CONSOLIDATED REPORT AND ORDER

I. INTRODUCTION

On September 30, 1997  [1 The Pascoag Fire District filed a motion with the Commission on December 30, 1996 seeking a one year extension to file its restructuring plan, which the URA requires filed on or before January 1, 1997. The Commission granted this motion, in accordance with authority conferred through the URA (See Order No. 15212).], the Pascoag Fire District ("Pascoag" or "District") filed a Restructuring Plan ("Plan") with the Rhode Island Public Utilities Commission ("Commission") in accordance with the requirements of Rhode Island General Laws, Section 39-1-27, as contained within the Utility Restructuring Act of 1996 ("URA" or the "Act"). [2 This filing is required by the Rhode Island Utility Restructuring Act of 1996. Section 39-1-27(a) requires electric companies to file a plan for transferring ownership of generation, transmission, and distribution facilities into separate affiliates. Section 39-1-27.3(e) of the Act further requires electric companies to file unbundled rates which separately identify charges for use of the transmission and distribution facilities and provide for retail access in accordance with the schedule set forth in the URA. The Act also provides that retail access requires "standard offer" and "last resort power" tariffs, and compliance with certain "standards of conduct". Please refer to the URA for other requirements and details.]  Pascoag's plan seeks the following Commission actions:

(1) find that Pascoag is entitled to a Pascoag-specific transition charge, without regard to 2.8 cents/kwh cap applicable to larger investor-owned electric distribution companies that have all requirements contracts, and establish a Pascoag-specific transition charge which currently is estimated at 4.8 cents per kwh with market value to be established by a market valuation process that does not require the sale of Pascoag's purchase power contracts, and trued-up semi-annually;

(2) take all actions necessary to continue the Commission's designation as bargaining agent for Pascoag's receipt of NYPA power and to provide for Pascoag's continued resale of NYPA power to its primarily (although not exclusively) residential customers through Pascoag's standard rate offer;

(3) exempt Pascoag from transferring its contracts for generation purchases to affiliates (to the extent such requirement is found applicable to Pascoag) and from the probation against selling electricity at retail within its service territory;

(4) find that while Pascoag's distribution functions will be undertaken as an electric distribution company, Pascoag's marketing functions at wholesale and, within its territory, at retail, will be undertaken as a limited nonregulated power producer;

(5) exempt Pascoag from the Act's standards of conduct, to the extent they require separation of Pascoag's marketing and distribution functions or cumbersome and expensive communications requirements;

(6) exempt Pascoag from the prohibition against recovery of restructuring expenses in regulated rates as well as from charges for PUC regulatory activities;

(7) establish as Pascoag's standard offer(s), standard rates adjusted by the Commission on a semi-annual basis, to continue to allow the District, a not for profit entity, to adjust its rates according to its actual cost to sell and distribute electricity;

(8) direct the Division to assist Pascoag in developing terms and conditions for nonregulated power producers. Postpone the date for submittal of Pascoag's nondiscriminatory distribution service tariff until a date coincidental to the date retail access is implemented within Pascoag, and Pascoag's cost of service study and new rate design are reviewed and evaluated by the Commission;

(9) to the extent the Commission finds Pascoag's plan in any way deficient, grant Pascoag leave to supplement it or waive the pertinent requirement, as appropriate; and

(10) order such other relief as is necessary, appropriate and equitable, after consideration of Pascoag's unique circumstances.

(Pascoag Exh. 1 (Docket 2516), pp. 2-3).

Subsequently, on January 23, 1998, Pascoag filed an application with the Commission seeking a general increase in its existing rate schedules. Pascoag's rate filing was offered for a July 1, 1998 effective date and was designed to generate total revenues in the amount of $4,167,436. This request, if granted, would increase Pascoag's present revenue collections by $217,500 or approximately 5.5 percent. The Commission suspended the effective date of the rate change for a period of six months pursuant to the provisions of Rhode Island General Laws, Section 39-3-11 (Order No. 15532), effective February 10, 1998.

Pascoag's rate change filing states that the District proposes to modernize its rates by changing the rate structure from a declining block rate structure to a flat rate structure, and to redesign rates based on changes in Pascoag's revenue requirements. Pascoag maintains that its proposed rate structure also encourages energy conservation. Pascoag explains that it is also proposing a re-allocation of revenues among the rate classes based on the results of an embedded cost of service study. Pascoag noted that its last general rate filing was in 1982.

On March 5, 1998 Pascoag filed a motion with the Commission seeking a consolidation of the aforementioned two filings. The District also sought expedited consideration in order that the rates may be approved concurrently with the implementation of retail access in the District by July 1, 1998. The Division of Public Utilities and Carriers, ("Division") an indispensable party by statute, offered no objections to Pascoag's motion. The District's motion for consolidation was approved by the Commission on March 9, 1998.

The Commission conducted three public hearings in this consolidated docket. Two of the hearings were held at the Commission's offices, located at 100 Orange Street in Providence. These hearings were conducted on May 7 and 8, 1998. There was also a public night hearing conducted on April 1, 1998, in the auditorium of the Burrillville Middle School (within Pascoag's service territory). One individual ratepayer offered comment at that time.

The following counsel entered appearances in this docket:

FOR PASCOAG:                    Ina V. Suuberg, Esq.

FOR THE DIVISION:             Paul J. Roberti, Esq.

Special Assistant Attorney General

FOR THE COMMISSION:     John Spirito, Jr., Esq.

II. PASCOAG'S DIRECT CASES

A. Restructuring Plan

The Plan filed by the District was accompanied by the direct prefiled testimony of Frank W. Radigan, a Senior Energy Consultant with Louis Berger & Associates, 270 River Street, Troy, New York. Mr. Radigan's testimony covered the following five issues:

1) the Pascoag specific manner for implementation of a non-bypassable transition charge and standard rate offer;

2) the unbundled rate design for use on or after January 1, 1998;

3) the proposed terms and conditions for electric service;

4) the standards of conduct implementation procedures; and

5) the interconnection guidelines for small scale generators.

Mr. Radigan first discussed the District's proposed transition charge. He related that to serve its 7.6 MW of load, Pascoag purchases all of its energy through long term contracts. Mr. Radigan explained that the power is wheeled through a Blackstone Valley Electric Company transmission and distribution substation. Mr. Radigan noted that Pascoag neither has generation of its own nor is it directly interconnected to the region's transmission pool (Pascoag Exh. 2 (Docket 2516), p. 4).

Mr. Radigan testified that the District has contracts with "three main suppliers" who provide 99 percent of the electricity used by Pascoag's ratepayers. According to the witness two contracts exist between Pascoag and the New York Power Authority ("NYPA") for the purchase of a portion of the output from NYPA's Niagara and St. Lawrence hydroelectric projects. Mr. Radigan related that these two contracts total 2.4 MW of capacity and provided 12,905 MWH of energy in fiscal year 1996 (ending October 31, 1996). For both the demand and energy components under these contracts, Pascoag's average price for this power was 0.74 cents per kwh (Id., p. 5).

Mr. Radigan testified that another supply source comes from Pascoag's partial ownership (1.128 MW) of the Seabrook nuclear power station. He related that purchases from this plant are made through a power purchase contract which Pascoag has with the Massachusetts Municipal Wholesale Electric Company ("MMWEC"). Mr. Radigan explained that with a demand cost alone of over $1 million, this contract accounts for over a third of Pascoag's total purchased power costs. Mr. Radigan testified that in fiscal year 1996 the average cost of this energy was 20.95 cents per kwh (Id.).

Mr. Radigan described the third 1996 fiscal year supply source as "Montaup CD purchases" from the Montaup Electric Company ("Montaup") (Id.). He related that Pascoag was obligated to purchase certain committed amounts of Montaup system power through October 31, 2000. These amounts varied by year and reached a high of 5.3 MW in the 1997-1998 power year. Mr. Radigan explained that the amounts of power purchased under this contract were split between an initial block and a tail block and the energy pricing was also differentiated by time of day. He related that these contracts were basically a fill-in supply so that Pascoag could meet its load on a hourly basis for its requirements above that power taken from the NYPA and Seabrook contracts. Mr. Radigan testified that for fiscal year 1996 the Montaup contract had a blended average price of 7.5 cents/kwh (Id., p. 6). He also explained that Pascoag has renegotiated this contract, infra.

Mr. Radigan also testified that since all of Pascoag's purchased power is coming from remote sources, transmission wheeling costs are significant. He testified that in fiscal year 1996, the District paid about $250,000 to outside parties to wheel power to Pascoag's substation (Id.).

