Decision No. 94-W-2001

March 2, 2001

Reasons for Decision

March 2, 2001

IN THE MATTER OF the proposed tariff of pilotage charges published by the Laurentian Pilotage Authority and the notices of objection filed by the Canadian Shipowners Association, Cargill Limited, the Canadian Wheat Board and Les Silos Port-Cartier; and interventions filed by the Chamber of Maritime Commerce, the Corporation of Lower St. Lawrence River Pilots, the Corporation of Mid-St. Lawrence River Pilots Inc. and the Shipping Federation of Canada.

File No. W9250-3-6


INTRODUCTION

Under the Pilotage Act, R.S.C., 1985, c. P-14 (hereinafter the Pilotage Act), 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 waters of Chaleur Bay. Pilotage is compulsory from the St. Lambert Lock to Les Escoumins, including the Saguenay River, and pilotage is not compulsory east of Les Escoumins. The Authority has divided the compulsory waters into three pilotage districts for administrative purposes: District 1-1 for the Port of Montréal; District 1 from Montréal to Québec; and District 2 from Québec to Les Escoumins (including the Saguenay River).

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 edition of September 16, 2000.

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).

In accordance with this provision, objections to the tariff proposal were filed on October 16, 2000 by the Canadian Shipowners Association, Cargill Limited, the Canadian Wheat Board and Les Silos Port-Cartier. Interventions were filed by the Chamber of Maritime Commerce, the Shipping Federation of Canada, the Corporation of Mid-St. Lawrence River Pilots Inc. and the Corporation of Lower St. Lawrence River Pilots.

Subsection 34(4) of the Pilotage Act requires the Agency to make an investigation of the proposed charge. 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.

As part of its investigation, the Agency held a hearing in Montréal from January 10 to 12, 2001 after issuing procedural directions on December 1, 2000. A pre-hearing conference was also held on January 4, 2001. On January 5, 2001, the Agency issued Order No. 2001-W-6 containing its directions on the treatment of confidential information and procedures to be followed at the public hearing.

RECOMMENDATION

The Agency has given careful consideration to the evidence submitted by all parties.

The Agency recommends that the tariff proposal published by the Laurentian Pilotage Authority on September 16, 2000 be implemented as it is not prejudicial to the public interest.

Reasons for this Decision will follow.


REASONS FOR DECISION NO. 94-W-2001


March 23, 2001

IN THE MATTER OF the proposed tariff of pilotage charges published by the Laurentian Pilotage Authority and the notices of objection filed by the Canadian Shipowners Association, Cargill Limited, the Canadian Wheat Board and Les Silos Port-Cartier; and interventions filed by the Chamber of Maritime Commerce, the Corporation of Lower St. Lawrence River Pilots, the Corporation of Mid-St. Lawrence River Pilots Inc. and the Shipping Federation of Canada.

File No. W9250-3-6


INTRODUCTION

Under the Pilotage Act, R.S.C., 1985, c. P-14 (hereinafter the Pilotage Act), 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 waters of Chaleur Bay. Pilotage is compulsory from the St. Lambert Lock to Les Escoumins, including the Saguenay River, and pilotage is not compulsory east of Les Escoumins. The Authority has divided the compulsory waters into three pilotage districts for administrative purposes: District 1.1 for the port of Montréal; District 1 from Montréal to Québec; and District 2 from Québec to Les Escoumins (including the Saguenay River).

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 edition of September 16, 2000.

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).

In this regard, objections to the tariff proposal were filed on October 16, 2000 by the Canadian Shipowners Association (hereinafter the CSA), Cargill Limited (hereinafter Cargill), the Canadian Wheat Board (hereinafter the CWB) and Les Silos Port-Cartier. Interventions in support of the tariff proposal were filed by the Shipping Federation of Canada (hereinafter the SFC) and the Corporation of Lower St. Lawrence River Pilots (hereinafter the CLSLRP). The Agency also accepted late interventions in support of the objections from the Chamber of Maritime Commerce (hereinafter the CMC) and in support of the tariff proposal by the Corporation of Mid-St. Lawrence River Pilots Inc. (hereinafter the CMSLRP).

Subsection 34(4) of the Pilotage Act requires the Agency to make an investigation of the proposed tariff. 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

Following the receipt of objections, the Agency began its investigation in accordance with its mandate under the Pilotage Act. By Order No. 2000-W-421 dated November 1, 2000, the Agency directed the Authority to produce and file with the Agency, by November 30, 2000, 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 the other information, particulars and documents requested available to the parties of record upon request.

In accordance with the Rules, the Authority filed its response to the objections on November 10, 2000 and its response to Order No. 2000-W-421 on November 24, 2000.

The CSA filed a reply to the Authority's answer to the objections on November 24, 2000 and issued interrogatories and a notice to produce to the Authority, the CMSLRP and the CLSLRP on December 6, 2000. The CLSLRP issued interrogatories and a notice to produce to the CSA on December 15, 2000. Pleadings were filed by the parties regarding the relevancy of the information requested in the interrogatories and notices to produce. By letter dated January 8, 2001, the Agency ruled that the information requested by the CSA and the CLSLRP was not relevant to the determination that the Agency must make pursuant to the Pilotage Act.

As part of its investigation, the Agency convened a hearing in Montréal for January 10 to 12, 2001 after issuing procedural directions on December 1, 2000. A pre-hearing conference was also held on January 4, 2001. On January 5, 2001, the Agency issued Order No. 2001-W-6 containing its directions on the treatment of confidential information and procedures to be followed at the public hearing.

In its Decision No. 94-W-2001 dated March 2, 2001, the Canadian Transportation Agency (hereinafter the Agency) issued its recommendation that the proposed tariff be implemented. The reasons for this Decision are set out below.

ISSUE

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 September 16, 2000 is prejudicial to the public interest.

POSITIONS OF THE PARTIES

PARTIES OBJECTING TO THE TARIFF PROPOSAL

Objectors

The CSA

The CSA is an association of owners, charterers and operators of Canadian vessels trading into and within the Great Lakes and connecting waters, the St. Lawrence River and the waters within the region of the Authority.

In its notice of objection, the CSA submits that it opposes the tariff proposal because it is prejudicial to the public interest as the proposal is inconsistent with the national transportation policy as set out in the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA).

The CSA argues that since 1989, the cumulative increase in Authority pilotage tariffs has been 49.6 percent while the increase in the Quebec consumer price index (hereinafter the CPI) for the same period was 27.04 percent. With anticipated rates of inflation for 2001 and 2002 at 2.3 percent and 2.0 percent respectively, the CSA concludes that the proposed increases of 4.2 percent and 4.1 percent are not justified as they are almost double the rates of inflation.

The CSA notes that the Authority does not benefit from any government subsidies and is a non-profit entity. Revenues should only be sufficient to cover administrative and operating costs. The Authority is unable to establish an overall rate-setting methodology to determine justifiable tariff increases due to the lack of financial information about the pilot corporations.

