FEDERAL REG

SOR/2016-90: Regulations Amending the Great Lakes Pilotage Tariff Regulations and Making a Related Amendment

REGISTRATION OF FEDERAL REGULATION - VIA OIC DATABASE, PRIOR TO PART II OF THE GAZETTE

Registered
May 6, 2016


REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Issues In its 2008 Special Examination Report, the Auditor General required the Great Lakes Pilotage Authority (the Authority) to take measures to eliminate its accumulated deficit and to be financially self-sufficient. The Authority has been successfully taking measures to control its costs and to increase reve... (Click for more)


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Published on May 6, 2016

Bill Summary

SOR/2016-90: Regulations Amending the Great Lakes Pilotage Tariff Regulations and Making a Related Amendment

REGULATORY IMPACT ANALYSIS STATEMENT (This statement is not part of the Regulations.) Issues In its 2008 Special Examination Report, the Auditor General required the Great Lakes Pilotage Authority (the Authority) to take measures to eliminate its accumulated deficit and to be financially self-sufficient. The Authority has been successfully taking measures to control its costs and to increase revenues as means of reducing its 2009 accumulated deficit of $5.5 million to $0.4 million at the end of 2014. Based on the latest forecasts, the Authority is anticipating a $0.4 million loss for 2015, which would increase the accumulated deficit to $0.8 million. The 2015 loss is primarily due to unreasonably high pilot overtime and productivity to support the 13.3% increase in traffic levels from the anticipated traffic levels used in the budget for the amendment of the 2015 to 2017 tariff rates. The Authority plans to hire and train additional pilots to service the increased pilotage assignments. However, the associated training costs for these incremental pilots were not part of the assumptions used in the previously approved rate increases (i.e. 2016–2017 tariff rate increases). The other component contributing to the 2015 loss is the approximate $0.3 million of unforeseen pilot transfer fees that had not been known during the 2015 tariff rate revision. Finally, the Authority’s customers have requested the Authority to introduce a new short notice fee to allow the Authority to provide pilotage services for requests made within 12 hours. Background The Authority, a Crown corporation listed in Part I of Schedule III to the Financial Administration Act, was established in 1972 pursuant to the Pilotage Act (the Act). The Authority is required by subsection 33(3) of the Act to fix pilotage charges at a level that permits the Authority to operate on a self-sustaining financial basis and is fair and reasonable. The following events, however, are threatening the ability of the Authority to return to its self-sustaining basis that was emphasized as a priority in the 2008 Special Examination Report conducted by the Auditor General. Incremental pilots needed to meet current traffic demands — Unbudgeted costs Even though the 2015 to 2017 tariffs have been set, the underlying traffic level assumptions as well as the corresponding pilot numbers have changed significantly. In establishing the 2015 to 2017 tariff rates, assignments were forecasted to be approximately 6 400, which could be easily serviced by the 55.5 full-time equivalent (FTE) pilots; however, in 2015, there were approximately 7 400 assignments. As a result, the Authority estimated that 5 additional pilots are needed to efficiently service the increased workload (7 000 assignments) anticipated in the future. The hiring of new pilots comes with incremental apprentice-pilot training costs. Pilot transfer services at the locks — Unbudgeted costs Prior to the start of the 2015 navigation season, the St. Lawrence Seaway Management Corporation informed the Authority that it would no longer have linespersons available at three locks to assist pilots boarding and disembarking vessels at no costs because the linespersons were replaced by the implementation of a hands-free mooring system. The purpose of the system is solely for safely securing vessels in the locks and does not accommodate pilot transfers. Consequently, the Authority was required to negotiate contracts with third parties to ensure safe pilot transfer services are in place at the St. Lambert Locks, the Beauharnois Locks, and Lock 7 in the Welland Canal. Given the 2015 to 2017 tariffs had been finalized prior to the loss of this service, the Authority agreed to incur these costs without passing on the cost to its customers in 2015. However, the Authority can no longer absorb the approximate $0.5 million annual cost without increasing revenues. Short notice service requests Subsection 8(1) of the Great Lakes Pilotage Regulations (the Regulations) requires that a customer provide the Authority with at least a 12-hour notice before a pilot is required. While the Authority may waive this notice per subsection 8(2) of these Regulations, this has never been done because it would result in non-recoverable costs (i.e. pilot overtime and productivity). To provide added flexibility to its customers, the Authority is adding a new charge for the short notice requirement in the amendments to recover associated costs in order to facilitate access to pilotage services for customers who wish to seek these services with less than a 12-hour notice. Objectives The objective of this regulatory amendment is to revise the tariff surcharge and to set new pilot transfer fees and a new short notice fee. The tariff amendments are required for the Authority to continue to offer safe, efficient and economical pilotage services, while allowing the Authority to fully eliminate its accumulated deficit and be financially self-sufficient for the subsequent years. Revised tariff surcharge This surcharge revision ensures that the Authority’s revenues