Mr. Radigan related that Pascoag's average purchase power price is about 7.3 cents per kwh. He explained that when Pascoag adds the costs associated with transmission and distribution losses, the average cost to ratepayers rises to 7.97 cents per kwh (Id.). Because of this high cost, the District contends that it is unable to comply with the URA's mandated transition charge of 2.8 cents per kwh.

Mr. Radigan testified that if the District is going to comply with the mandated transition charge of 2.8 cents per kwh, it must charge an energy rate of 4.3 cents per kwh (7.97 cents per kwh, less a transmission cost of .88 cents per kwh, less the mandated 2.8 cents per kwh transition cost). However, he opined that because this energy rate would be over 50 percent higher than the standard offer of the other Rhode Island utilities, Pascoag's ratepayers would likely seek other suppliers (Id., p. 7). Mr. Radigan maintained that this scenario would leave Pascoag with an inability to pay the $2.2 million of demand charges associated with its supply contracts (Id.).

As an alternative to the mandated 2.8 cents per kwh transition charge, Mr. Radigan cites provisions in the URA which allow the Commission to establish a "transition charge specific to Pascoag" (Id., p. 8). [3 R.I.G.L. Sections 39-1-27(g) and 39-1-2(26).]  In calculating a Pascoag-specific transition charge, Mr. Radigan opined that "all charges paid for under the Seabrook contract be included in the transition cost" (Id., p. 9). Mr. Radigan reasoned that these purchases from Seabrook constitute 'above market payments to power suppliers for purchased power contracts...' within the provisions of URA Section 39-1-27.4(b)(3), and therefore are includable in Pascoag's transition charge (Id.).

Mr. Radigan testified that the Commission should also consider the costs associated with the Montaup purchases. He related that Pascoag and Montaup now have an agreement which terminated the earlier purchased power contract and replaced it with a termination charge and a provision for back-stop service. Mr. Radigan testified that the price for this back-stop service is less than Montaup's 'standard offer' for wholesale service (Id., p. 10). Under the new contract with Montaup, Pascoag anticipates savings of approximately $120,000 per year (Id., pp. 10-11). For purposes of the transition charge calculation, Mr. Radigan explained that Pascoag proposes to measure the total cost of the Montaup contract against Montaup's 'standard offer' wholesale rate. He related that any costs above this amount would be included in the District's transition costs (Id., p. 11).

Mr. Radigan testified that the District does not include the cost of its NYPA power purchases in the calculation of its transition cost. He called the NYPA power "a unique resource whose use must be retained for its customers" (Id.).

Mr. Radigan also commented on the District's proposed treatment of transmission costs. He related that Pascoag proposes to unbundle these rates for its purchase power expense and account for them separately and show them separately under its unbundled bill format (Id.).

Mr. Radigan next addressed the restriction in the URA which requires that the standard offer:

...be priced such that the average revenue per kilowatt-hour received from the customer for such power together with approved distribution, transmission and transition charges shall equal the price that would have been paid under rates in effect during the twelve (12) month period ending September 30, 1996 adjusted annually for eighty percent (80%) of the change in the consumer price index for the immediately preceding twelve (12) month period, and also for other factors reasonably beyond the control of the electric distribution company... (R.I.G.L. Section 39-1-27.3(d)).

Concerning this language, Mr. Radigan maintained that the URA gives the Commission latitude to exempt Pascoag from the aforementioned restriction based on factors "reasonably beyond the control" of the District (Id., p. 12). He contended that any cost changes since 1996 were beyond the control of the District. Accordingly, he related that the standard rate that the District proposes "is consistent with the spirit of the Act" (Id., p. 12).

Mr. Radigan also explained that both the District's transition charge and standard offer rate will change with time. He based this necessity on the effects which purchased power expense and wheeling cost increases will have on these two rates. He testified that because purchased power rates will be beyond the control of Pascoag, Pascoag will need to amend its transition charge and standard offer rate when necessary.

Using the District's proposed calculation methodology, Mr. Radigan calculated a fiscal year 1996 transition charge of 4.85 cents per kwh. Factoring in anticipated savings from the new Montaup contract, "the transition charge would be reduced to 4.52 cents/kwh" (Id., p. 14). Mr. Radigan calculated the District's transmission rate at 0.88 cents per kwh; and the standard offer rate at 2.24 cents per kwh (Id.).

Mr. Radigan next discussed the District's proposed unbundled rates. He started his discussion by noting that the URA requires that customer bills contain the following information:

a) the total number of kilowatt hours consumed;

b) the total cost of distributing the consumer power to the customers (the distribution costs);

c) transition charges;

d) conservation costs;

e) the total cost of transmitting the consumed power to the distribution site (the transmission costs):

f) all applicable credits;

g) applicable street light rental costs;

h) applicable taxes;

i) the cost of power delivered; and

j) all other costs. (Id., p. 14).

He then testified that to implement the URA billing requirements the District proposes that its currently utilized Capacity Cost Adjustment and Fuel Adjustment Clauses be replaced with three new automatic collection mechanisms, namely, one for the District's transition cost charge, one for the transmission charge, and one for the standard rate charge.

Mr. Radigan explained that the current "customer charge" tariff provision would continue to be used. He related that the District would also continue to separate out costs for energy conservation and street lights (Id., p. 15). Taxes, credits and "other charges" will also be separate line items (Id., p. 16).

Mr. Radigan related that in order to accomplish this billing requirement, the District has begun reformatting its billing system as part of its computer system upgrade, which is now in progress. He opined that the new computer and billing system should become operational in 1998 (Id., pp. 16-17).

Mr. Radigan next discussed the District's proposed new "Terms and Conditions for Electric Service", which he noted is required under Section 39-1-27(a) of the URA. The proposed terms and conditions are attached to Mr. Radigan's prefiled testimony (Id., exhibit FWR-5).

Mr. Radigan asserted that the proposed terms and conditions meet all of the requirements of the URA. He also noted the addition of two "housekeeping items" (Id., p. 18). In comparing the District's proposed terms and conditions to the terms and conditions currently in effect, he related that the District has eliminated "the residential customer deposit rules" (Id.). He submitted that these rules are unnecessarily restrictive and duplicative. He also indicated that the definition for metering had been changed. According to the witness, the change was necessary to make it clear that the District is only required to deliver service to one metering point (Id.).

Mr. Radigan next addressed the URA's requirement (pursuant to Section 39-1-27.6) that the District submit proposed standards of conduct. Pascoag believes that it requires a "variety of specific exemptions" from this requirement. The totality of the exemptions being sought are fully delineated in an attachment to Mr. Radigan's prefiled testimony (Id., Exhibit FWR-6).

Mr. Radigan also discussed the interconnection guidelines for small scale generators as required under URA Section 39-1-27(a). He related that while the District can comply with the URA requirement of proposing interconnection standards and the provision of information regarding its customers to potential power suppliers, it cannot at this time comply with the requirement that the District provide its customers' "load shapes and ABMS procedures" (Id., p. 20). He testified that "the District does not possess the necessary information" (Id.). Mr. Radigan explained that Pascoag must rely on the metering of load by Montaup. Mr. Radigan stated that the District will work with Division staff "to develop an alternative and workable solution" (Id., p. 21).

B. Rate Change Request

Pascoag offered the prefiled direct testimony of four witnesses in support of its application to change rates. The four witnesses were identified as follows:

1. Mr. Theodore G. Garille

General Manager

Pascoag Fire District;

2. Ms. Judith Allaire

Customer Service and Account Manager

Pascoag Fire District;

3. Mr. Robert L. Anderson

Louis Berger & Associates, Inc.

270 River Street

Suite 302

Troy, NY 12180; and

4. Mr. Frank W. Radigan

Louis Berger & Associates, Inc.

270 River Street

Suite 302

Troy, NY 12180.

Mr. Theodore Garille testified that Pascoag services a 45 square-mile territory. He related that Pascoag serves 4,021 metered customers. He proffered the following table as a breakdown of Pascoag's customer classes:

(Pascoag Exh. 1 (Docket 2688), p. 4)

Mr. Garille related that Pascoag's system is exclusively a distribution system. He explained that Pascoag has an inter-tie consisting of two 13.8 kV distribution lines from the Blackstone Valley Electric Company. He testified that one line is closed and feeds the District power on a day-to-day basis. He noted that the other is available as an emergency backup source (Id., p. 5).

Mr. Garille emphasized that the District has no installed generation of its own. He testified that Pascoag's purchased power includes 2.4 MW from NYPA, up to 5.3 MW from the Montaup Electric Company, and 1.2 MW from MMWEC. He testified that the District's system peak, during December 1997, was 7,900 KW (Id.).

