Coast Guard: Stakeholders' Views on Issues and Options for Managing the Great Lakes Pilotage Program

The Great Lakes-St. Lawrence Seaway maritime transportation system is the longest inland navigation system in the world. In 2016, the Coast Guard implemented a number of changes, including amending its methodology for setting the rates charged to shippers for using U.S. marine pilotage services in these waters.

GAO was asked to review the Coast Guard's management of the Great Lakes Pilotage Program. This report (1) describes how the Coast Guard obtains stakeholder input on the Great Lakes Pilotage Program, and identifies key stakeholder issues that exist; and (2) discusses alternatives to the current structure and governance of the Great Lakes pilotage system identified by stakeholders, and the reported tradeoffs they may present.

GAO reviewed applicable laws, Coast Guard rulemakings from 2016-2019, Great Lakes Pilotage Advisory Committee meeting minutes for 2017 and 2018, and issues identified by stakeholders. GAO also interviewed a range of stakeholders, including shipping industry and pilot representatives, to obtain perspectives on the Coast Guard's management of the program and any alternative governance options that may exist.

The Coast Guard manages the Great Lakes Pilotage Program to implement federal requirements that any oceangoing or foreign commercial vessel entering the Great Lakes-St. Lawrence Seaway use a registered marine pilot to safely navigate the vessel through the system. The Coast Guard employs several mechanisms for communicating with stakeholders and obtaining their input on the program. These include the federal rulemaking process, meetings of the Great Lakes Pilotage Advisory Committee, and ad-hoc communications with local pilotage stakeholders. Since 2016, when the Coast Guard implemented several programmatic changes, shipping industry stakeholders and pilots have identified a number of issues that they would like to have considered for the program. The issues cited by shipping industry stakeholders relate, in large part, to the financial impacts associated with the Coast Guard's methodology for calculating pilotage rates. The issues raised by Great Lakes pilots and their representatives are varied and include changes that may be needed to respond to the increasing volume and variety of vessels needing Great Lakes pilotage services, such as cruise ships.

U.S. Pilot Associations in the Great Lakes-St. Lawrence Seaway

Shipping industry stakeholders and others have suggested potential alternatives to the structure and governance of Great Lakes pilotage. The proposed alternatives include consolidating the three U.S. pilot associations and districts, revising the existing governance structure and entities responsible for pilotage rate-setting, and introducing some level of competition for providing pilotage services. Each of these options presents various tradeoffs. For example, it is unclear if consolidating the three associations and districts would result in cost savings because there are relatively few administrative positions that could be reduced. According to the Coast Guard and pilot representatives, the specialized training and local experience needed to become registered pilots also presents a challenge to implementing competition because there is generally a limited supply of pilots available to compete in the same geographic area. Further, many of the governance structures and procedures of the existing Great Lakes pilotage system were established by statute and revisions would require legislative changes.

The Great Lakes-St. Lawrence Seaway (Great Lakes-Seaway) maritime  transportation system, located in North America, is the longest inland  navigation system in the world. It includes the St. Lawrence River, the five  Great Lakes (Ontario, Erie, Huron, Michigan, and Superior), and their  connecting system of channels and locks. The Great Lakes-Seaway  system extends 2,300 miles from the Atlantic Ocean in the east to Duluth,  Minnesota at the western end of Lake Superior. It serves more than 100  ports across eight U.S. states and two Canadian provinces. The region’s  maritime sector is a critical economic driver and provides an important  transportation route to the manufacturing and agricultural heartland of  North America. The opening of the St. Lawrence Seaway in 1959  provided an accessible route to the Great Lakes for oceangoing  commercial vessels and resulted in a significant increase in shipping  traffic. As a result, congressional committees soon became concerned  that marine pilots on these oceangoing commercial vessels were not  operating with the same level of specialized local knowledge or skills as  Great Lakes pilots and presented a potential threat to maritime safety.

The economic and environmental costs of a vessel collision or disaster on  the Great Lakes-Seaway, which also serves as the source of drinking  water for millions of people, could be catastrophic to the region. Since  1960, federal law has required that any oceangoing or foreign commercial  vessel that enters the Great Lakes-Seaway use a registered Great Lakes  marine pilot to board and safely navigate the vessel throughout the  system. United States and Canadian vessels that generally operate  within the Great Lakes-Seaway (commonly referred to as “lakers”)  account for most of the commercial shipping on the Great Lakes-Seaway  and are not affected by this law. Registered Great Lakes marine pilots  provide a vital safety service by using their local knowledge, navigational  abilities, and ship handling expertise to guide vessels through the ports  and waterways of the Great Lakes-Seaway.

Pilotage in the U.S. waters of the Great Lakes-Seaway falls under the  authority of the U.S. Coast Guard (part of the Department of Homeland  Security) through its Great Lakes Pilotage Program. This program is  unique in that the federal government has no role in managing pilotage  programs in any other U.S. waterways. Through this program, the Coast  Guard determines the total number of U.S. pilots needed and establishes  the rates for pilotage services to be paid by shippers, among other  regulatory activities. In 2016, the Coast Guard implemented a number of  programmatic changes, including a change to its methodology for setting  pilotage rates, which resulted in significantly increased pilotage rates in  some areas. Since that time, shipping industry stakeholders have raised  questions about the Coast Guard’s ability to effectively manage the Great  Lakes Pilotage Program and the process it uses to address industry  stakeholders’ input. You asked us to review the Coast Guard’s  management of the Great Lakes Pilotage Program. This report (1)  describes how the Coast Guard obtains stakeholder input on its  management of the Great Lakes Pilotage Program, and identifies key  stakeholder issues that currently exist; and (2) discusses alternatives to  the current structure and governance of the Great Lakes pilotage system  identified by stakeholders, and the reported tradeoffs that they present.

To describe how the Coast Guard obtains stakeholder input, we first  identified and reviewed criteria that govern federal rulemaking and  advisory committee proceedings, including the Administrative Procedure  Act and the Federal Advisory Committee Act. We also reviewed all Coast  Guard rulemakings associated with Great Lakes pilotage rates and  related methodology updates from 2016-2019, and the documented  proceedings of the Great Lakes Pilotage Advisory Committee (GLPAC)  meetings from 2017 and 2018. Further, we conducted interviews with  Coast Guard officials in the Great Lakes Pilotage Program to obtain  information on how they use these mechanisms and to identify any other  methods used to obtain stakeholder input regarding the Great Lakes  Pilotage Program. We identified current stakeholder issues by reviewing:  (1) public comments submitted as part of the rulemakings, (2)  proceedings of recent GLPAC meetings, (3) documentation of specific  issues identified by shipping industry stakeholders in related legal filings,  and (4) letters and documentation provided to the Coast Guard and  Members of Congress by shipping industry stakeholders. Finally, we  conducted interviews with a range of stakeholders to obtain additional  perspectives on issues affecting the Great Lakes Pilotage Program. The  shipping industry representatives that we met with include the American  Great Lakes Ports Association, the ports of Toledo (Ohio) and Monroe  (MI), Fednav Limited, the Shipping Federation of Canada, the American  Great Lakes Shipping Association, and the Conference of Great Lakes  and St. Lawrence Governors and Premiers. The pilot representatives that  we met with include the American Pilots Association; the presidents of the  three U.S. Great Lakes-Seaway pilots associations; and the International  Organization of Masters, Mates, and Pilots.

