STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

THE CITIZENS OF THE STATE OF ) FLORIDA, )

)

Petitioner, )

)

vs. ) CASE NO. 92-5717RP

)

PUBLIC SERVICE COMMISSION, )

)

Respondent. )

)

FINAL ORDER

This matter was heard by William R. Dorsey, Jr., the Hearing Officer designated by the Division of Administrative Hearings, on November 9, 1992, in Tallahassee, Florida.

APPEARANCES

For Petitioner: H. F. Mann, II, Esquire

Office of the Public Counsel

111 West Madison Street, Room 812 Tallahassee, Florida 32399-1400

For Respondent: Marsha E. Rule, Esquire

Division of Legal Services Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32399-0863

STATEMENT OF THE ISSUE

The issue is whether proposed rule 25-14.031 of the Public Service Commission constitutes an invalid exercise of delegated legislative authority.

PRELIMINARY STATEMENT

The Florida Public Service Commission filed notice in the September 3, 1992 edition of the Florida Administrative Weekly of its intention to adopt proposed rule 25-14.012, which would govern the manner in which regulated utilities must account for employees' postretirement benefits other than pensions. It did so under its statutory authority to set rates which allow regulated utilities sufficient revenue to recover prudently incurred costs of providing utility service, and a fair rate of return on the utilities' rate base.

Among the costs of providing utility service are personnel costs, which include not only current payroll, but future benefits such as pension benefits, and other postemployment benefits (OPEBs). Until the publication of the proposed rule, the Commission has handled treatment of the cost for OPEBs on a case-by-case basis in individual rate cases.

The rule proposed by the Commission defines postretirement benefits other than pensions by adopting the definition of those benefits found in Statement of Financial Accounting Standards No. 106 of the Financial Accounting Standards Board (FAS 106 or Standard 106), and requires all utilities to use the definition of those benefits and to account for their costs in the manner set out in FAS 106. The rule also prescribes the accounting treatment for unfunded accumulated postretirement benefit obligations. The rule prohibits a utility from including that unfunded liability in its rate base.

Through the Office of the Public Counsel, The Citizens of the State of Florida (Citizens) filed a request for determination of the invalidity of the proposed rule on September 23, 1992, arguing that proposed rule 25-14.012 is an invalid exercise of delegated legislative authority for three reasons. Citizens contend: (1) through the rule the Commission abdicates its statutory regulatory duty to set fair, just, compensable and nondiscriminatory rates to the Financial Accounting Standards Board, which is a private, nongovernmental entity; (2) the Commission has not adopted FAS 106 as of a certain date, and thus attempts to incorporate by reference future amendments to this standard promulgated by the Financial Accounting Standards Board, and (3) the rule lacks adequate standards to guide the Commission in its rate-making decisions, thereby vesting unbridled discretion in the Commission and permitting arbitrary and capricious action.

The Commission filed a Motion To Dismiss, which was denied in an Order dated October 7, 1992; on that same date, a Notice Of Hearing was entered setting the final hearing for November 9, 1992.

Citizens moved to amend their petition on October 8, 1992, and the Commission objected in a response filed on October 14, 1992. Citizens were granted leave to amend their petition on October 15, 1992. The hearing went forward on the amended petition. At the hearing, Citizens withdrew their challenge to the economic impact statement which the Commission had prepared to accompany the proposed rule (Tr. 103). Citizens presented the testimony of Victoria Montanaro and offered exhibit 1 into evidence, which was received. The Commission called Deborah K. Flannagan as a witness, and its exhibits 1 through

5 were received in evidence. Both Ms. Montanaro and Ms. Flannagan are certified public accountants and both were accepted as expert witnesses in regulatory matters and in the application and interpretation of FAS 106. A transcript of hearing was filed on November 20, 1992. At the request of the parties they were granted until January 15, 1993, in which to file proposed final orders. Rulings on each proposed findings of fact has been made either directly in this Final Order or in the accompanying Appendix.

FINDINGS OF FACT

Background

1. The Public Service Commission (Commission) proposed rule 25-14.102, Florida Administrative Code, governing accounting for other postretirement benefits (OPEBs), by publication in the Florida Administrative Weekly. The Citizens of the State of Florida (Citizens) filed a timely challenge to that proposed rule, and they have standing to bring the challenge.

   
   

2. The proposed rule applies to utilities regulated by the Commission under Chapters 364, 366 and 367, Florida Statutes (1991), which include telecommunications companies, investor-owned electric and gas utilities, and

   water and wastewater utilities. No specific statute requires that a regulated utility use the accrual accounting method for OPEBs.

   
   

3. Section (1) of the proposed rule defines postretirement benefits other than pensions, and prescribes the sole acceptable method for measuring and recognizing the employer's accumulated postretirement benefit obligation.1 Under Section (2), utilities must account for the cost of such benefits in the

   manner required by Statement of Financial Accounting Standards No. 106, entitled "Employers' Accounting For Postretirement Benefits Other Than Pensions" published by the Financial Accounting Standards Board in December 1990, and they are prohibited from using deferral accounting under Statement of Financial Accounting Standards No. 71 (Accounting for the Effects of Certain Types of Regulation) for these benefits unless the utility obtains prior approval from the Commission. Section (3) specifies that unfunded accumulated postretirement benefit obligations will be treated as a reduction to rate base in Commission rate proceedings. This means a utility is not entitled to earn a return on an amount equal to the accumulated postretirement benefit obligation recognized on its financial statement which the utility has not actually funded. This can be done by treating the unfunded obligation as a reduction to the utility's working capital by adding it to current liabilities. Section (3) also makes explicit that if the Commission disallows a specific OPEB expense, the cost of that disallowed expense does not reduce the utility's rate base.

