Decision No. 565-W-1991

November 15, 1991

ERRATUM


December 9, 1991

Decision No. 565-W-1991 dated November 15, 1991 - Proposed tariff of pilotage charges published by the Laurentian Pilotage Authority and the notice of objection filed by the Canadian Shipowners Association.

Staff Investigation Report of the Laurentian Pilotage Authority's tariff proposal.

File No. D 2465/90-1

On page 5 of the above-noted Decision, first paragraph, the last sentence should be deleted and the following substituted therefor:

These amendments were presented to Transport Canada in draft form in January 1989 but have not been finalized for publication.

On page 7 of the above-noted Report, second paragraph, the last sentence should be deleted and on page 34, fourth paragraph, the first sentence should be deleted and the following substituted therefor:

These amendments were presented to Transport Canada in draft form in January 1989 but have not been finalized for publication.


November 15, 1991

IN THE MATTER OF proposed tariff of pilotage charges published by the Laurentian Pilotage Authority in the Canada Gazette Part I on October 20, 1990 pages 3734-3744; and the notice of objection filed by the Canadian Shipowners Association.

File No. D 2465/90-1


Pursuant to subsection 34(1) of the Pilotage Act, R.S.C., 1985, c. P-14, the Laurentian Pilotage Authority (hereinafter the Authority) gave public notice in the Canada Gazette Part I on October 20, 1990 of a proposed amendment to the Laurentian Pilotage Tariff Regulations. The proposal incorporates an average increase of about 7.1 percent in each of the Port of Montreal (hereinafter District 1.1), the Montreal to Quebec portion of the St. Lawrence River (hereinafter District 1) and the Quebec to Les Escoumins portion of the St. Lawrence River including the Saguenay River (hereinafter District 2). The tariff increase is expected to offset increased costs and to reduce, in stages, the current deficit which the Authority attributes to a steady decline in traffic since 1984.

An objection to the proposal was filed with the National Transportation Agency (hereinafter the Agency) on November 19, 1990 by the Canadian Shipowners Association (hereinafter the Association).

In addition, a notice of intervention was filed by La Corporation des Pilotes du Bas St-Laurent et Pilotes du St-Laurent Central Inc. (hereinafter the Corporations) on November 19, 1990 with comments to follow and on December 4, 1990 the Shipping Federation of Canada (hereinafter the Federation) filed an intervention.

The Authority filed a response to the objection and commented on the intervention of the Federation.

The Association filed an answer to the response of the Authority.

The Federation filed comments on the response of the Authority.

The Corporations filed their intervention and comments on the response of the Authority as one document. The Corporations also filed comments on the answer of the Association.

Where a notice of objection is filed, subsection 34(4) of the Pilotage Act requires the Agency to make such an investigation of the proposed charge as in its opinion is desirable; to make a recommendation to the Authority; and to file a copy of the recommendation with the Minister of Transport (hereinafter the Minister). The Authority is obliged to abide by the recommendation.

The Agency issued Order No. 1991-W-68 dated February 7, 1991 directing the Authority to file with the Agency, by February 22, 1991 certain information, particulars and documents relating to the operation and administration of the Authority. The Order also required the Authority to make available to the parties of record the same material, except those which are considered to be of a confidential nature, with the cost of reproduction and delivery to be borne by the party making the request. The Agency granted parties of record an opportunity to comment on the material filed under Order No. 1991-W-68.

Pleadings closed on April 8, 1991 following the request for and the granting of several extensions of time for the filing of documents.

The above-noted objection, response, answer and comments form part of the public record on this matter and are available for inspection at the Head Office of the Agency in Hull, Quebec.

POLICY CONSIDERATIONS

Pursuant to the Pilotage Act, the Authority has the objective to establish, operate, maintain and administer in the interest of safety an efficient pilotage service. In carrying out its mandate, the Authority is required to prescribe charges which are to be fair and reasonable and consistent with providing a revenue, together with any revenue from other sources, sufficient to permit the Authority to operate on a self-sustaining financial basis.