To identify potential alternatives to the current structure and governance  of the Great Lakes pilotage system and obtain information on  stakeholders’ perspectives on the associated tradeoffs of the alternatives,  we reviewed GLPAC proceedings; as well as several recent reports  addressing marine pilotage systems used elsewhere in the United States,  including one that specifically presented various alternative governance  options for pilotage in the Great Lakes-Seaway. To augment the studies  we reviewed, we also discussed alternative governance issues with the  shipping industry and pilot representatives listed above. In addition, we  also met with representatives of the St. Lawrence Seaway Development  Corporation, the Washington State Pilotage Commission, and the  Canadian Great Lakes Pilotage Authority to obtain perspectives on the  perceived benefits and potential implementation challenges of the various  alternative governance options presented.

We conducted this performance audit from July 2018 to June 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

History and Purpose of Great Lakes Pilotage Act

The Great Lakes Pilotage Act of 1960 established the system of  compulsory pilotage on the Great Lakes. Senate committee reports  accompanying the legislation indicate pilotage requirements in the Great  Lakes were established because they were viewed as essential to helping  ensure maritime safety. The committees also recognized that international coordination between the United States and Canada would  be required at a federal level and the act specifically precludes any state,  municipality, or local authority from regulating any aspect of pilotage in  the waters of the Great Lakes-Seaway.

Overview of the Great Lakes Pilotage System

All oceangoing commercial vessels are required to use U.S. or Canadian  registered pilots during their transit through regulated waters of the Great  Lakes-Seaway. Generally, these vessels are assigned a U.S. or  Canadian pilot depending on (1) the order in which they transit a  particular area of the Great Lakes-Seaway and (2) their destination  port(s). Vessels do not choose which pilot they receive. The U.S. waters  of the Great Lakes-Seaway are divided into three pilotage districts, each  operated by an association of independent pilots certified by the Coast  Guard (see figure 1). The registered pilots only operate within their  designated district and do not cross district boundaries. If a vessel needs  to cross a district boundary to reach the next port, there will be a change  of registered pilots at predetermined locations.

Each pilotage district is further divided into “designated” and  “undesignated” areas. Designated areas of the Great Lakes-Seaway  include areas that are generally more challenging to navigate and require  pilots to be fully engaged in the navigation of vessels in their charge at all  times. In undesignated areas, which are generally open bodies of water,  pilots are required to be “on board and available to direct the navigation of  the vessel at the discretion of and subject to the customary authority of  the master.” Given the size of the Great Lakes-Seaway, and depending  on the port calls planned, registered pilots can be onboard vessels for  multiple days. This contrasts with marine pilot transits in most U.S.  coastal waters that may be just a few miles each way. Commercial  vessels transiting the Great Lakes-Seaway are also generally smaller  than many of the vessels that operate at coastal ports. As a result,  pilotage fees typically represent a greater proportion of the vessel costs  than many larger commercial vessels operating in coastal waters.

Pursuant to the Great Lakes Pilotage Act of 1960, the Coast Guard  regulates the operation of U.S. pilotage services and establishes the rates  they may charge. These rates are to be established through a full  rulemaking process at least every 5 years, but must be reviewed and  adjusted on an annual basis. The rate-setting process currently includes  a 10-step methodology generally designed to account for the estimated  annual revenues needed by registered U.S. Great Lakes pilots to provide  pilotage services and total vessel traffic expected in each of the three  U.S. pilotage districts. (See appendix I for further details on the pilotage  rate-setting methodology.) Among other regulatory roles, the U.S. Coast  Guard is also responsible for developing competency standards for pilot  training and issuing pilot registrations, providing oversight of the pilot  associations, and determining the total number of authorized pilots  operating in the U.S. waters of the Great Lakes-Seaway. For the 2019  shipping season, 54 U.S. pilots were authorized to serve the Great Lakes- Seaway.

The Great Lakes Pilotage Advisory Committee (GLPAC) was established  in November 1998 to provide advice and make recommendations to the  Coast Guard on matters relating to Great Lakes pilotage. The GLPAC,  which meets at least once annually, is comprised of seven members that  include the presidents of the three U.S. Great Lakes-Seaway pilotage  districts; three members that represent the ports, shipping industry, and  vessel operators, respectively; and one member with a finance and  accounting background that is selected by unanimous vote of the other  six members.

2016 Pilotage Rate Increase and Subsequent Litigation

The number of U.S. pilots in the Great Lakes-Seaway decreased from 44  in 2007 to 36 in 2014, which, according to the Coast Guard, resulted in  pilot shortages and contributed to shipping delays. In 2016, the Coast  Guard initiated a number of changes to its pilotage rate-setting  methodology that were intended, in part, to provide sufficient pilot  compensation to attract, hire, and retain appropriate numbers of qualified  Great Lakes pilots. As shown in Figure 2, after continuing to increase  between 2014 and 2016, hourly rates for U.S. pilotage services in 4 of the  6 pilotage areas of the Great Lakes-Seaway were reduced for the 2017  shipping season. Since 2017, they have increased by about 10 percent  annually. According to the Coast Guard, these hourly rates are intended  to generate the revenues needed to cover the annual operating expenses  of the pilot associations; compensate working pilots; maintain  infrastructure, such as pilot boats and dispatch equipment; and train new  pilots.

In May 2016, shipping industry stakeholders filed a complaint in the U.S.  District Court for the District of Columbia contesting specific elements of  the Coast Guard’s 2016 rate-setting methodology. In November 2017, the  court dismissed 3 of the 5 original claims and found for the industry  plaintiffs for the two remaining claims. In March 2018, the court remanded  the matter to the Coast Guard to address those two claims while leaving  the 2016 rule in place. In November 2018, a coalition of shipping  industry stakeholders filed an additional complaint challenging the  underlying data and decision-making process used by the Coast Guard  for determining the 2018 Great Lakes pilotage rates. This case is still  pending before the court.

The Coast Guard Uses Several Mechanisms to Obtain Stakeholder Input on the Great Lakes Pilotage Program, and Stakeholders Have Raised a Variety of Issues for Consideration

The Coast Guard uses several mechanisms to obtain stakeholder input  on the Great Lakes Pilotage Program, which stakeholders have used to  raise a number of issues to the Coast Guard’s attention. Some of the  mechanisms are more formal and include obtaining stakeholder input on  proposed rule changes and at annual meetings, while other mechanisms  are informal and are employed on an as-needed basis. Since 2016,  shipping industry stakeholders and pilots have identified a number of  issues, or suggestions, they would like to see integrated within the Great  Lakes Pilotage Program. Issues identified by shipping industry  stakeholders relate, in large part, to the financial impacts associated with  the Coast Guard’s methodology for calculating pilotage rates, as well as  other areas where enhanced transparency or oversight is suggested.  Issues identified by pilots and their representatives include updating the  list of “designated waters” to include areas like Great Lakes ports and  addressing changes that may be needed to respond to the increasing  volume and variety of vessels needing Great Lakes pilotage services,  such as cruise ships.

The Coast Guard Uses Several Mechanisms for Obtaining Stakeholder Input

The Coast Guard uses several mechanisms to obtain stakeholder input  on the Great Lakes Pilotage Program. Formal mechanisms include  obtaining stakeholder comments during the rulemaking process and  soliciting input during annual meetings of the Great Lakes Pilotage  Advisory Committee. According to the Coast Guard, additional inputs are  also provided more informally during ad-hoc communications and  operational coordination efforts.

