<PAGE>
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: 1-672
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Rochester Gas and Electric Corporation
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(Exact name of registrant as specified in its charter)
New York 16-0612110
----------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 East Avenue, Rochester, NY 14649
--------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 546-2700
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N/A
- --------------------------------------------------------------------
(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 classes of
common stock, as of the latest practicable date.
Common Stock, $5 par value, at October 31, 1997: 38,858,719
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<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
Information Required on Form 10-Q
Page
Description Number
- ----------- ------
PART I - FINANCIAL INFORMATION
- ------
Consolidated Balance Sheet
as of September 30, 1997 and December 31, 1996 1 - 2
Consolidated Statement of Income
Three Months and Nine Months Ended September 30, 1997 and 1996 3 - 4
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1997 and 1996 5
Notes to Financial Statements 6 -11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 -24
PART II - OTHER INFORMATION
- -------
Legal Proceedings 24
Other Events 24
Exhibits and Reports on Form 8-K 24 -25
Signatures 26
<PAGE>
PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Utility Plant
Electric $2,431,583 $2,413,881
Gas 406,755 391,231
Common 135,140 129,946
Nuclear fuel 242,727 224,701
------------ --------------
3,216,205 3,159,759
Less: Accumulated depreciation 1,479,948 1,381,908
Nuclear fuel amortization 200,909 187,170
------------ --------------
1,535,348 1,590,681
Construction work in progress 64,896 69,711
------------ --------------
Net Utility Plant 1,600,244 1,660,392
------------ --------------
Current Assets
Cash and cash equivalents 153,033 21,301
Accounts receivable, net of allowance for
doubtful accounts: 1997-$22,581, 1996-$17,500 85,938 112,908
Unbilled revenue receivable 33,209 53,261
Materials, supplies and fuels, at average cost 32,066 39,888
Prepayments 32,501 23,103
------------ --------------
Total Current Assets 336,747 250,461
------------ --------------
Deferred Debits
Nuclear generating plant decommissioning fund 123,413 91,195
Nine Mile Two deferred costs 30,571 31,360
Unamortized debt expense 13,653 14,820
Other deferred debits 23,968 28,759
Regulatory assets (Note 2) 241,273 284,489
------------ --------------
Total Deferred Debits 432,878 450,623
------------ --------------
Total Assets $2,369,869 $2,361,476
- ----------------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
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ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
Capitalization and Liabilities 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization
Long term debt - mortgage bonds $485,417 $555,054
- promissory notes 101,900 91,900
Preferred stock redeemable at option of Company 47,000 67,000
Preferred stock subject to mandatory redemption 35,000 45,000
Common shareholders' equity:
Common stock
Authorized 50,000,000 shares; 38,851,464
shares outstanding at September 30, 1997
and at December 31, 1996. 696,273 696,019
Retained earnings 114,213 90,540
---------------- ----------------
Total common shareholders' equity 810,486 786,559
---------------- ----------------
Total Capitalization 1,479,803 1,545,513
---------------- ----------------
Long Term Liabilities (Department of Energy)
Nuclear waste disposal 82,221 79,057
Uranium enrichment decommissioning 14,978 14,695
---------------- ----------------
Total Long Term Liabilities 97,199 93,752
---------------- ----------------
Current Liabilities
Long term debt due within one year 131,900 20,000
Preferred stock redeemable within one year 10,000 10,000
Short term debt - 14,000
Accounts payable 56,858 49,462
Dividends payable 18,788 19,349
Taxes accrued 758 4,694
Interest accrued 13,804 10,317
Other 34,259 30,395
---------------- ----------------
Total Current Liabilities 266,367 158,217
---------------- ----------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 355,769 370,028
Pension costs accrued 69,345 69,806
Other 101,386 124,160
---------------- ----------------
Total Deferred Credits and Other Liabilities 526,500 563,994
---------------- ----------------
Commitments and Other Matters (Note 2) - -
---------------- ----------------
Total Capitalization and Liabilities $2,369,869 $2,361,476
- --------------------------------------------------------------------------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Electric $ 178,625 $ 190,507
Gas 36,886 42,481
---------- ----------
215,511 232,988
Electric sales to other utilities 5,824 1,855
---------- ----------
Total Operating Revenues 221,335 234,843
---------- ----------
Fuel Expenses
Fuel for electric generation 13,463 9,893
Purchased electricity 6,873 9,380
Gas purchased for resale 22,606 29,904
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Total Fuel Expenses 42,942 49,177
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OPERATING REVENUE LESS FUEL EXPENSES 178,393 185,666
---------- ----------
Other Operating Expenses
Operations excluding fuel expenses 62,973 65,114
Maintenance 8,550 11,148
Depreciation and amortization 29,051 29,349
Taxes - local, state and other 27,539 29,603
Federal income tax 15,664 14,293
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Total Other Operating Expenses 143,777 149,507
---------- ----------
OPERATING INCOME 34,616 36,159
---------- ----------
Other (income) and Deductions
Allowance for other funds
used during construction (150) (72)
Federal income tax (626) (552)
Other - net 1,355 1,440
---------- ----------
Total Other Income and Deductions 579 816
---------- ----------
INCOME BEFORE INTEREST CHARGES 34,037 35,343
---------- ----------
Interest Charges
Long term debt 10,859 11,892
Other - net 1,695 2,505
Allowance for borrowed funds
used during construction (241) (116)
---------- ----------
Total Interest Charges 12,313 14,281
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NET INCOME 21,724 21,062
---------- ----------
Dividends on Preferred Stock 1,305 1,866
---------- ----------
EARNINGS APPLICABLE TO COMMON STOCK $ 20,419 $ 19,196
---------- ----------
Weighted average number of shares
outstanding in each period (000's) 38,851 38,851
Earnings per Common Share $0.52 $0.49
Cash Dividends Paid per Common Share $0.45 $0.45
</TABLE>
- ------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Revenues
Electric $516,042 $524,143
Gas 234,932 242,676
--------- ---------
750,974 766,819
Electric sales to other utilities 14,625 12,797
--------- ---------
Total Operating Revenues 765,599 779,616
--------- ---------
Fuel Expenses
Fuel for electric generation 35,825 29,750
Purchased electricity 17,313 35,688
Gas purchased for resale 137,689 139,478
--------- ---------
Total Fuel Expenses 190,827 204,916
--------- ---------
OPERATING REVENUE LESS FUEL EXPENSES 574,772 574,700
--------- ---------
Other Operating Expenses
Operations excluding fuel expenses 191,938 195,008
Maintenance 30,333 36,166
Depreciation and amortization 87,575 76,707
Taxes - local, state and other 90,596 97,101
Federal income tax 53,395 53,578
--------- ---------
Total Other Operating Expenses 453,837 458,560
--------- ---------
OPERATING INCOME 120,935 116,140
--------- ---------
Other (Income) and Deductions
Allowance for other funds
used during construction (283) (600)
Federal income tax (2,395) (1,556)
Other - net 3,519 544
--------- ---------
Total Other Income and Deductions 841 (1,612)
--------- ---------
INCOME BEFORE INTEREST CHARGES 120,094 117,752
--------- ---------
Interest Charges
Long term debt 33,999 36,733
Other - net 5,220 7,025
Allowance for borrowed funds
used during construction (454) (1,289)
--------- ---------
Total Interest Charges 38,765 42,469
--------- ---------
NET INCOME 81,329 75,283
--------- ---------
Dividends on Preferred Stock 4,500 5,599
--------- ---------
EARNINGS APPLICABLE TO COMMON STOCK $ 76,829 $69,684
--------- ---------
Weighted average number of shares
outstanding in each period (000's) 38,851 38,735
Earnings per Common Share $1.97 $1.79
Cash Dividends Paid per Common Share $1.35 $1.35
</TABLE>
______________________________________________________________________
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
(Thousands of Dollars) September, 30,
- --------------------------------------------------------------------------------------------------
1997 1996*
----------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 81,329 $ 75,283
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization 101,713 88,470
Deferred fuel (1,709) (3,352)
Deferred income taxes (2,116) 5,948
Allowance for funds used during construction (737) (1,890)
Unbilled revenue, net 20,051 23,693
Nuclear generating plant decommissioning fund (14,831) (6,652)
Pension costs accrued (2,383) (869)
Post employment benefit internal reserve 4,998 4,485
Changes in certain current assets and liabilities:
Accounts receivable 26,969 15,865
Materials, supplies and fuels 7,822 (443)
Taxes accrued (3,936) (18,229)
Accounts payable 7,396 4,330
Other current assets and liabilities, net (2,607) (11,021)
Other, net 14,653 10,894
----------- -----------
Total Operating 236,612 186,512
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Net additions to utility plant (55,710) (95,620)
Other, net - 9,216
----------- -----------
Total Investing (55,710) (86,404)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from:
Sale/issuance of common stock - 8,612
Issuance of Promissory notes 101,900 -
Repayment of Short term borrowings (14,000) -
Retirement of preferred stock (30,000) -
Retirement of long term debt (49,668) (67,332)
Dividends paid on preferred stock (5,061) (5,599)
Dividends paid on common stock (52,449) (52,173)
Other, net 108 3,118
----------- -----------
Total Financing (49,170) (113,374)
----------- -----------
Increase (decrease) in cash and cash equivalents 131,732 (13,266)
Cash and cash equivalents at beginning of period 21,301 44,121
----------- -----------
Cash and cash equivalents at end of period $153,033 $ 30,855
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Nine Months Ended
(Thousands of Dollars) September, 30,
- --------------------------------------------------------------------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash Paid During the Period
Interest paid (net of capitalized amount) $ 33,906 $ 37,573
----------- -----------
Income taxes paid $ 47,000 $ 55,638
----------- -----------
</TABLE>
* Reclassified for comparative purposes.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: GENERAL
The Company, in the opinion of management, has included adjustments (which
include normal recurring adjustments) necessary for a fair statement of the
results of operations for the interim periods presented. The consolidated
financial statements for 1997 are subject to adjustment at the end of the year
when they will be audited by independent accountants. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
results for these interim periods are not necessarily indicative of results to
be expected for the year, due to seasonal, operating, and other factors. These
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
Note 2. COMMITMENTS AND OTHER MATTERS
The following matters supplement the information contained in Note 10 to the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 and should be read in conjunction with the
material contained in that Note.
LITIGATION
Department of Justice Lawsuit. On June 24, 1997, the Antitrust Division of
the United States Department of Justice filed a civil complaint against the
Company in the United States District Court for the Western District of New
York. The complaint follows a Civil Investigative Demand investigation. That
investigation included a broad look at the Company's activities in the electric
power industry including initially, the Company's power purchase agreement with
an independent power producer. The investigation then focused primarily upon
the flexible rate long term contracts entered between the Company and a number
of its large customers under a tariff approved by the New York State Public
Service Commission (PSC). The tariff and the PSC policies it implemented
recognized that if large customers took their electrical load off the system,
the rates for remaining customers would have to increase to cover the fixed
costs of operation.
The Division in its complaint has challenged only certain provisions of one
flexible rate contract, the contract with the University of Rochester. The
Complaint alleges that those provisions in that contract violate Section 1 of
the Sherman Act by restricting the customer's right to compete with the Company
in the sale of electricity and seeks an injunction prohibiting the Company from
enforcing that contract and from entering other agreements that limit
competition in the sale of electricity to other customers.
The Company believes that the investigation and the Complaint reflect the
desire by the Antitrust Division to become involved in the deregulation of
electric utilities, but that the proper way to do that is in the proceedings
before the PSC in the Competitive Opportunities Case.
On September 3, 1997, the Company filed its answer which denied the material
allegations of the Complaint. At the same time, the Company filed a motion for
summary judgment asking the Court to dismiss the action with prejudice on the
grounds that the Company's actions are immune from antitrust liability under the
state action exemption, that the Company's actions did not injure competition
and that the Department of Justice's claims are speculative. On November 3,
1997, the Department of Justice filed its
6
<PAGE>
opposition to the Company's motion for summary judgment and filed its own Motion
for Summary Judgement. The Company's response to the Justice Department motion
is due on December 5, 1997. These motions for summary judgment are scheduled
for argument on December 19, 1997.
Litigation with Co-Generator. The Company is engaged in litigation with
Kamine/Besicorp Allegany L.P. (Kamine), the only co-generator with a power
purchase agreement attempting to operate in its service territory. The details
of the litigation, involving several different proceedings, are described in
Note 10 of the Company's 1996 Annual Report on Form 10-K. One of the complaints
served by Kamine seeks damages in the amount of $420,000,000.
Significant developments in these proceedings since the filing of the 1996
Annual Report on Form 10-K are described below.
In November 1995 Kamine filed in Newark, New Jersey for protection under the
bankruptcy laws and filed a complaint in an adversary proceeding seeking, among
other things, specific performance of the agreement to sell power to the
Company. Kamine filed a motion to compel the Company to pay what would be due
under Kamine's view of the terms of that agreement during the pendency of the
Adversary Proceeding. After hearing, the Bankruptcy Court denied that motion.
The Court also denied various motions made by the Company to change the venue of
the proceeding to New York State and to lift the automatic stay of the pending
New York State action. On appeal, the Bankruptcy Court was reversed and the
case sent back to the Bankruptcy Court to decide where the contract issues in
the Adversary Proceeding should be adjudicated. As of June 16, 1997, the
Company filed a Second Amended Complaint in the State Court action asserting
additional claims based on subsequent occurrences.
On March 19, 1997, the Bankruptcy Court stayed the Adversary Proceeding
pending resolution of the contract issues in the New York State court trial.
Kamine has indicated it will not appeal this action.
On June 26, 1997, the defendants filed a Joint Notice of Removal of Action,
removing the action to the United States District Court for the Western District
of New York. There have been no further proceedings to date.
Numerous other procedural motions have been presented in the Bankruptcy
Court, some of which may now be considered by the New York State court. While
these proceedings are pending, the Company would pay approximately two cents per
kilowatt hour when the plant operates. It is not operating at the present time.
General Electric Capital Corporation Lawsuit. On July 3, 1997, General
Electric Capital Corporation (GECC) filed a complaint against the Company in the
United States District Court for the Western District of New York in connection
with the Kamine project in Hume, New York, for which GECC provided financing.
The complaint asserts that the Company violated the antitrust laws in its
dealings with Kamine and seeks injunctive relief, treble damages and alleged
actual damages of not less than $100,000,000. The claims made in the complaint
filed are substantially similar to the claims made by Kamine in the same court
under Kamine's version of the terms of the Power Purchase Agreement for the Hume
project. The court denied Kamine's motion for preliminary injunction on grounds
which included Kamine's failure to establish a likelihood of success on the
merits of its claims. Kamine had filed a notice of appeal from a decision
denying Kamine's motion for a preliminary injunction. Kamine subsequently
withdrew the appeal. The Company believes the complaint by GECC is also without
merit and intends to defend the action.
ENVIRONMENTAL MATTERS
Federal Clean Air Act Amendments. The Company is developing strategies
responsive to
7
<PAGE>
the federal clean air act amendments of 1990 (Amendments) which will primarily
affect air emissions from the Company's fossil-fueled generating facilities.
The strategy being developed is a combination of hardware solutions which have a
capital and operation and maintenance (O&M) component and allowance trading
solutions which have strictly an O&M impact. The most recent strategic
developments still envision this combination of efforts as the most cost
effective means of proceeding although there is some activity in the New York
State Legislature that could impact the Company's ability to rely upon the
emission allowance market as a reliable means of meeting some of its
environmental commitments. At this time, it is impossible to predict the
outcome of these proceedings in the Legislature and, as a result, the Company's
projections are based solely on the combination strategy. A range of capital
costs between $2.9 and $3.5 million has been estimated for the implementation of
several potential alterations for meeting the foreseeable nitrogen oxide and
sulfur dioxide requirements of the Amendments, as well as $1.0 to $1.5 million
per year in operating expenses. These capital costs would be incurred between
1998 and 2000. The O&M expenses would be for the year 1999. For the year 2000
and beyond, the Company estimates that the annual operating expenses would rise
to between $2.4 million and $3.7 million. Any additional post-2000 capital
costs and operating expense cannot be predicted until state and federal
legislation stabilizes sufficiently to enable the Company to finalize its
compliance strategy.
Opacity Issue. In May 1997, the Company commenced negotiations with the New
York State Department of Environmental Conservation (NYSDEC) to resolve
allegations of past opacity violations at the Company's Beebee and Russell
Stations. The opacity standard is a regulation which limits the density of the
smoke emitted from the Stations' smokestacks. The Company believes that it will
reach an agreement with NYSDEC on this issue and that the amount of any civil
penalty will likely include both cash and environmental benefit project
components which, in the aggregate, will not be material to the Company's
financial condition or results of operations. This matter has resulted in
operational adjustments which are discussed in Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operations under the heading
"Fossil Unit Deratings".
FERC 636 TRANSITION COSTS
As a result of the restructuring of the gas transportation industry by the
Federal Energy Regulatory Commission (FERC) pursuant to Order No. 636 and
related decisions, the Company was required to pay a share of certain transition
costs incurred by the interstate pipelines through which it has purchased gas.
The Company, as a customer, estimated total costs of about $50 million which,
for the most part, have been paid to its suppliers. The pipeline with the
largest transition cost liability has reached a negotiated settlement with its
customers, including the Company. This settlement agreement, filed with the
FERC and awaiting FERC approval, would resolve the last transition cost case.
Under the settlement, transition costs will be paid until January 1999, then
cease. A regulatory asset and related deferred credit have been established on
the balance sheet to account for these costs. Approximately $42.7 million of
these costs were paid to suppliers, of which about $37.1 million has been
included in purchased gas costs. An amount of $12.9 million remains for future
collection from customers. The Company has a $10 million credit agreement with
a domestic bank to provide funds for the Company's transition cost liability to
CNG Transmission Corporation. At September 30, 1997 the Company had $5.5
million of borrowings outstanding under the credit agreement. The Company is
collecting those costs through the Gas Cost Adjustment clause in its rates.
GAS RESTRUCTURING PROCEEDING
In the PSC's Proceeding on Restructuring the Emerging Competitive Natural Gas
Market, the PSC established a three-year period (ending March 28, 1999) during
which the State's local distribution companies (LDCs) would be permitted to
require customers converting from sales service to take associated pipeline
capacity for which the LDCs had originally contracted. Prior to the beginning
of the third year, the LDCs would be required to
8
<PAGE>
demonstrate their efforts to dispose of "excess" capacity. On September 4,
1997, the PSC issued an Order clarifying the March 28, 1996 Order. The
September 4 Order requires, among other things, that the LDCs (a) assess
strandable costs; (b) evaluate and pursue options to address strandable costs,
including exploration of alternative uses and quantification of market values
for the capacity that could be stranded by converting customers; (c) actively
encourage competition including collaboration with marketers to expand the
number of customers taking transportation service from the LDC and to provide
customer education; and (d) to the extent LDCs cannot shed all their capacity as
contracts expire, to continue to seek lower cost options and more flexibility
and shorter contract terms, where cost effective. LDCs are required to file
plans addressing the foregoing issues by April 1, 1998. Pursuant to the PSC's
orders, the cost of capacity defined as "excess" may not be fully recoverable in
rates. Accordingly, the Company's ability to avoid absorbing this cost will
depend on the success of remarketing and portfolio structuring efforts, as
described in Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations under the heading "1995 Gas Settlement", and, if such
efforts do not result in eliminating all "excess" capacity, on a satisfactory
explanation as to why all such capacity could not be eliminated. The Company is
engaged in negotiations with the Staff of the PSC and other parties to address
these and other issues related to the future provision of gas service. At this
time, no assessment of the potential impact of these requirements on the Company
can be made.
On September 4, 1997, the PSC also issued for comment a Staff position paper
which proposes that LDCs exit their merchant function, i.e., cease to supply the
natural gas commodity to their existing customers, within five years and that
they eliminate or restructure transportation and storage capacity contracts
extending beyond five years so as to eliminate obligations beyond that point,
except where capacity is required to fulfill operational requirements or the
LDC's obligations as the "supplier of last resort" to customers having no
competitive alternative. If adopted by the PSC, the Staff proposal could
require the Company to remarket more capacity and to do so more rapidly than
currently contemplated. Since the comment period will not conclude until
December 20, 1997, no prediction can be made as to whether the Staff proposal
will be adopted or, if so, the extent of its potential impact on the Company.
ASSERTION OF TAX LIABILITY
The Company's federal income tax returns have been examined by the Internal
Revenue Service (IRS) through the calendar year 1992. The Company has reached
an Agreement with the IRS on the issues related to the Nine Mile Two in-service
date. With this Agreement, all outstanding issues will have essentially been
resolved and the Company has ultimately prevailed concerning the use of a 1987
in-service date and all other outstanding issues for the years 1987-1992. As a
result of this favorable settlement, the Company received a refund of $762,938
on October 31, 1997.
REGULATORY AND STRANDABLE ASSETS
With PSC approval the Company has deferred certain costs rather than
recognize them on its books when incurred. Such deferred costs are then
recognized as expenses when they are included in rates and recovered from
customers. Such deferral accounting is permitted by Statement of Financial
Accounting Standards No. 71 (SFAS-71). These deferred costs are shown as
Regulatory Assets on the Company's Balance Sheet. Such cost deferral is
appropriate under traditional regulated cost-of-service rate setting, where all
prudently incurred costs are recovered through rates. In a purely competitive
pricing environment, such costs might not have been incurred and could not have
been deferred. Accordingly, if the Company's rate setting was changed from a
cost-of-service approach, and it was no longer allowed to defer these costs
under SFAS-71, these assets would be adjusted for any impairment to recovery
(pursuant to Statement of Financial Accounting Standards No. 121 (SFAS-121)).
In certain cases, the entire amount could be written off.
9
<PAGE>
Below is a summarization of the Regulatory Assets as of September 30, 1997.
<TABLE>
<CAPTION>
Millions
of Dollars
----------
<S> <C>
Income Taxes $162.4
Uranium Enrichment Decommissioning Deferral 16.7
Deferred Ice Storm Charges 12.1
FERC 636 Transition Costs 12.9
Demand Side Management Costs Deferred 4.8
Gas Deferred Fuel 9.3
Other, net 23.1
------
Total - Regulatory Assets $241.3
======
</TABLE>
See the Company's Form 10-K for the fiscal year ended December 31,
1996 Item 8, Note 10 of the Notes to Financial Statements, "Regulatory and
Strandable Assets" for a description of the Regulatory Assets shown above.
SFAS-121,"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires write-down of assets whenever
events or circumstances occur which indicate that the carrying amount of a long-
lived asset may not be fully recoverable.
In a competitive electric market, strandable assets would arise when
investments are made in facilities, or costs are incurred to service customers,
and such costs are not fully recoverable in market-based rates. Examples
include purchase power contracts (e.g., the Kamine/Besicorp Allegany L.P.
contract), or high cost generating assets. Estimates of strandable assets are
highly sensitive to the competitive wholesale market price assumed in the
estimation. The amount of potentially strandable assets at September 30, 1997
depends on market prices and the competitive market in New York State which is
still under development and subject to continuing changes which are not yet
determinable, but could be significant. Strandable assets, if any, could be
written down for impairment of recovery in the same manner as deferred cost
discussed above.
In a competitive natural gas market, strandable assets would arise
where customers migrate away from dependence on the Company for full service,
leaving the Company with surplus pipeline and storage capacity, as well as
natural gas supplies, under contract. The Company has been restructuring its
transportation, storage and supply portfolio to reduce its potential exposure to
strandable costs. Regulatory developments discussed under " GAS RESTRUCTURING
PROCEEDING," above, may affect this exposure; but whether and to what extent
there may be an impact on the level and recoverability of strandable asset costs
cannot be determined at this time.
At September 30, 1997 the Company believes that its regulatory and
strandable assets, if any, are not impaired and are probable of recovery,
although no assurance can be given. The proposed settlement in the Competitive
Opportunities proceeding does not impair the opportunity of the Company to
recover its investment in these assets. However, the PSC has published a Staff
paper to address issues surrounding Nuclear generation, including the
determination of fair market value for facilities after a five year
restructuring transition period. It appears that the PSC may seek to apply
similar principles to other types of generating facilities. A determination in
this proceeding could have an impact on strandable assets.
10
<PAGE>
EITF ISSUE 97-4 - DEREGULATION OF THE PRICING OF ELECTRICITY.
In July, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force (EITF) reached a consensus on accounting rules for utilities'
transition plans for moving to more competitive environments and provided
guidance on when utilities with transition plans will need to discontinue the
application of Financial Accounting Standards Board Statement No. 71 (SFAS 71),
"Accounting for the Effects of Certain Types of Regulation".
The major EITF consensus was that the application of SFAS 71 to a
segment (e.g. generation) which is subject to a deregulatory transition plan
should cease when the legislation or enabling rate order contains sufficient
detail for the utility to reasonably determine what the transition plan will
entail. The EITF also concluded that a decision to continue to carry some or
all of the regulatory assets (including stranded costs) and liabilities of the
separable portion of the business that is discontinuing the application of SFAS
71 should be determined on the basis of where the regulated cash flows to
realize and settle them will be derived. The president of the Edison Electric
Institute has stated that "The combined effect of the above EITF conclusions is
that if a transition plan provides for a non-bypassable fee for the recovery of
stranded costs, there may not be any significant write-off when Statement 71 is
discontinued for generation. An individual company's facts and circumstances
will determine the final accounting impact."
The current Competitive Opportunities Settlement language provides for
recovery of regulatory and stranded costs associated with generation as
discussed in further detail below under Management's Discussion and Analysis of
Financial Condition and Results of Operations, "PSC Competitive Opportunities
Case Settlement". Under the Settlement, if approved by the PSC, there would be
no expectation of a material write-off in the transition to competition.
DECOMMISSIONING TRUST
The Nuclear Regulatory Commission has released for comments a notice of
proposed rule (NOPR) modifying certain aspects of the financial assurance
requirements for decommissioning nuclear power reactors. The NOPR includes,
among other things, changes to the definition of "electric utility" for the
purposes of providing financial assurance for decommissioning as well as new
reporting requirements regarding each licensee's progress on external funding.
The Company does not anticipate any material impact of the application of these
rules today, however it cannot predict the impact of these rules as resolution
of nuclear plant regulation progresses in New York (see Management's Discussion
and Analysis of Financial Condition and Results of Operations under the heading
"PSC Position Paper on Nuclear Generation"). See the Company's 1996 Form 10-K,
Item 8, Note 10 to the Financial Statements regarding the Company's plan for the
eventual decommissioning of the Ginna Nuclear Plant and its 14% share of Nine
Mile Two.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is Management's assessment of certain significant factors
affecting the financial condition and operating results of the Company. This
assessment contains
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<PAGE>
forward-looking statements which are subject to various risks and uncertainties.
The Company's actual results could differ from those anticipated in such
forward-looking statements as a result of numerous factors which may be beyond
the Company's control by reason of factors such as electric and gas utility
restructuring, future economic conditions, and developments in the legislative,
regulatory and competitive environments in which the Company operates. Shown
below is a listing of the principal items discussed .
<TABLE>
<S> <C>
Earnings Summary Page 12
Competition Page 13
PSC Competitive Opportunities Case Settlement
PSC Position Paper on Nuclear Generation
Nuclear Operating Company
FERC Open Transmission Orders
FERC Market Based Electric Rates
PSC Gas Restructuring Case
Securitization
Rates and Regulatory Matters Page 19
1996 Rate Settlement
Gas Settlement Negotiations
1995 Gas Settlement
Gas Fixed Price Proposal
Liquidity and Capital Resources Page 20
Capital and Other Requirements
Redemption of Securities
Financing
Results of Operations Page 22
Operating Revenues and Sales
Fossil Unit Deratings
Operating Expenses
Dividend Policy Page 24
</TABLE>
EARNINGS SUMMARY
Earnings per common share for the current and prior year three month and nine
month periods ended September 30, are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Three Months $ .52 $ .49
Nine Months $1.97 $1.79
</TABLE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS-128"), "Earnings per
Share," which changes the methodology of calculating earnings per share. The
Company will adopt SFAS No. 128 in the fourth quarter of 1997. Had the Company
adopted SFAS-128 during the first quarter the impact on earnings would not have
been significant.
