ML17265A393

Request for Consent to Corporate Reorganization.Rg&E Is Restructuring to Adopt Holding Company Form of Corporate Organization as Authorized by New York State PSC

ML17265A393
Person / Time
Site:	Nine Mile Point, Ginna
Issue date:	07/31/1998
From:	NIXON, HARGRAVE, DEVANS & DOYLE, ROCHESTER GAS & ELECTRIC CORP.
To:	NRC
Shared Package
ML17265A391	List: ML17265A390 ML17265A393
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NUDOCS 9808050257
Download: ML17265A393 (369)

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UNITEDSTATESOFAMERICABEFORETHENUCLEARREGULATORYCOMMISSIONROCHESTERGASANDELECTRIC)DocketNos.50-410and50-244CORPORATION)FacilityOperatingLicensesNos.NPF-69andDPR-18REQUESTFORCONSE<NTTOCORPORATEREORGANIZATIONNIXON,HARGRAVE,DEVANSdkDOYLEu,pAttorneysforRochesterGasandElectricCorporationClintonSquareP.O.Box1051Rochester,NewYork14603-1051Telephone:(716)263-1000Facsimile:(716)263-1600July31,199898080502575000244PDRADOCK0pDRH

,0oe UNITEDSTATESOFAMERICABEFORETHENUCLEARREGULATORYCOMMISSIONROCHESTERGASANDELECTRIC)CORPORATION)DocketNos.50-410and50-244FacilityOperatingLicensesNos.NPF-69andDPR-18REQUESTFORCONSE<NTTOCORPORATEREORGANIZATIONI.INTRODUCTIONRochesterGasandElectricCorporation("RG&E,"the"Company")herebyrequeststhe~consentoftheNuclearRegulatoryCommission(the"Commission"),pursuantto10C.F.R.Section50.80,totheindirecttransferofcontroloftwolicensesgrantedbytheCommission:RG&E'spossessorylicenseforits14%ownershipinterestintheNineMilePointNuclearStation,UnitNo.2("NineMile2")locatedinScriba,NewYork;andtheCompany'soperatinglicenseforitswholly-ownednucleargeneratingfacility,theR.E.GinnaNuclearPowerPlant("Ginna").RG&EisaNewYorkcorporationengagedprincipallyinthegeneration,purchase,transmission,distributionandsaleofelectricpower,andthepurchase,transportation,IdistributionandsaleofnaturalgasinserviceterritoriesinwesternNewYorkState,underthegeneralregulatorysupervisionoftheNewYorkStatePublicServiceCommission(the"NYPSC").RG&Ealsosellselectricityonthewholesalebulkpowermarket,transmitselectricityininterstatecommerce,andoperateshydroelectricgeneratingfacilities,allofwhichR182280.I activitiesaresubjecttoregulationbytheFederalEnergyRegulatoryCommission(the"FERC").RG&Eisan"electricutility"withinthemeaningoftheCommission'sregulations(10C.F.R.Section50.2).InconjunctionwiththerestructuringofitsregulatedelectricservicebusinesspursuanttothepolicydirectionoftheNYPSC,andinaccordancewiththeprovisionsoftheAmendedandRestatedSettlementAgreement,datedOctober23,1997(the"Settlement"),'rovidingforsuchrestructuring,RG&Eproposestopursueacorporatereorganization,inwhichRG&Ewouldbecomeawholly-ownedsubsidiaryofaholdingcompany(the"Holdco").Thisformalchangeincorporatestructurewould,inlightofpriorCommissiondeterminations,bedeemedtoinvolveachangeincontrolofRG&E,andaccordinglyanindirecttransferofthelicensestoHoldcoasthenewownerofRG&E.Thus,theCompanyseekstheCommission'sapprovalforthistransaction,andfortheindirecttransferofRG&E'slicensesthatitwouldentail.Thisapplicationwillsetforththeregulatorybackgroundfor,andthepurposesandframeworkof,theproposedreorganization;itwillalsoaddressanumberofmatterstowhichtheCommissionhasdirectedparticularattentioninconsideringsimilarapplicationsinthepast.RG&EbelievesthattheproposedreorganizationwouldnotaffectitsqualificationforthelicensesgrantedtoitbytheCommission,wouldnotaffectitsstatusasan"electricutility"fortheAmendedandRestatedSettlementAgreement,datedOctober23,1997,resolvingissueswithrespecttoRG&EinproceedingsbeforetheNYPSC,Cases94-E-0952,MatterofCometitive0ortunitiesReardinElectricService,and96-E-0898,MatterofRochesterGasandElectricCooration'sPlansforElectricRate/RestructurinPursuantto0inionNo.96-12.AcopyoftheSettlementisattachedheretoasExhibitA.ThereaftertheNYPSCissuedtwoorders,thefirstapprovingtheSettlementsubjecttocertainmodifications,andthesecondsettingforthindetailtherationaleforitsdecisionssetforthintheearlierorder.SeeOrderAdoptingTermsofSettlementSubjecttoConditionsandChanges,issuedNovember26,1997inCaseNo.96-E-0898,andOpinionNo.98-1,OpinionandOrderAdoptingTermsofSettlementSubjecttoConditionsandChanges,issuedJanuary14,1998inCaseNo.96-E-0898.AcopyofeachOrderisattachedheretoasExhibitBandExhibitC,respectively.RI82280.1

e. Commission'spurposes,andwouldinallotherrespectsbeconsistentwithlaw,regulationsand4Commissionorders.TheCompanyfurtherbelievesthattheinformationsetforthhereinshouldsatisfyanyconcernsthattheCommissionmighthaveonthesepoints.Shoulditappear,however,thatadditionalinformationwouldbehelpful,theCompanywouldbepleasedtoprovideitpromptly.II.THEPROPOSEDREORGANIZATIONPursuanttoordersissuedbytheNYPSC,andafterextensivenegotiationswiththeStaffoftheDepartmentofPublicServiceandotherparties,RG8cEenteredintotheSettlement,establishingaframeworkforcompetitiveretailelectricserviceintheCompany'sserviceterritory,'andotherwiseprovidingfortherestructuringoftheCompany'selectricutilitybusinessconsistentwiththeNYPSC'sdirectives.Theproposedcorporatereorganization,asdescribedhereinafter,isexplicitlycontemplatedintheSettlement.0ThereorganizationthatRGB'roposestoundertake,subjecttoshareholderandregulatoryapprovals,issubstantiallysimilartoreorganizationspursuedbyotherelectricutilitiesinrecentyears,likewiseinvolvingtheindirecttransferofcontroloflicensesfornucleargeneratingfacilities,andwhichtheCommissionhasapproved.InaccordancewithaplanforSeeSettlement(ExhibitA)Pars.62,67,atpp.50,52-53;seealsoSettlementScheduleJ,"FormofPetitiontoFormHoldingCompany."Forexample,theothernon-operatinglicenseesfortheNineMile2facilityhavesimilarlysoughtauthorizationtotransfertheirlicensesinconnectionwiththeircorporaterestructurings:NewYorkStateElectric&GasCorporation(applicationgrantedasofMarch30,1998);LongIslandLightingCompany(applicationgrantedasofJanuary12,1998);andCentralHudsonGas&ElectricCorporation(applicationdatedApril8,1998).See,~e,LetterfromNRCtoIllinoisPowerCompany,regardingCorporateRestructuringofIllinoisPowerCompany(TACNo.M88222),datedJanuary31,1994;LetterfromNRCtoPennsylvaniaPowerandLightCompany,regardingApprovalofProposedCorporateRestructuringofPennsylvaniaPowerandLightCompany(TACNos.M90079andM90080),datedDecember26,1994;LetterfromNRCtoDetroitEdisonootnotecontinuedonnextpage)(Footnotecontinuedfrompreviouspage)"Holdco"isusedhereintoindicatetheproposedholdingcompanysolelyforpurposesofthisapplication;RG&Eintends,inconjunctionwiththecreationoftheholdingcompany,toadoptanofficialcorporatenameforit.Rt82280.t 4exchangeofsharespursuanttoSection913oftheNewYorkBusinessCorporationsLaw,alltheoutstandingsharesofthecommonstockofRG&Ewouldbeexchangedonashare-for-sharebasisforthesharesofcommonstockofHoldco(subjecttoanyexercisebyshareholdersofdissenters'ights).Uponconsummationoftheshareexchange,eachholderofRG&EcommonstockimmediatelypriortotheshareexchangewouldthereafterownacorrespondingnumberofsharesofHoldcocommonstock,andHoldcowouldownalltheoutstandingsharesofRG&Ecommonstock.The100organizationalsharesofHoldcocommonstockheldinitiallybyRG&EwouldeitherbecanceledorretainedbyRG&E,dependinguponcertainincometaxconsequences.Asawholly-ownedsubsidiaryofHoldco,RG&Ewouldretainitsseparateexistence.Itwouldcontinuetobean"electricutility"underSection50.2oftheCommission'sregulations,engagedinthebusinessofgenerating,transmittinganddistributingelectricpower.Itwould0continuetobesubjecttoratemakingandotherregulationbytheNYPSCandFERC.Itwouldalsocontinuetobetheownerof,andactuallicenseefor,itspresentinterestsinNineMile2andGinna.Itwould,moreover,continuetorecoveritsinvestmentinthosefacilitiesthroughitsratesforservice,subjecttotheprovisionsoftheSettlementduringitsterm,andthereaftersubjecttotheratemakingauthorityoftheNYPSC.Holdco,andnotRG&E,wouldbetheownerofanynon-utilitysubsidiariesengagedinunregulatedbusinessactivities.Moreover,theSettlementdoesnotcallforthedivestitureofanyutilityassets.WhileitestablishescertainfinancialincentivesfortheCompanytosellgeneratingfacilities,andinparticularofferstheCompanyagreatershareofanygainsonsuchsalesif(Fooinoiccontinuedfrompreviouspage)Company,regardingApprovalofProposedCorporateRestructuringofDetroitEdisonCompanybyEstablishmentofaHoldingCompany(TACNos.M91890and92343),datedAugust30,1995.RI82280.1 consummatedearlierratherthanlaterintheSettlementterm,itdoesnotrequirethedivestitureofanyofRG&Egenerationassets,includingitsinterestintheNineMile2andtheGinnafacilities.NordoestheSettlementpermitthetransferofanyutilityassetsbyRG&EunlessnecessaryapprovalsaregrantedbytheNYPSCunderSection70oftheNewYorkPublicServiceLaw.Theadoptionoftheholdingcompanystructureinthemannerdescribedwouldaccomplishtheclearseparationofregulatedpublicutilityfunctions(includingthetransmissionanddistributionofelectricity,andthecontinuedprovisionofregulatedretailelectricserviceforcustomers.notservedbycompetitiveretailers)fromunregulated,competitivenon-utilityoperations,consistentwithregulatorypolicydirectionsatboththefederalandStatelevelsfortherestructuringoftheelectricserviceindustry.Moreover,theholdingcompanystructurerepresentsacommonandwell-establishedformofbusinessorganizationforcompaniesengagedeIinmultiplelinesofbusiness,particularlywheresomeoftheactivitiesareregulatedandothersareconductedonacompetitivebasis.Theholdingcompanystructurewouldaffordincreasedfinancial,managerialandorganizationalflexibilitytoenhanceRG&E'spositioninthechangingenvironmentoftheelectricindustry,inparticularbyenablingaspeedierresponsetocompetitiveopportunitiesthanispossibleforaregulatedbusiness.Itwouldaccommodatethecreationofunregulatedsubsidiaries,andtherebyfacilitategreaterflexibilityinfinancingcompetitiveactivities.Atthesametime,itwouldprotectthelegallyseparateregulatedutilitybusiness-andallofitscustomers-fromtherisksattendingcompetitivebusinessenterprises.ThetransferofdirectequityownershipofRG&EtoHoldcowouldconstitutealegalchangeofcontrolsubjecttoFoomotccontinuedfrompreviouspage)TheCompany'spreferredstockandexistingdebtwouldremainoutstandingsecuritiesofRG&E.SeeSettlement(ExhibitA)atPar.20,pp.26-27.Rt82280.t Commissionapproval.However,theproposedrestructuringwouldhaveminimaleffectonthe4actualcontroloftheCompany,sinceitsexistingshareholderswouldbecometheownersofHoldcoandtherebywouldindirectlycontrolRG&E,astheregulatedutilitysubsidiaryofHoldcoandthelicenseeforNineMile2andGinna.InapprovingtheSettlement,theNYPSCendorsedinprincipletheproposedrestructuring,subjecttotheCompany'sfilingofapetitionsubstantiallyintheformattachedasScheduleJtotheSettlement.RG&Eintendstofilesuchapetitionpresently,aswellaspetitionstotheFERC(undertheFederalPowerAct)forapprovalofthereorganization,andtotheSecuritiesandExchangeCommission(underthePublicUtilitiesHoldingCompanyActof1935("PUHCA"))foradeterminationthattheproposedholdingcompanystructurewouldbeexemptfromtheprovisionsofPUHCA.TheCompanywillsubmittotheCommissioncopiesofthesepetitionswhenfiled.III.EFFECTOFPROPOSEDREORGANIZATIONONRG&E'SFINANCIALCONDITIONTheproposedreorganizationwouldhavenoadverseeffectonRG&E'sfinancialhealth,andinparticularwouldnotimpairtheavailabilitytoRG&EoffundsneededtocarryoutitsactivitiesandresponsibilitiesundertheNineMile2andGinnalicenses.AcopyofRG&E'sAnnualReporttotheSecuritiesandExchangeCommissiononForm10-K,attachedheretoasExhibitD,demonstratesthattheCompanyhasreasonableassuranceofobtainingnecessaryfundsforongoingoperations.Aspreviouslystated,aftertheproposedreorganizationRG&EwouldremainsubjecttojurisdictionoftheNYPSCwithrespecttoratesforretailelectricservice,amongothermatters.UndertheSettlement,theCompany'scostsofimplementingtheproposedSeeForm10-K(ExhibitD)atp.26,"CompetitionandtheCompany'sProspectiveFinancialPosition",andpp.27-30,"LiquidityandCapitalResources".RI82280.I 0,~j0 corporatereorganizationwillnotaffectratesforserviceduringthetermoftheSettlement,andmaybedeferredforsubsequentrecoveryonlytotheextentofanyexcessofoverallrestructuringimplementationcostsoveraspecifiedthresholdinagivenrateyear.Anychangesinthe9Company'sarrangementsforbulkpowersalesonthewholesalemarket,orinitsratesfortransmissionofelectricenergyininterstatecommerce,wouldremainsubje'cttoreviewandapprovalbyFERC.TheproposedcorporatereorganizationwouldnotinvolvethesaleofRG&Estock,orthesaleorleaseoftheCompany'sfacilitiesorotherassets.ItwouldhavenoeffectontheCompany'scapitalstructure,oronitscostsofobtainingfinancing.NorwouldtheadoptionofaholdingcompanystructurealterthesourceofRG&E'sfundsforconductingitsutilityoperations.TheCompany'scostsofoperatingitsnuclearfacilities,thecostsofanynecessarycapitalimprovements,andthefundingofeventualdecommissioningactivitieswithrespecttobothofthosefacilities,wouldcontinuetobederivedfromcustomerpaymentsforutilityservices0subjecttoregulatedrates,inthesamemannerasbeforetheadoptionofaholdingcompanystructure.Insum,theproposedreorganizationisexpectedtobringaboutnochangeinthesourcesofRG&E'sfundsforcontinuedplantoperations,capitalinvestments,andeventualplantdecommissioning.Norisitexpectedtoaltertheregulatoryprocessesestablishingratesandothertermsandconditionsofservicefromwhichthoserevenuesarederived.Accordingly,RG&EbelievesthattheproposedrestructuringwillnotadverselyaffectitsfinancialresourcesfortheconductoffutureactivitiesunderthelicensesissuedbytheCommissionfortheNineMile2andGinnafacilities.IV.EFFECTOFPROPOSEDREORGANIZATIONONMANAGEMENTANDOPERATIONOFNUCLEARFACILITIES0SeeSettlement(ExhibitA)atPar.17,p.24.RI82280.i

~.I Asnotedabove,RG&Ehasa14%ownershipinterestintheNineMile2facility,sharingownershipwithseveralotherNewYorkStateelectricutilities;theownerofthelargestinterest,NiagaraMohawkPowerCorporation("NiagaraMohawk"),hasresponsibilityforoperationoftheplant,pursuanttoalicenseissuedbytheCommission.RG&E'slicenseforNineMile2isforthepossession,ratherthantheoperation,ofitsshareofthatfacility.Incontrast,RG&EissoleownerandoperatoroftheGinnaplant,andithasanoperatinglicenseforthatfacility.authorizingbothpossessionandoperation.Thereorganizationproposedhereinwillhavenoeffectonthemanagementandoperationofeitherfacility.NiagaraMohawkwillcontinuetoberesponsiblefortheongoingon-sitecontrol,maintenanceandoperationofNineMile2,subjecttooversightinbudgetandplanningmattersinwhichRG&Eandtheotherownerutilitieswillcontinuetoparticipate.Niagara0Mohawk'scontinuedmaintenanceofallnecessarytechnicalqualifications,anditscomplianceinallotherrespectswiththeNineMile2operatinglicense,willnotbeaffectedbytheadoptionofaholdingcompanystructureforRG&E.Asdiscussedabove,undertheproposedreorganizationRG&Ewouldretainitswhollydiscreteandlegallyseparateidentityasasubsidiaryoftheholdingcompany,andwouldcontinuetoexerciseitspublicutilityfunctionsasheretofore.ThefunctionsofmanagementattheHoldcolevelwouldbedirectedchieflytowardthestrategicdevelopmentofitsbusinessenterprises,andtowardadministrativeandfinancialmatters.JointmanagementoversightwithrespecttoNineMile2,andallaspectsoftheoperationofGinna,wouldremain,astoday,theresponsibilityofRG&Easaregulatedutility.TheCompany'sexistingmanagementfunctions,reportingchannels,programs,policiesandprocedureswithrespecttoitsactivitiespursuanttoitsnuclearRI82280.i

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licenseswouldcontinueunalteredbytheproposedreorganization.Achartshowingthe0Company'snuclearoperationsorganizationisattachedheretoasExhibitE.Thus,withrespecttoNineMile2,RG&Ewillcontinuetoparticipatewiththeotherownerutilitiesinoversightofthatfacility,andinothernon-operationalresponsibilitiesallocatedtothenon-operatingownersbythegoverningcontracts.Likewise,theCompany'sownershipandoperationalresponsibilitiesfortheGinnaplant,anditsresourcesandarrangementstofulfillthoseresponsibilities,wouldnotbechangedbytheproposedreorganization.Insum,theCompany'sadoptionofaholdingcompanystructurewouldinnowayaffectitsmanagementofnuclearoperations,oritstechnicalqualificationstoconductthoseoperations.RG&EwouldcontinuetofulfillitsobligationsundertheCommission'slicensesasithasinthepast.V.EFFECTOFPROPOSEDREORGANIZATIONONDOMESTICOWNERSHIPANDCONTROLOFRG&EUndertheproposedreorganization,asdescribedabove,sharesofHoldcowouldbeexchangedonaone-for-onebasisforpubliclyheldsharesofRG&Ecommonstock.RG&E,whichwouldcontinuetobealicenseeforNineMile2andthelicenseeforGinna,wouldbecomethewholly-ownedsubsidiaryofHoldco.Uponthereorganization,therefore,HoldcowouldbeownedbytheformerholdersofRG&E'sstock,inthesameproportionsastheirpriorownershipofRG&E.Currentlyavailableinformationindicatesthatonlyabout10,000ofapproximately39,000,000outstandingsharesofRG&Ecommonstock-significantlylessthan1%-areheldbyforeignpersonsorentities.Implementationoftheproposedreorganization,suchthatRG&Eisownedbyapubliclyheldholdingcompany,isnotexpectedtobringaboutanychangeinthettproportionofforeignownership.Accordingly,thereorganizationwillnotresultintheownership,controlordominationofRG&Ebyanalien,aforeigncorporationoraforeign0government.Rl82280.l VIEFFECTOFPROPOSEDREORGANIZATIONONCOMPETITIONAfurthermatteraddressedbytheCommission,initsconsiderationofsimilarapplicationsinthepast,hasbeenthepotentialeffectoftheproposedindirectlicensetransferonIcompetition,andinparticularthepotentialfortheexerciseofincreasedmarketpowerbythe/licenseeasaresultofthetransaction.Theadoptionoftheholdingcompanystructure,whilefacilitatingtheCompany'sentryintocompetitivebusinessactivities,wouldalsoeffectthelegalandstructuralseparationofsuchactivitiesfromregulatedutilitybusinesses.Thereorganizationwouldthereforenotenabletheexerciseofmarketpower,eitherverticalorhorizontal,byHoldco(theindirecttransfereeofcontrolovertheRG&Elicenses)orbythelicensee,RGB',itself.Quitetothecontrary,RG&E'srestructuringunderthetermsoftheSettlementcanbeexpectedtofacilitatethegrowthofunprecedentedcompetitionintheprovisionofenergyservicesinRG&E'sserviceterritory.Overitsterm,theSettlementprovidesfortheintroductioneofcompetitiveelectricserviceforincreasingproportionsofRG&E'smarket;retailcustomersintheCompany'sserviceareawillbeableforthefirsttimetopurchaseenergyandcapacityfromcompetitivesuppliers.Atthesametime,duringtheSettlementtermRG&Ewillremainsubjecttoanobligationtoprovideregulatedretailelectricservicetoallcustomersthat,bychoiceorotherwise,donottakeservicefromcompetitivesuppliers.'heindirecttransferofcontroloverthelicensesthatwouldoccurwiththeadoptionofaholdingcompanystructurecouldhavenomaterialeffectontheCompany'sabilitytoexercisemarketpower,eitherwithinorwithoutitsserviceterritory,whetherinretailorinwholesalemarkets.TheconsequencesoftheCompany'srestructuringarepro-competitive,andthe0SeeSettlement(ExhibitA)atPar.65,pp.51-52.RI82280.1 presentsnoimpedimentwhatevertovigorouscompetitioninany.market,retailorwholesalecontemplatedindirecttransfertoHoldcoofcontrolofthelicensesforNineMile2andGinnaVII.SUBSEQUENTTRANSFERSOFRG&EASSETSRG&EundertakestoinformtheDirectorofNuclearReactorRegulationsixtydaysbeforethetransferfromittoHoldco,ortoanydirectorindirectsubsidiaryofHoldco,offacilitiesfortheproduction,transmissionordistributionofelectricity(butexcludinggrantsofsecurityinterestsorliens)havingadepreciatedbookvalue,intotalasdeterminedduringanytwelve-monthperiod,inexcessoftenpercentofthedepreciatedbookvalueofRG&E'sconsolidatednetutilityplant,asrecordedontheCompany'sbooksofaccount.VIII.CONCLUSIONRG&Ebelievesthattheinformationsetforthinthisapplication,andintheExhibitsattachedhereto,issufficientfortheCommissiontograntitsconsenttotheproposed0'.reorganization,andtotheindirecttransferofRG&E'slicensesinthemannerdescribedabove.TheproposedreorganizationwillnotimpairRG&E'squalificationsasalicenseefortheNineMile2andGinnafacilities,noritsabilitytocarryoutitsobligationsunderthoselicenses.Moreover,thetransactiondescribedwouldbeconsistentwithapplicablelawsandregulationsoftheCommission.RG&ErespectfullyrequeststhattheCommissionreviewandapprovethisapplicationsoastoenabletheCompanytoproceedpromptlywithfurtherstepsnecessaryforitsrestructuringinthemannercontemplatedintheSettlement.RG&Eisplanningtoholditsannualshareholders'eetinginmid-April1999,andwouldprefertobringtheproposedholdingcompanyreorganizationbeforetheshareholdersatthattime.InordertoenabletheCompanytocompletethesubstantialpreparationsnecessarybeforethesubmissionofsuchaproposalforshareholderapproval,includingbutnotlimitedtoformalRI82280.1 actionbytheCompany'sBoardofDirectorsandthepreparationanddisseminationofappropriatedisclosurematerials,RG&ErespectfullyrequeststhattheCommissionactuponthepresentapplicationassoonaspracticable,butinanyeventbyFebruary1,1999.RG&EwouldbepleasedtoprovidepromptlyanyfurtherinformationthattheCommissionmayrequireforitsconsiderationofthisapplication.Respectfullysubmitted,ROCHESTERGASANDELECTRICCORPORATIONBy:PaulC.WilkensTitle:SeniorVicePresident-GenerationDated:July30,1998Rochester,NewYorkRI82280.1 STATEOFNEWYORKCOUNTYOFMONROEPaulC.Wilkens,beingdulysworn,deposesandsays:IamtheSeniorVicePresident-GenerationofROCHESTERGASANDELECTRICCORPORATION,theapplicantherein;Ihavereadtheforegoingapplicationandknowthecontentsthereof;thesameistruetothebestofmyknowledgeexceptastothosemattersthereinstatedtobeallegedoninformationandbelief,andastothosemattersIbelievethemtobetrue.Sworntobeforemethis30'hdayofJuly,1998NotaryPublic,StateofNewYorkLORETTAMARSHALLPARKERNotaryPubliciutheStateotNewYorkMONROECOUNTYCommissionExpiresDec.12,19.iL,Rt82280.1 0

EXHIBITA

'0t-e'0 STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSIONCASE94-E-0952-IntheMatterofCompetitiveOpportunitiesRegardingElectricServiceCASE96-E-0898-IntheMatterofRochesterGasandElectricCorporation'sPlansforElectricRate/RestructuringPursuanttoOpinionNo.96-12AME<NDEDANDRESTATEDSE<TTLEMENTAGREEMENTOctober23,1997

\TABLEOFCONTENTSPageINTRODUCTIONPartiesSubject...........Background...."....Negotiations11248AGREEMENT~omersTerm($1)Rates($$2-9)ReturnonEquity(g10)Kamine(ttll)..........................Inflation(tj12)PropertyTaxes($13)....................."SystemBenefitsCharge"(fjfj14,15)Mandates,CatastrophicEventsandCompetitionImplementationCosts(fj$16,17)........Securitization($18)......................SunkCosts($19)........................SaleofGeneratingAssets($20)..............To-GoCosts($21).......................NuclearFacilities(tttt22,23)................Shut-DownandDecommissioningCosts($24)....SystemReliabilityandMarketPower($25)......Amortizations($26)......................Post-EmploymentBenefits(tt27)GinnaOutageCosts(tt28)..................ExcessEarnings($29)EnvironmentalRemediationCosts(g30)........AmountsDueCustomers($31)IncentivesOwedRG&;EandAmountsOwedCustUnderSettlements($32)..............FlexibleTariffDiscounts($33)LegalServices($34)RegulatedRateDesign(fj$35-41).............LargeCustomerCreditProgram($42)Low-IncomeProgram(fj43)ServiceQuality($44).....................RetailAccessGenerally(fj$45-52)............DistributionAccessCharges(tttI53-57).........Reciprocity($58)~~~I~~~~~~~~I~~~~0~~1010111718192020232525262829303132323333333434353536373738394447 e'

TABLEOFCONTENTSPage....4849.~..49....50....51....51....51..52..52....53....55....56....56....57....57....57....60Operations(tj67)............ReturntoRLSE($59)EnvironmentalInformation($60)....DairyleaProgram($61)CorporateStructure(fj62).......;......DISCO(063)GENCO(fj64)RLSE(tt65)ULSE(tt66)HOLDCOandCapitalizationofUnregulatedPetitionforRelief(tjg68-70)............FilingRequirements(g71-73)DisputeResolution($74)BindingEffectofSettlement(tt75).......,.SupersedingPriorSettlements($76).......ModificationofSettlement($77).........EffectofAgreement(fj78)WithdrawalfromLitigation(fj79)SCHEDULESABCDEFGHIJKRatesAmortizationsManufacturingClassificationsNuclearDecommissioningLargeCustomerCreditProgramLowIncomeProgramServiceQualityPerformanceProgramRetailingFunctionsStandardsPertainingtoAffiliatesandtheProvisionofInformationFormofPetitiontoFormHoldingCompanySBCProgramCosts STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSIONCASE94-E-0952-IntheMatterofCompetitiveOpportunitiesRegardingElectricServiceCASE96-E-OS98-IntheMatterofRochesterGasandElectricCorporation'sPlansforElectricRate/RestructuringPursuanttoOpinionNo.96-12SETTLEMENTAGREEMENTINTRODUCTIONParties'This,AmendedandRestatedSettlementAgreement("Settlement")isenteredintothis23rddayofOctober,1997byandamongtheStaffoftheDepartmentofPublicService("Staff',RochesterGasandElectricCorporation("RGB.E"or"theCompany"),TheJointSupporters("JointSupporters"),theNationalAssociationofEnergyServiceCompanies("NAESCO"),andMultipleIntervenors("MI"),hereinaftercollectivelyreferredtoas"theParties." ~Sub'ectAsmorespecificallydescribedherein,thisSettlementisintendedtoresolveallissuesintheabove-captionedproceedingsastheypertaintoRGAE.-"ConsistentwiththevisionarticulatedbythePublicServiceCommission("theCommission"or"thePSC")inits1996OpinionintheCompetitiveOpportunitiesProceeding,-"thisSettlementwill,uponapprovalbytheCommission,setelectricratesforafive-yearperiod(July1,1997throughJune30,2002)atlevelsthatare,overall,substantiallybelowtheircurrentlevels.Whileratesforallcustomerclasseswillbereduced,largeindustrialandcommercialcustomerswillreceivethemostsignificantpricedecreases.SuchdecreasesareinkeepingwiththeCommission'sgoaloffosteringeconomicdevelopmentandjobretentionintheStatebystabilizingandreducingelectricityprices.-"Inadditiontoprovidingforlowerpricesforthenextfiveyears,theSettlementeffectsamajorrestructuringofRGB.E'soperationstoopenuptheCompany'sserviceareatoincreasedcustomerchoice.OnJuly1,1998,theCompanywillbegintoallowcustomerstoAsnotedelsewhereherein,certainissuesremainthesubjectofgenericconsiderationandare,therefore,notresolvedintheirentiretybythisSettlement.See,~efootnote123,infra.Cases94-E-0952etal.,IntheMatterofCometitive0ortunitiesReardinElectricService,OpinionNo.96-12,OpinionandOrderRegardingCompetitiveOpportunitiesforElectricService,issuedMay20,1996.See,~e,id.at1.

004i choosetheirownsupplierofelectricenergy.'-'yearlater,assumingimplementationofaStatewideIndependentSystemOperator("ISO")andPowerExchange("PE"),-"customerswillbegintobeabletochoosetheirownsupplierofenergyandcapacity.-"Duringthistime,RGkEwillrestructureitsoperationssoastofunctionallyseparateitsgeneration,distribution,retailingandoveralladministrativefunctions.Whilecertainfunctions,suchasdistribution,willremainasregulatedmonopolyservices,others,includingretailservice,willbeopentocompetitionfromthirdparties.-"Recognizingthatnotallcustomerswillbeable(orperhapswilling)toselectalternativesuppliersofenergyand/orcapacity,theSettlementprovidesforcontinuedservicetosuchcustomersbyaCommission-regulatedfunctionalunitofRG&E.ThisSettlementalsoprovidesforcontinuationofaprogramtoassistlow-incomecustomers-"andaservicequalityprogramintendedtomaintainsafeandreliableservicedespitethecost-cuttingpressuresthataccompanyincreasedcompetition.-"Further,thisresolutionofissuesintheCompetitiveOpportunitiesProceedingrespondstotheSeeparagraph46,infra.TheISOandPE(alsoreferredtoasthe"marketexchange")aredescribedbytheCommission.SeeOpinionNo.96-12at63,footnotes1and2.Seeibid.Seeparagraphs62through67,infra.Seeparagraph43,infra.Seeparagraph44,infra.

4Commission'sdirective-'"tointroduceretailaccesstofarmandfoodprocessorcustomersonanexpeditedbasis.-'"Finally,thisSettlementresolvesthreependingcasesinvolvingjudicialreviewofCommissiondecisionsastheypertaintoRG&E.-'"Exceptasexpresslyprovidedotherwiseherein,thisSettlementwill,uponapprovalbytheCommission,supersedethecurrentSettlementdatedMay10,1996("the1996Settlement")approvedwithmodificationsbytheCommissiononJune27,1996.-'"Inaddition,uponapprovalbytheCommission,thisSettlementwillsupersedetheinitialSettlementintheseproceedingsdatedApril8,1997("InitialSettlement").Baclc~round'OpinionNo.96-12isgroundedintheCommission'sdesiretobringtoNewYorkStateconsumerstheinnovationsandefficienciesofcompetitivemarkets,together10!Cases96-E-0948etal.,PetitionofDairleaCooerativeInc.toEstablishan0en-AccessPilotProramforFarmandFoodProcessorElectricitvCustomers,OrderEstablishingRetailAccessPilotPrograms,issuedJune23,1997.12/Seeparagraph61,infra.'Seeparagraph79,infra.13/Cases95-E-0673etal.,RochesterGasandElectricCororation,OrderApprovingTermsofSettlementAgreementWithChanges,issuedJune.27,1996.TheCommissionrestateditsapprovalwithmodificationinOpinionNo.96-27,OpinionandOrderConcerningRevenueRequirementandRateDesign,issuedSeptember26,1996.TheCommission'smodificationofthe1996SettlementisthesubjectofanArticle78proceeding,RochesterGasandElectricCororationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.6616-96),thatwillbewithdrawnuponapprovalofthisSettlement.Seeparagraph79,infra. witheconomicdevelopment,lowerelectricpricesandgreatercustomerchoice,while,atthesametime,maintainingthesafetyandreliabilityofelectricservice.TowardtheseendstheCommission'sOpinioncalledupontheState'sutilitiestotakecertainactionsandmake.certainfilings.TheCommissionadopteda"two-prongapproach"toimplementationofthepolicydirectionsidentifiedinOpinionNo.96-12.Thefirstprong,anongoingcollaborativeeffortamongtheutilitiesandotherparties,wastocontinueto"accomplishtechnicalstudies(includingaddressingmarketpowerconcerns,theroleofenergyservicecompanies,andreportingrequirements),necessaryFERC[FederalEnergyRegulatoryCommission]filings,andpubliceducationalforumsbyOctober1,1996."-'"ThesecondimplementationprongconsistedofindividualutilityfilingsalsotobesubmittedbyOctober1,1996.Thesefilings0were"toaddress,ataminimum,theutilities'tructure,retailaccessproposals,long-termrateplans,publicprograms,marketpowerandenergyservices."-'"TheCommissiondescribedthesubjectmatteroftheindividualfilingsingreaterdetailasfollows:-'"(1)thestructureoftheutilitybothintheshortandlongterm,thescheduleandcosttoattainthatstructure,adescriptionofhowthatstructurecomplieswithourvision'nd,incaseswheredivestitureofgenerationisnotproposed,effectivemechanismsthatadequatelyaddressresultingmarketpowerconcerns;OpinionNo.96-12at91.Ibid.l6'd.at75-76. (2)aschedulefortheintroductionofretailaccesstoalloftheutility'scustomers,andasetofunbundledtariffsthatisconsistentwiththeretailaccessprogram;(3)arateplantobeeffectiveforasignificantportionofthetransitionthatincorporatesourgoalofmovingtoacompetitivemarket,includingmechanismstoreduceratesandaddressstrandablecosts;(4)identificationofthepublicpolicyprograms,whosefundingisnotrecoverableinacompetitivemarket,thatneedspecialratetreatmentandcompetitivelyneutralmechanismstorecoversuchcosts;(5)anexaminationoftheloadpocketsuniquetotheutility,identificationofpotentialmarketpowerproblems,andproposalstomitigatemarketpower;and'(6)aplanfortheprovisionofenergyservices,includingaddressingthecontinuedprovisionofcustomerprotectionsconsistentwithanemergingcompetitivemarket.-'"InitsOctober1,1996submissiontotheCommission,entitled"CompetitiveInitiative,"-'"RGB:EaddressedthetopicsidentifiedbytheCommission,statingwhattheia.TheCompanyjoinedwiththeEnergyAssociationofNewYorkStateandsixotherutilitiesinanArticle7SproceedingforjudicialreviewofOpinionNo.96-12.ThatproceedingwascommencedonSeptember18,1996.TheEnerAssociationofNewYorkStateetal.v.PublicServiceCommission(AlbanyCo.IndexNo.5S30-96).ThecaseiscurrentlypendingbeforetheAppellateDivision,ThirdDepartment.Alsoreferredtohereinasthe"October1Submission."InAugust1996,duringdevelopmentoftheSubmission,theCompanyhadheldtwoPublicForums,opentoallcustomers,andanIssuesForum,forelectedofficials,toaddressmatterspertainingtocompetitionandderegulationintheelectricindustry.SeeOctober1SubmissionatI-19-I-21.

0'-' Company'sproposalswouldbeintheeventthatitwererequiredtoimplementtheCommission'spolicies.-'"OnOctober9,1996,theCommissioninstitutedCase96-E-0898forthepurposeofexaminingRG&E'sOctober1Submission.-'"UndertheproceduralscheduleestablishedbytheOctober9Order,thepartieswouldhavea90-daynegotiationperiodduringwhichtheywereencouragedtoreachasettlementinlieuoflitigation.Intheeventthatnegotiationsprovedunsuccessful,alitigationschedulewouldfollowandtherecordwouldclosewithin150daysofissuanceoftheOctober9Order.Toencouragesettlement,theCommissionwaivedcertainelementsofits1992ProceduralGuidelinesforSettlements.=""PublicEducationForumsandPublicStatementHearingsregardingRG&E's'ctober1SubmissionwereheldonDecember2,1996inCanandaiguaandonDecember4,1996inRochester.='-"TheonlyelementoftheCompetitiveInitiativethatwasnotcontingentupontheoutcomeoftheArticle78proceeding(seefootnote17,~surawastheCompany'sproposaltoinstituteaseparate,identified"PublicPolicyCharge"("PPC")forthecostsofpublicpolicyprogramstheCompanyisexpectedtoundertake.Case94-E-0952etal.,OrderEstablishingProceduresandSchedule("October9Order").21/Case90-M-0255etal.ProceedinonMotionoftheCommissionConcerninitsProceduresforSettlementandStiulationAreementsfiledinC11175,Opinion,OrderandResolutionAdoptingSettlementProceduresandGuidelines,issuedMarch24,1992.TheStenographicMinutesofthePublicStatementHearingsconsistofpages1-150. NeotiationsBetweenOctober22,1996andDecember4,1996,RG&Epersonnelmeton13occasionswithinterestedparties.-'"ThesemeetingsbeganwithinformationalsessionsatwhichCompanyrepresentativesexplainedtheOctober1Submissionindetailandansweredquestions.Discussionsprogressedtosettlementnegotiations,whichincludedexchangesofproposalsandcounter-proposals.These"all-party"meetingswereconductedpursuanttotheprovisionsoftheCommission'sregulationsregardingsettlements.-"'nearlyDecember,withthethen-currentdeadlineforfilingtestimonyjustweeksawayandtheparties'eterminationthattheywerenotsufficientlyclosetoachievingasettlement,theall-partynegotiationsweresuspendedinordertopreparetestimony.StaffandtheCompany,however,maintainedadialogue,exploringalternativeapproachesthatultimatelyledtotheinstantSettlement.Althoughthesediscussionsweresuspendedatvariouspoints,theeffortcontinuedthroughoutJanuary,FebruaryandMarch.Duringthisperiod,inputoncertainaspectsoftheproposalsunderdiscussionwassoughtandreceivedfromtheConsumerProtectionBoardandMultipleIntervenors.OnMarch27,1997,anearlycompletedraftoftheInitialSettlement,-'"togetherwithasummarythereof,wasdistributedtoallpartiestoCase96-E-0898.Onthesameday,23/24!151Thesemeetingsincludedtenall-daymeetingsheldinRochesterandAlbanyandthreelengthyconferencecallsinwhichtheparitieswereinvitedtoparticipate.16NYCRR$3.9.IncludingdraftSchedules.

0,.0,'

Staff,withassistancefromRG&E,madeapresentationtothepartiesinAlbany.-'"StaffandtheCompanyfieldedquestionsonthedraftandsolicitedfurthercomments.Additionalall-partymeetingswereheldonApril1,2,and3,1997.Thesenegotiationswereproductive,resultingintheconsiderationofcommentsandsuggestionsprovidedbythosewhoparticipatedinthesemeetings.TheInitialSettlementwasexecutedandfiledasofApril8,1997.InaccordancewiththeCommission'srulesandthespecificproceduresapplicabletotheseproceedings,variouspartiesfiledstatementsandtestimonyinsupportof,orinoppositionto,theInitialSettlement.EvidentiaryhearingswereheldinAlbanyonJune3,4and5,1997.-"Post-hearingbriefswerefiledonoraboutJune20,1997.OnJuly16,1997,AdministrativeLawJudge("ALJ")WalterT.MoynihanissuedaRecommendedDecision("RD")whichrecommendedapprovaloftheInitialSettlementwithminorchanges.BriefsonexceptionsandrepliestoexceptionswerefiledonAugust5and20,1997,respectively.AtitsPublicSessionheldinAlbanyonOctober8,1997,theCommissiondiscussedtheInitialSettlementandrecommendedthatthepartiestotheseproceedingsconductfurthernegotiationswithaviewtowardaddressingcertainconcernsraisedintheCommission'sdiscussion.Onnoticetoallactiveparties,furthernegotiationswereheldinInadditiontoStaffandtheCompany,tenindividuals,representingsevenotherparties,attendedinperson.Twopartiesparticipatedbytelephone.TheStenographicMinutesoftheEvidentiaryHearingsconsistofpages335-2029. AlbanyonOctober14,15and16,1997.Representativesofthefollowingpartiesparticipated:Staff,RG&E,theJointSupporters,NAESCO,MI,theConsumerProtectionBoard,theAttorneyGeneral,thePublicUtilityLawProject,thePublicInterestIntervenors,NewYorkStateElectric&GasCorporation,WheeledElectricPowerCompany,EnronCapital&TradeResources,andtheIndependentPowerProducersofNewYork,Inc.ThesenegotiationsresultedinthechangestotheInitialSettlementthatarereflectedinthisSettlement.ThePartiesbelievethatthisSettlement,whichconstitutesacarefullybalancedresolutionofdiverseinterestsandaddressesthemattersraisedattheCommission'sOctober8,1997PublicSession,isinthepublicinterest,andshouldbeadopted.AGREEMENTThePartiesagreeasfollows:Terml.Exceptasexpresslyprovidedotherwiseherein,thisSettlementshallbeeffectiveforaperiodoffiveRateYears,-'"commencingJuly1,1997-'"andterminatingJune30,2002.29/ForpurposesofthisSettlement,a"RateYear"istheone-yearperiodcommencingonJuly1stofonecalendaryearandterminatingonJune30thofthefollowingcalendaryear.InasmuchasratesfortheRateYearcommencingJuly1,1997arecomparabletothoseestablishedforthatperiodbythe1996Settlement,approvalofthisSettlementafterJuly1,1997requiresnoadjustmenttotheratesineffectforthatRateYear. RatesExceptasexpresslyprovidedotherwiseinthisSettlement,electricratesshallbereduced,cumulatively,fromthelevelsineffectasofJuly1,1996asfollows:-'"July1,1997:$3.5million;July1,1998:$12.8million;July1,1999:$27.6million;July1,2000:$39.5million;andJuly1,2001:$51.1million.Thetotalannualamountsoftheforegoingreductionsshallbeoffsetbythefollowingannualamounts,listedbycommencementofRateYear,fortherecoveryofcosts-'"pertainingtotheeKamine/BesicorpAlleganyL.P.project("Kamine")otherthanthosedescribedinparagraph11,infra:July1,1998:$3.5million;July1,1999:$8.4million;and'30/3l/EachdatelistedsignifiesthebeginningoftheRateYeartowhichtheindicatedreductionapplies.NocostreferencedinthisSettlementmaybeconsideredforrecovery,true-upordeferralunlessitisprudentandverifiable.

0,~-e

-12.-July1,2000andcontinuingatthisleveluntilrecoveryofthecostof'anysettlementorotheractionrequiringpaymentiscompleteorJune30,2002,whicheverislater:$10.5million.-'GEcEshallbeentitledtocommencetheforegoingoffsetsregardlessofwhenanysettlementorotheractionrequiringpaymenttoKaminetakeseffect.Intheeventthat,duringthetermofthisSettlement,itshouldbecomecertainthatthetotalcostofanysettlementorotheractionrequiringpaymentstoKaminewillbelessthanthetotalamountprovidedhereunderforKaminerecoveryduringsuchterm(i.e.,$32.9million),theCommissionmay,initsdiscretion,requireadditionalratereductions;provided,however,thatthetotalamountofsuchreductionsshallnotexceedthedifferencebetweenactualKaminecostsandtheamountsprovidedforinthisparagraph.Inallothercases,intheeventthattheforegoingamountsprovidedforKaminecostrecoveryexceedcostsactuallyattributabletoKamine,anysuchexcessbalanceremainingasofJune30,2002shallbeappliedtoSunkCosts,asdescribedinparagraph19,infra.3.TheratereductionandKaminerecoveryamountslistedinparagraph2~sura,includetheanticipatedimpactsofrecentlyenactedreductionsinStategrossreceipts32/Intheeventthatrecoveryisnot,orwillnotbe,completebyJune30,2002,andRGB'.EoranyotherPartybelievesthatcircumstanceswouldfavororpermitmorerapidrecoveryofKaminecosts,RG&EorsuchotherPartyshallhavetheright,notwithstandinganyotherprovisionofthisSettlement,torequesttheCommissiontoincreasetheoffsetamount.

~i0~ooi~, taxes("GRT").TheanticipatedaveragecombinedStateandlocalGRTrates,listedbycommencementofRateYear,areasfollows:July1,1997:5.23%July1,1998:5.04%July1,1999:4.60%July1,2000:4.23%July1,2001:4.23%TotheextentthataverageGRTratesareotherthanasanticipated,theratereductionsprovidedforinthisSettlementwillberevisedaccordingly.4.TheallocationoftheforegoingratedecreasesamongcustomergroupsshallbeasdescribedinScheduleAtothisSettlement.05.TheallocationoftherevenuedecreasescorrespondingtotheforegoingratedecreasesshallbeappliedtotheGenerationBusinessSegment-'"andshallbebasedupontherelativeresponsibilityofnuclearandnon-nucleargenerationforCashOperationandMaintenance("0&M")'-"expense.33/RG&E'scurrentutilityoperationswillbefunctionallyseparatedintoGeneration,Transmission,DistributionandRetailing,hereinafterreferredfoas"BusinessSegments."Seeparagraphs62-67,infra.ForpurposesofthisSettlement,"CashO&M"shallmeannon-fuelO&MexpenseslesstheamortizationslistedinScheduleB.Forpurposesofthis'Settlement,thefollowingallocationshallbeused:65percenttonuclearand35percenttonon-nuclear. 6.Exceptasotherwiseprovidedbycontract,beginningJuly1,1999andcontinuingthroughJune30,2002,IncrementalManufacturingLoad-'"shallbeservedatanaveragerateof$0.059perKWH.7.ExceptasotherwiseprovidedinthisSettlement,theratesresultingfromtheforegoingreductionsshallnotbemodifiedduringthetermofthisSettlementtoreflectanychangesinrevenuesorexpenses,includingbutnotlimitedtochangesinOAMsavings(bothCashO&MandNon-CashOEM-'"),Stateandlocaltaxreductions,-'"andassetsales.-'"8.UponfilingappropriatedocumentationwiththeCommission,theratesresultingfromtheforegoingreductionsshallbesubjecttomodificationforthefollowing:'ForpurposesofthisSettlement,"IncrementalManufacturingLoad"shallmeanenergysalesmeetingbothofthefollowingcharacteristics:1.TheenergyissoldtoacustomerwhoseStandardIndustrialClassificationisinoneofthegroupslistedinScheduleC.2.Thecustomeraddsatleast50KWofnewloadby:(a)(b)(c)(d)constructinganewfacility;expandinganexistingfacility;addingfacilitiesorequipmenttoanexistingsite;oraddingfacilitiesthroughtheredevelopmentofanexistingsitewhichhasbeenvacantforatleastsixmonths.3+I37/38'orpurposesofthisSettlement,"Non-CashOAM"shallmeanamortizationspursuanttoScheduleB.Forpurposesofthisparagraph,"taxes"shallnotincludetheGrossReceiptsTaxorpropertytaxes.Notwithstandinganypreviousrequirementpertainingtosuchmatters,allsavingsnotreflectedinratesasofJuly1,1996arisingfromtheoperationoftheNineMilePoint2andOswego6jointlyownedfacilitiesshallberetainedbytheCompany. a.Kaminerecoveryasdescribedinparagraphs2,~sura,and11,infra.b.Variationsinthecostsdescribedinparagraphs14and15,infra:c.Securitizationbenefitsasdescribedinparagraph18,infra;d.Deferrals-'"pursuanttothisSettlement,includingbutnotlimitedtothoseprovidedforinparagraphs12through17,24and30,infra;ande.Adjustmentspursuanttoparagraphs24,68and69,infra.DuringthetermofthisSettlementsuchmodificationspursuanttoparagraph8,~sura,shallbemadeonlyiftheneteffectofallsuchfactorswouldbea\tprojectedcumulativebalance,eitherowedtocustomersorowedtoshareholders,greaterthan0$30milliononapre-taxbasis.Theamountprojectedtobegreaterthan$30millionshallberecoveredbyadjustingrates,onthenextJuly1st,fortheremainingtermoftheSettlement;provided,however,thatsuchrateadjustmentsshallbesubjecttothefollowing:a.NorateadjustmentsshallbemadeinRateYearsIor2withtheexceptionofadjustmentspursuanttoparagraphs14and18,infra.AsingleRateYearrateadjustmentshallnotexceed$7.0millionforanyofthefinalthreeRateYearsoftheSettlementwiththeexceptionofadjustmentspursuanttoparagraph18,infra.AllamountsdeferredpursuanttothisSettlementshallbearcarryingchargesattherateof9.0percent. c.Arateadjustmentshallnotbeforlessthan$3.5million,subjecttoItemd.d.Thecumulativeeffectofallrateincreasesshallnotexceed$12.1millionperRateYear.e.AnyamountattributabletoitemsforwhichchangesincostarepermittedtoberecoveredpursuanttothisSettlement,butwhicharenotrecoveredbytheendofthetermofthisSettlementasaconsequenceofthisparagraphshallbedeferredforrecoverybeyondtheendofsuchtermandthetimingofsuchrecoveryshallbedeterminedbytheCommission.Changesduetothe"SystemBenefitsCharge"-'ndSecuritizationshallbereflectedwithout4regardtotheforegoinglimitations.The"SystemBenefitsCharge"isdescribedinparagraph14,infra. ReturnonEuitv10.IntheeventthatRGB:Eachievesareturn'-"oncommonequityinexcessof11.80percent,asdeterminedfortheentire'"five-yeartermofthisSettlement,-'"the.amountinexcessof11.80percentshallbetreatedasfollows:a.Fifty(50)percentshallbeusedtowritedowndeferralsaccumulatedduringterm'ofthisSettlement.Anyremainingamountofthisfifty(50)percentportionshallberetainedasearningsbytheCompany.b.Thefirst$800,000oftheotherfifty(50)percentportionshallbeusedtoreduceratesforsubclassespri-pri,subtra-sec,subtra-commercialandindustrial,aslistedinScheduleA.Theremainingamountofthisfifty(50)percentportionshallbeusedtowritedownaccumulateddeferralsorSunkCosts.-'"TotheAsusedinthisSettlement,"return"meansthereturnonaregulatorybasisforregulatedoperations-~e,itdoesnotreflecttaxbenefitsstatutorilyreservedforthebenefitofinvestorsoranydisallowedassetsforunrealizedtaxbenefits.42/43/Theactualreturnoncommonequityshallbecomputedannually.Seeparagraph71,infra.Attheendofthefive-yearSettlementperiod,annualamountsofover-or-under-earningsshallbenettedforpurposesofdetermininganysharingpursuanttothisparagraph.150basispoints(30basispointsperyear)shallbeaddedtothecomputationofearningsforthisfive-yearperiodtoreflectasharingofearningsfromtheRateYearendedJune30,1997.44/ForpurposesofthisSettlement,"SunkCosts"shallhavethemeaningdescribedinfootnote66,infra. extentthatanyportionsofthisamountshallremainafterwritingdownallsuchdeferralsandSunkCosts,theCommissionshalldeterminethedispositionofsuchportion.Kamine11.IntheeventthatRG&EbecomesobligatedtomakeactualpaymentstoKamineoranyotherpartypursuanttoeitherthepurportedPowerPurchaseAgreement("PPA")oranylitigationpertainingtotheKamineprojectorthepurportedPPA,RG&Eshallbeentitled,subjecttoparagraphs,8and9,~sura,torecoveronacurrentbasisinelectricratesanadditionalamount"-"nottoexceed,onaRate-Yearbasis,-'"the"NetPPAAmount,"whichshallconsistof:seven-eighths(7/8)ofthedifferencebetween(i)theamountthatwouldbepayabletoKamineifthepurportedPPAwereenforcedandKaminegeneratedandsoldtoRG&EthemaximumoutputpermittedunderthepurportedPPA,'-"and(ii)anyamountattributabletoKaminethatwasincludedintheratesthatwereeffectiveasofJuly1,1996;providedthatsuchNetPPAAmountshallbereducedby:a.amountsaccruedforKaminecostspursuanttoparagraph2,~sura;and45/I.e.,inadditiontotheamountattributabletoKamine($9.6million)thatwasincludedintheratesthatwereeffectiveasofJuly1,1996.Prorated,asnecessary,toreflectcommencementofrecoveryatanytimeotherthanthefirstdayofarateyear.WhetherKamineactuallyproducesandsellselectricitytoRG&Eornot.

