<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 September 30, 1996

                                      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                    November 1, 1996
        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.
<PAGE>
<PAGE 2>

                        PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                   SEPTEMBER 30, 1996 AND DECEMBER 31, 1995

                                    ASSETS

                            (Dollars in thousands)



                                                  September 30,  December 31,
                                                       1996          1995    
                                                   (Unaudited)

PROPERTY, PLANT AND EQUIPMENT, at original cost    $448 553        $436 531
  Less -  Accumulated depreciation and
          amortization                              176 582         163 929
                                                    271 971         272 602
  Add  -  Construction work in progress               3 389           5 759
          Nuclear fuel in process                       254             122
                                                    275 614         278 483

LEASED PROPERTY, net                                 12 692          13 128

INVESTMENTS
  Equity in corporate joint venture                   3 421           3 372

CURRENT ASSETS
  Cash                                                  832              12
  Accounts receivable-
    Affiliated companies                              8 476           9 282
    Other                                            10 764           9 520
  Electric production fuel oil                          878             762
  Prepaid property taxes                                -               874
  Other                                               3 683           3 435
                                                     24 633          23 885

DEFERRED CHARGES
  Seabrook 1                                          5 454           6 436
  Seabrook 2                                          1 912           3 343
  Other                                              19 305          20 813
                                                     26 671          30 592

                                                   $343 031        $349 460
<PAGE>
<PAGE 3>

                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                   SEPTEMBER 30, 1996 AND DECEMBER 31, 1995

                        CAPITALIZATION AND LIABILITIES

                            (Dollars in thousands)

                                                  September 30,  December 31,
                                                       1996          1995    
                                                   (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                                 51 980          52 070
                                                     98 381          98 471
  Long-term debt, including premiums, less
   current sinking fund requirements and 
   maturing debt                                     83 611          83 941
                                                    181 992         182 412

CAPITAL LEASE OBLIGATIONS                            12 114          12 547

CURRENT LIABILITIES
  Interim Financing -
   Notes payable to banks                            15 250          23 425
   Advances from affiliates                          14 565           5 865
   Maturing long-term debt                              -             3 230
                                                     29 815          32 520
  Other Current Liabilities -
   Current sinking fund requirements                    350             920
   Accounts payable -
     Affiliated companies                             1 127           2 049
     Other                                           19 884          19 757
   Accrued taxes -
     Income                                           1 289           3 159
     Local property and other                         1 366             855
   Capital lease obligations                            578             581
   Accrued interest and other                         4 106           3 608
                                                     28 700          30 929
                                                     58 515          63 449
DEFERRED CREDITS
  Accumulated deferred income taxes                  71 981          72 914
  Unamortized investment tax credits and other       18 429          18 138
                                                     90 410          91 052

COMMITMENTS AND CONTINGENCIES
                                                   $343 031        $349 460

                            See accompanying notes.
<PAGE>
<PAGE 4>

                            CANAL ELECTRIC COMPANY

             CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS

        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

                            (Dollars in thousands)
                                  (Unaudited)

                                      Three Months Ended    Nine Months Ended
                                        1996      1995        1996     1995

ELECTRIC OPERATING REVENUES
  Sales to affiliated companies       $27 959   $26 710    $ 77 924  $ 69 469
  Sales to non-affiliated companies    19 969    17 182      58 192    35 878
                                       47 928    43 892     136 116   105 347

OPERATING EXPENSES
  Fuel used in production              21 453    16 371      59 355    32 669
  Electricity purchased for resale      2 624     4 013       5 716    12 524
  Other operation and maintenance      10 126    10 222      29 374    29 314
  Depreciation                          4 546     4 292      13 638    12 407
  Taxes - 
    Income                              2 277     2 191       7 761    (1 482)
    Local property                        652       710       1 885     2 091
    Payroll and other                     170       176         593       594
                                       41 848    37 975     118 322    88 117

OPERATING INCOME                        6 080     5 917      17 794    17 230

OTHER INCOME                              144        53       2 245       131

INCOME BEFORE INTEREST CHARGES          6 224     5 970      20 039    17 361

INTEREST CHARGES
  Long-term debt                        1 983     2 056       6 038     6 177
  Other interest charges                  567       527       1 574     1 392
  Allowance for borrowed funds
    used during construction              (25)     (247)        (80)     (532)
                                        2 525     2 336       7 532     7 037

