SecProbe.io

CORRESP
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filename1.htm

Via EDGAR

June 7, 2005

United States Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Mail Stop 0308

     RE:
     The Potomac Edison Company ("Potomac")

         Allegheny Generating Company ("AGC")

         Form 10-K for the fiscal year ended December 31, 2004

         Filed March 11, 2005

         File Nos. 1-3376 and 0-14688

The Potomac Edison Company

         Registration Statement on Form S-4

         Filed April 29, 2005

         File No. 333-124473

Dear Mr. Allegretto:

This letter is written in response to
the comments contained in your letter to Paul J. Evanson dated May 23, 2005 regarding the
above-referenced filings. A detailed response to each of the individual comments in your
letter follows.

Form 10-K for the Year
Ended December 31, 2004

General

     1.
     Where a comment below requests additional disclosures or other revisions to be made, these revisions should be included in
         your future filings as applicable.

     We will incorporate additional disclosures and revisions in response to your comments in future filings, as
                  indicated in our response to each comment below.

Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations

The Potomac Edison
Company and Subsidiaries — Results of Operations, page 85

     2.
     We note that effective January 8, 2002, distribution rates for Maryland customers decreased due to the Customer Choice
         Credit, which will remain in effect until a total of $72.8 million has been credited to residential customers and a total of
         $10.5 million has been credited to commercial and industrial customers.  Please explain the specific provisions of this
         credit.  Further, please explain why the total amount to be credited does not represent a regulatory liability under
         paragraph 11 of SFAS 71.

1

The customer choice credit is reflected on Maryland customer bills and represents the rate reduction pursuant to our
                  Electric Restructuring Case No. 8797, consistent with the Maryland restructuring legislation that required customer
                  rate reductions as a condition of electric deregulation.  The specific language from Case No. 8797 follows:

Rate Reductions

     15.
     Allegheny Power shall reduce rates in effect as of December 31, 2001, as well as any
                                    succeeding lawful rates, as follows:

     a).
     For residential customers during the period January 1, 2002 through December
                                                   31, 2008, there shall be annual revenue reductions of $10.4 million totaling $72.8
                                                   million.

 b).

For customers taking service under rate Schedules C, G, CA, CSH and PH during
                                                   the period January 1, 2002 through December 31, 2008, there shall be annual revenue
                                                   reductions of $1.5 million totaling $10.5 million.

c).

These reductions shall be shown as a separate line item on customers' bills as
                                                   a credit to distribution charges only.

In accordance with the order in Case No. 8797 shown above, the Customer Choice Credit is reflected in our financial
                  statements as a reduction in annual revenue, in the amounts and during each of the years stated in the order.

The situation described above did not (a) involve a regulatory order for refunds to customers, (b) arise from a gain
                  or (c) arise from a reduction in allowable costs.  Because none of these criteria were met, a regulatory liability
                  was not recorded at the time of the order, in accordance with paragraph 11 of SFAS 71.

Financial Condition,
Requirements and Resources

Liquidity and Capital
Requirements

Other Matters Concerning
Liquidity and Capital Requirements, page 95

     3.
     Please consider revising your table of contractual cash obligations to include the following:

     (a)Estimated interest payments on your debt;

     (b)      Estimated payments under interest rate swap agreements; and

     (c)      Required funding of pension and other postretirement benefit obligations.

2

     Because the table is aimed at increasing transparency of cash flow, we believe these payments should be included in the
         table.  If you choose not to include these payments, a footnote to the table should clearly identify the excluded items and
         provide any additional information that is material to an understanding of your cash requirements.  See Section IV.A and
         footnote 46 to the Commission's MD&A Guidance issued December 19, 2003, available at www.sec.gov.

