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DECISION NO. 194-W-1992


April 6, 1992

IN THE MATTER OF proposed tariff of pilotage charges published by the Atlantic Pilotage Authority in the Canada Gazette Part I on August 3, 1991, pages 2547-2557; and the notices of objection filed by the Halifax Shipping Association; the Halifax-Dartmouth Port Development Commission; and Puddister Trading Company Limited.

File No. D 2530-2-4

Pursuant to subsection 34(1) of the Pilotage Act, R.S.C. 1985, c. P-14, the Atlantic Pilotage Authority (hereinafter the Authority) gave public notice in the Canada Gazette Part I on August 3, 1991 of a proposed amendment to the Atlantic Pilotage Tariff Regulations. The proposal incorporates a 4.7 percent tariff increase for all compulsory pilotage areas. For non-compulsory pilotage areas in the Atlantic Region, excluding Newfoundland and Labrador, the Authority proposes a tariff increase of 8 percent; the introduction of an additional area, i.e., Belledune, New Brunswick; and the removal of two areas, i.e., Buctouche and Shediac, New Brunswick.

Three objections to the proposed amendment were filed with the National Transportation Agency (hereinafter the Agency) by the following parties during the period from August 26 to 30, 1991:

  1. Halifax Shipping Association

  2. Halifax-Dartmouth Port Development Commission (hereinafter the Commission)

  3. Puddister Trading Company Limited

In addition, interventions were filed by the Halifax Port Corporation, The Shipping Federation of Canada (hereinafter the Federation) and the Halifax Board of Trade. The Authority filed an answer to the objections and interventions and the Puddister Trading Company Limited filed a reply to the answer of the Authority.

The above-noted objections, interventions, answer and reply form part of the public record on this matter and are available for inspection at the Head Office of the Agency in Hull, Quebec and the Regional Office in Moncton, New Brunswick.

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

The Agency issued Order No. 1991-W-531 dated October 23, 1991 directing the Authority to produce and file with the Agency, by November 1, 1991, certain information, particulars and documents relating to the operation and administration of the Authority. The Order also required the Authority to make the same material available to the parties of record, except items considered to be of a confidential nature, with the cost of reproduction and delivery to be borne by the party making the request.

The Authority requested an extension within which to respond to the Order and the Agency granted an extension until November 8, 1991.

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 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.

ECONOMIC ISSUES

The major economic issues raised in the objections to the proposed tariff increases are as follows:

  1. Cross-subsidization

  2. Cost Efficiency

These issues continue to be the main areas of concern of parties objecting to Authority tariff increases as the same issues were raised in the past two tariff investigations. In addition, a number of secondary issues, listed below, were also raised in the pleadings.

  1. Allocation of Overhead Expenses

  2. Pilot Boat Replacement Fund

  3. Regional Self-Sufficiency

  4. Wage Restraint Program of the Federal Government

  5. Changes to Pilotage Services

During the course of the investigation, the Agency received letters from the Commission and the Federation regarding a $15.00 pilot travel expense charge that the Authority proposed to implement on November 1, 1991 pursuant to Part VI, section 7 of the Atlantic Pilotage Tariff Regulations. Both parties objected to the implementation of this charge and the Commission requested that it be considered as part of the tariff review. The Agency informed all parties of record by letter dated November 26, 1991 that this matter would be included in its review of the tariff proposal.

All of the foregoing issues were addressed in this investigation.

METHOD OF INVESTIGATION

The Agency notes that the economic issues raised by the objectors are fundamentally the same issues which were addressed by the Agency in Decision No. 394-W-1988 dated October 26, 1988 and Decision No. 534-W-1990 dated October 26, 1990 and which were discussed in those previous Decisions under virtually similar circumstances in terms of economics of operation. As a result, the Agency proceeded with a file investigation of the tariff proposal.

