Also...

http://www.themodernantiquarian.com/post/27197

It seems we have two versions of the tale. On the one hand there's this one, with no mention of Penshaw. On the other hand is the song, which mentions it. Given that the song was written for a pantomime, I'm inclined to think that the Worm has only been associated with Penshaw in recent times. I suspect that the author of the song wanted a landmark more well-known than Worm Hill. Obviously I can't say for sure, though.