<PAGE 1>

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                         Washington, D. C. 20549-1004

                                   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 June 30, 1998

                                      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 2-30057

                             CANAL ELECTRIC COMPANY               
            (Exact name of registrant as specified in its charter)

        Massachusetts                                        04-1733577   
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)

One Main Street, Cambridge, Massachusetts                   02142-9150    
(Address of principal executive offices)                    (Zip Code)   

                                (617) 225-4000                   
             (Registrant's telephone number, including area code)

                                                                         
     (Former name, address and 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.

                                                    Outstanding at
           Class of Common Stock                    August 1, 1998

        Common Stock, $25 par value                1,523,200 shares

The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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<PAGE 2>

                        PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                      JUNE 30, 1998 AND DECEMBER 31, 1997

                                    ASSETS

                            (Dollars in thousands)



                                                   June 30,     December 31,
                                                     1998           1997    
                                                  (Unaudited)

PROPERTY, PLANT AND EQUIPMENT, at original cost    $469,900        $469,861
  Less -  Accumulated depreciation and
          amortization                              207,974         197,844
                                                    261,926         272,017
  Add  -  Construction work in progress               4,026           2,228
          Nuclear fuel in process                       445             193
                                                    266,397         274,438

INVESTMENTS
  Equity in corporate joint venture                   3,058           3,075

CURRENT ASSETS
  Cash                                                   18              18
  Accounts receivable-
    Affiliates                                        9,613          12,159
    Other                                            11,497          15,397
  Electric production fuel oil                          729             806
  Prepaid property taxes                                -               840
  Other                                               2,537           2,277
                                                     24,394          31,497

DEFERRED CHARGES
  Regulatory assets                                  16,841          17,413
  Other                                               9,861           9,774
                                                     26,702          27,187

                                                   $320,551        $336,197









                            See accompanying notes.
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<PAGE 3>

                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                      JUNE 30, 1998 AND DECEMBER 31, 1997

                        CAPITALIZATION AND LIABILITIES

                            (Dollars in thousands)

                                                   June 30,     December 31,
                                                     1998           1997    
                                                  (Unaudited)
CAPITALIZATION
  Common Equity -
    Common stock, $25 par value -
      Authorized - 2,328,200 shares
      Outstanding - 1,523,200 shares,
        wholly-owned by Commonwealth
        Energy System (Parent)                     $ 38,080        $ 38,080
    Amounts paid in excess of par value               8,321           8,321
    Retained earnings                                56,145          53,130
                                                    102,546          99,531
  Long-term debt, including premiums, less
    current sinking fund requirements                83,917          83,917
                                                    186,463         183,448

CAPITAL LEASE OBLIGATIONS                            10,943          11,227

CURRENT LIABILITIES
  Interim Financing -
    Notes payable to banks                            1,275          20,850
    Advances from affiliates                          5,660             -  
                                                      6,935          20,850
  Other Current Liabilities -
    Current sinking fund requirements                   350             350
    Accounts payable -
      Affiliates                                        851           1,028
      Other                                          19,168          21,335
    Accrued taxes -
      Income                                          1,591           2,054
      Local property and other                           16             844
    Accrued interest                                  1,449           1,420
    Other                                             5,144           5,328
                                                     28,569          32,359
                                                     35,504          53,209
DEFERRED CREDITS
  Accumulated deferred income taxes                  68,954          69,447
  Unamortized investment tax credits and other       18,687          18,866
                                                     87,641          88,313

COMMITMENTS AND CONTINGENCIES
                                                   $320,551        $336,197



                            See accompanying notes.
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<PAGE 4>

                            CANAL ELECTRIC COMPANY

             CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS

           FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997

                            (Dollars in thousands)
                                  (Unaudited)
                                      Three Months Ended    Six Months Ended
                                        1998      1997       1998      1997