In carrying out the file investigation, the Agency relied upon the data filed by the Authority under Order No. 1991-W-531 plus supplemental information and 1991 year-end financial and operational results. On many occasions, inconsistencies and inaccuracies were found in the data appearing on different reports where the same data source had been used to prepare each document. As well, problems were discovered with the 1992 forecast of the Authority for which it was unable to provide a satisfactory explanation. Thus, considerable time was devoted to verifying data received from the Authority which lengthened the time needed to consider the tariff proposal. Similar problems were encountered in previous investigations yet the Authority does not appear to have changed its data recording procedures to eliminate the data inconsistency problem.

One means of overcoming the problem of data verification to a large extent would be for the Authority to voluntarily file information with the Agency on a regular and continuing basis. In this way, any queries could be resolved at the time the information is received and the Agency would have a body of current data in hand should the need arise to investigate a tariff proposal. Since any delay in the consideration of a tariff proposal has a direct financial impact on the Authority, taking steps to reduce the processing time would be to the benefit of the Authority.

CONCLUSIONS

The current tariff proposal of the Authority for compulsory pilotage areas represents a change in approach by the Authority from its 1989 tariff proposal where it indicated that it was striving for port-by-port financial sufficiency in response to the recommendations made in the February 1988 investigation report, which was accepted by the Agency in Decision No. 394-W-1988, that cross-subsidization of small ports by large ports should be eliminated. To achieve this objective, the Authority argued in 1989 that individual rate increases for each port was necessary. Moreover, the Authority argued at that time that the same rate increase for each port in the compulsory pilotage areas would produce inequities and would financially overburden some ports.

The review by the Agency of the 1989 tariff proposal suggested that district financial self-sufficiency should be an initial goal rather than port-by-port viability. With the current tariff proposal, the Authority appears to have abandoned the port or district financial self-sufficiency concept and returned to the concept of cross-subsidization, a practice strongly discouraged by the Agency in its last two decisions on Authority tariff proposals.

In 1991, the Authority undertook a study of pilot workload and pilotage operations in other countries as well as in other parts of Canada. The study is expected to be completed by mid-1992. The results of this study should provide insight into the workload standards at various ports/districts and the manner in which pilotage services are delivered. The Authority has indicated that if the results of the study point to changes or improvements, then such will be negotiated with the pilots.

In September 1990, the Authority signed a three-year collective agreement with the employee pilots covering the period from February 1, 1990 to January 31, 1993. Salaries were increased by 6.0 percent in 1991 and the increase for 1992 will be the greater of 5.5 percent or the cost of living (maximum 6.0 percent).

The analysis of the tariff proposal revealed that the overall financial results of the Authority have worsened since the 1990 investigation. The Authority incurred substantial losses in each of 1990 and 1991, $333,000 and $458,000, respectively. The outlook for 1992 shows some improvement, i.e. a loss of $262,000 is predicted. The 1992 forecast is based on the assumption that the proposed tariff increase is in effect throughout the year.

The review of the financial results for the ports in the compulsory areas revealed that the Authority continues to incur large losses on operations in the Cape Breton and St. John's districts. In the Cape Breton district, the losses on operations are incurred at Canso and Sydney while operations at Bras d'Or remain profitable. The Authority continues to use 6 pilots in this district and has high unit pilot boat costs compared to other major ports. The 1989/1990 investigation questioned the hiring of a 6th pilot in this district when services had been provided previously by 5 pilots. The Authority has not provided any explanation of the pilot strength in this district nor any indication that it has addressed the question of high pilot boat costs. As a result, there is still an unresolved question of economic efficiency in the Cape Breton district and for this reason the rate increase does not appear justified. The 1992 forecast for the Cape Breton district shows a loss on operations of $140,000. Without the tariff increase, the loss would be about $193,000 in this district.

In the St. John's district substantial losses on operations were experienced in 1990 and 1991, $134,000 and $156,000, respectively. Notwithstanding, the losses in these two years were much lower than the 1989 loss of $282,000. The forecast for 1992 is an improvement with the loss expected to be lowered to $71,000; however, without the tariff increase the loss would be about $130,000.

