INDEPENDENT REGULATORY REVIEW COMMISSION
Actions Taken by the Commission
[26 Pa.B. 5915]
The Independent Regulatory Review Commission met publicly on Thursday, November 21, 1996, at 10:30 a.m. and took the following actions:
Pennsylvania Public Utility Commission # 57-152--Line Extensions (amends 52 Pa. Code § 65.1 and adds sections 65.21, 65.22 and 65.23)
Pennsylvania Public Utility Commission # 57-156--Revisions of Rules and Administrative Practice and Procedure (amends 52 Pa. Code Chapters 1, 3, 5, 57 and 59)
Pennsylvania Insurance Department # 11-135--Requirements for Funds Held as Security for the Payment of Obligations of Unlicensed, Unqualified Reinsurers (amends 31 Pa. Code by adding Chapter 163)
Municipal Police Officers' Education and Training Commission # 17-55--Administration of the Training Program (amends 37 Pa. Code by adding a new Chapter 203 and by repealing Chapter 201)
Department of Agriculture # 2-108--Deletion of ''Grade AA'' Regulatory Standards for Milk (deletes the provisions of 7 Pa. Code Chapter 59)
State Board of Chiropractic # 16A-437--Examination Fees (amends 49 Pa. Code § 5.6)
Pennsylvania Insurance Department # 11-136--No-Fault Motor Vehicle Insurance (amends 31 Pa. Code by deleting Chapter 66)
Commissioners present: John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Arthur Coccodrilli; John F. Mizner; Irvin G. Zimmerman
Public meeting held
November 21, 1996
Pennsylvania Public Utility Commission--Line Extensions; Doc. No. 57-152
On September 23, 1994, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Pennsylvania Public Utility Commission (PUC). This rulemaking would amend 52 Pa. Code § 65.1 and add §§ 65.21, 65.22 and 65.23. This regulation would also delete § 69.171 Fixed utility line extensions--statement of policy. The authority for this regulation is 66 Pa.C.S. §§ 501 and 1501. The proposed regulation was published in the Pennsylvania Bulletin on October 8, 1994 with a 45-day public comment period. The final-form regulation was submitted to the Commission on November 12, 1996.
The PUC is proposing to establish a universal standard for determining when an individual may be required to contribute to the costs of a line extension for water utility service and the amount of contribution that will have to be made. The proposed regulation applied to large electric, water, natural gas, and local exchange telephone utilities. However, as a result of comments received during the proposed rulemaking stage, the final-form rulemaking only applies to line extensions for water utilities.
Historically, utilities have had provisions in their tariffs (rules, rates and conditions for service) that provided either a specific distance of free line extension or that established a utility contribution toward the costs of an extension based on the customer's expected revenue or consumption. In September 1992, the PUC adopted a Statement of Policy (52 Pa. Code § 69.171 Fixed utility line extensions--statement of policy) where it interpreted Pennsylvania appellate court decisions on when a customer should contribute to the costs of a line extension for all utilities. This policy statement provides that a utility can only require a customer contribution if a given line extension would materially handicap the utility in securing a fair return on its overall investment or would place an undue burden on utility customers.
Numerous complaints have been filed on utilities' line extension policies which have resulted in extensive litigation before the PUC. The PUC has not historically provided clear direction on line extensions and the utilities' policies have varied considerably. As a result, the PUC has had to decide numerous line extension complaints on a case-by-case basis with no apparent end in sight. The PUC developed this rulemaking in an effort to develop a fair and uniform policy for line extensions to alleviate litigation.
The rulemaking establishes an economic test to determine when a customer contribution may be required for a proposed water utility line extension. Customer contributions may be required at the point where annual revenue from the line extension is less than the utility's annual line extension costs. The utility's investment is determined by a formula in the regulation which includes factors directly related to the line extension including the utility's expected revenues and costs. A customer's contribution is determined by subtracting the utility's investment from the total construction costs for the line extension. The regulation further provides that utilities with $10 million or more in gross annual revenue shall give the customer the option of either paying the customer contribution over a period of not less than 3 years with the utility recovering financing costs, or providing information to the customer on financial institutions that may offer financing. Finally, the regulation creates a category called ''special utility service'' which is specifically exempted from the economic test in the rulemaking. Special utility service is defined as residential or business service which exceeds that required for ordinary residential purposes.