The federal rulemaking process represents a key mechanism by which  the Coast Guard obtains stakeholder input regarding proposed changes  to annual rates pilots may charge for services. Pursuant to the  Administrative Procedure Act, the Coast Guard publishes a notice of  proposed rulemaking in the Federal Register and allows a minimum of 30  days for public comment on any applicable changes to the rate-setting  methodology and proposed pilotage rates. According to Coast Guard  Great Lakes Pilotage Program officials, public participation is essential to  the rulemaking process and they consider all comments and information  received. In the final rule published to the Federal Register, the Coast  Guard summarizes the nature of the public comments received on the  notice of proposed rulemaking and characterizes how the comments were  incorporated into the final rule, as applicable. For example, the 2018 Final  Rule summarizes the comments received in eight different categories,  including pilot compensation benchmarks and staffing model  calculations. According to Coast Guard officials, they have historically  received about five to seven comments each year. However, they  received nearly 60 comments regarding the proposed rulemaking in 2016  given the broader scope of revisions and the higher rate of pilot  compensation proposed in that year.

As previously stated, the GLPAC is to meet at least once annually to  provide advice and make recommendations to the Coast Guard on  matters relating to Great Lakes pilotage. This committee is governed by  the Federal Advisory Committee Act, which calls for a published agenda,  public participation, and a written transcript of the proceedings. Our  review of 2017 and 2018 GLPAC meeting transcripts indicate the  meetings were well-attended and provided a venue for sharing a variety  of ideas and perspectives; as well as for providing specific input to the  Coast Guard. In addition to the annual GLPAC meetings, Coast Guard  officials also noted that GLPAC members participate in scheduled phone  calls to discuss pertinent matters—such as a discussion of executive  orders or revised regulations—on an as-needed basis. According to the  Coast Guard, since 2013 there have been up to three GLPAC meetings  per year, ranging in length from 5 hours to 2 days.

Coast Guard Great Lakes Pilotage Program officials also stated that  GLPAC recommendations from the 2014 meeting were a key input for  many of the rate-setting methodology changes implemented in 2016.  Although the Coast Guard is not required to implement them, program  officials commented that considerable weight is given to GLPAC-issued  recommendations. At the September 2018 meeting, the Committee  developed three recommendations addressing issues related to the billing  dispute process and issuance of temporary registrations to applicant  pilots. According to the Coast Guard, these recommendations are still  being considered for future action.

Coast Guard program officials reported that they have extensive ad-hoc  communications with shippers, pilots associations, and their Canadian  counterparts to coordinate pilot assignments and help reduce vessel  traffic delays on the Great Lakes-Seaway. These stakeholders  corroborated their communications with the Coast Guard during our  meetings with them. Other venues for information sharing and  stakeholder interaction identified by Coast Guard officials include visits to  the pilots’ offices to perform oversight functions, meetings with shipping  industry representatives and Canadian counterparts (Great Lakes  Pilotage Authority) at maritime meetings and conventions; as well as  interactions with Coast Guard officials from District 9 (Cleveland, OH),  which is responsible for broader Coast Guard activities in the Great  Lakes-Seaway. According to these Coast Guard program officials,  operational coordination and routine meetings with stakeholders provide  ongoing opportunities to obtain input on the Great Lakes Pilotage  Program and help inform potential changes that may be needed.

Shipping Industry Stakeholders and Pilots Have Identified a Number of Issues in Recent Years

Since 2016, when the Coast Guard implemented several significant  programmatic changes, shipping industry stakeholders and pilots have  identified a number of issues. Collectively, these issues have been the  subject of discussion during annual GLPAC meetings, documented in  written comments submitted as part of the annual rulemaking process,  and included in supplemental correspondence to the Coast Guard and  Members of Congress.

Issues Identified by Shipping Industry Stakeholders

Issues identified by shipping industry stakeholders relate, in large part, to  the financial impacts associated with the Coast Guard’s methodology for  calculating pilotage rates, as well as other areas where enhanced  oversight is suggested. The key issues cited by shipping industry  stakeholders in recent years generally fall into four categories: (1)  financial oversight and cost accounting, (2) vessel traffic estimates, (3)  pilot compensation and staffing, and (4) billing and dispute resolution.  Some of these issues remain the subject of ongoing litigation initiated by  a coalition of shipping industry stakeholders against the U.S. Coast  Guard. (See appendix II for additional details on selected issues identified  by shipping industry stakeholders, including a summary of the specific  claims that are in litigation).

Financial oversight and cost accounting. Since 2016, shipping  industry stakeholders have cited several issues regarding the timeliness  and transparency of financial information provided by the U.S. pilot  associations that is used during the rulemaking process. These issues  include a request for disclosure of individual pilot compensation levels,  and additional clarification and transparency regarding the use of the pilot  districts’ working capital funds. For example, shipping industry  representatives claim that disclosure of individual pilot compensation  levels would help ensure that compensation practices remain fair and are  not a disincentive to attracting and retaining Great Lakes pilots. At the  September 2018 GLPAC meeting, a pilots’ representative noted that this  information was previously provided for District 1, but was eliminated due  to concerns that the data could be used out of context. For example, this  individual stated that although all pilots in his association generally  receive the same rate of pay, some may obtain higher annual  compensation because of additional days worked. According to Coast  Guard officials, they do not collect or retain individual compensation data  on pilots; however, they do review such data during visits to the pilot  associations’ offices to help ensure fair compensation practices.

Vessel traffic estimates. In 2016, the Coast Guard began using a 10- year rolling average of Great Lakes-Seaway vessel traffic volumes to  estimate projected vessel traffic for each district in the coming year as  part of its annual pilotage rate-setting calculations. According to the  Coast Guard, this change was implemented to help reduce rate volatility  and remedy traffic overestimates that occurred in the past, largely based  on shipping industry projections. However, given the increasing volume of  vessel traffic on the Great Lakes-Seaway since the 2008-2009 recession,  shipping industry stakeholders contend that the 10-year rolling average  represents a significant underestimate of vessel traffic volume. For  example, in the 2017 shipping season, vessel traffic in 5 of the 6 pilotage  areas of the Great Lakes-Seaway exceeded the estimates (calculated  using a 10-year rolling average) by over 25 percent. According to its 2018  Notice of Proposed Rulemaking, the Coast Guard noted that use of the  rolling average will result in pilots taking in more revenue than projected  in some years, and in other years will result in less revenue. Coast  Guard officials believe that, over the long term, this methodology will help  ensure infrastructure is maintained and that pilots receive adequate  compensation and rest between assignments to enhance pilot retention.  Shipping industry organizations challenged the Coast Guard’s use of 10  years of traffic data in the complaint filed with the U.S. District Court for  the District of Columbia in November 2018, and that case is ongoing.

Pilot compensation and staffing needs. The data sources and  methodology used by the Coast Guard to develop a target compensation  benchmark for U.S. Great Lakes pilots have been subject to ongoing  disagreement among pilots and shipping industry stakeholders for several  years. Since 2016, the Coast Guard has used two primary data sources  as a basis for comparison—the average compensation of Canadian Great  Lakes-Seaway pilots, and compensation data for first mates on domestic  Great Lakes vessels (lakers). Shipping industry stakeholders identified  concerns with some of the specific adjustments made by the Coast Guard  related to both of these data sources and filed complaints in 2016 and  2018 in federal court contesting the Coast Guard’s methodology. A  related issue identified by shipping industry stakeholders concerns the  number of average pilot working days the Coast Guard uses to determine  the number of pilots needed each season. For example, the Coast Guard  uses 270 working days as a baseline to calculate pilot compensation  figures, but uses 200 working days to calculate staffing requirements so  as to account for a 10-day per month rest standard for pilots. The Coast  Guard states that this 10-day rest standard is not a requirement and  generally does not apply during the busiest times of the season. During  the busiest time, pilots generally remain available to work additional days  to service the increased vessel traffic on the Great Lakes-Seaway. The  2018 complaint filed by shipping industry stakeholders includes a claim  challenging the Coast Guard’s use of a 270-working day assumption, and  that case is ongoing.

