<PAGE>


                          Page 1 of 20
                                
                                
                                
                            FORM 10-Q
                                
                                
                                
               SECURITIES AND EXCHANGE COMMISSION
                     WASHINGTON, D.C.  20549
                                
                                
                                
                                
                                
           Quarterly Report under Section 13 or 15(d)
             of the Securities Exchange Act of 1934




For Quarter Ended September 30, 1998


Commission File Number 1-3376-2





                   THE POTOMAC EDISON COMPANY
     (Exact name of registrant as specified in its charter)




  Maryland and Virginia                         13-5323955
(State of Incorporation)           (I.R.S. Employer Identification No.)



           10435 Downsville Pike, Hagerstown, Maryland  21740-1766
                       Telephone Number - 301-790-3400





   The registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.

   At November 16, 1998, 22,385,000 shares of the Common Stock
(no par value) of the registrant were outstanding, all of which
are held by Allegheny Energy, Inc., the Company's parent.

<PAGE>

                              - 2 -
                                
                                
                                
                   THE POTOMAC EDISON COMPANY
                                
         Form 10-Q for Quarter Ended September 30, 1998
                                
                                
                                
                              Index
                                
                                
                                
                                                            Page
                                                             No.

PART I--FINANCIAL INFORMATION:

  Statement of income - Three and nine months ended
    September 30, 1998 and 1997                               3


  Balance sheet - September 30, 1998
    and December 31, 1997                                     4

 
  Statement of cash flows - Nine months ended
    September 30, 1998 and 1997                               5


  Notes to financial statements                              6-9


  Management's discussion and analysis of financial
    condition and results of operations                     10-19



PART II--OTHER INFORMATION                                   20


<PAGE>


                                                    - 3 -

                                       THE POTOMAC EDISON COMPANY
                                           Statement of Income
                                          (Thousands of Dollars)

<TABLE>
<CAPTION>


                                                  Three Months Ended             Nine Months Ended
                                                     September 30                  September 30
                                                    1998         1997            1998            1997

    ELECTRIC OPERATING REVENUES:
       <S>                                       <C>          <C>             <C>             <C>
       Residential                               $  76,633    $  69,337       $ 232,894       $ 227,156
       Commercial                                   41,743       38,963         118,231         110,826
       Industrial                                   52,883       50,006         153,807         146,777
       Wholesale and other, including affiliates     9,299        9,733          30,648          29,207
       Bulk power transactions, net                  9,975        7,425          24,170          18,593
         Total Operating Revenues                  190,533      175,464         559,750         532,559


    OPERATING EXPENSES:
      Operation:
       Fuel                                         37,527       35,737         109,008         104,606
       Purchased power and exchanges, net           38,610       32,845         104,053         102,489
       Deferred power costs, net                      (890)         571           4,798            (419)
       Other                                        20,727       21,176          64,426          62,675
      Maintenance                                   12,746       14,523          39,974          45,427
      Depreciation                                  18,660       18,375          56,025          55,126
      Taxes other than income taxes                 12,368       11,281          37,432          36,211
      Federal and state income taxes                14,105       10,568          39,696          32,100
              Total Operating Expenses             153,853      145,076         455,412         438,215
              Operating Income                      36,680       30,388         104,338          94,344

    OTHER INCOME AND DEDUCTIONS:
      Allowance for other than borrowed funds
       used during construction                        193          643             408           1,367
      Other income, net                              2,596        6,423           7,158          12,204
              Total Other Income and Deductions      2,789        7,066           7,566          13,571

              Income Before Interest Charges        39,469       37,454         111,904         107,915

    INTEREST CHARGES:
      Interest on long-term debt                    11,740       11,919          35,280          35,746
      Other interest                                   666          458           1,617           1,661
      Allowance for borrowed funds used during
       construction                                   (236)        (219)           (718)           (887)

              Total Interest Charges                12,170       12,158          36,179          36,520


    NET INCOME                                   $  27,299    $  25,296       $  75,725       $  71,395

</TABLE>

    See accompanying notes to financial statements.