Mr. Garille identified five reasons for the District's rate filing: specifically, (1) required by the Commission; (2) to finance the construction of distribution system improvements, which address reliability issues currently facing Pascoag; (3) to ensure that the rates charged to individual service classes more equitably reflect the cost of providing such service; (4) to increase rates so that the District is financially self-sufficient; and (5) to comply with the URA (Id., p. 6).

Mr. Garille identified a number of transmission, substation and distribution issues troubling the District. He began by explaining that the District's 110 miles of distribution system is in need of many repairs and improvements. He related that the repairs and improvements are required today due to a previous lack of long term planning by the District's prior general managers. He noted that he is the fourth general manager at Pascoag in the last 10 years (Id., pp. 6-7).

Mr. Garille next testified that although the District has no transmission of its own, it was necessary for Pascoag to "purchase the entire switchgear leading into our substation" (Id., p. 7). He explained that Pascoag no longer has to wait for Blackstone Valley Electric Company personnel to respond to emergency outage situations where switching is required (Id.). He added that Pascoag now has more control over the design and operation of the switchgear (Id.).

Mr. Garille related that Pascoag's present substation was built around 1936. He stated that the 5-kV circuit breakers were installed in the mid-1950s and are oil filled (Id., p. 8). He explained that these breakers have caused considerable problems for Pascoag. As a result, Mr. Garille testified that the District is proposing a new 13.8 kV distribution substation. He noted that the larger capacity will eliminate the District's current reliability problems, increase efficiency and reduce "line losses" (Id.). He estimates the cost of the new substation at $600,000 (Id.).

Mr. Garille also sponsored the District's proposed "Five Year Capital Construction Budget" (Id., Exhibit TG-1). He explained that this budget was developed in two parts:

...the first part is based on historic average additions to plant, and the second part is based on specific projects that we believe are essential to maintain safe and reliable service (Id., p. 9).

Mr. Garille summarized that Pascoag has forecasted its proposed additions to be approximately $155,000 per year on a going forward basis. He noted that this expense is 13% less than the $178,000 spent annually for the period 1993 through 1996 (Id.).

Mr. Garille explained that the second part, regarding specific projects, was forecasted by using the District's cost estimates for nine major projects which need to be accomplished over the next several years (Id.). The nine specific projects are identified below:

(Id., pp. 10-11).

Mr. Garille also commented on the availability and use of the District's reserve funds. He testified that as of November 1997 the District had a cash reserve of $530,695. He explained that the District's Board has authorized him to use these funds for specific purposes. He proposed the following distributions:

(Id., p. 12).

Mr. Garille related that after the aforementioned distributions are made, the District will still have approximately $127,000 in available cash. He recommended that this amount be used towards establishing a $135,000 reserve to be used for future emergency plant replacements (Id., p. 12).

Ms. Judith Allaire testified that as the District's Customer Service and Accounts Manager she oversees the accounting operations of the District. She related that her duties include directing the collection and assembly of accounting data, customer sales information, and preparation of all budgets and financial reports, including income statements, balance sheets, annual reports to regulatory agencies, and various other reports to the District's governing board. She stated that she also assists in policy analysis, reviewing power supply contracts, and provides support in regulatory affairs as they impact Pascoag. Additionally, Ms. Allaire related that she is the keeper of Pascoag's records; and oversees Pascoag's billing, depositing procedures, historical files, payroll, accounting for payroll and related costs, materials and supplies accounting, and general ledger accounting (Pascoag Exh. 2 (Docket 2688), p. 3).

Ms. Allaire's testimony addressed the following five areas: (1) the District's financial statements, (2) the additional documents required in rate proceedings pursuant to the Commission's Rules, (3) the schedule of principal and interest amounts paid on debt service, (4) Pascoag's municipal tax expense, and (5) financial transactions with affiliated entities and funds (Id., p. 4).

As part of her testimony, Ms. Allaire sponsored the District's income statement, cash flow statements, balance sheet, and statement of changes in retained earnings (Id., exhibit, JA-1). She noted that the income and cash flow statements and the balance sheet cover fiscal years 1993, 1994, 1995 and 1996.

Ms. Allaire testified that for the past three fully audited fiscal years, the District's operating loses have exceeded $160,000 in each year. She related that this loss equates to 4 percent of the District's revenues. She also explained that the filing contains a request for a three percent increase in wages and salaries. She attached the three year labor agreement which Pascoag agreed to for initial effect on November 1, 1995 (Id., exhibit JA-2).

Ms. Allaire also provided the following summarized additional information:

- The District's fiscal year ends on October 31 (Id., p. 6)

- That the income statement for FY 1996 is unaudited, and reflects an operating loss of $345,068 (Id);

- That currently Pascoag has one bond outstanding. The $110,000 bond was issued in 1993 and was used to purchase a "bucket truck" (Id., p. 7, and exhibit JA-5);

- The District pays property taxes to the town of Burrillville and to the Fire Districts of Harrisville and Pascoag. For fiscal year 1996, the District's tax expense was $46,224 (Id., p. 8);

- That the Pascoag Fire, Water and Electric departments share some office space and labor, which is individually reconciled on a department by department basis (Id., pp. 8-9);

- That the District plans to fund a significant portion of its capital program through bond sales (Id., pp. 9-10); and

- That capital improvements requiring an expenditure of over $50,000 require voter approval. Pascoag is permitted to issue bonds of up to $2 million (Id.).

Mr. Robert Anderson discussed Pascoag's proposed revenue requirement, its rate modernization proposal, and shifts in cost of service. Mr. Anderson also sponsored a cost of service study which he testified provides: a perspective of how well Pascoag's current rate levels are meeting its costs of providing electric service; an historic test year to determine whether each service class is providing sufficient revenues to cover the cost of providing services to each class; and, a true and clear basis for segregating or 'unbundling' the cost of providing electric service into its basic components (Pascoag Exh. 3, (Docket 2688) pp. 5-6).

Mr. Anderson opined that since Pascoag has no generation or transmission plant, the unbundling of rates is simpler than that for a fully integrated utility. He explained that it:

...is relatively straight-forward to segregate costs by accounts between purchased power and those for local distribution charges (billing, metering, and costs associated with distribution and general plant). However, some of the District's cost of capital is for prepayments of purchased power expenses and some of the administrative and general expenses are for processing purchased power bills. These details are addressed in segregating the District's cost structure so that all components are properly accounted for. Unbundling also requires that the rates for each service class are accurate (Id., pp. 6-7).

Mr. Anderson next provided an overview of the test year revenue requirement used in Pascoag's rate change application. He began by noting that Pascoag's historical test year is the 12 month period ending October 31, 1996, which Mr. Anderson related, coincides with Pascoag's 1996 fiscal year. He testified that Pascoag's test year revenue requirement is comprised of three major components: operating revenues, distribution operating expenses, and return on rate base. Mr. Anderson proffered a number of exhibits reflecting how these components were calculated and incorporated into the District's revenue requirement.

Mr. Anderson testified extensively on Pascoag's cost of service study. In his preliminary comments, Mr. Anderson pointed out that the "Residential Heating" class was separately allocated its share of costs in the test year, which are to be combined with the "Residential class"; and that the study includes purchased power, which is treated separately in the development of Pascoag's rate structure. Mr. Anderson also explained that the results of the study show that rates of return by service class vary significantly from the overall rate of return being earned by Pascoag. He concluded that this result was not surprising since Pascoag has not had a change in rates since 1985, [actually 1982], despite significant changes in sales, capital expenditures, and expense levels. Mr. Anderson's exhibit (Schedule) RLA-2 summarized the results of the District's fully allocated cost of service study.

Mr. Anderson provided a detailed description of how the District's cost of service study was developed. A summary is provided below:

- Rate base was calculated from electric plant-in-service, working capital, materials and supplies, and prepaid expenses (Pascoag Exh. 3 (Docket 2688), p. 9).

- Working capital is comprised of estimated capital required to meet operating expenses, the materials and supplies account, and prepaid expenses. The amount of working capital is determined by a lead-lag calculation, assuming an amount for other operating and prepaid expenses (Id.).

- The cost of service study utilizes the following factors:

Demand Factor: used for allocating demand-related costs that relate to Pascoag's system coincident peak (CP). Factors were derived based on the District's customer classes' respective coincident peaks. Coincident peak calculations were based on estimates of class peak demands using available billing data.

Energy Factor: used for allocating energy-related costs that reflect annual class energy consumption. The only energy-related costs are for purchased power and do not affect calculation of the local distribution charge.

Customer Factor: used for apportioning customer-related costs.

Administrative and General Factors: builds upon and is based on the classification and allocation of other expenses.