0/Q0' b.anySecuritizationbenefitsotherwisepermittedtobeusedtomitigateKaminecosts.AnyKaminecostsnotrecoveredcurrentlyshallbedeferredforrecoveryinthesubsequentRateYearsofthetermofthisSettlement-'nd,ifnotrecoveredbytheendofsuchterm,shallbedeferredforrecoverybeyondtheendofsuchtermandthetimingofsuchrecoveryshallbedeterminedbytheCommission.Inflation12.If,inanyRateYear,inflation,asmeasuredbytheactualGDPChain-WeightedPriceDeflator,exceeds4.0percent,RG&EshallbepermittedtodeferforfutureIrecoverytheamountbywhichanyinflation-basedincreaseinCashO&Mexceedssuch04.0percentincreaseuptothepercentageincreasedeterminedbytheGDPChain-WeightedPriceDeflator."-'eferralandrecoveryofsuchincreasedcostspursuanttothisparagraphshallnotrequirefurtherpetitiontoorapprovalbytheCommissionotherthanfilingofappropriateworkpapersshowingthecalculationoftheamounttobedeferred.DuringthetermofthisSettlement,however,suchdeferralandrecoveryshallnotcauseanyincreaseattributabletoKaminecoststoexceedtheNetPPAAmountthatwouldapplytotheyearofrecovery.49/Forpurposesofthisparagraph,CashO&Mshallbeassumedtobe$201millionuntiltheimplementationoftheEnergyandCapacitystageoftheRetailAccessProgram,describedatparagraph46,infra,atwhichtimeCashO&Mwillbeassumedtobe$176million.Theseamountsshallbereducedbyanyamountsrecoveredthroughthe"SystemBenefitsCharge,"asdescribedinparagraph14,infra.ThedeferralshallbecalculatedastheproductofCash0&Mandthedifferencebetweenactualinflationand4.0percent. ProertvTaxes13.Changesinpropertytaxesshallbeaddressedasfollows:a.Fifty(50)percentofanypropertytaxincreasesovertheBaseLevel,-'"describedinsubparagraphc,below,shallbedeferredforfuturerecovery.b.Fifty(50)percentofanypropertytaxdecreasesfromtheBaseLevelshallbelikewisedeferredforfuturepassbacktocustomers.'c.TheBaseLevelshallbeequaltoactualpropertytaxexpendituresoverthetwelve(12)monthsendedFebruary28,1997,lesstaxesrelatedtoanyassetssoldafterJune30,1997."S'stemBenefitsChare"14.ThePartiesagreethatthecostsofcertainmandatedprogramswillberecoveredthroughratesapplicabletoallcustomers,'whetherornotthesecostsareincludedinaseparateSystemBenefitsCharge("SBC").-'"Theprogramsareasfollows:Propertytaxespertainingtonon-nucleargeneratingfacilitiesshallbedeductedfromtheBaseLevelpursuanttotheschedulestatedinparagraph55,infra.TheinstitutionofsuchachargeiscurrentlyunderconsiderationinCase94-E-0952. a.ResearchandDevelopment:mandatedresearchanddevelopmentprograms,excludingNewYorkStateEnergyResearchandDevelopmentAuthoritycontributions;b.EnergyEfficiency:mandatedenergyefficiencyprograms,includingDSMbiddingprogramsundertakeninaccordancewithCommissionorders;-""'c.LowIncome:mandatedlow-incomeprograms,whethernew,existingorexpanded,includinglow-incomeenergyefficiencyprograms;andd.EnvironmentalProtection:mandatedenvironmentalprotectionprograms,includingprogramsdesignedtomitigatetheenvironmentalimpactsofelectricindustryrestructuringprograms,excludingenvironmentalremediationcosts.-'"TherevenuelevelsincludedinthisSettlementaredeemedtoincludefundingforsuchprogramsatthelevelslistedinScheduleKand,unlessdifferentexpenditurelevelsareapproved,thenetimpactoncustomerswouldbezero.TheCompanywillcontinuetoadministerexistingcontractsandthefundsrequiredtocomplytherewith.TotheextentthatthecostsrelatedtotheabovedescribedSBCprogramschangefromthelevelslistedin53rOnewayofdisbursingfundsforenergyefficiencyprogramscoveredbythischargewouldbebymeansofastandardperformancecontractwithstipulatedpricingapprovedbytheCommission.Seeparagraph30,infra.

,~.0e' ScheduleKduringthetermofthisSettlement,thosechangeswillbereflectedinanadjustmenttoratestotakeeffecteachJuly1stduringthetermofthisSettlement.CostsnotrecoveredduringanyparticularRateYearwillbereflectedinratesinafutureRateYear,-"'ssoonaspracticable.Suchcostchangesshallbeallocatedtovoltageclassesinproportiontothe"RateReductions"listedinScheduleA.TheCompanyshallhavenofurtherobligationpursuanttothe1996Settlementorthe1997Eighteen-MonthDSMPlantoimplementoradministerDSMprogramsandtheCompanyshallhavenofurtherobligationtoprepareorfilefutureDSMplansorevaluationreports.-'"15.ThecostsdescribedasPublicPolicyCostsinSectionVIIofRG8cE'sOctober1Submission,totheextentpermittedtobebilledseparatelyaspartofanSBC,orasaPublicPolicyCharge,underthetermsoftheCommission'sOrderestablishinganSBC,maybeincludedinRGAE'sSBC.TotheextentthatanyofsuchcostsarenotrecoveredthroughanSBCorsimilarcharge,asdescribedinparagraph14,~sura,suchcostsshallbeotherwiserecoveredthroughdistributionaccessrates.ChangesinsuchcostsduetogovernmentalactionofanykindwillbeconsideredMandates,asdescribedinparagraph16,'infra.ThematerialityWhichmayincludetheperiodimmediatelyfollowingthetermofthisSettlement.Inaddition,thereshallbenodenialofrecoveryofactualDSMexpenditurespursuanttoScheduleFtothe1996Settlement.DuetocontractualcommitmentsunderexistingDSMprograms,discontinuanceoftheCompany'sobligationswillnotresultinimmediatecessationofallexpenditures.

~.,4.0e' thresholdof$2.5million'-willbeappliedtoaggregatedcostchangeswithineachofthesevencategoriesofPublicPolicyCosts,-'"excludingSBCitems.MandatesCatastrohicEventsandCometitionImlementationCosts16.Intheeventthat,afterthedateuponwhichthisSettlementisexecutedbytheCompanyandonorbeforeJune30,2002,oneormoreMandates-'simplemented'-"and/oroneormoreCatastrophicEvents'-"occursand,duringanyRateYearcoveredbythis56/Azero($0)materialitythresholdshallapplytoitemsincludedintheSBC.~57/Thesecategoriesare:1)DSM2)Low-IncomeAssistance3)ObligationtoServe-IncrementalExpenses4)EconomicGrowth5)EnvironmentalInitiatives6)MandatedandPublicPolicyResearchandDevelopment7)RegulatoryAssessmentsandExpensesForpurposesofthisSettlement,a"Mandate"shallmean(a)anygovernmentalaction,includingchangesinlawsandregulations(includingtaxlawsandregulations)andordersofregulatoryandotheragencieswhichresultincostchanges,and(b)anychangesinaccountingrequiredbygenerallyacceptedaccountingprinciples.Intheeventthatanysuch"Mandate"consistsofactionsinresponsetoanassertedfailurebytheCompanytoconformtovalidlegalrequirements,theCompanyshallhavetheburdenofshowingthatitsconductwhichgaverisetosuchactionwasconsistentwiththebestinterestsofcustomers.59/"Implementation,"asusedinthisparagraph,shallnotbedeemedtoreferonlytocommencementofnewMandates,butshallinsteadincludebothcommencementofnewMandatesandchangestoexistingMandates.ForpurposesofthisSettlement,a"CatastrophicEvent"shallmeananeventthattriggersthedesignationofpartoftheCompany'sserviceterritoryasadisasterareaorasbeingunderastateofemergency.

0~.Oje Settlement,thecostimpactofanyindividualMandateoranyindividualCatastrophic.Eventexceeds$2.5million,-"RG&EshallbeentitledtodefertheentireamountattributabletosuchMandatesandCatastrophicEventsandtorecoverorpassbacksuchamountassoonas.possiblethereafter,subjecttothetermsofparagraphs8and9,~sura.Suchdeferralandrecoveryorpass-back,withtheexceptionofCommission-imposedMandates,shallnotapplytogeneratingfacilitiesthat,pursuanttotheEnergyandCapacitystageoftheCompany's~RetailAccessProgram,-"-'refullyexposedtomarketpricing.17.RG&Eshallbeentitledtodeferandtorecoverassoonaspossible,subjecttothetermsofparagraphs8and9,~sura,theentireamountofallCompetitionImplementationCosts'-"thatexceed,intheaggregateinanyRateYear,$2.5million.63/Suchimpactshallbecalculatedonlywithreferencetoregulatedoperations.The$2.5millionthreshold,however,shallnotapplytochangesinnucleardecommissioningcoststhataretheresultofMandates.Describedatparagraphs45-52,infra.63/ForpurposesofthisSettlement,"CompetitionImplementationCosts"shallmeanallincrementalexpendituresincurredbyRG&EafterFebruary28,1997,inconnectionwithallregulatoryproceedings,legislation,regulations,andorderspertainingtotheimplementationofacompetitivemarketforelectricservice.

r~.00' Securitization18.Thebenefits,ifany,ofanySecuritization-'hatmaybecomeavailableafterthisSettlementisexecutedbyRGB'.Eshall,subjecttoparagraph11,~sura,beusedtoincreasetheamountsoftheratereductionsidentifiedinparagraph2,~sura,-'"andanysuchfurtherratereductionsshallbeallocatedinamannerconsistentwiththelegislationorCommissionordersauthorizingSecuritization.SunkCosts19.AllprudentlyincurredSunkCosts"-"asofMarch1,1997shallbe'includedinrateschargedpursuanttoRGAE'sdistributionaccesstariff.ThePartiesintendthattheprovisionsofthisSettlementwillallowtheCompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement,underStatementofFinancialAccountingStandardsWNo.71("SFAS71"),'-"whichprovidesforcertainaccountingconventionsforregulated64'orpurposesofthisSettlement,"Securitization"shallmeanCommission-issuedrateorders,legislativelyauthorizedorotherwise,thatarespecificallyintendedtocreateaddedcreditqualityforutilityborrowings,allowingassetsorutilitycoststobefinancedatmorefavorabletermsthanotherwiseavailable.Thisreducedcostofborrowingisthebenefitreferredtointhetext.Securitization'shallnotbedeemedtoincludegeneralrateordersorfinancingordersissuedintheordinarycourse.65166!67(Withoutregardtothelimitationsofparagraph9(a)and(b),~sura.ForpurposesofthisSettlement,"SunkCosts"shallmeanallinvestmentinelectricplantandelectricRegulatoryAssets.A"RegulatoryAsset"isadeferredcostwhoseclassificationontheCompany'sBalanceSheetasanassetispermittedpursuanttoparagraph9ofSFAS71.AccountingfortheEffectsofCertainTypesofRegulation. companiessubjecttocost-basedratemaking.ThePartiesshallmeetpriortoJuly1,2000todiscussfutureratemakingtreatmentofsuchcosts.SuchtreatmentshallbeconsistentwiththeprinciplethattheCompanyshallhaveareasonableopportunitybeyondJuly1,2002to.recoverallsuchcosts.-'"SaleofGeneratinAssets~20.Totheextentthatanyexistinggeneratingassetsaresold(suchasviaanauctionorothersuitablemechanismtoestablishmarketvalue)duringthetermofthisSettlement,anygainsonsuchsalesshallbesharedbetweenshareholdersandcustomersasfollows:a.Withrespecttosalesoccurringduringthefirstthree(3)RateYearsoftheSettlementperiod,customersshallbeentitledtosixty(60)percentofthefirst$20.0millionofanysuchgain,andtheCompanyshallbeentitledtoretaintheremainder.Customerswillbeentitledtoeighty(80)percentofanysuchgainsoverandabovethefirst$20.0million.b.Withrespecttosalesoccurringduringthefinaltwo(2)RateYearsoftheSettlementperiod,customersshallbeentitledtoSuchprinciplesofcostrecoveryshallalsoapplytothenegotiationsreferencedinparagraph23,infra.

. eighty(80)percentandtheCompanyshallbeentitledtoretaintwenty(20)percentofallgains.Thegainsosharedshallbenetofanylossesduetogenerationassetsales,transactioncosts,thecostofanyhedgingarrangementsnecessarytomanagetheCompany'sriskoffluctuationsinthepriceoftheelectriccommodityorrequiredancillaryservices,andallapplicablefinancialstatementtaxeffects.TheCompany'sshareofthegainshallbeexcludedfromallcalculationsofregulatoryearnings.ThepartiesshallmeetpriortoJuly1,2000todiscussthetreatmentofthecustomer'sshareofthegainandmakearecommendationtotheCommissionwithrespectthereto.ThePartiesintendthattheprovisionsofthisSettlementwillallowtheCompanytorecover,inrateschargedpursuanttoRGAE'sdistributiontariff,anyprudently0incurredlosses,includingallapplicablefinancialstatementtaxeffects,resultingfromthesaleofageneratingasset,duringthetermoftheSettlement,underSFAS71.ThePartiesshallmeetpriortoJuly1,2000todiscussfutureratemakingtreatmentofsuchcosts.SuchtreatmentshallbeconsistentwiththeprinciplethattheCompanyshallhaveareasonable'pportunitybeyondJuly1,2002torecoverallsuchcosts. To-GoCosts21.ThefixedportionoftheTo-GoCosts'-"ofRG&E'sfossilgeneratingunits,-'"hydroelectricgeneratingunits,-'"gasturbines,-'"andpowerpurchasecontracts(otherthanKamine),-'"andthefixedportionoftheTo-GoCostsoftheCompany'sshareofOswego6shallberecoveredinfullthroughtheCompany'sdistributionaccesstariffuntilJuly1,199969/ForpurposesofthisSettlement,"To-GoCosts"shallmeanallcapitalcostsincurredafterFebruary28,1997,O&Mexpensesandproperty,payrollandothertaxes.The"variable"portionofsuchcostsshallmeanthecoststhatvaryasKWHoutputvariesatageneratingplant,chieflyfuelexpense.The"fixed"portionofsuchcostsshallmeanallsuchcostsnotdefinedas"variable."RG&E'swhollyownedfossilgeneratingunitsconsistofBeebeeStation(Unit12)and0RussellStation(Units1-4).Stations2,5,26,160,170and172.Stations3and9.RG&Ecurrentlyhasthefollowinglong-termpowerpurchasecontracts:ContractNameNiagaraFirmNiagaraPar."B"St.LawrenceHydroQuebecFitzPatrickWinterSummerGilboaContractCapacity(KW)65,00035,00055,00020,00044,00050,000150,000ExpirationofContractAugust,2007August,2007August,2007October,199812MonthNoticeJune,2002 inaccordancewithparagraphs45and52,infra.ThevariableportionofsuchTo-GoCosts'-"shallbesubjecttothemarketforelectricityinaccordancewithparagraphs45and46,infra.NuclearFacilities22.AllprudentlyincurredcostsofGinnaStationandtheCompany'sshareofNineMilePoint2shallberecoveredthroughretailratessubjecttotheprovisionsofthefollowingparagraph,provided,however,thatsuchcostsshallnotbesubjecttotrue-uporreconciliationexceptasotherwiseprovidedinthisSettlement.23.RG8cEshallparticipateingood-faithnegotiationswithStaffandwiththeothercotenantsofNineMilePoint2regardingfutureratetreatmentofsuchfacility.ThePartiesanticipatethatsimilartreatmentwillbeappliedtoGinnaStation.Suchnegotiationsandanyproposedtreatmentresultingtherefromshallbeconsistentwithandinfurtheranceofthefollowingprinciples:a.anyCommissionorotherStatesolutionmustbeconsistentwithNuclearRegulatoryCommission("NRC")requirements;b.aStatewidesolutiontotreatmentofnuclearfacilitiesispreferabletoindividualutility-by-utilitysolutionsandanysolutionpertainingtoRGAEmustbeconsistentwithaStatewidesolution;Seefootnote69,~sura. c.RG&E'snuclearfacilitiesshallremainsubjecttotheprovisionsofparagraph16,~sura,duringthetermofthisSettlement;andd.nochangeinthetreatmentofRG&E'snuclearfacilitiesshallbeimplementeduntilatleastJanuary1,2000.Intheeventthattheabove-describednegotiationsshouldresultinanychangeinratemakingtreatment,thePartieswillmeettodiscusstherelationshipbetweenthepotentialimpactontheRetailAccessProgramimplementationschedule,theassociatedconditionsandlimitationsoncustomerparticipationandthelevelofTo-GoCoststhataresubjecttothemarket.Shut-DownandDecommissioninCosts~24.Allprudentlyincurredincrementalcostspertainingtotheshut-downanddecommissioningofgeneratingfacilities,-'"whetherfullyorpartiallyownedbyRG&E,shallberecoveredthroughtheCompany'sdistributionaccesstariff.NucleardecommissioningcostsshallbeasdescribedinScheduleD.IntheeventthattheestimatesofnucleardecommissioningcostscontainedinScheduleDchange,-'"RG&EshallsubmittotheCommissionandthePartiesarevisedScheduleD,showingsuchchangesandshall,uponrequestoftheCommissionortheParties,providereasonabledocumentationtherefor.TheInadditiontothedecommissioningcostsshowninScheduleDfornuclearplant,"shutdownanddecommissioningcosts"includetransmissionanddistributioncostsassociatedwitheliminationofaparticulargeneratingfacility,severancepayresultingfromsuchelimination,anddecommissioningoffossilfacilities.ThisprovisionisintendedtoaddresschangesinestimatesthatarenottheresultofchangesinMandates,asdefinedinfootnote58,~sura.

0~0' Company,uponCommissionapproval,-'"shallthereuponbepermittedtochangeitsdistributionaccessratestoreflectsuchincreaseordecrease.Otherthannucleardecommissioningcostscurrentlyincludedinrates,theabovecostsshallbedeemedincrementalanddeferredforrecoverypursuanttotheprovisionsofparagraphs8and9,~sura.SstemReliabilityandMarketPower25.RG&Eshallmaintainthereliabilityofitssystem,includingthoseportionsofthesystemidentifiedasLoadPockets,-'"inthemostcost-effectivemanner,consideringarangeofalternativesincludingbutnotlimitedto:transmissionanddistributionsystemreinforcements,maintenanceofexistingplant,energyefficiencyanddistributedgeneration.InconnectionwiththepetitionoftheMemberSystemsoftheNewYorkPoweriOPool("NYPP")totheFERCtoformnewwholesalemarketinstitutions(theISO,PEandtheNewYorkStateReliabilityCouncil),theCompanyshallfileamarketpowermitigationplanwithFERCandshalltakeappropriateactioninaccordancewiththeoutcomeofsuchfiling.NothinginthisSettlementshallprecludetheCommissionfromimplementingmarketpowermitigationmeasuresforretailservice,asappropriate,afterthetermofthisSettlement.Suchapprovalprocessshallbebaseduponashowingofthenecessityandreasonablenessoftheexpenditures.ForpurposesofthisSettlement,"LoadPockets"shallhavethemeaningdescribedinOpinionNo.96-12(at60):"'Loadpockets'xistwhen,duetotransmissionsystemlimitations,somegenerationmustbelocatedwithinaparticularlocationinordertocontinuetheprovisionofreliableservice."RG&E'sLoadPocketsaredescribedinSectionVoftheOctober1Submission. i~Amortizations26.ScheduleBtothisSettlementshowstheitemsandtheamountsthereofthatwillbedeemedtohavebeenamortizedduringthetermoftheSettlement.RG&EshallbepermittedtorecordamortizationsandunamortizedbalancesasitdeemsappropriateoverthefiveRateYearsoftheSettlement;provided,however,that,attheconclusionoftheSettlementperiod,anyunamortizedbalanceforaparticularitemshallnotbegreaterthanitwouldhavebeenhadtheamortizationbeenrecordedasshownonScheduleB.ForpurposesofcomputingRGEcE'sregulatoryearnings,thelevelsofamortizationexpensesshallbeasindicatedonScheduleB.Post-EmlovmentBenefitse27.ThepartiesagreethatuponapprovalofthisSettlementbytheCommission,andeffectiveasofJanuary1,1997,theCommission'spolicystatementonaccountingandratemakingforpensionsandotherpost-employmentbenefits'-"shallnolongerapplytoRGB.Eandtoitsaccountingpolicies.Case91-M-0890,StatementofPolicandOrderConcernintheAccountinandRatemakinTreatmentforPensionsandPostretirementBenefitsotherthanPensions,issuedSeptember7,1993.

e ~,GinnaOutaeCosts28.RGAEshallbepermitted,atitsoption,tobookcostsassociatedwithGinnaStationmaintenanceoutagesonalevelizedbasis.Suchcostsshallbedeemedto.havebeenrecoveredfromcustomersonalevelizedbasis.ExcessEarnins,29.Exceptasexpresslyprovidedotherwiseinparagraph10,~sura,anyexcessearningsattributabletotheRateYearendingJune30,1997oranypriorRateYear-"'hallbedeemedtohavebeenpassedbacktocustomersasofJuly1,1997.EnvironmentalRemediationCosts030.RGE.Ewilldeferonitsbooksofaccountandreflectinratesasprescribedbythisparagraphandpursuanttoparagraphs8and9,~sura,siteinvestigationandremediation("SIR")costs-'"forelectricoperationsinexcessof$2.0millionannually.Anycostsdeferredunderthisparagraphwillbenetofrecoveriesofthesecostsunderinsurancepoliciesorfromthirdparties.$0!Includinganyamount,notexceeding$2.5million,pertainingtoexcesscollectionsundertheFuelCostAdjustment.SIRcostsarethecostsRGEcEincurstoinvestigate,remediate,orpaydamages,includingnaturalresourcedamages,butexcludingpersonalinjurydamages,withrespecttoindustrialandhazardouswasteorcontamination,spills,dischargesandemissionsforwhichRG8rEisresponsible. AmountsDueCustomers31.RGEcEshallrecordanyServiceQualityPerformanceProgram-'~penaltiesthatbecomeduetocustomersduringthetermofthisSettlement.TotheextentthattheseamountsarenotoffsetbyamountsduetheCompany,excludingMandates,asdescribedinparagraph16,~sura,theyshallbecarriedforwardtotheendofthetermofthisSettlementandtheultimatedispositionofanysuchcarry-forwardbalanceshallbedeterminedinafuturerateproceeding.-'"IncentivesOwedRGAEandAmountsOwedCustomersUnderSettlements32.AnyandallElectricRevenueAdjustmentMechanism("ERAM")deferralsandincentiveamountsthatwereduetotheCompanyasofJune30,1997,includingamountsderivedfromtheelectricratesettlementapprovedbytheCommissioninOpinionNo.93-19("the1993Settlement")-"',shallbedeemedtobeeliminatedasoftheeffectivedateofthisSettlement.AnyandallamountsthatwereduetocustomersasofJune30,1997includingamountsderivedfromthe1993Settlement,the"SettlementAgreement-Demand83/84!TheServiceQualityPerformanceProgramisdescribedinparagraph44,infra.Suchbalanceshallbearcarryingchargesattheannualrateef9.0percent.Cases92-E-0739etal.,RochesterGasandElectricCororation,OpinionandOrderApprovingSettlement,issuedAugust24,1993.ThereferenceditemsincludeDSM,ServiceQuality,IntegratedResourceManagementIncentive("IRMI")andGinnaSteamGeneratorreplacementcostsharing.See1993Settlement,paragraphsIS-20,32. SideManagementIssues"("theDSMSettlement")approvedinOpinionNo.95-20,-'"the1996SettlementandtheNineMile2SettlementsshallalsobedeemedtobeeliminatedasoftheeffectivedateofthisSettlement.FlexibleTariffDiscounts33.DuringthetermofthisSettlement,RG&EshallhaveauthoritytoprovidediscountedservicepursuanttoServiceClassificationNo.10("SC-10")contractsorsimilarflexiblepricingarrangements,includingtheFlexibleDistributionTariffOptiondescribedinAppendixAtoScheduleA.LostmarginsresultingfromallsuchsalespriortoJuly1,2002shallbedeemedtohavebeenrecoveredbytheCompanyduringthetermofthisSettlement.-"'eLealServices34.ThisSettlementresolvesallissues'pertainingtothecostoflegalservicesandisdeemedtocompletealltherecommendationscontainedinthefinalreportissuedbyMitchell/TitusandCompanyinNovember1993intheStatewideLegalServices86/Cases95-E-0673etal.,RochesterGasandElectricCooration,OpinionandOrderApprovingSettlementofDSMIssues,issuedDecember27,1995.ThisparagraphshallnotbeconstruedaslimitingRG8cE'srighttoseekexplicitrecoveryofsomeorallofthelostmarginsonsalesofelectricityordistributionservicemadeafterJune30,2002,regardlessofwhenthecontractspursuanttowhichsuchsalesweremadewereenteredinto. iStudy(Case92-M-0047).Accordingly,therearenofurtherstudies,reportsoractionsrequiredoftheCompanyinregardtothismatter.ReulatedRateDesin35.ExceptasexpresslyprovidedotherwiseinthisSettlement,anychangeinrevenuespursuanttotheprovisionshereofshallbeallocateduniformlytoallserviceclassifications("SC").-'"36.ForSC-1,SC-2,andSC-4,ScheduleI,themonthlycustomerchargeshallbeincreasedby$1.50ineachRateYearofthetermofthisSettlement,withcorrespondingdecreasesinenergyrates,asshowninScheduleA.37.ForSC-4,mandatoryapplicationtolargecustomersshallbeeliminated.38.ForSC-8,thedifferencebetweenpeakandshoulderperiodenergychargesshallbeeliminatedasofJuly1,1997,withacorrespondingincreaseindemandcharges.Insubsequentyears,energychargesshallbereducedaccordingly,asshownforillustrativepurposesinScheduleA.39.TheCompanyisauthorizedtomodifytheeligibilitycriteriaofSC-10toeliminatetherequirementsofitemA.3(energyaudits).Referenceinthisparagraphandinparagraphs36through40,infra,to"serviceclassifications"shallbetothe.existingserviceclassificationsinRG&E'sElectricTariff(P.S.C.No.14),andinRG&E'sStreetLightingTariff(PSCNo.13).ForthepurposesofthisSettlement,theprojectedKWHsalesaspresentedinScheduleAshallbeused. 40.TheCompanyisauthorizedtomodifytheeligibilitycriteriaofSC-11toeliminatetheenergyauditrequirement.41.TheCompanyisauthorizedtomakeratedesignchangestoitsotherelectricserviceclassifications-'hatareconsistentwiththeprincipleofreducingmarginalenergyprices.Further,duringthetermofthisSettlement,theCompanymayatanytimepetitiontheCommissionforapprovaltoimplementrevenue-neutralordeminimisrateorratedesignchanges,includingchangestotheratedesignplansdescribedinparagraphs35through38,~sura.LarcCustomerCreditProram42.RG8'cEshallcontinueitsLargeCustomerCreditPrograminaccordancewithScheduleEtothisSettlement,whichshallsupersedeScheduleFtothe1996Settlement.Low-IncomeProram43.RGB'EshallcontinuetoimplementtheLow-IncomeProgramcontainedinScheduleFtothisSettlementandtorecoverinResidentialRates-'"theamountsspecifiedinScheduleK.PriortoJune30,1999,thePartiesshallmeettodiscusswhethertheProgramshouldcontinuebeyonditsscheduledexpirationdate(June30,1999)and,ifso,inwhatform.SC-3,SC-7andSC-9.Forpurposesofthisparagraph,"Residential"shallmeanSC-1andSC-4customers.

~-' 88'4.RG&EshallcontinueitsServiceQualityPerformancePrograminaccordancewithScheduleGtothisSettlement,whichshallsupersedeScheduleHtothe1996Settlement.-'henewProgramshallcontinuethroughJune30,1999.TheElectricReliabilitycomponent-"'ftheProgramshallapplyonlytoRG&E'sdistributionoperationsandtheCustomerServicecomponent-"'hallapplyonlytotheCompany'sRegulatedLoadServingEntity("RLSE")operations.-'"PriortoJune30,1999,thePartiesshallmeettodiscusswhethertheProgramshouldcontinuebeyonditsscheduledexpirationdateand,ifso,inwhatform.Notwithstandingtheforegoing,ifRG&EdeterminesthattheimplementationofcompetitionresultsindeteriorationofperformanceundertheServiceQualityPerformanceProgram;"'G&Eshallbepermitted,independentofanyotherprovisionofthisSettlement,topetitiontheCommissionforrelieffromtheeffectsofanycomponentoftheProgramthatisaffectedbyimplementationofcompetition.90/9l/92/93/94/Theonlysubstantivedifferencebetweenthe1996Programandthecurrentoneisintheamountsofthemaximumpenalties.ThemaximumpenaltyfortheElectricReliabilityComponentshallbe$750,000,allocatedequallybetweenthetwoitemsinthiscomponent.ThemaximumpenaltyfortheCustomerServicecomponent-shallbe$500,000,allocatedequallyamongthesixitemsinthiscomponent."RLSE"isdefinedinSectionVIII(p.VIII-23)ofRG&E'sOctober1Submissionanddescribedinparagraph65,infra.~E,complaintsduetocustomerconfusion.

i~;~s0' RetailAccessGenerallv45.RGEcEshallofferitscustomerstheopportunitytopurchasetheirownelectricenergyandcapacityandtheCompanyshalldeliversuchelectricenergyandcapacityinaccordancewiththefollowingdescriptionoftheCompany'sRetailAccessProgram.ThePartiesacknowledgethatRGkE'sabilitytoundertaketheRetailAccessProgramiscontingentuponnumerousconditionsandcircumstances,-'"anumberofwhicharenotwithinthedirectcontroloftheParties.Accordingly,thePartiesagreethatitmaybecomenecessarytomodifytheProgramtoaccountforsuchfactors,andtheyagreefurthertoaddresssuchmattersingoodfaithandtocooperateinanefforttoproposejointresolutionsofanysuchmatters.46.TheRetailAccessProgramshallbea"SingleRetailer"program,as0describedinRGB.E'sOctober1Submission,-'"andassuch"SingleRetailer"programhasbeenmodifiedpursuanttothetermsofthisSettlement.-"Foraperiodofthreeyears,beginningwiththeimplementationdateoftheProgram,asdescribedinparagraph48,infra,RGEcEshalloffertheoptionofunbundledbillingservicesunderatarifftoparticipatingLoad9S/Includingtheexistenceofanadequatemarket,asdescribedinparagraph52,infra.SeeSectionVIII(pp.VIII-16,-VIII-18).97/Alistoftheretailingfunctions,theprovisionofwhichwillbetheresponsibilityofLSEsparticipatingintheProgram,isincludedinScheduleH.

s0e' ServingEntities("LSEs").-'heProgramwillbephasedin,asdescribedinparagraphs48through52,infra.ItshallcommenceonJuly1,1998byallowingcustomerstochoosetheirownsupplierofelectricenergy(the"EnergyOnly"stageoftheProgram).DuringthisstageoftheProgram,theCompanyshallcontinuetoprovideandbecompensatedforthegeneratingcapacityrequiredtoserveallcustomersreliably.OnJuly1,1999,subjecttotheprovisionsofparagraphs52and68,infra,customerswillbepermittedtochoosetheirownsupplierofenergyandcapacity(the"EnergyandCapacity"stageoftheProgram).-'"47.RGEcEagreedtocooperatewiththePartiestocommenceworkontheRetailAccessProgramassoonasthePartiesexecutedtheInitialSettlementandtheCompanyagreestocontinuetodosouponexecutionofthisSettlement;provided,however,thatanyincrementalcostsorcommitmentsincurredbytheCompanyinconnectionwithsuchworkperformedsinceApril8,1997shallbedeemedtobeincludedintheCompetitionImplementationCoststhataresubjecttorecoverypursuanttoparagraph17,~sura.LSEsaredescribedinSectionVIIIofRGkE'sOctober1Submission(pp.VIII-10-VIII-11).AnindividualcustomercanqualifyasanLSEandprocureitscombinedneedsforsomeorallofitsseparateaccounts."Unbundledbillingservices"includepreparationandmailingofasinglebillontheLSE'sbehalf.ThepurposeofhavingRGEcEoffersuchserviceistopermitLSEstocommenceoperationswithouthavingtowaitfordevelopmentoftheirownbillingsystems.Thethree-yearlimitisintendedtorecognizethatthisservicewillultimatelybeavailableonacompetitivebasisand,therefore,togiveRGEcEtheoptionofterminatingthisregulatedofferingafterallowingLSEsareasonableperiodtomakealternativebillingarrangements.Asthedesignationindicates,theLSEwillberesponsibleforpurchasingcapacityuponcommencementofthisstageoftheProgram. 48.Subjecttotheprovisionsofparagraphs45,~sura,and52,infra,thescheduleforimplementationoftheRetailAccessProgramisasfollowsandiscontingentupontheeventslistedinItemsathroughc:a.ExecutionofanagreementregardingthefunctionalrequirementsoftheProgram-byMay30,1997;b.DevelopmentoftheformofOperatingAgreement-""andfilingofproposedtariffsbyDecember1,1997;CommissionapprovaloftariffsbyFebruary1,1998;-""d.TheEnergyOnlystageoftheProgrambeginsbyJuly1,1998,atwhichtimecustomersusingupto670GWHofenergyperyear,intheaggregate,-'"'illbeeligibletoparticipate;il001"Functionalrequirements"willdescribethebusinessand/orsystemprocessesneededtoimplementretailaccessandunbundledbilling.Subsequentcriticalcomponentsofthesystemdevelopmentprocess,suchastheoperatingagreement,businessprocedures,communications,systemspecificationsandtraining,willeventuallyevolvefromtheserequirements.I0IIOperatingAgreementsaredescribedinSectionVIII(pp.VIII-24-VIII-26)ofRGB:E'sOctober1Submission.TheOperatingAgreementiscurrentlybeingdraftedinconsultationwithanAdvisoryCouncilmadeupoftheParties.TheOperatingAgreementwillbereferencedintheDistributionAccessTariffandwillbeonfilewiththeCommission.ItisexpectedthattheremaybedifferencesbetweenanAgreementforasinglecustomeractingasanLSEandanAgreement.foranLSEservingmultiplecustomers.10>DExceptasprovidedinparagraph61,infra,thesetariffsshallbeeffectiveasofJuly1,1998.Allreferencestocustomerconsumptionaretoaggregateduse. TheEnergyandCapacitystageoftheProgrambeginsbyJuly1,1999,atwhichtimecustomersusingupto1,300GWHofenergyperyearwillbeeligibletoparticipate;f.AsofJuly1,2000,customersusingupto2,000GWHofenergywillbeeligibletoparticipate;g.AsofJuly1,2001,customersusingupto3,000GWHofenergywillbeeligibletoparticipate;h.AsofJuly1,2002,allretailcustomerswillbeeligibletoparticipate.49.Topermitimplementationwithoutunnecessarydisruption,thePartiesagreethattheRetailAccessProgramscopeandfunctionalrequirementswillnotbechanged0inawaythatsubstantiallyalterstheadministrativeandotherchangesnecessaryfortimelyimplementationoftheProgram.NosuchchangeinscopeorfunctionalrequirementsshallbemadewithoutRGB.E'sconsent.50.Totheextentthatenergyconsumptionbyend-usecustomersintheCompany'sserviceterritorygrowsbeyondalevelof6,714GWHduringthetermofthisagreement,theGWHcapsoneligibilitydescribedinparagraph48,~surawillbeincreasedbytheamountofadditionalenergyconsumption.51.EligibilityfortheRetailAccessProgramwillnestberestrictedbycustomerclass.

