ALLEGHENY POWER SYSTEM INC, DEF 14A, 1994-04-11

ALLEGHENY POWER SYSTEM INC
DEF 14A, 1994-04-11
ELECTRIC SERVICES

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant /X/
Filed by a party other than the registrant / /

Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12

ALLEGHENY POWER SYSTEM, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

ALLEGHENY POWER SYSTEM, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:/1

- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.

(1) Amount previously paid:

- --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:

- --------------------------------------------------------------------------------
(3) Filing party:

- --------------------------------------------------------------------------------
(4) Date filed:

- --------------------------------------------------------------------------------
- ---------------
/1 Set forth the amount on which the filing fee is calculated and state
how it was determined.
<PAGE> 2

ALLEGHENY POWER SYSTEM, INC.

(LOGO)

NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS
TO BE HELD ON MAY 12, 1994
AND PROXY STATEMENT
<PAGE> 3

ART WORK

12 East 49th Street
New York, N.Y. 10017

April 12, 1994

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of ALLEGHENY
POWER SYSTEM, INC. will be held on the fourth floor of The Waldorf-Astoria
Hotel, 301 Park Avenue, between 49th and 50th Streets, New York, N.Y., on
Thursday, May 12, 1994, at 10:30 a.m., New York time, for the following
purposes:

(1) To elect directors to hold office until the next Annual Meeting of
Stockholders and until their successors are duly chosen and qualified;

(2) To consider and vote upon a proposal to approve the implementation of a
performance share plan;

(3) To approve the appointment of independent accountants;

(4) To vote upon a shareholder proposal which would require a report by the
Company on the capital cost potential of carbon dioxide emission standards;

(5) To transact such other business as may properly come before the meeting
or any adjournment thereof.

Holders of record at the close of business on April 4, 1994, will be
entitled to vote at the meeting.

By Order of the Board of Directors,

EILEEN M. BECK
Secretary
<PAGE> 4

PROXY STATEMENT

Proxies in the form enclosed are solicited by the Board of Directors of
Allegheny Power System, Inc. (the Company), 12 East 49th Street, New York, New
York 10017, for the Annual Meeting of Stockholders to be held on May 12, 1994.
The proxy card provided each stockholder by the Company covers the total number
of shares registered in his or her name and, in the case of participants in the
Company's Dividend Reinvestment and Stock Purchase Plan, the shares held for his
or her account under the Plan. A proxy may be revoked at any time prior to its
exercise by written notice to the Company, by submission of another proxy
bearing a later date or by voting in person at the meeting.

At the close of business on April 4, 1994, there were outstanding
118,037,427 shares of Common Stock, each entitled to one vote. In elections of
directors, each holder entitled to vote is entitled to as many votes as shall
equal the number of shares held multiplied by the number of directors to be
elected and may cast all of such votes for a single director or may distribute
them among the number of directors to be elected or any two or more of them.
There are no conditions precedent to the exercise of such cumulative voting
rights.

The presence in person or by proxy of the holders of record of a majority
of the outstanding shares of Common Stock entitled to vote constitutes a quorum.
The affirmative vote of a majority of all the votes entitled to be cast is
required for the election of each director and for approval of the
implementation of a performance share plan, the appointment of Price Waterhouse
as independent accountants, and the shareholder proposal set forth herein.
Abstentions are counted only for purposes of determining whether a quorum is
present. Broker non-votes are not treated as votes nor are they calculated in
determining the existence of a quorum.

The approximate date on which the proxy statement and form of proxy are
first being sent or given to stockholders is April 12, 1994. The Annual Report
for 1993 has already been mailed to stockholders.

ELECTION OF DIRECTORS

At the meeting nine directors are to be elected to hold office until the
next Annual Meeting of Stockholders and until their respective successors are
duly chosen and qualified. The proxies received, unless marked to the contrary,
will be voted for the election of the following persons, all of whom are now
directors of the Company and are the nominees of the Board of Directors at this
election, or, if considered desirable, cumulative voting rights will be
exercised by the proxy holders to elect as many of such nominees as possible.
The Board of Directors does not expect that any of the nominees will become
unable to serve as a director, but if that should occur for any reason prior to
the meeting, the proxy holders reserve the right to name another person of their
choice.

