Allegheny Energy, Inc. v. DQE, Inc. (74 F. Supp. 2d 482, 1999)

United States District Court for the Western District of Pennsylvania 1999-12-03

Commerce and Trade

Citations

Full opinion text

TABLE OF CONTENTS

I.Findings of Fact............................................................485

A. The Parties............................................................485

B. Jurisdiction and Venue..................................................485

C. Deregulation of Electric Utilities in Pennsylvania...........................485

D. Background of the Merger...............................................487

E. The Merger Agreement..................................................488

1) Representations and Warranties......................................489

a) Parties’ Understanding of MAE Proviso............................491

2) Conditions to Consummation of the Merger.............................491

3) Right of Termination................................................492

F. The Restructuring Proceedings...........................................492

1) Background.........................................................492

2) The PECO Decision..................................................493

3) The January 12,1998 Noia and Marshall Meeting.......................495

4) Allegheny’sReaction to DQE’s Urging to Sale...........................496

5) West Penn’s and Duquesne’s Restructuring Proceedings.................497

a) Results of Duguesne’s Restructuring Proceedings...................497

b) Results of West Penn’s Restructuring Proceeding...................497

G. Allegheny and DQE Record The Results Of The Restructuring Orders.........500

H. The Effect Of The Restructuring Orders...................................502

I. Results Of The Merger Filing............................................503

J. DQE Terminates The Merger Agreement..................................505

K. Allegheny’s Settlement With The PUC ....................................510

L. DQE’s Asset Swap And Auction ..........................................511

II. Conclusions of Law..........................................................512

A. Principles Of Contract Construction.......................................512

B. DQE’s Termination Under Section 8.2(a)...................................513

1) Measurement Of A Material Adverse Effect (MAE) Arising From Application Of Restructuring Legislation.............................513

2) Definition Of “Materially Adverse Effect”..............................517

3) Application Of MAE Provision........................................518

4) As Of October 5,1998................................................518

C. Availability Of Section 8.2(a) To DQE......................................520

FINDINGS OF FACT AND CONCLUSIONS OF LAW

CINDRICH, District Judge.

This case involves DQE, Inc.’s termination on October 5, 1998 of a merger agreement with Allegheny Energy, Inc. That same day, Allegheny filed the instant complaint seeking specific performance of the merger agreement arguing that DQE had breached the agreement. Beginning on October 20, 1999, the parties presented extensive testimony and other evidence during a six day bench trial, after which the parties submitted proposed findings of fact and conclusions of law. The case has been extensively and expertly briefed and argued. Based on the evidence, arguments, and authorities presented, the court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

I.Findings of Fact

A.The Parties

1. This case involves the October 5, 1998 decision of DQE, Inc. (“DQE”) to terminate a merger agreement with Allegheny Energy, Inc. (“Allegheny”) that was announced on April 7, 1997 and approved by both DQE’s and Allegheny’s shareholders on August 7,1997.

2. Allegheny is a Maryland corporation and a registered public utility holding company under the Public Utility Holding Company Act of 1935, 15 U.S.C. § 79 et seq. (“PUHCA”). Allegheny derives substantially all of its income from the electric utility operations of its subsidiaries Monongahela Power Company, The Potomac Edison Company, and West Penn Power Company (“West Penn”), which are engaged principally in the generation, transmission, distribution and sale of electric energy in Pennsylvania, West Virginia, Maryland, Virginia, and Ohio. West Penn, the Pennsylvania subsidiary, constitutes approximately 45% of Allegheny’s total assets and revenues.

3. DQE, a Pennsylvania corporation, is an energy services holding company that owns various regulated and unregulated subsidiaries. DQE’s regulated electric utility subsidiary, Duquesne Light Company (“Duquesne”), provides electric service to customers in southwestern Pennsylvania, including, principally, the City of Pittsburgh. Duquesne constitutes approximately 90% of DQE’s assets and revenues.

4. Both Allegheny and DQE are publicly held companies. The shares of both companies are registered pursuant to Section 12 of the Securities Exchange Act of 1934 and are listed and traded on the New York Stock Exchange. (Direct Testimony of Dr. Gregg A. Jarrell (“Jarrell Direct”), at 10Exhs. D98, D101).

B. Jurisdiction and Venue

5. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1391(a) and (c). (PTO ¶ 3).

C. Deregulation of Electric Utilities in Pennsylvania

6. Effective January 1, 1997, Pennsylvania adopted the Electricity Generation Customer Choice and Competition Act. 66 Pa. Cons.Stat. §§ 2801 et seq. (the “Restructuring Legislation”). To benefit retail electric customers, the Restructuring Legislation is designed to facilitate the deregulation of, and phase-in of competition in, the business of generating electricity in Pennsylvania. Transmission and distribution services, which are the other two legs of a vertically integrated utility, are not opened for competition — they are generally described as “natural monopolies”— but instead will continue to be regulated.

7. The Restructuring Legislation gives each customer the right, over a phase-in period beginning January 1, 1999, to purchase electricity from any qualified supplier. 66 Pa. Cons.Stat. §§ 2802, 2806. Formerly, each Pennsylvania retail customer could purchase electricity solely from the utility that had been granted an exclusive franchise over the customer’s service territory. But with the passage of the Restructuring Legislation, customers are now permitted to choose their own suppliers, a development that represents a major change for electric utilities, which for the first time will be required to sell the electricity they generate in a competitive market, with no guaranteed customers or revenue base and no assurance that market prices will be sufficient to cover the cost of generating electricity or to produce a profit. (Direct Testimony of David D. Marshall (“Marshall Direct”), at 4).

8. Under the Restructuring Legislation, two-thirds of Pennsylvania retail electricity customers are currently eligible to choose their supplier of electricity, or “shop,” with the remainder becoming eligible on January 1, 2000. Although shopping has been permitted only since January 1, 1999, by October 1, 1999 over 14 percent of Allegheny’s and over 20 percent of DQE’s customer load had switched to new suppliers. (Exh. D218).

9. The Restructuring Legislation requires customers to continue to pay to their franchised utility a delivery charge that reflects the cost of transmission and delivery of power over the utility’s existing power lines, plus a separate charge reflecting the price that each customer agrees to pay to the electricity supplier of its choice. (PTO ¶ 12).

