DR 97-188
                           DR 98-112
                                
                   LAKES REGION WATER COMPANY
                                
                 Request For Single Rate Tariff
                                
               Order Approving Single Rate Tariff
                                
                    O R D E R   N O.  23,146
                                
                       February 11, 1999
                                
       In this order, the Commission approves a request by
     Lakes Region Water Company (Lakes Region) for a rate increase to
     be reflected in a single tariff for all customers of the nine
     systems owned and operated by Lakes Region.
     I.     PROCEDURAL HISTORY 
       This consolidated proceeding began with a 1997 filing
     by Lakes Region for an increase in the company's overall annual
     revenues by $66,765, DR 97-188.  The proposal would have, if
     approved, resulted in a 14.99% rate reduction at Echo Lake Woods
     system and rate increases in the remaining eight systems ranging
     from 1.27% to 210.28%.  Upon receipt of that rate filing, the
     Commission opened docket DR 97-188.
       On May 5, 1998, Lakes Region supplemented its original
     filing in DR 97-188 and proposed to consolidate the rates of its
     nine systems; however, Lakes Region withdrew this supplemental
     testimony prior to the merits hearing.  Thereafter, Lakes Region
     and Staff stipulated to revenue requirements for each of Lakes
     Region's individual systems, and on May 28, 1998, the Commission
     held a hearing to consider that stipulation. 
       On June 23, 1998, Lakes Region filed a new proposal to
     charge consolidated rates based on the stipulated revenue
     requirements in DR 97-188.  That filing opened DR 98-112, which
     the Commission later consolidated with DR 97-188.
       By Order No. 23,058 (November 2, 1998), the Commission
     granted Lakes Region's request to set then-current rates as
     temporary rates effective for service rendered on or after July
     1, 1998.
       On November 24, 1998, the Commission held a hearing to
     address Lakes Region's request for consolidated rates.  
     II.    POSITIONS OF PARTIES AND STAFF  
       A.   Lakes Region
       Lakes Region has 1,026 customers in nine "divisions." 
     Exhibit 7, Introductory Letter.  Currently, Lakes Region's rates
     are based on a separate estimate of the cost of service for each
     division.  In the instant filing, Lakes Region identifies two
     factors which led it to seek consolidated rates: first, the
     Commission's decision in Pennichuck Water Works, Inc.'s
     (Pennichuck's) rate case last year (DR 97-058); and second, the
     State's decision to make revolving loan funds available for
     improvements at Brake Hill and Tamworth Water Works divisions. 
     According to Lakes Region, 
         [T]he single rate design is appropriate because of the
       magnitude of the rate increases in Deer Run, Brake Hill
       and Tamworth Water Works...The Company has concerns
       about the ability of its customers to pay the higher
       rates and the ability of some of its customers to drill
       their own well......A single rate is appropriate for
       [Lakes Region] because the magnitude of the rate
       increase that results from the cost of service
       methodology is too much for Deer Run, Brake Hill and
       Tamworth customers.            
     
     Exhibit 7.  Consistent with the stipulation filed in DR 97-181,
     Lakes Region proposes a single rate tariff based on an overall
     revenue requirement of $380,344.  
       B.   Staff 
       As noted above, Staff and Lakes Region stipulated in DR
     97-188 to an overall company-wide revenue requirement of
     $380,344.  On the issue of rate consolidation, Staff's testimony
     reflected divergent views on whether Lakes Region's request
     should be granted.  According to Staff Water Engineer, Douglas W.
     Brogan, "the fact that Lakes Region has been one of the very few
     players willing to acquire troubled systems merits... some level
     of consideration and support by the Commission."  Exhibit 9 at 4. 
     In sum, Mr. Brogan testified, "consolidation will offer more
     pluses than minuses."  Id. 
       Mr. Brogan testified that the direction of rate
     subsidies associated with Lakes Region's proposal could change
     over time:  customers whose rates are subsidized today might
     receive the benefits of rate subsidies in the future.  Mr. Brogan
     noted that such shifts in relative revenue burden have occurred
     between the Company's divisions in the past.  In addition, Mr.
     Brogan pointed out that Lakes Region has applied for State
     Revolving Loan Fund money to support projects at Tamorth and
     Brake Hill, in addition to its intent to seek Community
     Development Block Grant funds.  These funding sources could,
     according to Mr. Brogan, significantly mitigate the level of any
     rate subsidies. 
       Staff Finance Director, Mark A. Naylor, testified that
     rate consolidation violates the long-standing regulatory
     principles of setting rates based on cost-causation and could
     also send the wrong price signals to customers.  Mr. Naylor
     testified further that rate consolidation leads to a resulting
     loss of individual system income measurement, thereby reducing
     the ability of management and regulators to evaluate individual
     system performance and operating efficiency.  Exhibit 8 at 1.  
     
