regulatory action'' under section 
3(f) of Executive Order 12866, Regulatory Planning and Review, and does 
not require an assessment of potential costs and benefits under section 
6(a)(3) of that Order. It has not been reviewed by the Office of 
Management and Budget under that Order. It is not ``significant'' under 
the regulatory policies and procedures of the Department of Homeland 
Security (DHS).
    We expect the economic impact of this rule to be so minimal that a 
full Regulatory Evaluation under the regulatory policies and procedures 
of DHS is unnecessary.

Ratemaking Process and Methodology

    This section is a description of the analyses performed, and the 
seven-step methodology followed, in the development of the interim 
partial rate adjustment. The first part summarizes the partial rate 
changes in this interim rule; the second part describes the ratemaking 
process, explaining the formulas that make up the methodology and the 
use of the numbers obtained from the report of the independent 
accountant for the year 2001 in the formulas to show how the partial 
rate adjustment was actually calculated; and the third part describes 
how the rate in this interim rule differs from the one proposed in the 
NPRM published in January, 2003.

Part I: Pilotage Rate Charges--Summarized

    The pilotage rates for federal pilots on the Great Lakes contained 
in 46 CFR 401.405, 401.407, and 401.410 have been adjusted in 
accordance with the methodology appearing at 46 CFR part 404. The 
partial rate adjustment results in an average increase across all 
districts of 5 percent as set out in Figure 1:

                                Figure 1
                            [Rate in percent]
------------------------------------------------------------------------
  If you require pilotage  service in:            The rate will:
------------------------------------------------------------------------
Area 1 (Designated waters).............  Increase by 4
Area 2.................................  Decrease by 5
Area 4.................................  Increase by 21
Area 5 (Designated waters).............  Decrease by 5
Area 6.................................  Increase by 20
Area 7 (Designated waters).............  Decrease by 17
Area 8.................................  Increase by 19
------------------------------------------------------------------------

    Pilotage rates for ``Cancellation, delay or interruption in 
rendering services'' and ``Basic rates and charges for carrying a U.S. 
pilot beyond [the] normal change point or for boarding at other than 
the normal boarding point,'' in 46 CFR 401.420 and 401.428, 
respectively, are increased by an average of 5 percent.
    The seven-step calculation of the methodology is summarized in the 
table for each District. The actual calculations are then explained in 
more detail for each entry in the tables.

                                             Table A.--District One
----------------------------------------------------------------------------------------------------------------
                                                                    Area 1  St.
                                                                     Lawrence      Area 2  Lake        Total
                                                                       River          Ontario      District  One
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........................        $359,704        $239,802        $599,506
Step 2, Projection of target pilot compensation.................         785,279         352,726       1,138,005
Step 3, Projection of revenue...................................       1,105,233         629,149       1,734,382
Step 4, Calculation of investment base..........................          50,000          50,000         100,000

[[Page 69569]]

 
Step 5, Determination of target return on investment............           7.04%           7.04%           7.04%
                                                                           3,520           3,520           7,040
Step 6, Adjustment determination................................       1,148,503         596,048       1,744,551
Step 7, Adjustment of pilotage rates (Rate Multiplier)..........      1.04 (+4%)       .95 (-5%)      1.01 (+1%)
----------------------------------------------------------------------------------------------------------------


                                             Table B.--District Two
----------------------------------------------------------------------------------------------------------------
                                                                                      Area 5
                                                                   Area 4  Lake      Southeast         Total
                                                                       Erie       Shoal to  Port   District  Two
                                                                                     Huron, MI
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........................        $365,292        $446,468        $811,760
Step 2, Projection of target pilot compensation.................         477,218         930,701       1,407,919
Step 3, Projection of revenue...................................         705,015       1,461,069       2,166,084
Step 4, Calculation of investment base..........................          89,734         140,353         230,087
Step 5, Determination of target return on investment............           7.04%           7.04%           7.04%
                                                                           6,317           9,881          16,198
Step 6, Adjustment determination................................         854,237       1,392,460       2,246,697
Step 7, Adjustment of pilotage rates............................      1.21 (+21)       .95 (-5%)      1.04 (+4%)
----------------------------------------------------------------------------------------------------------------


                                            Table C.--District Three
----------------------------------------------------------------------------------------------------------------
                                                   Area 6  Lakes                                       Total
                                                     Huron and      Area 7  St.    Area 8  Lake      District
                                                     Michigan      Mary's  River     Superior          Three
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........        $739,550        $292,739        $508,441      $1,540,730
Step 2, Projection of target pilot compensation.       1,099,676         625,315         715,827       2,440,818
Step 3, Projection of revenue...................       1,540,306       1,119,819       1,030,693       3,690,818
Step 4, Calculation of investment base..........         111,668          83,752          83,752         279,172
Step 5, Determination of target return on                  7.04%           7.04%           7.04%           7.04%
 investment.....................................           7,861           5,896           5,896          19,654
Step 6, Adjustment determination................       1,847,087         923,950       1,230,164       4,001,201
Step 7, Adjustment of pilotage rate.............     1.20 (+20%)      .83 (-17%)     1.19 (+19%)      1.08 (+8%)
----------------------------------------------------------------------------------------------------------------

