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
References
NUDOCS 9808050257
Download: ML17265A393 (369)

Text

UNITEDSTATESOFAMERICABEFORETHENUCLEARREGULATORY COMMISSION ROCHESTER GASANDELECTRIC)DocketNos.50-410and50-244CORPORATION

)FacilityOperating LicensesNos.NPF-69andDPR-18REQUESTFORCONSE<NTTOCORPORATE REORGANIZATION NIXON,HARGRAVE, DEVANSdkDOYLEu,pAttorneys forRochester GasandElectricCorporation ClintonSquareP.O.Box1051Rochester, NewYork14603-1051 Telephone:

(716)263-1000Facsimile:

(716)263-1600July31,19989808050257 5000244PDRADOCK0pDRH

,0oe UNITEDSTATESOFAMERICABEFORETHENUCLEARREGULATORY COMMISSION ROCHESTER GASANDELECTRIC)CORPORATION

)DocketNos.50-410and50-244FacilityOperating LicensesNos.NPF-69andDPR-18REQUESTFORCONSE<NTTOCORPORATE REORGANIZATION I.INTRODUCTION Rochester GasandElectricCorporation

("RG&E,"the"Company"

)herebyrequeststhe~consentoftheNuclearRegulatory Commission (the"Commission"

),pursuantto10C.F.R.Section50.80,totheindirecttransferofcontroloftwolicensesgrantedbytheCommission:

RG&E'spossessory licenseforits14%ownership interestintheNineMilePointNuclearStation,UnitNo.2("NineMile2")locatedinScriba,NewYork;andtheCompany's operating licenseforitswholly-owned nucleargenerating

facility, theR.E.GinnaNuclearPowerPlant("Ginna").

RG&EisaNewYorkcorporation engagedprincipally inthegeneration,

purchase, transmission, distribution andsaleofelectricpower,andthepurchase, transportation, Idistribution andsaleofnaturalgasinserviceterritories inwesternNewYorkState,underthegeneralregulatory supervision oftheNewYorkStatePublicServiceCommission (the"NYPSC").

RG&Ealsosellselectricity onthewholesale bulkpowermarket,transmits electricity ininterstate

commerce, andoperateshydroelectric generating facilities, allofwhichR182280.I activities aresubjecttoregulation bytheFederalEnergyRegulatory Commission (the"FERC").RG&Eisan"electric utility"withinthemeaningoftheCommission's regulations (10C.F.R.Section50.2).Inconjunction withtherestructuring ofitsregulated electricservicebusinesspursuanttothepolicydirection oftheNYPSC,andinaccordance withtheprovisions oftheAmendedandRestatedSettlement Agreement, datedOctober23,1997(the"Settlement"

),'roviding forsuchrestructuring, RG&Eproposestopursueacorporate reorganization, inwhichRG&Ewouldbecomeawholly-owned subsidiary ofaholdingcompany(the"Holdco").Thisformalchangeincorporate structure would,inlightofpriorCommission determinations, bedeemedtoinvolveachangeincontrolofRG&E,andaccordingly anindirecttransferofthelicensestoHoldcoasthenewownerofRG&E.Thus,theCompanyseekstheCommission's approvalforthistransaction, andfortheindirecttransferofRG&E'slicensesthatitwouldentail.Thisapplication willsetforththeregulatory background for,andthepurposesandframework of,theproposedreorganization; itwillalsoaddressanumberofmatterstowhichtheCommission hasdirectedparticular attention inconsidering similarapplications inthepast.RG&Ebelievesthattheproposedreorganization wouldnotaffectitsqualification forthelicensesgrantedtoitbytheCommission, wouldnotaffectitsstatusasan"electric utility"fortheAmendedandRestatedSettlement Agreement, datedOctober23,1997,resolving issueswithrespecttoRG&Einproceedings beforetheNYPSC,Cases94-E-0952, MatterofCometitive0ortunities ReardinElectricService,and96-E-0898, MatterofRochester GasandElectricCooration's PlansforElectricRate/Restructurin Pursuantto0inionNo.96-12.AcopyoftheSettlement isattachedheretoasExhibitA.Thereafter theNYPSCissuedtwoorders,thefirstapproving theSettlement subjecttocertainmodifications, andthesecondsettingforthindetailtherationale foritsdecisions setforthintheearlierorder.SeeOrderAdoptingTermsofSettlement SubjecttoConditions andChanges,issuedNovember26,1997inCaseNo.96-E-0898,andOpinionNo.98-1,OpinionandOrderAdoptingTermsofSettlement SubjecttoConditions andChanges,issuedJanuary14,1998inCaseNo.96-E-0898.

AcopyofeachOrderisattachedheretoasExhibitBandExhibitC,respectively.

RI82280.1

e. Commission's

purposes, andwouldinallotherrespectsbeconsistent withlaw,regulations and4Commission orders.TheCompanyfurtherbelievesthattheinformation setforthhereinshouldsatisfyanyconcernsthattheCommission mighthaveonthesepoints.Shoulditappear,however,thatadditional information wouldbehelpful,theCompanywouldbepleasedtoprovideitpromptly.

II.THEPROPOSEDREORGANIZATION PursuanttoordersissuedbytheNYPSC,andafterextensive negotiations withtheStaffoftheDepartment ofPublicServiceandotherparties,RG8cEenteredintotheSettlement, establishing aframework forcompetitive retailelectricserviceintheCompany's serviceterritory,'and otherwise providing fortherestructuring oftheCompany's electricutilitybusinessconsistent withtheNYPSC'sdirectives.

Theproposedcorporate reorganization, asdescribed hereinafter, isexplicitly contemplated intheSettlement.

0Thereorganization thatRGB'roposes toundertake, subjecttoshareholder andregulatory approvals, issubstantially similartoreorganizations pursuedbyotherelectricutilities inrecentyears,likewiseinvolving theindirecttransferofcontroloflicensesfornucleargenerating facilities, andwhichtheCommission hasapproved.

Inaccordance withaplanforSeeSettlement (ExhibitA)Pars.62,67,atpp.50,52-53;seealsoSettlement ScheduleJ,"FormofPetitiontoFormHoldingCompany."

Forexample,theothernon-operating licensees fortheNineMile2facilityhavesimilarly soughtauthorization totransfertheirlicensesinconnection withtheircorporate restructurings:

NewYorkStateElectric&GasCorporation (application grantedasofMarch30,1998);LongIslandLightingCompany(application grantedasofJanuary12,1998);andCentralHudsonGas&ElectricCorporation (application datedApril8,1998).See,~e,LetterfromNRCtoIllinoisPowerCompany,regarding Corporate Restructuring ofIllinoisPowerCompany(TACNo.M88222),datedJanuary31,1994;LetterfromNRCtoPennsylvania PowerandLightCompany,regarding ApprovalofProposedCorporate Restructuring ofPennsylvania PowerandLightCompany(TACNos.M90079andM90080),datedDecember26,1994;LetterfromNRCtoDetroitEdisonootnotecontinued onnextpage)(Footnote continued frompreviouspage)"Holdco"isusedhereintoindicatetheproposedholdingcompanysolelyforpurposesofthisapplication; RG&Eintends,inconjunction withthecreationoftheholdingcompany,toadoptanofficialcorporate nameforit.Rt82280.t 4exchangeofsharespursuanttoSection913oftheNewYorkBusinessCorporations Law,alltheoutstanding sharesofthecommonstockofRG&Ewouldbeexchanged onashare-for-share basisforthesharesofcommonstockofHoldco(subjecttoanyexercisebyshareholders ofdissenters'ights).

Uponconsummation oftheshareexchange, eachholderofRG&Ecommonstockimmediately priortotheshareexchangewouldthereafter ownacorresponding numberofsharesofHoldcocommonstock,andHoldcowouldownalltheoutstanding sharesofRG&Ecommonstock.The100organizational sharesofHoldcocommonstockheldinitially byRG&EwouldeitherbecanceledorretainedbyRG&E,depending uponcertainincometaxconsequences.

Asawholly-owned subsidiary ofHoldco,RG&Ewouldretainitsseparateexistence.

Itwouldcontinuetobean"electric utility"underSection50.2oftheCommission's regulations, engagedinthebusinessofgenerating, transmitting anddistributing electricpower.Itwould0continuetobesubjecttoratemaking andotherregulation bytheNYPSCandFERC.Itwouldalsocontinuetobetheownerof,andactuallicenseefor,itspresentinterests inNineMile2andGinna.Itwould,moreover, continuetorecoveritsinvestment inthosefacilities throughitsratesforservice,subjecttotheprovisions oftheSettlement duringitsterm,andthereafter subjecttotheratemaking authority oftheNYPSC.Holdco,andnotRG&E,wouldbetheownerofanynon-utility subsidiaries engagedinunregulated businessactivities.

Moreover, theSettlement doesnotcallforthedivestiture ofanyutilityassets.Whileitestablishes certainfinancial incentives fortheCompanytosellgenerating facilities, andinparticular offerstheCompanyagreatershareofanygainsonsuchsalesif(Fooinoic continued frompreviouspage)Company,regarding ApprovalofProposedCorporate Restructuring ofDetroitEdisonCompanybyEstablishment ofaHoldingCompany(TACNos.M91890and92343),datedAugust30,1995.RI82280.1 consummated earlierratherthanlaterintheSettlement term,itdoesnotrequirethedivestiture ofanyofRG&Egeneration assets,including itsinterestintheNineMile2andtheGinnafacilities.

NordoestheSettlement permitthetransferofanyutilityassetsbyRG&Eunlessnecessary approvals aregrantedbytheNYPSCunderSection70oftheNewYorkPublicServiceLaw.Theadoptionoftheholdingcompanystructure inthemannerdescribed wouldaccomplish theclearseparation ofregulated publicutilityfunctions (including thetransmission anddistribution ofelectricity, andthecontinued provision ofregulated retailelectricserviceforcustomers.not servedbycompetitive retailers) fromunregulated, competitive non-utility operations, consistent withregulatory policydirections atboththefederalandStatelevelsfortherestructuring oftheelectricserviceindustry.

Moreover, theholdingcompanystructure represents acommonandwell-established formofbusinessorganization forcompanies engagedeIinmultiplelinesofbusiness, particularly wheresomeoftheactivities areregulated andothersareconducted onacompetitive basis.Theholdingcompanystructure wouldaffordincreased financial, managerial andorganizational flexibility toenhanceRG&E'spositioninthechangingenvironment oftheelectricindustry, inparticular byenablingaspeedierresponsetocompetitive opportunities thanispossibleforaregulated business.

Itwouldaccommodate thecreationofunregulated subsidiaries, andtherebyfacilitate greaterflexibility infinancing competitive activities.

Atthesametime,itwouldprotectthelegallyseparateregulated utilitybusiness-andallofitscustomers

-fromtherisksattending competitive businessenterprises.

Thetransferofdirectequityownership ofRG&EtoHoldcowouldconstitute alegalchangeofcontrolsubjecttoFoomotccontinued frompreviouspage)TheCompany's preferred stockandexistingdebtwouldremainoutstanding securities ofRG&E.SeeSettlement (ExhibitA)atPar.20,pp.26-27.Rt82280.t Commission approval.

However,theproposedrestructuring wouldhaveminimaleffectonthe4actualcontroloftheCompany,sinceitsexistingshareholders wouldbecometheownersofHoldcoandtherebywouldindirectly controlRG&E,astheregulated utilitysubsidiary ofHoldcoandthelicenseeforNineMile2andGinna.Inapproving theSettlement, theNYPSCendorsedinprinciple theproposedrestructuring, subjecttotheCompany's filingofapetitionsubstantially intheformattachedasScheduleJtotheSettlement.

RG&Eintendstofilesuchapetitionpresently, aswellaspetitions totheFERC(undertheFederalPowerAct)forapprovalofthereorganization, andtotheSecurities andExchangeCommission (underthePublicUtilities HoldingCompanyActof1935("PUHCA"))

foradetermination thattheproposedholdingcompanystructure wouldbeexemptfromtheprovisions ofPUHCA.TheCompanywillsubmittotheCommission copiesofthesepetitions whenfiled.III.EFFECTOFPROPOSEDREORGANIZATION ONRG&E'SFINANCIAL CONDITION Theproposedreorganization wouldhavenoadverseeffectonRG&E'sfinancial health,andinparticular wouldnotimpairtheavailability toRG&Eoffundsneededtocarryoutitsactivities andresponsibilities undertheNineMile2andGinnalicenses.

AcopyofRG&E'sAnnualReporttotheSecurities andExchangeCommission onForm10-K,attachedheretoasExhibitD,demonstrates thattheCompanyhasreasonable assurance ofobtaining necessary fundsforongoingoperations.

Aspreviously stated,aftertheproposedreorganization RG&Ewouldremainsubjecttojurisdiction oftheNYPSCwithrespecttoratesforretailelectricservice,amongothermatters.UndertheSettlement, theCompany's costsofimplementing theproposedSeeForm10-K(ExhibitD)atp.26,"Competition andtheCompany's Prospective Financial Position",

andpp.27-30,"Liquidity andCapitalResources".

RI82280.I 0,~j0 corporatereorganization willnotaffectratesforserviceduringthetermoftheSettlement, andmaybedeferredforsubsequent recoveryonlytotheextentofanyexcessofoverallrestructuring implementation costsoveraspecified threshold inagivenrateyear.Anychangesinthe9Company's arrangements forbulkpowersalesonthewholesale market,orinitsratesfortransmission ofelectricenergyininterstate

commerce, wouldremainsubje'cttoreviewandapprovalbyFERC.Theproposedcorporate reorganization wouldnotinvolvethesaleofRG&Estock,orthesaleorleaseoftheCompany's facilities orotherassets.ItwouldhavenoeffectontheCompany's capitalstructure, oronitscostsofobtaining financing.

Norwouldtheadoptionofaholdingcompanystructure alterthesourceofRG&E'sfundsforconducting itsutilityoperations.

TheCompany's costsofoperating itsnuclearfacilities, thecostsofanynecessary capitalimprovements, andthefundingofeventualdecommissioning activities withrespecttobothofthosefacilities, wouldcontinuetobederivedfromcustomerpaymentsforutilityservices0subjecttoregulated rates,inthesamemannerasbeforetheadoptionofaholdingcompanystructure.

Insum,theproposedreorganization isexpectedtobringaboutnochangeinthesourcesofRG&E'sfundsforcontinued plantoperations, capitalinvestments, andeventualplantdecommissioning.

Norisitexpectedtoaltertheregulatory processes establishing ratesandothertermsandconditions ofservicefromwhichthoserevenuesarederived.Accordingly, RG&Ebelievesthattheproposedrestructuring willnotadversely affectitsfinancial resources fortheconductoffutureactivities underthelicensesissuedbytheCommission fortheNineMile2andGinnafacilities.

IV.EFFECTOFPROPOSEDREORGANIZATION ONMANAGEMENT ANDOPERATION OFNUCLEARFACILITIES 0SeeSettlement (ExhibitA)atPar.17,p.24.RI82280.i

~.I Asnotedabove,RG&Ehasa14%ownership interestintheNineMile2facility, sharingownership withseveralotherNewYorkStateelectricutilities; theownerofthelargestinterest, NiagaraMohawkPowerCorporation

("NiagaraMohawk"),hasresponsibility foroperation oftheplant,pursuanttoalicenseissuedbytheCommission.

RG&E'slicenseforNineMile2isforthepossession, ratherthantheoperation, ofitsshareofthatfacility.

Incontrast, RG&EissoleownerandoperatoroftheGinnaplant,andithasanoperating licenseforthatfacility.authorizing bothpossession andoperation.

Thereorganization proposedhereinwillhavenoeffectonthemanagement andoperation ofeitherfacility.

NiagaraMohawkwillcontinuetoberesponsible fortheongoingon-sitecontrol,maintenance andoperation ofNineMile2,subjecttooversight inbudgetandplanningmattersinwhichRG&Eandtheotherownerutilities willcontinuetoparticipate.

Niagara0Mohawk'scontinued maintenance ofallnecessary technical qualifications, anditscompliance inallotherrespectswiththeNineMile2operating license,willnotbeaffectedbytheadoptionofaholdingcompanystructure forRG&E.Asdiscussed above,undertheproposedreorganization RG&Ewouldretainitswhollydiscreteandlegallyseparateidentityasasubsidiary oftheholdingcompany,andwouldcontinuetoexerciseitspublicutilityfunctions asheretofore.

Thefunctions ofmanagement attheHoldcolevelwouldbedirectedchieflytowardthestrategic development ofitsbusinessenterprises, andtowardadministrative andfinancial matters.Jointmanagement oversight withrespecttoNineMile2,andallaspectsoftheoperation ofGinna,wouldremain,astoday,theresponsibility ofRG&Easaregulated utility.TheCompany's existingmanagement functions, reporting

channels, programs, policiesandprocedures withrespecttoitsactivities pursuanttoitsnuclearRI82280.i

'

licenseswouldcontinueunaltered bytheproposedreorganization.

Achartshowingthe0Company's nuclearoperations organization isattachedheretoasExhibitE.Thus,withrespecttoNineMile2,RG&Ewillcontinuetoparticipate withtheotherownerutilities inoversight ofthatfacility, andinothernon-operational responsibilities allocated tothenon-operating ownersbythegoverning contracts.

Likewise, theCompany's ownership andoperational responsibilities fortheGinnaplant,anditsresources andarrangements tofulfillthoseresponsibilities, wouldnotbechangedbytheproposedreorganization.

Insum,theCompany's adoptionofaholdingcompanystructure wouldinnowayaffectitsmanagement ofnuclearoperations, oritstechnical qualifications toconductthoseoperations.

RG&Ewouldcontinuetofulfillitsobligations undertheCommission's licensesasithasinthepast.V.EFFECTOFPROPOSEDREORGANIZATION ONDOMESTICOWNERSHIP ANDCONTROLOFRG&EUndertheproposedreorganization, asdescribed above,sharesofHoldcowouldbeexchanged onaone-for-one basisforpubliclyheldsharesofRG&Ecommonstock.RG&E,whichwouldcontinuetobealicenseeforNineMile2andthelicenseeforGinna,wouldbecomethewholly-owned subsidiary ofHoldco.Uponthereorganization, therefore, HoldcowouldbeownedbytheformerholdersofRG&E'sstock,inthesameproportions astheirpriorownership ofRG&E.Currently available information indicates thatonlyabout10,000ofapproximately 39,000,000 outstanding sharesofRG&Ecommonstock-significantly lessthan1%-areheldbyforeignpersonsorentities.

Implementation oftheproposedreorganization, suchthatRG&Eisownedbyapubliclyheldholdingcompany,isnotexpectedtobringaboutanychangeinthettproportion offoreignownership.

Accordingly, thereorganization willnotresultintheownership, controlordomination ofRG&Ebyanalien,aforeigncorporation oraforeign0government.

Rl82280.l VIEFFECTOFPROPOSEDREORGANIZATION ONCOMPETITION Afurthermatteraddressed bytheCommission, initsconsideration ofsimilarapplications inthepast,hasbeenthepotential effectoftheproposedindirectlicensetransferonIcompetition, andinparticular thepotential fortheexerciseofincreased marketpowerbythe/licenseeasaresultofthetransaction.

Theadoptionoftheholdingcompanystructure, whilefacilitating theCompany's entryintocompetitive businessactivities, wouldalsoeffectthelegalandstructural separation ofsuchactivities fromregulated utilitybusinesses.

Thereorganization wouldtherefore notenabletheexerciseofmarketpower,eitherverticalorhorizontal, byHoldco(theindirecttransferee ofcontrolovertheRG&Elicenses) orbythelicensee, RGB',itself.Quitetothecontrary, RG&E'srestructuring underthetermsoftheSettlement canbeexpectedtofacilitate thegrowthofunprecedented competition intheprovision ofenergyservicesinRG&E'sserviceterritory.

Overitsterm,theSettlement providesfortheintroduction eofcompetitive electricserviceforincreasing proportions ofRG&E'smarket;retailcustomers intheCompany's serviceareawillbeableforthefirsttimetopurchaseenergyandcapacityfromcompetitive suppliers.

Atthesametime,duringtheSettlement termRG&Ewillremainsubjecttoanobligation toprovideregulated retailelectricservicetoallcustomers that,bychoiceorotherwise, donottakeservicefromcompetitive suppliers.'he indirecttransferofcontroloverthelicensesthatwouldoccurwiththeadoptionofaholdingcompanystructure couldhavenomaterialeffectontheCompany's abilitytoexercisemarketpower,eitherwithinorwithoutitsserviceterritory, whetherinretailorinwholesale markets.Theconsequences oftheCompany's restructuring arepro-competitive, andthe0SeeSettlement (ExhibitA)atPar.65,pp.51-52.RI82280.1 presentsnoimpediment whatevertovigorouscompetition inany.market,retailorwholesale contemplated indirecttransfertoHoldcoofcontrolofthelicensesforNineMile2andGinnaVII.SUBSEQUENT TRANSFERS OFRG&EASSETSRG&Eundertakes toinformtheDirectorofNuclearReactorRegulation sixtydaysbeforethetransferfromittoHoldco,ortoanydirectorindirectsubsidiary ofHoldco,offacilities fortheproduction, transmission ordistribution ofelectricity (butexcluding grantsofsecurityinterests orliens)havingadepreciated bookvalue,intotalasdetermined duringanytwelve-monthperiod,inexcessoftenpercentofthedepreciated bookvalueofRG&E'sconsolidated netutilityplant,asrecordedontheCompany's booksofaccount.VIII.CONCLUSION RG&Ebelievesthattheinformation setforthinthisapplication, andintheExhibitsattachedhereto,issufficient fortheCommission tograntitsconsenttotheproposed0'.reorganization, andtotheindirecttransferofRG&E'slicensesinthemannerdescribed above.Theproposedreorganization willnotimpairRG&E'squalifications asalicenseefortheNineMile2andGinnafacilities, noritsabilitytocarryoutitsobligations underthoselicenses.

Moreover, thetransaction described wouldbeconsistent withapplicable lawsandregulations oftheCommission.

RG&Erespectfully requeststhattheCommission reviewandapprovethisapplication soastoenabletheCompanytoproceedpromptlywithfurtherstepsnecessary foritsrestructuring inthemannercontemplated intheSettlement.

RG&Eisplanningtoholditsannualshareholders'eeting inmid-April 1999,andwouldprefertobringtheproposedholdingcompanyreorganization beforetheshareholders atthattime.InordertoenabletheCompanytocompletethesubstantial preparations necessary beforethesubmission ofsuchaproposalforshareholder

approval, including butnotlimitedtoformalRI82280.1 actionbytheCompany's BoardofDirectors andthepreparation anddissemination ofappropriate disclosure materials, RG&Erespectfully requeststhattheCommission actuponthepresentapplication assoonaspracticable, butinanyeventbyFebruary1,1999.RG&Ewouldbepleasedtoprovidepromptlyanyfurtherinformation thattheCommission mayrequireforitsconsideration ofthisapplication.

Respectfully submitted, ROCHESTER GASANDELECTRICCORPORATION By:PaulC.WilkensTitle:SeniorVicePresident

-Generation Dated:July30,1998Rochester, NewYorkRI82280.1 STATEOFNEWYORKCOUNTYOFMONROEPaulC.Wilkens,beingdulysworn,deposesandsays:IamtheSeniorVicePresident-Generation ofROCHESTER GASANDELECTRICCORPORATION, theapplicant herein;Ihavereadtheforegoing application andknowthecontentsthereof;thesameistruetothebestofmyknowledge exceptastothosemattersthereinstatedtobeallegedoninformation andbelief,andastothosemattersIbelievethemtobetrue.Sworntobeforemethis30'hdayofJuly,1998NotaryPublic,StateofNewYorkLORETTAMARSHALLPARKER NotaryPubliciutheStateotNewYorkMONROECOUNTYCommission ExpiresDec.12,19.iL,Rt82280.1 0

EXHIBITA

'0t-e'0 STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSION CASE94-E-0952

-IntheMatterofCompetitive Opportunities Regarding ElectricServiceCASE96-E-0898

-IntheMatterofRochester GasandElectricCorporation's PlansforElectricRate/Restructuring PursuanttoOpinionNo.96-12AME<NDEDANDRESTATEDSE<TTLEMENT AGREEMENT October23,1997

\TABLEOFCONTENTSPageINTRODUCTION PartiesSubject...........

Background....

"....Negotiations 11248AGREEMENT

~omersTerm($1)Rates($$2-9)ReturnonEquity(g10)Kamine(ttll)..........................

Inflation (tj12)PropertyTaxes($13).....................

"SystemBenefitsCharge"(fjfj14,15)Mandates, Catastrophic EventsandCompetition Implementation Costs(fj$16,17)........Securitization

($18)......................

SunkCosts($19)........................

SaleofGenerating Assets($20)..............

To-GoCosts($21).......................

NuclearFacilities (tttt22,23)................

Shut-Down andDecommissioning Costs($24)....SystemReliability andMarketPower($25)......

Amortizations

($26)......................

Post-Employment Benefits(tt27)GinnaOutageCosts(tt28)..................

ExcessEarnings($29)Environmental Remediation Costs(g30)........AmountsDueCustomers

($31)Incentives OwedRG&;EandAmountsOwedCustUnderSettlements

($32)..............

FlexibleTariffDiscounts

($33)LegalServices($34)Regulated RateDesign(fj$35-41).............

LargeCustomerCreditProgram($42)Low-Income Program(fj43)ServiceQuality($44).....................

RetailAccessGenerally (fj$45-52)............

Distribution AccessCharges(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)Environmental Information

($60)....DairyleaProgram($61)Corporate Structure (fj62).......;......

DISCO(063)GENCO(fj64)RLSE(tt65)ULSE(tt66)HOLDCOandCapitalization ofUnregulated PetitionforRelief(tjg68-70)............

FilingRequirements (g71-73)DisputeResolution

($74)BindingEffectofSettlement (tt75).......,.

Superseding PriorSettlements

($76).......

Modification ofSettlement

($77).........

EffectofAgreement (fj78)Withdrawal fromLitigation (fj79)SCHEDULES ABCDEFGHIJKRatesAmortizations Manufacturing Classifications NuclearDecommissioning LargeCustomerCreditProgramLowIncomeProgramServiceQualityPerformance ProgramRetailing Functions Standards Pertaining toAffiliates andtheProvision ofInformation FormofPetitiontoFormHoldingCompanySBCProgramCosts STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSION CASE94-E-0952

-IntheMatterofCompetitive Opportunities Regarding ElectricServiceCASE96-E-OS98

-IntheMatterofRochester GasandElectricCorporation's PlansforElectricRate/Restructuring PursuanttoOpinionNo.96-12SETTLEMENT AGREEMENT INTRODUCTION Parties'This,AmendedandRestatedSettlement Agreement

("Settlement"

)isenteredintothis23rddayofOctober,1997byandamongtheStaffoftheDepartment ofPublicService("Staff',Rochester GasandElectricCorporation

("RGB.E"or"theCompany"),TheJointSupporters

("JointSupporters"

),theNationalAssociation ofEnergyServiceCompanies

("NAESCO"),

andMultipleIntervenors

("MI"),hereinafter collectively referredtoas"theParties." ~Sub'ectAsmorespecifically described herein,thisSettlement isintendedtoresolveallissuesintheabove-captioned proceedings astheypertaintoRGAE.-"Consistent withthevisionarticulated bythePublicServiceCommission

("theCommission" or"thePSC")inits1996OpinionintheCompetitive Opportunities Proceeding,-"

thisSettlement will,uponapprovalbytheCommission, setelectricratesforafive-year period(July1,1997throughJune30,2002)atlevelsthatare,overall,substantially belowtheircurrentlevels.Whileratesforallcustomerclasseswillbereduced,largeindustrial andcommercial customers willreceivethemostsignificant pricedecreases.

Suchdecreases areinkeepingwiththeCommission's goaloffostering economicdevelopment andjobretention intheStatebystabilizing andreducingelectricity prices.-"

Inadditiontoproviding forlowerpricesforthenextfiveyears,theSettlement effectsamajorrestructuring ofRGB.E'soperations toopenuptheCompany's serviceareatoincreased customerchoice.OnJuly1,1998,theCompanywillbegintoallowcustomers toAsnotedelsewhere herein,certainissuesremainthesubjectofgenericconsideration andare,therefore, notresolvedintheirentiretybythisSettlement.

See,~efootnote123,infra.Cases94-E-0952 etal.,IntheMatterofCometitive0ortunities ReardinElectricService,OpinionNo.96-12,OpinionandOrderRegarding Competitive Opportunities forElectricService,issuedMay20,1996.See,~e,id.at1.

004i choosetheirownsupplierofelectricenergy.'-'

yearlater,assumingimplementation ofaStatewide Independent SystemOperator("ISO")andPowerExchange("PE"),-"

customers willbegintobeabletochoosetheirownsupplierofenergyandcapacity.-"

Duringthistime,RGkEwillrestructure itsoperations soastofunctionally separateitsgeneration, distribution, retailing andoveralladministrative functions.

Whilecertainfunctions, suchasdistribution, willremainasregulated monopolyservices, others,including retailservice,willbeopentocompetition fromthirdparties.-"

Recognizing thatnotallcustomers willbeable(orperhapswilling)toselectalternative suppliers ofenergyand/orcapacity, theSettlement providesforcontinued servicetosuchcustomers byaCommission-regulated functional unitofRG&E.ThisSettlement alsoprovidesforcontinuation ofaprogramtoassistlow-incomecustomers-"

andaservicequalityprogramintendedtomaintainsafeandreliableservicedespitethecost-cutting pressures thataccompany increased competition.-"

Further,thisresolution ofissuesintheCompetitive Opportunities Proceeding respondstotheSeeparagraph 46,infra.TheISOandPE(alsoreferredtoasthe"marketexchange")

aredescribed bytheCommission.

SeeOpinionNo.96-12at63,footnotes 1and2.Seeibid.Seeparagraphs 62through67,infra.Seeparagraph 43,infra.Seeparagraph 44,infra.

4Commission's directive

-'"tointroduce retailaccesstofarmandfoodprocessor customers onanexpedited basis.-'"Finally,thisSettlement resolvesthreependingcasesinvolving judicialreviewofCommission decisions astheypertaintoRG&E.-'"Exceptasexpressly providedotherwise herein,thisSettlement will,uponapprovalbytheCommission, supersede thecurrentSettlement datedMay10,1996("the1996Settlement"

)approvedwithmodifications bytheCommission onJune27,1996.-'"Inaddition, uponapprovalbytheCommission, thisSettlement willsupersede theinitialSettlement intheseproceedings datedApril8,1997("InitialSettlement"

).Baclc~round

'OpinionNo.96-12isgroundedintheCommission's desiretobringtoNewYorkStateconsumers theinnovations andefficiencies ofcompetitive markets,together10!Cases96-E-0948 etal.,PetitionofDairleaCooerativeInc.toEstablish an0en-AccessPilotProramforFarmandFoodProcessor Electricitv Customers, OrderEstablishing RetailAccessPilotPrograms, issuedJune23,1997.12/Seeparagraph 61,infra.'Seeparagraph 79,infra.13/Cases95-E-0673 etal.,Rochester GasandElectricCororation,OrderApproving TermsofSettlement Agreement WithChanges,issuedJune.27,1996.TheCommission restateditsapprovalwithmodification inOpinionNo.96-27,OpinionandOrderConcerning RevenueRequirement andRateDesign,issuedSeptember 26,1996.TheCommission's modification ofthe1996Settlement isthesubjectofanArticle78proceeding, Rochester GasandElectricCororationv.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.6616-96),

thatwillbewithdrawn uponapprovalofthisSettlement.

Seeparagraph 79,infra. witheconomicdevelopment, lowerelectricpricesandgreatercustomerchoice,while,atthesametime,maintaining thesafetyandreliability ofelectricservice.TowardtheseendstheCommission's OpinioncalledupontheState'sutilities totakecertainactionsandmake.certainfilings.TheCommission adopteda"two-prong approach" toimplementation ofthepolicydirections identified inOpinionNo.96-12.Thefirstprong,anongoingcollaborative effortamongtheutilities andotherparties,wastocontinueto"accomplish technical studies(including addressing marketpowerconcerns, theroleofenergyservicecompanies, andreporting requirements),

necessary FERC[FederalEnergyRegulatory Commission]

filings,andpubliceducational forumsbyOctober1,1996."-'"

Thesecondimplementation prongconsisted ofindividual utilityfilingsalsotobesubmitted byOctober1,1996.Thesefilings0were"toaddress,ataminimum,theutilities'tructure, retailaccessproposals, long-term rateplans,publicprograms, marketpowerandenergyservices."

-'"TheCommission described thesubjectmatteroftheindividual filingsingreaterdetailasfollows:-'"(1)thestructure oftheutilitybothintheshortandlongterm,thescheduleandcosttoattainthatstructure, adescription ofhowthatstructure complieswithourvision'nd, incaseswheredivestiture ofgeneration isnotproposed, effective mechanisms thatadequately addressresulting marketpowerconcerns; OpinionNo.96-12at91.Ibid.l6'd.at75-76. (2)aschedulefortheintroduction ofretailaccesstoalloftheutility's customers, andasetofunbundled tariffsthatisconsistent withtheretailaccessprogram;(3)arateplantobeeffective forasignificant portionofthetransition thatincorporates ourgoalofmovingtoacompetitive market,including mechanisms toreduceratesandaddressstrandable costs;(4)identification ofthepublicpolicyprograms, whosefundingisnotrecoverable inacompetitive market,thatneedspecialratetreatment andcompetitively neutralmechanisms torecoversuchcosts;(5)anexamination oftheloadpocketsuniquetotheutility,identification ofpotential marketpowerproblems, andproposals tomitigatemarketpower;and'(6)aplanfortheprovision ofenergyservices, including addressing thecontinued provision ofcustomerprotections consistent withanemergingcompetitive market.-'"InitsOctober1,1996submission totheCommission, entitled"Competitive Initiative,"

-'"RGB:Eaddressed thetopicsidentified bytheCommission, statingwhattheia.TheCompanyjoinedwiththeEnergyAssociation ofNewYorkStateandsixotherutilities inanArticle7Sproceeding forjudicialreviewofOpinionNo.96-12.Thatproceeding wascommenced onSeptember 18,1996.TheEnerAssociation ofNewYorkStateetal.v.PublicServiceCommission (AlbanyCo.IndexNo.5S30-96).

Thecaseiscurrently pendingbeforetheAppellate

Division, ThirdDepartment.

Alsoreferredtohereinasthe"October1Submission."

InAugust1996,duringdevelopment oftheSubmission, theCompanyhadheldtwoPublicForums,opentoallcustomers, andanIssuesForum,forelectedofficials, toaddressmatterspertaining tocompetition andderegulation intheelectricindustry.

SeeOctober1Submission atI-19-I-21.

0'-' Company's proposals wouldbeintheeventthatitwererequiredtoimplement theCommission's policies.-

'"OnOctober9,1996,theCommission instituted Case96-E-0898 forthepurposeofexamining RG&E'sOctober1Submission.-

'"Undertheprocedural scheduleestablished bytheOctober9Order,thepartieswouldhavea90-daynegotiation periodduringwhichtheywereencouraged toreachasettlement inlieuoflitigation.

Intheeventthatnegotiations provedunsuccessful, alitigation schedulewouldfollowandtherecordwouldclosewithin150daysofissuanceoftheOctober9Order.Toencourage settlement, theCommission waivedcertainelementsofits1992Procedural Guidelines forSettlements.=""

PublicEducation ForumsandPublicStatement Hearingsregarding RG&E's'ctober1Submission wereheldonDecember2,1996inCanandaigua andonDecember4,1996inRochester.='-"

TheonlyelementoftheCompetitive Initiative thatwasnotcontingent upontheoutcomeoftheArticle78proceeding (seefootnote17,~surawastheCompany's proposaltoinstitute aseparate, identified "PublicPolicyCharge"("PPC")forthecostsofpublicpolicyprogramstheCompanyisexpectedtoundertake.

Case94-E-0952 etal.,OrderEstablishing Procedures andSchedule("October9Order").21/Case90-M-0255 etal.Proceedin onMotionoftheCommission Concernin itsProcedures forSettlement andStiulationAreementsfiledinC11175,Opinion,OrderandResolution AdoptingSettlement Procedures andGuidelines, issuedMarch24,1992.TheStenographic MinutesofthePublicStatement Hearingsconsistofpages1-150. Neotiations BetweenOctober22,1996andDecember4,1996,RG&Epersonnel meton13occasions withinterested parties.-'"

Thesemeetingsbeganwithinformational sessionsatwhichCompanyrepresentatives explained theOctober1Submission indetailandansweredquestions.

Discussions progressed tosettlement negotiations, whichincludedexchanges ofproposals andcounter-proposals.

These"all-party" meetingswereconducted pursuanttotheprovisions oftheCommission's regulations regarding settlements.-"'n earlyDecember, withthethen-current deadlineforfilingtestimony justweeksawayandtheparties'etermination thattheywerenotsufficiently closetoachieving asettlement, theall-party negotiations weresuspended inordertopreparetestimony.

StaffandtheCompany,however,maintained adialogue, exploring alternative approaches thatultimately ledtotheinstantSettlement.

Althoughthesediscussions weresuspended atvariouspoints,theeffortcontinued throughout January,FebruaryandMarch.Duringthisperiod,inputoncertainaspectsoftheproposals underdiscussion wassoughtandreceivedfromtheConsumerProtection BoardandMultipleIntervenors.

OnMarch27,1997,anearlycompletedraftoftheInitialSettlement,-

'"togetherwithasummarythereof,wasdistributed toallpartiestoCase96-E-0898.

Onthesameday,23/24!151Thesemeetingsincludedtenall-daymeetingsheldinRochester andAlbanyandthreelengthyconference callsinwhichtheparitieswereinvitedtoparticipate.

16NYCRR$3.9.Including draftSchedules.

0,.0,'

Staff,withassistance fromRG&E,madeapresentation tothepartiesinAlbany.-'"StaffandtheCompanyfieldedquestions onthedraftandsolicited furthercomments.

Additional all-partymeetingswereheldonApril1,2,and3,1997.Thesenegotiations wereproductive, resulting intheconsideration ofcommentsandsuggestions providedbythosewhoparticipated inthesemeetings.

TheInitialSettlement wasexecutedandfiledasofApril8,1997.Inaccordance withtheCommission's rulesandthespecificprocedures applicable totheseproceedings, variouspartiesfiledstatements andtestimony insupportof,orinopposition to,theInitialSettlement.

Evidentiary hearingswereheldinAlbanyonJune3,4and5,1997.-"Post-hearing briefswerefiledonoraboutJune20,1997.OnJuly16,1997,Administrative LawJudge("ALJ")WalterT.MoynihanissuedaRecommended Decision("RD")whichrecommended approvaloftheInitialSettlement withminorchanges.Briefsonexceptions andrepliestoexceptions werefiledonAugust5and20,1997,respectively.

AtitsPublicSessionheldinAlbanyonOctober8,1997,theCommission discussed theInitialSettlement andrecommended thatthepartiestotheseproceedings conductfurthernegotiations withaviewtowardaddressing certainconcernsraisedintheCommission's discussion.

Onnoticetoallactiveparties,furthernegotiations wereheldinInadditiontoStaffandtheCompany,tenindividuals, representing sevenotherparties,attendedinperson.Twopartiesparticipated bytelephone.

TheStenographic MinutesoftheEvidentiary Hearingsconsistofpages335-2029. AlbanyonOctober14,15and16,1997.Representatives ofthefollowing partiesparticipated:

Staff,RG&E,theJointSupporters, NAESCO,MI,theConsumerProtection Board,theAttorneyGeneral,thePublicUtilityLawProject,thePublicInterestIntervenors, NewYorkStateElectric&GasCorporation, WheeledElectricPowerCompany,EnronCapital&TradeResources, andtheIndependent PowerProducers ofNewYork,Inc.Thesenegotiations resultedinthechangestotheInitialSettlement thatarereflected inthisSettlement.

ThePartiesbelievethatthisSettlement, whichconstitutes acarefully balancedresolution ofdiverseinterests andaddresses themattersraisedattheCommission's October8,1997PublicSession,isinthepublicinterest, andshouldbeadopted.AGREEMENT ThePartiesagreeasfollows:Terml.Exceptasexpressly providedotherwise herein,thisSettlement shallbeeffective foraperiodoffiveRateYears,-'"

commencing July1,1997-'"andterminating June30,2002.29/ForpurposesofthisSettlement, a"RateYear"istheone-yearperiodcommencing onJuly1stofonecalendaryearandterminating onJune30thofthefollowing calendaryear.InasmuchasratesfortheRateYearcommencing July1,1997arecomparable tothoseestablished forthatperiodbythe1996Settlement, approvalofthisSettlement afterJuly1,1997requiresnoadjustment totheratesineffectforthatRateYear. RatesExceptasexpressly providedotherwise inthisSettlement, electricratesshallbereduced,cumulatively, fromthelevelsineffectasofJuly1,1996asfollows:-'"

July1,1997:$3.5million;July1,1998:$12.8million;July1,1999:$27.6million;July1,2000:$39.5million;andJuly1,2001:$51.1million.Thetotalannualamountsoftheforegoing reductions shallbeoffsetbythefollowing annualamounts,listedbycommencement ofRateYear,fortherecoveryofcosts-'"pertaining totheeKamine/Besicorp AlleganyL.P.project("Kamine")

otherthanthosedescribed inparagraph 11,infra:July1,1998:$3.5million;July1,1999:$8.4million;and'30/3l/Eachdatelistedsignifies thebeginning oftheRateYeartowhichtheindicated reduction applies.Nocostreferenced inthisSettlement maybeconsidered forrecovery, true-upordeferralunlessitisprudentandverifiable.

0,~-e

-12.-July1,2000andcontinuing atthisleveluntilrecoveryofthecostof'anysettlement orotheractionrequiring paymentiscompleteorJune30,2002,whichever islater:$10.5million.-

'GEcEshallbeentitledtocommencetheforegoing offsetsregardless ofwhenanysettlement orotheractionrequiring paymenttoKaminetakeseffect.Intheeventthat,duringthetermofthisSettlement, itshouldbecomecertainthatthetotalcostofanysettlement orotheractionrequiring paymentstoKaminewillbelessthanthetotalamountprovidedhereunder forKaminerecoveryduringsuchterm(i.e.,$32.9million),

theCommission may,initsdiscretion, requireadditional ratereductions;

provided, however,thatthetotalamountofsuchreductions shallnotexceedthedifference betweenactualKaminecostsandtheamountsprovidedforinthisparagraph.

Inallothercases,intheeventthattheforegoing amountsprovidedforKaminecostrecoveryexceedcostsactuallyattributable toKamine,anysuchexcessbalanceremaining asofJune30,2002shallbeappliedtoSunkCosts,asdescribed inparagraph 19,infra.3.Theratereduction andKaminerecoveryamountslistedinparagraph 2~sura,includetheanticipated impactsofrecentlyenactedreductions inStategrossreceipts32/Intheeventthatrecoveryisnot,orwillnotbe,completebyJune30,2002,andRGB'.EoranyotherPartybelievesthatcircumstances wouldfavororpermitmorerapidrecoveryofKaminecosts,RG&EorsuchotherPartyshallhavetheright,notwithstanding anyotherprovision ofthisSettlement, torequesttheCommission toincreasetheoffsetamount.

~i0~ooi~, taxes("GRT").Theanticipated averagecombinedStateandlocalGRTrates,listedbycommencement ofRateYear,areasfollows:July1,1997:5.23%July1,1998:5.04%July1,1999:4.60%July1,2000:4.23%July1,2001:4.23%TotheextentthataverageGRTratesareotherthanasanticipated, theratereductions providedforinthisSettlement willberevisedaccordingly.

4.Theallocation oftheforegoing ratedecreases amongcustomergroupsshallbeasdescribed inScheduleAtothisSettlement.

05.Theallocation oftherevenuedecreases corresponding totheforegoing ratedecreases shallbeappliedtotheGeneration BusinessSegment-'"andshallbebasedupontherelativeresponsibility ofnuclearandnon-nuclear generation forCashOperation andMaintenance

("0&M")'-"

expense.33/RG&E'scurrentutilityoperations willbefunctionally separated intoGeneration, Transmission, Distribution andRetailing, hereinafter referredfoas"Business Segments."

Seeparagraphs 62-67,infra.ForpurposesofthisSettlement, "CashO&M"shallmeannon-fuelO&Mexpenseslesstheamortizations listedinScheduleB.Forpurposesofthis'Settlement, thefollowing allocation shallbeused:65percenttonuclearand35percenttonon-nuclear. 6.Exceptasotherwise providedbycontract, beginning July1,1999andcontinuing throughJune30,2002,Incremental Manufacturing Load-'"shallbeservedatanaveragerateof$0.059perKWH.7.Exceptasotherwise providedinthisSettlement, theratesresulting fromtheforegoing reductions shallnotbemodifiedduringthetermofthisSettlement toreflectanychangesinrevenuesorexpenses, including butnotlimitedtochangesinOAMsavings(bothCashO&MandNon-CashOEM-'"),Stateandlocaltaxreductions,-

'"andassetsales.-'"8.Uponfilingappropriate documentation withtheCommission, theratesresulting fromtheforegoing reductions shallbesubjecttomodification forthefollowing:

'ForpurposesofthisSettlement, "Incremental Manufacturing Load"shallmeanenergysalesmeetingbothofthefollowing characteristics:

1.TheenergyissoldtoacustomerwhoseStandardIndustrial Classification isinoneofthegroupslistedinScheduleC.2.Thecustomeraddsatleast50KWofnewloadby:(a)(b)(c)(d)constructing anewfacility; expanding anexistingfacility; addingfacilities orequipment toanexistingsite;oraddingfacilities throughtheredevelopment ofanexistingsitewhichhasbeenvacantforatleastsixmonths.3+I37/38'orpurposesofthisSettlement, "Non-Cash OAM"shallmeanamortizations pursuanttoScheduleB.Forpurposesofthisparagraph, "taxes"shallnotincludetheGrossReceiptsTaxorpropertytaxes.Notwithstanding anypreviousrequirement pertaining tosuchmatters,allsavingsnotreflected inratesasofJuly1,1996arisingfromtheoperation oftheNineMilePoint2andOswego6jointlyownedfacilities shallberetainedbytheCompany. a.Kaminerecoveryasdescribed inparagraphs 2,~sura,and11,infra.b.Variations inthecostsdescribed inparagraphs 14and15,infra:c.Securitization benefitsasdescribed inparagraph 18,infra;d.Deferrals

-'"pursuanttothisSettlement, including butnotlimitedtothoseprovidedforinparagraphs 12through17,24and30,infra;ande.Adjustments pursuanttoparagraphs 24,68and69,infra.DuringthetermofthisSettlement suchmodifications pursuanttoparagraph 8,~sura,shallbemadeonlyiftheneteffectofallsuchfactorswouldbea\tprojected cumulative balance,eitherowedtocustomers orowedtoshareholders, greaterthan0$30milliononapre-taxbasis.Theamountprojected tobegreaterthan$30millionshallberecovered byadjusting rates,onthenextJuly1st,fortheremaining termoftheSettlement;

provided, however,thatsuchrateadjustments shallbesubjecttothefollowing:

a.Norateadjustments shallbemadeinRateYearsIor2withtheexception ofadjustments pursuanttoparagraphs 14and18,infra.AsingleRateYearrateadjustment shallnotexceed$7.0millionforanyofthefinalthreeRateYearsoftheSettlement withtheexception ofadjustments pursuanttoparagraph 18,infra.AllamountsdeferredpursuanttothisSettlement shallbearcarryingchargesattherateof9.0percent. c.Arateadjustment shallnotbeforlessthan$3.5million,subjecttoItemd.d.Thecumulative effectofallrateincreases shallnotexceed$12.1millionperRateYear.e.Anyamountattributable toitemsforwhichchangesincostarepermitted toberecovered pursuanttothisSettlement, butwhicharenotrecovered bytheendofthetermofthisSettlement asaconsequence ofthisparagraph shallbedeferredforrecoverybeyondtheendofsuchtermandthetimingofsuchrecoveryshallbedetermined bytheCommission.

Changesduetothe"SystemBenefitsCharge"-'ndSecuritization shallbereflected without4regardtotheforegoing limitations.

The"SystemBenefitsCharge"isdescribed inparagraph 14,infra. ReturnonEuitv10.IntheeventthatRGB:Eachievesareturn'-"

oncommonequityinexcessof11.80percent,asdetermined fortheentire'"five-year termofthisSettlement,-

'"the.amountinexcessof11.80percentshallbetreatedasfollows:a.Fifty(50)percentshallbeusedtowritedowndeferrals accumulated duringterm'ofthisSettlement.

Anyremaining amountofthisfifty(50)percentportionshallberetainedasearningsbytheCompany.b.Thefirst$800,000oftheotherfifty(50)percentportionshallbeusedtoreduceratesforsubclasses pri-pri,subtra-sec, subtra-commercial andindustrial, aslistedinScheduleA.Theremaining amountofthisfifty(50)percentportionshallbeusedtowritedownaccumulated deferrals orSunkCosts.-'"TotheAsusedinthisSettlement, "return"meansthereturnonaregulatory basisforregulated operations

-~e,itdoesnotreflecttaxbenefitsstatutorily reservedforthebenefitofinvestors oranydisallowed assetsforunrealized taxbenefits.

42/43/Theactualreturnoncommonequityshallbecomputedannually.

Seeparagraph 71,infra.Attheendofthefive-year Settlement period,annualamountsofover-or-under-earnings shallbenettedforpurposesofdetermining anysharingpursuanttothisparagraph.

150basispoints(30basispointsperyear)shallbeaddedtothecomputation ofearningsforthisfive-year periodtoreflectasharingofearningsfromtheRateYearendedJune30,1997.44/ForpurposesofthisSettlement, "SunkCosts"shallhavethemeaningdescribed infootnote66,infra. extentthatanyportionsofthisamountshallremainafterwritingdownallsuchdeferrals andSunkCosts,theCommission shalldetermine thedisposition ofsuchportion.Kamine11.IntheeventthatRG&Ebecomesobligated tomakeactualpaymentstoKamineoranyotherpartypursuanttoeitherthepurported PowerPurchaseAgreement

("PPA")oranylitigation pertaining totheKamineprojectorthepurported PPA,RG&Eshallbeentitled, subjecttoparagraphs,8 and9,~sura,torecoveronacurrentbasisinelectricratesanadditional amount"-"nottoexceed,onaRate-Year basis,-'"

the"NetPPAAmount,"whichshallconsistof:seven-eighths (7/8)ofthedifference between(i)theamountthatwouldbepayabletoKamineifthepurported PPAwereenforcedandKaminegenerated andsoldtoRG&Ethemaximumoutputpermitted underthepurported PPA,'-"and(ii)anyamountattributable toKaminethatwasincludedintheratesthatwereeffective asofJuly1,1996;providedthatsuchNetPPAAmountshallbereducedby:a.amountsaccruedforKaminecostspursuanttoparagraph 2,~sura;and45/I.e.,inadditiontotheamountattributable toKamine($9.6million)thatwasincludedintheratesthatwereeffective asofJuly1,1996.Prorated, asnecessary, toreflectcommencement ofrecoveryatanytimeotherthanthefirstdayofarateyear.WhetherKamineactuallyproducesandsellselectricity toRG&Eornot.

