(a) A pilotage association must report each expense item for which it seeks reimbursement through the charging of pilotage rates, and make supporting information available to the Director. The Director must recognize the item as both necessary for providing pilotage service, and reasonable as to its amount when compared to similar expenses paid by others in the maritime or other comparable industry, or when compared with Internal Revenue Service guidelines. The association will be given an opportunity to contest any preliminary determination that a reported item should not be recognized.

(b) The Director applies the following criteria to recognize an expense item as necessary and reasonable within the meaning of paragraph (a) of this section:

(1) Operating or capital lease costs. Conformity to market rates, or in the absence of a comparable market, conformity to depreciation plus an allowance for return on investment, computed as if the asset had been purchased with equity capital.

(2) Return-on-investment. A market equivalent return-on-investment is allowed for the net capital invested in the association by its members, if that investment is necessary for providing pilotage service.

(3) Transactions not directly related to providing pilotage services. Revenues and expenses generated from these transactions are included in ratemaking calculations as long as the revenues exceed the expenses. If these transactions adversely affect providing pilotage services, the Director may make rate adjustments or take other steps to ensure pilotage service is provided.

(4) Pilot benefits. Association-paid benefits, including medical and pension benefits and profit sharing, are treated as pilot compensation.

(5) Profit sharing for non-pilot association employees. These association expenses are recognizable.

(6) Legal expenses. These association expenses are recognizable except for any and all expenses associated with legal action against the U.S. Coast Guard or its agents in relation to the ratemaking and oversight requirements in 46 U.S.C. 9303,9304.

(7) Apprentice Pilot expenses. The association's expenses for Apprentice Pilots and Apprentice Pilots with Limited Registrations, such as health care, travel expenses, training, and other expenses are recognizable when determined to be necessary and reasonable.

(c) The Director does not recognize the following expense items as necessary and reasonable within the meaning of paragraph (a) of this section:

(1) Unreported or undocumented expenses, and expenses that are not reasonable in their amounts or not reasonably related to providing safe, efficient, and reliable pilotage service;

(2) Revenues and expenses from Canadian pilots that are commingled with revenues and expenses from U.S. pilots;

(3) Lobbying expenses; or

(4) Expenses for personal matters.