-----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, KGajgIun45ObQlzw+lxhJH4HCG5S+J5ULIu6wBADF5h4vw7CzH6/hQA73liROCtC ppsGhqpBWm7AfO8cmCoHnA== 0000074778-97-000031.txt : 19971113 0000074778-97-000031.hdr.sgml : 19971113 ACCESSION NUMBER: 0000074778-97-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-04315 FILM NUMBER: 97716875 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 September 30, 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 13,654,859 shares (Class) (Outstanding at October 31, 1997) TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets (Unaudited) at September 30, 1997 and December 31, 1996 1 Consolidated Statements of Income (Unaudited) for the three months and nine months ended September 30, 1997 and September 30, 1996 3 Consolidated Cash Flow Statements (Unaudited) for the nine months ended September 30, 1997 and September 30, 1996 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 24 ITEM 6. Exhibits and Reports on Form 8-K 27 Signatures 28 PART I. FINANCIAL INFORMATION Item I. Financial Statements ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) Assets
September 30, December 31, 1997 1996 (Thousands of Dollars) Utility Plant: Electric $1,036,481 $1,023,796 Gas 229,207 219,712 Common 62,348 59,589 Utility Plant in Service 1,328,036 1,303,097 Less accumulated depreciation 466,100 440,333 Net Utility Plant in Service 861,936 862,764 Construction work in progress 58,323 36,879 Net Utility Plant 920,259 899,643 Non-utility Property: Non-utility property 11,702 17,818 Less accumulated depreciation, depletion and amortization 1,078 2,344 Net Non-utility Property 10,624 15,474 Current Assets: Cash and cash equivalents 2,985 3,321 Temporary cash investments - 1,289 Customer accounts receivable, less allowance for uncollectible accounts of $2,391 and $2,391 57,237 60,992 Accrued utility revenue 14,587 22,773 Other accounts receivable, less allowance for uncollectible accounts of $303 and $258 9,004 7,648 Materials and supplies (at average cost) 38,452 35,595 Prepaid property taxes 32,547 20,051 Prepayments and other current assets 34,000 21,540 Total Current Assets 188,812 173,209 Deferred Debits: Income tax recoverable in future rates 74,187 74,198 Deferred revenue taxes 12,697 14,271 Deferred pension and other postretirement benefits 9,580 9,922 IPP settlements 16,655 24,065 Unamortized debt expense (amortized over term of securities) 10,617 10,046 Other deferred debits 27,588 37,072 Total Deferred Debits 151,324 169,574 Total $1,271,019 $1,257,900 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) Capitalization and Liabilities
September 30, December 31, 1997 1996 (Thousands of Dollars) Capitalization: Common stock (13,654,752 & 13,654,121 shares outstanding) $ 68,274 $ 68,271 Premium on capital stock 133,627 133,616 Capital stock expense (6,111) (6,097) Retained earnings 182,029 192,060 Total 377,819 387,850 Non-redeemable preferred stock (428,443 shares outstanding) 42,844 42,844 Non-redeemable cumulative preference stock (11,746 and 12,180 shares outstanding) 383 397 Total Non-Redeemable Stock 43,227 43,241 Long-term debt 276,642 281,622 Total Capitalization 697,688 712,713 Non-current Liabilities: Reserve for claims and damages 4,130 3,843 Postretirement benefits 15,014 15,213 Pension costs 42,078 37,421 Obligations under capital leases 1,681 - Total Non-current Liabilities 62,903 56,477 Current Liabilities: Notes payable and obligations due within one year 177,755 161,963 Accounts payable 82,360 67,449 Accrued Federal income and other taxes 1,120 1,024 Refundable fuel and gas costs 5,462 4,943 Refunds to customers 1,386 1,816 Other current liabilities 29,446 35,800 Total Current Liabilities 297,529 272,995 Deferred Taxes and Other: Deferred Federal income taxes 190,140 185,156 Deferred investment tax credits 14,697 15,292 Accrued IPP settlement agreements - 2,000 Accrued Order 636 transition costs 1,340 11,620 Other deferred credits 5,810 7,983 Total Deferred Taxes and Other 211,987 222,051 Net Liabilities (Assets) of Discontinued Operations (Note 6 ) 912 (6,336) Total $1,271,019 $1,257,900 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (Thousands of Dollars) Operating Revenues: Electric $145,244 $144,506 $364,224 $373,297 Gas 14,364 15,589 117,415 125,681 Total Utility Revenues 159,608 160,095 481,639 498,978 Diversified Activities 120 433 602 1,108 Total Operating Revenues 159,728 160,528 482,241 500,086 Operating Expenses: Operations: Fuel used in electric production 25,149 21,615 53,332 41,816 Electricity purchased for resale 14,568 14,719 47,428 58,946 Gas purchased for resale 7,978 8,592 69,896 74,240 Other expenses of operation 37,790 35,038 106,697 110,813 Maintenance 8,724 8,400 26,711 26,842 Depreciation and amortization 8,871 9,164 27,087 23,054 Taxes other than income taxes 24,592 25,220 74,179 76,064 Federal income taxes 8,315 10,954 18,707 22,003 Total Operating Expenses 135,987 133,702 424,037 433,778 Income from Operations 23,741 26,826 58,204 66,308 Other Income and (Deductions): Allowance for other funds used during construction 30 4 64 13 Investigation costs 625 (200) (2,765) (1,000) Other - net (88) 81 663 (2,228) Taxes other than income taxes (68) (33) (200) (181) Federal income taxes 65 42 1,455 504 Total Other Income and (Deductions) 564 (106) (783) (2,892) Income Before Interest Charges 24,305 26,720 57,421 63,416 Interest Charges: Interest on long-term debt 5,957 6,040 18,118 18,143 Other interest 1,586 1,215 4,901 4,068 Amortization of debt premium, expense-net 412 366 1,221 1,097 Allowance for borrowed funds used during construction (347) (118) (740) (393) Total Interest Charges 7,608 7,503 23,500 22,915 Income from Continuing Operations 16,697 19,217 33,921 40,501 (continued)
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) (continued)
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 (Thousands of Dollars) Discontinued Operations (Note 6): Loss from discontinued operations net of related income taxes - (541) (6,738) (950) Estimated net loss on disposal of discontinued operations (4,129) - (8,694) - Loss with respect to discontinued operations (4,129) (541) (15,432) (950) Net Income 12,568 18,676 18,489 39,551 Dividends on preferred and preference stock, at required rates 700 755 2,099 2,268 Earnings applicable to common stock $11,868 $17,921 $16,390 $37,283 Avg. number of common shares outstanding(000's) 13,654 13,654 13,654 13,654 Earnings Per Average Common Share Outstanding: Continuing Operations $1.17 $1.35 $2.33 $2.80 Discontinued Operations - (.04) (.49) (.07) Estimated net loss on disposal (.30) - (.64) - Total $ .87 $1.31 $1.20 $2.73 Dividends declared per common share outstanding $ - $ - $1.94 $1.94 The accompanying notes are an integral part of these statements.
ORANGE AND ROCKLAND UTILITIES, INC. AND SUBSIDIARIES Consolidated Cash Flow Statements (Unaudited)
Nine Months Ended September 30, 1997 1996 (Thousands of Dollars) Cash Flow from Operations: Net income $18,489 $39,551 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,751 24,658 Deferred Federal income taxes 4,637 5,504 Deferred investment tax credit (595) (607) Deferred and refundable fuel and gas costs 519 (372) Allowance for funds used during construction (804) (406) Other non-cash charges 2,833 3,172 Changes in certain current assets and liabilities: Accounts receivable (net) and accrued utility rev. 10,585 8,384 Materials and supplies (2,857) (3,533) Prepaid property taxes (12,496) (8,536) Prepayments and other current assets (12,460) (1,713) Operating accounts payable 14,911 22,754 Accrued Federal Income and other taxes 96 (375) Accrued interest (2,834) (2,767) Refunds to customers (430) (11,019) Other current liabilities (3,491) (2,152) Discontinued operations 7,248 1,668 Other-net 13,379 (10,785) Net Cash Provided from Operations 63,481 63,426 Cash Flow from Investing Activities: Additions to plant (47,822) (31,938) Temporary cash investments 1,289 1,335 Allowance for funds used during construction 804 406 Net Cash Used in Investing Activities (45,729) (30,197) Cash Flow from Financing Activities: Proceeds from: Issuance of long-term debt 20,089 26 Retirements of: Preference and preferred stock (1,390) - Long-term debt (25,252) (167) Capital lease obligations (166) (275) Net borrowings (repayments) under short-term debt arrangements* 17,180 (1,234) Dividends on preferred and common stock (28,549) (28,687) Net Cash Used in Financing Activities (18,088) (30,337) Net Change in Cash and Cash Equivalents (336) 2,892 Cash and Cash Equivalents at Beginning of Period 3,321 3,189 Cash and Cash Equivalents at End of Period $ 2,985 $ 6,081 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $25,825 $24,088 Federal income taxes $10,000 $14,281 *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 September 30, 1997, the consolidated statements of income for the three month and nine month periods ended September 30, 1997 and 1996, and the consolidated cash flow statements for the nine 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 normal recurring adjustments and the adjustments necessitated by the discontinued operations) necessary to fairly present the financial position and results of operations at September 30, 1997, and for all periods presented, have been made. The amounts in the consolidated balance sheet as of December 31, 1996 have been derived 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 periods ended September 30, 1997 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 intercompany balances and transactions have been eliminated. 4. Contingencies at September 30, 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 "Regulatory 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 simplifies the computation of earnings per share ("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. SFAS No. 128 will be effective for financial statements for periods ending after December 15, 1997, and the Company plans to adopt the statement for year-end 1997. If adopted currently, SFAS No. 128 would have a negligible impact on the Company's reported EPS. 6. NORSTAR Management, Inc. ("NMI"), a wholly-owned indirect subsidiary of the Company sold certain of the assets of NORSTAR Energy Limited Partnership ("NORSTAR"), a natural gas services and marketing company of which NMI is the general partner. The assets sold consist primarily of customer contracts and accounts receivable. NMI is expected to wind up the remaining portion of the NORSTAR business prior to December 31, 1997. In accordance with Accounting Principles Board Opinion No. 30, the financial results for this segment are reported as "Discontinued Operations." The total losses related to discontinued operations were $(4,128,911) or $(0.30) per share for the quarter ended September 30, 1997 and $(540,814) or $(0.04) per share for the quarter ended September 30, 1996. The impact of NORSTAR as reported in "Discontinued Operations" is as follows: Three Months Ended Sept. 30, 1997 1996 Gross Revenue $ - $55,723,001 Cost and Expense - 57,345,980 Loss Before Income Taxes - (1,622,979) Provision for Taxes - (1,082,165) Loss from Discontinued Operations - (540,814) Estimated Loss on Disposal (net of tax benefits of $1,934,301) (4,128,911) - Total Loss Related to Discontinued Operations $(4,128,911) $ (540,814) Sept. 30, 1997 Dec. 31, 1996 Assets: Current Assets $ 7,893,167 $ 49,515,807 Fixed Assets 295,479 1,532,565 Other Assets 643,736 2,416,712 Total Assets 8,832,382 53,465,084 Liabilities: Current Liabilities 8,709,723 46,054,645 Other Liabilities 1,034,966 1,073,987 Net Liabilities (Assets) of Discontinued Operations $ 912,307 $ (6,336,452) 7. The Company experienced a major storm on April 1, 1997. On June 27, 1997, the Company filed a petition with the New York Public Service Commission ("NYPSC") to defer and recover the $2.8 million of incremental costs incurred in its New York service area during this event. The Company continues to defer these charges pending final resolution by the NYPSC. 8. Certain amounts from prior years have been reclassified to conform with the current year presentation. 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 from continuing operations for the third quarter of 1997 were $1.17 as compared to $1.35 for the third quarter of 1996. The Company's consolidated loss per average common share outstanding from discontinued operations for the third quarter of 1997 was $(0.30) as compared to $(0.04) for the third quarter of 1996. Fluctuations within the components of earnings are discussed in the "Results of Operations". The average number of common shares outstanding was 13.7 million for the third quarters of both 1997 and 1996. The return from continuing operations on average common equity for the twelve months ended September 30, 1997 was 10.32% as compared to 11.49% for the twelve months ended September 30, 1996. Capital Resources and Liquidity At September 30, 1997, the Company and its utility subsidiaries had unsecured bank lines of credit totaling $100.0 million. During October 1997, unsecured bank lines of credit were increased to $200 million. The Company may borrow under the lines of credit through the issuance of promissory notes to commercial banks or use such lines of credit to support fully commercial paper borrowings, which are issued through dealers. The aggregate amount of borrowings through the issuance of promissory notes and commercial paper cannot exceed the Company's aggregate lines of credit. Through September 30, 1997, such lines of credit were used to support fully the Company's commercial paper borrowing; however, during October the Company issued $78.0 million of promissory notes to banks to finance temporarily maturing issues of long-term debt, as described below. The Company's authority to issue promissory notes and commercial paper was increased by the Federal Energy Regulatory Commission, effective October 1, 1997 through September 30, 1999, to up to $200 million, at any one time outstanding, from $125 million at September 30, 1997. The average daily balance of short-term borrowings for the nine months ended September 30, 1997 amounted to $99.0 million at an effective interest rate of 5.8% as compared to $58.5 million at an effective interest rate of 5.7% for the same period of 1996. The average daily balance of temporary cash investments for the nine months ended September 30, 1997 was $0.9 million with an effective interest rate of 5.2% compared to $1.4 million at an effective interest rate of 5.1% for the same period of 1996. The 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, however, common stock used to satisfy the requirements of the DRP and ESPP is being purchased on the open market. On October 1, 1997 the Company's First Mortgage Bonds, Series I, 6 1/2% (the "Series I Bonds") in the principal amount of $23 million were repaid at maturity. The Series I Bonds were the final series of bonds outstanding under the Orange and Rockland Utilities, Inc. First Mortgage Indenture. The indenture under which the Company's debentures are issued contains a covenant restricting the issuance by the Company of secured indebtedness while any securities are outstanding under the debenture indenture. The covenant prohibits the Company from issuing additional bonds under the First Mortgage Indenture. In addition, on October 15, 1997 the Company's Debentures, Series B, 6 1/2% (the "Series B Debentures") in the principal amount of $55 million were repaid at maturity. Funds required for the repayment of the Series I Bonds and the Series B Debentures, which totaled $78 million, were provided by the issuance of promissory notes, pending the anticipated issuance by the Company of $80 million of debentures during the fourth quarter of 1997, the proceeds of which will be primarily used to repay such promissory notes. On July 18, 1997, the Company filed a petition with the NYPSC for approval to repurchase up to 700,000 shares of its common stock and to issue up to $25 million of unsecured debt obligations. If the petition is approved, the Company will repurchase stock from time to time, not later than December 31, 1999 in the open market or through privately negotiated transactions. The proceeds of the debt issue will be used to provide funds for the common stock repurchase. The Company currently has no other plans for the issuance of additional debt or equity securities, with the exception of the expected issuance of debentures discussed above. It is expected that all other capital requirements will be met with funds from operations, supplemented with short-term debt as required. Regulatory Activities New York On November 6, 1997, the Company, the New York State Department of Public Service (the "Staff") and other parties entered into, and filed with the NYPSC, an Electric Rate and Restructuring Plan (the "Restructuring Plan") in Case 