Allegheny Energy RTO Compliance Report by nyb13813

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									                         UNITED STATES OF AMERICA
                                BEFORE THE
                  FEDERAL ENERGY REGULATORY COMMISSION

Allegheny Power                             )              Docket No. RT–____–____

                     ORDER NO. 2000 RTO COMPLIANCE FILING
                     AND PETITION FOR DECLARATORY ORDER

                                         I. Introduction

              Pursuant to Section 35.34 of the Commission's Regulations, 18 C.F.R. § 35.34

(2000), Allegheny Energy Service Corporation, as agent for Monongahela Power Company, The

Potomac Edison Company, and West Penn Power Company, all doing business as Allegheny

Power (hereafter "Allegheny"), hereby files this report in compliance with the requirements of

the Commission's Order No. 2000. In this report Allegheny 1) will describe the choices it faces,

the decisions it has made to date, the main factors affecting its future decisions, the status of

negotiations it has undertaken in order to achieve compliance within the timeframe required by

Order No. 2000, and 2) requests guidance from the Commission in the form of a declaratory

order regarding a "PJM West" proposal outlined herein, which would begin operation no later

than December 15, 2001.

              Allegheny requests that copies of all future correspondence and pleadings in these

proceedings be served upon the following:

       Karl Pfirrmann                               Leonard W. Belter, Esq.
       Vice President, System Planning              Winston & Strawn
        & Operations                                1400 L Street, N.W.
       Allegheny Power                              Washington, D.C. 20005-3502
       800 Cabin Hill Drive                         (202) 371-5701
       Greensburg, PA 15601-1689                    lbelter@winston.com
       (724) 838-6543
       kpfirrm@alleghenypower.com
                                 II. The Choices Allegheny Faces

               Allegheny has four possible methods of complying with Order No. 2000:

               1)      Join or associate with the Midwest ISO;

               2)      Join or associate with the Alliance;

               3)      Join or associate with PJM; or

               4)      Form its own regional transmission organization (RTO).

               Allegheny has rejected joining the Midwest ISO, primarily because Allegheny is

not contiguous with the Midwest ISO. The problems which arise from non-contiguity make it

impractical for Allegheny to consider joining or associating with the Midwest ISO. Allegheny

has also rejected forming its own RTO. This leaves joining or associating with either the

Alliance or PJM.     Allegheny has not made a final decision between the Alliance and PJM.

Allegheny will herein describe the considerations which affect its decision and its proposed

course of action.

                                  III. The Recent Alliance Filing

               The Alliance Companies made a compliance filing on September 15, 2000 which

raised a number of significant issues which are currently pending before the Commission for

resolution. Allegheny cannot make an intelligent choice as to whether to join or associate with

the Alliance until the Commission acts upon that filing. For example, until the Commission acts

upon the transition rate aspect of the recent Alliance filing, Allegheny cannot estimate the

financial implications of joining the Alliance.

               In addition to rate aspects, of course, Allegheny needs to know if the Commission

will find that the Alliance meets all other Order No. 2000 RTO requirements.            Clearly,




                                                  2
Allegheny cannot make an intelligent choice until the Commission rules upon the adequacy of

the Alliance Companies' September 15, 2000 compliance filing.

                        IV. Key Factors Affecting Allegheny's Decision

              Allegheny's choice is heavily influenced by three overriding factors.        First,

Allegheny favors independent transmission companies (ITCs) and disfavors allowing its

significant dollar investment in transmission facilities to be controlled and operated by a

nonprofit independent system operator (ISO) structure. In Allegheny's judgment, the Alliance

structure presents an attractive vehicle with respect to this factor. Second, Allegheny favors a

sophisticated market-based congestion management scheme and spot-market power exchange. In

Allegheny's judgment, the spot market power exchange and related locational marginal price

(LMP) based congestion management scheme of PJM gives the proper price signals for

transmission. It represents a superior method of congestion management as opposed to the

inefficiencies inherent in calculations of transmission capacity, scheduling of through and out

system transactions, and resultant transmission loading relief (TLR) events. The so-called hybrid

congestion management scheme, consisting of a combination of LMP and flow-gate based

tracking and market redispatch concepts, has not yet been fully developed and explained nor

successfully demonstrated and is still vague in its applicable parameters. Allegheny sees little

point in actively pursuing new and untested congestion management schemes in its region when

the PJM LMP-based congestion management scheme and related power exchange have already

been demonstrated to be successful. Consequently, regarding the requirement for market-based

congestion management, Allegheny views the PJM approach as superior.

              Third, Allegheny's decision is also critically affected by the impact of its choice

upon transmission revenues. In this respect, resolving the problem of losing significant amounts




                                               3
of point-to-point revenue as a result of elimination of transmission rate pancaking is of critical

importance to Allegheny. Like other transmission owners affected by the problem of pancake

elimination, Allegheny reviewed with considerable interest the recent Alliance Companies' filing

of September 15, 2000.       Based upon information provided by the Alliance Companies'

consultant, Allegheny believes that the pricing protocols in that filing are generally appropriate

and should be adopted by the Commission. As further described below, Allegheny contemplates

that in connection with an association with PJM described in section V herein (the PJM West

concept), the PJM rate schedules applicable to PJM West signatories must be coordinated with

the Alliance Companies' rate proposals in order to minimize pancaking. This will require a

seams/reciprocity agreement between the PJM West signatories and the Alliance members.

               In this context, Allegheny notes its concern that the Alliance proposal, which calls

for a transition adjustment only through the end of 2004, may not be adequate. As noted in the

Alliance Companies' proposal, a number of utilities have retail rate moratoriums extending

beyond this period, as does Allegheny. Attached hereto as Appendix A is a chart summarizing

the status of retail rate legislation and related settlements affecting Allegheny. As is noted on

that chart, Allegheny is subject to retail rate moratoriums in some states extending to July 2007.

Allegheny anticipates that, if the PJM West concept goes forward, it will be requesting at least a

5-year rate moratorium and related transition adjustment.

                             V. The PJM West Concept and Status

               Allegheny has had several negotiating/information gathering sessions with both

individual Alliance members and with the PJM Office of Interconnection (PJM OI). Those

sessions have been designed to enable Allegheny to analyze in detail the various options

available to Allegheny with respect to joining or associating with either the Alliance or the PJM.




                                                4
As a result of those discussions, Allegheny is actively pursuing an association with PJM which,

for ease of reference, will hereinafter be referred to as "PJM West". As further described herein,

Allegheny believes that the PJM West alternative has the potential to provide significant benefits

which combine the best aspects of both PJM and the Alliance in a fashion which would benefit

both Allegheny and the public at large.

               Allegheny specifically requests Commission guidance in the form of a declaratory

order with respect to its ability to meet the requirements of Order No. 2000 on the basis of the

PJM West concept as described herein. Allegheny hereby advises the Commission that it will

make a final decision between its two alternatives within 45 days after the Commission issues its

decisions with respect to 1) the issues raised by the recent Alliance compliance filing and 2) its

guidance with respect to the PJM West proposal detailed below. As detailed in section X herein

(Timetable) this will enable compliance by December 15, 2001.

                             VI. PJM West - Status of Negotiations

               Given Allegheny's desire to tailor any association with PJM to meet the particular

circumstances of Allegheny and other potential PJM West signatories, Allegheny is currently

involved in negotiations with the PJM OI to develop a contract which will enable the

implementation of the PJM West concept.1 At this stage Allegheny and PJM OI have achieved a

written memorandum of agreement (MOA) with an accompanying detailed term sheet

committing Allegheny and PJM to negotiate a definitive agreement, incorporating all aspects of

the term sheet, by February 1, 2001. This MOA (attached hereto as Appendix B) has been

executed by Allegheny and has been approved by the PJM Independent Board of Directors.



1
       The PJM OI has authority to enter into contracts sufficient or appropriate to carry out its
purposes.



                                                 5
              The MOA recognizes that any resulting definitive agreement will be subject to

acceptance by Allegheny and by the PJM Independent Board at such time as it is completed.

The MOA commitment to negotiate and finalize a definitive agreement by February 1, 2001 is

needed in order to make the PJM West concept a viable option within the timeframe required by

Order No. 2000. As further described in Section VII, the final definitive written agreement will

achieve compliance with Order No. 2000 by adopting by reference (with the possibility of minor,

necessary, but non-material, exclusions) 1) the current PJM transmission owners agreement and

2) the current PJM operating agreement, while creating 3) a new reliability assurance agreement

applicable to PJM West which recognizes differences in NERC reliability council reserve and

other requirements peculiar to the potential PJM West area.

