Decision No. 195-W-1994

April 29, 1994

File No. D 2530-2-6

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BACKGROUND

Pursuant to subsection 34(1) of the Pilotage Act, R.S.C., 1985, c. P-14, the Atlantic Pilotage Authority (hereinafter the Authority) published a proposed amendment to the Atlantic Pilotage Tariff Regulations in the Canada Gazette Part 1 edition of February 27, 1993. This tariff proposal provides for a 7 percent across-the-board increase for all compulsory pilotage areas to be implemented as soon as possible and a subsequent 8 percent across-the-board increase one year later.

Pursuant to subsection 34(2) of the Pilotage Act, nine notices of objection to the proposed tariff amendment were filed with the National Transportation Agency of Canada (hereinafter the Agency) between March 16, 1993 and March 29, 1993 by the following parties:

• The Nova Scotia Department of Transportation and Communications;
• The Shipping Federation of Canada;
• Kent Line Limited;
• The Halifax Board of Trade;
• The Government of Newfoundland and Labrador;
• The Halifax-Dartmouth Port Development Commission;
• The Canadian Shipowners Association;
• The Saint John Port Corporation; and
• The Halifax Shipping Association.

In addition, a notice of intervention was filed by the Halifax Port Corporation on March 24, 1993.

The Authority filed an answer to the objections on April 28, 1993.

Where a notice of objection is filed, subsection 34(4) of the Pilotage Act requires the Agency to make such an investigation of the proposed charge as in its opinion is desirable. Section 35 of the Pilotage Act requires the Agency to make a recommendation to the Authority and to file a copy of the recommendation with the Minister of Transport. The Authority is obliged to abide by the recommendation.

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

The role of the Agency, in accordance with its mandate under the Pilotage Act, is to determine whether or not the proposed tariff of pilotage charges, to which objection is made, is prejudicial to the public interest. In doing so, the Agency must determine whether or not the Authority has based its costs on an economically efficient operation and whether or not the proposed tariff of charges is fair and reasonable.

In considering its approach to the examination of the tariff proposal of the Authority, the Agency directed staff to conduct an assessment of the tariff proposal through an examination of operational, financial and economic information from the Authority. The Agency also directed that the results of the staff analyses be documented in a report.

By Order No. 1993-W-181 dated June 14, 1993, the Agency directed the Authority to produce and file with the Agency certain information, particulars and documents relating to the finances, operations and administration of the Authority. Certain documents were to be filed with the Agency by June 18, 1993 while other information was to be filed by June 25, 1993. The Order also required the Authority to make the same material available to the objectors and the intervener upon request, except items considered to be of a confidential nature.

On December 3, 1993, the Agency Staff Investigation Report (hereinafter the Report) dated November, 1993 was sent to the Authority and to the parties of record for their comments. All comments on the Report were to be filed with the Agency by December 17, 1993; however, following requests for an extension of time to file comments with the Agency, parties were granted until December 24, 1993 to do so. Subsequent to the receipt of comments from parties, the Agency decided that a meeting with the Authority and parties of record was desirable to obtain further elaboration and clarification of certain aspects of the Authority's pilotage services.

On February 24, 1994, the Agency issued a Notice of Meeting to the Authority and parties of record indicating that a meeting would be held in Halifax on March 10, 1994. The date of the meeting was subsequently changed to March 14, 1994. The Notice set out the specific issues that the Agency wished to discuss and parties were given an opportunity to make a presentation and to question and comment upon information provided by the Authority at the meeting.

The above-noted objections, intervention, answer of the Authority, Report, comments of parties thereupon and the transcript of the meeting in Halifax form part of the public record on this matter and are available for inspection at the Head Office of the Agency in Hull, Quebec or at the Regional Office in Moncton, New Brunswick.

POSITION OF PARTIES - REPORT ANALYSES

The objectors and the intervener raised economic and policy issues in their submissions which were summarized and analyzed in the Report.

The economic analysis in the Report focused on financial results and forecasts, cost efficiency (pilot workload, pilot strength and pilot boat operations), as well as the recurring issues of cross-subsidization and allocation of overhead expenses. It was noted in the Report that the Agency has indicated in previous decisions that cross-subsidization is to be avoided for an economic and efficient service and that there is no apparent requirement to alter the current method of overhead allocation.