The Company reported higher earnings of $.52 per share for the third
quarter compared to $.49 per share for the same period in 1996. The three cent
per share increase in earnings was achieved despite an electric rate reduction
begun July 1, 1997. Retail electric sales were flat in the third quarter when
compared to the same period last year. Gas sales were up about 3% in the same
comparison periods.
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Earnings for the nine month period were $1.97 per share compared to $1.79
per share for the same period in 1996. A significant factor in the increase in
earnings for the year to date is a difference in timing for the refueling and
steam generator replacement outage at the Ginna facility during the first nine
months of 1996. The purchased electricity cost for this outage reduced the 1996
nine months results by about $.18 per share. The 1997 refueling outage at Ginna
began October 20 and is anticipated to be about one month long. The next
refueling outage is not scheduled to occur until 1999.
The Company has maintained its earnings while reducing electric rates on
July 1, 1996 and again on July 1, 1997. Additional electric rate reductions in
accordance with the Amended and Restated Competitive Opportunities Settlement
(see description below) recently filed with the New York State Public Service
Commission (PSC) are scheduled to begin July 1, 1998, assuming approval from the
PSC. The Company believes that the Settlement, when implemented, allows for a
phase-in to open electric markets while lowering customer prices and
establishing an opportunity for competitive returns on shareholder investments.
The nature and magnitude of the potential impact of any proposals ultimately
adopted by the PSC on the business of the Company will depend on the specific
details of any plan for increased competition and resolution of the complex
issues involved, especially competition at the retail level.
Future earnings will also be affected, in part, by the Company's degree
of success in remarketing its excess gas capacity as set under the terms of the
1995 Gas Settlement and in controlling its local gas distribution costs. The
Company believes it will be successful in meeting the 1995 Gas Settlement
targets over the remaining year of the Settlement period, although no assurance
can be given.
COMPETITION
See the Company's Form 10-K for the fiscal year ended December 31, 1996,
Item 7.- "Competition" for a discussion of the Company's business strategy . See
Note 2 of the Notes to Financial Statements for a discussion of regulatory and
strandable assets and related accounting issues.
PSC COMPETITIVE OPPORTUNITIES CASE SETTLEMENT. By Opinion No. 96-12
issued May 20, 1996 in the "Competitive Opportunities Proceeding," the PSC
endorsed a fundamental restructuring of the electric utility industry in the
State. Among other elements, the PSC's goals included lower rates for consumers
and increased customer choice in obtaining electricity and other energy
services.
On April 8, 1997, the Company, the PSC Staff ("Staff") and other parties
entered into a Settlement Agreement (the "Settlement") with regard to the
Competitive Opportunities Proceeding. The Settlement was the subject of a PSC
examination to determine whether it is in the public interest. This examination
included hearings before an Administrative Law Judge ("ALJ") in early June 1997,
followed by a Recommended Decision by the ALJ recommending approval of the
Settlement in all material respects. At its Open Session held October 8, 1997,
the PSC identified a number of issues for further consideration by the parties
to the Settlement. Additional negotiations were held and an Amended and
Restated Settlement Agreement was entered into on October 23, 1997 and filed the
following day. PSC consideration of the Settlement as amended had been
scheduled for November 5, 1997; but the PSC has postponed such consideration.
At this time, a new date for a decision has not been set. (In the following
description, references to the Settlement are to the revised version.)
Summary. The Settlement, which is subject to PSC approval, provides for
a transition to competition during the five-year term of the Settlement (July 1,
1997 through June 30, 2002). The Settlement would establish the Company's
electric rates for each annual period commencing July 1 ("Rate Year") during the
term. A Retail Access Program will be phased in, allowing customers to purchase
electricity, and later electricity and capacity commitments, from sources other
than the Company. During the
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<PAGE>
term, the Company's non-nuclear generating sources (fossil-fuel, hydro, gas-
turbine generation and purchased power contracts, excluding Kamine) will be
required to compete in the market. The Company will be provided a reasonable
opportunity to recover prudently incurred costs, including those pertaining to
generation and purchased power.
The Settlement also requires the Company to functionally separate its
component operations: distribution, generation, and retailing. The Company
would be required to separate, structurally, any unregulated retail operations
from the remainder of the regulated utility functions. In addition, the Company
would have the option to establish a holding company structure and to utilize
certain funds derived from rendering utility service for unregulated operations.
Although the Settlement provides incentives for the sale of generating assets,
it requires neither divestiture of generating or other assets, nor writing off
of "stranded costs" (the above-market costs, presumed to result from
competition).
The Company believes that the Settlement Agreement will not adversely
affect its eligibility to continue to apply SFAS-71. If, contrary to the
Company's view, such eligibility were adversely affected, a material write-down
of assets, the amount of which is not presently determinable, could be required.
Rate Plan. Subject to certain conditions, the Rate Plan contained in the
Settlement continues and augments the rate reductions provided for in the
Company's 1996 settlement ("the 1996 Settlement") approved by the PSC. Over the
five rate years of the term, the cumulative rate reductions will be as follows:
Rate Year 1: $3.5 million; Rate Year 2: $12.8 million; Rate Year 3: $27.6
million; Rate Year 4: $39.5 million; and Rate Year 5: $51.1 million. The
foregoing amounts include assumed levels of reductions to state gross receipt
taxes ("GRT"). To the extent that the GRT rates are other than as anticipated,
the rate reductions would be revised accordingly. The reduction for Rate Year 1
is equal to the previously approved reduction planned as a provision of the
Company's 1996 Rate Settlement. It was implemented on July 1, 1997 pursuant to
the earlier agreement. No changes in rates would be required for this period
whether the Settlement is approved or not.
The Rate Plan permits the Company to offset against the foregoing total
-----
reductions certain amounts related to a Purchase Power Agreement with Kamine
which is the subject of substantial litigation described in Item 1, Financial
Statements under the caption "Litigation with Co-Generator" in Note 2,
Commitments and Other Matters. To provide for possible settlement of the Kamine
litigation, the Rate Plan permits the Company to make the following offsets, by
"Rate Year": Rate Year 2: $3.5 million; Rate Year 3: $8.4 million; Rate Year 4:
and following (until payment is completed): $10.5 million. The Settlement also
would permit the Company to recover the full amount of any difference between
Kamine costs currently included in rates and any increased amount resulting from
enforcement of the purported PPA or judicially required payments. Seven-eighths
of this difference may be added, on a current basis, to the amount already
included in rates. Amounts not currently recovered may be deferred for future
recovery.
The Settlement permits recovery of inflation-based increases to certain
Operation and Maintenance ("O&M") expenses above 4.0 percent, permits the
Company to retain a portion of property tax decreases, and allows the Company to
recover the costs of certain "Mandates" (i.e. governmentally required and
external costs imposed on the Company) to be included in a "System Benefits
Charge" and to recover others to the extent they exceed a $2.5 million
threshold. The Company also would be permitted to recover the costs of
Catastrophic Events and Competition Implementation Costs (i.e., the cost of
----
transition) to the extent they exceed the same threshold. Low-income and
service quality programs, established in prior proceedings would continue in
much their same form. The maximum service quality penalty, however, would be
reduced to $1.25 million per year.
In the event that the Company earns a return on common equity in excess
of an effective rate of 11.50 percent over the entire five-year term of the
Settlement, 50 percent of such excess will be used to write down deferred costs
accumulated during the term. With regard to the other 50 percent of the excess,
the first $.8 million will be used to reduce rates for certain large industrial
and commercial customer subclasses and
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<PAGE>
the remainder will be used to write down accumulated deferrals or investment in
electric plant and Regulatory Assets (which are deferred costs whose
classification as an asset on the balance sheet is permitted by SFAS-71). If the
Company's rate of return on common equity falls below 8.5 percent or increases
above 14.5 percent, or if the pre-tax interest coverage falls below 2.5 times,
or if certain governmental actions occur which cannot adequately be addressed by
the Settlement as it pertains to Mandates, either the Company or any party to
the Settlement would have the right to petition the PSC for review of the
Settlement and appropriate remedial action.
Retail Access. Over the five-year term of the Settlement, the Company
will phase in a Retail Access Program that will permit customers to purchase
their own electricity and capacity from alternative suppliers. Assuming that
certain operational requirements are met and certain governmental approvals are
in place, on July 1, 1998, customers whose electric loads total 670 Gigawatt
hours ("GWH") (representing approximately 10 percent of the Company's total
annual Retail Sales) will be eligible to purchase electricity (but not capacity
commitments) from alternative suppliers. On July 1, 1999, customers with loads
totaling up to 1,300 GWH (approximately 20 percent of total Sales) will be
eligible to purchase energy and capacity commitments from alternative suppliers.
As of July 1, 2000, aggregate customer load of up to 2,000 GWH (approximately 30
percent of total Sales) will be eligible; and, as of July 1, 2001, up to 3,000
GWH (approximately 46 percent of total Sales) will be eligible. The cited
amounts eligible for retail access would be increased for growth in retail sales
above 6,714 GWH. As of July 1, 2002, all retail customers will be eligible to
purchase energy and capacity from alternative suppliers.
Under the Retail Access Program, delivery of electricity will continue to
be through The Company's distribution system. The schedule for implementation
of the "Energy and Capacity" stage of the Program (commencing July 1, 1999)
assumes that a Statewide Energy and Capacity Market will be in place by July 1,
1998. If the operation of that Market is delayed, the Company may petition the
PSC for a delay in implementation of the Energy and Capacity stage.
During the initial, energy only stage of the Retail Access Program, the
Company delivery rate will be set by deducting from the rates that would apply
to bundled retail service 2.3 cents per kilowatt hour ("KWH") and Load Serving
Entities acting as retailers in the Company's service area will be entitled to
purchase electricity from the Company at a rate of 1.9 cents per KWH. During
the energy and capacity stage, the rate will generally equal the bundled rate
less the cost of the electric commodity and the Company's non-nuclear generating
capacity. These commodity and capacity costs, generally referred to as
"contestable costs," are estimated to be 3.2 cents per KWH.
The Company would not be required to divest any of its generation
facilities. Instead, the phasing-in of the Retail Access Program subjects the
Company's generation to competition from the market in increments, as described
above. "Sunk Costs", the investment in electric plant as of March 1, 1997,
would be included in electric distribution tariff rates during the term of the
Settlement. Future rate treatment of such costs is to be consistent with the
principle that the Company is to have a reasonable opportunity to recover such
costs.
To the extent that the Company sells any generating assets during the
term of the Settlement, gains on such sales will be shared between the Company
and customers according to the following: (1) the first $20.0 million of gains
on sales in the first three Rate Years will be allocated 60 percent to customers
and 40 percent to the Company, and customers will be entitled to 80 percent and
the Company to 20 percent of gains over $20.0 million; and (2) during the final
two Rate Years, customers will be entitled to 80 percent and the Company to 20
percent of all gains. With regard to losses on such sales, the Settlement
acknowledges an intent that the Company will be permitted to recover such losses
through distribution rates during the term of the Settlement in accordance with
SFAS-71. Future rate treatment is to be consistent with the principle that the
Company is to have a reasonable opportunity to recover such costs.
"To-Go Costs" of the Company's non-nuclear resources (i.e., capital costs
----
15
<PAGE>
incurred after February 28, 1997, operation and maintenance expenses, and
property, payroll and other taxes) are to be recovered through the distribution
access tariff. The fixed portion of To-Go Costs would be recovered in full
through the distribution access tariff until July 1, 1999 and subject to the
market thereafter in accordance with the phase-in schedule for the Retail Access
program described above. The variable portion of non-nuclear To-Go Costs would
also be subject to the market in accordance with the phase-in Schedule described
above. Upon extension of eligibility for the Retail Access Program to all
retail customers on July 1, 2002, the Company would be authorized to modify its
distribution access rates, so as to hold constant the degree to which its To-Go
Costs are at risk for recovery through the market. Thus, while the recovery of
non-nuclear To-Go Costs would continue to be through the market, recovery of
nuclear costs would remain recoverable through regulated rates. If, during the
operation of the Energy and Capacity Stage of the Retail Access Program, the
market price of energy and capacity exceeds an average of 3.2 cents per KWH, the
pace of the Retail Access Program implementation schedule could, after
discussion among the Settlement parties, be accelerated.
During at least the first two and one-half years of the Settlement, all
prudently incurred costs associated with the Ginna nuclear plant and the
Company's share of the Nine Mile Point 2 nuclear facility would be recovered
through regulated retail rates. Future rate treatment of Nine Mile Point 2
would be determined through good faith negotiations among the Company, Staff and
the other co-tenants of the facility. It is expected that rate treatment of
Ginna would be similar. No change in such treatment of nuclear facilities may
be implemented prior to January 1, 2000. Shutdown and decommissioning costs
would be recovered during the term of the Settlement in a manner consistent with
past ratemaking treatment.
Corporate Structure. The Settlement envisions, and authorizes the
Company to form, a holding company ("HOLDCO") structure and provides standards
of conduct to govern relationships among affiliated entities within that
structure. Formation of the HOLDCO would require a separate petition to the
PSC, a form of which is appended to the Settlement, and approval by
shareholders, the Securities and Exchange Commission, the Federal Energy
Regulatory Commission ("FERC") and the Nuclear Regulatory Commission.
The Settlement would authorize the Company to initially fund its
unregulated activities, whether conducted through a HOLDCO or otherwise, with
$50 million and would not require a separate authorization by the PSC for such
investment.
Miscellaneous. Consistent with a PSC order issued June 23, 1997 in a
separate proceeding involving establishment of pilot programs for farmers and
food processors, the Settlement provides that the Company's retail access
program will commence on February 1, 1998 for those groups of customers within
the Company's service area. To preserve rights in the event that the Settlement
were not approved, the Company, in October 1997, petitioned for judicial review
of the June 23, 1997 order.
Upon approval of the Settlement by the PSC, the Company would withdraw
from an appeal challenging the PSC's Opinion No. 96-12, terminate its petition
seeking judicial review of the PSC's decision regarding the settlement in the
previous electric rate proceeding (the 1996 Rate Settlement) and terminate its
petition seeking judicial review of the PSC's decision requiring implementation
of a retail access pilot program, as discussed in the preceding paragraph. The
present Settlement would, upon approval, supersede the 1996 Rate Settlement.
Various incentive and penalty provisions in the 1996 Rate Settlement would be
eliminated.
PSC POSITION PAPER ON NUCLEAR GENERATION. On August 27, 1997, the PSC
requested comments from interested parties on a PSC Staff position paper
concerning the treatment of Nuclear generation after a transition period. The
Staff paper concludes that (1) Nuclear generation should operate on a
competitive basis, (2) sale of generation plants at auction to third parties is
the preferred means of determining market value and offer the greatest potential
for mitigation of stranded costs and the elimination of anti-competitive
subsidies, and (3) where third party sales are not feasible, "to go" costs
(fuel, labor and other operating costs, prospective capital additions, property
taxes and insurance)
16
<PAGE>
must be recovered in the wholesale market price of power.
On October 15, 1997, the Company and four other utilities jointly
responded (1) indicating the Staff report did not thoroughly consider
responsibility for decommissioning and disposal of spent fuel as well as other
safety, health, environmental and fuel diversity issues, (2) that the use of an
untested auction process may not be a practical way to achieve any reduction in
sunk costs to be borne by customers and (3) that the report did not address the
recovery of substantial transaction costs such as approvals of a sale by
bondholders and other lenders and by the NRC. The utilities believe that the
inherent operating characteristics of nuclear generation and the implications of
NRC regulation require that nuclear plants have access to an adequate revenue
stream and that such plants should be treated for dispatch purposes as baseload,
must run units. The utilities urge the PSC to adopt a process that would enable
all parties to fully develop the necessary facts and analyses and to invite the
NRC to participate in addressing the future of nuclear generation in New York
State.
NUCLEAR OPERATING COMPANY. On October 12, 1996, the Company and Niagara
Mohawk Power Corporation (Niagara) announced plans to establish a nuclear
operating company to be known as the New York Nuclear Operating Company (NYNOC).
Since that time NYNOC has been organized as a New York Limited Liability Company
and the Consolidated Edison Company of New York and New York Power Authority
have announced their desire to move forward with the Company and Niagara with
plans to implement NYNOC. It is envisioned that NYNOC would eventually assume
responsibility for operation of all the nuclear plants in New York State,
including the Company's totally owned Ginna Nuclear Plant and jointly owned Nine
Mile Two. The Company believes that NYNOC could contribute to maintaining a
high level of operational performance, contribute to continued satisfactory NRC
regulatory compliance, provide opportunities for continued cost reduction and
provide the basis for satisfactory economic regulation by the PSC. Various
groups are now involved in the detailed studies and analyses required before a
definitive decision to proceed with NYNOC can be made. The organizing utilities
have submitted comments on the PSC Staff position paper on nuclear generation
noting that the Staff proposal would nullify the potential benefits of NYNOC.
FERC OPEN TRANSMISSION ORDERS. In early 1996 FERC issued new rules to
facilitate the development of competitive wholesale markets by requiring
electric utilities to offer "open-access" transmission service on a non-
discriminatory basis in tariffs. The Company filed its required transmission
service tariff on July 9, 1996. The new tariff would apply to wholesale
purchases and sales made by the Company and the financial impact will depend on
prevailing energy prices in the wholesale market. The near-term impacts of this
tariff are not expected to be significant. On March 6, 1997, the Company
reached a settlement in principle with the other parties respecting rate issues.
FERC approval of the settlement was granted on June 25, 1997.
In December 1996 the Company and other New York utilities submitted a
compliance filing with FERC in accordance with the requirements of the FERC's
"open-access" order. In order to support the FERC's "open access" order, the
utilities also established a centralized transmission service information
network, which went on-line in early January 1997. This "open access same-time
information system" (OASIS) enables wholesale customers of New York State's bulk
power system to obtain timely information regarding transmission service
availability and pricing via the Internet.
On January 31, 1997, the utilities filed a "Comprehensive Proposal To
Restructure the New York Wholesale Electric Market" with the FERC. As proposed,
the existing New York Power Pool ("NYPP") will be dissolved and the independent
system operator (ISO) will administer a state-wide open access tariff and
provide for the short-term reliable operation of the bulk power system in the
state. In addition to proposing a FERC-endorsed ISO, the proposal calls for
creation of a New York Power Exchange ("NYPEx") and a New York State
Reliability Council ("NYSRC"). On May 2, 1997 the utilities made a supplemental
filing with FERC that provided additional details of the proposed NYSRC.
The NYPEx is a voluntary organization intended to facilitate development
of an
17
<PAGE>
active wholesale market by providing facilities and procedures to offer energy
for sale and to make energy purchases. As proposed, generators of electricity
could submit bids to sell energy to, and load serving entities could submit bids
to buy energy from, the NYPEx or any other power exchange. Each power exchange
would then submit its delivery schedules to the ISO which would review them for
feasibility and reliability. The energy market would use a "locational-based
marginal pricing" mechanism that takes into account transmission limitations.
Generators would also have the opportunity to enter into bilateral contracts for
electricity. The NYSRC is an organization formed by the existing eight
transmission providers in New York plus three representatives of other market
participants (buyers, sellers, and consumer/environmental groups). The role of
the NYSRC would be to establish general reliability standards that the ISO would
use to establish day-to-day operating procedures.
The proposed NYSRC is viewed by the transmission providers as an
essential prerequisite to transferring control of their transmission facilities
to the ISO. The NYPP member systems believe that the combination of an ISO with
day-to-day operational responsibility and the NYSRC with limited authority to
establish basic reliability standards on a long-term basis provides a balanced
structure to resolve the inherent tension between maintaining current system
reliability and maximizing the commercial use of transmission facilities by an
increased number of market participants.
Significant changes to pricing procedures now in effect within NYPP are
expected, but it is unclear what effect these changes may have once other
regulatory changes in New York State are implemented. At the present time, the
Company cannot predict what effects regulations ultimately adopted by FERC will
have, if any, on future operations or the financial condition of the Company.
FERC MARKET-BASED ELECTRIC RATES. On July 1, 1997, as amended on July
25, 1997, the Company filed with the FERC seeking authorization to engage in the
wholesale sale of electric energy and capacity at market-based rates. Roxdel,
(now "Energetix, Inc.") the Company's wholly-owned, power marketer subsidiary,
also filed on July 1, 1997.
FERC allows power sales at market-based rates if the seller and its
affiliates do not have, or have adequately mitigated, market power in generation
and transmission, and cannot erect other barriers to entry. To satisfy the
latter, a transmission owning public utility must have an open access
transmission tariff for the provision of comparable service. The Company's
open access transmission tariff was accepted by the FERC on June 25, 1997.
On September 12, 1997, the FERC accepted the Company's and Energetix's
applications to engage in market-based rates transactions. Consistent with FERC
precedent, the Company must comply with a code of conduct governing the
relationship between it and Energetix and must seek separate authorization in
order to sell electric energy to Energetix at market-based rates.
PSC GAS RESTRUCTURING CASE. In March 1996 the PSC issued an Order and
approved utility restructuring plans designed to open up the local natural gas
market to competition and thereby allow residential, small business and
commercial/industrial users the same ability to purchase their gas supplies from
a variety of sources, other than the local utility, that larger industrial
customers already have. During a three-year phase-in period the State's gas
utilities would be permitted to require customers converting from sales service
to take associated pipeline capacity for which the utilities had originally
contracted. The PSC has indicated that it will address the issue of how the
costs of such capacity would be recovered after the three-year period during the
third year of the phase-in period. The PSC Staff has recently issued a position
paper on The Future of the Natural Gas Industry in which the Staff proposes that
LDCs exit the merchant function in five years. Treatment of existing pipeline
capacity contracts and Provider of Last Resort responsibilities are substantial
issues to be worked out between the PSC, LDCs and other stakeholders (see note 2
for further information). Under two new gas
18
<PAGE>
transportation tariffs, gas customers have a choice of suppliers beginning
November 1, 1996. The Company will distribute the gas and charge for the
distribution as well as associated services. The Company believes its position
in the market is such that it will maintain its distribution system margins.
Under a phase-in limitation, loss of gas commodity sales may be limited to five
percent of the Company's annual gas volume the first year, and then five
additional percent for each of the following two years. The phase-in will be
reviewed as experience is gained with the program. The Company anticipates that
the use of transportation gas service will increase. Through September 30,
1997, 38 customers were being served under this new service.
SECURITIZATION. Legislation known as "securitization" was passed by the
New York State Senate on March 19, 1997. However, the 1997 regular session ended
without Assembly action. The Senate's securitization program, the Electric
Ratepayer Relief Act, would provide electric corporations the opportunity to
obtain highly secure, lower-cost financing for intangible assets - costs
incurred by the corporation, for which it does not acquire any physical property
(e.g. buy-outs and/or restructuring of above-market independent power purchase
(IPP) contracts, demand-side management expenditures, environmental remediation
costs, and other regulatory liabilities). Any net savings as a result of such
financing would be dedicated to electric rate reductions.
The Senate legislation specifically defines Qualified Intangible
Expenditures as:
(1) Expenditures which did not or will not result in the acquisition of real
or tangible personal property (including costs incurred due to
cancellation or reduction of IPP Contract obligations).
(2) Amounts necessary to refinance or retire existing debt or equity capital
in order to achieve an appropriate capital structure as approved by the
PSC.
(3) Costs incurred to obtain, carry, or administer financing for such
expenditures, and federal, state or local tax expense incurred by the
electric corporation from the financing transaction and/or the intangible
charges.
The bill states that the PSC is required to verify that securitization
will result in significant customer rate savings. The Company believes that
securitization will balance the interest of the electric company and consumers
by providing a reasonable and fair solution to the problem of stranded assets at
no cost to the state. Securitization has already been successfully enacted in
several other states. The Company believes that passage of securitization
legislation should be a priority during the upcoming legislative session.
RATES AND REGULATORY MATTERS
1996 ELECTRIC RATE SETTLEMENT. The PSC approved a Settlement Agreement
(1996 Rate Settlement) among the Company, PSC Staff and several other parties
which set rates for a three-year period, ending June 30, 1999. If the PSC
approves the Competitive Opportunities Settlement (Settlement) discussed
earlier, the Settlement would supersede the 1996 Rate Settlement and the Company
would terminate its petition seeking judicial review of the 1996 Rate
Settlement. For a description of the 1996 Rate Settlement see the Company's 1996
Form 10-K, Item 7, under the heading "Rates and Regulatory Matters".
GAS SETTLEMENT NEGOTIATIONS. In July 1997, the Company commenced negotiations
with the PSC Staff and other parties with the objective of developing a multi-
year settlement of issues pertaining to the Company's gas business that would
take effect upon expiration of the current Gas Settlement (see paragraph below.)
on June 30, 1999. A further objective of these negotiations is to maximize the
efficiencies of the entire business by structuring a settlement that will be as
consistent as possible with the provisions of the
19
<PAGE>
settlement in the Competitive Opportunities Proceeding, as discussed earlier
under "Competition". Negotiations are at an early stage; accordingly, the
Company can make no prediction as to their outcome.
1995 GAS SETTLEMENT. The Company entered into several agreements to help
manage its pipeline capacity costs and successfully met settlement targets for
capacity remarketing for the twelve months' periods ending October 31, 1997 and
October 31, 1996, thereby avoiding negative financial impacts for those periods.
The Company believes that it will also be successful in meeting the Settlement
targets in the remaining year of the Settlement period, although no assurance
may be given. For further information with respect to the 1995 Gas Settlement
see the Company's 1996 Form 10-K Item 8, Note 10 of the Notes to Financial
Statements.
GAS FIXED PRICE OPTION. On October 7, 1997, the PSC issued an Order which
requires each New York gas utility to offer a gas fixed price plan commencing
with this heating season. The Company is offering a gas fixed price option to
help customers manage the price volatility exhibited in recent years. If
customer interest warrants, the Company may use financial instruments to manage
price risk.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997 cash flow from operations (see
Consolidated Statement of Cash Flows), provided the funds for construction
expenditures and the payment of dividends and short-term debt. At September 30,
1997 the Company had cash and cash equivalents of $153 million, however, $102
million of that amount, received from financing activities in August and
September, is being used to redeem debt in the fourth quarter. Capital
requirements during 1997 are being satisfied primarily from the combination of
internally generated funds and the use of short-term credit arrangements.
CAPITAL AND OTHER REQUIREMENTS. The Company's capital requirements relate
primarily to expenditures for energy delivery, including electric transmission
and distribution facilities and gas mains and services as well as nuclear fuel,
electric production and the repayment of existing debt. The Company has no
plans to install additional baseload generation.
Total 1997 capital requirements are currently estimated at $132 million, of
which $102 million is for construction and $30 million is for the redemption of
maturing securities and sinking fund obligations. Approximately $58 million had
been expended for construction as of September 30, 1997, reflecting primarily
expenditures for nuclear fuel and upgrading electric generating, transmission
and distribution facilities and gas mains.
Purchased Power Requirement. Under federal and New York State laws and
regulations, the Company is required to purchase the electrical output of
unregulated cogeneration facilities which meet certain criteria (Qualifying
Facilities). The Company was compelled by regulators to enter into a contract
with Kamine for approximately 55 megawatts of capacity, the circumstances of
which are discussed in this report under Note 2 of the Notes to Financial
Statements and in the Company's 1996 Form 10-K under Item 8, Note 10 of the
Notes to Financial Statements. The Kamine contract and the outcome of related
litigation may have an important impact on the Company's electric rates and its
ability to function effectively in a competitive environment. In the event the
Settlement (described above) is approved by the PSC, recovery of costs
pertaining to Kamine will be governed by its terms. The Company has no other
long-term obligations to purchase energy from Qualifying Facilities.