The Senate Consumer Affairs and Professional Licensure Committee met on November 13, 1996, and approved the rulemaking. The House Consumer Affairs Committee met on November 20, 1996, and approved the rulemaking.
All PUC jurisdictional public water utilities will be affected by the regulation. According to the PUC, the cost of compliance will vary from utility to utility since some companies already have policies which are at least as generous as the regulation while others are more restrictive. The PUC believes the economic test contained in the regulation will result in a substantially greater amount of footage at no cost to the customer. The regulation should provide a more streamlined approach to determine when a customer contribution may be required for a line extension. This should result in a decrease in the number of appeals and complaints being filed against utilities concerning whether contributions need to be made by customers and in the associated costs incurred by the utilities and the PUC.
We have reviewed this regulation and find it to be in the public interest. We compliment the PUC on their determination to improve this regulation. This regulation has been revised several times to resolve various concerns. We expressed serious concerns with a final-form regulation filed on March 21, 1996, and the PUC withdrew that final-form regulation on April 12, 1996. The PUC resubmitted a final-form rulemaking on October 28, 1996, but withdrew that final-form regulation on November 12, 1996, to correct a substantive error. The PUC resubmitted this final-form rulemaking on November 12, 1996. The following discussion highlights some of the previous concerns expressed and how the PUC resolved the issues.
In the final-form regulation submitted March 21, 1996, the PUC used an economic test to determine the percentage of the total construction costs the customer may be required to pay. Unfortunately, none of the definitions and nothing in the PUC's regulation clearly reflected an intent to net contributions against the utility's investment to calculate costs. In fact, the regulation, as interpreted by Table III in the PUC's Order approving the final-form regulation, showed an intent to base depreciation costs and debt costs upon the total cost of the line extension, which included the contributed property. For this reason, we believed the PUC's economic test was flawed. We recommended that the rulemaking be withdrawn to make the appropriate revisions. The PUC withdrew the rulemaking. In the resubmitted regulation, the PUC corrected the calculations to set contributions against the utility's investment. Therefore, the PUC has satisfactorily addressed our concern in this area.
The proposed regulation exempted ''special utility service'' from the economic test provisions of the regulation. Special utility service was defined as residential or business service which exceeds that required for ordinary residential purposes or service for which there is a safe, adequate and competitively priced alternative to meet the applicant's utility needs. If the utility determined that a line extension falls under the definition of special utility service, the customer no longer qualified for the economic test provisions in the regulation and would be required to bear the full cost of a line extension.
We saw two problems with the special utility service provision. First, we believed the economic test in the regulation should be used to strike a reasonable balance between the utility and all of its customers regardless of the service the customer was requesting. We did not believe any provisions beyond the economic test were necessary or reasonable. Second, the regulation also did not provide guidance on how to determine ''safe, adequate and competitively priced alternatives'' or how the utility would substantiate their existence to the customer. For these reasons we believed the special utility service provision should have been deleted. The PUC explained that there are circumstances where the special utility service provision would protect the utility. However, the PUC agreed that the utilities were not prepared to provide substantive alternatives to customers and the PUC deleted the ''safe, adequate and competitively priced alternatives'' from the final-form regulation. We believe the special utility service definition is now an acceptable compromise.
In every submittal to the Commission, including the PUC's order accompanying the final-form rulemaking, the rulemaking had a provision which exempted special utility service from all of the provisions except one. The single provision that was not exempted for special utility service provided for refunds of a portion of the money advanced by the original customer if more customers attached service lines to the main extension within 10 years. However, in the final-form regulation submitted on October 28, 1996, the PUC inadvertently exempted special utility service from the requirement to provide reimbursement of a portion of the advance if additional customers attach to the main extension. The PUC recognized the error and the regulation was withdrawn. The resubmitted regulation now contains the correct exemption language for special utility service.
The proposed regulation provided that a utility with gross annual receipts of $10 million or more must provide a line extension customer the option of financing the cost of the line extension over at least a 3-year period. Our comments recommended that the PUC delete this financing provision unless it could demonstrate a significant number of potential utility customers are having difficulty obtaining the cost of essential line extensions. We took this position because we do not believe utilities should be in the business of providing financial services to its customer or have the ability to perform this function. We suggested that if the PUC maintained the financing provision in the regulation, it should allow the utility to screen customers with poor credit histories and to charge market based rates.
