Edgar Filing: CONSOLIDATED EDISON INC

95% Confidence Level,

One-Day Holding Period

(Millions of Dollars)

Average for the period

For the Fiscal Year Ended December 31, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to


Commission File Number	Exact name of registrant as specified in its charter and principal office address and telephone number	State of Incorporation	I.R.S. Employer ID. Number
1-14514	Consolidated Edison, Inc.	New York	13-3965100
	4 Irving Place, New York, New York 10003 (212) 460-4600

1-1217	Consolidated Edison Company of New York, Inc.	New York	13-5009340
	4 Irving Place, New York, New York 10003 (212) 460-4600

Securities Registered Pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Consolidated Edison, Inc.,
Common Shares ($.10 par value) 7.25% Public Income NotES (7.25% Debentures, Series 2002A) due 2042		New York Stock Exchange New York Stock Exchange
Consolidated Edison Company of New York, Inc.,
$5 Cumulative Preferred Stock, without par value		New York Stock Exchange
Cumulative Preferred Stock, 4.65% Series C ($100 par value)		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

Title of each class

Consolidated Edison Company of New York, Inc.

Cumulative Preferred Stock, 4.65% Series D ($100 par value)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Con Edison, Inc. (Con Edison)	Yes	x	No	¨
Con Edison Company of New York, Inc. (Con Edison of New York)	Yes	x	No	¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Con Edison	Yes	¨	No	x
Con Edison of New York	Yes	¨	No	x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Con Edison	Yes	x	No	¨
Con Edison of New York	Yes	x	No	¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Con Edison

Large accelerated filer

Accelerated filer

Non-accelerated filer

Con Edison of New York

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).


Con Edison	Yes	¨	No	x
Con Edison of New York	Yes	¨	No	x

The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2006, was approximately $10.9 billion.

As of January 31, 2007, Con Edison had outstanding 257,647,079 Common Shares ($.10 par value).

All of the outstanding common equity of Con Edison of New York is held by Con Edison.

Documents Incorporated By Reference

Portions of Con Edison’s definitive proxy statement and Con Edison of New York’s definitive information statement, for their respective Annual Meetings of Stockholders to be held on May 21, 2007, to be filed with the Commission pursuant to Regulation 14A and Regulation 14C, respectively, not later than 120 days after December 31, 2006, are incorporated in Part III of this report.

Filing Format

This Annual Report on Form 10-K is a combined report being filed separately by two different registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and, as such, the information in this report about Con Edison of New York also applies to Con Edison. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. However, Con Edison of New York makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.

Table of Contents


		PAGE
Glossary of Terms		4
PART I
ITEM 1.	Business	6
	Con Edison	7
	Con Edison of New York	9
ITEM 1A.	Risk Factors	17
	Con Edison	17
	Con Edison of New York	17
ITEM 1B.	Unresolved Staff Comments	17
	Con Edison	17
	Con Edison of New York	17
ITEM 2.	Properties	17
	Con Edison	17
	Con Edison of New York	17
	O&R	17
ITEM 3.	Legal Proceedings	18
	Con Edison	18
	Con Edison of New York	18
ITEM 4.	Submission of Matters to a Vote of Security Holders	22
	Executive Officers of the Registrant	22
	Con Edison	22
	Con Edison of New York	22
PART II
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
	Con Edison	24
	Con Edison of New York	24
ITEM 6.	Selected Financial Data	25
	Con Edison	25
	Con Edison of New York	25
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Con Edison	26
	Con Edison of New York	26
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	56
	Con Edison	56
	Con Edison of New York	56
ITEM 8.	Financial Statements and Supplementary Data	57
	Con Edison	57
	Con Edison of New York	57
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	117
	Con Edison	117
	Con Edison of New York	117
ITEM 9A.	Controls and Procedures	117
ITEM 9B.	Other Information	117
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	118
ITEM 11.	Executive Compensation	118
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	118
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	118
ITEM 14.	Principal Accounting Fees and Services	118
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	120
	Signatures	127

Glossary of Terms

The following is a glossary of frequently used abbreviations or acronyms that are found in the Companies’ SEC reports:


Con Edison Companies
Con Edison		Consolidated Edison, Inc.
Con Edison Communications		Con Edison Communications, LLC
Con Edison Development		Consolidated Edison Development, Inc.
Con Edison Energy		Consolidated Edison Energy, Inc.
Con Edison of New York		Consolidated Edison Company of New York, Inc.
Con Edison Solutions		Consolidated Edison Solutions, Inc.
O&R		Orange and Rockland Utilities, Inc.
Pike		Pike County Light & Power Company
RECO		Rockland Electric Company
The Companies		Con Edison and Con Edison of New York
The Utilities		Con Edison of New York and O&R

Regulatory and State Agencies
DEC		New York State Department of Environmental Conservation
EPA		Environmental Protection Agency
FERC		Federal Energy Regulatory Commission
IRS		Internal Revenue Service
ISO-NE		ISO New England
NJBPU		New Jersey Board of Public Utilities
NJDEP		New Jersey Department of Environmental Protection
NYAG		New York Attorney General
NYISO		New York Independent System Operator
NYPA		New York Power Authority
NYSERDA		New York State Energy Research and Development Authority
NYSRC		New York State Reliability Council
PJM		PJM Interconnection
PSC		New York State Public Service Commission
PPUC		Pennsylvania Public Utility Commission
SEC		Securities and Exchange Commission

Other
ABO		Accumulated Benefit Obligation
APB		Accounting Principles Board
AFDC		Allowance for funds used during construction
CO₂		Carbon dioxide
COSO		Committee of Sponsoring Organizations Treadway Commission
DIG		Derivatives Implementation Group
District Court		The United States District Court for the Southern District of New York
dths		Dekatherms
EITF		Emerging Issues Task Force
EMF		Electric and magnetic fields
ERRP		East River Repowering Project
FASB		Financial Accounting Standards Board
FIN		FASB Interpretation No.
Fitch		Fitch Ratings
FSP		FASB Staff Position
GHG		Greenhouse gases
kV		Kilovolts
kWh		Kilowatt-hour
LILO		Lease In/Lease Out


Other
LTIP		Long Term Incentive Plan
MD&A		Management’s Discussion and Analysis of Financial Condition and Results of Operations
mdths		Thousand dekatherms
MGP Sites		Manufactured gas plant sites
mmlbs		Million pounds
Moody’s		Moody’s Investors Service
MVA		Megavolt amperes
MW		Megawatts or thousand kilowatts
MWH		Megawatt hour
NUGs		Non-utility generators
OCI		Other Comprehensive Income
PCBs		Polychlorinated biphenyls
PPA		Power purchase agreement
PRP		Potentially responsible party
S&P		Standard & Poor’s Rating Services
SFAS		Statement of Financial Accounting Standards
SO₂		Sulfur dioxide
SSCM		Simplified service cost method
Superfund		Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes
VaR		Value-at-Risk
VIE		Variable interest entity

PART I

ITEM 1.

BUSINESS


CONTENTS OF ITEM 1		PAGE
Incorporation By Reference
Available Information
Con Edison	Corporate Overview	7
	Operating Segments	7
	Con Edison of New York	7
	O&R	7
	Competitive Energy Businesses	7
	Regulation	8
	Competition	8
	Capital Requirements and Financing	8
	State Anti-takeover Law	8
	Employees	9
Con Edison of New York	Corporate Overview	9
	Operating Segments	9
	Electric Operations	9
	Gas Operations	10
	Steam Operations	10
	Regulation	11
	Competition	11
	Capital Requirements and Financing	11
	Environmental Matters	11
Operating Statistics	Con Edison of New York	13
	O&R	15

Incorporation by Reference

Information in other Items of this report as to which reference is made in this Item 1 is hereby incorporated by reference in this Item 1. The use of terms such as “see” or “refer to” shall be deemed to incorporate into this Item 1 the information to which such reference is made.

Available Information

Con Edison, and Con Edison of New York file annual, quarterly and current reports, proxy or information statements and other information with the Securities and Exchange Commission (SEC). The public may read and copy any materials that the companies file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers (including Con Edison and Con Edison of New York) that file electronically with the SEC. The address of that site is http://www.sec.gov.

This information the Companies file with the SEC is also available free of charge on or through the Investor Information section of their websites as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the SEC. Con Edison’s internet website is at: http://www.conedison.com; and Con Edison of New York’s is at: http://www.coned.com.

The Investor Information section of Con Edison’s website also includes the company’s code of ethics (and amendments or waivers of the code for executive officers or directors), corporate governance guidelines and the charters of the following committees of the company’s Board of Directors: Audit Committee, Management Development and Compensation Committee, and Corporate Governance and Nominating Committee. This information is available in print to any shareholder who requests it. Requests should be directed to: Corporate Secretary, Consolidated Edison, Inc., 4 Irving Place, New York, NY 10003.

Information on the Companies’ websites is not incorporated herein.

Con Edison

Corporate Overview

Consolidated Edison, Inc. (Con Edison), incorporated in New York State in 1997, owns all of the outstanding common stock of Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Con Edison of New York and O&R, which are regulated utilities, are referred to in this report as the “Utilities.” As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. Con Edison has no significant business operations other than those of the Utilities and Con Edison’s competitive energy businesses. See “Corporate Overview” in Item 7.

Operating Segments

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility segments, O&R’s regulated electric and gas utility segments and Con Edison’s competitive energy businesses. For a discussion of operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional segment information see Note N to the financial statements in Item 8.

Con Edison of New York

For information about Con Edison of New York, see below in this Item 1.

O&R

O&R, a subsidiary of Con Edison, has two wholly-owned utility subsidiaries, Rockland Electric Company (RECO), a New Jersey corporation, and Pike County Light & Power Company (Pike), a Pennsylvania corporation.

O&R and its utility subsidiaries provide electric service in southeastern New York and in adjacent areas of northern New Jersey and eastern Pennsylvania, an approximately 1,350 square mile service area. They also provide gas service in southeastern New York and adjacent areas of eastern Pennsylvania. O&R’s business is subject to regulation by the New York State Public Service Commission (PSC), the New Jersey Board of Public Utilities (NJBPU), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). Changes in regulation or legislation applicable to O&R could have a material adverse effect on the company’s financial position, results of operations or liquidity. O&R’s principal business segments are its regulated electric and gas utility businesses. In 2006, electric and gas operating revenues were 71 percent and 29 percent, respectively, of its operating revenues. See “O&R Operating Statistics” below.

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly owned subsidiaries: Consolidated Edison Development, Inc. (Con Edison Development), Consolidated Edison Energy, Inc. (Con Edison Energy) and Consolidated Edison Solutions, Inc. (Con Edison Solutions).

Con Edison Development owns, leases or operates energy and infrastructure projects, principally in the United States. Substantially all of its electric generation facilities are located in New England and the PJM markets. See Item 2 for information about the company’s 1,668 MW of generating capacity. Con Edison Development sells capacity and energy in wholesale markets administered by independent system operators in New England, New York and PJM. The company also sells capacity and energy to other utilities through its affiliate Con Edison Energy by participating in auctions for basic generation service or other wholesale supply transactions. These markets have developed significantly as states have opened their wholesale markets to competition.

Con Edison Development has investments in two “Lease In/ Lease Out” (LILO) transactions—see Note J to the financial statements in Item 8. These leases involve gas distribution and electric generating facilities in the Netherlands. Additionally, Con Edison Development has invested in tax-advantaged leases under Section 42 of the Internal Revenue Code. See “Affordable Housing program” in Note H to the financial statements in Item 8.

Con Edison Energy markets the electric production of Con Edison Development’s generation facilities and manages the fuel supply for those facilities. It also supplies electricity to wholesale customers and it procures electricity for Con Edison Solutions.

Con Edison Solutions was reported by KEMA consulting in 2006, as the ninth largest non-residential retail electricity provider in the United States. The company primarily sells electricity to industrial and large commercial customers and also to residential customers in the northeastern United States. At December 31, 2006, it served approximately 43,000 customers, not including 162,000 served under a single aggregation agreement in Massachusetts. Con Edison Solutions sold 10.6 million MWHs of electricity in 2006, a seven percent increase over 2005 volumes.

Con Edison Solutions seeks to serve customers in utility service territories that encourage retail competition through transparent pricing, purchase of receivables or utility-sponsored customer acquisition programs. The company currently sells electricity in the service territories of 29 utilities in the states of New York,

Massachusetts, Connecticut, New Hampshire, New Jersey, Delaware, Maryland and Texas and the District of Columbia.

Industrial and large commercial customers had contracted for 2,900 MWs of peak supply as of the end of 2006. Most of the sales volumes were contracted by customers in New York, with essentially all of the remainder in New England and the Mid-Atlantic States. Con Edison Solutions entered the retail electricity supply market in Texas in 2006, but volumes remain small.

Con Edison Solutions offers the choice of green power to customers. In 2006 it sold 50,000 MWHs of green power, ending the year with almost 8,000 customers. Green power is a term used by electricity suppliers to describe electricity produced from renewable energy sources, including wind, hydro and solar.

Con Edison Solutions also provides energy-efficiency services to government and commercial customers in the northeastern United States. The services include the design and installation of lighting retrofits, high-efficiency heating, ventilating and air conditioning equipment and other energy saving technologies. The company is compensated based primarily on the increased energy efficiency of installed equipment over a multi-year period. Con Edison Solutions has won competitive solicitations for energy savings contracts with Con Edison of New York and a shared energy savings contract with the United States Postal Service.

The competitive energy businesses’ generating capacity owned or leased, sales and customers were as follows:


	2006		2005		2004	2003	2002
Generating capacity (MW)	1,668		1,668		1,668	1,668	1,003
Generation sold (MWH)	3,154,988		3,602,727		3,397,007	2,064,259	1,534,711
Wholesale electricity sales	6,548,658		1,288,696		1,907,302	2,000,000	540,500
Retail electric volumes sold (MWH)	10,633,151		9,970,252		6,943,299	6,002,126	4,723,588
Number of retail customers accounts:
Industrial and large commercial	10,957	*	5,775	*	3,913	3,469	3,103
Mass market	31,725		24,989		24,242	26,738	29,775

*	Excludes aggregation agreement customers.

Regulation

The Utilities are subject to extensive federal and state regulation, including by state utility commissions and the FERC. Con Edison, itself, is not subject to such regulation except to the extent that the rules or orders of these agencies impose restrictions on relationships between Con Edison and the Utilities. See “Regulation” in the discussion below of Con Edison of New York’s business in this Item 1.

Con Edison has been and is expected to continue to be impacted by legislative and regulatory developments. The Utilities are subject to extensive regulation in New York, New Jersey and Pennsylvania. Changes in regulation or legislation applicable to Con Edison’s subsidiaries could have a material adverse effect on the Companies. See “Regulatory Matters” in Item 7.

Competition

See “Competition,” below in the discussion of the businesses of Con Edison of New York in this Item 1. The competitive energy businesses participate in competitive energy supply and services businesses that are subject to different risks than those found in the businesses of the Utilities.

Capital Requirements and Financing

For information about Con Edison’s capital requirements, financing and securities ratings, see “Liquidity and Capital Resources—Capital Resources and Capital Requirements” and “Financial and Commodity Market Risks” in Item 7.

State Anti-takeover Law

New York State law provides that a “domestic corporation,” such as Con Edison, may not consummate a merger, consolidation or similar transaction with the beneficial owner of a 20 percent or greater voting stock interest in the corporation, or with an affiliate

of the owner, for five years after the acquisition of the voting stock interest, unless the transaction or the acquisition of the voting stock interest was approved by the corporation’s board of directors prior to the acquisition of the voting stock interest. After the expiration of the five-year period, the transaction may be consummated only pursuant to a stringent “fair price” formula or with the approval of a majority of the disinterested stockholders.

Employees

Con Edison has no employees other than those of Con Edison of New York, O&R and Con Edison’s competitive energy businesses (which at December 31, 2006 had 13,500, 1,049 and 246, employees, respectively). The collective bargaining agreements covering most of the employees of Con Edison of New York and O&R expire in June 2008 and June 2009, respectively.

Con Edison of New York

Corporate Overview

Con Edison of New York, incorporated in New York State in 1884, is a subsidiary of Con Edison and has no significant subsidiaries of its own. Con Edison of New York provides electric service in all of New York City (except part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million. It also provides gas service in Manhattan, the Bronx and parts of Queens and Westchester, and steam service in parts of Manhattan.

Operating Segments

Con Edison of New York’s principal business segments are its regulated electric, gas and steam businesses. In 2006, electric, gas and steam operating revenues were 76 percent, 17 percent and 7 percent, respectively, of its operating revenues. For a discussion of the company’s operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional information about the segments, see Note N to the financial statements in Item 8.