ELECTRIC OPERATING REVENUES
  Sales to affiliated companies       $27,088   $27,997   $ 56,008   $ 62,307
  Sales to non-affiliated companies    15,283    16,551     34,610     43,927
                                       42,371    44,548     90,618    106,234

OPERATING EXPENSES
  Fuel used in production              17,942    19,174     43,710     55,052
  Electricity purchased for resale        133     1,307        281      3,979
  Other operation and maintenance      11,088     9,697     19,806     18,293
  Depreciation                          5,038     5,066     10,077     10,131
  Taxes - 
    Income                              2,012     2,478      4,076      5,020
    Local property                        604       760      1,300      1,430
    Payroll and other                     200       224        417        452
                                       37,017    38,706     79,667     94,357

OPERATING INCOME                        5,354     5,842     10,951     11,877

OTHER INCOME                              223       114        352        238

INCOME BEFORE INTEREST CHARGES          5,577     5,956     11,303     12,115

INTEREST CHARGES
  Long-term debt                        1,976     1,976      3,954      3,954
  Other interest charges                  120       295        298        659
                                        2,096     2,271      4,252      4,613

NET INCOME                              3,481     3,685      7,051      7,502

RETAINED EARNINGS -
  Beginning of period                  56,700    56,437     53,130     52,620
  Dividends on common stock            (4,036)   (3,808)    (4,036)    (3,808)

RETAINED EARNINGS -
  End of period                       $56,145   $56,314   $ 56,145   $ 56,314










                            See accompanying notes.
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<PAGE 5>

                            CANAL ELECTRIC COMPANY

                      CONDENSED STATEMENTS OF CASH FLOWS

                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997

                            (Dollars in thousands)
                                  (Unaudited)


                                                       1998           1997 
                                                                
OPERATING ACTIVITIES
 Net income                                          $ 7,051        $ 7,502
 Effects of noncash items -
   Depreciation and amortization                      11,220         11,880
   Deferred income taxes and investment
     tax credits, net                                   (900)          (611)
   Earnings from corporate joint venture                (223)          (222)
 Dividends from corporate joint venture                  240            241
 Change in working capital, exclusive of cash
   and interim financing                               3,313          5,445
 All other operating items                              (661)        (2,728)
Net cash provided by operating activities             20,040         21,507

INVESTING ACTIVITIES
 Additions to property, plant and equipment           (2,089)        (2,313)

FINANCING ACTIVITIES
 Payment of short-term borrowings                    (19,575)        (9,975)
 Payment of dividends                                 (4,036)        (3,808)
 Advances from (payments to) affiliates                5,660         (5,410)
Net cash used for financing activities               (17,951)       (19,193)

Net increase in cash                                     -                1
Cash at beginning of period                               18             12
Cash at end of period                                $    18        $    13


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash paid during the period for:
   Interest (net of capitalized amounts)             $ 4,111        $ 4,428
   Income taxes                                      $ 4,779        $ 4,527













                            See accompanying notes.
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<PAGE 6>

                            CANAL ELECTRIC COMPANY

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

(1) General Information

        Canal Electric Company (the Company) is a wholly-owned subsidiary of
    Commonwealth Energy System.  The parent company is referred to in this
    report as the "System" and together with its subsidiaries is collectively
    referred to as "the system."  The System is an exempt public utility
    holding company under the provisions of the Public Utility Holding
    Company Act of 1935 and, in addition to its investment in the Company,
    has interests in other utility and several nonregulated companies.

        The Company has 106 regular employees including 79 (75%) represented
    by a collective bargaining agreement that will remain in effect through
    May 31, 2001.  Employee relations have generally been satisfactory.

        The Company is a wholesale power company and operates two generating
    units under life-of-the-unit power contracts on file with the Federal
    Energy Regulatory Commission (FERC).  The price of power is based on a
    two-part rate consisting of a demand charge and an energy charge.  The
    demand charge covers all expenses except fuel costs and includes the re-
    covery of the original investment.  It also provides for any adjustments
    to that investment over the economic lives of the units.  The energy
    charge is based on the cost of fuel and is billed to each purchaser in
    proportion to its purchase of power.  Purchasers are billed monthly.