1
<PAGE> 5

<TABLE>
<CAPTION>
DIRECTORS, PRINCIPAL OCCUPATION, DIRECTOR
OTHER DIRECTORSHIPS, OF THE
BUSINESS EXPERIENCE, AND 1993 COMPANY
BOARD AND COMMITTEE MEETINGS ATTENDANCE AGE SINCE
- --------------------------------------------------------------------- --- -------
<S> <C> <C>
KLAUS BERGMAN (2) (3) (5) 62 1985
Chairman of the Board, President, and Chief Executive Officer of
the Company, Allegheny Power Service Corporation, and Allegheny
Generating Company. Chairman of the Board and Chief Executive
Officer of the Company's other principal subsidiaries.
Attendance: 20 of 20.
PHILLIP E. LINT (1) (3) (5) 64 1989
Retired. Formerly partner, Price Waterhouse.
Attendance: 22 of 22.
EDWARD H. MALONE (3) 69 1985
Retired. Formerly Vice President of General Electric Company and
Chairman, General Electric Investment Corporation. Director of
Corporate Property Investors, Fidelity Group of Mutual Funds,
General Re Corporation, and Mattel, Inc.
Attendance: 13 of 15.
FRANK A. METZ, JR.(2) (3) (4) 59 1984
Retired. Formerly Senior Vice President, Finance and Planning, and
Director of International Business Machines Corporation, a
manufacturer and distributor of information systems equipment and
services. Director of Monsanto Company and Norrell Corporation.
Attendance: 21 of 21.
STEVEN H. RICE (1) (4) (5) 50 1986
Business consultant and attorney-at-law. Director and member of the
Investment and Audit Committees of Royal Group, Inc. (The Royal
Insurance Companies). Director and Vice Chairman of the Board of
Stamford Federal Savings Bank.
Attendance: 21 of 21.
GUNNAR E. SARSTEN (5) 57 1992
Chairman and Chief Executive Officer of MK International. Formerly,
President and Chief Operating Officer of Morrison Knudsen
Corporation, President and Chief Executive Officer of United
Engineers & Constructors International, Inc., (now Raytheon
Engineers & Constructors, Inc.), and Deputy Chairman of the Third
District Federal Reserve Bank in Philadelphia.
Attendance: 10 of 13.
PETER L. SHEA (1) 61 1993
Managing Director of Hydrocarbon Energy, Inc., a privately owned
oil and gas development drilling and production company.
Attendance: 4 of 4.6
</TABLE>

- ------------

1 Member of Audit Committee.
2 Member of Executive Committee.
3 Member of Finance Committee.
4 Member of Management Review Committee.
5 Member of New Business Committee.
6 Elected effective September 9, 1993.

2
<PAGE> 6

COMPENSATION OF DIRECTORS

Each of the directors is also a director of the following subsidiaries of
the Company: Monongahela Power Company, The Potomac Edison Company, West Penn
Power Company, and Allegheny Power Service Corporation. In 1993, directors who
were not officers or employees of System companies received for all services to
System companies (a) $16,000 in retainer fees, (b) $800 for each committee
meeting attended, except Executive Committee meetings for which such fees are
$200, and (c) $250 for each Board meeting of each company attended. Under an
unfunded deferred compensation plan, a director may elect to defer receipt of
all or part of his or her director's fees for succeeding calendar years to be
payable with accumulated interest when the director ceases to be such, in equal
annual installments, or, upon authorization by the Board of Directors, in a lump
sum.

BOARD OF DIRECTORS AND CERTAIN COMMITTEE MATTERS

The Board of Directors has Audit, Finance, Management Review, and New
Business Committees. The Audit Committee makes recommendations to the Board with
respect to auditing matters, including the employment of independent accountants
and the handling of the annual audit of the books and accounts of the Company
and its subsidiaries. It met three times in 1993. The Management Review
Committee, which is made up of outside directors only, makes recommendations to
the Board on certain matters concerning directors and officers, including
compensation and management succession. This Committee serves also as the
nominating committee for directors and considers recommendations sent by
shareholders to the President that are accompanied by a comprehensive written
resume of the proposed nominee's experience and background and a written consent
of such person to serve as a director if nominated and elected. It met five
times in 1993. The total number of Board meetings held in 1993 was nine.

PROPOSAL TO APPROVE THE IMPLEMENTATION OF A PERFORMANCE SHARE PLAN

The Boards of Directors of the Allegheny Power System companies have
adopted a Performance Share Plan (the "Plan") for senior officers of the Company
and its subsidiaries, subject to the approval of the Plan by the shareholders.
The growth, development and financial success of the Company and its
subsidiaries is dependent on ensuring the best possible management. The Board
believes the Plan will be an important aid to the Company in attracting and
retaining individuals of outstanding ability and in rewarding them for the
continued profitable management of, and the continued providing of economical
and reliable service to its customers by, the Company and its subsidiaries.

The Plan will be administered by the Management Review Committee of the
Board ("the Committee") and will be made up of Plan cycles which will be not
less than three (3) or more than five (5) years in length. The Committee will
establish, and the Board will review and approve each Plan cycle, the conditions
of each grant made under the Plan, and determine which senior officers will
receive awards, as well as the amount of each award, and establish guidelines
for each Plan cycle. The performance criteria and standards to be included in
the Plan guidelines shall include (a) customer related criteria such as the cost
and quality of service provided to residential customers, and (b) shareholder
related criteria. The first Plan cycle is expected to begin as of January 1,
1994, provided the Plan is approved by the shareholders, and its length,
participants, award amounts, and performance criteria and standards will be
determined upon such approval.

