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File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
ALLEGHENY POWER SERVICE CORPORATION
800 Cabin Hill Drive
Greensburg, PA 15601
MONONGAHELA POWER COMPANY
1310 Fairmont Avenue
Fairmont, WV 26554
THE POTOMAC EDISON COMPANY
10435 Downsville Pike
Hagerstown, MD 21740
WEST PENN POWER COMPANY
800 Cabin Hill Drive
Greensburg, PA 15601
(Name of company or companies filing this statement and addresses of
principal executive offices)
ALLEGHENY POWER SYSTEM, INC.
10435 Downsville Pike
Hagerstown, MD 21740
(Name of top registered holding company parent of each applicant or
declarant)
Thomas K. Henderson, Esq.
Vice President
Allegheny Power
10435 Downsville Pike
Hagerstown, MD 21740
(Name and address of agent for service)
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TABLE OF CONTENTS
Page
ITEM 1. Description of Proposed Transaction 1
I. Restructuring 1
A. Consolidation and Reengineering of Functions 3
1. Restructuring of Electric Utility Company 3
Functions
a. Operating Business Unit 4
b. Retail Marketing 4
c. Corporate Affairs 5
2. Restructuring of Bulk Power Supply 5
a. Generation Business Unit 5
b. Transmission Business Unit 6
c. Planning and Compliance Business Unit 6
3. Restructuring of Corporate Services 7
B. AYP Capital, Inc. 14
C. Reasons for Restructuring 15
D. Control over APSC 18
E. Cost Allocation 18
F. Proposed Amendment to Service Agreements 20
II. Electric Utility Companies Providing Services to
One Another 21
A. Operations Services 22
B. Customer Service Center 23
C. Office Services/Mail Payment 24
III. Compliance with Rule 54 24
ITEM 2. Fees, Commissions, and Expenses 25
ITEM 3. Applicable Statutory Provisions 26
ITEM 4. Regulatory Approval 26
ITEM 5. Procedure 26
ITEM 6. Exhibits and Financial Statements 27
ITEM 7. Information as to Environmental Effects 28
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
INTRODUCTION
Allegheny Power Service Corporation (APSC), a wholly-owned
subsidiary service corporation of Allegheny Power System, Inc. (APS, Inc.),
a holding company registered under the Public Utility Holding Company Act
of 1935 (1935 Act), proposes to amend Exhibit I (Proposed Amendment) to its
Service Agreements with Monongahela Power Company, an Ohio corporation with
general corporate offices in Fairmont, West Virginia (Monongahela), The
Potomac Edison Company, a Maryland and Virginia corporation with general
corporate offices in Hagerstown, Maryland (Potomac Edison), and West Penn
Power Company, a Pennsylvania corporation with general corporate offices in
Greensburg, Pennsylvania (West Penn), (collectively, the Electric Utility
Companies). The Proposed Amendment reflects changes in the scope of
services provided by APSC to the above-referenced companies, which are all
subsidiaries of APS, Inc. The changes are in large part a further
consolidation of services already performed by APSC. Some of these changes
began on January 1, 1996; the bulk of the changes commenced as of July 1,
1996.
In addition, the Electric Utility Companies propose to enter
into a Service Agreement among themselves, which is similar to the existing
APSC Service Agreements. This Agreement will allow the Electric Utility
Companies to perform services for one another and properly allocate the
costs of such services.
I. RESTRUCTURING
In 1995, APS, Inc. announced its intention to undertake a
restructuring designed to consolidate and reengineer its operations to
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better meet the competitive challenges of the changing electric utility
industry and remain the energy supplier of choice in the future for its
customers. On or about January 1, 1996, APSC began to realign its
organization to create distinct power generation and energy transmission and
distribution groups. As of July 1, 1996, the Electric Utility Companies
restructured, including the reengineering of processes and the consolidation
of functions with services already provided by APSC. In addition, although
they have not changed their legal corporate names, nor altered in any manner
ownership of capital assets, the Electric Utility Companies began doing
business under the trade name "Allegheny Power" as of September 1, 1996.
The restructuring is an effort to further control costs, operate
more efficiently, and prepare for the anticipated increase in retail and
wholesale competition among suppliers of electricity, beginning with the
Energy Policy Act of 1992. Allegheny Power's goal is to expand by
attracting new customers to its service area and, to the extent legally
permitted, to aggressively pursue new business within and outside its
service area, using its resources efficiently and capitalizing on its
competitive strengths. The restructuring process, for the most part, should
be completed by the end of 1996, although Allegheny Power now embraces
business process reengineering and continuous improvement as a way of life.
Allegheny Power expects to realize a number of benefits from its
restructuring. Beginning in 1996 and continuing into the future, increased
efficiencies and synergies are expected to result from the elimination of
layers of management and the elimination of previously duplicated functions.
The flattening, streamlining and consolidation of functions within the
organization will lead to enhanced efficiency and communication, which
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should translate into a reduction in the rate of growth in operating and
maintenance costs and thereby minimize the need for future rate increases.
A. Consolidation and Reengineering of Functions
In general, the restructuring consolidated in APSC certain
functions which previously were either performed separately by employees of
each of Allegheny Power's three Electric Utility Companies, or by employees
of the three Electric Utility Companies along with employees of APSC.
Allegheny Power has been restructured into the following functional units:
Operating Business Unit; Retail Marketing; Corporate Affairs; Generation
Business Unit; Transmission Business Unit; Planning and Compliance Business
Unit; and Corporate Services, which serves the business units. The
restructuring did not involve the formation of any new legal entities, nor
did it require the writedown of any rate base assets. No capital assets
were transferred among companies within Allegheny Power in connection with
the restructuring.
The overall goals of the restructuring have been to realign
functions by process and consolidate functions where feasible. The
following briefly describes the restructured functions.
1. Restructuring of Electric Utility Company Functions
Most of the functions which were performed exclusively by the
Electric Utility Companies have been consolidated into three units: 1) the
Operating Business Unit (OBU); 2) Retail Marketing business unit; and 3)
Corporate Affairs. The Vice Presidents of these groups all report to a
Senior Vice President of APSC, who also holds the title of President of each
of the Electric Utility Companies. Some of the main goals of the
restructuring of these functions include establishing a team-oriented
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environment, maintaining fewer layers of management, establishing broader
job classifications, and establishing an integrated work management system
to schedule, design, track, and finish jobs.
a. Operating Business Unit
The OBU is administered by one Vice President and ten process
directors. Teams of employees handle various processes from start to
finish. The processes covered include: respond to electric service
requests, restore service, ensure reliable service, manage the revenue
stream, manage resources, and respond to customer inquiries. Instead of the
21 divisions comprising the service territory of the Electric Utility
Companies before restructuring, the service area of the OBU is divided into
seven administrative regions which are staffed and serviced by teams
consisting of employees of APSC and employees of the Electric Utility
Companies. At present, many physical employees, including all of the union
work force, remain employees of the Electric Utility Companies. [FN]
The OBU will also include a consolidated state-of-the-art
Customer Service Center located in Fairmont, which will be the "front door"
to the new organization and will handle calls or forward them to members of
the appropriate process teams. All non-union OBU employees will be APSC
employees by January 1, 1997.
b. Retail Marketing
Retail Marketing functions are performed by a Vice President,
three General Managers (residential, industrial, and commercial), and their
staffs. This business unit has responsibility for acquiring and maintaining
[FN] 1 Although they will remain employees of the Electric Utility Companies,
as of January 1, 1997, all union employees will be paid and receive
benefits through APSC.
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customers. To the extent legally permissible, this group aggressively
markets new products and services to meet customers' needs.
c. Corporate Affairs
Corporate Affairs functions are handled by three Vice
Presidents, one located at each general corporate office, and their staffs.
These employees will maintain active community and state regulatory
relations.
2. Restructuring of Bulk Power Supply
The Bulk Power Supply (BPS) section of APSC underwent a process
redesign, effective January 1, 1996, which created distinct generation,
transmission, and planning and compliance business units, and resulted in
a reduction in work force of about 170 employees. The restructuring of BPS
combined the services that it was already providing to the Electric Utility
Companies into three functional business units: Generation Business Unit
(GBU), Transmission Business Unit (TBU), and Planning and Compliance
Business Unit (P&CBU). These business units are each headed by a Vice
President of APSC. The Vice Presidents of the GBU, TBU, and P&CBU all
report to a Senior Vice President of APSC. Various administrative and other
support services will continue to be provided to these business units by
other APSC departments. In the restructuring of BPS, no new entities were
formed and no capital assets were transferred.
a. Generation Business Unit
The GBU is responsible for ensuring that adequate generation is
available to serve the native load customers of the Electric Utility
Companies and other loads served by the GBU by employing their generating
facilities and third-party generation obtained through marketing efforts.
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Its primary responsibilities include ensuring the cost-effective operation
and maintenance of the Electric Utility Companies' generating units and
providing the most economic mix of generation from available generating
units and off-system purchases and sales.
b. Transmission Business Unit
The TBU is responsible for ensuring that adequate high-voltage
network facilities are available and on-line to reliably convey power
produced from the power production operations run by, or procured by, the
GBU to serve native load and other loads served by those operations. It
will also engage in marketing efforts for sales of bundled and unbundled
transmission services to nonaffiliates and will be responsible for
accommodating requests for transmission service submitted by nonaffiliates
who qualify as customers for that service under federal regulations.
Finally, the TBU is responsible for maintaining the optimal economic balance
on a real-time basis between native customer load and the output of the
generation resources supplied by the GBU, as well as managing the various
emission allowance resources of Allegheny Power.
c. Planning and Compliance Business Unit
The P&CBU provides strategic resource planning and engineering
analysis of alternate transmission and generation resource options,
environmental and regulatory issues management, environmental compliance
oversight, research and development, and emerging technology development for
Allegheny Power. Much of the work of this business unit will be
accomplished through multi-functional, cross-organizational, teams yielding
a more balanced solution to strategic problems.
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3. Restructuring of Corporate Services
The groups in this area provide certain corporate services to
the business units and have been restructured in order to supply these
services more efficiently. The following is a brief description of major
changes to this area resulting from the restructuring.
a. Accounting
Historically, functions of the Accounting department have
included general accounting, payroll, accounts payable, plant accounting,
and taxes. These functions were performed at three locations (Greensburg,
Fairmont, and Hagerstown) by employees of one of the Electric Utility
Companies or employees of APSC. By January 1, 1997, all Accounting
employees will be employees of APSC. The restructuring of the Accounting
department also involves the following changes:
1) General Accounting - consolidated in
Greensburg and called Corporate Accounting. The consolidation is intended
to eliminate duplicative activities, and certain non-general accounting
tasks will be transferred to more appropriate sections (i.e., transportation
accounting) in the near future.
2) Payroll - consolidated in Greensburg. The
payroll process will be simplified, and paycheck production, including
payroll taxes, may eventually be outsourced.
3) Plant Accounting - consolidated in
Fairmont and called Asset Accounting. Billing and work order approval
processes will be standardized and streamlined.
4) Taxes - consolidated in Greensburg. This
department will place more emphasis on tax planning for the future.
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5) Accounts Payable - consolidated in
Hagerstown and called Payment Processing.
b. Information Services
Prior to the restructuring, this department was divided into
four groups: Applications Development and Support; Technical Information
Services and Network Support; EDP Operations; and EDP User Support and
Research and Development. There was a decentralized system of user support
that concentrated on designing most systems to the individual needs of each
user. These services were performed by APSC employees or Electric Utility
Company employees located at Greensburg, Hagerstown and Fairmont.
Information Services has been reorganized into three main
groups: 1) Business Solutions Team - concentrating on applications
acquisition, development, implementation, and maintenance; 2) Technology
Operations Team - handling infrastructure planning, operation and
maintenance; and 3) Customer Support Team - including customer services and
support center. Also, six Business Consultants are assigned to the major
business units and will handle tasks from all three Information Services
groups. There is a customer service presence at all three corporate
headquarters, but the other teams are consolidated in Greensburg. As of
January 1, 1997, all Information Services employees will be employees of
APSC.
Key changes to be implemented by the restructuring include the
negotiation of service level agreements for specific projects with the
various business units which will specify a certain level of service for
specific services. The service level agreements are not intended to cover
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cost allocation. In addition, Information Services will be doing more
direct billing of its services rather than using cost allocation.
c. Financial Management
Historically, Financial Management has provided the following
services: capital management; forecasting of long-term financing;
insurance/risk management; corporate strategic planning; and financial
planning.
Major changes implemented by the restructuring include combining
four budgeting groups and financial planning into a single financial
management group. The consolidation is designed to eliminate duplicate
efforts and reduce or eliminate hand-offs. In addition, the Risk Management
function has been transferred to Treasury, and Financial Management has
assumed long-term financial planning and cash forecasting from Treasury.
As of January 1, 1997, all Financial Management employees will be APSC
employees.
d. Secretary/Treasurer
This area has historically provided services involving: 1)
Corporate secretarial functions, including Board of Directors matters,
administration of the Electric Utility Companies' indentures, regulatory
filings, and records and library management; and 2) Treasury functions, such
as bank relations, cashier services, cash management (internal funding, cash
forecasting, and external short-term borrowing and investing), credit and
collections, cash and customer bill processing, and long-term financing.
These functions were performed at all three corporate headquarters, by
employees of the Electric Utility Companies.
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The restructuring of this area has produced the following key
changes: The Corporate Secretary function is transferred to Legal Services;
and Treasury assumed the risk management function from Financial Management
and electronic commerce from Information Services. Treasury continues long-
term financings, bank relations and cash management functions and is
consolidated in Hagerstown. As of January 1, 1997, all employees in these
areas will be APSC employees.
e. Investor Relations
As of July 1, 1996, Investor Relations and Public Relations
(originally part of the Administrative function at APSC and part of Customer
Relations at the Electric Utility Companies) were transferred and
consolidated to form External Relations, located at Hagerstown. As of
October 1, 1996, External Relations was combined with Communications
(formerly under the authority of Corporate Affairs) to form Corporate
Communications, which is responsible for internal and external
communications, including advertising and stockholder publications.