The role of the Agency, in accordance with its mandate under the Pilotage Act, is to determine whether or not the proposed tariff of pilotage charges is prejudicial to the public interest. Pursuant to section 3 of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.), the public interest is to be consistent with the national transportation policy which states, inter alia, that in order to serve the needs of shippers and travellers, transportation services are to be provided at the lowest total cost having due regard for the requirement that the transportation system meets the highest safety standards and that each mode of transportation bears a fair proportion of the real costs of the resources, facilities and services provided to that carrier or mode of transportation at public expense. In carrying out its role, the Agency must determine whether or not the Authority has based its costs on an economically efficient operation and whether or not the proposed tariff of charges is fair and reasonable.

Issues

The objection of the Association and the subsequent pleadings brought forward a number of issues related to the operations of the Authority. Of these, the following were the main economic issues examined by the Agency.

  1. unfair and unreasonable rates
  2. uneconomically inefficient service
  3. excessive number of pilots
  4. high pilot boat costs at Les Escoumins

Due to the fact that these economic issues are not mutually exclusive but are interrelated, the examination of Authority financial and operational results did not specifically focus on each issue separately. The analysis was, however, of sufficient depth and detail to enable the Agency to assess the operations of the Authority in the context of these interrelated issues.

In addition to the foregoing economic issues, a number of secondary issues, set out below, arose from the pleadings.

  1. declining cargo volumes
  2. increasing ports and seaway charges
  3. arbitrary imposition of compulsory pilotage
  4. the issuance of pilotage certificates
  5. newly imposed double pilotage
  6. possible new Transport Canada imposed charges

Although seaway and ports traffic and charges are not directly related to the operations of the Authority, information from the St. Lawrence Seaway Authority and individual Port Authorities was examined to address the queries raised.

Regarding the remaining issues, namely the imposition of compulsory pilotage, the issuance of pilotage certificates, the imposition of double pilotage and possible new Transport Canada charges, the Agency concluded that these matters did not fall within its mandate in conducting a tariff investigation.

Under the Pilotage Act, the Authority has the statutory mandate of establishing the geographical extent of compulsory pilotage waters, of determining which vessels are subject to compulsory pilotage and of establishing how many pilots are to be on board a vessel. In addition, the Authority is empowered to establish procedures for the issuance of pilotage certificates.

While the Agency has broad powers in a tariff investigation, its role is not one of assuming responsibility for fulfilling Authority mandates. The prime objective of an Agency tariff investigation is to determine whether the proposed rates are fair and reasonable within a given set of parameters. In other words, the Agency is to examine the tariff proposal in the context of operational regimes of compulsory pilotage waters, double pilotage and requirements for obtaining pilotage certificates as established by the Authority. It is therefore inappropriate for the Agency to address the foregoing issues relating to statutory Authority mandates in a tariff investigation.

Similarly, the Agency is not involved in Transport Canada cost recovery program directed at marine services nor do newly imposed user charges enter into an Authority tariff proposal. Therefore, this matter does not come within the scope of an Agency tariff investigation.

For the above reasons the Agency is unable to examine the issues of pilotage certificates, compulsory pilotage areas or the imposition of double pilotage since a mechanism already exists in legislation for the Minister to appoint an Inquiry Officer to investigate these issues if an objection to them is filed with the Minister at the time of their publication in the Canada Gazette.

In addition to the foregoing, an allegation was made by the Association that certain sums of money had been improperly paid by the Authority to the Pilot Corporations to cover their legal costs incurred during contract negotiations. This matter was investigated and the monies referred to by the Association were paid to the Pilot Corporations in settlement of a dispute over the interpretation of certain contract clauses contained in the 1988-1989-1990 contract. Therefore, there was nothing improper, as alleged by the Association, in the payments made by the Authority.

Review of Decision WTC 3-86 of April 4, 1986

An Authority tariff proposal was last investigated in 1985 through a public hearing presided over by the Water Transport Committee (hereinafter the WTC) of the former Canadian Transport Commission (hereinafter the CTC). The 1985 hearing was followed by several months of investigative analysis and culminated in the release of Decision WTC 3-86 along with the accompanying investigation report on April 4, 1986.

