VIII. Remaining Issues

In this investigation we stated we would determine whether:

· The terms and conditions of Union Pacific's service are just and reasonable;

· Union Pacific should file tariffs for furnishing water; and

· Union Pacific's abandonment of service would be in the public interest.

The record is insufficient to determine just and reasonable terms and conditions for the Keene Water System.

ORA's testimony states that Union Pacific reported expenses for 1999 as $168,078 and rate base of $607,886 for the Keene Water System. ORA contends that the system's expenses were unreasonable given operating expenses the Commission had recently adopted for other water utilities. ORA asserts that the operating expenses of Keene Water System are 264% greater than the average operating expenses for 3 Class D (under 500 connections) water utilities for which the Commission recently adopted rates. ORA also contends that $600,000 in rate base represented expenditures that benefited the railroad. ORA's testimony recommends that no rate increase should occur until Union Pacific files an application for a rate increase for the Keene Water System and fully supports its request.

Subsequently, ORA submitted one page of additional testimony⁶ which recommended a quantity rate and monthly service charge as follows:

Quantity Rate:
	All water, per 100 cubic feet	$6.90
		Per Meter
		Per Month
Service Charge:
	For 5/8 x ¾ inch meter	$66.00
	For ¾ inch meter	$99.00
	For 1 inch meter	165.00
	For 1-1/2 inch meter	330.00
	For 2 inch meter	528.00

ORA calculated the above rate and service charge by omitting $33,118 in costs Union Pacific incurred for purchased water. At hearing, the ORA witnesses justified the deduction on a belief that higher rates would promote conservation and reduce or eliminate the need to import water (via trucks). In addition, ORA adjusted depreciation and taxes to reflect lower operating expenses. ORA's proposal also reduces plant to $127,048 after excluding $509,263 for replacing a water line. ORA argues that the capital addition should be disallowed because the pipeline benefits the railroad and also because the improvement was unnecessary and unreasonable. Union Pacific's witness testified that the line in question was over a 100 years old and deteriorated and needed replacement.

In its responsive testimony, Union Pacific submits that its operating expenses in 1999 were $152,572 and that such operating expenses are representative of the actual costs of operating the water system in complying with analytical reporting requirements imposed by DHS. Union Pacific also asserts it incurred $616,313 in capital expenditures in 1999 and 2000. Union Pacific states that these capital expenditures were incurred to satisfy DHS requirements regarding the operation of the water system.

Currently, customers pay $4 per 1000 gallons of water used. The information presented at hearing is too preliminary to establish rates given the magnitude of the rate increase proposed by Union Pacific. We are also concerned that the operating expenses of Keene water system are 264% greater than the average operating expenses for 3 Class D water utilities for which the Commission recently adopted rates. We agree with ORA's initial recommendation that Union Pacific should file an application to establish rates. Given the limited analysis contained in the existing record, we will order Union Pacific, which has the burden of proof on this issue, to file an application setting forth just and reasonable rates for water service to these communities. This will build on the record developed in the OII.

Union Pacific may also file an application to transfer the system.