-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzQfcLaM8Pn+XVDk7532MyDduwn4xWg99KCbsywCFSORPdhFcXtRbDL+2dNRbMyw Yh7NGf8GUuGGhzhtTf+nCQ== 0000074778-97-000011.txt : 19970514 0000074778-97-000011.hdr.sgml : 19970514 ACCESSION NUMBER: 0000074778-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORANGE & ROCKLAND UTILITIES INC CENTRAL INDEX KEY: 0000074778 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 131727729 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04315 FILM NUMBER: 97602553 BUSINESS ADDRESS: STREET 1: ONE BLUE HILL PLZ CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 9143526000 MAIL ADDRESS: STREET 1: ONE BLUE HILL PLAZA CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: ROCKLAND LIGHT & POWER CO DATE OF NAME CHANGE: 19681202 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-4315 ORANGE AND ROCKLAND UTILITIES, INC. (Exact name of registrant as specified in its charter) New York 13-1727729 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Blue Hill Plaza, Pearl River, New York 10965 (Address of principal executive offices) (Zip code) (914) 352-6000 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the close of the latest practicable date. Common Stock - $5 Par Value 13,654,495 shares (Class) (Outstanding at April 30, 1997) TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets (Unaudited) at March 31, 1997 and December 31, 1996 1 Consolidated Statements of Income (Unaudited) for the three months ended March 31, 1997 and March 31, 1996 3 Consolidated Cash Flow Statements (Unaudited) for the three months ended March 31, 1997 and March 31, 1996 4 Notes to Consolidated Financial Statements 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 13 ITEM 4. Submission of Matters to a Vote of Security Holders 13 ITEM 6. Exhibits and Reports on Form 8-K 15 Signatures 16 PART I. FINANCIAL INFORMATION Item I. Financial Statements ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) Assets
March 31, December 31, 1997 1996 (Thousands of Dollars) Utility Plant: Electric $1,026,455 $1,023,796 Gas 221,208 219,712 Common 60,859 59,589 Utility Plant in Service 1,308,522 1,303,097 Less accumulated depreciation 448,956 440,333 Net Utility Plant in Service 859,566 862,764 Construction work in progress 42,731 36,879 Net Utility Plant 902,297 899,643 Non-utility Property: Non-utility property 21,362 20,784 Less accumulated depreciation, depletion and amortization 3,847 3,778 Net Non-utility Property 17,515 17,006 Current Assets: Cash and cash equivalents 6,700 3,485 Temporary cash investments 520 1,289 Customer accounts receivable, less allowance for uncollectible accounts of $2,408 and $2,391 69,582 60,992 Accrued utility revenue 19,242 22,773 Other accounts receivable, less allowance for uncollectible accounts of $327 and $258 8,902 10,473 Gas marketing accounts receivable, less allowance for uncollectible accounts of $3,779 and $606 27,591 45,589 Materials and supplies (at average cost) 27,536 35,595 Prepaid property taxes 21,028 20,051 Prepayments and other current assets 23,238 22,478 Total Current Assets 204,339 222,725 Deferred Debits: Income tax recoverable in future rates 73,932 74,198 Deferred revenue taxes 13,939 14,271 Deferred pension and other postretirement benefits 9,584 9,922 IPP settlement costs 21,686 24,065 Unamortized debt expense (amortized over term of securities) 11,406 10,046 Other deferred debits 29,988 41,754 Total Deferred Debits 160,535 174,256 Total $1,284,686 $1,313,630 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) Capitalization and Liabilities
March 31, December 31, 1997 1996 (Thousands of Dollars) Capitalization: Common stock (13,654,242 & 13,654,121 shares outstanding) $ 68,271 $ 68,271 Premium on capital stock 133,618 133,616 Capital stock expen se (6,097) (6,097) Retained earnings 189,469 192,060 Total 385,261 387,850 Non-redeemable preferred stock (428,443 shares outstanding) 42,844 42,844 Non-redeemable cumulative preference stock (12,221 and 12,539 shares outstanding) 394 397 Total Non-Redeemable Stock 43,238 43,241 Long-term debt 281,675 281,622 Total Capitalization 710,174 712,713 Non-current Liabilities: Reserve for claims and damages 3,741 3,843 Postretirement benefits 15,053 15,213 Pension costs 38,501 37,421 Total Non-current Liabilities 57,295 56,477 Current Liabilities: Notes payable and obligations due within one year 180,304 162,968 Accounts payable 42,842 67,036 Gas marketing accounts payable 28,002 42,295 Accrued Federal income and other taxes 11,511 1,268 Refundable fuel and gas costs 9,724 6,839 Refunds to customers 2,322 1,816 Other current liabilities 28,638 38,969 Total Current Liabilities 303,343 321,191 Deferred Taxes and Other: Deferred Federal income taxes 184,939 186,354 Deferred investment tax credits 15,094 15,292 Accrued IPP settlement agreements 2,000 2,000 Accrued Order 636 transition costs 5,110 11,620 Other deferred credits 6,731 7,983 Total Deferred Taxes and Other 213,874 223,249 Total $1,284,686 $1,313,630 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1997 1996 (Thousands of Dollars) Operating Revenues: Electric $107,101 $108,019 Gas 77,906 78,944 Total Utility Revenues 185,007 186,963 Diversified Activities 58,295 98,709 Total Operating Revenues 243,302 285,672 Operating Expenses: Operations: Fuel used in electric production 12,414 7,746 Electricity purchased for resale 18,856 25,936 Gas purchased for resale 48,117 47,637 Non-utility gas marketing purchases 58,657 95,901 Other expenses of operation 38,782 35,418 Maintenance 8,959 9,754 Depreciation and amortization 9,708 8,261 Taxes other than income taxes 25,423 25,857 Federal income taxes 4,905 7,636 Total Operating Expenses 225,821 264,146 Income from Operations 17,481 21,526 Other Income and (Deductions): Allowance for other funds used during construction 15 5 Investigation costs (3,390) -- Other - net (545) 1,034 Taxes other than income taxes (66) (91) Federal income taxes 1,409 (108) Total Other Income and (Deductions) (2,577) 840 Income Before Interest Charges 14,904 22,366 Interest Charges: Interest on long-term debt 6,150 6,236 Other interest 1,669 1,357 Amortization of debt premium, expense-net 397 365 Allowance for borrowed funds used during construction (228) (147) Total Interest Charges 7,988 7,811 Net Income 6,916 14,555 Dividends on preferred and preference stock, at required rates 700 756 Earnings applicable to common stock $ 6,216 $13,799 Avg. number of common shares outstanding (000's) 13,654 13,654 Earnings per average common share outstanding $ .46 $ 1.01 Dividends declared per common share outstanding $ .645 $ .645 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Cash Flow Statements (Unaudited)
Three Months Ended March 31, 1997 1996 (Thousands of Dollars) Cash Flow from Operations: Net income $6,916 $14,555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,370 9,723 Deferred Federal income taxes (2,252) (4,167) Deferred investment tax credit (198) (203) Deferred and refundable fuel and gas costs 4,781 8,602 Allowance for funds used during construction (243) (152) Other non-cash charges 752 1,773 Changes in certain current assets and liabilities: Accounts and gas marketing receivables (net) and accrued utility revenues 14,510 1,474 Materials and supplies 8,059 6,420 Prepaid property taxes (977) (1,383) Prepayments and other current assets (760) 3,271 Operating and gas marketing accounts payable (38,487) (26,282) Accrued Federal Income and other taxes 10,243 13,890 Accrued interest (2,771) (2,430) Refunds to customers 506 2,796 Other current liabilities (7,531) (6,099) Other-net 4,987 3,691 Net Cash Provided from Operations 6,905 25,479 Cash Flow from Investing Activities: Additions to plant (12,573) (6,246) Temporary cash investments 769 815 Allowance for funds used during construction 243 152 Net Cash Used in Investing Activities (11,561) (5,279) Cash Flow from Financing Activities: Proceeds from: Issuance of long-term debt 20,056 -- Retirements of: Preferred stock (1,390) -- Long-term debt (20,114) (112) Capital lease obligations -- (138) Net borrowings (repayments) under short-term debt arrangements* 18,855 (10,071) Dividends on preferred and common stock (9,536) (9,562) Net Cash Used in Financing Activities 7,871 (19,883) Net Change in Cash and Cash Equivalents 3,215 317 Cash and Cash Equivalents at Beginning of Period 3,485 5,164 Cash and Cash Equivalents at End of Period $ 6,700 $ 5,481 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $10,198 $9,784 *Debt with maturities of 90 days or less. The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated balance sheet as of March 31, 1997, the consolidated statements of income for the three month periods ended March 31, 1997 and 1996, and the consolidated cash flow statements for the three month periods then ended have been prepared by Orange and Rockland Utilities, Inc. (the "Company") without an audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the financial position and results of operations at March 31, 1997, and for all periods presented, have been made. The amounts in the consolidated balance sheet as of December 31, 1996 are from audited financial statements. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these unaudited consolidated financial statements, notes to consolidated financial statements and the management's discussion and analysis of financial condition and results of operations be read in conjunction with the consolidated financial statements, the review of the Company's results of operations and financial condition and the notes to consolidated financial statements included in the Company's December 31, 1996 Annual Report to Shareholders. The results of operations for the period ended March 31, 1997 and March 31, 1996 are not necessarily indicative of the results of operations for the full year. 3. The consolidated financial statements include the accounts of the Company, all subsidiaries and the Company's pro rata share of an unincorporated joint venture. All inter-company balances and transactions have been eliminated. 4. Contingencies at March 31, 1997 are substantially the same as the contingencies described in the "Notes to Consolidated Financial Statements" included in the Company's December 31, 1996 Annual Report to Shareholders, which material is incorporated by reference to the Company's December 31, 1996 Form 10-K Annual Report, and in Item 3, Legal Proceedings of the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1996, except changes in the status of regulatory matters which are updated in Part I, Item 2 under the caption "Rate Activities" and the status of certain Legal Proceedings which are updated in Part II, Item I, "Legal Proceedings". 5. In February 1997, the Financial Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This statement supersedes APB Opinion No. 15, "Earnings per Share" and simplifies the computation of earnings per share ("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the period. In addition, fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects the potential dilution if certain securities are converted. This statement requires dual presentation of basic and diluted EPS by entities with complex capital structures and also requires restatement of all prior-period EPS data presented. SFAS No. 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997, and the Company plans to adopt the statement for year-end 1997. The Company does not expect the effect of adopting SFAS No. 128 to have more than a negligible impact on its EPS calculation. If adopted currently, SFAS No. 128 would not have more than a negligible impact on the Company's reported EPS. 6. The Company experienced a major storm on April 1, 1997 and is in the process of accumulating all costs related to this storm. At this time the Company cannot predict the total costs or what regulatory treatment, if any, it will receive. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition: Financial Performance The Company's consolidated earnings per average common share outstanding for the first quarter of 1997 were $0.46 as compared to $1.01 for the first quarter of 1996. Fluctuations within the components of earnings are discussed in the "Results of Operations". The average number of common shares outstanding were 13.7 million for the first quarters of both 1997 and 1996. The current quarterly dividend rate of $0.645 is equivalent to an annual dividend rate of $2.58 per share. Dividends declared during the twelve months ended March 31, 1997 amounted to $2.58 with a dividend payout ratio of 98.9% as compared to $2.58 a year ago with a payout ratio of 101.6%. The return on average common equity for the twelve months ended March 31, 1997 was 9.33% as compared to 9.16% for the twelve months ended March 31, 1996. Capital Resources and Liquidity At March 31, 1997, the Company and its utility subsidiaries had unsecured bank lines of credit totaling $100 million. Effective April 1, 1997, the Company's bank lines of credit were increased to $115 million. The Company may borrow under the lines of credit through the issuance of promissory notes to the banks. The Company, however, utilizes such lines of credit to fully support commercial paper borrowings. The aggregate amount of borrowings through the issuance of promissory notes and commercial paper cannot exceed the aggregate lines of credit. In addition, non-utility lines of credit amounted to $20.0 million at March 31, 1997, and the non-utility subsidiaries may undertake short-term borrowings or make short-term investments. The average daily balance of short-term borrowings for the three months ended March 31, 1997 amounted to $93.7 million at an effective interest rate of 5.8% as compared to $61.7 million at an effective interest rate of 5.8% for the same period of 1996. The average daily balance of temporary cash investments for the three months ended March 31, 1997 was $1.3 million with an effective interest rate of 5.2% compared to $1.5 million at an effective interest rate of 5.2% for the same period of 1996. The New York Public Service Commission ("NYPSC") has authorized the Company to issue up to 750,000 shares of common stock under its Dividend Reinvestment and Stock Purchase Plan ("DRP") and its Employee Stock Purchase and Dividend Reinvestment Plan ("ESPP"). Under an option of the Company, common stock used to satisfy the requirements of the DRP and ESPP is being purchased by the agent under the plans on the open market. On February 4, 1997, Rockland Electric Company ("RECO") a wholly owned utility subsidiary of the Company, issued $20 million of First Mortgage 7 1/8% Bonds, Series J, due February 1, 2007 ("Series J Bonds"). The proceeds from the issuance of the Series J Bonds, together with other RECO funds were used to refund on March 6, 1997, RECO's $20 million First Mortgage 9.59% Bonds, Series H. In addition, on January 6, 1997, the Company redeemed the remaining 13,896 shares of Redeemable Cumulative Preferred Stock, Series I, 8 1/8% then outstanding, at $100 per share. The Company currently has no plans for the issuance of additional debt or equity securities, with the exception of the expected refinancing of $78 million of long-term debt which will mature during 1997, and it is expected that all other capital requirements will be met with funds from operations, supplemented with short-term debt as required. Rate Activities New York The Company has been engaged in settlement negotiations regarding the Company's rate and restructuring filing in the New York Public Service Commission ("NYPSC") Competitive Opportunities Proceeding (Case 96-E-00-900). Reference is made to the Company's Form 8-K Current Report dated March 25, 1997, which is filed as Exhibit 10.47 to this quarterly report on Form 10-Q, for a discussion of the Settlement Agreement entered into on March 25, 1997 by the Company, the NYPSC Staff and other parties in Case 96-E-00900. QUARTERLY COMPARISON Results of Operations Earnings per average common share outstanding for the first quarter of 1997 amounted to $0.46 per share as compared to $1.01 per share for the first quarter of 1996. Utility operations were adversely effected by the below-normal energy sales resulting from the mild winter weather. This was partially offset by the Company's continued success in containing utility expenses. The net effect was utility operations experienced a modest decline in earnings when comparing the first quarter of 1997 to the first quarter of 1996. The majority of this quarter's decline was the loss incurred by the Company's non- utility gas marketing subsidiary, NORSTAR Management, Inc. ("NMI"), the general partner of NORSTAR Energy Limited Partnership ("NORSTAR Partnership"), resulting from a write-down of NORSTAR Partnership's receivables as well as its continued poor operating performance. The first quarter earnings also reflect the balance of costs associated with an arbitration settlement with the Company's former Chief Executive Officer signed in February 1997. Electric and Gas Revenues Electric and gas operating revenues, including fuel cost and purchased gas cost recoveries, decreased by $2.0 million during the first quarter of 1997 as compared to the same quarter of 1996, as a result of decreased electric and gas sales and the elimination (during the second quarter of 1996) of the New York electric RDM adjustment. Electric operating revenues during the current quarter were $107.1 million as compared to $108.0 million for the first quarter of 1996. This decrease is primarily the result of base rate reductions, lower fuel cost recoveries and lower sales to customers, partially offset by an increase in sales to other utilities which produced a revenue increase of $1.1 million when compared to the same quarter of 1996. The 1996 revenues also reflect the impact of the Company's RDM then in effect. In accordance with the NYPSC's May 3, 1996 Order electric revenues are no longer governed by an RDM agreement. Total sales of electric energy to retail customers during the first quarter of 1997 were 1,116,718 megawatt hours ("Mwh"), compared with 1,128,698 Mwh during the comparable period a year ago. Sales to other utilities for the first quarter of 1997 amounted to 67,924 Mwh with revenues of $1.5 million compared to 37,493 Mwh and $0.4 million in 1996. Gas operating revenues during the quarter were $77.9 million compared to $78.9 million for the first quarter of 1996. This decrease is primarily the result of a decrease in sales to interruptible and firm customers, partially offset by an increase in gas cost recoveries. Moderate weather conditions during the first quarter of 1997 when compared to the first quarter of 1996 resulted in a decrease in gas sales. Sales to firm customers totaled 8,996 million cubic feet ("Mmcf"), compared with 9,943 Mmcf during the same period a year ago. Gas revenues from firm customers were $72.6 million, compared with $72.8 million in the first quarter of 1996. Interruptible gas sales were 878 Mmcf for the first quarter of 1997 compared to 1,275 Mmcf for the same period of 1996. Revenues from interruptible customer were $3.9 million in 1997 compared to $4.9 million in 1996. Fuel, Purchased Electricity and Purchased Gas Costs, Excluding Gas Marketing The cost of fuel used in the production of electricity and purchased electricity costs decreased by $2.4 million during the first quarter of 1997 when compared to the same quarter of 1996. This decrease reflects the lower cost of fuel used in generation and lower purchased power costs, partially offset by increased demand (including sales for resale). Purchased gas costs for utility operations were $48.1 million in the first quarter of 1997 compared to $47.6 million in 1996, an increase of $0.5 million. This increase is the result of significant increases in the cost of purchased gas, partially offset by a decrease in the volume of gas purchased for resale and deferred costs. Other Operating and Maintenance Expenses The Company's total operating expenses excluding fuel, purchased power, gas purchased for resale and non-utility gas marketing purchases for the first quarter, increased by $0.9 million compared with the same period in 1996. Utility operating expenses increased $0.3 million. Diversified operating expenses increased by $0.6 million. The net increase in utility operating expenses of $0.3 