   
   

   The Board and its Standards

   
   

4. The Financial Accounting Standards Board is the authoritative body which promulgates standards of financial accounting for the accounting profession. It was organized in 1972 as the successor to the Accounting Principles Board. The Board derives its authority through Rule 203 of the Code of Professional Ethics of the American Institute of Certified Public Accountants. Its pronouncements are an important source of what are known as "generally accepted accounting principles." These principles are concerned with both measurement and disclosure. Measurement principles determine the timing and amounts of items which enter the accounting cycle and have an impact on financial statements. They are quantitative standards which require numerically precise answers to problems and activities which may be subject to substantial uncertainty. Disclosure principles deal with factors which may not be numerical. They compliment measurement standards by explaining the standards and giving other information on accounting policies, contingencies and uncertainties which are essential ingredients in the analytical process of accounting. Generally accepted accounting principles thus include the measurement of economic activity, the time when such measurements are made and recorded, disclosures surrounding these activities, and the preparation and presentation of summarized economic activities found in financial statements. Complicated business activities often give rise to complex accounting principles. The Board has issued 110 Statements on Financial Accounting Standards to date, issued Interpretations and Technical Bulletins, and devoted substantial time and resources to development of a Conceptual Framework for Financial Accounting.

   
   

5. Once adopted by the Financial Accounting Standards Board, the text of numbered financial accounting standards are not amended. If, for some reason, the Board wished to change the accounting treatment required by a Financial Accounting Standard, a new standard bearing a new number would be adopted. Under current practice of the Financial Accounting Standard Board, the Commission's adoption of FAS 106 is not an attempt to currently adopt future

   changes to FAS 106, for there will be none. Moreover, the language of section

   (1) of the proposed rule adopts the Standard as promulgated in December 1990.

   
   

6. Standard 106, which the proposed rule would adopt, is not solely applicable to utilities, but is part of generally accepted accounting principles applicable to all business enterprises. Standard 106 sets measurement and disclosure standards for the manner in which postretirement benefits other than pensions are treated in external financial statements. Standard 106 itself consists of 38 pages of black letter text, and is supplemented with appendices which include a comparison of accounting for other postemployment benefits with accounting for pensions; illustrations; background information concerning considerations which were the basis for the conclusions reached in Standard 106 which are an integral part of the Standard; and a glossary (Commission composite Exhibit 1, at tab 2). The Standard treats OPEBs as a form of deferred compensation and requires accrual accounting. Expected postretirement costs are to be attributed to the period when an employee renders services. The Standard prescribes a uniform methodology for measuring and recognizing the employer's accumulated postretirement benefit obligation.

   
   

7. The Standard applies to all postretirement benefits, and benefits payable to disabled workers. The benefits encompassed include tuition assistance, legal services, day care, housing subsidies, and other benefits. The most significant one is postretirement health care. Benefits most often depend on a formula established by the employer, using factors such as years of service, or compensation before retirement. These benefits may be available to current employees, former employees, beneficiaries such as spouses and to persons dependent on the retiree. The Standard focuses on the substantive benefit plan--the one employees understand based on past practice or by the employer's communication of intended plan changes. This is usually the same as the employer's current benefit plan, but if the written plan and practice differ, practice controls.

   
   

8. Using the substantive benefit plan, the Standard attempts to account for the exchange between employers who provide OPEBs and employees whose services are provided at least in part to obtain these OPEBs. Standard 106 requires that the employer's liability be fully accrued when the employee is fully eligible for all expected benefits, even if the employee continues to work, since the employee has already provided the service which has earned the benefits. The costs are attributed in equal amounts (unless the plan text loads a disproportionate share of benefits in early years of employment) over the period from initial employment until the employee attains full eligibility for all benefits.

   
   

9. The basic tenet of FAS 106 is that while it requires the use of some variables that are difficult to measure, recognition and measurement of the overall liability of the employer to provide OPEBs is best done through accrual accounting. The use of estimates is superior to implying, by failure to accrue, that no cost or obligation exists prior to the actual cash payment of benefits to retirees.

   
   

10. The Financial Accounting Standards Board began work on accounting for OPEBs in 1979, as part of an ongoing project on accounting for pensions. By 1984, the Board decided to separate out accounting for OPEBs as a separate project. In April 1987 the Board issued, as an interim measure, its Technical Bulletin No. 87-1, Accounting For A Change In Method Of Accounting For Certain Postretirement Benefits. Standard 106 amends another, older source of generally accepted accounting principles, Opinion 12 of the Accounting Principles Board of

    the American Institute of Certified Public Accountants, a predecessor to the Financial Accounting Standards Board. The amendment is effective for fiscal years beginning after March 15, 1991. Portions of Standard 106, which are wholly new and not an amendment to APB 12, are effective for fiscal years beginning after December 15, 1992. Standard 106 shares with other accounting standards a salient characteristic of pension accounting--delayed recognition. Changes are not made immediately, but are recognized in a gradual and systematic way. This is why there is a transition obligation in Standard 106. The employer's accumulated postretirement benefit obligation for benefits attributable to the period before Standard 106 became effective is recognized on a delayed basis. The recognition period used must result in recognition of the accumulated obligation at least as rapidly as it would be recognized on a "pay- as-you-go" or cash basis. Until a utility actually recognizes a portion of its accumulated postretirement benefit obligation, that portion of the obligation plays no part in setting the utility's rates.