Billing and dispute resolution. Other issues cited by shipping industry  stakeholders pertain to billings from pilot associations and the Coast  Guard’s dispute resolution process. The primary billing issues cited by  shipping industry stakeholders since 2016 include an increase in the  number of tug boats requested, as well as cases where double pilotage  was employed that shipping industry officials did not believe were  necessary. In the case of tug boat usage, pilot representatives  acknowledged that there may have been an increase in tug boat usage,  but they noted that they do not have any financial incentive to call for the  use of tug boats and they only request them, in coordination with the  shippers’ agents, when they deem them necessary. According to Great  Lakes Pilotage Program officials, the Coast Guard routinely reviews  inquiries from shippers on this issue, but noted that decisions to use tug  boats remain safety decisions that are made between the vessel  operators and the Great Lakes pilots. In contrast, authorizations for  double pilotage are provided on a case-by-case basis by the Director of  the Great Lakes Pilotage Program. According to the Coast Guard, there  were instances in which pilot associations charged for double pilotage  without obtaining authorization from the Director and, in such instances,  the Coast Guard has ruled in favor of vessel operators with regard to  billing disputes. Both of these issues were topics addressed at the  September 2018 GLPAC meeting, as well as discussion regarding  reasonable time frames for filing billing disputes. According to Great  Lakes Pilotage Program officials, some disputes were filed after an  extended period of time had elapsed, making it more difficult to adjudicate  the issues. For this reason, the Coast Guard reported that it is  considering introducing a maximum amount of time allowable for vessel  operators to initiate a billing dispute, and corresponding time frames for  pilot associations and the Coast Guard to respond and adjudicate,  respectively.

Issues Identified by Great Lakes Pilots and Their Representatives

Issues raised by Great Lakes pilots and their representatives generally  include the following categories: (1) recognition of the pilots’ unique  qualifications and role, (2) review of “designated waters,” and (3) review  of protocols for vessel priorities.

Recognition of pilots’ unique qualifications and role: Representatives  of the U.S. Great Lakes pilots state that the shipping industry remains  overly focused on pilotage costs and may fail to recognize the unique  qualifications that registered Great Lakes pilots possess and the  fundamental public interest the pilots serve by ensuring the safety of  vessel navigation and environmental protection on the Great Lakes- Seaway. The pilots noted that, in addition to the often challenging  weather conditions they face, they also serve a security role in that they  may be the only U.S. citizen on board to provide situational awareness to  U.S. authorities in the event of any suspicious activities given that foreign  vessels in the Great Lakes-Seaway can travel close to major  infrastructure and U.S. cities. The pilots also stated that it can be easy for  the shipping industry to select individual routes and billings to make a  case that U.S. pilots charge significantly more than their Canadian  counterparts, but they contend that is not an accurate picture of actual  system-wide costs.

Review of designated waters: Great Lakes pilots commented that  “designated water” determinations have not been reviewed for over 50  years and they should be reassessed. In particular, pilots note that  increases in the volume and variety of vessels; as well as expanded port  infrastructure on the Great Lakes-Seaway since establishment of the  Great Lakes Pilotage Program in 1960, warrant the consideration of  additional areas as “designated waters,” which are generally more  challenging to navigate and require registered pilots to be in full  navigational control of the vessels at all times as they transit these  designated areas. For example, pilots contend that the Straits of  Mackinac and all ports on the Great Lakes-Seaway should be considered  designated waters. Coast Guard officials reported that it is their  understanding that masters are already relying on pilots to direct  navigation in waters such as the Straits of Mackinac. Additionally, the  officials stated that the Coast Guard does not have the authority to make  these designation changes through regulation; rather, such revisions  require a presidential declaration.

Review of protocols for vessel priorities: Great Lakes pilots also  commented that increases in the volume and variety of vessel traffic on  the Great Lakes-Seaway in recent years may necessitate a review of the  first-come, first-served standard for assigning pilots to vessels. For  example, the pilots note that plans for increasing the volume of cruise  ships on the Great Lakes-Seaway may require adjustments to the priority  process for assigning pilots given that cruise ships are generally on fixed  itineraries and tight timelines. This issue was discussed at the 2018  GLPAC meeting and is the subject of ongoing discussions among the  Coast Guard and Great Lakes-Seaway stakeholders.

Stakeholder-Identified Alternatives to the Current Structure and Governance of the Great Lakes Pilotage System Entail Potential Tradeoffs

Some shipping industry stakeholders, and a recent report commissioned  by the Conference of Great Lakes and St. Lawrence Governors and  Premiers, have suggested that it is time to evaluate potential governance  alternatives to help ensure the Great Lakes pilotage system is efficient,  cost-effective, and better serves the needs of the maritime shipping  industry and the public. Some of the proposed alternatives include  changes that could be implemented within the existing governance  system, such as the consolidation of the three U.S. pilotage districts and  a review of some pilotage requirements. Other changes, such as  transferring the pilotage rate-setting function from the Coast Guard to  another entity, would entail more sweeping reforms and require statutory  changes. Finally, some proposals, such as the introduction of  competitive pilotage services, would reflect an even more significant  change from the existing model of Great Lakes pilotage consisting of  federal oversight and economic regulation of independent pilot  associations, known as a regulated monopoly.

District Consolidation and Review of Some Pilotage Requirements

Some shipping industry stakeholders and the report commissioned by the  Conference of Great Lakes and St. Lawrence Governors and Premiers  suggest that consolidation of the three existing U.S. Great Lakes-Seaway  pilotage districts might help reduce administrative costs. According to  these sources, such a consolidation could also limit the complexity  associated with vessel agents and shippers interacting with multiple pilot  associations over the course of a single journey on the Great Lakes- Seaway. Apart from consolidating all three of the existing districts into  one, industry stakeholders did not identify any other proposed alternatives  for changing the existing district boundaries.

According to representatives of the Great Lakes pilots, the expansive  area of the Great Lakes-Seaway and natural geographic boundaries lend  themselves to maintaining the three pilot associations. The pilot  representatives also noted that if the districts were to be consolidated,  shippers and agents would lose some degree of localized service  currently provided by each district, such as knowledge of local conditions  and transit times.

It remains unclear to what extent cost savings could be realized through  consolidation of the three existing U.S. pilotage districts. According to the  pilot association presidents, there are relatively few administrative and  support staff employed for such a large geographic area and some  perform multiple functions. Specifically, the pilots reported that,  collectively, there were 23.5 administrative positions (non-pilots),  comprised mostly of 8.5 seasonal dispatchers and 10 pilot boat  operators. Assuming that existing pilot boat operations would generally  remain consistent following district consolidation, administrative and  dispatch services represent the principal source of potential cost savings.

Based on our review of the Canadian Great Lakes Pilotage Association  (GLPA) model, which operates a single, consolidated administrative  office, it is not clear that the number of administrative staff, including  dispatchers, would be reduced after consolidation of the three U.S.  pilotage districts and associations. For example, during the 2018 shipping  season, the Canadian Great Lakes Pilotage Association included 21  administrative positions, of which 10 were designated as dispatchers— which is similar in proportion to the existing U.S. Great Lakes Pilotage  dispatcher distribution.

It is also important to note that even with a potential consolidation of  administrative functions within one U.S. pilotage district; pilots would still  be limited to operating within the geographic area where they are  licensed. According to pilots and Coast Guard program officials, cross- licensing is generally not feasible for multiple waterways between districts  given the extent of local specialized training and knowledge required and  is not practiced anywhere else in the United States or the Great Lakes- Seaway.

