File No. 70-9627
(Potomac Edison Asset Transfer)
Leaseback
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFFECTIVE AMENDMENT NO. 2
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Energy, Inc. Allegheny Energy Supply Company, LLC
10435 Downsville Pike R.R. 12, P.O. Box 1000 Roseytown Road
Hagerstown, Maryland 21740 Greensburg, Penna. 15601
The Potomac Edison Company Allegheny Energy Service Corporation
(d/b/a Allegheny Power) 10435 Downsville Pike
10435 Downsville Pike Hagerstown, Maryland 21740
Hagerstown, Maryland 21740
__________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 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
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
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Item No. 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Introduction and Summary of the Proposed Transaction
Allegheny Energy, Inc. ("Allegheny"), a registered holding
company, Allegheny Energy Service Company ("AESC"), a service
subsidiary of Allegheny, The Potomac Edison Company ("Potomac
Edison"), a wholly owned public utility electric subsidiary of
Allegheny, and Allegheny Energy Supply Company, LLC ("Genco"),<F1> a
wholly owned generating company subsidiary of Allegheny
(collectively, "Applicants"),<F2> hereby file this application-
declaration with the Securities and Exchange Commission
("Commission") under Sections 9(a), 10 and 12(d) of the Act.
Sections 9 and 10 of the Act and rule 54 under the Act.
In Holding Company Act Release No. 27205, Order Authorizing
Formation of Subsidiary Companies; Transfer of Assets and
Liabilities to Associate Generation Company; Issuance of Notes;
Payment of Dividends; Intrasystem Service Agreements; Reservation
of Jurisdiction (July 31, 2000) ("Transfer Order"), the Commission
authorized Potomac Edison to transfer its undivided ownership
interests in certain jointly held generating facilities, certain
wholly owned generating facilities, related fixed assets, other
interests, and certain generating related liabilities to
Allegheny's wholly owned generation company - Genco. Pursuant to
the terms and conditions set forth above, Potomac and Genco now
propose to enter into a leaseback agreement to resolve state
regulatory concerns related to taxation of generation and
distribution.
Potomac Edison held at the date of the Transfer Order
undivided ownership interests in: electric generating stations
("Generating Assets").<F3> Potomac Edison's undivided ownership
interests in Generating Assets consist of: a 25% interest
in the Fort Martin Power station located in Maidsville, West
Virginia; a 33% interest in the Albright Power Station
located in Albright, West Virginia; a 32.76% interest in
the Harrison Power Station located in Shinnston, West
Virginia; a 20% interest in the Hatfield's Ferry Power Station
located in Masontown, Pennsylvania; a 30% interest in the
Pleasants Power Station, located in Saint Mary's, West
Virginia; a 100% interest in the R. Paul Smith Station and R. Paul
_______________________________
<F1> See Allegheny Energy, Inc., Holding Co. Act Release No.35-27101,
Order Authorizing Formation of Subsidiary Company; Transfer of
Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999). In Application No. 70-9683 (filed May 25,
2000), Genco, among other things, is seeking authorization to,
directly or indirectly through one or more exempt subsidiaries or
intermediate companies, engage in Rule 58 activities; acquire
interests in, finance the acquisition of, and/or hold the
securities of, one or more Exempt Wholesale Generators ("EWGs").
Genco is not an EWG nor are there any plans for Genco to become an
EWG.
<F2> 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. Allegheny Power, together with Genco, which operates
and markets competitive retail and wholesale electric generation
and operates regulated electric generation for its affiliates, and
Allegheny Ventures, which actively invests in and develops energy-
related and telecommunications projects through Allegheny
Communications Connect ("ACC"), an exempt telecommunications
company ("ETC"), make up the Allegheny system.
<F3> The term "Generating Assets" does not include Potomac Edison's
100% interest in the Luray, Newport, Shenandoah, and Warren
hydroelectric generating stations located in Virginia ("Virginia
Hydros") or the Riverton property, which together represent less
than 1% of the total net book value.
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Smith Ash Basin both located in Williamsport, Maryland; and a 100%
interest in the Millville, Dam #4 and Dam #5 hydro stations in
located in West Virginia.<F4>
Potomac Edison and Genco propose to enter into a leaseback
agreement to allow AE Supply to lease to Potomac Edison a fixed
amount of the 425 MW nameplate rating of the Albright, Fort
Martin, Harrison, and Pleasants facilities which is the equivalent
of 29% of Potomac Edison's former interest in those facilities to
comply with the requirements of the West Virginia State Tax
Department to eliminate the potential for the imposition of a
$380,000 per month distribution tax on both Potomac Edison and
Genco, that would otherwise be incurred if the lease hadn't been
undertaken. The amounts payable by Potomac Edison under the lease
described in this section will be computed in accordance with
Rules 90 and 91 under the Act and other applicable rules and
regulations. During the lease, Genco will operate that portion
of the Generating Assets leased to Potomac Edison pursuant to
operating agreements previously approved by this Commission in
Holding Company Act Release No. 27205.