0/Q0' b.anySecuritization benefitsotherwise permitted tobeusedtomitigateKaminecosts.AnyKaminecostsnotrecovered currently shallbedeferredforrecoveryinthesubsequent RateYearsofthetermofthisSettlement-'nd, ifnotrecovered bytheendofsuchterm,shallbedeferredforrecoverybeyondtheendofsuchtermandthetimingofsuchrecoveryshallbedetermined bytheCommission.

Inflation 12.If,inanyRateYear,inflation, asmeasuredbytheactualGDPChain-WeightedPriceDeflator, exceeds4.0percent,RG&Eshallbepermitted todeferforfutureIrecoverytheamountbywhichanyinflation-based increaseinCashO&Mexceedssuch04.0percentincreaseuptothepercentage increasedetermined bytheGDPChain-Weighted PriceDeflator."-

'eferralandrecoveryofsuchincreased costspursuanttothisparagraph shallnotrequirefurtherpetitiontoorapprovalbytheCommission otherthanfilingofappropriate workpapers showingthecalculation oftheamounttobedeferred.

DuringthetermofthisSettlement, however,suchdeferralandrecoveryshallnotcauseanyincreaseattributable toKaminecoststoexceedtheNetPPAAmountthatwouldapplytotheyearofrecovery.

49/Forpurposesofthisparagraph, CashO&Mshallbeassumedtobe$201millionuntiltheimplementation oftheEnergyandCapacitystageoftheRetailAccessProgram,described atparagraph 46,infra,atwhichtimeCashO&Mwillbeassumedtobe$176million.Theseamountsshallbereducedbyanyamountsrecovered throughthe"SystemBenefitsCharge,"asdescribed inparagraph 14,infra.Thedeferralshallbecalculated astheproductofCash0&Mandthedifference betweenactualinflation and4.0percent. ProertvTaxes13.Changesinpropertytaxesshallbeaddressed asfollows:a.Fifty(50)percentofanypropertytaxincreases overtheBaseLevel,-'"described insubparagraph c,below,shallbedeferredforfuturerecovery.

b.Fifty(50)percentofanypropertytaxdecreases fromtheBaseLevelshallbelikewisedeferredforfuturepassbacktocustomers.

'c.TheBaseLevelshallbeequaltoactualpropertytaxexpenditures overthetwelve(12)monthsendedFebruary28,1997,lesstaxesrelatedtoanyassetssoldafterJune30,1997."S'stemBenefitsChare"14.ThePartiesagreethatthecostsofcertainmandatedprogramswillberecovered throughratesapplicable toallcustomers,

'whetherornotthesecostsareincludedinaseparateSystemBenefitsCharge("SBC").-'"

Theprogramsareasfollows:Propertytaxespertaining tonon-nuclear generating facilities shallbedeductedfromtheBaseLevelpursuanttotheschedulestatedinparagraph 55,infra.Theinstitution ofsuchachargeiscurrently underconsideration inCase94-E-0952. a.ResearchandDevelopment:

mandatedresearchanddevelopment

programs, excluding NewYorkStateEnergyResearchandDevelopment Authority contributions; b.EnergyEfficiency:

mandatedenergyefficiency

programs, including DSMbiddingprogramsundertaken inaccordance withCommission orders;-""'c.LowIncome:mandatedlow-income

programs, whethernew,existingorexpanded, including low-income energyefficiency programs; andd.Environmental Protection:

mandatedenvironmental protection

programs, including programsdesignedtomitigatetheenvironmental impactsofelectricindustryrestructuring

programs, excluding environmental remediation costs.-'"TherevenuelevelsincludedinthisSettlement aredeemedtoincludefundingforsuchprogramsatthelevelslistedinScheduleKand,unlessdifferent expenditure levelsareapproved, thenetimpactoncustomers wouldbezero.TheCompanywillcontinuetoadminister existingcontracts andthefundsrequiredtocomplytherewith.

Totheextentthatthecostsrelatedtotheabovedescribed SBCprogramschangefromthelevelslistedin53rOnewayofdisbursing fundsforenergyefficiency programscoveredbythischargewouldbebymeansofastandardperformance contractwithstipulated pricingapprovedbytheCommission.

Seeparagraph 30,infra.

,~.0e' ScheduleKduringthetermofthisSettlement, thosechangeswillbereflected inanadjustment toratestotakeeffecteachJuly1stduringthetermofthisSettlement.

Costsnotrecovered duringanyparticular RateYearwillbereflected inratesinafutureRateYear,-"'s soonaspracticable.

Suchcostchangesshallbeallocated tovoltageclassesinproportion tothe"RateReductions" listedinScheduleA.TheCompanyshallhavenofurtherobligation pursuanttothe1996Settlement orthe1997Eighteen-Month DSMPlantoimplement oradminister DSMprogramsandtheCompanyshallhavenofurtherobligation toprepareorfilefutureDSMplansorevaluation reports.-

'"15.Thecostsdescribed asPublicPolicyCostsinSectionVIIofRG8cE'sOctober1Submission, totheextentpermitted tobebilledseparately aspartofanSBC,orasaPublicPolicyCharge,underthetermsoftheCommission's Orderestablishing anSBC,maybeincludedinRGAE'sSBC.Totheextentthatanyofsuchcostsarenotrecovered throughanSBCorsimilarcharge,asdescribed inparagraph 14,~sura,suchcostsshallbeotherwise recovered throughdistribution accessrates.Changesinsuchcostsduetogovernmental actionofanykindwillbeconsidered

Mandates, asdescribed inparagraph 16,'infra.

Themateriality Whichmayincludetheperiodimmediately following thetermofthisSettlement.

Inaddition, thereshallbenodenialofrecoveryofactualDSMexpenditures pursuanttoScheduleFtothe1996Settlement.

Duetocontractual commitments underexistingDSMprograms, discontinuance oftheCompany's obligations willnotresultinimmediate cessation ofallexpenditures.

~.,4.0e' threshold of$2.5million'-

willbeappliedtoaggregated costchangeswithineachofthesevencategories ofPublicPolicyCosts,-'"excluding SBCitems.MandatesCatastrohicEventsandCometitionImlementation Costs16.Intheeventthat,afterthedateuponwhichthisSettlement isexecutedbytheCompanyandonorbeforeJune30,2002,oneormoreMandates-'simplemented'-

"and/oroneormoreCatastrophic Events'-"occursand,duringanyRateYearcoveredbythis56/Azero($0)materiality threshold shallapplytoitemsincludedintheSBC.~57/Thesecategories are:1)DSM2)Low-Income Assistance 3)Obligation toServe-Incremental Expenses4)EconomicGrowth5)Environmental Initiatives 6)MandatedandPublicPolicyResearchandDevelopment 7)Regulatory Assessments andExpensesForpurposesofthisSettlement, a"Mandate" shallmean(a)anygovernmental action,including changesinlawsandregulations (including taxlawsandregulations) andordersofregulatory andotheragencieswhichresultincostchanges,and(b)anychangesinaccounting requiredbygenerally acceptedaccounting principles.

Intheeventthatanysuch"Mandate" consistsofactionsinresponsetoanassertedfailurebytheCompanytoconformtovalidlegalrequirements, theCompanyshallhavetheburdenofshowingthatitsconductwhichgaverisetosuchactionwasconsistent withthebestinterests ofcustomers.

59/"Implementation,"

asusedinthisparagraph, shallnotbedeemedtoreferonlytocommencement ofnewMandates, butshallinsteadincludebothcommencement ofnewMandatesandchangestoexistingMandates.

ForpurposesofthisSettlement, a"Catastrophic Event"shallmeananeventthattriggersthedesignation ofpartoftheCompany's serviceterritory asadisasterareaorasbeingunderastateofemergency.

0~.Oje Settlement, thecostimpactofanyindividual Mandateoranyindividual Catastrophic.

Eventexceeds$2.5million,-"

RG&Eshallbeentitledtodefertheentireamountattributable tosuchMandatesandCatastrophic Eventsandtorecoverorpassbacksuchamountassoonas.possiblethereafter, subjecttothetermsofparagraphs 8and9,~sura.Suchdeferralandrecoveryorpass-back, withtheexception ofCommission-imposed

Mandates, shallnotapplytogenerating facilities that,pursuanttotheEnergyandCapacitystageoftheCompany's

~RetailAccessProgram,-

"-'refullyexposedtomarketpricing.17.RG&Eshallbeentitledtodeferandtorecoverassoonaspossible, subjecttothetermsofparagraphs 8and9,~sura,theentireamountofallCompetition Implementation Costs'-"thatexceed,intheaggregate inanyRateYear,$2.5million.63/Suchimpactshallbecalculated onlywithreference toregulated operations.

The$2.5millionthreshold, however,shallnotapplytochangesinnucleardecommissioning coststhataretheresultofMandates.

Described atparagraphs 45-52,infra.63/ForpurposesofthisSettlement, "Competition Implementation Costs"shallmeanallincremental expenditures incurredbyRG&EafterFebruary28,1997,inconnection withallregulatory proceedings, legislation, regulations, andorderspertaining totheimplementation ofacompetitive marketforelectricservice.

r~.00' Securitization 18.Thebenefits, ifany,ofanySecuritization

-'hatmaybecomeavailable afterthisSettlement isexecutedbyRGB'.Eshall,subjecttoparagraph 11,~sura,beusedtoincreasetheamountsoftheratereductions identified inparagraph 2,~sura,-'"andanysuchfurtherratereductions shallbeallocated inamannerconsistent withthelegislation orCommission ordersauthorizing Securitization.

SunkCosts19.Allprudently incurredSunkCosts"-"asofMarch1,1997shallbe'includedinrateschargedpursuanttoRGAE'sdistribution accesstariff.ThePartiesintendthattheprovisions ofthisSettlement willallowtheCompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement, underStatement ofFinancial Accounting Standards WNo.71("SFAS71"),'-"whichprovidesforcertainaccounting conventions forregulated 64'orpurposesofthisSettlement, "Securitization" shallmeanCommission-issued rateorders,legislatively authorized orotherwise, thatarespecifically intendedtocreateaddedcreditqualityforutilityborrowings, allowingassetsorutilitycoststobefinancedatmorefavorable termsthanotherwise available.

Thisreducedcostofborrowing isthebenefitreferredtointhetext.Securitization'shall notbedeemedtoincludegeneralrateordersorfinancing ordersissuedintheordinarycourse.65166!67(Withoutregardtothelimitations ofparagraph 9(a)and(b),~sura.ForpurposesofthisSettlement, "SunkCosts"shallmeanallinvestment inelectricplantandelectricRegulatory Assets.A"Regulatory Asset"isadeferredcostwhoseclassification ontheCompany's BalanceSheetasanassetispermitted pursuanttoparagraph 9ofSFAS71.Accounting fortheEffectsofCertainTypesofRegulation. companies subjecttocost-based ratemaking.

ThePartiesshallmeetpriortoJuly1,2000todiscussfutureratemaking treatment ofsuchcosts.Suchtreatment shallbeconsistent withtheprinciple thattheCompanyshallhaveareasonable opportunity beyondJuly1,2002to.recoverallsuchcosts.-'"SaleofGeneratin Assets~20.Totheextentthatanyexistinggenerating assetsaresold(suchasviaanauctionorothersuitablemechanism toestablish marketvalue)duringthetermofthisSettlement, anygainsonsuchsalesshallbesharedbetweenshareholders andcustomers asfollows:a.Withrespecttosalesoccurring duringthefirstthree(3)RateYearsoftheSettlement period,customers shallbeentitledtosixty(60)percentofthefirst$20.0millionofanysuchgain,andtheCompanyshallbeentitledtoretaintheremainder.

Customers willbeentitledtoeighty(80)percentofanysuchgainsoverandabovethefirst$20.0million.b.Withrespecttosalesoccurring duringthefinaltwo(2)RateYearsoftheSettlement period,customers shallbeentitledtoSuchprinciples ofcostrecoveryshallalsoapplytothenegotiations referenced inparagraph 23,infra.

. eighty(80)percentandtheCompanyshallbeentitledtoretaintwenty(20)percentofallgains.Thegainsosharedshallbenetofanylossesduetogeneration assetsales,transaction costs,thecostofanyhedgingarrangements necessary tomanagetheCompany's riskoffluctuations inthepriceoftheelectriccommodity orrequiredancillary

services, andallapplicable financial statement taxeffects.TheCompany's shareofthegainshallbeexcludedfromallcalculations ofregulatory earnings.

ThepartiesshallmeetpriortoJuly1,2000todiscussthetreatment ofthecustomer's shareofthegainandmakearecommendation totheCommission withrespectthereto.ThePartiesintendthattheprovisions ofthisSettlement willallowtheCompanytorecover,inrateschargedpursuanttoRGAE'sdistribution tariff,anyprudently 0incurredlosses,including allapplicable financial statement taxeffects,resulting fromthesaleofagenerating asset,duringthetermoftheSettlement, underSFAS71.ThePartiesshallmeetpriortoJuly1,2000todiscussfutureratemaking treatment ofsuchcosts.Suchtreatment shallbeconsistent withtheprinciple thattheCompanyshallhaveareasonable

'pportunity beyondJuly1,2002torecoverallsuchcosts. To-GoCosts21.ThefixedportionoftheTo-GoCosts'-"ofRG&E'sfossilgenerating units,-'"hydroelectric generating units,-'"

gasturbines,-

'"andpowerpurchasecontracts (otherthanKamine),-

'"andthefixedportionoftheTo-GoCostsoftheCompany's shareofOswego6shallberecovered infullthroughtheCompany's distribution accesstariffuntilJuly1,199969/ForpurposesofthisSettlement, "To-GoCosts"shallmeanallcapitalcostsincurredafterFebruary28,1997,O&Mexpensesandproperty, payrollandothertaxes.The"variable" portionofsuchcostsshallmeanthecoststhatvaryasKWHoutputvariesatagenerating plant,chieflyfuelexpense.The"fixed"portionofsuchcostsshallmeanallsuchcostsnotdefinedas"variable."

RG&E'swhollyownedfossilgenerating unitsconsistofBeebeeStation(Unit12)and0RussellStation(Units1-4).Stations2,5,26,160,170and172.Stations3and9.RG&Ecurrently hasthefollowing long-term powerpurchasecontracts:

ContractNameNiagaraFirmNiagaraPar."B"St.LawrenceHydroQuebecFitzPatrick WinterSummerGilboaContractCapacity(KW)65,00035,00055,00020,00044,00050,000150,000Expiration ofContractAugust,2007August,2007August,2007October,199812MonthNoticeJune,2002 inaccordance withparagraphs 45and52,infra.ThevariableportionofsuchTo-GoCosts'-"shallbesubjecttothemarketforelectricity inaccordance withparagraphs 45and46,infra.NuclearFacilities 22.Allprudently incurredcostsofGinnaStationandtheCompany's shareofNineMilePoint2shallberecovered throughretailratessubjecttotheprovisions ofthefollowing paragraph,

provided, however,thatsuchcostsshallnotbesubjecttotrue-uporreconciliation exceptasotherwise providedinthisSettlement.

23.RG8cEshallparticipate ingood-faith negotiations withStaffandwiththeothercotenants ofNineMilePoint2regarding futureratetreatment ofsuchfacility.

ThePartiesanticipate thatsimilartreatment willbeappliedtoGinnaStation.Suchnegotiations andanyproposedtreatment resulting therefrom shallbeconsistent withandinfurtherance ofthefollowing principles:

a.anyCommission orotherStatesolutionmustbeconsistent withNuclearRegulatory Commission

("NRC")requirements; b.aStatewide solutiontotreatment ofnuclearfacilities ispreferable toindividual utility-by-utility solutions andanysolutionpertaining toRGAEmustbeconsistent withaStatewide solution; Seefootnote69,~sura. c.RG&E'snuclearfacilities shallremainsubjecttotheprovisions ofparagraph 16,~sura,duringthetermofthisSettlement; andd.nochangeinthetreatment ofRG&E'snuclearfacilities shallbeimplemented untilatleastJanuary1,2000.Intheeventthattheabove-described negotiations shouldresultinanychangeinratemaking treatment, thePartieswillmeettodiscusstherelationship betweenthepotential impactontheRetailAccessProgramimplementation

schedule, theassociated conditions andlimitations oncustomerparticipation andthelevelofTo-GoCoststhataresubjecttothemarket.Shut-Down andDecommissionin Costs~24.Allprudently incurredincremental costspertaining totheshut-down anddecommissioning ofgenerating facilities,-'"

whetherfullyorpartially ownedbyRG&E,shallberecovered throughtheCompany's distribution accesstariff.Nucleardecommissioning costsshallbeasdescribed inScheduleD.Intheeventthattheestimates ofnucleardecommissioning costscontained inScheduleDchange,-'"RG&EshallsubmittotheCommission andthePartiesarevisedScheduleD,showingsuchchangesandshall,uponrequestoftheCommission ortheParties,providereasonable documentation therefor.

TheInadditiontothedecommissioning costsshowninScheduleDfornuclearplant,"shutdownanddecommissioning costs"includetransmission anddistribution costsassociated withelimination ofaparticular generating

facility, severance payresulting fromsuchelimination, anddecommissioning offossilfacilities.

Thisprovision isintendedtoaddresschangesinestimates thatarenottheresultofchangesinMandates, asdefinedinfootnote58,~sura.

0~0' Company,uponCommission approval,-'"

shallthereupon bepermitted tochangeitsdistribution accessratestoreflectsuchincreaseordecrease.

Otherthannucleardecommissioning costscurrently includedinrates,theabovecostsshallbedeemedincremental anddeferredforrecoverypursuanttotheprovisions ofparagraphs 8and9,~sura.SstemReliability andMarketPower25.RG&Eshallmaintainthereliability ofitssystem,including thoseportionsofthesystemidentified asLoadPockets,-

'"inthemostcost-effective manner,considering arangeofalternatives including butnotlimitedto:transmission anddistribution systemreinforcements, maintenance ofexistingplant,energyefficiency anddistributed generation.

Inconnection withthepetitionoftheMemberSystemsoftheNewYorkPoweriOPool("NYPP")totheFERCtoformnewwholesale marketinstitutions (theISO,PEandtheNewYorkStateReliability Council),

theCompanyshallfileamarketpowermitigation planwithFERCandshalltakeappropriate actioninaccordance withtheoutcomeofsuchfiling.NothinginthisSettlement shallprecludetheCommission fromimplementing marketpowermitigation measuresforretailservice,asappropriate, afterthetermofthisSettlement.

Suchapprovalprocessshallbebaseduponashowingofthenecessity andreasonableness oftheexpenditures.

ForpurposesofthisSettlement, "LoadPockets"shallhavethemeaningdescribed inOpinionNo.96-12(at60):"'Loadpockets'xist when,duetotransmission systemlimitations, somegeneration mustbelocatedwithinaparticular locationinordertocontinuetheprovision ofreliableservice."

RG&E'sLoadPocketsaredescribed inSectionVoftheOctober1Submission. i~Amortizations 26.ScheduleBtothisSettlement showstheitemsandtheamountsthereofthatwillbedeemedtohavebeenamortized duringthetermoftheSettlement.

RG&Eshallbepermitted torecordamortizations andunamortized balancesasitdeemsappropriate overthefiveRateYearsoftheSettlement;

provided, however,that,attheconclusion oftheSettlement period,anyunamortized balanceforaparticular itemshallnotbegreaterthanitwouldhavebeenhadtheamortization beenrecordedasshownonScheduleB.Forpurposesofcomputing RGEcE'sregulatory

earnings, thelevelsofamortization expensesshallbeasindicated onScheduleB.Post-EmlovmentBenefitse27.ThepartiesagreethatuponapprovalofthisSettlement bytheCommission, andeffective asofJanuary1,1997,theCommission's policystatement onaccounting andratemaking forpensionsandotherpost-employment benefits'-

"shallnolongerapplytoRGB.Eandtoitsaccounting policies.

Case91-M-0890, Statement ofPolicandOrderConcernin theAccountin andRatemakin Treatment forPensionsandPostretirement BenefitsotherthanPensions, issuedSeptember 7,1993.

e ~,GinnaOutaeCosts28.RGAEshallbepermitted, atitsoption,tobookcostsassociated withGinnaStationmaintenance outagesonalevelized basis.Suchcostsshallbedeemedto.havebeenrecovered fromcustomers onalevelized basis.ExcessEarnins,29.Exceptasexpressly providedotherwise inparagraph 10,~sura,anyexcessearningsattributable totheRateYearendingJune30,1997oranypriorRateYear-"'hallbedeemedtohavebeenpassedbacktocustomers asofJuly1,1997.Environmental Remediation Costs030.RGE.Ewilldeferonitsbooksofaccountandreflectinratesasprescribed bythisparagraph andpursuanttoparagraphs 8and9,~sura,siteinvestigation andremediation

("SIR")costs-'"forelectricoperations inexcessof$2.0millionannually.

Anycostsdeferredunderthisparagraph willbenetofrecoveries ofthesecostsunderinsurance policiesorfromthirdparties.$0!Including anyamount,notexceeding

$2.5million,pertaining toexcesscollections undertheFuelCostAdjustment.

SIRcostsarethecostsRGEcEincurstoinvestigate, remediate, orpaydamages,including naturalresourcedamages,butexcluding personalinjurydamages,withrespecttoindustrial andhazardous wasteorcontamination, spills,discharges andemissions forwhichRG8rEisresponsible. AmountsDueCustomers 31.RGEcEshallrecordanyServiceQualityPerformance Program-'~

penalties thatbecomeduetocustomers duringthetermofthisSettlement.

TotheextentthattheseamountsarenotoffsetbyamountsduetheCompany,excluding

Mandates, asdescribed inparagraph 16,~sura,theyshallbecarriedforwardtotheendofthetermofthisSettlement andtheultimatedisposition ofanysuchcarry-forward balanceshallbedetermined inafuturerateproceeding.-

'"Incentives OwedRGAEandAmountsOwedCustomers UnderSettlements 32.AnyandallElectricRevenueAdjustment Mechanism

("ERAM")deferrals andincentive amountsthatwereduetotheCompanyasofJune30,1997,including amountsderivedfromtheelectricratesettlement approvedbytheCommission inOpinionNo.93-19("the1993Settlement"

)-"',shallbedeemedtobeeliminated asoftheeffective dateofthisSettlement.

Anyandallamountsthatwereduetocustomers asofJune30,1997including amountsderivedfromthe1993Settlement, the"Settlement Agreement

-Demand83/84!TheServiceQualityPerformance Programisdescribed inparagraph 44,infra.Suchbalanceshallbearcarryingchargesattheannualrateef9.0percent.Cases92-E-0739 etal.,Rochester GasandElectricCororation,OpinionandOrderApproving Settlement, issuedAugust24,1993.Thereferenced itemsincludeDSM,ServiceQuality,Integrated ResourceManagement Incentive

("IRMI")andGinnaSteamGenerator replacement costsharing.See1993Settlement, paragraphs IS-20,32. SideManagement Issues"("theDSMSettlement"

)approvedinOpinionNo.95-20,-'"

the1996Settlement andtheNineMile2Settlements shallalsobedeemedtobeeliminated asoftheeffective dateofthisSettlement.

FlexibleTariffDiscounts 33.DuringthetermofthisSettlement, RG&Eshallhaveauthority toprovidediscounted servicepursuanttoServiceClassification No.10("SC-10")

contracts orsimilarflexiblepricingarrangements, including theFlexibleDistribution TariffOptiondescribed inAppendixAtoScheduleA.Lostmarginsresulting fromallsuchsalespriortoJuly1,2002shallbedeemedtohavebeenrecovered bytheCompanyduringthetermofthisSettlement.-"'e LealServices34.ThisSettlement resolvesallissues'pertaining tothecostoflegalservicesandisdeemedtocompletealltherecommendations contained inthefinalreportissuedbyMitchell/Titus andCompanyinNovember1993intheStatewide LegalServices86/Cases95-E-0673 etal.,Rochester GasandElectricCooration,OpinionandOrderApproving Settlement ofDSMIssues,issuedDecember27,1995.Thisparagraph shallnotbeconstrued aslimitingRG8cE'srighttoseekexplicitrecoveryofsomeorallofthelostmarginsonsalesofelectricity ordistribution servicemadeafterJune30,2002,regardless ofwhenthecontracts pursuanttowhichsuchsalesweremadewereenteredinto. iStudy(Case92-M-0047).

Accordingly, therearenofurtherstudies,reportsoractionsrequiredoftheCompanyinregardtothismatter.ReulatedRateDesin35.Exceptasexpressly providedotherwise inthisSettlement, anychangeinrevenuespursuanttotheprovisions hereofshallbeallocated uniformly toallserviceclassifications

("SC").-'"

36.ForSC-1,SC-2,andSC-4,ScheduleI,themonthlycustomerchargeshallbeincreased by$1.50ineachRateYearofthetermofthisSettlement, withcorresponding decreases inenergyrates,asshowninScheduleA.37.ForSC-4,mandatory application tolargecustomers shallbeeliminated.

38.ForSC-8,thedifference betweenpeakandshoulderperiodenergychargesshallbeeliminated asofJuly1,1997,withacorresponding increaseindemandcharges.Insubsequent years,energychargesshallbereducedaccordingly, asshownforillustrative purposesinScheduleA.39.TheCompanyisauthorized tomodifytheeligibility criteriaofSC-10toeliminate therequirements ofitemA.3(energyaudits).Reference inthisparagraph andinparagraphs 36through40,infra,to"serviceclassifications" shallbetothe.existingserviceclassifications inRG&E'sElectricTariff(P.S.C.No.14),andinRG&E'sStreetLightingTariff(PSCNo.13).ForthepurposesofthisSettlement, theprojected KWHsalesaspresented inScheduleAshallbeused. 40.TheCompanyisauthorized tomodifytheeligibility criteriaofSC-11toeliminate theenergyauditrequirement.

41.TheCompanyisauthorized tomakeratedesignchangestoitsotherelectricserviceclassifications

-'hatareconsistent withtheprinciple ofreducingmarginalenergyprices.Further,duringthetermofthisSettlement, theCompanymayatanytimepetitiontheCommission forapprovaltoimplement revenue-neutral ordeminimisrateorratedesignchanges,including changestotheratedesignplansdescribed inparagraphs 35through38,~sura.LarcCustomerCreditProram42.RG8'cEshallcontinueitsLargeCustomerCreditPrograminaccordance withScheduleEtothisSettlement, whichshallsupersede ScheduleFtothe1996Settlement.

Low-Income Proram43.RGB'Eshallcontinuetoimplement theLow-Income Programcontained inScheduleFtothisSettlement andtorecoverinResidential Rates-'"theamountsspecified inScheduleK.PriortoJune30,1999,thePartiesshallmeettodiscusswhethertheProgramshouldcontinuebeyonditsscheduled expiration date(June30,1999)and,ifso,inwhatform.SC-3,SC-7andSC-9.Forpurposesofthisparagraph, "Residential" shallmeanSC-1andSC-4customers.

~-' 88'4.RG&EshallcontinueitsServiceQualityPerformance Programinaccordance withScheduleGtothisSettlement, whichshallsupersede ScheduleHtothe1996Settlement.-

'henewProgramshallcontinuethroughJune30,1999.TheElectricReliability component

-"'ftheProgramshallapplyonlytoRG&E'sdistribution operations andtheCustomerServicecomponent

-"'hallapplyonlytotheCompany's Regulated LoadServingEntity("RLSE")operations.-

'"PriortoJune30,1999,thePartiesshallmeettodiscusswhethertheProgramshouldcontinuebeyonditsscheduled expiration dateand,ifso,inwhatform.Notwithstanding theforegoing, ifRG&Edetermines thattheimplementation ofcompetition resultsindeterioration ofperformance undertheServiceQualityPerformance Program;"'G&E shallbepermitted, independent ofanyotherprovision ofthisSettlement, topetitiontheCommission forrelieffromtheeffectsofanycomponent oftheProgramthatisaffectedbyimplementation ofcompetition.

90/9l/92/93/94/Theonlysubstantive difference betweenthe1996Programandthecurrentoneisintheamountsofthemaximumpenalties.

ThemaximumpenaltyfortheElectricReliability Component shallbe$750,000,allocated equallybetweenthetwoitemsinthiscomponent.

ThemaximumpenaltyfortheCustomerServicecomponent-shall be$500,000,allocated equallyamongthesixitemsinthiscomponent.

"RLSE"isdefinedinSectionVIII(p.VIII-23)ofRG&E'sOctober1Submission anddescribed inparagraph 65,infra.~E,complaints duetocustomerconfusion.

i~;~s0' RetailAccessGenerallv 45.RGEcEshallofferitscustomers theopportunity topurchasetheirownelectricenergyandcapacityandtheCompanyshalldeliversuchelectricenergyandcapacityinaccordance withthefollowing description oftheCompany's RetailAccessProgram.ThePartiesacknowledge thatRGkE'sabilitytoundertake theRetailAccessProgramiscontingent uponnumerousconditions andcircumstances,-

'"anumberofwhicharenotwithinthedirectcontroloftheParties.Accordingly, thePartiesagreethatitmaybecomenecessary tomodifytheProgramtoaccountforsuchfactors,andtheyagreefurthertoaddresssuchmattersingoodfaithandtocooperate inanefforttoproposejointresolutions ofanysuchmatters.46.TheRetailAccessProgramshallbea"SingleRetailer" program,as0described inRGB.E'sOctober1Submission,-

'"andassuch"SingleRetailer" programhasbeenmodifiedpursuanttothetermsofthisSettlement.-"

Foraperiodofthreeyears,beginning withtheimplementation dateoftheProgram,asdescribed inparagraph 48,infra,RGEcEshalloffertheoptionofunbundled billingservicesunderatarifftoparticipating Load9S/Including theexistence ofanadequatemarket,asdescribed inparagraph 52,infra.SeeSectionVIII(pp.VIII-16,-

VIII-18).

97/Alistoftheretailing functions, theprovision ofwhichwillbetheresponsibility ofLSEsparticipating intheProgram,isincludedinScheduleH.

s0e' ServingEntities("LSEs").-

'heProgramwillbephasedin,asdescribed inparagraphs 48through52,infra.ItshallcommenceonJuly1,1998byallowingcustomers tochoosetheirownsupplierofelectricenergy(the"EnergyOnly"stageoftheProgram).

DuringthisstageoftheProgram,theCompanyshallcontinuetoprovideandbecompensated forthegenerating capacityrequiredtoserveallcustomers reliably.

OnJuly1,1999,subjecttotheprovisions ofparagraphs 52and68,infra,customers willbepermitted tochoosetheirownsupplierofenergyandcapacity(the"EnergyandCapacity" stageoftheProgram).-

'"47.RGEcEagreedtocooperate withthePartiestocommenceworkontheRetailAccessProgramassoonasthePartiesexecutedtheInitialSettlement andtheCompanyagreestocontinuetodosouponexecution ofthisSettlement;

provided, however,thatanyincremental costsorcommitments incurredbytheCompanyinconnection withsuchworkperformed sinceApril8,1997shallbedeemedtobeincludedintheCompetition Implementation Coststhataresubjecttorecoverypursuanttoparagraph 17,~sura.LSEsaredescribed inSectionVIIIofRGkE'sOctober1Submission (pp.VIII-10-VIII-11).

Anindividual customercanqualifyasanLSEandprocureitscombinedneedsforsomeorallofitsseparateaccounts.

"Unbundled billingservices" includepreparation andmailingofasinglebillontheLSE'sbehalf.ThepurposeofhavingRGEcEoffersuchserviceistopermitLSEstocommenceoperations withouthavingtowaitfordevelopment oftheirownbillingsystems.Thethree-year limitisintendedtorecognize thatthisservicewillultimately beavailable onacompetitive basisand,therefore, togiveRGEcEtheoptionofterminating thisregulated offeringafterallowingLSEsareasonable periodtomakealternative billingarrangements.

Asthedesignation indicates, theLSEwillberesponsible forpurchasing capacityuponcommencement ofthisstageoftheProgram. 48.Subjecttotheprovisions ofparagraphs 45,~sura,and52,infra,thescheduleforimplementation oftheRetailAccessProgramisasfollowsandiscontingent upontheeventslistedinItemsathroughc:a.Execution ofanagreement regarding thefunctional requirements oftheProgram-byMay30,1997;b.Development oftheformofOperating Agreement

-""andfilingofproposedtariffsbyDecember1,1997;Commission approvaloftariffsbyFebruary1,1998;-""d.TheEnergyOnlystageoftheProgrambeginsbyJuly1,1998,atwhichtimecustomers usingupto670GWHofenergyperyear,intheaggregate,-

'"'illbeeligibletoparticipate; il001"Functional requirements" willdescribethebusinessand/orsystemprocesses neededtoimplement retailaccessandunbundled billing.Subsequent criticalcomponents ofthesystemdevelopment process,suchastheoperating agreement, businessprocedures, communications, systemspecifications andtraining, willeventually evolvefromtheserequirements.

I0IIOperating Agreements aredescribed inSectionVIII(pp.VIII-24-VIII-26)ofRGB:E'sOctober1Submission.

TheOperating Agreement iscurrently beingdraftedinconsultation withanAdvisoryCouncilmadeupoftheParties.TheOperating Agreement willbereferenced intheDistribution AccessTariffandwillbeonfilewiththeCommission.

Itisexpectedthattheremaybedifferences betweenanAgreement forasinglecustomeractingasanLSEandanAgreement.

foranLSEservingmultiplecustomers.

10>DExceptasprovidedinparagraph 61,infra,thesetariffsshallbeeffective asofJuly1,1998.Allreferences tocustomerconsumption aretoaggregated use. TheEnergyandCapacitystageoftheProgrambeginsbyJuly1,1999,atwhichtimecustomers usingupto1,300GWHofenergyperyearwillbeeligibletoparticipate; f.AsofJuly1,2000,customers usingupto2,000GWHofenergywillbeeligibletoparticipate; g.AsofJuly1,2001,customers usingupto3,000GWHofenergywillbeeligibletoparticipate; h.AsofJuly1,2002,allretailcustomers willbeeligibletoparticipate.

49.Topermitimplementation withoutunnecessary disruption, thePartiesagreethattheRetailAccessProgramscopeandfunctional requirements willnotbechanged0inawaythatsubstantially alterstheadministrative andotherchangesnecessary fortimelyimplementation oftheProgram.Nosuchchangeinscopeorfunctional requirements shallbemadewithoutRGB.E'sconsent.50.Totheextentthatenergyconsumption byend-usecustomers intheCompany's serviceterritory growsbeyondalevelof6,714GWHduringthetermofthisagreement, theGWHcapsoneligibility described inparagraph 48,~surawillbeincreased bytheamountofadditional energyconsumption.

51.Eligibility fortheRetailAccessProgramwillnestberestricted bycustomerclass.

0O.0,0 52.ThePartiesagreethattheexistence ofafunctioning Statewide EnergyandCapacityMarket-inwhichRGEcEisabletopracticably participate isacrucialfactorintheCompany's abilitytoimplement theEnergyandCapacitystageoftheProgram.IfsuchaStatewide EnergyandCapacityMarketisnotimplemented byJuly1,1998,theCompanymaypetitiontheCommission foradelayintheimplementation oftheEnergyandCapacitystageoftheProgramandshowcausewhyrelieffromthisscheduleisrequired.

IftheProgramisdelayedinthisfashion,theprovisions ofparagraph 56,infra,willapplyandthecapsonparticipation intheEnergyandCapacitystageoftheProgramdescribed inparagraph 48,~sura,willapply.ThePartiesfurtheragreethat,priortoJuly1,2000,theyshallmeettoreviewtheprogressofretailaccessundertheProgramandshallconsiderandrecommend totheCommission, asappropriate, anychangestotheimplementation schedule0thataredetermined tobenecessary;

provided, however,thatnosuchchangesshallberecommended unlesstheyarerevenueneutralanddonotmaterially increasethelevelofriskbornebytheCompany.104/The"Statewide EnergyandCapacityMarket"isdefinedtobeasetofcircumstances andconditions suchasthatidentified bytheMemberSystemsoftheNYPPintheirJanuary31,1997filingwiththeFERCtocreatenewwholesale marketinstitutions inNewYork.ThisMarket,asthusdefined,wouldincludemechanisms forthewholesale purchaseandsaleoftheelectricenergycommodity byanyqualified entity,aswellasthesameordifferent mechanisms forthepurchaseandsaleofgenerating capacitycommitments bysuchentities. Distribution AccessChares53.LSEswillberequiredtotaketransmission serviceundertheCompany's FERCOpenAccessTransmission Tariff("OATT"),-

""untilsuchtimeasthattariffissuperseded byaFERC-approved Statewide openaccesstransmission tariff.Atthattime,LSEswillberequiredtotakeserviceundertheStatewide tariff.Totheextentthatmodifications totheOATTarenecessary duringthetermofthisSettlement toimplement theRetailAccessProgram,theCompanywillconsultwithinterested Partiesinthedevelopment ofsuchmodifications, andtheCompanywillfilesuchmodifications withtheCommission witharequestthattheCommission approvesuchmodifications.

InthefilingtheCompanywilljustifyrequested modifications tonon-ratetermsandconditions andwillindicatehowIratesshouldbedesignedfortheRetailAccessProgram.Following Commission

approval, theCompanywillfiletheamendments totheOATTtogetherwiththeCommission's orderapproving theamendments withtheFERCwitharequestthattheFERCdefertotheCommission onsuchmodifications.

Whererequested bytheCompanytodoso,Staffshallemployallreasonable meanstoexpeditetheCommission's approvalprocess.Theforegoing processshallnotbeconstrued asrequiring RG&Etotakeanyactionthatisinconsistent withlawfulFERCjurisdiction andrequirements.