Year 2000 Computer Issues. As the year 2000 approaches many companies face a
potentially serious information systems (computer) problem because most software
application and operational programs written in the past will not properly
recognize calendar dates beginning with the year 2000. Systems and devices in
the Company's
20
<PAGE>
Customer Service, Operations and Financial systems which were written using two-
year digits to define the applicable year, rather than four may require
remediation. If not corrected, this could force computers to either halt or
lead to incorrect calculations. In July 1996, a formal Year 2000 project was
initiated and a project team, comprised of representatives from each of the
Company's business areas was established to oversee compliance efforts. The
Company has also entered into an agreement with a consultant, International
Business Machines Corporation, for assessment, remediation and testing services.
At this time, the Company believes that the problem is being addressed properly
to prevent any adverse operational or financial impacts. The Company believes
it will incur approximately $15 million of costs through January 1, 2000,
associated with making the necessary modifications identified to date.
REDEMPTION OF SECURITIES. During 1997 the Company has redeemed the
securities shown below as of November 15, 1997. Funds for these redemptions
came, largely, from cash and the refinancing of pollution control revenue bonds
(see following discussion under "Financing".).
<TABLE>
<CAPTION>
Long Term Debt Redeemed.
- -----------------------
Amount
Date Series Rate (000's)
---- ------ ---- -------
<S> <C> <C> <C>
5- 1-97 W* 6 1/4% $ 20,000
5- 1-97 Y* 8.00 29,668
10- 1-97 1984** monthly 51,700
10-15-97 EE** 6 1/2 10,000
11-15-97 1985** annually 40,200
--------
Total $151,568
</TABLE>
* first mortgage bonds
** tax-exempt pollution control securities
<TABLE>
<CAPTION>
Preferred Stock Redeemed.
- ------------------------
Amount
Date Series Rate (000's)
---- ------ ---- -------
<S> <C> <C> <C>
4-22-97 N 7.50% $ 20,000
9- 1-97 S 7.45% 10,000
--------
Total $ 30,000
</TABLE>
FINANCING. (See Form 10-K for the fiscal year ended December 31, 1996, Item
8. Note 9. Short-Term Debt, regarding the Company's short-term borrowing
arrangements.)
On August 19, 1997 the Company sold $101.9 million of New York State
Energy Research and Development Authority (NYSERDA) multi-mode tax-exempt bonds
due August 1, 2032. The proceeds from the multi-mode issue are being used to
redeem three tax-exempt issues during the fourth quarter of 1997 (see
"Redemption of Securities" above). The initial weighted average interest rate on
the multi-mode issue was 3.33%, on an annualized basis, for seven days.
Subsequent interest rates may be set weekly or may be set for varying periods
based on market conditions at the time.
On September 16, 1997, the Company completed arrangements for the delivery
in September 1998 of $25.5 million of 5.95% NYSERDA tax-exempt bonds due
September 1, 2033. Proceeds will be used to redeem an issue of tax-exempt first
mortgage bonds which is not redeemable until December 1998.
The multi-mode issue and the fixed-rate issue described above are insured
by MBIA
21
<PAGE>
Insurance Corporation, and rated AAA/Aaa.
Under the Company's Performance Stock Option Plan, options for 261,261
shares of Common Stock have become exercisable due to Common Stock market price
performance during October 1997.
RESULTS OF OPERATIONS
The following financial review identifies the causes of significant changes
in the amounts of revenues and expenses, comparing the three-month and nine-
month periods ended September 30, 1997 to the three-month and nine-month periods
ended September 30, 1996. A summary of changes in Electric and Gas department
revenues and expenses is presented in the Operating Revenues and Expenses table.
<TABLE>
<CAPTION>
Operating Revenues and Expenses
(Millions of Dollars)
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
<S> <C> <C>
1996 Earnings $19.2 $ 69.7
Increase (decrease) in earnings:
Electric revenue changes (7.9) (6.3)
- Includes effect of rate changes
- Consumption changes including weather
- Changes in sales to other electric utilities
Electric fuel cost changes (1.1) 12.3
Gas margin (revenue less fuel) 1.7 (5.9)
- Consumption changes including weather
Miscellaneous non-fuel operating and maintenance 4.7 8.9
- Reflects operating cost associated with 1996
replacement of nuclear steam generators
- Reflects expense reductions for payroll, R&D
and outside services
Depreciation and amortization .3 (10.9)
Net federal income tax effects (1.3) 1.0
Local and state tax effects 2.1 6.5
Other income and deductions effects .2 (3.3)
Interest expense 2.0 3.7
- Redeemed 8 3/8% series CC bonds 3/7/96
- Redeemed 8.00% series Y bonds 5/1/97
- Reflects write off of unamortized debt expense
Dividends on preferred stock .5 1.1
- Redeemed 7.50% series N 4/22/97
- Redeemed 7.45% series S 9/ 1/97 _____ -----
1997 Earnings $20.4 $76.8
</TABLE>
22
<PAGE>
OPERATING REVENUES AND SALES. Total Company revenues for the first nine
months of 1997 were $14.0 million or 1.8% below the first nine months of 1996
with decreases in customer electric rates and lower therm sales of gas due to
warmer weather than last year partially offset by higher customer electric
kilowatt-hour sales and higher electric sales to other utilities (OEU sales).
For the third quarter, total Company revenues were $13.5 million or 5.8% below
last year reflecting mainly lower electric rates and lower gas costs partially
offset by higher OEU sales and an increase in gas sold and transported.
FOSSIL UNIT DERATINGS. Several of the Company's fossil-fueled generating
units have been temporarily derated since February 1997 to maintain acceptable
opacity levels while the Company investigates additional engineering solutions
to address the opacity of the Units' emissions ( see Note 2 of the Notes to
Financial Statements under the heading "Environmental Matters, Opacity Issue").
The financial impact of the deratings includes the lost opportunity associated
with energy sales and, at times, the need to make additional purchases to meet
system requirements. While the deratings have decreased earnings, and will
continue to do so, the amount is not expected to be material.
The NYPP is in the process of evaluating new rules for its system load
regulation. Opacity limitations are expected to reduce the ability of the
Company to react to changes in load and provide regulation services when called
upon by the NYPP, resulting in additional costs. Depending on the new NYPP
requirements, the revised rules could result in the Company having to purchase
additional regulation services which may cost between $500,000 and $2,500,000
annually. The Company intends to make a $2.7 million capital upgrade to the
precipitator of one of its fossil-fueled generating units which is expected to
remove a substantial portion of the opacity exceedance which led to the
derating.
FUEL EXPENSES. Fuel expenses decreased in both comparison periods
reflecting mainly lower kwh purchases of electricity due to efficiencies derived
from the new steam generators installed last year at the Ginna nuclear plant.
While the Ginna Plant operated throughout the first nine months of 1997, it was
in a refueling and steam generator replacement outage in the second quarter of
1996 and operated intermittently in the third quarter of 1996. Purchased
electricity is expected to increase in the fourth quarter of 1997 because the
Ginna plant began a scheduled refueling outage on October 20 and is expected to
be out of service for about a month.
OPERATIONS EXCLUDING FUEL EXPENSES AND MAINTENANCE EXPENSES. The
decreases in operations excluding fuel and maintenance expenses in both
comparison periods reflect mainly lower payroll due to less overtime and
workforce reductions, lower research and development and outside services
expenses and lower maintenance expenses following the Ginna steam generator
replacement outage last year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
in the nine month comparison period due mainly to an increase in nuclear
decommissioning expense allowed in rates effective July 1, 1996 and completion
of the steam generator replacement at the Ginna nuclear plant in the summer of
1996. Depreciation and amortization was flat for the third quarter comparison
period.
TAXES. The decreases in local, state and other taxes in both
comparison periods reflect mainly lower property taxes due to decreases in
assessments and/or rates and lower revenue taxes due to decreases in revenues
and the New York State revenue tax surcharge rate.
The decrease in Federal income tax in the first nine months of 1997
reflects mainly the reversal of a prior provision for the in-service date of
Nine Mile Two as a result of an agreement reached with the Internal Revenue
Service. The increase in Federal income tax for the third quarter is a result
of increased pre-tax earnings for the period.
OTHER STATEMENT OF INCOME ITEMS. Other (Income) and Deductions, Other-net
increased in the nine month comparison period due mainly to a decline in
subsidiary earnings resulting from the sale of the Company's interest in the
Empire State Pipeline in
23
<PAGE>
1996. The decreases in interest charges in both comparison periods reflect
mainly the early redemption of long-term debt in the second quarter. Preferred
stock dividends decreased due to the redemption of issues in April and
September, 1997.
DIVIDEND POLICY
On September 17, 1997, the Board of Directors authorized a common
stock dividend of $.45 per share, which was paid on October 25, 1997 to
shareholders of record on October 2, 1997. Dividends on the preferred stocks
were also declared at the regular rates per share payable December 1, 1997 to
stockholders of record at the close of business on November 5, 1997. The
Company believes that future common stock dividend payments will need to be
evaluated in the context of maintaining the financial strength necessary to
operate in a more competitive and uncertain business environment. This will
require consideration, among other things, of a dividend payout ratio that is
lower over time, reevaluating assets and managing greater fluctuation in
revenues. While the Company does not presently expect the impact of these
factors to affect the Company's ability to pay dividends at the current rate,
future dividends may be affected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information on Legal Proceedings reference is made to Note 2 of the
Notes to Financial Statements.
ITEM 5. OTHER EVENTS
SENIOR MANAGEMENT CHANGES. In September the Board of Directors
announced that Thomas S. Richards will become Chairman, President and Chief
Executive Officer on January 1, 1998. He is currently President and Chief
Operating Officer. He will succeed Roger W. Kober, Chairman and Chief Executive
Officer who will retire on December 31.
Michael T. Tomaino was named Senior Vice President and General Counsel
on October 1, 1997. Mr. Tomaino was most recently Vice President, General
Counsel and Secretary of Goulds Pumps, Inc. Prior to that, he was a partner at
the law firm of Nixon, Hargrave, Devans & Doyle, where he concentrated his
practice in telecommunications and utility law and general civil litigation. He
also served on the Board of Directors of the former Rochester Telephone
Corporation (now Frontier Corp., Inc.) from 1974 to 1994 when the telephone
industry was undergoing substantial deregulation.
BOARD OF DIRECTORS CHANGES. In September two persons were elected to
the Board of Directors. They are Susan Holliday, President and Publisher of the
Rochester Business Journal, and Mark Grier, Executive Vice President for
Financial Management of the Prudential Insurance Company of America.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: See Exhibit Index below.
(b) Reports on Form 8-K: None
EXHIBIT INDEX
Exhibit 10-1* Form of Rochester Gas and Electric Corporation 1996 Performance
Stock Option Plan Agreement.
Exhibit 10-2* Agreement, dated October 1, 1997, between the Company and
Michael T. Tomaino, Senior Vice President and General Counsel.
24
<PAGE>
Exhibit 10-3 Agreement dated as of September 23,1997 between the Company and
International Business Machines Corporation.
Exhibit 10-4 Amended and Restated Settlement Agreement dated October 23,
1997 between the Company, the Staff of the New York PSC and other
parties (excluding Schedules).
Exhibit 27 Financial Data Schedule pursuant to Item 601 (c) of
Regulation S-K.
* Denotes executive compensation plans and arrangements.
25
<PAGE>
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.
ROCHESTER GAS AND ELECTRIC CORPORATION
--------------------------------------
(Registrant)
Date: November 13, 1997 By /s/ J.B. STOKES
------------------------------------
J. Burt Stokes
Senior Vice President, Corporate Services
and Chief Financial Officer
Date: November 13, 1997 By /s/ WILLIAM J. REDDY
--------------------------------------
William J. Reddy
Controller
26
<PAGE>
EXHIBIT 10-1
FORM OF
ROCHESTER GAS AND ELECTRIC CORPORATION
1996 PERFORMANCE STOCK OPTION PLAN
STOCK OPTION AGREEMENT
AGREEMENT made and entered into as of the day of , between
----- -----------
Rochester Gas and Electric Corporation ("RG&E"), a New York corporation, and
___________________________________________ ("Employee").
Whereas, RG&E wishes to provide an incentive for the Employee to advance the
interests of RG&E and its shareholders in light of an increasingly competitive
market and,
Whereas, the Board of Directors of RG&E ("Board") has adopted the Rochester Gas
and Electric Corporation 1996 Performance Stock Option Plan ("Plan").
(Capitalized terms used in this Agreement but not otherwise defined, shall have
the meanings ascribed to them in the Plan. The Plan is hereby incorporated by
reference into this Agreement, and this Agreement is subject in all aspects to
the terms and conditions of the Plan.)
Now, therefore, in consideration of the mutual promises made herein and for
other good and valuable consideration, the parties hereby agree as follows:
SECTION ONE -- AWARD
RG&E hereby awards to the Employee, by action of the Committee on Management
("Committee") of the Board of Directors of RG&E, as a matter of separate
agreement and not in lieu of salary or any other compensation for services, the
right and option (the "Option") to purchase __________ full shares of RG&E
common stock ("Common Stock"), par value $5.00 per share, on the terms and
conditions set out in the Plan and below.
SECTION TWO -- EXERCISE PRICE
The exercise price of the shares of Common Stock subject to this Option is
$__________per share.
SECTION THREE -- WHEN EXERCISABLE
The Option may be exercised, to the extent indicated, upon the occurrence of the
following "Performance Conditions":
. _______ percent (___%) of the shares subject to the Option may be
purchased after the Common Stock has maintained for five (5)
consecutive trading days a closing price ("Closing Price") on the New
York Stock Exchange of __________________ Dollars ($______);
<PAGE>
2
. an additional ______________ percent ( ___%) of the shares subject to
the Option may be purchased after the Common Stock has maintained for
five (5) consecutive trading days a Closing Price of ___________
Dollars ($_________); and
. the final ________________percent (___%) of the shares subject to the
Option may be purchased after the Common Stock has maintained for five
(5) consecutive trading days a Closing Price of ____________ Dollars
($________).
Notwithstanding the Performance Conditions above, no Option awarded under this
Agreement may be exercised:
. after ten (10) years from the date of this Agreement or;
. after the employment of Employee by RG&E has terminated, except (i) to
the extent that one or more Performance Conditions have been met and
(ii) if one of the following special circumstances occurs:
-- In the event of the death of the Employee, the Option may be
exercised for a period of one year by the Employee's estate or by
a person who acquires the right to exercise the Option by bequest
or inheritance or by reason of the death of the Employee.
-- If the Employee retires in accordance with RG&E's formal plan of
retirement at or after age 65, or in the sole discretion of the
Committee, prior to age 65, the Option may be exercised for
ninety (90) days (or for up to three (3) years in the discretion
of the Committee) after retirement.
-- If the Employee's employment with RG&E is terminated as a result
of a Disability, the option may be exercised for ninety (90) days
(or up to one (1) year in the discretion of the Committee) after
termination of employment.
Notwithstanding any other conditions, if a Change in Control of RG&E occurs,
prior to the termination of Employee's employment with RG&E, 100% of the shares
subject to the Options will be eligible for exercise for a period of ninety (90)
days from the date of the Change in Control.
<PAGE>
3
SECTION FOUR -- METHODS OF EXERCISING THE OPTION
The Employee shall exercise the Option by written notice to RG&E in the form
provided or such other writing that the Committee accepts. The writing must
specify (i) the number of shares being purchased, (ii) the form of payment of
the Exercise Price, (iii) a statement of intention to exercise, (iv) any
representations or disclosure required by any applicable securities law and (v)
the signature of the Employee.
The Employee may use any form of payment of the Exercise Price allowed under the
Plan.
Notwithstanding any other provision of this Agreement, no exercise will be
allowed that violates any applicable securities law.
SECTION FIVE -- TRANSFER OF THE OPTION
The Option shall not be transferable by the Employee other than by will and the
laws of descent and distribution. During the lifetime of the Employee, the
Option shall be exercisable only by the Employee.
SECTION SIX -- TERMINATION OF THE OPTION
In the event of the voluntary or involuntary termination of the employment of
the Employee for any reason, other than the death, retirement or Disability of
the Employee, or in the event of a Change in Control, the Option shall terminate
immediately.
SECTION SEVEN -- DIVIDEND EQUIVALENT RIGHTS
For each share subject to this Option, the Employee shall have a Dividend
Equivalent Right ("DER") which shall entitle the Employee to a payment on a per
share basis in the amount of any dividends paid on the Common Stock of RG&E from
the date the Option is granted under this Agreement until the date the Option is
exercised, if the Option is exercised. The DER is only payable if the Option
associated with it is exercised - and is payable in the same proportion as that
of the Option exercised, i.e., if 50% of the Option is exercised, the DER is
only payable on the 50% portion of shares. If the associated Option or a
portion thereof expires unexercised, the DER or the same portion thereof expires
simultaneously with the Option. To the extent that any DER is not used as a
portion of a payment of the Exercise Price, such DER shall be paid in accordance
with the Plan.
<PAGE>
4
SECTION EIGHT -- TAX WITHHOLDING
(a) Whenever RG&E transfers shares of Common Stock under the Plan and this
Agreement to Employee, RG&E has the right to require the Employee to remit
to RG&E an amount sufficient to satisfy any federal, state or local
withholding tax requirements ("Tax Requirements") prior to the delivery of
the shares.
b) Whenever under the Plan and this Agreement payments are to be made in cash,
such payments shall be net of an amount sufficient to satisfy any Tax
Requirements.
c) Employee may satisfy his or her obligation under this Section Eight by (i)
directing RG&E to withhold shares otherwise transferable to Employee, (ii)
by delivering Common Stock to RG&E or (iii) by delivering cash, of a value
equal to the Tax Requirements amount.
SECTION NINE -- NO WARRANTY OF TAX EFFECT
Nothing in this Agreement shall be deemed to be expressed or warranted as to the
effect for federal, state or local tax purposes of any Awards.
SECTION TEN -- EFFECT ON THE EMPLOYMENT RELATIONSHIP
This Agreement does not confer any rights or privileges to the Employee
regarding any expectation of continued employment or the terms of any
employment. The Employee remains an employee-at-will of RG&E or its subsidiary,
such status being unaffected by this Agreement.
SECTION ELEVEN -- ADJUSTMENTS
Pursuant to the Plan, in the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, stock split,
combination, distribution or other change in the corporate structure of RG&E
affecting the Common Stock, the Committee shall adjust the number and class of
securities subject to the Option under this Agreement in such manner as the
Committee shall determine to be appropriate to prevent the dilution or
diminution of Awards under this Agreement.
SECTION TWELVE -- ADMINISTRATION
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York.
<PAGE>
5
This is the entire Agreement between the parties; it may not be modified or
altered except in writing executed by the parties hereto.
The Committee may, as provided in the Plan, interpret the Plan and this
Agreement, adopt, amend and rescind rules and regulations relating to the Plan
and its Awards, and make all other determinations and take all other action
advisable for the implementation and administration of the Plan and Awards made
in this Agreement. All determinations and decisions made by the Committee, the
Board and any delegate of the Committee pursuant to the provisions of the Plan
shall be final, conclusive and binding on all persons. No member of the
Committee shall be liable for any action taken or decision made in good faith
relating to the Plan or any Award under this Agreement.
IN WITNESS WHEREOF, Rochester Gas and Electric Corporation has caused this
Agreement to be executed by its duly authorized officer and
_____________________________ (Employee Signature) has executed this Agreement
by his or her own hand, on the _________ day of _______________, _________.
ROCHESTER GAS AND ELECTRIC CORPORATION
By _____________________________
Title __________________________
________________________________
<PAGE>
EXHIBIT 10-2
ROCHESTER GAS AND ELECTRIC CORPORATION
CHANGE OF CONTROL AGREEMENT
This Severance Agreement is made effective as of this 1st day of October
---- -------
1997, by and between Rochester Gas and Electric Corporation, a New York
- ----
corporation having its principal place of business in Rochester, New York (the
"Company"), and Michael T. Tomaino, Esq., an individual currently residing in
------------------------
Honeoye Falls, New York (the "Employee").
1. PAYMENT OF SEVERANCE AMOUNT. If the Employee's employment by the
Company or any subsidiary or successor of the Company shall be subject to a
Voluntary Termination or an Involuntary Termination within the Covered Period,
then the Company shall pay the Employee a lump sum amount equal to the
applicable Severance Amount, payable within 15 business days after the
Termination Date.
2. DEFINITIONS. All the terms defined in this paragraph 2 shall have the
meanings given below throughout this Agreement.
(a) "ANNUAL SALARY" shall, as determined on the Termination Date, be
equal to the greater of:
i. the Employee's annual salary plus bonus on the date of the
earliest Change of Control to occur during the Covered Period, or
ii. the Employee's annual salary plus bonus on the Termination
Date.
Bonuses for the purpose of this definition of Annual Salary shall mean the bonus
for the Employee's final year or the average of the bonuses for the last three
years, whichever is greater.
(b) "CHANGE IN DUTIES" shall mean any one or more of the following:
i. a significant change in the nature or scope of the
Employee's authorities or duties from those applicable to him immediately prior
to the date on which a Change of Control occurs;
ii. a reduction in the Employee's Annual Salary from that
provided to him immediately prior to the date on which a Change of Control
occurs;
iii. a diminution in the Employee's eligibility to participate in
bonus, incentive award and other compensation plans which provide opportunities
to receive compensation, from the greater of:
. the opportunities provided by the Company (including its
subsidiaries) for executives with comparable duties; or
. the opportunities under any such plans under which he was
participating immediately prior to the date on which a
Change of Control occurs;
<PAGE>
2
iv. a diminution in employee benefits (including but not limited
to medical, dental, life insurance and long-term disability plans) and
perquisites applicable to Employee, from the greater of:
. the employee benefits and perquisites provided by the
Company (including its subsidiaries), to executives with
comparable duties; or
. the employee benefits and perquisites to which he was
entitled immediately prior to the date on which a Change of
Control occurs;
v. a change in the location of the Employee's principal place
of employment by the Company (including its subsidiaries) by more than fifty
miles from the location where he was principally employed immediately prior to
the date on which a Change of Control occurs; or
vi. a reasonable determination by the Board of Directors of the
Company that, as a result of a Change in Control and a change in circumstances
thereafter significantly affecting his position, he is unable to exercise the
authorities, powers, function or duties attached to his position immediately
prior to the date on which a Change of Control occurs.
(c) a "CHANGE OF CONTROL" shall be deemed to have occurred if:
i. any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding securities;
ii. as a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of the Company before the
transaction shall cease to constitute a majority of the Board of directors of
the Company or any successor to the Company;
iii. the Company is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70 percent
of the outstanding voting securities of the surviving or resulting corporation
shall then be owned in the aggregate by the former stockholders of the Company,
other than (x) affiliates within the meaning of the Exchange Act or (y) any
party to the merger or consolidation;
iv. a tender offer or exchange offer is made and consummated for
the ownership of securities of the Company representing 20 percent or more of
the combined voting power of the Company's then outstanding voting securities;
or
v. the Company transfers substantially all of its assets to
another corporation which is not a wholly-owned subsidiary of the Company.
(d) "COVERED PERIOD" for the Employee shall mean a period of time
following the occurrence of the Change of Control equal to the lesser of (i) the
Employee's period of employment with the Company, any subsidiary, or any
predecessor of either prior to that Change of Control, or (ii) two years
following the occurrence of the Change of Control.
<PAGE>
3
(e) "INVOLUNTARY TERMINATION" shall mean any termination which:
i. does not result from a resignation by the Employee (other
than a resignation pursuant to clause ii of this subparagraph (e); or
ii. results from a resignation following any Change in Duties;
provided, however, the term "Involuntary Termination" shall not include:
x. a Termination for Cause, or
y. any termination as a result of death, disability, or
normal retirement pursuant to a retirement plan to which the Employee was
subject prior to any Change of Control.
(f) "SEVERANCE AMOUNT" is equal to:
i. in the case of an Involuntary Termination, two (2) times the
Employee's Annual Salary (except if the Employee is within two years of age 65
at the time of Involuntary Termination, the Severance Amount shall be reduced to
the number of whole months remaining to age 65, with a minimum payment of one
(1) times the Employee's Annual Salary) or the amount determined in Section 3
below which does not produce an excise tax, whichever is higher; or
ii. in the case of a Voluntary Termination, one (1) times the
Employee's Annual Salary, except if the Employee is within one year of age 65 at
the time of Voluntary Termination, the Severance Amount shall be reduced to the
number of months remaining to age 65, with no minimum payment.
(g) "TERMINATION FOR CAUSE" shall mean only a termination as a result
of fraud, misappropriation of or intentional material damage to the property or
business of the Company (including its subsidiaries), or commission of a felony
by the Employee.
(h) "VOLUNTARY TERMINATION" shall mean any termination which is not:
i. an Involuntary Termination;
ii. a Termination for Cause, or
iii. the result of death, disability, or normal retirement
pursuant to a retirement plan to which the Employee was subject prior to any
Change of Control.
(i) "VOTING SECURITIES" shall mean any securities which ordinarily
possess the power to vote in the election of directors without the happening of
any pre-condition or contingency.
(j) "TERMINATION DATE" shall mean the date on which the Employee's
employment terminates.
3. GOLDEN PARACHUTE PAYMENT REDUCTION. It is the intention of the
parties that the Severance Amount in Section 2(f)(i) of this Agreement be such
that it is not subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") (or any similar tax that may
hereafter be imposed), on account of "excess parachute payments" as
<PAGE>
4
defined in Section 280G of the Code. However, it is also the intention of the
parties that the Severance Amount be at least equal to the largest amount that
will not be subject to the excise tax if that amount would exceed two (2) times
the Employee's Annual Salary. The determination of this amount to be paid
hereunder shall be made at the expense of the Company by the independent
certified public accounting firm acting as auditors for the Company on the date
of a Change of Control (or another accounting firm designated by that firm).
Notwithstanding the foregoing in this Section 3, if payment is being prorated
because the Employee is within two years of age 65, then the amount determined
pursuant to this Section 3 shall be the lesser of prorated amount or the amount
that is not subject to the excise tax.
4. NOTICES. Notices and all other communications under this Agreement
shall be in writing and shall be deemed given when personally delivered or when
mailed by United States registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Company, to:
Rochester Gas & Electric Corporation
89 East Avenue
Rochester, New York 14649-0001
ATTENTION: Group Manager Human Resource Services
If to the Employee, to:
Michael T. Tomaino, Esq.
-------------------------
135 Taylor Road
-------------------------
Honeoye Falls, NY 14472
-------------------------
or to such other address as either party may furnish to the other in writing,
except that notices of changes of address shall be effective only upon receipt.
5. APPLICABLE LAW. This contract is entered into under, and shall be
governed for all purposes by, the laws of the State of New York.
6. SEVERABILITY. If a court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then the invalidity
or unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement and all other provisions
shall remain in full force and effect.
7. WITHHOLDING OF TAXES. Company may withhold from any benefits payable
under this Agreement all Federal, state, city or other taxes as may be required
pursuant to any law, governmental regulation or ruling.
8. NOT AN EMPLOYMENT AGREEMENT. Nothing in this Agreement shall given
the Employee any rights (or impose any obligations to continued employment by
the Company or any subsidiary or successor of the Company), nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Employee for the Company or any subsidiary or successor of the
company.
9. NO ASSIGNMENT. the Employee's right to receive payments or benefits
under this Agreement shall not be assignable or transferable, whether
<PAGE>
5
by pledge, creation of a security interest or otherwise, other than a transfer
by will or by the laws of descent or distribution. In the event of any
attempted assignment or transfer contrary to this paragraph, the Company shall
have no liability to pay any amount so attempted to be assigned or transferred.