The CSA indicates that pilotage costs represent between 2 and 5 percent of vessel operating costs, which means that any increase in pilotage tariffs will have a significant detrimental effect on equitable transportation services as set out in the national transportation policy.

In its reply to the Authority's answer, the CSA argues that the Pilotage Act imposes two burdens on a pilotage authority: that tariffs must be at a level necessary for operating on a self-sustained financial basis; and that tariffs must be fair and reasonable. It does not follow from this that tariffs that may be necessary to achieve a self-sustaining financial state are by definition fair and reasonable. The requirement that tariffs be fair and reasonable is the only mechanism for controlling prices in order to ensure that costs incurred result from an efficient operation. Moreover, the CSA maintains that the Authority cannot escape scrutiny by contracting out services to pilot corporations and then simply passing on these costs to users.

According to the CSA, the proposed tariff increases are for the most part due to increases in pilot salaries. The Authority currently pays more for each pilot employed by the corporations than for its own employee pilots. There is no reason to believe that the cost per corporation pilot should be higher than the cost of the pilots employed by the Authority. It follows that the corporations are extracting huge profits. The CSA is of the view that unless the Authority can demonstrate that the profits obtained by the corporations are reasonable, the Authority should not be permitted to increase tariffs.

The CSA points out that pilot corporations were characterized by the Agency's predecessor as virtual monopolies in National Transportation Agency (hereinafter the NTA) Decision No. 712-W-1993. The only way of ensuring that services from the pilot corporations are acquired at a prudent cost is for the Authority to demonstrate that the corporations operate efficiently and the CSA is of the opinion that the Authority has failed to do so.

Thus, in addition to the tariff increases sought to recover normal operating costs, the Authority imposes significant surcharges every year to recover the capital costs of pilot boats. Furthermore, it is apparent that dispatching costs could have been reduced if the Authority had implemented a recommendation by consultants KPMG to consolidate dispatching centres sooner. The cost of such a delay to implement the recommendations cannot be considered to be a prudent and efficient cost.

Witnesses for the CSA indicate that its member companies are facing a situation of declining ship numbers, reduced utilization of ships and the ageing of a fleet comprised of vessels that will not likely be replaced because of the cost of building new ships. As well, more ships will likely be taken out of service at their next major inspection as the maintenance costs to keep them in service cannot be justified. The traditional movement of grain exports and carriage of iron ore to Canadian and United States of America steel mills is in decline. Some member companies have stated that cargoes are won or lost on cents per tonne. In the last 5 years, the average revenue per tonne of cargo carried decreased by approximately 7.5 percent.

Some of the witnesses also indicate that they were not consulted by the Authority during the negotiations when a 3 percent increase in fees was granted to pilot corporations.

The CSA concludes that the proposed Authority tariff regulations are inconsistent with the national transportation policy as set out in section 5 of the CTA and are also inconsistent with the objective of the national marine policy which is to ensure that marine transportation is available at a reasonable cost to the users.

The CWB

In its notice of objection, the CWB indicates that it is the sole marketer of western Canadian wheat and barley for export markets and domestic human consumption. Its objective is to maximize returns for farmers to whom all sales revenues less operating costs are returned. The CWB is a major user of the St. Lawrence River and Seaway and has a considerable interest in ensuring that users have access to the system at a reasonable cost and that the costs reflect the competitive environment in which the users operate. The CWB must take into account market forces, freight rates and logistics to get the grain to market.

The CWB is of the view that the proposed increases will impact on the volume of grain that the CWB and grain companies market through the east coast corridor as they will be forced to find lower cost export corridors to preserve the competitiveness of Canadian grain exports. Current pilotage fees represent about 50 cents per tonne of the cost of moving grain. The proposed increases will raise the cost to 52 cents per tonne in 2001 and 54 cents per tonne in 2002, which will amount to an additional cost of $448 per ship in 2002.

The CWB explains that most western Canadian grain is exported and that any change in the competitiveness of export routes will potentially affect the choice of corridor. The CWB compares the cost of grain shipments through west coast Canadian ports and U.S. west coast and Gulf ports and the Great Lakes-St. Lawrence River and Seaway system. In the 1999-2000 crop year, exports through the U.S. Gulf region totalled 3.2 million metric tonnes and the importance of this gateway will continue to grow.

The CWB considers it important that the Agency consider the proposed increases in the context of the overall competitiveness in the agriculture industry and competitiveness in industries whose livelihood depends on Canada's marine system. The Agency must ensure that users have access to marine facilities at a cost which is fair and reasonable and that recognizes the competitive environment in which these users operate.

The CWB strongly urges that the Agency not recommend the implementation of the proposed increases and recommends a re-examination of opportunities for competition and the use of technology for pilotage without in any way compromising safety or efficiency. The combination of rigid pilotage requirements and the lack of competition results in users being denied savings that would be present in a competitive system or through the adoption of technology.

At the hearing, a witness from the CWB gave examples of the practical implications of the proposed increases. In the opinion of this witness, the proposal has the potential to divert grain traffic from the St. Lawrence River and Seaway to other routes. The witness did not quantify this potential impact.

Cargill

Cargill is an international marketer, processor and distributor of agricultural, food and industrial products with operations in most provinces of Canada. Cargill is of the view that the proposed tariffs are prejudicial to the public interest.

In its notice of objection, Cargill states that under the Pilotage Act, the Authority is required to establish, operate, maintain and administer an efficient pilotage service. Cargill questions the efficiency of the service provided and indicates that since 1989, pilotage fees have increased by 50 percent while the CPI increased by about 27 percent during the same period. As well, anticipated rates of inflation for 2001 and 2002 are in the order of 2 percent while the Authority has proposed tariff increases of about twice these levels. The proposed increases appear to be inconsistent with the Authority's non-profit status.

Cargill concludes by indicating that the Canadian grain industry and farmers have worked to create a viable, efficient and competitive transportation system through a series of reforms. In these times of very low commodity prices, high foreign export subsidies and shrinking markets, the industry is not in a position to absorb tariff increases such as those proposed by the Authority. Ultimately, farmers and the industry will bear the cost of tariff increases.

Les Silos Port Cartier

Les Silos Port-Cartier operates a grain elevator strategically located for the export of Canadian grain. As a long established company on the north shore of the St. Lawrence River, it also plays an important role in the local economy. The interdependence of the movement of export grain and metallic ores through the Great Lakes by Les Silos Port-Cartier is of crucial importance for domestic marine transportation.

This objector explains that the St. Lawrence River and Seaway play an important role in the movement of grain and that the proposed tariff increase will be an added cost to the already excessive costs for export grain, all of which will place this mode of transportation at a competitive disadvantage. The tariff increases will have a negative impact on water transport to and from the Great Lakes and will consequently adversely affect Les Silos Port-Cartier.

The witness for Les Silos Port-Cartier states that the St. Lawrence River and Seaway is the only route by which it can receive grain supplies and that any increase in transportation costs would adversely impact the company.

Intervener

The CMC

The CMC is a binational association representing domestic and international marine carriers, shippers, ports and others in the marine industry in Canada and the United States of America.

