[Federal Register Volume 70, Number 46 (Thursday, March 10, 2005)]
[Rules and Regulations]
[Pages 12082-12104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4586]



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Part III





Department of Homeland Security





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Coast Guard



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46 CFR Part 401



Rates for Pilotage on the Great Lakes; Interim Rule

  Federal Register / Vol. 70, No. 46 / Thursday, March 10, 2005 / Rules 
and Regulations  

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

46 CFR Part 401

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


Rates for Pilotage on the Great Lakes

AGENCY: Coast Guard, Department of Homeland Security.

ACTION: Interim rule; request for comments.

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SUMMARY: The Coast Guard is changing the rates for pilotage on the 
Great Lakes. The last full-rate adjustment for pilotage on the Great 
Lakes became effective in August 2001, and a partial-rate adjustment 
became effective January 12, 2004. This change is necessary both to 
generate sufficient revenues for allowable expenses and to ensure that 
the pilots receive target compensation.

DATES: This interim rule is effective April 11, 2005. Comments and 
related material must reach the Docket Management Facility on or before 
June 8, 2005.

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, Great Lakes Pilotage, Office of 
Waterways Management Plans and Policy (G-MWP), U.S. 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:

I. Preamble Organization

    This preamble is organized as follows:

II. Public Participation and Request for Comments
    A. Submitting comments
    B. Viewing comments and documents
    C. Privacy Act
III. Public Meeting
IV. Program History
V. Discussion of Comments
    A. General
    B. Significance
    C. Immediate Rate Implementation
    D. New Data for Calculation of Rate
    E. Adjustment for Lost Revenue
    F. Expenses
    1. General
    2. Source Documentation
    3. Legal Fees
    4. Non-Recurring Expenses
    5. Lobbying Expenses
    6. Subsistence Payments
    7. Travel Expenses
    8. Business Promotions
    G. Health Insurance Premiums for Retired Pilots
    H. Accounts Receivable
    I. Pilotage Dues
    J. Investment Base
    K. Inflation Rate
    L. 401(k) Plans
    M. Number of Pilots Needed
    N. Delay and Detention
    O. Target Pilot Compensation
    1. The 54-Day Multiplier
VI. Discussion of the Rule
    A. Ratemaking Process and Methodology
    B. PART 1: PILOTAGE RATE CHARGES--SUMMARIZED
    C. PART 2: CALCULATING THE RATE MULTIPLIER
    1. Step 1: Projection of Operating Expenses
    i. Submission of Financial Information
    ii. Determination of Recognized Expenses
    iii. Social Security and Medicare Expenses
    iv. Reimbursed Expenses
    v. Not Recognized Expenses
    vi. Reclassified Expenses
    vii. Undocumented Expenses
    viii. Foreseeable Circumstances
    ix. Adjustment for Inflation
    x. Projection of Operating Expenses
    2. Step 2: Projection of Target Pilot Compensation
    i. Determination of Target Pilot Compensation
    ii. Determination of Number of Pilots Needed
    ii. Projection of Target Pilot Compensation
    3. Step 3: Projection of Revenue
    i. Projection of Revenue
    ii. Calculation of Investment Base
    3. Step 5 Determination of Target Rate of Return on Investment
    4. Step 6 Adjustment Determination
    i. Projected Rate of Return on Investment
    ii. Revenue Needed Adjustment Determination
    5. Step 7: Adjustment of Pilotage Rates
VII. Regulatory Evaluation
VIII. Small Entities
IX. Assistance for Small Entities
X. Collection of Information
XI. Federalism
XII. Undated Mandates Reform Act
XIII. Taking of Private Property
XIV. Civil Justice Reform
XV. Protection of Children
XVI. Indian Tribal Governments
XVII. Energy Effects
XVIII. Technical Standards
XIX. Environment

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

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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.

Program History

    The U.S. waters of the Great Lakes and St. Lawrence Seaway to Snell 
Lock is divided into three pilotage districts which are further divided 
into Areas. Each district is administered by an Association (any 
organization that holds or held a Certificate of Authorization issued 
by the Director of Great Lakes Pilotage to operate a pilotage pool on 
the Great Lakes). District One, which contains Areas 1 and 2, includes 
all U.S. waters of the St. Lawrence River between the international 
boundary at St. Regis and a line at the head of the river running (at 
approximately 127[deg] True) between Carruthers Point Light and South 
Side Light extended to the New York shore. District Two, containing 
Areas 4 and 5, includes all U.S. waters of Lake Erie westward of a line 
running (at approximately 026[deg] True) from Sandusky Pierhead Light 
at Cedar Point to Southeast Shoal Light; all waters contained within 
the arc of a circle of one mile radius eastward of Sandusky Pierhead 
Light; the Detroit River; Lake St. Clair; the St. Clair River, and 
northern approaches thereto south of latitude 43[deg]05'30'' N. 
District Three, containing Areas 6, 7, and 8, includes all U.S. waters 
of the St. Mary's River, Sault Ste. Marie Locks and approaches thereto 
between latitude 45[deg]59' N at the southern approach and longitude 
84[deg]33' W at the northern approach.
    The Great Lakes Pilotage Act of 1960 requires foreign flag vessels 
and U.S. flag vessels in foreign trade to use a federal Great Lakes 
Registered Pilot while transiting the St. Lawrence Seaway and the Great 
Lakes system. 46 U.S.C. Chapter 93. The Coast Guard is responsible for 
administering this pilotage program, which includes setting rates for 
pilotage service.
    The Coast Guard pilotage regulations require annual reviews of 
pilotage rates and the creation of a new rate at least once every five 
years, or sooner, if the annual review shows a need. 49 CFR part 404. 
In order to facilitate this process, each pilot association must 
provide annual financial reports to the Coast Guard. The Coast Guard 
contract accountant uses these reports, in connection with annual 
reviews of each association's records, to prepare independent financial 
reports. The Coast Guard uses these reports in its annual evaluation of 
whether a rate adjustment is necessary and appropriate.
    The last full-rate adjustment became effective in August 2001, and 
a partial-rate adjustment became effective on January 12, 2004. The 
2004 partial-rate adjustment was based on calculations using 2001 
financial data.
    The rates in this interim rule are based on data from the 
``Independent Accountant's Reports on Applying Agreed Upon Procedures, 
Financial Statement Analysis, Supplementary Financial Information and 
Report of Findings and Recommendations 31 December 2002'' for each 
District and the 2003 AMO union contracts. The Coast Guard followed the 
ratemaking analyses and methodology in 46 CFR part 404 and Appendix A 
to that part.
    To determine whether projected traffic under the current rate 
structure is adequate to raise enough revenue to cover all costs and 
permit the pilots to earn target pilot compensation, the rate-setting 
methodology looks at projected and target pilot compensation, necessary 
and reasonable operating expenses, return on investment, and revenue 
projections. (Target pilot compensation is set based on the American 
Maritime Officers' (AMO) union contract.)
    The last full-rate adjustment became effective August 13, 2001. On 
January 23, 2003, the Coast Guard published a notice of proposed 
rulemaking (NPRM) using 2001 financial information. 68 FR 3202. That 
NPRM recommended a 25 percent average increase in pilotage rates. This 
recommended increase was based on a number of factors, including an 
approximately 20 percent increase in the AMO union contract, an 
adjustment for inflation, and other increased costs. The public was 
afforded many opportunities to comment--there were two public meetings 
and an extended comment period.
    The Coast Guard got comments from the pilots, the Great Lakes 
maritime community, and other agencies that raised issues that had not 
been addressed by the Coast Guard in earlier ratemakings. These 
comments included the impact of pilotage rates on foreign flag shipping 
in the Great Lakes, the method for calculating components of the rate 
multiplier, target pilot compensation, and projection of revenues and 
expenses.
    In response, the Coast Guard issued an interim rule that 
established a partial rate adjustment of five percent to implement the 
uncontested parts of the rate increase in time for the 2004 season, and 
allow the Coast Guard time to evaluate the remaining open issues. 68 FR 
69564, Dec. 12, 2003. Corrections to this interim rule were published 
the following January. 69 FR 128, Jan. 2, 2004, and 69 FR 533, Jan. 6, 
2004.
    This interim rule 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.
    The rates in this interim rule are based on data from the 
``Independent Accountant's Reports on Applying Agreed Upon Procedures, 
Financial Statement Analysis, Supplementary Financial Information and 
Report of Findings and Recommendations 31 December 2002'' for each 
District and the 2003 AMO union contracts. The Coast Guard followed the 
ratemaking analyses and methodology in 46 CFR part 404 and Appendix A 
to that part.

Discussion of Comments

    Significant rules often require additional staffing and review of 
each document in the rulemaking process. The Coast Guard's plan to 
issue an SNPRM, provide time for public comment, and then issue the 
rate change cannot be completed before the end of the 2004 navigation 
season. Because of the amount of time already consumed in developing 
this full-rate calculation and to ensure that a new rate is not delayed 
beyond the start of the 2005 navigation season, the Coast Guard has 
decided to issue the full-rate calculation as an interim rule with an 
effective date just before the start of the 2005 navigation season. 
Issuing an interim rule will allow us to receive and evaluate comments 
and make any necessary changes, while at the same time, allow the new 
rates to become effective in time for the 2005 season.

General

    The Coast Guard received 27 comments in response to the December 
2003 interim rule. Many of these comments expressed concerns about the 
calculations done for the partial-rate adjustment in the interim rule; 
about what expenses were allowed; and about the monthly multiplier used 
to calculate the target pilot compensation. We received comments from 
individual pilots, pilots' Associations, and from the Great Lakes 
Pilotage User Group, which includes the Shipping Federation of Canada 
and its members, the U.S. Great Lakes Shipping Association, the Chamber 
of Maritime Commerce, and

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the American Great Lakes Ports Association, Inc.
    To the extent that NPRM comments have previously been addressed in 
the December 2003 IR, no further responses have been made to comments 
in the NPRM. However, certain issues raised in the NPRM, were deferred 
in the IR for further review and response in SNPRM/IR. Those issues 
have been included in preamble of this document.

Significance

    Issue: We received several comments on the Coast Guard's 
determination that this rulemaking was not significant under Executive 
Order 12866. Three comments expressed agreement with the determination 
of ``not significant'' but stated the rule ``would have a substantial 
impact on the type and quality of pilotage services'' and ``* * * the 
pilots concur with the decision in the interim rate notice of the Coast 
Guard, the Department of Homeland Security, and the Office of 
Management and Budget that this proposed rate adjustment is not 
significant under section 3(f) of Executive Order 12866. (68 FR 
69568).'' Similarly, the pilots concurred with the statement in the 
NPRM that, ``[w]hile these adjustments to pilotage rates may seem 
relatively large they actually represent a small change to the overall 
cost of moving these vessels through the St. Lawrence Seaway System.'' 
(68 FR 3213).
    One comment, disagreeing with the ``not significant'' 
determination, repeated from its earlier comments that the proposed 
rate increase was a ``significant regulatory action,'' under Executive 
Order 12866 and thus requires an economic analysis of its impact.
    Response: Although this rulemaking is not economically significant 
under Executive Order 12866, OMB has determined that it is a 
significant rulemaking action and has reviewed it under that Order.
    The Coast Guard contracted for an economic analysis of rate changes 
for pilotage on the Great Lakes and it is available for review in the 
docket. An analysis of the changes in this interim rule is set out in 
the Regulatory Evaluation of this preamble.

Immediate Rate Implementation

    Issue: In the 2003 interim rule, we said we planned to publish a 
supplemental notice of proposed rulemaking (SNPRM) with an opportunity 
to comment before effecting a permanent rate adjustment during the 
Spring 2004. Numerous comments urged the Coast Guard to issue new 
pilotage rates as an interim rule, effective immediately. One comment 
stated that the pilotage pools are working on an expense base that is 
nearly a decade old. Another comment said that the last rate adjustment 
in pilotage rates for the Great Lakes went into effect in August 2001. 
The comment further stated that ``it has been almost three years since 
those rates have been adjusted, even though Federal regulations require 
the Coast Guard to perform an annual review and adjustment of the 
rates.'' One comment stated this rate is long overdue and an interim 
final rule should be in place before the start of the 2004 navigation 
season.
    Some comments urged the Coast Guard not to follow the December 12, 
2003, interim rule with an SNPRM, stating that an SNPRM, which is not 
effective immediately, but rather subject to public comment, would 
delay the effective date of any further rule and serve no purpose 
except delay. Another comment stated the Coast Guard should issue the 
rate now as an interim final rule, effective immediately, while 
continuing to accept comments. One comment stated that a delay in the 
rate serves as a subsidy to foreign shipping companies, who have 
tripled their freight rates over the 2003 shipping season.
    One comment stated that the ``most glaring point is that it is now 
the second month of 2004 and we are addressing these comments to a 
docket established in 2002 despite the fact that the Coast Guard is 
required to routinely review and establish pilotage rates on an annual 
basis. One of the purposes of an annual review is to adjust rates 
periodically on an incremental basis that avoids the impact and 
political fallout of large adjustments.''
    One comment stated it is within the Coast Guard's administrative 
authority to issue this rate as an interim final rule, effective 
immediately, receive further comments, and later adjust the rule, if 
necessary.
    Response: Although the NPRM and the 2003 interim rule were not 
``significant'' under Executive Order 12866,this interim rule is 
``significant.'' Significant rules often require additional staffing 
and review of each document in the rulemaking process. The Coast 
Guard's plan to issue an SNPRM, provide time for public comment, and 
then issue the rate change cannot be completed before the end of the 
2004 navigation season. Because of the amount of time already consumed 
in developing this full-rate calculation and to ensure that a new rate 
is not delayed beyond the start of the 2005 navigation season, the 
Coast Guard has decided to issue the full-rate calculation as an 
interim rule with an effective date just before the start of the 2005 
navigation season. The Coast Guard received comments on both the NPRM 
and 2003 interim rule. Issuing an interim rule will allow us to receive 
and evaluate additional comments and make any necessary changes before 
finalizing the rates, while at the same time, allowing the new rates to 
become effective in time for the 2005 season.