Labor Factor L-1: used to apportion labor-related Administrative and General expenses, primarily involving employee welfare expenses (Id., pp. 10-11).

- The plant-in-service account balances were organized by utility function and then classified according to demand, energy, or customer (Id., p. 11).

- The operating and maintenance expenses were subdivided into four cost elements, namely, labor, materials, transportation, and miscellaneous and depreciation (Id., p. 12).

Mr. Anderson testified that based on the results of the District's cost of service study, the District proposes that there be a reallocation of revenues among the various service classes (Id., p. 13). However, he characterized the proposed reallocation as "tempered" due to the impacts of the overall rate increase, the proposed rate design changes, the impacts of restructuring, and the District's rate objectives (Id., pp. 13-14).

Mr. Anderson identified the following objectives as providing guidance to Pascoag in the rate making process:

-- The primary goal in developing rates is to generate sufficient revenue to meet the District's revenue requirement.

-- The District currently has declining block rates and wishes to move toward a flat rate structure; the Commission also supports this policy;

-- The customer charge is substantially below cost; customers with no or little consumption enjoy the availability of electricity without paying for that availability, or even paying the full cost of basic metering, service, and billing costs; the District wishes to increase this bill component; this is also consistent with establishing a separate local distribution charge as called for in the Restructuring Act of 1996;

-- Notwithstanding the above circumstances, the District is concerned that the rates -- and any rate increase -- not unduly affect those customers on low or fixed incomes; such customers generally consume relatively small amounts of energy, and the slightest change in rates -- which may result in only modest absolute changes in customers' bills -- could produce substantial percentage changes; the District wishes to minimize these impacts;

-- In accordance with the Commission's rate design procedures, the District proposes to eliminate the Residential Heating Service Rate (Service Class AH);

-- The District also wishes to foster economic development and key customer retention. These objectives entail reduction of commercial and industrial customer rates that achieve rate structures that more directly address market concerns and conditions, and to consider the changes taking place in the electric industry; [and]

-- The District also seeks to pursue demand-side management in order to reduce utility resource costs, contain load growth, reduce customer costs, and add an additional and important component to the District's resource mix (Id., pp. 14-15).

Mr. Anderson testified that Pascoag was "not entirely" able to design rates consistent with the aforementioned objectives. He related that potentially significant rate changes have complicated things for Pascoag. Mr. Anderson explained that in the test year residential customers received a credit to their bills so as to give them preference to the low cost PASNY power. He noted that the credit, however, was eliminated last year. Mr. Anderson proffered an exhibit which shows the impact of an untempered reallocation of revenues to correct for cost of service deficiencies, and that increased rates resulting from the rate increase necessary to cover the revenue requirement would result in some very large rate increases for some customers. He testified that Residential Electric Heat customers would face a 69 percent increase on a cost basis. He related that Residential customers would face an average increase of 27.4 percent, while Commercial and Industrial customers would enjoy a 23 percent reduction (Id., p. 16; and exhibit RLA-19).

In order to temper these rate impacts, Mr. Anderson testified that the District proposes to limit the average rate class increase to no more than 13.8 percent (Id.). Mr. Anderson's exhibit RLA-22 reflects the rate increase percentages for each of the usage classes.

Mr. Anderson next discussed the District's rate proposal particulars for its various customer classes. He related that the District favors merging the Residential Heating class with the Residential class. Mr. Anderson proffered the following table to compare the present and proposed rates for this class:

(Id., exhibit RLA-23)

Mr. Anderson observed that most customers in this class will receive in excess of a 20 percent increase in their bills (Id., p. 18).

Mr. Anderson next described the District's rate proposal particulars for its Small Commercial class. He related that Pascoag proposes to raise the minimum charge of $5.56 to $12.50 per month. He noted that the proposed increase is substantially below the $18.86 per month cost for metering, and below the rates charged by other utilities (Id., p. 18). He explained that the District has limited the increase for this rate to lessen bill impacts. Mr. Anderson related that as with the rate design changes for residential customers, the District proposes to replace the declining block rate structure with a flat rate charge of $0.01134 per kwh (Id.). Mr. Anderson proffered the following table to compare the present and proposed rates.

(Id., exhibit RLA-26).

Mr. Anderson next described the District's rate proposal particulars for its Large Commercial and Industrial rate class. He related that the District proposes to raise the minimum charge of $56.42 to $125.00 (Id., p. 19). He noted that the proposed increase is below the $129.33 per month cost for metering and billing as indicated by the cost of service study (Id.). Mr. Anderson also testified that the District proposes to simplify the rate structure by eliminating the energy rate. He related that the demand charge would increase to $2.96 per kw month. Mr. Anderson proffered the following table to compare the present and proposed rates:

(Id., exhibit RLA-28).

Mr. Anderson also described the District's rate proposal particulars for its Housing Authority rate. He testified that for this rate, Pascoag proposes to replace the minimum charge of $112.84 with a customer charge of $115.00 (Id). He related that the proposed change is below the $129.33 per month cost for metering and billing as indicated by the cost of service study. Mr. Anderson also related that the proposal eliminates the declining block rate and increases the demand rate to $13.10 per kw month. He proffered the following table to compare the present and proposed rates:

(Id., exhibit RLA-30).

The last rates addressed by Mr. Anderson was the District's proposed streetlighting rates. He testified that the District proposes to increase these rates by the class average increase of 13.77 percent (Id., p. 20).

Mr. Frank Radigan described the savings realized from the renegotiated Montaup contract. He also presented an analysis which supports the District's need for a rate increase (Pascoag Exh. 4 (Docket 2668)).

Mr. Radigan testified that beginning in the summer of 1997, Pascoag and Montaup entered into negotiations to determine whether the then existing "CD" contract could be re-formatted in a manner that would benefit both parties. Mr. Radigan related that the "CD" contract was a contract demand service agreement that was entered into in 1981. He stated that the agreement called for specific amounts of capacity to be made available to Pascoag. He related that the agreement was amended and reformatted in 1988 and again in 1995. Mr. Radigan explained that the pricing addressed in the agreement was for a demand charge for the contract demand and an energy charge for the energy that was taken. He related that the energy taken under the agreement was for system energy needs not met through the District's power purchase agreements. Mr. Radigan stated that:

The agreement was beneficial in a sense that Montaup was responsible for supplying the energy needs of the District. The downside of the agreement was that the contract demand provided capacity in excess of the District's needs and it was high priced. The average price of power under the contract for the test year was 7.5 cents/kwh (Id., p. 4).

According to the witness, the renegotiated agreement is much more favorably priced and provides maximum leverage to Pascoag to manage its supply portfolio.

Mr. Radigan testified that there are three main "points" covered in the renegotiated contract. He described the points as follows:

First, the contract reformats the pricing into three separate components. The first component is a contract termination fee which is designed to compensate Montaup for its above market costs that it would have collected under the old contract. The termination fee totals $1,903,000.

The second component is the capacity price with an initial rate of $35/kw/yr. The third component is an energy rate that begins at 2.6 cents/kwh and escalates from year to year. At a 65 percent load factor, the capacity and energy rate equates to an all-in rate of approximately 3.2 cents/kwh, which is equal to Montaup's wholesale standard offer rate.

Mr. Radigan opined that Pascoag will have an adequate supply of capacity under this new contract. He also related that the reformatted contract will reduce costs by about $120,000 per year (Id., p. 5). He explained that the contract allows Pascoag to call upon 5 MW of Montaup's capacity so that Pascoag is assured of maintaining an adequate supply of capacity. He related that this is an important aspect of the contract because the amount of CD capacity was scheduled to diminish over time. He stated that this lowering of the CD amount was so great, in fact, that Pascoag would have had to seek other power supply arrangements for future years had the contract not been renegotiated. Mr. Radigan maintained that perhaps most importantly, the capacity and energy portion of the contract is cancelable by Pascoag upon 90 days notice. He concluded that if prices under deregulation do indeed fall, Pascoag will be in a position to cancel this contract and obtain lower price supply for its customers. Mr. Radigan also related that Pascoag only needs to pay for capacity, not the energy. He concluded that the District has the ability to enter into short term purchases of energy in the open market, and consequently will be able to further the savings to its customers if the market has attractive power available (Id., pp. 5-6).

Mr. Radigan also testified that the lower payments under the renegotiated contract will reduce the transition charge from the estimated 4.8 cents per kwh to 4.5 cents per kwh. However, he related that because the District's contract termination charge will only last 34 months, in less than three years the District's transition charge will be "reduced to a level below that prescribed by the Rhode Island Restructuring Act" (Id., pp. 6-7). Mr. Radigan related that based on test year sales, the transition charge is estimated to be reduced to 2.33 cents per kwh, or 17 percent less than that prescribed by law (Id., p. 7).