              The purpose of the PJM West approach is to 1) secure the benefits of a wider PJM

spot-market power exchange, including expanding the PJM congestion management scheme

based upon LMP to the Allegheny service territory and beyond; 2) tailor the arrangement to meet

the needs of Allegheny and other utilities located to the west of PJM; 3) allow a mechanism for

rapid future development and expansion of the PJM Market in a fashion which accommodates

ITC operation, with appropriate recasting of functions with FERC approval at such time as any

independent transmission company or companies are formed; and 4) resolve the revenue loss

problem associated with elimination of transmission rate pancaking, while 5) accommodating the

transition charges needed by both PJM West signatories and Alliance Companies without

unnecessary pancaking.

              Of particular significance to this status report and the potential timetable for

future implementation are the representations made to Allegheny in the course of its discussions

with PJM OI regarding the timing of expansion of the PJM market.            Attached hereto as




                                               6
Appendix C is a letter and accompanying paper provided to Allegheny by the PJM OI setting out

in detail both the timing and the method for expanding the PJM market to Allegheny and

potentially to other areas. As noted therein, PJM represents that it is able to expand the PJM

market operation over multiple new control areas within a 6-9 month timeframe. PJM's ability to

make such a representation reflects both the successful current operation and experience of PJM

and the inherent advantages of expanding an already proven system to new areas, rather than

starting from scratch.

                                VII. The PJM West Structure

               The key elements of the PJM West concept are as follows:

               Division of the PJM West structure into a Phase I and Phase II with Phase I

representing the current status of utility organization and PJM structure, and Phase II

representing the contemplated situation when, and if, an ITC is formed within PJM West.

               The term sheet indicates that during Phase I the structure will consist of a

definitive agreement between Allegheny (and other potential signatories) and PJM under which

the signatory transmission owner(s) bind themselves to the currently existing PJM transmission

owners agreement and PJM operating agreement (with certain non-material exceptions) within

the existing PJM. Thus, in effect, the PJM West signatories become bound by the provisions of

those agreements as if they had actually executed them. With respect to the third currently

existing PJM constitutive document, the reliability assurance agreement (RAA), there will be a

new RAA governing the PJM West area. This new RAA is necessary to recognize differences

between ECAR and MAAC primarily in the area of reserve responsibilities. When the definitive

agreement is completed, it will have to recognize and address security coordinator and other

issues arising, because the PJM area will, at least initially, cover multiple NERC reliability




                                              7
council regions. It is also recognized that to the extent this concept expands beyond the ECAR

and MAAC regions, other regional councils may become involved. The term sheet recognizes

this and states that there is an end-state objective of having a single security coordinator and

single regional reliability council, which may take some time to develop.

               The term sheet indicates that PJM will be responsible for administering a single

PJM open-access tariff, will incorporate the PJM West systems into its OASIS, will be

responsible for regional transmission planning, will be the security coordinator, but also

recognizes that the transmission owners have certain rights with respect to filing of rates

applicable to their zones within PJM.

               With respect to rates, the term sheet mirrors the current existing situation within

the existing PJM in calling for a zonal rate, which PJM will administer, applicable to the PJM

West signatories, while incorporating them within the PJM market structure.            The PJM

Companies made their RTO Compliance Filing, including a package of rate protocols

implementing their desire to allow for innovative rate proposals, on October 11, 2000.

Allegheny supports the PJM pricing protocols contained in that filing.

               The term sheet specifically authorizes an innovative rate proposal which is

required to be allowed in the final definitive agreement (Appendix B,para.6H).. Under this rate

proposal, transmission owners will be authorized to offer firm transmission service, over and

above that which is authorized by PJM. They do so at their own financial risk. This can be

accomplished because, within PJM, the cost associated with firming transactions which would

otherwise be considered non-firm consists almost exclusively of congestion charges.

Transmission owners should be given the incentive to make better use of the transmission system

by taking financial risks (not security risks) associated with offering more firm transmission




                                                8
service than would an ISO-type independent operator of the system. This proposal is designed to

reflect this key aspect of an ITC.

               Finally, while the term sheet discusses the Phase II concept, it specifically

recognizes that before any functions currently performed by PJM are transferred to an ITC, this

Commission's approval under section 203 of the Federal Power Act is required. The parties

agree to complete the definitive written agreement by February 1, 2001.

                                     VIII. RTO Requirements

               The PJM West concept, in conjunction with the existing PJM arrangements as

described in the PJM RTO compliance filing, will enable Allegheny, as a member of PJM West,

to meet its RTO requirements including all of the minimum RTO characteristics and functions.

A.     RTO Characteristics:


               1.      Independence - The PJM current structure, including its independent

Board of Directors, will enable PJM West signatories to meet the independence requirements.

The only difference between PJM West signatories and the current owners will be in the

reliability assurance agreement recognition of different reserve requirements, and perhaps other

requirements, associated with different NERC reliability regions.

               2.      Scope and Regional Configuration - The adequacy of PJM regional scope

is discussed in detail in the PJM RTO compliance filing. The PJM West concept can only

improve the regional scope of PJM. In this context, Allegheny reiterates its request that the

Commission encourage expansion of the PJM West market into the Alliance area.

               3.      Operational Authority - PJM will be the security coordinator for the PJM

West signatories. Appendix C discusses the means by which the PJM market will be expanded

over multiple control areas. The PJM West signatories will be subject to all of the material



                                                9
requirements of the existing transmission owners agreement and the operating agreement of

PJM, effectively transferring functional control over their transmission facilities to PJM.

               4.      Short Term Reliability - PJM will have the short term reliability function.

This function is further described in the PJM RTO compliance filing.

B.     Functions of RTOs

               1.      Tariff Administration and Design - PJM will be the sole provider of

transmission service and the administrator of a single PJM open access transmission tariff

(OATT). Within that OATT there will be separate rate schedules applicable to the PJM West

signatories, including zonal access charges, and charges which may result from any inter-

regional cooperation agreement between the PJM West signatories and the Alliance Companies.

               2.      Congestion Management - The Commission is familiar with PJM's LMP-

based congestion management scheme. As noted herein, Allegheny asks the Commission to

encourage Alliance Companies and others to accept expansion of the PJM market structure,

including its LMP based congestion management scheme.

               3.      Parallel Path Flow - Parallel path flow between the Mid-Atlantic,

Northeast, Eastern Canadian and Northern Mid-Western regions has long been recognized to be

a problem. The formation and affiliation of PJM West, with the existing PJM region, advances a

solution to this problem. While not totally resolving the issue, FERC can advance a total

solution by encouraging others to accept the expansion of the PJM Market and associated

congestion management scheme.

               4.      Ancillary Services - PJM operates as a provider of last resort for ancillary

services and will continue to do so for PJM West signatories.




                                                10
                 5.        OASIS, TTC and ATC - PJM will be the single OASIS administrator for

all transmission facilities under its control and will be responsible for calculating TTC and ATC

as further described in its compliance filing.

                 6.        Market Monitoring - PJM will be responsible for market monitoring as

described in its filing.

                 7.        Planning and Expansion - Again, the concepts of the existing PJM

transmission planning and expansion protocol will apply to PJM West signatories.

                 8.        Inter-Regional Coordination - As described in further detail in section IX,

the PJM West signatories recognize the need for an appropriate inter-regional cooperation

agreement with the Alliance Companies.

                                       IX. Inter-RTO Cooperation

                 In order to eliminate any rate pancaking for transactions from the Midwest ISO to

PJM (including PJM West signatories), while accommodating the Alliance filing, an inter-RTO

cooperation agreement between PJM West and the Alliance Companies is required.                    The

Alliance Companies' September 15, 2000 compliance filing recognizes (in Attachment P) the

need for, and encourages, such agreements.

                 It is Allegheny's view that the appropriate agreement would necessarily follow the

objectives set-out in section 4.2.1 of Attachment P to the Alliance Companies compliance filing

that there be:

                 ". . . a comprehensive proposal to provide a market-oriented
                 congestion management methodology that minimizes the effect of
                 the RTO boundaries and maximizes the ability to alleviate
                 congestion, in accordance with the guidelines of Order No. 2000."

                 In this respect, it is Allegheny's view that 1) Allegheny has an equal need and

right to transition charges to achieve revenue neutrality for the loss of pancaked transmission



                                                   11
charges, as does each of the Alliance Companies; 2) that there cannot be pancaked transition

charges for deliveries through both the Alliance and Allegheny; 3) that any such agreement must

recognize and deal with the fact that any PJM West signatories that associate with PJM will be

inside PJM for purposes of transactions that occur entirely within PJM, i.e. wherein only

congestion charges apply; and 4) that an agreement must be achieved in timely fashion to allow

the proposal to go forward. In this respect, there is nothing to prevent any such agreement from

being implemented in a fashion which maintains the one stop shopping requirement of Order No.

2000. Any resulting rates applicable to the Allegheny zone, for example, which incorporate

Alliance Companies' pricing and/or revenue distribution protocols, could be administered by

PJM with some of the resulting revenues distributed, in part, among Alliance Companies in

accordance with any agreement. Indeed, the Commission's open architecture requirements of

Order No. 2000 are designed precisely to accommodate such needed mechanisms.

