[Federal Register Volume 60, Number 69 (Tuesday, April 11, 1995)]
[Rules and Regulations]
[Pages 18366-18373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8572]
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DEPARTMENT OF TRANSPORTATION
Office of the Secretary
Coast Guard
46 CFR Parts 401, 403, and 404
[OST Docket No. 50248]
[CGD 92-072]
RIN 2105-AC21
Great Lakes Pilotage Rate Methodology
AGENCY: Office of the Secretary, DOT.
ACTION: Final rule; request for comments.
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SUMMARY: The Department of Transportation (the Department) is amending
the regulations concerning Great Lakes pilotage by amending the
procedures for determining Great Lakes pilotage rates, and revising the
financial reporting requirements mandated for Great Lakes pilot
associations. The purpose of these changes is to improve the ratemaking
process. This final rule does not change the existing Great Lakes
pilotage rates and charges.
DATES: This rule is effective on June 12, 1995. Comments must be
received on or before May 11, 1995. Late-filed comments will be
considered only to the extent practicable.
ADDRESSES: Comments should be sent, preferably in triplicate, to Docket
Clerk, OST Docket No. 50248, U.S. Department of Transportation, 400 7th
St. SW., room PL-401, Washington, DC 20590. Comments will be available
for inspection at this address from 9 a.m. to 5:30 p.m., Monday through
Friday. Commenters who wish the receipt of their comments to be
acknowledged should include a stamped, self-addressed postcard with
their comments. The Docket Clerk will date-stamp the postcard and mail
it back. Unless otherwise indicated, documents referred to in this
preamble are also available for inspection or copying at this address.
Comments should not be sent to the Coast Guard docket.
FOR FURTHER INFORMATION CONTACT: Scott A. Poyer, Project Manager,
Merchant Vessel Personnel Division, Office of Marine Safety, Security
and Environmental Protection (G-MVP/12) room 1210, U.S. Coast Guard
Headquarters, 2100 Second Street, SW., Washington, DC 20593-0001, (202)
267-6102, or Steven B. Farbman, Office of the Assistant General Counsel
for Regulation and Enforcement, 400 7th St. SW., room 10424,
Washington, DC 20590, (202) 366-9306.
Regulatory History
On December 7, 1988, the Department of Transportation published the
Great Lakes Pilotage Study Final Report (1988 DOT Pilotage Study). The
study revealed weaknesses in accounting for the expenses incurred by
the pilot associations and the need to formally establish the factors
used in establishing pilotage rates. On April 25, 1990, the Coast Guard
published a final rule (55 FR 17580) establishing improved audit
requirements and general guidelines and procedures to be followed in
ratemaking (CGD 92-072).
In May 1990, the Inspector General (IG) for the Department of
Transportation initiated an audit of Coast Guard oversight of Great
Lakes pilotage. The final report of the audit (Audit of the U.S. Coast
Guard's Oversight and Management of the Great Lakes Pilotage Program),
detailing further issues affecting the basis for Great Lakes pilotage
rates, was issued on December 14, 1990.
On August 2, 1991, a DOT Task Force was formed to: (1) Develop an
interim rate adjustment; and (2) establish a new pilotage ratemaking
methodology. On June 5, 1992, an interim rate increase was published
(CGD 89-104). The DOT Task Force then developed a new pilotage
ratemaking methodology, which the Coast Guard published in a notice of
proposed rulemaking (NPRM) (59 FR 17303) dated April 12, 1994.
The NPRM proposed to amend the Great Lakes pilotage regulations by
establishing new procedures for determining Great Lakes pilotage rates
and revising the financial reporting requirements mandated for Great
Lakes pilot associations (CGD 92-072). The NPRM also announced a public
hearing that was held in Cleveland, OH on May 20, 1994. The comment
period for the NPRM ended on July 11, 1994.
In response to the NPRM and the public hearing, the Coast Guard
received 31 comments and two requests for additional public meetings to
explain the proposals contained in the NPRM. In the Federal Register
(59 FR 18774) on April 20, 1994, the Coast Guard announced that it
would conduct two public meetings. The first public meeting was held in
Chicago, IL on May 3, 1994. The second public meeting was held in
Massena, NY on May 5, 1994.
The Coast Guard also received one request to extend the comment
period for the NPRM. Because the comment period for the NPRM was 90
days, the Coast Guard determined that there was sufficient time to
submit comments. Therefore, the comment period was not extended.
Background and Purpose
Under the Great Lakes Pilotage Act of 1960 (Pub. L. 86-555, 46
U.S.C. 9301 et seq.) (the Act), vessels of the United States operating
on register and foreign vessels must engage a U.S. or Canadian
registered pilot when traversing the waters of the Great Lakes. The Act
vests the Secretary of Transportation with responsibility for setting
pilotage rates. Section 9303 of the Act provides that the Secretary
shall prescribe by regulation rates and charges for pilotage services,
giving consideration to the public interest and the costs of providing
the services. This authority, except for the authority to enter into,
revise or amend arrangements with Canada, has been delegated to the
Commandant of the Coast Guard by 49 CFR 1.46(a). This authority has
been further delegated to the Director, Great Lakes Pilotage (the
Director).
Currently, the navigable waters of the Great Lakes are divided into
eight pilotage areas. United States registered pilots, along with their
Canadian counterparts, provide pilotage services in areas 1, 2, 4, 5,
6, 7, and 8. Pilotage area 3 (the Welland Canal) is currently a wholly-
Canadian area where only Canadian pilots provide services. Pilotage
areas 2, 4, 6, and 8 are ``undesignated waters.'' Pilotage areas 1, 5,
and 7 are ``designated waters.'' Pilots are required to direct
navigation of vessels in designated waters. Pilots are required to be
on board and available to direct navigation in undesignated waters. The
seven U.S. pilotage areas are grouped together into three pilotage
districts. District 1 consists of areas 1 and 2. District 2 consists of
areas 4 and 5. District 3 consists of areas 6, 7, and 8. Each district
has its own pilot association.