Mr. Radigan next discussed the District's need for a rate increase. He testified that he examined the cash flow of the District in two ways, namely, based on an inflation adjusted forecast of test year expenditures, and based on the District's 1998 fiscal year budget as approved by its Board in October, 1997.

Mr. Radigan explained that for the inflation adjusted forecast, he increased test year expenditures by 2.5 percent per annum. He related that he did not increase revenues "because there is very little load growth in the District, and given the fact that there are no weather adjusted historical load data with which to perform a time series analysis" (Id.).

Mr. Radigan also testified that he did not make any normalization adjustments to test year expenditures. He related that the District's expenditures have been steadily increasing over time and that the District has incurred an operating loss for several years (Id.). Mr. Radigan further reasoned that Pascoag's non-purchased power expense is largely driven by maintaining the system, customer accounting and administrative costs, and outside services. He related that these expenses "are starting to increase due to deregulation" (Id.). Lastly, Mr. Radigan observed that no adjustments are necessary for Pascoag because "in a system this small, 'extraordinary' expense in one year seem to be replaced by others the following year" (Id., p. 8).

Mr. Radigan proffered tables to show historic and inflation forecast income and cash flow statements (Id., exhibit FWR-4). He testified that given the District's $1 million construction budget, he forecasted that Pascoag will have a negative cash flow of $941,214 for 1998 (Id.).

Mr. Radigan also compared the 1998 budget, which was approved by Pascoag's Board, to his inflation adjusted forecast. Mr. Radigan testified that the primary differences between the two is "the net income derived from sales and the construction budget" (Id., p. 9). Mr. Radigan related that:

The adopted budget has an operating loss of $365,584, compared with the loss from inflation forecast of $218,421. The $147,163 difference is due largely to the difference in operating revenues net of fuel (budget - $918,500 versus the inflation forecast of $1,097,387) of $178,887. The budget forecast was prepared in late September after a warmer than normal winter and relatively cool summer. The impact of this weather is to impact sales and tends to decrease revenues. Lower receivables are what I believe resulted in District personnel taking a skeptical view when forecasting future revenues (Id.).

Mr. Radigan explained that for revenue requirement purposes, Pascoag is recommending that the inflation forecast be used (Id.).

In order to better illustrate the District's need for a rate increase, Mr. Radigan presented an exhibit which shows the net cash flow from operations and construction related programs over the next five years (Id., exhibit FWR-7). Mr. Radigan explained that the exhibit demonstrates the "positive and negative variables" of the District's cash flow (Id., pp. 5-10). Mr. Radigan related that on the positive side of the equation, the District receives positive cash flows from operating activities, revenues from bond issuances or loans, interest income, and cash available from reserves. On the negative side, Mr. Radigan stated, the District has to pay principal and interest on old bonds, construction expenditures, reserve deposits, and principal and interest in any new bond issuances. According to this witness, based on the construction budget, the cash flow projection from operating reserves, and the available reserves as presented by District Witness Garille, the District will have a shortfall of over $1.6 million in the 1998-2002 time frame (Id., p. 10).

Mr. Radigan testified that Pascoag has three options for addressing this problem; specifically, to raise rates, to issue bonds, or a combination of the first two. He related that if Pascoag were to just raise rates, it would need an approximately $320,000 rate increase ($1.6 million/5 years) (Id., p. 10). If bonds alone were issued, Mr. Radigan calculated that an average rate increase of $140,000 in annual revenues would be needed to cover the principal on the bonds over the next five years (Id.). However, he noted that loan payments would continue to escalate over time which would necessitate future rate increases (Id., pp. 10-11).

Consequently, Mr. Radigan testified that the District recommends a combination approach. He opined that:

... the District increase rates to provide an adequate level of cash flow to internally fund its construction program needs but not enough to cover major additions such as the substation. A revenue increase of $217,500 would be appropriate with an anticipated bond issuances of $975,000 (Id., p. 11).

Mr. Radigan demonstrated the projected cash flow from this alternative in an attachment to his testimony (Id., exhibit FWR-9).

According to Mr. Radigan, a $217,500 increase netted against the $120,000 savings from the new Montaup contract would increase rates by about 2.5 percent. He explained that over the five-year forecast period, this 2.5 percent equates to an annual increase in rates of 0.5 percent per annum. He contended that this is considerably below the inflation increase allowed under the Rhode Island URA (Id.).

III. THE DIVISION'S DIRECT CASES

A. Restructuring Plan

The Division proffered the prefiled direct testimony of Mr. David J. Effron, a consultant specializing in utility regulation, 386 Main Street, Ridgefield, Connecticut, as its only witness relative to Pascoag's proposed restructuring plan. Mr. Effron limited his testimony to a discussion regarding Pascoag's proposed transition charge.

Mr. Effron recognized that Pascoag's selected method for the unbundling and restructuring of its rates is different than the method used by the investor owned utilities. Mr. Effron acknowledged that Pascoag has no generating plant to divest and no other parties to whom it can assign its purchased power contracts. Mr. Effron noted that Pascoag cannot even assign its entitlement to its purchased power from NYPA. Accordingly, Mr. Effron concluded that Pascoag itself must continue to be responsible for providing standard offer service, and to do so it must continue to purchase power and be able to recover the cost of that power from its ultimate customers (Division Exh. 1 (Docket 2615), p. 16). Mr. Effron related that this is the reason why Pascoag has defined its standard offer service rate as the total cost of purchased power less the transition and transmission costs included in the total purchased power expense.

Mr. Effron testified that Pascoag's power purchases from NYPA also distinguish it from investor owned utilities. Mr. Effron related that the terms of the contract between Pascoag and NYPA require Pascoag to resell the low cost power only to its own customers. He related that in effect, the NYPA power which Pascoag receives "has a market value that is the same as its cost" (Id., p. 17). Mr. Effron explained that because Pascoag must deliver the NYPA power to its own customers at cost, it cannot be used to offset the relatively high cost of Pascoag's other purchased power in determining the transition charge (Id.).

Mr. Effron did however, recommend a number of modifications to Pascoag's unbundled rates and to the calculation of its transition cost. First, he recommended that fiscal year 1997 be used for calculating the cost of purchased power and the level of retail sales. He reasoned that the more current 1997 information is available now and should be used (Id., pp. 17-18).

He also recommended that the calculation of the transition charge reflect the renegotiation of the contract with the Montaup Electric Company. He called this "a known and measurable change", and asserted that it will reduce the cost of the purchased power incurred by Pascoag in the future (Id., p. 18).

Mr. Effron also recommended that the effect of prepaying the Montaup contract termination charge and amortizing the prepayment over five years be reflected in the transition cost calculation. In support of this recommendation, Mr. Effron related that it is his understanding that Pascoag is presently seeking to take out a five-year loan to prepay this contract termination charge. He contended that the repayment of this loan should be accounted for as if it were purchased power (Id., pp. 17-19).

Mr. Effron further recommended that a market value be assigned to the Seabrook power that is retained by Pascoag and not resold (Id., p. 18). He related that just because this power is retained by Pascoag does not mean that it has no market value. He testified that it only means that at certain times there is greater value to Pascoag in using the Seabrook power to meet its retail requirements than there is in reselling it (Id., pp. 19-20). Mr. Effron opined that a market value of $0.032 per kwh, the same market value which Pascoag uses for Montaup power, is reasonable (Id., p. 20).

Mr. Effron summarized the effect of his recommended modifications on a schedule attached to his testimony (Id., Sch. DJE-2, p. 1). Predicated upon the recommended modifications noted above, Mr. Effron calculated a transition charge of $0.0291 per kwh, which is $0.0193 less than the transition charge of $0.0484 per kwh proposed by Pascoag (Id., pp. 20-22).

Using the same modifications, Mr. Effron also calculated a standard offer rate of $0.0235 per kwh and a transmission rate of $0.0083 per kwh, which is the same as Pascoag's proposed transmission rate (Id., p. 22).

B. Rate Change Request

The Division proffered the prefiled direct testimony of three individuals in response to Pascoag's rate change request. The witnesses were identified as Mr. David J. Effron, supra; Ms. Gretchen McClain, a consultant with the Tellus Institute, 11 Arlington Street, Boston, Massachusetts; and Mr. John Milano, the Division's Deputy Administrator.

Mr. David Effron testified that it was reasonable for Pascoag to develop its revenue requirement on a cash flow basis over an approximate five year time horizon (Division Exh. 1 (Docket 2688), p. 4). However, Mr. Effron proposed several modifications to Pascoag's revenue requirement analysis. These recommended modifications collectively reduce Pascoag's required rate increase by $94,900 (from $217,500 to $122,600) (Id., pp. 4-5).