        The Company also procures bulk electric power at the request of and
    for its affiliates thereby securing cost savings for their respective
    customers by planning for a power supply on a single system basis.

        On May 27, 1998, the System announced that three of its subsidiary
    companies (Commonwealth Electric Company, Cambridge Electric Light
    Company and the Company) have selected affiliates of Southern Energy New
    England, L.L.C., an affiliate of The Southern Company, to buy substan-
    tially all of their non-nuclear electric generating assets in conjunction
    with electric industry restructuring in Massachusetts.  The plants being
    sold include: Canal Unit 1 (566 mw) and a one-half interest in Canal Unit
    2 (282.5 mw) located in Sandwich, MA and owned by the Company.

(2) Significant Accounting Policies

        (a) Principles of Accounting

        Generally, expenses which benefit more than one interim period are
    allocated to other periods to more appropriately match revenues and
    expenses.  Income tax expense is recorded using the statutory rates in
    effect applied to book income subject to tax recorded in the interim
    period.

        The unaudited financial statements for the periods ended June 30,
    1998 and 1997, reflect, in the opinion of the Company, all adjustments
    (consisting of only normal recurring accruals) necessary to summarize
    fairly the results for such periods.  In addition, certain prior period
    amounts are reclassified from time to time to conform with the presenta-
    tion used in the current period's financial statements.
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<PAGE 7>

                            CANAL ELECTRIC COMPANY

        The Company's significant accounting policies are described in Note 2
    of Notes to Financial Statements included in its 1997 Annual Report on
    Form 10-K filed with the Securities and Exchange Commission.  For interim
    reporting purposes, the Company follows these same basic accounting
    policies but considers each interim period as an integral part of an
    annual period and makes allocations of certain expenses to interim
    periods based upon estimates of such expenses for the year.

        (b) Regulatory Assets

        The Company is regulated as to rates, accounting and other matters by
    various authorities, including the FERC and the Massachusetts Department
    of Telecommunications and Energy (DTE).

        Based on the current regulatory framework, the Company accounts for
    the economic effects of regulation in accordance with the provisions of
    Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
    for the Effects of Certain Types of Regulation."  The Company has
    established various regulatory assets in cases where the FERC has
    permitted or is expected to permit recovery of specific costs over time. 
    In the event the criteria for applying SFAS No. 71 are no longer met, the
    accounting impact would be an extraordinary, non-cash charge to opera-
    tions of an amount that could be material.  Criteria that give rise to
    the discontinuance of SFAS No. 71 include: 1) increasing competition
    restricting the Company's ability to establish prices to recover specific
    costs, and 2) a significant change in the current manner in which rates
    are set by regulators from cost based regulation to another form of
    regulation.  These criteria are reviewed on a regular basis to ensure the
    continuing application of SFAS No. 71 is appropriate.  Based on the
    current evaluation of the various factors and conditions that are
    expected to impact future cost recovery, the Company believes that its
    regulatory assets are probable of future recovery.

        The principal regulatory assets included in deferred charges were as
    follows:
                                             June 30,      December 31,
                                               1998            1997    
                                              (Dollars in thousands)

       Deferred income taxes                  $13,171        $13,089
       Seabrook related costs                   3,670          4,324
                                              $16,841        $17,413

        In November 1997, the Commonwealth of Massachusetts enacted a
    comprehensive electric utility industry restructuring bill.  On November
    19, 1997, the Company, together with Cambridge Electric Light Company
    (Cambridge Electric) and Commonwealth Electric Company (Commonwealth)
    filed a restructuring plan with the DTE.  The plan, approved by the DTE
    on February 27, 1998, provides that Commonwealth and Cambridge, beginning
    March 1, 1998, initiate a ten percent rate reduction for all customer
    classes and allow customers to choose their energy supplier.  As part of
    the plan, the DTE authorized the recovery  of certain strandable costs
    and provides that certain future costs may be deferred to achieve or
    maintain the rate reductions that the restructuring bill mandates.  The
    legislation gives the DTE the authority to determine the amount of 
<PAGE>
<PAGE 8>