<PAGE>

                                                   - 4 -

                                          THE POTOMAC EDISON COMPANY
                                                Balance Sheet
                                            (Thousands of Dollars)

<TABLE>
<CAPTION>


                                                                  September 30,               December 31,
                                                                      1998                        1997
    ASSETS:
      Property, Plant, and Equipment:
         <S>                                                    <C>  <C>                    <C> <C>
         At original cost, including $58,589
           and $55,702 under construction                       $    2,237,028              $   2,196,262
         Accumulated depreciation                                     (912,370)                  (859,076)
                                                                     1,324,658                  1,337,186
      Investments:
         Allegheny Generating Company - common stock at equity          45,093                     55,847
         Other                                                             479                        529
                                                                        45,572                     56,376
      Current Assets:
         Cash                                                            2,577                      2,319
         Accounts receivable:
            Electric service, net of $2,259 and $1,683
               uncollectible allowance                                  77,911                     83,431
            Affiliated and other                                        20,892                      5,302
         Notes receivable from affiliates                               33,750                      1,450
         Notes receivable from subsidiary                               66,250                     -
         Materials and supplies - at average cost:
            Operating and construction                                  22,397                     23,715
            Fuel                                                        13,873                     15,843
         Prepaid taxes                                                  15,400                     15,052
         Other                                                             723                      4,716
                                                                       253,773                    151,828
      Deferred Charges:
         Regulatory assets                                              75,513                     80,651
         Unamortized loss on reacquired debt                            16,091                     17,094
         Prepaid pensions                                                8,525                      4,925
         Other                                                          14,073                     12,587
                                                                       114,202                    115,257

                Total Assets                                    $    1,738,205              $   1,660,647

    CAPITALIZATION AND LIABILITIES:
      Capitalization:
         Common stock                                           $      447,700              $     447,700
         Other paid-in capital                                           2,690                      2,690
         Retained earnings                                             286,970                    239,391
                                                                       737,360                    689,781
         Preferred stock                                                16,378                     16,378
         Long-term debt and QUIDS                                      578,296                    627,012
                                                                     1,332,034                  1,333,171
      Current Liabilities:
         Long-term debt due within one year                             50,000                      1,800
         Accounts payable                                               23,622                     29,125
         Accounts payable to affiliates                                 39,097                     19,929
         Taxes accrued:
            Federal and state income                                     7,797                      2,106
            Other                                                       19,163                     11,461
         Interest accrued                                               12,985                      9,487
         Payrolls accrued                                               -                           6,353
         Other                                                          15,983                     10,553
                                                                       168,647                     90,814
      Deferred Credits and Other Liabilities:
         Unamortized investment credit                                  20,063                     21,470
         Deferred income taxes                                         178,152                    178,529
         Regulatory liabilities                                         11,604                     12,424
         Other                                                          27,705                     24,239
                                                                       237,524                    236,662

                Total Capitalization and Liabilities            $    1,738,205              $   1,660,647

</TABLE>


      See accompanying notes to financial statements.


<PAGE>

                                               - 5 -


                                     THE POTOMAC EDISON COMPANY
                                       Statement of Cash Flows
                                        (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                                           Nine Months Ended
                                                                             September 30
                                                                         1998               1997

    CASH FLOWS FROM OPERATIONS:
         <S>                                                          <C>                <C>
         Net income                                                   $  75,725          $  71,395
         Depreciation                                                    56,025             55,126
         Deferred investment credit and income taxes, net                 3,603              6,782
         Deferred power costs, net                                        4,798               (419)
         Unconsolidated subsidiaries' dividends in excess of earnings    10,788              1,107
         Allowance for other than borrowed funds used
             during construction                                           (408)            (1,367)
         Restructuring liability                                           -               (13,645)
         Changes in certain current assets and
             liabilities:
                Accounts receivable, net                                (10,070)             8,064
                Materials and supplies                                    3,288             (3,356)
                Accounts payable                                         13,665             (2,812)
                Taxes accrued                                            13,393              6,106
                Interest accrued                                          3,498              4,350
         Other, net                                                      (1,920)             5,664
                                                                        172,385            136,995

    CASH FLOWS FROM INVESTING:
         Construction expenditures (less allowance for
            equity funds used during construction)                      (44,630)           (43,631)


    CASH FLOWS FROM FINANCING:
         Issuance of long-term debt                                      33,200               -
         Retirement of long-term debt                                   (34,000)              (800)
         Short-term debt, net                                              -                (7,497)
         Notes receivable from affiliates                               (32,300)           (39,200)
         Notes receivable from subsidiary                               (66,250)              -
         Dividends on capital stock:
            Preferred stock                                                (613)              (613)
            Common stock                                                (27,534)           (46,561)
                                                                       (127,497)           (94,671)


    NET CHANGE IN CASH                                                      258             (1,307)
    Cash at January 1                                                     2,319              1,444
    Cash at September 30                                              $   2,577          $     137


    SUPPLEMENTAL CASH FLOW INFORMATION:
         Cash paid during the period for:
             Interest (net of amount capitalized)                       $30,492            $31,657
             Income taxes                                                31,603             23,005

</TABLE>

    See accompanying notes to financial statements.


