Decision No. 709-W-2004

December 29, 2004

December 29, 2004

IN THE MATTER OF the proposed tariff of pilotage charges published by the Laurentian Pilotage Authority; the notices of objection filed by the Canadian Shipowners Association/Chamber of Maritime Commerce and the Shipping Federation of Canada; and the intervention filed by the Corporation des Pilotes du Saint-Laurent Central.

File No. W9250-3-8


INTRODUCTION

[1] Under the Pilotage Act, R.S.C., 1985, c. P-14, the Laurentian Pilotage Authority (hereinafter the Authority) is responsible for providing pilotage services within Canadian waters in and around the province of Quebec, north of the northern entrance to St. Lambert Lock, except the water of Chaleur Bay. Pilotage is compulsory from the St. Lambert Lock eastern limits of the Port of Montréal, District 1-1; from Montréal to Québec, District 1; and from Québec to Les Escoumins, including the Saguenay River, District 2. Beyond Les Escoumins, pilotage is not compulsory and these waters are referred to as District 3.

[2] Pursuant to subsection 34(1) of the Pilotage Act, the Authority published proposed amendments to the Laurentian Pilotage Tariff Regulations in the Canada Gazette Part I of July 31, 2004.

[3] Under subsection 34(2) of the Pilotage Act, any interested person who has reason to believe that any charge in a proposed tariff of pilotage charges is prejudicial to the public interest may file an objection with the Canadian Transportation Agency (hereinafter the Agency).

[4] On August 27, 2004, a joint objection to the tariff proposal was filed by the Canadian Shipowners Association (hereinafter the CSA) and the Chamber of Maritime Commerce (hereinafter the CMC) and on August 30, 2004, the Shipping Federation of Canada (hereinafter the SFC) filed an objection. An intervention was filed by the Corporation des Pilotes du Saint-Laurent Central (hereinafter the CPSLC) in support of the proposed tariff increase.

[5] Subsection 34(4) of the Pilotage Act requires the Agency to conduct an investigation of the proposed tariff amendment. Section 35 of the Pilotage Act requires the Agency to make a recommendation to the Authority and the Authority is required to govern itself accordingly.

BACKGROUND

[6] Following the receipt of objections, the Agency began its investigation in accordance with the mandate under the Pilotage Act. By Order No. 2004-W-391 dated September 10, 2004, the Agency directed the Authority to produce and file with the Agency, by September 24, 2004, a tariff justification as well as information, particulars and documents relating to its finances, operations and administration. The Authority was required to provide a copy of the tariff justification to the objectors and to make available to the parties of record, upon request, the other information, particulars and documents requested.

[7] On September 24, 2004, the Authority filed its response to Order No. 2004-W-391. In accordance with the National Transportation Agency General Rules, SOR/88-23, the Authority filed its answer to the objections on September 29, 2004. The CSA, the CMC and the SFC filed replies to the Authority's answer on October 13, 2004.

[8] Following the Federal Court ruling of October 1, 2004 which rejected the Authority's appeal of the homologation of the March 12, 2003 arbitration award of Richard Marcheterre, the Agency asked the Authority, by Decision No. LET-W-280-2004, dated October 13, 2004, to describe what impact, if any, this would have on the Authority's projections of revenue and expenses for 2004 and 2005. In its reply filed on October 19, 2004, the Authority indicated that its forecasts included a 3 percent increase in fees for the District 1 pilot corporation and did not include the additional 5 percent increase in fees awarded by the arbitrator. The Authority also indicated to the Agency that the extra payments arising from the arbitrator's award would have to be dealt with under separate tariff amendments. Parties of record were given the opportunity to comment by October 27, 2004 on the Authority's reply; however, no comments were filed by the other parties by October 27, 2004. Subsequently, comments were received from the SFC on October 29, 2004, the CSA/CMC on November 1, 2004 and the CPSLC on November 4, 2004. These comments were accepted by the Agency and formed part of the record of the investigation.

[9] The Authority filed additional submissions on November 2 and 9, 2004 commenting on its plans with respect to additional tariff proposals related to the arbitration award of March 12, 2003. The Agency informed the Authority in Decision No. LET-W-314-2004 dated November 15, 2004, that these submissions dealt with planned tariff amendments that were not before the Agency so the submissions would not form part of the record of this current investigation.

[10] Based on the foregoing, the Agency, in this investigation, is dealing solely with the current tariff proposal of a 4 percent increase in 2005 and a docking charge of $213.36 at the St. Lambert Lock.

[11] Following a review of the information received in response to the Agency order to produce and the pleadings, the Agency concluded that it had sufficient information to complete its investigation without the need for an oral hearing and parties were informed of this verbally on November 3, 2004.

ISSUE

[12] In accordance with subsection 34(2) of the Pilotage Act, the issue to be addressed is whether the proposed tariff of pilotage charges published by the Authority on July 31, 2004 is prejudicial to the public interest.

POSITIONS OF THE PARTIES

Laurentian Pilotage Authority

[13] The Authority states that the proposal for a general 4 percent increase in pilotage charges will generate additional revenues of approximately $1,778,000 for 2005. Over and above the general increase, the Authority is proposing the introduction of a new $213.36 charge for docking at the St. Lambert Lock. This charge is expected to generate additional revenues of approximately $250,000 in 2005. The Authority submits that it is required under the Pilotage Act to operate on a self-sustaining financial basis, and that the 4 percent increase in pilotage charges for 2005 is fair and reasonable and reflects only justifiable service delivery costs.

[14] The Authority states that it is having serious financial difficulties, and that its financial situation did not improve in 2003 and 2004 in spite of the cost-cutting measures it implemented. The Authority points out that projected revenues were not realized because the Authority's requests for tariff increases for the past two years had been reduced following users' objections. It maintains that these recurring deficits affect the forecasts for 2005.

[15] The Authority explains that failure to implement its tariff proposal will result in a recurring annual revenue loss to the Authority of $2,040,000. Of this total,$1,778,000 is related to the tariff increase of 4 percent, $250,000 is for the docking charge at the St. Lambert Lock and $12,000 related to the 4 percent tariff increase applied to increased marine traffic. The Authority adds that it would be impossible to reduce its expenses in an equivalent manner because they are not related to a potential tariff increase. Moreover, the Authority is of the view that it is unlikely to obtain a loan in view of its financial situation and inability to repay, so that it would find it difficult to obtain the Minister of Finance's approval to arrange a loan. The Authority states that if the tariff increase is not implemented and no solution is found to its financial problems, it will have to reduce such user services as assigning night pilots or making the Authority's pilot boats available. Alternatively, users may be required to pay their pilotage charges within a shorter period of time.

[16] The Authority indicates that it consulted the main groups of pilotage service users before releasing its tariff proposal on July 31, 2004 and the users indicated reluctance to accept an increase that is higher than the consumer price index (hereinafter the CPI) but does not guarantee additional pilotage services. The Authority contends, however, that the negative signal received after the consultations from the users' representatives was a reaction to the increase of navigation costs to the legislative mechanism for renegotiating service contracts and to the quality of the Authority's services rather than to the 4 percent itself.

[17] The Authority submits that the proposed tariff increase takes into account costs attributable to service contracts with the pilots' corporations or, in the case of the contract with the CPSLC, to the selection of a final offer by an arbitrator. The Authority states that the tariff increase is necessary to cover projected operating expenses for 2005, including contractual obligations and arbitration awards, and that the increase will enable the Authority to maintain safe, efficient pilotage services while operating in a financially self-sustaining manner.

[18] The Authority indicates that its contractual obligations for pilotage services alone necessitate a 4.12 percent increase in revenues for 2005. These obligations include the cost of the productivity payments made necessary by insufficient recruitment of apprentice pilots and force the Authority to propose a tariff that is higher than the CPI. The Authority points out that the new tariff increases pilotage charges by approximately $128 per trip down the St. Lawrence from the Escoumins pilotage station to Montréal. It is the Authority's view that pilotage charges that users are required to pay make up a very small part of the cost of operating a vessel on the St. Lawrence, and that certain policy decisions have a greater impact on users than competition. The Authority further submits that other factors, such as subsidies to other modes of transportation, navigating conditions, port fees and the rise and fall of the Canadian dollar may have a significant impact on competitiveness in marine transport.

[19] The Authority states that it has taken a number of measures to stabilize or reduce administrative and operational expenses. It estimates that the cost of administrative and management services, which make up approximately 4 percent of all expenses, will be about 6 percent lower in 2004 than in 2003.The Authority indicates that the amalgamation of the dispatch offices will save $100,000 a year and the move to less expensive accommodations will save $25,000 a year in rent. A temporary workforce reduction saved $50,000 a year while the introduction of a new computerized billing, payment and dispatching system will improve service quality.