Investor Relations remains responsible for maintaining a favorable
relationship between Allegheny Power and the financial community. As of
January 1, 1997, all employees in these areas will be APSC employees.
f. Audit Services
Historically, this department has performed financial,
contracts, and operations/consulting audits. Prior to the restructuring,
Audits consisted of four divisions located at the three corporate general
office locations. The Audit employees were either employees of one of the
Electric Utility Companies or employees of APSC. As a result of the
restructuring, Audit Services became one department and all Audit employees
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became APSC employees. The department will continue to perform the same
types of services as it did prior to the restructuring, although during the
transition process it is expected to devote additional attention to
allocation and billing processes to ensure effective practices are
maintained. It will also strive to become more customer-focused, reduce the
process cycle time, and promote its consulting role.
g. Supply Chain
The Supply Chain functions include Purchasing, Stores, Fuel
Accounting, and Accounts Payable. Historically, these functions were
performed by employees of one of the Electric Utility Companies or employees
of APSC, located at one of the three general corporate offices. As a result
of the restructuring, Purchasing is named Procurement, and the employees
performing this function have been organized into Client Service Provider
Teams. Stores is named Materials Management and Distribution, and
management of this function has been centralized at Connellsville,
Pennsylvania, and at Hagerstown. In addition, Accounts Payable is now
called Payment Processing and is consolidated in Hagerstown. All Supply
Chain employees are currently APSC employees.
h. Legal Services
In the past, localized legal services were provided to the
Electric Utility Companies by their own legal staffs, and the APSC legal
department handled corporate matters or matters of more generalized interest
to Allegheny Power. As a result of the restructuring, all Legal Services
personnel are currently employees of APSC, and the attorneys are available
to perform legal work for any Allegheny Power company. The local presence
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of Legal Services personnel in each general corporate office has been
maintained, and the Legal Services staff has been organized into teams, the
members of which are available to handle questions or issues related to
specific legal subjects.
Claims is also part of Legal Services. The functions of this
group have traditionally been performed by employees of each Electric
Utility Company, either at the general corporate offices of each company or
at the former division offices. As a result of the restructuring, the
Claims functions are performed by full-time APSC employees located at each
general corporate office and certain field locations.
In addition, responsibility for the functions of the Corporate
Secretary has been placed under Legal Services.
i. Regulation and Pricing
The functions of the Rates department have included: Costing -
providing cost of service allocations by jurisdiction and/or customer class
using load research data; Pricing Support - Establishing and implementing
charges for company services; Regulatory Management - assembling and
providing primary support for regulatory filings while maintaining direct
contacts with commission staffs; and Billing - rendering reliable and
accurate bills to retail and wholesale customers. These functions were
performed by employees of the Electric Utility Companies and by employees
of APSC. As of January 1, 1997, all of the responsibilities of this
department, which is now known as Regulation and Pricing, will be performed
entirely by APSC employees. The Costing and Pricing Teams are consolidated
in Greensburg, the Financial Analysis Team is consolidated in Hagerstown,
and the Fuel and Capital Recovery Team is consolidated in Fairmont. In
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addition, the routine rate applications function is transferred to the OBU,
and the responsibility for billing controls is transferred to, and
consolidated in, the OBU.
j. Human Resources
Human resources policies for all of Allegheny Power have
traditionally been set by a Human Resources (HR) policy-making department
at APSC. These policies were administered by separate HR departments of
APSC and of each Electric Utility Company; each department was run by one
of four HR Directors. As the result of the restructuring, a single HR
Director, with the assistance of a two-person management team, will set and
administer human resources policies system-wide. Various teams have been
formed to handle Employee Development, Employee Relations, Medical Services,
Rewards Systems, Staffing, and Technical and Administrative Support. This
department is consolidated at Greensburg, but some HR employees, who are
members of one or more of the above-listed teams, are located in the other
general corporate offices to provide local support. All HR employees are
currently APSC employees.
k. Governmental Affairs
Prior to the restructuring, the Governmental Affairs function
was part of the Legal Services group and was performed locally by employees
of the various Electric Utility Companies. This function has been removed
from Legal Services and its employees now report to a Vice President of
Governmental Affairs, a newly created position within APSC. The Vice
President has two Assistants, one of which handles research and
communication with local Governmental Affairs representatives; the other
supervises the activities of the local Governmental Affairs representatives.
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In the near future, Allegheny Power will, for the first time, have a full-
time Governmental Affairs representative located in Washington, D.C., who
will focus exclusively on federal legislation and its effect on Allegheny
Power and the electric industry. As of January 1, 1997, all Governmental
Affairs employees will be APSC employees.
B. AYP Capital, Inc.
AYP Capital, Inc. (AYP), a subsidiary of APS, Inc., has been
authorized by this Commission to engage in certain unregulated activities,
but it does not presently have any employees. After the restructuring, AYP
and its subsidiaries will continue to receive services from APSC under
existing service agreements.
Although it is not formally part of the restructuring, AYP's
operations will be affected by the activities of the Retail Marketing
business unit. The Retail Marketing business unit will, to the extent
legally permissible, sell unregulated services on behalf of AYP to end-
users. Currently approved services which AYP may provide include energy
management services, demand-side management services, and consulting
services. AYP will offer only those products and services for which it has
received approval from this Commission. The energy services and consulting
business lines of AYP report to the Vice President of Retail Marketing.
AYP is also approved to invest in exempt wholesale generators
(EWGs), independent power producers (IPPs), and foreign utility companies
(FUCOs). AYP has several of these types of investments, including AYP
Energy, Inc. (Energy), an EWG authorized to sell wholesale power at market
based rates, and the Latin American Energy and Electricity Fund, which
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invests in FUCOs. Pursuant to prior authority granted by this Commission,
AYP also has invested in the Envirotech Fund. The reporting responsibility
for these activities will remain unchanged.
C. Reasons for Restructuring
Allegheny Power is restructuring in order to prepare to
functionally unbundle electric services consistent with best meeting
customer needs and the evolving regulatory structure of the industry and to
operate more efficiently.
Customers no longer want "one-size-fits-all" electric service;
they want customized services at competitive prices. In order to achieve
this, bundled electric services must be unbundled. Electric companies have
traditionally provided energy generation and delivery services as a single
package. Unbundling will enable electric companies to generate and sell
electricity in the competitive marketplace while separately providing
delivery services to their customers.
The Federal Energy Regulatory Commission (FERC) has mandated the
separation of generation and transmission in the wholesale market. (See the
Final Rule, Order 888, published April 24, 1996.) In that Order, FERC
stated:
We conclude that functional unbundling of
wholesale services is necessary to implement non-
discriminatory open access transmission and that
corporate unbundling should not now be required.
As we explained in the NOPR [Notice of Proposed
Rulemaking], functional unbundling means three
things:
(1) a public utility must take
transmission services (including
ancillary services) for all of its new
wholesale sales and purchases of
energy under the same tariff of
general applicability as do others;
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(2) a public utility must state
separate rates for wholesale
generation, transmission, and
ancillary services;
(3) a public utility must rely on the
same electronic information network
that its transmission customers rely
on to obtain information about its
transmission system when buying or
selling power.
Although the final FERC rule does not require corporate
restructuring, it does require functional separation of generation and
transmission.
In the retail market, separation of the generation and delivery
functions, although not yet required in the states served by Allegheny
Power, is good public policy. The restructuring will enable Allegheny Power
to provide the separate electric services that customers desire in a manner
that is consistent with evolving regulatory requirements.
As a result of the restructuring, Allegheny Power expects to
provide improved services more efficiently. By reorganizing and eliminating
certain processes and consolidating functions, Allegheny Power expects to
perform its functions with approximately 1,200 fewer employees. Some
savings from employee reductions will be offset by additional expenses for
technology, facilities revisions required by the restructuring and other
improvements in operations of the business units.
It is expected that all costs associated with the restructuring
program will be recovered primarily through cost savings over a period of
two years after staff reductions. (Total restructuring costs are estimated
to be in the area of $100 million, pre-tax; total expected savings are
expected to be in the area of $60 million per year, pre-tax.) Initially,
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savings from restructuring are expected to be less than Allegheny Power's
investments in information systems, employee training and development, the
Customer Service Center, and other areas which will facilitate efficient
operations. However, the overall operating and maintenance budget for the
Electric Utility Companies (including savings from staff reductions and
additional expenses to improve operations for the years 1996 through 1999)
is expected to remain level. (The operating and maintenance budgets for each
individual Electric Utility Company may vary from year to year.) Increases
in the number of employees are expected for Retail Marketing and for AYP
Capital, Inc.
In addition, the business and support units are emphasizing
improvements in service to external and internal customers. For example,
the generating stations are being operated by shift teams composed of
employees with various skills. As a result of organizing by business units,
improvements will be implemented efficiently and consistently across the
entire generation, transmission, and operating groups rather than on a
company-by-company basis.
Except for the union work force and possibly some other
employees, the management, engineering, maintenance, legal, accounting,
payables, and administrative and support functions previously performed by
employees of the Electric Utility Companies will be supplied, after the
realignment, by employees of APSC. By January 1, 1997, all non-union
employees of the Electric Utility Companies will be employees of APSC. The
cost of services which they provide will be determined in accordance with
Rules 90 and 91 under the 1935 Act and will be either direct-billed or
billed in accordance with the existing cost allocation methods under the
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Service Agreements. As compared with January 1, 1996, the restructuring of
Allegheny Power is expected to result in the net transfer of approximately
2800 non-union employees to APSC from the Electric Utility Companies. This
transfer will increase overall employment by APSC and virtually eliminate
non-union employment by the Electric Utility Companies.
D. Control over APSC
A number of factors will ensure that APSC continues to be
responsive to the needs of the Electric Utility Companies and provide the
Electric Utility Companies with the ability to judge their need for inter-
affiliate services and to monitor the quality and value of the services
being provided. These factors include the APSC budget process, Commission-
approved work order procedures to track and document the initiation of
services, billing and review procedures designed to ensure the accuracy of
APSC billings, and internal audit controls designed to ensure the fairness
of APSC charges. For example, Audit Services will continue to meet at least
twice a year with the Audit Committees of the Boards of Directors of APS,
Inc., APSC, and the Electric Utility Companies (which Audit Committees are
comprised solely of outside directors) to review audit plans and findings.
In addition, the Director, Audit Services will continue to have open and
direct access to the Chairmen of the Audit Committees. These procedures
will ensure that costs associated with the services performed by APSC on
behalf of the Electric Utility Companies are properly authorized, allocated,
and tracked.
E. Cost Allocation
Under existing Commission authority, each of the Electric
Utility Companies pays to APSC all costs which reasonably can be identified
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and related to a particular transaction or service performed by APSC on its
behalf. These costs are captured in work orders in accordance with the
Commission's Uniform System of Accounts for Mutual Service Companies and
Subsidiary Service Companies. APSC's current method of allocations will be
maintained in the restructured organization.
APSC maintains a separate record of the expenses for each
department. Expenses are reported as departmental expenses, incremental out-
of-pocket expenses, or overhead expenses. Departmental expenses consist of
salaries and employee expenses, employee welfare expenses, rents, expenses
of training and development of APSC's employees, and all other expenses
attributable to, or necessary to, the operation of the department.
Incremental out-of-pocket expenses are expenses incurred for the direct
benefit and convenience of a particular company or group of companies and
are charged solely to such company(ies). Overhead expenses include costs
of maintaining the corporate existence, such as taxes, outside auditing and
legal fees, and other corporate expenses.
1. Allocation of Departmental and Out-of-Pocket
Expenses
Departmental and out-of-pocket expenses incurred by APSC are
accumulated by specific, identifiable work order numbers and directly billed
to the receiving company(ies). APSC will continue to use controls and
procedures relating to the existing work order accounting system reviewed
by this Commission pursuant to a prior audit. These procedures ensure that
costs associated with the services performed on behalf of the receiving
company are properly authorized, allocated, and tracked. Work orders are
established and administered in accordance with the Commissions' Uniform
System of Accounts for Mutual and Subsidiary Service Companies.
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When a service is rendered for the benefit of two or more
companies, the costs are shared by the receiving companies in proportion to
the average electric operating revenues of each (exclusive of sales to
another APS subsidiary), operating and maintenance expenses (exclusive of
fuel, deferred fuel, and purchased power and exchanges), kilowatthours sold
to regular customers (other than to the APS subsidiaries), and total
electric plant in service (less reserves for depreciation and amortization),
over the three preceding calendar years.
2. Allocation of Overhead Expenses
Overhead expenses and the cost of services rendered by APSC are
distributed among receiving companies in direct proportion to the amount of
department expenses charged to or allocated to such companies.
The foregoing billing principles will remain the basis for
APSC's charges to the Electric Utility Companies unless and until modified
or until new principles are adopted and reported to and/or approved by the
Commission.
F. Proposed Amendment to Service Agreements
The Proposed Amendment to the Service Agreements is attached as
Exhibit B-1. The services described in the Proposed Amendment and
centralized in APSC as a result of the restructuring represent a logical
extension of existing services to reflect changed business conditions and
cost reduction opportunities. They therefore do not represent a fundamental
change in the essential character of the services previously rendered by
APSC. They will be billed in the same manner, using existing allocation
methods, as other similar services which heretofore have been provided by
APSC.
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II. Electric Utility Companies Providing Services To One Another
One effect of the restructuring was to combine certain services
which were previously performed separately by each Electric Utility Company.
The Electric Utility Companies propose to enter into the Service Agreement
attached hereto as Exhibit B-2 in order to perform certain services for one
another.
The Electric Utility Company performing work for an affiliated
Electric Utility Company will accumulate the actual costs incurred in
providing authorized services through the use of specific, identifiable work
order numbers or by FERC accounts and will bill the receiving company based
on the amounts accumulated. Employee timesheets will be used to record the
amount of time employed in rendering such services. Out-of-pocket expenses
which are expended in regard to specific services will also be recorded.
The total cost of a particular service will be the sum of:
facilities charges, in order to recover depreciation and return on
investment on fixed assets; working capital charges, where appropriate; all
labor charges, including related payroll overheads and out-of-pocket
expenses; and any related overhead charge associated with out-of-pocket
costs. The billing process will be done monthly. In return for services
performed by an Electric Utility Company, the recipient of the services will
pay the Electric Utility Company which performs the service the actual costs
incurred by it in providing the service, calculated in accordance with Rules
90 and 91 of the 1935 Act.