<PAGE>

                              - 6 -
                                
                                
                   THE POTOMAC EDISON COMPANY
                                
                 Notes to Financial Statements


1. The Potomac Edison Company (the Company) is a wholly-owned
   subsidiary of Allegheny Energy, Inc.  The Company's Notes to
   Financial Statements in its Annual Report on Form 10-K for
   the year ended December 31, 1997 should be read with the
   accompanying financial statements and the following notes.
   With the exception of the December 31, 1997 balance sheet in
   the aforementioned annual report on Form 10-K, the
   accompanying financial statements appearing on pages 3
   through 5 and these notes to financial statements are
   unaudited.  In the opinion of the Company, such financial
   statements together with these notes contain all adjustments
   necessary to present fairly the Company's financial position
   as of September 30, 1998, the results of operations for the
   three and nine months ended September 30, 1998 and 1997, and
   cash flows for the nine months ended September 30, 1998 and
   1997.


2. The Statement of Income reflects the results of past
   operations and is not intended as any representation as to
   future results.  The Company's comprehensive income does not
   differ from its net income.  For purposes of the Balance
   Sheet and Statement of Cash Flows, temporary cash investments
   with original maturities of three months or less, generally
   in the form of commercial paper, certificates of deposit, and
   repurchase agreements, are considered to be the equivalent of
   cash.


3. The Company owns 28% of the common stock of Allegheny
   Generating Company (AGC), and affiliates of the Company own
   the remainder.  AGC owns an undivided 40% interest, 840
   megawatts (MW), in the 2,100 MW pumped-storage hydroelectric
   station in Bath County, Virginia, operated by the 60% owner,
   Virginia Electric and Power Company, a nonaffiliated utility.
   Following is a summary of income statement information for
   AGC:

                                     Three Months Ended     Nine Months Ended
                                        September 30           September 30
                                      1998        1997      1998         1997
                                              (Thousands of Dollars)
   
   Electric operating revenues      $18,303     $19,664   $56,033      $60,288
   
   Operation and maintenance
     expense                            888         856     3,383        3,612
   Depreciation                       4,242       4,284    12,710       12,852
   Taxes other than income taxes      1,168       1,185     3,505        3,581
   Federal income taxes               2,708       3,109     8,480        9,374
   Interest charges                   3,707       3,888    10,518       11,765
   Other income, net                    (35)     (9,054)      (86)      (9,055)
     Net income                     $ 5,625     $15,396   $17,523      $28,159


   The Company's share of the equity in earnings above was $1.6
   million and $4.3 million for the three months ended September
   30, 1998 and 1997, respectively, and $4.9 million and $7.9
   million for the nine months ended September 30, 1998 and
   1997, respectively, and was included in other


<PAGE>

                              - 7 -


   income, net, on the Statement of Income.  Dividends received
   from AGC in 1998 exceeded equity in earnings by $10.8 million
   which reflects an effort to reduce AGC equity to about 45% of
   capital.


4. On April 7, 1997, the Company's parent, Allegheny Power
   System, Inc. (now renamed Allegheny Energy, Inc.) and DQE,
   Inc. (DQE), parent company of Duquesne Light Company in
   Pittsburgh, Pennsylvania, announced that they had agreed to
   merge in a tax-free, stock-for-stock transaction.

   On March 25, 1998, the Maryland Public Service Commission
   (PSC) approved a settlement agreement between Allegheny
   Energy, Inc. (Allegheny Energy) and various parties, in which
   the PSC indicated its approval of the merger.  This action
   was requested in connection with the proposed issuance of
   Allegheny Energy stock to exchange for DQE stock to complete
   the merger.
   
   On July 8, 1998, the City of Pittsburgh reached a settlement
   agreement with Allegheny Energy and agreed to support the
   merger.
   
   On July 16, 1998, the Public Utilities Commission of Ohio
   (PUCO) found that the proposed merger would be in the public
   interest.  The PUCO also stated that the Midwest Independent
   System Operator (ISO) is the regional transmission entity
   that will best serve the interests of the Ohio customers of
   Monongahela Power Company, the Company's utility affiliate,
   and will best mitigate any market power issues which might
   exist.
   
   The Nuclear Regulatory Commission has approved the transfer
   of control of the operating licenses for DQE's nuclear
   plants.  While Duquesne Light Company (Duquesne), principal
   subsidiary of DQE, will continue to be the licensee, this
   approval was necessary since control of Duquesne will pass
   from DQE to Allegheny Energy after the merger.
   