10. Prior to the implementation of the Restructuring Legislation, the Pennsylvania Public Utility Commission (“PUC”) traditionally prescribed the rates that utilities such as West Penn and Duquesne may charge for all of their services — generation, transmission and distribution. In order to ensure that rates were both stable and as low as possible, the PUC required utilities to defer recovery of certain obligations and investments, including investments in generation assets, in return for the assurance — or the so-called “regulatory compact” — that they would have an opportunity to recover such costs under regulation in the future. (Morrell Direct at If 6.)

11. Because of the requirements imposed by the pervasive regulatory system, expenditures and investments (including investments in generation facilities) that were made and approved under the regulatory regime may not be recoverable in a competitive market. To the extent that recovery of these investments will be impeded or prevented by the advent of competition, some or all of these costs would become “stranded.” (Morrell Direct at ¶ 7.)

12. The Restructuring Legislation requires customers to pay to their franchised utility during the period from January 1, 1999 through December 31, 2005 (the “Transition Period”), unless extended by the PUC, a competitive transition charge (“CTC”) that provides for the recovery of the utility’s stranded costs.

13. More specifically, the Restructuring Legislation directed the PUC to determine the level of transition or stranded costs and required each utility in Pennsylvania to file a “restructuring” application with the PUC. Thereafter, the PUC would hold a public proceeding to establish each utility’s stranded costs and issue a restructuring order awarding such costs. The amount of stranded costs awarded is to be collected by each utility through the CTC which is paid by the utility’s transmission and distribution customers during the Transition Period.

14. Thus, the CTC represents a stream of guaranteed future revenue that electric utilities are entitled to recover during the Transition Period regardless of whether future market prices of electricity go up or down (Marshall Direct, at 35). Accordingly, the restructuring proceedings were a matter of vital importance to electric utilities in Pennsylvania as the amount of CTC awarded by the PUC could substantially affect revenues and income during the Transition Period.

15. In sum, rates have changed under the Restructuring Legislation from a single “bundled” rate for combined services to “unbundled” rates consisting of three major components: (i) a charge for “generation services” — that is, electric power supply; (ii) a charge for “delivery services” — that is, transmission and distribution services; and (iii) the CTC.

16. However, the incumbent local utility is permitted to continue to charge the bundled rate to any customer that remains on its system. By comparison, customers who shop for electricity from alternative suppliers receive a credit — the “shopping credit” — equal to the generation component of their bundled rate, while paying the CTC and delivery charges to the incumbent local utility and a market rate for generation to a third party. Thus, only customers who shop receive a market price for generation. (Morrell Direct at ¶ 10.)

D. Background of the Merger

17. Beginning in October 1996, senior representatives of Allegheny and DQE began discussing the possibility of pursuing a merger. (Noia Direct at ¶ 25.)

18. At the time, the electric utility industry was undergoing a wave of consolidation as the industry was, throughout the nation, moving away from traditional regulation towards a more competitive environment. (Marshall Direct, at 3; Direct Testimony of John W. Barr (“Barr Direct”), at 8).

19. In these early conversations, Allegheny’s Chairman and Chief Executive Officer, Alan J. Noia (“Noia”), expressed to DQE’s Chief Executive Officer, David D. Marshall (“Marshall”), how important the transaction was to Allegheny, in part because it would diversify Allegheny’s business risk beyond the traditional regulated utility business to the unregulated businesses in which DQE clearly had experience and success. (See Id. at ¶ 26.) Mr. Noia told Mr. Marshall that he believed DQE’s management skills in marketing and retail services would be critical in a competitive environment and particularly valuable when combined with Allegheny’s historic strength in traditional electrical generation businesses. {See id.)

20. DQE believed that it would be too small to compete effectively on a standalone basis in the coming competitive environment in Pennsylvania. It was DQE’s belief that the electric generation business would come to be dominated by a small number of very large, national and international players that would be able to reduce their risk and improve their margins by generating electricity through a system of plants located throughout the United States and diversified as to type of fuel and capacity. (Trial Tr., 10/26/99 (Marshall), at 125). DQE believed that a combination with Allegheny could provide it with greater opportunities to compete in a deregulated market, and that a combined DQE/Allegheny itself would be an attractive acquisition candidate as competition ushered in the wave of consolidation expected to occur among electric utilities here and abroad. (Marshall Direct, at 4-5).

21. Following passage of the Restructuring Legislation, Allegheny wished to remain in the generation business. In contrast, DQE had considered selling its plants, but had made no final decision to do so. (Marshall Direct, at 5, 17). Nevertheless, after it began merger discussions with Allegheny, DQE recognized that a combined DQE/Allegheny could be a stronger competitor in the generation business than DQE on a stand-alone basis. (Marshall Direct, at 17). DQE and Allegheny agreed that they would try to remain in the generation business in the event they merged, but only if they could do so on a rational financial basis that would not expose their shareholders to undue risk. (Marshall Direct, at 17-18).

22. Both DQE and Allegheny were well aware that their Pennsylvania subsidiaries shortly would be required to commence restructuring proceedings in Pennsylvania pursuant to the Restructuring Legislation. (Marshall Direct, at 18). Both companies recognized that there was a danger that one or both subsidiaries might not be permitted by the PUC to recover enough of their stranded costs to protect their shareholders from undue risk. DQE was fully prepared to exit the generation business if, as a result of the PUC’s rulings in the restructuring proceedings, a sale of generation appeared necessary to protect the interests of its shareholders, and it made this clear to Allegheny. Accordingly, DQE made no commitment to Allegheny to remain in the generation business. (Marshall Direct, at 18; Trial Tr., 10/26/99 (Marshall), at 101-02).

23. During early discussions, DQE representatives did not express concern about the amount of stranded cost recovery that Allegheny would seek or need heading into deregulation (Noia Direct at ¶ 29.) Instead, DQE, which believed that it had more stranded costs than Allegheny, was more concerned with addressing whether Allegheny would oppose generation-related stranded cost recovery for high cost utilities such as DQE. (See id.) Mr. Noia explained that Allegheny had taken this position at the time that the competition legislation was being formulated but now that legislation had passed, Allegheny believed that each company — including West Penn — had to do its best to recoup its stranded costs. (See id.)