Section 9305 of the Pilotage Act provides that the Secretary of
Transportation, subject to the concurrence of the Secretary of State,
may make agreements with the appropriate agency of Canada to prescribe
joint or identical rates and [[Page 18367]] charges. The latest
Memorandum of Arrangements between the United States and Canada, dated
January 18, 1977, specifies that the Secretary of Transportation of the
United States of America and the Minister of Transport of Canada will
establish regulations imposing identical rates. A copy of this
Memorandum of Arrangements is available in the docket and may also be
obtained by writing to Mr. Scott Poyer at the address listed under FOR
FURTHER INFORMATION CONTACT, above. In the past, consultations between
the United States and Canada resulted in nominally identical U.S. and
Canadian rates.
However, there are differences in the cost bases and in the
operating organizations of the U.S. and Canadian pilots, particularly
with regard to pilot compensation. These differences need to be taken
into account in reaching identical U.S. and Canadian rates. As a
result, the ratemaking methodology contained in this final rule would
not translate directly into new rates, but rather would form the basis
for proposals to be negotiated with Canada.
Discussion of Comments and Changes
Although the Coast Guard issued the NPRM under authority delegated
to the Commandant by the Secretary, the Secretary is issuing the final
rule. Under 49 CFR 1.43(a), the Secretary may exercise powers and
duties delegated or assigned to officials other than the Secretary.
Because the Secretary is issuing this final rule, the Department is
consolidating Coast Guard Docket No. 92-072 into OST Docket No. 50248.
All further pleadings should be filed in the new docket at the docket
address listed above.
The Coast Guard received 31 comments on the NPRM. Twenty comments
were from Great Lakes Pilots, Great Lakes Pilot Associations, or
employees of these associations. Six comments were from shippers,
ports, and associations representing the Great Lakes maritime industry.
Five comments were from unions or professional organizations that
represent pilots. Some of the comments addressed issues that were not
the subject of this rulemaking. The Department is responding only to
those comments relating to this rulemaking.
All comments were carefully considered, and in response to the
comments significant changes have been made to the proposals that were
published in the NPRM. The NPRM proposed changes to 46 CFR part 403,
which deals with accounting and financial reporting requirements, and
46 CFR part 404, which details ratemaking procedures.
Most of the comments criticized the NPRM for being overly complex
and unwieldy. In response to this criticism, the regulations that were
proposed in the NPRM have been cut by approximately two thirds, with no
sacrifice of fairness or substance. Accounting requirements have been
streamlined for easier use, financial reporting requirements have been
reduced, and the proposed ratemaking methodology has been revised to
make it less complex.
The NPRM elements that received the strongest objections from the
public were proposals to change the way pilotage rates are charged on
the Great Lakes. Almost everyone who commented on the proposed rule
objected to the proposals to create a class of ``ancillary services''
and to recalculate point-to-point pilotage charges based on hourly
fees. These proposals were found in Step 7 of appendix A to part 404.
The majority of commenters felt that the proposals for hourly pilotage
fees would degrade safety by creating an incentive for vessels to go
faster in order to avoid or reduce pilotage costs. Commenters also
objected to labeling some pilotage services such as docking and
undocking as ``ancillary services'' and allowing fees for these
services to be set purely at the discretion of the Director. There were
concerns that purely discretionary rates would not be predictable for
shippers or pilots.
In response to the comments from pilots, shippers, unions and most
other commenters, the NPRM proposal to charge fees on an hourly basis
has been modified. The Department agrees with the expressed concerns
regarding undue complexity and possible disincentives for operational
safety, and has therefore rewritten Step 7 of appendix A to part 404.
This final rule retains the current method for charging pilotage rates
to various users, which specifies charges for specific travel segments.
If concerns are raised in the future regarding the equity of the way in
which pilotage rates are charged, this issue may be reopened. However,
no changes will be made without a proceeding that provides for public
involvement.
There were many objections from pilots and shippers to the proposal
that the timing of rate reviews be determined by the Director of Great
Lakes Pilotage. Several alternatives were suggested, but most comments
indicated that it would be more appropriate if a rate review were
conducted at least every one, two, or three years in order to keep
pilotage rates current. The Department agrees with these comments. The
provision in 46 CFR 404.1(b), which gave the Director authority to
determine the timing of rate reviews, has been revised in response to
the public comments received. Section 404.1(b) now requires the
Director to conduct a detailed audit of pilot association expenses and
use the ratemaking procedures in appendix A of part 404 to set base
pilotage rates at least once every five years. The Director of Great
Lakes Pilotage will initiate the new methodology as soon as possible
after the effective date of this rule using the most current audit
reports available. If interested parties request reviews more often
than once every five years, the Director can review the request, and
conduct a special audit and ratemaking if the Director concludes that a
reasonable basis for conducting a review has been established.
In the intervening years between the five-year or special audits,
pilotage rates proposed for coordination with Canada will be reviewed
annually using a simplified procedure detailed in appendix C to part
404. This annual review procedure addresses public comments that a less
complicated ratemaking process would be faster and less burdensome on
all parties.