   On July 23, 1998, the Pennsylvania Public Utility Commission
   (PUC) approved the Allegheny Energy-DQE merger with
   conditions acceptable to Allegheny Energy in response to a
   Petition for Reconsideration filed by Allegheny Energy on
   June 12, 1998.  In its Petition for Reconsideration of a
   previous PUC Order, Allegheny Energy reiterated its
   commitment to staying in and supporting the Midwest ISO
   subject to merger consummation, and also offered to
   relinquish some generation in order to mitigate market power
   concerns.  Allegheny Energy committed to relinquishing
   control of the 570 MW Cheswick, Pennsylvania, generating
   station through at least June 30, 2000 and, in the event that
   the Midwest ISO has not eliminated pancaked transmission
   rates by June 30, 2000, Allegheny Energy could be required to
   divest up to 2,500 MW of generation, if the PUC were to so
   order.
   
   In a letter to Allegheny Energy dated July 28, 1998, DQE
   stated that its Board of Directors determined that DQE was
   not required to proceed with the merger under present
   circumstances, referring to the PUC's Orders of July 23, 1998
   (regarding the PUC's approval of the merger described above),
   and May 29, 1998 (regarding the restructuring plan of the
   Company's Pennsylvania affiliate, West Penn Power Company
   (West Penn) described in Note 6 below).  DQE took the
   position that the findings of both Orders constitute a
   material adverse effect under the Agreement and Plan of
   Merger and invited Allegheny Energy to agree promptly to
   terminate the merger agreement by mutual consent.  DQE
   asserted that the findings in


<PAGE>

                              - 8 -

   
   the PUC Orders will result in a failure of the conditions to
   DQE's obligation to consummate the merger.  DQE indicated
   that if Allegheny Energy was not amenable to a consensual
   termination, DQE would terminate the agreement unilaterally
   not later than October 5, 1998 if circumstances did not
   change sufficiently to remedy the adverse effects DQE stated
   were associated with the PUC Orders.  In a letter dated July
   30, 1998, Allegheny Energy informed DQE that DQE's
   allegations were incorrect, that the Orders do not constitute
   a material adverse effect, that Allegheny Energy remains
   committed to the merger, and that if DQE prevents completion
   of the merger, Allegheny Energy would pursue all remedies
   available to protect the legal and financial interests of
   Allegheny Energy and its shareholders.  Allegheny Energy has
   also notified DQE that its letter and other actions
   constitute a material breach of the merger agreement by DQE.

   On September 16, 1998, the Federal Energy Regulatory
   Commission (FERC) approved Allegheny Energy's merger with DQE
   with conditions that were acceptable to Allegheny Energy.
   The principal condition is divestiture of the Cheswick
   Generating Station which enhances the proposal initially made
   by Allegheny Energy and DQE to mitigate market power
   concerns.

   On October 5, 1998, DQE notified Allegheny Energy that it had
   decided to terminate the merger.  In response, Allegheny
   Energy filed with the United States District Court for the
   Western District of Pennsylvania on October 5, 1998, a
   complaint for specific performance of the merger agreement
   or, alternatively, damages and motions for a temporary
   restraining order and preliminary injunction against DQE.

   On October 28, 1998, the District Court denied Allegheny
   Energy's motions for a temporary restraining order and
   preliminary injunction.  The District Court did not rule on
   the merits of the complaint for specific performance or
   damages.  On October 30, 1998, Allegheny Energy appealed the
   District Court's order to the United States Court of Appeals
   for the Third Circuit.  Allegheny Energy cannot predict the
   outcome of the litigation between it and DQE.

   All of the Company's incremental costs of the merger process
   ($5.0 million through September 30, 1998) are being deferred.
   The accumulated merger costs will be written off by the
   Company when the merger occurs, or if it is determined that
   the merger will not occur.

  
5. As required by the Maryland PSC, the Company, on July 1,
   1998, filed testimony in Maryland's investigation into
   stranded costs, price protection, and unbundled rates.  The
   filing also requested a surcharge to recover the cost of the
   Warrior Run cogeneration project which is scheduled to
   commence production on October 1, 1999.  Hearings are
   scheduled to begin in April 1999.  A second PSC proceeding is
   planned to begin examining market power protective measures
   in December 1999.  Under the PSC's current timetable, a third
   of the state's electricity customers would be able to choose
   their electricity suppliers beginning in July 2000, and all
   customers would have choice by mid-2002.  On October 9, 1998,
   the Company and four other electric utilities operating in
   Maryland, filed appeals which request judicial review of
   decisions by the PSC in which the PSC asserted it has
   authority to restructure the electric utility industry
   without authorization from the state legislature.  The


<PAGE>
                                
                              - 9 -


   appeals allow the restructuring process to continue on
   schedule, while preserving the legal rights of utility
   companies to have state courts review PSC decisions.


6. In December 1996, Pennsylvania enacted the Electricity
   Generation Customer Choice and Competition Act (Customer
   Choice Act) to restructure the electric industry in
   Pennsylvania to create retail access to a competitive
   electric energy generation market.  The Company's
   Pennsylvania affiliate, West Penn, is subject to this Act.
   On August 1, 1997, West Penn filed with the PUC a
   comprehensive restructuring plan to implement full customer
   choice of electric generation suppliers as required by the
   Customer Choice Act.

