$//Pacbell & US West; DA 95-604 //$ $/ Section 0.291 Delegated Authority /$ TRANSMITTED FOR FCC RECORD ONLY ///newjob/// $///DA 95-604 Record only 4-12-95///$ Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 DA 95 - 604 In the Matter of ) ) Pacific Bell ) Transmittal No. 1773 Tariff F.C.C. No. 128 ) ) ) U S West ) Transmittal No. 584 Tariff F.C.C. No. 5 ) ) CC Docket No. 94-157 MEMORANDUM OPINION AND ORDER SUSPENDING RATES Adopted: March 24 , 1995; Released: March 24 , 1995 By the Chief, Tariff Division, Common Carrier Bureau: I. INTRODUCTION 1. On January 20, 1995, Pacific Bell and US West filed the above-captioned transmittals to reflect the exogenous treatment of Statement of Financial Accounting Standard No. 106 (SFAS-106), "Employers Accounting for Postretirement Benefits Other Than Pensions." On February 6, 1995, MCI Telecommunications Corporation (MCI) filed a petition to suspend and investigate both transmittals. Pacific Bell and US West filed replies on February 16, 1995. For the reasons given below, we suspend the Pacific Bell and US West transmittals and include them in our investigation in CC Docket No. 94-157. II. BACKGROUND 2. The investigation in CC Docket No. 94-157 was initiated in December 1994 to consider the local exchange carriers' (LECs') requests for exogenous treatment of SFAS-106 costs. In that proceeding, a number of LECs sought to adjust their price cap index (PCI) levels to reflect implementation of SFAS-106 since the United States Court of Appeals decision in Southwestern Bell Telephone Company v. FCC, 28 F. 3d 165 (D.C.Cir. 1994). In that case, the United States Court of Appeals for the District of Columbia Circuit reversed and remanded a Commission Order which concluded that increases in booked Other Postretirement Employee Benefits (OPEB) costs caused by the implementation of SFAS-106 were not eligible for exogenous treatment. SFAS-106 requires companies to account for OPEBs on an accrual basis, treating OPEBs as a form of deferred compensation earned by employees during their working years. Accordingly, the costs of OPEBs are recognized during the years the benefits are earned, rather than during the years when the amounts of benefits are actually paid by the company. In addition, SFAS-106 requires companies to recognize on their books the amount of their unfunded obligation for OPEBs to retirees and to active employees as of the date of their adoption of SFAS-106. This obligation is known as the Transitional Benefit Obligation (TBO). 3. While it is clear that after the Southwestern Bell decision, supra, changes in LEC OPEB costs caused by the implementation of SFAS-106 are eligible for exogenous treatment, other issues remain that concern the specific adjustments that LECs may make to their PCI levels to reflect the cost change. Those issues are now under investigation in CC Docket No. 94-157. III. PLEADINGS A. The Transmittals. 4. In Transmittal No. 1773, Pacific Bell proposes to increase its PCI to incorporate exogenous cost adjustments resulting from adoption of SFAS-106. Pacific Bell states that these adjustments are in addition to the increase in the PCI for the TBO in 1993. Pacific Bell asserts that its proposed exogenous cost adjustment is temporary and is intended to recover the revenues it would have earned during the period between adoption of the OPEB Order and its reversal and remand. In addition, Pacific Bell is proposing increases to its PCI in an amount that reflects its on-going annual requirement for recovery of the incremental costs associated with the adoption of SFAS-106. Pacific Bell states that these incremental costs are based on a number of actuarial assumptions, including average age and number of retirees, rate of inflation for medical costs, and return on plan assets, i.e. the OPEB and Voluntary Employee Beneficiary Association (VEBA) funds. Pacific Bell assumes that these funds are earning a return on investment of 9 and 8.5 percent respectively. 5. US West proposes in Transmittal No. 584 to adjust its PCI to reflect the difference between the TBO portion SFAS-106 and the ongoing incremental costs of adopting SFAS-106. US West states that it is seeking to reflect the difference between TBO exogenous cost treatment, already in its PCI, and the incremental OPEB costs that it may now submit for exogenous cost treatment based on the Southwestern Bell decision. According to US West, these incremental OPEB costs were calculated using standard actuarial assumptions, including that its VEBA and OPEB fund obligations that were funded on December 31, 1992 are assumed to be earning a 9 percent and 8.5 return on investment, respectively. B. MCI's Petition 6. MCI filed a petition to suspend and investigate both the Pacific Bell and US West transmittals. MCI contends that the Commission's Responsible Accounting Official (RAO) Letter 24 bars Pacific Bell and US West from recovery of OPEBs until those costs are actually incurred. According to MCI, the Commission has established that work force reduction costs should be recognized when they actually occur. MCI claims that Pacific Bell and US West are proposing to adjust their existing PCIs for exogenous work force costs they expect to incur in the future. Premature recognition of OPEBs will, according to MCI, allow both Pacific Bell and US West to raise their PCIs and realize more pricing flexibility, especially for raising prices, in monopoly access markets. MCI objects to Pacific Bell's and US West's proposals to adjust their existing PCIs for costs they expect to incur in the future because it is difficult for a LEC to project accurately what its work force reduction expenses will be. Therefore, says MCI, the LECs should book their OPEB expenses, just as RAO Letter 24 requires, when the amounts have actually been funded. MCI contends that under this method, the LECs will be ensured of being compensated for actual OPEB expenses. 