0O.0,0 52.ThePartiesagreethattheexistenceofafunctioningStatewideEnergyandCapacityMarket-inwhichRGEcEisabletopracticablyparticipateisacrucialfactorintheCompany'sabilitytoimplementtheEnergyandCapacitystageoftheProgram.IfsuchaStatewideEnergyandCapacityMarketisnotimplementedbyJuly1,1998,theCompanymaypetitiontheCommissionforadelayintheimplementationoftheEnergyandCapacitystageoftheProgramandshowcausewhyrelieffromthisscheduleisrequired.IftheProgramisdelayedinthisfashion,theprovisionsofparagraph56,infra,willapplyandthecapsonparticipationintheEnergyandCapacitystageoftheProgramdescribedinparagraph48,~sura,willapply.ThePartiesfurtheragreethat,priortoJuly1,2000,theyshallmeettoreviewtheprogressofretailaccessundertheProgramandshallconsiderandrecommendtotheCommission,asappropriate,anychangestotheimplementationschedule0thataredeterminedtobenecessary;provided,however,thatnosuchchangesshallberecommendedunlesstheyarerevenueneutralanddonotmateriallyincreasethelevelofriskbornebytheCompany.104/The"StatewideEnergyandCapacityMarket"isdefinedtobeasetofcircumstancesandconditionssuchasthatidentifiedbytheMemberSystemsoftheNYPPintheirJanuary31,1997filingwiththeFERCtocreatenewwholesalemarketinstitutionsinNewYork.ThisMarket,asthusdefined,wouldincludemechanismsforthewholesalepurchaseandsaleoftheelectricenergycommoditybyanyqualifiedentity,aswellasthesameordifferentmechanismsforthepurchaseandsaleofgeneratingcapacitycommitmentsbysuchentities. DistributionAccessChares53.LSEswillberequiredtotaketransmissionserviceundertheCompany'sFERCOpenAccessTransmissionTariff("OATT"),-""untilsuchtimeasthattariffissupersededbyaFERC-approvedStatewideopenaccesstransmissiontariff.Atthattime,LSEswillberequiredtotakeserviceundertheStatewidetariff.TotheextentthatmodificationstotheOATTarenecessaryduringthetermofthisSettlementtoimplementtheRetailAccessProgram,theCompanywillconsultwithinterestedPartiesinthedevelopmentofsuchmodifications,andtheCompanywillfilesuchmodificationswiththeCommissionwitharequestthattheCommissionapprovesuchmodifications.InthefilingtheCompanywilljustifyrequestedmodificationstonon-ratetermsandconditionsandwillindicatehowIratesshouldbedesignedfortheRetailAccessProgram.FollowingCommissionapproval,theCompanywillfiletheamendmentstotheOATTtogetherwiththeCommission'sorderapprovingtheamendmentswiththeFERCwitharequestthattheFERCdefertotheCommissiononsuchmodifications.WhererequestedbytheCompanytodoso,StaffshallemployallreasonablemeanstoexpeditetheCommission'sapprovalprocess.TheforegoingprocessshallnotbeconstruedasrequiringRG&EtotakeanyactionthatisinconsistentwithlawfulFERCjurisdictionandrequirements.LSEswillalsoberequiredtotakedistributionserviceunderaPSC-regulateddistributiontariff.AnycostsnotrecoveredthroughtheFERC-regulatedtransmissiontariffwillberecovered,totheextentpermittedhereunder,FiledJuly9,1996inDocketNo.OA96-141-000.

~~~.e. throughthePSC-regulatedtariffsandanycostsrecoveredthroughFERC-regulatedtariffsshallnotberecoveredthroughPSC-regulatedtariffs.ThedistributionaccesstariffchargeswillbebasedupontheloadsoftheLSE'sretailcustomersaggregatedbyvoltageclass..54.FortheEnergyOnlystageoftheRetailAccessProgram,therateschargedtoLSEsundertheCompany'starifffordistributionaccessshallbesetbydeductingfromtheratesthatwouldapplytobundledretailservice$0.02305perKWH-.LSEsshallbeentitledtopurchaseenergyfromtheCompanyatarateof$0.01905perKWHtoservethe,requirementsoftheretailcustomerstheyservewithintheCompany'sservicearea,providedthatsuchLSEscontracttoservethefullrequirementsofsuchcustomersandpurchasealloftheenergyrequiredtodosofromtheCompanythroughJune30,1999oruntiltheEnergyOnlystageoftheProgramterminates,ifsuchstageextendsbeyondJune30,1999.-""IntheeventthattheEnergyOnlystageoftheProgramextendsbeyondJune30,1999,thedistributionaccessratesmay,ifnecessary,bechangedinaccordancewithparagraph56,infra.55.FortheEnergyandCapacitystageoftheRetailAccessProgram,therateschargedtoLSEsundertheCompany'starifffordistributionaccessshallbeapproximatelyequal,onaverage,totheratesthatwouldapplytobundledretailservicelessretailingcostsandtheper-unitfixedandvariableTo-GoCostsofnon-nuclearenergysources,exclusiveofpropertytaxes.Thepropertytaxcomponentoftheper-unitnon-nuclearTo-Go106'fthisamount,$0.004perKWHrepresentsaverage"retailingcosts."Thetypesofretailingfunctionstowhich"retailingcosts"pertainareshowninScheduleH.107!LSEsshallmakethiselectiononacustomer-by-customerbasis,thuspermittingLSEstodiversifytheirsourcesofelectricitysupply. Costsshallbedeductedfrombundledratesasfollows:twenty(20)percentuponcommencementoftheEnergyandCapacitystageoftheRetailAccessProgram,andanadditionaltwenty(20)percentcommencingeverytwelve(12)monthsthereafter.-"56.IftheStatewideEnergyandCapacityMarketisnotfullyinplaceasofJuly1,1998,theCompanyshall,afterconsultationwithinterestedParties,beauthorizedtochargeratesfordistributionaccessthatwillbeapproximatelyequal,onaverage,totheratesthatwouldapplytobundledretailservicelessretailingcostsandtheper-unitmarketpriceofenergyandcapacity,asdefinedatthepointsatwhichtheCompany'stransmissionsysteminterconnectswiththeStatewidetransmissionsystem.-""Theserateswillapplytodistributionaccessserviceforaperiodnolongerthantwelve(12)monthsafterthefullimplementationoftheStatewideEnergyandCapacityMarket.TheCompanywillnotinterferewithorinanywayseektodelaytheimplementationoftheStatewideEnergyandCapacityMarket.,TheappropriateratesforLSEspurchasingenergyfromtheCompanyshallbedeterminedconsistentwiththisparagraph.108!Thetotalper-unitreductionfrombundledrateswillaverage3.2centsperKWH.ThisfigureincludesbothretailingcostsandTo-GoCostsofnon-nuclearenergysources.ScheduleAshows,forillustrativepurposes,theaveragedistributionaccessrevenuesperKWHbyvoltagelevel,withoutaccountingforratedesign,foreachyearoftheEnergyandCapacitystageoftheProgram.TheactualdistributionaccessratesshallbefiledwiththeCommissionastariffchanges.109!TheCompanyshallfileappropriatetariffleavestoeffectsuchchangeandtheapprovalprocessthereforshallbelimitedtoverificationofthechangesreflectedtherein.Thesameprocedureshallapplytochangespursuanttoparagraph57,infra.

0~e 57.UponextensionofeligibilityfortheRetailAccessProgramtoallretailcustomersonJuly1,2002,theCompanyshallbeauthorizedtomodifyitsdistributionaccessratessoastoholdconstantthedegreetowhichitsTo-GoCostsareatriskforrecoverythroughthemarket.-""ThePartiesagreetomeetbeforeJuly1,2001todiscussfutureratemakingplans.If,duringtheoperationoftheEnergyandCapacityStageoftheRetailAccessProgram,themarketpriceofenergyandcapacitymeasuredattheCompany'sinterconnectionswiththeStatewidetransmissionsystem,exceedsanaverageof3.2centsperKWHonapersistentandsustainedbasis,thePartieswillmeettodiscussthepotentialaccelerationoftheRetailAccessProgramimplementationschedule,theassociatedconditionsandlimitationsoncustomerparticipationandcontinuedrecoveryofnuclearcostsintheevent0ofasubsequentdecreaseinmarketprices,subjecttotheprovisionsofparagraph23,~sura.~Recirocitv58.IntheeventthatRG&Eisrequestedtopermitaccessbyanelectricutilityoraffiliate-""ofsuchutilitywhereanaffiliateofRG&Ewouldbedeniedcomparableaccesstotheserviceterritoryofsuchotherutilityorutilityaffiliate,RG&Eshallhavethe1101Recoveryofnon-nuclearTo-GoCostsshallcontinuetobethroughthemarket,exceptthatpropertytaxesaretobephasedoutofregulatedrates-asdescribedinparagraph55,~sura.ForpurposesofthisSettlement,"utilityaffiliate"shallmeananyentityhavinganyownership,partnership,jointventureorothercommonenterpriseinterestwithautilityinwhicheitherentityhasmorethanfive(5)percentownershipintheotherorinanyoftheforegoingentities. righttopetitiontheCommissionforanorderrequiringthatsuchotherutilityprovidetheCompany'saffiliatecomparableaccessorprecludingtheotherutilityoritsaffiliatefromparticipatinginRG&E'sRetailAccessProgramuntilsuchtimeasaccessisprovidedtoRG&E'saffiliate.-""ThefilingofsuchpetitionshalloperateautomaticallytostayparticipationinRG&E'sProgramuntilthematterisdecidedbyanorderoftheCommissiononthepetition.ReturntoRLSE59.CustomerswhohaveparticipatedintheRetailAccessProgramshallbepermittedtoreturntoserviceundertheRegulatedLoadServingEntity("RSLE")-""tariff;provided,however,thatRG&Eshallbepermittedtoestablishreasonablemeasures,includingbutnotlimitedtotimeandfrequencylimitsonswitching,topreventcustomersfrom"gaming"theProgram.DuringtheEnergyOnlystage,RG&Ewillallowsuchreturningcustomerstotakeserviceatregulatedretailrates.DuringtheEnergyandCapacitystage,iftheCompany'sincrementalcostsofsupplyingenergyandcapacityaredifferentfromthecostsofenergyandcapacityembeddedinregulatedretailrates,theCompanyshallbepermittedtochargesuchcustomerstheequivalentofregulatedretailratesadjustedfortheincrementalll2/ll3/ThePartiesagreethattheCommissionmaybelimitedbylawintheactionsitmaytakewithrespecttonon-NewYorkStateentitiesandtheirprograms.Totheextentthatanysuchentitymaybetheobjectofapetition,asprovidedforherein,theCommissionshall,totheextentitislegallyabletodoso,takeactionconsistentwiththisparagraph.TheRLSEisdescribedinparagraph65,infra.

~O~e0,0e. costs(whetherpositiveornegative)ofprocuringenergyandcapacityonbehalfofsuchcustomers.Otherwise,suchcustomerswillpayregulatedretailrates.DuringtheEnergyandCapacitystage,RGAEshallhavenoobligationtomaintaincapacityforsuchcustomers.Newcustomerswillpaythesameratesandbeallowedtotakethesameservicesassuchreturningcustomers.EnvironmentalInformation60.RG&EandStaffshallworkwithLSEstodevelopandimplement,wherefeasible,meaningful,andcost-effective,ameansofprovidingcustomerswithinformationonthefuelmixandemissioncharacteristicsofthegenerationrelieduponbytheirIrespectiveLSEs.1DairvleaPro~ram61.ThepartiesagreethattheCompany'sintroductionoftheRetailAccessProgramto-eligiblefarmandfoodprocessorcustomersonFebruary1,1998(fivemonthspriortoitsstartingdateforothercustomers),theintroductionoftheProgramtothosecustomersoutsideofthecapswhichotherwiselimitparticipation,andtheprovisionofarateequaltothemarketpriceofenergyandcapacityplusretailingcosts(plus$0.006for residentialcustomers),satisfiestherateandtimingaspectsoftheCommission'sOrderEstablishingRetailAccessPilotProgramsissuedJune23,1997inCases96-E-0948etal.-""'ororateStructure62.RGkEshallseparateitsexistingoperations,eitherfunctionallyorstructurally,asindicated,andshallprovidefornewoperationsbyestablishingthefollowingactivity-basedunits:afunctionallyseparatedistributionunit("DISCO");ob.afunctionallyseparategeneratingunit("GENCO");c.afunctionallyseparateRegulatedLoadServingEntity("RLSE");d.astructurallyseparateUnregulatedLoadServingEntity("ULSE");ande.aHoldingCompany("HOLDCO").-""RG&Ewilldevelopandprovide,byJanuary1,1998,theaccountingtreatmenttobeappliedtotheforegoingunits.TheCompanywillmeetperiodicallywithStaffduringsuchdevelopmentperiodtokeepStaffapprisedofprogressandtoreceiveinput.PetitionofDairleaCooerativeInc.toEstablishan0en-AccessPilotProramforFarmaodFoodProcessorEtectricitCustomers(the"~Dairleacase").TheHOLDCOmay,attheCompany'soption,beafunctionallyseparateunitservingessentiallythesamepurposesofaholdingcompanyoritmaybealegallydistinctentityascontemplatedinparagraph67,infra.

~e DISCO63.TheDISCOshallcontinuetocarryonRG&E'stransmissionanddistributionservicewhichshallbeprovidedtoLSEs(RegulatedandUnregulated)pursuanttoregulatedtariffs.ExceptasotherwisedescribedinthisSettlement,DISCOratesshallincludethecostsofRG&Egeneratingfacilities-"andallcostsidentifiedinSectionVIIofRG&E'sOctober1Submission.-""ExcepttotheextentthatanyofRG&E'sgeneratingfacilities-"aresoldtounaffiliatedentities,ownershipofsuchfacilitiesshallremainwiththeDISCOeitherdirectlyorthroughownershipbytheDISCOoftheGENCO.GENCOi64.ExceptasotherwiseprovidedinthisSettlement,theGENCOshallberesponsibleforoperatingRG&E'sgeneratingfacilitiesandfortheirassociatedTo-GoCosts.RLSE65.TheRLSEshallprovidebundledserviceundertariffstocustomerswhoelecttocontinuereceivingbundledserviceorwhodonothaveapracticablealternative.TheRLSEshallcontinuetoserveasa"ProviderofLastResort"("POLR")untiltheCommissionapprovesanalternativemeansofprovidingsuchservice.AllcostsofPOLRservicethatare116/Seeparagraphs19through24,46,48and52,~sura.Seeparagraph15,~sura.IncludingRG&E'sinterestinanyjointlyownedgeneratingfacilities. currentlyincludedinbundledratesandarenotcollecteddirectlyfromcustomersoftheRLSEshallbecollectedinDISCOratesconsistentwithparagraph15,~sura.TheCompany'willworkwithStaffaftertheinitialimplementationoftheRetailAccessProgramtodevise.anexperimentalalternativewhichwillentailprovidingPOLRserviceonacompetitivebasis.ThisexperimentwillbeconductedduringthetermofthisSettlement.ULSE66.TheULSEshallbepermittedtofunctionasanenergymarketerandproviderofotherenergyservicesbothwithinandoutsideRGEcE'sutilityserviceterritory.TheULSEshallbepermittedtouseRGEcEinitsnameandmakeknownthatitisanaffiliateofRGEcE.Thenatureoftherelationshipsamongaffiliatedunitsorcorporationsisaddressedinthe"StandardsPertainingtoAffiliatesandtheProvisionofInformation"containedinScheduleIattachedhereto.HOLDCOandCaitalizationofUnreulated0erations67.ThePartiessupportRGkE'sPetitioninsubstantiallytheformofScheduleJ-""toestablishaholdingcompanystructureinwhichRG&Ewouldbepermittedtooperatethroughoneormoreregulatedcompaniesandoneormoreunregulatedcompanies,includingenergyservicecompanies("ESCOs")andLSEs.WhetherRGAEconductsitse'OrasimilarpetitionproposingtheformationofaHOLDCOwiththesameresult,butthroughadifferentstructure.

~.e 0unregulatedactivitiesthroughaHOLDCOoraseparatesubsidiaryofautilityparent,itshallbepermittedinitiallytofund,throughcash,loanguaranteesoradvances,suchactivitiesintheamountof$50million.Theprinciplesrelatingtotheinter-companyrelationships,codeofconduct,costallocations,protectionsandrestrictionsapplicabletoaholdingcompanyorcompetitivesubsidiaryarecontainedinScheduleI.AuthorizationtofundsuchunregulatedoperationsisgrantedwiththeapprovalofthisSettlement.Exceptforthe$50millionofinitialinvestment,orasotherwise-'""authorizedbytheCommission,RG&E'sregulatedBusinessSegmentswillneithermakeloansto,norguaranteeorprovidecreditsupportfortheobligationsofunregulatedaffiliates,andRG&E'sregulatedBusinessSegmentswillnotpledgeanyutilityassetsassecurityforloansorfinancingarrangementsforunregulatedactivities.1PetitionforRelief68.Intheeventthatanyofthefollowingconditionsoccursorislikelytooccur,RG&EoranyotherPartytothisSettlementshallhavetherighttopetitiontheCommissionforreviewoftheoperationofthisSettlementandappropriateremedialaction:a.Returnonequity,determinedonaRateYearregulatorybasisforallremainingregulatedoperations,fallsbelow8.5percentorincreasesabove14.5percent;I.e.,subsequenttoinitialinvestment. b.Pre-taxinterestcoveragefallsbelow2.5times;GovernmentalactionoccursthatcannotadequatelybeaddressedthroughtheprovisionsofthisSettlementpertainingtoMandates,includingbutnotlimitedto:ActionstakenbyFERCwithrespectto:jurisdictionoverfunctionstraditionallyunderstoodas"localdistribution"ofelectricity;ISOandPEfunctionsandtransactions;andQualifyingFacilityandIndependentPowerProducermatters.ii.ActionstakenbytheNRCwithrespectto:nuclear'decommissioning;nuclearwastedisposal;nuclearpowerplantoperatingandsafetyrequirements;andfinancialstandardsfornuclearpowerplantoperators.iii.NewYorkStateorfederallegislationpertainingto:energyindustryrestructuring;changestothePublicUtilityRegulatoryPoliciesAct;andchangestothePublicUtilityHoldingCompanyActof1935.i69.AnyPartyseekingreviewpursuanttotheprecedingparagraphshallhavetheburdenofshowingtotheCommission'ssatisfactionthatcontinuedoperationofthisSettlementastothespecificbasisforthatParty'spetitionisunjustorunreasonable.Insuchevent,theCommissionmaysuspendormodifyanyportionsofthisSettlementortakeor0" oe.

i4-55-refusetotakeanyotheractionpermittedbylawunderthecircumstancesastheythenexist,thetermsandprovisionsofthisSettlementnotwithstanding.70.ThePartiesacknowledgethattheCommission,pursuanttoitsstatutoryresponsibility,onitsownmotionoronrequestofanyparty,reservestheauthoritytoactontheleveloftheCompany'sratesiftheCommissiondeterminesthatunforeseencircumstanceshaverenderedtheCompany'sratesorreturnoninvestmentunreasonable,inadequateorexcessivefortheprovisionofsafeandadequateservice.FilinReuirements71.RG&EshallfilewiththeCommission,notlaterthanSeptember30followingeachRateYearsubjecttothisSettlement,(a)acalculationofregulatoryearningseoncommonequityforsuchRateYear,whichfilingshallbeusedforpurposesofdeterminingwhethertheCompany'searningsexceedorfallbelowthe11.80percentreturndescribedinparagraph10,~sura,and(b)acalculationofanypenaltiesincurredpursuanttotheServiceQualityPerformanceProgramdescribedinparagraph44,~sura.72.RG&Eshallnot,asoftheeffectivedateofthisSettlement,berequiredtomakeanyofthefilingsorcomputationsrequiredbythe1996Settlement.73.Within90daysofapprovalofthisSettlement,theCompanywillfilewithStaffaplanoutliningthemannerinwhichtheCompanywillcarryoutRetailAccessProgramphase-in.Suchaplanshouldinclude,butnotbelimitedto,acustomereducation planandacustomerapplicationprocedureforeachstageoftheRetailAccessProgram.TheCompanywillconsultwithStaffandthePartiespriortofilingsuchaplan.DisutcResolution74.IntheeventofanydisagreementovertheinterpretationofthisSettlementortheimplementationofanyoftheprovisionsofthisSettlement,whichcannotberesolvedinformallyamongtheParties,suchdisagreementshallberesolvedinthefollowingmannerunlessotherwiseprovidedherein:ThePartiesshallpromptlyconveneaconferenceandingoodfaithshallattempttoresolvesuchdisagreement.IfanysuchdisagreementcannotberesolvedbytheParties,anyPartymaypetitiontheCommissionforreliefonadisputedmatter.eBindinEffectofSettlement75.ThisSettlementrepresentsanegotiatedagreementand,exceptasotherwiseexpresslystatedherein,noneofthePartiesshallbedeemedtohaveapproved,agreedto,orconsentedtoanyprinciple,methodologyorinterpretationoflaw,underlyingorsupposedtounderlieanyprovisionhereof,andthisSettlementshallnotbecitedorrelieduponwithrespectto.anymattersotherthanthosespecificallyaddressedherein.

0~-e SuersedinPriorSettlements76.Exceptasexpresslyprovidedotherwiseherein,thisSettlementshall,uponapprovalbytheCommission,supersedetheDSMSettlementandthe1996Settlement.ModificationofSettlement77.ApprovalbytheCommissionofthisSettlementshallconstituteapprovalofallofitsterms.IftheCommissionapprovesthisSettlementinitsentiretyormodifiesitinamanneracceptabletotheParties,thisSettlementshallbeimplementedinaccordancewithitsterms.BecausethisSettlementisanintegratedwhole,witheachprovisioninconsiderationfor,insupportof,anddependentontheothers,anyattempttomodifyitstermsmayfrustrateitspurpose.Thus,iftheCommissiondoesnotapprovethisSettlementinitsentirety,withoutoImodification,eachofthePartiesreservestherighttowithdrawitsacceptancebyservingwrittennoticeontheCommissionandtheotherPartiesandtorenegotiateand,ifnecessary,tolitigate,withoutprejudice,anyorallissuesastowhichsuchPartyagreedinthisSettlement;suchPartyshallnotbeboundbytheprovisionsofthisSettlement,asexecutedorasmodified,andthisSettlementshallnottakeeffect.EffectofAreement.I2,78.ThisSettlementcallsforRGAEtomakemajor,andinsomecasesirreversible,commitmentsforthepurposeoffurtheringthegoaloftheCommissiontorestructuretheelectricindustryandtoreduceelectricratesintheStateofNewYork.RG8cE, e'eO.'0 byexecutingthisSettlement,ismakingsuchcommitmentswiththeexpectationth'atthePartiesandtheCommissionshallcontinuetohonortheassurancesembodiedinthisSettlement.Specifically:a.AspartofthisSettlement,RG8cEhasagreedtomakecommitments,asdescribedherein,includingbutnotlimitedtothefollowing:(i)agreementtowithdrawfromthethreeArticle78proceedingsdescribedinparagraph79,infra;(ii)significantratereductions;(iii)therestructuringoftheCompany'sbusiness;(iv)openingoftheCompany'sserviceterritorytocompetitors;(v)providingretailaccesstocustomers;and(vi)resolvingtheKaminematterwhilecontrollingitsimpactonrates.b.RGAEhasmadeeachsuchcommitmentinreturnforrateandotherassurancesbytheCommission,includingbutnotlimitedtothefollowing:(i)excepttotheextenttheCompanyhasexpresslyagreedhereintoplacegenerationatmarketrisk,-""RGEcEshallhaveareasonableopportunitytorecoverallprudentlyincurredinvestmentandexpensesandtoearnareasonablereturnoninvestments;(ii)theCompanyshallhaveaSeeparagraph48,~sura.

0ry~i reasonableopportunitytorecovertransitioncosts;(iii)ratetreatmentfortheCompany'sinvestmentinnuclearfacilitiesshallbeasdescribedherein;(iv)RG&Eshallbeaffordedareasonableopportunitytofundandtoundertakecompetitivebusinessactivities;and(v)theCompanyisentitledtorecoverKaminecosts.c.ThePartiesrecognizethatRGEcE'sparticipationinthisSettlementisbasedonthepremisethat,inadoptingthisSettlement,theCommissionwillfind,insubstance,that:(i)theforegoingcommitmentsandassurancesareinextricablyinterrelated;(ii)theratesestablishedpursuanttothisSettlementarejustandreasonabletobothcustomersandshareholdersthroughJune30,2002;(iii)thereasonableopportunityforRGB.Etocontinuetorecovertheprudentlyincurredcostsreferredtoinsubparagraphb,~sura,-'"-'eyondthetermofthisSettlementisjustified;(iv)exceptasnotedherein,thisSettlementconstitutesfullcompliancewiththeCommission'sOtherthanthefuturecostsofcompetitivebusinessesreferencedinsubparagraphb(iv),~sura. policiesidentifiedinOpinionNo.96-12;-""(v)thisSettlementisinthepublicinterest;and(vi)thereisaclearneedtoreducetheburdensimposedbyMandates.WithdrawalfromLitiation79.Inconsiderationfortheforegoing,RG&E,uponfinalapprovalofthisSettlementbytheCommission,-'"'greestopetitiontheAppellateDivisionoftheSupremeCourtforpermissiontowithdrawasapartytotheappealintheArticle78proceedingbroughttochallengeOpinionNo.96-12,EnervAssociationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.5830-96),andtowithdrawtheCompany'spendingArticle78IproceedingsbroughttochallengetheCommission'sactionwithrespectto:(a)the1996eSettlement,RochesterGasandElectricCororationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.6616-96);and(b)theCommission'sJune23,1997OrderEstablishingRetailAccessPilotProgramsinCases96-E-0948etal.,RochesterGasandElectricCororationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.6531-97).123!124/FullcompliancepertainingtothefollowingtasksoutlinedinOpinionNo.96-12hasnotbeeneffectedbythisSettlement:(a)afilingtodistinguishandclassifytransmissionanddistributionfacilities;(b)theproposedresolutionofmarketpowerproblemsasrelatedtoLoadPockets,asdiscussedinparagraph25,~sura;(c)compliancewithfutureESCOrequirements(~e,oversight,meteringandbilling);(d)compliancewithfutureISOrequirements;and(e)continuationofpublicforumstoprovideeducationandconsumerinputrelatedtocompetitionandtheneedswithinRG&E'sserviceterritory.I.e.,afteranyappealsfromsuchapprovalareexhaustedorthetimetoappealhasexpired,whicheverislater.'

0'0ry WithdrawalofthetwoRochesterGasandElectriccasesandRGkE'swithdrawalasapartytotheEnerAssociationcaseshallbeeffectedthroughStipulationsofWithdrawal,mutuallyagreedtobyRGAEandtheCommission.UntiltheaforementionedpetitionwithrespecttotheEnervAssociationcaseisgranted,theCompanywilldiscontinueitslitigationactivitiestotheextentthatitisabletodosowithoutprejudicingitsrightsinanyofthethreeArticle78proceedings.WO:ROCII:II3098 RochesterGasandElectricCorporationCases94-E-09S2and96-K%898AmendedandRestatedSettlementAgreementOctober23,1997ThepartywhosesignaturefollowssubscribestotheforegoingAmendedandRestatedSettlcmcntAy'ccmcnLStaffoftheStateofNewYorkDepartmentofPublicServiceBy:lRobertL.Whitaker,DirectorOfficeofRegulatoryEconomics RochesterGasandElectricCorporationCases94-E-0952and96-E-OS98AmendedandRestatedSettlementAgreementOctober23,1997ThepartywhosesignaturefollowssubscribestotheforegoingAmendedandRestatedSettlementAgreement.RochesterGasandElectricCorporationBy:WilliamJ.ddyController.0ROCII:I02096

'0'40' RochesterGasandElectricCorporationCases94-E-0952aud96-~898AmendedandRestatedSettlementAgreementOctober23,1997ThepartywhosesignaturefollowssubscribestotheforegoingAmendedandRestatedSettleinentAgreement.TheJointSupportersBy:RubenS.BrownTheECubedCompany RochesterGasandElectricCorporationCases94-E-09'Q9&K%898AmendedandRestatedSettlementAgreementOctober23,'1997ThepartywhosesignaturefollowssubscribestotheforegoingAmcndcdandRestatedSettlementAgreement.NationalAssociationofEnergyServiceCompaniesBy:RunS.Brown SCHEDULEARATE<S(INCLUDINGILLUSTRATIVERATES)FORE<LECTRICSERVICEROCIl:l00274 SCHEDULEARATES(INCLUDINGILLUSTRATIVERATES)FORELECTRICSE<RVICEALLOCATIONOFREDUCTIONSROCII;I00214

,)RochesterGasandElectriorationAllocationofRateReductionsVoltageClassPresentRevenue(000's)PresentPrice7/1/97RateReduction(000's)PercentReductionKamineRecovery(000's)NetReduction(000's)NetPercentReductionNewRevenues(000's)NewPriceForecastSales(MWH)Industrialsubtotal$76,321$0.0623$4410.58%4410.58%75,880$0.06191,224,884subtra-commsubtra-secPfl-Prlpri-secsec-sec39,28813,34249,322112,697379.6580.07440.08830.08430.10080.1233224732615791,9160.57%0540.53%P.51%050%224732615791,916057%054%0.53%051ogop50%39,06313,27049,061112,117377,7420.07400.08790.08380.10030.1227528,206151,039585,2631,117,5383,079,691subtotal$594,307$0.1088$3,0530.51%$3,0530.51%$591,254$0.10835,461,736Total$670,628$0.1003$3,4940.52%$3,4940.52%$667,134$0.09986,686,620printed:10/22/97Page1

'e'e4 RochesterGasandE(ectriorationAllocationofRateReductions0VoltageClassPresentRevenue(000's)PresentPrice7/1/98RateReduction(000's)PercentReductionKamineRecovery(000's)NetReduction(000's)NetPercentReductionNewRevenues(000's)NewPriceForecastSales(MWH)industrialsubtotal$76,321$0.0623$2,7523.61%6402,1122.77%74,209$0.06061,224;884subtra-commsubtra-secprlpflpri-secsec-secTotal39,28813,34249,322112,697379,658subtotal$594,307$670,6280.07440.08830.08430.10080.1233$0.1088$0.100312324491,0211,7955,608$10,105$128563.14%3.37%2.07%1.59%48%1.701.92%276793055841,6109563707161,2113.9982,854$7,2513.494$9,3632.43%2.77%1.45%107%1.05%38,33112,97248,607111,486375,6601.22%$587,0561.40%$661,2650.07260.08590.08310.09980.1220$0.1075$0.0989528,206151,039585,2631,117,5383,079,6915,461,7366,686,620printed:10/22/97Page2 000t'0e iQ)RochesterGasandElectriorationAllocationofRateReductionsVoltageClassPresentRevenue(000's)PresentPrice7/1/99RateReduction(000's)PercentReductionKamineRecovery(000's)NetReduction(000's)NetPercentReductionNewRevenues(000's)NewPriceForecastSales(MWH)industrialsubtotal$76,321$0.0623$69689.13%1,5485,4207.10%70,901$0.05791,224,884subtra-commsubtra-secpri-pripri-secsec-sec39,28813,34249,322112,697379,6580.07440.08830.08430.1008"0.12333,1511,0842,2063,65710,5488.02%8.13%4.47%3.24%2.78%6671917401,4123,8922,4848931,4662,2446,6566.32%6.70%2.97%199%1.75%36,80412,44947,856110,452373,0020.06970.08240.08180.09880.1211528,206151,039585,2631,117,5383,079,691subtotal$594,307$0.1088$20,6453.47%6,901$13,7442.31%$580,563$0.10635,461,736Total$670,628$0.1003$27.613418,449$19,1642.86%$651,464$0.09746,686,620printed:10/22/97Page3

'00

<+)RochesterGasandElectricorationAllocationofRateReductionsVoltageClassPresentRevenue(000's)PresentPrice7/1/00RateReduction(000's)PercentReductionKamineRecovery(000's)NetReduction(000's)NetPercentReductionNewRevenues(000's)NewPriceForecastSales(MWH)IndustrialsubtotalS76,321S0.0623-S10,47513.73%1,9248,55211.20%67,769S0.05531,224,884subtra-commsubtra-secpri-pripri-secsec-sec39,28813,34249,322112,697379,6580.07440.08830.08430.10080.1233S4,4341,5853,0945,16014,77511.29%11.88%6.27%4.58%3.89%8292379191,7554,8363,6051,3482,1753,4059,9399.17%10.10%4.41%3.02%2.62%35,68311,99447,148109,292369,7190.06760.07940.08060.09780.1201528,206151,039585,2631,117,5383,079,691subtotalS594,307S0.108829,0474.89%8,576$20,4713.44%S573,836S0.10515,461,736TotalS670,628S0.1003S39,5225.89%10,499S29,0234.33%S641,605S0.09606,686,620printed:10/22/97Page4 1o RochesterGasandElectricorationAllocationofRateReductionsVoltageClassPresentRevenue(000's)PresentPrice7/1/01RateReduction(000's)PercentReductionKamineRecovery(000's)NetReduction(000's)NetPercentReductionNewRevenues(000's)NewPriceForecastSales(MWH)industrialsubtotal$76,321$0.0623$1049113.75%1,9248,56811.23%67,753$0.05531,224,884subtra-commsubtra-secpflpflpri-secsec-secsubtotalTotal39,28813,34249,322112,697379,658$594,307$670,6280.07440.08830.08430.10080.1233$0.1088$0.1003$44351,5853,3877,38623,818$40,611$51,10211.29%11.88%6.87%6.55%6.27%6.83%8292379191,7554,8368,5767.62%10,4993,6061,3482,4685,63118,982$32,035$40,6029.18%10.10%5QQ%5PQ%5PQ%35,68211,99446,854107,066360,6760.06760.07940.08010.09580.11715.39%$562,272$0.10296.05%$630,025$0.0942528,206151,039585,2631,1175383.079,6915,461,7366,686,620printed:10/22/97Page5 SCHEDULEARATES(INCLUDINGILLUSTRATIVERATES)FORELE<CTRICSE<RVICE<RATEDE<SIGNROClI:l00274 ILLUSTRATIVERATEDESIGNTOBEPROVIDEDROCII:I00274 SCHEDULEARATES(INCLUDINGILLUSTRATIVE<RATES)FORELECTRICSERVICEDISTRIBUTIONACCE<SSRE<VE<NUE<SROC11:100274 ILLUSTRATIVEAVERAGEDISTRIBUTIONACCESSREVE<NUESTOBEPROVIDEDROCll:l00274 o

APPENDIXATOSCHEDULEAFLEXIBLEDISTRIBUTIONACCESSTARIFFOPTION1.TheCompanyshallhavetheoptiontonegotiatespecialcontractsfordistributionaccessservicewithLoadServingEntities("LSEs")thatservecustomersthathaveaviablecompetitivealternative.ThepurposeofthisoptionistoallowtheCompanytoparticipate,withLSEs,ineffortstoretainortoattractdistributioncustomersintheCompany'sserviceterritoryandtherebytobenefitalldistributioncustomers.A"competitivealternative"forthispurposeisdefinedasameansofmeetingelectricpowerneedswithoutmakinguseoftheCompany'sdistributionsystem,includingrelocationoutsidetheCompany'sserviceterritory.2.AsatransitionalarrangementforexistingSC-10customers,theCompanyshallhavethediscretiontoofferthefollowingtwooptions:ExtendthetermofanexistingSC-10contracttoJune30,2002,orb.OfferaprorateddistributiontariffdiscounttoanLSEthatservesthecustomer,fortheloadtakenbythatcustomer,throughJune30,2002.3.Theprorateddiscountwouldbecalculatedinthefollowingmanner: ~calculatetheaveragepriceperKWHforaparticularcontractatratesineffectattheendofitsterm-callthistheaveragecontractrate~calculatetheaveragepriceperKWHforthatsamecontractassumingtheapplicablebundledtariffrates-callthistheaveragefulltariffrate~CalculatethefulldiscountperKWH-thisisequaltotheaveragefulltariffrateminustheaveragecontractratepro-ratethefulldiscounttodistributionratesaccordingtothisformula:distributiondiscount=fulldiscountx(averagecontractrate-3.2cents/KWH)/averagecontractrate-"Forexample,iftheaveragefulltariffratewas8cents,theaveragecontractratewas7cents,thediscountattributedtodistributionrateswouldbe0.54cents.Theremainderwouldbeattributedin.essencetothecontestablecostof3.2cents.ROCII:I00274

SCHEDULE8E4LECTRICDEPARTMENTAMORTIZATIONS(IncludingDecommissioningAccruals)(000's)12MOS.JUNE199812MOS.12MOS.JUNE1999JUNE200012MOS.JUNE200112MOS.JUNE2002NUC.FUELSTORAGER&DSITEREMIDATIONDSM/HIECAPENTREPI,IIPENTREFIIIPENSIONDEF'DADJ.OTHERDEF'DPROJICESTORMSALESUSETAXAUDITNMIILITIGATION/GEREVENUETAXAUDITFASB112CISPLUSLASERLIGHTSHOWERAMEXCESSEARNINGSNMP2SHARINGJOB010NMPSREFUELOUTII4TOTAL$4,575(2,149)09,50000(38)2,2942,5461,642001,68401,6750000$21,729$4,832009,5000002,2942,5461,642001,684000000$22,498$5,103006,6060002,2942,5461,642001,684000000$19,875$5,390007,0000002,2952,5461,642001,684000000$20,557$5,692007,0000002,2952,5461,642000000000$19,175DECOMMISSIONINGACCRUALS'innaNineMile2$18,5123,646$18,5703,674$18,6313,705$18,6963,739$18,7653,775TOTALDECOM.ACCRUALS$22158$22244$22336.-$22435$22540'hederivationofdecommissioningaccrualsisdescribedinScheduleD.ROCInn3025

SCHEDULECMANUFACTURINGCLASSIFICATIONS(StandardIndustrialClassifications-DivisionD.Manufacturing)MajorGroup20FoodandKindredProductsIndustryGroupNo.201MeatProducts202DairyProducts203Canned,Frozen,andPreservedFruits,Vegetables,andFoodSpecialities204GrainMillProducts205BakeryProducts206SugarandConfectioneryProducts207FatsandOils208Beverages209MiscellaneousFoodPreparationandKindredProductsMajorGroup21TobaccoProductsIndustryGroupNo.211Cigarettes212Cigars213ChewingandSmokingTobaccoandSnuff214TobaccoStemmingandRedryingMajorGroup22IndustryGroupNoTextileMillProducts221BroadWovenandFabricMills,Cotton222BroadWovenFabricMills,ManmadeFiberandSilk223BroadWovenFabricMills,Wool(IncludingDyeingandFinishing)224NarrowFabricandOtherSmallwaresMills:Cotton,Wool,Silk,andManmadeFiber225KnittingMills226DyeingandFinishingTextiles,ExceptWood,FabricsandKnitGoods227CarpetsandRugs228YarnandThreadMills229MiscellaneousTextileGoods MajorGroup23AarelandOtherFinishedProductsMadefromFabricsandSimilarIndustryGroupNoMaterials231Men'sandBoys'uits,Coats,andOvercoats232Men'sandBoys'urnishings,WorkClothing,andAlliedGarments233Women',Misses',andJuniors'uterwear234Women',Misses',Children',andInfants'ndergarments235Hats,Caps,andMillinery236Girls',Children',andInfants'uterwear237FurGoods238MiscellaneousApparelandAccessories239MiscellaneousFabricatedTextileProductsMajorGroup24IndustryGroupNo.LumberandWoodProductsexcetFurniture241Logging242SawmillsandPlaningMills243Millwork,Veneer,Plywood,andStructuralWoodMembers244WoodContainers245WoodBuildingsandMobileHomes249MiscellaneousWoodProductsMajorGroup25IndustryGroupNoFurnitureandFixtures251HouseholdFurniture252OfficeFurniture253PublicBuildingandRelatedFurniture254Partitions,Shelving,Lockers,andOfficeandStoreFixtures259MiscellaneousFurnitureandFixturesMajorGroup26IndustryGroupNoPaerandAlliedProducts261PulpMills262PaperMills263PaperboardMills265PaperboardContainersandBoxes267ConvertedPaperandPegboardProducts,ExceptContainersandBoxesMajorGroup27IndustryGroupNoPrintinPublishinandAlliedIndustries271Newspapers:Publishing,orPublishingandPrinting272Periodicals:Publishing,orPublishingandPrinting273Books274MiscellaneousPublishing275CommercialPrinting 00~ (Cont'd)MajorGroup27IndustryGroupNoPrintinPublishinandAlliedIndustries276ManifoldBusinessForms277GreetingCards278Blankbooks,LooseleafBinders,andBookbindingandRelatedWork279ServiceIndustriesforthePrintingTradeMajorGroup2SIndustryGroupNoChemicalsandAlliedProducts281IndustrialInorganicChemicals282PlasticsMaterialsandSyntheticResins,SyntheticRubber,CellulosicandOtherManmadeFibers,ExceptGlass283Drugs284Soap,Detergents,andClearingPreparations;Perfumes,Cosmetics,andOtherToiletPreparations285Paints,Varnishes,Lacquers,Enamels,andAlliedProducts286IndustrialOrganicChemicals287AgriculturalChemicals289MiscellaneousChemicalProductsMajorGroup290IndustryGroupNo.PetroleumRefininandRelatedIndustries291PetroleumRefining295AsphaltPavingandRoofingMaterials299MiscellaneousProductsofPetroleumandCoalMajorGroup30IndustryGroupNoRubberandMiscellaneousPlasticsProducts301TiresandInnerTubes302RubberandPlasticsFootwear305Gaskets,Packing,andSealingDevicesandRubberandPlasticsHoseandBelting306FabricatedRubberProducts,notElsewhereClassified308MiscellaneousPlasticsProductsMajorGroup31IndustryGroupNo.LeatherandLeatherProducts311LeatherTanningandFinishing313BootandShoeCutStockandFindings314Footwear,ExceptRubber315LeatherGlovesandMittens316Luggage317HandbagsandOtherPersonalLeatherGoods319LeatherGoods,NotElsewhereClassified 000o 4MajorGroup32StoneClayGlassandConcreteProductsIndustryGroupNo.321FlatGlass322GlassandGlassware,PressedorBlown323GlassProducts,MadeofPurchasedGlass324Cement,Hydraulic325StructuralClayProducts326PotteryandRelatedProducts327Concrete,Gypsum,andPlasterProducts328CutStoneandStoneProducts329Abrasive,Asbestos,andMiscellaneousNonmetallicMineralProductsMajorGroup33PrimaMetalIndustries331SteelWorks,BlastFurnaces,androllingandFinishingMills332IronandSteelFoundries333PrimarySmeltingandRefiningofNonferrousMetals334SecondarySmeltingandRefiningofNonferrousMetals335Rolling,Drawing,andExtrudingofNonferrousMetals336NonferrousFoundries(Castings)339MiscellaneousPrimaryMetalProductsMajorGroup34FabricatedMetalProductscxcctMachine;indTransortationIndustryGroupNo.~Euiment341MetalCansandShippingContainers342Cutlery,Handtools,andGeneralHardware343HeatingEquipment,ExceptElectricandWarmAir;andPlumbingFixtures344FabricatedStructuralMetalProducts345ScrewMachineProducts,andBolts,Nuts,Screws,Rivets,andWashers346MetalForgingsandStampings347Coating,Engraving,andAlliedServices348OrdnanceandAccessories,exceptVehiclesandGuidedMissiles349MiscellaneousFabricatedMetalProductsMajorGroup35IndustryGroupNoIndustrialandCommercialMachineandComuterKuiment":SlEnginesandTurbines')52FarmaiidGardenMachineryandEquipment 00 (Cont'd)MajorGroup35IndustrialandCommercialMachineandComuterEuimentIndustryGroupNo.353Construction,Mining,andMaterialsHandlingMachineryandEquipment354MetalWorkingMachineryandEquipment355SpecialIndustryMachinery,exceptMetalworkingMachinery356GeneralIndustrialMachineryandEquipment357ComputerandOfficeEquipment358RefrigerationandServiceIndustryMachinery359MiscellaneousIndustrialandCommercialMachineryandEquipmentMajorGroup36ElectronicandOtherElectricalEuimentandComonentsE<xcetComuterEuimentIndustryGroupNo.361ElectricTransmissionandDistributionEquipment362ElectricalIndustrialApparatus363HouseholdAppliances364ElectricLightingandWiringEquipment365HouseholdAudioandvideoEquipment,andAudioRecordings366CommunicationsEquipment367ElectronicComponentsandAccessories369MiscellaneousElectricalMachinery,Equipment,andSuppliesMajorGroup37IndustryGroupNoTransortationE<uiment371MotorVehiclesandMotorVehicleEquipment372AircraftandParts373ShipandBoatBuildingandRepairing374RailroadEquipment375Motorcycles,Bicycles,andParts376GuidedMissilesandSpaceVehiclesandParts379MiscellaneousTransportationEquipmentMajorGroup38MeasurinAnalzinandControllinInstrumentsPhotorahicIndustryGroupNoMedicaland0ticalGoodsWatchesandClocks381Search,Detection,Navigation,Guidance,Aeronautical,andNauticalSystems,Instruments,andEquipment382LaboratoryApparatusandAnalytical,.Optical,Measuring,andControllingInstruments384Surgical,Medical,andDentalInstrumentsandSupplies385OphthalmicGoods386PhotographicEquipmentandSupplies387Watches,Clocks,ClockworkOperatedDevices,andParts MajorGroup39MiscellaneousManufacturinIndustries391Jewelry,Silverware,andPlatedWare393MusicalInstruments394Dolls,Toys,GamesandSportingandAthleticGoods395Pens,Pencils,andOtherArtists'aterials396CostumeJewelry,CostumeNovelties,Buttons,andMiscellaneousNotions,ExceptPreciousMetal399MiscellaneousManufacturingIndustriesROC11:101302 SCHEDULEDNUCLEARDECOiVIMISSIONING1.Itis-agreedthattheprojectedcostofdecommissioningRG&E's100%ownedGinnaNuclearPowerPlantanditsshareofthecostofdecommissioningNineMilePoint2,shallbebasedonsite-specificstudiesandmethodssubmittedbytheCompany.2.ThestudyforGinnaestimatesthatthedecommissioningofGinnawillcost$296,303,000in1995dollars.Ifthisamountisinflatedby4.0%annually,theprojectedcostofdecommissioningthefacilityin2009is$513,100,000.3.ThestudyforNineMilePoint2estimatesthatdecommissioningRG&E's14%shareofNineMilePoint2willbe$112,840,000in1995dollars.Ifthisamountisinflatedby4.0%annually,theprojectedcostofRG&E'ssharein2026is$380,624,000.4..Theafter-taxinterestratesprojectedtobeearnedbytheamountscollectedfordecommissioningtheseplantsare6.40%foreachplant'sexternalfundestablishedtoqualifyforacurrenttaxdeductionunderInternalRevenueService("IRS")rulesand4.77%foreachplant'snon-IRSqualifiedexternalfund.TheratesestablishedpursuanttotheSettlementtowhichthisScheduleisattachedarebasedonfundingthecontaminatedportionsoftheunits,asrequiredbytheNuclearRegulatoryCommission($470,119,000for.Ginnaand$343,318,000forNineMilePoint2),usingexternalfundingmethods.5.TheannualexpenseallowanceincorporatedinratesforGinna,basedonexternalfunding,is$17,362,000fortherateyearsendingJune1998throughJune2002.The annualexpenseallowanceincorporatedinratesforNineMilePoint2,basedonexternalfunding,is$3,374,000forrateyearsendingJune1997throughJune2002.Theseamountsaretobedepositedinseparateexternalfundssetupsolelyforthepurposeofaccumulatingdecommissioningfundsforeachplant.~~6.AdditionalannualexpenseallowancesincorporatedinratesforGinna,basedoninternalfunding,are$1,150,000,$1,208,000,$1,269,000,$1,334,000,and$1,493,000forrateyearsendingJune1998,1999,2000,2001and2002,respectively.TheadditionalannualexpenseallowancesincorporatedinratesforNineMilePoint2basedoninternalfunding,are$272,000,$300,000,$331,000,$365,000,and$401,000forrateyearsendingJune1998,1999,2000,2001and2002,respectively.Theseadditionalamountsareforthedecommissioningandremovalofnon-contaminatedfacilitiesatGinnaandNineMilePoint2.ROCII:I0055I o

SCHEDULEELARGECUSTOMERCREDITPROGRAMExceptasotherwiseprovidedinthisSettlement,thisScheduleEsupersedesthe"DemandSideManagementPlans"containedinthe1996SettlementasScheduleF.ThisScheduleEisintendedtocontinuetheLargeCustomerCreditProgram("LCCP")totheextentthatDSMcostscontinuetoberecoveredinrates,whetherthroughanSBCorotherwise.AllSCNo.8customerswho,underthe1996Settlement(ScheduleF),wereeligibletoexercisetheoptionnottoparticipateinRG&E'sDSMprogramsandwho,infact,exercisedsuchoption,shallcontinuetobecoveredbytheLCCPpursuanttothetermsofthisSchedule.TotheextentthatRG&EmayberequiredtofileaDSMPlanforanyperiod~withinthetermofthisSettlementandtheCompanyisnotprohibitedfromcontinuingtheLCCP,RG&EshallprovidenoticeofthisoptiontoeligiblecustomersatleastoncepriortothecommencementofeachsuchDSMPlan.Suchnoticeshallbegivennotearlierthansixty(60)norlaterthanthirty(30)dayspriortothecommencementofeachSuchDSMPlan.Eligiblecustomersshallhavethirty(30)daysaftersuchnoticetoelectwhethertoexercisesuchoption.SuchcustomersshallceasetobeeligiblefordirectparticipationinanyaspectofRG&E'sDSMprograms.TheelectionsofsuchcustomersshallbeeffectivefortheremainingtermofthisSettlement.2.ThroughoutthetermofthisSettlement,anySCNo.8customerwhoelectsnottoparticipateinRG&E'sDSMprogramsandwhocomplieswiththecriteriafortheLCCPshallreceiveabillingcreditof$0.0003perKWHofconsumptionfromthelatterof thedateofcomplianceorthedateofcommencementoftheDSMPlantowhichthecustomer'selectionnottoparticipaterelates;providedthatsuchcustomershallnotreceiveanybillingcreditapplicabletothecalendaryearduringwhichsuchcustomerreceivespaymentsfromRG&Eunderthatyear'sDSMprograms.-"TheforegoingcreditshallbesubjecttorecalculationintheeventthatRG&E'sspendingonDSMprogramchangesmaterially.Inotherwords,ifacustomerreceivesapaymentin1997,offeredpursuanttoRG&E'sinitial(January1997throughJune199S)Flan,thecustomercannotreceiveabillingcreditduringtheperiodcoveredbythatPlan.Ontheotherhand,acustomerwhoreceivesapaymentin1997pursuanttoaplanineffectforaprioryearwillbepermittedtoreceiveabillingcreditin1997ifthatcustomerotherwisequalifiesfortheelection.ROCII:l02N3 SCHEDULEFLOW-INCOMEPROGRAMThisScheduleFsupersedestheLow-IncomeProgramcontainedinthe1996SettlementasScheduleG.Customerualifieations1.TheLow-IncomeProgram(the"Program")shallbeavailabletoRG&Ecustomerswhomeetallofthefollowingcriteria:a.ThecustomermustbeagasheatingorelectricheatingcustomeroftheCompany.b.Thecustomermustbepayment-troubledorinarrears.c.ThecustomermustbeHEAPeligible.-"d.Thecustomermustagreetoreceiveahomeenergyauditattheappropriateresidence.e.Thecustomermustagreetoparticipateinhouseholdbudgetmanagementtraining.IntheeventthattheHEAPprogramisdiscontinued,RGEcEshallapplycomparablecriteria.

e- T~G2.InadditiontoidentifyingcustomerswhomeettheProgramcriteriastatedinparagraph1,~sura,RG&EshallmakeaparticularefforttoidentifyqualifiedelderlycustomerswhocouldbenefitfromtheProgram.3.RG&Eshallworkwithappropriatesocialagenciesandnot-for-profitorganizationstoidentifyappropriatecustomersforparticipationintheProgram.~Pro~ramSize4.Duringthefirstrateyearunderthe1996Settlement(July1,1996throughJune30,1997),RG&Eshallhaveenrolled350participantsintheProgram;duringthefirstrateyearundertheinstantSettlement(July1,1997throughJune30,1998),RG&Eshallhaveenrolled700participants;andduringthesecondrateyearofthisSettlement(July1,1998throughJune30,1999),RG&Eshallhaveenrolled1,000participants.-"SuchagenciesandorganizationsincludetheOfficefortheAging,RuralOpportunitiesInc.,theChildAssistanceProgramoftheDepartmentofSocialServices("DSS")andlocalDSSoffices.RG&EshallmakeareasonableefforttoreplacecustomerswhodropoutoftheProgram.

ProramCpmoncnts5.EachparticipantwhocomplieswiththeProgramcriteria'shallbeeligibletoparticipate,andshallbeencouragedtoparticipate,intheProgramforthreeyears.6.DuringthefirstyearofparticipationintheProgram,eachparticipantshallbeexpectedtomakemonthlypaymentsoncurrentbillsofatleast75percentofthebudgetbillingamount.Theactualamounttobepaidshallbegreaterthan75percentifthecustomerisfoundtobecapableofmakingsuchgreaterpayments.Theremainderofsuchmonthlypaymentsshallbeforgivenduringthecustomer'sparticipationintheProgram.Duringtl>esecondandthirdyearsofparticipation,eachcustomershallbeexpectedtomakefullpaymentofthebudgetbillingamount.7.AparticipantwhohascompliedwithallProgramcriteriaforatleastonefullyearshallreceiveforgivenessof25percentofthecustomer'sarrearsbalance.AparticipantwhohascompliedwithallProgramcriteriaforatleasttwofullyearsshall'receiveforgivenessofanother25percentofthecustomer'sarrearsbalance.AparticipantwhohascompliedwithallProgramcriteriaforatleastthreefullyears,andthushascompletedtheProgram,shallreceiveforgivenessoftheremaining50percentofthecustomer'sarrearsbalance.8.EachProgramparticipantshallreceiveenergyconservationandutilizationeducationthroughreceiptofaSavingPowerenergyauditandEndServeanalysisorsimilarservices.

~-e0, 49.EachProgramparticipantshallreceivetraininginhouseholdfinancialmanagement,budgetingandwisepurchasingpractices..10.CollectionactivityshallbesuspendedduringtheperiodthattheparticipantremainsincompliancewithProgramcriteria.~~11.ProgramparticipantsshallbedirectedtoappropriateDSMprogramsandweatherizationprograms,ifany.CostRecove12.ThecostoftheProgramshallberecoveredentirelytliroughresidentialelectricrates.13.Forpurposesofcostrecovery,arrearsforgivenessshallbeassumednottoexceed$850percustomer.14.Recoverableadministrativecostsshallnotexceed20percentoftotalProgramcostswhichshallbecalculatedbyrecognizingarrearsforgivenessintheyearinwhichaparticipantenterstheProgram.Evaluation15.RG&Eshallevaluatethecost-effectivenessoftheProgramandreporttheresultstotheCommissionbeforetheendoftheSettlementperiod.SuchevaluationshallincludeanalysisofthebenefitsoftheProgram.ROCII:I0I036

SCHEDULEGSERVICEQUALITYPERFORMANCEPROGRAMThisSchedule6supersedestheServiceQualityPerformance("SQP")Programcontainedinthe1996SettlementasScheduleH.Overview1.RG&EshallcontinuetheSQPProgramprovidingforpenaltiesofuptoatotalof$1,250,000forfailuretoachievetheminimumacceptablecriteriafortheservicequalitymeasuresdescribedbelow.Thespecificoperationofthepenaltysystemisdescribedbelow.2.TheSQPProgramshallconsistoftwoprincipalcomponents,anElectricReliabilitycomponentandaCustomerServicecomponent,asdescribedbelow.ElectricReliabili3.ElectricReliabilityshallbemeasuredintermsoftheSystemAverageInterruptionFrequencyIndex("SAIFI")andtheCustomerAverageInterruptionDurationIndex("CAIDI"),calculatedinaccordancewithCommissionrequirements.-"Measurementshallbeonaweightedaverage"-Company-widebasis.ForSAIFI,theminimumacceptablelevelshallbe1.27.ForCAIDI,theminimumacceptablelevelshallbe1.73.SeeCases90-E-1119and95-E-0165.Individualdistrictdataincludedshallbeweightedbythenumberofcustomersrepresented.