96-E-0900, the NYPSC Competitive Opportunities Proceeding, which provides for the sale of all of its generating assets (i.e., all units at the Lovett and Bowline Generating Stations, hydro-electric facilities and gas turbines) and for lower electric rates. The Restructuring Plan supersedes the settlement agreement the Company entered into on March 25, 1997 with the Staff and other parties in this case. The NYPSC had found the March 25, 1997 settlement agreement unacceptable and on September 10, 1997, directed the Company, the Staff and other parties to resume negotiations to modify it. The Company anticipates that the Restructuring Plan will be addressed by the NYPSC on November 25, 1997. Under the terms of the Restructuring Plan, which covers a four- year period commencing with NYPSC approval, the Company has agreed to commence immediately the process of auctioning all of its generating assets. The Company will not be a bidder in the auction. The Restructuring Plan provides that if the Company selects a winning bidder prior to May 1, 1999, the New York share of any net book gains associated with the sale are to be allocated between shareholders and customers on a 25/75 basis, respectively, and any net book losses are to be allocated between shareholders and customers on a 5/95 basis, respectively. If the Company selects a winning bidder on or after May 1, 1999, the New York share of the net book gains or losses associated with sale are to be allocated between shareholders and customers on a 20/80 basis, respectively. The Restructuring Plan further provides for a $20 million cap on the New York share of net book gains allocable to shareholders from the sale of generating assets. In addition, the terms of the Restructuring Plan permit the Company to defer and recover up to $7.5 million (New York electric share) of prudent and verifiable non-officer employee costs, such as retraining, outplacement, severance, early retirement and employee retention programs associated with the divestiture. Under the terms of the Restructuring Plan, the Company will be authorized to petition the NYPSC for recovery of employee costs in excess of $7.5 million. In addition, the terms of the Restructuring Plan permit the Company to retain all earnings up to an 11.4% return on equity and further provide that earnings in excess of 11.4% are to be shared, with 75% to be used to offset NYPSC approved deferrals or otherwise inure to the Company's customers, and 25% to be retained by the Company's shareholders. The Restructuring Plan further provides that full retail access to a competitive energy and capacity market will be available for all customers by May 1, 1999. The Company's existing PowerPick(TM) Program, whereby customers can purchase energy (but not capacity) from suppliers other than the Company, would be expanded to all customers on May 1, 1998. The Restructuring Plan also provides for electric price reductions of approximately $32.4 million over its four-year term and for recovery of above market generation costs should the transfer of title to the Company's generating assets not occur before May 1, 1999, through a Competitive Transition Charge (the "CTC"). Should a CTC be required, the Company would be authorized to recover the difference between its non-variable costs of generation, including 75% of fixed production labor expenses and property taxes, and the revenues, net of fuel and variable operating and maintenance ("O&M") expenses, derived from the operation of the Company's generating assets in a deregulated competitive market. If title to the generating assets has not transferred as of May 1, 2000, the CTC would be modified so as to allow a maximum recovery of only 65% of fixed production labor expenses and property taxes. The modified CTC would remain effective until the earlier of the date title to the generating assets is transferred or October 31, 2000. In the event title to the generating assets is not to be transferred by October 31, 2000, the Company would be authorized to petition the NYPSC for permission to continue a CTC until the date title to the generating assets is transferred. The CTC does not allow for the recovery of inflationary increases in non-fuel O&M production costs, property tax increases, wage rate increases, or increased costs associated with capital additions or changes in the costs of capital applicable to production costs. The Restructuring Plan also provides that the Company and its utility subsidiaries are to apply to the appropriate regulatory authorities for the permission required to form a new holding company, which would be a registered holding company under the Public Utility Holding Company Act of 1935 (the "1935 Act"). The Company currently is an exempt holding company under the 1935 Act. The new holding company structure would provide for separate regulated electric distribution companies in the New York, New Jersey and Pennsylvania service territories, as well as an unregulated energy services company. The Company would continue as the New York regulated electric distribution company. The formation of the holding company is conditioned upon shareholder and regulatory approval, including approval of the Securities and Exchange Commission, the Federal Energy Regulatory Commission, the NYPSC, the New Jersey Board of Public Utilities and the Pennsylvania Public Utility Commission. The unregulated energy services company would be able to market electricity and unbundled energy services (e.g., metering) to wholesale and retail customers on a competitive basis using the Company's name without a royalty payment. Reference is made to Exhibit 99.7 of this Form 10-Q Quarterly Report which contains the full text of the Restructuring Plan. It is not possible to predict whether the NYPSC will approve the Restructuring Plan in its present form, or with modifications, or to predict the outcome of the New York Competitive Opportunities proceeding or its effect on the Company's consolidated financial position or results of operations. On June 5, 1997, the NYPSC issued an Order Requiring the Filing of Proposals to Ameliorate Gas Price Volatility and Requesting Comments in Case 97-G-0600, In the Matter of the Commission's Request for Gas Distribution Companies to Reduce Gas Cost Volatility and Provide for Alternative Gas Purchasing Mechanisms. Under the Order, gas utilities in New York were required to submit proposals for fixed price gas sales options to be available for use by all customers during the 1997-1998 heating season. In addition, the NYPSC directed the utilities to review their gas procurement practices and to develop an acquisition strategy to include a mix of purchase options comprised of, but not limited to, indices, spot purchases and financial transactions with a view toward fostering gas price stability. On August 4, 1997, the Company filed a multi-part proposal in response to the NYPSC's Order. The proposal provided, in part, for the Company to use financial derivatives to hedge an unspecified portion of its gas supply portfolio for the upcoming winter with the costs associated with the hedging activity to be recovered by the Company through its gas adjustment clause. The proposal also included a new tariff which would allow the Company to negotiate the commodity price of gas with its larger customers. Pursuant to further direction of the NYPSC, the Company revised its proposal in this proceeding on September 26, 1997. The revised proposal provides for a five-month, fixed- price option to be available to firm sales customers for the 1997- 1998 heating season. The fixed-price option will lock in only the commodity cost of gas. The option will be limited to ten percent of customers in each eligible customer class. By order issued October 7, 1997, the NYPSC provided that costs associated with any variations between gas utilized by customers electing the fixed price option and volumes locked in by the Company, to the extent prudently incurred, will be recoverable. The October 7 Order requires the Company to file tariff sheets implementing its fixed price option. The tariff sheets will become effective in November 1997 but will be subject to NYPSC review. On September 4, 1997, the NYPSC issued a Notice Inviting Comments on Staff's Report in Case 97-G-1380, In the Matter of Issues Associated with the Future of the Natural Gas Industry and the Role of Local Gas Distribution Companies ("LDCs"). The Notice invites comments by November 20, 1997, on the Staff's Position Paper entitled "The Future of the Natural Gas Industry." The primary conclusion of the Staff's Position Paper is that over the next five years, LDCs in New York should transition out of the business of selling gas. Staff believes that this action is necessary in order to encourage competition and provide gas customers with choice in the marketplace. The Position Paper sets forth Staff's recommendations towards accomplishing the goal of removing LDCs from the merchant function. In addition, the Paper identifies, discusses and requests comments on the following three impediments to LDCs terminating their gas merchant role: (1) upstream pipeline capacity held by LDCs; (2) the LDCs' supplier of last resort and obligation to serve responsibilities; and (3) system reliability and operational integrity issues. The Company anticipates filing comments on the Position Paper by November 20, 1997. It is not possible to predict the outcome of this proceeding or its effect on the Company's consolidated financial position or results of operations. New Jersey On April 30, 1997, the New Jersey Board of Public Utilities ("NJBPU") issued an order "Adopting and Releasing Final Report in its Energy Master Plan Phase II Proceeding to Investigate the Future Structure of the Electric Power Industry (Docket No. EX 94120585Y)." The Order required the Company's subsidiary, Rockland Electric Company ("RECO"), and other New Jersey investor owned electric utilities each to file unbundled rates, a stranded cost proposal and a restructuring plan by July 15, 1997. As part of its stranded cost proposal, the NJBPU has recommended that each utility should provide a 5-10% rate reduction. RECO's filing was made on July 15, 1997. The filing includes a Restructuring Plan, a Stranded Costs Filing and an Unbundled Rates Filing. The Restructuring Plan calls for RECO to remain a regulated transmission and distribution company within a registered holding company structure. Standards of Conduct and Affiliate Rules have been proposed in order to promote effective competition and ensure that regulated operations do not subsidize unregulated operations. RECO has proposed to implement full retail competition (energy and capacity) for all customers by May 1, 1999. Under this schedule, full retail access will be achieved 13 months ahead of the NJBPU's proposed phase-in schedule. In its Stranded Costs Filing, RECO has identified two categories of potential stranded costs: generation investment and power purchase contracts with non-utility generators ("NUGS"). RECO proposes to recover stranded generation investment through regulated delivery rates by means of a two-part Market Transition Charge ("MTC"). The MTC would be in effect for an initial four year period during which RECO would recover 90-100% of its annual stranded costs. At the end of the four year period, a market valuation of the generation assets would be performed. Any difference between market and net book value then would be recovered over an appropriate period of time. Stranded NUG contract payments are proposed to be recovered over the remaining life of the contracts through the MTC. RECO has proposed to reduce its annual net revenue (revenue net of fuel, purchased power and gross receipts taxes) by $4.7 million or 5.6% effective in October 1998. RECO also made an Unbundled Rates Filing which separates the components of existing tariffs into production, transmission, distribution and customer cost categories. The Unbundled Rates Filing would serve as the basis to segregate the costs of the generation function from rates in order to facilitate customer choice. In addition, the MTC mechanism would be added to the existing rate structure to allow for recovery of stranded costs, and a non-bypassable societal benefits charge would be created as a billing mechanism for mandated public policy programs. On October 1, 1997, the ALJ issued a modified prehearing order in the Stranded Costs and Unbundled Rates Proceedings. Hearings will be held from February 24 through March 2, 1998, and initial and reply briefs will be due on March 13 and 27, 1998, respectively. The ALJ will issue his decision by May 15, 1998. The NJBPU has not yet established a hearing schedule for the Restructuring Proceeding. The NJBPU has indicated that it will rule on these filings by October 1998. RECO's filing may be accepted or significantly modified by the NJBPU before becoming effective. The NYPSC's action with respect to the Restructuring Plan filed in the NYPSC Competitive Opportunities Proceeding, as described in this section under the caption "New York," could change RECO's filings. It is not possible to predict the outcome of the NJBPU proceeding or its effect on the Company's consolidated financial position or results of operations. Pennsylvania On September 30, 1997, in accordance with the requirements of the Pennsylvania Electricity Generation Customer Choice and Competition Act, the Company's subsidiary, Pike County Light & Power Company ("Pike"), submitted its restructuring filing to the Pennsylvania Public Utility Commission ("PPUC"). In this filing, Pike proposed that full retail competition be implemented for all customers by May 1, 1999. With the implementation of retail competition, Pike proposes to continue to serve as the "provider of last resort" for those consumers who do not choose an alternate provider, or whose alternate provider defaults. Pike proposed to remain a regulated transmission and distribution company within a registered holding company structure. Pike also submitted proposed unbundled rates which separate the components of existing tariffs into production, transmission, distribution and customer cost categories. It is expected that the PPUC will rule on Pike's restructuring filing by June 1998. Pike's filing may be accepted or significantly modified by the PPUC before becoming effective. The NYPSC's action with respect to the Restructuring Plan filed in the NYPSC Competitive Opportunities Proceeding, as described in this section under the caption "New York," could change Pike's filings. It is not possible to predict the outcome of the PPUC proceeding; however, it is not expected that this proceeding will have a material effect on the Company's consolidated financial position or results of operations. QUARTERLY COMPARISON Results of Operations The Company's total consolidated earnings per average common share outstanding for the third quarter of 1997 amounted to $0.87 per share as compared to $1.31 per share for the third quarter of 1996. The majority of this quarter's decline resulted from the provision of additional losses for NORSTAR to dispose of its discontinued operations. In addition, earnings from continuing operations decreased as a result of a shift in the electric sales mix, resulting in lower margin, slightly offset by higher electric sales of 1.3 percent as well as increases in certain operating expense when compared with the same period a year ago. Electric and Gas Revenues Electric and gas operating revenues, including fuel cost and purchased gas cost recoveries, decreased by $0.5 million. The timing of fuel cost recoveries had a negative effect on revenues in the third quarter of 1997 as compared to the same quarter of 1996. Electric operating revenues during the current quarter were $145.2 million as compared to $144.5 million for the third quarter of 1996, an increase of $0.7 million. This increase was the result of higher fuel cost recoveries, slightly higher sales and higher sales to other utilities. Actual total sales of electric energy to retail customers during the third quarter of 1997 were 1,298,466 megawatt hours ("Mwh"), compared with 1,281,021 Mwh during the comparable period a year ago. Revenues associated with these sales were $141.2 million during the current quarter compared to $141.9 million during the third quarter of 1996. This decrease in revenue is attributable to changes in the sales mix offset by higher fuel cost recoveries and slightly higher sales. Sales to other utilities for the third quarter of 1997 amounted to 124,585 Mwh with revenues of $2.8 million compared to 84,258 Mwh and revenues of $1.6 million in 1996. Revenue from these sales are primarily a recovery of costs, and under the applicable tariff regulations, have a minimal impact on earnings. Gas operating revenues