from pilotage surcharge tariffs are sufficient to offset the incremental pilot recruiting and training costs due to the higher volume demands and higher than anticipated pilot retirements as well as to increase pilot numbers to reduce the vessel delays due to a shortage of pilots at a more reasonable level which the industry can accept. New pilot transfer fees These new fees allow the Authority to recover the cost associated with ensuring the safe boarding and disembarking of pilots at the three locks where there are pilot exchanges. New short notice fee At the customers’ requests, this fee will allow the Authority to recover the costs associated with providing pilotage services within 12 hours of a request. Description Revised tariff surcharge The Authority is amending the following increase to its previously approved tariff surcharges: — from 11.0% for 2016 to 12.0%; and — from 10.0% for 2017 to 11.5%. The tariff surcharge will be in effect until the end of 2017 at which time the Authority will have discussions with its users about the necessity of maintaining appropriate tariff surcharges. New pilot transfer fees The Authority is introducing new pilot transfer fees for vessels transiting through the St. Lambert Locks, the Beauharnois Locks and Lock 7 in the Welland Canal. The new charge is strictly a cost recovery of the anticipated cost for the service. These fees will remain in effect until the Authority, along with its stakeholders, can find alternative solutions while ensuring pilot transfers are provided in a safe and efficient manner. The fee for 2016 is $125/pilot transfer and $128/pilot transfer for 2017. New short notice fee The Authority introduces a new fee for a short notice on requesting pilotage services when it is less than the 12-hour minimum requirement. The fee will be established at the Authority’s average cost per assignment, which is $3,569. “One-for-One” Rule The “One-for-One” Rule does not apply to this amendment, as there is no change in administrative costs for business. Small business lens The small business lens does not apply to this amendment, as there are no costs for small business. Consultation The Authority’s principal stakeholder is the Shipping Federation of Canada, which represents the owners/ operators of foreign-flag ships that operate within the Great Lakes system. It is mandatory that foreign-flag ships use Authority pilotage services while transiting these waters. Foreign-flag ships represent approximately 85% of the Authority’s business. The Authority met with the Federation on numerous occasions in 2015 to discuss the proposed tariff structures. Presentations were made on the traffic assumptions, which are substantially greater than what had been discussed when the 2015 to 2017 tariffs had been proposed, the pilot numbers given the anticipated pilot retirements and expected continuing vessel delays due to a shortage of pilots should the Authority not respect its pilot succession planning strategy, as well as on the revised financial forecasts for the two years in question. The Authority demonstrated that the tariff structures will only allow the Authority to (i) offset the higher apprentice-pilot recruiting and training costs; and (ii) recover unexpected pilot transfer costs that had not been known at the time the 2016–2017 tariffs had been finalized, prior to the start of the 2015 navigation season. The Canadian domestic fleet, represented by the Canadian Shipowners Association (the Association), represents the remaining 15% of the Authority’s business. The Association represents approximately 70 Canadian-flag ships, most of which do not use the services of the Authority’s pilots as at least one of their crew members holds a Great Lakes pilotage certificate. However, approximately 10 ships within the domestic fleet are Canadian tankers that would request pilotage services when transiting certain districts under the Authority’s jurisdiction or that have ship/cargo charterers requiring them to use the services of a pilot. In December 2015, the Authority discussed the tariff amendments along with other business matters with representatives of the Association. All stakeholders are aware that the Authority needs to respect its objective to remain financially self-sufficient, which it had previously planned and communicated. The amendments to the tariff structure are viewed as reasonable and fair to its customer base. The Federation has expressed that it would not object to these tariff amendments, while the Association did not provide any indications that it would object to these tariff amendments. As required under section 34 of the Pilotage Act, these amendments were published in the Canada Gazette, Part I, on February 13, 2016, followed by a 30-day comment period to provide interested persons with the opportunity to make comments or to file a notice of objection with the Canadian Transportation Agency (CTA). No comments were received and no notices of objection were filed. Rationale The ultimate objective is to ensure that the Authority will be financially self-sufficient. While being financially self-sufficient is a priority, the Authority needs to continue to invest in its resources to ensure it operates, maintains and administers its pilotage services within the Great Lakes region in an efficient and safe manner, as per its mandate. The Authority charges the user, or customer, for its services. The optimal quality of service is one that is completely safe (i.e. a service without shipping incidents, without injury or damage to individuals, vessels, port facilities or the environment) and that is efficient (i.e. without delays caused by pilot shortage). There is an inherent safety risk associated with pilotage services and the potential for an accident is always present. However, based on historical performance results, the Authority has maintained an extremely low level of