In response to our concern, the PUC amended the regulation by providing two options which are within the discretion of the utility. The first option is that a utility may finance the customer's main extension costs over 3 years. The second option is that the utility may provide information to the customer on financial institutions that may offer financing. We believe the amended regulation provides the flexibility for a utility to avoid financing a customer's costs for a main extension and, therefore, we consider this issue to be resolved.
Finally, another concern we raised with the final-form rulemaking submitted March 21, 1996, was that it allowed a utility discretion in collecting the customer contribution. After establishing the ground rules for a fair and common policy, the central provision in section 65.21(b) states the following: ''. . . a bona fide service applicant may be required to provide a customer advance to the utility's cost of construction for the line extension.'' (Emphasis added.) We believed that in order for the regulation to be fairly applied, the word ''may'' should have been changed to ''shall'' because discretion could result in inequitable treatment of line extension requests.
The PUC addressed this concern in their Order and stated that ''a hard and fast rule would mean that companies wishing to be more generous would have to seek a waiver of the rule. . . .'' The PUC perceives a need to protect service applicants from overly zealous utilities, but the PUC does not perceive a need to protect the utilities from themselves. The PUC states that utilities do not as a rule make uneconomic or irrational business decisions by offering to fund their own line extensions when they are permitted to ask for a reasonable customer contribution. The PUC believes using the word ''shall'' would not address a compelling public interest.
We believe a more definitive guideline would avert more line extension proceedings before the PUC, or at a minimum make the adjudication of a complaint easier. Further, based upon the PUC's explanation in their Order, we question how the PUC will treat the resulting investment by a ''generous'' utility in a ratemaking proceeding if the utility foregoes the opportunity for a contribution and funds a line extension. A more definitive requirement could avoid even more future litigation because the exercise of discretion has the potential for inequitable treatment of customers requesting line extensions and could have future ratemaking implications. However, the PUC's complaint procedures and adversarial ratemaking process provide the opportunity to resolve these issues if they ever develop into a significant problem. Despite this remaining concern, the regulation is an improvement over the PUC's present procedures which have resulted in numerous case-by-case judgments on line extension complaints.
Therefore, It Is Ordered That:
1. Regulation No. 57-152 from the Pennsylvania Public Utility Commission, as submitted to the Commission on November 12, 1996, is approved; and
2. The Commission will transmit a copy of this Order to the Legislative Reference Bureau.
Commissioners Present: John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Arthur Coccodrilli; John F. Mizner, Dissenting; Irvin G. Zimmerman
Public meeting held
November 21, 1996
Pennsylvania Public Utility Commission--Revisions of Rules of Administrative Practice and Procedure; Doc. No. 57-156
On March 28, 1995, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Pennsylvania Public Utility Commission (PUC). This rulemaking would comprehensively amend and update the PUC's rules of Administrative Practice and Procedure at 52 Pa. Code Chapters 1, 3, 5, 57 and 59. The authority for this regulation is found in sections 331--335, 501, and 701--703 of the Public Utility Code (66 Pa.C.S. §§ 331--335, 501, and 701--703) and the Commonwealth Documents Law (45 P. S. § 1201 et seq.) and its attendant regulations at 1 Pa. Code §§ 7.1--7.4. The proposed regulation was published in the April 8, 1995 edition of the Pennsylvania Bulletin, with a 90-day public comment period. The final-form regulation was submitted to the Commission on October 28, 1996.
The PUC believes these amendments are necessary to improve the rules by changing provisions which are incorrect, inefficient or outdated. The PUC's stated objective is to produce procedural rules that are fair, efficient and clear. The rules were previously amended in 1984 and 1989. Approximately 100 sections are involved in these amendments, ranging from minor grammatical changes, rewording phrases and correcting references to adding entirely new sections to address perceived problems.
The PUC began this round of proposed changes by publishing an advance notice of proposed rulemaking in the Pennsylvania Bulletin on March 13, 1993. Following receipt of numerous comments and recommendations from PUC practitioners, a PUC internal committee made further changes before this rulemaking was adopted by the PUC.
Chapter 1 amendments section 1.8 (Definitions) includes certain new terms. For example, the rules now distinguish ''active parties'' from ''inactive parties'' in general rate cases. There is also now an Office of the ''Prothonotary'' (rather than ''Secretary'') of the PUC. The ''Prothonotary'' is the PUC office where pleadings and other documents are filed and records kept.