The following services have been consolidated and may be
performed by one or more of the Electric Utility Companies for another
Electric Utility Company:
<PAGE>
A. Operations Services
At West Penn's Connellsville Center, the restructuring
consolidated certain engineering and construction work that had previously
been performed by Monongahela and Potomac Edison. Also, certain of the work
that was previously performed by West Penn was consolidated at Potomac
Edison's Bower Avenue location. The Electric Utility Companies believe that
consolidation of those functions will result in increased efficiency for the
entire System.
1. Material Supply and Distribution System
Transmission and distribution materials are supplied from West
Penn's Connellsville storeroom and Potomac Edison's Bower Avenue storeroom
to all locations for the three Electric Utility Companies.
2. Distribution Transformer/Regulator Repair
Repair of distribution transformers as well as regulator repairs
for all three Electric Utility Companies may be consolidated at West Penn's
Connellsville Center. Currently, this work is also being performed in
Hagerstown.
3. Oil Circuit Recloser Repair
West Penn's Connellsville Center is the central oil circuit
recloser (OCR) repair site for Monongahela and West Penn. OCR repairs for
Potomac Edison are performed at Hagerstown. Future cost comparison studies
will determine whether all of the OCR repairs should be performed at
Connellsville.
<PAGE>
4. Rubber Goods Repair and Testing
For all three Electric Utility Companies, testing and inspection
of rubber goods, such as gloves, sleeves, and blankets have been
consolidated at West Penn's Connellsville location.
5. Metering
Most meter test activities for the three Electric Utility
Companies have been consolidated at West Penn's Connellsville location,
although some wiring of meter packages for all three Electric Utility
Companies is still performed at Hagerstown.
6. Other Operations Services
Other operations services which have been consolidated, but are
still performed, at least in part, by Electric Utility Company employees,
include: Building Management, Transportation Services, Substation
Construction, Substation Maintenance, and Telecommunications Operations.
B. Customer Service Center
As noted above, a consolidated state-of-the-art Customer Service
Center will be located in Fairmont, and its employees will answer incoming
customer calls to the Electric Utility Companies via one toll-free number.
At present, its functions may be performed by employees of APSC or by
employees of any of the Electric Utility Companies. Therefore, the Electric
Utility Companies may perform services for one another which include
responding to customer inquiries, initiating new service, dispatching
service and line crews in response to power outages, handling credit and
collection activities, responding to customer and Public Service Commission
complaints, and managing the meter reading and billing activities.
<PAGE>
C. Office Services/Mail Payment
Currently, employees of one or more of the Electric Utility
Companies may perform payment processing services for one or more of the
other Electric Utility Companies. In addition, the Electric Utility
Companies may perform certain office services, including secretarial,
typing, mail room services, duplicating, fleet administration, and other
similar services, for one another.
III. Compliance with Rule 54
Rule 54 provides that in determining whether to approve certain
transactions other than those involving exempt wholesale generators (EWGs)
or foreign utility companies (FUCOs), as defined in the 1935 Act, the
Commission will not consider the effect of the capitalization of earnings
of any subsidiary which is an EWG or FUCO if Rule 53(a), (b) and (c) are
satisfied. The requirements of Rule 53(a), (b), and (c) are satisfied.
Rule 53(a)(1). APS, Inc. has one EWG subsidiary, AYP Energy,
Inc., which recently received approval of its application with the FERC to
declare its 50% interest in Unit No. 1 at the Fort Martin Power Station a
hybrid EWG. As of June 30, 1996, APS, Inc., through its subsidiary, AYP
Capital, Inc., had invested $0 in AYP Energy, Inc. This investment
represents less than 1% of $981 million, the average of the consolidated
retained earnings of APS, Inc. reported on Form 10-K or Form 10-Q, as
applicable, for the four consecutive quarters ended June 30, 1996.
Rule 53(a)(2). AYP Energy, Inc. will maintain books and records
and make available the books and records required by Rule 53(a)(2).
<PAGE>
Rule 53(a)(3). No more than 2% of the employees of the Electric
Utility Companies will, at any one time, directly or indirectly render
services to AYP Energy, Inc.
Rule 53(a)(4). APS, Inc. will submit a copy of Item 9 and
Exhibits G and H of APS, Inc.'s Form U5S to each of the public service
commissions having jurisdiction over the retail rates of the Electric
Utility Companies.
Rule 53(b). (i) Neither APS, Inc. nor any if its subsidiaries
is the subject of any pending bankruptcy or similar proceeding; (ii) APS,
Inc.'s average consolidated retained earnings for the four most recent
quarterly periods ending on June 30, 1996 ($981 million) represented an
increase of approximately $24 million (or 2.5%) in the average consolidated
retained earnings from the previous four quarterly periods ended on June 30,
1995 ($957 million); and (iii) for the year ended December 31, 1995, there
were no losses attributable to APS, Inc.'s investments in AYP Capital other
than $572,000 in preliminary development and start-up costs.
Rule 53(c). Rule 53(c) is inapplicable because the requirements
of Rule 53(a) and (b) have been satisfied.
ITEM 2. FEES, COMMISSIONS, AND EXPENSES
No fees, commissions, or expenses, other than ordinary fees and
expenses of APSC estimated not to exceed $1,000, and the services of APSC
personnel, which are to be billed at cost, are to be paid in connection with
the proposed transaction.
<PAGE>
ITEM 3. APPLICABLE STATUTORY PROVISIONS
Applicants have been advised that Section 13(b) of the 1935 Act
and Rules 80 through 94 thereunder may be applicable to the proposed
transactions described herein.
ITEM 4. REGULATORY APPROVAL
The Proposed Amendment and the Service Agreement between the
Electric Utility Companies will be expressly authorized by the Virginia
State Corporation Commission as to Potomac Edison. The Proposed Amendment
and the Service Agreement between the Electric Utility Companies will be
expressly authorized by the Public Service Commission of West Virginia as
to Monongahela and Potomac Edison. The Proposed Amendment and the Service
Agreement between the Electric Utility Companies will also be expressly
authorized by the Pennsylvania Public Utility Commission as to West Penn.
Copies of applications to such commissions will be filed by amendment
hereto, and copies of the orders of such commissions will also be filed by
amendment hereto. No commission other than the Securities and Exchange
Commission and these commissions has jurisdiction over the proposed
transaction.
ITEM 5. PROCEDURE
It is requested, pursuant to Rule 23(c) of the Rules and
Regulations of the Commission, that the Commission's Order permitting this
Application or Declaration to become effective be issued on or before
December 2, 1996. APSC and APS, Inc. waive any recommended decision by a
hearing officer or by any other responsible officer of the Commission and
<PAGE>
waive the 30-day waiting period between the issuance of the Commission's
Order and the date it is to become effective since it is desired that the
Commission's Order, when issued, become effective forthwith. APSC and APS,
Inc. consent to the Office of Public Utility Regulation assisting in the
preparation of the Commission's decision and/or Order in this matter, unless
the Office opposes the matter covered by this Application or Declaration.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
B-1 Proposed Amendment to Service Agreements - APSC,
Monongahela Power, Potomac Edison, and West Penn
B-2 Service Agreement between Allegheny Power Service
Corporation, Monongahela, Potomac Edison, and West
Penn
B-3 Organizational Charts (APS, Inc., APSC,
Monongahela, Potomac Edison, and West Penn) before
Restructuring
B-4 Organizational Charts (APS, Inc., APSC,
Monongahela, Potomac Edison, and West Penn) after
Restructuring
D-1 Application to the Pennsylvania Public Utility
Commission (to be filed by amendment)
D-2 Application to the Virginia State Corporation
Commission (to be filed by amendment)
D-3 Application to the Public Service Commission of
West Virginia (to be filed by amendment)
D-4 Order of the Pennsylvania Public Utility Commission
(to be filed by amendment)
D-5 Order of the Virginia State Corporation Commission
(to be filed by amendment)
D-6 Order of the Public Service Commission of West
Virginia (to be filed by amendment)
F Opinion of Counsel (to be filed by amendment)
<PAGE>
G Financial Data Schedules
H Form of Notice
(b) Financial Statements
Balance Sheets per books as of June 30, 1996 for:
1-A Monongahela Power
2-A Potomac Edison
3-A West Penn Power
4-A APS, Inc. and subsidiaries (consolidated)
Statements of income and retained earnings per books for
the 12 months ended June 30, 1996 for:
1-B Monongahela Power
2-B Potomac Edison
3-B West Penn Power
4-B APS, Inc. and subsidiaries (consolidated)
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
It is believed that permitting this Application or Declaration
to become effective will not constitute a major Federal action significantly
affecting the quality of the human environment. No other Federal agency has
prepared or is preparing an environmental impact statement with respect to
the proposed transactions.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused this
statement to be signed on their behalf by the undersigned thereunto duly
authorized.
ALLEGHENY POWER SERVICE CORPORATION
/s/ T. K. Henderson
By:
Thomas K. Henderson,
Vice President
MONONGAHELA POWER COMPANY
/s/ T. K. Henderson
By:
Thomas K. Henderson,
Vice President
THE POTOMAC EDISON COMPANY
/s/ T. K. Henderson
By:
Thomas K. Henderson,
Vice President
WEST PENN POWER COMPANY
/s/ T. K. Henderson
By:
Thomas K. Henderson,
Vice President
October 21, 1996
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5069276
<OTHER-PROPERTY-AND-INVEST> 63276
<TOTAL-CURRENT-ASSETS> 533150
<TOTAL-DEFERRED-CHARGES> 692208
<OTHER-ASSETS> 5068
<TOTAL-ASSETS> 6362978
<COMMON> 151600
<CAPITAL-SURPLUS-PAID-IN> 1012145
<RETAINED-EARNINGS> 987034
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2150779
0
170086
<LONG-TERM-DEBT-NET> 2263449
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 107513
<LONG-TERM-DEBT-CURRENT-PORT> 1587
0
<CAPITAL-LEASE-OBLIGATIONS> 2397
<LEASES-CURRENT> 887
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1661967
<TOT-CAPITALIZATION-AND-LIAB> 6362978
<GROSS-OPERATING-REVENUE> 2369335
<INCOME-TAX-EXPENSE> 145435
<OTHER-OPERATING-EXPENSES> 1815156
<TOTAL-OPERATING-EXPENSES> 1960591
<OPERATING-INCOME-LOSS> 408744
<OTHER-INCOME-NET> 6581
<INCOME-BEFORE-INTEREST-EXPEN> 415325
<TOTAL-INTEREST-EXPENSE> 179995
<NET-INCOME> 235330
9256
<EARNINGS-AVAILABLE-FOR-COMM> 226074
<COMMON-STOCK-DIVIDENDS> 201297
<TOTAL-INTEREST-ON-BONDS> 113425
<CASH-FLOW-OPERATIONS> 0<F1>
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<FN>
<F1>Not calculated for Form U-1 purposes.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1072290
<OTHER-PROPERTY-AND-INVEST> 56704
<TOTAL-CURRENT-ASSETS> 135433
<TOTAL-DEFERRED-CHARGES> 190370
<OTHER-ASSETS> 379
<TOTAL-ASSETS> 1455176
<COMMON> 294550
<CAPITAL-SURPLUS-PAID-IN> 2441
<RETAINED-EARNINGS> 211261
<TOTAL-COMMON-STOCKHOLDERS-EQ> 508252
0
74000
<LONG-TERM-DEBT-NET> 489668
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 7696
<LONG-TERM-DEBT-CURRENT-PORT> 500
0
<CAPITAL-LEASE-OBLIGATIONS> 811
<LEASES-CURRENT> 118
<OTHER-ITEMS-CAPITAL-AND-LIAB> 374131
<TOT-CAPITALIZATION-AND-LIAB> 1455176
<GROSS-OPERATING-REVENUE> 653245
<INCOME-TAX-EXPENSE> 39112
<OTHER-OPERATING-EXPENSES> 519265
<TOTAL-OPERATING-EXPENSES> 558377
<OPERATING-INCOME-LOSS> 94868
<OTHER-INCOME-NET> 8024
<INCOME-BEFORE-INTEREST-EXPEN> 102892
<TOTAL-INTEREST-EXPENSE> 38834
<NET-INCOME> 64058
5037
<EARNINGS-AVAILABLE-FOR-COMM> 59021
<COMMON-STOCK-DIVIDENDS> 48953
<TOTAL-INTEREST-ON-BONDS> 27472
<CASH-FLOW-OPERATIONS> 0<F1>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Not calculated for Form U-1 purposes.
<F2>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1317439
<OTHER-PROPERTY-AND-INVEST> 58804
<TOTAL-CURRENT-ASSETS> 157272
<TOTAL-DEFERRED-CHARGES> 110236
<OTHER-ASSETS> 737
<TOTAL-ASSETS> 1644488
<COMMON> 447700
<CAPITAL-SURPLUS-PAID-IN> 2690
<RETAINED-EARNINGS> 226996
<TOTAL-COMMON-STOCKHOLDERS-EQ> 677386
0
16378
<LONG-TERM-DEBT-NET> 628240
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 800
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 321684
<TOT-CAPITALIZATION-AND-LIAB> 1644488
<GROSS-OPERATING-REVENUE> 739484
<INCOME-TAX-EXPENSE> 41589
<OTHER-OPERATING-EXPENSES> 576788
<TOTAL-OPERATING-EXPENSES> 618377
<OPERATING-INCOME-LOSS> 121107
<OTHER-INCOME-NET> 12156
<INCOME-BEFORE-INTEREST-EXPEN> 133263
<TOTAL-INTEREST-EXPENSE> 50292
<NET-INCOME> 82971
773
<EARNINGS-AVAILABLE-FOR-COMM> 82198
<COMMON-STOCK-DIVIDENDS> 64691
<TOTAL-INTEREST-ON-BONDS> 38752
<CASH-FLOW-OPERATIONS> 0<F1>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Not calculated for Form U-1 purposes.
