Coast Guard Proposes Annual Great Lakes Pilotage Increase

“When somebody says it’s not about the money, it’s about the money.” – H.L. Mencken, American journalist and essayist, 1880-1956.

This report is about Great Lakes pilotage rates. It’s all about the money. In fact, it’s hard to find someone who even suggests that it’s not about the money.

For fifty or so Great Lakes pilots, it’s about cold hard cash: now. For others, say, vessel owners, it’s about wasted resources, about lost chances for a more efficient and sustainable system; “opportunity costs,” as economists like to say. Others charge that pilotage costs are indefensible and work against the pilots themselves, extracting unsustainable short-term benefits, but sending a poisonous signal that this system is rigged, that the Great Lakes isn’t a region for maritime investment; to the contrary: it’s time to get out.

Methodology & Money
The acrimonious – no middle ground – debate about pilotage rates was recharged in October when the U.S. Coast Guard published its “Great Lakes Pilotage Rates—2019 Annual Review and Revisions to Methodology.” This starts the required process for adjusting US pilotage rates, keeping the rates linked, with some sense of parity, to certain economic indicators. (Canadian pilots, of course, work within a different system). The Great Lakes Pilotage Act of 1960 established the US ratemaking process. Once the Great Lakes pilotage rates are set, those are the rates charged to shippers for pilots’ services.

Under U.S. Coast Guard regulations, all U.S. vessels sailing on register and all non-Canadian, foreign merchant vessels (often referred to as ‘‘salties’’), are required to engage U.S. or Canadian pilots during their transit through regulated waters. United States and Canadian ‘‘lakers,’’ which account for most commercial shipping on the Great Lakes, are not subject to these regs.

The Coast Guard uses a somewhat formulaic approach to set an hourly rate that allows three American pilotage organizations to cover all of their costs, e.g., wages, infrastructure and training. The pilots work for the pilot organizations, considered independent businesses.
In 2018, pilotage rates ranged from $271 to $653 per pilot hour (rates vary depending on specific Great Lake service areas). For each pilot, that equals a “compensation benchmark” of $352,485.  

For 2019, rates get ratcheted up again, to between $304 to $698 per hour, a per pilot compensation benchmark of $359,887, a $7,402 raise, or 2%. Again, that’s proposed. Final rates could end higher, or lower. In 2018, for example, the proposed benchmark started at $319,617, but, as noted, when finished, increased by $33,868, to $352,485.

The Coast Guard estimates the 2019 rate would increase shippers’ payments by more than USD $2 million, totaling $27,222,585 compared to the 2018 total estimated at $25,156,442. That money is just for pilots – not new equipment, software, ships, education, training, nothing that makes the pie bigger; except, of course, the pilots’ pie.

For government work, the Great Lakes benchmark of $359,887 is a nice gig. By comparison, the Department of Veterans Affairs annual pay ranges for physicians, dentists and podiatrists, effective November 2018, starts at $103,395 and tops out at $262,000. Likely, some docs and dentists make more, but, of course, so do some pilots. The Coast Guard references pilot salaries ranging from a rather piddling $173,554 annually to a high of $758,922.

This comparison isn’t meant to be flippant. It’s a core part of how the Coast Guard develops a comparative number, historically linked to American Maritime Officers Union (AMOU) data, but something of a black-box process now because AMOU, citing proprietary reasons, stopped providing the Coast Guard with contract information. However, the Coast Guard used AMOU data, available through 2015, to build a new compensation model. The Coast Guard is confident that its model fairly captures and reflects comparative wages, inflation and, importantly, a value of service, always difficult to price in, essentially, a monopoly.

Push Back
It’s surely an understatement to say that maritime businesses find pilotage rates and rate setting to be unfair, untenable and largely indefensible, something that perpetuates, via extraction, a rich and largely untouchable economic fortress for a select few who, of course, have no incentive to change anything except to make the cash pipeline even bigger.

Businesses express outrage about direct and indirect pilotage costs. The Chamber of Marine Commerce, for example, an industry group based in Ontario, with American and Canadian membership, writes in its current issue of Marine Delivers magazine that on the St. Lawrence River, “the hourly cost of pilotage exceeds the cost of the entire crew of a vessel, or more than double the cost of a vessel’s captain.”