shipping incidents — it is 99.9% incident free. The Authority determined the necessary tariff adjustments following an analysis of the forecasted financial results. Revised tariff surcharge The 2016–2017 traffic assumptions approved in 2014 by the industry included approximately 6 400 assignments per year. The current level is closer to 7 400 for 2015 and is easily expected to be between 6 700 and 7 000 for 2016 and 2017, which the industry has now confirmed. This increase is a significant one that the current pilot numbers can no longer service on an ongoing basis — thus creating high levels of vessel delays due to a shortage of pilots. The Authority thus needs to hire and train an additional five pilots in addition to those previously planned for when the tariffs were set in 2014. Also, the high level of pilotage demands have placed an additional burden on older pilots (average age is approximately 60), who, as a result, are now contemplating earlier retirement than their previous plans. This was not the trend when the assignments per pilot were at more manageable levels. Without the adjustment to the tariff surcharge rates that would allow for the increase in pilot numbers, the customers will continue to experience a high level of vessel delays due to a shortage of pilots. The overall business financial implications to the customer are much greater than the increase in tariffs that are being amended. When the decision was made in 2009 to reduce pilot numbers due to the lower traffic level, the customers were aware that the Authority would eventually need to increase its pilot numbers when the traffic returned to pre-2009 recession levels. The Authority’s optimum level of average assignments per pilot needs to be between 110 and 115 for the 9-month period to ensure a safe and efficient pilotage service. Pilots averaged 136 assignments in 2014 and are on track to average even more assignments in 2015. These averages cannot be maintained indefinitely without creating safety concerns. Pilot numbers need to be increased to maintain the most safe and efficient pilotage service for the Authority and its customers. Compared to the 2016 and 2017 surcharge rates previously approved and given the higher traffic projections, the increases will generate additional revenues of approximately $216,000 in 2016 and $310,000 in 2017. The overall net increases in the tariff rates will allow the Authority to recover the greater pilot recruiting expenditures to ensure pilot succession planning and to maintain its financial self-sufficiency for those two years. New pilot transfer fees The Authority has no option but to introduce a charge for the pilot transfers in the three locks stated above, as it has a legal obligation to ensure that the transfers are done in a safe manner. The pilot transfers at the locks are considered to be the most economical solution. The only other option is to have pilot transfers outside of the locks, with the use of pilot boats. This option is not financially feasible as the increase in tariffs required to support this type of operation would be significant. The Authority would need to purchase pilot boats, hire additional pilots to crew the pilot boats and incur ongoing operational costs. The new pilot transfer fees will generate additional revenues of approximately $446,000 in 2016 and $455,000 in 2017, which will simply offset the expenditures paid to the service provider. New short notice fee The introduction of the fee to waive the minimum 12-hour pilotage service request notice is in response to requests from customers. As the decision to request a shorter notification period is at the sole discretion of the customers as part of their operational needs, the Authority will not accommodate these requests if it is unable to recover the associated incremental costs. Given that the number of requests from customers cannot be determined, no cost sensitivity analysis has been prepared. The customers would complete a financial analysis to determine if it is in their best interest to pay the fee to waive the minimum notification period for their business purposes. Summary To put these increases in perspective, for a large-sized ship transiting the St. Lawrence Seaway between Montréal and Thunder Bay, the cost based on the previously approved tariffs is approximately $49,000 for a one-way trip in 2016. Should these amendments be approved, the cost will be $49,800 (a 1.6% net increase). The Authority’s overall increase in its tariff surcharge rates and the new pilot transfer fees for 2016 and 2017 are in line with its 2016–2020 Corporate Plan objectives to be financially self-sufficient. The revenue generated from the amendments will be beneficial as it will enhance the Authority’s ability to fulfill its mandate to operate on a self-sustaining financial basis. The amendments will also allow the Authority to continue to provide a safe and efficient pilotage service in accordance with the requirements of the Act. Implementation, enforcement and service standards Section 45 of the Act provides an enforcement mechanism for these Regulations in that a pilotage authority can inform a customs officer at any port in Canada to withhold clearance from any ship for which pilotage charges are outstanding and unpaid. Section 48 of the Act stipulates that every person who fails to comply with Part 1 of the Act, other than section 15.3, or with the Regulations is guilty of an offence and liable on summary conviction to a fine not exceeding $5,000. Contact Mr. Robert F. Lemire Chief Executive Officer Great Lakes Pilotage Authority P.O. Box 95 Cornwall, Ontario K6H 5R9 Telephone: 613-933-2991 Fax: 613-932-3793 Footnote a S.C. 1998, c. 10, s. 150 Footnote b R.S., c. P-14 Footnote c R.S., c. P-14 Footnote d R.S., c. P-14 Footnote 1 SOR/84-253; SOR/96-409, s. 1 Footnote 2 SOR/2015-71

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