<F2>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2005448
<OTHER-PROPERTY-AND-INVEST> 94507
<TOTAL-CURRENT-ASSETS> 254304
<TOTAL-DEFERRED-CHARGES> 365410
<OTHER-ASSETS> 1158
<TOTAL-ASSETS> 2720827
<COMMON> 465994
<CAPITAL-SURPLUS-PAID-IN> 55475
<RETAINED-EARNINGS> 442108
<TOTAL-COMMON-STOCKHOLDERS-EQ> 963577
0
79708
<LONG-TERM-DEBT-NET> 904957
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 35933
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 1587
<LEASES-CURRENT> 769
<OTHER-ITEMS-CAPITAL-AND-LIAB> 732246
<TOT-CAPITALIZATION-AND-LIAB> 2720827
<GROSS-OPERATING-REVENUE> 1097231
<INCOME-TAX-EXPENSE> 51555
<OTHER-OPERATING-EXPENSES> 894588
<TOTAL-OPERATING-EXPENSES> 946143
<OPERATING-INCOME-LOSS> 151088
<OTHER-INCOME-NET> 13952
<INCOME-BEFORE-INTEREST-EXPEN> 165040
<TOTAL-INTEREST-EXPENSE> 69345
<NET-INCOME> 95695
3447
<EARNINGS-AVAILABLE-FOR-COMM> 92248
<COMMON-STOCK-DIVIDENDS> 93305
<TOTAL-INTEREST-ON-BONDS> 47206
<CASH-FLOW-OPERATIONS> 0<F1>
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Not calculated for Form U-1 purposes.
<F2>All common stock is owned by parent, no EPS required.
</FN>
</TABLE>
CONTENTS
Statement
No.
Balance sheets at June 30, 1996:
Monongahela Power Company 1-A
The Potomac Edison Company 2-A
West Penn Power Company and Subsidiaries 3-A
Allegheny Power System, Inc. and Subsidiaries 4-A
Statements of income and retained earnings for twelve months
ended June 30, 1996:
Monongahela Power Company 1-B
The Potomac Edison Company 2-B
West Penn Power Company and Subsidiaries 3-B
Allegheny Power System, Inc. and Subsidiaries 4-B
These financial statements have been prepared for Form U-1
purposes and are unaudited.
Reference is made to the Notes to Financial Statements in the
Allegheny Power System companies combined Annual Report on
Form 10-K for the year ended December 31, 1995 and to the
Form 10-Q's for the quarters ended March 31, 1996 and June 30, 1996.
The income statements do not reflect any additional income from
investments which may be made with the proceeds from the
transactions set forth in this application-declaration.
<PAGE>
<TABLE>
<CAPTION>
Statement 1-A
MONONGAHELA POWER COMPANY
BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Assets
Property, plant, and equipment:
<S> <C>
At original cost $1,842,329
Accumulated depreciation (770,039)
Investments and other assets:
Allegheny Generating Company -
common stock at equity 56,704
Other 379
Current assets:
Cash and temporary cash investments 2,833
Accounts receivable:
Electric service, net of $2,142,000 uncollectible allowance 61,302
Affiliated and other 11,356
Materials and supplies--at average cost:
Operating and construction 20,437
Fuel 14,032
Prepaid taxes 10,636
Deferred income taxes 10,024
Other 4,813
Deferred charges:
Regulatory assets 163,391
Unamortized loss on reacquired debt 15,715
Other 11,264
Total Assets $1,455,176
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement 1-A
(continued)
MONONGAHELA POWER COMPANY
BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Capitalization and Liabilities
Capitalization:
Common stock:
Common stock - par value $50 per share,
authorized 8,000,000 shares, outstanding
5,891,000 shares (no change
<S> <C>
since 7-1-95) $294,550
Other paid-in capital (decreased $76,000
since 7-1-96) 2,441
Retained earnings 211,261
Preferred stock:
Cumulative preferred stock - par value
$100 per share, authorized 1,500,000
shares, outstanding 740,000 shares 74,000
Long-term debt and QUIDS 489,668
Current liabilities:
Short-term debt 7,696
Long-term debt due within one year 500
Accounts payable 21,953
Accounts payable to affiliates 7,913
Taxes accrued:
Federal and state income 10,337
Other 11,683
Deferred power costs 18,624
Interest accrued 8,964
Restructuring liabilities 8,630
Other 18,035
Deferred credits and other liabilities:
Unamortized investment credit 21,518
Deferred income taxes 207,326
Regulatory liabilities 19,138
Restructuring liabilities 4,130
Other 16,809
Total Capitalization and Liabilities $1,455,176
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement 2-A
THE POTOMAC EDISON COMPANY
BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Assets
Property, plant, and equipment:
<S> <C>
At original cost $2,079,519
Accumulated depreciation (762,080)
Investments and other assets:
Allegheny Generating Company -
common stock at equity 58,804
Other 737
Current assets:
Cash 2,600
Accounts receivable:
Electric service, net of $1,462,000 uncollectible allowance 91,550
Affiliated and other 2,807
Notes receivable from affiliates 4,400
Materials and supplies--at average cost:
Operating and construction 25,110
Fuel 13,454
Prepaid taxes 7,126
Other 10,225
Deferred charges:
Regulatory assets 80,509
Unamortized loss on reacquired debt 18,468
Other 11,259
Total Assets $1,644,488
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement 2-A
(continued)
THE POTOMAC EDISON COMPANY
BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Capitalization and Liabilities
Capitalization:
Common stock:
Common stock - no par value, authorized
23,000,000 shares, outstanding
22,385,000 shares (no change
<S> <C>
since 7-1-95) $447,700
Other paid-in capital (decrease of $66,000
since 7-1-95) 2,690
Retained earnings 226,996
Preferred stock:
Cumulative preferred stock - par value
$100 per share, authorized 5,378,611
shares, outstanding 163,784 shares: 16,378
Long-term debt 628,240
Current liabilities:
Long-term debt due within one year 800
Accounts payable 20,018
Accounts payable to affiliates 13,711
Taxes accrued:
Federal and state income 9,568
Other 9,701
Interest accrued 10,219
Customer deposits 6,601
Restructuring liabilities 10,288
Other 14,504
Deferred credits and other liabilities:
Unamortized investment credit 24,719
Deferred income taxes 158,365
Regulatory liabilities 14,815
Restructuring liabilities 4,880
Other 24,295
Total Capitalization and Liabilities $1,644,488
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement 3-A
WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Assets
Property, plant, and equipment:
<S> <C>
At original cost $3,115,808
Accumulated depreciation (1,110,360)
Investments and other assets:
Allegheny Generating Company -
common stock at equity 94,507
Other 1,158
Current assets:
Cash 343
Accounts receivable:
Electric service, net of $9,707,000 uncollectible allowance 115,962
Affiliated and other 13,921
Materials and supplies--at average cost:
Operating and construction 37,175
Fuel 27,109
Deferred income taxes 25,527
Prepaid taxes 29,354
Other 4,913
Deferred charges:
Regulatory assets 340,638
Unamortized loss on reacquired debt 11,623
Other 13,149
Total Assets $2,720,827
</TABLE>
<PAGE>
Statement 3-A
(continued)
WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 PER BOOKS
(Thousands)
Per Books
Capitalization and Liabilities
Capitalization:
Common stock:
Common stock - no par value, authorized
28,902,923 shares, outstanding
24,361,586 shares (no change
since 7-1-95) $465,994
Other paid-in capital (decrease of $212,000
since 7-1-95) 55,475
Retained earnings 442,108
Preferred stock:
Cumulative preferred stock - par value
$100 per share, authorized 3,097,077
shares, outstanding 797,077 shares: 79,708
Long-term debt and QUIDS 904,957
Current liabilities:
Short-term debt 37,983
Accounts payable 50,906
Accounts payable to affiliates 5,594
Taxes accrued:
Federal and state income 7,121
Other 9,546
Deferred power costs 24,000
Interest accrued 17,212
Restructuring liabilities 14,446
Other 23,611
Deferred credits and other liabilities:
Unamortized investment credit 49,076
Deferred income taxes 463,200
Regulatory liabilities 34,194
Restructuring liabilities 6,590
Other 29,106
Total Capitalization and Liabilities $2,720,827
<PAGE>
<TABLE>
<CAPTION>
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996
Assets Per Books
Property, plant, and equipment:
<S> <C>
At original cost $7,880,554
Accumulated depreciation (2,811,278)
5,069,276
Investments and other assets:
Subsidiaries consolidated--excess of cost
over book equity at acquisition 15,077
Benefit plan's investments 48,199
Other 5,068
68,344
Current assets:
Cash and temporary cash investments 6,699
Accounts receivable:
Electric service, net of $13,310,000 uncollectible allowance 268,815
Other 14,147
Materials and supplies--at average cost:
Operating and construction 84,914
Fuel 54,595
Prepaid taxes 47,116
Deferred income taxes 41,727
Other 15,137
533,150
Deferred charges:
Regulatory assets 599,155
Unamortized loss on reacquired debt 55,329
Other 37,724
692,208
Total Assets $6,362,978
Capitalization and Liabilities
Capitalization:
Common stock $151,600
Other paid-in capital 1,012,145
Retained earnings 987,034
2,150,779
Preferred stock 170,086
Long-term debt and QUIDS of subsidiaries 2,263,449
4,584,314
Current liabilities:
Short-term debt 107,513
Long-term debt due within one year 5,900
Accounts payable 103,672
Taxes accrued:
Federal and state income 27,200
Other 31,521
Interest accrued 41,828
Deferred power costs 44,648
Restructuring liabilities 33,365
Other 66,560
462,207
Deferred credits and other liabilities:
Unamortized investment credit 145,639
Deferred income taxes 987,003
Regulatory liabilities 95,604
Restructuring liabilities 15,600
Other 72,611
1,316,457
Total Capitalization and Liabilities $6,362,978
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement 1-B
MONONGAHELA POWER COMPANY
STATEMENT OF INCOME FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books*
<S> <C>
ELECTRIC OPERATING REVENUES $653,245
OPERATING EXPENSES:
Operation:
Fuel 143,938
Purchased power and exchanges 95,333
Deferred power costs, net 13,219
Other 94,181
Maintenance 75,860
Depreciation 56,134
Taxes other than income taxes 40,600
Federal and state income taxes 39,112
Total Operating Expenses 558,377
Operating Income 94,868
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 372
Other income, net 7,652
Total Other Income and Deductions 8,024
Income Before Interest Charges 102,892
INTEREST CHARGES:
Interest on first mortgage bonds 27,472
Interest on other long-term obligations 9,687
Other interest 2,279
Allowance for borrowed funds used during
construction (604)
Total Interest Charges 38,834
Net Income $64,058
*Includes a charge of $19.3 million for restructuring.
</TABLE>
<PAGE>
Statement 1-B
(continued)
MONONGAHELA POWER COMPANY
STATEMENT OF RETAINED EARNINGS
FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books
Balance at July 1, 1995 $202,556
Add:
Net income 64,058
266,614
Deduct:
Dividends on capital stock:
Preferred stock 5,037
Common stock 48,953
Charge on redemption of preferred stock 1,363
Total deductions 55,353
Balance at June 30, 1996 $211,261
<PAGE>
Statement 2-B
THE POTOMAC EDISON COMPANY
STATEMENT OF INCOME FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books*
ELECTRIC OPERATING REVENUES $739,484
OPERATING EXPENSES:
Operation:
Fuel 139,991
Purchased power and exchanges 138,665
Deferred power costs, net 11,848
Other 107,450
Maintenance 62,024
Depreciation 69,806
Taxes other than income taxes 47,004
Federal and state income taxes 41,589
Total Operating Expenses 618,377
Operating Income 121,107
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 495
Other income, net 11,661
Total Other Income and Deductions 12,156
Income Before Interest Charges 133,263
INTEREST CHARGES:
Interest on first mortgage bonds 38,752
Interest on other long-term obligations 9,708
Other interest 2,279
Allowance for borrowed funds used during
construction (447)
Total Interest Charges 50,292
Net Income $82,971
*Includes a charge of $23.1 million for restructuring.
<PAGE>
Statement 2-B
(continued)
THE POTOMAC EDISON COMPANY
STATEMENT OF RETAINED EARNINGS
FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books
Balance at July 1, 1995 $211,476
Add:
Net income 82,971
294,447
Deduct:
Dividends on capital stock:
Preferred stock 773
Common stock 64,691
Charge on redemption of preferred stock 1,987
Total deductions 67,451
Balance at June 30, 1996 $226,996
<PAGE>
Statement 3-B
WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books*
ELECTRIC OPERATING REVENUES $1,097,231
OPERATING EXPENSES:
Operation:
Fuel 239,070
Purchased power and exchanges 128,855
Deferred power costs, net 17,100
Other 185,135
Maintenance 117,597
Depreciation 115,253
Taxes other than income taxes 91,578
Federal and state income taxes 51,555
Total Operating Expenses 946,143
Operating Income 151,088
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 1,851
Other income, net 12,101
Total Other Income and Deductions 13,952
Income Before Interest Charges 165,040
INTEREST CHARGES:
Interest on first mortgage bonds 47,206
Interest on other long-term obligations 18,470
Other interest 5,208
Allowance for borrowed funds used during
construction (1,539)
Total Interest Charges 69,345
Consolidated Net Income $95,695
*Includes a charge of $45.2 million for restructuring.
<PAGE>
Statement 3-B
(continued)
WEST PENN POWER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books
Balance at July 1, 1995 $445,322
Add:
Consolidated net income 95,695
541,017
Deduct:
Dividends on capital stock:
Preferred stock 3,447
Common stock 93,305
Charge on redemption of preferred stock 2,157
Total deductions 98,909
Balance at June 30, 1996 $442,108
<PAGE>
Statement 4-B
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books*
ELECTRIC OPERATING REVENUES $2,369,335
OPERATING EXPENSES:
Operation:
Fuel 523,000
Purchased power and exchanges 176,823
Deferred power costs, net 42,167
Other 369,638
Maintenance 256,731
Depreciation 258,763
Taxes other than income taxes 188,034
Federal and state income taxes 145,435
Total Operating Expenses 1,960,591
Operating Income 408,744
OTHER INCOME AND DEDUCTIONS:
Allowance for other than borrowed funds
used during construction 2,719
Other income, net 3,862
Total Other Income and Deductions 6,581
Income Before Interest Charges and
Preferred Dividends 415,325
INTEREST CHARGES AND PREFERRED DIVIDENDS:
Interest on first mortgage bonds 113,425
Interest on other long-term obligations 53,809
Other interest 15,353
Allowance for borrowed funds used during
construction (2,592)
Dividends on preferred stock of subsidiaries 9,256
Total Interest Charges and
Preferred Dividends 189,251
Consolidated Net Income $226,074
*Includes a charge of $87.6 million for restructuring.