During the regular five-year audit of the Great Lakes pilot
associations and the corresponding rate review, the Director will
calculate an ``expense multiplier'' for each pilot association using
the most recent regular and/or special audit data. This expense
multiplier is the ratio of all other expenses, including a return
element, to pilot compensation expense in unit cost terms for the base
period analyzed. When target pilot compensation is determined for a
prospective annual rate period, total economic costs can be easily
determined by increasing such pilot compensation by the multiplier. Use
of this ratio avoids the need to recalculate other expenses and the
return element each year in order to review the rates. Moreover, since
this review procedure focuses on changes in unit costs, i.e., total
economic costs per bridge hour, between the base period and the new
rate period, the need to project revenues for the new period is also
avoided. Finally, this calculation will not change the rate structure;
it will merely change proposed rates uniformly by the percentage change
in unit costs.
Most pilots, and organizations representing pilots, commented on
the NPRM's proposal to continue the Department policy of maintaining
income comparability between Great Lakes Registered Pilots, and
masters/chief mates on Great Lakes vessels. This policy was established
as a result of the [[Page 18368]] 1988 DOT Pilotage Study, which
examined many alternatives and selected the master/chief mate target
for pilot compensation. Commenters believed pilots should earn more
than masters/chief mates. Among the many alternatives proposed by
commenters were: Comparability with State pilots; comparability with
Canadian pilots; automatic cost-of-living allowances; overtime bonuses;
and work hour/travel time/rest time adjustments. No single alternative
appeared to represent a consensus. After considering all the
alternatives, the Department is keeping the pilot compensation
methodology proposed in the NPRM. This is fully consistent with the
recommendation in the 1988 DOT Pilotage Study, which states, ``The
study team believes that pilot compensation should be tied to the local
economy. The use of local masters and mates pay scales has the
important impact of tying pilot compensation to regional industry pay
levels. Salaries of pilots, like those of teachers, physicians,
lawyers, and other professionals, are tied to the fluctuations of
supply and demand for their services in their particular locality. In
this fashion, Great Lakes pilots share in the fortunes of the Great
Lakes.'' Commenters offered no new information that alters this
assessment.
There were several objections from Great Lakes Pilot Associations
and their employees to the proposed new 46 CFR part 403, as published
in the NPRM. Commenters objected that this part was unduly burdensome
for small pilot associations and should be eliminated in order to
streamline the regulations, and reduce costs to the pilot associations.
After careful consideration, and in light of the lesser requirements of
the procedures for the annual reviews of base pilotage rates, the
Department agrees with the public comments and has greatly streamlined
part 403. Specific account numbers and detailed account descriptions
have been removed in favor of a requirement that financial records of
the association be kept in accordance with generally accepted
accounting principles. Associations are required to complete and retain
annual financial statements and an audit by a certified public
accountant. However, reporting requirements have been reduced to
require that audits only be forwarded to the Director once every five
years, or by special request. At the same time, associations must keep
in mind that answers challenging proposed cost disallowances or other
applications of the ratemaking methodology, as well as ad hoc requests
for rate reviews, must be based on full and adequate financial records.
Two commenters from two of the three Great Lakes Pilot Associations
objected to the proposed requirement that the financial records of the
associations be retained for a period of ten years, and proposed an
alternative three-year requirement that would conform to Internal
Revenue Service (IRS) requirements. The Department does not agree. The
Department does not use the financial records of the pilot association
for the same purpose as the IRS. On several occasions the Director has
accessed historical data to ensure that only reasonable expenses have
been included in ratemaking calculations. For this reason, the
Department is adopting the proposed requirement regarding the 10-year
retention of financial records.
The Department anticipates implementing all the rate reviews under
the methodologies adopted in this rulemaking proceeding through
additional public procedures. Following a review, the Department will
publish its tentative findings and any proposed rate changes, and it
will request the comment of interested parties on the calculations.
(Comments seeking reconsideration of our rate methodology will not be
addressed through this process.) The Department will then seek to
coordinate any proposed change in rates, as modified by any warranted
corrections, with Canadian authorities. Following the coordination
process, the Department will establish final rates to be effective for
the designated future rate period. Both the proposed and final rate
documents will be served on the pilot associations and other interested
persons requesting in writing to be placed on the service list in this
docket; both documents will also be published in the Federal Register.
Although the Coast Guard received no comments on the section
pertaining to the uniform pilot's source form, the Department is making
a slight modification to clarify that the format for source forms is
approved by the Director of Great Lakes Pilotage and issued by the
pilot associations. The ``Pilot's Source Form--Great Lakes Pilotage,''
referred to in the NPRM, is not an official United States Government
form.
The Department is also removing several subparts as part of our
streamlining of the accounting regulations. Subparts B, C, D, and G, as
contained in the NPRM, have been eliminated, and subparts E, F, and H
have been redesignated subparts B, C, and D, respectively.
There were several objections from employees and representatives of
the District 3 pilot association to the proposed revision to 46 CFR
404.05, which provided that profit sharing expenses not be recognized
for ratemaking purposes. Commenters argued that profit sharing for
employees of the District 3 pilot association is part of their
recognized pension plan, and employees of this association would be
unfairly penalized if this proposal were adopted. The Department agrees
and has changed the wording of the proposed paragraph to allow
reasonable profit sharing expenses for non-pilot employees only. Profit
sharing that benefits pilots will be considered part of pilot
compensation.