These amendments update a variety of procedural filing requirements. For example, under ''date of filing'' (section 1.11), a new subsection (c) has been added to explicitly prohibit telecopier facsimile transmission (fax) filings. The rationale is to ensure that the PUC's files contain clear and legible original documents. However, parties to litigation proceedings are not precluded from agreeing to accept faxed documents from each other. In the final-form regulation, new language has been added to subsection (b) in section 1.12 (relating to computation of time) to further clarify the rules on computing time.
Section 1.21 (appearance in person) and section 1.22 (appearance by attorney or certified legal intern), involve representation before the PUC. The PUC's proposed amendments to these sections were the most controversial provisions of this rulemaking, based on commentators' comments during the proposed rulemaking phase. Several commentators, including the Pennsylvania Bar Association's Unauthorized Practice of Law Committee (PBA) and the Attorney General's Office of Consumer Advocate (OCA), cited Pennsylvania's statutory and case law (and Pennsylvania Supreme Court Rules of Professional Conduct) which generally impose significant restrictions on using non-lawyers in the manner proposed in the revisions to sections 1.21 and 1.22.
For example, amendments proposed for section 1.22(d) would have allowed legal assistants (joining attorneys and legal interns), employed by or subject to the direct supervision of a currently certified Pennsylvania attorney, to represent an individual who files a formal complaint with the PUC's Bureau of Consumer Services alleging an inability to pay a utility bill. It was unclear whether this language was intended to allow such representation before an Administrative Law Judge (ALJ) in formal, adversarial hearings. The PUC's intent was to only allow legal assistants to be involved in representing complainants in non-hearing informal proceedings involving factual issues (for example, resolution of a complaint over a utility bill).
We concluded our Comments on the unauthorized practice of law issue by stating our belief that the representation of parties by legal assistants may be allowed only in informal proceedings before the PUC's Bureau of Consumer Services. We requested that section 1.22 of the final-form regulation be further amended, consistent with applicable law, to clarify the limits of legal assistants' representational authority. The PUC has further amended sections 1.21 and 1.22 in response to these concerns.
Section 1.21 of the final-form regulation has been revised and reorganized into four subsections for improved clarity. Subsection (a) provides that individuals may represent themselves in PUC proceedings. Subsection (b) now provides that in adversarial proceedings partnerships, corporations, trusts, associations, agencies, political subdivisions and government entities shall be represented only as provided under section 1.22 (for example, by attorneys and certified legal interns). The PUC also adopted a suggestion of the OCA and amended subsection (b) to provide that any request for a general rate increase (under 66 Pa.C.S. § 1307(f) or § 1308(d)), made under subsection (b), shall be considered to be an adversarial proceeding.
Section 1.21(c) is the former section 1.21(b). It provides that, in nonadversarial proceedings, a member of a partnership may represent the partnership, and a bona fide officer of a corporation, trust or association may represent the corporation, trust or association. An officer or employe of another agency, political subdivision or government entity may represent the agency or political subdivision before the PUC and in conjunction with formal proceedings under Chapter 5 (relating to formal proceedings).
Section 1.21(d) is new in the final-form regulation. It provides that in informal proceedings brought under Chapters 56 and 64 (relating to standards and billing practices for residential utility service and residential telephone service, for example, residential utility billing disputes), parties may be represented by paralegals working under the direct supervision of an attorney admitted to the Pennsylvania Bar or by another appropriate individual. The PUC substituted the word ''paralegals'' for ''legal assistants'' and clarified that the role of paralegals as representatives is limited to only informal proceedings, which involve efforts to resolve factual issues in billing disputes. Since informal proceedings do not involve legal issues, the PUC also provided, for added flexibility, that parties may be represented by paralegals supervised by a licensed attorney or another appropriate individual.
Section 1.22 now provides for representational appearance by an attorney or a certified legal intern. The proposal to allow an appearance by a ''legal assistant'' has been dropped, as was the proposed subsection (d). Subsection (a) provides that a Pennsylvania attorney may represent individuals, partnerships, associations, corporations or government entities in PUC proceedings. Subsection (b) would allow an attorney from another state to represent a party in a PUC proceeding even if a Pennsylvania attorney would not be accorded like privileges in that other state, if so allowed in the discretion of the presiding officer or the PUC. Sections 1.22(c) would allow law students meeting the requirements of Pennsylvania Bar Admission Rule 321 to appear in PUC proceedings consistent with Pennsylvania Bar Admission Rule 322 (relating to authorized activities of certified legal interns).
