File No. 70-________
(Allegheny Advantages)
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION / DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
___________________________________
Allegheny Energy, Inc. Allegheny Energy Service Corporation
10435 Downsville Pike 10435 Downsville Pike
Hagerstown, MD 21740 Hagerstown, MD 21740
_____________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application/Declaration to:
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
Robert R. Winter, Esq.
Deputy General Counsel
Allegheny Power
800 Cabin Hill Drive
Greensburg, Pennsylvania 15601
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
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TABLE OF CONTENTS Page
Item 1. Description of the Proposed Transaction . . . . . . . . . . . . 3
A. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. Background . . . . . . . . . . . . . . . . . . . . . . . . . 3
C. Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. Form and Invest in Allegheny Advantages and Subsidiaries . . 4
2. Other Investments . . . . . . . . . . . . . . . . . . . . . . 5
(a) Housing Credits . . . . . . . . . . . . . . . . . . . . . 5
(b) Joint Ventures . . . . . . . . . . . . . . . . . . . . . . 5
(1) Wires Recycling/Business Consulting Services . . . . . . 5
(2) Forestry/Consulting Services . . . . . . . . . . . . . . 5
D. Service Agreements . . . . . . . . . . . . . . . . . . . . . . 5
E. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . . . . . . 6
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . . . 6
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . 9
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . . 9
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Information as to Environmental Effects . . . . . . . . . . . . 9
Exhibit H . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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Item 1. Description of Proposed Transactions
A. Summary
Now comes Allegheny Energy, Inc. ("Allegheny") seeking
authority to: (a) organize and invest up to $25 million in a to-be-
formed special purpose subsidiary - Allegheny Advantages; (b)
permit Allegheny Advantages to engage in Rule 58 activities: and
(c) permit Allegheny and Allegheny Advantages to, directly or
indirectly through other to-be-formed subsidiaries, make multiple
de minimis investments in certain core and non-core activities in
an aggregate amount not to exceed $35 million. Total combined
investment in Allegheny Advantages and the other to-be-formed
subsidiaries will not exceed $60 million.
B. Background
The deregulation of generation and introduction of
competition is now a market reality in Pennsylvania; is coming to
Maryland on July 1, 2000; and to Ohio, Virginia and West Virginia
over the course of the next two years. In the face of
deregulation Allegheny has: formed a generating company - Genco;<F1>
acquired West Virginia Power;<F2> moved to acquire Mountaineer Gas;<F3>
and moved to transfer The Potomac Edison Company's ("Potomac
Edison") generating assets to Allegheny Energy Supply Company,
LLC.<F4> To remain competitive Allegheny must have the flexibility
to develop and offer a diverse mix of energy and energy related
services in order to grow and continue to serve the current and
emerging energy and energy related needs of customers within
Allegheny Power's<F5> traditional service territories and to develop
and serve the needs of customers outside the traditional service
territories as opportunities arise. The requests contained herein
are designed to assist Allegheny Power as it addresses the
challenges of deregulation.
In a series of orders issued in dated July 14, 1994, February
3, 1995, October 27, 1995, and October 9, 1996 (Holding Co. Act
Release Nos. 26085, 26229, 26401, and 26590 respectively),
Allegheny then d.b.a. Allegheny Power System, was authorized,
among other things, to organize and finance Allegheny Ventures,
Inc., then d.b.a. AYP Capital, to engage and invest, directly or
indirectly, in development activities with respect to: (i)
qualifying cogeneration facilities and small power production
facilities ("SPPs"); (ii) non-qualifying cogeneration facilities,
non-qualifying SPPs, and independent power production facilities
located within the service territories of Allegheny regulated
companies; (iii) exempt wholesale generators; (iv) companies
involved in new technologies related to the core business of
Allegheny; (v) foreign utility companies; (vi) provide consulting,
<F1> Holding Co. Act Release No. 27101 (November 12, 1999).
<F2> See Holding Co. Act Release No. 27121, Order Authorizing
Retention of Assets (December 23, 1999).
<F3> See File No. 70-9625, Application of Monongahela Power Company
to Acquire 100% of the Securities of Mountaineer Gas (filed Feb.
4, 2000).
<F4> See File No. 70-9627, Application of The Potomac Edison Company
to Transfer Assets (filed Feb. 11, 2000).
<F5> Potomac Edison, along with West Penn Power Company and
Monongahela Power Company collectively d/b/a Allegheny Power
deliver electric and gas energy to about 1.4 million customers in
parts of Maryland, Ohio, Pennsylvania, Virginia, and West
Virginia.
