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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
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another and properly allocate the costs of such services.
Finally, APSC requests authority to use an existing
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
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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
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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 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
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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, some physical employees,
including a minority of the union work force, remain employees of
the Electric Utility Companies.1
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.
[FN]
1 In Fall 1997, Locals No. 102 and 331 of the Utility
Workers Union of America (jointly) and Local 2357 of the
International Brotherhood of Electrical Workers signed new labor
agreements with APSC. The new agreements have been ratified by
the members of each union. Although the other remaining union
employees currently are Electric Utility Company employees, all
union employees currently are paid and receive benefits through APSC.
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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 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
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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.
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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
Historically, functions of the Accounting department have
included general accounting, payroll, accounts payable, plant
accounting, and taxes. These functions were performed at three
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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
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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,
1997, all Information Services employees will be employees of APSC.
Key changes to be implemented by the restructuring include
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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
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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 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
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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.
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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
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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
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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
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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 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
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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 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.
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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 1,100 fewer employees, with long-term annual cost
savings of approximately $54 million. See Estimated Net Impact
Chart at Exhibit B-5.2
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
[FN]
2
As shown on Exhibit B-5, Allegheny Power's work force
decreased by 1,076 employees during the period January 1, 1995
through March 31, 1997. The Chart shows employee reductions by
company (Monongahela, Potomac Edison, West Penn and APSC) and the
reasons for employment termination (acceptance of a separation
package, early retirement, resignation, refusal to relocate for
another position with Allegheny Power, etc.). The Chart also
shows the estimated costs associated with resturctuing
($109,000,000), which are expected to be recovered over a two-
year period. Finally, the Chart shows the long-term annual
savings expected from restructuring (approximately $54 million),
by company.
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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
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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.
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
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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
(employees in Corporate Accounting or Asset Accounting) 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 charges in
relationship to a department's function and employees' work
schedule. The review also ensures that the time document
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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.
The APSC work order review process is as follows:
Capital Work Orders: Capital work orders are processed and
controlled by an Asset Accounting Analyst, who reviews new
work orders to ensure that proper information is provided,
accounting is assigned, and the appropriate company is
charged. The Manager of Asset Accounting reviews and
approves all project work orders in excess of $100,000 and
multiple company project work orders in excess of $500,000.
Work Orders Other Than Capital: Corporate Accounting
processes work orders other than capital. Accounting clerks
perform a review similar to that used for capital work
orders. All work orders are reviewed and approved by the
Manager of Corporate Accounting, who reviews the work orders
to ensure proper Electric Utility Company authorization is
provided and to review the allocations and assignments to
the appropriate company.
APSC billings are prepared in Corporate Accounting and are
reviewed by the Team Leader, Financial Records, and approved by
the Manager of Corporate Accounting. Detailed APSC information
(i.e., time sheets, invoices) is available upon request. As part
of the closing process, unusual charges are brought to the
attention of the Team Leader, Financial Records, and are reviewed
with the appropriate APSC Departments.
The review of APSC billings by Regulations and Rates is
performed after the review by Corporate Accounting. After the
bill is prepared and approved, but before it is sent for payment,
an Analyst in Regulations and Rates performs a review and audit
of the billings. The procedure includes:
<PAGE>
1. Verifying that the amounts on the
invoice match the APSC bill reports and the
journal entry totals prepared for each associated
company.
2. APSC bill reports are provided by work
order number, by journal entry number, and by
charging department. Regulations and Rates does a
sampling review on each report. For example, all
work order charges in excess of $100,000 in the
month are reviewed to determine if the work order
is appropriate for the company charged. Charges
to first time work orders are highlighted and
reviewed for appropriateness. Charges by journal
entry are reviewed for unusual items, such as a
right-of-way vegetation control charge to an
unregulated power marketing company.