               Allegheny asks the Commission, in its response to this filing, to encourage the

development of an inter-RTO cooperation agreement as suggested herein and in Allegheny's

October 13, 2000 comments on the Alliance Companies' compliance filing. As noted in that

pleading, those principles include: 1) non-discrimination, i.e. equal treatment of all transmission

owners with respect to recovering lost revenues; 2) no penalties to be imposed upon transmission

owners which join an efficient market based congestion management scheme which requires that

congestion charges be the only transmission costs associated for deliveries within the market;

and 3) disparate treatment of transmission owners based upon differences in congestion

management schemes from day one may be appropriate, particularly since the Alliance

Companies have the option to avail themselves of the expansion of the PJM Market.




                                                12
              Attached hereto as Appendix D is a rate protocol describing the elements of an

appropriate pricing cooperation agreement between the Alliance and PJM West which meets all

the above objectives. It treats all transmission owners fairly, allows for implementation of the

Alliance Companies' proposal while eliminating any possibility of creating two pancakes

between the Midwest ISO and PJM, and recognizes the expansion of the PJM market to include

PJM West.     Such an agreement would have the implicit effect of expanding the Alliance

Companies' regional scope, at least for transaction pricing purposes and should go a long way

toward alleviating the Commission's "toll booth" concerns respecting Alliance. Allegheny asks

the Commission to issue a ruling endorsing the Appendix D protocol in sufficient time (we note

and support the Alliance Companies' request for a December 15, 2000 response to their filing) to

allow any necessary incorporation into the definitive written agreement which Allegheny and

PJM contemplate will be achieved by February 1, 2001.

                                         X. Timetable

              In order to meet the Order No. 2000 implementation date of December 15, 2001,

a reasonably progressive timetable is necessary. As described above in Section VI, Allegheny

has achieved a term sheet MOA with PJM which calls for the negotiation and submittal to the

PJM Independent Board and to the Allegheny Board of a definitive written PJM West agreement

by February 1, 2001.

              While the time to negotiate this definitive agreement (October 5, 2000 - February

1, 2001) may not seem compressed, Allegheny cannot reasonably be expected to finalize and

execute any such agreement until the guidance of this Commission is received with respect to

both the Alliance compliance filing and to the PJM West concept proposal as detailed herein.

The February 1, 2001 date suggested herein allows time for finalization of the contract after the




                                               13
Commission issues its ruling (assuming the Commission's timetable is close to that suggested by

the Alliance Companies in their compliance filing - December 15, 2000).

               Assuming that this timetable is met, and the definitive PJM West agreement is

successfully achieved, Allegheny commits to filing such definitive agreement with this

Commission on or before March 1, 2001, 2 requesting a ruling by this Commission on or before

June 15, 2001. Most of the potential issues relating to such definitive agreement are already

before the Commission as a result of this filing, the Commission's knowledge of PJM, and the

PJM RTO compliance filing of October 11, 2000. As further described in Section VIII above,

the PJM West concept proposal meets Order No. 2000 requirements and the Commission can

rule on this, as well as its reaction to the Alliance Companies' compliance proposal, in the

timeframe within which Allegheny and PJM must negotiate their definitive agreement. Thus, the

three and one-half month timeframe (March 1 - June 15, 2001) for review by this Commission of

the actual final definitive written agreement should be adequate.

               Assuming a ruling on the definitive PJM West agreement is issued by June 15,

2001, PJM has advised Allegheny that the lead-time requirement for extending the PJM market

over multiple control areas, including Allegheny's and other potential signatories is a 6-9 month

timeframe (see Appendix C). Allegheny is willing to commence this process by March 1, 2001

while awaiting Commission review of the final PJM West definitive agreement. Thus, if the

Commission accepts the PJM West approach, and this proposed timetable, PJM West would

begin operation no later than December 15, 2001. In short, implementation of the PJM West

proposal by December 15, 2001 will require cooperation and encouragement from this

2
     As noted above (p.5) Allegheny commits to making a final choice within 45 days of the
Commission's rulings on the PJM West concept and on the Alliance Companies' compliance




                                                14
Commission, PJM, Allegheny and other potential PJM West signatories and the Alliance

Companies, but the end result in the public interest is clear. This Commission can materially

assist this process by specifically endorsing the concepts outlined herein, including inter-regional

pricing protocols, in a ruling on or about December 15, 2000.

                                         XI. Conclusion

               The PJM West proposal would provide joining entities and the public with

significant benefits. It would expand the successful PJM LMP-based congestion management

scheme and power exchange over a significant area to the west of the current PJM membership.

The PJM West concept would provide the independence required by Order No. 2000 and would

also provide a vehicle for transitioning to a structure in which the independence requirement may

be met by independent transmission companies (i.e. those with no association, ownership or

otherwise, with integrated utilities or other market participants.) Clearly this structure is an

appropriate end-state for purposes of assuring adequate long-term independence.

               Allegheny asks the Commission to specifically (1) declare that the PJM West

concept as detailed herein is sound in principle and meets the Commission's RTO requirements,

while reserving the Commission's right to review the final implementing documents at the time

they are filed (currently contemplated to be March 1, 2001), (2) indicate a willingness to effect a

timely ruling on those documents, (3) encourage other utilities to endorse the PJM West concept




filing. This would be on or before February 1, 2001 if the Commission rules by December 15,
2001 as requested.


                                                15
and (4) declare that the pricing protocol and related principles espoused herein (pp. 11-13)

applicable to the needed inter-RTO cooperation agreement are just and reasonable.

                                            Respectfully submitted,


                                            ________________________
                                            Leonard W. Belter, Esq.
                                            Winston & Strawn
                                            1400 L Street, N.W.
                                            Washington, D.C. 20005
                                            202-371-5701

                                            Thomas K. Henderson, Esq.
                                            Vice President and General Counsel
                                            Allegheny Energy
                                            10435 Downsville Pike
                                            Hagerstown, MD 21740-1766
                                            301-665-2703