New Data for Calculation of Rate

    Issue: Several comments urged the Office of Great Lakes Pilotage 
``to issue an interim final rate using current rate and revenue figures 
for each of the three districts.''
    One comment supported using updated data and believed it would 
result in a more accurate rate setting. However, the comment urged the 
Coast Guard ``to make the new data (including the AMO union contract 
and 2002 audits) available to the public and provide adequate time for 
comment.''
    Another comment stated that the Coast Guard should use the most 
current figures available. The pilots asked that use of the most 
current figures not be used as a reason to recalculate, and, therefore, 
substantially delay the rate.
    One comment also stated that ``U.S. laker mate and master 
compensation is currently more than 16 percent higher than target pilot 
compensation.'' The comment suggested that ``the Coast Guard mitigate 
this chronic inequity as much as possible by always using the latest 
available AMO union contract and the expense figures in every rate it 
enacts.''
    Response: In calculating the proposed rate in the NPRM, and the 
partial rate in the interim rule, the Coast Guard used data from the 
2002 AMO union contracts and the 2001 independent accountant's reports 
for each District. In the December 2003, interim rule, we said we were 
considering using the data from the 2003 AMO union contracts for our 
full-rate calculation. We also proposed using the most current (2002) 
expense and revenue figures from each of the three Districts for the 
full-rate calculation. We specifically requested comments on whether we 
should use the newer data to calculate the full-rate adjustment.
    The comments on this issue supported using updated data because it 
would result in a more accurate rate setting, and requested that the 
new data be made available to the public with adequate time for 
comment. The Coast Guard agrees with this rationale.

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    In calculating this full-rate adjustment, the Coast Guard used the 
data from the 2003 AMO union contract and the 2002 independent 
accountant's reports for each District. These materials are available 
for review in the public docket.

Adjustment for Lost Revenue

    Issue: One comment requested that an adjustment be added to this 
rate so that the pilots would be reimbursed for monies lost because 
this rate was not in effect at the beginning of the 2003 navigation 
season.
    Response: Although the regulations provide for some adjustments 
during calculation of pilotage rates, those adjustments relate to 
correcting erroneous amounts and classifications of expenses and 
revenues; determining and using an inflation adjustment; and an 
adjustment mechanism for ``foreseeable circumstances.'' The type of 
adjustment suggested by the comment to recover monies for services 
prior to establishment of the new rate is not allowed by the current 
regulations. The Coast Guard has not included any adjustment for 
services provided by the pilots prior to the establishment of the new 
rate. The regulations do not provide for retroactive application of 
rates or prospective adjustments to fees paid by shippers or earned by 
pilots.

Expenses

    General. The Coast Guard received comments concerning particular 
types of expense items. Some comments disagreed with the Coast Guard's 
reclassification of an expense as pilot compensation or disagreed with 
amounts which had been disallowed and removed from the expense base. 
These expense issues are discussed individually below.
    Some comments related to particular expense items in previous rate 
calculations and reviews of Association financial statements. This 
section of the preamble does not discuss specific expense items 
incurred prior to those in the 2002 financial statements. We do, 
however, generally discuss various types of expenses and whether or not 
these expenses are normally recognized and allowed and how these types 
of expenses were treated in calculating this full-rate adjustment.
    In determining whether expenses should be allowed, the Coast Guard 
applied the guidelines for recognition of expenses set out in 46 CFR 
404.5(a)(1) and (a)(2). Under 46 CFR 404.5(a)(1), each expense item is 
evaluated to determine if it is necessary for the provision of pilotage 
service, and if so, what dollar amount is reasonable for that expense 
item. Criteria for determining reasonableness of expense items are set 
out in 46 CFR 404.5(a)(2), which requires that each expense item be 
measured against one or more of the following: Comparable or similar 
expenses paid by others in the maritime industry; comparable or similar 
expenses paid by other industries; or, U.S. Internal Revenue Service 
guidelines.

Source Documentation

    Issue: Two comments stated that ``source documentation'' should be 
made available to the public so it can determine if the Coast Guard 
correctly applied the ratemaking analyses and methodology found in 
Appendix A to 46 CFR part 403 in the regulations. One comment asked 
that the amount and nature of legal expenses incurred by two Districts, 
as well as travel expenses and the amounts invoiced for services 
provided before August 13, 2001, for these Districts, be made public 
and available for comment before an SNPRM is published.
    Response: The Coast Guard disagrees. Under 46 CFR 403.105(b), each 
Association is required to maintain ``all books, records and memoranda 
in a manner that will permit audit and examination by the Director or 
the Director's representatives.'' Section 403.105 does not require that 
individual source documents be submitted to the Coast Guard or made 
available to the public. However, any financial statements, data, and 
other materials the Coast Guard used in calculating the rate in this 
interim rule are in the docket for this rulemaking and are available 
for inspection and copying at the address and web site found in the 
ADDRESSES section.

Legal Fees

    Issue: In response to the December 2003, interim rule, one comment 
stated the Coast Guard must establish a methodology for determining the 
appropriate amount of legal fees to justify inclusion of such fees into 
the expense base.
    Response: The Coast Guard disagrees. Legal fees necessary for the 
provision of pilotage in reasonable amounts for the expense items 
submitted are allowed if they are substantiated as set out in 46 CFR 
404.5. In 2002, all legal fees submitted as expenses were recognized 
and allowed.

Non-Recurring Expenses

    Issue: In the interim rule, the Coast Guard discussed recurring and 
non-recurring expenses in conjunction with Erie Leasing Inc., and said 
it would review those issues before calculating a full-rate adjustment.
    Response: It has done so. Erie Leasing Inc., was an affiliate 
company owned by the Lakes Pilot Association in District Two. It 
provided support services to the pilot association through its rental 
and leasing of pilot boats, automobiles, and office space. Erie Leasing 
Inc., no longer exists. It was dissolved in 2001 and its assets were 
sold off. Since District Two has divested itself of Erie Leasing and 
because we used the 2002 financial data, there are no leasing expense 
issues in the current calculation.
    Issue: One comment stated that only recurring expenses should be 
included in the expense base. Another comment stated that ``including 
non-recurring costs will artificially inflate rates for pilotage 
services * * * and that the Coast Guard must perform the critical 
analysis to assure the segregation of those costs from the expense 
base.'' Another comment stated that the Coast Guard should remove non-
recurring legal expenses from the expense base.
    Response: Pilot Associations may incur unusually large expenses in 
a single year which will not recur in subsequent years. These expenses 
may be related to leasing of pilot boats or to the cost of operation or 
maintenance of purchased pilot boats, or to legal fees related to 
litigation, or other occasional expenses. All expenses, recurring and 
non-recurring, are subject to the same criteria in 46 CFR 404.5.
    In these cases, the regulations do not prohibit the inclusion of 
non-recurring expenses in the expense base. Any expense, recurring or 
non-recurring, if recognized as necessary for the provision of pilotage 
services, and if reasonable in amount, is an allowable item in the 
expense base.

Lobbying Expenses

    Issue: One comment asserted that the Coast Guard had not removed 
all lobbying expenses from the expense base used in the partial-rate 
calculation.
    Response: This comment is incorrect. Under 46 CFR 404.5(a)(8)(ii), 
lobbying expenses are one of five specific expenses that are not 
recognized as expenses for ratemaking purposes. In the 2002 expense 
base submissions used in this calculation, the lobbying expenses for 
Districts One and Three were removed from their legal fee expense item. 
District Two confirmed that they had no lobbying expenses in 2002.

Subsistence Payments

    Issue: One comment said the Coast Guard, ``needs to allow 
subsistence expenses in the rate base'' and since

[[Page 12086]]

they provided the Office of Great Lakes Pilotage documentation in the 
form of source forms and dispatch sheets, that the full amount should 
be allowed in the expense base.
    One comment said pilots should be allowed subsistence based on the 
number of days worked which the District does substantiate as to time, 
place, and purpose (dispatching forms and source forms are submitted to 
the Director on a monthly basis). Further, the comment stated this 
methodology is acceptable for IRS purposes. IRS Rev. Proc. 2002-63. 
Sec. 3.03 states, ``[s]uch allowance may be paid with respect to the 
number of days away from home in connection with the performance of 
services as an employee * * *.'' The subsistence payments are paid 
separately and clearly identified as such. In addition, the Association 
can provide substantiation as to time, place, and purpose.
    Response: Subsistence expenses are already accounted for, either 
directly or indirectly. For 2002, in District One, subsistence (per 
diem and travel) was reimbursed based upon adequately prepared and 
documented contemporaneous log entries and reported on a per trip 
basis. Any amount over $75 was documented as required by IRS Code 
requirements for substantiation of travel-related expenses. All 
District One travel expenses were allowed.
    District Two paid their pilots a daily meals and incidental expense 
allowance of $38 per day, based on days available, approximately 265 
days per pilot. This amount was not a reimbursement for expenses 
actually incurred and was disallowed because the Department of 
Transportation guidance incorporating the Federal Travel Regulations in 
41 CFR part 301-11 do not permit payments based on days available for 
travel. Internal Revenue Service Regulations 1.62-2(c) and Rev. Proc. 
2001-47 allow for ``reasonable business practice'' in reimbursement of 
per diem costs. Using Federal Travel Regulations' established 
allowances for Transportation workers daily meals and expenses in 41 
CFR part 301-11, the per diem allowance was recalculated allowing per 
diem for each pilot for 200 travel days, which included days engaged in 
pilotage, travel between assignments, and down time at remote locations 
awaiting dispatch. The 200 days was based on the number of days worked 
according to a schedule provided by the Association.
    In District Three, the pilots reported their per diem expenses to 
the Association but did not get reimbursed for them directly. Instead, 
pilot per diem was calculated according to a schedule provided by the 
Association, using the number of days worked. This per diem allowance 
approximated 200 travel days per pilot. Temporarily registered pilots 
were paid a per diem allowance. All pilots were reimbursed for actual 
hotel and temporary lodging expenses.

Travel Expenses

    Issue: One comment objected to the Coast Guard reclassifying $8,600 
of travel expense as pilot compensation. The comments stated these 
amounts represented reimbursement to pilots for attendance at board of 
directors meetings as well as meetings regarding other District Two 
business (insurance, etc.) and were reimbursements for travel expense 
and not compensation to the pilots.
    Response: Under IRS regulation 1.62-2(c)(5), reimbursement for 
travel costs that are not regularly reported as expenses to employers 
(a non-accountable plan) are fully taxable to the employee and subject 
to FICA and income tax withholding. The $8,600 travel expense relates 
to an adjustment made to District Two's financial position as noted in 
the 2003 interim rule. District Two reported a travel expense of 
$8,600, which was reclassified as pilot compensation. These amounts 
represented unaccounted for payments by the Association to pilots for 
attendance at board of directors meetings as well as other District Two 
business meetings. In this case, pilots were given cash to conduct 
their travel without a requirement to account for the use of the money 
or to repay amounts not expended in connection with business. 
Accordingly, these amounts were properly considered compensation and 
not expenses.
    With respect to the 2002 financial reports, the Coast Guard 
adjusted and reclassified travel expenses reported by District One and 
District Three. In District One, $10,500, and in District Three, 
$146,907, in pilot travel expenses, were reclassified as operating 
expenses from pilot compensation.