     We included a table of contractual cash obligations and commitments in the Form 10-K for the year ended December 31,
                  2004 for Potomac and AGC.  In addition, the Form 10-Q for the three months ended March 31, 2005 for each of these
                  registrants included a statement that the obligations and commitments at that date had not changed materially from
                  the amounts disclosed in the 2004 annual reports on Form 10-K.  As a result, a table was not provided in the Potomac
                  or AGC first quarter Form 10-Q.

In all future filings in which a new table is provided, we will add (a) estimated interest payments on contractual
                  debt obligations as of the date of the table, and (b) estimated payments under interest swap agreements, if any.
                  Neither Potomac nor AGC had any interest rate swaps at December 31, 2004.  We will also add a footnote to the table
                  to make it clear that the amounts in the table are based on interest rates as of the date of the table, and do not
                  reflect any estimates regarding future changes in interest rates or unscheduled debt repayments.

Estimated amounts to be funded for pension and postretirement benefit obligations during 2005 were disclosed in Note
                  17 to the consolidated financial statements included in the 2004 Form 10-K of Allegheny Energy, Inc.  Amounts to be
                  funded for these obligations are influenced by future actuarial determinations and discretionary considerations, and
                  cannot be reasonably estimated beyond one year into the future.  In all future filings in which a table is provided,
                  we will include a footnote to the table to this effect, including a reference to the pension and postretirement
                  benefits footnote to the financial statements.  We will also include any additional information that is material to
                  an understanding of our cash requirements.

New Accounting Standards,
page 106

     4.
     You disclose that, based on a qualitative analysis, you do not believe that either West Penn or Potomac Edison is the
         primary beneficiary of either of the described variable interest entities.  Please show us how you performed the qualitative
         analysis, including the basis for your conclusion. Further, tell us when you entered into the long-term electricity purchase
         contracts with these entities, whether the contracts are PURPA related, why you are "unable" to obtain the quantitative
         information, and whether this represents a temporary or permanent situation.

     West Penn and Potomac entered into PURPA related long-term electricity purchase contracts in July, 1987 and
                  February, 2000, respectively.

Although we concluded that these contracts represent variable interests in the variable interest entities ("VIE")
                  that generate the power, we have been unable to obtain the information that would be necessary to definitively
                  determine if either West Penn or Potomac is the primary beneficiary of each VIE.  We have requested this information
                  from the VIE both orally and in writing during each quarter of 2004.  The VIE is not required to provide this
                  information under the terms of the power purchase contracts, and has denied our requests because it considers this
                  information to be proprietary and confidential.  As a result, we believe that it is unlikely that we will receive
                  the requested information.

3

     Because West Penn and Potomac have been unable to obtain the information referred to above, they are not required to
                  apply FIN 46R to the variable interest entities in accordance with paragraph 4.g. of that financial interpretation.

Although we have been unable to obtain the information referred to above, the following qualitative factors and
                  considerations lead us to believe that West Penn and Potomac are not the primary beneficiaries of the VIE:

     i.
     The purchase contracts provide for delivery of power to West Penn and Potomac at a fixed rate with certain adjustments based
                           on avoided costs of specified Allegheny plants.  As a result, a portion of the variability in the cash
                           flows of the VIE relating to operating costs is not absorbed by the power contracts, to the extent that
                           such costs of the VIE differ from the costs of our plants.

ii.

The duration of the long-term purchase contracts for West Penn and Potomac extends through 2016 and 2030, respectively.  The
                           useful life of these plants will likely exceed these dates, possibly by twenty years or more.  As a result,
                           it is likely that the plants will continue to operate, and will increase or decrease in value, well after
                           the date that the contractual relationship with West Penn and Potomac ends.

iii.

All of the changes in the fair value of the VIE plants (for all periods) and all of the variability of the operating cash
                           flows of the VIE subsequent to the power contract expiration dates will accrue entirely to the benefit or
                           detriment of the VIE.  We believe that these benefits or detriments (and related variability in cash flows)
                           will likely be larger (either positively or negatively) than the net variability in the VIEs' costs and
                           market price of electricity absorbed by the West Penn and Potomac purchase contracts.  To the extent that
                           this is the case, West Penn and Potomac would not be considered the primary beneficiary of the VIE, and
                           consolidation would not be appropriate under FIN 46R.

iv.