The type of award that may be granted under the Plan is a performance share
award. Each such award will entitle the participant to receive up to a specified
number of shares of the Company's Common Stock determined in accordance with
Plan cycle performance criteria and guidelines governing the award. The total
number of award shares issued in each cycle is not expected to exceed 40,000
shares, and the Plan provides that the total number of shares granted over the
life of the Plan, which is expected to end in 2007, shall not exceed 500,000
shares. Common Stock issued under the Plan may be authorized and unissued stock
or stock purchased on the open market and will be valued on the basis of the
closing price of the Common Stock at the end of the prior year. The closing
price of a share of Common Stock as reported for New York Stock Exchange
composite transactions for December 31, 1993 was $26.50 per share.

3
<PAGE> 7

Senior officers of the Company and its subsidiaries who, in the opinion of
the Committee, are mainly responsible for the continued growth and development
and financial success of the Company or its subsidiaries, are eligible to be
granted awards under the Plan. Subject to the provisions of the Plan, the
Committee shall from time to time select from such eligible persons those to
whom awards shall be granted and determine the number of shares to be granted.
While eligibility is determined by these subjective criteria, and it is not
possible at this time to determine either the number of employees eligible to
participate in the Plan or the amount of awards which will be made, it is
expected that initially not more than 15 individuals would be considered for
participation in the Plan.

The performance share awards granted will be paid in Common Stock or cash
as determined by the Committee. A participant may elect to have the receipt of
such shares deferred until some future date.

The Boards of the Allegheny companies may amend, revise or suspend the Plan
or any portion thereof, provided that no such amendment shall be made without
shareholder approval if it would materially increase the benefits accruing to
participants or increase the number of shares which may be paid under the Plan.
No such amendment or modification shall impair the rights of any participant
under any award without the consent of such participant.

In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, combination, exchange
of shares, spin-off or other distribution of assets (other than normal cash
dividends), or other similar changes in the Common Stock, then appropriate
adjustments shall be made in the shares of Common Stock theretofore granted but
not yet awarded to the participants and in the aggregate number of shares of
Common Stock which may be awarded to the participants and in the aggregate
number of shares of Common Stock which may be awarded pursuant to the Plan.

For Federal Income Tax purposes, the grant of award shares does not
immediately result in taxable income to a recipient or a tax deduction to the
Company. At the time the shares of Common Stock are awarded and become free of
any restrictions, a recipient will recognize taxable ordinary income in an
amount equal to the fair market value of the Common Stock, and the Company will
be entitled to a corresponding income tax deduction.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
IMPLEMENTATION OF A PERFORMANCE SHARE PLAN AND WILL SO VOTE PROXIES RECEIVED
THAT DO NOT OTHERWISE SPECIFY.

APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Upon the recommendation of the Audit Committee, the Board of Directors has
appointed Price Waterhouse as independent accountants for the Company to audit
its consolidated financial statements for 1994 and to perform other audit
related services. Such services include: review of the Company's quarterly
interim financial information; review of periodic reports and registration
statements filed by the Company with the Securities and Exchange Commission;
issuance of special purpose reports covering such matters as employee benefit
plans and submissions to various governmental agencies; and consultation in
connection with various accounting and financial reporting matters. Price
Waterhouse also performs non-audit services for the Company. Fees for the 1993
audit and fees for audit services paid during the year aggregated $843,300, and
fees for non-audit services, $66,875. The Board has directed that the
appointment of Price Waterhouse be submitted to the stockholders for approval.
If the stockholders should not approve, the Audit Committee and the Board would
reconsider the appointment. Representatives of Price Waterhouse will be present
at the annual meeting to make a statement if they wish and to answer questions.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
APPOINTMENT OF PRICE WATERHOUSE AS INDEPENDENT ACCOUNTANTS AND WILL SO VOTE
PROXIES RECEIVED THAT DO NOT OTHERWISE SPECIFY.

4
<PAGE> 8

SHAREHOLDER PROPOSAL

The Sisters of St. Dominic of Caldwell, New Jersey, the beneficial owners of
1,000 shares of Common Stock, and the Sisters of the Humility of Mary, Villa
Maria, Pennsylvania, the beneficial owners of 5,200 shares of Common Stock, have
advised the Company that they will present for consideration and action the
following resolution:

"Whereas we believe:

"The U.S. performs poorly in energy efficiency, compared to other
industrialized countries, ranking 9th out of the 10 OECD nations, and using
nearly twice as much energy per dollar of GNP as Japan, West Germany, or Sweden;

"Electric utilities are the single largest source of carbon dioxide (CO2)
accounting for 35% of emissions nationwide. CO2 in turn represents about half of
all greenhouse gases (far more than any other gas) involved in the trapping of
solar heat and greenhouse warming which cause climate change. The risk of
climate change -- to economic welfare, public health, environmental stability,
agricultural production, and possible rises in sea level -- would affect many
people both in the U.S. and around the world;

"Numerous world leaders have attested to the importance and urgency of
reducing CO2 emissions. Many scientists have called for 20% reductions in CO2
emissions by the year 2000. Some 20 countries are already taking action so that
their CO2 emissions in 2000 will not exceed 1990 levels. Some U.S. corporations
have adopted 20% reduction goals for their own energy consumption and CO2
emissions by the year 2000 or even sooner.