Business Promotions

    Issue: One comment stated the Director, Great Lakes Pilotage, 
incorrectly disallowed a 2001 business promotion expense of $74 as 
unrelated to the provision of pilotage services. District Two provides 
services in addition to pilotage to lakers (vessels that operate 
entirely within the Great Lakes system). The revenue from lakers was 
$8,126 for 2001. District Two advertises and promotes this service as a 
means of generating revenue to offset total boat expenses.
    Response: The Coast Guard disagrees. Although the comment related 
to 2001 expenses, the 2002 independent accountant's report disallowed 
similar expenses and the Coast Guard adopted the recommendation. The 
regulations in Sec.  404.5(a)(5) state that, ``[f]or ratemaking 
purposes, the revenues and expenses generated from Association 
transactions that are not directly related to the provision of pilotage 
services are included in ratemaking calculations as long as the 
revenues exceed the expenses from these transactions.'' However, the 
promotional advertisement did not advertise the specific service to be 
provided, but rather contained only the name of the Association. The 
business promotion expenses were not specifically related to offering 
services other than pilotage, but were incurred generally to create 
goodwill in the community; therefore, the expenses will not be 
recognized.

Health Insurance Premiums for Retired Pilots

    Issue: One comment stated that the Office of Great Lakes Pilotage 
needs to continue to allow health insurance paid to two individual 
retired pilots in the expense base.
    Response: Under 46 CFR 404.5(a)(6), medical, pension, and other 
benefits paid to pilots, or for the benefit of pilots, by the 
Association are treated as pilot compensation. The amount recognized 
for each of these benefits is the cost of these benefits in the most 
recent AMO union contract for first mates on Great Lakes vessels. The 
AMO union contract has been used since the ratemaking methodology was 
amended effective June 12, 1995. The AMO union contract was used in the 
1997 and 2001 final rulemaking and the 2003 interim rule. The AMO union 
contract also represents most first mates and masters working on the 
Great Lakes. To remain consistent, we will continue to use the AMO 
union contracts as the basis in our calculations of target pilot 
compensation. That contract allows for lifetime health insurance for 
all active and retired first mates, and the cost of health insurance 
for retired pilots is not otherwise provided for as ``target 
compensation'' in the calculated compensation base. Therefore, these 
costs are properly included in the expense base. In District Two, 
$19,494 for health insurance for retirees was added to the expense base 
from pilot compensation.

[[Page 12087]]

Accounts Receivable

    Issue: One comment asked whether accounts receivable should be 
included in the revenue base.
    Response: Accounts receivable is included in revenue on the accrual 
basis of accounting when calculating the revenue base. All three 
Districts use the accrual system, including accounts receivable in the 
revenue base in accordance with generally acceptable accounting 
principles.

Pilotage Dues

    Issue: One comment stated that only 15 percent of the American 
Pilots Association dues expense should have been disallowed for 
lobbying in 2001, and that 85 percent of the dues amount should have 
been added back into the expense base for District Two. The comment 
stated, ``it is absolutely necessary that pilots belong to professional 
organizations which keep them informed of current changes in the 
pilotage industry. This is not compensation to the pilots. These dues 
are reasonable and proper business expenses.''
    Response: All of the American Pilots Association dues expenses were 
not prohibited as lobbying expenses; they were reclassified as pilot 
compensation. American Pilots Association dues are not an expense. 
Union pilots who work for domestic shipping companies must pay their 
own dues and the amounts paid by the pilotage organizations for the 
benefit of pilots have been correctly reclassified as pilot 
compensation, the use of which to pay dues is discretionary and 
personal to the pilots.
    As set out in 46 CFR 404.5(a)(6), medical, pension, and other 
benefits paid to pilots, or for the benefit of pilots, are treated as 
pilot compensation. Because union dues are ``other benefits,'' they 
have been consistently treated as such and have, therefore, been 
properly classified as compensation. No provision for the payment of 
union dues by employers is provided for in the current AMO union 
contract. The allowability of the lobbying expense portion of the dues 
is therefore not an issue.
    In this computation, pilotage dues of $26,210 and $6,600 from 
District Three; $15,840 from District Two; and $13,970 from District 
One were all removed from the expense base and reclassified as pilot 
compensation.

Investment Base

    Issue: One comment said the target return on investment should be 
increased from 0.0704 to a ``realistic'' number, which is probably more 
than double this figure.
    Another comment stated that, ``in the rate methodology, we find it 
difficult to accept that investment in assets necessary to provide 
pilotage services is recognized only at a rate of return on investment 
equivalent to high quality bonds. High quality bonds are a safe, 
passive investment requiring no management or risk. That is not the 
case in the pilotage environment in the Great Lakes or in any other 
area.''
    A third comment said, ``we believe a fair return on pilot assets 
would be a minimum of 15 percent to recognize lost opportunity costs 
from alternative available investments for their financial assets.''
    One comment stated that wrong numbers were used for the investment 
base's return on investment for one of the Districts. The comment also 
stated the return on investment should be more than double the 0.0704 
used in the interim rule.
    Response: In calculating the investment base for 2002, we are 
required to use the Investment Base Formula in Appendix B to 46 CFR 
part 404. We must calcualate the investment base to project each 
association return on investment pursuant to 46 CFR part 404, Appendix 
A, Step 4. Under step 5(2) of Appendix A, it states that, ``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.'' We have used Moody's AAA bond rate for this purpose since 
the methodology was adopted in 1995. Moody's Corporation is a publicly 
traded company (NYSE:MCO) that provides financial services, including 
credit ratings, research, and risk analysis.
    The investment base reported by each District for 2002, and 
reviewed by the independent accountant, was incorporated into the 
independent accountant's report for each District without adjustment. 
These amounts were used for the projection of return on investment and 
in the calculation of this rate.

Inflation Rate

    Issue: One comment stated the inflation rate for the full-rate 
adjustment should be increased to five or six percent instead of the 
two percent found in the interim rule.
    Response: Appendix A to 46 CFR part 404, Step 1.C., ``Adjustment 
for Inflation or Deflation,'' requires an inflation adjustment for 
which we used the preceding year's change in the U.S. Department of 
Labor, Bureau of Labor Statistics, ``Midwest Economy--Consumer 
Prices.'' This is a separate adjustment to expenses and is in addition 
to inflation adjustments to the union contract. The ``Midwest Economy--
Consumer Prices'' index of the North Central Region has been 
traditionally used as part of the ratemaking methodology and it most 
accurately reflects economic changes over time in the Great Lakes 
region. When, as here, several years elapse between rate adjustments, 
the inflation rate will be compounded, that is, the adjustments become 
cumulative. In this ratemaking, we are using an inflation adjustment of 
1.9 percent for each of the years 2003 and 2004 to properly account for 
inflation from the date of the last full ratemaking in 2001.

401(k) Plans

    Issue: Three comments discussed whether 2001 contributions to 
employee 401(k) plans were calculated correctly and how much an 
employer is allowed to contribute to those 401(k) plans. Of those, one 
comment said employer contributions to those 401(k) plans had been 
improperly calculated--that it should be based on a first mate's daily 
pay. Another comment stated that the Coast Guard had correctly 
calculated the employer portion by using a first mate's total pay, 
instead of just their daily pay. Another comment said that all three 
Districts should be allowed to add expenses for contributions, not just 
two of them (Districts Two and Three).
    Response: As of August 1, 2001, the AMO union contracts required 
employers to match employee contributions to a 401(k) plan in an amount 
equal to 42 percent of the employee contribution up to 4.2 percent of 
the employee's compensation. Effective August 1, 2002, the matching 
amount was increased to 50 percent not to exceed 5 percent of employee 
compensation.
    In direct response to the three comments, the Coast Guard, 
consistent with prior years' calculations, has used the AMO union 
contracts for the purposes of computing employer contributions to 
401(k) plans, we have consistently used the AMO union contracts' 
definition of ``compensation'' of a contributing employee--``the 
pilots' wages for time worked, not including benefits.'' We have 
included in total pilot compensation an amount for the first four 
months equal to 42 percent of the pilot's contribution up to 4.2 
percent of a contributing pilot's base wages and for the next five 
months, a 50 percent employer match up to 5 percent of a contributing 
pilot's base wages. This amount is included as a benefit in total pilot 
compensation.

[[Page 12088]]

Number of Pilots Needed

    Issue: A number of comments criticized the Coast Guard's 
determination of the number of pilots needed to provide pilotage 
services for the projected volume of vessel traffic. One comment said 
that the result of not rounding up the number of pilots needed in each 
area separately will be to under-staff each area and delay the ships.
    Response: In the interim rule, we divided the individual bridge-
hour target per pilot (1,000 or 1,800 hours required by 46 CFR part 
404, Appendix A, Step 2B (1) and (2)) into projected bridge hours in 
each area to determine the ``number of pilots needed'' in each area. 
That number is almost never a whole number in any calculation. In the 
partial-rate calculation, we did not round up to the ``next whole 
number'' because to do so would inaccurately inflate the resulting 
target pilot compensation and revenues needed. This number is merely 
one step in the calculation of the rate. It should not be confused with 
the actual number of pilots employed in each area to provide necessary 
pilotage services.
    In this full-rate calculation, again for precision and accuracy in 
computation, we calculated the ``number of pilots needed'' in each area 
to the nearest tenth. We did not round up or down to the nearest whole 
number. As we stated in the interim rule, it is up to each Association 
to determine how many pilots to employ to meet the actual shipping 
demand.

Delay and Detention

    Issue: A number of comments stated that the Coast Guard needs to 
include detention, delay, and travel time in the calculation of bridge 
hours.
    One comment stated American Great Lakes pilots have always counted 
delay, detention, movages, and cancellations (DDMC) when calculating 
bridge hours. Canadian pilots count DDMC as bridge time. Pilots 
throughout the United States count DDMC as bridge time. Delay and 
detention figures have always been included in past rate adjustments.
    Other comments said the Coast Guard has excluded delay and 
detention from projected bridge hours. One comment stated ``prior to 
the 2000 rate, detention and delay was always included in projected 
bridge hours, and the exclusion of detention and delay from projected 
bridge hours was strictly the erroneous interpretation of the previous 
Director of Great Lakes Pilotage.''
    Response: The Coast Guard disagrees that it has improperly 
calculated bridge hours. In this ratemaking, bridge hours are 
determined based upon the same definition that has appeared in the 
regulations since 1995, when the ratemaking methodology was published. 
60 FR 18366, April 11, 1995. That definition appears at Appendix A to 
46 CFR part 404 in (Step 2.B.(1)), ``Determination of Number of Pilots 
Needed,'' and states that ``Bridge hours are the number of hours a 
pilot is aboard a vessel providing basic pilotage service.'' The Coast 
Guard continues to interpret this language to mean actually providing 
pilotage service and not to include delay, detention, and travel time. 
The Coast Guard's interpretation of bridge hours will be reviewed in 
light of the ``Bridge Hour Study'' conducted by RADM Riker USCG Ret. 
That review may result in a separate rulemaking to revise the 
ratemaking analyses and methodology.

Target Pilot Compensation

The 54-Day Multiplier
    Issue: There were numerous comments to the interim rule that 
opposed the use of 44 days as the multiplier when calculating target 
pilot compensation. One comment expressed concern that the use of the 
44-day multiplier in the interim rule was a proposed change that would 
be carried forward into future rulemaking. Another comment objected to 
the multiplier being reduced from 54 to 44 days on the basis of pilots 
having scheduled time off during the season, with no corresponding 
decrease in bridge hours during the navigation season.
    Still another comment stated the Coast Guard must re-think its 
calculation of target compensation and reinstate the 54-day basis for 
target compensation to reflect the fact that revenue generation is 
based on the average annual compensation of first mates and masters of 
lake ships. One comment stated it was a ``profound'' error to change 
the multiplier from 54 days to 44 days because it reduced the 
calculation of target pilot compensation by 15.27 percent in 
undesignated waters and 16.16 percent in designated waters with no 
corresponding reduction in the work standard (1,800 and 1,000 hours, 
respectively).
    Response: In the 2003 interim rule, the Coast Guard used a 44-day 
multiplier to calculate the partial-rate adjustment. The use of the 44-
day multiplier was a one-time use of that number solely for the 
purposes of the partial-rate calculation. The interim rule did not 
propose a permanent change to the multiplier. The reason we used the 44 
days was because of comments on the NPRM suggesting a reduction in the 
multiplier from 54 to 44 or 45 days, to take into consideration 
vacation time actually taken by the pilots.
    As stated in the interim rule, the Coast Guard used 44 days as the 
multiplier while it reviewed the multiplier issue and made a final 
determination on the appropriate multiplier to use in the full-rate 
calculation. The use of 44 days in the interim rule was not a change to 
the methodology, but rather the highest number we were certain of 
before we completed the review of this issue. We have completed that 
review. We have concluded that 54 days is the correct multiplier, and 
have used that number in this full-rate calculation.
    This is consistent with the current AMO union contract under which 
a first mate who works a full month will receive wages, exclusive of 
benefits, equivalent to 54 times the daily wage rate.
    We have historically used the 54-day multiplier used by AMO in 
their contracts. Under the AMO contracts, this 54-day multiplier is 
broken down as follows:

Average Working Days per Month..................................    30.5
Vacation Days per month.........................................    15.0
Weekend Days per month..........................................     4.0
Holidays per month..............................................     1.5
Bonus per month.................................................     3.0
                                                                 -------
                                                                    54.0
  Basic Calculation.............................................      *
 
*54.0 x Daily Rate = Monthly Wage Rate.