Part 2: Calculating the Rate Multiplier

    The authority to establish pilotage rates on the Great Lakes 
derives from 46 U.S.C. 9303(f), which states, in pertinent part, that: 
``[t]he Secretary shall prescribe by regulation rates and charges for 
pilotage services, giving consideration to the public interest and the 
costs of providing the services.'' The pilotage regulations provide, at 
46 CFR 404.1(b), that the pilotage rates ``shall be reviewed annually 
in accordance with the procedures detailed in Appendix C'' of the 
regulations and, ``the Director shall complete a thorough audit of 
pilot association expenses and establish pilotage rates in accordance 
with the procedures detailed in Sec.  404.10 of this part at least once 
every five years.''
    Appendix C to part 404 of title 46, CFR, provides the methodology 
used by the pilotage office in connection with annual reviews. The 
actual ratemaking methodology is contained in appendix A to part 404 of 
title 46, CFR, and is comprised of seven (7) steps. Those steps are:
    (1) Projection of Operating Expenses;
    (2) Projection of Target Pilot Compensation;
    (3) Projection of Revenue;
    (4) Calculation of Investment Base;
    (5) Determination of Target Return on Investment;
    (6) Adjustment Determination (Revenue Needed); and,
    (7) Adjustment of the Rates.
    The financial data used to calculate each of the seven steps comes 
from an independent accountant's review of the books and records of 
each association, which is provided the Coast Guard on an annual basis, 
and other documents and records provided to the Coast Guard by the 
pilotage associations. All documents and records relied upon in this 
ratemaking have been made part of the public record and may be found in 
the docket for this rulemaking.
    The methodology is used to develop a multiplier to be used to 
adjust pilotage rates in each pilotage area. The following is an 
explanation of each step of the methodology and how the rate multiplier 
is derived.
Step 1: Projection of Operating Expenses
    (1) The Coast Guard projects the amount of vessel traffic annually. 
Based upon that projection, the Coast Guard forecasts the amount of 
fair and reasonable operating expenses that pilotage rates should 
recover. This consists of the following phases:
    (a) Submission of financial information from each association;
    (b) Determination of recognizable expenses;
    (c) Adjustment for inflation or deflation; and
    (d) Final projection of operating expenses.
Step 1.A. Submission of Financial Information
    (1) Each Association is responsible for providing detailed 
financial information to the Coast Guard, in accordance with part 403 
of title 46, CFR. The information is collected and reviewed

[[Page 69570]]

by a Coast Guard-contracted independent accounting firm that compiles 
this information into financial reports for each District. The 
financial reports are reviewed by the Coast Guard in accordance with 
the requirements contained at Appendix C to Part 404, on an annual 
basis.
    (2) Every five years, the Coast Guard is required by the 
regulations to complete a thorough audit of pilot association expenses 
and establish pilotage rates in accordance with the procedures detailed 
in Sec.  404.10. Because we are issuing an interim rule that adjusts 
the current rate, we are following the methodology appearing at 
appendix A to part 404.
    (3) All data used in this interim rule are taken from these 
reports. The reports reflect the period ending December 31, 2001. These 
reports may be found in the docket.
Step 1.B. Determination of Recognizable Expenses
    (1) The Coast Guard determines which Association expenses will be 
recognized for ratemaking purposes, using the guidelines for the 
recognition of expenses contained in Sec.  404.05.
    (2) The following is a summary of the independent CPA's major 
findings and adjustments to the pilot associations' audited expenses, 
along with the Coast Guard's corresponding adjustments:

                                                                   Recognized Expenses
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              District One                      District Two                     District Three
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reported expenses for 2001........................                          $687,591                        $1,386,376                        $1,336,710
Independent CPA Proposed Adjustments..............   Equalization Between Districts    Equalization Between Districts    Equalization Between Districts
                                                                             $10,120                              None                          $143,035
                                                                             $62,096                                                            $152,535
                                                           Reimbursed Expenses               Reimbursed Expenses               Reimbursed Expenses
                                                                           ($13,000)                         ($83,376)                        ($163,207)
                                                                                                            ($174,414)
                                                                                                            ($211,849)
                                                        Not Recognized or Allowed         Not Recognized or Allowed         Not Recognized or Allowed
                                                                              ($782)                             ($74)                            ($995)
                                                                           ($43,100)                            ($720)                         ($19,780)
                                                                                                             ($28,124)
                                                         Misclassified Expenses            Misclassified Expenses            Misclassified Expenses
                                                                            ($4,500)                           (8,600)                          ($4,050)
                                                                           ($11,740)                         ($20,470)                         ($23,100)
                                                                          ($120,377)
                                                          Undocumented Expenses             Undocumented Expenses             Undocumented Expenses
                                                                                None                         (125,559)                              None
                                                   -----------------------------------------------------------------------------------------------------
    Total expenses 2001 +.........................                          $566,308                          $733,190                        $1,421,148
Inflation adjustment (2%).........................                           $11,326                           $14,664                           $28,423
Coast Guard's Adjustments.........................                           $21,872                           $20,500                            $25,00
                                                                                                               $43,406                           $66,159
                                                   =====================================================================================================
    Total projected expenses for 2003 pilotage                              $599,506                          $811,760                        $1,540,730
     season.......................................
--------------------------------------------------------------------------------------------------------------------------------------------------------

Step 1.C. Adjustment for Inflation or Deflation
    (1) In making projections of future expenses, expenses that are 
subject to inflationary or deflationary pressures are adjusted. Costs 
not subject to inflation or deflation are not adjusted. Annual cost 
inflation or deflation will be projected to the succeeding navigation 
season, reflecting the gradual increase or decrease in costs throughout 
the year. The inflation adjustment is based on the year 2000 change in 
the Consumer Price Index for the North Central Region of the United 
States.
    (2) Based upon the foregoing, a 2 percent inflation adjustment was 
made to the expense base. That adjustment appears in the table above.
Step 1.D. Projection of Operating Expenses
    Once all adjustments are made to the recognized operating expenses, 
the Coast Guard projects these expenses for each pilotage area. In 
doing so, the Coast Guard takes into account foreseeable circumstances 
that could affect the accuracy of the projection. General and 
administrative expenses are apportioned to each area according to the 
number of pilots needed in that area. The results of Step 1.D for each 
district are displayed as follows:

                                                  District One
----------------------------------------------------------------------------------------------------------------
                                                                 Area 1  St.      Area 2  Lake   Total  District
                                                               Lawrence  River      Ontario             One
----------------------------------------------------------------------------------------------------------------
Projection of operating expenses.............................        $359,704         $239,802         $599,506
----------------------------------------------------------------------------------------------------------------