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energy management, and demand-side management services.<F6>
Allegheny now seeks to form and finance one or more entities under
Allegheny Power to engage in Rule 58 activities.
C. Discussion
1. Form and Invest in Allegheny Advantages and
Subsidiaries
Allegheny seeks authorization to organize Allegheny
Advantages as a wholly owned subsidiary. Allegheny Advantages
will do business as an Allegheny Power company. Additionally,
Applicants seek authority for Allegheny Advantages to form special
purpose subsidiaries and to, directly or indirectly, engage in
Rule 58 activities within the United States.
Allegheny Advantages, directly or indirectly, proposes to
offer the following types of unregulated services to customers in
the United States and abroad: consulting services; forestry
services; meter data usage; emergency service restoration;
billing; meter reading; distributed generation; construction and
maintenance of transmission and distribution facilities (such as
substations) owned by customers or other third parties; mutual
assistance; advertising; vegetation control; power quality;
lighting; call center operations; customer and account management;
heating, ventilation and air conditioning; electro technologies;
home security; service contracts; appliance warranties;
information technology financing and leasing; and, other similar
projects. Allegheny also seeks authority to invest in Allegheny
Advantages an aggregate amount not to exceed $25 million.
2. Other Investments
Allegheny and Allegheny Advantages seek additional authority
to, directly or indirectly through to-be-formed subsidiaries as
authorized herein, make multiple de minims investments in certain
core and non-core activities. Total investment in such
subsidiaries of Allegheny Advantages shall not exceed $35
million. Aggregate investment under this application will not
exceed $60 million.
(a) Housing Credits
Allegheny Advantages seeks to invest in federal affordable
housing credits. Investments will take the form of an equity
pledge to the partnership. A third party will finance this pledge
by advancing cash to the partnership. Applicant proposes to repay
the third party with interest from funds derived from its share of
the tax benefits enjoyed by the partnership. The amount to be
invested in federal affordable housing credits is expected not to
exceed $10 million for any one investment. Allegheny Advantages
will evaluate future partnership opportunities on an individual
basis in order to determine investment amounts.
<F6> Now collectively referred to as Rule 58 activities.
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(b) Joint Ventures
(1) Wires Recycling/Business Consulting Services
Allegheny Advantages proposes to make an investment in and/or
enter into a joint venture with Versatile Processing, Inc. ("VPI")
to develop commission revenues from marketing a process in
conjunction with a scrap metal processor and a wire vendor,
whereby customers of the scrap metal processor and/or the wire
vendor can reduce their wire replacement costs. VPI is a
privately held company engaged in the recycling of scrap, obsolete
or excess wire and cable. VPI holds an interest in Transformer
Decommissioning, LLC ("TDL") that provides services such as
testing, evaluating and decommissioning transformers. Allegheny
Advantages' contribution to the joint venture will be to provide
financial expertise.
(2) Forestry/Consulting Services
Allegheny Advantages, using to-be-formed subsidiaries,
proposes to enter into one or more joint ventures with
Environmental Consultants International, Limited ("ECIL") a
private company limited by shares and registered in the United
Kingdom. ECIL and Allegheny Advantages plan to coordinate efforts
and jointly market their combined expertise in managing vegetation
control to utility companies in Europe, Australia and New Zealand.
Allegheny Advantages' participation would be limited to providing
consulting and forestry services to Coops, Municipal utilities,
and private corporations including electric, gas, and
telecommunication companies. The parties also plan to offer
services to agencies and corporations responsible for maintaining
highways, railroads, airports and industrial sites.
(3) Information Technology Service Subsidiaries
Applicants seek authorization to form and invest in special
purpose subsidiaries for the purpose of providing business and
technology integration and consulting services to utility and
related industries. The services would utilize core skills and
expertise relating to process design and technology integration.
D. Service Agreements
Allegheny Advantages, and the other to-be-formed subsidiaries
will not have paid employees. Personnel employed by Allegheny
Energy Service Corporation ("AESC") will provide services.
Allegheny Advantages seeks authority to enter into service
agreements with AESC and the Allegheny Power companies to cover
use by Allegheny Advantages and the other to-be-formed
subsidiaries of personnel and utility-owned tools and equipment.
All services will be at cost and in accordance with Rules 90 and
91 under the Act. AESC will account for, allocate and charge its
costs of these services provided on a full cost reimbursement
basis under a work order system consistent with the Uniform System
of Accounts for Mutual and Subsidiary Service Companies. The time
of employees will be billed Allegheny Advantages, or the to-be-
formed subsidiaries, and paid by each on a monthly basis based
upon time records. Allegheny Advantages and the to-be-formed
subsidiaries will maintain separate financial records and detailed
supporting records.