Decision WTC 3-86 contained several recommendations for the Authority, the major recommendation being a new formula for determining charges to be paid by vessels for trips, movages and anchorages as well as a new method for calculating pilotage units for each vessel. Additional recommendations were made regarding charges for other types of pilotage services. These tariff recommendations amounting to a 9.2 percent tariff increase were adopted by the Authority on September 25, 1986.

Decision WTC 3-86 contained recommendations in respect of Authority administration, despatching services, traffic forecasting methodology and pilot workforce adjustments. As well, the decision recommended that the Authority exercise its mandate in District 3, the noncompulsory waters east of Les Escoumins.

In response to these recommendations, the Authority carried out a reorganization of its administrative personnel and achieved a reduction of ten (10) administrative positions between 1985 and 1990. Regarding traffic forecasts, the Authority engaged a firm to develop a traffic forecasting technique, the Box-Jenkins method was selected, as well as to design and implement a computerized billing and payment system. The forecasting methodology and billing/payment system were adopted by the Authority in October 1986, and are currently in use.

On the matter of dispatching services, the Authority consolidated its dispatching centre at Montreal with its operations centre in that city. It also consolidated its dispatching centre in Quebec City with Ports Canada facilities. The Authority began offering pilotage services in District 3 at the beginning of 1988.

Regarding pilot workforce adjustments, the Authority introduced an early retirement plan in 1988 which was followed by a tariff surcharge, agreed to by users, to finance the retirement plan. The tariff surcharge, introduced in July 1989, equals 1 percent of the pilotage charges payable by users and will be collected until the fund reaches an amount of $551,000 which is expected to be achieved by mid-October 1991.

Between 1985 and 1990, the number of licensed pilots (year end totals) in District 1.1 was reduced from 16 to 12, in District 1 from 138 to 127 and in District 2 from 92 to 81.

Since the issuance of Decision WTC 3-86, the Authority has implemented two tariff increases. A 4.75 percent increase came into effect on January 1, 1989 followed by a 3.7 percent increase effective January 1, 1990. No objections were filed when these two tariff proposals were published.

Blouin Committee

In September 1985, during the course of the WTC investigation which lead to the issuance of Decision WTC 3-86, the Authority established the Blouin Committee to examine its operations with the aim of improving productivity as well as to examine compulsory pilotage zones, classes of vessels subject to compulsory pilotage, the issuance of pilotage certificates and the granting of waivers to compulsory pilotage.

The Blouin Committee presented an interim report to the Authority in September 1986, and a final report in May 1987. The Blouin Committee recommended that the manner of issuing pilotage certificates be revised and that the Authority grant waivers to compulsory pilotage to vessels that make regular trips. The recommendation was also made that the geographical extent of compulsory waters remain unchanged (the Blouin Committee had recommended in its interim report that the extent of compulsory waters be reduced).

Following consideration of the Blouin report, the Authority drew up regulatory amendments proposing a reduction in the extent of compulsory pilotage waters in District 2, the issuance of waivers to compulsory pilotage to vessels making regular trips within Authority controlled waters and the issuance of pilotage certificates to ship officers who make regular trips. These amendments were presented to Transport Canada in January 1989, but have not been enacted and remain before Transport Canada.

Brander-Smith Commission

In June 1989, the Minister commissioned a public review of tanker safety in Canadian waters. In October 1990, the Brander-Smith report was presented to the Government. The report contained wide ranging recommendations regarding the ability of Canada to respond to oil or chemical spills as well as recommendations for preventative measures to reduce the risk of such happening.

For the St. Lawrence River, the recommendation was made that the Authority withdraw its proposal to reduce the extent of compulsory waters in District 2. In addition, the recommendation was made that the Authority examine the need for harbour pilotage at Sept Iles, Baie Comeau and Port Cartier, all of which are in noncompulsory waters of District 3.