NET INCOME                              3 699     3 634      12 507    10 324

RETAINED EARNINGS -
  Beginning of period                  52 089    51 711      52 070    51 647
  Dividends on common stock            (3 808)   (3 046)    (12 597)   (9 672)

  End of period                       $51 980   $52 299    $ 51 980  $ 52 299



                            See accompanying notes.
<PAGE>
<PAGE 5>

                            CANAL ELECTRIC COMPANY

                      CONDENSED STATEMENTS OF CASH FLOWS

             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

                            (Dollars in thousands)
                                  (Unaudited)


                                                       1996           1995 

OPERATING ACTIVITIES
  Net income                                         $12 507        $10 324
  Effects of noncash items -
   Depreciation and amortization                      17 227         16 502
   Deferred income taxes and investment
     tax credits, net                                 (1 312)        (4 931)
   Earnings from corporate joint venture                (380)          (408)
  Dividends from corporate joint venture                 331            559
  Change in working capital, exclusive of cash
   and interim financing                              (1 587)        (2 132)
  All other operating items                              644           (291)
Net cash provided by operating activities             27 430         19 623

INVESTING ACTIVITIES
  Additions to property, plant and equipment
   (exclusive of AFUDC)                              (10 328)       (19 830)
  Allowance for borrowed funds used
   during construction                                   (80)          (532)
Net cash used for investing activities               (10 408)       (20 362)

FINANCING ACTIVITIES
  Proceeds from (payment of) short-term borrowings    (8 175)         5 500
  Payment of dividends                               (12 597)        (9 672)
  Advances from affiliates                             8 700          5 460
  Long-term debt issue refunded                       (3 420)             -
  Sinking fund payments                                 (710)          (549)
Net cash provided by (used for) financing activities (16 202)           739

Net increase in cash                                     820              -
Cash at beginning of period                               12             12
Cash at end of period                                $   832        $    12


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for:
   Interest (net of capitalized amounts)             $ 7 117        $ 6 388
   Income taxes                                      $10 781        $ 3 081




                            See accompanying notes.
<PAGE>
<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 non-regulated companies.

        The Company has 118 regular employees including 91 (77%) represented
   by a collective bargaining agreement which expires in May 1997.

        The Company is a wholesale power company and operates its two
   generating units under life-of-the-unit power contracts on file with the
   FERC.  The price of power under the power contracts 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 recovery 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.

(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 September 30,
   1996 and 1995, 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 presentation
   used in the current period's financial statements.

        The Company's significant accounting policies are described in Note 2
   of Notes to Financial Statements included in its 1995 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.
<PAGE>
<PAGE 7>

                            CANAL ELECTRIC COMPANY

        (b) Regulatory Assets

        The Company is regulated as to rates, accounting and other matters by
   various authorities, including the Federal Energy Regulatory Commission
   (FERC) and the Massachusetts Department of Public Utilities (DPU).

        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.  On January 1,
   1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
   Long-Lived Assets and for Long-Lived Assets to be Disposed Of."  SFAS No.
   121 imposes stricter criteria for regulatory assets by requiring that such
   assets be probable of future recovery at each balance sheet date.  As of
   September 30, 1996, SFAS No. 121 did not have an impact on the Company's
   financial position or results of operations.  However, this result may
   change as modifications are made in the current regulatory framework
   pursuant to electric utility restructuring orders issued by the DPU
   including a final order that is expected to be issued by the end of 1996. 
   For additional discussion of electric industry restructuring activities,
   see Management's Discussion and Analysis of Results of Operations.

        The principal regulatory assets included in deferred charges were as
   follows:

                                            September 30,   December 31,
                                                 1996           1995    
                                               (Dollars in thousands)

        Seabrook related costs                $ 7 075          $ 9 511
        Deferred income taxes                  14 229           14 106
        Postretirement benefit costs              -              1 774
          Total regulatory assets             $21 304          $25 391


(3)     Commitments and Contingencies

        Construction

        The Company is engaged in a continuous construction program presently
   estimated at $57.2 million for the five-year period 1996 through 2000.  Of
   that amount, $19.1 million is estimated for 1996.  As of September 30,
   1996, construction expenditures, including an allowance for funds used
   during construction, amounted to approximately $10.4 million.  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 expenditures
   with internally generated funds and short-term borrowings.
<PAGE>
<PAGE 8>

                            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 nine months
ended September 30, 1996 and 1995 and unit sales for these periods is shown
below:

                                     Three Months Ended   Nine Months Ended
                                        September 30,       September 30,
                                        1996 and 1995       1996 and 1995
                                              Increase (Decrease)
                                            (Dollars in thousands)

Electric Operating Revenues          $  4 036     9.2%     $ 30 769    29.2%

Operating Expenses -
  Fuel used in production               5 082    31.0        26 686    81.7
  Electricity purchased for resale     (1 389)  (34.6)       (6 808)  (54.4)
  Other operation and maintenance         (96)   (0.9)           60     0.2
  Depreciation                            254     5.9         1 231     9.9
  Taxes -
    Federal and state income               86     3.9         9 243   623.7
    Local property and other              (64)   (7.2)         (207)   (7.7)
                                        3 873    10.2        30 205    34.3

Operating Income                          163     2.8           564     3.3

Other Income                               91   171.7         2 114 1 613.7

Income Before Interest Charges            254     4.3         2 678    15.4

Interest Charges                          189     8.1           495     7.0

Net Income                           $     65     1.8       $ 2 183    21.1

Unit Sales (MWH) Increase             161 651    20.5       779 650    48.3

                                                                             
                             Three Months Ended         Nine Months Ended
                                September 30,             September 30,
MWH Unit Sales                  1996 and 1995             1996 and 1995

Canal Unit 1                  628 128     438 166    1 682 838     438 166
Canal Unit 2                  147 320     180 325      282 414     692 001
Seabrook 1                     90 429      80 901      254 967     246 257
Purchased for Resale           84 907      89 741      173 336     237 481
                              950 784     789 133    2 393 555   1 613 905

<PAGE>
<PAGE 9>

                            CANAL ELECTRIC COMPANY

  Revenue, Fuel and Purchased Power

        Operating revenues for the three and nine months ended September 30,
  1996 increased approximately $4 million or 9.2% and $30.8 million or 29.2%,
  respectively.  The increase in both periods includes higher unit sales and,
  during the nine months, reflects the absence of a refund to customers
  during the second quarter of 1995 (approximately $7.5 million) due to the
  settlement of certain Seabrook-related tax issues.  Also affecting
  operating revenues in both periods was a decrease in the level of purchases
  made on behalf of affiliated retail distribution companies.

        Unit sales increased during both current periods primarily due to the
  increased availability of Unit 1 which was out of service for the first
  seven months of 1995 due to a combination of scheduled maintenance and
  unscheduled repairs to the turbine.  Somewhat offsetting the increase in
  unit sales was the decreased availability of Unit 2 which returned to
  service in mid-August 1996, following approximately five months of
  scheduled maintenance.  Also affecting unit sales in both periods was the
  decrease in purchases made on behalf of affiliated retail distribution
  companies.

        The significant increase in fuel used in production during the
  current three and nine-month periods reflects the impact of the previously
  discussed Unit 1 outage during the first seven months of 1995 and higher
  oil costs.  Fuel, purchased power and transmission costs for the current
  three and nine-month periods represented approximately 52% and 50%,
  respectively, of operating revenues and averaged 2.62 cents and 2.82 cents
  per KWH, respectively, as compared to 2.69 cents and 2.96 cents per KWH for
  the same periods a year ago.

  Other Operating Expenses

        During the first nine months of 1996 other operation and maintenance
  was virtually unchanged as a decrease in maintenance costs associated with
  Unit 1 ($3.8 million) was offset by an increase in maintenance related to
  Unit 2 ($1 million) and higher benefit costs ($2.8 million).  Other
  operation and maintenance expense decreased by less than 1% during the
  current quarter as increases in benefit costs ($900,000) and maintenance
  related to Unit 2 ($600,000) were virtually offset by lower maintenance
  costs ($1.3 million) related to Unit 1.  The increase in benefit costs
  during both current periods was due primarily to the Federal Energy
  Regulatory Commission's (FERC) acceptance of rate schedules which allow the
  recovery of previously deferred postretirement benefit costs over a six-
  month period which began in March.  Depreciation expense increased in both
  current periods due to higher levels of plant-in-service.  Federal and
  state income taxes increased during the nine-month period due to the
  absence of a tax adjustment during the second quarter of 1995 that related
  to the settlement of certain Seabrook-related income tax issues ($7.5
  million) and a higher level of pretax income.  The decrease in local
  property and other taxes reflects changes in property assessments.