Electric Operations

Electric Sales. Electric operating revenues were $7 billion in 2006 or 76 percent of Con Edison of New York’s operating revenues. The percentages were 75 and 77 percent, respectively, in the two preceding years. In 2006, 46 percent of the electricity delivered by Con Edison of New York in its service area was sold by the company to its full-service customers, 34 percent was sold by other suppliers, including Con Edison Solutions, a competitive energy business of Con Edison, to Con Edison of New York’s customers under its electric retail access program and the balance was delivered to the state and municipal customers of the New York Power Authority (NYPA) and the economic development customers of municipal electric agencies. The company charges its cost for the electricity it sells to full-service customers, and it charges all customers in its service area for the delivery of electricity.

For additional information about electricity sales, see “Con Edison of New York Operating Statistics,” below, and “Results of Operations” in Item 7.

Electric Peak Demand. The electric peak demand in Con Edison of New York’s service area occurs during the summer air conditioning season. The 2006 service area peak demand, which occurred on August 2, 2006, was 13,141 thousand kilowatts (MW). The 2006 peak demand included an estimated 6,690 MW for Con Edison of New York’s full-service customers, 4,505 MW for customers participating in its electric retail access program and 1,946 MW for NYPA’s customers and municipal electric agency customers. On August 2, 2006, the New York Independent System Operator (NYISO) invoked demand reduction programs. Without these reduction programs, the actual 2006 peak demand would have been higher. “Design weather” for the electric system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. Since the majority of demand reduction programs are invoked only in specific circumstances, design conditions do not include these programs’ potential impact. The company estimates that, under design weather conditions, the 2007 service area peak demand will be 13,575 MW, including an estimated 6,550 MW for its full-service customers, 4,935 MW for its electric retail access customers and 2,090 MW for NYPA’s customers and municipal electric agency customers.

Electric Supply. Most of the electricity sold by Con Edison of New York to its customers in 2006 was purchased under firm power contracts or through the wholesale electricity market administered by the NYISO.

The company plans to meet its continuing obligation to supply electricity to its customers with electric energy purchased under contracts with NUGs or others, purchased through the NYISO’s wholesale electricity or generated from its electric generating facilities.

For additional information about electric power purchases, see “Regulatory Matters” and “Electric Power Requirements” in Item 7 and “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

For information about the company’s contracts with NUGs for approximately 3,576 MW of electric generating capacity, see Note I to the financial statements in Item 8.

For information about the company’s 709 MW of electric generating facilities, see Item 2.

In 2002, the Governor of New York set a goal of having 25 percent of the electricity used in New York provided by renewable resources by 2013. In September 2004, the PSC issued an order, which provides that by 2013, 23.5 percent of

the State’s energy needs would come from large renewable facilities such as wind, hydro, and biomass, 1 percent would come from green marketing efforts, and the remaining 0.5 percent is expected to come from on-site generation, limited to solar, fuel cells, and wind farms less than 300 kW in size. The PSC agreed with the Utilities that the responsibility for procuring the new renewable resources would rest with the New York State Energy Research and Development Authority (NYSERDA), and not the Utilities. NYSERDA is expected to enter into long-term agreements with developers that will pay renewable premiums to finance the construction of renewable projects. The renewable premiums plus NYSERDA’s administrative fee are financed through a volumetric wires charge imposed on the delivery customers of each of the state’s utilities. Pursuant to the PSC order, Con Edison and Con Edison of New York billed customers renewable portfolio standard surcharges of $12 and $11 million in 2006, respectively, and $2 million each in 2005.

New York Independent System Operator. The NYISO is a not-for-profit organization that controls and operates most of the electric transmission facilities in New York State, including those of Con Edison of New York, as an integrated system and administers wholesale markets for electricity in New York State. Pursuant to a requirement that is set annually by the New York State Reliability Council (NYSRC), the NYISO requires that entities supplying electricity to customers in New York State have generating capacity (either owned or contracted for) in an amount above the expected peak demand for their customers. NYSRC set the margin at 18 percent in 2006 and, subject to approval by the appropriate regulatory agency at 16.5 percent for 2007. In addition, the NYISO has determined that entities that serve customers in New York City must have enough New York City-located capacity to cover a substantial percentage of their New York City customer peak demands. Con Edison of New York met the requirements applicable to it in 2006 and expects to meet them in 2007. As transmission owners participating in the NYISO, the Utilities may be required to construct and/or fund projects that resulted from the NYISO’s planning process and are approved by FERC.

Gas Operations

Gas Sales. Gas operating revenues in 2006 were $1.6 billion or 17 percent of Con Edison of New York’s operating revenues. The percentages were 18 and 16 percent in the two preceding years. In 2006, 36 percent of the gas delivered by the company in its service area was sold by the company to its full-service (firm and interruptible) customers and 64 percent was sold by other suppliers. For additional information about gas sales, see “Con Edison of New York Operating Statistics,” below, and “Results of Operations” in Item 7.

Gas Requirements and Peak Demand. Firm demand for gas in Con Edison of New York’s service area peaks during the winter heating season. The “design criteria” for the company’s gas system assume severe weather conditions, which have not occurred since the 1933-34 winter. Under these criteria, the company estimated that its requirements to deliver gas to firm customers during the November 2006/March 2007 winter heating season would amount to 95,400 mdths (including 69,800 mdths to its firm sales customers and 25,600 mdths to its firm transportation customers). Through January 31, 2007, the company’s peak throughput day in this heating season occurred on January 10, 2007, when it delivered 1,212 mdths of gas (including 494 mdths to its firm and interruptible sales customers, 99 mdths to NYPA, 473 mdths to its transportation customers and 146 mdths for use by the company in generating electricity and steam).

Under its design criteria, the company projects that for the November 2007/March 2008 winter heating season, its requirements for firm gas customers will amount to 97,900 mdths (including 68,500 mdths to firm sales customers and 29,400 mdths to firm transportation customers) and that the peak day requirements for these customers will amount to 1,112 mdths. The company expects to be able to meet these requirements.

Gas Supply. Con Edison of New York and O&R have established a combined gas supply and capacity portfolio. The combined portfolio is administered by, and related management services are provided by, Con Edison of New York (for itself and as agent for O&R) and costs are allocated between the Utilities in accordance with provisions approved by the PSC. See Note R to the financial statements in Item 8.

Charges from suppliers for the firm purchase of gas, which are based on formulas or indexes or are subject to negotiation, are generally designed to approximate market prices. The contracts are for various terms extending to 2011. The Utilities have contracts with interstate pipeline companies for the purchase of firm transportation and storage services. Charges under these contracts are approved by the FERC. The contracts are for various terms extending to 2013. The Utilities are required to pay certain charges under the supply, transportation and storage contracts whether or not the contracted capacity is actually used. These fixed charges amounted to approximately $159 million in 2006, including $128 million for Con Edison of New York. See “Liquidity and Capital Resources – Contractual Obligations” in Item 7. In addition, the Utilities purchase gas on the spot market and have interruptible gas transportation contracts. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

Steam Operations

Steam Sales. Con Edison of New York sells steam in Manhattan south of 96^th Street, mostly to large office buildings, apartment houses and hospitals. In 2006, steam operating

revenues were $623 million or 7 percent of the company’s operating revenues. The percentages were 7 percent in the two preceding years.

For additional information about Con Edison of New York’s steam operations, see “Regulatory Matters” and “Results of Operations” in Item 7, the discussion of Con Edison of New York’s steam facilities in Item 2 and “Con Edison of New York Operating Statistics,” below.

Steam Peak Demand and Capacity. Demand for steam in Con Edison of New York’s service area peaks during the winter heating season. The one-hour peak demand during the winter of 2006/2007 (through January 31, 2007) occurred on January 26, 2007 when the demand reached 8.8 million pounds (mmlbs) per hour. The company’s estimate for the winter of 2007/2008 peak demand of its steam customers is 10.5 mmlbs per hour under design criteria, which assume severe weather.

On December 31, 2006, the steam system had the capability of delivering about 12.9 mmlbs of steam per hour and Con Edison of New York estimates that the system will have the capability to deliver this capacity in the 2007/2008 winter.

Steam Supply. Forty-five percent of the steam sold by Con Edison of New York in 2006 was produced in the company’s steam-only generating stations; 37 percent was produced in the company’s steam/electric generating stations, where it is first used to generate electricity; and 18 percent was purchased from others. See Item 2 for a discussion of Con Edison of New York’s steam facilities.

Regulation

The PSC regulates, among other things, Con Edison of New York’s electric, gas and steam rates, the siting of its transmission lines and the issuance of its securities. Certain activities of the company are subject to the jurisdiction of the FERC. In addition, various matters relating to the construction and operations of the company’s facilities are subject to regulation by other governmental agencies. Changes in regulation or legislation applicable to the company could have a material adverse effect on the company. For additional information, including information about the company’s electric, gas and steam rates, see “Regulatory Matters” in Item 7.

The PSC from time to time conducts “generic” proceedings to consider issues relating to all electric and gas utilities operating in New York State. Pending proceedings include those relating to utilities exiting the business of selling electric energy and gas at retail (including an examination of utilities’ provider of last resort responsibility and consumer protections) and addressing any rate disincentives to the promotion of energy efficiency and distributed generation. The company typically is an active participant in such proceedings. The company does not expect that the pending generic proceedings will have a material adverse effect on its financial position, results of operation or liquidity.

Competition

Con Edison of New York is primarily a “wires and pipes” energy delivery company that:

–	has sold most of its electric generating capacity;

–	provides its customers the opportunity to buy electricity and gas from other suppliers;

–	purchases substantially all of the electricity and all of the gas it sells to its full-service customers (the cost of which is recovered pursuant to provisions approved by the PSC); and

–	provides energy delivery services to customers pursuant to rate provisions approved by the PSC.

See “Rate Agreements” in Note B and “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

Competition from suppliers of oil and other sources of energy, including distributed generation (such as fuel cells and micro-turbines) may provide alternatives for Con Edison of New York delivery customers. The company does not consider it reasonably likely that another company would be authorized to provide utility delivery service where the company already provides service. Any such other company would need to obtain PSC consent, satisfy applicable local requirements and install facilities to provide the service. A new company would also be subject to extensive ongoing regulation by the PSC.

Capital Requirements and Financing

For information about Con Edison of New York’s capital requirements, financing and securities ratings, see “Liquidity and Capital Resources—Capital Resources” and “Capital Requirements” and “Financial and Commodity Market Risks” in Item 7.

Environmental Matters

Hazardous substances, such as asbestos, polychlorinated biphenals (PCBs) and coal tar, have been used or generated in the course of operations of Con Edison of New York and its predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored. See “Asbestos” and “Superfund” in the discussion of Con Edison of New York’s legal proceedings in Item 3 and Note G to the financial statements in Item 8.

Con Edison of New York’s capital expenditures for environmental protection facilities and related studies were $80 million in 2006 and are estimated to be $86 million in 2007.

Toxic Substances Control Act. Virtually all electric utilities, including Con Edison of New York, own equipment containing PCBs. PCBs are regulated under the Federal Toxic Substances Control Act of 1976.

Water Quality. Certain governmental authorities are investigating contamination in the Hudson River and the New York Harbor. These waters run through portions of Con Edison of New York’s service area. Governmental authorities could require entities that released hazardous substances that contaminated these waters to bear the cost of investigation and remediation, which could be substantial.

Greenhouse Gas Emissions. The potential for adverse effects from global warming associated with the atmospheric release of greenhouse gases (GHG), particularly carbon dioxide (CO₂), from industrial sources may result in legislation or regulations requiring utilities to reduce GHG emissions from power plants and take other steps to offset GHG emissions from other sources. Several bills have been introduced in Congress that would limit GHG emissions. Beginning in 2009, both Con Edison of New York and Con Edison Development will be subject to CO₂ emissions restrictions being established under the Regional Greenhouse Gas Initiative. The Regional Greenhouse Gas Initiative is a cooperative effort by Northeastern and Mid-Atlantic states to reduce carbon dioxide emissions resulting from the generation of electricity. Also, New York City recently announced a goal to reduce GHG emissions by the year 2030 by greater than 30 percent. The impacts of these initiatives are currently not defined, but have the potential to be material. Con Edison of New York minimizes GHG emissions from its generating plants through the use of oil and gas fuels and the application of cogeneration technologies that reduce GHG emissions per unit of energy output. The company’s GHG emissions also include sulfur hexafluoride (used for arc suppression at substations) and methane (from operation of its gas delivery system), which the company is working voluntarily with the EPA to reduce. The cost to comply with any new legislation or regulations limiting the company’s GHG emissions could be substantial.

Operating Statistics

The following tables contain operating statistics for Con Edison of New York and O&R.

Con Edison of New York

Operating Statistics


	Year Ended December 31,
	2006	2005	2004	2003	2002
ELECTRIC ENERGY (MWH)
Generated	2,785,602	2,261,680	1,441,498	1,077,681	1,259,533
Purchased from others	25,282,216	29,055,402	30,221,137	31,717,254	32,712,723
Total Generated and Purchased	28,067,818	31,317,082	31,662,635	32,794,935	33,972,256
Less: Used by company	162,449	178,406	168,533	175,965	172,873
Distribution losses and other variances	1,028,512	1,794,724	1,623,682	1,893,403	2,008,530
Net Generated and Purchased	26,876,857	29,343,952	29,870,420	30,725,567	31,790,853
Electric Energy Sold
Residential	12,589,961	13,689,870	12,672,847	12,440,663	12,481,689
Commercial and industrial	13,409,474	15,402,396	16,966,448	18,033,468	19,110,770
Railroads and railways	13,217	16,847	19,308	18,193	55,186
Public authorities	88,061	234,839	209,699	135,758	125,651
Con Edison of New York full service customers	26,100,713	29,343,952	29,868,302	30,628,082	31,773,296
Off-System Sales	776,144	-	2,118	97,485	17,557
Total Electric Energy Sold	26,876,857	29,343,952	29,870,420	30,725,567	31,790,853
Electric Energy Delivered
Con Edison of New York full service customers	26,100,713	29,343,952	29,868,302	30,628,082	31,773,296
Delivery service for retail access customers	19,256,268	16,847,745	14,143,045	12,636,520	11,925,752
Delivery service to NYPA customers and others	10,194,775	10,423,616	10,034,301	9,823,018	9,504,526
Delivery service for municipal agencies	723,905	720,757	696,041	647,388	762,660
Total Deliveries in Franchise Area	56,275,661	57,336,070	54,741,689	53,735,008	53,966,234
Average Annual KWH Use per Residential Customer (a)	4,613	5,052	4,700	4,622	4,652
Average Revenue per KWH Sold (Cents)
Residential (a)	20.9	21.1	18.9	19.4	17.0
Commercial and Industrial (a)	18.3	18.6	16.0	16.3	14.4

(a)	Includes Municipal Agency sales.

Con Edison of New York

Operating Statistics – Continued


	Year Ended December 31,
	2006			2005			2004			2003			2002
GAS (DTH)
Purchased		133,395,510			147,855,203			137,605,722			145,325,065			134,126,768
Storage—net change		(8,294,717	)		(5,041,321	)		(1,331,154	)		(5,516,703	)		5,728,684
Used as boiler fuel at Electric and Steam Stations		(38,061,392	)		(35,820,239	)		(29,435,890	)		(27,362,620	)		(29,386,788	)
Gas Purchased for Resale		87,039,401			106,993,643			106,838,678			112,445,742			110,468,664
Less: Gas used by the company		120,626			366,780			364,142			383,312			323,915
Off-System Sales & NYPA		724,748			6,449,725			6,062,145			4,007,592			16,120,307
Distribution losses and other variances		2,340,000			2,074,000			2,769,000			4,023,631			4,555,763
Total Gas Purchased for Con Edison of New York Customers		83,854,027			98,103,138			97,643,391			104,031,207			89,468,679
Gas Sold
Firm Sales
Residential		40,589,064			48,175,004			48,569,514			51,943,706			44,162,920
General		31,269,464			36,800,299			35,886,544			36,840,304			32,681,926
Total Firm Sales		71,858,528			84,975,303			84,456,058			88,784,010			76,844,846
Interruptible Sales		11,995,499			13,127,835			13,187,333			15,247,197			12,623,833
Total Gas sold to Con Edison of New York Customers		83,854,027			98,103,138			97,643,391			104,031,207			89,468,679
Transportation of customer-owned gas
Firm transportation		23,687,707			19,087,650			16,795,124			16,485,309			15,695,403
NYPA		41,057,320			22,305,249			18,622,910			23,360,162			25,466,325
Other		83,687,918			66,667,025			63,306,409			61,575,954			99,815,203
Off-System Sales		691,321			127,696			266,907			459,088			8,354,940
Total Sales and Transportation		232,978,293			206,290,758			196,634,741			205,911,720			238,800,550
Average Revenue per DTH Sold
Residential	$	19.24		$	16.94		$	13.94		$	13.02		$	12.30
General	$	15.07		$	13.41		$	10.75		$	10.23		$	8.90
Steam Sold (MLBS)		23,250,064			26,876,883			26,128,644			26,248,361			24,519,476
Average Revenue per MLB Sold	$	25.71		$	22.77		$	20.34		$	19.47		$	15.52
Customers – Average for Year
Electric		3,203,541			3,176,355			3,152,023			3,137,301			3,117,542
Gas		1,058,816			1,054,981			1,053,698			1,053,946			1,054,312
Steam		1,780			1,796			1,811			1,825			1,838

O&R

Operating Statistics


	Year Ended December 31,
	2006	2005		2004	2003	2002
ELECTRIC ENERGY (MWH)
Total Purchased	4,099,968	4,348,953		4,113,111	4,388,804	4,506,217
Less: Supplied without direct charge	-	-		7	11	9
Used by company	13,539	15,068		14,174	15,511	13,435
Distribution losses and other variances	76,455	38,585	(a)	217,036	215,615	173,397
Net Purchased	4,009,974	4,295,300		3,881,894	4,157,667	4,319,376

Electric Energy Sold
Residential	1,802,574	1,904,884		1,729,095	1,769,421	1,815,241
Commercial and industrial	2,093,880	2,276,161		2,045,800	2,276,973	2,393,039
Public authorities	113,520	114,255		106,999	111,273	111,096
Total Electric Energy Sold	4,009,974	4,295,300		3,881,894	4,157,667	4,319,376
Total deliveries to O&R customers	4,009,974	4,295,300		3,881,894	4,157,667	4,319,376
Delivery service for Retail Choice customers	1,765,958	1,835,948		1,860,661	1,454,794	1,235,048
Total Deliveries In Franchise Area	5,775,932	6,131,248		5,742,555	5,612,461	5,554,424
Average Annual KWH Use Per Residential Customer	8,979	9,657		8,818	8,955	8,801
Average Revenue Per KWH Sold (Cents)
Residential	13.98	13.34		12.35	12.17	11.23
Commercial and Industrial	11.34	10.90		9.89	9.81	8.65

(a)	Includes one-time unbilled sales adjustment of 89,331 MWH recorded in March 2005.

