DR 97-058
pennichuck water works, inc.
Petition for Permanent Rate Increase
Order Approving Settlement Agreement and Petition for Rate
Consolidation
O R D E R N O. 22,883
March 25, 1998
APPEARANCES: Gallagher, Callahan and Gartrell by David
A. Garfunkel, Esq. for Pennichuck Water Works, Inc.; Ransmeier
and Spellman by Dom S. D'Ambruoso, Esq. for Anheuser-Busch, Inc.;
Amy L. Ignatius, Esq. for the Staff of the New Hampshire Public
Utilities Commission.
I. PROCEDURAL HISTORY
Pennichuck Water Works, Inc. (Pennichuck) serves the
southern New Hampshire area, operating a core system that serves
Nashua and portions of Amherst, Merrimack, Milford, Hollis and
Bedford, as well as 10 independent community systems serving
portions of Epping, Derry, Bedford, Milford and Plaistow. On May
28, 1997, Pennichuck filed with the New Hampshire Public
Utilities Commission (Commission) a petition for an increase in
its rates and to consolidate the rates of the core and community
systems, even though the systems are not physically
interconnected.
Anheuser-Busch, Inc. (AB), Pennichuck's largest
customer, sought and was granted intervention.
Pennichuck requested an overall 26.98% increase in
permanent rates, on a consolidated system basis. In its
testimony filed July 10, 1997, Pennichuck also requested a
temporary increase in revenues overall, to be derived solely from
core customers, which the Commission granted by Order No. 22,683
(August 18, 1997). The 5.12% increase in revenues, on a
temporary basis, excluded the community systems and all
commercial and municipal fire protection customers. This
resulted in a 7.8% increase in rates to those core customers
affected.
Subsequent to the temporary rate order, on November 6,
1997, AB filed testimony of its expert witness, Ernest Harwig,
opposing rate consolidation. Also on that date, Staff filed
testimony of Douglas W. Brogan, James L. Lenihan and Mark A.
Naylor. Staff witness Tracy B. Guyette filed testimony on
November 13, 1997.
On December 5, 1997, AB moved for permission to file
rebuttal testimony, which Staff opposed. The Commission granted
the request and on December 23, 1997, AB filed rebuttal testimony
of Mr. Harwig. Also on that date, Pennichuck filed rebuttal
testimony of Stephen J. Densberger and its consultant Janice A.
Beecher. On January 6, 1998, AB moved to strike Dr. Beecher's
testimony, which Pennichuck opposed. The Commission denied the
motion to strike. On January 22, 1998, AB filed surrebuttal
testimony of Mr. Harwig and on the following date, Staff filed
surrebuttal testimony of Mr. Brogan.
On January 30, 1998, Pennichuck and Staff submitted a
Settlement Agreement on all issues except rate consolidation.
The Commission took evidence on the Settlement Agreement and the
contested issue of rate consolidation on February 3 through 5,
1998.
II. SETTLEMENT AGREEMENT
The Settlement Agreement addressed all issues except
rate consolidation. Revenue requirements were calculated for the
systems on a stand alone basis, with Pennichuck's explicit
statement that it did not agree to stand alone calculations. AB
did not participate in the settlement negotiations on any issue
other than rate consolidation and took no position on the
Settlement Agreement.
Revenue deficiency for the core was set at $511,230 and
at levels for the community systems ranging from ($7,158) to
$41,791, based on stipulated rate base and net operating income
for the core and community systems (found as attachments to the
Settlement Agreement). Pennichuck and Staff agreed on an allowed
return on common equity of 10.35%, a cost of long term debt of
7.41%, cost of short term debt of 7.43%, and a treatment of a
parent company infusion as short term debt, producing an overall
cost of capital of 8.34%.
The proposed revenue increase would be collected on all
but private and municipal fire protection customers, based on a
recent review of Pennichuck's 1992 cost of service study that
indicated an over-collection of fire protection charges.
Pennichuck and Staff recommend, therefore, that fire protection
rates remain at their present levels.
Pennichuck and Staff also agreed to a step adjustment
to occur simultaneously with the increase in permanent rates, to
reflect plant additions completed on or before December 31, 1997
that were made in conformance with the Safe Drinking Water Act or
mandated by the City of Nashua and/or the State for highway work,
or any projects in which $50,000 or more was expended on non-revenue producing items. In addition, the step adjustment would
reflect one year's accumulated depreciation and related deferred
taxes and one year's depreciation expense and property taxes in
connection with the approved plant additions. Again, private and
municipal fire protection customers would be excluded from the
increase.
The proposed permanent rate increase, excluding the
step adjustment, is the same as that approved by the Commission
for temporary rates; therefore there would be no recoupment for
the difference between temporary and permanent rates. Rate case
expenses, however, would be surcharged over a 12 month period.