million is primarily the result of the implementation, in May 1996, of the provisions of a NYPSC approved rate agreement, which, among other things, provided for the recovery of Independent Power Producer contract termination costs and the elimination of substantially all of the expense reconciliation items under the previously mandated Revenue Decoupling Mechanism. In addition, depreciation expense increased by $1.4 million because of a regulatory adjustment made in the first quarter of 1996 and a decrease in taxes of $0.1 million. Diversified Activities The Company's diversified activities consist of gas marketing, energy related services and business ventures and land development conducted through wholly-owned non-utility subsidiaries. The net operating results from all diversified activities amounted to a loss of $4.5 million or 33 cents per average common share outstanding during the first quarter of 1997 compared to a gain of $99,000 or one cent per share during the first quarter of 1996. The primary reason for the decline in earnings is the loss incurred by the NORSTAR Partnership, which resulted from a write- down of receivables as well as the NORSTAR Partnership's continued poor operating performance. Additionally, gas marketing results were adversely affected by the accounting treatment for Shell Gas Trading Company's minority interest in the NORSTAR Partnership. The minority partner's equity balance reached zero during 1996, and consistent with Statement of Financial Accounting Standards No. 94, "Consolidation of Majority-Owned Subsidiaries," all partnership losses must be absorbed by the Company's subsidiary, NMI, the general partner of the NORSTAR Partnership. As the restructuring of the gas marketing business from high volume/low margin wholesale customers towards securing lower volume/higher margin retail customers continues, losses are expected through 1997. Other Income, Deductions and Interest Charges - Net Other income, net of interest charges and other deductions, decreased by $3.6 million during the first quarter of 1997 when compared to the same quarter of 1996 as a result of increased investigation costs associated with an arbitration settlement signed in February 1997. PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Item 3 Legal Proceedings in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 under the caption "Environmental and Other Litigation" for a description of the litigation entitled Crossroads Cogeneration Corporation v. Orange and Rockland Utilities, Inc. On April 9, 1997, Crossroads filed papers in opposition to the Company's motion to dismiss, and a cross-motion for partial summary judgment in its favor on its contract claims. On April 29, 1997, the Company filed further papers in support of its motion to dismiss and in opposition to Crossroads' motion for partial summary judgment. Reference is made to Item 3 Legal Proceedings in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 under the caption "Regulatory Matters: New York Competitive Opportunities Proceeding" for a discussion of the settlement negotiations regarding the Company's rate and restructuring filing in the New York Public Service Commission ("NYPSC") Competitive Opportunities Proceeding (Case 96-E-00-900) and to the Company's Form 8-K Current Report dated March 25, 1997, which is filed as Exhibit 10.47 to this Form 10-Q, for a discussion of the Settlement Agreement entered into on March 25, 1997 by the Company, the NYPSC Staff and other parties in Case 96-E-00900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. Item 4. Submission of Matters to a Vote of Security Holders: (a) The Company's Annual Meeting of Shareholders was held on April 9,1997. (b) The following directors were elected at the Annual Meeting of Shareholders on April 9, 1997: Robert E. Mulcahy III was elected for a one-year term expiring at the Annual Meeting of Shareholders in 1998, J. Fletcher Creamer, Jon F. Hanson, Kenneth D. McPherson, and Linda C. Taliaferro were elected for three-year terms expiring at the Annual Meeting of Shareholders in 2000. The terms of office of the following Directors continued after the meeting: Ralph M. Baruch, Michael J. DelGiudice, James F. O'Grady, Jr., D. Louis Peoples, Frederic V. Salerno and H. Kent Vanderhoef. (c) The following matters were submitted to a vote of security holders at the Company's Annual Meeting of Shareholders held on April 9, 1997: 1. The Company's nominees for election as Directors were approved by the following vote: Shares Shares Broker For Withheld Non-Votes J. Fletcher Creamer 11,281,304 294,220 N/A Jon F. Hanson 11,315,775 259,849 N/A Kenneth D. McPherson 11,321,771 253,853 N/A Robert E. Mulcahy 11,267,737 307,887 N/A Linda C. Taliaferro 11,269,859 305,765 N/A 2. A proposal to appoint the firm of Arthur Andersen LLP, independent public accountants, to audit the books, records and accounts of the Company and its subsidiaries for the year 1997 was approved by the following vote: Shares Shares Shares Broker For Against Abstaining Non-Votes 11,218,023 131,817 225,684 N/A Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.2A Amendment to Lease Agreement effective August 1, 1996. 10.47 The Company's Form 8-K Current Report dated March 25, 1997. (b) Reports on Form 8-K On April 17, 1997, the Company filed a Current Report on Form 8-K dated March 25, 1997 pertaining to the Settlement Agreement between the Company, the New York Public Service Commission Staff and other parties in Case 96-E-0900. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ORANGE AND ROCKLAND UTILITIES, INC. (Registrant) Date: May 9, 1997 By ROBERT J. McBENNETT Robert J. McBennett Treasurer Date: May 9, 1997 By EDWARD M. McKENNA Edward M. McKenna Controller EX-10.2A 2 AMENDMENT TO LEASE AGREEMENT This Amendment is effective as of August 1, 1996 and amends and modifies that certain Lease Agreement, dated as of February 1, 1971 (the "Lease") by and between Orange and Rockland Utilities, Inc. of one Blue Hill Plaza, Pearl River, NY 10965 ("Lessee"), and United States Trust Company of New York ("US Trust"), as lessor thereunder and trustee under that certain Trust Agreement, dated as of February 1, 1971. Fleet Capital Corporation of 50 Kennedy Plaza, Fifth Floor, Providence, Rhode Island 02903 ("FCC"), has succeeded to all interests of US Trust as lessor of the Units under the Lease and to all interests of Industrial National Leasing Corporation as owner of the Trust Estate under the Trust Agreement; all references herein and in the Lease to "Lessor" or "Owner" shall be deemed to be references to FCC. Except as otherwise defined herein, all capitalized terms used herein and not defined herein shall have the meanings set forth or referred to in the Lease. Subject to the terms and provisions hereof, Lessee has elected to renew the Lease for the Renewal Term as contemplated in Section 24(a) of the Lease. Lessor and Lessee hereby agree to amend and modify the Lease as set forth below: 1. Definitions. (a) The second sentence of the definition of "Stipulated Loss Value" shall be deleted in its entirety and replaced with the following two sentences: "Stipulated Loss Value" for each Unit as of any Semi-Annual Payment Date during the Renewal Term shall mean one-half of the amount set forth as the Purchase Price Amount in Annex A attached to the Amendment to Lease Agreement effective as of August 1, 1996 opposite such Semi-Annual Payment Date. Stipulated Loss Value" for each Unit as of the expiration of the Renewal Term shall mean $100,000." (b) The second sentence of the definition of "Termination Value" shall be deleted in its entirety and replaced with the following: "Termination Value" for each Unit as of any Semi-Annual Payment Date during the Renewal Term shall mean one-half of the amount set forth as the Termination Value in Annex A attached to the Amendment to Lease Agreement effective as of August 1, 1996 opposite such Semi-Annual Payment Date." 2. Substitution of FCC for US Trust. The quoted language appearing in the second paragraph of section 8 shall be deleted in its entirety and replaced with the following: "Fleet Capital Corporation, Owner-Lessor under Lease Agreement, dated February 1, 1971." 3. Early Termination. Section 10(a) shall be deleted in its entirety and replaced with the following: "If no Event of Default (or other event which after lapse of time or notice or both would become an Event of Default) shall have occurred and be continuing and this Lease shall not have been earlier terminated, Lessee shall be entitled, at its option, upon at least 35 days' prior written notice to Lessor, to terminate this Lease with respect to either or both of the Units on the next succeeding Semi-Annual Payment Date upon payment of the Termination Value for such Unit or Units as of such Semi- Annual Payment Date and thereupon Lessee shall deliver such Unit or Units to Lessor in accordance with section 5 hereof, whereupon the obligation of Lessee to make payments of Basic Rent shall terminate for all Semi-Annual Lease Periods commencing on or after such termination." 4. Lessee Officers. The last paragraph of section 16 shall be modified by deleting the reference to "Chairman of the Board" contained therein and substituting therefor "the Chief Executive Officer, the Treasurer,..." 5. New Addresses for Notices and Payments. Section 21 shall be modified to refer to the addresses of the Lessee and Lessor set forth above. Section 22 shall be modified to require payments in immediately available funds to Lessor at its address set forth above, or at such other address as Lessor shall from time designate in written notice to Lessee. 6. Renewal and Purchase Options. (a) The last clause of section 24(a) beginning with the phrase "each in an amount equal to 7 1/4%...shall be deleted in its entirety and replaced with the following: "each in an amount equal to $72,500 for each such Unit, payable on the Semi-Annual Payment Dates for the Renewal Term." (b) The first sentence of section 24(b) shall be deleted in its entirety and replaced with the following: "If no Event of Default (or other event which after lapse of time or notice or both would become an Event of Default) shall have occurred and be continuing and this Lease shall not have been earlier terminated, Lessee shall be entitled, at its option, upon at least six months' prior written notice to Lessor, to purchase any Unit on the next succeeding Semi-Annual Payment Date or expiration of the Renewal Term with respect thereto upon payment of the Stipulated Loss Value applicable to such Unit and, in the event of such purchase, the obligation of Lessee to pay Basic Rent with respect to such Unit for all Semi-Annual Periods commencing on or after the termination date shall terminate." (c) Section 24(c) shall be deleted in its entirety. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. Except as specifically set forth herein, all of the terms and conditions of the Lease shall remain in full force and effect and are hereby ratified and affirmed. To the extent that the provisions of this Amendment conflict with any provisions contained in the Lease, the provisions of this Amendment shall control. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized representatives as of the dates set forth below. Orange and Rockland Utilities, Inc. Fleet Capital Corporation By: /s/Robert J. McBennett By: /s/Brian D. DeRusha Name: Robert J. McBennett Name: Brian D. DeRusha Title: Treasurer Title: Vice President Annex A TERMINATION PURCHASE SEMI-ANNUAL VALUE PRICE PAYMENT DATE ($) AMOUNT ($) August 1, 1996 1,873,550.00 2,073,550.00 February 1, 1997 1,817,565.14 2,017,565.14 August 1, 1997 1,758,877.03 1,958,877.03 February 1, 1998 1,697,355.14 1,897,355.14 August 1, 1998 1,632,862.64 1,832,862.64 February 1, 1999 1,565,256.09 1,765,256.09 August 1, 1999 1,494,385.14 1,694,385.14 February 1, 2000 1,420,092.15 1,620,092.15 August 1, 2000 1,342,211.89 1,542,211.89 February 1, 2001 1,260,571.15 1,460,571.15 August 1, 2001 1,174,988.35 1,374,988.35 February 1, 2002 1,085,273.15 1,285,273.15 August 1, 2002 991,226.02 1,191,226.02 February 1, 2003 892,637.78 1,092,637.78 August 1, 2003 789,289.16 989,289.16 February 1, 2004 680,950.32 880,950.32 August 1, 2004 567,380.29 767,380.29 February 1, 2005 448,326.48 648,326.48 August 1, 2005 323,524.12 523,524.12 February 1, 2006 192,695.61 392,695.61 EX-10.47 3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): March 25, 1997 ORANGE AND ROCKLAND UTILITIES, INC. (Exact name of Registrant as specified in its charter) Incorporated in New York 1-4315 13-1727729 (State or Other (Commission (IRS Employer Jurisdiction of File Number) Identification Incorporation) Number) One Blue Hill Plaza, Pearl River, New York 10965 (Address of principal executive offices) (zipcode) Registrant's telephone number, including area code: (914) 352-6000 Items 1. - 4. Not Applicable. Item 5. Other Events NYPSC Settlement Agreement Reference is made to Item 3 Legal Proceedings of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 under the caption "Regulatory Matters: New York Competitive Opportunities Proceeding" for a discussion of the settlement negotiations regarding the Company's rate and restructuring filing in the New York Public Service Commission's ("NYSPC") Competitive Opportunities Proceeding. On March 25, 1997, the Company and the Staff of the NYPSC entered into a Settlement Agreement ("Agreement") in Case 96-E-0900, the case initiated by the NYPSC to examine the Company's filing in the NYPSC's Competitive Opportunities Proceeding. Additional parties to the Agreement are the New York State Department of Economic Development, the Industrial Energy Users Association, the National Association of Energy Services, Inc. and the Joint Supporters. The Agreement, which is subject to NYPSC approval, covers a four-year period commencing with NYPSC approval. Large industrial customers (defined as manufacturing and mining customers listed in the SC-9 Class) will have the opportunity to realize an average electric price of $.06/kwh beginning with the effective date of new rates. The rates of all other customers will be reduced in the first year by 1.09% and by another 1% effective one year later. The cumulative customer benefits over the four-year period are equal to approximately $37 million. The Agreement allows the Company to retain all earnings up to an 11.5% return on equity and provides that earnings in excess of 11.5% will be shared, with 50% to be used to write down generation assets, 25% to be credited to the Company's customers, and 25% to be retained by the Company's shareholders. The Agreement provides that full retail access to a competitive energy and capacity market will be available for all customers on or about May 1, 1999. The Company's existing PowerPick(TM) Program, for energy only, will be expanded to all customers on May 1, 1998. For large industrial customers, the PowerPick(TM) Program will be expanded in the summer of 1997. The Agreement provides that the Company will restructure to create a separate affiliated unregulated generation company, one or more unregulated energy services companies, and a regulated transmission/distribution company. Upon the commencement of retail access, the transmission/ distribution company will be the provider of last resort for all customers choosing to purchase basic energy services from it, for all those customers who do not choose an energy provider, and for those customers who purchase from other providers but who later return as customers purchasing power from the transmission and distribution company. The Agreement provides for recovery of above market generation costs through a Competitive Transition Charge ("CTC"), which will be in place for four years from May 1, 1999 or the commencement of retail competition, if later. Under the CTC, the first 10% variance (plus or minus) between market revenues and the Company's fixed cost of generation, using 1996 costs as the standard, will flow directly to transmission/distribution customers. Any variance beyond this threshold will be shared between the Company's shareholders (10%) and customers (90%). At the end of the four year CTC period, the market value of the Company's generation facilities (i.e., its Lovett and Bowline Point generating stations) will be determined. 80% of any difference between market and book value will be the responsibility of or for the benefit of customers; 20% of the difference will be the responsibility of or for the benefit of the Company's shareholders. A non-bypassable System Benefits Charge ("SBC") will be used to collect the costs of certain mandated public policy programs. In the Agreement, expenditure levels for SBC programs (e.g., research and development, energy efficiency, environmental protection, low income programs) initially will be covered in base rates and subsequently broken out in accordance with the unbundled rates approved by the NYPSC. Any increases in the spending levels for these programs above those currently included in rates will be recovered through the SBC. As part of the Agreement, the Company agreed that, following final NYPSC approval of the Agreement, the Company will withdraw from the pending appeal of the November 25, 1996 Decision and Order of the New York State Supreme Court denying the request of the Company, the six other New York State investor-owned electric utilities and the Energy Association of New York State to invalidate the May 20, 1996 Order of the NYPSC relating to the restructuring of the electric industry of New York State in the Competitive Opportunities Proceeding. The Agreement will be the subject of NYPSC examination to determine whether it is in the public interest. A NYPSC decision regarding the Agreement is anticipated by mid-1997. The Company is unable to predict whether the NYPSC will approve the Agreement. The Company believes that the Agreement will not adversely affect its eligibility to continue to apply Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation". If, contrary to the Company's view, such eligibility were adversely affected, it is expected that it would apply only to the unregulated parts of the business and that, given the mechanism for recovery in the Agreement, as described above, it is not expected there would be a material write-down of assets. Item 6. Not Applicable. Item 7. Financial Statements and Exhibits Exhibit 10 - Settlement Agreement dated March 25, 1997 among the Registrant, the New York State Department of Public Service, the New York State Department of Economic Development, the Industrial Energy Users Association, the National Association of Energy Services, Inc. and the Joint Supporters in Case 96-E-00900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. Item 8. Not Applicable. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ORANGE AND ROCKLAND UTILITIES, INC. By: /s/Robert J. McBennett Robert J. McBennett Treasurer Dated: April 17, 1997 EXHIBIT INDEX Page Exhibit 10 6 Settlement Agreement dated March 25, 1997 among the Registrant, the New York State Department of Public Service, the New York State Department of Economic Development, the Industrial Energy Users Association, the National Association of Energy Services, Inc. and the Joint Supporters in Case 96-E-00900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12. STATE OF NEW YORK PUBLIC SERVICE COMMISSION ________________________________________________________ Case 96-E-0900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12 ________________________________________________________ Settlement Agreement G. D. Caliendo Senior Vice President, General Counsel and Corporate Secretary John L. Carley Senior Attorney Andrew Gansberg Nixon, Hargrave, Devans & Doyle LLP Attorneys for: Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, New York 10965 Dated: March 25, 1997 Albany, New York Table of Contents Overview of O&R Settlement i Introduction 1 Terms of Settlement 3 I. Rate Plan 3 A. Electric Price Reductions 3 Large Industrial Customers All other Customers Cumulative Price Reduction Summary Sources of Price Reductions ($000) B. Return on Equity Sharing 5 C. Performance Standards 7 D. Rate Design 7 II. Transition to Retail Access 8 A. Sequence of Events 8 B. Reciprocity 8 C. Expansion of PowerPick(TM) Program 9 D. Full Retail Access 9 E. Unbundled Tariffs 9 F. System Benefits Charge 10 G. Low Income Program 11 III. Strandable Costs 11 A. Regulatory Assets 11 B. NUG Contract Purchased Power Costs 11 C. Above Market Generation Costs 12 D. Other Strandable Costs 13 IV. Corporate Structure 13 A. Structural Separation 13 B. Section 107 Preauthorization 14 C. Delivery Company and Affiliated ESCOs 14 D. Load Pockets 15 E. System Upgrades 15 V. Other Provisions 15 A. Changes in Laws or Regulations 15 B. Confidentiality and Privileged Information 16 C. Changes in Rates 16 D. Rate Design Flexibility 16 E. Regulatory Reform and Customer Operations Procedures 16 F. Customer Outreach and Education 18 G. Interdepartmental Transfers 19 H. Accounting Provisions 19 I. Property Tax Refunds 19 J. Flex Rates and Economic Development Rate 19 K. Securitization 20 L. Gross Receipts and Franchise Taxes 20 M. Merger 20 N. Arrangements with Third Parties 20 O. Comprehensive Nature of Settlement Agreement 20 P. Provisions Not Separable 21 Q. Provisions Not Precedent 21 R. Term and Time Line 21 S. Effect of Agreement 21 T. Dispute Resolution 22 Appendices Appendix A - Time Line for Certain Actions Appendix B - Standard Industrial Codes Appendix C - Eligibility Guidelines for Large Industrial Customer Classification Appendix D - Sources of Price Reductions Appendix E - Privileged Information Appendix F - Customer Service and Reliability Performance Mechanism Appendix G - Low Income Customer Assistance Program Appendix H - Standards of Competitive Conduct Appendix I - Affiliate Relations Appendix J - Accounting for Affiliate Transactions Appendix K - Interdepartmental Transfers STATE OF NEW YORK PUBLIC SERVICE COMMISSION ________________________________________________________ Case 96-E-0900 - In the Matter of Orange and Rockland Utilities, Inc.'s Plans for Electric Rate/Restructuring Pursuant to Opinion No. 96-12 ________________________________________________________ Settlement Agreement Overview of O&R Settlement This Settlement has been developed with three major goals in mind: Improve customer service and customer choice while reducing price and introducing competition; Promote jobs and economic development in the region by reducing industrial rates substantially and immediately; Reduce rates for all other customers in 1997 and 1998, and then freeze the reductions until the end of this four-year agreement, in order to reduce the impact of the cost of electricity on the budgets of smaller customers. The signatories to this Settlement view the accomplishment of these goals as essential to the future welfare of the region. Integral to this agreement is the principle that these economic goals can be pursued successfully while maintaining quality customer service and protection; maintaining essential environmental programs; and seeking ways to reduce the effects of energy prices on low-income customers. Upon Commission approval, this Settlement will further reduce rates for all O&R ratepayers. In the past two years, residential ratepayers have already experienced rate decreases, on average, of 4%. Commercial and industrial classes have experienced decreases between 4% and 14%. Rate Plan The Settlement covers a four-year period. Large Industrial Customers have the opportunity to realize an average electric price of six cents per kWh beginning with the effective date of new rates. The Peak Activated Rate will be eliminated. The rates of all other customers will be reduced in the first year by 1.09% and by another 1.0% effective one year later. The cumulative customer benefits over the four-year period are equal to approximately $37 million. For each of the four rate years that this Settlement is in effect, earnings on regulated electric operations in excess of 11.5% in New York will be shared with 50% being used to write down generation assets (or otherwise inure to the benefit of O&R customers), 25% will be credited to O&R's customers; and 25% will be retained by O&R's shareholders. A flexible rate tariff will be designed and filed with the Commission. It will provide for the possibility of rate discounts for commercial and industrial customers who are currently taking service and who are at serious risk of relocating or closing their facilities. Transition to Retail Access Full retail access to a competitive energy and capacity market will be available on May 1, 1999 for all customers. The existing PowerPick(TM) program (choice of purchasing energy from alternate suppliers) will be expanded to all customers on May 1, 1998. For large industrial customers, the PowerPick(TM) program will be expanded in Summer 1997. O&R will file proposed unbundled rates for electric services in August 1997. Corporate Structure The Company will restructure to create an independent unregulated generation company ("GENCO"), one or more unregulated Energy Services companies ("ESCOs"), and a regulated Transmission and Distribution Company. Upon commencement of retail access, the Transmission and Distribution Company will provide basic energy services, including energy, capacity, ancillary services, metering and billing within the service territory. The Transmission and Distribution Company will be the Provider of Last Resort for all customers choosing to continue to purchase "packaged" energy services from it, for those customers who do not choose an energy provider, and for those customers who purchase from other providers but who later return as customers purchasing power from the Transmission and Distribution Company. Metering and billing services will be opened up to other competitors. Stranded Cost Incentive Mechanism Once retail access begins, O&R will be allowed a reasonable opportunity to recover its investment in stranded generation assets. A competitive transition charge mechanism will operate for four years. The first 10% variance (plus or minus) between market revenues and the Company's fixed cost of generation will flow directly to Transmission and Distribution customers. Any variance beyond this threshold will be shared between the Company (10%) and the customers (90%). After four years, the market value of the Company's generation facilities will be determined. 80% of any gain or loss over book value will be absorbed by the customers; 20% will be covered by the Company's shareholders. The Company will recover in full the remaining minimal commitments to purchases from non-utility generators. Performance Standards The Performance Standards, which were agreed to in the Company's most recent case, will be continued. There are five areas: three focus on customer service standards and two on reliability standards. If the Company fails to meet the target levels for these performance standards, there will be an adjustment to the return on equity sharing threshold; the adjustment will be up to 25 basis points. Low Income Program A Low Income Customer Assistance Program will be conducted for a two-year period for the residents of the City of Port Jervis. The Program will address energy efficiency, payment patterns, and/or arrears forgiveness. Energy efficiency measures, including refrigerator replacement, will be the first priority for expenditures. The Company will support the development of a pilot program that would aggregate low income customers as a single purchasing group. Customer Outreach and Education The Company will continue to develop and implement programs and materials that will aid its customers in understanding the changes in the electric industry that are coming and the nature of the services that customers can expect to receive from O&R in the future. The overall goals are to enable customers, particularly small customers, to make informed choices about utility service while understanding their rights and responsibilities as utility customers. These efforts will be complemented by those of participating energy providers. Public Interest Program Public interest program will be continued through a competitively neutral Systems Benefit Charge. This summary is intended to be a general description of the terms of the Settlement. The complete text of the Settlement will control in the event of any conflict. Introduction On May 20, 1996, the New York State Public Service Commission (the "Commission") issued its Opinion and Order Regarding Competitive Opportunities for Electric Service, Opinion No. 96-12 in Case 94-E-0952 (the "Competitive Opportunities Proceeding"). In Opinion No. 96-12, the Commission articulated a vision for the electric utility industry that includes the following market characteristics: 1. Effective competition in the generation and energy services sectors; 2. reduced prices resulting in improved economic development for the State as a whole; 3. increased opportunities for consumers to choose suppliers and service companies; 4. a system operator that treats all participants fairly and ensures reliable service; 5. a provider of last resort for all consumers and the continuation of a means to fund necessary public policy programs; 6. ample and accurate information for consumers to use in making informed decisions; and 7. the availability of information that permits adequate oversight of the market to ensure its fair operation. Opinion No. 96-12, at 24-25. The Commission directed Orange and Rockland Utilities, Inc. ("Orange and Rockland" "O&R" or "the Company") and four other electric utilities to file a rate/restructuring plan consistent with the Commission's policy and vision for increased competition. Id., at 74-75. The plans to be filed were to address such matters as the structure of the utility both in the short and long term, a schedule for transition to retail access for all of the utility's customers and a rate plan to be effective for a significant portion of the transition. The Commission directed the utilities to collaborate with the Staff and other interested parties in developing a number of technical studies, undertaking public informational and educational forums and determining what FERC filings were necessary to implement the Independent System Operator ("ISO") and Power Exchange ("PE"). On October 1, 1996, Orange and Rockland filed a rate/restructuring plan in response to Opinion No. 96-12. The Company's filing included a rate plan that would go beyond the third year of the rate settlement approved in Case 95-E-0491, a schedule for expanding its PowerPick(TM) Program and introducing retail access to all customers, a plan to separate the generation function from the regulated delivery function and a means of addressing the strandable cost issue. By its Order Establishing Procedures and Schedule dated October 9, 1996, the Commission initiated Case 96-E-0900 to examine Orange and Rockland's October 1, 1996 filing. The Commission established a procedural schedule, including a 90-day negotiation period during which the parties were strongly encouraged to reach a negotiated settlement instead of pursuing a litigated outcome. To facilitate these negotiations, the Commission's Order of October 9, 1996, waived certain settlement guidelines established in Case 90-M-0255, Settlement and Stipulation Agreements, Opinion No. 92-2 (March 24, 1992). Between October 29 and November 7, 1996, Orange and Rockland and Staff hosted four technical meetings with the intervenors in this case. The Company provided detailed presentations on its October 1, 1996 filing, furnished supporting data and responded to numerous questions of the parties. Preliminary settlement negotiations were conducted between the Company and Staff during January and February 1997. After agreement in principle was attained, the negotiations included the Consumer Protection Board, the Industrial Energy Users Association and other parties. By notices issued December 19, 1996, January 9, 1997, February 13, 1997, February 26, 1997, and March 6, 1997, the Secretary of the Commission extended the 90- day negotiation period established in the Order of October 9, 1996 to March 25, 1997. On February 28, 1997 the Company and Staff informed the active parties that they had made significant progress in resolving the issues in this proceeding and a summary of settlement terms was circulated to the active parties. The parties were invited to attend settlement negotiations on March 4, 1997, in order to discuss the summary of settlement terms and indicate their willingness to participate in the preparation of a detailed settlement proposal for submission to the Commission. Subsequent meetings of the active parties took place on March 11, 18 and 24, 1997, to review drafts of a detailed settlement proposal. The term of this Settlement is four years from the first full month after the date of the effectiveness of new rates (unless new rates are effective on the first of the month). The times for various actions to be accomplished by the various parties are set forth on Appendix A. Terms of Settlement I. Rate Plan Orange and Rockland shall implement a rate plan for the four years beginning with the first full month after the effectiveness of new rates which shall include the following provisions. A. Electric Price Reductions Large Industrial Customers Large Industrial Customers(1) will be provided the opportunity to realize an average electric price of six cents per kWh beginning with the effectiveness of new rates. This electric price reduction opportunity is to be achieved through a combination of energy choice (i.e., PowerPick(TM) and rate reductions (i.e., one-time credits and base rate reductions). Cents/ Revenue kWh Equivalent ($000) Average Price 6.82 $31,661 Electric Price Reductions: PowerPick(TM) Savings Opportunity(2) .24 -$ 1,108 Scheduled Rate Reductions -.58 - 2,707 Total -.82 -$ 3,815 Average Price Opportunity 6.00 $27,846 ____________________ (1) Large Industrial Customers are all customers in the existing S.C.9 class whose facilities are classified by the Standard Industrial Manual (1987 ed. or supplement thereto) as Mining [Division B] or Manufacturing [Division D] and where 60 percent or more of the account's electric usage is used directly for manufacturing and/or mining per the Standard Industrial Codes ("SIC") codes set forth in Appendix B. (2) The PowerPick(TM) savings opportunity is based on an estimate and represents energy-only choice for all energy requirements of the Large Industrial Customers. The Company will permit all Large Industrial Customers to participate in the PowerPick(TM) program (energy-only) for all of their energy requirements at the time of the effectiveness of new rates. Guidelines for eligibility are set forth in Appendix C. All Other Customers Reduce electric rates, through one-time credits and base rate reductions, by 1.09% at the time of the effectiveness of new rates and an additional 1% effective one year later. Revenue Levels @ Rate Reductions Cumulative Classification May 3,1996 Rates Year 1(1.09%) Year 2(1%) Total $000 $000 $000 Large Commercial 25,600 -$ 280 -$ 256 -$ 536 Small C&I 120,298 - 1,317 - 1,203 - 2,520 Residential 146,023 - 1,599 - 1,460 - 3,059 Total $291,921 -$ 3,196 -$ 2,919 -$ 6,115 Cumulative Price Reduction Summary ($000) Year 1 Year 2 Year 3 Year 4 Lg. Industrial -$3,815 -$3,815 -$3,815 -$3,815 All Other - 3,196 - 6,115 - 6,115 - 6,115 Total -$7,011 -$9,930 -$9,930 -$9,930 Sources of Price Reductions ($000)(3) Year 1 Year 2 Year 3 Year 4 PowerPick(4) -$1,108 -$1,108 -$1,108 -$1,108 Deferred Credits - 4,271 - 3,256 - 3,256 0 Expired Surcharge - 498 - 498 - 1,849 - 7,150 Cost Reductions - 1,342 - 2,076 - 1,672 - 1,672 Total -$7,219 -$6,938 -$7,885 -$9,930 ____________________ (3) A detailed schedule of each source of price reductions is set forth in Appendix D. (4) Estimated savings for Large Industrial Customers are based on the PowerPick(TM) program for all of their energy requirements. In order to provide the opportunity to achieve the 6 cents/kWh rate for the first rate year, the Company will permit all Large Industrial Customers to participate in the PowerPick(TM) program (energy-only) at the time of the effectiveness of new rates. "Dump" energy losses incurred as a result of the expansion of the PowerPick(TM) program prior to the implementation of wholesale competition due to system load falling below minimum load requirements of the Company's generating plants will not be recoverable through the FCA. The sources of the above price reductions underlie the agreed-upon changes in rate levels. The main objectives of this component of the Settlement are 1) to achieve price reductions to Large Industrial Customers so that they have a reasonable opportunity starting in the first rate year to reduce their average price to 6 cents per kWh; and 2) to reduce all other customers' average rates by 1.09 percent in the first rate year, and by another one percent effective one year later. For Industrial customers these price reduction opportunities are intended to remain in effect through the four-year term of this Settlement; the 1.09% reduction for all other customers is intended to remain in place for the first rate year and the 2.09 percent reduction for all other customers is intended to remain in place through the end of the four-year term. Cumulative customer benefits over the four-year period will equal approximately $37 million. After rates are unbundled in accordance with the provisions of Section II.E herein, the cost of Power Supply will not be included in rates for Delivery services. Delivery service customers will be charged for authorized services at the regulated rates approved by the Commission as a result of the Company's unbundling filing. Delivery service customers will be billed for power supply at market prices as charged by the customer's energy supplier plus any amounts necessary to cover stranded costs recoverable in accordance with Section III herein. It is expressly understood that the tariff reductions provided for in this Settlement will be reflected in the unbundled Delivery rates and that the sources supporting these reductions will likewise be reflected in unbundled Delivery rates. The parties acknowledge that the form of any price reduction provided for herein will vary among permanent base rate reductions and temporary credits which will expire when the related funding source is depleted. It is the intention of the parties that the form of rate reductions provided to the Company's customers not reduce the cumulative level of customer benefits below the $37 million provided over the term of this Settlement. B. Return on Equity Sharing For each of the four rate years, earnings in excess of 11.5% on regulated New York electric operations will be shared as follows: 50% to be used to write down generation assets, or otherwise inure to the benefit of customers; 25% to be credited to Orange and Rockland's customers; and 25% to be retained by Orange and Rockland's shareholders. To the extent that the Rate Settlement approved in Case 95-E- 0491 provides for an adjustment to the calculation of the annual earnings for the earnings sharing mechanism incorporated in such Rate Settlement to take into account the levelized rate reduction, a similar adjustment will be permitted from the effective date of this Settlement until April 30, 1999. Additional adjustments to the calculation of the actual return on equity set forth in the Rate Settlement will include: Any earned incentive or penalty from the partial pass- through Fuel Cost Adjustment (while still in effect), off- system sales imputations, property tax refunds, or other incentive or penalty mechanism made effective during the three-year rate period pursuant to an Order of the Commission. Revenues associated with the equalization of the return on equity provided by the Power Supply Agreements as approved by the Federal Energy Regulatory Commission and the 10.4 percent return on equity provided for in the Commission's Order Approving Settlement Agreements in Cases 95-E-0491, 89- E-0175 and 93-M-0849 (May 3, 1996). Upon the implementation of full retail access, the return on equity will be calculated based on Delivery company operations excluding the assets, revenues and operating costs associated with the GENCO. The Company and Staff acknowledge that this Settlement is intended to finally resolve a number of accounting and rate matters currently pending before the Commission, including calculations of earnings for any prior period (in accordance with the settlement approved by Commission Order Approving Settlement Agreements in Cases 95-E-0491, 89-E-0175 and 93-M-0849 (May 3, 1996)), deferral accounting petitions and compliance filings or studies submitted in accordance with the settlement approved by the Commission in Case 95-E-0491. These resolved matters include: 1. Earnings calculations (95-E-0491, 89-E-175 and 93-M-0849); 2. Accounting procedures and journal entries (95-E-0491); 3. Low income program; 4. Labor panel recommendations;(5) 5. Property tax benefits associated with March 1996 Special Franchise Tax Settlement; 6. The filing of studies associated with bus bar costs, transfer gas mark-up and cost allocation. ______________ (5) Subject to Staff field verification. Expenditures of $2,985,000 incurred to terminate the Company's contract for coal supply with Pittston (to the extent that they can be matched to verifiable savings flowed through to customers) and any regulatory assets approved by the Commission during the term of this Settlement may be deferred and written off against reductions in NUG contract purchased power costs below those reflected in rates, or any source of price reductions set forth in Appendix D when the total of such sources exceeds the totals shown on page 6 under "Sources of Price Reductions" for any of the four 12-month periods shown. The Company will be given 60 days after the end of the relevant time period to submit to the Director of Accounting and Finance any earnings calculations required herein. These calculations will be submitted in summary form to other requesting parties at the same time that the detailed calculations are provided to Staff. The Staff will be given 60 days to review any such calculations and if the Company receives no written objections or comments from Staff or other parties , the Company's calculations will be deemed approved. Written objections or comments, if not resolved within 30 days from the date of receipt, shall be submitted to the Commission for a determination. The Staff and the Company agree that any commercially sensitive data underlying any calculations submitted in accordance with this Settlement will be given protection against disclosure as described in Appendix E. C. Performance Standards The Company agrees to continue to operate under the performance standards incorporated in the Commission- approved settlement in Case 95-E-0491. These performance standards are set forth in detail in Appendix F and include customer service standards and reliability standards. The Company agrees to a maximum adjustment to the return on equity sharing threshold of 25 basis points for failure to meet the performance standards each year (five basis points per performance standard). D. Rate Design The mandatory Time-of-Use Residential Rate will continue for customers presently taking such service. No new residential customers will be added as mandatory Time-of-Use Customers after Commission approval of this Settlement. The continuing participation of residential customers as mandatory Time-of- Use customers will be reviewed by the Commission during its consideration of the Company's unbundled rate proposal. The Company shall be permitted to defer any revenue shortfalls that may result from changing the mandatory nature of this rate. The Company will eliminate the Peak Activated Rate ("PAR") for the Large Industrial Customers. The Company will eliminate the PAR for the other SC-9 customers by applying the rate decrease proposed for this customer class in this Settlement. Should that decrease not cover the full elimination of the PAR, the Company shall make such related rate design changes as are required to ensure revenue neutrality. The Company will not implement the PAR provisions of the existing SC-9 tariffs in 1997. Should the rate reductions and associated new rate design provisions of this Settlement not be approved by the Commission and not made effective until after the beginning of the PAR period, June 1, 1997, the Company will defer the resulting revenue requirement shortfall for the period June 1, 1997, to the effective date of new rates. The deferred revenue will be the difference between the rates actually billed to all SC-9 customers and the rates that will be designed to eliminate the PAR in a revenue neutral manner. The regulatory asset associated with the deferred PAR revenue requirement will be written off by application of Orange and Rockland's share of PowerPick(TM) savings in accordance with the Retail Access Pilot Program approved by the Commission in Case 95-E-0491. No later than April 4, 1997, Orange and Rockland will provide to Staff and other interested parties an acceptable tariff design that will implement the terms of this Settlement for all current SC-9 customers. The Industrial Energy Users Association ("IEUA") endorsement of this Settlement is conditioned on Orange and Rockland meeting this provision. II. Transition to Retail Access A. Sequence of Events The parties anticipate the following sequence of events: The ISO becomes fully operational upon FERC approval. Expansion of PowerPick(TM) Program (energy only) to all Large Industrial Customers at the time of the effectiveness of new rates and to all other customers on May 1, 1998.(6) Full retail access (energy and capacity) to all customers on May 1, 1999. _________________ (6) Customers in the PowerPick(TM) Program as of December 31, 1997, will remain eligible to participate through April 30, 1998. Unbundled tariffs, as described in detail below, should become effective at least several months prior to the effectiveness of full retail access in order to allow customers a reasonable time to understand and react properly to the pricing signals that will be in effect when full retail access is implemented. B. Reciprocity Staff and O&R agree that implementation of full retail access in O&R's service territory before O&R is able to gain comparable access to other New York electric utilities' service territories could result in a substantial financial disadvantage for O&R. Accordingly, once full retail access has been implemented by O&R, the Company will not be required unconditionally to accommodate a transaction between an O&R customer and a New York utility or affiliated company that does not offer full retail access. Instead, the Company, upon being requested to accommodate such a transaction, will be authorized to petition the Commission for an Order requiring the seller- utility or affiliated companies, including generating, energy services or marketing companies, to provide O&R comparable access to customers located in the seller-utility's own service territory. Upon the filing of the petition, the transaction will be immediately stayed pending the Commission's decision on the petition. This provision is not applicable to the New York Power Authority ("NYPA"). C. Expansion of PowerPick(TM) Program(7) The existing PowerPick(TM) program (energy only) will be expanded to all customers on May 1, 1998. O&R affiliates (other than the Delivery Company) will not be precluded from participating in the expanded PowerPick(TM) program. If it should appear that the energy-only ISO would not be in place by February 1998, and, in the Company's view, the failure to implement the energy-only ISO would present technical or financial obstacles to the expansion of the PowerPick(TM) program, the Company may petition the Commission and show cause why relief from this commitment, in whole or in part, is required. Staff will join the Company in requesting the Commission to address the petition expeditiously. _______________ (7) The PowerPick(TM) Program is intended to refer to the "Retail Access Pilot Program" as described in Appendix D to the Settlement approved by the Commission by Order Concerning Settlement Agreements issued May 3, 1996, in Cases 95-E-0491, 93-M-0849 and 93-G-0779. D. Full Retail Access Effective May 1, 1999, full retail access (capacity and energy) will be available to all customers. In the event the ISO is not fully operational on an energy and capacity basis by December 1998, and, in the Company's view, the failure to implement the ISO would present technical obstacles to the implementation of full retail access, the Company may petition the Commission and show cause why relief from this commitment, in whole or in part, is required. Staff will join the Company in requesting that the Commission address the petition expeditiously. E. Unbundled Tariffs O&R agrees to file with the Commission in August 1997 proposed unbundled draft electric tariffs based on an updated embedded cost of service study, or other appropriate studies, using calendar 1996 data, subject to necessary confidentiality protections. It is anticipated that these unbundled tariffs will separate the cost of: - Power Supply (energy and capacity) - Power Delivery - Governmental Tax Surcharges - Systems Benefits (mandated public policy programs) - Competitive Transition Charge Should the cost of service study show that one of the above cost components should be subdivided into more than one component or that other cost components should be separately identified, O&R will be permitted to propose them in its unbundling submittal in August 1997. The Power Supply component will be used to bill customers for energy and capacity costs, regardless of the provider, unless other approved billing procedures are chosen by the customer. Until the wholesale energy market becomes effective and/or full retail access is implemented, energy costs will continue to be charged through the existing FAC and the fixed costs of O&R's generation and purchased power will continue to be recovered through the base rates approved as part of this Settlement. When wholesale competition is implemented, the FAC will reflect energy purchases at market prices made by the regulated delivery function on behalf of its customers. The embedded capacity cost of O&R's generation function will continue to be charged at tariff rates until the implementation of full retail access. Any margin (wholesale revenues from sales of energy in excess of fuel costs) realized by the O&R generation function will be used as a mitigation measure to offset NUG purchased power costs during the interval between the implementation of wholesale competition and full retail access. In the event NUG purchased power costs incurred during that interval are fully offset, additional margins will be shared between the customers and the Company on an 80/20 basis. The parties acknowledge that the current FAC will need to be re-examined and may require modification in accordance with changes occurring in electricity markets and rates. The Power Delivery charge(s) will recover the costs associated with transmission and distribution, customer services (e.g., metering and billing) and O&R's Hydro-Electric facilities and Gas Turbines. All regulatory assets will also be recovered in the Power Delivery charge(s). The Governmental Tax Surcharge component will identify separately all gross receipts and franchise taxes and governmental surcharges to the extent consistent with the Tax Law. It is contemplated that O&R's generation plant will continue to operate. After full retail access, the Competitive Transition Charge ("CTC") component will be used to collect, over a period of four years (as further described in Section III.C herein), the stranded costs representing the difference between O&R's embedded fixed costs of generation and the revenues net of fuel costs and variable O&M expenses derived from the operation of O&R's generation plant in a deregulated competitive market. Fixed generation costs include: non-variable O&M costs,(8) depreciation expense, property taxes, an allocable share of administrative costs, return and interest cost. The CTC component will be recalculated annually and filed with Staff 90 days before the effective date. Such calculation shall be subject to review by Staff and approval by the Commission before implementation. In addition, the Company will provide to other requesting parties a summary of any changes in the CTC at the same time as the detailed CTC calculation is provided to Staff. Any written objections to or comments on the CTC recalculation, if not resolved within 30 days from the date of receipt, shall be submitted to the Commission for a determination on an expedited basis. _____________ (8) Non-variable O&M costs exclude fuel and variable O&M expenses estimated at one mill per kWh of generation. F. System Benefits Charge Opinion No. 96-12 provides that "[c]osts required to be spent on necessary environmental and other public policy programs that would not otherwise be recovered in a competitive market will generally be recovered by a non-bypassable system benefits charge." The System Benefits Charge ("SBC") will be used to collect the costs of mandated public policy programs. This non- bypassable charge will be imposed on all Delivery company customers. The expenditures reflected in the SBC are for research and development ("R&D"), energy efficiency, environmental protection, and low income programs that are required or approved by the Commission to be funded by the SBC. One way of disbursing such expenditures would be by means of a standard performance contract with stipulated pricing approved by the Commission. In this Settlement, expenditure levels for SBC programs will initially be covered in base rates and subsequently broken out in accordance with the unbundled rates approved by the Commission, but they will be non-bypassable in any event. The price levels established in this Settlement include specific annual rate allowances for the costs of mandated public policy programs. Increases in these annual rate allowances are not provided for in the targeted price levels for the Large Industrial Customers, nor in the rate reductions proposed for all other customers. The parties agree that any increases in these spending levels resulting from changes required by law (including by order of the Commission) will be fully recoverable. G. Low Income Program The Company agrees to implement the Low Income Customer Assistance Program developed pursuant to the Commission-approved Settlement in May 1996. The specific provisions of this Program are set forth in detail in Appendix G hereto. The cost of this Program will not be included in the SBC. In addition, the Company will support the development of a pilot program that would aggregate low income customers as a single purchasing group. Such a pilot program could help advance the state of knowledge and experience with such programs if it included 1) several towns within the service territory (and one or more towns in the Eastern Division which can experience load pocket conditions) and 2) a representative mix of multi- and single-family homes. III. Strandable Costs A. Regulatory Assets Generation-related regulatory assets established in accordance with Commission orders, policies or practices will be fully recoverable in regulated Delivery company rates. At the time rates are unbundled, an appropriate allowance for these regulatory assets will be identified in the rates for the Delivery company. B. NUG Contract Purchased Power Costs Until rates are unbundled, these costs will continue to be recovered through the FAC. When rates are unbundled, the recovery of these costs will be identified in the regulated rates for the Delivery company. The costs of these contracts escalate during their initial years and decline in later years. Therefore, these costs are to be recovered by means of a fixed annual rate until full recovery. An estimate of recoverable NUG purchased power costs will be made at the time of unbundling and converted to a fixed charge to be included in Delivery rates. Recoverable NUG purchased power costs will consist of actual NUG contract payments less an estimate of the revenues received from the resale of the NUG purchased power. A full reconciliation of recoverable NUG purchased power costs shall be permitted. C. Above Market Generation Costs During the transition to full competition, Orange and Rockland will be afforded an opportunity, but not a guarantee, to recover above-market generation costs by means of an incentive- based CTC over a four-year period commencing with the full implementation of retail competition. The CTC will be established by identifying the fixed production costs using an embedded cost of service study for 1996 as a guide. The unbundling process will establish the precise amount of fixed production costs to be used in the CTC, including the appropriate amount of administrative and general expenses allocable to the generation function. The parties acknowledge that, over its four-year term, the CTC does not allow for the recovery of inflationary increases in non-fuel O&M production costs, property tax increases, wage rate increases, and increased costs associated with capital additions or changes in the cost of capital applicable to production costs. The parties further acknowledge that the four-year term of the CTC is a reasonable period necessary to allow for the development of effective competition in the Company's service territory. Should there be a difference between O&R's embedded fixed costs of generation and the revenues net of fuel costs and variable O&M expenses derived from the operation of O&R's generation plant in a deregulated competitive market, any such difference falling within a band of +/-10% around the embedded fixed costs of generation reflected in rates (as determined in the unbundling process) shall be directly assignable to O&R's Delivery service customers. Any additional difference falling outside that +/-10% band shall be allocated between O&R and its customers on a 90% customer/10% Company basis. The Company will consider alternative, economically comparable means of allowing an individual customer to pay for its allocable share of above- market embedded fixed costs of generation that customers would otherwise pay through the CTC. Following implementation of the ISO, Orange and Rockland agrees that the average of its bids for its fossil fuel resources shall not fall below the incremental cost of fuel plus variable O & M costs.(9) _______________ (9) Variable O&M costs are estimated at one mill per kwh of generation. Upon expiration of the CTC, O&R's generation assets will be subject to a one-time final market valuation procedure to be determined by Staff and Company.