The CMC supports the positions of the objectors and reiterates the argument related to the percentage increase in the Authority's pilotage charges as compared to the CPI since 1989 (respectively 50 percent and 27 percent). As well, the CMC states that the increases in tolls charged by the St. Lawrence Seaway Management Corporation have been flat in comparison with increases in the CPI and the Authority's pilotage charges. Ultimately, it is the consumer who pays all added costs.

The CMC explains that its member companies carry bulk, low-value commodities that are extremely sensitive to any increase in transportation costs and that, furthermore, any increase in pilotage fees can only undermine the competitive position of the St. Lawrence River and Seaway's users as Canadian firms must meet rather than make world commodity prices.

CMC member companies have fought hard to remain competitive in a time of economic downturn and believe that any gains realized may be lost with unreasonable or unsupportable increases by government agencies.

Witnesses for the CMC indicate that Canadian companies must meet the challenge of competing in the world economy. To that end, they must ensure that their competitiveness is not adversely affected, among other things, by increases in their transportation costs.

In its closing remarks, the CMC argues that the intent of Parliament was that financial self-sufficiency for the pilotage authorities should be predicated and developed on a foundation of financial accountability and financial responsibility and was never intended to allow the pilotage authorities to continually generate more revenue as opposed to adopting a sound business plan with cost control. The CMC remarks that since the release of the Agency's report on the status of marine pilotage in Canada which contained suggestions for more cost-effective and efficient ways to deliver pilotage services, the marine industry has heard nothing from those responsible for pilotage services until the announcement of this tariff proposal.

PARTIES SUPPORTING THE TARIFF PROPOSAL

Proponent

The Authority
Tariff proposal

Structure of the tariff

The Regulatory Impact Analysis Statement (hereinafter the RIAS) for the tariff proposal explains that the proposed regulations include changes to the structure of the tariff where some charges are abolished or consolidated and a new docking charge is introduced. According to the Authority, these structural changes do not result in an overall increase in pilotage fees but merely redistribute the various charges.

In its pleadings, the Authority states that the proposal reflects the first major revision to the tariff structure since 1986. The Authority notes that the tariff proposal was prepared by industry board members and followed a series of meetings with all sectors of the industry. Double pilotage charges have been revised as have charges for tugs and tows. The practice of imposing docking charges in District 2 has been eliminated and has been replaced with a docking charge with a maximum rate. According to the Authority, the docking charge is to compensate pilots for the additional skill and experience required for dockings as compared to those needed for transit trips. According to the Authority, the tariff will not result in increased revenue as the docking charge is offset by a reduction in the trip charge and no docking charge will be applied to ships in transit.

Increase

The RIAS indicates that the tariff proposal also incorporates a 4.2 percent tariff increase on January 1, 2001 and a 4.1 percent tariff increase on January 1, 2002 which are expected to generate an additional $1,631,000 in revenue in 2001 and $1,668,000 in 2002. The tariff proposal takes into consideration loan repayments, the cost of pilot contract negotiations and the projected rate of inflation. The Authority indicates that the proposed tariff will provide it with the means to maintain its financial self-sufficiency.

The Authority provided its tariff justification and responded to the four objections filed by the CSA, the CWB, Cargill and Les Silos Port-Cartier.

Tariff justification

Financial situation

With respect to its current financial situation, the Authority states that it is in a precarious financial position with negative working capital and debts related to bank loans to cover operating losses from 1996 and 1997 and loans for new pilot boats. The Authority contends that in spite of its modest profits in 1998 and 1999 ($464,000 and $476,000, respectively), it had negative working capital in 1998 ($664,000) and 1999 ($1,202,000).

The Authority initially projected a loss of $250,000 for 2000 but this was revised upwards to $632,000 as a result of unexpected productivity payments made to District 1 pilots and extra overtime payments to employee pilots at the port of Montréal due to an unplanned pilot retirement.

The Authority asserts that without the proposed tariff increases, losses for 2001 and 2002 would total approximately $4,957,000. It would be forced to borrow additional funds to cover these losses which would increase the total losses to about $5,182,000 when interest charges are added for the two years. The Authority states that before such additional amounts could be borrowed, the current ceiling on the Authority's borrowing would have to be increased by the Minister of Finance. Moreover, to be able to obtain additional loans, it would have to demonstrate that it will be in a position to repay the loans. The Authority expresses the opinion that with the current state of its finances, it would not likely be able to obtain additional bank loans and would be placed in the position of not being able to meet its financial obligations.

The Authority also asserts that its financial situation is a result of excessive delays in implementing tariffs and its inability to implement tariff increases that would allow it to generate sufficient revenue to meet all financial obligations.

Pilots

With respect to its expenses, the Authority explains that payments to pilots represent approximately 80 percent of the total.

The Authority signed a four-year agreement expiring in June of 2003 with the District 1 pilot corporation and its 105 active licensed pilots, which represents a 3 percent annual increase. A total of 10 pilot retirements are expected by the end of 2002 and the Authority anticipates hiring 10 apprentice pilots for each of 2001 and 2002, representing a cost of $48,655 and $50,115 per apprentice pilot respectively in each year.

The District 2 pilot corporation with its 79 active licensed pilots signed a four-year agreement with the Authority expiring on December 31, 2003, which represents a 3 percent annual increase. The service agreement also includes an additional 1.75 percent increase in trip fees that is related to a compensation study carried out in District 2 which concluded that its pilots were undercompensated in comparison to the District 1 pilots. The Authority expects 6 pilot retirements by the end of 2002 and anticipates hiring 7 apprentice pilots in that same year. By not recruiting apprentice pilots in 2001, the Authority expects to realize a saving of $230,000.

The Authority states that the increases awarded to the pilot groups are comparable to compensation awarded by other authorities and for masters and officers on Canadian ships.

Administration

The Authority has 15 employees in addition to the Chairman at its headquarters in Montréal. Administrative costs which include employee benefits, special and professional services, rental fees, public utilities, furnishings and supplies, communications, maintenance and interest on loans represent approximately 4.6 percent of total expenses.

The Authority has two dispatching centres, one in Montréal and the other in Québec, with a total staff of 17 employees. Costs associated with dispatching services represent about 3.5 percent of total costs. In 2001, the Authority intends to examine the possibility of consolidating these dispatching centres, a measure which could result in the elimination of 2 positions.

Pilot boats

The Authority owns 3 pilot boats at Les Escoumins and contracts out for pilot boat services in 4 other locations, namely the ports of Montréal, Lanoraie-Sorel, Trois-Rivières and Québec. Pilot boat expenses represent approximately 10 percent of the Authority's total expenses. At the locations where contracted services are rendered, the Authority levies the charge negotiated between itself and the pilot boat contractor and adds a 4.8 percent administrative charge to the contractor's fee.

In 1996, the Authority replaced one of its ice-reinforced pilot boats and will be replacing a second ice-reinforced boat this year. The 1996 boat was built at a cost of $2,400,000 and it is estimated that the newest boat will cost $3,050,000. The Authority has financed the two boats with bank loans amortized over 15 years. In order to repay these loans, the Authority must collect additional charges from users. The pilot boat charge at Les Escoumins, which was $359 in 2000, increased to $428 on January 1, 2001 with the surcharge for the newest boat.