[[Page 69571]]


                                                  District Two
----------------------------------------------------------------------------------------------------------------
                                                                                     Area 5
                                                                 Area 4  Lake      Southeast     Total  District
                                                                     Erie        Shoal to  Port         Two
                                                                                   Huron,  MI
----------------------------------------------------------------------------------------------------------------
Projection of operating expenses.............................        $365,292         $446,468         $811,760
----------------------------------------------------------------------------------------------------------------


                                                 District Three
----------------------------------------------------------------------------------------------------------------
                                               Area  6 Lakes
                                                 Huron  and       Area 7 St.      Area 8 Lake     Total District
                                                  Michigan       Mary's River       Superior          Three
----------------------------------------------------------------------------------------------------------------
Projection of operating expenses............        $739,550         $292,739         $508,441       $1,540,730
----------------------------------------------------------------------------------------------------------------

Step 2: Projection of Target Pilot Compensation
    (1) The second step in the ratemaking methodology is to project the 
amount of target pilot compensation that pilotage rates should provide 
in each area. This step consists of the following phases: a. 
Determination of the target rate of compensation; b. Determination of 
the number of pilots needed in each pilotage area; and
    c. Multiplication of target compensation by the number of pilots 
needed to project target pilot compensation needed in each area. Each 
of these phases is detailed below.
Step 2.A. Determination of Target Rate of Compensation
    (1) Target pilot compensation for pilots providing services in 
undesignated waters approximates the average annual compensation for 
first mates on U.S. Great Lakes vessels. The average annual 
compensation for first mates is determined based on the most current 
AMOU contract, and includes wages and benefits received by first mates.
    (2) Target pilot compensation for pilots providing services in 
designated waters approximates the average annual compensation for 
masters on U.S. Great Lakes vessels. It is calculated as 150 percent of 
the compensation earned by first mates on U.S. Great Lakes vessels. 
Based on detailed information provided by commentators, the Great Lakes 
Pilotage Office has consistently calculated this by multiplying the 
first mates' salary by 150 percent and adding benefits since this is 
the best approximation of the average annual compensation for masters.
    (3) The table below summarizes how total target pilot compensation 
is determined for undesignated and designated waters:

------------------------------------------------------------------------
                                          Monthly (First      Monthly
                                           mate) pilots      (master)
            Monthly component                   on           pilots on
                                           undesignated     designated
                                              waters          waters
------------------------------------------------------------------------
$207.70 (Daily Rate) x 44 (Days)........          $9,139             N/A
$207.70 (Daily Rate) x 44 x 1.5.........             N/A         $13,709
Clerical................................             126             188
Health..................................           1,748           1,748
Pension.................................             513             513
Monthly total...........................          11,526          16,158
Monthly total x 9 months................         103,743         145,422
------------------------------------------------------------------------

Step 2.B. Determination of Number of Pilots Needed
    (1) The number of pilots needed in each area of designated waters 
is established by dividing the projected bridge hours for that area by 
1,000. Bridge hours are the number of hours a pilot is aboard a vessel 
providing basic pilotage service.
    (2) The number of pilots needed in each area of undesignated waters 
is established by dividing the projected bridge hours for that area by 
1,800.
    (3) In determining the number of pilots needed in each pilotage 
area, the Coast Guard is guided by the results of the calculations in 
steps 2.A. and 2.B. However, the Coast Guard may also find it necessary 
to make adjustments to these numbers to ensure uninterrupted pilotage 
service in each area, or for other reasonable circumstances that the 
Coast Guard determines are appropriate.
    (4) Projected bridge hours are based on the vessel traffic that 
pilots are expected to serve. The Coast Guard projects that bridge 
hours for the 2003 season will be the same as or comparable to the 
totals of 2001. Dividing the projected annual number of bridge hours 
per area by the target number of bridge hours per pilot determines the 
number of pilots required in each area to service vessel traffic.
    (5) The following table shows the calculation of pilots needed:

----------------------------------------------------------------------------------------------------------------
                                                                     Projected      Divided by
                          Pilotage area                             2003 bridge     bridge-hour       Pilots
                                                                       hours          target         required
----------------------------------------------------------------------------------------------------------------
AREA 1..........................................................           5,407           1,000             5.4
AREA 2..........................................................           6,130           1,800             3.4

[[Page 69572]]

 
AREA 4..........................................................           8,298           1,800             4.6
AREA 5..........................................................           6,395           1,000             6.4
AREA 6..........................................................          19,016           1,800            10.6
AREA 7..........................................................           4,320           1,000             4.3
AREA 8..........................................................          12,354           1,800             6.9
----------------------------------------------------------------------------------------------------------------

Step 2.C. Projection of Target Pilot Compensation
    (1) The projection of target pilot compensation is determined 
separately for each pilotage area by multiplying the number of pilots 
needed in an area by the target pilot compensation for pilots working 
in that area (i.e., 5.4 pilots are required in Area 1, target 
compensation for the designated waters of Area 1 is $145,422, 5.4 x 
$145,422 = $785,279).
    (2) The results for each pilotage area are summarized below:

                                                  District One
----------------------------------------------------------------------------------------------------------------
                                                                  Area 1  St.      Area 2  Lake        Total
                                                                Lawrence  River      Ontario       District  One
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation.......................        $785,279         $352,726       $1,138,005
----------------------------------------------------------------------------------------------------------------


                                                  District Two
----------------------------------------------------------------------------------------------------------------
                                                                                     Area 5
                                                                 Area 4  Lake      Southeast     Total  District
                                                                     Erie        Shoal to Port          Two
                                                                                   Huron, MI
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation......................        $477,218         $930,701       $1,407,919
----------------------------------------------------------------------------------------------------------------