This Agreement shall inure to the benefit of and be enforceable by the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
10. SUCCESSORS. This Agreement shall be binding upon and insure to the
benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate). The Company agrees that it will not effect the sale or other
disposition of all or substantially all of its assets unless either (i) the
person or entity acquiring the assets or a substantial portion of the assets
shall expressly assume by an instrument in writing all duties and obligations of
the Company under this Agreement, or (ii) the Company shall provide, through the
establishment of a separate reserve for the payment in full of all amounts which
are, or may reasonably be expected to become, payable to the Employee under this
Agreement.
11. INDEMNITY AND RELEASES. In consideration for the cash payment
provided in paragraph 1 above, the Employee releases and discharges the
Employer, its officers, agents, employees, subsidiaries, and successors, from
all claims of any kind, which the Employee, or the Employee's agents, executors,
heirs, or assigns ever had or now have, whether known or unknown, up to and
including the date this Agreement is signed. This release includes, but is not
limited to, the following: any action or cause of action asserted or which
could have been asserted under the Age Discrimination in Employment Act of 1967,
as amended, Title VII of the Civil Rights Act of 1964, all state statutes
related to discrimination, the Employee Retirement Income Security Act or the
Americans With Disabilities Act; claims for wrongful discharge, unjust
dismissal, or constructive discharge; claims for breach of any alleged oral,
written or implied contract of employment; claims for salary or severance
payments not provided by this Agreement; claims for benefits; claims for
attorneys fees; and any other claims under any federal, state or local statute,
law, rule or regulation; provided that in any event all such actions or claims
relate to employment or benefits matters.
IN EXECUTING THIS AGREEMENT, THE EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS
BEEN GIVEN AT LEAST TWENTY-ONE (21) DAYS IN WHICH TO CONSIDER SIGNING THIS
AGREEMENT AND THE RELEASE CONTAINED IN THIS PARAGRAPH 11. EMPLOYEE ACKNOWLEDGES
THE OPPORTUNITY TO CONSULT WITH AN ATTORNEY OF EMPLOYEE'S CHOICE CONCERNING THIS
AGREEMENT AND RELEASE. EMPLOYEE HAS CAREFULLY READ AND FULLY UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT AND RELEASE, AND IS ENTERING INTO THIS AGREEMENT
AND RELEASE VOLUNTARILY. EMPLOYEE ACKNOWLEDGES THAT THE CONSIDERATION BEING
RECEIVED IN EXCHANGE FOR EXECUTING THIS AGREEMENT AND RELEASE IS GREATER THAN
THAT WHICH EMPLOYEE WOULD BE ENTITLED TO IN THE ABSENCE OF THIS AGREEMENT AND
RELEASE. EMPLOYEE HAS NOT RELIED UPON ANY REPRESENTATION OR STATEMENT, WRITTEN
OR ORAL, NOT SET FORTH IN THIS DOCUMENT. EMPLOYEE ACKNOWLEDGES THAT THIS
DOCUMENT SETS FORTH THE ENTIRE AGREEMENT WITH THE EMPLOYER AND THAT IT MAY NOT
BE CHANGED ORALLY. EMPLOYEE HAS THE RIGHT TO REVOKE THIS AGREEMENT WITHIN SEVEN
(7) DAYS OF SIGNING IT, AND THAT THIS AGREEMENT SHALL NOT BECOME EFFECTIVE OR
ENFORCEABLE UNTIL THIS SEVEN DAY PERIOD HAS EXPIRED.
<PAGE>
6
12. TERM. This Agreement shall be effective as of the date first above
written and shall remain in effect until terminated by written agreement of both
parties. In the event of a Change of Control during the term of this Agreement,
this Agreement shall remain in effect for the Covered Period.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed
and delivered as of the day and year first written.
ROCHESTER GAS AND ELECTRIC CORPORATION
By: /s/ ROGER W. KOBER
-----------------------
Roger W. Kober
Its: Chairman and CEO
-----------------------------
By: /s/ MICHAEL T. TOMAINO
----------------------
Employee
<PAGE>
EXHIBIT 10.3
- --------------------------------------------------------------------------------
Rochester Gas & Electric Corp. CONTRACT
CONTRACT NO. CP-70134-J-RD SEPTEMBER 23, 1997
- --------------------------------------------------------------------------------
---------------------------------------------------
Contractor's Name and Address
-----------------------------
IBM CORPORATION
100 CLINTON SQUARE
ROCHESTER, NY 14649
---------------------------------------------------
SECTION A
CONTRACT
THIS CONTRACT is entered into as of September 23, 1997 by and between Rochester
Gas and Electric Corporation a corporation organized and existing under the laws
of the State of New York (hereinafter called RG&E) and International Business
Machines Corporation (IBM), a corporation organized and existing under the laws
of the State of New York , hereinafter called the CONTRACTOR,
WITNESSETH:
This Contract is comprised of the following Sections:
Section A - Contract and Signature Page
Section B - Time and Material Prices
Section C - Statement of Work
Section D - Packaging and Marking
Section E - Quality Requirements (Not Applicable)
Section F - Deliveries and Performance (Not Applicable)
Section G - Contract Administration
Section H - General Contract Provisions
Section I - Special Contract Provisions
1
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All documents in this Contract shall be read so as to be consistent. In the
event of an inconsistency in this Contract, and unless otherwise provided
herein, the inconsistency shall be resolved by giving precedence in the follow
order:
1. Section C - Statement of Work;
2. Section I - Special Contract Provisions;
3. Section H - General Contract Provisions;
4. Section A - Contract and Signature Page, Section B - Time and Material
Prices,
Section D - Packaging and Marking, and Section G- Contract
Administration
The foregoing documents referenced herein are hereby incorporated as part of
this Contract.
This agreement supersedes all prior offers, negotiations, and agreements,
express or implied, pertaining to the subject matter herein and constitutes the
final, entire and complete agreement between the parties.
Now therefore, both parties, do hereby bind their respective companies to the
duties and responsibilities of performance required hereunder.
This proposed contract shall constitute an offer until acceptance by the
CONTRACTOR. Except as may be otherwise provided herein, RG&E specifically
reserves the right to revoke this offer at any time prior to acceptance
hereof in writing by the CONTRACTOR. Upon acceptance by the CONTRACTOR,
the rights and obligations of the parties hereto shall be subject to and
governed by the Terms and Conditions contained herein. When accepted by
the CONTRACTOR, this contract, as described, shall constitute the entire
agreement between the parties hereto and any terms or conditions offered by
the CONTRACTOR in addition thereto or in any way different from those set
forth herein are objected to by RG&E.
In WITNESS WHEREOF, the parties hereto have executed this Contract as of the day
and year first above written.
- --------------------------------------------------------------------------------
International Business Machines Rochester Gas and Electric
Corporation Corporation
By /s/ H. C. Wolff By /s/ J. B. Stokes
-------------------------------- ---------------------------------
Title Managing Principal Title Senior Vice President & CFO
----------------------------- -------------------------------
Date 10/3/97 Date September 29, 1997
------------------------------ --------------------------------
- --------------------------------------------------------------------------------
2
<PAGE>
SECTION B.
PRICES
As consideration for performance of the work required under this Contract, RG&E
hereby agrees to pay the CONTRACTOR in U.S. Dollars in accordance with the
requirements of this Contract on a Time and Material basis as follows:
B.1 PRICE
CLIN DESCRIPTION QTY ESTIMATED
---- ----------- ---
PRICE
------
001 Assessment Evaluation 1 Lot $200,000
B.2. RATES (Overtime rates equal to straight time rates)
B.2.1 Labor Rate for CLIN 001 is established at $200.00 per hour, blended
rate.
B.2.2 Labor rates for all future Statements of Work shall be established
by mutual agreement prior to signing of the applicable Statement of
Work and shall be itemized substantially as follows, provided that
such rates shall be consistent with the hourly rates at which IBM
provides Year 2000 assessment, remediation and testing services for
other similarly situated commercial customers:
Labor Category Position Description Rate per Hour
-------------- -------------------- -------------
B.3. TERMS OF PAYMENT
The CONTRACTOR shall submit properly certified invoices, in triplicate to
Rochester Gas & Electric Corporation, 89 West Avenue, Rochester, NY 14649,
Attn: Accounts Payable. A copy of the invoice shall be provided to the
authorized Procurement Representative identified in Section G. All
invoices shall reference this contract number and applicable CLIN.
B.3.1 Terms of payment for invoices under this contract are Net 30 days
after receipt of invoice. A late fee of 2% per month from the due date
will be applied to all outstanding invoices which are not paid when due
except to the extent that such payment is disputed in good faith by RG&E.
3
<PAGE>
B.4 PAYMENT PROVISIONS
B.4.1 Progress Payments
Monthly payments will invoiced by IBM for labor hours and Travel and
Living expenses incurred. Provided RG&E executes IBM SOWs for Year
2000 services, and provided further that the aggregate value of such
SOWs is, at a minimum, of $10 million dollars, then IBM agrees that
for each partition, it will bill RG&E 95% of the billable charges
for each such partition and that the remaining 5% will not be due
until the expiration of the applicable Support Time Period, for such
partition. RG&E and IBM agree to discuss whether alternate retained
billing provisions are appropriate in the event the estimated
aggregate value of the Year 2000 services is less than $10 million.
Travel & Living Expenses shall be invoiced with actual direct cost
only, without overhead burden or profit.
Reasonable expenses in accordance with the following expense
reimbursement policies shall be allowed:
EXPENSE REIMBURSEMENT POLICIES
1. Ground transportation will be reimbursed for tolls, parking fees, taxi, bus
or auto rental. In the case of auto rentals, prior instructions must be
obtained from RG&E regarding the rental company and rates to be used and a
copy of the auto rental agreement will be required for reimbursement.
2. Air transportation will be reimbursed at the tourist or coach class fare
for the most direct route of scheduled airlines.
3. RG&E will reimburse lodging upon presentation of hotel bill which is
commensurate with the average rates charged for the immediate area.
4. RG&E will reimburse reasonable and actual expenses for meals. The
guidelines for meal(s) is a maximum amount of $30.00 per day.
5. RG&E will not reimburse personal expenses. If expenses of a personal
nature (i.e., hotel shop purchases, alcoholic beverages, sundry items,
movies, etc.) are charged against a hotel room, the amount will be deducted
from the invoice presented to RG&E.
6. For trips which extend beyond four (4) days, reasonable valet and laundry
charges will be reimbursed.
7. Necessary business calls made on behalf of RG&E will be reimbursed.
Business use of a personal automobile (excluding travel time) will be
reimbursed at the rate of $.275 per mile.
8. RG&E will reimburse reasonable tipping.
4
<PAGE>
9. You shall submit to RG&E invoices and applicable receipts for expenses
incurred in excess of $25.00 per item. RG&E shall make payments to you
within thirty (30) days after receipt of acceptable invoices and receipts.
SECTION C
STATEMENT OF WORK
C.1 SUPPLIES/SERVICES TO BE FURNISHED
The CONTRACTOR, in the capacity as an Independent CONTRACTOR, and not as an
agent of RG&E shall, in accordance with the terms and conditions of this
Contract, furnish the necessary management, personnel, labor, services,
documentation, materials, equipment, tools, facilities and support services,
except as specified herein to be furnished by RG&E, and do all actions/necessary
and/or incidental to performing the requirements of this Contract. The tasks
include, but are not limited to, planning, design, supporting analyses,
documentation, fabrication, demonstration and delivery. During the performance
of all tasks, RG&E shall have the opportunity to review the designs, witness
critical in-process operations, tests, configuration audits, and in-process
analytical effort.
C.1.1 Statement of Work (SOW)
The CONTRACTOR shall perform all effort required by and in conformance with
the requirements of any Statement of Work as may be signed by the CONTRACTOR and
RG&E from time to time, with respect to the year 2000 project, which are
incorporated by reference herein. As used herein, "Statement of Work" shall mean
any Statement of Work attached and any such additional Statement of Work.
5
<PAGE>
SECTION D
PACKAGING AND MARKING
(TO BE PROVIDED BY IBM UPON COMPLETION OF SOW. PACKAGING, MARKING AND
METHOD OF SHIPMENT FOR DELIVERY AND RECEIPT OF CODE FROM IBM'S CONVERSION
CENTER SHALL BE INCORPORATED INTO A SOW.)
6
<PAGE>
SECTION G
CONTRACT ADMINISTRATION
G.1. CONTRACT DIRECTION
Direction given to the CONTRACTOR shall be binding on the CONTRACTOR only
when issued in writing by a RG&E authorized Procurement Representative.
All direction received shall be acknowledged by the CONTRACTOR within five
(5) working days of receipt of the communication. All communication shall
be sent to the address shown below:
G.1.1 RG&E CONTRACTOR
----- ----------
For Correspondence: For Correspondence:
RG&E Corp. IBM Corp.
89 East Avenue, One Commercial Plaza
Rochester, NY 14649 Hartford, Connecticut 06103
Attn: Robert J. DiBaudo Attn: Richard Partyka
Mail Point: 2nd Floor
Telephone:716-77--724-8033 Telephone: 860-727-6145
FAX: 716-771-2820 FAX: 860-727-6265
G.1.2 For all Quotes/Proposals including updates and revisions:
RG&E CORP.
89 East Avenue,
Rochester, NY 14649
Attn: Robert J. DiBaudo
Mail Point: 2nd Floor
Telephone: 716-77--724-8033
FAX: 716-771-2820
G.2 LIAISON RESPONSIBILITIES
Unless otherwise stated herein, RG&E shall be solely responsible for all
liaison and coordination between RG&E the CONTRACTOR, or any associated
CONTRACTORS, and any designated RG&E Contractors
7
<PAGE>
G.3. ROUTING OF CONTRACT DATA REQUIREMENTS
Unless otherwise directed in writing by an authorized RG&E Procurement
Representative, all data requiring submittal to, or action by RG&E, or any
employee or organizational unit of RG&E, shall be routed to, or through the
RG&E Procurement Representative by transmittal letter listing the documents
and the applicable provision requiring submission.
8
<PAGE>
SECTION H
IBM AGREEMENT FOR SERVICES
(ATTACHED)
9
<PAGE>
[IBM LOGO] Agreement for Services
________________________________________________________________________________
Thank you for doing business with us. We strive to provide you with the highest
quality Services. If, at any time, you have any questions or problems, or are
not completely satisfied, please let us know. Our goal is to do our best for
you.
This IBM Agreement for Services (called the Agreement") covers the Services you
acquire from us, including Services we provide on a contract period basis and
Services we provide on a project basis.
This Agreement and its applicable Attachments and Transaction Documents are the
complete agreement regarding these Services, and replace any prior oral or
written communications between us. No machines or licensed program products are
to be acquired under this Agreement. Such items are available only under the
terms of 1) the IBM Customer Agreement (or any equivalent agreement between us)
or 2) the applicable third-party agreement.
By signing below for our respective Enterprises, each of us agrees to the terms
of this Agreement. Once signed, 1) any reproduction of this Agreement, an
Attachment, or Transaction Document made by reliable means (for example,
photocopy or facsimile) Is considered an original and 2) all Services you order
under this Agreement are subject to it.
Agreed to: (Enterprise name) Agreed to:
International Business Machines
Corporation
By /S/ J B Stokes By /s/ H C Wolff
---------------------------------------- ------------------------------
Authorized signature Authorized signature
Name (type or print): Name (type or print): H.C. Wolff
J. Burt Stokes
Date: Date: 10/3/97
September 29, 1997
Enterprise number Agreement number
Enterprise address: IBM Office address:
- --------------------------------------------------------------------------------
After signing, please return a copy of this Agreement to the local "IBM Office
address" shown above.
- --------------------------------------------------------------------------------
10
<PAGE>
[IBM LOGO] Agreement for Services
Table of Contents
- --------------------------------------------------------------------------------
Section Title
PART 1 - GENERAL
1.1 Definitions
1.2 Agreement Structure
1.3 Prices and Payment
1.4 Patents and Copyrights
1.5 Limitation of Liability
1.6 Mutual Responsibilities
1.7 Your Other Responsibilities
1.8 IBM Business Partners
1.9 Changes to the Agreement Terms
1.10 Agreement Termination
1.11 Geographic Scope
1.12 Governing Law
PART 2 - WARRANTY TERMS
2.1 Warranty for IBM Services
2.2 Extent of Warranty
2.3 Items Not Covered by Warranty
PART 3 - SERVICES
3.1 Maintenance Services
3.2 Continuing Support Services
3.3 Project Support Services
3.4 The Statement of Work
3.5 Materials Ownership and License
11
<PAGE>
IBM [LOGO] AGREEMENT FOR SERVICES
Part 1 - General
- --------------------------------------------------------------------------------
1.1 DEFINITIONS
ENTERPRISE is any legal entity (such as a corporation) and the
subsidiaries it owns by more than 50 percent. The term
"Enterprise"applies only to the portion of the enterprise located in
the United States or Puerto Rico.
MACHINE is a machine, its features, conversions, upgrades, elements,
or accessories, or a combination of them. The term "Machine" includes
an IBM Machine and any non-IBM Machine (including other equipment)
that we may provide Maintenance Services for.
MATERIALS are literary works or other works of authorship (such as
programs, program listings programming tools, documentation, reports,
drawings, and similar works) that we may deliver to you. The term
"Materials" does not include licensed program products available under
their own license agreement.
Service is performance of a task, provision of advice and counsel,
assistance, or use of resource (such as access to an information data
base) we make available to you.
1.2 AGREEMENT STRUCTURE
ATTACHMENT
Some Services have terms in addition to those we specify in this
Agreement. We provide the additional terms in documents called
"Attachments," which are also part of this Agreement. We make the
Attachments available to you for signature.
TRANSACTION DOCUMENTS
For each business transaction, we will provide you with the
appropriate "Transaction Documents" that confirm the specific details
of the transaction. Some Transaction Documents require signature, and
others do not. Statements of Work and their Change Authorizations are
examples of Transaction Documents that must be signed by both of us.
Supplements and invoices are examples of administrative, unsigned
Transaction Documents.
CONFLICTING TERMS
If there is a conflict among the terms in the various documents, those
of an Attachment prevail over those of this Agreement. The terms of a
Transaction Document prevail over those of both of these documents.
OUR ACCEPTANCE OF YOUR ORDER
A Service becomes subject to this Agreement when we accept your order.
We accept your order by doing any of the following:
1. signing a Transaction Document signed by you;
2. sending you a supplement or invoice; or
3. providing the Service.
12
<PAGE>
YOUR ACCEPTANCE OF ADDITIONAL TERMS
You accept the additional terms in an Attachment or Transaction
Document by doing any of the following:
1. signing the Attachment or Transaction document;
2. allowing us to perform the Service; or
3. making any payment for the Service.
1.3 PRICES AND PAYMENT
The amount payable for a Service will be based on one or
more of the following types of charges:
1. recurring, including usage (for example, a periodic
charge for Continuing Support Maintenance Services);
2. time and materials (for example, charges for Hourly
Services); or
3. fixed price (for example, a specific amount agreed to
between us for Project Support Services).
Depending on the particular Service or circumstance,
additional charges may apply. We will inform you in advance
whenever additional charges apply.
Payment for Services is due as we specify, either in
advance, as the work progresses, or after the work is
completed. You agree to pay amounts due, including any late
payment fees, we specify in the invoice.
If any authority imposes a duty, tax, levy, or fee,
excluding those based on our net income upon any transaction
under this Agreement, then you agree to pay that amount as
specified the invoice or supply exemption documentation.
We may increase recurring charges for Services (including
hourly rates and minimums) by giving you three months'
written notice. An increase applies on the first day of the
applicable invoice period on or after the effective date we
specify in the notice.
You receive the benefit of a decrease in charges for amounts
which become due on or after the effective date of the
decrease.
1.4 PATENTS AND COPYRIGHTS
If a third party claims that Materials we provide to you
infringe that party's patent copyright, we will defend you
against that claim at our expense and pay all costs, damage
and attorney's fees that a court finally awards, provided
that you:
1. promptly notify us in writing of the claim; and
2 allow us to control, and cooperate~-with us in, the
defense and any related settlement negotiations.
If such a claim is made or appears likely to be made, you
agree to permit us to enable you continue to use the
Materials, or to modify them, or replace them with Materials
that are at least functionally equivalent. If we determine
that none of these
13
<PAGE>
alternatives is reasonably available, you agree to return
the Materials to us on our written request. We will then
give you a credit equal to the amount you paid us for the
Materials.
This is our entire obligation to you regarding any claim of
infringement.
CLAIMS FOR WHICH WE ARE NOT RESPONSIBLE
We have no obligation regarding any claim. based on any of
the following:
1. anything you provide which is incorporated into the
Materials:
2. your modification of the Materials; or
3. the combination, operation, or use of the Materials with
any product, data, or apparatus that we did not provide.
1.5 LIMITATION OF LIABILITY
Circumstances may arise where, because of a default on our
part or other liability, you are entitled to recover damages
from us. In each such instance, regardless of the basis on
which you are entitled to claim damages from us (including
fundamental breach, negligence, misrepresentation, or other
contract or tort claim), we are liable only for:
1. payments referred to in our patents and copyrights terms
described above;
2. damages for bodily injury (including death) and damage to
real property and tangible personal property; and
3. the amount of any other actual direct damages or loss, up
to the greater of $100,000 or the charges (if recurring,
12 months' charges apply) for the Service that is the
subject of the claim.
This limit also applies to any of our subcontractors. It is
the maximum for which we and our subcontractors are
collectively responsible.
ITEMS FOR WHICH WE ARE NOT LIABLE
Under no circumstances are we or our subcontractors liable
for any of the following:
1. third-party claims against you for losses or damages
(other than those under the first two items listed
above);
2. loss of, or damage to, your records or data; or
3. special, incidental, or indirect damages or for any
economic consequential damages (including lost profits or
savings), even if we-are informed of their possibility,
1.6 MUTUAL RESPONSIBILITIES
Both of us agree that under this Agreement;
1. neither of us grants the other the right to use its
trademarks, trade names, or other designations in any
promotion or publication;
14
<PAGE>
2. all information exchanged is nonconfidential. If either
of us requires the exchange of confidential information,
it will be made under a signed confidentiality agreement;
3. each is free to enter into similar agreements with
others;
4. each grants the other only the licenses and rights
specified. No other licenses or rights (including
licenses or rights under patents) are granted;
5. each may communicate with the other by electronic means
and such communication is acceptable as a signed writing.
An identification code (called a USERID) contained in an
electronic document is legally sufficient to verify the
sender's identity and the document's authenticity;
6. each will allow the other reasonable opportunity to
comply before it claims that the other has not met its
obligations;
7. neither of us will bring a legal action more than two
years after the cause of action arose; and
8. neither of us is responsible for failure to fulfill any
obligations due to causes beyond its control.
1.7 YOUR OTHER RESPONSIBILITIES
You agree:
1. not to assign, or otherwise transfer, this Agreement or
your rights under it, delegate your obligations, or
resell any Service, without prior written consent. Any
attempt to do so is void;
2. that you are responsible for the results obtained from
the Services; and
3. to provide us with sufficient, free, and safe access to
your facilities for us to fulfill our obligations.
1.8 IBM BUSINESS PARTNERS
We have signed agreements with certain organizations (called
"IBM Business Partners") to promote, market, and support
certain Services. When you order our Services (marketed to
you by IBM Business Partners) under this Agreement, we
confirm that we are responsible for providing the Services
to you under the warranties and other terms of this
Agreement. We are not responsible for 1) the actions of IBM
Business Partners, 2) any additional obligations they have
to you, or 3) any products or services that they supply to
you under their agreements.
1.9 CHANGES TO THE AGREEMENT TERMS
In order to maintain flexibility in our Services, we may
change the terms of this Agreement by giving you three
months' written notice However, these changes are not
retroactive. They apply, as of the effective date we specify
in the notice, only to new orders (those we receive on or
after the date of the notice) and to on-going transactions.
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Otherwise, for a change to be valid, both of us must sign
it. Additional or different terms in any order or written
communication from you are void.
1.10 AGREEMENT TERMINATION
You may terminate this Agreement on written notice to us
following the expiration or termination of your obligations,
Either of us may terminate this Agreement if the other does
not comply with any of its terms, provided the one who is
not complying is given written notice and reasonable time to
comply.
Any terms of this Agreement which by their nature extend
beyond its termination remain in effect until fulfilled, and
apply to respective successors and assignees.
1.11 GEOGRAPHIC SCOPE
All your rights and all our obligations are valid only in
the United States and Puerto Rico except that all licenses
to Materials are valid as specifically granted.
1.12 GOVERNING LAW
The laws of the State of New York govern this Agreement.
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IBM [LOGO] Agreement for Services
Part 2 - Warranty Terms
-----------------------------------------------------------------
2.1 WARRANTY FOR IBM SERVICES
For each IBM Service, we warrant that we perform it:
1. in a workmanlike manner: and
2. according to its current description (including any
Completion Criteria) contained in this Agreement, an
Attachment, or a Transaction Document.
2.2 EXTENT OF WARRANTY
THESE WARRANTIES REPLACE ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
2.3 ITEMS NOT COVERED BY WARRANTY
We do not warrant uninterrupted or error-free operation of
any deliverable or Service. Unless we specify otherwise, we
provide Materials and non-lBM Services on an "AS IS" basis.
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[IBM LOGO] Agreement for Services
PART 3 - SERVICES
-----------------------------------------------------------------
3.1 MAINTENANCE SERVICES
We will restore the Machine to good working order or
exchange it based on the type of service you select from
those available for the Machine. We may also perform
preventive maintenance. We manage and install engineering
changes that apply to IBM Machines.
We will inform you of the date on which Maintenance Services
begin. We may inspect the Machine within one month following
that date. If the Machine is not in an acceptable condition
for service, you may have us restore it for a charge.
Alternatively, you may withdraw your request for Maintenance
Services. However, you will be charged for any Maintenance
Services which we have performed at your request.
For a Machine under a usage plan, you-agree to provide us
with the meter reading as of the last working day of the
period that the minimum maintenance charge covers.
Maintenance Services do not cover accessories, supply items.
and certain parts, such as batteries, frames and covers. In
addition, Maintenance Services do not cover service of a
Machine damaged by misuse, accident, modification,
unsuitable physical or operating environment, improper
maintenance by you, removal or alteration of Machine or
parts identification labels, or failure caused by a product
for which we are not responsible. Unless otherwise agreed,
Maintenance Services do not cover service of Machine
alterations.
TYPES OF SERVICE FOR MACHINES
We provide certain types of repair and exchange service
either at your location or at our service center to keep
Machines in, or restore them to, good working order.
Under carry-in service, you may deliver the failing Machine
or ship it suitably packaged (prepaid, unless we specify
otherwise) to a location we designate. After we have
repaired or exchanged the Machine, we will return it, to you
at our expense unless we specify otherwise.
Under on-site service, we may repair the failing Machine at
your site or exchange it, at our discretion, depending on
the nature of the failure.
When a type of service involves the exchange of a Machine or
part, the item we replace becomes our property and the
replacement becomes yours. You represent that all removed
items are genuine and unaltered. The replacement may not be
new, but will be in good working order and at least
functionally equivalent to the item replaced. The
replacement assumes the warranty and Maintenance Service
status of the replaced item. Before we exchange a Machine or
part, you agree to remove all features, parts, options,
alterations, and attachments not under our service. You also
agree to ensure that the item is free of any legal
obligations or restrictions that prevent its exchange.
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You agree to:
1. obtain authorization from the owner to have us service a
Machine that you do not own; and
2. where applicable, before we provide service
a. follow the problem determination, problem analysis,
and service-request procedures that we provide,
b. secure all programs, data, and funds contained in a
Machine, and
c. inform us of changes in a Machine's location.
ALTERNATIVE SERVICE DURING WARRANTY
For certain Machines, you may choose alternative warranty
service. We provide the alternative type of service for an
additional charge. When the alternative warranty service
ends, we will continue Maintenance Services for the Machine
under the same type of service you selected.