The Report concluded that the expenses incurred by the Authority appear to be justified from the viewpoint of exercising control over pilot boat costs, providing services with a reasonable number of pilots and taking steps to reduce administrative expenses. The Report also concluded that the proposed 7 and 8 percent increases were needed in most ports or districts, with the exception of the ports of Halifax and Saint John, to generate additional revenue in order to attain financial self-sufficiency. With respect to the port of Halifax, the Report indicated that a 3 percent increase appeared adequate to achieve a breakeven financial result and with respect to the port of Saint John, the 7 percent increase was adequate; therefore, there was no apparent need for additional increases at these two ports at this time. It was observed in the Report that due to uncertainty with forecasting of traffic at the port of Halifax and the fact that the port should operate at least on a breakeven financial basis, the implementation of a 7 percent increase would not necessarily be unreasonable.

The Report noted that for the St. John's District, pilot workload was about one-half of the productivity standard established for that district as a result of the sudden drop in assignments caused by the closure of the cod fishing industry. The Report observed that there could be a continuing requirement for the complement of five pilots due to operational needs but that the Authority should monitor the situation closely and make adjustments to pilot strength if warranted.

With respect to the ports of Halifax and Saint John, the Report observed that the addition of a sixth pilot at Saint John was reasonable from the viewpoint of pilot workload but that if traffic declined, pilot strength could probably be brought back to five. At the port of Halifax, the Report noted that there was a need for a certain degree of flexibility which justified 11 pilots but should traffic decline further, the complement of pilots could likely be reduced to 10 pilots.

The Report noted that in past decisions, the Agency has indicated that the Authority should strive for district-by-district financial self-sufficiency which means that increases in pilotage charges would reflect the differing revenue requirements of each district. The Report observed that, in this context, such tariff proposals would be more appropriate than proposals that incorporate across-the-board increases.

In its comments, the Authority argued that the 8 percent rate increase was needed at the ports of Halifax and Saint John to ensure overall financial self-sufficiency as assignments at Halifax were decreasing and traffic at Saint John was "fragile". The Authority argued that the statutory requirement set out in the Pilotage Act for financial self-sufficiency meant overall financial self-sufficiency and, within this context, there could also be district-by-district financial self-sufficiency. The Authority indicated that it would carry out a detailed examination of the minimum charge at the port of Halifax applicable to small vessels.

The Shipping Federation of Canada, Kent Line Limited, the Government of Newfoundland and Labrador, the Halifax-Dartmouth Port Development Commission, the Canadian Shipowners Association, the Halifax Shipping Association and the Halifax Port Corporation filed comments on the Report. The comments of these parties were similar in several aspects and, as such, their main arguments could be summarized together and are as follows:

• The 7 percent increase at the port of Halifax is not justified since the Report shows that 3 percent is adequate.
• The proposed 7 and 8 percent increases greatly exceed current inflation and are unacceptable in the current economic environment.
• Authority costs are not justified when the analysis shows that productivity is below standard at the ports of Halifax and Saint John as well as in the Cape Breton and St. John's Districts. There appears to be a difference of approach in assessing pilot strength at Saint John and in the St. John's District.
• Approval of the rate increases would be contrary to the principles enunciated in recent decisions on the Laurentian Pilotage Authority and the Great Lakes Pilotage Authority, i.e., unreasonable costs which are not related to an economic and efficient service should not be passed on to users. In this regard, the Authority legal costs should not be passed on to users and pilot costs where workload is below the productivity standard are unreasonable costs.
• The Authority has failed to adjust its costs to declining traffic volumes by seeking innovative solutions such as modifications to collective agreements. Renewal of collective agreements with no salary increase while workload is going down amounts to a salary increase.
• The minimum charge for small vessels at the port of Halifax, which forms part of the tariff structure, is too low and results in losses for the Authority. The Report suggests that a review of the Authority tariff structure does not fall within the jurisdiction of the Agency.
• The Report fails to examine the competitive situation and the need to keep costs down faced by the port of Halifax. Other port interests have reduced costs and the Authority should be part of this effort.

DISCUSSION AT MEETING

With respect to the issues that the Agency indicated it wished to discuss at the meeting, the Authority described a number of factors which influence operational aspects of providing pilotage services, namely demand for service, port facilities, weather conditions and geography.