Mr. Effron first recommended adjustments to Pascoag's determination of the net cash flow provided from operating activity. Specifically, he contended that the difference between clause revenue (fuel and purchased power) and purchased power expense should be eliminated from the determination of the operating cash flow under present rates that is used in the determination of Pascoag's additional base rate revenue requirements (Id., p. 7). Mr. Effron related that this adjustment has the effect of increasing the present operating cash flow by $32,000 per year, from $55,000 to $87,000 (Id.). Mr. Effron also proffered a schedule which shows how this discrepancy affected Pascoag's calculation of its revenue requirement (Id., DJE-1, p. 3).

Mr. Effron also recommended certain reductions to the forecasted construction expenditures for the years 1998-2002. Specifically, Mr. Effron reduced the spending on overhead conductors/devices from $80,000 per year to $50,000 per year (Id., p. 9). He also reduced the spending on meters from $12,500 per year to $10,000 per year (Id.). Mr. Effron related that these adjustments are based on the engineering analysis conducted by the Division (Id.).

Mr. Effron next testified that he has "assumed" that all of the spending on the "specific projects" would be financed. He reasoned that these projects represent special capital additions to plant which should not be funded from current cash flow (Id., pp. 9-10). Mr. Effron did note that he has provided $155,000 per year, from current cash flow, for Pascoag's "routine" capital additions (Id., p. 10).

Mr. Effron further testified that he has also "assumed" that Pascoag's transportation equipment expenditures would be financed over a five year term at an interest rate of 5 percent, and that all other financing would be financed over a term of twenty years at 6 percent (Id., pp. 5 and 10). Mr. Effron opined that these terms and interest rates are reasonable (Id., p. 11).

Mr. Effron also "assumed" that the amounts taken from Pascoag's cash reserves to fund construction spending would be withdrawn over the years 1998 through 2002, to levelize the net cash flow (Id., p. 5). Mr. Effron related that modifying the treatment of the withdrawals from the reserve affects not only the amount of the withdrawal by year, but also the interest income by year, since the interest income is based on the remaining balance (Id., p. 11). He added that this approach also prevents the immediate depletion of the reserve (Id.).

Mr. Effron also explained that he aimed to make the net cash flow over the years 1998 through 2002 as close to zero as reasonably possible (Id., p. 6). He related that this assumption is based on his belief that the net operating cash balance available to Pascoag will be the same at the end of the five year period as it is now (Id., p. 12).

In closing, Mr. Effron reiterated that Pascoag's rate increase be reduced from the requested amount of $217,500 to $122,600. He also reiterated that in determining its proposed rates, Pascoag should use billing determinants from the fiscal year ended October 31, 1997 (rather than October 31, 1996) for the purpose of designing rates (Id., p. 14). Finally, Mr. Effron related that although he used a five year time frame in his cash flow analysis, he is not suggesting that the Commission's authorized rates be in effect for five years (Id., p. 15). He maintained that if it is determined that Pascoag's rates are producing a cash flow that is either excessive or inadequate, the Commission should be able to order further rate modifications (Id.).

Ms. Gretchen McClain discussed Pascoag's embedded cost of service study, proposed revenue allocations, and proposed rate designs. She offered the following summary of her conclusions:

- Pascoag's COSS is seriously lacking in substantive data necessary to develop the demand allocators which are key to allocating costs in the COSS. In addition, the Company's methods for classifying select Distribution Plant costs are arbitrary in nature and have carry-over impacts on the classification of the General Plant costs.

- Pascoag's Revenue Allocations recommend that the Industrial and Commercial classes receive a 10% reduction in class revenue responsibility, while all other rate classes receive an increase of almost 14% in class revenue responsibility. This is not appropriate, given the weaknesses in the COSS, and the rate shock implications for the related rates.

- Pascoag's proposed rates represent a serious departure from their current rates. Proposed changes in the Company's Residential and Small Commercial and Industrial rates include the elimination of minimum bills, and the elimination of multiple rate blocks. Instead, customer charges accompanied by single block rates are proposed. Although these changes are a move in the right direction, the set of rates proposed by Pascoag have serious billing impacts for small customers in particular, and raise issues of rate continuity. In addition, the proposed Large Industrial and Commercial and Housing Authority rates include only customer and demand charges, which raises additional concerns (Division Exh. 2 (Docket 2669), p. 3).

Based on her findings, Ms. McClain recommended the following:

- The results of the Company's COSS should be used as a guide to the allocation of revenue increases.

- At this time there should be no decreases in class revenue responsibility.

- Customer charges should replace minimum bills. However, the size of the customer charges should be less than Pascoag has proposed.

- Multiple block rates should be simplified, but blocking should not be abandoned (Id., p. 4).

Ms. McClain testified that she has concerns about the judgments embodied in Pascoag's cost of service study, and about the data available to develop the study. She explained that her concerns center on Pascoag's classification of the electric distribution costs as contained in its study. She related that all of these costs are functionalized appropriately as distribution, and then some costs are classified entirely to demand, some entirely to customer, and some are split between demand and customer, in an apparently arbitrary manner. She related that accounts 364 (Poles, Towers, and Fixtures) and 368 (Line transformers) were classified as 50% demand-related and 50% customer-related. Ms. McClain observed that there was no justification given for this classification. She testified that the choice of 50% appears to be arbitrary (Id., pp. 5-6). Ms. McClain also identified other cost classifications which are dependent on the classification of the distribution plant costs. She noted that the General Plant Accounts were classified as 58% demand and 42% customer based on the result that 42% of Distribution Plant is classified as customer-related and 58% is classified as demand-related. Ms. McClain contended that these questionable classifications of Distribution Plant will have carry-over impacts on the classification of other costs in the COSS (Id., p. 6).

Ms. McClain testified that costs ought to be classified correctly for two reasons, as explained below:

First, customer and demand costs are not divided in the same proportions among rate classes. Thus, errors in classification can lead to errors in class revenue responsibility and class rates of return. Second, customer costs are generally collected through fixed customer charges. Errors in classifying customer-related costs can lead to errors in the development of customer charges. Overstating customer charges in turn decreases the sensitivity of the bill to the customer's consumption, thereby reducing the incentive for customers to conserve (Id.).

Ms. McClain also voiced concern over the fact that the demand factors for Pascoag's study were derived from each class' respective coincident peak, with the coincident peak calculations based on estimates of class peak demands. She related that in developing the customer factors, Pascoag used weighting factors to determine the relative burden of providing customer services to each customer class. Ms. McClain questioned this method because Pascoag provided no cost basis or evidence to support the development of these weighting factors (Id., p. 7).

Due to these concerns, Ms. McClain opined that Pascoag's cost of service study should only be used "to guide the assignment of class rate increases". She contended that it would be inappropriate to assign the increases based directly on the study results, or to base rate design directly on unit costs from the study (Id.).

Ms. McClain next discussed Pascoag's proposed changes in class revenue responsibility. She related that Pascoag proposed an increase of $349,330 from Residential classes, while offering decreases to the Commercial and Industrial classes totaling $137,515. She also related that Pascoag's proposed rate design would have "severe impacts" for the Residential, Heating, Hot Water, and Streetlighting classes. She observed that under Pascoag's rate design, the Commercial and Industrial classes would receive a 10 percent decrease, while all other classes would increase by 13.8 percent (Id., p. 8).

Ms. McClain recommended instead that the Commercial and Industrial classes "receive no change in their required class revenues" (Id.). She recommended further that the remaining classes "each receive the same percentage revenue increase" (Id., p. 9).

Ms. McClain related that using the revenue increase figure of $122,600, and holding the Commercial and Industrial revenue requirements fixed, she proposed an increase in existing class revenues of 4.76 percent for the Residential, Public, and Streetlighting classes (Id.).

Ms. McClain also offered comments on Pascoag's rate design. She related that the types of large increases in customer charges, being proposed by Pascoag, create hardships for small-use customers (Id., p. 10). She explained that when the fixed portion of a customer's rate increases, "there is no way for this customer to respond to the increase through alterations in consumption" (Id.). She also voiced concern over the customer and demand charges being proposed for the large Commercial and Industrial class and the Housing Authority class (Id., p. 11).