<PAGE>
Statement 4-B
(continued)
ALLEGHENY POWER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR TWELVE MONTHS ENDED JUNE 30, 1996
(Thousands)
Per Books
Balance at July 1, 1995 $967,764
Add:
Consolidated net income 226,074
1,193,838
Deduct:
Dividends on common stock of Allegheny
Power System, Inc. (cash) 201,297
Expenses related to subsidiary companies' preferred
stock transactions 5,507
Total deductions 206,804
Balance at June 30, 1996 $987,034
<PAGE>
<PAGE>
EXHIBIT H
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- : )
Allegheny Power Service Corporation, Monongahela
Power Company, The Potomac Edison Company, West
Penn Power Company - Notice Requesting Approval
of Amendment to Service Agreements and Approval
of Intercompany Service Agreement
ALLEGHENY POWER SERVICE CORPORATION
800 Cabin Hill Drive
Greensburg, PA 15601
MONONGAHELA POWER COMPANY
1310 Fairmont Avenue
Fairmont, WV 26554
THE POTOMAC EDISON COMPANY
10435 Downsville Pike
Hagerstown, MD 21740
WEST PENN POWER COMPANY
800 Cabin Hill Drive
Greensburg, PA 15601
Allegheny Power Service Corporation (APSC), a wholly-owned
subsidiary service corporation of Allegheny Power System, Inc. (APS, Inc.), a
holding company registered under the Public Utility Holding Company Act of
1935 (1935 Act), proposes to amend Exhibit I (Proposed Amendment) to its
Service Agreements with Monongahela Power Company, an Ohio corporation with
general corporate offices in Fairmont, West Virginia (Monongahela), The
Potomac Edison Company, a Maryland and Virginia corporation with general
corporate offices in Hagerstown, Maryland (Potomac Edison), and West Penn
Power Company, a Pennsylvania corporation with general corporate offices in
Greensburg, Pennsylvania (West Penn), (collectively, the Electric Utility
Companies). The Proposed Amendment reflects changes in the scope of services
provided by APSC to the above-referenced companies, which are all subsidiaries
of APS, Inc. The changes are in large part a further consolidation of
services already performed by APSC. Some of these changes began on January 1,
1996; the bulk of the changes commenced as of July 1, 1996.
In addition, the Electric Utility Companies propose to enter into
a Service Agreement among themselves, which is similar to the existing APSC
Service Agreements. This Agreement will allow the Electric Utility Companies
to perform services for one another and properly allocate the costs of such
services.
<PAGE>
I. RESTRUCTURING
In 1995, APS, Inc. announced its intention to undertake a
restructuring designed to consolidate and reengineer its operations to better
meet the competitive challenges of the changing electric utility industry and
remain the energy supplier of choice in the future for its customers. On or
about January 1, 1996, APSC began to realign its organization to create
distinct power generation and energy transmission and distribution groups. As
of July 1, 1996, the Electric Utility Companies restructured, including the
reengineering of processes and the consolidation of functions with services
already provided by APSC. In addition, although they have not changed their
legal corporate names, nor altered in any manner ownership of capital assets,
the Electric Utility Companies began doing business under the trade name
"Allegheny Power" as of September 1, 1996.
The restructuring is an effort to further control costs, operate
more efficiently, and prepare for the anticipated increase in retail and
wholesale competition among suppliers of electricity, beginning with the
Energy Policy Act of 1992. Allegheny Power's goal is to expand by attracting
new customers to its service area and, to the extent legally permitted, to
aggressively pursue new business within and outside its service area, using
its resources efficiently and capitalizing on its competitive strengths. The
restructuring process, for the most part, should be completed by the end of
1996, although Allegheny Power now embraces business process reengineering and
continuous improvement as a way of life.
Allegheny Power expects to realize a number of benefits from its
restructuring. Beginning in 1996 and continuing into the future, increased
efficiencies and synergies are expected to result from the elimination of
layers of management and the elimination of previously duplicated functions.
The flattening, streamlining and consolidation of functions within the
organization will lead to enhanced efficiency and communication, which should
translate into a reduction in the rate of growth in operating and maintenance
costs and thereby minimize the need for future rate increases.
A. Consolidation and Reengineering of Functions
In general, the restructuring consolidated in APSC certain
functions which previously were either performed separately by employees of
each of Allegheny Power's three Electric Utility Companies, or by employees of
the three Electric Utility Companies along with employees of APSC. Allegheny
Power has been restructured into the following functional units: Operating
Business Unit; Retail Marketing; Corporate Affairs; Generation Business Unit;
Transmission Business Unit; Planning and Compliance Business Unit; and
Corporate Services, which serves the business units. The restructuring did
not involve the formation of any new legal entities, nor did it require the
writedown of any rate base assets. No capital assets were transferred among
companies within Allegheny Power in connection with the restructuring.
The overall goals of the restructuring have been to realign
functions by process and consolidate functions where feasible. The following
briefly describes the restructured functions.
<PAGE>
1. Restructuring of Electric Utility Company Functions
Most of the functions which were performed exclusively by the
Electric Utility Companies have been consolidated into three units: 1) the
Operating Business Unit (OBU); 2) Retail Marketing business unit; and 3)
Corporate Affairs. The Vice Presidents of these groups all report to a Senior
Vice President of APSC, who also holds the title of President of each of the
Electric Utility Companies. Some of the main goals of the restructuring of
these functions include establishing a team-oriented environment, maintaining
fewer layers of management, establishing broader job classifications, and
establishing an integrated work management system to schedule, design, track,
and finish jobs.
a. Operating Business Unit
The OBU is administered by one Vice President and ten process
directors. Teams of employees handle various processes from start to finish.
The processes covered include: respond to electric service requests, restore
service, ensure reliable service, manage the revenue stream, manage resources,
and respond to customer inquiries. Instead of the 21 divisions comprising the
service territory of the Electric Utility Companies before restructuring, the
service area of the OBU is divided into seven administrative regions which are
staffed and serviced by teams consisting of employees of APSC and employees of
the Electric Utility Companies. At present, many physical employees,
including all of the union work force, remain employees of the Electric
Utility Companies.[FN]
The OBU will also include a consolidated state-of-the-art Customer
Service Center located in Fairmont, which will be the "front door" to the new
organization and will handle calls or forward them to members of the
appropriate process teams. All non-union OBU employees will be APSC employees
by January 1, 1997.
b. Retail Marketing
Retail Marketing functions are performed by a Vice President,
three General Managers (residential, industrial, and commercial), and their
staffs. This business unit has responsibility for acquiring and maintaining
customers. To the extent legally permissible, this group aggressively markets
new products and services to meet customers' needs.
c. Corporate Affairs
Corporate Affairs functions are handled by three Vice Presidents,
one located at each general corporate office, and their staffs. These
employees will maintain active community and state regulatory relations.
2. Restructuring of Bulk Power Supply
The Bulk Power Supply (BPS) section of APSC underwent a process
redesign, effective January 1, 1996, which created distinct generation,
transmission, and planning and compliance business units, and resulted in a
[FN]1 Although they will remain employees of the Electric Utility Companies, as
of January 1, 1997, all union employees will be paid and receive benefits
through APSC.
<PAGE>
reduction in work force of about 170 employees. The restructuring of BPS
combined the services that it was already providing to the Electric Utility
Companies into three functional business units: Generation Business Unit
(GBU), Transmission Business Unit (TBU), and Planning and Compliance Business
Unit (P&CBU). These business units are each headed by a Vice President of
APSC. The Vice Presidents of the GBU, TBU, and P&CBU all report to a Senior
Vice President of APSC. Various administrative and other support services
will continue to be provided to these business units by other APSC
departments. In the restructuring of BPS, no new entities were formed and no
capital assets were transferred.
a. Generation Business Unit
The GBU is responsible for ensuring that adequate generation is
available to serve the native load customers of the Electric Utility Companies
and other loads served by the GBU by employing their generating facilities and
third-party generation obtained through marketing efforts. Its primary
responsibilities include ensuring the cost-effective operation and maintenance
of the Electric Utility Companies' generating units and providing the most
economic mix of generation from available generating units and off-system
purchases and sales.
b. Transmission Business Unit
The TBU is responsible for ensuring that adequate high-voltage
network facilities are available and on-line to reliably convey power produced
from the power production operations run by, or procured by, the GBU to serve
native load and other loads served by those operations. It will also engage
in marketing efforts for sales of bundled and unbundled transmission services
to nonaffiliates and will be responsible for accommodating requests for
transmission service submitted by nonaffiliates who qualify as customers for
that service under federal regulations. Finally, the TBU is responsible for
maintaining the optimal economic balance on a real-time basis between native
customer load and the output of the generation resources supplied by the GBU,
as well as managing the various emission allowance resources of Allegheny
Power.
c. Planning and Compliance Business Unit
The P&CBU provides strategic resource planning and engineering
analysis of alternate transmission and generation resource options,
environmental and regulatory issues management, environmental compliance
oversight, research and development, and emerging technology development for
Allegheny Power. Much of the work of this business unit will be accomplished
through multi-functional, cross-organizational, teams yielding a more balanced
solution to strategic problems.
3. Restructuring of Corporate Services
The groups in this area provide certain corporate services to the
business units and have been restructured in order to supply these services
more efficiently. The following is a brief description of major changes to
this area resulting from the restructuring.
a. Accounting
<PAGE>
Historically, functions of the Accounting department have included
general accounting, payroll, accounts payable, plant accounting, and taxes.
These functions were performed at three locations (Greensburg, Fairmont, and
Hagerstown) by employees of one of the Electric Utility Companies or employees
of APSC. By January 1, 1997, all Accounting employees will be employees of
APSC. The restructuring of the Accounting department also involves the
following changes:
1) General Accounting - consolidated in
Greensburg and called Corporate Accounting. The consolidation is intended to
eliminate duplicative activities, and certain non-general accounting tasks
will be transferred to more appropriate sections (i.e., transportation
accounting) in the near future.
2) Payroll - consolidated in Greensburg. The
payroll process will be simplified, and paycheck production, including payroll
taxes, may eventually be outsourced.
3) Plant Accounting - consolidated in Fairmont
and called Asset Accounting. Billing and work order approval processes will
be standardized and streamlined.
4) Taxes - consolidated in Greensburg. This
department will place more emphasis on tax planning for the future.
5) Accounts Payable - consolidated in
Hagerstown and called Payment Processing.
b. Information Services
Prior to the restructuring, this department was divided into four
groups: Applications Development and Support; Technical Information Services
and Network Support; EDP Operations; and EDP User Support and Research and
Development. There was a decentralized system of user support that
concentrated on designing most systems to the individual needs of each user.
These services were performed by APSC employees or Electric Utility Company
employees located at Greensburg, Hagerstown and Fairmont.
Information Services has been reorganized into three main groups:
1) Business Solutions Team - concentrating on applications acquisition,
development, implementation, and maintenance; 2) Technology Operations Team -
handling infrastructure planning, operation and maintenance; and 3) Customer
Support Team - including customer services and support center. Also, six
Business Consultants are assigned to the major business units and will handle
tasks from all three Information Services groups. There is a customer service
presence at all three corporate headquarters, but the other teams are
consolidated in Greensburg. As of January 1, 1997, all Information Services
employees will be employees of APSC.
Key changes to be implemented by the restructuring include the
negotiation of service level agreements for specific projects with the various
business units which will specify a certain level of service for specific
services. The service level agreements are not intended to cover cost
allocation. In addition, Information Services will be doing more direct
billing of its services rather than using cost allocation.
c. Financial Management
<PAGE>
Historically, Financial Management has provided the following
services: capital management; forecasting of long-term financing;
insurance/risk management; corporate strategic planning; and financial
planning.
Major changes implemented by the restructuring include combining
four budgeting groups and financial planning into a single financial
management group. The consolidation is designed to eliminate duplicate
efforts and reduce or eliminate hand-offs. In addition, the Risk Management
function has been transferred to Treasury, and Financial Management has
assumed long-term financial planning and cash forecasting from Treasury. As
of January 1, 1997, all Financial Management employees will be APSC employees.
d. Secretary/Treasurer
This area has historically provided services involving: 1)
Corporate secretarial functions, including Board of Directors matters,
administration of the Electric Utility Companies' indentures, regulatory
filings, and records and library management; and 2) Treasury functions, such
as bank relations, cashier services, cash management (internal funding, cash
forecasting, and external short-term borrowing and investing), credit and
collections, cash and customer bill processing, and long-term financing.
These functions were performed at all three corporate headquarters, by
employees of the Electric Utility Companies.
The restructuring of this area has produced the following key
changes: The Corporate Secretary function is transferred to Legal Services;
and Treasury assumed the risk management function from Financial Management
and electronic commerce from Information Services. Treasury continues long-
term financings, bank relations and cash management functions and is
consolidated in Hagerstown. As of January 1, 1997, all employees in these
areas will be APSC employees.
e. Investor Relations
As of July 1, 1996, Investor Relations and Public Relations
(originally part of the Administrative function at APSC and part of Customer
Relations at the Electric Utility Companies) were transferred and consolidated
to form External Relations, located at Hagerstown. As of October 1, 1996,
External Relations was combined with Communications (formerly under the
authority of Corporate Affairs) to form Corporate Communications, which is
responsible for internal and external communications, including advertising
and stockholder publications. Investor Relations remains responsible for
maintaining a favorable relationship between Allegheny Power and the financial
community. As of January 1, 1997, all employees in these areas will be APSC
employees.
f. Audit Services
Historically, this department has performed financial, contracts,
and operations/consulting audits. Prior to the restructuring, Audits
consisted of four divisions located at the three corporate general office
locations. The Audit employees were either employees of one of the Electric
Utility Companies or employees of APSC. As a result of the restructuring,
Audit Services became one department and all Audit employees became APSC
<PAGE>
employees. The department will continue to perform the same types of services
as it did prior to the restructuring, although during the transition process
it is expected to devote additional attention to allocation and billing
processes to ensure effective practices are maintained. It will also strive
to become more customer-focused, reduce the process cycle time, and promote
its consulting role.
g. Supply Chain
The Supply Chain functions include Purchasing, Stores, Fuel
Accounting, and Accounts Payable. Historically, these functions were
performed by employees of one of the Electric Utility Companies or employees
of APSC, located at one of the three general corporate offices. As a result
of the restructuring, Purchasing is named Procurement, and the employees
performing this function have been organized into Client Service Provider
Teams. Stores is named Materials Management and Distribution, and management
of this function has been centralized at Connellsville, Pennsylvania, and at
Hagerstown. In addition, Accounts Payable is now called Payment Processing
and is consolidated in Hagerstown. All Supply Chain employees are currently
APSC employees.
h. Legal Services
In the past, localized legal services were provided to the
Electric Utility Companies by their own legal staffs, and the APSC legal
department handled corporate matters or matters of more generalized interest
to Allegheny Power. As a result of the restructuring, all Legal Services
personnel are currently employees of APSC, and the attorneys are available to
perform legal work for any Allegheny Power company. The local presence of
Legal Services personnel in each general corporate office has been maintained,
and the Legal Services staff has been organized into teams, the members of
which are available to handle questions or issues related to specific legal
subjects.