2006 also included an unbilled sales adjustment of 22,510 MWH recorded in March 2006

O&R

Operating Statistics — Continued


	Year Ended December 31,
	2006		2005		2004		2003		2002
GAS (DTH)
Purchased		12,173,028		15,208,262		15,732,315		16,546,568		19,723,917
Storage – net change		409,333		121,547		373,271		1,112,011		(2,139,045	)
Gas Purchased For Resale		12,582,361		15,329,809		16,105,586		17,658,579		17,584,872
Less: Gas used by the company		37,630		48,410		58,823		52,377		56,939
Distribution losses and other variances		294,343		727,243		1,017,134		376,605		856,036
Total Gas Purchased For O&R Customers		12,250,388		14,554,156		15,029,629		17,229,597		16,671,897
Gas Sold
Firm Sales
Residential		7,758,439		9,306,592		9,486,765		10,810,384		10,203,403
General		1,891,565		2,269,207		2,487,197		3,314,154		3,294,624
Total Firm Sales		9,650,004		11,575,799		11,973,962		14,124,538		13,498,027
Interruptible Sales		2,600,384		2,978,357		3,055,667		3,105,059		3,173,870
Total Gas Sold To O&R Customers		12,250,388		14,554,156		15,029,629		17,229,597		16,671,897
Transportation of customer-owned gas
Firm transportation		9,058,260		9,840,507		9,930,731		8,497,814		6,367,990
Interruptible transportation		3,255,956		3,480,376		3,940,332		3,728,018		4,192,062
Sales for resale		938,503		1,072,111		1,067,953		1,133,649		1,057,156
Sales to electric generating stations		3,035,695		1,433,891		659,449		2,833,322		13,983,048
Off-System Sales		371,724		172,458		53,692		373,686		2,883,913
Total Sales and Transportation		28,910,526		30,553,499		30,681,786		33,796,086		45,156,066
Average Revenue Per DTH Sold
Residential	$	17.38	$	14.07	$	11.84	$	10.41	$	8.29
General	$	16.44	$	13.37	$	11.27	$	10.00	$	7.87
Customers – Average For Year
Electric		295,390		293,245		290,905		288,746		285,519
Gas		125,589		124,591		123,505		122,565		121,437

ITEM 1A.

RISK FACTORS

Con Edison

For information about the risk factors of Con Edison, see “Risk Factors” in Item 7 (which information is incorporated herein by reference).

Con Edison of New York

For information about the risk factors of Con Edison of New York, see “Risk Factors” in Item 7 (which information is incorporated herein by reference).

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Con Edison

None.

Con Edison of New York

None.

ITEM 2.

PROPERTIES

Con Edison

Con Edison has no significant properties other than those of the Utilities and its competitive energy businesses.

For information about the capitalized cost of the Companies’ utility plant, net of accumulated depreciation, see “Plant and Depreciation” in Note A to the financial statements in Item 8 (which information is incorporated herein by reference).

Con Edison of New York

Electric Facilities

Generating Facilities. Con Edison of New York’s electric generating facilities consist of plants located in New York City with an aggregate capacity of 709 MW. The company expects to have sufficient amounts of gas and fuel oil available in 2007 for use in these facilities. This includes the company’s East River Repowering Project, which commenced commercial operations in April 2005 and is currently supplying electric capacity of 297 MW based on a summer rating.

Transmission Facilities. Under terms of the NYISO Tariff, Con Edison of New York’s transmission facilities are operated under the jurisdiction of the NYISO, except specific underground bulk power facilities which are located predominantly within New York City. See “Electric Operations—Electric Supply” in Item 1 (which information is incorporated herein by reference). At December 31, 2006, Con Edison of New York’s transmission system had 428 miles of overhead circuits operating at 138, 230, 345 and 500 kV and 663 miles of underground circuits operating at 138 and 345 kV. There are 267 miles of radial subtransmission circuits operating at 69 kV and above. The company’s 37 transmission substations supplied by circuits operated at 69kV and above. The company’s transmission facilities are located in New York City and Westchester, Orange, Rockland, Putnam and Dutchess counties in New York State.

Con Edison of New York has transmission interconnections with Niagara Mohawk, Central Hudson Gas & Electric Corporation, O&R, New York State Electric and Gas Corporation, Connecticut Light and Power Company, Long Island Power Authority, NYPA and Public Service Electric and Gas Company.

Distribution Facilities. Con Edison of New York owns 57 area distribution substations and various distribution facilities located throughout New York City and Westchester County. At December 31, 2006, the company’s distribution system had a transformer capacity of 27,114 MVA, with 36,240 miles of overhead distribution lines and 93,297 miles of underground distribution lines.

Gas Facilities

Natural gas is delivered by pipeline to Con Edison of New York at various points in its service territory and is distributed to customers by the company through an estimated 4,306 miles of mains and 380,795 service lines. The company owns a natural gas liquefaction facility and storage tank at its Astoria property in Queens, New York. The plant can store approximately 1,000 mdths of which a maximum of about 250 mdths can be withdrawn per day. The company has about 1,230 mdths of additional natural gas storage capacity at a field in upstate New York, owned and operated by Honeoye Storage Corporation, a corporation 28.8 percent owned by Con Edison of New York.

Steam Facilities

Con Edison of New York generates steam at one steam/electric generating station and five steam-only generating stations and distributes steam to its customers through approximately 105 miles of transmission, distribution, and service piping. Con Edison of New York also has an energy sales agreement for steam and electricity with Brooklyn Navy Yard Cogeneration Partners.

O&R

Electric Transmission and Distribution Facilities

O&R and its utility subsidiaries, RECO and Pike, own, in whole or in part, transmission and distribution facilities which include 602 circuit miles of transmission lines, 14 transmission substations 62 distribution substations 97,855 in-service line transformers, 3,643 pole miles of overhead distribution lines and 1,532 miles of underground distribution lines. O&R’s transmission system is part of the NYISO system except that portions of RECO’s system are located within the transmission area controlled by the Pennsylvania-Jersey-Maryland Independent System Operator.

Gas Facilities

O&R and Pike own their gas distribution systems, which include 1,828 miles of mains. In addition, O&R owns and maintains a gas transmission system, which includes 73 miles of mains.

RECO & Pike Mortgages

Substantially all of the utility plant and other physical property of O&R’s utility subsidiaries, RECO and Pike, is subject to the liens of the respective indentures securing first mortgage bonds of each company.

Competitive Energy Businesses

Con Edison Development, a subsidiary of Con Edison owns or leases interests in 1,668 MW of capacity in electric generating facilities, most of which use gas and/or oil as fuel. These interests, the capitalized costs of which at December 31, 2006 amounted to $785 million (net of accumulated depreciation), are as follows:


Name/location	Plant Type/ Fuel Used	Off-take Contract	Power Pool	Capacity (MWs) Aggregate
Name/location	Plant Type/ Fuel Used	Off-take Contract	Power Pool	Capacity (MWs) Aggregate		Constructed
Baseload
Newington(a) Newington, NH	Gas/Oil	Merchant	ISO-NE	525		2002
ADA Ada, MI	Gas	Consumers Power Co. (2026)	East Central Area Reliability Council	29		1984
Total baseload				554
Intermediate
GENOR Puerto Barrios, Guatemala	Oil	Merchant	Central America	42		2001
CEEMI West Springfield, MA	Gas/Oil/Hydro	Merchant	ISO-NE	125		Various
Lakewood Lakewood, NJ	Gas/Oil	JCPL (2014)	PJM	236		1994
Total intermediate				403
Peaking
CEEMI West Springfield, MA	Gas/Oil	Merchant	ISO-NE	156		Various
Ocean Peaking Lakewood, NJ	Gas	Merchant	PJM	330		2003
Rock Springs Rising Sun, MD	Gas	Merchant	PJM	335		2003
Total peaking				821
Total capacity				1,778	(b)

(a)	Leased pursuant to a consolidated lease transaction. See Note P to the financial statements in Item 8.

(b)	Con Edison Development’s interest in these facilities amounts to 1,668 MW.

Con Edison Development has also leased gas distribution and electric generating facilities in the Netherlands in two separate transactions. See Note J to the financial statements in Item 8 (which information is incorporated herein by reference).

ITEM 3.

LEGAL PROCEEDINGS

Con Edison

Northeast Utilities

For information about legal proceedings relating to Con Edison’s October 1999 agreement to acquire Northeast Utilities, see Note H to the financial statements in Item 8 (which information is incorporated herein by reference).

Lease in/Lease Out Transactions

For information about Con Edison’s appeal of a disallowance by the Internal Revenue Service of certain tax losses recognized in connection with the company’s lease in/lease out transactions, see Note J to the financial statements in Item 8 (which information is incorporated herein by reference).

Mirant Litigation

For information about the legal proceeding relating to the Utilities’ 1999 sale of generating assets (Mirant Corporation, et al. v. Consolidated Edison et al. (In re Mirant Corporation)), pending in the United States Bankruptcy Court for the Northern District of Texas, see “Mirant Litigation” in Note H to the financial statements in Item 8 (which is incorporated herein by reference).

Con Edison of New York

Power Outage Proceedings

For information about proceedings relating to power outages in 2006, see “Power Outage Proceedings” in Note B to the financial statements in Item 8 (which is incorporated herein by reference).

Asbestos

For information about legal proceedings relating to exposure to asbestos, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Superfund

The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation, remediation costs and environmental damages. The sites at which Con Edison of New York has been asserted to have liability under Superfund include its and its predecessor companies’ former manufactured gas sites, its Astoria PCB storage facility, the Arthur Kill Generating Station site and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that the company has liability. For a further discussion of claims and possible claims against the company under Superfund, including with respect to its manufactured gas sites, estimated liability accrued for Superfund claims and recovery from customers of site investigation and remediation costs, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Manufactured Gas Sites. Con Edison of New York and its predecessors formerly manufactured gas and maintained storage holders for manufactured gas at sites in New York City and Westchester County (MGP Sites). Many of these sites are now owned by parties other than Con Edison of New York and have been redeveloped by them for other uses, including schools, residential and commercial developments and hospitals. The New York State Department of Environmental Conservation (DEC) is requiring the company to investigate, and if necessary, develop and implement remediation programs for the sites, which include 33 manufactured gas plant sites and 17 storage holder sites.

The information available to Con Edison of New York for many of the MGP Sites is incomplete as to the extent of contamination and scope of the remediation likely to be required. Through the end of 2006, investigations have been started for all or portions of 32 MGP Sites, and have been completed at ten of the sites. Coal tar and/or other manufactured gas production/storage-related environmental contaminants have been detected at 25 MGP Sites, including locations within Manhattan and other parts of New York City and in Westchester County. Remediation has been completed at one site and portions of eight other sites.

Astoria Site. Con Edison of New York is permitted by the DEC to operate a PCB waste storage facility on property the company owns in the Astoria section of Queens, New York. Apart from the PCB waste storage facility, portions of the property were the former location of a manufactured gas plant and have been used or are being used for, among other things, electric generation operations, electric substation operations, the storage of fuel oil and liquefied natural gas, and the maintenance and storage of electric equipment. As a condition of its DEC permit, the company is required to investigate the property and where environmental contamination is found and action is necessary, to conduct corrective action to remediate the contamination. The company has investigated various sections of the property and is planning additional investigations. The company has submitted to the DEC and the New York State Department of Health a report identifying the known areas of contamination. The company estimates that its undiscounted potential liability for the cleanup of the known contamination on the property will be at least $19 million.

Arthur Kill Site. Following a September 1998 transformer fire at Con Edison of New York’s former Arthur Kill Generating Station, it was determined that oil containing high levels of PCBs was released to the environment during the incident. The company has completed DEC-approved cleanup programs for the station’s facilities and various soil and pavement areas of the site affected by the PCB release. Pursuant to a July 1999 DEC consent order, the company completed a DEC-approved assessment of the nature and extent of the contamination in, and recommended a remediation program, for the waterfront area of the station. DEC has selected the remediation program for the waterfront area and the company will implement it pursuant to an additional consent order entered into during 2005. The company estimates that its undiscounted potential liability for the cleanup of PCB contamination at the site will be approximately $3.2 million.

Flushing Service Center Site. The owner of a former Con Edison of New York service center facility in Flushing, New York, has informed the company that PCB contamination has been detected on a substantial portion of the property, which the owner plans to investigate, remediate, and redevelop for residential and commercial use pursuant to the New York Brownfield Cleanup Program administered by the DEC. In late 2005, the property owner claimed that the costs of investigation and remediation will be approximately $36 million and has demanded that the company pay these costs.

Other Superfund Sites. Con Edison of New York is a potentially responsible party (PRP) with respect to other Superfund sites where there are other PRPs and it is not managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and are expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.

The following table lists each of Con Edison of New York’s other Superfund sites for which the company anticipates it may have a liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending, and the company’s current estimate of its approximate potential liability for investigation, remediation and monitoring and environmental damages at the site or the unpaid share of any payments it is required to make under a settlement agreement resolving its liability for the site.


Site	Location	Start	Court or Agency	Estimated Liability(a)		% of Total(a)
Maxey Flats Nuclear	Morehead, KY	1986	EPA	$	111,000	0.8%
Curcio Scrap Metal	Saddle Brook, NJ	1987	EPA		241,000	100%
Metal Bank of America	Philadelphia, PA	1987	EPA		316,000	1.0%
Cortese Landfill	Narrowsburg, NY	1987	EPA		840,000	6.0%
Global Landfill	Old Bridge, NJ	1988	EPA		115,000	0.3%
PCB Treatment, Inc.	Kansas City, KS & MO	1994	EPA		2,000,000	6.1%
Borne Chemical	Elizabeth, NJ	1997	NJDEP		117,000	0.7%

(a)	Superfund liability is joint and several. Estimated liability shown is the company’s estimate of its anticipated share of the total liability determined pursuant to consent decrees, settlement agreements or otherwise and in light of financial condition of other PRPs.

O&R

Asbestos

For information about legal proceedings relating to exposure to asbestos, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Superfund

The sites at which O&R has been asserted to have liability under Superfund include its manufactured gas sites, its West Nyack site and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that O&R has liability. For a further discussion of claims and possible claims against O&R under Superfund, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Manufactured Gas Sites. O&R and its predecessors formerly owned and operated manufactured gas plants at seven sites (O&R MGP Sites) in Orange County and Rockland County, New York. Four of these sites are now owned by parties other than O&R, three of which have been redeveloped by them for residential, commercial or industrial uses. The DEC is requiring O&R to develop and implement remediation programs for the O&R MGP Sites.

O&R has completed remedial investigations at five of its seven MGP Sites and will complete investigation of the remaining two sites in 2007. O&R has completed the remediation at one of its sites; is currently implementing remediation at its Nyack site; and has received DEC’s decision regarding the remedial work to be done at another site. Since the latter site is Company-owned and has no off-site impacts, remediation of this site has been deferred, with DEC’s concurrence, until approximately 2010.

West Nyack Site. In 1994 and 1997, O&R entered into consent orders with the DEC pursuant to which O&R agreed to conduct a remedial investigation and remediate certain property it owns in West Nyack, New York at which PCBs were discovered. Petroleum contamination related to a leaking underground storage tank was found as well. O&R has completed all remediation at the site that the DEC has required to date. The DEC has requested a supplemental groundwater investigation and an on-site vapor intrusion study that will be conducted in 2007.