LSEswillalsoberequiredtotakedistribution serviceunderaPSC-regulated distribution tariff.Anycostsnotrecovered throughtheFERC-regulated transmission tariffwillberecovered, totheextentpermitted hereunder, FiledJuly9,1996inDocketNo.OA96-141-000.

~~~.e. throughthePSC-regulated tariffsandanycostsrecovered throughFERC-regulated tariffsshallnotberecovered throughPSC-regulated tariffs.Thedistribution accesstariffchargeswillbebasedupontheloadsoftheLSE'sretailcustomers aggregated byvoltageclass..54.FortheEnergyOnlystageoftheRetailAccessProgram,therateschargedtoLSEsundertheCompany's tarifffordistribution accessshallbesetbydeducting fromtheratesthatwouldapplytobundledretailservice$0.02305perKWH-.LSEsshallbeentitledtopurchaseenergyfromtheCompanyatarateof$0.01905perKWHtoservethe,requirements oftheretailcustomers theyservewithintheCompany's servicearea,providedthatsuchLSEscontracttoservethefullrequirements ofsuchcustomers andpurchasealloftheenergyrequiredtodosofromtheCompanythroughJune30,1999oruntiltheEnergyOnlystageoftheProgramterminates, ifsuchstageextendsbeyondJune30,1999.-""IntheeventthattheEnergyOnlystageoftheProgramextendsbeyondJune30,1999,thedistribution accessratesmay,ifnecessary, bechangedinaccordance withparagraph 56,infra.55.FortheEnergyandCapacitystageoftheRetailAccessProgram,therateschargedtoLSEsundertheCompany's tarifffordistribution accessshallbeapproximately equal,onaverage,totheratesthatwouldapplytobundledretailservicelessretailing costsandtheper-unitfixedandvariableTo-GoCostsofnon-nuclear energysources,exclusive ofpropertytaxes.Thepropertytaxcomponent oftheper-unitnon-nuclear To-Go106'fthisamount,$0.004perKWHrepresents average"retailing costs."Thetypesofretailing functions towhich"retailing costs"pertainareshowninScheduleH.107!LSEsshallmakethiselectiononacustomer-by-customer basis,thuspermitting LSEstodiversify theirsourcesofelectricity supply. Costsshallbedeductedfrombundledratesasfollows:twenty(20)percentuponcommencement oftheEnergyandCapacitystageoftheRetailAccessProgram,andanadditional twenty(20)percentcommencing everytwelve(12)monthsthereafter.-"

56.IftheStatewide EnergyandCapacityMarketisnotfullyinplaceasofJuly1,1998,theCompanyshall,afterconsultation withinterested Parties,beauthorized tochargeratesfordistribution accessthatwillbeapproximately equal,onaverage,totheratesthatwouldapplytobundledretailservicelessretailing costsandtheper-unitmarketpriceofenergyandcapacity, asdefinedatthepointsatwhichtheCompany's transmission systeminterconnects withtheStatewide transmission system.-""Theserateswillapplytodistribution accessserviceforaperiodnolongerthantwelve(12)monthsafterthefullimplementation oftheStatewide EnergyandCapacityMarket.TheCompanywillnotinterfere withorinanywayseektodelaytheimplementation oftheStatewide EnergyandCapacityMarket.,Theappropriate ratesforLSEspurchasing energyfromtheCompanyshallbedetermined consistent withthisparagraph.

108!Thetotalper-unitreduction frombundledrateswillaverage3.2centsperKWH.Thisfigureincludesbothretailing costsandTo-GoCostsofnon-nuclear energysources.ScheduleAshows,forillustrative

purposes, theaveragedistribution accessrevenuesperKWHbyvoltagelevel,withoutaccounting forratedesign,foreachyearoftheEnergyandCapacitystageoftheProgram.Theactualdistribution accessratesshallbefiledwiththeCommission astariffchanges.109!TheCompanyshallfileappropriate tariffleavestoeffectsuchchangeandtheapprovalprocessthereforshallbelimitedtoverification ofthechangesreflected therein.Thesameprocedure shallapplytochangespursuanttoparagraph 57,infra.

0~e 57.Uponextension ofeligibility fortheRetailAccessProgramtoallretailcustomers onJuly1,2002,theCompanyshallbeauthorized tomodifyitsdistribution accessratessoastoholdconstantthedegreetowhichitsTo-GoCostsareatriskforrecoverythroughthemarket.-""ThePartiesagreetomeetbeforeJuly1,2001todiscussfutureratemaking plans.If,duringtheoperation oftheEnergyandCapacityStageoftheRetailAccessProgram,themarketpriceofenergyandcapacitymeasuredattheCompany's interconnections withtheStatewide transmission system,exceedsanaverageof3.2centsperKWHonapersistent andsustained basis,thePartieswillmeettodiscussthepotential acceleration oftheRetailAccessProgramimplementation

schedule, theassociated conditions andlimitations oncustomerparticipation andcontinued recoveryofnuclearcostsintheevent0ofasubsequent decreaseinmarketprices,subjecttotheprovisions ofparagraph 23,~sura.~Recirocitv58.IntheeventthatRG&Eisrequested topermitaccessbyanelectricutilityoraffiliate

-""ofsuchutilitywhereanaffiliate ofRG&Ewouldbedeniedcomparable accesstotheserviceterritory ofsuchotherutilityorutilityaffiliate, RG&Eshallhavethe1101Recoveryofnon-nuclear To-GoCostsshallcontinuetobethroughthemarket,exceptthatpropertytaxesaretobephasedoutofregulated rates-asdescribed inparagraph 55,~sura.ForpurposesofthisSettlement, "utilityaffiliate" shallmeananyentityhavinganyownership, partnership, jointventureorothercommonenterprise interestwithautilityinwhicheitherentityhasmorethanfive(5)percentownership intheotherorinanyoftheforegoing entities. righttopetitiontheCommission foranorderrequiring thatsuchotherutilityprovidetheCompany's affiliate comparable accessorprecluding theotherutilityoritsaffiliate fromparticipating inRG&E'sRetailAccessProgramuntilsuchtimeasaccessisprovidedtoRG&E'saffiliate.-

""Thefilingofsuchpetitionshalloperateautomatically tostayparticipation inRG&E'sProgramuntilthematterisdecidedbyanorderoftheCommission onthepetition.

ReturntoRLSE59.Customers whohaveparticipated intheRetailAccessProgramshallbepermitted toreturntoserviceundertheRegulated LoadServingEntity("RSLE")-""tariff;provided, however,thatRG&Eshallbepermitted toestablish reasonable

measures, including butnotlimitedtotimeandfrequency limitsonswitching, topreventcustomers from"gaming"theProgram.DuringtheEnergyOnlystage,RG&Ewillallowsuchreturning customers totakeserviceatregulated retailrates.DuringtheEnergyandCapacitystage,iftheCompany's incremental costsofsupplying energyandcapacityaredifferent fromthecostsofenergyandcapacityembeddedinregulated retailrates,theCompanyshallbepermitted tochargesuchcustomers theequivalent ofregulated retailratesadjustedfortheincremental ll2/ll3/ThePartiesagreethattheCommission maybelimitedbylawintheactionsitmaytakewithrespecttonon-NewYorkStateentitiesandtheirprograms.

Totheextentthatanysuchentitymaybetheobjectofapetition, asprovidedforherein,theCommission shall,totheextentitislegallyabletodoso,takeactionconsistent withthisparagraph.

TheRLSEisdescribed inparagraph 65,infra.

~O~e0,0e. costs(whetherpositiveornegative) ofprocuring energyandcapacityonbehalfofsuchcustomers.

Otherwise, suchcustomers willpayregulated retailrates.DuringtheEnergyandCapacitystage,RGAEshallhavenoobligation tomaintaincapacityforsuchcustomers.

Newcustomers willpaythesameratesandbeallowedtotakethesameservicesassuchreturning customers.

Environmental Information 60.RG&EandStaffshallworkwithLSEstodevelopandimplement, wherefeasible, meaningful, andcost-effective, ameansofproviding customers withinformation onthefuelmixandemissioncharacteristics ofthegeneration relieduponbytheirIrespective LSEs.1DairvleaPro~ram61.ThepartiesagreethattheCompany's introduction oftheRetailAccessProgramto-eligible farmandfoodprocessor customers onFebruary1,1998(fivemonthspriortoitsstartingdateforothercustomers),

theintroduction oftheProgramtothosecustomers outsideofthecapswhichotherwise limitparticipation, andtheprovision ofarateequaltothemarketpriceofenergyandcapacityplusretailing costs(plus$0.006for residential customers),

satisfies therateandtimingaspectsoftheCommission's OrderEstablishing RetailAccessPilotProgramsissuedJune23,1997inCases96-E-0948 etal.-""'ororateStructure 62.RGkEshallseparateitsexistingoperations, eitherfunctionally orstructurally, asindicated, andshallprovidefornewoperations byestablishing thefollowing activity-based units:afunctionally separatedistribution unit("DISCO");ob.afunctionally separategenerating unit("GENCO");

c.afunctionally separateRegulated LoadServingEntity("RLSE");

d.astructurally separateUnregulated LoadServingEntity("ULSE");

ande.aHoldingCompany("HOLDCO").-

""RG&Ewilldevelopandprovide,byJanuary1,1998,theaccounting treatment tobeappliedtotheforegoing units.TheCompanywillmeetperiodically withStaffduringsuchdevelopment periodtokeepStaffapprisedofprogressandtoreceiveinput.PetitionofDairleaCooerativeInc.toEstablish an0en-Access PilotProramforFarmaodFoodProcessor Etectricit Customers (the"~Dairleacase").TheHOLDCOmay,attheCompany's option,beafunctionally separateunitservingessentially thesamepurposesofaholdingcompanyoritmaybealegallydistinctentityascontemplated inparagraph 67,infra.

~e DISCO63.TheDISCOshallcontinuetocarryonRG&E'stransmission anddistribution servicewhichshallbeprovidedtoLSEs(Regulated andUnregulated) pursuanttoregulated tariffs.Exceptasotherwise described inthisSettlement, DISCOratesshallincludethecostsofRG&Egenerating facilities

-"andallcostsidentified inSectionVIIofRG&E'sOctober1Submission.-

""ExcepttotheextentthatanyofRG&E'sgenerating facilities

-"aresoldtounaffiliated

entities, ownership ofsuchfacilities shallremainwiththeDISCOeitherdirectlyorthroughownership bytheDISCOoftheGENCO.GENCOi64.Exceptasotherwise providedinthisSettlement, theGENCOshallberesponsible foroperating RG&E'sgenerating facilities andfortheirassociated To-GoCosts.RLSE65.TheRLSEshallprovidebundledserviceundertariffstocustomers whoelecttocontinuereceiving bundledserviceorwhodonothaveapracticable alternative.

TheRLSEshallcontinuetoserveasa"Provider ofLastResort"("POLR")untiltheCommission approvesanalternative meansofproviding suchservice.AllcostsofPOLRservicethatare116/Seeparagraphs 19through24,46,48and52,~sura.Seeparagraph 15,~sura.Including RG&E'sinterestinanyjointlyownedgenerating facilities. currently includedinbundledratesandarenotcollected directlyfromcustomers oftheRLSEshallbecollected inDISCOratesconsistent withparagraph 15,~sura.TheCompany'will workwithStaffaftertheinitialimplementation oftheRetailAccessProgramtodevise.anexperimental alternative whichwillentailproviding POLRserviceonacompetitive basis.Thisexperiment willbeconducted duringthetermofthisSettlement.

ULSE66.TheULSEshallbepermitted tofunctionasanenergymarketerandproviderofotherenergyservicesbothwithinandoutsideRGEcE'sutilityserviceterritory.

TheULSEshallbepermitted touseRGEcEinitsnameandmakeknownthatitisanaffiliate ofRGEcE.Thenatureoftherelationships amongaffiliated unitsorcorporations isaddressed inthe"Standards Pertaining toAffiliates andtheProvision ofInformation" contained inScheduleIattachedhereto.HOLDCOandCaitalization ofUnreulated0erations67.ThePartiessupportRGkE'sPetitioninsubstantially theformofScheduleJ-""toestablish aholdingcompanystructure inwhichRG&Ewouldbepermitted tooperatethroughoneormoreregulated companies andoneormoreunregulated companies, including energyservicecompanies

("ESCOs")

andLSEs.WhetherRGAEconductsitse'Orasimilarpetitionproposing theformation ofaHOLDCOwiththesameresult,butthroughadifferent structure.

~.e 0unregulated activities throughaHOLDCOoraseparatesubsidiary ofautilityparent,itshallbepermitted initially tofund,throughcash,loanguarantees oradvances, suchactivities intheamountof$50million.Theprinciples relatingtotheinter-company relationships, codeofconduct,costallocations, protections andrestrictions applicable toaholdingcompanyorcompetitive subsidiary arecontained inScheduleI.Authorization tofundsuchunregulated operations isgrantedwiththeapprovalofthisSettlement.

Exceptforthe$50millionofinitialinvestment, orasotherwise

-'""authorized bytheCommission, RG&E'sregulated BusinessSegmentswillneithermakeloansto,norguarantee orprovidecreditsupportfortheobligations ofunregulated affiliates, andRG&E'sregulated BusinessSegmentswillnotpledgeanyutilityassetsassecurityforloansorfinancing arrangements forunregulated activities.

1PetitionforRelief68.Intheeventthatanyofthefollowing conditions occursorislikelytooccur,RG&EoranyotherPartytothisSettlement shallhavetherighttopetitiontheCommission forreviewoftheoperation ofthisSettlement andappropriate remedialaction:a.Returnonequity,determined onaRateYearregulatory basisforallremaining regulated operations, fallsbelow8.5percentorincreases above14.5percent;I.e.,subsequent toinitialinvestment. b.Pre-taxinterestcoveragefallsbelow2.5times;Governmental actionoccursthatcannotadequately beaddressed throughtheprovisions ofthisSettlement pertaining toMandates, including butnotlimitedto:ActionstakenbyFERCwithrespectto:jurisdiction overfunctions traditionally understood as"localdistribution" ofelectricity; ISOandPEfunctions andtransactions; andQualifying FacilityandIndependent PowerProducermatters.ii.ActionstakenbytheNRCwithrespectto:nuclear'decommissioning; nuclearwastedisposal; nuclearpowerplantoperating andsafetyrequirements; andfinancial standards fornuclearpowerplantoperators.

iii.NewYorkStateorfederallegislation pertaining to:energyindustryrestructuring; changestothePublicUtilityRegulatory PoliciesAct;andchangestothePublicUtilityHoldingCompanyActof1935.i69.AnyPartyseekingreviewpursuanttothepreceding paragraph shallhavetheburdenofshowingtotheCommission's satisfaction thatcontinued operation ofthisSettlement astothespecificbasisforthatParty'spetitionisunjustorunreasonable.

Insuchevent,theCommission maysuspendormodifyanyportionsofthisSettlement ortakeor0" oe.

i4-55-refusetotakeanyotheractionpermitted bylawunderthecircumstances astheythenexist,thetermsandprovisions ofthisSettlement notwithstanding.

70.ThePartiesacknowledge thattheCommission, pursuanttoitsstatutory responsibility, onitsownmotionoronrequestofanyparty,reservestheauthority toactontheleveloftheCompany's ratesiftheCommission determines thatunforeseen circumstances haverenderedtheCompany's ratesorreturnoninvestment unreasonable, inadequate orexcessive fortheprovision ofsafeandadequateservice.FilinReuirements 71.RG&EshallfilewiththeCommission, notlaterthanSeptember 30following eachRateYearsubjecttothisSettlement, (a)acalculation ofregulatory earningseoncommonequityforsuchRateYear,whichfilingshallbeusedforpurposesofdetermining whethertheCompany's earningsexceedorfallbelowthe11.80percentreturndescribed inparagraph 10,~sura,and(b)acalculation ofanypenalties incurredpursuanttotheServiceQualityPerformance Programdescribed inparagraph 44,~sura.72.RG&Eshallnot,asoftheeffective dateofthisSettlement, berequiredtomakeanyofthefilingsorcomputations requiredbythe1996Settlement.

73.Within90daysofapprovalofthisSettlement, theCompanywillfilewithStaffaplanoutlining themannerinwhichtheCompanywillcarryoutRetailAccessProgramphase-in.

Suchaplanshouldinclude,butnotbelimitedto,acustomereducation planandacustomerapplication procedure foreachstageoftheRetailAccessProgram.TheCompanywillconsultwithStaffandthePartiespriortofilingsuchaplan.DisutcResolution 74.Intheeventofanydisagreement overtheinterpretation ofthisSettlement ortheimplementation ofanyoftheprovisions ofthisSettlement, whichcannotberesolvedinformally amongtheParties,suchdisagreement shallberesolvedinthefollowing mannerunlessotherwise providedherein:ThePartiesshallpromptlyconveneaconference andingoodfaithshallattempttoresolvesuchdisagreement.

Ifanysuchdisagreement cannotberesolvedbytheParties,anyPartymaypetitiontheCommission forreliefonadisputedmatter.eBindinEffectofSettlement 75.ThisSettlement represents anegotiated agreement and,exceptasotherwise expressly statedherein,noneofthePartiesshallbedeemedtohaveapproved, agreedto,orconsented toanyprinciple, methodology orinterpretation oflaw,underlying orsupposedtounderlieanyprovision hereof,andthisSettlement shallnotbecitedorrelieduponwithrespectto.anymattersotherthanthosespecifically addressed herein.

0~-e SuersedinPriorSettlements 76.Exceptasexpressly providedotherwise herein,thisSettlement shall,uponapprovalbytheCommission, supersede theDSMSettlement andthe1996Settlement.

Modification ofSettlement 77.ApprovalbytheCommission ofthisSettlement shallconstitute approvalofallofitsterms.IftheCommission approvesthisSettlement initsentiretyormodifiesitinamanneracceptable totheParties,thisSettlement shallbeimplemented inaccordance withitsterms.BecausethisSettlement isanintegrated whole,witheachprovision inconsideration for,insupportof,anddependent ontheothers,anyattempttomodifyitstermsmayfrustrate itspurpose.Thus,iftheCommission doesnotapprovethisSettlement initsentirety, withoutoImodification, eachofthePartiesreservestherighttowithdrawitsacceptance byservingwrittennoticeontheCommission andtheotherPartiesandtorenegotiate and,ifnecessary, tolitigate, withoutprejudice, anyorallissuesastowhichsuchPartyagreedinthisSettlement; suchPartyshallnotbeboundbytheprovisions ofthisSettlement, asexecutedorasmodified, andthisSettlement shallnottakeeffect.EffectofAreement.I2,78.ThisSettlement callsforRGAEtomakemajor,andinsomecasesirreversible, commitments forthepurposeoffurthering thegoaloftheCommission torestructure theelectricindustryandtoreduceelectricratesintheStateofNewYork.RG8cE, e'eO.'0 byexecuting thisSettlement, ismakingsuchcommitments withtheexpectation th'atthePartiesandtheCommission shallcontinuetohonortheassurances embodiedinthisSettlement.

Specifically:

a.AspartofthisSettlement, RG8cEhasagreedtomakecommitments, asdescribed herein,including butnotlimitedtothefollowing:

(i)agreement towithdrawfromthethreeArticle78proceedings described inparagraph 79,infra;(ii)significant ratereductions; (iii)therestructuring oftheCompany's business; (iv)openingoftheCompany's serviceterritory tocompetitors; (v)providing retailaccesstocustomers; and(vi)resolving theKaminematterwhilecontrolling itsimpactonrates.b.RGAEhasmadeeachsuchcommitment inreturnforrateandotherassurances bytheCommission, including butnotlimitedtothefollowing:

(i)excepttotheextenttheCompanyhasexpressly agreedhereintoplacegeneration atmarketrisk,-""RGEcEshallhaveareasonable opportunity torecoverallprudently incurredinvestment andexpensesandtoearnareasonable returnoninvestments; (ii)theCompanyshallhaveaSeeparagraph 48,~sura.

0ry~i reasonable opportunity torecovertransition costs;(iii)ratetreatment fortheCompany's investment innuclearfacilities shallbeasdescribed herein;(iv)RG&Eshallbeaffordedareasonable opportunity tofundandtoundertake competitive businessactivities; and(v)theCompanyisentitledtorecoverKaminecosts.c.ThePartiesrecognize thatRGEcE'sparticipation inthisSettlement isbasedonthepremisethat,inadoptingthisSettlement, theCommission willfind,insubstance, that:(i)theforegoing commitments andassurances areinextricably interrelated; (ii)theratesestablished pursuanttothisSettlement arejustandreasonable tobothcustomers andshareholders throughJune30,2002;(iii)thereasonable opportunity forRGB.Etocontinuetorecovertheprudently incurredcostsreferredtoinsubparagraph b,~sura,-'"-'eyond thetermofthisSettlement isjustified; (iv)exceptasnotedherein,thisSettlement constitutes fullcompliance withtheCommission's Otherthanthefuturecostsofcompetitive businesses referenced insubparagraph b(iv),~sura. policiesidentified inOpinionNo.96-12;-""(v)thisSettlement isinthepublicinterest; and(vi)thereisaclearneedtoreducetheburdensimposedbyMandates.

Withdrawal fromLitiation79.Inconsideration fortheforegoing, RG&E,uponfinalapprovalofthisSettlement bytheCommission,-

'"'greestopetitiontheAppellate DivisionoftheSupremeCourtforpermission towithdrawasapartytotheappealintheArticle78proceeding broughttochallenge OpinionNo.96-12,EnervAssociation v.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.5830-96),

andtowithdrawtheCompany's pendingArticle78Iproceedings broughttochallenge theCommission's actionwithrespectto:(a)the1996eSettlement, Rochester GasandElectricCororationv.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.6616-96);

and(b)theCommission's June23,1997OrderEstablishing RetailAccessPilotProgramsinCases96-E-0948 etal.,Rochester GasandElectricCororationv.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.6531-97).

123!124/Fullcompliance pertaining tothefollowing tasksoutlinedinOpinionNo.96-12hasnotbeeneffectedbythisSettlement:

(a)afilingtodistinguish andclassifytransmission anddistribution facilities; (b)theproposedresolution ofmarketpowerproblemsasrelatedtoLoadPockets,asdiscussed inparagraph 25,~sura;(c)compliance withfutureESCOrequirements

(~e,oversight, meteringandbilling);

(d)compliance withfutureISOrequirements; and(e)continuation ofpublicforumstoprovideeducation andconsumerinputrelatedtocompetition andtheneedswithinRG&E'sserviceterritory.

I.e.,afteranyappealsfromsuchapprovalareexhausted orthetimetoappealhasexpired,whichever islater.'

0'0ry Withdrawal ofthetwoRochester GasandElectriccasesandRGkE'swithdrawal asapartytotheEnerAssociation caseshallbeeffectedthroughStipulations ofWithdrawal, mutuallyagreedtobyRGAEandtheCommission.

Untiltheaforementioned petitionwithrespecttotheEnervAssociation caseisgranted,theCompanywilldiscontinue itslitigation activities totheextentthatitisabletodosowithoutprejudicing itsrightsinanyofthethreeArticle78proceedings.

WO:ROCII:II3098 Rochester GasandElectricCorporation Cases94-E-09S2 and96-K%898AmendedandRestatedSettlement Agreement October23,1997Thepartywhosesignature followssubscribes totheforegoing AmendedandRestatedSettlcmcnt Ay'ccmcnL StaffoftheStateofNewYorkDepartment ofPublicServiceBy:lRobertL.Whitaker, DirectorOfficeofRegulatory Economics Rochester GasandElectricCorporation Cases94-E-0952 and96-E-OS98 AmendedandRestatedSettlement Agreement October23,1997Thepartywhosesignature followssubscribes totheforegoing AmendedandRestatedSettlement Agreement.

Rochester GasandElectricCorporation By:WilliamJ.ddyController

.0ROCII:I02096

'0'40' Rochester GasandElectricCorporation Cases94-E-0952 aud96-~898AmendedandRestatedSettlement Agreement October23,1997Thepartywhosesignature followssubscribes totheforegoing AmendedandRestatedSettleinent Agreement.

TheJointSupporters By:RubenS.BrownTheECubedCompany Rochester GasandElectricCorporation Cases94-E-09'Q 9&K%898AmendedandRestatedSettlement Agreement October23,'1997Thepartywhosesignature followssubscribes totheforegoing AmcndcdandRestatedSettlement Agreement.

NationalAssociation ofEnergyServiceCompanies By:RunS.Brown SCHEDULEARATE<S(INCLUDING ILLUSTRATIVE RATES)FORE<LECTRIC SERVICEROCIl:l00274 SCHEDULEARATES(INCLUDING ILLUSTRATIVE RATES)FORELECTRICSE<RVICEALLOCATION OFREDUCTIONS ROCII;I00214

,)Rochester GasandElectriorationAllocation ofRateReductions VoltageClassPresentRevenue(000's)PresentPrice7/1/97RateReduction (000's)PercentReduction KamineRecovery(000's)NetReduction (000's)NetPercentReduction NewRevenues(000's)NewPriceForecastSales(MWH)Industrial subtotal$76,321$0.0623$4410.58%4410.58%75,880$0.06191,224,884 subtra-comm subtra-sec Pfl-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%39,06313,27049,061112,117377,7420.07400.08790.08380.10030.1227528,206151,039585,2631,117,538 3,079,691 subtotal$594,307$0.1088$3,0530.51%$3,0530.51%$591,254$0.10835,461,736 Total$670,628$0.1003$3,4940.52%$3,4940.52%$667,134$0.09986,686,620 printed:10/22/97Page1

'e'e4 Rochester GasandE(ectriorationAllocation ofRateReductions 0VoltageClassPresentRevenue(000's)PresentPrice7/1/98RateReduction (000's)PercentReduction KamineRecovery(000's)NetReduction (000's)NetPercentReduction NewRevenues(000's)NewPriceForecastSales(MWH)industrial subtotal$76,321$0.0623$2,7523.61%6402,1122.77%74,209$0.06061,224;884 subtra-comm subtra-sec prlpflpri-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$0.0989528,206151,039585,2631,117,538 3,079,691 5,461,736 6,686,620 printed:10/22/97Page2 000t'0e iQ)Rochester GasandElectriorationAllocation ofRateReductions VoltageClassPresentRevenue(000's)PresentPrice7/1/99RateReduction (000's)PercentReduction KamineRecovery(000's)NetReduction (000's)NetPercentReduction NewRevenues(000's)NewPriceForecastSales(MWH)industrial subtotal$76,321$0.0623$69689.13%1,5485,4207.10%70,901$0.05791,224,884 subtra-comm subtra-sec pri-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%36,80412,44947,856110,452373,0020.06970.08240.08180.09880.1211528,206151,039585,2631,117,538 3,079,691 subtotal$594,307$0.1088$20,6453.47%6,901$13,7442.31%$580,563$0.10635,461,736 Total$670,628$0.1003$27.613418,449$19,1642.86%$651,464$0.09746,686,620 printed:10/22/97Page3

'00

<+)Rochester GasandElectricorationAllocation ofRateReductions VoltageClassPresentRevenue(000's)PresentPrice7/1/00RateReduction (000's)PercentReduction KamineRecovery(000's)NetReduction (000's)NetPercentReduction NewRevenues(000's)NewPriceForecastSales(MWH)Industrial subtotalS76,321S0.0623-S10,47513.73%1,9248,55211.20%67,769S0.05531,224,884 subtra-comm subtra-sec pri-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%35,68311,99447,148109,292369,7190.06760.07940.08060.09780.1201528,206151,039585,2631,117,538 3,079,691 subtotalS594,307S0.108829,0474.89%8,576$20,4713.44%S573,836S0.10515,461,736 TotalS670,628S0.1003S39,5225.89%10,499S29,0234.33%S641,605S0.09606,686,620 printed:10/22/97Page4 1o Rochester GasandElectricorationAllocation ofRateReductions VoltageClassPresentRevenue(000's)PresentPrice7/1/01RateReduction (000's)PercentReduction KamineRecovery(000's)NetReduction (000's)NetPercentReduction NewRevenues(000's)NewPriceForecastSales(MWH)industrial subtotal$76,321$0.0623$1049113.75%1,9248,56811.23%67,753$0.05531,224,884 subtra-comm subtra-sec pflpflpri-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$0.0942528,206151,039585,2631,1175383.079,691 5,461,736 6,686,620 printed:10/22/97Page5 SCHEDULEARATES(INCLUDING ILLUSTRATIVE RATES)FORELE<CTRIC SE<RVICE<

RATEDE<SIGNROClI:l00274 ILLUSTRATIVE RATEDESIGNTOBEPROVIDEDROCII:I00274 SCHEDULEARATES(INCLUDING ILLUSTRATIVE<

RATES)FORELECTRICSERVICEDISTRIBUTION ACCE<SSRE<VE<NUE<S ROC11:100274 ILLUSTRATIVE AVERAGEDISTRIBUTION ACCESSREVE<NUES TOBEPROVIDEDROCll:l00274 o

APPENDIXATOSCHEDULEAFLEXIBLEDISTRIBUTION ACCESSTARIFFOPTION1.TheCompanyshallhavetheoptiontonegotiate specialcontracts fordistribution accessservicewithLoadServingEntities("LSEs")thatservecustomers thathaveaviablecompetitive alternative.

ThepurposeofthisoptionistoallowtheCompanytoparticipate, withLSEs,ineffortstoretainortoattractdistribution customers intheCompany's serviceterritory andtherebytobenefitalldistribution customers.

A"competitive alternative" forthispurposeisdefinedasameansofmeetingelectricpowerneedswithoutmakinguseoftheCompany's distribution system,including relocation outsidetheCompany's serviceterritory.

2.Asatransitional arrangement forexistingSC-10customers, theCompanyshallhavethediscretion toofferthefollowing twooptions:ExtendthetermofanexistingSC-10contracttoJune30,2002,orb.Offeraprorateddistribution tariffdiscounttoanLSEthatservesthecustomer, fortheloadtakenbythatcustomer, throughJune30,2002.3.Theprorateddiscountwouldbecalculated inthefollowing manner: ~calculate theaveragepriceperKWHforaparticular contractatratesineffectattheendofitsterm-callthistheaveragecontractrate~calculate theaveragepriceperKWHforthatsamecontractassumingtheapplicable bundledtariffrates-callthistheaveragefulltariffrate~Calculate thefulldiscountperKWH-thisisequaltotheaveragefulltariffrateminustheaveragecontractratepro-ratethefulldiscounttodistribution ratesaccording tothisformula:distribution discount=fulldiscountx(averagecontractrate-3.2cents/KWH)/average contractrate-"Forexample,iftheaveragefulltariffratewas8cents,theaveragecontractratewas7cents,thediscountattributed todistribution rateswouldbe0.54cents.Theremainder wouldbeattributed in.essencetothecontestable costof3.2cents.ROCII:I00274

SCHEDULE8E4LECTRIC DEPARTMENT AMORTIZATIONS (Including Decommissioning Accruals)

(000's)12MOS.JUNE199812MOS.12MOS.JUNE1999JUNE200012MOS.JUNE200112MOS.JUNE2002NUC.FUELSTORAGER&DSITEREMIDATIONDSM/HIECA PENTREPI,IIPENTREFIIIPENSIONDEF'DADJ.OTHERDEF'DPROJICESTORMSALESUSETAXAUDITNMIILITIGATION/GE REVENUETAXAUDITFASB112CISPLUSLASERLIGHTSHOWERAMEXCESSEARNINGSNMP2SHARINGJOB010NMPSREFUELOUTII4TOTAL$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$19,175DECOMMISSIONING ACCRUALS'inna NineMile2$18,5123,646$18,5703,674$18,6313,705$18,6963,739$18,7653,775TOTALDECOM.ACCRUALS$22158$22244$22336.-$22435$22540'hederivation ofdecommissioning accrualsisdescribed inScheduleD.ROCInn3025

SCHEDULECMANUFACTURING CLASSIFICATIONS (Standard Industrial Classifications

-DivisionD.Manufacturing)

MajorGroup20FoodandKindredProductsIndustryGroupNo.201MeatProducts202DairyProducts203Canned,Frozen,andPreserved Fruits,Vegetables, andFoodSpecialities 204GrainMillProducts205BakeryProducts206SugarandConfectionery Products207FatsandOils208Beverages 209Miscellaneous FoodPreparation andKindredProductsMajorGroup21TobaccoProductsIndustryGroupNo.211Cigarettes 212Cigars213ChewingandSmokingTobaccoandSnuff214TobaccoStemmingandRedryingMajorGroup22IndustryGroupNoTextileMillProducts221BroadWovenandFabricMills,Cotton222BroadWovenFabricMills,ManmadeFiberandSilk223BroadWovenFabricMills,Wool(Including DyeingandFinishing) 224NarrowFabricandOtherSmallwaresMills:Cotton,Wool,Silk,andManmadeFiber225KnittingMills226DyeingandFinishing

Textiles, ExceptWood,FabricsandKnitGoods227CarpetsandRugs228YarnandThreadMills229Miscellaneous TextileGoods MajorGroup23AarelandOtherFinishedProductsMadefromFabricsandSimilarIndustryGroupNoMaterials 231Men'sandBoys'uits, Coats,andOvercoats 232Men'sandBoys'urnishings, WorkClothing, andAlliedGarments233Women',Misses',andJuniors'uterwear 234Women',Misses',Children',

andInfants'ndergarments 235Hats,Caps,andMillinery 236Girls',Children',

andInfants'uterwear 237FurGoods238Miscellaneous ApparelandAccessories 239Miscellaneous Fabricated TextileProductsMajorGroup24IndustryGroupNo.LumberandWoodProductsexcetFurniture 241Logging242SawmillsandPlaningMills243Millwork, Veneer,Plywood,andStructural WoodMembers244WoodContainers 245WoodBuildings andMobileHomes249Miscellaneous WoodProductsMajorGroup25IndustryGroupNoFurniture andFixtures251Household Furniture 252OfficeFurniture 253PublicBuildingandRelatedFurniture 254Partitions,

Shelving, Lockers,andOfficeandStoreFixtures259Miscellaneous Furniture andFixturesMajorGroup26IndustryGroupNoPaerandAlliedProducts261PulpMills262PaperMills263Paperboard Mills265Paperboard Containers andBoxes267Converted PaperandPegboardProducts, ExceptContainers andBoxesMajorGroup27IndustryGroupNoPrintinPublishin andAlliedIndustries 271Newspapers:

Publishing, orPublishing andPrinting272Periodicals:

Publishing, orPublishing andPrinting273Books274Miscellaneous Publishing 275Commercial Printing 00~ (Cont'd)MajorGroup27IndustryGroupNoPrintinPublishin andAlliedIndustries 276ManifoldBusinessForms277GreetingCards278Blankbooks,Looseleaf Binders,andBookbinding andRelatedWork279ServiceIndustries forthePrintingTradeMajorGroup2SIndustryGroupNoChemicals andAlliedProducts281Industrial Inorganic Chemicals 282PlasticsMaterials andSynthetic Resins,Synthetic Rubber,Cellulosic andOtherManmadeFibers,ExceptGlass283Drugs284Soap,Detergents, andClearingPreparations;

Perfumes, Cosmetics, andOtherToiletPreparations 285Paints,Varnishes,

Lacquers, Enamels,andAlliedProducts286Industrial OrganicChemicals 287Agricultural Chemicals 289Miscellaneous ChemicalProductsMajorGroup290IndustryGroupNo.Petroleum RefininandRelatedIndustries 291Petroleum Refining295AsphaltPavingandRoofingMaterials 299Miscellaneous ProductsofPetroleum andCoalMajorGroup30IndustryGroupNoRubberandMiscellaneous PlasticsProducts301TiresandInnerTubes302RubberandPlasticsFootwear305Gaskets,Packing,andSealingDevicesandRubberandPlasticsHoseandBelting306Fabricated RubberProducts, notElsewhere Classified 308Miscellaneous PlasticsProductsMajorGroup31IndustryGroupNo.LeatherandLeatherProducts311LeatherTanningandFinishing 313BootandShoeCutStockandFindings314Footwear, ExceptRubber315LeatherGlovesandMittens316Luggage317HandbagsandOtherPersonalLeatherGoods319LeatherGoods,NotElsewhere Classified 000o 4MajorGroup32StoneClayGlassandConcreteProductsIndustryGroupNo.321FlatGlass322GlassandGlassware, PressedorBlown323GlassProducts, MadeofPurchased Glass324Cement,Hydraulic 325Structural ClayProducts326PotteryandRelatedProducts327Concrete, Gypsum,andPlasterProducts328CutStoneandStoneProducts329Abrasive,

Asbestos, andMiscellaneous Nonmetallic MineralProductsMajorGroup33PrimaMetalIndustries 331SteelWorks,BlastFurnaces, androllingandFinishing Mills332IronandSteelFoundries 333PrimarySmeltingandRefiningofNonferrous Metals334Secondary SmeltingandRefiningofNonferrous Metals335Rolling,Drawing,andExtruding ofNonferrous Metals336Nonferrous Foundries (Castings) 339Miscellaneous PrimaryMetalProductsMajorGroup34Fabricated MetalProductscxcctMachine;ind TransortationIndustryGroupNo.~Euiment341MetalCansandShippingContainers 342Cutlery,Handtools,andGeneralHardware343HeatingEquipment, ExceptElectricandWarmAir;andPlumbingFixtures344Fabricated Structural MetalProducts345ScrewMachineProducts, andBolts,Nuts,Screws,Rivets,andWashers346MetalForgingsandStampings 347Coating,Engraving, andAlliedServices348OrdnanceandAccessories, exceptVehiclesandGuidedMissiles349Miscellaneous Fabricated MetalProductsMajorGroup35IndustryGroupNoIndustrial andCommercial MachineandComuterKuiment":SlEnginesandTurbines')52FarmaiidGardenMachinery andEquipment 00 (Cont'd)MajorGroup35Industrial andCommercial MachineandComuterEuimentIndustryGroupNo.353Construction, Mining,andMaterials HandlingMachinery andEquipment 354MetalWorkingMachinery andEquipment 355SpecialIndustryMachinery, exceptMetalworking Machinery 356GeneralIndustrial Machinery andEquipment 357ComputerandOfficeEquipment 358Refrigeration andServiceIndustryMachinery 359Miscellaneous Industrial andCommercial Machinery andEquipment MajorGroup36Electronic andOtherElectrical EuimentandComonentsE<xcetComuterEuimentIndustryGroupNo.361ElectricTransmission andDistribution Equipment 362Electrical Industrial Apparatus 363Household Appliances 364ElectricLightingandWiringEquipment 365Household AudioandvideoEquipment, andAudioRecordings 366Communications Equipment 367Electronic Components andAccessories 369Miscellaneous Electrical Machinery, Equipment, andSuppliesMajorGroup37IndustryGroupNoTransortationE<uiment371MotorVehiclesandMotorVehicleEquipment 372AircraftandParts373ShipandBoatBuildingandRepairing 374RailroadEquipment 375Motorcycles,

Bicycles, andParts376GuidedMissilesandSpaceVehiclesandParts379Miscellaneous Transportation Equipment MajorGroup38MeasurinAnalzinandControllin Instruments PhotorahicIndustryGroupNoMedicaland0ticalGoodsWatchesandClocks381Search,Detection, Navigation,

Guidance, Aeronautical, andNauticalSystems,Instruments, andEquipment 382Laboratory Apparatus andAnalytical,.Optical, Measuring, andControlling Instruments 384Surgical, Medical,andDentalInstruments andSupplies385Ophthalmic Goods386Photographic Equipment andSupplies387Watches,Clocks,Clockwork OperatedDevices,andParts MajorGroup39Miscellaneous ManufacturinIndustries 391Jewelry,Silverware, andPlatedWare393MusicalInstruments 394Dolls,Toys,GamesandSportingandAthleticGoods395Pens,Pencils,andOtherArtists'aterials 396CostumeJewelry,CostumeNovelties, Buttons,andMiscellaneous Notions,ExceptPreciousMetal399Miscellaneous Manufacturing Industries ROC11:101302 SCHEDULEDNUCLEARDECOiVIMISSIONING 1.Itis-agreed thattheprojected costofdecommissioning RG&E's100%ownedGinnaNuclearPowerPlantanditsshareofthecostofdecommissioning NineMilePoint2,shallbebasedonsite-specific studiesandmethodssubmitted bytheCompany.2.ThestudyforGinnaestimates thatthedecommissioning ofGinnawillcost$296,303,000 in1995dollars.Ifthisamountisinflatedby4.0%annually, theprojected costofdecommissioning thefacilityin2009is$513,100,000.

3.ThestudyforNineMilePoint2estimates thatdecommissioning RG&E's14%shareofNineMilePoint2willbe$112,840,000 in1995dollars.Ifthisamountisinflatedby4.0%annually, theprojected costofRG&E'ssharein2026is$380,624,000.

4..Theafter-tax interestratesprojected tobeearnedbytheamountscollected fordecommissioning theseplantsare6.40%foreachplant'sexternalfundestablished toqualifyforacurrenttaxdeduction underInternalRevenueService("IRS")rulesand4.77%foreachplant'snon-IRSqualified externalfund.Theratesestablished pursuanttotheSettlement towhichthisScheduleisattachedarebasedonfundingthecontaminated portionsoftheunits,asrequiredbytheNuclearRegulatory Commission

($470,119,000 for.Ginnaand$343,318,000 forNineMilePoint2),usingexternalfundingmethods.5.Theannualexpenseallowance incorporated inratesforGinna,basedonexternalfunding,is$17,362,000 fortherateyearsendingJune1998throughJune2002.The annualexpenseallowance incorporated inratesforNineMilePoint2,basedonexternalfunding,is$3,374,000 forrateyearsendingJune1997throughJune2002.Theseamountsaretobedeposited inseparateexternalfundssetupsolelyforthepurposeofaccumulating decommissioning fundsforeachplant.~~6.Additional annualexpenseallowances incorporated inratesforGinna,basedoninternalfunding,are$1,150,000,

$1,208,000,

$1,269,000,

$1,334,000, and$1,493,000 forrateyearsendingJune1998,1999,2000,2001and2002,respectively.

Theadditional annualexpenseallowances incorporated inratesforNineMilePoint2basedoninternalfunding,are$272,000,$300,000,$331,000,$365,000,and$401,000forrateyearsendingJune1998,1999,2000,2001and2002,respectively.

Theseadditional amountsareforthedecommissioning andremovalofnon-contaminated facilities atGinnaandNineMilePoint2.ROCII:I0055I o

SCHEDULEELARGECUSTOMERCREDITPROGRAMExceptasotherwise providedinthisSettlement, thisScheduleEsupersedes the"DemandSideManagement Plans"contained inthe1996Settlement asScheduleF.ThisScheduleEisintendedtocontinuetheLargeCustomerCreditProgram("LCCP")totheextentthatDSMcostscontinuetoberecovered inrates,whetherthroughanSBCorotherwise.

AllSCNo.8customers who,underthe1996Settlement (Schedule F),wereeligibletoexercisetheoptionnottoparticipate inRG&E'sDSMprogramsandwho,infact,exercised suchoption,shallcontinuetobecoveredbytheLCCPpursuanttothetermsofthisSchedule.

TotheextentthatRG&EmayberequiredtofileaDSMPlanforanyperiod~withinthetermofthisSettlement andtheCompanyisnotprohibited fromcontinuing theLCCP,RG&Eshallprovidenoticeofthisoptiontoeligiblecustomers atleastoncepriortothecommencement ofeachsuchDSMPlan.Suchnoticeshallbegivennotearlierthansixty(60)norlaterthanthirty(30)dayspriortothecommencement ofeachSuchDSMPlan.Eligiblecustomers shallhavethirty(30)daysaftersuchnoticetoelectwhethertoexercisesuchoption.Suchcustomers shallceasetobeeligiblefordirectparticipation inanyaspectofRG&E'sDSMprograms.

Theelections ofsuchcustomers shallbeeffective fortheremaining termofthisSettlement.

2.Throughout thetermofthisSettlement, anySCNo.8customerwhoelectsnottoparticipate inRG&E'sDSMprogramsandwhocomplieswiththecriteriafortheLCCPshallreceiveabillingcreditof$0.0003perKWHofconsumption fromthelatterof thedateofcompliance orthedateofcommencement oftheDSMPlantowhichthecustomer's electionnottoparticipate relates;providedthatsuchcustomershallnotreceiveanybillingcreditapplicable tothecalendaryearduringwhichsuchcustomerreceivespaymentsfromRG&Eunderthatyear'sDSMprograms.-"

Theforegoing creditshallbesubjecttorecalculation intheeventthatRG&E'sspendingonDSMprogramchangesmaterially.

Inotherwords,ifacustomerreceivesapaymentin1997,offeredpursuanttoRG&E'sinitial(January1997throughJune199S)Flan,thecustomercannotreceiveabillingcreditduringtheperiodcoveredbythatPlan.Ontheotherhand,acustomerwhoreceivesapaymentin1997pursuanttoaplanineffectforaprioryearwillbepermitted toreceiveabillingcreditin1997ifthatcustomerotherwise qualifies fortheelection.

ROCII:l02N3 SCHEDULEFLOW-INCOME PROGRAMThisScheduleFsupersedes theLow-Income Programcontained inthe1996Settlement asScheduleG.Customerualifieations 1.TheLow-Income Program(the"Program"

)shallbeavailable toRG&Ecustomers whomeetallofthefollowing criteria:

a.ThecustomermustbeagasheatingorelectricheatingcustomeroftheCompany.b.Thecustomermustbepayment-troubled orinarrears.c.ThecustomermustbeHEAPeligible.-"

d.Thecustomermustagreetoreceiveahomeenergyauditattheappropriate residence.

e.Thecustomermustagreetoparticipate inhousehold budgetmanagement training.

IntheeventthattheHEAPprogramisdiscontinued, RGEcEshallapplycomparable criteria.

e- T~G2.Inadditiontoidentifying customers whomeettheProgramcriteriastatedinparagraph 1,~sura,RG&Eshallmakeaparticular efforttoidentifyqualified elderlycustomers whocouldbenefitfromtheProgram.3.RG&Eshallworkwithappropriate socialagenciesandnot-for-profit organizations toidentifyappropriate customers forparticipation intheProgram.~

Pro~ramSize4.Duringthefirstrateyearunderthe1996Settlement (July1,1996throughJune30,1997),RG&Eshallhaveenrolled350participants intheProgram;duringthefirstrateyearundertheinstantSettlement (July1,1997throughJune30,1998),RG&Eshallhaveenrolled700participants; andduringthesecondrateyearofthisSettlement (July1,1998throughJune30,1999),RG&Eshallhaveenrolled1,000participants.-"

Suchagenciesandorganizations includetheOfficefortheAging,RuralOpportunities Inc.,theChildAssistance ProgramoftheDepartment ofSocialServices("DSS")andlocalDSSoffices.RG&Eshallmakeareasonable efforttoreplacecustomers whodropoutoftheProgram.

ProramCpmoncnts5.Eachparticipant whocomplieswiththeProgramcriteria'shall beeligibletoparticipate, andshallbeencouraged toparticipate, intheProgramforthreeyears.6.Duringthefirstyearofparticipation intheProgram,eachparticipant shallbeexpectedtomakemonthlypaymentsoncurrentbillsofatleast75percentofthebudgetbillingamount.Theactualamounttobepaidshallbegreaterthan75percentifthecustomerisfoundtobecapableofmakingsuchgreaterpayments.

Theremainder ofsuchmonthlypaymentsshallbeforgivenduringthecustomer's participation intheProgram.Duringtl>esecondandthirdyearsofparticipation, eachcustomershallbeexpectedtomakefullpaymentofthebudgetbillingamount.7.Aparticipant whohascompliedwithallProgramcriteriaforatleastonefullyearshallreceiveforgiveness of25percentofthecustomer's arrearsbalance.Aparticipant whohascompliedwithallProgramcriteriaforatleasttwofullyearsshall'receive forgiveness ofanother25percentofthecustomer's arrearsbalance.Aparticipant whohascompliedwithallProgramcriteriaforatleastthreefullyears,andthushascompleted theProgram,shallreceiveforgiveness oftheremaining 50percentofthecustomer's arrearsbalance.8.EachProgramparticipant shallreceiveenergyconservation andutilization education throughreceiptofaSavingPower energyauditandEndServeanalysisorsimilarservices.

~-e0, 49.EachProgramparticipant shallreceivetraininginhousehold financial management, budgeting andwisepurchasing practices.

.10.Collection activityshallbesuspended duringtheperiodthattheparticipant remainsincompliance withProgramcriteria.

~~11.Programparticipants shallbedirectedtoappropriate DSMprogramsandweatherization

programs, ifany.CostRecove12.ThecostoftheProgramshallberecovered entirelytliroughresidential electricrates.13.Forpurposesofcostrecovery, arrearsforgiveness shallbeassumednottoexceed$850percustomer.

14.Recoverable administrative costsshallnotexceed20percentoftotalProgramcostswhichshallbecalculated byrecognizing arrearsforgiveness intheyearinwhichaparticipant enterstheProgram.Evaluation 15.RG&Eshallevaluatethecost-effectiveness oftheProgramandreporttheresultstotheCommission beforetheendoftheSettlement period.Suchevaluation shallincludeanalysisofthebenefitsoftheProgram.ROCII:I0I036

SCHEDULEGSERVICEQUALITYPERFORMANCE PROGRAMThisSchedule6supersedes theServiceQualityPerformance

("SQP")Programcontained inthe1996Settlement asScheduleH.Overview1.RG&EshallcontinuetheSQPProgramproviding forpenalties ofuptoatotalof$1,250,000 forfailuretoachievetheminimumacceptable criteriafortheservicequalitymeasuresdescribed below.Thespecificoperation ofthepenaltysystemisdescribed below.2.TheSQPProgramshallconsistoftwoprincipal components, anElectricReliability component andaCustomerServicecomponent, asdescribed below.ElectricReliabili 3.ElectricReliability shallbemeasuredintermsoftheSystemAverageInterruption Frequency Index("SAIFI")

andtheCustomerAverageInterruption DurationIndex("CAIDI"),

calculated inaccordance withCommission requirements.-"

Measurement shallbeonaweightedaverage"-

Company-wide basis.ForSAIFI,theminimumacceptable levelshallbe1.27.ForCAIDI,theminimumacceptable levelshallbe1.73.SeeCases90-E-1119 and95-E-0165.

Individual districtdataincludedshallbeweightedbythenumberofcustomers represented.

4.ThemaximumpenaltyforSAIFIandCAIDIshallbe$375,000each.5.ForSAIFI,penalties shallbegraduated, applyingasfollows:25percentofthemaximumpenaltywhenperformance exceedstheminimumacceptable level;50percentofthemaximumpenaltywhenperformance exceeds105percentoftheminimumacceptable level;andthefullpenaltywhenperformance exceeds110percentoftheminimumacceptable level.ForCAIDI,thefullpenaltyshallapplywhenperformance exceeds110percentoftheminimumacceptable level.CustomerService6.CustomerServiceshallbemeasuredintermsofthesixcriterialistedinthefollowing table,alongwiththerespective performance levelsbelowwhichtheindicated percentages ofthemaximumallowable penaltywouldbeimposed:' Measure25%Penalty,50%

Penalty100%Penalty'ppointments Kept99.0%CallsAnsweredw/in30Seconds73%71.5%700/BillsAdjusted2.70%2.85%3.00%Estimated Bills-Unscheduled-"

13.7%Closed-Loop CustomerSatisfaction Survey-"PSCComplaints (per100,000customers) 9.07.Themaximumpenaltyforeachofthemeasureslistedinparagraph 6,~sura,shallbe$83,000.Underthe1996Settlement, theTargetlevelwassetattherateyearaveragetargetpertheMeterReadingImplementation Plan.ThislevelshallbeupdatedforthefirstandsecondrateyearsoftheinstantSettlement periodpertheMeterReadingImplementation Plan.Targetlevelsforthefirstandsecondratey'earsoftheinstantSettlement periodshallbesetasdescribed inparagraph 11,infra.

e.

Imlementation ofPenalties 8.Penalties assessedpursuanttothisScheduleshallbetreatedinaccordance withparagraph 30oftheSettlement.

9.TheCompanyshallhavetherighttoseekawaiverofanypenalties resulting frombelow-target performance forcallsansweredwithin30seconds,billsadjustedandPSCcomplaints onanyofthegroundslistedbelow:a.performance belowthetargetlevelresultedfromcircumstances beyondtheCompany's control;b.performance belowthetargetresultedfromactionstakentoimprovelong-term performance inthatmeasureofcustomerservice;c.performance belowthetargetlevelresultedfromactionstakentoimproveshort-orlong-term performance inanotheraspectofcustomerservice;and'.performance belowthetargetlevelresultedfromtheimplementation ofcompetition.

Anyoftheforegoing conditions, ifshowntoexist,shallbegroundsforawaiver.TheCompanyshallhavetheburdenofdemonstrating thatoneormoreoftheconditions occurred. Closed-Lop CustomerSatisfaction Surve10.TheClosed-Loop CustomerSatisfaction Surveyshallbedesignedtomeasureandtrackcustomersatisfaction withRGAE'scustomerserviceprocesses.

TheSurveyshallfocusoncustomerserviceprocesses thathavethegreatestpotential toimprovecustomersatisfaction.

ThePartiesacknowledge, however,thattheareasonwhichtheSurveyfocuseswilllikelychangeovertheSettlement period.11.ForthefirstandsecondrateyearsoftheSettlement period,thePartiesshallhaveanopportunity toreviewtheSurveyprocess,togainconfidence thattheSurveyprocesswillresultinreliabledataregarding customersatisfaction withtheCompany's customerserviceprocesses.