Review of Seaway and Ports Traffic and Charges

The review of seaway and ports traffic, together with the number of assignments handled by the Authority, revealed that, over the past decade, there has been a steady decline in traffic and cargo moving through the St. Lawrence River system. Between 1980 and 1990, Authority assignments declined by 32 percent. In comparison, cargo handled at the ports of Montreal, Trois-Rivières and Quebec declined by 10 percent. During the 1979 to 1989 period, seaway cargo in the Montreal - Lake Ontario sector declined by 33 percent. These results indicate a declining revenue base for the Authority as well as a reduced requirement for pilots. There is no evidence to suggest that this long term decline in traffic will abate.

The examination of seaway tolls revealed that, on the Montreal - Lake Ontario sector, tolls increased by 9.2 percent over the 1985 to 1990 period. This compares with a 46.5 percent increase in tolls on the Welland Canal sector. During this same period, port charges increased by 22.2 percent which closely matched the rate of increase in the Consumers Price Index (hereinafter CPI) of 23.2 percent (1985 to 1990). The increases in the pilotage charges cited earlier produced a cumulative increase of 18.6 percent over the 1985 to 1990 period.

Financial and Operational Review - 1985 to 1990

The 1985 to 1990 period was selected as the previous CTC investigation of 1985/1986 only had partial 1985 results available.

The review of the Authority annual financial reports to the Minister revealed that it incurred substantial losses on operations between 1985 and 1990. The Authority has, in fact, been unable to generate a profit since 1981. As a result, the Authority has had to rely upon Government appropriations to cover its annual deficits. During the six (6) years under consideration, the Authority had an accumulated loss of $11.024 million while Government appropriations totalled $9.8 million. As of December 31, 1990 the Authority had an outstanding deficit of $2.4 million.

The Authority derives the majority of its revenue, 89 percent on average, from pilotage charges with 10.7 percent coming from pilot boat charges. The balance, 0.3 percent, is derived from interest payments and salvage activities. Payments for pilot salaries and fees represent an average of 79 percent of Authority expenses with pilot boat and administration costs each accounting for about 10.5 percent of total expenses.

A comparison of the monies paid to the Corporations with the revenue obtained from pilotage charges showed that about 92 percent of this revenue was paid to the Corporations. With such a large portion of pilotage revenue going to these pilots, there is insufficient revenue remaining to cover administrative expenses and pilot costs at the Port of Montreal. Pilot boat revenues are generally equal to pilot boat expenses.

In November 1990, the Authority signed a new three-year contract with the employee pilots at Montreal that granted salary increases of about 5 percent per year as well as bonus payments in each year. In December 1990, three-year contracts were signed with the Corporations that granted rate increases of 7, 6.5 and 6.5 percent respectively as well as new minimum and vessel docking fees.

Authority revenue and expenses, expressed in terms of dollars per assignment, increased by similar amounts over the 1985 to 1990 period; 23.1 percent and 22.5 percent respectively. In comparison, the CPI in Quebec rose by 23.2 percent over the same period. Although the rates of increase in revenues and expenses per assign-ment have been similar, there is a continuing gap between the two which has resulted in annual deficits for the Authority.

An examination of Authority expenses in terms of dollars per assignment related hour showed that District 1 and 2 unit costs were somewhat higher than that of District 1.1. This is not unexpected as the Corporations incur expenses that the employee pilots do not have to bear, i.e. management costs, pension costs, accommodation costs, etc. This analysis showed that there was no disproportionate difference in unit costs between Districts.

The number of assignments declined from 24,515 in 1985 to 22,922 in 1990, a drop of 6.5 percent. This decline is a continuation of a decrease in the number of assignments which commenced in 1981. At present, there is no indication that traffic will level off or that there could be a reversal in the volume of traffic using the seaway. This suggests that the Authority may be facing a continually shrinking revenue base.

The pilots in the Port of Montreal are employees of the Authority and are paid fixed salaries. For Districts 1 and 2, the pilots are members of pilot corporations and the Authority pays monies to each corporation on the basis of a schedule of fees which mirror the pilotage charges levied by the Authority on users, i.e. separate charges for different types of assignments. The fees payable to the Corporations represent between 90 and 95 percent of the pilotage charges that the Authority levies on users. The pilot corporations distribute the funds amongst its member pilots.