"We believe our Company plays an important role in controlling CO2
emissions, through its fuel choices, its choices of which plants it runs when,
and its ratepayer efficiency programs know as Demand-Side Management (DSM).
Great opportunities exist to reduce CO2 by investing in DSM and generating
electricity with cleaner and more renewable sources of energy. Given the long
lead times required to build large new power plants and the associated
regulatory risks, energy options which lower CO2 emissions can create financial
security for our Company by reducing or eliminating the need for new
electricity-generating capacity;

"Integrating CO2 reductions into planning now will also minimize the risk
of expensive compliance with probable future CO2 regulations. In states where
the regulatory framework allows, DSM can also become an increasingly important
source of profits. Our company can achieve financial and regulatory stability by
demonstrating environmental leadership in this area. All these measures would
enhance the Company's image and shareholder value.

"Resolved, that shareholders request our Company to issue a report,
prepared at reasonable cost and omitting proprietary information, on the
potential for large capital costs to the Company if standards on carbon dioxide
emissions are imposed; the projected amount of such costs; and Company plans to
use alternative energy sources."

Supporting Statement: "Demonstrating leadership in reducing the impacts of
climate change can give the Company stability in the future, especially as
pollution control becomes stricter and power plants are targeted as major
offenders. By taking appropriate measures, our Company can protect both its
short-and long-term financial health and shareholder value. Shareholders seeking
to minimize the costs of climate change -- both to the Company and to society at
large -- should vote FOR this resolution putting their concern on the record and
asking for a response by our Company."

5
<PAGE> 9

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THIS PROPOSAL AND WILL
SO VOTE PROXIES RECEIVED THAT DO NOT OTHERWISE SPECIFY.

The Allegheny Power System (APS) companies have made available to
shareholders, the investment community, customers, and regulators in their
quarterly, annual, and other reports extensive information concerning the
greenhouse gas issue and its consequences for their customers. They have also
described their integrated resource planning and demand-side management and
other activities. This material has demonstrated the substantial and unnecessary
financial burden which carbon dioxide (CO2) emission restrictions would
represent and the disastrous effect of such costs on the competitive position of
their industrial customers in world markets. The APS companies have also
expressed their opinion that no scientific basis for CO2 restrictions has been
demonstrated and that even the most stringent U.S. domestic CO2 emission
reductions would have a minimal impact because of the overwhelming increases in
CO2 emissions in other parts of the world. Furthermore, they have made available
detailed explanations of what greenhouse gases are, how they originate, and the
fact that there is no effective technological means to reduce CO2 emissions and
that they should continue to use coal as their generating fuel, which is
essential to the economy of their operating territories. Furthermore, no other
fuel source is an adequate or viable substitute for coal in their generating
plants. The APS companies have also detailed their participation in developing
voluntary, cost-effective programs designed to accomplish President Clinton's
announced greenhouse gas emission reduction goals while not adversely affecting
the ability of American industry to compete in the world or the continuing
growth of the American economy.

The introductory statement's conclusions about U.S. energy efficiency and
the responsibility of the electric utility industry for increases in man-made
carbon dioxide emissions and, by implication, all greenhouse gases, are
misleading and, moreover, these conclusions are not meaningful or even related
to the subject matter of the proposed resolution. Actually, the U.S. energy
industry is one of the most highly efficient in the world, and CO2 emissions
both in the U.S. and from the Allegheny Power System have been decreasing and
are continuing to do so, unlike those in many parts of the rest of the world.

The Department of Energy (DOE), pursuant to Section 1605 of the Energy
Policy Act of 1992, is promulgating rules requiring reporting and cataloging on
a national basis by utilities and others of various CO2 and other so-called
greenhouse gas emissions, as well as actions taken to stabilize and reduce them.
Our companies are working with the DOE in this effort and, therefore, additional
self-imposed reporting of greenhouse gas reduction activities by our companies,
pending finalization of the DOE's reporting requirement rules, is unnecessary
and would be counterproductive.

THEREFORE, THE BOARD URGES STOCKHOLDERS TO VOTE "AGAINST" THIS PROPOSAL.

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<PAGE> 10

MANAGEMENT REVIEW COMMITTEE REPORT

GENERAL

The compensation program for executive officers of the Company and its
subsidiaries is directed by the Management Review Committee of the Company's
Board of Directors. The Committee recommends the annual compensation program for
each year to the Board of Directors of the Company and of each subsidiary for
its approval.

The executive compensation program is intended to meet three objectives:

- Create a strong link between executive compensation and total return to
stockholders, reliable and economical service to customers, and System
financial stability, integrity, and overall performance.

- Offer compensation opportunities that are competitive with the median
level of opportunity in the marketplace, at expected levels of
performance.

- Ensure internal compensation equity -- maintaining a reasonable
relationship between compensation and the duties and responsibilities of
each executive position.

It recognizes that the Company's financial success depends, at least in
part, on regulators' perceptions of customer satisfaction, which depends on our
supplying reliable electric service at reasonable prices in an environmentally
acceptable way.

EXECUTIVE COMPENSATION PROGRAM

The Company's executive compensation program has two components: salary and
incentive awards (as described below) and, if approved by the shareholders will,
in future years, have a third component, the Performance Share Plan.

