DF 96-210 TILTON & NORTHFIELD AQUEDUCT COMPANY, INC. Petition for Authority to Issue Securities and Increase Rates Order Approving Increase in Rates O R D E R N O. 22,884 March 27, 1998 APPEARANCES: Jay C. Boynton, Esq. for Tilton & Northfield Aqueduct Company; and Eugene F. Sullivan III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY The New Hampshire Public Utilities Commission (Commission) authorized the Petitioner, Tilton & Northfield Aqueduct Company, Inc. (TNA or the Company) in Docket DF 95-185, by Order No. 21,876, to issue securities in an amount not to exceed $3,124,398. Order No. 21,876 also found the proposal to finance the construction of gravel packed wells in Northfield and a new transmission system to comply with the Safe Drinking Water Act (SDWA) to be prudent uses of the funds. The Commission also approved a Stipulation entered into by TNA and Staff which resolved all of the issues in the proceeding and set forth the ratemaking methodology to be used to derive TNA's revenue requirement once the new source of supply provided service to customers. On August 27, 1996, the Commission issued Order No. 22,296 in DF 96-210 which provided authorization for borrowing an additional $64,318 for larger transmission mains in order to achieve acceptable fire flows. On February 11, 1997, the Commission issued Order No. 22,502 which increased TNA's financing authorization up to $3,841,965, to enclose its storage reservoir rather than use a floating cover system. Finally, Order No. 22,564 (April 21, 1997) further authorized the Company to increase its total borrowing authority up to $4,159,889. The increase in financing related to the lapse in time since the original estimates in 1995 and the subsequent higher bids for the well pumping station and the water main improvement projects. On December 30, 1997, the Company filed financial schedules, per the terms of the Stipulation in DF 95-185, which would provide for a 192% increase in its currently approved rates as a result of the construction of the wells, pump station, transmission system and one half of the storage reservoir (Phase I of the project). Those schedules included the Company's calculations of the final construction costs of Phase I as well as related increases in expenses. A duly noticed prehearing conference was held on February 25, 1998. The Commission received no requests for intervention. On March 10, 1998, the Commission issued Order No. 22,866 approving a procedural schedule to govern its investigation into the proposed increase in rates. On March 16, 1998, the Commission heard testimony from the Company and Staff in support of a rate increase. II. POSITIONS OF THE PARTIES AND STAFF TNA and the Staff presented financial schedules at the hearing which provided for a 180% increase in revenues for TNA. In accordance with the methodology approved in the Stipulation in DF 95-185, TNA's rate increase would be calculated based on the new capital additions installed to comply with the SDWA as well as 1995 test year data. Staff witness Steven Mullen presented the schedules and explained the components of the rate increase. An audit of the construction costs had been completed and the Company's records were found to be in good order. The major exception noted during the audit, the amount of interest to be capitalized as part of the plant costs, was resolved with the Company. TNA's plant in service totaled $4,036,520 which consisted of the cost of the new capital additions and the December 31, 1995 plant balance. Subtracting accumulated depreciation resulted in net plant in service of $3,592,674. Adding a cash working capital allowance of $61,866, materials and supplies of $16,357 and prepayments of $7,438 yielded a total rate base of $3,678,336. Applying the overall cost of capital of 9.59% determined for this proceeding to the rate base resulted in a revenue requirement of $352,775. Combining the revenue requirement with the proforma test year loss and a calculated tax effect yielded an overall revenue deficiency of $573,972, requiring an increase of 180% over test year revenues. It was noted that the proposed effective date for the increased rates resulting from this proceeding would be January 1, 1998, to be reflected in bills rendered April 1, 1998. Mr. Mullen noted that the financial schedules, prepared by the Company, were agreed to by Staff earlier in the day prior to the hearing. While Staff noted some minor calculation errors in the schedules, the schedules were accepted as presented. It was agreed with the Company that final reconciliation of all numbers would occur during the proceedings for Phase II of the compliance project, which TNA anticipates filing in June 1998. Items to be completed during Phase II include the second half of the reservoir, installation of a backup generator at the pumphouse and paving projects. It was further noted that TNA had filed an additional financing petition with the Commission in February 1998 for the primary purpose of replacing concrete-tin mains which were experiencing leaks due to increased system pressure from placing the Phase I plant additions in service. This was an unanticipated consequence and Staff recommended that, due to timing considerations, the financing petition be assigned a new docket number, although it was referred to as "Step III" throughout the proceeding. Staff witness Douglas Brogan explained that Staff had been in contact with the Company throughout the construction process, had visited the site of the new wells and pumphouse, and was satisfied with the Phase I plant additions. Mr. Brogan further explained that, regarding Step III, the leakage in concrete-tin mains occurred in spite of surge protection installed in the new pump station and the relatively low pressure increases seen in the system from the project. He stated that the leakage was more a reflection of the age and type of mains affected. Kenneth Money, President of TNA, detailed the construction process and the financial and engineering oversight responsibilities required by the bank. Mr. Money was asked what the potential rate implications were for Phase II of the compliance project. He explained that it was difficult to determine because TNA had submitted an application for a Surface Water Treatment Rule Filtration grant which could potentially offset 30% of the costs of qualified Phase I and II plant additions. Any potential impact on rates could, in fact, be negative. The Company did not yet know whether it will be receiving the grant. Mr. Money also elaborated on the problems the Company had been experiencing with the concrete-tin pipe and the difficulty involved in repairing it. He expected that if the main replacement project is approved it will be completed by mid-summer 1999. TNA applied for State Revolving Loan Funds from the Department of Environmental Services and is on the list to potentially receive funding. That funding is contingent in part upon receiving approval from the Commission to borrow and increase rates accordingly. He explained that TNA has been identified as a disadvantaged water company which would make the Company eligible for principal forgiveness, lessening the potential rate impact. Attorney Boynton read into the record the following procedural schedule for Phase II of the SDWA project proposed by Staff and the Company: Audit of 1995 Test Year April - May 1998 Company Filing July 1, 1998 Data Requests July 15, 1998 Data Responses August 1, 1998 Staff Testimony September 1, 1998 Hearing September 15-20, 1998 III. COMMISSION ANALYSIS We have reviewed the financial schedules presented by the Company and Staff, and approve them as presented. We note that the agreed upon 180% increase in rates is lower than the 192% originally requested by the Company. We previously addressed and approved the construction on TNA's water system, which was necessary to comply with the SDWA. We are now approving the 180% increase in rates necessary to service the debt incurred to bring the water system into compliance with federal law. Although this is a dramatic increase in rates, it is just and reasonable in light of the significant modifications made to the water system to meet the requirements of the SDWA. 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. We direct the Company to vigorously pursue State Revolving Loan Funds and any other avenues available that will assist in reducing rates to customers and to keep the Commission informed of all such efforts. We also find the aforementioned procedural schedule set forth during the hearing for Phase II of the SDWA compliance project to be reasonable and will approve it for the duration of the proceeding. Finally, the financing petition for "Step III" has been assigned a new docket number, DF 98-035. We find that to be reasonable in light of the fact that construction may not be completed until mid-1999. Based upon the foregoing, it is hereby ORDERED, that Tilton & Northfield Aqueduct Company is authorized to increase its rates related to Phase I of the SDWA compliance project, effective January 1, 1998, as per the Stipulation in DF 95-185, in order to recover additional revenues of $573,972; and it is FURTHER ORDERED, that the procedural schedule delineated above for Phase II of the project is approved; and it is FURTHER ORDERED, that TNA submit a properly annotated tariff with the Commission within 10 days of the date of this order in accordance with N.H. Admin. Rules Puc 1603.06(o); and it is FURTHER ORDERED, that matters related to the financing petition filed on February 11, 1998 will now be addressed in docket DF 98-035. By order of the Public Utilities Commission of New Hampshire this twenty-seventh 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