                                            Attorneys for Allegheny Power

Dated: October 16, 2000




                                              16
APPENDIX A
                                  AP STATE LEGISLATION                                             Rev 7 July 25, 2000
                                                                                                          WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES      PENNSYLVANIA                      MARYLAND                        VIRGINIA                         OHIO                               WEST VIRGINIA
Implementation Date   Restructuring plan                Functional separation plan by   Restructuring plan               Functional separation plan by      Job protection plan due 6 mos
                      submitted by 9/30/97.             7/1/00.                         submitted by 1/1/01,             1/1/00.                            before start date.
                      Pilots to begin in 1997           Choice begins 7/1/00.           effective 1/1/02.                Transition plan due 1/5/00.        Choice begins on start date.
                      (began 11/97).                                                    Submit by 10/16/00 plan to       Join RTO by 1/1/01.                Functional separation by start
                      Choice begins 1/1/99.                                             join RTO by 1/1/01.              Choice begins 1/1/01.              date.
                                                                                        Choice begins 1/1/02.                                               Join RTO by 1/1/03, or file
                                                                                                                                                            FERC application by 1/1/02.
                                                                                                                                                            Corporate separation of
                                                                                                                                                            generation by 1/1/05.
Transition Period     Phase-in: 1/3 - 1/1/99            Phase-in:1/3 resid- 7/1/00      Phase-in from 1/1/02 thru        All custs have choice on start     All custs to have choice
                               2/3 - 1/1/00                      Ind/Com- 1/1/01        1/1/04.                          date (1/1/01). Market              beginning on start date, to be
                               All - 1/1/01                      2/3 resid- 7/1/01                                       development period thru            set after 1/1/01 following
                      By settlement: 2/3 choice by               All cust- 7/1/02                                        12/31/05, unless utility           enactment of tax changes and
                      1/1/99 and all by 1/1/00.         By settlement: All on 7/1/00.                                    requests earlier end date, and     implementing resolution by
                                                                                                                         shows effective competition or     Legislature.
                                                                                                                         20% switch.
Price Freeze/Cap      Cap for shorter of 54 months      Cap from 7/1/00 - 7/1/04        Cap from 1/1/01 - 7/1/07, with   Capped during market               Capped for 1st 4 years, subject
                      or until CTC recovery                                             one-time T&D increase            development period                 to opener for significant
                      complete.                         By settlement: T&D capped       possible after 1/1/04.           (generally, 1/1/01-12/31/05),      financial effects, incl financial
                      Generation component capped       thru 2004. C and I generation                                    initially adjusted for tax         condn of gen assets of util or
                      for shorter of 9 years or until   capped thru 2004, resid                                          changes.                           affiliate and existing power
                      CTC recovery is complete.         generation capped thru 2008.                                                                        purch contracts. Supply rate
                                                                                                                         By settlement: rates frozen        caps continue w/ escalator for
                      By settlement: T&D capped                                                                          for C and I thru 2003, for resid   7 years for C and I and for 10
                      thru 2005. Generation capped                                                                       thru 2005.                         years for resid, with market
                      thru 2008 subj to scheduled                                                                                                           rates thereafter. New C and I
                      increases after 2005.                                                                                                                 load after 4th year at market
                                                                                                                                                            rates.
Rate Reduction        None mandated.                    3 to 7.5% residential rate      None mandated.                   5% reduction in generation         $56.75 M to resid and small
                                                        reduction.                                                       component of resid rates           commercial in 11th-thru 13th
                      By settlement: 2.5% ($25M)                                        By settlement: $1M.              during market development          year thru Rate Stabilization
                                                        By settlement: $12M                                              period.                            Deferral Account.
                                                                                                                                                            3% reduction from 7/31/99
                                                                                                                                                            bundled rate for large
                                                                                                                                                            commercial and industrial
                                                                                                                                                            from 7/1/00 thru 1st 4 years of
                                                                                                                                                            plan.
                                       AP STATE LEGISLATION                                              Rev 7 July 25, 2000
                                                                                                                WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES          PENNSYLVANIA                      MARYLAND                         VIRGINIA                           OHIO                              WEST VIRGINIA
Rate Unbundling           Generally req'd, for T&D          PSC to determine categories      Rates to be unbundled.             Rates to be unbundled and         Rates to be unbundled, with
                          components and other services     for unbundling rates and         Billing standards to be            services to be itemized on bill   fuel rates rolled into supply
                          as PUC requires.                  services.                        determined by SCC for              as determined by PUCO.            rate.
                                                                                             competitive services.
Stranded Cost/Benefits    PUC may order through CTC,        Through CTC, with clawback       Recoverable through capped         Recoverable thru capped rates     Wires charge to 1/1/11 for
                          up to 9 years, subject to         for generation facility sales    rates or wires charge during       during market development         those who shop, at 2.6
                          annual review. Transition         through 6/30/05. Subject to      cap period. No stranded            period (up to 12/31/05) and       mils/kwh in 2001, declining to
                          bonds allowed with recovery       annual review. Qualified rate    benefits.                          through nonbypassable             0.75 mils/kwh in 2008.
                          through qualified rate order.     order available for intangible                                      transition charge beginning
                          PURPA renegotiation costs         transition costs.                                                   1/1/01. Subject to periodic
                          recoverable over 3 years.                                                                             review. Recovery of
                                                                                                                                regulatory assets allowable to
                          By settlement: clawback if                                                                            12/31/10, with 1-time
                          generation sold before 2002.                                                                          adjustment allowed after
                                                                                                                                12/04. No stranded benefits.
Supplier of Last Resort   Obligation to serve while         Utility to provide at least      Utility may be designated to       Utility to provide at unbundled   Util to provide at least for 1st 5
                          collecting CTC or intangible      through 7/1/03. May be           provide any or all components      rate during market                years. By bidding process for
                          transition charge.                extended for residential and     in service area at regulated       development period.               years 6 thru 13, if results in
                          PUC to promulgate regs            small commercial.                rates, but not required to do so   Thereafter, through market-       lower rates. If not by bid, at
                          service thereafter.               Competitive selection            outside territory. May be          based mechanism, including        market rates after 7 years for
                                                            procedure to be adopted.         eliminated after 7/1/04.           use of competitive bid            C and I, and after 10th year for
                          By settlement: Beginning                                                                              process.                          all others. PSC to determine
                          1/1/01, 20% to be served by       By settlement: PE to provide                                                                          method beginning in 14th year.
                          other supplier selected by bid.   thru 2008 for resid, and thru
                          No obligation to serve after      2004 for C and I, with gen to
                          2008.                             be by bid after 7/1/03 if less
                                                            than capped rates.
Aggregation               Permitted, subject to license     Permitted, subject to license    Permitted, subject to license      Permitted, subject to license     Permitted, subject to licensing
                          requirements, PUC regs and        requirements. Counties and       requirements. Municipalities       req'mnts. Counties and local      requirements. Govt may be an
                          standards.                        municipalities may not act as    may aggregate government or        municipalities may aggregate      aggregator.
                                                            aggregators unless PSC finds     non-government load, state         loads, and may jointly
                                                            insufficient competition.        may aggregate government           aggregate with other govt
                                                                                             load. Aggregation of non-          units. Participation may be on
                                                                                             govt load is on an individual      an opt-out basis after
                                                                                             cust opt-in basis.                 referendum, with customers
                                                                                                                                able to opt out every 2 yrs.




                                                                                             2
                                         AP STATE LEGISLATION                                             Rev 7 July 25, 2000
                                                                                                                 WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES            PENNSYLVANIA                     MARYLAND                          VIRGINIA                         OHIO                              WEST VIRGINIA
Competitive Metering and    PUC may order unbundling of      Competitive metering begins       SCC proposes plan for            PUCO to initiate proceeding       Avail to large commercial and
Billing                     other services, and others may   1/1/02 for large customers and    competitive metering to begin    to determine feasibility.         industrials beginning on start
                            provide "related services."      by 4/1/02 for all.                1/1/03 for nonresid 50 kW or                                       date. Begins within 4 years of
                                                             Competitive billing begins        greater, and on 1/1/04 for all                                     start date for all others.
                            By settlement, comp metering     7/1/00.                           others. Competitive billing to
                            avail 9/1/99, subj to                                              begin 1/1/02. See PUE
                            operational constraints, with                                      000346.
                            supplier's residential meters
                            installed by company until
                            1/1/03.
Universal Service Funding   Nonbypassable surcharge for      $34M for 3 yrs beginning          None.                            Funded thru Universal Service     Existing 20% credit to low
                            full recovery. Program           1/1/00 through surcharge                                           Rider administered by Dir of      income custs during winter is
                            required for univ service and    under cap.                                                         Development. Rider to             replaced by a credit of
                            energy conservation.                                                                                replace PIPP rider and low        $0.012/kwh. Bill payment
                                                                                                                                income energy efficiency          assistance also avail thru 1/3
                                                                                                                                costs in rates. Add'nl costs      of Sys Benefits Charge. See
                                                                                                                                apparently above cap.             Public Benefits Charge,
                                                                                                                                                                  below.
Slamming and Cramming       PUC to establish regs and        PSC to adopt protective           SCC to establish standards and   PUCO to adopt rules. No           PSC to develop rules.
                            enforce, requiring direct oral   measures, including customer      enforce. Private action w/ 3x    switching w/o consent under
                            or written conf.                 consent for disclosures of info   damages.                         confirmation rules, which may
                            See 52 Pa Code Chapters 54       and service changes.                                               include 3rd party verification.
                            and 57.                          See PSC 8738 Order 75949.                                          See O.A.C. 4901:1-21 et seq.
Consumer Education          By each utility, subject to      Utilities to implement through    SCC to develop program           Required as part of transition    To be developed by PSC.
                            PUC approval.                    6/30/02 as ordered by PSC.        during transition period and     plan, during market dev
                                                             PSC to recommend funding          thereafter. Duration and         period. $16M 1st year and
                                                             methodology and levels            funding methodology to be        $17M total for remaining
                                                             beyond 6/30/00.                   developed by 12/1/99.            years thru Universal Service
                                                                                                                                Rider.
Public Benefits Charge      Energy conservation costs        Consumer ed costs after           None. Energy efficiency, low     Energy efficiency revolving       System Benefit Charge at 0.3
                            funded through fully             6/30/00, conservation,            income, renewables programs      fund at $15M/yr thru 2005,        mils/kwh, above cap on non-
                            recoverable surcharge            renewables, and DSM costs         to be studied further.           $5M/yr thereafter, funded thru    low income custs for 10 yrs,
                            determined by PUC.               may be recovered over cap if                                       temp rider up to 10 yrs, with     for weatherization, bill
                                                             not in 1/1/00 rates.                                               additional costs apparently       payment assistance, worker
                                                                                                                                above cap.                        protection. Min $.60/mo and
                                                                                                                                                                  max $450/mo.