Claims is also part of Legal Services. The functions of this
group have traditionally been performed by employees of each Electric Utility
Company, either at the general corporate offices of each company or at the
former division offices. As a result of the restructuring, the Claims
functions are performed by full-time APSC employees located at each general
corporate office and certain field locations.
In addition, responsibility for the functions of the Corporate
Secretary has been placed under Legal Services.
i. Regulation and Pricing
The functions of the Rates department have included: Costing -
providing cost of service allocations by jurisdiction and/or customer class
using load research data; Pricing Support - Establishing and implementing
charges for company services; Regulatory Management - assembling and providing
primary support for regulatory filings while maintaining direct contacts with
commission staffs; and Billing - rendering reliable and accurate bills to
retail and wholesale customers. These functions were performed by employees
of the Electric Utility Companies and by employees of APSC. As of January 1,
1997, all of the responsibilities of this department, which is now known as
<PAGE>
Regulation and Pricing, will be performed entirely by APSC employees. The
Costing and Pricing Teams are consolidated in Greensburg, the Financial
Analysis Team is consolidated in Hagerstown, and the Fuel and Capital Recovery
Team is consolidated in Fairmont. In addition, the routine rate applications
function is transferred to the OBU, and the responsibility for billing
controls is transferred to, and consolidated in, the OBU.
j. Human Resources
Human resources policies for all of Allegheny Power have
traditionally been set by a Human Resources (HR) policy-making department at
APSC. These policies were administered by separate HR departments of APSC and
of each Electric Utility Company; each department was run by one of four HR
Directors. As the result of the restructuring, a single HR Director, with the
assistance of a two-person management team, will set and administer human
resources policies system-wide. Various teams have been formed to handle
Employee Development, Employee Relations, Medical Services, Rewards Systems,
Staffing, and Technical and Administrative Support. This department is
consolidated at Greensburg, but some HR employees, who are members of one or
more of the above-listed teams, are located in the other general corporate
offices to provide local support. All HR employees are currently APSC
employees.
k. Governmental Affairs
Prior to the restructuring, the Governmental Affairs function was
part of the Legal Services group and was performed locally by employees of the
various Electric Utility Companies. This function has been removed from Legal
Services and its employees now report to a Vice President of Governmental
Affairs, a newly created position within APSC. The Vice President has two
Assistants, one of which handles research and communication with local
Governmental Affairs representatives; the other supervises the activities of
the local Governmental Affairs representatives. In the near future, Allegheny
Power will, for the first time, have a full-time Governmental Affairs
representative located in Washington, D.C., who will focus exclusively on
federal legislation and its effect on Allegheny Power and the electric
industry. As of January 1, 1997, all Governmental Affairs employees will be
APSC employees.
B. AYP Capital, Inc.
AYP Capital, Inc. (AYP), a subsidiary of APS, Inc., has been
authorized by this Commission to engage in certain unregulated activities, but
it does not presently have any employees. After the restructuring, AYP and
its subsidiaries will continue to receive services from APSC under existing
service agreements.
Although it is not formally part of the restructuring, AYP's
operations will be affected by the activities of the Retail Marketing business
unit. The Retail Marketing business unit will, to the extent legally
permissible, sell unregulated services on behalf of AYP to end-users.
Currently approved services which AYP may provide include energy management
services, demand-side management services, and consulting services. AYP will
offer only those products and services for which it has received approval from
<PAGE>
this Commission. The energy services and consulting business lines of AYP
report to the Vice President of Retail Marketing.
AYP is also approved to invest in exempt wholesale generators
(EWGs), independent power producers (IPPs), and foreign utility companies
(FUCOs). AYP has several of these types of investments, including AYP Energy,
Inc. (Energy), an EWG authorized to sell wholesale power at market based
rates, and the Latin American Energy and Electricity Fund, which invests in
FUCOs. Pursuant to prior authority granted by this Commission, AYP also has
invested in the Envirotech Fund. The reporting responsibility for these
activities will remain unchanged.
C. Reasons for Restructuring
Allegheny Power is restructuring in order to prepare to
functionally unbundle electric services consistent with best meeting customer
needs and the evolving regulatory structure of the industry and to operate
more efficiently.
Customers no longer want "one-size-fits-all" electric service;
they want customized services at competitive prices. In order to achieve
this, bundled electric services must be unbundled. Electric companies have
traditionally provided energy generation and delivery services as a single
package. Unbundling will enable electric companies to generate and sell
electricity in the competitive marketplace while separately providing delivery
services to their customers.
The Federal Energy Regulatory Commission (FERC) has mandated the
separation of generation and transmission in the wholesale market. (See the
Final Rule, Order 888, published April 24, 1996.) In that Order, FERC stated:
We conclude that functional unbundling of
wholesale services is necessary to implement non-
discriminatory open access transmission and that
corporate unbundling should not now be required. As
we explained in the NOPR [Notice of Proposed
Rulemaking], functional unbundling means three things:
(1) a public utility must take
transmission services (including ancillary
services) for all of its new wholesale
sales and purchases of energy under the
same tariff of general applicability as do
others;
(2) a public utility must state separate
rates for wholesale generation,
transmission, and ancillary services;
(3) a public utility must rely on the same
electronic information network that its
transmission customers rely on to obtain
<PAGE>
information about its transmission system
when buying or selling power.
Although the final FERC rule does not require corporate
restructuring, it does require functional separation of generation and
transmission.
In the retail market, separation of the generation and delivery
functions, although not yet required in the states served by Allegheny Power,
is good public policy. The restructuring will enable Allegheny Power to
provide the separate electric services that customers desire in a manner that
is consistent with evolving regulatory requirements.
As a result of the restructuring, Allegheny Power expects to
provide improved services more efficiently. By reorganizing and eliminating
certain processes and consolidating functions, Allegheny Power expects to
perform its functions with approximately 1,200 fewer employees. Some savings
from employee reductions will be offset by additional expenses for technology,
facilities revisions required by the restructuring and other improvements in
operations of the business units.
It is expected that all costs associated with the restructuring
program will be recovered primarily through cost savings over a period of two
years after staff reductions. (Total restructuring costs are estimated to be
in the area of $100 million, pre-tax; total expected savings are expected to
be in the area of $60 million per year, pre-tax.) Initially, savings from
restructuring are expected to be less than Allegheny Power's investments in
information systems, employee training and development, the Customer Service
Center, and other areas which will facilitate efficient operations. However,
the overall operating and maintenance budget for the Electric Utility
Companies (including savings from staff reductions and additional expenses to
improve operations for the years 1996 through 1999) is expected to remain
level. (The operating and maintenance budgets for each individual Electric
Utility Company may vary from year to year.) Increases in the number of
employees are expected for Retail Marketing and for AYP Capital, Inc.
In addition, the business and support units are emphasizing
improvements in service to external and internal customers. For example, the
generating stations are being operated by shift teams composed of employees
with various skills. As a result of organizing by business units,
improvements will be implemented efficiently and consistently across the
entire generation, transmission, and operating groups rather than on a
company-by-company basis.
Except for the union work force and possibly some other employees,
the management, engineering, maintenance, legal, accounting, payables, and
administrative and support functions previously performed by employees of the
Electric Utility Companies will be supplied, after the realignment, by
employees of APSC. By January 1, 1997, all non-union employees of the
Electric Utility Companies will be employees of APSC. The cost of services
which they provide will be determined in accordance with Rules 90 and 91 under
<PAGE>
the 1935 Act and will be either direct-billed or billed in accordance with the
existing cost allocation methods under the Service Agreements. As compared
with January 1, 1996, the restructuring of Allegheny Power is expected to
result in the net transfer of approximately 2800 non-union employees to APSC
from the Electric Utility Companies. This transfer will increase overall
employment by APSC and virtually eliminate non-union employment by the
Electric Utility Companies.
D. Control over APSC
A number of factors will ensure that APSC continues to be
responsive to the needs of the Electric Utility Companies and provide the
Electric Utility Companies with the ability to judge their need for inter-
affiliate services and to monitor the quality and value of the services being
provided. These factors include the APSC budget process, Commission-approved
work order procedures to track and document the initiation of services,
billing and review procedures designed to ensure the accuracy of APSC
billings, and internal audit controls designed to ensure the fairness of APSC
charges. For example, Audit Services will continue to meet at least twice a
year with the Audit Committees of the Boards of Directors of APS, Inc., APSC,
and the Electric Utility Companies (which Audit Committees are comprised
solely of outside directors) to review audit plans and findings. In addition,
the Director, Audit Services will continue to have open and direct access to
the Chairmen of the Audit Committees. These procedures will ensure that costs
associated with the services performed by APSC on behalf of the Electric
Utility Companies are properly authorized, allocated, and tracked.
E. Cost Allocation
Under existing Commission authority, each of the Electric Utility
Companies pays to APSC all costs which reasonably can be identified and
related to a particular transaction or service performed by APSC on its
behalf. These costs are captured in work orders in accordance with the
Commission's Uniform System of Accounts for Mutual Service Companies and
Subsidiary Service Companies. APSC's current method of allocations will be
maintained in the restructured organization.
APSC maintains a separate record of the expenses for each
department. Expenses are reported as departmental expenses, incremental out-
of-pocket expenses, or overhead expenses. Departmental expenses consist of
salaries and employee expenses, employee welfare expenses, rents, expenses of
training and development of APSC's employees, and all other expenses
attributable to, or necessary to, the operation of the department. Incremental
out-of-pocket expenses are expenses incurred for the direct benefit and
convenience of a particular company or group of companies and are charged
solely to such company(ies). Overhead expenses include costs of maintaining
the corporate existence, such as taxes, outside auditing and legal fees, and
other corporate expenses.
<PAGE>
1. Allocation of Departmental and Out-of-Pocket
Expenses
Departmental and out-of-pocket expenses incurred by APSC are
accumulated by specific, identifiable work order numbers and directly billed
to the receiving company(ies). APSC will continue to use controls and
procedures relating to the existing work order accounting system reviewed by
this Commission pursuant to a prior audit. These procedures ensure that costs
associated with the services performed on behalf of the receiving company are
properly authorized, allocated, and tracked. Work orders are established and
administered in accordance with the Commissions' Uniform System of Accounts
for Mutual and Subsidiary Service Companies.
When a service is rendered for the benefit of two or more
companies, the costs are shared by the receiving companies in proportion to
the average electric operating revenues of each (exclusive of sales to another
APS subsidiary), operating and maintenance expenses (exclusive of fuel,
deferred fuel, and purchased power and exchanges), kilowatthours sold to
regular customers (other than to the APS subsidiaries), and total electric
plant in service (less reserves for depreciation and amortization), over the
three preceding calendar years.
2. Allocation of Overhead Expenses
Overhead expenses and the cost of services rendered by APSC are
distributed among receiving companies in direct proportion to the amount of
department expenses charged to or allocated to such companies.
The foregoing billing principles will remain the basis for APSC's
charges to the Electric Utility Companies unless and until modified or until
new principles are adopted and reported to and/or approved by the Commission.
F. Proposed Amendment to Service Agreements
The Proposed Amendment to the Service Agreements is attached as
Exhibit B-1. The services described in the Proposed Amendment and centralized
in APSC as a result of the restructuring represent a logical extension of
existing services to reflect changed business conditions and cost reduction
opportunities. They therefore do not represent a fundamental change in the
essential character of the services previously rendered by APSC. They will be
billed in the same manner, using existing allocation methods, as other similar
services which heretofore have been provided by APSC.
II. Electric Utility Companies Providing Services To One Another
One effect of the restructuring was to combine certain services
which were previously performed separately by each Electric Utility Company.
The Electric Utility Companies propose to enter into the Service Agreement
attached hereto as Exhibit B-2 in order to perform certain services for one
another.
The Electric Utility Company performing work for an affiliated
Electric Utility Company will accumulate the actual costs incurred in
providing authorized services through the use of specific, identifiable work
<PAGE>
order numbers or by FERC accounts and will bill the receiving company based on
the amounts accumulated. Employee timesheets will be used to record the
amount of time employed in rendering such services. Out-of-pocket expenses
which are expended in regard to specific services will also be recorded.
The total cost of a particular service will be the sum of:
facilities charges, in order to recover depreciation and return on investment
on fixed assets; working capital charges, where appropriate; all labor
charges, including related payroll overheads and out-of-pocket expenses; and
any related overhead charge associated with out-of-pocket costs. The billing
process will be done monthly. In return for services performed by an Electric
Utility Company, the recipient of the services will pay the Electric Utility
Company which performs the service the actual costs incurred by it in
providing the service, calculated in accordance with Rules 90 and 91 of the
1935 Act.
The following services have been consolidated and may be performed
by one or more of the Electric Utility Companies for another Electric Utility
Company:
A. Operations Services
At West Penn's Connellsville Center, the restructuring
consolidated certain engineering and construction work that had previously
been performed by Monongahela and Potomac Edison. Also, certain of the work
that was previously performed by West Penn was consolidated at Potomac
Edison's Bower Avenue location. The Electric Utility Companies believe that
consolidation of those functions will result in increased efficiency for the
entire System.
1. Material Supply and Distribution System
Transmission and distribution materials are supplied from West
Penn's Connellsville storeroom and Potomac Edison's Bower Avenue storeroom to
all locations for the three Electric Utility Companies.
2. Distribution Transformer/Regulator Repair
Repair of distribution transformers as well as regulator repairs
for all three Electric Utility Companies may be consolidated at West Penn's
Connellsville Center. Currently, this work is also being performed in
Hagerstown.
3. Oil Circuit Recloser Repair
West Penn's Connellsville Center is the central oil circuit
recloser (OCR) repair site for Monongahela and West Penn. OCR repairs for
Potomac Edison are performed at Hagerstown. Future cost comparison studies
will determine whether all of the OCR repairs should be performed at
Connellsville.