Just as galling are wage disparities between American and Canadian pilots (who also work within a monopoly type structure, although there are significant differences). In comments regarding the Coast Guard’s 2018 pilotage review an industry compendium (the Shipping Federation of Canada, the American Great Lakes Ports Association and the United States Great Lakes Shipping Association) points out that U.S. pilotage fees are “now often the single highest cost component of vessel operations in the St. Lawrence Seaway and they frequently, if not always, significantly exceed the pilotage costs for similar or identical vessel itineraries when pilotage is provided by Canadian pilots.” (Generally, vessels are assigned a U.S. or Canadian pilot depending on the order in which they transit a particular area of the Great Lakes, and do not choose the pilot they receive.)

As an example, the industry group cites 2016 Canadian and U.S. pilotage rates and compares an identical, hypothetical transit between Buoy 33 at Thunder Bay (northwestern Lake Superior) to Port Colborne (eastern Lake Erie).  Cost with a Canadian pilot: CDN$28,000. An American pilot: approximately US$41,800. The group writes that “adjusting for currency exchange rates at the time, the U.S. pilotage costs are roughly double the Canadian costs. This hypothetical assumes no delays and normal transit times.”

That smooth-sailing reference is important because pilots are paid, of course, even when they are not piloting, stuck like everyone else, for example, because of weather or an accident or unexpectedly delayed in a queue at a series of locks. Some vessel owners charge that pilots are dismissive of logistical efficiency; after all, slow transit pads a pilot’s billing sheet. That may be overly cynical, but it references major concerns among vessel owners, i.e. that pilotage fees are opaque, that pilot-related decisions are arbitrary regarding operations and schedules. Vessel owners complain of widely variable pilot decisions made within similar, even identical, maritime operating conditions. These peculiarities cost a lot of money.

Murky Water
Wayne Elliott is Founder and Director of Business Development at Marine Recycling Corporation (MRC), headquartered in Port Colborne. MRC’s experiences with pilotage problems are cited within Transport Canada’s report “2018 Pilotage Act Review,” released earlier this year, a study that has started an in-depth evaluation of Canada’s pilotage system, established in 1972.

Elliott presents a common litany of concerns, including:

• Trying to estimate towing costs, due primarily to the inconsistency in the number of pilots required for any given tow.  (He refers to this as “likely the most difficult situation for our company.”)
• Tows with same size vessels in the same waters, e.g., Toronto Harbour to Port Colborne, through the Welland Canal, are sometimes required to have one, two or as many as three pilots.  (“The canal is a cement ditch,” Elliott commented.)
• Recently, on a tow from Quebec City to Port Colborne six pilots were assigned in one section and five in another.

Elliott explained that during one trip, once in American waters, “the American pilots got on for the American locks (and) we had 10 pilots.” Elliott, unhappily, called this “a record, never happened in the world.”

This was surely the trip from hell. The tow was stopped for darkness. Elliott commented sarcastically, “It gets dark every night. In our 60-year history and more than 100 dead ship tows, this tow set a record for the number of pilots assigned and a first for stopping a tow for darkness.” Actually, Elliott said they laid over two nights. His crew costs were $3,000/hour. Elliott wired payment for over $200,000 in pilotage fees before casting off one line. “We do everything we can to avoid needing pilots,” Elliott said.

It’s reference to safety that forms the core pushback to complaints about pilotage. A pilot in a tricky waterway should not be thinking about cutting corners just to help a captain get to London one day sooner. This arms-length expertise takes money. Salary is a top concern for the Coast Guard. The Great Lakes competes for pilots with coastal ports paying considerably more. For example, the average 2014 compensation set by the Louisiana Public Rate Commission for the Associated Branch Pilots for the Port of New Orleans was $459,051, not including medical or pension benefits, compensated separately.

Pilots explain that concerns about safety may not be well understood by outsiders. Consider remarks by George Haynes, Pilot with Lakes Pilots Association District 2, during discussion at the September Great Lakes pilotage Advisory Committee meeting in Cape Vincent, NY. There was discussion about pilots’ unwarranted calls for tugs in Cleveland and Detroit. More specifically, the reference was to ships with bow thrusters – tugs not needed.

Maybe. Maybe not, remarked Haynes. Equipment doesn’t always deliver as expected. Haynes described how bow-thrusters can be rated at 1200hp, but “sometimes you only get 600. We may not know if the thing's going to work properly or not. Tugs are relatively cheap insurance. When it comes to the cost of an accident, even a fender bender can be tens of thousands of dollars.”

