92-005717RP The Citizens Of The State Of Florida vs. Florida Public Service Commission Status: Closed DOAH Final Order on Friday, March 26, 1993.

Summary: Upholds adoption of Fianancial Accounting Standards Board standard 106, on treatment of postretirement benefit obligations. Assumption made must be best ones available to the utility.

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.

ansition 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.

30. 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).

31. 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

32. 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).

33. 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.

34. 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.

35. 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).

36. 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.

37. 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. . . . "

38. 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:

(a) The material shall be generally available

to affected persons.

(b) 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.

39. 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).

40. 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.

41. 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.

42. 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.

43. 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
m e n t t e c h n i q u e s

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])

44. 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.

45. 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).

46. 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

[phone]

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.

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

19. 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.

26. Adopted in Finding of Fact 27.

27. Rejected because the attribution period is dictated by the substantive

plan.

28. Implicit in Finding of Fact 25.

29. Accepted in Finding of Fact 27.

30. Accepted in Finding of Fact 28.

31. Accepted in Finding of Fact 28.

32. Rejected; because the assumptions may not be identical does not mean

they are inconsistent.

33. Addressed in Finding of Fact 29.

34. 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.

35. Rejected as unnecessary.

36. Addressed in Finding of Fact 31.

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

38. 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.

39. Rejected as unnecessary.

40. 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.

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

48. Rejected as unnecessary.

49. 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.

59. 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.

60. Rejected; whether nor not Ms. Flannagan might have been confused is

not in issue. The entire Standard, including appendixes, are adopted in the

rule.

61. Rejected, almost any rule will permit more than one interpretation.

This is no basis for invalidating a rule.

62. Adopted in Finding of Fact 6.

63. Rejected as unnecessary, see Finding of Fact 3.

64-66. Rejected as unnecessary.

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

69. Rejected as unnecessary.

70. Rejected, see Finding of Fact 3.

71. 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.

10. Rejected as unnecessary.

11. Adopted in Finding of Fact 3.

12. Adopted in Findings of Fact 5 and 6.

13 & 14. Adopted in Finding of Fact 6.

15. Adopted in Finding of Fact 20.

16. Adopted in Findings of Fact 9 and 12.

17. Adopted in Findings of Fact 12 and 13.

18 & 19. Adopted in Finding of Fact 13.

20. Adopted in Finding of Fact 14.

21. Adopted in Finding of Fact 26.

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

25 & 26. Adopted in Finding of Fact 18.

27. Adopted in Finding of Fact 19.

28. Adopted in Finding of Fact 18.

29 & 30. Adopted in Finding of Fact 20.

31. Adopted in Finding of Fact 20.

32. Adopted in Finding of Fact 22.

33. Rejected as redundant.

34. 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.