SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27920; 70-10100)

Allegheny Energy, Inc., et al.

Supplemental Order Extending Authority to Enter into Financing Transactions and to Pay Dividends out of Capital or Unearned Surplus; Reservation of Jurisdiction

December 3, 2004

Allegheny Energy, Inc. ("Allegheny"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and Allegheny Energy Supply Company, LLC ("AE Supply"),¹ a registered holding company and public utility company subsidiary of Allegheny (collectively "Applicants"), Greensburg, Pennsylvania, have filed a post-effective amendment ("Amendment") to a previous application-declaration with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, and 12 of the Act and rules 46, 52 and 54 under the Act. The Commission issued a notice of the proposed transactions on November 30, 2001 (Holding Co. Act Release No. 27471).

Applicants seek a continuation through April 30, 2005, of certain previously authorized financing transactions and financing parameters as described below. By order dated April 29, 2004 (Holding Co. Act Release No. 27840)("April 29 Order"), the Commission extended through December 31, 2004, revised financing conditions for the Applicants, relief from the requirement that Allegheny maintain common equity of 28% and that AE Supply maintain common equity of 20%, authority for AE Supply to pay dividends out of capital and unearned surplus in an amount up to $481.3 million,² authority for Allegheny to issue and sell up to $350 million in common stock,³ and authority for the Applicants to have outstanding at any one time up to $1.950 billion in short- and long-term debt.⁴ In addition, the Commission reserved jurisdiction, pending completion of the record, over transactions authorized by previous financing orders, but not covered by the April 29 Order, when the common stock equity ratio levels of Allegheny and AE Supply are below 28 and 20 percent, respectively.⁵

In this Amendment, Applicants seek only an extension of their current financing authority and the currently applicable financing conditions established by the Commission. Applicants do not seek any changes in or additions to their current authority. Applicants also seek a continuation of the reservation of jurisdiction, pending completion of the record, over all transactions authorized in the Financing Order, but not released in the order issued under this Amendment, when the common stock equity ratio level of Allegheny and AE Supply is below 28 and 20 percent, respectively.

As required by the April 29 Order and prior Commission orders currently applicable to them, Applicants would use the authority for which they seek an extension for general corporate purposes, including: (1) payments, redemptions, acquisitions, and refinancing of outstanding securities issued by Applicants; (2) investments in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs");⁶ (3) loans to, and investments in, other system companies;⁷ and (4) other lawful corporate purposes permitted under the Act. In addition, Allegheny commits that any dividends paid to it by AE Supply under the requested authority will be used solely to pay the debt of Allegheny or to meet the requirements of the Applicants' intercreditor agreement.⁸ Allegheny commits that no dividends issued under this authority will be used by it to pay dividends to its stockholders.

Applicants will continue to use the proceeds of their up to $1.950 billion in debt financing authority to replace outstanding notes and bonds with debt containing more favorable interest costs, maturities and covenants in order to maximize Applicants' financial flexibility. With continued improvement in Applicants' financial health, Applicants will have opportunities to access the equity markets on reasonable terms. Proceeds from equity issuances will be used to pay down debt. Applicants are unable to predict what and when refinancing opportunities will arise. Accordingly, the requested authority is necessary to grant Applicants the flexibility necessary to take fullest advantage of these opportunities as they occur.

Applicants will continue to be subject to the reporting requirements established in the April 29 Order.

Applicants state that fees, commissions and expenses incurred or to be incurred in connection with this Amendment will not exceed $5,000. No state or federal commission, other than this Commission, has jurisdiction with respect to the proposed transactions described in this Amendment.

The requested authority is subject to rule 54 under the Act.⁹ Allegheny does not satisfy the requirements of rule 53(a)(1). In the Financing Order, the Commission authorized Allegheny to invest up to $2 billion in EWGs and FUCOs and found that this investment would not have either of the adverse effects set forth in rule 53(c). As of September 30, 2004, Allegheny's "aggregate investment," as defined in rule 53(a)(l), was approximately $129 million. These investments by Allegheny were made in compliance with the Financing Order.