Some shipping industry stakeholders state that a broader review of Great  Lakes pilotage requirements may be necessary, particularly the  compulsory use of pilots in “undesignated” or open areas of the Great  Lakes. According to these stakeholders, such a review is warranted  given the significant technology improvements that have occurred since  initial passage of the Great Lakes Pilotage Act in 1960. Any proposed  changes to the existing pilotage requirements could not be implemented  through Coast Guard regulatory changes and would require legislative  changes or a presidential declaration.

Although a significant portion of a Great Lakes-Seaway vessel transit may  occur in “undesignated” open waters, the Coast Guard and pilots’  representatives cited several logistical challenges that would likely occur  if pilotage requirements in these areas were revised or eliminated. For  example, if a pilot was not on board a vessel in open waters, there likely  would be no way to get one on board in the event of severe weather,  equipment failure, or other emergency. In addition, the officials noted that  if a pilot did not remain on board the vessel for the entire transit, one  would still be required to navigate the vessel in and out of each port  destination. This would entail additional costs for picking up the  disembarking pilot and transporting the pilot to a designated shore  location and then later to transport another pilot to the vessel to navigate  into port. These additional pilot transfers may require the acquisition of  additional pilot boats, which are generally customized and can cost in  excess of $1 million. Alternately, each individual port could employ its  own registered pilot and make the necessary infrastructure investments,  including pilot boats and related dispatch equipment, but the result could  be an overall increase in the number of pilots operating in the system,  which could also increase pilotage costs.

Finally, an increasing number of vessels that otherwise are not compelled  to use pilots (e.g., domestic oil tankers) are requesting pilotage services  due, in part, to requirements by insurance providers. Because of this  increase in the requests for pilotage services, a change in open water  pilotage requirements may not result in a reduction in the number of pilots  required in some areas of the Great Lakes-Seaway.

Transfer of the Pilotage Rate-Setting Function from the Coast Guard to a Different Entity

Establish a Great Lakes Pilotage Advisory Board to Assist with Rate-Setting

The report commissioned by the Conference of Great Lakes and St.  Lawrence Governors and Premiers cites an opportunity for enhanced  input into the governance process through the establishment of an  advisory board or other oversight mechanism, such as those used  commonly in state pilotage commissions nationwide. According to the  report, such a mechanism would provide for increased industry  participation in the governance process beyond the consultative inputs  currently available through the GLPAC and rulemaking processes, and  could include responsibility for the pilotage rate-setting function. The  principal advantage cited for this increased level of participation would be  to better align pilotage services with user needs.

Under this proposal, an advisory board would be formed and the board  members would be involved in the full range of pilotage governance  functions as generally provided by state pilotage commissions. These  responsibilities commonly include safety oversight and related functions,  such as selecting individuals for admission into the training program,  overseeing the training process, issuing licenses, investigating accidents  or pilot complaints, taking disciplinary actions, and establishing pilotage  rates. All of these activities are current regulatory functions performed by  the Coast Guard and statutory changes would be required to designate a  new pilotage regulatory body and delineate these responsibilities. Given  that stakeholders we met with generally do not advocate for transferring  any of the safety oversight and related regulatory functions from the  Coast Guard, for the purposes of this report we will focus on the potential  tradeoffs associated with having an advisory board formed that would  only take responsibility for the Great Lakes pilotage rate-setting function  from the Coast Guard.

With regard to the rate-setting function, the introduction of an advisory  board to determine pilotage rates may not improve one of the core issues  cited by both shipping industry and pilot stakeholders at the most recent  GLPAC meeting that was held in September 2018. That is, no matter  what entity has responsibility for pilotage rate-setting—a new advisory  board or the Coast Guard—such an entity would face similar rate-setting  challenges posed by the competing interests of pilots and shipping  industry representatives. Further, according to a recent report reviewing  the pilotage system in the state of Washington, proposed changes to  pilotage rates are often evenly split between shipping industry  representatives and pilot representatives and final determinations  routinely come down to committee chairpersons or independent board  members, sometimes without full transparency regarding how decisions  were reached. In contrast, the current GLPAC process provides for  considerable input by committee members, stakeholder and public  participation, and is documented through publicly available transcripts.  Coupled with the rulemaking requirements that incorporate public review  and comments, we found that the existing mechanisms represent a fairly  transparent system of pilotage rate-setting as compared to the process  used by some coastal states.

Establish an Independent Rate-Setting Entity

One variation used in some U.S. coastal states to help overcome the  challenge of competing stakeholder interests during the pilot rate-setting  process is the establishment of an independent rate-setting entity, similar  to a public utility commission. In fact, one of the principal  recommendations in the Washington report was to transfer the rate- setting function from the state pilotage commission to an independent  utility and transportation commission in an effort to establish a more  clearly defined, rigorous, and transparent process with enforceable  timelines. In many respects, we found that the Coast Guard is currently  performing this independent function as its rate-setting process includes  many of the characteristics identified as a best practice, such as a defined  methodology, clear data submission and review process, and the  absence of any direct material interest in the outcome of the rate  determinations. While individual stakeholders may not agree with the  specific inputs and assumptions used by the Coast Guard, the current  process is generally transparent and provides an opportunity for informed  stakeholder feedback and identification of any grounds on which they can  choose to take legal action.

Transfer Pilotage Rate-Setting Authority to Another Federal Entity

Another option presented by various stakeholders is to transfer pilotage  rate-setting authority to another federal entity. Under this scenario, the  Coast Guard would retain its jurisdiction over safety and related  regulatory functions, but responsibility for pilotage rate-setting would be  transferred to another federal entity. One specific entity that has been  identified as a potential replacement for the Coast Guard is the Saint  Lawrence Seaway Development Corporation (SLSDC). According to  some stakeholders we spoke with, the SLSDC would have more of a  vested interest in ensuring that pilotage rate changes consider the  potential impact of such changes on the viability of commercial shipping in the Great Lakes-Seaway. SLSDC representatives declined to comment  specifically on this proposal, but they cited historical precedent to indicate  that if SLSDC were statutorily required to assume pilotage rate-setting  responsibilities, additional staffing resources would likely be needed.

It should be recognized that shipping industry and pilotage stakeholders  will continue to have vested interests in each of the rate-setting inputs  and assumptions that are used to determine pilotage rates and some  degree of contention is likely to remain no matter the entity responsible. In  addition, pilots’ representatives previously filed a complaint regarding the  transfer of pilotage rate-setting authority from the Coast Guard to the  SLSDC in the 1990s, and they told us that they continue to oppose such  a move. According to pilot representatives, they are concerned with a  potential transfer of the pilotage rate-setting function to SLSDC given its  role in trade promotion, which could potentially affect SLSDC’s ability to  remain fully independent in this role.

Whether the Coast Guard maintains responsibility for pilotage rate-setting  or that function is transferred to another federal entity like SLSDC, the  continued role of a federal entity in performing the pilotage rate-setting  process would ensure that Administrative Procedure Act requirements still  apply, thereby retaining transparency and providing stakeholders and the  public an opportunity for review and comment. While there may be some  potential for redundancy or increased administrative burden on the pilot  associations if the safety oversight and pilotage rate-setting functions  were split between the Coast Guard and another federal entity, similar  division of responsibilities currently exist in the handful of states that use  an independent rate-setting entity, such as a public utility commission. It  is the Coast Guard’s position that authorizing two federal agencies to  oversee different aspects of the Great Lakes Pilotage Program could be  challenging. For example, Coast Guard officials noted that a transfer of  the rate-setting function may not consider potential impacts to other  authorities associated with rate setting, such as limiting the number of  pilot pools; prescribing a uniform system of accounts; performing audits;  determining the number of pilots to be registered; and establishing  conditions for services.