4.ThemaximumpenaltyforSAIFIandCAIDIshallbe$375,000each.5.ForSAIFI,penaltiesshallbegraduated,applyingasfollows:25percentofthemaximumpenaltywhenperformanceexceedstheminimumacceptablelevel;50percentofthemaximumpenaltywhenperformanceexceeds105percentoftheminimumacceptablelevel;andthefullpenaltywhenperformanceexceeds110percentoftheminimumacceptablelevel.ForCAIDI,thefullpenaltyshallapplywhenperformanceexceeds110percentoftheminimumacceptablelevel.CustomerService6.CustomerServiceshallbemeasuredintermsofthesixcriterialistedinthefollowingtable,alongwiththerespectiveperformancelevelsbelowwhichtheindicatedpercentagesofthemaximumallowablepenaltywouldbeimposed:' Measure25%Penalty,50%Penalty100%Penalty'ppointmentsKept99.0%CallsAnsweredw/in30Seconds73%71.5%700/BillsAdjusted2.70%2.85%3.00%EstimatedBills-Unscheduled-"13.7%Closed-LoopCustomerSatisfactionSurvey-"PSCComplaints(per100,000customers)9.07.Themaximumpenaltyforeachofthemeasureslistedinparagraph6,~sura,shallbe$83,000.Underthe1996Settlement,theTargetlevelwassetattherateyearaveragetargetpertheMeterReadingImplementationPlan.ThislevelshallbeupdatedforthefirstandsecondrateyearsoftheinstantSettlementperiodpertheMeterReadingImplementationPlan.Targetlevelsforthefirstandsecondratey'earsoftheinstantSettlementperiodshallbesetasdescribedinparagraph11,infra.

e.

ImlementationofPenalties8.PenaltiesassessedpursuanttothisScheduleshallbetreatedinaccordancewithparagraph30oftheSettlement.9.TheCompanyshallhavetherighttoseekawaiverofanypenaltiesresultingfrombelow-targetperformanceforcallsansweredwithin30seconds,billsadjustedandPSCcomplaintsonanyofthegroundslistedbelow:a.performancebelowthetargetlevelresultedfromcircumstancesbeyondtheCompany'scontrol;b.performancebelowthetargetresultedfromactionstakentoimprovelong-termperformanceinthatmeasureofcustomerservice;c.performancebelowthetargetlevelresultedfromactionstakentoimproveshort-orlong-termperformanceinanotheraspectofcustomerservice;and'.performancebelowthetargetlevelresultedfromtheimplementationofcompetition.Anyoftheforegoingconditions,ifshowntoexist,shallbegroundsforawaiver.TheCompanyshallhavetheburdenofdemonstratingthatoneormoreoftheconditionsoccurred. Closed-LopCustomerSatisfactionSurve10.TheClosed-LoopCustomerSatisfactionSurveyshallbedesignedtomeasureandtrackcustomersatisfactionwithRGAE'scustomerserviceprocesses.TheSurveyshallfocusoncustomerserviceprocessesthathavethegreatestpotentialtoimprovecustomersatisfaction.ThePartiesacknowledge,however,thattheareasonwhichtheSurveyfocuseswilllikelychangeovertheSettlementperiod.11.ForthefirstandsecondrateyearsoftheSettlementperiod,thePartiesshallhaveanopportunitytoreviewtheSurveyprocess,togainconfidencethattheSurveyprocesswillresultinreliabledataregardingcustomersatisfactionwiththeCompany'scustomerserviceprocesses.ThePartiesshallhaveanopportunitytoreviewandreachagreementregardingproposedtargetlevels.IfthePartiesarenotconfidentthattheSurveyprocesswillproducereliabledataasdescribedabove,orareunabletoagreeonacceptabletargetlevels,thePartiesshallemploythedisputeresolutionmechanismprovidedintheSettlementtoresolvetheissue.TheCompanyshallmeetwiththePartiesinMayprecedingthebeginningofeachrateyeartodiscusstheseissuesandsuchreviewprocessshallbecompleted30daysaftertheCompanyprovidesStaffwiththeinformationnecessarytocompleteitsreview.

OtherMatters12.PerformanceforallmeasuressubjecttotheSQPProgramshallbecalculatedonarateyearaveragebasis.ROCII:I12639

a.

SCHEDULEHRETAILINGFUNCTIONS¹tes:(1)PPrimaryresponsibilityforfunction.S-Secondaryresponsibilityforfunction.RelationshiptobegovernedandfurtherclarifiedbyOperatingAgreementunderdistributiontariff.(2)TherelationshipbetweentheISO/PE(IndependentSystemOperator/PowerExchange)andthediscoisnotyetclear.ForpurposesofdevelopingacompletelistofLSE/discoactivities,thediscoisassumedtoactasalocalextensionoftheISO/PEforactivitiesrequiredtomaintainsystemreliabilityandsecurity.(3)Functionsthatarethesoleresponsibilityofthediscohavebeeneliminatedfromthislist.FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities1.Systemrequirementsforecasting,planning,andbudgeting(Forecastfutureenergydeliverysystemcapability/infrastructurerequirements.Preparedetailedplansandbudgetstomodifysystemtomeetrequirements.)2.Energysystemworkmanagement,includingprioritization,scheduling,andcoordination(Prioritize,schedule,andcoordinatetheefficientuseoflaborandmaterialstomeetcustomerrequests,aswellastheconstructionandmaintenanceoftheenergysystem.)3.Designanddocumentationofsystemoperatingrules,operatingagreements,andoperatingprocedures(Managereal-timeconstructionandmaintenanceofthedeliverysystem,agreementswithenergysuppliersandtheISOwithrespecttodeliveryandreceiptofenergy,protectionofthesystemduringextremeoperatingconditionssuchasloadshedding,voltageandpressurereductions,andrequestsforfuelswitchingandcurtailmentofgasorelectricusage.)4.Negotiationandadministrationofcontractsforbalancingandancillaryservices(Ancillaryservicesrequiredforsecureandreliabledeliveryofenergy;balancingservicestocovervariancesbetweenreal-timedeliveriesandreal-timeenergyconsumption.Includesaccountingandinvoiceprocessingsupport.)SProvideenergysalesforecastsfordiscoaggregationSWorkwithdiscotosetemergencyandnon-emergencyworkpriorityandresponsetimeguidelinesSWorkwithdiscotodesignoperatingrules,agreements,andproceduresSMaycontractwithanon-discoproviderforsomeancillaryservices,asprovidedbyFERCrulesPAllactivitiesPAllactivitiesPAllactivitiespAllactivitiesROC11:101531 FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities5.Shorttermforecastingandschedulingofsystemenergyrequirements(Daily,monthly,andseasonalenergyforecasts,short-termschedulingofenergyreceiptanddelivery,short-termschedulingofbalancingandancillaryservices.)6.Real-timecontrolandmonitoringoftheenergydeliverysystem(Real-timeuseofenergybalancingandancillaryservices,real-timeinteractionwithISOandthird-partysuppliersofenergy,real-timeapplicationandenforcemcntofsystemoperatingrules,operatingagreements,andoperatingprocedures,real-timeinterpretationofSCADAinformation)7.Energyimbalancemanagementandcoordinationforthedistributionarea(Identifyimbalances,tradeimbalances,acquireorcurtailenergysupplytoresolveimbalances,allocateimbalancecosts,setimbalanceperformancestandardsandmonitorcomplianceamongmarketparticipants,acquireandmanage/processreal-timecustomermeterdataforimbalancediagnosis)8.Managementofsystemrestoration(Performanceoftasksrequiredtoanalyze,coordinate,schedule,andfacilitaterestorationoftheenergysupplysysteminatimely,safemanner.)SProducedaily,monthly,andseasonalenergyforecastsforcustomerswithreal-timemeters.Scheduledeliveriestodiscointerchangepoint/citygatebasedonthoseforecasts,andbasedonloadshapesforcustomerswithoutreal-timemeters.SRespondtodisco/ISOoperatingrequirementsreal-timeSProvidedataasrequiredbyagreementwithdiscoSProvidepersonnelandresourcestosupportrestorationactivitiesPAllotheractivities,includingdevelopingstandardloadshapesandload-shape-basedforecastsforusebyLSEswherereal-timemetersarelacking;forecastingtotalsystemenergyrequirements;andaggregatingLSEdeliveryschedulestodeterminerequirementsforloadbalancingandancillaryservices.PAllotheractivitiesPAllotheracttvittesPAllotheractivitiesROC11:101531 o FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities9.Dispatchoffieldpersonnelforunscheduledenergysystemworkp'orespondtosame-dayrequestsforcustomerserviceandresponsetoemergencyoroutagesituations.)¹terThismayincluderepairsofequipmentandfacilitiesonthecustomersideofthemeterifsuchrepairswillfacilitatearapidreturntoservice.SDependingontermsofagreementwithdisco,mayreceivefirstcustomernotificationofoutagesoremergencies,maydispatchfieldpersonneltomakeinitialdiagnosisofproblem,maydispatchfieldpersonnelforrepairsofcustomer-side-of-the-meterequipmentandfacilities.PAllotheractivities,possiblyincludingtrackingofcostsforcharge-backtocustomer'sLSE10.Real-timeresponsetocustomerserviceandfieldpersonnelinquiriesforenergydeliveryfacilities'nformation(Providedataforstake-outsandtorespondtosuchcustomerrequestsaswhentheycanexpecttoreturntoserviceafteranoutage.Futurecustomerrequestscouldaddresssuchcustomerissuesasinterruptionsofcustomer/generatorbilateralcontractsforoperatingreasons.)11.Coordinationandmaintenanceofemergencyresponseplansandtraining(Develop,coordinate,anddocumentemergencyresponseplans,andassociatedtrainingrequirements,includingemergencyresponsedrills.)¹te:Emergenciesinclude,forexample,wire-downreports(includingphoneandcablewire-downs),individualorlocalserviceoutagcs,large-scaleserviceoutages(e.g.,icestorms),poleandcablehits,andpipedig-ups.12.Deliverenergyfromthecitygate/interchangepointtotheend-userSDependingontermsofagreementwithdisco,mayprovideinterfacebetweendirectretailcustomerqueryanddtsco.SParticipateindevelopmentofemergencyresponseplansandensurepersonnelaretrainedasagreedbyLSEsanddtscoSScheduleenergydeliveries(pluslosses)tocitygate/interchangepointandinformdiscoaccordinglyPAllotheractivitiesPAllotheractivitiesPAllotheractivitiesROC11:101531 FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities.13.Distributedgeneration/back-upgeneration/buy-backpowermanagementofinteractionwithenergysystem(Identifyinterfacerequirements,accommodatepartialandfulloutagesofcustomer-sitedgeneration,analyzeandresolvepowerqualityandsystemoperatingissuesduetosuchgeneration,setandenforceperformancestandards.)Nore:ItisnotclearwhethertheLSEordiscowouldbebestpositionedtohaveultimateauthorityandaccountabilityovercustomer-sitedgeneration.14.Powerquality(Acceptcustomercalls,diagnoseproblems,determineproblemaccountability(callingcustomer,othercustomers,discofacilities),prioritize,schedule,andcoordinateproblemresolution,implementproblemresolution.)Note:PowerqualitymayrequireacollaborativeapproachamongsomeorallLSEs,thediscoandcustomersandproviderswithpowerqualityconcernstoaddressmulti-customerorcross-customerissues.15.Marketresearch(Collect,analyze,andreportcustomerdataforthesupportofplanninganddevelopmentofnewandexistingproductsandservices.)16.Qualityservicemanagement(Serveasaninternaladvocateforthecustomer;collectandanalyzecustomerdataforfeedbackonserviceperformanceandproductquality.)SPurchaseallpowerfromcustomergenerators(notsoldtootherLSEs)andprovideback-uppower.DependingonagreementwithrEsco,mayinterfacebetweendiscoandcustomer.PAllotheractivitiesPAllotheractivitiesPAllotheractivitiesPSetandenforceinterfacerequirements,includingimposingnon-performancepenalties.SProvidediagnosticsupportuponLSErequest,andresolvepowerqualityproblemsattributabletodiscofacilitiesoroperations,includingtrackingcostsandbillingLSEsasappropriateSWorkwithLSEstounbundlewholesaledistributionservicestoallowforproductdifferentiationSWorkwithLSEstosetandmaintaindeliveryservicequalitystandardsandperformanceROC11:101531 r FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities17.Marketing,includingpricingdesignidentifyvaluethroughproductsandservicestocustomersandcustomersubgroupsbasedonneedsanddesiresidentifiedthroughmarketresearch.Coordinatecross-functionalteamsforproductdesignandpricing,positioning,andpromotionoftheproductandservice.)¹re:Doesnotincluderegulatedtariffs,addressedseparatelybelow.18.Sales(Prospecting,communicating,andsellingproductsandservicestocustomers)PAllotheractivitiesPAllactivitiesS%'orkwithLSEstounbundlewholesaledistributionservicestoallowforproductdifferentiation.¹A19.Maintenanceofthirdpartyrelationships(Maintainrelationshipswiththirdpartieswhoalsohaverelationshipswithretailcustomersforenergyorenergy-relatedproductsandservices.)Note:Includesconductingtrainingfortradeallies,workingwithlocalgovernmentstoconductmunicipally-mandatedundergroundingandotheractivities,actingonbehalfoflow-incomecustomerstofacilitateDepartmentofSocialServiceactivities,respondingtofiredepartmentrequeststoaddresspossiblegasleaksandwire-downs,workingwithvariousdisasterandemergencyofficesandorganizations,interfacingwithlocalgovernmentsandpublicinterestgroups,participatinginIEEEstandardsgroups,and,inthefuture,negotiatingservices,prices,performancestandards,anddataexchangearrangementswithLSEs.)20.Respondingtocustomerinquiriesandrequestsincludesturn-on/shut-off,requestsforoutage-relatedinformation,applicationprocessing,requestsforaccountinformation,andrequestsforinformationregardingenergytechnologiesandend.uses.)SMaintainrelationshipswithdiscos,otherLSEs,andjointventures/alliances/suppliers.PAllotheractivitiesMaintainrelationshipswithemergency-andsafety-relatedorganizations,LSEs,suppliers,andDSSandotherpartiesinvolvedinprovidingfundingforservicestoretailcustomerswhocan'payfullpriceforthem.SImplementturn-on/shut-off.ProvideinformationuponrequestconcerningthestatusofoutageswhoserestorationisbeingmanagedbythediscoROC1n101531 0'4~o Functions21.Managementoftherevenuecollectionprocess(Obtainconsumptioninformation,billcustomerconsistentwithserviceagreement,acceptandprocesspayments,managedelinquentaccounts,maintainaccuracyandintegrityofcustomerrecords.)Note:Includesdesign,operations,andmaintenanceof'ISandotherinformationsystemsinfrastructure.22.Facilitationofcustomertradingofimbalancesandstoragebalances(Providecustomerswithanefficientmeansofengagingintransactionswithothercustomerstomitigateexpenseassociatedwithenergyimbalances.)¹te:Responsibilityandpracticesmaybedifferentforgasandelectricity.23.Developmentandimplementationof-publicinvolvementprograms(Communicatewiththcgeneralpublicforpurposeofeducation,informationexchange,andtoaddresscustomercomplaintswhichmayotherwiseelevatetoaPSCcomplaint.)¹re:Tofacilitatedevelopmentofthecompetitiveretailmarket,allcustomer-interfaceactivitiesshouldeventuallybeconductedbytheLSEratherthanthedisco.24.Regulatorycoordinationandtariffdesign(ServeastheliaisonbetweentheCompanyandregulatorybodies,designtariffs,conductratecases.)¹te:DiscoandregulatedLSEwillremainunderrate-of-returnandotherStateregulation.Load-ServingEntityResponsibilitiesPConductthistaskattheretaillevel,forrevenuecollecteddirectlyfromretailcustomersPConductthistaskattheretaillevel,forretailcustomerswithreal-timemeterswhohavebeengiventheoptionintheirretailproductdesignofavoidingtheflow-throughofwholesaleimbalancechargesPAllotheractivitiesSRegulatedLSEwillhaveretailtariffresponsibilitiesthatcompetitiveLSEswillnot.AllLSEsmayneedtocomplywithlicensingandreportingrequirements.DiscoResponsibilitiesSConductthistaskatthewholesalelevel,forrevenuecollectedfromLSEsSConductthistaskatthewholesalelevel,forLSEsonlySProvidefundingthroughpublicpolicychargePWholesaledistributiontariffandotherregulatorycoordinationactivities.ROC11:101531

'0~o FunctionsLoad-ServingEntityResponsibilitiesDiscoResponsibilities~25.Forecastingofcustomerenergyrequirements(Forecastingofelectricsystemandinstalledreservecapacityandenergyrequiredtomeetcustomerdemandforelectricenergy,includingforecastsforspecificgroupsand/orindividualcustomersasrequiredbyfutureservice/tariffdesigns.Forecastscanbedaily,monthly,seasonallyand/orlong-term.)26.Schedulingofcapacityandenergypurchasesanddeliverytotheservicearea(Capacity(c.g.,installedreserve)andenergyprocurementanddeliveryschedulingconsistentwithforecastsofcustomerrequirements.)Note:Responsibilityandpracticesmaybedifferentforgasandelectricity.27.Negotiationandadministrationofcontractsforprocurementofenergyandassociateddeliveryservices(Consistentwithforecastedcapacityandenergyrequirements,negotiatecontractsfortheprocurementofcapacity,energy,andwholesaledeliveryservices.Administrationofthecontractsincludesaccountingandinvoiceprocessingsupport.)¹terAssumesthatLSEsareresponsibleforpipelineandinstalledreservecapacitytomeettheircustomers'eeds.Itmaybethatelectricinstalledreservesaremoreefficientlypurchasedbythediscoforitsservicearealoadandpassedthroughinthewholesaledistributiontariff.PAllotheractivitiesPAllotheractivitiesPAllotheractivitiesSAggregateLSEforecastsandproducetotalsystemloadforecastsfordistributionsystemplanningandimbalanceservicerequirementsSSchedulingofspotmarketenergypurchasesandstand-bycapacitytoeliminatelocalloadimbalancesSCapacityandenergycontractsassociatedwithlong-termimbalancetrends.ROC1n101531 SCHEDQLEISTANDARDSPERTAININGTOAFFILIATESANDTHEPROVISIONOFINFORiVIATIONThisScheduleIaddressestherelationships,totheextentrelevanttothesubjectmatterofthisSettlement,amongtheDISCO-",anyHOLDCOthatRGAEmayestablishpursuanttothisSettlementorotherwise,theULSEoranyotheraffiliate,andcompetitorsoftheULSEorsuchotheraffiliate.StandardsofConductThefollowingStandardsofConductshallgoverntheDISCO'srelationshipwithanyenergysupplyandenergyserviceaffiliates,includingtheULSE:(i)Therearenorestrictionsonanyaffiliate'susingthesamename,tradenames,trademarks,servicename,servicemarkoraderivativeofaname,oftheHOLDCOortheDISCOorinidentifyingitselfasbeingaffiliatedwiththeHOLDCOortheDISCO.TheDISCOwillnotprovidesalesleadsinvolvingcustomersinitsserviceterritorytoanyaffiliate,includingtheULSE,andwillrefrainfromgivinganyappearancethatitrepresentsanaffiliateorthatanaffiliaterepresentstheDISCO.Ifacustomerrequestsinformationaboutsecuringanyserviceorproductofferedwithintheserviceterritorybyanaffiliate,theDISCOmayprovidealistofInthisdocument,"DISCO"referstoboththeDISCOandtheRLSE,unlesscontextrequiresotherwise.Rocii:li264i companiesoperatingintheserviceterritorywhoprovidetheserviceorproduct,whichmayincludeanaffiliate,buttheDISCOwillnotpromoteitsaffiliate.(ii)TheDISCOwillnotprovideservicesonpreferentialterms,norrepresentthatsuchtermsareavailable,exclusivelytocustomerswhopurchasegoodsorservicesfrom,orsellgoodsandservicesto,anaffiliateoftheDISCO.TheDISCOwillnotpurchasegoodsorservicesonpreferentialtermsofferedonlytosupplierswhopurchasegoodsorservicesfromorsellgoodsorservicestoanaffiliateoftheDISCO.Thisstandarddoesnotprohibittwoormoreoftheunregulatedaffiliatesfromlawfullypackagingtheirservices.(iii)Allsimilarlysituatedcustomers,includingenergyservicescompaniesandcustomersofenergyservicecompanies,whetheraffiliatedorunaffiliated,willpaythesameratesfortheDISCO'sutilityservicesand,intheeventthatanytariffprovisionaffordstheDISCOdiscretionintheapplicationof'suchprovision,theDISCOshallapplysuchtariffprovisioninaconsistentmanner.(iv)TransactionssubjecttoFERC'sjurisdiction-willbegovernedbyFERC'sordersorstandardsasapplicable.(v)ReleaseofproprietarycustomerinformationrelatingtocustomerswithintheDISCO'sserviceterritoryshallbesubjecttopriorauthorizationbythecustomerandsubjecttothecustomer'sdirectionregardingtheperson(s)toROCII:ii2641 0Qa0:a whomtheinformationmaybereleased.IfacustomerauthorizesthereleaseofinformationtoaDISCOaffiliateoroneormoreoftheaffiliate'scompetitors,theDISCOshallmakethatinformationavailabletotheaffiliateand/orothercompetitorsdesignatedbythecustomeronasimultaneousandcomparablebasis.(vi)TheDISCOwillnotdisclosetoitsaffiliateanycustomerormarketinformationrelativetoitsserviceterritorythatitreceivesfromamarketer,customerorpotentialcustomer,whichisnotavailablefromsourcesotherthantheDISCOunlessitmakessuchinformationavailabletoitsaffiliate'scompetitorsonasimultaneousandcomparablebasis.(vii)IfanycompetitororcustomeroftheDISCObelievesthattheDISCOhasviolatedthestandardsofconductestablishedinthissectionoftheagreement,suchcompetitororcustomermayfileacomplaintinwritingwiththeDISCO.TheDISCOwillrespondtothecomplaintinwritingwithintwenty(20)businessdaysafterreceiptofthecomplaint.Afterthefilingofsuchresponse,theDISCOandthecomplainingpartywillmeet,ifnecessary,inanattempttoresolvethematterinformally.IftheDISCOandthecomplainingpartyarenotabletoresolvethematterinformallywithin15businessdaysafterthefilingofsuchresponse,thematterwillbereferredpromptlytotheCommissionfordisposition.ThisprovisionshallnotprecludetheCommissionfromaddressinganysuchmattermoreexpeditiouslyintheeventthatexigentcircumstancessorequire.ROCII:112641 0e0:.4 4(viii)TheCommissionmayimposeontheDISCOremedialaction,consistentwiththeCommission'sstatutoryauthority,forviolationsoftheStandardsofConduct.IftheCommission,afteraffordingtheDISCOafullandfairopportunitytopresentitspositionastoanyallegedviolationsoftheseStandardsofConduct,findsthattheDISCOhasviolatedtheStandardsduringthetermofthisSettlement,itshallprovidetheDISCOnoticeofitsfindingsandshallaffordtheDISCOareasonableopportunitytoremedysuchconduct.IftheDISCOfailstoremedysuchconductwithinareasonableperiodafterreceivingsuchnotice,theCommissionmaytakeremedialactionwithrespecttotheDISCOtopreventitfromfurtherviolatingtheStandard(s)atissue.(ix)TheStandardsofConductsetforthinthisSettlementwillapplyinlieuofanyexistinggenericstandardsofconduct(e.g.,theinterimgasstandardsestablishedinCase93-G-0932)andmaybeproposedassubstitutesforanyfuturegenericstandardsofconductestablishedbytheCommissionthroughoutthetermofthisSettlement.Thereafter,StaffandtheCompanyshallmeettodiscusswhetheranychangesintheseStandardsareappropriate,givingdueconsideration.totheCompany'sspecificcircumstances,includingitsperformanceundertheexistingStandards.-"ThePartiescontemplatethat,astheunregulatedmarketdevelops,therewillbeaneedforfewer,ratherthanmore,restrictions.ROCII:Ii264i

' AccesstoBooksandRecordsandReportsThefollowingprovisionsgoverntheaccessbyStafftocertainbooksandrecordsintheeventthatRGEcEestablishesaHOLDCOpursuanttothisSettlementor,ifitdoesnot,toanysubsidiariesestablishedbyRGEcEitself:(i)Staffwillhaveaccess,onreasonablenoticeandsubjecttoappropriateresolutionofconfidentialityandprivilegeissues,tothebooksandrecordsoftheHOLDCOandtheHOLDCOmajority-ownedsubsidiaries.Staffwillhaveaccess,onreasonablenoticeandsubjecttoappropriateresolutionofconfidentialityandprivilegeissues,tothebooksandrecordsofallotherHOLDCOsubsidiariestotheextentnecessarytoauditandmonitoranytransactionswhichhaveoccurredbetweentheDISCOandsuchsubsidiaries,totheextenttheHOLDCOhas'ccesstosuchbooksandrecords.(ii)TheDISCOwillsupplementtheinformationthattheCommission'sregulationsrequireittoreportannuallywiththefollowinginformation:Transfersofassetstoandfromanaffiliate,costallocationsrelativetoaffiliatetransactions,identificationofDISCOemployeestransferredtoanaffiliate,andalistingofaffiliateemployeesparticipatingincommonbenefitplans.(iii)TheHOLDCOwillprovidealistonaquarterlybasistotheCommissionofallfilingsmadewiththeSecuritiesandExchangeCommissionbytheHOLDCOandanysubsidiaryoftheHOLDCOincludingtheDISCO.ROCII:II2641

~ .(iv)AseniorofficeroftheHOLDCOandtheDISCOwilleachdesignateanemployee,aswellasanalternatetoactintheabsenceofsuchdesignee,toactasliaisonamongtheHOLDCO,theDISCOandStaff("CompanyLiaisons").TheCompanyLiaisonswillberesponsibleforensuringadherencetotheestablishedproceduresandproductionofinformationforStaff,andwillbeauthorizedtoprovideStaffaccesstoanyrequestedinformationtobeprovidedinaccordancewiththisAgreement.(v)Accesstobooksandrecordsshallbesubjecttoclaimsofprivilegeandconfidentialityconcernsassetforthinfra.vAffiliateRelationsGenerala)Within180daysoftheformationofanynewsubsidiary:(i)TheHOLDCOandsuchsubsidiarywillmaintainbooksofaccountandotherbusinessrecordsthatareseparateanddistinctfromthoseoftheDISCO.(ii)Anyunregulatedaffiliate,competingintheenergy-relatedbusinesswithintheCompany'sserviceterritory,shallestablishandmaintainofficesandworkspacesseparateanddistinctfromthoseoftheDISCOinaseparatebuildingorleasehold.b)CostallocationguidelinesareattachedasAppendixAtothisSchedule.Theseguidelineswillbeamendedand/orsupplemented,ifnecessary,toROCIi:(1264I reflectaffiliatetransactionsnotcontemplatedbytheinitialguidelinessetforthinAppendixA.TheCompanywillfilewiththeDirectoroftheOfficeofAccountingandFinanceoftheDepartmentofPublicServiceallamendmentsandsupplementstotheguidelines,thirty(30)dayspriortomakingsuchchange(s)."Royalties"TherateplaninthisSettlementshallbeinlieuofanyandall"royalty"paymentsthatcouldormightbeassertedtobepayablebyanyaffiliateoftheDISCOorimputedtotheDISCOorcreditedtoDISCOcustomersatanytime,includingaftertheexpirationofthisSettlement;provided,however,thatapplicabilityofthissection2tothepost-SettlementperiodshallbeconditioneduponRG&E'scompliancewiththestandardscontainedinthisScheduleIassuchstandardsmaybemodifiedpursuanttoitem(ix)of"StandardsofConduct,"~sura.3.TransferofAssetsa)TransfersofassetsfromtheDISCOtoanaffiliateorfromanaffiliatetotheDISCOwillnotrequirepriorCommissionapprovalexceptforthetransferofgeneratingstationsandotherassetsfrom.theDISCOwhosetransferrequiresCommissionapprovalunderPublicServiceLaw$70.b)Forallassetsotherthangeneratingstations,transfersofassetsfromtheDISCOtoanaffiliateshallbeatthehigherofnetbookvalueorfairROCII:II264I marketvalue-"andtransfersofassetsfromanaffiliatetotheDISCOshallbeonabasisnottoexceedfairmarketvalueexceptthattheDISCOmay,aspartofitsreorganization,transfertotheHOLDCOoraffiliatetitletoofficefurniture,equipmentandotherassetshavinganaggregatenetbookvaluenottoexceed$5.0million.4.Personnela)TheDISCOandtheunregulatedaffiliateswillhaveseparateoperatingemployees.b)Non-administrativeoperatingofficersoftheDISCOwillnotbeoperatingofficersofanyoftheunregulatedaffiliates.c)OfficersoftheHOLDCOmaybeofficersoftheDISCO.Officersofthe.DISCOmaynotbedirectorsofanyoftheunregulatedaffiliates.d)EmployeesmaybetransferredbetweentheDISCOandanunregulatedaffiliateuponmutualagreement.TransferredemployeesmaynotbereemployedbytheDISCOforaminimumofoneyearfromthetransferdate.EmployeesreturningtotheDISCOmaynotbetransferredtoanunregulatedaffiliateforaminimumofoneyearfromthedateofreturn.TheDISCOwillfileannualreportstotheCommission,beginningwiththeRateYearendingJune30,1998,showingtransfersbetweentheDISCOFairmarketvalueshallbedeterminedinaccordancewiththecostallocationguidelines.SeeAppendixA.Rocii:iI264i

andunregulatedaffiliatesbyemployeename,formercompany,formerposition,newcompanyandnewposition.e)Theforegoingprovisionsdonotrestrictanyaffiliatefromloaningemployees,onafullyloadedcostbasis,totheDISCOtorespondtoanemergencythatthreatensthesafetyorreliabilityofservicetoconsumersortoassisttheDISCOduringGinnaStationoutages.f)ThecompensationofDISCOemployeesmaynotbetiedtotheperformanceofanyoftheunregulatedsubsidiaries;provided,however,thatstockoftheHOLDCOmaybeusedasanelementofcompensation;andprovidedfurtherthatthecompensationoftheofficersoftheHOLDCOwhoarealsoofficersoftheDISCOmaybebasedupontheperformanceoftheDISCOandtheaggregateperformanceoftheHOLDCO.g)TheemployeesofHOLDCO,DISCOandtheunregulatedsubsidiariesmayparticipateincommonpensionandbenefitplans,andthecostshallbeallocatedassetforthinAppendixA.5.ProvisionofServicesandGoodsa)Corporateservices(suchascorporategovernance,administrative,legal,purchasing,andaccounting)maybeprovidedbyHOLDCOfortheDISCOandunregulatedsubsidiariesonafully-loadedcostbasis.b)TheDISCOmayprovideotherservicestoanunregulatedaffiliate,exceptthattheDISCOmaynotuseanyofitsmarketingorsalesemployeestoROCII:i)264i

'00'0 provideservicestoanunregulatedaffiliateforbusinesswithintheDISCO'sterritory.TheunregulatedaffiliateshallcompensatetheDISCOfortheservicesofemployeesperformingsuchservicesatthehigheroftheemployees'ully-loadedcostorthepricethattheDISCOwouldchargeathirdpartyforsuchemployees'ervices.c)TheunregulatedaffiliatesmayprovideservicestotheHOLDCOandtheDISCO.Anymanagement,construction,engineeringorsimilarcontractbetweentheDISCOandanaffiliateandanycontractforthepurchasebytheDISCOfromanaffiliateofelectricenergyorgasshallbegovernedbyPublicServiceLaw$110,andwillbesubjecttoanyapplicableFERCrequirements.AllothergoodsandserviceswillbeprovidedtotheDISCOatapricethatshallnotbegreaterthanfairmarketvalue.d)TheDISCO,theHOLDCO,andtheunregulatedaffiliatesmaybecoveredbycommonproperty/casualtyandotherbusinessinsurancepolicies.ThecostsofsuchpoliciesshallbeallocatedamongtheDISCO,theHOLDCOandtheunregulatedaffiliatesinanequitablemanner.PrivilegedInformationNothingisthisSettlementrequiresorwillbeconstruedtorequiretheDISCO,theHOLDCOoranunregulatedaffiliatetoprovideStafforanyotherpartyaccessto,ortomakedisclosureofanyinformationastowhichtheentityinpossessionofsuchinformationwouldbejentitledtoassertalegalprivilege,suchastheattorney-clientprivilege,if,either(i)theprivilegeROCII:II264I 0ll couldbeassertedpursuanttoCPLH.f4503,CPLR$3101(oranyotherapplicablestatuteorconstitution)inajudicialproceeding,action,trialorhearing,or(ii)providingaccesstoormakingdisclosureofsuchinformationwouldimpairinanymannertherightoftheentityinpossessionofsuchinformationtoassertsuchprivilegeagainstthirdparties.IfStafforanyotherpartyseeksaccesstoordisclosureofanyinformationthateithertheDISCO,theHOLDCOoranunregulatedaffiliatebelievesisexemptfromaccessordisclosureunderthetermsofthisSettlement,counselfortheentityassertingsuchprivilegewilldetail,totheextentpracticalwithoutdestroyingtheprivilege,thereasonswhytheprivilegeisbeingclaimedinsufficientdetailtopermitadeterminationofwhetherornottodisputetheclaimofprivilege.IfStaffdecidestodisputesuchclaim,itmayrequestthatanassignedAdministrativeLawJudgeconductanincamerareviewofsuchinformationtodeterminewhetheritisinfactexemptfromaccessordisclosureunderthetermsofthissection,whichdisclosureshallnotbedeemedwaiveroftheprivilege.SuchdeterminationwillbesubjecttoreviewbytheCommissionand,ifnecessary,tojudicialreview.ConfidentialityofRecordsTheHOLDCOandtheDISCOshalldesignateasconfidentialanynon-publicinformationtoorofwhichStaffrequestsaccessordisclosure,andwhichtheHOLDCO,theDISCOoranunregulatedsubsidiarybelievesisentitledtobetreatedasatradesecret.Anypartywillhavetherighttocontestthetradesecretnatureofsuchdesignatedconfidentialinformation.Anyonewhoisaffordedaccessto,ortowhomdisclosureismadeof,designatedconfidentialportionsofbooksandrecords,financialinformation,contracts,minutes,memoranda,ROCII:II2641

'0~. businessplans,andthelike,willagreetomaintainsuchinformationasconfidential,otherthaninformationthatpreviouslyhasbeenmadepublic.ForthepurposesofthisAgreement,"informationthatpreviouslyhasbeenmadepublic"willmeaninformationthateither(i)hasbeendisclosedbyeithertheHOLDCO,theDISCOoranyunregulatedaffiliateinfinancialorotherliteraturetothefinancialcommunityortothepublicatlarge,(ii)appearsindocumentscontainedinthepublicfilesofalocal,Stateorfederalagency,bodyorcourtandwhichhasnotbeenaccordedtradesecretprotection,or(iii)informationthatotherwiseisinthepublicdomain.IntheeventthatStafforanyotherpartyreceivesanyinformationdesignatedasconfidentialpursuanttotheproceduresdescribedinthisSettlementanddesirestousesuchinformationinalitigatedproceedingbeforetheCommission,StafforthepartywillfirstnotifycounselfortheDISCOandtheHOLDCOandtheunregulatedaffiliate,ifapplicable,ofthenatureofsuchinformationaswellasitsintentiontousesuchinformationinsuchproceedingandaffordtheDISCO,theHOLDCOand/ortheunregulatedaffiliate,ifapplicable,theopportunitytoapplytotheAdministrativeLawJudgepresidingoversuchproceedingwithinten(10)businessdaysforarulingdesignedtomaintaintheconfidentialityofsuchinformationunderPart6-1oftheCommission'sRulesofProcedure(16NYCRR).StaffandanyotherpartymayobjecttoanysuchapplicationonthegroundsthatsuchinformationisnotentitledtobetreatedasatradesecretunderPart6-1.ThemattershallberesolvedpursuanttotheproceduresofPart6-1.IntheeventthatamemberofStaffreceivesanyinformationdesignatedasconfidentialpursuanttotheproceduresdescribedinthisSettlementanddesirestouseorrefertosuchinformationinamemorandumorotherdocumentwhichmaybecomean"agencyrecord"asthetermisdefinedintheNewYorkFreedomofInformationLaw(PublicOfficersLawf86),ROCII:II264I

'r StafffirstshallnotifytheCompanyLiaisonsofthenatureofsuchinformationaswellasitsintendeduse,andaffordtheDISCO,theHOLDCOand/ortheunregulatedaffiliate,ifapplicable,theopportunitytoapplytotheCommissionunderPart6-1oftheCommission'sRulesofProcedurewithinten(10)businessdaysforaprotectiveorderdesignedtomaintaintheconfidentialityofsuchinformation.StaffandanyotherpartymayobjecttoanysuchapplicationonthegroundsthatsuchinformationisnotentitledtobetreatedasatradesecretunderPart6-1.ThemattershallberesolvedpursuanttotheproceduresofPart6-1.+iROCII:Il264I a1a APPENDIXATOSCHEDULEICOSTALLOCATIONGUIDELINESI<'ORAFFILIATE<TRANSACTIONSi,CostsassociatedwithgoodsandservicesprovidedbyandamongaHOLDCO/parentcompanyandaDISCOand/orotheraffiliateswillfollowallocationproceduresdesignedtoensurethatthosecostsincurredonanaffiliate'sbehalfareappropriatelyidentifiedandassignedtotheaffiliateonasystematic,rational,andfullyloadedbasis.DirectCosts:ThesearecostsincurredbytheHOLDCOorDISCOindirectsupportofanaffiliate.Theywillbechargeddirectlytotheaffiliatewithoutundergoinganyallocationprocess.Thesecostswouldincludegoodsandservicesprovidedthatarereadilyascribabletoanaffiliateentityandareforthespecificbenefitoftheaffiliateandnotmutuallybeneficialtoallaffiliates.TheamountsochargedwillbetheoriginalcostincurredwithintheaffiliatedgroupwithoutanyadjustmentsforintercompanyprofitorotherpurposeexcepttherecognitionofIndirectCostsdescribedbelow.IndirectCosts:TheseareconsequentialcostsincurredinconnectionwithDirectCosts.Forexample,thecostsofemployeebenefits,salesandothersuchcostsareindirectcosts.Thesecosts,willbechargeddirectlytoaffiliates,concurrentlywiththerelatedBirectCosts.JointandCommonCosts:Theseareothercoststhatencompassbroadgeneralandkadministrativecorporateactivityandthusintheorybenefitallaffiliates.Assuch,itisnecessarythateachaffiliatebeararepresentativeshareofthesecosts.Examplesincludes:Corporate

'e. Governance(BoardofDirectorsandOfficers),GeneralAccounting(includingAccountsPayableandPayroll),FinanceandTreasury,Purchasing,InternalAudit,HumanResources,andRealEstate.TheassignmentofJointandCommonCostswillbemadebyallocationandchargedtotheappropriatebooksofaccountofeachaffiliatemonthlybasedonafactor.Thegeneralmethodologyisasfollows:Calculatetheallocationfactorbasedoncriteriasuchas:(a)numberofemployees;(b)totalassets;(c)grossrevenue;and(d)shareholders'quity.(Note:zeroshallbesubstitutedwhenanallocationfactorisnegative)Thesimplemathematicalaverageoftheallocationbasesdescribedabovewillbecomputedquarterlyandwillbeusedprospectivelyasthedefaultfactorforcostallocationtoaffiliates.(Forcertaintypesofallocablecosts,asubsetoftheallocationbasesmightbeappropriatelyusedinsteadofthedefaultfactor.)ThepercentagethusderivedwillbeappliedeachmonthtocostsassociatedwiththoseareasidentifiedascorporateadministrativeandgeneralwithintheHOLDCO.VSuchamountwillbedeemedtobetheallocableJointandCommonCostsandchargedviaintercompanyaccountstotheappropriateaffiliate(s).Theamountschargedwillberegardedaspre-taxamounts.Roc!I:iI264i SCHEDULEJFORMOFPETITIONTOFORMHOLDINGCOMPANYSTATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSIONCASE97-M-IntheMatteroftheApplicationofRochesterGasandElectricCorporationunderthePublicServiceLaw,IncludingSections70,107,10Sand110Thereof,toFormaHoldingCompanyandforCertainRelatedTransactionsPETITION,1997 STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSIONCASE97-M-IntheMatteroftheApplicationofRochesterGasandElectricCorporationunderthePublicServiceLaw,IncludingSections70,107,108and110Thereof,toFormaHoldingCompanyandforCertainRelatedTransactions~~PETITIONt,Petitioner,ROCHESTERGASANDELECTRICCORPORATION("Company"),herebyappliestotheCommissionforauthorityunderSections70,107,108and110ofthePublicServiceLawtoformaholdingcompanyandforcertainrelatedtransactions.TheCommissionmayrelyoninformationincludedinCompany'ssubmissions,includingthedocumentsrelatingtothesettlementagreement("SettlementAgreement")intheCompetitiveOpportunitiesCaseassupportfortheactionrequestedinthisfiling.InsupportofthisapplicationtheCompanystates:1.TheCompanysupplieselectricandgasserviceinninecountiescenteringabouttheCityofRochester,NewYork.TheCompanyisacorporationorganizedpursuanttothelawsoftheStateofNewYorkin1904.CertifiedcopiesofitsorganizationaldocumentshavebeendulyfiledwiththeCommission.2.Thereisappendedhereto,asScheduleA,astatementoffinancialconditionoftheCompanyatDecember31,1996,pursuanttotheCommission'sRulesofProcedure,16NYCRR$18.1.3.TheSettlementAgreementpermitstheestablishmentofaholdingcompanystructureunderwhichoneormoreregulatedcompaniesandoneormoreunregulatedcompaniesmayoperate.Theseoperatingcompanieswouldbedirectorindirectsubsidiariesofaholdingcompany("HoldCo").ThisstructurewillbenefittheCompany's0 e'40 .customers,shareholdersandemployeesbyprovidingtheflexibilityneededtocompeteeffectivelyinthechangingutilityindustry,whileatthesametimeprotectingtheCompany'scustomersfromtherisksinherentintheunregulatedbusinesses.Tocompeteeffectively,theCompanymusthavenolessflexibilityindoingbusinessthanthatavailabletoitscompetitors.AholdingcompanystructurewouldallowtheCompanytoimplementadecisiontoenterordeploycapitalinacompetitivebusinesswithoutthedelayofaregulatoryapprovalprocess.Thedelaysnecessarilyassociatedwithobtainingregulatoryapprovalsforsuchinvestmentsonaspecific,case-by-casebasiswhilereasonable,necessaryandlargelyunavoidableinaregulatedcontext,aresimplyinconsistentwithcompetitivesuccess.ThenewcorporatestructurealsowouldpermittheissuanceofsecuritiesbytheHoldCo,oraseparatefinancesubsidiary,tofinancecompetitivebusinesses(including"CompCo").UndertheCompany'scurrentcorporatestructure,Section69ofthePublicServiceLawwouldnotpermittheissuanceofsecuritiesforthispurpose.5.Thecustomersoftheregulatedutilitysubsidiary("RegCo")wouldbeprotectedfromtherisksinherentincompetitivebusinesses.TheRegCo,asaseparatelegalentity,wouldnotbearanylossesorberesponsibleforanyobligationsthatmayarisefromtheHoldCooritscompetitivebusinesses.Inaddition,theRegCo,whichwouldnotcountasanassetanyinvestmentinacompetitivebusiness,shouldnothaveitsaccesstocapitalmarketsorcreditratingsadverselyaffectedbytheHoldCooritscompetitivebusinesses.6.U~~UponCommissionapprovalandreceiptofthenecessaryshareholderandotherregulatoryapprovals(describedinparagraph13below),theCompanyintendstoestablishtheHoldCopursuanttoatax-freereorganization(the"Reorganization").TheReorganizationwouldbeeffectedasa"bindingshareexchange"asfollows:First,theCompanywouldcreatetheHoldCoasafirst-tier,wholly-ownedsubsidiary.Then,inaccordancewithaplanofexchangeadoptedpursuanttoSection9l3oftheBusinessCorporationLaw,

'0'e0 theCompany'scommonshareholderswouldreceiveoneHoldCocommonshareinexchangeforeachCompanycommonshareheldbytheshareholdersimmediatelypriortotheReorganization.<<7.UponconsummationoftheReorganization,alloftheCompany'scommonshareswouldbeheldbytheHoldCo,andalloftheHoldCo'scommonshareswouldbepubliclyheld.TheCompanydoesnotexpectthatanychangeinthepreferredstockordebtoftheCompanywouldbeeffectedbytheReorganization,exceptthattheCompanymayneedtoamendthevotingrightsofthepreferredstockinordertoqualifyforataxfreereorganizationundertheInternalRevenueCode.-"InconnectionwiththeHoldCo'scommencementofoperations,theRegComayleaseofficespacetotheHoldCoandtransfertotheHoldCoofficefurniture,equipmentandotherassetshavinganaggregatenetbookcostofnottoexceed$5million.8.TheCompanywouldbetheRegCo,'andHoldCowouldhavesubsidiariesinadditiontotheRegCo.-"TheCompany'sstrategicplansastothecompetitivebusinessesinwhichitwillcompetewillnecessarilyevolveastheutilityindustrycontinuestoevolve.Regardlessofthebusinessesinvolved,itisessentialthatthecompetitivebusinessesnotbedisadvantagedbyregulatoryoroperatingconstraintsimposedbytheCommission.ThecompetitivebusinessesshouldbeabletotransactbusinesswitheachotherandwiththeRegCoonthesamebasisastheircompetitors.9.TheCompanybelievesthattheCommissioncan,withoutimposingoperatingconstraintsonHoldCooritscompetitivebusinesses,protecttheRegCo'scustomersandpreventanyunfaircompetitiveadvantage.TheprovisionssetforthintheSettlementAchangeinthevotingrightsofthepreferredstockwouldrequireanamendmcntoftheCompany'sCertificateofIncorporation.ItisexpectedthattheCompany,simultaneouslywiththeReorganizationorshortlybefore,willdropitsstockinEnergylineInc.at.dCompCointoHoldCoandthatEnergylineInc.andCompCowillbecomewholly-ownedsubsidia;lcsofHoldCo.

~a0e-Agreement,andthecorporatestructure,willprotecttheRegCo'scustomersfromtherisksofcompetitivebusinesses.10.BecausetheSettlementAgreementprovidesforafundamentalchangeintheCompanyandtheopeningofitselectricbusinesstocompetition,theCompanybelievesthatonlylimitedoperatingconstraints,tailoredcloselytotheactivitytobemonitored,areappropriate.Theseconstraints,alongwiththeexistingstatutorytoolsoftheCommissionandtheFederalEnergyRegulatoryCommissionandthefederalandstateantitrustlaws,willbeadequatetoprotectcustomersandensurethatrobustcompetitiondevelopswhileatthesametimeallowingtheHoldCoanditssubsidiariestocompeteinthemarket.Ascompetition,develops,theCompanybelievesthatthespecificrestrictionsshouldbereviewedtodeterminewhethertheyarestillappropriateornecessary.11.TheSettlementAgreementsetsforththeconditionstothemakingofcapitalcontributionstoHoldCoanditsunregulatedaffiliates.ThoseprovisionsareincorporatedinthisPetitionbyreference.12.TheCompanyalsoagreestoabidebycertainoperatingprinciplesrelatingtointercompanyrelationships,itscodeofconduct,costallocationsandotherprovisions,allassetforthinScheduleItotheSettlementAgreement.13.ImplementationoftheHoldCostructurewillrequirecertainapprovalsinadditiontothatoftheCommissionandotheractionsbyfederalandstateauthorities.ConsummationoftheReorganizationwillrequiretheadoptionofaplanofexchangeatameetingoftheCompany'sshareholders.Inconnectionwithitssolicitationofproxiestovoteatthemeeting,HoldComustfileaRegistrationStatementonFormS-4withtheSecuritiesandExchangeCommissiontoregistertheHoldCocommonsharestobeexchangedfortheoutstandingCompanycommonsharesandsuchRegistrationStatementmustbecomeeffective.TheRegistrationStatementwillalsocontainaproxystatementoftheCompanydescribingtheReorganizationindetail,whichproxystatementwillbemailedtoCompanyshareholderspriortothemeetingreferredtoabove.TheCompanymustdelivertotheNewYorkStateSecretaryofStateacertificateofexchangeunderSection913oftheNewYorkBusiness CorporationLaw,thecertificateofexchangemustbeendorsedonbehalfoftheCommission(pursuanttoSection108ofthePublicServiceLaw),andtheSecretaryofStatemustfilethecertificateofexchange.Inaddition,priortothereorganizationitisexpectedthatHoldCowouldfilewiththeSecuritiesandExchangeCommissionfortheintrastateexemptionfromtheregistrationrequirementsofthePublicUtilitiesHoldingCompanyActprovidedbySection3(a)(1)thereoforRule2thereunder.TheCompanywillneedtofilefortheapprovaloftheFederalEnergyRegulatoryCommissionandtheNuclearRegulatoryCommission.14.TheCompanyrespectfullyreservestherighttowithdrawthisPetitionatanytimepriortoitsacceptanceofanorderoftheCommissionwithrespecttothePetition.TheCompanyfurtherrequeststhatanysuchorderbyitstermspermittheCompany(evenafterunconditionallyacceptingtheorder)todecidenottoconsummatethetransactions,describedherein.AVHEREFORE,theCompanyrequeststhattheCommissionissueanorderauthorizing(i)theformation'ofaholdingcompanyfortheCompany,asdescribedandsubjecttotheconditionscontainedherein,(ii)therelatedtransactionsdescribedhereinandintheSettlementAgreement,(iii)theSecretaryoftheCommissiontoendorsetheCommission'sconsentandapprovaluponthecertificateofexchangeexecutedbytheCompany,and(iv)suchotherandfurtherrelieftowhichPetitionermaybeentitledbyreasonofthepremises.Respectfullysubmitted,ROCHESTERGASANDELECTRICCORPORATIONBy:Title:Dated:Rochester,NewYork,1997 STATEOFNEWYORKCOUNTYOFMONROE,beingdulysworn,deposesandsays:IamtheofROCHESTERGASANDELECTRICCORPORATION,thePetitionerherein;IhavereadtheforegoingPetitionandknowthecontentsthereof;thesameistruetothebestofmyknowledge.Sworntobeforemethisdayof,1997INotaryPublic,StateofNewYorkROCII:II2640 SCHEDULE>>KSBCPROGRAMCOSTS(SMM)SettlementYearTotalEnergy~EfficiencLow-IncomeEnvironmentalRADP~rorams4.75.24.8~yl474.54.04444444.30.50.60.20.10.00.20.20.20.20.20.00.00.00.00.0ROCII:II3027,0 EXHIBITB Copy1to-F.Colon.G.LangJ.ReynoldsD.SchraverJ.SmithD.TennantW.ThomasSTATEOFNEWYORKPUBLICSERVICECOMMISSIONAtasessionofthePublicServiceCommission.heldintheCityofAlbanyonNovember25,1997COMMISSIONERSPRESENT:JohnF.O'Mara,ChairmanMaureenO.HelmerThomasJ.DunleavyCASE96-E-0898-IntheMatterofRochesterGasandElectricCorporation'sPlansforElectricRate/RestructuringPursuanttoOpinionNo.96-12.ORDERADOPTINGTERMSOFSETTLEMENTSUBJECTTOCONDITIONSANDCHANGES(IssuedandEffectiveNovember26,1997)BYTHECOMMISSION:INTRODUCTIONThisproceedingconcernsissuesrelatedtocompetitiveopportunitiesforelectricserviceforRochesterGasandElectricCorporation(RG&Eorthecompany).Interestedpartieswereencouragedtoreachanegotiatedresolutionofthecomplexissuesraisedbythetransitiontoacompetitivemarketforthesupplyofelectricity.'fterfilingaSettlementAgreementdatedApril8,1997(April8Settlement),thepartiesproposedfurtherrevisionstoresolveconcernsidentifiedbyus.ThesefurtherrevisionswerereflectedinanAmendedand"RestatedSettlementAgreement(Settlement)datedOctober23,1997'eachedbyRG&E,DepartmentofPublicServicestaff(staff),MultipleIntervenors,JointSupporters,andtheNationalAssociationofEnergy.ServiceCompanies.AftercarefulreviewoftheSettlement,thecommentsCases94-E-0952etal.,IntheMatterofCometitive0ortunitiesReardinElectricService,OrderEstablishingProceduresandSchedule(issuedOctober9,1996)",p.3.AcopyoftheSettlementisAppendixAtothisorder.

CASE96-E-0898received,andtheevidenceandargumentsinthisproceeding,theSettlementisadoptedsubjecttotheconditionsandchangessetforthinfra.Thisabbreviatedordersetsforthourdecision.Amore,comprehensiveopinionwillfollow,describingthebasesforourdecision.Thestatuteoflimitationsforfili'ngpetitionsforrehearingorclarificationofourdecisionwillbedeemedtorunfromthedateofissuanceofouropinion.THESETTLEMENTTheSettlementwouldchangetheregulatoryframeworkforRGEEtoprepareitforthe.dynamicchangestakingplaceintheelectricindustryandtheemergenceofcompetition.ThetermsoftheSettlementarelargelybasedonthoseoftheApril8Settlement,whichwasthesubjectofsupportingandopposingIIstatementsandtestimony,rebuttalstatementsandtestimony,evidentiaryhearings,post-hearingbriefs,arecommendeddecision,andbriefsonexceptionsandopposingexceptions.InarecommendeddecisionissuedJuly16,1997,AdministrativeLawJudgeWalterT.MoynihanfoundthatthetermsofApril8Settlementwerereasonable.Amongotherth'ings,heconcludedthatthephase-inofcompetitionwouldproceedatareasonablepace,theaverageback-outratewouldreflectRGEE'scostofenergyandcapacityforitsnon-nucleargeneratingunits,andtheproposedcorporaterestructuringwouldexposethecompany's,electricgenerationoperationstomarketforces.'fterreviewingtherecommendeddecisionandthepartiesexceptions,weidentifiedseveralmajor'reasofconcernregardingthetermsoftheApril8Settlement,'ncludingthefollowing:achievinggreaterratereductionsforresidentialandsmallcommercialcustomers;amelioratingtheimpactsoftheproposedincreaseinthemonthlycustomercharge;increasingtheR.D.,pp.71,72.TheseissueswerediscussedatoursessiononOctober8,1997.

