RATES & REGULATION

     On February 24, 2000 the Company filed a request for increased rateswith the New York State Public Service Commission (PSC) in the amount of $384,024.  Accounting adjustments and updates to incorporate the most current informationsubsequently reduced that request to nearly zero.   Because the Company hadaccumulated significant accounting credits since the last rate case, a filing was still required to resolve the final disposition of those credits as wellas provide needed rate relief.

     The PSC ratemaking requirements provide for the specific recovery ofcertain expense items as identified in the Company's most recent rate case. Any deviation in the actual expense from the amount which is included in Rates is accumulated in a deferred Balance Sheet account and can only bedisposed of in the context of a rate case.  Since the Company's last ratecase which became effective in September, 1996 significant credits hadaccumulated as the actual expenses incurred were less than the amountin rates.  Accumulated credits as well as the actual current reductionin the expenses amount to approximately $1,442,000 including interest.The Company proposed to include the credit in rates over a two year period, or approximately $721,000 per year. 

       Settlement discussions held in August with the Company, PSCStaff and intervenors resulted in an agreement to decrease rates to customers by $300,000.  When the total credit of $721,000  is reduced by the ratereduction of $300,000 earnings are enhanced by the difference, or about$421,000.  The Settlement is designed to produce a Return On Equity of 10.7% for the Rate Year ending February 21, 2002.  Pending formal approval by theCommission new rates will become effective on February 22, 2001.

     As has been previously reported, the PSC has been actively working withutilities and marketers to move into the new, deregulated environment whereby all customers have a choice of energy providers.  This company has been activelyinvolved in the regulatory process and has spent a considerable amount of time and effort attempting to educate customers, work with marketers and generallysupport the effort.  However, progress both in our service territory and in the rest of the state has been slow for a variety of reasons.

     In our own service territory customers have indicated that they havegenerally been happy with the service provided by Corning Natural Gas and are reluctant to choose another provider.  To date approximately 650 of our 14,000 small volume customers have chosen an alternate provider.  Currently, theincreased cost of gas at the wellhead  which is nearly double the price fromthe previous year has prompted the marketers to take a wait and see attitudebefore actively soliciting new customers as they are concerned about not beingable to show  real savings and possibly further slowing down the process. 

     Since 1986 marketers have successfully been supplying gas to large volume customers.  Serving residential and small commercial customers has not been assuccessful for marketers as the administrative and regulatory requirements aresubstantially greater and profit margins are very thin.  As a result , manymarketers have ceased serving this market segment altogether.  Activity at the regulatory level continues as all parties work collaboratively to resolveissues which seem to be hampering the success of the endeavor.   This effortwill likely continue for some time as the issues involved in transforming along time regulated industry into a competitive environment are complex,  thesolutions are not always clear and the parties do not always share the samemotivations.   The Company will continue to support the efforts to deregulatethe industry in an orderly fashion and will work with customers as the industry transitions into the new environment.