                            CANAL ELECTRIC COMPANY

    strandable costs that will be eligible for recovery.  Costs that will
    qualify as strandable costs and be eligible for recovery include, but are
    not limited to, certain above market costs associated with generating
    facilities, costs associated with long-term commitments to purchase power
    at above market prices from independent power producers and regulatory
    assets and associated liabilities related to the generation portion of
    the electric business.

        The cost of transitioning to competition will be mitigated, in part,
    by the sale of the system's non-nuclear generating assets, including the
    Company's Units 1 and 2.  The sale is expected to be completed by the end
    of the year pending receipt of the necessary regulatory approvals.  The
    net proceeds from the sale of these assets will be used to mitigate
    stranded costs.  For additional information relating to electric industry
    restructuring, see Management's Discussion and Analysis of Results of
    Operations.

(3) Commitments and Contingencies

        Construction

        The Company is engaged in a continuous construction program presently
    estimated at $19.3 million for the five-year period 1998 through 2002. 
    Of that amount, $10.5 million is estimated for 1998.  As of June 30,
    1998, construction expenditures, including an allowance for funds used
    during construction, amounted to approximately $2.1 million.  These
    estimates include expenditures related to Units 1 and 2 which are to be
    sold in 1998 pursuant to the restructuring plan approved by the DTE.  The
    program is subject to periodic review and revision because of factors
    such as changes in business conditions, rates of customer growth, effects
    of inflation, maintenance of reliable and safe service, equipment
    delivery schedules, licensing delays, availability and cost of capital
    and environmental factors.  The Company expects to finance these expendi-
    tures with internally generated funds and short-term borrowings.
<PAGE>
<PAGE 9>

                            CANAL ELECTRIC COMPANY

Item 2.   Management's Discussion and Analysis of Results of Operations

      The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying condensed statements of income.  This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.

      A summary of the period to period changes in the principal items
included in the condensed statements of income for the three and six months
ended June 30, 1998 and 1997 and unit sales for these periods is shown below:

                                     Three Months Ended    Six Months Ended
                                           June 30,            June 30,
                                        1998 and 1997        1998 and 1997
                                              Increase (Decrease)
                                            (Dollars in thousands)

Electric Operating Revenues          $ (2,177)  (4.9)%    $(15,616)   (14.7)%

Operating Expenses -
  Fuel used in production              (1,232)   (6.4)     (11,342)   (20.6)
  Electricity purchased for resale      (1,174) (89.8)      (3,698)   (92.9)
  Other operation and maintenance       1,391    14.3        1,513      8.3
  Depreciation                            (28)   (0.5)         (54)    (0.5)
  Taxes -
    Federal and state income             (466)  (18.8)        (944)   (18.8)
    Local property and other             (180)  (18.3)        (165)    (8.8)
                                       (1,689)   (4.4)     (14,690)   (15.6)

Operating Income                         (488)   (8.4)        (926)    (7.8)

Other Income                              109    95.6          114     47.9

Income Before Interest Charges           (379)   (6.4)        (812)    (6.7)

Interest Charges                         (175)   (7.7)        (361)    (7.8)

Net Income                           $   (204)   (5.5)     $  (451)    (6.0)

Unit Sales (MWH)
  Increase(Decrease)                  133,421    15.5      (57,970)    (2.5)

                                                                            
                            Three Months Ended          Six Months Ended
                                  June 30,                  June 30,
MWH Unit Sales                 1998 and 1997             1998 and 1997