MAINTENANCE SERVICES TERMINATION
You may terminate Maintenance Services for a Machine on one
month's written notice to us under any of the following
circumstances:
1. after it has been under Maintenance Services for at least
six months;
2. if you permanently remove it from productive use within
your Enterprise;
3. as of the effective date of an increase in Maintenance
Services charges; or
4. if you terminate coverage for a Machine also covered by a
Maintenance Service Option because we 1) removed a
Machine type from eligibility or 2) increase total
adjusted charges for Maintenance Services
We may terminate Maintenance Services for a Machine on three
months' written notice, provided it has been under
Maintenance Services for at least one year.
Either of us may terminate service for any Machine if the
other does not meet its obligations concerning Maintenance
Services. On termination of service for a Machine, we will
give you any applicable credit
MAINTENANCE SERVICE OPTIONS
We provide Maintenance Service Options for certain Machines.
We provide the terms specific to an Option in an Attachment
or Statement of Work We will inform you periodically of any
changes. We will defer an unfavorable change (and all
changes related to it) until the next anniversary of the
start of your contract period, If you request it in writing
before the effective date of the change.
3.2 CONTINUING SUPPORT SERVICES
We provide Continuing Support Services on a contract-period
basis to assist you in improving the availability of your
systems. We provide the terms specific to a Service in an
Attachment or Statement of Work. If we make a change to the
terms that 1) affects your current contract period and 2)
you consider unfavorable, on your request, we will defer it
until the next anniversary of the start of the contract
period.
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Each of us agrees to notify the other (before your current
contract period expires) if they do not intend to renew.
CONTINUING SUPPORT SERVICES TERMINATION
You may terminate a Continuing Support Service by providing
us one month's written notice upon fulfillment of any
minimum commitments.
The termination of Services with contract periods longer
than one year results in adjustment charges. In this case,
you agree to pay the lesser of:
1. the difference between the total charges you paid through
the termination date and those you would have paid for
the same period of time at the charge level of the next
shorter contract period;
2. the monthly charge multiplied by the applicable
adjustment charge factor; or
3. the total charges remaining to complete the contract
period.
When an increase results in a change to your total monthly
charge for a Service of more than the adjustment charge we
specify, you may terminate that Service on the effective
date of the increase. Adjustment or termination charges do
not apply in this case.
3.3 PROJECT SUPPORT SERVICES
Following are examples of Project Support Services we make
available to you:
1. Consulting Services, such as reengineering business
processes, linking business and technology strategies,
improving manufacturing processes, and enhancing
application development and information processing
capabilities. We are responsible for managing the
engagement;
2. Custom Services, such as managing and performing project
tasks to deliver Materials. We are responsible for
managing the project, unless specified otherwise in the
Statement of Work; and
3. Hourly Services, such as assisting on a technical task.
You are responsible for managing the project and for any
results achieved. The Statement of Work will specify the
hourly rate and estimated number of hours. The estimate
is not a fixed-price commitment. Charges = (actual hours
x rate) + expenses.
Hourly Services end when the first of the following
occurs: 1) you advise us, in writing, that further
Services are not required, 2) we provide the specified
number of hours, or 3) the estimated end date expires.
You may authorize, in writing, additional hours or
extension of the end date.
PROJECT SUPPORT SERVICES TERMINATION
Either of us may terminate a project on written notice to
the other if the other does not meet its obligations
concerning the Statement of Work. Upon termination, we will
stop our work in an orderly manner as soon as practical.
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You agree to pay us for all Services we provide and any
Materials we deliver through the project's termination and
any charges we incur in terminating subcontracts.
3.4 THE STATEMENT OF WORK
A separate Statement of Work will be signed by both of us
for each Services transaction not covered by another
Transaction Document. When we accept your order, we agree to
provide the Services described in the Statement of Work.
The statement of Work includes, for example:
1. our respective responsibilities;
2. the specific conditions (called the "Completion
Criteria"), if any, that we ar required to meet to
fulfill our obligations;
3. a contract period for Maintenance and Continuing Support
Services and an estimated schedule for Project Support
Services that we provide for planning purposes; and
4. applicable charges (not including taxes) and any other
terms.
If a Statement of Work contains an estimated schedule, each
of us agrees to make reasonable efforts to carry out our
respective responsibilities according to that schedule. If
the Statement of Work contains Completion Criteria, we will
inform you when we meet each of them. You then have 10 days
to inform us if you believe that we have not met those
criteria. The project is complete when we meet the
Completion Criteria.
CHANGES TO THE STATEMENT AT WORK
When both of us agree to change a Statement of Work, other
than as permitted in the Maintenance Service Options and
Continuing Support Services Sections of this Agreement, we
will prepare a written description of the agreed change
(called a "Change Authorization'') which both of us must
sign. The terms of a Change Authorization prevail over those
of the Statement of Work and any of its previous Change
Authorizations.
Any change in the Statement of Work may affect the charges,
estimated schedule, or other terms. Depending on the extent
and complexity of the requested changes, we may charge you
for our effort required to analyze it. When charges are
necessary, we will give you a written estimate and begin the
analysis only on your written authorization.
PERSONNEL
Each of us will;
1. designate a coordinator who will represent each of us,
respectively, in all matters concerning Project Support
Services and other Services where applicable; and
2. be responsible for the supervision, direction, and
control of our respective personnel.
We will try to honor your requests regarding the assignment
of our personnel to your project.
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However, we reserve the right to determine the assignment of
our personnel.
We may subcontract a Service, or any part of it, we provide
to you, to subcontractors selected by us.
3.5 MATERIAL OWNERSHIP AND LICENSE
We will specify Materials to be delivered to you. We will
identify them as being "Type I Materials." "Type II
Materials," or otherwise as we both agree. If not specified,
Materials will be considered Type II Materials.
Type I Materials are those, created during the Service
performance periods in which you will have all right, title,
and interest (including ownership of copyright). We will
retain one copy of the Materials. You grant us 1) an
irrevocable, nonexclusive, worldwide, paid-up license to
use, execute, reproduce, display, perform, distribute
(internally and externally) copies of, and prepare
derivative works based on Type I Materials and 2) the right
to authorize others to do any of the former.
Type II Materials are those, created during the Service
performance period or otherwise (such as those that preexist
the Service), in which we or third parties have all right,
title, and interest (including ownership of copyright). We
will deliver one copy of the specified Materials to you. We
grant you an irrevocable, nonexclusive, worldwide, paid-up
license to use, execute, reproduce, display, perform, and
distribute, within your Enterprise only, copies of Type II
Materials.
Each of us agrees to reproduce the copyright notice and any
other legend of ownership on any copies made under the
licenses granted in this Section.
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SECTION I
SPECIAL CONTRACT PROVISIONS
(ATTACHED)
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SECTION I
SPECIAL CONTRACT PROVISIONS
Set forth below are certain modifications, deletions and additions to the
IBM Agreement for Services (the "General Contract Provisions") included under
Section H of the attached Contract. To the extent of any inconsistency between
the General Contract Provisions and these Special Terms and Conditions, the
Special Terms and Conditions shall control. All references below to sections
are to sections of the General Contract Provisions.
1. Section 1.2 (Agreement Structure) is deleted, with the understanding
that the Contract relates solely to a specific project and that all relevant
Transaction Documents have been included in the Contract or are incorporated by
reference therein. The parties agree to negotiate in good faith the terms of
separate Statements of Work for estimated completion on or before December 31,
1998 of the Detail Analysis and Planning and Code Conversion phases of the Year
2000 project described in the Request for Proposal (RG&E Year 2000 Conversion
Unit Specification, dated April 3, 1997) (the "Additional SOWs"), provided that
IBM has performed the services to the satisfaction of RG&E. The Additional SOWs
shall be governed by the same terms and conditions (Sections A, B and D through
I of the Contract) as any attached Statement of Work and the format of any
Additional SOWs shall be similar to any attached Statement of Work. Each
Additional SOW shall be signed by RG&E and IBM.
2. Section 1.3 (Prices and Payment) is modified to provide that IBM will
not increase its hourly charges to RG&E except in accordance with general price
increases for other substantially similarly situated commercial customers for
whom IBM is providing Year 2000
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assessment, remediation, and testing services. In addition, Contractor agrees
to notify RG&E in writing at least 10 working days in advance of incurring any
"additional charges" pursuant to this provision.
3. Section 1.5(3) (Limitation of Liability) is modified to provide that
Contractor's liability for "other actual direct damages or loss" shall not
exceed the greater of the amounts specified therein or the total amount paid or
payable to Contractor for services actually rendered pursuant to the Statement
of Work.
4. Section 1.6(2) (Mutual Responsibilities) is modified to delete the
first sentence thereof and replace it with the following: All information
exchanged is nonconfidential unless it is exchanged under the terms of the IBM
Agreement for Exchange of Confidential Information between RG&E and IBM dated
November 30, 1990, which is incorporated by reference herein.
5. Section 1.6(7) (Mutual Responsibilities) is modified to change the
period within which a legal action may be brought from two years to four years
after the cause of action arose.
6. Section 1.7(2) (Your Other Responsibilities) is modified to add the
word "business" before the word results.
7. Section 1.8 (IBM Business Partners) is deleted, with the understanding
that no IBM Business Partners will be involved with the project.
8. Section 1.9 (Changes to the Agreement Terms) is modified to delete
"and to on-going transactions" from the end of the first paragraph thereof. The
parties understand and
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agree that (i) the project contemplated by the Statement of Work is the subject
of an existing order, and (ii) this Agreement (including any applicable
Statement of Work and all related documents) may be terminated by RG&E for
convenience at any time. Within fifteen (15) working days following termination
of this Agreement, Contractor agrees to deliver to RG&E all reports, analyses
and Materials prepared pursuant to this Agreement.
9. Section 1.10 (Agreement Termination) is modified to delete the second
paragraph and replace it with the following:
"Either of us may terminate this Agreement if the other does not comply
with any of its terms, provided that the one who is not complying is given
at least thirty (30) days written notice of the default and an opportunity
to cure the default within such period."
10. Section 2.1 (Warranty for IBM Services) is modified to add the
following provisions:
1. We warrant that our personnel and agents are and shall
be fully experienced and properly licensed and qualified to perform the
work contemplated by the Statement of Work and that such work will comply
with any and all applicable laws, rules, regulations and orders.
2. Conversion Center Process Error Support
---------------------------------------
IBM will correct, at no additional charge to RG&E, "Process Errors" that
were caused directly due to actions of IBM during the conversion process at the
IBM Conversion Center, provided, RG&E notifies IBM, in writing, of such errors
within thirty calendar days from the date of delivery of each code partition to
RG&E (the "Support Time Period"), and provided
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further the parties mutually agree, in the exercise of standard judgment, that
each such error is a "Process Error". Process Errors shall include: (1)
modifications to source code that introduce new compilation errors using the
same compiler and compiler options in which the original source code was
compiled; (2) failure to include source code provided by RG&E at the start of
the conversion at the IBM Conversion Center; (3) failure to return, at the
conclusion of the conversion at the IBM Conversion Center, source code provided
by RG&E; (4) version management errors introduced into the conversion process at
the IBM Conversion Center; and (5) errors in IBM's pre-existing windowing
routines.
In the event partial deliveries of a code partition are desired, the
Support Time Period will commence on the date each partial delivery is returned
to RG&E.
Process Errors do not include: (1) support for post-remediation testing
and the effort required to identify any errors and (2) "Conversion Errors" and
any other errors other than the five (5) Process Errors defined above.
Conversion Errors include, but are not limited to, the following: (1)
Missing Date Errors (errors associated with not locating all date sensitive
variables); (2) Infrastructure Errors (errors resulting from problems associated
with the operation of RG&E's hardware, system software, or utilities); (3)
Third-Party Errors (errors resulting from problems associated with the operation
of third-party software); (4) Secondary Errors (errors related to the impact to
other program sections, paragraphs, and programs that are not directly impacted
by the remediation services); (5) Interface Errors (errors related to the impact
to external interfaces (such as files, external systems, and/or external
interfaces) that are not directly impacted by the remediation
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services); (6) Date Errors (problems within the existing data which impact the
operation of the converted code); (7) Customer Input Errors (errors resulting
from customer supplied components, such as incorrect versions of source code
and/or compiler options and errors resulting from incorrect or untimely
information and feedback from RG&E); or (8) any other errors introduced during
the conversion process.
This support will be deemed completed upon the earlier to occur of:
a) IBM's correction of Process Errors identified during the Support Time
Period; or
b) The expiration of the Support Time Period in the event no errors are
identified.
3. Post-Conversion Hourly Support
------------------------------
Each Statement of Work shall include an estimated number of hours to be
used for billable hourly post-conversion support. Post-conversion hourly
support will be provided to RG&E for the purpose of reviewing code changes with
RG&E and assisting RG&E with the correction of "Conversion Errors". For each
returned partition, IBM will provide such support until the earlier to occur of:
a) the expiration of the agreed-upon number of billable hours; or b) the
expiration of the Support Time Period with respect to each code partition
delivered to RG&E. In the event partial deliveries of a code partition are
desired, the Support Time Period will commence upon the date each partial
delivery is returned to RG&E.
11. Section 2.3 (Items Not Covered by Warranty) is modified to provide
that "non-IBM Services" do not include work performed by IBM's agents or
subcontractors.
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12. Sections 3.1 (Maintenance Services) and 3.2 (Continuing Support
Services) are deleted with the understanding that such provisions are not
applicable to the project.
13. Section 3.3(3) (Project Support Services) is modified so that the
second paragraph thereof is deleted and replaced with the following:
Hourly Services end when the first of the following occurs: 1)
you advise us, in writing, that further Services are not
required, 2) we provide the specified number of hours unless you
authorize us in writing for additional hours, or 3) the estimated
end date expires unless you authorize us in writing for
additional hours and/or an extension of the estimated end date.
14. Section 3.3 (Project Support Services -- Project Support Services
Termination) is modified so that the first sentence thereof is deleted and
replaced with the following:
"Either of us may terminate this Agreement if the other does not
comply with any of its obligations concerning the Statement of
Work, provided that the one who is not complying is given at
least thirty (30) days written notice of the default and an
opportunity to cure the default within such period."
In addition, the second paragraph of Section 3.3 is deleted and replaced
with the following:
Upon a termination for convenience by you, you agree to pay us
for all Services we provide and any Materials we deliver through
the project's termination plus reasonable termination charges
(including charges IBM incurs in terminating subcontractors
involved in the project up to a maximum of 15 working days of
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subcontractor performance), but no amount will be allowed for
anticipated profit or unperformed services.
15. Section 3.4 (The Statement of Work -- Personnel) is modified to
provide that Contractor may not subcontract a Service (excluding work performed
by a majority-owned subsidiary of Contractor) without obtaining the prior
written consent of RG&E, which shall not be unreasonably withheld. In addition,
Section 3.4 is modified to add the following:
1. Contractor shall submit a "Key Contractor Personnel" list
for RG&E's approval prior to execution of the Contract.
2. Contractor shall use reasonable efforts to cause at least
one of the Key Contractor Personnel to devote substantial
time and effort to the performance of the requirements under
the Statement of Work until completion of the project.
Contractor shall not assign an individual to a position
designated thereunder unless the replacement individual is
at least as competent to perform the required services.
Contractor shall notify RG&E of any proposed assignment,
shall introduce the individual to appropriate RG&E
representatives, and shall provide RG&E with a resume and
other information about the individual reasonably requested
by RG&E. If RG&E in good faith objects to the proposed
assignment, the parties shall attempt to resolve RG&E's
concerns on a mutually agreeable basis. If the parties have
not been able to resolve RG&E's concerns within five (5)
working days, Contractor shall not assign the individual to
that position and shall propose to RG&E the assignment of
another individual of suitable ability and qualifications.
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16. Section 3.4 (The Statement of Work) is modified to add the following:
Work Breakdown Structure (WBS):
------------------------------
RG&E has requested that IBM develop and deliver a Work
Breakdown Structure (WBS) that correlates to each measurable
task and product delivery as described in the applicable
SOW. This WBS would be used as a basis when reporting
original estimated Man Hours, Cost, Schedule vs. Actuals,
etc. Where possible, IBM will support the level of detail
reporting that RG&E has requested. There may be activities
that arise that make such detail reporting impractical. For
example, IBM and RG&E have not, as a team, come to agree or
understand the specific role(s) of the Conversion Centers,
during and after remediation activities. Therefore, it is
impractical to agree at this time on WBS reporting until IBM
and RG&E agree on the specific SOWs. It is IBM's intent, to
satisfy the level of detail RG&E is requesting; IBM may need
RG&E's support in completing this requirement.
17. Section 3.5 (Materials Ownership and License) is modified to add the
following:
All reports and analyses prepared by Contractor in connection with the
project shall be treated as Type II Materials, with the understanding that
neither party shall have any right, title or interest in the other party's
confidential information and such information shall remain subject to the terms
of the Agreement for Exchange of Confidential Information.
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TYPE III MATERIALS
------------------
"Converted Code is source or application programs that RG&E or third
parties have all right, title and interest, including ownership of copyright,
that RG&E provides to Contractor for Contractor to perform conversion services
as described in the Statement of Work. Contractor will provide RG&E the
Converted Code which contains modifications, programs, or programming language
that result from these services.
Contractor retains no ownership rights to the Converted Code, however,
Contractor is free to use all ideas, concepts, know-how, or techniques that are
used, developed, or provided by either of us, or jointly by the both of us, in
the performance of these services. Moreover, Contractor is free to use all
modules, components, designs, utilities, interfaces, subroutines, methods,
report formats, modules and other pre-existing materials used or developed by
Contractor in the course of this engagement. Contractor is free to provide same
or similar services to others, including the provision of the same or similar
modifications, programs, or programming language without accounting to RG&E.
18. The Agreement is also amended to add the following provisions:
(i) Audit. Contractor shall keep accurate records and accounts
-----
showing all hours worked, disbursements, or expenses
incurred by Contractor in the performance of the work.
Upon 90 days prior written notice, RG&E shall have the
right to audit such records and accounts up to one year
after payment of the final invoice for the work to verify
that the hours worked and expenses reported were actually
incurred.
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(ii) Insurance. See Exhibit A attached hereto whose terms are
---------
incorporated herein by reference.
(iii) Independent Contractor. Contractor shall have complete
----------------------
charge of and responsibility for all its personnel and
agents engaged in the work and shall perform the work in
accordance with its own methods, subject to compliance
with this Agreement. Contractor shall comply with all
reasonable safety and other rules of RG&E for work
performed upon its premises provided such rules are
provided to Contractor.
(iv) Export. Contractor and RG&E acknowledge that certain
------
software and technical data to be provided hereunder and
certain transactions hereunder may be subject to export
controls under the laws and regulations of the United
States and other countries. Neither the Contractor nor
RG&E shall export or re-export any such items or any
direct product thereof or undertake any transaction in
violation of any such laws or regulations. To the extent
within either party's control, such party shall be
responsible for, and shall coordinate and oversee,
compliance with such export laws in respect of such items
exported or imported hereunder.
(v) No Waiver. The failure of either party to enforce the
---------
provisions of this Agreement shall not constitute a waiver
thereof nor of the right to seek such remedies as it may
have for any breach thereof. No waiver shall be valid
unless in a writing signed by the waiving party.
(vi) Security, No Conflicts. Contractor agrees that
----------------------
Contractor's employees, representatives, and
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agents, upon entering RG&E's premises shall, if required,
sign in at the facility "Sign-In Log" and, if applicable,
shall wear visible identification specifying Contractor's
name. Contractor's employees, representatives and agents
shall be subject at all times to RG&E's security policies
and procedures.
Each party agrees to inform the other of any information
made available to the other that is classified or
restricted data, agrees to comply with the security
requirements imposed by any state or local government, or
by the United States Government, and shall return all such
material upon request. Each party warrants that its
participation in this Agreement does not create any
conflict of interest prohibited by the United States
Government or any other domestic or foreign government and
shall promptly notify the other party if any such conflict
arises during the engagement.
(vii) Miscellaneous. Any reference to Contractor shall be deemed
-------------
a reference to Contractor, its employees and
subcontractors and those under their direction and
control. This Agreement may be amended only by a writing
signed by the parties. Any notice in connection with this
Agreement shall be in writing and may be delivered either
personally or by prepaid first class mail, recognized
courier, or facsimile machine; provided that in the latter
event a copy is then mailed to the intended recipient
within 24 hours. Addresses for notice shall be as set
forth in the preamble or as changed by notice. Any dispute
shall be resolved in courts located in Monroe County, New
York, and Contractor consents to their personal
jurisdiction.
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EXHIBIT A
INSURANCE REQUIREMENTS FOR
CONTRACTORS AND LABOR SUPPLIERS
Before commencing work, the Contractor shall procure and maintain at its
own expense for a period of two years beyond completion of the work, the
insurance types, limits, terms, and conditions listed in Section 1 below. The
amounts as specified are minimums only. The actual amounts above the minimums
shall be determined by the Contractor. In addition, for any work that is
authorized to be subcontracted, the Contractor shall require each subcontractor
to procure and maintain all insurance as outlined in Section 1.
IF YOU DO NOT HAVE A CURRENT CERTIFICATE ON FILE WITH RG&E, prior to
commencement of work, Certificates of Insurance evidencing Contractor's and/or
subcontractor's possession of insurance as outlined in Section 1 shall be filed
with Rochester Gas and Electric Corporation for its review. Certificates of
Insurance should be mailed to the Purchasing Department at the following
address:
Rochester Gas and Electric Corporation
Attn: Strategic Supply Management
89 East Avenue
Rochester, New York 14649-0001
1. Required Insurance Coverages and Minimum Amounts
------------------------------------------------
Each insurance policy shall be placed with an insurance company
licensed to write insurance in the State of New York and shall have an
A.M. Best's Rating of not less than "B+" and a policyholder surplus of
at least $25,000,000.
RG&E should be notified of any reduction in the aggregate policy
limits.
Each policy shall be endorsed to provide a minimum of thirty (30) days
prior written notice of cancellation, intent not to renew, or material
change in coverage.
Each policy shall be endorsed to provide a breach of warranty clause.
In the event Contractor and/or subcontractor has a policy(ies) written
on a "claims-made" basis, such insurance shall provide for a
retroactive date
35
<PAGE>
not later than the commencement of work under this agreement. In
addition, the Contractor and/or subcontractor will guarantee future
coverage for claims arising out of events occurring during the course
of this agreement.
All of the insurance required hereunder will be primary to any or all
other insurance coverage in effect for Rochester Gas and Electric Corporation.
1.1 Workers' Compensation and Employers' Liability Insurance in accordance
with the statutory requirements of the State of New York. For work
that is conducted outside of New York State, the minimum limit for
Employers' Liability Insurance should be $500,000 each accident,
$500,000 disease-policy limit, $500,000 disease-each employee.
1.2 Automobile Liability insuring any auto, all owned autos, hired autos,
and non-owned autos with a bodily injury and property damage combined
single limit of $1,000,000 per occurrence.
1.3 General Liability (Comprehensive or Commercial Form), including
coverage for Premises/Operations, Products/Completed Operations,
Contractual Liability, Independent Contractors, Broad Form Property
Damage, and Personal Injury, in the amount of $1,000,000 per
occurrence and $3,000,000 aggregate.
In the event of claims being made by reason of damage to property
belonging to any insured hereunder for which another insured is or may
be liable, then this policy shall cover such insured against whom a
claim is made or may be made in the same manner as if separate
policies had been issued to each insured hereunder, except with
respect to the limits of insurance.
None of the requirements contained herein as to types, limits and approval
of insurance coverage to be maintained by Contractors or subcontractors are
intended to, nor shall they in any manner limit or qualify the liabilities and
obligations assumed by Contractor or subcontractor under this agreement.
36
<PAGE>
Exhibit 10-4
STATE OF NEW YORK
BEFORE THE
PUBLIC SERVICE COMMISSION
________________________________________________________________________________
CASE 94-E-0952 - In the Matter of Competitive Opportunities Regarding Electric
Service
CASE 96-E-0898 - In the Matter of Rochester Gas and Electric Corporation's
Plans for Electric Rate/ Restructuring Pursuant to Opinion
No. 96-12
________________________________________________________________________________
AMENDED AND RESTATED
SETTLEMENT AGREEMENT
October 23, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION..............................................................
Parties..............................................................
Subject..............................................................
Background...........................................................
Negotiations.........................................................
AGREEMENT.................................................................
Term ((P) 1).........................................................
Rates ((P)(P) 2-9)...................................................
Return on Equity ((P) 10)............................................
Kamine ((P) 11)......................................................
Inflation ((P) 12)...................................................
Property Taxes ((P) 13)..............................................
"System Benefits Charge" ((P)(P) 14, 15).............................
Mandates, Catastrophic Events and Competition
Implementation Costs ((P)(P) 16, 17)............................
Securitization ((P) 18)..............................................
Sunk Costs ((P) 19)..................................................
Sale of Generating Assets ((P) 20)...................................
To-Go Costs ((P) 21).................................................
Nuclear Facilities ((P)(P) 22, 23)...................................
Shut-Down and Decommissioning Costs ((P) 24).........................
System Reliability and Market Power ((P) 25).........................
Amortizations ((P) 26)...............................................
Post-Employment Benefits ((P) 27)....................................
Ginna Outage Costs ((P) 28)..........................................
Excess Earnings ((P) 29).............................................
Environmental Remediation Costs ((P) 30).............................
Amounts Due Customers ((P) 31).......................................
Incentives Owed RG&E and Amounts Owed Customers
Under Settlements ((P) 32)......................................
Flexible Tariff Discounts ((P) 33)...................................
Legal Services ((P) 34)..............................................
Regulated Rate Design ((P)(P) 35-41).................................
Large Customer Credit Program ((P) 42)...............................
Low-Income Program ((P) 43)..........................................
Service Quality ((P) 44).............................................
Retail Access Generally ((P)(P) 45-52)...............................
Distribution Access Charges ((P)(P) 53-57)...........................
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reciprocity ((P) 58).................................................
Return to RLSE ((P) 59)..............................................
Environmental Information ((P) 60)...................................
Dairylea Program ((P) 61)............................................
Corporate Structure ((P) 62).........................................
DISCO ((P) 63).......................................................
GENCO ((P) 64).......................................................
RLSE ((P) 65)........................................................
ULSE ((P) 66)........................................................
HOLDCO and Capitalization of Unregulated Operations ((P) 67).........
Petition for Relief ((P)(P) 68-70)...................................
Filing Requirements ((P)(P) 71-73)...................................
Dispute Resolution ((P) 74)..........................................
Binding Effect of Settlement ((P) 75)................................
Superseding Prior Settlements ((P) 76)...............................
Modification of Settlement ((P) 77)..................................
Effect of Agreement ((P) 78).........................................
Withdrawal from Litigation ((P) 79)..................................
</TABLE>
SCHEDULES
A - Rates
B - Amortizations
C - Manufacturing Classifications
D - Nuclear Decommissioning
E - Large Customer Credit Program
F - Low Income Program
G - Service Quality Performance Program
H - Retailing Functions
I - Standards Pertaining to Affiliates and the Provision of Information
J - Form of Petition to Form Holding Company
K - SBC Program Costs
-ii-
<PAGE>
STATE OF NEW YORK
BEFORE THE
PUBLIC SERVICE COMMISSION
________________________________________________________________________________
CASE 94-E-0952 - In the Matter of Competitive Opportunities Regarding Electric
Service
CASE 96-E-0898 - In the Matter of Rochester Gas and Electric Corporation's
Plans for Electric Rate/ Restructuring Pursuant to Opinion
No. 96-12
________________________________________________________________________________
SETTLEMENT AGREEMENT
INTRODUCTION
PARTIES
- -------
This Amended and Restated Settlement Agreement ("Settlement") is
entered into this 23rd day of October, 1997 by and among the Staff of the
Department of Public Service ("Staff"), Rochester Gas and Electric Corporation
("RG&E" or "the Company"), The Joint Supporters ("Joint Supporters"), the
National Association of Energy Service Companies ("NAESCO"), and Multiple
Intervenors ("MI"), hereinafter collectively referred to as "the Parties."