   On November 4, 1998, the PUC tentatively approved an
   agreement between West Penn and intervenors to settle West
   Penn's restructuring proceeding. Under the settlement
   agreement, two-thirds of West Penn's customers may, beginning
   in 1999, choose an alternative generation supplier.  All of
   West Penn's customers can do so beginning in the year 2000.
   Additionally, West Penn received authorization to transfer
   its generation assets to an unregulated business at book
   value, and the unregulated business received authorization,
   subject to a code of conduct, to sell generation capacity and
   energy in unregulated markets.  A majority of West Penn's
   generating assets are jointly owned with its affiliates in
   Allegheny Energy, including the Company.  The Company and its
   affiliates, including West Penn, are also parties to a power
   supply agreement under which generating capacity, generating
   spinning reserves and energy are subject to intercompany
   allocations based in large part upon generation reserve
   margins of each company which are based on each company's
   demand from regulated customers. The anticipated changes in
   West Penn's generation demand will require adjustments in the
   administration of the power supply agreement.  The Company
   believes that West Penn's transfer of generation assets to an
   unregulated business and the administrative adjustments to
   the power supply agreement will not have a significant effect
   on the Company's operations or its financial condition.


7. In June 1997, the Financial Accounting Standards Board (FASB)
   issued Statement of Financial Accounting Standards (SFAS) No.
   131, "Disclosures about Segments of an Enterprise and Related
   Information," to establish standards for reporting
   information about operating segments in financial statements.
   The Company continues to review this standard for further
   potential effect on the Company's financial statement
   disclosures.
   
   In June 1998, the FASB issued SFAS No. 133, "Accounting for
   Derivative Instruments and Hedging Activities," to establish
   accounting and reporting standards for derivatives.  The new
   standard requires recognizing all derivatives as either
   assets or liabilities on the balance sheet at their fair
   value and specifies the accounting for changes in fair value
   depending upon the intended use of the derivative. The new
   standard is effective for fiscal years beginning after June
   15, 1999.  The Company expects to adopt SFAS No. 133 in the
   first quarter of 2000.  The Company is in the process of
   evaluating the impact of SFAS No. 133.


<PAGE>

                             - 10 -


                   THE POTOMAC EDISON COMPANY

	
   Management's Discussion and Analysis of Financial Condition
                    and Results of Operations


COMPARISON OF THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998
    WITH THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997


        The Notes to Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 should be read in conjunction with
the following management's discussion and analysis information.


Factors That May Affect Future Results

        This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forecast information
items that are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995.  These include
statements with respect to deregulation activities and movements
toward competition in states served by the Company and the DQE,
Inc. (DQE) merger as well as results of operations.  All such
forward-looking information is necessarily only estimated.  There
can be no assurance that actual results will not materially
differ from expectations.  Actual results have varied materially
and unpredictably from past expectations.

        Factors that could cause actual results to differ
materially include, among other matters, electric utility
restructuring, including the ongoing state and federal
activities; potential Year 2000 operation problems; developments
in the legislative, regulatory, and competitive environments in
which the Company operates, including regulatory proceedings
affecting rates charged by the Company; environmental legislative
and regulatory changes; future economic conditions; developments
relating to the proposed merger with DQE, including expenses that
may be incurred in litigation; and other circumstances that could
affect anticipated revenues and costs such as significant
volatility in the market price of wholesale power, unscheduled
maintenance or repair requirements, weather, and compliance with
laws and regulations.


Significant Events in the First Nine Months of 1998

*       Merger with DQE

        In a letter to Allegheny Energy dated October 5, 1998,
DQE stated that it had decided to terminate the merger.  In
response, Allegheny Energy filed with the United States District
Court for the Western District of Pennsylvania on October 5, 1998
a complaint for specific performance of the merger agreement or,
in the alternative, damages, and also filed a request for a
temporary restraining order and preliminary injunction against
DQE.  See Note 4 to the Financial Statements for more information
about the merger.  Allegheny Energy believes that DQE's basis for
seeking to terminate the merger is without merit.  Accordingly,
Allegheny Energy continues to seek the


<PAGE>


                             - 11 -


remaining regulatory approvals from the Department of Justice and
the Securities and Exchange Commission.  It is not likely either
agency will act on the requests unless Allegheny Energy obtains
judicial relief requiring DQE to move forward.  Allegheny Energy
cannot predict the outcome of the litigation between it and DQE.


