I did that successfully once, and now I don't seem to be able to alter the passwords on either _SYSTEM or PUBLIC. It always says "000 No valid password supplied in the function chpass." I know I am entering the correct passwords, and the system even recongizes them in other contexts (e.g. I can log in as those users -- I just can't change their passwords).
By the way, with respect for the need to use "tsql -a C -u PUBLIC" to change the PUBLIC password, note that is does not say anything about that in the password instructions (see page 135-136 of http://www.thunderstone.com/site/texis.pdf). I've come across issues like this many times. It seems that your documentation could use reviewing for errors, ommissions, and things that used to be true, but no longer are in the current version of the database. You guys have been great at quickly answering questions, but if the documentation were better it would save everyone a lot of time because the questions wouldn't need to be asked in the first place.
The program is supposed to allow using ALTER USER, however this it the first time we've run into a problem, and a workaround is available. Try providing the password with the -p passwd option.