Based on discussions with the VIE sponsors/operators, they have not "deconsolidated" the VIEs from their financial
                           statements based on their belief that the variability associated with the fair value of the plants
                           outweighs the variability in cash flows aborbed by the West Penn and Potomac purchase contracts.

     The New Accounting Standards section (page 106) contains the statement that we do not believe that West Penn or
                  Potomac are the primary beneficiaries of the VIEs based on a qualitative analysis, although we continue to pursue,
                  but have been unable to obtain, certain quantitative information necessary to fully support this position.  Note 26
                  to the consolidated financial statements included in our 2004 Form 10-K, contains the statement that Allegheny
                  continues to pursue, but has been unable to obtain, certain information necessary to determine if the VIEs should be
                  consolidated, without reference to the subjective or qualitative analysis referred to in the New Accounting
                  Standards section.

Upon further consideration of this matter, in future filings, we will delete all references to our subjective belief
                  based on qualitative factors regarding primary beneficiary status, and will simply state that we have not been able
                  to obtain the information necessary to make a determination in this matter.

4

The Potomac Edison
Company and Subsidiaries- Consolidated Statements of Cash Flows, page 219

     5.
     Your netting of cash flows related to other assets and liabilities in arriving at your operating cash flows may not be
         appropriate.  Please present the changes in other assets separately from the changes in other liabilities to the extent
         significant.  If not, please provide us a detail of the items comprising other operating cash flows and, if not clear from
         the descriptive caption, ensure we understand your basis for operating classification.

     Potomac's Consolidated Statements of Cash Flows included a line within the operating cash flows section related to
                  the combined change in certain asset and liabilities for each of the years presented.  The following table
                  segregates the changes in assets and liabilities that comprise this line item.  This operating cash flow detail was
                  not separately disclosed because the amounts were not individually significant.  In future filings, we will not
                  combine changes in assets and liabilities in operating cash flows, unless the amounts are clearly insignificant, and
                  we will reclassify amounts on this basis for all periods presented.

     2004
     2003
     2002

     Other assets

       3,348

       (18,501
        )
       4,117

     Other liabilities
       10,845

       20,024

       4,740

     Other, net
       14,193

       1,523

       8,857

Note 5. Asset
Impairments, page 231

     6.
     Please explain your basis under GAAP for including the impairment of the Hagerstown, Maryland property in "Other income and
         expenses, net" rather than as a component of operating income.  See paragraph 25 of SFAS 144.

5

     The Hagerstown, Maryland property consisted of an office building situated on 69 acres together with an undeveloped
                  320 acre business park.  The office building had served as Allegheny's corporate headquarters until early 2004.
                  Allegheny made the decision to sell this property in 2004, and it was classified as held-for-sale at that date.  No
                  adjustment to the carrying value was made at that date, because the fair value of the property was estimated to be
                  greater than its carrying value.   In July, 2004 the Company entered into an agreement to sell the property for a
                  cash amount slightly greater than its carrying value.  The potential buyer terminated the sales agreement in
                  December, 2004, and the carrying value was written-down by approximately $0.9 million to reflect a revised estimated
                  fair value less cost to sell at that date.  The Company completed the sale of the property in May, 2005 at a price
                  that approximated its carrying value at that date.  The 2004 impairment charge of approximately $0.9 million was
                  included in "other income and expenses, net" because the assets were no longer considered to be operating assets,
                  and because greater than 50% of the carrying value of the property was attributable to the undeveloped land.  This
                  was consistent with the Company's historical practice of recording gains or losses on land sales in "other income
                  and expenses, net" with appropriate disclosure of the amount of gain or loss relating to such sales.

Note 11. Pension Benefits
and Postretirement