    The purpose of the Coast Guard's ratemaking methodology is to 
ensure that a pilot working 1,800 hours on undesignated waters receives 
the average annual compensation for first mates on U.S. Great Lakes 
vessels based on the most current AMO union contracts and that a pilot 
working 1,000 hours on designated waters receives the average annual 
compensation of masters on U.S. Great Lakes vessels. We believe that 
use of the 54-day multiplier to calculate wages in conjunction with our 
historic methodology of calculating benefits best meets this purpose.

Discussion of the Rule

Ratemaking Process and Methodology

    This section is a description of the analyses performed, and the 
seven-step methodology followed, in the development of the full-rate 
adjustment. The first part summarizes the full-rate changes in this 
interim rule. The second part describes the ratemaking process and 
explains the formulas used in the methodology to show how the full-rate 
adjustment was actually calculated.
    The authority to establish pilotage rates on the Great Lakes 
derives from 46

[[Page 12089]]

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 require that pilotage rates be reviewed 
annually in accordance with procedures detailed in Appendix C to 46 CFR 
part 404. The Coast Guard reviews Association financial reports 
annually and, at a minimum, the Coast Guard completes a thorough review 
of pilot association expenses, and establishes pilotage rates in 
accordance with the procedures detailed in Sec.  404.10 and Appendix A 
of this part at least once every five years. If the annual review shows 
that pilotage rates are within a reasonable range of their target, no 
adjustment to the rates will be initiated. However, if the annual 
review indicates that an adjustment is necessary, or if it is the fifth 
anniversary of the last full ratemaking, then the Coast Guard will 
establish new pilotage rates using Sec.  404.10 and Appendix A of this 
part.
    The Coast Guard compares projected rates of return on investment to 
target rates of return on investment for each pilotage area to 
determine whether an adjustment to the pilotage rates is necessary. If 
the projected rates of return on investment are lower than the target 
rates of return on investment, the revenues generated by the current 
pilotage rates would be insufficient for the pilots to earn target 
pilot compensation. As the following analysis shows, the difference 
between the projected rates of return on investment and the target 
rates of return on investment, makes an increase appropriate in this 
case. Therefore, the Coast Guard used the methodology contained in 
Appendix A to develop a new rate. The purpose of the ratemaking 
analyses and methodology contained in Appendix A is to arrive at a rate 
multiplier that will make the projected rates of return on investment 
equal to the target rates of return on investment in each pilotage 
Area. Once this is accomplished, the Coast Guard calculates a rate 
multiplier, that when applied to the current rates will increase or 
decrease those rates, generating sufficient revenue to permit the 
pilots to earn target compensation.
    To arrive at the rate multiplier, the Coast Guard first projects 
target pilot compensation, revenue, and reasonable and necessary pilot 
expenses. In a separate calculation, the Coast Guard then calculates 
the investment base for each District to determine the target rate of 
return on investment. Taking into consideration revenues, expenses, and 
returns on investment, the Coast Guard then calculates the projected 
rates of return on investment. The Coast Guard then compares the 
projected rates of return on investment to the target rates of return 
on investment. If there is a difference between the projected rates of 
return on investment and target rates of return on investment, a rate 
adjustment may be appropriate. Finally, to arrive at the appropriate 
rate multiplier, the revenue needed is divided into projected revenue. 
A rate multiplier is calculated individually for each Area. The new 
rates are arrived at by multiplying the rate in each Area by the 
applicable rate multiplier.

Part 1: 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 full-
rate adjustment results in an average increase of 20 percent across all 
Districts over the partial-rate adjustment.

                         2004 Area Rate Changes
                              [In percent]
------------------------------------------------------------------------
                                                          Then the rate
                                                          represents a
          If pilotage service is required in:            change over the
                                                        current rate of:
------------------------------------------------------------------------
Area 1 (Designated waters)............................                20
Area 2 (Undesignated waters)..........................                16
Area 4 (Undesignated waters)..........................                26
Area 5 (Designated waters)............................                29
Area 6 (Undesignated waters)..........................                16
Area 7 (Designated waters)............................                16
Area 8 (Undesignated waters)..........................                13
------------------------------------------------------------------------

    Rates for ``Cancellation, delay or interruption in rendering 
services (Sec.  401.420)'' 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 (Sec.  401.428)'' are increased by 20 
percent. These charges are the same in every Area.

Part 2: Calculating the Rate Multiplier

    The ratemaking analyses and methodology contained in Appendix A to 
part 404 is comprised of seven steps. These 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 Rate of Return on Investment;
    (6) Adjustment Determination (Revenue Needed); and
    (7) Adjustment of Pilotage Rates.
    The data used to calculate each of the seven steps comes from the 
2002 independent accountant's reports for each District. The Coast 
Guard also used the most recent union contracts between the AMO and 
vessel owners and operators on the Great Lakes to determine target 
pilot compensation. All documents and records used in this full-rate 
calculation have been placed in the public docket for this rulemaking 
and are available for review at the addresses under ADDRESSES.
    The Coast Guard uses the Appendix A analyses and methodology to 
develop a rate multiplier to adjust pilotage rates in each pilotage 
Area. The following is an explanation of each step of the analyses and 
methodology and how the rate multiplier is calculated.
    Some values may not total due to format rounding for presentation 
in charts and explanations in this section. The rounding does not 
effect the integrity or truncate the real value of all calculations in 
the ratemaking methodology described below.

Step 1: Projection of Operating Expenses

    The Coast Guard projects the amount of vessel traffic annually. 
Based on that projection, the Coast Guard forecasts the amount of fair 
and reasonable operating expenses that pilotage rates should recover.
    To project operating expenses, the Coast Guard obtains financial 
data from each Association. Included in the financial data is a 
detailed listing of all the Association's operating expenses. Based on 
recommendations of an independent accountant, the Coast Guard 
determines the expenses to be used in projecting future expenses. Once 
these expenses are identified and totaled, the Coast Guard makes an 
adjustment to the total for inflation or deflation. The Coast Guard 
then uses the projected annual vessel traffic to project the amount of 
expenses that the rates should recover.
    The steps that follow explain how this is performed:
     Submission of financial information from each Association;
     Determination of recognizable expenses;
     Adjustment for inflation or deflation; and
     Final projection of operating expenses.

[[Page 12090]]

Submission of Financial Information

    (1) Each district Association must provide the Coast Guard with 
detailed annual financial statements in accordance with 46 CFR 404.300.
    This information is reviewed by a Coast Guard-contracted 
independent accounting firm. With this information, the independent 
accounting firm visits the offices of each Association and performs a 
detailed review of all accounts over $75 to confirm the accuracy of the 
financial statements provided by each Association. Using the financial 
statements from the Associations and the information obtained during 
the independent accounting firm's review of each Association's records 
and accounts, the independent accountant compiles this information into 
financial reports for each District.
    (2) This interim rule uses the 2002 independent accountant?s 
reports for each District for the period ending December 31, 2002. 
These reports may be found in the docket.

Determination of Recognized 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.  404.5. Each Association is 
responsible for making available to the Coast Guard documentation to 
support the expense figures.
    (2) Expense items which the Coast Guard determines to be necessary 
and reasonable for the provision of pilotage service are recognized for 
ratemaking purposes.
    (3) The following is a summary of the adjustments to expense items 
adopted from the 2002 independent accountant?s reports ending on 
December 31, 2002.

----------------------------------------------------------------------------------------------------------------
                                                                 District one     District two    District three
----------------------------------------------------------------------------------------------------------------
                                         SUMMARY OF EXPENSE ADJUSTMENTS
----------------------------------------------------------------------------------------------------------------
1. Reported Expenses for 2002................................        $658,913       $1,295,595       $1,242,847
2. Expense Adjustments
    Social Security and Medicare Expenses....................          69,025   ...............         136,390
    Reimbursed Expenses:
        Dispatch Service/Parking Fees........................  ...............         (76,671)  ...............
        Pilot Boat Revenue...................................  ...............        (290,508)  ...............
        Canadian Pilot Revenue...............................  ...............  ...............        (161,680)
        Uncollected Pilotage Fees/Bad Debt Expense...........  ...............  ...............          14,190
    Not Recognized Expenses:
        Lobbying Expenses....................................         (21,000)  ...............          (9,000)
        Promotional Expenses.................................  ...............            (882)  ...............
        Promotional/Charitable Expenses......................  ...............  ...............            (471)
    Reclassified Expenses:
    As additional pilot compensation:
        Training Expenses (Paid to members for the training            (2,500)  ...............  ...............
         of unregistered pilots).............................
        American Pilots Association (APA) dues...............         (13,970)         (15,840)  ...............
        Contract Pilotage Fees as operating expense..........        (118,919)  ...............  ...............
        Meeting attendance...................................  ...............          (9,300)         (26,210)
        APA/Masters, Mates, & Pilots dues....................  ...............  ...............          (6,600)
    As operating expenses:
        Insurance Fees.......................................          23,578   ...............  ...............
        Unreimbursed Travel Costs............................          12,076   ...............  ...............
        Pilot travel expense (Reclassified as operating                10,500   ...............         146,907
         expense from pilots' compensation)..................
    Undocumented Expenses:
        Subsistence (Daily meals/incidental expense per diem)  ...............         (17,180)  ...............
                                                              ------------------
3. Total Adjustments.........................................         (41,210)        (410,381)          93,526
                                                              ------------------
        Total Adjusted Expenses for 2002.....................         617,703          885,214        1,336,373
                                                              ------------------
                                   SUMMARY OF PROJECTION OF OPERATING EXPENSES
----------------------------------------------------------------------------------------------------------------
1. Reported Expenses for 2002................................         658,913        1,295,595        1,242,847
    Total Adjustments........................................         (41,210)        (410,381)          93,526
                                                              ------------------
        Total Adjusted Expenses for 2002.....................         617,703          885,214        1,336,373
2. Inflation Adjustments
    (2003)--1.9%.............................................          11,736           16,819           25,391
    (2004)--1.9%.............................................          11,959           17,139           25,874
        3. 2002 Adjustments for Foreseeable Circumstances....               0                0                0
Expenses projections of $8,086 are for travel and FICA                  8,086   ...............  ...............
 expenses associated with additional bridge hours projected
 for Area 2..................................................
                                                              ------------------
4. Total Expenses for 2002 Pilotage. Expenses Projected for           649,485          919,172        1,387,638
 2004........................................................
----------------------------------------------------------------------------------------------------------------

    Each expense adjustment adopted by the Coast Guard on the 
independent accountant's recommendation is detailed and explained 
below, and in the notes to the 2002 independent accountant's reports 
for each District.
    Adjustments made to reported expenses are divided into five 
categories:

[[Page 12091]]

    (1) Social Security and Medicare Expenses;
    (2) Reimbursed Expenses;
    (3) Not Recognized Expenses;
    (4) Reclassified Expenses; and
    (5) Undocumented Expenses.

Social Security and Medicare Expenses

    The Coast Guard must ensure that each Association's expenses are 
analyzed fairly and consistently with the other Associations. The 
Associations of Districts One and Three are organized as partnerships, 
while the Association of District Two is organized as a corporation. 
Because of this difference, the District Two Association pays the 
employer's share of Social Security and Medicare taxes out of corporate 
funds. In the Associations of Districts One and Three, the individual 
pilots pay these expenses because each pilot is self-employed. The 
Coast Guard adopted the recommendation of the independent accountant 
and amounts for these expenses have been added to District One and 
Three's expense bases. In District One, $69,025 in Social Security and 
Medicare taxes have been added to the expense base. In District Three, 
$136,390 in Social Security and Medicare taxes have been added to the 
expense base.

Reimbursed Expenses

    The independent accountant found that a number of expenses have 
been erroneously reimbursed to the Associations and recommended that 
these expenses should not be included in each District's expense base. 
Examples are reimbursement from one pilots' Association to another for 
shared pilot boats and dispatch and reimbursement from Canadian pilots 
for shared administrative expenses, dispatch, and pilot boat services.
    The Coast Guard adopted the independent accountant's recommendation 
to deduct these reimbursed expenses from the Districts' expense bases. 
These expenses are paid for by other Districts or parties, not by the 
Associations claiming them, and, as such, should not be included in the 
expense base of the District being reimbursed. In District Two, we 
deducted a total of $367,179 from the expense base--$290,508 from pilot 
boat revenue, of which $129,162 was for pilot boat surcharges from 
shippers, and $76,671 for dispatch service and parking fees. Likewise, 
in District Three, we deducted $161,680 in reimbursed expenses for 
pilotage and in dispatch services from the expense base. There were no 
reimbursed expenses in the District One expense base.
    In District Three, we adjusted 2002 operating expenses because the 
pilot Association was unable to collect pilotage fees from one ship in 
2001. The Association included this $14,190 expense under the title 
``provision for doubtful accounts'' in the Association's 2001 financial 
statements. These funds were later recovered in 2002 and included as a 
reduction in operating expenses on the Association's financial 
statements. In the independent accountant's 2001 report on the 
Association, this expense was excluded from the ratemaking expense 
base. This 2002 recovery has been similarly excluded as an adjustment 
to the expense base. Generally accepted accounting principles would 
classify this recovery as ``other income'' not as a reduction of 
expenses.