In elaborating on demand for services, the Authority indicated that traffic volumes had dropped dramatically in the St. John's District since 1991 and that other ports had also experienced decreasing volumes since then. The Authority indicated that future prospects suggest a continuation of declining traffic volumes in many ports with stabilization of traffic at Halifax and possible growth at Saint John.

The Authority discussed pilot strength and indicated that it is continuously aware of the state of health of each pilot, the approaching retirement of pilots and the need to train new pilots in order to maintain adequate pilot strength. The Authority indicated that a two-year period is needed to fully train a pilot and that the number of recall assignments is a factor that is taken into consideration when deciding whether additional pilots are needed.

With respect to pilot strength in the St. John's District, the Authority stated that one of the five pilots is on sick leave and would not likely return to work while a second pilot is due to retire at the end of 1995. The Authority indicated that four pilots could handle current traffic volumes and that by the end of 1995 perhaps only three pilots would be necessary.

The parties of record, making presentations and directing questions to the Authority at the meeting, focused on the same issues and arguments that they had made in their objections and comments on the Report, all of which have already been summarized in this decision. No new substantial issues arose at the meeting out of the comments, presentations and questioning by the parties of record.

AGENCY CONCLUSIONS

The Agency has carefully reviewed the submissions of the parties, the information obtained from the Authority, the analyses documented in the Report, the comments of the parties on the Report and the discussion at the meeting in Halifax. The review of all this material has enabled the Agency to arrive at certain conclusions regarding the tariff proposal.

At the outset, the Agency would like to note that its approach in assessing tariff proposals has not varied. In carrying out pilotage tariff investigations, the Agency must make a determination of whether or not pilotage charges are fair and reasonable. To meet these criteria, the cost of providing pilotage services must be justifiable and based on an operation that is economic and efficient. When the Agency is unable to establish whether or not operations are economic and efficient or if there is evidence that changes can be made in operations to improve efficiency to lower costs, rate increases are not justifiable. This same principle is applied by the Agency in all tariff investigations.

With respect to the argument that the proposed 7 and 8 percent rate increases exceed inflation and are not justified, the Agency would like to note that while the current rate of inflation and the state of the economy are important factors in the review of a tariff proposal, they alone do not determine whether or not tariff increases are justified. If the Agency is satisfied that the pilotage services are economic and efficient, rate increases can be justified to recover costs even if the increases are less than or exceed inflation.

Regarding the rate increase for the port of Halifax, the analysis in the Report suggested that the 7 percent rate increase could be implemented due to uncertainty associated with forecasting traffic and the fact that the port of Halifax should operate at least on a breakeven financial basis. Notwithstanding, the Agency is of the opinion that the objectors have presented a valid argument that the 7 percent increase could

generate excess profits at the port of Halifax which could be used to cross-subsidize losses at other ports. As indicated by the Agency in past decisions, Halifax should not be expected to cross-subsidize other ports. In view of this, the Agency is of the opinion that only a 3 percent increase should be implemented at the port of Halifax. The Agency is also of the opinion that if the number of assignments at Halifax continues to drop, the Authority should be able to reduce its costs through a further reduction in pilot strength and/or other operational expenses which would assist the Authority in maintaining a breakeven financial position at the port.

Regarding the statement that the Authority costs are not justified in view of low pilot productivity at Halifax, Saint John, Cape Breton and St. John's, pilot strength is not only a function of the number of assignments but also of the operational requirements of each port or district. The fact that pilot productivity may be below a standard in one year does not necessarily mean that the service is inefficient where there is a minimum number of pilots needed to offer the service 24 hours a day.

Under the Pilotage Act, each pilotage authority is to establish rates that are fair and reasonable. Thus the onus to establish a tariff structure, including minimum charges if deemed appropriate, to meet these criteria rests with the pilotage authority. As indicated in the Report, although the minimum charge at the port of Halifax is substantially less than the average cost per assignment at this port, this is not necessarily inconsistent with the manner in which charges are levied, i.e., large vessels pay higher charges than smaller vessels. Since the setting of a minimum charge is necessarily somewhat arbitrary, the Agency is of the opinion that the Authority is best suited to establish such charges in consultation with users. The Agency is pleased to note that the Authority has indicated that it will undertake a detailed assessment of the minimum charge at the port of Halifax.