The Authority lowered the workload standard in the St. John's district from 400 assignments per pilot per year to 325 assignments per pilot per year in 1991 due to the changed traffic patterns following the reopening of the refinery at Come-by-Chance. The adjustment to the workload standard appears justified as average assignment time has grown by 30 percent in recent years thereby reducing the number of assignments each pilot is able to perform in a year. The Authority continues to incur high unit pilot boat costs in this district and the Authority has not provided any explanation of the rationale for the high level of such costs. As with the Cape Breton district, there is an unresolved question of economic efficiency in the St. John's district and for this reason the tariff increase does not appear justified.

The 1990 investigation argued that the port of Come-by-Chance should be viewed separately from the other ports in the St. John's district due to the nature of traffic utilizing the port. This reasoning remains valid and Come-by-Chance should operate at least on a breakeven financial basis. Without the tariff increase, the port risks incurring a loss in 1992. Consequently, the tariff increase at Come-by-Chance appears justified to ensure continued viability.

The port of Halifax continued to generate a profit on pilotage operations from 1989 to 1991. However, the level of profit declined substantially in 1991 and the expected outcome for 1992 in essentially a breakeven financial position if the proposed tariff increase is implemented. Pilot workload at Halifax met the Authority guideline over the 1989 to 1991 period and pilot strength will be reduced by one pilot during 1992. Without the proposed tariff increase, Halifax would likely suffer a substantial loss on operations in 1992. Therefore, the tariff increase appears justified to ensure continued financial viability.

With respect to the port of Saint John, traffic appears to be recovering from a 1990 decline, due to the effects of a longshoremen strike in that year. However, a loss on operations is predicted for 1992. Pilot workload at this port exceeded the Authority standard over the 1989 to 1991 period. The tariff increase at Saint John appears justified to allow the port to attain financial viability.

The ports of Humber Arm, Bay of Exploits, Restigouche and Miramichi generated losses on operations in 1991 while Stephenville generated a small profit. For Miramichi, the Authority reduced the pilot strength from 3 to 2 pilots in 1991 which resulted in an improvement in the financial performance of this port in 1991 over that of 1990. Although the level of traffic at each of these five ports is not large, there is a requirement to maintain the current pilot strength to ensure continuous pilotage services. For this reason, the rate increases at these ports appear to be justified.

For Charlottetown and Pugwash, the services are provided by entrepreneurial pilots whose fees are geared to the level of traffic and average vessel size. In this regard, a rate increase of 12.5 percent was implemented at both ports in early 1991 and traffic and average vessel size increased during the year. These factors combined provided the pilots with a substantive fee increase. The pilotage services at both ports will remain profitable in 1992 without the rate increase. Consequently, there appears to be no economic justification for the 4.7 percent tariff increase at Charlottetown and Pugwash at the present time.

The review of the pilotage operations in the non-compulsory areas showed that these services have and continue to be profitable. The ability to maintain profitability in the non-compulsory areas is related to the manner in which pilots receive payment for assignments. The pilots receive 85 percent of vessel charges after pilot boat and overhead costs have been deducted.

The majority of the assignments in non-compulsory areas are performed by employee pilots on a volunteer basis, hence they receive the majority of fees for such assignments. This means that the employee pilots benefit from rate increases in their collective agreement as well as from rate increases in non-compulsory areas.

The 1992 forecast for the non-compulsory areas shows a profit of about $12,000 on operations with the tariff increase which would be reduced to about $4,000 without the tariff increase. In view of this, there does not appear to be any economic justification for the proposed 8 percent tariff increase for 1992.

The issue of cross-subsidization continues to be a matter of concern to the parties of record in this investigation as it was in the two previous investigations. The Agency indicated in its 1990 decision that ideally the Authority should strive for port-by-port financial self-sufficiency which would lead to the elimination of cross-subsidization but that the initial goal of district financial self-sufficiency would be more appropriate. This reasoning remains valid as a large part of the pilotage services are provided on a district basis with a pool of pilots serving several ports.