West Virginia imposes two taxes upon corporations in the
business of selling electricity in the state: (1) a tax is imposed
on businesses generating or producing electricity using generating
units in the state that are leased or owned; and (2) a tax is
imposed on businesses that sell electricity not generated or
produced in the state." See West Virginia Code section 11-13-
1o(b)(1) and (2). Section 11-13-1o(b)(2) provides for: "a credit
against the amount of tax due . for any electric power generation
taxes or a tax similar to the tax imposed [under this subsection]
. with respect to such electric power in the state in which such
power was generated or produced." As determined by the West
Virginia Chief Administer for Revenue Operations [See Exhibit B-
13], the leasing of generating capacity by Potomac Edison falls
within the statutory requirement for generation that offsets
distribution by an owner or lessor of the generating unit.
Therefore, under the leaseback agreement, Potomac Edison as a
seller can offset the tax imposed under Section 11-13-2o-(b)(2).
The leaseback agreement will eliminate the tax on Potomac Edison,
allow Potomac Edison to fulfill its regulatory obligations in West
Virginia, and allow the Allegheny system to avoid double taxation
on the generation and distribution of energy in West Virginia and
resulting in a monthly savings of $380,000 or a savings of
approximately $1.9 million for the last five months of the year
2000 reflecting the tax assessed against Genco.
Item 2. FEES, COMMISSIONS AND EXPENSES
Fees and expenses in the estimated amount of less than $500
are expected to be incurred 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
The proposed transaction is subject to Sections 9(a), 10 and
12(d) of the Act. Sections 9 and 10 of the Act and rule 54 under
the Act are applicable as this transaction involves conveyance of
a leasehold interest in a utility asset. Section 9(a)(1) provides
that unless the acquisition has been approved by the Commission
<F4> The jurisdictional allocation is calculated as follows, for
example using Maryland - the value of Potomac Edison's undivided
interest in the Fort Martin Power Station would be calculated by
multiplying the 56.34% Maryland allocation by the dollar value of
Potomac Edison's 25% undivided interest in Fort Martin on June 30,
2000.
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under Section 10, it shall be unlawful for any registered holding
company or any subsidiary company thereof "to acquire, directly or
indirectly, any securities or utility assets or any other interest
in any business." Rules 90 and 91 require that the transaction be
at cost. Applicants believe that the proposed transaction satisfy
the standards of the Act and the Rules under the Act.
The transaction complies with all applicable state laws and,
as described above, is in response to state law - the West
Virginia Tax Code, and does not tend toward interlocking relations
or the concentration of public utility companies. Moreover, the
overall asset transfer [as previously authorized in the Transfer
Order] is a part of the deregulation and introduction of
competition in the retail electrical generation markets of West
Virginia and has been enacted specifically in the public interest
and the interests of investors and consumers; as the transactions
described herein are being effected to comply with and to further
such legislative initiatives, this transaction likewise should be
deemed in the public interest and the interests of investors and
consumers.
The consideration to be paid in connection with this
transaction is fair and reasonable by operation of Rules 90 and 91
and as evidenced by the approval of the West Virginia Tax
Department. See Exhibit B-13, Approval Letter from the West
Virginia State Tax Department.
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 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. Concerning Rules 53 and
54, as of September 30, 2000, Allegheny's consolidated retained
earnings were approximately $917.6 million, and Allegheny's
aggregate investment in EWGs and FUCOs was approximately $27.5
million. The proposed financing arrangements will be structured
so that Allegheny's "aggregate investment" in EWGs and FUCOs will
not exceed 50% of the system's consolidated retained earnings
(approximately $458.8 million). The conditions specified under
Rule 53(a) are otherwise satisfied and none of the conditions set
forth in Rule 53(b) exist or will exist as a result of the
proposed financing transactions.
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. The conditions will be
unaffected by this 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
Transaction.
Item 4. REGULATORY APPROVAL
Except as noted above, no state commission or federal
commission, other than this Commission, has jurisdiction over any
part of the proposed transactions.
Item 5. PROCEDURE
It is requested that the Commission's order granting this
Application or Declaration be issued on or before December 31,
2000. There should be no recommended decision by a hearing or
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other responsible officer of the Commission and no 30-day waiting
period between the issuance of the Commission's order and its
effective date. Applicants consent to the Division of Corporate
Regulation assisting in the preparation of the Commission's
decision and order in this matter, unless the Division opposes the
Transaction covered by this Application or Declaration.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
B-12 Form of Leaseback Agreement
(filed October 12, 2000)
B-13 Approval Letter from the West Virginia State Tax Department
(filed October 12, 2000)
F Opinion Letter (filed December 22, 2000).
H Form of Notice
(filed December 22, 2000).
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 Energy, Inc.
The Potomac Edison Power Company
Allegheny Energy Supply Company
Allegheny Energy Service Company
By: /S/ THOMAS K. HENDERSON
Thomas K. Henderson
Dated: December 22, 2000
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