In the proposed version, the PUC amended section 1.36 to allow a party's attorney to personally verify all applications, petitions, formal complaints, motions and answers. In our Comments on the proposed rulemaking, we questioned the PUC's justification for allowing an attorney to sign a verification since, in many cases, the attorney may know only what has been disclosed by the client. We suggested the PUC adopt alternative section 1.36(a) language proposed by Duquesne Light Company (Duquesne Light). The PUC did so in the final-form regulation and also deleted the reference to a party's attorney executing a verification.
Section 1.54(c) provides for service of process by mail and how that is to be done. In our Comments on the proposed rulemaking we suggested some language changes to improve clarity and allow the use of other modes of delivery (for example, by Federal Express). The PUC incorporated our suggested language in the final-form regulation.
Other subchapters of Chapter 1 may be summarized as follows. Subchapter D deals with requirements for documentary filings and provides basic filing forms. Subchapter E relates to fees. Section 1.43(a) increases the fee to provide copies of microfilm from $25 per roll to $80 per roll. Minor clarifying amendments are also proposed in the language of other subchapters including: Subchapter F, dealing with service of documents; Subchapter G, dealing with matters before other tribunals; and Subchapter H, relating to public access to PUC records.
A number of clarifications/corrections have been made in Chapter 3 (relating to special provisions). Subchapter A deals with special PUC actions. It includes procedures for emergency orders and interim emergency orders, including their issuance or denial, and hearings on them. An ''emergency order'' is an ex parte order issued by a single PUC Commissioner, the PUC, the PUC's Director of Operations or his executive assistant, or the PUC's Secretary, in response to an emergency. This change has been made to reflect the PUC's current practice of having the PUC's Secretary sign emergency orders when a PUC Commissioner or the Director of Operations is not available. Other sections deal with various procedural matters relating to emergency orders.
Subchapter B of Chapter 3 deals with informal complaint procedures. Section 3.111(b) provides that informal complaints in rate cases be filed with the Prothonotary of the PUC. All other informal complaints instituted by a letter or other informal communication are to be filed with the PUC's Bureau of Consumer Services. Non-rate case informal complaints involve mostly billing/ability-to-pay disputes with utilities. The filing of an informal complaint may lead to the filing of a formal complaint with the PUC, which would be a more formal, adversarial proceeding before an ALJ.
Section 3.501 (relating to certificate of public convenience as a water or wastewater treatment supplier), has been expanded and refined to cover wastewater treatment suppliers. The PUC states that it coordinated these provisions with the Department of Environmental Protection (DEP). Subsection (d) requires service of applications upon the OCA, the Office of Small Business Advocate (OSBA), and the DEP. The protest subsection has been moved to section 3.502, which sets out the requirements for filing protests in more detail. Section 3.551 sets forth a listing of various official PUC forms.
There is a new Subchapter I (sections 3.601 and 3.602) with requirements for public utilities to file a notice of registration of a securities certificate with the PUC before they may issue or assume securities. This information, currently in Form L, is slightly revised and moved into the body of this regulation.
Chapter 5 (relating to formal proceedings) deals with amendments to the procedural requirements for formal PUC proceedings (as distinguished from ''informal'' proceedings before the PUC's Bureau of Consumer Services). These include sections 5.21 (formal complaints, generally) and 5.41 (petitions, generally), which add new subsections requiring that petitions be served upon the OCA, the PUC's Office of Trial Staff and, if applicable, the OSBA. Section 5.21(d) spells out that the filing of a formal complaint generally entitles the complainant to a formal trial-type hearing unless the PUC determines that the complaint should be dismissed without hearing if, in its opinion, a hearing is not necessary in the public interest. New language relating to the filing of motions has been added to further clarify section 5.21(d).
Many other sections in Chapter 5 have been expanded or otherwise include a variety of clarifying amendments, including those dealing with hearings and other conferences, settlements and stipulations, transcripts, interlocutory (for example, interim or pre-final) review of PUC rulings, discovery, evidence and witnesses, subpoenas and protective orders and presiding officers.
