Reforms Separating Ratemaking from Safety Issues and Standardizing Tariff Adoption Processes are Improving the Regulation of West Coast Pilotage

Captain Mike Moore, Vice President & Mike Jacob, Vice President and Counsel

This month, the Washington State Utilities and Transportation Commission (WUTC) issued an Order in a rate case for the Puget Sound Pilots (PSP). The WUTC was responding to a petition by PSP for a tariff increase of $15 million or 42.3% to pay for more pilots than are actually licensed, run-away expenses, and to provide more than $605,000 per pilot in net income plus medical insurance.

The WUTC denied the PSP proposal. However, it did nevertheless choose to increase the tariff to fund additional pilots and provided for an inflation- adjusted increase to pilot income levels. For context, the targeted total revenue in the Order is $5.6 million more than the highest level set in the WUTC’s 2020 Order and will require tariff rate increases of more than 18%.

And, as representatives of the industry ratepayers vigorously fighting to ensure safety while keeping costs down amidst fierce competition for discretionary West Coast cargo, PMSA will not be contesting the award.

Why not? While we feel that some of the increase is excessive and unjustified, it was nonetheless based on the logical application of facts produced by a vigorously litigated hearing process before an independent panel of three rate-setting professionals and an Administrative Law Judge. This process resulted in a well-reasoned 119-page Final Order , accompanied by 37 conclusions of law and 42 findings of fact, some of which benefitted pilots and some which benefited ratepayers. In short: it was the product of a fair, honest, apolitical, and impartial conclusion.

This was just the second tariff-setting process in front of the WUTC since a set of reforms were adopted by the Washington State Legislature in 2018. Prior to these reforms, the Washington State Board of Pilotage Commissioners (BPC) handled both the economic regulation of pilotage – ratesetting – and the safety regulation of pilotage – training, licensing, and discipline of pilots. This co-mingling of safety and economic regulation was criticized in a report done for the Washington State Legislature in 2018 as a system which “lacks methodological structure” and “serves as a distraction and limits discussion on other important items under BPC jurisdiction, such as safety.” The 2018 reforms were based on this report and were supported by both the pilots and industry. Ultimately, the BPC kept its jurisdiction over the licensing and training issues that it had expertise in, and rate-making and tariff-setting was transferred to the independent WUTC to administer with an Administrative Law Judge process. Since these reforms were adopted, the BPC has been able to focus exclusively on safety while the WUTC focuses exclusively on rates and the economic regulation of the pilotage monopoly.

Last year, PMSA and the San Francisco Bar Pilots (SFBP) crafted a similar compromise measure to the one exercised in Washington state. The California State Board of Pilot Commissioners (BOPC) system was very similar to Washington’s original system. And while the California BOPC did not set rates directly, it had the sole jurisdiction to hold hearings on rates and made recommendations to the State Legislature for potential rate changes, in addition to handling licensing, training, and discipline. Additionally, California’s BOPC has been on the national forefront of several new pilot regulations for fatigue management, medical and physical reviews, and navigation technology. A central hallmark of the pilot and ratepayer compromise, which was also negotiated with representatives from the cruise and tanker industries in California, is a process very similar to Washington’s: all ratemaking decisions will now be made by an independent Administrative Law Judge and substantively divorced from the day-to-day licensing, training, and disciplinary functions of the state BOPC.

With these two reforms, the U.S. West Coast has successfully standardized and institutionalized all of its pilotage systems such that the public tariffs and rate- setting processes are independent of the core safety systems and licensing missions of the organizations that manage pilots. In Southern California, with municipal pilots at the Port of Los Angeles, and independent contractor pilots operating under a set Port tariff in the Ports of Long Beach, Port Hueneme, and San Diego, this has always been the case.

This development is good for pilots and for the vessels that rely on pilotage services to provide safe, efficient, and reliable services. This is true because these pilotage systems are standardized independent rate-setting systems which are “cost-plus,” meaning that they are directly based on providing a rate which reimburses the service provider pilots with their justifiable and necessary costs plus a reasonable rate of return, just as if they had been participants in a competitive market. Rates based on essential cost causation is legally sound, logical and fair.

And, in exchange for the right to control this business without competition, the pilot monopolies are obligated by law to provide a safe, rested, efficient, regular, and uninterrupted pilotage service to all prospective vessel customers at the lawfully mandated rates. This also requires the pilots to be adequately staffed, but in order to maximize revenues and profits per pilot they must also manage the number of licensees to avoid excessive labor overhead and to eliminate unnecessary expenses. These pressures have created incentives for other pilotage grounds to be prudent managers of their costs and to avoid over-staffing their pilotage corps. As a result, we do not have over-staffing issues in Long Beach, Los Angeles, Port Hueneme, San Diego or San Francisco. These systems align the interests of pilots and their customers, as it provides pilots with the incentive to safely work more because they earn more, and conversely if pilots work less they earn less. Proper incentive and disincentives promote better overall system efficiency including more effective pilot dispatching. In the Puget Sound, part of PSP’s rate- setting strategies at the BPC were seemingly based on seeking increases in the number of pilots and hope for higher tariffs to cover these extra licensees, but under the new WUTC system that should no longer be an attractive approach, especially given the decreasing overall workload and revenues being experienced now in the pacific northwest.

There is no perfect rate-setting process for pilots, but before the Washington and California reforms were put into place the pilotage hearing processes for both the BPC and BOPC were distracting at best and the wild, wild West at worst. At times the rate hearings themselves more resembled auctions with bids being made by competing parties than the well-reasoned, arm’s-length, objective deliberations coupled with analysis one might expect from an independent state commission. And the contentious, and often excessively-political aspects of pilot rate- setting would not only consume the state board’s time and attention, but it would discourage people who really cared about the core pilotage issues of safety, training, and licensing from becoming engaged as volunteers for these state agencies.

Ultimately, we are very proud of the progress that we have made in the last several years to get consensus with state agencies, legislatures, and our pilot stakeholders on the need for systemic improvements to pilotage and to bring these systems into the 21st century. While we might not always agree on what constitutes a good rate for pilotage services, we look forward to having a fair forum, fair litigation, and collegial approaches to setting the costs of the pilotage system. These improvements should, in turn, allow our state licensing boards to focus on what they do best – recruit, train, and license pilots which have maintained impeccable safety records on the West Coast – without having these important goals compromised or undermined by debates about expenses or pilot income.