Allegheny Energy (AYE)

Transmission Expansion

TrAIL Project.  In February 2007, TrAIL Company proposed a return on equity of 13.9% for TrAIL and for a static volt-ampere reactive power compensator at the Black Oak substation (the “Black Oak SVC”) and a return on equity of 12.2% for other TrAIL Company projects. FERC accepted TrAIL Company’s proposed formula rate, subject to conditions, suspended it for a nominal period subject to refund and hearing and established hearing and settlement judge procedures.

In July 2008, FERC approved a settlement that provides for an incentive return on equity of 12.7% for TrAIL and the Black Oak SVC and a return on equity of 11.7% for any other projects TrAIL Company may undertake for which no incentive return on equity was requested. TrAIL Company was also granted the following incentives:

PATH Project.  On October 15, 2008, PJM announced a reconfiguration of PATH. The reconfiguration avoids certain siting constraints identified as a result of comprehensive siting studies, interaction with government agencies, public input, and a desire to identify a solution that reduces line mileage and minimizes the impact on communities and the environment. The new configuration will: consist of a single 765 kV line from the AEP substation near St. Albans, West Virginia to the new substation near Kemptown, Maryland; eliminate the connection with the Bedington substation and the twin-circuit 500 kV lines from Bedington to Kemptown; and include a new midpoint substation in Hardy County, West Virginia. PJM has confirmed that the reconfigured project addresses its reliability concerns. On October 31, 2008, PJM released the results of studies that changed the required in-service date for PATH to June 2013. Total project costs for both series are expected to be approximately $1.8 billion, of which Allegheny’s share is expected to be approximately $1.2 billion.

On December 28, 2007, PATH, LLC submitted a filing to FERC under Section 205 of the FPA to implement a formula rate tariff to be effective March 1, 2008. The filing also included a request for certain incentive rate treatments. On February 29, 2008, FERC issued an order granting the following rate incentives:

FERC set for hearing the cost of service formula rate that will be used to calculate annual revenue requirements for the project. In December 2008, PATH submitted to FERC a settlement of the formula rate and protocols with the active parties. FERC approval of the settlement is pending. Rehearing of the February 29, 2008 order with respect to return on equity remains pending before the FERC.

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National Interest Electric Transmission Corridor (“NIETC”).  In October 2007, the DOE issued a NIETC designation for the Mid-Atlantic corridor that includes the areas where TrAIL and PATH are proposed to be sited. Challenges by several entities to the Mid-Atlantic corridor designation are pending in the United States Court of Appeals for the Ninth Circuit. Briefing is expected to conclude in May 2009. AE and certain of its subsidiaries are intervenors in this proceeding. Allegheny cannot predict the outcome of this proceeding or whether it will have a material impact on its business or financial position.

In February 2009, the United States Circuit Court for the Fourth Circuit ruled on challenges to FERC rules promulgated for siting transmission lines within a NIETC. In its opinion, the Court held, among other things, that a state’s outright denial of a transmission siting application within one year does not constitute withholding of approval within one year, rejecting FERC’s interpretation of the relevant provision of the FPA. The Distribution Companies and TrAIL Company are intervenors in this proceeding.

Transmission Expansion

By order entered on December 12, 2008, the Pennsylvania PUC authorized TrAIL Company to construct a 1.2 mile portion of the TrAIL Project in Pennsylvania from the proposed 502 Junction Substation in Greene County to the Pennsylvania-West Virginia state line. This portion of TrAIL will connect with portions of the TrAIL Project approved in West Virginia and Virginia. In the same order, the Pennsylvania PUC also approved an agreement among TrAIL Company, West Penn and Greene County, Pennsylvania in which, among other provisions, TrAIL Company agreed to engage in a collaborative process to identify possible solutions to reliability problems in the Washington County, Pennsylvania area in lieu of the Prexy Facilities that had been a part of the original TrAIL proposal. In addition, West Penn agreed to release certain easements that would have been used by TrAIL Company for the Prexy Facilities, and Greene County agreed that the Pennsylvania PUC should authorize construction of the 1.2 mile portion of TrAIL from 502 Junction Substation to the Pennsylvania-West Virginia state line. An intervenor has initiated judicial review of the order by the Commonwealth Court of Pennsylvania.