                                                 District Three
----------------------------------------------------------------------------------------------------------------
                                               Area 6  Lakes
                                                 Huron  and      Area 7  St.      Area 8  Lake   Total  District
                                                  Michigan      Mary's  River       Superior           Three
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation.....      $1,099,676         $625,315         $715,827       $2,440,818
----------------------------------------------------------------------------------------------------------------

Step 3: Projection of Revenue
    (1) The third step in the ratemaking methodology is to project the 
revenue that would be received in each pilotage area if existing rates 
were left unchanged. This consists of a projection of both future 
vessel traffic and pilotage revenue.
Step 3.A. Projection of Revenue
    (1) The Coast Guard projects the pilotage service that will be 
required by vessel traffic in each pilotage area. These projections are 
based on historical data and all other relevant data available. 
Projected demand for pilotage service is multiplied by the existing 
pilotage rates for that service, to arrive at the projection of 
revenue.
    (2) The results of Step 3.A for each district are summarized below:

                                                  District One
----------------------------------------------------------------------------------------------------------------
                                                                 Area 1  St.      Area 2  Lake   Total  District
                                                               Lawrence  River      Ontario             One
----------------------------------------------------------------------------------------------------------------
Projection of revenue........................................      $1,105,233         $629,149       $1,734,382
----------------------------------------------------------------------------------------------------------------


                                                  District Two
----------------------------------------------------------------------------------------------------------------
                                                                                     Area 5
                                                                 Area 4  Lake      Southeast     Total  District
                                                                     Erie        Shoal  to Port         Two
                                                                                   Huron,  MI
----------------------------------------------------------------------------------------------------------------
Projection of revenue........................................        $705,015       $1,461,069       $2,166,084
----------------------------------------------------------------------------------------------------------------


[[Page 69573]]


                                                 District Three
----------------------------------------------------------------------------------------------------------------
                                               Area 6  Lakes
                                                 Huron and       Area 7  St.      Area 8  Lake   Total  District
                                                  Michigan      Mary's  River       Superior           Three
----------------------------------------------------------------------------------------------------------------
Projection of revenue.......................      $1,540,306       $1,119,819       $1,030,693       $3,690,818
----------------------------------------------------------------------------------------------------------------

Step 4: Calculation of Investment Base
    (1) The fourth step in the ratemaking methodology is the 
calculation of the investment base of each Association. The investment 
base is the recognized capital investment in the assets employed by 
each Association required to support pilotage operations. In general, 
it is the sum of available cash and the net value of real assets, less 
the value of land. The investment base has been established through the 
use of the balance sheet accounts, as amended by material supplied in 
the notes to the independent accountant's financial statements, which 
are in the public docket, and adjustments taken by the Coast Guard 
after consulting with the accountant.
    (2) The formula for determining the investment base appears at 
appendix B to part 404. The calculation appears in the independent 
accountant's reports for each district. The Investment Base is the 
Recognized Assets times the ratio of Recognized Sources of Funds to 
Total Sources of Funds. The investment base (Step 4) as calculated for 
each district is displayed below:

                                                  District One
----------------------------------------------------------------------------------------------------------------
                                                                 Area 1  St.      Area 2  Lake   Total  District
                                                               Lawrence  River      Ontario             One
----------------------------------------------------------------------------------------------------------------
Calculation of investment base...............................         $50,000          $50,000         $100,000
----------------------------------------------------------------------------------------------------------------


                                                  District Two
----------------------------------------------------------------------------------------------------------------
                                                                                     Area 5
                                                                 Area 4  Lake      Southeast     Total  District
                                                                     Erie        Shoal to  Port         Two
                                                                                   Huron,  MI
----------------------------------------------------------------------------------------------------------------
Calculation of investment base...............................         $89,734         $140,353         $230,087
----------------------------------------------------------------------------------------------------------------


                                                 District Three
----------------------------------------------------------------------------------------------------------------
                                               Area 6  Lakes
                                                 Huron and       Area 7  St.      Area 8  Lake   Total  District
                                                  Michigan      Mary's  River       Superior           Three
----------------------------------------------------------------------------------------------------------------
Calculation of investment base..............        $111,660          $83,752          $83,752         $279,172
----------------------------------------------------------------------------------------------------------------

Step 5: Determination of Target Rate of Return on Investment
    (1) The fifth step in the ratemaking methodology is to determine 
the Target Rate of Return on Investment. For each Association, a 
market-equivalent return-on-investment is allowed for the recognized 
net capital invested in the Association by its members.
    (2) The allowed Return on Investment (ROI) is based on the 
preceding year's average annual rate of return for new issues of high-
grade corporate securities.
    (3) Assets subject to return on investment provisions must be 
reasonable in both purpose and amount. If an asset or other investment 
is not necessary for the provision of pilotage services, that portion 
of the return element is not allowed for ratemaking purposes.
    (4) The target rate of return on investment for 2002 was set at 
7.04 percent. This is based on the preceding year's (2001's) average 
annual rate of return of new issues of high-grade corporate securities 
(Moody's AAA rating, average return).
Step 6a: Adjustment Determination--Projected Return on Investment
    (1) The next step in the ratemaking methodology is to insert the 
results from steps 1, 2, 3, and 4 into a formula that is based on a 
basic regulatory rate structure, and comparing the results to step 5. 
This basic regulatory rate structure takes into account revenues, 
expenses and return on investment, as set out below:

        Adjustment Determination (Projected Return on Investment)
------------------------------------------------------------------------
              Line                             Calculation
------------------------------------------------------------------------
1..............................  + Revenue (from Step 3)
2..............................  - Operating Expenses (from Step 1)
3..............................  - Pilot Compensation (from Step 2)
4..............................  = Operating Profit/Loss
5..............................  - Interest Expense (from Audit reports)
6..............................  = Earnings Before Tax
7..............................  - Federal Tax Allowance
8..............................  = Net Income
9..............................  Return Element (Net Income + Interest)
10.............................  / Investment Base (from Step 4)
11.............................  = Projected Return on Investment
------------------------------------------------------------------------