    
    

11. The Standard requires the use of some assumptions, i.e., the estimates about the occurrence of future events, such as plan continuity. Continuity of the substantive plan for OPEBs is presumed in the absence of evidence to the contrary. Actuarial assumptions are also required, such as retirement age, salary progression in pay-related benefit plans, the probability of payment based on employee turnover, mortality and dependency status. When discount rates are used in present value calculations required by the Standard, they are to be based on current interest rates, as of the measurement date, for high quality fixed income investments with similar face amounts and maturities at which the postretirement benefit obligations could be settled. Present value factors for health care benefits require consideration of cost trend rates, medicare reimbursement rates and per capita claims cost by age.

    
    

12. Standard 106 requires companies to recognize and account for the cost of OPEBs during the time period in which employees earn those benefits. Companies have generally recognized the expense of OPEBs on their financial statements only as those benefits were paid out to retired employees rather than accruing a liability for those future payments as they were earned by employees (the "accrual method"). The pay-as-you-go method was acceptable when OPEB expenses were small, but those expenses are now so significant that the Financial Accounting Standards Board has determined that the pay-as-you-go method of accounting distorts financial statements and is inappropriate.

    
    

13. The utility rate payers pay the cost of OPEBs and other expenses in their utility rates. Recognition of OPEB expenses under the pay-as-you-go method causes current utility rate payers to fund benefits paid to retired utility employees. After the transition period, the implementation of accrual accounting for OPEBs will match employees' OPEB expenses solely with the group of rate payers who actually benefit from service from those employees.

    
    

14. The accrual accounting method also contributes to containment of health care costs, since utilities must currently measure the value of the benefits promised in the future and also book a liability for those future health care costs attributable to all employees, not just retired employees.

    
    

    Other accrual requirements of the Commission

    
    

15. The Commission already requires utilities to use accrual accounting for other significant expenses. Utilities accrue depreciation expenses after their initial cash outlay for plant so that the cost of construction is paid over the useful life of the plant by rate payers who receive service from that

    plant, rather than from rate payers who happened to be using the system during the period in which the plant was constructed and the construction cost incurred. These expenses do not represent actual cash outlays. As is typical of depreciation, these non-cash expenses are not matched with deposits in internal or external accounts to provide a fund out of which to build new plants as current plants are retired. Rather, depreciation expenses recovered in utility rates become an additional source of cash, which is matched by a corresponding decrease in the value of plant on which a utility earns a rate of return.

    
    

16. Utilities accrue nuclear decommissioning expenses before those expenses actually become current cash outlays. Through this method, rate payers who have received the benefit of power produced at a nuclear plant pay an estimated portion of the eventual dismantlement cost of the plant in each of the years during which the plant is actually in service. Unlike depreciation, the Commission requires that these expenses be funded currently, because the cost of closure of nuclear plants will be large--perhaps hundreds of millions of dollars in a one-year period. It could be difficult or impossible for a utility to raise such amounts in the capital markets at the time they are needed.

    
    

17. Requiring accrual accounting treatment for OPEB expenses is consistent with existing Commission policy for the treatment of these other large expenses.

    
    

    Commission policy development

    
    

18. Before this rule was proposed, the Commission was developing a policy on proper accounting for OPEB expenses in utility rate hearings conducted under Section 120.57, Florida Statutes. In rate cases for Centel and Gulf Power Corporation, the Commission required the use of accrual accounting for OPEBs. In the latest rate case for Florida Power Corporation, Final Order PSC-92-1197- FOF-EI entered October 22, 1992, the Commission ordered the utility to adopt accrual accounting for OPEB expenses under FAS 106 (Commission Exhibit 2 at 67, paragraph Z). In the latest rate case for United Telephone Company of Florida, Final Order PSC-92-0708-FOF-TL, the Commission also ordered that utility to adopt accrual accounting for OPEBs under FAS 106 (Commission Exhibit 3 at 34, paragraph VII.C.1.)

    
    

19. In none of these cases did the Commission take the position that the use of accrual accounting under FAS 106 automatically required Commission approval of all expenses shown by the utilities as OPEB expenses in their rate filings with the Commission.

    
    

20. The proposed rule instructs utilities how to prepare their accounting information for Commission review. The rule's text does not require the Commission to allow recovery of all costs presented for review in each rate case. A utility recovers accrued OPEB expenses through rates only when the Commission takes action to change rates, and that action always takes place in the context of a rate case which is subject to a Section 120.57(1) evidentiary hearing.

    
    

21. In a rate case, the Commission will review the utility's accrual for OPEB expenses, and has the authority to disallow any expense which the Commission finds imprudently incurred, unreasonable in amount, or not related to providing utility service. Adoption of FAS 106 does not limit the Commission's ability to adjust expenses claimed by utilities. The Commission has recognized in the Economic Impact Statement for the proposed rule that intervenors can

    challenge a utility's actuarial assumptions, discount rates, benefit levels, cost containment efforts, or other accruals in rate hearings (Commission Composite Exhibit 1, tab 3, EIS at page 5).

    
    

22. The proposed rule represents a policy decision made by the Commission, which is consistent with the conclusion reached by the Financial Accounting Standards Board, that accrual accounting under FAS 106 is the most appropriate method to account for OPEB expenses.

    
    

    Impermissible Assumptions?