Several comments from both pilots and shippers, as part of the
overall objection to the complexity of the proposal, argued that the
market-equivalent Return-on-Investment (ROI) provisions of 46 CFR
404.5(a)(4), Step 5 of appendix A, and the formulas contained in
appendix B should not be included. Some members of the public objected
to allowing a return on the capital that pilots had invested in their
pilot associations on the grounds that this would encourage pilots to
make investments that were unrelated to pilotage, and thereby increase
pilotage fees. Other commenters believed that the ROI provisions made
the ratemaking formula in appendix A too complicated. The Department
carefully considered these comments and believes that we have
significantly reduced the proposal's complexity and burden. However, a
return element is an important component of cost-based rate
methodologies. Rates that have been set without a return element have
been vulnerable to legal challenge and do not meet the goals of the
investigations and audits that underlie this rulemaking. Also, in order
to negotiate with the Canadians we must have rates that can withstand
scrutiny as to their conformity to sound ratemaking principles. The
Department believes it is only fair to allow pilots a return on the
capital they invest. The Department also believes that sufficient
safeguards against excessive investment are in place because 46 CFR
404.5(a)(4) specifically stipulates that capital that is not necessary
and reasonable for the provision of pilotage services will not be
allowed for ratemaking purposes.
Final Rule With Request for Comments
The Department is issuing this document as a final rule but is also
providing an opportunity for comment. This rulemaking document is
within the scope of the NPRM. The primary purposes of the final rule
have not changed from the NPRM stage: to [[Page 18369]] standardize the
financial reporting of Great Lakes pilotage associations, and to
clarify the methodology to be used in future ratemakings. We believe
that we have responded to all the concerns expressed in the comments to
the NPRM. Nevertheless, we want to give the public an additional
opportunity to present its views to us, given the changes that we have
made to the NPRM. Accordingly, even though the final rule will be
effective on June 12, 1995, we will consider any new matters presented
to us during the 30-day comment period. We will make revisions to this
rule if we believe they are warranted.
Executive Order 12866
This rule is a significant regulatory action under section 3(f) of
Executive Order 12866 and has been reviewed by the Office of Management
and Budget under that order. It is significant under the regulatory
policies and procedures of the Department of Transportation (44 FR
11040; February 26, 1979) because a rulemaking affecting the setting of
pilotage rates is controversial and of significant interest to the
public.
The Department expects the economic impact of this rule to be
minimal. This rule does not represent a significant departure from the
current ratemaking process, and there are no expected increases in
costs. Therefore, a full regulatory evaluation is not necessary.
Small Entities
Under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the
Department must consider whether this final rule will have a
significant economic impact on a substantial number of small entities.
``Small entities'' include independently owned and operated small
businesses that are not dominant in their field and that otherwise
qualify as ``small business concerns'' under section 3 of the Small
Business Act (15 U.S.C. 632). This final rule should have little or no
impact on small entities that pay pilotage rates or that receive income
from pilotage rates. Because it expects the impact of this proposal to
be minimal, the Department certifies under 5 U.S.C. 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.) that this final rule
will not have a significant economic impact on a substantial number of
small entities.
Collection of Information
This rule contains collection-of-information requirements. The
Department has submitted the requirements to the Office of Management
and Budget (OMB) for review under section 3504(h) of the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.), and OMB has approved them. The
part numbers are parts 401 and 403 and the corresponding OMB approval
number is OMB Control Number 2115-0616.
Federalism
The Department has analyzed this final rule under the principles
and criteria contained in Executive Order 12612, and has determined
that this rule does not have sufficient federalism implications to
warrant the preparation of a Federalism Assessment. Under 49 CFR
1.46(a) the Secretary delegates to the Commandant of the authority to
carry out the Great Lakes Pilotage Act of 1960, as amended, except the
authority to enter into, revise, or amend arrangements with Canada.
State action addressing pilotage regulation is preempted by 46
U.S.C. 9306, which provides that a State or political subdivision of a
State may not regulate or impose any requirement on pilotage on the
Great Lakes.
Environment
The Department considered the environmental impact of this final
rule and concluded that under section 2.B.2 of Commandant Instruction
M16475.1B, this rule is categorically excluded from further
environmental documentation. The rule is procedural in nature because
it deals exclusively with ratemaking and accounting procedures.
Therefore, this is included in the categorical exclusion in subsection
2.B.2.1,--Administrative actions or procedural regulations and policies
that clearly do not have any environmental impact. A Categorical
Exclusion Determination has been placed in the docket.
List of Subjects in 46 CFR Parts 401, 403, and 404
Administrative Practice and Procedure, Great Lakes, Navigation
(water), Penalties, Reporting and Recordkeeping Requirements, Seamen.
For the reasons set out in the preamble, the Department proposes to
amend parts 401, 403, and 404 of title 46 of the Code of Federal
Regulations as follows:
PART 401--[AMENDED]
1. The authority citation for part 401 is revised to read as
follows:
Authority: 46 U.S.C. 6101, 7701, 8105, 9303, 9304; 49 CFR 1.45,
1.46. 46 CFR 401.105 also issued under the authority of 44 U.S.C.
3507.
2. In Sec. 401.110 the introductory text of paragraph (a) and
paragraph (a)(9) are revised, and paragraph (a)(16) is added to read as
follows:
Sec. 401.110 Definitions.
(a) As used in this chapter:
* * * * *
(9) Director means Director, Great Lakes Pilotage. Communications
with the Director may be sent to the following address: Director, Great
Lakes Pilotage (G-MVP-7), 2100 2nd St., SW., Washington, DC 20593.
* * * * *
(16) Association means 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.
3.-4. Part 403 is revised to read as follows:
PART 403--GREAT LAKES PILOTAGE UNIFORM ACCOUNTING SYSTEM
Subpart A--General
Sec.
403.100 Applicability of system of accounts and reports.
403.105 Records.
403.110 Accounting entities.
403.115 Accounting period.
403.120 Notes to financial statements.
Subpart B--Inter-Association Settlements
403.200 General.
Subpart C--Reporting Requirements
403.300 Financial reporting requirements.
Subpart D--Source Forms
403.400 Uniform pilot's source form.
Authority: 46 U.S.C. 8105, 9303, 9304; 49 CFR 1.46.