Ms. McClain also expressed the following three concerns regarding Pascoag's proposed changes in the large customer rates:

First, the proposed rates represent a substantial departure from current rates, and raise issues of rate continuity. Second, the signal sent to customers on such rates is to limit demand during peak periods. The distribution system is designed to meet maximum demand. Shifting distribution to off-peak periods might not result in distribution investment savings for the utility. Instead, it might simply result in more distribution costs being collected from other rate classes, as large customers reduce their demand. Third, developing rates which collect distribution costs through a demand component alone raises concerns about the quality of the demand data for these and all other classes (Id., p. 11).

Ms. McClain agreed that Pascoag's current rates need to be modified in order to develop rates which are more responsive to the need for rate continuity. She related that she agrees with Pascoag's proposal to replace minimum bills with customer charges and the simplification of the blocking structure. However, she related that she would limit the changes to preserve rate continuity. She related that in order to smooth out the fluctuations in billing impacts for the Residential classes, she recommended introducing a lower customer charge than that proposed by Pascoag, and implementing a declining two-block rate (Id., p. 12). For the large Industrial and Commercial, and Housing Authority classes, she recommends maintaining a block structure in addition to the demand charge (Id.).

In closing, Ms. McClain recommended that Pascoag be required to produce the billing data necessary to fully evaluate rate design alternatives which include multiple block rates. She contended that Pascoag's proposed rates should be rejected, and that Pascoag be required to develop a more reasonable set of alternative rates (Id., p. 13).

Mr. John Milano offered testimony on Pascoag's proposed system improvements. He explained that his evaluation is primarily based on a "comprehensive inspection" which he conducted on March 17, 1998 (Division Exh. 3 (Docket 2688), pp. 3-4).

Predicated on his inspection, Mr. Milano testified that Pascoag's planned substation work is reasonable. He opined that the projected costs for this project are also reasonable, "based on my experience with these types of projects" (Id., p. 4).

Mr. Milano also found Pascoag's plan to convert its system from 4KV to 13KV, both reasonable and necessary (Id., p. 5). Mr. Milano did however conclude that Pascoag's projected total cost of $500,000 for this project to be excessive. He opined that a total cost of $280,000 would be more realistic (Id., pp. 6-7).

Mr. Milano also supported Pascoag's plan to install emergency generators at its office and substation. He concluded that the related costs were reasonable (Id., p. 7).

Mr. Milano similarly supported the need assessment and cost estimate associated with Pascoag's vehicle replacement proposal (Id., p. 7).

Mr. Milano also made the following comments regarding the overall condition of Pascoag's system:

In our review we witnessed the use of the EMETCON System, an AMR meter system utilizing the power system wiring only. The system will allow Pascoag to obtain individual customer load profiles instantaneously, plus will additionally allow for instant turn-on/turn-off capability. There are 20 such meters in place at a cost of $175 per meter. Pascoag plans to expand by 50 additional meters each year. The system is also a mini SCADA and can provide distribution automation for field switching and control of voltage regulation devices. Based on Pascoag's very rural service area, this is an important tool to minimize outage time. In my field review, I was impressed with the condition of the facilities in general. Distribution plant and substation equipment were in exceptional condition in spite of age (Id., p. 8).

Mr. Milano did state however, that Pascoag's annual meter replacement expense should be reduced from $12,000 to $10,000 (Id.). He related that this adjustment reflects lower current market prices for AMR meter technology (Id.).

IV. PASCOAG'S REBUTTAL CASE

Pascoag filed its rebuttal case on April 22, 1998. Pascoag's rebuttal case exclusively addressed matters relevant to its rate change request. Prefiled rebuttal testimony was proffered by Messrs. Robert L. Anderson and Frank W. Radigan.

Mr. Robert Anderson testified that Pascoag agrees with the Division's contention that there are gaps in some of the data that are desirable for developing demand allocations. He related that he pointed this out in his direct testimony. He attributed the lack of data to Pascoag not having an ongoing load research program, and thus not having specific information on class demands. He maintained that this lack of data is not uncommon for small municipal utilities (Pascoag Exh. 6 (Docket 2688), p. 2).

Mr. Anderson admitted that the alternative techniques used by Pascoag to develop its demand allocation factors do not produce totally accurate results. However, he opined that "accuracy is only a matter of degree" (Id.). He related that all of the load research methods which he is familiar with, rely on estimates and produce results which are inaccurate to some degree. He testified that "there is no sampling method that produces perfect results" (Id.). He explained that in order to produce accurate results Pascoag would need to employ continuous metering of every account on the system in order to build a complete chronological load profile by class. He asserted that this would be prohibitively expensive for Pascoag (Id., pp. 2-3).

Mr. Anderson also defended Pascoag's use of weighting factors for developing its customer allocation factors. He related that the use of weighting factors is a common and accepted technique to help develop customer allocation factors in cost of service studies (Id., p. 3).

Accordingly, Mr. Anderson defended Pascoag's allocation factors for heating and non-heating costs relative to billing and metering service. He related that the weighting is used to offset the subsidy of heating customers which would otherwise occur (Id., p. 5).

He similarly defended the use of a weighting factor for streetlighting. He opined that the only way to account for some of this cost burden is through a weighting factor (Id.).

Mr. Anderson also took exception to the Division's opinion that Pascoag's methods for classifying select distribution plants costs are arbitrary in nature and have carry-over impacts on the classification of several plant costs. He related that all classification methods have carry-over impacts. He also asserted that the methods used to classify costs were not arbitrary. He testified that "generally accepted ratemaking procedures were used in carrying out all COS calculations" (Id., p. 6).

Mr. Anderson next testified that the Division's recommendation to maintain the block rate structure is inconsistent with accepted ratemaking principles. He related that declining block rates are undesirable for the following reasons:

1 They send an inappropriate price signal to consumers.

2 They encourage consumption rather than encouraging conservation; this results in greater capital resource requirements, more fuel consumption, and overall higher utility costs.

3. They are more difficult to administer (Id., p. 7).

Mr. Anderson also claimed that the Division's proposals are inconsistent with Pascoag's rate objectives, which parallel the above reasons (Id.). Mr. Anderson also reiterated a number of Pascoag's other rate objectives in support of its allocation decisions. He related that while it was impossible to achieve all rate objectives, it was possible to balance a number of concerns to maximize Pascoag's rate intentions (Id., pp. 8-13).

Mr. Frank Radigan discussed the following three issues in his rebuttal testimony:

...the correction of a math error that was discovered when preparing responses to interrogatories, the Division's adjustment to the determination of the present net operating cash flow, and I have updated the District's exhibits to reflect the bonding terms, rates and methodology used by the Division in the calculation of the revenue requirement (Pascoag Exh. 5 (Docket 2688), p. 2).

He also related that the District's requested revenue requirement increase has been amended downward to $210,700 (Id.).

In explaining the math error, Mr. Radigan related that during the discovery process, the District received an information request asking how the depreciation expense level of $228,084 was calculated. He related that in reviewing that calculation he discovered that the expense level was not increased by the same inflation factor as applied to all other expenses (2.5 percent v. 5.1 percent) (Id., pp. 2-3). He related that correcting this error increases Pascoag's revenue requirement by $5,369 (Id., p. 3).

Mr. Radigan offered comment on the Division's adjustment to the calculation of the net operating cash flow. He related that the Division has taken the position that because the fuel adjustment revenues are fully reconciled to actual numbers, there must be some error in the unaudited numbers. In response, Mr. Radigan explained that the difference between the audited number and the number appearing on the sales sheets, is due to the fact that the sales sheets bill customers on the Commission approved FAC and CCA rates. Mr. Radigan related that because of this, there is a shortfall between the money collected through the District's purchased power recovery clause mechanism and the expenses paid to suppliers (Id., pp. 3-4).

Lastly, Mr. Radigan offered the following comment relative to bonding:

The District would agree with the terms and conditions for bonding of short term and long term items of property that the Division has included in its presentation with one change. The District would change the term of the loan for line trucks to seven years, rather than the five years as assumed by the Division. However, the Division has appeared to err in the amount of money that is required to be bonded for the purchase of new vehicles. A review of the Division's exhibits indicate that the Division is assuming that only that money over and above the historic level is to be bonded. This is an error since these assumptions excludes a large amount of the expenditures for new vehicles. For the period, 1993 through 1996, the District spent $52,582 per year on new vehicles. In the District's initial filing, a $45,000 historic level was used to differentiate between historic spending levels and the cost estimates for the specific large projects. This delineation, however, was not meant to assume that some cost would be covered through internally generated funds and only the amount above historic amounts would be bonded. In fact, the Electric Department's only outstanding bond was issued to purchase a new line truck. As such, I have corrected the Division's presentation to show the impacts of bonding for all new vehicles (Id., p. 6).