Other Superfund Sites. O&R is a PRP with respect to other Superfund sites where there are other PRPs and it is not managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and is expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.

The following table lists each of O&R’s other Superfund sites for which the company anticipates it may have liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending and the company’s current estimate of its potential liability for investigation, remediation and monitoring and environmental damages at the site.


Site	Location	Start	Court or Agency	Estimated Liability(a)		% of Total(a)
Borne Chemical	Elizabeth, NJ	1997	NJDEP	$	91,000	1.7%
Orange County Landfill	Goshen, NY	2000	NYAG		175,000	(b)
Clarkstown Landfill	Clarkstown, NY	2003	NYAG		400,000	(b)

(a)	Superfund liability is joint and several. Estimated liability shown is the company’s estimate of its anticipated share of the total liability determined pursuant to consent decrees, settlement agreements or otherwise and in light of financial condition of other PRPs.

(b)	Not ascertainable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Executive Officers of the Registrant

The following table sets forth certain information about the executive officers of Con Edison and Con Edison of New York as of February 15, 2006. As indicated, certain of the executive officers are executive officers of each of Con Edison and Con Edison of New York and others are executive officers of Con Edison or Con Edison of New York. The term of office of each officer, is until the next election of directors (trustees) of their company and until his or her successor is chosen and qualifies. Officers are subject to removal at any time by the board of directors (trustees) of their company. Messrs. Burke and McMahon have employment agreements with Con Edison, which provide for them to serve in their present positions through December 31, 2008, and August 31, 2007, respectively. The employment agreements for Messrs. Burke and McMahon provide for automatic one-year extensions of their term, unless notice to the contrary is received six months prior to the end of the term.


Name	Age	Offices and Positions During Past Five Years
Executive Officers of Con Edison and Con Edison of New York
Kevin Burke	56	3/06 to present – Chairman of the Board, President and Chief Executive Officer and Director of Con Edison and Chairman, Chief Executive Officer and Trustee of Con Edison of New York
		9/05 to 2/06 – President, Chief Executive Officer and Director of Con Edison and Chief Executive Officer and Trustee of Con Edison of New York
		9/00 to 8/05 – Chairman, President of Con Edison of New York

Louis L. Rana	58	9/05 to present – President of Con Edison of New York
		2/03 to 8/05 – Senior Vice President – Electric Operations
		10/01 to 1/03 – Vice President – Manhattan Electric Operations
		4/00 to 9/01 – Vice President – Manhattan Customer Service

Robert N. Hoglund	45	9/05 to present – Senior Vice President and Chief Financial Officer of Con Edison and Con Edison of New York
		4/04 to 8/05 – Senior Vice President of Finance of Con Edison and Con Edison of New York
		6/04 to present – Chief Financial Officer and Controller of O&R
		4/97 to 3/04 – Managing Director, Citigroup Global Markets Inc. and predecessors

Frances A. Resheske	46	2/02 to present – Senior Vice President – Public Affairs of Con Edison of New York

Charles E. McTiernan, Jr.	62	1/03 to present – General Counsel of Con Edison and Con Edison of New York
		10/85 to 12/02 – Associate General Counsel of Con Edison of New York

Edward J. Rasmussen	58	12/00 to present – Vice President and Controller of Con Edison and Con Edison of New York
		12/00 to 12/03 – Vice President, Controller and Chief Financial Officer of O&R

Joseph P. Oates	45	4/04 to present – Vice President and Treasurer of Con Edison and Con Edison of New York
		1/04 to 04/04 – Vice President of Con Edison of New York
		11/03 to 01/04 – Vice President – Bronx and Westchester of Con Edison of New York
		7/01 to 11/03 – Vice President – Energy Management of Con Edison of New York

Executive Officers of Con Edison but not Con Edison of New York
Stephen B. Bram	64	4/06 to present – Group President, Competitive Energy Businesses
		1/03 to 3/06 – Group President, Energy and Communications of Con Edison
		9/00 to 12/02 – President and Chief Executive Officer of O&R

John D. McMahon	55	1/03 to present – President and Chief Executive Officer of O&R
		8/98 to 12/02 – Senior Vice President and General Counsel of Con Edison and Con Edison of New York

Executive Officers of Con Edison of New York but not Con Edison (All offices and positions listed are with Con Edison of New York)

Marilyn Caselli	52	5/05 to present – Senior Vice President – Customer Operations
		8/98 to 4/05 –Vice President – Customer Operations

Mary Jane McCartney	58	10/93 to present – Senior Vice President – Gas Operations

John F. Miksad	47	9/05 to present – Senior Vice President – Electric Operations
		2/03 to 8/05 – Vice President - Manhattan Electric Operations
		1/00 to 1/03 - Chief Engineer - Distribution Engineering


Name	Age	Offices and Positions During Past Five Years

William G. Longhi	53	12/06 to present – Senior Vice President – Central Operations
		09/01 to 11/06 – Vice President – System & Transmission Operations

JoAnn Ryan	49	7/06 to present – Senior Vice President – Business Shared Services
		3/01 to 6/06 – President and CEO, Con Edison Solutions

Luther Tai	58	7/06 to present – Senior Vice President – Enterprise Shared Services
		9/01 to 6/06 – Senior Vice President – Central Services
		9/00 to 8/01 – Senior Vice President – Central Operations

PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Con Edison

Con Edison’s Common Shares ($.10 par value), the only class of common equity of Con Edison, are traded on the New York Stock Exchange. As of January 31, 2007, there were 76,634 holders of record of Con Edison’s Common Shares.

The market price range for Con Edison’s Common Shares during 2006 and 2005, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2006 and 2005 were as follows:


	2006						2005
	High		Low		Dividends Paid		High		Low		Dividends Paid
1^st Quarter	$	47.52	$	43.35	$	0.575	$	44.71	$	41.10	$	0.57
2^nd Quarter	$	44.99	$	41.17	$	0.575	$	47.23	$	41.50	$	0.57
3^rd Quarter	$	47.45	$	44.25	$	0.575	$	49.29	$	45.60	$	0.57
4^th Quarter	$	49.28	$	46.04	$	0.575	$	49.10	$	43.70	$	0.57

On January 18, 2007, Con Edison’s Board of Directors declared a quarterly dividend of 58 cents per Common Share. The first quarter 2007 dividend will be paid on March 15, 2007.

Con Edison expects to pay dividends to its shareholders primarily from dividends and other distributions it receives from its subsidiaries. The payment of future dividends, which is subject to approval and declaration by Con Edison’s Board of Directors, will depend on a variety of factors, including business, financial and regulatory considerations. For additional information see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).

LOGO


	Years Ending
Company / Index	2001	2002	2003	2004	2005	2006
Consolidated Edison, Inc.	100	111.93	118.79	127.42	141.89	154.71
S&P 500 Index	100	77.90	100.25	111.15	116.61	135.03
S&P Electric Utilities	100	84.94	105.39	133.39	156.94	193.37
S&P Utilities	100	70.01	88.39	109.85	128.35	155.29

Based

on $100 invested at December 31, 2001, reinvestment of all dividends in equivalent shares of stock and market price changes on all such shares.

Con Edison of New York

The outstanding shares of Con Edison of New York’s Common Stock ($2.50 par value), the only class of common equity of Con Edison of New York, are held by Con Edison and are not traded.

The dividends declared by Con Edison of New York in 2006 and 2005 are shown in its Consolidated Statement of Common Shareholder’s Equity included in Item 8 (which information is incorporated herein by reference). For additional information about the payment of dividends by Con Edison of New York, and restrictions thereon, see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).

ITEM 6.

SELECTED FINANCIAL DATA

Con Edison


	For the Year Ended December 31,
(Millions of Dollars, except per share amounts )	2006			2005			2004			2003			2002
Operating revenues	$	12,137		$	11,641		$	9,730	*	$	9,808		$	8,498
Purchased power		4,879			4,698			3,925			3,884			3,201
Fuel		734			816			597			504			289
Gas purchased for resale		1,082			1,155			852			889			596
Operating income		1,260			1,157			934			1,044			1,078
Income from continuing operations		738			732			549			634			689
Loss from discontinued operations		(1	)		(13	)		(12	)		(109	)		(21	)
Income before cumulative effect of changes in accounting principles		737			719			537			525			668
Cumulative effect of changes in accounting principles		-			-			-			3			(22	)
Net income		737			719			537			528			646
Total assets		26,699			24,848			22,560			20,966			19,667
Long-term debt		8,298			7,398			6,561			6,733			6,166
Common shareholders’ equity		8,004			7,310			7,054			6,423			5,921
Basic earnings per share
Continuing operations	$	2.96		$	3.00		$	2.33		$	2.87		$	3.24
Discontinued operations		-		$	(0.05	)	$	(0.05	)	$	(0.50	)	$	(0.10	)
Before cumulative effect of changes in accounting principles	$	2.96		$	2.95		$	2.28		$	2.37		$	3.14
Cumulative effect of changes in accounting principles		-			-			-		$	0.02		$	(0.11	)
Net Income	$	2.96		$	2.95		$	2.28		$	2.39		$	3.03

Diluted earnings per share
Continuing operations	$	2.95		$	2.99		$	2.32		$	2.86		$	3.23
Discontinued operations		-		$	(0.05	)	$	(0.05	)	$	(0.50	)	$	(0.10	)
Before cumulative effect of changes in accounting principles	$	2.95		$	2.94		$	2.27		$	2.36		$	3.13
Cumulative effect of changes in accounting principles		-			-			-		$	0.02		$	(0.11	)
Net income	$	2.95		$	2.94		$	2.27		$	2.38		$	3.02
Cash dividends per common share	$	2.30		$	2.28		$	2.26		$	2.24		$	2.22
Average common shares outstanding (millions)		249			244			236			221			213

*	Reflects a $124 million pre-tax charge in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.

Con Edison of New York


	For the Year Ended December 31
(Millions of Dollars)	2006		2005		2004			2003		2002
Operating revenues	$	9,288	$	9,227	$	7,971	*	$	8,166	$	7,224
Purchased power		3,052		3,322		3,029			3,124		2,622
Fuel		525		526		404			358		232
Gas purchased for resale		902		965		709			715		472
Operating income		1,110		1,041		825			942		954
Net income for common stock		686		694		518			591		605
Total assets		22,816		21,144		19,244			17,764		16,837
Long-term debt		6,925		6,055		5,235			5,435		5,392
Common shareholder’s equity		7,132		6,437		6,116			5,482		4,890

*	Reflects $124 million pre-tax charge in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK)

This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York) and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. Con Edison of New York is a subsidiary of Con Edison and, as such, information in this MD&A about Con Edison of New York applies to Con Edison.

Information in the notes to the consolidated financial statements referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.

Corporate Overview

Con Edison’s principal business operations are those of its utility companies, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R), together known as the “Utilities.” Con Edison also has competitive energy businesses (see “Competitive Energy Businesses,” below). Certain financial data of Con Edison’s businesses is presented below:


	Twelve months ended December 31, 2006								At December 31, 2006
(Millions of Dollars)	Operating Revenues				Net Income				Assets
Con Edison of New York	$	9,288		77 %	$	686		93 %	$	22,816	85%
O&R		818		7 %		45		6 %		1,768	7%
Total Utilities		10,106		84 %		731		99 %		24,584	92%
Con Edison Development (a)		976		8 %		30		4 %		1,283	5%
Con Edison Energy (a)		44		- %		1		- %		378	1%
Con Edison Solutions (a)		1,132		9 %		8		1 %		65	-%
Other (b)		(121	)	(1)%		(32	)	(4)%		389	2%
Total continuing operations		12,137		100 %		738		100 %		26,699	100%
Discontinued operations (c)		-		- %		(1	)	- %		-	-%
Total Con Edison	$	12,137		100 %	$	737		100 %	$	26,699	100%

(a)	Net income of the competitive energy businesses for the twelve months ended December 31, 2006 includes $22 million of net after-tax mark-to-market losses (Con Edison Development, $1 million, Con Edison Energy, $1 million and Con Edison Solutions, $20 million).

(b)	Represents inter-company and parent company accounting. See “Results of Operations,” below.

(c)	Represents the discontinued operations of Con Edison Communications.

Con Edison’s net income for common stock in 2006 was $737 million or $2.96 a share. Net income for common stock in 2005 and 2004 was $719 million or $2.95 a share and $537 million or $2.28 a share, respectively. See “Results of Operations – Summary,” below.

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and Con Edison’s competitive energy businesses. Con Edison of New York’s principal business segments are its regulated electric, gas and steam utility activities. For segment financial information, see Note N to the financial statements and “Results of Operations,” below.

For information about factors that could have a material adverse effect on the Companies, see “Risk Factors,” below.

Regulated Utilities

Con Edison of New York provides electric service to approximately 3.2 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility businesses, provides electric service to approximately 0.3 million customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to over 0.1 million customers in southeastern New York and adjacent areas of eastern Pennsylvania.

The Utilities are primarily “wires and pipes” energy delivery businesses that deliver energy in their service areas subject to extensive federal and state regulation. The Utilities’ customers buy this energy from the Utilities, or from other suppliers through the Utilities’ retail access programs. The Utilities purchase substantially all of the energy they sell to customers pursuant to firm contracts or through wholesale energy markets, and recover (generally on a current basis) the cost of the energy sold, pursuant to approved rate plans.

Con Edison anticipates that the Utilities will continue to provide substantially all of its earnings over the next few years. The Utilities’ earnings will depend on various factors including demand for utility service and the Utilities’ ability to charge rates for their services that reflect the costs of service, including a return on invested equity capital. The factors affecting demand for utility service include growth of customer demand, weather, market prices for energy and economic conditions. Demand for electric service peaks during the summer air conditioning season. Demand for gas and steam service peaks during the winter heating season.

Because the energy delivery infrastructure must be adequate to meet demand in peak periods with a high level of reliability, the

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Utilities’ capital investment plans reflect in great part actual growth in electric peak demand adjusted to summer design weather conditions, as well as forecast growth in peak usage. The Utilities had estimated that, under design weather conditions, the 2006 peak electric demand in their respective service areas would be 13,400 MW for Con Edison of New York and 1,570 MW for O&R. On August 2, 2006, the electric demand served by the Utilities reached new record peaks: 13,141 MW for Con Edison of New York, and 1,617 MW for O&R. Also, on August 2, 2006, the New York Independent System Operator (NYISO) invoked demand reduction programs for Con Edison of New York customers. Without these reduction programs, the actual peak demand for Con Edison of New York would have been higher.

The average annual growth rate of the peak electric demand over the next five years at design conditions is estimated to be approximately 1.5 percent for Con Edison of New York and 2.3 percent for O&R. Design conditions do not include the potential impact of any demand reduction programs invoked only in specific circumstances. The Companies anticipate an ongoing need for substantial capital investment in order to meet this growth in peak usage with the high level of reliability that they currently provide (see “Liquidity and Capital Resources—Capital Requirements,” below).

The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York’s electric, gas and steam rate plans are effective through March 31, 2008, September 30, 2007 and September 30, 2008, respectively. Con Edison of New York has filed a request for a new gas rate plan to be effective October 1, 2007, and expects in May 2007 to file a request for a new electric rate plan to be effective April 1, 2008. O&R’s gas rate plan for its service in New York extends through October 31, 2009. O&R’s electric rate plan expired on October 31, 2006, and in December 2006 the New York State Public Service Commission (PSC) ordered O&R to demonstrate why the company’s electric rates should not be reduced. In June 2006, O&R’s New Jersey subsidiary, Rockland Electric Company (RECO), filed a request with the New Jersey Board of Public Utilities (NJBPU) for new electric rates, to be effective April 2007. Pursuant to the Utilities’ rate plans, charges to customers generally may not be changed during the respective terms of the rate plans other than for recovery of the costs incurred for energy supply, for specified increases provided in the rate plans and for limited other exceptions. The rate plans generally require the Utilities to share with customers earnings in excess of specified rates of return on common equity capital. Changes in delivery volumes are reflected in operating income (except to the extent that weather-normalization provisions apply to the gas businesses, and subject to provisions in the rate plans for sharing above-target earnings with customers). See “Regulatory Matters” below and “Recoverable Energy Costs” and “Rate Agreements” in Notes A and B, respectively, to the financial statements.

Accounting rules and regulations for public utilities include Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” pursuant to which the economic effects of rate regulation are reflected in financial statements. See “Application of Critical Accounting Policies,” below.

Competitive Energy Businesses

Con Edison’s competitive energy businesses participate in segments of the electricity industry that are less comprehensively regulated than the Utilities. These segments include the operation of electric generation facilities, trading of electricity and fuel, sales of electricity to wholesale and retail customers and sales of certain energy-related goods and services. At December 31, 2006, Con Edison’s equity investment in its competitive energy businesses was $557 million and their assets amounted to $1.7 billion.

Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity directly to some delivery-service customers of utilities primarily in the Northeast and Mid-Atlantic regions (including some of the Utilities’ customers) and also offers energy-related services. Con Edison Solutions does not sell electricity to the Utilities. The company sold approximately 10.6 million MWHs of electricity to customers in 2006.

Consolidated Edison Development, Inc. (Con Edison Development) owns, leases or operates generating plants and participates in other infrastructure projects. At December 31, 2006, the company owned or leased the equivalent of 1,668 MWs of capacity in electric generating facilities of which 203 MWs are sold under long-term purchase power agreements and the balance is sold on the wholesale electricity markets. In addition, the company sells electricity at wholesale to utilities. Con Edison is considering strategic alternatives with respect to the electric generation facilities of its competitive energy businesses.

Consolidated Edison Energy, Inc. (Con Edison Energy) procures electric energy and capacity for Con Edison Solutions and fuel for Con Edison Development. It sells the electric capacity and energy produced by plants owned, leased or operated by Con Edison Development and others. The company also provides energy risk management services to Con Edison Solutions and Con Edison Development, offers these services to others and manages wholesale supply transactions for Con Edison Development.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

The competitive energy businesses are focusing on increasing their customer base, gross margins and the value of their existing assets. See “Liquidity and Capital Resources—Capital Requirements” and “Capital Resources,” below.

Discontinued Operations

In March 2006, Con Edison completed the sale of Con Edison Communications, LLC (Con Edison Communications) to RCN Corporation. See Note T to the financial statements.

Results of Operations – Summary

Con Edison’s earnings per share in 2006 were $2.96 ($2.95 on a diluted basis). In 2005, earnings per share were $2.95 ($2.94 on a diluted basis). Earnings per share in 2004 were $2.28 ($2.27 on a diluted basis).

Net income for the years ended December 31, 2006, 2005 and 2004 was as follows:


(Millions of Dollars)	2006			2005			2004
Con Edison of New York	$	686		$	694		$	518	(a)
O&R		45			49			46
Competitive energy businesses (b)		39			1			(1	)
Other (c)		(32	)		(12	)		(14	)
Total continuing operations		738			732			549
Discontinued operations (d)		(1	)		(13	)		(12	)
Con Edison	$	737		$	719		$	537

(a)	Includes $80 million after-tax charge in accordance with Con Edison of New York’s electric, gas and steam rate plans. See Note B to the financial statements.

(b)	Includes $(22) million, $(2) million and $4 million of net after-tax mark-to-market gains/(losses) in 2006, 2005 and 2004, respectively.

(c)	Other consists of inter-company and parent company accounting. See “Results of Operations,” below.

(d)	Represents the discontinued operations of Con Edison Communications. See Note T to the financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

The Companies’ results of operations for 2006, as compared with 2005, reflect milder weather in 2006, the Companies’ rate agreements (including the electric rate agreement that took effect in April 2005), expenditures related to the 2006 power outages discussed under “Power Outage Proceedings” in Note B to the financial statements, increased interest expense and improved results for the competitive energy businesses including mark-to-market effects. The following table presents the estimated effect on earnings per share and net income for 2006 as compared with 2005 and 2005 as compared with 2004:


	2006						2005
	Earnings per Share			Net Income (Millions of Dollars)			Earnings per Share			Net Income (Millions of Dollars)
Con Edison of New York
Sales growth	$	0.12		$	28		$	0.16		$	37
Impact of weather		(0.32	)		(79	)		0.17			40
Electric rate agreement		0.74			181			0.72			170
Gas rate agreement		0.09			22			0.13			33
Steam rate agreement		0.07			18			0.20			47
Queens power outage		(0.14	)		(34	)		-			-
Operations and maintenance expense – other		(0.28	)		(67	)		(0.26	)		(61	)
Depreciation and property taxes		(0.27	)		(66	)		(0.37	)		(88	)
Pension and other postretirement benefit costs		0.01			3			(0.19	)		(45	)
2004 non-cash rate agreement charges		-			-			0.34			80
Allowance for funds used during construction		(0.03	)		(5	)		(0.11	)		(26	)
Interest charges – timing of deductions of construction-related costs		(0.07	)		(17	)		-			-
Interest charges – other		(0.13	)		(31	)		(0.02	)		(2	)
Other (includes dilutive effect of new stock issuances)		0.11			39			(0.12	)		(9	)
Total Con Edison of New York		(0.10	)		(8	)		0.65			176
Orange and Rockland Utilities		(0.02	)		(4	)		0.01			3
Competitive energy businesses
Earnings excluding net mark-to-market effects		0.24			58			0.03			8
Mark-to-market effects		(0.08	)		(19	)		(0.04	)		(6	)
Other, including parent company expenses		(0.08	)		(21	)		0.02			2
Discontinued operations		0.05			12			-			(1	)
Total	$	0.01		$	18		$	0.67		$	182

See “Results of Operations” below for further discussion and analysis of results of operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Risk Factors

The Companies’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition. These risk factors include:

The Utilities’ Revenues And Results Of Operations Reflect Regulatory Actions—The Utilities have rate plans approved by state utility regulators that cover the prices they can charge their customers. The prices are generally designed to cover the Utilities’ cost of service (including a return on equity) and generally may not be changed during the specified terms of the rate plans other than for the recovery of energy costs and limited other exceptions. The rate plans generally include earnings adjustments for meeting or failing to meet certain standards. Certain of the plans require action by regulators at their expiration dates, which may include approval of new plans with different provisions. Regulators may also take actions affecting the company outside of the framework of the approved rate plans. The regulators in the states in which the Utilities provide service generally permit the Utilities to recover from their customers the cost of service, other than any cost that is determined to have been imprudently incurred. The Utilities’ regulatory filings can involve complex accounting and other calculations. See “Application of Critical Accounting Polices” and “Regulatory Matters,” below.

Con Edison’s Ability To Pay Dividends Or Interest Is Subject To Regulatory Restrictions—Con Edison’s ability to pay dividends on its common stock or interest on its external borrowings depends primarily on the dividends and other distributions it receives from its businesses. The dividends that the Utilities may pay to Con Edison are generally limited to not more than 100 percent of their respective income available for dividends calculated on a two-year rolling average basis, with certain exceptions. See “Dividends” in Note C to the financial statements.

The Companies Purchase Energy For Their Customers—A disruption in the wholesale energy markets or in the Companies’ energy supply arrangements could adversely affect their ability to meet their customers’ energy needs and the Companies’ results of operations. The Companies have policies to manage the economic risks related to energy supply, including related hedging transactions and the risk of a counterparty’s non-performance. The Utilities generally recover their prudently incurred fuel, purchased power and gas costs, including the cost of hedging transactions, in accordance with rate provisions approved by state regulators. Con Edison’s competitive energy businesses enter into hedging transactions to manage their commodity-related price and volumetric risks. See “Financial and Commodity Market Risks,” below.

Energy Market Prices Are Volatile—The impact of changing energy market prices on the Companies is mitigated by their energy management policies and rate provisions pursuant to which the Utilities recover energy supply costs. See “Financial and Commodity Market Risks,” below. High energy market prices result in increases in energy costs billed to customers that could result in decreased energy usage. If this were to occur, until the Utilities’ rates were adjusted to offset the effect of decreased usage, the Utilities would have decreased energy delivery revenues. Prices for electricity, fuel oil and gas could also affect the value of Con Edison’s competitive energy businesses.

The Utilities Have A Substantial Ongoing Utility Construction Program—The Utilities estimate that their construction expenditures will exceed $5.9 billion over the next three years. The ongoing construction program includes large energy transmission, substation and distribution system projects. The failure to complete these projects in a timely manner could adversely affect the Utilities’ ability to meet their customers’ growing energy needs with the high level of reliability that they currently provide. The Utilities expect to use internally-generated funds, equity contributions from Con Edison and external borrowing to fund the construction expenditures.

The Companies Are Active Participants in Financial Markets—Changes in financial market conditions or in the Companies’ credit ratings could adversely affect their ability and their cost to borrow funds. The Companies’ commercial paper and unsecured debt are rated by Moody’s Investors Services, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) and Fitch Ratings (Fitch). The current ratings are shown in “Liquidity and Capital Resources—Capital Resources,” below. Changes to financial market conditions could also adversely affect the return on investment of the plan assets for the Companies’ pension and other postretirement benefit plans. See “Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits” and “Financial and Commodity Market Risks,” below.

The Companies Operate Essential Energy Facilities And Other Systems—The Utilities provide electricity, gas and steam service using energy facilities that are located either in, or close to, public places. A failure of, or damage to, these facilities could result in bodily injury or death, property damage, the release of hazardous substances or extended service interruptions. See “Power Outage Proceedings” in Note B to the financial statements. The Companies have information systems relating to their operations, billing, accounting and other matters, the failure of which could adversely affect the Companies’ operations and liquidity. In the event of failure or damage to these facilities or systems, the Utilities could incur substantial liability, higher costs and

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increased regulatory requirements. The Utilities have training, operating, security, maintenance and capital programs designed to provide for the safe and reliable operation of their energy facilities and information systems.

Con Edison’s Competitive Energy Businesses Are In Evolving Markets—Con Edison’s competitive energy businesses are active in evolving markets that are affected by the actions of governmental agencies, other organizations (such as independent system operators) and other competitive businesses. Compared to the Utilities, the profitability of their products and services and the recoverability of Con Edison’s investment in these competitive energy businesses is not as predictable.

The Companies May Be Affected By The Application Of Critical Accounting Policies And Rules—The application of the Companies’ critical accounting policies reflects complex judgments, assumptions and estimates. These policies, which are described in “Application of Critical Accounting Policies,” below, include industry specific accounting applicable to regulated public utilities, the accounting and funding rules applicable to pensions and other postretirement benefits, and accounting for contingencies, long-lived assets, derivative instruments, goodwill and leases. New accounting policies or rules or changes to current accounting policies, rules or interpretations of such policies or rules that affect the Companies’ financial statements may be adopted by the relevant accounting or other authorities.

The Companies Are Exposed To Risks Relating To Environmental Matters—Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or produced in the course of the Utilities’ operations and are present on properties or in facilities and equipment currently or previously owned by them. See “Environmental Matters,” below and Note G to the financial statements. Electric and magnetic fields (EMF) are found wherever electricity is used. If a causal relationship between EMF and adverse health effects were established, there could be a material adverse effect on the Companies. Negative perceptions about EMF can make it more difficult to construct facilities needed for the Companies’ operations.

The Companies Are Subject To Extensive Government Regulation And Taxation—The Companies’ operations require numerous permits, approvals and certificates from various federal, state and local governmental agencies. The Companies’ federal income tax returns reflect certain tax positions with which the Internal Revenue Service, which has essentially completed its audits of the tax returns through 2001, does not or may not agree. See Notes J and L to the financial statements. The Companies may be subject to new laws or regulations or the revision or reinterpretation of existing laws or regulations which could have a material adverse effect on the Companies.

The Companies Face Weather And Other Risks That Are Beyond Their Control—The Companies’ results of operations can be affected by changes in the weather, which directly influences the demand for electricity, gas and steam and can affect the price of energy commodities. The cost of repairing damage to the Companies’ facilities and the potential disruption of their operations due to heat, storms, natural disasters, wars, terrorist acts and other catastrophic events could be substantial. See “Power Outage Proceedings” in Note B to the financial statements. The occurrence or risk of occurrence of future terrorist attacks or related acts of war could also adversely affect the New York or United States economy. A lower level of economic activity for these or other reasons could result in a decline in energy consumption, which could adversely affect the Companies’ revenues and earnings and limit the Companies’ future growth prospects.

Forward-Looking Statements

This report includes forward-looking statements intended to qualify for the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements of future expectation and not facts. Words such as “expects,” “estimates,” “anticipates,” “intends,” “believes,” “plans,” “will” and similar expressions identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made, and accordingly speak only as of that time. Actual results or developments might differ materially from those included in the forward-looking statements because of various factors such as those discussed under “Risk Factors,” above.

Application of Critical Accounting Policies

The Companies’ financial statements reflect the application of their accounting policies, which conform to accounting principles generally accepted in the United States of America. The Companies’ critical accounting policies include industry-specific accounting applicable to regulated public utilities and accounting for pensions and other postretirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases.

Accounting for Regulated Public Utilities – SFAS No. 71

The Utilities are subject to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” and the accounting requirements of the Federal Energy Regulatory Commission and state public utility regulatory authorities having jurisdiction.

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SFAS No. 71 specifies the economic effects that result from the causal relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or “regulatory assets” under SFAS No. 71. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or “regulatory liabilities” under SFAS No. 71.

The Utilities’ principal regulatory assets and liabilities are listed in Note B to the financial statements. The Utilities are each receiving or being credited with a return on all regulatory assets for which a cash outflow has been made. The Utilities are each paying or being charged with a return on all regulatory liabilities for which a cash inflow has been received. The regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.

In the event that regulatory assets of the Utilities were no longer probable of recovery (as required by SFAS No. 71), these regulatory assets would be charged to earnings. At December 31, 2006, the regulatory assets for Con Edison and Con Edison of New York were $4.6 billion and $4.2 billion, respectively.

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison’s competitive energy businesses also provide such benefits to certain of their employees. The Companies account for these benefits in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In addition, the Utilities apply SFAS No. 71 to account for the regulatory treatment of these obligations (which, as described in Note B to the financial statements, reconciles the amounts reflected in rates for the costs of the benefit to the costs actually incurred). In applying these accounting policies, the Companies have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, discount rates, health care cost trends and future compensation. See Notes E and F to the financial statements for information about the Companies’ accounting for the adoption of SFAS No. 158, the actuarial assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2006, 2005 and 2004.

Primarily because of the amortization of previous years’ net investment gains and deferrals of certain pension expenses in accordance with its rate agreements, Con Edison of New York’s pension expense for 2006, 2005 and 2004 was negative, resulting in a credit in each year. Investment gains and losses on plan assets are fully recognized in expense over a 15-year period (20 percent of the gains and losses for each year begin to amortize in each of the following five years and the amortization period for each 20 percent portion of the gains and losses is ten years). This amortization is in accordance with the Statement of Policy issued by the PSC and is permitted under SFAS No. 87.

The cost of pension and other postretirement benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions and benefit experience. Con Edison’s and Con Edison of New York’s current estimates for 2007 are increases, compared with 2006, in their pension and other postretirement benefits cost of $35 million, respectively. The increases reflect the amortization of prior period actuarial losses associated with asset returns lower than assumed levels and changes to the discount rate. The discount rate used to determine 2007 pension and other postretirement benefit accounting cost is 6.0 percent and the expected return on plan assets (tax-exempt assets for postretirement benefit accounting costs) is 8.5 percent.

Amortization of market gains and losses experienced in previous years is expected to increase Con Edison’s and Con Edison of New York’s pension and other postretirement benefit costs by an additional $20 million and $19 million, respectively, in 2008. A 5.0 percentage point variation in the actual annual return in 2007, as compared with the expected annual asset return of 8.5 percent would change pension and other postretirement benefit costs for both Con Edison and Con Edison of New York by approximately $16 million, in 2008.

The discount rate for determining the present value of future period benefit payments is determined using a model to match the durations of highly-rated (Aa and Aaa, by Moody’s) corporate bonds with the projected stream of benefit payments. Due to declines in interest rates between year-end 2003 and year-end 2005, the Companies reduced the discount rate used to calculate 2006 pension and other postretirement benefit costs to 5.7 percent compared with 5.9 percent and 6.3 percent in 2005 and 2004, respectively.

In determining the health care cost trend rate, the Companies review actual recent cost trends and projected future trends.

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The following table illustrates the effect on 2006 pension and other postretirement costs of changing the critical actuarial assumptions discussed above, while holding all other actuarial assumptions constant:


Actuarial Assumption	Change in Assumption		Pension		Other Postretirement Benefits		Total
	(Million of Dollars)
Increase in accounting cost:
Discount rate
Con Edison	(0.25	%)	$	29	$	4	$	33
Con Edison of New York	(0.25	%)	$	27	$	3	$	30
Expected return on plan assets
Con Edison	(0.25	%)	$	19	$	2	$	21
Con Edison of New York	(0.25	%)	$	18	$	2	$	20
Health care trend rate
Con Edison	1.00	%		-	$	6	$	6
Con Edison of New York	1.00	%		-	$	3	$	3

Increase in projected benefit obligation:
Discount rate
Con Edison	(0.25	%)	$	264	$	43	$	307
Con Edison of New York	(0.25	%)	$	248	$	37	$	285
Health care trend rate
Con Edison	1.00	%		-	$	30	$	30
Con Edison of New York	1.00	%		-	$	10	$	10

Pension benefits are provided through a pension plan maintained by Con Edison to which Con Edison of New York, O&R and the competitive energy businesses make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets.

The Companies were not required to make cash contributions to the pension plan in 2006 under funding regulations and tax laws. However, Con Edison of New York, O&R and Con Edison’s competitive energy businesses made discretionary contributions to the plan in 2006 of $66 million, $37 million and $1 million, respectively, and expect to make discretionary contributions in 2007 of $92 million, $33 million and $1 million, respectively.