[[Page 69574]]


                             Table A.--District One--Projected Return on Investment
----------------------------------------------------------------------------------------------------------------
                                                                                                 Total  District
                             Step                                   Area 1           Area 2            One
----------------------------------------------------------------------------------------------------------------
1............................................................       $1,105,233         $629,149       $1,734,382
2............................................................       ($359,704)       ($239,802)       ($599,506)
3............................................................       ($785,279)       ($352,726)     ($1,138,005)
4............................................................        ($39,750)          $36,621         ($3,129)
5............................................................                0                0                0
6............................................................        ($39,750)          $36,621         ($3,129)
7............................................................                0                0                0
8............................................................        ($39,750)          $36,621         ($3,129)
9............................................................        ($39,750)          $36,621         ($3,129)
10...........................................................          $50,000          $50,000          $10,000
11...........................................................          (0.795)            0.732          (0.031)
----------------------------------------------------------------------------------------------------------------


                                Table B.--District Two--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                                                                                                 Total  District
                             Step                                   Area 4           Area 5            Two
----------------------------------------------------------------------------------------------------------------
1............................................................         $854,237       $1,392,460       $2,246,697
2............................................................       ($365,292)       ($446,468)       ($811,760)
3............................................................       ($477,218)       ($930,701)     ($1,407,919)
4............................................................          $11,727          $15,291          $37,018
5............................................................           ($734)           ($734)         ($1,468)
6............................................................          $10,993          $14,557          $25,550
7............................................................         ($5,410)         ($5,410)        ($10,820)
8............................................................           $5,583           $9,147          $14,730
9............................................................           $6,317           $9,881          $16,198
10...........................................................          $89,734         $140,353         $230,087
11...........................................................            .0704            .0704            .0704
----------------------------------------------------------------------------------------------------------------


                                Table C.--District Three--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                    Step                           Area 6           Area 7           Area 8      Total  District
----------------------------------------------------------------------------------------------------------------
1...........................................       $1,847,087         $923,950       $1,230,164       $4,001,202
2...........................................       ($739,550)       ($292,739)       ($508,441)     ($1,540,730)
3...........................................     ($1,099,676)       ($625,315)       ($715,827)     ($2,440,818)
4...........................................           $7,861           $5,896           $5,896          $19,654
5...........................................         ($1,909)         ($1,909)         ($1,909)         ($5,727)
6...........................................           $5,952           $3,987           $3,987          $13,927
7...........................................                0                0                0                0
8...........................................           $5,952           $3,987           $3,987          $13,927
9...........................................           $7,861           $5,896           $5,896          $19,654
10..........................................         $111,668          $83,752          $83,752         $279,172
11..........................................            .0704            .0704            .0704            .0704
----------------------------------------------------------------------------------------------------------------

    (2) The Coast Guard compares the projected return on investment (as 
calculated using the formula in Step 6a) to the target return on 
investment (from Step 5), to determine whether an adjustment to the 
base pilotage rates is necessary. If the projected return on investment 
is significantly different from the target return on investment, the 
revenues that would be generated by the current pilotage rates are not 
equal to the revenues that would need to be recovered by the pilotage 
rates.
    (3) It is clear from the table below that the difference between 
the projected and target Returns on Investment are significant, 
indicating that a rate adjustment is necessary.

  Table D.--Comparison of Projected Returns on Investment versus Target
                          Returns on Investment
------------------------------------------------------------------------
                                                 Projected
                                                    ROI      Target  ROI
------------------------------------------------------------------------
District 1....................................      (0.031)        .0704
District 2....................................      (0.280)        .0704
District 3....................................      (1.041)        .0704
------------------------------------------------------------------------

    (4) The base pilotage revenues that are needed are calculated by 
determining what change in projected revenue will make the target 
return on investment equal to the projected return on investment. This 
projection of revenue needed is used in determining the basis for 
proposed adjustments to the base pilotage rates. The mechanism for 
adjusting the base pilotage rates is discussed in Step 7 below. The 
required return, tax, and interest elements may be considered additions 
to the operating expenses and pilot compensation components of the base 
pilotage rates.
Step 6b: Revenue Needed Determination
    The same formula used in Step 6a, above, is used to calculate the 
Adjustment Determination. To find the proper adjustment determination, 
Projected Revenue as determined in Step 3, is adjusted in each area 
until the formula in Step 6a yields a Projected Return on Investment 
equal to the Target Return on Investment from Step

[[Page 69575]]

5. The following tables show the results of these calculations.

                                Table A.--District One--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                                                                                                  Total District
                             Step                                   Area 1           Area 2            One
----------------------------------------------------------------------------------------------------------------
1............................................................       $1,148,503         $629,149       $1,744,551
2............................................................       ($359,704)       ($239,802)       ($599,506)
3............................................................       ($785,279)       ($352,726)     ($1,138,005)
4............................................................           $3,520           $3,520           $7,040
5............................................................                0                0                0
6............................................................           $3,520           $3,520           $7,040
7............................................................                0                0                0
8............................................................           $3,520           $3,520           $7,040
9............................................................           $3,520           $3,520            $7040
10...........................................................          $50,000          $50,000         $100,000
11...........................................................            .0704            .0704            .0704
----------------------------------------------------------------------------------------------------------------