Subpart A--General
Sec. 403.100 Applicability of system of accounts and reports.
Each Association shall keep its books of account, records and
memoranda, and make reports to the Director in accordance with the
guidelines of the Generally Accepted Accounting Principles (GAAP)
issued by the Financial Accounting Standards Board. These guidelines
are available by writing to the Director, Great Lakes Pilotage at the
address listed in Sec. 401.110(a)(9) of this chapter.
Sec. 403.105 Records.
(a) Each Association shall maintain the general books of account
and all books, records, and supporting memoranda in such manner as to
provide, at any time, full information relating to any account.
Supporting memoranda must provide sufficient information to verify the
nature and character of each entry and its proper
classification. [[Page 18370]]
(b) Each Association shall maintain all books, records and
memoranda in a manner that will readily permit audit and examination by
the Director or the Director's representatives. All books, records and
memoranda shall be protected from loss, theft, or damage by fire, flood
or otherwise, and shall be retained for 10 years unless otherwise
authorized by the Director.
Sec. 403.110 Accounting entities.
Each Association shall be a separate accounting entity. However,
the records shall be maintained with sufficient particularity to
allocate items to each pilotage pool operation or nonpool operation and
to support the equitable proration of items that are common to two or
more pilotage pools.
Sec. 403.115 Accounting period.
Each Association subject to this part shall maintain its accounts
on a calendar year basis unless otherwise approved by the Director.
Sec. 403.120 Notes to financial statements.
(a) All matters that are not clearly identified in the body of the
financial statements of the Association, but which may materially
influence interpretations or conclusions that may reasonably be drawn
in regard to financial condition or earnings of the Association, shall
be clearly and completely stated as footnotes to the financial
statements.
(b) Financial items that are not otherwise required to be reported
in the Association financial statements, but which may affect
ratemaking calculations, are required to be reported to the Director in
the notes to the financial statements. Any financial items that are not
reported to the Director will not be considered by the Director during
ratemaking procedures contained in part 404 of this chapter.
Subpart B--Inter-Association Settlements
Sec. 403.200 General.
Each Association that shares revenues and expenses with the
Canadian Great Lakes Pilotage Authority (GLPA) shall submit settlement
statements regarding these activities. The settlement statements shall
be completed in accordance with the terms of agreements between the
United States and Canada and guidance from the Director of Great Lakes
Pilotage.
Subpart C--Reporting Requirements
Sec. 403.300 Financial reporting requirements.
(a) General:
(1) The financial statements shall list each active account,
including subsidiary accounts.
(2) The financial statements, together with any other required
statistical data, shall be submitted to the Director within 30 days of
the end of the reporting period, unless otherwise authorized by the
Director.
(3) An officer of the Association shall certify the accuracy of the
financial statements.
(b) Required Reports:
(1) Every five years, or when specially requested by the Director,
each Association shall furnish the Director the Association's annual
financial statements audited in accordance with generally accepted
auditing standards by an independent certified public accountant.
(2) Each Association shall furnish the Director a copy of all
settlement statements annually.
Subpart D--Source Forms
Sec. 403.400 Uniform pilot's source form.
(a) Each Association shall record pilotage transactions on a form
approved by the Director. The approved form shall be issued to pilots
by authorized United States pilotage pools.
(b) Pilots shall complete forms in detail as soon as possible after
completion of assignment and return the entire set to the dispatching
office, together with adequate support for reimbursable travel
expenses.
(c) Upon receipt by the Association, the forms shall be completed
by insertion of rates and charges as specified in part 401 of this
chapter.
(d) Copies of the form shall be distributed as follows:
(1) Original to accompany invoice;
(2) First copy to Director;
(3) Second copy to billing office for accounting record;
(4) Third copy to pilot's own Association for pilot's personal
record;
(5) Fourth copy to corresponding Canadian Association or agency for
office use.
(e) Associations shall account by number for all pilot source forms
issued.
5. Part 404 is revised to read as follows:
PART 404--GREAT LAKES PILOTAGE RATEMAKING
Sec.
404.1 General ratemaking provisions.
404.5 Guidelines for the recognition of expenses.
404.10 Ratemaking Procedures and Guidelines.
Appendix A to Part 404--Ratemaking analyses and methodology.
Appendix B to Part 404--Ratemaking definitions and formulas.
Appendix C to Part 404--Procedures for Annual Review of Base
Pilotage Rates
Authority: 46 U.S.C. 8105, 9303, 9304; 49 CFR 1.46.
Sec. 404.1 General ratemaking provisions.
(a) The purpose of this part is to provide guidelines and
procedures for Great Lakes pilotage ratemaking. Included in this part
are explanations of the steps followed in developing a pilotage rate
adjustment, the analysis used, and the guidelines followed in arriving
at the pilotage rates contained in part 401 of this chapter.
(b) Great Lakes pilotage rates shall be reviewed and, if necessary,
adjusted annually in accordance with the procedures detailed in
appendix C to this part. At least once every five years the Director
shall complete a thorough audit of pilot association expenses and
establish pilotage rates in accordance with the procedures detailed in
Sec. 404.10. An interested party or parties may also petition the
Director for a review at any time. The petition must present a
reasonable basis for concluding that a review may be warranted. If the
Director determines, from the information contained in the petition,
that the existing rates may no longer be reasonable, a full review of
the pilotage rates will be conducted. If the full review shows that
pilotage rates are within a reasonable range of their target, no
adjustment to the rates will be initiated.
Sec. 404.5 Guidelines for the recognition of expenses.