(10) Should Staff and the Company be unable to agree on a procedure for market valuation by a date two years before the expiration of the CTC, the dispute will be referred to the Commission for resolution. The difference between market and book value will reflect the net cost of the valuation and the present value of related regulatory assets. That difference will be shared between customers and shareholders, respectively, on an 80/20 basis, with the 80% share to be recovered from or refunded to customers over an appropriate period of time and through an appropriate mechanism as determined by the Commission. _______________ (10) The Staff favors an auction to accomplish this valuation. The Company does not agree that the auction would necessarily be the most effective way to perform such valuation. If the Company sells any of its generating facilities prior to the final market valuation, Orange and Rockland's shareholders and customers will share any after tax gain or loss (net of the cost of the sale) on an 80/20 basis. Should the Company sell more than one generating station or unit, the gains and losses, if any, will be offset against each other. Sale of a generating facility will resolve recovery of any related regulatory assets. D. Other Strandable Costs Orange and Rockland's Delivery service rates will be set so that the Company is provided a reasonable opportunity to recover from all customers other prudent and verifiable stranded costs associated with depreciable assets used in connection with the metering and billing functions. IV. Corporate Structure A. Structural Separation Orange and Rockland agrees to structural separation and will apply to the appropriate regulatory authorities for permission to form a holding company that will accomplish such separation. Such structural separation is intended to further the public interest by avoiding barriers to full and fair competition. Orange and Rockland's interest in its generating facilities (excluding Hydro Electric facilities and Gas Turbines) will be transferred to a separate corporate subsidiary. Implementation of this holding company structure is conditioned upon shareholder and regulatory (i.e., Federal Energy Regulatory Commission ("FERC"), Securities and Exchange Commission ("SEC"), the Commission, the New Jersey Board of Public Utilities ("NJBPU") and the Pennsylvania Public Utility Commission ("PAPUC")) approvals. Orange and Rockland agrees to move expeditiously to secure such approvals and will use its best efforts to implement this structural separation prior to the introduction of full retail competition. The parties acknowledge, however, that shareholder approval can be obtained no earlier than the Company's April 1998 annual meeting. Staff will join the Company in requesting that the Commission act expeditiously on the petition required to implement this structural separation. If a registered holding company is formed, it will become the successor to Orange and Rockland as signatory hereto. Standards of conduct and rules governing affiliate relations are set forth in Appendices H and I, respectively. B. Section 107 Preauthorization Orange and Rockland will be allowed to invest up to $25 million of retained earnings derived from revenues received from the rendition of public service within New York State without the need to make separate application under Section 107 of the Public Service Law for each investment. Orange and Rockland will limit its investments to energy services and marketing, telecommunication services, environmental services and related developmental projects. Staff will be given access to the books and records of each unregulated subsidiary which receives such investments in order to review any and all transactions between Orange and Rockland and such unregulated subsidiaries. This investment authority would be subject to immediate and automatic suspension by the Commission should the Standard and Poor's bond rating of Orange and Rockland (or the successor entity subject to a bond rating) fall to BBB- or below. In addition, Orange and Rockland would commit to entering into written contracts for all exchanges of goods and services between the Company and any unregulated subsidiary established pursuant to this pre- authorization which receives such investments and to file all such contracts with the Commission at least 30 days prior to their effective dates. C. Delivery Company and Affiliated ESCOs At the time the Transmission and Distribution ("T&D") segment of O&R's electric system in New York is separated from Orange and Rockland's GENCO, the Delivery company will be authorized to continue to provide basic energy services, including energy, capacity, ancillary services, metering and billing within the service territory. Other companies including the Delivery company may enter into the market for providing metering and billing services to Orange and Rockland's Delivery company customers. In accordance with Paragraphs A and B herein, subject to certain conditions, O&R will be authorized to create an affiliated unregulated Energy Services Company ("ESCO"). O&R's affiliated ESCO will be authorized to provide energy services and products at market prices. O&R's affiliated ESCO shall operate in accordance with standards of conduct designed to prevent it from gaining an unfair competitive advantage as a result of its affiliation with the Delivery company or from providing an unfair competitive advantage to O&R's affiliated GENCO. O&R's affiliated ESCO will be subject to the same regulatory requirements applicable to any other comparably situated ESCO. The Standards of Conduct that will govern the relationship between the Delivery company and its affiliated ESCO are set forth in Appendix H. Upon separation of the Delivery company and the GENCO, there will be no bilateral agreements between Delivery company and GENCO (except if necessary to address load pockets or other reliability issues, including ancillary transmission services). As part of its responsibility to continue to minimize energy costs, the Delivery company may petition the Commission for a waiver of the above restriction on bilateral agreements. Any such bilateral agreement shall be in writing and filed with the Commission for a review of its consistency with the transition to competition. Up to one year after the expiration of the four-year term of this Settlement, affiliated ESCOs will be subject to examination by the Commission to determine whether the manner in which they conduct business impedes competition in the energy-related service or product markets within O&R's service territory in which they operate. After providing notice and opportunity to be heard to the ESCO, Delivery company and Holding company, if such an impediment is found, the Commission may order suitable remedies. The Delivery company shall be the Provider of Last Resort ("POLR") for all customers choosing to continue to purchase "packaged" energy services from the Delivery Company or failing to choose an energy provider and those customers deciding to purchase from providers other than the Delivery Company, but who later return as customers purchasing power from the Delivery Company. To the extent that a disproportionate amount of higher risk, lower usage customers will continue to be supplied with power by the Delivery company, rates shall reflect an appropriate allowance for the billing and collection costs associated with such customers. D. Load Pockets Orange and Rockland has identified two separate load pocket areas in its service territory. A process will be established in which Staff, the Company, and other interested parties will address different measures,(11) analyses of which are to be submitted in January 1998, for mitigating load pocket conditions in O&R's service territory. Incremental costs associated with a load pocket mitigation measure will be fully recovered in rates. The January 1998 filing will include a proposal to provide for such interim relief as may be necessary pending a final Commission determination. _________________ (11) Such as existing and new local distributed generation or energy efficiency/management measures. E. System Upgrades When deciding whether to implement major transmission or distribution upgrades (in excess of $2 million), the Delivery company will consider a full range of alternative measures, including demand side technologies and practices, fuel cells, photovoltaic systems or other alternatives that may defer the need for implementing the upgrade. V. Other Provisions A. Changes in Laws or Regulations If any law, rule, regulation, order or other requirement (or any repeal or amendment of an existing rule, regulation, order or other requirement) of a state, local or federal government body,(12) results in a change of five percent or more in the Company's net income from regulated electric operations, O&R will defer on its books of account the total effect of all such annual cost changes in excess of 5% of net income, with any such deferrals to be reflected in rates in a manner found reasonable and appropriate by the Commission. _______________ (12) Excluding Gross Receipts and Franchise Taxes. B. Confidentiality and Privileged Information Pursuant to the provisions of this Settlement, the Company is required to and may be requested to provide information to the Commission and other parties. In responding to these requirements and/or requests, the Company reserves the right to assert the legal privileges and/or the right to designate as confidential certain information as described in Appendix E. C. Changes in Rates The Commission reserves the authority to act on the level of Orange and Rockland's base electric rates in the event of unforeseen circumstances that, in the Commission's opinion, have such a substantial impact upon the return on equity contemplated in this Settlement as to render the Company's return unreasonable and unnecessary for the provision of safe and adequate service. If a circumstance occurs that, in the judgment of the Commission, so threatens the Company's economic viability or ability to maintain safe and adequate service, the Company shall be permitted to file for a change in base electric rates at any time. In the event of cost inflation (as measured by a generally accepted economic index, such as the GDP Price Deflator) in excess of four percent per year, the Company may petition the Commission for appropriate relief. D. Rate Design Flexibility During the term of this Settlement, the Company will have the right to seek to change regulated rates in a revenue-neutral manner or to propose de minimis rate changes. All rate changes will be filed with the Commission and subject to its approval. Where the Company proposes more than one rate change to take effect at approximately the same time, it will, to the extent practicable, combine such proposals in a single filing with the Commission. Any changes in rate design will fairly reflect underlying costs of service in order to avoid or minimize the likelihood of customers using electricity uneconomically or wastefully. E. Regulatory Reform and Customer Operations Procedures In consideration of the Company's implementation of retail competition as described in this Settlement and in light of the increased uncertainty of accurately forecasting avoided costs as competition is introduced, the parties agree that, upon the Commission's approval of this Settlement, Orange and Rockland's obligation to purchase from qualifying facilities under the Public Utility Regulatory Policies Act of 1978 shall be limited to "as available" purchases or contracts for a period of no longer than two years setting forth the price schedules based on projections of Orange and Rockland's system avoided costs. To facilitate the Company's operations under the rate plan, the parties agree that the provisions of Part 11, Part 13, Part 140, and Part 273 of 16 N.Y.C.R.R. and the requirements for a plain language bill format adopted in Case 28080, Order Requiring Gas and Electric Utilities To File Revised Billing Formats (Oct. 31, 1985), should be waived to the extent that any such provisions are inconsistent with the Company's ability to: institute non-discriminatory procedures which require an applicant to provide reasonable proof of the applicant's identity as a condition of service; modify its bill content and format in response to industry restructuring; provided, however, the Company's bills will contain the following: - an explanation of how bills may be paid - total charges due - due date - dates of present and previous meter readings - whether the consumption levels were based on estimated or actual readings - the amount of any penalty charges - any credits from past bills - any amounts owed and unpaid from previous bills - the customer service classification - any budget plan information, if applicable - unit price of energy consumed or other appropriate itemization of charges (including sales taxes and other informative tax itemization) - complete name and address of customer - unique account number or customer number assigned to the customer - meter readings - period of time associated with each product or service - name of entity rendering bill - local or toll-free telephone number customers may call with inquiries include non-tariffed items in a bill; provided, however, that customers' current payments are credited first to tariffed items and that service cannot be terminated for failure to pay non-tariffed items. Upon appropriate customer authorization, the Delivery Company shall disclose to qualifying ESCOs and other service providers agreeing to such protective conditions as the Commission finds appropriate, residential and non-residential customers' current payment status information to other service providers to the extent such information is limited to: whether or not a deposit could be requested from the customers by the Delivery Company due to delinquency, as defined in 16 NYCRR Section 11.12(d)(2) or in 16 NYCRR Section 13.1(b)(13), or for any reason provided in 16 NYCRR Section 13.7(a)(1); whether or not a customer could be denied service by the Delivery Company due to unpaid bills on an existing or prior account; or, whether a customer's service could be terminated by the Delivery Company, provided that: such information is to be used by other service providers only for the purposes of determining whether unregulated energy services will be provided to the customer, whether a deposit will be collected from such customer, or for other purposes approved by the Commission; ownership of the data remains with the Delivery Company; and such information request is made by a service provider in response to a bona fide request from the customer to the service provider for electric service or with other customer consent. The Company supports the concept of informed customer choice. To facilitate informed customer choice the Company will support the implementation of a program of environmental disclosure which will provide to those customers who wish to know the fuel sources of the electricity they purchase and the approximate types and levels of pollutants associated with such generation; provided, however, that no such program will be implemented unless and until a practical, meaningful, and cost effective approach to providing such information is developed. F. Customer Outreach and Education Orange and Rockland will continue to develop and implement programs and materials that will aid its customers in understanding the changes in the electricity market that are coming and the nature of the services that customers can expect to receive from the Company in the future. The Company's overall goals in conducting these programs are to enable customers, particularly small customers, to make informed choices about utility service while understanding their rights and responsibilities as a utility customer. For retail access and energy services choices in the competitive energy market, the Company's efforts would be complemented by those of the participating providers of competitive services, who can be expected to provide prospective retail access customers with information about the energy choices becoming available to consumers. The Company will provide to Staff by June 30 of each year of this Settlement, a summary of its customer education efforts. This submission will include, but not be limited to, an assessment of the progress made by these efforts and the various methods used to communicate the information, how the information was distributed, and the most frequently asked questions by customers. The first report is due June 30, 1998. G. Interdepartmental Transfers For purposes of this Settlement, electric prices will be reduced by $375,000 annually to reflect an imputation of cost savings resulting from the separation of the gas and electric purchasing functions and the anticipated ensuing cost reduction in gas purchased for electric generation. Cost savings in excess of $375,000 will be preserved for the benefit of customers in the form of future price reductions or mitigation of stranded costs. The $375,000 annual imputation will initially be in the form of a credit to the FAC and, in the event of changes in the FAC, in an appropriate form of equivalent dollar impact. As part of the Company's proposal to functionally separate the gas and electric departments (to allow the electric department to purchase in an open market), the Company proposed a $.05 per Mcf rate for all gas volumes transported to the electric department for electric generation. Consistent with the principles set forth in Appendix K, the Company will submit to the Commission no later than June 1, 1997, proposed changes in the FAC and Gas Adjustment Clause that will accomplish the pricing contemplated herein. Staff will support such pricing and join with the Company in seeking expeditious consideration of the Company's proposal. This proposed charge to the electric department will be a minimum of $1,275,000 based on the carrying costs on average embedded cost of distribution associated with plant dedicated to serve generation. The actual annual dollar amount paid to the gas department will be dependent on the volume of gas transported (at $0.05 per MCF) each year for O&R's electric generation, but in no event will the total annual charge be less than $1.275 million. The Company's proposal will provide for a review of the minimum at two-year intervals unless the Company or Staff requests review within a shorter interval. H. Accounting Provisions Consistent with Commission policy and precedent and subject to Staff review for reasonableness, reconciliation and/or deferral accounting of the following costs will continue in effect through the term of this Settlement for regulated operations, including 1) R&D, 2) Pensions, 3) Other Post Employment Benefits ("OPEBs"), 4) Demand-Side Management ("DSM"), 5) Cable gasification, 6) the Gas Turbine Maintenance Reserve, and 7) West Nyack and Manufactured Gas Plant site investigation and remediation costs. I. Property Tax Refunds Consistent with the terms of the approved settlement in Case 95-E-0491, the Company will retain ten percent of any Property Tax Refunds. This provision will remain in effect through the term of this Settlement. J. Flex Rates and Economic Development Rate The Flex Rate and Economic Development provisions contained in the approved Settlement in Case 95-E-0491 will remain in effect through the term of this Settlement. Any existing NYPA EDP business customers served pursuant to the current statutory program, including Economic Development Power and high load factor customers served under Rider G, would be exempted from strandable cost recovery to the extent that portion of the customer's usage is provided by NYPA resources and so long as that customer continues to take service under Rider G or any successor tariff rider. The Company will design and file a flexible rate tariff for commercial and industrial customers who are currently taking service and who are at serious risk of relocating or closing their facility absent a discount rate. Additionally, a customer must be receiving a comprehensive package of economic incentives from a State or local authority to qualify for the discount, which, coupled with the rate discount, will enable the business to remain in New York. The mechanism for sharing net lost revenues caused by the discounts resulting from such a rate will be consistent with the Flexible Rate Tariff Provisions approved by the Commission in Case 95-E-0941. The Company will file the tariff within 60 days after the approval of this Settlement. K. Securitization In the event of enactment of statewide securitization legislation providing cost savings to Orange and Rockland, the Company agrees to submit appropriate filings to provide the benefits prescribed by such statute or order of the Commission. L. Gross Receipts and Franchise Taxes Any changes in Gross Receipts and Franchise Taxes will be flowed through to Orange and Rockland's customers. M. Merger Should the regulated utility, within the next five years, merge, purchase or be purchased by any regulated utility or other company in this or any other state, such an event will be considered to be unforeseen for the purpose of this Settlement. Such merger or purchase will not, in any manner, restrict the Commission's authority to consider appropriate actions regarding any savings that may result, or from taking any other action that the Commission deems reasonable. N. Arrangements with Third Parties Prior to the implementation of full retail competition, the Company may enter into arrangements with third parties. The Company acknowledges that the Commission may exercise such authority as is provided by the Public Service Law to approve or disapprove such an agreement or consider actions regarding any savings that may result from any such arrangements and to take any other action that the Commission deems reasonable, including the modification of this Settlement. O. Comprehensive Nature of Settlement Agreement The foregoing reflects the parties' efforts to resolve complex revenue requirement and rate level issues in this