during the quarter were $14.4 million compared to $15.6 million for the third quarter of 1996, a decrease of $1.2 million. This decrease is primarily the result of the timing of fuel cost recoveries. Gas sales to firm customers during the third quarter of 1997 totaled 1,566 million cubic feet ("Mmcf"), compared with 1,563 Mmcf during the same period a year ago. Gas revenues from firm customers were $10.8 million, compared with $11.7 million in the third quarter of 1996. Interruptible gas sales were 802 Mmcf for the third quarter of 1997 compared to 773 Mmcf for the same period of 1996. Revenues from interruptible customers were $2.7 million for the third quarters of both 1997 and 1996. Fuel, Purchased Electricity and Purchased Gas Costs The cost of fuel used in the production of electricity and purchased electricity costs increased by $3.4 million during the third quarter of 1997 when compared to the same quarter of 1996. This increase reflects higher volumes of fuel and purchased power to satisfy increased demand (including sales for resale), offset slightly by a decrease in the cost of fuel. Purchased gas costs amounted to $8.0 million in the third quarter of 1997 compared to $8.6 million in 1996, a decrease of $0.6 million. This decrease in gas costs is primarily attributable to lower commodity prices for gas, partially offset by an increase in the volume of gas purchased. Other Operating and Maintenance Expenses The Company's total operating expenses excluding fuel, purchased power and gas purchased for resale for the third quarter decreased by $0.5 million compared with the same period in 1996. Utility operating expenses decreased $0.6 million, offset by an increase in diversified operations expenses of $0.1 million. The decrease in utility operating expenses is primarily the result of reductions in payroll taxes, property taxes and sales taxes of $0.3 million, reductions in revenue taxes of $0.3 million, lower depreciation and amortization of $0.3 million and lower Federal income tax expense of $2.6 million. These decreases were offset by increases in other operation and maintenance expenses of $2.9 million. Diversified Activities The Company's diversified activities, excluding the discontinued gas marketing operations, consist of energy related services and business ventures and land development businesses conducted through wholly-owned non-utility subsidiaries. Revenues from continuing diversified activities decreased by $313,000 for the third quarter of 1997 as compared to the same quarter of 1996. The estimated net loss provision to dispose of the discontinued operations of NORSTAR is $(4.1) million or $(0.30) per average common share outstanding during the third quarter of 1997 compared to an operating loss of $(0.5) million or $(0.04) per share during the third quarter of 1996. Other Income, Deductions and Interest Charges - Net Other income, net of interest charges and other deductions, increased by $0.6 million during the third quarter of 1997 when compared to the same quarter of 1996. This is primarily the result of lower investigation charges. YEAR TO DATE COMPARISON Results of Operations Earnings per average common share outstanding from continuing operations for the first nine months of 1997 amounted to $2.33 per share as compared to $2.80 per share for the first nine months of 1996. The loss per average common share outstanding from discontinued operations for the first nine months of 1997 amounted to $(1.13) per share as compared to $(0.07) per share for the first nine months of 1996. The Company's combined total consolidated earnings per average common share outstanding for the first nine months of 1997 were $1.20 as compared to $2.73 for the first nine months of 1996. The majority of the decline in earnings for the first nine months of 1997 resulted from the operating losses incurred by NORSTAR's gas marketing activities and the estimated loss to dispose of NORSTAR's discontinued operations. The nine-month decrease in earnings from continuing operations is primarily the result of lower revenue on a slightly higher level of electric sales, lower gas sales and revenue, and the recognition of the balance of costs associated with the arbitration settlement with the Company's former Chief Executive Officer in February 1997. Electric and Gas Revenues Electric and gas operating revenues, including fuel cost and purchased gas cost recoveries, decreased by $17.3 million in the first nine months of 1997 as compared to the same period of 1996. Electric operating revenues during the current nine-month period were $364.2 million as compared to $373.3 million for the first nine months of 1996, a decrease of $9.1 million. This decrease is primarily the result of base rate reductions and the timing of fuel cost recoveries. Actual total sales of electric energy to retail customers during the first nine months of 1997 were 3,522,642 Mwh, compared with 3,513,678 Mwh during the comparable period a year ago. Electric revenues associated with these sales were $356.8 million compared to $361.9 million during the first nine months of 1996 a decrease of $5.1 million. This decrease is attributable to reductions in base rates, changes in the sales mix and the timing of fuel cost recoveries. Sales to other utilities for the first nine months of 1997 amounted to 222,098 Mwh with revenues of $5.0 million compared to 155,922 Mwh and $2.6 million in 1996. Revenue from these sales is primarily a recovery of costs, which under the applicable tariff regulations, has a minimal impact on earnings. Gas operating revenues during the first nine months were $117.4 million compared to $125.7 million for the first nine months of 1996, a decrease of $8.3 million. Revenues were decreased by lower gas cost recoveries and lower sales volumes from a mild winter. Gas sales to firm customers during the first nine months of 1997 totaled 13,643 Mmcf, compared with 14,675 Mmcf during the same period a year ago. Gas revenues from firm customers were $104.5 million, compared with $109.8 million in the first nine months of 1996. Fuel, Purchased Electricity and Purchased Gas Costs The cost of fuel used in the production of electricity and purchased electricity costs remained level during the first nine months of 1997 when compared to the same period of 1996. A decrease in the commodity cost of fuel and purchased power was offset by increased demand. Purchased gas costs for utility operations were $69.9 million in the first nine months of 1997 compared to $74.2 million in 1996, a decrease of $4.3 million. This decrease in gas costs is attributable to the lower volume of gas purchased for resale and lower commodity prices. Other Operating and Maintenance Expenses The Company's total operating expenses, excluding fuel, purchased power and gas purchased for resale for the first nine months decreased by $5.4 million compared with the same period in 1996. The decrease in expenses associated with utility operating expenses amounted to $6.4 million. Diversified operation and maintenance expenses increased $1.0 million. The decrease in utility operating expenses is primarily the result of the reduction in the amortization of recoverable IPP costs of $6.5 million and a decrease in payroll taxes, property taxes and sales taxes of $0.8 million, reductions in revenue taxes of $1.2 million and Federal income tax of $3.0 million, offset by an increase in other operating and maintenance expenses of $1.0 million and an increase in depreciation of $4.1 million. The increase in depreciation is primarily the result of a regulatory adjustment made during 1996 which resulted in a reduction, in that year, in depreciation expense. Diversified Activities Revenues from diversified activities decreased by $506,000 for the first nine months of 1997 as compared to the same period of 1996. Revenues for 1996 have been restated to exclude the discontinued operations and estimated loss on disposal of NORSTAR. The net loss resulting from the discontinued operations of NORSTAR amounted to $(15.4) million or $(1.13) per average common share outstanding during the first nine months of 1997 compared to a loss of $(1.0) million or $(0.07) per share during the same period in 1996. Other Income, Deductions and Interest Charges - Net Other income, net of interest charges and other deductions, increased by $1.5 million during the first nine months of 1997 when compared to the same period of 1996. The increase reflects the impact of the reversals of previously deferred balances implemented as part of the May 3, 1996 NYPSC Order issued by the NYPSC in cases 95-E-0491 and 93-G-0779 which, among other things, provided for the elimination of substantially all of the expense reconciliation items under the previously mandated Revenue Decoupling Mechanism. Partially offsetting the increase is higher investigation costs associated with an arbitration settlement, signed in February 1997, with a former Chief Executive Officer and higher interest expense on short term debt. 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 year ended December 31, 1996 and to Part II, Item I, Legal Proceedings, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, for a description of litigation entitled Town of Wallkill and State of New York v. Tesa Tape, Inc., et al. On September 18, 1997, the parties reached a global settlement of the above case. As part of that global settlement, the Company's settlement amount was increased from $125,000 to $135,000. The Court has formally approved the Consent Decree incorporating the Company's settlement(which, except for the increased settlement amount, contains the provisions described in Item I, Legal Proceedings, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and to Part II, Item 1, Legal Proceedings, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, for a description of a remedial investigation of a property owned by the Company in West Nyack, New York. On or about August 28, 1997, the New York State Department of Environmental Conservation ("NYSDEC") issued a Proposed Remedial Action Plan ("PRAP") which, inter alia, approved a Feasibility Study Report submitted by the Company in November 1996 and proposed a remedy for clean-up of the soil contamination at the site. A public meeting was held on September 9, 1997 to discuss the PRAP, and the deadline for submission of written comments to the NYSDEC was September 29, 1997 (no comments were submitted to the NYSDEC). The NYSDEC has issued a Record of Decision ("ROD"), dated October 20, 1997, which provides for the removal and off-site disposal of soils contaminated with polychlorinated biphenyls and other petroleum-related contaminants, as well as the post-remedial monitoring of groundwater. The Company and the NYSDEC are negotiating a Consent Order to implement the clean-up provided for by the ROD. The Company does not believe that this matter will have a material effect on the financial condition of the Company. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, for a description of a petition filed by the Company, the six other New York State investor-owned electric utilities, and the Energy Association of New York State ("Petitioners") in the New York State Supreme Court pursuant to Article 78 of the New York Civil Practice Law and Rules challenging the NYPSC's May 20, 1996 Order in the Competitive Opportunities Proceeding, NYPSC Case 94- E-0952. On or about October 31, 1997, the Supreme Court of the State of New York, Appellate Division, Third Department, granted the Petitioners' motion for an extension of time to perfect the appeal for a period of six months through and including March 24, 1998. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and to Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, for a description of the NYPSC Competitive Opportunities Proceeding (Case Nos. 94-E-0952 and 96-E-0900). Reference is also made to the earlier discussion in this Form 10-Q Quarterly Report under the caption "Regulatory Activities" in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, concerning the Rate and Restructuring Plan entered into by the Company, the Staff and other parties and filed with the NYPSC on November 6, 1997 in the NYPSC Competitive Opportunities Proceeding. The Company is unable to predict the outcome of this regulatory proceeding or the effect on the Company's consolidated financial position or results of operations. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and to Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and in this Form 10-Q Quarterly Report, for a description of the New Jersey Board of Public Utilities ("NJBPU") Energy Master Plan proceedings and RECO's filing on July 15, 1997 of a Restructuring Plan, a Stranded Costs Proposal and Proposed Unbundled Rates. Reference is also made to the earlier discussion in this Form 10-Q Quarterly Report under the caption "Regulatory Activities" in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, concerning the Rate and Restructuring Plan entered into by the Company, the Staff and other parties and filed with the NYPSC on November 6, 1997 in the NYPSC Competitive Opportunities Proceeding. Depending upon the NYPSC's action with respect to the Restructuring Plan, RECO may be required to amend its July 15, 1997 Restructuring Plan, Stranded Cost proposal and Unbundled Rates filings. It is not possible to predict the outcome of the NJBPU proceeding or its effect on the Company's consolidated financial position or results of operations. Reference is made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and to Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q Quarterly Report, for a description of the Pennsylvania Electricity Generation Customer Choice and Competition Act and the September 30, 1997 Submission by Pike County Light & Power Company ("Pike") to the Pennsylvania Public Utility Commission ("PPUC") of its restructuring filing. Reference is also made to the earlier discussion in this Form 10-Q Quarterly Report under the caption "Regulatory Activities" in Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, concerning the Rate and Restructuring Plan entered into by the Company, the Staff and other parties and filed with the NYPSC on November 6, 1997 in the NYPSC Competitive Opportunities Proceeding. Depending upon the NYPSC's action with respect to the Restructuring Plan, Pike may be required to amend its restructuring filing. It is not possible to predict the outcome of the PPUC proceeding, however, it is not expected that this proceeding will have a material effect on the Company's consolidated financial position or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits +10.49 Agreement and General Release dated August 27, 1997 between Orange and Rockland Utilities, Inc. and Larry S. Brodsky. 99.7 Settlement Agreement dated November 6, 1997 among the Registrant, the New York State Department of Public Service, the New York State Department of Economic Development, the National Association of Energy Service Companies, the Joint Supporters, the Industrial Energy Users Association, Independent Power Producers of New York, Inc. and Pace Energy Project in 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. + Denotes executive compensatory plans and arrangements. (b) Reports on Form 8-K None. 