Response to objections

The Authority contests the CWB's assertions related to the increased cost per tonne and the total cost per vessel of $448 resulting from the proposed increases in pilotage charges and argues that the CWB provided no basis for its assertions. In addition, the Authority claims that the CWB had to demonstrate that the cost per tonne on alternate export grain routes is actually lower than the St. Lawrence Seaway cost. The Authority questioned the CWB's assertion that an increase of 2 cents or 4 cents per tonne would shift grain traffic to the rail system and ports at Vancouver or Prince Rupert, where pilotage costs are considerably higher.

The Authority states that it is carrying out all of the recommendations arising from the ministerial pilotage review. The Authority notes that qualified Canadian masters and officers are eligible to obtain pilotage certificates. Shipowners with certified masters would then avoid paying pilotage charges.

Regarding the comments made by the CSA with respect to the cumulative tariff increases since 1989, the Authority notes that tariff increases from 1975 to 1995 were less than the change in the CPI and also less than increases by other authorities. It is only recently, since the Government ended subsidy payments, that the Authority has increased tariffs to be able to be financially self-sufficient and repay bank loans.

The Authority indicates that as their arguments are almost identical, the responses made to the arguments of the CWB and the CSA also apply to Cargill, Les Silos Port-Cartier and the CMC.

At the hearing, the Authority called upon a witness from the Department of Finance to explain the financial constraints (limits on borrowing, acceptance of corporate plans) facing the Authority.

Interveners

Three of the four interventions filed with the Agency supported the Authority's tariff proposal: those of the CLSLRP, the CMSLRP and the SFC.

Pilot corporations

The pilot corporations point out that both the Authority and the corporations, in contract negotiations, are subject to final offer selection; that the Authority has balanced its budget over the last two years; that tariff increases have been less than those in the Canadian transport industry (roughly equal to the CPI but less than in other pilotage regions); that pilotage costs historically represent 0.5 percent to 2 percent of the operating costs of ships; and that pilots have agreed to changes to reduce costs for users. Moreover, they argue that the objectors represent private interests and that there is no evidence of harm to the public interest in the tariff proposal.

The CLSLRP states that it is aware of the financial situation that the Authority faces and has made efforts to prevent further deficits. The CLSLRP continues to provide the docking service at Québec at its own expense and has undertaken some pilot training, also at its own expense. The agreement to mediated settlements and the final offer selection process in the 1993 contracts followed discussions aimed at ensuring that there would be no traffic delays on the St. Lawrence River to impede maritime commerce.

Witnesses from the CLSLRP describe the history and the reasons that led to the enactment of the final offer selection process in the Pilotage Act. They also explain that during negotiations with the Authority, the CLSLRP agreed to the withdrawal of contractual clauses (i.e. double pilotage charges for movages, anchorages and dockings). This enabled the Authority to save money.

The CMSLRP suggests that the Agency consider modifying the tariff formula for vessel length as it does not reflect today's reality and is not equitable as modern ships have a length which greatly exceeds 7.5 times the breadth of the ship. This modification to the tariff formula would assist the Authority in attaining its requirement to be financially self-sufficient.

Witnesses for the CMSLRP state that the most recent service contract was concluded by mediation, which was preferable to a final offer selection process, and that a committee has been formed with the Authority to examine ways to improve service.

The SFC

The SFC represents the majority of foreign-flagged ships trading in ports in Atlantic and central Canada, accounting for about 80 percent of the Authority's traffic. The SFC indicates that it was consulted on the tariff increases.

According to the SFC, the Authority's tariff proposal includes amendments that better reflect the direct cost of the service provided. The proposed increases are in accordance with legislative requirements that pilotage authorities be financially self-sufficient.

The Authority has made a number of improvements to its operations since the last Agency investigation and further adjustments can be expected as other ministerial recommendations are implemented. There are costs associated with the introduction of technology aimed at improving efficiency and risk assessments recommended by the Minister which must be borne by users as the Authority has no other source of income.

The Authority is a Crown corporation and is not a non-profit organization. The Agency determined in a previous decision on an Atlantic Pilotage Authority proposal that a target return on investment for a pilotage authority is acceptable and that it is in the public interest.

Since government subsidies were eliminated in 1996, the Authority has been burdened with bank debt and charges in addition to its normal operating costs. The SFC contends that it is in the user's best interests to have these debts eliminated as soon as possible.

The SFC argues that because the Authority has service contracts and collective agreements in place, the major costs borne by the Authority are locked in for several years. Even if the Agency determines that improvements in efficiency are possible, there is little the Authority can do about its major fixed costs until current contracts expire. If the Agency determines that the tariff increases are not in the public interest, the Authority will have to continue borrowing money and users will have to pay for such loans. A debt-free Authority is in the best interests of the users.

In conclusion, the SFC states that the Authority's tariff proposal represents the result of negotiations in good faith and promotes a financially self-sufficient, efficient and safe pilotage service in the context of the scope of the tariff amendments and the financial situation of the Authority at this time.

The SFC indicated to the Agency that it would not participate in the hearing. Accordingly, no witnesses were heard for the SFC and no arguments were presented.

PRELIMINARY ISSUES

A number of issues were raised either in the written pleadings or at the hearing that relate to the scope of the Agency investigation. Before considering the merits of this case, the Agency will rule on these issues.

Tariff proposal for the year 2000

In its closing remarks at the hearing, counsel for the Authority argued that since the tariff published on September 16, 2000 did not come into effect during that year, the Agency could not make a recommendation on the tariff for the year 2000.

The Agency notes that the proposed tariff contemplates changes to the structure of the previous tariff. These structural changes are for the years 2000, 2001 and 2002. The tariff also provides increases for the years 2001 and 2002. Because the new structure applies to the years 2000, 2001 and 2002, the Agency notes that its finding on this issue will be the same for the three years. Furthermore, under the Pilotage Act, the Agency has a mandate to investigate a tariff proposal as published by the Authority in the Canada Gazette. As such, the Agency's investigation examines the entire tariff proposal regardless of whether or not the intended implementation date was met.

Competing pilotage services

In the written pleadings from the objectors, the matter of competing pilotage services was raised as a possible cost reduction measure.

The Agency notes that section 15 of the Pilotage Act does not contemplate competing pilotage services. Furthermore, an Agency investigation does not extend to an examination of the structure of pilotage services. Accordingly, the Agency will focus its investigation on the tariff proposal published by the Authority on September 16, 2000.

Formula used to determine pilotage charges

In its intervention, the CMSLRP advocated a change to the formula used to determine the length of a ship that is set out in the Authority's tariff. The length of a ship is one of the dimensions used to calculate vessel units which are then used to establish applicable pilotage charges. The CMSLRP argued that the formula which limits the length to 7.5 times the breadth of the ship no longer represents modern ship design where the length is considerably more than 7.5 times the breadth.

