(This statement is not part of the Regulations.)

Executive summary

Issue

The Authority has been affected by a steady decline in traffic levels during the past four years while salary increases for its pilots has influenced the costs of its pilotage services. These factors have produced successive losses in revenue during this period despite annual tariff increases, and the Authority has had to rely on external borrowing. The Authority now has an accumulated cash deficit of $3 million, and further external borrowing is not possible. Without an increase in tariffs, the deficit would increase to approximately $4.3 million at the end of the 2009 navigational season.

The proposed amendment to the Great Lakes Pilotage Tariff Regulations (the Regulations) is intended to allow the Authority to operate on a self-sustaining financial basis. The temporary surcharge, when combined with the tariff increase brought into effect by SOR/2008-179 on January 1, 2009, is intended to realize a positive cash flow at the end of 2009. This positive cash flow will ensure that the costs for the Authority’s pilotage services in 2009 are fully covered and the remaining funds are allocated to reducing its deficit. These financial initiatives involved extensive consultation and discussion with the marine industry and other key stakeholders operating within the Great Lakes region.

Objectives

The Authority is responsible for administering, in the interests of safety, an efficient pilotage service within Canadian waters in the province of Quebec, south of the northern entrance to Saint-Lambert Lock and in and around the provinces of Ontario and Manitoba. The Authority is required to prescribe tariffs of pilotage charges that are fair and reasonable and consistent with providing revenues sufficient to allow the Authority to operate on a self-sustaining financial basis. Mindful of the present economic situation, its clients and its Board, the Authority strives to be financially self-sufficient. In addition, Treasury Board and the Office of the Auditor General in its Special Audit Report of April 2008 require the Authority to take appropriate measures to be financially self-sufficient and to eliminate its deficit within the next five years. The Authority is consequently supplementing its 2009 tariff increase (SOR/2008-179) with a temporary 6% surcharge on all pilotage invoices for the year 2009. These financial initiatives are intended to ensure that the Authority has a positive cash flow that will fully cover the costs of pilotage services to its clients and provide funding to reduce its accumulated $3-million deficit while continuing to provide a safe and efficient pilotage service in accordance with the Pilotage Act (the Act).

Description

The Authority is proposing to implement a temporary 6% surcharge on all its pilotage invoices for the year 2009. This proposed surcharge, however, was calculated on a 2008 base rate that will, in effect, result in a temporary 4% surcharge compared to the current rates charged by the Authority, and would expire on December 31, 2009. When combined with the 4% tariff increase that came into effect on January 1, 2009 (SOR/2008-179), the net effect of these two tariff initiatives will amount to an overall increase of 8%. To avoid confusion and in the interest of clarity, since the 6% surcharge was calculated on a 2008 base rate, it will henceforth be referred to as an overall 4% temporary surcharge.

Regulatory and non-regulatory options considered

Retention of the existing tariff rates was a possible option. The Authority, however, rejected this status quo position since it has an accumulated deficit of $3 million and must take measures to ensure its financial self-sufficiency and reduce its deficit. The Authority has incurred successive losses during the past four years and has had to rely on external borrowing. In accordance with the Special Audit Report of April 2008, the Authority is required to be financially self-sufficient and eliminate its deficit by 2013; so further external borrowing is not a realistic option.

Since the decision was taken to approve the 4% tariff increases for the years 2008 and 2009 (SOR/2008-179), the Authority’s operating costs have increased due to pilots’ salaries while its revenues have fallen based on declining traffic levels. During this period, the Authority has taken steps to keep its administrative costs at the lowest possible level. Over 90% of the Authority’s expenses are on pilot salaries and direct operating expenses and less than 10% are on administrative overheads.

The personnel at headquarters includes ten administrative officers and staff and also eight full-time dispatchers. This number is essential to administer and maintain an efficient pilotage service from Saint-Lambert Lock (Montréal) to Thunder Bay, including multiple ports within the Great Lakes and the St. Lawrence region. As part of its cost-cutting measures to generate savings in 2009, the Authority is reducing two pilot positions by means of an early retirement incentive program for senior pilots. In addition, it is deferring pilot training and development, deferring staff / management professional development, limiting salary increases and reducing travel and maintenance costs. These measures are expected to create savings of approximately $575,000 and will have contributed substantially to keeping the proposed tariff increases as low as possible.

Benefits and costs

The 4% tariff increase brought into effect by SOR/2008-179 on January 1, 2009, is expected to generate approximately $615,000 at the end of 2009. The proposed overall 4% temporary surcharge will generate approximately $930,000. For an average-sized ship transiting the Seaway between Saint-Lambert Lock (Montréal) and Toronto, the current pilotage charge is $11,703 for a one-way trip. Taking into account the 4% tariff increase for 2009 plus the proposed overall 4% temporary surcharge, it will cost the shipowner an additional $947. For a round trip, the above charges would be doubled.

