#### EXHIBIT NO. 10-10

STATE OF NEW YORK
PUBLIC SERVICE COMMISSION

Niagara Mohawk Holdings, Inc.; Niagara Mohawk Power)              
                       
                       
                       
                       
Case No. 01-M-0075
Corporation; National Grid Group plc; National Grid USA)

# JOINT PROPOSAL

This
Joint Proposal is sponsored by Niagara Mohawk Power Corporation (Niagara
Mohawk or the Company), Niagara Mohawk Holdings, Inc.,
National Grid Group plc, and National Grid USA (together National
Grid) (collectively the Petitioners or the
Companies) and by the following (who, together with the Petitioners,
are collectively the Signatories):

> New York State Department of Public Service
>                   New York State Consumer Protection Board
>                   New York State Department of Economic Development1
>                   Empire State Development Corporation1
>                   Multiple Intervenors
>                   Public Utility Law Project
>                   Energetix, Inc.
>                   Advantage Energy, Inc.
>                   Leveraged Energy Purchasing Corporation, Inc.
>                   Community Energy, Inc.
>                   Natural Resources Defense Council
>                   Association for Environmental Defense
>                   American Wind Energy Association
>                   Distributed Power Coalition of America
>                   E Cubed Company, L.L.C.
>                   Keyspan Technology, Inc.
>                   Capstone Turbine
>                   Integrated Energy Concepts Engineering PC
>                   RealEnergy
>                   International Brotherhood of Electrical Workers Local-97
>                   Niagara Mohawk Pension Club - Utica (IBEW Members Club No. 310)
>                   Niagara Mohawk Pension Club - East
>                   Niagara Mohawk Pension Club - Western Division
>                   Niagara Mohawk Retirees Club - Potsdam
>                   The Ski Resorts Coalition
>                   Energy Enterprises, Inc.

This
Joint Proposal is designed to resolve all issues presented by the merger of the
Companies and to establish a Rate Plan for Niagara Mohawk (the Rate
Plan).2

The Rate Plan reduces the revenues under Niagara Mohawks Electricity Delivery
Rates by $159.8 million per year on the Effective Date and maintains those rates
through December 31, 2011. Electricity Delivery Rates include charges for
transmission, distribution, and Niagara Mohawks Competitive Transition
Charge (CTC) but exclude the prices for commodity and the
commodity-based Delivery Charge Adjustment (DCA). The reduced
revenues, shown on Attachment 4, p. 2, column G, line 14, are subject to the
adjustments set forth below. The lower Electricity Delivery Rates are mainly
achieved by realizing synergies and efficiency gains in Niagara Mohawks
transmission and distribution operations and by limiting and reshaping Niagara
Mohawks recovery of its stranded costs during the Rate Plan Period. The
Rate Plan sets forth the provisions for the recovery of Niagara Mohawks
stranded costs after the Effective Date of the Rate Plan and resolves the issues
associated with the estimation, allocation, and sharing of synergy savings and
efficiency gains. The Rate Plan also includes a comprehensive Service Quality
Assurance Program with potential annual penalties of $24 million pre-tax to
encourage Niagara Mohawk to maintain and enhance safety, reliability, and
service to customers (Attachment 9). Niagara Mohawk will continue its Low Income
Customer Assistance Program (LICAP) and enhance its services to low
income customers by providing bill credits to eligible customers (Attachment
19). Niagara Mohawk will have the opportunity to earn incentives of up to 250
basis points over the term of the Rate Plan for performance in implementing
customer outreach and education and competition-related programs, and the low
income rate discount (Attachment 8).

In addition, the Rate Plan provides for the continuation of an option for commodity
sales to Niagara Mohawks Standard Rate Service (SRS) customers
under which base commodity prices are partially hedged through the remainder of
the Rate Plan Period by Niagara Mohawks portfolio of electricity supply
contracts. This option, which is subject to adjustment for changes in commodity
costs, will result in the continuation of Niagara Mohawks DCA for eligible
rate classes. The Rate Plan also extends a limited hedge to all of Niagara
Mohawks customers by continuing to reset the CTC every two years based on
updated market price forecasts for the commodity portion of the electricity
bill.

With regard to the natural gas rates of Niagara Mohawk, this Joint Proposal extends
the current Natural Gas Rate and Restructuring Agreement for an additional 16
months beyond its current expiration date of August 31, 2003, or through
December 31, 2004, subject to the terms and conditions set forth in Section 1.6.

The Signatories have agreed on the following:

## 1.   Rate Plan

1.1       Effective Date and Term

1.1.1   
Effective Date

The Effective Date of the
Rate Plan (Effective Date) shall be the day after the closing of the
merger of Niagara Mohawk Holdings and National Grid, provided, however, that if
the Effective Date occurs after January 1, 2002, Niagara Mohawk shall adjust its
write off of electric stranded costs such that the remaining balance equals the
amount shown for the delayed Effective Date on Attachment 2.3 Additionally,
Niagara Mohawk will place into the Deferral Account set forth in Section 1.2.4,
an electric customer credit of $425,000 per day for every day the Effective Date
is delayed beyond January 1, 2002, pursuant to Section 1.2.4.20. Niagara Mohawk
shall have the option after notice to the Commission and the parties of moving
forward the Effective Date to a date following: (a) the receipt of all
regulatory approvals necessary to close the merger and implement the Rate Plan;
and (b) the closing of the sale of the Nine Mile Point Nuclear Units.

1.1.2   
Rate Plan Expiration Date

The electric Rate Plan
shall continue until December 31, 2011 (Expiration Date). Any
balances in the Deferral Account established pursuant to Section 1.2.4, whether
positive or negative, remaining on the Expiration Date will be addressed in the
Niagara Mohawk general rate filing at the end of the Rate Plan Period, as
discussed more fully in Section 1.2.6. Certain aspects of the Rate Plan
specifically delineated below, such as the recovery of the Over-Market Variable
Costs of certain Independent Power Producer (IPP) contracts or the
amortization of IPP buy down or buy out costs as set forth in Section 1.2.2.5,
shall extend beyond the Expiration Date of the Rate Plan.

1.1.3   
Rate Plan Period

The Rate Plan Period shall
be the period between the Effective Date as determined under Section 1.1.1 and
the Expiration Date as determined under Section 1.1.2 unless the
Commission approves a request by Niagara Mohawk or another party to change rates
pursuant to Sections 1.2.8 or 1.2.7 respectively, or the Commission opens the
Rate Plan pursuant to Section 3.5.

1.2   
Electricity Delivery Rates

1.2.1   
Reduction and Stabilization of Electricity Delivery Rates

Niagara Mohawk shall
implement the Electricity Delivery Rates included in Attachment 3 for usage on
and after the Effective Date. Class average prices and overall impacts by rate
class are included in Attachment 4. The revenue requirements analyses supporting
the Electricity Delivery Rates in each year of the Rate Plan Period are shown in
Attachment 1. As shown on that Attachment, State Income Taxes are rolled into
the Electricity Delivery Rates. Unless otherwise authorized by the Commission,
the Electricity Delivery Rates will remain constant through the Rate Plan
Period, with the exception of the adjustments set forth below dealing with:

> Transmission Revenue Adjustment (Section 1.2.3.1),
>          System Benefits Charge (Section 1.2.3.2),
>          Adjustment for Deferrals (Section 1.2.3.4),
>          Reclassification of Costs (Section 1.2.3.5),
>          Rate Re-opener (Section 1.2.3.6), and
>          Adjustment in the Event of Poor Service Quality (Section 1.2.3.7),

and the following commodity-related adjustments:

> New York Power Authority (NYPA) Reconciliation (Section 1.2.3.2),
>          CTC Reset (Section 1.2.3.3), and
>          Delivery Charge Adjustment (Section 1.3).

The Electricity Delivery
Rates shall also be subject to the rights to file a complaint and general rate
increase pursuant to Sections 1.2.7 and 1.2.8, and the Commissions
authority set forth in Section 3.5. In addition to the Electricity Delivery
Rates, Niagara Mohawks rates for SRS customers shall include the charges
for commodity and the commodity-based DCA that are set forth in Section 1.3.

1.2.2   
Components of Electricity Delivery Rates

Niagara Mohawks
Electricity Delivery Rates shall recover: (a) the costs of providing
transmission and distribution service to Niagara Mohawks retail customers;
and (b) Niagara Mohawks CTC, including Over-Market Variable Costs (offset
by the NYPA Residential Hydropower Benefit) and Fixed Costs, defined below, as
shown on Attachment 1, p. 1.

1.2.2.1   
Calculation of Transmission and Distribution Charges

Niagara Mohawks
Transmission and Distribution Charges are based on the revenue requirements
analyses for each year of the Rate Plan included in Attachment 1. Niagara Mohawk
shall be authorized to use a 10.6% return on equity for the electric component
of equity in thecalculation of its Allowance for Funds Used During
Construction.

1.2.2.2  
Over-Market Variable Costs Recovered in CTC

The estimated market value
and the resulting Over-Market Variable Costs of the electricity produced from
Niagara Mohawks power supply portfolio are established in Attachment 5
(Over-Market Variable Costs). The Over-Market Variable Costs shown
on Attachment 5 include gas-indexing costs related to IPP contracts. The
Over-Market Variable Costs shall be recovered in the CTC subject to the
adjustments in Sections 1.2.2.4 and 1.2.3.3.

1.2.2.3   
Fixed Cost Recovery in the CTC Is Limited

In addition to Over-Market
Variable Costs, Niagara Mohawks CTC shall recover the Fixed Costs together
with a return on the unamortized balance of those Fixed Costs as shown on
Attachment 1, p. 3 (Fixed Costs). Niagara Mohawk shall reduce the
Fixed Costs included in the CTC recovery during the Rate Plan Period by writing
off the balance of its stranded costs down to the level shown on Attachment 2 as
of the Effective Date, and applying the write-off to the stranded costs
associated with Niagara Mohawks ownership interest in the Nine Mile Point
Nuclear Units. If the Effective Date occurs on January 1, 2002, the write-off
would reduce the stranded costs associated with the Nine Mile Point Nuclear
Units by about $850 million. This write-off is in addition to the write-off of
$123 million of nuclear stranded costs pursuant to Niagara Mohawks Joint
Proposal associated with the proposed sale of Nine Mile Point Nuclear Units to
Constellation Nuclear LLC (Constellation) as announced on December
12, 2000, pending before the Commission in Case No. 01-E-0011 (Nine Mile
Point Sale).4 The balance of Fixed Costs recovered through the
CTC remaining after the above adjustments shall be recovered during the Rate
Plan in accordance with the schedule of amortization and return shown in
Attachment 1, subject to the adjustment mechanisms set forth in this Agreement.

1.2.2.4   
Mitigation of Over-Market Costs Associated with IPP Contracts

Niagara Mohawk may
restructure its power contracts. Niagara Mohawks recovery associated with
the amortization of the economic buy down or buy out payments with a return
equal to Niagara Mohawks over-all pre-tax cost of capital shall be limited
to the forecast stream of purchased power costs under the original IPP contract
less a reasonable level of savings. For the period from the buy down or buy out
through the next CTC Reset (see Section 1.2.3.3), Niagara Mohawks recovery
of the amortized buy down or buy out costs as set forth in the prior sentence
shall be recovered through the Commodity Adjustment Clause, defined in Rule 29
of Niagara Mohawks tariff. At the next CTC reset, the net revenue
requirements associated with the amortization and return of the remaining net
buy down or buy out payments will be reflected in the CTC component of
the rates. To facilitate Commission review of the proposed ratemaking, the buy
down and buy out payments and recoveries will be separately identified in the
CTC Reset filing made with the Commission pursuant to Section 1.2.3.3.

1.2.2.5   
Recovery of Stranded Costs beyond the Rate Plan Period Limited to Over-Market Variable Costs of IPP Contracts

At the Rate Plan Expiration
Date, all generation related stranded costs will be fully amortized for
ratemaking purposes with the exception of: (1) any Over-Market Variable Costs
associated with IPP contracts that extend beyond the Rate Plan Expiration Date
(offset by the NYPA Residential Hydropower Benefit); and (2) any unamortized
amounts that remain on or occur after the Rate Plan Expiration Date associated
with the economic buy down or buy out of IPP contracts. At that time, Niagara
Mohawk shall cease recovery of the Fixed Cost component of the CTC, but shall
have the right to recover both any ongoing Over-Market Variable Costs (offset by
the NYPA Residential Hydropower Benefit) and any unamortized IPP buy down or
buy out costs identified in the prior sentence.

1.2.3   
Adjustments to Electricity Delivery Rates

Electricity Delivery Rates established under Section 1.2.2 shall be subject to adjustments, including those set
forth in this section.

1.2.3.1   
Transmission Revenue Adjustment

Niagara Mohawk shall
continue the Transmission Revenue Adjustment set forth in Rule 43 with a revised
target of about $123 million of transmission revenues per year included in the
Base Electricity Delivery Rates as set forth in Attachment 21.

1.2.3.2   
System Benefits Charge and New York Power Authority Reconciliation

Niagara Mohawks
Electricity Delivery Rates shall continue to be adjusted for the System Benefits
Charge (SBC) and the NYPA Residential Hydropower Benefit
Reconciliation.  For the SBC, the Company will recover the amounts set
forth by the Commission in its Order Continuing and Expanding the System
Benefits Charge for Public Benefit Programs, Case 94-E-0952, In the Matter of
Competitive Opportunities Regarding Electric Service (January 26, 2001), as
it may be modified from time to time. See Attachment 6 for the
methodology that will be used to reconcile and adjust the NYPA Hydropower
Benefit Charge.

1.2.3.3   
CTC Reset

The CTC component of
Niagara Mohawks rates shall be reset every two years to reflect the impact
that changes in the forecast of commodity prices for electricity and natural gas
have on Niagara Mohawks Over-Market Variable Costs, including economic buy
downs and buy outs of over-market IPP contracts as set forth in Section 1.2.2.4,
that are recovered through the CTC as further described in the CTC reset
procedure in Attachment 7. The Over-Market Variable Costs are established for
the first two years of the Rate Plan Period through the market value forecast
that is included in Attachment 5. During the period from the Effective Date of
the Rate Plan through December 31, 2003 and in any periods between CTC resets,
the market forecast used to establish the CTC (excluding ancillary services and
NYPA Transmission Adjustment Clause (NTAC), which are addressed in
Rule 46), will be reconciled to actual market prices monthly with the
differences included in the DCA as set forth below. The procedure for resetting
the CTC shall be as follows.  On August 1, 2003 and every two years
thereafter (the August Filing), Niagara Mohawk shall make a
compliance filing to: (a) forecast market prices for electricity, purchased
power costs (including quantities and prices), and gas indexing costs for the
coming two calendar years; (b) recalculate the Over-Market Variable Costs shown
on Attachment 5 for the same period; (c) use the new forecast of Over-Market
Variable Costs to adjust Electricity Delivery Rates by allocating the increase
or reduction in accordance with the rate design procedure set forth in
Attachment 7; and (d) use the new forecast of market prices to reset the
benchmark price from which the DCA is measured in the rates of SRS customers.
The calculations and adjustments shall be made in accordance with the procedures
set forth in the following subsections and shall become effective, after review
and approval by the Commission consistent with the notice and comment periods in
the State Administrative Procedures Act (SAPA), for usage on and
after January 1 of the calendar year following the filing and remain in effect
for two calendar years.

1.2.3.3.1   
Market Price Forecast

In the August Filing,
Niagara Mohawk shall forecast market prices for the following two calendar years
using a method that provides a reasonable estimate of the prices of electricity
and natural gas used for the design of electricity rates in the zones
that Niagara Mohawk serves. The new market price forecast should extend
throughout the balance of the 10-year rate plan period for illustrative
purposes.

1.2.3.3.2   
Recalculation of Over-Market Variable Costs

The Over-Market Variable
Costs shall be adjusted by the new forecast (excluding any costs or benefits
from New Hedges, as defined in Section 1.2.3.3.4) using the methodology shown on
Attachment 7.

1.2.3.3.3   
Adjust Electricity Delivery Rates

Any increase or decrease in
Over-Market Variable Costs caused by the forecast process in Sections 1.2.3.3.1
and 1.2.3.3.2 shall be reflected in an adjustment to Niagara Mohawks
Electricity Delivery Rates using the methodology set forth in Attachment 7. This
methodology for adjusting the Electricity Delivery Rates is designed to allocate
the costs and benefits of Niagara Mohawks hedges executed on or before
June 1, 2001 to both SRS and Market Rate Service (MRS) customers.

Any increase or decrease caused by the Adjustment for Deferrals, set forth in Section 1.2.3.4 will be a separate
adjustment to Electricity Delivery Rates and allocated among rate classes using the methodology set forth in
Attachment 7.

1.2.3.3.4   
Reset the DCA for SRS Customers

The CTC for SRS customers
shall be reset so that the benchmark price from which the DCA is measured
results in a forecast DCA of zero for each class, plus or minus the projected
net costs or benefits of New Hedges, defined below, plus the balance, if any,
carried forward from the DCA Cap, set forth in Rule 29. A New Hedge is the Erie
Boulevard Orion contract extension accepted by the Commission by
Order issued on June 22, 20015 and any other contract or other
instrument that mitigates SRS customers market price risk for power or gas
supplies related to electric power supply arrangements executed on or before
June 1, 2001.  The buy out or restructuring of power supply and hedging
contracts in place on June 1, 2001 shall not be construed as a New Hedge.

1.2.3.4   
Adjustment for Deferrals

Niagara Mohawks
Electricity Delivery Rates will also be subject to an adjustment for the
balances in the Deferral Account as defined in Section 1.2.4. The Adjustment for
Deferrals will include any items above the thresholds set forth in that section,
including the plus or minus $100 million cap on all deferrals for all items
subject to the Deferral Account, and the $20 million cap on Customer Service
Backout Credits, Metering Credits, and Billing Credits in excess of their
respective Short Run Avoided Costs (SRAC) that applies when the
Deferral Account is positive (that is when customers owe Niagara Mohawk money),
implemented in accordance with Section 1.2.4.9. The Adjustment for Deferrals
will be implemented with a compliance filing made at the same time as the CTC
Reset. The balances as of June 30 in the year of the CTC Reset filing will be
used to determine whether the thresholds for deferrals have been exceeded. Any
amounts in excess of the thresholds, as updated at least through
September 30, together with a forecast of future deferrals through the end of
the CTC Reset Period, will be recovered pursuant to the procedure set
forth in Section 1.2.3.3.3.

1.2.3.5   
Reclassification of Costs

The Electricity Delivery
Rates and transmission and distribution charges of Niagara Mohawk are based on
the current separation of costs among the generation, supply, transmission, and
distribution functions of the electricity supply and delivery system, and
between the electric operations and the natural gas operations of Niagara
Mohawk. To the extent that Niagara Mohawks service responsibilities
change, including, without limitation, (a) through the introduction of
competition in metering, billing, and information services, (b) through a change
in responsibilities between Niagara Mohawk and the New York Independent System
Operator and any successors thereto (defined as the NYISO), (c)
through a restructuring of Niagara Mohawks transmission operations, (d)
through a change in Niagara Mohawks franchise rights to provide
distribution and transmission service within its service territory, (e) through
a change in the allocation of costs and revenues now allocated between Niagara
Mohawks natural gas and electric operations,6 or (f) through any other
change in the allocation of costs and revenues to or from Niagara Mohawks
transmission and distribution operations by the Commission, Federal Energy
Regulatory Commission (FERC), NYISO, or any other agency having
authority over how such costs or revenues are allocated to or away from the
distribution or transmission function, Niagara Mohawk shall make
appropriate adjustments to its Electricity Delivery Rates and to its
transmission and distribution charges all of which are subject to
normal Commission approval procedures. Any such reallocation of responsibilities
shall not affect: (i) Niagara Mohawks ability to recover from retail
customers all of the revenues allowed under this Joint Proposal, including
without limitation, the CTC; and (ii) Niagara Mohawks ability to retain
its fifty percent allocation of Synergy Savings, Efficiency Gains, and Costs to
Achieve. It is the intent of the signatories that any reclassification or
reallocation be done in a revenue neutral manner.7 To the extent that any
reclassification or reallocation leads to an under- or over-recovery of
electricity delivery revenues, Niagara Mohawk shall include such under- or
over-recovery in its Electricity Delivery Rates using a rate design specified at
the time of Commission approval.8

1.2.3.6   
Rate Re-opener



Niagara Mohawks Rate
Plan shall be subject to a Rate Re-opener in the calendar year beginning on
January 1, 2007, if its cumulative earnings as calculated under the Earnings
Sharing Mechanism, set forth in Section 1.2.5, for the period from the Effective
Date through December 31, 2005 show earnings in excess of an 11.75 percent
Return on Equity (ROE). For the purposes of this section only, the
11.75 percent ROE shall not be adjusted for Niagara Mohawks performance
under the Competition-Related and Low Income Incentive Mechanisms set forth in
Attachment 8. The need for a Rate Re-opener shall be determined using the
following procedure.

1.2.3.6.1   
File Cumulative Earnings Report

By July 1, 2006, Niagara
Mohawk shall file with the Commission a Cumulative Earnings Report for the
period from the Effective Date through December 31, 2005. The Cumulative
Earnings Report shall calculate Niagara Mohawks Cumulative Earned Return
on Equity using the procedures and with the adjustments as applied to the
Earnings Sharing Mechanism set forth in Section 1.2.5 for the period through
December 31, 2005. Niagara Mohawk shall hold an information session on the
Cumulative Earnings Report. If the parties agree or the Commission finds that
the Cumulative Earnings Report demonstrates that an 11.75 percent ROE has not
been reached during the period through December 31, 2005, no Rate Re-opener
filing by Niagara Mohawk will be required for the period that begins on January
1, 2007.

1.2.3.6.2   
File Rate Re-opener

If, and only if, Niagara
Mohawk agrees or the Commission finds that the Cumulative Earnings Report
demonstrates that an 11.75 percent ROE has been exceeded for the period through
December 31, 2005, Niagara Mohawk shall divide the amount of pretax earnings in
excess of 11.75 percent by the number of years, representing the period between
the Effective Date and December 31, 2005, to calculate the annualized amount of
excess earnings.9 Niagara Mohawk shall then make a compliance filing by September
15, 2006 of a credit to reduce its Electricity Delivery Rates by fifty percent
of the annualized amount of the excess earnings (the Re-opener
Credit). The Re-opener Credit shall become effective for services rendered
on and after January 1, 2007, and remain in effect through the Rate Plan
Expiration Date.

1.2.3.6.3   
Re-evaluations in the Event the Re-opener Credit Has Not Been Implemented

If, and only if, the
Cumulative Earnings Report filed under Section 1.2.3.6.1 demonstrated that no
excess earnings over 11.75 percent ROE were realized during the period from the
Effective Date through December 31, 2005, and as a result no Re-Opener Credit
was implemented on January 1, 2007, then Niagara Mohawk shall repeat the
analysis in the following year by making a compliance filing by July 1, 2007 for
the four-year period from January 1, 2003 through December 31, 2006. In the
event the analysis again shows that no excess earnings were realized, the
analysis will be repeated each year reflecting the most recent four calendar
years. In the first analysis which shows that excess earnings occurred, Niagara
Mohawk shall make the compliance filing pursuant to Section 1.2.3.6.2 and
implement a Re-opener Credit to reduce Electricity Delivery Rates by 50 percent
of the earnings in excess of an 11.75 percent ROE for the remainder of the Rate
Plan Period. Only one Re-opener Credit will be implemented during the Rate Plan
Period, and once a Re-opener Credit is implemented, this section will no longer
apply for the remainder of the Rate Plan, and the Modified Sharing Schedule set
forth in Section 1.2.5.3 will become effective from and after the effective date
of the Re-opener Credit.

1.2.3.7   
Adjustment in the Event of Poor Service Quality

Under the Service Quality
Assurance Program set forth in Attachment 9, Niagara Mohawk is required to
report on its performance for the prior year by March 31. Whenever that
performance indicates that penalties greater than or equal to $7.5
million have accrued during the prior year, Niagara Mohawk shall reflect the
entire amount as a credit to the customer charge of each of its electric and gas
customers using the following methodology. The portion of the credit associated
with penalties relating to electric reliability will be determined by dividing
the amount of electric reliability penalty accrued in the prior year by the
number of Niagara Mohawks total electric bills expected for the following
July. The portion of the credit associated with penalties relating to customer
service will be determined by dividing the amount of customer service penalty
accrued in the prior year by the number of electric and gas bills expected for
the following July. The credit shall be implemented in July billings,
shall be accompanied by a bill insert explaining the credit, and shall be fully
reconciled through the Deferral mechanism pursuant to Section 1.2.4.8.

1.2.4   
Deferral Account

Niagara Mohawk shall
establish a Deferral Account to accumulate balances pursuant to this section. At
the end of each month in the Rate Plan Period, the appropriate balances in the
accounts set forth below shall be summed, and added or subtracted from Niagara
Mohawks rate base. The Deferral Account shall be subject to audit by DPS
Staff, and Niagara Mohawk shall compile and file a report with the Commission on
July 1 of each year detailing activity in the Deferral Account. On-site DPS
Staff shall receive monthly updates. In the event that the cumulative balance in
the Deferral Account exceeds plus or minus $100 million as of June 30 in a year
in which Niagara Mohawk is scheduled to make a CTC reset filing, Niagara Mohawk
shall make a compliance filing to determine the excess over plus or minus $100
million, as updated at least through September 30, plus a forecast of future
deferrals through the end of the upcoming CTC reset period. Niagara Mohawk shall
collect or refund any such excess amounts over the upcoming CTC Reset Period as
an adjustment to rates using the procedure set forth in Section 1.2.3.3
unless otherwise required under Section 1.2.4.9. The revenues collected or
refunded under this adjustment shall be included in the Deferral Account and
fully reconciled. The balance in the Deferral Account remaining at the end of
the Rate Plan Period shall be estimated and addressed in the rate filing under
Section 1.2.6, and nothing in this Joint Proposal shall preclude Niagara Mohawk
from proposing to recover or return the remaining balances in the Deferral
Account by extending or shortening the CTC recoveries at the end of the Rate
Plan Period. Any party may propose an alternative method for recovery or refund
of any item or amounts that would otherwise be included in the Deferral Account.
If Niagara Mohawk agrees or the Commission orders implementation of the proposed
alternative method, Niagara Mohawk shall file a tariff adjustment that will be
subject to Commission review and approval. The Deferral Account shall include the items
listed in the following sections:

1.2.4.1   
Existing Deferral Balances

The beginning balance in
the Deferral Account shall include the existing regulatory deferrals and the
deferrals of NYISO Rate Schedule 1 and 2 costs as authorized in the Year 4 and 5
Compliance Filing in Case Nos. 94-E-0098 and 0099, all as shown on Attachment
11. The actual balances on the Effective Date shall be reflected in the
Deferral Account following an audit by DPS Staff. The MRA Interest Savings
Deferral included in the deferral balances shall continue through August 31,
2003 and shall be calculated in the same way as Niagara Mohawk has calculated
the interest savings in Attachment 11. Deferrals associated with the Memorandum
of Understanding between NYPA and Niagara Mohawk shall continue until the
expiration of the agreement on August 31, 2003 or the date through which such
agreement is extended.

1.2.4.2   
Tax and Accounting Changes

1.2.4.2.1   
Externally Imposed

Niagara Mohawk shall
include in the Deferral Account all of the effects of any externally imposed
accounting change, and all of the effects associated with any change in the
federal or state rates, laws, regulations, or precedents governing income,
revenue, sales, franchise, or property taxes, if the accounting or tax change
evaluated individually increases or decreases Niagara Mohawks costs or
revenues from regulated electric operations at an annual rate of more than $2.0
million per year. This provision shall also cover refunds to or payments (with
interest and net of deferred taxes) reasonably made by Niagara Mohawk associated
with electric operations as the result of ongoing examinations by federal and
state tax authorities of Niagara Mohawks tax returns filed prior to the
Effective Date and during the Rate Plan Period. In addition, this provision
shall cover any reduction in revenues associated with the Power for Jobs Program
from the revenues that are now recovered as a credit against the tax imposed
pursuant to §186-2 of the Tax Law, but which may not be recovered from that
source in the future either because the tax liability pursuant to that section
falls below zero or for any other reason.

1.2.4.2.2   
Internally Adopted

Niagara Mohawk shall notify
the DPS Director of the Office of Accounting and Finance of any significant
changes to its accounting policies. Niagara Mohawk shall include in the Deferral
Account the net impact of any accounting change adopted as a matter of
internal accounting policy during the Rate Plan Period (other than those
accounting changes incorporated in the Fair Value Report provided pursuant to
Section 1.2.5.2.8) when the accounting change, evaluated individually, increases
or decreases Niagara Mohawks costs or revenues from regulated operations
or changes Niagara Mohawks policy for capitalizing or expensing any item
by more than $500,000 per year. The approval of the DPS Director of the Office
of Accounting and Finance shall be required for any such charges or credits to
the Deferral Account.

1.2.4.3   
Legislative or Regulatory Changes

Unless otherwise provided
for in Section 1.2.3.5, Niagara Mohawk shall include in the Deferral Account all
of the effects of any legislative, court, or regulatory change, which imposes
new or modifies existing obligations or duties and which, evaluated
individually, increases or decreases Niagara Mohawks revenues or costs
from regulated electric operations at an annual rate of more than $2.0 million
per year.

1.2.4.3.1   
Material Regulatory Changes

To the extent that the
actions of FERC, the New York ISO, or any other agency having authority over how
costs or revenues are allocated to or away from the distribution or transmission
function, materially alter the existing ratemaking and/or cost responsibility
for retail electric customers, interested parties will reconvene and negotiate
in good faith to resolve the impact on electricity delivery rates, if any.

1.2.4.4   
Extraordinary Inflation

During each of the first
five years of the Rate Plan, Niagara Mohawk shall include in the Deferral
Account the amount by which the actual inflation in the prior year as measured
by Gross Domestic Product Price Index (GDPPI) exceeds the GDPPI
indexed at 4.5 percent from the Effective Date. During the second five years of
the rate plan, the 4.5 percent GDPPI inflation index for excess inflation shall
be adjusted to equal a percentage that is 2.3 percent over the January 2007 Blue
Chip consensus forecast of inflation for calendar years 2007 and 2008. The
excess inflation determined in the prior sentence shall be applied to a base
that equals the amounts shown on Attachment 12 and shall be capped by the actual
increases to Niagara Mohawks departmental expenses using the methodology
shown in Attachment 12. The addition to the Deferral Account shall be made when
actual inflation exceeds the cumulative GDPPI inflation index from the Effective
Date, provided, however, that any adjustment under this section shall never be
less than zero, and provided further, that no adjustment shall be made under
this section to the extent that: (a) Niagara Mohawks earnings in the
calendar year, as calculated in the earnings sharing analysis pursuant to
Section 1.2.5.2, are greater than 10.6 percent or (b) Niagara Mohawks
actual electric Departmental Expenses are below the forecasted electric
Departmental Expenses shown on Attachment 12. The calculation for the adjustment
is illustrated in the example set forth in Attachment 12.

1.2.4.5   
Costs Associated with Extraordinary Storms

Using the methodology
illustrated in Attachment 13, Niagara Mohawk shall include in the Deferral
Account any Incremental Costs that exceed $2.0 million from any individual Major
Storm occurring in a calendar year, provided that Niagara Mohawk has first spent
a total of $6.0 million on Incremental Costs of Major Storms in that year, which
has not been included in the Deferral Account. A Major Storm shall be defined in
accordance with the Commissions definition in 16 NYCRR Part 97.
Incremental Costs shall include overtime and associated overheads paid to
employees to restore service following the Major Storm, rest time wages incurred
as the result of a Major Storm as specified in Niagara Mohawks union
contracts, outside vendor costs (including the costs of crews from affiliate
companies), lodging and meal charges, and material and supply charges that
Niagara Mohawk would have not incurred, except for the Major Storm. Any
capitalized costs shall be excluded from Incremental Costs, and proceeds from
insurance shall be deducted from Incremental Costs. Niagara Mohawk shall open a
work order for each Major Storm, and the Incremental Costs charged as a result
of any Major Storm shall be subject to audit by the DPS Staff for reasonableness
and appropriateness. The $2.0 million deductible for each Major Storm resolves
any and all issues related to the Incremental Costs having the effect of
reducing Niagara Mohawks ongoing operating costs.

1.2.4.6   
Site Investigation and Remediation Costs

Niagara Mohawk shall
include in the Deferral Account any Site Investigation and Remediation
(SIR) Costs allocated to electric operations paid in excess or below
$12.75 million per year. SIR Costs are defined in Attachment 14, and are
consistent with the SIR Costs that are now being deferred under Power Choice.

1.2.4.7   
Economic Development Fund

Each month, Niagara Mohawk
shall include in the Deferral Account any difference between one twelfth of the
annual amounts shown on line 4 in Attachment 15 and the actual costs or revenue
reductions occurring in that month associated with: (a) the actual Empire Zone
Discounts10 associated with Contestable Loads as defined in the tariff for SC-12
up to one twelfth of the annual amounts shown on line 6 of Attachment 15 and 50
percent of the amounts in excess of that level; (b) the actual Empire Zone
Discounts other than for Contestable Loads up to one twelfth of the annual
amounts shown on line 7 of Attachment 15 and 90 percent of the amounts in excess
of that level; (c) the actual discounts provided under SC-11 and SC-12 during
the month11 and (d) the fully documented actual incremental non-labor costs
associated New Program Initiatives developed pursuant to Section 1.2.10.2, which
have been filed with and approved by the Commission and which were incurred
during the month. Niagara Mohawks obligations under subparagraphs (a) and
(b), above shall be limited to $2.0 million per year, and after this threshold
is reached, the 50 percent in subparagraph (a) and the 90 percent in
subparagraph (b) shall be revised to 100 percent.

1.2.4.8   
Service Quality Penalties

Niagara Mohawk shall
include in the Deferral Account any penalties associated with failure to meet
the Service Quality standards set forth in Attachment 9, not otherwise credited
to customers under Section 1.2.3.7.

1.2.4.9   
Customer Service Backout, Metering, and Billing Credits

Niagara Mohawk shall
include in the Deferral Account the sum of: (a) the difference between the
Customer Service Backout Credits provided pursuant to Section 1.3.3 to customers
choosing to take service from an energy service provider other than Niagara
Mohawk and SRAC associated with such Customer Service Backout Credits as set
forth in Section 1.3.3; (b) following approval by the Commission of Niagara
Mohawks SRAC for metering, the difference between the metering credits
provided by Niagara Mohawk pursuant to the Commissions orders in Case Nos.
94-E-0952 and 00-E-0165 and the approved SRAC, unless the Commission requires an
alternative method for recovery; and (c) following approval by the Commission of
Niagara Mohawks SRAC for billing, the difference between the billing
credits provided by Niagara Mohawk pursuant to the Commissions orders in
Case Nos. 99-M-0631 and 98-M-1343 and the approved SRAC, unless the Commission
requires an alternative method for recovery. If the Deferral Account established
under Section 1.2.4 is positive (that is, customers owe Niagara Mohawk money) as
of June 30 in the year of any CTC Reset filing, the deferral under this Section
1.2.4.9 shall be limited to $20 million, after which the current differential in
excess of $20 million, as updated at least through September 30, plus a forecast
of future differentials through the end of the upcoming CTC Reset period shall
be reflected in current rates commencing on the date of the next CTC Reset
following the procedure set forth in Sections 1.2.3.3 and 1.2.3.4.

If the Deferral Account is
negative (that is, Niagara Mohawk owes customers money) as of June 30, in the
year of any CTC Reset filing, the $20 million cap set forth in this Section
1.2.4.9 shall not apply and no rate adjustment shall be made. Such Deferral
shall continue unless the Commission has established an alternative method for
the recovery of these costs. If the Commission has established
such an alternative method, this Deferral shall cease on the date when Niagara
Mohawk implements the alternative method.

1.2.4.10   
Earnings Sharing Mechanism

Niagara Mohawk shall
include in the Deferral Account the customers share of the earnings above
the Applicable ROE Cap calculated pursuant to the procedure set forth in Section
1.2.5, below.

1.2.4.11   
Stranded Cost Mitigation and Adjustment

Niagara Mohawk shall
include in the Deferral Account any reductions or additions to stranded costs
associated with the implementation of the Niagara Mohawk Joint Proposal for Nine
Mile Point (Case No. 01-E-0011), and the implementation of any of Niagara
Mohawks other agreements for the sale of the fossil and hydro generating
assets to the extent allowed by the orders in those cases.12

1.2.4.12   
Renewables Cap

Niagara Mohawk shall
include in the Deferral Account any revenues in the tracking/projection account
as currently allowed in Rule 12.8 of Niagara Mohawks PSC 207 tariff.

1.2.4.13   
Pension and OPEB Expense

Niagara Mohawk shall include in the Deferral Account any amounts or credits authorized or required under the
procedures set forth in Attachment 16.

1.2.4.14   
Incremental Expenses Associated with the Customer Outreach and  Education Program and the Competition-Related and Low Income
Incentive Mechanisms

Niagara Mohawk shall
include in the Deferral Account any approved incremental non-labor costs
associated with the implementation of the Customer Outreach and Education
Program and the Competition-Related and Low Income Incentive Mechanisms, as set
forth in Attachment 8.

1.2.4.15   
Religious Rates

Any refunds or revenue effects associated with the resolution of Case No. 99-E-0503 shall be included in the
Deferral Account.

1.2.4.16   
Major Investments in Years Seven to Ten of the Rate Plan Period

Niagara Mohawk shall have
the right to petition the Commission for special ratemaking treatment for major
programs and expenditures that may occur in years seven through ten of the Rate
Plan Period. In the petition, Niagara Mohawk must demonstrate that the proposed
investment was incremental to the original 10-year forecasts underlying the
rates agreed to in this Joint Proposal and that any expenses or savings go
beyond such forecasts. To this end, Niagara Mohawk shall, within six months of
the Effective Date and every two years thereafter, file with the Commission a
five-year capital and expense budget including therein a schedule of projects
consistent with and developed from the capital expenditure forecasts
underpinning this Joint Proposal. Any significant additional projects would be
accompanied by an engineering economic and/or technical justification. In the
petition, Niagara Mohawk shall have the right to propose a sharing of any
efficiency gains as a method to recover the costs for such program or
expenditures. To the extent that the petition as approved by the Commission
increases or decreases pre-tax net income, Niagara Mohawk shall include the
differential in the Deferral Account.

1.2.4.17   
Loss of Revenue from Changes to Rules 12, 44, and 52

Niagara Mohawk shall
include in the Deferral Account all verifiable losses of revenue associated with
modifications to Rules 12, 44 and 52 after the filing date of this Joint
Proposal, including, without limitation, the implementation of the Standby Order
contemplated in Section 1.2.17.1, and the implementation of the modification to
Rule 52 set forth in Section 1.2.17.3.2, but excluding the following: (a) any
loss of revenues associated with the implementation of the modification of Rule
52 set forth in Section 1.2.17.3.1, and (b) for each calendar year from
September 1, 2003 through the expiration of the Rate Plan Period, the first $2.0
million of verifiable losses of revenues that would otherwise be deferred under
this section.13

1.2.4.18   
New Services and Royalties

Niagara Mohawk shall
include in the Deferral Account 50 percent of any net incremental revenues from
Currently Provided Incidental Services pursuant to Section 2.4.1 of Attachment
23, and commercialization of R&D products and technologies pursuant to
Section 4.4.1 of Attachment 23. Niagara Mohawk shall also include the sharing
level for net incremental revenues associated with proposed new services which
the Commission has found appropriate pursuant to Section 2.4.2 of Attachment 23.

1.2.4.19   
Follow-on Merger Credit

In the event that National
Grid closes any additional mergers or acquisitions within the United States,
Niagara Mohawk shall implement a Follow-on Merger Credit calculated pursuant to
methodology set forth in Attachment 10, which is designed to credit the Deferral
Account by fifty percent of the additional synergies net of costs to achieve
produced by the follow-on merger and allocable to Niagara Mohawk. The Follow-on
Merger Credit to the Deferral Account shall remain in effect for the remaining
term of the Rate Plan. The Follow-on Merger Credit shall begin on the closing of
the Follow-on Merger after Niagara Mohawk submits a compliance filing that sets
forth the synergy savings, costs to achieve and allocation method pursuant to
the protocols set forth in Attachment 10. Niagara Mohawk is allowed to retain
fifty percent of the Follow-on Merger synergy savings through the end of the
Rate Plan Period by retaining the Follow-on Merger Synergy Allowance referenced
in Section 1.2.5.2.9. Subsequent to the end of the Rate Plan, the Follow-on
Merger savings are allocated pursuant to Section 1.2.6.

1.2.4.20   
Delay in Effective Date

On the Effective Date,
Niagara Mohawk shall include in the Deferral Account an electric customer credit
equal to $425,000 per day for each day between January 1, 2002 and the Effective
Date as set forth in Attachment 2, p. 2.

1.2.5   
Earnings Sharing Mechanism

1.2.5.1   
File Cumulative Earnings Report

By July 1 of each calendar
year Niagara Mohawk shall file an annual earnings report calculated using the
methodology set forth in this Section. On or before July 1, 2006, Niagara Mohawk
shall file with the Commission the Cumulative Earnings Report realized from
electric operations during the period from the Effective Date through December
31, 2005. The Cumulative Earnings Report shall be used for the Earnings Sharing
Mechanism in this Section and shall also be used to evaluate the Rate Re-opener
as set forth in Section 1.2.3.6.1. In addition, commencing on July 1, 2007 and
annually thereafter through July 1, 2012, Niagara Mohawk shall complete a
similar Cumulative Earnings Report for the prior two calendar years, excluding
any excess earnings that had been subject to sharing in prior earnings sharing
reviews in accordance with the methodology set forth in Attachment 17, Page 2.
The Cumulative Earnings Reports shall compare Niagara Mohawks Cumulative
Earned Return on Equity to an Applicable ROE Cap equal to 11.75 percent, plus
the portion of the basis points that Niagara Mohawk will have earned by
achieving the performance targets set forth in Section 1.2.5.4 and Attachment 8.
The actual performance in achieving the targets in Attachment 8 in each year of
the evaluation period will be used to evaluate the incentive component of the
ROE Cap, and an average Applicable ROE Cap, including the incentive component,
shall be calculated for the evaluation period.

1.2.5.2   
Calculation of Cumulative Earned Return on Equity

Niagara Mohawk shall
calculate its earnings from electric operations for each of the years in the
evaluation period, incorporating the adjustments set forth in the following
Sections to arrive at a Cumulative Earned Return on Equity. The methodology for
the calculation of the Cumulative Earned Return on Equity is set forth below,
and unless otherwise specified the calculation shall be consistent with the
methodology used in the Earnings Sharing Mechanism for gas operations approved
by the Commission in Case No. 99-G-0336.

1.2.5.2.1   
Earnings Base/Capitalization

Niagara Mohawk shall
perform the Earnings Base/Capitalization comparison when determining the
earnings base for electric operations. When calculating the Earnings
Base/Capitalization comparison, the actual figures in each calendar year shall
be used to adjust the Earnings Base and the Capitalization of Niagara Mohawk.
Niagara Mohawks Earnings Base shall include Niagara Mohawks
unamortized regulatory asset associated with recovery of the Fixed Costs in the
CTC, which, as set forth in Section 1.2.2.3 has been reduced to reflect an
additional write-off of the Nine Mile Point stranded costs. Unless otherwise set
forth in the Fair Value Report as provided in Section 1.2.5.2.8, neither
Earnings Base nor Capitalization shall include goodwill associated with the
acquisition of Niagara Mohawk by National Grid or the write-off of stranded
costs set forth in Section 1.2.2.3. The calculation of the Earnings
Base/Capitalization shall follow the methodology set forth in the revenue
requirements analyses shown in Attachment 1, provided, however, that nothing in
that analysis or in this Joint Proposal shall limit Niagara Mohawks
ability to manage the differences between its Capitalization and Earnings Base.

1.2.5.2.2   
Capital Structure

Niagara Mohawk shall calculate its Cumulative Earnings using the Capital Structure calculated as set forth in
Attachment 17.

1.2.5.2.3   
Performance Based Compensation

Niagara Mohawk shall add
back to income all expenses that have been charged to Niagara Mohawk associated
with supplemental executive retirement programs (SERP) or other
executive plans, programs, or arrangements and with incentive compensation
payments under the Senior Executive Program, Incentive Compensation Plan
(ICP) I and ICP II programs for the Service Company and for the
equivalent programs for Niagara Mohawk. Fifty percent of the Incentive
Compensation paid to Niagara Mohawk employees under other incentive compensation
programs shall also be added back to income, unless Niagara Mohawk files a
report with the Commission at the time of a Cumulative Earnings Report
demonstrating that Niagara Mohawks compensation programs are comparable to
National Grids compensation programs. Niagara Mohawk shall also add back
to income all incentive compensation payments to Niagara Mohawk employees in any
year in which the penalties under the Service Quality Assurance Program in
Attachment 9 exceed $7.5 million. Finally, Niagara Mohawk will add back to
income incentive compensation payments to Niagara Mohawk employees to the extent
that Niagara Mohawks actual electric departmental expenses exceed the
forecast levels set forth in Attachment 12, as modified by any Follow-on Merger
Synergies.

1.2.5.2.4   
Interest Payments by Constellation to Niagara Mohawk

As part of the sale of the
Nine Mile Point Nuclear Units to Constellation, Niagara Mohawk may receive only
50 percent of the proceeds at closing, and agreed that Constellation could pay
the remainder with interest over the next five years. Nevertheless, in
accordance with the Joint Proposal for Nine Mile Point, Niagara Mohawk credited
100 percent of the proceeds to rate base at the closing. As a result, customers
will receive the economic benefit of the sale at the outset, and Niagara Mohawk
shall record any interest payments received from Constellation during the year
below the line.

1.2.5.2.5   
NOL Benefits

Niagara Mohawk has
calculated deferred taxes on the regulatory asset that are being recovered
through the CTC assuming that it had received the full benefit of the income tax
reductions associated with past net operating losses (NOL). As a
result, these tax benefits have already been fully reflected in the revenue
requirements analysis and in rates to customers. Thus, Niagara Mohawk shall
exclude from earnings any income tax expense benefits associated with the
realization of the NOL during the year, and the NOL balances shall be excluded
from rate base and capitalization calculations.

1.2.5.2.6   
Net Incremental Revenue from New Services and Royalties

Niagara Mohawk shall
subtract from its actual pre-tax earnings: 1) 50 percent of the net incremental
revenues from providing operation, maintenance, and construction services to
customers equipment (behind the meter) at a customers
explicit request that is related to energy delivery services currently provided
for in Rule 28 of PSC No. 207, and 2) 50 percent of royalties related to
commercialization of R&D technologies pursuant to Section 4.4.1 of
Attachment 23. In addition, Niagara Mohawk shall subtract from its actual
pre-tax earnings any portion of the net incremental revenues from providing any
yet-to-be approved services (such as billing for third parties) that the
Commission allows Niagara Mohawk to retain as part of the approval to provide
the services. Niagara Mohawk shall amend its Rule 28 to comply with the
Commissions ruling on the new service.

1.2.5.2.7   
Synergy Savings, Efficiency Gains, and Costs to Achieve

Niagara Mohawk shall also
add back to expenses for electric operations fifty percent of the electric
portion of the Efficiency Gains and Synergy Savings, and Costs to Achieve that
have been agreed to in this Joint Proposal. The Efficiency Gains and Synergy
Savings and Costs to Achieve for each year of the Rate Plan are shown on
Attachment 18. They are based on a phase in of total Synergy Savings to $130
million per year, allocated 62 percent to New York, and Efficiency Gains of $60
million per year, allocated 100 percent to New York.

1.2.5.2.8   
Fair Value Adjustments

Any of Niagara
Mohawks accounts that are adjusted to reflect the purchase will be
included in a Fair Value Report that will be filed with the Commission within
one year of the Effective Date. To the extent that the Fair Value Adjustments
affect the expenses or balances on Niagara Mohawks accounts, these
differences will be noted and quantified. Subject to the Commissions
approval, these differences will be excluded from the calculation of cumulative
earnings, rate base, and capitalization during the Rate Plan Period.

1.2.5.2.9   
Follow-on Merger Synergy Allowance

In the event that National
Grid closes any additional domestic mergers or acquisitions, Niagara Mohawk
shall be authorized to add back to expenses in the Earnings Sharing Analysis
Niagara Mohawks fifty percent share of the Follow-on Merger Synergy
Allowance that is set forth in Attachment 10.

1.2.5.3   
Earnings Sharing

If Niagara Mohawks
Cumulative Earned Return on Equity for the report period as adjusted in the
above sections exceeds the Applicable ROE Cap established in Section 1.2.5.1,
then Niagara Mohawk shall credit fifty percent of such excess, grossed up for
state and federal income taxes, to the Deferral Account. The addition to the
Deferral Account shall be as of January 1, 2007 for the first report and as of
January 1 of the calendar year following the evaluation period for the remaining
reports. The fifty percent sharing set forth above shall be adjusted to the
following percentages on the earlier of the effective date of a Re-opener Credit
or January 1, 2009:

> For Earnings Between:
> 11.75%-14.0%          50% customer/50% shareholder
> 14.0%-16.0%            75% customer/25% shareholder
> Over 16.0%               90% customer/10% shareholder

1.2.5.4   
Customer Outreach and Education Program and Competition-Related and Low Income Incentive Mechanisms

Customer outreach and
education is an integral part of the customer service function. Niagara Mohawk
shall design and implement an annual customer outreach and education program
that is responsive to customers needs. In addition Niagara Mohawk shall
design and implement mechanisms to facilitate competition and to enhance its low
income programs. These programs and mechanisms are detailed in Attachment 8 and
provide the grounds for the basis point incentive for the Earning Sharing
Mechanism that is set forth in Section 1.2.5.1.

1.2.6   
Post Rate Plan Filing

By February 1, 2011,
Niagara Mohawk shall make a full revenue requirements filing that includes a
fully allocated cost of service study for each of its rate classes and a review
of its Service Quality Standards. The rate filing shall become effective after
the Expiration Date of the Rate Plan and be subject to Commission approval
following normal rate case suspension periods. The rates filed shall exclude any
recovery of the Fixed Costs included in the CTC and any allowance for Efficiency
Gains and Synergy Savings and Costs to Achieve. Niagara Mohawk shall be
authorized to continue the Follow-on Merger Synergy Allowance set forth in
Section 1.2.5.2.9, only if Niagara Mohawks departmental expenses for the
year 11 cost of service (excluding the Follow-on Merger Synergy Allowance) are
lower than the forecast of departmental expenses for year 10 adjusted for
inflation for the eleventh year as shown on Attachment 10, page 3
(Departmental Expense Reduction). In that event, Niagara Mohawk
shall be authorized to add back to its expenses in the revenue requirements
analysis the lesser of the Follow-on Merger Synergy Allowance or 50 percent of
the Departmental Expense Reduction. See Attachment 10, page 3 for an
illustration of the calculation. The Follow-on Merger Synergy Allowance
authorized under this Section shall expire five years after the associated
Follow-on Merger Credit became effective under Section 1.2.4.19. Niagara Mohawk
shall also be allowed the opportunity to request the continuation of an Earnings
Sharing Mechanism with a fifty percent sharing of ongoing efficiency gains not
otherwise included in the Efficiency Gain, Synergy Savings and Cost to Achieve
allowance and the Follow-on Merger Synergy allowance reflected during the Rate
Plan Period. Niagara Mohawk shall document the efficiency gains that it proposes
to share, and may propose other incentives that are designed to further the
safe, reliable, and efficient operation of the transmission and distribution
system after the expiration of the Rate Plan.

1.2.7   
Right to File a Complaint During the Rate Plan Period

At any time after the
Effective Date, Niagara Mohawks Electricity Delivery Rates may be reviewed
upon a complaint brought pursuant to New York Public Service Law
(PSL), Section 71 (McKinneys 2000). In defending against such
a complaint, Niagara Mohawk shall be authorized to include in its revenue
requirements 100 percent of the annual Synergy Savings, Efficiency Gains, and
Costs to Achieve shown on Attachment 18 for the relevant year. Niagara Mohawk
shall also be authorized to include in its revenue requirements the recovery of
its CTC pursuant to the schedule set forth in Attachment 1, page 1.

1.2.8   
Right to Make a General Rate Filing During the Rate Plan Period

At any time after the Effective Date, Niagara Mohawk may file to increase its Electricity Delivery Rates above
the levels set forth in Attachment 3 by making a general revenue requirements filing with the Commission.  If as
a result of any such filing Niagara Mohawk is authorized to increase its Electricity Delivery Rates, Niagara
Mohawk shall be precluded from including in its revenue requirements any adjustment to retain any portion of the
Synergy Savings or Efficiency Gains included in Attachment 18 or any Follow-on Merger Synergy Allowance set forth
in Section 1.2.5.2.9.  Niagara Mohawk shall be authorized to include in its revenue requirements the recovery of
its CTC pursuant to the schedule set forth in Attachment 1, page 1, and, with the exception of the fifty percent
allowances for Synergy Savings and Efficiency Gains, which are superceded by precluding their inclusion in the
cost of service, the other adjustments as set forth in Sections 1.2.4 and 1.2.5.  Such filing shall include a
fully allocated cost of service study showing class relative rates of return on regulated services.

1.2.9   
Low Income Customer Services

During the Rate Plan
Period, Niagara Mohawk shall implement the Low Income Customer Services that are
described in Attachment 19, unless such program is modified by the Commission.
SBC funding currently supports the energy efficiency service component of Low
Income Customer Services. Niagara Mohawk may file for Commission approval to
change the scope of the program if funding through the SBC increases, decreases,
or expires during the Rate Plan, or if the allocation of funds from the SBC for
Niagara Mohawk Low-Income Customer Services is changed by the Commission.

Niagara Mohawk shall
implement the low income rate, as set forth in Attachment 3, which provides a $5
per month discount for eligible customers from the otherwise applicable PSC 207,
SC-1 rate. Customers eligible for this discount will be drawn from those
customers who meet the eligibility requirements of existing assistance programs,
such as Home Energy Assistance Program (HEAP), Supplemental Security
Income (SSI), Food Stamps, or Temporary Assistance to Needy Families
(TANF). Niagara Mohawk shall meet with interested parties to discuss
the implementation and outreach of the low income rate within 45 days after the
filing of the Joint Proposal. The total estimated discounts under the program
are shown on the following table. An allowance of $2.0 million per year has been
included in rates. The discounts under the program will be reconciled to the
$2.0 million allowance in base rates through a separate deferral, which will be
applied to future low income discounts.14 If necessary, the $2.0 million allowance
built into base rates will be adjusted at the next CTC Reset. Incremental
funding for the allowance, if any, shall be allocated in a manner to be
determined by the Commission at the time the allowance is increased.

`Number of
                     Monthly
         Year     Bill Credits  Estimated Annual Discounts
         ----     ------------  -------------------------

         2002       180,000           $1 Million
         2003       360,000           $2 Million
         2004       540,000           $3 Million
         2005       720,000           $4 Million`

During the fourth year of the Rate Plan, Niagara Mohawk will convene meetings of interested parties to discuss
and develop recommendations for the continuation, elements and/or expansion of the low income rate during years
five through ten.

1.2.10   
Economic Development

1.2.10.1   
Continued Commitment to Economic Development Activities

Niagara Mohawk will
continue to implement an Economic Development Program to encourage attraction,
expansion, and retention of business customers in Niagara Mohawks service
territory. Specifically, Niagara Mohawk will continue to conduct economic
development programs and other related programs and policies, and will
coordinate and cooperate in good faith on economic development matters with
Empire State Development, local economic development agencies, and DPS Staff.

1.2.10.2   
Economic Development Plan

Upon seeking input from
Empire State Development, local economic development agencies, DPS Staff, and
other interested parties, Niagara Mohawk shall formulate an Economic Development
Plan that will provide incremental funding associated with existing programs, if
required, and develop new program initiatives that may include, but not be
limited to:

(a)   discounts, incentives and other cooperative programs for attraction, expansion and retention of business;
        
(b)   discounts on delivery of incremental NYPA Economic Development Power allocations for qualifying businesses; and,
        
(c)   discounts targeting customers that are also receiving benefits from local
Industrial Development Authorities (IDAs).

The new program initiatives
and incremental funding for existing programs, if required, shall be developed
with a goal to minimize the need for deferrals allowed under Section 1.2.4.7
over the entire Rate Plan period. Niagara Mohawk will file within 90 days of the
Effective Date the initial Economic Development Plan with the Commission for its
approval. Ensuing Economic Development Plan changes, if necessary, will be
subject to Commission approval if the modified plan exceeds the $12.5 million
incremental funding level or if total program costs are expected to exceed the
amounts shown on Line 4, Attachment 15 and require a deferral. Programmatic
changes below the $12.5 million annual funding level will be approved by the DPS
Director of the Office of Consumer Education and Advocacy with the concurrence
of the Commissioner of the New York State Department of Economic Development.

Economic Development Plan expenditures will be subject to auditing and
monitoring by DPS Staff. On September 1 of each year, Niagara Mohawk will submit
a copy of the Economic Development Plan for the upcoming calendar year to Empire
State Development and DPS Staff.

1.2.11   
Environmental and Renewable Marketing Commitments

Niagara Mohawk shall implement the environmental and renewable marketing commitments set forth in
Attachment 20.

1.2.12   
Contract Customers

Within 30 days after the
Effective Date, Niagara Mohawk shall contact all customers who are now served
under SC-11 or SC-12 and apprise them of their option to be charged the rates
for the otherwise applicable service class subject to the following
provisions. Within 90 days of the Effective Date, customers
choosing the standard tariff option will be required to sign a new contract
amendment for the remaining term of their contract. A form of the new contract
amendment is included in Attachment 21. The new contract amendments will contain
a minimum monthly delivery provision based on the maximum demand defined below.15
The minimum monthly delivery provision will be administered on a billing period
basis and will be calculated net of any commodity services for the term of the
new contract agreement. The calculation of the minimum bill (net of any
commodity services) shall be computed as the product of (a) the sum of the
otherwise applicable demand charges and (b) the peak kilowatt service provided
by Niagara Mohawk over the last 24 months prior to the Effective Date. The peak
kilowatt service shall be determined on an individual customer basis and shall
be adjusted to eliminate the award of NYPA allocations (Economic Development
Power (EDP), Power For Jobs (PFJ), NYPA Hydro).

Service under SC-12 shall remain open to customers subject to the terms and conditions
of the tariff. Niagara Mohawk shall implement revised pricing options for
customers who are served under Rule 46, System Average Pricing and/or are
eligible for Form H Contract Extensions as set forth in Attachment 21, Customer
Contract Options.

1.2.13   
Transmission and Delivery Charges for Customers Taking NYPA Service under an EDP Rider, PFJ Rider or High Load Factor Fitzpatrick
Delivery Charge

Retail customers receiving
service under Niagara Mohawks EDP Rider or PFJ Rider, or taking service
under High Load Factor Fitzpatrick shall have their delivery charges for NYPA
deliveries frozen at their current levels for the Rate Plan Period as shown in
Attachment 3 unless otherwise mandated through legislative changes. New
Allocations, defined in Section 1.2.15, to these customer classes will be set at
Niagara Mohawks otherwise applicable unbundled rates.

1.2.14   
Transmission and Delivery Charges for Customers Taking NYPA Hydro Service under SC-4

Transmission and distribution rates for delivery of NYPA Hydro allocations for customers shall be frozen at their
current levels during the Rate Plan Period.  Customers taking New Allocations will be charged the applicable
transmission and distribution rates as reflected in SC-3 and SC-3A of PSC 207.

1.2.15   
New Allocations Defined

The term New
Allocations as used in Sections 1.2.13 and 1.2.14, above, means
allocations approved by NYPAs Trustees after the Effective Date of this
Rate Plan, but shall not include: (a) Replacement Power that becomes available
for reallocation prior to September 30, 2002 under Article V of the
Agreement: Allocation and Transfer of Replacement Power Pursuant to
Niagara Contract NS-1 dated April 4, 1988; or (b) transfers and
assignments of allocations from a customer premise/location on Niagara
Mohawks system (i.e., a change in ownership/occupancy of a
premise/location will not be deemed new). A customer with an
existing allocation (i.e., any allocation not within the definition of
the term New Allocations under this section) may receive a New
Allocation without causing its existing allocations to be classified as New
Allocations hereunder.

1.2.16   
Outdoor Lighting Service

Rate design revisions for
Electricity Delivery Charges for PSC 214 are incorporated in Attachment 3.
Niagara Mohawk is also reviewing new rate designs and tariff proposals to
streamline the administration of its outdoor lighting offerings pursuant to the
Commissions Case No. 00-E-0935. Niagara Mohawk shall have the right under
this Joint Proposal to file tariff changes for its outdoor lighting services
that are revenue neutral within PSC 214 rate classes, and to file non-revenue
neutral cost based tariff changes for new facilities.

1.2.17   
Rules 12, 44, and 52

Niagara Mohawk shall adopt the following policies toward Rules 12, 44, and 52 of PSC 207:

1.2.17.1   
Rule 12

The Commission is expected
to issue an order setting forth its policy on standby electric rates in Case
99-E-1470, Proceeding on Motion of the Commission as to the Reasonableness of
the Rates, Terms and Conditions for the Provision of Electric Standby
Service (Standby Order). In the Standby Order, the Commission is
expected to establish a generic policy governing standby electric rates that may
differ from the billings authorized by Niagara Mohawks Rule 12 to
customers with on-site generation. The Signatories agree to implement the
Commissions Standby Order as follows:

| | (a) | If the time allotted to other utilities to file tariffs complying with the
Standby Order exceeds 20 days, Niagara Mohawk shall, within 20 business days
after the later of the issuance of the Standby Order or the submission of this
Joint Proposal, file proposed tariff leaves for SC-2, SC-3, SC-3A and all other
applicable classes that are limited to the changes required to comply with and
implement the Standby Order and which would replace Rule 12. If the time
allotted to utilities to comply is less than 20 days, Niagara Mohawk will comply
with the Standby Order.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | At the time of the filing, Niagara Mohawk shall serve the proposed tariff leaves
and all supporting work papers on the parties to this proceeding.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Niagara Mohawks filing shall be subject to the Commissions rules on discovery.
| | --- | --------------------------------------------------------------------------------

| | (d) | Within 14 days after the filing, Niagara Mohawk shall convene a technical conference and settlement
negotiations to discuss, and attempt to resolve, any issues associated with the compliance
filing as soon as possible after the filing.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | The Signatories shall consent to a schedule for addressing Niagara Mohawks
filing that allows for dispute resolution and the implementation of tariff
leaves for standby electric rates within the later of: (a) 75 days from the date
of the filing or (b) the Effective Date. In the absence of consent, an
Administrative Law Judge will establish such a schedule.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | Nothing herein shall constitute a waiver of a partys right to challenge
the Standby Order issued by the Commission. A challenge to the Standby Order
shall not affect the schedule established above.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1.2.17.2   
Rule 44

The parties agree that
nothing in the Joint Proposal precludes any party from advocating that the
Commission modify or eliminate Rule 44 or its applicability in a particular
circumstance; or precludes the Commission from adopting different policies on
its own initiative.

1.2.17.3   
Rule 52

Niagara Mohawk shall modify Rule 52 in accordance  with the following  sections.  A modified Rule 52 is included in
Attachment 21.

1.2.17.3.1   
Islanded Generation

Rule 52 shall not apply to
a customers premises which is disconnected from the Niagara Mohawk system
when the customers electricity is either supplied by the customer or by a
third party who is also disconnected from Niagara Mohawks system with all
of the customers or third partys generating capacity installed after
the Effective Date, located on or immediately adjacent to the customers
premises and used exclusively to serve that single customer, even if the
customers premises is located within 100 feet of the Niagara Mohawk
system.

1.2.17.3.2   
Connected Generation

Rule 52 shall not apply
when the customer disconnects from the Niagara Mohawk system and is connected to
a third party owning generation located on or immediately adjacent to the
customers premises when: (a) the third party owned generation is connected
to the Niagara Mohawk system; (b) all of the third partys generating
capacity has been installed after the Effective Date; (c) the generating
capacity is used to serve only one retail customer at that location with any
excess electricity being delivered over Niagara Mohawks system, even if
that customers premises is located within 100 feet of the Niagara Mohawk
system; and (d) the third party generator agrees to pay the charges under Rule
12 or Niagara Mohawks standby tariff for retail service notwithstanding
any other payments the third party generator may make under Niagara
Mohawks or the NYISOs tariffs filed with the FERC or the Commission
or any other rights that the third party generator may have under federal or
state law. In the event that the third party generator fails to agree to pay the
standby tariff, Rule 52 shall apply to the customer.

1.2.17.3.3   
Reservation of Rights

The parties agree that
nothing in this Joint Proposal precludes any party from advocating that the
Commission modify or eliminate Rule 52 or its applicability in certain
circumstances, or precludes the Commission from adopting different policies on
its own initiative.16

1.2.17.3.4   
Accounting for Exit Fees

In the event that Niagara Mohawk receives any exit fee payments from customers during the Rate Plan Period,
Niagara Mohawk shall amortize such payment to income ratably over the period used to calculate each component of
the exit fee.

1.2.18   
Distributed Generation Pilot Program

Niagara Mohawk shall
implement a two-year Pilot Program to consider issuance of RFPs for up to
two Distributed Generation (DG) projects per year, when such DG
projects may defer traditional investment in the electricity delivery system,
and where such traditional investment in the electricity delivery system would
otherwise cost at least $750,000 per project. Contracts will not be awarded when
the bid for a DG project proposal is not superior or equal to the otherwise
applicable traditional delivery system investment. Nothing in this section shall
preclude the Commission from imposing additional requirements on Niagara Mohawk.

Within sixty days of the Effective Date, Niagara Mohawk will commence a series
of meetings with interested parties to discuss implementation of this provision,
along with review of studies pertaining to the use of DG as a complement to the
electricity delivery system. At a minimum, Niagara Mohawk will comply with the
Commissions order in Case No. 00-E-0005, Proceeding on Motion of the
Commission to Examine Costs, Benefits and Rates Regarding Distributed
Generation, and its successors.

1.2.19   
IEEE Standard 1547

The Institute of Electrical
and Electronics Engineers (IEEE) is currently drafting IEEE Standard
1547. Once this standard is approved by the IEEE Standards Board, Niagara Mohawk
will convene a meeting of interested signatories to this Joint Proposal to
review these standards and if appropriate incorporate the IEEE 1547 standard in
its then current interconnection standards, including expanded applicability.
Upon agreement, Niagara Mohawk shall implement the revised standard within 60
days of publication by IEEE unless otherwise ordered by the Commission. Any
revisions to Niagara Mohawks interconnection standards will, at a minimum,
comply with the Commissions Opinion and Order Adopting Standard
Interconnection Requirements for Distributed Generation Units in Case No.
94-E-0952 (In the Matter of Competitive Opportunities Regarding Electric
Service, filed in Case No. 93-M-0229) (December 31, 1999) and its
successors.

1.2.20   
Terms and Conditions for Suppliers to Facilitate Retail Access

Within 180 days after the Effective Date, Niagara Mohawk shall file a proposal to implement consistent terms,
conditions, and protocols for suppliers of electricity and natural gas across the National Grid/Niagara Mohawk
combined systems.  Not less than 90 days prior to any such filing, Niagara Mohawk/National Grid shall commence
technical discussions with ESCos and Marketers on any proposed implementation on retail access and shall seek to
obtain consent from said ESCos and Marketers on any proposed filing.  The objective will be to standardize as
much as possible, consistent with the regulatory policies in New York, Massachusetts, Rhode Island, and New
Hampshire, the methodologies for switching customers to marketers and suppliers, and the data requirements for
the customers served on the Niagara Mohawk/National Grid systems, and not inconsistent with the explicit terms of
this proposal.  The goal will be to reduce costs for and improve service to all marketers and suppliers serving
retail customers on the combined systems.  The proposal, which will also address any potential conflicts with
Uniform Business Practices, will be filed with and subject to the approval of the Commission.

1.2.21   
Rights to File Revenue Neutral Rate Designs and Regulatory Simplification

Niagara Mohawk shall have the right to file proposed changes in rate designs during the period of the Rate Plan,
provided that such changes: (a) are revenue neutral to Niagara Mohawk; (b) do not increase the customer charges
to SC-1 customers during the period from the Effective Date through December 31, 2005; and (c) are not
inconsistent with the explicit terms of this Joint Proposal.  Niagara Mohawk intends to and shall be authorized
to include in the August Filing for its first CTC reset proposed new rate designs for its SC-2, SC-3, and SC-3A
tariffs to become effective January 1, 2004, which reflect the pricing policies that the Commission may establish
in the Standby Rate proceeding and such other tariff redesigns as approved by the Commission.  Nothing in this
Joint Proposal shall preclude any party from opposing such proposed rate design modifications.  In addition,
Niagara Mohawk shall have the right during the Rate Plan Period to propose methods to simplify tariffs and
regulatory requirements in ways that address underlying policy objectives and facilitate the realization of the
Synergy Savings and Efficiency Gains that are reflected in the Joint Proposal.  Any proposed changes to Niagara
Mohawks tariffs shall not become effective until approved by the Commission, following the notice and comment
procedures in SAPA.

1.2.22   
Transmission Planning and Investment

Niagara Mohawk recognizes
its responsibility to study, plan and implement improvements to its transmission
system to continue to provide its customers with safe, reliable and economically
efficient access to electric commodity. Niagara Mohawk will provide to DPS
Staff, within six months of the Effective Date and every two years thereafter,
economic analyses of the costs and benefits (including the expected impacts on
customer commodity costs) of potential transmission investments. These studies
will include transmission investments which will have the potential to benefit
Niagara Mohawk customers, including, but not limited to, analyses of congestion
costs, and local load pockets, that is, those load pockets within
Niagara Mohawks service territory whose impacts primarily affect Niagara
Mohawk customers. Analyses of local load pockets will include the costs to
eliminate such load pockets, and the estimated benefits associated with
eliminating the potential exercise of market power by generators within such
load pockets. Analyses of local load pockets can be conducted based largely on
data that are readily available to Niagara Mohawk, i.e., the amount of
load within a given load pocket, the percentage of time that generation within
that load pocket is needed to serve the load, and the extent to which generators
within the load pocket could possess market power.

Studies of other potential
transmission investments, such as those investments which could have
inter-utility or inter-regional benefits and costs, may also be conducted, and
Niagara Mohawk will work with the NYISO and other relevant parties to obtain the
data necessary to conduct these studies. The quality of the results will be
subject to the provision of relevant information by those parties.

Within six months of the
Effective Date, Niagara Mohawk and National Grid shall file a Five Year
Transmission Statement similar to that which National Grid has prepared for New
England, setting forth information on demand, generation, the characteristics of
the existing and planned transmission system in New England and New York, and
other facts that can help transmission customers evaluate opportunities to make
new or further use of the system. Niagara Mohawk and National Grid shall update
such transmission statement annually, unless a regional entity assumes
responsibility for issuing a similar report.

Niagara Mohawk shall have
the right to make to the Commission, the NYISO or successor organization, or
FERC proposals for incentive regulation for transmission service, including,
without limitation, an incentive to reduce or limit transmission congestion,
increase reliability, or improve efficiency. Niagara Mohawk shall have the right
to retain any incentive approved by the relevant agency by excluding such
incentive from the Transmission Revenue Adjustment Clause and adjusting the
earnings under the Rate Re-opener and the Earnings Sharing Mechanism to
eliminate the approved incentive payment and any additional incremental cost
otherwise allocable to Niagara Mohawk customers associated with the incentive
program from Niagara Mohawks cumulative actual earnings during the
relevant period. However, Niagara Mohawks right to retain such an
incentive does not include programs and/or projects to be supported by the
budgets underlying the rate levels being agreed to in this Joint Proposal.

1.3   
Commodity Service

Niagara Mohawk will continue to provide commodity service to SRS customers and MRS customers on the following
terms:

1.3.1   
DCA Available for SRS Customers; Partial Hedge

Niagara Mohawk shall
continue to offer a DCA and Commodity Adjustment Clause (CAC) as
described in the existing PSC 207 Rule 29 to customers served under the
following Service Classifications: SC-1, SC-1B, SC-1C, SC-2 non-demand, SC-2
demand, SC-3 (through the expiration of the Orion Contract), SC-4 (under 2
megawatts, through the expiration of the Orion Contract, and PSC 214.
The supplies purchased by Niagara Mohawk under its hedged contracts do not match
the total demands of DCA customers. As a result, Niagara Mohawks DCA will
only provide a partial hedge against changes in the market price for electricity
from that reflected in the forecast used to implement the CTC Reset under
Section 1.2.3.3, above. The target percentage hedges by customer service
classification for each year of the Rate Plan are set forth in Rule 29. Niagara
Mohawk shall implement the changes to Rules 29, 42, and 43 as shown in
Attachment 21.

1.3.2   
SRS Customers May Transfer to MRS

For the period from the
Effective Date through 2003, Niagara Mohawk shall continue to allow SRS
customers with aggregate usage totaling up to 2,150 gigawatthours per year to
move from SRS to MRS as described in the existing Rule 48. Subsequent
adjustments to the allotment for MRS shall be filed and implemented at the time
set forth in the procedures for resetting the CTC as set forth in Section
1.2.3.3.

1.3.3   
All Customers May Select an Alternative Supplier of Commodity; Customer Service Backout Credit

All of Niagara
Mohawks customers are eligible to select an alternative supplier for their
commodity needs. Customers selecting an alternative supplier shall be credited
with a Customer Service Backout Credit of $0.004 per kilowatthour for
residential customers served under SC-1, SC-1B, SC-1C, and non-demand metered
commercial customers served under SC-2, and of $0.002 per kilowatthour for
all other demand metered customer classes and customers served under PSC 214 as
described in existing Rule 42. These Customer Service Backout Credits are in
addition to the credits for metering and billing approved by the Commission in
the cases cited in Section 1.2.4.9. These Customer Service Backout Credits shall
remain in place until the Commission approves an alternative credit or method of
addressing these issues for the utilities following the completion
of generic proceedings on unbundling, Case No. 00-M-0504. Niagara Mohawk
shall recover any difference between the Customer Service Backout Credit and
Niagara Mohawks SRAC, for which the Parties agree to use the
figure of $0.0005 per kilowatthour, at this time, through the
mechanism set forth in Section 1.2.4.9 until the Commission provides an
alternative mechanism or method to recover these costs at the time
unbundled rates for Niagara Mohawk are implemented.

1.3.4   
Future Hedges for SRS Customers

Niagara Mohawk shall have
the right to execute reasonable hedges for its SRS customers after the Effective
Date of the Rate Plan. Niagara Mohawk will file its hedging plans, for
informational purposes only, coincident with the biennial August Filing for the
CTC Reset under Section 1.2.3.3.  The costs and benefits of all reasonable
New Hedges as defined in Section 1.2.3.3.4 shall be recovered through the DCA
Adjustment and shall not be allocated to MRS customers through the CTC Reset.

1.3.5   
Market Match for Customers Greater than One Megawatt

Niagara Mohawk will provide
opportunities for ESCos and Niagara Mohawks business customers to exchange
information. Initiatives will include the Market Match Program and Market Expo
Program. Within six months of the Effective Date and one year thereafter,
Niagara Mohawk shall offer to facilitate the market and assist its larger
customers in receiving a hedged power supply by undertaking the pilot Market
Match and Market Expo Program set forth below.

The Market Match Program shall include the following elements:

| | (a) | Niagara Mohawk shall develop a system on its web site to provide exchange of
customer data for MRS customers interested in obtaining a fixed price
solicitation from ESCos.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Niagara Mohawk shall inform all MRS customers greater than one megawatt of the
system via mail. At its option, Niagara Mohawk may elect to reduce the
eligibility threshold of this program to less than one megawatt.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The customer shall inform Niagara Mohawk in writing or through the Niagara
Mohawk web site of its interest to be solicited for a fixed price commodity
option and shall provide a contact name, address and telephone number.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Niagara Mohawk shall then post on a secure web page the customers
historical energy consumption, applicable service class, NYISO zone, name, and
contact person.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | The participating ESCos may access this information via the secure web page, and
then solicit such customer by providing a fixed price offer for electricity
commodity service, provided, however, that the ESCo must sign a confidentiality
agreement under which the ESCo agrees not to use the information for any other
purpose or release it to any other party.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | The customer at any time may inform Niagara Mohawk in writing or through the web
to withdraw its load information from the web.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

The Market Expo Program shall include the following elements:

| | (a) | Niagara Mohawk shall hold an Expo in Syracuse, New York to provide an exchange
of customer data for MRS customers interested in obtaining a fixed price
solicitation from ESCos on the date of the Expo.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Niagara Mohawk shall inform all MRS customers by mail at least four weeks in
advance of the Expo of its date and location.
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | (c) | Three weeks prior to the Expo, the customer shall inform Niagara Mohawk in
writing of its desire to have Niagara Mohawk release such customers
historical energy consumption, applicable service class, NYISO zone, name and
contact person.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Niagara Mohawk shall then email such customers historical energy
consumption, applicable service class, NYISO zone, name and contact person to
the participating ESCos.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | On the date of the Expo Niagara Mohawk will (i) establish a registration
procedure under which customers will schedule 15 minute sessions with specific
ESCos for later in the day, (ii) give a one hour presentation on the status of
the electricity market in the Northeast market along with the disposition of its
retail access rules, and (iii) schedule the remainder of the day for individual
meetings between customers and ESCos.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1.3.6   
Commodity Sales under Existing Programs

1.3.6.1   
SC-3A, Option 2

Consistent with their
contracts, customers served under SC-3A, Option 2 will be provided commodity at
the rates set forth in PSC 207 through August 31, 2003 or such shorter term that
the customer nominated. Thereafter, the commodity to such customer will be
provided under the MRS.

1.3.6.2   
NYPA Commodity Sales Program

Commodity costs for
quantities of sales served under NYPA commodity sales programs are not affected
by this Joint Proposal. If the Memorandum of Understanding between NYPA and
Niagara Mohawk is not extended beyond August 31, 2003, Niagara Mohawk shall
notify affected customers, and in a compliance filing, increase its rates to
reflect recovery of the cost of NYISO charges directly from customers
receiving NYPA power.

1.3.6.3   
Empire Zone Rider Customers

Niagara Mohawk shall work
with Empire Zone Rider customers and suppliers to facilitate contracts between
marketers and Empire Zone Rider customers who wish to procure hedged
products for their commodity service.

1.3.6.4   
Power for Jobs Allocation Methodology

On the Effective Date,
Niagara Mohawk shall adopt a first through the meter methodology for the
allocation of power from the PFJ Program that is currently based on load factor
sharing methodology. The change in the allocation methodology will allow PFJ
recipients to receive a greater share of the economic benefits associated with
the award of their PFJ allocation.

1.4   
Modifications to Prices Unrelated to Electricity Delivery Rates; Introduction of New Services

The Rate Plan set forth in this Joint Proposal shall govern
the prices for regulated delivery service under Niagara Mohawks
Electricity Delivery Rates and its commodity sales under SRS and MRS. Nothing in
this Rate Plan shall limit in any way Niagara Mohawks right to modify,
increase or otherwise adjust: (i) fees or charges for incidental behind
the meter services now provided pursuant to Niagara Mohawks terms and
conditions; (ii) fees or charges for new services introduced by Niagara Mohawk
during the period of the Rate Plan; (iii) the pole attachment fees or fees for
space in underground ducts; or (iv) fees or charges for any other contract for
service between Niagara Mohawk and its customers or marketers.

Niagara Mohawk shall have the right to modify the fees or charges set forth in this section by filing the
proposed change with the Commission.  Such modifications or new services shall become effective upon approval by
the Commission.

During the Rate Plan
Period, Niagara Mohawk shall have the ability to introduce new services that are
either optional for the customer or may be provided by alternative suppliers
using procedures set forth in Section 2.4.2 of Attachment 23.17

1.5    
Resolution of Outstanding Issues

The reduction in stranded
cost recovery, the limitation on transmission and distribution charges, and the
reduction in the overall level of Electricity Delivery Rates during the Rate
Plan Period are designed to resolve: (a) all issues associated with the recovery
of Niagara Mohawks Fixed Cost component of the CTC that remains
unamortized as of the Effective Date, including the amortization of the
remaining regulatory assets on Niagara Mohawks books with a return equal
to Niagara Mohawks weighted cost of capital18 and the full
recovery of all of Niagara Mohawks remaining payments to IPPs under
existing contracts and economic buy down or buy out agreements through the
remaining periods of those contracts even if those agreements extend beyond the
Rate Plan Period; and (b) all issues associated with the estimation, allocation,
and sharing of Efficiency Gains, Synergy Savings, and Costs to Achieve,
including the ratemaking treatment of those Efficiency Gains, Synergy
Savings, and Costs to Achieve during the Rate Plan Period.

1.6   
Extension of Natural Gas Rate and Restructuring Agreement

In its Opinion No. 00-9,
issued July 27, 2000 in Case 99-G-0336, Niagara Mohawk Power Corporation -
Gas Rates and Restructuring, the Commission approved Niagara Mohawks
Gas Rate and Restructuring Settlement Agreement (Gas Settlement).
Among other things, the Gas Settlement provides for a delivery revenue
requirement freeze for the period from November 1, 1999 through August 31, 200319
and comprehensively addresses the goals set forth by the Commission in its
Policy Statement Concerning the Future of the Natural Gas Industry in New York
State (issued November 3, 1998 in Case No. 93-G-0932 et al.). The Gas
Settlement also makes provision for an extension beyond August 31, 2003 in the
event rate or other changes to its terms are not sought or made for the
post-August 31, 2003 period. See, e.g., Gas Settlement, § III
(definitions of Stayout and Settlement Period).

1.6.1   
Extension of Gas Freeze

Niagara Mohawk shall extend
the Gas Settlement by 16 months through December 31, 2004, and shall commit not
to file for any delivery service rate or other change to its terms that would
take effect during this period except as specified in this Joint Proposal.20 Thus,
Niagara Mohawks gas delivery revenue requirement shall remain frozen at
current levels through December 31, 2004.

1.6.1.1   
Synergy Savings and Efficiency Gains in New Rates

If Niagara Mohawk files for
and receives a gas delivery service rate increase to become effective any time,
all synergy and efficiency savings from this or any Follow-on Merger or
Acquisition associated with the gas business will be allocated 100% to
customers.

1.6.1.2   
Roll-In of State Income Taxes

Niagara Mohawk shall by May
1, 2003 make a compliance filing to roll State Income Taxes into gas delivery
service rates and eliminate any surcharges associated with State Income Taxes in
a manner that is revenue neutral to Niagara Mohawk. This will be done exclusive
of SC-9 and SC-14 Special Contract Customers whose State Net Income Tax will be
collected as a surcharge. The compliance tariffs including the State Income Tax
Roll-In shall become effective September 1, 2003. The annual SIT recoveries
including SC-9 and SC-14 will be $2.856 million.

1.6.1.3   
Follow-on Merger Credits

If Niagara Mohawk does not
receive a gas delivery service rate increase, Niagara Mohawk shall implement a
Follow-on Merger Credit for its gas business following the same procedure and
under the same conditions as set forth for its electricity business in Section
1.4.19 and in Attachment 10, provided, however, that the Follow-on Merger Credit
shall be included in the Contingency Reserve Account (CRA). The
Follow-on Merger Credit shall be based on 50 percent of the Follow-on Merger
Synergy Savings allocable to Niagara Mohawk gas operations. Niagara Mohawk shall
retain its 50 percent allocation of Follow-on Merger Synergy Savings pursuant to
Section 1.6.8.

1.6.1.4   
Pension and OPEB Expenses

Effective September 1,
2003, Niagara Mohawk shall apply the Pension and OPEB expense provisions
included in Attachment 16 to gas delivery service rates for the period through
the later of December 31, 2004 or Niagara Mohawks next gas delivery
service rate filing. The provisions of paragraph 5 of Attachment 16 shall become
effective for gas delivery service rates on the date that a Follow-on Merger
Credit becomes effective.

1.6.1.5   
Modifications and Clarifications

This Joint Proposal
includes certain modifications to the Gas Settlement. All provisions of the Gas
Settlement, as modified by this Joint Proposal, will remain in effect through
December 31, 2004, and thereafter in the event of a Stayout as defined in the
Gas Settlement.

1.6.2   
Other Terms and Conditions

1.6.2.1   
Cathodic Protection Program

The Company will continue
to abide by the provisions of the Gas Settlement at Sections V.A.1 and V.E.2.
(c) regarding the Cathodic Protection Program. DPS Staff and the Company will
continue to plan to meet prior to January 1, 2003, and establish potential
extension parameters at that time if the program were to be continued. The
Signatories agree that, by taking into consideration the progress accomplished
to date and with a better understanding of the unprotected pipe remaining,
annual minimum and targeted mileage can more accurately be established. The
Signatories should recognize diminishing returns on economical protection when
setting new annual minimum and targeted mileage levels for this program.

1.6.2.2   
One-Call Notice

The Company will continue
to abide by the provisions of the Gas Settlement at Section V.E.2. (a) regarding
one-call notices. The Company will be assessed a penalty for failure, measured
each calendar year, to respond on three or more occasions to Rule 753-3.1
one-call notices within the time frame required by Rule 753-4.5, other than
failures to respond as a result of emergency notice notifications.

1.6.2.3   
Backlog of Leaks

The Company will continue
to abide by the provisions of the Gas Settlement at Section V.E.2.b regarding
the gas leak backlog. The Company will be assessed a penalty for exceeding
annual threshold backlogs of Type 1, 2 and 2A leaks requiring repair, not
including leaks repaired but pending recheck by December 31 of every calendar
year.

The threshold leak backlog for each year shall be as follows:

Calendar Year       Target
                
    2001                 
   250
                
    2002                 
   200
                
    2003                 
   200
                
    2004                 
   150
                
    2005                 
   100

1.6.2.4   
Upstream Capacity

The Capacity Incentive
Program (Section V.E. 3 of the Gas Settlement) will expire on August 31, 2003.
Appendix D, Schedule 1, Item 2 of the Gas Settlement will remain in effect
through December 31, 2004, and any Stayout as defined in the Gas Settlement.

1.6.2.5   
Customer Migration Incentive

The incentive formula for
an increase in the threshold earnings level shall continue according to the
provisions regarding Subsequent Years described in Section V. E. 5
of the Gas Settlement. Effective September 1, 2003, the floor for the threshold
earnings formula will be adjusted to align with the allowed ROE in this Joint
Proposal (i.e., increased from 10.0% to 10.6%).

1.6.2.6   
Understanding and Awareness Incentive

The incentive formula for
an increase in the threshold earnings level shall continue as described under
the heading, Subsequent Years in Section V. E. 6 of the Gas
Settlement. Effective September 1, 2003, the floor for the threshold earnings
formula will be adjusted to align with the allowed ROE in this Joint Proposal
(i.e., increased from 10.0% to 10.6%).

1.6.2.7   
Revenue Sharing

The capacity release, sales
for resale and portfolio management incentive mechanisms with revenue sharing at
85% / 15% for ratepayers and shareholders, respectively (Gas Settlement Section
V.E. 4) shall remain in effect through December 31, 2004, and any Stayout as
defined in the Gas Settlement.

The incentive provisions of
the Gas Settlement regarding the sharing of net revenues from the SC-4 and SC-6
classes between shareholders and customers (Gas Settlement Section V.E. 4.e)
will continue through December 31, 2004, and any Stayout as defined in the Gas
Settlement. The combined annual target will be changed from $6,108,000 to
$4,600,000, effective September 1, 2003. Sharing levels above and below the
annual target will continue at 80% and 20% for ratepayers and shareholders,
respectively.

The provisions of the Gas
Settlement regarding the treatment of revenue variances from target for the SC-9
class (Gas Settlement Section V.A.4.b) will continue through December 31, 2004,
and any Stayout as defined in the Gas Settlement. The annual target will be
changed from $16,542,000 to $20,000,000, effective September 1, 2003. Sharing
levels above and below the annual target will continue at 100% and 0% for
ratepayers and shareholders, respectively.

1.6.3   
Balancing

For the period beyond
September 1, 2003, the daily balancing fee shall continue to be set at a maximum
of $0.244326 per maximum peak day quantity per month using the same adjustment
mechanisms specified in steps 6 and 7 of Schedule 1, p. 2, of Appendix E to the
Gas Settlement.

Daily balancing tolerance
bands shall be determined as follows, effective September 1, 2003:

Nov. 1 - March 31       April 1 - October 31
    ±  
5%                      
If  Storage Capacity Balance*  18,  ±10%
                      
              
If  Storage Capacity Balance*  16  and  18,  ±8%
                      
              
If  Storage Capacity Balance*  14  and  16,  ±7%
                      
              
If  Storage Capacity Balance*  12  and  14,  ±6%
                      
              
If  Storage Capacity Balance*  10  and  12,  ±5%

> *     Effective April 1 of each
> year; quantities in MMDT. Notice will be provided of changes in daily balancing
> tolerance bands to marketers
>        and direct customers (as defined in
> SC-11) as soon as known, but in no case will there be less than 30 days prior
> notice of such changes.

If the Storage Capacity
Balance is projected to drop below 10 MMDT at any time during the year,
tolerance levels would be renegotiated for both the November 1 to March 31 and
April 1 to October 31 periods.

1.6.4   
SC-14 Gas, Transportation Service for Dual Fuel Electric Generators

Delivery service revenues, net of depreciation expense, property taxes and rate of return (pre-tax) on the
investment, from any new SC-14 customers (i.e., customers other than the Albany and Oswego Steam Stations) will
be shared 50/50 between ratepayers and shareholders.  The ratepayers share will be credited to the CRA.

In the event of a Force Majeure, as defined in PSC 218 Gas, SC-14, there will be a 50/50 sharing between
ratepayers and shareholders of any revenue shortfall not collected to cover depreciation expense, property taxes
and rate of return (pre-tax) on the investment.  The Company will collect the customers share from the CRA.
Such recovery will be limited to the accumulated SC-14 revenues that previously will have been credited to the
CRA.

1.6.5   
Costs of New Pipeline During Extension Period

Niagara Mohawk has filed
for authorization to construct a new pipeline from Schenectady northward toward
Glens Falls (Case No. 01-T-1160). Niagara Mohawk shall be entitled to record
against the CRA the following costs related to the new pipeline: depreciation;
incremental operations and maintenance expense (subject to a hard cap of $50,000
annually); property taxes; and a pre-tax return. No such costs shall be applied
against the CRA before the later of September 1, 2003 or the in-service date of
the new pipeline.

1.6.6   
Pipeline Safety Requirements

The revenue requirement
impact of changes in pipeline safety standards and requirements (including but
not limited to operator qualifications, testing and inspection, and public
information) shall be deferred with interest accruing at the unadjusted customer
deposit rate according to Section V.B.6 of the Gas Settlement (Legislative,
Regulatory and Related Actions). In determining whether the deferral threshold
of one percent of gas net income per year has been met, the incremental revenue
requirements associated with separate pipeline safety requirements emanating
from any comprehensive regulatory or legislative initiative regarding pipeline
safety (e.g., Federal DOT, Office of Pipeline Safety, Docket No. RSPA-00-7666,
Pipeline Integrity Management) shall be aggregated and treated as a single item.
However, the company regularly is subjected to changing pipeline safety
requirements in the normal course of its business and, as such, would not be
allowed deferral accounting for such ongoing changes. Only major incremental
changes would be subject to deferral accounting, with Commission approval on
their ultimate disposition.

1.6.7   
Miscellaneous Tariff and Rate Design Issues

1.6.7.1   
SC-1 Minimum Charge

The SC-1 minimum charge
shall be increased by $1.50 effective September 1, 2003 from $11.57 to $13.07
monthly and by $1.48 effective September 1, 2004 from $13.07 to $14.55 monthly
for non-heating customers. For heating customers, the minimum charge shall
remain unchanged at $14.55 monthly. These changes shall be implemented on a
revenue-neutral basis by reducing the unit rate in the first block after the
minimum charge.

1.6.7.2   
SC-2 Tail Block Rate

The SC-2 Small General
Service tail block rate for usage in excess of 5000 therms is $0.02583 per
therm; and for SC-3 Large General Service, the equivalent rate is $0.04577 per
therm. To address this anomaly whereby the large volume customer is paying a
higher unit rate than the smaller use customer for the same level of usage, the
SC-2 tail block rate shall be changed to $0.05 per therm effective September 1,
2003. An offsetting adjustment shall be made to the penultimate SC-2 block rate
to ensure that the tail block rate change is revenue neutral.

1.6.7.3
   
SC-6 Lock-in

Each month, the Statement
of Rate for SC-6 Large Volume Interruptible Transportation service customers
shall set forth (a) a monthly price, and (b) an annual price at which customers
can lock in regardless of the date on which they migrated to SC-6 service.
Customers currently locked in to an annual price will remain locked in until
their current term expires. Both the monthly rate and the annual rate will be
posted on Niagara Mohawks web site by the 15th of the month preceding the
effective date of the rate. This modified approach to the SC-6 lock
in will be implemented on the Effective Date of the Rate Plan (Section
1.1.1 of this Joint Proposal) or with the effective date of the
Commissions order, if feasible.

1.6.7.4   
Classification of Multiple Dwellings

Niagara Mohawk and DPS
Staff will work together to develop tariff language modifications to harmonize
the treatment of multiple dwelling customers under Niagara Mohawks
electric and gas tariffs.

1.6.7.5   
Former Syracuse Suburban Customer Issues

Effective September 1,
2004, former customers of Syracuse Suburban Gas Company (Niagara Mohawk
Suburban) taking service under Niagara Mohawks SC-6 tariff shall be
subject to the same $350 per month administrative charge for the first 100
therms or less that applies to all other SC-6 customers. Revenues from this
service class are shared 80% to ratepayers and 20% to shareholders.

In addition, in
continuation of a process set out in the Gas Settlement, the Niagara Mohawk
Suburban rate differential for the SC-1, SC-2, and SC-5 classes shall be reduced
by another one-sixth on September 1, 2004. Furthermore, if the Stayout extends
beyond September 1, 2005, the final Niagara Mohawk Suburban rate differential
for SC-1, SC-2, and SC-5 shall be eliminated on September 1, 2005. At that
point, since no remaining differences would exist in the Niagara Mohawk Suburban
tariff structure, separate delivery service rates for Niagara Mohawk Suburban in
Niagara Mohawks gas tariffs would be eliminated.

Finally, as a point of
clarification of the current Gas Settlement, all incremental revenues resulting
from the process to eliminate the Niagara Mohawk Suburban rate differential
shall be credited to the CRA beginning with the second one-sixth rate change
filed to become effective August 1, 2001.

1.6.7.6   
Bill Impacts of Rate Changes

The estimated impact of the
proposed gas tariff and rate design changes are set forth on Attachment 22.

1.6.7.7   
Gas Billing Backout Credit

Niagara Mohawk currently
charges gas marketers for providing billing services on their behalf. This
one-bill option allows the charges for both delivery and commodity services to
be included on a single bill. The customer pays for the billing in its delivery
service rates and, presumably, also pays the gas marketer to contract with the
utility for billing services. To avoid a double payment, there needs to be a
billing backout credit applied to the delivery portion of customers bills.
Beginning September 1, 2003 and consistent with the billing order (issued May
18, 2001) in Case 99-M-0631, Niagara Mohawk will include a backout credit of
$0.53 per bill for those customers who are gas only, and the charge to gas
marketers will also be set at $0.53 per bill, until a further determination is
made in the generic unbundling proceeding.

1.6.8   
Earnings Sharing Mechanism

The earnings sharing
mechanism of the Gas Settlement (Section V.D) shall remain in effect through
December 31, 2004, and continue through any Stayout as defined in the Gas
Settlement. Effective September 1, 2003, Niagara Mohawk shall also adjust actual
earnings from gas operations to reflect fifty percent of the gas portion of the
Synergy Savings, Efficiency Savings, and Costs to Achieve that have been agreed
to in this Joint Proposal. The Synergy Savings, Efficiency Gains, and Costs to
Achieve for each year of the Rate Plan are shown on Attachment 18. They are
based on a phase in of total Synergy Savings to $130 million per year, allocated
62 percent to New York, and Efficiency Gains of $60 million per year, allocated
100 percent to New York. The Synergy Savings Allowance shall be adjusted to
reflect the gas share of a Follow-on Merger Synergy Allowance on the effective
date of a Follow-on Merger Credit. The Follow-on Merger Synergy Allowance shall
continue until the later of the end of the Electric Rate Plan Period or five
years, provided, however, the Follow-on Merger Synergy Allowance shall cease on
the effective date of any general increase in gas delivery service rates.

1.6.9   
Religious Rates

If the resolution of Case No. 99-E-0503 results in an increase in gas revenues, such revenues will be deferred
into the CRA for future customer benefit.

1.6.10   
Allowance for Funds Used During Construction

Effective September 1,
2003, Niagara Mohawk shall be authorized to use a 10.6% return on equity for the
gas component of equity in the calculation of its Allowance for Funds
Used During Construction.

1.7   
Force Majeure

This Joint Proposal is
executed on the assumption that Niagara Mohawk is able to carry on its business
without interference by acts of war or terrorism. Given that acts of war or
terrorism can interfere with Niagara Mohawks ability to carry on its
business, destroy its equipment, or otherwise result in a significant addition
to Niagara Mohawks costs, Niagara Mohawk shall be free to file with the
Commission a response plan, a request to recover additional costs not reimbursed
by third parties, and any other appropriate modifications to the components of
the Rate Plan necessary to implement such plan or to reflect the changed
circumstances. Any modifications shall become effective only after Commission
review and approval. Nothing in this Section shall relieve Niagara Mohawk of its
obligations to take reasonable and appropriate measures to reduce its security
risks.

## 2.   
Merger Approval, Corporate Authorizations and Retiree Benefits

2.1   
Closing of the Merger a Condition to the Settlement

On September 5, 2000, National
Grid and Niagara Mohawk announced their intention to merge. The closing of this
transaction is a condition to the effectiveness of this Joint Proposal. In the
event that the merger does not close prior to the termination of the Merger
Agreement or any agreed upon extensions, the Rate Plan will, as of the
termination date of the Merger Agreement, be deemed withdrawn and any order of
the Commission approving or implementing the Rate Plan will become ineffective
and unenforceable. In that event, the Power Choice Settlement for electric
service and the Gas Settlement will remain effective and enforceable according
to their terms.

2.2   
Support before All Regulatory Agencies

To assure that the condition in the prior paragraph is achieved, the Parties to this Joint Proposal shall not
oppose the approval of the merger before any state or federal agency whose approval is required to close the
merger.

2.3   
Approval of the Merger, Financings, Corporate Structure, and Affiliate Rules

The Signatories agree:
     
(a)
    that the merger of the Petitioners is in the public interest and should
be approved;
     
(b)
    that the approvals and requested authorizations set forth in the January 17, 2001 Petition and below
  should be granted including the following;

(i)   Acquisition of Niagara Mohawk Stock. Approval pursuant to N.Y. Public
Service Law §70 to enable National Grid indirectly to acquire 100 percent
of the common
                   
 stock of Niagara Mohawk in accordance with the description in the
Petition as it may be modified prior to closing as long as Niagara Mohawk does
not
                   
 assume any obligations.

(ii)   
Joint Proposal and Incentive Rate Plan.
Approval under the N.Y. PSL§§65(1) and 110 of the Joint Proposal in a form substantially similar to that proposed by
Petitioners.

(iii)   
Financing. A finding under the N.Y. PSL§ 69 that Niagara Mohawks
participation in the National Grid USA Money Pool, whether as a borrower or
lender, and
                    
 participation of Niagara Mohawks affiliates as lenders, are
appropriate, so long as such participation is fully in conformance with the
National Grid USA
                    
 Money Pool Agreement.

(iv)   
Change in Fiscal Year.
Authorization pursuant to N.Y. PSL §66(4) for Niagara Mohawk to convert from a calendar year fiscal year to
fiscal year ending March 31.

(v)   
Extension for Filing of PSC Annual Report. Authorization for Niagara Mohawk
to delay its filing of its PSC Annual Report to June 1 of each calendar year.

(c)
    
that the proposed corporate structure, affiliate rules, and contracts,
accounting treatment and dividend limitations, and standards of competitive
conduct set
               
 forth in Attachment 23 should be authorized and approved;

(d)
    
that the limited waiver from the Commission Statement of Policy on pensions and
post-retirement benefits other than pensions, and the other provisions set
               
 forth in Section 2.5.4, below should be authorized and approved;

(e)
    
that approval of this Joint Proposal should represent a finding of no
significant environmental impact under the State Environmental Quality Review
Act and its
               
 implementing regulations, 6 NYCRR Part 617; and

(f)
     
that, except for SEQRA finding referenced in Section 2.3(e), no other approvals
or authorizations from the Commission are known to be necessary to
consummate
               
 the merger and implement the proposed Scheme of Arrangement.

2.4   
Labor Negotiations Reserved

As detailed in Section
1.2.5.2.7, the Rate Plan contemplates Efficiency Gains and Synergy Savings of
$190 million per year. Niagara Mohawk and National Grid have been working
jointly to develop an integration plan to achieve these savings while improving
service to customers. These savings will be achieved through a combination of
adoption of best practices, non-staff savings, and through elimination of
redundant positions. It is the objective of Niagara Mohawk and National Grid to
accomplish the necessary reduction in staff over time through attrition and
voluntary programs, such as early retirement and voluntary separation programs.
While neither Niagara Mohawk nor IBEW Local 97 intend to waive any rights under
the currently effective collective bargaining agreement or applicable federal
and state labor laws, Niagara Mohawk agrees to initiate negotiations with IBEW
Local 97 promptly after approval of the merger with the objective of avoiding
the need for involuntary terminations (i.e., layoffs). Among other
things, negotiations between Niagara Mohawk and IBEW Local 97 shall include the
terms of an early retirement program for represented employees in areas where
staff reductions are possible, enhancements to the existing separation plans, a
voluntary separation plan, and/or retraining programs and associated costs.
Nothing in this Joint Proposal shall affect the rights, obligations, or
abilities of Niagara Mohawk and IBEW local 97 to engage in collective bargaining
on issues related to represented employees.

2.5   
Retiree Benefits

Retirement benefits are a
key component of the compensation and benefits package offered to Niagara Mohawk
employees. From time to time Niagara Mohawk, subject to its duty to bargain
concerning represented employees, adjusts future retirement benefits in response
to changing needs or conditions relative to Niagara Mohawk, its workforce and/or
retirees. Historically, none of those changes have resulted in significant
additional costs to existing retirees. In fact, many changes have been to their
benefit.

Niagara Mohawk and National
Grid have publicly stated that they have no present intention to reduce
retirees benefits, and their historical track records evidence that
retiree benefits have been delivered as designed. In addition, federal law
prohibits the reduction of retiree pension benefits, although similar
restrictions do not exist with respect to retiree health and life benefits. That
does not mean, however, that retirees do not have legal rights relative to
retiree health and life benefits under existing laws or contracts, which rights
are not diminished by the merger. Further, there are natural disincentives for
changing existing retirees health and life benefits in a negative way,
including: the adverse impact such changes could have on the morale of the
current workforce, many of whom anticipate being future retirees; and the lobby
of retirees, who can have a positive or negative impact on Niagara Mohawks
and National Grids initiatives depending upon their satisfaction with
Niagara Mohawk and National Grid. Additionally, as set forth in Section 2.5.4,
National Grid and Niagara Mohawk will follow the Commissions Statement of
Policy that eliminates any profit or loss to Niagara Mohawk and National Grid
from changes in retiree benefits. Nonetheless, in order to respond to potential
future changes in the way health and life benefits are delivered or other
unpredictable circumstances, the merged company needs to maintain its
various rights permitted by law, the plans, and contracts in just the same
manner Niagara Mohawk has reserved those rights to date.

Notwithstanding the above
assertions and protections, certain Niagara Mohawk retirees have expressed
concern about the continuation of their existing benefits following the merger.
In order to address these concerns, Niagara Mohawk and National Grid have agreed
to the following accommodations:

2.5.1   
Extension of Commitments in Merger Agreement

The National Grid/Niagara Mohawk Merger Agreement states that:

> For
> a period of two years immediately following the Closing Date, the compensation,
> benefits and coverage provided to current employees and retirees of the Company
> or any Company Subsidiary, other than those covered by a collective bargaining
> agreement, who continue employment with Newco or one of its Subsidiaries (the
> Affected Employees) pursuant to compensation and employee
> benefit plans or arrangements maintained by Newco or one of its subsidiaries
> shall be, in the aggregate, not less favorable (as determined by Newco and the
> Surviving Entity using reasonable assumptions and valuation methods) than those
> provided, in the aggregate, to such Affected Employees by the Company and any
> Company Subsidiary immediately prior to the Closing Date.

National Grid and Niagara
Mohawk have agreed that the protection afforded to retirees under the above
provision would be extended so that it applies for a period of four years from
the Closing Date, rather than the original two. Nothing in this Joint Proposal
shall preclude retirees either individually or as group from arguing that their
protections extend beyond this four year extension.

2.5.2   
Retirees Advisory Committee Established

A Niagara Mohawk
Retirees Advisory Committee will be established. The committee will be
made up of a minimum of two representatives from each organized chapter of
Niagara Mohawks retiree association. Niagara Mohawk and National Grid will
advise the Retiree Advisory Committee of any future changes they intend to
implement to retirees health/life benefits, premiums or out of pocket
costs not contemplated by the arrangements in existence at the time of merger by
providing the Retiree Advisory Committee with at least 45 days notice. Notice
will generally be measured from the effective date of the changes, but all
reasonable efforts will be made to provide the Retiree Advisory Committee with
applicable notice at least 30 days in advance of their general announcement,
provided, however, that such notice and information shall be disclosed to IBEW
Local 97 at the same time it is provided to the Retirees Advisory
Committee. The role of the Retiree Advisory Committee shall be to facilitate
information exchange, allow the retirees to express their views, and allow those
views to be considered by Niagara Mohawk and National Grid when reaching their
independent business decisions regarding retiree issues. The Retiree Advisory
Committee shall not be considered a bargaining agent.

Niagara Mohawk and
National Grid representatives will be available to meet with Retiree Advisory
Committee representatives annually to discuss retiree benefit matters. Retiree
representatives will be welcome to discuss their thoughts relative to any and
all other retirement benefit issues at the meeting. Niagara Mohawk will
reimburse members for reasonable costs incurred to attend this annual meeting
with company representatives.

2.5.3   
Annuitization of Pensions Requires Prior Notice to and Approval from the Commission

Niagara Mohawk and National Grid commit not to purchase annuities from an insurance company in lieu of the
pension trust delivered benefits for any Niagara Mohawk retirees who retired between the period January 1, 1989
and July 1, 1998 for four years after the closing of the merger.  Moreover, Niagara Mohawk and National Grid have
no current intentions of purchasing annuities in lieu of continuing to pay legally protected pension obligations
from the pension trust after that period.  It is worthwhile to repeat that such an endeavor would be risky under
current law since it is not clear that the pension trust would not remain liable for spun-off obligations, making
such a transaction generally uneconomic.  In any event, however, to ensure that such a transaction, which could
only take place after year four, is only undertaken with the input from interested parties, Niagara Mohawk and
National Grid have also agreed to an explicit notice provision on this topic.  If at any time during the period
after year four through the end of the ten year term of the Rate Plan, Niagara Mohawk and National Grid propose
to purchase annuities from an insurance company in lieu of pension trust delivered benefits for any Niagara
Mohawk retirees who retired between January 1, 1989 and July 1, 1998, Niagara Mohawk and National Grid will give
60 days advance notice to the Retiree Advisory Committee and the Director of Accounting and Finance of the New
York Department of Public Service.  This provides affected retirees the opportunity to petition the company
and/or to express their concerns to the Commission.  In the event that the Commission decided that it was
appropriate to hold a hearing on the subject matter, then retirees would have the same rights as any other
interested parties to participate in the proceedings.

In addition, Niagara Mohawk
and National Grid will not purchase annuities from an insurance company, in lieu
of benefits derived from its entire trust devoted to Niagara Mohawk retirees,
without first seeking and obtaining approval from the Commission.

2.5.4   
Commissions Statement of Policy Followed for Ratemaking

In general, the company
will adhere for the full ten years of the Rate Plan Period to the
Commissions Statement of Policy (SOP) regarding Pensions and
Post-retirement benefits. Under the SOP, Niagara Mohawk reconciles its pension
and benefit expense with the allowance in its rates and will realize no profit
or loss from changes to retirees benefits under its pension and benefit plans.
However, Niagara Mohawk and National Grid will be granted waiver from the
requirements of the SOP in the following limited respects:

| | (a) | Although Niagara Mohawk and National Grid will not merge their pensions funds
without prior approval of the Commission following notice to the signatories,
they may establish a single master trust, with separate segregated sub-trusts
for its New York and New England retirees, as long as a complete separate
accounting of the assets, liabilities and annual expense levels can be made for
the Niagara Mohawk sub-trust. Any information, not otherwise confidential,
provided to the Commission shall be made available upon request to any
signatory.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | ServiceCo (a Massachusetts corporation defined in Attachment 23) will be
permitted to manage the pension/OPEB plans subject to Commission staff review as
long as a separate, non-affiliated entity is handling the investment decisions
pertaining to the plans.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.5.5   
No Effect on Collective Bargaining Process

Niagara Mohawk, IBEW Local
97, and individual retirees do not waive any rights that they may have under the
currently effective or any prior collective bargaining agreements, or other
contracts, or applicable federal and state labor laws. Nothing in this Section
2.5 shall affect the rights, obligations, or abilities of Niagara Mohawk and
IBEW Local 97 to engage in collective bargaining on pension and benefit issues
relative to represented employees.

2.6   
Operations in New York

The parties agree that
integration of Niagara Mohawk and National Grid, and achievement of the
associated Synergy Savings and Efficiency Gains upon which the rate reduction
included in the Joint Proposal is predicated, will require changes in the
location of facilities and the means used to deliver services to customers as
best practices between the merging companies and among the industry generally
are adopted throughout the combined company.

Notwithstanding the
foregoing, Niagara Mohawk will notify the Commission prior to implementing any
significant changes to the location(s) and/or means of delivery of services,
including emergency response, associated with its customer service functions.
Further, Niagara Mohawks corporate headquarters will be maintained in
Syracuse, New York. Niagara Mohawk also agrees that its officers and the senior
management team responsible for day-to-day electric and gas operations in New
York will maintain offices in New York State. In addition, Niagara Mohawk agrees
to provide safe and reliable service to customers consistent with the objectives
set forth in the Service Quality Assurance Program established in Section
1.2.4.8 and Attachment 9. To achieve these defined customer service and
reliability objectives, Niagara Mohawk agrees to maintain a level of workforce
in New York that, in its view, is sufficient to achieve these objectives and to
utilize all other necessary resources, including but not limited to, internal
and external human resources, investments in plant and technology.

## 3.   Additional Provisions

3.1   
No Admissions

The making of this Joint Proposal shall not be construed, interpreted or otherwise deemed in any respect to
constitute an admission by any party regarding any allegation or contention in this proceeding or any other
proceeding.

3.2   
Discussion Privileged

The discussions which have
produced this Joint Proposal have been conducted on the explicit understanding
that any and all prior proposals and discussions relating thereto are and shall
be privileged, shall be without prejudice to the position of any party or
participant presenting such offer or participating in any such discussions or
proceedings, and are not to be used in any manner in connection with these or
any other proceedings.

3.3   
Commission Acceptance a Condition

This Joint Proposal is
expressly conditioned upon the Commissions acceptance of all provisions
hereof without change or condition. In the event the Commission does not by
order accept it in its entirety, each Signatory shall have the right to withdraw
from the Joint Proposal upon written notice to the Commission. If any of the
Petitioners give such notice, this Joint Proposal shall be deemed withdrawn, it
shall not constitute any part of the record in this proceeding or be used for
any other purpose, and each of its provisions shall be deemed to be null and
void.

3.4   
Dispute Resolution

In the event of any
disagreement over the interpretation of this Joint Proposal or the
implementation of any of the provisions of this Joint Proposal, which cannot be
resolved informally among the Parties, such disagreements shall be resolved in
the following manner unless otherwise provided herein. The Parties shall
promptly convene a conference and in good faith shall attempt to resolve such
disagreement. If any such disagreement cannot be resolved by the Parties, any
Party may petition the Commission for relief on a disputed matter.

3.5   
Commission Authority

Nothing in this Joint
Proposal shall be construed to limit the Commissions authority to reduce
Niagara Mohawks rates should it determine, in accordance with the Public
Service Law, that the established rates are in excess of just and reasonable
rates for Niagara Mohawks electric and gas service.

Respectfully submitted,

---

FOOTNOTES

| | 1 | This party has indicated its intention to sign the Joint Proposal on or before October 12, 2001.
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| | 2 | The Merger Agreement itself contains many commitments among
the Petitioners. Those commitments shall remain in place in accordance with the
Merger Agreement unless expressly modified by this Joint Proposal.
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| | 3 | See Section 1.6 for the provisions affecting natural gas delivery service rates.
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| | 4 | The Joint Proposal by Multiple Intervenors, the Department of Public Service
Staff (DPS Staff), and Niagara Mohawk filed with the Commission on
May 7, 2001 in Case No. 01-E-0011 (Joint Proposal for Nine Mile
Point) is incorporated by reference into this Joint Proposal. If the
Commission approves the Joint Proposal for Nine Mile Point, all commitments,
rights, and obligations set forth in that agreement shall apply during the Rate
Plan Period, unless expressly modified in this Joint Proposal. Among the
agreements in the Joint Proposal for Nine Mile Point was the stipulation that
Niagara Mohawk would flow through the full consideration agreed upon for the
Nine Mile Point Units as a reduction to rate base upon closing, even though
Constellation may only pay a portion of the amount at closing with the balance
to be paid over time with interest. In consideration of the immediate reduction
in rate base, Niagara Mohawk is allowed to record the interest payments from
Constellation below the line.
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| | 5 | Case No. 01-E-0383.
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| | 6 | The expense allocations in this Joint Proposal are based on 83 percent to electric operations and 17 percent to gas
operations.  In the event the Commission modifies these allocation percentages in either a gas or electric proceeding,
Niagara Mohawk shall make a compliance filing to incorporate the new allocations in this Joint Proposal and
Attachments 10, 12, and 16.
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| | 7 | For example, if FERC were to increase the rate of return on transmission assets, then electricity distribution rates
would be reduced such that the bundled retail delivery rate remains unchanged.
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| | 8 | Nothing in this section or in the Joint Proposal shall prejudice any rights a party may have in the proceeding on
Niagara Mohawks Open Access Transmission Tariff in the FERC Docket No. OA96-194-00.
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| | 9 | For example, if the Effective Date is February 15, 2002, the number of years is 3.875.
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| | 10 | The Laws of 2000, Chapter 63, Part GG, Section 15 changed the name of Economic Development Zones to Empire Zones.  Accordingly,
Economic Development Zones or EDZ, wherever appearing in Niagara Mohawks Tariffs shall be deemed to mean Empire Zones for
all purposes.
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| | 11 | Niagara Mohawk has credited the Deferral Account by $300,000 pursuant to the Customer Contract Options Section of
Attachment 21.
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| | 12 | See Case Nos. 94-E-0098 and 94-E-0099 for the order dated June 7, 1999, approving the sale of Huntley and Dunkirk Stations,
and the order dated May 27, 1999, approving the sale of the hydro stations, the order dated April 26, 2000, approving the
sale of the Albany Station; see those dockets and Case No. 96-E-0898 for the order dated October 21, 1999, approving the sale
of the Oswego Station; see those dockets and Case Nos. 96-E-0909 and 96-E-0897 for the order dated December 20, 2000, approving
the sale of the Roseton Station; and see Case No. 98-E-1028 for the order dated September 29, 1999, approving the sale of the
Glen Park Hydro Station.
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| | 13 | For the period from September 1, 2003 through December 31, 2003, the under-recovery shall be limited to $667,000.
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| | 14 | For purposes of recording the annual deferrals in this mechanism, actual annual funding of discounts will be capped
at the estimated annual levels shown in the table in Section 1.2.9.
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| | 15 | The minimum monthly electricity delivery bill provision of the new contract represents service under a standard tariff
offering subject to a demand ratchet.  Therefore, the Commissions guidelines for flexible contracts do not apply.
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| | 16 | Nothing in Section 1.2.17 or in the Joint Proposal shall prejudice any rights a party may have in Case No. 99-E-0844.
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| | 17 | The parties recognize that special service programs like Niagara Mohawks Master Card or Advertise with Us shall be filed
with the Commission for approval under this provision.
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| | 18 | The remaining
regulatory assets include the unamortized balance of Niagara Mohawks
payments under the Master Restructuring Agreement. Niagara Mohawk shall be
authorized to realize a return on this regulatory asset as shown in Attachment
1. The return shall be adjusted to match the Commissions finding on the
weighted cost of capital should Niagara Mohawks rates be changed pursuant
to Sections 1.2.7, 1.2.8, or 3.5 during the period of the Rate Plan.
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| | 19 | The almost four year revenue requirement freeze established in the Gas Settlement follows the Commissions
1996 adoption of a three year settlement agreement that provided for an annualized $10 million rate decrease for
Niagara Mohawks gas customers.  See Case No. 95-G-1095 et al., Opinion No. 96-32, issued December 19, 1996.
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| | 20 | However, the Gas Settlement and this Joint Proposal recognize the possibility of certain changes to the Gas
Settlement being made that would not affect its continuing validity.  See, e.g., Gas Settlement, Section VII.C.5.
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