The actual amount of rate case expenses will be determined after
review of a compliance filing Pennichuck is to submit upon
issuance of this order.
Finally, regarding depreciation, Pennichuck and Staff
agree to use the "whole life" rather than Pennichuck's proposed
"average remaining life" methodology, for an annual depreciation
expense of $1,272,791, which results in an annual composite
depreciation rate of 2.44%.
III. POSITIONS OF THE PARTIES AND STAFF ON RATE CONSOLIDATION
A. Pennichuck and Engineering Staff
Pennichuck sought to consolidate all of the community
systems into one set of rates, even though the systems are not
physically interconnected. Applying the settlement figures,
including the step adjustment, the consolidated rate would be
approximately $253 per year for the average residential user. By
contrast, again applying the settlement revenue requirements but
keeping the rates on a stand alone basis would result in an
average residential core rate of $245 per year; the community
systems' rates would range from $291 to $1,166 per year. Single
family residential customers in the core system, therefore, would
pay an additional $8 per year under the rate consolidation
proposal, while most of the community system customers would see
a decrease in their bills.
In support of the rate consolidation proposal,
Pennichuck argued that the community systems would benefit from
Pennichuck's ability to upgrade or repair facilities as necessary
to meet environmental mandates without fear of overwhelming
community systems' customers. Because the community systems are
small (ranging from 29 to 458 customers), any significant capital
improvement can result in a significant increase in rates.
Pennichuck anticipates reduction in regulatory and
accounting expense if the systems are consolidated, and predicts
that with rate consolidation it would be better able to consider
purchase of small systems in the future, as the Commission has
encouraged.
Pennichuck's consultant, Janice A. Beecher, testified
that commissions have ruled both ways on rate consolidation
proposals, and found merit in Pennichuck's request. In her view,
Pennichuck's community systems are simply too small to be viable
on a stand alone basis.
Staff engineer Douglas W. Brogan testified in support
of Pennichuck's proposal, concluding that the viability of the
systems and their ability to come into and remain in conformance
with environmental standards would be greatly enhanced by
consolidation with the core. He analyzed characteristics of the
systems and asserted that they bore strong similarities to the
core, further bolstering the arguments for rate consolidation.
He distinguished this proposal from the Consumers New Hampshire
water system in which unhappiness with rate consolidation was the
source of much of the impetus for the town of Hudson purchase of
Consumers New Hampshire's assets. According to Brogan, the
Consumers New Hampshire systems had different characteristics
than the Pennichuck systems. Further, Consumers New Hampshire's
service and water quality and utility management were not on a
par with that of Pennichuck.
Brogan stated he would not support rate consolidation
in all cases, but that the particular circumstances in this case
justified approval of the request. He felt the approximately $8
per year increase to single family residential core customers
under rate consolidation was justified by the benefits that
accrued to all Pennichuck ratepayers, and the overall rate of
$253 per year was just and reasonable.
B. Anheuser-Busch, Economics and Finance Staff
AB, Pennichuck's largest industrial customer, opposed
the rate consolidation proposal. AB's consultant Ernest Harwig
argued that consolidation of rates, also known as single tariff
pricing (STP), was unwise regulatory policy because it breaks the
connection between rates and costs. It changes the economics for
water conservation, especially in the community systems, because
the rate decreases produced by STP weaken the incentive to
conserve. Mr. Harwig indicated that the subsidy to be paid by AB
would be $20,000 annually, and he rejected the notion that
Pennichuck is one large consolidated operation because of the
differences between demand characteristics of the core system and
those of the community systems.
Applying the Settlement revenues and assuming rate
consolidation is approved, AB's yearly charge (pursuant to a
special contract) would increase by $99,990, from $481,417 to
$581,407. Without rate consolidation, the increase would be
approximately $20,000 less, as testified by Mr. Harwig.
The Commission's Acting Finance Director, Mark A.
Naylor, testified in opposition to the proposal, arguing among
other things that by blending the rates there would be no
tracking of the specific costs of each system. In response,
Pennichuck stated that while it would not keep full books on each
system, it would record and make available all costs on a system
by system basis. Naylor questioned Pennichuck's anticipated
savings in regulatory and accounting costs for two reasons: 1) it
could not quantify those savings and did not provide for any
savings in this rate filing, and 2) its response noted above that
it would track the costs of each system and this would appear to
erode the anticipated savings. Mr. Naylor also testified that,
unlike other regulated utilities which are moving toward
deregulation as a result of alternative choices in "supplies" of
product, water is unique in not enjoying such supply
alternatives, and price signals to customers become even more
critical in properly managing water resources.
Staff Economist James L. Lenihan also opposed
consolidation on the ground that the systems are not physically
interconnected and, therefore, should not have rates set on a
consolidated basis. According to Lenihan, the community systems
should remain on a stand alone basis in order to reflect true
costs of each system. The "subsidy" by core customers, although
small, would be inappropriate.