<PAGE>
-2-
SUBJECT
- -------
As more specifically described herein, this Settlement is intended to
resolve all issues in the above-captioned proceedings as they pertain to
RG&E./1/ Consistent with the vision articulated by the Public Service
Commission ("the Commission" or "the PSC") in its 1996 Opinion in the
Competitive Opportunities Proceeding,/2/ this Settlement will, upon approval by
the Commission, set electric rates for a five-year period (July 1, 1997 through
June 30, 2002) at levels that are, overall, substantially below their current
levels. While rates for all customer classes will be reduced, large industrial
and commercial customers will receive the most significant price decreases.
Such decreases are in keeping with the Commission's goal of fostering economic
development and job retention in the State by stabilizing and reducing
electricity prices./3/
In addition to providing for lower prices for the next five years, the
Settlement effects a major restructuring of RG&E's operations to open up the
Company's service area to increased customer choice. On July 1, 1998, the
Company will begin to allow customers to
________________________________
/1/ As noted elsewhere herein, certain issues remain the subject of generic
consideration and are, therefore, not resolved in their entirety by this
Settlement. See, e.g., footnote 123, infra.
--- ---- -----
/2/ Cases 94-E-0952 et al., In the Matter of Competitive Opportunities
-- --- ------------------------------------------
Regarding Electric Service, Opinion No. 96-12, Opinion and Order Regarding
--------------------------
Competitive Opportunities for Electric Service, issued May 20, 1996.
/3/ See, e.g., id. at 1.
--- ---- --
<PAGE>
-3-
choose their own supplier of electric energy./4/ A year later, assuming
implementation of a Statewide Independent System Operator ("ISO") and Power
Exchange ("PE"),/5/ customers will begin to be able to choose their own supplier
of energy and capacity./6/ During this time, RG&E will restructure its
---
operations so as to functionally separate its generation, distribution,
retailing and overall administrative functions. While certain functions, such as
distribution, will remain as regulated monopoly services, others, including
retail service, will be open to competition from third parties./7/ Recognizing
that not all customers will be able (or perhaps willing) to select alternative
suppliers of energy and/or capacity, the Settlement provides for continued
service to such customers by a Commission-regulated functional unit of RG&E.
This Settlement also provides for continuation of a program to assist
low-income customers/8/ and a service quality program intended to maintain safe
and reliable service despite the cost-cutting pressures that accompany increased
competition./9/ Further, this resolution of issues in the Competitive
Opportunities Proceeding responds to the Commission's directive/10/ to
_____________________________
/4/ See paragraph 46, infra.
--- -----
/5/ The ISO and PE (also referred to as the "market exchange") are described
by the Commission. See Opinion No. 96-12 at 63, footnotes 1 and 2.
---
/6/ See ibid.
--- ----
/7/ See paragraphs 62 through 67, infra.
--- -----
/8/ See paragraph 43, infra.
--- -----
/9/ See paragraph 44, infra.
--- -----
/10/ Cases 96-E-0948 et al., Petition of Dairylea Cooperative Inc. to
-- --- ----------------------------------------
Establish an Open-Access
------------------------
(continued...)
<PAGE>
-4-
introduce retail access to farm and food processor customers on an expedited
basis./11/ Finally, this Settlement resolves three pending cases involving
--
judicial review of Commission decisions as they pertain to RG&E./12/
--
Except as expressly provided otherwise herein, this Settlement will,
upon approval by the Commission, supersede the current Settlement dated May 10,
1996 ("the 1996 Settlement") approved with modifications by the Commission on
June 27, 1996./13/ In addition, upon approval by the Commission, this Settlement
--
will supersede the initial Settlement in these proceedings dated April 8, 1997
("Initial Settlement").
BACKGROUND
- ----------
Opinion No. 96-12 is grounded in the Commission's desire to bring to
New York State consumers the innovations and efficiencies of competitive
markets, together with economic
________________
(.... continued)
Pilot Program for Farm and Food Processor Electricity Customers, Order
---------------------------------------------------------------
Establishing Retail Access Pilot Programs, issued June 23, 1997.
/11/ See paragraph 61, infra.
-- --- -----
/12/ See paragraph 79, infra.
-- --- -----
/13/ Cases 95-E-0673 et al., Rochester Gas and Electric Corporation, Order
-- -- --- --------------------------------------
Approving Terms of Settlement Agreement With Changes, issued June 27, 1996.
The Commission restated its approval with modification in Opinion No. 96-
27, Opinion and Order Concerning Revenue Requirement and Rate Design,
issued September 26, 1996. The Commission's modification of the 1996
Settlement is the subject of an Article 78 proceeding, Rochester Gas and
-----------------
Electric Corporation v. Public Service Commission (Sup. Ct. Albany Co.
-------------------------------------------------
Index No. 6616-96), that will be withdrawn upon approval of this
Settlement. See paragraph 79, infra.
--- -----
<PAGE>
-5-
development, lower electric prices and greater customer choice, while, at the
same time, maintaining the safety and reliability of electric service. Toward
these ends the Commission's Opinion called upon the State's utilities to take
certain actions and make certain filings.
The Commission adopted a "two-prong approach" to implementation of the
policy directions identified in Opinion No. 96-12. The first prong, an ongoing
collaborative effort among the utilities and other parties, was to continue to
"accomplish technical studies (including addressing market power concerns, the
role of energy service companies, and reporting requirements), necessary FERC
[Federal Energy Regulatory Commission] filings, and public educational forums by
October 1, 1996."/14/ The second implementation prong consisted of individual
--
utility filings also to be submitted by October 1, 1996. These filings were "to
address, at a minimum, the utilities' structure, retail access proposals, long-
term rate plans, public programs, market power and energy services."/15/ The
--
Commission described the subject matter of the individual filings in greater
detail as follows:/16/
--
(1) the structure of the utility both in the
short and long term, the schedule and cost to
attain that structure, a description of how
that structure complies with our vision and,
in cases where divestiture of generation is
not proposed, effective mechanisms that
adequately address resulting market power
concerns;
________________________
/14/ Opinion No. 96-12 at 91.
--
/15/ Ibid.
-- ----
/16/ Id. at 75-76.
-- --
<PAGE>
-6-
(2) a schedule for the introduction of retail
access to all of the utility's customers, and
a set of unbundled tariffs that is consistent
with the retail access program;
(3) a rate plan to be effective for a significant
portion of the transition that incorporates
our goal of moving to a competitive market,
including mechanisms to reduce rates and
address strandable costs;
(4) identification of the public policy programs,
whose funding is not recoverable in a
competitive market, that need special rate
treatment and competitively neutral
mechanisms to recover such costs;
(5) an examination of the load pockets unique to
the utility, identification of potential
market power problems, and proposals to
mitigate market power; and
(6) a plan for the provision of energy services,
including addressing the continued provision
of customer protections consistent with an
emerging competitive market./17/
--
In its October 1, 1996 submission to the Commission, entitled
"Competitive Initiative,"/18/ RG&E addressed the topics identified by the
--
Commission, stating what the
________________________
/17/ The Company joined with the Energy Association of New York State and six
--
other utilities in an Article 78 proceeding for judicial review of Opinion
No. 96-12. That proceeding was commenced on September 18, 1996. The Energy
----------
Association of New York State et al. v. Public Service Commission (Albany
-----------------------------------------------------------------
Co. Index No. 5830-96). The case is currently pending before the Appellate
Division, Third Department.
/18/ Also referred to herein as the "October 1 Submission." In August 1996,
--
during development of the Submission, the Company had held two Public
Forums, open to all
(continued...)
<PAGE>
-7-
Company's proposals would be in the event that it were required to implement the
Commission's policies./19/
--
On October 9, 1996, the Commission instituted Case 96-E-0898 for the
purpose of examining RG&E's October 1 Submission./20/ Under the procedural
--
schedule established by the October 9 Order, the parties would have a 90-day
negotiation period during which they were encouraged to reach a settlement in
lieu of litigation. In the event that negotiations proved unsuccessful, a
litigation schedule would follow and the record would close within 150 days of
issuance of the October 9 Order. To encourage settlement, the Commission waived
certain elements of its 1992 Procedural Guidelines for Settlements./21/
--
__________________
(...continued)
customers, and an Issues Forum, for elected officials, to address matters
pertaining to competition and deregulation in the electric industry. See
October 1 Submission at I-19-[-21.
/19/ The only element of the Competitive Initiative that was not contingent upon
-- the outcome of the Article 78 proceeding (see footnote 17, supra) was the
--- -----
Company's proposal to institute a separate, identified "Public Policy
Charge" ("PPC") for the costs of public policy programs the Company is
expected to undertake.
/20/ Case 94-E-0952 et al., Order Establishing Procedures and Schedule ("October
-- -- ---
9 Order").
/21/ Case 90-M-0255 et al., Proceeding on Motion of the Commission Concerning
-- -- --- -------------------------------------------------
its Procedures for Settlement and Stipulation Agreements, filed in C 11175,
--------------------------------------------------------------------------
Opinion, Order and Resolution Adopting Settlement Procedures and
Guidelines, issued March 24, 1992.
<PAGE>
-8-
Public Education Forums and Public Statement Hearings regarding RG&E's
October 1 Submission were held on December 2, 1996 in Canandaigua and on
December 4, 1996 in Rochester./22/
--
NEGOTIATIONS
- ------------
Between October 22, 1996 and December 4, 1996, RG&E personnel met on
13 occasions with interested parties./23/ These meetings began with
--
informational sessions at which Company representatives explained the October 1
Submission in detail and answered questions. Discussions progressed to
settlement negotiations, which included exchanges of proposals and counter-
proposals. These "all-party" meetings were conducted pursuant to the provisions
of the Commission's regulations regarding settlements./24/ In early December,
--
with the then-current deadline for filing testimony just weeks away and the
parties' determination that they were not sufficiently close to achieving a
settlement, the all-party negotiations were suspended in order to prepare
testimony. Staff and the Company, however, maintained a dialogue, exploring
alternative approaches that ultimately led to the instant Settlement. Although
these discussions were suspended at various points, the effort continued
throughout January, February and March.
_____________________
/22/ The Stenographic Minutes of the Public Statement Hearings consist of pages
--
pages 1-150.
/23/ These meetings included ten all-day meetings held in Rochester and
--
Albany and three lengthy conference calls in which the parities were
invited to participate.
/24/ 16 NYCRR (S) 3.9.
<PAGE>
-9-
During this period, input on certain aspects of the proposals under discussion
was sought and received from the Consumer Protection Board and Multiple
Intervenors.
On March 27, 1997, a nearly complete draft of the Initial
Settlement,/25/ together with a summary thereof, was distributed to all parties
--
to Case 96-E-0898. On the same day, Staff, with assistance from RG&E, made a
presentation to the parties in Albany./26/ Staff and the Company fielded
--
questions on the draft and solicited further comments. Additional all-party
meetings were held on April 1, 2, and 3, 1997. These negotiations were
productive, resulting in the consideration of comments and suggestions provided
by those who participated in these meetings.
The Initial Settlement was executed and filed as of April 8, 1997. In
accordance with the Commission's rules and the specific procedures applicable to
these proceedings, various parties filed statements and testimony in support of,
or in opposition to, the Initial Settlement. Evidentiary hearings were held in
Albany on June 3,4 and 5, 1997./27/ Post-hearings briefs were filed on or about
--
June 20, 1997.
On July 16, 1997, Administrative Law Judge ("ALJ") Walter T. Moynihan
issued a Recommended Decision ("RD") which recommended approval of the Initial
Settlement with
_________________________________________
/25/ Including draft Schedules.
--
/26/ In addition to Staff and the Company, ten individuals, representing seven
--
other parties, attended in person. Two parties participated by telephone.
/27/ The Stenographic Minutes of the Evidentiary Hearings consist of pages
--
335-2029.
<PAGE>
-10-
minor changes. Briefs on exceptions and replies to exceptions were filed on
August 5 and 20, 1997, respectively.
At its Public Session held in Albany on October 8, 1997, the
Commission discussed the Initial Settlement and recommended that the parties to
these proceedings conduct further negotiations with a view toward addressing
certain concerns raised in the Commission's discussion. On notice to all active
parties, further negotiations were held in Albany on October 14, 15 and 16,
1997. Representatives of the following parties participated: Staff, RG&E, the
Joint Supporters, NAESCO, MI, the Consumer Protection Board, the Attorney
General, the Public Utility Law Project, the Public Interest Intervenors, New
York State Electric & Gas Corporation, Wheeled Electric Power Company, Enron
Capital & Trade Resources, and the Independent Power Producers of New York, Inc.
These negotiations resulted in the changes to the Initial Settlement that are
reflected in this Settlement.
The Parties believe that this Settlement, which constitutes a
carefully balanced resolution of diverse interests and addresses the matters
raised at the Commission's October 8, 1997 Public Session, is in the public
interest, and should be adopted.
<PAGE>
-11-
AGREEMENT
The Parties agree as follows:
TERM
- ----
1. Except as expressly provided otherwise herein, this Settlement
shall be effective for a period of five Rate Years,/28/ commencing July 1,
--
1997/29/ and terminating June 30, 2002.
--
RATES
- -----
2. Except as expressly provided otherwise in this Settlement,
electric rates shall be reduced, cumulatively, from the levels in effect as of
July 1, 1996 as follows:/30/
--
July 1, 1997: $3.5 million;
July 1, 1998: $12.8 million;
July 1, 1999: $27.6 million;
July 1, 2000: $39.5 million; and
__________________
/28/ For purposes of this Settlement, a "Rate Year" is the one-year period
--
commencing on July 1st of one calendar year and terminating on June 30th of
the following calendar year.
/29/ Inasmuch as rates for the Rate Year commencing July 1, 1997 are comparable
--
to those established for that period by the 1996 Settlement, approval of
this Settlement after July 1, 1997 requires no adjustment to the rates in
effect for that Rate Year.
/30/ Each date listed signifies the beginning of the Rate Year to which the
--
indicated reduction applies.
<PAGE>
-12-
July 1, 2001: $51.1 million.
The total annual amounts of the foregoing reductions shall be offset by the
following annual amounts, listed by commencement of Rate Year, for the recovery
of costs/31/ pertaining to the Kamine/Besicorp Allegany L.P. project ("Kamine")
--
other than those described in paragraph 11, infra:
-----
July 1, 1998: $3.5 million;
July 1, 1999: $8.4 million; and
July 1, 2000 and continuing at this level until recovery of the
cost of any settlement or other action requiring payment is
complete or June 30, 2002, whichever is later: $10.5 million./32/
--
RG&E shall be entitled to commence the foregoing offsets regardless of when any
settlement or other action requiring payment to Kamine takes effect. In the
event that, during the term of this Settlement, it should become certain that
the total cost of any settlement or other action requiring payments to Kamine
will be less than the total amount provided hereunder for Kamine recovery during
such term (i.e., $32.9 million), the Commission may, in its discretion, require
----
additional
_______________________
/31/ No cost referenced in this Settlement may be considered for recovery, true-
--
up or deferral unless it is prudent and verifiable.
/32/ In the event that recovery is not, or will not be, complete by June 30,
--
2002, and RG&E or any other Party believes that circumstances would favor
or permit more rapid recovery of Kamine costs, RG&E or such other Party
shall have the right, notwithstanding any other provision of this
Settlement, to request the Commission to increase the offset amount.
<PAGE>
-13-
rate reductions; provided, however, that the total amount of such reductions
shall not exceed the difference between actual Kamine costs and the amounts
provided for in this paragraph. In all other cases, in the event that the
foregoing amounts provided for Kamine cost recovery exceed costs actually
attributable to Kamine, any such excess balance remaining as of June 30, 2002
shall be applied to Sunk Costs, as described in paragraph 19, infra.
-----
3. The rate reduction and Kamine recovery amounts listed in
paragraph 2 supra, include the anticipated impacts of recently enacted
-----
reductions in State gross receipts taxes ("GRT"). The anticipated average
combined State and local GRT rates, listed by commencement of Rate Year, are as
follows:
July 1, 1997: 5.23%
July 1, 1998: 5.04%
July 1, 1999: 4.60%
July 1, 2000: 4.23%
July 1, 2001: 4.23%
To the extent that average GRT rates are other than as anticipated, the rate
reductions provided for in this Settlement will be revised accordingly.
4. The allocation of the foregoing rate decreases among
customer groups shall be as described in Schedule A to this Settlement.
<PAGE>
-14-
5. The allocation of the revenue decreases corresponding to the
foregoing rate decreases shall be applied to the Generation Business Segment/33/
--
and shall be based upon the relative responsibility of nuclear and non-nuclear
generation for Cash Operation and Maintenance ("O&M")/34/ expense.
--
6. Except as otherwise provided by contract, beginning July 1,
1999 and continuing through June 30, 2002, Incremental Manufacturing Load/35/
--
shall be served at an average rate of $0.059 per KWH.
7. Except as otherwise provided in this Settlement, the rates
resulting from the foregoing reductions shall not be modified during the term of
this Settlement to reflect any
- --------------------------------
/33/ RG&E's current utility operations will be functionally separated into
--
Generation, Transmission, Distribution and Retailing, hereinafter referred
to as "Business Segments." See paragraphs 62-67, infra.
--- -----
/34/ For purposes of this Settlement, "Cash O&M" shall mean non-fuel O&M
--
expenses less the amortizations listed in Schedule B. For purposes of this
Settlement, the following allocation shall be used: 65 percent to nuclear
and 35 percent to non-nuclear.
/35/ For purposes of this Settlement, "Incremental Manufacturing Load" shall
--
mean energy sales meeting both of the following characteristics:
1. The energy is sold to a customer whose Standard Industrial
Classification is in one of the groups listed in Schedule C.
2. The customer adds at least 50 KW of new load by:
(a) constructing a new facility;
(b) expanding an existing facility;
(c) adding facilities or equipment to an existing site; or
(d) adding facilities through the redevelopment of an existing site
which has been vacant for at least six months.
<PAGE>
-15-
changes in revenues or expenses, including but not limited to changes in O&M
savings (both Cash O&M and Non-Cash O&M/36/), State and local tax
--
reductions,/37/ and asset sales./38/
-- --
8. Upon filing appropriate documentation with the Commission,
the rates resulting from the foregoing reductions shall be subject to
modification for the following:
a. Kamine recovery as described in paragraphs 2, supra,
-----
and 11, infra;
-----
b. Variations in the costs described in paragraphs 14 and
15, infra;
-----
c. Securitization benefits as described in paragraph 18,
infra;
-----
d. Deferrals/39/ pursuant to this Settlement, including
--
but not limited to those provided for in paragraphs 12
through 17, 24 and 30, infra; and
-----
e. Adjustments pursuant to paragraphs 24, 68 and 69,
infra.
-----
9. During the term of this Settlement such modifications
pursuant to paragraph 8, supra, shall be made only if the net effect of all such
-----
factors would be a projected cumulative balance, either owed to customers or
owed to shareholders, greater than $30 million
- ---------------------------
/36/ For purposes of this Settlement, "Non-Cash O&M" shall mean amortizations
--
pursuant to Schedule B.
/37/ For purposes of this paragraph, "taxes" shall not include the Gross
--
Receipts Tax or property taxes.
/38/ Notwithstanding any previous requirement pertaining to such matters, all
--
savings not reflected in rates as of July 1, 1996 arising from the
operation of the Nine Mile Point 2 and Oswego 6 jointly owned facilities
shall be retained by the Company.
/39/ All amounts deferred pursuant to this Settlement shall bear carrying
--
charges at the rate of 9.0 percent.
<PAGE>
-16-
on a pre-tax basis. The amount projected to be greater than $30 million shall be
recovered by adjusting rates, on the next July 1st, for the remaining term of
the Settlement; provided, however, that such rate adjustments shall be subject
to the following:
a. No rate adjustments shall be made in Rate Years 1 or 2 with
the exception of adjustments pursuant to paragraphs 14 and
18, infra.
-----
b. A single Rate Year rate adjustment shall not exceed $7.0
million for any of the final three Rate Years of the
Settlement with the exception of adjustments pursuant to
paragraph 18, infra.
-----
c. A rate adjustment shall not be for less than $3.5 million,
subject to Item d.
d. The cumulative effect of all rate increases shall not exceed
$12.1 million per Rate Year.
e. Any amount attributable to items for which changes in cost
are permitted to be recovered pursuant to this Settlement,
but which are not recovered by the end of the term of this
Settlement as a consequence of this paragraph shall be
deferred for recovery beyond the end of such term and the
timing of such recovery shall be determined by the
Commission.
<PAGE>
-17-
Changes due to the "System Benefits Charge"/40/ and Securitization shall be
--
reflected without regard to the foregoing limitations.
RETURN ON EQUITY
- ----------------
10. In the event that RG&E achieves a return/41/ on common
--
equity in excess of 11.80 percent, as determined for the entire/42/ five-year
--
term of this Settlement,/43/ the amount in excess of 11.80 percent shall be
--
treated as follows:
a. Fifty (50) percent shall be used to write down
deferrals accumulated during term of this Settlement.
Any remaining amount of this fifty (50) percent portion
shall be retained as earnings by the Company.
b. The first $800,000 of the other fifty (50) percent
portion shall be used to reduce rates for subclasses
pri-pri, subtra-sec,
- ---------------------------------
/40/ The "System Benefits Charge" is described in paragraph 14, infra.
-- -----
/41/ As used in this Settlement, "return" means the return on a regulatory
--
basis for regulated operations -- e.g., it does not reflect tax benefits
----
statutorily reserved for the benefit of investors or any disallowed
assets for unrealized tax benefits.
/42/ The actual return on common equity shall be computed annually. See
-- ---
paragraph 71, infra. At the end of the five-year Settlement period,
-----
annual amounts of over-or-under-earnings shall be netted for purposes of
determining any sharing pursuant to this paragraph.
/43/ 150 basis points (30 basis points per year) shall be added to the
-- computation of earnings for this five-year period to reflect a sharing
of earnings from the Rate Year ended June 30, 1997.
<PAGE>
-18-
subtra-commercial and industrial, as listed in Schedule
A. The remaining amount of this fifty (50) percent
portion shall be used to write down accumulated
deferrals or Sunk Costs./44/ To the extent that any
--
portions of this amount shall remain after writing down
all such deferrals and Sunk Costs, the Commission shall
determine the disposition of such portion.
KAMINE
- ------
11. In the event that RG&E becomes obligated to make actual
payments to Kamine or any other party pursuant to either the purported Power
Purchase Agreement ("PPA") or any litigation pertaining to the Kamine project or
the purported PPA, RG&E shall be entitled, subject to paragraphs 8 and 9, supra,
to recover on a current basis in electric rates an additional amount/45/ not to
--
exceed, on a Rate-Year basis,/46/ the "Net PPA Amount," which shall consist of:
--
seven-eighths (7/8) of the difference between (i) the amount that would be
payable to Kamine if the purported PPA were enforced and Kamine generated and
sold to RG&E the maximum output
- -------------------------------
/44/ For purposes of this Settlement, "Sunk Costs" shall have the meaning
-- described in footnote 66, infra.
-----
/45/ I.e., in addition to the amount attributable to Kamine ($9.6 million)
-- ----
that was included in the rates that were effective as of July 1, 1996.
/46/ Prorated, as necessary, to reflect commencement of recovery at any time
-- other than the first day of a rate year.
<PAGE>
-19-
permitted under the purported PPA,/47/ and (ii) any amount attributable to
--
Kamine that was included in the rates that were effective as of July 1, 1996;
provided that such Net PPA Amount shall be reduced by:
a. amounts accrued for Kamine costs pursuant to paragraph 2,
supra; and
-----
b. any Securitization benefits otherwise permitted to be used
to mitigate Kamine costs.
Any Kamine costs not recovered currently shall be deferred for recovery in the
subsequent Rate Years of the term of this Settlement/48/ and, if not recovered
--
by the end of such term, shall be deferred for recovery beyond the end of such
term and the timing of such recovery shall be determined by the Commission.
INFLATION
- ---------
12. If, in any Rate Year, inflation, as measured by the actual
GDP Chain-Weighted Price Deflator, exceeds 4.0 percent, RG&E shall be permitted
to defer for future recovery the amount by which any inflation-based increase in
Cash O&M exceeds such 4.0 percent increase up to the percentage increase
determined by the GDP Chain-Weighted Price
- ----------------------------------
/47/ Whether Kamine actually produces and sells electricity to RG&E or not.
--
/48/ During the term of this Settlement, however, such deferral and recovery
-- shall not cause any increase attributable to Kamine costs to exceed the
Net PPA Amount that would apply to the year of recovery.
<PAGE>
-20-
Deflator./49/ Deferral and recovery of such increased costs pursuant to this
--
paragraph shall not require further petition to or approval by the Commission
other than filing of appropriate workpapers showing the calculation of the
amount to be deferred.
PROPERTY TAXES
- --------------
13. Changes in property taxes shall be addressed as follows:
a. Fifty (50) percent of any property tax increases over
the Base Level,/50/ described in subparagraph c, below,
--
shall be deferred for future recovery.
b. Fifty (50) percent of any property tax decreases from
the Base Level shall be likewise deferred for future
passback to customers.
c. The Base Level shall be equal to actual property tax
expenditures over the twelve (12) months ended February
28, 1997, less taxes related to any assets sold after
June 30, 1997.
- ---------------------------------
/49/ For purposes of this paragraph, Cash O&M shall be assumed to be $201
-- million until the implementation of the Energy and Capacity stage of the
Retail Access Program, described at paragraph 46, infra, at which time
-----
Cash O&M will be assumed to be $176 million. These amounts shall be
reduced by any amounts recovered through the "System Benefits Charge,"
as described in paragraph 14, infra. The deferral shall be calculated as
-----
the product of Cash O&M and the difference between actual inflation
and 4.0 percent.
/50/ Property taxes pertaining to non-nuclear generating facilities shall be
-- deducted from the Base Level pursuant to the schedule stated in
paragraph 55, infra.
-----
<PAGE>
-21-
"SYSTEM BENEFITS CHARGE"
- ------------------------
14. The Parties agree that the costs of certain mandated
programs will be recovered through rates applicable to all customers, whether or
not these costs are included in a separate System Benefits Charge ("SBC")./51/
--
The programs are as follows:
a. Research and Development: mandated research and
development programs, excluding New York State Energy
Research and Development Authority contributions;
b. Energy Efficiency: mandated energy efficiency programs,
including DSM bidding programs undertaken in accordance
with Commission orders;/52/
--
c. Low Income: mandated low-income programs, whether new,
existing or expanded, including low-income energy
efficiency programs; and
d. Environmental Protection: mandated environmental
protection programs, including programs designed to
mitigate the
- ---------------------------
/51/ The institution of such a charge is currently under consideration in
-- Case 94-E-0952.
/52/ One way of disbursing funds for energy efficiency programs covered by
-- this charge would be by means of a standard performance contract with
stipulated pricing approved by the Commission.
<PAGE>
-22-
environmental impacts of electric industry
restructuring programs, excluding environmental
remediation costs./53/
--
The revenue levels included in this Settlement are deemed to include funding for
such programs at the levels listed in Schedule K and, unless different
expenditure levels are approved, the net impact on customers would be zero. The
Company will continue to administer existing contracts and the funds required to
comply therewith. To the extent that the costs related to the above described
SBC programs change from the levels listed in Schedule K during the term of this
Settlement, those changes will be reflected in an adjustment to rates to take
effect each July 1st during the term of this Settlement. Costs not recovered
during any particular Rate Year will be reflected in rates in a future Rate
Year,/54/ as soon as practicable. Such cost changes shall be allocated to
--
voltage classes in proportion to the "Rate Reductions" listed in Schedule A. The
Company shall have no further obligation pursuant to the 1996 Settlement or the
1997 Eighteen-Month DSM Plan to implement or administer DSM programs and the
Company shall have no further obligation to prepare or file future DSM plans or
evaluation reports./55/
--
15. The costs described as Public Policy Costs in Section VII of
RG&E's October 1 Submission, to the extent permitted to be billed separately as
part of an SBC, or as a
__________________
/53/ See paragraph 30, infra.
