DF 98-076
                     HANOVER WATER WORKS COMPANY
           Petition to Issue Securities and Increase Rates
     Order Approving Issuance of Securities and Increase in Rates
                      O R D E R   N O.  23,007
                          September 1, 1998
       APPEARANCES: McLane, Graf, Raulerson & Middleton by
     Steven V. Camerino, Esq. and Sarah B. Knowlton, Esq. for Hanover
     Water Works Company; Robert Frank, Esq. for the Staff of the New
     Hampshire Public Utilities Commission.
               On May 8, 1998, Hanover Water Works Company (Hanover)
     filed with the New Hampshire Public Utilities Commission
     (Commission) a petition, pursuant to RSA 369, requesting
     authority to borrow money and to increase rates.  Hanover
     requested to borrow an amount up to $4,035,000 from the Drinking
     Water State Revolving Fund (DWSRF) which is administered by the
     New Hampshire Department of Environmental Services (NHDES).  On
     April 9, 1998, Hanover received preliminary approval from NHDES
     to borrow said amount in order to finance three projects
     recommended in an engineering study by the firm Dufresne-Henry,
     Inc. to better provide adequate, safe and reliable service under
     all conditions to the Town of Hanover, New Hampshire.  Final
     approval from NHDES is contingent in part upon Hanover receiving
     authority from the Commission to borrow these funds and increase
     its rates to service the debt. 
          An Order of Notice was issued on June 26, 1998 and a
public hearing was held on July 17, 1998.  The Commission
received no requests for intervention. 
               Hanover and the Staff of the Commission (Staff)
     presented a Stipulation Agreement(Agreement or Stipulation)
     providing authorization to issue securities in an amount up to
     $4,035,000 in order to finance certain construction projects and
     to increase rates by means of two step adjustments in order to
     service this debt.
               Peter Kulbacki, General Manager of Hanover, provided
     testimony to describe the need for the proposed construction
     projects.  Mr. Kulbacki stated that in 1996, as a result of 
     increased water main breaks and associated service disruptions,
     and in an effort to ensure continued compliance with an existing
     Waiver of Filtration from NHDES, Hanover commissioned the
     engineering firm Dufresne-Henry, Inc. to conduct an engineering
     study to assess the viability of Hanover's water distribution
     system and water storage facilities.  In December 1997,
     Dufresne-Henry, Inc. completed a study of Hanover's metering and
     infrastructure.  The study found a number of infrastructure
     deficiencies that pose a threat of backflow and
     cross-contamination to the drinking water supply.  Mr. Kulbacki
     explained that this threat exists because much of the
     infrastructure is greater than 100 years old and consists of
     unlined cast-iron pipe which is subject to corrosion and failure. 
     In addition, over 78% of the system has no post-treated storage. 
     Also, increased traffic on the roadways, under which much of the
     distribution system is located, exerts additional pressure on
     these already weak pipes.  Mr. Kulbacki stated that the
     engineering study made a number of recommendations to improve the
               Mr. Kulbacki said that in February 1998 Hanover applied
     for financing from the DWSRF for the three recommended projects
     with highest priority.  Hanover received preliminary approval for
     these projects from NHDES on April 9, 1998.
               Mr. Kulbacki outlined the three projects originally
     applied for as follows: 1) replace the water distribution main
     located at East Wheelock Street at an estimated cost of
     $1,290,000, with construction estimated to begin in the late fall
     of 1998 or early spring of 1999 and ending in the summer of 1999; 
     2) construct water transmission and distribution mains on Crosby
     and Lebanon Streets and an 800,000 gallon storage facility on the
     south end of the main system at an estimated cost of $2,225,000; 
     and 3) replace a four inch water main on North College, Maple,
     Prospect and West Streets at an estimated cost of $520,000.  Mr.
     Kulbacki anticipated that construction on these last two projects
     would begin during the summer of 1999 with completion expected to
     be during the late fall of 1999.
               Mr. Kulbacki also outlined two additional projects not
     contained in the original filing but which Hanover would be
     requesting approval for under its current DWSRF funding proposal. 
     The first involves moving the Balch Hill pump station to a new
     location near the Fletcher Reservoir as part of the East Wheelock
     Street project.  The second project involves replacement of the
     source meter in conjunction with relocation of the current
     chemical injection point, both also at Fletcher Reservoir.  Mr.
     Kulbacki indicated that the additional projects will not result
     in any change to the total amount of funding requested.