    
    

23. Citizens object that the rule provides vague guidance to utilities about what should be included in the calculation of OPEB expenses, but sets no specific formula for expense calculations so that two companies would apply a formula and arrive at the same result if they were providing similar benefits. Under FAS 106 the utilities must make estimates and assumptions, and the manner in which they are used can affect the final benefit cost used in rate setting.

    
    

24. Under the proposed rule, the utilities are not required to fund the accumulated postretirement benefit obligation, which is an expense, with an internal or external account. Just as depreciation expenses result in a write- down of the value of the depreciated asset, so that the utility earns a rate of return only on the depreciated asset value, any unfunded accumulated postretirement benefit expense allowed by the Commission reduces the utility's rate base so no return is earned on that amount. This can be done as a reduction to the utility's working capital, by treating any portion of the accumulated postretirement benefit obligation which has been allowed but not actually funded by the utility as a current liability. For some utilities, such as water and sewer utilities, the regulatory accounting derives working capital in an unusual way--i.e., by computing one eighth of the operation and maintenance expense rather than subtracting current liabilities from current assets (Tr. 118). For these utilities, the reduction to rate base will have to be accomplished in some other way. If a specific OPEB expense for retirees is disallowed by the Commission (e.g., dental coverage for retirees) the utility does not recover that expense in its rate base. Concomitantly the disallowed expense does not become a reduction to rate base [Tr. 151, proposed rule section (3)].

1. The Substantive Benefit Plan.

25. The first assumption a utility must make concerns the substantive content of the future benefit plan. Standard 106 requires a utility to assume that its current written benefit plan will be the plan in effect throughout the time used to calculate benefits for employees who will retire in the future. The utility may deviate from this written plan if it has communicated to its employees that their postretirement benefits will be something other than what is found in its current plan. Standard 106 requires the utility to decide whether it has communicated something other than its current plan to its employees and if so, what that plan is. The substantive plan must be disclosed in the utility's filings with the Commission [Standard 106, paragraph 74(a)]. The witness for the Citizens has reviewed benefit plans for nine utilities, and found that although they are quite detailed, all contain language which permits the utility to modify, amend, withdraw, or terminate benefits. This does not invalidate the proposed rule. Assumptions must necessarily be made today about benefits payable in the future. The Commission retains the authority to review the explicit assumptions the utility makes about the future content of its benefit plans when evaluating a utility's current OPEB expense. The disclosure

requirement will draw attention to the utility's choices, which the Commission can review. Significant matters which must be disclosed include any changes in cost-sharing provisions between the utility and retirees in the form of co- payments or deductibles, changes in monetary benefits, changes in employees covered or types of benefits provided, or the utility's funding policy for its allowed OPEB expenses.

2. Transition obligation and amortization period.

26. Standard 106 also permits utilities to make assumptions and requires disclosures about their transition obligation and amortization period. The transition obligation is one of six cost components that a utility may include in the calculation of postemployment benefits under FAS 106. The transition obligation attempts to quantify and recognize the employer's liability for benefits that employees accrued or earned before accruals for OPEB expenses became mandatory. It attempts to recognize prior period costs, and to include those costs on the utilities' financial statements. The amortization period for the transition obligation is not a set number of years, FAS 106 allows the utilities a range of choices. Prior period costs can be immediately recognized in the first year FAS 106 is effective, or amortized over the average service life of employees, or over some set number of years. The amortization period may be anywhere from one to twenty years for a particular utility, but cannot be slower than the recognition of the obligation on a pay-as-you-go or cash basis. The shorter the amortization period, the higher the annual cost that will be recognized currently. Rate payers in those years covered by the amortization period will pay for a portion of the prior period costs in each of those years. Thus, if a ten-year period is used, the rate payers for the next ten years will be charged currently for benefits to be paid in the future to employees, which benefits were earned before the accrual method of accounting for OPEBs was required by FAS 106, in addition to accruals for current employees. Standard 106, paragraph 74 (b) includes required disclosures about amortization of unrecognized transition obligations.

3. Attribution period.

27. The Standard also requires the utilities to compute an attribution period, which measures the timing of an employee's eligibility for benefits, and attributes the benefit earned by the employee to that period. For example, if the utility's substantive plan promises employees that they will receive OPEB benefits once they reach the age of 55 if they also have five years of service with the utility, then the utility must accrue the full liability associated with the total cost of that employee's OPEBs by the time the employee reaches age 55 and has five years of service, even though the employee may continue to work beyond that time. Standard 106 does not require the utility's substantive plan to contain any specific attribution period. This permits utilities with otherwise similar circumstances but different substantive plans to have an attribution period of "55 years old with ten years of service" while another may select a period of "55 years old and five years of service." Because the second utility promises the employees benefits in a shorter period of time, the annual cost, which is recovered from the rate payers, will be greater under FAS 106 for the second utility than for the first. The terms of the substantive plan control because it is the best evidence of the exchange transaction between employer and employee.

4. Marital and Dependent Status.

28. The Standard also directs the utility to develop an explicit assumption about its employees' marital status and number of covered dependents on retirement. This is important because substantive plan provisions which entitle a spouse or dependents to health care or other welfare benefits substantially increase the employer's cost and obligation for postretirement benefits. Utilities historically have used differing assumptions about these matters. These factors can be determined based on the actual experience of each utility, and may vary from utility to utility.