(a) The following is a listing of the principal guidelines followed
by the Director when determining whether expenses will be recognized in
the ratemaking process:
(1) Each expense item included in the rate base 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. Each
Association is responsible for providing the Director with sufficient
information to show the reasonableness of all expense items. The
Director will give the Association the opportunity to defend any
expenses that are questioned. However, subject to the terms and
conditions contained in other provisions of this part, expense items
that the Director determines are not reasonable and necessary for the
provision of pilotage services will not be recognized for ratemaking
purposes.
(2) In determining reasonableness, each expense item is measured
against one or more of the following: [[Page 18371]]
(i) Comparable or similar expenses paid by others in the maritime
industry,
(ii) Comparable or similar expenses paid by other industries, or
(iii) U.S. Internal Revenue Service guidelines.
(3) Lease costs for both operating and capital leases are
recognized for ratemaking purposes to the extent that they conform to
market rates. In the absence of a comparable market, lease costs are
recognized for ratemaking purposes to the extent that they conform to
depreciation plus an allowance for return on investment (computed as if
the asset had been purchased with equity capital). The portion of lease
costs that exceed these standards is not recognized for ratemaking
purposes.
(4) For each Association, a market-equivalent return-on-investment
is allowed for the net capital invested in the Association by its
members. Assets subject to return on investment provisions are subject
to reasonableness provisions. If an asset or other investment is not
necessary for the provision of pilotage services, the return element is
not allowed for ratemaking purposes.
(5) For 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.
For non-pilotage transactions that result in a net financial loss for
the Association, the amount of the loss is not recognized for
ratemaking purposes. The Director reviews non-pilotage activities to
determine if any adversely impact the provision of pilotage service,
and may make ratemaking adjustments or take other steps to ensure the
provision of pilotage service.
(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 union contract for first
mates on Great Lakes vessels. Any expenses in excess of this amount are
not recognized for ratemaking purposes.
(7) Expense items that are not reported to the Director by the
Association are not considered by the Director in ratemaking
calculations.
(8) Expenses are appropriate and allowable if they are reasonable,
and directly related to pilotage. Each Association must substantiate
its expenses, including legal expenses. In general, the following are
not recognized as reasonable expenses for ratemaking purposes:
(i) Undocumented expenses;
(ii) Expenses for lobbying;
(iii) Expenses for personal matters;
(iv) Expenses that are not commensurate with the work performed;
and
(v) Any other expenses not directly related to pilotage.
(9) In any Great Lakes pilotage district where revenues and
expenses from Canadian pilots are commingled with revenues and expenses
from U.S. pilots, Canadian revenues and expenses are not included in
the U.S. calculations for setting pilotage rates.
(10) Reasonable profit sharing for non-pilot employees of pilot
associations will be allowed as an expense for ratemaking purposes.
Profit sharing that benefits pilots will be treated as part of pilot
compensation.
Sec. 404.10 Ratemaking procedures and guidelines.
(a) Appendix A to this part is a description of the types of
analyses performed and the methodology followed in the development of a
base pilotage rate. Ratemaking calculations in appendix A of this part
are made using the definitions and formulas contained in appendix B of
this part. Appendix C of this part is a description of the methodology
followed in the development of annual reviews to base pilotage rates.
Pilotage rates actually implemented may vary from the results of the
calculations in appendices A, B and C of this part, because of
agreements with Canada requiring identical rates, or because of other
circumstances to be determined by the Director. Additional analysis may
also be performed as circumstances require. The guidelines contained in
Sec. 404.05 are applied in the steps identified in appendix A to this
part.
(b) A separate ratemaking calculation is made for each of the
following U.S. pilotage areas:
Area 1--the St. Lawrence River;
Area 2--Lake Ontario;
Area 4--Lake Erie;
Area 5--the navigable waters from South East Shoal to Port Huron,
MI;
Area 6--Lakes Huron and Michigan;
Area 7--the St. Mary's River; and
Area 8--Lake Superior.
Appendix A to Part 404--Ratemaking Analyses and Methodology
Step 1: Projection of Operating Expenses
(1) The Director projects the amount of vessel traffic annually.
Based upon that projection, the Director forecasts the amount of
fair and reasonable operating expenses that pilotage rates should
recover. This consists of the following phases:
(a) Submission of financial information from each Association;
(b) determination of recognizable expenses;
(c) adjustment for inflation or deflation; and
(d) final projection of operating expenses. Each of these phases
is detailed below.
Step 1.A.--Submission of Financial Information
(1) Each Association is responsible for providing detailed
financial information to the Director, in accordance with part 403
of this chapter.
Step 1.B.--Determination of Recognizable Expenses
(1) The Director determines which Association expenses will be
recognized for ratemaking purposes, using the guidelines for the
recognition of expenses contained in Sec. 404.05. Each Association
is responsible for providing sufficient data for the Director to
make this determination.
Step 1.C.--Adjustment for Inflation or Deflation
(1) In making projections of future expenses, expenses that are
subject to inflationary or deflationary pressures are adjusted.
Costs not subject to inflation or deflation (e.g., depreciation,
long-term leases, pilot compensation, etc.) are not adjusted. The
inclusion of an inflation or deflation adjustment does not imply
that pilotage rates will be automatically adjusted each shipping
season. The inflation or deflation adjustment is only made during
the expense projection phase of a full-scale pilotage rate review.
Annual cost inflation or deflation rates will be projected to
the succeeding navigation season, reflecting the gradual increase or
decrease in cost throughout the year.
For ratemaking calculations begun after January 1, 1996, the
actual annual experienced change in operational costs per pilot
assignment for each pilotage area will be used to project the
inflation or deflation adjustment. For ratemaking calculations begun
prior to January 1, 1996, the inflation or deflation adjustment will
be based on the preceding year's change in the North Central
Region's Consumer Price Index as calculated by the U.S. Bureau of
Labor Statistics.