Not Recognized Expenses

    Lobbying expenses and certain miscellaneous expenses such as 
advertising, business promotion, and donations were identified as 
unnecessary for the provision of pilotage services.
    The Coast Guard adopted the independent accountant's recommendation 
to deduct $21,000 in lobbying fees from District One's expense base and 
$9,000 from District Three's expense base. District Two reported no 
lobbying expenses in 2002. Lobbying expenses are specifically excluded 
by regulation--46 CFR 404.5(a)(8)(ii). An expense item for business 
promotion in District Two of $882 was also deducted. Lastly, we 
deducted $471 for charitable donations from District Three's expense 
base. The Coast Guard adopted the independent accountant's 
recommendation to deduct these expenses because none were necessary for 
the provision of pilotage services.

Reclassified Expenses

    The independent accountant recommended deductions of $13,970 (dues 
payments), $2,500 (training expenses) and $118,919 (contract pilotage 
service) from District One; $9,300 (meeting expense) and $15,840 
(association dues) from District Two; and $26,210 (dues and 
subscriptions) and $6,600 (union dues) from District Three because 
these payments were erroneously classified as expenses. These expenses 
were reclassified as pilot compensation for ratemaking purposes.
    The $9,300 paid to pilots in District Two for attending yearly 
meetings was in addition to those payments pilots received for travel 
and per diem. Section 404.5 states that in determining reasonableness, 
such an expense item is measured against one of three criteria: (1) 
Comparable or similar expenses paid by others in the maritime industry, 
(2) comparable or similar expenses paid by other industries, and (3) 
U.S. Internal Revenue Service Guidelines. 46 CFR 404.5(a)(2). In this 
case, the appropriate criteria are provided by U.S. Internal Revenue 
Service guidelines. As set out in IRS Regulation 1.62-2(c)(5), travel 
costs that are not made under an ``accountable plan,'' one in which 
regular reporting of expenses by employees is required, are fully 
taxable to the employee and subject to Social Security and income tax 
withholding. Therefore, the Coast Guard reclassified these payments as 
pilot compensation, not expense reimbursements.
    The remaining expenses, which are detailed below, are subject to 46 
CFR 404.5(a)(6) which states that medical, pension, and other benefits 
paid to pilots, or for the benefit of pilots by the Association, are 
treated as pilot compensation.
    District One paid $2,500 to registered pilots to train temporarily 
registered pilots on Lake Ontario and $118,919 to an independent 
registered pilot for the provision of pilotage services.
    Deductions were also made for union dues in District One of 
$13,970, Association dues of $15,840 in District Two, and subscriptions 
and union dues of $6,600 and $26,210 in District Three. No provision 
for the payment of union dues, by employers, is provided for in the 
2003 AMO union contract.
    The independent accountant made several recommendations to 
reclassify certain sums of money as expenses for inclusion in the 
expense bases of the Associations in Districts One and Three. In 
District One, the independent accountant recommended that $23,578 paid 
by the Association for insurance to cover pilotage operations be 
reclassified as an expense rather than a member's distribution, as was 
done by the Association, because the expense is necessary and 
reasonable for the provision of pilotage services and AMO members would 
not be required to pay this expense.
    In addition, District One reported pilot travel expenses in the 
amount of $10,500 under pilots' compensation rather than as an 
operating expense.
    Additional travel costs of $12,076 incurred by river pilots, but 
not reimbursed by the St. Lawrence Seaway Pilots Association, were 
examined by the independent accountant. These unreimbursed expenses 
were supported by an adequate contemporaneous log and reported on a per 
trip basis. Any amount over $75 was documented

[[Page 12092]]

according to existing Internal Revenue Code regulations for the 
substantiation of travel expenses. The Coast Guard adopted the 
independent accountant's recommendation that those amounts be 
reclassified as expenses.
    In District Three, the Association reported $146,907 in pilot 
travel expenses under pilot compensation rather than as an operating 
expense. This amount has been reclassified as an operating expense. The 
pilots report their per diem expenses to the Association but do not get 
reimbursed for them as reported. Instead, the Association uses a 
schedule based on 200 travel days per pilot (per 187 days worked) and 
provides reimbursement in accordance with this schedule. Temporarily 
registered pilots are paid a per diem allowance and all pilots are 
reimbursed for actual hotel and temporary lodging expenses. No 
unallowable administrative travel costs were identified during the 
review.

Undocumented Expenses

    The independent accountant's examination of District Two's 
financial statements noted payments of a $38 daily meals and incidental 
expense per diem based on days available, generally about 265 days per 
pilot. These per diem payments totaled $115,160. The Federal Travel 
Regulations (41 CFR part 301-11) do not contemplate a payment based on 
days available for travel. The IRS procedure in Rev. Proc. 2001.47 
(2001) requires substantiation as to time, place, and purpose for 
expenses paid.
    Internal Revenue Service regulations currently allow for 
``reasonable business practice'' in reimbursement of per diem costs. 
Given that pilots are often at remote sites waiting for ships, 
allowable per diem expenses are based on approximately two days per 
diem for each passage or 200 days travel per pilot per 100 days worked. 
Recalculating the per diem expense shows that the allowable amount to 
be expensed is $97,980. The Coast Guard adopted the independent 
accountant's recommendation and the balance of $17,180 was reclassified 
as pilot compensation.
Foreseeable Circumstances
    Finally, an additional expense projection of $8,086 was made for 
pilot travel and Social Security expenses and benefits associated with 
the addition of 766 additional bridge hours for pilots to cover the 50 
percent of vessel traffic in Area 2 required under the Memorandum of 
Arrangements with Canada.
Adjustment for Inflation
    In making projections of future expenses, expenses that are subject 
to inflationary or deflationary pressures are adjusted. Annual cost 
inflation or deflation will be projected to the succeeding navigation 
season, reflecting the increase or decrease in costs throughout the 
year. Upon the recommendation of the independent accountant, the Coast 
Guard adopted the adjustments for inflation for the years 2003 and 2004 
based on the U.S. Department of Labor, Bureau of Labor Statistics, 
``Midwest Economy--Consumer Price'' using the years 2002 to 2003 annual 
average in the amount of 1.9 percent per year.
Projection of Operating Expenses
    Once all adjustments are made to the recognized operating expenses, 
the Coast Guard projects those expenses for each pilotage area. For the 
remainder of the 2004 and for the 2005 navigation seasons, the Coast 
Guard projects that operating expenses will remain the same as the 2002 
navigation season. Operating expenses over the last several years have 
remained steady across all three Districts. The Coast Guard believes 
that there are no foreseeable circumstances that will cause the 
projection for the remainder of the 2004 and for the 2005 seasons to be 
so different from the 2002 navigation season to require an adjustment. 
General and administrative expenses are apportioned to each Area 
according to the number of pilots needed in that Area. For the 
remainder of the 2004 and for the 2005 navigation seasons, the 
projection of operating expenses are:

----------------------------------------------------------------------------------------------------------------
                                               Area 1 St.        Area 2 Lake     Total district
               District one                  Lawrence River        Ontario             one
------------------------------------------------------------------------------------------------
Projection of operating expenses..........          $300,682          $348,803          $649,485
----------------------------------------------------------------------------------------------------------------


 
                                                              Area 5 Southeast
               District two                 Area 4 Lake Erie    Shoal to Port    Total district
                                                                  Huron, MI            two
------------------------------------------------------------------------------------------------
Projection of operating expenses..........          $419,205          $499,967          $919,172
----------------------------------------------------------------------------------------------------------------


 
                                            Area 6 Lakes
             District three                   Huron and        Area 7 St.        Area 8 Lake     Total district
                                              Michigan        Mary's River        Superior            three
----------------------------------------------------------------------------------------------------------------
Projection of operating expenses........          $693,924          $269,645          $424,070        $1,387,639
----------------------------------------------------------------------------------------------------------------

Step 2: Projection of Target Pilot Compensation

    (1) The second step in the ratemaking analyses and methodology is 
to project the amount of target pilot compensation that pilotage rates 
should provide in each Area. This step consists of the following:
    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 is detailed below.
Determination of Target Pilot 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 
AMO union contracts, 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. The Coast Guard has consistently 
calculated compensation for pilots on designated waters by multiplying 
first mates' salary portion of their compensation by 150 percent and 
adding benefits as required by 46 CFR part 404, Appendix A, Step 
2.A(2).
    (3) First mates' pay is calculated under the AMO union contracts on 
a daily wage rate basis and is then multiplied by the average days per

[[Page 12093]]

month, plus certain additional entitlements, yielding a monthly 
multiplier, as follows:


a. Average Working Days per Month...............................    30.5
b. Vacation Days per month......................................    15.0
c. Weekend Days per month.......................................     4.0
d. Holidays per month...........................................     1.5
e. Bonus per month..............................................     3.0
                                                                 -------
  Monthly Multiplier............................................    54.0
 


    The monthly multiplier (54 days) is then multiplied by the daily 
rate for first mates ($220.35) under the 2003 AMO union contract, 
yielding the total monthly pay rate of $11,898.90, and a total annual 
pay rate, without benefits, of $107,090.10.
    The Coast Guard has then consistently multiplied the monthly pay 
rate by nine months, the approximate length of the Great Lakes shipping 
season. For a first mate, this would be equivalent to working every day 
of those nine months. Several comments on this rulemaking stated that 
this is inappropriate because pilots do not work every day of the 
shipping season and this led to the suggestions to reduce the 54-day 
monthly multiplier.
    After review of these comments, the Coast Guard decided to continue 
to use the 54-day monthly multiplier and the nine-month shipping 
season. The Coast Guard's goal in determining target pilot compensation 
is to approximate the compensation of first mates and masters on U.S. 
Great Lakes vessels. Over the course of the entire shipping season, 
however, pilots, first mates, and masters generally do not work the 
same number of days, making a comparison of actual or average days 
worked inappropriate since the goal is to achieve comparable annual 
compensation. Indeed, each first mate and master may work different 
numbers of days resulting in different overall actual compensation. 
Similarly, pilots working primarily in designated waters have to work 
fewer hours than pilots working primarily in undesignated waters for 
each to work a sufficient number of bridge hours to achieve their 
target compensation. Consequently, comparing days worked is not a 
useful measure to ensure that pilots receive annual compensation 
(wages) comparable to the annual compensation (wages) of a first mate 
or master working on U.S. Great Lakes vessels.
    First mates and masters do not generally work every day of the 
shipping season. As a result, calculating target compensation by 
multiplying both the monthly wages and the monthly benefits by nine 
months--the equivalent compensation of a first mate or master working 
every day of the shipping season--would result in a target pilot 
compensation exceeding the annual compensation of first mates and 
masters on U.S. Great Lakes vessels. This would also be inappropriate.
    In each of its prior ratemakings the Coast Guard has calculated 
benefits based on 180 days/6 months worked per navigation season and 
has calculated wages based on nine months worked per navigation season. 
This results in a blended total compensation figure between target 
compensation that would be too high (assuming pilots worked every day 
of the navigation season) and target compensation that would be too low 
(assuming pilots only worked 180 days in a navigation season). While 
comments suggested alternative methods of calculating pilot 
compensation, none of the comments provided sufficient supporting data 
to demonstrate that those alternatives better approximated the annual 
compensation of first mates and masters serving on U.S. Great Lakes 
vessels. The Coast Guard will therefore maintain its current method of 
calculating target compensation.
    (4) The tables below summarize how total target pilot compensation 
is determined for undesignated and designated waters:

                             Table 1.--Wages
------------------------------------------------------------------------
                                          (First mate)       (Master)
                                           Pilots on        Pilots on
           Monthly component              undesignated      designated
                                             waters           waters
------------------------------------------------------------------------
$220.35 (Daily Rate) x 54 (Days)......          $11,899              N/A
Monthly Total x 9 Months = Total Wages          107,090              N/A
Wages: $220.35 (Daily Rate) x 54 x 1.5              N/A          $17,848
Monthly Total x 9 Months = Total Wages              N/A          160,635
------------------------------------------------------------------------


                           Table 2.--Benefits
------------------------------------------------------------------------
                                          (First mate)       (Master)
                                           Pilots on        Pilots on
           Monthly component              undesignated      designated
                                             waters           waters
------------------------------------------------------------------------
Employer Contribution--401(k) Plan....          $552.64          $828.96
Clerical..............................           330.53           330.53
Health................................         2,064.79         2,064.79
Pension...............................         1,283.10         1,283.10
Monthly Total Benefits................         4,231.05         4,507.37
Monthly Total Benefits x 6............           25,386           27,044
Total Wages Plus Benefits.............          132,476          187,679
------------------------------------------------------------------------