Canal Unit 1                 495,880     526,167    1,391,111   1,507,869
Canal Unit 2                 357,394     256,933      713,554     555,634
Seabrook 1                    69,676      51,111      141,228     126,952
Purchased for Resale             -        24,994          -       113,408
                             992,950     859,205    2,245,893   2,303,863


<PAGE>
<PAGE 10>

                            CANAL ELECTRIC COMPANY

Revenue, Fuel and Purchased Power

    Operating revenues for the three and six months ended June 30, 1998
decreased approximately $2.2 million or 4.9% and $15.6 million or 14.7%,
respectively, due primarily to decreases in fuel used in production and
electricity purchased for resale.  The change in unit sales during the current
periods reflects the timing of an inspection outage at Unit 1, the increased
availability of Unit 2, the timing of a refueling outage at Seabrook during
1997 and the expiration of contracts for the purchase of electricity on behalf
of affiliated retail distribution companies.

    The decreases in fuel used in production during the current three and six-
month periods reflects the lower average cost of fuel oil and the decreased
availability of Unit 1.  Fuel, purchased power and transmission costs for the
current three and six-month periods represented approximately 45% and 50%,
respectively, of operating revenues and averaged 1.9 cents and 2 cents per
KWH, respectively, as compared to 2.5 cents and 2.6 cents for the correspond-
ing periods a year ago.  

Other Operating Expenses

    During the current quarter and first six months of 1998, other operation
and maintenance increased by approximately $1.4 million or 14.3% and $1.5
million or 8.3%, respectively, due primarily to an increase in maintenance
($2.1 million and $2.4 million, respectively) primarily related to Unit 1,
offset, in part by a decrease in other operation ($678,000 and $914,000,
respectively).  The decrease in other operation during the current three and
six-month periods reflects the absence of amortization related to an abandoned
nuclear unit ($58,000 and $584,000, respectively) and lower insurance and
benefits costs ($88,000 and $194,000, respectively).  Federal and state income
taxes decreased due to lower levels of pre-tax income.

Interest Charges

    Total interest charges decreased for both current periods due to lower
average levels of short-term borrowings.

Electric Industry Restructuring

    On November 25, 1997, the Governor of Massachusetts signed into law the
Electric Industry Restructuring Act (the Act).  This legislation provided,
among other things, that customers of retail electric utility companies who
take standard offer service receive a 10 percent rate reduction and be allowed
to choose their energy supplier, effective March 1, 1998.  The Act also
provides that utilities be allowed full recovery of transition costs subject
to review and an audit process.  The rate reduction mandated by the legisla-
tion increases to 15 percent effective September 1, 1999 for customers who
continue to take standard offer service.

    It is likely that a statewide referendum will appear on the ballot in
November of this year that is seeking to repeal the legislation.  Management
is unable to predict what the ultimate outcome of this challenge will be.

    The Company, together with retail affiliates Cambridge Electric and
Commonwealth, filed a comprehensive electric restructuring plan with the
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<PAGE 11>

                            CANAL ELECTRIC COMPANY

DTE in November 1997, that was substantially approved by the DTE in February
1998.  The divestiture of the Company's non-nuclear generation assets is an
integral part of the Company's restructuring plan and is consistent with the
Act.

    In March 1997, the Company, together with Cambridge Electric and Common-
wealth, had submitted a report to the DTE that detailed the proposed auction
process for selling their electric generation assets and the entitlements
associated with purchased power contracts.  The auction process provided a
market-based approach to maximizing stranded cost mitigation and minimizing
the transition costs that retail customers will have to pay for stranded cost
recovery.  A request for bids from interested parties was issued last August
and an Offering Memorandum followed in October.  Potential bidders examined
all pertinent information related to the generating facilities and purchased
power contracts in order to prepare and submit their first round of bids in
mid-December.  Final binding bids were submitted on May 8, 1998. 