E. The Merger Agreement

24. On April 5, 1997, Allegheny and DQE entered into a written Agreement and Plan of Merger (the “Merger Agreement” or “Agreement”) contemplating a tax-free, stock-for-stock merger transaction (the “Merger”), pursuant to which DQE would become a wholly-owned subsidiary of Allegheny. Under the terms of the Merger Agreement, each share of DQE common stock was to be exchanged for 1.12 shares of Allegheny common stock (the “Exchange Ratio”). (PTO ¶¶4-5). The Exchange Ratio represented a 22 percent premium for DQE’s shareholders based on the closing prices of DQE’s and Allegheny’s stock on April 4, 1997, the last trading day prior to announcement of the Merger. (Marshall Direct, at 3). If the Merger was consummated, DQE’s shareholders would have owned approximately 42 percent of the combined company. (PTO ¶ 5).

25. The Merger Agreement also provided that Allegheny would select nine of the fifteen directors for the merged company and that Mr. Noia would serve as Chairman and Chief Executive Officer, with Mr. Marshall slated to be President and Chief Operating Officer. (Noia Direct at ¶ 31.) Mr. Marshall conceded that these terms ensured that Allegheny would control the combined company. (Marshall Direct at 44.)

26. In negotiating the Merger, DQE and Allegheny exchanged five year projections (the “Budgets”). Section 5.1(f) of the Merger Agreement, titled “Absence of Certain Changes,” expressly provides that each party’s Budget was “provided to, and accepted by,” the other party. (Exh. Dl, at § 5.1(f)). Thus, the Budgets and the expected financial performance of each company set forth therein formed an integral part of the parties’ agreement to merge. In fact, in Section 5.1(f) of the Merger Agreement, DQE and Allegheny represented and warranted to each other that, among other things, except as expressly contemplated by their Budgets and certain other specified financial reports, each would suffer no “development” that would be “reasonably likely” to have a material adverse effect on its financial condition, properties, business or results of operations. (Exh. Dl, at § 5.1(f)). In preparing their Budgets, both companies assumed that they would recover 100 percent of their stranded costs from the PUC in their subsidiaries’ respective restructuring proceedings. (Exh. D102; Trial Tr., 10/26/99 (Marshall), at 205-06).

1) Representations and Warranties

27. Section 5.1 of the Merger Agreement sets forth the express contractual representations and warranties made by both Allegheny and DQE in connection with the contemplated Merger.

28. In Section 5.1(e) of the Merger Agreement, Allegheny and DQE represented and warranted to each other that from and after the “Audit Date” (December 31, 1996) their respective financial statements would fairly present their financial position and results of operations in accordance with generally accepted accounting principles (“GAAP”), and that their filings with the Securities and Exchange Commission (the “Reports”), including the financial statements set forth in the Reports, would contain no materially false or misleading statements of fact or omit to state any material facts necessary to make the reports not misleading. Section 5.1(e) provided in pertinent part that:

... [T]he Reports did not, and any Reports filed with the SEC subsequent to the date hereof will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. Each of the consolidated balance sheets included in or incorporated by reference into the Reports (including the related notes and schedules) fairly presents, or will fairly present, the consolidated financial position of it and its Subsidiaries as of its date and each of the consolidated statements of income and of changes in financial position included in or incorporated by reference into the Reports (including any related notes and schedules) fairly presents, or will fairly present, the results of operations, retained earnings and changes in financial position, as the case may be, of it and its Subsidiaries for the periods set forth therein ... in each case in accordance with generally accepted accounting principles (“GAAP”) consistently applied during the period involved, except as may be noted therein.

(Exh. Dl, at § 5.1(e) (emphasis added)).

29. An objective of the parties in negotiating this Agreement, as expressed by Mr. Marshall in a March 25, 1999 letter to Mr. Noia, was that the contract make it “difficult to terminate [the Merger] since we both know the costs that termination would impose on each of our companies.” (PX 35; see also 10/26/99 Trial Tr. at 129; Noia Direct ¶ 33.) As Mr. Noia phrased it, Allegheny’s intention was “to maximize the chances of closing.” (PX 29 at DQE 014215.)

30. Consistent with this objective, DQE sought in the Agreement to minimize a party’s ability to use legislative or regulatory developments and, in particular, the new legislation in Pennsylvania deregulating aspects of the electric generation business, as grounds to terminate the merger agreement. Like many merger agreements, the DQE/Allegheny agreement contains a provision requiring, as a condition to closing, that the parties represent to one another that no development has occurred from a specified date prior to the Merger Agreement being signed that is reasonably likely to have a material adverse effect (“MAE”) on aspects of the company’s business. This representation is embodied in Section 5.1(f) of the Merger Agreement and reads as follows:

Except as disclosed in the Reports filed prior to the date hereof, or as expressly contemplated by this Agreement or as expressly contemplated by the DQE, Inc.1997 Five Year Plan, a copy of which has been provided to, and accepted by, [Allegheny] (the “Company Budget ”) or the Allegheny Power Final Operating, Cash and Capital Budget for Year 1997 and Forecast Years 1998 through 2001, a copy of which has been provided to, and accepted by, [DQE] (the “Parent Budget ” and collectively with the Company Budget, the “Budgets ”), since the Audit Date it and its Subsidiaries have conducted their respective businesses only in, and have not engaged in any material transaction other than according to, the ordinary and usual course of such businesses and there has not been (i) any change in the financial condition, properties, business or results of operations of it and its Subsidiaries or any development or combination of developments affecting it of which its management has knowledge that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect on it.

(Exh. D1, at § 5.1(f)(i) (emphasis added)).

31. MAE is defined in Section 5.1(a) of the Merger Agreement, which states in pertinent part as follows:

“Material Adverse Effect” means with respect to any Person, a material adverse effect on the financial condition, properties, operations, business or results of operations of such Person and its Subsidiaries taken as a whole;

32. The definition of MAE in Section 5.1(a) of the Merger Agreement was the subject of negotiations between Mr. Noia and Mr. Marshall. Mr. Noia urged that the existence of an MAE resulting from any regulatory proceeding or ruling prior to closing of the Merger be determined by reference to the effect of the proceeding or ruling solely on the particular company affected. Allegheny took this position because it was concerned with DQE’s ownership interest in certain nuclear facilities and wanted to be able to terminate the Merger Agreement in the event DQE suffered an adverse ruling with respect to those plants. (Trial Tr., 10/21/99 (Noia), at 48; Exh. D125, at 1-2).