proceeding. The issues involved difficult questions arising from stranded cost recovery as well as issues arising from the corporate restructuring under review in this proceeding. In developing the rate plan, the parties intended to develop a comprehensive plan that accounts for both typical revenue- requirement issues such as expected productivity improvements as well as for claims regarding stranded cost recoverability. The rate plan is intended as a permanent and comprehensive resolution of the Company's revenue requirement for the four-year term of the Settlement. The plan resolves these issues on a basis that is intended to allow the Company to remain under the Statement of Financial Accounting Standards No. 71 requiring regulated companies to follow cost-based ratemaking. P. Provisions Not Separable The parties have negotiated this Settlement with each provision being in consideration for, support of, and dependent upon all others. This Settlement is, therefore, presented for the Commission's approval as an integrated whole. If the Commission does not approve this Settlement in its entirety, without modification, any signatory hereto may withdraw its acceptance of this Settlement by serving written notice on the other parties, and shall be free to pursue its position in this proceeding without prejudice. Q. Provisions Not Precedent The terms and provisions of this Settlement apply solely to and are binding only in the context of the purposes and results of this Settlement. None of the terms and provisions of this Settlement and none of the positions taken herein by any party may be referred to, cited or relied upon by any other party in any fashion as precedent in any other proceeding before this Commission or any other regulatory agency or before any court of law except in furtherance of the purposes of this Settlement. R. Term and Time Line The term of this Settlement runs for four years from the first full month after the effective date of the new rates implemented upon Commission approval of this Settlement. The dates scheduled for expansion of the PowerPick(TM) Program and the implementation of full retail access shall remain May 1, 1998 and May 1, 1999, respectively. The times for various actions to be accomplished by the various parties are set forth on Appendix A. S. Effect of Agreement The Company will petition the Appellate Division of the Supreme Court for permission to withdraw its December 24, 1996 appeal in Energy Association of N.Y.S. v. Public Service Commission, Albany County Index No. 5830-96, with prejudice, following final Commission approval of this agreement (i.e., when any appeals from such approval are exhausted or the time to appeal has expired). Until this petition is granted, the Company will discontinue its appeal to the extent it is able to do so without forfeiting the right to appeal. The Company has made the following additional concessions: Providing for substantial price reductions to large industrial customers and all other customers. Allocating equity earnings in excess of the sharing threshold between shareholders and customers and to writing down generation assets. Expanding PowerPick(TM) (energy only) to all Large Industrial Customers at the time of the effectiveness of new rates and to all other customers in 1998. Implementing structural separation of the generation and delivery functions. Providing full retail access (energy and capacity) to all customers in 1999. It is the express intention of the signatories hereto that Orange and Rockland be provided with: A reasonable rate of return while maintaining the overall level of rates for the term of the Settlement. A reasonable opportunity to recover prudently incurred strandable costs through the CTC. The parties agree that the provisions of this Settlement will result in rates that are just and reasonable to both customers and shareholders through the four-year term of this Settlement. Future generic determinations by the Commission will be addressed in good faith by the parties to this Settlement and will provide guidance for potential tailoring or application of those determinations or this agreement, as appropriate, to preserve this agreement and associated considerations and obligations of Orange and Rockland and the Commission. T. Dispute Resolution In the event of any disagreement over the interpretation of this Settlement or the implementation of any of the provisions of this Settlement, which cannot be resolved informally among the parties hereto, such disagreement shall be resolved in the following manner: the parties shall promptly attempt to convene a conference and in good faith shall attempt to resolve such disagreement. If any such disagreement cannot be resolved by the parties within 60 days, any party may petition the Commission for relief on a disputed matter. Orange and Rockland Utilities, Inc. ______________________________________ G. D. Caliendo, Esq. Senior Vice President, General Counsel and Corporate Secretary New York State Department of Public Service __________________________________ Robert R. Garlin, Esq. Assistant Counsel New York State Department of Economic Development __________________________________ Jeffrey Schnur Director of Energy Policy Industrial Energy Users Association ________________________________ Thomas A. Condon, Esg. Birbrower, Montalbano, Condon & Frank, P.C. National Association of Energy Services, Inc. _________________________________ Ruben S. Brown The E Cubed Company on behalf of Joint Supporters _________________________________ Ruben S. Brown Appendix A Time Line for Certain Actions March 25, 1997 Settlement Agreement filed _________________________ Commission approves Settlement _________________________ O&R withdraws from Article 78 appeal (4 months after Commission approval) Effectiveness of new rates O&R provides Large Industrial Customers with opportunity to realize an electric price of 6 cents/kWh and reduces electric rates for all other customers by 1.09%. PowerPick(TM) is expanded to include all Large Industrial Customers (energy only). August 1997 O&R files proposed draft unbundled electric tariffs One year after effectiveness of O&R reduces rates for all new rates other customers by an additional 1% May 1, 1998 O&R expands PowerPick(TM) (energy only) to all customers _________________________ O&R implements structural separation _________________________ Unbundled electric tariffs become effective May 1, 1999 O&R introduces full retail choice (energy and capacity) to all customers May 1, 1999 CTC commences April, 2001 Market valuation procedure filed Four years after effectiveness Settlement terminates of new rates May 2003 CTC terminates May 2003 Begin collection/refund of difference between market and book value Appendix B Page 1 Standard Industrial Codes Division B Mining The Division as a Whole This division includes all establishments primarily engaged in mining. The term mining is used in the broad sense to include the extraction of minerals occurring naturally; solids, such as coal and ores; liquids, such as crude petroleum; and gases such as natural gas. The term mining is also used in the broad sense to include quarrying, well operations, milling (e.g., crushing, screening, washing, flotation), and other preparation customarily done at the mine site, or as a part of mining activity. Exploration and development of mineral properties are included. Services performed on a contract or fee basis in the development or operation of mineral properties are classified separately, but within this division. Establishments which have complete responsibility for operating mines, quarries, or oil and gas wells for others on a contract or fee basis are classified according to the product mined rather than as mineral services. Mining operations are classified, by industry, on the basis of the principal mineral produced, or, if there is no production, on the basis of the principal mineral for which exploration or development work is in process. The mining of culm banks, ore dumps, and tailing piles is classified as mining according to the principal mineral product derived. The purification and distribution of water is classified in Transportation and Public Utilities, Industry 4941, and the bottling and distribution of natural spring and mineral waters is classified in Wholesale Trade, Industry 5149. Crushing, grinding, or otherwise preparing clay, ceramic, and refractory minerals; barite; and miscellaneous nonmetallic minerals, except fuels, not in conjunction with mining or quarrying operations, are classified in Manufacturing, Industry 3295. Dressing of stone or slab is classified in Manufacturing, Industry 3281, whether or not mining is done at the same establishment. Appendix B Page 2 Division D Manufacturing The Division as a Whole The manufacturing division includes establishments engaged in the mechanical or chemical transformation of materials or substances into new products. These establishments are usually described as plants, factories, or mills and characteristically use power driven machines and materials handling equipment. Establishments engaged in assembling component parts of manufactured products are also considered manufacturing if the new product is neither a structure nor other fixed improvement. Also included is the blending of materials, such as lubricating oils, plastics, resins or liquors. The materials processed by manufacturing establishments include products of agriculture, forestry, fishing, mining, and quarrying as well as products of other manufacturing establishments. The new product of a manufacturing establishment may be finished in the sense that it is ready for utilization or consumption, or it may be semifinished to become a raw material for an establishment engaged in further manufacturing. For example, the product of the copper smelter is the raw material used in electrolytic refineries; refined copper is the raw materials used by copper wire mills; and copper wire is the raw material used by certain electrical equipment manufacturers. The materials used by manufacturing establishments may be purchased directly from producers, obtained through customary trade channels, or secured without recourse to the market by transferring the product from one establishment to another which is under the same ownership. Manufacturing production is usually carried on for the wholesale market, for interplant transfer, or to order for industrial users, rather than for direct sale to the domestic consumer. There are numerous borderline cases between manufacturing and other divisions of the classification system. Specific instances will be found in the descriptions of the individual industries. The following activities, although not always considered as manufacturing, are so classified: Milk bottling and pasteurizing; Fresh fish packaging (oyster shucking, fish filleting); Apparel jobbing (assigning of materials to contract factories or shops for fabrication or other contracting operations) as well as contracting on materials owned by others; Publishing; Ready-mixed concrete production; Leather converting; Logging; Wood preserving; Various service industries to the manufacturing trade, such as typesetting, engraving, plate printing, and preparing electrotyping and stereotype plates, but not blue-printing or photocopying services; Electroplating, plating, metal heat treating, and polishing for the trade; Lapidary work for the trade; Fabricating of signs and advertising displays. Appendix B Page 3 There are also some manufacturing-type activities performed by establishment which are primarily engaged in activities covered by other divisions, and are, thus not classified as manufacturing. A few of the more important examples are: Agriculture, Forestry, and Fishing Processing on farms is not considered manufacturing if the raw materials are grown on the farm and if the manufacturing activities are on a small scale without the extensive use of paid labor. Other exclusions are threshing and cotton ginning. Mining The dressing and beneficiating of ores; the breaking, washing, and grading of coal; the crushing and breaking of stone; and the crushing, grinding, or otherwise preparing of sand, gravel, and nonmetallic chemical and fertilizer minerals other than barite are classified in Mining. Construction Fabricating operations performed at the site of construction by contractors are not considered manufacturing, but the prefabrication of sheet metal, concrete, and terrazzo products and similar construction materials is included in the Manufacturing Division. Wholesale and Retail Trade Establishments engaged in the following types of operations are included in Wholesale or Retail Trade; cutting and selling purchased carcasses; preparing feed at grain elevators and farm supply stores; stemming leaf tobacco at wholesale establishments; and production of wiping rags. The breaking of bulk and redistribution in smaller lots, including packaging, repackaging, or bottling products, such as liquors or chemicals, is also classified as Wholesale or Retail Trade. Also included in Retail Trade are establishments primarily engaged in selling, to the general public, products produced on the same premises from which they are sold, such as bakeries, candy stores, ice cream parlors, and custom tailors. Services Tire retreading and rebuilding, sign painting and lettering shops, computer software production, and the production of motion picture films (including video tapes) are classified in Services. Most repair activities are classified as Services. However, some repair activity such as shipbuilding and boatbuilding and repair, the rebuilding of machinery and equipment on a factory basis, and machine shop repair are classified as Manufacturing. Appendix C Eligibility Guidelines for Large Industrial Customer Classification The following guidelines shall serve as eligibility requirements to take service under the Large Industrial Customer classification: (i) General primary, substation and transmission service customers who maintain a minimum demand of 1,000 kW during any two of the previous twelve months. (ii) The facility is classified by the Standard Industrial Classification Manual (1987 edition or supplements thereto) as Mining (Division B) or Manufacturing Division). (iii) Energy use for mining or manufacturing purposes must be at least 60% of their total energy usage as determined by the Company. (iv) At time of application for Large Industrial Classification a Minimum Eligibility Requirement for that facility representing 60% of customer's total energy usage at time of application will be established. (v) If a customer's actual kWh energy usage for minings or manufacturing purposes falls below the Minimum Eligibility Requirement established in (iv) above by more than 25% the customer will be removed from this rate and transferred to as appropriate service classification. (vi) A customer who fails to maintain criteria set forth in (i), (ii) and (iii) above may at the customer's option transfer to another appropriate service classification. Appendix D Sources of Price Reductions Description Year 1 Year 2 Year 3 Year 4 Expiring Surcharges: RDM Rate Allowance $468,000 $468,000 $468,000 $468,000 Allowance for Rate Case Costs 253,000 253,000 Amort. of OPEBs 1,016,000 1,016,000 NUG Amortization 4,978,000(A) Subtotal 468,000 468,000 1,737,000 6,715,000 One-Time Refunds 3 year Amortization): Ramapo Tax Settlement 1,855,600 902,200 902,200 R&D Overcollection 541,000 541,000 541,000 RDM Overcollection 82,000 82,000 82,000 Investigation Refund Shortfall 40,000 40,000 40,000 Unallocated Depreciation Reserve-Net (71%) 1,491,873 1,491,873 1,491,873 Subtotal 4,010,473 3,057,073 3,057,073 0 Other Cost Reductions Special Franchise Property Tax Savings 185,000 185,000 185,000 185,000 DSM Program Reductions 645,000 1,335,000 1,335,000 1,335,000 R&D Reductions 300,000 300,000 300,000 300,000 Gas Transfer Pricing(71%) 380,069 380,069 0 0 Incremental Holding Company Costs(B) -250,000 -250,000 -250,000 -250,000 Subtotal 1,260,069 1,950,069 1,570,000 1,570,000 Total Cost Reductions (Excl. GRT) $5,738,542 $5,475,142 $6,364,073 $8,285,000 Cost Reductions(Incl. GRT) $6,110,400 $5,829,931 $6,776,465 $8,821,868 PowerPick(TM) Savings Opportunity (Incl. GRT) $1,108,492 $1,108,492 $1,108,492 $1,108,492 Total Sources of Price Reduction (Incl. GRT) $7,218,892 $6,938,423 $7,884,957 $9,930,360 (A) Total NUG Amortization of $5,292,000 less amount applied to other regulatory assets in the amount of $314,000. (B) Costs up to maximum of $1.0 million incurred in establishment of Holding Company will be deferred and amortized over term of settlement. Appendix E Page 1 Privileged Information Nothing is this Settlement requires or will be construed to require the Delivery Company, the Holding Company or an unregulated subsidiary to provide Staff or any other party access to, or to make disclosure of any information as to which the entity in possession of such information would be entitled to assert a legal privilege, such as the attorney-client privilege, if, either (i) the privilege could be asserted pursuant to CPLR 4503, CPLR 3101 (or any other applicable statute or constitution) in a judicial proceeding, action, trial or hearing, or (ii) providing access to or making disclosure of such information would impair in any manner the right of the entity in possession of such information to assert such privilege against third parties. If Staff or any other party seeks access to or disclosure of any information that either the Delivery Company, the Holding Company or an unregulated subsidiary believe is privileged and not subject to access or disclosure under the terms of this Settlement, counsel for the entity asserting such privilege will detail, to the extent practical without destroying the privilege, the reasons why the privilege is being claimed in sufficient detail to permit a determination of whether or not to dispute the claim of privilege. If Staff or any other party decides to dispute such claim, it may request that an assigned administrative law judge conduct an in camera review of such information to determine whether it is in fact exempt from access or disclosure under the terms of this section, which disclosure shall not be deemed waiver of the privilege. Such determination will be subject to review by the Commission and, if necessary, judicial review. Confidentiality of Records The Holding Company and the Delivery Company shall designate as confidential any non-public information to or of which Staff or any other party requests access or disclosure, and which the Holding Company, the Delivery Company or an unregulated subsidiary believe is entitled to be treated as a trade secret. The Holding Company, Delivery Company or unregulated subsidiary shall provide the requesting party with a redacted version of the information deemed to be confidential together with a non- confidential description of the information and a full explanation of why the information should be provided "trade secret" status. Any party will have the right to contest the trade secret nature of such designated confidential information in accordance with the Commission's Rules of Procedure. Appendix E Page 2 Anyone who is afforded access to, or to whom disclosure is made of, designated confidential portions of books and records, financial information, contracts, minutes, memoranda, business plans, and the like, will agree to maintain such information as confidential, other than information that previously has been made public. For the purposes of this Settlement, "information that previously has been made public" will mean information that either (i) has been disclosed by either the Holding Company, the Delivery Company or any unregulated subsidiary in financial or other literature to the financial community or to the public at large, (ii) appears in documents contained in the public files of a local, state or federal agency, body or court and which has not been accorded trade secret protection, or (iii) information that otherwise is in the public domain. In the event that Staff or any other party receives any information designated as confidential pursuant to the procedures described in this Settlement and desires to use such information in a litigated proceeding before the Commission, Staff