                                 Table B.--District Two Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                                                                                                  Total District
                             Step                                   Area 4           Area 5            Two
----------------------------------------------------------------------------------------------------------------
1............................................................         $854,237       $1,392,460       $2,246,697
2............................................................       ($365,292)       ($446,468)       ($811,760)
3............................................................       ($477,218)       ($930,701)     ($1,407,919)
4............................................................          $11,727          $15,291          $37,018
5............................................................           ($734)           ($734)         ($1,468)
6............................................................          $10,993          $14,557          $25,550
7............................................................         ($5,410)         ($5,410)        ($10,820)
8............................................................           $5,583           $9,147          $14,730
9............................................................           $6,317           $9,881          $16,198
10...........................................................          $89,734         $140,353         $230,087
11...........................................................            .0704            .0704            .0704
----------------------------------------------------------------------------------------------------------------


                                Table C.--District Three Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                    Step                           Area 6           Area 7           Area 8       Total District
----------------------------------------------------------------------------------------------------------------
1...........................................       $1,847,087         $923,950       $1,230,164       $4,001,202
2...........................................       ($739,550)       ($292,739)       ($508,441)     ($1,540,730)
3...........................................     ($1,099,676)       ($625,315)       ($715,827)     ($2,440,818)
4...........................................           $7,861           $5,896           $5,896          $19,654
5...........................................         ($1,909)         ($1,909)         ($1,909)         ($5,727)
6...........................................           $5,952           $3,987           $3,987          $13,927
7...........................................                0                0                0                0
8...........................................           $5,952           $3,987           $3,987          $13,927
9...........................................           $7,861           $5,896           $5,896          $19,654
10..........................................         $111,668          $83,752          $83,752         $279,172
11..........................................            .0704            .0704            .0704            .0704
----------------------------------------------------------------------------------------------------------------

Step 7: Adjustment of Pilotage Rates
    (1) As previously indicated, the final step in the ratemaking 
methodology is to adjust base pilotage rates if the calculations from 
Step 6 show that pilotage rates in a pilotage area should be adjusted, 
and if the Coast Guard determines that it is appropriate to go forward 
with a rate adjustment. Rate adjustments are calculated in accordance 
with the procedures found in this step.
    (2) Pilotage rate adjustments are calculated for each area by 
multiplying the existing pilotage rates in each area by the rate 
multiplier. The rate multiplier is calculated by inserting the result 
from the steps detailed above into the following formula:

------------------------------------------------------------------------
              Line                            Rate multiplier
------------------------------------------------------------------------
1...............................  Revenue Needed (from Step 6(C)).
2...............................  / Projected Revenue (from Step 3).
3...............................  = Rate multiplier
------------------------------------------------------------------------

    (1) Using the formula above, the following are the calculations for 
the rate multiplier by District and Area:

                  Table A.--District 1--Rate Multiplier
         [Revenue Needed / Projected Revenue = Rate Multiplier]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Area 1........................      $1,148,503 / $1,105,233         1.04
Area 2........................          $596,048 / $629,149         0.95
    Total.....................      $1,744,551 / $1,734,382         1.01
------------------------------------------------------------------------


[[Page 69576]]


                  Table B.--District 2--Rate Multiplier
         [Revenue Needed / Projected Revenue = Rate Multiplier]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Area 4........................          $854,237 / $705,015         1.21
Area 5........................      $1,392,460 / $1,461,069         0.95
    Total.....................      $2,246,697 / $2,166,084         1.04
------------------------------------------------------------------------


                  Table C.--District 3--Rate Multiplier
         [Revenue Needed / Projected Revenue = Rate Multiplier]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Area 6........................      $1,847,087 / $1,540,306         1.20
Area 7........................        $923,950 / $1,119,819         0.83
Area 8........................      $1,230,164 / $1,030,693         1.19
    Total.....................      $4,001,202 / $3,690,818         1.08
------------------------------------------------------------------------


               Total Across All Districts--Rate Multiplier
         [Revenue Needed / Projected Revenue = Rate Multiplier]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
All Districts.................      $7,992,450 / $7,591,284         1.05
------------------------------------------------------------------------

    (2) The Coast Guard amends the pilotage rates for the waters 
treated in 46 CFR 401.405 through 46 CFR 401.410 by multiplying the 
current pilotage rates by the rate multiplier for each pilotage area. 
The following table shows the percentage changes in rates by Area.

------------------------------------------------------------------------
    If you require pilotage service in:            The rate will:
------------------------------------------------------------------------
Area 1 (Designated waters)................  Increase by 4%.
Area 2....................................  Decrease by 5%.
Area 4....................................  Increase by 21%.
Area 5 (Designated waters)................  Decrease by 5%.
Area 6....................................  Increase by 20%.
Area 7 (Designated waters)................  Decrease by 17%.
Area 8....................................  Increase by 19%.
------------------------------------------------------------------------

    The total change across all Districts is 5 percent.

Part 3: Differences Between This Interim Ratemaking Regulation and the 
NPRM Published in January 2003

    (1) Pending an opportunity to finish reviewing certain comments 
that were received in connection with the NPRM published in the Federal 
Register on January 23, 2003 (68 FR 3202), the Coast Guard has 
concluded that while many of these comments raised important points to 
be further explored, it was also equally important to establish at 
least a partial rate adjustment pending that review. We adopted a 
number of suggestions raised by comments, which has had the effect of 
reducing the rates proposed in the NPRM.
    (2) Calculations to determine pilot target compensation for 
undesignated and designated waters of the Great Lakes differs from the 
calculations published in the NPRM (68 FR 3202). Comments received in 
response to the NPRM stated that the Coast Guard should credit only 5 
days a month as vacations days vice 15 days to determine pilots' target 
compensation. The Coast Guard, in previous rulemakings, has included 15 
days a month in its calculation of pilots' target compensation. For 
purposes of this interim rule, the Coast Guard has used the figures of 
those favoring a 44-day multiplier over a 54-day multiplier. This 
change has decreased the rate proposed in the NPRM. The Coast Guard 
continues to review this issue and expects to make a determination 
before calculating the full rate adjustment for the supplemental notice 
of proposed rulemaking (SNPRM).
    (3) Many comments suggested that the needs of pilotage on the Great 
Lakes could be met with fewer than the total number of pilots 
recommended in the NPRM. This season's decline in shipping indicates 
that for the near term the rounding up of pilotage numbers, which is 
frequently performed in the course of determining the number of pilots 
needed, is not necessary, pending a full economic review of the Great 
Lakes basin. This, too, has resulted in a reduction to rates proposed 
in the NPRM.