The PUC also has made minor clarifying amendments to section 57.26 (relating to construction and maintenance of electrical service facilities), and to sections 57.45 and 59.45 (preservation of records) relating to electric service and gas service, respectively.
These comprehensive amendments of the PUC's procedural rules will affect public utilities subject to the PUC's jurisdiction, including those providing gas, water, telecommunication, electric and some transportation services. The amendments will also affect other parties who appear before the PUC in connection with various complaints or requests for approval of utility rate changes. In terms of record keeping and reporting impacts, certain amendments may require some additional information while other amendments may reduce or otherwise lessen current requirements.
There is one direct cost increase associated with this rulemaking. Section 1.43(a), relating to schedule of fees payable to the PUC, would increase the fee to provide copies of microfilm from $25 per roll to $80 per roll. The PUC states that it has done so following an in-house cost study, which establishes that the proposed new charge reflects its actual costs. No opposition was expressed about this change.
Commentators on the proposed version of this rulemaking, in addition to this Commission, were the PBA; Central Pennsylvania Paralegal Association; National Federation of Paralegal Associations, Inc.; DEP; Duquesne Light; law firms of Kirkpatrick & Lockhart and Malatesta, Hawke & McKeon; OCA; OSBA; PECO Energy Company; Pennsylvania Conference of Administrative Law Judges; Pennsylvania Gas Association; Pennsylvania Power Company; West Penn Power Company; PUC Office of Trial Staff; PUC's Special Assistants and its Bureaus of Audits, Law and the Secretary; and Raymond A. Thistle, Jr., Esquire.
Most, but not all, comments consisted of suggested refinements and ''fine-tuning'' amendments. After carefully considering all comments, the PUC further revised the final-form regulation. There were also a number of suggested changes that the PUC chose not to make. The PUC staff stated that in some instances certain suggested changes were determined to be too costly, administratively too burdensome, or otherwise were inappropriate to adopt.
On November 13, 1996, the Senate Consumer Protection and Professional Licensure Committee met and voted to approve the final-form regulation.
The Commission received four comment letters on the final-form regulation. Letters from the Harrisburg law firm of Maletesta, Hawke & McKeon and the Keystone Alliance of Paralegal Associations were supportive of the final-form regulation. The Pennsylvania Gas Association suggested a further clarification be made. The comment letter from the PBA objected to the use of the word ''paralegals'' in section 1.21(d) as an ambiguous and imprecise term. The PBA also noted that this provision could be interpreted as allowing ''another appropriate individual'' (for example, someone other than a non-Pennsylvania licensed attorney) to supervise paralegals. It is the PBA's position that paralegals must be supervised exclusively by attorneys.
At our public meeting, the PUC representative stated that the term ''paralegal'' was used to refer to a general class of individuals and clarified that the phase ''another appropriate individual'' is intended to allow a company's customer service representative or some other person to participate in a billing dispute between the utility and its customer. While the wording of this section could be improved, we agree with the PUC's position on this issue.
We also note that PUC Commissioner John Hanger issued a Statement in connection with the PUC's Order approving the submission of this final-form regulation. Commissioner Hanger, reflecting a concern he raised initially in connection with the proposed version of this rulemaking, stated that section 1.21 should be amended to make clear that non-attorneys may appear as witnesses presenting factual testimony in adversarial proceedings before an ALJ without having to hire an attorney to sponsor their testimony.
We understand Commissioner Hanger's concern that it may not be economically feasible or practical for small utilities to hire an attorney so that a witness can give factual testimony in an adversarial proceeding. However, any business which has been incorporated is required by Pennsylvania law to be represented by an attorney in adversarial proceedings. In effect, for the corporation to have legal standing so that an owner or other person may present factual testimony in a proceeding before an ALJ, the testimony must be sponsored by an attorney who has entered an appearance on behalf of the corporation. This is in contrast to the section 1.21(a) rule which allows individuals to represent themselves in either formal or informal PUC proceedings.
We have reviewed this regulation and find it to be in the public interest. The final-form regulation incorporates extensive amendments, including many of those suggested by commentators. These revisions will update incorrect, inefficient or outdated provisions and result in fairer, more efficient and clarified PUC procedural rules.