The Agency notes that the Authority did not propose any amendments to the tariff formula for ship length in the tariff that was published in September 2000. Furthermore, no evidence was filed to support or dispute this proposed change. Accordingly, the Agency considers that it would be inappropriate to make a determination on this matter.

The CMSLRP attempted to file evidence in support of its position at the hearing. This evidence was not accepted as the CMSLRP did not comply with the procedural directions for the hearing which indicated that all evidence was to be filed prior to the hearing.

Delays in implementing tariffs

The Authority argued both orally and in writing that its present financial position is due to delays in implementing tariffs resulting from numerous objections. Between 1972 and 1995, the Authority's tariffs were subjected to a review by the Agency's predecessors on 7 occasions as a result of objections and interventions by both the CSA and the SFC. The implementation of tariffs in the years leading up to 1995 is not relevant to the current situation as the Authority received annual government appropriations to cover losses on operations when the tariffs proposed by the Authority did not generate sufficient revenue to offset costs. From January 1, 1996 to February 24, 2000, there were no delays in the implementation of the Authority's tariffs. The tariff increases of January 1, 1996 and January 1, 1997 were implemented as planned following NTA Decision No. 669-W-1995. Subsequent increases were also implemented as planned as there were no objections to any of the proposals for 1998, 1999 and 2000. Therefore, the Agency does not accept the Authority's argument that its present financial position is due to delays in the implementation of tariffs resulting from objections.

ANALYSIS AND FINDINGS

Mandate of the Agency

Under the Pilotage Act, Authorities are mandated to make regulations prescribing tariffs of pilotage charges to be paid by users. Subsection 33(3) 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 obligation to be financially self-sufficient is reinforced by section 36.01, which states that no payment to an Authority may be made under an appropriation by Parliament to enable the Authority to discharge an obligation or liability. However, section 36 provides for the borrowing of money by an Authority for the purpose of defraying its expenses.

Subsection 34(2) of the Pilotage Act creates a mechanism by which an interested person who has reason to believe that any charge in a proposed tariff is prejudicial to the public interest may file a notice of objection with the Agency within 30 days of its publication in the Canada Gazette. This provision indicates that the public interest in question includes (without limiting the generality of the foregoing) the public interest consistent with the national transportation policy set out in section 5 of the CTA. Pursuant to subsections 34(4) and 35(1) of the Pilotage Act, the Agency is required to investigate objections and make a recommendation to the Authority which shall govern itself accordingly.

The structure of the Pilotage Act requires the Agency to balance the interests of the parties involved; the Agency must ensure that the 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.

Financial self-sufficiency

In accordance with subsection 33(3) of the Pilotage Act, a pilotage authority must establish tariffs at a level that permits the authority to operate on a self-sustaining financial basis. This means that an authority should generate sufficient revenue to cover all expenses. To determine whether a proposed tariff is required for an Authority to be self-sufficient, the Agency must therefore consider whether the tariff increase meets the Authority's financial obligations, including the contractual agreements entered into by the Authority.

The Authority's costs consist mainly of fees paid to the pilot corporations in Districts 1 and 2 and salaries paid to employee pilots at the port of Montréal. The costs also include dispatching and pilot boat services and administrative expenses. A summary of revenues and expenses submitted by the Authority is shown in the table below. Actual results are shown for 1996 to 1999 while the figures for 2000, 2001 and 2002 are projections which include the proposed tariff increases.

Laurentian Pilotage Authority - Annual Revenues and Expenses ($000)
  1996 1997 1998 1999 20001 20012 20023
Total 38,846 39,020 40,847 41,213 43,681 45,600 48,086
Revenues 36,096 38,348 41,407 41,689 43,049 45,815 47,903
Expenses              
Employee Pilots 988 957 1,011 1,024 1,203 1,235 1,264
District 1 Pilots 17,303 17,396 18,790 18,702 20,671 21,307 22,757
District 2 Pilots 13,667 13,593 13,840 13,840 13,734 14,382 15,330
Dispatching 1,323 1,329 1,477 1,446 1,593 1,738 2,710
Pilot Boats              
Les Escoumins 1,596 1,512 1,552 1,546 1,738 2,070 2,174
Contracted 2,438 2,569 2,926 2,738 2,710 2,791 2,875
Administration 1,609 1,826 1,902 1,916 1,943 2,000 1,970
               
Profit (Loss) (2,828) (834) 464 476 (632) 215 (183)

Should the proposed tariff be disallowed, the Authority has indicated that it would incur losses of $1,616,000 for 2001 and $3,341,000 for 2002. Objectors have not disputed these figures.

The forecasted revenues and expenses shown in the foregoing table were based on traffic projections provided to the Authority by Transport Canada. These forecasts predict small increases in each of 2000, 2001 and 2002. Objectors questioned why the Authority would use a forecast that showed increased assignments when actual traffic volumes in the past five years have been relatively flat. While projecting accurate future traffic volumes is difficult, there is no indication that the Authority asked shipowners to verify the Transport Canada forecasts to determine whether the projections of increased assignments were realistic.

Over the 1995 to 1999 period, the number of Authority assignments changed very little, the average for this period being 21,586 assignments per year. The forecast for 2000 shows an increase of 2.3 percent over this volume with increases of 0.8 percent for each of 2001 and 2002. At the hearing, the Authority stated that the actual number of assignments in 2000 was less than projected. This means that the results for 2001 and 2002 could be lower than expected since the projections for these two years were dependent upon a Transport Canada forecast from the year 2000. In the end, the overall effect on projected profit and loss for each of 2001 and 2002 may not be affected to any great extent since most of the Authority's costs (i.e. payments to the District 1 and 2 pilot corporations) rise or decrease in step with traffic. However, given that the Authority's financial flexibility is so limited, any effort to enhance the accuracy of the Authority's projections is important.

Parties objecting to the tariff proposal argued that the Authority's tariff increases over the past 5 years have greatly exceeded increases in the CPI and that projected tariff increases will continue to exceed projected changes in the CPI in future years. Objectors argue that increases in costs which are greater than the CPI are indicative of inefficiencies in operations.

The Authority's tariffs increased by 22.1 percent from 1996 to 1999. In comparison, the CPI increased by 4.4 percent during this same period. Authority expenses rose by 6.1 percent over this period, while revenues grew by 15.7 percent to bring the Authority from a deficit position in 1996 (a loss of $2,828,000) to a profitable position in 1999 (a profit of $476,000). Given that the Authority's expenses exceeded revenues by such a large amount when government subsidies were eliminated in 1996, large tariff increases and a corresponding large increase in revenue were necessary to reach a profitable position in 1999.

At the hearing, the Authority stated that it was being subjected to increased scrutiny from the federal government as a result of its financial position. In this regard, the Authority stated that it was required to report on its finances and operations on a monthly basis. The Authority indicated that its ability to borrow money to meet its obligations was affected by the fact that the Department of Finance had only granted borrowing approval on loans until the end of March 2001. Mr. Bartlett, a witness from the Department of Finance, made this clear in his testimony. According to this witness, the Authority must demonstrate an ability to repay loans before additional authorization can be granted, which means that the Authority's cash flow must improve. In the opinion of the witness, the Authority's cash flow situation will not improve with the proposed tariff increases; some other solution is therefore necessary. Mr. Bartlett added that government organizations are not normally allowed to borrow money to finance operating losses and noted that pilotage authorities are required by the Pilotage Act to be financially self-sufficient.