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: November 12, 1997 By ROBERT J. McBENNETT Robert J. McBennett Treasurer Date: November 12, 1997 By EDWARD M. McKENNA Edward M. McKenna Controller EX-10.49 2 AGREEMENT AND GENERAL RELEASE On this 27th day of August, 1997, Larry S. Brodsky ("Employee"), who resides at 5 Lowell Drive, New City, NY 10956, and Orange and Rockland Utilities, Inc. ("Employer") hereby knowingly and voluntarily agree to enter into this Agreement with General Release ("Agreement") in order to resolve any and all claims between them pertaining to outstanding issues and to set forth all obligations between the parties. Employee and Employer acknowledge and agree that this Agreement constitutes the sole obligation of each to the other and that no other promises, commitments or representations have been made with or by either of the parties to the other arising out of the termination of Employee's employment relationship with Employer. First: Employee has resigned his employment as President and Chief Operating Officer effective August 8, 1997. Contemporaneous with his execution of this Agreement and General Release, Employee shall execute and provide to Employer a letter of resignation in a form attached hereto as Exhibit A. Second: Employer agrees to pay to Employee as severance his base salary at the Employee's current salary, less applicable withholdings and deductions, until the earlier of (i) the date Employee is subsequently engaged in full-time employment; or (ii) the expiration of the two (2) year period commencing on August 8, 1997 (hereinafter the "severance period"). Such payments shall be made on a semi-monthly basis consistent with Employer's current payroll practices. Third: (a) Employer shall pay to Employee any payment(s) to which he may be entitled under the Annual Team Incentive Plan and under the Long-Term Performance Share Unit Plan in accordance with the terms of such plans and at such times as such payments are generally made by Employer. (b) Employer shall pay to Employee his accrued but unused vacation for 1997 up until the date of his resignation. Fourth: Employer shall provide Employee with coverage under all group health insurance benefit plans and life insurance plans in accordance with the terms of such plans to the same extent as if he remained employed by Employer until the earlier of (i) such time as Employee is entitled to receive health insurance benefits and life insurance benefits from a subsequent employer; or (ii) the end of the severance period. If health insurance benefits terminate upon the expiration of the severance period, Employee may thereafter convert his health insurance benefits at his expense in accordance with applicable law. All other benefits provided by Employer to Employee shall cease as of August 8, 1997. Fifth: Employer shall convey to Employee title to Employee's company car, a 1996 Chevrolet Blazer Sport Utility 4D, VIN # 1GNDT13W2T2149315. Any tax ramifications of such transaction shall be the sole responsibility of the Employee. Sixth: Employer shall provide, at no cost to Employee, outplacement services to Employee through an outplacement service of Employee's choosing, not to exceed a total cost of $50,000 (Fifty Thousand Dollars). Seventh: (a) As a material inducement to Employer to enter into this Agreement, and in exchange for the above stated consideration, Employee hereby irrevocably and unconditionally releases, acquits, and forever discharges Employer, and any and all of its subsidiaries, parents and affiliates, and any of its or their officers, directors, employees and agents, and all persons acting by, through, under or in concert with any of them (hereinafter the "O&R Entities and/or Persons" or "Releasees"), from any and all liabilities arising directly or indirectly out of his employment and/or the termination thereof, including any charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorney's fees and costs actually incurred), of any nature whatsoever, known or unknown, that Employee now has, owns, holds, or claims to have, own, or hold, or that Employee at any time heretofore had, owned, held, or claimed to have, own, or hold against each of the Releasees by reason of any act, omission, transaction, practice, conduct, occurrence or other matter up to and including the date of this Agreement. (b) Without limiting the generality of the foregoing, this instrument releases Releasees from any and all claims, whether asserted and non-asserted, known or unknown, that Employee now has, ever had or may have against Releasees, including, but not limited to, claims in tort, for breach of contract or employment agreements, or under any federal, state or local statute, regulation, rule, ordinance or order including, but not limited to, discrimination based on race, sex, age, religion, national origin, sexual orientation, disability, veteran status, marital status and/or retaliation. This waiver and release includes any and all claims Employee may have under the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans With Disabilities Act, the New York Human Rights Law and the Employee Retirement Income Security Act. (c) Employee covenants that he shall not at any time hereafter commence, maintain, prosecute, participate in, or permit to be filed by any other person on his behalf, any action, claim, suit, complaint or proceeding of any kind against any of the Releasees with respect to any claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorney's fees and costs actually incurred), of any nature whatsoever, known or unknown, including, but not limited to, any claims asserted and non-asserted which he may have in tort, for breach of contract or employment agreements or under any federal, state or local statute, regulation, rule, ordinance or order, that he now has, owns, holds, or claims to have, own, or hold, or which he at any time heretofore had, owned, held, or claimed to have, own, or hold against any of the Releasees. Eighth: (a) Employee agrees not to directly or indirectly take, support, encourage or participate in any action or attempted action which in any way would damage the reputation or business relationships of Releasees. Employee further agrees that he will not disparage the Releasees in any way and will only speak about the Releasees in positive terms. Employer agrees that, upon any inquiry regarding Employee, his employment, or his resignation, Employer will respond by (i) confirming dates of employment and position held; and (ii) stating that Employee resigned his employment with Employer to pursue other interests. (b) Employee agrees that he will cooperate with the Employer as necessary in any legal disputes and/or proceedings relating to issues and/or incidents that took place during his term of employment. (c) The Employee shall not publish or disclose any confidential information of the Releasees. The Employee further promises not to use any such confidential information for his own personal use or advantage. The Employee hereby warrants that prior to his execution of this Agreement he has not published or disclosed any confidential information of the Releasees. All information regarding the Releasees' business, whether written or not, is presumed to be confidential, except to the extent the same shall have been lawfully and without breach of confidential obligation made available to the general public without restriction. (d) Employee agrees that contemporaneous with the effective date of this Agreement he shall return to the Employer any and all property of the Releasees, including, but not limited to, any proprietary or confidential information and/or documentation relating to the business of any of the Releasees in his possession or under his direction and/or control, including, but not limited to, any and all of the Employer's documents, books, notes, memoranda, records, statements, plans, policies, programs, and or tapes (computer, cassette or video), and any information related to the Employer's business that may be stored on computer (hard or floppy) disks. Employee's right to receive severance pursuant to the Second paragraph of this Agreement shall not be effective until Employee fully and completely performs all obligations undertaken by him pursuant to this paragraph of the Agreement. (e) The Employee acknowledges that the restrictions contained in this paragraph are reasonable and necessary to protect the business and interests of the Employer and that any violation of these restrictions will cause substantial or irreparable injury to the Employer. Therefore, the Employee agrees that, in addition to any other remedies to which it may be entitled under applicable law, and notwithstanding the arbitration provisions of the Thirteenth paragraph of this Agreement, the Employer is entitled to preliminary and permanent injunctive relief in a judicial proceeding commenced to secure specific performance or to prevent any breach of this paragraph. (f) The restrictions set forth in this paragraph shall be construed as independent covenants, and the existence of any claim or cause of action against the Employer, whether predicated upon this Agreement or otherwise, shall not constitute any defense to the Employer's enforcement of the restrictions contained in this paragraph. Ninth: Employee hereby agrees and acknowledges that the payments and other consideration provided for in this Agreement (i) exceed any payment, benefit, or other thing of value to which Employee might otherwise be entitled under any policy, plan or procedure of Employer; and (ii) are in full discharge of any and all of Employer's liabilities or obligations to Employee, including but not limited to any and all obligations arising under any written or oral agreements, understandings or arrangements between Employee and Employer. Tenth: Employee and Employer acknowledge that the existence and terms of this Agreement and all discussions leading up to it are confidential. Employee agrees that he will not divulge either the existence or the terms of this Agreement to any third party, except his immediate family and attorney. Eleventh: Employee acknowledges that he has been advised in writing to consult with an attorney before signing this Agreement; that he has been represented by counsel or has had a reasonable opportunity to consult with counsel in connection with the execution of this Agreement; and that he has had the opportunity to consider the terms of this Agreement, including, but not limited to, the Seventh paragraph of this Agreement, for a period of twenty-one (21) days prior to its execution. Employee further acknowledges that he has read this Agreement in its entirety; that he fully understands all of its terms and their significance; that he has signed it voluntarily and of his own free will; and that he intends to abide by its provisions without exception. Twelfth: This Agreement constitutes the entire agreement between the parties. Any amendments to or changes in the obligations created by this Agreement shall not be effective unless reduced to writing and signed by the parties. All prior written or oral agreements between Employer and Employee are hereby terminated and expressly disavowed. This Agreement shall be construed under New York law. Thirteenth: Except as provided in the Eighth paragraph of this Agreement, any and all disputes that may arise from or in connection with this Agreement shall be submitted to final and binding arbitration through the processes of the American Arbitration Association in New York, NY. Fourteenth: This Agreement and the payment of any consideration hereunder shall not be construed as an admission of any kind whatsoever on the part of Employer, and/or any of its subsidiaries, parents or affiliates, their officers, agents, representatives or employees. Fifteenth: This Agreement shall not become effective until the eighth day following Employee's execution of this Agreement and Employee may at any time prior to the effective date revoke this Agreement by giving notice in writing of such revocation to Nancy Jakobs, Vice President of Human Resources, Orange and Rockland Utilities, Inc., One Blue Hill Plaza, Pearl River, New York 10965. In the event Employee revokes this Agreement prior to the eighth day after his execution thereof, this Agreement, and the promises contained therein, shall automatically be deemed null and void. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A WAIVER AND RELEASE. To signify their agreement to the terms of this Agreement, the parties have executed this Agreement on the date set forth opposite their signatures which appear below. August 27, 1997 LARRY S. BRODSKY Date Larry S. Brodsky August 29, 1997 NANCY M. JAKOBS Date Orange and Rockland Utilities, Inc. VICE PRESIDENT, HUMAN RESOURCES EXHIBIT A August 8, 1997 Mr. D. Louis Peoples Vice Chairman and Chief Executive Officer Orange and Rockland Utilities, Inc. One Blue Hill Plaza Pearl River, NY 10965 Dear Mr. Peoples: Effective today I hereby resign my employment as President and Chief Operating Officer with Orange and Rockland Utilities, Inc. and all of its applicable subsidiaries. Very truly yours, LARRY S. BRODSKY Larry S. Brodsky EX-99.7 3 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. Electric Rate and Restructuring Plan Dated: November 6, 1997 Albany, New York Table of Contents Overview of O&R Plan i Introduction 1 Terms of Plan 4 I. Rate Plan 4 A. Electric Price Reductions 4 * Large Industrial Customers * All Other Customers * Cumulative Price Reduction Summary * Sources of Price Reductions ($000) B. Return on Equity Sharing 8 C. Performance Standards 10 D. Rate Design 10 E. Accounting Provisions 11 II. Transition to Retail Access 12 A. Sequence of Events 12 B. Reciprocity 13 C. Expansion of PowerPick(TM)Program 13 D. Full Retail Access 14 E. Unbundled Tariffs 14 F. System Benefits Charge 16 G. Low Income Program 17 III. Strandable Costs 18 A. Regulatory Assets 18 B. NUG Contract Purchased Power Costs 18 C. Divestiture 19 D. Allocation of Net Book Gains and Losses from the Disposition of Generating Assets 25 E. Other Strandable Costs 26 F. Proceeds of Divestiture 26 IV. Corporate Structure 26 A. Holding Company 26 B. Section 107 Preauthorization 27 C. Delivery Company and Affiliated ESCOs 27 D. Metering Services 29 E. Billing Services 30 F. Load Pockets 30 G. System Upgrades 30 V. Other Provisions 31 A. Force Majeure 32 B. Changes in Laws or Regulations 32 C. Confidentiality and Privileged Information 32 D. Changes in Rates 32 E. Rate Design Flexibility 32 F. Regulatory Reform and Customer Operations Procedures 33 G. Customer Outreach and Education 35 H. Interdepartmental Transfers 35 I. Other Accounting Provisions 36 J. Flex Rates and Economic Development Rate 36 K. Securitization 37 L. Gross Receipts and Franchise Taxes 37 M. Merger 37 N. Arrangements with Third Parties 37 O. Comprehensive Nature of Plan 38 P. Provisions Not Separable 38 Q. Provisions Not Precedent 38 R. Plan Modification 38 S. Term and Time Line 38 T. Effect of Plan 39 U. Dispute Resolution 40 V. Additional Public Statement Hearings 40 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. Electric Rate and Restructuring Plan Overview of O&R Plan This Electric Rate and Restructuring Plan (the "Plan") has been developed with three major goals in mind: Improve customer service and customer choice while ameliorating current price levels and introducing competition; Promote jobs and economic development in the region by significantly reducing industrial rates immediately; Continue steps taken in prior years to reduce rates for all other customers by further reducing their rates in 1997 and 1998 (with first claim going to non- Large Industrial Customers for benefits produced by the customers' share of net gains on the disposition of generating assets[1]), in order to reduce the impact of the cost of electricity on the budgets of all customers other than Large Industrial customers. The signatories to this Plan view the accomplishment of these goals as essential to the future welfare of the region. Integral to this Plan is the principle that these economic goals can be pursued successfully while maintaining reliability, quality customer service and protection; maintaining essential environmental programs; and seeking ways to reduce the effects of energy prices on low-income customers. ____________________ [1] Hereinafter referred to as "Generating Assets" which include all units at Lovett and Bowline Generating stations, the Company's hydro-electric facilities and gas turbines. Upon Commission approval, this Plan 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 Plan 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 made optional. 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. Gross Receipts Tax Reform will result in additional savings.[2] Additional benefits to all other customers, up to the equivalent of an overall 5% rate reduction, are possible should sufficient net gains on the sale of Generating Assets be realized. The cumulative rate reductions over the four-year period are approximately $32.4 million. Additional opportunities for savings for all customers will become available with the expansion of the PowerPick(TM) program and the Gross Receipts Tax Reform.[3] ___________________ [2] Additional savings of about 1% for all customers including Large Industrial Customers are expected from the recent passage of Gross Receipts Tax Reform. [3] The $32.4 million does not include: 1) an opportunity for Large Industrial Customers to realize additional savings of about 3 1/2% in annual bill reductions from the expansion of the PowerPick(TM) program, 2) an opportunity for all customers other than Large Industrial Customers to realize benefits over the term of the Plan of about 2% in annual bill reductions beginning with the expansion of PowerPick(TM) in May 1998, and 3) the Gross Receipts Tax Reform. 