33. In contrast, Mr. Marshall urged that an MAE be determined by reference to the effect of any development on the “combined” company. He believed that Allegheny’s proposal, i.e., “[Ijooking at impacts on one company” only, would make “it much easier to terminate the agreement.” (Exh. D126, at 2).

34. In the drafting leading up to the Agreement, DQE suggested a proviso to this definition that would limit the extent to which a party could claim an MAE if the “effect” resulted from legislation or legislative activity. The proviso as initially proposed by DQE read as follows:

provided, however, that any such effect resulting from any change in law, rule or regulation promulgated by (i) United States Congress, (ii) the Securities and Exchange Commission (the “SEC”) with respect to the Public Utilities Holding Company Act (the “PUHCA”), (iii) the Pennsylvania State Legislature or the Pennsylvania Public Utilities Commission or (iv) the Federal Energy Regulatory Commission (the “FERC”). or any interpretation of any such law which affects both [DQE] and its Subsidiaries taken as a whole and [Allegheny] and its Subsidiaries taken as a whole shall only be considered when determining if a Material Adverse Effect has occurred to the extent that such effect on one such party exceeds the effect on the other party[.]

(PX 3 at AE 118829-30.)

35. Also, DQE initially suggested that the effect on it of any action taken by the PUC be specifically excluded from the MAE definition:

provided further that any such effect resulting from any action with respect to [DQE] taken by the Pennsylvania Public Utility Commission shall not be considered when determining whether a Material Adverse Effect has occurred.

36. DQE later amended this exclusionary language to specifically refer to the Restructuring Legislation:

provided, further, that any such effect resulting from or caused by any Governmental Consents (as defined by Section 7.1(c)) or as a result of any restructuring plan of such person or any of its Subsidiaries pursuant to the Electricity Generation Customer Choice and Competition Act ... shall not be considered when determining if a Material Adverse Effect has occurred.

PX 4 at p. 10 (Rider 10.1); PX 5 at p.10 (Rider 10.1).)

37. The final definition of MLAE as contained in the Merger Agreement reads as follows:

“Material Adverse Effect ” means with respect to any Person, a material adverse effect on the financial condition, properties, operations, business or results of operations of such Person and its Subsidiaries taken as a whole; provided, however, that any such effect resulting from ... the application of the Pennsylvania Restructuring Legislation ... which affects both [DQE]- and its Subsidiaries, taken as a whole, and [Allegheny] and its Subsidiaries, taken as a whole, shall only be considered ivhen determining if a Material Adverse Effect has occurred to the extent that such effect on one such party exceeds such effect on the other party.

(emphasis added).

a) Parties’ Understanding of MAE Proviso

38. DQE and Allegheny both testified at trial that prior to the execution of the Merger Agreement, both parties anticipated presenting its restructuring case before the PUC in the alternative — one case to be applied in the event that the Merger was consummated and one to be applied if the Merger was not consummated. (Noia Direct at ¶ 47; Morrell Direct at ¶ 33-36; Marshall Direct at 16.)

39. Mr. Noia and Michael Morrell (“Morrell”), Allegheny’s Chief Financial Officer, testified that they understood that the proviso, where applicable, required that the MAE test would only be applied to the amount that represented the extent to which the effect was greater on one party than the other (i.e. the “differential effect”). (See PX 294 at AE 118504 (“Effects of Pa. restructuring legislation — take difference of effect on [companies] and apply it to MAE”); Noia Direct at ¶32; Morrell Direct at ¶ 69.)

40. Moreover, Mr. Morrell testified that in his “view [ ] a sophisticated merger partner like DQE would take into account what any particular [thing] that has occurred would have an affect on the future earning power of its merger partner.... You look at what happened to its value, what happened to its earning potential .... But those words in my view mean looking at the financial capabilities of the Company and how they have or have not been impacted since the day the representation was originally made.” (10/20/99 Trial Tr. at 124-25.)

2) Conditions to Consummation of the Merger

41. Section 7.3 of the Merger Agreement set forth the conditions to the parties’ obligation to consummate the Merger. One such condition, found in Section 7.3(a), required all of the representations and warranties made by Allegheny in the Merger' Agreement, including the 1V1AE Representation, to be:

true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation and warranty expressly speaks as of an earlier date), and [DQE] shall have received a certificate signed on behalf of [Allegheny] by an executive officer of [Allegheny] to such effect.

(Exh. Dl, at § 7.3(a)).

3) Right of Termination

42. Article VIII of the Merger Agreement specified the circumstances in which one or both parties could terminate the contract prior to consummation of the Merger (the “Effective Time”). Subsection (a) of section 8.2 of the Merger Agreement provided in pertinent part that:

[The] Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by action of the board of directors of either [Allegheny] or [DQE] if (a) the Merger shall not have been consummated by October 5, 1998 ... (the “Termination Date”); provided that the Termination Date shall automatically be extended for six months if, on October 5, 1998:(i) any of the conditions set forth in Section 7.1(c) [requiring receipt of required governmental approvals of the Merger] has not been satisfied or waived, (ii) each of the other conditions to consummation of the Merger set forth in Article VII [conditions to each party’s obligation to effect the merger including representations and warranties) has been satisfied or waived or can readily be satisfied, and (iii) any Governmental Consent that has not yet been obtained is being pursued diligently and in good faithf.] ....

(Exh. Dl, at § 8.2(a) (emphasis added)).

43. Thus, under Section 8.2(a), DQE was permitted to terminate the Agreement on October 5, 1998 if the Merger had not been consummated by that date, unless “on October 5, 1998,” each of the conditions to the Merger (other than those relating to receipt of required governmental approvals) had been satisfied — including the condition in Section 7.3(a) that the MAE Representation in Section 5.1(f) be true and correct.

44. Section 8.2 further provided, however, that

the right to terminate this Agreement pursuant to clause (a) ... shall not be available to any party that has breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure of the Merger tó be consummated.

(Dx 1).

45. Section 6.5(c) of the Agreement required both parties “to cooperate with each other and use ... all commercially reasonable efforts ... to obtain as promptly as practicable all ... approvals” necessary to consummate the Merger. (Dx 1).