Alternatives to a Regulated Monopoly of Great Lakes Pilotage

The existing model of Great Lakes pilotage consisting of federal oversight  and economic regulation of independent pilot associations is referred to  as a regulated monopoly. This model of regulating pilotage is employed  almost exclusively within U.S. coastal states and is also a common  method for delivering marine pilotage services worldwide. However, there  is also some precedent for pilots serving as government employees.  One reason why this government employee model has been identified as  one potential alternative for U.S.-registered pilots in the Great Lakes- Seaway is because a majority of the Canadian pilots that operate in the  Great Lakes-Seaway are federal employees.

Although making U.S. Great Lakes pilots federal employees could  eliminate the need for the Coast Guard to provide administrative and  financial oversight of independent pilots, we found that U.S. Great Lakes  pilot associations provide many administrative and logistical functions,  such as dispatching and pilot transfers, which would need to be assumed  by the federal government under this type of alternative model. According  to pilots’ representatives, one of the principal impacts of the government  employee model would likely be the provision of some financial benefit to  the shipping industry, given that taxpayers would potentially be assuming  the cost of pilotage salaries, benefits, and retirement-related benefits.  Additional costs to the U.S. government would also likely be required to  fund initial procurement of existing pilot association infrastructure and  assets, such as offices and pilot boats.

Another factor to consider in evaluating the pilots as federal employees  model involves how the Coast Guard budget process may also affect the  future funding and operation of pilotage operations. A significant  expansion of the pilotage program staffing and associated resource  requirements would likely pose an additional challenge to ensure  sufficient annual appropriations are obtained, given the ongoing need to  balance funding and resources across the Coast Guard’s 11 statutory  missions.

According to representatives of the Canadian Great Lakes Pilotage  Association, pilotage operations in their jurisdiction are to be financially  self-supporting through pilotage tariffs, and the Canadian government  does not provide an annual appropriation for this purpose. They noted  that government pension benefits are also incorporated into the pilotage  rates to help achieve these offsets. Similar mechanisms could also  potentially be used to fund the additional costs borne to the U.S.  government within a federal employee pilot model. Additional  considerations associated with a government employee model include the  different compensation and overtime structures, and the potential for  reduced flexibility afforded to the government if fewer numbers of pilots  are needed due to reduced pilotage demand. For example, according to  representatives of the U.S. pilot associations, each pilot presently  receives the same compensation for each working day they are available,  regardless of seniority. However, the U.S. federal government routinely  employs a system of graduated compensation based on years employed  and may face difficulties in hiring or terminating pilot employees if  necessary due to shifting pilotage demand.

Another approach identified within the government employee model is the  use of harbor pilots. This option would generally entail pilots working  directly for an individual or group of ports as municipal or port employees.  According to one pilot representative, the key challenge identified with  such an approach is that individual ports would each require its own  infrastructure and pilot boats to service incoming vessels, which could  represent a substantial investment. In addition, the geography of the  Great Lakes and the long transits many times involved present additional  hurdles associated with pilot transfers and related logistical support  services make the harbor pilot approach less feasible.

Competition for Pilotage Service Delivery

Shipping industry stakeholders have also proposed that the Coast Guard  consider the introduction of some level of competition for pilotage service  delivery, which would represent the most significant change to the  existing model of pilotage regulation. According to shipping industry  stakeholders, the introduction of competition would be intended to provide  an additional incentive for pilot associations to contain costs. Some  specific mechanisms identified include introducing a competitive bidding  process to provide pilotage services under multi-year contracts, or  allowing individual pilots or groups of pilots to compete for business from  vessel operators. The concept of using some form of competitive bidding  to grant multi-year contracts for pilotage service delivery is generally  consistent with government cost-containment efforts. However,  stakeholders we spoke with were unable to identify any pertinent  examples where market competition for pilotage services was currently  used within U.S. coastal states to provide a basis for further evaluation of  this model.

According to the Coast Guard and pilot representatives, several features  of the Great Lakes-Seaway pilotage system present challenges for  potentially implementing competitive pilotage services in the Great Lakes- Seaway. Most notably, the nature of marine pilotage requires several  years of specialized training and local experience that entail significant  time and investment to acquire. These requirements generally result in a  limited supply of available pilots that could compete for a competitive  contract in the same geographical area. This represents a potential  barrier to market entry and could lead to a single, entrenched service  provider, which may reduce the competitive pressure toward cost  containment. Further, if registered pilots did not have the assurance of  steady employment in the Great Lakes, there may be increased  incentives for them to seek opportunities outside of the region, thereby  reducing the overall pool of available pilots.

Other mechanisms of pilotage competition, such as allowing individual  pilots or pilot associations to compete for business, would represent a  fundamental shift from the norms of compulsory pilotage services  worldwide. As a representative of the American Pilots Association stated  at the September 2018 GLPAC meeting, one of the foundations of the  existing regulated monopoly system is that pilots provide services using  their independent judgement to ensure marine safety and the public  interest and should not be subject to any potential financial incentive or  business pressure from a vessel operator. Similar statements can be  seen in Florida state statutes, which specify the need for economic  regulation of marine pilotage at the state level, rather than competition in  the marketplace, to better serve and protect the public health, safety, and  welfare. In contrast, shipping industry stakeholders suggest that there  are likely comparisons to the deregulation implemented in other industries  where public safety is also of paramount concern, such as commercial  aviation. However, an evaluation of models of competition used in other  industries was outside the scope of our review. An additional challenge  noted by pilot representatives is that, in a competitive model, pilots may  prefer to pursue customers offering more regular or profitable work rather  than operate in a non-discriminate manner as is currently the case under  the existing numbered rotation system of pilotage assignment.

Along these lines, research conducted by KPMG on international models  of marine pilotage, found that although a model “comprised of  independent contractor pilots could result in theoretically more  competitive rates, the combination of what appears to be relatively the  same demand for pilotage services in the market, and the uniqueness of  pilot skillsets have resulted in a scenario where competition is limited in  reality.” The authors’ findings also suggest that, in the few cases where  competitive pilotage was introduced, it was generally unsuccessful; and  that absent sufficient oversight, direct competition among pilots could  potentially lead to incentives to cut costs through reduced focus on safety  and quality of service.

In May 2019, we provided a draft of this report to the Department of  Homeland Security and the Coast Guard for review and comment. The  Coast Guard provided technical comments which we incorporated into the  report.

We are sending copies of this report to the appropriate congressional  committee, the Secretary of Homeland Security, the U.S. Coast Guard,  and other interested parties. In addition, the report is available at no  charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (206) 287-4804 or AndersonN@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.

Appendix I: Summary of Great Lakes Pilotage Rate-Setting Methodology

Pursuant to the Great Lakes Pilotage Act of 1960, the Coast Guard  regulates pilotage for oceangoing vessels on the Great Lakes—including  setting the rates for pilotage services and adjusting them on an annual  basis. For the 2018 shipping season, these base pilotage rates ranged  from $271 to $653 per pilot hour depending on the specific areas where  pilotage service is provided. According to the Coast Guard, the three  U.S. pilot associations use this revenue to cover operating expenses,  compensate working pilots, maintain infrastructure, such as pilot boats,  dispatch equipment, and personal pilotage units; and train new pilots.  The Coast Guard uses the following 10-step methodology to calculate  revenues needed for each Great Lakes pilotage association based on the  estimated volume of foreign vessel traffic for the upcoming shipping  season.

Step 1 – Recognize previous operating expenses. The Director of the  Great Lakes Pilotage Program reviews audited operating expenses from  each of the three U.S. Great Lakes pilot associations. This number forms  the baseline amount that each association is budgeted. There is a 3-year  delay between the year the expenses were incurred and when they are  included in the rate-setting calculation. For example, the 2019 pilotage  rates are calculated using 2016 operating expenses.

