SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27878; 70-10100)

Allegheny Energy, Inc., et al.

Supplemental Order Releasing Jurisdiction to Pay Dividends Out of Capital and Unearned Surplus; Reserving Jurisdiction

July 27, 2004

Allegheny Energy, Inc. ("Allegheny"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), Allegheny Energy Supply Company, LLC ("AE Supply"), a registered holding company and public utility company subsidiary of Allegheny, and the following nonutility subsidiaries of Allegheny: Allegheny Energy Solutions, Inc. ("Solutions"), Allegheny Ventures, Inc. ("Ventures"), Mountaineer Gas Services, Inc. ("Mountaineer") and The West Virginia Power & Transmission Company ("WVPT" and collectively, "Applicants"), all located in Greensburg, Pennsylvania, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Amendment") under section 12(c) of the Act and rules 46 and 54 under the Act to an application-declaration previously filed under the Act. The Commission issued a notice of the application-declaration on November 30, 2001 (Holding Co. Act Release No. 27471).

Solutions, Ventures, Mountaineer and WVPT, (collectively the "Dividending Companies") received authority to pay dividends out of capital and unearned surplus through July 31, 2005 to the extent permitted under applicable corporate law, so long as certain financing conditions were met. See Holding Co. Act Release No. 27486 (December 31, 2001) (the "Original Financing Order"). The Original Financing Order has been supplemented by a series of Commission orders in light of changing financial conditions at Allegheny.¹ One of these orders, the Capitalization Order, reserves jurisdiction over, among other things, dividends out of capital and unearned surplus by the Dividening Companies, and other nonexempt nonutility subsidiaries, at times when the consolidated common equity of Allegheny and/or AE Supply is below 28 and 20 percent, respectively.² As of March 31, 2004, Allegheny's and AE Supply's common equity ratio is 21.6 and 21.1 percent, respectively.

Overview of the Applicants

The Allegheny system consists of three electric public utility companies, West Penn Power Company ("West Penn"), Monongahela Power Company ("Monongahela Power"), The Potomac Edison Company ("Potomac Edison" and together with West Penn and Monongahela Power, the "Operating Companies"), and a public utility natural gas company, Mountaineer Gas Company, which is a wholly-owned subsidiary of Monongahela Power (all collectively d/b/a "Allegheny Power"). Allegheny Power delivers electric energy to approximately 1.6 million customers in parts of Maryland, Ohio, Pennsylvania, Virginia, and West Virginia and natural gas to approximately 230,000 customers in West Virginia.

AE Supply is the principal electric generating company for the Allegheny system. During l999 and 2000, in response to deregulation legislation in Maryland, Virginia, and Pennsylvania, two of the Operating Companies, West Penn and Potomac Edison, transferred generating assets which totaled approximately 6,600 MW to AE Supply. In 2001, Monongahela Power transferred generating assets, totaling 352 MW associated with its Ohio customers, to AE Supply. Under the contracts, AE Supply provides power to West Penn, Potomac Edison, and Monongahela Power to serve their customers in Pennsylvania, Maryland, Virginia, and Ohio and to serve the retail load of Potomac Edison in West Virginia. These contracts represent a significant portion of the normal capacity of AE Supply's fleet of transferred generating assets and a substantial majority of the requirements of West Penn and Potomac Edison. As a result, AE Supply's core business has been to provide power to Allegheny Power to serve its native load. AE Supply is a public utility company within the meaning of the Act, but is not a utility for purposes of state regulation, nor is it subject to regulation as an electric public utility in any of the states in which it operates.

Solutions is an energy related company under rule 58 of the Act ("Rule 58 Company") that currently develops competitive generation solutions (i.e., distributed generation, cogeneration, prime power, green power, and uninterrupted power source) for customers through products such as reciprocating generators, microturbines, steam turbines, combustion turbines, fuel cells, wind turbine and solar cells. It is a wholly-owned subsidiary of Ventures.

Ventures is a Rule 58 Company and invests indirectly in energy-related and telecommunications companies. It is a wholly-owned subsidiary of Allegheny.

Mountaineer operates natural gas producing properties, gas gathering facilities, and intrastate transmission pipelines. It owns more than 300 natural gas wells and a net revenue interest in about 100 additional wells. Mountaineer makes no sales of gas at retail. It is a wholly-owned subsidiary of Mountaineer Gas Company.

WVPT owns approximately 4,000 acres of land in West Virginia that were acquired for possible future development.

Background Information

Most of the Dividending Companies have been in existence for a relatively short period of time. Some of the companies have a history of operating losses, while others have suffered accounting write-offs, leaving them with negative retained earnings. Certain of the Dividending Companies are downsizing their operations or exiting lines of business and possess cash accumulated from asset liquidations. In many cases, there are plans to sell more assets in the future.

Requested Authorization

Applicants seek a release of jurisdiction to pay dividends out of capital and unearned surplus by the Dividending Companies in the aggregate amount up to $91.95 million through July 31, 2005. Applicants state that this authority is necessary to release excess cash currently held by the Dividending Companies that can be used to pay down debt of Allegheny, AE Supply, or any of their direct or indirect subsidiaries, or to fulfill the obligations of any of the foregoing to unaffiliated counterparties that otherwise could be fulfilled only through the incurrence of additional debt. Applicants state that these actions will benefit the financial condition of the Allegheny system generally and will not adversely affect the Dividending Companies. Applicants expect that dividends by individual Dividending Companies during this period will be as follows:

* Dollar amounts (000's)

The specific sources of the funds to be dividended by each of the Dividending Companies are as follows:

The funds that Solutions proposes to dividend come, and will come, from collections of receivables in connection with its energy project management activities. The funds that Ventures proposes to dividend come, and will come, from: (1) dividends received from its subsidiaries (i.e., Solutions and Allegheny Communications Connect, Inc., an exempt telecommunications company under the Act), (2) the sale of operational assets as it winds down some of its operations, and (3) liquidating its remaining passive investments in energy-related companies. The funds that WVPT proposes to dividend come, and will come, from the sale of its real property holdings, which, as noted above, were acquired for possible future development. The funds that Mountaineer Gas Services proposes to dividend come, and will come, from the collection of receivables.