The Authority contracts for pilot boat services at Montreal, Sorel/ Lanoraie, Trois-Rivières and Quebec. Users are charged the rates that are set out in the pilot boat contracts and the Authority remits the monies to the pilot boat contractors. At Les Escoumins, the Authority owns and operates its own pilot boats and has, over the 1985 to 1990 period, achieved a balance between revenue and expenses; revenue of $17.37 million compared with expenses of $17.11 million. The Authority currently has fourteen (14) employees at Les Escoumins.

There is considerable variation in 1990 pilot boat costs per transshipment with Montreal being the lowest at approximately $70. The Sorel/Lanoraie figure was $233 per transhipment in 1990 compared to $244 at Les Escoumins. Trois-Rivières and Quebec were similar with costs of $143 and $169 per transhipment respectively. The variation in costs reflects, to a certain degree, the different geographical characteristics of each District. Nonetheless, the cost at Les Escoumins is considerably higher than that of Quebec which suggests that there may be room for improvement at Les Escoumins through contracting out the service.

Authority administrative expenses have grown by 2.1 percent from 1985 to 1990. This low rate of growth is due to the fact that the number of administrative personnel has dropped to 37 in 1990 from 46 in 1985. The complement of 37 employees is made up of 8 at the Quebec despatching office, 13 at the Montreal despatching office and 16 employees at the Montreal head office. Administration expenses expressed as a cost per assignment grew by 9.5 percent between 1985 and 1990 which was less than the 23.2 percent change in the CPI during these years.

Employee salaries represent a large portion of administrative expenses, about 56 percent in 1990. Transportation/communications and professional services expenses represent 10 and 17 percent of total costs respectively. The remaining 19 percent of expenses consists of rentals, utilities, maintenance, financing and other costs. Professional services are largely actuarial expenses incurred when contract negotiations are underway with the pilots. Part of professional services expenses relate to the billing and payment services provided by a consulting firm. As well, naval architects are engaged when major refits are carried out on pilot boats.

Every year the Authority prepares a Corporate Plan which contains financial and operational forecasts for a 5 year period. The 1991 and 1992 Authority forecasts were examined in the context of the expected impact of the current tariff proposal. Initially, the Authority expected a loss of $2.3 million in 1991 based on the implementation of the 7.1 percent tariff increase on January 1, 1991. However, this forecast was revised by the Authority due to a delay in the implementation of the current tariff proposal and due to additional fees/payments to pilots that were agreed to in the contracts but were not incorporated into the tariff proposal. The Authority now expects to incur a loss of $4.017 million in 1991 on the basis of the assumption that the 7.1 percent tariff increase would go into effect on October 1, 1991.

The 1992 forecast was based on the assumption of a 6.5 percent tariff increase on January 1, 1992 as well as the previous assumption of implementing the 7.1 percent tariff increase on January 1, 1991. The Authority expected the deficit to drop to $1.673 million in 1992 but this may no longer be valid as the 1991 results have been modified considerably and will in all probability impact on the 1992 results.

Pilot Workload and Productivity

In examining pilot workload, the number of licensed pilots rather than the number of active pilots was chosen as a basis for workload measurements. Although certain pilots are occupied mainly with the management of the pilot corporations or only work part time, the number of licensed pilots represents the actual number of pilots being paid either as employees of the Authority or through Authority payments to the Corporations.

Between 1985 and 1990, pilot workload in District 1 varied little and averaged 100 assignments per pilot per year. In comparison, pilot workload in District 2 stood at 90 assignments per pilot in 1985 and increased to 100 assignments per pilot by 1990. For the Port of Montreal, the 1990 average workload was 169 assignments per pilot. These average workload figures are lower than that achieved by pilots in past years and are also lower than productivity guidelines established by the Authority through a series of workload studies conducted over the 1986 to 1988 period.