Regarding the proposed $15 pilot travel expense charge, the Authority indicated that the charge was designed to recover costs associated with "in area" travel (travel by pilots in a port area and payment of the travel allowance contained in the collective agreement) that the Authority stated were incurred on a regular basis. The Authority has not explained why a separate charge is required at this time, i.e. the Authority has been in existence for 20 years and has now only identified such costs as warranting a separate additional charge. Moreover, the Authority has indicated that "in area" travel costs are in fact different for each port and that the proposed charge was an average. In view of the fact that the use of an average charge would introduce another element of cross-subsidization and that the Authority has not provided sound economic justification for this additional charge, the implementation of such charge does not appear justified.

Regarding overhead expenses, the Authority at present allocates these expenses between ports on the basis of pilotage units. This method has been questioned in previous investigations and the matter has again been raised in the current tariff investigation. While the suggestion has been made that overhead expenses be allocated on the basis of assignments, doing so would introduce a measure of inconsistency in the financial aspects of the pilotage services. If revenue from users of pilotage services is based on their ability to pay, then the allocation of common expenses associated with providing the services should be carried out in a consistent manner.

Regarding the pilot boat replacement fund, until such time as the Authority achieves profitability the issue of setting funds aside for future pilot boat purchases should not be considered. As was indicated in the staff investigation report of July 1990 which was accepted by the Agency in Decision 534-W-1990, there is no convincing evidence that a replacement fund is the best method of making provision for the periodic replacement of pilot boats. Other methods, such as borrowing from financial institutions when required, could be considered.

On the topic of regional self-sufficiency, concerns were expressed related to the ability of the port of Halifax to compete effectively with other ports within the jurisdiction of the Laurentian Pilotage Authority whose operations are heavily subsidized. The Agency notes, however, that each pilotage authority has the responsibility under legislation to operate an efficient pilotage service and has been directed to strive for financial self-sufficiency. When an objection is received by the Agency on a proposed tariff increase, the Agency must conduct its investigation into the proposed increase as it pertains to the operation of that particular authority. The operations of any given pilotage authority are completely different from the operations of another pilotage authority.

With respect to the Wage Restraint Program of the Federal Government, it should be noted that the tariff proposal established by the Authority is related to the cost of pilotage operations and is independent from the policy of the Federal Government with respect to the salary increases for public servants and for this reason has no relevance to the outcome of this investigation.

With respect to the issues raised by Puddister Trading Company Limited concerning the privatization of pilotage services, the use of privately contracted operators on an as required basis, the use of retired pilots or Master Mariners on a casual employment basis and the increase in minimum tonnage of Canadian flag vessels required to use the service of a pilot are all matters which fall under either the jurisdiction of the Authority itself, or Transport Canada which has the responsibility for policy matters related to pilotage services. Therefore, these matters do not come within the scope of an Agency tariff investigation.

RECOMMENDATIONS

The Agency, having carefully investigated the present tariff proposal, recommends to the Authority that:

  1. the proposed rate increase of 4.7 percent at Halifax, Saint John, Come-by-Chance, Humber Arm, Stephenville, Bay of Exploits, Restigouche and Miramichi be implemented as such is not prejudicial to the public interest;

  2. the proposed rate increase of 4.7 percent at Canso, Sydney, Bras d'Or, St. John's, Clarenville, Holyrood, Pugwash and Charlottetown not be implemented as such is prejudicial to the public interest;

  3. the proposed rate increase of 8 percent for all non-compulsory areas within the Atlantic region, excluding Newfoundland and Labrador, not be implemented as such is prejudicial to the public interest; and

  4. the proposed $15 fee for pilot travel expenses not be implemented as such is prejudicial to the public interest.

In addition to the foregoing recommendations, the Agency would like to draw to the attention of the Authority the previously discussed issue of data verification. The Agency is of the view that the voluntary filing of information on a regular and on-going basis would greatly assist in overcoming this problematic aspect of tariff proposal investigations. The Authority is asked to give serious consideration to this suggestion.


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