[20] The Authority also maintains that it will save approximately $20,000 a year by reorganizing its Board of Examiners system. It explains that it had to freeze apprentice pilot recruitment as a temporary cost-cutting measure, following a decision by the Agency to award a 2.5 percent tariff increase on January 1, 2003 instead of the 3.95 percent that the Authority had requested. The Authority stated that while this situation is temporary it will lead to a pilot shortage in future and make it necessary to apply the productivity clause in its service contract with the CPSLC.

[21] With respect to its operation of pilotage services, the Authority estimates that pilot boat costs, which account for approximately 10 percent of total expenses, will increase from $4,742,000 in 2003 to $5,163,000 in 2004. The cost of assigning pilots, which represents about 4 percent of total expenses, will rise from $1,691,000 in 2003 to $1,782,000 in 2004. As for pilots' salaries and fees, which account for approximately 82 percent of the Authority's expenses, these items are expected to go up from $38,436,000 in 2003 to $41,309,000 in 2004. The Authority points out that the anticipated increases in the fees paid to pilot corporations and in the salaries paid to the pilots employed by the Authority will have the greatest impact on its financial situation.

[22] With regard to the salaried pilots in the Port of Montréal, the Authority advises that the collective agreement that will be effective on January 1, 2005 provides for an average salary raise of 2.5 percent in 2005.

[23] As for the Corporation des pilotes du Bas Saint-Laurent (hereinafter CPBSL), the Authority maintains that its service contract provides for a fee raise for 2005 that reflects the CPI, with a minimum of 2.25 percent and a maximum of 3.5 percent. The Authority also points out that payments will be made to the CPBSL on the basis of vessel dimensions and that the contract also provides for other payments, so that the total increase for 2005 will be 4.7 percent, less expenses. The Authority indicates that the new service contract places more emphasis on the Authority's management rights and reflects a new, more commercial approach while eliminating numerous irritants.

[24] In District 1, the Authority states that the current service contract with the CPSLC includes increases that match the CPI for the years ending on June 30 in 2004, 2005 and 2006. These increases were granted by an arbitrator who also ordered new fees paid to the CPSLC for the docking charge at the St. Lambert Lock effective July 1, 2004. Moreover, after a dispute between the Authority and the CPSLC concerning the service contract that expired on June 30, 2003, an arbitrator ordered the Authority to pay an 8 percent fee increase to the CPSLC retroactively to July 1, 2002. The Authority advises that a Federal Court action to overturn the arbitration award was unsuccessful and that this award will have a significant impact on the Authority's financial position.

[25] The Authority states that its tariff action of July 31, 2004 and the revenues projected in it do not take into account the retroactive increase awarded by the arbitrator for the period between July 1, 2002 and June 30, 2003. It points out that it had expected a 3 percent increase in the rate established on July 31, 2004 and that an additional 5 percent increase such as the one that the arbitrator awarded represents an additional unbudgeted item of some $2,600,000, which would substantially increase the $575,000 loss already projected for 2004. The Authority states that the unanticipated 5 percent represents an additional recurring expense of $1,050,000 a year, necessitating an additional increase of 5 percent for District 1.

[26] The Authority indicates that its preference would be to reach an agreement with the CPSLC on the terms of payment of the $2,600,000 retroactivity, or alternatively to ask the Minister of Transport to allow the Authority to arrange a loan so that it could spend the unbudgeted funds in question. The Authority adds that if a loan were granted it would be necessary to consider a further tariff increase for the years to come in order to pay back the loan, by taking a further 3.6 percent increase a year over a three-year period, for example.

[27] The Authority argues that its pilotage services are very safe, efficient and economical for users. Although the Authority admits that trips are occasionally delayed, it attributes these delays mainly to nighttime winter navigation restrictions. The Authority points out that pilotage authorities do not now have a statutory obligation to increase services in order to justify a fee increase. However, the Authority is considering changes to regulations governing night navigation services in District 1 to improve services, for double pilotage which is currently the subject of a risk assessment and the use of electronic charts.

Canadian Shipowners Association and Chamber of Maritime Commerce

[28] The CSA represents owners and operators of Canadian vessels trading within Canadian waters, including waters that are in the pilotage districts under the jurisdiction of the Authority. The CMC membership is comprised of major Canadian and American shippers, ports and marine service providers, and domestic and international shipowners.

[29] The CSA and the CMC filed a joint Notice of Objection stating that the proposed charges in the tariff published on July 31, 2004 are prejudicial to the public interest, including the public interest that is consistent with the national policy set out in the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA). The CSA and the CMC are of the opinion that the proposed general increase of 4 percent is not fair and reasonable as it is above the estimated CPI for the year 2005. The CSA and the CMC note that over the 2000 to 2004 period, the CPI increased by 10.3 percent, while the Authority increased its pilotage charges by 14.5 percent, which represents an excess of 41 percent over the CPI for the same period. The CSA and the CMC are of the opinion that increases exceeding the CPI are indicative of inefficiencies in the Authority's operation and that the negotiating and granting of such increases contribute to and perpetuate the poor financial state of the Authority.

[30] The CSA and the CMC note that they filed an objection to the 3.95 percent tariff increase published by the Authority in 2002 for the year 2003 and that the Agency limited the increase to 2.5 percent after finding that the proposed 3.95 percent was not in the public interest. They also state that, among other things, the Agency determined that the Authority lacked sensitivity to the competitive pressures faced by the shippers and shipowners and that self-sufficiency should not be achieved only through tariff increases without regard to cost containment. They believe that the same rationale should apply to the present 4 percent tariff increase. The CSA and the CMC note that, although the 2003 tariff increase was reduced, the Authority declared a net profit of $571,000 that year. They add that they did not object to a 2.95 percent tariff increase published by the Authority in 2003 for the year 2004.

[31] The CSA and the CMC are of the opinion that the proposed 4 percent increase is the result of increases of payments made to pilots through contract negotiations and decisions of arbitrators. While they note that the proposed increase does not reflect a corresponding improvement in the quality of services provided by the pilots, the CSA and the CMC submit that the Authority should not be allowed to recuperate from the users excessive increases in payments to pilots that are above the CPI with self-sufficiency as the only justification.

[32] The CSA and the CMC submit that the present financial position of the Authority results from decisions made outside arbitral adjudications, and that the consideration of any tariff increase must take into consideration the arbitration proceedings concerning payments made to the CPSLC. They believe that the results of the arbitration proceedings may substantially increase the pilotage costs in District 1 in addition to the proposed 4 percent general tariff increase. The CSA and the CMC further submit that arbitral decisions regarding service contracts, that are incompatible with parameters set out by the Agency, must be subject to the Agency's approval. They are of the opinion that the criteria found either in the legislation or in previous Agency decisions must prevail and have precedence over those made by an arbitrator. The CSA and the CMC believe that the contrary would give the arbitrator the power of dictating terms and conditions of pilotage charges imposed on the users, thereby circumventing the mandate of the Agency under the present legislation. The CSA and the CMC deplore the fact that an arbitrator is not compelled to consider the financial position of the Authority and its statutory requirement, as well as the impact of a decision on the users.

[33] With respect to the new $213.36 charge being proposed for docking at the St. Lambert Lock, the CSA and the CMC note that the new charge reflects a 0.6 percent increase over and above the general 4 percent tariff increase, resulting in a cumulative proposed increase of 4.6 percent. The CSA and the CMC submit that the proposed docking fee that is to be paid to the CPSLC is the result of a decision made by the arbitrator in the context of a Final Offer Selection process between the Authority and the CPSLC, and are of the opinion that the Agency cannot accept such a tariff proposal made in the context of contract negotiations.

[34] Further, the CSA and the CMC state that there has not been any docking charge at the St. Lambert Lock for over 40 years and that the new charge is, under the circumstances, an indirect and hidden method by the Authority to increase the tariff. The CSA and the CMC assert that the new fee is unfair and unreasonable and that, like every tariff increase imposed on the users, it will have a negative impact on the commercial competitiveness of their members with other modes of transportation which, according to them, is contrary to section 5 of the CTA.

[35] In regard to the service contract with the CPSLC, the CSA and the CMC note that, despite the criticism from the Agency in the past, the so-called "productivity payment clause" has not been eliminated. They believe that such costly payments should only be justified by increased efficiency and productivity as they generate added costs to the users without compensation to the Authority from the revenues received from the users. The CSA and the CMC submit that claims made by the CPSLC that the pilotage fees have remained under the CPI levels since 1993 is misleading and that they do not take into account additional payments made to pilots such as productivity payments.