It is anticipated that the combination of these two financial initiatives will provide the Authority with a positive cash flow at the end of the year. This positive cash flow will ensure the Authority’s self-sufficiency for 2009 and provide additional funding of approximately $480,000 that will be allocated to reducing its deficit. The Authority’s savings due to its cost-cutting measures will also have a positive impact on its revenue for 2009.

There are presently fewer than 20 companies operating foreign-flag ships within the Great Lakes that employ Authority pilots. For a foreign-flag ship transiting the Great Lakes, its total pilotage costs would represent approximately 3% of its total operating costs. The increase in pilotage costs attributed to the 4% tariff increase (SOR/2008-179) and the proposed overall 4% temporary surcharge will represent approximately 0.25% of a ship’s total operating costs.

The Authority’s pilotage costs are approximately 10% less per mile transited with respect to other Canadian pilotage organizations while it provides a safe and efficient pilotage service through multiple Seaway locks and miles of narrow congested waters.

In certain districts within the Authority’s jurisdiction, pilotage is shared equally between Canadian and U.S. pilots on a turn-about basis. The Authority and its U.S. counterpart regularly exchange information concerning pilotage rates. The U.S. pilotage authority intends to increase its tariff rates by 20% in February 2009 to cover its losses due to the 15% reduction in traffic during 2008. The Authority’s rates will be approximately 25% lower than those of its U.S. counterpart due to the exchange evaluation as well as the higher U.S. tariff increase. Although the 4% tariff increase for 2009 (SOR/2008-179) and the proposed overall 4% temporary surcharge provides Canada with a financial competitive advantage, the impact on international competitiveness is negated by operational principles since pilotage services are shared equally between both countries on a turn-about basis.

The 4% tariff increase for 2009 (SOR/2008-179), the proposed overall 4% temporary surcharge and the savings taken by the Authority are beneficial in that they will enhance its ability to operate on a self-sustaining financial basis that is both fair and reasonable, while repaying its deficit in accordance with the Special Audit Report of April 2008. These 2009 charges are also beneficial in that the Authority can continue to provide a safe and efficient pilotage service in accordance with the requirements of the Act.

Strategic environmental analysis

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals of 1999 and the Transport Canada Policy Statement on Strategic Environmental Assessment, a strategic environmental assessment of these amendments was conducted in the form of a preliminary scan. The strategic environmental assessment concluded that the amendments are not likely to have important environmental effects.

Consultation

The Authority met with representatives from the Shipping Federation of Canada on October 30, 2008, to discuss traffic levels and present its financial position. The Authority introduced an amendment providing for a 6% tariff increase and a temporary 2% surcharge for 2009 in order to ensure its financial self-sufficiency and reduce its $3-million deficit. The Authority also consulted with the Canadian Shipowners Association and the Chamber of Maritime Commerce on November 12, 2008, to introduce and discuss the same amendments as were tabled at the Shipping Federation of Canada meeting. During this period, the Authority also circulated its proposed amendments to various port and Seaway authorities and other key stakeholders to solicit their comments. On December 4, 2008, the Authority was reminded by its Board of the directive from Treasury Board and the Auditor General of Canada addressing its need to operate on a self-sustaining financial basis and to eliminate its deficit within the next five years.

At subsequent meetings with the Shipping Federation of Canada, the Canadian Shipowners Association and the Chamber of Maritime Commerce, their representatives indicated that they did not support the initial amendments proposed by the Authority. Following considerable deliberation and further consultation amongst themselves, they proposed an overall 4% temporary surcharge. This adjusted proposal, due to terminate on December 31, 2009, was then circulated to all members of these organizations and all other key stakeholders for their input and comments.

Based on the active participation and input, during the consultative process, of the Shipping Federation of Canada, the Canadian Shipowners Association and the Chamber of Maritime Commerce, and the lack of further response from these representatives and other key stakeholders, the Authority is of the opinion that the marine industry generally accepts that the proposed overall 4% temporary surcharge is fair and reasonable.

Implementation, enforcement and service standards

Section 45 of the Act provides an enforcement mechanism for these Regulations in that a Pilotage Authority can inform a customs officer at any port in Canada to withhold clearance from any ship for which pilotage charges are outstanding and unpaid. Section 48 of the Act stipulates that every person who fails to comply with the Act or Regulations is guilty of an offence and liable on summary conviction to a fine not exceeding $5,000.

Mr. R. F. Lemire
Chief Executive Officer
Great Lakes Pilotage Authority
P.O. Box 95
Cornwall, Ontario
K6H 5R9
Telephone: 613-933-2991
Fax: 613-932-3793

PROPOSED REGULATORY TEXT