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File No. 70-8941
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
AMENDED
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
ITEM 1. Description of Proposed Transaction 1
I. Restructuring 2
A. Consolidation and Reengineering of Functions 3
1. Restructuring of Electric Utility
Company Functions 4
a. Operating Business Unit 4
b. Retail Marketing 5
c. Corporate Affairs 5
2. Restructuring of Bulk Power Supply 5
a. Generation Business Unit 6
b. Transmission Business Unit 6
c. Planning and Compliance Business
Unit 7
3. Restructuring of Corporate Services 7
B. AYP Capital, Inc. 16
C. Reasons for Restructuring 17
D. Control over APSC 20
E. Cost Allocation 24
F. Proposed Amendment to Service Agreements 26
II. Electric Utility Companies Providing Services to
One Another 26
A. Operations Services 27
B. Customer Service Center 29
C. Office Services/Mail Payment 29
III. All System Companies Allocation Factor 29
IV. Compliance with Rule 54 30
ITEM 2. Fees, Commissions, and Expenses 32
ITEM 3. Applicable Statutory Provisions 32
ITEM 4. Regulatory Approval 32
ITEM 5. Procedure 33
ITEM 6. Exhibits and Financial Statements 33
ITEM 7. Information as to Environmental Effects 34
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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.
Finally, APSC requests authority to use an existing
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allocation factor for unregulated subsidiaries of APS, Inc.
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
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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.
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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 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.
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At present, many physical employees, including all of the union work
force, remain employees of the Electric Utility Companies.<F1>
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
<F1> 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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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. 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,
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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.
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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.
5) Accounts Payable - consolidated in
Hagerstown and called Payment Processing.
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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. The Technology Operations Team (one Team Leader, 26
Specialists and 14 Technicians) and Business Solutions Team (46
Specialists) are located in Greensburg, Pennsylvania. The
Customer Support Team is divided among the corporate centers, with
four Specialists located in Fairmont, West Virginia; four
Specialists located in Hagerstown, Maryland, and 14 Specialists,
two Contract Coordinators, two Contract Assistants and one
Technician located in Greensburg. Also, six Business Consultants
are assigned to the major business units and will handle tasks
from all three Information Services groups. As of January 1,
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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
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'
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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
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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
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
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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.
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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 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
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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
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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 invests in FUCOs. Pursuant to
prior authority granted by this Commission, AYP also has invested
in the Envirotech Fund. The reporting responsibility for these
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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
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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
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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<F2>.) 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.
<F2> Allegheny Power's restructuring and re-engineering activities
are expected to result in a reduction of approximately 1,200
employees. The expected savings from restructuring are due mainly
to this reduction in force. Based on an average annual salary for
Allegheny Power employees of $50,000, total restructuring savings
are expected to be approximately $60,000,000 per year (1200 x
$50,000 = $60,000,000).
<PAGE>
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 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 ensure that the Electric Utility
Companies have the means to judge the need for APSC services and
to monitor the quality and value of the services being provided.
These factors include the budget process, Commission-approved work
order procedures to track and document the initiation of services,
billing and review procedures to ensure the accuracy of service
company billings, review and approval of work orders and billings
by designated Electric Utility Company representatives, and
internal audit examinations.
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As in the past, operating and construction budgets continue
to be prepared separately for the Electric Utility Companies, for
review and approval by their Boards of Directors. Expenditures
are monitored against these budgets on a monthly basis. Electric
Utility Company financial results are produced monthly for
internal analysis and review by the Boards of Directors and are
issued to the public and state regulatory commissions quarterly.
The internal audits department and the external auditors continue
to review APSC charges. Separate individual audit opinions for
individual APSC billings to all Allegheny Power companies and for
the financial condition and financial statements of each Electric
Utility Company are obtained annually from an independent public
accounting firm.
Under existing Commission authority, each of the Electric
Utility Companies pays to APSC all costs that reasonably can be
identified and related to a particular transaction or service
performed on its behalf. These costs are documented using work
order numbers in accordance with the Commission's Uniform System
of Accounts for Mutual Service Companies and Subsidiary Service
Companies. Designated Electric Utility Company representatives
review new work orders and the Regulation and Rates department,
which is independent of the billing function, analyzes each
month's APSC departmental billing summaries to the Electric
Utility Companies to ensure billing to the proper company. All
APSC time documents are reviewed and approved by a department head
or executive of APSC, including review of the time document
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charges in relationship to a department's function and employees'
work schedule. The review also ensures that the time document
indicates the work order number charged. Pursuant to controls
built into APSC's accounting system, a transaction requiring a
work order will not be processed unless there is a work order
number provided. All project work orders for a single Electric
Utility Company in excess of $100,000 must be approved by a
designated Electric Utility Company representative. With respect
to project work orders where more than one Electric Utility
Company is involved, APSC will obtain a prior authorization from
an Electric Utility Company representative, acting as a
representative for all the affected companies, for each multiple
party work order in excess of $500,000.