Allegheny is no longer in compliance with the financing conditions set forth in the 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 in them 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. However, as reflected in Allegheny's unaudited financial statements, as of September 30, 2004, Allegheny's common equity ratio was 17.4 percent.¹⁰ 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 requirements of rule 53(a)(2), rule 53(a)(3) and rule 53(a)(4). None of the circumstances described in 53(b)(1) have occurred. The circumstances described in rule 53(b)(2) and 53(b)(3) have occurred. The requirements of rule 53(c) are met.

Allegheny submits that the requested authorization will not have a substantial adverse impact upon the financial integrity of Allegheny, the Operating Companies, or Mountaineer Gas Company ("Mountaineer").¹¹ Moreover, the Operating Companies, Mountaineer, and their customers will not be adversely impacted by the requested relief. The ratio of common equity to total capitalization of each of the Operating Companies and Mountaineer will continue to be maintained at not less than 30 percent.¹² In addition, each of the Operating Companies and Mountaineer is subject to regulation by state commissions that are able to protect utility customers within their respective states.

Due notice of the filing of 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, the Amendment be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

IT IS FURTHER ORDERED, that jurisdiction is reserved, pending completion of the record, over transactions authorized in the Financing Order, but not authorized in this order, when the common stock equity ratio levels of Allegheny and AE Supply are below 28% and 20%, respectively.

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

Endnotes

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¹ AE Supply is the principal electric generating company for the Allegheny system. It provides power to Allegheny's three regulated electric utility companies, West Penn Power Company ("West Penn"), The Potomac Edison Company ("Potomac Edison"), and Monongahela Power Company ("Monongahela")(collectively, "Operating Companies") to serve customers in Pennsylvania, Maryland, Virginia, Ohio and West Virginia. These contracts represent a significant portion of the normal capacity of AE Supply's fleet of generating assets and a substantial majority of the requirements of West Penn and Potomac Edison.

² By order dated February 21, 2003 (Holding Co. Act Release No. 27652)("Capitalization Order"), the Commission authorized certain revised financing conditions, including relief from the requirements that Allegheny maintain common equity of 28% and that AE Supply maintain common equity of 20%, and authorized AE Supply to pay dividends of up to $500 million out of capital and unearned surplus through December 31, 2003. AE Supply's dividend authority has been extended subsequently by Holding Co. Act Release No. 27780 (Dec. 22, 2003) and in the April 29 Order, which extended it through December 31, 2004 in the amount of $481.3 million.

³ By order dated December 31, 2001 (Holding Co. Act Release No. 27652)("Financing Order"), Allegheny received authority to issue up to $1 billion in equity securities, including common stock, through July 31, 2005. The issuance of these securities became subject to revised financing conditions in the Capitalization Order. Allegheny subsequently became unable to satisfy all of those conditions when its common equity ratio fell below 28 percent, a requirement established in the Capitalization Order. Its authority to issue equity securities therefore became subject to a reservation of jurisdiction. The Commission released jurisdiction over authority for Allegheny to issue up to $350 million in common stock in Holding Co. Act Release No. 27796 (Feb. 3, 2004). That authority was continued through December 31, 2004 in the April 29 Order.

⁴ The Financing Order authorized Applicants to issue up to $4 billion in short- and long-term debt. The issuance of these securities became subject to revised financing conditions in the Capitalization Order. Allegheny and AE Supply subsequently became unable to satisfy all of those conditions when their common equity ratio fell below the requirements of 28 and 20 percent, respectively, as required by the Capitalization Order. Their authority to issue debt securities, therefore, became subject to a reservation of jurisdiction. The Commission released jurisdiction over $1.6 billion of Applicants' short- and long-term debt authority in Holding Co. Act Release No. 27796 (Feb. 3, 2004). The April 29 Order authorized $1.95 billion in short- and long-term debt authority through December 31, 2004.

⁵ The primary orders establishing the Applicants' financing authority are: the Financing Order, as supplemented by Holding Co. Act Release No. 27521 (April 17, 2002), Holding Co. Act Release No. 27579 (Oct. 17, 2002), and the Capitalization Order.