Small Entities

    Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have 
considered whether this rule would have a significant economic impact 
on a substantial number of small entities. The term ``small entities'' 
comprises small businesses, not-for-profit organizations that are 
independently owned and operated and are not dominant in their fields, 
and governmental jurisdictions with populations of less than 50,000.
    There are no small entities that will be directly affected by this 
interim rule. The businesses directly affected will be owners and 
operators of vessels who generally are large companies or are 
affiliated with large companies. Indirectly affected entities, such as 
shippers of major commodities like steel, iron ore, and grain will be 
affected only to the extent that these changes cause owners and 
operators of vessels to adjust shipping charges.
    Therefore, the Coast Guard certifies under 5 U.S.C. 605(b) that 
this rule will not have a significant economic impact on a substantial 
number of small entities. If you think that your business, 
organization, or governmental jurisdiction qualifies as a small entity 
and that this rule will have a significant economic impact on it, 
please submit a comment to the Docket Management Facility at the 
address under ADDRESSES. In your comment, explain why you think it 
qualifies and how and to what degree this rule will economically affect 
it.

Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement 
Fairness Act of 1996 (Pub. L. 104-121), we want to assist small 
entities in understanding this rule so that they can better evaluate 
its effects on them and participate in the rulemaking. If the rule 
would affect your small business, organization, or governmental 
jurisdiction and you have questions concerning its provisions or 
options for compliance, please call Paul Wasserman, Director, Office of 
Great Lakes Pilotage, (G-MWP-1), Coast Guard, telephone (202) 267-2856 
or

[[Page 69577]]

send him e-mail at [email protected].
    Small businesses may send comments on the actions of Federal 
employees who enforce, or otherwise determine compliance with, Federal 
regulations to the Small Business and Agriculture Regulatory 
Enforcement Ombudsman and the Regional Small Business Regulatory 
Fairness Boards. The Ombudsman evaluates these actions annually and 
rates each agency's responsiveness to small business. If you wish to 
comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR 
(1-888-734-3247).

Collection of Information

    This interim rule calls for no new collection of information under 
the Paperwork Reduction Act of 1995 [44 U.S.C. 3501-3520].

Federalism

    A rule has implications for federalism under Executive Order 13132, 
Federalism, if it has a substantial direct effect on State or local 
governments and would either preempt State law or impose a substantial 
direct cost of compliance on them. We have analyzed this rule under 
that Order and have determined that it does not have implications for 
federalism.

Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
requires Federal agencies to assess the effects of their discretionary 
regulatory actions. In particular, the Act addresses actions that may 
result in the expenditure by a State, local, or tribal government, in 
the aggregate, or by the private sector of $100,000,000 or more in any 
one year. Though this rule will not result in such an expenditure, we 
do discuss the effects of this rule elsewhere in this preamble.

Taking of Private Property

    This rule will not effect a taking of private property or otherwise 
have taking implications under Executive Order 12630, Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights.

Civil Justice Reform

    This rule meets applicable standards in sections 3(a) and 3(b)(2) 
of Executive Order 12988, Civil Justice Reform, to minimize litigation, 
eliminate ambiguity, and reduce burden.

Protection of Children

    We have analyzed this rule under Executive Order 13045, Protection 
of Children from Environmental Health Risks and Safety Risks. This rule 
is not an economically significant rule and does not create an 
environmental risk to health or risk to safety that may 
disproportionately affect children.

Indian Tribal Governments

    This rule does not have tribal implications under Executive Order 
13175, Consultation and Coordination with Indian Tribal Governments, 
because it does not have a substantial direct effect on one or more 
Indian tribes, on the relationship between the Federal Government and 
Indian tribes, or on the distribution of power and responsibilities 
between the Federal Government and Indian tribes.

Energy Effects

    We have analyzed this rule under Executive Order 13211, Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use. We have determined that it is not a ``significant 
energy action'' under that order because it is not a ``significant 
regulatory action'' under Executive Order 12866 and is not likely to 
have a significant adverse effect on the supply, distribution, or use 
of energy. The Administrator of the Office of Information and 
Regulatory Affairs has not designated it as a significant energy 
action. Therefore, it does not require a Statement of Energy Effects 
under Executive Order 13211.

Environment

    We have analyzed this rule under Commandant Instruction M16475.lD, 
which guides the Coast Guard in complying with the National 
Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and 
have concluded that there are no factors in this case that would limit 
the use of a categorical exclusion under section 2.B.2 of the 
Instruction. Therefore, this rule is categorically excluded, under 
figure 2-1, paragraph (34)(a), of the Instruction, from further 
environmental documentation. An ``Environmental Analysis Check List'' 
and a ``Categorical Exclusion Determination'' are available in the 
docket where indicated under the section of this preamble on ``Public 
Participation and Request for Comments''. We will consider comments on 
this section before we make the final decision on whether this rule 
should be categorically excluded from further environmental review.

List of Subjects

46 CFR Part 401

    Administrative practice and procedures, Great Lakes, Navigation 
(water), Penalties, Reporting and recordkeeping requirements, Seamen.

46 CFR Part 404

    Great Lakes, Navigation (water), Seamen.


0
For the reasons discussed in the preamble, the Coast Guard amends 46 
CFR parts 401 and 404 as follows:

PART 401--GREAT LAKES PILOTAGE REGULATIONS

0
1. Revise the authority citation for part 401 to read as follows:

    Authority: 46 U.S.C. 2104(a), 6101, 7701, 8105, 9303, 9304; 
Department of Homeland Security Delegation No. 0170.1; 46 CFR 
401.105 also issued under the authority of 44 U.S.C. 3507.