46. Section 8.3(b)(ii) of the Merger Agreement also permitted DQE to terminate the Merger Agreement at any time, either before or after October 5, 1998, in the event Allegheny committed, but failed to promptly cure, any material breach of the contract. Specifically, Section 8.3(b)(ii) states as follows:

[The] Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by stockholders of [DQE] ... by action of the board of directors of [DQE]:

******

(b) if ... (ii) there has been a material breach by [Allegheny] of any representation, warranty, covenant or agreement contained in [the] Agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by [DQE] to [Allegheny] ....

(Exh. Dl, at § 8.3(b)(ii)).

F. The Restructuring Proceedings

1) Background

47. The Restructuring Legislation defines stranded costs as “known and measurable net electric generation costs ... which traditionally would be recoverable under a regulated environment but which may not be recoverable in a competitive electric generation market.” One method for determining stranded costs for generation assets would be to sell those assets in an arm’s length market transaction. Stranded costs could then be measured by the difference between the book value, representing the undepreciated historical cost of the plant, and the sale-determined market value of the plant. An alternative to selling generation to determine stranded costs is an administrative determination of stranded costs, which relies on computer-generated market price and cost forecasts and application of discount rates that extend well into the future to establish stranded costs.

48. At the time they agreed to merge, both Allegheny and DQE recognized that the proposed Merger could take a year or more to close after the Merger Agreement was signed. (Marshall Direct, at 7-8). They also knew that there was a significant risk that the Merger might not be consummated at all, either due to a failure to obtain required regulatory approvals or because any regulatory approval might contain conditions that were unacceptable to the parties or that could not be satisfied. (Marshall Direct at 7-8).

49. Because both DQE and Allegheny understood there was no guarantee that the Merger would be consummated, they expected and agreed that each would be responsible for conducting its respective subsidiary’s restructuring proceedings before the PUC in accordance with the best interests of its own shareholders. (Marshall Direct, at 8,16-17).

50. Initially, however, both Allegheny and DQE agreed on a common strategy and approach. Both determined to ask the PUC to make a “market-based” determination of stranded costs, where actual market prices of electricity would be used to determine how much of West Penn’s and Duquesne’s costs were recoverable and how much were stranded. Allegheny and DQE agreed that such a determination would be superior to, and more likely to protect the interests of their shareholders than, the forecast approach, where the PUC would decide what future electricity prices were likely to be after considering testimony and forecasts offered by the utilities and the various intervenors in the restructuring proceedings. (Marshall Direct, at 8-9).

51. Consequently, both Allegheny and DQE proposed that the PUC employ a “multi-phase” approach, in which a CTC would be set initially by the PUC and then periodically adjusted in separate proceedings at intervals over the course of the Transition Period. (Marshall Direct, at 8). Although the initial CTC would be awarded based on expert forecasts of market prices, the CTC would be adjusted (or “trued up”) at the end of the Transition Period to reflect actual market prices, with future credit to be given to, or additional charges imposed on, customers to accomplish the adjustment. (Marshall Direct, at 10).

52. The Pennsylvania Office of Consumer Advocate (“OCA”) and various in-tervenors objected to these proposals, arguing that the only acceptable way to make a market-based determination of stranded costs would be to immediately auction the generation assets of each utility, which would establish the current fair market value of those assets. To the extent that the utility realized less than book value at the auction, the PUC would permit the utility to recover the difference through collection of a CTC from its customers. (Marshall Direct, at 10).

2) The PECO Decision

53. In December 1997, while the West Penn and Duquesne restructuring proceedings were still pending, the PUC issued a final order in the restructuring case of Philadelphia Electric Company (“PECO”), the first utility in Pennsylvania to undergo restructuring. (Marshall Direct, at 11).

54. The PUC’s order in the PECO restructuring case made clear that it intended to conduct a single, one-time determination of stranded costs for each Pennsylvania utility and, consequently, that the PUC would not agree to any form of phased, market-based determination as proposed by Duquesne and West Penn. (Marshall Direct, at 11).

55. Additionally, the PUC adopted the forecast of future market prices for electricity submitted by the OCA, which projected prices substantially above those forecast by West Penn and Duquesne. (Marshall Direct, at 11).

56. From the PUC’s PECO decision, it became apparent that the OCA price forecast would also be applied by the PUC in any administrative determination of the stranded costs in the West Penn and Du-quesne restructuring cases, and, in such event, would result in a significant disal-lowance of each utility’s stranded cost request. (Marshall Direct, at 11).

57. The PUC’s PECO decision was a watershed event, and one to which DQE and Allegheny reacted in very different ways.

58. DQE believed that in a competitive environment, the business of generating electricity would be a commodity business characterized by high volatility and low margins, and would through consolidation come to be dominated by a relatively small number of large national companies. (Marshall Direct, at 4-5). Given its perception of the coming competitive environment, DQE believed that full recovery of stranded costs in Duquesne’s restructuring proceeding would be vital to its ability to compete, and that anything less than full recovery of its stranded costs would expose its shareholders to the risks of a highly volatile, low margin commodity business. (Marshall Direct, at 11-12).

59. The PECO decision demonstrated to DQE that, since the PUC would adopt the OCA’s price projections, which were substantially higher than those of DQE and Allegheny, full recovery of Duquesne’s stranded costs could not be obtained in an administrative determination of stranded costs, but could only be assured through the offer of an auction of its generation assets. (Marshall Direct, at 11).

60. Allegheny does not dispute that the generation business in a competitive environment will be more volatile and riskier and dominated by large national players. (Exhs. D 182, D183). Allegheny believes, however, that it is well-positioned to meet these challenges in light of its claimed expertise in the generation business. In addition, Allegheny emphasizes that it is a relatively low-cost generator of power given its lack of nuclear generation, its rural customer base and the location of its fossil fuel plants near sources of fuel. (Direct Testimony of Alan J. Noia (“Noia Direct”), at 12, 16, 27). Given these factors, Allegheny believes that it can — and would like to try to — survive in the coming competitive environment by retaining its generation assets and continuing to operate, as it has in the past, as an “independent” generator of electricity. (Noia Direct, at 24-29; Marshall Direct, at 25-26).

61. Allegheny has argued that its status as a low-cost generator with a low shopping credit under deregulation will deter most of West Penn’s customers from shopping for alternative suppliers of power. Since customers who do not shop will continue to pay the old, pre-deregulation price for electricity, Allegheny believes that West Penn will be able to maintain its pre-competition revenue stream. (Direct Testimony of John G. Graham (“Graham Direct”), at 17-18). DQE presented evidence, however, showing that West Penn faces a substantial threat of competition. (Exhs. D204, D216, D217).

