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               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, 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 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, 1997

        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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                        PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                   SEPTEMBER 30, 1997 AND DECEMBER 31, 1996

                                    ASSETS

                            (Dollars in thousands)



                                                 September 30,  December 31,
                                                     1997           1996    
                                                  (Unaudited)

PROPERTY, PLANT AND EQUIPMENT, at original cost    $465,615        $464,003
  Less -  Accumulated depreciation and
          amortization                              195,036         179,307
                                                    270,579         284,696
  Add  -  Construction work in progress               4,207             943
          Nuclear fuel in process                       180           1,597
                                                    274,966         287,236

INVESTMENTS
  Equity in corporate joint venture                   3,300           3,321

CURRENT ASSETS
  Cash                                                   13              12
  Accounts receivable-
    Affiliated companies                              9,505          10,294
    Other                                            13,006          12,390
  Electric production fuel oil                          863             979
  Prepaid taxes -
    Income                                                -              64
    Property                                          1,260             795
  Other                                               2,418           3,087
                                                     27,065          27,621

DEFERRED CHARGES
  Regulatory assets                                  18,375          19,859
  Other                                               9,534           5,486
                                                     27,909          25,345

                                                   $333,240        $343,523







                            See accompanying notes.
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                            CANAL ELECTRIC COMPANY

                           CONDENSED BALANCE SHEETS

                   SEPTEMBER 30, 1997 AND DECEMBER 31, 1996

                        CAPITALIZATION AND LIABILITIES

                            (Dollars in thousands)

                                                 September 30,  December 31,
                                                     1997           1996    
                                                  (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                                56,252          52,620
                                                    102,653          99,021
  Long-term debt, including premiums, less
    current sinking fund requirements                83,917          83,618
                                                    186,570         182,639

CAPITAL LEASE OBLIGATIONS                            11,448          11,878

CURRENT LIABILITIES
  Interim Financing -
    Notes payable to banks                           10,075          26,550
    Advances from affiliates                          2,395           7,250
                                                     12,470          33,800
  Other Current Liabilities -
    Current sinking fund requirements                   350             350
    Accounts payable -
      Affiliated companies                            1,171           1,347
      Other                                          21,511          18,123
    Accrued taxes -
      Income                                          1,226             -  
      Local property and other                        1,479             795
    Capital lease obligations                           574             576
    Accrued interest and other                        6,612           3,986
                                                     32,923          25,177
                                                     45,393          58,977
DEFERRED CREDITS
  Accumulated deferred income taxes                  71,271          71,550
  Unamortized investment tax credits and other       18,558          18,479
                                                     89,829          90,029

COMMITMENTS AND CONTINGENCIES
                                                   $333,240        $343,523


                            See accompanying notes.
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                            CANAL ELECTRIC COMPANY

             CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS

        FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

                            (Dollars in thousands)
                                  (Unaudited)

                                     Three Months Ended   Nine Months Ended
                                       1997     1996         1997      1996


ELECTRIC OPERATING REVENUES
  Sales to affiliated companies      $33,075  $27,627     $ 95,382   $ 77,592
  Sales to non-affiliated companies   22,162   20,161       66,089     58,192
                                      55,237   47,788      161,471    135,784

OPERATING EXPENSES
  Fuel used in production             30,510   21,453       85,562     59,355
  Electricity purchased for resale     1,488    2,624        5,467      5,716
  Other operation and maintenance      9,183   10,126       27,476     29,374
  Depreciation                         5,065    4,546       15,196     13,638
  Taxes - 
    Income                             2,418    2,277        7,438      7,761
    Local property                       693      652        2,123      1,885
    Payroll and other                    190      170          642        593
                                      49,547   41,848      143,904    118,322

OPERATING INCOME                       5,690    5,940       17,567     17,462

OTHER INCOME                             123      284          361      2,577

INCOME BEFORE INTEREST CHARGES         5,813    6,224       17,928     20,039

INTEREST CHARGES
  Long-term debt                       1,979    1,983        5,933      6,038
  Other interest charges                 279      567        1,003      1,574
  Allowance for borrowed funds
    used during construction             (38)     (25)        (103)       (80)
                                       2,220    2,525        6,833      7,532

NET INCOME                             3,593    3,699       11,095     12,507

RETAINED EARNINGS -
  Beginning of period                 56,314   52,089       52,620     52,070
  Dividends on common stock           (3,655)  (3,808)      (7,463)   (12,597)

  End of period                      $56,252  $51,980     $ 56,252   $ 51,980







                            See accompanying notes.
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                            CANAL ELECTRIC COMPANY

                      CONDENSED STATEMENTS OF CASH FLOWS

             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

                            (Dollars in thousands)
                                  (Unaudited)


                                                       1997           1996

OPERATING ACTIVITIES
  Net income                                        $ 11,095       $ 12,507
  Effects of noncash items -
    Depreciation and amortization                     17,736         17,227
    Deferred income taxes and investment
      tax credits, net                                  (844)        (1,312)
    Earnings from corporate joint venture               (339)          (380)
  Dividends from corporate joint venture                 360            331
  Change in working capital, exclusive of cash
    and interim financing                              8,303         (1,587)
  All other operating items                           (3,212)           644
Net cash provided by operating activities             33,099         27,430

INVESTING ACTIVITIES
  Additions to property, plant and equipment
    (exclusive of AFUDC)                              (3,852)       (10,328)
  Allowance for borrowed funds used
    during construction                                 (103)           (80)
Net cash used for investing activities                (3,955)       (10,408)

FINANCING ACTIVITIES
  Payment of short-term borrowings                   (16,475)        (8,175)
  Payment of dividends                                (7,463)       (12,597)
  Advances from (payments to) affiliates              (4,855)         8,700
  Long-term debt issue refunded                          -           (3,420)
  Sinking fund payments                                 (350)          (710)
Net cash used for financing activities               (29,143)       (16,202)

Net increase in cash                                       1            820
Cash at beginning of period                               12             12
Cash at end of period                               $     13       $    832


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for:
    Interest (net of capitalized amounts)           $  6,172       $  7,117
    Income taxes                                    $  6,952       $ 10,781







                            See accompanying notes.
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                            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 81 (76%) represented
    by a collective bargaining agreement that was scheduled to expire in May
    1997.  During the first quarter of 1997, a new agreement was reached that
    will remain in effect through May 31, 2001.  Employee relations have
    generally been satisfactory.

        During the second quarter of 1997, the system initiated a voluntary
    personnel reduction program.  For additional information, see the
    "Personnel Reduction Program" section under Management's Discussion and
    Analysis of Results of Operations.

        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.

(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, 1997 and 1996, reflect, in the opinion of the Company, all adjust-
    ments (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
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                            CANAL ELECTRIC COMPANY

    of Notes to Financial Statements included in its 1996 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 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. 
    Effective 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.  SFAS No. 121 did not have an impact on the
    Company's financial position upon adoption.  This result may change as
    modifications are made to the current regulatory framework due to ongoing
    electric utility restructuring efforts in Massachusetts.  For additional
    information relating to electric industry restructuring, 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,
                                                1997           1996    
                                              (Dollars in thousands)

       Deferred income taxes                  $13,720        $13,597
       Seabrook related costs                   4,655          6,262
         Total regulatory assets              $18,375        $19,859

(3) Commitments and Contingencies

        Construction

        The Company is engaged in a continuous construction program presently
    estimated at $68.2 million for the five-year period 1997 through 2001. 
    Of that amount, $20 million is estimated for 1997.  As of September 30,
    1997, construction expenditures, including an allowance for funds used
    during construction, amounted to approximately $4 million.  A $12 million
    project, of which $9.5 million was scheduled to be expended in 1997, was
    deferred.  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.
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                            CANAL ELECTRIC COMPANY

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

    The following is a discussion of major 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, 1997 and 1996 and unit sales for these periods is shown below:

                                     Three Months Ended    Nine Months Ended
                                        September 30,         September 30,
                                        1997 and 1996         1997 and 1996
                                               Increase (Decrease)
                                              (Dollars in thousands)

Electric Operating Revenues           $  7,449    15.6%     $ 25,687    18.9%

Operating Expenses -
  Fuel used in production                9,057    42.2        26,207    44.2
  Electricity purchased for resale      (1,136)  (43.3)         (249)   (4.4)
  Other operation and maintenance         (943)   (9.3)       (1,898)   (6.5)
  Depreciation                             519    11.4         1,558    11.4
  Taxes -
    Federal and state income               141     6.2          (323)   (4.2)
    Local property and other                61     7.4           287    11.6
                                         7,699    18.4        25,582    21.6

Operating Income                          (250)   (4.2)          105     0.6

Other Income                              (161)  (56.7)       (2,216)  (86.0)

Income Before Interest Charges            (411)   (6.6)       (2,111)  (10.5)

Interest Charges                          (305)  (12.1)         (699)   (9.3)

Net Income                            $   (106)   (2.9)      $(1,412)  (11.3)

Unit Sales (megawatthours or MWH)      393,766    41.4     1,254,858    52.4


    The following is a summary of unit sales (in MWH) for the periods  
indicated:

                            Three Months Ended         Nine Months Ended
                               September 30,             September 30,
                              1997        1996         1997        1996  

Canal Unit 1                 885,529     628,128    2,393,398   1,682,838
Canal Unit 2                 323,818     147,320      879,452     282,414
Seabrook 1                    88,697      90,429      215,649     254,967
Purchased for Resale          46,506      84,907      159,914     173,336
                           1,344,550     950,784    3,648,413   2,393,555

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                            CANAL ELECTRIC COMPANY

Revenue, Fuel and Purchased Power

    Operating revenues for the three and nine months ended September 30, 1997
increased approximately $7.4 million or 15.6% and $25.7 million or 18.9%,
respectively, due primarily to a significant increase in unit sales during
both periods, reflecting increased availability of Units 1 and 2.  Also
affecting unit sales in the current nine-month period was a lower level of
power from Seabrook resulting from a refueling outage that occurred during the
second quarter of 1997.  The decline in purchases made on behalf of affiliated
retail distribution companies was due to greater sales from the Canal Units
resulting in reduced requirements from other sources.

    The significant increase in fuel used in production during the current
three and nine-month periods reflects the increased availability of Units 1
and 2.  Fuel, purchased power and transmission costs for the current three and
nine-month periods represented approximately 58% and 59%, respectively, of
operating revenues and averaged 2.56 cents and 2.44 cents per KWH, respective-
ly, as compared to 2.82 cents and 2.62 cents per KWH for the same periods of
1996.

    Other Operating Expenses

    During the current quarter and first nine months of 1997, other operation
and maintenance decreased by $.9 million or 9.3% and $1.9 million or 6.5%,
respectively, due primarily to the absence of amortization related to postre-
tirement benefit costs ($542,000 and $1,597,000, respectively).  Also affect-
ing the change in other operation and maintenance during both periods was
lower maintenance related to Unit 2, offset by an increase in maintenance
related to Unit 1 and Seabrook.  Depreciation expense increased in both
current periods due to higher levels of plant-in-service reflecting the costs
associated with the converting of Unit 2 to burn natural gas as well as oil. 
Federal and state income taxes decreased 4.2% in the nine-month period due to
a lower level of pretax income.  The increase in local property and other
taxes reflects changes in property assessments.

    Other Income and Interest Charges

    The significant decrease in other income during the first nine months of
1997 was primarily due to the absence of the 1996 reversal of a reserve for
costs associated with postretirement benefits (approximately $1.8 million)
following Federal Energy Regulatory Commission acceptance of rate schedules
that provided for the recovery of these costs over a six-month period that
began in March 1996.

    Total interest charges decreased for the current quarter and first nine
months of 1997 by 12.1% and 9.3%, respectively, due to a lower average level
of short-term borrowings, and additionally in the nine-month period, lower
long-term interest costs reflecting the retirement of Series A First Mortgage
Bonds during the second quarter of 1996.

    Personnel Reduction Program

    As initially discussed in the Company's 1996 Annual Report on Form 10-K
filed with the Securities and Exchange Commission, the Company announced the
details of a system-wide voluntary Personnel Reduction Program (PRP) in May
1997.  The goal of the PRP is to achieve a reduced, more efficient and more
productive workforce in response to the significant regulatory changes facing
the System.  This action followed the consolidation of the system's electric
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                            CANAL ELECTRIC COMPANY

and gas operations.  The expectation is that the system's workforce will be
reduced by 15% to 20%.

    The PRP was offered to substantially all regular and part-time employees
of the system.  Eligibility for employees covered by collective bargaining
agreements was subject to negotiation.  The system reserves the right to limit
the number of participants to 300; however, the system expects the final
participation level to exceed this count.

    The program provides severance based on years of service, the continuation
of certain health and dental insurance for specified periods and limited
reimbursement for certain educational and/or outplacement services.

    To date, approximately 8% of the Company's employees have voluntarily
terminated employment with the Company as a result of the PRP.  The Company
estimates that the cost of termination benefits, as described above, will
approximate $2.7 million.  These costs have been deferred and will be ad-
dressed separately as part of the industry restructuring process.

    Electric Industry Restructuring

    On December 30, 1996 the DPU issued a final order announcing its "Model
Rules and Legislative Proposal" as a guide in the creation of a competitive
market for electric generation in Massachusetts.  Legislative proposals
concerning electric industry restructuring were filed by the Governor of the
Commonwealth of Massachusetts on February 24, 1997, and by the Massachusetts
Legislature's Joint Committee on Electric Utility Restructuring on March 20,
1997 that ultimately evolved into the proposal issued on August 4, 1997 by the
Senate Chairman of the Joint Committee on Government Regulations.  Additional-
ly, during the past year, three Massachusetts electric utilities announced
negotiated restructuring settlements with the Massachusetts Attorney General.  
Generally, these original proposals and settlement agreements included, among
other things, provisions for a 10% reduction in customer charges, divestiture
of non-nuclear generating assets, recovery of stranded costs through a non-
bypassable access charge and an implementation date of January 1, 1998.

    Subsequently, on October 3, 1997, the House Chairman of the Joint Commit-
tee on Government Regulations issued another proposal that included, among
other things, a provision calling for a 15% reduction in rates for customers
taking standard offer service from the utility over a seven-year period, the
establishment of an auditing board within the DPU that would review the
stranded costs that would be included in each company's non-bypassable access
charge, unbundled rates as of January 1, 1998 and implementation of customer
choice of energy supplier by March 1, 1998. 

    On October 29, 1997, a joint proposal was filed by the chairpersons of the
Joint Committee on Government Regulations which essentially reflected the
provisions previously proposed.  This proposal was then forwarded to the Ways
and Means Committee of the House of Representatives for further review and
amendment.  The House Ways and Means Committee then sent the amended legisla-
tive proposal to the House of Representatives (the House).  On November 10,
1997, after a considerable number of additional amendments were made by
members of the House, the legislation was passed in the House by a vote of 157
to 3.  Provisions of this legislation include, among other things, a 10%
discount on standard offer service and retail choice of energy supplier
effective March 1, 1998, with a subsequent increase in the discount on
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                            CANAL ELECTRIC COMPANY

standard offer service to 15% upon completion of divestiture of non-nuclear
generating assets and securitization of net non-mitigable stranded costs
(which, for the system, are primarily the result of above-market purchased
power contracts with non-utility generators); and, recovery of stranded costs
subject to review and an audit process.  A Senate version of electric industry
restructuring legislation is expected shortly.

    The proposed legislation is lengthy, complex and subject to change before
it is finalized.  The system cannot yet determine the final impact on its
operations and financial condition.  The final legislation must also be
approved by the Massachusetts House and Senate and signed by the Governor of
Massachusetts.  While the system is encouraged by the legislation's treatment
of stranded cost recovery, the mandated customer discount could have a
significant impact on future cash flows.  The system is preparing a restruc-
turing plan in anticipation of final legislation being enacted.

    Auction Process

    On March 31, 1997, the system submitted a report to the DPU which detailed
the proposed auction process for selling its electric generation assets
(including the Company's Units 1 and 2) and entitlements.  The process
includes a standard, sealed-bid auction for generation assets and purchased
power contracts.  The auction process would provide a market-based approach to
maximizing stranded cost mitigation and minimizing the access charges that
ratepayers will have to pay for stranded cost recovery.  A request for bids
from interested parties was issued during August and in October an Offering
Memorandum was issued.  The system expects that the final bidders will be
chosen by year-end and that the entire process, including regulatory approv-
als, will be completed no later than the end of 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 will
continue to have an impact on future operations, capital costs and construc-
tion schedules of major facilities.
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                            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, 1997.

        Filed herewith as Exhibit 2 is the restated 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, 1997.
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<PAGE 13>

                            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:  November 14, 1997

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