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. For each of the four rate years that this Plan is in effect, earnings on regulated electric operations in excess of 11.4% in New York will be shared with 75% being used to offset Commission-approved deferrals or otherwise inure to the benefit of O&R Customers; and 25% being 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 at the time of Commission approval of the Plan. O&R will file proposed unbundled rates for electric service one month after Commission approval of the Plan. Divestiture and Corporate Structure Upon Commission approval of the Plan, the Company will immediately commence a process to auction all of its electric Generating Assets. The Company will seek to restructure itself as a Registered Holding company to create structurally separate subsidiaries such as one or more unregulated Energy Services companies ("ESCOs"), and a regulated Transmission and Distribution company or Delivery company. Upon commencement of retail access, the Delivery company will provide basic energy services, including energy, capacity, ancillary services, metering and billing within the service territory. Unless and until relieved of the obligation, the Delivery 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 Delivery company. The parties have agreed to study transferring this obligation to the competitive market and will present recommendations to the Commission by May 1, 1999. After issuance of the Staff report on metering issues ordered by the Commission in Opinion No. 97-13 (August 1, 1997), and before March 31, 1999, O&R will submit a plan regarding the provision of competitive metering services by December 31, 1999. Other companies will be able to enter into the market for providing billing services to Orange and Rockland's Delivery company customers consistent with the manner and in accordance with the schedule prescribed by the Commission. Allocation of Net Book Gains and Losses from the Disposition of Generating Assets The New York share of combined net book gains/losses from the divestiture of the Generating Assets shall be allocated on the following basis:[4] - If the Company selects a winning bidder prior to May 1, 1999, any gains shall be allocated between shareholders and customers on a 25/75 basis and any losses shall be allocated between shareholders and customers on a 5/95 basis. - If the Company selects a winning bidder on or after May 1, 1999, any gains or losses shall be allocated between shareholders and customers on a 20/80 basis. - There shall be a cap of $20 million on the New York share of net book gains allocated to shareholders as a result of the divestiture of the Generating Assets. The Company will recover in full its Commission- approved regulatory assets and the remaining commitments to purchases from non-utility generators. ___________________ [4] 100% of the net book gains/losses shall be allocated among New York, New Jersey and Pennsylvania in accordance with the then-effective FERC-approved Power Supply Agreements. The sharing percentages (customers/shareholders) shall be applied to New York's share of the net book gains/losses. The parties intend that the allocation of the net book gains/losses among the three states be determined by FERC based upon appropriate consideration of the positions of the regulatory authorities in each state. 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 a downward adjustment of up to 25 basis points to the 11.4% return on equity sharing threshold. Low Income Program A Low Income Customer Assistance Program will be conducted for a four-year period for approximately 400 customers in 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 allocate up to $200,000 of DSM overcollections to support the development of a pilot program that would aggregate low income customers. Customer Outreach and Education In conjunction with the parties, 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. Up to $1 million of the present value of the fourth year equivalent of SBC funding levels will be spent on educating the Company's Residential and Commercial customers about electric competition. The Staff will develop a proposal to implement this education program and circulate it to the active parties by December 31, 1997. Public Interest Program Public interest programs will be continued through a competitively neutral Systems Benefit Charge. This summary is intended to be a general description of the terms of the Plan. The complete text of the Plan 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 (at 24-25), 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. 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 Federal Energy Regulatory Commission ("FERC") filings were necessary to implement the Independent System Operator ("ISO"), Power Exchange ("PE") and Reliability Council. 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. A Settlement Agreement was signed on March 25, 1997. Evidence relating to the terms of the proposed Settlement was submitted by the Company, the Staff and several other parties and hearings were held in Albany on May 19, 20 and 22, 1997, before Administrative Law Judge Stewart C. Boschwitz. Judge Boschwitz Recommended Decision was issued on July 2, 1997, and after briefing by the parties was considered by the Commission at its session on September 10, 1997. At that session, the Commission expressed concerns about the terms of the Settlement Agreement and directed the parties to resume negotiations to address those concerns. The parties met on September 15, 16 and 22 and October 15 and 30, 1997, participated in several conference calls and renegotiated a number of Settlement terms consistent with the concerns expressed by the Commission. This Plan was signed on November 6, 1997, by the Company, the Staff, the New York State Department of Economic Development, the Industrial Energy Users Association, the National Association of Energy Service Companies, The Joint Supporters, the Independent Power Producers of New York, Inc., and Pace Energy Project. This Plan has been reviewed and approved by Orange and Rockland's Board of Directors as submitted at the Board meeting on November 6, 1997. The term of this Plan is four years from the date of the effectiveness of new rates. The times for various actions to be accomplished by the various parties are set forth on Appendix A. Terms of Plan I. Rate Plan Orange and Rockland shall implement a rate plan for the four years beginning with the effectiveness of new rates, which shall include the following provisions. A. Electric Price Reductions In the event that the Commission approves the terms of this Plan on November 25, 1997, new rates shall become effective on November 26, 1997. Large Industrial Customers Large Industrial Customers[5] 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 $31,661 Electric Price Reductions: PowerPick(TM) Savings Opportunity[6] -.24 -$ 1,108 Scheduled Rate Reductions -.58 - 2,707 Total -.82 -$ 3,815 Average Price Opportunity 6.00 $27,846 ___________________ [5] 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% 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. [6] 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 Total Lg. Industrial -$2,707 -$2,707 -$2,707 -$2,707 All Other -3,196 -6,115 - 6,115 -6,115 Sub.Total -$5,903 -$8,822 -$8,822 -$8,822 -$ 32,369 Lg. Industrial PowerPick(TM) -$1,108 -$1,108 -$1,108 -$1,108 -$ 4,432 Total -$7,011 -$9,930 -$9,930 -$9,930 -$ 36,801 Sources of Price Reductions ($000)[7] Year 1 Year 2 Year 3 Year 4 Total PowerPick(TM)[8] -$1,108 -$1,108 -$1,108 -$1,108 Deferred Credits - 4,271 - 3,256 - 3,256 0 Expired Surcharg - 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 -$31,972 ____________________ [7] A detailed schedule of each source of price reductions is set forth in Appendix D. [8] Estimated savings for Large Industrial Customers are based on their participation in the PowerPick(TM) program for all of their energy requirements. For all other customers they are based on such customers being provided the opportunity to choose alternative providers under the PowerPick(TM) program effective May 1, 1998. 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.[9] The main objectives of this component of the Plan 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% in the first rate year, and by another 1% effective one year later. For Large Industrial Customers these price reduction opportunities are intended to remain in effect through the four-year term of this Plan; the 1.09% reduction for all other customers is intended to remain in place for the first rate year and the 2.09% reduction for all other customers is intended to remain in place through the end of the four-year term. It is the intention of the parties that cumulative rate reductions over the four-year period will equal approximately $32.4[10] million. 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. 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 customers' 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 Plan will be reflected in the unbundled Delivery rates and that the sources supporting these reductions will likewise be reflected in unbundled Delivery rates. ____________________ [9] The parties acknowledge that the difference between the cumulative price reductions and the sources of price reductions is $4,829,000 and that this Plan does not identify the sources of such price reductions. [10] This amount does not reflect the potential net book gain/loss associated with the divestiture of the Generating Assets. The $32.4 million does not include: 1) an opportunity for Large Industrial Customers to realize additional savings of about 32% in annual bill reductions from the expansion of the PowerPick(TM) program, 2) an opportunity for all customers other than Large Industrial Customers to realize benefits over the term of the Plan of about 2% in annual bill reductions beginning with the expansion of PowerPick(TM) in May 1998, and 3) the Gross Receipts Tax Reform. All parties acknowledge that there is no guarantee that the Company will realize a net book gain from the sale of the Generating Assets. In the event that the Company does realize a net book gain from the sale of the Generating Assets, the Company will file a plan with the Commission that will return the customers' share of such net gain over an appropriate period of time consistent with the principle of maintaining rate stability. These benefits will first be provided to customers other than Large Industrial Customers so that "All Other" customers could receive the annual equivalent of an additional 2.91% rate reduction that, when combined with the rate reduction of 2.09%, yields the annual equivalent of a 5% rate reduction. The parties acknowledge that such net gain, if any, may not be sufficient to provide an amount of customer benefits necessary to produce the full 2.91% equivalent rate reduction. Should the net gain be sufficient to provide customer benefits greater than the 2.91% equivalent rate reduction, the Company will propose for Commission approval the manner in which such additional benefits will be allocated among customer classes. In the event the Company realizes a net book loss from the sale of the Generating Assets, the customers' share shall be recovered through a non-bypassable wires charge component of regulated delivery company rates over an appropriate period of time. The Company shall submit a proposal to recover the customers' share. Staff and other parties shall submit comments on the Company's proposal within 60 days after receiving such proposal. The Commission shall consider the Company's proposal expeditiously. The parties agree that the customers' share of any net book losses shall be recovered in rates as soon as practicable consistent with rate stability considerations. Total Rate Reductions Since 1995 ($000) The rate plan provides for the further rate reductions for all O&R customers. Since May 1995, customers have already been provided significant rate reductions. Total electric rate reductions from May 1995 through 1998 and the annual benefit of the Gross Receipts Tax Reform once fully phased in by January 1, 2000, are as follows: GRT 1995-96 1997 1998 Total Reform Large Industrial $ (4,702) $(2,707) $ -$(7,409)$ All Other Customers$(17,241) $(3,196) $(2,919)$(23,356) Total $(21,943) $(5,903) $(2,919)$(30,765)$(3,315) -6.4% -1.8% -0.9% -9.0% -1.0% B. Return on Equity Sharing For each of the four rate years, earnings in excess of 11.4% on regulated New York electric operations will be shared as follows: 75% to be used to offset Commission-approved deferrals or otherwise inure to the benefit of customers; 25% to be credited to 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 Plan 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% 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 generation. The Company and Staff acknowledge that this Plan 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;[11] 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; and 7. DSM performance mechanism. Pending the completion of Staff's analysis, the Company will be authorized to defer a maximum of $2,985,000 of expenditures it incurred to terminate the Company's contract for coal supply with Pittston Coal Sales Corporation (Case 96-M-1145) provided those expenditures can be matched to verifiable savings flowed through to customers. This deferral and any regulatory assets approved by the Commission during the term of this Plan 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 of the Department of Public Service 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. Other parties may request the detailed calculations subject to appropriate confidentiality protections. 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. Staff and the Company agree that any commercially sensitive data underlying any calculations submitted in accordance with this Plan will be given protection against disclosure as described in Appendix E. ____________________ [11] Subject to Staff field verification. 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 downward 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 Consistent with the Commission's order in Case 97-E- 1795, the Company will submit a plan to phase out mandatory Time-of-Use Residential Rates for customers presently taking such service. No new residential customers will be added as mandatory Time-of-Use Customers. The Company will, however, continue to offer Time-of-Use rates to Residential customers on an optional basis. The Company shall be permitted to defer any revenue shortfalls that may result from changing the mandatory nature of this rate. The Company will offer the Peak Activated Rate ("PAR") for the SC-9 and Large Industrial Customers on an optional basis. The Company will eliminate the mandatory nature of the PAR by applying the rate decrease proposed for this customer class in this Plan. 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. In response to requests from Staff and other signatory parties, the Company did not implement the PAR provisions of the existing SC-9 tariffs in 1997. Because the rate reductions and associated new rate design provisions of this Plan were not made effective until after the end of the PAR period, September 30, 1997, the Company deferred the resulting revenue requirement shortfall for the period June 1, 1997, through September 30, 1997. The parties agree that this treatment is appropriate. E. Accounting Provisions Orange and Rockland will defer all prudent and verifiable incremental costs associated with divesting its Generating Assets, such as developing an auction plan, obtaining approval of the plan, conducting the auction, transferring title to the Generating Assets, and any related environmental, transaction, financial and litigation costs. In addition, the parties recognize that all reasonable employee-related transition costs, including retraining, outplacement, severance, early retirement and employee retention programs should be recovered from customers. The Company will defer up to $7.5 million (New York electric share) of prudent and verifiable non-officer employee costs, such as retraining, outplacement, severance, early retirement and employee retention programs associated with the divestiture plan. Orange and Rockland shall be able to petition the Commission for recovery of employee costs in excess of $7.5 million.