V. THE DIVISION'S SURREBUTTAL CASE

Mr. David Effron filed surrebuttal testimony on April 29, 1998. At the outset of his testimony he related that the Division and Pascoag had reached a settlement that would provide for an increase in rates to produce $160,000 of additional annual revenue (Division Exh. 4 (Docket 2688), p. 1).

Mr. Effron additionally related that his amended schedules also reflect changes in the areas of cash reserves that can be withdrawn to support Pascoag's capital spending program, and the financing assumptions for the capital spending program.

Mr. Effron agreed with Mr. Radigan's representation that Pascoag has $454,000 of total cash available to it, after the first half of fiscal year 1998. He also now agrees that since Pascoag has earmarked $383,000 of these funds for reserves, that only $71,000 of cash will be available for construction spending. Mr. Effron explained that his previous assumption that $247,000 could be used for construction was incorrect. Mr. Effron related that because of this difference of $176,000, "the additional revenues from the rate increase must be modified accordingly" (Id., p. 2).

Mr. Effron also testified that he changed his financing assumptions to be consistent with Mr. Radigan's rebuttal testimony. Specifically, he now agrees that the line truck and material handler will be financed over a seven year term at a rate of 5.20% (Id.). Mr. Effron similarly agreed to eliminate the borrowing associated with the superintendent's vehicle (Id., p. 3). Mr. Effron also asserted that his revised financing assumptions will not result in an amount of debt for Pascoag which will be in excess of its $1 million charter limitation (Id.).

Ms. Gretchen McClain also filed surrebuttal testimony on April 29, 1998. Ms. McClain proffered a set of preliminary settlement rates, which she explained, reflect the parties:

...agreed upon structure of the rates, and the agreed upon customer charges for the rates.

She related that the transition, standard offer, and transmission component of the rates is still being determined (Division Exh. 5 (Docket 2688), p. 1). She indicated that the parties are also discussing the specific distribution energy and demand charges (Id.).

Ms. McClain testified that although the exact allocation of the base rates revenue requirement is still being discussed by the Division and Pascoag, the parties agree that the increase of $160,000 should be allocated among all rate classes with more of the increase being allocated to the non-commercial and non-industrial classes (Id., p. 2).

Ms. McClain's related that there are three main features to the preliminary settlement regarding residential rates. She identified the features as:

1. The residential heating and hot water rate was merged together with residential rate.

2. The minimum bill provision for each rate was eliminated, with the adoption of a single customer charge of $3.00 per month.

3. The multiple declining block distribution charge feature of these rates was replaced with a flat block rate (Id., p. 3).

Ms. McClain testified that the Division supports merging the two residential rates because such merger will eliminate the fundamental inequity in the treatment of the residential customers in the two rate classes. She related that as a consequence of this merger all residential customers will be subject to the same rates, and customers who had previously been on the residential heating and hot water rate will have an incentive to conserve energy equal to all other residential customers (Id., p. 3).

Ms. McClain also opined that this new residential rate will promote energy conservation. She explained that the elimination of the minimum bill makes the customer's bill more sensitive to energy use in that each kWh consumed by the customer will increase the customer's bill. She added that each kWh consumed will cost the customer the same amount, so electricity no longer becomes relatively cheaper as the customer consumes more (Id.).

For the small commercial and industrial rates, Ms. McClain related that the settlement proposes the elimination of the minimum bill provision. She explained that the minimum bill will be replaced with a customer charge. She also explained that the declining block distribution charge structure will be replaced by a flat block distribution charge (Id., p. 4). She noted that this rate structure:

...sends a strong message to customers to conserve energy, just as the proposed residential rate does, while not shifting the revenue burden disproportionately to small-use customers (Id., p. 4).

Ms. McClain testified that the preliminary settlement also proposes a limited increase in the customer charge for the large commercial and industrial rate (Id.). She related that the parties have also agreed to eliminate the declining block distribution charges in favor of a uniform per-kW demand charge (Id.). She opined that this change should improve load management among these users (Id., pp. 4-5).

Ms. McClain related that the preliminary settlement's Housing Authority rate changes parallel those in the large commercial and industrial rate. She indicated that there would be a small increase in the customer charge; and that a demand-only distribution charge would be implemented in place of the previous declining block distribution energy rates (Id., p. 5).

She testified that the streetlighting rates would be adjusted to increase each fixed component by 13 percent (Id.). She related that a decision was made by the parties to limit the increase for this rate class in the interest of rate continuity (Id.).

Ms. McClain also commented on why the settlement rates maintain customer charges at a level similar to the previous minimum bill charges. She explained that the:

...advantages of maintaining small fixed charges are twofold. First, maintaining a small fixed charge limits the impact of eliminating the minimum bill charge for small-use customers, preventing a revenue burden from being disproportionately shifted to small-use customers. Second, it places the emphasis on conservation, since the customer's bill is relatively more sensitive to usage than if a large customer charge had been adopted (Id., p. 5-6).

VI. STIPULATION

On May 7, 1998, the District and the Division filed a settlement agreement with the Commission, which the parties represent, provides a "resolution of the issues in the...consolidated proceedings" (Joint Exh. 2). This settlement was subsequently revised by the parties and refiled on June 2, 1998 (Joint Exh. 3). The revised settlement, in its entirety, is attached to this report and order as "Appendix 1" and is incorporated by reference.

The stipulation's major components are reflected below:

A. REVENUE REQUIREMENT

Pascoag and the Division have agreed on an increase in the base rate revenue requirement of $160,000.

The parties agree that the construction program largely drives the need for the base rate revenue increase. Beyond normal ongoing plant replacements and additions, Pascoag commits that several specific projects will be done in 1998 through 2002, subject to approval by the voters of the District with regard to any single expenditure in excess of $50,000. In addition to the commitment to do these projects, Pascoag also agrees to provide the Division and Commission with updates on its progress in completing the construction program. These updates will be for all construction expenditures, with a specific report on the status of construction and cost of the specific projects, to the Division and the Commission. Pascoag will file the updates at the time the true-up filing for the Transition, Transmission and Standard Rate Offer Charges, referred to in paragraph D below, is made.

Pascoag agrees to the following station equipment additions of $675,000. This includes the cost for a new substation and emergency generators for the substation and Pascoag headquarters building. The District agrees to continue the conversion of its 4 kv distribution system to 13.8 kv. The construction expenditures for this work are as follows: 1998-$100,000, 1999-$70,000, 2000-$70,000, 2001-$20,000 and 2002-$20,000. New automatic meter reading devices will continue to be purchased at a cost of $10,000 per year. The District will purchase new and more efficient street lighting equipment in 1998 at a cost of $9,000. An upgrade to Pascoag's old substation building will begin in the year 2000 and be completed by the end of 2002 at a total cost of $100,000. The District will replace vehicles (a line truck, a new vehicle for the superintendent and a material handler vehicle) in 1998 and 1999 at a total cost of $295,000.

B. ALLOCATION OF REVENUE REQUIREMENT

VII. COMMISSION FINDINGS

The Commission has thoroughly examined the record in this case, and finds that the revised stipulation proffered by the parties represents a fair and reasonable resolution to the issues previously in dispute. The Commission also finds the stipulated agreement to generally be in the best interest of all ratepayers. We do however, find that some modifications are necessary. Our specific findings are reflected below:

A. Cost of Service

The Pascoag Fire District is a municipal organization as opposed to an investor-owned utility. The Commission has approved revenue requirements for non-investor owned utilities on a cash needs basis and will therefore accept Pascoag's cash flow schedule as a basis for its cost of service. We find that the revenue increase of $160,000 for fiscal year 1998, as agreed to by the parties, is justified for the proforma year on the basis of funding the cash needs of the District.

The revenue requirements are based on a cost of service and cash flow schedule presented for the proforma fiscal year which ends October 31, 1998. This cost of service was presented by Pascoag's witness Mr. Frank Radigan, at Schedule FWR-4, Pascoag Exhibit 4. Mr. Radigan presents fiscal year 1996 as the test year, and he increases expenses by 2 1/2% for each of two years to arrive at his inflation-adjusted fiscal year 1998 amounts. The resulting cost of service revenue requirement was then adjusted to reflect: (1) a cash basis and (2) the infusion of additional debt and capital reserves to supplement the cost of capital improvements. The settlement position of the parties for revenue requirements on a cash basis is reflected in Mr. Effron's revised Schedule DJE-1R, Division Exhibit 4.

This five-year schedule appears to substantiate the continuing need of this funding level, and in fact, any increase in operating costs beyond fiscal year 1998 would seem to require a higher level of funding after fiscal year 1998. The Commission does not take a position on revenue requirements beyond the proforma rate year; however, we do not find issue with the five-year approach underlying the parties' agreement.