Therefore, It Is Ordered That:
1. Regulation No. 57-156 from the Pennsylvania Public Utility Commission, as submitted to the Commission on October 28, 1996, is approved; and
2. The Commission will transmit a copy of this Order to the Legislative Reference Bureau.
Commissioners Present: John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Arthur Coccodrilli; John F. Mizner; Irvin G. Zimmerman
Public meeting held
November 21, 1996
Insurance Department--Requirements for Funds Held as Security for the Payment of Obligations of Unlicensed, Unqualified Reinsurers; Doc. No. 11-135
On February 27, 1996, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Insurance Department (Department). This rulemaking would amend 31 Pa. Code by adding Chapter 163. The authority for this regulation is found in sections 319, 319.1 and 319.2 of the Insurance Law of 1921 (Act) (40 P. S. §§ 442, 442.1 and 442.2). The proposed regulation was published in the March 9, 1996 Pennsylvania Bulletin with a 30-day public comment period. The final-form regulation was submitted to the Commission on November 4, 1996.
Reinsurance is an agreement in which one insurance company (the ceding insurer) purchases insurance from another insurance company (the reinsurer) to cover the potential losses the ceding insurer may incur from the policies it has underwritten. By ''ceding'' a portion of the risk of loss to a reinsurer, the ceding insurer is protected from operating losses and can underwrite a greater number of policies.
According to the Department, for accounting purposes a ceding insurer may create an asset for losses it is entitled to recover from a reinsurer or reduce its liabilities for losses that are reinsured. This accounting transaction is called credit for reinsurance. However, if the reinsurer is not licensed by the Department or is not on the Department's list of qualified reinsurers, the reinsurer must provide collateral for the amount it is obligated to pay the ceding insurer under the reinsurance agreement. The collateral must meet the requirements established in the proposed regulation for the ceding insurer to take credit for the reinsurance.
This regulation establishes minimum requirements for trust agreements, letters of credit and other types of security approved by the Department for credit for reinsurance ceded to unlicensed, unqualified reinsurers. The regulation is intended to ensure that the collateral provided by the reinsurer to back up its obligations under the reinsurance agreement meets minimum standards for quality and collectibility.
In our Comments submitted in response to the proposed rulemaking, we raised several issues relating to the clarity of the regulation. The Department agreed with the vast majority of our recommendations, and the final-form regulation reflects the changes we suggested in our Comments. However, the Department rejected two of our recommendations. In addition, the Insurance Federation of Pennsylvania (IFP) made a recommendation in its comments on the proposed rulemaking relating to credit for reinsurance ceded to an alien reinsurer. A discussion of these issues follows.
Section 163.6(a) provides that assets in trust accounts must be in the form of security permitted by 40 P. S. § 442.1(b). However, the regulation does not list the types of security permitted by 40 P. S. § 442.1(b). In our Comments, we noted that the clarity of the regulation could be improved by including a list of acceptable types of security. Therefore, we recommended that in the final-form regulation, the Department provide a list summarizing the types of security permitted by 40 P. S. § 442.1(b).
In response, the Department stated that it believes domestic insurers have ready access to and are familiar with the laws and regulations affecting reinsurance agreements, and with statutory accounting principles related to reinsurance agreements. The Department stated that it believes summarizing the statutory requirements in the regulation could increase the potential for misinterpretation and noncompliance. The Department does not object to reciting statutory language that is not lengthy or subject to misinterpretation if taken out of context of the statute. However, because of the nature and length of 40 P. S. § 442.1(b), the Department decided not to repeat it in the regulation.
We agree with the Department that misinterpretation is possible if portions of the statute are taken out of context. In addition, no party has raised any objection to the reference to 40 P. S. § 442.1(b) in the regulation. Therefore, we believe the Department has sufficiently justified its reasons for rejecting the recommendation we made on this issue in our Comments.
Section 163.8 provides the conditions under which the trustee may resign or be removed. In its comments, IFP proposed to add an additional provision to subsection (3) which would allow for replacement of a trust with a letter of credit. In our Comments, we noted that it was our understanding that nothing in the regulation would prevent a trust from being replaced with a letter of credit. We noted that the clarity of the regulation could be improved by adopting IFP's recommendation. We recommended that the Department incorporate IFP's proposal in the final-form regulation.
In its response, the Department agreed that nothing in the regulation precludes one form of security from being replaced with another. The Department noted that the introductory statement in section 163.8 provides the following:This section applies if the resignation or removal of a trustee does not result in the termination of the trust agreement under § 163.9 (relating to termination of trust agreements). (Emphasis added.)