The Companies’ policy is to fund their pension and other postretirement benefit accounting costs to the extent tax deductible and for the Utilities, to the extent these costs are recovered under their rate agreements.

Accounting for Contingencies

SFAS No. 5, “Accounting for Contingencies,” applies to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include service interruptions experienced in 2006 (Note B), the Utilities’ responsibility for hazardous substances, such as asbestos, PCBs and coal tar that have been used or generated in the course of operations (Note G); certain tax matters (Notes J and L); and other contingencies (Note H). In accordance with SFAS No. 5, the Companies have accrued estimates of losses relating to the contingencies as to which loss is probable and can be reasonably estimated and no liability has been accrued for contingencies as to which loss is not probable or cannot be reasonably estimated.

The Utilities generally recover costs for asbestos lawsuits, workers’ compensation and environmental remediation pursuant to their current rate plans. Changes during the terms of the rate plans to the amounts accrued for these contingencies would not impact earnings.

Accounting for Long-Lived Assets

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that certain long-lived assets must be tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. The carrying amount of a long-lived asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Under SFAS No. 144, an impairment loss is recognized if the carrying amount is not recoverable from such cash flows, and exceeds its fair value, which approximates market value.

Con Edison’s competitive energy businesses test their assets for impairment whenever events indicate that their carrying amount might not be recoverable. A critical element of this test is the forecast of future undiscounted cash flows to be generated from the long-lived assets. Forecast of these cash flows requires complex judgments about future operations, which are particularly difficult to make with respect to evolving industries such as the competitive energy businesses. Under SFAS No. 144, if alternative courses of action are under consideration or if a range is estimated for the amount of possible future cash flows, the probability of all possible outcomes must be weighted. With respect to the forecasted cash flows associated with Con Edison Development’s generation facilities, a 10 percent decrease in the estimated undiscounted cash flows for these

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facilities would not result in an impairment charge. No impairments were identified by the tests in 2004 or 2006. As a result of the 2005 tests, Con Edison recognized impairment charges of $9 million ($5 million after tax) with respect to Con Edison Communications. See “Impairments” in Note A to the financial statements.

Accounting for Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Con Edison is required to annually test goodwill for impairment. See Note K to the financial statements. Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill.

The goodwill of $406 million at December 31, 2006, was most recently tested for impairment during the first quarter of 2006. This test did not require any second-step assessment and did not result in any impairment. The company’s most significant assumptions surrounding the goodwill impairment test relate to the estimates of reporting unit fair values. The company estimated fair values based primarily on discounted cash flows. A decrease in the forecasted cash flows of 10 percent would not have resulted in the carrying value of any reporting units exceeding their estimated fair values.

Accounting for Derivative Instruments

The Companies apply SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and other related accounting pronouncements to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See “Financial and Commodity Market Risks,” below and Note O to the financial statements.

Where the Companies are required to make mark-to-market estimates pursuant to SFAS No. 133, the estimates of gains and losses at a particular period end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of a transaction. Substantially all of

the estimated gains or losses are based on prices supplied by external sources such as the fair value of exchange traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.

Accounting for Leases

The Companies apply SFAS No. 13, “Accounting for Leases” and other related pronouncements to their leasing transactions. See Note J to the financial statements for information about Con Edison Development’s “Lease In/Lease Out” or LILO transactions, a disallowance of tax losses by the Internal Revenue Service and a possible future charge to earnings. In accordance with SFAS No. 13, Con Edison accounted for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases.

Liquidity and Capital Resources

The Companies’ liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below.

The principal factors affecting Con Edison’s liquidity are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities and cash flows from financing activities, including, in 2006 and 2004, issuance of 12.2 million and 16.7 million shares of common stock for $510 and $578 million, respectively, of which $447 million and $512 million were invested in Con Edison of New York. In 2005, 2.8 million shares of common stock were issued for $78 million.

The principal factors affecting Con Edison of New York’s liquidity are its cash flows from operating activities, cash used in investing activities (including construction expenditures), the dividends it pays to Con Edison and cash flows from financing activities discussed below.

The Companies generally maintain minimal cash balances and use short-term borrowing to meet their working capital needs and other cash requirements. The Companies repay their short-term borrowings using funds from long-term financings and operating activities. The Utilities’ cost of capital, including working capital, is reflected in the rates they charge to their customers.

Each of the Companies believes that it will be able to meet its reasonably likely short-term and long-term cash requirements.

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See “Risk Factors,” and “Application of Critical Accounting Policies—Accounting for Contingencies,” above, and “Regulatory Matters,” below.

Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2006, 2005 and 2004 are summarized as follows:

Con Edison


(Millions of Dollars)	2006			2005			Variance 2006 vs. 2005			2004			Variance 2005 vs. 2004
Operating activities	$	1,354		$	790		$	564		$	1,311		$	(521	)
Investing activities		(1,918	)		(1,274	)		(644	)		(1,531	)		257
Financing activities		577			539			38			197			342
Net change		13			55			(42	)		(23	)		78
Balance at beginning of period		81			26			55			49			(23	)
Balance at end of period	$	94		$	81		$	13		$	26		$	55

Con Edison of New York


(Millions of Dollars)	2006			2005			Variance 2006 vs. 2005			2004			Variance 2005 vs. 2004
Operating activities	$	1,163		$	818		$	345		$	1,201		$	(383	)
Investing activities		(1,839	)		(1,167	)		(672	)		(1,412	)		245
Financing activities		662			400			262			188			212
Net change		(14	)		51			(65	)		(23	)		74
Balance at beginning of period		61			10			51			33			(23	)
Balance at end of period	$	47		$	61		$	(14	)	$	10		$	51

Cash Flows from Operating Activities

The Utilities’ cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as weather and economic conditions. The prices at which the Utilities provide energy to their customers are determined in accordance with their rate agreements. In general, changes in the Utilities’ cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements. See “Recoverable Energy Costs” in Note A to the financial statements.

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation, deferred income tax expense and in 2004 charges in accordance with Con Edison of New York’s rate plans. For the Companies, principal non-cash credits also included prepaid pension costs and amortizations of certain net regulatory liabilities, including the tax effects, in accordance with its rate plan. See “Application of Critical Accounting Policies— Accounting for Pensions and Other Postretirement Benefits” and Notes E and F to the financial statements.

Net cash flows from operating activities in 2006 for Con Edison and Con Edison of New York were $564 million and $345 million higher, respectively, than in the 2005 period. The increase in net cash flows reflects increased deferred tax benefits, the timing of Con Edison of New York’s New York City property tax payments and higher energy prices in the last quarter of 2005. The company achieved a 1.5 percent reduction in its City property taxes for the fiscal year ending June 30, 2006 by prepaying the annual tax amount due on June 30, 2005 instead of paying semi-annual installments on their due dates (July 1, 2005 and January 1, 2006). For the fiscal year ending June 30, 2007, the company made a semi-annual installment on July 1, 2006. The higher 2005 energy prices resulted in higher accounts receivable, net of allowance for uncollectibles, and accounts payable at the end of 2005 and increased collections of receivables from customers and accounts payable payments in the 2006 period.

Net cash flows from operating activities in 2005 for Con Edison and Con Edison of New York were $521 million and $383 million lower, respectively, than in 2004. The decrease reflects primarily prepayment of New York City property taxes, described above, reduced deferred tax benefits and an increase in customer accounts receivable, offset in part by increases in accounts payable. The increases in customer accounts receivable and accounts payable reflect primarily higher energy market prices and higher sales and delivery volumes. See “Other Changes in Assets and Liabilities,” below.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities in 2006 for Con Edison and Con Edison of New York were $644 million and $672 million higher, respectively, than in 2005. The increases for the Companies reflect primarily increased utility construction expenditures and decreased net sale proceeds from the sale of certain properties ($60 million in 2006 as compared with $534 million in 2005). For Con Edison, the increase was partially offset, relative to Con Edison of New York, by $39 million of net proceeds from the completion of the sale of Con Edison Communications in March 2006.

Net cash flows used in investing activities for Con Edison and Con Edison of New York were $257 million and $245 million lower, respectively, in 2005 than in the 2004, reflecting primarily $534 million of net proceeds from the completion in May 2005 of the sale of Con Edison of New York properties located on First

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Avenue in Manhattan, collectively referred to as the “First Avenue Properties” (see “Regulatory Assets and Liabilities” in Note B to the financial statements), partially offset by increased utility construction expenditures.

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison and Con Edison of New York increased $38 million and $262 million in 2006 compared with 2005, and increased $342 million and $212 million, respectively, in 2005 compared with 2004.

Con Edison’s cash flows from financing activities for the years ended December 31, 2006 and 2004, reflect the issuance through public offerings of 9.7 million and 14 million Con Edison common shares resulting in net proceeds of $447 million and $512 million, respectively, which were invested by Con Edison in Con Edison of New York.

Cash flows from financing activities for 2006, 2005 and 2004 also reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2006: 2.5 million shares for $63 million, 2005: 2.8 million shares for $78 million, 2004: 2.7 million shares for $66 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $40 million in 2006, $38 million in 2005 and $39 million in 2004.

Net cash flows from financing activities during the years ending December 31, 2006, 2005 and 2004 also reflect the following Con Edison of New York transactions:

2006

–	Issued $400 million 5.85% 30-year debentures, $250 million 5.30% 10-year debentures and $250 million 5.70% 30-year debentures, the proceeds of which were used for general corporate purposes;

–	Issued $400 million 6.20% 30-year debentures, the proceeds of which were used for general corporate purposes and to redeem in advance of maturity $100 million 7.75% debentures due 2026; and

–	Issued $400 million 5.50% 10-year debentures, the proceeds of which were used to redeem in advance of maturity $400 million 7.50% debentures due 2041.

2005

–	Issued $350 million 5.30% 30-year debentures, $125 million 5.25% 30-year debentures and $350 million 5.375% 10-year debentures, the proceeds of which were used for general corporate purposes;

–

Issued note for $126 million of variable-rate, tax-exempt Facilities Revenue Bonds due 2039, the proceeds of which were classified as restricted cash at June 30, 2005 and used together with other funds to redeem in advance of maturity $128 million 6.10% fixed-rate tax-exempt Facilities Revenue Bonds due 2020; and

–	Redeemed at maturity $100 million 6.625% 10-year debentures and $350 million 6.625% 5-year debentures.

2004

–

Issued notes for $344 million of variable-rate, tax-exempt Facilities Revenue Bonds, with various maturity dates between 28 and 35 years, the proceeds of which were used to redeem in advance of maturity fixed-rate tax-exempt Facilities Revenue Bonds, 5.25% due 2020, 5.375% due 2022, 6.0% due 2028 and 7.125% due 2029;

–	Issued $200 million 4.7% 10-year debentures and $200 million 5.7% 30-year debentures, the proceeds of which were used to redeem in advance of maturity $150 million 7.125% debentures due 2029 and for general corporate purposes;

–	Redeemed at maturity $150 million 7.625% 12-year debentures; and

–	Issued $275 million 4.7% 5-year debentures, the proceeds of which were used in July to redeem in advance of maturity $275 million 7.35% 40-year debentures.

Con Edison’s net cash flows from financing activities also include O&R’s financings. In 2006, O&R issued $75 million of 5.45% 10-year debentures. In 2005, O&R issued $40 million of 5.30% 10-year debentures. In 2004, $46 million of 5.22% Transition Bonds associated with securitization of previously deferred purchased power costs of O&R’s New Jersey subsidiary were issued.

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at December 31, 2006, 2005 and 2004 and the average daily balances for 2006, 2005 and 2004 for Con Edison and Con Edison of New York were as follows:


(Millions of Dollars, except Weighted Average Yield)	2006						2005						2004
(Millions of Dollars, except Weighted Average Yield)	Out- standing at Dec. 31			Daily average			Out- standing at Dec. 31			Daily average			Out- standing at Dec. 31			Daily average
Con Edison	$	117		$	448		$	755		$	210		$	156		$	166
Con Edison of New York	$	-		$	305		$	520		$	118		$	100		$	126
Weighted average yield		5.4	%		5.0	%		4.3	%		3.3	%		2.2	%		1.2	%

Common stock issuances and external borrowings are sources of liquidity that could be affected by changes in credit ratings,

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) — CONTINUED

financial performance and capital market conditions. For information about the Companies’ credit ratings and certain financial ratios, see “Capital Resources,” below.

Other Changes in Assets and Liabilities

The following table shows changes in assets and liabilities at December 31, 2006, compared with December 31, 2005, that have not impacted the Companies’ consolidated statements of cash flows.


(Millions of Dollars)	Con Edison 2006 vs. 2005 Variance			Con Edison of New York 2006 vs. 2005 Variance
Assets
Fair value of derivative assets	$	(209	)	$	(175	)
Deferred derivative losses		228			204
Prepaid pension costs		(1,474	)		(1,474	)
Regulatory asset—Unrecognized pension and other postretirement costs		1,929			1,776

Liabilities
Deferred derivative gains		(218	)		(165	)
Fair value of derivative liabilities		335			216

Upon adoption of SFAS No. 158, the Companies’ prepaid pension costs were eliminated and a regulatory asset for unrecognized pension and other postretirement costs was established. See Notes E and F to the financial statements.

In the context of decreasing energy market prices in 2006, the Companies’ policies for managing their energy purchases resulted in a decrease in the fair value of derivative assets (included in the consolidated balance sheets as a current asset) and an increase in the fair value of derivative liabilities at December 31, 2006 as compared with year-end 2005. For the Utilities, mark-to-market activity had no effect on net income as the amounts were deferred as regulatory assets/liabilities (deferred derivative losses/gains). In accordance with provisions approved by state regulators, the Utilities generally recover from customers their energy supply costs, net of gains and losses on derivative instruments used to hedge energy purchases. The mark-to-market accounting for Con Edison’s competitive energy businesses resulted in a net increase in the fair value of derivative liabilities. The competitive energy businesses record mark-to-market gains and losses on derivative instruments in earnings in the reporting period in which such changes occur for contracts that do not meet the requirements of cash flow hedge accounting or for which such accounting has not been elected. For the Companies, changes in fair value of derivative instruments may lead to collateral payments made to or received from counterparties or brokers that are reflected in other current assets and other current liabilities.

Capital Resources

Con Edison is a holding company that operates only through its subsidiaries and has no material assets other than its interests in its subsidiaries. Con Edison expects to finance its capital requirements primarily from dividends it receives from its subsidiaries and through the sale of securities, including commercial paper and the issuance in 2007 of between $500 million and $700 million of Con Edison common shares in addition to stock issuances under its dividend reinvestment and employee stock plans. Con Edison’s ability to make payments on its external borrowings and dividends on its common shares is also dependent on its receipt of dividends from its subsidiaries or proceeds from the sale of its securities or its interests in its subsidiaries.

For information about restrictions on the payment of dividends by the Utilities and significant debt covenants, see Note C to the financial statements.

For information on the Companies’ commercial paper program and revolving credit agreements with banks, see Note D to the financial statements.

The Utilities expect to finance their operations and capital requirements from external borrowings, contributions of equity capital from Con Edison and internally-generated funds. The Utilities expect to finance their payment of dividends to Con Edison from internally-generated funds.

In May 2005, the PSC authorized Con Edison of New York to issue up to $4.4 billion of debt securities prior to December 31, 2009, of which the company had issued $1.675 billion at December 31, 2006. In January 2006, the PSC authorized O&R to issue up to $325 million of debt securities prior to December 31, 2009, of which the company had issued $75 million as of December 31, 2006. In addition, the PSC has authorized the Utilities’ to refund outstanding debt securities and preferred stock should the Utilities determine that it is economic to do so.

Con Edison’s competitive energy businesses have financed their operations and capital requirements primarily with capital contributions and borrowings from Con Edison, internally-generated funds and external borrowings. See Note P to the financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the years ended December 31, 2006, 2005, 2004, 2003, and 2002 was:


Earnings to Fixed Charges (Times)	2006	2005	2004	2003	2002
Con Edison	2.9	3.1	2.6	3.1	3.1
Con Edison of New York	3.2	3.6	3.1	3.4	3.4

For each of the Companies, the common equity ratio at December 31, 2006, 2005 and 2004 was:


Common Equity Ratio (Percent of total capitalization)	2006	2005	2004
Con Edison	48.5	49.0	51.0
Con Edison of New York	50.0	50.7	52.9

The commercial paper of the Companies is rated P-1, A-2 and F1, respectively, by Moody’s, S&P and Fitch. Con Edison’s unsecured debt is rated A2, A- and A, respectively, by Moody’s, S&P and Fitch. The unsecured debt of Con Edison of New York is rated A1, A and A+, respectively, by Moody’s, S&P and Fitch. The unsecured debt of O&R is rated A2, A and A+, respectively, by Moody’s, S&P and Fitch. Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Capital Requirements

The following table contains the Companies’ capital requirements for the years 2004 through 2006 and their current estimate of amounts for 2007 through 2009.