[36] In respect of the Authority's estimation that the productivity payments represent 40 percent of the proposed 2005 tariff increase, the CSA and the CMC outline that these payments, although approved by an arbitrator, have been found inefficient and an obstacle to the self-sufficiency of the Authority. The CSA and the CMC are of the opinion that the productivity payment clause is contrary to section 5 of the CTA and that it has a negative impact on the self-sufficiency of the Authority.

[37] The CSA and the CMC claim that the tariff increases projected by the Authority in its business plans over the past several years have been lower than those that have been subsequently published. They state that the Authority business plan for the years 2004 to 2008 project a 2.7 percent tariff increase for the year 2005 and that, therefore, the users cannot rely on these projections in their long range planning. The CSA and the CMC further state that the Authority published increases of pilotage charges on a one-year basis, placing the marine carriers at a financial disadvantage in the forecasting of their own freight rates and in the negotiation of long term contracts with their customers. The CSA and the CMC are of the opinion that the Authority should be held to its projected tariff increases and indicate that the now proposed 4 percent tariff increase fails to take into account the long-term planning process and is not sensitive to the business environment in which the users operate.

[38] The CSA and the CMC indicate that the Seaway traffic increased by 11.5 percent as of July 31, 2004 over the 2003 level, while transits in the Montréal/Lake Ontario section increased from 1,095 to 1,223, or about 11.7 percent, and tonnage traffic from 11.656 million tonnes to 12.952 million tonnes, or about 11.1 percent, over the same period. Further, the parties state that the St. Lawrence Seaway Management Corporation is forecasting a double digit tonnage increase in this section of the Seaway by the end of 2004. They believe that as a large number of vessels that navigate in these regions also transit in the St. Lawrence River, the increases of traffic will result in added revenues for the Authority, therefore allowing much lower tariffs that will not harm the users.

Shipping Federation of Canada

[39] The SFC represents shipowners, operators and agents of vessels trading internationally to and from Canadian ports in Eastern and Central Canada. Its members account for 75 percent of the traffic in the St. Lawrence River.

[40] The SFC states that the proposed 4 percent tariff increase is neither fair nor reasonable because it has no reasonable justification, and that it contravenes the objective of the Canada Marine Act which requires marine transportation services to be organized to satisfy the needs of the users and to be available at a reasonable cost. The SFC is of the opinion that the increase would be exceeding the estimated 2.5 percent CPI without reflecting an improvement of pilotage services. The SFC claims that the level of service has in fact decreased in certain sectors, i.e., the declining night navigation in District 1.

[41] While the SFC recognizes that the Authority has deployed considerable energy in order to improve the situation, notably the recent service contract with the CPBSL pilots, it has concerns with respect to the contract with the CPSLC. The SFC is of the opinion that the Authority has locked itself in an unreasonable service contract with the CPSLC and proposes to recuperate the unreasonable costs of the contract agreement through a tariff increase without justifying the costs of providing pilotage services. The SFC believes that, in the current situation, service contracts seem to prevail over the Pilotage Act, and that, if the Authority has lost the means to administer an efficient pilotage service and is governed by service contracts with certain pilot corporations, the users should not be penalized by paying higher pilotage fees. The SFC affirms that the Authority is penalized by the productivity payments clause included in its service contract with the CPSLC as cost increases associated to higher traffic surpass revenues. The SFC adds that this situation prevents the Authority from managing the traffic growth and places the Authority at a financial disadvantage. The SFC is of the opinion that the granting of the proposed 4 percent tariff increase would be against the public interest as it would be rewarding the productivity payments dysfunctional system, which would lead to inefficiencies.

[42] With respect to the level of pilotage services provided to the users, the SFC points out that the proposed increase does not guarantee year-round, 24-hour service in District 1, which does not permit the SFC's members to meet the shippers' demands. The SFC adds that the delays in ship transits have a detrimental effect on the users' efficiency and their ability to compete. Further, the SFC submits that priorities such as availability of pilots, double pilotage risk assessment and a plan to provide pilots with electronic charts, while being addressed by committees, are not resolved and cannot be considered as factors to justify the proposed increase.

[43] With respect to the negotiation of service contracts, the SFC disagrees with comments from the CPSLC that costs fixed by arbitrators reflect costs of operations. The SFC states that the Authority is victim of a non-supportive legislation and judgments of the courts, which place the users and the Authority in a quandary because arbitral decisions in the context of contract negotiations have been given precedence over present legislation governing pilotage services. The SFC believes that courts and arbitrators, without direction from the Pilotage Act and the CTA, will make it impossible for the Authority to comply with the legislation governing pilotage services. The SFC believes that the acceptance of the 4 percent tariff increase proposed by the Authority will not solve the quandary but will only postpone the resolution of the underlying problems. The SFC submits, however, that a refusal will force the interested parties to resolve these problems and to ensure safe and efficient pilotage services. The SFC states that, for the same reasons it is opposing the present 4 percent increase, it would also oppose any additional increase requested by the Authority to compensate for payments to the CPSLC ordered by the arbitrator.

Corporation des Pilotes du Saint-Laurent Central

[44] The CPSLC represents the pilots in District 1. In exchange for the Corporation's pilotage services, the Authority makes payments to the Corporation as provided for in the service contract.

[45] The CPSLC is of the view that the general 4 percent tariff increase proposed by the Authority is not prejudicial to the public interest, pursuant to subsection 5(1) of the CTA. Referring to services which are essential to safe marine transport and which the pilots provide under the national transportation policy, the CPSLC argues that the level of the tariff should reflect operating costs. The CPSLC further states that no evidence has been led to support the allegations of trip delays or of decreased nighttime travel and submits that such occurrences may be due to causes beyond the pilots' control. The CPSLC adds that the existing Pilotage Act does not require year round, 24 hours a day, seven days a week service, or the use of electronic charts by pilots, to justify a tariff increase.

[46] With regard to the impact that the proposed 4 percent increase will have on competition and market forces as well as cost-effectiveness for users, the CPSLC observes that the objectors submitted no evidence to that effect. Moreover, the CPSLC is of the view that this increase will have no impact on the users of District 1 pilotage services as all users must pay the same tariff. Unlike the SFC, the CPSLC submits that the 4 percent increase is not necessarily contrary to the public interest because it does not reflect a business or commercial approach and must be analyzed in light of the national transportation policy and the criteria established by the Agency in Decision No. 645-W-2002.

[47] The CPSLC states that its service contract with the Authority is neither unreasonable nor unlawful, and maintains that it is consistent with the Pilotage Act and that the Agency does not have jurisdiction to intervene in contract matters, including the decisions of an arbitrator appointed under the Pilotage Act. Furthermore, the CPSLC explains that the increases awarded to District 1 pilots in all service contracts negotiated between the parties since 1993 have been in line with the CPI. In addition, the pilots had no increase in 1996. The only adjustments that slightly exceed the CPI relate to the docking charges. The CPSLC advises that it is harder to dock systematically at the St. Lambert Lock but that it has become necessary to do so because the Seaway authorities now conduct their inspections at St. Lambert instead of at Pointe-aux-Trembles, as in the past. The proposed tariff is consistent with the other docking charges in the region, which have been in place since 2000.

[48] The CPSLC does not believe that the increase in marine traffic should automatically be reflected in additional revenues and that these revenues will be sufficient for the Authority to avoid the proposed tariff increase. The CPSLC further submits that costs rise as traffic increases and that the revenues generated by the increase are only a small part of the Authority's additional profit. The CPSLC also states that there are no tariff criteria that oblige the Authority to adhere to its budget forecasts in its business plan solely to enable users of pilotage services to develop a long-term plan that is fair and sensitive to the business needs of carriers and shippers. The CPSLC submits that the relevant criteria may be found in the legislation and in Agency Decision No. 645-W-2002, and that the objectors have not proved that the Authority's proposed 4 percent general tariff increase contravenes these criteria and is on that basis prejudicial to the public interest.

[49] Nevertheless, the CPSLC objects to an additional increase of 5 percent, only in District 1, over and above the general 4 percent increase. This objection concerns the Authority's argument that an additional 5 percent increase in the fees paid only to the CPSLC is needed to offset the recurring $1,050,000 expense resulting from the arbitration award that ordered payment of a retroactive 8 percent increase for the period from July 1, 2002 to June 30, 2003 in settlement of a contractual dispute between the parties. The CPSLC draws the Agency's attention to fee increases awarded to the CPBSL that were folded into the general tariff increases and affect users who do not employ the CPBSL's pilotage services. The CPSLC states that in his decision of March 12, 2003 arbitrator Richard Marcheterre considered the increases awarded to the CPBSL, which were higher than those granted to the CPSLC. The arbitrator ordered an 8 percent increase to be awarded to the CPSLC in order to restore the balance between the fees paid to the two corporations. In view of the fact that the fee increases paid to the CPBSL were recovered through pilotage charges levied on all St. Lawrence users, the CPSLC is of the view that it would be unfair and prejudicial to the public interest to limit recovery of the additional 5 percent increase to fees paid by the CPSLC District 1 users.

[50] Contrary to the objectors' comments, the CPSLC is of the view that the decision of arbitrator Marcheterre was consistent with the Pilotage Act, which establishes the criteria for service contract renewals. The CPSLC further submits that the investigation into the Authority's proposed tariff increase is not the appropriate forum for interventions concerning disputes resolved by an arbitrator's decision under the Pilotage Act, and that the positions expressed by the objectors on this subject are not material to the present investigation of the tariff increase before the Agency.

AGENCY MANDATE

[51] When the Pilotage Act came into force in 1971, four pilotage authorities were created, each with the exclusive right to administer pilotage services in a specific geographic region of Canada. As such, each authority is a monopolistic organization.

[52] Pilot groups that were in existence when the Pilotage Act came into force were given the option of becoming employees of an authority or of forming a pilot corporation. Once a pilot corporation was formed, the corporation had the exclusive right to provide pilotage services in a specific region and a pilotage authority could not deal with any other pilot group for that region. Thus, monopolistic pilotage authorities must deal with monopolistic pilot corporations. This is the situation for the Authority.

[53] It is with this double monopoly in mind that the Agency must exercise its mandate. However, it is appropriate to provide a brief summary of the objectors' argument that Agency decisions and the criteria set by the Agency in the review of the statutory duties of a pilotage authority should take precedence over arbitration decisions. It is important not to confuse the two roles. The job of an arbitrator is to establish the contractual relationship between the pilotage authority and the pilots' corporation in the event that the parties cannot agree on the labour relations that should govern their relationship. The Agency's mandate is quite different. The Agency intervenes when an authority's proposal to change its pilotage tariff raises objections. The Agency does not deny that the tariff change may flow from the consequences of the final offer selected by the arbitrator, but its role is to examine the proposed change in the light of the public interest criterion while also taking into account the obligations of pilotage authorities under the Pilotage Act. The Agency's mandate, therefore, is quite different from that of an arbitrator and, in a sense, it is more extensive.

[54] Under the Pilotage Act, a pilotage authority has a responsibility to prescribe pilotage tariffs. Section 33 and those following of the Pilotage Act concern the establishment of pilotage tariffs and the procedure in the event that a notice of objection to the tariff is filed.

[55] Section 33 provides that the tariffs of pilotage charges prescribed by an authority must be fixed at a level that permits the authority to operate on a self-sustaining financial basis and that they must be fair and reasonable. In Agency Decision No. 94-W-2001 of March 23, 2001, the Agency made a number of policy statements that take into account the pilotage authority's obligation to assure that the authority can operate on a self-sustaining financial basis and that the tariffs are fair and reasonable. These statements are as follows:

  1. A pilotage authority has an imposed public duty to ensure the safety of navigation in Canadian waters under its jurisdiction.
  2. A pilotage authority is entitled to receive reasonable compensation for fulfilling the imposed duty of ensuring the safety of navigation.
  3. A pilotage authority has a responsibility to organize and provide services in an efficient manner.
  4. A pilotage authority has a requirement to be financially self-sufficient and cannot rely upon government appropriations to achieve this.
  5. A pilotage authority has the right to establish user charges at a level that enables it to meet the requirement of being financially self-sufficient.
  6. User charges set by a pilotage authority are to be fair and reasonable, reflecting only the justifiable costs of providing the service.

[56] Under subsection 34(2) of the Pilotage Act, any interested person who has reason to believe that any charge in a proposed tariff of pilotage charges is prejudicial to the public interest may file a notice of objection. The Agency makes an investigation and makes a recommendation to the Authority, which must govern itself accordingly. The public interest mentioned in subsection 34(2) of the Pilotage Act includes the public interest referred to in section 5 of the CTA. Section 5 of the CTA is a policy statement that provides a framework for the decisions that the Agency makes in the performance of its mandate. The framework in question in Decision No. 645-W-2002, reproduced above, is not only consistent with the Pilotage Act but also with the national transportation policy set out in section 5 of the CTA. The analysis made in Decision No. 645-W-2002, reproduced below, applies in its entirety to the present decision.

[57] The first point relates to the imposed public duty of a pilotage authority to ensure the safety of navigation in Canadian waters under its jurisdiction. This duty originates in section 18 of the Pilotage Act, which provides that the objects of an Authority are to establish, operate, maintain and administer an efficient pilotage service in the interests of safety. This duty is also confirmed in the national transportation policy. Thus, the introductory provision of section 5 and paragraph 5(a) of the CTA recognize the importance of establishing a safe transportation system that meets the highest practicable safety standards.

[58] The second point relates to the compensation to which a pilotage authority is entitled. There is no doubt that a pilotage authority is entitled to receive reasonable compensation for fulfilling the imposed duty of ensuring the safety of navigation. Paragraph (f) of the national transportation policy recognizes this fact. Paragraph (f) nevertheless makes clear that the fairness and reasonableness of this compensation is a function of the resources, facilities and services that the carrier is required to provide as an imposed public duty. A pilotage authority will therefore not be compensated for all of the costs incurred; rather, it will be compensated only for fair and reasonable costs. Further, the compensation to which a pilotage authority is entitled depends on the services that it is required to provide as an imposed public duty. In other words, a pilotage authority could not be compensated for the costs of services that do not directly meet the needs of the public, namely the users.

[59] The issue of compensation is closely linked to the efficiency of the service, which is the third point of the framework of rights and duties of a pilotage authority. Section 18 of the Pilotage Act provides that the pilotage service established by a pilotage authority is to be efficient. This is made clear by the introductory paragraph of the national transportation policy, which recognizes the importance of establishing a viable and effective transportation network, and in paragraph (b), which recognizes competition and market forces as prime agents in providing viable and effective transportation services. The effectiveness of a pilotage authority can therefore not be determined without regard to the needs of the users that it claims to serve.

[60] The fourth and fifth points of the framework relate to the requirement for a pilotage authority to be financially self-sufficient and the recognized corollary right to establish user charges that enable it to meet that requirement. Moreover, subsection 33(3) of the Pilotage Act requires that the charges be fixed at a level that permits the authority to operate on a self-sustaining financial basis, and that they be fair and reasonable. The requirement to be financially self-sufficient is also reinforced by section 36.01 of the Pilotage Act, which provides that no payment may be made to an authority under an appropriation by Parliament to enable the authority to discharge an obligation or liability. Section 36, however, provides for the borrowing of money by an authority for the purpose of defraying its expenses.

[61] The Agency is of the opinion that the tariff of pilotage charges must permit a pilotage authority to generate sufficient revenues to cover the inherent expenses of the service provided to the users. The requirement to be financially self-sufficient, however, does not mean that users of a pilotage service have to bear costs inconsistent with scrupulous and effective management by an authority. Accordingly, a tariff of pilotage charges that permits an authority to cover the reasonable inherent expenses related to providing an efficient pilotage service will meet the requirement to be financially self-sufficient, as provided for in subsection 33(3) of the Pilotage Act, even if the revenues generated by the tariff are insufficient to cover the authority's anticipated expenses not due to effective management. The Agency is of the opinion that an authority's imposed requirement to be financially self-sufficient is therefore closely linked to its duty of efficiency.

[62] The sixth point of the framework further specifies that user charges must not only be fair and equitable, they must also reflect only the justifiable cost of providing the service. Regarding the fairness and equity of the pilotage charges that may be imposed by a pilotage authority, the Agency refers the parties to what it said on the subject in its Decision No. 94-W-2001. The Agency noted among other things that, in order for pilotage charges to be fair and reasonable, they had to result from an economic and efficient service. The Agency specified that the costs that could legitimately be recovered from users had also to be shown to be based on an economic and efficient service (see in this regard Decision No. 669-W-1995 of the National Transportation Agency). In this respect, the Agency considers that the costs must favour competition and market forces within the meaning of the introductory paragraph of the national transportation policy and its paragraphs (c) and (g).

[63] It is on the basis of these principles, then, that the Agency will exercise its mandate to determine, in accordance with the evidence established by the parties in the written pleadings, whether the proposed tariff of pilotage charges respects the balance of rights and duties of the various parties and is accordingly in the public interest within the meaning of the Pilotage Act and the national transportation policy.

[64] The conclusion to be drawn from this analysis is that the structure of the Pilotage Act requires the Agency to balance the objectives set forth in this framework. Thus, the Agency must ensure that an Authority has a fair and reasonable tariff that permits it to operate and discharge its mandate on a self-sustaining financial basis without being prejudicial to the public interest.

ANALYSIS AND FINDINGS

[65] Before examining the Authority's tariff proposal, there are a number of statements made by the CPSLC in its intervention that the Agency will briefly address.

[66] In its intervention, the CPSLC argues that the objectors have the burden of proving that the tariff proposal is against the public interest. In particular, the CPSLC asserts that the objectors have not provided evidence that the tariff will affect the viability of users, that the tariff will affect competition and market forces, nor any evidence of delays in providing pilotage services that affect the efficiency of service. The Agency is well aware of the burden of proof that objectors must meet. Subsection 34(2) of the Pilotage Act provides that any interested person who has reason to believe that a proposed tariff is prejudicial to the public interest may file a notice of objection setting out the grounds upon which a person relies. Once a notice is filed however, the Agency has the discretion to define the scope of its investigation as it deems appropriate.

[67] As to the intervener's comments with respect to the scope of the Agency's mandate versus that of the arbitrator, the Agency refers the intervener to that part of this Decision where the Agency discusses its mandate pursuant to the Pilotage Act. With respect to the intervener's comments on financial matters, the Agency will now examine the financial results and projections provided by the Authority.

Financial results and projections

[68] As part of the assessment of the Authority's tariff proposal, the Agency examined the Authority's operational and financial results for the 2002 to 2005 period.

[69] A summary of the financial results is presented in the following table. The figures for 2002 and 2003 are actual results and the figures for 2004 and 2005 are projections. The 2005 forecast includes the proposed 4 percent tariff increase and the new $213.36 docking charge at the St. Lambert Lock.

[70] These results show that the Authority's revenues increased by 2.2 percent from 2002 to 2003, while expenses rose by 1.9 percent. In 2002 and 2003, the Authority generated sufficient revenues to cover all its expenses and consequently made a profit. The projections show that the Authority's revenues ought to increase by 4.4 percent from 2003 to 2004 and by 4.9 percent from 2004 to 2005, while expenses are expected to increase by 6.8 percent in 2004 and by 3.9 percent in 2005. The Authority does not foresee being able to generate sufficient revenues to cover its expenses in 2004 and 2005.

Laurentian Pilotage Authority - Annual Revenues and Expenses ($000)
  2002 2003 20041 20052
Total 19,149 19,599 20,185 20,313
Revenues
District 1-1 1,305 1,288 1,428 1,518
District 1 23,745 23,518 24,612 25,846
District 2 16,697 17,325 18,407 19,421
Pilot Boats - Contractors 2,823 2,993 3,023 3,114
Pilot Boats - Escoumins 2,077 2,172 2,370 2,465
Other 184 5573 104 36
Total Revenues 46,831 47,853 49,944 52,400
Expenses
District 1-1 1,221 1,288 1,312 1,429
District 1 20,938 21,102 22,760 23,652
District 2 15,221 16,046 17,237 18,319
Pilot Boats - Contractors 2,695 2,852 2,885 2,971
Pilot Boats - Escoumins 1,979 1,890 2,278 2,220
Subtotal - Expenses 42,054 43,178 46,472 48,591
Profit (Loss) 4,777 4,675 3,472 3,809
Administration and dispatching expenses 4,366 4,104 4,047 3,902
Total Expenses 46,420 47,282 50,519 52,493
Net Profit (Loss) 411 571 -575 -93
Assignments
District 1-1 1,243 1,206 1,304 1,333
District 1 11,263 11,784 12,031 12,031
District 2 6,653 6,609 6,850 6,949

Cost of pilot boats

[71] Pilot boat operations represent about 10 percent of the Authority's expenses. The Authority contracts with some operators and also owns and operates two pilot boats at Les Escoumins pilotage station. The financial results for the 2002 to 2005 period from the operation of the Authority's pilot boats and from contracted pilot boats are presented in the following table.

Laurentian Pilotage Authority - Pilot Boats at Les Escoumins
  2002 2003 20044 20055
Ratio of charges: expenses 1.045 1.149 1.041 1.111
Expenses ($000)
Salaries 921 913 1,019 1,008
Travel and communications 18 17 23 23
Professional and special services 5 4 18 18
Leasing 352 352 352 352
Repairs and maintenance 143 74 316 266
Public utilities and supply 154 143 172 182
Depreciation 233 236 236 238
Carrying charges 113 106 95 84
Other 41 45 47 49
Total Expenses ($000) 1,979 1,890 2,278 2,220
Pilot boat revenues ($000) 2,077 2,172 2,370 2,465
Transshipments 4,695 4,534 4,675 4,750
User fees ($) 441 479 507 519
Expenses/Transshipment ($) 422 417 487 467

[72] Pilot boat operating expenses at Les Escoumins are projected to rise by 12.2 percent in the 2002 to 2005 period, while revenues are expected to grow by 18.7 percent. The cost increase is due to the cost of the salary item, which is the most expensive component of pilot boat operation. Maintenance and repair projections for 2004 and 2005 will also have a significant impact on the increase in the cost of these pilot boats. Since pilot boat revenues are expected to increase at a higher rate than pilot boat expenses, the Authority's margin of profit at Les Escoumins is expected to increase between 2004 and 2005 from 4 percent to 11 percent.

Laurentian Pilotage Authority - Pilot Boat Contracting
  2002 2003 20046 20057
Total payments to contractors ($000) 2,695 2,844 2,885 2,971
Pilot boat revenues ($000) 2,823 2,993 3,023 3,114

[73] Pilot boat contracting expenses are projected to increase by 10.2 percent in the 2002 to 2005 period, while revenues are expected to grow by 10.3 percent. As the Authority charges an administrative fee for collecting the pilot boat charges from the users and then remitting the payments to the pilot boat contractors, the revenue always exceeds the payments.

Administrative and dispatching costs

[74] Administrative and dispatching expenses represent slightly less than 10 percent of the Authority's total expenses. In Decision No. 645-W-2002, the Agency highlighted the Authority's difficulty in bringing under control its administrative and dispatching costs, which kept rising from one year to the next. The Agency expressed concern that during a period while the Authority was struggling to achieve financial self-sufficiency it was having difficulty keeping its administrative and dispatching costs under control. The Authority's administrative and dispatching costs in the 2002 to 2005 period are shown below.

Laurentian Pilotage Authority - Administrative Costs
  2002 2003 20048 20059
Total Expenses ($000) 2,565 2,413 2,265 2,194
Assignments 19,159 19,599 20,185 20,313
Cost/Assignment ($) 133.88 123.12 112.21 108.01

[75] The Authority managed to reduce its administrative costs by 6 percent between 2002 and 2003. Projections are for further reductions of 6 percent and 3 percent in 2004 and 2005 respectively. The lower costs are attributable to a decline in professional fees and to the Authority's decision to move its headquarters to less expensive accommodations.

Laurentian Pilotage Authority - Dispatching Costs
  2002 2003 200410 200511
Dispatching ($000) 1,801 1,691 1,782 1,708
Assignments 19,159 19,599 20,185 20,313
Cost/Assignment ($) 94 86.3 88.3 84.1

[76] The main factors affecting dispatching costs are salary and expenses associated with the computer system. In 2002, the Authority implemented a new computer system; this had the effect of increasing expenses. In 2004, the Authority decided to shut down the Quebec Dispatch Office and consolidate dispatching operations in the Montréal office. This measure will allow the Authority to reduce its dispatching costs, as two dispatcher positions have been abolished.

Pilot costs

[77] Pilot costs are the largest expense category for the Authority, representing about 82 percent of total expenses (based on pilot costs for Districts 1.1, 1 and 2). If pilot boat costs are removed from total expenses (as pilot boat operations are managed separately and the tariff increase does not apply to pilot boat charges), the pilot costs represent approximately 90 percent of expenses affected.