                                                                                               3
                                          AP STATE LEGISLATION                                           Rev 7 July 25, 2000
                                                                                                                WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES              PENNSYLVANIA                    MARYLAND                        VIRGINIA                       OHIO                              WEST VIRGINIA
Utility Employee Protection   Discussion of employee          None.                           None. Subject to further       Transition plan to include        PSC to review plans to be
                              impact req'd in restructuring                                   study.                         employee assistance through       submitted 6 mos before start
                              plan.                                                                                          severance, retraining, early      date, to incl 2 wks
                                                                                                                             retirement, retention,            severance/yr, health benefits
                                                                                                                             outplacement.                     cont'd for weeks of severance,
                                                                                                                                                               outplacement, other benefits.
                                                                                                                                                               Worker Trust Fund of 1/3 Sys
                                                                                                                                                               Benefits Charge for retraining,
                                                                                                                                                               outplacement of utility, mine,
                                                                                                                                                               transport, or construction
                                                                                                                                                               workers.
                                                                                                                                                               Asset transferee to recognize
                                                                                                                                                               existing contract and
                                                                                                                                                               bargaining unit.
Fuel/Emissions Labeling       PUC to establish info           Uniform disclosure of fuel      Fuel mix and emissions data    Fuel mix and environ              PSC to adopt rules allowing
                              requirements "to enable         mix and emissions data, every   on annualized basis under      characteristics disclosed at      verified labeling claims. Fuel
                              customer to make informed       6 months.                       standards developed by SCC     initial solicitation and          mix and emissions to be
                              choices."                                                                                      quarterly, with comparison of     publicized as determined by
                                                                                                                             projected to actual, and annual   PSC, at least annually, and
                                                                                                                             comparison to average data.       avail to custs on request.
                                                                                                                             See O.A.C. 4901:1-10-31.
Renewables – Portfolio        None.                           Maintain at least 1998 levels   None. To be studied further.   None.                             None.
Standards                                                     of renewables and continue to
                                                              purchase PURPA output. PSC
                                                              to report by 2/1/00 on
                                                              portfolio stnds.
Renewables Program            Application of renewable        Renewables may be funded        None. To be studied further.   None.                             None.
Funding                       resources included as part of   under public purpose prog or
                              energy cons and universal       through env surcharge of 0.15
                              service programs, above.        mill/kwh.

                              Settlement addresses
                              Sustainable Energy Fund and
                              other programs.




                                                                                              4
                                          AP STATE LEGISLATION                                            Rev 7 July 25, 2000
                                                                                                                 WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES            PENNSYLVANIA                    MARYLAND                          VIRGINIA                          OHIO                               WEST VIRGINIA
Other Environmental         None noted.                     Utility to study shifts in        None noted.                       None noted.                        None.
                                                            generation and emissions by
                                                            7/1/01 due to restructuring.
                                                            Env surcharge on power distr.
                                                            PSC to adopt measures to
                                                            maintain environ standards, or
                                                            new programs.
Generation Dereg            Deregulation as of conclusion   Deregulated 7/1/00 except for     Effective 1/1/02, except rates    Effective 1/1/01, except rates     No PSC jurisdiction, effective
                            of phase-in, scheduled for      price of standard offer service   may be regulated in trans-        may be regulated in                on start date. New
                            1/1/01.                         and approval for divestiture.     constrained areas, default rate   transmission-constrained areas     construction and additions
                                                            Finding of need for               regulated, construction subject   and default supplier rate          after start date not subject to
                                                            construction.                     to approvals, assets to remain    capped during market               PSC approvals.
                                                                                              avail during cap and while        development period.
                                                                                              default provider.                 Construction subject to
                                                                                                                                approval. Need presumed.
Generation Divestiture      Permitted, not required.        Permitted, not required.          Permitted, not required.          Allowed at any time, subject       Permitted, not required. No
                                                            Subject to review until all       Divestiture subject to approval   to certain restrictions relating   PSC approval required for
                                                            custs have choice or transition   during rate cap period and        to T&D and ancillary services.     transfers at book after start
                                                            costs finally determined.         while serving as default                                             date, unless transfer to affiliate
                                                            Clawback on transfers thru        provider.                                                            imposes future obligations on
                                                            6/30/05.                                                                                               utility. PE may transfer to
                                                                                                                                                                   affiliate at book beginning
                                                                                                                                                                   7/1/00.
Market Power                PUC to investigate, with        PSC to investigate with           SCC to investigate, and may       PUCO to investigate and            PSC may revise codes of
                            enforcement by AG, DOJ,         referral to AG.                   regulate rates in transmission-   resolve, including regulating      conduct to prevent abuse.
                            SEC or FERC.                                                      constrained areas.                rates in transmission              PSC may extend caps if no
                                                                                                                                constrained areas.                 competition.
Antitrust/Unfair Business   PUC may investigate.            PSC to adopt measures to          State AG to prosecute.            PUCO to adopt rules and may        Restrictions on certain claims
Practices                                                   protect and may investigate.                                        investigate and enforce.           by util or affiliates favoring
                                                            AG prosecutes.                                                                                         the relationship with the
                                                                                                                                                                   affiliate. PSC to develop rules
                                                                                                                                                                   on marketing, truth-in-
                                                                                                                                                                   advertising, telemarketing,
                                                                                                                                                                   billing. Consent req'd for
                                                                                                                                                                   disclosure of cust and
                                                                                                                                                                   marketing info.




                                                                                              5
                                     AP STATE LEGISLATION                                               Rev 7 July 25, 2000
                                                                                                               WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES         PENNSYLVANIA                      MARYLAND                         VIRGINIA                          OHIO                               WEST VIRGINIA
Codes of Conduct         Generally, to be included in      By 7/1/00, between electric co   To be developed between           Functional separation plan         Functional separation of
                         restructuring plan.               and affiliate and as measures    utility and affiliate, and        with separate accounting, and      generation and non-reg
                                                           to protect against               between functionally separate     competitive services through       business from regulated by
                         See settlement and 52 Pa Code     anticompetitive and abusive      units.                            fully separate affiliates.         start date.
                         54.12. et seq.                    practices, self-dealing.                                                                              Corporate separation of
                                                                                            See PUA 000029.                                                      generation by 1/1/05.
                                                           See settlement and MD Case                                                                            PSC to develop code of
                                                           No 8820, Order No. 76292                                                                              conduct rules.
                                                                                                                                                                 Employees of affiliate to
                                                                                                                                                                 operate independently to the
                                                                                                                                                                 extent practicable. Inter-
                                                                                                                                                                 affiliate transfers of
                                                                                                                                                                 employees limited.
                                                                                                                                                                 Utility to have code of
                                                                                                                                                                 conduct dispute resolution
                                                                                                                                                                 procedure.
                                                                                                                                                                 No joint advertising or
                                                                                                                                                                 marketing between utility and
                                                                                                                                                                 affiliate.
Books and Records/       Generally, PUC to investigate,    Supplier books open for,         Change in control involving       Open books as to utility and       Utility and affiliate to keep
Affiliate Transactions   with right to see books of        among other things,              entity providing                  related affiliate. Supplier,       separate books, with no
                         suppliers, aggregators, etc, on   maintaining financial            noncompetitive services or        aggregator, etc, books open        internal cross-access. Util and
                         market power.                     integrity. PSC to ensure         affiliates subject to approval.   for market power issues.           affiliate books open to PSC to
                                                           competitive markets, require                                       Change in control of utility or    enforce ban on utility
                                                           separation.                                                        holding company subject to         subsidization of non-reg
                                                                                                                              approval.                          business.
Eminent Domain –         PUC approval before               PSC approval before              SCC approval before               RTO, if authorized to build,       Eminent domain available,
Transmission             construction or condemnation.     construction or condemnation.    construction or condemnation.     also has eminent domain.           PSC approvals still required
                                                                                                                              Siting req'mnts still apply, but   before construction.
                                                                                                                              need is presumed.
Eminent Domain -         No longer avail after 1/1/01.     Eminent domain available.        Not avail after 1/1/02.           No eminent domain.                 No PSC approval required.
Generation                                                 Finding of need required to      Approval required for             Approval req'd for                 No eminent domain available
                                                           condemn. Other siting            construction.                     construction, but need is          after start date.
                                                           req'ments apply in all cases.                                      presumed.




                                                                                            6
                                             AP STATE LEGISLATION                                               Rev 7 July 25, 2000
                                                                                                                       WV info based on PSC Plan of 1/28/00 and HCR 27