*       Maryland Settlement and Deregulation

        After substantial negotiations, the Company reached a
settlement agreement with various parties on the Office of
People's Counsel's (OPC) petition for a reduction in the
Company's Maryland rates.  The agreement, which includes
recognition of costs to be incurred from the Warrior Run
cogeneration project, was filed with the Maryland Public Service
Commission (Maryland PSC) on July 30, 1998 and approved by that
Commission on October 27, 1998.  Under the terms of the
agreement, the Company will increase its rates about 4% ($13
million) in each of the years 1999, 2000, and 2001 (a $39 million
annual effect in 2001).  The increases are designed to recover
additional costs of about $131 million, over the period 1999-
2001, for capacity purchases from AES's Warrior Run generation
project net of alleged overearnings of $52 million for the same
period absent these adjustments.  The net effect of these changes
over the 1999-2001 time frame results in a pre-tax income
reduction of $12.0 million in 1999, $18.0 million in 2000, and
$22.0 million in 2001.  In addition, the settlement requires that
the Company share, on a 50% customer, 50% shareholder basis,
earnings above a threshold return on equity (ROE) level of 11.4%
for 1999-2001.  This sharing will occur through an after-the-fact
true-up conducted after each calendar year is completed.  In the
event the merger with DQE is consummated, an additional rate
reduction of $4.4 million annually will occur.  "Warrior Run" is
a cogeneration project being built by AES Corporation in western
Maryland.  The Company is required to purchase the project's
energy at above-market prices pursuant to the requirements of the
Public Utility Regulatory Policies Act of 1978 (PURPA).

        On July 1, 1998, the Company filed testimony in
Maryland's investigation into stranded costs, price protection,
and unbundled rates.  See Note 5 to the Financial Statements for
more information regarding the Maryland filing.


*       Virginia Rate Settlement

        On August 7, 1998, the Virginia State Corporation
Commission (Virginia SCC) approved an agreement reached between
the Company and the Staff of the Virginia SCC which will reduce
base rates for the Company's Virginia customers beginning
September 1, 1998 by about $2.5 million annually.  The review of
rates was required by an annual information filing in Virginia.


*       Pennsylvania Deregulation

        On November 4, 1998, the Pennsylvania Public Utility
Commission (PUC) tentatively approved an agreement between the
Company's Pennsylvania affiliate, West Penn Power Company (West
Penn), and intervenors to settle West Penn's deregulation
proceeding in that state.  Under the settlement agreement,


<PAGE>

                             - 12 -


West Penn's customers will obtain the ability to choose
alternative generation suppliers and West Penn's generation
assets, some of which are jointly owned with the Company, will be
removed from rate regulation.  See Note 5 to the Financial
statements for information concerning certain intercompany
transactions between the Company and West Penn which will be
affected by the Pennsylvania deregulation process.  The Company
does not believe that the changes to the intercompany
transactions, if any, will have a significant effect on the
Company's operations or its financial condition.


Review of Operations

EARNINGS SUMMARY

        The increase in net income in the third quarter and first
nine month periods was due primarily to increased kilowatt-hour
(kWh) sales to retail customers.


SALES AND REVENUES

        Percentage changes in revenues and kWh sales by major
customer classes were:

                                 Change from Prior Periods
                       Three Months Ended         Nine Months Ended
                          September 30              September 30
                       Revenues       kWh         Revenues      kWh

Residential              10.5%       10.7%           2.5%      2.2%
Commercial                7.1        10.4            6.7       8.3
Industrial                5.8         6.4            4.8       5.7
Total                     8.2         8.6            4.2       4.9


        Residential kWh sales, which are more weather sensitive
than the other classes, increased 10.7% in the third quarter due
primarily to weather conditions.  The third quarter of 1998 was
35% warmer than the corresponding 1997 period as measured in
cooling degree days.  Residential kWh sales increased only 2.2%
in the nine month ended period due to mild winter weather in
early 1998.  The first quarter winter weather was 11% warmer than
1997 and 22% warmer than normal as measured in heating degree
days.  The increase in commercial kWh sales for the three and
nine months ended periods reflects increased usage due to weather
and commercial activity as well as growth in the number of
customers. The increase in industrial kWh sales in both periods
reflects increased sales to paper and printing customers and to
the Eastalco aluminum reduction plant, and generally reflects
continued economic growth in the service territory.


<PAGE>


                             - 13 -


        The changes in revenues from sales to residential,
commercial, and industrial customers resulted from the following:

                                      Change from Prior Periods
                            Three Months Ended         Nine Months Ended
                               September 30              September 30
                                       (Millions of Dollars)

Fuel clauses                       $ 2.1                     $ 6.4
All other                           10.9                      13.8
Net change in retail
  revenues                         $13.0                     $20.2


        Revenues reflect not only the changes in kWh sales, but
also any changes in revenues from fuel and energy cost adjustment
clauses (fuel clauses) which have little effect on net income
because increases and decreases in fuel and purchased power costs
and sales of transmission services and bulk power are passed on
to customers by adjustment of customer bills through fuel
clauses.