4. Rubber Goods Repair and Testing
For all three Electric Utility Companies, testing and inspection
of rubber goods, such as gloves, sleeves, and blankets have been consolidated
at West Penn's Connellsville location.
<PAGE>
5. Metering
Most meter test activities for the three Electric Utility
Companies have been consolidated at West Penn's Connellsville location,
although some wiring of meter packages for all three Electric Utility
Companies is still performed at Hagerstown.
6. Other Operations Services
Other operations services which have been consolidated, but are
still performed, at least in part, by Electric Utility Company employees,
include: Building Management, Transportation Services, Substation
Construction, Substation Maintenance, and Telecommunications Operations.
B. Customer Service Center
As noted above, a consolidated state-of-the-art Customer Service
Center will be located in Fairmont, and its employees will answer incoming
customer calls to the Electric Utility Companies via one toll-free number. At
present, its functions may be performed by employees of APSC or by employees
of any of the Electric Utility Companies. Therefore, the Electric Utility
Companies may perform services for one another which include responding to
customer inquiries, initiating new service, dispatching service and line crews
in response to power outages, handling credit and collection activities,
responding to customer and Public Service Commission complaints, and managing
the meter reading and billing activities.
C. Office Services/Mail Payment
Currently, employees of one or more of the Electric Utility
Companies may perform payment processing services for one or more of the other
Electric Utility Companies. In addition, the Electric Utility Companies may
perform certain office services, including secretarial, typing, mail room
services, duplicating, fleet administration, and other similar services, for
one another.
III. Compliance with Rule 54
Rule 54 provides that in determining whether to approve certain
transactions other than those involving exempt wholesale generators (EWGs) or
foreign utility companies (FUCOs), as defined in the 1935 Act, the Commission
will not consider the effect of the capitalization of earnings of any
subsidiary which is an EWG or FUCO if Rule 53(a), (b) and (c) are satisfied.
The requirements of Rule 53(a), (b), and (c) are satisfied.
Rule 53(a)(1). APS, Inc. has one EWG subsidiary, AYP Energy,
Inc., which recently received approval of its application with the FERC to
declare its 50% interest in Unit No. 1 at the Fort Martin Power Station a
hybrid EWG. As of June 30, 1996, APS, Inc., through its subsidiary, AYP
Capital, Inc., had invested $0 in AYP Energy, Inc. This investment represents
less than 1% of $981 million, the average of the consolidated retained
earnings of APS, Inc. reported on Form 10-K or Form 10-Q, as applicable, for
the four consecutive quarters ended June 30, 1996.
<PAGE>
Rule 53(a)(2). AYP Energy, Inc. will maintain books and records
and make available the books and records required by Rule 53(a)(2).
Rule 53(a)(3). No more than 2% of the employees of the Electric
Utility Companies will, at any one time, directly or indirectly render
services to AYP Energy, Inc.
Rule 53(a)(4). APS, Inc. will submit a copy of Item 9 and
Exhibits G and H of APS, Inc.'s Form U5S to each of the public service
commissions having jurisdiction over the retail rates of the Electric Utility
Companies.
Rule 53(b). (i) Neither APS, Inc. nor any if its subsidiaries is
the subject of any pending bankruptcy or similar proceeding; (ii) APS, Inc.'s
average consolidated retained earnings for the four most recent quarterly
periods ending on June 30, 1996 ($981 million) represented an increase of
approximately $24 million (or 2.5%) in the average consolidated retained
earnings from the previous four quarterly periods ended on June 30, 1995
($957 million); and (iii) for the year ended December 31, 1995, there were no
losses attributable to APS, Inc.'s investments in AYP Capital other than
$572,000 in preliminary development and start-up costs.
Rule 53(c). Rule 53(c) is inapplicable because the requirements
of Rule 53(a) and (b) have been satisfied.
Except as described herein, no associate company or affiliate of
the Applicants or any affiliate of any such associate company has any material
interest, directly or indirectly, in the proposed transactions.
The application and any amendments thereto are available for
public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by , 1996, to the Secretary, Securities and
Exchange Commission, Washington, DC 20549, and serve a copy on the Applicant
at the address specified above. Proof of service (by affidavit or, in case of
an attorney at law, by certificate) should be filed with the request. Any
request for a hearing shall identify specifically the issues of fact or law
that are disputed. A person who so requests will be notified of any hearing,
if ordered, and will receive a copy of any notice or order issued in this
matter. After said date, the application, as filed or as it may be amended,
may be granted.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
<PAGE>
<PAGE>
EXHIBIT B-1
AMENDMENT TO SERVICE AGREEMENTS
This Amendment, effective as of July 1, 1996, by and between Allegheny
Power Service Corporation, a Maryland corporation ("APSC"), and Monongahela
Power Company, an Ohio corporation ("MP"), The Potomac Edison Company, a
Maryland and Virginia corporation ("PE"), and West Penn Power Company, a
Pennsylvania corporation ("WPP") (MP, PE and WPP are hereinafter collectively
referred to as the "Electric Companies"),
WITNESSETH THAT, WHEREAS, the Electric Companies and APSC are all
subsidiaries of Allegheny Power System, Inc., a Maryland corporation ("APS"),
and
WHEREAS, each Electric Company entered into a service agreement with APSC
dated November 3, 1993 (the "Service Agreements"), and
WHEREAS, as a result of the restructuring and continuing reengineering of
the corporate and operational functions of APSC and of the Electric Companies,
APSC and the Electric Companies have agreed to amend Exhibit I to the Service
Agreements (which describes the services that APSC may perform for each of the
Electric Companies) as provided herein.
NOW THEREFORE, APSC and the Electric Companies hereby agree that Exhibit
I to the Service Agreements shall be deleted and replaced by the revised Exhibit
I which is attached hereto and incorporated herein.
IN WITNESS WHEREOF, the parties have signed or have caused this Amendment
to be signed by their duly authorized representatives effective as of the day
and year first above written.
ATTEST: ALLEGHENY POWER SERVICE CORPORATION
____________________________ By: ___________________________________
Vice President
ATTEST: MONONGAHELA POWER COMPANY
____________________________ By: ___________________________________
President
<PAGE>
ATTEST: THE POTOMAC EDISON COMPANY
____________________________ By: ___________________________________
President
ATTEST: WEST PENN POWER COMPANY
____________________________ By: ___________________________________
President
<PAGE>
Exhibit I
(As Amended, effective July 1, 1996)
Allegheny Power Service Corporation Principal Functions
The following is a description of the principal functions of
Allegheny Power Service Corporation ("APSC"). In accordance with the terms and
conditions of the Service Agreement dated November 3, 1993, APSC may perform the
services described herein for Monongahela Power Company, The Potomac Edison
Company, and West Penn Power Company (collectively hereinafter referred to as
the "Allegheny Power" companies or the "Electric Companies").
I. Corporate Services
1. Accounting
(a) Payroll - Processes and verifies timesheets and paychecks
for Allegheny Power employees. Ensures compliance with payroll tax laws and
regulations.
(b) Asset Accounting - Maintains corporate accounting records
for Allegheny Power's fixed assets in accordance with regulatory requirements,
corporate capital budget management, and fixed asset return objectives.
(c) Taxes - Ensures compliance with all federal, state and
local tax laws (except payroll and benefits matters). Prepares and files
applicable returns, gives instructions for timely payment of tax liabilities,
and coordinates the issuance of tax accounting instructions to Allegheny Power.
Also provides tax planning services.
(d) Corporate Accounting - Gathers, reports, and analyzes
accounting and management information. Reviews and corrects accounting data.
(e) Payment Processing - Processes invoices from, and issues
payment to, vendors for goods and services provided to Allegheny Power.
(f) Fuel Accounting - Initiates payment for fuel receipts and
compiles fuel data for report preparation on fuel purchases and generation
statistics to meet various regulatory requirements.
2. Information Services
Provides electronic data processing services:
(a) Machine related computer activity - services such as data
processing for customer accounting, payroll and general accounting, engineering
planning, purchasing and stores studies, forecasts and various other
administrative and engineering applications.
<PAGE>
(b) Computer applications activity - services such as
feasibility studies for new applications, development and/or acquisition of new
applications, enhancement of existing applications and other related activity.
3. Financial Management
Oversees annual budgeting and capital management, long-term
forecasting, and financial planning.
4. Treasury
(a) Cash Processing - Maintains relationship with banking
institutions for lines of credit. Handles customer bill processing, money pool
(internal funding among Allegheny Power companies, external short-term borrowing
and investing), and long-term financing and cash forecasting.
(b) Risk Management - provides risk financing through
insurance purchases and other funding mechanisms. Provides transfer of risk via
contracts and insurance certification for all contractors, lessees,cogenerators,
and PURPA projects. Provides risk control to protect Allegheny Power companies'
properties from loss, and provides advice to Legal, Claims, and Human Resources
relative to liability and worker's compensation issues, including litigation.
(c) Electronic Commerce - Provides guidance, implementation,
and oversight of Electronic Commerce (EC) activities. EC is defined as any
binding business transaction conducted or consummated over an electronic network
between Allegheny Power and its customers, suppliers, financial institutions, or
other entities.
5. Audit Services
Performs independent appraisals of significant activities carried
out within, and/or related to, the Allegheny Power companies through application
of financial, contract, operational and compliance audit techniques. Provides
consulting services upon management request.
6. Legal
(a) Legal Services - Renders services relating to financings,
financial reporting, shareholders' meetings, rates and other regulatory
proceedings, environmental matters, litigation, marketing, human resources,
contracts, real estate, leasing, corporate and other legal matters.
(b) Corporate Secretary - Responsible for creation,
maintenance, and retention of corporate records; liaison with Board of
Directors; administration of indentures (performed by Assistant Secretaries);
support for long-term financing, regulatory filings; handles
shareholder/bondholder relations
<PAGE>
and relationship with stock transfer agent and
bond trustee (records kept, checks sent, etc. by outside agents).
(c) Claims - Responsible for investigating and taking other
appropriate actions concerning claims made against Allegheny Power by third
parties. Also responsible for activities involved with collecting monies owed
to Allegheny Power by third parties for property damage.
7. Regulation & Pricing
(a) Costing & Pricing - Provides cost of service analysis.
Identifies usage pattern trends to assist marketing efforts. Performs special
studies requested internally or by regulatory agencies. Provides analyses such
as separation, cost of service and loss studies.
(b) Financial Analysis - Assembles and provides primary
support for regulatory filings. Maintains contacts with state commission staff
members. Performs special financial studies.
(c) Fuel & Capital Recovery - Assembles and provides primary
support for fuel and depreciation regulatory filings.
8. Human Resources
Initiates, maintains, supervises and administers the human resources
policies of the Allegheny Power companies. Assists the Allegheny Power
companies' management in maximizing the results from their employees. This is
accomplished by developing and administering programs and policies, and
consulting in five primary functions. They are:
(a) Employee Relations - labor relations,litigation/regulatory
compliance, employee communications and employee policies.
(b) Employee Development - training program development and
delivery, performance evaluation and management development.
(c) Medical Services - workers' compensation, employee
assistance program, and employee wellness/awareness programs.
(d) Rewards - design and administration of compensation,
benefits, and recognition programs.
(e) Staffing - employment/placement, succession planning and
EEO/affirmative action.
In addition, Business Practices is a group within HR which coordinates and
participates in the development and/or documentation of new and revised
policies, business practices, procedures, references and forms.
<PAGE>
9. Governmental Affairs
Analyzes and provides views and recommendations on state and federal
legislation to assure fair and equitable treatment of the Allegheny Power
companies. Provides information to assist management decision-making on company
strategy and policy.
10. System Security
Originates, establishes, and administers security standards,
procedures and policies. Provides investigative and loss prevention services in
reference to the protection of assets and its employees. Acts as liaison with
federal, state and local law enforcement agencies.
11. Procurement
Provides services and gives functional direction in connection with
the procurement of goods and services, including market research, preparation of
commitments, requests for quotations, preparation of bid summaries, and
materials management.
12. Corporate Communications
Responsible for media relations, including the financial and trade
press, production of stockholder publications, advertising, and numerous
internal and customer communications.
13. AYP Capital
Oversees the business development and operations of and investments
in products, services and ventures that are not regulated as public utility
services. Included are unregulated power generators, power marketing and
related activities.
II. Business Units
1. Operating Business Unit (OBU)
a) Customer Service Center - Answers all incoming calls to
Allegheny Power via one toll-free number, responds to customer inquiries,
initiates new service, dispatches service and line crews in response to power
outages, handles credit and collection activities, responds to customer and
public service/utility commission complaints, and manages the meter reading and
billing activities.
b) Operations Services - Operations Services provides the
following services in the indicated areas: Stores - Centralizes materials supply
and distribution; Technical Services - Provides electrical equipment repair and
testing; Transportation - Handles fleet management and repair services; Safety,
Quality and Training - Develops safety and training programs; Building
Services - Provides building maintenance and management, and office services;
Substations -
<PAGE>
Builds, operates, and maintains substations and equipment; T&D Operation -
Performs switching functions for all facilities above distribution voltage;
Forestry -Provides maintenance services for electrical facilities rights-of-way;
Planning - Provides planning services for all non-network electrical facilities;
Lines Services - Provides lines support for lines teams in service centers; and
Telecommunications - Provides support and maintenance for the telecommunications
systems.
c) Various Regions - Each region supports the processes for
responding to electric service requests, ensuring reliable service, and
restoration of service.
2. Retail Marketing
Executes the marketing and sales of the products and services of
Allegheny Power. Also performs economic development activities which affect
areas served by the Electric Companies.
3. Corporate Affairs
Maintains relationships with state regulatory commissions, municipal
and county governments and is responsible for identifying state-level regulatory
issues.
4. Transmission Business Unit (TBU)
Responsible for ensuring that adequate high-voltage network
facilities are available and on-line to convey power produced from the power
production operations run by, or procured by, the Generation Business Unit (GBU)
to serve native load and to engage in wholesale transmission sales to
nonaffiliates. Will engage in marketing efforts for sales of bundled and
unbundled transmission services to nonaffiliates and will be responsible for
accommodating requests for transmission service submitted by nonaffiliates who
qualify as customers for that service under federal regulations. Finally, is
responsible for maintaining the optimal economic balance on a real-time basis
between native customer load and the output of the generation resources supplied
by the GBU.