           ISSUES                PENNSYLVANIA                     MARYLAND                          VIRGINIA                           OHIO                             WEST VIRGINIA
Taxes                            PURTA eliminated on              Corp income tax applies due       Eliminates state and local         Utility property taxes reduced   Plan to preserve revenue and
                                 generation, local assessment     to elimination of offset of       gross receipts taxes and SCC       and replaced with kwh excise     avoid tax shifting to be
                                 on generation substituted. For   income subject to gross           special assessment,                tax on distribution company.     addressed separately. No
                                 revenue neutrality, Gross        receipts tax. Imposes kwh tax.    substituting declining block       Gross receipts tax eliminated.   double tax on electricity
                                 Receipts tax rates to be         Gross receipts tax repealed for   consumption tax, corporate net     Corp franchise tax imposed on    transfers betw affiliates,
                                 adjusted annually for 5 years,   gen. Reclassifies poles, lines,   income tax, real and personal      elec companies. Profits          except as needed to preserve
                                 fixed thereafter.                towers, cables as pers prop.      property assessment by SCC.        subject to municipal taxes.      existing tax revenue. Start
                                                                  Pers prop for gen taxed at                                                                            date contingent on tax plan
                                                                  50%.                                                                                                  preserving state and local
                                                                                                                                                                        revenues.
Municipalities/Co-ops            Co-ops subject to competition.   Munis may opt in. Co-ops to       Munis may opt in. Co-ops           Co-ops may opt in. Munis         Munis and co-ops retain sole
                                 Boroughs may opt in.             provide choice by 7/1/03.         subject to competition, but        remain closed.                   right to provide default service
(See also: Retail Reciprocity,                                    Munis and co-ops retain right     retain sole right to provide                                        in territory unless they serve
below)                                                            to provide Standard Offer         default service in territory                                        default elsewhere.
                                                                  Service in their areas.           unless they serve default
                                                                                                    elsewhere.
RTO's                            Encourages but does not          Not specifically addressed.       Must join by 1/1/01,               Must transfer operation and      Must join independent FERC-
                                 require ISOs and power pools.    Supplier must show proof of       transferring management and        control to FERC-approved         approved entity by 1/1/03, or
                                                                  compliance with FERC and          control to state-approved          entity at time of start of       file application by 1/1/02.
                                                                  rules of any RTO it uses.         entity meeting FERC                competition (1/1/01) Interim     Must use best efforts to
                                                                                                    requirements.                      plan w/ adequate separation if   eliminate rate pancaking in
                                                                                                                                       RTO not operational. RTO to      WV by 1/1/05, if utilities join
                                                                                                                                       be operational by 12/31/03.      different RTO's.
Distributed Generation           On-site generation pays CTC.     No CTC on existing on-site        Expedited or standardized          No transition charge on self-    No wires charge or public
                                                                  generation built or under         permitting process for systems     generation. Suppliers must       benefits charge on self-
(See also: Net Metering,                                          contract or on 1st 80 MW of       under 500 kW. Wires charge         provide back-up generation.      generation.
below)                                                            new on-site renewable gen of      based on actual usage from                                          PSC to develop
                                                                  500 kW or less.                   distribution utility.                                               interconnection standards that
                                                                  Not subject to utility            Not subject to utility reg if                                       do not present undue barriers
                                                                  regulation if 80% consumed        uses renewable or                                                   to new technology.
                                                                  on site. Environ surcharge        nondepletable fuel source, up
                                                                  does not apply to on-site         to 7.5 MW, and output not
                                                                  power.                            sold to residential custs. (1999
                                                                                                    HB 2646)




                                                                                                    7
                                  AP STATE LEGISLATION                                                  Rev 7 July 25, 2000
                                                                                                               WV info based on PSC Plan of 1/28/00 and HCR 27

          ISSUES     PENNSYLVANIA                       MARYLAND                            VIRGINIA                           OHIO                             WEST VIRGINIA
Net Metering         Per tariff: resid and single       Resid and schools using solar,      Resid to 10 KW and nonresid        Any cust using solar, wind,      Not addressed.
                     phase small comm'l using           up to 80 kW. Open to 35 MW          to 25 kW using solar wind,         biomass, landfill gas, hydro,
                     biomass, photovoltaics,            max statewide.                      and hydro. Open to 0.1%            microturbines (to 100kW), or
                     methane, fuel cell, hydro, and                                         peak load max. Begins              fuel cell. Open to 1%
                     wind, up to 10kW.                                                      7/1/00.                            supplier's peak demand max.
                                                                                            See 20 V.A.C. 5-315-10 et          See O.A.C. 4901:1-10-82.
                                                                                            seq.
Retail Reciprocity   PA utilities and affiliates, co-   For suppliers or their affiliates   Munis may stay closed as long      Retail elec services of for-     All public util custs can
                     ops, and munis may not sell        w/ distribution in PA, DE,          as they don't sell outside their   profit elec utilities may be     choose suppliers. Utils cannot
                     outside service area unless        WV, VA, or DC, a portion of         area.                              obtained from any supplier.      act as competitive supplier,
                     their area is open. Borough        their distr service area must be                                       Co-ops may elect to open their   unless thru an affiliate. Munis
                     systems may stay closed as         open. Munis may stay closed                                            areas. Muni systems remain       and co-ops can act as
                     long as they don't sell outside    as long as don't sell outside                                          closed. Munis and co-ops can     suppliers.
                     their area.                        their area.                                                            act as suppliers outside their
                                                                                                                               areas.
Other                                                   Fuel clause repealed later of                                          Fuel cases end 1/1/01.           During initial 4-year rate cap,
                                                        7/1/00 or initial                                                                                       changes in FERC-based trans
                                                        implementation date.                                                   Restrictions on holding co.      rates to be offset by change in
                                                                                                                               investment and lending           retail distribution rates.
                                                                                                                               activities removed.
                                                                                                                                                                Shopping C and I cust may
                                                                                                                               Protection against raiding       return to default once,
                                                                                                                               pension assets.                  residential cust may return
                                                                                                                                                                twice. No right to return to
                                                                                                                               PUCO authorized to order         default service after 24
                                                                                                                               restitution for damages due to   months, or after 4th year for C
                                                                                                                               power fluctuation.               and I and after 8th year for
                                                                                                                                                                residential. Returning cust
                                                                                                                               Non-firm service cust can        must stay for 12 months.
                                                                                                                               obtain back-up on nondiscrim
                                                                                                                               basis from other suppliers       Existing PSC approved elec
                                                                                                                               during periods of                power purch agreements
                                                                                                                               nonemergency curtailment.        remain in effect.

                                                                                                                                                                PSC may regulate rates after
                                                                                                                                                                cap if no workable
                                                                                                                                                                competition.




                                                                                            8
APPENDIX B
                           Allegheny Power(1) /PJM Interconnection, L.L.C.
                                     Memorandum of Agreement


                Allegheny Power(1) (Allegheny) and PJM Interconnection, L.L.C. (PJM) (hereafter

jointly referred to as Parties) have agreed to enter into good faith negotiations in an attempt to

achieve a definitive written agreement incorporating the terms set forth on the attached term

sheet, and to support the acceptance of such definitive agreement by the Federal Energy

Regulatory Commission (FERC). This Memorandum of Agreement is intended to create a

commitment on the part of both Allegheny and PJM to negotiate such definitive written

agreement by February 1, 2001 for submittal thereafter to and execution by the Parties, subject to

any necessary PJM member approvals and to acceptance thereafter by all regulatory authorities

having jurisdiction over the resulting definitive agreement. In the event the Parties are unable to

achieve a definitive written agreement by February 1, 2001, the Parties will be excused from

further negotiating commitments unless, by mutual agreement, they agree to continue the

negotiations.



(1)   "Allegheny Power" is the registered trade name of the three operating subsidiaries of Allegheny Energy, Inc., that own
      and control transmission facilities.


AGREED TO This 5th day of



  JAY S. PIFER
  On behalf of Allegheny Power

  AGREED TO This day of
  Power


PHILLIP G. HARRIS
On behalf of PJM
                                 Term Sheet
1.   The agreement is expected to be memorialized in a contract between PJM, the

     corporate entity within Allegheny that owns and controls transmission facilities,

     and ultimately other transmission owning entities surrounding PJM that wish to

     participate in an expanded competitive energy marketplace. Allegheny and PJM

     contemplate that the formal execution would occur prior to March 1, 2001.

     Subsequent to the execution of this agreement and following discussion and

     negotiation with other transmission owners in the region, Allegheny and PJM

     anticipate that this concept will expand and encompass a much larger regional

     area (tentatively referred to in this document as PJM West) and consequently

     expand the PJM competitive market structure and associated locational marginal

     pricing (LNV) based congestion management system (PJM Market) into a much

     larger region. It is further anticipated that PJM West will adopt, with certain

     exceptions, the existing PJM Transmission Owners Agreement (TOA) and

     Operating Agreement (OA); adopt the existing PJM Open Access Transmission

     Tariff (PJM Tariff) along with a new Schedule defining the annual transmission

     rates for each of the PJM West associates; and develop a new Reliability

     Assurance Agreement (RAA) reflecting the unique needs of the PJM West

     associates and their control areas.

2.   The agreement will recite the objectives of the Parties, including the end state

     objective of significantly expanding the scope of the currently existing PJM

     Market. The agreement may also include recitals and/or commitments respecting

     consolidation of existing control areas, the creation of a PJM West operation

     center, and other preferred end-state objectives.




                                       2
3.   Hereafter the phrase "PJM East" will refer to the existing PJM control area and

     the phrase "PJM West" will refer to the control area(s) currently operated by

     Allegheny and any other entities that participate in this affiliation with PJM. The

     Parties recognize that initially two or more control areas will exist over which the

     PJM Office of Interconnection (PJM 0I) will operate the PJM Market. The

     Parties also recognize that the current NERC control area definitions and rules

     and regulations are expected to be revised and that such revision(s) must be

     recognized and accommodated in the agreement.