[12] Orange and Rockland will defer the $2,649,900 revenue shortfall associated with eliminating the mandatory PAR. The regulatory asset associated with the deferred PAR revenue requirement will be written off by the 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 and other customer credits that become available during the term of the Plan. Any remaining regulatory asset not otherwise offset will be addressed in Orange and Rockland's next base rate case or other suitable proceeding. Orange and Rockland will be permitted to establish a major storm damage reserve[13] of up to $3.0 million by transferring to a storm damage account overcollections from other cost elements which are subject to reconciliation. The Company will be permitted to charge storm damage costs incurred after the date of the Commission's approval of the Plan in excess of any costs included in rates (i.e., $200,000) to the storm damage reserve and will notify Staff accordingly. Storm costs charged to the reserve shall be subject to Staff verification and review. ____________________ [12] The costs of such programs for employees transferred to unregulated affiliates shall not be paid for by customers. [13] A "A major storm" is defined as a period of adverse weather during which service interruptions affect at least 10% of the Company's customers within an operating area and/or results in customers being without electric service for durations of at least 24 hours. Orange and Rockland will defer its New York share of incremental costs associated with establishing an ISO, PE and Reliability Council and, if not otherwise offset, these incremental costs will be addressed in the Company's next base rate case or other suitable proceeding. Orange and Rockland will be permitted to defer environmental costs caused by the operation of the Generating Assets up to the date of transfer of title[14]. This provision is designed to protect the Company by providing for the recovery of reasonable and prudent expenditures incurred in connection with the investigation and/or remediation of environmental conditions associated with the ownership and operation of the Generating Assets. Consistent with the terms of the approved settlement in Case 95-E-0491, the Company will retain 10% of any property tax refunds. The customers' 90% share of any property tax refunds shall be deferred and used to offset other regulatory assets or otherwise be returned to customers. This provision will remain in effect through the term of this Plan. Consistent with the objectives set forth elsewhere in this Plan, the Company will have the discretion to offset deferred regulatory assets against deferred regulatory liabilities established in accordance with this Plan or pursuant to prior Commission approval. The Company will submit to Staff and other interested parties for its review an annual report showing the offsets recorded within 60 days after the end of each rate year covered by this Plan. II. Transition to Retail Access A. Sequence of Events The parties anticipate the following sequence of events: 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.[15] ____________________ [14] These costs shall not include the cost of any NOx allowances purchased under applicable environmental laws and regulations. [15] Customers in the PowerPick(TM) Program as of December 31, 1997, will remain eligible to participate through April 30, 1998. The ISO becomes fully operational. Full retail access (energy and capacity) to all customers on May 1, 1999. 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. Prior to the implementation of full retail access in O&R's service territory, the Commission is expected to determine the appropriate standards for reciprocity with respect to other New York utilities or their affiliates operating in O&R's service territory. Until the time of such Commission determination, the Company will not be required unconditionally to accommodate a full retail transaction between an O&R customer and a New York utility or affiliated company that does not offer comparable access to O&R. This provision is not applicable to the New York Power Authority ("NYPA"). C. Expansion of PowerPick(TM) Program 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 April 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. In order to enhance the participation of smaller customers (non-Large Industrial) in the retail access programs provided in this Plan, a competitive enhancement fund of $250,000 will be created for the first 12 months after the May 1, 1998 expansion of the PowerPick(TM) program. Funding shall be the equal responsibility of both customers and shareholders (50/50 sharing). The $250,000 fund is designed to produce a temporary stimulus to encourage the participation of small customers in the retail access program. Staff will initiate a process to determine the necessary details by December 31, 1997. 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 within one month of Commission approval of this Plan 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. The proposed tariffs will disaggregate the Commission-approved bundled rate for each rate class into its functionalized components in a revenue neutral manner among classes. It is the parties intention that the unbundled tariffs will be designed to produce the same total revenue requirement underlying the rate levels reflected in Section I.A. of this Plan. It is anticipated that the Company's filing will separate the cost of: - Power Supply (energy and capacity) - Power Delivery - Metering - Billing - Governmental Tax Surcharges - Systems Benefits (mandated public policy programs) - Competitive Transition Charge - Non-Bypassable Wires 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. The transitional rate design proposed by IPPNY, including rate and bill impact concerns, particularly for low-use or low-income customers, will be addressed by the parties in the proceeding following the Company's filing. The parties agree that the entire record already developed on the transitional rate design proposed by IPPNY will be incorporated into the record developed in the phase of this proceeding involving unbundled rates. 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 Plan. 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 plant not yet transferred in accordance with the auction procedure provided for herein 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, and customer services (e.g., metering and billing). 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. The CTC, as described in Section III.C. herein, will also be separately identified as necessary and appropriate in the Company's unbundling filing. The customers' share of any net gain or loss from the sale of Generating Assets as determined in accordance with Sections I.A. and III.D. of this Plan shall be recovered or refunded through a non-bypassable wires charge included in the regulated rates of the Delivery company. In addition, any stranded costs approved by the Commission resulting from the introduction of competitive metering and/or billing services in accordance with Sections IV.D. and E. of this Plan shall also be recovered through the non-bypassable wires charge. It is contemplated that O&R's Generation Assets will continue to operate until title is transferred in accordance with the divestiture process set forth herein. The CTC, which will commence on May 1, 1999, if title has not been transferred by that time, will allow O&R to recover in customers' rates a portion of above-market generation costs as more fully described in Section III.C. herein. The CTC component of rates will be filed with Staff 90 days before its proposed effective date. Such filing shall be subject to review by Staff and approval by the Commission before implementation. In addition, the Company will provide to other requesting parties. Orange and Rockland can remove information it designates as confidential from copies of the filing provided to parties other than Staff and seek trade secret status for such designated confidential information in accordance with the Commission's rules of procedure. 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. With respect to transmission required to provide wheeling service to retail customers under the Plan, the Company will use its Open Access Transmission Tariff ("OATT") currently on file with the FERC, until such time as there is a pool-wide tariff available from the Independent System Operator. The Company will file, for the Commission's review and approval, a revised OATT which will contain those changes to the OATT that are necessary to implement retail wheeling. In the filing the Company will propose and justify requested changes to non-rate terms and conditions, and also indicate how rates should be designed for retail customers using the OATT. Following Commission approval, the Company will file the amended OATT and Commission order approving the tariff with the FERC with a request that the FERC defer to the state-approved tariff. 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 Plan, expenditure levels of one mill per kWh on average for the first three years of this Plan 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 Plan 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. The parties agree that the Commission may appoint a third- party administrator to administer the SBC funded programs. All SBC funds will be allocated by the statewide administrator, although the establishment of such a statewide administrator shall not preempt program funding for commitments made prior to the date of this Plan. The statewide administrator may continue implementation of certain Company programs. Over or under collections of SBC funds will be accumulated for future SBC program use. Commission-approved low income energy efficiency assistance program services for persons not included in the Port Jervis low income assistance program will be provided as a portion of the energy efficiency SBC budget. Appropriate funding levels for the SBC in Year 4 will be revisited by the Commission via a formal proceeding or other public process at the discretion of the Commission. 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. The Program will commence as soon as practicable after the effectiveness of new rates and terminate four years after the effectiveness of new rates. The Program will be conducted solely for the residents of the City of Port Jervis, New York and residents of the zip code area 12771. The goal of the Program is to serve approximately 400 customers in total, and approximately 100 customers in each rate year. 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. Funding for this program including $35,000 of administrative costs per year shall come from unexpended DSM funds accumulated prior to the commencement of the SBC funding mechanism. Should unexpended DSM funds not be sufficient to cover this Program the remaining costs shall be deferred. Any additional unexpended DSM funds shall be deferred for future disposition in accordance with the Accounting Plan submitted in accordance with Section E above. The Company will allocate up to $200,000 of DSM overcollections accumulated prior to the commencement of the SBC funding mechanism for the purpose of developing a pilot program that would aggregate low income customers. 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. Staff will develop a proposal to implement the program and will circulate it to the active parties by March 31, 1998. The parties agree to meet thereafter to begin the development of this pilot. As directed by the Commission in its Order Concerning Retail Access Proposals, issued February 25, 1997, in Case 94-E-0385, the parties shall consider the petition of the New York State Division of Housing and Community Renewal, et al., in Case 97-E-0073. III. Strandable Costs A. Regulatory Assets Generation-related regulatory assets[16] 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 ____________________ [16] Excluding FAS 109 effects related to divestiture. 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. Divestiture Upon the Commission's approval of the Plan, the Company will immediately commence a process to auction all of its electric generating assets (i.e., Lovett, Bowline, hydro-electric facilities and gas turbines) (collectively referred to as the "Generating Assets"). Neither the Company nor any of its affiliates will bid in such auction.[17] The divestiture of the Generating Assets to third parties will be carried out through a process that will result in a fair and reasonable treatment of all parties, including the Company, its employees, investors and customers. The Company will submit its divestiture plan to Staff and the other parties in this proceeding within three months of the Commission approving the Plan. Staff and the other parties shall submit their comments to the Company within 30 days of their receipt of the divestiture plan. This divestiture plan will identify how the Generating Assets will be packaged for sale; what restrictions, if any, will be placed on the capacity that any one bidder may purchase; the procedures to be followed in the sale of the Generating Assets, including minimum bids; and key dates and milestones to achieve the scheduled divestiture. The divestiture plan will also address the resolution of market power issues in any load pocket areas. At the time the Company submits its divestiture plan, it will submit supporting documentation subject to appropriate protection being provided for confidential information in accordance with Appendix E. The Company further agrees to provide a copy of the collective bargaining agreement to any party that indicates an interest in bidding in any auction of the Generating Assets. ____________________ [17] The Company and Con Edison are tenants in common in the Bowline Generating Station. The Company will attempt to coordinate the divestiture of its interest in Bowline with Con Edison. The agreement between the Company and Con Edison for the operation and maintenance of Bowline provides that if either tenant wishes to convey its ownership interest in Bowline to a third party, the other tenant shall have a six- month right of first refusal to purchase such interest in Bowline under the terms and conditions offered by the third party. For purposes of this Plan, the Company shall be deemed to have selected the winning bidder for its interest in Bowline on the date the Company selects the winning bidder's offer for the its interest in Bowline, regardless of whether Con Edison exercises its right of first refusal. The parties recognize that the Company and Local No. 503 of the International Brotherhood of Electrical Workers are subject to a collective bargaining agreement effective through midnight May 31, 2000, which includes the following provisions: This Agreement is made by and between Orange and Rockland Utilities, Inc., (hereinafter called the "Company") and Local Union No. 503 of the International Brotherhood of Electrical Workers (hereinafter called the "Union"). This Agreement is made for the purpose of establishing stabilized conditions of employment, including rates of pay, and working conditions, facilitating the peaceful adjustment of differences that may arise between the parties hereto from time to time, and of promoting harmony and efficiency, to the end that the Company and the Union may be better able to fulfill their obligation to furnish uninterrupted and adequate electric and gas service to the public. Identity of contracting parties: The parties to this Contract agree that it shall have force and effect as between them as herein named and described, and that this Contract, for any part of its term, shall be binding on the parties, their lawful successors and assigns. An absolute precondition to the sale, lease, transfer or takeover by sale, transfer, lease, assignment, corporate reorganization, receivership, bankruptcy proceeding of the entire operation or any part thereof is that any purchaser, transferee, lessee, assignee, etc., shall agree and become party to and bound by all the terms, conditions and obligations of this agreement. If the above-named Local Union is merged into or consolidated with any other Local Unions of the Brotherhood, this Contract shall continue in force as between the Company and the successor Local Unions resulting from such merger or consolidation, when such merger or consolidation is sanctioned in accordance with the constitution of the International Brotherhood of Electrical Workers, AFL-CIO. Agreement made by and between the Orange and Rockland Utilities, Inc., a corporation organized and existing under and pursuant to the Transportation Corporations Law of the State of New York, its successors or assigns, hereinafter referred to as the "Company" and Local 503 of the International Brotherhood of Electrical Workers hereinafter referred to as the "Union" the "Company" shall provide notice of the existence of the terms of this Collective Bargaining Agreement to any purchaser, transferee, assignee or lessee. Such notice shall be in writing with a copy to the Union. Nothing in this Plan in intended to add to, subtract from or otherwise modify any rights, duties or obligations set forth in said collective bargaining agreement. Within six months of the Commission approving the Plan, the Company will submit a revised expanded divestiture plan. Staff and interested parties will be given an opportunity to file comments on the revised divestiture plan within thirty days of its submission. The Commission will review and act expeditiously on this plan and any comments submitted. Once the divestiture plan is approved, Orange and Rockland will use its best efforts to expeditiously complete the auction process and select the winning bidder(s) of the Generating Assets. Following implementation of the ISO, Orange and Rockland agrees that its bids for energy from its fossil fuel resources shall not fall below the incremental cost of fuel plus variable O & M costs.