    Effective August 1, 2001, AMO union contracts provided ``that 
employers will make matching contributions for each participating 
401(k) plan employee in an amount equal to 42 percent of the employee's 
contribution, to a maximum to 4.2 percent of a participating employee's 
compensation.'' Effective August 1, 2002, the matching benefit 
increased to 50 percent for each participating 401(k) employee up to a 
maximum of 5 percent of a participating employee's compensation. For 
purposes of this benefit, the AMO union contracts interpret ``employee 
compensation'' to mean base wages. District Two has a pension plan, 
while District Three has a 401(k) plan. District One does not provide 
either a 401(k) or pension plan for its members. Therefore, to conform 
to the AMO union contracts in

[[Page 12094]]

accounting for employer contributions of 42 percent during the first 
four months of the season and 50 percent for the last five months of 
the navigation season, pilot compensation for Districts Two and Three 
are increased. The increase in undesignated waters is $3,315.84 and for 
designated waters is $4,973.64 per pilot. These increases are 4.2 
percent and 5 percent of compensation, respectively.
    District One does not administer any form of 401(k) or retirement 
plan. As a consequence, in the NPRM, a decision was made not to permit 
the District One Association to benefit by obtaining the matching 
expense. At the recommendation of the independent accountant, the Coast 
Guard has determined that the District One Association pilots should 
receive the same employer matching benefits as Districts Two and Three.
    This decision is analogous to the Social Security and Medicare 
equalization performed earlier to equalize benefits between District 
Two and Districts One and Three respecting corporate payment of Social 
Security and Medicare benefits that are not paid by Districts One and 
Three. Accordingly, the compensation base of District One is adjusted 
to include an amount equivalent to an employer's contribution under the 
AMO 401(k) matching plan, which increases pilot compensation in 
undesignated waters by $3,315.84 and for designated waters by 
$4,973.64, per pilot.
    The calculation of 401(k) matching benefits for undesignated and 
designated waters appear in the tables below:

----------------------------------------------------------------------------------------------------------------
             Employer contributions
----------------------------------------------------------------------------------------------------------------
                                               UNDESIGNATED WATERS
----------------------------------------------------------------------------------------------------------------
42%............................................  $11,898.90 x .042 x 4 / 9 = $222.11
50%............................................  $11,898.90 x .050 x 5 / 9 = $330.53
                                                 $222.11 + 330.53 = $552.64
Pilot Compensation for 401(k)plan..............  $552.64 x 6 = $3,315.84
------------------------------------------------
                                                DESIGNATED WATERS
----------------------------------------------------------------------------------------------------------------
42%............................................  $17,848 x .042 x 4 / 9 = $333.16
50%............................................  $17,848 x .050 x 5 / 9 = $495.78
                                                 $333.16 + 495.78 = $828.94
Pilot Compensation for 401(k) plan.............  $828.94 x 6 = $4,973.64
----------------------------------------------------------------------------------------------------------------

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 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) The 1,000 hours in paragraph (1) and 1,800 hours in paragraph 
(2) are the target number of bridge hours a pilot needs to earn target 
pilot compensation.
    (4) The Coast Guard used the results in calculating target pilot 
compensation and paragraphs (1) through (3) in ``Determination of 
Number of Pilots Needed'' to calculate the proper number of pilots 
needed for each pilotage Area. Although we had originally included a 
projection for the fast-ferry between Rochester, NY, and Toronto, 
Canada, on Lake Ontario, the ferry is not operating. Therefore, this 
rule does not contain any adjustments for fast-ferry pilotage needs in 
Area 2. However, the Coast Guard made adjustments to the number of 
pilots needed for Area 2 to ensure sufficient pilots to provide 50 
percent of the pilotage service projected in that Area. The Memorandum 
of Arrangements Great Lakes Pilotage Between the Secretary of 
Transportation of the United States of America and the Minister of 
Transport of Canada (Dated January 18, 1977, Washington, DC, and 
January 18, 1977, Ottawa, Canada,) hereafter Memorandum of 
Arrangements, requires that we share traffic equally in Area 2 with the 
Canadian pilots requiring 766 additional bridge hours. In 2002, Area 2 
reported bridge hours totaling 5,951 or 44.3 percent of pilotage 
service provided by U.S. pilots. Because, the MOA with Canada requires 
that pilotage service for Area 2 be equally divided between the United 
States and Canada, we increased the percentage of pilotage service in 
our projection from 44.3 percent to 50 percent. By increasing pilot 
service hours from 44.3 percent to 50 percent, we increased the bridge 
hour levels from 5,951 to the projected 6,717. This change results in 
an increase of 766 hours.
    (5) Projected bridge hours are based on the vessel traffic that 
pilots are expected to serve. The Coast Guard projects, with the 
exception of Area 2 as discussed above, that bridge hours for the 
remainder of the 2004 and for the 2005 navigation season will be 
comparable to that of 2002. Dividing the projected annual number of 
bridge hours per area by the target number of bridge hours per pilot 
results in the number of pilots that will be needed in each Area to 
service vessel traffic.
    (6) The following table shows the calculation of the number of 
pilots needed in each Area for the remainder of the 2004 and for the 
2005 navigation season:

----------------------------------------------------------------------------------------------------------------
                                                                                 Divided by
                       Pilotage area                         Projected 2003      bridge-hour      Pilots needed
                                                              bridge hours         target              \1\
----------------------------------------------------------------------------------------------------------------
Area 1....................................................             5,010             1,000               5.0
Area 2....................................................             6,717             1,800               3.7
Area 4....................................................             8,139             1,800               4.5
Area 5....................................................             6,395             1,000               6.4
Area 6....................................................            18,000             1,800              10.0
Area 7....................................................             3,863             1,000               3.9

[[Page 12095]]

 
Area 8....................................................            11,390             1,800              6.3
----------------------------------------------------------------------------------------------------------------
\1\The results of calculation of pilots needed has been rounded to one place to the right of the decimal. For
  example, in Area 1, 5,010 projected hours divided by 1,000 target hours is actually 5.01 pilots needed.

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 each Area by the target pilot compensation for pilots working 
in that Area.
    (2) The results for each pilotage Area are set out below:

----------------------------------------------------------------------------------------------------------------
                                                               Area 1 St.        Area 2 Lake     Total district
                       District one                          Lawrence River        Ontario             one
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation...................          $940,274          $494,358        $1,434,632
----------------------------------------------------------------------------------------------------------------


 
                                                                              Area 5 Southeast
                       District two                         Area 4 Lake Erie    Shoal to Port    Total district
                                                                                  Huron, MI            two
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation...................          $599,014        $1,200,210        $1,799,224
----------------------------------------------------------------------------------------------------------------


 
                                            Area 6 Lakes
             District three                   Huron and        Area 7 St.        Area 8 Lake     Total district
                                              Michigan        Mary's River        Superior            three
----------------------------------------------------------------------------------------------------------------
Projection of target pilot compensation.        $1,324,764          $725,005          $838,281        $2,888,051
----------------------------------------------------------------------------------------------------------------

Step 3: Projection of Revenue

    (1) The third step in the ratemaking analyses and methodology is to 
project the revenue that would be received in each pilotage Area if 
existing rates were left unchanged. This calculation uses both the 
projection of vessel traffic for 2004 and for 2005 and current pilotage 
rates.
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 a review of 2001 and 2002 data. In this case, the Coast Guard 
projected that vessel traffic for the remainder of the 2004 and for the 
2005 navigation seasons would remain the same as traffic during 2002. 
Traffic will remain the same, but the percentage of traffic serviced by 
Area 2 will increase as previously discussed. This projected demand was 
multiplied by the rates contained in the 2004 partial-rate adjustment 
to arrive at projected revenue.
    (2) The results of the projection of revenue for each District are 
summarized below:

----------------------------------------------------------------------------------------------------------------
                                                               Area 1 St.      Area 2 \1\ Lake   Total district
                       District one                          Lawrence River        Ontario             one
----------------------------------------------------------------------------------------------------------------
Projection of revenue.....................................        $1,041,032          $735,224        $1,776,256
----------------------------------------------------------------------------------------------------------------


 
                                                                              Area 5 Southeast
                       District two                         Area 4 Lake Erie    Shoal to Port    Total district
                                                                                  Huron, MI            two
----------------------------------------------------------------------------------------------------------------
Projection of revenue.....................................          $824,888        $1,337,241        $2,162,129
----------------------------------------------------------------------------------------------------------------


 
                                            Area 6 Lakes
             District three                   Huron and        Area 7 St.        Area 8 Lake     Total district
                                              Michigan        Mary's River        Superior            three
----------------------------------------------------------------------------------------------------------------
Projection of Revenue...................        $1,760,947          $864,911        $1,131,740       $3,757,599
----------------------------------------------------------------------------------------------------------------
\1\This figure includes an adjustment for increased traffic due to servicing a larger percentage of ships to
  satisfy our obligations under the MOA with Canada.

Step 4: Calculation of Investment Base

    (1) The fourth step in the ratemaking analyses and 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.
    (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 equal to 
the recognized assets multiplied by the ratio of recognized sources of 
funds to total sources of funds. The investment base as calculated for 
each District is displayed below:

[[Page 12096]]



----------------------------------------------------------------------------------------------------------------
                                                               Area 1  St.      Area 2  Lake     Total district
                       District one                          Lawrence River        Ontario             one
----------------------------------------------------------------------------------------------------------------
Calculation of investment base............................          $142,622          $179,637          $322,259
----------------------------------------------------------------------------------------------------------------


 
                                                                                   Area 5
                                                              Area 4  Lake     Southeast Shoal   Total district
                       District two                               Erie         to Port Huron,          two
                                                                                     MI
----------------------------------------------------------------------------------------------------------------
Calculation of investment base............................          $358,974          $428,132          $787,106
----------------------------------------------------------------------------------------------------------------


 
                                            Area 6  Lakes
             District three                   Huron and        Area 7  St.      Area 8  Lake     Total district
                                              Michigan        Mary's River        Superior            three
----------------------------------------------------------------------------------------------------------------
Calculation of investment base..........          $445,915          $172,274          $272,507          $890,696
----------------------------------------------------------------------------------------------------------------

Step 5: Determination of Target Rate of Return on Investment

    (1) The fifth step in the ratemaking analyses and 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 is equal to 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 5.67 
percent. This figure is the preceding year's (2001's) average annual 
rate of return on new issues of high-grade corporate securities in 
Moody's AAA rating, average return.

Step 6: Adjustment Determination

Projected Rate of Return on Investment
    (1) The next step in the ratemaking analyses and methodology is to 
insert the results from steps 1, 2, 3, and 4 into a formula and to 
compare the results to step 5. This step considers revenues, expenses, 
and rates of return on investment, as set out below:

                        Adjustment Determination
                [Projected rate of return on investment]
------------------------------------------------------------------------
                                      Ratemaking projections for basic
               Line                               pilotage
------------------------------------------------------------------------
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 financial
                                    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 Rate of Return on
                                    Investment.
------------------------------------------------------------------------


                              District One--Projected Rate of Return on Investment
----------------------------------------------------------------------------------------------------------------
                                                                                                 Total district
                          Line                                 Area 1             Area 2              one
----------------------------------------------------------------------------------------------------------------
1......................................................        $1,041,032           $735,224         $1,776,256
2......................................................           300,682            348,803            649,485
3......................................................           940,274            494,358          1,434,632
4......................................................          (199,924)          (107,937)          (307,861)
5......................................................                 0                  0                  0
6......................................................          (199,924)          (107,937)          (307,861)
7......................................................                 0                  0                  0
8......................................................          (199,924)          (107,937)          (307,861)
9......................................................          (199,924)          (107,937)          (307,861)
10.....................................................           142,622            179,637            322,259
11.....................................................            (1.402)            (0.601)            (1.001)
----------------------------------------------------------------------------------------------------------------


                              District Two--Projected Rate of Return on Investment
----------------------------------------------------------------------------------------------------------------
                          Line                                 Area 4             Area 5        Total district 2
----------------------------------------------------------------------------------------------------------------
1......................................................          $824,888         $1,337,241         $2,162,129
2......................................................           419,205            499,967            919,172
3......................................................           599,014          1,200,210          1,797,224
4......................................................          (193,331)          (362,936)          (554,267)
5......................................................             9,028              9,028             18,056
6......................................................          (202,359)          (371,964)          (572,323)
7......................................................             4,282              4,282              8,564
8......................................................          (206,641)          (376,246)          (580,887)
9......................................................          (197,613)          (367,218)          (562,831)
10.....................................................           358,974            428,132            787,106

[[Page 12097]]

 
11.....................................................            (0.550)            (0.858)            (0.704)
----------------------------------------------------------------------------------------------------------------


                             District Three--Projected Rate of Return on Investment
----------------------------------------------------------------------------------------------------------------
                Line                        Area 6             Area 7             Area 8         Total district
----------------------------------------------------------------------------------------------------------------
1...................................        $1,760,947           $864,911         $1,131,740         $3,757,598
2...................................           693,924            269,645            424,070          1,387,639
3...................................         1,324,764            725,005            838,281          2,888,050
4...................................          (257,741)          (129,739)          (130,611)          (518,091)
5...................................             1,235              1,235              1,235              3,705
6...................................          (258,976)          (130,974)          (131,846)          (514,386)
7...................................                 0                  0                  0                  0
8...................................          (258,976)          (130,974)          (131,846)          (514,386)
9...................................          (257,741)          (129,739)          (130,611)          (510,681)
10..................................           445,915            172,274            272,507            891,696
11..................................            (0.578)            (0.753)            (0.479)            (0.603)
----------------------------------------------------------------------------------------------------------------

    (2) The Coast Guard compares projected rates of return on 
investment, from Step 6, to target rates of return on investment, from 
Step 5, to determine whether an adjustment to the pilotage rates is 
appropriate. If the projected rates of return on investment are 
different from the target rates of return on investment, the revenues 
that would be generated by the current pilotage rates will not equal 
the revenues needed to reach target pilot compensation.
    (3) The differences between the projected rates of return on 
investment and the target rates of return on investment in the table 
below demonstrate that a rate adjustment is appropriate.