hCASE96-E-0898~,ratepayersshareofpossibleexcessiveearningsandgainsonthesaleofgeneratingunits,whilestillencouragingdivestiture;acceleratingthepaceofretailaccessifwarranted;increasingthebackoutrateduringtheEnergyOnlyphaseofretailaccess;andestablishingminimumspendinglimitsonsystembenefitscharges.Asaresultoffurthernegotiations,theSettlementwasfi3.edandparti'eswereinvitedtosubmitfurtherwrittencomments.ThetermsoftheSettlementwillofferasoundregulatoryframeworkforRG&E,itscompetitors,anditscustomersinthetransitiontofullycompetitivegenerationandenergyservicemarkets.Havingreviewedtheseterms,however,thereareseveralimportantissuesthatarenotresolvedtooursatisfaction.Forthisreason,weadoptthetermsoftheSettlementsubjecttothefollowing:1.TheSettlement($6)providesthat,beginningJuly1,1999andcontinuingthroughJune30,2002,IncrementalManufacturingLoadshallbeservedatanaveragerateof$0.059perkWh.Weadoptthistermontheconditionthattheaveragerateinsteadis$0.045perkWh..2.TheSettlement($10(b))providesthatthefirst$800,000ofthecustomers'hareofanyexcessearningswillbeusedtoreduceratesforcertainlargecustomerclasses.Weconclude,thatlargecustomersalreadyreceivesubstantialbenefitsunderotherprovisionsoftheSettlement;thus,thereisnoneedforthisuniqueadditionalbenefit.Accordingly,weadoptthistermontheconditionthatthefirstsentenceof'aragraph10(b)isremoved,andthewords"...ofthisamount..."aredeletedfromthesecondsentence.3.CertainprovisionsoftheSettlement(i.e.,)$8,11-17,24(withrespecttoshut-downcosts),and$30)providefordeferralandrecoverywithoutrequiringfurtherpetitiontoorapprovalbytheCommission.Withoutalteringtheintentoftheseterms,weadoptthemontheconditionthataformalpetitionwill

e.

CASE'96-E-0898~befiledwiththeCommissionpriortoestablishingdeferralsoranyrecoveryduringthetermoftheSettlement.4.TheSettlement($23)makesreferencetopossibleStatewideresolutionofthefutureratemakingandownershipofnuclearfacilities.Paragraph23(d)statesthat"no.changeinthetreatmentofRGRE'snuclearfacilitiesshallbeimplementeduntilatleastJanuary1,2000."TheJanuary1,2000datemightbeconstruedasprecludingasaleortransfer,throughanauctionorotherwise,ofthecompanysinterestinnuclearfacilitiesuntilatleasttheyear2000and,thus,couldconflictwithsubsequentactionontheAugust1997StaffReportonNuclearGeneration.Weadoptthisparagraphontheconditionthat$23(d)ismodifi'edtoreadasfollows:"nochangeinthetreatmentofRGEE'snuclearfacilitiesshallbeimplementedpriortotheCommission'sresolutionoftheAugust1997StaffReportonNuclearGeneration."5.TheSettlement($48(h))providesthat,"[a]sofJuly1,2002,allretailcustomerswillbeeligibletoparticipate"inRGSE'sRetailAccessProgram.OurapprovaloftheSettlementisconditionedonthecompanymovingtofullretailaccessoneyearearlier.Accordingly,$48(f)ismodifiedbyaddingtheword"and"attheend;$48(g)ismodifiedtoread:"AsofJuly1,2001,allretailcustomerswillbeeligibletoparticipate.";and$48(h)isdeleted.6.Thelastsentenceof.$52oftheSettlementprovidesforapossibleincreaseinthepaceofretailaccessimplementationifcertainconditionsaremet.Xnlightofthemodificationsdescribedinthepreceding'paragraph,thislastsentenceisunnecessary,andtherefore,weadopt$52ontheconditionthatthissentenceisdeleted.7.The'Settlement(Sch.A)providesthat,bythefinalyearoftheterm,ratesforthesmallercustomerclasseswillbe5.0%belowtheratesineffectasofJune30,1997.TheSettlementisapprovedonconditionthattheratereductionforthe"pri-pri,""pri-sec,"and"sec-sec"voltageclasseswillbeincreasedfrom5.0~to7.5%inthefinalyearoftheSettlement.

CASE96-E-0898Thischangerequiresacorrespondingadjustmenttothecumulativereductionshownin$2,whichwouldincreasetheamountforJuly1,2001,from"$51.1million"to"$64.6million."8.TheSettlement($55,n.108,and)57)identifiesacontestablerateof$0.032perkWh,butdoesnotindicatewhethertheGrossReceiptsTax(GRT)isconsideredinthederivationofthatamount.Weadoptthisratesubjecttothe'clarificationthatthe$0.032rateincludestheimpactoftheGRT.9.TheSettlement($67)authorizesRGEEtoprovideinitialfundingforunregulatedbusinessactivitiesintheamountof$50million.WeauthorizeRGEEtofundunregulatedoperationsintheamountof$100million.Therefore,weadopt$67except$50millionisincreasedto$100million.STATEENVIRONMENTALUALITYREVIEWACTEVALUATIONInconformancewiththeStateEnvironmentalQualityReviewAct(SEQRA),weissuedonMay20,1996aFinalGenericEnvironmentalImpactStatement(FGEIS),whichevaluatedtheactionadoptedinCase94-E-0952.Wealsorequiredindividualutilitiestofileanenvironmentalassessmentoftheirrestructuringproposals.InaJune19,1997ruling,ChiefAdministrativeLawJudgeLynchnarrowedtheissuesneedingfurtherconsiderationintheenvironmentalassessment.RGBfiledanEnvironmentalAssessmentForm(EAF)concerningtheApril8SettlementonJune24,1997.SubsequenttofilingoftheEAF,PublicInterestIntervenors(PII)fileda.petitionaskingthataSupplementalEnvironmentalImpactStatementbefiled.Initsargumentssupportingthepetition,PIIraisedseveralsubstantiveissuesforSEQRAconsideration.TheinformationprovidedbyRGEEinitsEAF,theparties'ommentsandresponses,theSettlement,and-otherinformationwereevaluatedinordertodeterminewhetherthepotentialimpactsresultingfromadoptingtheSettlement's,termswouldbewithintheboundsandthresholdsoftheFGEISadoptedin1996.Theanalysisexaminedseveralareasofpotentialimpacts CASE96-E-0898includingthepotentialforincreasedairemissions,whichcouldincreaseasaresultofgreaterloadgrowthduetoreducedrates,andreduceddemandsidemanagementprograms.Arguably,allofthepotentialimpactsneednotbeconsideredgiventhatsomeresultfromTypeIIexemptrateactions.Nonetheless,consideringallfactors,thepotentialenvironmentalimpactsoftheSettlementarefoundtobewithintheboundsandthresholdsevaluatedintheFGEIS.Therefore,noUfurtherSEQRAactionisnecessary.However,asamatterofdiscretion,monitoringofRGEEsrestructuringwillbeimplemented.ThefinalEAFwillbeappendedtotheopiniontobeissuedlater.DISCUSSIONTakingintoaccountouroverallresponsibilitytosetjustandreasonablerates,thecompany'sstatutoryburdenofproof,andoursettlementguidelines,andhavingconsideredtheevidence,comments,arguments,andEAFinformation,thetermsoftheSettlement,subjecttotheabovedescribedconditions,andchanges,arefoundtobereasonableandinthepublicinterest.Amongotherthings,theseterms,conditions,andchangeswillhelpconsumersinandaroundRochestersaveover$115millionincumulativeratereductionsoverthenextfewyearsandthiswillhelpretainand,attractbusinessesandstimul'ateeconomicactivity.Inaddition,customerswillnolongerbeliablefor$73millionincreditsownedthecompanyarisingfromflex-ratediscountsandpastincentives.TheSettlement'stermsalsoincludeanincentivefordivestitureoftheutility'sgenerationandestablishesanenvironmentforarobust,competitiveelectricgenerationmarket.Withthisframeworkandexpectedcompetitionintheenergyservicessector,manycustomerscananticipatereceivingelectricitybillslowerthanotherwiseandallcustomersshouldenjoygreaterchoicesofenergyprovidersandservices.Atthesanetime,the CASE96-E-0898Settlement'stermsfairlyaddressenvironmentalconcernsduringthetransitiontoafullycompetitivemarket.Accordingly,theSettlement'stermsareadoptedintheirentiretysubjecttotheconditionsandchangeslistedaboveandtheyareincorporatedbyreference,intothisorder.'nasmuchasthetermsoftheSettlementareinterrelated,asareourconditionsandchangeslistedabove,ifanyterm,condition,orchangeismodified,vacated,orotherwisemateriallyaffectedbyjudicialreview,wemayre-examineourentiredecision.TheCommissionorders:1.ThetermsoftheAmendedandRestatedSettlementAgreement(Settlement)datedOctober23,1997andfiledinthisproceeding,asmodifiedbytheconditionsandchangesdescribedabove,areadoptedintheirentiretyandareincorporatedaspartofthisorder.2.Thepotentialenvironmentalimpactsofthesetermsarewithintheboundsandthresholdsevaluatedinthe1996FGEIS,and,therefore,nofurtherSEQRAactionisnecessary.3.RG&EisdirectedtofilebyDecember1,1997,tobecomeeffectivenolaterthanJuly1,1998,suchtariffamendmentsasarenecessarytoeffectuatetheretailaccessprogramcontemplatedbytheSettlementasadoptedandtoimplementOpinionNo.97-'5.RGBisalsodirectedtofilebyJune1,1998,tobecomeeffectiveJuly1,1998,suchtariffamendmentsasarenecessarytoeffectuatetheratereductionsandotherraterelatedmatterscontemplatedbytheSettlementasadopted.Thecompanyshallservecopiesofitsfilingsuponallpartiestothisproceeding.AnycommentsonthefilingtoeffectuatetheretailaccessprogrammustbereceivedattheCommission'sofficeswithin45daysofpublicationintheStateRegisterpursuanttotheStateAdministrativeProcedureAct.AnyTotheextentthelastsevenwordsof$77suggestsanysignatorycouldpreventusfrommakingthisdecision,suchlanguageiscontrarytothepublicinterestandisnotadopted.

CASE96-E-0898commentsonthefilingtoeffectuatetheratereductionsmustbereceivedattheCommission'sofficeswithintendaysofserviceofthecompany'sproposedamendments.TheamendmentsshallnotbecomeeffectiveonapermanentbasisuntilapprovedbytheCommission.4.TotheextentexceptionstotherecommendeddecisionissuedinthisproceedingonJuly16,1997arenotmoot,orareotherwisegranted,theyaredenied.S.RG&E,incooperationwi'thstaff,shallmonitortheenvironmentalimpactsofelectricrestructuringresultingfromthisorder.6.RG&Emustsubmitawrittenstatementofunconditionalacceptanceoftheconditionsandchangescontainedinthisorder,signedandacknowledgedbyadulyauthorizedofficerofRGEE,byDecember1,1997.Xfsuchacceptanceofthisorderisnotsofiled,theadoptionofthetermsoftheSettlementmayberevoked.ThisstatementshouldbefiledwiththeSecretaryoftheCommissionandservedonallpartiesinthisproceeding.7.Thisproceedingiscontinued.BytheCommission,(SIGNED)JOHNC.CRARYSecretary EXHIBITC STATEOFNEWYORKPUBLICSERVICECOMMISSIONOPINIONNO.98-1Copyto:RNGRJBSWWCASE96-E-0898-IntheMatterofRochesterGasandElectricCorporation'sPlansforElectricRate/RestructuringPursuanttoOpinionNo.96-12.OPINIONANDORDERADOPTINGTERMSOFSETTLEMENTSUBJECTTOCONDITIONSANDCHANGESIssuedandEffective:January14,1998 CASE96-E-0898TABLEOFCONTENTSAPPEARANCESINTRODUCTIONPROCEDURALHISTORYProceduralConcernsPacaeTHEREVISEDSETTLEMENTREVENUEREQUIREMENTStrandableCostsKamineCostRecoveryReturnonEquityGainonSaleofGeneratingPlantsSBCFundingOtherProposalsREVENUEALLOCATIONANDRATEDESIGNTHEPROGRAMSingleRetailerModelImplementationScheduleDeliveryRatesOtherRetailAccessIssues101015172122232530303138CORPORATESTRUCTUREENVIRONMENTALMATTERSMARKETPOWERMITIGATIONFINDINGSUNDERSEQRACONCLUSIONORDER39424347APPENDIXAAPPENDIXBAPPENDIXC

CASE96-E-0898APPEARANCESFORROCHESTERGASANDELECTRICCORPORATION:Nixon,Hargrave,Devans&Doyle(byRobertJ.Bird,RichardN.George,andStanleyW.Widger,Jr.,Esqs.),ClintonSquare-P.O.Box1051,Rochester,NewYork14603FORDEPARTMENTOFPUBLICSERVICESTAFF:MichellePhillips,Esq.,ThreeEmpireStatePlaza,Albany,NewYork12223-1350FORATTORNEYGENERALOFTHESTATEOFNEWYORK:GlenC.King,Esq.,TheCapitol,Albany,NewYork12247FORNEWYORKSTATECONSUMERPROTECTIONBOARD:AnneCurtinandJamesWarden,Esqs.,99WashingtonAvenue,Suite1020,Albany,NewYork12210FORNEWYORKPOWERAUTHORITY:~EricJ.Schmaler,Esq.,1633Broadway,NewYork,NewYork10019FORAMERICANASSOCIATIONOFRETIREDPERSONS:Ward,Sommer&:Moore,LLC(byDouglasH.Ward,Esq.),122SouthSwanStreet,Albany,NewYork12210FORPUBLICINTERESTINTERVENORSANDFORPACEENERGYPROJECT:DavidResnick,Esq.,78NorthBroadway,WhitePlains,NewYork10606FOR1PPNY:AaronBreidenbaugh,291HudsonAvenue,Albany,NewYork12210FORENRONTRADEEcCAPITALRESOURCES:ReadRLaniado(byKevinBrocks,Esq.),23EagleStreet,Albany,NewYork12207~

~,ee~I CASE96-E-0898APPEARANCESFORMULTIPLEINTERVENORS:Couch,White,Brenner,Howard&Feigenbaum(byRobertM.Loughney,Esq.),540Broadway,P.O.Box2222,Albany,NewYork12201FORRETAILCOUNCILOFNEWYORK:Cohen,Dax8Koenig(byPaulRapp,Esq.),90StateStreet,Albany,NewYork12211FORWHEELEDELECTRICPOWERCOMPANY:JoelBlau,Esq.,32WindsorCourt,Delmar,NewYork12054FORCONSOLIDATEDEDISONCOMPANYOFNEWYORK'NCJohnF.Gallagher,Esq.,4IrvingPlace,NewYork,NewYork10003FORCONSOLIDATEDNATURALGASCOMPANIES:Whiteman,Osterman8Hanna(byMichaelWhiteman,Esq.),OneCommercePlaza,Albany,NewYork12260FORNEWYORKSTATEELECTRICScGASCORPORATION:HuberLawrenceEAbell(byAndrewFisher,Esq.),605ThirdAvenue,NewYork,NewYork10158PROSE:JeromeBowe,104BrentwoodDrive,Penfield,NewYork14526CharlesA.Straka,6OakwoodLane,Fairport,NewYork14405 STATEOFNEWYORKPUBLICSERVICECOMMISSIONCOMMISSIONERS:JohnF.O'Mara,ChairmanMaureenO.HelmerThomasJ.DunleavyCASE96-E-0898-IntheMatterofRochesterGasandElectricCorporation'sPlansforElectricRate/RestructuringPursuanttoOpinionNo.96-12'PINIONNO.98-1OPINIONANDORDERADOPTINGTERMSOFSETTLEMENTSUBJECTTOCONDITIONSANDCHANGES(IssuedandEffectiveJanuary14,1998)BYTHECOMMISSION:INTRODUCTIONThisproceedingconcernsissuesrelatedtoratesandtherestructuringoftheelectricutilityindustryforRochesterGasandElectricCorporation(RG&Eorthecompany).Interestedpartieswereencouragedtoreachanegotiatedresolutionofthecomplexissuesraisedbythetransitiontoacompetitivemarketforthesupplyofelectricity.'fterfilingaSettlementAgreementdatedApril8,1997(April8Settlement),thepartiesproposedfurtherrevisionstoresolveconcernsidentifiedbyusatourOctober8,1997session.ThesefurtherrevisionswerereflectedinanAmendedandRestatedSettlementAgreement(RevisedSettlement)datedOctober23,1997reachedbyRG8E,DepartmentofPublicServiceStaff(Staff),MultipleIntervenors,JointSupporters,andtheNationalAssociationofEnergyServiceCompanies.AftercarefulreviewoftheApril8Settlement,theRevisedSettlement,thecommentsreceived,theevidence,andargumentsinthisproceeding,we~Cases94-E-0952etal.,IntheMatterofCometitive0ortunitiesReardinElectricService,OrderEstablishingProceduresandSchedule(issuedOctober9,1996),p.3,(October9Order).i

~'o CASE96-E-0898issuedanorderadoptingtheRevisedSettlementsubjecttocertainconditionsandchanges.'hefindingsanddecisionmadeinthatorderareherebyincorporated,andthisopiniondescribesthebasesforourdecision.PROCEDURALHISTORYOpinionNo,.96-12'equiredfiveoftheState'electricutilitiestofileplanstobringtoNewYorkStateconsumersthebenefitsofacompetitiveelectricitymarket.Incompliancewiththatopinionandorder,RGSEsubmitteditsplanon,October1,1996.ConsiderablepubliccommentontheApril8Settlementwasreceivedthrougheducationalforums,publicstatementhearings,'ndconsumercorrespondence.Whilethecommentsgenerallysupportedourgoalsforacompetitivemarketplace,fourareasofconcernwereidentifiedbythepublic:systemandservicereliability;theimpactofcompetitiononlow-andfixed-incomeconsumers;theeffectofstrandablecostsonrates;andtheneedforconsumereducation.Concernswerealsoexpressedabouttherelativelysmallerrevenuedecreasesforresidentialandsmallcommercialcustomers;theincreaseintheresidentialandsmallcommercialcustomers'noverallcustomers;strandablemonthlycustomercharge,whichwouldhaveresultedinbillincreaseforroughly43.oftheresidentialthefailuretoquantifyandrequiresharingofcosts,whichitwasallegedwouldhavejustifiedCase96-E-0898,OrderAdoptingTermsofSettlementSubjecttoConditionsandChanges(issuedNovember26,1997)(November26Order).Cases94-E-0952etal.,IntheMatterofCometitive0ortunitiesReardinElectricService,OpinionNo.96-12(issuedMay20,1996).EducationalforumsandpublicstatementhearingswereheldonMay28and29,1997inCanandaiguaandRochester,respectively.

0,~o~le.

CASE96-E-0898furtherratereductions;theslowpaceofconversiontoretailaccess--aboutfiveyears;andthelackofasystemtodecidewhowouldbeaffordedretailaccessfirst.EvidentiaryhearingsontheApril8SettlementwereheldfromJune3throughJune5,1997;therecordcontains2,029transcriptpages(Tr.)and82exhibits.Inaddition,statementsandbriefsinsupportoforinoppositiontotheApril8Settlementweresubmittedbynumerousparties.OnJuly16,1997,arecommendeddecisionbyAdministrativeLawJudgeWalterT.Moynihanwasissued,whichgenerallysupportedadoptionoftheApril8Settlement.Briefsand/orreplybriefsonexceptionswerereceivedfromRGEE;Staff;JointSupporters;theDepartmentofLaw(AttorneyGeneral)MultipleIntervenors;StateConsumerProtectionBoard(CPB);NewYorkPowerAuthority(NYPA);AmericanAssociationofRetiredPersons(AARP);PublicInterestIntervenors(PII),abroad-basedumbrellacoalitioncomprising18consumerandenvironmentalorganizations;PublicUtilityLawProjectofNewYork,Inc.(PULP),anot-for-profitpublicinterestfirmrepresentingtheinterestsoflow-incomeresidentialconsumers;RetailCouncilofNewYork(RetailCouncil),anassociationofnearly5,000retailenterprisesinNewYorkState;IndependentPowerProducersofNewYork,Inc.andEnronCapital&TradeResources(IPPNY/Enron),WheeledElectricPowerCompany(WEPCO),independentpowermarketers;andMr.JeromeP.Bowe,aproseintervenor.Afterreviewingtherecommendeddecisionandtheparties'xceptions,werequestedthepartiestorenegotiatethetermsoftheApril8Settlementto:achievegreaterratereductionsforresidentialandothersmallcustomers;consideramelioratingtheimpactsoftheproposedincreaseinthemonthlycustomercharge;increasetheratepayers'hareofpossibleexcessiveearningsandgainsonthesaleofgeneratingunits,~'ppendixAisalistofabbreviationsusedinthisdocument.TheseissueswerediscussedatoursessiononOctober8,1997.

0~o CASE96-E-0898whilestillencouragingdivestiture;acceleratethepaceofretailaccessifwarranted;increasetheback-outrateduringtheEnergyOnlystageofretailaccess;andestablishminimumspendinglimitsforthesystembenefitscharge(SBC).Asaresultoffurthernegotiations,theRevisedSettlementwasfiledandpartieswereinvitedtosubmitfurtherwrittencomments.'hirteenpartiessubmittedcomments'ncludingthefivesignatoriestotheRevisedSettlementandeightothersthatopposeitsadoption.InourNovember26Order,wefoundthatwithcertainmodificationsthetermsoftheRevisedSettlementofferasoundregulatoryframeworkforRG&E,itscompetitors,anditscustomersinthetransitiontofullycompetitivegenerationandenergyservicemarkets.ProceduralConcernsTherecommendeddecisionrejectedanargumentthatmostoftheactivepartieswereunfairlyorimproperlyexcludedfromdiscussionsamongStaff,thecompany,CPB,andMultipleIntervenors.Therecommendeddecisionobservedthatwewaivedinpartoursettlementguidelines'ntheinstantcasetoenhancetheparties'bilitytobecreativeandcommunicatefreely.4Thus,therecommendeddecisionconcludedthecaucusingamongsomepartieswasnotproscribed,andtheApril8Settlementshouldnotberejectedormodifiedbasedonthisproceduralargument.AARPandMr.Boweexcept,arguingtheApril8Settlementwasreachedasaresultofproceduresthatdeniedpartiesameaningfulopportunitytoparticipate.AARPalsoCase96-E-0898,NoticeInvitingCommentsonProposedSettlement(issuedOctober24,1997).AppendixBisalistofthepartieswhofiledcomments.Cases90-M-0255etal.,SettlementProceduresandGuidelinesOpinionNo.92-2(issuedMarch24,1992),AppendixB,p.4(guidelineB.(3)).October9Order.

CASE96-E-0898assertsthat,becausewetruncatedimportantprocedures,theApril8Settlementshouldberejected.RG&Erepliesthatearliernegotiationswereunproductivewhenallpartieswerepresent.Theproceduresfollowedinthiscasehaveaffordedallpartiesampleopportunitiestoshapethedecisionsreachedinthiscase.Astherecommendeddecisionnotes,wewaivedoursettlementguidelinestopermitcaucusingtoenhancetheparties'bilitytobecreative,communicatefreely,andreachanexpeditiouslynegotiatedresolution.Thewaiveroftheguidelinespermittednotonlythecaucusingmentionedabove,butalsodiscussionsamongStaffandotherparties.Asaresultofthecaucusing,adraftagreementwaspreparedandcirculatedamongalltheparties.Afterfurthernegotiations,atwhichallpartieshadanopportunitytoattend,modificationswereincorporatedintheagreementbasedonthevariousparties'omments.ThismodifiedagreementistheApril8Settlement.Inaddition,allpartieswereaffordedanopportunitytoconductdiscovery,presenttestimonyandpre-hearingpositionpapers,cross-examinewitnesses,submitpost-hearingbriefs,andfilebriefsonandopposingexceptionstoJudgeMoynihan'srecommendeddecision.Moreover,allpartiesweregivenafurtheropportunitytocommentontheRevisedSettlement.Theseproceduralstepsgaveeachpartyareasonableopportunitytoparticipate.Consequently,AARP'sandMr.Bowe'sproceduralexceptionsaredenied.THEREVISEDSETTLEMENTGenerally,theRevisedSettlementisintendedtoresolveallissuesinthisproceeding.Inadditiontoanumberofmiscellaneousprovisions,theRevisedSettlementaddressesthreemaintopics:ratereductions,retailaccess,andcorporaterestructuring.TheRevisedSettlementwouldestablishelectricratesforafive-yearperiod(July1,1997throughJune30,2002)atlevelsthatare,overall,belowtheircurrentlevels.Whileratesforallcustomerclasseswouldbereduced,largeindustrialandcommercialcustomerswouldreceivethebiggestdecreases.

CASE96-E-0898TheRevisedSettlementcallsforratereductionsineachoffiveyearsculminatinginanet$40.6million(6.1%)decreaseinRGEE'selectricrevenuesinthefifthyearascomparedwithratesineffectonJuly1,1996.Thecumulativerevenuedecrease,subjecttocertaincontingenciesdiscussedinfra,wouldbe$101.6million.Inaddition,RGEEwouldforgo$73millionofincentivepaymentsandlostnetrevenuesotherwisedueitarisingfromdiscountscontainedinitsflex-ratecontracts.Theratestobeestablishedtoproducetheforegoingrevenuereductionswouldnotbemodifiedtoreflectchangesinrevenuesorexpense,stateandlocaltaxes(otherthangrossreceiptstaxesandpropertytaxes)andassetsalesduringthetermoftheRevisedSettlementexceptforthefollowingitems,someofwhicharethesubjectofexceptionsasmorefullydiscussedinfra:a.Kamine/Besicorp-AlleganyL.P.(Kamine)recovery;b.Variationsinthelevelsofmandatedrelief;C.d.e.Securitizationbenefits;Deferrals;andAdjustmentsExceptforchangesarisingfromamandatedSBCandsecuritization,whichwouldbereflectedinrateswithoutanylimitations,rateswillonlybechangedifthepre-taxneteffectofallothersuchitems,onaprojectedcumulativebasisduringthetermoftheRevisedSettlement,wouldbegreaterthan$30million.However,nosuchrateadjustmentwouldbemadeinrateyears'neortwo,andadjustmentsinthefinalthreerate0Arateyearisaone-yearperiodcommencingonJuly1ofonecalendaryearandterminatingonJune30ofthefollowingcalendaryear.

CASE96-E-0898yearswouldbesubjecttomonetarylimitations,whichensurethattherewouldberatedecreasesduringthefiveyears.Anyamountsthatarenotrecoveredasaconsequenceofthemonetarylimitationsmaybedeferred.Generally,theRevisedSettlementprovidesthattherevenuedecreaseswouldbeallocatedtoRG&E'sserviceclassesbasedontheirresponsibilityforgenerationcosts'heproposedrevenuereductionsareinadditiontothebaseratereductionsandtheeliminationoffueladjustmentchargeseffectiveJuly1,1996,inaccordancewithasettlementagreement(1996Settlement)thatweapprovedwithmodifications.'ursuantto'he1996Settlement,thetotalreductionsforthe12monthsendedJune30,1997approximated2.5%forresidentialcustomersand4.5%fornon-residentialcustomers.'everalspecificratedesignchangesarealsosetforthintheRevisedSettlement,includingaproposedyearly$1.50increaseinthemonthlycustomerchargefortheresidentialandsmallbusinesscustomers,eliminationofthedifferencebetweenthepeakandshoulder-peakenergychargesasofJuly1,1997forlargeindustrialcustomers,andmodificationoftheenergyauditrequirementintheflex-ratetariffs.Inaddition,beginningJuly1,1999andcontinuingthroughJune30,2002,certainincrementalmanufacturingloadofatleast50kWwouldbeservedatanaveragerateof$0.059perkWh.Allotherchangesinrevenueswouldbeallocateduniformlywithineachserviceclassification.WithrespecttotheRetailAccessProgram(Program),theRevisedSettlementrequiresRGEEtoopenitselectricsystemCases95-E-0673etal.,RochesterGasandEIectricCororation,OrderApprovingTermsofSettlementAgreementWithChanges(issuedJune27,1996),whichwasrestatedinCases95-E-0673etal.,OpinionNo.96-27(issuedSeptember26,1996).Ourmodificationofthe1996SettlementisthesubjectofanArticle78proceedingthatwillbeterminateduponapprovalofthependingRevisedSettlement.0Thesedecreasesreducedthecompany'srevenuesby$23millionannually.

0~oe CASE96-E-0898tocompetitionatapacesuchthatallretailcustomerswouldbeallowedtochoosetheirownsupplierofenergyandcapacitybyJuly1,2002.ThesignatoriesrecognizethatRG&E'sabilitytoundertaketheProgramiscontingentuponfactorssuchasafunctioningstatewideenergyandcapacitymarket,whicharenotinthedirectcontrolofthecompany.TheyagreetomodifytheProgram,ifnecessary,toaccountforsuchfactors,andtoaddresssuchmattersingoodfaith.TheRevisedSettlementwouldadoptasingle-retailermodel,whichwouldallowaLoadServingEntity(LSE)'opurchasepowerontheopenmarketanddistributionaccessfromRGGE.TheLSEwouldmarketthepowertocustomers'ndberesponsibleforschedulingdeliveries.TheProgramwouldbedeployedinstages.IntheEnergyOnlystage,whichwouldcommenceonJuly1,1998,,customers(upto10-'fthesystemwideenergysalesof6,714gWh)wouldbeabletochoosetheirownsupplierofelectricenergy.Theback-outrateduringthisstageisestimatedtobeapproximately$.019perkNh.'nJuly1,1999,theEnergyandCapacitystagewouldbeintroduced,whichwouldpermitcustomersusingupto20'.ofthetotalenergytochoosetheirownsupplierofenergyandcapacity.Theback-outrateforthisstage,$.032perkWh,isgenerallyequaltothevariablecostsandspecifiedfixedcoststhatRG&Eincurstoproducepowerfromitsfossilandhydrogeneratingunitsandfrompowerpurchased(otherthanfromKamine).OnJuly1ofthefollowingtwoyears,theProgramwouldbeexpandedAnLSEisanalogoustotheenergyservicescompany(ESCO)inatwo-retailermodel.AnindividualcustomercouldqualifyasanLSEandprocureenergytomeet'itsownneeds.TheRevisedSettlementcallsforaback-outrateof$.004perkWhforretailingcostsplusanallowanceof$.01905perkNhasthevalueofenergy(equivalenttothecompany'sbuy-backrate).Thus,RG&Ewoulddeductatotalofapproximately$.02305perkWhfrombundledratesduringtheEnergyOnlystage.

CASE96-E-0898toinclude30'.and46'.oftheenergy,andonJuly1,2002allofthecompany'senergy.Theschedulemaybeacceleratedifthemarketpriceforpowerexceeds$.032perkWhonapersistentandsustainedbasisduringtheEnergyandCapacitystage.Also,totheextentthatenergyconsumptionbyend-usecustomersgrowsbeyondalevelof6,714gWh,theenergycapsoneligibilitywillbeincreasedbytheamountofadditionalconsumption.Asforcorporaterestructuring,RG&Ewouldfunctionallydivideexistingoperationsintothefollowingactivity-basedunits:distributionunit(DISCO),generatingunit(GENCO),regulatedloadserviceentity(RLSE),and,atitsoption,afunctionallyseparateholdingcompany(HOLDCO).Thecompanywouldalsocreateastructurallyseparateunregulatedloadservingentity(ULSE).TheULSEwouldbeanenergymarketerandproviderofotherenergyservicesbothwithinandoutsideRG&E'sDISCOserviceterritory.TheDISCOwouldcontinueRG&E'stransmissionand'istributionservice,whichwouldbeprovidedtotheULSEandtheRLSEpursuanttoregulatedtariffs.TheGENCOwouldberesponsibleforoperatingRG&E'sgeneratingfacilities.RG&E'sGENCOwouldconsistofaportfolioofnuclearandnon-nuclearsources.Theoutputfromnuclearsourceswouldbe"dedicated"toregulatedload,whichissubjecttochangetoconformwiththeoutcomeofanyseparatestatewideproceedingonnuclearissues.Outputfromnon-nuclearsources(whichwouldinitiallyserveregulatedload)wouldserveloadonacompetitivelypricedbasisascustomersmigrateawayfromtheRLSE.TheRLSEwouldcontinuetoserveasaprovideroflastresort(POLR)andprovidebundledserviceundertariffstocustomerswhoelecttocontinuereceivingbundledserviceorwhodonothaveapracticablealternative.Inaddition,RG&EwouldcommittoworkingwithStafftodevelopanexperimentalalternativetoprovidePOLRserviceonacompetitivebasis.TheRevisedSettlementalsoprovidesforcontinuationofaprogramtoassistlow-incomecustomersandaservicequalityprogramtomaintainsafeandreliableservice.Further,the ee CASE96-E-0898RevisedSettlementrespondstoourdirective'ointroduceretailaccesstofarmandfoodprocessorcustomersonanexpeditedbasisandaffectsthreependingappealsofourpriordecisionsconcerningRGKE.'inally,exceptasexpresslyprovidedotherwise,theRevisedSettlementwouldsupersedethe1996Settlement.PartiestookanumberofexceptionstotherecommendeddecisionandsubmittedcommentsontheRevisedSettlement.Inaddition,weimposedconditionsandchangesinourNovember26OrderbeforeadoptingtheRevisedSettlement.Inasmuchasissueswereraisedatvariousstages,thisopinionwilladdresstheparties'xceptionsasstatedintheirbriefsonexceptionsandbriefsopposingexceptions(whererelevant),anycorrespondingrevisionsmadeintheRevisedSettlement,theparties'ommentsontheserevisions,andtheconditionsasstatedinour,November26Order./StrandableCostsREVENUEREUIREMENTForthefive-yeartermoftheApril8Settlement(andtheRevisedSettlement),RGEE'stariffratesarepresumedtoincludeallprudentlyincurredinvestmentinelectricplantandelectricregulatoryassets(sunkcosts)asofMarch1,1997.Cases96-E-0948etal.,PetitionofDairleaCooerativeInc.,OrderConcerningRetailAccessProposals(issuedFebruary25,1997).RG&Ewillpetitionthecourtforpermissiontowithdraw(1)asapartytotheappealintheArticle78proceedingbroughttochallengeOpinionNo.96-12,EnerAssociationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.5830-96);(2)thecompany'spendingArticle78proceedingRochesterGasandElectricCororationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.6616-96).(Inthelattercase,werejectedthe1996Settlement'sKamineprovisions);and(3)thecompany'spendingArticle78proceedingRochesterGasandElectricCororationv.PublicServiceCommission(Sup.Ct.AlbanyCo.IndexNo.6531-97)broughttochallengeourJune23,1997OrderEstablishingRetailAccessPilotProgramsinCases96-E-0948etal.

CASE96-E-0898Rateswouldbereducedwithoutidentifyingcostsavings.Thus,neitherRG&E'sratesforfullservicenoritsratesforunbundledservicewouldreflectanysavingsspecificallyidentifiedasarisingfromtheexclusionofstrandablecosts,butthecompanymustmanageitsbusinesstoreducecostsinlinewiththerevenuereductionsinordertomaintainitsrateofreturn.Inaddition,forthosecustomerswhochoosetopurchasepowerinthecompetitivemarket,theremaybeadditionalcostsavings.ThesecustomerscanavoidpayingRG&E'sback-outenergy,capacity,andretailingrateof$.032perkWhandpaythemarketpriceforsuchpower.TheywouldreapthesavingsfromlowerpricedmarketpowerandRG&E'sstockholderswouldbearthelossifthecompanywereunabletoreduceitsgeneratingcosttothemarketprice.IntheRevisedSettlement,thesignatoriesagreedtomeetpriortoJuly1,2000(oneyearearlierthanagreedtointheApril8Settlement)todiscussfutureratemakingtreatmentforsunkcosts.Inaddition,attheendofthefive-yearterm,theremaybefundsavailabletooffsetsomeofthesunkcosts.Thesefundscouldcomefromearningsinexcessoftheallowedrateofreturnonequity,unusedfundssetasidetomatchapotentialliabilityforKamine(bothdiscussedmorefullyinfra),and,ifweapprove,thecustomers'hareofanygainsonthesaleofgeneratingplants.Inthemeantime,boththeApril8SettlementandtheRevisedSettlementprovidethatthecostsofRG&E'snucleargeneratingfacilities,GinnaStationandthecompany's14'.shareofNineMilePoint2,wouldberecoveredinretailratesatleastthrough1999.RG&Efurthercommitstoparticipateingood-faithnegotiationswithStaffandwiththeothercotenantsofNineMilePoint2regardingfutureratetreatmentofthisfacility.ThesignatoriesanticipatethatsimilartreatmentwillbeappliedtoGinnaStation.Forthenon-nucleargeneratingfacilities,bothagreementsaddressthe"fixed"and"variable"portionsofRG&E'sfossilgeneratingunits,hydroelectricgeneratingunits,gas

~e CASE96-E-0898turbines,andpowerpurchasecontracts(otherthanKamine),collectivelyknownasthe"To-GoCosts."IntheEnergyOnlystage,thecompanywouldallow$.01905perkWhastheestimatedmarketvalueforenergyprovidedandwouldagreetoselltoretailersatthisrate.Withanallowanceof$.004perkWhforretailingcosts,theallowancewouldbe$.02305perkWh,whichisgreaterthantheestimated$.013perkWhintheApril8Settlement.ThevariableportionoftheTo-GoCostswouldbesubjecttothe.marketforelectricitycommencingJuly1,1998,thestartoftheEnergyOnlystage.ThefixedportionofsuchcostsistheremainderofallTo-GoCostsnotdefinedasvariable.ThefixedportioncomprisesallcapitalcostsincurredafterFebruary28,1997,06Mexpenses,andproperty,payrollandothertaxes.ThefixedportionoftheTo-GoCostsareassumedtoberecoveredinfullthroughthecompany'sdistributionaccesstariffuntilJuly1,1999,thestartoftheEnergyandCapacitystage,afterwhichrecoveryofthecombinedfixedandvariableTo-GoCostsandretailingcosts,atotalof$.032perkWh,wouldbesubjecttocompetition.TherecommendeddecisiondidnotincludespecificestimatesofstrandablecostsinthecomputationofRG&E'srevenuerequirement.Accordingtotherecommendeddecision,studiesofRGSE'sstrandablecostsarespeculativeatpresentbecauseofthelackofacompetitivemarketforelectricity.TherecommendeddecisionalsonotedthattheApril8Settlementcallsforratereductionswithoutspecifyinganestimateofstrandablecostsandallowsforfutureconsiderationofsuchcostswhensomeofthevariables,suchastheactualmarketpriceforelectricity,willbeknown.Therecommendeddecisionalsopointedoutthat,exceptfornuclearpowerandKaminepurchases,therecoveryoftheremaininghalfofRGEE'sTo-GoCostsforgenerationwoulddependuponthecompany'sabilitytocompetewithoutsidesourcesofpower.IfthecompetitivepricesarelowerthanRGSE'sback-outrates,customerswhopurchasethatpowerwillautomaticallyenjoy 0~e CASE96-E-0898thebenefitsandstockholderswillbeartheeffectsoftherevenueloss.Severalpartiesexcept,insistingthatstrandablecostsshouldbecalculatednowandthatfurtherratereductionsshouldbeauthorizedbydisallowingaportionofthestrandablecosts.AARPrenewsitsclaimthatstrandablecostsamountto$800millionto$940million,andAARPcallsforanequalsharingofstrandablecostsbetweenratepayersandstockholdersunlessthefinancialintegrityofRG&Eisinjeopardyorlegislationispassedprohibitingsharing.AARPmaintainstherecommendeddecisionisinconsistentwithOpinionNo.96-12,whichstatedthatstrandablecostsshouldbeallocatedthrougha"carefulbalancingofinterestsandexpectations";that"innovativemeansmustbeusedtoreducetheamountofstrandablecostsbeforetheyareconsideredforrecovery";andthatthesecostsshouldbe"recoveredwithaneyetoloweringrates,[and]fosteringeconomicdevelopment.AccordingtoAARP,therecommendeddecisionadmitsthattheApril8Settlementisnotsupportedbysubstantialevidenceoftheamountofstrandablecostsbecausethesignatoriesdidnotestimatethemandtheydidnotsetforthhowsuchcostswillbeestimatedinthefuture.CPBreiteratesitsestimatedrangeof$1,200millionto$1,500millionforstrandablecosts,butnotesthatapreciseestimateofstrandablecostsisnotneededtorequireimmediateratereductionsofuptotenpercent.CPBalsoclaimsthattherecommendeddecisionfailstorecognizethatthedisparitiesbetweencompetitiveelectricpricesandcurrentrateswillbeattheirzenithoverthenextseveralyears,whichshouldbetakenadvantageoftoreducerates.Finally,CPBrespondstovariouscriticismsofitsstrandablecostproposalbynotingthat(1)withrespecttobondratings,CPBwouldlimititsstrandablecostdisallowancetomaintainanequityratioofatleast40%,01Cases94-E-0952eral.,~suraOpini,onNo.96-12,mimeopp.89-90.

CASE96-E-0898and(2)withrespecttosharing,CPB'sproposalswouldallocate30%ofthetotalstrandablecoststoRG&E'sshareholders.RG&EandStaffsupporttherecommendeddecision'sconclusionswithrespecttostrandablecosts.TheypointoutthattheApril8Settlementdoesnotguaranteerecoveryofstrandablecosts;andnotethatapproximately$155millionincumulativeratereductionsandforgonecreditsarecalledforintheApril8Settlementwithoutspecifyinghowthecompanyistoreduceitscosts.ThecomparablefigurefortheRevisedSettlementis$174.6million.StaffexplainsthatthestrandablecoststudiessubmittedbyCPBandAARPcontaindataandcomputationalerrorsthatrenderthemunreliableasabasisformodifyingtheApril8Settlement.AnexampleoftheerrorscontainedinthestudiesthatstaffobservedisAARP'srelianceupon1995data,whichdoesnotprovideanaccuraterepresentationofthecostsoftheKaminepurchasedpowercontract.TheomissionoftheKaminecontractcostsalone,staffsuggests,couldincreasestrandablecostsbyover$101million,andadoublecountofregulatoryassetswoulddecreasestrandablecostsby$210million.Ontheotherhand,StaffnotesthattheApril8Settlementprovidesmeaningfulratereductions,strongincentivestomitigatecosts,includingstrandablecosts,andpowerfulincentivesforRG&Etomanageitsoperationsefficientlyandaggressively.RG&EarguesthatCPB'spositionisconsistentwithitsadvocacyofconfiscatinginvestors'undsinordertoprovideashort-termbenefittodayforcustomers,regardlessofthelong-termconsequences.Forexample,RG&EmaintainsthatitwouldsufferabonddowngradingwereCPB'sproposalstobeimplemented,andthatitsstockvaluewoulddeclinesignificantly.RG&EpointstothestocksofutilitiesinTexas,whichsufferedasignificantandimmediatedropinpriceswhentheTexascommissionannouncedthatthoseutilitieswouldhavetowriteoffaportionofstrandablecosts.Likewise,thecompanycitesa50%declineinthestockpriceandabonddowngradingoftheparentcompanyofPublicServiceCompanyofNewHampshirewhenthat CASE96-E-0898~state'scommissionannouncedtheutilitywouldhavetoabsorbsomestrandablecosts.IncommentsontheRevisedSettlement,theRetailCouncilrepeatsthecallsforacurrentestimationofstrandedcosts,inordertojustifyfurtherraterelief.WefindreasonabletheRevisedSettlement'streatmentofstrandablecosts.First,byincludingintheback-outrateacomponentforthefixedportionoftheTo-GoCosts,RG&E'scustomershaveameaningfulopportunitytoavoidtheequivalentofsomeofRG&E'strandablecostsiftheycanpurchaseelectricpoweronthemarketatapricebelowtheback-outrate.Inaddition,theRevisedSettlementcallsforratereductionsandtherelinquishmentofotherbenefitswithoutspecifyinghowRG&Eistoachievethecomplementarysavingsneededsothatitcanmaintainitsoverallrateofreturn.TheRevisedSettlementalsorequiresthepartiestomeetpriortoJuly1,2000todiscussthefutureratemakingtreatmentofRG&E'ssunkcosts.Finally,theexceptionscallingforanimmediateestimateofstrandablecostsaredeniedbecausetheestimatesprofferedontherecordcontaindataandcomputationalerrors.KamineCostRecoverRG&Eisinvolvedinlitigationpertainingtoitspowerpurchasefromfacilities'ownedbyKamine.TheApril8Settlement'sKaminerecoveryprovisionspermitRG&Etosetaside$33.2million($32.9millionintheRevisedSettlement)overthefive-yeartermtocovercostsrelatedtoresolutionofthelitigation.AssumingasettlementoftheKaminelitigation,RG&EwouldbeallowedtocontinueafterJuly1,2002toreflectinrates$10.6millionperyear($10.5millionintheRevisedSettlement)untilthecostofthatsettlementisrecovered.However,ifnosettlementwerereachedandRG&Ewereobligatedtopay,RG&Ewouldbepermittedtorecoverfromratepayersuptoseven-eightsofthecostofthemaximumoutputofKamineduringthefive-yearterm,lessamountsalreadyaccruedandanysecuritizationbenefitsforthcoming.Alsothe CASE96-E-0898$10.6million($10.5millionundertheRevised.Settlement)automaticrecoverywouldendattheterminationofthefive-yearterm.Theunrecoveredbalance,ifany,wouldbedeferredforfuturerecovery,andwewoulddeterminethetimingoffuturerecovery.TherecommendeddecisionsupportstheApril8Settlement'streatmentoftheKaminedispute.Therecommendeddecisionalsopointedoutthat,intheabsenceofasettlementofthatdispute,therearelimitsontheimmediaterateimpactsofKaminecostrecovery,andrecoveryofKaminecostsonalongtermbasismaybesubjecttotheforcesofacompetitivemarketforelectricity.Forthesereasons,theJudgerecommendedapprovaloftheKaminecostrecoveryprovisions.CPBexcepts,contendingfootnote31oftheApril8Settlementlimitsthecompanytorecoveryofprudentandverifiablecosts,andthatanycourtordereddamagepaymentscouldbe,butshouldnotbe,recoveredinrates.Inaddition,CPBnotesthat,iftheKaminedisputeissettled,RG&Ewouldbeentitledto100%recoveryofstrandableKaminecosts.CPBrequeststhatthisprovisionbeclarifiedtoassurerecoveryonlyifthetotalcostofthesettlementislessthantheKaminecontractprice.TheAttorneyGeneralarguesthatthereshouldbenoautomaticrecoveryofKaminecosts,andthatweshouldinsistonaprudencereviewofallpaymentstoKamine.RG&ErespondsthatithassteadfastlypursuedallavailableavenuestorelieveitscustomersoftheburdentheywouldbeariftheKaminecontractwereenforced.Intheprocess,itstates,thecompanyhassaveditscustomerstensofmillionsofdollars.ItcriticizesCPB'ssuggestionthatitshouldcontinuetodevoteitsresourcestoavoidingexcessiveKaminepowercosts,whilebearingtheentireriskofdamages,as"theultimateformofcynical,one-way-streetregulation."WithrespecttoCPB'ssecondpoint,RG&Edoesnotanticipatesettlingthecontractualclaimforanamountgreaterthanthatpayableunderthecontract~

CASE96-E-0898AtourOctober8,1997session,wenotedourdiscretiontoreduceratesduringthefive-yeartermifitbecomesclearthattheKaminecostrecoveryclausewouldrecovermorefundsthanneededtoresolvethecontractdispute.TheRevisedSettlementexpresslyacknowledgesthatdiscretion.IncommentsontheRevisedSettlement,RGEE,Staff,CPB,andMultipleIntervenorsmaintainthisflow-throughprovisionisreasonable.Further,asalludedtoabove,footnote31statesspecifically"[n]ocostreferencedinthis[Revised]Settlementmaybeconsideredforrecovery,true-upordeferralunlessitisprudentandverifiable."~ReturnonEuitUndertheApril8Settlement,ifRGEEachievesareturnoncommonequityforitsregulatedoperationsinexcessof11.80'.fortheentirefive-yearterm,thecompanywouldbeentitledtoretain50'ftheamountinexcessof11.80'.andtousetheremaining50%towritedownaccumulateddeferralsorsunkcosts.Therecommendeddecisionfoundtheseprovisionsreasonable.ItnotedthatCPB'sproposed10.2%returnonequitydidnotincludeastayoutpremium,whichatthetimewascomputedtobe1.44%basedonthespreadbetweentheJune1997treasurybillsandMay2002treasurybonds.TherecommendeddecisionnotedthataddingastayoutpremiumtoCPB'sreturnwouldincreaseitto11.64'.,closetotheApril8Settlement'ssharingthreshold.CPB,theAttorneyGeneral,andtheRetailCounciltakeexceptions.CPBclaimsthatitsproposed10.2%returnonequityshouldbeusedasthesharingthreshold.CPB's10.2;equityreturnwasbasedondiscountedcashflow,capitalassetpricingmodel,comparableearnings,andriskpremiummethods.CPBalsocontendstherecommendeddecisionmiscalculatedthestayoutpremium.CitingtherecommendeddecisionintheGenericFinanceProceeding(Case91-G-0509),CPBclaimsthepremiumshouldbebasedonone-halfofthespread,whichitsayswouldreducetherecommendeddecision'sfigurefrom11.64.to10.92%

o CASE96-E-0898CPBalsorenewsitscallfordifferentsharingofearningsoverthethreshold,with50'.towritedownstrandablecosts,25%forthestockholdersand25%fortheratepayersforearningsinexcessof10.2'.Itproposesthiscomputationbeperformedannuallyinsteadofforfiveyears.TheAttorneyGeneralsupportscontinuationofthe11.2%sharingthresholdinthe1996Settlement,contendingRG&Ewillassumelittleadditionalriskasaresultoftheintroductionofcompetition.TheRetailCouncilcallsfortheflowthroughofallexcessearningstoratepayers.Accordingtoit,theApril8Settlementgives100%ofexcessearningstostockholdersbecausetheportionthatwouldbeusedforwritedownsissimplyareturnofcapitaltoshareholders.TheRetailCouncilarguesweshouldrejecttheconceptofa"regulatorycompact,"whichitseesasguaranteeingshareholderrecoveryofallpastinvestments.RG&ErespondsthatCPB'sproposed10.2-.returnonequityisabout130basispointsbelowtheaverageallowedreturnsforelectricutilitiesinthefourth'quarterof1996andfirstquarterof1997.AlsoRG&EobservesthatCPB'simpliedspreadoverbondyieldsisabout160basispoints,whichislessthanthatemployedintheGenericFinanceProceeding,wherea350basispointriskpremiumabovetheutilities'ondyieldswasgenerallyemployedand250basispointswasconsideredthelow-endoftherange.RG&Econducteditsownstudiesandconcludesthatitscurrentcostofequityisbetween11.95%and12.20-..Moreover,RG&EpointsoutthatCPB'sstrandablecostproposalwouldweakenthecompany'sfinancialpositionbyloweringitsequityratioandincreasingitsrisk,whichcouldleadtoadeclineinitsbondratings.RG&Esuggestsitsequityratiowouldbereducedfromtheexisting49'-.to36.3.ifCPB'stotalratebasedisallowanceswereadopted.Finally,RG&EobservesthatCPB'sproposedallocationofexcessearningsonanannualbasiswouldbeunfairlyasymmetricalbecauseexcessearningsingoodyearswouldbesharedwiththeratepayersbutearningsshortfallsinbadyears CASE96-E-0898wouldbecompletelyabsorbedbythestockholders.RGGEsuggestsitwouldneverearnthetargetreturnifthischangeisadopted.AtourOctober8,1997session,wesuggestedthatthe11.8.returnonequitysharingthresholdwastoohigh,especiallygiventhatthecompanyhadrecentlyearnedexcessprofits,whichitwouldretainfullyundertheApril8Settlement,andthattheprovisionsrelatedtodeferralscouldresultintheneedforrateincreasesattheendofthefive-yearterm.RGEE,Staff,andMultipleIntervenorsmaintainthattheRevisedSettlementaddressesourconcerns.TheycitetheRevisedSettlement'sprovisionthatimputes150basispointsofthe1997rateyearoverearningstothe11.8'.returnonequitymeasurementsoverthefive-yearterm.Thiswouldeffectivelyreducethesharingcapto11.5%Theexcessearningsallocationwouldalsobereallocatedsuchthat(1)halfoftheexcesswouldbeusedtowritedowndeferredcostsaccumulatedduringtheterm,andanyportionofthishalfremainingafterdeferralsarewrittendownwouldberetainedbythecompanyasearnings;and(2)withregardtotheotherhalfofanyexcessearnings,thefirst$800,000wouldbeusedtoreduceratesforcertainlargeindustrialandcommercialcustomerclasses.Theremainderwouldbeusedtowritedownaccumulateddeferralsorsunkcosts,andtotheextentthatanypartofthislatterhalfremainsafterwritingdownsuchdeferralsandsunkcosts,wewoulddetermineitsdisposition.MultipleIntervenorsstatesthatthe$800,000allocationforlargecustomersisintendedtocorrectforthefactthatadisproportionateshareoftheSBCreallocationwasdirectedtosmallcustomers.StaffassertsthattheRevisedSettlementreducesthelikelihoodofrateincreasesattheendofthefive-yearterm.CPBreiteratesitsclaimthattheearningssharingtriggershouldbe10.2%andnotesthat,sincethetimeitsdirecttestimonywassubmitted,interestrateson30-yeartreasurybondshavedeclinedbyabout60basispoints,whichitclaimswouldjustifyalowerequityreturn.

0o CASE96-E-0898TheRetailCouncilreiteratesthatthetreatmentofexcessearningsisunacceptablebecausethereallocationofexcessearningsbenefitsonlyshareholdersorlargecustomers.The11.5'-.sharingthresholdfallswithintherangeofequityreturnspresentedinthiscase:from10';byCPBto12.2%byRGEE.Althoughacursoryviewwouldleadtotheconclusionthatthe11.5%isonthehighside,acloserexaminationwillshowthe11.5%effectivethresholdisreasonable.First,itmustberememberedthatwerecentlyestablishedan11.2%sharingthresholdinthecompany'slastcase'hatcoversthethree-yearperiodendingJune30,1999.Ifearningsexceedthat,overtheentirethree-yearperiod,theyweretobesharedequallybetweenshareholdersandcustomers,withthecustomers'harebeingusedtowritedownassets.Second,theRevisedSettlementwouldextendthestayoutperiodbytwoyears,andwouldincreasethecompany'sbusinessriskbyremovingitsmonopolystatusandsubjectingittocompetition.Inaddition,theRevisedSettlement'srevenuereductionsplacemoreriskontheshareholders.Thecombinationofthetwo-yearextension,increasedbusinessrisk,andreducedrevenuesmorethanjustifytheincreaseinthethresholdforsharing.Third,theRevisedSettlementallocatesmoreofanyexcessearningstowritedowndeferredcostsorsunkcosts.Wedohaveonereservationabouttheprovisionthat$800,000ofexcessearningswillbeusedtoreduceratesforcertainlargecustomerclasses.WeconcludethatlargecustomerswillalreadyreceivesubstantialbenefitsunderotherprovisionsoftheRevisedSettlement;thus,thereisnoneedforthisuniqueadditionalbenefit.Accordingly,weadoptthistermoftheRevisedSettlementontheconditionthatthefirstsentenceofParagraph10(b)isremoved,andthewords"...ofthisamount..."aredeletedfromthesecondsentence.01Cases95-5-0673etal.,~suza,OpinionNo.96-27,mimeopp.7,21,and27.

CASE96-E-0898GainonSaleofGeneratinPlantsTheApril8Settlementcontainsnoseparateprovisionsforthedispositionofgains,ifany,onthesaleofelectricgeneratingplants.Rather,anygainswouldbeincludedinthereturnonequityandsharedifthatreturnexceedscertainthresholds.AtourOctober8,1997session,westatedourbeliefthattheApril8Settlementwasunbalancedwithrespect-toitstreatmentofanygainonthesaleofgeneratingassets.WealsosoughtaprovisionthatwouldencourageRG&Etosellgeneratingplants.TheRevisedSettlementcontainsprovisionsthatincreasethecustomers'hareofgainsrealizedonsuchsales,andprovideanincentivetoencouragepromptdivestitureofgeneration.StaffandRGSEobservethattheRevisedSettlementgenerallyprovidesfora20%/80%splitbetweenshareholdersandratepayersofanynetgainsoverthefive-yeartermandthatcustomerswillbenefitfromanysuchgainonthesaleofgeneratingassetsregardlessofthecompany'slevelofequityreturn.Thesplitmaychangeto40:shareholderand60:ratepayeronthefirst$20millionofnetgaininthefirstthreeyearsoftheRevisedSettlement.Thesepartiesmaintainthisadditionalallocationtotheshareholderisasufficientincentivetoencouragepromptdivestiture.CPBrepliesthatadivestitureincentiveisunwarrantedbecauseRGEE'sratesareamongthehighestinthenationandanyratereductionresultingfromtheflowthroughofanetgaintoratepayerswouldmakethecompany'sratesmorecompetitive,produceadditionalsales,andincreaseshareholders'arnings.WefindthattheRevisedSettlement'streatmentofgainsonthesaleof.generatingassetsisreasonablebecauseitensuresratepayerswillreceiveasubstantialportionofanynetgainsonthesaleofplantsthatwereacquiredonbehalfofandfinanciallysupportedbytheratepayers.Inaddition,weadopttheincentiveforRG&Etodivestgeneratingassetspromptlybecausedivestiturewillhastenthedevelopmentofacompetitivepowermarket,thebenefitsofwhichwillredoundtoratepayers, 0O.