In District 1.1, the Authority workload study determined that the long term average workload per pilot was 209 assignments per year equivalent to 2,363 hours on duty each year. In District 1, the average workload was established as 120 assignments per year while that of District 2 was 106 assignments per year. The District 1 productivity guideline has been incorporated in the 1991-1992-1993 contract between the Authority and the District 1 pilots. The contracts with the District 1.1 and 2 pilots do not contain productivity guidelines.

On the basis of the foregoing productivity guidelines, fewer pilots in each District could have handled 1990 traffic. In District 1.1, the assignments could have been handled by 10 instead of 12 pilots. In District 1, 106 pilots as opposed to 127 could have handled all assignments. Similarly for District 2, 72 pilots rather than 81 could have handled 1990 assignments.

Although the current level of assignments per pilot is lower than those developed in the workload studies, a number of factors influence pilot strength. In the pleadings, the Corporations identified planned pilot retirements between 1991 and 1995. As well, the Authority indicated that pilot strength at Montreal could be reduced to 10 from 12. As overall pilot strength is reduced in this manner, a sufficient number of pilots must be maintained to ensure continued safe operations and to avoid lengthy delays to shipping. Moreover, a sufficient number of fully qualified pilots (no restriction on the size or type of vessel that can be piloted) must be maintained to handle traffic which on average is increasing in size. This means that actual pilot strength in a given year may be different from that which results by applying the standards developed in the workload studies.

Pilot Contracts

The Agency recognizes that the pilots in each District are the sole individuals who are able to provide the pilotage services. Once contracts have been negotiated with the pilots, the rate increases and fees/payments that are included in the contracts represent predetermined costs that the Authority will incur. Since the users of pilotage services represent the Authority's sole source of revenue, the increased costs must be passed on to users through increased pilotage charges. Only in this manner will the Authority be able to achieve its mandate of financial selfsufficiency.

Further to the foregoing, an uninterrupted flow of shipping on the St. Lawrence River is of vital importance to the Canadian economy. It is absolutely essential that Canada be able to fulfil trade agreements, in particular export agreements for grain, as well as maintain an adequate flow of crude oil and petroleum products into these regions. The Authority is very aware of the necessity of maintaining uninterrupted shipping on the St. Lawrence River and this is always an important consideration when the Authority is negotiating contracts with District 1 and 2 pilots and the employee pilots at Montreal.

The current contracts signed between the pilots and the Authority (contract with District 1.1 signed in November 1990; contracts with Districts 1 and 2 signed in December 1990) contain fees/payments that were not anticipated when the tariff proposal was prepared prior to its publication in October 1990. As a result, the Authority now faces additional contract related expenses which impact on its expected financial results for 1991. As noted earlier, the Authority now anticipates a deficit of over $4 million in 1991.

CONCLUSIONS

The Authority analysis of the financial and operating results revealed that it has incurred and continues to incur substantial losses on its operations. As well, the 1991 and 1992 Authority forecasts show increased losses resulting from a delay in the implementation of the proposed tariff increase and additional costs related to contract rate increases and new fees/payments.

Since the issuance of Decision WTC 3-86, the Authority reduced the number of administrative positions by 10 and consolidated its dispatching centres with its operational centres. As well, the Authority introduced an early retirement plan, funded by users, to reduce the number of licensed pilots. This demonstrated that the Authority took measures, to the extent possible, to control costs.

The comparison of unit costs (cost per assignment related hour) between Districts 1.1, 1 and 2 showed that there were no disproportionate differences between Districts.

The Agency concludes that, under the current legislative structure, the costs stemming from contracts negotiated with the pilots represent the lowest costs at which their services can be obtained. As well, the Authority appears to have achieved a balance of costs and revenues at Les Escoumins and has taken steps to control its administrative costs. Accordingly, the Agency is of the opinion that the pilotage services are being provided by the Authority at the lowest total cost which is consistent with national transportation policy. The Agency is of the opinion that the Authority tariff proposal as published in the Canada Gazette Part I on October 20, 1990 should be implemented as the proposal is not prejudicial to the public interest.

RECOMMENDATIONS

The Agency recommends that the tariff proposal published by the Laurentian Pilotage Authority in the Canada Gazette, Part I on October 20, 1990 be implemented.

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