Step 1.D.--Projection of Operating Expenses
(1) Once all adjustments are made to the recognized operating
expenses, the Director projects these expenses for each pilotage
area. In doing so, the Director takes into account foreseeable
circumstances that could affect the accuracy of the projection. The
Director will determine, as accurately as reasonably practicable,
the ``projection of operating expenses.''
Step 2: Projection of Target Pilot Compensation
(1) The second step in the Great Lakes pilotage ratemaking
methodology is to project the amount of target pilot compensation
that pilotage rates should provide in each area. This step consists
of the following phases:
(a) Determination of target rate of
compensation; [[Page 18372]]
(b) determination of number of pilots needed in each pilotage
area; and
(c) multiplication of the target compensation by the number of
pilots needed to project target pilot compensation needed in each
area. Each of these phases is detailed below.
Step 2.A.--Determination of Target Rate of Compensation
(1) Target pilot compensation for pilots providing services in
undesignated waters approximates the average annual compensation for
first mates on U.S. Great Lakes vessels. The average annual
compensation for first mates is determined based on the most current
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. It is calculated as 150% of the
compensation earned by first mates on U.S. Great Lakes vessels.
Step 2.B.--Determination of Number of Pilots Needed
(1) The basis for the number of pilots needed in each area of
designated waters is established by dividing the projected bridge
hours for that area by 1,000. Bridge hours are the number of hours a
pilot is aboard a vessel providing basic pilotage service.
(2) The basis for the number of pilots needed in each area of
undesignated waters is established by dividing the projected bridge
hours for that area by 1,800.
(3) In determining the number of pilots needed in each pilotage
area, the Director is guided by the results of the calculations in
steps 2.A. and 2.B. However, the Director may also find it necessary
to make adjustments to these numbers in order to ensure
uninterrupted pilotage service in each area, or for other reasonable
circumstances that the Director determines are appropriate.
Step 2.C.--Projection of Target Pilot Compensation
(1) The ``projection of target pilot compensation'' is
determined separately for each pilotage area by multiplying the
number of pilots needed in that area by the target pilot
compensation for pilots working in that area.
Step 3: Projection of Revenue
(1) The third step in the Great Lakes pilotage ratemaking
methodology is to project the revenue that would be received in each
pilotage area if existing rates were left unchanged. This consists
of a projection of future vessel traffic and pilotage revenue.
Step 3.A.--Projection of Revenue
(1) The Director generates the most accurate projections
reasonably possible of the pilotage service that will be required by
vessel traffic in each pilotage area. These projections are based on
historical data and all other relevant data available. Projected
demand for pilotage service is multiplied by the existing pilotage
rates for that service, to arrive at the ``projection of revenue.''
Step 4: Calculation of Investment Base
(1) The fourth step in the Great Lakes pilotage ratemaking
methodology is the calculation of the investment base of each
Association. The investment base is the recognized capital
investment in the assets employed by each Association required to
support pilotage operations. In general, it is the sum of available
cash and the net value of real assets, less the value of land. The
investment base will be established through the use of the balance
sheet accounts, as amended by material supplied in the Notes to the
Financial Statement. The formula used in calculating the investment
base is detailed in Appendix B to this part.
Step 5: Determination of Target Rate of Return on Investment
(1) The fifth step in the Great Lakes pilotage ratemaking
methodology is to determine the Target Rate of Return on Investment.
For each Association, a market-equivalent return-on-investment (ROI)
is allowed for the recognized net capital invested in the
Association by its members.
(2) The allowed ROI is based on the rate of the most recent
return on stockholder's equity for a representative cross section of
transportation industry companies, including maritime companies,
with a minimum rate equal to the interest rate incurred by the
Associations for debt capital, and a maximum rate of 20 percent.
(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.
Step 6: Adjustment Determination
(1) The next step in the Great Lakes pilotage ratemaking
methodology is to insert the results from steps 1, 2, 3, and 4 into
a formula that is based on a basic regulatory rate structure, and
comparing the results to step 5. This basic regulatory rate
structure takes into account revenues, expenses and return on
investment, and is of the following form:
------------------------------------------------------------------------
Line Ratemaking projections for basic 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 Audit reports)
-----------------------------------------------------------------
6. =Earnings Before Tax
7. -Federal Tax Allowance
-----------------------------------------------------------------
8. =Net Income
9. Return Element (Net Income + Interest)
10. +Investment Base (from step 4)
-----------------------------------------------------------------
11. =Return on Investment
------------------------------------------------------------------------
(2) The Director will compare the projected return on investment
(as calculated using the formula above) to the target return on
investment (from step 5), to determine whether an adjustment to the
base pilotage rates is necessary. If the projected return on
investment is significantly different from the target return on
investment, the revenues that would be generated by the current
pilotage rates are not equal to the revenues that would need to be
recovered by the pilotage rates.
(3) The base pilotage revenues that are needed are calculated by
determining what change in projected revenue will make the target
return on investment equal to the projected return on investment.
This ``projection of revenue needed'' is used in determining the
basis for proposed adjustments to the base pilotage rates. The
mechanism for adjusting the base pilotage rates is discussed in Step
7 below. The required return, tax, and interest elements may be
considered additions to the operating expenses and pilot
compensation components of the base pilotage rates.