CASE96-E-0898consistentwithOpinionNo.96-12,and,ensureafair~~~~quantificationofstrandablecosts.'SBCFundinTherecommendeddecisionsupportedtheApril8SettlementprovisionsrelatedtotheSBCcharge,i.e.,toflowthroughtoratepayersallmandatedincreasesanddecreasesinspendingforSBCprograms,whichincluderesearchanddevelopment,energyefficiency,lowincome,andenvironmentalprotection.Thelevelofspendingalreadyreflectedinrateshadbeenestablishedinthe1996Settlement,whichsetratesforthethree-yearperiodendingJune30,1999.AARP,CPB,andPIIexcepttotherecommendeddecision'sconclusionnottomodifytheApril8SettlementprovisionsrelatedtotheSBCcharge.Theyseekspecificspendinglevels.Forexample,CPBrequeststhatthe1995spendinglevelsbemaintainedthroughoutthefive-yearterm,whilePIIsupportsexpendituresderivedfroma$.0015perkWhratechargedtoallenergysales.StaffpointsoutthattheRevisedSettlementwouldbuildspecificSBCexpendituresintotherates,thecostofwhichwouldbegreaterthanthetotalthatwouldbespentiftheSBCweresetat$.001perkWhforthreeyears.However,StafffurtherexplainsthattheexpenditureswouldbespreadoverfiveyearsbecausemostoftheexpendituresrelatetoongoingenergysavingsandincentivepaymentsthatthecompanyisobligatedtopayforunderitsDSMbiddingprogram.PIIopposestheSBCmodificationscontainedintheRevisedSettlementbecauseitwouldreduceexpendituresfortheseprogramsbynearlyhalffrom$7.8millionin1995toanaverageof$4.78millionbeginningin1998.PIIsetsforthseveralexamplesofspecificspendingreductionsthatwouldresultandstatesthatthecutsareinconsistentwiththeclearlyexpressed~Cases94-E-0952etal.,~snra,OpinionNo.96-12,mimeop.60.

o CASE96-E-0898intentiontopreservetheseprogramsatleastduringthetransitionperiod.'urthermore,PIIcallsfortheeliminationoftheLargeCustomerCreditProgram,whichallowsindustrialcustomerstoelectnottoparticipateintheDSMprogramandtherebyreceivea$.0003perkWhcredit.ArguingthatRG&EwillnolongerofferDSMprograms,PIIbelievesthecreditshouldbeterminated.SincetheSBCfundingallowancecontainedintheRevisedSettlementmeetsourstatedgoal,wefindtheseprovisionsacceptable.WithrespecttoPII'spositionthattheLargeCustomerCreditProgrambeeliminated,wenotethatthecreditissubjecttorecalculationintheeventthatRG&E'sspendingonDSMprogramschangesmaterially.'therProosalsSeveralpartiessupportotherchangestopartsoftheRevisedSettlementthatareunchangedfromtheApril8Settlement.PIIproposesa"pricecapplus"mechanismforRG&E'srevenuerequirement,whichisacombinedrevenuecapandpricecap.Underpricecapplus,theinitialyear'srevenuecapwouldbesetusingtraditionalcostofserviceregulationandinsubsequentyears,therevenuecapwouldbeadjustedforthreefactors:inflation,productivity,andgrowth.Inaddition,PII'spricecapplusincludesarevenuecaptrue-up.PII'spricecapplusproposalisnotacceptablebecauseitcouldleadtoincreasedratesifproductivityisnotsufficienttooffsetinflationand,inanyevent,wouldrequireannualregulatoryoversightofthetrue-upmechanism.Ineffect,thisproposalrunscountertoourobjective,whichistorelymoreoncompetitionandlessonregulation.Cases94-E-0952etal.,~snraOpini,onNo.96-12,mimeop.61.Cases95-E-0673and95-G-0674,RochesterGasandElectricCororation-DSM,OpinionNo.95-20(issuedDecember27,1995),mimeoAppendixp.9.

CASE96-E-0898~CPBproposestoreducetherevenuerequirementby$235,000toreflectreformsinWorkers'ompensationLaw.CPB'sadjustmentissubsumedintheoverallrevenuereductionsrequiredbythisorderandisrejectedbecausethischangeisbutoneofmanychangesexpectedinthefuturethatwillaffectearningssubjecttothesharingthreshold.CPBalsoproposeswemodifytheprovisionthatwouldpermitRG&Etodeferthecostsofoperationandmaintenancerelatedtoinflationinexcessof4.0'%PBstatesweshouldsimultaneouslyrequirethereturnonequitytodropbelow9.beforedeferralispermitted.TheCPB'smodificationisasymmetrical,i.e.,RG&Ewouldhavetobear100%oftheexcessinflationriskasthereturnonequitydropsfrom11.5.to9.0%,butthecompanywouldonlyretainasmallportionofth'eupsidebenefitabovethe11.5'.equityreturnbecauseofotherequityreturnsharingmechanismweadopted~sura.Consequently,thisproposalisnotadopted.AARPexceptstothepropertytaxincentive,whichwouldallowRG&Etodeferforfuturerecoveryorpassbacktoratepayers50.ofanypropertytaxexpenseincreaseordecreaseincomparisontothebaselevel,i.e.,theactualtaxexpendituresduringthe12monthsendedFebruary28,1997lesstaxesrelatedtoanyassetssoldafterJune30,1997.Theother50;wouldbereflectedintherateofreturncomputations.AARPcharacterizestheprovisionasabribetogetthecompanytolobbyfortaxreductions.AARP'sexceptionisrejectedbecausetheprovisionwillencourageRG&Etopursuereductionsinthecostofpropertytaxes,orfailingthat,becausetheprovisionwillsparecustomershalfofany'increaseinsuchcosts.WenotethatcertainprovisionsoftheRevisedSettlement(i.e.,($8,11-17,24(withrespecttoshut-downcosts),and$30)providefordeferralandrecoverywithoutrequiringfurtherpetitiontoorapprovalbyus.Withoutalteringtheintentoftheseterms,weadoptthemontheconditionthataformalpetitionwillbefiledwithuspriorto CASE96-E-0898establishingdeferralsorcommencinganyrecoveryduringthefive-yearterm.Finally,wealsoobservethattheRevisedSettlementreferstopossibleStatewideresolutionofthefutureratemakingandownershipofnuclearfacilities.Paragraph23(d)statesthat"nochangeinthetrea'tmentofRG&E'snuclearfacilitiesshallbeimplementeduntilatleastJanuary1,2000."TheJanuary1,2000datemightbeconstruedasprecludingasaleortransfer,throughanauctionorotherwise,ofthecompany'sinterestinnuclearfacilitiesuntilatleasttheyear2000and,thus,couldconflictwithsubsequentactionontheAugust1997StaffReportonNuclearGeneration.Weadoptthisparagraphontheconditionthat$23(d)ismodifiedtoreadasfollows:"nochangeinthetreatmentofRG&E'snuclearfacilitiesshallbeimplementedpriortotheCommission'sresolutionoftheAugust1997StaffReportonNuclearGeneration."lREVENUEALLOCATIONANDRATEDESIGNPursuanttotheApril8Settlement,revenuedecreaseswouldgenerallybeallocatedtoRG&E'sserviceclassesbasedontheirresponsibilityforgenerationcosts.Asaresult,thelargeindustrialcustomerswouldreceiveratereductionsof10-:toachieveanaveragerateof$.056perkWh;largecommercialcustomerswouldreceiveratereductionsof8%toachieveanaveragerateof$.068perkWh;otherindustrialandcommercialcustomerswouldreceiveratereductionsof3.7'.toachieveanaveragerateof$.08perkWh;andresidentialandsmallbusinesscustomerswouldreceiveratereductionsaveraging2.5%,withratesvaryingdependingonusageandclassification.SeveralIspecificratedesignchangeswerealsosetfoith,includingamongothersaproposedannual$1.50increaseinthemonthlycustomerchargeforresidentialandsmallbusinesscustomers.TheJudgerecommendedtheallocationfavoringthelargeindustrialcustomersbecause(1)asMultipleIntervenorshadobserved,RG&E'sresidential,commercial,andindustrialrateswerein1995,respectively,34.6'-.,32.1'.,and61.5'.above e

CASE96-E-0898correspondingnationalaveragerates,whichjustifiesproportionatelygreaterreductionsfortheindustrialclass,and(2)theallocationofrevenuesandindividualratechangeswouldmoveRG&E'sratesclosertothemarginalcosts,whichiseconomicallyefficientandmakessenseinanincreasinglycompetitiveelectricitymarket.Withrespecttotheincreasesinthemonthlycharge,therecommendeddecisionconcludedthattheultimatecustomerchargeof$17.50isjustifiedbythefactthatthecomparablemarginalcostisabout$20.'PBexcepts,arguinggreaterattentioncanandshouldbepaidtorateschargedforelectricityaroundthecountry.Itprovidesextensivelegalargumentsinsupportofthisproposition.Assumingweweretoadoptthisapproach,CPBconcludesweshouldadoptequalacross-the-boardpercentagedecreasesforallclasses.AARPobjectstoresidentialcustomersreceivingsmallerdecreasesandarguessubstantialjointandcommoncostsshouldnotbeallocatedtocustomercostssomoreofthemcanbecoveredinratespaidbynon-residentialusers.PULPcontendsthatwehavenostatutoryauthoritytofavorlargerindustrialcustomersoverothercustomers.PULPalsoassertsitisirrationalandillegaltofavorthisonecustomerclassoverothersasthereassertedlyhasbeennoshowingtheindustrialcustomersneedsuchadecrease.PIIclaimsthatthecustomerchargeshouldnotbeincreasedfromthecurrent$10monthlychargeto$17.50overthefiveyearsbecausethemarginalcoststudywascalculatedthreeyearsagoandwasnotsubmittedinthiscase,andbecausetheeffectofsuchachargewouldincreasebillsfor43;oftheresidentialclassevenwithanoverallrevenuedecrease.Inaddition,PIIisconcernedthatthedecreasetoenergyrateswouldcarrynegativeenvironmentalconsequences.Accordingto~Exhibits50and51,Tr.1,450-1,459.

0e CASE96-E-0898PII,theincreaseinsaleswouldbeaccompaniedbyanincreaseinpollution.0Staff,RG&E,andMultipleIntervenorssupporttherecommendeddecision'sfindingswithrespecttorevenueallocationandratedesign.Theynotethatratesmustberealignedtopromoteeconomicdevelopmentandindustrialcompetitiveness.Forexample,StaffreasonsthatindustrialcustomerswhomaybeconsideringwhethertoexpandinRochesterortorelocateandexpandelsewheremightbeinducedbylowerratestoremainintheRG&Eserviceterritory.Theresultingexpansionoffacilitiesandcreationofnewjobs,Staffstates,wouldhavepositiveeconomicimpactsfortheratepayersandforthelocalcommunity.Thesepartiesfurtherassertthatmarginalcostsarearationalbasisuponwhichtosetrates,andlargecustomersarecontributingrevenuesdisproportionatelyinexcessoftheirmarginalcostsofservicerelativetoresidentialandothersmallcustomers.0Withrespecttotheannual$1.50increaseinthemonthlycustomerchargesoverthetermoftheApril8Settlement,StaffandRG&Ereadilyconcedethatabout43.oftheresidentialclasswouldexperiencebillincreases,buttheynotethatthecurrentcustomerchargeiswellbelowthe$20marginalcosts,andenergypricesoverallarewellabovemarginalcosts,resultinginimproperpricesignalsuponwhichcustomersbasetheirdecisions.RG&Ealsonotesthatitslow-incomecustomersarejustaslikelytoconsumemorethantheaveragelevelofenergyastheyaretoconsumelessthanaverage.Therefore,RG&Ebelievesthattheincreaseinthecustomerchargewillnotfalldisproportionatelyonlow-incomecustomers.AtourOctober8,1997session,wedidnotquestiontheratereductionsforlargeindustrialcustomersbutexpressedinterestinprovidinglargerratedecreasestoresidentialandothersmallcustomers.Inaddition,weaskedthepartiestoreconsiderthecustomerimpactoffiveannualincreasesof$1.50 CASE96-E-0898inthemonthlycustomercharge,butacknowledgedthatlargerratereductionsforsmallcustomerclassesmightallaythisconcern.RG&E,Staff,andMultipleIntervenorsnotethattheRevisedSettlementwouldgiveallserviceclassificationsatleastafivepercentreduction.TheyexplainthatthroughreallocationoftheSBCfundingandtheuseofGrossReceiptsTax(GRT)reductionstheoverallrevenuedecreasewillchangefrom$27.1million(4.1%)to$40.6million(6.1%).MultipleIntervenorspointsoutthatadisproportionateshareoftheSBCreallocation(approximately$800,000)wasdirectedtotheresidentialandsmallcommercialcustomers.StaffstatesthateveryclasswillreceivethebenefitsoftheGRTreductions.TheAttorneyGeneral,CPB,RetailCouncil,PII,PULP,andMr.Strakaclaimthatevenfurtherreductionsarewarrantedfortheresidentialandsmallcommercialclasses.PULPmaintainstheallocationoftherevenuedecreaseisnotbalancedandthereisnosupportforthepropositionthattheindustrialcustomersarepayingasubsidyundercurrentrates.PII,CPB,andMr.Strakaalsoobservethattheplannedratereductionsforresidentialandsmallcommercialcustomersareback-endloaded,i.e.,byyearfourthesecustomerswillreceivea2.62:reductionandtheninyearfivejumptothefulldecreaseofabout5%.Ontheotherhand,PIIstatesthatthelargestindustrialcustomerswillreceive11.2%decreases,ormostoftheirreductions,byyearfour.TheAttorneyGeneraladdsthattheflowthroughoftheGRTreductionswouldcostRG&EnothingandtheratescontainedintheRevisedSettlementwouldstillbeuncompetitive.Mr.Owens,Mr.Straka,andCPBclaimthat36%ofresidentialcustomerswouldstillreceiveabillincreaseundertheRevisedSettlement,whichtheystateisunacceptable.Mr.Owensrecommendsthatthemonthlychargeincreasebehalvedto$.75peryear,whileCPBwouldeliminateanyincreaseinthisrate.AsCPBargues,wecanconsideranumberoffactorsindeterminingaproperlevelofrates.AnimportantconsiderationisthecompetitivenessofRG&E'srateswiththoseofotherareas

CASE96-E-0898inthenation.Aslargeindustrialcustomershavethewidestarrayofcompetitivealternatives,andareverysensitivetothelevelofrates,theirratesshouldbealignedascloselyaspossibletocomparativealternatives.UndertheApril8Settlement,thelargeindustrialrateswouldhavebeenultimatelyreducedto$.056perkWhonaverage,whichapproachestheindustrialnationalaveragepriceforelectricityofapproximately$.046perkWh.UndertheRevisedSettlement,theindustrialrateswouldbe$.055perkWh.However,wefindthattheresidentialandsmallcommercialcustomers'ouldnotreceivesufficientrevenue,reductionsundertheRevisedAgreement.Wewillincreasetherevenuereductionsforthosecustomersfromapproximately5.0%to7.5.inthefinalyearoftheterm.ThischangerequiresacorrespondingadjustmenttotheRevisedSettlement'scumulativereductionfrom$51.1millionto$64.6millionforJuly1,2001.TheRevisedSettlementprovidesthat,beginningJuly1,1999andcontinuingthroughJune30,2002,IncrementalManufacturingLoadshallbeservedatanaveragerateof$.059perkWh.Weadoptthistermontheconditionthattheaveragerateinsteadis$.045perkWhsothatitapproximatesthenationalaveragerate.Withrespecttotheincreaseintheresidentialandsmallcommercialcustomercharges,weobservethattheincreasesarebasedoncomparisonsofratesandmarginalcosts,whichsuggestenergyratesshouldbereducedandthatcustomerchargesmaybeincreasedwithoutexceedingcost.Thisrealignmentisconsistentwiththecomingcompetitivemarketforelectricityandretailingservices.Wenotethatthefurtherratereductionsapprovedfortheresidentialcustomerswillreduceto27%thepercentageofcustomerswhowillreceivebillincreasesonaverage.Itshouldalsobenotedthattheyearly$1.50increaseResidentialandothersmallusersareidentifiedintheRevisedSettlementschedulesbytheirlowervoltageclassas"pri-pri,""sec-sec,"and"pri-sec."

CASE96-E-0898inthemonthlycustomerchargehadalreadybeenapprovedforthethreeyearsendingJune30,1999inthecompany'slastrateproceeding.TheRevisedSettlementreasonablyextendstheincreaseforthreemoreyears.Lastly,PII'soppositiontoadecreaseinenergycharges,becauseofpotentialnegativeenvironmentalimpacts,isrejected.Evenwiththechange,energyrateswillremainabovemarginalcostsandPIIhasofferednoevidencethatenvironmentalimpactsaresosubstantialastoexceedtheenvironmentalthresholdsdiscussedinfra.SinleRetailerModel'HEPROGRAMThesingleretailermodelisthefoundationuponwhichtheentireProgramisbuilt.AccordingtotheApril8Settlement,asingleretailer,orLSE,wouldpurchasepowerontheopenmarketanddistributionaccessfromRG&E.TheLSEwouldmarketthepowertocustomersandwouldberesponsibleforschedulingdeliveriesbasedonloadshapesorreal-timemeterdata.Also,forthefirstthreeyearsoftheProgram,RG&EwouldofferbillingservicestotheLSEssothattheymaycommenceoperationswithouthavingtowaitfordevelopmentoftheirownbillingsystems.RG&Ewouldretainownershipofthemeters.Numerousobjectionswereraised.TherecommendeddecisionconsideredmanyofthesebutdidnotaddressWEPCO'ssecuritydepositconcernsbecausetheissuewouldbethesubjectofanoperatingagreement.Onexception,WEPCOassertsthatthesingleretailermodelwouldprecludeallbutthelargestLSEsfromenteringthemarketbecauseitfearsRGEEwillrequireLSEstopostsecuritydeposits,andtoparticipateinservicerestorationeffortsandTheissueoftheapplicabilityoftheHomeEnergyFairPracticesActtosingleretailershasbeenconsideredinanotherCommissionorder.Cases94-E-0952and96-E-0898,~suza,OrderRegardingRegulatoryRegimeforSingleRetailerModel(issuedDecember24,1997).

CASE96-E-0898powerqualitymatters.Inlieuofasecuritydeposit,WEPCOproposesa"lockbox"approach,i.e.,asharedbankaccountbetweentheLSEandRGEE.RG&Erespondsthattheseissuesshouldbepartofthediscussionleadinguptoanoperatingagreementbecausetherearelesscostlyapproachesthanthe"lockbox"approachsuchasindividualguarantees,lettersofcredit,andescrowarrangements.Withrespecttoparticipatio'ninservicerestorationandpowerqualityissuesofWEPCO,RG&Earguesthatthesecustomercontactsareanongoingelementofbeingaretailer.WeagreewiththeJudgethattheseissuesshouldbeconsideredinconnectionwithanoperatingagreementespeciallyinviewofourrecentopiniontorequireutilitiestofiletariffscoveringvariousoperatingprocedures.'ntilthepartieshaveanopportunitytoaddressboththeproposedtariffsandoperatingagreements,theseissuesarenotripefordecision.~ImlementationScheduleAsnotedabove,retailcompetitionwouldbeintroducedinstagesoverfiveyears,beginningwithaone-yearEnergyOnlystageandthenamulti-yearEnergyandCapacitystage.TherecommendeddecisionsupportedthisapproachtogiveRGREsufficienttimetoovercomeproblemsrelatingtoitsnuclearplantsandloadpockets.Anumberofpartiesexcept.CPBurgesfullretailaccessnolaterthanoneyearaftertheimplementationoftheindependentsystemoperator(ISO).TheAttorneyGeneralbelievesthatanacceleratedscheduleisneededbecausethefive-yeartermwouldbetoorestrictive,precludingchancestotakeadvantageofarisingopportunities.Inthemeantime,theAttorneyGeneralurgesthatthe1996Settlementbeleftineffect,thecompanybe~~'ase94-E-0952,IntheMatterofCometitive0ortunitiesReardinElectricService,OpinionNo.97-5(issuedMay19,1997),mimeop.34.

CASE96-E-0898requiredtosolveitsnuclearandloadpocketproblems,andretailaccessbeimplementedshortlyaftercompetitionbecomestechnicallyfeasible.IPPNY/EnronandWEPCOassertthatRGEE'sproblemsarenottechnicalbutratherfinancial.TheybelievethattheproblemscanbeaddressednowandtheProgramcanbeaccelerated.AccordingtoIPPNY/Enron,theApril8andRevisedSettlementsthemselvessupportitsstatementthattherearenotechnicalimpedimentsbecausetheyprovideforanacceleratedretailaccessscheduleifthemarketpriceforpowerisaboveRG&E'sback-outrateof$.032perkWh.SeveralpartiespointtothemorerapidintroductionofretailaccessrequiredinotherstatesasjustificationforaquickertimetableforRG&E.AtourOctober8,1997session,weurgedthepartiestoconsiderandexplorewaystospeeduptheintroductionofretailaccess.WenotedthattheApril8Settlementcallsforanacceleratedscheduleonlyifastatewideresolutionofnucleargenerationissuespermittedanearlierplacementofsuchpoweronthemarket,orifmarketpricesforpowerexceeded$.032perkWhonapersistentandsustainedbasis.TheRevisedSettlementcontainsanewprovision,whichestablishesaprocesswherebythepartieswillmeetpriortoJuly1,2000toassessthefeasibilityofacceleratingretailaccess.'taffbelievesthatthisnewprocessispreferabletorenegotiatinganumberofimportantprovisionsrelatedtotheretailaccessschedule.CPB,theAttorneyGeneral,WEPCO,theRetailCouncil,andMr.Strakadisagree.TheyassertthattheretailaccessscheduleisprotractedandwillcauseRGEEtofallbehindotherupstateutilitiessuchasNYSEGandNiagaraMohawk,whichhaveproposalsunderwhichallcustomerswouldbeeligibleforretailaccessbytheendof1999.WEPCOcontendsthatRG&E'snucleargenerationisnotareasontodelayimplementationofretailaccessbecauseweindicatedthattheStateshouldmovetoward~retailcompetitionwithduespeedevenwithoutastatewide CASE96-E-0898solutiontonuclearissues.'PBwantsfullretailaccessforRGREby1999orwithin12monthsoftheimplementationoftheISO.TheAttorneyGeneralseeksclarificationofthemodifiedlanguage.ItnotesthattheprovisiontoconsideracceleratingretailaccesscouldbereadasprovidingRG8Ewithvetopowerconcerninganychangeinthescheduleforimplementationofcompetition,andtheAttorneyGeneralwouldratherhaveusgrantotherpartiestherighttosubmitarecommendationwithoutRGaE'sconcurrence.Inaddition,theAttorneyGeneralunderstandsthatthe"risk"thatmustbeaddressedrelatestoRGEE'sprofits,whichitclaimsshouldbeexplicitlystated.'erecognizethatRGSEisuniqueamongthestateutilitiesinthatmorethanhalfitsgenerationisnuclearfueled,andthereforebelievethataphase-inofretailaccessshouldbelongenoughtogiveRGEEsufficienttimetoaddressthisfact.However,wefindthefive-yearphase-inperiodforretailaccesstobeexcessive,andconcludethatfouryearsshouldsuffice.Consequently,wewillrequirefullimplementationfortheProgrambyJuly1,2001,whichisoneyearearlierthanprovidedforintheRevisedSettlement.Thelastsentenceof$52oftheRevisedSettlement(whichissetforthintheprecedingfootnote)providesforaCases94-E-0982etal.,~suta,OpinionNo.96-12,mimeop.88.Therelevantportionoff52oftheRevisedSettlementisasfollows:~Thepartiesfurtheragreethat,priortoJuly1,2000,theyshallmeettoreviewtheprogressofretailaccessundertheProgramandshallconsiderandrecommendtotheCommission,asappropriate,anychangestotheimplementationschedulethataredeterminedtobenecessary;provided,however,thatnosuchchangesshallberecommendedunlesstheyarerevenueneutralanddonotmateriallyincreasethelevelofriskbornebytheCompany.

CASE96-E-0898possibleincreaseinthepaceofretailaccessimplementationifcertainconditionsaremet.Xnlightofourmodificationoftheretailaccessschedule,thelastsentenceisunnecessary,andtherefore,isnotadopted.Notonlywillfullretailaccessbeachievedoneyearearlier,butalsotheeffectivepercentageofretailaccessavailableforthenon-contractcustomersshouldbegreaterthanidentifiedintheRevisedSettlement.ThisisbecausealargepartofRG&E'sloadisundercontractandthesecontractcustomerscannotparticipateintheProgramuntiltheircontractsexpire.Consequently,agreaterproportionofthenon-contractcustomerswillbeabletoswitchtotheProgramintheearlyyears.DeliverRatesTheApril8SettlementincludesratesfordeliveryduringbothstagesoftheProgram.DuringtheEnergyOnlystage,thedistributionaccessratewouldequaltheaveragerateforbundledretailservicelesstheper-unitretailingcostandtheper-unitenergy-relatedcostofallnon-nuclearenergysources,estimatedtobeatleast$.013perkWh.lntheEnergyandCapacitystage,therateschargedtoLSEswouldequal,onaverage,theratesforbundledretailserviceless$.032perkWh,whichincludesretailingcostof$.004perkWhandtheper-unitfixedandvariableTo-GoCostsofnon-nuclearenergysources,exclusiveofaportionofpropertytaxes.Twentypercentofthepropertytaxcomponentoftheper-unitnon-nuclearTo-GoCostswouldbedeductedfrombundledratesuponcommencementoftheEnergyandCapacitystageandanadditional20%commencingevery12monthsthereafterduringthetermoftheApril8Settlement.Theactualdistributionaccessrateswouldbefiledastariffchanges.PursuanttotheApril8Settlement,whentheProgramisopenedtoallretailcustomersonJuly1,2002,thecompanywouldbeauthorizedtomodifyitsdistributionaccessrates,soastoholdconstantthedegreetowhichitsTo-GoCostsareat CASE96-E-0898riskforrecoverythroughthemarket.ThesignatoriestotheApril8SettlementagreetomeetbeforeJuly1,2001todiscussthefutureoftheseratemakingplans'herecommendeddecisionfoundtheaveragerate,reasonableandrejectedcallsforahigherback-outrateandperiodicupdating.However,therecommendeddecisionfoundtheretailingcostsforresidentialcustomersisgreaterthantheaverageof$.004perkWh.Thus,itwouldrequireRGEEtoestimateandreflecttheactualretailingcostsineachclass'sback-outratewhenitisfiled.AARPandWEPCOexcept,arguingtheback-outrateistoolowandwillinhibitcompetition.ThesepartiesaskustoorderROTEtoreflecttheproperretailingcostsineachclass'sback-outrate.Inaddition,WEPCOquestionsthejustificationforanEnergyOnlystagebecausethe$.013perkWhissolowthatitisunlikelythatLSEsorcustomerswouldparticipateinthisstage.WEPCOsupportsitsargumentbypointingtotheexperienceinOrangeandRocklandUtilities'ilotprogram,whichcontainedanenergy-onlyformat.AccordingtoWEPCO,thatprogramdidnotproducesufficientsavingstowarrantparticipationbysmallcustomers.WEPCOrequeststhattheinitialback-outratebesetat$.032perkWhwithappropriateupdatingeachyear.WEPCOalsoarguesthatafixedback-outrateforaperiodoftwotofiveyearsinahighlyuncertainenvironmentwouldentailconsiderablerisks.Ifthefixedback-outrateunderstatesthemarketpriceofenergyandcapacity,WEPCO'laimsthatarobustcompetitiveretailmarketwillnotdevelop.Whenenteringintoahighlyuncertainsituation,WEPCOadvises,thebestcourseofactionistobuildincheckpointssuchasanannualresetoftheback-outrate.RG&EagreeswithWEPCOthattheEnergyOnlystagehaslimitedvalue,butobservesthatuntilthenecessarysupportingmechanismsandstructuresforacapacitymarketareinplace,capacitychargeswillbeincurredbyRG&E,whichitmustrecover.RG&Eopposesanannualupdateofthe$.032perkWhback-outratebecause(1)afixedratewillprovidecompetitorswithastable CASE96-E-0898targetagainstwhichtocompeteand(2)afixedratewilllimittheriskfacedbythecompanyfromcustomermigrationtoretailaccess.Periodicupdating,RGEEnotes,wouldsubjectittoavariablelevelofriskandthereforeupsetthebalancestruckbythesignatoriestotheApril8Settlement.StaffmaintainsthattheApril8Settlementdoesnotprecludeupdateoftheback-outrateifcircumstanceswarrantsuchaction,butagreesthatatthistimetheoverridingconcernistocreateastableandcertainrateforLSEs.Withrespecttotheappropriatelevelofretailingcoststoincludeintheback-outrate,StaffandRGEEopposetherecommendeddecision'sproposaltocomputeeachclass'sretailingcosts.Staffobservesthatsuchaproposalwouldaddanunwarrantedlevelofcomplexityinthetariffs.RGEEmaintainsthatevenifthe$.004perkWhretailingcostislessthanactualfortheresidentialcustomerclass,itdoesnotfollowthattheoverallback-outrateisunderstatedgiventhatresidentialcustomersreceivesubstantialallocationsofNYPAhydropoweratlowrates.Theneteffect,accordingtothecompany,isthatthecombinedcostofenergy,capacity,andretailingisapproximatelyequaloverallclasses.AtourOctober8,1997session,weexpressedourdesiretohavetheback-outrateduringtheEnergyOnlystageapproximatemarketenergypricesandtorequirethecompanytosellenergyatthatprice.AccordingtoRGEE,Staff,andJointSupporters,theRevisedSettlement'sback-outrateof$.02305perkWh(inclusiveof$.004perkWhretailingcosts)isdesignedtoaddressourconcernthattheearlierestimated$.013perkWhback-outratewastoolowtoencouragecompetition.Staffobservesthatthesignificantincreaseintheback-outratealsoautomaticallyreducesthedeliveryratechargedtoLSEs.TheproponentsfurthernotethatRGSEisnowcommittedtogivingLSEstheoptionofpurchasingenergyfromRG&Eat$.01905perkWh,theenergyportionoftheback-outrate.CPBagreesthatthisrateappearsreasonable.

CASE96-E-0898WEPCOacknowledgesthatthenewrateisanimprovement,butmaintainsitstillfallsshortofWEPCO'sestimateofapproximately$.028perkWhforthewholesalecostofpurchasingpower.Consequently,itbelievesthatLSEswillbeforcedtopurchasepowerfromRG&E.WEPCOobjectstotheuseofthe$.004perkWhcompany-wideaveragecostofretailing,reiteratingitsclaimthattheactualretailingcostsforsmallcustomersishigher.ItcitesourrecentdecisionintheDairyleaCase'nwhicha$.01perkWhadderwasadoptedforsmallcustomers.WeconcludethattheRevisedSettlement'sback-outrateduringtheEnergyOnlystageisacceptable.TheEnergyOnlystageisexpectedtobeimplementedbeforethedevelopmentofamaturestatewideenergyandcapacitymarket.Inaddition,RGEEshouldgainvaluableexperienceduringtheEnergyOnlystagebecauseitwillprovideacontrollableandworkableenvironmentinwhichtopreparefortheremainingphaseofretailaccess.Insum,weareunpersuadedbyWEPCO'sobjectionstotheEnergyOnlystage.0thatamount.Weadoptthisratesubjecttotheclarificationthat.the$.032rateincludestheimpactofGRT.Finally,therecommendeddecision'ssuggestiontoreflectactualretailingcostsineachserviceclassificationisrejectedbecauseitwouldaddalayerofunnecessarycomplexity.ThiscomplexitywouldarisenotonlyfromtheallocationofWithrespecttotheEnergyandCapacitystage,theuseofthe$.032perkWhfixedback-outrateshouldcontributetoastablecompetitivemarketbecausetherateisbasedonRGEE'scostsandthelackofperiodicupdatingwillprovidepotentialcompetitorswithpredictablecompetitivetargetback-outanddistributionrates--significantinputstotheirprice.Oneitemstillconcernsus,however.TheRevisedSettlementidentifiesacontestablerateof$.032perkWh,butdoesnotindicatewhetherGRTisconsideredinthederivationof0Case96-E-0948,~suraOrder,EstablishingRetailAccessPilotProgram,pp.13-16.

CASE96-E-0898retailingcoststhemselves,'butalsofromconsiderationofotherclassspecificchangesthatpartieswouldnodoubtraiseas0furtherrefinements.OtherRetailAccessissuesPULP'sclaimsthatwelacktheauthority(1)toapprovegeneralretailwheelingforallcustomerclasses,and(2)toderegulatenewgenerationproviders.PULPisessentiallyrepeatingtheargumentsitraisedinanArticle78proceedingchallengingOpinionNo.96-12.TheSupremeCourt'asrejectedPULP'sclaims,andtheyarerejectedherebasedontherationalesetforthintheConEdisonrate/restructuringdecision.'YPA'sandRGEE'sexceptionstotherecommendeddecision'srefusaltoconsideraseparateEconomicDevelopmentPower(EDP)tariffratearedenied.SinceNYPAhasnoEDPcustomersinRGEE'sservicedoesnotaddressEDPrates,inthisdecision.However,thefuture,wewilladdressterritoryandtheRevisedSettlementweseenoneedtoaddressthisissueifacustomerrequestsanEDPrateintheissueatthattime.CPB'srequesttorequireLSEstoprovidepriceinformationtoapplicantsinacommonformatisrejected.Thisrequirementisunnecessaryinacompetitivemarketwhereparticipatingmarketershavetheincentivetoshowprospectivecustomershowtheirprices,howeverpackaged,comparetothoseofferedbyothers.AARP'scallforafundtoestablishaPOLRthatwouldprovideconsumerswithelectricityataffordablepricesisdenied.RecognizingthatinnovativePOLRpilotprogramscouldbeEnerAssociationetal.v.PublicServiceComm'n,169Misc.2d924,933(1996).Case96-E-0897,ConsolidatedEdisonComanofNewYorkInc.,OpinionandOrderAdoptingTermsofSettlementSubjecttoConditionsandUnderstandings,OpinionNo.97-16(issuedNovember3,1997),mimeop.30.

CASE96-E-0898explored,wehavedecidedthat,"[f]ornow,theutilitieswillfunctionasPOLRs."'ARP,CPB,andPULPalsoraiseanumberofconcernsaboutconsumerprotectionsandmarketingguidelines.Astheseconcernswereeitheralreadyconsideredorarethesubjectofaseparateproceeding,'lloftheseexceptionsaredenied.Finall'y,CPBcallsforthedevelopmentofacustomereducationprogrambecauseitbelievestheApril8Settlement(andforthatmattertheRevisedSettlement)doesnotaddressthisitem.CPB'sexceptionisdenied;theRevisedSettlement($73)setsforththerequirementthatRGEEfileaconsumereducationplan.ThisDepartmentwillalsobecontinuingbroadoutreachandeducationefforts,aswellasmonitoringandoverseeingtheutilities'wnoutreachandeducationefforts,whichshouldbeconsiderable.~CORPORATESTRUCTURETheRevisedSettlementincorporatestheApril8Settlement'sprovisionsthatwouldrequireRGEEtofunctionallyseparateitsexistingoperationsandstructurallyseparateitsULSE.Inaddition,RG&Ewouldbepermittedtoformaholdingcompany.Therecommendeddecisionagreedwiththeseproposalsbecausethehighcostofdivestitureeffectivelyprecludesstructuralseparation,especiallywithrespecttothecompany'ssizablenuclearassets.Inaddition,therecommendeddecisionfoundreasonabletheprinciplessetforthintheApril8Settlementrelatingtoaffiliaterelationships,codeofconduct,costallocations,protections,andrestrictionsbecausetheywerebasedonstandardsapprovedinothercasesandwouldpermitourreviewintheeventofabuse.Finally,therecommendeddecisionconcludedthatnoproscriptions,prohibitionsagainstcompetition,orroyaltypaymentsshouldbeimposedonRGEECases94-E-0952etal.,~sura,OpinionNo.97-5,mimeop.43~andOpinionNo.97-17,mimeop.21.IbidIp26.

CASE96-E-0898becausetheratereductions,amongotherthings,areaquidproduoforthebenefitsthecompanyexpectstoreceivethroughtheoperationofitsunregulatedbusinesses.TheAttorneyGeneralandCPBpreferdivestitureofgenerationtopreventself-dealingandotherabusesarisingfromaffiliaterelationships.TheAttorneyGeneralfearsthatStaffmaynothavetheresourcestoauditeffectivelythevarioustransactionsamongtheaffiliates.CPBwouldextendthestandardsfortherelationshipbetweendistributionentity,i.e.,theDISCOanditsULSE,totheDISCO'srelationshipwiththeRSLE.CPBalsosupportsphysicalseparation.WEPCOseekstoprohibitRG&E'sunregulatedmarketingaffiliatefromusingRG&E'sname,relyingontheexpertiseandexperienceofutilitypersonnel,andrelyingonRG&E'sfinancialresources.Furthermore,WEPCOasksthatRG&E'saffiliatesbeexcludedfromcompetingintheserviceterritoryfortwoyearsoruntil20;ofthecompany'scustomersareservedbyLSEs.TheAttorneyGeneralandCPBseekaroyaltypaymentfromtheunregulatedsubsidiariestocompensatetheregulatedutilityforgoodwillthatRG&E'snameandaffiliationwillbringthem.RG&Ehasstatedthatitwilltransitionoutofitswholly-ownedfossilandhydrogenerationoverthenextseveralyears.ThecompanyplanstoretireorotherwiseremoveGinnaStationfromratebasewhenitslicenseexpiresin2009,andpriortothatGinnaStationandNineMile2aresubjecttoastatewideresolutionofnuclearplantownershipandratemaking.Inviewoftherelativelyshortremaininglivesonmuchofthecompany'sgeneration,thependingresolutionofnuclearplantissues,andtheincentivetodivestplants,functionalseparationofRG&E'sexistingoperationsisaccepted.ThestructuralseparationofitsULSEaresubjecttothevariousrules,codes,andrestrictionssetforthintheRevisedSettlement.Inasmuchasmostoftheseprovisionsarebasedonstandardsweestablished~inotherproceedings,andareexpectedtoanticipatelikely CASE96-E-0898potentialabuses,theyareadoptedwithoutthemodificationsproposedbyCPB.RGRE'saffiliateswillnotbeprohibitedfromusingthenameofRGEEorcompetinginthecompany'sserviceterritory,orberequiredtopayaroyaltyfortheuseoftheRG&Enameanditsaffiliation.Theseconcessionswerepartofthegiveandtakeinthenegotiationsandwillnotbedisturbed.Finally,whetherRGEEconductsitsunregulatedactivitiesthroughaholdingcompanyoraseparatesubsidiaryofautilityparent,thecompanywouldbepermittedinitiallytofunditsactivitiesintheamountof$50millionunderthetermsoftheRevisedSettlement.Exceptforthe$50million,RGEE'sregulatedbusinesssegmentswouldnotbepermittedtofundsuchunregulatedoperations,andwouldneitherbeallowedtomakeloansto,norguaranteeorprovidecreditsupportfor,theobligationsofunregulatedaffiliates.InviewofourchangesandmodificationstotheRevisedSettlement,especiallytheaccelerationoftheintroductionofretailaccess,andourdesiretobringthebenefitsofacompetitiveelectricgenerationindustrytoNewYorkconsumers,wewillincreasethemaximumforfundingforunregulatedactivitiesto$100million.ENVIRONMENTALMATTERSTherecommendeddecisiondidnotsupportcallsforamandatorydisclosureofgenerationsourcesandtheimpositionofmorestringentenvironmentalrequirementsonoldergenerationfacilities.Wepreviouslyconsideredandrejectedsimilarrequestsinaseparateproceeding.'IIandCPBexcept,pointingoutthatwedidnotexpresslyrejecttheseproposalsandarguingtheyshouldbeconsideredhere.PIIandCPBarecorrectinpart.Infact,atourOctober8,1997session,wedirectedthepartiestoconsiderdesininamethodofrovidincustomerswithenvironmentalggpgCase94-E-0952,~suraOpinio,nNo.97-5.

CASE96-E-0898information.TheRevisedSettlementcontainslanguagerequiringthecompanytoworkwithLSEsondevelopingsuchenvironmentalinformation.However,wewillnotimposemorestringentemissionstandardsonoldergenerationfacilities.WeviewthisrequestbyPIIasathinlydisguisedattempttoimposenewenvironmentalstandardsonolderplants,whichwillnotlikelycreatealevelplayingfieldforcompetinggenerationsources.Thefactthattheseplantshaveanadvantageincostsattributedtoloweremissionstandardsisbutonecostconsideration.PIIdidnotaddressthetotalcost,whichincludesotherfactorsthatmaymorethanoffsetthisadvantage.MARKETPOWERMITIGATIONDuringthefive-yearterm,RG&Ewouldberequiredtomaintainitssysteminthemostcosteffectivemanner,fileamarketpowermitigationplanwiththeFederalEnergyRegulatoryCommission(FERC),'ndtakeappropriateactioninaccordancewiththeoutcomeofthatfiling.TheRevisedSettlementalsoreservesourrighttoimplementmarketpowermitigationmeasuresforretailserviceafterthefive-yearterm.Therecommendeddecisionfoundtheseprovisionsreasonable.Anumberofpartiesraiseconcernsthatanticipateproblemsrelatedtomarketpowerandloadpockets.IncommentsontheRevisedSettlement,PIIsuggestsRG&Eisonlyboundto"consider"arangeofoptionstomaintainthereliabilityofitssystem.Accordingly,PIIrepeatsitsdemandthatthecompanybe"obligated"toundertakevariousforecasts,loadmonitoringprograms,evaluations,andimplementalternatestomajortransmissionanddistributionadditions.RGEcEfileditsrequesttoengageinwholesalesalesofcapacityandenergyatmarketbasedrateswithFERConJuly1,1997andamendeditonJuly25,1997.RGEEaddressedtheissueofmarketpowerinitsrequesttoFERC.ByorderissuedSeptember12,1997,FERCacceptedRGSE'sfiling.

CASE96-E-0898Theseexceptionsaredeniedwithoutprejudice.AsnotedinitsFERCfil'ing,RG&Ehascommittedtoimplementtransmissionsystemupgrades,whichbyJune1999willeliminateloadpocketsforallbut3%ofsummerhours.Moreover,becauseRG&Emustmaintainsystemreliabilitywithinloadpocketsbyoperatingitsunits,thecostofwhicharealreadyinrates,marketpowerconcernsaremitigated.AnyauctionofRG&Egenerationwillbesubjecttoourapprovaltoensure,amongotherthings,thatanymarketpowerconcernsareaddressed.Ifaspecificproblemshouldariseinthemeantime,wewilladdressitonanadhocbasis.~FINDINGSUNDERSERAInconformancewiththeStateEnvironmentalQualityReviewAct(SEQRA),wepreviouslyissuedaFinalGenericEnvironmentalImpactStatement(FGEIS)onMay3,1996.'ealsorequiredindividualutilitiestofileanenvironmentalassessmentoftheirOctober1996restructuringproposals.RG&EfiledanEnvironmentalAssessmentForm(EAF)concerningtheApril8SettlementonJune24,'1997.'ubsequenttofilingoftheEAF,PIIfiledapetitionaskingthataSupplementalEnvironmentalImpactStatementbefiled.Initsargumentssupportingthepetition,PIIraisedseveralsubstantiveissuesforSEQRAconsideration.InaJune19,1997ruling,ChiefAdministrativeLawJudgeLynchnarrowedtheissuesneedingfurtherconsiderationintheenvironmentalassessment..TheinformationprovidedbyRG&EinitsEAF,theparties'omments,theRevised'ettlement,andotherinformationwereevaluatedinordertodeterminewhetherthepotentialimpactsresultingfromadoptingtheRevisedSettlement'stermswouldbewithintheboundsandthresholdsoftheFGEISadoptedinCases94-E-0952etal.,~suta,OpinionNo.96-12,mimeo~pp.76-81.ThefinalEnvironmentalAssessmentFormisAppendixC.

CASE96-E-08981996.TheevaluationalsoconsideredtheconditionsandchangestotheRevisedSettlementthatweadoptedatoursessiononNovember25,1997.Arguably,allofthepotentialimpactsneednotbeconsidered,giventhatsomeresultfromTypeIIexemptrateactions.Nonetheless,theanalysisexaminedallareasinwhichimpactscouldreasonablybeexpected.Noimpactswerefoundto'beassociatedwithpricecapregulation.RGEEcurrentlyoperatesunderaformofpricecapregulation;thecontinuationofthisratesettingapproachfortheregulatedtransmissionanddistributioncompany,consequently,doesnotconstituteachangeinducedbycompetitionorbytheRevisedSettlement.Moreover,thepossibilityofprudencereviewisseenasanimportantdeterrenttoexcessiveinfrastructureinvestmentsaswellasanincentiveforpromotingtheuseoftargetedDSMasappropriatetoavoidexcessivetransmissionanddistributionupgrades.NosignificantimpactsweredeterminedtoresultfromeitherretirementornewconstructionofgenerationasaresultoftheRevisedSettlement.Also,thecompanyassertsithasnoplanstoeitherretireanyofitsexistingelectricgeneratingfacilitiesorconstructnewgeneratingfacilitiesasaconsequenceoftheRevisedSettlement.TheRevisedSettlementwillnotresultinsignificantnewtransmissionlineconstructionimpacts.Thecompany's1996loadpocketstudyindicatesthatunderhighsummerusageandequipmentfailures,loadpocketsmayoccur.AnapplicationfiledbythecompanywithFERC(datedJuly1,1997andamendedJuly25,1997)containsRG&E'splantoreinforceitstransmissionanddistributionsysteminordertoalleviatethetwoloadpocketswithinitsserviceterritory.Theplannotesthatwiththeexceptionofonenew115kVtransmissionline(undertenmilesinlength),theconstructionrequiredwillbelimitedtocapacitorandtransformerworkwithinexistingsubstations.

0'o CASE96-E-0898IMinorlocalizedcommunityeconomicimpactsmayoccur(e.cC,duetoreducedtaxreceipts),butthesewouldbebalancedbypositiveeffectsinotherlocalities.Agreatersourceofconcernisthepossibleincreaseinairpollutionthatcouldaccompanyincreaseddemandforelectricenergy.ItislikelythatincreasesinenergydemandwillresultfromtheRevisedSettlement'sdecreaseinrates(0.56:averageannualincreaseindemandoverthe1998-2012period)andinDSMexpenditures(0.3%increaseindemand).Eachoftheseincrementalgrowthratesisanupperbound.Forexample,itisnotclearthatalloftheratereductionsfromtheRevised1Settlementshouldbeattributedtorestructuring;also,thelowerDSMexpendituresdonotconsiderLSEs'SMspending.Staff'sopinionisthattheactualgrowthrateswillbesubstantiallylessthanthecorrespondingratesintheFGEIS(1'.annualincrementalgrowthfromthe"highsales"scenario,and0.29%fromthe"noincrementalutilityDSM"scenario)~Becauseoftheinherentuncertaintyinforecastingfutureimpacts,asamatterofdiscretion,monitoringofRGEE'srestructuringandenvironmentalimpactsisbeingimplemented,'ndanSBCisbeingestablished.WhilelimitingtheratedecreasesintheRevisedSettlement,whichwereadoptedafterextensivenegotiations,couldmitigateenvironmentalimpacts,thiswouldreducetheeconomicbenefitsoftheratereductionstoconsumersandbusinesses.Themitigationmethodsweareadoptingarereasonableinthesecircumstances.Basedontheseanalyses,thepotentialenvironmentalimpactsoftheRevisedSettlementarefoundtobewithintherangeofthresholdsandconditionssetforthintheFGEIS.Therefore,nofutureSEQRAactionisnecessary.November26Order,p.8.

CASE96-E-0898CONCLUSIONOurSettlementGuidelinesestablishthefollowingstandardsforassessingaproposedsettlementinlightofourobligationtosetjustandreasonableratesandautility'sburden,underthePublicServiceLaw,ofshowingthereasonablenessofaratechangeitisproposing:a.Adesirablesettlementshouldstriveforabalanceamong(1)protectionoftheratepayers,(2)fairnesstoinvestors,and(3)thelongtermviabilityoftheutility;shouldbeconsistentwithsoundenvironmental,social,andeconomicpoliciesoftheAgencyandtheState;andshouldproduceresultsthatwerewithintherangeofreasonableresultsthatwouldhavearisenfromaCommissiondecisioninalitigatedproceeding.b.Injudgingasettlement,theCommissionshallgiveweighttothefactthatasettlementreflectstheagreementbynormallyadversarialparties.'enerally,wefindthattheRevisedSettlementasmodified'rovidesforreductionsthatarereasonableandprovideratepayerssignificantbenefitsoverthefive-yearterm.Inaddition,ratepayerswillnolongerbeliableforcreditsarisingfromflex-ratediscountsandpastincentives.Furthermore,therateswillberedesignedtomorecloselyreflectmarginalcosts,whichshouldnotonlyremovesomeoftheinter-andintra-classreturndiscrepancies,butalsobringtheratesclosetothoseexpectedwhentheelectricitymarketiscompetitive.TheProgramintheRevisedSettlement,asmodified,isreasonablebecauseitphasesincompetitionatapacethatwillallowRG&Etoovercomeproblemsrelatedtoits-relianceonCases90-M-0225etal.,~sura,OpinionNo.92-2,AppendixB,p.8.TheNovember26OrderrequiredRG&Etosubmitawrittenstatementunconditionallyacceptingtheconditionsandmodificationcontainedtherein.OnDecember1,1997,suchastatementwasdulyfiledwiththeSecretary.

CASE96-E-0898~inuclearpower,givescustomerspromptaccesstoaretailelectricitymarket,andprovidesforback-outratesatalevelthatshouldstimulatecompetition.TheproposedrestructuringofRG&Einconjunctionwiththeincentivestooperateitsgeneratingfacilitiesefficiently,andthesafeguardsgoverningthetransactionsofthevariousaffiliates,arereasonableasdiscussedabove.WhileRG&E'sULSEwillbenefitbybeingpermittedtousethecorporatenameandupto$100millionoffundingfromthecompany,theULSEwillbeanaddedsourceofcompetition,thebenefitsofwhichshouldredoundtoelectricconsumers.Althoughallofthesignatoriesdidnotsubmittheirlitigationpositions,RG&Edid.Itisclearfromreviewingthecompany'sOctober1,1996submissionthatRG&Emadesubstantialconcessionespeciallywithrespecttoratereductions.MultipleIntervenorsnotesthatitwouldhavearguedforlargerratedecreases,afasterphase-inofretailaccess,andagreatersharingofstrandedcostsduringthetransitionperiod.ItshouldalsobekeptinmindthatanumberofpartiesopposedtheApril8SettlementandtheRevisedSettlementandtheylitigatedtheirpositions.Afterconsideringthefactsandreasonsbehindtheirpositions,weadoptedanumberofmodificationstotheRevisedSettlement.Inlightofalloftheabove,weadoptthetermsoftheRevisedSettlementsubjecttotheconditionsandchangesdescribedabove,whichwerepreviouslyincludedintheNovember26Order.TheCommissionorders:1.ClausesonethroughfivecontainedintheOrderAdoptingTermsofSettlementSubjecttoConditionsandChanges(issuedNovember26,1997)areadoptedintheirentiretyandareincorporatedaspartofthisopinionandorder.

CASE96-E-08982.Case96-E-0898iscontinued.BytheCommission,(Signed)JOHNC.CRARYSecretary CASE96-E-0898-DRAFTAPPENDIXAPage1of2CASE96-E-0898ROCHESTERGASANDELECTRICCORPORATIONLISTOFABBREVIATIONSAARP-AmericanAssociationofRetiredPersonsATTORNEYGENERAL-NewYorkStateDepartmentofLawCASH06M-CashOperationandMaintenanceCPB-NewYorkStateConsumerProtectionBoardDAIRYLEA-DairyleaCooperativeInc.DISCO-DistributionUnitDSM-DemandSideManagementEDP-EconomicDevelopmentPower~ENTEK-EntekPowerServices,Inc.ESCO-EnergyServiceCompanyFERC-FederalEnergyRegulatoryCommissionFGEIS-FinalGenericEnvironmentalImpactStatementGDP-GrossDomesticProductGENCO-GeneratingUnitGRT-GrossReceiptTaxgWh-Gigawatt-hourHEFPA-HomeEnergyFairPracticesActHOLDCO-HoldingCompanyIPPNY~Enron-IndependentPowerProducersofNewYork,Inc.andEnronCapital&TradeResourcesISO-IndependentSystemOperatorKAMINE-Kamine/BeiscoAlleganyL.P.KCAM-KamineCostAdjustmentMechanismkW-KilowattkWh-Kilowatt-hourLSE-LoadServingEntityMBIS-Metering,billing,andinformationservicesNEV-NewEnergyVentures,Inc.NRC-NuclearRegulatoryCommissionNYPA-NewYorkPowerAuthorityoftheStateofNewYorkPII-PublicInterestIntervenorsPOLR-,ProviderofLastResortPSL-PublicServiceLawPULP-PublicUtilityLawProjectof-NewYork,Inc.RETAILCOUNCIL-RetailCouncilofNewYorkRGsE-RochesterGasandElectricCorporationRSLE-RegulatedLoadServingEntity

CASE96-E-0898-DRAFTSAPA-StateAdministrativeProcedureActAPPENDIXAPage2of2SBC-SystemBenefitsChargeSC-ServiceClassificationStaff-NewYorkStateDepartmentofPublicServiceStaffULSE-UnregulatedLoadServingEntityWEPCO--WheeledElectricPowerCompany

CASE96-E-0898-DRAFTListofPartiesWhichFiledCommentsonOctober311997APPENDIXBRochesterGasandElectricCorporation(RG&E)NewYorkStateDepartmentofPublicServiceStaff(Staff)MultipleIntervenorsJointSupportersNationalAssociationofEnergyServiceCompanies0onents~NewYorkStateDepartmentofLaw(AttorneyGeneral)NewYorkStateConsumerProtectionBoard(CPB)PublicInterestIntervenors(PII)PublicUtilityLawProjectofNewYork,Inc.(PULP)RetailCouncilofNewYork(RetailCouncil)WheeledElectricPowerCompany(WEPCO)LarryOwensCharlesStraka EXHIBITD