or the party will first notify counsel for the Delivery Company and the Holding Company and the unregulated subsidiary, if applicable, of the nature of such information as well as its intention to use such information in such proceeding and afford the Delivery Company, the unregulated subsidiary and/or the Holding company the opportunity to apply to the administrative law judge presiding over such proceeding within ten (10) business days for a ruling designed to maintain the confidentiality of such information under Part 6-1 of the Commission's Rules of Procedure (16 NYCRR). Staff and any other party may object to any such application on the grounds that such information is not entitled to be treated as a trade secret under Part 6-1. In the event that a member of Staff receives any information designated as confidential pursuant to the procedures described in this Settlement and desires to use or refer to such information in a memorandum or other document which may become an "agency record" as the term is defined in the New York Freedom of Information Law, Staff first shall notify the Company Liaisons (as defined in Appendix H, p. 4, paragraph (iv)) of the nature of such information as well as its intended use, and afford the Delivery Company, the unregulated subsidiary, if applicable, and/or the Holding Company the opportunity to apply to the Commission under Part 6-1 of the Commission's Rules of Procedure within ten (10) business days for a protective order designed to maintain the confidentiality of such information. Staff and any other party may object to any such application on the grounds that such information is not entitled to be treated as a trade secret under Part 6-1. Should O&R or any of its affiliates come into possession of any information protected by the provisions of Part 6-1 of the Commission's regulations, such information shall be afforded the same protection by the Company as is afforded the Company's confidential information under the provisions of this Appendix. Contract and pricing terms between Delivery Company customers and providers other than O&R or its affiliates shall constitute confidential information and will be used by the Company solely as needed to comply with its required customer and supplier billing function under PowerPick(TM). O&R shall provide such confidential information to its own personnel on a need-to-know basis only and will not disclose such information to any affiliate without the written consent of the party with proprietary rights in the information. Any confidential information provided to O&R shall be clearly marked on every page to the effect that the information is confidential and protected by the Commission's rules on confidentiality and non-disclosure. Appendix F Page 1 Customer Service and Reliability Performance Mechanism Customer Service The Company shall continue the customer service performance mechanism consisting of: 1) an annual Residential Customer Assessment Score ("RCAS"), 2) an annual Commercial and Industrial Customer Assessment Score ("CICAS"), and 3) an annual PSC complaint rate target. The customer satisfaction surveys that will be used as the basis to establish the targets discussed below are intended to evaluate Company performance as rated by customers in the categories of overall favorableness, value and loyalty. The customer satisfaction survey shall be conducted for each year of this Settlement. At the commencement of retail access, the Company and Staff will assess the appropriateness of the survey upon which the CAS is based and determine whether a modified survey is necessary. The RCAS target shall be 2.73 for each rate year of the Settlement. The actual RCAS will be subject to adjustment to account for any applicable margin of error. If the actual RCAS as adjusted falls below the 2.73 target or the customer satisfaction survey is not performed in any rate year, the Sharing Threshold (as defined in this Settlement) will be reduced by five basis points in that rate year. The CICAS target shall be 2.65 for each rate year of the Settlement. The actual CICAS will be subject to adjustment to account for any applicable margin of error. If the actual CICAS, as adjusted, falls below the 2.65 target or the customer satisfaction survey is not performed in any rate year, the Sharing Threshold will be reduced by five basis points in that rate year. The annual PSC Complaint Rate target shall be 10.6 complaints per 100,000 customers for each rate year. The actual complaint rate shall be calculated using a 12-month average. If the actual complaint rate exceeds 10.6 in any rate year, the Sharing Threshold will be reduced by five basis points in that rate year. The Company will, upon request from Staff, provide such information as is available to verify survey results. Any confidential information or trade secrets given to Staff shall be held and used in accordance with Appendix E. Average Duration of Interruptions The weighted Company-wide average duration of interruption level target it 1.54 Hrs./Int. ("Interruption Duration Target"), which is a composite of the following minimum acceptable values established by the Commission's Order of May 30, 1995, in Case 95- E-0165: Appendix F Page 2 Minimum Operating Area Interruption Standard (Hrs./Int.) Eastern Duration 1.46 Central Duration 1.70 Western Duration 1.53 If, for any of the rate years covered by this Settlement, Orange and Rockland fails to achieve the Interruption Duration Target, the Sharing Threshold (as defined in this Settlement) applicable to that rate year shall be reduced by five basis points. Average Frequency of Interruptions The weighted Company-wide average frequency of interruption level target is 1.70 Int./Cust. ("Interruption Frequency Target") which is a composite of the following minimum acceptable values established by the Commission in its order dated May 30, 1995, in Case 95-E-0165: Minimum Operating Area Interruption Standard (Int./Cust) Eastern Frequency 1.46 Central Frequency 1.70 Western Frequency 2.25 If, for any of the rate years covered by this Settlement, Orange and Rockland fails to achieve the Interruption Frequency Target, the Sharing Threshold applicable to that rate year shall be reduced by five basis points. Appendix G Page 1 Low Income Customer Assistance Program Introduction On April 2, 1996, Orange and Rockland Utilities, Inc. ("Orange and Rockland" or the "Company"), New York State Department of Public Service Staff ("Staff"), the New York State Consumer Protection Board ("CPB") and the Industrial Energy Users Association ("IEUA") entered into a settlement agreement on electric rates ("Rate Case Settlement Agreement") in this proceeding. As part of the Rate Case Settlement Agreement, the parties agreed to meet and discuss the feasibility of developing a new low income program. The Rate Case Settlement Agreement was approved by the Commission in Opinion No. 96-21 issued August 12, 1996. Since the issuance of Opinion No. 96-21, representatives of the Company, Staff, Pace Energy Project ("Pace") and Public Utility Law Project of New York, Inc. ("PULP") have met on various occasions to discuss the development of a new low income program. The parties have agreed that the Company shall implement a low income program ("Program") in accordance with the terms and conditions set forth below. 1. Term The Program will commence upon the effectiveness of new rates and terminate two years thereafter. 2. Eligible Customers The Program will be conducted solely for the residents of the City of Port Jervis, New York and/or residents of the zip code area 12771. The goal of the Program is to serve no fewer than 140 customers in total, 70 customers in the first rate year and 70 customers in the second rate year. To be eligible, a customer must have been the current customer of record and been receiving service for at least one year at the present location. 3. Program Expenditures Program expenditures will be kept at $170,000 for the two- year period and will include all expenses for energy efficiency, arrears forgiveness, evaluation and administration. Expenditures per customer will be capped at $1,000. This expenditure includes the cost of an energy audit, disaggregated billing analysis, energy efficiency measures, and arrears forgiveness. If the Company finds that it is spending consistently less than $1,000 per customer, it will attempt to recruit more customers (in excess of the original 140 customers) into the Program in order to fully expend the available funds. Appendix G Page 2 4. Financial Eligibility Criteria Customers must be at or below 150% of the Federal Poverty Level to qualify for entry into the Program. HEAP eligibility guidelines will be used. Participating customers must apply for HEAP benefits, and, where applicable, customers also must apply to the Neighbor Fund for a grant. The Company's target for recruiting customers who are on a direct payment program with the Department of Social Services will be 10% of the total customers served. 5. Budget Program Participating customers will be required to participate in the Company's budget program. 6. Landlord Contribution If a customer lives in a leased premise, a landlord contribution of 25% will be required for energy conservation measures. If the landlord does not contribute, the customer will not be eligible to participate in the Program. 7. Energy Audit An energy audit will be conducted for each participant to identify the potential for the installation of an energy efficient refrigerator and/or weatherization measures. Weatherization measures will be considered for electric or gas heating customers only. The final determination of which measures, if any, to install will be based on the cost of the measures and the benefits to the customer. 8. Contract A participating customer must execute a contract with the Company which sets forth the terms of the agreement including: the budget payments to be made, the amount of arrears forgiveness agreed on (if any), the energy measures to be installed, and the conditions upon which continued participation will be allowed. The contract will also provide that the customer will be removed from credit action while participating in the Program. 9. Program Measures The Program will address energy efficiency, payment patterns, and/or arrears forgiveness, depending upon a customer's circumstances. Energy efficiency measures (including refrigerator replacement) will be the first priority for Program expenditures. Appendix G Page 3 10. Arrears Forgiveness Arrears forgiveness, capped at $250 per participant, is a customer option in the Program. Customers who choose this option will be required to make on-time monthly budget payments. If a customer fails to make three monthly payments by the due date for those payments, the customer will be removed automatically from the Program, will forfeit any further arrears forgiveness, will be returned to normal credit action. All accounts complying with the payment criteria, as well as all other Program requirements, will then have 25% of the arrears agreed on between the customer and the Company removed from the customers account at the end of each successful three-month segment. If a participating customer chooses not to take advantage of the arrears forgiveness component, the customer will be required to participate and remain on a mutually agreeable payment plan to address the customers arrears condition. At the conclusion of a customer's participation in the Program, any arrears still existing will be subject to a mutually agreeable payment plan, and all normal collection activity will be reinstated. 11. Program Evaluation At the conclusion of the Program's first year, the Company will prepare and provide to Staff a brief status report on the Program. The Company will evaluate the Program and prepare a detailed report within 75 days of the Program's conclusion. 12. Legislative, Regulatory or Related Actions If any law, rule, regulation, order or other requirement (or any repeal or amendment of an existing rule, regulation, order or other requirement) of the state, local or federal government results in a material change in the terms of this Settlement, the parties agree to reconvene promptly and consider any appropriate changes to this Settlement. Appendix H Page 1 Standards of Competitive Conduct General Principles The following standards of competitive conduct shall govern the Delivery Company's relationship with any energy supply and energy service affiliates: (i) There are no restrictions on affiliates using the same name, trade names, trademarks, service names, service mark or a derivative of a name, of the Holding Company or the Delivery Company or in identifying itself as being affiliated with the Holding Company or the Delivery Company. The Delivery Company will not provide sales leads involving customers in its service territory to any affiliate, including the ESCO, and will refrain from giving any appearance that the Delivery Company speaks on behalf of an affiliate or that an affiliate speaks on behalf of the Delivery Company. If a customer requests information about securing any service or product offered within the service territory by an affiliate, the Delivery Company will provide a list of companies of which it is aware operating in the service territory who provide the service or product, which may include an affiliate, but the Delivery Company will not promote its affiliate. (ii) The Delivery Company will not provide services to its marketing affiliates or customers of its marketing affiliates on preferential terms, nor represent that such terms are available, exclusively to customers who purchase goods or services from, or sell goods or services to, an affiliate of the Delivery Company. The Delivery Company will not purchase goods or services on preferential terms offered only to suppliers who purchase goods or services from, or sell goods or services to an affiliate of the Delivery Company. The Delivery Company will not represent to any customer, supplier, or third party that an advantage may accrue to such customer, supplier, or third party in the use of the Delivery Company's services as a result of that customer, supplier or third party dealing with any affiliate. This standard does not prohibit two or more of the unregulated affiliates from lawfully packaging their services. The Delivery Company must process all similar requests for distribution services in the same manner and within the same period of time. (iii) All similarly situated customers, including energy services companies and customers of energy service companies, whether affiliated or unaffiliated, will pay the same rates for the Delivery Company's utility services and the Delivery Company shall apply any tariff provision in the same manner if there is discretion in the application of the provision. The Delivery Company must strictly enforce a tariff provision for which there is no discretion in the application of the provision. Appendix H Page 2 (iv) Transactions subject to FERC's jurisdiction over the provision of sales or services in interstate commerce will be governed by FERC's orders or standards as applicable. (v) Release of proprietary customer information relating to customers within the Delivery Company's service territory shall be subject to prior authorization by the customer and subject to the customer's direction regarding the person(s) to whom the information may be released. (vi) The Delivery Company will not disclose to its affiliate any customer or market information relative to its service territory, including, but not limited to utility customer lists, that it possesses or receives from a marketer, customer, potential customer, or agent of such customer or potential customer other than information available from sources other than the Delivery Company, unless it discloses such information to its affiliate's competitors on an equal basis and subject to the consent of the marketer, customer, or potential customer. (vii) The Delivery Company shall establish a complaint process consistent with the following. If any competitor or customer of the Delivery Company believes that the Delivery Company has violated the standards of competitive conduct established in this section of the agreement, such competitor or customer may file a complaint in writing with the Delivery Company. The Delivery Company will respond to the complaint in writing within twenty (20) business days after receipt of the complaint, including a detailed factual report of the complaint and a description of any course of action proposed to be taken. After the filing of such response, the Delivery Company and the Complaining party will meet, if necessary, in an attempt to resolve the matter informally. If the Delivery Company and the complaining party are not able to resolve the matter informally within 15 business days, the matter will be referred promptly to the Commission for disposition. Appendix H Page 3 (viii) The Commission may impose on the Delivery Company remedial action for violations of the standards of competitive conduct. If the Commission believes that the Delivery Company has violated the standards of competitive conduct during the course of this Settlement, it shall provide the Delivery Company notice of and a reasonable opportunity to remedy such conduct or explain why such conduct is not a violation. If the Delivery Company fails to remedy violating conduct within a reasonable period after receiving such notice, the Commission may take remedial action with respect to the Holding Company to prevent the Delivery Company from further violating the standard(s) at issues. Such remedial action may include directing the Holding Company to divest the unregulated subsidiary, or some portion of the assets of the unregulated subsidiary, that is the subject of the Delivery Company's violation(s), but exclude directing the Holding Company to divest the Delivery Company or imposing a service territory restriction on the unregulated subsidiary. If the Holding Company is directed to divest an unregulated subsidiary, it may not thereafter, without prior Commission approval, use a new or existing subsidiary of the Holding Company to conduct within the Delivery Company's service territory the same business activities as the divested subsidiary (e.g., energy services). (ix) The Standards of Conduct set forth in this Settlement will apply in lieu of any existing generic standards of conduct (e.g., the interim gas standards established in Case 93-G-0932) and may be proposed as substitutes for any future generic standards of conduct established by the Commission through the term of this Settlement. The Standards of Conduct set forth in this Settlement will continue to apply after the expiration of the term of this Settlement, given the Company's need for stability in rules governing its structure. Before the Commission makes any changes to these standards, it will consider the Company's specific circumstances, including its performance under the existing standards. (x) Evidence of adherence to these Standards of Competitive Conduct may be introduced to rebut the presumption that imposition of a royalty is appropriate. Appendix H Page 4 Access to Books and Records and Reports (i) Staff will have access, on reasonable notice and subject to appropriate resolution of confidentiality and privileges, to the books and records of the Holding Company and the Holding Company majority-owned subsidiaries. Staff will have access, on reasonable notice and subject to the provisions of Appendix E regarding confidentiality and privileges, to the books and records of all other Holding Company subsidiaries to the extent necessary to audit and monitor any transactions which have occurred between the Delivery Company and such subsidiaries, to the extent the Holding Company has access to such books and records. (ii) The Delivery Company will supplement the information that the Commission's regulations require it to report annually with the following information: Transfers of assets to and from an affiliate, cost allocations relative to affiliate transactions, identification of Delivery Company employees transferred to an affiliate, and a listing of affiliate employees participating in common benefit plans. (iii) The Holding Company will provide a list on a quarterly basis to the Commission of all filings made with the Securities and Exchange Commission by the Holding Company and any subsidiary of the Holding Company including the Delivery Company. (iv) A senior officer of the Holding Company and the Delivery Company will each designate a company employee, as well as an alternate to act in the absence of such designee, to act as liaison among the Holding Company, the Delivery Company and Staff ("Company Liaisons"). The Company Liaisons will be responsible for ensuring adherence to the established procedures and production of information for Staff, and will be authorized to provide Staff access to any requested information to be provided in accordance with this Settlement. (v) Access to books and records shall be subject to claims of privilege and confidentiality as set forth in Appendix E hereto. Appendix I Page 1 Affiliate Relations 1. General a) The Delivery Company and the Holding Company's other subsidiaries will be operated as separate entities, with separate books of account and other business records, within 180 days of structural separation. Unregulated affiliates will establish and maintain separate and distinct offices and work space from the Delivery Company in a separate building or leasehold. b) Cost allocation guidelines are attached as Appendix J. These guidelines are fully reviewable and non-binding proposals that may be amended and/or supplemented as necessary. The Company will file with the Director of the Office of Accounting and Finance of the Department of Public Service all amendments and supplements to the guidelines, thirty days prior to making such change(s). c) Neither the Delivery Company nor marketing affiliate personnel shall communicate with any customer, supplier or third party that any advantage may accrue to such customer supplier or third party in the use of the Delivery Company's service as a result of their dealing with the marketing affiliate. d) If the Delivery Company offers its affiliate or a customer of its affiliate a discount or special arrangement for distribution service, billing, metering on any other service offered, it must contemporaneously offer the same arrangement to all similarly situated non-affiliate merchants and must file with the Commission procedures that will enable the Commission to determine how the Delivery Company is complying with those standards. 