Am. Great Lakes Ports Ass'n v. Zukunft, Civil Action No.: 16–1019 (RC)

296 F.Supp.3d 27

AMERICAN GREAT LAKES PORTS ASSOCIATION, et al., Plaintiffs,

v.Admiral Paul F. ZUKUNFT, Commandant, United States Coast Guard, et al., Defendants.

Civil Action No.: 16–1019 (RC)

United States District Court, District of Columbia.

Signed November 3, 2017

Charles Jonathan Benner, Thompson Coburn LLP, Washington, DC, for Plaintiffs.

Jeremy S. Simon, U.S. Attorney's Office for the District of Columbia, Washington, DC, for Defendants.

MEMORANDUM OPINION

GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT; GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT

RUDOLPH CONTRERAS, United States District Judge

I. INTRODUCTION

In 2016, the Coast Guard promulgated new rules for calculating the rates that international shippers must pay American maritime pilots on the waters of the Great Lakes. Throughout the notice-and-comment process, Plaintiffs—representatives of the international shipping community—criticized the proposed rules in a variety of ways. After having their comments largely rejected, the shippers sued the Coast Guard in this Court under the Administrative Procedure Act, 5 U.S.C. §§ 500 et seq . All the parties have now moved for summary judgment on Plaintiffs' claims. For the various reasons explained below, the Court grants in part and denies Plaintiffs' motion for summary judgment.

II. BACKGROUND

With limited exceptions, all foreign vessels¹ operating in the Great Lakes and some of their connecting waters (collectively "the Great Lakes") must employ a registered Canadian or American maritime pilot to aid in navigation. 46 U.S.C. § 9302(a)(1). In 1960, Congress enacted the Great Lakes Pilotage Act ("GLPA"), which authorized the United States Coast Guard ("Coast Guard") to "form[ ] ... a pool ... of United States authorized pilots to provide for efficient dispatching of vessels and rendering of pilotage services" in the waters of the Great Lakes. Id. §§ 9301(2), 9304(a). Thus, pilots on the Great Lakes are organized into private associations certified by the Coast Guard, which operate in three separate geographical districts.² See Great Lakes Pilotage Rates—2016 Annual Review and Changes to Methodology, 81 Fed. Reg. 11,908, 11,910 (Mar. 7, 2016). The Coast Guard is responsible for setting "standards of competency" for registered American pilots and prescribes "rates and charges for pilotage services, giving consideration to the public interest and the cost of providing the services." 46 U.S.C. § 9303(a), (f). Thus, the Coast Guard determines the base pilotage rates that foreign vessels must pay to hire American maritime pilots to navigate the Great Lakes and reviews and adjusts these rates annually. See id.

In September 2015, the Coast Guard issued a Notice of Proposed Rulemaking ("NPRM") informing the public that the Coast Guard sought to "revis[e] the current methodology by which the Coast Guard sets base rates for U.S. pilotage service" and to set pilotage rates for the 2016 shipping season using that new methodology. Great Lakes Pilotage Rates—2016 Annual Review and Changes to Mehodology, 80 Fed. Reg. 54,484, 54,484 (Sept. 10, 2015). The reasons for the methodology change were twofold. First, the Coast Guard explained that "over many years both pilots and industry have identified certain methodology issues that they believe significantly distort[ed] ratemaking calculations." Id. In particular, "[p]ilot associations believe[d] those distortions result[ed] in low rates that contributed to their difficulty in retaining pilots and attracting applicant pilots." Id. Second, a methodology change was required because certain data that the Coast Guard previously relied upon would no longer be available. See id. Before 2016, the Coast Guard's pilotage rate-setting methodology relied, in part, on union compensation data for merchant marine masters and mates.³ 81 Fed. Reg. at 11,908; see also St. Lawrence Seaway Pilots Ass'n, Inc. v. United States Coast Guard , 85 F.Supp.3d 197, 204–05 (D.D.C. 2015). According to the Coast Guard, "only one union's contract data [was] ever [ ] made available to the Coast Guard," but that union "now regards th[e] data as proprietary and [would] no longer disclose it to the Coast Guard." 80 Fed. Reg. at 54,484. Consequently, "the Coast Guard no longer ha[d] access to the detailed breakdown of compensation calculation that [its] [former] methodology [once] relie[d] on." Id. Thus, as a result of the previous complaints from pilots and industry concerning the old methodology combined with the future unavailability of pilot compensation data, the Coast Guard decided to change its methodology.