5. Discount Rate.

29. A discount rate is applied to a company's calculated future postretirement benefit liability in order to discount that amount back to a present value. The liability for OPEB expenses for the period prior to the adoption of FAS 106 is amortized. In other words, the discount rate is used to calculate a present value of the utility's transition obligation. The selection of a discount rate is initially left to the utility. The discount rates used by business enterprises have varied. Since a difference in the discount rate selected could result in approximately a ten percent difference in the utilities' annual expense for OPEBs, two different utilities, in similar circumstances and with similar customer bases in geographic proximity to one another could use different discount rates, and generate different expenses for similar OPEBs. Discount rates are, however, to be chosen based on the interest rates paid, as of the measurement date, on high grade investment securities that have cash flows matching the timing and amount of benefit payments due to employees. The variability should be minor from utility to utility if the measurement dates involved are similar and the timing and amounts of benefits due are similar. The weighted-average of assumed discount rates used to measure the accumulated postretirement benefit obligation must be disclosed. Standard 106, paragraph 74(e).

6. Future Medical Expenses.

1. Standard 106 requires utilities to measure expected postretirement benefit obligations for health care benefits by making explicit assumptions about the timing and amount of these benefits payable to plan participants in the future. Recent medical claims costs in the geographic area are useful in making estimates of assumed per capita claims cost by age from the earliest date benefits could be due to a participant through the longest life expectancy of participants. Utilities must also calculate their best estimate of the projected medical inflation trend far into the future. The FAS 106 does not require or even suggest a specific time frame that the utilities' estimated trend rate is to encompass. There are a number of indices currently used to evaluate medical inflation which could be used, such as the National Hospital Input Price Index, or a utility could develop a Florida hospital input price index. Some indices show medical inflation trend rates as high as 21 percent, others are as low as 13 percent. The effect of a one percent change in the medical inflation trend can result in a change of 15 to 19 percent in the utilities' current expense level, to be charged to current rate payers. Over time it should be possible to use claims cost data specific to each utility, based on 1) current medical care utilization and delivery patterns, 2) evidence of the health status of covered employees, and 3) the location of employees, to project costs specifically for the Florida markets where retirees reside. More art than science is inherent in factoring in assumptions about changes in health care utilization patterns based on technological advances.

   This is the stock-in-trade of consulting actuaries, and such estimates can be made. These estimates are more easily evaluated because a sensitivity analysis of the effect of a 1% increase in assumed health care cost trend rates on the accumulated postretirement benefit obligation for health benefits, and on the aggregate of the service and interest cost components of net periodic postretirement health care benefit costs are required to be presented by the utility. Standard 106, paragraph 74(f).

   
   

2. The short answer to the problem of variability arising from the use of permissible assumptions under FAS 106, is that the rule is not invalid because acceptable choices are not etched in stone. All choices available under FAS 106 are subject to review by the Commission. Important ones must be highlighted by disclosures and, in some cases, sensitivity analyses. Unreasonable assumptions could be rejected by the Commission, even though the rule does not state this in haec verba as to each of the estimates or assumptions available to utilities under the proposed rule. The simplest example would be the utilities' selection of a discount rate. The Commission has modified the discount rate selected by a utility in the past. If the rate selected is unreasonable, based on the market interest rate being paid on high quality fixed income investments as of the measurement date, the Commission could disallow the utilities' assumption, and use instead another rate which the Commission determined from evidence more closely reflected the market rate for analogous investment vehicles providing necessary cash flows for expected benefit payouts. The text of FAS 106 requires the utility to use the assumption that "individually represents the best estimate of a particular future event, to measure the expected postretirement benefit obligation." FAS 106, paragraph 29. The utility is not free to make whatever assumption it believes will result in the highest charge to its customers. The test is whether the assumption made reflects the utility's "best estimate of the plan's future experience solely with respect to that assumption" (FAS 106, Glossary, definition of Explicit Assumptions, at page 197, Commission Composite Exhibit 1, tab 2 [emphasis added]). The Commission retains authority to question whether an assumption is the best estimate of future experience, which is a fact specific inquiry into the circumstances of each utility, its employee cohort and its substantive plan. The Commission has authority in the text of FAS 106 to make a searching inquiry into each explicit assumption to insure that the best estimate, given the utility's unique circumstances, has been used. If not the Commission can disallow the expense the assumption generates.

   
   

   CONCLUSIONS OF LAW

   
   

3. The Division of Administrative Hearings has jurisdiction over this matter. Section 120.54(4), Florida Statutes (1991). The Citizens have standing to bring this proceeding. Section 350.0611(5), Florida Statutes (1991).

   
   

4. The notice published by the Commission for the proposed rule on accounting for OPEB expenses list Sections 364.01, 366.05 and 367.011, Florida Statutes (1991), as the authority for adopting the proposed rule, and Sections 364.17, 366.04 and 367.121, Florida Statutes (1991), as the laws implemented by the proposed rule.

   
   

5. Section 364.01, Florida Statutes, grants the Commission exclusive jurisdiction and broad authority over telecommunication companies. Section 364.17, Florida Statutes (1991), allows the Commission to specify accounting methodologies to be used by telecommunication companies.

6. Section 366.05(1), Florida Statutes (1991), gives the Commission authority over investor-owned electric and gas utilities and grants it the authority to prescribe rules "reasonably necessary and appropriate for the administration and enforcement of this Chapter." The law implemented, Section 366.04, grants the Commission the authority to "prescribe uniform systems and classifications of accounts." Section 366.04(2)(a), Florida Statutes (1991).

   
   

7. Section 367.011(2), Florida Statutes (1991), grants the Commission broad jurisdiction over water and wastewater utilities. Like its power over electric and gas utilities, the Commission has statutory authority under Section 367.121(1)(b), Florida Statutes (1991), to adopt rules to establish "a uniform system and classification of all accounts for all utilities." The Commission has the authority to adopt the type of rule at issue here.