With respect to the comment that the competitive situation faced by the port of Halifax was not taken into consideration in the Report, each authority has an exclusive mandate under the Pilotage Act to provide pilotage services in specified regions. In doing so, each pilotage authority is to set charges that are fair and reasonable and result in financially self-sufficient operations. A pilotage authority, as opposed to a port authority, does not operate in a competitive environment in that there are no competing pilotage services. The prime focus of an Agency investigation is to assess whether or not pilotage operations are economic and efficient and costs are justifiable, thereby leading to charges that are fair and reasonable. If an investigation concludes that operations are indeed economic and efficient, rate increases to recover costs are justifiable and, therefore, not prejudicial to the public interest.

Regarding the comment that the Report suggests that a review of the Authority tariff structure does not fall within the jurisdiction of the Agency, an Agency investigation does not have as an objective the prescribing of rate increases for each port or district. This does not mean that a review of the tariff structure falls outside the mandate of the Agency, it only means that a pilotage authority is responsible for determining its revenue requirements and, hence, proposed rate increases. The role of the Agency is to assess a tariff proposal that has been objected to following its publication and to make a determination of whether or not proposed charges are fair and reasonable.

The Agency concludes that the proposed 7 percent increase is justified for all ports except for Halifax where only a 3 percent increase is justified. Regarding the subsequent 8 percent increase which is proposed to be implemented one year later, the Agency has reservations about the justification of such an increase due to the uncertainty associated with future traffic volumes.

In this regard, the Authority stated in its comments on the Report that traffic at Saint John was "fragile" and that "assignments at Halifax have been steadily declining". Moreover, the Authority referred to potential losses on operations in 1996 without the 8 percent increase and argued that the 8 percent rate increase was necessary to fulfil its obligation to operate on a self-sufficient financial basis. Although the Authority made reference to financial results in future years in its comments on the Report, the Authority did not take the opportunity to provide any additional information regarding its expectations for either 1995 or 1996 which could have substantiated its arguments.

Further, the presentation of the Authority at the meeting in Halifax did not dispel the uncertainty associated with future traffic volumes. The discussion of the St. John's District indicated that there is still a considerable degree of uncertainty regarding traffic volumes in this district over the next several years due to the moratorium on cod fishing. As well, the Authority indicated that the port of Saint John was the only port where there were signs of traffic growth, that traffic at the port of Halifax "appeared" to be stabilizing, and that there was little prospect for traffic growth elsewhere in compulsory pilotage areas.

In the face of this considerable uncertainty associated with future traffic volumes throughout the compulsory pilotage areas, the Agency cannot determine with confidence at this time whether the additional 8 percent rate increase would be just and reasonable and therefore, it is deemed to be prejudicial to the public interest.

In past decisions, the Agency has indicated that the Authority should strive for district-by-district financial self-sufficiency to eventually eliminate cross-subsidization. The Agency has indicated in this regard that tariff proposals that take into consideration the revenue requirements of each district are more appropriate than across-the-board increases. The Agency wishes to re-emphasize this point.

In a tariff investigation, the Agency, conscious of its duty under the Pilotage Act, does not remain silent on or refrain from commenting upon problems of the pilotage authorities achieving economic efficiencies necessary to meet the objective of financial self-sufficiency. The Agency is of the opinion that the Authority will not attain financial self-sufficiency by revenue increases alone. The Authority recognizes that there are limits on the tariff increases that can be implemented at some ports and commented on this in its reply to the Report:

With regard to the conclusions reached in the Report, in order to achieve overall self-sufficiency and district-by-district self-sufficiency, rate increases for ports other than Halifax and Saint John in the second year of this proposal would be approximately as follows:

1. combined areas of Sydney, Canso, Bras d'Or - 36%
2. Miramichi and Restigouche - 23%
3. multiple pilotage areas of St. John's, Clarenville, Holyrood and Come by Chance - 29%
4. Humber Arm, Stephenville, Bay of Exploits - 30 %

It was felt during the review by the Authority of the tariff, large rate increases for the smaller areas would not be fair and reasonable and therefore the Authority approved across the board increases.

Furthermore, the revenue and expense data presented in the Report for the port of St. John's (as contrasted with the St. John's District) indicate that an increase of over 90 percent would be required for the port to become financially self-sufficient in 1994. In addition, traffic at the port of St. John's has fallen by 50 percent since 1992 and is not expected to increase in the foreseeable future due to the moratorium on cod fishing.