A. 2016 Rate–Setting Methodology

The final pilotage rate-setting methodology adopted by the Coast Guard was largely the same as the rule that it had proposed in September 2015. See 81 Fed. Reg. at 11,942. The Coast Guard developed this methodology based on a set of recommendations made by the Great Lakes Pilotage Advisory Committee ("GLPAC").

See id. at 11,911. The GLPAC is a committee created by statute whose purpose is to assist the Coast Guard in formulating pilotage rates and policies.⁴ See 46 U.S.C. § 9307(a). When the Coast Guard engages in those functions, the Coast Guard is required to consider the GLPAC's recommendations, id. at § 9307(d)(2), and in this instance, the Coast Guard accorded the GLPAC's recommendations significant weight, see 81 Fed. Reg. at 11,911.

In concept, the revised methodology is rather straightforward. The Coast Guard seeks to set hourly pilotage rates that will be sufficient to cover pilotage associations' expenses and also provide a modest rate of return. To do this, the Coast Guard first estimates the expenses that it expects the pilotage associations will incur, including expenses associated with pilot compensation, in the upcoming season. It then adds a return on investment based on high-grade corporate securities. Viewed together, the expenses and the return on investment, represent the target revenue amount that the Coast Guard is hoping the pilotage associations will achieve. To come up with an hourly pilotage rate sufficient to meet this goal, the Coast Guard divides the target revenue by an estimate of the number of hours it expects the associations will work. The Coast Guard can then adjust this rate on an ad hoc basis under "supportable circumstances." The Coast Guard has broken out this methodology into the following eight steps:

Step One: "Recognize previous operating expenses." First, the Coast Guard examines the pilotage associations' prior expenses based on independent third-party audits and then determines which expense items should be recognized for the purpose of ratemaking.

Step Two: "Project operating expenses, adjusting for inflation or deflation." Next, the Coast Guard projects the pilotage associations' operating expenses (other than those expenses associated with compensating pilots) using the recognized operating expenses identified from Step One and adjusting them for inflation or deflation using U.S. government consumer price index data for the Midwest.

Step Three: "Determine number of pilots needed." The Coast Guard then projects how many pilots the Great Lakes will need in the upcoming shipping season. Unlike the prior methodology, this step takes into account not only the "hours a pilot is on the vessel's bridge, but also the total average time a pilot spends in preparing for and returning from each pilot assignment." It also uses a "peak-staffing model," which aims to determine the number of pilots needed at all times by looking to the amount of pilots needed during average peak-season demand in previous years.

Step Four: "Determine target pilot compensation." The Coast Guard then uses "the most relevant currently available non-proprietary information" to determine base individual pilot compensation. The Coast Guard then multiplies that figure by the number of pilots needed calculated in Step Three.

Step Five: "Project return on investment." Because associations have management responsibilities and exposure to business risk, the Coast Guard calculates a return on investment. To do this, the Coast Guard multiplies the sum of the operating expenses from Step Two and the target pilot compensation from Step Four by the annual rate of return for high-grade corporate securities.

Step Six: "Project needed revenue." Here, the Coast guard estimates the revenue that each pilotage association will need to successfully operate by adding together the projected operating expenses (Step Two), projected pilot compensation (Step Four), and projected return on investment (Step Five).

Step Seven: "Initially calculate base rates." At this step, the Coast Guard divides the projected needed revenue from Step Six by the averages of past hours worked in each geographic area's waters.

Step Eight: "Review and analyze rates." Finally, the Coast Guard reviews the base pilotage rates to make sure the rates meet the "goal of ... promot[ing] safe, efficient, and reliable pilotage service on the Great Lakes." At this step, the Coast Guard may either finalize the rates or "make[ ] necessary and reasonable adjustments to them based on requirements of Great Lakes pilotage agreements between the United States and Canada, or other supportable circumstances."

See 81 Fed. Reg. at 11,908–42.

B. The Present Action

On May 31, 2016, the American Great Lakes Ports Association, a not-for-profit organization representing the interests of commercial ports and port users in the United States, and several other organizations in the shipping industry sued the Coast Guard under the Administrative Procedure Act ("APA"), claiming that the new methodology and 2016 pilotage rates were arbitrary and capricious in various respects. See Compl. at 4–5, 20, ECF No. 1. Thereafter, the three Great Lakes pilotage associations ("Pilots") moved to intervene as defendants. Pilots Ass'ns Mot. Intervene Supp. Defs., ECF No. 6. The Court granted the pilotage...