     Table D.--Comparison of Projected Rate of Returns on Investment and Target Rate of Return on Investment
----------------------------------------------------------------------------------------------------------------
                                                                                                  Difference in
                                                            Projected return  Target return on      return on
                                                              on investment      investment        investment
----------------------------------------------------------------------------------------------------------------
District One..............................................           (1.001)             .0567           (0.945)
District Two..............................................           (0.704)             .0567           (0.647)
District Three............................................           (0.603)             .0567           (0.547)
----------------------------------------------------------------------------------------------------------------

    (4) The Coast Guard projects the revenues needed to make the 
projected rates of return on investment equal to the target rates of 
return on investment.
Revenue Needed Adjustment Determination
    The formula used to calculate the revenue needed adjustment 
determination is similar to the formula used in determining the 
projected rates of return on investment.

                 Revenue Needed Adjustment Determination
------------------------------------------------------------------------
                                      Ratemaking projections for basic
               Line                               pilotage
------------------------------------------------------------------------
1................................  + Revenue (Revenue Needed).
2................................  - Operating Expenses (from Step 1).
3................................  - Pilot Compensation (from Step 2).
4................................  = Operating Profit/(Loss).
5................................  - Interest Expense (from financial
                                    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...............................  = Revenue Needed Adjustment Rate.
------------------------------------------------------------------------

    To find the proper adjustment determination, projected revenue, as 
determined in Step 3, is adjusted in each Area until the formula used 
in determining the projected rates of return on investment yields 
projected rates of return on investment equal to the target rates of 
return on investment from Step 5. The following tables show the results 
of these calculations:

                                     District One--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                                                                                                 Total district
                          Line                                 Area 1             Area 2              one
----------------------------------------------------------------------------------------------------------------
1......................................................         $1,249,042           $853,346         $2,102,389
2......................................................            300,682            348,803            649,485
3......................................................            940,274            494,358          1,452,903
4......................................................              8,087             10,185             18,272
5......................................................                  0                  0                  0

[[Page 12098]]

 
6......................................................              8,087             10,185             18,272
7......................................................                  0                  0                  0
8......................................................              8,087             10,185             18,272
9......................................................              8,087             10,185             18,272
10.....................................................            142,622            179,637            322,259
11.....................................................              .0567              .0567              .0567
----------------------------------------------------------------------------------------------------------------


                                     District Two--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                          Line                                 Area 4             Area 5        Total district 2
----------------------------------------------------------------------------------------------------------------
1......................................................         $1,042,855         $1,728,734         $2,771,589
2......................................................            419,205            499,967            919,172
3......................................................            599,014          1,200,210          1,799,224
4......................................................             24,636             28,557             53,193
5......................................................              9,028              9,028             18,056
6......................................................             15,608             19,529             35,137
7......................................................              4,282              4,282              8,564
8......................................................             11,326             15,247             26,573
9......................................................             20,354             24,275             44,629
10.....................................................            358,974            428,132            787,106
11.....................................................              .0567              .0567              .0567
----------------------------------------------------------------------------------------------------------------


                                    District Three--Adjustment Determination
----------------------------------------------------------------------------------------------------------------
                Line                        Area 6             Area 7             Area 8         Total district
----------------------------------------------------------------------------------------------------------------
                                             $2,043,972         $1,004,418         $1,277,802         $4,326,192
2...................................            693,924            269,645            424,070          1,387,639
3...................................          1,324,764            725,005            838,281          2,888,050
4...................................             25,283              9,768             15,451             50,503
5...................................              1,235              1,235              1,235              3,705
6...................................             24,048              8,533             14,216             46,798
7...................................                  0                  0                  0                  0
8...................................             24,048              8,533             14,216             46,798
9...................................             25,283              9,768             15,451             50,503
10..................................            445,915            172,274            272,507            890,696
11..................................              .0567              .0567              .0567              .0567
----------------------------------------------------------------------------------------------------------------

Step 7: Adjustment of Pilotage Rates

    (1) The final step in the ratemaking analyses and methodology is to 
adjust pilotage rates if the calculations from Step 6 indicate that 
pilotage rates in a pilotage area should be adjusted, and if the Coast 
Guard determines that a rate adjustment is appropriate.
    (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
------------------------------------------------------------------------

    (3) 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..........................................................      $1,249,042     /$1,041,032            1.20
Area 2..........................................................         853,346        /735,224            1.16
                                                                 -----------------
    District Total..............................................       2,102,389      /1,776,256            1.18
----------------------------------------------------------------------------------------------------------------


                                       Table B District 2--Rate Multiplier
                             [Revenue Needed / Projected Revenue = Rate Multiplier]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Area 4..........................................................      $1,042,855       /$824,888            1.26
Area 5..........................................................       1,728,734      /1,337,241            1.29
                                                                 -----------------

[[Page 12099]]

 
    District Total..............................................       2,771,589      /2,162,129            1.28
----------------------------------------------------------------------------------------------------------------


                                       Table C District 3--Rate Multiplier
                             [Revenue Needed / Projected Revenue = Rate Multiplier]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Area 6..........................................................      $2,043,972     /$1,760,947            1.16
Area 7..........................................................       1,004,418        /864,911            1.16
Area 8..........................................................       1,277,802      /1,131,740            1.13
                                                                 -----------------
    District Total..............................................       4,326,192      /3,757,599            1.15
----------------------------------------------------------------------------------------------------------------


                                   Total Across All Districts--Rate Multiplier
                             [Revenue Needed / Projected Revenue = Rate Multiplier]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
District One Total..............................................      $2,102,389     /$1,776,256            1.18
District Two Total..............................................       2,771,589      /2,162,129            1.28
District Three Total............................................       4,326,192      /3,757,599            1.15
                                                                 -----------------
    All Districts...............................................       9,200,170      /7,695,983            1.20
----------------------------------------------------------------------------------------------------------------

    The seven-step calculation of the methodology is summarized in the 
tables below for each District.

                                                  District One
----------------------------------------------------------------------------------------------------------------
                                                                    Area 1 St.      Area 2 Lake   Total district
                                                                  Lawrence River      Ontario           one
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........................        $300,682        $348,803        $649,485
Step 2, Projection of target pilot compensation.................         940,274         494,358       1,434,632
Step 3, Projection of revenue...................................       1,041,032         735,224       1,776,256
Step 4, Calculation of investment base..........................         142,622         179,637         322,259
Step 5, Determination of target return on investment............           5.67%           5.67%           5.67%
                                                                           8,087          10,185          18,272
Step 6, Adjustment determination................................       1,249,042         853,346       2,102,389
Step 7, Adjustment of pilotage rates............................            1.20            1.16            1.18
----------------------------------------------------------------------------------------------------------------


                                                  District Two
----------------------------------------------------------------------------------------------------------------
                                                                                      Area 5
                                                                    Area 4 Lake      Southeast    Total district
                                                                       Erie        Shoal to Port        two
                                                                                     Huron, MI
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........................        $419,205        $499,967        $919,172
Step 2, Projection of target pilot compensation.................         599,014       1,200,210       1,799,224
Step 3, Projection of revenue...................................         824,888       1,337,241       2,162,129
Step 4, Calculation of investment base..........................         358,974         428,132         787,106
Step 5, Determination of target return on investment............           5.67%           5.67%           5.67%
                                                                          20,354          24,275          44,629
Step 6, Adjustment determination................................       1,042,855       1,728,734       2,771,589
Step 7, Adjustment of pilotage rates............................            1.26            1.29            1.28
----------------------------------------------------------------------------------------------------------------


                                                 District Three
----------------------------------------------------------------------------------------------------------------
                                                   Area 6 Lakes
                                                     Huron and      Area 7 St.      Area 8 Lake   Total district
                                                     Michigan      Mary's River      Superior          three
----------------------------------------------------------------------------------------------------------------
Step 1, Projection of operating expenses........        $693,924        $269,645        $424,070      $1,387,639
Step 2, Projection of target pilot compensation.       1,324,764         725,005         838,281       2,888,051
Step 3, Projection of revenue...................       1,760,947         864,911       1,131,740       3,757,598
Step 4, Calculation of investment base..........         445,915         172,274         272,507         890,696
Step 5, Determination of target return on                  5.67%           5.67%           5.67%           5.67%
 investment.....................................          25,283           9,768          15,451          50,502

[[Page 12100]]

 
Step 6, Adjustment determination................       2,043,972       1,004,418       1,277,802       4,326,192
Step 7, Adjustment of pilotage rate.............            1.16            1.16            1.13            1.15
----------------------------------------------------------------------------------------------------------------

    (4) Based on the above calculations and all the documents and 
records used in this full-rate adjustment, the Coast Guard has 
determined it is appropriate to adjust the rates in accordance with the 
above table.
    (5) 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.

                         2004 Area Rate Changes
------------------------------------------------------------------------
                                                       Then the rate
                                                    represents a change
       If pilotage service is required in:         over the current rate
                                                       of: (percent)
------------------------------------------------------------------------
Area 1 (Designated waters)......................  20
Area 2 (Undesignated waters)....................  16
Area 4 (Undesignated waters)....................  26
Area 5 (Designated waters)......................  29
Area 6 (Undesignated waters)....................  16
Area 7 (Designated waters)......................  16
Area 8 (Undesignated waters)....................  13
------------------------------------------------------------------------

Regulatory Evaluation

    Executive Order 12866, ``Regulatory Planning and Review'', 58 FR 
51735, October 4, 1993, requires a determination whether a regulatory 
action is ``significant'' and therefore subject to review by the Office 
of Management and Budget (OMB) and subject to the requirements of the 
Executive Order. This rule has been identified as significant under 
Executive Order 12866 and has been reviewed by OMB and DHS.
    This rulemaking provides a 20 percent overall average increase in 
pilotage rates for the Great Lakes system, effective March 1, 2005. 
This increase will be a full-rate adjustment in addition to the five 
percent average partial-rate adjustment provided by the interim rule, 
68 FR 69564, December 12, 2003.
    These adjustments to Great Lakes pilotage rates meet the 
requirements set forth in 46 CFR part 404 for similar compensation 
levels between Great Lakes pilots and industry. They also include 
adjustments for inflation and changes in the prices for the 
Associations' expenses, such as insurance fees and pilot travel costs. 
The full-rate adjustment in this interim rule uses financial data from 
the 2002 base accounting year. The last full-rate adjustment occurred 
in 2001 and used financial data from the 1997 base accounting year.
    The increase in pilotage rates will be an additional cost for 
shippers to transit the Great Lakes system. The shippers affected by 
this full-rate adjustment are those owners and operators of domestic 
vessels operating on register (employed in the foreign trade) and 
owners and operators of foreign vessels on a route within the Great 
Lakes system. These owners and operators must have pilots or pilotage 
service as required by 46 U.S.C. 9302. There is no minimum tonnage 
limit or exemption for these vessels. However, the Coast Guard issued a 
policy position several years ago stating that the statute applies only 
to commercial vessels and not to recreational vessels.
    Owners and operators of other vessels that are not affected by this 
interim rule, such as recreational boats and vessels only operating 
within the Great Lakes system, may elect to purchase pilotage services. 
However, this election is voluntary and does not affect the Coast 
Guard's calculation of the rate increase and is not a part of our 
estimated national cost to shippers.
    For instance, after a review of some pilot source forms, the forms 
used to record the actual pilotage transaction on the vessel, we 
discovered a case of a U.S. Great Lakes vessel, a small tanker without 
registry, that purchased pilotage services in District One to 
presumably leave the Great Lakes. This vessel, however, is recorded in 
the Coast Guard's data as a vessel operating only in the Great Lakes, 
which would make it exempt from the pilotage requirements. After 
consulting with the Coast Guard's Office of Great Lakes Pilotage, the 
determination was made that this vessel voluntarily chose to use pilots 
because of the type of cargo it was carrying, possibly hazardous, and 
the inexperience of the vessel's crew to navigate the locks and 
passages of District One.
    We used recent arrival data from the Coast Guard's National Vessel 
Movement Center (NVMC) to estimate the annual number of vessels 
affected by the full-rate adjustment to be 217 vessels that, for some, 
make several journeys or trips into the Great Lakes system. These 
vessels entered the Great Lakes by transiting through or in part of at 
least one of the three pilotage Districts before leaving the Great 
Lakes system. These vessels often make several stops docking, 
offloading, and onloading at facilities in Great Lakes ports that may 
or may not involve a pilot. Of the total trips for the 217 vessels, 
there were a total of 1,095 distinct U.S. port arrivals before the 
vessels left the Great Lakes system.
    We used district pilotage revenues from the independent 
accountant's

[[Page 12101]]

reports of the Districts' financial statements to estimate the 
additional cost to shippers of the full-rate adjustment. These revenues 
represent the direct and indirect pilotage costs that shippers must pay 
for pilotage services in order to transit their vessels in the Great 
Lakes. Table 1 shows historical pilotage revenues by District.