APSC bills to the Electric Utility Companies are reviewed and
approved by an Electric Utility Company representative prior to
payment. Detailed APSC information (i.e. time sheets, invoices)
is available upon request. Electric Utility Company
representatives will, if necessary, contact responsible APSC
managers for explanations of unusual items. In general,
disagreements are resolved, if possible, by direct communication
and negotiation between the Electric Utility Company
representative and APSC departments. Where consensus on selected
matters cannot be reached, the matter is referred to executives in
the Electric Utility Company and APSC. The basis for the
allocation of costs will be reviewed annually by APSC department
heads to ensure that the allocation basis continues to be
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reasonable and have a relationship to the types of services or
functions provided by the departments. APSC will continue to work
with the staff of the Commission to ensure that the allocation
methods effectively allocate costs according to benefits received.
APSC accounting staff verifies that every multiple party work
order has the correct cost allocation method.
Another control which is performed every month is the
reconciliation of APSC billings to APSC expenses with regard to
services rendered for the Electric Utility Companies. Such
reconciliation ensures that all expenses have been billed, and it
also immediately detects any over-or under-billings. Audits
provide an additional control measure. Almost all APSC charges
are processed through one of two systems - Accounts Payable and
Payroll. Both of these systems, which are scheduled for audit in
1997, accumulate charges utilizing work orders. Therefore, a
review of the work order process will be an integral part of the
review. Audit Services continues 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.
<PAGE>
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.
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
<PAGE>
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.
<PAGE>
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 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.
<PAGE>
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
<PAGE>
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.
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,
<PAGE>
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. All System Companies Allocation Factor
APSC is requesting authority from this Commission to use the
All System Companies Allocation Factor for unregulated
subsidiaries of Allegheny Power. This factor is used when work or
<PAGE>
expenses are to be billed to all companies in Allegheny Power.
This allocation factor, which was previously used for billings to
the Electric Utility Companies and APS, Inc., has been expanded to
include billings all companies in Allegheny Power, including
unregulated subsidiaries.
The allocation factor will be based on the average of the
prior three years' direct costs charged by APSC to each Allegheny
Power company. Examples of the types of services using this new
allocation factor are system tax work, investor relations,
financial consolidations, and corporate communications.
IV. 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
<PAGE>
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).
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.
<PAGE>
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.
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 have been expressly authorized by the
Virginia State Corporation Commission as to Potomac Edison. The
Proposed Amendment and the Service Agreement between the Electric
Utility Companies have been 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 have been expressly authorized by
the Pennsylvania Public Utility Commission as to West Penn.
Copies of applications to such commissions and copies of the
orders of such commissions are attached as Exhibit D-1 through D-
6. No commission other than the Securities and Exchange
Commission and these commissions has jurisdiction over the
proposed transaction.
<PAGE>
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 July 25, 1997. APSC and APS, Inc. waive any
recommended decision by a hearing officer or by any other
responsible officer of the Commission and 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 (previously filed)
B-2 Service Agreement between Monongahela,
Potomac Edison, and West Penn (previously
filed)
B-3 Organizational Charts (APS, Inc., APSC,
Monongahela, Potomac Edison, and West Penn)
before Restructuring (previously filed)
B-4 Organizational Charts (APS, Inc., APSC,
Monongahela, Potomac Edison, and West Penn)
after Restructuring (previously filed)
D-1 Application to the Pennsylvania Public
Utility Commission (previously filed)
<PAGE>
D-2 Application to the Virginia State Corporation
Commission (previously filed)
D-3 Application to the Public Service Commission
of West Virginia (previously filed)
D-4 Order of the Pennsylvania Public Utility
Commission (previously filed)
D-5 Order of the Virginia State Corporation
Commission (previously filed)
D-6 Order of the Public Service Commission of
West Virginia (previously filed)
F Opinion of Counsel (previously filed)
G Financial Data Schedules (previously filed)
H Form of Notice (previously filed)
(b) Financial Statements (previously filed)
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
<PAGE>
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.
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
By: /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
MONONGAHELA POWER COMPANY
By: /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
THE POTOMAC EDISON COMPANY
By: /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
<PAGE>
WEST PENN POWER COMPANY
By: /s/ Thomas K. Henderson
Thomas K. Henderson,
Vice President
Original filing: October 21, 1996
Amended filing: July 18, 1997
Amended filing: July 21, 1997
Amended filing: July 23, 1997
<PAGE>