5. Generation Business Unit (GBU)
Responsible for ensuring that adequate generation is available to
serve the native load customers of Allegheny Power by using its own generating
facilities and the third-party generation obtained through its marketing
efforts. Primary responsibilities include ensuring the cost-effective operation
and maintenance of our generating units, and providing the most economic mix of
generation by available generating units and off-system purchases and sales. It
also provides advisory and supervisory services as needed. The GBU will also
broker energy services.
<PAGE>
6. Planning and Compliance Business Unit (P&CBU)
Forecasts electric demand and energy requirements for Allegheny
Power and develops plans to provide and integrate the production and
transmission facilities needed to serve the electricity requirements of
customers of the Electric Companies. Oversees compliance with state and federal
regulatory and legal requirements.
III. ADDITIONAL SERVICES
Certain other services in addition to the above as APSC may be able
to provide to the Allegheny Power companies.
<PAGE>
<PAGE>
EXHIBIT B-2
SERVICE AGREEMENT
THIS SERVICE AGREEMENT, effective July 1, 1996, between Monongahela Power
Company, a public utility corporation organized and existing under the laws of
the State of Ohio ("Monongahela"), The Potomac Edison Company, a public utility
corporation organized and existing under the laws of the Commonwealth of
Virginia and the State of Maryland ("Potomac Edison"), and West Penn Power
Company, a public utility corporation organized and existing under the laws of
the Commonwealth of Pennsylvania ("West Penn") (collectively, Monongahela,
Potomac Edison, and West Penn are hereinafter referred to as the "Companies"),
WITNESSETH:
WHEREAS, the Companies are wholly-owned subsidiaries of Allegheny Power
System, Inc., a holding company organized and existing under the laws of the
State of Maryland ("APS"), and
WHEREAS, as the result of a restructuring and continuing reengineering of
the corporate and operational functions of APS and its various subsidiaries, the
Companies may be called upon to perform certain services for one another, and
WHEREAS, the Companies have decided to offer to perform for each other
certain services and to set out a method of determining allocation of and
payment for such services.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto, intending to be reasonably
bound, hereby agree as follows:
1. Each Company hereby offers to furnish to any other Company the
services detailed on Exhibit I attached hereto and made a part hereof.
2. For all services rendered for any Company by another Company, the
Company receiving the services agrees to pay the costs thereof, which costs will
be calculated as follows:
a. Actual costs incurred by a Company shall be accumulated by
specific, identifiable work order numbers or by FERC accounts and shall be
directly billed to the receiving Company.
b. The total cost of a particular service shall be the sum of:
facilities charges (to recover depreciation and return on investment on fixed
assets; working capital charges (where appropriate); all labor charges
(determined from employee timesheets) and related payroll overheads; out-of-
pocket expenses; and any overheads associated with out-of-pocket expenses.
c. When a service is rendered for the benefit of two or more
Companies, the costs shall be accumulated and shared by all receiving Companies
in proportion to the average electric operating revenues of each (exclusive of
<PAGE>
sales to another APS subsidiary), operating and maintenance expenses (exclusive
of fuel, deferred fuel, and purchased power and exchanges), kilowatt-hours sold
to regular customers (other than to the APS subsidiaries) and total electric
plant in service (less reserves for depreciation and amortization) over the
three preceding calendar years.
3. Payment shall be made by the receiving Company to the providing
Company on a monthly basis on or before the 20th day of the succeeding month,
upon receipt of a statement showing the amount due. Certain charges billed may
not be due immediately and will be so indicated on the statement of billing.
Monthly charges may be made on an estimated basis, but adjustments will be made
at the end of each calendar year so that all charges for the calendar year will
be in accordance with the foregoing.
4. Nothing herein shall be construed to release the officers and
directors of any Company from the performance of their respective duties or
limit the exercise of their powers as prescribed by law or otherwise.
5. This Service Agreement shall continue in full force and effect from
year to year but may be terminated by any party upon 60 days' prior notice, and
any Company may terminate its participation in this Service Agreement at any
time with or without notice for any cause deemed by it to be sufficient.
6. The Service Agreement will be subject to termination or modification
at any time to the extent its performance may conflict with the provisions of
the Public Utility Holding Company Act of 1935, as amended, or with any rule or
regulation of the Securities and Exchange Commission adopted before or after the
making of this Service Agreement and shall be subject to the approval of any
state commission or other regulatory body whose approval is a legal prerequisite
to its execution and delivery or performance.
IN WITNESS WHEREOF, each Company has caused this Service Agreement to be
signed by its duly authorized officer, effective as of the date first written
above.
MONONGAHELA POWER COMPANY
By _________________________________
ATTEST: President
______________________________
Assistant Secretary
<PAGE>
THE POTOMAC EDISON COMPANY
By _________________________________
President
______________________________
Assistant Secretary
WEST PENN POWER COMPANY
By _________________________________
President
______________________________
Assistant Secretary
<PAGE>
Exhibit I
In accordance with the terms and conditions of the Service Agreement dated
July 1, 1996, the Companies may perform the following services for one another:
1. Office Services - including secretarial, typing, mail room services,
duplicating, fleet administration, and other similar services.
2. Operations Services - including line construction, maintenance and
repair; meter reading; substation construction, maintenance and repair; power
station construction, maintenance and repair; supply of transmission and
distribution materials; distribution transformer and regulator repair; oil
circuit recloser repair; testing, inspection and repair of rubber goods; meter
testing; meter wiring; building management; transportation services; substation
construction; substation maintenance; and telecommunications operations.
3. Customer Service Center Services - including answering incoming
customer calls to the Companies via one toll-free number, responding to customer
inquiries, initiating new service, dispatching service and line crews in
response to power outages, handling credit and collection activities, responding
to customer and Public Service Commission complaints, and managing the meter
reading and billing activities.
4. Mail Payment Center - including processing of customer bill payments.
5. Other Services - including certain other services in addition to the
above as a Company may be able to provide and/or as one or more of the Companies
may require or request.
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EXHIBIT B-3a
ALLEGHENY POWER SYSTEM, INC./
ALLEGHENY POWER SERVICE CORPORATION
ORGANIZATIONAL CHART
(BEFORE RESTRUCTURING)*
Chief Executive Officer and Chairman of the Board (APS & APSC)
President and Chief Operating Officer (APS & APSC)
VP, Administration (APS & APSC)
Asst. VP, AYP Capital
Executive Director, Central Services (APSC)
Director, System Security (APSC)
Director, Human Resources (APSC)
Director, Public Information (APSC)
SVP & Chief Financial Officer (APS & APSC)
VP & Treasurer (APS & APSC)
Director, Financial Management (APSC)
VP, Legal & Regulatory (APSC & APS)
VP, Legal Services (APSC, MP, PE & WPP)
Secretary (APS, APSC, MP & PE)
Director, Legal Services (APSC)
VP & Comptroller (APS & APSC)
Director, Accounting Studies & Asst. Comptroller
(APSC)
Controller (APSC, PE & WPP)
Director, System Internal Audits (APSC)
Director, Rates (APSC)
SVP (APS & APSC) & President (MP, PE & WPP)
SVP, Bulk Power Supply (APS & APSC)
Exec. Director, Planning (APSC)
Exec. Director, Engineering (APSC)
Exec. Director, Construction (APSC)
Exec. Director, Operating (APSC)
Director, Project Cost (APSC)
* As of December 31, 1995
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EXHIBIT B-3b
MONONGAHELA POWER COMPANY
ORGANIZATIONAL CHART
(BEFORE RESTRUCTURING)*
Chairman of the Board and Chief Executive Officer (APS & APSC)
President and Chief Operating Officer (APS & APSC)
President (MP, PE & WPP) & SVP (APS & APSC)
Director, Engineering and Construction (MP, PE &
WPP)
Vice President (MP)
Mgr., Elkins Division
Mgr., Fairmont Division
Mgr., Morgantown/Panhandle Division
Mgr., Parkersburg Division
Mgr., Southern Division
VP, Legal Services (MP, PE & WPP)
Exec. Director, Customer Relations (MP, PE & WPP)
Controller (MP)
Secretary (APS, APSC, MP)
Treasurer (APS, APSC, MP)
* As of December 31, 1995
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EXHIBIT B-3c
THE POTOMAC EDISON COMPANY
ORGANIZATIONAL CHART
(BEFORE RESTRUCTURING)*
Chairman of the Board and Chief Executive Officer (APS & APSC)
President and Chief Operating Officer (APS & APSC)
President (MP, PE & WPP) & SVP (APS & APSC)
Exec. VP (PE)
Director, Engineering and Construction (MP, PE &
WPP)
Vice President (PE)
Mgr., Central Division
Mgr., Eastern Division
Mgr., Northern Division
Mgr., Southern Division
Mgr., Western Division
VP, Legal Services (MP, PE & WPP)
Exec. Director, Customer Relations (MP, PE & WPP)
Secretary & Treasurer (PE)
Controller (PE, WPP & APSC)
* As of December 31, 1995
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EXHIBIT B-3d
WEST PENN POWER COMPANY
ORGANIZATIONAL CHART
(BEFORE RESTRUCTURING)*
Chairman of the Board and Chief Executive Officer (APS & APSC)
President and Chief Operating Officer (APS & APSC)
President (MP, PE & WPP) & SVP (APS & APSC)
Director, Engineering and Construction (MP, PE &
WPP)
Vice President (WPP)
Secretary & Treasurer (WPP)
Mgr., Allegheny-Kiski Division
Mgr., Butler-Kittanning Division
Mgr., Keystone Division
Mgr., Laurel Division
Mgr., Lincoln Division
Mgr., Mon Valley Division
Mgr., Nittany Division
Mgr., South Penn Division
Mgr., Southwest Division
VP, Legal Services (MP, PE & WPP)
Exec. Director, Customer Relations (MP, PE & WPP)
Controller (PE, WPP & APSC)
* As of December 31, 1995
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EXHIBIT B-4a
ALLEGHENY POWER SYSTEM, INC./ALLEGHENY POWER SERVICE CORPORATION
ORGANIZATIONAL CHART
(AFTER RESTRUCTURING)*
President & Chief Executive Officer (APS & APSC)
VP, Administration (APS & APSC)
Director, Information Services (APSC)
Director, System Security (APSC)
Director, Human Resources (APSC)
Director, Procurement (APSC)
Director, Corporate Communications
SVP & Chief Financial Officer (APS & APSC)
VP & Treasurer (APS & APSC)
Director, Financial Management (APSC)
VP, Legal (APSC)
Secretary (APS & APSC)
VP, Legal Services (APSC)
Director, Legal Services (APSC)
VP & Controller (APS & APSC)
Director, Regulation & Pricing (APSC)
Director, Audit Services (APSC)**
Controller (MP, PE, WPP & APSC)
Senior Vice President (APSC & APS)
VP, Generation Business Unit (APSC)
Director, Generation Projects (3)(APSC)
Director, Fuel Procurement (APSC)
Director, Generation Marketing (APSC)
Director, Operations (APSC)
Regional Manager, Ft. Martin/Albright Region
Regional Manager, Harrison/Rivesville Region
Regional Manager, Armstrong/Springdale Region
Regional Manager, PE Hydro Region
Regional Manager, Pleasants/Willow Island
Region
Regional Manager, Hatfield/Lake Lynn/Mitchell
Region
* As of October 1, 1996.
**The Director, Audit Services also has a direct reporting relationship to the
Audit Committees of the Boards of Directors of APS, Inc., APSC, Monongahela
Power, Potomac Edison and West Penn Power.
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EXHIBIT B-4a (continued)
ALLEGHENY POWER SYSTEM, INC./
ALLEGHENY POWER SERVICE CORPORATION
ORGANIZATIONAL CHART
(AFTER RESTRUCTURING)*
VP, Transmission Business Unit (APSC)
Director, Transmission Projects (3)(APSC)
Director, Transmission Marketing (APSC)
Director, Operations (APSC)
VP, Planning & Compliance Business Unit (APSC)
Director, Planning & Compliance (2) (APSC)
Senior Vice President (APS) & VP (APSC)
VP, Operating Business Unit (APSC)
Director, Process, Central Region (APSC)
Director, Process, Metro Region (APSC)
Director, Process, Southern Region (APSC)
Director, Process, Western Region (APSC)
Director, Process, Eastern Region (APSC)
Director, Process, Northern Region (APSC)
Director, Process, Tri-State Region (APSC)
Director, Operations Services (2) (APSC)
Director, Customer Service (APSC)
VP, Retail Marketing (APSC)
General Manager, Residential (APSC)
General Manager, Industrial (APSC)
General Manager, Commercial (APSC)
VP, Corporate Affairs (3) (APSC)
VP, Governmental Affairs (APSC)
Asst. To VP (2)(APSC)
* As of October 1, 1996.
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EXHIBIT B-4b
MONONGAHELA POWER COMPANY
ORGANIZATIONAL CHART***
(AFTER RESTRUCTURING)
Chief Executive Officer and Chairman of the Board (MP, PE & WPP)
President (MP, PE & WPP)
Vice Presidents (6)
Secretary (MP, PE & WPP)
Treasurer (MP, PE & WPP)
Controller (MP, PE & WPP)
***Since the majority of functions of the operating companies are being taken
over by APSC, this chart is actually a listing of officers of Monongahela Power
Company as of October 1, 1996.
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EXHIBIT B-4c
THE POTOMAC EDISON COMPANY
ORGANIZATIONAL CHART
(AFTER RESTRUCTURING)***
Chief Executive Officer and Chairman of the Board (MP, PE & WPP)
President (MP, PE & WPP)
Vice Presidents (5)
Secretary (MP, PE &WPP)
Treasurer (MP, PE & WPP)
Controller (MP, PE & WPP)
***Since the majority of functions of the operating companies are being taken
over by APSC, this chart is actually a listing of officers of The Potomac Edison
Company as of October 1, 1996.
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EXHIBIT B-4d
WEST PENN POWER COMPANY
ORGANIZATIONAL CHART
(AFTER RESTRUCTURING)***
Chief Executive Officer and Chairman of the Board (MP, PE & WPP)
President (MP, PE & WPP)
Vice Presidents (6)
Secretary (MP, PE & WPP)
Treasurer (MP,PE & WPP)
Controller (MP,PE & WPP)
***Since the majority of functions of the operating companies are being taken
over by APSC, this chart is actually a listing of officers of West Penn Power
Company as of October 1, 1996.
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