The Company's executive compensation is both market-and performance-based.
The Committee believes that it is necessary to use both market-and
performance-based compensation to meet the challenges of intensifying
competitive, economic and regulatory pressures.

To ensure that the System's salary structure and total compensation
continue to be competitive, they are compared each year through an annual
compensation survey with those of comparable electric utilities -- over 30
companies in recent years. The survey companies are either similar in type and
size to Allegheny, contiguous to our geographic territory, or have a similar
fuel mix.

In 1993, over 80% of these survey companies are included in the Dow Jones
Electric Index to which the Company's performance is compared on page 12 of this
proxy statement. This comparison, conducted by a national compensation
consulting firm, involves matching System positions, including the Chairman,
President and Chief Executive Officer (CEO), with those in the survey companies
that have comparable duties and responsibilities. For 1993, the survey indicated
that the System's executive salary structure was slightly below the median. As
in prior years, this survey data became the basis for the consulting firm's
recommendations as to salary structure position placement and total
compensation, and 1993 base salary ranges for each position in line with the
survey average for comparable positions.

Base salary:

The base salaries of all executive officers, including the CEO, are
reviewed annually by the Committee, which makes recommendations to the
Boards of Directors. In recommending base salary levels, the Committee
gives most weight to the performance of each executive. The Committee
receives a report from the CEO including (a) the performance rating of each
executive (other than himself) based on that executive's position-specific
responsibilities and performance evaluation by his or her supervisor, and
(b) a specific salary recommendation for each. In determining its
recommendations to the Boards, the Committee also takes into consideration
operating performance, including such factors as safety, efficiency, and
customer satisfaction, and financial results, including such things as
total returns, earnings per share, quality of earnings, dividends paid and
dividend payout ratio.

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<PAGE> 11

Annual Performance Incentive:

The Allegheny Power System Annual Performance Incentive Plan (the
"Incentive Plan") is designed to supplement base salaries and provide cash
incentive compensation opportunities to attract, retain and motivate a
senior group of managers of Allegheny Power System, including executive
officers selected by the Management Review Committee. The Incentive Plan
provides for establishment of individual incentive awards based on meeting
specific predetermined performance targets. The performance targets are
based on net income available to common shareholders, achieved shareholder
return, and overall corporate financial results (changes in earnings per
share, quality of earnings, dividends paid per share and dividend payout
ratios) quality and cost of service to customers and System performance. In
addition, personal performance goals as to operating factors such as
efficiency and safety are set on a position specific basis for
participants.

Specific operating, management, or financial areas to be emphasized,
as well as performance targets, are determined each year by the Committee
with the recommendations of the CEO. If the performance targets are not
met, no awards are paid. The target awards under the Plan are a percent of
base compensation determined by the Committee, and participants may earn up
to 1 1/4 times the target award. For named officers for the 1992 Plan the
targets were 20% of 1991 base compensation. Targets for other participants
were 20% or less. Incentive Plan awards earned are paid in the year after
the year for which they are earned. Awards earned for performance in 1991
and 1992 are set forth in the Summary Compensation Table for those years
under the column "Incentive Award" for the individuals named therein. The
awards, if any, for 1993, payable in 1994, have not as yet been determined.

For the CEO, the Management Review Committee develops salary and incentive
award recommendations for the Board's consideration. The base salary
recommendation was based upon the Committee's evaluation of the CEO's
performance of his responsibilities in the context of the Company's overall
financial and operating performance, including the factors described in the next
sentence, and the quality and cost of service rendered to its customers. The
incentive award recommendation was based primarily on 1992 corporate financial
results, including total shareholder return, changes in earnings per share,
quality of earnings, dividends paid per share, and dividend payout ratios. The
overall quality and cost of service rendered to customers and overall System
performance were also considered. Mr. Bergman's 1993 total compensation
reflected the Committee's evaluation of his performance and the described 1992
financial results, total return to shareholders, and service to the Company's
customers and its efficient operations.

The executive compensation program, which is annually reviewed by the
Committee and the Board, is intended to reward the individual performance of
each executive relative to the overall financial performance of the Company, the
service provided to customers, and its cost. The program is further intended to
provide competitive compensation to help the Company attract, motivate, and
retain the executives needed to ensure continued stockholder return and reliable
and economical electric service to customers.

Recently enacted Section 162(m) of the Internal Revenue Code generally
limits to $1 million the corporate deduction for compensation paid to executive
officers named in the Proxy Statement, unless certain requirements are met. This
Committee has carefully considered the effect of this new tax code provision on
the current executive compensation program. At this time, Allegheny's deduction
for officer compensation is not limited by the provisions of Section 162(m). The
Committee intends to take such actions with respect to the executive
compensation program, if necessary, to preserve the corporate tax deduction for
executive compensation paid.

