DR 97-058
                       pennichuck water works, inc.
                   Petition for Permanent Rate Increase
        Order Approving Settlement Agreement and Petition for Rate
                         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.
               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
               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
               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,
               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
               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%.
          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
               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.  
               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
               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
               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