[78] Objectors were concerned with several aspects of pilot costs: fee increases that exceed the change in the CPI, no improvement in service for increased payments, expensive service contracts resulting from arbitration awards, a productivity clause in the District 1 contract, the docking fee at the St. Lambert Lock and the inability of the Authority to control costs. These concerns were examined by the Agency along with other aspects of pilot costs.

Pilot corporation service contracts

[79] In District 1-1, the Authority and the pilots signed a new collective agreement covering the January 1, 2005 to December 31, 2009 period. The salary increase for 2005, 2006 and 2007 is 2.5 percent each year followed by increases of 2.75 percent in 2008 and 3 percent in 2009.

[80] The current service contract with the CPBSL covers the January 1, 2004 to December 31, 2006 period. This contract was the result of negotiations between the Authority and the pilot corporation. In the first year of the contract, the fee increase is 2.5 percent and in the second and third years, the fee increase is linked to the change in the CPI in the province of Quebec.

[81] In the District 2 service contract, the Authority negotiated a change in the manner of paying transportation, communications and pilot training expenses; these items are now included in the fee structure rather than being an annual payment.

[82] For District 1, the current contract covers the July 1, 2003 to June 30, 2006 period and resulted from a final offer selection process. The fee increase is 2.5 percent in the first year and equals the change in the CPI in the province of Quebec for the last two years. An option exists until the end of December 2004 for the Authority to convert the productivity clause to a fee increase. The contract also contains a new docking fee at the St. Lambert Lock. The previous provision where one party could renounce the fee increase in the last year of the contract has been removed. The Authority attempted to have the productivity clause removed from the contract but was not successful in doing so.

[83] Both service contracts contain provisions to compensate the pilot corporation for the effect of using the tariff length of vessels (7.5 times the breadth of the vessel which has been in the Authority's tariff structure since 1986) rather than the actual vessel length when calculating vessel units. The use of the tariff length results in lower vessel units than would otherwise be determined if the actual length had been used. This has the effect of reducing the pilotage charges from what would be levied based on actual ship length.

[84] For District 1, there is a provision in the service contract that a record will be kept of vessels with a length greater than 7.5 times their breadth and four months before the expiry of the contract, a committee will determine the amount of revenue foregone and will calculate a fee increase for this revenue.

[85] For District 2, a component of the supplemental fee increases for revenue foregone through the use of the tariff length for vessels.

[86] According to the Authority, these adjustments have been made with the concurrence of the users to compensate the pilot corporations for earnings foregone from the use of the tariff length of vessels. This issue has not been raised in the current tariff proposal.

Pilot strength

[87] At present, the Authority has 9 pilots in District 1-1 and this number will be reduced to 7 in 2006 following the retirement of two pilots in 2005. The Authority plans to hire one apprentice in this district in each of 2006 and 2007 to maintain the necessary complement of pilots.

[88] In District 2, there are presently 77 licensed pilots. The Authority did not hire any apprentices in this District in 2003, hired two apprentice pilots in 2004 and plans to hire 8 apprentices in 2005 followed by 6 additional apprentices in 2006. These apprentices would be needed to replace 8 pilots who are expected to retire in 2004 and 2005 as well as to maintain pilot strength at a level where the average workload is between 95 and 100 assignments per pilot per year.

[89] In District 1, there are presently 96 licensed pilots. The Authority hired 4 apprentices in 2003 and plans to hire 10 apprentices in 2005 followed by an additional 8 apprentices in 2006.

[90] In its submissions regarding pilot strength, the Authority argued that due to the fact that it did not receive its planned tariff increases in 2003 and 2004, it had to postpone the hiring of apprentice pilots. Previously, the Authority had planned to hire 6 apprentices in District 2 and 12 apprentices in District 1 in 2003, but it was only able to hire 4 apprentices in District 1 in 2003.

[91] The level of pilot strength in District 1 is of great concern to the Authority because of the productivity clause that applies when the average workload per pilot exceeds 120 assignments per year. The average workload in District 1 was 125 assignments per pilot in 2003 and it is expected to increase to 133 assignments per pilot in 2004. This average workload is not expected to return to 120 per pilot until after 2007 providing the Authority is able to hire the planned number of apprentices in coming years. The Authority expects to pay the District 1 corporation about $955,000 in 2004 and about $808,000 in 2005 as productivity payments. The Authority has no off-setting revenue for these payments so it must build this revenue requirement into its overall tariff increase.

[92] The issue of apprentice pilots was examined and discussed in some detail in the investigation leading to Decision No. 645-W-2002. In that decision, the Agency expressed the view that the Authority had not substantiated the number of apprentice pilots to be hired in the face of declining traffic and some uncertainty over pilot retirements. The present circumstances are different in that the Authority foresees increasing traffic and a significant number of pilot retirements

[93] As has been noted, the Authority faces substantial productivity payments in each of 2004 and 2005 as the level of pilot strength in District 1 is not sufficient to reduce the average workload to 120 assignments per pilot. The Authority has not recruited a sufficient number of apprentice pilots in District 1 to reduce the average workload so it continues to face productivity payments. The Authority attempted to have the productivity clause removed from the service contract but it was unsuccessful in the final offer selection process where the offer of the pilot corporation was selected. If the Authority does not proceed with the planned apprentice pilot recruitment in 2005 in District 1, the pilot strength in this district will continue to be insufficient to reduce the average workload to 120 assignments per pilot.

[94] Based on the information provided by the Authority, the proposed tariff is expected to generate an additional $1,778,000 in 2005. The productivity payments in District 1 for 2005 are estimated by the Authority to be $808,000 or 45 percent of the additional revenue. This means that a significant portion of the proposed tariff increase is directly related to the productivity payments; approximately 1.8 percent of the 4 percent with the balance of 2.2 percent related to cost increases from contract renewals as administrative expenses are expected to decline in 2005.

[95] Deferring the hiring of apprentice pilots will have an impact in the medium term. As a basis for comparison, the Authority plans to hire 10 apprentice pilots for District 1 in 2005, at a cost of approximately $525,000. If this recruitment is postponed, the Authority estimates that its productivity payments in 2008 will be equivalent to those of 2005 and 2006 ($800,000). In the 1999 Review of Pilotage Issues, the Review Panel pointed out that the productivity payments can have an impact on the Authority's financial position and that it is not obvious how these payments benefit users of the service. At that time, the Review Panel was advised that the productivity payments were the subject of negotiations between the Authority and the District 1 and 1-1 pilots. The productivity clause remains in the collect agreement with District 1-1 and in the service contract with District 1. The Agency reiterates that the productivity clause in the District 1 service contract and the collective agreement with District 1-1 is a burden to users and to the Authority with no added benefit to users for the extra payments and that the clause should be removed from the contract. Notwithstanding, the Agency is of the view that apprentice pilots may be needed to bring a balance to the workforce in times where traffic is expected to grow and to mitigate future effects of the productivity clause.

PUBLIC INTEREST

[96] As has been noted earlier, the Agency's examination of the public interest must, among other things, take into consideration the public interest that is consistent with the national transportation policy provisions of the CTA. These provisions encompass the concepts of fairness and reasonableness that are referred to in section 33 of the Pilotage Act, which describes a pilotage authority's mandate to establish pilotage tariffs. In past investigations, the Agency has established that in order for pilotage tariffs to be fair and reasonable, they must result from economic and efficient pilotage services. In this regard, another factor that must be considered is the stipulation that costs which may legitimately be recovered from users must obviously be justified by economical, efficient service. The obligation imposed on an Authority under the Pilotage Act to operate efficiently is an important one. It not only ensures the users that the pilotage service offered is safe, but it also ensures that the cost charged for the use of this service does not exceed what is otherwise fair and reasonable.

[97] The objectors argued that the proposed charges in the tariff published on July 31, 2004 are prejudicial to the public interest, including the public interest that is consistent with the national policy set out in the CTA. They are of the opinion that the proposed general increase of 4 percent is not fair and reasonable as it is above the estimated CPI for the year 2005. They are of the opinion that increases exceeding the CPI are indicative of inefficiencies in the Authority's operation and that the negotiating and granting of such increases contribute to and perpetuate the poor financial state of the Authority.

[98] Referring to the Agency's most recent decision, the CSA and the CMC stated that, among other things, the Agency determined that the Authority had no sensitivity to the competitive pressures facing shippers and shipowners and that self-sufficiency should not be achieved only through tariff increases without regard to cost containment.

[99] The CSA and the CMC are of the opinion that the proposed 4 percent increase is the result of increases of payments made to pilots through contract negotiations and decisions of arbitrators. Not only did the objectors argue that the proposed increase does not reflect a corresponding improvement in the quality of pilotage services, they also submitted that the Authority should not be allowed to recuperate excessive increases in payments to pilots from the users that are above the CPI with self-sufficiency as the only justification.