   
   

8. One of the Citizens' arguments is that the courts have invalidated the Legislature's attempt to adopt statutes which would incorporate by reference future legislative or administrative actions by entities outside of Florida. Department of Legal Affairs v. Rogers, 329 So.2d 257, 267 (Fla. 1976). This is not, however, a case where the Commission has delegated to the Financial Accounting Standards Board the Commission's authority to regulate utility rates through the incorporation of future amendments to FAS 106. The text of the Administrative Procedure Act makes that impossible. The rule at issue does not republish the text of FAS 106, but incorporates it by reference. According to Section 120.54(8):

   
   

   "[A] rule may incorporate material by reference but only as such material exists on the date the rule is adopted. For purposes of such rule, changes in such material shall have no effect with respect to the rule unless the rule is amended to incorporate such material as changed. "

   
   

9. The Department of State implements this requirement of the rulemaking procedure with Rule 1S-1.005, Florida Administrative Code, with this language:

   
   

   1. Any . . . standard . . . or similar material may be published by reference

      in a rule subject to the following conditions:

      
      

      1. The material shall be generally available to affected persons.

      2. The material shall be published by a governmental agency or a generally recognized professional organization.

         
         

   2. The agency publishing material by reference shall file with the Department of State a correct and complete copy of the referenced material with an attached certification page which shall state a description of the referenced material and specify the rule to which the referenced material relates.

      
      

   3. Any amendments to material published by reference must be promulgated under the rulemaking provisions of Section 120.54, Florida Statutes, in order for the amended portions to be validly incorporated.

      See also, England and Levinson, Florida Administrative Practice Manual, Section 9.26(c), (d), (1993).

      Moreover, section (1) of the proposed rule identifies FAS 106 by its December 1990 adoption date, clearly incorporating by reference the Standard as originally promulgated by the Financial Accounting Standards Board.

      
      

10. Once the Commission files the text of its rule, including FAS 106, with the Department of State, that copy is the only version of the FAS 106 adopted through Section 120.54 rulemaking. Future amendments must be separately adopted. There has been no showing here that the Commission intends to violate Section 120.54(8), and will refuse to file with the Secretary of State the copy of FAS 106 which is part of the rulemaking record (Commission Composite Exhibit 1, tab 2).

    
    

11. The statutory authority to incorporate material by reference, with the gloss provided by the Department of State that the material must be something published by a generally recognized professional organization, is an indication that adoption of standards such as the one at issue is contemplated in the rulemaking process.

    
    

12. As shown in Finding 5, it is not the practice of the Financial Accounting Standards Board to amend Standards after they are adopted. Changes are made through the adoption of a new Standard, which the Commission would then have to adopt by reference if it chose to do so.

    
    

13. It is difficult to understand the Citizens' argument that through adoption of FAS 106 the Commission has abdicated its regulatory function to the Financial Accounting Standards Board. Since 1979, the Board has been dealing with the appropriate accounting treatment for OPEBs. This lead to the promulgation of FASB Technical Bulletin No. 87-1, Accounting for a Change in Method of Accounting for Certain Postretirement Benefits, which ultimately was rescinded with the recent adoption of FAS 106. A substantial amount of thought obviously has gone into FAS 106. It is hardly surprising that the Commission also would be concerned with accounting for retirement expenses, other than pensions, of retired utility workers. Health care costs have made these expenses more significant over time. The investor-owned gas and electrical utilities regulated by the Commission must conform to the requirements of FAS

    106 in external financial statements prepared for their investors, since FAS 106 has become part of generally accepted accounting principles through the adoption of the Standard. The Commission has the statutory authority to require regulated utilities to keep their accounts in a manner prescribed by Commission, and has determined that it wishes to adopt this Standard. It is not blindly adopting an unknown Standard. After review of the text of FAS 106, and adoption of the Standard in at least four individual rate cases, the Commission has determined that FAS 106 represents the appropriate way to treat OPEB expenses for regulatory purposes, as well as for financial reporting purposes. This action of moving from incipient policy, where principles are adopted in individual cases, to adoption of policy through rulemaking is what Section 120.535, Florida Statutes (1991), requires.

    
    

14. What lead the Financial Accounting Standards Board to adopt FAS 106 as the uniform method for accounting for OPEBs applies with equal force to the work of the Commission:

    The Board believes that understandability, comparability, and usefulness of financial information are improved by narrowing the use of alternative accounting methods that

    do not reflect different facts and circumstances. The Board has been unable to identify circumstances that would make it appropriate for different employers to use fundamentally different

    accounting methods or measurement techniques for similar postretirement benefit plans or for a single employer to use fundamentally different methods or measure ment techniques for different plans. As a result, a single

    method is prescribed for measuring and recognizing an employer's accumulated postretirement benefit obligation. (Commission Composite Exhibit 1,

    tab 2, Statement of Financial Accounting Standards No. 106, Summary [unnumbered page])

    
    

15. The Citizens next urge that the rule is fatally flawed because FAS 106 permits utilities to make assumptions about factors to be used in computing the utility's accumulated postretirement benefit obligations such as the substantive plan's text, discount rates, salary progressions in pay related plans, and present value factors for health care benefits, such as medical costs trends. They argue that this latitude runs afoul of Section 120.52(8)(d), Florida Statutes (1991), by failing to establish adequate standards for agency decisions, or vesting unbridled discretion in the agency.