62. As previously noted, after just nine months of competition, and with only two-thirds of retail customers in Pennsylvania being allowed to shop, over 14 percent of West Penn’s customer load had already “shopped away” from West Penn and was purchasing power from alternate suppliers as of October 1,1999. (Exh. D218).

63. In light of the PECO decision, DQE determined that it could assure full recovery of its stranded costs only by offering in Duquesne’s restructuring proceeding to auction all of Duquesne’s generation assets for sale to the highest bidder. (Marshall Direct, at 11-12). Having decided to make that offer, DQE still needed to determine when and how to make it.

64. DQE concluded, after consulting with its advisers, that it could lose the opportunity to gain PUC approval of an auction plan if it attempted to submit an auction proposal after the close of the record in Duquesne’s restructuring proceeding.

65. Indeed, the intervenors in Du-quesne’s restructuring proceeding had advocated the position that it would be unfair to Duquesne’s ratepayers to permit an auction of Duquesne’s generation assets, with a subsequent true-up of the stranded cost award, after an administrative determination had been made, since a low auction sale price might then mean that customers would pay a CTC higher than the charge imposed as a result of the PUC’s earlier administrative determination of stranded costs.

66. However, in an effort not to undermine Allegheny’s attempt to get the highest stranded cost award it could before deciding whether to retain its generation assets, DQE waited until Duquesne submitted its rejoinder testimony in its restructuring case (i.e., until just before the record closed) to propose a generation auction. In further deference to Allegheny, DQE made its auction proposal on conditional terms, offering to auction its generation assets only if the Merger with Allegheny were not consummated. (Marshall Direct, at 18-19).

3) The January 12, 1998 Noia and Marshall Meeting

67. On January 12, 1998, Messrs. Marshall and Noia met in advance of Mr. Marshall’s testimony before the PUC in the proceedings on the parties’ separate application for approval of the Merger. (Marshall Direct, at 19-20). Mr. Marshall was concerned that, given Duquesne’s offer of a generation auction in its standalone case, he would be asked during his testimony whether Allegheny would agree to auction its assets as well. (Marshall Direct, at 20).

68. Mr. Marshall explained to Mr. Noia why DQE had determined to offer an auction in Duquesne’s restructúring case, and why it believed that an auction provided the only means available to Allegheny for securing a market-based determination of stranded costs in West Penn’s proceeding and protecting the interests of the combined company’s shareholders. (Marshall Direct, at 20).

69. Mr. Noia viewed things differently. Mr. Noia testified that Mr. Marshall was, in his eyes, unduly panicked by the PECO case and that he believed that it was still the beginning of a long process that would present many opportunities either to obtain a solid restructuring order or to elect to sell generation. (Noia Direct at ¶ 50; 10/20/99 Trial Tr. at 143-44.)

70. Mr. Noia argued to Mr. Marshall that even if the PUC were to adopt the OCA price forecast in the West Penn proceeding as it had done in the PECO case, Allegheny would still be able to address that result by selling its generation assets later, if necessary. (Noia Direct at ¶ 51.)

71. Mr. Noia further contended that generation was intended to be a major component of the merged entity’s future— and that Allegheny, unlike DQE, was extremely proficient at operating generation — and that it was too early in the restructuring process to risk losing West Penn’s low-cost assets in an auction. (See id.)

72. Mr. Noia also maintained that if West Penn indicated to the PUC any willingness to sell its generation assets, no other stranded cost solution would be possible because the intervenors and PUC, which obviously favored divestiture, would leap at the offer. (See id.; 10/20/99 Trial Tr. at 143-46.)

4) Allegheny’s Reaction to DQE’s Urging to Sale

73. Recognizing that Mr. Marshall had made a case for considering an offer to auction generation and that the results of the hearing might require it, Mr. Noia asked Mr. Morrell to prepare a memorandum to the Allegheny Board on the status of the Pennsylvania restructuring proceeding that raised the issue of whether an auction offer should be made. (See PX 40.)

74. Mr. Morrell’s memorandum outlined potential near-term lost revenues if the assumptions in its case — which included 100% shopping — actually came about and West Penn was awarded no CTC and could not sell generation for two years to cover the loss because of pooling of interest accounting restrictions related to the Merger. (Morrell Direct at ¶¶ 43-44.) The memorandum forecast that a CTC recovery of between $200 and $800 million (the PUC final order would award West Penn $524 million in CTC recovery) would be sufficient to collect a CTC for two years and then “the Company could take some action at that time to try and mitigate the lost revenue including a divestiture of generation after the two-year prohibition on sales of assets (due to pooling of interest accounting) expires.” (PX 40 at AE 109444.)

75. In preparation for a February 1998 Allegheny Board meeting, Mr. Morrell and others from Allegheny met with representatives of Goldman, Sachs & Co. (“Goldman Sachs”) regarding generation asset valuation and divestiture. (See PX 304.) Goldman Sachs assured Allegheny that they believed that West Penn’s generation would sell above book value. (Morrell Direct at ¶ 45.) They repeated that advice to the Allegheny Board on February 5, 1998, estimating that West Penn’s assets would sell for between 1.25 to 2.2 times book value. (See PX 68.)

76. Prior to the February meeting, Mr. Morrell also received advice from Merrill Lynch on February 3, 1998 that they were comfortable that West Penn plants would get at least book value in a sale (for at least 2 years). (Morrell Direct at ¶ 45; PX 305 AE 123244-45.)

77. Neither firm predicted any imminent drop in market prices. (10/20/99 Trial Tr. at 85.) This was important because an issue existed as to whether a sale could be made within two years of consummation of the Merger, when the rules governing the ability to use pooling accounting, which the Merger Agreement contemplated, would restrict the combined companies’ activities.

78. The Merrill Lynch and Goldman Sachs advice was conveyed to DQE shortly after it was received. (10/20/99 Trial Tr. at 86.)

79. At the February 5 meeting, Allegheny’s Board concluded that it was premature to offer to sell generation assets to determine stranded costs. (See PX 287 at AE 121336-339; Noia Direct at ¶ 56.) As Mr. Morrell explained Allegheny’s strategy, Allegheny “saw substantial value from our generation and wanted to keep that value for the benefit of our shareholders.... I remember explaining it that way to Mr. Marshall and financial analysts that it made perfectly good sense to go as long as you could and as far as you could to find out how much subsidy, so to speak, you could get, and then once you know the subsidy in the form of the CTC, add it on top of the value of the assets, basically what the output of them can be sold in the market and sale at market, then make a determination.” (10/20/99 Trial Tr. at 148-49.)