       According to Mr. Naylor, substantial differences exist
     between this case and DR 97-058 where the Commission granted
     Pennichuck's request for consolidated rates; for instance, in
     Pennichuck's case, there is a core system of 20,000 customers
     over which the rate subsidy is spread to lower the rates of
     approximately 1000 satellite customers.  By contrast, Lakes
     Region proposes to require 651 customers to subsidize the rates
     of 375 customers.  In addition, Mr. Naylor avers that none of
     the individual system rates which would result if the Commission
     denied Lakes region's request would fall outside of a "just and
     reasonable" zone.       
       In sum, Mr. Naylor recommended that the Commission
     carefully weigh this issue and its long-term impacts on Lakes
     Region's customers.                  
     III.   COMMISSION ANALYSIS       
       The primary issue pending before the Commission is
     whether we should approve Lakes Region's request to adopt a
     single consolidated rate for all customers of its nine systems. 
     We have carefully considered the arguments that were presented on
     both sides of the issue and conclude that Lakes Region's request
     is justified.  In our view, the benefits of rate consolidation in
     this case outweigh the negative impacts.  
       An overriding consideration that favors rate
     consolidation is the wide disparity in rates among customers of
     the individual systems that would result from denying Lakes
     Region's request.  As we observed in the Pennichuck Water Works
     case, 
         [S]tand alone rates in this case produce results for
       some customers that are well beyond the zone of 'just
       and reasonable'......A consolidated rate will ensure
       affordability and continued viability of many of
       Pennichuck's community systems.       
     
     Order No. 22,883 at 11-12.  An evaluation of the factors we
     considered in Pennichuck lead us to the same outcome in the
     instant case.  We are particularly concerned about the rate
     levels that would result from a denial of Lakes Region's request
     for the customers of the Deer Run, Brake Hill and Tamworth
     systems.  For example, customers of Brake Hill would be facing a
     200% rate increase absent consolidation.  As in Pennichuck, we
     find that such rates are outside the zone of "just and
     reasonable."  See RSA 378:7.  
       In addition to the foregoing considerations, we also
     believe that rate consolidation will have the salutary effect of
     encouraging financially sound utilities to acquire community
     systems that are not otherwise attractive acquisitions in the
     short term.  Rate consolidation is therefore a policy that
     promotes the expansion of public water systems, which we believe
     is in the overall public good.  
       There was also testimony in this proceeding regarding
     the possible need for a step increase based on anticipated
     capital improvements during 1999.  We will entertain any such
     request at the appropriate time, but decline to pre-approve any  
     such anticipated costs.                   
       Finally, we will allow Lakes Region to recoup the new
     rates for the period that temporary rates were in effect based on
     the table in Appendix A of this order.  We note that Lakes Region
     attempted to implement its own recoupment schedule after we
     deliberated this matter during the Commission's December 14, 1998
     public meeting.  Lakes Region was thereafter directed to notify
     its customers that any recoupment of temporary rates was not
     authorized until the Commission issued an order.  We affirm that
     prior directive:  Lakes Region is ordered to notify all affected
     customers that the Commission has approved a different temporary
     rate recoupment than the one proposed by Lakes Region, and that
     customers are not responsible for paying the unauthorized
     recoupment portion their bills.  We also direct Lakes Region to
     seek Staff's concurrence on the content of the notice before it
     is sent it out.  For those customers who have already submitted
     payment to Lakes Region for the unauthorized recoupment portion
     of their bill, we direct Lakes Region to credit the
     overcollection to customer bills.           
       Based upon the foregoing, it is hereby
       ORDERED, that the request by Lakes Region for
     consolidated rates based on the stipulated revenue requirements
     in DR 97-188 is APPROVED; and it is
       FURTHER ORDERED, that Lakes Region shall notify all
     affected customers of the temporary rate recoupment schedule
     approved by the Commission as set forth in this order; and it is
       FURTHER ORDERED, that Lakes Regions shall credit
     customer bills for the unauthorized recoupment portion of the
     bill for those customers who have submitted payment prior to
     receiving the aforementioned notification from Lakes Region.
       By order of the Public Utilities Commission of New
     Hampshire this eleventh day of February, 1999.
     
     
                                                                      
           Douglas L. Patch       Susan S. Geiger     Nancy Brockway
               Chairman           Commissioner          Commissioner
     
     
     Attested by:
     
     
                                      
     Thomas B. Getz
     Executive Director and Secretary
     
     
     
                           APPENDIX A