        All other is the net effect of kWh sales changes due to
changes in customer usage (primarily weather for residential
customers), growth in the number of customers, and changes in
pricing other than changes in general tariff and fuel clause
rates.  The increase in the three and nine months ended periods
all other retail revenues was primarily the result of customer
usage and an increase in the number of customers.

        Wholesale and other revenues were as follows:

                                Three Months Ended     Nine Months Ended
                                   September 30          September 30
                                 1998        1997      1998         1997
                                         (Millions of Dollars)

Wholesale customers              $5.8        $6.8     $18.5        $20.6
Affiliated companies              2.2         2.6       7.5          7.0
Street lighting and other         1.3          .3       4.6          1.6
  Total wholesale and other
    revenues                     $9.3        $9.7     $30.6        $29.2


        Wholesale customers are cooperatives and municipalities
that own their own distribution systems and buy all or part of
their bulk power needs from the Company under regulation by the
FERC. Competition in the wholesale market for electricity was
initiated by the National Energy Policy Act of 1992 (EPACT),
which permits wholesale generators, utility-owned and otherwise,
and wholesale customers to request from owners of bulk power
transmission facilities a commitment to supply transmission
services.  Five-year contracts have been signed (one in 1997 with
an expiration date in 2002 with estimated annual revenues of $3
million, and four in 1998 with expiration dates in 2003 with
estimated annual revenues of $19 million) with the Company's
wholesale customers allowing the Company to continue as their
wholesale supplier.  The decrease in wholesale revenues in 1998
was primarily due to the mild 1998 winter as mentioned above.


<PAGE>

                             - 14 -


        Revenues from affiliated companies represent sales of
energy and intercompany allocations of generating capacity,
generation spinning reserves, and transmission services pursuant
to a power supply agreement among the Company and the other
regulated utility subsidiaries of Allegheny Energy.  The increase
in such revenues in the nine months ended September 30, 1998
resulted primarily from an increase in the allocation of
transmission services revenues to the Company.

        The increases in street lighting and other revenues in
the quarter and year-to-date periods ended September 30, 1998
were primarily due to the recording in 1998 of pole attachment
revenues for 1998 and 1997.

        Bulk power transactions consist of sales of power to
power marketers and other utilities.  Revenues from bulk power
transactions consist of the following items:

                                  Three Months Ended     Nine Months Ended
                                     September 30          September 30
                                   1998        1997      1998         1997
                                           (Millions of Dollars)
Revenues:
  Transmission services sales
    to nonaffiliated companies    $ 6.1        $3.2     $12.4        $10.3
  Bulk power                        3.9         4.2      11.8          8.3
    Total bulk power trans-
      actions, net                $10.0        $7.4     $24.2        $18.6


        Revenues from bulk power sales increased in the first
nine months of 1998 due to increased sales which occurred
primarily in the month of June as a result of warm weather which
increased the demand and price for energy.  The increase in
revenues from transmission services was due to an increase in
price.

        In June and July 1998, certain events combined to produce
significant volatility in the spot prices for electricity at the
wholesale level.  These events included extremely hot weather and
Midwest generation unit outages and transmission constraints.
Wholesale prices for electricity rose from a normal range of from
$25-$40 per megawatt-hour (mWh) to as high as $3,500-$7,000 per
mWh.  The costs of purchased power and revenues from sales to
power marketers and other utilities, including transmission
services, are currently recovered from or credited to customers
under fuel and energy cost recovery procedures.  The impact to
the fuel and energy cost recovery clauses, either positively or
negatively, depends on whether the Company is a net buyer or
seller of electricity during such periods.  The impact of such
price volatility in June and the third quarter of 1998 was
insignificant to the Company because changes are passed through
to customers through operation of fuel clauses.


OPERATING EXPENSES

        Fuel expenses for the three and nine months ended
September 30, 1998 increased 5.0% and 4.2%, respectively, due to
a 3.5% and 4.2% increase in kWh's generated. Fuel expenses are
primarily subject to deferred power cost accounting procedures
with the result that changes in fuel expenses have little effect
on net income.