-- --- -----
/54/ Which may include the period immediately following the term of this
-- Settlement.
/55/ In addition, there shall be no denial of recovery of actual DSM
-- expenditures pursuant to Schedule F to the 1996 Settlement. Due to
contractual commitments under existing DSM programs, discontinuance of the
Company's obligations will not result in immediate cessation of all
expenditures.
<PAGE>
-23-
Public Policy Charge, under the terms of the Commission's Order establishing an
SBC, may be included in RG&E's SBC. To the extent that any of such costs are not
recovered through an SBC or similar charge, as described in paragraph 14, supra,
-----
such costs shall be otherwise recovered through distribution access rates.
Changes in such costs due to governmental action of any kind will be considered
Mandates, as described in paragraph 16, infra. The materiality threshold of $2.5
-----
million/56/ will be applied to aggregated cost changes within each of the seven
--
categories of Public Policy Costs,/57/ excluding SBC items.
--
MANDATES, CATASTROPHIC EVENTS AND COMPETITION IMPLEMENTATION COSTS
- ------------------------------------------------------------------
16. In the event that, after the date upon which this Settlement is
executed by the Company and on or before June 30, 2002, one or more Mandates/58/
--
is implemented/59/ and/or
--
____________________
/56/ A zero ($0) materiality threshold shall apply to items included in the
--
SBC.
/57/ These categories are:
--
1) DSM
2) Low-Income Assistance
3) Obligation to Serve - Incremental Expenses
4) Economic Growth
5) Environmental Initiatives
6) Mandated and Public Policy Research and Development
7) Regulatory Assessments and Expenses
/58/ For purposes of this Settlement, a "Mandate" shall mean (a) any
--
governmental action, including changes in laws and regulations (including
tax laws and regulations) and orders of regulatory and other agencies which
result in cost changes, and (b) any changes in accounting required by
generally accepted accounting principles. In the event that any such
"Mandate" consists of actions in response to an asserted failure by the
Company to conform to valid legal requirements, the Company shall have the
burden of showing that
(continued...)
<PAGE>
-24-
one or more Catastrophic Events/60/ occurs and, during any Rate Year covered by
--
this Settlement, the cost impact of any individual Mandate or any individual
Catastrophic Event exceeds $2.5 million,/61/ RG&E shall be entitled to defer the
--
entire amount attributable to such Mandates and Catastrophic Events and to
recover or pass back such amount as soon as possible thereafter, subject to the
terms of paragraphs 8 and 9, supra. Such deferral and recovery or pass-back,
with the exception of Commission-imposed Mandates, shall not apply to generating
facilities that, pursuant to the Energy and Capacity stage of the Company's
Retail Access Program,/62/ are fully exposed to market pricing.
--
___________________
(...continued)
its conduct which gave rise to such action was consistent with the best
interests of customers.
/59/ "Implementation," as used in this paragraph, shall not be deemed to refer
-- only to commencement of new Mandates, but shall instead include both
commencement of new Mandates and changes to existing Mandates.
/60/ For purposes of this Settlement, a "Catastrophic Event" shall mean an event
-- that triggers the designation of part of the Company's service territory as
a disaster area or as being under a state of emergency.
/61/ Such impact shall be calculated only with reference to regulated
-- operations. The $2.5 million threshold, however, shall not apply to changes
in nuclear decommissioning costs that are the result of Mandates.
/62/ Described at paragraphs 45-52, infra.
-- -----
<PAGE>
-25-
17. RG&E shall be entitled to defer and to recover as soon as
possible, subject to the terms of paragraphs 8 and 9, supra, the entire amount
-----
of all Competition Implementation Costs/63/ that exceed, in the aggregate in any
Rate Year, $2.5 million.
SECURITIZATION
- --------------
18. The benefits, if any, of any Securitization/64/ that may become
--
available after this Settlement is executed by RG&E shall, subject to paragraph
11, supra, be used to increase the amounts of the rate reductions identified in
-----
paragraph 2, supra,/65/ and any such further rate reductions shall be allocated
----- --
in a manner consistent with the legislation or Commission orders authorizing
Securitization.
___________________
/63/ For purposes of this Settlement, "Competition Implementation Costs" shall
-- mean all incremental expenditures incurred by RG&E after February 28, 1997,
in connection with all regulatory proceedings, legislation, regulations,
and orders pertaining to the implementation of a competitive market for
electric service.
/64/ For purposes of this Settlement, "Securitization" shall mean Commission-
-- issued rate orders, legislatively authorized or otherwise, that are
specifically intended to create added credit quality for utility
borrowings, allowing assets or utility costs to be financed at more
favorable terms than otherwise available. This reduced cost of borrowing is
the benefit referred to in the text. Securitization shall not be deemed to
include general rate orders or financing orders issued in the ordinary
course.
/65/ Without regard to the limitations of paragraph 9(a) and (b), supra.
-- -----
<PAGE>
-26-
SUNK COSTS
- ----------
19. All prudently incurred Sunk Costs/66/ as of March 1, 1997 shall
--
be included in rates charged pursuant to RG&E's distribution access tariff. The
Parties intend that the provisions of this Settlement will allow the Company to
continue to recover such costs, during the term of the Settlement, under
Statement of Financial Accounting Standards No. 71 ("SFAS 71"),/67/ which
--
provides for certain accounting conventions for regulated companies subject to
cost-based ratemaking. The Parties shall meet prior to July 1, 2000 to discuss
future ratemaking treatment of such costs. Such treatment shall be consistent
with the principle that the Company shall have a reasonable opportunity beyond
July 1, 2002 to recover all such costs./68/
--
SALE OF GENERATING ASSETS
- -------------------------
20. To the extent that any existing generating assets are sold (such
as via an auction or other suitable mechanism to establish market value) during
the term of this Settlement, any gains on such sales shall be shared between
shareholders and customers as follows:
_______________________
/66/ For purposes of this Settlement, "Sunk Costs" shall mean all investment in
-- electric plant and electric Regulatory Assets. A "Regulatory Asset" is a
deferred cost whose classification on the Company's Balance Sheet as an
asset is permitted pursuant to paragraph 9 of SFAS 71.
/67/ Accounting for the Effects of Certain Types of Regulation.
--
/68/ Such principles of cost recovery shall also apply to the negotiations
-- referenced in paragraph 23, infra.
-----
<PAGE>
-27-
a. With respect to sales occurring during the first three (3)
Rate Years of the Settlement period, customers shall be
entitled to sixty (60) percent of the first $20.0 million of
any such gain, and the Company shall be entitled to retain
the remainder. Customers will be entitled to eighty (80)
percent of any such gains over and above the first $20.0
million.
b. With respect to sales occurring during the final two (2)
Rate Years of the Settlement period, customers shall be
entitled to eighty (80) percent and the Company shall be
entitled to retain twenty (20) percent of all gains.
The gain so shared shall be net of any losses due to generation asset sales,
transaction costs, the cost of any hedging arrangements necessary to manage the
Company's risk of fluctuations in the price of the electric commodity or
required ancillary services, and all applicable financial statement tax effects.
The Company's share of the gain shall be excluded from all calculations of
regulatory earnings. The parties shall meet prior to July 1, 2000 to discuss
the treatment of the customer's share of the gain and make a recommendation to
the Commission with respect thereto. The Parties intend that the provisions of
this Settlement will allow the Company to recover, in rates charged pursuant to
RG&E's distribution tariff, any prudently incurred losses, including all
applicable financial statement tax effects, resulting from the sale of a
generating asset, during the term of the Settlement, under SFAS 71. The Parties
shall meet prior to July 1, 2000 to discuss future ratemaking treatment of such
costs. Such treatment shall be consistent
<PAGE>
-28-
with the principle that the Company shall have a reasonable opportunity beyond
July 1, 2002 to recover all such costs.
TO-GO COSTS
- -----------
<PAGE>
-29-
21. The fixed portion of the To-Go Costs/69/ of RG&E's fossil
--
generating units, /70/ hydroelectric generating units, /71/ gas turbines, /72/
-- -- --
and power purchase contracts (other than Kamine), /73/ and the fixed portion of
--
the To-Go Costs of the Company's share of Oswego 6 shall be recovered in full
through the Company's distribution access tariff until July 1, 1999 in
___________________
/69/ For purposes of this Settlement, "To-Go Costs" shall mean all capital
--
costs incurred after February 28, 1997, O&M expenses and property,
payroll and other taxes. The "variable" portion of such costs shall mean
the costs that vary as KWH output varies at a generating plant, chiefly
fuel expense. The "fixed" portion of such costs shall mean all such costs
not defined as "variable."
/70/ RG$E's wholly owned fossil generating units consist of Beebee Station
--
(Unit 12) and Russell Station (Units 1-4).
/71/ Stations 2, 5, 26, 160, 170 and 172.
--
/72/ Stations 3 and 9.
--
/73/ RG&E currently has the following long-term power purchase contracts:
--
<TABLE>
<CAPTION>
================================================================================
CONTRACT NAME CONTRACT CAPACITY (KW) EXPIRATION OF CONTRACT
- --------------------------------------------------------------------------------
<S> <C> <C>
Niagara Firm 65,000 August, 2007
- --------------------------------------------------------------------------------
Niagara Par. "B" 35,000 August, 2007
- --------------------------------------------------------------------------------
St. Lawrence 55,000 August, 2007
- --------------------------------------------------------------------------------
Hydro Quebec 20,000 October, 1998
- --------------------------------------------------------------------------------
FitzPatrick 12 Month Notice
Winter 44,000
Summer 50,000
- --------------------------------------------------------------------------------
Gilboa 150,000 June, 2002
================================================================================
</TABLE>
<PAGE>
-30-
accordance with paragraphs 45 and 52, infra. The variable portion of such To-Go
-----
Costs/74/ shall be subject to the market for electricity in accordance with
--
paragraphs 45 and 46, infra.
-----
NUCLEAR FACILITIES
- ------------------
22. All prudently incurred costs of Ginna Station and the Company's
share of Nine Mile Point 2 shall be recovered through retail rates subject to
the provisions of the following paragraph, provided, however, that such costs
shall not be subject to true-up or reconciliation except as otherwise provided
in this Settlement.
23. RG&E shall participate in good-faith negotiations with Staff and
with the other cotenants of Nine Mile Point 2 regarding future rate treatment
of such facility. The Parties anticipate that similar treatment will be applied
to Ginna Station. Such negotiations and any proposed treatment resulting
therefrom shall be consistent with and in furtherance of the following
principles:
a. any Commission or other State solution must be consistent
with Nuclear Regulatory Commission ("NRC") requirements;
b. a Statewide solution to treatment of nuclear facilities is
preferable to individual utility-by-utility solutions and
any solution pertaining to RG&E must be consistent with a
Statewide solution;
_________________
/74/ See footnote 69, supra.
-- --- -----
<PAGE>
-31-
c. RG&E's nuclear facilities shall remain subject to the
provisions of paragraph 16, supra, during the term of this
-----
Settlement; and
d. no change in the treatment of RG&E's nuclear facilities
shall be implemented until at least January 1, 2000.
In the event that the above-described negotiations should result in any change
in ratemaking treatment, the Parties will meet to discuss the relationship
between the potential impact on the Retail Access Program implementation
schedule, the associated conditions and limitations on customer participation
and the level of To-Go Costs that are subject to the market.
SHUT-DOWN AND DECOMMISSIONING COSTS
- -----------------------------------
24. All prudently incurred incremental costs pertaining to the shut-
down and decommissioning of generating facilities, /75/ whether fully or
--
partially owned by RG&E, shall be recovered through the Company's distribution
access tariff. Nuclear decommissioning costs shall be as described in Schedule
D. In the event that the estimates of nuclear decommissioning costs contained in
Schedule D change, /76/ RG&E shall submit to the Commission and the Parties a
--
revised Schedule D, showing such changes and shall, upon request of the
Commission or the
___________________
/75/ In addition to the decommissioning costs shown in Schedule D for nuclear
--
plant, "shut down and decommissioning costs" include transmission and
distribution costs associated with elimination of a particular generating
facility, severance pay resulting from such elimination, and
decommissioning of fossil facilities.
/76/ This provision is intended to address changes in estimates that are not
--
the result of changes in Mandates, as defined in footnote 58, supra.
-----
<PAGE>
-32-
Parties, provide reasonable documentation therefor. The Company, upon Commission
approval, /77/ shall thereupon be permitted to change its distribution access
--
rates to reflect such increase or decrease. Other than nuclear decommissioning
costs currently included in rates, the above costs shall be deemed incremental
and deferred for recovery pursuant to the provisions of paragraphs 8 and 9,
supra.
- -----
SYSTEM RELIABILITY AND MARKET POWER
- -----------------------------------
25. RG&E shall maintain the reliability of its system, including
those portions of the system identified as Load Pockets,/78/ in the most cost-
--
effective manner, considering a range of alternatives including but not limited
to: transmission and distribution system reinforcements, maintenance of
existing plant, energy efficiency and distributed generation. In connection
with the petition of the Member Systems of the New York Power Pool ("NYPP") to
the FERC to form new wholesale market institutions (the ISO, PE and the New York
State Reliability Council), the Company shall file a market power mitigation
plan with FERC and shall take appropriate action in accordance with the outcome
of such filing. Nothing in this Settlement
______________
/77/ Such approval process shall be based upon a showing of the necessity and
--
reasonableness of the expenditures.
/78/ For purposes of this Settlement, "Load Pockets" shall have the meaning
--
described in Opinion No. 96-12 (at 60): "'Load pockets' exist when, due to
transmission system limitations, some generation must be located within a
particular location in order to continue the provision of reliable
service." RG&E's Load Pockets are described in Section V of the October 1
Submission.
<PAGE>
-33-
shall preclude the Commission from implementing market power mitigation measures
for retail service, as appropriate, after the term of this Settlement.
AMORTIZATIONS
- -------------
26. Schedule B to this Settlement shows the items and the amounts
thereof that will be deemed to have been amortized during the term of the
Settlement. RG&E shall be permitted to record amortizations and unamortized
balances as it deems appropriate over the five Rate Years of the Settlement;
provided, however, that, at the conclusion of the Settlement period, any
unamortized balance for a particular item shall not be greater than it would
have been had the amortization been recorded as shown on Schedule B. For
purposes of computing RG&E's regulatory earnings, the levels of amortization
expenses shall be as indicated on Schedule B.
POST-EMPLOYMENT BENEFITS
- ------------------------
27. The parties agree that upon approval of this Settlement by the
Commission, and effective as of January 1, 1997, the Commission's policy
statement on accounting and ratemaking for pensions and other post-employment
benefits/79/ shall no longer apply to RG&E and to its accounting policies.
--
________________
/79/ Case 91-M-0890, Statement of Policy and Order Concerning the Accounting
-- -------------------------------------------------------
and Ratemaking Treatment for Pensions and Postretirement Benefits other
-----------------------------------------------------------------------
than Pensions, issued September 7, 1993.
-------------
<PAGE>
-34-
GINNA OUTAGE COSTS
- ------------------
28. RG&E shall be permitted, at its option, to book costs associated
with Ginna Station maintenance outages on a levelized basis. Such costs shall
be deemed to have been recovered from customers on a levelized basis.
EXCESS EARNINGS
- ---------------
29. Except as expressly provided otherwise in paragraph 10, supra,
-----
any excess earnings attributable to the Rate Year ending June 30, 1997 or any
prior Rate Year/80/ shall be deemed to have been passed back to customers as of
--
July 1, 1997.
ENVIRONMENTAL REMEDIATION COSTS
- -------------------------------
30. RG&E will defer on its books of account and reflect in rates as
prescribed by this paragraph and pursuant to paragraphs 8 and 9, supra, site
-----
investigation and remediation ("SIR") costs/81/ for electric operations in
--
excess of $2.0 million annually. Any costs deferred under this paragraph will be
net of recoveries of these costs under insurance policies or from third parties.
_________________
/80/ Including any amount, not exceeding $2.5 million, pertaining to excess
--
collections under the Fuel Cost Adjustment.
/81/ SIR costs are the costs RG&E incurs to investigate, remediate, or pay
--
damages, including natural resource damages, but excluding personal injury
damages, with respect to industrial and hazardous waste or contamination,
spills, discharges and emissions for which RG&E is responsible.
<PAGE>
-35-
AMOUNTS DUE CUSTOMERS
- ---------------------
31. RG&E shall record any Service Quality Performance Program/82/
--
penalties that become due to customers during the term of this Settlement. To
the extent that these amounts are not offset by amounts due the Company,
excluding Mandates, as described in paragraph 16, supra, they shall be carried
-----
forward to the end of the term of this Settlement and the ultimate disposition
of any such carry-forward balance shall be determined in a future rate
proceeding./83/
--
INCENTIVES OWED RG&E AND AMOUNTS OWED CUSTOMERS UNDER SETTLEMENTS
- -----------------------------------------------------------------
32. Any and all Electric Revenue Adjustment Mechanism ("ERAM")
deferrals and incentive amounts that were due to the Company as of June 30,
1997, including amounts derived from the electric rate settlement approved by
the Commission in Opinion No. 93-19 ("the 1993 Settlement")/84/, shall be deemed
--
to be eliminated as of the effective date of this Settlement. Any and all
amounts that were due to customers as of June 30, 1997 including amounts derived
from the 1993 Settlement, the "Settlement Agreement - Demand Side Management
Issues" ("the
_________________
/82/ The Service Quality Performance Program is described in paragraph 44,
--
infra.
-----
/83/ Such balance shall bear carrying charges at the annual rate of 9.0
--
percent.
/84/ Cases 92-E-0739 et al., Rochester Gas and Electric Corporation, Opinion
-- -- -- --------------------------------------
and Order Approving Settlement, issued August 24, 1993. The referenced
items include DSM, Service Quality, Integrated Resource Management
Incentive ("IRMI") and Ginna Steam Generator replacement cost sharing. See
---
1993 Settlement, paragraphs 18-20, 32.
<PAGE>
-36-
DSM Settlement") approved in Opinion No. 95-20,/85/ the 1996 Settlement and the
--
Nine Mile 2 Settlements shall also be deemed to be eliminated as of the
effective date of this Settlement.
FLEXIBLE TARIFF DISCOUNTS
- -------------------------
33. During the term of this Settlement, RG&E shall have authority to
provide discounted service pursuant to Service Classification No. 10 ("SC-10")
contracts or similar flexible pricing arrangements, including the Flexible
Distribution Tariff Option described in Appendix A to Schedule A. Lost margins
resulting from all such sales prior to July 1, 2002 shall be deemed to have been
recovered by the Company during the term of this Settlement./86/
--
LEGAL SERVICES
- --------------
34. This Settlement resolves all issues pertaining to the cost of
legal services and is deemed to complete all the recommendations contained in
the final report issued by Mitchell/Titus and Company in November 1993 in the
Statewide Legal Services Study (Case 92-M-0047). Accordingly, there are no
further studies, reports or actions required of the Company in regard to this
matter.
_____________________
/85/ Cases 95-E-0673 et al., Rochester Gas and Electric Corporation, Opinion
-- -- -- --------------------------------------
and Order Approving Settlement of DSM Issues, issued December 27, 1995.
/86/ This paragraph shall not be construed as limiting RG&E's right to seek
--
explicit recovery of some or all of the lost margins on sales of
electricity or distribution service made after June 30, 2002, regardless
of when the contracts pursuant to which such sales were made were entered
into.
<PAGE>
-37-
REGULATED RATE DESIGN
- ---------------------
35. Except as expressly provided otherwise in this Settlement, any
change in revenues pursuant to the provisions hereof shall be allocated
uniformly to all service classifications ("SC")./87/
--
36. For SC-1, SC-2, and SC-4, Schedule I, the monthly customer charge
shall be increased by $1.50 in each Rate Year of the term of this Settlement,
with corresponding decreases in energy rates, as shown in Schedule A.
37. For SC-4, mandatory application to large customers shall be
eliminated.
38. For SC-8, the difference between peak and shoulder period energy
charges shall be eliminated as of July 1, 1997, with a corresponding increase in
demand charges. In subsequent years, energy charges shall be reduced
accordingly, as shown for illustrative purposes in Schedule A.
39. The Company is authorized to modify the eligibility criteria of
SC-10 to eliminate the requirements of item A.3 (energy audits).
40. The Company is authorized to modify the eligibility criteria of
SC-11 to eliminate the energy audit requirement.
_________________
/87/ Reference in this paragraph and in paragraphs 36 through 40, infra, to
-- -----
"service classifications" shall be to the existing service classifications
in RG&E's Electric Tariff (P.S.C. No. 14), and in RG&E's Street Lighting
Tariff (PSC No. 13). For the purposes of this Settlement, the projected
KWH sales as presented in Schedule A shall be used.
<PAGE>
-38-
41. The Company is authorized to make rate design changes to its
other electric service classifications/88/ that are consistent with the
--
principle of reducing marginal energy prices. Further, during the term of this
Settlement, the Company may at any time petition the Commission for approval to
implement revenue-neutral or de minimis rate or rate design changes, including
changes to the rate design plans described in paragraphs 35 through 38, supra.
-----
LARGE CUSTOMER CREDIT PROGRAM
- -----------------------------
42. RG&E shall continue its Large Customer Credit Program in
accordance with Schedule E to this Settlement, which shall supersede Schedule F
to the 1996 Settlement.
LOW-INCOME PROGRAM
- ------------------
43. RG&E shall continue to implement the Low-Income Program contained
in Schedule F to this Settlement and to recover in Residential Rates/89/ the
amounts specified in Schedule K. Prior to June 30, 1999, the Parties shall meet
to discuss whether the Program should continue beyond its scheduled expiration
date (June 30, 1999) and, if so, in what form.
______________
/88/ SC-3, SC-7 and SC-9.
--
/89/ For purposes of this paragraph, "Residential" shall mean SC-1 and SC-4
--
customers.
<PAGE>
-39-
SERVICE QUALITY
- ---------------
44. RG&E shall continue its Service Quality Performance Program in
accordance with Schedule G to this Settlement, which shall supersede Schedule H
to the 1996 Settlement./90/ The new Program shall continue through June 30,
--
1999. The Electric Reliability component/91/ of the Program shall apply only to
--
RG&E's distribution operations and the Customer Service component/92/ shall
--
apply only to the Company's Regulated Load Serving Entity ("RLSE")
operations./93/ Prior to June 30, 1999, the Parties shall meet to discuss
--
whether the Program should continue beyond its scheduled expiration date and, if
so, in what form. Notwithstanding the foregoing, if RG&E determines that the
implementation of competition results in deterioration of performance under the
Service Quality Performance Program,/94/ RG&E shall be permitted, independent of
--
any other provision of this Settlement, to petition the Commission for relief
from the effects of any component of the Program that is affected by
implementation of competition.
/90/ The only substantive difference between the 1996 Program and the current
--
one is in the amounts of the maximum penalties.
/91/ The maximum penalty for the Electric Reliability Component shall be
--
$750,000, allocated equally between the two items in this component.
/92/ The maximum penalty for the Customer Service component shall be
--
$500,000, allocated equally among the six items in this component.
/93/ "RLSE" is defined in Section VIII (p. VIII-23) of RG&E's October 1
--
Submission and described in paragraph 65, infra.
-----
/94/ E.g., complaints due to customer confusion.
-- ----
<PAGE>
-40-
RETAIL ACCESS GENERALLY
- -----------------------
45. RG&E shall offer its customers the opportunity to purchase their
own electric energy and capacity and the Company shall deliver such electric
energy and capacity in accordance with the following description of the
Company's Retail Access Program. The Parties acknowledge that RG&E's ability to
undertake the Retail Access Program is contingent upon numerous conditions and
circumstances,/95/ a number of which are not within the direct control of the
--
Parties. Accordingly, the Parties agree that it may become necessary to modify
the Program to account for such factors, and they agree further to address such
matters in good faith and to cooperate in an effort to propose joint resolutions
of any such matters.
46. The Retail Access Program shall be a "Single Retailer" program,
as described in RG&E's October 1 Submission,/96/ and as such "Single Retailer"
--
program has been modified pursuant to the terms of this Settlement./97/ For a
--
period of three years, beginning with the implementation date of the Program, as
described in paragraph 48, infra, RG&E shall offer the option of unbundled
-----
billing services under a tariff to participating Load Serving Entities
("LSEs")./98/ The Program will be phased in, as described in paragraphs 48
--
through 52, infra. It
-----
_______________
/95/ Including the existence of an adequate market, as described in paragraph
--
52, infra.
-----
/96/ See Section VIII (pp. VIII-16 - VIII-18).
-- ---
/97/ A list of the retailing functions, the provision of which will be the
--
responsibility of LSEs participating in the Program, is included in
Schedule H.
/98/ LSEs are described in Section VIII of RG&E's October 1 Submission (pp.
--
VIII-10 - VIII-11). An individual customer can qualify as an LSE and
procure its combined needs
(continued...)
<PAGE>
-41-
shall commence on July 1, 1998 by allowing customers to choose their own
supplier of electric energy (the "Energy Only" stage of the Program). During
this stage of the Program, the Company shall continue to provide and be
compensated for the generating capacity required to serve all customers
reliably. On July 1, 1999, subject to the provisions of paragraphs 52 and 68,
infra, customers will be permitted to choose their own supplier of energy and
- -----
capacity (the "Energy and Capacity" stage of the Program)./99/
--
47. RG&E agreed to cooperate with the Parties to commence work on the
Retail Access Program as soon as the Parties executed the Initial Settlement and
the Company agrees to continue to do so upon execution of this Settlement;
provided, however, that any incremental costs or commitments incurred by the
Company in connection with such work performed since April 8, 1997 shall be
deemed to be included in the Competition Implementation Costs that are subject
to recovery pursuant to paragraph 17, supra.
-----
_____________
(...continued)
for some or all of its separate accounts. "Unbundled billing services"
include preparation and mailing of a single bill on the LSE's behalf. The
purpose of having RG&E offer such service is to permit LSEs to commence
operations without having to wait for development of their own billing
systems. The three-year limit is intended to recognize that this service
will ultimately be available on a competitive basis and, therefore, to
give RG&E the option of terminating this regulated offering after allowing
LSEs a reasonable period to make alternative billing arrangements.
/99/ As the designation indicates, the LSE will be responsible for purchasing
--
capacity upon commencement of this stage of the Program.
<PAGE>
-42-
48. Subject to the provisions of paragraphs 45, supra, and 52, infra,
----- -----
the schedule for implementation of the Retail Access Program is as follows and
is contingent upon the events listed in Items a through c:
a. Execution of an agreement regarding the functional
requirements of the Program/100/ by May 30, 1997;
---
b. Development of the form of Operating Agreement/101/ and
---
filing of proposed tariffs by December 1, 1997;
c. Commission approval of tariffs by February 1, 1998;/102/
---
_____________
/100/ "Functional requirements" will describe the business and/or system
---
processes needed to implement retail access and unbundled billing.
Subsequent critical components of the system development process, such as
the operating agreement, business procedures, communications, system
specifications and training, will eventually evolve from these
requirements.
/101/ Operating Agreements are described in Section VIII (pp. VIII-24 - VIII-
---
26) of RG&E's October 1 Submission. The Operating Agreement is currently
being drafted in consultation with an Advisory Council made up of the
Parties. The Operating Agreement will be referenced in the Distribution
Access Tariff and will be on file with the Commission. It is expected
that there may be differences between an Agreement for a single customer
acting as an LSE and an Agreement for an LSE serving multiple customers.
/102/ Except as provided in paragraph 61, infra, these tariffs shall be
--- -----
effective as of July 1, 1998.
