DR 98-142
                         Northern Utilities, Inc.
                 1998/1999 Demand Side Management Program
                          Order Approving Program
                         O R D E R   N O.  23,068
                             November 23, 1998

         APPEARANCES:  LeBoeuf, Lamb, Greene & MacRae, L.L.P. by
     Paul B. Dexter, Esq. for Northern Utilities, Inc. and Larry S.
     Eckhaus, Esq. for the Staff of the New Hampshire Public Utilities
               On August 3, 1998, Northern Utilities, Inc. (Northern)
     filed with the New Hampshire Public Utilities Commission
     (Commission) a petition for approval of its 1998/1999 Demand Side
     Management (DSM) Program for the period November 1, 1998 through
     October 31, 1999.  The filing was made in compliance with Order
     No. 22,846 (February 4, 1998).  Northern proposes to continue
     offering its currently approved DSM programs for an additional
               By an Order of Notice issued August 13, 1998, the
     Commission scheduled a prehearing conference for September 1,
     1998, set deadlines for intervention requests and objections
     thereto, and outlined a proposed procedural schedule.  No party
     filed for intervention.  The Office of the Consumer Advocate
     (OCA) is a statutorily recognized intervenor.  On September 9,
     1998, the Commission issued Order No. 23,014 approving the
     procedural schedule.
               Pursuant to the approved procedural schedule, Northern
     and Staff engaged in formal discovery.  On September 23, 1998,
     Northern filed a request to reschedule the technical session and
     to extend filing of Staff's testimony.  On October 1, 1998, Staff
     requested an extension to the deadline for the filing of Staff's
     testimony due to delays in discovery.  Staff also requested to
     reschedule the settlement conference.  On October 2, 1998, the
     Commission granted the requested changes to the procedural
               On October 6, 1998, Staff filed the direct testimony of
     Michelle A. Caraway, Utility Analyst III and the joint testimony
     of Stephen P. Frink, Assistant Finance Director, and Robert F.
     Egan, Utility Analyst III.  On October 20, 1998, Staff filed a
     request to extend the date established for the filing of a
     settlement agreement and also to reschedule the hearing on the
     merits due to a scheduling conflict identified by Northern's
     counsel.  On October 21, 1998, the Commission granted Staff's
               On October 26, 1998, Staff notified the Commission that
     Northern and Staff were unable to reach a final resolution to the
     issues raised in the docket and would not be filing a settlement
     agreement.  Staff stated that the primary issues to be raised at
     the hearing were whether Northern should continue to sponsor DSM
     programs and whether Northern should be entitled to recover Lost
     Net Revenues associated with measures installed for new
     customers.  On October 26, 1998, a hearing was held before the
     Commission at which time testimony was offered by Northern's
     witness Paul Smith, Manager, Demand Side Management and Staff's
     witnesses Michelle Caraway, Stephen Frink and Robert Egan.
               On November 2, 1998, the Commission issued Order No.
     23,059 that suspended Northern's proposed Conservation Charges
     and required Northern to continue to offer its DSM programs and
     to collect the Conservation Charges as approved in Order No.
     22,846 until the final order in this docket was issued.  On
     November 10, 1998, Staff sent Northern a letter asking Northern
     to revise the Conservation Charges to reflect the effects on the
     proposed Conservation Charges of continuing the 1997/1998
     Conservation Charges for an additional month and the forecasted
     therm sales for the remaining eleven-month period.  Although the
     revised Conservation Charges would still be based on estimates,
     Staff believed that the Commission should have the opportunity to
     approve Conservation Charges based on the best information
     available to date.
          A.   Northern Utilities, Inc.
               For Residential Water Heating and Residential Heating
     customers, Northern proposes to implement its programs with
     direct program budgets of $3,128 and $102,367, respectively.  The
     water heating program offers a 100% incentive for the domestic
     hot water (DHW) package which includes hot water heater wraps,
     low flow showerheads, faucet aerators, hot water pipe insulation,
     and DHW temperature turndown.  The heating program provides for a
     pre-installation audit to identify if a customer needs any of the
     DHW measures listed above or qualifies for attic insulation,
     clock thermostats, duct or pipe insulation, or an incremental
     incentive for the installation of a high efficiency heating
     system.  The incentive level varies depending on whether the
     participant is low-income qualified, a renter or an
     owner/landlord.  The Total Resource Cost (TRC) test, the method
     currently accepted by the Commission to evaluate the
     cost-effectiveness of DSM programs in New Hampshire, resulted in
     ratios of 1.32 and 1.02, respectively.  Based on an impact
     evaluation, the cost-effectiveness analysis was calculated using
     a 57% realization rate applied to the engineering estimates of
     the therm savings.
               Northern proposes to offer its Small Commercial
     customers more standardized services at a direct program budget
     of $359,276.  These services include a computer generated audit,
     contractor arranging, and incentives for all measures that are
     cost-effective for a particular customer.  Measures may include
     DHW measures, attic insulation, wall insulation, clock
     thermostats, duct or pipe insulation, a premature heating system
     replacement, an incremental incentive for the installation of a
     high efficiency heating system, and heat recovery.  The direct
     incentives offered to these customers consist of a buydown to a
     2.5 year payback or 50% of the cost for an early replacement
     measure, whichever is less, with a maximum incentive of $30,000. 
     The TRC ratio for this program is 1.35 using a 76% realization
     rate based on a recent impact evaluation.
               For its Large Commercial customers, Northern provides
     more customized services by typically offering a walk-through
     energy audit to identify potential energy savings opportunities. 
     The proposed direct program budget is $71,861.  Northern proposes
     to pay a minimum of 75% of the cost of an engineering study and
     the customer would pay the remainder.  Direct incentives would
     consist of a buydown to a 2.5 year payback or 50% of the cost for
     early replacement measures, whichever is less.  The maximum
     incentive that Northern provides to buy down to a payback of 2.5
     years is $30,000 or 50% of the cost for the early replacement
     measure, whichever is less.  No incentive will be paid for any
     measure with less than a 2.5 year payback.  Prior to providing a
     financial incentive, Northern requires a customer to install any
     measure with a payback less than 2.5 years, unless there is a
     viable technical or operational reason why such measure should
     not be installed.  The TRC ratio for this program is 2.32 using a
     76% realization rate based on a recent impact evaluation.
               Northern anticipates substantial undercollections for
     its Residential Heating and Small Commercial customers for the
     end of the current program year.  Northern explained that the
     undercollections were due to negative Conservation Charges (i.e.,
     credits) that were in effect during the first three months of the
     1997/1998 program year, i.e., the high use winter months, and
     also to warmer than normal weather resulting in decreased sales. 
     Northern had been extremely late in filing its 1997/1998 DSM
     program, making the filing on October 24, 1997 as opposed to
     August 1, 1997 as required by Order No. 22,516 (March 3, 1997). 
     The Commission suspended the proposed Conservation Charges
     associated with the 1997/1998 program year by Order No. 22,780
     (November 3, 1997).  The Commission acknowledged the effect on
     rates in Order No. 22,846 which stated: "In order to lessen the
     rate impact to Northern's customers which would result from
     compacting recovery of the total DSM costs into the remaining
     nine months of the Program Year and to enable the Company to
     implement the proposed CCs on February 1, 1998, any
     over/undercollection associated with the first three months of
     the 1997/1998 Program Year will be addressed in Northern's
     1998/1999 DSM filing."  Thus, Northern proposes that the
     undercollections be recovered through the Conservation Charges
     effective in the 1998/1999 program year.
               At the hearing, Northern's witness Mr. Smith testified
     that Northern and Staff had agreed to revise the Conservation
     Charges to reflect the removal of the prospective Shared Savings
     Incentive of $58,270 related to the upcoming 1998/1999 program
     year.  Mr. Smith stated that any incentive earned by Northern for
     the 1998/1999 program year would be reconciled in the 1999/2000
     DSM program filing (Tr. at 7-8).
               Mr. Smith testified that he disagreed with Staff's
     prefiled testimony regarding disallowing recovery of Lost Net
     Revenues associated with new customers for two reasons.  First,
     Mr. Smith stated that the purpose of Lost Net Revenues was to
     make Northern whole so that it was not at a disadvantage when it
     delivers conservation services to its customers.  If Northern was
     not entitled to recover Lost Net Revenues associated with
     measures installed for new customers, Mr. Smith stated that
     Northern would be disadvantaged because it would be expecting a
     certain revenue stream that would not materialize.  Additionally,
     Mr. Smith testified that applying Staff's recommendation
     retrospectively was not a fair proposal (Tr. at 13-14).
               Mr. Smith also testified that Northern does not propose
     that the 1998/1999 program year be used to phase out its DSM
     programs.  He stated that it is appropriate for Northern to file
     an updated avoided cost study so that the results can be
     incorporated into the development and proposal of future DSM
     programs (Tr. 18-20).
          B.   Staff
               Staff's prefiled testimony dealt primarily with
     Northern's recovery of Lost Net Revenues associated with
     conservation measures installed for new customers, financial
     discrepancies in Northern's supporting schedules, the historic
     cost-effectiveness of Northern's DSM programs, the need for
     updated avoided costs, and whether Northern should continue to
     offer DSM programs.  Staff recommended that Northern not be
     entitled to collect Lost Net Revenues associated with measures
     installed for new customers.  By Order No. 19,905 (August 7,
     1990), the Commission allowed electric utilities to collect lost
     revenues related to "reduced sales due directly to utility C&LM
     programs."  Staff interpreted this phrase to refer to "a
     utility's existing customer base and not to DSM programs which
     have the effect of increasing sales" (Ex. 3, pp. 3-4).  Staff's
     testimony conveyed its concern that Northern's DSM program could
     be having the opposite effect intended by DSM programs; i.e.,
     load-building.  In particular, Staff questioned whether the
     rebates for new heating systems were generating new customers for
     Northern similar to the experience of EnergyNorth Natural Gas,
     Inc. (ENGI).  Data produced for ENGI's recent DSM proceeding
     (Docket DR 98-129) showed that 43% of heating system rebates were
     provided to new customers, either from new construction or
     switching from an alternate fuel source.
               Staff testified that Northern's DSM programs were
     screened for cost-effectiveness using avoided costs that were
     neither approved nor rejected by the Commission (Docket
     DR 95-107).  Staff recommended that should Northern propose to
     continue its DSM program into the 1999/2000 program year, then
     Northern should file an avoided cost study within its Integrated
     Resource Plan (Docket DR 98-135), by May 15, 1999, so that the
     study could be reviewed and the results incorporated into the
     benefit-cost analysis for the upcoming year.
               Staff also testified that Northern's DSM programs have
     not been cost-effective for the 1996/1997 and to date 1997/1998
     program years when the realization rates are incorporated in the
     cost-effectiveness analysis.  Staff's witnesses stated their
     belief that the avoided costs, when filed, will be lower than
     those used to prepare this filing.  Given new peaking sources and
     the new supply portfolio that will be available to Northern from
     the Wells Tank, the Portland Natural Gas Pipeline, and Maritimes
     & Northeast Pipeline, L.L.C., Staff believes that the avoided
     costs used to prepare the cost-effectiveness analysis will be
     lower, thus reducing the TRC ratios that have been presented in
     this filing.  Staff testified that these options will reduce the
     cost of supplemental gas which drives the savings or benefits of
     the DSM programs.  Northern will be avoiding its peaking costs,
     which are the most expensive supplies and therefore the benefits
     derived from the DSM program will be considerably less (Tr. 79
     and 86).  Staff stated that because the DSM programs have not
     been cost-effective for the last two years and the avoided costs
     used to prepare the 1998/1999 filing may be producing TRC ratios
     that are higher than should be, it is their recommendation that
     Northern's DSM programs be phased out during the 1998/1999
     program year.  Staff is not supportive of DSM programs which have
     not been proven to be cost-effective and which do not provide any
     benefits to non-participants.
               Staff testimony at the hearing focused primarily on two
     issues: (1) whether Northern should be denied Lost Net Revenues
     associated with measures provided to new customers and (2)
     whether Northern should phase out its entire DSM program over
     this coming program year.  Based on the evidence and the
     arguments presented, we will approve Northern's DSM program
     proposal, subject to the removal of the prospective Shared
     Savings Incentive of $58,270 related to the upcoming 1998/1999
     program year and subject to the elimination of the Lost Net
     Revenues associated with prospective DSM services to new
     customers.  The Commission will not require that Lost Net
     Revenues associated with such services be eliminated on a
     retrospective basis.  DSM programs were implemented as part of
     Integrated Resource Plan filings so that demand side and supply
     side options could be analyzed to "determine the optimal mix of
     resources that will provide ratepayers' energy service needs at
     the least cost consistent with the reliable supply..."  (Order
     No. 19,052 dated April 7, 1988).  It was the Commission's
     intention that these programs be used to conserve energy and
     would not be used as potential marketing tools to build load on a
     utility's system at other ratepayers' expense, a concern
     heightened by the move to increased competition in energy
               Consistent with our decision in the order addressing
     ENGI's 1998/1999 DSM Program (docket DR 98-129), we believe it is
     premature to decide whether gas utility-sponsored DSM programs
     should be phased out.  Staff presented evidence that suggests
     that Northern's TRC ratios may be lower for the programs now
     being offered, given changes in the determinants of its avoided
     costs in recent months.  Northern has agreed to file an updated
     avoided cost study if it wishes to justify further ratepayer-
     funded DSM programs after this year.  However, it may be that
     improvements to program design could increase the retention rates
     for the programs, or otherwise increase the cost-effectiveness of
     the programs.  Thus, we will not prejudge at this time whether
     DSM for Northern should be continued past this program year.  We
     note, however, the need to make such a determination in a timely
     fashion, before customer expectations are raised or lowered
     unnecessarily.  It is particularly important for Northern to make
     timely filings of its avoided cost study within the IRP docket on
     or before May 15, 1999, and make its proposals for DSM for
     program year 1999/2000 on or before July 15, 1999.
               We believe that removal of the prospective Shared
     Savings Incentive is consistent with previous Commission orders
     for the electric utilities regarding performance incentives
     related to conservation programs and with Order No. 21,881
     (October 30, 1995) regarding Northern's 1995/1996 DSM program,
     which stated: "Northern may collect a Performance Incentive as a
     result of the DSM programs... to be calculated and collected in
     the next Program Year."
               On November 12, 1998, Northern submitted revised
     Conservation Charges in response to a request made by Staff.  We
     believe that these revised Conservation Charges reflect our
     decisions regarding Lost Net Revenues and Shared Savings
     Incentives, and are based on the best information to date. 
     Therefore, we will approve the following Conservation Charges:
     for Residential Water Heating, $0.0090/therm; for Residential
     Heating, $0.0203/therm; for Small Commercial, $0.0382/therm; and
     for Large Commercial, $0.0078/therm.
               Finally, we waive the application of N.H. Admin. Rules,
     Puc 1203.05(a), which requires generally that rate changes be
     implemented on a service-rendered basis, and will allow Northern
     to implement its Conservation Charges on a bills-rendered basis. 
     This waiver, pursuant to Puc 201.05, produces a result consistent
     with the principles embodied in Puc 1203.05(b), which sets forth
     exceptions for allowing rate changes on a bills-rendered basis,
     and is in the public interest because it eliminates consumer
     confusion and reduces administrative costs.
               Based upon the foregoing, it is hereby 
               ORDERED, that Northern's 1998/1999 DSM Program
     proposal, as filed at the hearing held October 26, 1998, and as
     revised by our analysis detailed above, is APPROVED; and it is
               FURTHER ORDERED, that the following Conservation
     Charges are APPROVED effective December 1, 1998 on a
     bills-rendered basis: for Residential Water Heating,
     $0.0090/therm; for Residential Heating, $0.0203/therm; for Small
     Commercial, $0.0382/therm; and for Large Commercial,
     $0.0078/therm; and it is
               FURTHER ORDERED, that Northern shall file properly
     annotated tariff pages in compliance with this Order no later
     than 15 days from the issuance date of this Order, as required by
     N.H. Admin. Rules, Puc 1603.
               By order of the Public Utilities Commission of New
     Hampshire this twenty-third day of November, 1998.
       Douglas L. Patch     Susan S. Geiger       Nancy Brockway
           Chairman           Commissioner        Commissioner
     Attested by:
     Thomas B. Getz
     Executive Director and Secretary