4.   The agreement will contain definitive operating provisions for a Phase I and

     conceptual possibilities and objectives for a Phase II. Under Phase I, PJM West

     will operate under the control of PJM OI within the context of the agreements and

     structure defined herein. Phase II will commence only after (1) the creation of an

     independent transmission company (ITC) (to be defined) and (2) submittal to and

     approval by the FERC under Section 203 of the Federal Power Act of the

     delineation of functions between such ITC and PJM. Under Phase II PJM West

     may become an ITC that would individually meet some or all of the requirements

     of FERC Order 2000. PJM would likely continue the PJM Market function and

     some aspects of system control and management while ITCs operating in this

     region would regain some aspects of system control and management.

5.   The agreement will contain provisions obligating each party to support its

     acceptance by the FERC including, on the part of PJM, support for claims and

     recitals respecting its ability to expand the reach of the PJM Market over a

     broader region within a specified timeframe, initially anticipated to be

     approximately six months after formal execution of the contract and acceptance

     by the FERC. The agreement is expected to contain provisions respecting mutual

     encouragement by both Parties of other entities joining or associating in a fashion

     that expands the reach of the PJM Market. In this respect PJM has provided

                                      3
     certain information to Allegheny regarding its ability to expand the PJM Market

     as described in the letter of October 2, 2000 from Richard A. Wodyka to Karl V.

     Pfirrmann (attached hereto).

6.   Phase I will commence on December 15, 2001, or such other date as the FERC

     requires or permits for start-up operations under its Order 2000.

     A. In Phase I, there will be an immediate transfer of functional control of

         Allegheny's transmission facilities to PJM as reflected in the adoption by

         reference of the PJM OA and TOA as described herein.              The Parties

         recognize that the Phase I transfer will include establishment of a PJM West

         operation center with certain staff, reporting to the PJM 0I located at

         Norristown, PA; development of software for LMP administration, and

         implementation of certain communications and computer equipment.

     B. PJM will eventually extend its NERC Security Coordinator function to cover

         the whole PJM East and West regions. During the transition the Parties

         recognize PJM West and PJM East may belong to more than one NERC

         Regional Reliability Council and thus may require multiple NERC Security

         Coordinators. The Parties recognize that the NERC Security Coordinator

         function may require, during the transition in which there are multiple control

         areas, that PJM exercise the NERC Security Coordinator functions for PJM

         West within ECAR rules and PJM East within MAAC rules. The Parties

         agree that the goal is to have one NERC Security Coordinator and one

         regional reliability entity.

     C. PJM will have transmission line monitoring capabilities to observe system

         performance in real time, and will have approval authority over any plans to

         disconnect transmission facilities from service to perform scheduled

         maintenance.



                                        4
D. PJM will administer a single PJM Tariff that will include schedules

     applicable to PJM West. PJM will be the sole transmission provider for the

     whole region. PJM West signatories will have the right to propose, design,

     and defend rates applicable to their zones.

E    PJM will incorporate PJM West into its OASIS system.

F.   PJM will develop a plan for and integrate PJM West into the PJM Market

     (per the attachment).      PJM will have responsibility to administer all

     congestion management tools needed to avoid congestion after fully

     exploiting redispatch, and will have emergency authority over generation and

     transmission facilities in PJM West.

G. PJM will have the role of power market administration in the PJM West area,

     including the extension of the PJM Market. Also, its market monitoring

     function will be extended there. PJM will administer the Fixed Transmission

     Rights (FTR) calculation and auction process for the baseline transmission

     capacity that it ascertains to be "firm".

H. PJM West signatories will have the right to implement risk management and

     financial hedging techniques and products to maximize the throughput of

     their systems, as well as implement other innovative market offerings. For

     example, PJM West signatories could have the right to carry out a

     supplemental FTR allocation and sale/auction, for transmission capacity over

     and above that amount allocated by PJM from time to time, and sell this

     resource for their own profit, subject to their own financial risk and

     responsibility for assuring firmness.

I.   Each individual signatory to the PJM West agreement shall retain all of the

     rights set forth in this section; provided, however, that such rights shall be

     exercised in a manner consistent with a signatory's obligations under the

     Federal Power Act and the FERC's rules and regulations thereunder.

                                   5
     i.          Each signatory shall have the right at any time unilaterally to file

                 pursuant to section 205 of the Federal Power Act to change the

                 revenue requirements underlying its rates for providing services

                 under the PJM Tariff.

     ii.         Each signatory shall have the right to adopt and implement

                 procedures it deems necessary to protect its electric facilities from

                 physical damage or to prevent injury or damage to persons or

                 property.

     iii.        Each signatory shall have the right to build, acquire, sell, dispose,

                 retire, merge or otherwise transfer or convey all or any part of its

                 assets, including any transmission facilities, such right to include,

                 but not be limited to the right, individually or collectively, to

                 terminate the relationship, subject to FERC approval, with PJM in

                 connection with the creation of a transmission company to own

                 and/or operate its transmission facilities.


     iv.         Each signatory shall have the right to take whatever actions it

                 deems necessary to fulfill its obligations under local, state or

                 federal law.

J.        Due to the multi-control area nature of PJM in the future, separate and

          perhaps different RAAs will exist which may define different reserve

          obligations and the manner in which those obligations are met.

K.        Signatories will retain the maximum degree of discretion possible with

          respect to their existing rate filing rights under section 205 of the Federal

          Power Act. Initially, as noted in I (i) above, they will retain the right to



                                    6
            design and submit PJM Tariff schedules for recovery of their revenue

            requirement. Allegheny contemplates an initial rate structure intended to

            minimize pancaking, ensure non-discriminatory pricing, minimize cost

            shifting for PJM West transmission owners, and insure revenue neutrality

            for PJM West transmission owners during a transition period. Allegheny

            notes that the September 15, 2000 filing by the Alliance Companies, if

            accepted by the FERC, includes among other pricing concepts a transition

            charge(s) designed to maintain revenue neutrality. In order for Allegheny

            to meet the goal stated above of minimizing pancaking, Allegheny and the

            Alliance Companies must meld their transmission rates, particularly any

            transition adjustment charge, in a fashion which prevents pancaking of

            charges (i.e. separate and cumulative transition adjustment charges

            including, as described in the Alliance Companies filing, zonal adjustment

            charges and Regional Out and Through Rates (ROTR) charges) for

            deliveries to PJM and/or other utilities to the east of Allegheny.

     L.     PJM will extend its transmission planning function to cover the PJM West

            region in accordance with the expansion planning provisions of the OA for

            the PJM West signatories.

7.   Phase II: The agreement will recognize that any Phase H changes will require

     FERC approval. The agreement will attempt to specify certain functions that the

     Parties anticipate will be retained by PJM after Phase II commences.

     A. Preliminarily it is anticipated that PJM will retain all the RTO functions not

          directly related to the transmission business.       These include all those

          activities related to power market administration, including the Power Market

          function. PJM will also retain the market monitoring function, and will have

          access to all information available to the ITC for this purpose. The Parties



                                      7
         agree that they will work to define the optimal relationship between PJM and

         any newly formed ITC.

     B. It is anticipated that when/if a large ITC is formed in the PJM West region,

         certain functions considered useful to the management of the transmission

         function may be transferred to it. The Parties recognize, for example, that the

         ITC will have physical, operational, and functional control of its facilities,

         and will decide how much transmission service it wishes to sell as firm,

         taking financial responsibility for assuring the firmness of the services sold.

     C. The Parties also agree that, rate pancaking will be eliminated (after a

         transition period) throughout the region covered by the association between

         PJM West and PJM East. The agreement will make clear that retransfer of

         any control from PJM to an ITC in Phase II will be authorized only following

         acceptance by the FERC under section 203 of the Federal Power Act, and

         under section 205 for any rate aspects.

8.   During the tern of this Memorandum of Agreement, Allegheny and PJM will be

     free to negotiate FERC Order 2000 compliance alternatives with others provided

     they keep the other Party to this Memorandum of Agreement aware of

     developments in those other negotiations.




                                      8
APPENDIX C
                                                                                            Richard A. Wodyka
                                                                                   Vice President - System Coordination
                                                                                          Chief Operating Officer
                                                                                     (610) 666-8853 Π (610) 666-2296


PJM
Interconnection,LLC

                                          VIA FEDERAL EXPRESS


October 2, 2000

Mr. Karl V. Pfirrmann
Vice President, System Planning & Operations
Allegheny Power
800 Cabin Hill Drive
Greensburg, PA 15601-1689

  Dear Karl:

  PJM MARKET MODEL APPLIED TO MULTIPLE CONTROL AREAS

One of the fundamental elements of the PJM West concept that we have been discussing with Allegheny Power is the
extension of the PJM Market Model to multiple control areas. PJM has conducted a preliminary evaluation of this
subject and concluded that the PJM Market Model can be adapted to incorporate a single regional market in areas that
have multiple control areas. There are a number of alternatives that can be used to accomplish this solution from
running separate markets with inter-control area coordination to operating the region as a single energy balancing market
and separate ancillary services markets (e.g. regulation, operating reserves). The attached outline presents the latter
model that implements a single regional energy market with transmission congestion pricing over multiple control areas.