<PAGE>
-43-
d. The Energy Only stage of the Program begins by July 1, 1998,
at which time customers using up to 670 GWH of energy per
year, in the aggregate,/103/ will be eligible to
---
participate;
e. The Energy and Capacity stage of the Program begins by July
1, 1999, at which time customers using up to 1,300 GWH of
energy per year will be eligible to participate;
f. As of July 1, 2000, customers using up to 2,000 GWH of
energy will be eligible to participate;
g. As of July 1, 2001, customers using up to 3,000 GWH of
energy will be eligible to participate;
h. As of July 1, 2002, all retail customers will be eligible to
participate.
49. To permit implementation without unnecessary disruption, the
Parties agree that the Retail Access Program scope and functional requirements
will not be changed in a way that substantially alters the administrative and
other changes necessary for timely implementation of the Program. No such
change in scope or functional requirements shall be made without RG&E's consent.
50. To the extent that energy consumption by end-use customers in the
Company's service territory grows beyond a level of 6,714 GWH during the term of
this
_____________
/103/ All references to customer consumption are to aggregated use.
---
<PAGE>
-44-
agreement, the GWH caps on eligibility described in paragraph 48, supra, will be
-----
increased by the amount of additional energy consumption.
51. Eligibility for the Retail Access Program will not be restricted
by customer class.
52. The Parties agree that the existence of a functioning Statewide
Energy and Capacity Market/104/ in which RG&E is able to practicably participate
---
is a crucial factor in the Company's ability to implement the Energy and
Capacity stage of the Program. If such a Statewide Energy and Capacity Market
is not implemented by July 1, 1998, the Company may petition the Commission for
a delay in the implementation of the Energy and Capacity stage of the Program
and show cause why relief from this schedule is required. If the Program is
delayed in this fashion, the provisions of paragraph 56, infra, will apply and
-----
the caps on participation in the Energy and Capacity stage of the Program
described in paragraph 48, supra, will apply. The Parties further agree that,
-----
prior to July 1, 2000, they shall meet to review the progress of retail access
under the Program and shall consider and recommend to the Commission, as
appropriate, any changes to the implementation schedule that are determined to
be necessary; provided,
___________
/104/ The "Statewide Energy and Capacity Market" is defined to be a set of
---
circumstances and conditions such as that identified by the Member
Systems of the NYPP in their January 31, 1997 filing with the FERC to
create new wholesale market institutions in New York. This Market, as
thus defined, would include mechanisms for the wholesale purchase and
sale of the electric energy commodity by any qualified entity, as well as
the same or different mechanisms for the purchase and sale of generating
capacity commitments by such entities.
<PAGE>
-45-
however, that no such changes shall be recommended unless they are revenue
neutral and do not materially increase the level of risk borne by the Company.
DISTRIBUTION ACCESS CHARGES
- ---------------------------
53. LSEs will be required to take transmission service under the
Company's FERC Open Access Transmission Tariff ("OATT"),/105/ until such time as
---
that tariff is superseded by a FERC-approved Statewide open access transmission
tariff. At that time, LSEs will be required to take service under the Statewide
tariff. To the extent that modifications to the OATT are necessary during the
term of this Settlement to implement the Retail Access Program, the Company will
consult with interested Parties in the development of such modifications, and
the Company will file such modifications with the Commission with a request that
the Commission approve such modifications. In the filing the Company will
justify requested modifications to non-rate terms and conditions and will
indicate how rates should be designed for the Retail Access Program. Following
Commission approval, the Company will file the amendments to the OATT together
with the Commission's order approving the amendments with the FERC with a
request that the FERC defer to the Commission on such modifications. Where
requested by the Company to do so, Staff shall employ all reasonable means to
expedite the Commission's approval process. The foregoing process shall not be
construed as requiring RG&E to take any action that is inconsistent with lawful
FERC jurisdiction and requirements. LSEs will also be
__________________
/105/ Filed July 9, 1996 in Docket No. OA96-141-000.
---
<PAGE>
-46-
required to take distribution service under a PSC-regulated distribution tariff.
Any costs not recovered through the FERC-regulated transmission tariff will be
recovered, to the extent permitted hereunder, through the PSC-regulated tariffs
and any costs recovered through FERC-regulated tariffs shall not be recovered
through PSC-regulated tariffs. The distribution access tariff charges will be
based upon the loads of the LSE's retail customers aggregated by voltage class.
54. For the Energy Only stage of the Retail Access Program, the rates
charged to LSEs under the Company's tariff for distribution access shall be set
by deducting from the rates that would apply to bundled retail service $0.02305
per KWH/106/. LSEs shall be entitled to purchase energy from the Company at a
---
rate of $0.01905 per KWH to serve the requirements of the retail customers they
serve within the Company's service area, provided that such LSEs contract to
serve the full requirements of such customers and purchase all of the energy
required to do so from the Company through June 30, 1999 or until the Energy
Only stage of the Program terminates, if such stage extends beyond June 30,
1999./107/ In the event that the Energy Only stage of the Program extends beyond
---
June 30, 1999, the distribution access rates may, if necessary, be changed in
accordance with paragraph 56, infra.
-----
_____________
/106/ Of this amount, $0.004 per KWH represents average "retailing costs." The
---
types of retailing functions to which "retailing costs" pertain are shown
in Schedule H.
/107/ LSEs shall make this election on a customer-by-customer basis, thus
---
permitting LSEs to diversify their sources of electricity supply.
<PAGE>
-47-
55. For the Energy and Capacity stage of the Retail Access Program,
the rates charged to LSEs under the Company's tariff for distribution access
shall be approximately equal, on average, to the rates that would apply to
bundled retail service less retailing costs and the per-unit fixed and variable
To-Go Costs of non-nuclear energy sources, exclusive of property taxes. The
property tax component of the per-unit non-nuclear To-Go Costs shall be deducted
from bundled rates as follows: twenty (20) percent upon commencement of the
Energy and Capacity stage of the Retail Access Program, and an additional twenty
(20) percent commencing every twelve (12) months thereafter./108/
---
56. If the Statewide Energy and Capacity Market is not fully in place
as of July 1, 1998, the Company shall, after consultation with interested
Parties, be authorized to charge rates for distribution access that will be
approximately equal, on average, to the rates that would apply to bundled retail
service less retailing costs and the per-unit market price of energy and
capacity, as defined at the points at which the Company's transmission system
interconnects with the Statewide transmission system./109/ These rates will
---
apply to distribution access service for a period no longer than twelve (12)
months after the full implementation of the Statewide
__________
/108/ The total per-unit reduction from bundled rates will average 3.2 cents
---
per KWH. This figure includes both retailing costs and To-Go Costs of
non-nuclear energy sources. Schedule A shows, for illustrative purposes,
the average distribution access revenues per KWH by voltage level,
without accounting for rate design, for each year of the Energy and
Capacity stage of the Program. The actual distribution access rates shall
be filed with the Commission as tariff changes.
/109/ The Company shall file appropriate tariff leaves to effect such change
---
and the approval process therefor shall be limited to verification of the
changes reflected therein. The same procedure shall apply to changes
pursuant to paragraph 57, infra.
-----
<PAGE>
-48-
Energy and Capacity Market. The Company will not interfere with or in any way
seek to delay the implementation of the Statewide Energy and Capacity Market.
The appropriate rates for LSEs purchasing energy from the Company shall be
determined consistent with this paragraph.
57. Upon extension of eligibility for the Retail Access Program to
all retail customers on July 1, 2002, the Company shall be authorized to modify
its distribution access rates so as to hold constant the degree to which its To-
Go Costs are at risk for recovery through the market./110/ The Parties agree to
---
meet before July 1, 2001 to discuss future ratemaking plans. If, during the
operation of the Energy and Capacity Stage of the Retail Access Program, the
market price of energy and capacity measured at the Company's interconnections
with the Statewide transmission system, exceeds an average of 3.2 cents per KWH
on a persistent and sustained basis, the Parties will meet to discuss the
potential acceleration of the Retail Access Program implementation schedule, the
associated conditions and limitations on customer participation and continued
recovery of nuclear costs in the event of a subsequent decrease in market
prices, subject to the provisions of paragraph 23, supra.
-----
___________
/110/ Recovery of non-nuclear To-Go Costs shall continue to be through the
---
market, except that property taxes are to be phased out of regulated
rates as described in paragraph 55, supra.
-----
<PAGE>
-49-
RECIPROCITY
- -----------
58. In the event that RG&E is requested to permit access by an
electric utility or affiliate/111/ of such utility where an affiliate of RG&E
---
would be denied comparable access to the service territory of such other utility
or utility affiliate, RG&E shall have the right to petition the Commission for
an order requiring that such other utility provide the Company's affiliate
comparable access or precluding the other utility or its affiliate from
participating in RG&E's Retail Access Program until such time as access is
provided to RG&E's affiliate./112/ The filing of such petition shall operate
---
automatically to stay participation in RG&E's Program until the matter is
decided by an order of the Commission on the petition.
RETURN TO RLSE
- --------------
59. Customers who have participated in the Retail Access Program
shall be permitted to return to service under the Regulated Load Serving Entity
("RSLE")/113/ tariff; provided, however, that RG&E shall be permitted to
---
establish reasonable measures, including but
______________________
/111/ For purposes of this Settlement, "utility affiliate" shall mean any
---
entity having any ownership, partnership, joint venture or other common
enterprise interest with a utility in which either entity has more than five (5)
percent ownership in the other or in any of the foregoing entities.
/112/ The Parties agree that the Commission may be limited by law in the
---
actions it may take with respect to non-New York State entities and their
programs. To the extent that any such entity may be the object of a petition, as
provided for herein, the Commission shall, to the extent it is legally able to
do so, take action consistent with this paragraph.
/113/ The RLSE is described in paragraph 65, infra.
--- -----
<PAGE>
-50-
not limited to time and frequency limits on switching, to prevent customers from
"gaming" the Program. During the Energy Only stage, RG&E will allow such
returning customers to take service at regulated retail rates. During the Energy
and Capacity stage, if the Company's incremental costs of supplying energy and
capacity are different from the costs of energy and capacity embedded in
regulated retail rates, the Company shall be permitted to charge such customers
the equivalent of regulated retail rates adjusted for the incremental costs
(whether positive or negative) of procuring energy and capacity on behalf of
such customers. Otherwise, such customers will pay regulated retail rates.
During the Energy and Capacity stage, RG&E shall have no obligation to maintain
capacity for such customers. New customers will pay the same rates and be
allowed to take the same services as such returning customers.
ENVIRONMENTAL INFORMATION
- -------------------------
60. RG&E and Staff shall work with LSEs to develop and implement,
where feasible, meaningful, and cost-effective, a means of providing customers
with information on the fuel mix and emission characteristics of the generation
relied upon by their respective LSEs.
DAIRYLEA PROGRAM
- ----------------
61. The parties agree that the Company's introduction of the Retail
Access Program to eligible farm and food processor customers on February 1, 1998
(five months prior to its starting date for other customers), the introduction
of the Program to those customers outside of the caps which otherwise limit
participation, and the provision of a rate equal to the market
<PAGE>
-51-
price of energy and capacity plus retailing costs (plus $0.006 for residential
customers), satisfies the rate and timing aspects of the Commission's Order
Establishing Retail Access Pilot Programs issued June 23, 1997 in Cases 96-E-
0948 et al./114/
---
CORPORATE STRUCTURE
- -------------------
62. RG&E shall separate its existing operations, either functionally
or structurally, as indicated, and shall provide for new operations by
establishing the following activity-based units:
a. a functionally separate distribution unit ("DISCO");
b. a functionally separate generating unit ("GENCO");
c. a functionally separate Regulated Load Serving Entity
("RLSE");
d. a structurally separate Unregulated Load Serving Entity
("ULSE"); and
e. a Holding Company ("HOLDCO")./115/
---
RG&E will develop and provide, by January 1, 1998, the accounting treatment to
be applied to the foregoing units. The Company will meet periodically with
Staff during such development period to keep Staff apprised of progress and to
receive input.
______________________
/114/ Petition of Dairylea Cooperative Inc. to Establish an Open-Access Pilot
--- -----------------------------------------------------------------------
Program for Farm and Food Processor Electricity Customers (the "Dairylea
---------------------------------------------------------
case").
/115/ The HOLDCO may, at the Company's option, be a functionally separate unit
---
Serving essentially the same purposes of a holding company or it may be a
legally distinct entity as contemplated in paragraph 67, infra.
-----
<PAGE>
-52-
DISCO
- -----
63. The DISCO shall continue to carry on RG&E's transmission and
distribution service which shall be provided to LSEs (Regulated and Unregulated)
pursuant to regulated tariffs. Except as otherwise described in this
Settlement, DISCO rates shall include the costs of RG&E generating
facilities/116/ and all costs identified in Section VII of RG&E's October 1
---
Submission./117/ Except to the extent that any of RG&E's generating
---
facilities/118/ are sold to unaffiliated entities, ownership of such facilities
---
shall remain with the DISCO either directly or through ownership by the DISCO of
the GENCO.
GENCO
- -----
64. Except as otherwise provided in this Settlement, the GENCO shall
be responsible for operating RG&E's generating facilities and for their
associated To-Go Costs.
______________________
/116/ See paragraphs 19 through 24, 46, 48 and 52, supra.
--- --- -----
/117/ See paragraph 15, supra.
--- --- -----
/118/ Including RG&E's interest in any jointly owned generating facilities.
---
<PAGE>
-53-
RLSE
- ----
65. The RLSE shall provide bundled service under tariffs to customers
who elect to continue receiving bundled service or who do not have a practicable
alternative. The RLSE shall continue to serve as a "Provider of Last Resort"
("POLR") until the Commission approves an alternative means of providing such
service. All costs of POLR service that are currently included in bundled rates
and are not collected directly from customers of the RLSE shall be collected in
DISCO rates consistent with paragraph 15, supra. The Company will work with
-----
Staff after the initial implementation of the Retail Access Program to devise an
experimental alternative which will entail providing POLR service on a
competitive basis. This experiment will be conducted during the term of this
Settlement.
ULSE
----
66. The ULSE shall be permitted to function as an energy marketer
and provider of other energy services both within and outside RG&E's utility
service territory. The ULSE shall be permitted to use RG&E in its name and make
known that it is an affiliate of RG&E. The nature of the relationships among
affiliated units or corporations is addressed in the "Standards Pertaining to
Affiliates and the Provision of Information" contained in Schedule I attached
hereto.
<PAGE>
-54-
HOLDCO AND CAPITALIZATION OF UNREGULATED OPERATIONS
- ---------------------------------------------------
67. The Parties support RG&E's Petition in substantially the form of
Schedule J/119/ to establish a holding company structure in which RG&E would be
---
permitted to operate through one or more regulated companies and one or more
unregulated companies, including energy service companies ("ESCOs") and LSEs.
Whether RG&E conducts its unregulated activities through a HOLDCO or a separate
subsidiary of a utility parent, it shall be permitted initially to fund, through
cash, loan guarantees or advances, such activities in the amount of $50 million.
The principles relating to the inter-company relationships, code of conduct,
cost allocations, protections and restrictions applicable to a holding company
or competitive subsidiary are contained in Schedule I. Authorization to fund
such unregulated operations is granted with the approval of this Settlement.
Except for the $50 million of initial investment, or as otherwise/120/
---
authorized by the Commission, RG&E's regulated Business Segments will neither
make loans to, nor guarantee or provide credit support for the obligations of
unregulated affiliates, and RG&E's regulated Business Segments will not pledge
any utility assets as security for loans or financing arrangements for
unregulated activities.
______________________
/119/ Or a similar petition proposing the formation of a HOLDCO with the same
---
result, but through a different structure.
/120/ I.e., subsequent to initial investment.
--- ----
<PAGE>
-55-
PETITION FOR RELIEF
- -------------------
68. In the event that any of the following conditions occurs or is
likely to occur, RG&E or any other Party to this Settlement shall have the right
to petition the Commission for review of the operation of this Settlement and
appropriate remedial action:
a. Return on equity, determined on a Rate Year regulatory basis
for all remaining regulated operations, falls below 8.5
percent or increases above 14.5 percent;
b. Pre-tax interest coverage falls below 2.5 times;
c. Governmental action occurs that cannot adequately be
addressed through the provisions of this Settlement
pertaining to Mandates, including but not limited to:
i. Actions taken by FERC with respect to: jurisdiction
over functions traditionally understood as "local
distribution" of electricity; ISO and PE functions and
transactions; and Qualifying Facility and Independent
Power Producer matters.
ii. Actions taken by the NRC with respect to: nuclear
decommissioning; nuclear waste disposal; nuclear power
plant operating and safety requirements; and financial
standards for nuclear power plant operators.
<PAGE>
-56-
iii. New York State or federal legislation pertaining to:
energy industry restructuring; changes to the Public
Utility Regulatory Policies Act; and changes to the
Public Utility Holding Company Act of 1935.
69. Any Party seeking review pursuant to the preceding paragraph
shall have the burden of showing to the Commission's satisfaction that continued
operation of this Settlement as to the specific basis for that Party's petition
is unjust or unreasonable. In such event, the Commission may suspend or modify
any portions of this Settlement or take or refuse to take any other action
permitted by law under the circumstances as they then exist, the terms and
provisions of this Settlement notwithstanding.
70. The Parties acknowledge that the Commission, pursuant to its
statutory responsibility, on its own motion or on request of any party, reserves
the authority to act on the level of the Company's rates if the Commission
determines that unforeseen circumstances have rendered the Company's rates or
return on investment unreasonable, inadequate or excessive for the provision of
safe and adequate service.
<PAGE>
-57-
FILING REQUIREMENTS
- -------------------
71. RG&E shall file with the Commission, not later than September 30
following each Rate Year subject to this Settlement, (a) a calculation of
regulatory earnings on common equity for such Rate Year, which filing shall be
used for purposes of determining whether the Company's earnings exceed or fall
below the 11.80 percent return described in paragraph 10, supra, and (b) a
-----
calculation of any penalties incurred pursuant to the Service Quality
Performance Program described in paragraph 44, supra.
-----
72. RG&E shall not, as of the effective date of this Settlement, be
required to make any of the filings or computations required by the 1996
Settlement.
73. Within 90 days of approval of this Settlement, the Company will
file with Staff a plan outlining the manner in which the Company will carry out
Retail Access Program phase-in. Such a plan should include, but not be limited
to, a customer education plan and a customer application procedure for each
stage of the Retail Access Program. The Company will consult with Staff and the
Parties prior to filing such a plan.
DISPUTE RESOLUTION
- ------------------
74. In the event of any disagreement over the interpretation of this
Settlement or the implementation of any of the provisions of this Settlement,
which cannot be resolved informally among the Parties, such disagreement shall
be resolved in the following manner unless otherwise provided herein: The
Parties shall promptly convene a conference and in good
<PAGE>
-58-
faith shall attempt to resolve such disagreement. If any such disagreement
cannot be resolved by the Parties, any Party may petition the Commission for
relief on a disputed matter.
BINDING EFFECT OF SETTLEMENT
- ----------------------------
75. This Settlement represents a negotiated agreement and, except as
otherwise expressly stated herein, none of the Parties shall be deemed to have
approved, agreed to, or consented to any principle, methodology or
interpretation of law underlying or supposed to underlie any provision hereof,
and this Settlement shall not be cited or relied upon with respect to any
matters other than those specifically addressed herein.
SUPERSEDING PRIOR SETTLEMENTS
- -----------------------------
76. Except as expressly provided otherwise herein, this Settlement
shall, upon approval by the Commission, supersede the DSM Settlement and the
1996 Settlement.
MODIFICATION OF SETTLEMENT
- --------------------------
77. Approval by the Commission of this Settlement shall constitute
approval of all of its terms. If the Commission approves this Settlement in its
entirety or modifies it in a manner acceptable to the Parties, this Settlement
shall be implemented in accordance with its terms. Because this Settlement is
an integrated whole, with each provision in consideration for, in support of,
and dependent on the others, any attempt to modify its terms may frustrate its
purpose. Thus, if the Commission does not approve this Settlement in its
entirety, without
<PAGE>
-59-
modification, each of the Parties reserves the right to withdraw its acceptance
by serving written notice on the Commission and the other Parties and to
renegotiate and, if necessary, to litigate, without prejudice, any or all issues
as to which such Party agreed in this Settlement; such Party shall not be bound
by the provisions of this Settlement, as executed or as modified, and this
Settlement shall not take effect.
EFFECT OF AGREEMENT
- -------------------
78. This Settlement calls for RG&E to make major, and in some cases
irreversible, commitments for the purpose of furthering the goal of the
Commission to restructure the electric industry and to reduce electric rates in
the State of New York. RG&E, by executing this Settlement, is making such
commitments with the expectation that the Parties and the Commission shall
continue to honor the assurances embodied in this Settlement. Specifically:
a. As part of this Settlement, RG&E has agreed to make
commitments, as described herein, including but not limited
to the following: (i) agreement to withdraw from the three
Article 78 proceedings described in paragraph 79, infra;
-----
(ii) significant rate reductions; (iii) the restructuring of
the Company's business; (iv) opening of the Company's
service territory to competitors; (v) providing retail
access to customers; and (vi) resolving the Kamine matter
while controlling its impact on rates.
<PAGE>
-60-
b. RG&E has made each such commitment in return for rate and
other assurances by the Commission, including but not
limited to the following: (i) except to the extent the
Company has expressly agreed herein to place generation at
market risk,/121/ RG&E shall have a reasonable opportunity
---
to recover all prudently incurred investment and expenses
and to earn a reasonable return on investments; (ii) the
Company shall have a reasonable opportunity to recover
transition costs; (iii) rate treatment for the Company's
investment in nuclear facilities shall be as described
herein; (iv) RG&E shall be afforded a reasonable opportunity
to fund and to undertake competitive business activities;
and (v) the Company is entitled to recover Kamine costs.
c. The Parties recognize that RG&E's participation in this
Settlement is based on the premise that, in adopting this
Settlement, the Commission will find, in substance, that:
(i) the foregoing commitments and assurances are
inextricably interrelated; (ii) the rates established
pursuant to this Settlement are just and reasonable to both
customers and shareholders through June 30, 2002; (iii) the
reasonable opportunity for RG&E to continue to recover the
______________________
/121/ See paragraph 48, supra.
--- --- -----
<PAGE>
-61-
prudently incurred costs referred to in subparagraph b,
supra,/122/ beyond the term of this Settlement is justified;
----- ---
(iv) except as noted herein, this Settlement constitutes
full compliance with the Commission's policies identified in
Opinion No. 96-12;/123/ (v) this Settlement is in the public
---
interest; and (vi) there is a clear need to reduce the
burdens imposed by Mandates.
WITHDRAWAL FROM LITIGATION
- --------------------------
79. In consideration for the foregoing, RG&E, upon final approval of
this Settlement by the Commission,/124/ agrees to petition the Appellate
Division of the Supreme Court for permission to withdraw as a party to the
appeal in the Article 78 proceeding brought to challenge Opinion No. 96-12,
Energy Association v. Public Service Commission (Sup. Ct. Albany Co. Index No.
- -----------------------------------------------
5830-96), and to withdraw the Company's pending Article 78 proceedings
______________________
/122/ Other than the future costs of competitive businesses referenced in
---
subparagraph b(iv), supra.
-----
/123/ Full compliance pertaining to the following tasks outlined in Opinion
---
No. 96-12 has not been effected by this Settlement: (a) a filing to distinguish
and classify transmission and distribution facilities; (b) the proposed
resolution of market power problems as related to Load Pockets, as discussed in
paragraph 25, supra; (c) compliance with future ESCO requirements (e.g.,
----- ----
oversight, metering and billing); (d) compliance with future ISO requirements;
and (e) continuation of public forums to provide education and consumer input
related to competition and the needs within RG&E's service territory.
/124/ I.e., after any appeals from such approval are exhausted or the time to
--- ----
appeal has expired, whichever is later.
<PAGE>
-62-
brought to challenge the Commission's action with respect to: (a) the 1996
Settlement, Rochester Gas and Electric Corporation v. Public Service Commission
-------------------------------------------------------------------
(Sup. Ct. Albany Co. Index No. 6616-96); and (b) the Commission's June 23, 1997
Order Establishing Retail Access Pilot Programs in Cases 96-E-0948 et al.,
-- --
Rochester Gas and Electric Corporation v. Public Service Commission (Sup. Ct.
- -------------------------------------------------------------------
Albany Co. Index No. 6531-97). Withdrawal of the two Rochester Gas and Electric
--------------------------
cases and RG&E's withdrawal as a party to the Energy Association case shall be
------------------
effected through Stipulations of Withdrawal, mutually agreed to by RG&E and the
Commission. Until the aforementioned petition with respect to the Energy
------
Association case is granted, the Company will discontinue its litigation
- -----------
activities to the extent that it is able to do so without prejudicing its rights
in any of the three Article 78 proceedings.
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CASES 94-E-0952 AND 96-E-0898
AMENDED AND RESTATED SETTLEMENT AGREEMENT
OCTOBER 23, 1997
The party whose signature follows subscribes to the foregoing Amended and
Restated Settlement Agreement.
Staff of the State of New York
Department of Public Service
By: /s/ ROBERT L. WHITAKER
-------------------------------
Robert L. Whitaker, Director
Office of Regulatory Economics
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CASES 94-E-0952 AND 96-E-0898
AMENDED AND RESTATED SETTLEMENT AGREEMENT
OCTOBER 23, 1997
The party whose signature follows subscribes to the foregoing Amended and
Restated Settlement Agreement.
Rochester Gas and Electric Corporation
By: /S/ WILLIAM J. REDDY
----------------------
William J. Reddy
Controller
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CASES 94-E-0952 AND 96-E-0898
AMENDED AND RESTATED SETTLEMENT AGREEMENT
OCTOBER 23, 1997
The party whose signature follows subscribes to the foregoing Amended and
Restated Settlement Agreement.
National Association of Energy
Service Companies
By: /s/ RUBEN S. BROWN
----------------------
Ruben S. Brown
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CASES 94-E-0952 AND 96-E-0898
AMENDED AND RESTATED SETTLEMENT AGREEMENT
OCTOBER 23, 1997
The party whose signature follows subscribes to the foregoing Amended and
Restated Settlement Agreement.
The Joint Supporters
By: /s/ RUBEN S. BROWN
----------------------
Ruben S. Brown
The E Cubed Company
<PAGE>
ROCHESTER GAS AND ELECTRIC CORPORATION
CASES 94-E-0952 AND 96-E-0898
AMENDED AND RESTATED SETTLEMENT AGREEMENT
OCTOBER 23, 1997
The party whose signature follows subscribes to the foregoing Amended and
Restated Settlement Agreement.
Multiple Intervenors
By: /s/ ROBERT M. LOUGHNEY
-----------------------
Robert M. Loughney
Couch, White, Brenner
Howard & Fregenbaum, LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheet, consolidated statement of income and consolidated statement of
cash flows and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,600,244
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 336,747
<TOTAL-DEFERRED-CHARGES> 432,878
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,369,869
<COMMON> 194,257
<CAPITAL-SURPLUS-PAID-IN> 502,016
<RETAINED-EARNINGS> 114,213
<TOTAL-COMMON-STOCKHOLDERS-EQ> 810,486
35,000
47,000
<LONG-TERM-DEBT-NET> 485,417
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 101,900
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 131,900
10,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 748,166
<TOT-CAPITALIZATION-AND-LIAB> 2,369,869
<GROSS-OPERATING-REVENUE> 765,599
<INCOME-TAX-EXPENSE> 51,000
<OTHER-OPERATING-EXPENSES> 591,269
<TOTAL-OPERATING-EXPENSES> 644,664
<OPERATING-INCOME-LOSS> 120,935
<OTHER-INCOME-NET> (3,236)
<INCOME-BEFORE-INTEREST-EXPEN> 120,094
<TOTAL-INTEREST-EXPENSE> 38,765
<NET-INCOME> 81,329
4,500
<EARNINGS-AVAILABLE-FOR-COMM> 76,829
<COMMON-STOCK-DIVIDENDS> 52,449
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 236,612
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.97
</TABLE>