                                           Table 1.--District Revenues
                                                      ($US)
----------------------------------------------------------------------------------------------------------------
                      Year                          District 1      District 2      District 3         Total
----------------------------------------------------------------------------------------------------------------
1998............................................       2,127,577       3,202,374       4,026,802       9,356,753
1999............................................       2,009,180       2,727,688       3,599,993       8,336,861
2000............................................       1,890,779       2,947,798       4,036,354       8,874,931
2001............................................       1,676,578       2,375,779       3,657,756       7,710,113
2002............................................       1,686,655       2,089,348       3,460,560      7,236,563
----------------------------------------------------------------------------------------------------------------
Source: Annual independent accountant's reports of the Districts to the Coast Guard's Office of Great Lake
  Pilotage.

    While the revenues have decreased over time, the Coast Guard 
adjusts pilotage rates to achieve a target pilot compensation similar 
to masters and first mates working on U.S. vessels engaged in the Great 
Lakes trade.
    We estimated the additional cost of the full-rate adjustment to be 
the difference between the full-rate adjustment revenue (revenue 
needed) and the projected 2005 revenue. Both of these revenue values 
are described and calculated in the Ratemaking Process and Methodology 
section of this interim rule. The projected revenue uses the 2002 
revenues in Table 1 adjusted for the December 2003 interim rule, 
partial-rate adjustment, and the expected revenue due to changes in 
bridge hours. Table 2 compares base year, projected, and adjusted 
revenues (note: some values may not total due to rounding).

                       Table 2.--Base Year, Projected, and Adjusted Pilotage Revenues \1\
----------------------------------------------------------------------------------------------------------------
                      Year                          District 1      District 2      District 3         Total
----------------------------------------------------------------------------------------------------------------
Base Revenue....................................       1,686,655       2,089,348       3,460,560       7,236,563
Projected Revenue \2\...........................
(`Base Revenue' + `Partial-Rate Adjustment             1,776,256       2,162,129       3,757,598       7,695,983
 Revenue' + `Bridge Hour Revenue Changes')......
Full-Rate Adjustment Revenue \2\................       2,102,389       2,771,589       4,326,192       9,200,170
(`Projected Revenue' x `Full-Rate Adjustment
 Factor').......................................
Additional Revenue or Cost......................         326,133         609,460         568,594      1,504,187
(`Full-Rate Adjustment Revenue'-`Projected
 Revenue')......................................
----------------------------------------------------------------------------------------------------------------
\1\ Some values may not total due to rounding.
\2\ For calculation of these figures, see the Ratemaking Process and Methodology section of this interim rule.

    After applying the full-rate adjustment, the resulting difference 
between the full-rate adjustment revenue (revenue needed) and the 
projected revenue is the annual cost for the affected population of 
this interim rule, because this figure will be equivalent to the total 
additional payments that shippers will make for pilotage services.
    The annual cost of the full-rate adjustment to shippers is 
approximately $1.5 million (non-discounted). To calculate an exact cost 
per vessel is difficult because of the variation in vessel types, 
routes, port arrivals, commodity carriage, time of season, conditions 
during navigation, and preferences for the extent of pilotage services 
on designated and undesignated portions of the Great Lakes system. Some 
owners and operators will pay more and some will pay less depending on 
the distance and port arrivals of their vessels' trips. However, the 
annual cost reported above does capture all of the additional cost the 
shippers will face as a result of this full-rate adjustment.
    We estimated the total cost to shippers of the full-rate adjustment 
over a five-year period, because the Coast Guard is required to 
determine and, if necessary, adjust Great Lakes pilotage rates at a 
minimum of at least once every five years from the last full-rate 
adjustment. However, the Coast Guard does evaluate and analyze the 
Great Lakes pilotage rates every year, regardless of whether an 
adjustment is needed or not. The total cost estimate of this interim 
rule to shippers is discounted present value (PV) $6.6 million (2005-
2009, seven percent discount rate).
    The cost to shippers of this interim rule is minimal compared with 
the travel cost shippers save when they use the Great Lakes system. The 
alternative to Great Lakes waterborne transportation is to choose 
coastal delivery, such as East Coast and Gulf Coast ports which are 
more expensive, and extra-modal transportation overland, which is far 
less practical and has additional transportation costs for all 
commodity groups. See Coast Guard docket number USCG-2002-11288 for an 
assessment of alternatives to Great Lakes waterborne transportation and 
the associated costs entitled ``Analysis of Great Lakes Shipping and 
the Potential Impact of Pilotage Rate Increases'' (October 1, 2004). 
This assessment analyzes Great Lakes pilotage charges and their impact 
on ocean transportation costs as well as total through transportation 
costs.

Small Entities

    Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have 
considered whether this interim rule will have a significant economic 
impact on a substantial number of small entities in the United States. 
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.

[[Page 12102]]

    There are two U.S. entities, which are large shipping firms that 
operate foreign flagged vessels, engaged in foreign trade, in the Great 
Lakes system that will be affected by the full-rate increase and pay 
additional costs for pilotage services. The North American Industry 
Classification System (NAICS) code subsector for these shippers is 483-
Water Transportation, and includes one or all of the following 6-digit 
NAICS codes for freight transportation: 483111-Deep Sea Freight 
Transportation, 483113-Coastal and Great Lakes Freight Transportation, 
and 483211-Inland Water Freight Transportation. According to the Small 
Business Administration's definition, a U.S. company with these NAICS 
codes and employing less than 500 employees is considered a small 
entity. These shippers do not qualify as small entities because their 
number of employees exceeds 500. We assume that new industry entrants 
will be comparable in size to these shippers with a large enough 
employee base and the financial resources to support long international 
trade routes and, thus, will not be small businesses.
    There are three U.S. entities that are affected by the interim rule 
that will receive the additional revenues from the full-rate increase. 
These are the three pilot Associations that are the only entities 
providing pilotage services within the Great Lakes Districts. Two of 
the Associations operate as partnerships and one operates as a 
corporation. These Associations are classified with the same NAICS 
industry classification and small entity size standards as the U.S. 
shippers above, but they have far less than 500 employees: 
approximately 65 total employees combined. However, they are not 
adversely impacted with the additional costs of the full-rate increase, 
but instead receive the additional revenue benefits for operating 
expenses and pilot compensation.
    Therefore, the Coast Guard certifies under 5 U.S.C. 605(b) that 
this interim rule will not have a significant economic impact on a 
substantial number of U.S. 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 would 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-2), U.S. Coast Guard, telephone 202-267-
2856 or 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). The Coast Guard will not retaliate against small 
entities that question or complain about this rule or any policy or 
action of the Coast Guard.

Collection of Information

    This 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 because there are no similar State regulations, and the 
States do not have the authority to regulate and adjust rates for 
pilotage services in the Great Lakes system.

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 even though it is a 
``significant regulatory action'' under Executive Order 12866, it 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.

Technical Standards

    The National Technology Transfer and Advancement Act (NTTAA) (15 
U.S.C. 272 note) directs agencies to use voluntary consensus standards 
in their regulatory activities unless the agency

[[Page 12103]]

provides Congress, through the Office of Management and Budget, with an 
explanation of why using these standards would be inconsistent with 
applicable law or otherwise impractical. Voluntary consensus standards 
are technical standards (e.g., specifications of materials, 
performance, design, or operation; test methods; sampling procedures; 
and related management systems practices) that are developed or adopted 
by voluntary consensus standards bodies. This rule does not use 
technical standards. Therefore, we did not consider the use of 
voluntary consensus standards.

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 in 46 CFR Part 401

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

PART 401--GREAT LAKES PILOTAGE REGULATIONS

0
1. The authority citation for part 401 continues 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............................  \1\ $10 per kilometer or $18
                                             per mile.
Each Lock Transited.......................  \1\ $222.
Harbor Movage.............................  \1\ $728.
------------------------------------------------------------------------
\1\ The minimum basic rate for assignment of a pilot in the St. Lawrence
  River is $486 and the maximum basic rate for a through trip is $2,132.

    (b) Area 2 (Undesignated Waters):

------------------------------------------------------------------------
                         Service                           Lake  Ontario
------------------------------------------------------------------------
Six-Hour Period.........................................            $379
Docking or Undocking....................................             362
------------------------------------------------------------------------


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.........................            $510            $510
Docking or Undocking....................             393             393
Any Point on the Niagara River below the             N/A           1,003
 Black Rock Lock........................
------------------------------------------------------------------------

    (b) Area 5 (Designated Waters):

----------------------------------------------------------------------------------------------------------------
                                                   Toledo or any
                                                   Port on Lake
       Any point on or in            Southeast     Erie west of    Detroit River   Detroit Pilot     St. Clair
                                       Shoal         Southeast                         Boat            River
                                                       Shoal
----------------------------------------------------------------------------------------------------------------
Toledo or any port on Lake Erie           $1,211            $715          $1,571          $1,211             N/A
 west of Southeast Shoal........
Port Huron Change Point.........       \1\ 2,108       \1\ 2,442           1,584           1,232            $876
St. Clair River.................       \1\ 2,108             N/A           1,584           1,584             715
Detroit or Windsor or the                  1,211           1,571             715             N/A           1,584
 Detroit River..................
Detroit Pilot Boat..............             876           1,211             N/A             N/A          1,584
----------------------------------------------------------------------------------------------------------------
\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.........................................            $390
Docking or Undocking....................................             370
------------------------------------------------------------------------

    (b) Area 7 (Designated Waters):

----------------------------------------------------------------------------------------------------------------
                                                                                                     Any other
                              Area                                    De tour        Gros cap         harbor
----------------------------------------------------------------------------------------------------------------
Gros Cap........................................................          $1,383             N/A             N/A
Algoma Steel Corporation Wharf at Sault Ste. Marie, Ontario.....           1,383            $521             N/A
Any point in Sault Ste. Marie, Ontario, except the Algoma Steel            1,159             521             N/A
 Corporation Wharf..............................................
Sault Ste. Marie, Michigan......................................           1,159             521             N/A

[[Page 12104]]

 
Harbor Movage...................................................             N/A             N/A            $521
----------------------------------------------------------------------------------------------------------------

    (c) Area 8 (Undesignated Waters):

------------------------------------------------------------------------
                         Service                          Lake  Superior
------------------------------------------------------------------------
Six-Hour Period.........................................            $351
Docking or Undocking....................................             334
------------------------------------------------------------------------

Sec.  401.420  [Amended]

0
5. In Sec.  401.420--
0
a. In paragraph (a), remove the number ``$56'' and add, in its place, 
the number ``$67''; and remove the number ``$873'' and add, in its 
place, the number ``$1,048''.
0
b. In paragraph (b), remove the number ``$56'' and add, in its place, 
the number ``$67''; and remove the number ``$873'' and add, in its 
place, the number ``$1,048''.
0
c. In paragraph (c)(1), remove the number ``$330'' and add, in its 
place, the number ``$396''; in paragraph (c)(3), remove the number 
``$56'' and add, in its place, the number ``$67''; and, also in 
paragraph (c)(3), remove the number ``$873'' and add, in its place, the 
number ``$1,048''.


Sec.  401.428  [Amended]

0
6. In Sec.  401.428, remove the number ``$337'' and add, in its place, 
the number ``$404''.

    Dated: March 4, 2005.
Thomas H. Collins,
Admiral, U.S. Coast Guard, Commandant.
[FR Doc. 05-4586 Filed 3-4-05; 1:58 pm]
BILLING CODE 4910-15-P