No current member of the Management Review Committee is or ever was an
employee of the Company or any of its subsidiaries.
Clarence F. Michalis,
Chairman
Eleanor Baum
Frank A. Metz, Jr.
Steven H. Rice

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EXECUTIVE COMPENSATION

During 1993, and for 1992 and 1991, the annual compensation paid by the
Company and its subsidiaries directly or indirectly for services in all
capacities to such companies to their Chief Executive Officer and each of the
four most highly paid executive officers of the Company and its subsidiaries
whose cash compensation exceeded $100,000 was as follows:

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
INCENTIVE ALL OTHER
NAME AND CAPACITIES IN WHICH SERVED YEAR SALARY AWARD(A) COMPENSATION(B)
---- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
KLAUS BERGMAN
Chairman of the Board, President, and 1993 $460,000 (a) $46,889
Chief Executive Officer of the 1992 445,000 $80,000 13,529(c)
Company, Allegheny Power Service 1991 425,000 80,000 6,037
Corporation, and Allegheny Generating
Company. Chairman of the Board and
Chief Executive Officer of the
Company's other principal
subsidiaries.
ALAN J. NOIA
1993 212,500 (a) 20,107
President and Director of The Potomac 1992 200,000 $38,000 7,975(c)
Edison Company. 1991 185,800 38,000 6,990
STANLEY I. GARNETT, II
Vice President, Finance of the Company 1993 206,000 (a) 24,006
and Allegheny Power Service 1992 195,600 $35,000 7,939(c)
Corporation, Vice President and 1991 180,600 35,000 5,752
Director of West Penn Power Company
and Allegheny Generating Company, and
a Director of the Company's other
principal subsidiaries.
PETER J. SKRGIC
Vice President of the Company and 1993 200,000(d) (a) 18,678
Allegheny Power Service Corporation, 1992 190,000(d) $31,000 8,325(c)
Vice President and Director of The 1991 176,000(d) 29,000 5,696
Potomac Edison Company and Allegheny
Generating Company, and a Director of
the Company's other principal
subsidiaries.
BENJAMIN H. HAYES
1993 190,000 (a) 19,668
President and Director of Monongahela 1992 180,000 $30,000 11,114(c)
Power Company. 1991 156,300 27,000 5,151
</TABLE>

9
<PAGE> 13

(a) Incentive awards are based upon performance in the year in which the figure
appears but are paid in the second quarter of the following year. Any
awards that may be granted in 1994 with respect to the 1993 plan and
performance have not yet been determined. Whether the incentive award plan
will be continued for 1994 has also not yet been determined.

(b) Effective January 1, 1992, the basic group life insurance provided
employees was reduced from two times salary during employment, which
reduced to one times salary after 5 years in retirement, to a new plan
which provides one times salary until retirement and $25,000 thereafter.
Executive officers and other senior managers remain under the prior plan.
In order to pay for this insurance for these executives during 1992,
insurance was purchased on the lives of each of them. Effective January 1,
1993, the Company started to provide funds to pay for the future benefits
due under the supplemental retirement plan (Secured Benefit Plan). To do
this, the Company purchased, during 1993, life insurance on the lives of
the covered executives. The premium costs of both the 1992 and 1993
policies plus a factor for the use of the money are returned to the Company
at the earlier of (a) death of the insured or (b) the later of age 65 or 10
years from the date of the policy's inception. The figures in this column
include the present value of the executives' cash value at retirement
attributable to the current year's premium payment for both the Executive
Life Insurance and Secured Benefit Plans (based upon the premium, future
valued to retirement, using the policy internal rate of return minus the
corporation's premium payment), as well as the premium paid for the basic
group life insurance program plan and the contribution for the Employee
Stock Ownership and Savings Plan (ESOSP) established as a non-contributory
stock ownership plan for all eligible employees effective January 1, 1976,
and amended in 1984 to include a savings program. Under the ESOSP for 1993,
all eligible employees may elect to have from 2% to 7% of their
compensation contributed to the Plan as pre-tax contributions and an
additional 1% to 6% as post-tax contributions. Employees direct the
investment of these contributions into one or more of five available funds.
Each System company matches 50% of the pre-tax contributions up to 6% of
compensation with common stock of Allegheny Power System, Inc. Effective
January 1, 1993 the maximum amount of any employee's compensation that may
be used in these computations is $235,840. Effective January 1, 1994 the
amount was reduced to $150,000 as a result of The Omnibus Reconciliation
Act of 1993. Employees' interests in the ESOSP vest immediately. Their
pre-tax contributions may be withdrawn only upon meeting certain financial
hardship requirements or upon termination of employment. For 1993, the
figure shown includes amounts representing (a) the aggregate of life
insurance premiums and dollar value of the benefit to the executive officer
of the remainder of the premium paid on the Group Life Insurance program,
the Executive Life Insurance, and Secured Benefit Plans, and (b) ESOSP
contributions respectively, as follows: Mr. Bergman $42,392 and $4,497; Mr.
Noia $15,610 and $4,497; Mr. Garnett $19,509 and $4,497; Mr. Skrgic $14,181
and $4,497; and Mr. Hayes $15,171 and $4,497, respectively.

(c) These amounts as previously reported did not include the following amounts
representing the dollar value of the benefit to the executive officer of
the remainder of the premium paid on the Executive Life Insurance Plan: Mr.
Bergman $786; Mr. Noia $186; Mr. Garnett $210; Mr. Skrgic $218; and Mr.
Hayes $381.