ThePartiesshallhaveanopportunity toreviewandreachagreement regarding proposedtargetlevels.IfthePartiesarenotconfident thattheSurveyprocesswillproducereliabledataasdescribed above,orareunabletoagreeonacceptable targetlevels,thePartiesshallemploythedisputeresolution mechanism providedintheSettlement toresolvetheissue.TheCompanyshallmeetwiththePartiesinMaypreceding thebeginning ofeachrateyeartodiscusstheseissuesandsuchreviewprocessshallbecompleted 30daysaftertheCompanyprovidesStaffwiththeinformation necessary tocompleteitsreview.

OtherMatters12.Performance forallmeasuressubjecttotheSQPProgramshallbecalculated onarateyearaveragebasis.ROCII:I12639

a.

SCHEDULEHRETAILING FUNCTIONS

¹tes:(1)PPrimaryresponsibility forfunction.

S-Secondary responsibility forfunction.

Relationship tobegovernedandfurtherclarified byOperating Agreement underdistribution tariff.(2)Therelationship betweentheISO/PE(Independent SystemOperator/Power Exchange) andthediscoisnotyetclear.Forpurposesofdeveloping acompletelistofLSE/disco activities, thediscoisassumedtoactasalocalextension oftheISO/PEforactivities requiredtomaintainsystemreliability andsecurity.

(3)Functions thatarethesoleresponsibility ofthediscohavebeeneliminated fromthislist.Functions Load-Serving EntityResponsibilities DiscoResponsibilities 1.Systemrequirements forecasting,

planning, andbudgeting (Forecast futureenergydeliverysystemcapability/

infrastructure requirements.

Preparedetailedplansandbudgetstomodifysystemtomeetrequirements.)

2.Energysystemworkmanagement, including prioritization, scheduling, andcoordination (Prioritize,

schedule, andcoordinate theefficient useoflaborandmaterials tomeetcustomerrequests, aswellastheconstruction andmaintenance oftheenergysystem.)3.Designanddocumentation ofsystemoperating rules,operating agreements, andoperating procedures (Managereal-time construction andmaintenance ofthedeliverysystem,agreements withenergysuppliers andtheISOwithrespecttodeliveryandreceiptofenergy,protection ofthesystemduringextremeoperating conditions suchasloadshedding, voltageandpressurereductions, andrequestsforfuelswitching andcurtailment ofgasorelectricusage.)4.Negotiation andadministration ofcontracts forbalancing andancillary services(Ancillary servicesrequiredforsecureandreliabledeliveryofenergy;balancing servicestocovervariances betweenreal-time deliveries andreal-time energyconsumption.

Includesaccounting andinvoiceprocessing support.)

SProvideenergysalesforecasts fordiscoaggregation SWorkwithdiscotosetemergency andnon-emergency workpriorityandresponsetimeguidelines SWorkwithdiscotodesignoperating rules,agreements, andprocedures SMaycontractwithanon-disco providerforsomeancillary

services, asprovidedbyFERCrulesPAllactivities PAllactivities PAllactivities pAllactivities ROC11:101531 Functions Load-Serving EntityResponsibilities DiscoResponsibilities 5.Shorttermforecasting andscheduling ofsystemenergyrequirements (Daily,monthly,andseasonalenergyforecasts, short-termscheduling ofenergyreceiptanddelivery, short-term scheduling ofbalancing andancillary services.)

6.Real-time controlandmonitoring oftheenergydeliverysystem(Real-time useofenergybalancing andancillary

services, real-time interaction withISOandthird-party suppliers ofenergy,real-time application andenforcemcnt ofsystemoperating rules,operating agreements, andoperating procedures, real-time interpretation ofSCADAinformation) 7.Energyimbalance management andcoordination forthedistribution area(Identify imbalances, tradeimbalances, acquireorcurtailenergysupplytoresolveimbalances, allocateimbalance costs,setimbalance performance standards andmonitorcompliance amongmarketparticipants, acquireandmanage/process real-time customermeterdataforimbalance diagnosis) 8.Management ofsystemrestoration (Performance oftasksrequiredtoanalyze,coordinate,

schedule, andfacilitate restoration oftheenergysupplysysteminatimely,safemanner.)SProducedaily,monthly,andseasonalenergyforecasts forcustomers withreal-time meters.Scheduledeliveries todiscointerchange point/citygatebasedonthoseforecasts, andbasedonloadshapesforcustomers withoutreal-timemeters.SRespondtodisco/ISO operating requirements real-time SProvidedataasrequiredbyagreement withdiscoSProvidepersonnel andresources tosupportrestoration activities PAllotheractivities, including developing standardloadshapesandload-shape-based forecasts forusebyLSEswherereal-timemetersarelacking;forecasting totalsystemenergyrequirements; andaggregating LSEdeliveryschedules todetermine requirements forloadbalancing andancillary services.

PAllotheractivities PAllotheracttvittes PAllotheractivities ROC11:101531 o Functions Load-Serving EntityResponsibilities DiscoResponsibilities 9.Dispatchoffieldpersonnel forunscheduled energysystemworkp'orespondtosame-dayrequestsforcustomerserviceandresponsetoemergency oroutagesituations.)

¹terThismayincluderepairsofequipment andfacilities onthecustomersideofthemeterifsuchrepairswillfacilitate arapidreturntoservice.SDepending ontermsofagreement withdisco,mayreceivefirstcustomernotification ofoutagesoremergencies, maydispatchfieldpersonnel tomakeinitialdiagnosis ofproblem,maydispatchfieldpersonnel forrepairsofcustomer-side-of-the-meterequipment andfacilities.

PAllotheractivities, possiblyincluding trackingofcostsforcharge-back tocustomer's LSE10.Real-time responsetocustomerserviceandfieldpersonnel inquiries forenergydeliveryfacilities'nformation (Providedataforstake-outs andtorespondtosuchcustomerrequestsaswhentheycanexpecttoreturntoserviceafteranoutage.Futurecustomerrequestscouldaddresssuchcustomerissuesasinterruptions ofcustomer/generator bilateral contracts foroperating reasons.)

11.Coordination andmaintenance ofemergency responseplansandtraining(Develop, coordinate, anddocumentemergency responseplans,andassociated trainingrequirements, including emergency responsedrills.)¹te:Emergencies include,forexample,wire-downreports(including phoneandcablewire-downs),individual orlocalserviceoutagcs,large-scaleserviceoutages(e.g.,icestorms),poleandcablehits,andpipedig-ups.12.Deliverenergyfromthecitygate/interchange pointtotheend-userSDepending ontermsofagreement withdisco,mayprovideinterface betweendirectretailcustomerqueryanddtsco.SParticipate indevelopment ofemergency responseplansandensurepersonnel aretrainedasagreedbyLSEsanddtscoSScheduleenergydeliveries (pluslosses)tocitygate/interchange pointandinformdiscoaccordingly PAllotheractivities PAllotheractivities PAllotheractivities ROC11:101531 Functions Load-Serving EntityResponsibilities DiscoResponsibilities.

13.Distributed generation/back-up generation/buy-back powermanagement ofinteraction withenergysystem(Identify interface requirements, accommodate partialandfulloutagesofcustomer-sited generation, analyzeandresolvepowerqualityandsystemoperating issuesduetosuchgeneration, setandenforceperformance standards.)

Nore:ItisnotclearwhethertheLSEordiscowouldbebestpositioned tohaveultimateauthority andaccountability overcustomer-sited generation.

14.Powerquality(Acceptcustomercalls,diagnoseproblems, determine problemaccountability (callingcustomer, othercustomers, discofacilities),

prioritize,

schedule, andcoordinate problemresolution, implement problemresolution.)

Note:Powerqualitymayrequireacollaborative approachamongsomeorallLSEs,thediscoandcustomers andproviders withpowerqualityconcernstoaddressmulti-customer orcross-customerissues.15.Marketresearch(Collect, analyze,andreportcustomerdataforthesupportofplanninganddevelopment ofnewandexistingproductsandservices.)

16.Qualityservicemanagement (Serveasaninternaladvocateforthecustomer; collectandanalyzecustomerdataforfeedbackonserviceperformance andproductquality.)

SPurchaseallpowerfromcustomergenerators (notsoldtootherLSEs)andprovideback-uppower.Depending onagreement withrEsco,mayinterface betweendiscoandcustomer.

PAllotheractivities PAllotheractivities PAllotheractivities PSetandenforceinterface requirements, including imposingnon-performance penalties.

SProvidediagnostic supportuponLSErequest,andresolvepowerqualityproblemsattributable todiscofacilities oroperations, including trackingcostsandbillingLSEsasappropriate SWorkwithLSEstounbundlewholesale distribution servicestoallowforproductdifferentiation SWorkwithLSEstosetandmaintaindeliveryservicequalitystandards andperformance ROC11:101531 r Functions Load-Serving EntityResponsibilities DiscoResponsibilities 17.Marketing, including pricingdesignidentifyvaluethroughproductsandservicestocustomers andcustomersubgroups basedonneedsanddesiresidentified throughmarketresearch.

Coordinate cross-functional teamsforproductdesignandpricing,positioning, andpromotion oftheproductandservice.)

¹re:Doesnotincluderegulated tariffs,addressed separately below.18.Sales(Prospecting, communicating, andsellingproductsandservicestocustomers)

PAllotheractivities PAllactivities S%'orkwithLSEstounbundlewholesale distribution servicestoallowforproductdifferentiation.

¹A19.Maintenance ofthirdpartyrelationships (Maintain relationships withthirdpartieswhoalsohaverelationships withretailcustomers forenergyorenergy-related productsandservices.)

Note:Includesconducting trainingfortradeallies,workingwithlocalgovernments toconductmunicipally-mandated undergrounding andotheractivities, actingonbehalfoflow-income customers tofacilitate Department ofSocialServiceactivities, responding tofiredepartment requeststoaddresspossiblegasleaksandwire-downs,workingwithvariousdisasterandemergency officesandorganizations, interfacing withlocalgovernments andpublicinterestgroups,participating inIEEEstandards groups,and,inthefuture,negotiating

services, prices,performance standards, anddataexchangearrangements withLSEs.)20.Responding tocustomerinquiries andrequestsincludesturn-on/shut-off, requestsforoutage-related information, application processing, requestsforaccountinformation, andrequestsforinformation regarding energytechnologies andend.uses.)

SMaintainrelationships withdiscos,otherLSEs,andjointventures/alliances/

suppliers.

PAllotheractivities Maintainrelationships withemergency-andsafety-related organizations, LSEs,suppliers, andDSSandotherpartiesinvolvedinproviding fundingforservicestoretailcustomers whocan'payfullpriceforthem.SImplement turn-on/shut-off.

Provideinformation uponrequestconcerning thestatusofoutageswhoserestoration isbeingmanagedbythediscoROC1n101531 0'4~o Functions 21.Management oftherevenuecollection process(Obtainconsumption information, billcustomerconsistent withserviceagreement, acceptandprocesspayments, managedelinquent

accounts, maintainaccuracyandintegrity ofcustomerrecords.)

Note:Includesdesign,operations, andmaintenance of'ISandotherinformation systemsinfrastructure.

22.Facilitation ofcustomertradingofimbalances andstoragebalances(Providecustomers withanefficient meansofengagingintransactions withothercustomers tomitigateexpenseassociated withenergyimbalances.)

¹te:Responsibility andpractices maybedifferent forgasandelectricity.

23.Development andimplementation of-publicinvolvement programs(Communicate withthcgeneralpublicforpurposeofeducation, information

exchange, andtoaddresscustomercomplaints whichmayotherwise elevatetoaPSCcomplaint.)

¹re:Tofacilitate development ofthecompetitive retailmarket,allcustomer-interface activities shouldeventually beconducted bytheLSEratherthanthedisco.24.Regulatory coordination andtariffdesign(ServeastheliaisonbetweentheCompanyandregulatory bodies,designtariffs,conductratecases.)¹te:Discoandregulated LSEwillremainunderrate-of-return andotherStateregulation.

Load-Serving EntityResponsibilities PConductthistaskattheretaillevel,forrevenuecollected directlyfromretailcustomers PConductthistaskattheretaillevel,forretailcustomers withreal-time meterswhohavebeengiventheoptionintheirretailproductdesignofavoidingtheflow-throughofwholesale imbalance chargesPAllotheractivities SRegulated LSEwillhaveretailtariffresponsibilities thatcompetitive LSEswillnot.AllLSEsmayneedtocomplywithlicensing andreporting requirements.

DiscoResponsibilities SConductthistaskatthewholesale level,forrevenuecollected fromLSEsSConductthistaskatthewholesale level,forLSEsonlySProvidefundingthroughpublicpolicychargePWholesale distribution tariffandotherregulatory coordination activities.

ROC11:101531

'0~o Functions Load-Serving EntityResponsibilities DiscoResponsibilities

~25.Forecasting ofcustomerenergyrequirements (Forecasting ofelectricsystemandinstalled reservecapacityandenergyrequiredtomeetcustomerdemandforelectricenergy,including forecasts forspecificgroupsand/orindividual customers asrequiredbyfutureservice/tariff designs.Forecasts canbedaily,monthly,seasonally and/orlong-term.)

26.Scheduling ofcapacityandenergypurchases anddeliverytotheservicearea(Capacity (c.g.,installed reserve)andenergyprocurement anddeliveryscheduling consistent withforecasts ofcustomerrequirements.)

Note:Responsibility andpractices maybedifferent forgasandelectricity.

27.Negotiation andadministration ofcontracts forprocurement ofenergyandassociated deliveryservices(Consistent withforecasted capacityandenergyrequirements, negotiate contracts fortheprocurement ofcapacity, energy,andwholesale deliveryservices.

Administration ofthecontracts includesaccounting andinvoiceprocessing support.)

¹terAssumesthatLSEsareresponsible forpipelineandinstalled reservecapacitytomeettheircustomers'eeds.

Itmaybethatelectricinstalled reservesaremoreefficiently purchased bythediscoforitsservicearealoadandpassedthroughinthewholesale distribution tariff.PAllotheractivities PAllotheractivities PAllotheractivities SAggregate LSEforecasts andproducetotalsystemloadforecasts fordistribution systemplanningandimbalance servicerequirements SScheduling ofspotmarketenergypurchases andstand-bycapacitytoeliminate localloadimbalances SCapacityandenergycontracts associated withlong-term imbalance trends.ROC1n101531 SCHEDQLEISTANDARDS PERTAINING TOAFFILIATES ANDTHEPROVISION OFINFORiVIATION ThisScheduleIaddresses therelationships, totheextentrelevanttothesubjectmatterofthisSettlement, amongtheDISCO-",anyHOLDCOthatRGAEmayestablish pursuanttothisSettlement orotherwise, theULSEoranyotheraffiliate, andcompetitors oftheULSEorsuchotheraffiliate.

Standards ofConductThefollowing Standards ofConductshallgoverntheDISCO'srelationship withanyenergysupplyandenergyserviceaffiliates, including theULSE:(i)Therearenorestrictions onanyaffiliate's usingthesamename,tradenames,trademarks, servicename,servicemarkoraderivative ofaname,oftheHOLDCOortheDISCOorinidentifying itselfasbeingaffiliated withtheHOLDCOortheDISCO.TheDISCOwillnotprovidesalesleadsinvolving customers initsserviceterritory toanyaffiliate, including theULSE,andwillrefrainfromgivinganyappearance thatitrepresents anaffiliate orthatanaffiliate represents theDISCO.Ifacustomerrequestsinformation aboutsecuringanyserviceorproductofferedwithintheserviceterritory byanaffiliate, theDISCOmayprovidealistofInthisdocument, "DISCO"referstoboththeDISCOandtheRLSE,unlesscontextrequiresotherwise.

Rocii:li264i companies operating intheserviceterritory whoprovidetheserviceorproduct,whichmayincludeanaffiliate, buttheDISCOwillnotpromoteitsaffiliate.

(ii)TheDISCOwillnotprovideservicesonpreferential terms,norrepresent thatsuchtermsareavailable, exclusively tocustomers whopurchasegoodsorservicesfrom,orsellgoodsandservicesto,anaffiliate oftheDISCO.TheDISCOwillnotpurchasegoodsorservicesonpreferential termsofferedonlytosuppliers whopurchasegoodsorservicesfromorsellgoodsorservicestoanaffiliate oftheDISCO.Thisstandarddoesnotprohibittwoormoreoftheunregulated affiliates fromlawfullypackaging theirservices.

(iii)Allsimilarly situatedcustomers, including energyservicescompanies andcustomers ofenergyservicecompanies, whetheraffiliated orunaffiliated, willpaythesameratesfortheDISCO'sutilityservicesand,intheeventthatanytariffprovision affordstheDISCOdiscretion intheapplication of'suchprovision, theDISCOshallapplysuchtariffprovision inaconsistent manner.(iv)Transactions subjecttoFERC'sjurisdiction-will begovernedbyFERC'sordersorstandards asapplicable.

(v)Releaseofproprietary customerinformation relatingtocustomers withintheDISCO'sserviceterritory shallbesubjecttopriorauthorization bythecustomerandsubjecttothecustomer's direction regarding theperson(s) toROCII:ii2641 0Qa0:a whomtheinformation maybereleased.

Ifacustomerauthorizes thereleaseofinformation toaDISCOaffiliate oroneormoreoftheaffiliate's competitors, theDISCOshallmakethatinformation available totheaffiliate and/orothercompetitors designated bythecustomeronasimultaneous andcomparable basis.(vi)TheDISCOwillnotdisclosetoitsaffiliate anycustomerormarketinformation relativetoitsserviceterritory thatitreceivesfromamarketer, customerorpotential

customer, whichisnotavailable fromsourcesotherthantheDISCOunlessitmakessuchinformation available toitsaffiliate's competitors onasimultaneous andcomparable basis.(vii)Ifanycompetitor orcustomeroftheDISCObelievesthattheDISCOhasviolatedthestandards ofconductestablished inthissectionoftheagreement, suchcompetitor orcustomermayfileacomplaint inwritingwiththeDISCO.TheDISCOwillrespondtothecomplaint inwritingwithintwenty(20)businessdaysafterreceiptofthecomplaint.

Afterthefilingofsuchresponse, theDISCOandthecomplaining partywillmeet,ifnecessary, inanattempttoresolvethematterinformally.

IftheDISCOandthecomplaining partyarenotabletoresolvethematterinformally within15businessdaysafterthefilingofsuchresponse, thematterwillbereferredpromptlytotheCommission fordisposition.

Thisprovision shallnotprecludetheCommission fromaddressing anysuchmattermoreexpeditiously intheeventthatexigentcircumstances sorequire.ROCII:112641 0e0:.4 4(viii)TheCommission mayimposeontheDISCOremedialaction,consistent withtheCommission's statutory authority, forviolations oftheStandards ofConduct.IftheCommission, afteraffording theDISCOafullandfairopportunity topresentitspositionastoanyallegedviolations oftheseStandards ofConduct,findsthattheDISCOhasviolatedtheStandards duringthetermofthisSettlement, itshallprovidetheDISCOnoticeofitsfindingsandshallaffordtheDISCOareasonable opportunity toremedysuchconduct.IftheDISCOfailstoremedysuchconductwithinareasonable periodafterreceiving suchnotice,theCommission maytakeremedialactionwithrespecttotheDISCOtopreventitfromfurtherviolating theStandard(s) atissue.(ix)TheStandards ofConductsetforthinthisSettlement willapplyinlieuofanyexistinggenericstandards ofconduct(e.g.,theinterimgasstandards established inCase93-G-0932) andmaybeproposedassubstitutes foranyfuturegenericstandards ofconductestablished bytheCommission throughout thetermofthisSettlement.

Thereafter, StaffandtheCompanyshallmeettodiscusswhetheranychangesintheseStandards areappropriate, givingdueconsideration

.totheCompany's specificcircumstances, including itsperformance undertheexistingStandards.-"

ThePartiescontemplate that,astheunregulated marketdevelops, therewillbeaneedforfewer,ratherthanmore,restrictions.

ROCII:Ii264i

' AccesstoBooksandRecordsandReportsThefollowing provisions governtheaccessbyStafftocertainbooksandrecordsintheeventthatRGEcEestablishes aHOLDCOpursuanttothisSettlement or,ifitdoesnot,toanysubsidiaries established byRGEcEitself:(i)Staffwillhaveaccess,onreasonable noticeandsubjecttoappropriate resolution ofconfidentiality andprivilege issues,tothebooksandrecordsoftheHOLDCOandtheHOLDCOmajority-owned subsidiaries.

Staffwillhaveaccess,onreasonable noticeandsubjecttoappropriate resolution ofconfidentiality andprivilege issues,tothebooksandrecordsofallotherHOLDCOsubsidiaries totheextentnecessary toauditandmonitoranytransactions whichhaveoccurredbetweentheDISCOandsuchsubsidiaries, totheextenttheHOLDCOhas'ccess tosuchbooksandrecords.(ii)TheDISCOwillsupplement theinformation thattheCommission's regulations requireittoreportannuallywiththefollowing information:

Transfers ofassetstoandfromanaffiliate, costallocations relativetoaffiliate transactions, identification ofDISCOemployees transferred toanaffiliate, andalistingofaffiliate employees participating incommonbenefitplans.(iii)TheHOLDCOwillprovidealistonaquarterly basistotheCommission ofallfilingsmadewiththeSecurities andExchangeCommission bytheHOLDCOandanysubsidiary oftheHOLDCOincluding theDISCO.ROCII:II2641

~ .(iv)AseniorofficeroftheHOLDCOandtheDISCOwilleachdesignate anemployee, aswellasanalternate toactintheabsenceofsuchdesignee, toactasliaisonamongtheHOLDCO,theDISCOandStaff("CompanyLiaisons"

).TheCompanyLiaisonswillberesponsible forensuringadherence totheestablished procedures andproduction ofinformation forStaff,andwillbeauthorized toprovideStaffaccesstoanyrequested information tobeprovidedinaccordance withthisAgreement.

(v)Accesstobooksandrecordsshallbesubjecttoclaimsofprivilege andconfidentiality concernsassetforthinfra.vAffiliate Relations Generala)Within180daysoftheformation ofanynewsubsidiary:

(i)TheHOLDCOandsuchsubsidiary willmaintainbooksofaccountandotherbusinessrecordsthatareseparateanddistinctfromthoseoftheDISCO.(ii)Anyunregulated affiliate, competing intheenergy-related businesswithintheCompany's serviceterritory, shallestablish andmaintainofficesandworkspacesseparateanddistinctfromthoseoftheDISCOinaseparatebuildingorleasehold.

b)Costallocation guidelines areattachedasAppendixAtothisSchedule.

Theseguidelines willbeamendedand/orsupplemented, ifnecessary, toROCIi:(1264I reflectaffiliate transactions notcontemplated bytheinitialguidelines setforthinAppendixA.TheCompanywillfilewiththeDirectoroftheOfficeofAccounting andFinanceoftheDepartment ofPublicServiceallamendments andsupplements totheguidelines, thirty(30)dayspriortomakingsuchchange(s).

"Royalties" TherateplaninthisSettlement shallbeinlieuofanyandall"royalty" paymentsthatcouldormightbeassertedtobepayablebyanyaffiliate oftheDISCOorimputedtotheDISCOorcreditedtoDISCOcustomers atanytime,including aftertheexpiration ofthisSettlement;

provided, however,thatapplicability ofthissection2tothepost-Settlement periodshallbeconditioned uponRG&E'scompliance withthestandards contained inthisScheduleIassuchstandards maybemodifiedpursuanttoitem(ix)of"Standards ofConduct,"

~sura.3.TransferofAssetsa)Transfers ofassetsfromtheDISCOtoanaffiliate orfromanaffiliate totheDISCOwillnotrequirepriorCommission approvalexceptforthetransferofgenerating stationsandotherassetsfrom.theDISCOwhosetransferrequiresCommission approvalunderPublicServiceLaw$70.b)Forallassetsotherthangenerating

stations, transfers ofassetsfromtheDISCOtoanaffiliate shallbeatthehigherofnetbookvalueorfairROCII:II264I marketvalue-"andtransfers ofassetsfromanaffiliate totheDISCOshallbeonabasisnottoexceedfairmarketvalueexceptthattheDISCOmay,aspartofitsreorganization, transfertotheHOLDCOoraffiliate titletoofficefurniture, equipment andotherassetshavinganaggregate netbookvaluenottoexceed$5.0million.4.Personnel a)TheDISCOandtheunregulated affiliates willhaveseparateoperating employees.

b)Non-administrative operating officersoftheDISCOwillnotbeoperating officersofanyoftheunregulated affiliates.

c)OfficersoftheHOLDCOmaybeofficersoftheDISCO.Officersofthe.DISCOmaynotbedirectors ofanyoftheunregulated affiliates.

d)Employees maybetransferred betweentheDISCOandanunregulated affiliate uponmutualagreement.

Transferred employees maynotbereemployed bytheDISCOforaminimumofoneyearfromthetransferdate.Employees returning totheDISCOmaynotbetransferred toanunregulated affiliate foraminimumofoneyearfromthedateofreturn.TheDISCOwillfileannualreportstotheCommission, beginning withtheRateYearendingJune30,1998,showingtransfers betweentheDISCOFairmarketvalueshallbedetermined inaccordance withthecostallocation guidelines.

SeeAppendixA.Rocii:iI264i

andunregulated affiliates byemployeename,formercompany,formerposition, newcompanyandnewposition.

e)Theforegoing provisions donotrestrictanyaffiliate fromloaningemployees, onafullyloadedcostbasis,totheDISCOtorespondtoanemergency thatthreatens thesafetyorreliability ofservicetoconsumers ortoassisttheDISCOduringGinnaStationoutages.f)Thecompensation ofDISCOemployees maynotbetiedtotheperformance ofanyoftheunregulated subsidiaries;

provided, however,thatstockoftheHOLDCOmaybeusedasanelementofcompensation; andprovidedfurtherthatthecompensation oftheofficersoftheHOLDCOwhoarealsoofficersoftheDISCOmaybebasedupontheperformance oftheDISCOandtheaggregate performance oftheHOLDCO.g)Theemployees ofHOLDCO,DISCOandtheunregulated subsidiaries mayparticipate incommonpensionandbenefitplans,andthecostshallbeallocated assetforthinAppendixA.5.Provision ofServicesandGoodsa)Corporate services(suchascorporate governance, administrative, legal,purchasing, andaccounting) maybeprovidedbyHOLDCOfortheDISCOandunregulated subsidiaries onafully-loaded costbasis.b)TheDISCOmayprovideotherservicestoanunregulated affiliate, exceptthattheDISCOmaynotuseanyofitsmarketing orsalesemployees toROCII:i)264i

'00'0 provideservicestoanunregulated affiliate forbusinesswithintheDISCO'sterritory.

Theunregulated affiliate shallcompensate theDISCOfortheservicesofemployees performing suchservicesatthehigheroftheemployees'ully-loaded costorthepricethattheDISCOwouldchargeathirdpartyforsuchemployees'ervices.

c)Theunregulated affiliates mayprovideservicestotheHOLDCOandtheDISCO.Anymanagement, construction, engineering orsimilarcontractbetweentheDISCOandanaffiliate andanycontractforthepurchasebytheDISCOfromanaffiliate ofelectricenergyorgasshallbegovernedbyPublicServiceLaw$110,andwillbesubjecttoanyapplicable FERCrequirements.

AllothergoodsandserviceswillbeprovidedtotheDISCOatapricethatshallnotbegreaterthanfairmarketvalue.d)TheDISCO,theHOLDCO,andtheunregulated affiliates maybecoveredbycommonproperty/casualty andotherbusinessinsurance policies.

Thecostsofsuchpoliciesshallbeallocated amongtheDISCO,theHOLDCOandtheunregulated affiliates inanequitable manner.Privileged Information NothingisthisSettlement requiresorwillbeconstrued torequiretheDISCO,theHOLDCOoranunregulated affiliate toprovideStafforanyotherpartyaccessto,ortomakedisclosure ofanyinformation astowhichtheentityinpossession ofsuchinformation wouldbejentitledtoassertalegalprivilege, suchastheattorney-client privilege, if,either(i)theprivilege ROCII:II264I 0ll couldbeassertedpursuanttoCPLH.f4503,CPLR$3101(oranyotherapplicable statuteorconstitution) inajudicialproceeding, action,trialorhearing,or(ii)providing accesstoormakingdisclosure ofsuchinformation wouldimpairinanymannertherightoftheentityinpossession ofsuchinformation toassertsuchprivilege againstthirdparties.IfStafforanyotherpartyseeksaccesstoordisclosure ofanyinformation thateithertheDISCO,theHOLDCOoranunregulated affiliate believesisexemptfromaccessordisclosure underthetermsofthisSettlement, counselfortheentityasserting suchprivilege willdetail,totheextentpractical withoutdestroying theprivilege, thereasonswhytheprivilege isbeingclaimedinsufficient detailtopermitadetermination ofwhetherornottodisputetheclaimofprivilege.

IfStaffdecidestodisputesuchclaim,itmayrequestthatanassignedAdministrative LawJudgeconductanincamerareviewofsuchinformation todetermine whetheritisinfactexemptfromaccessordisclosure underthetermsofthissection,whichdisclosure shallnotbedeemedwaiveroftheprivilege.

Suchdetermination willbesubjecttoreviewbytheCommission and,ifnecessary, tojudicialreview.Confidentiality ofRecordsTheHOLDCOandtheDISCOshalldesignate asconfidential anynon-public information toorofwhichStaffrequestsaccessordisclosure, andwhichtheHOLDCO,theDISCOoranunregulated subsidiary believesisentitledtobetreatedasatradesecret.Anypartywillhavetherighttocontestthetradesecretnatureofsuchdesignated confidential information.

Anyonewhoisaffordedaccessto,ortowhomdisclosure ismadeof,designated confidential portionsofbooksandrecords,financial information, contracts, minutes,memoranda, ROCII:II2641

'0~. businessplans,andthelike,willagreetomaintainsuchinformation asconfidential, otherthaninformation thatpreviously hasbeenmadepublic.ForthepurposesofthisAgreement, "information thatpreviously hasbeenmadepublic"willmeaninformation thateither(i)hasbeendisclosed byeithertheHOLDCO,theDISCOoranyunregulated affiliate infinancial orotherliterature tothefinancial community ortothepublicatlarge,(ii)appearsindocuments contained inthepublicfilesofalocal,Stateorfederalagency,bodyorcourtandwhichhasnotbeenaccordedtradesecretprotection, or(iii)information thatotherwise isinthepublicdomain.IntheeventthatStafforanyotherpartyreceivesanyinformation designated asconfidential pursuanttotheprocedures described inthisSettlement anddesirestousesuchinformation inalitigated proceeding beforetheCommission, StafforthepartywillfirstnotifycounselfortheDISCOandtheHOLDCOandtheunregulated affiliate, ifapplicable, ofthenatureofsuchinformation aswellasitsintention tousesuchinformation insuchproceeding andaffordtheDISCO,theHOLDCOand/ortheunregulated affiliate, ifapplicable, theopportunity toapplytotheAdministrative LawJudgepresiding oversuchproceeding withinten(10)businessdaysforarulingdesignedtomaintaintheconfidentiality ofsuchinformation underPart6-1oftheCommission's RulesofProcedure (16NYCRR).Staffandanyotherpartymayobjecttoanysuchapplication onthegroundsthatsuchinformation isnotentitledtobetreatedasatradesecretunderPart6-1.Themattershallberesolvedpursuanttotheprocedures ofPart6-1.IntheeventthatamemberofStaffreceivesanyinformation designated asconfidential pursuanttotheprocedures described inthisSettlement anddesirestouseorrefertosuchinformation inamemorandum orotherdocumentwhichmaybecomean"agencyrecord"asthetermisdefinedintheNewYorkFreedomofInformation Law(PublicOfficersLawf86),ROCII:II264I

'r StafffirstshallnotifytheCompanyLiaisonsofthenatureofsuchinformation aswellasitsintendeduse,andaffordtheDISCO,theHOLDCOand/ortheunregulated affiliate, ifapplicable, theopportunity toapplytotheCommission underPart6-1oftheCommission's RulesofProcedure withinten(10)businessdaysforaprotective orderdesignedtomaintaintheconfidentiality ofsuchinformation.

Staffandanyotherpartymayobjecttoanysuchapplication onthegroundsthatsuchinformation isnotentitledtobetreatedasatradesecretunderPart6-1.Themattershallberesolvedpursuanttotheprocedures ofPart6-1.+iROCII:Il264I a1a APPENDIXATOSCHEDULEICOSTALLOCATION GUIDELINES I<'ORAFFILIATE<

TRANSACTIONS i,Costsassociated withgoodsandservicesprovidedbyandamongaHOLDCO/parent companyandaDISCOand/orotheraffiliates willfollowallocation procedures designedtoensurethatthosecostsincurredonanaffiliate's behalfareappropriately identified andassignedtotheaffiliate onasystematic,

rational, andfullyloadedbasis.DirectCosts:ThesearecostsincurredbytheHOLDCOorDISCOindirectsupportofanaffiliate.

Theywillbechargeddirectlytotheaffiliate withoutundergoing anyallocation process.Thesecostswouldincludegoodsandservicesprovidedthatarereadilyascribable toanaffiliate entityandareforthespecificbenefitoftheaffiliate andnotmutuallybeneficial toallaffiliates.

Theamountsochargedwillbetheoriginalcostincurredwithintheaffiliated groupwithoutanyadjustments forintercompany profitorotherpurposeexcepttherecognition ofIndirectCostsdescribed below.IndirectCosts:Theseareconsequential costsincurredinconnection withDirectCosts.Forexample,thecostsofemployeebenefits, salesandothersuchcostsareindirectcosts.Thesecosts,willbechargeddirectlytoaffiliates, concurrently withtherelatedBirectCosts.JointandCommonCosts:Theseareothercoststhatencompass broadgeneralandkadministrative corporate activityandthusintheorybenefitallaffiliates.

Assuch,itisnecessary thateachaffiliate beararepresentative shareofthesecosts.Examplesincludes:

Corporate

'e. Governance (BoardofDirectors andOfficers),

GeneralAccounting (including AccountsPayableandPayroll),

FinanceandTreasury, Purchasing, InternalAudit,HumanResources, andRealEstate.Theassignment ofJointandCommonCostswillbemadebyallocation andchargedtotheappropriate booksofaccountofeachaffiliate monthlybasedonafactor.Thegeneralmethodology isasfollows:Calculate theallocation factorbasedoncriteriasuchas:(a)numberofemployees; (b)totalassets;(c)grossrevenue;and(d)shareholders'quity.

(Note:zeroshallbesubstituted whenanallocation factorisnegative)

Thesimplemathematical averageoftheallocation basesdescribed abovewillbecomputedquarterly andwillbeusedprospectively asthedefaultfactorforcostallocation toaffiliates.

(Forcertaintypesofallocable costs,asubsetoftheallocation basesmightbeappropriately usedinsteadofthedefaultfactor.)Thepercentage thusderivedwillbeappliedeachmonthtocostsassociated withthoseareasidentified ascorporate administrative andgeneralwithintheHOLDCO.VSuchamountwillbedeemedtobetheallocable JointandCommonCostsandchargedviaintercompany accountstotheappropriate affiliate(s).

Theamountschargedwillberegardedaspre-taxamounts.Roc!I:iI264i SCHEDULEJFORMOFPETITIONTOFORMHOLDINGCOMPANYSTATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSION CASE97-M-IntheMatteroftheApplication ofRochester GasandElectricCorporation underthePublicServiceLaw,Including Sections70,107,10Sand110Thereof,toFormaHoldingCompanyandforCertainRelatedTransactions PETITION,1997 STATEOFNEWYORKBEFORETHEPUBLICSERVICECOMMISSION CASE97-M-IntheMatteroftheApplication ofRochester GasandElectricCorporation underthePublicServiceLaw,Including Sections70,107,108and110Thereof,toFormaHoldingCompanyandforCertainRelatedTransactions

~~PETITIONt,Petitioner, ROCHESTER GASANDELECTRICCORPORATION

("Company"),herebyappliestotheCommission forauthority underSections70,107,108and110ofthePublicServiceLawtoformaholdingcompanyandforcertainrelatedtransactions.

TheCommission mayrelyoninformation includedinCompany's submissions, including thedocuments relatingtothesettlement agreement

("Settlement Agreement"

)intheCompetitive Opportunities Caseassupportfortheactionrequested inthisfiling.Insupportofthisapplication theCompanystates:1.TheCompanysupplieselectricandgasserviceinninecountiescentering abouttheCityofRochester, NewYork.TheCompanyisacorporation organized pursuanttothelawsoftheStateofNewYorkin1904.Certified copiesofitsorganizational documents havebeendulyfiledwiththeCommission.

2.Thereisappendedhereto,asScheduleA,astatement offinancial condition oftheCompanyatDecember31,1996,pursuanttotheCommission's RulesofProcedure, 16NYCRR$18.1.3.TheSettlement Agreement permitstheestablishment ofaholdingcompanystructure underwhichoneormoreregulated companies andoneormoreunregulated companies mayoperate.Theseoperating companies wouldbedirectorindirectsubsidiaries ofaholdingcompany("HoldCo").

Thisstructure willbenefittheCompany's 0

e'40 .customers, shareholders andemployees byproviding theflexibility neededtocompeteeffectively inthechangingutilityindustry, whileatthesametimeprotecting theCompany's customers fromtherisksinherentintheunregulated businesses.

Tocompeteeffectively, theCompanymusthavenolessflexibility indoingbusinessthanthatavailable toitscompetitors.

Aholdingcompanystructure wouldallowtheCompanytoimplement adecisiontoenterordeploycapitalinacompetitive businesswithoutthedelayofaregulatory approvalprocess.Thedelaysnecessarily associated withobtaining regulatory approvals forsuchinvestments onaspecific, case-by-case basiswhilereasonable, necessary andlargelyunavoidable inaregulated context,aresimplyinconsistent withcompetitive success.Thenewcorporate structure alsowouldpermittheissuanceofsecurities bytheHoldCo,oraseparatefinancesubsidiary, tofinancecompetitive businesses (including "CompCo").

UndertheCompany's currentcorporate structure, Section69ofthePublicServiceLawwouldnotpermittheissuanceofsecurities forthispurpose.5.Thecustomers oftheregulated utilitysubsidiary

("RegCo")

wouldbeprotected fromtherisksinherentincompetitive businesses.

TheRegCo,asaseparatelegalentity,wouldnotbearanylossesorberesponsible foranyobligations thatmayarisefromtheHoldCooritscompetitive businesses.

Inaddition, theRegCo,whichwouldnotcountasanassetanyinvestment inacompetitive

business, shouldnothaveitsaccesstocapitalmarketsorcreditratingsadversely affectedbytheHoldCooritscompetitive businesses.

6.U~~UponCommission approvalandreceiptofthenecessary shareholder andotherregulatory approvals (described inparagraph 13below),theCompanyintendstoestablish theHoldCopursuanttoatax-freereorganization (the"Reorganization"

).TheReorganization wouldbeeffectedasa"bindingshareexchange" asfollows:First,theCompanywouldcreatetheHoldCoasafirst-tier,wholly-owned subsidiary.

Then,inaccordance withaplanofexchangeadoptedpursuanttoSection9l3oftheBusinessCorporation

Law,

'0'e0 theCompany's commonshareholders wouldreceiveoneHoldCocommonshareinexchangeforeachCompanycommonshareheldbytheshareholders immediately priortotheReorganization.

<<7.Uponconsummation oftheReorganization, alloftheCompany's commonshareswouldbeheldbytheHoldCo,andalloftheHoldCo'scommonshareswouldbepubliclyheld.TheCompanydoesnotexpectthatanychangeinthepreferred stockordebtoftheCompanywouldbeeffectedbytheReorganization, exceptthattheCompanymayneedtoamendthevotingrightsofthepreferred stockinordertoqualifyforataxfreereorganization undertheInternalRevenueCode.-"Inconnection withtheHoldCo'scommencement ofoperations, theRegComayleaseofficespacetotheHoldCoandtransfertotheHoldCoofficefurniture, equipment andotherassetshavinganaggregate netbookcostofnottoexceed$5million.8.TheCompanywouldbetheRegCo,'and HoldCowouldhavesubsidiaries inadditiontotheRegCo.-"TheCompany's strategic plansastothecompetitive businesses inwhichitwillcompetewillnecessarily evolveastheutilityindustrycontinues toevolve.Regardless ofthebusinesses

involved, itisessential thatthecompetitive businesses notbedisadvantaged byregulatory oroperating constraints imposedbytheCommission.

Thecompetitive businesses shouldbeabletotransactbusinesswitheachotherandwiththeRegCoonthesamebasisastheircompetitors.

9.TheCompanybelievesthattheCommission can,withoutimposingoperating constraints onHoldCooritscompetitive businesses, protecttheRegCo'scustomers andpreventanyunfaircompetitive advantage.

Theprovisions setforthintheSettlement Achangeinthevotingrightsofthepreferred stockwouldrequireanamendmcnt oftheCompany's Certificate ofIncorporation.

ItisexpectedthattheCompany,simultaneously withtheReorganization orshortlybefore,willdropitsstockinEnergyline Inc.at.dCompCointoHoldCoandthatEnergyline Inc.andCompCowillbecomewholly-owned subsidia;lcs ofHoldCo.

~a0e-Agreement, andthecorporate structure, willprotecttheRegCo'scustomers fromtherisksofcompetitive businesses.

10.BecausetheSettlement Agreement providesforafundamental changeintheCompanyandtheopeningofitselectricbusinesstocompetition, theCompanybelievesthatonlylimitedoperating constraints, tailoredcloselytotheactivitytobemonitored, areappropriate.

Theseconstraints, alongwiththeexistingstatutory toolsoftheCommission andtheFederalEnergyRegulatory Commission andthefederalandstateantitrust laws,willbeadequatetoprotectcustomers andensurethatrobustcompetition developswhileatthesametimeallowingtheHoldCoanditssubsidiaries tocompeteinthemarket.Ascompetition,

develops, theCompanybelievesthatthespecificrestrictions shouldbereviewedtodetermine whethertheyarestillappropriate ornecessary.

11.TheSettlement Agreement setsforththeconditions tothemakingofcapitalcontributions toHoldCoanditsunregulated affiliates.

Thoseprovisions areincorporated inthisPetitionbyreference.

12.TheCompanyalsoagreestoabidebycertainoperating principles relatingtointercompany relationships, itscodeofconduct,costallocations andotherprovisions, allassetforthinScheduleItotheSettlement Agreement.

13.Implementation oftheHoldCostructure willrequirecertainapprovals inadditiontothatoftheCommission andotheractionsbyfederalandstateauthorities.

Consummation oftheReorganization willrequiretheadoptionofaplanofexchangeatameetingoftheCompany's shareholders.

Inconnection withitssolicitation ofproxiestovoteatthemeeting,HoldComustfileaRegistration Statement onFormS-4withtheSecurities andExchangeCommission toregistertheHoldCocommonsharestobeexchanged fortheoutstanding CompanycommonsharesandsuchRegistration Statement mustbecomeeffective.

TheRegistration Statement willalsocontainaproxystatement oftheCompanydescribing theReorganization indetail,whichproxystatement willbemailedtoCompanyshareholders priortothemeetingreferredtoabove.TheCompanymustdelivertotheNewYorkStateSecretary ofStateacertificate ofexchangeunderSection913oftheNewYorkBusiness Corporation Law,thecertificate ofexchangemustbeendorsedonbehalfoftheCommission (pursuant toSection108ofthePublicServiceLaw),andtheSecretary ofStatemustfilethecertificate ofexchange.

Inaddition, priortothereorganization itisexpectedthatHoldCowouldfilewiththeSecurities andExchangeCommission fortheintrastate exemption fromtheregistration requirements ofthePublicUtilities HoldingCompanyActprovidedbySection3(a)(1)thereoforRule2thereunder.

TheCompanywillneedtofilefortheapprovaloftheFederalEnergyRegulatory Commission andtheNuclearRegulatory Commission.

14.TheCompanyrespectfully reservestherighttowithdrawthisPetitionatanytimepriortoitsacceptance ofanorderoftheCommission withrespecttothePetition.

TheCompanyfurtherrequeststhatanysuchorderbyitstermspermittheCompany(evenafterunconditionally accepting theorder)todecidenottoconsummate thetransactions

,described herein.AVHEREFORE, theCompanyrequeststhattheCommission issueanorderauthorizing (i)theformation

'ofaholdingcompanyfortheCompany,asdescribed andsubjecttotheconditions contained herein,(ii)therelatedtransactions described hereinandintheSettlement Agreement, (iii)theSecretary oftheCommission toendorsetheCommission's consentandapprovaluponthecertificate ofexchangeexecutedbytheCompany,and(iv)suchotherandfurtherrelieftowhichPetitioner maybeentitledbyreasonofthepremises.

Respectfully submitted, ROCHESTER GASANDELECTRICCORPORATION By:Title:Dated:Rochester, NewYork,1997 STATEOFNEWYORKCOUNTYOFMONROE,beingdulysworn,deposesandsays:IamtheofROCHESTER GASANDELECTRICCORPORATION, thePetitioner herein;Ihavereadtheforegoing Petitionandknowthecontentsthereof;thesameistruetothebestofmyknowledge.

Sworntobeforemethisdayof,1997INotaryPublic,StateofNewYorkROCII:II2640 SCHEDULE>>

KSBCPROGRAMCOSTS(SMM)Settlement YearTotalEnergy~Efficienc Low-Income Environmental RADP~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.ThomasSTATEOFNEWYORKPUBLICSERVICECOMMISSION AtasessionofthePublicServiceCommission.

heldintheCityofAlbanyonNovember25,1997COMMISSIONERS PRESENT:JohnF.O'Mara,ChairmanMaureenO.HelmerThomasJ.DunleavyCASE96-E-0898

-IntheMatterofRochester GasandElectricCorporation's PlansforElectricRate/Restructuring PursuanttoOpinionNo.96-12.ORDERADOPTINGTERMSOFSETTLEMENT SUBJECTTOCONDITIONS ANDCHANGES(IssuedandEffective November26,1997)BYTHECOMMISSION:

INTRODUCTION Thisproceeding concernsissuesrelatedtocompetitive opportunities forelectricserviceforRochester GasandElectricCorporation (RG&Eorthecompany).

Interested partieswereencouraged toreachanegotiated resolution ofthecomplexissuesraisedbythetransition toacompetitive marketforthesupplyofelectricity.'fter filingaSettlement Agreement datedApril8,1997(April8Settlement),

thepartiesproposedfurtherrevisions toresolveconcernsidentified byus.Thesefurtherrevisions werereflected inanAmendedand"RestatedSettlement Agreement (Settlement) datedOctober23,1997'eached byRG&E,Department ofPublicServicestaff(staff),MultipleIntervenors, JointSupporters, andtheNationalAssociation ofEnergy.ServiceCompanies.

AftercarefulreviewoftheSettlement, thecommentsCases94-E-0952 etal.,IntheMatterofCometitive0ortunities ReardinElectricService,OrderEstablishing Procedures andSchedule(issuedOctober9,1996)",p.3.AcopyoftheSettlement isAppendixAtothisorder.

CASE96-E-0898

received, andtheevidenceandarguments inthisproceeding, theSettlement isadoptedsubjecttotheconditions andchangessetforthinfra.Thisabbreviated ordersetsforthourdecision.

Amore,comprehensive opinionwillfollow,describing thebasesforourdecision.

Thestatuteoflimitations forfili'ngpetitions forrehearing orclarification ofourdecisionwillbedeemedtorunfromthedateofissuanceofouropinion.THESETTLEMENT TheSettlement wouldchangetheregulatory framework forRGEEtoprepareitforthe.dynamicchangestakingplaceintheelectricindustryandtheemergence ofcompetition.

ThetermsoftheSettlement arelargelybasedonthoseoftheApril8Settlement, whichwasthesubjectofsupporting andopposingIIstatements andtestimony, rebuttalstatements andtestimony, evidentiary

hearings, post-hearing briefs,arecommended

decision, andbriefsonexceptions andopposingexceptions.

Inarecommended decisionissuedJuly16,1997,Administrative LawJudgeWalterT.MoynihanfoundthatthetermsofApril8Settlement werereasonable.

Amongotherth'ings,heconcluded thatthephase-inofcompetition wouldproceedatareasonable pace,theaverageback-outratewouldreflectRGEE'scostofenergyandcapacityforitsnon-nuclear generating units,andtheproposedcorporate restructuring wouldexposethecompany's, electricgeneration operations tomarketforces.'fter reviewing therecommended decisionandthepartiesexceptions, weidentified severalmajor'reas ofconcernregarding thetermsoftheApril8Settlement,'ncluding thefollowing:

achieving greaterratereductions forresidential andsmallcommercial customers; ameliorating theimpactsoftheproposedincreaseinthemonthlycustomercharge;increasing theR.D.,pp.71,72.Theseissueswerediscussed atoursessiononOctober8,1997.

hCASE96-E-0898

~,ratepayers shareofpossibleexcessive earningsandgainsonthesaleofgenerating units,whilestillencouraging divestiture; accelerating thepaceofretailaccessifwarranted; increasing thebackoutrateduringtheEnergyOnlyphaseofretailaccess;andestablishing minimumspendinglimitsonsystembenefitscharges.Asaresultoffurthernegotiations, theSettlement wasfi3.edandparti'eswereinvitedtosubmitfurtherwrittencomments.

ThetermsoftheSettlement willofferasoundregulatory framework forRG&E,itscompetitors, anditscustomers inthetransition tofullycompetitive generation andenergyservicemarkets.Havingreviewedtheseterms,however,thereareseveralimportant issuesthatarenotresolvedtooursatisfaction.

Forthisreason,weadoptthetermsoftheSettlement subjecttothefollowing:

1.TheSettlement

($6)providesthat,beginning July1,1999andcontinuing throughJune30,2002,Incremental Manufacturing Loadshallbeservedatanaveragerateof$0.059perkWh.Weadoptthistermonthecondition thattheaveragerateinsteadis$0.045perkWh..2.TheSettlement

($10(b))providesthatthefirst$800,000ofthecustomers'hare ofanyexcessearningswillbeusedtoreduceratesforcertainlargecustomerclasses.Weconclude, thatlargecustomers alreadyreceivesubstantial benefitsunderotherprovisions oftheSettlement; thus,thereisnoneedforthisuniqueadditional benefit.Accordingly, weadoptthistermonthecondition thatthefirstsentenceof'aragraph 10(b)isremoved,andthewords"...ofthisamount..."

aredeletedfromthesecondsentence.

3.Certainprovisions oftheSettlement (i.e.,)$8,11-17,24(withrespecttoshut-down costs),and$30)providefordeferralandrecoverywithoutrequiring furtherpetitiontoorapprovalbytheCommission.

Withoutalteringtheintentoftheseterms,weadoptthemonthecondition thataformalpetitionwill

e.

CASE'96-E-0898

~befiledwiththeCommission priortoestablishing deferrals oranyrecoveryduringthetermoftheSettlement.

4.TheSettlement

($23)makesreference topossibleStatewide resolution ofthefutureratemaking andownership ofnuclearfacilities.

Paragraph 23(d)statesthat"no.change inthetreatment ofRGRE'snuclearfacilities shallbeimplemented untilatleastJanuary1,2000."TheJanuary1,2000datemightbeconstrued asprecluding asaleortransfer, throughanauctionorotherwise, ofthecompanysinterestinnuclearfacilities untilatleasttheyear2000and,thus,couldconflictwithsubsequent actionontheAugust1997StaffReportonNuclearGeneration.

