DF 96-210 TILTON & NORTHFIELD AQUEDUCT COMPANY, INC. Petition for Authority to Issue Securities and Increase Rates Order Delineating Actions to be Taken Arising from Rehearing O R D E R N O. 23,008 September 1, 1998 APPEARANCES: Jay C. Boynton, Esq. on behalf of Tilton & Northfield Aqueduct Company; James R. Anderson, Esq. of the Office of the Consumer Advocate on behalf of residential ratepayers; and Eugene F. Sullivan III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On March 27, 1998, the New Hampshire Public Utilities Commission (Commission) issued Order No. 22,884, which granted Tilton & Northfield Aqueduct Company, Inc. (TNA or the Company) authority to increase rates in order to recover additional revenues of $573,972. This increase in revenues increased average annual bills for residential customers from approximately $180 to approximately $505. The revenue increase was necessary to recover the costs of investment in plant and equipment required for compliance with the Surface Water Treatment Rule (SWTR) of the federal Safe Drinking Water Act (SDWA). On April 24, 1998, the Commission received a petition signed by numerous TNA customers asking for rehearing of the Commission's decision. On April 28, 1998, the Commission also received a request for rehearing from State Representatives Tom Salatiello, Gerard St. Cyr and Gordon Bartlett. Among other things, the requests for rehearing argued that the rate increase was too large and that proper notice of the hearings was not provided. On June 9, 1998, a hearing was held to accept public comment on the issues raised by the requests for rehearing. II. POSITIONS OF THE PARTIES AND STAFF This case has a lengthy procedural history which spans several years and dockets. The central issue has been TNA's attempts to secure the necessary funding to comply with the SWTR of the SDWA. TNA made various objections to reconsideration of any of the previous orders. The Company also stated that it believed that notice had been sufficient and in accordance with Commission rules and orders. The Company went on to provide its explanation of the events that led to the rate increase. Customers and other interested parties were then given the opportunity to state their positions. Numerous customers expressed their concern over the level of the rate increase as well as what they believed to be insufficient notice of the construction project and its resultant effect on rates. Also mentioned were concerns about the terms of the existing financing, the potential availability of other, lower cost, sources of financing, and impacts of system expansion. Limited statements were also made supporting the project and the efforts of TNA. III. COMMISSION ANALYSIS As was noted by both the Company and Staff, this case has a rather lengthy procedural history. Given the issues raised in the requests for rehearing regarding notice, the terms and conditions of the note and the resultant increase in rates, we believe it is necessary to provide a summary of the events that surround the Commission's finding that the note and the resultant rate increases to service the debt was for the public good. The "case" actually consists of five dockets; DF 94-218, DF 94-264, DF 95-135, DF 95-185 and DF 96-210. The first three dockets were relatively minor financings totaling $180,000, which provided TNA with the necessary funds to retain the engineering expertise required to assess the available SDWA compliance options, to drill and pump test wells that were part of the engineering assessment of viable options, and to construct and reconstruct mains necessary to provide service to new commercial establishments along U.S. Route 3 that would also be an integral part of the compliance option ultimately chosen. DF 95-185 was the main proceeding in which the Commission authorized TNA to borrow approximately $4.1 million and also determined that the Company's decision to construct gravel pack wells in Northfield, transmission mains back into Tilton along U.S. Route 140 to provide service to new customers at the intersections of Route 3 and Route 140, and to construct new storage reservoirs was the prudent and most economically efficient means of compliance with the SDWA. The Commission also concluded in DF 95-185 that the Company should receive a rate increase to service the debt incurred to implement this means of compliance once the wells, mains and reservoirs were prudently constructed and providing service to customers and a financial audit had been conducted to ensure that the funds had been expended as initially represented. The case began informally in 1990 when conversations commenced between Commission Staff and TNA regarding TNA's inability to locate any financial institutions willing to loan the necessary funds for compliance with the SWTR of the SDWA. TNA and other small water utilities indicated that no bank would lend a small water utility funds without a guarantee that those funds could be recovered from ratepayers because of RSA 378:30-a, the so-called "anti-CWIP law", and the prudence and used and usefulness reviews required under RSA 378:28. In response to this concern, Commission Staff proposed by letter dated August 3, 1992 that TNA submit its proposed plan for compliance with the SWTR of the SDWA for a prudence review at