In its investigation, the Agency found that the Authority had made some efforts to reduce its costs. In response to Order No. 1993-W-181, the Authority filed a statement of "Economic Measures" it had implemented to produce cost reductions estimated at $467,000. Despite these cost reductions, the Authority's loss for 1992 increased by almost $1 million. In commenting on the economic measures taken, the Authority said that it was in the second year of experiencing a dramatic change in the demand for its services which resulted in a decrease of approximately $1 million in revenue.

Under these circumstances, in order to achieve financial self-sufficiency, the Authority must attack its deficit from both sides of the financial equation. Pilot salaries are a major cost incurred by the Authority; however, the Authority indicated that certain provisions of the collective agreement with its employee pilots restrict its ability to implement reductions in salary expenses. This is most evident in the smaller, less busy ports where a minimum number of employee pilots are required to maintain service 24 hours a day. Such pilots are paid an annual salary that is unrelated to workload. While the use of entrepreneurial pilots at some ports is an alternative in that these pilots are only paid when there are pilotage assignments to perform, the Authority indicated at the meeting in Halifax that the current provisions of the Pilotage Act do not give it the flexibility to substitute entrepreneurial pilots for employee pilots.

Added to this inflexibility stemming from the Pilotage Act, certain collective agreement provisions, such as the exclusive right by pilots who are members of the Merchant Service Guild to provide pilotage service and the working rules of one week on duty followed by one week off duty (which the Authority indicated in a previous investigation is unrelated to safety of providing service), impede the Authority in taking measures to control costs in the face of changing traffic patterns.

The Agency is of the opinion that the Authority appears to be in a quandary. The Authority recognizes, in the face of declining demand for its services coupled with low traffic volumes at smaller ports, that revenue cannot be increased sufficiently, through tariff increases that are fair and reasonable, to achieve financial self-sufficiency without cross-subsidization. At the same time, the Authority is hindered from taking cost-reduction measures by the aforementioned constraints.

The situation that the Authority finds itself in is not one of recent development and has existed for many years. The constraints faced by the Authority and the economic problems stemming therefrom have been commented by the Agency and its predecessor, the Canadian Transport Commission (hereinafter the CTC) in past decisions, as well as in a 1986 publication entitled "Marine Pilotage in Eastern Canada". This document described in considerable details the quandary faced by the Authority and concluded that the absence of provisions in the Pilotage Act to counter the monopoly power of pilots, the failure of the Pilotage Act to clearly specify how pilotage authorities can meet designated objectives, coupled with institutional constraints, were at the root of the problems. The 1986 CTC document also set out clearly that the CTC had no jurisdiction or mandate to deal with these legislative and institutional shortcomings. This situation still exists today and the mandate of the Agency under the Pilotage Act is unchanged from that of its predecessor.

The foregoing problems were also recognized in a January 1988 Transport Canada document entitled "Report and Recommendations on Marine Pilotage Policy" wherein the report recommended that unless there were improvements in the financial and operational positions of the pilotage authorities by the end of 1988, then "... serious consideration should be given to certain changes in the Act in this regard."

The Agency is of the opinion that the Authority not only needs to explore imaginative and innovative measures that are within its managerial mandate to control costs; it also needs greater operational flexibility than presently exists under the current legislative and institutional framework within which it operates to be able to implement certain cost control measures. The solution to the quandary of the Authority would seem to rest in a combination of action on the legislative and institutional fronts, as well as in the exercising of its managerial prerogatives to the fullest extent possible.

RECOMMENDATIONS

The National Transportation Agency, having carefully examined the tariff proposal of February 27, 1993, hereby recommends to the Atlantic Pilotage Authority:

1. That only the following rate increases be implemented as they are not considered to be prejudicial to the public interest: a 7 percent rate increase applicable to charges at Saint John, Restigouche, Miramichi, Canso, Sydney, Bras d'Or, Humber Arm, Stephenville, Bay of Exploits, St. John's, Holyrood, Come-by-Chance, Clarenville, Charlottetown and Pugwash and applicable to the miscellaneous and supplementary charges; and a 3 percent rate increase applicable to charges at Halifax.
2. All other proposed rate increases are considered to be prejudicial to the public interest.