    
    

16. Standard 106 does require the use of assumptions, but they are "explicit assumptions" (FAS 106, paragraph 29). An explicit assumption is a defined term. It is an estimate of the occurrence of future events affecting postretirement benefit costs, such as employee turnover, retirement age, mortality, dependency status, per capita claims costs by age, health care cost trends, levels of Medicare and other health care providers' reimbursements, and discount rates reflecting the time value of money. All these matters are capable of estimation. This explicit assumption approach requires that each significant assumption used reflect the utility's best estimate of the plan's future experience solely with respect to that assumption (FAS 106, paragraph 30 and Appendix E, Glossary, at pages 194 and 197). This test for evaluating assumptions found in paragraphs 29 through 33 of Standard 106 is sufficiently detailed so that the Commission can review in a rate case the underlying rationale offered by the utility in its minimum filing requirements for any estimate or assumption. The utility will be faced with the duty in each case to show why each assumption "represents the best estimate of a particular future event," (FAS 106, paragraph 29).

    
    

17. These are examples of matters which cannot be realistically made more specific by rule. Section 120.535, Florida Statutes (1991), recognizes that there are situations where rulemaking is impracticable, where particular questions at issue are of such narrow scope that more specific resolution of the matter is impracticable outside of an adjudication to determine the substantial interest of a party, based on individual circumstances. Section 120.535(1)(b)2., Florida Statutes (1991). The factors which FAS 106 requires a utility to make "explicate assumptions" about are ones which are so fact specific that, as a practical matter, a range of choices must be made available to the utility. How the utility deals with those factors is, however, subject to review by the Commission in the context of a substantial interest

adjudication under Section 120.57(1), Florida Statutes, that is, in a rate case, in which the utility bears the burden of persuasion.

SUMMARY

The Commission does not abdicate its duty to set fair, just, compensable and nondiscriminatory rates by adopting FAS 106. It has not attempted to incorporate future, unknown amendments to that Standard in its rule. The explicit assumption approach required by the rule is sufficiently rigorous that it sets adequate standards for Commission decisions in rulemaking cases, and does not permit arbitrary action.

ORDER

It is ORDERED that the challenge to proposed rule 25-14.012 of the Public Service Commission filed by the Citizens of the State of Florida through the Office of Public Counsel be dismissed.

DONE AND ORDERED in Tallahassee, Leon County, Florida, this 26th day of March 1993.

WILLIAM R. DORSEY, JR.

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 26th day of March 1993.

ENDNOTE

1/ The text of the proposed rule is as follows:

25-14.012 Accounting for Postretirement Benefits Other Than Pensions.

1. "Postretirement benefits other than pensions" shall mean all forms of benefits, other than retirement income, provided by an employer to retirees, as defined by the Financial Accounting Standards Board in its Statement of Financial Accounting Standards No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions, December 1990). Those benefits may be defined in terms of specified benefits, such as health care, tuition assistance, or legal services, that are provided to retirees as the need for those benefits arises, or they may be defined in terms of monetary amounts that become payable on the occurrence of a specified event, such as life insurance benefits.

2. Each utility that offers postretirement benefits other than pensions shall account for the costs of such benefits in the manner required by Statement of Financial Accounting Standards No. 106. Deferral accounting under Statement of Financial Accounting No. 71 (Accounting for the Effects of Certain Types of Regulation, December 1982) shall not be used to account for the costs of postretirement benefits other than pensions without prior Commission approval.

3. Each utility's unfunded accumulated postretirement benefit obligation shall be treated as a reduction to rate base in rate proceedings. The amount that

   reduces rate base is limited to that portion of the liability associated with the cost allowance for postretirement benefits other than pensions.

   
   

   APPENDIX

   
   

   The following constitutes my rulings on proposed findings of fact as required by Section 120.59(2), Florida Statutes.

   
   

   Rulings on findings of fact submitted the Citizens.

   
   

   1. Rejected as unnecessary.

   2. Rejected, see Findings of Fact 20 and 31.

   3. Rejected as unnecessary.

   4. Rejected, see Finding of Fact 18.

   5. Rejected, FAS 106 requires the use of explicit assumptions, see Finding of Fact 31.

   6. Rejected because the rule itself states that the adoption of the Standard is the version promulgated in December 1990. See proposed rule 25- 14.012(1).

   7. Adopted in Finding of Fact 5.

   8. Rejected as unnecessary.

   9. Rejected as unnecessary, although authoritative interpretations of Standard 106 may become part of generally accounting principles.

   10. Rejected as unnecessary, although the Commission's action as shown in Findings 18 through 21 indicate that the Commission does review expenses for prudence, appropriateness, etc., and there is no reason to believe that it will not do so under this rule.

   11. Rejected, see Finding of Fact 31. Explicit assumptions are required, and may lead to the rejection of assumptions. To the extent there is a suggestion that the Commission lacks the authority to correct arithmetic errors, I reject it as not credible.

   12. Rejected, see Finding of Fact 31.

   13. Rejected, see Finding of Fact 23.

   14. Accepted in Finding of Fact 21.

15-17. Accepted in Finding of Fact 25.

1. Rejected for the reasons stated in Finding of Fact 25.

2. Rejected as unnecessary. The rule does not provide for the specific way in which the Commission can make adjustments to benefits or their costs, but there is no reason to believe the Commission lacks authority to reject proposed expenses, just as it can now in the absence of the rule if it finds them to be inappropriate.

20-25. Addressed in Finding of Fact 26.