2. Transfer of Assets a) Transfers of assets from an affiliate to the Delivery Company will not require prior Commission approval. Transfers of assets from the Delivery Company to an affiliate will not require prior Commission approval, except for assets of the Delivery Company whose transfer requires Commission approval under Public Service Law, Section 70. Appendix I Page 2 b) For all assets other than generating stations, transfers of assets from the Delivery Company to an affiliate shall be at the higher of net book value or fair market value net of deferred Federal income taxes, except that the Delivery Company may, as part of its reorganization, transfer to the Holding Company or affiliate, at no charge, title to office furniture, equipment and other assets having an aggregate net book value not to exceed $250,000. Transfers of assets from an affiliate to the Delivery Company shall be on a basis not to exceed fair market value. c) Fair market value shall be determined in accordance with the cost allocation guidelines. For example, the Delivery Company may transfer to an affiliate any computer software system that the Delivery Company is authorized to transfer, without data, at a price at which the Delivery Company would sell such software to an unaffiliated third party. 3. Personnel a) The Delivery Company and the unregulated affiliates will have separate operating employees. b) Officers of the Delivery Company may not be officers of the GENCO or the ESCO. c) Employees may be transferred from the Delivery Company to an unregulated affiliate upon mutual agreement. Transferred employees may not be reemployed by the Delivery Company for a minimum of one year after the transfer date. Employees returning to the Delivery Company may not be transferred again to an unregulated affiliate until one year after the date of return. The Delivery Company will file annual reports to the Commission, beginning 45 days after the end of the first calendar quarter following structural separation showing transfers between the Delivery Company and unregulated affiliates by employee name, former company, former position, new company, new position, and salary or annualized base compensation. d) For each employee transferred from the Delivery Company to an unregulated affiliate, the unregulated affiliate shall compensate the Delivery Company by paying an amount equal to 25 percent of the employee's prior year's annual salary on a one-time basis, except that there shall be no compensation (i) for employees transferred to an unregulated affiliate not later than six months from the date of structural separation or the unregulated affiliate to which the employee is transferred is formed, whichever is later; (ii) for the transfer of employees covered by a collective bargaining agreement; or (iii) where the employee's transfer is attributable to the transfer or reduction of a Delivery Company function or major asset. Appendix I Page 3 e) The foregoing provisions do not restrict any affiliate from loaning employees to Delivery Company to respond to an emergency that threatens the safety or reliability of service to consumers. f) The compensation of Delivery Company employees may not be tied to the performance of any of the unregulated subsidiaries, provided, however, that stock of the Holding Company may be used as an element of compensation and the compensation of common officers of the Holding Company and Delivery Company may be based upon the operations of the Holding Company and Delivery Company. g) The employees of Holding Company, Delivery Company and the unregulated subsidiaries may participate in common pension and benefit plans, provided that funding requirements for employees remaining with the regulated entity are readily determined. If the plans are maintained or amended in such a manner that employees of the unregulated entities are treated inconsistently with the employees of the regulated entity, then the plans of the regulated entity will be segregated and made independent. 4. Provision of Services and Goods a) Corporate services (such as corporate governance, administrative, legal, purchasing and accounting) may be provided by the Holding Company to or on behalf of the Delivery Company and unregulated affiliates at a price equal to fully-loaded cost. This guideline will not operate as a prescription of the ratemaking treatment of requested allowances for the costs of such services. b) The Delivery Company may provide services to an unregulated affiliate, except that the Delivery Company may not use any of its marketing or sales employees to provide services to any affiliated GENCO or ESCO relating to business within the Delivery Company's service territory. The unregulated affiliate shall compensate the Delivery Company for the services of employees at the higher of the employees' fully-loaded cost or the price that the Delivery Company would charge a third party for such employees' services. This guideline will not operate as a limitation on the projections of revenues from such services adopted for ratemaking purposes. c) Subject to the provisions of this Appendix, the Company's unregulated affiliates may provide services to the Delivery Company. Any management, construction, engineering or similar contract between the Delivery Company and an affiliate and any contract for the purchase by the Delivery Company from an affiliate of electric energy or gas will be filed with the Public Service Commission pursuant to Public Service Law Section 110, and will be subject to any applicable FERC requirements. All other goods and services will be provided to the Delivery Company at a price that shall not be greater than fair market value. This guideline will not operate as a prescription of the ratemaking treatment of requested allowances for the costs of such services. d) The Delivery Company, the Holding Company, and the unregulated affiliates may be covered by common property/casualty and other business insurance policies. The costs of such policies shall be allocated among the Delivery Company, the Holding Company and the unregulated affiliates in an equitable manner. Appendix J Page 1 ACCOUNTING FOR AFFILIATE TRANSACTIONS 1.0 PURPOSE - To provide accounting guidelines for the transfer of assets and employees and the provision of goods and services among the Holding Company and its affiliates. 2.0 APPLICATION - Corporate Accounting Accounting Policies & Procedures ("APP") Accounts Payable ("AP") General Accounting and Financial Reporting ("GA") Plant Accounting ("PA") Treasury Tax Accounting Human Resources Payroll All other Applicable Organizations 3.0 PROCEDURES - 3.1 Background On October 1, 1996 in the Competitive Opportunities proceeding, Orange and Rockland Utilities, Inc. ("O&R") submitted to the New York State Public Service Commission ("PSC") a petition which set forth a plan for corporate restructuring. As part of the Settlement Agreement dated _______ regarding Competitive Opportunities for Electric Service, Case 96-E-0900, "O&R's" regulated and unregulated business would be conducted through separate corporate entities which would be direct or indirect subsidiaries of a holding company. The holding company ("HoldCo") and its subsidiaries, including the regulated company ("RegCo") are considered affiliates for purposes of this procedure. The procedures outlined herein are designed to properly allocate costs among the HoldCo, the RegCo and unregulated affiliates. 3.3 Provision of Goods and Services a) The cost allocations set forth in this procedure have been developed utilizing guidelines established by the (1) Securities and Exchange Commission's Staff Accounting Bulletin No. 55, "Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity"; and (2) Cost Accounting Standards Board's Standard 403, Appendix J Page 2 "Allocation of Home Office Expenses to Segments, " Standard 410, "Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives," and Standard 418, "Allocation of Direct and Indirect Costs." b) Expenses incurred by the RegCo and the HoldCo in support of an affiliate will be allocated directly to that affiliate to the maximum extent practicable. Expenses that are not directly allocable will be accumulated into homogenous cost categories and allocated on a cost causative basis. If cost drivers cannot be determined, then allocations will be based upon reasonable and related proportional relationships (i.e., capitalization, number of employees, revenues, etc.). c) The unregulated affiliates may provide services to the HoldCo and the RegCo. Any management, construction, engineering or similar contract between the RegCo and an affiliate and any contract for the purchase by the RegCo from an affiliate of electric energy or gas will be governed by PSL 110, subject to any applicable FERC requirements. All other goods and services will be provided to the RegCo at a price that will not be greater than fair market value, determined through reference within a specified market. In the absence of a specified market, fair market value may be determined, for example, by using independent qualified appraisers. Note: Based on net book value less deferred taxes compared to fair market value reduced by federal tax benefits previously taken. Assets valued at fair market value will be discounted for tax benefits previously utilized. 3.4 Costs Incurred by the RegCo on Behalf of Affiliates a) Direct Cost Allocations Salaries and labor related expenses incurred by the RegCo in support of affiliate activities will be directly assigned and billed to affiliates each month based on the extent practical. These charges are to be made on direct time and material basis plus appropriate overhead. Salary and labor related expenses will be charged to the affiliate based on the hours reported on the weekly or semi- monthly time report. RegCo corporate services (such as legal and accounting) will be billed on a fully-loaded cost basis. Appendix J Page 3 b) Proportional and Other Allocations 1. Allocable Charges - Category I Category I costs include all RegCo employees who provide services (both corporate and project specific) to affiliates. Costs incurred that are impractical to charge direct will be distributed based on the relationship of the expenses to the cost incurred to provide the service. Some of these costs will be based on a percentage of the base costs incurred or an average cost per activity to insure a fully loaded cost billing. See Exhibit A for a breakdown of Allocable Costs. 2. Common Services - Category II Category II identifies general corporate functions or administrative support services performing common activities applicable to all affiliates. Included in Common Services would be, but not limited to, Internal Auditing, Human Resources, Corporate Communications and Accounting. Corporate governance costs related to Board of Directors, financial communication, investor relations, and ethics would also be included in this category. c) Cost Causative Allocations 1. Administrative support services (Common Services) incurred by the RegCo on behalf of the affiliates and which cannot be allocated directly will be billed to the affiliates each month based on appropriate cost causative allocations. These administrative support services may include, but are not limited to transactions processed by the following RegCo organizations: Accounting, Office of Treasurer, Board of Directors, Tax Accounting, Corporate Communication, Ethics, Financial Forecasting & Budgets. 2. The costs associated with these administrative support services will be allocated to the affiliates, as appropriate, based on the activities and business functions and allocated based on one of the following measures: ratio of affiliates assets to total consolidated assets activity unique to a department distributed to applicable business segments. Appendix J Page 4 percentage of either payroll dollars or staffing levels of the affiliate in relation to all payroll dollars or employees percentage of affiliates operating revenue to the total operating revenue of all affiliates percentage of average net book value of the affiliates assets plus inventories to the total average net book value of assets of all affiliates the number of affiliate transactions processed in relation to the total number of transactions processed. 2. Affiliate employees may have the opportunity to participate in the benefit programs of the RegCo. These programs may include medical and hospitalization coverage as well as pension and other post retirement benefits. The RegCo will be reimbursed by the affiliates for costs associated with these benefits based on the fringe benefit applied to the salary of the affiliates employees. 3. The RegCo, the HoldCo, and the unregulated affiliates may be covered by common property/casualty and other business insurance policies. The costs of such policies will be allocated among the RegCo, the HoldCo and the unregulated affiliates in accordance with the use, occupancy and/or liability risk being insured. 3.5 Costs Incurred by the HoldCo on Behalf of Affiliates a) Costs incurred by the HoldCo that are specifically attributable to the affiliates will be charged to the affiliates by direct cost allocations (as described in Section 3.4a) or cost causative allocations (as described in Section 3.4b and 3.4c). b) Costs incurred by the HoldCo that are of a general corporate nature, such as organization costs and development stage activities, will be charged to the affiliates by proportional cost allocations (as described in Section 3.4c). 4.0 EXHIBIT Exhibit A-Allocation of Expenses Between the RegCo and Affiliates Appendix J Page 5 EXHIBIT A ORANGE AND ROCKLAND UTILITES, INC. ALLOCATION OF EXPENSES BETWEEN THE HOLDCO AND/OR REGCO AND AFFILIATES Description of Expense Basis for Allocation 1) Compensation A) Salaries Number of hours devoted to affiliate operation or percentage of time. B) Other Compensation Includes deferred compensation and imputed income. Allocated on same basis as salaries. C) Support Services Allocated on basis of utilization of individuals for whom support work is performed. (e.g. information technology, security, safety.) D) Fringe Benefits Corporate fringe benefit rate to be applied to all straight-time labor 2) Employee Expenses A) Office Space Charged at the market rate per square foot, including utilities and building service maintenance (as provided by the Real Estate Department); multiplied by the space utilized (as provided by Facilities Management). B) Office Supplies & Expenses Overhead percentage to be applied (excluding expenses directly to total salary and other assignable to the affiliate compensation (based on RegCo ratio or included in the office of Office Supplies and space charge) Expenses-PSC Account 921, less Building Service costs and Administrative and General Salaries). Appendix J Page 6 3) Corporate Governance Expenses Weighting of affiliate assets, employees, and revenue contribution to consolidated assets, employees and revenues. (also applies to corporate fiscal expenses and outside services performed for consolidated group. 4) Other Expenses Directly These costs will be charged to an Assignable to Affiliates affiliate account and paid directly by the affiliate. Appendix K Page 1 Interdepartmental Transfers The Company's submission to the Commission to modify its Fuel Adjustment Clause and Gas Adjustment Charge will be consistent with the following principles: 1. The existing agreement in which the Company's gas department provided a bundled gas service (i.e., acquired gas and transported from production area to generation site) for generation is changed. 2. The new agreement functionally separates the electric and gas departments' business relationship. Electric department will now purchase gas separate from the gas department. 3. The gas department will not be obligated to provide gas services (including natural gas, transportation, capacity or balancing services upstream of the citygate) to electric department, except: under separately negotiated contracts at market based prices. 4. The new Transportation price will incorporate a charge of $0.05 per Mcf for all volumes transported to the electric department by the gas department, but in no event will the total annual charge be less than $1.275 million (Bowline By-Pass). 5. All gas transactions between gas and electric business units will be arms length, with separate purchasing personnel. 6. Negotiated agreements between gas and electric departments will be at posted bulletin board prices (market prices), consistent with FERC standards and regulations. Copies of agreements will be filed with the Commission by the gas business unit. This will include: transportation and capacity services from production areas to citygate (i.e., all upstream capacity); price of gas (commodity) sold; and balancing services. 7. Absent a separate balancing agreement approved by the Commission, the electric department must balance its gas deliveries to the citygate and from the citygate to the generator site within the limits established for transportation customers, as described in the gas transportation tariff, or face penalty charges detailed in the gas tariff. 8. Expenditures associated with the upgrade of the existing pipeline to Bowline, in order to allow the pipeline to operate it at a higher pressure, and not for instance due to general safety considerations, will be allocated to the Company's electric department. EX-27 4
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORANGE AND ROCKLAND UTILITIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 3-MOS DEC-31-1997 MAR-31-1997 PER-BOOK 902,297 17,515 204,339 160,535 0 1,284,686 68,271 127,521 189,469 385,261 394 42,844 281,675 3,330 0 98,900 78,074 0 0 0 394,208 1,284,686 243,302 4,905 220,916 225,821 17,481 (2,577) 14,904 7,988 6,916 700 6,216 8,807 6,150 6,905 0.46 0
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