If Regulations and Rates employees have questions on the
billings, both the appropriate Business Unit and Corporate
Accounting are notified. These departments research the
questions and provide answers to Regulations and Rates. If
changes are found to be necessary, the Manager of Corporate
Accounting is notified and any appropriate corrections are made
the following month. 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 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
<PAGE>
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. Quarterly
meetings are held to review monthly results. These meetings are
attended by the Electric Utility Company Controller, various
Controller department managers and representatives, and Business
Unit/Electric Utility Company departments. These meetings focus
primarily on a review of expenditures as compared to budget and
prior year expenditures. Questions are researched by either the
appropriate Business Unit or Corporate Accounting and correcting
entries, if appropriate, are approved by the Electric Utility
Company Controller and the Business Unit.
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
<PAGE>
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
<PAGE>
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.
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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, 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
<PAGE>
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
expenses are to be billed to all companies in Allegheny Power.
This allocation factor, which was previously used for billings to
<PAGE>
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
<PAGE>
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).
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.
<PAGE>
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.
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.
<PAGE>
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.
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 January 31, 1998. 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)
<PAGE>
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)
B-5 Estimated Net Impact Chart
D-1 Application to the Pennsylvania
Public Utility Commission (previously
filed)
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
<PAGE>
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
By: /s/
Thomas K. Henderson,
Vice President
MONONGAHELA POWER COMPANY
By: /s/
Thomas K. Henderson,
Vice President
THE POTOMAC EDISON COMPANY
By: /s/
Thomas K. Henderson,
Vice President
WEST PENN POWER COMPANY
By: /s/
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
Amended filing: January 16, 1998
<PAGE>
_______________________________
1 In Fall 1997, Locals No. 102 and 331 of the Utility
Workers Union of America (jointly) and Local 2357 of the
International Brotherhood of Electrical Workers signed new labor
agreements with APSC. The new agreements have been ratified by
the members of each union. Although the other remaining union
employees currently are Electric Utility Company employees, all
union employees currently are paid and receive benefits through
APSC.
2 As shown on Exhibit B-5, Allegheny Power's work force
decreased by 1,076 employees during the period January 1, 1995
through March 31, 1997. The Chart shows employee reductions by
company (Monongahela, Potomac Edison, West Penn and APSC) and the
reasons for employment termination (acceptance of a separation
package, early retirement, resignation, refusal to relocate for
another position with Allegheny Power, etc.). The Chart also
shows the estimated costs associated with restructuring
($109,000,000), which are expected to be recovered over a two-
year period. Finally, the Chart shows the long-term annual
savings expected from restructuring (approximately $54 million),
by company.
<PAGE>
EXHIBIT B-5
<TABLE>
ALLEGHENY POWER RESTRUCTURING - ESTIMATED NET IMPACT
<CAPTION>
Number of Employees
Employee Reductions
Voluntary Refused to New Net
Separation Relocate Other* Total Hires Reduction
<S> <C> <C> <C> <C> <C> <C>
APSC 171 64 161 396 186 210
Monongahela Power 114 18 149 281 281
Potomac Edison 128 64 157 349 349
West Penn Power 151 7 78 236 236
564 153 545 1,262 186 1,076
<CAPTION>
Estimated
Annual Long-term
Labor Allocation of
Reductions Reductions**
<C> <C>
$10,500,000 -
14,050,000 $ 13,450,000
17,450,000 16,140,000
11,800,000 24,210,000
$53,800,000 $53,800,000
<CAPTION>
Annual Payback
<S> Restructuring Labor Period
Payback Period for Costs: Costs*** Savings (Years )
<C> <C> <C>
Monongahela Power $ 28,400,000 $13,450,000 2.1
Potomac Edison 30,700,000 16,140,000 1.9
West Penn Power 49,900,000 24,210,000 2.1
$109,000,000 $53,800,000 2.0
<FN>
* Early retirements, resignations, etc.
** No official allocation of the estimated labor reductions by operating
companies was made because to do so would require so many assumptions
as to make any final result highly speculative. However, at the
special request of the SEC staff we have made this special purpose
estimated allocation using the APSC billing system allocation method
currently in use as approved by the SEC.
*** Primarily severance and other employee-related separation costs.
</TABLE>