(d) Salary includes a $15,000 housing allowance in all years.

10
<PAGE> 14

RETIREMENT PLAN

The Company maintains a Retirement Plan covering substantially all
employees. The Retirement Plan is a noncontributory, trusteed pension plan
designed to meet the requirements of Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Each covered employee is eligible for
retirement at normal retirement date (age 65), with early retirement permitted.
In addition, executive officers and other senior managers participate in a
supplemental executive retirement plan ("Secured Benefit Plan").

Pursuant to the Secured Benefit Plan senior executives of Allegheny Power
System companies who retire at 60 or over with 40 or more years of service are
entitled to a supplemental retirement benefit in an amount that, together with
the benefits under the basic plan and from other employment, will equal 60% of
the executive's highest average monthly earnings for any 36 consecutive months.
The supplemental benefit is reduced for less than 40 years service and for
retirement age from 60 to 55. It is included in the amounts shown where
applicable. To provide funds to pay such benefits, beginning January 1, 1993 the
Company purchased insurance on the lives of the participants in the Plan. The
Plan has been designed so that if the assumptions made as to mortality
experience, policy dividends, and other factors are realized, the Company will
recover all premium payments, plus a factor for the use of the Company's money.
All executive officers are participants in the Plan. It also provides for use of
Average Compensation in excess of Code maximums.

The following table shows estimated maximum annual benefits payable
following retirement (assuming payments on a normal life annuity basis and not
including any survivor benefit) to an employee in specified remuneration and
Years of Credited Service classifications. These amounts are based on an
estimated Average Compensation (defined as average total earnings, excluding
incentive awards, during the highest-paid 36 consecutive calendar months or, if
smaller, the member's highest rate of pay as of any July 1st"), retirement at 65
and without consideration of any effect of various options which may be elected
prior to retirement. The benefits listed in the Pension Plan Table are not
subject to any deduction for Social Security or any other offset amounts.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
AVERAGE ---------------------------------------------------------------
COMPENSATION(A) 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
- ---------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$200,000........................ $60,000 $80,000 $100,000 $110,000 $115,000 $120,000
250,000........................ 75,000 100,000 125,000 137,500 143,750 150,000
300,000........................ 90,000 120,000 150,000 165,000 172,500 180,000
350,000........................ 105,000 140,000 175,000 192,500 201,250 210,000
400,000........................ 120,000 160,000 200,000 220,000 230,000 240,000
450,000........................ 135,000 180,000 225,000 247,500 258,750 270,000
500,000........................ 150,000 200,000 250,000 275,000 287,500 300,000
550,000........................ 165,000 220,000 275,000 302,500 316,250 330,000
600,000........................ 180,000 240,000 300,000 330,000 345,000 360,000
</TABLE>

- ---------------

(a) The earnings of Messrs. Bergman, Noia, Garnett, Skrgic, and Hayes covered by
the plan correspond substantially to such amounts shown for them in the
summary compensation table. As of December 31, 1993, they had accrued 22,
24, 12, 29, and 29 years of credited service, respectively, under the
Retirement Plan.

11
<PAGE> 15

PERFORMANCE GRAPH

The graph set forth below compares the Company's cumulative total
shareholder return on its Common Stock with the Dow Jones Electric Utility Index
and the Standard & Poor's Midcap 400 Index at each December 31 during the period
beginning December 31, 1988 and ending December 31, 1993, and assumes the
investment of $100 in each on December 31, 1988 and the reinvestment of all
dividends.

COMPARISON OF ALLEGHENY POWER SYSTEM, INC.'S 5-YEAR CUMULATIVE
TOTAL RETURN VS. DOW JONES ELECTRIC UTILITY INDEX AND S&P MIDCAP 400

<TABLE>
<CAPTION>
MEASUREMENT PERIOD ALLEGHENY DOW JONES S&P MIDCAP
(FISCAL YEAR COVERED) POWER ELECTRIC 400
<S> <C> <C> <C>
1988 100 100 100
1989 121 133 135
1990 116 135 128
1991 151 176 193
1992 175 191 216
1993 206 214 246
</TABLE>

12
<PAGE> 16

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below shows the number of shares of Common Stock that are
beneficially owned, directly or indirectly, by each named director and each
named executive officer of the Company and its subsidiaries, and by all
directors and executive officers of the Company and its subsidiaries as a group
as of March 1, 1994. To the best of the knowledge of the Company, there is no
person who is a beneficial owner of more than 5% of the outstanding shares of
Common Stock, except for Franklin Resources, Inc., 777 Mariners Island
Boulevard, San Mateo, California 94404, which at December 31, 1993, was the
beneficial owner of 6,393,500 shares, or 5.4%.

