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U.S. Securities and Exchange Commission


(Release No. 35-27869; 70-10230)

Allegheny Energy Inc.

Order Authorizing the Issuance of Common Stock Under Stock Unit Plan

June 30, 2004

Allegheny Energy Inc. ("Allegheny"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), Greensburg, Pennsylvania, has filed a declaration ("Declaration") with the Securities and Exchange Commission ("Commission") under sections 6(a) and 7 of the Act and rule 54 under the Act. The Commission issued a notice of the Declaration on June 4, 2004 (Holding Co. Act Release No. 27855).

Allegheny requests authority to issue shares of common stock, $1.25 par value ("Common Stock"), according to a Stock Unit Plan ("Plan"). Allegheny proposes to issue up to 4,500,000 shares of Common Stock to settle stock units ("Units") issued to certain employees. Specifically, upon vesting of each Unit, participants in the Plan ("Participants") will receive one share of Allegheny Common Stock for each Unit, as well as dividends paid by Allegheny during the period the Unit was held.

The Plan became effective upon its approval by Allegheny's Board of Directors on May 14, 2004.1 At that time, 3,414,048 Units that had previously been granted to certain of Allegheny's executive officers under employment agreements ("Outstanding Units") were made subject to the Plan, as consented to by each of the relevant executive officers. Subject to adjustment as provided under the Plan, the total number of Units authorized under the Plan is 4,500,000, inclusive of the Outstanding Units.2 If any award under the Plan is forfeited or otherwise terminated, or is cancelled prior to the vesting of any Units, then the Units covered by the award will again be available under the Plan.

Allegheny maintains that implementation of the Plan is necessary to attract and retain employees who are essential for Allegheny's growth and profitability. The Plan will be administered by Allegheny's Board of Directors, which will determine the individuals to whom Units shall be granted, the conditions under which Units may become vested and/or forfeited, and other terms and conditions as the Board may establish. Each Participant in the Plan will enter into an agreement ("Stock Unit Agreement") providing that, upon vesting, each Participant shall be entitled to one share of Allegheny Common Stock and shall be subject to the terms and conditions of the Plan. A Stock Unit Agreement may grant a Participant rights with respect to dividends paid by Allegheny during the period a Unit was held, as well as a right to defer payments with respect to vested Units.

The Outstanding Units, as originally issued, entitled holders to the market value of a share of Allegheny Common Stock payable, at Allegheny's option, in cash or Common Stock at each vesting date. Because the Outstanding Units originally provided for payment in either cash or Common Stock and because Allegheny does not have authority to settle the Outstanding Units through the issuance of Common Stock, Allegheny has been required to use the variable method of accounting for the Units. As a result, Allegheny is recording an accrued expense liability for the cash amount payable to Participants at the vesting dates of issued Units, and compensation expense increases or decreases as the market value of stock increases or decreases.

The Plan provides that all Units, including the Outstanding Units, will be settled only through the issuance of Common Stock. Once Allegheny receives Commission authorization to issue Common Stock, the fixed method of accounting will replace the variable method of accounting for all Units, including the Outstanding Units that have become subject to the Plan. Under the fixed method of accounting, total compensation expense to be recorded over the vesting period of an award is equal to the market price of Allegheny stock on the date of the award multiplied by the number of Units awarded. Under this method of accounting, total compensation expense for each award is calculated and fixed at the grant date (or the date of the Commission's authorization for Outstanding Units). This fixed total compensation expense will be recorded over the vesting period on a straight-line basis, and will not vary regardless of subsequent increases or decreases in the market price of Allegheny stock.

Allegheny maintains that the requested authority will benefit the company by reducing the volatility associated with accounting for the Units. It will also permit Allegheny to conserve cash in its administration of the Plan, redeeming Units through the issuance of stock, rather than cash payments. In addition, the authority will result in increased Common Stock capitalization in the amount of compensation expense that would otherwise be paid to participants in cash.

The request is subject to rule 54 of the Act. Allegheny does not satisfy the requirements of rule 53(a)(1). The Commission has authorized Allegheny to invest up to $2 billion in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") and found that this investment would not have either of the adverse effects set forth in rule 53(c).3 As of March 31, 2004, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $235 million. Allegheny is, however, no longer in compliance with the revised financing conditions of its Financing Order and subsequent orders. As of March 31, 2004, Allegheny's common equity ratio was below 28 percent. As a result, Allegheny is no longer able to make any investments in EWGs and FUCOs, without further authorization from the Commission.

Allegheny currently complies with, and will comply with, rules 53(a)(2), 53(a)(3), and 53(a)(4). None of the circumstances described in 53(b)(1) have occurred. The circumstances described in rule 53(b)(2) and (b)(3) have occurred.

Allegheny asserts that the requirements of rule 53(c) are met. Allegheny believes that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny nor its public utility company subsidiaries ("Operating Companies"). Allegheny maintains that the requested relief will not adversely affect the Operating Companies and their customers. The ratio of common equity to total capitalization of each of the Operating Companies will continue to be maintained at not less than 30 percent4 and will not be affected by the proposed transactions. Finally, Allegheny notes that each of the Operating Companies is subject to regulation by state commissions that are able to protect utility customers within their respective states.

The fees, commissions and expenses incurred or to be incurred in connection with this Declaration will not exceed $10,000. Allegheny maintains that no state or federal regulatory agency, other than the Commission, has jurisdiction over the requested authority.

Due notice of the filing of this Declaration has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Declaration, as amended, be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Margaret H. McFarland
Deputy Secretary



Modified: 07/06/2004