[100] Furthermore, in response to comments made by the Authority with respect to self-sufficiency, the CSA and the CMC submitted that the present financial position of the Authority results from decisions made outside arbitral adjudications.

[101] As has been noted, the main cost component for the Authority is payments to pilots. Payments to all pilots represent about 82 percent of expenses with payments of fees to the two pilot corporations representing about 80 percent of expenses.

[102] Regarding District 2, the Authority negotiated a service contract with fee increases linked to the CPI in the province of Quebec. As well, the Authority converted annual payments for communications, transportation and pilot training to supplemental fee increases over the life of the contract. In future years, annual payments for these three aspects will no longer be made. The provisions in the contract that relate to the Authority's regulatory powers have been removed.

[103] The District 1 service contract remains problematic for the Authority. While the fee increases in the contract are linked to the CPI in the province of Quebec, the contract still contains the productivity payment clause. The Agency commented on this clause in Decision No. 94-W-2001 dated March 21, 2001 saying that productivity payments are usually associated with a corresponding reduction in costs for users, which is not the case. The productivity clause results in added costs for users.

[104] The recruitment of apprentice pilots in District 1 may be an option for the Authority to be able to reduce the average workload so that it does not face continuing added payments of $800,000 or more per year. To be able to accomplish this, the Authority needs sufficient revenue to cover the cost of additional apprentice pilots. The Authority plans to hire 10 apprentices in District 1 in 2005. In addition, the Authority foresees a need to recruit apprentice pilots in District 2 to maintain adequate pilot strength and to maintain the average workload in this district between 95 and 100 assignments per pilot per year. The Authority also anticipates the need to hire apprentices in District 1-1. In order to be able to hire the projected number of apprentice pilots in 2005, 10 in District 1 and 8 in District 2, the Authority needs additional revenue to be able to cover the cost of hiring.

[105] Regarding the docking charge at the St. Lambert Lock, the Authority argued that this is consistent with other docking charges and that the service contract with the CPSLC now contains payments for such dockings. The CPSLC stated in its supporting intervention that docking at the St. Lambert Lock is an extra service provided to users for which the pilots should be compensated. The CSA and the CMC object to this charge arguing that there has not been any docking charges at the St. Lambert Lock for over 40 years and that it is a charge accepted by an arbitrator in the context of a contract negotiation. Furthermore, this new charge does not bring any additional benefit to the users. The Agency finds the justification for this new docking charge unsatisfactory given that the pilots have been providing such services since the opening of the St. Lawrence Seaway as part of their regular piloting duties for an assignment. This new charge is not similar to the other docking charges that only apply when a ship actually needs a docking service. The charge for the St. Lambert Lock applies to all vessels that proceed to the lock whether directly or with a temporary docking at the waiting wall before the lock. There is no benefit to the users and, therefore, the Agency is of the opinion that this docking fee is prejudicial to the public interest.

[106] In carrying out its mandate, the Agency must establish a balance among the objectives which it established in its framework. These objectives take into account the obligation of a pilotage authority to fix its tariffs at a level that is fair and reasonable and that allows the Authority to operate on a self-sustaining financial basis. Thus, the objectives allow the Agency to make a recommendation. In that regard, it is appropriate to recall that in explaining its framework, the Agency recognizes that although an authority is entitled to reasonable compensation for the imposed duty of providing services to the public, it ought not to be compensated for the costs of services that do not directly meet the needs of the public, namely the users. Furthermore, although the tariff of pilotage charges must permit a pilotage authority to generate sufficient revenues to cover the inherent expenses of the service provided to the users, the Agency also states in the framework that the requirement to be financially self-sufficient does not mean that users of a pilotage service have to bear costs inconsistent with scrupulous and effective management by an authority. The tariff must reflect only the justifiable cost of providing the service.

[107] Thus, it is the business of the Agency to balance the various objectives set forth in the framework in the light of the submissions of the parties. Some of the objectives go to the issues of the fairness and reasonableness of the tariff while others focus on the issue of the public interest. It is the Agency's job to weigh them. In this regard, the Agency cannot accept the objectors' argument that the Authority ought to match its annual cost increases to the CPI. Taking the CPI as the standard for a fair and reasonable tariff that would permit the Authority to operate with financial self-sufficiency would be tantamount to depriving the Agency of its discretion in carrying out its mandate and would disregard circumstances in which an authority may have good cause to raise or lower the tariff.

[108] In consideration of the foregoing, the Agency now makes its recommendation.

RECOMMENDATION

[109] The Agency has determined that a tariff increase of 4 percent is not prejudicial to the public interest and may be implemented while the new docking fee at St. Lambert Lock is prejudicial to the public interest and may not be implemented.


DISSENTING OPINION OF MARY-JANE BENNETT

[110] I have read the reasons of the majority in this proceeding and I disagree with its conclusion, that being, a finding that the tariff increase of 4 percent sought is not prejudicial to the public interest. I agree with the conclusion of the majority that the new docking fee at the St. Lambert Lock is prejudicial to the public interest and may not be implemented.

[111] My dissent concerns both the definition of the "public interest" and the balancing exercise required in making a determination as to whether the tariff proposal published by the Authority on July 31, 2004 is "not prejudicial to the public interest" as required in subsection 34(2) of the Pilotage Act. In particular, this dissent concerns the productivity payments in the service contract negotiated between the Authority and the District 1 CPSLC and whether such payments can reasonably be seen as being prejudicial to the public interest.

Public interest

[112] In its decision, the majority found that the "public interest" was established by a balancing of the policy objectives as set out in section 5 of the CTA and those of subection 33(3) of the Pilotage Act.

[113] A plain reading of subsection 34(2) of the Pilotage Act directs the objector to the "public interest" as outlined in section 5 of the CTA. For the majority, the policy objectives in section 5 of the CTA have been placed secondary to those in subsection 33(3) of the Pilotage Act in an attempt to determine the "public interest" in this situation. Although these objectives are specific to pilotage, such as the requirement that tariffs allow the Authority to be "self-sufficient" and that such tariffs be "fair and reasonable", it is to section 5 of the CTA that one finds the "public interest".

[114] The policy objectives of section 5 of the CTA require the "highest of safety standards", that the mode of transportation or carrier bear a "fair proportion of the real costs of the resources, facilities and services...", that fees, rates and conditions do not constitute "an unfair disadvantage in respect of any such traffic...", that transportation modes be "at the lowest total cost (that) is essential to serve the transportation needs of shippers.. and to maintain the economic well-being and growth of Canada and its regions", that fares, rates and conditions do not constitute "an unfair disadvantage in respect of any such traffic". A key policy objective is competition and market forces as they have been viewed by Parliament as "the prime agents in providing viable and effective transportation services". Yet, it is this very lack of competition available to the pilotage users which has resulted in the objection before the Agency.

[115] In a concept as dynamic as the "public interest", a consideration of the community concerned - the Authority, the CSA, the CMC and the SFC - is required . Of lesser concern is the intervention of the CPSLC as its intervention supporting a tariff increase by the Authority of 4 percent of which 90 percent would go to fees, seems more a matter of private than public interest.

[116] The Ontario Energy Board has determined that in a regulatory environment the "public interest" requires a balancing of the "benefits and detriments", "quot;, ", "quot;pluses and minuses" of these conflicting specific interests:

One might interpret the public interest as the best possible accommodation of conflicting specific interests. Not all sectional interests may be represented at a Board hearing but nevertheless the Board must have regard for them. The Board follows a multi-stage process in resolving value conflicts of particular interests in arriving at its decision in the overall public interest. In considering whether the public interest would be served by a specific proposal, the Board must also consider whether any disservice to the public interest would be done in the event that the proposal was not approved.

Clearly, there are no firm criteria for determining the public interest which will hold good in every situation. Like "just and reasonable" and "public convenience and necessity", the criteria of public interest in any given situation are understood rather than defined and it may well not serve any purpose to attempt to define these terms too precisely. Rather, it must be left to those who have to arrive at a conclusion to strike the balance of "puts and takes", pluses and minuses, that at the particular point in time are considered appropriate.

The public interest is dynamic, varying from one situation to another, if only because the values ascribed to the conflicting interests alter. It follows that the criteria by which the public interest is served may also change according to the circumstances. 2 E.B.R.O. 1985

History of productivity payments

[117] With this need to balance the interests of all parties in mind, this dissent now turns to the request for a 4 percent tariff increase and the productivity payment component thereof.