Step 2 – Project operating expenses, adjusting for inflation or  deflation. The Coast Guard applies 3 years of inflation adjustors to the  baseline of operating expenses identified in Step 1. The inflation adjustors  routinely used are from the Bureau of Labor Statistics’ Consumer Price  Index.

Step 3 – Estimate the number of working pilots. The Coast Guard  determines the number of working pilots that need to be compensated via  collection of pilotage fees. As part of this step, the Coast Guard also uses  a “staffing model” to determine how many pilots may be needed for each  district to handle expected shipping traffic at the beginning and close of  the season. According to the Coast Guard, this number helps inform the  Director of the Great Lakes Pilotage Program regarding how many total  pilot credentials may be authorized for each district to help meet future  demand.

Step 4 – Determine target pilot compensation. This step contains two  phases to determine the revenue needed for pilot compensation. In the  first phase, the Coast Guard determines a target “compensation  benchmark” for each of the working pilots. For the 2018 shipping season,  this number was derived from 2015 data provided by the American  Maritime Officers Union regarding labor contracts, along with annual  inflation adjustments deemed applicable by the Director. The second  phase entails multiplying this compensation figure by the number of  working pilots in each pilotage district and area.

Step 5 – Project working capital fund. This value is obtained by adding  total operating expenses (step 2) and total pilot compensation figure (step  4) and multiplying that figure by the annual rate of return from the  preceding year for new issues of high-grade corporate securities.

Step 6 – Project needed revenue. The Director of the Great Lakes  Pilotage Program adds the total values produced for operating expenses,  total pilot compensation, and the working capital fund. This number,  which is calculated separately for each district and area, represents the  total projected revenue needed for the upcoming season.

Step 7 – Calculate initial base rates. This step consists of first  calculating the 10-year vessel traffic average for each district and area.  Then, the figure for needed revenue is divided by the 10-year traffic  averages.

Step 8 – Calculate average weighting factors by area. Since each  vessel that requires a U.S. Great Lakes pilot pays a multiple of the “base  rate” based on its size (ranging from 1.0 for the smallest vessels to 1.45  for the largest vessels), the Coast Guard calculates the extra revenue that  has historically been produced by the weighting factor in each area.

Step 9 – Calculate revised base rates. The Coast Guard modifies the  base rate to account for the extra revenue generated by the weighting  factors. This is done by dividing the initial base rate by the average  weighting factor to produce a revised rate.

Step 10 – Review and finalize rates. According to the Coast Guard, this  step can be referred to informally as “director’s discretion” and is  principally intended to help ensure that the rates meet the goals set forth  in applicable law and regulation. The Coast Guard reported that no  additional adjustments were included as part of this step for the 2018  Final Rule.

After the base pilotage rates are set, the Coast Guard also considers  whether surcharges are necessary, such as those used to help fund the  training of new pilots. This amount is calculated as a percentage of total  revenue for each district and that percentage is applied to each bill until  the total amount of the surcharge is collected.

Appendix II: Further Information on Issues Identified by the Shipping Industry and Recent Litigation on Great Lakes Pilotage

Financial Oversight and Cost Accounting   Shipping industry stakeholders identified a number of issues related to  improving the timeliness and transparency of pilotage association  financial information used in pilotage rate-setting process. Among these  include (1) addressing the 3-year time lag that exists to incorporate  pilotage expenses into the rate calculations; (2) presentation of financial  information in a uniform format; (3) disclosure of individual pilot  compensation data; and (4) clarifying the purpose and authorized uses of  the working capital fund.

3-year time lag to incorporate pilotage expenses. Shipping  industry stakeholders suggest that the Coast Guard make an effort to  reduce the 3-year time lag to incorporate pilotage expenses into the  rate-setting calculations. For example, audited financial information for  the 2016 shipping season is used in the development of the 2019  rulemaking. At the most recent GLPAC meeting in September 2018,  Coast Guard representatives identified several reasons for this time  lag, including about 6 months required for an auditor to conduct an  independent review of pilotage expenses and multiple stages of  federal review that can take an additional 6 months for the Coast  Guard to develop and publish the proposed rate in the Notice of  Proposed Rulemaking each year. Pilot representatives and Coast  Guard officials generally agree that shortening this lag would be  preferable, but are unable to identify a method by which this could be  achieved given the existing time frames required for the financial  auditing and rulemaking processes.

Uniform format for financial reporting. Shipping industry  stakeholders have requested that audited financial statements for the  pilot associations be presented in a uniform format. According to an  industry representative, the audited financial statements (prepared  individually by each pilotage association each year after the shipping  season) differ primarily due to the standard accounting practices of  the different organizational structures. Specifically, two pilot  associations are partnerships and one is a corporation. Our review  indicates that a consistent format is used by the Coast Guard and its  designated independent reviewer to present summary information of  applicable expenses for all three pilot associations as part of the  rulemaking process.

Public reporting of individual pilot compensation. Shipping  industry stakeholders contend that individual pilotage compensation  levels should be disclosed to help ensure revenues are being shared  equally among the associations’ workforce. According to one pilot  representative, individual compensation data were previously  provided for District 1 as part of audited financial statements, but was  eliminated because the information was being used out of context.  The pilot representative noted that although all pilots in his association  generally receive the same rate of pay, some may obtain higher  annual compensation due to additional days worked. According to  Coast Guard officials, they do not collect or retain individual  compensation data on the pilots, but they do review such data during  visits to the pilot association offices to help ensure fair compensation  practices.

Enhanced transparency of the working capital fund. Members of  the shipping industry also identified an issue related to the “working  capital” component of the rate-setting process. According to these  stakeholders, this fund could potentially be used to augment general  revenue and compensation levels and there is a lack of transparency  regarding how these funds are being applied to fund capital  improvements. This position was the basis of one of the claims  included in the complaint filed by a coalition of industry stakeholders  in November 2018. In that complaint, the plaintiffs claim that the  Coast Guard’s failure to eliminate the working capital element as a  basis for additional revenue requirements or to bound revenue raised  as working capital to particular uses is arbitrary and capricious,  among other things. That case is ongoing. According to pilots’  representatives, this fund is important to help fund capital  improvements, particularly through the winter months, but they also  recognize that additional clarity could be provided about its intended  uses and potential limitations. In November 2018, the Coast Guard  issued guidance to each of the pilotage association’s presidents  regarding the reporting and uses of the working capital fund.  Specifically, the Coast Guard directed the associations to segregate  revenues generated by this fund and place them into a separate  account at least once per quarter, and further clarified that funds from  this account could be applied only toward capital projects,  infrastructure improvements/maintenance, and non-recurring  technology purchases necessary for providing pilotage services.

In 2016, the Coast Guard initiated changes to its rate-setting methodology  regarding how it estimates projected vessel traffic for each district and the  corresponding hours worked for related pilotage services. Citing a  recommendation issued by the Great Lakes Pilotage Advisory Committee  in 2014, the Coast Guard initially proposed using a rolling average of 5  years of historical shipping data to estimate traffic volume as part of its  ratemaking calculations for the 2016 shipping season. However, based  on public comments received on the 2016 Notice of Proposed  Rulemaking, the Coast Guard increased this number to 10 years of  historical data. According to the Coast Guard, this change was  implemented to further reduce rate volatility and help remedy traffic  overestimates that occurred in the past, largely based on industry  projections.