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E. Financing
Allegheny proposes to invest in Allegheny Advantages, and
Allegheny or Allegheny Advantages propose to invest in the to-be-
formed subsidiaries up to an aggregate of $60 million through
December 31, 2008. Allegheny and Allegheny Advantages propose to
obtain loans from banks or issue other recourse obligations,
guaranteed by Allegheny or Allegheny Advantages.<F7> Loans from
Allegheny would mature by December 31, 2008 and would bear a fixed
interest rate equal to a rate not above the prime rate in effect
on the date of the loan at a bank designated by Allegheny. Loans
from third parties would mature by December 31, 2008 and would
bear a fixed interest rate not above 3% over the prime rate at a
U.S. money center bank to be designated by Allegheny. Allegheny
would guarantee notes sold to such parties.
Item 2. Fees, Commissions, and Expenses
Fees and expenses in the estimated amount of $20,000 are
expected to be incurred in connection with the proposed
transactions plus ordinary expenses not over $500 in connection
with the preparation of this Application. None of the fees,
commissions or expenses is to be paid to any associate or
affiliate company of Allegheny or any affiliate of any such
associate company except for legal, financial and other services
to be performed at cost.
Item 3. Applicable Statutory Provisions
This application is subject to Sections 6(a), 7, 9(a), 10,
12(a)&(b), and 13 of the Act and Rules 45, 53, 54, and 58 under
the Act.
A. Sections 6, 7, 12, and Rule 45
Sections 6, 7, and 12 of the Act and Rule 45 under the Act
collectively governs and requires prior Commission approval for
the sale and issuance of securities, borrowing from, extending
loans to, issuing guarantees on behalf of or providing credit to
companies within the Allegheny system.
B. Section 9 and 10
Sections 9 and 10 govern, and requires prior Commission
approval for, the acquisition of interests, securities, or assets.
C. Section 13(b) Compliance
Section 13(b) of the Act provides that:
It shall be unlawful for any subsidiary company of
any registered holding company or for any mutual
service company, by use of the mails or any means
or instrumentality of interstate commerce, or
otherwise, to enter into or take any step in the
performance of any service, sales, or construction
contract by which such company undertakes to
<F7> Such third-party borrowings that are guaranteed by Allegheny or
Allegheny Advantages would be subject to the $60 million
investment authority.
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perform services or construction work for, or sell
goods to, any associate company thereof except in
accordance with such terms and conditions and
subject to such limitations and prohibitions as
the Commission by rules and regulations or order
shall prescribe as necessary or appropriate in the
public interest or for the protection of investors
or consumers and to insure that such contracts are
performed economically and efficiently for the
benefit of such associate companies at cost,
fairly and equitably allocated between such
companies.
Any transactions between Allegheny Advantages, the to-be-
formed subsidiaries, and AESC shall be in compliance with section
13(b) of the Act and Rules 90 and 91 under the Act.
D. Rule 58
The Act prohibits registered companies (corporate structures
under which a parent company owns or controls public utilities)
and the subsidiaries of such companies from owning, investing in,
or engaging in certain non-utility activities unless prior
authorization has been requested and granted. Rule 58 is an
exception to the general prohibition. The rule provides that
without requesting the approval of the Securities and Exchange
Commission, a registered holding company (Allegheny) or any of its
subsidiaries (such as the Allegheny Power companies) may acquire
the securities of (invest in) a non-utility energy related
company. An "energy related company" is defined as a company that
derives substantially all of its revenues from defined activities.