Weadoptthisparagraph onthecondition that$23(d)ismodifi'ed toreadasfollows:"nochangeinthetreatment ofRGEE'snuclearfacilities shallbeimplemented priortotheCommission's resolution oftheAugust1997StaffReportonNuclearGeneration."

5.TheSettlement

($48(h))providesthat,"[a]sofJuly1,2002,allretailcustomers willbeeligibletoparticipate" inRGSE'sRetailAccessProgram.OurapprovaloftheSettlement isconditioned onthecompanymovingtofullretailaccessoneyearearlier.Accordingly,

$48(f)ismodifiedbyaddingtheword"and"attheend;$48(g)ismodifiedtoread:"AsofJuly1,2001,allretailcustomers willbeeligibletoparticipate.";

and$48(h)isdeleted.6.Thelastsentenceof.$52oftheSettlement providesforapossibleincreaseinthepaceofretailaccessimplementation ifcertainconditions aremet.Xnlightofthemodifications described inthepreceding'paragraph, thislastsentenceisunnecessary, andtherefore, weadopt$52onthecondition thatthissentenceisdeleted.7.The'Settlement (Sch.A)providesthat,bythefinalyearoftheterm,ratesforthesmallercustomerclasseswillbe5.0%belowtheratesineffectasofJune30,1997.TheSettlement isapprovedoncondition thattheratereduction forthe"pri-pri,"

"pri-sec,"

and"sec-sec" voltageclasseswillbeincreased from5.0~to7.5%inthefinalyearoftheSettlement.

CASE96-E-0898 Thischangerequiresacorresponding adjustment tothecumulative reduction shownin$2,whichwouldincreasetheamountforJuly1,2001,from"$51.1million"to"$64.6million."

8.TheSettlement

($55,n.108,and)57)identifies acontestable rateof$0.032perkWh,butdoesnotindicatewhethertheGrossReceiptsTax(GRT)isconsidered inthederivation ofthatamount.Weadoptthisratesubjecttothe'clarification thatthe$0.032rateincludestheimpactoftheGRT.9.TheSettlement

($67)authorizes RGEEtoprovideinitialfundingforunregulated businessactivities intheamountof$50million.Weauthorize RGEEtofundunregulated operations intheamountof$100million.Therefore, weadopt$67except$50millionisincreased to$100million.STATEENVIRONMENTAL UALITYREVIEWACTEVALUATION Inconformance withtheStateEnvironmental QualityReviewAct(SEQRA),weissuedonMay20,1996aFinalGenericEnvironmental ImpactStatement (FGEIS),whichevaluated theactionadoptedinCase94-E-0952.

Wealsorequiredindividual utilities tofileanenvironmental assessment oftheirrestructuring proposals.

InaJune19,1997ruling,ChiefAdministrative LawJudgeLynchnarrowedtheissuesneedingfurtherconsideration intheenvironmental assessment.

RGBfiledanEnvironmental Assessment Form(EAF)concerning theApril8Settlement onJune24,1997.Subsequent tofilingoftheEAF,PublicInterestIntervenors (PII)fileda.petition askingthataSupplemental Environmental ImpactStatement befiled.Initsarguments supporting thepetition, PIIraisedseveralsubstantive issuesforSEQRAconsideration.

Theinformation providedbyRGEEinitsEAF,theparties'omments andresponses, theSettlement, and-other information wereevaluated inordertodetermine whetherthepotential impactsresulting fromadoptingtheSettlement's, termswouldbewithintheboundsandthresholds oftheFGEISadoptedin1996.Theanalysisexaminedseveralareasofpotential impacts CASE96-E-0898 including thepotential forincreased airemissions, whichcouldincreaseasaresultofgreaterloadgrowthduetoreducedrates,andreduceddemandsidemanagement programs.

Arguably, allofthepotential impactsneednotbeconsidered giventhatsomeresultfromTypeIIexemptrateactions.Nonetheless, considering allfactors,thepotential environmental impactsoftheSettlement arefoundtobewithintheboundsandthresholds evaluated intheFGEIS.Therefore, noUfurtherSEQRAactionisnecessary.

However,asamatterofdiscretion, monitoring ofRGEEsrestructuring willbeimplemented.

ThefinalEAFwillbeappendedtotheopiniontobeissuedlater.DISCUSSION Takingintoaccountouroverallresponsibility tosetjustandreasonable rates,thecompany's statutory burdenofproof,andoursettlement guidelines, andhavingconsidered theevidence,

comments, arguments, andEAFinformation, thetermsoftheSettlement, subjecttotheabovedescribed conditions, andchanges,arefoundtobereasonable andinthepublicinterest.

Amongotherthings,theseterms,conditions, andchangeswillhelpconsumers inandaroundRochester saveover$115millionincumulative ratereductions overthenextfewyearsandthiswillhelpretainand,attractbusinesses andstimul'ate economicactivity.

Inaddition, customers willnolongerbeliablefor$73millionincreditsownedthecompanyarisingfromflex-rate discounts andpastincentives.

TheSettlement's termsalsoincludeanincentive fordivestiture oftheutility's generation andestablishes anenvironment forarobust,competitive electricgeneration market.Withthisframework andexpectedcompetition intheenergyservicessector,manycustomers cananticipate receiving electricity billslowerthanotherwise andallcustomers shouldenjoygreaterchoicesofenergyproviders andservices.

Atthesanetime,the CASE96-E-0898 Settlement's termsfairlyaddressenvironmental concernsduringthetransition toafullycompetitive market.Accordingly, theSettlement's termsareadoptedintheirentiretysubjecttotheconditions andchangeslistedaboveandtheyareincorporated byreference, intothisorder.'nasmuch asthetermsoftheSettlement areinterrelated, asareourconditions andchangeslistedabove,ifanyterm,condition, orchangeismodified, vacated,orotherwise materially affectedbyjudicialreview,wemayre-examine ourentiredecision.

TheCommission orders:1.ThetermsoftheAmendedandRestatedSettlement Agreement (Settlement) datedOctober23,1997andfiledinthisproceeding, asmodifiedbytheconditions andchangesdescribed above,areadoptedintheirentiretyandareincorporated aspartofthisorder.2.Thepotential environmental impactsofthesetermsarewithintheboundsandthresholds evaluated inthe1996FGEIS,and,therefore, nofurtherSEQRAactionisnecessary.

3.RG&EisdirectedtofilebyDecember1,1997,tobecomeeffective nolaterthanJuly1,1998,suchtariffamendments asarenecessary toeffectuate theretailaccessprogramcontemplated bytheSettlement asadoptedandtoimplement OpinionNo.97-'5.RGBisalsodirectedtofilebyJune1,1998,tobecomeeffective July1,1998,suchtariffamendments asarenecessary toeffectuate theratereductions andotherraterelatedmatterscontemplated bytheSettlement asadopted.Thecompanyshallservecopiesofitsfilingsuponallpartiestothisproceeding.

Anycommentsonthefilingtoeffectuate theretailaccessprogrammustbereceivedattheCommission's officeswithin45daysofpublication intheStateRegisterpursuanttotheStateAdministrative Procedure Act.AnyTotheextentthelastsevenwordsof$77suggestsanysignatory couldpreventusfrommakingthisdecision, suchlanguageiscontrarytothepublicinterestandisnotadopted.

CASE96-E-0898 commentsonthefilingtoeffectuate theratereductions mustbereceivedattheCommission's officeswithintendaysofserviceofthecompany's proposedamendments.

Theamendments shallnotbecomeeffective onapermanent basisuntilapprovedbytheCommission.

4.Totheextentexceptions totherecommended decisionissuedinthisproceeding onJuly16,1997arenotmoot,orareotherwise granted,theyaredenied.S.RG&E,incooperation wi'thstaff,shallmonitortheenvironmental impactsofelectricrestructuring resulting fromthisorder.6.RG&Emustsubmitawrittenstatement ofunconditional acceptance oftheconditions andchangescontained inthisorder,signedandacknowledged byadulyauthorized officerofRGEE,byDecember1,1997.Xfsuchacceptance ofthisorderisnotsofiled,theadoptionofthetermsoftheSettlement mayberevoked.Thisstatement shouldbefiledwiththeSecretary oftheCommission andservedonallpartiesinthisproceeding.

7.Thisproceeding iscontinued.

BytheCommission, (SIGNED)JOHNC.CRARYSecretary EXHIBITC STATEOFNEWYORKPUBLICSERVICECOMMISSION OPINIONNO.98-1Copyto:RNGRJBSWWCASE96-E-0898

-IntheMatterofRochester GasandElectricCorporation's PlansforElectricRate/Restructuring PursuanttoOpinionNo.96-12.OPINIONANDORDERADOPTINGTERMSOFSETTLEMENT SUBJECTTOCONDITIONS ANDCHANGESIssuedandEffective:

January14,1998 CASE96-E-0898 TABLEOFCONTENTSAPPEARANCES INTRODUCTION PROCEDURAL HISTORYProcedural ConcernsPacaeTHEREVISEDSETTLEMENT REVENUEREQUIREMENT Strandable CostsKamineCostRecoveryReturnonEquityGainonSaleofGenerating PlantsSBCFundingOtherProposals REVENUEALLOCATION ANDRATEDESIGNTHEPROGRAMSingleRetailerModelImplementation ScheduleDeliveryRatesOtherRetailAccessIssues101015172122232530303138CORPORATE STRUCTURE ENVIRONMENTAL MATTERSMARKETPOWERMITIGATION FINDINGSUNDERSEQRACONCLUSION ORDER39424347APPENDIXAAPPENDIXBAPPENDIXC

CASE96-E-0898 APPEARANCES FORROCHESTER GASANDELECTRICCORPORATION:

Nixon,Hargrave, Devans&Doyle(byRobertJ.Bird,RichardN.George,andStanleyW.Widger,Jr.,Esqs.),ClintonSquare-P.O.Box1051,Rochester, NewYork14603FORDEPARTMENT OFPUBLICSERVICESTAFF:MichellePhillips, Esq.,ThreeEmpireStatePlaza,Albany,NewYork12223-1350 FORATTORNEYGENERALOFTHESTATEOFNEWYORK:GlenC.King,Esq.,TheCapitol,Albany,NewYork12247FORNEWYORKSTATECONSUMERPROTECTION BOARD:AnneCurtinandJamesWarden,Esqs.,99Washington Avenue,Suite1020,Albany,NewYork12210FORNEWYORKPOWERAUTHORITY:

~EricJ.Schmaler, Esq.,1633Broadway, NewYork,NewYork10019FORAMERICANASSOCIATION OFRETIREDPERSONS:Ward,Sommer&:Moore,LLC(byDouglasH.Ward,Esq.),122SouthSwanStreet,Albany,NewYork12210FORPUBLICINTERESTINTERVENORS ANDFORPACEENERGYPROJECT:DavidResnick,Esq.,78NorthBroadway, WhitePlains,NewYork10606FOR1PPNY:AaronBreidenbaugh, 291HudsonAvenue,Albany,NewYork12210FORENRONTRADEEcCAPITALRESOURCES:

ReadRLaniado(byKevinBrocks,Esq.),23EagleStreet,Albany,NewYork12207~

~,ee~I CASE96-E-0898 APPEARANCES FORMULTIPLEINTERVENORS:

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,NewYork10003FORCONSOLIDATED NATURALGASCOMPANIES:

Whiteman, Osterman8Hanna(byMichaelWhiteman, Esq.),OneCommercePlaza,Albany,NewYork12260FORNEWYORKSTATEELECTRICScGASCORPORATION:

HuberLawrenceEAbell(byAndrewFisher,Esq.),605ThirdAvenue,NewYork,NewYork10158PROSE:JeromeBowe,104Brentwood Drive,Penfield, NewYork14526CharlesA.Straka,6OakwoodLane,Fairport, NewYork14405 STATEOFNEWYORKPUBLICSERVICECOMMISSION COMMISSIONERS:

JohnF.O'Mara,ChairmanMaureenO.HelmerThomasJ.DunleavyCASE96-E-0898

-IntheMatterofRochester GasandElectricCorporation's PlansforElectricRate/Restructuring PursuanttoOpinionNo.96-12'PINIONNO.98-1OPINIONANDORDERADOPTINGTERMSOFSETTLEMENT SUBJECTTOCONDITIONS ANDCHANGES(IssuedandEffective January14,1998)BYTHECOMMISSION:

INTRODUCTION Thisproceeding concernsissuesrelatedtoratesandtherestructuring oftheelectricutilityindustryforRochester GasandElectricCorporation (RG&Eorthecompany).

Interested partieswereencouraged toreachanegotiated resolution ofthecomplexissuesraisedbythetransition toacompetitive marketforthesupplyofelectricity.'fter filingaSettlement Agreement datedApril8,1997(April8Settlement),

thepartiesproposedfurtherrevisions toresolveconcernsidentified byusatourOctober8,1997session.Thesefurtherrevisions werereflected inanAmendedandRestatedSettlement Agreement (RevisedSettlement) datedOctober23,1997reachedbyRG8E,Department ofPublicServiceStaff(Staff),MultipleIntervenors, JointSupporters, andtheNationalAssociation ofEnergyServiceCompanies.

AftercarefulreviewoftheApril8Settlement, theRevisedSettlement, thecommentsreceived, theevidence, andarguments inthisproceeding, we~Cases94-E-0952 etal.,IntheMatterofCometitive0ortunities ReardinElectricService,OrderEstablishing Procedures andSchedule(issuedOctober9,1996),p.3,(October9Order).i

~'o CASE96-E-0898 issuedanorderadoptingtheRevisedSettlement subjecttocertainconditions andchanges.'he findingsanddecisionmadeinthatorderareherebyincorporated, andthisopiniondescribes thebasesforourdecision.

PROCEDURAL HISTORYOpinionNo,.96-12'equired fiveoftheState'electricutilities tofileplanstobringtoNewYorkStateconsumers thebenefitsofacompetitive electricity market.Incompliance withthatopinionandorder,RGSEsubmitted itsplanon,October1,1996.Considerable publiccommentontheApril8Settlement wasreceivedthrougheducational forums,publicstatement hearings,'nd consumercorrespondence.

Whilethecommentsgenerally supported ourgoalsforacompetitive marketplace, fourareasofconcernwereidentified bythepublic:systemandservicereliability; theimpactofcompetition onlow-andfixed-incomeconsumers; theeffectofstrandable costsonrates;andtheneedforconsumereducation.

Concernswerealsoexpressed abouttherelatively smallerrevenuedecreases forresidential andsmallcommercial customers; theincreaseintheresidential andsmallcommercial customers'n overallcustomers; strandable monthlycustomercharge,whichwouldhaveresultedinbillincreaseforroughly43.oftheresidential thefailuretoquantifyandrequiresharingofcosts,whichitwasallegedwouldhavejustified Case96-E-0898, OrderAdoptingTermsofSettlement SubjecttoConditions andChanges(issuedNovember26,1997)(November 26Order).Cases94-E-0952 etal.,IntheMatterofCometitive0ortunities ReardinElectricService,OpinionNo.96-12(issuedMay20,1996).Educational forumsandpublicstatement hearingswereheldonMay28and29,1997inCanandaigua andRochester, respectively.

0,~o~le.

CASE96-E-0898 furtherratereductions; theslowpaceofconversion toretailaccess--about fiveyears;andthelackofasystemtodecidewhowouldbeaffordedretailaccessfirst.Evidentiary hearingsontheApril8Settlement wereheldfromJune3throughJune5,1997;therecordcontains2,029transcript pages(Tr.)and82exhibits.

Inaddition, statements andbriefsinsupportoforinopposition totheApril8Settlement weresubmitted bynumerousparties.OnJuly16,1997,arecommended decisionbyAdministrative LawJudgeWalterT.Moynihanwasissued,whichgenerally supported adoptionoftheApril8Settlement.

Briefsand/orreplybriefsonexceptions werereceivedfromRGEE;Staff;JointSupporters; theDepartment ofLaw(Attorney General)MultipleIntervenors; StateConsumerProtection Board(CPB);NewYorkPowerAuthority (NYPA);AmericanAssociation ofRetiredPersons(AARP);PublicInterestIntervenors (PII),abroad-based umbrellacoalition comprising 18consumerandenvironmental organizations; PublicUtilityLawProjectofNewYork,Inc.(PULP),anot-for-profit publicinterestfirmrepresenting theinterests oflow-income residential consumers; RetailCouncilofNewYork(RetailCouncil),

anassociation ofnearly5,000retailenterprises inNewYorkState;Independent PowerProducers ofNewYork,Inc.andEnronCapital&TradeResources (IPPNY/Enron),

WheeledElectricPowerCompany(WEPCO),independent powermarketers; andMr.JeromeP.Bowe,aproseintervenor.

Afterreviewing therecommended decisionandtheparties'xceptions, werequested thepartiestorenegotiate thetermsoftheApril8Settlement to:achievegreaterratereductions forresidential andothersmallcustomers; considerameliorating theimpactsoftheproposedincreaseinthemonthlycustomercharge;increasetheratepayers'hare ofpossibleexcessive earningsandgainsonthesaleofgenerating units,~'ppendixAisalistofabbreviations usedinthisdocument.

Theseissueswerediscussed atoursessiononOctober8,1997.

0~o CASE96-E-0898 whilestillencouraging divestiture; accelerate thepaceofretailaccessifwarranted; increasetheback-outrateduringtheEnergyOnlystageofretailaccess;andestablish minimumspendinglimitsforthesystembenefitscharge(SBC).Asaresultoffurthernegotiations, theRevisedSettlement wasfiledandpartieswereinvitedtosubmitfurtherwrittencomments.'hirteen partiessubmitted comments'ncluding thefivesignatories totheRevisedSettlement andeightothersthatopposeitsadoption.

InourNovember26Order,wefoundthatwithcertainmodifications thetermsoftheRevisedSettlement offerasoundregulatory framework forRG&E,itscompetitors, anditscustomers inthetransition tofullycompetitive generation andenergyservicemarkets.Procedural ConcernsTherecommended decisionrejectedanargumentthatmostoftheactivepartieswereunfairlyorimproperly excludedfromdiscussions amongStaff,thecompany,CPB,andMultipleIntervenors.

Therecommended decisionobservedthatwewaivedinpartoursettlement guidelines'n theinstantcasetoenhancetheparties'bility tobecreativeandcommunicate freely.4Thus,therecommended decisionconcluded thecaucusing amongsomepartieswasnotproscribed, andtheApril8Settlement shouldnotberejectedormodifiedbasedonthisprocedural argument.

AARPandMr.Boweexcept,arguingtheApril8Settlement wasreachedasaresultofprocedures thatdeniedpartiesameaningful opportunity toparticipate.

AARPalsoCase96-E-0898, NoticeInvitingCommentsonProposedSettlement (issuedOctober24,1997).AppendixBisalistofthepartieswhofiledcomments.

Cases90-M-0255 etal.,Settlement Procedures andGuidelines OpinionNo.92-2(issuedMarch24,1992),AppendixB,p.4(guideline B.(3)).October9Order.

CASE96-E-0898 assertsthat,becausewetruncated important procedures, theApril8Settlement shouldberejected.

RG&Erepliesthatearliernegotiations wereunproductive whenallpartieswerepresent.Theprocedures followedinthiscasehaveaffordedallpartiesampleopportunities toshapethedecisions reachedinthiscase.Astherecommended decisionnotes,wewaivedoursettlement guidelines topermitcaucusing toenhancetheparties'bility tobecreative, communicate freely,andreachanexpeditiously negotiated resolution.

Thewaiveroftheguidelines permitted notonlythecaucusing mentioned above,butalsodiscussions amongStaffandotherparties.Asaresultofthecaucusing, adraftagreement waspreparedandcirculated amongalltheparties.Afterfurthernegotiations, atwhichallpartieshadanopportunity toattend,modifications wereincorporated intheagreement basedonthevariousparties'omments.

Thismodifiedagreement istheApril8Settlement.

Inaddition, allpartieswereaffordedanopportunity toconductdiscovery, presenttestimony andpre-hearing positionpapers,cross-examine witnesses, submitpost-hearing briefs,andfilebriefsonandopposingexceptions toJudgeMoynihan's recommended decision.

Moreover, allpartiesweregivenafurtheropportunity tocommentontheRevisedSettlement.

Theseprocedural stepsgaveeachpartyareasonable opportunity toparticipate.

Consequently, AARP'sandMr.Bowe'sprocedural exceptions aredenied.THEREVISEDSETTLEMENT Generally, theRevisedSettlement isintendedtoresolveallissuesinthisproceeding.

Inadditiontoanumberofmiscellaneous provisions, theRevisedSettlement addresses threemaintopics:ratereductions, retailaccess,andcorporate restructuring.

TheRevisedSettlement wouldestablish electricratesforafive-year period(July1,1997throughJune30,2002)atlevelsthatare,overall,belowtheircurrentlevels.Whileratesforallcustomerclasseswouldbereduced,largeindustrial andcommercial customers wouldreceivethebiggestdecreases.

CASE96-E-0898 TheRevisedSettlement callsforratereductions ineachoffiveyearsculminating inanet$40.6million(6.1%)decreaseinRGEE'selectricrevenuesinthefifthyearascomparedwithratesineffectonJuly1,1996.Thecumulative revenuedecrease, subjecttocertaincontingencies discussed infra,wouldbe$101.6million.Inaddition, RGEEwouldforgo$73millionofincentive paymentsandlostnetrevenuesotherwise dueitarisingfromdiscounts contained initsflex-rate contracts.

Theratestobeestablished toproducetheforegoing revenuereductions wouldnotbemodifiedtoreflectchangesinrevenuesorexpense,stateandlocaltaxes(otherthangrossreceiptstaxesandpropertytaxes)andassetsalesduringthetermoftheRevisedSettlement exceptforthefollowing items,someofwhicharethesubjectofexceptions asmorefullydiscussed infra:a.Kamine/Besicorp

-AlleganyL.P.(Kamine)recovery; b.Variations inthelevelsofmandatedrelief;C.d.e.Securitization benefits; Deferrals; andAdjustments ExceptforchangesarisingfromamandatedSBCandsecuritization, whichwouldbereflected inrateswithoutanylimitations, rateswillonlybechangedifthepre-taxneteffectofallothersuchitems,onaprojected cumulative basisduringthetermoftheRevisedSettlement, wouldbegreaterthan$30million.However,nosuchrateadjustment wouldbemadeinrateyears'neortwo,andadjustments inthefinalthreerate0Arateyearisaone-yearperiodcommencing onJuly1ofonecalendaryearandterminating onJune30ofthefollowing calendaryear.

CASE96-E-0898 yearswouldbesubjecttomonetarylimitations, whichensurethattherewouldberatedecreases duringthefiveyears.Anyamountsthatarenotrecovered asaconsequence ofthemonetarylimitations maybedeferred.

Generally, theRevisedSettlement providesthattherevenuedecreases wouldbeallocated toRG&E'sserviceclassesbasedontheirresponsibility forgeneration costs'heproposedrevenuereductions areinadditiontothebaseratereductions andtheelimination offueladjustment chargeseffective July1,1996,inaccordance withasettlement agreement (1996Settlement) thatweapprovedwithmodifications.'ursuant to'he1996Settlement, thetotalreductions forthe12monthsendedJune30,1997approximated 2.5%forresidential customers and4.5%fornon-residential customers.'everal specificratedesignchangesarealsosetforthintheRevisedSettlement, including aproposedyearly$1.50increaseinthemonthlycustomerchargefortheresidential andsmallbusinesscustomers, elimination ofthedifference betweenthepeakandshoulder-peak energychargesasofJuly1,1997forlargeindustrial customers, andmodification oftheenergyauditrequirement intheflex-rate tariffs.Inaddition, beginning July1,1999andcontinuing throughJune30,2002,certainincremental manufacturing loadofatleast50kWwouldbeservedatanaveragerateof$0.059perkWh.Allotherchangesinrevenueswouldbeallocated uniformly withineachserviceclassification.

WithrespecttotheRetailAccessProgram(Program),

theRevisedSettlement requiresRGEEtoopenitselectricsystemCases95-E-0673 etal.,Rochester GasandEIectricCororation,OrderApproving TermsofSettlement Agreement WithChanges(issuedJune27,1996),whichwasrestatedinCases95-E-0673 etal.,OpinionNo.96-27(issuedSeptember 26,1996).Ourmodification ofthe1996Settlement isthesubjectofanArticle78proceeding thatwillbeterminated uponapprovalofthependingRevisedSettlement.

0Thesedecreases reducedthecompany's revenuesby$23millionannually.

0~oe CASE96-E-0898 tocompetition atapacesuchthatallretailcustomers wouldbeallowedtochoosetheirownsupplierofenergyandcapacitybyJuly1,2002.Thesignatories recognize thatRG&E'sabilitytoundertake theProgramiscontingent uponfactorssuchasafunctioning statewide energyandcapacitymarket,whicharenotinthedirectcontrolofthecompany.TheyagreetomodifytheProgram,ifnecessary, toaccountforsuchfactors,andtoaddresssuchmattersingoodfaith.TheRevisedSettlement wouldadoptasingle-retailer model,whichwouldallowaLoadServingEntity(LSE)'opurchasepowerontheopenmarketanddistribution accessfromRGGE.TheLSEwouldmarketthepowertocustomers'nd beresponsible forscheduling deliveries.

TheProgramwouldbedeployedinstages.IntheEnergyOnlystage,whichwouldcommenceonJuly1,1998,,customers (upto10-'fthesystemwide energysalesof6,714gWh)wouldbeabletochoosetheirownsupplierofelectricenergy.Theback-outrateduringthisstageisestimated tobeapproximately

$.019perkNh.'nJuly1,1999,theEnergyandCapacitystagewouldbeintroduced, whichwouldpermitcustomers usingupto20'.ofthetotalenergytochoosetheirownsupplierofenergyandcapacity.

Theback-outrateforthisstage,$.032perkWh,isgenerally equaltothevariablecostsandspecified fixedcoststhatRG&Eincurstoproducepowerfromitsfossilandhydrogenerating unitsandfrompowerpurchased (otherthanfromKamine).OnJuly1ofthefollowing twoyears,theProgramwouldbeexpandedAnLSEisanalogous totheenergyservicescompany(ESCO)inatwo-retailer model.Anindividual customercouldqualifyasanLSEandprocureenergytomeet'itsownneeds.TheRevisedSettlement callsforaback-outrateof$.004perkWhforretailing costsplusanallowance of$.01905perkNhasthevalueofenergy(equivalent tothecompany's buy-backrate).Thus,RG&Ewoulddeductatotalofapproximately

$.02305perkWhfrombundledratesduringtheEnergyOnlystage.

CASE96-E-0898 toinclude30'.and46'.oftheenergy,andonJuly1,2002allofthecompany's energy.Theschedulemaybeaccelerated ifthemarketpriceforpowerexceeds$.032perkWhonapersistent andsustained basisduringtheEnergyandCapacitystage.Also,totheextentthatenergyconsumption byend-usecustomers growsbeyondalevelof6,714gWh,theenergycapsoneligibility willbeincreased bytheamountofadditional consumption.

Asforcorporate restructuring, RG&Ewouldfunctionally divideexistingoperations intothefollowing activity-based units:distribution unit(DISCO),generating unit(GENCO),regulated loadserviceentity(RLSE),and,atitsoption,afunctionally separateholdingcompany(HOLDCO).

Thecompanywouldalsocreateastructurally separateunregulated loadservingentity(ULSE).TheULSEwouldbeanenergymarketerandproviderofotherenergyservicesbothwithinandoutsideRG&E'sDISCOserviceterritory.

TheDISCOwouldcontinueRG&E'stransmission and'istribution service,whichwouldbeprovidedtotheULSEandtheRLSEpursuanttoregulated tariffs.TheGENCOwouldberesponsible foroperating RG&E'sgenerating facilities.

RG&E'sGENCOwouldconsistofaportfolio ofnuclearandnon-nuclear sources.Theoutputfromnuclearsourceswouldbe"dedicated" toregulated load,whichissubjecttochangetoconformwiththeoutcomeofanyseparatestatewide proceeding onnuclearissues.Outputfromnon-nuclear sources(whichwouldinitially serveregulated load)wouldserveloadonacompetitively pricedbasisascustomers migrateawayfromtheRLSE.TheRLSEwouldcontinuetoserveasaprovideroflastresort(POLR)andprovidebundledserviceundertariffstocustomers whoelecttocontinuereceiving bundledserviceorwhodonothaveapracticable alternative.

Inaddition, RG&EwouldcommittoworkingwithStafftodevelopanexperimental alternative toprovidePOLRserviceonacompetitive basis.TheRevisedSettlement alsoprovidesforcontinuation ofaprogramtoassistlow-income customers andaservicequalityprogramtomaintainsafeandreliableservice.Further,the ee CASE96-E-0898 RevisedSettlement respondstoourdirective'o introduce retailaccesstofarmandfoodprocessor customers onanexpedited basisandaffectsthreependingappealsofourpriordecisions concerning RGKE.'inally, exceptasexpressly providedotherwise, theRevisedSettlement wouldsupersede the1996Settlement.

Partiestookanumberofexceptions totherecommended decisionandsubmitted commentsontheRevisedSettlement.

Inaddition, weimposedconditions andchangesinourNovember26OrderbeforeadoptingtheRevisedSettlement.

Inasmuchasissueswereraisedatvariousstages,thisopinionwilladdresstheparties'xceptions asstatedintheirbriefsonexceptions andbriefsopposingexceptions (whererelevant),

anycorresponding revisions madeintheRevisedSettlement, theparties'omments ontheserevisions, andtheconditions asstatedinour,November26Order./Strandable CostsREVENUEREUIREMENTForthefive-year termoftheApril8Settlement (andtheRevisedSettlement),

RGEE'stariffratesarepresumedtoincludeallprudently incurredinvestment inelectricplantandelectricregulatory assets(sunkcosts)asofMarch1,1997.Cases96-E-0948 etal.,PetitionofDairleaCooerativeInc.,OrderConcerning RetailAccessProposals (issuedFebruary25,1997).RG&Ewillpetitionthecourtforpermission towithdraw(1)asapartytotheappealintheArticle78proceeding broughttochallenge OpinionNo.96-12,EnerAssociation v.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.5830-96);

(2)thecompany's pendingArticle78proceeding Rochester GasandElectricCororationv.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.6616-96).

(Inthelattercase,werejectedthe1996Settlement's Kamineprovisions);

and(3)thecompany's pendingArticle78proceeding Rochester GasandElectricCororationv.PublicServiceCommission (Sup.Ct.AlbanyCo.IndexNo.6531-97)broughttochallenge ourJune23,1997OrderEstablishing RetailAccessPilotProgramsinCases96-E-0948 etal.

CASE96-E-0898 Rateswouldbereducedwithoutidentifying costsavings.Thus,neitherRG&E'sratesforfullservicenoritsratesforunbundled servicewouldreflectanysavingsspecifically identified asarisingfromtheexclusion ofstrandable costs,butthecompanymustmanageitsbusinesstoreducecostsinlinewiththerevenuereductions inordertomaintainitsrateofreturn.Inaddition, forthosecustomers whochoosetopurchasepowerinthecompetitive market,theremaybeadditional costsavings.Thesecustomers canavoidpayingRG&E'sback-outenergy,capacity, andretailing rateof$.032perkWhandpaythemarketpriceforsuchpower.TheywouldreapthesavingsfromlowerpricedmarketpowerandRG&E'sstockholders wouldbearthelossifthecompanywereunabletoreduceitsgenerating costtothemarketprice.IntheRevisedSettlement, thesignatories agreedtomeetpriortoJuly1,2000(oneyearearlierthanagreedtointheApril8Settlement) todiscussfutureratemaking treatment forsunkcosts.Inaddition, attheendofthefive-year term,theremaybefundsavailable tooffsetsomeofthesunkcosts.Thesefundscouldcomefromearningsinexcessoftheallowedrateofreturnonequity,unusedfundssetasidetomatchapotential liability forKamine(bothdiscussed morefullyinfra),and,ifweapprove,thecustomers'hare ofanygainsonthesaleofgenerating plants.Inthemeantime, boththeApril8Settlement andtheRevisedSettlement providethatthecostsofRG&E'snucleargenerating facilities, GinnaStationandthecompany's 14'.shareofNineMilePoint2,wouldberecovered inretailratesatleastthrough1999.RG&Efurthercommitstoparticipate ingood-faith negotiations withStaffandwiththeothercotenants ofNineMilePoint2regarding futureratetreatment ofthisfacility.

Thesignatories anticipate thatsimilartreatment willbeappliedtoGinnaStation.Forthenon-nuclear generating facilities, bothagreements addressthe"fixed"and"variable" portionsofRG&E'sfossilgenerating units,hydroelectric generating units,gas

~e CASE96-E-0898

turbines, andpowerpurchasecontracts (otherthanKamine),collectively knownasthe"To-GoCosts."IntheEnergyOnlystage,thecompanywouldallow$.01905perkWhastheestimated marketvalueforenergyprovidedandwouldagreetoselltoretailers atthisrate.Withanallowance of$.004perkWhforretailing costs,theallowance wouldbe$.02305perkWh,whichisgreaterthantheestimated

$.013perkWhintheApril8Settlement.

ThevariableportionoftheTo-GoCostswouldbesubjecttothe.marketforelectricity commencing July1,1998,thestartoftheEnergyOnlystage.Thefixedportionofsuchcostsistheremainder ofallTo-GoCostsnotdefinedasvariable.

Thefixedportioncomprises allcapitalcostsincurredafterFebruary28,1997,06Mexpenses, andproperty, payrollandothertaxes.ThefixedportionoftheTo-GoCostsareassumedtoberecovered infullthroughthecompany's distribution accesstariffuntilJuly1,1999,thestartoftheEnergyandCapacitystage,afterwhichrecoveryofthecombinedfixedandvariableTo-GoCostsandretailing costs,atotalof$.032perkWh,wouldbesubjecttocompetition.

Therecommended decisiondidnotincludespecificestimates ofstrandable costsinthecomputation ofRG&E'srevenuerequirement.

According totherecommended

decision, studiesofRGSE'sstrandable costsarespeculative atpresentbecauseofthelackofacompetitive marketforelectricity.

Therecommended decisionalsonotedthattheApril8Settlement callsforratereductions withoutspecifying anestimateofstrandable costsandallowsforfutureconsideration ofsuchcostswhensomeofthevariables, suchastheactualmarketpriceforelectricity, willbeknown.Therecommended decisionalsopointedoutthat,exceptfornuclearpowerandKaminepurchases, therecoveryoftheremaining halfofRGEE'sTo-GoCostsforgeneration woulddependuponthecompany's abilitytocompetewithoutsidesourcesofpower.Ifthecompetitive pricesarelowerthanRGSE'sback-outrates,customers whopurchasethatpowerwillautomatically enjoy 0~e CASE96-E-0898 thebenefitsandstockholders willbeartheeffectsoftherevenueloss.Severalpartiesexcept,insisting thatstrandable costsshouldbecalculated nowandthatfurtherratereductions shouldbeauthorized bydisallowing aportionofthestrandable costs.AARPrenewsitsclaimthatstrandable costsamountto$800millionto$940million,andAARPcallsforanequalsharingofstrandable costsbetweenratepayers andstockholders unlessthefinancial integrity ofRG&Eisinjeopardyorlegislation ispassedprohibiting sharing.AARPmaintains therecommended decisionisinconsistent withOpinionNo.96-12,whichstatedthatstrandable costsshouldbeallocated througha"carefulbalancing ofinterests andexpectations";

that"innovative meansmustbeusedtoreducetheamountofstrandable costsbeforetheyareconsidered forrecovery";

andthatthesecostsshouldbe"recovered withaneyetoloweringrates,[and]fostering economicdevelopment.

According toAARP,therecommended decisionadmitsthattheApril8Settlement isnotsupported bysubstantial evidenceoftheamountofstrandable costsbecausethesignatories didnotestimatethemandtheydidnotsetforthhowsuchcostswillbeestimated inthefuture.CPBreiterates itsestimated rangeof$1,200millionto$1,500millionforstrandable costs,butnotesthatapreciseestimateofstrandable costsisnotneededtorequireimmediate ratereductions ofuptotenpercent.CPBalsoclaimsthattherecommended decisionfailstorecognize thatthedisparities betweencompetitive electricpricesandcurrentrateswillbeattheirzenithoverthenextseveralyears,whichshouldbetakenadvantage oftoreducerates.Finally,CPBrespondstovariouscriticisms ofitsstrandable costproposalbynotingthat(1)withrespecttobondratings,CPBwouldlimititsstrandable costdisallowance tomaintainanequityratioofatleast40%,01Cases94-E-0952 eral.,~suraOpini,onNo.96-12,mimeopp.89-90.

CASE96-E-0898 and(2)withrespecttosharing,CPB'sproposals wouldallocate30%ofthetotalstrandable coststoRG&E'sshareholders.

RG&EandStaffsupporttherecommended decision's conclusions withrespecttostrandable costs.TheypointoutthattheApril8Settlement doesnotguarantee recoveryofstrandable costs;andnotethatapproximately

$155millionincumulative ratereductions andforgonecreditsarecalledforintheApril8Settlement withoutspecifying howthecompanyistoreduceitscosts.Thecomparable figurefortheRevisedSettlement is$174.6million.Staffexplainsthatthestrandable coststudiessubmitted byCPBandAARPcontaindataandcomputational errorsthatrenderthemunreliable asabasisformodifying theApril8Settlement.

Anexampleoftheerrorscontained inthestudiesthatstaffobservedisAARP'srelianceupon1995data,whichdoesnotprovideanaccuraterepresentation ofthecostsoftheKaminepurchased powercontract.

TheomissionoftheKaminecontractcostsalone,staffsuggests, couldincreasestrandable costsbyover$101million,andadoublecountofregulatory assetswoulddecreasestrandable costsby$210million.Ontheotherhand,StaffnotesthattheApril8Settlement providesmeaningful ratereductions, strongincentives tomitigatecosts,including strandable costs,andpowerfulincentives forRG&Etomanageitsoperations efficiently andaggressively.

RG&EarguesthatCPB'spositionisconsistent withitsadvocacyofconfiscating investors'unds inordertoprovideashort-term benefittodayforcustomers, regardless ofthelong-termconsequences.

Forexample,RG&Emaintains thatitwouldsufferabonddowngrading wereCPB'sproposals tobeimplemented, andthatitsstockvaluewoulddeclinesignificantly.

RG&Epointstothestocksofutilities inTexas,whichsufferedasignificant andimmediate dropinpriceswhentheTexascommission announced thatthoseutilities wouldhavetowriteoffaportionofstrandable costs.Likewise, thecompanycitesa50%declineinthestockpriceandabonddowngrading oftheparentcompanyofPublicServiceCompanyofNewHampshire whenthat CASE96-E-0898

~state'scommission announced theutilitywouldhavetoabsorbsomestrandable costs.IncommentsontheRevisedSettlement, theRetailCouncilrepeatsthecallsforacurrentestimation ofstrandedcosts,inordertojustifyfurtherraterelief.Wefindreasonable theRevisedSettlement's treatment ofstrandable costs.First,byincluding intheback-outrateacomponent forthefixedportionoftheTo-GoCosts,RG&E'scustomers haveameaningful opportunity toavoidtheequivalent ofsomeofRG&E'strandable costsiftheycanpurchaseelectricpoweronthemarketatapricebelowtheback-outrate.Inaddition, theRevisedSettlement callsforratereductions andtherelinquishment ofotherbenefitswithoutspecifying howRG&Eistoachievethecomplementary savingsneededsothatitcanmaintainitsoverallrateofreturn.TheRevisedSettlement alsorequiresthepartiestomeetpriortoJuly1,2000todiscussthefutureratemaking treatment ofRG&E'ssunkcosts.Finally,theexceptions callingforanimmediate estimateofstrandable costsaredeniedbecausetheestimates proffered ontherecordcontaindataandcomputational errors.KamineCostRecoverRG&Eisinvolvedinlitigation pertaining toitspowerpurchasefromfacilities

'ownedbyKamine.TheApril8Settlement's Kaminerecoveryprovisions permitRG&Etosetaside$33.2million($32.9millionintheRevisedSettlement) overthefive-year termtocovercostsrelatedtoresolution ofthelitigation.

Assumingasettlement oftheKaminelitigation, RG&EwouldbeallowedtocontinueafterJuly1,2002toreflectinrates$10.6millionperyear($10.5millionintheRevisedSettlement) untilthecostofthatsettlement isrecovered.

However,ifnosettlement werereachedandRG&Ewereobligated topay,RG&Ewouldbepermitted torecoverfromratepayers uptoseven-eights ofthecostofthemaximumoutputofKamineduringthefive-year term,lessamountsalreadyaccruedandanysecuritization benefitsforthcoming.

Alsothe CASE96-E-0898

$10.6million($10.5millionundertheRevised.Settlement) automatic recoverywouldendatthetermination ofthefive-year term.Theunrecovered balance,ifany,wouldbedeferredforfuturerecovery, andwewoulddetermine thetimingoffuturerecovery.

Therecommended decisionsupportstheApril8Settlement's treatment oftheKaminedispute.Therecommended decisionalsopointedoutthat,intheabsenceofasettlement ofthatdispute,therearelimitsontheimmediate rateimpactsofKaminecostrecovery, andrecoveryofKaminecostsonalongtermbasismaybesubjecttotheforcesofacompetitive marketforelectricity.

Forthesereasons,theJudgerecommended approvaloftheKaminecostrecoveryprovisions.

CPBexcepts,contending footnote31oftheApril8Settlement limitsthecompanytorecoveryofprudentandverifiable costs,andthatanycourtordereddamagepaymentscouldbe,butshouldnotbe,recovered inrates.Inaddition, CPBnotesthat,iftheKaminedisputeissettled,RG&Ewouldbeentitledto100%recoveryofstrandable Kaminecosts.CPBrequeststhatthisprovision beclarified toassurerecoveryonlyifthetotalcostofthesettlement islessthantheKaminecontractprice.TheAttorneyGeneralarguesthatthereshouldbenoautomatic recoveryofKaminecosts,andthatweshouldinsistonaprudencereviewofallpaymentstoKamine.RG&Erespondsthatithassteadfastly pursuedallavailable avenuestorelieveitscustomers oftheburdentheywouldbeariftheKaminecontractwereenforced.

Intheprocess,itstates,thecompanyhassaveditscustomers tensofmillionsofdollars.Itcriticizes CPB'ssuggestion thatitshouldcontinuetodevoteitsresources toavoidingexcessive Kaminepowercosts,whilebearingtheentireriskofdamages,as"theultimateformofcynical,one-way-street regulation."

WithrespecttoCPB'ssecondpoint,RG&Edoesnotanticipate settlingthecontractual claimforanamountgreaterthanthatpayableunderthecontract~

CASE96-E-0898 AtourOctober8,1997session,wenotedourdiscretion toreduceratesduringthefive-year termifitbecomesclearthattheKaminecostrecoveryclausewouldrecovermorefundsthanneededtoresolvethecontractdispute.TheRevisedSettlement expressly acknowledges thatdiscretion.

IncommentsontheRevisedSettlement, RGEE,Staff,CPB,andMultipleIntervenors maintainthisflow-through provision isreasonable.

Further,asalludedtoabove,footnote31statesspecifically

"[n]ocostreferenced inthis[Revised]

Settlement maybeconsidered forrecovery, true-upordeferralunlessitisprudentandverifiable."

~ReturnonEuitUndertheApril8Settlement, ifRGEEachievesareturnoncommonequityforitsregulated operations inexcessof11.80'.fortheentirefive-year term,thecompanywouldbeentitledtoretain50'ftheamountinexcessof11.80'.andtousetheremaining 50%towritedownaccumulated deferrals orsunkcosts.Therecommended decisionfoundtheseprovisions reasonable.

ItnotedthatCPB'sproposed10.2%returnonequitydidnotincludeastayoutpremium,whichatthetimewascomputedtobe1.44%basedonthespreadbetweentheJune1997treasurybillsandMay2002treasurybonds.Therecommended decisionnotedthataddingastayoutpremiumtoCPB'sreturnwouldincreaseitto11.64'.,closetotheApril8Settlement's sharingthreshold.

CPB,theAttorneyGeneral,andtheRetailCounciltakeexceptions.

CPBclaimsthatitsproposed10.2%returnonequityshouldbeusedasthesharingthreshold.

CPB's10.2;equityreturnwasbasedondiscounted cashflow,capitalassetpricingmodel,comparable

earnings, andriskpremiummethods.CPBalsocontendstherecommended decisionmiscalculated thestayoutpremium.Citingtherecommended decisionintheGenericFinanceProceeding (Case91-G-0509),

CPBclaimsthepremiumshouldbebasedonone-halfofthespread,whichitsayswouldreducetherecommended decision's figurefrom11.64.to10.92%

o CASE96-E-0898 CPBalsorenewsitscallfordifferent sharingofearningsoverthethreshold, with50'.towritedownstrandable costs,25%forthestockholders and25%fortheratepayers forearningsinexcessof10.2'.Itproposesthiscomputation beperformed annuallyinsteadofforfiveyears.TheAttorneyGeneralsupportscontinuation ofthe11.2%sharingthreshold inthe1996Settlement, contending RG&Ewillassumelittleadditional riskasaresultoftheintroduction ofcompetition.

TheRetailCouncilcallsfortheflowthroughofallexcessearningstoratepayers.

According toit,theApril8Settlement gives100%ofexcessearningstostockholders becausetheportionthatwouldbeusedforwritedownsissimplyareturnofcapitaltoshareholders.

TheRetailCouncilarguesweshouldrejecttheconceptofa"regulatory compact,"

whichitseesasguaranteeing shareholder recoveryofallpastinvestments.

RG&ErespondsthatCPB'sproposed10.2-.returnonequityisabout130basispointsbelowtheaverageallowedreturnsforelectricutilities inthefourth'quarter of1996andfirstquarterof1997.AlsoRG&EobservesthatCPB'simpliedspreadoverbondyieldsisabout160basispoints,whichislessthanthatemployedintheGenericFinanceProceeding, wherea350basispointriskpremiumabovetheutilities'ond yieldswasgenerally employedand250basispointswasconsidered thelow-endoftherange.RG&Econducted itsownstudiesandconcludes thatitscurrentcostofequityisbetween11.95%and12.20-..Moreover, RG&EpointsoutthatCPB'sstrandable costproposalwouldweakenthecompany's financial positionbyloweringitsequityratioandincreasing itsrisk,whichcouldleadtoadeclineinitsbondratings.RG&Esuggestsitsequityratiowouldbereducedfromtheexisting49'-.to36.3.ifCPB'stotalratebasedisallowances wereadopted.Finally,RG&EobservesthatCPB'sproposedallocation ofexcessearningsonanannualbasiswouldbeunfairlyasymmetrical becauseexcessearningsingoodyearswouldbesharedwiththeratepayers butearningsshortfalls inbadyears CASE96-E-0898 wouldbecompletely absorbedbythestockholders.

RGGEsuggestsitwouldneverearnthetargetreturnifthischangeisadopted.AtourOctober8,1997session,wesuggested thatthe11.8.returnonequitysharingthreshold wastoohigh,especially giventhatthecompanyhadrecentlyearnedexcessprofits,whichitwouldretainfullyundertheApril8Settlement, andthattheprovisions relatedtodeferrals couldresultintheneedforrateincreases attheendofthefive-year term.RGEE,Staff,andMultipleIntervenors maintainthattheRevisedSettlement addresses ourconcerns.

TheycitetheRevisedSettlement's provision thatimputes150basispointsofthe1997rateyearoverearnings tothe11.8'.returnonequitymeasurements overthefive-year term.Thiswouldeffectively reducethesharingcapto11.5%Theexcessearningsallocation wouldalsobereallocated suchthat(1)halfoftheexcesswouldbeusedtowritedowndeferredcostsaccumulated duringtheterm,andanyportionofthishalfremaining afterdeferrals arewrittendownwouldberetainedbythecompanyasearnings; and(2)withregardtotheotherhalfofanyexcessearnings, thefirst$800,000wouldbeusedtoreduceratesforcertainlargeindustrial andcommercial customerclasses.Theremainder wouldbeusedtowritedownaccumulated deferrals orsunkcosts,andtotheextentthatanypartofthislatterhalfremainsafterwritingdownsuchdeferrals andsunkcosts,wewoulddetermine itsdisposition.

MultipleIntervenors statesthatthe$800,000allocation forlargecustomers isintendedtocorrectforthefactthatadisproportionate shareoftheSBCreallocation wasdirectedtosmallcustomers.

StaffassertsthattheRevisedSettlement reducesthelikelihood ofrateincreases attheendofthefive-year term.CPBreiterates itsclaimthattheearningssharingtriggershouldbe10.2%andnotesthat,sincethetimeitsdirecttestimony wassubmitted, interestrateson30-yeartreasurybondshavedeclinedbyabout60basispoints,whichitclaimswouldjustifyalowerequityreturn.

0o CASE96-E-0898 TheRetailCouncilreiterates thatthetreatment ofexcessearningsisunacceptable becausethereallocation ofexcessearningsbenefitsonlyshareholders orlargecustomers.

The11.5'-.sharingthreshold fallswithintherangeofequityreturnspresented inthiscase:from10';byCPBto12.2%byRGEE.Althoughacursoryviewwouldleadtotheconclusion thatthe11.5%isonthehighside,acloserexamination willshowthe11.5%effective threshold isreasonable.

First,itmustberemembered thatwerecentlyestablished an11.2%sharingthreshold inthecompany's lastcase'hatcoversthethree-year periodendingJune30,1999.Ifearningsexceedthat,overtheentirethree-year period,theyweretobesharedequallybetweenshareholders andcustomers, withthecustomers'hare beingusedtowritedownassets.Second,theRevisedSettlement wouldextendthestayoutperiodbytwoyears,andwouldincreasethecompany's businessriskbyremovingitsmonopolystatusandsubjecting ittocompetition.

Inaddition, theRevisedSettlement's revenuereductions placemoreriskontheshareholders.

Thecombination ofthetwo-yearextension, increased businessrisk,andreducedrevenuesmorethanjustifytheincreaseinthethreshold forsharing.Third,theRevisedSettlement allocates moreofanyexcessearningstowritedowndeferredcostsorsunkcosts.Wedohaveonereservation abouttheprovision that$800,000ofexcessearningswillbeusedtoreduceratesforcertainlargecustomerclasses.Weconcludethatlargecustomers willalreadyreceivesubstantial benefitsunderotherprovisions oftheRevisedSettlement; thus,thereisnoneedforthisuniqueadditional benefit.Accordingly, weadoptthistermoftheRevisedSettlement onthecondition thatthefirstsentenceofParagraph 10(b)isremoved,andthewords"...ofthisamount..."

aredeletedfromthesecondsentence.

01Cases95-5-0673 etal.,~suza,OpinionNo.96-27,mimeopp.7,21,and27.

CASE96-E-0898 GainonSaleofGeneratin PlantsTheApril8Settlement containsnoseparateprovisions forthedisposition ofgains,ifany,onthesaleofelectricgenerating plants.Rather,anygainswouldbeincludedinthereturnonequityandsharedifthatreturnexceedscertainthresholds.

AtourOctober8,1997session,westatedourbeliefthattheApril8Settlement wasunbalanced withrespect-toitstreatment ofanygainonthesaleofgenerating assets.Wealsosoughtaprovision thatwouldencourage RG&Etosellgenerating plants.TheRevisedSettlement containsprovisions thatincreasethecustomers'hare ofgainsrealizedonsuchsales,andprovideanincentive toencourage promptdivestiture ofgeneration.

StaffandRGSEobservethattheRevisedSettlement generally providesfora20%/80%splitbetweenshareholders andratepayers ofanynetgainsoverthefive-year termandthatcustomers willbenefitfromanysuchgainonthesaleofgenerating assetsregardless ofthecompany's levelofequityreturn.Thesplitmaychangeto40:shareholder and60:ratepayer onthefirst$20millionofnetgaininthefirstthreeyearsoftheRevisedSettlement.

Thesepartiesmaintainthisadditional allocation totheshareholder isasufficient incentive toencourage promptdivestiture.

CPBrepliesthatadivestiture incentive isunwarranted becauseRGEE'sratesareamongthehighestinthenationandanyratereduction resulting fromtheflowthroughofanetgaintoratepayers wouldmakethecompany's ratesmorecompetitive, produceadditional sales,andincreaseshareholders'arnings.

WefindthattheRevisedSettlement's treatment ofgainsonthesaleof.generating assetsisreasonable becauseitensuresratepayers willreceiveasubstantial portionofanynetgainsonthesaleofplantsthatwereacquiredonbehalfofandfinancially supported bytheratepayers.

Inaddition, weadopttheincentive forRG&Etodivestgenerating assetspromptlybecausedivestiture willhastenthedevelopment ofacompetitive powermarket,thebenefitsofwhichwillredoundtoratepayers, 0O.

CASE96-E-0898 consistent withOpinionNo.96-12,and,ensureafair~~~~quantification ofstrandable costs.'SBCFundinTherecommended decisionsupported theApril8Settlement provisions relatedtotheSBCcharge,i.e.,toflowthroughtoratepayers allmandatedincreases anddecreases inspendingforSBCprograms, whichincluderesearchanddevelopment, energyefficiency, lowincome,andenvironmental protection.