IV. COMMISSION ANALYSIS
We have reviewed the Settlement Agreement and testimony
and conclude that the Settlement Agreement is a sound resolution
of the rate case issues. We recognize that Pennichuck has faced
extraordinary costs due to highway and other construction work
mandated by the State and the City of Nashua. These capital
intensive, non-revenue producing projects have put a strain on
the company, in part prompting us to approve a 5.12% increase in
revenues on a temporary basis in August, 1997. In addition, we
recognized that the mandates of the Safe Drinking Water Act or
other environmental standards have required significant
investments in both the core and community systems.
Because of the magnitude of some of these investments,
we will accept the recommendation that we approve a simultaneous
step adjustment on the effective date of the permanent rate
increase, for certain specified improvements. To do otherwise
would force Pennichuck to file another rate case relatively soon,
which ultimately is a cost borne by ratepayers. For projects
completed in 1997 that meet the threshold criteria, we will
approve the step adjustment.
While New Hampshire law is replete with references to
the appropriate standard for establishing a utility's rate base
and rate of return, there appears to be no specific guidance on
the point of rate consolidation or single tariff pricing. Thus,
in the absence of any legal impediment to utilizing single tariff
pricing, our decision essentially becomes one of policy that is
bound only by our statutory constraints that rates be just and
reasonable and that we act in the public interest. See RSAs
374:2 and 378:28.
Opponents of rate consolidation in this case argue that
we should adhere to our traditional ratemaking policy of cost
causation. We find their position unpersuasive in this case for
two reasons. First, traditional cost of service regulation
already includes some measure of rate averaging in that customers
are not charged the true costs of serving them on an individual
basis. Second, and perhaps more important, stand alone rates in
this case produce results for some customers that are well beyond
the zone of "just and reasonable". One needs only to look at the
stand alone rates that would result from the Settlement Agreement
to see just how extreme the results are when significant
investments are required in a very small system. Most of the
community systems are simply too small to absorb the magnitude of
investments mandated by environmental enactments. However,
without these investments, it is clear that the small community
systems would have been unable to provide safe and adequate water
service to their customers.
We do not believe it would be in the public interest to
impose annual rates in the range of $800 to $1200, as would be
the case here, when a reasonable alternative is available. By
consolidating the community systems with the core system for
ratemaking purposes, all customers would face a uniform tariff
which, for the average residential customer, would be
approximately $253 per year. The rates for the average
residential customer in the core system would increase less than
$1.00 per month, for a total of $8 per year, under the rate
consolidation proposal which, in light of the alternative, we
find to be acceptable. We consider a single tariff rate of
approximately $253 per year for the core residential customer to
be just and reasonable. A consolidated rate will ensure
affordability and the continued viability of many of Pennichuck's
community systems. It will also enable Pennichuck to operate in
a more administratively efficient manner by eliminating separate
general ledgers for each system, thereby reducing administrative
costs.
Although we are approving the rate consolidation
proposal, we share the concerns of Mr. Naylor that there is a
risk that there will be inadequate information tracked on a
community system basis and, as a result, a troubled system, or
over-investment, could escape the scrutiny of management and
regulators. We accept the commitment of Pennichuck to record
costs on a system specific basis.
We find that all investments that are the subject of
this proceeding have been prudently incurred and that the
facilities are used and useful in the provision of public utility
service.
The result of the rate consolidation proposal and the
Settlement Agreement, including the step adjustment, will be an
additional increase of 12.97% for customers (excluding fire
protection customers) for bills rendered on or after April 1,
1998. Together with the temporary rate increase approved in
August, 1997 (which mirrors the permanent rate increase approved
by this order) Pennichuck will see a total 16.77% increase in
revenues and general metered core customers will see a total
20.77% increase in rates over those in effect prior to the filing
of the rate case in the summer of 1997. The billing impact for
core customers as of April 1, 1998, however, will be 12.97%,
given that 7.8% of the increase has already been included in
rates as of the temporary rate order last August. As of April 1,
1998, community system customers will see increases or decreases
in their bills according to whether their community system rate
had been above or below the consolidated rate of approximately
$253 per year.
Finally, we emphasize that by approving rate
consolidation in this case, we are not accepting it as a generic
policy for all water companies.
Based upon the foregoing, it is hereby
ORDERED, that the Settlement Agreement reached between
Pennichuck and Staff is APPROVED; and it is
FURTHER ORDERED, that Pennichuck's rate consolidation
proposal is APPROVED; and it is
FURTHER ORDERED, that Pennichuck shall file its final
rate case expense request within five days for Staff review and
Commission consideration; and it is
FURTHER ORDERED, that Pennichuck shall submit a
compliance tariff within five days in conformance of this order.
By order of the Public Utilities Commission of New
Hampshire this twenty-fifth day of March, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary