<PAGE>
 
                                                                   Exhibit 10-18

                               STATE OF NEW YORK
                           PUBLIC SERVICE COMMISSION


                                OPINION NO. 98-1


CASE 96-E-0898 - In the Matter of Rochester Gas and Electric
                 Corporation's Plans for Electric Rate/
                 Restructuring Pursuant to Opinion No. 96-12.



                 OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT
                       SUBJECT TO CONDITIONS AND CHANGES



Issued and Effective:  January 14, 1998
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
                                          Page
                                          ----
<S>                                       <C>
APPEARANCES
 
INTRODUCTION                               1
 
PROCEDURAL HISTORY                         2
 
     Procedural Concerns                   4
 
THE REVISED SETTLEMENT                     5
 
REVENUE REQUIREMENT                       10
 
     Strandable Costs                     10
 
     Kamine Cost Recovery                 15
 
     Return on Equity                     17
 
     Gain on Sale of Generating Plants    21
 
     SBC Funding                          22
 
     Other Proposals                      23
 
REVENUE ALLOCATION AND RATE DESIGN        25
 
THE PROGRAM                               30
 
     Single Retailer Model                30
 
     Implementation Schedule              31
 
     Delivery Rates                       34
 
     Other Retail Access Issues           38
 
CORPORATE STRUCTURE                       39
 
ENVIRONMENTAL MATTERS                     41
 
MARKET POWER MITIGATION                   42
 
FINDINGS UNDER SEQRA                      43
 
CONCLUSION                                46
 
ORDER                                     47

APPENDIX A

APPENDIX B

APPENDIX C
</TABLE>
<PAGE>
 
CASE 96-E-0898
                                  APPEARANCES
                                  -----------


FOR ROCHESTER GAS AND ELECTRIC CORPORATION:

          Nixon, Hargrave, Devans & Doyle (by Robert J. Bird, Richard N. George,
          and Stanley W. Widger, Jr., Esqs.), Clinton Square - P.O. Box 1051,
          Rochester, New York 14603

FOR DEPARTMENT OF PUBLIC SERVICE STAFF:

          Michelle Phillips, Esq., Three Empire State Plaza, Albany, New York
          12223-1350

FOR ATTORNEY GENERAL OF THE STATE OF NEW YORK:

          Glen C. King, Esq., The Capitol, Albany, New York 12247

FOR NEW YORK STATE CONSUMER PROTECTION BOARD:

          Anne Curtin and James Warden, Esqs.,
          99 Washington Avenue, Suite 1020, Albany,
          New York 12210

FOR NEW YORK POWER AUTHORITY:

          Eric J. Schmaler, Esq., 1633 Broadway, New York, New York 10019

FOR AMERICAN ASSOCIATION OF RETIRED PERSONS:

          Ward, Sommer & Moore, LLC (by Douglas H. Ward, Esq.),
          122 South Swan Street, Albany, New York 12210

FOR PUBLIC INTEREST INTERVENORS AND FOR PACE ENERGY PROJECT:

          David Resnick, Esq., 78 North Broadway, White Plains, 
          New York 10606

FOR IPPNY:

          Aaron Breidenbaugh, 291 Hudson Avenue, Albany, New York 12210

FOR ENRON TRADE & CAPITAL RESOURCES:

          Read & Laniado (by Kevin Brocks, Esq.),
          23 Eagle Street, Albany, New York 12207


                                      -i-
<PAGE>
 
CASE 96-E-0898


                                  APPEARANCES
                                  -----------

FOR MULTIPLE INTERVENORS:

     Couch, White, Brenner, Howard & Feigenbaum  (by Robert M. Loughney, Esq.),
     540 Broadway, P.O. Box 2222, Albany, New York 12201

FOR RETAIL COUNCIL OF NEW YORK:

     Cohen, Dax & Koenig (by Paul Rapp, Esq.),
     90 State Street, Albany, New York  12211

FOR WHEELED ELECTRIC POWER COMPANY:

     Joel Blau, Esq., 32 Windsor Court, Delmar, New York 12054

FOR CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.:

     John F. Gallagher, Esq., 4 Irving Place, New York, New York 10003

FOR CONSOLIDATED NATURAL GAS COMPANIES:

     Whiteman, Osterman & Hanna (by Michael Whiteman, Esq.),
     One Commerce Plaza, Albany, New York 12260

FOR NEW YORK STATE ELECTRIC & GAS CORPORATION:

     Huber Lawrence & Abell (by Andrew Fisher, Esq.),
     605 Third Avenue, New York, New York 10158

PRO SE:

     Jerome Bowe, 104 Brentwood Drive, Penfield, New York 14526

     Charles A. Straka, 6 Oakwood Lane, Fairport, New York 14405


                                     -ii-
<PAGE>
 
                               STATE OF NEW YORK
                           PUBLIC SERVICE COMMISSION


COMMISSIONERS:

     John F. O'Mara, Chairman
     Maureen O. Helmer
     Thomas J. Dunleavy


CASE 96-E-0898 -    In the Matter of Rochester Gas and Electric Corporation's
  Plans for Electric Rate/ Restructuring Pursuant to Opinion No. 96-12.

                                OPINION NO. 98-1

                 OPINION AND ORDER ADOPTING TERMS OF SETTLEMENT
                       SUBJECT TO CONDITIONS AND CHANGES

                    (Issued and Effective January 14, 1998)


BY THE COMMISSION:

                                  INTRODUCTION
                                  ------------

       This proceeding concerns issues related to rates and the restructuring of
the electric utility industry for Rochester Gas and Electric Corporation (RG&E
or the company).  Interested parties were encouraged to reach a negotiated
resolution of the complex issues raised by the transition to a competitive
market for the supply of electricity./1/


       After filing a Settlement Agreement dated April 8, 1997 (April 8
Settlement), the parties proposed further revisions to resolve concerns
identified by us at our October 8, 1997 session. These further revisions were
reflected in an Amended and Restated Settlement Agreement (Revised Settlement)
dated October 23, 1997 reached by RG&E, Department of Public Service Staff
(Staff), Multiple Intervenors, Joint Supporters, and the National Association of
Energy Service Companies.  After careful review of the April 8 Settlement, the
Revised Settlement, the comments received, the evidence, and arguments in this
proceeding, we


/1/  Cases 94-E-0952 et al., In the Matter of Competitive Opportunities
                     -- ---  ------------------------------------------
Regarding Electric Service, Order Establishing Procedures and Schedule (issued
--------------------------                                                    
October 9, 1996), p. 3, (October 9 Order).
<PAGE>
 
CASE 96-E-0898

issued an order adopting the Revised Settlement subject to certain conditions
and changes./1/


       The findings and decision made in that order are hereby incorporated, and
this opinion describes the bases for our decision.

                               PROCEDURAL HISTORY
                               ------------------

       Opinion No. 96-12/2/ required five of the State's electric utilities to
file plans to bring to New York State consumers the benefits of a competitive
electricity market.  In compliance with that opinion and order, RG&E submitted
its plan on October 1, 1996.


       Considerable public comment on the April 8 Settlement was received
through educational forums, public statement hearings,/3/ and consumer
correspondence.  While the comments generally supported our goals for a
competitive marketplace, four areas of concern were identified by the public:
system and service reliability; the impact of competition on low- and fixed-
income consumers; the effect of strandable costs on rates; and the need for
consumer education.


       Concerns were also expressed about the relatively smaller revenue
decreases for residential and small commercial customers; the increase in the
residential and small commercial customers' monthly customer charge, which would
have resulted in an overall bill increase for roughly 43% of the residential
customers; the failure to quantify and require sharing of strandable costs,
which it was alleged would have justified


----------------------
/1/  Case 96-E-0898, Order Adopting Terms of Settlement Subject to Conditions
     and Changes (issued November 26, 1997) (November 26 Order).

/2/  Cases 94-E-0952 et al., In the Matter of Competitive Opportunities
                     -- ---  ------------------------------------------
     Regarding Electric Service, Opinion No. 96-12 (issued May 20, 1996).
     --------------------------                                          

/3/  Educational forums and public statement hearings were held on May 28 and
     29, 1997 in Canandaigua and Rochester, respectively.

                                       2
<PAGE>
 
CASE 96-E-0898

further rate reductions; the slow pace of conversion to retail access--about
five years; and the lack of a system to decide who would be afforded retail
access first.

       Evidentiary hearings on the April 8 Settlement were held from June 3
through June 5, 1997; the record contains 2,029 transcript pages (Tr.) and 82
exhibits.  In addition, statements and briefs in support of or in opposition to
the April 8 Settlement were submitted by numerous parties.

       On July 16, 1997, a recommended decision by Administrative Law Judge
Walter T. Moynihan was issued, which generally supported adoption of the April 8
Settlement.  Briefs and/or reply briefs on exceptions were received from RG&E;
Staff; Joint Supporters; the Department of Law (Attorney General);/1/ Multiple
Intervenors; State Consumer Protection Board (CPB); New York Power Authority
(NYPA); American Association of Retired Persons (AARP); Public Interest
Intervenors (PII), a broad-based umbrella coalition comprising 18 consumer and
environmental organizations; Public Utility Law Project of New York, Inc.
(PULP), a not-for-profit public interest firm representing the interests of low-
income residential consumers; Retail Council of New York (Retail Council), an
association of nearly 5,000 retail enterprises in New York State; Independent
Power Producers of New York, Inc. and Enron Capital & Trade Resources
(IPPNY/Enron), Wheeled Electric Power Company (WEPCO), independent power
marketers; and Mr. Jerome P. Bowe, a pro se intervenor.
                                     --- --            

       After reviewing the recommended decision and the parties' exceptions, we
requested the parties to renegotiate the terms of the April 8 Settlement/2/ to:
achieve greater rate reductions for residential and other small customers;
consider ameliorating the impacts of the proposed increase in the monthly
customer charge; increase the ratepayers' share of possible excessive earnings
and gains on the sale of generating units,


-------------------
/1/  Appendix A is a list of abbreviations used in this document.

/2/  These issues were discussed at our session on October 8, 1997.

                                       3
<PAGE>
 
CASE 96-E-0898

while still encouraging divestiture; accelerate the pace of retail access if
warranted; increase the back-out rate during the Energy Only stage of retail
access; and establish minimum spending limits for the system benefits charge
(SBC).


       As a result of further negotiations, the Revised Settlement was filed and
parties were invited to submit further written comments./1/  Thirteen parties
submitted comments/2/ including the five signatories to the Revised Settlement
and eight others that oppose its adoption.


       In our November 26 Order, we found that with certain modifications the
terms of the Revised Settlement offer a sound regulatory framework for RG&E, its
competitors, and its customers in the transition to fully competitive generation
and energy service markets.

Procedural Concerns
-------------------

       The recommended decision rejected an argument that most of the active
parties were unfairly or improperly excluded from discussions among Staff, the
company, CPB, and Multiple Intervenors.  The recommended decision observed that
we waived in part our settlement guidelines/3/ in the instant case to enhance
the parties' ability to be creative and communicate freely./4/ Thus, the
recommended decision concluded the caucusing among some parties was not
proscribed, and the April 8 Settlement should not be rejected or modified based
on this procedural argument.


       AARP and Mr. Bowe except, arguing the April 8 Settlement was reached as a
result of procedures that denied parties a meaningful opportunity to
participate.  AARP also

-------------------
/1/  Case 96-E-0898, Notice Inviting Comments on Proposed Settlement (issued
     October 24, 1997).

/2/  Appendix B is a list of the parties who filed comments.

/3/  Cases 90-M-0255 et al., Settlement Procedures and Guidelines, Opinion No.
                     -- ---  -------------------------------------            
     92-2 (issued March 24, 1992), Appendix B, p. 4 (guideline B.(3)).

/4/  October 9 Order.

                                       4
<PAGE>
 
CASE 96-E-0898

asserts that, because we truncated important procedures, the April 8 Settlement
should be rejected.  RG&E replies that earlier negotiations were unproductive
when all parties were present.

       The procedures followed in this case have afforded all parties ample
opportunities to shape the decisions reached in this case.  As the recommended
decision notes, we waived our settlement guidelines to permit caucusing to
enhance the parties' ability to be creative, communicate freely, and reach an
expeditiously negotiated resolution.  The waiver of the guidelines permitted not
only the caucusing mentioned above, but also discussions among Staff and other
parties.  As a result of the caucusing, a draft agreement was prepared and
circulated among all the parties.  After further negotiations, at which all
parties had an opportunity to attend, modifications were incorporated in the
agreement based on the various parties' comments.  This modified agreement is
the April 8 Settlement.  In addition, all parties were afforded an opportunity
to conduct discovery, present testimony and pre-hearing position papers, cross-
examine witnesses, submit post-hearing briefs, and file briefs on and opposing
exceptions to Judge Moynihan's recommended decision.  Moreover, all parties were
given a further opportunity to comment on the Revised Settlement.  These
procedural steps gave each party a reasonable opportunity to participate.
Consequently, AARP's and Mr. Bowe's procedural exceptions are denied.

                             THE REVISED SETTLEMENT
                             ----------------------

       Generally, the Revised Settlement is intended to resolve all issues in
this proceeding.  In addition to a number of miscellaneous provisions, the
Revised Settlement addresses three main topics:  rate reductions, retail access,
and corporate restructuring.  The Revised Settlement would establish electric
rates for a five-year period (July 1, 1997 through June 30, 2002) at levels that
are, overall, below their current levels.  While rates for all customer classes
would be reduced, large industrial and commercial customers would receive the
biggest decreases.

                                       5
<PAGE>
 
CASE 96-E-0898

       The Revised Settlement calls for rate reductions in each of five years
culminating in a net $40.6 million (6.1%) decrease in RG&E's electric revenues
in the fifth year as compared with rates in effect on July 1, 1996.  The
cumulative revenue decrease, subject to certain contingencies discussed infra,
                                                                        ----- 
would be $101.6 million.  In addition, RG&E would forgo $73 million of incentive
payments and lost net revenues otherwise due it arising from discounts contained
in its flex-rate contracts.

       The rates to be established to produce the foregoing revenue reductions
would not be modified to reflect changes in revenues or expense, state and local
taxes (other than gross receipts taxes and property taxes) and asset sales
during the term of the Revised Settlement except for the following items, some
of which are the subject of exceptions as more fully discussed infra:
                                                               ----- 

       a.   Kamine/Besicorp - Allegany L.P. (Kamine) recovery;

       b.   Variations in the levels of mandated relief;

       c.   Securitization benefits;

       d.   Deferrals; and

       e.   Adjustments

       Except for changes arising from a mandated SBC and securitization, which
would be reflected in rates without any limitations, rates will only be changed
if the pre-tax net effect of all other such items, on a projected cumulative
basis during the term of the Revised Settlement, would be greater than $30
million.  However, no such rate adjustment would be made in rate years/1/ one or
two, and adjustments in the final three rate years would be subject to monetary
limitations, which ensure that

--------------------
/1/  A rate year is a one-year period commencing on July 1 of one calendar year
     and terminating on June 30 of the following calendar year.

                                       6
<PAGE>
 
CASE 96-E-0898

there would be rate decreases during the five years.  Any amounts that are not
recovered as a consequence of the monetary limitations may be deferred.

       Generally, the Revised Settlement provides that the revenue decreases
would be allocated to RG&E's service classes based on their responsibility for
generation costs.  The proposed revenue reductions are in addition to the base
rate reductions and the elimination of fuel adjustment charges effective July 1,
1996, in accordance with a settlement agreement (1996 Settlement) that we
approved with modifications./1/  Pursuant to the 1996 Settlement, the total
reductions for the 12 months ended June 30, 1997 approximated 2.5% for
residential customers and 4.5% for non-residential customers./2/


       Several specific rate design changes are also set forth in the Revised
Settlement, including a proposed yearly $1.50 increase in the monthly customer
charge for the residential and small business customers, elimination of the
difference between the peak and shoulder-peak energy charges as of July 1, 1997
for large industrial customers, and modification of the energy audit requirement
in the flex-rate tariffs.  In addition, beginning July 1, 1999 and continuing
through June 30, 2002, certain incremental manufacturing load of at least 50 kW
would be served at an average rate of $0.059 per kWh.  All other changes in
revenues would be allocated uniformly within each service classification.

       With respect to the Retail Access Program (Program), the Revised
Settlement requires RG&E to open its electric system to competition at a pace
such that all retail customers would be

-------------------
/1/  Cases 95-E-0673 et al., Rochester Gas and Electric Corporation, Order
                     -- ---  --------------------------------------       
     Approving Terms of Settlement Agreement With Changes (issued June 27, 
     1996), which was restated in Cases 95-E-0673 et al., Opinion No. 96-27 
                                                  -- ---
     (issued September 26, 1996). Our modification of the 1996 Settlement is the
     subject of an Article 78 proceeding that will be terminated upon approval
     of the pending Revised Settlement.

/2/  These decreases reduced the company's revenues by $23 million annually.

                                       7
<PAGE>
 
CASE 96-E-0898

allowed to choose their own supplier of energy and capacity by July 1, 2002.
The signatories recognize that RG&E's ability to undertake the Program is
contingent upon factors such as a functioning statewide energy and capacity
market, which are not in the direct control of the company.  They agree to
modify the Program, if necessary, to account for such factors, and to address
such matters in good faith.

       The Revised Settlement would adopt a single-retailer model, which would
allow a Load Serving Entity (LSE)/1/ to purchase power on the open market and
distribution access from RG&E.  The LSE would market the power to customers/2/
and be responsible for scheduling deliveries.

       The Program would be deployed in stages.  In the Energy Only stage, which
would commence on July 1, 1998, customers (up to 10% of the systemwide energy
sales of 6,714 gWh) would be able to choose their own supplier of electric
energy.  The back-out rate during this stage is estimated to be approximately
$.019 per kWh./3/  On July 1, 1999, the Energy and Capacity stage would be
introduced, which would permit customers using up to 20% of the total energy to
choose their own supplier of energy and capacity. The back-out rate for this
stage, $.032 per kWh, is generally equal to the variable costs and specified
fixed costs that RG&E incurs to produce power from its fossil and hydro
generating units and from power purchased (other than from Kamine).  On July 1
of the following two years, the Program would be expanded to include 30% and 46%
of the energy, and on July 1, 2002 all of


----------------
/1/  An LSE is analogous to the energy services company (ESCO) in a two-retailer
     model.
/2/  An individual customer could qualify as an LSE and procure energy to meet 
     its own needs.

/3/  The Revised Settlement calls for a back-out rate of $.004 per kWh for
     retailing costs plus an allowance of $.01905 per kWh as the value of energy
     (equivalent to the company's buy-back rate).  Thus, RG&E would deduct a 
     total of approximately $.02305 per kWh from bundled rates during the 
     Energy Only stage.

                                       8
<PAGE>
 
CASE 96-E-0898

the company's energy.  The schedule may be accelerated if the market price for
power exceeds $.032 per kWh on a persistent and sustained basis during the
Energy and Capacity stage.  Also, to the extent that energy consumption by end-
use customers grows beyond a level of 6,714 gWh, the energy caps on eligibility
will be increased by the amount of additional consumption.


       As for corporate restructuring, RG&E would functionally divide existing
operations into the following activity-based units:  distribution unit (DISCO),
generating unit (GENCO), regulated load service entity (RLSE), and, at its
option, a functionally separate holding company (HOLDCO).  The company would
also create a structurally separate unregulated load serving entity (ULSE).  The
ULSE would be an energy marketer and provider of other energy services both
within and outside RG&E's DISCO service territory.

       The DISCO would continue RG&E's transmission and distribution service,
which would be provided to the ULSE and the RLSE pursuant to regulated tariffs.
The GENCO would be responsible for operating RG&E's generating facilities.
RG&E's GENCO would consist of a portfolio of nuclear and non-nuclear sources.
The output from nuclear sources would be "dedicated" to regulated load, which is
subject to change to conform with the outcome of any separate statewide
proceeding on nuclear issues. Output from non-nuclear sources (which would
initially serve regulated load) would serve load on a competitively priced basis
as customers migrate away from the RLSE.  The RLSE would continue to serve as a
provider of last resort (POLR) and provide bundled service under tariffs to
customers who elect to continue receiving bundled service or who do not have a
practicable alternative.  In addition, RG&E would commit to working with Staff
to develop an experimental alternative to provide POLR service on a competitive
basis.

       The Revised Settlement also provides for continuation of a program to
assist low-income customers and a service quality program to maintain safe and
reliable service.  Further, the

                                       9
<PAGE>
 
CASE 96-E-0898

Revised Settlement responds to our directive/1/ to introduce retail access to
farm and food processor customers on an expedited basis and affects three
pending appeals of our prior decisions concerning RG&E./2/  Finally, except as
expressly provided otherwise, the Revised Settlement would supersede the 1996
Settlement.

       Parties took a number of exceptions to the recommended decision and
submitted comments on the Revised Settlement.  In addition, we imposed
conditions and changes in our November 26 Order before adopting the Revised
Settlement.  Inasmuch as issues were raised at various stages, this opinion will
address the parties' exceptions as stated in their briefs on exceptions and
briefs opposing exceptions (where relevant), any corresponding revisions made in
the Revised Settlement, the parties' comments on these revisions, and the
conditions as stated in our November 26 Order.

                              REVENUE REQUIREMENT
                              -------------------
Strandable Costs
----------------

       For the five-year term of the April 8 Settlement (and the Revised
Settlement), RG&E's tariff rates are presumed to include all prudently incurred
investment in electric plant and electric regulatory assets (sunk costs) as of
March 1, 1997.

-----------------------
/1/  Cases 96-E-0948 et al., Petition of Dairylea Cooperative Inc., Order
                     -- ---  -------------------------------------       
     Concerning Retail Access Proposals (issued February 25, 1997).

/2/  RG&E will petition the court for permission to withdraw (1) as a party to 
     the appeal in the Article 78 proceeding brought to challenge Opinion 
     No. 96-12, Energy Association v. Public Service Commission (Sup. Ct. 
                -----------------------------------------------
     Albany Co. Index No. 5830-96); (2) the company's pending Article 78 
     proceeding Rochester Gas and Electric Corporation v. Public Service 
                --------------------------------------------------------
     Commission (Sup. Ct. Albany Co. Index No. 6616-96).  (In the latter case, 
     ----------
     we rejected the 1996 Settlement's Kamine provisions); and (3) the 
     company's pending Article 78 proceeding Rochester Gas and Electric 
                                             --------------------------
     Corporation  v. Public Service Commission (Sup. Ct. Albany Co.
     -----------------------------------------                     
     Index No. 6531-97) brought to challenge our June 23, 1997 Order 
     Establishing Retail Access Pilot Programs in Cases 96-E-0948 et al.
                                                                  -- ---

                                       10
<PAGE>
 
CASE 96-E-0898

Rates would be reduced without identifying cost savings.  Thus, neither RG&E's
rates for full service nor its rates for unbundled service would reflect any
savings specifically identified as arising from the exclusion of strandable
costs, but the company must manage its business to reduce costs in line with the
revenue reductions in order to maintain its rate of return.

       In addition, for those customers who choose to purchase power in the
competitive market, there may be additional cost savings.  These customers can
avoid paying RG&E's back-out energy, capacity, and retailing rate of $.032 per
kWh and pay the market price for such power.  They would reap the savings from
lower priced market power and RG&E's stockholders would bear the loss if the
company were unable to reduce its generating cost to the market price.

       In the Revised Settlement, the signatories agreed to meet prior to July
1, 2000 (one year earlier than agreed to in the April 8 Settlement) to discuss
future ratemaking treatment for sunk costs.  In addition, at the end of the
five-year term, there may be funds available to offset some of the sunk costs.
These funds could come from earnings in excess of the allowed rate of return on
equity, unused funds set aside to match a potential liability for Kamine (both
discussed more fully infra), and, if we approve, the customers' share of any
                     -----                                                  
gains on the sale of generating plants.

       In the meantime, both the April 8 Settlement and the Revised Settlement
provide that the costs of RG&E's nuclear generating facilities, Ginna Station
and the company's 14% share of Nine Mile Point 2, would be recovered in retail
rates at least through 1999.  RG&E further commits to participate in good-faith
negotiations with Staff and with the other cotenants of Nine Mile Point 2
regarding future rate treatment of this facility.  The signatories anticipate
that similar treatment will be applied to Ginna Station.

       For the non-nuclear generating facilities, both agreements address the
"fixed" and "variable" portions of RG&E's fossil generating units, hydroelectric
generating units, gas

                                       11
<PAGE>
 
CASE 96-E-0898

turbines, and power purchase contracts (other than Kamine), collectively known
as the "To-Go Costs."  In the Energy Only stage, the company would allow $.01905
per kWh as the estimated market value for energy provided and would agree to
sell to retailers at this rate.  With an allowance of $.004 per kWh for
retailing costs, the allowance would be $.02305 per kWh, which is greater than
the estimated $.013 per kWh in the April 8 Settlement.  The variable portion of
the To-Go Costs would be subject to the market for electricity commencing July
1, 1998, the start of the Energy Only stage.

       The fixed portion of such costs is the remainder of all To-Go Costs not
defined as variable.  The fixed portion comprises all capital costs incurred
after February 28, 1997, O&M expenses, and property, payroll and other taxes.
The fixed portion of the To-Go Costs are assumed to be recovered in full through
the company's distribution access tariff until July 1, 1999, the start of the
Energy and Capacity stage, after which recovery of the combined fixed and
variable To-Go Costs and retailing costs, a total of $.032 per kWh, would be
subject to competition.

       The recommended decision did not include specific estimates of strandable
costs in the computation of RG&E's revenue requirement.  According to the
recommended decision, studies of RG&E's strandable costs are speculative at
present because of the lack of a competitive market for electricity.  The
recommended decision also noted that the April 8 Settlement calls for rate
reductions without specifying an estimate of strandable costs and allows for
future consideration of such costs when some of the variables, such as the
actual market price for electricity, will be known.

       The recommended decision also pointed out that, except for nuclear power
and Kamine purchases, the recovery of the remaining half of RG&E's To-Go Costs
for generation would depend upon the company's ability to compete with outside
sources of power.  If the competitive prices are lower than RG&E's back-out
rates, customers who purchase that power will automatically enjoy

                                       12
<PAGE>
 
CASE 96-E-0898

the benefits and stockholders will bear the effects of the revenue loss.

       Several parties except, insisting that strandable costs should be
calculated now and that further rate reductions should be authorized by
disallowing a portion of the strandable costs. AARP renews its claim that
strandable costs amount to $800 million to $940 million, and AARP calls for an
equal sharing of strandable costs between ratepayers and stockholders unless the
financial integrity of RG&E is in jeopardy or legislation is passed prohibiting
sharing.

       AARP maintains the recommended decision is inconsistent with Opinion No.
96-12, which stated that strandable costs should be allocated through a "careful
balancing of interests and expectations"; that "innovative means must be used to
reduce the amount of strandable costs before they are considered for recovery";
and that these costs should be "recovered with an eye to lowering rates, [and]
fostering economic development. . . ."/1/


       According to AARP, the recommended decision admits that the April 8
Settlement is not supported by substantial evidence of the amount of strandable
costs because the signatories did not estimate them and they did not set forth
how such costs will be estimated in the future.

       CPB reiterates its estimated range of $1,200 million to $1,500 million
for strandable costs, but notes that a precise estimate of strandable costs is
not needed to require immediate rate reductions of up to ten percent.  CPB also
claims that the recommended decision fails to recognize that the disparities
between competitive electric prices and current rates will be at their zenith
over the next several years, which should be taken advantage of to reduce rates.
Finally, CPB responds to various criticisms of its strandable cost proposal by
noting that (1) with respect to bond ratings, CPB would limit its strandable
cost disallowance to maintain an equity ratio of at least 40%,

-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 96-12, mimeo pp. 89-90.
                     -- ---  -----                                     

                                       13
<PAGE>
 
CASE 96-E-0898

and (2) with respect to sharing, CPB's proposals would allocate 30% of the total
strandable costs to RG&E's shareholders.

       RG&E and Staff support the recommended decision's conclusions with
respect to strandable costs.  They point out that the April 8 Settlement does
not guarantee recovery of strandable costs; and note that approximately $155
million in cumulative rate reductions and forgone credits are called for in the
April 8 Settlement without specifying how the company is to reduce its costs.
The comparable figure for the Revised Settlement is $174.6 million.

       Staff explains that the strandable cost studies submitted by CPB and AARP
contain data and computational errors that render them unreliable as a basis for
modifying the April 8 Settlement.  An example of the errors contained in the
studies that staff observed is AARP's reliance upon 1995 data, which does not
provide an accurate representation of the costs of the Kamine purchased power
contract.  The omission of the Kamine contract costs alone, staff suggests,
could increase strandable costs by over $101 million, and a double count of
regulatory assets would decrease strandable costs by $210 million.  On the other
hand, Staff notes that the April 8 Settlement provides meaningful rate
reductions, strong incentives to mitigate costs, including strandable costs, and
powerful incentives for RG&E to manage its operations efficiently and
aggressively.

       RG&E argues that CPB's position is consistent with its advocacy of
confiscating investors' funds in order to provide a short-term benefit today for
customers, regardless of the long-term consequences.  For example, RG&E
maintains that it would suffer a bond downgrading were CPB's proposals to be
implemented, and that its stock value would decline significantly.  RG&E points
to the stocks of utilities in Texas, which suffered a significant and immediate
drop in prices when the Texas commission announced that those utilities would
have to write off a portion of strandable costs.  Likewise, the company cites a
50% decline in the stock price and a bond downgrading of the parent company of
Public Service Company of New Hampshire when that

                                       14
<PAGE>
 
CASE 96-E-0898

state's commission announced the utility would have to absorb some strandable
costs.

       In comments on the Revised Settlement, the Retail Council repeats the
calls for a current estimation of stranded costs, in order to justify further
rate relief.

       We find reasonable the Revised Settlement's treatment of strandable
costs.  First, by including in the back-out rate a component for the fixed
portion of the To-Go Costs, RG&E's customers have a meaningful opportunity to
avoid the equivalent of some of RG&E's strandable costs if they can purchase
electric power on the market at a price below the back-out rate.  In addition,
the Revised Settlement calls for rate reductions and the relinquishment of other
benefits without specifying how RG&E is to achieve the complementary savings
needed so that it can maintain its overall rate of return.  The Revised
Settlement also requires the parties to meet prior to July 1, 2000 to discuss
the future ratemaking treatment of RG&E's sunk costs.  Finally, the exceptions
calling for an immediate estimate of strandable costs are denied because the
estimates proffered on the record contain data and computational errors.

Kamine Cost Recovery
--------------------

       RG&E is involved in litigation pertaining to its power purchase from
facilities owned by Kamine.  The April 8 Settlement's Kamine recovery provisions
permit RG&E to set aside $33.2 million ($32.9 million in the Revised Settlement)
over the five-year term to cover costs related to resolution of the litigation.
Assuming a settlement of the Kamine litigation, RG&E would be allowed to
continue after July 1, 2002 to reflect in rates $10.6 million per year ($10.5
million in the Revised Settlement) until the cost of that settlement is
recovered.

       However, if no settlement were reached and RG&E were obligated to pay,
RG&E would be permitted to recover from ratepayers up to seven-eights of the
cost of the maximum output of Kamine during the five-year term, less amounts
already accrued and any securitization benefits forthcoming.  Also the

                                       15
<PAGE>
 
CASE 96-E-0898

$10.6 million ($10.5 million under the Revised Settlement) automatic recovery
would end at the termination of the five-year term.  The unrecovered balance, if
any, would be deferred for future recovery, and we would determine the timing of
future recovery.

       The recommended decision supports the April 8 Settlement's treatment of
the Kamine dispute.  The recommended decision also pointed out that, in the
absence of a settlement of that dispute, there are limits on the immediate rate
impacts of Kamine cost recovery, and recovery of Kamine costs on a long term
basis may be subject to the forces of a competitive market for electricity.  For
these reasons, the Judge recommended approval of the Kamine cost recovery
provisions.

       CPB excepts, contending footnote 31 of the April 8 Settlement limits the
company to recovery of prudent and verifiable costs, and that any court ordered
damage payments could be, but should not be, recovered in rates.  In addition,
CPB notes that, if the Kamine dispute is settled, RG&E would be entitled to 100%
recovery of strandable Kamine costs.  CPB requests that this provision be
clarified to assure recovery only if the total cost of the settlement is less
than the Kamine contract price.

       The Attorney General argues that there should be no automatic recovery of
Kamine costs, and that we should insist on a prudence review of all payments to
Kamine.

       RG&E responds that it has steadfastly pursued all available avenues to
relieve its customers of the burden they would bear if the Kamine contract were
enforced.  In the process, it states, the company has saved its customers tens
of millions of dollars.  It criticizes CPB's suggestion that it should continue
to devote its resources to avoiding excessive Kamine power costs, while bearing
the entire risk of damages, as "the ultimate form of cynical, one-way-street
regulation."  With respect to CPB's second point, RG&E does not anticipate
settling the contractual claim for an amount greater than that payable under the
contract.

                                       16
<PAGE>
 
CASE 96-E-0898

       At our October 8, 1997 session, we noted our discretion to reduce rates
during the five-year term if it becomes clear that the Kamine cost recovery
clause would recover more funds than needed to resolve the contract dispute.
The Revised Settlement expressly acknowledges that discretion.  In comments on
the Revised Settlement, RG&E, Staff, CPB, and Multiple Intervenors maintain this
flow-through provision is reasonable. Further, as alluded to above, footnote 31
states specifically "[n]o cost referenced in this [Revised] Settlement may be
considered for recovery, true-up or deferral unless it is prudent and
verifiable."

Return on Equity
----------------

       Under the April 8 Settlement, if RG&E achieves a return on common equity
for its regulated operations in excess of 11.80% for the entire five-year term,
the company would be entitled to retain 50% of the amount in excess of 11.80%
and to use the remaining 50% to write down accumulated deferrals or sunk costs.
The recommended decision found these provisions reasonable.  It noted that CPB's
proposed 10.2% return on equity did not include a stayout premium, which at the
time was computed to be 1.44% based on the spread between the June 1997 treasury
bills and May 2002 treasury bonds.  The recommended decision noted that adding a
stayout premium to CPB's return would increase it to 11.64%, close to the April
8 Settlement's sharing threshold.

       CPB, the Attorney General, and the Retail Council take exceptions.  CPB
claims that its proposed 10.2% return on equity should be used as the sharing
threshold.  CPB's 10.2% equity return was based on discounted cash flow, capital
asset pricing model, comparable earnings, and risk premium methods.  CPB also
contends the recommended decision miscalculated the stayout premium.  Citing the
recommended decision in the Generic Finance Proceeding (Case 91-G-0509), CPB
claims the premium should be based on one-half of the spread, which it says
would reduce the recommended decision's figure from 11.64% to 10.92%.

                                       17
<PAGE>
 
CASE 96-E-0898

       CPB also renews its call for different sharing of earnings over the
threshold, with 50% to write down strandable costs, 25% for the stockholders and
25% for the ratepayers for earnings in excess of 10.2%.  It proposes this
computation be performed annually instead of for five years.

       The Attorney General supports continuation of the 11.2% sharing threshold
in the 1996 Settlement, contending RG&E will assume little additional risk as a
result of the introduction of competition.

       The Retail Council calls for the flow through of all excess earnings to
ratepayers.  According to it, the April 8 Settlement gives 100% of excess
earnings to stockholders because the portion that would be used for write downs
is simply a return of capital to shareholders.  The Retail Council argues we
should reject the concept of a "regulatory compact," which it sees as
guaranteeing shareholder recovery of all past investments.

       RG&E responds that CPB's proposed 10.2% return on equity is about 130
basis points below the average allowed returns for electric utilities in the
fourth quarter of 1996 and first quarter of 1997.  Also RG&E observes that CPB's
implied spread over bond yields is about 160 basis points, which is less than
that employed in the Generic Finance Proceeding, where a 350 basis point risk
premium above the utilities' bond yields was generally employed and 250 basis
points was considered the low-end of the range.  RG&E conducted its own studies
and concludes that its current cost of equity is between 11.95% and 12.20%.

       Moreover, RG&E points out that CPB's strandable cost proposal would
weaken the company's financial position by lowering its equity ratio and
increasing its risk, which could lead to a decline in its bond ratings.  RG&E
suggests its equity ratio would be reduced from the existing 49% to 36.3% if
CPB's total rate base disallowances were adopted.

       Finally, RG&E observes that CPB's proposed allocation of excess earnings
on an annual basis would be unfairly asymmetrical because excess earnings in
good years would be shared with the ratepayers but earnings shortfalls in bad
years

                                       18
<PAGE>
 
CASE 96-E-0898

would be completely absorbed by the stockholders.  RG&E suggests it would never
earn the target return if this change is adopted.

       At our October 8, 1997 session, we suggested that the 11.8% return on
equity sharing threshold was too high, especially given that the company had
recently earned excess profits, which it would retain fully under the April 8
Settlement, and that the provisions related to deferrals could result in the
need for rate increases at the end of the five-year term.

       RG&E, Staff, and Multiple Intervenors maintain that the Revised
Settlement addresses our concerns.  They cite the Revised Settlement's provision
that imputes 150 basis points of the 1997 rate year overearnings to the 11.8%
return on equity measurements over the five-year term.  This would effectively
reduce the sharing cap to 11.5%.

       The excess earnings allocation would also be reallocated such that (1)
half of the excess would be used to write down deferred costs accumulated during
the term, and any portion of this half remaining after deferrals are written
down would be retained by the company as earnings; and (2) with regard to the
other half of any excess earnings, the first $800,000 would be used to reduce
rates for certain large industrial and commercial customer classes.  The
remainder would be used to write down accumulated deferrals or sunk costs, and
to the extent that any part of this latter half remains after writing down such
deferrals and sunk costs, we would determine its disposition.

       Multiple Intervenors states that the $800,000 allocation for large
customers is intended to correct for the fact that a disproportionate share of
the SBC reallocation was directed to small customers.  Staff asserts that the
Revised Settlement reduces the likelihood of rate increases at the end of the
five-year term.

       CPB reiterates its claim that the earnings sharing trigger should be
10.2% and notes that, since the time its direct testimony was submitted,
interest rates on 30-year treasury bonds have declined by about 60 basis points,
which it claims would justify a lower equity return.

                                       19
<PAGE>
 
CASE 96-E-0898

       The Retail Council reiterates that the treatment of excess earnings is
unacceptable because the reallocation of excess earnings benefits only
shareholders or large customers.

       The 11.5% sharing threshold falls within the range of equity returns
presented in this case:  from 10% by CPB to 12.2% by RG&E.  Although a cursory
view would lead to the conclusion that the 11.5% is on the high side, a closer
examination will show the 11.5% effective threshold is reasonable.  First, it
must be remembered that we recently established an 11.2% sharing threshold in
the company's last case/1/ that covers the three-year period ending June 30,
1999.  If earnings exceed that, over the entire three-year period, they were to
be shared equally between shareholders and customers, with the customers' share
being used to write down assets.

       Second, the Revised Settlement would extend the stayout period by two
years, and would increase the company's business risk by removing its monopoly
status and subjecting it to competition.  In addition, the Revised Settlement's
revenue reductions place more risk on the shareholders.  The combination of the
two-year extension, increased business risk, and reduced revenues more than
justify the increase in the threshold for sharing.

       Third, the Revised Settlement allocates more of any excess earnings to
write down deferred costs or sunk costs.

       We do have one reservation about the provision that $800,000 of excess
earnings will be used to reduce rates for certain large customer classes.  We
conclude that large customers will already receive substantial benefits under
other provisions of the Revised Settlement; thus, there is no need for this
unique additional benefit.  Accordingly, we adopt this term of the Revised
Settlement on the condition that the first sentence of Paragraph 10(b) is
removed, and the words "...of this amount..." are deleted from the second
sentence.

-------------------
/1/  Cases 95-E-0673 et al., supra, Opinion No. 96-27, mimeo pp. 7, 21, and 27.
                     -- ---  -----                                             

                                       20
<PAGE>
 
CASE 96-E-0898


Gain on Sale of Generating Plants
---------------------------------

       The April 8 Settlement contains no separate provisions for the
disposition of gains, if any, on the sale of electric generating plants.
Rather, any gains would be included in the return on equity and shared if that
return exceeds certain thresholds.

       At our October 8, 1997 session, we stated our belief that the April 8
Settlement was unbalanced with respect to its treatment of any gain on the sale
of generating assets.  We also sought a provision that would encourage RG&E to
sell generating plants.  The Revised Settlement contains provisions that
increase the customers' share of gains realized on such sales, and provide an
incentive to encourage prompt divestiture of generation.

       Staff and RG&E observe that the Revised Settlement generally provides for
a 20%/80% split between shareholders and ratepayers of any net gains over the
five-year term and that customers will benefit from any such gain on the sale of
generating assets regardless of the company's level of equity return.  The split
may change to 40% shareholder and 60% ratepayer on the first $20 million of net
gain in the first three years of the Revised Settlement.  These parties maintain
this additional allocation to the shareholder is a sufficient incentive to
encourage prompt divestiture.

       CPB replies that a divestiture incentive is unwarranted because RG&E's
rates are among the highest in the nation and any rate reduction resulting from
the flow through of a net gain to ratepayers would make the company's rates more
competitive, produce additional sales, and increase shareholders' earnings.

       We find that the Revised Settlement's treatment of gains on the sale of
generating assets is reasonable because it ensures ratepayers will receive a
substantial portion of any net gains on the sale of plants that were acquired on
behalf of and financially supported by the ratepayers.  In addition, we adopt
the incentive for RG&E to divest generating assets promptly because divestiture
will hasten the development of a competitive power market, the benefits of which
will redound to ratepayers,

                                       21
<PAGE>
 
CASE 96-E-0898

consistent with Opinion No. 96-12, and, ensure a fair quantification of
strandable costs./1/

SBC Funding
-----------

       The recommended decision supported the April 8 Settlement provisions
related to the SBC charge, i.e., to flow through to ratepayers all mandated
                           ----                                            
increases and decreases in spending for SBC programs, which include research and
development, energy efficiency, low income, and environmental protection.  The
level of spending already reflected in rates had been established in the 1996
Settlement, which set rates for the three-year period ending June 30, 1999.

       AARP, CPB, and PII except to the recommended decision's conclusion not to
modify the April 8 Settlement provisions related to the SBC charge.  They seek
specific spending levels. For example, CPB requests that the 1995 spending
levels be maintained throughout the five-year term, while PII supports
expenditures derived from a $.0015 per kWh rate charged to all energy sales.

       Staff points out that the Revised Settlement would build specific SBC
expenditures into the rates, the cost of which would be greater than the total
that would be spent if the SBC were set at $.001 per kWh for three years.
However, Staff further explains that the expenditures would be spread over five
years because most of the expenditures relate to ongoing energy savings and
incentive payments that the company is obligated to pay for under its DSM
bidding program.

       PII opposes the SBC modifications contained in the Revised Settlement
because it would reduce expenditures for these programs by nearly half from $7.8
million in 1995 to an average of $4.78 million beginning in 1998.  PII sets
forth several examples of specific spending reductions that would result and
states that the cuts are inconsistent with the clearly expressed

-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 96-12, mimeo p. 60.
                     -- ---  -----                                 

                                       22
<PAGE>
 
CASE 96-E-0898

intention to preserve these programs at least during the transition period./1/


       Furthermore, PII calls for the elimination of the Large Customer Credit
Program, which allows industrial customers to elect not to participate in the
DSM program and thereby receive a $.0003 per kWh credit.  Arguing that RG&E will
no longer offer DSM programs, PII believes the credit should be terminated.

       Since the SBC funding allowance contained in the Revised Settlement meets
our stated goal, we find these provisions acceptable.  With respect to PII's
position that the Large Customer Credit Program be eliminated, we note that the
credit is subject to recalculation in the event that RG&E's spending on DSM
programs changes materially./2/



Other Proposals
---------------
       Several parties support other changes to parts of the Revised Settlement
that are unchanged from the April 8 Settlement.

       PII proposes a "price cap plus" mechanism for RG&E's revenue requirement,
which is a combined revenue cap and price cap.  Under price cap plus, the
initial year's revenue cap would be set using traditional cost of service
regulation and in subsequent years, the revenue cap would be adjusted for three
factors:  inflation, productivity, and growth.  In addition, PII's price cap
plus includes a revenue cap true-up.

       PII's price cap plus proposal is not acceptable because it could lead to
increased rates if productivity is not sufficient to offset inflation and, in
any event, would require annual regulatory oversight of the true-up mechanism.
In effect, this proposal runs counter to our objective, which is to rely more on
competition and less on regulation.

-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 96-12, mimeo p. 61.
                     -- ---  -----                                 
/2/  Cases 95-E-0673 and 95-G-0674, Rochester Gas and Electric Corporation -
                                    ----------------------------------------
     DSM, Opinion No. 95-20 (issued December 27, 1995), mimeo Appendix p. 9.
     ---

                                       23
<PAGE>
 
CASE 96-E-0898

       CPB proposes to reduce the revenue requirement by $235,000 to reflect
reforms in Workers' Compensation Law.  CPB's adjustment is subsumed in the
overall revenue reductions required by this order and is rejected because this
change is but one of many changes expected in the future that will affect
earnings subject to the sharing threshold.

       CPB also proposes we modify the provision that would permit RG&E to defer
the costs of operation and maintenance related to inflation in excess of 4.0%.
CPB states we should simultaneously require the return on equity to drop below
9% before deferral is permitted.  The CPB's modification is asymmetrical, i.e.,
                                                                          ---- 
RG&E would have to bear 100% of the excess inflation risk as the return on
equity drops from 11.5% to 9.0%, but the company would only retain a small
portion of the upside benefit above the 11.5% equity return because of other
equity return sharing mechanism we adopted supra.  Consequently, this proposal
                                           -----                              
is not adopted.

       AARP excepts to the property tax incentive, which would allow RG&E to
defer for future recovery or pass back to ratepayers 50% of any property tax
expense increase or decrease in comparison to the base level, i.e., the actual
                                                              ----            
tax expenditures during the 12 months ended February 28, 1997 less taxes related
to any assets sold after June 30, 1997.  The other 50% would be reflected in the
rate of return computations.  AARP characterizes the provision as a bribe to get
the company to lobby for tax reductions.

       AARP's exception is rejected because the provision will encourage RG&E to
pursue reductions in the cost of property taxes, or failing that, because the
provision will spare customers half of any increase in such costs.

       We note that certain provisions of the Revised Settlement (i.e., (P)(P)8,
                                                                  ----          
11-17, 24 (with respect to shut-down costs), and (P)30) provide for deferral and
recovery without requiring further petition to or approval by us.  Without
altering the intent of these terms, we adopt them on the condition that a formal
petition will be filed with us prior to

                                       24
<PAGE>
 
CASE 96-E-0898

establishing deferrals or commencing any recovery during the five-year term.

       Finally, we also observe that the Revised Settlement refers to possible
Statewide resolution of the future ratemaking and ownership of nuclear
facilities.  Paragraph 23(d) states that "no change in the treatment of RG&E's
nuclear facilities shall be implemented until at least January 1, 2000."  The
January 1, 2000 date might be construed as precluding a sale or transfer,
through an auction or otherwise, of the company's interest in nuclear facilities
until at least the year 2000 and, thus, could conflict with subsequent action on
the August 1997 Staff Report on Nuclear Generation.  We adopt this paragraph on
the condition that (P)23(d) is modified to read as follows: "no change in the
treatment of RG&E's nuclear facilities shall be implemented prior to the
Commission's resolution of the August 1997 Staff Report on Nuclear Generation."

                       REVENUE ALLOCATION AND RATE DESIGN
                       ----------------------------------

       Pursuant to the April 8 Settlement, revenue decreases would generally be
allocated to RG&E's service classes based on their responsibility for generation
costs.  As a result, the large industrial customers would receive rate
reductions of 10% to achieve an average rate of $.056 per kWh; large commercial
customers would receive rate reductions of 8% to achieve an average rate of
$.068 per kWh; other industrial and commercial customers would receive rate
reductions of 3.7% to achieve an average rate of $.08 per kWh; and residential
and small business customers would receive rate reductions averaging 2.5%, with
rates varying depending on usage and classification.  Several specific rate
design changes were also set forth, including among others a proposed annual
$1.50 increase in the monthly customer charge for residential and small business
customers.

       The Judge recommended the allocation favoring the large industrial
customers because (1) as Multiple Intervenors had observed, RG&E's residential,
commercial, and industrial rates were in 1995, respectively, 34.6%, 32.1%, and
61.5% above

                                       25
<PAGE>
 
CASE 96-E-0898

corresponding national average rates, which justifies proportionately greater
reductions for the industrial class, and (2) the allocation of revenues and
individual rate changes would move RG&E's rates closer to the marginal costs,
which is economically efficient and makes sense in an increasingly competitive
electricity market.

       With respect to the increases in the monthly charge, the recommended
decision concluded that the ultimate customer charge of $17.50 is justified by
the fact that the comparable marginal cost is about $20./1/


       CPB excepts, arguing greater attention can and should be paid to rates
charged for electricity around the country.  It provides extensive legal
arguments in support of this proposition.  Assuming we were to adopt this
approach, CPB concludes we should adopt equal across-the-board percentage
decreases for all classes.

       AARP objects to residential customers receiving smaller decreases and
argues substantial joint and common costs should not be allocated to customer
costs so more of them can be covered in rates paid by non-residential users.

       PULP contends that we have no statutory authority to favor larger
industrial customers over other customers.  PULP also asserts it is irrational
and illegal to favor this one customer class over others as there assertedly has
been no showing the industrial customers need such a decrease.

       PII claims that the customer charge should not be increased from the
current $10 monthly charge to $17.50 over the five years because the marginal
cost study was calculated three years ago and was not submitted in this case,
and because the effect of such a charge would increase bills for 43% of the
residential class even with an overall revenue decrease.  In addition, PII is
concerned that the decrease to energy rates would carry negative environmental
consequences.  According to

-------------------
/1/  Exhibits 50 and 51, Tr. 1,450-1,459.

                                       26
<PAGE>
 
CASE 96-E-0898

PII, the increase in sales would be accompanied by an increase in pollution.

       Staff, RG&E, and Multiple Intervenors support the recommended decision's
findings with respect to revenue allocation and rate design.  They note that
rates must be realigned to promote economic development and industrial
competitiveness.  For example, Staff reasons that industrial customers who may
be considering whether to expand in Rochester or to relocate and expand
elsewhere might be induced by lower rates to remain in the RG&E service
territory.  The resulting expansion of facilities and creation of new jobs,
Staff states, would have positive economic impacts for the ratepayers and for
the local community.

       These parties further assert that marginal costs are a rational basis
upon which to set rates, and large customers are contributing revenues
disproportionately in excess of their marginal costs of service relative to
residential and other small customers.

       With respect to the annual $1.50 increase in the monthly customer charges
over the term of the April 8 Settlement, Staff and RG&E readily concede that
about 43% of the residential class would experience bill increases, but they
note that the current customer charge is well below the $20 marginal costs, and
energy prices overall are well above marginal costs, resulting in improper price
signals upon which customers base their decisions. RG&E also notes that its low-
income customers are just as likely to consume more than the average level of
energy as they are to consume less than average.  Therefore, RG&E believes that
the increase in the customer charge will not fall disproportionately on low-
income customers.

       At our October 8, 1997 session, we did not question the rate reductions
for large industrial customers but expressed interest in providing larger rate
decreases to residential and other small customers.  In addition, we asked the
parties to reconsider the customer impact of five annual increases of $1.50

                                       27
<PAGE>
 
CASE 96-E-0898

in the monthly customer charge, but acknowledged that larger rate reductions for
small customer classes might allay this concern.

       RG&E, Staff, and Multiple Intervenors note that the Revised Settlement
would give all service classifications at least a five percent reduction.  They
explain that through reallocation of the SBC funding and the use of Gross
Receipts Tax (GRT) reductions the overall revenue decrease will change from
$27.1 million (4.1%) to $40.6 million (6.1%).  Multiple Intervenors points out
that a disproportionate share of the SBC reallocation (approximately $800,000)
was directed to the residential and small commercial customers.  Staff states
that every class will receive the benefits of the GRT reductions.

       The Attorney General, CPB, Retail Council, PII, PULP, and Mr. Straka
claim that even further reductions are warranted for the residential and small
commercial classes.  PULP maintains the allocation of the revenue decrease is
not balanced and there is no support for the proposition that the industrial
customers are paying a subsidy under current rates.  PII, CPB, and Mr. Straka
also observe that the planned rate reductions for residential and small
commercial customers are back-end loaded, i.e., by year four these customers
                                          ----                              
will receive a 2.62% reduction and then in year five jump to the full decrease
of about 5%.  On the other hand, PII states that the largest industrial
customers will receive 11.2% decreases, or most of their reductions, by year
four.  The Attorney General adds that the flow through of the GRT reductions
would cost RG&E nothing and the rates contained in the Revised Settlement would
still be uncompetitive.

       Mr. Owens, Mr. Straka, and CPB claim that 36% of residential customers
would still receive a bill increase under the Revised Settlement, which they
state is unacceptable. Mr. Owens recommends that the monthly charge increase be
halved to $.75 per year, while CPB would eliminate any increase in this rate.

       As CPB argues, we can consider a number of factors in determining a
proper level of rates.  An important consideration is the competitiveness of
RG&E's rates with those of other areas

                                       28
<PAGE>
 
CASE 96-E-0898

in the nation.  As large industrial customers have the widest array of
competitive alternatives, and are very sensitive to the level of rates, their
rates should be aligned as closely as possible to comparative alternatives.
Under the April 8 Settlement, the large industrial rates would have been
ultimately reduced to $.056 per kWh on average, which approaches the industrial
national average price for electricity of approximately $.046 per kWh.  Under
the Revised Settlement, the industrial rates would be $.055 per kWh.

       However, we find that the residential and small commercial customers/1/
would not receive sufficient revenue reductions under the Revised Agreement.  We
will increase the revenue reductions for those customers from approximately 5.0%
to 7.5% in the final year of the term.  This change requires a corresponding
adjustment to the Revised Settlement's cumulative reduction from $51.1 million
to $64.6 million for July 1, 2001.

       The Revised Settlement provides that, beginning July 1, 1999 and
continuing through June 30, 2002, Incremental Manufacturing Load shall be served
at an average rate of $.059 per kWh.  We adopt this term on the condition that
the average rate instead is $.045 per kWh so that it approximates the national
average rate.

       With respect to the increase in the residential and small commercial
customer charges, we observe that the increases are based on comparisons of
rates and marginal costs, which suggest energy rates should be reduced and that
customer charges may be increased without exceeding cost.  This realignment is
consistent with the coming competitive market for electricity and retailing
services.  We note that the further rate reductions approved for the residential
customers will reduce to 27% the percentage of customers who will receive bill
increases on average.  It should also be noted that the yearly $1.50 increase

-------------------
/1/  Residential and other small users are identified in the Revised Settlement
     schedules by their lower voltage class as "pri-pri," "sec-sec," and 
     "pri-sec."

                                       29
<PAGE>
 
CASE 96-E-0898

in the monthly customer charge had already been approved for the three years
ending June 30, 1999 in the company's last rate proceeding.  The Revised
Settlement reasonably extends the increase for three more years.

       Lastly, PII's opposition to a decrease in energy charges, because of
potential negative environmental impacts, is rejected.  Even with the change,
energy rates will remain above marginal costs and PII has offered no evidence
that environmental impacts are so substantial as to exceed the environmental
thresholds discussed infra.
                     ----- 

                                  THE PROGRAM
                                  -----------
Single Retailer Model/1/
---------------------   

       The single retailer model is the foundation upon which the entire Program
is built.  According to the April 8 Settlement, a single retailer, or LSE, would
purchase power on the open market and distribution access from RG&E.  The LSE
would market the power to customers and would be responsible for scheduling
deliveries based on load shapes or real-time meter data.  Also, for the first
three years of the Program, RG&E would offer billing services to the LSEs so
that they may commence operations without having to wait for development of
their own billing systems.  RG&E would retain ownership of the meters.

       Numerous objections were raised.  The recommended decision considered
many of these but did not address WEPCO's security deposit concerns because the
issue would be the subject of an operating agreement.

       On exception, WEPCO asserts that the single retailer model would preclude
all but the largest LSEs from entering the market because it fears RG&E will
require LSEs to post security deposits, and to participate in service
restoration efforts and

-------------------
/1/  The issue of the applicability of the Home Energy Fair Practices Act to
     single retailers has been considered in another Commission order.  Cases 
     94-E-0952 and 96-E-0898, supra, Order Regarding Regulatory Regime for 
                              -----
     Single Retailer Model (issued December 24, 1997).

                                       30
<PAGE>
 
CASE 96-E-0898

power quality matters.  In lieu of a security deposit, WEPCO proposes a "lock
box" approach, i.e., a shared bank account between the LSE and RG&E.
               ----                                                 

       RG&E responds that these issues should be part of the discussion leading
up to an operating agreement because there are less costly approaches than the
"lock box" approach such as individual guarantees, letters of credit, and escrow
arrangements.  With respect to participation in service restoration and power
quality issues of WEPCO, RG&E argues that these customer contacts are an ongoing
element of being a retailer.

       We agree with the Judge that these issues should be considered in
connection with an operating agreement especially in view of our recent opinion
to require utilities to file tariffs covering various operating procedures./1/
Until the parties have an opportunity to address both the proposed tariffs and
operating agreements, these issues are not ripe for decision.


Implementation Schedule
-----------------------

       As noted above, retail competition would be introduced in stages over
five years, beginning with a one-year Energy Only stage and then a multi-year
Energy and Capacity stage.  The recommended decision supported this approach to
give RG&E sufficient time to overcome problems relating to its nuclear plants
and load pockets.

       A number of parties except.  CPB urges full retail access no later than
one year after the implementation of the independent system operator (ISO).  The
Attorney General believes that an accelerated schedule is needed because the
five-year term would be too restrictive, precluding chances to take advantage of
arising opportunities.  In the meantime, the Attorney General urges that the
1996 Settlement be left in effect, the company be


-------------------
/1/  Case 94-E-0952, In the Matter of Competitive Opportunities Regarding
                     ----------------------------------------------------
Electric Service, Opinion No. 97-5 (issued May 19, 1997), mimeo p. 34.
----------------                                                      

                                       31
<PAGE>
 
CASE 96-E-0898

required to solve its nuclear and load pocket problems, and retail access be
implemented shortly after competition becomes technically feasible.

       IPPNY/Enron and WEPCO assert that RG&E's problems are not technical but
rather financial.  They believe that the problems can be addressed now and the
Program can be accelerated. According to IPPNY/Enron, the April 8 and Revised
Settlements themselves support its statement that there are no technical
impediments because they provide for an accelerated retail access schedule if
the market price for power is above RG&E's back-out rate of $.032 per kWh.
Several parties point to the more rapid introduction of retail access required
in other states as justification for a quicker timetable for RG&E.

       At our October 8, 1997 session, we urged the parties to consider and
explore ways to speed up the introduction of retail access.  We noted that the
April 8 Settlement calls for an accelerated schedule only if a statewide
resolution of nuclear generation issues permitted an earlier placement of such
power on the market, or if market prices for power exceeded $.032 per kWh on a
persistent and sustained basis.  The Revised Settlement contains a new
provision, which establishes a process whereby the parties will meet prior to
July 1, 2000 to assess the feasibility of accelerating retail access.

       Staff believes that this new process is preferable to renegotiating a
number of important provisions related to the retail access schedule.

       CPB, the Attorney General, WEPCO, the Retail Council, and Mr. Straka
disagree.  They assert that the retail access schedule is protracted and will
cause RG&E to fall behind other upstate utilities such as NYSEG and Niagara
Mohawk, which have proposals under which all customers would be eligible for
retail access by the end of 1999.  WEPCO contends that RG&E's nuclear generation
is not a reason to delay implementation of retail access because we indicated
that the State should move toward retail competition with due speed even without
a statewide

                                       32
<PAGE>
 
CASE 96-E-0898

solution to nuclear issues./1/  CPB wants full retail access for RG&E by 1999 or
within 12 months of the implementation of the ISO.

       The Attorney General seeks clarification of the modified language.  It
notes that the provision to consider accelerating retail access could be read as
providing RG&E with veto power concerning any change in the schedule for
implementation of competition, and the Attorney General would rather have us
grant other parties the right to submit a recommendation without RG&E's
concurrence.  In addition, the Attorney General understands that the "risk" that
must be addressed relates to RG&E's profits, which it claims should be
explicitly stated./2/


       We recognize that RG&E is unique among the state utilities in that more
than half its generation is nuclear fueled, and therefore believe that a phase-
in of retail access should be long enough to give RG&E sufficient time to
address this fact.  However, we find the five-year phase-in period for retail
access to be excessive, and conclude that four years should suffice.
Consequently, we will require full implementation for the Program by July 1,
2001, which is one year earlier than provided for in the Revised Settlement.

       The last sentence of (P)52 of the Revised Settlement (which is set forth
in the preceding footnote) provides for a

-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 96-12, mimeo p. 88.
                     -- ---  -----                                 
/2/  The relevant portion of (P)52 of the Revised Settlement is as follows:

     The parties further agree that, prior to July 1, 2000, they shall meet to
     review the progress of retail access under the Program and shall consider
     and recommend to the Commission, as appropriate, any changes to the
     implementation schedule that are determined to be necessary; provided,
     however, that no such changes shall be recommended unless they are revenue
     neutral and do not materially increase the level of risk borne by the
     Company.

                                       33
<PAGE>
 
CASE 96-E-0898

possible increase in the pace of retail access implementation if certain
conditions are met.  In light of our modification of the retail access schedule,
the last sentence is unnecessary, and therefore, is not adopted.

       Not only will full retail access be achieved one year earlier, but also
the effective percentage of retail access available for the non-contract
customers should be greater than identified in the Revised Settlement.  This is
because a large part of RG&E's load is under contract and these contract
customers cannot participate in the Program until their contracts expire.
Consequently, a greater proportion of the non-contract customers will be able to
switch to the Program in the early years.

Delivery Rates
--------------

       The April 8 Settlement includes rates for delivery during both stages of
the Program.  During the Energy Only stage, the distribution access rate would
equal the average rate for bundled retail service less the per-unit retailing
cost and the per-unit energy-related cost of all non-nuclear energy sources,
estimated to be at least $.013 per kWh.

       In the Energy and Capacity stage, the rates charged to LSEs would equal,
on average, the rates for bundled retail service less $.032 per kWh, which
includes retailing cost of $.004 per kWh and the per-unit fixed and variable To-
Go Costs of non-nuclear energy sources, exclusive of a portion of property
taxes.  Twenty percent of the property tax component of the per-unit non-nuclear
To-Go Costs would be deducted from bundled rates upon commencement of the Energy
and Capacity stage and an additional 20% commencing every 12 months thereafter
during the term of the April 8 Settlement.  The actual distribution access rates
would be filed as tariff changes.

       Pursuant to the April 8 Settlement, when the Program is opened to all
retail customers on July 1, 2002,  the company would be authorized to modify its
distribution access rates, so as to hold constant the degree to which its To-Go
Costs are at

                                       34
<PAGE>
 
CASE 96-E-0898

risk for recovery through the market.  The signatories to the April 8 Settlement
agree to meet before July 1, 2001 to discuss the future of these ratemaking
plans.

       The recommended decision found the average rate reasonable and rejected
calls for a higher back-out rate and periodic updating.  However, the
recommended decision found the retailing costs for residential customers is
greater than the average of $.004 per kWh.  Thus, it would require RG&E to
estimate and reflect the actual retailing costs in each class's back-out rate
when it is filed.

       AARP and WEPCO except, arguing the back-out rate is too low and will
inhibit competition.  These parties ask us to order RG&E to reflect the proper
retailing costs in each class's back-out rate.  In addition, WEPCO questions the
justification for an Energy Only stage because the $.013 per kWh is so low that
it is unlikely that LSEs or customers would participate in this stage. WEPCO
supports its argument by pointing to the experience in Orange and Rockland
Utilities' pilot program, which contained an energy-only format.  According to
WEPCO, that program did not produce sufficient savings to warrant participation
by small customers.  WEPCO requests that the initial back-out rate be set at
$.032 per kWh with appropriate updating each year.

       WEPCO also argues that a fixed back-out rate for a period of two to five
years in a highly uncertain environment would entail considerable risks.  If the
fixed back-out rate understates the market price of energy and capacity, WEPCO
claims that a robust competitive retail market will not develop.  When entering
into a highly uncertain situation, WEPCO advises, the best course of action is
to build in checkpoints such as an annual reset of the back-out rate.

       RG&E agrees with WEPCO that the Energy Only stage has limited value, but
observes that until the necessary supporting mechanisms and structures for a
capacity market are in place, capacity charges will be incurred by RG&E, which
it must recover. RG&E opposes an annual update of the $.032 per kWh back-out
rate because (1) a fixed rate will provide competitors with a stable

                                       35
<PAGE>
 
CASE 96-E-0898

target against which to compete and (2) a fixed rate will limit the risk faced
by the company from customer migration to retail access.  Periodic updating,
RG&E notes, would subject it to a variable level of risk and therefore upset the
balance struck by the signatories to the April 8 Settlement.

       Staff maintains that the April 8 Settlement does not preclude update of
the back-out rate if circumstances warrant such action, but agrees that at this
time the overriding concern is to create a stable and certain rate for LSEs.

       With respect to the appropriate level of retailing costs to include in
the back-out rate, Staff and RG&E oppose the recommended decision's proposal to
compute each class's retailing costs.  Staff observes that such a proposal would
add an unwarranted level of complexity in the tariffs.  RG&E maintains that even
if the $.004 per kWh retailing cost is less than actual for the residential
customer class, it does not follow that the overall back-out rate is understated
given that residential customers receive substantial allocations of NYPA
hydropower at low rates.  The net effect, according to the company, is that the
combined cost of energy, capacity, and retailing is approximately equal over all
classes.

       At our October 8, 1997 session, we expressed our desire to have the back-
out rate during the Energy Only stage approximate market energy prices and to
require the company to sell energy at that price.

       According to RG&E, Staff, and Joint Supporters, the Revised Settlement's
back-out rate of $.02305 per kWh (inclusive of $.004 per kWh retailing costs) is
designed to address our concern that the earlier estimated $.013 per kWh back-
out rate was too low to encourage competition.  Staff observes that the
significant increase in the back-out rate also automatically reduces the
delivery rate charged to LSEs.  The proponents further note that RG&E is now
committed to giving LSEs the option of purchasing energy from RG&E at $.01905
per kWh, the energy portion of the back-out rate.  CPB agrees that this rate
appears reasonable.

                                       36
<PAGE>
 
CASE 96-E-0898

       WEPCO acknowledges that the new rate is an improvement, but maintains it
still falls short of WEPCO's estimate of approximately $.028 per kWh for the
wholesale cost of purchasing power.  Consequently, it believes that LSEs will be
forced to purchase power from RG&E.  WEPCO objects to the use of the $.004 per
kWh company-wide average cost of retailing, reiterating its claim that the
actual retailing costs for small customers is higher.  It cites our recent
decision in the Dairylea Case/1/ in which a $.01 per kWh adder was adopted for
small customers.

       We conclude that the Revised Settlement's back-out rate during the Energy
Only stage is acceptable.  The Energy Only stage is expected to be implemented
before the development of a mature statewide energy and capacity market.  In
addition, RG&E should gain valuable experience during the Energy Only stage
because it will provide a controllable and workable environment in which to
prepare for the remaining phase of retail access.  In sum, we are unpersuaded by
WEPCO's objections to the Energy Only stage.

       With respect to the Energy and Capacity stage, the use of the $.032 per
kWh fixed back-out rate should contribute to a stable competitive market because
the rate is based on RG&E's costs and the lack of periodic updating will provide
potential competitors with predictable competitive target back-out and
distribution rates--significant inputs to their price.

       One item still concerns us, however.  The Revised Settlement identifies a
contestable rate of $.032 per kWh, but does not indicate whether GRT is
considered in the derivation of that amount.  We adopt this rate subject to the
clarification that the $.032 rate includes the impact of GRT.

       Finally, the recommended decision's suggestion to reflect actual
retailing costs in each service classification is rejected because it would add
a layer of unnecessary complexity. This complexity would arise not only from the
allocation of

-------------------
/1/  Case 96-E-0948, supra, Order Establishing Retail Access Pilot Program, pp.
                     -----                                                     
     13-16.

                                       37
<PAGE>
 
CASE 96-E-0898

retailing costs themselves, but also from consideration of other class specific
changes that parties would no doubt raise as further refinements.

Other Retail Access Issues
--------------------------

       PULP's claims that we lack the authority (1) to approve general retail
wheeling for all customer classes, and (2) to deregulate new generation
providers.  PULP is essentially repeating the arguments it raised in an Article
78 proceeding challenging Opinion No. 96-12.  The Supreme Court/1/ has rejected
PULP's claims, and they are rejected here based on the rationale set forth in
the Con Edison rate/restructuring decision./2/

       NYPA's and RG&E's exceptions to the recommended decision's refusal to
consider a separate Economic Development Power (EDP) tariff rate are denied.
Since NYPA has no EDP customers in RG&E's service territory and the Revised
Settlement does not address EDP rates, we see no need to address this issue in
this decision.  However, if a customer requests an EDP rate in the future, we
will address the issue at that time.

       CPB's request to require LSEs to provide price information to applicants
in a common format is rejected.  This requirement is unnecessary in a
competitive market where participating marketers have the incentive to show
prospective customers how their prices, however packaged, compare to those
offered by others.

       AARP's call for a fund to establish a POLR that would provide consumers
with electricity at affordable prices is denied.  Recognizing that innovative
POLR pilot programs could be

-------------------
/1/  Energy Association et al. v. Public Service Comm'n, 169 Misc. 2d 924, 933
     --------------------------------------------------                       
     (1996).

/2/  Case 96-E-0897, Consolidated Edison Company of New York, Inc., Opinion and
                     ---------------------------------------------             
     Order Adopting Terms of Settlement Subject to Conditions and 
     Understandings, Opinion No. 97-16 (issued November 3, 1997), mimeo p. 30.

                                       38
<PAGE>
 
CASE 96-E-0898

explored, we have decided that, "[f]or now, the utilities will function as
POLRs."/1/


       AARP, CPB, and PULP also raise a number of concerns about consumer
protections and marketing guidelines.  As these concerns were either already
considered or are the subject of a separate proceeding,/2/ all of these
exceptions are denied.


       Finally, CPB calls for the development of a customer education program
because it believes the April 8 Settlement (and for that matter the Revised
Settlement) does not address this item.  CPB's exception is denied; the Revised
Settlement ((P)73) sets forth the requirement that RG&E file a consumer
education plan.  This Department will also be continuing broad outreach and
education efforts, as well as monitoring and overseeing the utilities' own
outreach and education efforts, which should be considerable.

                              CORPORATE STRUCTURE
                              -------------------

       The Revised Settlement incorporates the April 8 Settlement's provisions
that would require RG&E to functionally separate its existing operations and
structurally separate its ULSE.  In addition, RG&E would be permitted to form a
holding company.  The recommended decision agreed with these proposals because
the high cost of divestiture effectively precludes structural separation,
especially with respect to the company's sizable nuclear assets.  In addition,
the recommended decision found reasonable the principles set forth in the April
8 Settlement relating to affiliate relationships, code of conduct, cost
allocations, protections, and restrictions because they were based on standards
approved in other cases and would permit our review in the event of abuse.
Finally, the recommended decision concluded that no proscriptions, prohibitions
against competition, or royalty payments should be imposed on RG&E


-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 97-5, mimeo p. 43 and Opinion
                     -- ---  -----                                           
     No. 97-17, mimeo p. 21.

/2/  Ibid., p. 26.
     -----        

                                       39
<PAGE>
 
CASE 96-E-0898

because the rate reductions, among other things, are a quid pro quo for the
                                                       ---- --- ---        
benefits the company expects to receive through the operation of its unregulated
businesses.

       The Attorney General and CPB prefer divestiture of generation to prevent
self-dealing and other abuses arising from affiliate relationships.  The
Attorney General fears that Staff may not have the resources to audit
effectively the various transactions among the affiliates.  CPB would extend the
standards for the relationship between distribution entity, i.e., the DISCO and
                                                            ----               
its ULSE, to the DISCO's relationship with the RSLE.  CPB also supports physical
separation.

       WEPCO seeks to prohibit RG&E's unregulated marketing affiliate from using
RG&E's name, relying on the expertise and experience of utility personnel, and
relying on RG&E's financial resources.  Furthermore, WEPCO asks that RG&E's
affiliates be excluded from competing in the service territory for two years or
until 20% of the company's customers are served by LSEs.

       The Attorney General and CPB seek a royalty payment from the unregulated
subsidiaries to compensate the regulated utility for good will that RG&E's name
and affiliation will bring them.

        RG&E has stated that it will transition out of its wholly-owned fossil
and hydro generation over the next several years.  The company plans to retire
or otherwise remove Ginna Station from rate base when its license expires in
2009, and prior to that Ginna Station and Nine Mile 2 are subject to a statewide
resolution of nuclear plant ownership and ratemaking. In view of the relatively
short remaining lives on much of the company's generation, the pending
resolution of nuclear plant issues, and the incentive to divest plants,
functional separation of RG&E's existing operations is accepted.  The structural
separation of its ULSE are subject to the various rules, codes, and restrictions
set forth in the Revised Settlement.  Inasmuch as most of these provisions are
based on standards we established in other proceedings, and are expected to
anticipate likely

                                       40
<PAGE>
 
CASE 96-E-0898

potential abuses, they are adopted without the modifications proposed by CPB.

       RG&E's affiliates will not be prohibited from using the name of RG&E or
competing in the company's service territory, or be required to pay a royalty
for the use of the RG&E name and its affiliation.  These concessions were part
of the give and take in the negotiations and will not be disturbed.

       Finally, whether RG&E conducts its unregulated activities through a
holding company or a separate subsidiary of a utility parent, the company would
be permitted initially to fund its activities in the amount of $50 million under
the terms of the Revised Settlement.  Except for the $50 million, RG&E's
regulated business segments would not be permitted to fund such unregulated
operations, and would neither be allowed to make loans to, nor guarantee or
provide credit support for, the obligations of unregulated affiliates.

       In view of our changes and modifications to the Revised Settlement,
especially the acceleration of the introduction of retail access, and our desire
to bring the benefits of a competitive electric generation industry to New York
consumers, we will increase the maximum for funding for unregulated activities
to $100 million.

                             ENVIRONMENTAL MATTERS
                             ---------------------

       The recommended decision did not support calls for a mandatory disclosure
of generation sources and the imposition of more stringent environmental
requirements on older generation facilities.  We previously considered and
rejected similar requests in a separate proceeding./1/  PII and CPB except,
pointing out that we did not expressly reject these proposals and arguing they
should be considered here.

       PII and CPB are correct in part.  In fact, at our October 8, 1997
session, we directed the parties to consider designing a method of providing
customers with environmental

-------------------
/1/  Case 94-E-0952, supra, Opinion No. 97-5.
                     -----                   

                                       41
<PAGE>
 
CASE 96-E-0898

information.  The Revised Settlement contains language requiring the company to
work with LSEs on developing such environmental information.

       However, we will not impose more stringent emission standards on older
generation facilities.  We view this request by PII as a thinly disguised
attempt to impose new environmental standards on older plants, which will not
likely create a level playing field for competing generation sources.  The fact
that these plants have an advantage in costs attributed to lower emission
standards is but one cost consideration.  PII did not address the total cost,
which includes other factors that may more than offset this advantage.

                            MARKET POWER MITIGATION
                            -----------------------

       During the five-year term, RG&E would be required to maintain its system
in the most cost effective manner, file a market power mitigation plan with the
Federal Energy Regulatory Commission (FERC),/1/ and take appropriate action in
accordance with the outcome of that filing.  The Revised Settlement also
reserves our right to implement market power mitigation measures for retail
service after the five-year term.  The recommended decision found these
provisions reasonable.

       A number of parties raise concerns that anticipate problems related to
market power and load pockets.  In comments on the Revised Settlement, PII
suggests RG&E is only bound to "consider" a range of options to maintain the
reliability of its system.  Accordingly, PII repeats its demand that the company
be "obligated" to undertake various forecasts, load monitoring programs,
evaluations, and implement alternates to major transmission and distribution
additions.

-------------------
/1/  RG&E filed its request to engage in wholesale sales of capacity and energy
     at market based rates with FERC on July 1, 1997 and amended it on July 25,
     1997. RG&E addressed the issue of market power in its request to FERC. By
     order issued September 12, 1997, FERC accepted RG&E's filing.

                                       42
<PAGE>
 
CASE 96-E-0898

       These exceptions are denied without prejudice.  As noted in its FERC
filing, RG&E has committed to implement transmission system upgrades, which by
June 1999 will eliminate load pockets for all but 3% of summer hours.  Moreover,
because RG&E must maintain system reliability within load pockets by operating
its units, the cost of which are already in rates, market power concerns are
mitigated.  Any auction of RG&E generation will be subject to our approval to
ensure, among other things, that any market power concerns are addressed.  If a
specific problem should arise in the meantime, we will address it on an ad hoc
                                                                        -- ---
basis.

                              FINDINGS UNDER SEQRA
                              --------------------

       In conformance with the State Environmental Quality Review Act (SEQRA),
we previously issued a Final Generic Environmental Impact Statement (FGEIS) on
May 3, 1996./1/  We also required individual utilities to file an environmental
assessment of their October 1996 restructuring proposals.  RG&E filed an
Environmental Assessment Form (EAF) concerning the April 8 Settlement on June
24, 1997./2/

       Subsequent to filing of the EAF, PII filed a petition asking that a
Supplemental Environmental Impact Statement be filed.  In its arguments
supporting the petition, PII raised several substantive issues for SEQRA
consideration.  In a June 19, 1997 ruling, Chief Administrative Law Judge Lynch
narrowed the issues needing further consideration in the environmental
assessment.

       The information provided by RG&E in its EAF, the parties' comments, the
Revised Settlement, and other information were evaluated in order to determine
whether the potential impacts resulting from adopting the Revised Settlement's
terms would be within the bounds and thresholds of the FGEIS adopted in


-------------------
/1/  Cases 94-E-0952 et al., supra, Opinion No. 96-12, mimeo pp. 76-81.
                     -- ---  -----                                     
/2/  The final Environmental Assessment Form is Appendix C.

                                       43
<PAGE>
 
CASE 96-E-0898

1996.  The evaluation also considered the conditions and changes to the Revised
Settlement that we adopted at our session on November 25, 1997.

       Arguably, all of the potential impacts need not be considered, given that
some result from Type II exempt rate actions.  Nonetheless, the analysis
examined all areas in which impacts could reasonably be expected.

       No impacts were found to be associated with price cap regulation.  RG&E
currently operates under a form of price cap regulation; the continuation of
this rate setting approach for the regulated transmission and distribution
company, consequently, does not constitute a change induced by competition or by
the Revised Settlement.  Moreover, the possibility of prudence review is seen as
an important deterrent to excessive infrastructure investments as well as an
incentive for promoting the use of targeted DSM as appropriate to avoid
excessive transmission and distribution upgrades.

       No significant impacts were determined to result from either retirement
or new construction of generation as a result of the Revised Settlement.  Also,
the company asserts it has no plans to either retire any of its existing
electric generating facilities or construct new generating facilities as a
consequence of the Revised Settlement.

       The Revised Settlement will not result in significant new transmission
line construction impacts.  The company's 1996 load pocket study indicates that
under high summer usage and equipment failures, load pockets may occur.  An
application filed by the company with FERC (dated July 1, 1997 and amended July
25, 1997) contains RG&E's plan to reinforce its transmission and distribution
system in order to alleviate the two load pockets within its service territory.
The plan notes that with the exception of one new 115 kV transmission line
(under ten miles in length), the construction required will be limited to
capacitor and transformer work within existing substations.

                                       44
<PAGE>
 
CASE 96-E-0898

       Minor localized community economic impacts may occur (e.g. due to reduced
                                                             ----               
tax receipts), but these would be balanced by positive effects in other
localities.

       A greater source of concern is the possible increase in air pollution
that could accompany increased demand for electric energy.  It is likely that
increases in energy demand will result from the Revised Settlement's decrease in
rates (0.56% average annual increase in demand over the 1998-2012 period) and in
DSM expenditures (0.3% increase in demand).  Each of these incremental growth
rates is an upper bound.  For example, it is not clear that all of the rate
reductions from the Revised Settlement should be attributed to restructuring;
also, the lower DSM expenditures do not consider LSEs' DSM spending.  Staff's
opinion is that the actual growth rates will be substantially less than the
corresponding rates in the FGEIS (1% annual incremental growth from the "high
sales" scenario, and 0.29% from the "no incremental utility DSM" scenario).

       Because of the inherent uncertainty in forecasting future impacts, as a
matter of discretion, monitoring of RG&E's restructuring and environmental
impacts is being implemented,/1/ and an SBC is being established.  While
limiting the rate decreases in the Revised Settlement, which were adopted after
extensive negotiations, could mitigate environmental impacts, this would reduce
the economic benefits of the rate reductions to consumers and businesses.  The
mitigation methods we are adopting are reasonable in these circumstances.

       Based on these analyses, the potential environmental impacts of the
Revised Settlement are found to be within the range of thresholds and conditions
set forth in the FGEIS. Therefore, no future SEQRA action is necessary.

-------------------
/1/  November 26 Order, p. 8.

                                       45
<PAGE>
 
CASE 96-E-0898

                                 CONCLUSION
                                 ----------

       Our Settlement Guidelines establish the following standards for assessing
a proposed settlement in light of our obligation to set just and reasonable
rates and a utility's burden, under the Public Service Law, of showing the
reasonableness of a rate change it is proposing:

          a. A desirable settlement should strive for a balance among (1)
             protection of the ratepayers, (2) fairness to investors, and (3)
             the long term viability of the utility; should be consistent with
             sound environmental, social, and economic policies of the Agency
             and the State; and should produce results that were within the
             range of reasonable results that would have arisen from a
             Commission decision in a litigated proceeding.

          b. In judging a settlement, the Commission shall give weight to the
             fact that a settlement reflects the agreement by normally
             adversarial parties./1/

     Generally, we find that the Revised Settlement as modified/2/ provides for
reductions that are reasonable and provide ratepayers significant benefits over
the five-year term.  In addition, ratepayers will no longer be liable for
credits arising from flex-rate discounts and past incentives.  Furthermore, the
rates will be redesigned to more closely reflect marginal costs, which should
not only remove some of the inter- and intra-class return discrepancies, but
also bring the rates close to those expected when the electricity market is
competitive.


     The Program in the Revised Settlement, as modified, is reasonable because
it phases in competition at a pace that will allow RG&E to overcome problems
related to its reliance on

-------------------
/1/  Cases 90-M-0225 et al., supra, Opinion No. 92-2, Appendix B, p. 8.
                     -- ---  -----                                     
/2/  The November 26 Order required RG&E to submit a written statement
     unconditionally accepting the conditions and modification contained 
     therein.  On December 1, 1997, such a statement was duly filed with 
     the Secretary.

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<PAGE>
 
CASE 96-E-0898

nuclear power, gives customers prompt access to a retail electricity market, and
provides for back-out rates at a level that should stimulate competition.

     The proposed restructuring of RG&E in conjunction with the incentives to
operate its generating facilities efficiently, and the safeguards governing the
transactions of the various affiliates, are reasonable as discussed above.
While RG&E's ULSE will benefit by being permitted to use the corporate name and
up to $100 million of funding from the company, the ULSE will be an added source
of competition, the benefits of which should redound to electric consumers.

     Although all of the signatories did not submit their litigation positions,
RG&E did.  It is clear from reviewing the company's October 1, 1996 submission
that RG&E made substantial concession especially with respect to rate
reductions.  Multiple Intervenors notes that it would have argued for larger
rate decreases, a faster phase-in of retail access, and a greater sharing of
stranded costs during the transition period.

     It should also be kept in mind that a number of parties opposed the April 8
Settlement and the Revised Settlement and they litigated their positions.  After
considering the facts and reasons behind their positions, we adopted a number of
modifications to the Revised Settlement.

     In light of all of the above, we adopt the terms of the Revised Settlement
subject to the conditions and changes described above, which were previously
included in the November 26 Order.

The Commission orders:
--------------------- 

     1.  Clauses one through five contained in the Order Adopting Terms of
Settlement Subject to Conditions and Changes (issued November 26, 1997) are
adopted in their entirety and are incorporated as part of this opinion and
order.

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CASE 96-E-0898

     2.  Case 96-E-0898 is continued.
                                            By the Commission,


               (Signed)                      JOHN C. CRARY
                                                Secretary

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