    On May 27, 1998, the System announced that three of its subsidiary
companies (Commonwealth, Cambridge Electric and the Company) had selected
affiliates of Southern Energy New England, L.L.C., an affiliate of The
Southern Company of Atlanta, Georgia, to buy substantially all of their non-
nuclear electric generating assets for approximately $462 million (subject to
certain adjustments at closing).  These facilities represent 984 megawatts
(mw) of electric capacity and have an approximate book value of $79 million.

    The plants being sold include: Canal Unit 1 (566 mw) and a one-half
interest in Canal Unit 2 (282.5 mw) located in Sandwich, MA and owned by the
Company; the Kendall Station facility (67 mw) and the adjacent Kendall Jets
(46 mw), located in Cambridge, MA and owned by Cambridge Electric; five diesel
generators (13.8 mw) in Oak Bluffs and West Tisbury on the island of Martha's
Vineyard that are owned by Commonwealth, and a 1.4 percent joint-ownership
interest (8.9 mw) in Wyman Unit No. 4 located in Yarmouth, ME, also owned by
Commonwealth.

    On July 31, 1998, a formal divestiture filing was submitted to the FERC
and the DTE that requests approval of the sale of the generating assets.  The
required approvals of the sale are expected to be received by year-end 1998.

Environmental Matters

    The Company is subject to laws and regulations administered by federal,
state and local authorities relating to the quality of the environment.  These
laws and regulations affect, among other things, the siting and operation of
electric generating and transmission facilities and can require the installa-
tion of expensive air and water pollution control equipment.  These regula-
tions have had an impact on the Company's operations in the past and could
have an impact on future operations, capital costs and construction schedules
of major facilities.  However, the Company's electric generating facilities
are to be sold at auction in 1998 pursuant to the restructuring plan approved
by the DTE.
<PAGE>
<PAGE 12>

                            CANAL ELECTRIC COMPANY

Year 2000

    The Company has been involved in Year 2000 compliancy since 1996.  A
complete inventory and review of software, information processing, delivery
systems and operational components for certain facilities has been completed,
and work continues on computer systems wherever necessary.  While some
computer systems have already been updated, tested and placed in production,
the Company expects to complete the balance of the modifications by mid-1999.

    Costs associated with Year 2000 compliancy are being expensed as incurred. 
The total cost of this project is expected to be funded with internally
generated funds.

    Management believes that with appropriate modifications, the Company will
be fully compliant regarding all Year 2000 issues and will continue to provide
its products and services uninterrupted through the millennium change. 
Failure to become fully compliant could have a significant impact on the
Company's operations.

Forward-Looking Statements

    This discussion contains statements which, to the extent it is not a
recitation of historical fact, constitute "forward-looking statements" and is
intended to be subject to the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995.  A number of important factors
affecting the Company's business and financial results could cause actual
results to differ materially from those reflected in the forward-looking
statements or projected amounts.  Those factors include developments in the
legislative, regulatory and competitive environment, certain environmental
matters, demands for capital and the availability of cash from various
sources.
<PAGE>
<PAGE 13>

                            CANAL ELECTRIC COMPANY

                          PART II - OTHER INFORMATION

Item 1. Legal Proceedings

        None.

Item 5. Other Information

        None.

Item 6. Exhibits and Reports on Form 8-K

   (a)  Exhibits

        Exhibit 27 - Financial Data Schedule

        Filed herewith as Exhibit 1 is the Financial Data Schedule for the
        three months ended June 30, 1998.

   (b)  Reports on Form 8-K

        A report on Form 8-K was filed June 5, 1998 for an event first
        reported May 27, 1998 regarding the sale of the Company's generating
        assets.
<PAGE>
<PAGE 14>

                            CANAL ELECTRIC COMPANY

                                   SIGNATURE

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                             CANAL ELECTRIC COMPANY
                                                  (Registrant)


                                             Principal Financial Officer:



                                             JAMES D. RAPPOLI             
                                             James D. Rappoli,
                                             Financial Vice President
                                               and Treasurer



Date:  August 14, 1998