5) West Penn’s and Duquesne’s Restructuring Cases

80. West Penn and Duquesne were unique among the Pennsylvania utilities in that at the same time that they were proceeding through restructuring, their parents were in the process of seeking approval from the PUC for the Merger. As a result, West Penn and Duquesne each had to put forward what amounted to two distinct stranded cost cases: (i) a standalone case that assumed that the Merger did not occur, and (ii) a merger case to be applied if the Merger was consummated (the “Merger Restructuring Scenario”). (Morrell Direct at ¶ 33.)

81. In addition, because, unlike West Penn, Duquesne ultimately offered to sell generation, if possible, as a means to establish its stranded costs, the Duquesne case also contemplated in its stand-alone case both selling and not selling generation. (Morrell Direct at ¶¶ 29-36; PX 12 at DQE 028182, 028189.)

82. The PUC coordinated these approaches by making final stranded cost determinations for West Penn and Du-quesne in the alternative: one to be applied if the Merger went forward and one to be applied if it did not. (Id.)

a) Results of Duquesne’s Restructuring Proceedings

83. On March 25, 1998, the PUC administrative law judge (“ALJ”) assigned to hear Duquesne’s restructuring case recommended that the PUC accept Duquesne’s offer of a generation auction to establish its stranded costs for its generation assets, and that Duquesne recover all of its other stranded costs, with the only exception of $142 million for mothballed plants and certain regulatory assets. (Marshall Direct, at 12).

84. On April 30, 1998, through a nonbinding vote of its commissioners (a “polling decision”), the PUC voted to adopt the ALJ’s recommendation and accept Du-quesne’s offer of an auction. (Marshall Direct, at 12).

85. On May 29, 1998, the PUC entered a final order confirming its polling decision and approving Duquesne’s auction proposal. The PUC directed Duquesne to submit a detailed auction plan within 90 days, and ruled that if the auction did not generate proceeds equal to the book value of Du-quesne’s generation assets, the difference would be recovered through imposition of a CTC equal to the shortfall (with some minor exceptions relating to mothballed plants and regulatory assets). (Marshall Direct, at 12; Exh. D95 at 78-83).

86. The PUC’s decision permitted Du-quesne to fully recover all of its stranded costs, estimated at $1.9 billion, except for the $142 million in costs related to mothballed generating units and certain regulatory assets. (Marshall Direct, at 12-13; Exh. D95 at 78-83).

87. On April 30, the PUC also accepted “the rejoinder offer of Duquesne to divest itself of generation if the proposed DQE-[Allegheny] Merger is not consummated.” The PUC also found that if DQE did' not proceed with a divestiture, “the value of Duquesne’s stranded utility generation shall be determined on the record of this proceeding,” which the PUC termed the “merger scenario.” (PX 12 at DQE 028182, 028189). In the Merger Restructuring Scenario, the PUC granted Du-quesne an administrative determination of $1,332 billion (after tax) in stranded costs, which was a reduction from the $1.5 billion (after tax) that the ALJ had awarded.

b) Results of West Penn’s Restructuring Proceeding

88. In West Penn’s restructuring case, Allegheny claimed $1.6 billion in stranded costs. Because Allegheny had not offered an auction, on March 25, 1998, the ALJ assigned to the case adopted the OCA’s price forecast, as expected, and recommended that the PUC allow West Penn to recover only $241 million — or just 15 percent — of its requested stranded costs. (Marshall Direct, at 21). Although Allegheny was seeking in the restructuring proceeding to obtain the highest stranded cost recovery it could, so too were .all Pennsylvania utilities in their own restructuring proceedings, and Allegheny used the same assumptions and followed the same procedures as the other utilities in Pennsylvania. (Trial Tr., 10/20/99 (Noia), at 207-11). •

89. The ALJ’s recommended 15 percent recovery was by far the worst result in the proceedings of the major utilities in Pennsylvania. According to a presentation to the financial community prepared by Allegheny, the other utilities had received stranded cost awards ranging from 65 to 90 percent of their requests. (Exh. D171).

90. Allegheny’s reaction to the ALJ’s decision was immediate and vehement.

91. On March 26, 1998, Allegheny was publicly quoted as declaring that the ALJ’s decision constituted “a threat ... to the future viability of the company.” (Ken Zapinski, Power Merger Delay Sought, PITTSBURGH POST-GAZETTE Mar. 26,1998).

92. On April 14, 1998, it stated in a brief filed with the PUC that the ALJ’s recommendation, if adopted by the PUC, would have “devastating financial consequences.” (Exh. D170, at 2) Allegheny further stated that it would need at least $1 billion in stranded cost recovery “for West Penn to maintain its financial integrity.” (Exh. D170, at 5).

93. Allegheny prepared a presentation to the financial community in which it claimed that the ALJ’s decision would cause West Penn to lose all of its earnings in 1999, 2000 and 2001, and to lose more than $600 million in earnings throughout the Transition Period. (Exh. D171).

94. Allegheny also arranged a meeting with the Governor of Pennsylvania in an effort to enlist his aid in lobbying the PUC to reject the ALJ’s recommendation and permit Allegheny to recover substantially all of its $1.6 billion of stranded costs. In a set of “talking points” prepared for this meeting, Mr. Noia wrote that if the PUC adopted the ALJ’s recommendation for stranded cost recovery for West Penn, the effect “would be to severely punish and financially cripple” Allegheny. (Exh. D17). Mr. Noia also planned to tell the Governor that, if the ALJ’s decision was adopted, West Penn would have no ability to obtain bond financing for four years, that “Allegheny Energy’s stock price would plummet,” and that “[t]he lowest cost electric company in Pennsylvania will have been hurt the most.” (Exh. D17; Trial Tr., 10/21/99 (Noia), at 14). Mr. Noia also intended to tell the Governor that West Penn would need to recover at least two-thirds of its claimed stranded costs, or approximately $1 billion, to retain its financial strength. (Exh. D17; Trial Tr., 10/21/99 (Noia), at 16).