[18] It is the objective of the parties that the Company should implement full divestiture, by an auction, of Orange and Rockland's Generating Assets. If title to the Generating Assets is transferred prior to the implementation of retail access on May 1, 1999, no CTC will be required (other than to recover any net book losses associated with divestiture of the Generating Assets). In the event there is a delay in the transfer of title beyond May 1, 1999, Orange and Rockland will recover above-market generation costs by means of an incentive based CTC commencing May 1, 1999. The CTC will be established by identifying the non- variable electric production costs using an embedded cost of service study using 1996 as a guide. The unbundling process will establish the precise amount of non-variable production costs to be used in the calculation of the CTC. Should a CTC be required, Orange and Rockland will be authorized to recover the difference between Orange and Rockland's non-variable cost of generation as identified in the unbundling proceeding and the revenues, net of fuel and variable O&M expenses, derived from the operation of Orange and Rockland's generation plants in a deregulated competitive market with the exception of 25% of fixed production labor expenses and property taxes on generation properties that cannot be recovered from ____________________ [18] Variable O&M costs are estimated at one mill per kWh of generation. customers, but should instead be recovered through the competitive market. The CTC will remain in effect until the earlier of the date title to the Generating Assets is transferred or April 30, 2000. 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 and/or a non-bypassable wires charge. If title to the Generating Assets has not transferred as of May 1, 2000, the CTC will be modified to increase to 35% the level of fixed production labor expense and property taxes that cannot be recovered from customers, but should instead be recovered through the competitive market. The modified CTC will remain effective until the earlier of the date title to the Generating Assets is transferred or October 31, 2000. In the event title to the generation assets will not transfer by October 31, 2000, the Company may petition the Commission for permission to continue a CTC until the date title to the Generating Assets is transferred. The parties acknowledge that 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. An illustration of the CTC mechanism is shown on the following page. Illustration of CTC Mechanism Market Revenues Realized Below Above Above @ Risk @ Risk @ Risk Competitive Market Revenues Amount Amount Amount Annual Competitive GENCO Revenues $ 25 $100 $500 Less: Variable O&M & Fuel (12) (50) (250) Revenue Available for Fixed Costs $13 $50 $250 Regulatory Revenue Requirement for Fixed Generation Costs: "Going Forward Costs": Fixed Production Labor $50 $50 $50 Property Taxes 50 50 50 Other Production Costs 10 10 10 Total "Going Forward Costs" 110 110 110 Capital Costs: Depreciation 25 25 25 Interest 25 25 25 Return & FIT 30 30 30 Total Capital Costs 80 80 80 Total Regulated Revenue Requirement $190 $190 $190 CTC Mechanism Competitive GENCO Revenues - Net $ 13 $ 50 $250 Less: 25% of Fixed Production Labor and Property Taxes (25) (25) (25) Available for CTC Eligible Costs 0 25 225 Less: Eligible "Going Forward Costs" (85) (85) (85) Less: Capital Costs (80) (80) (80) CTC Charge to Customers(A) $165 $140 ($60) O&R Cost Recovery Competitive GENCO Revenues - NET $ 13 $ 50 $250 CTC Charge to Customers 165 140 (60) Total Recovered $178 $190 $190 Revenue Impact on Company $(12) $ 0 $ 0 (A) CTC established to recover generation costs except 25% of Fixed Production Labor and Property Taxes, as defined above, which must be recovered through competitive market. If market revenues exceed total generation costs, the excess will be credited to customers. Illustration Gain (Loss) on Sale of Generation Assets ($000s) Gain Loss On Sale On Sale (New York Share) Sale Price (Winning Bid) $185,000 $140,000 Cost of Sale: Net Book Value of Assets Sold(A) 150,000 150,000 Divestiture Plan Costs (Legal, Financial, etc.)(B) 7,500 7,500 Employee Costs(B) 7,500 7,500 NYS Revenue Taxes 995 - Total Cost of Sale 165,995 165,000 Gain (Loss) Before Taxes 19,006 (25,000) Reversal of FAS 109 Regulatory Asset 3,500 3,500 Federal Income Tax Expenses: Current FIT expense 24,152 8,750 Reversal of FAS 109 Deferred FIT (3,500) (3,500) Reversal of Funded Deferred FIT (14,000) (14,000) Total Federal Tax Expense 6,652 (8,750) Net Gain (Loss) Eligible for Sharing $ 8,854 $ (19,750) CTC Mechanism Refund 75% of Net Gain(C) $ (6,640) Recover 95% of Net Loss(C) $ 18,763 (A) Includes generation plant in service, net of accumulated provision for depreciation and related CWIP, fuel inventories, spare parts inventory, prepaid property taxes and insurance, etc. (B) In accordance with the terms of the Plan, Section III, Para. D. (C) Net gain or loss to be refunded or surcharged to customers with interest calculated on unamortized balance at the Commission-approved after-tax overall rate of return over appropriate period of time as determined by the Commission. D. Allocation of Net Book Gains and Losses from the Disposition of Generating Assets The parties agree that the combined net book gains/losses from the divestiture of the Generating Assets shall be determined as follows: Net Book Gain or Loss = Bid - Cost of Sale - Tax Effects[19] Where: Bid = The Winning Bid Cost of Sale = Net Book Value of the Generating Assets + Costs of Developing and Implementing the Divestiture Plan(including all incremental financial,[20] environmental, transaction and litigation costs) + Employee Costs[21] Tax Effects = Revenue Taxes + State, Federal and Local Taxes These costs shall be prudent and verifiable. The net book gains/losses shall be allocated as follows: (a) If the Company selects a winning bidder prior to May 1, 1999, the New York share of any net book gains shall be allocated between shareholders and customers on a 25/75 basis and any net book losses shall be allocated between shareholders and customers on a 5/95 basis. (b) If Orange and Rockland selects a winning bidder on or after May 1, 1999, the New York share of any net book gains or losses shall be allocated between shareholders and customers on a 20/80 basis. There shall be a $20 million cap on the New York share of net book gains to shareholders from the divestiture of the Generating Assets. ____________________ [19] All tax effects related to the divesture of the Generating Assets consistent with avoiding any violation of the IRS rules and regulations governing tax normalization and Investment Tax Credits. [20] Including any prepayment penalties incurred as a result of the redemption of the Company's financial obligations. [21] As defined under "Accounting Provisions." E. 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. F. Proceeds of Divestiture The parties agree that the provisions of Public Service Law Section 70 and 107 shall not apply to any proceeds from the divestiture of the Generating Assets. For ten years from the date of the Commission order approving the Plan, Orange and Rockland agrees that neither it nor any of its affiliates shall purchase or otherwise acquire an ownership interest in the Generating Assets or in generating assets owned by Con Edison, New York State Electric and Gas Corporation or Central Hudson Gas & Electric Corporation or any other utility in a service territory contiguous to the Orange and Rockland system. At the determination of the Commission, when considering an application for a merger or acquisition, this provision may or may not apply to any third party which merges with or acquires Orange and Rockland or a Company affiliate after the approval date of the Commission order approving the Plan. In the event that Orange and Rockland or any affiliated company acquires another company, the newly created company is prohibited from purchasing or acquiring an ownership interest in the Generating Assets until after the expiration of ten years from the date of the Commission order approving the Plan. It is the intention of the parties that any winning bidder shall be free to own and/or operate the Generating Assets as an exempt wholesale generator pursuant to Section 32 of the Public Utility Holding Company Act of 1935 without first securing any additional approval from the Commission. IV. Corporate Structure A. Holding Company Orange and Rockland agrees to apply to the appropriate regulatory authorities for permission to form a registered holding company. The formation of a registered holding company is intended to further the public interest by avoiding barriers to full and fair competition. 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 form a registered holding company 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. At the time that a registered holding company is formed, it will become the successor to Orange and Rockland as signatory hereto. Standards of Competitive 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 $15 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. The Company agrees that any purchase of electric supply (i.e., the commodity) from an unregulated affiliate shall be pursuant to competitive bidding. 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 generation operations, 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. 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 Competitive Conduct designed to prevent it from gaining an unfair competitive advantage as a result of its affiliation with the Delivery company. O&R's affiliated ESCO will be subject to the same regulatory requirements applicable to any other comparably situated ESCO. The Standards of Competitive Conduct that will govern the relationship between the Delivery company and its affiliated ESCO are set forth in Appendix H. Affiliated ESCOs may be subjected to an annual examination by the Staff, if necessary, 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. The Company agrees that the Commission has authority to initiate an investigation and set a schedule to consider allegations of the Company's failure to meet the Standards of Competitive Conduct. The purpose of these conditions is to ensure the Commission can act promptly to eliminate unwarranted barriers to competition or require correction of anti- competitive behavior, consistent with its obligations and responsibilities under the Public Service Law. Remedial action for violations of the Standards of Competitive Conduct is covered in Appendix H, subp. (viii). Upon separation of the Delivery company from generation pending divestiture, there will be no bilateral agreements between Delivery company and the generation department (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. The Parties acknowledge that the Commission has determined that Provider of Last Resort ("POLR") responsibility should continue to exist to meet the needs of end-use customers including those who require service but have not chosen an ESCO or who require temporary service, and end-use customers who are unable to obtain service from an ESCO. The Commission has also concluded that, for the time being, this responsibility should be performed by the regulated utility company, although the Commission did not rule out alternatives to the regulated utility performing this function and specifically invited such alternative proposals. The parties agree that the transfer of the regulated utility's responsibility to serve as POLR to ESCOs through a competitive bid process is a desirable goal to explore. Accordingly, the parties agree that by May 1, 1999, they will submit their recommendations on this issue to the Commission for its consideration. Staff will initiate the process of this examination by May 1, 1998. Unless and until relieved of its obligation, the Delivery company shall be the 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. Metering Services Following issuance of the Staff report required by Commission Opinion No. 97-13 (August 1, 1997), on or before March 31, 1999, O&R will submit a plan designed to make metering competitive by December 31, 1999. In the event that there remain significant implementation obstacles (such as open architecture, customer protections or necessary changes to Parts 92 and 93 of the Commission's regulations) which cannot be timely resolved, the Company may petition the Commission to delay the implementation schedule. Should the Commission order that metering services become competitive earlier than the schedule contemplated herein, the Company shall meet the schedule prescribed by the Commission and offer such services in the manner and to the extent prescribed by the Commission. Any resulting stranded costs[22] approved by the Commission shall be fully recoverable (via a non-bypassable wires charge with recovery to commence during the term of this Plan) over an appropriate period of time as determined by the Commission. After the time that metering services become competitive, the Company may continue to provide such services to remaining customers at such rates as are determined by the Commission to be appropriate. ____________________ [22] Including the costs of implementing this program (e.g., meter removal costs incurred by the Company, if any). E. Billing Services Other companies will be able to enter into the market for providing billing services to Orange and Rockland's Delivery company customers consistent with the manner and in accordance with the schedule prescribed by the Commission. Any resulting stranded costs shall be fully recoverable (via a non-bypassable wires charge with recovery to commence during the term of this Plan) over an appropriate period of time as determined by the Commission. F. 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,[23] 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. The parties anticipate that the divestiture plan will address the load pocket issue on an interim basis pending a final Commission determination on the load pocket issue. G. System Upgrades The Company will continue its annual forecasts of T&D capital budget requirements. For each major T&D upgrade (projects of $2 million or more), the Company shall identify the location, reason, scope and projected capital costs, and shall monitor circuit peaks for any affected substation and the load on any affected transmission lines. When deciding whether to implement major T&D upgrades, the Company shall consider a full range of alternative measures, their cost-effectiveness and their environmental impacts, including demand-side technologies and practices, fuel cells, photovoltaic systems or other alternatives that may both defer the need for implementing the upgrades and ____________________ [23] Examples of such measures are existing and new local distributed generation or energy efficiency/management measures. minimize the environmental impacts of electricity usage. The Company will also continue to seek to minimize costs and environmental impacts for T&D projects that are not major projects. In the Company's first major electric rate filing following Commission approval of the Plan, unless otherwise directed by the Commission, Staff will address the merits of performance-based ratemaking, including the relationship among sales and distribution revenues and energy efficiency and concerning the appropriate measure of cost-effectiveness for alternatives to T&D projects, and make ratemaking proposals as warranted. V. Other Provisions A. Force Majeure If the Company because of an event of Force Majeure is rendered wholly or partly unable to perform its obligation under the Plan to select a winning bidder for its Generating Assets by May 1, 1999, or to transfer title to the Generating Assets by October 31, 2000, Orange and Rockland shall be excused from the performance affected by the Force Majeure and to the extent so affected, the time of performance shall be extended for a period equal to the time lost by reason of such Force Majeure. Orange and Rockland shall not be liable for the damage caused by such non-performance. The Company shall provide the Commission prompt notice of the occurrence of the Force Majeure, including an estimate of its expected duration and probable impact on the performance of the Company's obligations hereunder, and shall submit satisfactory evidence for Commission review of the existence of the Force Majeure. For purposes of the Plan, the term "Force Majeure" shall include, but not be limited to acts of God, fires, floods, earthquakes, landslides, storms, lightning, strikes, labor disputes, riots, nuclear emergencies, insurrections, acts of war (whether declared or otherwise), changes in laws, regulation or ordinances and unforeseeable acts or failures to act by governmental, regulatory or judicial bodies, failure of any party to submit a bid for the Generating Assets or any other unforeseeable causes beyond the reasonable control of and without the fault and negligence of Orange and Rockland. Orange and Rockland shall use its best efforts to remedy expeditiously its inability to perform. Orange and Rockland shall not be required to settle any strike, walkout, lockout or other labor dispute on terms which in its sole judgment, are contrary to its interest. When Orange and Rockland is able to resume performance of its obligations under the Plan, it shall provide written notice to that effect to Staff and the Commission. B. 