               Staff witness Jayson Laflamme presented the agreement
     and outlined the components of the stipulation.  Mr. Laflamme
     indicated that in order to repay the issued securities, Hanover
     would be allowed to increase its rates by means of two step
     adjustments.  The first would be in conjunction with the
     completion of the East Wheelock Street main replacement and is
     anticipated to be effective on or about June 1, 1999.  Based upon
     the estimated revenue requirement calculation, it is anticipated
     that the first step adjustment would result in a 10.5% increase
     in overall revenues.  The second step adjustment is contemplated
     to be effective on or about November 15, 1999 to coincide with
     the completion of the construction of mains on Crosby and Lebanon
     Streets and a storage facility on the south end of the main
     system as well as a main replacement on North College, Maple,
     Prospect and West Streets.  It is estimated that this step
     adjustment when added to the first step increase will result in a
     22.02% increase in overall revenues.  Mr. Laflamme said that
     final approval of each step increase by means of a Commission
     order will be contingent on review and approval of the costs
     actually incurred for each project in order to confirm that such
     costs are consistent with Hanover's petition in this case and
     that all construction was prudently completed.
               C. Bennett Brown, Jr. of Dayman, Lurie & Goldsbury,
     P.C., which provides accounting services to Hanover, presented
     testimony concerning the financial impact of the borrowing.  Mr.
     Brown stated that the terms and conditions of the DWSRF loans
     would be based on the individualized needs of Hanover and would
     be established based on the recommendations of the New Hampshire
     Business Finance Authority (NHBFA).  It is anticipated that the
     terms of the loans will be over 20 years at an interest rate of
     4.216% per annum for loans completed before October 1, 1998.  The
     interest rate will vary for those loan agreements entered into
     after October 1, 1998.  It is likely that NHDES will require
     Hanover to provide security for these loans through the
     assignment of water receipts.  
               Mr. Brown stated that under the proposed financing
     arrangement, NHDES will make disbursements directly to
     contractors engaged by Hanover in response to invoices submitted
     by Hanover.  NHDES will assess a flat 1% charge on all
     disbursements made.  In addition, interest will accrue on the
     loan from the date of substantial completion of the project.  All
     accrued interest plus the initial 1% charge on disbursements will
     be rolled into the principal amount of the loan for each project
     when Hanover begins making payments on the loan.  Mr. Brown said
     that he estimated that the total interest to be paid over the
     twenty year lives of the loans would be $1,786,214 assuming the
     interest rate on the loans is 4.216%.
               Mr. Brown stated that the financing will affect
     Hanover's operating budget by increasing operating expenses by
     $110,429, including depreciation of $82,850.  Mr. Brown also
     stated that interest expense will increase by $170,116.
     Completion of the total financing contemplated will result in a
     capitalization ratio of approximately 4.5 to 1.  
               Mr. Brown stated that Hanover will require a
     substantial rate increase to service the debt.  Due to the
     disparity between the length of the loans and the depreciable
     lives of the assets being put into service, Mr. Brown indicated
     that Hanover will almost assuredly have to initiate a filing for
     a full rate proceeding in the near future.
               We have reviewed the issues presented by the
     Stipulation between Hanover and Staff and believe that both the
     terms of the proposed borrowing and the purpose for which it is
     sought are consistent with the public good.  The proposed step
     increases are appropriate and will result in just and reasonable
     rates assuming that the estimated costs are actually incurred and
     that the aforementioned projects are constructed in a prudent
     manner.  Approval of the Stipulation will be with the
     understanding that paragraph B3 of the Stipulation contemplates
     further orders of the Commission requiring the review and audit
     of construction costs and a showing of prudence prior to the
     implementation of each step increase.
               Based upon the foregoing, it is hereby 
               ORDERED, that, pursuant to RSA 369, Hanover is
     authorized to borrow $4,035,000 at the rate of 4.216% under one
     or more 20-year notes issued by the Drinking Water State
     Revolving Fund administered by the New Hampshire Department of
     Environmental Services.  Such funds are to be used for the
     purpose of curing certain deficiencies in Hanover's system which
     were identified in a study by the engineering firm of
     Dufresne-Henry, Inc.; and it is
               FURTHER ORDERED, that Hanover is authorized to increase
     its rates by means of two step adjustments with the understanding
     that each step increase shall be contingent on review and
     approval of the costs actually incurred for each project to
     confirm that such costs are consistent with Hanover's petition in
     this case and that all construction was prudently completed as
     per Paragraph B3 of the Stipulation ; and it is
               FURTHER ORDERED, that the petitioner shall file an
     accounting with the Commission each January 1 and July 1, duly
     sworn to by its Treasurer, showing the disposition of the
     proceeds of this financing, until said proceeds are fully
               By order of the Public Utilities Commission of New
     Hampshire this first day of September, 1998.
        Douglas L. Patch    Bruce B. Ellsworth        Susan S. Geiger
            Chairman           Commissioner            Commissioner
     Attested by:
     Thomas B. Getz
     Executive Director and Secretary