Thelevelofspendingalreadyreflected inrateshadbeenestablished inthe1996Settlement, whichsetratesforthethree-year periodendingJune30,1999.AARP,CPB,andPIIexcepttotherecommended decision's conclusion nottomodifytheApril8Settlement provisions relatedtotheSBCcharge.Theyseekspecificspendinglevels.Forexample,CPBrequeststhatthe1995spendinglevelsbemaintained throughout thefive-year term,whilePIIsupportsexpenditures derivedfroma$.0015perkWhratechargedtoallenergysales.StaffpointsoutthattheRevisedSettlement wouldbuildspecificSBCexpenditures intotherates,thecostofwhichwouldbegreaterthanthetotalthatwouldbespentiftheSBCweresetat$.001perkWhforthreeyears.However,Stafffurtherexplainsthattheexpenditures wouldbespreadoverfiveyearsbecausemostoftheexpenditures relatetoongoingenergysavingsandincentive paymentsthatthecompanyisobligated topayforunderitsDSMbiddingprogram.PIIopposestheSBCmodifications contained intheRevisedSettlement becauseitwouldreduceexpenditures fortheseprogramsbynearlyhalffrom$7.8millionin1995toanaverageof$4.78millionbeginning in1998.PIIsetsforthseveralexamplesofspecificspendingreductions thatwouldresultandstatesthatthecutsareinconsistent withtheclearlyexpressed

~Cases94-E-0952 etal.,~snra,OpinionNo.96-12,mimeop.60.

o CASE96-E-0898 intention topreservetheseprogramsatleastduringthetransition period.'urthermore, PIIcallsfortheelimination oftheLargeCustomerCreditProgram,whichallowsindustrial customers toelectnottoparticipate intheDSMprogramandtherebyreceivea$.0003perkWhcredit.ArguingthatRG&EwillnolongerofferDSMprograms, PIIbelievesthecreditshouldbeterminated.

SincetheSBCfundingallowance contained intheRevisedSettlement meetsourstatedgoal,wefindtheseprovisions acceptable.

WithrespecttoPII'spositionthattheLargeCustomerCreditProgrambeeliminated, wenotethatthecreditissubjecttorecalculation intheeventthatRG&E'sspendingonDSMprogramschangesmaterially.'ther ProosalsSeveralpartiessupportotherchangestopartsoftheRevisedSettlement thatareunchanged fromtheApril8Settlement

.PIIproposesa"pricecapplus"mechanism forRG&E'srevenuerequirement, whichisacombinedrevenuecapandpricecap.Underpricecapplus,theinitialyear'srevenuecapwouldbesetusingtraditional costofserviceregulation andinsubsequent years,therevenuecapwouldbeadjustedforthreefactors:inflation, productivity, andgrowth.Inaddition, PII'spricecapplusincludesarevenuecaptrue-up.PII'spricecapplusproposalisnotacceptable becauseitcouldleadtoincreased ratesifproductivity isnotsufficient tooffsetinflation and,inanyevent,wouldrequireannualregulatory oversight ofthetrue-upmechanism.

Ineffect,thisproposalrunscountertoourobjective, whichistorelymoreoncompetition andlessonregulation.

Cases94-E-0952 etal.,~snraOpini,onNo.96-12,mimeop.61.Cases95-E-0673 and95-G-0674, Rochester GasandElectricCororation-DSM,OpinionNo.95-20(issuedDecember27,1995),mimeoAppendixp.9.

CASE96-E-0898

~CPBproposestoreducetherevenuerequirement by$235,000toreflectreformsinWorkers'ompensation Law.CPB'sadjustment issubsumedintheoverallrevenuereductions requiredbythisorderandisrejectedbecausethischangeisbutoneofmanychangesexpectedinthefuturethatwillaffectearningssubjecttothesharingthreshold.

CPBalsoproposeswemodifytheprovision thatwouldpermitRG&Etodeferthecostsofoperation andmaintenance relatedtoinflation inexcessof4.0'%PBstatesweshouldsimultaneously requirethereturnonequitytodropbelow9.beforedeferralispermitted.

TheCPB'smodification isasymmetrical, i.e.,RG&Ewouldhavetobear100%oftheexcessinflation riskasthereturnonequitydropsfrom11.5.to9.0%,butthecompanywouldonlyretainasmallportionofth'eupsidebenefitabovethe11.5'.equityreturnbecauseofotherequityreturnsharingmechanism weadopted~sura.Consequently, thisproposalisnotadopted.AARPexceptstothepropertytaxincentive, whichwouldallowRG&Etodeferforfuturerecoveryorpassbacktoratepayers 50.ofanypropertytaxexpenseincreaseordecreaseincomparison tothebaselevel,i.e.,theactualtaxexpenditures duringthe12monthsendedFebruary28,1997lesstaxesrelatedtoanyassetssoldafterJune30,1997.Theother50;wouldbereflected intherateofreturncomputations.

AARPcharacterizes theprovision asabribetogetthecompanytolobbyfortaxreductions.

AARP'sexception isrejectedbecausetheprovision willencourage RG&Etopursuereductions inthecostofpropertytaxes,orfailingthat,becausetheprovision willsparecustomers halfofany'increase insuchcosts.Wenotethatcertainprovisions oftheRevisedSettlement (i.e.,($8,11-17,24(withrespecttoshut-down costs),and$30)providefordeferralandrecoverywithoutrequiring furtherpetitiontoorapprovalbyus.Withoutalteringtheintentoftheseterms,weadoptthemonthecondition thataformalpetitionwillbefiledwithuspriorto CASE96-E-0898 establishing deferrals orcommencing anyrecoveryduringthefive-year term.Finally,wealsoobservethattheRevisedSettlement referstopossibleStatewide resolution ofthefutureratemaking andownership ofnuclearfacilities.

Paragraph 23(d)statesthat"nochangeinthetrea'tment ofRG&E'snuclearfacilities shallbeimplemented untilatleastJanuary1,2000."TheJanuary1,2000datemightbeconstrued asprecluding asaleortransfer, throughanauctionorotherwise, ofthecompany's interestinnuclearfacilities untilatleasttheyear2000and,thus,couldconflictwithsubsequent actionontheAugust1997StaffReportonNuclearGeneration.

Weadoptthisparagraph onthecondition that$23(d)ismodifiedtoreadasfollows:"nochangeinthetreatment ofRG&E'snuclearfacilities shallbeimplemented priortotheCommission's resolution oftheAugust1997StaffReportonNuclearGeneration."

lREVENUEALLOCATION ANDRATEDESIGNPursuanttotheApril8Settlement, revenuedecreases wouldgenerally beallocated toRG&E'sserviceclassesbasedontheirresponsibility forgeneration costs.Asaresult,thelargeindustrial customers wouldreceiveratereductions of10-:toachieveanaveragerateof$.056perkWh;largecommercial customers wouldreceiveratereductions of8%toachieveanaveragerateof$.068perkWh;otherindustrial andcommercial customers wouldreceiveratereductions of3.7'.toachieveanaveragerateof$.08perkWh;andresidential andsmallbusinesscustomers wouldreceiveratereductions averaging 2.5%,withratesvaryingdepending onusageandclassification.

SeveralIspecificratedesignchangeswerealsosetfoith,including amongothersaproposedannual$1.50increaseinthemonthlycustomerchargeforresidential andsmallbusinesscustomers.

TheJudgerecommended theallocation favoringthelargeindustrial customers because(1)asMultipleIntervenors hadobserved, RG&E'sresidential, commercial, andindustrial rateswerein1995,respectively, 34.6'-.,32.1'.,and61.5'.above e

CASE96-E-0898 corresponding nationalaveragerates,whichjustifies proportionately greaterreductions fortheindustrial class,and(2)theallocation ofrevenuesandindividual ratechangeswouldmoveRG&E'sratesclosertothemarginalcosts,whichiseconomically efficient andmakessenseinanincreasingly competitive electricity market.Withrespecttotheincreases inthemonthlycharge,therecommended decisionconcluded thattheultimatecustomerchargeof$17.50isjustified bythefactthatthecomparable marginalcostisabout$20.'PBexcepts,arguinggreaterattention canandshouldbepaidtorateschargedforelectricity aroundthecountry.Itprovidesextensive legalarguments insupportofthisproposition.

Assumingweweretoadoptthisapproach, CPBconcludes weshouldadoptequalacross-the-board percentage decreases forallclasses.AARPobjectstoresidential customers receiving smallerdecreases andarguessubstantial jointandcommoncostsshouldnotbeallocated tocustomercostssomoreofthemcanbecoveredinratespaidbynon-residential users.PULPcontendsthatwehavenostatutory authority tofavorlargerindustrial customers overothercustomers.

PULPalsoassertsitisirrational andillegaltofavorthisonecustomerclassoverothersasthereassertedly hasbeennoshowingtheindustrial customers needsuchadecrease.

PIIclaimsthatthecustomerchargeshouldnotbeincreased fromthecurrent$10monthlychargeto$17.50overthefiveyearsbecausethemarginalcoststudywascalculated threeyearsagoandwasnotsubmitted inthiscase,andbecausetheeffectofsuchachargewouldincreasebillsfor43;oftheresidential classevenwithanoverallrevenuedecrease.

Inaddition, PIIisconcerned thatthedecreasetoenergyrateswouldcarrynegativeenvironmental consequences.

According to~Exhibits50and51,Tr.1,450-1,459.

0e CASE96-E-0898 PII,theincreaseinsaleswouldbeaccompanied byanincreaseinpollution.

0Staff,RG&E,andMultipleIntervenors supporttherecommended decision's findingswithrespecttorevenueallocation andratedesign.Theynotethatratesmustberealigned topromoteeconomicdevelopment andindustrial competitiveness.

Forexample,Staffreasonsthatindustrial customers whomaybeconsidering whethertoexpandinRochester ortorelocateandexpandelsewhere mightbeinducedbylowerratestoremainintheRG&Eserviceterritory.

Theresulting expansion offacilities andcreationofnewjobs,Staffstates,wouldhavepositiveeconomicimpactsfortheratepayers andforthelocalcommunity.

Thesepartiesfurtherassertthatmarginalcostsarearationalbasisuponwhichtosetrates,andlargecustomers arecontributing revenuesdisproportionately inexcessoftheirmarginalcostsofservicerelativetoresidential andothersmallcustomers.

0Withrespecttotheannual$1.50increaseinthemonthlycustomerchargesoverthetermoftheApril8Settlement, StaffandRG&Ereadilyconcedethatabout43.oftheresidential classwouldexperience billincreases, buttheynotethatthecurrentcustomerchargeiswellbelowthe$20marginalcosts,andenergypricesoverallarewellabovemarginalcosts,resulting inimproperpricesignalsuponwhichcustomers basetheirdecisions.

RG&Ealsonotesthatitslow-income customers arejustaslikelytoconsumemorethantheaveragelevelofenergyastheyaretoconsumelessthanaverage.Therefore, RG&Ebelievesthattheincreaseinthecustomerchargewillnotfalldisproportionately onlow-income customers.

AtourOctober8,1997session,wedidnotquestiontheratereductions forlargeindustrial customers butexpressed interestinproviding largerratedecreases toresidential andothersmallcustomers.

Inaddition, weaskedthepartiestoreconsider thecustomerimpactoffiveannualincreases of$1.50 CASE96-E-0898 inthemonthlycustomercharge,butacknowledged thatlargerratereductions forsmallcustomerclassesmightallaythisconcern.RG&E,Staff,andMultipleIntervenors notethattheRevisedSettlement wouldgiveallserviceclassifications atleastafivepercentreduction.

Theyexplainthatthroughreallocation oftheSBCfundingandtheuseofGrossReceiptsTax(GRT)reductions theoverallrevenuedecreasewillchangefrom$27.1million(4.1%)to$40.6million(6.1%).MultipleIntervenors pointsoutthatadisproportionate shareoftheSBCreallocation (approximately

$800,000)wasdirectedtotheresidential andsmallcommercial customers.

StaffstatesthateveryclasswillreceivethebenefitsoftheGRTreductions.

TheAttorneyGeneral,CPB,RetailCouncil,PII,PULP,andMr.Strakaclaimthatevenfurtherreductions arewarranted fortheresidential andsmallcommercial classes.PULPmaintains theallocation oftherevenuedecreaseisnotbalancedandthereisnosupportfortheproposition thattheindustrial customers arepayingasubsidyundercurrentrates.PII,CPB,andMr.Strakaalsoobservethattheplannedratereductions forresidential andsmallcommercial customers areback-endloaded,i.e.,byyearfourthesecustomers willreceivea2.62:reduction andtheninyearfivejumptothefulldecreaseofabout5%.Ontheotherhand,PIIstatesthatthelargestindustrial customers willreceive11.2%decreases, ormostoftheirreductions, byyearfour.TheAttorneyGeneraladdsthattheflowthroughoftheGRTreductions wouldcostRG&Enothingandtheratescontained intheRevisedSettlement wouldstillbeuncompetitive.

Mr.Owens,Mr.Straka,andCPBclaimthat36%ofresidential customers wouldstillreceiveabillincreaseundertheRevisedSettlement, whichtheystateisunacceptable.

Mr.Owensrecommends thatthemonthlychargeincreasebehalvedto$.75peryear,whileCPBwouldeliminate anyincreaseinthisrate.AsCPBargues,wecanconsideranumberoffactorsindetermining aproperlevelofrates.Animportant consideration isthecompetitiveness ofRG&E'srateswiththoseofotherareas

CASE96-E-0898 inthenation.Aslargeindustrial customers havethewidestarrayofcompetitive alternatives, andareverysensitive tothelevelofrates,theirratesshouldbealignedascloselyaspossibletocomparative alternatives.

UndertheApril8Settlement, thelargeindustrial rateswouldhavebeenultimately reducedto$.056perkWhonaverage,whichapproaches theindustrial nationalaveragepriceforelectricity ofapproximately

$.046perkWh.UndertheRevisedSettlement, theindustrial rateswouldbe$.055perkWh.However,wefindthattheresidential andsmallcommercial customers'ould notreceivesufficient revenue,reductions undertheRevisedAgreement.

Wewillincreasetherevenuereductions forthosecustomers fromapproximately 5.0%to7.5.inthefinalyearoftheterm.Thischangerequiresacorresponding adjustment totheRevisedSettlement's cumulative reduction from$51.1millionto$64.6millionforJuly1,2001.TheRevisedSettlement providesthat,beginning July1,1999andcontinuing throughJune30,2002,Incremental Manufacturing Loadshallbeservedatanaveragerateof$.059perkWh.Weadoptthistermonthecondition thattheaveragerateinsteadis$.045perkWhsothatitapproximates thenationalaveragerate.Withrespecttotheincreaseintheresidential andsmallcommercial customercharges,weobservethattheincreases arebasedoncomparisons ofratesandmarginalcosts,whichsuggestenergyratesshouldbereducedandthatcustomerchargesmaybeincreased withoutexceeding cost.Thisrealignment isconsistent withthecomingcompetitive marketforelectricity andretailing services.

Wenotethatthefurtherratereductions approvedfortheresidential customers willreduceto27%thepercentage ofcustomers whowillreceivebillincreases onaverage.Itshouldalsobenotedthattheyearly$1.50increaseResidential andothersmallusersareidentified intheRevisedSettlement schedules bytheirlowervoltageclassas"pri-pri,"

"sec-sec,"

and"pri-sec."

CASE96-E-0898 inthemonthlycustomerchargehadalreadybeenapprovedforthethreeyearsendingJune30,1999inthecompany's lastrateproceeding.

TheRevisedSettlement reasonably extendstheincreaseforthreemoreyears.Lastly,PII'sopposition toadecreaseinenergycharges,becauseofpotential negativeenvironmental impacts,isrejected.

Evenwiththechange,energyrateswillremainabovemarginalcostsandPIIhasofferednoevidencethatenvironmental impactsaresosubstantial astoexceedtheenvironmental thresholds discussed infra.SinleRetailerModel'HEPROGRAMThesingleretailermodelisthefoundation uponwhichtheentireProgramisbuilt.According totheApril8Settlement, asingleretailer, orLSE,wouldpurchasepowerontheopenmarketanddistribution accessfromRG&E.TheLSEwouldmarketthepowertocustomers andwouldberesponsible forscheduling deliveries basedonloadshapesorreal-time meterdata.Also,forthefirstthreeyearsoftheProgram,RG&EwouldofferbillingservicestotheLSEssothattheymaycommenceoperations withouthavingtowaitfordevelopment oftheirownbillingsystems.RG&Ewouldretainownership ofthemeters.Numerousobjections wereraised.Therecommended decisionconsidered manyofthesebutdidnotaddressWEPCO'ssecuritydepositconcernsbecausetheissuewouldbethesubjectofanoperating agreement.

Onexception, WEPCOassertsthatthesingleretailermodelwouldprecludeallbutthelargestLSEsfromenteringthemarketbecauseitfearsRGEEwillrequireLSEstopostsecuritydeposits, andtoparticipate inservicerestoration effortsandTheissueoftheapplicability oftheHomeEnergyFairPractices Acttosingleretailers hasbeenconsidered inanotherCommission order.Cases94-E-0952 and96-E-0898,

~suza,OrderRegarding Regulatory RegimeforSingleRetailerModel(issuedDecember24,1997).

CASE96-E-0898 powerqualitymatters.Inlieuofasecuritydeposit,WEPCOproposesa"lockbox"approach, i.e.,asharedbankaccountbetweentheLSEandRGEE.RG&Erespondsthattheseissuesshouldbepartofthediscussion leadinguptoanoperating agreement becausetherearelesscostlyapproaches thanthe"lockbox"approachsuchasindividual guarantees, lettersofcredit,andescrowarrangements.

Withrespecttoparticipatio'n inservicerestoration andpowerqualityissuesofWEPCO,RG&Earguesthatthesecustomercontactsareanongoingelementofbeingaretailer.

WeagreewiththeJudgethattheseissuesshouldbeconsidered inconnection withanoperating agreement especially inviewofourrecentopiniontorequireutilities tofiletariffscoveringvariousoperating procedures.'ntil thepartieshaveanopportunity toaddressboththeproposedtariffsandoperating agreements, theseissuesarenotripefordecision.

~Imlementation ScheduleAsnotedabove,retailcompetition wouldbeintroduced instagesoverfiveyears,beginning withaone-yearEnergyOnlystageandthenamulti-year EnergyandCapacitystage.Therecommended decisionsupported thisapproachtogiveRGREsufficient timetoovercomeproblemsrelatingtoitsnuclearplantsandloadpockets.Anumberofpartiesexcept.CPBurgesfullretailaccessnolaterthanoneyearaftertheimplementation oftheindependent systemoperator(ISO).TheAttorneyGeneralbelievesthatanaccelerated scheduleisneededbecausethefive-year termwouldbetoorestrictive, precluding chancestotakeadvantage ofarisingopportunities.

Inthemeantime, theAttorneyGeneralurgesthatthe1996Settlement beleftineffect,thecompanybe~~'ase94-E-0952, IntheMatterofCometitive0ortunities ReardinElectricService,OpinionNo.97-5(issuedMay19,1997),mimeop.34.

CASE96-E-0898 requiredtosolveitsnuclearandloadpocketproblems, andretailaccessbeimplemented shortlyaftercompetition becomestechnically feasible.

IPPNY/Enron andWEPCOassertthatRGEE'sproblemsarenottechnical butratherfinancial.

Theybelievethattheproblemscanbeaddressed nowandtheProgramcanbeaccelerated.

According toIPPNY/Enron, theApril8andRevisedSettlements themselves supportitsstatement thattherearenotechnical impediments becausetheyprovideforanaccelerated retailaccessscheduleifthemarketpriceforpowerisaboveRG&E'sback-outrateof$.032perkWh.Severalpartiespointtothemorerapidintroduction ofretailaccessrequiredinotherstatesasjustification foraquickertimetable forRG&E.AtourOctober8,1997session,weurgedthepartiestoconsiderandexplorewaystospeeduptheintroduction ofretailaccess.WenotedthattheApril8Settlement callsforanaccelerated scheduleonlyifastatewide resolution ofnucleargeneration issuespermitted anearlierplacement ofsuchpoweronthemarket,orifmarketpricesforpowerexceeded$.032perkWhonapersistent andsustained basis.TheRevisedSettlement containsanewprovision, whichestablishes aprocesswherebythepartieswillmeetpriortoJuly1,2000toassessthefeasibility ofaccelerating retailaccess.'taff believesthatthisnewprocessispreferable torenegotiating anumberofimportant provisions relatedtotheretailaccessschedule.

CPB,theAttorneyGeneral,WEPCO,theRetailCouncil,andMr.Strakadisagree.

Theyassertthattheretailaccessscheduleisprotracted andwillcauseRGEEtofallbehindotherupstateutilities suchasNYSEGandNiagaraMohawk,whichhaveproposals underwhichallcustomers wouldbeeligibleforretailaccessbytheendof1999.WEPCOcontendsthatRG&E'snucleargeneration isnotareasontodelayimplementation ofretailaccessbecauseweindicated thattheStateshouldmovetoward~retailcompetition withduespeedevenwithoutastatewide CASE96-E-0898 solutiontonuclearissues.'PB wantsfullretailaccessforRGREby1999orwithin12monthsoftheimplementation oftheISO.TheAttorneyGeneralseeksclarification ofthemodifiedlanguage.

Itnotesthattheprovision toconsideraccelerating retailaccesscouldbereadasproviding RG8Ewithvetopowerconcerning anychangeinthescheduleforimplementation ofcompetition, andtheAttorneyGeneralwouldratherhaveusgrantotherpartiestherighttosubmitarecommendation withoutRGaE'sconcurrence.

Inaddition, theAttorneyGeneralunderstands thatthe"risk"thatmustbeaddressed relatestoRGEE'sprofits,whichitclaimsshouldbeexplicitly stated.'e recognize thatRGSEisuniqueamongthestateutilities inthatmorethanhalfitsgeneration isnuclearfueled,andtherefore believethataphase-inofretailaccessshouldbelongenoughtogiveRGEEsufficient timetoaddressthisfact.However,wefindthefive-year phase-inperiodforretailaccesstobeexcessive, andconcludethatfouryearsshouldsuffice.Consequently, wewillrequirefullimplementation fortheProgrambyJuly1,2001,whichisoneyearearlierthanprovidedforintheRevisedSettlement.

Thelastsentenceof$52oftheRevisedSettlement (whichissetforthinthepreceding footnote) providesforaCases94-E-0982 etal.,~suta,OpinionNo.96-12,mimeop.88.Therelevantportionoff52oftheRevisedSettlement isasfollows:~Thepartiesfurtheragreethat,priortoJuly1,2000,theyshallmeettoreviewtheprogressofretailaccessundertheProgramandshallconsiderandrecommend totheCommission, asappropriate, anychangestotheimplementation schedulethataredetermined tobenecessary;

provided, however,thatnosuchchangesshallberecommended unlesstheyarerevenueneutralanddonotmaterially increasethelevelofriskbornebytheCompany.

CASE96-E-0898 possibleincreaseinthepaceofretailaccessimplementation ifcertainconditions aremet.Xnlightofourmodification oftheretailaccessschedule, thelastsentenceisunnecessary, andtherefore, isnotadopted.Notonlywillfullretailaccessbeachievedoneyearearlier,butalsotheeffective percentage ofretailaccessavailable forthenon-contract customers shouldbegreaterthanidentified intheRevisedSettlement.

ThisisbecausealargepartofRG&E'sloadisundercontractandthesecontractcustomers cannotparticipate intheProgramuntiltheircontracts expire.Consequently, agreaterproportion ofthenon-contract customers willbeabletoswitchtotheProgramintheearlyyears.DeliverRatesTheApril8Settlement includesratesfordeliveryduringbothstagesoftheProgram.DuringtheEnergyOnlystage,thedistribution accessratewouldequaltheaveragerateforbundledretailservicelesstheper-unitretailing costandtheper-unitenergy-related costofallnon-nuclear energysources,estimated tobeatleast$.013perkWh.lntheEnergyandCapacitystage,therateschargedtoLSEswouldequal,onaverage,theratesforbundledretailserviceless$.032perkWh,whichincludesretailing costof$.004perkWhandtheper-unitfixedandvariableTo-GoCostsofnon-nuclear energysources,exclusive ofaportionofpropertytaxes.Twentypercentofthepropertytaxcomponent oftheper-unitnon-nuclear To-GoCostswouldbedeductedfrombundledratesuponcommencement oftheEnergyandCapacitystageandanadditional 20%commencing every12monthsthereafter duringthetermoftheApril8Settlement.

Theactualdistribution accessrateswouldbefiledastariffchanges.PursuanttotheApril8Settlement, whentheProgramisopenedtoallretailcustomers onJuly1,2002,thecompanywouldbeauthorized tomodifyitsdistribution accessrates,soastoholdconstantthedegreetowhichitsTo-GoCostsareat CASE96-E-0898 riskforrecoverythroughthemarket.Thesignatories totheApril8Settlement agreetomeetbeforeJuly1,2001todiscussthefutureoftheseratemaking plans'herecommended decisionfoundtheaveragerate,reasonable andrejectedcallsforahigherback-outrateandperiodicupdating.

However,therecommended decisionfoundtheretailing costsforresidential customers isgreaterthantheaverageof$.004perkWh.Thus,itwouldrequireRGEEtoestimateandreflecttheactualretailing costsineachclass'sback-outratewhenitisfiled.AARPandWEPCOexcept,arguingtheback-outrateistoolowandwillinhibitcompetition.

ThesepartiesaskustoorderROTEtoreflecttheproperretailing costsineachclass'sback-outrate.Inaddition, WEPCOquestions thejustification foranEnergyOnlystagebecausethe$.013perkWhissolowthatitisunlikelythatLSEsorcustomers wouldparticipate inthisstage.WEPCOsupportsitsargumentbypointingtotheexperience inOrangeandRocklandUtilities'ilot program,whichcontained anenergy-only format.According toWEPCO,thatprogramdidnotproducesufficient savingstowarrantparticipation bysmallcustomers.

WEPCOrequeststhattheinitialback-outratebesetat$.032perkWhwithappropriate updatingeachyear.WEPCOalsoarguesthatafixedback-outrateforaperiodoftwotofiveyearsinahighlyuncertain environment wouldentailconsiderable risks.Ifthefixedback-outrateunderstates themarketpriceofenergyandcapacity, WEPCO'laims thatarobustcompetitive retailmarketwillnotdevelop.Whenenteringintoahighlyuncertain situation, WEPCOadvises,thebestcourseofactionistobuildincheckpoints suchasanannualresetoftheback-outrate.RG&EagreeswithWEPCOthattheEnergyOnlystagehaslimitedvalue,butobservesthatuntilthenecessary supporting mechanisms andstructures foracapacitymarketareinplace,capacitychargeswillbeincurredbyRG&E,whichitmustrecover.RG&Eopposesanannualupdateofthe$.032perkWhback-outratebecause(1)afixedratewillprovidecompetitors withastable CASE96-E-0898 targetagainstwhichtocompeteand(2)afixedratewilllimittheriskfacedbythecompanyfromcustomermigration toretailaccess.Periodicupdating, RGEEnotes,wouldsubjectittoavariablelevelofriskandtherefore upsetthebalancestruckbythesignatories totheApril8Settlement.

Staffmaintains thattheApril8Settlement doesnotprecludeupdateoftheback-outrateifcircumstances warrantsuchaction,butagreesthatatthistimetheoverriding concernistocreateastableandcertainrateforLSEs.Withrespecttotheappropriate levelofretailing coststoincludeintheback-outrate,StaffandRGEEopposetherecommended decision's proposaltocomputeeachclass'sretailing costs.Staffobservesthatsuchaproposalwouldaddanunwarranted levelofcomplexity inthetariffs.RGEEmaintains thatevenifthe$.004perkWhretailing costislessthanactualfortheresidential customerclass,itdoesnotfollowthattheoverallback-outrateisunderstated giventhatresidential customers receivesubstantial allocations ofNYPAhydropower atlowrates.Theneteffect,according tothecompany,isthatthecombinedcostofenergy,capacity, andretailing isapproximately equaloverallclasses.AtourOctober8,1997session,weexpressed ourdesiretohavetheback-outrateduringtheEnergyOnlystageapproximate marketenergypricesandtorequirethecompanytosellenergyatthatprice.According toRGEE,Staff,andJointSupporters, theRevisedSettlement's back-outrateof$.02305perkWh(inclusive of$.004perkWhretailing costs)isdesignedtoaddressourconcernthattheearlierestimated

$.013perkWhback-outratewastoolowtoencourage competition.

Staffobservesthatthesignificant increaseintheback-outratealsoautomatically reducesthedeliveryratechargedtoLSEs.Theproponents furthernotethatRGSEisnowcommitted togivingLSEstheoptionofpurchasing energyfromRG&Eat$.01905perkWh,theenergyportionoftheback-outrate.CPBagreesthatthisrateappearsreasonable.

CASE96-E-0898 WEPCOacknowledges thatthenewrateisanimprovement, butmaintains itstillfallsshortofWEPCO'sestimateofapproximately

$.028perkWhforthewholesale costofpurchasing power.Consequently, itbelievesthatLSEswillbeforcedtopurchasepowerfromRG&E.WEPCOobjectstotheuseofthe$.004perkWhcompany-wide averagecostofretailing, reiterating itsclaimthattheactualretailing costsforsmallcustomers ishigher.ItcitesourrecentdecisionintheDairyleaCase'nwhicha$.01perkWhadderwasadoptedforsmallcustomers.

WeconcludethattheRevisedSettlement's back-outrateduringtheEnergyOnlystageisacceptable.

TheEnergyOnlystageisexpectedtobeimplemented beforethedevelopment ofamaturestatewide energyandcapacitymarket.Inaddition, RGEEshouldgainvaluableexperience duringtheEnergyOnlystagebecauseitwillprovideacontrollable andworkableenvironment inwhichtopreparefortheremaining phaseofretailaccess.Insum,weareunpersuaded byWEPCO'sobjections totheEnergyOnlystage.0thatamount.Weadoptthisratesubjecttotheclarification that.the$.032rateincludestheimpactofGRT.Finally,therecommended decision's suggestion toreflectactualretailing costsineachserviceclassification isrejectedbecauseitwouldaddalayerofunnecessary complexity.

Thiscomplexity wouldarisenotonlyfromtheallocation ofWithrespecttotheEnergyandCapacitystage,theuseofthe$.032perkWhfixedback-outrateshouldcontribute toastablecompetitive marketbecausetherateisbasedonRGEE'scostsandthelackofperiodicupdatingwillprovidepotential competitors withpredictable competitive targetback-outanddistribution rates--significant inputstotheirprice.Oneitemstillconcernsus,however.TheRevisedSettlement identifies acontestable rateof$.032perkWh,butdoesnotindicatewhetherGRTisconsidered inthederivation of0Case96-E-0948,

~suraOrder,Establishing RetailAccessPilotProgram,pp.13-16.

CASE96-E-0898 retailing coststhemselves,

'butalsofromconsideration ofotherclassspecificchangesthatpartieswouldnodoubtraiseas0furtherrefinements.

OtherRetailAccessissuesPULP'sclaimsthatwelacktheauthority (1)toapprovegeneralretailwheelingforallcustomerclasses,and(2)toderegulate newgeneration providers.

PULPisessentially repeating thearguments itraisedinanArticle78proceeding challenging OpinionNo.96-12.TheSupremeCourt'asrejectedPULP'sclaims,andtheyarerejectedherebasedontherationale setforthintheConEdisonrate/restructuring decision.'YPA's andRGEE'sexceptions totherecommended decision's refusaltoconsideraseparateEconomicDevelopment Power(EDP)tariffratearedenied.SinceNYPAhasnoEDPcustomers inRGEE'sservicedoesnotaddressEDPrates,inthisdecision.

However,thefuture,wewilladdressterritory andtheRevisedSettlement weseenoneedtoaddressthisissueifacustomerrequestsanEDPrateintheissueatthattime.CPB'srequesttorequireLSEstoprovidepriceinformation toapplicants inacommonformatisrejected.

Thisrequirement isunnecessary inacompetitive marketwhereparticipating marketers havetheincentive toshowprospective customers howtheirprices,howeverpackaged, comparetothoseofferedbyothers.AARP'scallforafundtoestablish aPOLRthatwouldprovideconsumers withelectricity ataffordable pricesisdenied.Recognizing thatinnovative POLRpilotprogramscouldbeEnerAssociation etal.v.PublicServiceComm'n,169Misc.2d924,933(1996).Case96-E-0897, Consolidated EdisonComanofNewYorkInc.,OpinionandOrderAdoptingTermsofSettlement SubjecttoConditions andUnderstandings, OpinionNo.97-16(issuedNovember3,1997),mimeop.30.

CASE96-E-0898

explored, wehavedecidedthat,"[f]ornow,theutilities willfunctionasPOLRs."'ARP, CPB,andPULPalsoraiseanumberofconcernsaboutconsumerprotections andmarketing guidelines.

Astheseconcernswereeitheralreadyconsidered orarethesubjectofaseparateproceeding,'ll oftheseexceptions aredenied.Finall'y, CPBcallsforthedevelopment ofacustomereducation programbecauseitbelievestheApril8Settlement (andforthatmattertheRevisedSettlement) doesnotaddressthisitem.CPB'sexception isdenied;theRevisedSettlement

($73)setsforththerequirement thatRGEEfileaconsumereducation plan.ThisDepartment willalsobecontinuing broadoutreachandeducation efforts,aswellasmonitoring andoverseeing theutilities'wn outreachandeducation efforts,whichshouldbeconsiderable.

~CORPORATE STRUCTURE TheRevisedSettlement incorporates theApril8Settlement's provisions thatwouldrequireRGEEtofunctionally separateitsexistingoperations andstructurally separateitsULSE.Inaddition, RG&Ewouldbepermitted toformaholdingcompany.Therecommended decisionagreedwiththeseproposals becausethehighcostofdivestiture effectively precludes structural separation, especially withrespecttothecompany's sizablenuclearassets.Inaddition, therecommended decisionfoundreasonable theprinciples setforthintheApril8Settlement relatingtoaffiliate relationships, codeofconduct,costallocations, protections, andrestrictions becausetheywerebasedonstandards approvedinothercasesandwouldpermitourreviewintheeventofabuse.Finally,therecommended decisionconcluded thatnoproscriptions, prohibitions againstcompetition, orroyaltypaymentsshouldbeimposedonRGEECases94-E-0952 etal.,~sura,OpinionNo.97-5,mimeop.43~andOpinionNo.97-17,mimeop.21.IbidIp26.

CASE96-E-0898 becausetheratereductions, amongotherthings,areaquidproduoforthebenefitsthecompanyexpectstoreceivethroughtheoperation ofitsunregulated businesses.

TheAttorneyGeneralandCPBpreferdivestiture ofgeneration topreventself-dealing andotherabusesarisingfromaffiliate relationships.

TheAttorneyGeneralfearsthatStaffmaynothavetheresources toauditeffectively thevarioustransactions amongtheaffiliates.

CPBwouldextendthestandards fortherelationship betweendistribution entity,i.e.,theDISCOanditsULSE,totheDISCO'srelationship withtheRSLE.CPBalsosupportsphysicalseparation.

WEPCOseekstoprohibitRG&E'sunregulated marketing affiliate fromusingRG&E'sname,relyingontheexpertise andexperience ofutilitypersonnel, andrelyingonRG&E'sfinancial resources.

Furthermore, WEPCOasksthatRG&E'saffiliates beexcludedfromcompeting intheserviceterritory fortwoyearsoruntil20;ofthecompany's customers areservedbyLSEs.TheAttorneyGeneralandCPBseekaroyaltypaymentfromtheunregulated subsidiaries tocompensate theregulated utilityforgoodwillthatRG&E'snameandaffiliation willbringthem.RG&Ehasstatedthatitwilltransition outofitswholly-owned fossilandhydrogeneration overthenextseveralyears.Thecompanyplanstoretireorotherwise removeGinnaStationfromratebasewhenitslicenseexpiresin2009,andpriortothatGinnaStationandNineMile2aresubjecttoastatewide resolution ofnuclearplantownership andratemaking.

Inviewoftherelatively shortremaining livesonmuchofthecompany's generation, thependingresolution ofnuclearplantissues,andtheincentive todivestplants,functional separation ofRG&E'sexistingoperations isaccepted.

Thestructural separation ofitsULSEaresubjecttothevariousrules,codes,andrestrictions setforthintheRevisedSettlement.

Inasmuchasmostoftheseprovisions arebasedonstandards weestablished

~inotherproceedings, andareexpectedtoanticipate likely CASE96-E-0898 potential abuses,theyareadoptedwithoutthemodifications proposedbyCPB.RGRE'saffiliates willnotbeprohibited fromusingthenameofRGEEorcompeting inthecompany's serviceterritory, orberequiredtopayaroyaltyfortheuseoftheRG&Enameanditsaffiliation.

Theseconcessions werepartofthegiveandtakeinthenegotiations andwillnotbedisturbed.

Finally,whetherRGEEconductsitsunregulated activities throughaholdingcompanyoraseparatesubsidiary ofautilityparent,thecompanywouldbepermitted initially tofunditsactivities intheamountof$50millionunderthetermsoftheRevisedSettlement.

Exceptforthe$50million,RGEE'sregulated businesssegmentswouldnotbepermitted tofundsuchunregulated operations, andwouldneitherbeallowedtomakeloansto,norguarantee orprovidecreditsupportfor,theobligations ofunregulated affiliates.

Inviewofourchangesandmodifications totheRevisedSettlement, especially theacceleration oftheintroduction ofretailaccess,andourdesiretobringthebenefitsofacompetitive electricgeneration industrytoNewYorkconsumers, wewillincreasethemaximumforfundingforunregulated activities to$100million.ENVIRONMENTAL MATTERSTherecommended decisiondidnotsupportcallsforamandatory disclosure ofgeneration sourcesandtheimposition ofmorestringent environmental requirements onoldergeneration facilities.

Wepreviously considered andrejectedsimilarrequestsinaseparateproceeding.'II andCPBexcept,pointingoutthatwedidnotexpressly rejecttheseproposals andarguingtheyshouldbeconsidered here.PIIandCPBarecorrectinpart.Infact,atourOctober8,1997session,wedirectedthepartiestoconsiderdesininamethodofrovidincustomers withenvironmental ggpgCase94-E-0952,

~suraOpinio,nNo.97-5.

CASE96-E-0898 information.

TheRevisedSettlement containslanguagerequiring thecompanytoworkwithLSEsondeveloping suchenvironmental information.

However,wewillnotimposemorestringent emissionstandards onoldergeneration facilities.

WeviewthisrequestbyPIIasathinlydisguised attempttoimposenewenvironmental standards onolderplants,whichwillnotlikelycreatealevelplayingfieldforcompeting generation sources.Thefactthattheseplantshaveanadvantage incostsattributed toloweremissionstandards isbutonecostconsideration.

PIIdidnotaddressthetotalcost,whichincludesotherfactorsthatmaymorethanoffsetthisadvantage.

MARKETPOWERMITIGATION Duringthefive-year term,RG&Ewouldberequiredtomaintainitssysteminthemostcosteffective manner,fileamarketpowermitigation planwiththeFederalEnergyRegulatory Commission (FERC),'nd takeappropriate actioninaccordance withtheoutcomeofthatfiling.TheRevisedSettlement alsoreservesourrighttoimplement marketpowermitigation measuresforretailserviceafterthefive-year term.Therecommended decisionfoundtheseprovisions reasonable.

Anumberofpartiesraiseconcernsthatanticipate problemsrelatedtomarketpowerandloadpockets.IncommentsontheRevisedSettlement, PIIsuggestsRG&Eisonlyboundto"consider" arangeofoptionstomaintainthereliability ofitssystem.Accordingly, PIIrepeatsitsdemandthatthecompanybe"obligated" toundertake variousforecasts, loadmonitoring

programs, evaluations, andimplement alternates tomajortransmission anddistribution additions.

RGEcEfileditsrequesttoengageinwholesale salesofcapacityandenergyatmarketbasedrateswithFERConJuly1,1997andamendeditonJuly25,1997.RGEEaddressed theissueofmarketpowerinitsrequesttoFERC.ByorderissuedSeptember 12,1997,FERCacceptedRGSE'sfiling.

CASE96-E-0898 Theseexceptions aredeniedwithoutprejudice.

AsnotedinitsFERCfil'ing,RG&Ehascommitted toimplement transmission systemupgrades, whichbyJune1999willeliminate loadpocketsforallbut3%ofsummerhours.Moreover, becauseRG&Emustmaintainsystemreliability withinloadpocketsbyoperating itsunits,thecostofwhicharealreadyinrates,marketpowerconcernsaremitigated.

AnyauctionofRG&Egeneration willbesubjecttoourapprovaltoensure,amongotherthings,thatanymarketpowerconcernsareaddressed.

Ifaspecificproblemshouldariseinthemeantime, wewilladdressitonanadhocbasis.~FINDINGSUNDERSERAInconformance withtheStateEnvironmental QualityReviewAct(SEQRA),wepreviously issuedaFinalGenericEnvironmental ImpactStatement (FGEIS)onMay3,1996.'ealsorequiredindividual utilities tofileanenvironmental assessment oftheirOctober1996restructuring proposals.

RG&EfiledanEnvironmental Assessment Form(EAF)concerning theApril8Settlement onJune24,'1997.'ubsequent tofilingoftheEAF,PIIfiledapetitionaskingthataSupplemental Environmental ImpactStatement befiled.Initsarguments supporting thepetition, PIIraisedseveralsubstantive issuesforSEQRAconsideration.

InaJune19,1997ruling,ChiefAdministrative LawJudgeLynchnarrowedtheissuesneedingfurtherconsideration intheenvironmental assessment..

Theinformation providedbyRG&EinitsEAF,theparties'omments, theRevised'ettlement, andotherinformation wereevaluated inordertodetermine whetherthepotential impactsresulting fromadoptingtheRevisedSettlement's termswouldbewithintheboundsandthresholds oftheFGEISadoptedinCases94-E-0952 etal.,~suta,OpinionNo.96-12,mimeo~pp.76-81.ThefinalEnvironmental Assessment FormisAppendixC.

CASE96-E-0898 1996.Theevaluation alsoconsidered theconditions andchangestotheRevisedSettlement thatweadoptedatoursessiononNovember25,1997.Arguably, allofthepotential impactsneednotbeconsidered, giventhatsomeresultfromTypeIIexemptrateactions.Nonetheless, theanalysisexaminedallareasinwhichimpactscouldreasonably beexpected.

Noimpactswerefoundto'beassociated withpricecapregulation.

RGEEcurrently operatesunderaformofpricecapregulation; thecontinuation ofthisratesettingapproachfortheregulated transmission anddistribution company,consequently, doesnotconstitute achangeinducedbycompetition orbytheRevisedSettlement.

Moreover, thepossibility ofprudencereviewisseenasanimportant deterrent toexcessive infrastructure investments aswellasanincentive forpromoting theuseoftargetedDSMasappropriate toavoidexcessive transmission anddistribution upgrades.

Nosignificant impactsweredetermined toresultfromeitherretirement ornewconstruction ofgeneration asaresultoftheRevisedSettlement.

Also,thecompanyassertsithasnoplanstoeitherretireanyofitsexistingelectricgenerating facilities orconstruct newgenerating facilities asaconsequence oftheRevisedSettlement.

TheRevisedSettlement willnotresultinsignificant newtransmission lineconstruction impacts.Thecompany's 1996loadpocketstudyindicates thatunderhighsummerusageandequipment

failures, loadpocketsmayoccur.Anapplication filedbythecompanywithFERC(datedJuly1,1997andamendedJuly25,1997)containsRG&E'splantoreinforce itstransmission anddistribution systeminordertoalleviate thetwoloadpocketswithinitsserviceterritory.

Theplannotesthatwiththeexception ofonenew115kVtransmission line(undertenmilesinlength),theconstruction requiredwillbelimitedtocapacitor andtransformer workwithinexistingsubstations.

0'o CASE96-E-0898 IMinorlocalized community economicimpactsmayoccur(e.cC,duetoreducedtaxreceipts),

butthesewouldbebalancedbypositiveeffectsinotherlocalities.

Agreatersourceofconcernisthepossibleincreaseinairpollution thatcouldaccompany increased demandforelectricenergy.Itislikelythatincreases inenergydemandwillresultfromtheRevisedSettlement's decreaseinrates(0.56:averageannualincreaseindemandoverthe1998-2012 period)andinDSMexpenditures (0.3%increaseindemand).Eachoftheseincremental growthratesisanupperbound.Forexample,itisnotclearthatalloftheratereductions fromtheRevised1Settlement shouldbeattributed torestructuring; also,thelowerDSMexpenditures donotconsiderLSEs'SMspending.

Staff'sopinionisthattheactualgrowthrateswillbesubstantially lessthanthecorresponding ratesintheFGEIS(1'.annualincremental growthfromthe"highsales"scenario, and0.29%fromthe"noincremental utilityDSM"scenario)

~Becauseoftheinherentuncertainty inforecasting futureimpacts,asamatterofdiscretion, monitoring ofRGEE'srestructuring andenvironmental impactsisbeingimplemented,'nd anSBCisbeingestablished.

Whilelimitingtheratedecreases intheRevisedSettlement, whichwereadoptedafterextensive negotiations, couldmitigateenvironmental impacts,thiswouldreducetheeconomicbenefitsoftheratereductions toconsumers andbusinesses.

Themitigation methodsweareadoptingarereasonable inthesecircumstances.

Basedontheseanalyses, thepotential environmental impactsoftheRevisedSettlement arefoundtobewithintherangeofthresholds andconditions setforthintheFGEIS.Therefore, nofutureSEQRAactionisnecessary.

November26Order,p.8.

CASE96-E-0898 CONCLUSION OurSettlement Guidelines establish thefollowing standards forassessing aproposedsettlement inlightofourobligation tosetjustandreasonable ratesandautility's burden,underthePublicServiceLaw,ofshowingthereasonableness ofaratechangeitisproposing:

a.Adesirable settlement shouldstriveforabalanceamong(1)protection oftheratepayers, (2)fairnesstoinvestors, and(3)thelongtermviability oftheutility;shouldbeconsistent withsoundenvironmental, social,andeconomicpoliciesoftheAgencyandtheState;andshouldproduceresultsthatwerewithintherangeofreasonable resultsthatwouldhavearisenfromaCommission decisioninalitigated proceeding.

b.Injudgingasettlement, theCommission shallgiveweighttothefactthatasettlement reflectstheagreement bynormallyadversarial parties.'enerally, wefindthattheRevisedSettlement asmodified'rovides forreductions thatarereasonable andprovideratepayers significant benefitsoverthefive-year term.Inaddition, ratepayers willnolongerbeliableforcreditsarisingfromflex-rate discounts andpastincentives.

Furthermore, therateswillberedesigned tomorecloselyreflectmarginalcosts,whichshouldnotonlyremovesomeoftheinter-andintra-class returndiscrepancies, butalsobringtheratesclosetothoseexpectedwhentheelectricity marketiscompetitive.

TheProgramintheRevisedSettlement, asmodified, isreasonable becauseitphasesincompetition atapacethatwillallowRG&Etoovercomeproblemsrelatedtoits-relianceonCases90-M-0225 etal.,~sura,OpinionNo.92-2,AppendixB,p.8.TheNovember26OrderrequiredRG&Etosubmitawrittenstatement unconditionally accepting theconditions andmodification contained therein.OnDecember1,1997,suchastatement wasdulyfiledwiththeSecretary.

CASE96-E-0898

~inuclearpower,givescustomers promptaccesstoaretailelectricity market,andprovidesforback-outratesatalevelthatshouldstimulate competition.

Theproposedrestructuring ofRG&Einconjunction withtheincentives tooperateitsgenerating facilities efficiently, andthesafeguards governing thetransactions ofthevariousaffiliates, arereasonable asdiscussed above.WhileRG&E'sULSEwillbenefitbybeingpermitted tousethecorporate nameandupto$100millionoffundingfromthecompany,theULSEwillbeanaddedsourceofcompetition, thebenefitsofwhichshouldredoundtoelectricconsumers.

Althoughallofthesignatories didnotsubmittheirlitigation positions, RG&Edid.Itisclearfromreviewing thecompany's October1,1996submission thatRG&Emadesubstantial concession especially withrespecttoratereductions.

MultipleIntervenors notesthatitwouldhavearguedforlargerratedecreases, afasterphase-inofretailaccess,andagreatersharingofstrandedcostsduringthetransition period.ItshouldalsobekeptinmindthatanumberofpartiesopposedtheApril8Settlement andtheRevisedSettlement andtheylitigated theirpositions.

Afterconsidering thefactsandreasonsbehindtheirpositions, weadoptedanumberofmodifications totheRevisedSettlement.

Inlightofalloftheabove,weadoptthetermsoftheRevisedSettlement subjecttotheconditions andchangesdescribed above,whichwerepreviously includedintheNovember26Order.TheCommission orders:1.Clausesonethroughfivecontained intheOrderAdoptingTermsofSettlement SubjecttoConditions andChanges(issuedNovember26,1997)areadoptedintheirentiretyandareincorporated aspartofthisopinionandorder.

CASE96-E-0898 2.Case96-E-0898 iscontinued.

BytheCommission, (Signed)JOHNC.CRARYSecretary CASE96-E-0898

-DRAFTAPPENDIXAPage1of2CASE96-E-0898 ROCHESTER GASANDELECTRICCORPORATION LISTOFABBREVIATIONS AARP-AmericanAssociation ofRetiredPersonsATTORNEYGENERAL-NewYorkStateDepartment ofLawCASH06M-CashOperation andMaintenance CPB-NewYorkStateConsumerProtection BoardDAIRYLEA-DairyleaCooperative Inc.DISCO-Distribution UnitDSM-DemandSideManagement EDP-EconomicDevelopment Power~ENTEK-EntekPowerServices, Inc.ESCO-EnergyServiceCompanyFERC-FederalEnergyRegulatory Commission FGEIS-FinalGenericEnvironmental ImpactStatement GDP-GrossDomesticProductGENCO-Generating UnitGRT-GrossReceiptTaxgWh-Gigawatt-hour HEFPA-HomeEnergyFairPractices ActHOLDCO-HoldingCompanyIPPNY~Enron

-Independent PowerProducers ofNewYork,Inc.andEnronCapital&TradeResources ISO-Independent SystemOperatorKAMINE-Kamine/Beisco AlleganyL.P.KCAM-KamineCostAdjustment Mechanism kW-KilowattkWh-Kilowatt-hour LSE-LoadServingEntityMBIS-Metering, billing,andinformation servicesNEV-NewEnergyVentures, Inc.NRC-NuclearRegulatory Commission NYPA-NewYorkPowerAuthority oftheStateofNewYorkPII-PublicInterestIntervenors POLR-,Provider ofLastResortPSL-PublicServiceLawPULP-PublicUtilityLawProjectof-NewYork,Inc.RETAILCOUNCIL-RetailCouncilofNewYorkRGsE-Rochester GasandElectricCorporation RSLE-Regulated LoadServingEntity

CASE96-E-0898

-DRAFTSAPA-StateAdministrative Procedure ActAPPENDIXAPage2of2SBC-SystemBenefitsChargeSC-ServiceClassification Staff-NewYorkStateDepartment ofPublicServiceStaffULSE-Unregulated LoadServingEntityWEPCO--WheeledElectricPowerCompany

CASE96-E-0898

-DRAFTListofPartiesWhichFiledCommentsonOctober311997APPENDIXBRochester GasandElectricCorporation (RG&E)NewYorkStateDepartment ofPublicServiceStaff(Staff)MultipleIntervenors JointSupporters NationalAssociation ofEnergyServiceCompanies 0onents~NewYorkStateDepartment ofLaw(Attorney General)NewYorkStateConsumerProtection Board(CPB)PublicInterestIntervenors (PII)PublicUtilityLawProjectofNewYork,Inc.(PULP)RetailCouncilofNewYork(RetailCouncil)WheeledElectricPowerCompany(WEPCO)LarryOwensCharlesStraka EXHIBITD

~WA"SECURITIES 20K)EXCEGQIGE COMMISSION WXSHINmoN, D.C.20549CFORM10-K(NarkOne)[X]ANNUALREPORTPURSUANTTOSECTION13OR15((R)OFTHESECURITIES EXCHANGEACTOF1934Forthefiscalyearended:December31,1997OR[]TRANSITION REPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGEACTOF1934Forthetransition periodfromtoCommission filenumber:1-672-2Rochester GasandElectricCorporation (Exactnameofregistrant asspecified initscharter)NewYork(Stateorotherjurisdiction ofincorporation ororganization) 16-0612110 (i.R.S.Employeridentification No.}89EastAvenue,Rochester, NY14649(Addressofprincipal executive offices)(ZipCode)Registrant's telephone number,including areacode:(716)546-2700Securities registered pursuanttoSection12(b}oftheAct:TitleofeachclassNameofeachexchangeonwhichreisteredCommonStock,$5parvalue=-NewYorkStockExchange ROCHESTER GASANDELECTRICCORPORATION Information RequiredonForm10-KlternNumberDescriotion PaaePar:IItem1Item2Item3Item4Item4ABusinessProperties LegalProceedings Submission ofMatterstoaVoteofSecurityHoldersExecutive OfficersoftheRegistrant 12141414PartZZItem5Item6Item7Ztem8Item9MarketfortheRegistrant's CommonEquityanK.RelatedStockholder MattersSelectedFinancial DataManagement's Discussion andAnalysisofFinancial Condition andResultsofOperations Financial Statements andSupplementary DataChangesinandDisagreements withAccountants onAccounting andF'nancial Disclosure 1617203468Item10Item1112em'3Directors andExecutive OfficersoftheRegistrant Executive Compensat'on Secur'tyOwnership ozCertainBeneficial OwnersandManagement CertainRelationships andRelatedTransactions 69696969Pav~TVZtem14Exhibits, Financia'tatement Schedules andReportsonForm8-K70Signatuzes 75 Operations.