the time of its financing request under RSA 369 along with a request for an increase in rates at the time the proposed facilities were placed in service. Only one financial institution, the Bank of New Hampshire (Bank), found that procedure acceptable to address the potential risks. Thus, TNA and the Bank entered into an agreement in which the Bank agreed to lend to TNA the funds necessary to construct gravel packed wells. The note would be repaid over 11.5 years at an interest rate of 175 basis points (1.75%) above prime. On June 20, 1995, consistent with the August 3, 1992 letter from Staff, TNA filed the proposed financing agreement with the Commission requesting a finding that the terms and conditions of the note and the proposed use of the funds were "consistent with the public good" pursuant to RSA 369:1. The petition specified that TNA would abandon its current water source, Knowles Pond, the use of which had reached and at times exceeded its safe yield, and use the proceeds of the notes to construct gravel packed wells on land located on Route 140 in the Town of Northfield, transmission mains would be constructed westerly along Route 140 to Route 3 in the Town of Tilton for interconnection with the existing transmission and distribution system in an area of new commercial development. The plan also included the construction of new covered reservoirs to replace the existing uncapped earthen reservoir located downstream from Knowles Pond. The Petition also requested that the Commission authorize TNA to increase its rates once the prudently constructed plant was placed in service. By Order No. 21,876 (October 24, 1994) the Commission found the terms and conditions of the note and the proposed use of the funds consistent with the public good and authorized the Company to implement rates to service the resultant debt once the plant had been placed in service and the books and records of the company had been audited by Staff. Re Tilton-Northfield Aqueduct Company, Inc., 80 NH PUC 673 (1995). Prior to the issuance of Order No. 21,876, the Commission issued an Order of Notice to provide the public an opportunity to give its input into the proceeding. The Order of Notice was published in the August 3, 1995 edition of the Laconia Evening Citizen and stated, among other things, that TNA was requesting permission to borrow $3,192,400 to comply with the SDWA and that customers faced, the potential of rate increases of $208 per year as of September 1, 1996 (144%) plus an additional $34 per year as of January 1, 1997 (10%). An average customer's annual bill following the two rate increases would be approximately $422. The Order of Notice also invited intervention by interested parties and advised that a prehearing conference would be held on September 6, 1995 at 10:00 a.m. at the Commission's offices in Concord to commence the Commission's investigation into the petition. Following this legal notice and the prehearing conference, a display advertisement was placed in the September 11, 1995, Laconia Evening Citizen announcing an informational public hearing to be held on September 21, 1995 at the Northfield Town Hall at 7:00 p.m. to accommodate those customers and other members of the public that were unable to attend the formal proceedings during the day. The public informational hearing took place in the Northfield town hall as scheduled. Subsequently, the Commission opened DF 96-210 to address TNA's requests to borrow additional funds required to meet unforseen contingencies such as, $317,923 required because the bids received for the project exceeded estimates, $64,317 to upgrade transmission mains for fire flows as requested by local fire officials, and an additional $84,808 to construct a metal roof rather than a floating cover over the new storage reservoirs as requested by the Department of Environmental Services. On December 30, 1997, following the approval of these incremental increases in TNA's authority to borrow and the completion of the major portions of the SDWA compliance project, TNA filed a request with the Commission to increase its revenues to cover the cost of the note, and thereby increase customers' rates. On January 30, 1998, the Commission issued an Order of Notice advising the public "the Company filed financial schedules which would provide for a 192% increase in its currently approved rates". The notice also provided that a prehearing conference would be held at the Commission's offices and required TNA to publish the Notice in a newspaper of general circulation in the area in which service is provided so that interested parties could participate in the Commission's investigation. TNA published the Notice in the February 4, 1998, Union Leader. Moreover, because a hearing had already been held in Northfield when the Company sought permission to borrow the majority of the funds for the compliance project, the Commission did not schedule another evening public informational hearing in either Tilton or Northfield. Based on its investigation of the proposed increase in rates and hearings held relative to that request, the Commission issued Order No. 22,884 (March 27, 1998) approving an increase in rates. It was in response to this Order that the rehearing requests herein were filed. Nothing raised by the parties at the rehearing