Given the increasing volume of actual Great Lakes-Seaway vessel traffic  in recent years, shipping industry stakeholders contend that the 10-year  rolling average used for rate-setting calculations represents an  underestimate of traffic volume. Responding to the 2018 Notice of  Proposed Rulemaking, industry commenters asserted that the 10-year  average included a period of substantially depressed traffic volume  caused by the recession in 2008-2009, which if used to estimate future  traffic volume could result in increased pilotage rates. See Table 1 for a  summary of the variance between actual traffic volumes during the 2017  Great Lakes-Seaway shipping season compared with the estimates  calculated using a 10-year rolling average.

In the November 2018 complaint, shipping industry organizations argued  that the Coast Guard’s use of 10 years of traffic data, in contrast with the  shorter periods used to determine expenses and manning levels, was  arbitrary and capricious, among other things, and that case is ongoing.

The process and sources used by the Coast Guard to develop a target  compensation benchmark for Great Lakes pilots have been subject to  ongoing disagreement among stakeholders. Prior to 2016, the Coast  Guard used compensation data for first mates on domestic Great Lakes  vessels as the basis for comparison. This data was based on labor  contracts of the American Maritime Officers Union (AMOU). However, in  2016, when the AMOU determined it would no longer provide this data to  the Coast Guard, program officials revised the rate-setting methodology  to begin using the average compensation of Canadian vessel pilots as the  primary source, along with a 10 percent adjustment that program officials  believed was appropriate to reflect the different level of benefits provided  to Canadian pilots as government employees. After the court found that  the 10 percent adjustment to the Canadian compensation level  benchmark was not supported by reasoned decision-making and  remanded the matter to the Coast Guard, for the 2018 rulemaking, the  Coast Guard reverted to using the pre-2016 compensation data of  domestic “laker” first mates. However, the November 2018 complaint  included a claim that the Coast Guard improperly applied an adjustment  of “guaranteed overtime” to the compensation benchmarks based on  additional input provided by the AMOU during the notice and comment  period. This case is ongoing. Regardless of the basis used, the  benchmark pilot compensation levels have not varied greatly in recent  years after accounting for annual inflation adjustments. That is, target  compensation in 2016 was $326,114 and has increased to $359,887 in  2019, an average annual increase of approximately 3.3 percent.

One related change implemented by the Coast Guard in 2016 that can  also affect pilot compensation figures includes the determination to  calculate pilotage rates based on the actual number of working Great  Lakes pilots rather than the total number authorized. For example, in  2019 there were 54 total authorized U.S.-registered Great Lakes pilots,  but only 51 were actually employed and available to provide pilotage  services. According to the Coast Guard, this change serves, in part, to  remove any financial incentive of pilot associations to operate with fewer  pilots than allowable to increase individual compensation levels.

The shipping industry has also identified issues regarding the number of  working days the Coast Guard uses to calculate compensation figures  and its application of a 10-day per month rest standard for pilots. For  example, in 2016, the Coast Guard began using 200 working days per  season as the basis for staffing calculations—down from 270—to allow  for up to 10-days of rest per month. According to the Coast Guard, this  change was made, in part, to address recommendations from the  National Transportation Safety Board regarding reducing possible “pilot  fatigue.” However, shipping industry stakeholders have suggested that if  200 days is the benchmark for working days, it should also be used to  determine pilot compensation levels. Instead, the Coast Guard multiplies  the weighted daily rate derived from AMOU compensation data by 270 to  calculate the target annual compensation. This issue is also the subject of  a claim included in the 2018 complaint, which alleges that the Coast  Guard’s use of the 270-day multiplier value is arbitrary and capricious,  among other things. The shipping industry stakeholders further contend  that the 10-day rest standard may need to be revisited to ensure  adequate pilot availability and avoid any unnecessary increases in total  pilot numbers. The Coast Guard states that this 10-day rest standard is  not a requirement and generally does not apply during the busiest times  of the season, when pilots would remain available to work additional days  to service increased vessel traffic on the Great Lakes-Seaway.

Billing Concerns and Dispute Resolution  There is ongoing concern among shipping industry stakeholders about  certain billings from pilot associations they view as unnecessary and the  Coast Guard’s dispute resolution process. The primary billing issues cited  by shipping industry stakeholders since 2016 include an increase in the  number of tug boats requested, as well as cases where double pilotage  was employed that vessel operators did not believe were necessary. In  the case of tug usage, pilot representatives generally recognize an  increase in tug usage but respond that they do not have any financial  incentive to call for the use of tug boats and that pilots only request them,  in coordination with the shippers’ agents, when they are deemed  necessary. Pilot representatives at the 2018 GLPAC meeting also stated  that tug boats represent additional insurance to avoid any potential  collisions in an increasingly risk-averse environment. Further, they noted  that the newer pilots that have come onboard in recent years may also be  a contributing factor for an increase in tug usage. According to the Coast  Guard, the program routinely reviews inquiries from shippers and masters  on this issue, but decisions to use tug boats remain safety decisions  between the master and pilot.

In contrast, authorizations for double pilotage are provided on a case-by- case basis by the Director of the Great Lakes Pilotage Program as  specified in regulation. In general, the Director may authorize double  pilotage when aids-to-navigation have been removed due to ice and  weather conditions, dead ship tows, adverse weather and sea conditions,  or any abnormal condition that will likely result in extended transits in  designated waters. According to the Coast Guard, there were instances in  which pilot associations charged for double pilotage without obtaining  authorization from the Director of the Great Lakes Pilotage Program. In  such cases, the Coast Guard has ruled in favor of vessel operators with  regard to billing disputes.

According to Great Lakes Pilotage Program officials, if vessel operators  believe a billing error was made, they should first engage directly with the  respective pilot association to review the charges and rectify any  mistakes. If no agreement is reached with the pilot association, then the  vessel operator can make an appeal to the Coast Guard to conduct a  further review. If the Coast Guard review determines that a chargeback is  justified, they can issue an advisory opinion that the pilot association  refund any amount not approved by the Coast Guard or reissue the bill.  At the September 2018 GLPAC meeting, Coast Guard representatives  noted that some billing concerns were presented after more than 2 years  and did not include sufficient details to effectively review and make an  informed decision. The Coast Guard is currently working on a proposal to  establish reporting timelines for presenting and making determinations on  billing disputes.

Another billing concern cited by industry stakeholders at the 2018 GLPAC  meeting includes objections to an absence of limits to charges when  pilots are onboard a vessel but it cannot get underway due to inclement  weather or for other reasons. Pilot representatives point out that such  delays consume pilotage resources and the charges are needed to  provide an incentive for shippers and agents to remain efficient when  ordering and releasing a pilot. Shipping industry stakeholders note that  there are a range of factors that can cause a pilot to be detained onboard  and the charges, which can exceed $20,000 per day, are unreasonable  and represent a large, unforeseen cost. According to Coast Guard  officials, they plan to continue engagement with GLPAC members on this  issue, recognizing that pilot resources should be employed efficiently, but  also that weather/ice conditions may require pilots to remain onboard a  vessel for an extended period of time at significant additional cost.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Christopher Conrad (Assistant  Director), Ryan Lambert (Analyst-in-Charge), Chuck Bausell, Dominick  Dale, Michele Fejfar, Eric Hauswirth, and Tracey King made key  contributions to this report.

The Great Lakes-St. Lawrence Seaway serves more than 100 ports and supplies drinking water for millions of people. To protect it, federal law requires foreign commercial vessels to use local registered pilots for navigation. The Coast Guard manages a program that oversees the pilots and sets their fees.

Shipping industry representatives and others have suggested changes to the program. This report discusses these options. Industry, for example, has urged opening pilot services to market competition. Coast Guard officials and pilots told us competition would be difficult because of the specialized training and local experience pilots need.