Under Rule 58 an "energy related company" is defined as a company
that derives substantially all of its revenues from one of the
following activities within the United States:
(i) The rendering of energy management services and demand-side
management services;
(ii) The development and commercialization of electrotechnologies
related to energy conservation, storage and conversion, energy
efficiency, waste treatment, greenhouse gas reduction, and similar
innovations;
(iii) The ownership, operation, sale, installation and
servicing of refueling, recharging and conversion equipment and
facilities relating to electric and compressed natural gas powered
vehicles;
(iv) The sale of electric and gas appliances; equipment to promote
new technologies, or new applications for existing technologies,
that use gas or electricity; and equipment that enables the use of
gas or electricity as an alternate fuel; and the installation and
servicing thereof;
(v) The brokering and marketing of energy commodities, including
but not limited to electricity, natural or manufactured gas and
other combustible fuels;
(vi) The production, conversion, sale and distribution of thermal
energy products, such as process steam, heat, hot water, chilled
water, air conditioning, compressed air and similar products;
alternative fuels; and renewable energy resources; and the
servicing of thermal energy facilities;
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(vii) The sale of technical, operational, management, and
other similar kinds of services and expertise, developed in the
course of utility operations in such areas as power plant and
transmission system engineering, development, design and
rehabilitation; construction; maintenance and operation; fuel
procurement, delivery and management; and environmental licensing,
testing and remediation;
(viii) The development, ownership or operation of ``qualifying
facilities,'' as defined under the Public Utility Regulatory
Policies Act of 1978, as amended (``PURPA''), and any integrated
thermal, steam host, or other necessary facility constructed,
developed or acquired primarily to enable the qualifying facility
to satisfy the useful thermal output requirements under PURPA;
(ix) The ownership, operation and servicing of fuel procurement,
transportation, handling and storage facilities, scrubbers, and
resource recovery and waste water treatment facilities; and
(x) The development and commercialization of technologies or
processes that utilize coal waste by-products as an integral
component of such technology or process; Provided, That any
company engaged in the activities specified in paragraphs
(b)(1)(ii), (b)(1)(iii) with respect to electric powered vehicles,
(b)(1)(vi), (b)(1)(ix) or (b)(1)(x) of this section, shall be an
``energy-related company'' for purposes of this section only if
the securities of such company are acquired, directly or
indirectly, by a registered holding company whose public-utility
company subsidiaries are primarily electric utility companies; and
Provided further, That any company engaged in the activities
specified in paragraph (b)(1)(iii) of this section with respect to
compressed natural gas powered vehicles, shall be an ``energy-
related company'' for purposes of this section only if the
securities of such company are acquired, directly or indirectly,
by a registered holding company whose public-utility company
subsidiaries are primarily gas utility companies.8
Separate authority is necessary to engage in Rule 58 type
activities as opposed to investing in Rule 58 companies. By this
application, applicants seek authority to directly or indirectly
engage in Rule 58 activities.
E. Rule 54
Rule 54 provides that the Commission, in determining whether
to approve certain transactions by such registered holding company
or its subsidiaries other than with respect to exempt wholesale
generators ("EWGs") and foreign utility companies ("FUCOs"), will
not consider the effect of the capitalization or earnings of any
subsidiary which is an EWG or FUCO upon the registered holding
company system if the provisions of Rule 53(a), (b) and (c) are
satisfied. At December 31, 1999, Allegheny's average consolidated
retained earnings were approximately $897 million, and Allegheny's
aggregate investment in EWGs and FUCOs was approximately $4.2
<F8> See Rule 58.
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million. Accordingly, Allegheny may invest up to approximately
$448.5 million or an additional $444.3 million (50% of Retained
Earnings less existing investment) in EWGs and FUCOs as of
December 31, 1999. When the Transaction is consummated, for
purposes of compliance with Rule 54, Allegheny's aggregate
investment in EWGs and FUCOs will not exceed 50% of its
consolidated retained earnings and the provisions of Rule 53(a)
will be satisfied.
Allegheny further states that for purposes of Rule 54, that
the conditions specified in Rule 53(a) are satisfied and that none
of the conditions set forth in rule 53(b) exist or will exist as a
result of the proposed Transaction. As a result, the Commission
will not consider the effect on Allegheny subsidiary that is an
EWG or FUCO, as each is defined in sections 32 and 33 of the Act,
respectively, in determining whether to approve the proposed
transactions.
Item 4. Regulatory Approval
No state or federal commission, other than this Commission,
has jurisdiction over the proposed transactions.
Item 5. Procedure
Allegheny waives any recommended decision by hearing officer
or by any other responsible officer of the Commission and waives
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 becomes effective upon issuance.
Allegheny consents 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 (to be filed by amendment)
F Opinion of Counsel (to be filed by amendment)
G Financial Data Schedules (to be filed by
amendment)
H Form of Notice - attached
(b) Financial Statements as of March 31, 2000
FS-1 Allegheny Energy,
Inc. balance sheet, per books and pro forma
(to be filed by amendment).
FS-2 Allegheny Energy, Inc.
statement of income and retained earnings, per
books and pro forma (to be filed by
amendment).
Item 7. Information as to Environmental Effects
(a) For the reasons set forth in Item 1 above, the
authorization applied for herein does not require major federal
action significantly affecting the quality of the human
environment for purposes of Section 102(2)(C) of the National
Environmental Policy Act (42 U.S.C. 4232(2)(C)).
(b) Not applicable.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the undersigned Applicants have
duly caused this statement to be signed on their behalf by the
undersigned thereunto duly authorized.
ALLEGHENY ENERGY, INC.
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
ALLEGHENY ENERGY SERVICE CORPORATION
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
Dated: June 7, 2000
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