Under the current situation, it is very difficult, if not impossible, for the Authority to discharge its mandate and, at the same time, to comply with the financial requirements of the Department of Finance. Indeed, Mr. Bartlett expressed the view that there is a conflict between marine policy and borrowing policy which places the Authority in a catch-22 situation.

In examining the issue of financial self-sufficiency, the Agency considered the Authority's operating ratio, a figure which is indicative of the financial health of an organization. This ratio, based on total expenses (less interest and taxes) divided by total revenue, is shown below for the period from 1995 to 2002.

Year Operating Ratio Year Operating Ratio
1995 1.12 2000 1.01
1996 1.07 2001 0.99
1997 1.01 2002 1.00
1998 0.98 (For these three years, ratio is based
1999 0.98 on estimated revenue and expenses)

This summary shows that the Authority has operated at a ratio of close to 1.0 or greater than 1.0. When operating at a ratio of 1.0 or slightly less, the Authority is able to cover its known operating expenses but does not generate sufficient profits to repay debt for losses incurred over the 1996-2000 period or for unexpected costs. The Authority has operated with little or no profit over this period and the tariffs implemented have not resulted in any improvement in the operating ratio. The Agency finds that the proposed increases will not improve the operating ratio.

The foregoing indicates that the Authority is in need of additional revenue to improve its financial situation. In this regard, the Agency suggests that the Authority explore other fee structures that are commonly accepted in the marine industry.

Pilot boats, administration and dispatching costs

Parties objecting to the tariff did not challenge the expenses incurred or projected by the Authority respecting pilot boats, administration or dispatching services.

Regarding the issue of contracting out pilot boat operations at Les Escoumins, the Authority has indicated that there are no contractors in the area and that no contractor is willing to set up operations at Les Escoumins as there would be no other commercial activity at that location to support a viable operation. Winter conditions at Les Escoumins necessitate the use of larger pilot boats which are more costly than the pilot boats used elsewhere within the compulsory pilotage areas. Accordingly, the Authority must provide the service.

Regarding administrative expenses, these costs rose by 16.5 percent between 1995 and 1999: an average increase of 3.9 percent per year. Increased professional services costs and financial charges accounted for most of the increase. Administrative expenses are expected to rise by a further 2.8 percent by 2002. However, administrative expenses represent a relatively small portion of Authority expenses; in 1999, they accounted for 4.7 percent of total costs. This ratio has been consistent for a number of years.

Finally, the Authority has dispatching centres in Québec and Montréal. In 1996, a KPMG consultant's review of dispatching services suggested an amalgamation of the two centres to realize cost savings. The Authority has indicated that the amalgamation could result in a possible reduction of 2 dispatcher positions at an annual savings of about $100,000 if all dispatchers were located at Montréal. However, these savings would be offset by the loss of about $90,000 in annual revenue that the Authority receives at the port of Québec through an arrangement with the local port authority. The Authority has indicated that it will re-examine the consolidation of the dispatching centres in 2001.

Cost of pilot services

The cost of pilot services is the focus of the objections filed against the tariff proposal. Objectors challenged the increases granted to pilot corporations in Districts 1 and 2 during the last round of negotiations and have questioned the strategy adopted by the Authority during the negotiations.

In considering the service contracts between the Authority and the District 1 and 2 pilot corporations as part of its investigation into the proposed tariff, the Agency notes that the Authority is responsible for negotiating the terms, conditions and payments in these contracts. The Agency's mandate in a pilotage investigation does not extend to assuming the negotiating role of the Authority. However, this does not mean that the Agency cannot comment on some of the choices made by the Authority in its current contracts.

The service contract concluded with the District 1 pilot corporation grants a 3 percent increase in each of 2001 and 2002. The service contract concluded with the District 2 pilot corporation also grants an increase of 3 percent for 2001 and 2002. In its testimony, the Authority stated that the proposed tariff increases are meant to allow the Authority to meet its obligations under the contracts.

Objectors argued that the Authority, in its negotiations, granted excessive payments to the pilot corporations and, as a result, the fees are not fair and reasonable since the pilots exercise their monopoly powers to extract maximum fees from the Authority.

In its response, the Authority argued that the increases granted to the pilot corporations were simply matching those granted by the shipowners to their own employees. The Agency heard evidence at the hearing that several shipping companies had signed contracts granting 3 percent increases per year to their employees. For their part, the shipping companies insisted that they are profitable organizations and that they could afford these raises. Furthermore, these increases were accompanied by corresponding productivity improvement concessions. On the other hand, the objectors argued that there were no improvements in the quality of pilotage services which could justify the tariff increase.

Given their significant differences, comparisons between the Authority and the shipping companies are not appropriate. Typically, government organizations face constraints which their private sector counterparts do not have to deal with. The Authority operates within the parameters of legislation, while the shipping companies operate in a commercial environment. This difference renders meaningless any comparisons between them.

The service contract between the Authority and the District 1 pilot corporation contains a provision whereby the corporation receives an additional payment over and above the regular payment for an assignment when the average number of assignments per pilot per year exceeds a level that has been established as the norm for a pilot during one year. This norm is currently 120 assignments per pilot per year and the additional payment to the corporation amounts to 50 percent of the normal fee. This means that the Authority receives less from users than it must pay to the corporation for these assignments, thereby increasing its losses.

This provision was identified in the ministerial pilotage review as being of no benefit to users since no additional service was offered in return for the productivity payment. The payments are made for assignments that are part of each pilot's regular schedule as opposed to payments to pilots for call back assignments where the pilot is off-duty and must report for work to take on extra assignments.

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.

The Authority indicated in its written response to the objections that its projected loss for the year 2000 would be greater than initially expected due to productivity payments of $230,000 to the District 1 corporation which were resulted from unexpected pilot retirements. Consequently, the number of active pilots for that year was reduced and the average number of assignments per pilot for the remaining pilots increased to a level above the norm of 120 assignments per year. At the hearing, the Authority stated that it was hiring 10 apprentice pilots in each of 2001 and 2002 at an annual cost of approximately $500,000 to avoid productivity payments in future years.

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.

Based on the foregoing, the Agency considers that from a strictly financial self-sufficiency perspective, the Authority needs the increases sought to cover its expenses.

Fair and reasonable

The concept of fair and reasonable is not defined in the Pilotage Act. No court cases have defined fair and reasonable in the context of the Pilotage Act. The Agency thus consulted dictionary definitions for guidance.

The Black's Law Dictionary, 5th ed., at page 535, defines "fair" as:

Having the qualities of impartiality and honesty; free from prejudice, favouritism and self-interest. Just; equitable, even-handed; equal, as between conflicting interests.