95. Allegheny also arranged to transport Allegheny’s employees to Harrisburg, where they held a rally on the steps of the Capitol to protest the results of the ALJ’s recommendation and to urge the PUC to reject it. (Trial Tr., 10/21/99 (Noia), at 10).

96. On April 30, 1998, the PUC held its scheduled informal polling on West Penn’s restructuring proceeding (the “Polling Decision”). The Polling Decision was an improvement to the ALJ’s decision — it doubled the stranded cost recovery to approximately $525 million over a seven-year period in the Merger Restructuring Scenario, or approximately $595 million on a stand-alone basis. (See PX 24A.) (The difference in the Merger and standalone awards reflected the PUC’s allocation to ratepayers of certain generation-related synergy savings in the event the Merger occurred.)

97. A major factor in the PUC’s stranded cost award was its assessment of the market value of West Penn’s plants: “Since all of West Penn’s generating assets have a book value of $1,196 billion, West Penn’s approach [seeking $1,084 billion in stranded utility generation] results in the conclusion that all of its generation assets are worth less than $100 million, or less than 10% of their book value. We agree ... that the proposal i[s] not credible.” (PX 13 at DQE 008754.) The result echoed the arguments of Allegheny Tele-dyne. (See PX 387 at 3 (“[I]n the competitive market place, West Penn’s generating assets will be worth far more than their book value, leaving West Penn with hundreds of millions of dollars of ‘stranded benefits.’ Therefore ... a reasonable result in this case is the denial of West Penn’s stranded cost claim.”).) The PUC instead concluded that the market value of West Penn’s plants was $908.8 million.

98. Although this ruling represented an improvement over the ALJ’s recommendation, Mr. Noia testified that Allegheny was still “greatly disappointed” by these results, which remained, in Allegheny’s view, inadequate and financially harmful. (Trial Tr., 10/21/99 (Noia), at 3).

99. The PUC’s disallowance of $1 billion of West Penn’s stranded cost request still left Allegheny with recovery of just one-third of its claimed stranded costs, still by far the worst result, in percentage terms, of any utility in Pennsylvania. In fact, a chart prepared by Allegheny itself revealed that no other utility in Pennsylvania received less than 54 percent of its requested stranded costs, and that the average recovery of Pennsylvania utilities was 70 percent. (Exh. D178).

100. On April 30, 1998, Allegheny issued a press release in response to the PUC’s polling decision in which it stated, without qualification, that the decision was “woefully inadequate, financially harmful to West Penn and unacceptable” and would cause the company to suffer “severe financial harm and competitively disadvantage the lowest cost producer of power in Pennsylvania.” (Trial Tr., 10/20/99 (Mor-rell), at 96-97; Exh. D55).

101. On May 6, 1998, Mr. Noia wrote to Allegheny’s employees explaining that “the PUC polling is inadequate and financially harmful to our company.” He wrote that “[i]f the final order does not show an improvement, we will have no choice but to challenge it in the courts to make sure that our customers, shareholders and employees are not harmed.” (Exh. D57, at 2).

102. On May 29, 1998, the PUC issued a final order identical in all material respects to the Polling Decision. (PTO ¶¶ 16-18; Exh. D93) As a result, Allegheny was denied recovery of approximately $1 billion, or two-thirds, of West Penn’s stranded costs.

103. This disallowance represented the loss of a large guaranteed income stream that would have substantially cushioned what DQE reasonably viewed as the considerable risks inherent in engaging in the highly volatile, low margin commodity business of generating electricity in a deregulated market.

104. Following issuance of the PUC’s final order, Allegheny had a second meeting, on or about June 10, 1998, with Governor Ridge in a further effort to enlist his aid to improve upon the effects of the PUC’s decision. In notes prepared for this meeting, Mr. Noia set forth points that he wanted to make with the Governor, including Mr. Noia’s view that the West Penn restructuring order was “financially harmful,” that Allegheny was “facing a huge write-off’ to reflect the effect of the order, and that Allegheny’s “stock price [had] plummeted” in response to the order (D22A; Trial Tr., 10/21/99 (Noia), at 17-28), dropping 5.5 percent in the time period from the PUC’s April 30, 1998 polling decision through June 9, 1998, just prior to Mr. Noia’s scheduled second meeting with the Governor. (Trial Tr., 10/21/99 (Noia), at 25).

105. At trial, Allegheny offered the testimony of an economist, Dr. Bruce E. Stangle, who conducted an “event study” purporting to demonstrate just the opposite of what Mr. Noia planned to tell Governor Ridge — i.e., that there was no negative reaction in Allegheny’s stock price to the PUC’s ruling in West Penn’s restructuring case. Dr. Stangle’s event study was flawed in a number of respects, most significantly in his mechanistic use of three day “event windows” to study Allegheny’s stock price reaction to various events, which had the effect of excluding significant declines in Allegheny’s stock price that are not properly attributable to anything other than the PUC’s ruling, and in his failure to consider that the Merger Agreement’s fixed Exchange Ratio caused the prices of Allegheny and DQE common stock to move in tandem. Indeed, as demonstrated by DQE’s expert economist, Dr. Gregg A. Jarrell, a properly conducted event study makes clear that Allegheny’s stock price declined in a statistically significant amount following the PUC’s issuance of the West Penn polling decision. (Jarrell Direct, at 50-52).

106. Allegheny has argued that the West Penn restructuring proceeding was no more than a typical “rate case,” and constituted an extended “negotiation” with the PUC over stranded cost recovery. Although the restructuring proceeding may have had some characteristics of a rate case, its significance was far more profound that of an ordinary rate case, since it represented a one-time, non-recurring opportunity for a utility to secure a guaranteed revenue stream which would be collected during the course of the transition to full competition, regardless of the market price for electricity during that period.

107. While we recognize that the restructuring process involved some negotiations with political undertones, Allegheny’s conduct and statements made in reaction to the PUC’s rulings undermine its arguments in this case that it never really believed that the West Penn restructuring order had, or was reasonably likely to cause it severe financial harm.

108. Indeed, Peter J. Skrgic, the Allegheny officer responsible for the operation of the Allegheny’s generating plants, prepared a memorandum during the restructuring proceedings outlining a presentation to be made to Allegheny’s Board of Directors on the results in West Penn’s case. (Exh. P289). In that memorandum, Mr. Skrgic declared that Allegheny needed to recover a