Transmission Expansion

On August 1, 2008, the West Virginia PSC issued an order authorizing construction of the TrAIL Project in West Virginia subject to certain conditions, including indicia of state commission approval in Pennsylvania and Virginia to construct the portion of the TrAIL Project from 502 Junction Substation to Loudoun Substation. The order also approved, with certain modifications, a settlement that had been entered into with regard to the TrAIL Project by TrAIL Company, the Staff of the West Virginia PSC, the Consumer Advocate Division and the West Virginia Energy Users Group. On February 13, 2009, the West Virginia PSC granted TrAIL Company’s petition for reconsideration of certain aspects of the order and denied other petitions for reconsideration. In addition, the West Virginia PSC modified a portion of its August 1, 2008 order that would have required TrAIL Company, prior to the commencement of construction on any part of the line in West Virginia, to obtain a determination by the West Virginia PSC, after hearing, as to whether all preconstruction permits and approvals had been obtained and all preconstruction commitments had been met for the entire length of the line in West Virginia. The modification eliminates the requirement for a hearing and an affirmative determination by the West Virginia PSC and requires only that TrAIL Company file written verification of these matters with the West Virginia PSC on a line segment basis prior to commencing construction on that segment.

Transmission Expansion

On October 7, 2008, the Virginia SCC issued an order authorizing construction of the TrAIL Project in Virginia. The order was conditioned upon receipt of authorization by the West Virginia PSC and the Pennsylvania PUC to construct the Pennsylvania and West Virginia portions of the project extending from 502 Junction Substation in Pennsylvania, through West Virginia and to the Loudoun Substation in Virginia, which TrAIL Company also received in 2008. Various intervenors have initiated judicial review of the order by the Virginia Supreme Court.

Transmission Expansion

The Delivery and Services segment includes the results of TrAIL Company and PATH, LLC. The combined results of operations for TrAIL Company and PATH, LLC are as follows:

Transmission Expansion

On April 19, 2007, TrAIL Company filed an application with the Virginia SCC for authorization to construct the TrAIL project in Virginia. An evidentiary hearing in this matter is scheduled to commence on February 25, 2008. Issuance of an order in this matter is expected by July 2008.

Transmission Expansion

On February 28, 2006, the Distribution Companies requested PJM to include in the PJM Regional Transmission Expansion Plan (“RTEP”) a proposal by the Distribution Companies to construct the Trans-Allegheny Interstate Line (“TrAIL”). PJM’s RTEP identifies transmission system upgrades and enhancements, through a region-wide planning effort, to provide for the operational, economic and reliability requirements of PJM customers and to determine the best way to integrate transmission with generation and load response projects to meet load-serving obligations. TrAIL is designed to increase the west-to-east energy transfer capability of the PJM Transmission System. As originally proposed, it would have consisted of a 330-mile 500 kV transmission line traversing the Distribution Companies’ PJM zone from west to east. In June 2006, the PJM Board of Managers approved an RTEP that includes some elements of the TrAIL proposal in a 240-mile transmission line project, 210 miles of which are to be constructed in the Distribution Companies’ PJM zone. The Distribution Companies were designated by PJM to construct the portion of the line that will be located in the Distribution Companies’ PJM zone. PJM continues to consider as part of its 15-year RTEP process several transmission alternatives that may be constructed within the Distribution Companies’ PJM zone.

Concurrent with the submission of the TrAIL proposal to PJM, Allegheny and the Distribution Companies submitted a petition for declaratory order to FERC requesting four incentive rate treatments. Incentive rate treatments are intended to promote the construction of transmission facilities, such as the TrAIL proposal. Upon the PJM Board of Managers’ approval of the RTEP in June 2006, Allegheny requested FERC to authorize the incentive rate treatments with regard to the 210-mile transmission line to be constructed by the Distribution Companies or their affiliate in the PJM zone. On July 20, 2006, FERC approved the incentive rate treatments for the transmission line. On February 21, 2007, the Distribution Companies submitted to FERC a filing under Section 205 of the FPA to implement a formula tariff rate for TrAIL Company that includes the incentive rate treatment approved by FERC.

On March 6, 2006, the Distribution Companies filed a request with the DOE requesting an early designation for the route of TrAIL as a National Interest Electric Transmission Corridor pursuant to the Energy Policy Act. On August 8, 2006, the DOE published a congestion study in which the general area of the TrAIL Project was classified as a “critical congestion area” that merits further federal attention. In that study, the DOE requested comment by October 10, 2006 as to whether the designation of corridors in relation to the areas identified as congested in the study would be appropriate and in the public interest and, if so, how the geographic boundaries for those corridors should be established. The Distribution Companies submitted comments supporting the designation of a corridor for the Mid-Atlantic area necessary for the construction of the TrAIL Project. Allegheny cannot predict when a decision with regard to this matter will be forthcoming.

During 2006, PJM submitted to FERC three filings providing for the cost allocation of RTEP projects among PJM transmission zones. The filings include allocations for several project to be constructed by the Distribution Companies or by TrAIL Company. The allocations for the TrAIL Project have been protested by several intervenors. This proceeding is set for hearing in June 2007. Allegheny cannot predict the outcome of this hearing or when a decision with regard to this matter will be forthcoming.