46 CFR Sect. 404

§ 403.200

46 CFR Ch. III (10–1–06 Edition)

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.
[60 FR 18369, Apr. 11, 1995. Redesignated and
amended at 61 FR 32655, June 25, 1996, and
further redesignated by USCG–1998–3976, 63
FR 35139, 35140, June 29, 1998]

Subpart B—Inter-Association
Settlements
SOURCE: 60 FR 18369, Apr. 11, 1995 unless
otherwise noted. Redesignated at 61 FR 32655,
June 25, 1996, and further redesignated by
USCG–1998–3976, 63 FR 35139, June 29, 1998.

§ 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

hmoore on PROD1PC68 with HMCFR

§ 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) By April 1 of each year, each Association shall obtain an annual unqualified long form audit report for the preceding year, audited and prepared in
accordance with generally accepted auditing standards by an independent certified public accountant.
(2) Each Association shall forward
their annual unqualified long form
audit report, and any associated settlement statements, to the Director no
later than April 7 of each year.
[60 FR 18369, Apr. 11, 1995, as amended at 61
FR 21084, May 9, 1996. Redesignated at 61 FR
32655, June 25, 1996, and further redesignated
by USCG–1998–3976, 63 FR 35139, June 29, 1998]

Subpart D—Source Forms
§ 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.
[60 FR 18369, Apr. 11, 1995. Redesignated and
amended at 61 FR 32655, June 25, 1996, and
further redesignated and amended by USCG–
1998–3976, 63 FR 35139, 35140, June 29, 1998]

PART 404—GREAT LAKES PILOTAGE
RATEMAKING
Sec.
404.1

General ratemaking provisions.

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Coast Guard (Great Lakes Pilotage), DHS
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. 2104(a), 8105, 9303,
9304; Department of Homeland Security Delegation No. 0170.1.

§ 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 annually in accordance
with the procedures detailed in Appendix C to this part. The Director shall
review Association audit reports annually and, at a minimum, the Director
shall complete a thorough audit of
pilot association expenses and establish pilotage rates in accordance with
the procedures detailed in § 404.10 of
this part at least once every five years.
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.
[60 FR 18370, Apr. 11, 1995, as amended at 61
FR 21084, May 9, 1996. Redesignated and
amended at 61 FR 32655, June 25, 1996, and
further redesignated and amended by USCG–
1998–3976, 63 FR 35139, 35140, June 29, 1998]

hmoore on PROD1PC68 with HMCFR

§ 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 ex-

§ 404.5
penses 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:
(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 marketequivalent 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.

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hmoore on PROD1PC68 with HMCFR

§ 404.10

46 CFR Ch. III (10–1–06 Edition)

(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.
[60 FR 18370, Apr. 11, 1995. Redesignated at 61
FR 32655, June 25, 1996, and further redesignated by USCG–1998–3976, 63 FR 35139, June
29, 1998]

§ 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 § 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.
[60 FR 18370, Apr. 11, 1995. Redesignated and
amended at 61 FR 32655, June 25, 1996, and
further redesignated and amended by USCG–
1998–3976, 63 FR 35139, 35140, June 29, 1998]

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;

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Coast Guard (Great Lakes Pilotage), DHS
(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
§ 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 are not adjusted. Annual cost inflation or deflation rates will be projected to
the succeeding navigation season, reflecting
the gradual increase or decrease in costs
throughout the year. The inflation adjustment will be based on the preceding year’s
change in the Consumer Price Index for the
North Central Region of the United States.
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.’’

Pt. 404, App. A
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.

hmoore on PROD1PC68 with HMCFR

Step 2: Projection of Target Pilot Compensation

Step 3: Projection of Revenue

(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;
(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.

(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

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Pt. 404, App. A

46 CFR Ch. III (10–1–06 Edition)

the existing pilotage rates for that service,
to arrive at the ‘‘projection of revenue.’’

11.

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 Return on Investment
(ROI) is based on the preceding year’s average annual rate of return for new issues of
high grade corporate securities.
(3) Assets subject to return on investment
provisions must be reasonable in both purpose and amount. If an asset or other investment is not necessary for the provision of pilotage services, that portion of the return
element is not allowed for ratemaking purposes.
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:
Ratemaking projections
for basic pilotage

hmoore on PROD1PC68 with HMCFR

Line
1.
2.
3.

+ Revenue (from step 3)
¥ Operating Expenses (from step 1)
¥ Pilot Compensation (from step 2)

4.
5.

= Operating Profit/(Loss)
¥ Interest Expense (from Audit reports)

6.
7.

= Earnings Before Tax
¥ Federal Tax Allowance

8.
9.
10.

= Net Income
Return Element (Net Income + Interest)
÷ Investment Base (from step 4)

Ratemaking projections
for basic pilotage

Line

= 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.
2.

+ Revenue Needed (from step 6)
÷ Revenue (from step 3)

3.

= Rate multiplier

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Coast Guard (Great Lakes Pilotage), DHS
[60 FR 18370, Apr. 11, 1995. Redesignated and
amended at 61 FR 32655, June 25, 1996; 62 FR
5923, Feb 10, 1997. Redesignated and amended
by USCG–1998–3976, 63 FR 35139, 35140, June
29, 1998; USCG–2002–11288, 68 FR 69578, Dec. 12,
2003]

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 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.
hmoore on PROD1PC68 with HMCFR

Investment Base Formula
(1) Regulatory Investment (Investment
Base) is the recognized capital investment in

Pt. 404, App. B
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
Funds

and

= 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.
[60 FR 18370, Apr. 11, 1995. Redesignated at 61
FR 32655, June 25, 1996, and further redesignated by USCG–1998–3976, 63 FR 35139, June
29, 1998]

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Pt. 404, App. C

46 CFR Ch. III (10–1–06 Edition)

APPENDIX C TO PART 404—PROCEDURES
FOR ANNUAL REVIEW OF BASE PILOTAGE RATES

hmoore on PROD1PC68 with HMCFR

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 § 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.
[60 FR 18370, Apr. 11, 1995. Redesignated and
amended at 61 FR 32655, June 25, 1996, and
further redesignated and amended by USCG–
1998–3976, 63 FR 35139, 35140, June 29, 1998]

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