~WA"SECURITIES20K)EXCEGQIGECOMMISSIONWXSHINmoN,D.C.20549CFORM10-K(NarkOne)[X]ANNUALREPORTPURSUANTTOSECTION13OR15((R)OFTHESECURITIESEXCHANGEACTOF1934Forthefiscalyearended:December31,1997OR[]TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber:1-672-2RochesterGasandElectricCorporation(Exactnameofregistrantasspecifiedinitscharter)NewYork(Stateorotherjurisdictionofincorporationororganization)16-0612110(i.R.S.EmployeridentificationNo.}89EastAvenue,Rochester,NY14649(Addressofprincipalexecutiveoffices)(ZipCode)Registrant'stelephonenumber,includingareacode:(716)546-2700SecuritiesregisteredpursuanttoSection12(b}oftheAct:TitleofeachclassNameofeachexchangeonwhichreisteredCommonStock,$5parvalue=-NewYorkStockExchange ROCHESTERGASANDELECTRICCORPORATIONInformationRequiredonForm10-KlternNumberDescriotionPaaePar:IItem1Item2Item3Item4Item4ABusinessPropertiesLegalProceedingsSubmissionofMatterstoaVoteofSecurityHoldersExecutiveOfficersoftheRegistrant12141414PartZZItem5Item6Item7Ztem8Item9MarketfortheRegistrant'sCommonEquityanK.RelatedStockholderMattersSelectedFinancialDataManagement'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsFinancialStatementsandSupplementaryDataChangesinandDisagreementswithAccountantsonAccountingandF'nancialDisclosure1617203468Item10Item1112em'3DirectorsandExecutiveOfficersoftheRegistrantExecutiveCompensat'onSecur'tyOwnershipozCertainBeneficialOwnersandManagementCertainRelationshipsandRelatedTransactions69696969Pav~TVZtem14Exhibits,Financia'tatementSchedulesandReportsonForm8-K70Signatuzes75 Operations.PercentagesoftheCompany'soperatingrevenuesderivedfromelectricandgasoperationsforeachofthelastthreeyearsareasfollows:199719961995ElectricGas67.6't32.4%67.1't32.9%71.1%28.9't100,0+o1000+o100.0+oTheCompanyisoperatinginarapidlychangingcompeti'tivemarketplaceforelecticandgasservice.ThiscompetitiveenvironmentincludesafederalandStatetrendtowardderegulationandpromotionofopen-marketchoicesforconsumers.InNovember1997theNewYorkStatePublicServiceCommission(PSC)approvedaSettlementAgreementamongtheCompany,PSCstaffandotherpartieswhichsetstheframeworkfortheintroductionanddevelopmentofopencompet'ionintheelectricenergymarketplaceinNewYorkStateoverthenextfiveyears.RegardingtheCompany'selectricbusiness,inearly1996theFederalEnergyRegulatoryCommission(FERC)issuednewrulestofacilitatethedevelopmentofcompetitivewholesalemarkets.In1997theCompanytogetherwithotherNewYorkutilitiesfiledwithFERCa"ComprehensivePropaphltoRestructuretheNewYorkWholesaleMarket"andrequestedapprovaloftheir'-restructuringplaninea.ly1998.AttheStatelevel,thePSCendorsedafundamental'estructuringoftheelectricutilityindustryintheStateinits"CompetitiveOpportunitiesProceed'ng".TheCompany'sCompetitiveOpportunitiesSettlementin1997,includingitsproposedretailaccessprogramcalled"EnergyChoice",allowsforaphase-intoopenelectricmarketswh'lelower'ngcustome"pricesandestablishinganopportun'tyfo"compe'vereturnsonshareholderinvestments.A'houghtneCompanyisjus"beginn'ngtorece'eappcationsfrompotentialcompe"'torsunderitsdistr'bu'ontar'==.'=expec"smoretobefiled,Ipar='c'arlyfromcompaniesw'ths"rongretailingandcustomerservicecapab'3esancwholesalepowetradingexper='se.<i"ththeunbundlingofservicesasc'rectedbyFERCOrder636,primaryresponsibilityforreliablenaturalgashasshif=ecfrom'n=erstatepipelinecompaniestolocaldistr'butioncompan'es,suchas=heCompany.Allgascusomershaveachoiceo.supp'erss'nceNovember1996.subjec"tocertainp'.".ase-inlimitaionsthrough'998fo"'ossocasco-..=..oci=ysales.Someofthesecompaniesa"elarge,nationa'lyknown,pb'ic',hecmarke=ersorsuppliers.In1997tneCompanycommencecnego=ia=ionswi"h='.".estaf.hePSCandothe"partieswiththeobjectiveofdevelop"ngamyearsettlementofissuesperta'n'ngtotheCompany'sgasbusiness.SeeItem7-Management'D'css'nancAna's'ofFinancialCond'ionancResultsofOperationsundertheheac'ng"Compe:ition"'orfurtherinformationontheCompetitiveOpportunitiesSetemen=andthecompeti"ivechallengestheCompanyfacesinitselectricandgasbusinessandhowiisrespondingtothosecha1lenges.REGULATORYMATTERSTheCompanyissubjecttopSCregulationofrates,service,andsaleofsecurities,amongothermatters.TheCompanyisalsoregulatedbytheFERConalimitedbasis,intheareasofinterstatesalesandexchangesofelectricity,intrastatesalesofelectricityforresale,transmissionwheelingserviceforotherutilities,andlicensingofhydroelectricfacilities.Asalicenseeandoperatorofnuclearfacilities,theCompanyisalsosubjecttoregulationbythe includeitsshareofOswego6intheseeffortsaswell.ThegrossandnetbookcostoftheCompany'sshareofOswego6asofDecember31,1997are$99millionand$58million,respectivelyOnJanuary21,1998theCompanydecidedtoretireBeebeeStationbymid-1999.Factorssuchastheplant'sage,locationinanareanolongerconsistentw'ththesurroundingdevelopment,lackofarail/coaldeliverysystemandmorestringentcleanairregulationsmadetheplantuneconomicalinthedevelop'ngcompetitivegenerationbusiness.TheretirementofBeebeeStationisnotexpectedtohaveamaterialeffectontheCompany'sfinancia'1positionoresultsofoperations.Theplantwillbefullydepreciatedatthetimeofretirement.TheSettlementprovidesthatallprudentlyincurredincrementalcostsassociatedwiththeshutdownanddecommissioningoftheplantarerecoverablethroughtheCompany'sdistributionaccesstariff.TheeX'ectriccapabil'ityandenergycurrentlyprovidedbytheplantisexpectedtobereplacedbypurchasedpowerasnee'ded.NineMileTwo,anucleargeneratingunitinOswegoCounty,NewYorkwithadesignedcapabilityof1,143megawatts(Mw)asestimatedbyNiagara,wascompletedandenteredcommercialserviceinSpring1988.NiagaraisoperatingtheUnitonbehalfofallownerspursuanttoafullpoweroperatinglicensewhichtheNRCissuedonJuly2,1987fora40-yeartermbeginningOctober31,1986.UndearrangementsdatingfromSeptember1975,ownership,outputandcostoftheprojectaresharedbytheCompany(14%),Niagara(41%)Long'IslandL'ghtingCompany(18%),NewYorkStateElectric&GasCorporation(18%%.a'ndCentralHudsonGas6ElectricCorporation(9%).UndertheoperatingAgreement,niagaraservesasoperatorofNineMileTwo,butallfivecotenantownerssharecertainpolicy,budgetandmanagerialoversightunct'ons.ThebasetermoftheOpeatingAgreementis24monthsfromiseffectivedae,withautomaticextension,unlessterm'..atedbywittennoticeofoneormoreofhecotenantownerstotheothe"cotenantowners;suchterm'nationbecomese=fectivesixmonthsfromthereceiptofanysuchnoticeofterminat.'onbya'1=heco"enantownersreceivingsuchro"'ce.hegrossandne"bookcos=o==heCompany'sshareoNineMileTwo'nc'uc'ng$374millionofdisa'oweccos=spreviouslywr'ttenoffasofDecember3,'997are$879millionand$399mi'ion,respect'vely..heCompany'sGinnaPlant,w'.".chnasbeen'"..commercialoperationsincely1,1970,povides480Mwo'heCompany'selectricgenerat'ngcapacity.InAgust1991t?.eNRCapprovedtheCo."..pany'sapp'ca='on'o"amendmenttoete.dtheGirnaPlantoperatinglicenseexp'ra='onCa=e'"omApr25,2006toSeptembe"18,2009..heg.ossandnetbookcos"o=.theG."..-.aP'.an:asofDecember31,1997are$560millionand$309m'lion,espec=ive;.Fromt'metotimeheNRCissuesd'ectivesrequiringallo"acer"a'.".g=oporeac=or1'enseestoperforma..alysesastotheirabil'tytomee=specifieccr'ter'a,g'de'nesoroperatingobjectivesandwherenecessay"omod=y=ac.'='es,sys=emso"procedurestocon=ormthereto.Typically,thesec;rec=vesa"eprem'sedontheNRC'sobligationtoprotectthepublichealthandsa=e=y..heCompanyreviewssuchd'rectivesandimplementsavarietyo'odificationsbasedonthesedirectivesandresultinganalyses.Expendituresa==heG'nnaP'ant,includingthecostoftnesemodifications,areestimaec=obe$0.;on.$10.4mllionand$6.4m'1'ionfortheyears1998,1999and2000.respectively,andareincludedinthecapitalexpenditureamountspresentedunder'tern7-Management'sDiscussionandAnalysisofFinancialConditionandRe'suitso'pera=ions.~,.TheCompanyhasfourlicensedhydroelecricgeneratingstaionswithanaggregatecapabilityof47megawatts.Althoughapplications.'orrenewalofthoselicensesweretimelymadein1991,theFERCwasunabletocompleteprocessingofmanysuchapplicationsbytheDecember31,1993licenseexp'ration.TheFERC,therefore,issuedannuallicensest?.atessent'allyexendthetermsoftheoldlicensesyear-toyearuntilprocessingofthenewonescanbecompleted.The SeeItem7-Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsunderthecaption"EnergyManagementandCosts-Gas"forad'scussionofthattop'c.TheCompanycontinuestoprovidenewandadditionalgasservice.Of243,264residentialgasspaceheatingcustomersatDecember31,1997,2,579wereaddedduring1997.Approximately31%ofthegasdeliveredtocustomersbytheCompanyduring1997waspurchaseddirectlybycommercial,industrialandmunicipalcustomersfrombrokers,producersandpipelines.TheCompanyprovidedthetransportationofgasonitssystemtothesecustomers'remises.FUELSUPPLYNuclear.Generally,thenuclearfuelcycleconsistsofthefollowing:(1)theprocurementofuraniumconcentrate(yellowcake),(2)theconversionofuraniumconcentratetouraniumhexafluoride,(3)theenrichmentoftheuraniumhexafluoide,(4)thefabricationoffuelassemblies,(5)theutilizationofthenuclearfuelingeneratingstationreactorsand(6)theappropriatestorageordispositionofspentfuelandradioactivewastes.ArrangementsfornuclearfuelmaterialsandsevicesfortheGinnaPlantandNineMileTwo.havebeenmadetopemitoperationoftheunitsthroughtheyearsindicated:GinnaPlantNine'MileTwo'"~UraniumConcentrateConversionEnrichmentFabrication2000o'000(')(5)20012002'"2002~~~(6)2003(1)InformationwassuppliedbyNiagaraMohawkPowerCorporation.(2)Arrangementshavebeenmadefo"procuringthemajorityoftheuraniumandconversionrequirementsthrough2002,leavingtheremainingportionoftherequirementsuncommitted.(3)TheCompanyhasacontractunde"which'tmayprocureupto80percentoftheannualGinnaPlanturaniumrequiements.Asecondcontrac"isinplacetosupplyabout30'toftheannualrequ'rementsfor1998through1999,and100'4ofrequirementsin2000.Theremainingrequirementsareuncommitted.(4)Seventypercentoftheconversionrequirementshavebeenprocuredthrough1997underonecontract.Asecondcontractisinplacecover'ng70%ofrequ'ementsin1998and1999,and100%,'n2000.Twentypecentofrequirementsfor1998arecoveredbyacontractfordeliveyofUF6(uraniumplusconversion).Tenpercentofrequiremensfor1998willbefilledfrominventory.(5)TheCompanyhasacontractwithUnitedStatesEnrichmentCorporation(USEC)fornuclearfuelenrichmentserviceswhichassuresprovisionof70%oftheGinnaPlant'srequirementsthrough1999.Asecondenrichmentcontractisinplacewhichassures30%oftheGinnaPlant'srequirementsthrough1999and100%ofrequirementsin2000and2001.(6)NineMileTwoiscoveredfor100'tofrequirementsthrough1998andfor75't(withanoptiontoincreaseto100%)from1999through2003.

(a)TheFirstMortgageprohibitstheissuanceofadditionalFirstMortgageBondsunlessearnings(asdefined)foraperiodoftwelvemonthsendingnotearlierthansixtydayspriortotheissuedateoftheadditionalbondsareatleast2.00timestheannualinterestchargesonFirstMortgageBonds,boththoseoutstandingandthoseproposedtobeoutstanding.TheratiounderthistestforthetwelvemonthsendedDecember31,1997was6.99.(b)TheFirstMortgagealsoprovidesthat,ifadditionalFirstMortgageBondsarebeingissuedonthebasisofpropertyadditions(asdefined),thepr'ncipalamountofthebondsmaynotexceed60%ofavailablepropertyadditions.AsofDecember31,1997theamountofadditionalFirstMortgageBondswhichcouldbeissuedonthatbasiswasapproximately$398,393,000.Inadditiontoissuanceonthebasisofpropertyadditions,Firs"MortgageBondsmaybeissuedonthebasisof100(oftheprincipalamountofotherF'stMortgageBondswhichhavebeenredeemed,paidatmaturity,orotherwisereacquiredbytheCompany.AsofDecember31,1997,theCompanycouldissue$321,669,000ofBondsagainstBondsthathavematuredorbeenredeemed.TheCompany'sRestatedCertificateofIncorporation(Charter)providesthat,withoutconsentbytwo-thirdsofthevotesentitledtobecastbythepreferedstockholders,theCompanymaynotissueadditionalpreferredstockunlessina12-monthperiodwithinthepreceding15months:(a)netearningsapplicabletopaymentofdividendsonpreferredstock,after'a~e's,havebeenatleast2.00timestheannualdividendrequirementsonpreferred=.stock,includingthesharesbothoutstandingandproposedtobeissued,and(b)net;'earningsavailableforinterestonindebtedness,aftertaxes,havebeenatleast1.50timestheannualinterestrequirementsonindebtednessandannualdividendrequirementsonpreferredstock,includingthesharesbothoutstandingandproposedtobeissued.ForthetwelvemonthsendedDecember31,1997,thecoverageatiounder(b)above(themoreres"rictiveprovision)was2.83.Forinformationwithrespec"tosho"-termborrowingarrangementsandmitaionsseeItem8,Note9-Shor=-.ermDebt.TheCompany'sCharterdoesno"containanyfinancialtestsfotheissuanceofpreerenceorcommonstock.TheCompany'ssecuritiesratingsa>>December31,1997were:MortgageBondsPre'erredStockStandardaPoor'sCorporationMoody'sInvestorsServiceDuffaPhelpsBBB~BaalBBB~BBBbaa2BBBThesecuriiesratingssetforthinthe".ablearesubjecttorevisionandjorwithdrawalatanytimebytherespeciveratingorganizationsandshouldnotbeconsideredarecommendationtobuy,selloholdsecuritiesoftheCompany.ENVIRONMENTALQUALITYCONTROL~~OperationsattheCompany'sfacilitiesaresubjecttovariousfederal,stateandlocalenvironmentalstandards.ToassuretheCompany'scompliancewiththeserequirements,theCompanyexpendedapproximately$0.6milliononavarietyofprojectsandfacilityadditionsduring1997.

s00',o 10ectricDepartmentStatisticsYearEndedDecember3119971996'995'994'993'992ElectricRevenue(000's)ResidenialCo.".merciaYu">c'pa'"d0-"e-ElectricrevenuefromourcustomersOtherelectricutilitiesTotalelectricrevenue$252,464210,643144,30572,06'79,C7320,856700.329$254,885215,763153,33766,898690,88316.885707.768$256;294215,696157,46467,128696.58225,883722,465$243,961206,545150.37257,270658,14816,605674,753$234,866196,100148>08459,905638,95516,361655,316222187XC!5760825633,210,262,507,288,267,541,808FlectricExpense(000's)Fueused'.".electricgenerationP"chasedelectricity0he"operationHa'ntenanceDepreciationandamortization-.axes-local,staeandohe".otalelectricexpenseOperatingXncomebefoeFedea!XrcomeTaxFedera!incometax47.66528,347205,05841,217103,39591.111516,793183,53661,83740.93846,48C204,74641,42992,61595<010521,222186,54661,90144,190SC,167199,52444,03278,812102,3&0523<10S199,36059,5004C,96137,002192,36047,29575,21197,919494>74&180,00552,84245,87131,563192,7C952,46472,32696,0C3491,016164,30043,84548,37629,706183,11853,71473,21394,8C1482,968150,84038,046OperatingXncomefromElectricOperations(000's)ElectricOperatingRatio8,ElectricSales-KWH(000's)ResidentialCommercialvldus~cipaandOtherr.otac.stonessalesOthere.ectrc=.fries46.02,139,0642,118,9912,010,613537,05147.12,132,9022,061,6252,010,963520,88547.32,144,7182,064.8131,96C,975531,3116.&OS,I!91,218,7946,726,37599C.8426,705,817l.4&C,196S121,699S124,645&139.860~~$127,1.63'Pl47.72,117,1682,028,6111,860,833513,6756,520,2871.02'.7332~4~123,277986,100892,700504,9876.507,064743.588S120,45549.2112,79449.72,084,7051,938.1731,929,720503,3886.455,9861,062,738.otaeectricsalesElectri"CstcmersatDecember3'es'dent'a.otaeectr'ccusomersectrcityGeneratecandP.rchased~!O>H(000's)FossK.c'ar..yc0P"mpedstorage.essenergyfo.pumpingOtheTora.generated-nePrchasedToa.electricenergySysem):etCapabi!ity-KNatDecember31FossilHuclearHydroOhewPurchasedTotalsystemnetcapabilityLteakLoad.KW1LoadFactor.Het%,8.024.5'3308.90930,9401,3002,8243C3,9730~<19544227,867238.900(358,350)8906.893,7651,30,6368.195.401526.000638,00047,00028,000375,0001,614,0001,421,00056.17.72-.2-7307,8130.620~3252,68834>844.094,272248,990246,726(370,097)9365,733.3402.437,4338.:70,773529,000638.00047,000~,000375,0001,617.0001,305,00061.98.190.03306.60130.426',3472.7!134:,085:.63:.933C.645,646:7'..88623".904(36:,'44)6,32>,7902.343.4&C8,671.274529.0006C0,00047,00028,000375.0001.619.0001,C25,00057.67.542,02030C.49429,9841,36!2,670338,509l.478.120C>wc>~>8218.:29247.550(37:.383):.2C56,'00,839:.998,8828,099,721532,000617,00047,00029,000375,00016000001.374.00058.8250,652302.21929,635.,3822.638335.87C'.520.936'99,239233,477(355,725)2.5596.095.9431.646.2447,742,187541,000620,000C7,00029.000347,0001,584,0001,333,00059.17.518,724300,34429,3391.3862,605333,6742.197,757C.191,035278,318226,39!(3CC,2C5)8116.550,0671.389,8757.939.942541,000617,000C7,00029,000348,0001,582,0001,252,00062.5~Reclassifiedforcomparaivepurposes.

Item2.PROPERTIES12ELECTRICPROPERTIESThenetcapabilityoftheCompany'selectricgeneratingplantsinopeationasofDecember31,1997thenetgenerationofeachplantfortheyearendedDecember31,1997,andtheyeareachplantwasplacedinserviceareassetforthbe'w:ElectricGeneratingPlantsYearUnitPlacedinServiceNetNetGenerationCapabilitythousands(Hw)(kwh)BeebeeStation(Steam)BeebeeStation(GasTurbine)CoalOil195919698014418,139RussellStation(Steam)Coal1949-1957257-',237,958GinnaStation(Steam)OswegoUnit6"(Steam)NineMilePointUgq~No2(2l(Steam)StationNo.9(Gas.'rbine)Sta=ion5(Hydro)50"he"Stations(Hydro)NuclearOilNucleaGasWaterWater197019801988196919'7'.906.1960480189158393,894,6528,8171,224,892465173,48754.380PmpedStoage'"Less:energyforpumping239238,900(358,350)~3TE5(1)Represents24%shareofjointly-ownedfacility.(2)Represents14%shareofjointly-ownedfacility.(3)OwnedandoperatedbythePowerAuthority.'

CItem3.LEGALPROCEEDINGS0Seeitem8,Note10-CommitmentsandOtherMatters.Item4.SUBMISSIONOFMATTERSTOAVOTEOFSECURITYHOLDERSTherewerenomatterssubmittedtoavoteosecurityholderscuringthefourthquarterofthefiscalyearendedDecember31,1997.Item4-A.EXECUTIVEOFFICERSOFTHEREGISTRANTNameAge1/1/98Positions,OfficesandBusinessExperience1993todateThomasS.Richards54ChairmanoftheBoard,Presiden"andChiefExecutiveOfficer-January1998todate.PresidentandChiefOperaticOfficer-March1996toDecember1997.SeniorVicePresident,Energy.ServicesAugust1995toMarch1996.SeniorVicePresident,CorporateServicesandGeneralCounsel-August,1994toAugust1995.M'chae~J.BovalinoSen'orVicePresident,FinanceandGeneralCounse'Ocobe"1993toAugust,1994.GeneralCounse'January,1993toOctober,993.Pres'cent,Energetx.Znc(awhollyownedsubsiciaryoftneCompany)January1998tocate.RobertE.Smith60SeniorV'cePresicen",EnergyServicesJanuary'997toDecember1997.V'cePres'cen,Reta'1ServicesforPlumSrectEnterpr'ses(awhollyownedsubsidiaryoN'agaraMohawkPowe"Corporation,300ErieBou'evarcNest,Syracuse,NY13202)priortojo'nngtheCompany.Senio"VicePresiden",EnergyOperationsAngus1995odate.Sen'orVicePresident,-CustomerOperationsAugust,1994toAugust,1995.SeniorVicePresident,ProductionandEngineering-1993toAugust,1994.

'0iO 16PARTIIItem5.MARKETFORTHEREGISTRANT'SCOMMONEQUITYANDRELATEDSTOCKHOLDERMATTERSCOMMONSTOCKANDDIVIDENDSEarnings/Dividendsamrgspe"snare~basic~diluedDividendspaidpe"share199719961995$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Shares/Shareholdersu.-uerorsnares00's)weightedaverage-basicdilutedActualnu.-.kerat.DeceWe31NurserofshazeholdesaDace..bar31199638,76238,76238,851199738,85338,90938,862199538,11338.11338,453313373367535356TAXSTATUSOPCASHDIVIDENDSCashdividendspaidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.DIVIDENDPOLICY~ITheCompanyhaspaidcashdividendsquarterlyonitsCommOn'.Stockwithoutinterruptionsinceitbecamepubliclyheldin1949.Thelevelo:futurecashdividendpaymentswillbedependentupontheCompany'sfutureearnings,itsf'nancialrequirementsandotherfactors.TheCompany'sCertificateofIncorporationprovidesfo"thepaymentofd'videndsonCommonStockoutofthesurplusnetprofits(retainedearnings)oftheCompany.Quarterlyd'idendsonCommonS"ockaregenerallypaidonthetwenty-fifthdayofJanuarv,Ap"i',JulyandOctober.anJanuary'998,theCompanypaidacashc'iaendof$.45pershareonitsCom..onStock.TheJanuary1998dividendpaymentisequ'valentto$1.80onanannualbasis.COMMONSTOCKTRADINGShaesoftheCompany'sCo...-..onS=ockaretracecontheNe~YorkStockExchange'eerthesy-,~ol"RGS".CommonStock-PriceRange199719961995High1st2nd3rd4thqua"tercuarterquarterquarrer203/87/~615/:634/2233/4217/82'/895/823225/8241/8241/8Low1stquarter2ndquarter3rdquarter4tnquarter187/8'8205/8233/4211/4197/818177/8203/8201/820223/8AtDecember3134191/8225/8 18ONDENSEDCONSOLIDATEDBALANCESHEETtDecember31tThousandsofDollars)AAssetsUtilityPlantLess:AccumulateddepreciationandamonSzationConstructionworkinprogressNetutilityplantCurrentAssetsInvestmentinEmpireDeferredDebitsTotalAssets199719961995'994'9931992',714,3681.569,0781.518.8781.423.0981,558.053128.8601,549.225121,7251.590,68169.7111.660.392250,461450.6231,519,70974,0181,686,913236,51938.560484.9621,670,950292,59638,879453.7261.593,727242,371432.191$2.268.289$2.361.476$2.456.151$2446.9541.253,1171,545.46483.8341.33530831.555.716112.7501,668.466248.58938.560488.5271.629.298209.6219.846181,434$2.444.142$2.030.199$3,234,077$3,159,759$3.068,103$2,981,151$2.890,799$2,798.581CAPITALIZATIONANDLIABILITIESCapitalizationLongtermdebtPreferredstockredeemableatoptionofCompanyPreferredstocksubjecttomandatoryredemptionCommonshareholders'quity:CommonstockRetainedearningsTotalcommonshareholders'quityTotalCapitalization$587,33447,00035,000$646,95467.00045,000699,031109.313696,01990,540808.344786,5591.477,6781,545.513$716,23267,00055,000687,51870.330757.8481.596,080$735,178$747,63167,00067.00055,00042.000670.569652,17274.566,75.126745.135.4727.2981.602.&t3'1.583.929$658.88067,00054.000591,53266.968658.5001.438.380LongTermLiabitities(Department,ofEnergy)CurrentUabilitiesrredCreditsandOtherLiabilitiesotalCapitalizationandLiabilitiesectassifiedforcomparativepurposes.96.72693,75290,88787.82689.80494,602189,317158.217182,338181,327234,530267,276504,568563,994586.846575.488535,879229.94132268.28932361.47632456.15162.446.95432.44444232030.199 io.o 20Item7.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS4ThefollowingisManagement'sassessmentofcertainsignificantfactorsaffectingthefinancialconditionandoperatingresultsoftheCompany.Thisassessmentcontainsforward-lookingstatementswhicharesubjecttovariousrisksanduncertainties.TheCompany'sactualresultscoulddifferfromthoseanticipatedinsuchforward-lookingstatementsasaresultofnumerousfactorswnicnmaybebeyondtheCompany'scontrolbyreasonoffactorssuchaselectricandgasutilityrestructuring,futureeconomicconditions,anddevelopmentsinthelegislative,regulatoryandcompetitiveenvironmentsinwhichtheCompanyoperates.Shownbelowisalistingoftheprincipalitemsdiscussed.EarningsSummaryPage20CompetitionPSCCompetitiveOpportunitiesCaseSettlementBusinessandFinancialStrategyPSCPositionPaperonNuclearGenerationFERCOpenTransmissionOrdersGasRestructuringandPSCNegotiationsProspectiveFinancialPositionRatesandRegulatoryMatters1996ElectricRateSettlement1995GasSettlementFlexiblePricingTariffPage21Page27LiquidityandCapitalResourcesCapitalandOtherRequirementsRedemptionofSecuritiesFinancingResultsofOperationsOperat'ngRevenuesandSalesFossilUnitRatngsancStatusOperatingExpensesDividendPolicyPage27Page30Page33EARNINGSSUMMARYDesp'teratereductions'"..Duy'996and1997,earn'ngsapplicabletoCommonStockwerenearlyunchangedin1997due,ir.part,to"heincreasedava'abilityoftheCompany'sGinnanucleargeneratingfacilityfollowingthe1996refuelingandsteamgeneratorreplacemen:outage.IncreasedCompanygenerationallowedtheCompanytoreducepurchasedelectricexpense,whileincreasingavailablepowerforcustomerconsumptionandresale.Adecreaseinfinancingcostsasaresultofdiscretionaryedemptionsandref'nancingac"ivitiesduringtheyearalsohelpedtoincreaseearnings.Inadditiontoratereductions,offsettingagainin1997earn'ngswereawa"merheatingseasonduringthefirstquarteroftheyea"coupledwithacoolersummerwhichaffecteda'cond'ioningload.Basicanddilutiveearningspershareof$2.30in1997aredowntwocentscomparedtoayearago.InFebruary1997,theFinancialAccountingStandardsBoardissuedStatementofFinancialAe'countingStandardsNo.128("SFAS-128"),"EarningsperShare,"whichchangesthemethodologyofcalculatingearningspershare.TheCompanyadoptedSFASNo.128duringthefourthquarterof1997.Theimpactonearningspershareforpriorperiodsisnotmaterial.AdiscussionofthecalculationofearningspershareispresentedinNote1totheNotestoFinancialStatements.Basicanddilutiveearningspershareof$1.69reportedin1995reflectapretaxreductionof$44.2million,or$.75persharenet-of-tax,inconnection

'0~.'e0' 22TheCompanybelievesthattheSettlementwillnotadverselyaffectitseligibilitytocontinuetoapplyStatementofFinancialAccountingStandardsNo.71("SFAS-71"),withtheexceptionofcertain"to-gocosts"associatedwithnon-nucleargeneration.If,contrarytotheCompany'sview,sucheligibilitywereadverselyaffected,amaterialwrite-downofassets,theamountofwhichisnotpresentlydeterminable,couldberequired.RatePlan.OverthefiveyeartermoftheSettlement,thecumulativeraterecuctionswillbeasfollows:RateYea"1:$3.5million;RateYea"2:$'2.8million;RateYear3:$27.6million;RateYear4:$39.5million;ancRateYea"5:$64.6m'llion.TheRateP)anpermitstheCompanytooffsetagainsttheforegoingtotalreductionscertaininflation-relatedexpenses,andcertainamountsrelatedtoapowerpurchaseagreementwithKamine/Besicorp:AlleganyL.P.'(Kamine),includingseven-eighthsofanydifferencebetweenKaminecostscurrentlyincludedinratesandanyincreasedamountresultingfromenforcementofsuchagreementw'hanybalancenotrecoveredduringthetermoftheSettlementsubjecttodeferralforrecoveryaftersuchterm.Theagreementissubjecttolitigation,asdiscussedinNote10oftheNotestoFinancialStatements.IntheeventofasettlementoftheKaminematter,theSettlementpermitstheCompanytooffsetagainstratereductions,thefollowingamounts:RateYear2,$3.5million;RateYear3,$8.4m'lion;RateYear4andcontinuinguntilSettlementpaymentsarecompleteorJuly1,2002,whicheverislater,$10.5million.IntheeventthattheCompanyearnsareturnoncommon.equityinexcessofaneffectiverateof11.50percentovertheentirefive-year.termoftheSettlement,50percentofsuch-excesswillbeusedtowritedowhdeferredcostsaccumulatedduringtheterm.Theother50percentoftheexcessw'allbeusedtowritedownaccumulateddeferralsorinvestmentinelectricplantorRegulatoryAssets(whicharedeferredcostswhoseclassificationasanassetonthebalancesheet'spermittedbySFAS-71).Ifcertainextraordinaryeventsoccur,includingarateofreturnoncommonequitybelow8.5percentorabove14.5percent,orapretaxinterestcoveragebelow2.5t'mes,thene'thertheCompanyoranyotherpartytotheSettlementwouldhavetherighttopetitionthePSCforreviewof=heSe"tlemenandappropriateremedia'ction.RetailAccess.RGaE'sEnergyCnoiceProgramwillbeava'labletoallofitscs"omes,withoutregardtocustomerclass,onanequalbasisuptocerta'nsagecaps.OnJuly1,1998,customeswnoseelectricloadsrepresentappoximately10percentoftheCompany'stotalannualretailsaleswillbee'ig'bletopurchaseelectricity(bu"no"capac'tycommitments)fromalternativesuppers.OnJuly1,1999,customerswith20percentoftotalsaleswillbee'gibleandasofJuly1,2000,30percentoftota'aleswillbeeligible.Aso=Ju'y1,2001,allreta'1customersweelig'ble-opurchaseenergyandcapac'tyfromalternativesuppliers.Duringtheinitial,energyonlvs=ageo'heReta'lAccessProgram,theCompany'sd'str'butionratewillbese=bydeducting2.3ce..sperkilowatthour("KWH")fromitsfullservice("buncled")raesandLoadServingEntitiesactingasretailersintheCompany'sserv'ceareawillbeenitl'edtopurchaseelectricityfromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapac'<<ystage,theratewillge..era'lyeqal"hebundledratelessthecostoftheelectriccommodityandtheCompany'sno..-nucleargeneratingcapacity.Tnesecommodityandcapacitycosts,generayreferredtoas"contestablecosts,"areestimatedtobe3.2centsperKWii,inclusiveofgrossreceiptstaxes.GeneratingAssets.TheCompanyw'lnoberequiredtodivestanyofitsgenerationfacilities.TotheextentthattheCompanysellsanygeneratingassetsduringthetermoftheSettlement,gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.Withregardtolossesonsuchsales,theSettlementacknowledgesanintentthattheCompanywillbepermittedtorecoversuchlossesthroughdistributionratesduringthetermoftheSettlement.FutureratetreatmentistobeconsistentwiththeprinciplethattheCompanyistohaveareasonableopportunitytorecoversuchcosts."To-gocosts"oftheCompany'snon-nuclearresources(i.e.,capitalcostsincurredafterFebruary28,1997,operationandmaintenanceexpenses,andproperty,payrollandothertaxes)aretoberecoveredthroughthedistribution 0e-24ThroughoutthetermoftheSettlement,RG&Ewillcontinuetoprovideregulatedandfullybundledelectricserviceunderitsretailservicetarifftocustomerswhochoosetocontinuewithorreturntosuchservice,andtocustomerstowhomnocompetitivealternativeisoffered.Untilthedevelopmentofawholesalemarketforgeneratingcapacity,therewillbenosuitablemechanismforthereallocation,fromtheregulatedutilitytotheLSE,ofresponsibilityforensuringadequateinstalledreservecapacity.Accordingly,duringtheinitial"EnergyOn)y"stageoftheEnergyChoiceProgram(July1,1998toJuly1,1999),LSEswillbeabletochoosetne'rownsourcesofenergysupply,whileRGGEwillprovidetoLSEs,andwillbecompensatedfor,thegeneratingcapacity(installedreserve)neededtoservetheirretailcustomersreliably.Duringthe"EnergyandCapacity"stagecommencingJuly1,1999,theLSEswillbeabletoselect,andwillberesponsibleforprocuring,generatingcapacity,aswella'senergy,toservetheloadsoftheirretailcustomers,anddistributionchargeswillbeaccordinglyreducedasnereinafterdescribed.IfbyJuly1,1998thereisnotafunctioningStatewideenergyandcapacitymarket(seediscussionunderFERCOpenTransmissionOrders),theCompanymaypetitionthePSCfordeferralofthescheduledcommencementoftheEnergyandCapacitystage.Summary.TheavailabilityofLSEstoserveeligiblecustomersandhowquicklytheydecidetobecomeinvolvedcannotbedetermined.Likewise,theCompanyisnotabletopredictthenumberofcustomersthatmaychosetonolongerbeservedundertheCompany'sregulatedtariffs.TheproposedtarifsforEnergyChoiceasfiledbythe.QotppanyareexpectedtobecomeeffectiveFebruary1,1998forthepilotprogram.ThePpChasnotsetadecision-makingdateforthefull-scaleprogram.TheCompanyis'nabletopred'ctwhatfinalrulesorregulationswil)ultimatelybeadoptedbythePSCforth'sprogram.UnregulatedEnergyServicesCompany.ItispartoftheCompany'sfinancialstrategytostimulategrowthbyenteringintounregulatedbusinesses.Thefirststep'nthisdirectionwastheformationandoperationofEnergetixeffectiveJanuary',1998.EnergetixisanunregulatedsubsidiaryoftheCompanythatwillbr'ngenergyproductsandservicestothemarketplacebothwithinandoutsidetheCompany'sfranchisearea..heSettlementapprovedbythePSCinNovembeallowsfortheinvestmentofupto$100millioni,nunregulatedbusinessesduringthenextfiveyeas.During998.theCompanyexpectstodeterminetheactualleveloftheinitial:nvestmentstobemadeinunregulatedbus'nessopportunities.OnJuly1,1997theCompanyandEnergetixfiledwiththeFederalEnergyRegulatoryCommission(FERC)seek'ngautnor'zat'ontoengageinthewholesalesaleoelectricenergyandcapac'tya"market-basedrates.TneseapplicationswereacceptedbyFERConSeptembe"12,1997.TheComoanymus"seekseparateauthorizationinordertosellelectricenergytoEne"getixatmarket-basedrates.StockRepurchasePlan..InDecembe"1997theCompany'sBoardofDirectorsapprovedaStockRepurchasePlan.Th'splan,whichissubjecttoapprovalbythePSC,providesfortherepurchaseove"thenextthreeyearsofupto4.5millionsharesofCommonStock,representingapproximately11.5percentoftheCompany'soutstandingsharesofCommonStockatDecember31,1997.TheCompanyexpectsaPSCdecisioninearly1998.NuclearOperatingCompany.InOctober1996,theCompanyandNiagaraMohawkPowerCorporation(Niagara)announcedplanstoestablishanuclearoperatingcompanytobeknownastheNewYorkNuclearOperatingCompany(NYNOC).SincethattimeNYNOChasbeenorganizedasaNewYorkLimitedLiabilityCompanyandtheConsolidatedEdi'sonCompanyofNewYorkandNewYorkPowerAuthorityhaveannouncedtheirdesiretomoveforwardwiththeCompanyandNiagarawithplanstoimplementNYNOC.ItisenvisionedthatNYNOCwouldeventua'lyassumeresponsibilityforoperationofallthenuclearplantsinNewYorkState,includingtheCompany'stotallyownedGinnaNuclearplantandjoinlyownedNineMileTwo.TheCompanybelievesthatNYNOCcouldcontributetoma'ntainingahighlevelofoperationalperformance,contributetocontinuedsatisfactoryNuclear e26naturalgasmarkettocompetitionandtherebyallowresidential,smallbusinessandcommercial/industrialusersthesameabilitytopurchasetheirgassuppliesfromavarietyofsources,otherthanthelocalutility,thatlargerindustrialcustomersalreadyhave.Duringathree-yearphase-inperiodtheState'sgasutilitieswouldbepermittedtorequirecustomersconvertingfromsalesservicetotakeassociatedpipelinecapacityforwhichtheutilitieshadoriginallycontracted.ThePSChasindicatedthatitwilladdresstheissueofhowthecostsofsuchcapacitywouldberecoveredafterthethree-yearperiodduringtheth'dyearofthephase-inperiod.ThePSCStaffhasrecentlyissuedaposi"'npaperonTheFutureoftheNaturalGasIndustryinwhichtheStaffproposesthatlocaldistributioncompanies(suchastheCompany)exitthemercnantfunctioninfiveyears.TreatmentofexistingpipelinecapacitycontractsandProvicerofLastResortresponsibilitiesaresubstantialissuestobeworkedoutbetweenthePSC,thelocalgasdistributioncomoaniesandotherstakeholders.SeeNote10oftheNotestoFinancialStatementsforfurther:informationaboutthePSCgasrestructuringproceedingsandthePSCStaffposi:tionpaper.GascustomershavehadachoiceofsupplierssinceNovember1,1996.Underseparatetransportationtariffs,theCompanydistributesthegasandchargesfo"thedistributionaswellasassociatedservices.TheCompanybelievesitspositioninthemarketissuchthatitwil)maintainitsdistributionsystemmargins.Underaphase-inlimitation,lossofgascommoditysalesmaybelim'tedtofivepercentof.theCompany'sannualgasvolumethefirstyear,andthenf'veadd'tionalpercentforeachofthefollowingtwoyears.Thephase-inwillbereviewedasexperienceisgainedwiththeprogram.TheCompanyanticipatesthattheuseoftransportationgasservicewillincrease.ThroughDecember31,1997,'0customerswerebeingservedunderthisservice.InJuly1997,theCompanycommencednegotiationswiththePSCStaffandothepartieswiththeobjectiveofdevelopingamulti-yearsettlementofissuespertainingtotheCompany'sgasbusinessthatwouldtakeeffectuponexpirationoftnecurrent1995GasSettlement(seeRatesandRegulatoryMatters)onJune30,1998.Afurtherobjectiveofthesenegotiationsistomaximizetheefficiencieso=theen'rebusinessbystructur'ngasettlementthatwillbeasconsistentaspossiblewiththeprovisionsoftheSet"lemenintheCompet'iveOpportun'ieProceec'ng,asdiscussedearlier.Nego=ia=io..sareatanearlystage;accorc'ngly,heCompanycanmakenoprecic='onastothei"outcome.COMPETITIONANDTHECOMPANY'SPROSPECTIVEFINANCIALPOS1TION.WithPSCapprova,theCompanyhasdeerredcer"a'ncostsrathertnanrecognizethemo'sbookswhenincurred.Suchdeferredcostsarehenrecognizedasexpenseswhen"heyaeincludedinratesandrecoveredfromcstomers.SuchdeferralaccontingispermittedbySEAS-71.Thesedeerreccostsa"eshownasRegultaoryseso..theCompanysBaanceShee".ancacscssionancsummarizationofsuch.eguatoryAssetsispresentedinNo=e0o'heNo"es"o."-nanc'alStatements.acompetitiveelectr'cmarke,s=rancab'easse=swoudarisewheninvestmentsaremadeinfacil'ties,o"cos"sa"eincurredtoservicecustomes,andsuchcostsarenotfullyecoverabeinmarket.basedra=es.Estimatesofsuchstrandableassetsarehigh'ysens'=ive"o=hecompet'vewholesalemarketpriceassumedintheestimation,.-.acompe'ivenaturalgasmarketstrandableasse"swouldaisewherecustomers-...'gra=eaway=romdependenceontheCompanyfo"fu'service,leavingtheCompanywths"p'uspipel'qeandstoragecapacity,aswellasnaturalgassupplies,unde"con:ract.AdiscussionofstrandableassetsispresentedinNote10oftheNotes:oFinancialStatements.AtDecember31,1997theCompanybelievesthatitsregulatoryandstrandableassets,ifany,arenotimpairedandareprobableofrecovery.TheSettlementintheCompetitiveOpportun'tiesProceedingdoesnotimpairtheopportunityoftheCompanytorecover"'itsinvestmentintheseassets.However,thePSChaspublishedaStaffpapertoaddressissuessurroundingnucleargeneration,includingthedeterminationoffairmarketvalueforfacilitiesafterafiveyearrestructuringtransitionperiod.ItappearsthatthePSCmayseektoapplysimilarprinciplestoothertypesofgeneratingfacilities.Adeterminationinthisproceedingcouldhaveanimpactonstrandableassets.

28CAPITALANDOTHERREQUIREMENTS.TheCompany'scapitalrequirementsrelateprimarilytoexpendituresforenergydelivery,includingelectrictransmissionanddistributionfacilitiesandgasmainsandservicesaswellasnuclearfuel,electricproductionandtherepaymentofexistingdebt.In1996theCompanycompletedreplacementofthetwosteamgeneratorsattheGinnaNuclearPlantwhichresultedinimprovedplantefficiency.TheCompanyspentapproximately$46milliononthisprojectin1996and$29millionin1995.TheCompanyhasnoplanstoinstalladditionalbaseloadgeneration.PurchasedPowerRequirement.Unde"federalandNewYorkStatelawsandegulations,theCompanyisrequ'edtopurchasetheelectricaloutputofunregulatedcogenerationfacilitieswhichmeetcertaincriteria(QualifyingFacilities).TheCompanywascompelledbyregulatorstoenterintoacontractwithKamineforapproximately55megawattsofcapacity,the.circumstancesofwhicharediscussedinNote10oftheNotestbFinancialStatements.TheCompanyhasnootherlong-termobligationstopurchaseenergyfromQualifyingFacilities.Year2000ComputerIssues.Astheyear2000approachesmanycompaniesfaceapotentiallyseriousinformationsystems(computer)problembecausemostsoftwareapplicationandoperationalprogramswritteninthepastwillnotproperlyrecognizecalendardatesbeginningwiththeyear2000.Atthistime,theCompanybelievesthattheproblemisbeingaddressedproperlytopreventanyadverseoperationalorfinancialimpacts.TheCompanybelievesitwillincurapproximately$15millionofcoststhroughJanuary1,2000,associatedwithmakingthenecessarymodificationsidentifiedtodate.Totalcostsincurredin1997wereapproximately$1.4million.ENVIRONMENTALISSUES.Theproductionanddeliveryofenergyarenecessarilyaccompaniedbythereleaseofby-productssubjecttoenvironmentalcontrols.TheCompanyhastakenavarietyofmeasures(e.g.,self-audit'g,recyclingandwasteminimization,tra'ningofemployeesinhazardouswastemanagement)toreducethepotentialfo"adverseenvironmentaleffectsfromitsenergyoperations.Amoredeta'edcise'sionconcerningtheCompany'se..v'ronmentalmatters,includingad'scuss'onofthefederalCleanAi"ActAmencments,canbefoundinNote10oftheNo=estoFinancialStatements.REDEMPTIONOFSECURITIES.Inacc:on=o'sa.".dmandatorys'nkingfuncobga='onsove""hepas=redemptionofsecuritiestotalec$m'on'.".'99",approx'mately$152mill'on'n1997.:nccec'.".c's'997werenearly$102millio..o'x-exemp"sec"'=..ewmult'.modetax-exemptbondsascisessecunce"=mortgagebondmatur'iesthreevears,d'iscretionary$49.-..onin1996,andcre"'ona"yredempt'onsforeswh'c..werere'nancedwitha'HfCg

'0 30Capitalandothercashrequirementsduring1998areanticipatedtobesatisfiedprimarilyfromacombinationofinternallygeneratedfundsandtheuseofshort-termcreditarrangements.TheCompanymayrefinancematuringlong-teandebtandPreferredStockobligationsduring1998dependingonprevailingfinancialmarketconditions.TheCompanyanticipatesutilizingitscreditagreementsandunsecuredlinesofcredittomeetanyinterimexternalfinancingneedspriortoissu'ganylong-termsecurities.Forinformationwithrespecttoshort-termborrowingarrangementsandlimitations,seeNote9oftheNotestoFinancialStatements.Asf'nancialmarketconditionswarrant,theCompanymayalso,fromtimetotime,redeemhighercostseniorsecurities.RESULTSOFOPEBATIONSThefollowingfinancialreviewidentifiesthecausesofsignificantchangesintheamountsofrevenuesandexpenses,comparing1997to1996and'996to1995.TheNotestoFinancialStatementscontainadditionalinformation.OPERATINGREVENUESANDSALES.Operatingrevenuesin1997werelowerthan1996withtheeffectofelectricbaseratedecreasesinJuly1996and1997andlowerthermsalesofgasduetomilderweatherthanlastyearpartiallyoffsetbyhighercustomerelectrickilowatt-hoursalesresultingfromincreasedcustomersandhigherelectricsalestootherutilities.Despitelower'pyzatingrevenues,operatingrevenueslessfuelexpenseswerenearlyunchangedref5ectingprimarilyadeclineinpurchasedelectricityexpenseasaresultofincrdasedavailabilityoftheCompany'sgeneratingfacilities.TheeffectofweathervariationsonoperatingrevenuesismostmeasurableintheGasDepartment,whererevenuesfromspaceheatingcustomerscompriseabout90to95percentoftotalgasoperatingrevenues.Comparedtoayearearlier,weather'ntheCompany'sserviceareawas9.0percentwarmerduringthefirstthreemonthsof1997and1.1percentwarme.fortheentireyearonacalendarmonnheatingdegreedaybasis.Incontrast,weatherduring1996was7.1percentcolderthan1995onacalendarmonthheatingdegreedaybasis.WitheliminationofaweathernormalizationclauseintheCompany'sgastariffeffectiveNovember'995,abnormalweathervaiationsmayhaveamorepronouncedeffectongasrevenues.Coolerthannormalsummerweatherduring1997and1996hamperedthedemandforairconditioningusage,withamorepronouncedeffectin1997withthe1997weathe"beingapproximately27percentcoolerthan1996.Comparedwithayea"earlier,kilowatt-hoursalesofenergytoretailcustomerswereup1.2percentin1997,follow'nga0.3percentincreasein1996.Sa1estocommercialcustomersachievedthelargestgainin1997.Salesto'ndustrialcustomersledthe'ncreasein1996comparedtoayearearlierandweedrivenbyonelargeindustrialcustomerwhopurchasedmoreelectricpowe"asana'ternativetopowerproducedatitsownplan".Decreasedelectricdemandfo"airconditioningusagec'ausedbycoolersumme"weatherhadanimpactonk'lowatt-hoursalesin1996and1997.<<.FluctuationsinrevenuesfromelectricsalestootherutilitiesaegenerallyrelatedtotheCompany'scustomerenergyrequirements,thewholesaleenergymarket,availabilityoftransmission,andtheavailabilityofelectricgenerationfromCompanyfacilities.Revenuesfromelectricsalestootheutilitiesrosein1997duetoincreasedsalesresultingfromgreateravailabilityofourcombinednuclearandfossilgeneration,afavorablewholesalemarketinthesecondhalfoftheyear,andincreasedmarketingofavailablecapacity.Incontrastto1997,revenuesfromsalescwotherelectricutilitiesdeclinedin1996reflectingdecreasedkilowatt-hoursalestosuchutilitiesandlessgenerationfromtheCompany'sGinnaNuclearPlant.Thetransportationofgasforlarge-volumecustomerswhoareabletopurchasenaturalgasfromsourcesotherthantheCompanyisanimportantcomponentoftheCompany'smarketingmix.Companyfacilitiesareusedtodistributethisgas,whichamountedto16.6milliondekathermsin1997and16.8milliondekathermsin1996.ThesepurchasesbyeligiblecustomershavecauseddecreasesinCompanyrevenues,withoffsettingdecreasesinpurchasedgas 32shareholderswillassumethefullbenefitsanddetrimentsrealizedfromactualelectricfuelcostsandgenerationmixcomparedwithPSC-approvedforecastamounts..TheCompanynormallypurchaseselectricpowertosupplementitsowngenerationwhenneededtomeetloadorreserverequirements,andwhensuchpo~erisavailableatacostlowerthantheCompany'sproductioncost.Increasedavailabilityandefficienciesfollowingthe1996installationofnewsteamgeneratorsattheGinnanuclearplantresultedinlowerkilowatt-hourpurchasesofelectricityin1997whichledtoadeclineinpurchasedelectricpowerexpense.Despiteanincreaseink'owatt-hourspurchasedin1996,electricpu"chasedpowerexpensewasalsodownin1996reflecting,inpart,lowepurchasesfromthehigher-costKaminefacilityasdiscussedbelow.UndeacontractwithKamine,theCompanyhasbeenrequiredtopurchaseunneededenergyatuneconomicalrates(seeNote10oftheNotestoF'nancialStatements).TheCompanypurchased337thousandmegawatt-hoursofenergyfromKamineatatotalpriceof$16.6millionin1995.TheKaminefacilityhasbeenoutofservicesincethemiddleofFebruary1996whichhelpedtolowertheunitcostforpurchasedelectricityin1996comparedto1995.EnergyManagementandCosts-Gas.TheCompanyacquiresgassupplyandtransportationcapacitybasedonitsrequirementstomeetpeakloadswhichoccurinthewintermonths.TheCompanyiscommittedtotransportationcapacityontheEmpireStatePipeline(Empire)andtheCNGTransmissionCorporation(CNG)pipelinesystems,aswellastoupstreampipelinetransportationandstorageservices.ThecombinedCNGandEmpiretransportationcapacity'-i'sadequatetomeettheCompany'scurrentrequirements.':orthe1997comparisonperiod,gaspurchasedforresaleexpensedeclineddrivenbyareducedvolumeofpurchasedgasresultingfromawarmerheatingseason.Highercommoditycostsandincreasedvolumesofpurchasedgascausedanincreaseingaspurchasedforresaleexpensein1996comparedto1995.OperationsExcludingFuelExpenses.Fo"the1997comparisonperiod,the'..creaseinoperationsexcludingfuelexpensesreflectsmainlyhigheroutsideserv'cesexpenses,recognitionofobsoleteandunproductivematerialsinventory,s"ormcosts,andregulatorycompliancecostspartiallyoffsetbylowerpayrollcos"sancdecreasedexpenseassocia"edwithuncollectibleaccounts.Forthe1996compar'sonperiod,theincreasei..operat'onsexcludingfuelexpensesreflects...a'.".lyh'gherpayrollcostsandanincrease'namortizat'onexpensebeginnin"ly1,1996forcustomerinformationsystemenhancements.Higherpayrollcostsforthisperiodreflectsamortizatio..ofadditionalear'yretirementcostsforprogramsconcludedinOctober1994andgreateremployeeredeploymen/outplacementcos"s.Anadditionalexpenseaccrualfordoubtfulaccoun"sincreasedoperatingexpensesbv$15.0millionin1995.TheCompanyiscontinuingtotakeaggressivestepstoimprovei"so,co.ectione.aborts.Uncollectibleexpensein'997was$18mil'ion,comparedwith$20mi1'onin1996.In1995,uncollec"ibleexpensewas$23million.Forbothcomparisonperiods,the'ncreaseindeprecia=ionexpensereflectsprimarilyresultsfromdepreciationofthenewGinnanuclearplantsteamgeneators(approximately$800,000additionalexpenseper.month)andrecoveryofincreasednucleardecommissioningexpenseofapproximately$3.2millionperquarterbeginningJuly1,1996.TaxesChargedToOperatingExpenses.Local,stateandothertaxesdecreasedin1997reflectingmainlylowerpropertytaxesduetodecreasesinassessmentsand/orratesandlowerrevenuetaxesduetodecreasesinrevenuesandtheNewYorkStaterevenuetaxsurchargerate.Thedecreaseinthesetaxesfor1996reflectsmainlylowerpropertytaxesduetodecreasesinassessments.Thedecreaseinfederalincometaxin1997reflectsmainlythereversalofapriorprovisionforthein-serv'cedateofNineMileTwoasaresultofanagreementreachedwiththeInternalRevenueService.