<TABLE>
<CAPTION>
SHARES OF
APS, INC. PERCENT
NAME COMMON STOCK OF CLASS
------------ ---------------
<S> <C> <C>
Eleanor Baum............................. 2,000 Less than .01%
William L. Bennett....................... 2,362 "
Klaus Bergman............................ 9,519 "
Stanley I. Garnett, II................... 3,940 "
Benjamin H. Hayes........................ 5,082 "
Phillip E. Lint.......................... 600 "
Edward H. Malone......................... 1,468 "
Frank A. Metz, Jr........................ 1,795 "
Alan J. Noia............................. 10,235 "
Steven H. Rice........................... 2,030 "
Gunnar E. Sarsten........................ 5,000 "
Peter L. Shea............................ 1,200 "
Peter J. Skrgic.......................... 5,026 "
All directors and executive officers of
the Company and its subsidiaries as a
group (31 persons)..................... 123,874 Less than .11%
</TABLE>

(a) Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC") and the New York Stock Exchange. The Company notes that Eleanor
Baum, a director, inadvertently failed to file a report timely with the SEC
as to the acquisition of 300 shares of Common Stock held in joint name with
her mother. A report of such acquisition was filed by Mrs. Baum with the
SEC.

13
<PAGE> 17

OTHER MATTERS

The Board of Directors is not aware of any other matters which may come
before the meeting. If any other matters properly come before the meeting, it is
the intention of the persons named in the proxy to vote the proxy thereon in
accordance with their judgment.

The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors, and
regular employees of the Company and its subsidiaries personally, by telephone,
or telegraph, and the Company may reimburse persons holding stock in their names
or in the names of their nominees for their expenses in sending soliciting
material to their principals. Although there are no plans to do so, the Company
may also obtain the services of additional persons in soliciting proxies. The
cost of any such additional solicitation, if undertaken, is not expected to
exceed $40,000.

It is important that proxies be returned promptly. Stockholders are,
therefore, urged to mark, date, sign, and return the proxy immediately. No
postage need be affixed if mailed in the enclosed envelope in the United States.

DEADLINE FOR SHAREHOLDER PROPOSALS

The date by which shareholder proposals must be received by the Company for
inclusion in the proxy materials relating to the next annual meeting is December
7, 1994.

PLEASE MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY IMMEDIATELY. NO POSTAGE IS
NECESSARY IF MAILED IN THE ENCLOSED ENVELOPE IN THE UNITED STATES. IF YOU ATTEND
THE MEETING, WE SHALL BE GLAD TO RETURN IT TO YOU, SO THAT YOU MAY VOTE IN
PERSON.

14
<PAGE> 18

PROXY ALLEGHENY POWER SYSTEM, INC.

12 East 49th Street
New York, N.Y. 10017

PROXY FOR USE AT ANNUAL MEETING OF STOCKHOLDERS

SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder hereby appoints Klaus Bergman, Stanley I.
Garnett, II, and Eileen M. Beck, and each of them, Proxies, with full power of
substitution, to vote all shares the undersigned is entitled to vote at the
Annual Meeting of Stockholders of Allegheny Power System, Inc. to be held on
the 4th Floor of The Waldorf-Astoria Hotel, 301 Park Avenue, between 49th and
50th Streets, New York, New York, on May 12, 1994, at 10:30 a.m., New York
time, and at any adjournments thereof, with all the powers the undersigned
would possess if personally present, as hereinafter specified by the
undersigned on the proposals listed on the reverse side hereof and in their
discretion on such matters as may properly come before the meeting.

WHEN PROPERLY EXECUTED AND RETURNED, THIS PROXY WILL BE VOTED AS
SPECIFIED BY THE UNDERSIGNED STOCKHOLDER. IF NO VOTING SPECIFICATION MADE,
THIS PROXY WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1, "FOR" ITEMS 2 AND 3, AND
"AGAINST" ITEM 4.

THIS PROXY IS CONTINUED ON THE REVERSE SIDE

PLEASE MARK, SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY.

12 East 49th Street
(LOGO) ALLEGHENY POWER SYSTEM, INC. New York, N.Y. 10017
Please mark
PROXY / X / your votes
like this

--------------------- ----------------------
Shares in Shares in
Your Name Dividend Reinvestment

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL
NOMINEES" IN ITEM 1.

FOR all WITHHOLD for
nominees all nominees

Item 1--Election of the following / / / /
nominees as Directors: Eleanor
Baum, William L. Bennett, Klaus
Bergman, Phillip E. Lint, Edward H.
Malone, Frank A. Metz, Jr., Steven
H. Rice, Gunnar E. Sarsten and
Peter L. Shea.

To Withhold authority to vote for any nominee, write the name on the line
below.

- -------------------------------------------------------------------------------

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 2 AND 3.

FOR AGAINST ABSTAIN

Item 2--Proposal to approve / / / / / /
implementation of a performance
share plan.

Item 3--Approval of appointment / / / / / /
of Price Waterhouse as
independent accountants.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" ITEM 4.

FOR AGAINST ABSTAIN

Item 4--Shareholders' proposal to / / / / / /
require a report on the capital cost
potential of carbon dioxide emission
standards.

Date , 1994
- ----------------------------------------------------------------------------

- ----------------------------------------------------------------------------
Signature

(Please sign your name(s) exactly as shown to the left).