  Other Income and Interest Charges

        The significant increase in other income during the first nine months
  of 1996 was primarily due to the recording of a regulatory asset for costs
<PAGE>
<PAGE 10>

                            CANAL ELECTRIC COMPANY

  associated with postretirement benefits (approximately $1.8 million)
  following FERC acceptance of rate schedules which provide for the recovery
  of these costs over a six-month period that began in March 1996.

        Total interest charges increased 8.1% and 7% during the current three
  and nine-month periods, respectively, reflecting an increase in short-term
  interest due to a higher average level of short-term borrowings coupled
  with a decrease in the debt component of allowance for funds used during
  construction, partially offset by lower long-term interest reflecting the
  retirement of Series A First Mortgage Bonds during the second quarter.

  Electric Industry Restructuring

        On August 16, 1995, the DPU issued an order calling for the
  restructuring of the electric utility industry in Massachusetts.  The DPU's
  intent is to reduce electric costs to consumers by providing customers with
  the opportunity to choose their electric power provider while retail
  electric companies such as Cambridge Electric Light Company and
  Commonwealth Electric Company continue to provide transmission and
  distribution services.  On May 1, 1996, the DPU issued an order containing
  proposed rules for implementing electric industry restructuring.

        The proposed rules, which were the subject of public comment and
  hearings during June and July 1996, provide for:

   (1)  the establishment of an independent system operator to operate the
        regional transmission system;
   (2)  a power exchange to manage a competitive bidding pool for short-term
        power sales;
   (3)  functional separation of electric companies into generation, trans-
        mission and distribution corporate entities;
   (4)  preservation of discounts for low-income customers, shut-off protec-
        tions and provision of service to all customers;
   (5)  registration requirements for generation suppliers;
   (6)  options for phased incentives for electric companies to divest their
        generation assets;
   (7)  promotion of environmental goals;
   (8)  support for energy efficiency and renewable energy resources;
   (9)  a price cap system of incentive regulation for the remaining distri-
        bution and transmission functions;
   (10) unbundling of rates on bills into separate components of transmis-
        sion, distribution and energy, and implementation of a competitive
        generation market by January 1, 1998; and
   (11) a reasonable opportunity for recovery of stranded cost.

  On August 9, 1996, the DPU issued an order delaying the issuance of final
  rules until the end of 1996.  The DPU also stated that it will issue a
  revised schedule for electric companies to make company-specific unbundled
  rate filings.

        Although the DPU has not yet issued its revised rate filing schedule,
  Cambridge and Commonwealth Electric anticipate filing their revenue-
  neutral, unbundled rates in early 1997 after the issuance of the DPU's
  final rules.  Also, during 1997, Cambridge and Commonwealth Electric will
<PAGE>
<PAGE 11>

                            CANAL ELECTRIC COMPANY

  file their comprehensive restructuring plan.  One element of their plan
  (announced on February 15, 1996) calls for the auctioning, in a competitive
  market, of their capacity entitlement (1,140 MW) in all of their twenty-one
  power contracts in an effort to develop a competitive market whereby
  customers would have the flexibility of choosing their electric supplier. 
  These entitlements include contracts for power held by Cambridge and
  Commonwealth Electric involving the Company.

  Canal Unit 2

        September 30, 1996 marked the completion of a two and one-half year
  project that will enable Unit 2 to burn natural gas, or a combination of
  gas and oil, up to 250 days each year, while maintaining the ability to
  burn only fuel oil the remainder of the year.  The ability to burn natural
  gas in combination with fuel oil will reduce overall emissions by 25%.  The
  $23 million project included the construction of a 1,400 foot pipeline
  under the Cape Cod Canal and a four and one-half mile pipeline through the
  adjacent town of Bourne, MA.

  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 installation of expensive air and water pollution control
  equipment.  These regulations have had an impact on the Company's
  operations in the past and will continue to have an impact on future
  operations, capital costs and construction schedules of major facilities.
<PAGE>
<PAGE 12>

                            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
        nine months ended September 30, 1996.

   (b)  Reports on Form 8-K

        No reports on Form 8-K were filed during the three months ended
        September 30, 1996
<PAGE>
<PAGE 13>

                            CANAL ELECTRIC COMPANY

                                  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.



                                              CANAL ELECTRIC COMPANY
                                                   (Registrant)


                                              Principal Financial Officer:



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



Date:  November 13, 1996