7. MCI further argues that Pacific Bell and US West do not clearly state in their transmittals the basis for assuming their VEBA funds earns 8.5 percent interest and their OPEBs funds earns 9 percent interest. MCI contends that these companies have the ability to earn more than 9 percent on these funds. In addition, MCI asks the Commission to review the amount of OPEBs cost Pacific Bell and US West allocated to nonregulated activities and to activities "subject-to-separations." MCI next argues that even if the Commission does not apply RAO Letter 24 to OPEB expenses, the potential still exists for a "double-count" of OPEBs through the GNP-PI adjustment in the price cap formula. Finally, says MCI, Pacific Bell and US West continue to rely on the same facts here to support OPEB exogenous cost treatment as they used to support OPEB costs currently under investigation in CC Docket No. 94-157. MCI argues that the Commission should therefore suspend and investigate these transmittals as well. Replies 8. In their replies, Pacific Bell and US West contend that the Commission has ordered the use of SFAS-106 accrual accounting for OPEB costs and that RAO Letter 24 has no bearing on this requirement. According to Pacific Bell, RAO Letter 24 states that accounting for work force restructuring is an exception to the Commission policy that requires conformance with Generally Accepted Accounting Procedures and Part 32 of the Commission's rules, 47 C.F.R. Part 32. US West states that it is accounting for OPEB costs in accordance with RAO Letter 20 which provides specific guidance as to how the effects of SFAS-106 should be recorded on a carrier's books for regulatory purposes. In addition, US West denies that its Transmittal No. 584 contains any costs classifiable as restructuring charges under RAO Letter 24. Rather, US West states, the SFAS-106 costs included in Transmittal No. 584 are the incremental costs of accruals which have been made on a routine basis in accordance with all applicable Commission accounting requirements. 9. Pacific Bell and US West further contend that their projected returns on their respective VEBA and OPEB funds are generally accepted as reasonable projected returns on a mixed portfolio of major stocks and investment grade bonds. US West maintains in addition that a 9 percent rate of return on SFAS-106 plan assets is appropriate and is used by other companies. Pacific Bell and US West also state that they properly allocated the amount of OPEBs costs allocated to nonregulated activities and activities subject-to-separations. In addition, U S West contends that its allocation of 5 percent of OPEB expenses to nonregulated operations comports with Part 64 of the Commission rules and, finally, that exogenous treatment of SFAS-106 costs will not result in double-counting through the GNP-PI adjustment in the price cap formula. IV. DISCUSSION 10. We have reviewed Pacific Bell Transmittal No. 1773 and US West Transmittal No. 584, supporting documents and pleadings. We find that the issues raised by these two transmittals are the same as the issues under investigation in CC Docket No. 94-157. As indicated above, Pacific Bell and US West state that they are proposing to revise their interstate access rates to reflect an adjustment of their exogenous costs for SFAS-106. While the Court has ordered the Commission to grant exogenous treatment of these postemployment benefits, the question of the specific amount eligible for exogenous treatment is subject to investigation in CC Docket No. 94-157. Therefore, we are suspending the two transmittals and including the issues presented therein in CC Docket No. 94-157. V. ORDERING CLAUSES 11. Accordingly, IT IS ORDERED that, pursuant to Section 204(a) of the Communications Act, 47 U.S.C.  204(a), and Section 0.291 of the Commission's Rules, 47 C.F.R.  0.291, the revised rates set forth in Pacific Bell Tariff F.C.C. No. 1, Transmittal No. 1773 and U S West Tariff F.C.C. No. 5, Transmittal No. 584 ARE SUSPENDED for one day from the current effective date and an investigation of those rates is included in CC Docket Nos. 94-157. Pacific Bell and U S West SHALL FILE supplements reflecting this suspension no later than five days from the release of this Order and should cite the "DA number" of this Order as the authority for making this tariff filing. 12. IT IS FURTHER ORDERED that, pursuant to Sections 4(i) and 204(a) of the Communications Act, 47 U.S.C.  154(i), 204 (a), and Section 0.291 of the Commission's Rules, 47 C.F.R.  0.291, Pacific Bell and U S West SHALL KEEP ACCURATE ACCOUNT of all amounts received that are associated with the rates that are the subject of this investigation. 13. IT IS FURTHER ORDERED that Pacific Bell and U S West SHALL INCLUDE STATEMENTS in all subsequent transmittals revising rates indicating whether, and to what extent, the price change is predicated upon the exogenous cost claim set forth in Transmittal Nos. 1773 and 584, respectively. 14. IT IS FURTHER ORDERED that the petition to suspend and investigate Pacific Bell Transmittal No. 1773 and U S West Transmittal No. 584 filed by MCI Telecommunications Corporation IS GRANTED to the extent discussed above and otherwise IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Geraldine A. Matise Chief, Tariff Division Common Carrier Bureau