	Actual						Estimate
(Millions of Dollars)	2004		2005		2006		2007		2008		2009
Regulated utility construction expenditures
Con Edison of New York	$	1,235	$	1,541	$	1,782	$	1,870	$	1,911	$	1,790
O&R		79		87		110		125		127		125
Total regulated construction expenditures		1,314		1,628		1,892		1,995		2,038		1,915
Competitive businesses capital expenditures		38		19		6		8		5		6
Sub-total		1,352		1,647		1,898		2,003		2,043		1,921
Retirement of long-term securities at maturity*
Con Edison–parent company		-		-		-		-		200		-
Con Edison of New York		923		578		500		330		280		475
O&R		-		2		2		22		3		2
Competitive energy businesses		16		17		21		22		24		14
Total retirement of long-term securities at maturity		939		597		523		374		507		491
Total	$	2,291	$	2,244	$	2,421	$	2,377	$	2,550	$	2,412

*	Includes long-term securities redeemed in advance of maturity.

Con Edison of New York’s utility construction expenditures reflect programs to meet growth in the demand for electricity and reliability needs, gas infrastructure expenditures and expenditures for permanent electric, gas and steam system restoration following the 2001 World Trade Center attack. Amounts for 2004 and 2005 also include expenditures for the East River Repowering Project. The increases in 2006 reflect a higher level of expenditures for electric substations and ongoing improvements and reinforcements of the electric distribution system.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Contractual Obligations

The following table summarizes the Companies’ material obligations at December 31, 2006, to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases, non-utility generator (NUG) contracts and other purchased power agreements (PPAs) (for which undiscounted future annual payments are shown) are described in the notes to the financial statements.


	Payments Due by Period
(Millions of Dollars)	Total		Less than 1 year		2 – 3 years		4 – 5 years		After 5 years
Long-term debt (Note C)
Con Edison of New York	$	7,276	$	330	$	755	$	625	$	5,566
O&R		459		22		5		61		371
Competitive energy businesses and parent		959		22		238		35		664
Interest on long-term debt		7,681		494		921		751		5,515
Total Long-term debt, including interest		16,375		868		1,919		1,472		12,116
Capital lease obligations (Note J)
Con Edison of New York		42		7		16		14		5
Operating leases (Notes J and P)
Con Edison of New York		332		39		79		79		135
O&R		7		2		3		2		-
Competitive energy businesses		10		2		4		1		3
Total operating leases		349		43		86		82		138
Purchase obligations
Non-utility generator contracts and purchase power agreements – Utilities (Note I)
Con Edison of New York
Energy (a)		14,598		1,091		2,223		1,413		9,871
Capacity		5,487		505		1,038		1,034		2,910
Total Con Edison of New York		20,085		1,596		3,261		2,447		12,781
O&R
Energy and Capacity (a)		174		100		74		-		-
Total non-utility generator contracts and purchase power agreements – Utilities		20,259		1,696		3,335		2,447		12,781
Natural gas supply, transportation, and storage contracts – Utilities (b)
Con Edison of New York
Natural gas supply		1,264		544		651		69		-
Transportation and storage		432		141		202		71		18
Total Con Edison of New York		1,696		685		853		140		18
O&R
Natural gas supply		296		110		168		18		-
Transportation and storage		99		34		48		14		3
Total O&R		395		144		216		32		3
Total natural gas supply, transportation and storage contracts		2,091		829		1,069		172		21
Other purchase obligations (c)
Con Edison of New York		1,869		1,185		596		58		30
O&R		144		83		47		11		3
Total other purchase obligations		2,013		1,268		643		69		33
Competitive energy businesses commodity and service agreements (d)		650		387		51		47		165
Total	$	41,779	$	5,098	$	7,119	$	4,303	$	25,259

(a)	Included in these amounts is the cost of minimum quantities of energy that the company is obligated to purchase at both fixed and variable prices.

(b)	Included in these amounts is the cost of minimum quantities of natural gas supply, transportation and storage that the Utilities are obligated to purchase at both fixed and variable prices.

(c)

Amounts shown for other purchase obligations, which reflect capital and operations and maintenance costs incurred by the Utilities in running their day-to-day operations, were derived from the Utilities’ purchasing systems as the difference between the amounts authorized and the amounts paid (or vouchered to be paid) for each obligation. For many of these obligations, the Utilities are committed to purchase less than the amount authorized. Payments for the “Other Purchase Obligations” are generally assumed to be made ratably over the term of the obligations. The Utilities believe that unreasonable effort and expense would be involved to modify their purchasing systems to enable them to report their “Other Purchase Obligations” in a different manner.

(d)	Amounts represent commitments to purchase minimum quantities of electric energy and capacity, natural gas, natural gas pipeline capacity and generating plant services entered into by Con Edison’s competitive energy businesses.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

The Companies’ commitments to make payments in addition to these contractual commitments include their other liabilities reflected in their balance sheets, any funding obligations for their pension and other postretirement benefit plans, financial hedging activities, their collective bargaining agreements and Con Edison’s guarantees of certain obligations of its businesses. See Notes E, F, P and “Guarantees” in Note H to the financial statements.

Electric Power Requirements

In 2006, the Utilities purchased substantially all of the energy they sold to customers pursuant to firm contracts and through the NYISO’s wholesale electricity market. Con Edison expects that these resources will again be adequate to meet the requirements of its customers in 2007.

In general, the Utilities recover prudently-incurred purchased power costs pursuant to rate provisions approved by the state public utility regulatory authority having jurisdiction. See “Financial and Commodity Market Risks—Commodity Price Risk,” below and “Recoverable Energy Costs” in Note A to the financial statements. From time to time certain parties have petitioned the PSC to review these provisions, the elimination of which could have a material adverse effect on the Companies’ financial position, results of operations or liquidity.

To reduce the volatility of electric energy costs, the Utilities have firm contracts to purchase electric energy and enter into derivative transactions to hedge the costs of a portion of their expected purchases under these contracts and through the NYISO’s wholesale electricity market, which together cover a substantial portion of the electric energy expected to be sold to customers in 2007. See Notes I and O to the financial statements. O&R’s New Jersey subsidiary entered into firm contracts to purchase electric energy for substantially all of the electric energy expected to be sold to its customers in 2007.

Con Edison of New York also owns generating stations in New York City associated primarily with its steam system. As of December 31, 2006, the generating stations had a combined electric capacity of approximately 709 MW. O&R does not own any electric generating capacity.

In a July 1998 order, the PSC indicated that it “agree(s) generally that Con Edison of New York need not plan on constructing new generation as the competitive market develops,” but considers “overly broad” and did not adopt Con Edison of New York’s request for a declaration that, solely with respect to providing generating capacity, it will no longer be required to engage in long-range planning to meet potential demand and, in particular, that it will no longer have the obligation to construct new generating facilities, regardless of the market price of capacity. Con Edison of New York monitors the adequacy of the electric capacity resources and related developments in its service area, and works with other parties on long-term resource adequacy issues within the framework of the NYISO.

For information about transmission issues arising from the proposed closure of the Lovett generating station located in O&R’s service territory see “Generating Assets Sold to Mirant” in Note H to the financial statements.

Con Edison’s competitive energy businesses sell electricity to wholesale and retail customers in the NYISO, PJM Interconnection (PJM), ISO New England (ISO-NE) and other markets. In addition, at December 31, 2006, Con Edison Development owned equity interests in electric generating facilities equivalent to 1,668 MW of net generating capacity, substantially all of which is located within the PJM or the ISO-NE. Con Edison Energy sells the electricity from these generating facilities on the wholesale electricity markets or under contract. See “Financial and Commodity Market Risks—Commodity Price Risk,” below.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Regulatory Matters

The following table, which summarizes certain significant provisions of the Utilities’ principal rate agreements, should be read in conjunction with, and is subject to, the more detailed discussion of the agreements in Note B to the financial statements.


Effective Period	Rate Increases	Amortization To Income of Net Regulatory (Assets) and Liabilities	Other Significant Revenue Sources	Return on Equity Sharing Threshold		Earnings Sharing Terms* (Shareholders / Customers)
	(Millions of Dollars, except percentages)
Con Edison of New York – Electric
April 2005 - March 2008	Yr. 1 -$104.6 Yr. 2 - None Yr. 3 -$220.4****	Yr. 1 - $128 Yr. 2 - $173 Yr. 3 - $249	$60 of annual transmission congestion contracts revenues Transmission and distribution plant reconciliation	11.40	%	11.4% - 13% - 50/50 > 13% - 25/75
Con Edison of New York – Gas
October 2004 - September 2007	Yr. 1 - $46.8 Yr. 2 - None Yr. 3 - None	$41 over 3 yrs.	$35 of annual non- firm revenues	11.75	%	50/50
Con Edison of New York – Steam
October 2006 - September 2008	None	$53 over 2 yrs.	East River Repowering Project carrying costs	11.00	%	11% - 12% - 50/50 >12% - 25/75
O&R – Electric (NY)
July 2003 - October 2006	None	$(11) over 3 yrs.	-	12.75	%**	50/50
O&R—Gas***
November 2006 - October 2009	Yr. 1 - $6.5 Yr. 2 - $6.5 Yr. 3 - $6.3	$(3) over 3 yrs.	-	11.00	%	11% - 12% - 50/50 12% - 14% - 35/65 >14% - 0/100

*	Subject to limitation for cost reconciliations described in Note B to the financial statements.

**	Ended June 30, 2006.

***	Reflects phase-in of rate increase discussed in Note B to the financial statements.

****	$ 60 million accrued to income in rate year 2.

Con Edison of New York expects to file a request in May 2007 for a new electric rate plan to be effective April 1, 2008. The company anticipates that the requested rate plan will include a substantial rate increase, principally to reflect the capital investments the company has made, and plans to continue to make, in its electric transmission and distribution systems to meet the growing needs of its customers. In November 2006, the company filed a request with the PSC for a net increase in the rates it charges for gas service, effective October 1, 2007, of $197 million.

In June 2006, O&R’s New Jersey subsidiary, RECO, filed a request with the NJBPU for new electric rates, to be effective April 2007. In December 2006, the PSC ordered O&R to demonstrate why its electric rates should not be reduced. In February 2007, O&R filed its response with the PSC which states that rates should not be reduced and that the issues regarding earnings sharing targets and deferral recovery mechanisms raised by the PSC should be examined in a proceeding setting rates for O&R.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

The Companies are actively participating in regulatory proceedings at the federal level that are underway to implement the Energy Policy Act of 2005, such as the implementation of mandatory reliability standards through the North American Electric Reliability Council and efforts to increase investment in infrastructure, including implementation of transmission pricing incentives. The Companies also participate in other federal regulatory proceedings that affect electric capacity and energy markets in New York and PJM regions, and those that affect gas pipeline companies.

Financial and Commodity Market Risks

The Companies are subject to various risks and uncertainties associated with financial and commodity markets. The most significant market risks include interest rate risk, commodity price risk, credit risk and investment risk.

Interest Rate Risk

The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its businesses manage interest rate risk through the issuance of mostly fixed rate-debt with varying maturities and through opportunistic refinancing of debt. The Companies estimate that each 10 percent variation in interest rates applicable to Con Edison’s and Con Edison of New York’s variable rate debt and commercial paper would result in a change in annual interest expense of $7 million and $6 million, respectively.

In addition, from time to time, Con Edison and its businesses enter into derivative financial instruments to hedge interest rate risk on certain debt securities. See “Interest Rate Hedging” in Note O to the financial statements.

Commodity Price Risk

Con Edison’s commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison’s competitive energy businesses have risk management strategies to mitigate their related exposures. See Note O to the financial statements.

Con Edison estimates that, as of December 31, 2006, each 10 percent change in market prices would result in a change in fair value of $146 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $117 million is for Con Edison of New York and $29 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs. See “Recoverable Energy Costs” in Note A to the financial statements.

Con Edison’s competitive energy businesses use a value-at-risk (VaR) model to assess the market risk of their electricity and gas commodity fixed-price purchase and sales commitments, physical forward contracts and commodity derivative instruments. VaR represents the potential change in fair value of instruments or the portfolio due to changes in market factors, for a specified time period and confidence level. These businesses estimate VaR across their electricity and natural gas commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level. Since the VaR calculation involves complex methodologies and estimates and assumptions that are based on past experience, it is not necessarily indicative of future results. VaR for transactions associated with hedges on generating assets and commodity contracts, assuming a one-day holding period, for the years ended December 31, 2006, and 2005, respectively, was as follows:

Credit Risk

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the company has a legally enforceable right of setoff.

The Utilities had $60 million of credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at December 31, 2006, of which $2 million was with investment-grade counterparties and $58 million was with commodity exchange brokers.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Con Edison’s competitive energy businesses had $196 million of credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at December 31, 2006, of which $166 million was with investment grade counterparties and $29 million was with commodity exchanges or independent system operators. The remaining $1 million was with entities which lacked ratings or whose ratings were not investment grade.

Investment Risk

The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. See “Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits,” above. The Companies’ current investment policy for pension plan assets includes investment targets of 65 percent equities and 35 percent fixed income and other securities. At December 31, 2006, the pension plan investments consisted of 66 percent equity and 34 percent fixed income and other securities. See Notes E and F to the financial statements.

Environmental Matters

For information concerning potential liabilities arising from laws and regulations protecting the environment and from claims relating to alleged exposure to asbestos, see Note G to the financial statements.

Impact of Inflation

The Companies are affected by the decline in the purchasing power of the dollar caused by inflation. Regulation permits the Utilities to recover through depreciation only the historical cost of their plant assets even though in an inflationary economy the cost to replace the assets upon their retirement will substantially exceed historical costs. The impact is, however, partially offset by the repayment of the Companies’ long-term debt in dollars of lesser value than the dollars originally borrowed. Also, to the extent the Companies’ prices change by more or less than inflation, the real price of the Companies’ services will increase or decline. Over the past 20 years, for example, the real price of electric service has declined substantially.

Material Contingencies

For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies—Accounting for Contingencies” and Notes B, G, H, J and L to the financial statements.

Results of Operations

Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies,” above), rate plans that cover the rates the Utilities can charge their customers (see “Regulatory Matters,” above) and demand for utility service. Demand for utility service is affected by weather, economic conditions and other factors.

The Companies’ results of operations for the 12 months ended December 31, 2006 reflect milder weather in 2006, the Utilities’ rate agreements, expenditures related to the 2006 power outages, increased interest expense and the results of the competitive energy businesses including mark-to-market effects. For additional information about major factors affecting earnings, see “Results of Operations—Summary,” above.

In general, the Utilities recover on a current basis the fuel, gas purchased for resale and purchased power costs they incur in supplying energy to their full-service customers (see “Recoverable Energy Costs” in Note A and “Regulatory Matters” in Note B to the financial statements). Accordingly, such costs do not generally affect the Companies’ results of operations. Management uses the term “net revenues” (operating revenues less such costs) to identify changes in operating revenues that may affect the Companies’ results of operations. Management believes that, although “net revenues” may not be a measure determined in accordance with accounting principles generally accepted in the United States of America, the measure facilitates the analysis by management and investors of the Companies’ results of operations.

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and Con Edison’s competitive energy businesses. Con Edison of New York’s principal business segments are its regulated electric, gas and steam utility activities. A discussion of the results of operations by principal business segment for the years ended December 31, 2006, 2005 and 2004 follows. For additional business segment financial information, see Note N to the financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

The Companies’ results of operations (which were discussed above under “Results of Operations—Summary”) in 2006 compared with 2005 were:


	Con Edison*					Con Edison of New York					O&R					Competitive Businesses and Other**
(Millions of Dollars)	Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent
Operating revenues	$	496		4.3	%	$	61		0.7	%	$	(6	)	(0.7	)%	$	441		27.7	%
Purchased power		181		3.9			(270	)	(8.1	)		(14	)	(4.4	)		465		44.0
Fuel		(82	)	(10.0	)		(1	)	(0.2	)		-		-			(81	)	(27.9	)
Gas purchased for resale		(73	)	(6.3	)		(63	)	(6.5	)		7		4.9			(17	)	(36.2	)
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)		470		9.5			395		8.9			1		0.3			74		37.6
Other operations and maintenance		216		12.8			195		13.7			8		4.5			13		14.9
Depreciation and amortization		37		6.3			36		7.1			1		2.9			-		-
Taxes, other than income taxes		68		5.7			69		6.2			-		-			(1	)	(4.2	)
Income taxes		46		12.7			26		7.9			(6	)	(19.4	)		26		Large
Operating income		103		8.9			69		6.6			(2	)	(2.8	)		36		81.8
Other income less deductions and related federal income tax		(11	)	(28.2	)		5		17.9			3		Large			(19	)	(95.0	)
Net interest expense		86		18.5			82		22.5			4		16.7			-		-
Income from continuing operations		6		0.8			(8	)	(1.2	)		(3	)	(6.1	)		17		Large
Discontinued operations		12		92.3			N/A		N/A			N/A		N/A			12		92.3
Net income	$	18		2.5	%	$	(8	)	(1.2	)%	$	(3	)	(6.1	)%	$	29		Large

*	Represents the consolidated financial results of Con Edison and its businesses.