STEP 7: Adjustment of Pilotage Rates
The final step in the Great Lakes pilotage ratemaking
methodology is to adjust base pilotage rates if the calculations
from Step 6 show that pilotage rates in a pilotage area should be
adjusted, and if the Director determines that it is appropriate to
go forward with a rate adjustment. Rate adjustments are calculated
in accordance with the procedures found in this step. However,
pilotage rates calculated in this step are subject to adjustment
based on requirements of the Memorandum of Arrangements between the
United States and Canada, and other supportable circumstances that
may be 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 Ratemaking projections
------------------------------------------------------------------------
1. + Revenue Needed (from step 6)
2. Revenue (from step 3)
-----------------------------------------------------------------
3. = Rate multiplier
------------------------------------------------------------------------
Appendix B to Part 404--Ratemaking Definitions and Formulas
The following definitions apply to the ratemaking formula
contained in this appendix.
(1) Operating Revenue--means the sum of all operating revenues
received by the Association for pilotage services, including
revenues such as docking, moveage, delay, detention, cancellation,
and lock transit.
(2) Operating Expense--means the sum of all operating expenses
incurred by the Association for pilotage services, less the sum of
disallowed expenses.
(3) Target Pilot Compensation--means the compensation that
pilots are intended to receive for full time employment. For pilots
providing services in undesignated waters, the target pilot
compensation is the average annual compensation for first mates on
U.S. Great Lakes vessels. For pilots providing services in
designated waters, the target pilot compensation is 150% of the
average annual [[Page 18373]] compensation for first mates on U.S.
Great Lakes vessels.
(4) Operating Profit/(Loss)--means Operating Revenue less
Operating Expense and Target Pilot Compensation.
(5) Interest Expense--means the reported Association interest
expense on operations, as adjusted to exclude any interest expense
attributable to losses from non-pilotage operations.
(6) Earnings Before Tax--means Operating Profit/(Loss), less the
Interest Expense.
(7) Federal Tax Allowance--means the Federal statutory tax on
Earnings Before Tax, for those Associations subject to Federal tax.
(8) Net Income--means the Earnings Before Tax, less the Federal
Tax Allowance.
(9) Return Element (Net Income plus Interest)--means the Net
Income, plus Interest Expense. The return element can be considered
the sum of the return to equity capital (the Net Income), and the
return to debt (the Interest Expense).
(10) Investment Base (separately determined)--means the net
recognized capital invested in the Association, including both
equity and debt. Should capital be invested in other than pilotage
operations, that capital is excluded from the rate base.
(11) Return on Investment--means the Return element, divided by
the Investment Base, and expressed as a percent.
Investment Base Formula
(1) Regulatory Investment (Investment Base) is the recognized
capital investment in the useful assets employed by the pilot
groups. In general, it is the sum of available cash and the net
value of real assets, less the value of land. The investment base is
established through the use of the balance sheet accounts, as
amended by material supplied in the Notes to the Financial
Statement.
(2) The Investment Base is calculated using financial data from
the Great Lakes pilot associations, as audited and approved by the
Director. The Investment Base would be calculated as follows:
Description
Recognized Assets:
+Total Current Assets
-Total Current Liabilities
+Current Notes Payable
+Total Property and Equipment (Net)
-Land
+Total Other Assets
-----------------------------------------------------------------
=Total Recognized Assets
Non-Recognized Assets
+Total Investments and Special Funds
-----------------------------------------------------------------
=Total Non-Recognized Assets
Total Assets
+Total Recognized Assets
+Total Non-Recognized Assets
-----------------------------------------------------------------
=Total Assets
Recognized Sources of Funds
+Total Stockholders' Equity
+Long-Term Debt
+Current Notes Payable
+Advances from Affiliated Companies
+Long-Term Obligations-Capital Leases
-----------------------------------------------------------------
=Total Recognized Sources
Non-Recognized Sources of Funds
+Pension Liability
+Other Non-Current Liabilities
+Deferred Federal Income Taxes
+Other Deferred Credits
-----------------------------------------------------------------
=Total Non-Recognized Sources
Total Sources of Funds
+Total Recognized Sources
+Total Non-Recognized Sources
-----------------------------------------------------------------
=Total Sources of Funds
(3) Using the figures developed above, the Investment Base is
the Recognized Assets times the ratio of Recognized Sources of Funds
to Total Sources of Funds.
Appendix C to Part 404--Procedures for Annual Review of Base Pilotage
Rates
The ratemaking methodology detailed in appendix A is used by the
Director to determine base pilotage rates at least once every five
years, as required by Sec. 404.1. In the intervening years the
Director will review, if warranted by cost changes, recalculate base
pilotage rates proposed for coordination with Canada using the
following procedures:
Step 1: Calculate the total economic costs for the base period
(i.e. pilot compensation expense plus all other recognized expenses
plus the return element) and divide by the total bridge hours used
in setting the base period rates;
Step 2: Calculate the ``expense multiplier,'' the ratio of other
expenses and the return element to pilot compensation for the base
period;
Step 3: Calculate an annual ``projection of target pilot
compensation'' using the same procedures found in Step 2 of appendix
A;
Step 4: Increase the projected pilot compensation in Step 3 by
the expense multiplier in Step 2;
Step 5: Adjust the result in Step 4, as required, for inflation
or deflation;
Step 6: Divide the result in Step 5 by projected bridge hours to
determine total unit costs;
Step 7: Divide prospective unit costs in Step 6 by the base
period unit costs in Step 1;
Step 8: Adjust the base period rates by the percentage change in
unit costs in Step 7. For example if the total economic costs per
bridge hour is $30.00 for the base period and $33.00 for the
prospective rate period, then the rates established for the base
period would be increased by 10% to determine the proposed rates for
the prospective rate period, which would then be subject to
negotiation with Canada.
Issued in Washington, DC, this 31st day of March, 1995.
Frederico Pena,
Secretary of Transportation.
[FR Doc. 95-8572 Filed 4-10-95; 8:45 am]
BILLING CODE 4910-62-P