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,[24] results in a change of 5% 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. C. Confidentiality and Privileged Information Pursuant to the provisions of this Plan, 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. D. 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 Plan 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 4% per year, the Company may petition the Commission for appropriate relief. E. Rate Design Flexibility During the term of this Plan, 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. ____________________ [24] Excluding Gross Receipts and Franchise Taxes. 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. F. Regulatory Reform and Customer Operations Procedures In consideration of the Company's implementation of retail competition as described in this Plan 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 Plan, 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 requested from such customer, or for other purposes approved by the Commission; 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 and agrees that consumers are entitled to meaningful environmental information concerning the power provided to them. To effectuate such disclosure, the Company agrees to work with interested parties to develop and implement on a statewide basis a feasible, meaningful and cost-effective approach to providing customers with fuel-mix and emissions characteristics of the generating resources relied upon by the load serving entity. G. Customer Outreach and Education In conjunction with the parties, 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. Such programs will include information on environmental programs as described above. 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 Plan, 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. As partial retail access is being offered to all customers by May 1998 and full retail access by May 1999, it is essential that the Company's customers are educated so that they can make informed energy choices. To achieve this goal, an information campaign would be undertaken by early next year. The Company agrees to the use of up to the equivalent of $1 million of the present value[25] of fourth year SBC funds for the purpose of educating Residential and Commercial customers about electric competition. Staff will develop a proposal to implement the program to educate customers about electric competition and will circulate it to the active parties by December 31, 1997. H. Interdepartmental Transfers For purposes of this Plan, 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 ____________________ [25] Discounted at the authorized overall rate of return of 8.79%. $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 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 January 1, 1998, 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. 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. I. Other 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 Plan 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. 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 Plan. 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. Such tariffs will be available regardless of the supplier of electricity and such discounts will be fashioned in a competitively neutral manner. 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 Plan. 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 to Large Commercial, Small Commercial and Industrial and Residential customers, unless otherwise prescribed by such statute or order of the Commission. The Commission will also consider the use of these savings for energy efficiency programs and clean energy technologies. 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 Plan. 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 Plan. O. Comprehensive Nature of Plan 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 Plan. 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 Plan with each provision being in consideration for, support of, and dependent upon all others. This Plan is, therefore, presented for the Commission's approval as an integrated whole. If the Commission does not approve this Plan in its entirety, without modification, any signatory hereto may withdraw its acceptance of this Plan 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 Plan apply solely to and are binding only in the context of the purposes and results of this Plan. None of the terms and provisions of this Plan 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 Plan. R. Plan Modification Upon mutual agreement, the signatories may modify this Plan in writing to take into consideration material information that may become available after the execution of this Plan and submit such written modification to the Commission for its approval. S. Term and Time Line The term of this Plan runs for four years from the effective date of the new rates implemented upon Commission approval of this Plan. 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. T. Effect of Plan 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. - Divestiture of the Generating Assets pursuant to an auction process. - Allocating equity earnings in excess of the sharing threshold between shareholders and customers and to writing down Commission-approved deferred costs. - 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. - Providing full retail access (energy and capacity) to all customers in 1999. - Agreeing to address alternative ways of providing metering and billing services. 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 Plan. - A reasonable opportunity to recover prudently incurred strandable costs as a result of divesting the Generating Assets, or otherwise during the effectiveness of the CTC. The parties agree that the provisions of this Plan will result in rates that are just and reasonable to both customers and shareholders through the four-year term of this Plan. Future generic determinations by the Commission will be addressed in good faith by the parties to this Plan 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. U. Dispute Resolution In the event of any disagreement over the interpretation of this Plan or the implementation of any of the provisions of this Plan, 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 30 days, any party may petition the Commission for relief on a disputed matter. V. Additional Public Statement Hearings The parties agree that additional public statement hearings should be held in the Company's service territory prior to the Commission acting on this Plan in order to receive and consider public input on important matters included within this Plan. The parties strongly encourage the Secretary to schedule such hearings. Orange and Rockland Utilities, Inc. G.D. CALIENDO, ESQ. G.D. Caliendo, Esq. Senior Vice President, General Counsel and Corporate Secretary New York State Department of Public Service SAUL A. RIGBERG, ESQ. Saul A. Rigberg, Esq. Assistant Counsel New York State Department of Economic Development JEFFREY SCHNUR Jeffrey Schnur Director of Energy Policy National Association of Energy Service Companies RUBEN S. BROWN Ruben S. Brown The Joint Supporters By: The E Cubed Company RUBEN S. BROWN Ruben S. Brown Industrial Energy Users Association THOMAS A. CONDON, ESQ. Thomas A. Condon, Esq. Birbrower, Montalbano, Condon & Frank, P.C. L.M. DIVALENTINO L.M. DiValentino Strategic Power Management, Inc. Exceptions to the following provisions of the Plan: __________________________________________ __________________________________________ Independent Power Producers of New York, Inc. CAROL E. MURPHY Carol E. Murphy Executive Director Pace Energy Project DAVID R. WOOLEY David R. Wooley Counsel for the Energy Project Center for Environmental Legal Studies Pace University School of Law Appendix A Time Line for Certain Actions November 6, 1997 Plan Filed _____________________ Commission approves Plan _____________________ 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) December 1997 O&R files proposed draft unbundled electric tariffs February 1998 O&R submits initial divestiture plan May 1, 1998 O&R expands PowerPick(TM) (energy only) to all customers May 1998 O&R submits detailed divesture plan One year after effectiveness O&R reduces rates for all of new rates other customers by an additional 1% _____________________ O&R forms Holding company _____________________ Unbundled electric tariffs become effective March 31 1999 O&R submits metering proposal April 30, 1999 O&R selects winning bidders of auction May 1, 1999 O&R introduces full retail choice (energy and capacity) to all customers May 1, 1999 Recommendations on POLR obligation submitted May 1, 1999 CTC commences, if necessary December 31, 1999 Metering proposal becomes effective assuming significant technical obstacles are resolved October 31, 2000, or earlier CTC terminates Four years after effectiveness Plan terminates of new rates Appendix B 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. 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: 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. 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 Total 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 GRT Gross-up 371,858 354,789 412,392 536,868 Cost Reductions (Incl. GRT) $6,110,400$5,829,931 $6,776,465 $8,821,868 PowerPick(TM) Savings Opportunity (Incl. GRT) $1,108,000$1,108,000 $1,108,000 $1,108,000 Total Sources of Price Reduction (Incl. GRT)$7,218,400$6,937,931 $7,884,465 $9,929,868 $31,970,664 (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 Privileged Information Nothing in this Plan 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 Plan, 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. 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 Plan, "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 Plan 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 Plan 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 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 Plan. 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 Plan. 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 Plan) will be reduced by five basis points in that rate year. The CICAS target shall be 2.65 for each rate year of the Plan. 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: 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 Plan, Orange and Rockland fails to achieve the Interruption Duration Target, the Sharing Threshold (as defined in this Plan) 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 Plan, 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 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 in Case 95-E-0941 ("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 as soon as practicable after the effectiveness of new rates and terminate four 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 approximately 400 customers in total, or approximately 100 customers for each of the four years included in this Plan. 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 include all expenses for energy efficiency, arrears forgiveness, evaluation and administration. Funding for this Program, including $35,000 of administrative costs per year, shall come from unexpended DSM funds. 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 400 customers) into the Program in order to fully expend the available funds. 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. 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 Plan, the parties agree to reconvene promptly and consider any appropriate changes to this Plan. Appendix H 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 in promotional advertising or otherwise 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. (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. (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 engaged in material violations of the standards of competitive conduct during the course of this Plan, 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 such 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 issue. 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 material 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). The Delivery company and the Holding company may exercise any and all legal and/or equitable relief from such remedial actions, including, but not limited to injunctive relief. Neither Orange and Rockland nor any affiliate or subsidiary will challenge the Commission's legal authority to implement the provisions of this subparagraph. (ix) The Standards of Competitive Conduct set forth in this Plan 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 Competitive Conduct established by the Commission through the term of this Plan. Unless otherwise ordered by the Commission, the Standards of Competitive Conduct set forth in this Plan will continue to apply after the expiration of the term of this Plan, 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) The rate levels provided for in this Plan cover all royalties that otherwise would be credited to the Delivery company's customers, at any time, including after the expiration of this Plan. 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 Plan. (v) Access to books and records shall be subject to claims of privilege and confidentiality as set forth in Appendix E hereto. Appendix I 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 formation of the Holding company. Unregulated affiliates will establish and maintain separate and distinct offices and work space from the Delivery company in a separate building or leasehold. b) Draft 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). At the discretion of the Commission, these guidelines will be considered in either the unbundling phase of this proceeding or as part of the Company's application to form a Holding company as appropriate. 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. 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 (on a system basis). 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 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% 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. 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 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. (As noted in Section IV.B. herein, certain electric supply contracts will be subject to competitive bidding.) 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 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, "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 section 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. 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. - 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 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 Overhead percentage & Expenses to be applied to total salary (excluding expenses and other compensation directly assignable (based on RegCo ratio of to the affiliate Office Supplies and or included in the Expenses-PSC Account 921, office space less Building Service costs charge) and Administrative and General Salaries). 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 Assignable to Affiliates charged to an affiliate account and paid directly by the affiliate. Appendix K 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 SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 920,259 10,624 188,812 151,324 0 1,271,019 68,274 127,516 182,029 377,819 0 43,227 276,642 4,500 0 95,050 78,038 0 1,681 167 393,895 1,271,019 482,241 18,707 405,330 424,037 58,204 (16,215) 41,989 23,500 18,489 2,099 16,390 26,420 18,118 63,481 1.20 0
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