At page 1262 of this same dictionary, "reasonable" is defined, in part, as:

Fair, proper, just, moderate, suitable under the circumstances. Fit and appropriate to the end in view; rational or acting according to the dictates of reason.

In past investigations, the Agency established that in order for pilotage charges to be fair and reasonable, they must result from an economic and efficient service. Related to this, the Agency has asserted that costs that can be recovered from users must be based on an economic and efficient service. (See NTA Decision No. 669-W-1995.)

In the RIAS, the Authority explained that the structure of the tariff is being modified for the first time since 1985. The proposed tariff abolishes certain charges and consolidates others. Double pilotage charges will no longer be applicable in the case of anchorages, movages or dockings. The tug and tow charges have been revised and will result in a decrease in costs for towing operations. A new docking fee has been introduced in recognition of the additional skill and experience needed by pilots to perform docking manoeuvres as compared to straight vessel transits through the compulsory areas.

Parties objecting to the tariff proposal have suggested that decisions made by the Authority which impacted on some of its costs were not reasonable. They argued that given the Authority's tight budget, it should have exercised more caution to avoid additional expenses. In the "Financial self-sufficiency" section of this Decision, the Agency discusses these arguments and the various obligations the Authority must meet to discharge its statutory mandate.

In past decisions, the Agency has expressed concerns about the reasonableness of the payments to the pilot corporations, which represent the largest component of Authority expenses. Notwithstanding, the Agency has recognized that the payments to the pilot corporations, which are based on negotiated contracts, represent the cost at which the services of the pilots can be obtained. In commenting on such payments, the Authority has stated that the service contracts are negotiated on the basis of value of services. The Authority's position is that the payments should be judged on their own merit in terms of reasonableness, taking into consideration the difficulty of the task and the need for uninterrupted service for maritime traffic. While the Agency has commented on payments to the pilot corporations in past decisions, it has not suggested that, in its role as an economic regulator, it should extend its mandate to that of stipulating what pilot earnings should be.

The position of the pilots in the corporations relates to provisions in thePilotage Act whereby pilots were given the right in 1972 to form corporations. When these were created, a pilotage authority was obligated to deal with the corporations. As such, the existence of the corporations and their exclusive rights to provide pilotage services are sanctioned by the Pilotage Act. Therefore, the Agency is of the view that the legislative right to be the sole providers of pilotage services gives the pilot corporations a strong position when negotiating with the Authority for payments for services.

As noted previously, the Authority, in its tariff proposal, introduced a significant restructuring of its tariff which will have an overall neutral effect on the revenue of the Authority but which will also benefit some users. The introduction of the docking fees will only apply to those requiring docking services and the reduction in the trip charge will produce savings for ships in transit. The removal of double pilotage charges on certain manoeuvres will also benefit users. The Agency is of the opinion that these changes contribute to the improvement of the tariff structure and will make the tariff more equitable.

In addition to this, the Authority has experimented with changes to the deadline for accepting assignments during the winter period beyond the previous 1 p.m. time limit. This has been one of the activities of the Service Plus Committee set up in District 1 to examine how the efficiency of pilotage services could be improved. As well, more nighttime assignments have been performed in the past several years. All of these measures, which reflect improvements in the quality of services, have been economically beneficial to users.

In the discussion of fair and reasonable tariffs at the hearing, objectors argued that there were no improvements to the quality of pilotage services which could justify the tariff increases. The argument that there should be an improvement in quality of service when tariffs increase does not take into consideration other factors such as normal increases in the cost of fuel, labour and materials that affect the cost of the services borne by the Authority. Although some improvements to pilotage services were implemented by the Authority, the fact that costs normally increase on an annual basis is one of the economic parameters with which the Authority must work in discharging its obligations.

The Agency considers that the proposed tariff apportions equitably, among the users, the costs necessary for the Authority to operate on a self-sustaining financial basis and that the users receive, in return, a service that corresponds to the charges they pay. The Agency concludes that the proposed tariff is fair and reasonable.

Public interest

In examining the issue of fair and reasonable pilotage tariffs, the Agency considered the statutory provisions which have relevance to the provision of pilotage services.

The basic provision is subsection 34(2) of the Pilotage Act. It reads:

Any interested person who has reason to believe that any charge in a proposed tariff of pilotage charges is prejudicial to the public interest, including, without limiting the generality thereof, the public interest that is consistent with the national transportation policy set out in section 5 of the Canada Transportation Act, may file a notice of objection setting out the grounds therefor with the Canadian Transportation Agency within thirty days after publication of the proposed tariff in the Canada Gazette.

In assessing the merits of the objections, the Agency must therefore consider the national transportation policy found in section 5 of the CTA:

It is hereby declared that a safe, economic, efficient and adequate network of viable and effective transportation services accessible to persons with disabilities and that makes the best use of all available modes of transportation at the lowest total cost is essential to serve the transportation needs of shippers and travellers, including persons with disabilities, and to maintain the economic well-being and growth of Canada and its regions and that those objectives are most likely to be achieved when all carriers are able to compete, both within and among the various modes of transportation, under conditions ensuring that, having due regard to national policy, to the advantages of harmonized federal and provincial regulatory approaches and to legal and constitutional requirements,

(a) the national transportation system meets the highest practicable safety standards,

(b) competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services,

(c) economic regulation of carriers and modes of transportation occurs only in respect of those services and regions where regulation is necessary to serve the transportation needs of shippers and travellers and that such regulation will not unfairly limit the ability of any carrier or mode of transportation to compete freely with any other carrier or mode of transportation,

(d) transportation is recognized as a key to regional economic development and that commercial viability of transportation links is balanced with regional economic development objectives so that the potential economic strengths of each region may be realized,

(e) each carrier or mode of transportation, as far as is practicable, 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,

(f) each carrier or mode of transportation, as far as is practicable, receives fair and reasonable compensation for the resources, facilities and services that it is required to provide as an imposed public duty,

(g) each carrier or mode of transportation, as far as is practicable, carries traffic to or from any point in Canada under fares, rates and conditions that do not constitute

(i) an unfair disadvantage in respect of any such traffic beyond the disadvantage inherent in the location or volume of the traffic, the scale of operation connected with the traffic or the type of traffic or service involved,

(ii) an undue obstacle to the mobility of persons, including persons with disabilities,

(iii) an undue obstacle to the interchange of commodities between points in Canada, or

(iv) an unreasonable discouragement to the development of primary or secondary industries, to export trade in or from any region of Canada or to the movement of commodities through Canadian ports, and

(h) each mode of transportation is economically viable,

and this Act is enacted in accordance with and for the attainment of those objectives to the extent that they fall within the purview of subject-matters under the legislative authority of Parliament relating to transportation.

There are other legislative provisions that are relevant to the Agency in carrying out its mandate under the Pilotage Act to ensure that a fair and reasonable tariff proposed by the Authority is not prejudicial to the public interest.

Section 18 of the Pilotage Act states, in part, the following:

The objects of an Authority are to establish, operate, maintain and administer in the interests of safety an efficient pilotage service...