Percentages oftheCompany's operating revenuesderivedfromelectricandgasoperations foreachofthelastthreeyearsareasfollows:199719961995ElectricGas67.6't32.4%67.1't32.9%71.1%28.9't100,0+o1000+o100.0+oTheCompanyisoperating inarapidlychangingcompeti'tive marketplace forelecticandgasservice.Thiscompetitive environment includesafederalandStatetrendtowardderegulation andpromotion ofopen-market choicesforconsumers.

InNovember1997theNewYorkStatePublicServiceCommission (PSC)approvedaSettlement Agreement amongtheCompany,PSCstaffandotherpartieswhichsetstheframework fortheintroduction anddevelopment ofopencompet'ion intheelectricenergymarketplace inNewYorkStateoverthenextfiveyears.Regarding theCompany's electricbusiness, inearly1996theFederalEnergyRegulatory Commission (FERC)issuednewrulestofacilitate thedevelopment ofcompetitive wholesale markets.In1997theCompanytogetherwithotherNewYorkutilities filedwithFERCa"Comprehensive PropaphltoRestructure theNewYorkWholesale Market"andrequested approvaloftheir'-restructuring planinea.ly1998.AttheStatelevel,thePSCendorsedafundamental'estructuring oftheelectricutilityindustryintheStateinits"Competitive Opportunities Proceed'ng".

TheCompany's Competitive Opportunities Settlement in1997,including itsproposedretailaccessprogramcalled"EnergyChoice",allowsforaphase-intoopenelectricmarketswh'lelower'ngcustome"pricesandestablishing anopportun'ty fo"compe'vereturnsonshareholder investments.

A'houghtneCompanyisjus"beginn'ng torece'eappcationsfrompotential compe"'tors underitsdistr'bu'ontar'==.'=expec"smoretobefiled,Ipar='c'arlyfromcompanies w'ths"rongretailing andcustomerservicecapab'3es ancwholesale powetradingexper='se.

<i"ththeunbundling ofservicesasc'rectedbyFERCOrder636,primaryresponsibility forreliablenaturalgashasshif=ecfrom'n=erstate pipelinecompanies tolocaldistr'bution compan'es, suchas=heCompany.Allgascusomershaveachoiceo.supp'erss'nceNovember1996.subjec"tocertainp'.".ase-in limitaionsthrough'998fo"'ossocasco-..=..oci=y sales.Someofthesecompanies a"elarge,nationa'ly known,pb'ic',hecmarke=ers orsuppliers.

In1997tneCompanycommencec nego=ia=ions wi"h='.".estaf.he PSCandothe"partieswiththeobjective ofdevelop"ng amyearsettlement ofissuesperta'n'ng totheCompany's gasbusiness.

SeeItem7-Management' D'css'nancAna's'ofFinancial Cond'ionancResultsofOperations undertheheac'ng"Compe:ition"

'orfurtherinformation ontheCompetitive Opportunities Setemen=andthecompeti"ive challenges theCompanyfacesinitselectricandgasbusinessandhowiisresponding tothosecha1lenges.REGULATORY MATTERSTheCompanyissubjecttopSCregulation ofrates,service,andsaleofsecurities, amongothermatters.TheCompanyisalsoregulated bytheFERConalimitedbasis,intheareasofinterstate salesandexchanges ofelectricity, intrastate salesofelectricity forresale,transmission wheelingserviceforotherutilities, andlicensing ofhydroelectric facilities.

Asalicenseeandoperatorofnuclearfacilities, theCompanyisalsosubjecttoregulation bythe includeitsshareofOswego6intheseeffortsaswell.ThegrossandnetbookcostoftheCompany's shareofOswego6asofDecember31,1997are$99millionand$58million,respectively OnJanuary21,1998theCompanydecidedtoretireBeebeeStationbymid-1999.Factorssuchastheplant'sage,locationinanareanolongerconsistent w'ththesurrounding development, lackofarail/coal deliverysystemandmorestringent cleanairregulations madetheplantuneconomical inthedevelop'ng competitive generation business.

Theretirement ofBeebeeStationisnotexpectedtohaveamaterialeffectontheCompany's financia'1 positionoresultsofoperations.

Theplantwillbefullydepreciated atthetimeofretirement.

TheSettlement providesthatallprudently incurredincremental costsassociated withtheshutdownanddecommissioning oftheplantarerecoverable throughtheCompany's distribution accesstariff.TheeX'ectric capabil'ity andenergycurrently providedbytheplantisexpectedtobereplacedbypurchased powerasnee'ded.NineMileTwo,anucleargenerating unitinOswegoCounty,NewYorkwithadesignedcapability of1,143megawatts (Mw)asestimated byNiagara,wascompleted andenteredcommercial serviceinSpring1988.Niagaraisoperating theUnitonbehalfofallownerspursuanttoafullpoweroperating licensewhichtheNRCissuedonJuly2,1987fora40-yeartermbeginning October31,1986.Undearrangements datingfromSeptember 1975,ownership, outputandcostoftheprojectaresharedbytheCompany(14%),Niagara(41%)Long'IslandL'ghtingCompany(18%),NewYorkStateElectric&GasCorporation (18%%.a'nd CentralHudsonGas6ElectricCorporation (9%).Undertheoperating Agreement, niagaraservesasoperatorofNineMileTwo,butallfivecotenantownerssharecertainpolicy,budgetandmanagerial oversight unct'ons.

ThebasetermoftheOpeatingAgreement is24monthsfromiseffective dae,withautomatic extension, unlessterm'..ated bywittennoticeofoneormoreofhecotenantownerstotheothe"cotenantowners;suchterm'nation becomese=fective sixmonthsfromthereceiptofanysuchnoticeofterminat.'on bya'1=heco"enantownersreceiving suchro"'ce.hegrossandne"bookcos=o==heCompany's shareoNineMileTwo'nc'uc'ng

$374millionofdisa'owec cos=spreviously wr'ttenoffasofDecember3,'997are$879millionand$399mi'ion,respect'vely.

.heCompany's GinnaPlant,w'.".chnasbeen'"..commercial operation sincely1,1970,povides480Mwo'heCompany's electricgenerat'ng capacity.

InAgust1991t?.eNRCapprovedtheCo."..pany's app'ca='on'o"amendment toete.dtheGirnaPlantoperating licenseexp'ra='on Ca=e'"omApr25,2006toSeptembe" 18,2009..heg.ossandnetbookcos"o=.theG."..-.aP'.an:asofDecember31,1997are$560millionand$309m'lion,espec=ive

.Fromt'metotimeheNRCissuesd'ectives requiring allo"acer"a'.".

g=oporeac=or1'enseestoperforma..alyses astotheirabil'tytomee=specifiec cr'ter'a, g'de'nesoroperating objectives andwherenecessay"omod=y=ac.'='es,sys=emso"procedures tocon=ormthereto.Typically, thesec;rec=vesa"eprem'sedontheNRC'sobligation toprotectthepublichealthandsa=e=y..heCompanyreviewssuchd'rectives andimplements avarietyo'odifications basedonthesedirectives andresulting analyses.

Expenditures a==heG'nnaP'ant,including thecostoftnesemodifications, areestimaec=obe$0.;on.

$10.4mllionand$6.4m'1'ionfortheyears1998,1999and2000.respectively, andareincludedinthecapitalexpenditure amountspresented under'tern7-Management's Discussion andAnalysisofFinancial Condition andRe'suitso'pera=ions.

~,.TheCompanyhasfourlicensedhydroelec ricgenerating staionswithanaggregate capability of47megawatts.

Althoughapplications

.'orrenewalofthoselicensesweretimelymadein1991,theFERCwasunabletocompleteprocessing ofmanysuchapplications bytheDecember31,1993licenseexp'ration.

TheFERC,therefore, issuedannuallicensest?.atessent'ally exendthetermsoftheoldlicensesyear-toyearuntilprocessing ofthenewonescanbecompleted.

The SeeItem7-Management's Discussion andAnalysisofFinancial Condition andResultsofOperations underthecaption"EnergyManagement andCosts-Gas"forad'scussion ofthattop'c.TheCompanycontinues toprovidenewandadditional gasservice.Of243,264residential gasspaceheating customers atDecember31,1997,2,579wereaddedduring1997.Approximately 31%ofthegasdelivered tocustomers bytheCompanyduring1997waspurchased directlybycommercial, industrial andmunicipal customers frombrokers,producers andpipelines.

TheCompanyprovidedthetransportation ofgasonitssystemtothesecustomers'remises.

FUELSUPPLYNuclear.Generally, thenuclearfuelcycleconsistsofthefollowing:

(1)theprocurement ofuraniumconcentrate (yellowcake),

(2)theconversion ofuraniumconcentrate touraniumhexafluoride, (3)theenrichment oftheuraniumhexafluoide,(4)thefabrication offuelassemblies, (5)theutilization ofthenuclearfuelingenerating stationreactorsand(6)theappropriate storageordisposition ofspentfuelandradioactive wastes.Arrangements fornuclearfuelmaterials andsevicesfortheGinnaPlantandNineMileTwo.havebeenmadetopemitoperation oftheunitsthroughtheyearsindicated:

GinnaPlantNine'Mile Two'"~UraniumConcentrate Conversion Enrichment Fabrication 2000o'000(')(5)20012002'"2002~~~(6)2003(1)Information wassuppliedbyNiagaraMohawkPowerCorporation.

(2)Arrangements havebeenmadefo"procuring themajorityoftheuraniumandconversion requirements through2002,leavingtheremaining portionoftherequirements uncommitted.

(3)TheCompanyhasacontractunde"which'tmayprocureupto80percentoftheannualGinnaPlanturaniumrequiements.Asecondcontrac"isinplacetosupplyabout30'toftheannualrequ'rements for1998through1999,and100'4ofrequirements in2000.Theremaining requirements areuncommitted.

(4)Seventypercentoftheconversion requirements havebeenprocuredthrough1997underonecontract.

Asecondcontractisinplacecover'ng70%ofrequ'ements in1998and1999,and100%,'n2000.Twentypecentofrequirements for1998arecoveredbyacontractfordeliveyofUF6(uraniumplusconversion).

Tenpercentofrequiremen sfor1998willbefilledfrominventory.

(5)TheCompanyhasacontractwithUnitedStatesEnrichment Corporation (USEC)fornuclearfuelenrichment serviceswhichassuresprovision of70%oftheGinnaPlant'srequirements through1999.Asecondenrichment contractisinplacewhichassures30%oftheGinnaPlant'srequirements through1999and100%ofrequirements in2000and2001.(6)NineMileTwoiscoveredfor100'tofrequirements through1998andfor75't(withanoptiontoincreaseto100%)from1999through2003.

(a)TheFirstMortgageprohibits theissuanceofadditional FirstMortgageBondsunlessearnings(asdefined)foraperiodoftwelvemonthsendingnotearlierthansixtydayspriortotheissuedateoftheadditional bondsareatleast2.00timestheannualinterestchargesonFirstMortgageBonds,boththoseoutstanding andthoseproposedtobeoutstanding.

TheratiounderthistestforthetwelvemonthsendedDecember31,1997was6.99.(b)TheFirstMortgagealsoprovidesthat,ifadditional FirstMortgageBondsarebeingissuedonthebasisofpropertyadditions (asdefined),

thepr'ncipal amountofthebondsmaynotexceed60%ofavailable propertyadditions.

AsofDecember31,1997theamountofadditional FirstMortgageBondswhichcouldbeissuedonthatbasiswasapproximately

$398,393,000.

Inadditiontoissuanceonthebasisofpropertyadditions, Firs"MortgageBondsmaybeissuedonthebasisof100(oftheprincipal amountofotherF'stMortgageBondswhichhavebeenredeemed, paidatmaturity, orotherwise reacquired bytheCompany.AsofDecember31,1997,theCompanycouldissue$321,669,000 ofBondsagainstBondsthathavematuredorbeenredeemed.

TheCompany's RestatedCertificate ofIncorporation (Charter) providesthat,withoutconsentbytwo-thirds ofthevotesentitledtobecastbythepreferedstockholders, theCompanymaynotissueadditional preferred stockunlessina12-monthperiodwithinthepreceding 15months:(a)netearningsapplicable topaymentofdividends onpreferred stock,after'a~e's, havebeenatleast2.00timestheannualdividendrequirements onpreferred=.stock, including thesharesbothoutstanding andproposedtobeissued,and(b)net;'earnings available forinterestonindebtedness, aftertaxes,havebeenatleast1.50timestheannualinterestrequirements onindebtedness andannualdividendrequirements onpreferred stock,including thesharesbothoutstanding andproposedtobeissued.ForthetwelvemonthsendedDecember31,1997,thecoverageatiounder(b)above(themoreres"rictive provision) was2.83.Forinformation withrespec"tosho"-termborrowing arrangements andmitaionsseeItem8,Note9-Shor=-.erm Debt.TheCompany's Charterdoesno"containanyfinancial testsfotheissuanceofpreerenceorcommonstock.TheCompany's securities ratingsa>>December31,1997were:MortgageBondsPre'erred StockStandardaPoor'sCorporation Moody'sInvestors ServiceDuffaPhelpsBBB~BaalBBB~BBBbaa2BBBThesecuriiesratingssetforthinthe".ablearesubjecttorevisionandjorwithdrawal atanytimebytherespeciveratingorganizations andshouldnotbeconsidered arecommendation tobuy,selloholdsecurities oftheCompany.ENVIRONMENTAL QUALITYCONTROL~~Operations attheCompany's facilities aresubjecttovariousfederal,stateandlocalenvironmental standards.

ToassuretheCompany's compliance withtheserequirements, theCompanyexpendedapproximately

$0.6milliononavarietyofprojectsandfacilityadditions during1997.

s00',o 10ectricDepartment Statistics YearEndedDecember3119971996'995'994'993'992ElectricRevenue(000's)ResidenialCo.".mercia Yu">c'pa'"d 0-"e-Electricrevenuefromourcustomers Otherelectricutilities Totalelectricrevenue$252,464210,643144,30572,06'79,C73 20,856700.329$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'.".electricgeneration P"chasedelectricity 0he"operation Ha'ntenance Depreciation andamortization

-.axes-local,staeandohe".otalelectricexpenseOperating XncomebefoeFedea!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&180,00552,84245,87131,563192,7C952,46472,32696,0C3491,016164,30043,84548,37629,706183,11853,71473,21394,8C1482,968150,84038,046Operating XncomefromElectricOperations (000's)ElectricOperating Ratio8,ElectricSales-KWH(000's)Residential Commercial vldus~cipaandOtherr.otac.stonessalesOthere.ectrc=.fries46.02,139,064 2,118,9912,010,613 537,05147.12,132,902 2,061,625 2,010,963 520,88547.32,144,718 2,064.813 1,96C,975 531,3116.&OS,I!91,218,794 6,726,375 99C.8426,705,817 l.4&C,196S121,699S124,645&139.860~~$127,1.63'Pl47.72,117,1682,028,6111,860,833 513,6756,520,287 1.02'.733 2~4~123,277986,100892,700504,9876.507,064743.588S120,45549.2112,79449.72,084,705 1,938.1731,929,720 503,3886.455,986 1,062,738

.otaeectricsalesElectri"CstcmersatDecember3'es'dent'a

.otaeectr'ccusomersectrcityGeneratec andP.rchased~!O>H(000's)FossK.c'ar..yc0P"mpedstorage.essenergyfo.pumpingOtheTora.generated

-nePrchasedToa.electricenergySysem):etCapabi!ity-KNatDecember31FossilHuclearHydroOhewPurchased Totalsystemnetcapability LteakLoad.KW1LoadFactor.Het%,8.024.5'3 308.90930,9401,3002,8243C3,9730~<19544227,867238.900(358,350) 8906.893,765 1,30,6368.195.401526.000638,00047,00028,000375,0001,614,000 1,421,000 56.17.72-.2-7 307,8130.620~3252,68834>844.094,272 248,990246,726(370,097) 9365,733.340 2.437,433 8.:70,773 529,000638.00047,000~,000375,0001,617.000 1,305,000 61.98.190.03306.60130.426',3472.7!134:,085:.63:.933 C.645,646:7'..88623".904(36:,'44) 6,32>,790 2.343.4&C 8,671.274 529.0006C0,00047,00028,000375.0001.619.000 1,C25,000 57.67.542,020 30C.49429,9841,36!2,670338,509l.478.120C>wc>~>8218.:29247.550(37:.383)

.2C56,'00,839

.998,882 8,099,721 532,000617,00047,00029,000375,00016000001.374.000 58.8250,652302.21929,635.,3822.638335.87C'.520.936

'99,239233,477(355,725) 2.5596.095.943 1.646.244 7,742,187 541,000620,000C7,00029.000347,0001,584,000 1,333,000 59.17.518,724 300,34429,3391.3862,605333,6742.197,757 C.191,035278,318226,39!(3CC,2C5) 8116.550,067 1.389,875 7.939.942 541,000617,000C7,00029,000348,0001,582,000 1,252,000 62.5~Reclassified forcomparaivepurposes.

Item2.PROPERTIES 12ELECTRICPROPERTIES Thenetcapability oftheCompany's electricgenerating plantsinopeationasofDecember31,1997thenetgeneration ofeachplantfortheyearendedDecember31,1997,andtheyeareachplantwasplacedinserviceareassetforthbe'w:ElectricGenerating PlantsYearUnitPlacedinServiceNetNetGeneration Capability thousands (Hw)(kwh)BeebeeStation(Steam)BeebeeStation(GasTurbine)CoalOil195919698014418,139RussellStation(Steam)Coal1949-1957 257-',237,958 GinnaStation(Steam)OswegoUnit6"(Steam)NineMilePointUgq~No2(2l(Steam)StationNo.9(Gas.'rbine)Sta=ion5(Hydro)50"he"Stations(Hydro)NuclearOilNucleaGasWaterWater197019801988196919'7'.906.1960480189158393,894,652 8,8171,224,892 465173,48754.380PmpedStoage'"Less:energyforpumping239238,900(358,350)

~3TE5(1)Represents 24%shareofjointly-owned facility.

(2)Represents 14%shareofjointly-owned facility.

(3)OwnedandoperatedbythePowerAuthority.'

CItem3.LEGALPROCEEDINGS 0Seeitem8,Note10-Commitments andOtherMatters.Item4.SUBMISSION OFMATTERSTOAVOTEOFSECURITYHOLDERSTherewerenomatterssubmitted toavoteosecurityholderscuringthefourthquarterofthefiscalyearendedDecember31,1997.Item4-A.EXECUTIVE OFFICERSOFTHEREGISTRANT NameAge1/1/98Positions, OfficesandBusinessExperience 1993todateThomasS.Richards54ChairmanoftheBoard,Presiden" andChiefExecutive Officer-January1998todate.President andChiefOperaticOfficer-March1996toDecember1997.SeniorVicePresident, Energy.Services August1995toMarch1996.SeniorVicePresident, Corporate ServicesandGeneralCounsel-August,1994toAugust1995.M'chae~J.BovalinoSen'orVicePresident, FinanceandGeneralCounse'Ocobe"1993toAugust,1994.GeneralCounse'January,1993toOctober,993.Pres'cent, Energetx.Znc(awhollyownedsubsiciary oftneCompany)January1998tocate.RobertE.Smith60SeniorV'cePresicen",

EnergyServicesJanuary'997toDecember1997.V'cePres'cen,Reta'1ServicesforPlumSrectEnterpr'ses (awhollyownedsubsidiary oN'agaraMohawkPowe"Corporation, 300ErieBou'evarc Nest,Syracuse, NY13202)priortojo'nngtheCompany.Senio"VicePresiden",

EnergyOperations Angus1995odate.Sen'orVicePresident,-

CustomerOperations August,1994toAugust,1995.SeniorVicePresident, Production andEngineering

-1993toAugust,1994.

'0iO 16PARTIIItem5.MARKETFORTHEREGISTRANT'S COMMONEQUITYANDRELATEDSTOCKHOLDER MATTERSCOMMONSTOCKANDDIVIDENDS Earnings/Dividendsamrgspe"snare~basic~diluedDividends paidpe"share199719961995$2.30$2.32$1.69$2.30$2.32$1.69$1.80$1.80$1.80Shares/Shareholders u.-uerorsnares00's)weightedaverage-basicdilutedActualnu.-.kerat.DeceWe31Nurserofshazeholde saDace..bar 31199638,76238,76238,851199738,85338,90938,862199538,11338.11338,453313373367535356TAXSTATUSOPCASHDIVIDENDS Cashdividends paidin1997,1996and1995were100percenttaxableforfederalincometaxpurposes.

DIVIDENDPOLICY~ITheCompanyhaspaidcashdividends quarterly onitsCommOn'.Stockwithoutinterruption sinceitbecamepubliclyheldin1949.Thelevelo:futurecashdividendpaymentswillbedependent upontheCompany's futureearnings, itsf'nancial requirements andotherfactors.TheCompany's Certificate ofIncorporation providesfo"thepaymentofd'vidends onCommonStockoutofthesurplusnetprofits(retained earnings) oftheCompany.Quarterly d'idendsonCommonS"ockaregenerally paidonthetwenty-fifth dayofJanuarv,Ap"i',JulyandOctober.anJanuary'998,theCompanypaidacashc'iaendof$.45pershareonitsCom..onStock.TheJanuary1998dividendpaymentisequ'valent to$1.80onanannualbasis.COMMONSTOCKTRADINGShaesoftheCompany's Co...-..on S=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 18ONDENSEDCONSOLIDATED BALANCESHEETtDecember31tThousands ofDollars)AAssetsUtilityPlantLess:Accumulated depreciation andamonSzation Construction workinprogressNetutilityplantCurrentAssetsInvestment inEmpireDeferredDebitsTotalAssets199719961995'994'9931992',714,368 1.569,078 1.518.878 1.423.098 1,558.053 128.8601,549.225 121,7251.590,681 69.7111.660.392 250,461450.6231,519,709 74,0181,686,913 236,51938.560484.9621,670,950 292,59638,879453.7261.593,727 242,371432.191$2.268.289

$2.361.476

$2.456.151

$2446.9541.253,117 1,545.464 83.8341.3353083 1.555.716 112.7501,668.466 248.58938.560488.5271.629.298 209.6219.846181,434$2.444.142

$2.030.199

$3,234,077

$3,159,759

$3.068,103

$2,981,151

$2.890,799

$2,798.581 CAPITALIZATION ANDLIABILITIES Capitalization LongtermdebtPreferred stockredeemable atoptionofCompanyPreferred stocksubjecttomandatory redemption Commonshareholders'quity:

CommonstockRetainedearningsTotalcommonshareholders'quity TotalCapitalization

$587,33447,00035,000$646,95467.00045,000699,031109.313696,01990,540808.344786,5591.477,678 1,545.513

$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

$658.88067,00054.000591,53266.968658.5001.438.380 LongTermLiabitities (Department

,ofEnergy)CurrentUabilities rredCreditsandOtherLiabilities otalCapitalization andLiabilities ectassified forcomparative purposes.

96.72693,75290,88787.82689.80494,602189,317158.217182,338181,327234,530267,276504,568563,994586.846575.488535,879229.94132268.289 32361.476 32456.151 62.446.954 32.44444232030.199 io.o 20Item7.MANAGEMENT'S DISCUSSION ANDANALYSISOFFINANCIAL CONDITION ANDRESULTSOFOPERATIONS 4Thefollowing isManagement's assessment ofcertainsignificant factorsaffecting thefinancial condition andoperating resultsoftheCompany.Thisassessment containsforward-looking statements whicharesubjecttovariousrisksanduncertainties.

TheCompany's actualresultscoulddifferfromthoseanticipated insuchforward-looking statements asaresultofnumerousfactorswnicnmaybebeyondtheCompany's controlbyreasonoffactorssuchaselectricandgasutilityrestructuring, futureeconomicconditions, anddevelopments inthelegislative, regulatory andcompetitive environments inwhichtheCompanyoperates.

Shownbelowisalistingoftheprincipal itemsdiscussed.

EarningsSummaryPage20Competition PSCCompetitive Opportunities CaseSettlement BusinessandFinancial StrategyPSCPositionPaperonNuclearGeneration FERCOpenTransmission OrdersGasRestructuring andPSCNegotiations Prospective Financial PositionRatesandRegulatory Matters1996ElectricRateSettlement 1995GasSettlement FlexiblePricingTariffPage21Page27Liquidity andCapitalResources CapitalandOtherRequirements Redemption ofSecurities Financing ResultsofOperations Operat'ng RevenuesandSalesFossilUnitRatngsancStatusOperating ExpensesDividendPolicyPage27Page30Page33EARNINGSSUMMARYDesp'teratereductions

'"..Duy'996and1997,earn'ngsapplicable toCommonStockwerenearlyunchanged in1997due,ir.part,to"heincreased ava'ability oftheCompany's Ginnanucleargenerating facilityfollowing the1996refueling andsteamgenerator replacemen:

outage.Increased Companygeneration allowedtheCompanytoreducepurchased electricexpense,whileincreasing available powerforcustomerconsumption andresale.Adecreaseinfinancing costsasaresultofdiscretionary edemptions andref'nancing ac"ivities duringtheyearalsohelpedtoincreaseearnings.

Inadditiontoratereductions, offsetting againin1997earn'ngswereawa"merheatingseasonduringthefirstquarteroftheyea"coupledwithacoolersummerwhichaffecteda'cond'ioning load.Basicanddilutiveearningspershareof$2.30in1997aredowntwocentscomparedtoayearago.InFebruary1997,theFinancial Accounting Standards BoardissuedStatement ofFinancial Ae'counting Standards No.128("SFAS-128"),

"Earnings perShare,"whichchangesthemethodology ofcalculating earningspershare.TheCompanyadoptedSFASNo.128duringthefourthquarterof1997.Theimpactonearningspershareforpriorperiodsisnotmaterial.

Adiscussion ofthecalculation ofearningspershareispresented inNote1totheNotestoFinancial Statements.

Basicanddilutiveearningspershareof$1.69reportedin1995reflectapretaxreduction of$44.2million,or$.75persharenet-of-tax,inconnection

'0~.'e0' 22TheCompanybelievesthattheSettlement willnotadversely affectitseligibility tocontinuetoapplyStatement ofFinancial Accounting Standards No.71("SFAS-71"),

withtheexception ofcertain"to-gocosts"associated withnon-nucleargeneration.

If,contrarytotheCompany's view,sucheligibility wereadversely

affected, amaterialwrite-down ofassets,theamountofwhichisnotpresently determinable, couldberequired.

RatePlan.OverthefiveyeartermoftheSettlement, thecumulative raterecuctions willbeasfollows:RateYea"1:$3.5million;RateYea"2:$'2.8million;RateYear3:$27.6million;RateYear4:$39.5million;ancRateYea"5:$64.6m'llion.TheRateP)anpermitstheCompanytooffsetagainsttheforegoing totalreductions certaininflation-related

expenses, andcertainamountsrelatedtoapowerpurchaseagreement withKamine/Besicorp:

AlleganyL.P.'(Kamine),

including seven-eighths ofanydifference betweenKaminecostscurrently includedinratesandanyincreased amountresulting fromenforcement ofsuchagreement w'hanybalancenotrecovered duringthetermoftheSettlement subjecttodeferralforrecoveryaftersuchterm.Theagreement issubjecttolitigation, asdiscussed inNote10oftheNotestoFinancial Statements.

Intheeventofasettlement oftheKaminematter,theSettlement permitstheCompanytooffsetagainstratereductions, thefollowing amounts:RateYear2,$3.5million;RateYear3,$8.4m'lion;RateYear4andcontinuing untilSettlement paymentsarecompleteorJuly1,2002,whichever islater,$10.5million.IntheeventthattheCompanyearnsareturnoncommon.equityinexcessofaneffective rateof11.50percentovertheentirefive-year

.termoftheSettlement, 50percentofsuch-excesswillbeusedtowritedowhdeferredcostsaccumulated duringtheterm.Theother50percentoftheexcessw'allbeusedtowritedownaccumulated deferrals orinvestment inelectricplantorRegulatory Assets(whicharedeferredcostswhoseclassification asanassetonthebalancesheet'spermitted bySFAS-71).

Ifcertainextraordinary eventsoccur,including arateofreturnoncommonequitybelow8.5percentorabove14.5percent,orapretaxinterestcoveragebelow2.5t'mes,thene'thertheCompanyoranyotherpartytotheSettlement wouldhavetherighttopetitionthePSCforreviewof=heSe"tlemen andappropriate remedia'ction.

RetailAccess.RGaE'sEnergyCnoiceProgramwillbeava'lable toallofitscs"omes,withoutregardtocustomerclass,onanequalbasisuptocerta'nsagecaps.OnJuly1,1998,customeswnoseelectricloadsrepresent appoximately 10percentoftheCompany's totalannualretailsaleswillbee'ig'bletopurchaseelectricity (bu"no"capac'tycommitments) fromalternative suppers.

OnJuly1,1999,customers with20percentoftotalsaleswillbee'gibleandasofJuly1,2000,30percentoftota'ales willbeeligible.

Aso=Ju'y1,2001,allreta'1customers weelig'ble-opurchaseenergyandcapac'tyfromalternative suppliers.

Duringtheinitial,energyonlvs=ageo'heReta'lAccessProgram,theCompany's d'str'bution ratewillbese=bydeducting 2.3ce..sperkilowatthour("KWH")fromitsfullservice("buncled")

raesandLoadServingEntitiesactingasretailers intheCompany's serv'ceareawillbeenitl'edtopurchaseelectricity fromtheCompanyatarateof1.9centsperKWH.Duringtheenergyandcapac'<<ystage,theratewillge..era'ly eqal"hebundledratelessthecostoftheelectriccommodity andtheCompany's no..-nuclear generating capacity.

Tnesecommodity andcapacitycosts,generay referredtoas"contestable costs,"areestimated tobe3.2centsperKWii,inclusive ofgrossreceiptstaxes.Generating Assets.TheCompanyw'lnoberequiredtodivestanyofitsgeneration facilities.

TotheextentthattheCompanysellsanygenerating assetsduringthetermoftheSettlement, gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.

Withregardtolossesonsuchsales,theSettlement acknowledges anintentthattheCompanywillbepermitted torecoversuchlossesthroughdistribution ratesduringthetermoftheSettlement.

Futureratetreatment istobeconsistent withtheprinciple thattheCompanyistohaveareasonable opportunity torecoversuchcosts."To-gocosts"oftheCompany's non-nuclear resources (i.e.,capitalcostsincurredafterFebruary28,1997,operation andmaintenance

expenses, andproperty, payrollandothertaxes)aretoberecovered throughthedistribution 0e-24Throughout thetermoftheSettlement, RG&Ewillcontinuetoprovideregulated andfullybundledelectricserviceunderitsretailservicetarifftocustomers whochoosetocontinuewithorreturntosuchservice,andtocustomers towhomnocompetitive alternative isoffered.Untilthedevelopment ofawholesale marketforgenerating

capacity, therewillbenosuitablemechanism forthereallocation, fromtheregulated utilitytotheLSE,ofresponsibility forensuringadequateinstalled reservecapacity.

Accordingly, duringtheinitial"EnergyOn)y"stageoftheEnergyChoiceProgram(July1,1998toJuly1,1999),LSEswillbeabletochoosetne'rownsourcesofenergysupply,whileRGGEwillprovidetoLSEs,andwillbecompensated for,thegenerating capacity(installed reserve)neededtoservetheirretailcustomers reliably.

Duringthe"EnergyandCapacity" stagecommencing July1,1999,theLSEswillbeabletoselect,andwillberesponsible forprocuring, generating

capacity, aswella'senergy,toservetheloadsoftheirretailcustomers, anddistribution chargeswillbeaccordingly reducedasnereinafter described.

IfbyJuly1,1998thereisnotafunctioning Statewide energyandcapacitymarket(seediscussion underFERCOpenTransmission Orders),theCompanymaypetitionthePSCfordeferralofthescheduled commencement oftheEnergyandCapacitystage.Summary.Theavailability ofLSEstoserveeligiblecustomers andhowquicklytheydecidetobecomeinvolvedcannotbedetermined.

Likewise, theCompanyisnotabletopredictthenumberofcustomers thatmaychosetonolongerbeservedundertheCompany's regulated tariffs.TheproposedtarifsforEnergyChoiceasfiledbythe.Qotppany areexpectedtobecomeeffective February1,1998forthepilotprogram.ThePpChasnotsetadecision-making dateforthefull-scale program.TheCompanyis'nabletopred'ctwhatfinalrulesorregulations wil)ultimately beadoptedbythePSCforth'sprogram.Unregulated EnergyServicesCompany.ItispartoftheCompany's financial strategytostimulate growthbyenteringintounregulated businesses.

Thefirststep'nthisdirection wastheformation andoperation ofEnergetix effective January',1998.Energetix isanunregulated subsidiary oftheCompanythatwillbr'ngenergyproductsandservicestothemarketplace bothwithinandoutsidetheCompany's franchise area..heSettlement approvedbythePSCinNovembeallowsfortheinvestment ofupto$100millioni,nunregulated businesses duringthenextfiveyeas.During998.theCompanyexpectstodetermine theactualleveloftheinitial:nvestments tobemadeinunregulated bus'nessopportunities.

OnJuly1,1997theCompanyandEnergetix filedwiththeFederalEnergyRegulatory Commission (FERC)seek'ngautnor'zat'on toengageinthewholesale saleoelectricenergyandcapac'tya"market-based rates.Tneseapplications wereacceptedbyFERConSeptembe" 12,1997.TheComoanymus"seekseparateauthorization inordertosellelectricenergytoEne"getix atmarket-based rates.StockRepurchase Plan..InDecembe"1997theCompany's BoardofDirectors approvedaStockRepurchase Plan.Th'splan,whichissubjecttoapprovalbythePSC,providesfortherepurchase ove"thenextthreeyearsofupto4.5millionsharesofCommonStock,representing approximately 11.5percentoftheCompany's outstanding sharesofCommonStockatDecember31,1997.TheCompanyexpectsaPSCdecisioninearly1998.NuclearOperating Company.InOctober1996,theCompanyandNiagaraMohawkPowerCorporation (Niagara) announced planstoestablish anuclearoperating companytobeknownastheNewYorkNuclearOperating Company(NYNOC).SincethattimeNYNOChasbeenorganized asaNewYorkLimitedLiability CompanyandtheConsolidated Edi'sonCompanyofNewYorkandNewYorkPowerAuthority haveannounced theirdesiretomoveforwardwiththeCompanyandNiagarawithplanstoimplement NYNOC.Itisenvisioned thatNYNOCwouldeventua'ly assumeresponsibility foroperation ofallthenuclearplantsinNewYorkState,including theCompany's totallyownedGinnaNuclearplantandjoinlyownedNineMileTwo.TheCompanybelievesthatNYNOCcouldcontribute toma'ntaining ahighlevelofoperational performance, contribute tocontinued satisfactory Nuclear e26naturalgasmarkettocompetition andtherebyallowresidential, smallbusinessandcommercial/industrial usersthesameabilitytopurchasetheirgassuppliesfromavarietyofsources,otherthanthelocalutility,thatlargerindustrial customers alreadyhave.Duringathree-year phase-inperiodtheState'sgasutilities wouldbepermitted torequirecustomers converting fromsalesservicetotakeassociated pipelinecapacityforwhichtheutilities hadoriginally contracted.

ThePSChasindicated thatitwilladdresstheissueofhowthecostsofsuchcapacitywouldberecovered afterthethree-year periodduringtheth'dyearofthephase-inperiod.ThePSCStaffhasrecentlyissuedaposi"'npaperonTheFutureoftheNaturalGasIndustryinwhichtheStaffproposesthatlocaldistribution companies (suchastheCompany)exitthemercnantfunctioninfiveyears.Treatment ofexistingpipelinecapacitycontracts andProvicerofLastResortresponsibilities aresubstantial issuestobeworkedoutbetweenthePSC,thelocalgasdistribution comoanies andotherstakeholders.

SeeNote10oftheNotestoFinancial Statements forfurther:information aboutthePSCgasrestructuring proceedings andthePSCStaffposi:tion paper.Gascustomers havehadachoiceofsuppliers sinceNovember1,1996.Underseparatetransportation tariffs,theCompanydistributes thegasandchargesfo"thedistribution aswellasassociated services.

TheCompanybelievesitspositioninthemarketissuchthatitwil)maintainitsdistribution systemmargins.Underaphase-inlimitation, lossofgascommodity salesmaybelim'tedtofivepercentof.theCompany's annualgasvolumethefirstyear,andthenf'veadd'tional percentforeachofthefollowing twoyears.Thephase-inwillbereviewedasexperience isgainedwiththeprogram.TheCompanyanticipates thattheuseoftransportation gasservicewillincrease.

ThroughDecember31,1997,'0customers werebeingservedunderthisservice.InJuly1997,theCompanycommenced negotiations withthePSCStaffandothepartieswiththeobjective ofdeveloping amulti-year settlement ofissuespertaining totheCompany's gasbusinessthatwouldtakeeffectuponexpiration oftnecurrent1995GasSettlement (seeRatesandRegulatory Matters)onJune30,1998.Afurtherobjective ofthesenegotiations istomaximizetheefficiencies o=theen'rebusinessbystructur'ng asettlement thatwillbeasconsistent aspossiblewiththeprovisions oftheSet"lemenintheCompet'ive Opportun'ie Proceec'ng, asdiscussed earlier.Nego=ia=io..s areatanearlystage;accorc'ngly, heCompanycanmakenoprecic='on astothei"outcome.COMPETITION ANDTHECOMPANY'S PROSPECTIVE FINANCIAL POS1TION.

WithPSCapprova,theCompanyhasdeerredcer"a'ncostsrathertnanrecognize themo'sbookswhenincurred.

Suchdeferredcostsarehenrecognized asexpenseswhen"heyaeincludedinratesandrecovered fromcstomers.Suchdeferralaccontingispermitted bySEAS-71.Thesedeerreccostsa"eshownasRegultaoryseso..theCompanysBaanceShee".ancacscssionancsummarization ofsuch.eguatoryAssetsispresented inNo=e0o'heNo"es"o."-nanc'alStatements.

acompetitive electr'cmarke,s=rancab'e asse=swoudarisewheninvestments aremadeinfacil'ties, o"cos"sa"eincurredtoservicecustomes,andsuchcostsarenotfullyecoverabeinmarket.basedra=es.Estimates ofsuchstrandable assetsarehigh'ysens'=ive "o=hecompet've wholesale marketpriceassumedintheestimation,

.-.acompe'ivenaturalgasmarketstrandable asse"swouldaisewherecustomers

-...'gra=e away=romdependence ontheCompanyfo"fu'service,leavingtheCompanywths"p'uspipel'qeandstoragecapacity, aswellasnaturalgassupplies, unde"con:ract.

Adiscussion ofstrandable assetsispresented inNote10oftheNotes:oFinancial Statements.

AtDecember31,1997theCompanybelievesthatitsregulatory andstrandable assets,ifany,arenotimpairedandareprobableofrecovery.

TheSettlement intheCompetitive Opportun'ties Proceeding doesnotimpairtheopportunity oftheCompanytorecover"'its investment intheseassets.However,thePSChaspublished aStaffpapertoaddressissuessurrounding nucleargeneration, including thedetermination offairmarketvalueforfacilities afterafiveyearrestructuring transition period.ItappearsthatthePSCmayseektoapplysimilarprinciples toothertypesofgenerating facilities.

Adetermination inthisproceeding couldhaveanimpactonstrandable assets.

28CAPITALANDOTHERREQUIREMENTS.

TheCompany's capitalrequirements relateprimarily toexpenditures forenergydelivery, including electrictransmission anddistribution facilities andgasmainsandservicesaswellasnuclearfuel,electricproduction andtherepayment ofexistingdebt.In1996theCompanycompleted replacement ofthetwosteamgenerators attheGinnaNuclearPlantwhichresultedinimprovedplantefficiency.

TheCompanyspentapproximately

$46milliononthisprojectin1996and$29millionin1995.TheCompanyhasnoplanstoinstalladditional baseloadgeneration.

Purchased PowerRequirement.

Unde"federalandNewYorkStatelawsandegulations, theCompanyisrequ'edtopurchasetheelectrical outputofunregulated cogeneration facilities whichmeetcertaincriteria(Qualifying Facilities).

TheCompanywascompelled byregulators toenterintoacontractwithKamineforapproximately 55megawatts ofcapacity, the.circumstances ofwhicharediscussed inNote10oftheNotestbFinancial Statements.

TheCompanyhasnootherlong-term obligations topurchaseenergyfromQualifying Facilities.

Year2000ComputerIssues.Astheyear2000approaches manycompanies faceapotentially seriousinformation systems(computer) problembecausemostsoftwareapplication andoperational programswritteninthepastwillnotproperlyrecognize calendardatesbeginning withtheyear2000.Atthistime,theCompanybelievesthattheproblemisbeingaddressed properlytopreventanyadverseoperational orfinancial impacts.TheCompanybelievesitwillincurapproximately

$15millionofcoststhroughJanuary1,2000,associated withmakingthenecessary modifications identified todate.Totalcostsincurredin1997wereapproximately

$1.4million.ENVIRONMENTAL ISSUES.Theproduction anddeliveryofenergyarenecessarily accompanied bythereleaseofby-products subjecttoenvironmental controls.

TheCompanyhastakenavarietyofmeasures(e.g.,self-audit'g, recycling andwasteminimization, tra'ningofemployees inhazardous wastemanagement) toreducethepotential fo"adverseenvironmental effectsfromitsenergyoperations.

Amoredeta'edcise'sion concerning theCompany's e..v'ronmental matters,including ad'scuss'on ofthefederalCleanAi"ActAmencments, canbefoundinNote10oftheNo=estoFinancial Statements.

REDEMPTION OFSECURITIES.

Inacc:on=o'sa.".dmandatory s'nkingfuncobga='ons ove""hepas=redemption ofsecurities totalec$m''on'.".'99",approx'mately

$152mill'on'n1997.:nccec'.".c's'997werenearly$102millio..o'x-exemp" sec"'=..ewmult'.mode tax-exempt bondsascisessecunce"=mortgagebondmatur'ies threevears,d'iscretionary

$49.-..onin1996,andcre"'ona"y redempt'ons foreswh'c..werere'nancedwitha'HfCg

'0 30Capitalandothercashrequirements during1998areanticipated tobesatisfied primarily fromacombination ofinternally generated fundsandtheuseofshort-term creditarrangements.

TheCompanymayrefinance maturinglong-tean debtandPreferred Stockobligations during1998depending onprevailing financialmarketconditions.

TheCompanyanticipates utilizing itscreditagreements andunsecured linesofcredittomeetanyinterimexternalfinancing needspriortoissu'ganylong-termsecurities.

Forinformation withrespecttoshort-term borrowing arrangements andlimitations, seeNote9oftheNotestoFinancial Statements.

Asf'nancial marketconditions warrant,theCompanymayalso,fromtimetotime,redeemhighercostseniorsecurities.

RESULTSOFOPEBATIONS Thefollowing financial reviewidentifies thecausesofsignificant changesintheamountsofrevenuesandexpenses, comparing 1997to1996and'996to1995.TheNotestoFinancial Statements containadditional information.

OPERATING REVENUESANDSALES.Operating revenuesin1997werelowerthan1996withtheeffectofelectricbaseratedecreases inJuly1996and1997andlowerthermsalesofgasduetomilderweatherthanlastyearpartially offsetbyhighercustomerelectrickilowatt-hour salesresulting fromincreased customers andhigherelectricsalestootherutilities.

Despitelower'pyzating

revenues, operating revenueslessfuelexpenseswerenearlyunchanged ref5ecting primarily adeclineinpurchased electricity expenseasaresultofincrdased availability oftheCompany's generating facilities.

Theeffectofweathervariations onoperating revenuesismostmeasurable intheGasDepartment, whererevenuesfromspaceheating customers compriseabout90to95percentoftotalgasoperating revenues.

Comparedtoayearearlier,weather'ntheCompany's serviceareawas9.0percentwarmerduringthefirstthreemonthsof1997and1.1percentwarme.fortheentireyearonacalendarmonnheatingdegreedaybasis.Incontrast, weatherduring1996was7.1percentcolderthan1995onacalendarmonthheatingdegreedaybasis.Withelimination ofaweathernormalization clauseintheCompany's gastariffeffective November'995,abnormalweathervaiationsmayhaveamorepronounced effectongasrevenues.

Coolerthannormalsummerweatherduring1997and1996hamperedthedemandforairconditioning usage,withamorepronounced effectin1997withthe1997weathe"beingapproximately 27percentcoolerthan1996.Comparedwithayea"earlier,kilowatt-hour salesofenergytoretailcustomers wereup1.2percentin1997,follow'ng a0.3percentincreasein1996.Sa1estocommercial customers achievedthelargestgainin1997.Salesto'ndustrial customers ledthe'ncreasein1996comparedtoayearearlierandweedrivenbyonelargeindustrial customerwhopurchased moreelectricpowe"asana'ternative topowerproducedatitsownplan".Decreased electricdemandfo"airconditioning usagec'ausedbycoolersumme"weatherhadanimpactonk'lowatt-hour salesin1996and1997.<<.Fluctuations inrevenuesfromelectricsalestootherutilities aegenerally relatedtotheCompany's customerenergyrequirements, thewholesale energymarket,availability oftransmission, andtheavailability ofelectricgeneration fromCompanyfacilities.

Revenuesfromelectricsalestootheutilities rosein1997duetoincreased salesresulting fromgreateravailability ofourcombinednuclearandfossilgeneration, afavorable wholesale marketinthesecondhalfoftheyear,andincreased marketing ofavailable capacity.

Incontrastto1997,revenuesfromsalescwotherelectricutilities declinedin1996reflecting decreased kilowatt-hour salestosuchutilities andlessgeneration fromtheCompany's GinnaNuclearPlant.Thetransportation ofgasforlarge-volume customers whoareabletopurchasenaturalgasfromsourcesotherthantheCompanyisanimportant component oftheCompany's marketing mix.Companyfacilities areusedtodistribute thisgas,whichamountedto16.6milliondekatherms in1997and16.8milliondekatherms in1996.Thesepurchases byeligiblecustomers havecauseddecreases inCompanyrevenues, withoffsetting decreases inpurchased gas 32shareholders willassumethefullbenefitsanddetriments realizedfromactualelectricfuelcostsandgeneration mixcomparedwithPSC-approved forecastamounts..TheCompanynormallypurchases electricpowertosupplement itsowngeneration whenneededtomeetloadorreserverequirements, andwhensuchpo~erisavailable atacostlowerthantheCompany's production cost.Increased availability andefficiencies following the1996installation ofnewsteamgenerators attheGinnanuclearplantresultedinlowerkilowatt-hour purchases ofelectricity in1997whichledtoadeclineinpurchased electricpowerexpense.Despiteanincreaseink'owatt-hours purchased in1996,electricpu"chased powerexpensewasalsodownin1996reflecting, inpart,lowepurchases fromthehigher-cost Kaminefacilityasdiscussed below.UndeacontractwithKamine,theCompanyhasbeenrequiredtopurchaseunneededenergyatuneconomical rates(seeNote10oftheNotestoF'nancial Statements).

TheCompanypurchased 337thousandmegawatt-hours ofenergyfromKamineatatotalpriceof$16.6millionin1995.TheKaminefacilityhasbeenoutofservicesincethemiddleofFebruary1996whichhelpedtolowertheunitcostforpurchased electricity in1996comparedto1995.EnergyManagement andCosts-Gas.TheCompanyacquiresgassupplyandtransportation capacitybasedonitsrequirements tomeetpeakloadswhichoccurinthewintermonths.TheCompanyiscommitted totransportation capacityontheEmpireStatePipeline(Empire)andtheCNGTransmission Corporation (CNG)pipelinesystems,aswellastoupstreampipelinetransportationand storageservices.

ThecombinedCNGandEmpiretransportation capacity'-i's adequatetomeettheCompany's currentrequirements.

':orthe1997comparison period,gaspurchased forresaleexpensedeclineddrivenbyareducedvolumeofpurchased gasresulting fromawarmerheatingseason.Highercommodity costsandincreased volumesofpurchased gascausedanincreaseingaspurchased forresaleexpensein1996comparedto1995.Operations Excluding FuelExpenses.

Fo"the1997comparison period,the'..crease inoperations excluding fuelexpensesreflectsmainlyhigheroutsideserv'cesexpenses, recognition ofobsoleteandunproductive materials inventory, s"ormcosts,andregulatory compliance costspartially offsetbylowerpayrollcos"sancdecreased expenseassocia"ed withuncollectible accounts.

Forthe1996compar'son period,theincreasei..operat'ons excluding fuelexpensesreflects...a'.".ly h'gherpayrollcostsandanincrease'namortizat'on expensebeginnin"ly1,1996forcustomerinformation systemenhancements.

Higherpayrollcostsforthisperiodreflectsamortizatio..

ofadditional ear'yretirement costsforprogramsconcluded inOctober1994andgreateremployeeredeploymen

/outplacement cos"s.Anadditional expenseaccrualfordoubtfulaccoun"sincreased operating expensesbv$15.0millionin1995.TheCompanyiscontinuing totakeaggressive stepstoimprovei"so,co.ectione.aborts.

Uncollectible expensein'997was$18mil'ion,comparedwith$20mi1'onin1996.In1995,uncollec"ible expensewas$23million.Forbothcomparison periods,the'ncreaseindeprecia=ion expensereflectsprimarily resultsfromdepreciation ofthenewGinnanuclearplantsteamgeneators(approximately

$800,000additional expenseper.month) andrecoveryofincreased nucleardecommissioning expenseofapproximately

$3.2millionperquarterbeginning July1,1996.TaxesChargedToOperating Expenses.

Local,stateandothertaxesdecreased in1997reflecting mainlylowerpropertytaxesduetodecreases inassessments and/orratesandlowerrevenuetaxesduetodecreases inrevenuesandtheNewYorkStaterevenuetaxsurcharge rate.Thedecreaseinthesetaxesfor1996reflectsmainlylowerpropertytaxesduetodecreases inassessments.

Thedecreaseinfederalincometaxin1997reflectsmainlythereversalofapriorprovision forthein-serv'ce dateofNineMileTwoasaresultofanagreement reachedwiththeInternalRevenueService.

34Item8.FINANCIAL, STATEMENTS ANDSUPPLEMENTARY DATA'0A.FINANCZAI STATEMENTS ReportofIndependent Accountants Consolidated Statement ofIncomeforeachofthethreeyearsendedDecember31,1997.Consolidated Statement ofRetainedEarningsforeachofthethreeyearsendedDecember31,1997.Consolidated BalancesheetatDecember31,1997and1996.Consolidated Statement ofCashFlowsforeachofthethreeyearsendedDecember31,1997.NotestoConsolidated Financial Statements.

Financial Statement Schedules:

Thefollowing Financial Statement Scheduleissubmitted aspartofItem14,Exhibits, Financial Statement Schedules andReportsonFormS-K,ofthisReport.(AllotherFinancial Statement Schedules areomittedbecausetheyarenotapplicable, ortherequiredinformation appearsin,theFinancial Statements ortheNotesthereto.)

ScheduleII-Valuation andQualifying Accounts.

B.SUPPLEMENTARY DATA'0InterimFinancial Data.'0 CONSOUDATED STATEMENT OFINCOME(Thousands ofDoaars)YearEndedDecember31199719961995radngRevenueslectricGasEkrctricsalestootherutrTIties TotalOperating Revenues$679.473336.3091,015.782 20.856$690.883$696.582346.279293.8631,037.16216.885990.44525.8831.036.638 1.054,047 1,016328Operating ExpensesFuelExpensesFocitorelectricgeneration Purchased etectricny Gaspurchased forresale47.66528.347196,57940.93844,19046.48454.167292.297767762TotalFuelExpenses272.59i289779266,ii9Operat(ng RevenuesLessFuelExpensesOtherOperating ExpensesOperatens excluding fuelexpensesMaintenance Depreciation andambit(sation Taxes-local.stateandornerFederalincometax764.047268,47446.635116.522121.79665.279764328.'66.094 47.063105.614126.86869.501750,209259.20749,22691.593133,89566.215TbtalOtherOperating ExpenSeS618,706615,140600,136OperabngIncomeOther(Income)andDeduct(ons Allowance lorotherfundsusedduringconsuuction FederalincometaxRegulatory disallowances Other.netTotalOther(Income)andDeductions InterestChargestermdebtr.net(ancelorborrowedfundsuseddunngconsuucten TotalInterestCharges145341(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)59.181NetIncomeDividendS OnPreterred Stoct(Earn(ngsAppacable tOCommonStock953605.805$89.5557.465$90.0467.4659757i77.928EamegsperCommonShare~BaseEarnv(gsperCommonShare-Dauted$2.30$2.30$2.32$2.32$1.69$1.69CONSOLIDATED STATEMENT OFRETAINEDEARNINGS(Thousands ofDotlars)YearEndedDecember31199719961995BalanceatBeginning olPeredAddNetIncomeAdlustmenl Assooated wnhStockRedempten TotalDeductDiveendsdeclaredoncaptatstockCumutatNe preferred stock.alrequiredratesCommonStockTotalBalanCealEndolPeriod$90.540$70.330$74.56695.36097,51171,928f846)\85.054I67,841146.4945.8057.4657.46569.93669.8366876997574177.30176164$109,313.$90,540$70,330Dividends DeclaredperCommonSharempanyingnotesareanintegralperlOl'thefinancial statements.

$1.80$1.80$1.80 CHESTERGASANDELECTRICCORPORATION NSOLIDATED STATEMENT OFCASHFLOWS(Thousands ofDoliars)YearEndedDecembe'r 31CASHFLOWFROMOPERATIONS NetincomeAdjustments toreconcile netincometonetcashprovidedfromoperating activities:

Depreciation andamortization DeferredfuelDeterredincometaxesAllowance forfundsusedduringconstruction Unbiliedrevenue,netStockoptionplanNucleargenerating plantdecommissioning fundPensioncostsaccruedPostemployment benefitinternalreserveRegulatory disa!IowanceProvision fordoubtfulaccountsChangesincertaincurrentassetsandliabilities:

Accountsreceivable Materials, suppliesandfuelsTaxesaccruedAccountspayableOthercurrentassetsandliabilities, netOther,netTotalOperating 199795,360133,942489(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)6,83715,1679,6449,63928,762251.791HFLOWFROMINVESTING ACTIVITIES etadditions toutilityplantOther,netTotalInvesting (84.068)(1)f84.069)(114,274)

(109,547) 9,20411,124CASHFLOWFROMFINANCING ACTIVITIES Proceedsfrom:Sale.'Issuance ofcommonstockIssuanceoflongtermdebtShorttermborrowings, netRetirement oflongtermdebtRetirement ofpreferred stockDividends paidonpreferred stockDividends paidoncommonstockOther,netTotalFinancing Increase(Decrease) incashandcashequivalents Cashandcashequivalents atbeginning ofyearCashandcashequivalents atendofyear272101,9006.000(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,~05741,3112,810S44.121SUPPLEMENTAL DISCLOSURE OFCASHFLOWINFORMATION (Thousands ofDollars)CashPaidDuringtheYearInterestpaid(netofcapitalized amount)metaxespaidTheaccompanying notesareanintegralpartofthefinancial statements.

199750,68170.500199655,545$76.890$199556,59243.500 40Allowance forOtherFundsUsedDuringConstruction, apartofOtherIncome.TherateapprovedbythePSCforpurposesofcomputing AFUDCwas5.0%duringthethree-year periodendedDecember31,1997.Replacement ofminoritemsofpropertyisincludedinmaintenance expenses.

Costsofdepreciable unitsofplantretiredareeliminated fromutilityplantaccounts, andsuchcosts,plusremovalexpenses, lesssalvage,arechargedtotheaccumulated depreciation reserve.CASHANDCASHEQUIVALENTS.

Cashandcashequivalents consistofcashandsho-termcommercial pape".Theseinvestments haveoriginalmatuitvno"exceed'ng threemonths.Suchinvestments arestatedatcost,whichapprox'mates fairvalue,andareconsidered cashequivalents forfinancial statement purposes.

INVESTMENTS INDEBTANDEQUITYSECURITIES.

TheCompany's accounting pol'cy,asprescribed bythePSC,withrespeqttoitsnucleardecommissioning trustsistoreflectthetrusts'ssets atmarketvalueandreflectunrealized gainsandlossesasachangeinthecoresponding accrueddecommissioning liability.

GASSUPPLY.TheCompanyperiodically entersintoagreements tominimizepricerisksfornaturalgasinstorage.Gainsorlossesresulting fromtheseagreements aredeferreduntilthecorresponding gasiswithdrawn fromstorageanddelivered tocustomers.

RESEARCHANDDEVELOPMENT COST.ResearchandDevelopment costswerechargedtoexpenseasincurred.

Expend'tures fortheyears1997,1996,pnd1995were$4.5million,$4.9millionand$5.2millionrespectively.

ENVIRONMENTAL REMEDZATZON COSTS.TheCompany,accruesforlo'ssesassociated withenvironmental remediation ob'igations whensuchlossesareprobableandreasonably estimable.

Accrualsfo"est'mated lossesfromenvironmental remediation obligations generally arerecognized nolaterthancompletion oftheremed'alfeasibility study.Suchaccualsareadjustedasfurthe"'nformat'on developsorc'rcumstances hange.Cossofutureexpend'"resforenv'ronmental remed'at'on obligations arenodiscounted tothe'rese."."

value.MATERIALS SUPPLIESANDFUELS.Materiasancspp'iesnventories areva.ueda"thelowerofcos"o"marketsng=he"rs=-i""rst-outmet'~od~uel~~IQII~'nvenzories arevaluedataveragecost..heCompanvper'od'cal'y entersintoagreements tom'nimizeprice'sksfornatralgas.".s"orage.Gainsorlossesesu't'ng'mtheseagreements arece=errec".".=thecorresponding gasisw'hcrawnfromstorageancdeiveredtoc'stomers.

TOCK-BASED COMPENSATION.

F'na..c.a Accont.ngStancarcs BoardStatement 123(SFAS.1.23),

Accounting

o"S"ockBase"Co.-..pe.-.sa:'on, wasadoptedbytheCompanyinthefirstquartero=.996.:=reco."..-..encs heuseofafairvalubasedmethodofaccounting forco.-..pensa='on cos"sassocia"ed w'thstock-based co.-..pensation.

TheCompanycrrent'y'.".asS=ockAp=eca=ionR'ghtsplanscover'ncertainempoyeesanddirectors.

Fo"=hesep'ans,=heCompany's accounting po'cyhasbeentouseafa'-va'ueme=hoco=compt'ngper'odiccompensation expense.SEAS-123wasappliedtothevaa='ono="he996PeformanceStockOpt'onPlan(PSOP),whichbecamee=fectveonana"y22,1997.Theaggregate amountchargedtoexpense's aresultoftheseplansapproximates

$1.0millionannuallyin1996and1995,andapprox'ma es$8.2m'ion'n1997.Additional information onthePSOPisincluded'"..Noe8.RECLASSIFICATIONS.

Certainamountsinhe'rioryears'inancial statements werereclassified toconfo".zwi"hcrren=yearpresentation.

IEARNINGSPERSHARE.SFAS-128.

Earn'ngsPe"Share,wasadoptedbytheCompanyinthefourthquarterof1997.Thisstatement replacesthepresentation fg7ofprimaryEarningsPerSharewithBasicEarningsPerShare,andalsorequirespresentation ofDilutedEarningsperShare.BasicEarningsPerShare(EPS)iscomputedbydividingincomeavailable tocommonsha.eholders bytheweightedaveragenumberofcommonsharesoustandingfo"theperiod.DilutedEPSreflectsthepotential dilutionthatcouldoccurifsecurities orothecontracts toissue 42Note2.FEDERALINCOMETAXES4Theprovision forfederalincometaxesisdistributed betweenoperating expenseandotherincomebaseduponthetreatment ofthevariouscomponents oftheprovision intherate-making process.Thefollowing isasummaryofincometaxexpensefo"thethreemostrecentyears.Charged(Credited) tooperat,ing expense:CurrentDeferredboaa1Charged(Credited) toothe."incone:C'uentDeferredDefe=redinvestnent taxcreditTotalTotalfederalincomeaxexpense1997$69,812(4,533)1,828(3,100)(2.432)73,lUT7$61,575(Thousands o!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$49,267Thefollowing isareconciliation ofthedifference betweentheamountoffederalincometaxexpensereportedintheConsolidated Statement ofIncome.,andtheamountcomputedatthestatutory taxrateof35%.(Thousands ofDollars)aetIncomedd:federa.incometaxexpenseincomebeforefederalincometaxComptedtaxexpensea"satuorytaxrae"ncreases (decreases) intaxresulting from:Difference betweentaxdepreciation andamo.".=deferedDeferrec.'nvestment axcedit)(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$49.267Asmmaryofthecomponents ofthene"deferredtaxliability isasfo'lows:a(.hosandsofDollars)a)"c'a"deco-'s'"ŽgAccelerated dep.eciationDeferedinvest.en taxcreditDepreciation previously flowedthroughpensionotherToal1997$(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.PENSIONPLANANDOTHERPOSTEMPLOYMENT BENEFITS0TheCompanyhasadefinedbenefitpensionplancoveringsubstantially allofitsemployees.

Thebenefitsarebasedonyearsofserviceandtheemployee's compensation.

TheCompany's fundingpolicyistocontribute annuallyanamountconsistent withtherequirements oftheEmployeeRetirement incomeSecurityActandtheinternalRevenueCode.Thesecontributions areintendedtoprovideforbenefitsattributed toservicetodateandforthoseexpectedtobeearnedinthefuture.Theplan'sfundedstatusandamountsrecognized ontheCompany's balancesheetareasfollows:1997(Millions) 1996Accumulated benefitobligation, including vestedbenefitsof$384.7in1997and$374.6in1996Projected benefitobligation forservicerenderedtodate404.0*S(499.3)*s392.6*S(480.2)*Less:Planassetsatfairvalue,primarily listedstocksandbondsPlanassetsinexcessofprojected benefits638.4.'-".567.1139.1~'6.9Unrecogn'zed netloss(gain)frompastpexperience different fromthatassumedandeffectsofchangesinassumptions Pr'rservicecostnotyetrecognized innetperiodicpensioncostUnrecogn'zed netobligation atDecembe"31Pensioncostsaccrued(219.0)10.7s67.4(170.7)11.6s69.8Actuarial presentvalue.Ne"pensioncostincludedthefollowing componer.ts:

1997(Mill'ons) 19961995Servicecost-benefitsearnedduringthepe'od:nterest'ost onprojected benefiob'iga=ion ActualreturnonplanassetsNetamortization anddeferralNetperiodicpension(credit)cost,s6.233.0(104.3)63.1~s$7.433.4(80.8)39.0$6.035.4(101.1)56.1Theprojected benefitobligation atDecembe"31,1997andDecember31,1996assumeddiscountratesof6.75%and7-.Z5%,respectively, andalong-term rateofincreaseinfuturecompensation levelsof5.00%.Theassumedlong-term rateofreturnonplanassetswas8.50%,.Theunrecognized netobligation isbeingamortized over15yearsbeginning January1986.1'nadditiontoproviding pensionbenefits, theCompanyprovidescertainhealthcareandlifeinsurance benefitstoretiredemployees andhealthcarecoverageforsurviving spousesofretirees.

Substantially alloftheCompany's employees areeligibleprovidedthattheyretireasemployees oftheCompany.Zn 46Note4.DEPARTMENTAL FINANCIAL INFORMATION

,0TheCompany's recordsaremaintained byoperating departments, inaccordance withPSCaccounting policies'he following istheoperating dataforeachoftheCompany's departments, andnointerdepartmental adjustments arerequiredtoarriveattheoperating dataincludedintheConsolidated Statement ofZncome.ElectricOperating Znformation Operating revenuesOperating

expenses, excluding provision forincometaxesPretaxoperating incomeProvision forincometaxesNetoperat'ng income(Thousands ofDollars)199719961995700,329$707,768$722,465516,793183,53661,837521,222186,54661,901523,105199,36059,500$121,699S124,645S139,860OtherXnformation Depreciation andamortization Nuclearfuelamortization Capitalexpenditures 103,395$$17,419$58,522JI&~-,615$78,81216;209;$17,98295,334'93,634Xnvestment Znformation, Zdentifiable assets(a)$1,783,825

$1,877,224

$1,913,762 Opera"'ng Xnformat'on Ooera-'ng revenueOperating

expenses, excluding prov's'on forincometaxes309.2253'4,'36276,935S336,309S346,279$293,863Pre"axoperating incomeProvision forincometaxes27,0843,44232,1437,60016,9286,715Ne=operat'ng

'ncomeOthernformation Deprec'ation Capitalexpenditures XnvestmentZnformationidentifiable assets(a)S23,642S24,543S10,213S13,127S'2,999S12,781S25,546S18,940$15,913S441,849S447,865S477,758(a)Excludescash,unamortized debtexpense.andotherco~onitems.

e=

Note6.LONG-TERM DEBT!0FIRSTMORTGAGEBONDSSeriesDue(Thousands ofDollars)Principal AmountDecember31199661/46.78.0061/283/893/881/46.356.507.007.157'37.647.667.676.3757.45WXYEEOO)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,SeriesRRandSeriesSSFirstMortgageBondsequaltheprincipal amountofandprovideforallpaymentsofprincipal, premiumandint,crest corresponding tothePollution ControlRevenueBonds,SeriesC,andPollution ControlRefunding RevenueBonas,Series1992A,Series)992B(Rochester GasandElectricCoporaionProjects),

respectively,

'ssuedbytheNewYorkStateEnergyResearchandDevelopment Authority (NYSERDA) throughaparticipation agreement w'ththeCompany.Paymentsofthepr'ncipal of,andinterestontheSeries1992AandSeries1992BBondsarecuaranteed underaBondInsurance PolicybyMB"AInsurance Corporation.

(b)TheSeriesQQFirstMortgageBondsandthe7%,7.15%,7.13%and6.375'4mecium-t,erm not,esaescribed be'owaregenera'yno"redeemab'e priortomaturity.

(c)Zn1993theCompanyissued$200mil'ionunderamedium-term noteprogramentitled"FirstMortgageBonds,Designated SecuredMedium-Term Notes,SeriesA"withmaturities that"angefromsevenyearstothirtyyears.TheFirstMortgageprovidessecurityforthebondsthroughafirstlienonsubstantially allthepropertyownedbytheCompany(exceptcashandaccountsreceivable).

Sinkingandimprovement fundrequirements aggregate

$333,540perannumundertheFirstMortgage, excluding mandatory sinkingfundsofindividual series.Such,requirements maybemetbycertification ofadditional propertyorbydepositing cashwiththeTrustee.The1997and1996requirements weremetwithfundsdeposited withtheTrustee,andthesefundswereusedforredemption ofoutstanding bondsofSeriesY.OnMay1,1997theCompanyredeemedallitsoutstanding FirstMortgage8%Bonds,SeriesY,dueAugust15,1999andallitsoutstanding FirstMortgage6'.Bonds,Seriesw,dueSeptember 15,1997.OnOctober15,1997,theCompanyredeemedallitsoutstanding FirstMortgage65%Bonds,SeriesEE.

50Basedonanestimated borrowing rateatyear-end1996of7.30%forlong-termdebtwithsimilartermsandaveragematurities (13years),thefairvalueoftheCompany's long-term debtoutstanding (including Promissory Notesasdescribed above)isapproximately

$670millionatDecember31,1996.OnSeptember 16,1997,theCompanycompleted arrangements forthedeliveryinSeptember 1998of$25.5millionof5.95'tNYSERDAtax-exempt bondsdueSeptembe1,2033.ProceedsareexpectedtobeusedtoredeemtheSer'sOO,tax-exempt,firstmortgagebondswhicharenotredeemable untilDecember"998.Note7.PREFERRED ANDPREFERENCE STOCKTebOrderofSenioritPreferred Stock(cumulative)

Preferred Stock(cumulative)

Preference StockParValue$100251Shares'uthorized 2,000,000 4,000,000 5,000,000 SharesOutstandin 920,000*Seebelowformandatory redemption requirements.

Nosharesofpreferred orpreference stockarereservedforemployees, orforoptions,warrants, conversions, orotherrights.A.PREFERRED STOCKiNOTSUBJECTTOMANDATORY REDEMPTION:

e~SeriesSharesOutstanding December31,1997(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,plusaccrueddividends inal.cases..heSer'esNwereredeemedonApr'122,1997.B.PREFERRED STOCK,SUBJECTTOMANDATORY REDEMPTION:

SharesOutstanding se"iesDecember31,1997(.housands)

December31.'997'996'ptional Redemption (ershare)7.45S7.55T7.65U6.60VTotalLess:DoewithinoneyearTotal+Thereafter at$100.00100,000100,000250,000,(mU100.000350000$3.0,00010,00025,000$~4,VR10.000~35000$10,00010,0001Q,QOO25,000,UH10,000~45000Notapplicable Notapplicable Notapplicable NotBefore3/1/04+

52Note8.COMMONSTOCKANDSTOCKOPTIONSInDecember1997,theBoardofDirectors oftheCompanyauthorized therepurchase ofupto4.5millionsharesoftheCompany's CommonStockontheopenmarket.Noneoftheshareswerepurchased priortoyearend.AtDecember31,1997,therewere50,000,000 sharesof$5parvalueCommonStockauthorized, ofwhich38,862,347 wereoutstanding.

NosharesoCommonStockarereservedforwarrants, conversions, orotherrights.Therewere1,445,141sharesofCommonStockreservedforemployees underthe1996PeformanceStockOptionPlan,asfurtherdescribed below.Therewere1,026,840 sharesofCommonStockreservedandunissuedforshareholders undertheAutomatic DividendReinvestment andStockPurchasePlan.and129,664sharesreservedandunissuedforemployees undertheRGRESavings"PlusPlan.COMMONSTOCKSharesOutstanding Amount(Thousands)

Balance,January1,1995SharesIssuedthroughStockPlansDecrease(Increase) inCapitalStockExpenseBalance,December31,1995SharesIssuedthroughStockPlansDecease(Increase) inCapitalStockExpenseBaance,December31,1996SharesIssuedthroughStockPansAddit'onal PaidinCapitalDecrease(Increase)

'n,Captock ExpenseBaance,December31.199737,669,963 783,20038,453,163 398,30138,851,464 0,88338,862,347

$670,56917,074(125)$687,5188,612(111)$696,0192722,399699,03"PERFORMANCE STOCKOPTIONPLANEffective January22,'99'7,heCompanyacop.edaPerformance StockOptionPlanwhichprovidesforthegrantingofop:fonstop."chaseupto2,000,000 authorized butunissuedshar'esort"easuryshareso:$5pa"-valueCommonStocktoexecutive officersandotherkeyemployees.

Yopar='c'pant shallbegrantedoptionsformorethan200,000shaeso=Co.-.=..on S"oci'.c'nganycalendaryear.Theoptionswouldbeexercisable foraperiodtobedeteminedbytheCommittee onManagement (theCommittee).

TheCommittee mayin'tssolediscretion granttherighttoreceiveacashpaymentuponanyexerciseofanoptionequaltothequarterly dividendpaymentpershareofCommonStockpaidfromthedatetheoptionwasgrantedtothedateofexe.cise.

In1997,theBoardofDirectosgranted504,700optionsatanexercisepriceof$19.0625pershare.Theseoptionsarevestedat50%whenthestockclosesat$25pershare,75%at$30pershareand100%at$35pershare.Alsoin1997,theBoardofDirectors granted50,159optionsatanexercisepriceof$24.75pershare.Theseoptionsarevestedat25%whenthestockcloses 00e.

Note9.SHORT-TERM DEBTOnDecember31,1997,theCompanyhadshort-term debtoutstanding of$20.0million.AtDecember31,1996theCompanyhadshort-term debtoutstanding of$14.0million.Theweightedaverageinterestratein1997onshort-term debtoutstanding atyearendwas6.64%andwas6.07%forborrowings duringtheyear.Theweightedaverageinterestrateonshort-term debtborroweddur'ng1996was5.86~o.InDecember1997theCompany's

$90millionrevolving creditagreement wasamendedextending itstermtofiveyears,terminating December31,2002.Commitment feesrelatedtothisfacilityamountedto$113,000in1997and1996,and$165,000in1995.TheCompany's CharterprovidesthattheCompanymaynotissueunsecured debtifimmediately aftersuchissuancethetotalamountofunsecured debtoutstanding wouldexceed15percentoftheCompany's totalsecuredindebtedness, capital,andsurpluswithouttheapprovalofatleastamajorityoftheholdersofoutstanding Preferred Stock.AsofDecember31,1997,theCompanywouldbeabletoincurapproximately

$103.8millionofadditional unsecured debtunderthisprovision.

TheCompanyhasunsecured linesofcredittotaling$27millionavailable fromseveralbanks,attheirdiscretion.

Inordertobeabletouseits$90millionrevolving creditagreement, the4Companyhascreatedasubordinate mortgagewhichsecuresborrowings underitsrevolving creditagreement thatmightotherwise berestricted bj-thisprovision oftheCompany's Charter.Inaddition, theCompanyhasaLoanandSecurityAgreement toprovideforborrowings upto$10millionfortheexclusive purpose'ffinancing FederalEnergyRegulatory Commission Order636transition costs(636 Notes)andupto$30millionasneededfromtimetotimeforotherworkingcapitalneeds.Borowingsunderthisagreement, whichcanberenewedannually, aresecuredbyalienontheCompany's accountsreceivable.

A-December31,1997,borrowings outstanding were$4.34millionof636Notes(recorded ontheBalanceSheetasaliability underDeferredCreditsandOtherLiab'lities).

00>>

56assetsduringthetermoftheSettlement, gainsonsuchsaleswillbesharedbetweentheCompanyandcustomers.

Withregardtolossesonsuchsales,theSettlement acknowledges anintentthattheCompanywillbepermitted torecoversuchlossesthroughdistribution ratesduringthetermoftheSettlement.

Futureratetreatment istobeconsistent withtheprinciple thattheCompanyistohaveareasonable opportunity torecoversuchcosts."To-gocosts"oftheCompany's non-nuclear resources (i.e.,capitalcostsincurredafte"February28,1997,operation andmaintenance

expenses, andpropety,payrollandothertaxes)aretobeinitially recovered throughdistribution rates.Thefixedportionofto-gocostswouldberecovered infulluntilJuly1,1999,andbesubjecttothemarketthereafter inaccordance withthephase-inschedulefortheRetailAccessprogram.Thevariableportionofnon-nuclear to-gocostswouldalsobesubjecttothemarketinaccordance withthephase-inschedule.

UndertheSettlement,.nuclear costs'would remainrecoverable throughregulated rates.Miscellaneous.

ThepresentSettlement supersedes the1996RateSettlement.

Variousincentive andpenaltyprovisions inthe1996RateSettlement areeliminated.

EZTFISSUE97-4-DEREGULATION OFTHEPRICINGOFELECTRICITY.

InJuly,1997,theFinancial Accounting Standards Boa'rd'sEmergingIssuesTaskForce(EZTF)reachedaconsensus onaccounting rulesforutilities'ransition plansformovingtomorecompetitive environments andprovidedguidanceonwhenutilities withtransition planswillneedtodiscontinue the~lication ofSFAS-71,"Accounting fortheEffectsofCertainTypesofRegulation'".'he majorEZTFconsensus wasthattheapplication ofSFAS-71toasegment(e.g.generation) whichissubjecttoaderegulation transition planshouldceasewhenthelegislation orenablingrateordercontainssufficient detailfortheu'litytoreasonably determine whatthetransition planwillentail.TheEZTFalsoconcluded thatadecisiontocontinuetocarrysomeoalloftheregulatory assets(including strandedcosts)andliab'lities ofthesepaableportionofthebus'essthatisdiscontinuing theappl'ation ofSFAS-71shouldbedetermined onthebasisofwheretheregulated cashflowstorealizeandsettlethemwillbeder'ved.Zfatansitionplanprovidesfo"anon-bypassable feefo"therecoveryofstrandedcosts,theremayno-beanysignificant write-off

'fSFAS-71isd'cont'nued forasegment.TheCompany's application oftheEZTF97-4consensus hasnotaffectedits'nancialpos'tionorresultsofoperat'ons becauseanyabove.marketgeneration costs,regulaoryassetsandregulatory liabil'ties associated withthegeneration pozionofitsbusinesswillberecovered bytheregulated portionoftneCompanythroughitsdistribution rates,g'ventheSe"tlement provisions.

TheSetlementprovidesforrecoveryofallprudently inc'rredsunkcosts(allinvestment inelectricplantandelectricregulatory assets)asofMarch1,1997byinclusion inrateschargedpursuanttotheCompany's distribution accessta'ff.TheSettlement a'sostatestha""hePartiesintendtha"thepovisionsoithisSettlement willallowtheCompanytocontinuetorecoversuchcosts,duringthetermoftheSettlement, unde=SFAS-71'.andtha"suchtreatment shallbeconsistent withtheprinciple tha=theCompanyshallhaveareasonable opportunity beyondJuly1,2002torecoverallsuchcosts!'snotedpreviously, thefixedportionofthenon-nuclear generation to-gocostsafterJuly1,1999andthevariableportionofthenon-nuclear generat'on to-gocostsafterJuly1,1998aresubjecttomarketforcesandwouldnolongerbeabletoapplySFAS-71.TheCompany's netinvestment atDecembe"31,1997innucleargenerating assetsis$698.4millionandinnon-nuclear generating assetsis$122.0million.REGULATORY ANDSTRANDABLE ASSETSWithPSCapprovaltheCompanyhasdeferredcertaincostsratherthanrecognize themonitsbookswhenincurred.

Suchdeferredcostsarethenrecognized asexpenseswhentheyareincludedinratesandrecovered fromcustomers.

Suchdeferralaccounting ispermitted bySFAS-71.ThesedeferredcostsareshownasRegulatory AssetsontheCompany's BalanceSheet.Suchcost 58highcostgenerating assets.Estimates ofstrandable assetsarehighlysensitive tothecompetitive wholesale marketpriceassumedintheestimation.

Theamountofpotentially strandable assetsatDecember31,1997dependsonmarketpricesandthecompetitive marketinNewYorkStatewh'chisstillunderdevelopment andsubjecttocontinuing changeswhicharenotyetdeterminable, butcouldbesignificant.

Strandable assets,ifany,couldbewrittendownforimpairment ofrecoveryinthesamemannerasdeferredcostsdiscussed above.Enacompetitive naturalgasmarket,strandable assetswouldarisewheecustomers migrateawayfromdependence ontheCompanyforfullserv'e,leav'ngtheCompanywithsurpluspipelineandstoragecapacity, aswellasnaturalgassupplies, undercontract.

TheCompanyhasbeenrestructuring itstransportation, storageandsupplyportfolio toreduceitspotential exposuretostrandable assets.Regulatory developments discussed under"GASRESTRUCTURiNG PROCEEDING,"

below,mayaffectthisexposure; butw'hetherandtowhatextenttheremaybeanimpactonthelevelandrecoverability ofstiandable assetscannotbedeterminea atthist'me.AtDecember31,1997theCompanybelievesthatitsregulatory andstandableassets,ifany,arenotimpairedandareprobableofrecovery.

Thesettlement approvedintheCompetitive Opportunities proceeding doesnotimpairtheopportunity oftheCompanytorecoveritsinvestment intheseassets.However,thePSChaspublished aStaffpapertoaddressissuessurrounding nucleargeneration, including thedetermination offairmarketvalueforfacilities afterafiveyearrestructuring transition period.ltappearsthatthePSCmayseektoapplysimilarprinciples toothertypesofgeneatingfacil'ties.

Adetermination inthisproceeding couldhaveanimpactonstrandable assets.CAPITALEXPENDITURES TheCompany's 1998construction expenditures programiscurrently estimated a=$"24million.TheCompanyhasenteredin"ocertaincommi"ments forpurchaseo=materiasandequipment inconnect'on w'ththatprogram.NUCLEAR-RELATED MATTERSDECOMMTSSEONZNG TRUST.TheCompanyiscol)ect'ng amountsin'tselectricratesfortheeventualdecommissioning of'tsGinnaPlantandforits14%shareo"thedecommissioning ofNineM'eTwo.Theoperating licensesfortheseplantsexp'rein2009and2026,respectively.

Underaccounting procedures approvecbyhePSC,theCompanyhascollected decomm'ssioning costsofapproximately s116.1m':lionthroughDecembe31,1997ana'sauthorized tocollectapproximate'y

$22millionannuallythroughJune30,2002'ordecommission'ng, coveringbothnuclearun'ts.Theamountallowedin=atesisbasedonest'mated ultimatedecommission'ng costsof$296.3millionforGinnaand$'12.8millionfo"theCompany's 14+shareofNineMileTwo(1995dollars).

Theseestimates arebasedons'tespec'ficcoststudiesforeachplantcompleted in1995.Sitespecificstudiesoftheanticipated costsofactualaecommissioning arerequiredtobesubmitted totheNRCat%eastfiveyearspriortotheexpiration ofthelicense.TheNRCrequiresreactorlicensees tosubmitfundingplansthatestablish minimumNRCexternalfundinglevelsforeactordecommissioning.

TheCompany's plan,filedin1990,consistsofanexternaldecommissioning trustfundcoveringbothitsGinnaPlantanditsNineMileTwoshare.Since1990,theCompanyhascontributed

$86.4milliontothisfundand,including realizedandunrealized investment returns,thefundhasabalanceof$132.5millionasofDecember31,1997.Theamountattributed totheallowance forremovalofnon-contaminated structures isbeingheldinaninternalreserve.TheinternalreservebalanceasofDecember31,1997is$29.7million.TheNRCiscurrently considering proposals whichmayimpactfinancial fundingrequirements fordecommissioning ofnuclearpowerplants.Undercurrent 0~'o 60government couldassesslicensees fortheclean-upofthesefederalfacilities.

InJanuary1998,theU.S.SupremeCourtrefusedtohearthecase,effectively upholding thedismissal oftheutilityclaims.NUCLEARFUELDISPOSALCOSTS.TheNuclearWastePolicyAct(NuclearWasteAct)of1982,asamended,requirestheDOEtoestablish anuclearwastedisposalsiteandtotaketitletonuclearwaste.Apermanent DOEhigh-level nuclearwasterepository isnotexpectedtobeoperational beforetheyea"2010.TheDOEisproposing toestabl'sh aninterimstoragefacilitywhichmayal'owittotaketitletoandpossession ofnuclearwastepriortotheestablishment oapermanent repository.

InDecember1996theDOEnotifiedtheCompanythattheDOEwillnotstartacceptance ofGinnaspentfuelin1998.InJanuary1997theDOEreleasedadraftrequestforproposaloutlining aprocessforprivatefirmstoacceptandtransport wastefromreactorsuntil.afederalfacilityisoperational.

TheNuclearWasteActprovidesforadetermination ofthefeescollectible bytheDOEforthedisposalofnuclearfuelirradiated priortoApril7,1983andforthreepaymentoptions.TheoptionofasinglepaymenttobemadeatanytimepriortothefirstdeliveryoffueltotheDOEwasselectedbytheCompanyinJune1985.TheCompanyestimates thefees,including accruedinterest, owedtotheDOEtobe$83.3millionatDecember31,1997.TheCompanyisallowedbythePSCtorecoverthesecostsinrates.Theestimated feesareclassified asalong-term liability andinterestisaccruedatthecurrentthree-month Treasurybillrate,adjustedquarterly.

TheNuclearWasteActalsorequirestheDOEtoprovideforthedisposalofnuclearfuelirradiated afterApril6,1983,forachargeofapproximately onemill($.001)perKWHofnuclear.energygenerated andsold.Thischarge(approximately

$3.6millionperyear)is'c~jently beingcollected fromcustomers andpaidtotheDOEpursuanttoPSCI'uthorization.

TheCompanyexpectstoutilizeon-sitestorageforall-spent orretireGnuclearfuelassemblies untilaninterimorpermanent, nucleardisposalfacilityisoperational.

Therearepresently nofacilities inoperation intheUnitedStatesavai'able forthereprocessing ofspen"nuclearfuelfromutil'tycompanies.

IntheCompany's determination ofnuclearfuelcostsithastakenintoaccountthatnuclearfuelwouldnotbereprocessed andhasprovidedfo"disposalcostsinaccordance withtheNuclearWasteAct.TheCompanyhascompleted aconceptual stucyofalternatives toincreasethecapacityfortheinterimstorageofspentnuclearfuelattheGinnaPlant.Thepreferred alternative, basedoncostandsaetycr'teria,'s toinstallhigh-capacity spentfuelracksintheexistingareaofthespentfuelpool.Theadditional storagecapacity, scheduled tobe'mpiemented priortoSeptember 2000,wouldallowinterimstorageofallspentfue'ischarged fromtheGinnaPlantthroughtheendofitsOperat'ng Licensein"heyea"2009.ENVXRONMENTAL MATTERSThefollowing tableslistvarioussiteswherepastwastehandlinganddisposalhaso"mayhaveoccurredthatarediscussed below:TABLEICOMPANY-OWNED SITES~SiteNameWestStation*EastStationFrontStreet*BrewerStreetBrooksAvenueCanandaigua LocationRochester, NYRochester-,

NYRochester, NYRochester, NYRochester, NYCanandaigua, NYEstimated CompanyCostUltimatecostshavenotbeendetermined.

TheCompanyhasincurredaggregate costsforthesesitesthroughDecember31,1997of$4.3million.*Voluntary agreement signed.k o

62sewersystemprojectshowedalayercontaining ablackviscousmaterial.

Thestudyofthelayerfoundthatsomeofthesoilandgroundwateron-sitehadbeenadversely impacted.

ThematterwasreportedtotheNYSDECand,inSeptember 1990,theCompanyalsoprovidedtheagencywithariskassessment.

ThereportoztheresultsofthisstudyandtheNYSDEC'sresponsetotherecommendations madethereinwillinfluence thefutureremediation costs.TheCompanyhassignedavoluntary agreement toperformlimitedadditional investigation atthesitetodetermine whethercertainremedialactionsarenecessary priortodevelopment.

AnotherpropertyownedbytheCompany~heregasmanufacturing tookplace'slocatedinCanandaigua, NewYork.Limitedinvestigative workperformed tnereduingthesummerof1995hasshownevidenceofboththeformergasmanufactur'ng operations andleakagefromfueltanks.TheNYSDECwasinformed; thefueltanksremoved;andadditional investigative workcontinues.

TheSIRcostsassociated withtheseactionsareincludedinTableI..TheNYSDEChasnottakenanyactionagainsttheCompanyasaresultofthesefindings.

OnanotherportionoftheCompany's property(BrewerStreet},theCountyofMonroehasinstalled andoperatessewerlines.,Duringsewerinstallation, tneCountyconstructed overCompanypropertycertainretention pondswhichreportedly receivedfromthesewerconstruction areacertainfossil-fuel-based materials (thematerials) foundthere.InJuly1989,theCompanyreceivedaletterfromtheCountyasserting thatactivities oftheCompanylefttheCountyunabletoeffectaregulatorily-approved closureoftheretention pondazea.TheCounty'slettertakesthepositionthatitintendstoseekreimbursement foritsadditional costsincurredwithrespecttothematerials once.the,NYSDEC identifies thegenerator thereofandthatanyfurthercleanupactionwhichtheNYSDECmayrequireattheretention pondsiteistheCompany's

.responsibility.

InaNovember1997letter,theCountyhasclaimedthattheCompanywastheoriginalgenerator ofthematerials.

ItassertsthatitwillholdtheCompanyliablefor50'tofallCountycosts--presently estimated atatotalofapproximately

$5million--associated bothwiththematerials'xcavation, treatment anddisposalandwitheffec'ngaregulatorily-approved closureofthereten"'on pondarea.TheCompanycoulc'ncurcostsasyetundetermined ifitweretobefoundliablefo"suchclosureandmateialshandl'ng, althoughprov'sions ofanexistingeasementa=fordtheCompanyrightswhichmavsezvetoo==se"alloraportionofanysuchCoun"yclaim.Todate,theCompanyhasagreec"opaya20~ashareoftheConty's'995'nvestigation ofthisarea,which'ses=imated tocostnomorethan$150,000.bu=nocommitment hasbeenmade"owa"canysubsequent investigat'ons o"remeciameasureswhichmaybereco.-,.-.endedbytheinvestigations.

Monitoring wellsinstalled atanotherCompanyfac"'ity(BrooksAvenue)in989revealedthatanundetermined amo"..".of'eadecgasolinenadreachedthegroncwater.TheCompanyhascontinued "omonitor'reeprodctlevelsinthewels.andhasbegunamodes"freeprocc.recoveryprojec=.Itisestimated tha=urtherinvestigative work'nto"h'sprob'e.-..r,"aycos=up=o$100,000.WhileoS:.ecos"o.corrective act'onscanno=bece:erm'nec

.".='nvesigationsarecompie"ed, preliminary estimates areno"expectectoexceed$500,000.SUPERFUND ANDNON-OWNED OTHERSITES.ŽheCompanyhasbeenormaybeassociatec asapotentially responsible par"y(PRP)a"seve.".s'esno"ownedbyTheCompanyhassignedordersonconsen:=orveo'hesesitesandrecordedestimated liabilities tota'ingapproximately

$.8mil'ion.Inonesate,knownastheQuantaResorcesSite,theCompanysignedaconsentorderwiththeEnvironmental Protection Agency(EPA)andpaidits$27,500shareofremedialcost.TheCompanywasaga'ncontacted byEPAinlateAugust,1996.TheEPAinformedtheCompanythatitbelievedcertainadditional workwasrequired, including astudytodeterm"he theextenttowhichadditional removalofwastematerials wasrequired.

TheEPA'slistofPRPshadgrowntoabout80.TheCompany,alongwithmostofthosePRPs,hasagreed(throughanAdministrative OrderonConsent)toconducttherequiredstudy.TheCompanyanticipates itsobligation throughthisphasewillbelessthan$10,000.OnMay12,1997,theCompanysignedanAdministrative OrderonConsentwiththeNYSDEC.Thisagreement servedtoobligatetherespective partiestopayNYSDEC'spastcostsattheSite,theCompany's shareofwhichwasdetermined tobe$1,500.Thereisasyet,noinformation onwhichtodetermine thecosttodesignandconductatthe 64uponbytheNYPP,resulting inadditional costs.Depending onthenewNYPPrequirements, andwhetherthederatings remainineffect,therevisedrulescouldresultintheCompanyhavingtopurchaseadditional regulation serviceswhichmaycos"between$500,000and$2,500,000 annually.

GASCOSTRECOVERYGASRESTRUCTURING PROCEEDING.

InthePSC'sProceeding onRestructur'ng theEmergingCompetitive NaturalGasMarket,thePSCestablished athree-year period(endingMarch28,1999)duringwhichtheState'slocaldistribution companies (LDCs)wouldbepermitted torequirecustomers converting fromsalesservicetotakeassociated pipelinecapacityforwhichtheLDCshadoriginally contracted.

Priortothebeginning oftheth'rdyear,the"LDCswouldbe'equired todemonstrate theireffortstodisposeof"excess"capacity.

OnSeptember 4,1997,thePSCissuedanOrderclarifying theMarch28,1996Order.TheSeptember 4Orderrequires, amongotherthings,thattheLDCs(a)assessstrandable costs;(b)evaluateandpursueoptionstoaddressstrandable costs,including exploration ofalternative usesandquantification ofmarketvaluesfothecapacitythatcouldbestrandedbyconverting customers; (c)activelyencourage competition including collaboration withmarketers toexpandthenumberofcustomers takingtranspor'tation servicefromtheLDCandtoprovidecustomereducation; and(d)totheextentLDCscannotshedalltheircapacityascontracts exp're,tocontinuetoseeklowercostoptionsandmoreflexibility andshortercontractterms,wherecost-effective.

LDCsarerequiredto,figeplans addressing theforegoing issuesbyApril1,1998.PursuanttothePSC's:~ders, thecostofcapacitydefinedas"excess"maynotbefullyrecoverable inra'tes,'ccordingly, theCompany's abilitytoavoidabsorbing thiscostw'lldependon'thesuccessofremarketing andportfolio structur'g e"ortsand,ifsucheffortsdonotresultineliminating all"excess"capacity, onasatisfactory explanation astowhyallsucncapacitycouldnotbeelim'nated.

.heCompanyisengagedinnegotiations withtneStaffofthePSCandotherpar"iestoaddresstheseandotherissuesrelatedtothefutureprovision o=gasserv'ce.Atthistime,noassessment ofhepotenialimpac"oftheserequ'rements ontheCompanycanbemade.OnSeptember 4,1997,thePSCa'o'suec=orcommentaStaffpositionpape"wh'chproposesthatLDCsexit=ne'rmerchantfunct'on.

'.e.,ceasetosupp'vthenatualgascommodity to=he'ex's='ngcs"o...ers, with'n'iveyearsanct.".attheyelim'nate o"restrc=ret"anspo"ta='on ancs"oragecapacitycon"racts extending beyondfiveyearssoas"oelim'nate obgations beyondthatpo'nt,excep"wherecapac'tyisrecu'recto="'='pera='ona'equiremen"s ortheLDC'sobligations asthe"supp'e"o='as"reso.""toc"s"omeshavingnocompetitive alternative.

I'coptecby='."ePSC,=heStaffproposalcouldrequiretheCompanytoremarkemorecapac'",anctocosomorerap'c'ythancurrently contemplated.

Thecomme.".".

per'occo.-.c'ec onDecember20,'997,andnoprec'c=ion canbemadeastow.".e=her

heS=affproposaw'eadoptedor,so,theextenofitspotent'a'mpa"

on='.".eCompan;.1995GASSETTLEMENT.

heCompany'..asen=erec'ntoseveralagreements tohelpmanageitspipelinecapac'",costsanc'..ass"cess'"'yme"Settlement targetsforcapacityremarke'ng=o==he=wevemon=hsencir.gOctober31,1997,therebyavoidingnegativefinancia'mpac=s=o"="..aper'.od..heCompanybeevesthatitwillalsobesuccessfu.

'nmee='ngtheSettlement targetsintheemainingyearoftheSettlement pe"od,a'=hoghnoassrancemaybegiven.TheFERCapprovedachange'"..ratedesgn'ortheGreatLakesGasTransmission LimitedPartnersh'p (GreatLakes)onwhichtheCompanyholdstransportation capacity.

Thischange.resulted

'naretroactive surcharge byGreatLakestotheCompanyintheamountofapproximately

$8million,including interest.

Underthetermsofthe1995GasSett}ement, theCompanymayrecoverapproximately one-halfofthesurcharge in"ateschargedtocustomers; buttheremainder mayno"bepassedthroughandhasbeenpreviously reserved.

TheCompany,whichpaidtheGreatLak'esassessme..t unde"protes,vigorously contested itbeforetheFERC,bu"onApril25,1996,theFERCupheldthisdetermination thatthechargetotheCompanyisproper.TheCompany's petitiontotheU.S.CourtofAppealswasdeniedonJanuary16,1998.TheCompanyisevaluating itsnextsteps.

66TheCompanybelievesthattheinvestigation andtheComplaint reflectthedesirebytheAntitrust Divisiontobecomeinvolvedinthederegulation ofelectricutilities, butthattheproperwaytodothatisintheproceedings beforethePSCintheCompet'tive Opportunities Case.OnSeptember 3,1997,theCompanyfileditsanswerwhichdeniedthematerialallegations oftheComplaint.

Atthesametime,theCompanyfiledaMotionforSummaryJudgmentaskingtheCourttodismisstheactionwithprejudice onthegroundsthattheCompany's actionsareimmunefromantitrust liabil'ty unde=theStateactionexemption, thattheCompany's actionsdidnotinjurecompet'tion andthattheDepartment ofJustice's cia'imsarespeculative.

OnNovember3,1997,theDepartment ofJusticefileditsopposition totheCompany's MotionforSummaryJudgmentandfileditsownMotionforSummaryJudgement.

TheCompany's responsetotheJusticeDepartment motionwasfiledonDecember5,1997.TheseMotionsforSummaryJudgmentwerearguedonDecember19,1997.InCourt,thepartiesagreedtoaresolution ofthedispute,suggested bytheJudgewhich,intheCompany's opinion,wouldnothaveanymaterialeffectonitscontractwiththeUniversity.

TheAntitrust

Division, however,hasexpressed itsunwillingness toagreetoaConsentDecreebasedontheagreement reachedinCourtandthematterisstillpending.~LITIGATION WITHCO-GENERATOR.

UnderfederalandNewYorkStatelawsandregulations, theCompanyisrequiredtopurchasetheelectrical outputofunregulated cogeneration facilities whichmeetcertaincriteria(Qualifying Facilities).

Underthesestatutes, autilityisrequiredtoy~forelectricity fromQualifying Facilities ataratethatequalsthecosttofheugilityofpoweritwouldotherwise produceitselforpurchasefromothersources('voidedCost).Withtheexception ofonecontractwhichtheCompanywascompelled byregulators toenterintowithKamine/Besicorp AlleganyL.P.(Kamine)forapproximately 55megawatts ofcapacity, theCompanyhasnolong-term obligations topurchaseenergyfromQualifying Facilities.

Unde."Statelawandregulatory requirements ineffectatthetimetheco..tract withKaminewasnegotiated, theCompanywasrequiredtoageetopayKam'neapriceforpowerthatissubstantially greaterthantheCompany's owncos"ofproduction andotherpurchases.

SincethattimetheState"six-cent" lawmandat'ng aminimumpricehighe"thantheCompany's owncostshasbeenrepealedandPSCest'mates offuturecostsonwhichthecontractwasbasedhavedeclineddrama'cally.InSeptember 1,994,theCompanycommenced alawsuitinNewYorkStateSupremeCourt,MonroeCounty,seekingtovoidor,alternatively, toreformaPowe"PurchaseAgreement withKamineforthepurchaseoftheelectrical outputofacogenerat'on facilityintheTownofHume,AlleganyCounty,NewYork,foratermof25years.Thecontractwasnegot'ated pursuanttothespec'ficpricingrequirement o'Statestatutethawaslaterrepealed, aswellasestimates ofAvoidedCostsbythePSCthatsubsequently weredrast'cally reduced.Asaresult,thecontractrequirestheCompanytopaypricesfo"Kamine'selecricaloutputthatdramatically exceedcurrentAvoidedCostsandcurrentprojectionsofAvoidedCosts.TheCompany's lawsuitseekstoavoidpaymentstoKaminethatexceecactualandcurrently projected AvoidedCosts.KamineansweredtheCompany's complaint, seekingtoforcetheCompanytotakeandpayforpoweratthehigherratescalledforinthecontractandclaimingdamagesinanunspecified amountallegedtohavebeencausedbytheCompany's conduct.TheCompanyreceivedtestgeneration fromtheKaminefacilityduringthelastquarterof1994.Kaminecontendsthatthefacilitywentintocommercial operation inDecember1994andthattheCompanyisobligated topaythefullcontractrateforit.TheCompanydisputesthiscontention andrefusestopaythefullcontractrate.During1995KaminefiledaMotionforSummaryJudgmentdismissing theCompany's complaint anddirecting ittoperformthePowerPurchaseAgreement.

ThecourtdeniedthatmotionandKamineappealed.

AfterargumentofthatappealKaminefiledforprotection undertheBankruptcy lawsandsenttotheAppellate Divisionanoticethatallfurtherproceedings werestayed.Inaddition, Kaminehasfiledarelatedcomplaint intheUnitedStatesDistrictCourtfortheWesternDistrictofNewYorkallegingthattheconductwhichisthesubjectoftheStatecourtactionviolatesthefederalantitrust

~.

68INTERIMFINANCIAL DATAXntheopinionoftheCompany,thefollowing quarterly information includesalladjustments, consisting ofnormalrecurring adjustments, necessary forafairstatement oftheresultsofoperations forsuchperiods.Thevariations inoperations reportedonaquarterly basisarearesultoftheseasonalnatureoftheCompany's businessandtheavailability ofsurpluselectricity.

Thesumofthequarterly earningspersharemaynotequalthefiscalyearearningspershareduetorounding.

(Thousands oiDollars)Oua"te=EndedOperaingRevenuesOpe"ating IncomeNetincomeEa"ningsonCommonStockEa=nirgspe"CommonShare(ir.dollars)BasicDilutedDece.".5e=

31,1997Septe..e'er 30,1997June30,1997Ya"ch31,1997Dece"..5e 31,1996'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).65.34.75Reclassified forcomparative purposes.

Includesrecognition of$28.7millionnet-of-tax gassettlement adjustment.

Item9.CHANGESINANDDISAGREEMENTS WITHACCOUNTANTS ONACCOUNTING ANDFINANCIAL DISCLOSURE Noae

70PARTIVItem14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTSONFORM8-K(a)1.Thefinancial statements listedbelowareshownunderItem8ofth'sReport.ReportofIndependent Accountants.

Consolidated Statement ofIncomeforeachofthethreeyearsendedDecember31,1997.Consolidated Statement ofRetainedEarningsforeachofthethreeyearsendedDecember31,1997.Consolidated BalancesheetatDecember31,1997and1996.Consolidated Statement ofCashFlowsforeachofthethreeyearsendedDecember31,1997.NotestoConsolidated Financial Statements.

(a)2.Financial Statement Schedules

-IncludedinItem14herein:ForeachofthethreeyearsendedDecember31,1997.ScheduleZZ-Valuation andQualifying Accounts.

(a)3.Exh'bits-SeeListo'xhibits.

(b)ReportsonForm8-KTheCompanyfiledaForm8-KdatedDecembe"5,1997,reporting unde"Item5,OtherEvents,approvalbythePSCoftheCompany's Competitive Opportunities CaseSettlement withthePSCstaf'ndothepart'eswi"nrespecttotherestrucur'ngoftheelectricutilityindus"ryinNewYorkState.

LISTOFEXHIBITSExhibit3-1*RestatedCertificate ofIncorporation ofRochester GasandElectricCorporation underSection807oftheBusinessCorporation LawfiledwiththeSecretary ofStateoftheStateofNewYorkonJune23,1992.(PiledinRegistationNo.33-49805asExhibit4-5inJu)y1993)Exhibit3-2*Certificate ofAmendment oftheCertificate ofIncorporation.

ofRochester GasandElectricCorporation UnderSection805oftheBusinessCorporation LawfiledwiththeSecretary ofStateoftheStateofNewYorkonMarch18,1994..(FiledasExhibit4inMay1994onForm10-Qforthequarter'endedMarch31,1994,SECPileNo.1-672'Exhibit3-3*By-LawsoftheCompany,asamendedtodate.(FiledasExhibit3-1inMay1996onForm10-QforthequarterendedMarch31,1996,SECFileNo.1-672)Exhibit4-1*RestatedCertificate ofIncorporation ofRochesteGasandElectricCorporation underSection807oftheBusinessCorporation LawfiledwiththeSecretary ofStateoftheStateofNewYorkonJune23,1992.(FiledinRegwstration No.33-49805asExhibit4-5inJuly1993)Exhibit4.2*~Certificate ofAmendment oftheCertificate ofIncorporation ofRochester GasandElectricCorporation UnderSection805oftheBusinessCorporation LawfiledwiththeSecretary ofStateoftheStateofNewYorkonMarch18,1994.(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..ts thereto,datedMarch1,1921,Octobe"23,1928,August1,1932andMay1,1940.(Filedasxhib't4-2'n:ebruary199onForm10-K:ortheyea"endedDecember31,'990,SECFileNo.1-672-2)Exhibit4-5*Supplemental Indenture, datedasofMarch1,1983betweentheCompanyandBankersTrustCompany,asTrustee(FiledasExhibit4-1onForm8-KdatedJuly15,1993,SECFileNo.1-672)Exhibit10-1*BasicAgreement datedasofSeptember 22,1975amongtheCompany,NiagaraMohawkPowerCorporation, LongIslandLightingCompany,NewYorkStateElectric&GasCorporation andCentralHudsonGas&ElectricCorporation.

(FiledinRegistration No.2-54547,asExhibit.5.-PinOctober1975.)Exhibit10-2*Letteramendment modifying BasicAgreement datedSeptember 22,1975amongtheCompany,CentralHudsonGas&ElectricCorporation, OrangeandRocklandUtilities, Inc.andNiagaraMohawkPowerCorporation.

(FiledinRegistration No.2-56351,asExhibit5-RinJune1976.)

0~ie Exhibit10-15*(A)ChangeofControlAgreement datedAugust17,1995betweentheCompanyandRobertE.Smith,SeniorVicePresident, EnergyOperations.

(FiledasExhibit10-15inFebruary1996onForm10-KfortheyearendedDecember31,1995,SECFileNo.1-672-2)Exhibit10-16'A)ChangeofControlAgreement datedJanuary2,1996betweentheCompanyandJ.BurtStokes,SeniorVicePresident, Corporate ServicesandChiefFinancial Officer.(FiledasExhibit10-16inFebruary1996onForm10-Kfortheyea"endedDecember31,1995,SECFileNo.1-672-2)Exhibit10-17*(A)ChangeofControlAgreement datedJanuary2,1997betweentheCompanyandMichaelJ.Bovalino, SeniorVicePresident, EnergyServices.

(FiledasExhibit10-18inFebruary1997onForm10-KfortheyearendedDecember31,1996,SECFileNo.1-672-2)Exhibit10-18AmendedandRestatedSettlement Agreement datedOctober23,1997betweentheCompanytheStaffoftheNewYorkPublicServiceCommission (PSC),andcertainotherparties(FiledasExhibit10-4onForm10-QforthequarterendedSeptember 30,1997,SECFileNo.1-672)asamendedpursuanttoanorderofthePSCissuedJanuary14,1998.-N'3ccluding Appendices) filedherewith.

Exhibit10-19~(A)FormofRochester GasandElectricCorporation 1996Performance StockOptionPlanAgreement.

(FiledasExhibit10-1inNovember'997onForm10-QforthequarterendedSeptembe30,'997,SEC":ileNo.1-672)10-20*(A)Agreement, datecOctobe"','997,betweentheCompanyandMichaelT.Toma'no,SeniorVicePres'dent andGeneralCounsel.(FilecasExh'bit10-2'nNovember1997onForm10-Qfo"theqar=erencecSeptember 30,1997,SECFileNo.1.672)Ex'.-'b't 10-21*Agreemen" catedaso=Sep=ember 23,'997betweentheCompanyandInternationa'us'..ess MachinesCorporat'on.

(FiledasExhibit10-3'.-.November997onFor;..0-Q'orthequarterndedSeptember 30,997,SEC.='IeNo.-672)Exh'bi"23Consen"oPr'ceNate"hoseP,independent accountants "xh'bit27Financial Da"aSchec"e.prsuanttotern601(c)ofRegulation S-K.~Incorporated byreference.

(A)Denotesexecutive compensation plansandarrangements.

TheCompanyagreestofurnishtotheCommission, uponrequest,acopyofallagreements orinstruments definingtherightsofholdersofdebtwhichdonotexceed10%ofthetotalassetswithrespecttoeachissue,including theSupplemental Indentures undertheGeneralMortgageandcreditagreements inconnection withpromissory notesassetforthinNote6oftheNotestoFinancial Statements.

irSIGNATURE D'ctors:76TITLEDATE/S/WILLIAMBALDERSTON IIIWzsamBaerstonIII)DirectorFebruary11,1998/S/ANGELOJ.CHIARELLA AngeoJ.CwareaDirectorFebruary11,1998/S/ALLANE.DUGANAanE.DuganDirectorFebruary11,1998MarB.GrxerDirectorFebruary,1998/S/SUSANR.HOLLIDAYSusanR.HozayDirectorFebruary11,1998/S/JAYT.HOLMESJayT.HomesDirectorFebruary11,1998/S/SAMUELT.HUBBARD,JR SamueT.Huar,Jr.DirectorFebruary11,1998/S/ROGERW.KOBERRogerW.KoerDirec"orFebruary11,1998/S/CONSTANCE M.MITCHELLConstance M.MiteeD'rectorFebruary11,1998/S/CORNELIUS J.MURPHYComexusJ.MurpyDirectorFebruary11,1998/S/CHARLESI.PLOSSERCaresI.PosserDirectorFebruary11,1998/S/THOMASS~RICHARDSTomasS.RzcarsDirectorFebruary11,1998 EXHIBITE

• 0ROCHESTER GAS&ELECTRICCORPORATION NuclearOpera'tions GroupPRESIDENT

CHAIRMAN, CEO,'.S.RICHARDSSR.VICEPRESIDENT ENERGYOPERATIONS P.C.WILKIBPS VICEPRESIDENT NUCLEAROPERATIONS R.C.MECREDYDEPARTMENT MANAGER~NUCLEARENGINEEIUNO SERVICEST.A.MARLOWDEPARTMENT MANAGER=NUCLEARASSESSMENT R.J.WATTSPLANTMANAGERJ.A.WIDAYDIRECTOR.;,'UDGET8:COSTG.M.VAUGHNDEPARTMENT MANAGERNUCLEAR'GUUNINO iLW.POPPSUPERINTI'.NDENT GINNAPRODUCTION

'.A.MARCHIONDA SUPERINTENDENT OINNAMAINTENANCE-J.P.SMITHGirraaLeadership Team 0