provides any justification for reconsideration of the chosen compliance option, nor do we believe the terms and conditions of the note were unreasonable under the circumstances in place prior to construction and inclusion of capital investments and operating expenses in rates. Notwithstanding this conclusion, we do believe there is room for improvement in the method of public notice employed in this proceeding. While the January 30, 1998 notice met all legal requirements for public notice, we recognize that publication of notice in those multiple local newspapers of general circulation that serve the different centers of interest in the Tilton-Northfield franchise area would have been more effective in apprising TNA ratepayers of impending rate increases for compliance with the SWTR. Moreover, we believe that TNA can take affirmative actions prospectively that will ameliorate the impact of the rate increases resulting from this federal mandate. After careful consideration of the comments put forth at the June 9, 1998, hearing, we direct that the following efforts be undertaken in an attempt to effect rate relief: 1. The Commission shall write to the Federal Environmental Protection Agency (EPA) questioning its interpretation of the applicability of the Drinking Water State Revolving Loan Fund low interest loans for water supply infrastructure improvements to refinancing of existing loans and that the Commission solicit the help of the New Hampshire congressional delegation on this issue. We note that similar concerns regarding the EPA's interpretation have been addressed to the EPA by Rep. Marge Roukema, a New Jersey congresswoman. If the EPA can be convinced to allow utilization of low interest loans for the Revolving Fund refinancings, this could help lower rates for customers. 2. The Commission reemphasizes its March 27, 1998 Order (No. 22,884), in which it directed TNA to vigorously pursue State Revolving Loan funds and any other avenues available that would assist in reducing rates to customers. We shall continue to require the Company to do this and, in addition, now require it to report to the Commission monthly on those efforts. As part of that effort, we direct TNA to pursue some recommendations made at the hearing; i.e., that TNA inquire into the Belknap County Economic Development Council and Industrial Development Bonds as potential resources. In the event that any savings can be realized as a result of refinancings, we intend to take action as quickly as possible to insure that the reductions are passed on to ratepayers. 3. We direct TNA to work with Staff and report to the Commission on avenues available to expand customer base as a means of increasing revenues to assist in reducing rates. These avenues should include looking into the possibilities for special contracts and modifications, if appropriate, to main extension policies. This is consistent with a prior order (Order No. 21,876 dated October 24, 1995) in which we essentially directed the Company to do this. 4. As a follow-up to a previous order of the Commission, we order TNA to work on finding ways to provide meters for the remaining customers who are residents of a manufactured home park and are not currently metered. Similar problems have been resolved by other water utilities, which could be used as a model in this instance. Staff can be of assistance on this issue. 5. Finally, we direct the Commission's Executive Director and Staff to review the Commission's current policies and rules concerning notice to customers to try to find better ways to insure that sufficient notice is provided to customers about how pending rate cases can impact customers' rates. While we do not find that any specific errors were committed by the Company, we believe more could have been done by the Commission and TNA to make sure that customers are made aware of proposed rate increases. In this case, the Commission held a hearing in the Company's service area early on in the process, a display advertisement was used as a means of notifying customers about possible rate increases, notice was provided in accordance with the Commission's Order of Notice, and it is our understanding that there was substantial press coverage about the SDWA compliance efforts by TNA. Nonetheless, given the size of the increase that ultimately resulted, we believe more could have been done to inform customers and we intend to take steps to avoid similar complaints in future proceedings. We believe that if all of the above efforts are undertaken, opportunities to lower rates exist. We will not modify Order No. 22,884 other than to require these additional efforts on the part of TNA, the Commission and Staff. In accordance with item #1 above, a letter was sent to the EPA on July 7, 1998 expressing our concerns regarding the applicability of Drinking Water State Revolving Loan Funds to refinancing of existing loans. Based upon the foregoing, it is hereby ORDERED, that Tilton & Northfield Aqueduct Company, the Commission and Staff undertake the directives delineated above to address concerns raised in response to the recent rate increase; and it is FURTHER ORDERED, that, except for the additional actions required above, Order No. 22,884 will stand as issued. 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