Based on this introductory statement, the Department explained that the restrictions in section 163.8 apply only when there is a change in the trustee for an existing agreement, not when an agreement is terminated and replaced with another form of security. Therefore, the Department concluded that IFP's recommendation would contradict, rather than clarify, the existing language.
We believe the Department has sufficiently explained why it rejected IFP's recommendation. Consequently, we have no outstanding concerns on this issue.
A domestic insurer may take credit for reinsurance ceded to an alien reinsurer under certain circumstances. Credit for reinsurance is permitted if the alien reinsurer is licensed in Pennsylvania, included on the Department's list of qualified reinsurers, or provides collateral to back up its obligations under the reinsurance agreement. In its comments, IFP proposed to add a new subsection (c) to section 163.20 (Other security acceptable to the Commissioner) which would permit credit for reinsurance ceded to a reinsurer domiciled and licensed in an alien jurisdiction. IFP proposed to permit credit for reinsurance if:
1. The alien jurisdiction has standards similar to those of Pennsylvania;
2. The reinsurance is recognized by the regulatory authority of the alien jurisdiction;
3. The reinsurance or the alien jurisdiction is approved by Pennsylvania's Insurance Commissioner; and
4. The credit for reinsurance is no more than 10% of the domestic ceding insurer's policyholder surplus as of the last filing.
In our Comments, we stated that IFP's proposal would place the burden on the Department of determining if the reinsurance requirements in a foreign country are comparable to those in Pennsylvania. We stated the burden of proving that reinsurance provided by an unqualified, alien reinsurer is acceptable should fall on the ceding insurer, not the Department. We further stated it would be inappropriate to assume that because the reinsurance is recognized by the regulatory authority of the alien jurisdiction it meets minimum standards for quality and collectibility in Pennsylvania.
To determine if the standards in an alien jurisdiction are comparable to those in Pennsylvania, the Department would not only have to be familiar with the alien jurisdiction's reinsurance standards, but also its laws and insurance practices. Without this information, it would be inappropriate for Pennsylvania's Insurance Commissioner to approve the reinsurance or the alien jurisdiction, even with the 10% limit proposed by IFP. We also noted in our Comments that alien reinsurers may conduct business in Pennsylvania by becoming ''qualified'' to do business in Pennsylvania under the requirements for qualifications set forth in 31 Pa. Code § 161.3(3).
We stated that we recognized the merit of IFP's position that no alien reinsurer may be as financially sound as a domestic reinsurer and able to meet its obligations under the reinsurance agreement. However, IFP's proposed subsection (c) placed the burden of demonstrating that the alien reinsurer can meet its obligations on the Department. We asserted in our Comments that this burden should fall on the ceding insurer. Consequently, we did not support IFP's proposal.
In the Preamble to the final-form regulation, the Department stated that it had given further consideration to IFP's recommendation but elected not to change its initial position on this issue. The Department asserts that existing laws and regulations provide sufficient alternatives for receiving credit for reinsurance. They emphasized that credit is allowed if an alien reinsurer:
1. Becomes licensed to transact business in Pennsylvania;
2. Becomes designated by the Insurance Commissioner as a qualified reinsurer; or
3. Provides collateral to cover its obligations.
The Department also pointed out that 31 Pa. Code § 161.8 provides the conditions under which partial credit for reinsurance with an alien reinsurer may be taken without full collateralization. In addition, the Department stressed the difficulty in making a determination that an alien jurisdiction's laws and standards are comparable to those in Pennsylvania, and in monitoring the status of the alien jurisdiction's laws and standards on an ongoing basis. The Department concluded that IFP's recommendation would unnecessarily increase the financial risk to domestic insurers.
We believe the decision to reject IFP's recommendation relating to alien reinsurers is appropriate. The Department has analyzed IFP's position and determined that it is not in the best interest of domestic insurers.
We have reviewed this regulation and find it to be in the public interest. The final-form regulation will benefit domestic ceding insurers by protecting their interests in reinsurance agreements with unlicensed, unqualified reinsurers.
Therefore, It Is Ordered That:
1. Regulation No. 11-135 from the Insurance Department, as submitted to the Commission on November 4, 1996, is approved; and
2. The Commission will transmit a copy of this Order to the Legislative Reference Bureau.
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