0
2. In Sec.  401.405, revise paragraphs (a) and (b), to read as follows:


Sec.  401.405  Basic rates and charges on the St. Lawrence River and 
Lake Ontario.

* * * * *
    (a) Area 1 (Designated Waters):

------------------------------------------------------------------------
                  Service                        St. Lawrence River
------------------------------------------------------------------------
Basic Pilotage............................  $8 per kilometer or $15 per
                                             mile\1\
Each Lock Transited.......................  \1\$185
Harbor Movage.............................  \1\$607
------------------------------------------------------------------------
\1\ The minimum basic rate for assignment of a pilot in the St. Lawrence
  River is $405, and the maximum basic rate for a through trip is
  $1,777.

    (b) Area 2 (Undesignated Waters):

------------------------------------------------------------------------
                         Service                           Lake Ontario
------------------------------------------------------------------------
Six-Hour Period.........................................            $327
Docking or Undocking....................................            $312
------------------------------------------------------------------------


0
3. In Sec.  401.407, revise paragraphs (a) and (b) to read as follows:


Sec.  401.407  Basic rates and charges on Lake Erie and the navigable 
waters from Southeast Shoal to Port Huron, MI.

* * * * *
    (a) Area 4 (Undesignated Waters):

------------------------------------------------------------------------
                                                 Lake Erie
                                                  (East of
                    Service                      southeast     Buffalo
                                                   shoal)
------------------------------------------------------------------------
Six-Hour Period...............................         $405         $405
Docking or Undocking..........................         $312         $312
Any Point on the Niagara River below the Black          N/A         $796
 Rock Lock....................................
------------------------------------------------------------------------

    (b) Area 5 (Designated Waters):

[[Page 69578]]



----------------------------------------------------------------------------------------------------------------
                                                               Toledo or
                                                               any Point
                                                                on Lake
               Any point on or in                 Southeast    Erie west     Detroit      Detroit     St. Clair
                                                    Shoal          of         River      Pilot Boat     River
                                                               Southeast
                                                                 Shoal
----------------------------------------------------------------------------------------------------------------
Toledo or any port on Lake Erie west of                 $939         $554       $1,218         $939          N/A
 Southeast Shoal...............................
Port Huron Change Point........................   \1\ $1,634   \1\ $1,893       $1,228         $955         $679
St. Clair River................................   \1\ $1,634          N/A       $1,228       $1,228         $554
Detroit or Windsor or the Detroit River........         $939       $1,218         $554          N/A       $1,228
Detroit Pilot Boat.............................         $679         $939          N/A          N/A      $1,228
----------------------------------------------------------------------------------------------------------------
\1\ When pilots are not changed at the Detroit Pilot Boat.


0
4. In Sec.  401.410, revise paragraphs (a), (b), and (c) to read as 
follows:


Sec.  401.410  Basic rates and charges on Lakes Huron, Michigan, and 
Superior, and the St Mary's River.

* * * * *
    (a) Area 6 (Undesignated Waters):

------------------------------------------------------------------------
                                                             Lakes Huron
                          Service                                and
                                                               Michigan
------------------------------------------------------------------------
Six-Hour Period............................................         $336
Docking or Undocking.......................................         $319
------------------------------------------------------------------------

    (b) Area 7 (Designated Waters):

------------------------------------------------------------------------
                                                                  Any
                  Area                     Detour    Gros Cap    harbor
------------------------------------------------------------------------
Gros Cap...............................     $1,192        N/A        N/A
Algoma Steel Corporation Wharf at Sault     $1,192       $449        N/A
 Ste. Marie Ontario....................
Any point in Sault Ste. Marie, Ontario,       $999       $449        N/A
 except the Algoma Steel Corporation
 Wharf.................................
Sault Ste. Marie, MI...................       $999       $449        N/A
Harbor Movage..........................        N/A        N/A       $449
------------------------------------------------------------------------

    (c) Area 8 (Undesignated Waters):

------------------------------------------------------------------------
                                                                 Lake
                          Service                              Superior
------------------------------------------------------------------------
Six-Hour Period............................................         $311
Docking or Undocking.......................................         $296
------------------------------------------------------------------------

Sec.  401.420  [Amended]

0
5. In Sec.  401.420--
0
a. In paragraph (a), remove the number ``$53'' and add, in its place, 
the number ``$56''; and remove the number ``$831'' and add, in its 
place, the number ``$873''.
0
b. In paragraph (b), remove the number ``$53'' and add, in its place, 
the number ``$56''; and remove the number ``$831'' and add, in its 
place, the number ``$873''.
0
c. In paragraph (c)(1), remove the number ``$314'' and add, in its 
place, the number ``$330''; in paragraph (c)(3), remove the number 
``$53'' and add, in its place, the number ``$56''; and, also in 
paragraph (c)(3), remove the number ``$831'' and add, in its place, the 
number ``$873''.


Sec.  401.428  [Amended]


0
6. In Sec.  401.428, remove the number ``$321'' and add, in its place, 
the number ``$337''.

PART 404--GREAT LAKES PILOTAGE RATEMAKING

0
7. Revise the authority citation for part 404 to read as follows:

    Authority: 46 U.S.C. 2104(a), 8105, 9303, 9304; Department of 
Homeland Security Delegation No. 0170.1.

Appendix A to Part 404 [Amended]

0
8. In Appendix A to part 404, in Step 6, paragraph 1, line 10 of the 
table, remove the symbol ``+'' and add, in its place, the symbol ``/''.

    Dated: December 8, 2003.
T.H. Gilmour,
Rear Admiral, U.S. Coast Guard, Assistant Commandant for Marine Safety, 
Security and Environmental Protection.
[FR Doc. 03-30711 Filed 12-8-03; 4:37 pm]
BILLING CODE 4910-15-P