34Item8.FINANCIAL,STATEMENTSANDSUPPLEMENTARYDATA'0A.FINANCZAISTATEMENTSReportofIndependentAccountantsConsolidatedStatementofIncomeforeachofthethreeyearsendedDecember31,1997.ConsolidatedStatementofRetainedEarningsforeachofthethreeyearsendedDecember31,1997.ConsolidatedBalancesheetatDecember31,1997and1996.ConsolidatedStatementofCashFlowsforeachofthethreeyearsendedDecember31,1997.NotestoConsolidatedFinancialStatements.FinancialStatementSchedules:ThefollowingFinancialStatementScheduleissubmittedaspartofItem14,Exhibits,FinancialStatementSchedulesandReportsonFormS-K,ofthisReport.(AllotherFinancialStatementSchedulesareomittedbecausetheyarenotapplicable,ortherequiredinformationappearsin,theFinancialStatementsortheNotesthereto.)ScheduleII-ValuationandQualifyingAccounts.B.SUPPLEMENTARYDATA'0InterimFinancialData.'0 CONSOUDATEDSTATEMENTOFINCOME(ThousandsofDoaars)YearEndedDecember31199719961995radngRevenueslectricGasEkrctricsalestootherutrTItiesTotalOperatingRevenues$679.473336.3091,015.78220.856$690.883$696.582346.279293.8631,037.16216.885990.44525.8831.036.6381.054,0471,016328OperatingExpensesFuelExpensesFocitorelectricgenerationPurchasedetectricnyGaspurchasedforresale47.66528.347196,57940.93844,19046.48454.167292.297767762TotalFuelExpenses272.59i289779266,ii9Operat(ngRevenuesLessFuelExpensesOtherOperatingExpensesOperatensexcludingfuelexpensesMaintenanceDepreciationandambit(sationTaxes-local.stateandornerFederalincometax764.047268,47446.635116.522121.79665.279764328.'66.09447.063105.614126.86869.501750,209259.20749,22691.593133,89566.215TbtalOtherOperatingExpenSeS618,706615,140600,136OperabngIncomeOther(Income)andDeduct(onsAllowancelorotherfundsusedduringconsuuctionFederalincometaxRegulatorydisallowancesOther.netTotalOther(Income)andDeductionsInterestChargestermdebtr.net(ancelorborrowedfundsuseddunngconsuuctenTotalInterestCharges145341(351)(3.704)3,308(747)44,6156,676(563)50.728149.188(684)(3,450)(712)(4.846)48,6189.328(1.423)150.073(585)(16,948)26.8669,63118,96453.0269.056(2.901)59.181NetIncomeDividendSOnPreterredStoct(Earn(ngsAppacabletOCommonStock953605.805$89.5557.465$90.0467.4659757i77.928EamegsperCommonShare~BaseEarnv(gsperCommonShare-Dauted$2.30$2.30$2.32$2.32$1.69$1.69CONSOLIDATEDSTATEMENTOFRETAINEDEARNINGS(ThousandsofDotlars)YearEndedDecember31199719961995BalanceatBeginningolPeredAddNetIncomeAdlustmenlAssooatedwnhStockRedemptenTotalDeductDiveendsdeclaredoncaptatstockCumutatNepreferredstock.alrequiredratesCommonStockTotalBalanCealEndolPeriod$90.540$70.330$74.56695.36097,51171,928f846)\85.054I67,841146.4945.8057.4657.46569.93669.8366876997574177.30176164$109,313.$90,540$70,330DividendsDeclaredperCommonSharempanyingnotesareanintegralperlOl'thefinancialstatements.$1.80$1.80$1.80 CHESTERGASANDELECTRICCORPORATIONNSOLIDATEDSTATEMENTOFCASHFLOWS(ThousandsofDoliars)YearEndedDecembe'r31CASHFLOWFROMOPERATIONSNetincomeAdjustmentstoreconcilenetincometonetcashprovidedfromoperatingactivities:DepreciationandamortizationDeferredfuelDeterredincometaxesAllowanceforfundsusedduringconstructionUnbiliedrevenue,netStockoptionplanNucleargeneratingplantdecommissioningfundPensioncostsaccruedPostemploymentbenefitinternalreserveRegulatorydisa!IowanceProvisionfordoubtfulaccountsChangesincertaincurrentassetsandliabilities:AccountsreceivableMaterials,suppliesandfuelsTaxesaccruedAccountspayableOthercurrentassetsandliabilities,netOther,netTotalOperating199795,360133,942489(10,064)(914)4,8232,399(20,331)(3,398)6,1895,0783,049(41)3473,7337,3446,847234.852199697,511S121,824(6,501)6,391(2,107)10,908(11,732)(2,494)6,6264,9873,228~'.i'1,238)'=.'13,944)P,116)(5,186)201.226199571,928109,5753,432(8,047)(3.486)(9,899)(8,837)6,2804,63626,86614,893(25.599)6,83715,1679,6449,63928,762251.791HFLOWFROMINVESTINGACTIVITIESetadditionstoutilityplantOther,netTotalInvesting(84.068)(1)f84.069)(114,274)(109,547)9,20411,124CASHFLOWFROMFINANCINGACTIVITIESProceedsfrom:Sale.'IssuanceofcommonstockIssuanceoflongtermdebtShorttermborrowings,netRetirementoflongtermdebtRetirementofpreferredstockDividendspaidonpreferredstockDividendspaidoncommonstockOther,netTotalFinancingIncrease(Decrease)incashandcashequivalentsCashandcashequivalentsatbeginningofyearCashandcashequivalentsatendofyear272101,9006.000(151.568}(30.000)(6.366)(69.933}3.016(146.679)S4.104SS21.301SS25.405S8.61214,000(67,332)(7,465)(69,657)2.866(118,976)(22,820)44,12121.30117,074(51,600)(1,000)(7,465)(68,347)~112,~05741,3112,810S44.121SUPPLEMENTALDISCLOSUREOFCASHFLOWINFORMATION(ThousandsofDollars)CashPaidDuringtheYearInterestpaid(netofcapitalizedamount)metaxespaidTheaccompanyingnotesareanintegralpartofthefinancialstatements.199750,68170.500199655,545$76.890$199556,59243.500 40AllowanceforOtherFundsUsedDuringConstruction,apartofOtherIncome.TherateapprovedbythePSCforpurposesofcomputingAFUDCwas5.0%duringthethree-yearperiodendedDecember31,1997.Replacementofminoritemsofpropertyisincludedinmaintenanceexpenses.Costsofdepreciableunitsofplantretiredareeliminatedfromutilityplantaccounts,andsuchcosts,plusremovalexpenses,lesssalvage,arechargedtotheaccumulateddepreciationreserve.CASHANDCASHEQUIVALENTS.Cashandcashequivalentsconsistofcashandsho-termcommercialpape".Theseinvestmentshaveoriginalmatuitvno"exceed'ngthreemonths.Suchinvestmentsarestatedatcost,whichapprox'matesfairvalue,andareconsideredcashequivalentsforfinancialstatementpurposes.INVESTMENTSINDEBTANDEQUITYSECURITIES.TheCompany'saccountingpol'cy,asprescribedbythePSC,withrespeqttoitsnucleardecommissioningtrustsistoreflectthetrusts'ssetsatmarketvalueandreflectunrealizedgainsandlossesasachangeinthecorespondingaccrueddecommissioningliability.GASSUPPLY.TheCompanyperiodicallyentersintoagreementstominimizepricerisksfornaturalgasinstorage.Gainsorlossesresultingfromtheseagreementsaredeferreduntilthecorrespondinggasiswithdrawnfromstorageanddeliveredtocustomers.RESEARCHANDDEVELOPMENTCOST.ResearchandDevelopmentcostswerechargedtoexpenseasincurred.Expend'turesfortheyears1997,1996,pnd1995were$4.5million,$4.9millionand$5.2millionrespectively.ENVIRONMENTALREMEDZATZONCOSTS.TheCompany,accruesforlo'ssesassociatedwithenvironmentalremediationob'igationswhensuchlossesareprobableandreasonablyestimable.Accrualsfo"est'matedlossesfromenvironmentalremediationobligationsgenerallyarerecognizednolaterthancompletionoftheremed'alfeasibilitystudy.Suchaccualsareadjustedasfurthe"'nformat'ondevelopsorc'rcumstanceshange.Cossofutureexpend'"resforenv'ronmentalremed'at'onobligationsarenodiscountedtothe'rese."."value.MATERIALSSUPPLIESANDFUELS.Materiasancspp'iesnventoriesareva.ueda"thelowerofcos"o"marketsng=he"rs=-i""rst-outmet'~od~uel~~IQII~'nvenzoriesarevaluedataveragecost..heCompanvper'od'cal'yentersintoagreementstom'nimizeprice'sksfornatralgas.".s"orage.Gainsorlossesesu't'ng'mtheseagreementsarece=errec".".=thecorrespondinggasisw'hcrawnfromstorageancdeiveredtoc'stomers.TOCK-BASEDCOMPENSATION.F'na..c.aAccont.ngStancarcsBoardStatement123(SFAS.1.23),Accounting:o"S"ockBase"Co.-..pe.-.sa:'on,wasadoptedbytheCompanyinthefirstquartero=.996.:=reco."..-..encsheuseofafairvalubasedmethodofaccountingforco.-..pensa='oncos"sassocia"edw'thstock-basedco.-..pensation.TheCompanycrrent'y'.".asS=ockAp=eca=ionR'ghtsplanscover'ncertainempoyeesanddirectors.Fo"=hesep'ans,=heCompany'saccountingpo'cyhasbeentouseafa'-va'ueme=hoco=compt'ngper'odiccompensationexpense.SEAS-123wasappliedtothevaa='ono="he996PeformanceStockOpt'onPlan(PSOP),whichbecamee=fectveonana"y22,1997.Theaggregateamountchargedtoexpense'saresultoftheseplansapproximates$1.0millionannuallyin1996and1995,andapprox'maes$8.2m'ion'n1997.AdditionalinformationonthePSOPisincluded'"..Noe8.RECLASSIFICATIONS.Certainamountsinhe'rioryears'inancialstatementswerereclassifiedtoconfo".zwi"hcrren=yearpresentation.IEARNINGSPERSHARE.SFAS-128.Earn'ngsPe"Share,wasadoptedbytheCompanyinthefourthquarterof1997.Thisstatementreplacesthepresentationfg7ofprimaryEarningsPerSharewithBasicEarningsPerShare,andalsorequirespresentationofDilutedEarningsperShare.BasicEarningsPerShare(EPS)iscomputedbydividingincomeavailabletocommonsha.eholdersbytheweightedaveragenumberofcommonsharesoustandingfo"theperiod.DilutedEPSreflectsthepotentialdilutionthatcouldoccurifsecuritiesorothecontractstoissue 42Note2.FEDERALINCOMETAXES4Theprovisionforfederalincometaxesisdistributedbetweenoperatingexpenseandotherincomebaseduponthetreatmentofthevariouscomponentsoftheprovisionintherate-makingprocess.Thefollowingisasummaryofincometaxexpensefo"thethreemostrecentyears.Charged(Credited)tooperat,ingexpense:CurrentDeferredboaa1Charged(Credited)toothe."incone:C'uentDeferredDefe=redinvestnenttaxcreditTotalTotalfederalincomeaxexpense1997$69,812(4,533)1,828(3,100)(2.432)73,lUT7$61,575(Thousandso!Do'ars)1996$65,7573.744vr'Y6T..(6,097)5.079(2.432)~$57$66,051199565,368847(9.996)(4.520)(2,432)(Vi~4$49,267ThefollowingisareconciliationofthedifferencebetweentheamountoffederalincometaxexpensereportedintheConsolidatedStatementofIncome.,andtheamountcomputedatthestatutorytaxrateof35%.(ThousandsofDollars)aetIncomedd:federa.incometaxexpenseincomebeforefederalincometaxComptedtaxexpensea"satuorytaxrae"ncreases(decreases)intaxresultingfrom:Differencebetweentaxdepreciationandamo.".=deferedDeferrec.'nvestmentaxcedit)(sce'aneositems,net.otafederalincomeaxexpense1997$95,36061,575$'56,935$54,927'0,772(2,432)(.692)$61,5751996$9'7,5116605'163.562$57,24710,796(2,432)440$66Os'995$71.92849,267$21,195$42.418'7,197(2,432)2,084$49.267Asmmaryofthecomponentsofthene"deferredtaxliabilityisasfo'lows:a(.hosandsofDollars)a)"c'a"deco-'s'"ŽgAccelerateddep.eciationDeferedinvest.entaxcreditDepreciationpreviouslyflowedthroughpensionotherToal1997$(20.807)216,70427,981157,538(23,166)(3.281)$344.9691996$(17,880)213,90729,562169,562-(24,570)(553)$370,0281995$(14,797)197.9523',143183,077(24,241)4.518$377,652 44Note3.PENSIONPLANANDOTHERPOSTEMPLOYMENTBENEFITS0TheCompanyhasadefinedbenefitpensionplancoveringsubstantiallyallofitsemployees.Thebenefitsarebasedonyearsofserviceandtheemployee'scompensation.TheCompany'sfundingpolicyistocontributeannuallyanamountconsistentwiththerequirementsoftheEmployeeRetirementincomeSecurityActandtheinternalRevenueCode.Thesecontributionsareintendedtoprovideforbenefitsattributedtoservicetodateandforthoseexpectedtobeearnedinthefuture.Theplan'sfundedstatusandamountsrecognizedontheCompany'sbalancesheetareasfollows:1997(Millions)1996Accumulatedbenefitobligation,includingvestedbenefitsof$384.7in1997and$374.6in1996Projectedbenefitobligationforservicerenderedtodate404.0*S(499.3)*s392.6*S(480.2)*Less:Planassetsatfairvalue,primarilylistedstocksandbondsPlanassetsinexcessofprojectedbenefits638.4.'-".567.1139.1~'6.9Unrecogn'zednetloss(gain)frompastpexperiencedifferentfromthatassumedandeffectsofchangesinassumptionsPr'rservicecostnotyetrecognizedinnetperiodicpensioncostUnrecogn'zednetobligationatDecembe"31Pensioncostsaccrued(219.0)10.7s67.4(170.7)11.6s69.8Actuarialpresentvalue.Ne"pensioncostincludedthefollowingcomponer.ts:1997(Mill'ons)19961995Servicecost-benefitsearnedduringthepe'od:nterest'ostonprojectedbenefiob'iga=ionActualreturnonplanassetsNetamortizationanddeferralNetperiodicpension(credit)cost,s6.233.0(104.3)63.1~s$7.433.4(80.8)39.0$6.035.4(101.1)56.1TheprojectedbenefitobligationatDecembe"31,1997andDecember31,1996assumeddiscountratesof6.75%and7-.Z5%,respectively,andalong-termrateofincreaseinfuturecompensationlevelsof5.00%.Theassumedlong-termrateofreturnonplanassetswas8.50%,.Theunrecognizednetobligationisbeingamortizedover15yearsbeginningJanuary1986.1'nadditiontoprovidingpensionbenefits,theCompanyprovidescertainhealthcareandlifeinsurancebenefitstoretiredemployeesandhealthcarecoverageforsurvivingspousesofretirees.SubstantiallyalloftheCompany'semployeesareeligibleprovidedthattheyretireasemployeesoftheCompany.Zn 46Note4.DEPARTMENTALFINANCIALINFORMATION,0TheCompany'srecordsaremaintainedbyoperatingdepartments,inaccordancewithPSCaccountingpolicies'hefollowingistheoperatingdataforeachoftheCompany'sdepartments,andnointerdepartmentaladjustmentsarerequiredtoarriveattheoperatingdataincludedintheConsolidatedStatementofZncome.ElectricOperatingZnformationOperatingrevenuesOperatingexpenses,excludingprovisionforincometaxesPretaxoperatingincomeProvisionforincometaxesNetoperat'ngincome(ThousandsofDollars)199719961995700,329$707,768$722,465516,793183,53661,837521,222186,54661,901523,105199,36059,500$121,699S124,645S139,860OtherXnformationDepreciationandamortizationNuclearfuelamortizationCapitalexpenditures103,395$$17,419$58,522JI&~-,615$78,81216;209;$17,98295,334'93,634XnvestmentZnformation,Zdentifiableassets(a)$1,783,825$1,877,224$1,913,762Opera"'ngXnformat'onOoera-'ngrevenueOperatingexpenses,excludingprov's'onforincometaxes309.2253'4,'36276,935S336,309S346,279$293,863Pre"axoperatingincomeProvisionforincometaxes27,0843,44232,1437,60016,9286,715Ne=operat'ng'ncomeOthernformationDeprec'ationCapitalexpendituresXnvestmentZnformationidentifiableassets(a)S23,642S24,543S10,213S13,127S'2,999S12,781S25,546S18,940$15,913S441,849S447,865S477,758(a)Excludescash,unamortizeddebtexpense.andotherco~onitems.

e=

Note6.LONG-TERMDEBT!0FIRSTMORTGAGEBONDSSeriesDue(ThousandsofDollars)PrincipalAmountDecember31199661/46.78.0061/283/893/881/46.356.507.007.157'37.647.667.676.3757.45WXYEEOO)a)PPQQIb)RR<a)SS)a)(b)(c)(b)(c)(b)(c)(c)(c)(c)(b)(c)(c)NetbonddiscountLess:DuewithinoneyearTotalSept.15,1997July1,1998Aug'5,1999Aug.1,2009Dec.1,2028Apr.1,2021Mar.15,2002May15,2032May15,2032Jan.14,2000Feb.10,2003Mar.3,2003Mar.15,2023Mar.15,2023Mar.15,2023July30,2003July30,202330,00025,500100,000100,00010,50050,00030,00039,0001,00033,0005,00012,000.40,00040,000gilt),))I(566)30,000~44420,00030,00029,6681O.OOO25,500100,000100,0001O,SOO50,00030,00039,0001,00033,0005,00012,00040,00040,000SSP.),6(((614)20,000~YP(a)TheSeries00,SeriesRRandSeriesSSFirstMortgageBondsequaltheprincipalamountofandprovideforallpaymentsofprincipal,premiumandint,crestcorrespondingtothePollutionControlRevenueBonds,SeriesC,andPollutionControlRefundingRevenueBonas,Series1992A,Series)992B(RochesterGasandElectricCoporaionProjects),respectively,'ssuedbytheNewYorkStateEnergyResearchandDevelopmentAuthority(NYSERDA)throughaparticipationagreementw'ththeCompany.Paymentsofthepr'ncipalof,andinterestontheSeries1992AandSeries1992BBondsarecuaranteedunderaBondInsurancePolicybyMB"AInsuranceCorporation.(b)TheSeriesQQFirstMortgageBondsandthe7%,7.15%,7.13%and6.375'4mecium-t,ermnot,esaescribedbe'owaregenera'yno"redeemab'epriortomaturity.(c)Zn1993theCompanyissued$200mil'ionunderamedium-termnoteprogramentitled"FirstMortgageBonds,DesignatedSecuredMedium-TermNotes,SeriesA"withmaturitiesthat"angefromsevenyearstothirtyyears.TheFirstMortgageprovidessecurityforthebondsthroughafirstlienonsubstantiallyallthepropertyownedbytheCompany(exceptcashandaccountsreceivable).Sinkingandimprovementfundrequirementsaggregate$333,540perannumundertheFirstMortgage,excludingmandatorysinkingfundsofindividualseries.Such,requirementsmaybemetbycertificationofadditionalpropertyorbydepositingcashwiththeTrustee.The1997and1996requirementsweremetwithfundsdepositedwiththeTrustee,andthesefundswereusedforredemptionofoutstandingbondsofSeriesY.OnMay1,1997theCompanyredeemedallitsoutstandingFirstMortgage8%Bonds,SeriesY,dueAugust15,1999andallitsoutstandingFirstMortgage6'.Bonds,Seriesw,dueSeptember15,1997.OnOctober15,1997,theCompanyredeemedallitsoutstandingFirstMortgage65%Bonds,SeriesEE.

50Basedonanestimatedborrowingrateatyear-end1996of7.30%forlong-termdebtwithsimilartermsandaveragematurities(13years),thefairvalueoftheCompany'slong-termdebtoutstanding(includingPromissoryNotesasdescribedabove)isapproximately$670millionatDecember31,1996.OnSeptember16,1997,theCompanycompletedarrangementsforthedeliveryinSeptember1998of$25.5millionof5.95'tNYSERDAtax-exemptbondsdueSeptembe1,2033.ProceedsareexpectedtobeusedtoredeemtheSer'sOO,tax-exempt,firstmortgagebondswhicharenotredeemableuntilDecember"998.Note7.PREFERREDANDPREFERENCESTOCKTebOrderofSenioritPreferredStock(cumulative)PreferredStock(cumulative)PreferenceStockParValue$100251Shares'uthorized2,000,0004,000,0005,000,000SharesOutstandin920,000*Seebelowformandatoryredemptionrequirements.Nosharesofpreferredorpreferencestockarereservedforemployees,orforoptions,warrants,conversions,orotherrights.A.PREFERREDSTOCKiNOTSUBJECTTOMANDATORYREDEMPTION:e~SeriesSharesOutstandingDecember31,1997(Thousands)December31,19971996OptionalRedemption(ershare)44.103/44.04on7.50o"a'JKN120,00080,00060,00050,00060,000100,000470000$'2,0008,0006,0005,0006,000,10,000547000$12,0008,0006,0005,0006,00010.00020,000$67000$105101101102.5102101102Mayberedeemedatanytimeattheop='ono="'heCompanyon30daysmin'mumno='ce,plusaccrueddividendsinal.cases..heSer'esNwereredeemedonApr'122,1997.B.PREFERREDSTOCK,SUBJECTTOMANDATORYREDEMPTION:SharesOutstandingse"iesDecember31,1997(.housands)December31.'997'996'ptionalRedemption(ershare)7.45S7.55T7.65U6.60VTotalLess:DoewithinoneyearTotal+Thereafterat$100.00100,000100,000250,000,(mU100.000350000$3.0,00010,00025,000$~4,VR10.000~35000$10,00010,0001Q,QOO25,000,UH10,000~45000NotapplicableNotapplicableNotapplicableNotBefore3/1/04+

52Note8.COMMONSTOCKANDSTOCKOPTIONSInDecember1997,theBoardofDirectorsoftheCompanyauthorizedtherepurchaseofupto4.5millionsharesoftheCompany'sCommonStockontheopenmarket.Noneoftheshareswerepurchasedpriortoyearend.AtDecember31,1997,therewere50,000,000sharesof$5parvalueCommonStockauthorized,ofwhich38,862,347wereoutstanding.NosharesoCommonStockarereservedforwarrants,conversions,orotherrights.Therewere1,445,141sharesofCommonStockreservedforemployeesunderthe1996PeformanceStockOptionPlan,asfurtherdescribedbelow.Therewere1,026,840sharesofCommonStockreservedandunissuedforshareholdersundertheAutomaticDividendReinvestmentandStockPurchasePlan.and129,664sharesreservedandunissuedforemployeesundertheRGRESavings"PlusPlan.COMMONSTOCKSharesOutstandingAmount(Thousands)Balance,January1,1995SharesIssuedthroughStockPlansDecrease(Increase)inCapitalStockExpenseBalance,December31,1995SharesIssuedthroughStockPlansDecease(Increase)inCapitalStockExpenseBaance,December31,1996SharesIssuedthroughStockPansAddit'onalPaidinCapitalDecrease(Increase)'n,CaptockExpenseBaance,December31.199737,669,963783,20038,453,163398,30138,851,4640,88338,862,347$670,56917,074(125)$687,5188,612(111)$696,0192722,399699,03"PERFORMANCESTOCKOPTIONPLANEffectiveJanuary22,'99'7,heCompanyacop.edaPerformanceStockOptionPlanwhichprovidesforthegrantingofop:fonstop."chaseupto2,000,000authorizedbutunissuedshar'esort"easuryshareso:$5pa"-valueCommonStocktoexecutiveofficersandotherkeyemployees.Yopar='c'pantshallbegrantedoptionsformorethan200,000shaeso=Co.-.=..onS"oci'.c'nganycalendaryear.TheoptionswouldbeexercisableforaperiodtobedeteminedbytheCommitteeonManagement(theCommittee).TheCommitteemayin'tssolediscretiongranttherighttoreceiveacashpaymentuponanyexerciseofanoptionequaltothequarterlydividendpaymentpershareofCommonStockpaidfromthedatetheoptionwasgrantedtothedateofexe.cise.In1997,theBoardofDirectosgranted504,700optionsatanexercisepriceof$19.0625pershare.Theseoptionsarevestedat50%whenthestockclosesat$25pershare,75%at$30pershareand100%at$35pershare.Alsoin1997,theBoardofDirectorsgranted50,159optionsatanexercisepriceof$24.75pershare.Theseoptionsarevestedat25%whenthestockcloses 00e.

Note9.SHORT-TERMDEBTOnDecember31,1997,theCompanyhadshort-termdebtoutstandingof$20.0million.AtDecember31,1996theCompanyhadshort-termdebtoutstandingof$14.0million.Theweightedaverageinterestratein1997onshort-termdebtoutstandingatyearendwas6.64%andwas6.07%forborrowingsduringtheyear.Theweightedaverageinterestrateonshort-termdebtborroweddur'ng1996was5.86~o.InDecember1997theCompany's$90millionrevolvingcreditagreementwasamendedextendingitstermtofiveyears,terminatingDecember31,2002.Commitmentfeesrelatedtothisfacilityamountedto$113,000in1997and1996,and$165,000in1995.TheCompany'sCharterprovidesthattheCompanymaynotissueunsecureddebtifimmediatelyaftersuchissuancethetotalamountofunsecureddebtoutstandingwouldexceed15percentoftheCompany'stotalsecuredindebtedness,capital,andsurpluswithouttheapprovalofatleastamajorityoftheholdersofoutstandingPreferredStock.AsofDecember31,1997,theCompanywouldbeabletoincurapproximately$103.8millionofadditionalunsecureddebtunderthisprovision.TheCompanyhasunsecuredlinesofcredittotaling$27millionavailablefromseveralbanks,attheirdiscretion.Inordertobeabletouseits$90millionrevolvingcreditagreement,the4Companyhascreatedasubordinatemortgagewhichsecuresborrowingsunderitsrevolvingcreditagreementthatmightotherwiseberestrictedbj-thisprovisionoftheCompany'sCharter.Inaddition,theCompanyhasaLoanandSecurityAgreementtoprovideforborrowingsupto$10millionfortheexclusivepurpose'ffinancingFederalEnergyRegulatoryCommissionOrder636transitioncosts(636Notes)andupto$30millionasneededfromtimetotimeforotherworkingcapitalneeds.Borowingsunderthisagreement,whichcanberenewedannually,aresecuredbyalienontheCompany'saccountsreceivable.A-December31,1997,borrowingsoutstandingwere$4.34millionof636Notes(recordedontheBalanceSheetasaliabilityunderDeferredCreditsandOtherLiab'lities).

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56assetsduringthetermoftheSettlement,gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.Withregardtolossesonsuchsales,theSettlementacknowledgesanintentthattheCompanywillbepermittedtorecoversuchlossesthroughdistributionratesduringthetermoftheSettlement.FutureratetreatmentistobeconsistentwiththeprinciplethattheCompanyistohaveareasonableopportunitytorecoversuchcosts."To-gocosts"oftheCompany'snon-nuclearresources(i.e.,capitalcostsincurredafte"February28,1997,operationandmaintenanceexpenses,andpropety,payrollandothertaxes)aretobeinitiallyrecoveredthroughdistributionrates.Thefixedportionofto-gocostswouldberecoveredinfulluntilJuly1,1999,andbesubjecttothemarketthereafterinaccordancewiththephase-inschedulefortheRetailAccessprogram.Thevariableportionofnon-nuclearto-gocostswouldalsobesubjecttothemarketinaccordancewiththephase-inschedule.UndertheSettlement,.nuclearcosts'wouldremainrecoverablethroughregulatedrates.Miscellaneous.ThepresentSettlementsupersedesthe1996RateSettlement.Variousincentiveandpenaltyprovisionsinthe1996RateSettlementareeliminated.EZTFISSUE97-4-DEREGULATIONOFTHEPRICINGOFELECTRICITY.InJuly,1997,theFinancialAccountingStandardsBoa'rd'sEmergingIssuesTaskForce(EZTF)reachedaconsensusonaccountingrulesforutilities'ransitionplansformovingtomorecompetitiveenvironmentsandprovidedguidanceonwhenutilitieswithtransitionplanswillneedtodiscontinuethe~licationofSFAS-71,"AccountingfortheEffectsofCertainTypesofRegulation'".'hemajorEZTFconsensuswasthattheapplicationofSFAS-71toasegment(e.g.generation)whichissubjecttoaderegulationtransitionplanshouldceasewhenthelegislationorenablingrateordercontainssufficientdetailfortheu'litytoreasonablydeterminewhatthetransitionplanwillentail.TheEZTFalsoconcludedthatadecisiontocontinuetocarrysomeoalloftheregulatoryassets(includingstrandedcosts)andliab'litiesofthesepaableportionofthebus'essthatisdiscontinuingtheappl'ationofSFAS-71shouldbedeterminedonthebasisofwheretheregulatedcashflowstorealizeandsettlethemwillbeder'ved.Zfatansitionplanprovidesfo"anon-bypassablefeefo"therecoveryofstrandedcosts,theremayno-beanysignificantwrite-off'fSFAS-71isd'cont'nuedforasegment.TheCompany'sapplicationoftheEZTF97-4consensushasnotaffectedits'nancialpos'tionorresultsofoperat'onsbecauseanyabove.marketgenerationcosts,regulaoryassetsandregulatoryliabil'tiesassociatedwiththegenerationpozionofitsbusinesswillberecoveredbytheregulatedportionoftneCompanythroughitsdistributionrates,g'ventheSe"tlementprovisions.TheSetlementprovidesforrecoveryofallprudentlyinc'rredsunkcosts(allinvestmentinelectricplantandelectricregulatoryassets)asofMarch1,1997byinclusioninrateschargedpursuanttotheCompany'sdistributionaccessta'ff.TheSettlementa'sostatestha""hePartiesintendtha"thepovisionsoithisSettlementwillallowtheCompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement,unde=SFAS-71'.andtha"suchtreatmentshallbeconsistentwiththeprincipletha=theCompanyshallhaveareasonableopportunitybeyondJuly1,2002torecoverallsuchcosts!'snotedpreviously,thefixedportionofthenon-nucleargenerationto-gocostsafterJuly1,1999andthevariableportionofthenon-nucleargenerat'onto-gocostsafterJuly1,1998aresubjecttomarketforcesandwouldnolongerbeabletoapplySFAS-71.TheCompany'snetinvestmentatDecembe"31,1997innucleargeneratingassetsis$698.4millionandinnon-nucleargeneratingassetsis$122.0million.REGULATORYANDSTRANDABLEASSETSWithPSCapprovaltheCompanyhasdeferredcertaincostsratherthanrecognizethemonitsbookswhenincurred.Suchdeferredcostsarethenrecognizedasexpenseswhentheyareincludedinratesandrecoveredfromcustomers.SuchdeferralaccountingispermittedbySFAS-71.ThesedeferredcostsareshownasRegulatoryAssetsontheCompany'sBalanceSheet.Suchcost 58highcostgeneratingassets.Estimatesofstrandableassetsarehighlysensitivetothecompetitivewholesalemarketpriceassumedintheestimation.TheamountofpotentiallystrandableassetsatDecember31,1997dependsonmarketpricesandthecompetitivemarketinNewYorkStatewh'chisstillunderdevelopmentandsubjecttocontinuingchangeswhicharenotyetdeterminable,butcouldbesignificant.Strandableassets,ifany,couldbewrittendownforimpairmentofrecoveryinthesamemannerasdeferredcostsdiscussedabove.Enacompetitivenaturalgasmarket,strandableassetswouldarisewheecustomersmigrateawayfromdependenceontheCompanyforfullserv'e,leav'ngtheCompanywithsurpluspipelineandstoragecapacity,aswellasnaturalgassupplies,undercontract.TheCompanyhasbeenrestructuringitstransportation,storageandsupplyportfoliotoreduceitspotentialexposuretostrandableassets.Regulatorydevelopmentsdiscussedunder"GASRESTRUCTURiNGPROCEEDING,"below,mayaffectthisexposure;butw'hetherandtowhatextenttheremaybeanimpactonthelevelandrecoverabilityofstiandableassetscannotbedetermineaatthist'me.AtDecember31,1997theCompanybelievesthatitsregulatoryandstandableassets,ifany,arenotimpairedandareprobableofrecovery.ThesettlementapprovedintheCompetitiveOpportunitiesproceedingdoesnotimpairtheopportunityoftheCompanytorecoveritsinvestmentintheseassets.However,thePSChaspublishedaStaffpapertoaddressissuessurroundingnucleargeneration,includingthedeterminationoffairmarketvalueforfacilitiesafterafiveyearrestructuringtransitionperiod.ltappearsthatthePSCmayseektoapplysimilarprinciplestoothertypesofgeneatingfacil'ties.Adeterminationinthisproceedingcouldhaveanimpactonstrandableassets.CAPITALEXPENDITURESTheCompany's1998constructionexpendituresprogramiscurrentlyestimateda=$"24million.TheCompanyhasenteredin"ocertaincommi"mentsforpurchaseo=materiasandequipmentinconnect'onw'ththatprogram.NUCLEAR-RELATEDMATTERSDECOMMTSSEONZNGTRUST.TheCompanyiscol)ect'ngamountsin'tselectricratesfortheeventualdecommissioningof'tsGinnaPlantandforits14%shareo"thedecommissioningofNineM'eTwo.Theoperatinglicensesfortheseplantsexp'rein2009and2026,respectively.UnderaccountingproceduresapprovecbyhePSC,theCompanyhascollecteddecomm'ssioningcostsofapproximatelys116.1m':lionthroughDecembe31,1997ana'sauthorizedtocollectapproximate'y$22millionannuallythroughJune30,2002'ordecommission'ng,coveringbothnuclearun'ts.Theamountallowedin=atesisbasedonest'matedultimatedecommission'ngcostsof$296.3millionforGinnaand$'12.8millionfo"theCompany's14+shareofNineMileTwo(1995dollars).Theseestimatesarebasedons'tespec'ficcoststudiesforeachplantcompletedin1995.SitespecificstudiesoftheanticipatedcostsofactualaecommissioningarerequiredtobesubmittedtotheNRCat%eastfiveyearspriortotheexpirationofthelicense.TheNRCrequiresreactorlicenseestosubmitfundingplansthatestablishminimumNRCexternalfundinglevelsforeactordecommissioning.TheCompany'splan,filedin1990,consistsofanexternaldecommissioningtrustfundcoveringbothitsGinnaPlantanditsNineMileTwoshare.Since1990,theCompanyhascontributed$86.4milliontothisfundand,includingrealizedandunrealizedinvestmentreturns,thefundhasabalanceof$132.5millionasofDecember31,1997.Theamountattributedtotheallowanceforremovalofnon-contaminatedstructuresisbeingheldinaninternalreserve.TheinternalreservebalanceasofDecember31,1997is$29.7million.TheNRCiscurrentlyconsideringproposalswhichmayimpactfinancialfundingrequirementsfordecommissioningofnuclearpowerplants.Undercurrent 0~'o 60governmentcouldassesslicenseesfortheclean-upofthesefederalfacilities.InJanuary1998,theU.S.SupremeCourtrefusedtohearthecase,effectivelyupholdingthedismissaloftheutilityclaims.NUCLEARFUELDISPOSALCOSTS.TheNuclearWastePolicyAct(NuclearWasteAct)of1982,asamended,requirestheDOEtoestablishanuclearwastedisposalsiteandtotaketitletonuclearwaste.ApermanentDOEhigh-levelnuclearwasterepositoryisnotexpectedtobeoperationalbeforetheyea"2010.TheDOEisproposingtoestabl'shaninterimstoragefacilitywhichmayal'owittotaketitletoandpossessionofnuclearwastepriortotheestablishmentoapermanentrepository.InDecember1996theDOEnotifiedtheCompanythattheDOEwillnotstartacceptanceofGinnaspentfuelin1998.InJanuary1997theDOEreleasedadraftrequestforproposaloutliningaprocessforprivatefirmstoacceptandtransportwastefromreactorsuntil.afederalfacilityisoperational.TheNuclearWasteActprovidesforadeterminationofthefeescollectiblebytheDOEforthedisposalofnuclearfuelirradiatedpriortoApril7,1983andforthreepaymentoptions.TheoptionofasinglepaymenttobemadeatanytimepriortothefirstdeliveryoffueltotheDOEwasselectedbytheCompanyinJune1985.TheCompanyestimatesthefees,includingaccruedinterest,owedtotheDOEtobe$83.3millionatDecember31,1997.TheCompanyisallowedbythePSCtorecoverthesecostsinrates.Theestimatedfeesareclassifiedasalong-termliabilityandinterestisaccruedatthecurrentthree-monthTreasurybillrate,adjustedquarterly.TheNuclearWasteActalsorequirestheDOEtoprovideforthedisposalofnuclearfuelirradiatedafterApril6,1983,forachargeofapproximatelyonemill($.001)perKWHofnuclear.energygeneratedandsold.Thischarge(approximately$3.6millionperyear)is'c~jentlybeingcollectedfromcustomersandpaidtotheDOEpursuanttoPSCI'uthorization.TheCompanyexpectstoutilizeon-sitestorageforall-spentorretireGnuclearfuelassembliesuntilaninterimorpermanent,nucleardisposalfacilityisoperational.TherearepresentlynofacilitiesinoperationintheUnitedStatesavai'ableforthereprocessingofspen"nuclearfuelfromutil'tycompanies.IntheCompany'sdeterminationofnuclearfuelcostsithastakenintoaccountthatnuclearfuelwouldnotbereprocessedandhasprovidedfo"disposalcostsinaccordancewiththeNuclearWasteAct.TheCompanyhascompletedaconceptualstucyofalternativestoincreasethecapacityfortheinterimstorageofspentnuclearfuelattheGinnaPlant.Thepreferredalternative,basedoncostandsaetycr'teria,'stoinstallhigh-capacityspentfuelracksintheexistingareaofthespentfuelpool.Theadditionalstoragecapacity,scheduledtobe'mpiementedpriortoSeptember2000,wouldallowinterimstorageofallspentfue'ischargedfromtheGinnaPlantthroughtheendofitsOperat'ngLicensein"heyea"2009.ENVXRONMENTALMATTERSThefollowingtableslistvarioussiteswherepastwastehandlinganddisposalhaso"mayhaveoccurredthatarediscussedbelow:TABLEICOMPANY-OWNEDSITES~SiteNameWestStation*EastStationFrontStreet*BrewerStreetBrooksAvenueCanandaiguaLocationRochester,NYRochester-,NYRochester,NYRochester,NYRochester,NYCanandaigua,NYEstimatedCompanyCostUltimatecostshavenotbeendetermined.TheCompanyhasincurredaggregatecostsforthesesitesthroughDecember31,1997of$4.3million.*Voluntaryagreementsigned.k o

62sewersystemprojectshowedalayercontainingablackviscousmaterial.Thestudyofthelayerfoundthatsomeofthesoilandgroundwateron-sitehadbeenadverselyimpacted.ThematterwasreportedtotheNYSDECand,inSeptember1990,theCompanyalsoprovidedtheagencywithariskassessment.ThereportoztheresultsofthisstudyandtheNYSDEC'sresponsetotherecommendationsmadethereinwillinfluencethefutureremediationcosts.TheCompanyhassignedavoluntaryagreementtoperformlimitedadditionalinvestigationatthesitetodeterminewhethercertainremedialactionsarenecessarypriortodevelopment.AnotherpropertyownedbytheCompany~heregasmanufacturingtookplace'slocatedinCanandaigua,NewYork.Limitedinvestigativeworkperformedtnereduingthesummerof1995hasshownevidenceofboththeformergasmanufactur'ngoperationsandleakagefromfueltanks.TheNYSDECwasinformed;thefueltanksremoved;andadditionalinvestigativeworkcontinues.TheSIRcostsassociatedwiththeseactionsareincludedinTableI..TheNYSDEChasnottakenanyactionagainsttheCompanyasaresultofthesefindings.OnanotherportionoftheCompany'sproperty(BrewerStreet},theCountyofMonroehasinstalledandoperatessewerlines.,Duringsewerinstallation,tneCountyconstructedoverCompanypropertycertainretentionpondswhichreportedlyreceivedfromthesewerconstructionareacertainfossil-fuel-basedmaterials(thematerials)foundthere.InJuly1989,theCompanyreceivedaletterfromtheCountyassertingthatactivitiesoftheCompanylefttheCountyunabletoeffectaregulatorily-approvedclosureoftheretentionpondazea.TheCounty'slettertakesthepositionthatitintendstoseekreimbursementforitsadditionalcostsincurredwithrespecttothematerialsonce.the,NYSDECidentifiesthegeneratorthereofandthatanyfurthercleanupactionwhichtheNYSDECmayrequireattheretentionpondsiteistheCompany's.responsibility.InaNovember1997letter,theCountyhasclaimedthattheCompanywastheoriginalgeneratorofthematerials.ItassertsthatitwillholdtheCompanyliablefor50'tofallCountycosts--presentlyestimatedatatotalofapproximately$5million--associatedbothwiththematerials'xcavation,treatmentanddisposalandwitheffec'ngaregulatorily-approvedclosureofthereten"'onpondarea.TheCompanycoulc'ncurcostsasyetundeterminedifitweretobefoundliablefo"suchclosureandmateialshandl'ng,althoughprov'sionsofanexistingeasementa=fordtheCompanyrightswhichmavsezvetoo==se"alloraportionofanysuchCoun"yclaim.Todate,theCompanyhasagreec"opaya20~ashareoftheConty's'995'nvestigationofthisarea,which'ses=imatedtocostnomorethan$150,000.bu=nocommitmenthasbeenmade"owa"canysubsequentinvestigat'onso"remeciameasureswhichmaybereco.-,.-.endedbytheinvestigations.MonitoringwellsinstalledatanotherCompanyfac"'ity(BrooksAvenue)in989revealedthatanundeterminedamo"..".of'eadecgasolinenadreachedthegroncwater.TheCompanyhascontinued"omonitor'reeprodctlevelsinthewels.andhasbegunamodes"freeprocc.recoveryprojec=.Itisestimatedtha=urtherinvestigativework'nto"h'sprob'e.-..r,"aycos=up=o$100,000.WhileoS:.ecos"o.correctiveact'onscanno=bece:erm'nec.".=nvesigationsarecompie"ed,preliminaryestimatesareno"expectectoexceed$500,000.SUPERFUNDANDNON-OWNEDOTHERSITES.ŽheCompanyhasbeenormaybeassociatecasapotentiallyresponsiblepar"y(PRP)a"seve.".s'esno"ownedbyTheCompanyhassignedordersonconsen:=orveo'hesesitesandrecordedestimatedliabilitiestota'ingapproximately$.8mil'ion.Inonesate,knownastheQuantaResorcesSite,theCompanysignedaconsentorderwiththeEnvironmentalProtectionAgency(EPA)andpaidits$27,500shareofremedialcost.TheCompanywasaga'ncontactedbyEPAinlateAugust,1996.TheEPAinformedtheCompanythatitbelievedcertainadditionalworkwasrequired,includingastudytodeterm"hetheextenttowhichadditionalremovalofwastematerialswasrequired.TheEPA'slistofPRPshadgrowntoabout80.TheCompany,alongwithmostofthosePRPs,hasagreed(throughanAdministrativeOrderonConsent)toconducttherequiredstudy.TheCompanyanticipatesitsobligationthroughthisphasewillbelessthan$10,000.OnMay12,1997,theCompanysignedanAdministrativeOrderonConsentwiththeNYSDEC.ThisagreementservedtoobligatetherespectivepartiestopayNYSDEC'spastcostsattheSite,theCompany'sshareofwhichwasdeterminedtobe$1,500.Thereisasyet,noinformationonwhichtodeterminethecosttodesignandconductatthe 64uponbytheNYPP,resultinginadditionalcosts.DependingonthenewNYPPrequirements,andwhetherthederatingsremainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditionalregulationserviceswhichmaycos"between$500,000and$2,500,000annually.GASCOSTRECOVERYGASRESTRUCTURINGPROCEEDING.InthePSC'sProceedingonRestructur'ngtheEmergingCompetitiveNaturalGasMarket,thePSCestablishedathree-yearperiod(endingMarch28,1999)duringwhichtheState'slocaldistributioncompanies(LDCs)wouldbepermittedtorequirecustomersconvertingfromsalesservicetotakeassociatedpipelinecapacityforwhichtheLDCshadoriginallycontracted.Priortothebeginningoftheth'rdyear,the"LDCswouldbe'equiredtodemonstratetheireffortstodisposeof"excess"capacity.OnSeptember4,1997,thePSCissuedanOrderclarifyingtheMarch28,1996Order.TheSeptember4Orderrequires,amongotherthings,thattheLDCs(a)assessstrandablecosts;(b)evaluateandpursueoptionstoaddressstrandablecosts,includingexplorationofalternativeusesandquantificationofmarketvaluesfothecapacitythatcouldbestrandedbyconvertingcustomers;(c)activelyencouragecompetitionincludingcollaborationwithmarketerstoexpandthenumberofcustomerstakingtranspor'tationservicefromtheLDCandtoprovidecustomereducation;and(d)totheextentLDCscannotshedalltheircapacityascontractsexp're,tocontinuetoseeklowercostoptionsandmoreflexibilityandshortercontractterms,wherecost-effective.LDCsarerequiredto,figeplansaddressingtheforegoingissuesbyApril1,1998.PursuanttothePSC's:~ders,thecostofcapacitydefinedas"excess"maynotbefullyrecoverableinra'tes,'ccordingly,theCompany'sabilitytoavoidabsorbingthiscostw'lldependon'thesuccessofremarketingandportfoliostructur'ge"ortsand,ifsucheffortsdonotresultineliminatingall"excess"capacity,onasatisfactoryexplanationastowhyallsucncapacitycouldnotbeelim'nated..heCompanyisengagedinnegotiationswithtneStaffofthePSCandotherpar"iestoaddresstheseandotherissuesrelatedtothefutureprovisiono=gasserv'ce.Atthistime,noassessmentofhepotenialimpac"oftheserequ'rementsontheCompanycanbemade.OnSeptember4,1997,thePSCa'o'suec=orcommentaStaffpositionpape"wh'chproposesthatLDCsexit=ne'rmerchantfunct'on.'.e.,ceasetosupp'vthenatualgascommodityto=he'ex's='ngcs"o...ers,with'n'iveyearsanct.".attheyelim'nateo"restrc=ret"anspo"ta='onancs"oragecapacitycon"ractsextendingbeyondfiveyearssoas"oelim'nateobgationsbeyondthatpo'nt,excep"wherecapac'tyisrecu'recto="'=pera='ona'equiremen"sortheLDC'sobligationsasthe"supp'e"o='as"reso.""toc"s"omeshavingnocompetitivealternative.I'coptecby='."ePSC,=heStaffproposalcouldrequiretheCompanytoremarkemorecapac'",anctocosomorerap'c'ythancurrentlycontemplated.Thecomme.".".per'occo.-.c'econDecember20,'997,andnoprec'c=ioncanbemadeastow.".e=her=heS=affproposaw'eadoptedor,so,theextenofitspotent'a'mpa"=on='.".eCompan;.1995GASSETTLEMENT.;heCompany'..asen=erec'ntoseveralagreementstohelpmanageitspipelinecapac'",costsanc'..ass"cess'"'yme"Settlementtargetsforcapacityremarke'ng=o==he=wevemon=hsencir.gOctober31,1997,therebyavoidingnegativefinancia'mpac=s=o"="..aper'.od..heCompanybeevesthatitwillalsobesuccessfu.'nmee='ngtheSettlementtargetsintheemainingyearoftheSettlementpe"od,a'=hoghnoassrancemaybegiven.TheFERCapprovedachange'"..ratedesgn'ortheGreatLakesGasTransmissionLimitedPartnersh'p(GreatLakes)onwhichtheCompanyholdstransportationcapacity.Thischange.resulted'naretroactivesurchargebyGreatLakestotheCompanyintheamountofapproximately$8million,includinginterest.Underthetermsofthe1995GasSett}ement,theCompanymayrecoverapproximatelyone-halfofthesurchargein"ateschargedtocustomers;buttheremaindermayno"bepassedthroughandhasbeenpreviouslyreserved.TheCompany,whichpaidtheGreatLak'esassessme..tunde"protes,vigorouslycontesteditbeforetheFERC,bu"onApril25,1996,theFERCupheldthisdeterminationthatthechargetotheCompanyisproper.TheCompany'spetitiontotheU.S.CourtofAppealswasdeniedonJanuary16,1998.TheCompanyisevaluatingitsnextsteps.

66TheCompanybelievesthattheinvestigationandtheComplaintreflectthedesirebytheAntitrustDivisiontobecomeinvolvedinthederegulationofelectricutilities,butthattheproperwaytodothatisintheproceedingsbeforethePSCintheCompet'tiveOpportunitiesCase.OnSeptember3,1997,theCompanyfileditsanswerwhichdeniedthematerialallegationsoftheComplaint.Atthesametime,theCompanyfiledaMotionforSummaryJudgmentaskingtheCourttodismisstheactionwithprejudiceonthegroundsthattheCompany'sactionsareimmunefromantitrustliabil'tyunde=theStateactionexemption,thattheCompany'sactionsdidnotinjurecompet'tionandthattheDepartmentofJustice'scia'imsarespeculative.OnNovember3,1997,theDepartmentofJusticefileditsoppositiontotheCompany'sMotionforSummaryJudgmentandfileditsownMotionforSummaryJudgement.TheCompany'sresponsetotheJusticeDepartmentmotionwasfiledonDecember5,1997.TheseMotionsforSummaryJudgmentwerearguedonDecember19,1997.InCourt,thepartiesagreedtoaresolutionofthedispute,suggestedbytheJudgewhich,intheCompany'sopinion,wouldnothaveanymaterialeffectonitscontractwiththeUniversity.TheAntitrustDivision,however,hasexpresseditsunwillingnesstoagreetoaConsentDecreebasedontheagreementreachedinCourtandthematterisstillpending.~LITIGATIONWITHCO-GENERATOR.UnderfederalandNewYorkStatelawsandregulations,theCompanyisrequiredtopurchasetheelectricaloutputofunregulatedcogenerationfacilitieswhichmeetcertaincriteria(QualifyingFacilities).Underthesestatutes,autilityisrequiredtoy~forelectricityfromQualifyingFacilitiesataratethatequalsthecosttofheugilityofpoweritwouldotherwiseproduceitselforpurchasefromothersources('voidedCost).WiththeexceptionofonecontractwhichtheCompanywascompelledbyregulatorstoenterintowithKamine/BesicorpAlleganyL.P.(Kamine)forapproximately55megawattsofcapacity,theCompanyhasnolong-termobligationstopurchaseenergyfromQualifyingFacilities.Unde."Statelawandregulatoryrequirementsineffectatthetimetheco..tractwithKaminewasnegotiated,theCompanywasrequiredtoageetopayKam'neapriceforpowerthatissubstantiallygreaterthantheCompany'sowncos"ofproductionandotherpurchases.SincethattimetheState"six-cent"lawmandat'ngaminimumpricehighe"thantheCompany'sowncostshasbeenrepealedandPSCest'matesoffuturecostsonwhichthecontractwasbasedhavedeclineddrama'cally.InSeptember1,994,theCompanycommencedalawsuitinNewYorkStateSupremeCourt,MonroeCounty,seekingtovoidor,alternatively,toreformaPowe"PurchaseAgreementwithKamineforthepurchaseoftheelectricaloutputofacogenerat'onfacilityintheTownofHume,AlleganyCounty,NewYork,foratermof25years.Thecontractwasnegot'atedpursuanttothespec'ficpricingrequiremento'Statestatutethawaslaterrepealed,aswellasestimatesofAvoidedCostsbythePSCthatsubsequentlyweredrast'callyreduced.Asaresult,thecontractrequirestheCompanytopaypricesfo"Kamine'selecricaloutputthatdramaticallyexceedcurrentAvoidedCostsandcurrentprojectionsofAvoidedCosts.TheCompany'slawsuitseekstoavoidpaymentstoKaminethatexceecactualandcurrentlyprojectedAvoidedCosts.KamineansweredtheCompany'scomplaint,seekingtoforcetheCompanytotakeandpayforpoweratthehigherratescalledforinthecontractandclaimingdamagesinanunspecifiedamountallegedtohavebeencausedbytheCompany'sconduct.TheCompanyreceivedtestgenerationfromtheKaminefacilityduringthelastquarterof1994.KaminecontendsthatthefacilitywentintocommercialoperationinDecember1994andthattheCompanyisobligatedtopaythefullcontractrateforit.TheCompanydisputesthiscontentionandrefusestopaythefullcontractrate.During1995KaminefiledaMotionforSummaryJudgmentdismissingtheCompany'scomplaintanddirectingittoperformthePowerPurchaseAgreement.ThecourtdeniedthatmotionandKamineappealed.AfterargumentofthatappealKaminefiledforprotectionundertheBankruptcylawsandsenttotheAppellateDivisionanoticethatallfurtherproceedingswerestayed.Inaddition,KaminehasfiledarelatedcomplaintintheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrust

~.

68INTERIMFINANCIALDATAXntheopinionoftheCompany,thefollowingquarterlyinformationincludesalladjustments,consistingofnormalrecurringadjustments,necessaryforafairstatementoftheresultsofoperationsforsuchperiods.ThevariationsinoperationsreportedonaquarterlybasisarearesultoftheseasonalnatureoftheCompany'sbusinessandtheavailabilityofsurpluselectricity.Thesumofthequarterlyearningspersharemaynotequalthefiscalyearearningspershareduetorounding.(ThousandsoiDollars)Oua"te=EndedOperaingRevenuesOpe"atingIncomeNetincomeEa"ningsonCommonStockEa=nirgspe"CommonShare(ir.dollars)BasicDilutedDece.".5e=31,1997Septe..e'er30,1997June30,1997Ya"ch31,1997Dece"..5e31,1996'epte.".ke"30,1996~~une30.1996Ya"ch31.1996Decerhe"31,1995"Septe.-.>e"30.1995June30,1995Yiatch31>1995$271,039221,335229,419314,845$274,431234,843235.577309,195$270,518245,145219,546281,119$24,40634,61631,12555,194$33,04836,15923,11556,866$32,32441,73829,45446,557$14.03121,72418,17241,433$22,22821,06211,73242,489$(387)26.93414,86130,520$12,72620,41916,68139,729$20,36219,1969,86640.623$(2,253)25,06812,99528,653$.32.52.421.02$0.520.490.251.05$(.05).34.75$.32.52.C21.02$.52.49.251.05$(.05).65.34.75Reclassifiedforcomparativepurposes.Includesrecognitionof$28.7millionnet-of-taxgassettlementadjustment.Item9.CHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURENoae

70PARTIVItem14.EXHIBITS,FINANCIALSTATEMENTSCHEDULESANDREPORTSONFORM8-K(a)1.ThefinancialstatementslistedbelowareshownunderItem8ofth'sReport.ReportofIndependentAccountants.ConsolidatedStatementofIncomeforeachofthethreeyearsendedDecember31,1997.ConsolidatedStatementofRetainedEarningsforeachofthethreeyearsendedDecember31,1997.ConsolidatedBalancesheetatDecember31,1997and1996.ConsolidatedStatementofCashFlowsforeachofthethreeyearsendedDecember31,1997.NotestoConsolidatedFinancialStatements.(a)2.FinancialStatementSchedules-IncludedinItem14herein:ForeachofthethreeyearsendedDecember31,1997.ScheduleZZ-ValuationandQualifyingAccounts.(a)3.Exh'bits-SeeListo'xhibits.(b)ReportsonForm8-KTheCompanyfiledaForm8-KdatedDecembe"5,1997,reportingunde"Item5,OtherEvents,approvalbythePSCoftheCompany'sCompetitiveOpportunitiesCaseSettlementwiththePSCstaf'ndothepart'eswi"nrespecttotherestrucur'ngoftheelectricutilityindus"ryinNewYorkState.

LISTOFEXHIBITSExhibit3-1*RestatedCertificateofIncorporationofRochesterGasandElectricCorporationunderSection807oftheBusinessCorporationLawfiledwiththeSecretaryofStateoftheStateofNewYorkonJune23,1992.(PiledinRegistationNo.33-49805asExhibit4-5inJu)y1993)Exhibit3-2*CertificateofAmendmentoftheCertificateofIncorporation.ofRochesterGasandElectricCorporationUnderSection805oftheBusinessCorporationLawfiledwiththeSecretaryofStateoftheStateofNewYorkonMarch18,1994..(FiledasExhibit4inMay1994onForm10-Qforthequarter'endedMarch31,1994,SECPileNo.1-672'Exhibit3-3*By-LawsoftheCompany,asamendedtodate.(FiledasExhibit3-1inMay1996onForm10-QforthequarterendedMarch31,1996,SECFileNo.1-672)Exhibit4-1*RestatedCertificateofIncorporationofRochesteGasandElectricCorporationunderSection807oftheBusinessCorporationLawfiledwiththeSecretaryofStateoftheStateofNewYorkonJune23,1992.(FiledinRegwstrationNo.33-49805asExhibit4-5inJuly1993)Exhibit4.2*~CertificateofAmendmentoftheCertificateofIncorporationofRochesterGasandElectricCorporationUnderSection805oftheBusinessCorporationLawfiledwiththeSecretaryofStateoftheStateofNewYorkonMarch18,1994.(FiledasExhibit4inMay1994onForm10-Qforthequarte"endedMarch31,1994,SECFileNo.1-672.)Ex".ib'4-3By-LawsoftheCompany,asamendedtodate.(FiledasExhibit3-1inMay1996onForm10-Qfo"thequarterendedMach31,1996,SECFileNo.1-672)xLibit4.4>>GeneralMortgagetoBankersTrustCompany,asTrustee,datedSeptembe"1,1918,andsuppleme..tsthereto,datedMarch1,1921,Octobe"23,1928,August1,1932andMay1,1940.(Filedasxhib't4-2'n:ebruary199onForm10-K:ortheyea"endedDecember31,'990,SECFileNo.1-672-2)Exhibit4-5*SupplementalIndenture,datedasofMarch1,1983betweentheCompanyandBankersTrustCompany,asTrustee(FiledasExhibit4-1onForm8-KdatedJuly15,1993,SECFileNo.1-672)Exhibit10-1*BasicAgreementdatedasofSeptember22,1975amongtheCompany,NiagaraMohawkPowerCorporation,LongIslandLightingCompany,NewYorkStateElectric&GasCorporationandCentralHudsonGas&ElectricCorporation.(FiledinRegistrationNo.2-54547,asExhibit.5.-PinOctober1975.)Exhibit10-2*LetteramendmentmodifyingBasicAgreementdatedSeptember22,1975amongtheCompany,CentralHudsonGas&ElectricCorporation,OrangeandRocklandUtilities,Inc.andNiagaraMohawkPowerCorporation.(FiledinRegistrationNo.2-56351,asExhibit5-RinJune1976.)

0~ie Exhibit10-15*(A)ChangeofControlAgreementdatedAugust17,1995betweentheCompanyandRobertE.Smith,SeniorVicePresident,EnergyOperations.(FiledasExhibit10-15inFebruary1996onForm10-KfortheyearendedDecember31,1995,SECFileNo.1-672-2)Exhibit10-16'A)ChangeofControlAgreementdatedJanuary2,1996betweentheCompanyandJ.BurtStokes,SeniorVicePresident,CorporateServicesandChiefFinancialOfficer.(FiledasExhibit10-16inFebruary1996onForm10-Kfortheyea"endedDecember31,1995,SECFileNo.1-672-2)Exhibit10-17*(A)ChangeofControlAgreementdatedJanuary2,1997betweentheCompanyandMichaelJ.Bovalino,SeniorVicePresident,EnergyServices.(FiledasExhibit10-18inFebruary1997onForm10-KfortheyearendedDecember31,1996,SECFileNo.1-672-2)Exhibit10-18AmendedandRestatedSettlementAgreementdatedOctober23,1997betweentheCompanytheStaffoftheNewYorkPublicServiceCommission(PSC),andcertainotherparties(FiledasExhibit10-4onForm10-QforthequarterendedSeptember30,1997,SECFileNo.1-672)asamendedpursuanttoanorderofthePSCissuedJanuary14,1998.-N'3ccludingAppendices)filedherewith.Exhibit10-19~(A)FormofRochesterGasandElectricCorporation1996PerformanceStockOptionPlanAgreement.(FiledasExhibit10-1inNovember'997onForm10-QforthequarterendedSeptembe30,'997,SEC":ileNo.1-672)10-20*(A)Agreement,datecOctobe"','997,betweentheCompanyandMichaelT.Toma'no,SeniorVicePres'dentandGeneralCounsel.(FilecasExh'bit10-2'nNovember1997onForm10-Qfo"theqar=erencecSeptember30,1997,SECFileNo.1.672)Ex'.-'b't10-21*Agreemen"catedaso=Sep=ember23,'997betweentheCompanyandInternationa'us'..essMachinesCorporat'on.(FiledasExhibit10-3'.-.November997onFor;..0-Q'orthequarterndedSeptember30,997,SEC.='IeNo.-672)Exh'bi"23Consen"oPr'ceNate"hoseP,independentaccountants"xh'bit27FinancialDa"aSchec"e.prsuanttotern601(c)ofRegulationS-K.~Incorporatedbyreference.(A)Denotesexecutivecompensationplansandarrangements.TheCompanyagreestofurnishtotheCommission,uponrequest,acopyofallagreementsorinstrumentsdefiningtherightsofholdersofdebtwhichdonotexceed10%ofthetotalassetswithrespecttoeachissue,includingtheSupplementalIndenturesundertheGeneralMortgageandcreditagreementsinconnectionwithpromissorynotesassetforthinNote6oftheNotestoFinancialStatements.

irSIGNATURED'ctors:76TITLEDATE/S/WILLIAMBALDERSTONIIIWzsamBaerstonIII)DirectorFebruary11,1998/S/ANGELOJ.CHIARELLAAngeoJ.CwareaDirectorFebruary11,1998/S/ALLANE.DUGANAanE.DuganDirectorFebruary11,1998MarB.GrxerDirectorFebruary,1998/S/SUSANR.HOLLIDAYSusanR.HozayDirectorFebruary11,1998/S/JAYT.HOLMESJayT.HomesDirectorFebruary11,1998/S/SAMUELT.HUBBARD,JRSamueT.Huar,Jr.DirectorFebruary11,1998/S/ROGERW.KOBERRogerW.KoerDirec"orFebruary11,1998/S/CONSTANCEM.MITCHELLConstanceM.MiteeD'rectorFebruary11,1998/S/CORNELIUSJ.MURPHYComexusJ.MurpyDirectorFebruary11,1998/S/CHARLESI.PLOSSERCaresI.PosserDirectorFebruary11,1998/S/THOMASS~RICHARDSTomasS.RzcarsDirectorFebruary11,1998 EXHIBITE

• 0ROCHESTERGAS&ELECTRICCORPORATIONNuclearOpera'tionsGroupPRESIDENTCHAIRMAN,CEO,'.S.RICHARDSSR.VICEPRESIDENTENERGYOPERATIONSP.C.WILKIBPSVICEPRESIDENTNUCLEAROPERATIONSR.C.MECREDYDEPARTMENTMANAGER~NUCLEARENGINEEIUNOSERVICEST.A.MARLOWDEPARTMENTMANAGER=NUCLEARASSESSMENTR.J.WATTSPLANTMANAGERJ.A.WIDAYDIRECTOR.;,'UDGET8:COSTG.M.VAUGHNDEPARTMENTMANAGERNUCLEAR'GUUNINOiLW.POPPSUPERINTI'.NDENTGINNAPRODUCTION'.A.MARCHIONDASUPERINTENDENTOINNAMAINTENANCE-J.P.SMITHGirraaLeadershipTeam 0