Actually, the bow-thruster discussion was more complex, highlighting a kind of planar disconnect between industry and pilots. The bow-thruster issue was raised by Michael Broad, President of the Shipping Federation of Canada. He referenced it as a policy question, not a comment about singular events. Broad notes that in 2017, there were 57 cases of ship masters filing formal disagreements with the Coast Guard regarding pilots’ use of tugs on ships with bow-thrusters. Other than acknowledging the filings, the Coast Guard did nothing, according to Broad. “It's incumbent on the Coast Guard to look into these things and provide an answer,” Broad emphasized.

Accountability
Ship owners complain there is no accountability for pilots’ decisions. Business as usual persists and persists for decades, despite outrageous costs. Ship owners contend that if this relationship has to stay wired together, i.e., political leaders don’t have the courage to take it on, that doesn’t mean it can’t work better, with more accountability, oversight, transparency and operational efficiency reflecting the world of 2018, not the ancient world of 1960, or even 1972, in Canada’s case.

Clay Diamond, with the American Pilots' Association, presented a rather lofty position at the September meeting, commenting that “a pilot's primary responsibility is to protect the interest of the public.” He added that “with all due respect, the principal customer of a pilot is not the ship or the ship owner, it's the public interest.”

But, the Great Lakes Pilots comments to the Coast Guard regarding 2018 rates don’t reference the term “public interest” even once. It’s all about the money. Every paragraph on every page builds to the same scold: that the Coast Guard, once again, is giving us the shaft.

In both the U.S. and Canada there are prospects of change. As noted, Transport Canada issued a 145-page analysis of shipping and pilotage issues with 38 recommendations for change, covering governance, labor, safety and tariffs and fees.  

The Chamber of Marine Commerce is working to leverage the TC analysis. In October, the Chamber’s “Marine Day on the Hill” focused on pilotage reform and infrastructure funding. The Chamber pressed these issues in discussions on Parliament Hill, including sessions with Transport Minister Marc Garneau and a multi-party panel with Liberal MP Vance Badawey, NDP MP Brian Masse and Conservative MP Kelly Block.

“Canada’s pilotage system has not been overhauled in more than 40 years and is inefficient, inflexible, out-of-date and desperately needs to be modernized,” explains Bruce Burrows, President of the Chamber of Marine Commerce.

He continued, “We urge the Minister of Transport to now move forward to introduce legislation that promotes safety and provides greater transparency and oversight of pilotage services while making the best use of proven and modern technology. The Pilotage Review Chair has made a series of recommendations that would achieve these goals while still maintaining the highest levels of safety and reliability.”

Similarly, on the other side of the border, pilotage issues are getting new attention. First, of course, is the Coast Guard rate setting process, open now. This process really just keeps the current system working but it surely serves to highlight the extreme concerns about pilotage. Another forum is the President’s focus on regulatory reform within the maritime industry. Pilotage rates were specifically called out by American and Canadian industry and trade groups, including The Great Lakes St. Lawrence Governors & Premiers who described a “toxic environment between the Coast Guard, system users, and the pilotage associations.”

Secondly, pushback is emerging among states. In October, Jacksonville-based Crowley Holdings Inc., the holding company for Crowley Maritime Corporation, released a statement urging Florida’s Board of Pilot Commissioners to reject a proposed pilotage increase. Crowley wrote that the fee increase would “raise average pilotage costs more than 100%.” Crowley is the port’s largest tenant and recently signed a new 10-year Port Everglades lease. Crowley calculated that pilotage fees would increase between 88 to 139 percent depending on vessel size.

State issues came to the fore in Houston, too, when, the Houston Pilots, in October, withdrew their application asking the Port of Houston Authority to approve higher rates. The pullback came after 15 shipping companies presented a unified “No Way!” to the Authority. More than one firm said it would be forced to look for other ports of call because the new Houston rates would be so far out of line with similar ports that they would have no other choice. Shippers said they have made substantial cost cuts to survive and suggest that the pilots do the same. Imagine this: one shipper even called for a rate reduction.

In September, the US Government Accountability Office (GAO) released a report on freight transport issues within the Great Lakes, citing pilotage issues as one particular challenge. Importantly, GAO is working on another report with an exclusive focus on pilotage, requested by Senators John Thune (SD) and Todd Young (IN).

Eventually, this analytical momentum has to turn into legislative engagement, at least at the federal level. After all, agencies can only do so much. They comply with the law as written in 1960. Politically savvy insiders know this, of course. You can be sure they are getting ready to refocus the debate and move it to a different set of players.

This article first appeared in the NOV/DEC edition of Maritime Logistics Professional magazine.