**	Includes inter-company and parent company accounting.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Con Edison of New York

Electric

Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in 2006 compared with 2005 were:


	Millions of kWhs Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2006	December 31, 2005	Variation		Percent Variation		December 31, 2006		December 31, 2005		Variation			Percent Variation
Residential/Religious	12,590	13,690	(1,100	)	(8.0	)%	$	2,631	$	2,884	$	(253	)	(8.8	)%
Commercial/Industrial	13,409	15,402	(1,993	)	(12.9	)		2,460		2,869		(409	)	(14.3	)
Retail access customers	19,256	16,848	2,408		14.3			1,040		679		361		53.2
NYPA, Municipal Agency and other sales	11,021	11,396	(375	)	(3.3	)		310		337		(27	)	(8.0	)
Other operating revenues	-	-	-		-			611		179		432		Large
Total	56,276	57,336	(1,060	)	(1.8	)%	$	7,052	$	6,948	$	104		1.5	%

Con Edison of New York’s electric operating revenues were $104 million higher in 2006 than in 2005, due primarily to increased recoverable fuel costs ($52 million), sales growth ($38 million), increased collections for demand side management programs ($31 million), the electric rate plan that took effect in April 2005 ($213 million), recovery of costs relating to the East River Repowering Project ($19 million), a reversal of a portion of the provision for refund to customers of shared earnings above the target level accrued in 2005 ($70 million) and a 2005 provision for refund to customers of deferred taxes associated with the sale of the First Avenue Properties ($23 million), offset in part by a decrease in purchased power costs ($286 million) and the impact of the milder weather ($91 million). Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Electric delivery volumes in Con Edison of New York’s service area decreased 1.8 percent in 2006 compared with 2005, primarily reflecting milder weather in 2006 compared with 2005. After adjusting for variations, principally weather and billing days, electric delivery volumes in Con Edison of New York’s service area increased 1.8 percent in 2006 compared with 2005.

Con Edison of New York’s electric fuel costs increased $52 million, reflecting higher sendout volumes from the company’s generating facilities ($59 million), offset by a decrease in unit costs ($7 million). Electric purchased power costs decreased $286 million in 2006 compared with 2005 reflecting a decrease in purchased volumes associated with milder 2006 weather and additional customers obtaining their energy supply through competitive providers ($547 million), partially offset by an increase in unit costs ($261 million).

Con Edison of New York’s electric operating income increased $54 million in 2006 compared with 2005. The increase reflects higher net revenues ($340 million, due principally to the electric rate agreement), offset in part by higher operations and maintenance costs ($175 million, due primarily to power outages ($63 million), compensation for spoilage of food associated with certain of the outages ($9 million), demand side management program expenses ($31 million), East River Repowering Project costs ($19 million), higher expenses relating to uncollectible customer accounts ($7 million), increased transmission and distribution expenses ($19 million) and recognition of expense for stock-based compensation ($7 million)), taxes other than income taxes ($60 million, principally property taxes) and depreciation ($21 million).

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Gas

Con Edison of New York’s gas sales and deliveries, excluding off-system sales, in 2006 compared with 2005 were:


	Thousands of dths Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2006	December 31, 2005	Variation		Percent Variation		December 31, 2006		December 31, 2005		Variation			Percent Variation
Residential	40,589	48,175	(7,586	)	(15.7	)%	$	781	$	816	$	(35	)	(4.3	)%
General	31,269	36,800	(5,531	)	(15.0	)		471		493		(22	)	(4.5	)
Firm transportation	23,688	19,088	4,600		24.1			105		69		36		52.2
Total firm sales and transportation	95,546	104,063	(8,517	)	(8.2	)		1,357		1,378		(21	)	(1.5	)
Interruptible sales	11,995	13,128	(1,133	)	(8.6	)		121		149		(28	)	(18.8	)
NYPA	41,057	22,305	18,752		84.1			4		4		-		-
Generation plants	64,365	48,564	15,801		32.5			46		50		(4	)	(8.0	)
Other	19,324	18,103	1,221		6.7			30		25		5		20.0
Other operating revenues	-	-	-		-			55		24		31		Large
Total	232,287	206,163	26,124		12.7	%	$	1,613	$	1,630	$	(17	)	(1.0	)%

Con Edison of New York’s gas operating revenues in 2006 decreased $17 million compared with 2005, reflecting primarily a decrease in purchased gas costs ($63 million), offset in part by higher non-firm revenues ($7 million) and the gas rate plan ($30 million). Con Edison of New York’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Con Edison of New York’s sales and transportation volumes for firm customers decreased 8.2 percent in 2006 compared with 2005 reflecting primarily the impact of the milder winter and spring weather in 2006. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 1.3 percent in 2006. Con Edison of New York’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.

Con Edison of New York’s purchased gas cost decreased $63 million in 2006 compared with 2005 due to lower sendout ($206 million), offset in part by higher unit costs ($143 million).

Con Edison of New York’s gas operating income increased $16 million in 2006 compared with 2005. The increase reflects primarily higher net revenues ($46 million), offset in part by higher operations and maintenance expense ($15 million), taxes other than income taxes ($6 million, principally property taxes), income taxes ($5 million) and depreciation ($4 million).

Steam

Con Edison of New York’s steam sales and deliveries in 2006 compared with 2005 were:


	Millions of Pounds Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2006	December 31, 2005	Variation		Percent Variation		December 31, 2006		December 31, 2005		Variation			Percent Variation
General	515	655	(140	)	(21.4	)%	$	21	$	22	$	(1	)	(4.5	)%
Apartment house	6,774	7,748	(974	)	(12.6	)		174		173		1		0.6
Annual power	15,961	18,474	(2,513	)	(13.6	)		405		417		(12	)	(2.9	)
Other operating revenues	-	-	-		-			23		37		(14	)	(37.8	)
Total	23,250	26,877	(3,627	)	(13.5	)%	$	623	$	649	$	(26	)	(4.0	)%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Con Edison of New York’s steam operating revenues decreased $26 million in 2006 compared with 2005, due primarily to the milder weather in 2006 ($38 million) net purchased power, fuel costs and timing of fuel recoveries ($23 million), offset in part by the net increase in rates under the steam rate plan ($30 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Steam sales and delivery volumes decreased 13.5 percent in 2006 compared with 2005, reflecting primarily the impact of weather. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 0.6 percent in 2006.

Con Edison of New York’s steam purchased power costs increased $16 million in 2006 compared with 2005 due primarily to increased purchased volumes. Steam fuel costs decreased $53 million due primarily to lower sendout volumes ($41 million) and lower unit costs ($12 million).

Steam operating income decreased $1 million in 2006 compared with 2005 reflecting higher depreciation expense ($11 million), income taxes ($10 million), operations and maintenance costs ($5 million) and taxes other than income taxes ($3 million, principally property taxes), offset in part by higher net revenues ($10 million) and recovery of costs related to the East River Repowering Project ($19 million).

Taxes Other Than Income Taxes

At over $1 billion, taxes other than income taxes remain one of Con Edison of New York’s largest operating expenses. The principal components of, and variations in, taxes other than income taxes were:


(Millions of Dollars)	2006			2005			Increase/ (Decrease)
Property taxes	$	869		$	796		$	73
State and local taxes related to revenue receipts		253			267			(14	)
Payroll taxes		54			52			2
Other taxes		7			(1	)		8
Total	$	1,183	(a)	$	1,114	(a)	$	69

(a)	Including sales tax on customers’ bills, total taxes other than income taxes billed to customers in both 2006 and 2005 were $1.5 billion.

Income Taxes

Operating income taxes increased $26 million in 2006 compared with 2005, due principally to higher income in the 2006 period.

Net Interest Expense

Net interest expense increased $82 million in 2006 compared with 2005, due principally to $28 million of interest accrued for the potential repayment of tax benefits from the timing of tax deductions of certain construction related costs (see Note L to the financial statements), new debt issuances since December 31, 2005, higher interest rates on variable-rate debt and higher interest rates on and principal amounts of commercial paper.

O&R

Electric

O&R’s electric sales and deliveries, excluding off-system sales, in 2006 compared with 2005 were:


	Millions of kWhs Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2006	December 31, 2005	Variation		Percent Variation		December 31, 2006		December 31, 2005			Variation			Percent Variation
Residential/Religious	1,803	1,905	(102	)	(5.4	)%	$	252	$	254		$	(2	)	(0.8	)%
Commercial/Industrial	2,094	2,276	(182	)	(8.0	)		237		248			(11	)	(4.4	)
Retail access customers	1,765	1,836	(71	)	(3.9	)		76		81			(5	)	(6.2	)
Public authorities	114	114	-		-			14		14			-		-
Other operating revenues	-	-	-		-			3		(1	)		4		Large
Total	5,776	6,131	(355	)	(5.8	)%	$	582	$	596		$	(14	)	(2.3	)%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

O&R’s electric operating revenues decreased $14 million in 2006 compared with 2005 due primarily to decreased recoverable purchased power costs ($14 million). O&R’s purchased power costs decreased $14 million in 2006 compared with 2005 due to a decrease in purchased volumes associated with milder 2006 weather. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan. See Note B to the financial statements.

Electric delivery volumes in O&R’s service area decreased 5.8 percent in 2006 compared with 2005 primarily as a result of the milder weather in 2006. After adjusting for weather variations and unbilled revenues, electric delivery volumes in O&R’s service area increased 0.1 percent in 2006 compared with 2005.

Electric operating income decreased by $1 million in 2006 compared with 2005.

Gas

O&R’s gas sales and deliveries, excluding off-system sales, in 2006 compared with 2005 were:


	Thousands of dths Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2006	December 31, 2005	Variation		Percent Variation		December 31, 2006		December 31, 2005		Variation			Percent Variation
Residential	7,758	9,307	(1,549	)	(16.6	)%	$	135	$	131	$	4		3.1	%
General	1,892	2,269	(377	)	(16.6	)		31		30		1		3.3
Firm transportation	9,058	9,841	(783	)	(8.0	)		32		32		-		-
Total firm sales and transportation	18,708	21,417	(2,709	)	(12.6	)		198		193		5		2.6
Interruptible sales	5,856	6,458	(602	)	(9.3	)		28		29		(1	)	(3.5	)
Generation plants	3,036	1,434	1,602		Large			3		2		1		50.0
Other	939	1,072	(133	)	(12.4	)		-		-		-		-
Other gas revenues	-	-	-		-			7		4		3		75.0
Total	28,539	30,381	(1,842	)	(6.1	)%	$	236	$	228	$	8		3.5	%

O&R’s gas operating revenues increased $8 million in 2006 compared with 2005. The increase is due primarily to higher costs of gas purchased for resale in 2006.

Sales and transportation volumes for firm customers decreased 12.6 percent in 2006 compared with 2005 reflecting the impact of the milder winter and spring weather in 2006. After adjusting for weather and other variations, total firm sales and transportation volumes were 2.8 percent lower in 2006 compared with 2005 partially due to reduced customer usage. O&R’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.

Non-firm transportation of customer-owned gas to electric generating plants increased in 2006 compared with 2005 because certain facilities resumed burning gas to generate electricity. The increase in gas burned had minimal impact on earnings because most revenues from these customers result from a fixed demand charge for local transportation.

Gas operating income decreased by $1 million in 2006 compared with 2005.

Taxes Other Than Income Taxes

Taxes, other than income taxes, were the same in 2006 compared with 2005. The principal components of taxes, other than income taxes, were:


(Millions of Dollars)	2006			2005			Increase/ (Decrease)
Property taxes	$	30		$	30		$	-
State and local taxes related to revenue receipts		13			13			-
Payroll taxes		4			4			-
Total	$	47	(a)	$	47	(a)	$	-

(a)	Including sales tax on customers’ bills, total taxes other than income taxes, billed to customers in 2006 and 2005 were $73 million and $68 million, respectively.

Income Taxes

Operating income taxes decreased by $6 million in 2006 compared with 2005 due principally to lower income in the 2006 period.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Other Income (Deductions)

Other income (deductions) increased $3 million in 2006 compared with 2005, due primarily to the sale of non-utility property and increased interest income.

Net Interest Expense

Net interest expense increased $4 million in 2006 compared with 2005, due principally to higher interest rates on and principal amounts of commercial paper and new debt issuances in the 2006 period.

Competitive Energy Businesses

The competitive energy businesses’ operating income and earnings increased $35 million and $39 million, respectively, in 2006 compared with 2005 due primarily to higher operating revenues and gross margins on wholesale and retail electric sales, offset in part by higher mark-to-market losses.

Operating revenues increased $506 million in 2006 compared with 2005, primarily due to higher electric wholesale and retail revenues offset in part by decreased generation and other revenues and increased net mark-to-market losses. Electric wholesale revenues increased $502 million, of which $490 million was due to higher sales volume and $12 million was due to an increase in unit prices. Electric retail revenues increased $124 million in 2006 as compared with 2005, of which $71 million was due to higher sales volumes and $53 million was due to an increase in unit prices. While electric retail revenues increased more than 12 percent from 2005 to 2006, gross margins increased at a greater rate as more customers shifted from indexed contracts to fixed-price contracts as energy prices declined during the year. Renewal rates for customers have remained above 90 percent for the past two years. Revenue from the sale of electricity from the competitive energy businesses’ generation facilities was $42 million lower, reflecting lower unit prices and volumes, partially offset by reliability-related capacity payments for two of its Massachusetts generating facilities. The development of capacity markets in New England and PJM is expected to result in more predictable capacity revenues. Net mark-to-market losses increased $33 million in 2006 as compared with 2005 due primarily to lower prices on natural gas contracts, which were economic hedges that supported retail obligations (but did not qualify for cash flow hedge accounting).

Operating expenses excluding income taxes increased $444 million in 2006 compared with 2005, reflecting increased purchased power ($531 million) and other operations and maintenance costs ($12 million), offset in part by lower fuel costs ($81 million), gas purchased for resale costs ($17 million) and taxes other than income taxes ($1 million).

Income taxes increased $27 million in 2006 as compared with 2005, reflecting primarily higher income.

Other income (deductions) increased $2 million in 2006 compared with 2005 due primarily to higher interest income, offset in part by an impairment of $6 million on an equity investment (see “Impairments” in Note A to the financial statements).

Other

For Con Edison, “Other” in 2006 reflects a $9 million expense (which will not be recoverable under the Utilities’ rate plans) for a charitable commitment to the World Trade Center Memorial Foundation and a $9 million expense to effectively reclassify from retained earnings to additional paid-in capital the tax benefits from the exercise of stock options that had been recognized in income in prior years. For Con Edison, “Other” also includes inter-company eliminations relating to operating revenues and operating expenses.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

The Companies’ results of operations (which were discussed above under “Results of Operations—Summary”) in 2005 compared with 2004 were:


	Con Edison*					Con Edison of New York					O&R					Competitive Businesses and Other**
(Millions of Dollars)	Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent		Increases (Decreases) Amount			Increases (Decreases) Percent
Operating revenues	$	1,911		19.6	%	$	1,256		15.8	%	$	121		17.2	%	$	534		50.6	%
Purchased power		773		19.7			293		9.7			74		30.1			406		62.5
Fuel		219		36.7			122		30.2			-		-			97		50.3
Gas purchased for resale		303		35.6			256		36.1			23		19.2			24		Large
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)		616		14.1			585		15.3			24		7.1			7		3.7
Other operations and maintenance		190		12.7			187		15.2			3		1.7			-		-
Depreciation and amortization		33		6.0			32		6.7			1		3.0			-		-
Taxes, other than income taxes		105		9.7			101		10.0			(1	)	(2.1	)		5		26.3
Income taxes		65		22.0			49		17.5			14		82.4			2		Large
Operating income		223		23.9			216		26.2			7		10.8			-		-
Other income less deductions and related federal income tax		(20	)	(33.9	)		(25	)	(47.2	)		-		-			5		31.3
Net interest expense		20		4.5			15		4.3			4		20.0			1		1.3
Income from continuing operations		183		33.3			176		34.0			3		6.5			4		26.7
Discontinued operations		(1	)	(8.3	)		N/A		N/A			N/A		N/A			(1	)	(8.3	)
Net income	$	182		33.9	%	$	176		34.0	%	$	3		6.5	%	$	3		11.1	%

*	Represents the consolidated financial results of Con Edison and its businesses.

**	Includes inter-company and parent company accounting.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

Con Edison of New York

Electric

Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in 2005 compared with 2004 were:


	Millions of kWhs Delivered						Revenues in Millions
	Twelve Months Ended						Twelve Months Ended
Description	December 31, 2005	December 31, 2004	Variation		Percent Variation		December 31, 2005		December 31, 2004		Variation		Percent Variation
Residential/Religious	13,690	12,673	1,017		8.0	%	$	2,884	$	2,399	$	485	20.2	%
Commercial/Industrial	15,402	16,966	(1,564	)	(9.2	)		2,869		2,722		147	5.4