Applicants represent that the dividends will be used to pay down debt of Allegheny, AE Supply, or any of their direct or indirect subsidiaries, or to fulfill the obligations of any of the foregoing to unaffiliated counterparties that otherwise could be fulfilled only through the incurrence of additional debt, and that none of these dividends will be used by Allegheny to pay dividends to its stockholders. Applicants further represent that the Dividending Companies will not declare or pay any dividends out of capital or unearned surplus in violation of any law restricting the payment of dividends, or if the Dividending Company derives any material part of its revenues from the sale of goods, services or electricity to the Operating Companies or Mountaineer Gas Company; and further provided that the Dividending Companies will not declare or pay any dividend out of capital or unearned surplus unless they: (i) have received excess cash as a result of the sale of their assets, (ii) have engaged in a restructuring or reorganization; and/or (iii) are returning capital to an associate company. Further, the Applicants represent that the payment of the proposed dividends will not impair the Dividending Companies' ability to meet their obligations, and that they have sufficient cash and other assets to meet their anticipated expenses and liabilities. Applicants state that these companies have relatively simple and small operations, with readily predictable cash needs. Applicants have considered the future cash needs of the Dividending Companies and have determined that following the dividends proposed above, the Dividending Companies will have adequate cash to meet their needs during the applicable time period. Moreover, making the proposed dividends will benefit Allegheny and the Operating Companies by increasing financial flexibility and facilitating the reduction of debt at Allegheny or AE Supply, which would otherwise have to be serviced with dividends from the Operating Companies.

Rule 54 Analysis

Rule 54 promulgated under the Act states that in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO"), or other transactions by a registered holding company or its subsidiaries other than with respect to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or a FUCO upon the registered holding company system if rules 53(a), (b) and (c) are satisfied.

Allegheny does not satisfy the requirements of rule 53(a)(1). In the Original Financing Order, the Commission authorized Allegheny to invest up to $2 billion in EWGs and FUCOs and found that such an investment would not have either of the adverse effects set forth in rule 53(c). As of March 31, 2004, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $235 million. These investments by Allegheny were made in compliance with the Original Financing Order.

As discussed above, Allegheny is no longer in compliance with the financing conditions set forth in the Original Financing Order. In the Capitalization Order, Allegheny was authorized to make additional investments in EWGs to the extent necessary to complete any project or desirable to preserve or enhance the value of Allegheny's investment or in connection with the qualification of an existing project as an EWG, as long as the revised financing conditions, as defined in the Capitalization Order, were met. One of the revised financing conditions is that Allegheny must maintain a common equity ratio of at least 28 percent. However, as reflected in Allegheny's unaudited financial statements, as of March 31, 2004, Allegheny's common equity ratio is 21.6 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, the record keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the Allegheny system's domestic public utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. None of the circumstances described in rule 53(b)(1) have occurred. The circumstances described in rule 53(b)(2) and rule 53(b)(3) have occurred. Allegheny respectfully submits that the requirements of rule 53(c) are met. Through this Amendment, Allegheny requests Commission approval of the transactions described in this order, and believes that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny, the Operating Companies and Mountaineer Gas Company. Moreover, Applicants state that the requested relief will not adversely impact the Operating Companies, Mountaineer Gas Company and their customers. The ratio of common equity to total capitalization of each of the Operating Companies and Mountaineer Gas Company will continue to be maintained at not less than 30 percent.³ Furthermore, the common equity ratios of the Operating Companies and Mountaineer Gas Company will not be affected by the proposed transactions. In addition, each of the Operating Companies and Mountaineer Gas Company is subject to regulation by state commissions that are able to protect utility customers within their respective states.

No state or federal commission other than the Commission has jurisdiction with respect to any of the proposed transactions described in this Amendment. The fees, commissions and expenses incurred, or to be incurred, in connection with this Amendment will not exceed $10,000.

Due notice of the transactions covered by this Amendment 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, except as to those matters over which jurisdiction has been reserved, 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, except as to those matters over which jurisdiction has been reserved, jurisdiction is released and the Amendment, as amended, be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and the following:

Allegheny will file Rule 24 certificates of notification within 30 days of the event, which will contain the information shown below.

1. The amount and timing of any and all dividends declared and/or paid by a Dividending Company; and

2. A description of the use of any funds received as a dividend from a Dividending Company.

IT IS FURTHER ORDERED, that all other jurisdiction reserved in prior orders issued in Commission's File No. 10100 continues to be reserved, pending completion of the record.

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

Endnotes

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¹ See Holding Co. Act Release No. 27521 (April 17, 2002), Holding Co. Act Release No. 27579 (October 17, 2002), Holding Co. Act Release No. 27652 (Feb. 21, 2003) (the "Capitalization Order"), Holding Co. Act Release No. 27780 (December 22, 2003), and Holding Co. Act Release No. 27796 (Feb. 3, 2004).

² See Holding Company Release No. 27652 (Feb. 21, 2003).

³ The common equity ratios of the Operating Companies as of March 31, 2004, are as follows: West Penn: 52.7 percent; Potomac Edison; 49.7 percent; and Monongahela Power: 38.2 percent.