1. Adopted in Finding of Fact 27.

2. Rejected because the attribution period is dictated by the substantive plan.

3. Implicit in Finding of Fact 25.

4. Accepted in Finding of Fact 27.

5. Accepted in Finding of Fact 28.

6. Accepted in Finding of Fact 28.

7. Rejected; because the assumptions may not be identical does not mean they are inconsistent.

8. Addressed in Finding of Fact 29.

9. Rejected because the explicit assumption approach does not merely leave the determination of a discount rate to discretion. Rather, the utility must match the discount rate to rates being charged for high quality debt

   instruments available, on the measurement date, which will provide the cash flow necessary to satisfy the retirement benefit obligations as they become due.

10. Rejected as unnecessary.

11. Addressed in Finding of Fact 31.

12. The sensitivity analysis is addressed in Finding of Fact 30.

13. Rejected because utilities may not have similar circumstances merely because their rate bases and geographic locations are similar. The question is what cash flows will be needed to pay the benefits offered by the utility's substantive plans as of the measurement date. The interest rate payable on high quality debt instruments to provide those cash flows may differ.

14. Rejected as unnecessary.

15. Rejected as unnecessary, all financial statements are the estimates of management, not of actuaries, although input from actuaries may be necessary to make an appropriate estimate under the explicit assumption approach of FAS 106.

41-43 and 45-46. Adopted in Finding of Fact 30.

44. Rejected, see Finding of Fact 31.

1. Rejected, see Finding of Fact 31 on explicit assumptions.

2. Rejected as unnecessary.

3. Rejected, see Finding of Fact 31. 50-55. Rejected as unnecessary.

56. Rejected, the question is whether the assumption is a reasonable one under the explicit assumption approach of FAS 106. See Finding of Fact 31.

57 & 58. Rejected, see Finding of Fact 31.

1. Rejected, it is obvious from the sequential numbering of the paragraphs in FAS 106 that the appendix is an integral part of the Standard. The Standard and the accompanying appendixes are part of the rulemaking record and apparently will be filed with the Secretary of State. All will be part of the rule through incorporation by reference.

2. Rejected; whether nor not Ms. Flannagan might have been confused is not in issue. The entire Standard, including appendixes, are adopted in the rule.

3. Rejected, almost any rule will permit more than one interpretation. This is no basis for invalidating a rule.

4. Adopted in Finding of Fact 6.

5. Rejected as unnecessary, see Finding of Fact 3. 64-66. Rejected as unnecessary.

67 & 68. Rejected, see Finding of Fact 3 and Tr. 151.

1. Rejected as unnecessary.

2. Rejected, see Finding of Fact 3.

3. Rejected. The Commission has no authority to require utilities to determine how matters will be treated on external financial statements. It does have authority to prohibit deferrals under FAS 71, which is specifically addressed to accounting for public utilities in regulatory accounting. It may tell utilities that in regulatory accounting they should not make deferrals, treating expenses as ones which the Commission will permit them to recovery in the future, in the absence of a specific statement from the Commission approving a future cost recovery in a rate making case.

Rulings of Findings of Fact proposed by the Commission:

1. Accepted in Finding of Fact 1.

2. Adopted in Finding of Fact 1 and the preliminary statement.

3. Adopted in Finding of Fact 2.

4-9. Discussed in the Conclusions of Law.

1. Rejected as unnecessary.

2. Adopted in Finding of Fact 3.

3. Adopted in Findings of Fact 5 and 6.

13 & 14. Adopted in Finding of Fact 6.

1. Adopted in Finding of Fact 20.

2. Adopted in Findings of Fact 9 and 12.

3. Adopted in Findings of Fact 12 and 13.

18 & 19. Adopted in Finding of Fact 13.

1. Adopted in Finding of Fact 14.

2. Adopted in Finding of Fact 26.

22-24. Adopted in Findings of Fact 15-17.

25 & 26. Adopted in Finding of Fact 18.

1. Adopted in Finding of Fact 19.

2. Adopted in Finding of Fact 18.

29 & 30. Adopted in Finding of Fact 20.

1. Adopted in Finding of Fact 20.

2. Adopted in Finding of Fact 22.

3. Rejected as redundant.

4. Adopted in Findings of Fact 23 through 31.

COPIES FURNISHED:

H. F. Mann, II, Esquire Office of the Public Counsel

111 West Madison Street, Room 812 Tallahassee, Florida 32399-1400

Marsha E. Rule, Esquire Division of Legal Services

Florida Public Service Commission

101 East Gaines Street Tallahassee, Florida 32399-0863

Steve Tribble

Director of Records and Recording Public Service Commission

101 East Gaines Street Tallahassee, Florida 32399-0850

David Swafford Executive Director

Public Service Commission Room 116

101 East Gaines Street Tallahassee, Florida 32399-0850

Rob Vandiver General Counsel

Public Service Commission Room 212

101 East Gaines Street Tallahassee, Florida 32399-0850

Carroll Webb, Executive Director Administrative Procedures Committee

120 Holland Building Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code Room 1802, The Capitol Tallahassee, Florida 32399-0250

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this final order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules Of Appellate Procedure. Such proceedings are commenced by filing one copy of a notice of appeal with the Agency Clerk Of The Division Of Administrative Hearings and a second copy, accompanied by filing fees prescribed by law, with the District Court Of Appeal, First District, or with the District Court Of Appeal in the appellate district where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.

Docket for Case No: 92-005717RP

Orders for Case No: 92-005717RP