From the preliminary analysis of this model, we believe that the current PJM systems could be expanded to incorporate a
larger geographic region, assuming the communications and data structures are in place to provide the information to
PJM. We also believe that the changes to the PJM model and systems for the day-ahead and real-time markets could be
accomplished in a six to nine-month period. Training and transition issues would also have to be addressed, but the PJM
implementation is a phased approach that would accommodate such issues.

As we continue our discussions on the PJM West concept, we will need to develop the specific implementation details
and a detailed implementation schedule for extending the PJM Market. PJM looks forward to developing these solutions
cooperatively with Allegheny and any other parties who wish to join the development of the PJM West concept.

Sincerely,

Richard A. Wodyka

RAW\mbh: #126699vl
Attachment

cc:   PJM Office of the Interconnection Staff
      Bruce M. Balmat           Robert 0. Hinkel
      Richard A. Drom           Stanley J. Kijewski
      Phillip G. Harris         Michael J. Kormos
      Steven R. Herling         Kenneth W. Laughlin

                                                   P.C.
      Barry S. Spector, Esq., Wright & Talisman,          Service With Integrity


                            955 Jefferson Avenue - Valley Forge Corporate Center – Norristown, PA 19403-2497


                                                                              10
PJM Market Model Applied to Multiple Control Areas
Day-ahead Market


The PJM Day-ahead Market enables participants to purchase and sell energy at binding day-ahead
prices. By expanding the analysis to multiple control areas, a single regional market could be
developed that makes transacting between the control areas seamless.

The expanded regional market will allow:

    Ø      Transmission customers the option to schedule bilateral transactions at binding day-ahead
           congestion charges based on the differences in Locational Marginal Prices (LMPs) between
           the transaction source and sink regardless of the control area.

    Ø      Load Serving Entities (LSEs) to lock-in at day-ahead prices for their load in all control
           areas and have a larger resource pool with which to schedule transactions.

    Ø      Generators to submit bids to participate in the markets and sell throughout the region or self
           schedule for their own needs.

The current PJM Day-ahead Market provides a set of physically feasible, financially binding schedules
for each hour of the next operating day. This function could be expanded to schedule over multiple
control areas which would result in a set of hourly demand quantities, supply quantities, and LMP
values for each control area; a set of net tie schedules between the control areas; and a set of net tie
schedules between these control areas and other adjacent control areas.

After the daily bidding period closes, the PJM Office of the Interconnection (0I) will calculate the day-
ahead schedule based on the bids, offers, and schedules submitted based on a least-cost, security
constrained unit commitment and dispatch for each hour of the next operating day. The day-ahead
scheduling process will incorporate all control area reliability requirements and reserve obligations into
the analysis. These obligations can be defined and accounted for as separate binding constraints in the
commitment process. The resulting day-ahead hourly schedules and day-ahead LMPs represent
binding financial commitments to the market participants across multiple control areas. Fixed
Transmission Rights (FIRS) are accounted for at the day-ahead LMP values.

The high level changes required to allow for regional day-ahead markets over multicontrol areas would
be an expansion of the current physical power system model (i.e. state estimator, load flow), inclusion
of the transmission ratings, inclusion of valid transmission constraints for the new entities, modeling in
unit commitment of all generation in the region, and expansion of the existing user interfaces.




   October 2, 2000                               1                                  #126378v1
PJM Market Model Applied to Multiple Control Areas
Real-time Market


The real-time market for the two or more control areas could be operated in much the same way as the
current PJM Market. The five-minute LMP calculation could be changed to ignore control area
boundaries and solve a security-constrained dispatch for the entire region. Based on this solution, the
dispatch would determine the net tie schedule adjustments that are required to maintain balance among
the control areas. Such analysis would include ramping limitations, loop flow analysis and, of course,
transmission limitations in order to preserve reliability and satisfy NERC criteria. Each control area
would be responsible for regulation and the minute-to-minute generation to load matching. Regional
dispatch changes in each control area would happen at predefined intervals with any imbalance
between those times handled as inadvertent interchange adjustments and priced as uplift or allocated
under an agreed to methodology between the participants.

The time step to perform the schedule adjustments between the control areas could coincide with the
five minute LMP calculations or could be performed on a ten to 30-minute basis depending on
implementation issues.

At five-minute intervals, LMPs would be calculated for all regional load busses and generation busses
that are modeled in the regional state estimator. LMPs would also be calculated for interface busses
with control areas not in the region.

All generation that is following the regional dispatch instructions would be eligible to set LMP values.
In addition to generation, external transactions that are designated as dispatchable and are following
the regional dispatch instructions are eligible to set LMP values. Since the LMP model includes a
detailed model of adjacent external systems, loop flow effects are implicitly included in the
calculations. Self-scheduled generation and individual transactions would not be eligible to set price
and would be modeled as fixed injections or withdrawals at their locations.

The LMP calculation is based upon the actual operating conditions existing in the control areas as
described by the regional state estimator solution (including the desired net tie schedules between
control areas). The LMP calculation will take into account transmission limitations that are identified
by the system operators when a control area is operating out of economic merit to control such
limitations. In order to perform LMP calculations and to perform the associated energy accounting and
billing, a complete set of input data is required. This set of input data would include updating and
changing the model (i.e. state estimator) of the actual operating conditions that exist on the regional
power grid, a complete description of all external transactions, a full set of offer data from generating
resources (unit commitment), a set of demand bids, a list of binding transmission constraints, economic
dispatch rates, and a log of dispatching instructions. Some of the changes would overlap with the
changes required for the day-ahead markets with additional work required to develop a regional
security constrained dispatch and expand the monitoring and analysis to the regional transmission
system.




   October 2, 2000                              2                                  #126378v1
APPENDIX D
A.     Intra-PJM/PJM West Transactions

               In order to implement PJM’s congestion management methodology, it will be

necessary to regard transactions between (to and from) PJM and PJM West as “in or within”

PJM. Zonal rates will apply for recovery of fixed transmission costs, and only losses and LMP

congestion charges will thereafter apply. So, for example:

       (a) For transactions from a generator in PJM to a load in PJM West, the PJM West zonal

           rate (license plate rate) will apply, as well as losses and LMP congestion charges.

       (b) For transactions from a generator in PJM West to a load in PJM, the local zonal rate

           will apply, as well as losses and LMP congestion charges.

B.     Inter-RTO Transactions

               In order to permit recovery, during the transition period, of lost pancaked rates

which Allegheny and other PJM West utilities will have collected in the test year proposed by

Alliance (year 2000), and at the same time to avoid a pancaking of the transition charges (e.g.

Alliance plus PJM West), PJM West’s base year transition revenues should be included in the

recalculation of the Alliance region wide rate (RWR), and PJM West should receive its

appropriate allocation of the RWR from Alliance in the settlement process. This will require a

modification of the Alliance RWR calculation, which will then recover transition costs for both

the Alliance and PJM West transmission owners. PJM West’s “lost revenues” include those from

ECAR-PJM transactions, as well as PJM- ECAR transactions in the test year. So, for example:

               (1) For transactions from generators in the Alliance RTO to loads in PJM or PJM

West, the RWR rate will be paid to Alliance (wheeling out), the PJM zonal rate will apply, and

PJM’s losses and LMP congestion charges will apply. PJM West transmission owners will

receive their share of the RWR from Alliance.
                 (2) For transactions from generators in MISO to loads in PJM or PJM West, the

MISO “wheeling out” fee will be waived (per Attachment P of the Alliance filing), the Alliance

RWR will be paid, the PJM zonal rate will apply and PJM’s losses and LMP congestion charges

will apply. PJM West transmission owners will receive their share of the RWR from Alliance.

                 (3) For transactions from PJM or PJM West generators to loads in Alliance, the

PJM “wheeling out” rate will be paid to PJM (and the PJM West transmission owners will be

paid a share of the fee from PJM), and the Alliance zonal rate will apply.

                 (4) For transactions from generators in PJM or PJM West to loads in MISO, the

PJM “wheeling out” fee would be waived (per Alliance’s Attachment P) (subject to any required

PJM approvals), the Alliance RWR will apply and the MISO zonal rate will apply. PJM West

transmission owners will receive their share of RWR from Alliance.

C.         Inter-RTO Agreements

                 The Alliance companies filed as Appendix P a concept in which transactions

crossing three or more RTO boundaries would be forgiven the "wheeling out" rate of the source

RTO. Allegheny also believes, as stated in Section IX, that "non-discrimination, i.e. equal

treatment of all transmission owners with respect to recovering lost revenues" is crucial to the

development of any inter-RTO agreement. Consequently, Allegheny believes that whenever a

"wheeling out" fee is waived, all RTO's involved should share the resulting net sum of "wheeling

out" fees.




184691.1




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