[118] The history of productivity payments has at its genesis reviews done in the late 1980's by the Authority to determine when the Authority should hire additional pilots to replace retiring pilots or to have sufficient pilot strength to handle a growing number of pilotage assignments. The results of the study for District 1(CPSLC) suggested that a workload guideline be established at 120 assignments per pilot per year. The Authority incorporated the workload guideline of 120 assignments per year into the 1991-1993 service contract with the District 1 pilots (CPSLC). In the subsequent service contract covering the 1993-1996 period, the pilot corporation succeeded in having a productivity payment clause inserted in the contract whereby when the average workload per pilot exceeded the workload guideline of 120 assignments per pilot per year, the corporation would receive a supplemental payment for each assignment over this average workload. The supplemental payment was equivalent to an additional 50 percent of the revenue for the assignment. This meant that the Authority would have to pay the pilot corporation more for these assignments than it received in revenue from the users. To provide some context of the eventual result of such payments, the Pilotage Review Panel in its Review of Pilotage Issues framed the matter thus:

An example of such a productivity payment in District 1 is as follows: the LPA collects $5,000. per assignment from the industry; the LPA's regular payment to the pilot's corporation is $4,000; the productivity payment is $2,000.; thus the total payment to the pilot's corporation is $6,000.

[119] This type of concern would be of limited relevance were the users of pilotage allowed some form of competition. But the monopoly in the provision of pilotage services in District 1 combined with the fact that tariff increases are directly related to the need to cover these payments has been of longstanding concern to the users of the system. By way of perspective, approximately 1.8 percent of the tariff increase of 4 percent sought is required to cover productivity payments.

[120] In Decision No. 669-W-1995, the National Transportation Agency noted that the Authority had accepted the productivity clause in its contract negotiations with District 1-1. This clause became part of the contract with District 1 (CPSLC) but not that with District 2.

[121] In its Review of Pilotage Issues, the Review Panel stressed the difference between productivity payments and payments for a call back assignment:

With specific reference to productivity payments in the LPA's districts 1.1 and 1, it is important to note the difference between payments for a call-back assignment and productivity payments. Off-duty pilots perform call-back assignments, and payments for such call-backs compensate pilots for working during an off-duty period. Such payments are generally viewed as similar to overtime payments. In such circumstances, an authority must determine whether it is more efficient and productive to train new pilots or to continue paying for call-backs.

In the case of productivity payments, pilots receive these for assignments that fall within their normal working schedule but exceed the number of assignments they are required to take each year. Consequently, increases in traffic volumes directly affect the payments the LPA makes to pilots in districts 1.1 and 1 and can hurt the LPA's financial position. In such a situation, it is not obvious how these productivity payments benefit users of the service. The Panel asserts that this is a matter for collective bargaining and must not be ignored.

[122] The Review Panel also noted that :

The Panel was advised that productivity payments are currently the subject of Negotiations between the LPA and the Districts 1 and 1-1 pilots.

[123] The productivity payment clause remained in the 1999-2003 service contract that the Authority negotiated with the District 1 pilot corporation.

[124] In a subsequent decision, (Decision No. 94-W-2001), the Agency again commented on the productivity payment clause in the District 1 service contract:

These so called productivity payments do not have any parallels in other industries. Where such bonus payments are made in industry, there is normally a corresponding reduction in costs due to improved productivity or a benefit accruing to the party paying the bonus. This is not the case with the District 1 pilot corporation, where the additional payments are not linked in any manner to productivity improvements resulting in lower costs for users. To the contrary, the pilot corporation receives additional money for no additional work on the part of the pilots, the result of which can only be increased costs for users.

Although the Authority is aware of the financial implications of the productivity clause, this clause is still contained in the service contract which extends until June 30, 2003

[125] In this current investigation, the Authority provided evidence that it had attempted to have the productivity payment clause removed from the District 1 service contract but was unsuccessful in doing so due to the final offer selection process. As a result, projected payments to the District 1 pilot corporation for this productivity clause remain a burden on both the Authority and the users in the service contract covering the 2003-2006 period.

[126] In its Review of Pilotage Issues, the Review Panel noted that any increase in maritime traffic would directly affect productivity payments and could have financial repercussions for the Authority. The Review Panel stressed that "In such a situation, it is not obvious how these productivity payments benefit the users of the service. The Review Panel asserts that this is a matter for negotiations and must not be ignored."

[127] As signalled by the Review Panel, any issue of increase in maritime traffic is of significant importance to the Authority as traffic increases can bring about financial ruin for the Authority. In this proceeding, the Authority has indicated that it expects productivity payments to be $808,000 in 2005 based on a traffic forecast of 12,031 assignments and active pilot strength of 91.5 pilots. The 91.5 active pilots can handle 10,980 assignments at 120 assignments per pilot. The difference between this and the projected number of assignments is 1,051 assignments. The projected productivity is then $798 per assignment. If traffic increases in 2005, the total productivity payments will be greater than the $808,000.

[128] Based on what has been said by the Authority and the objectors in the current investigation, traffic is growing in 2004 and will likely continue in 2005. If this forecast is accurate, the Authority will face higher productivity payments in 2005 than forecast as the active pilot strength has not increased. The following chart illustrates the difference between the projections in 2002 and the most recent projections as to pilot workload in District 1. The results show that there was an increase in the pilot workload from the projections at the time.

Laurentian Pilotage Authority - Comparison of pilot workload of District 1 pilots
  2002 2003 2004 2005
2002 forecast of pilot workload 115 119 127 121
2004 forecast of pilot workload 12012 12513 133 131

[129] The next chart shows a comparison between the projections of financial results forecast by the Authority over the period 2003-2008. The projections of March 2002 are at substantial odds with both those now established and those now forecast. In March 2002, the Authority forecast profits of $331,000 in 2004; $931,000 in 2005; and $1,465,000. in 2006. The last projections of the Authority show a loss in 2004 of $575,000; $93,000 in 2005 and $52,000. in 2006.

Laurentian Pilotage Authority - Comparison of projected financial results (loss) ($000)
  2003 2004 2005 2006 2007 2008
Business plan
March 2002
97 331 931 1 465 N.A. N.A.
Business plan
February 2004
254 (709) (319) 36 1 449 1 999
Business plan
2004 update
571 (575) (93) (52) 831 1 092

[130] The consequences of the differences between those as forecast and those realized are twofold: First, since 1996 tariff increases sought by the Authority have been 41 percent higher than the increase in the cost of living index. This is of special relevance in a monopoly situation where the users cannot look to other competition and thus have no alternative but to pay. Second, the industry is deprived of any ability to plan in the long term which affects its competitive advantage and its ability to compete with other modes of transportation.

Balancing of interests

[131] Turning to the balancing required to determine the public interest, is there a benefit or detriment to the community involved in the request for a tariff increase, a large component of which relates to productivity payments? I find there to be five reasons advanced on the public interest in connection with the productivity payments. Each shows that the full weight of the evidence goes against such payments.

  1. Productivity payments bring about no benefit to the users of the system;
  2. Productivity payments compromise the legislated mandate of the pilotage authority to "operate on a self sustaining financial basis";
  3. Any increase in maritime traffic would place the pilotage authority in a state of financial crisis due to the concomitant increase in productivity payments;
  4. Unlike other industries where a bonus forms part of a salary, there is no corresponding reduction in cost to the users and thus the payers of the system; and
  5. Productivity payments deprive the users (and payers of the system) of the ability to plan in the long term and of the ability to compete with other modes of transportation.

Although there is a benefit to the Authority in that the tariff increase would allow it "self sufficiency", this self sufficiency is of such fleeting duration that it cannot truly be termed such.

Conclusion and recommendation

[132] The Agency is mandated to review the tariff proposal to determine whether such proposal is prejudicial to the public interest and to make recommendations. This dissent finds that through past Agency decisions and through the 1999 Review of Pilotage Issues, the Authority has been aware that there is no benefit from productivity payments to the users of pilotage. In fact, to the contrary, the users of pilotage and the Authority itself are both placed at risk because of the productivity component in its contracts with CPSLC. To plead that there is nothing that can be done about this is to ignore the community it is there to serve.

[133] As a consequence, I find the proposed tariff proposal to be prejudicial to the public interest and would recommend a tariff increase of 2.2 percent, which sum excludes the 1.8 percent required for the productivity payment for the District 1 Corporation.


  1. Projections: Includes a non-recurring expense of $400,000 for judicial settlements.
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