⁶ Applicants also committed in their application seeking the Capitalization Order that at any time Allegheny's ratio of common equity to total capitalization is not at least 30 percent, neither Allegheny nor any of its subsidiaries will invest or commit to invest any funds in any new projects which qualify as EWGs or FUCOs under the Act; provided, however, that Allegheny may increase its investment in EWGs as a result of the qualification of existing projects as EWGs, and Allegheny may make additional investments in an existing EWG to the extent necessary to complete any project or desirable to preserve or enhance the value of Allegheny's investment in the EWG. Allegheny requested the Commission to reserve jurisdiction over any additional investment by Allegheny and its subsidiaries in EWGs and FUCOs during the period that Allegheny's common equity ratio is below 30 percent. Allegheny requests authority to make investments in its existing EWGs to the extent that it needs to do so to complete any project or to preserve or enhance the value of those EWGs.

⁷ Applicants have also committed that at any time Allegheny's ratio of common equity to total capitalization is not at least 30 percent, neither Allegheny nor any of its subsidiaries will invest or commit to invest any funds in any new energy-related company within the meaning of rule 58 under the Act ("Rule 58 Company"); provided, however, that Allegheny may increase its investment in an existing Rule 58 Company to the extent necessary to complete any project or desirable to preserve or enhance the value of Allegheny's investment in the company. The commitment also stipulated that notwithstanding the foregoing, Allegheny and/or AE Supply may invest in one or more new Rule 58 Companies which may be created in connection with the restructuring and/or reorganization of the existing energy trading business of AE Supply and its subsidiaries. Allegheny requested that the Commission reserve jurisdiction over any additional investment by Allegheny and its subsidiaries in Rule 58 Companies during the period that Allegheny's common equity ratio is below 30 percent. Allegheny requests authority to make investments in its existing Rule 58 Companies to the extent that it needs to do so to complete any project or to preserve or enhance the value of those Rule 58 Companies.

⁸ When Allegheny and AE Supply restructured their debt in February 2003, their lenders required that Allegheny and AE Supply enter into an intercreditor agreement under which, if either company or any of their subsidiaries were to issue debt or equity, a percentage of the proceeds under certain circumstances would be paid as a dividend to Allegheny in the case where AE Supply (or one of its subsidiaries) is the issuer, or as a capital contribution to AE Supply if Allegheny (or one of its subsidiaries (other than AE Supply or its subsidiaries)) is the issuer. This intercreditor agreement continues in place until November 2007, when debt held by certain parties to the intercreditor agreement matures. Until then, should Allegheny or any of its subsidiaries issue debt or equity under the circumstances specified in the intercreditor agreement, an amount equal to the proceeds must be contributed to AE Supply.

⁹ Rule 54 states that in determining whether to approve the issuance or sale of a security by a registered holding company for purposes other than the acquisition of an EWG or a FUCO, or other transactions by such 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.

¹⁰ For the third quarter of 2004, Allegheny recorded a $427.5 million consolidated net loss from discontinued operations that includes a non-cash asset impairment charge of $209.4 million pre-tax ($129.2 million after tax) from the previously announced sale of the Lincoln generating facility; a non-cash asset impairment charge of $35.1 million pre-tax ($20.7 million after tax) associated with the previously announced agreement to sell the West Virginia natural gas operations; and non-cash asset impairment charges of $445.4 million pre-tax ($274.7 million after tax) as a result of the previously announced decision to sell the Gleason and Wheatland generating facilities. Discontinued operations also included an after-tax loss of $2.9 million from operating results at these units. As a result of these charges, the unaudited common equity ratios for Allegheny and AE Supply, respectively, will decrease to 17.4 percent and 10.3 percent as of September 30, 2004. Allegheny notes, however, that its common equity ratio has improved somewhat since the recent issuance of approximately $152 million of common stock.

¹¹ Mountaineer is a regulated gas utility company, which is a wholly owned subsidiary of Monongahela. Allegheny announced earlier this year it had entered into an agreement to sell Mountaineer and all of Allegheny's West Virginia gas assets to a partnership composed of IGS Utilities LLC, IGS Holdings LLC, and affiliates of ArcLight Capital Partners LLC.

¹² The common equity ratios of the Operating Companies as of September 30, 2004, are as follows: West Penn, 57.6%; Potomac Edison, 49.5%; and Monongahela Power, 36.0%.