Paragraph 4(c) of the Marine Act states as follows:

The objective of this Act is to

(c) ensure that marine transportation services are organized to satisfy the needs of users and are available at a reasonable cost to the users;

The foregoing policy statements provide the framework within which a pilotage authority is to operate. These can be described in the following manner:

  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.

Objectors to the Authority's tariff proposal argued that the approval of the tariff increases would not be in the public interest in view of its effect on water transportation on the St. Lawrence River and Seaway. They have indicated that it is vital that the competitiveness of this waterway not be eroded any further as the very livelihood and continued existence of Canadian shippers and shipowners is at stake.

Witnesses for the CSA have described the shrinking fleet of laker vessels, the reduction in operating days per ship, the ageing of the ships and the likelihood that they will not be replaced. In the words of one witness, "the demise of the Canadian laker fleet is in the cards".

Reduced volumes of Canadian grain exports through the St. Lawrence River and Seaway, competition for grain transportation from railway companies, competition from U.S. waterways for the movement of grain to certain markets and a continuing erosion of the balance of grain transportation downriver and iron ore upriver were also evoked. The CWB witness stated that decisions on the routing of grain exports were based on the total cost of transportation and that increased costs on one route could lead to a choice of alternative routes.

Shippers represented by the CMC argued that sales of low-value, bulk commodities were very sensitive to small increases in transportation costs and that sales could be lost on the basis of cents per tonne. Shippers stated that commodity prices were set at the international level and that Canadian exporters were price takers rather than price makers. Shippers asserted that, in these times of market globalization, efforts were needed to protect the competitiveness of Canadian exporters. The tariff increases proposed by the Authority could, in the opinion of shippers, have an adverse effect on the international marketing of Canadian products.

The District 2 pilot corporation argued at the hearing that the objectors did not represent the public interest but rather that they reflected private interests only. This corporation further argued that there was no evidence of harm to the public interest.

After reviewing all of the evidence submitted by the parties, the Agency considers that there are two public interest issues arising from the foregoing that must be dealt with before arriving at a decision as to whether or not the tariff proposal is in the public interest.

  1. Will the ability of the Canadian laker fleet to operate in a viable manner be affected by the proposed tariff increases?
  2. Will the proposed tariff increases affect the competitiveness of the St. Lawrence River and Seaway system and its users?

At the hearing, evidence was given by Canadian shipowners that the movement of grain and iron ore could be affected by increases in transportation costs of cents per tonne. Moreover, with the decline in grain shipments through the St. Lawrence Seaway, the transport of iron ore was affected since there is less grain for ships on return trips and transporting ore becomes more expensive.

A decision regarding the Authority's tariff proposal must necessarily balance the differing interests of various groups. While the Agency recognizes that the Canadian laker fleet is declining in numbers and that shipping companies are facing economic challenges which affect their viability, there is no evidence that pilotage charges on their own have created this situation. For the past decade, a higher percentage of grain sales have been made in the Asia-Pacific region and therefore a higher proportion of Canada's grain production is exported through west coast ports. The former Union of Soviet Socialist Republics grain market vanished in 1990 and the European grain market has shrunk. This shift of markets is a major factor affecting the Canadian fleet in the Great Lakes-St. Lawrence region.

While the Agency recognizes that the Canadian laker fleet owners have made adjustments to their operations to maintain or reduce costs, the Agency is of the view that there is no direct relationship between the steady decline in the number of lakers, the economic situation faced by shipping companies and its impact on their viability, and the increases in pilotage charges. The geographic shift in markets for grain has been the most significant reason for the current situation.

In view of the foregoing, the Agency is of the view that the tariff proposed by the Authority is not prejudicial to the public interest.

Related issues

There are a number of issues arising from the Agency's investigation of the Authority's tariff proposal that warrant further discussion. While the Agency has found that there are some areas where the choices made by the Authority could have been somewhat different, the Agency recognizes that there are constraints within which the Authority is required to operate.

Institutional framework

Over the years, the institutional framework for pilotage has changed gradually and significantly. Examples of these changes include the elimination of the right to strike by pilots, the introduction of a mandatory mediation process to resolve contract disputes, the final offer selection process and the elimination by the federal government of subsidies to cover the Authority's losses. While many of these changes have been beneficial, there have also been negative consequences. At the moment, the Authority finds itself in a precarious financial situation, pilots continue to improve their economic situation and users pay for the tariff increases while some members of the industry are facing economic and financial challenges.

Final offer selection process

The legislative requirements within which the Authority must conduct its operations and negotiations with pilots are a concern. If service contracts cannot be renewed under negotiation and the mandatory mediation stage fails as well, there are no guidelines in the Pilotage Act as to which aspects of final offers an arbitrator is to consider when selecting between an offer from a pilot corporation and an offer from a pilotage authority. There is no explicit direction to an arbitrator to take into consideration the financial situation of the pilotage authority and the industry (i.e. the parties directly affected by pilotage charges) as well as the statutory requirement for the Authority to operate on a self-sufficiency basis.

By way of comparison, the final offer selection process set out in section 164 of the CTA states that an arbitrator shall take into consideration information provided in support of an offer, information provided by the parties at the arbitrator's request and whether there is alternative and competitive transportation available. This means that under the CTA, an arbitrator will consider all of the information which is relevant to the final offers. While an arbitrator may conduct a similar examination under the Pilotage Act, there is no legislative requirement to do so. Moreover, as there is no alternative pilotage service available to users, these users will inevitably bear the costs resulting from the arbitrator's selection once this decision has been made.

Consultations

The topic of consultations between the Authority, shipowners and shippers was discussed during the ministerial pilotage review and the Authority was directed to conduct regular consultations with interested parties on financial, operational and planning issues that affect such parties. Although the SFC indicated in its submission to the Agency that it had been consulted, it was made clear that there had been very little consultation with the CSA about the proposed tariff. The Authority had advised the CSA about the tariff proposal but there was no evidence that there had been any discussion of increases in fees and salaries granted to pilots, of the traffic projections used as a basis for the 2000, 2001 and 2002 forecasts, nor of a negotiating strategy possibly leading to a final offer selection process. Considering the fact that users constitute the Authority's sole source of revenue, these parties should have input in the establishment of the costs of the services.

At the hearing, the Authority expressed the view that the CSA representative on the Authority's Board of Directors could keep the CSA's membership informed. The Agency notes that the CSA Board member has a responsibility to act in the interest of the Authority and is not there to promote the views of the CSA's member companies. Although there is a CSA member on the Board of Directors of the Authority, this does not, in the opinion of the Agency, relieve the Authority of its duty to consult with the CSA.

There is an obvious need for greater communication and consultation between the Authority and all interested parties affected by pilotage issues.

It is for these reasons that the Agency, in its Decision No. 94-W-2001 dated March 2, 2001, recommended that the tariff be implemented.


  1. Projected results for 2000, 2001 and 2002
  2. Projected results for 2000, 2001 and 2002
  3. Projected results for 2000, 2001 and 2002
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