<PAGE>

                             - 15 -


        Purchased power and exchanges, net represents power
purchases from and exchanges with other companies, capacity
charges paid to Allegheny Generating Company (AGC), an affiliate
partially owned by the Company, and other transactions with
affiliates made pursuant to a power supply agreement whereby each
company uses the most economical generation available in the
Allegheny Energy System at any given time, and consists of the
following items:

                                Three Months Ended     Nine Months Ended
                                   September 30          September 30
                                 1998        1997      1998         1997
                                         (Millions of Dollars)
Nonaffiliated transactions:
  Purchased power               $ 6.0       $ 3.3     $ 10.8       $  8.4
  Power exchanges, net           (1.1)        (.9)       (.4)         -
Affiliated transactions:
  AGC capacity charges            5.8         5.7       18.1         19.0
  Other affiliated capacity
    charges                      10.2        12.4       33.0         38.0
  Energy and spinning
    reserve charges              17.7        12.4       42.6         37.1
      Purchased power and
        exchanges, net          $38.6       $32.9     $104.1       $102.5


        The AES Warrior Run PURPA power station project in the
Company's Maryland jurisdiction is scheduled to commence
generation in 1999.  The Company unsuccessfully sought a buyout
or restructuring of the existing contract to reduce the cost of
power purchases ($60 million or more annually) and to prevent the
need for increases in the Company's rates in Maryland because of
the high cost of this energy.  On July 30, 1998, a settlement
agreement was filed with the Maryland PSC.  The settlement was
approved by the Maryland PSC on October 27, 1998.  See page 11
for further information on the agreement.

        The increase in other operation expenses for the nine
months ended September 30, 1998 was due primarily to increased
allowances for uncollectible accounts ($1.4 million), expenses
related to competition in Maryland ($1.4 million), and an
increase in salaries and wages.

        Maintenance expenses decreased $1.8 million and $5.5
million for the three and nine months ended September 30, 1998,
respectively, because of a management program to postpone such
expenses for the year in response to limited sales growth in the
first quarter due to the warm winter weather.  The Company is
postponing these expenses primarily by extending the time between
maintenance outages.  Maintenance expenses represent costs
incurred to maintain the power stations, the transmission and
distribution (T&D) system, and general plant, and reflect routine
maintenance of equipment and rights-of-way as well as planned
major repairs and unplanned expenditures, primarily from forced
outages at the power stations and periodic storm damage on the
T&D system.  Variations in maintenance expense result primarily
from unplanned events and planned major projects, which vary in
timing and magnitude depending upon the length of time equipment
has been in service without a major overhaul and the amount of
work found necessary when the equipment is dismantled.


<PAGE>

                             - 16 -


        The increase in taxes other than income taxes in the
three and nine months ended September 30, 1998 was primarily due
to an increase in gross receipts taxes resulting from greater
revenues from retail customers and increased property taxes
related to an increase in the assessment of property in Maryland.

        The increases in federal and state income taxes for the
three and nine months ended September 30, 1998, were primarily
due to increases in income before taxes, exclusive of other
income which is reported net of taxes.

        The decreases in allowance for other than borrowed funds
used during construction (AOFDC) of $.5 million and $1.0 million
for the three and nine months ended September 30, 1998,
respectively, resulted primarily from adjustments of prior
periods.

        The decreases in other income, net, of $3.8 million and
$5.0 million in the three and nine months ended September 30,
1998, respectively, were primarily due to an interest refund on a
tax-related contract settlement in the three and nine months
ended September 30, 1997, received by the Company's subsidiary,
AGC.

        Other interest expense reflects changes in the levels of
short-term debt maintained by the Company throughout the year, as
well as the associated rates.


Financial Condition

        The Company's discussion on Financial Condition,
Requirements, and Resources and Significant Continuing Issues in
its Annual Report on Form 10-K for the year ended December 31,
1997 should be read in conjunction with the following
information.

        In the normal course of business, the Company is subject
to various contingencies and uncertainties relating to its
operations and construction programs, including legal actions and
regulations and uncertainties related to environmental matters.
See Notes 4, 5, and 6 to the Financial Statements for information
about merger activities, the Maryland activities relating to the
deregulation of electricity generation, and the Pennsylvania
Customer Choice Act's effect on its affiliate, West Penn.


*       Year 2000 Readiness Disclosure

        As the year 2000 approaches, most organizations,
including the Company, could experience serious problems related
to software and various equipment with embedded chips which may
not properly recognize calendar dates. To minimize such problems,
the Company and its affiliates in the Allegheny Energy System
(the System) are proceeding with a comprehensive effort to
continue operations without significant problems in the Year 2000
(Y2K) and beyond.  An Executive Task Force is coordinating the
efforts of 23 separate Y2K Teams, representing all business and
support units in the System.


<PAGE>

                             - 17 -
   
   
        The System has segmented the Y2K problem into the
following components:

*       Computer software
*       Embedded chips in various equipment
*       Vendors and other organizations on which the System
        relies for critical materials and services.


        The System's effort for each of these three components
includes assessment of the problem areas, remediation, testing
and contingency plans for critical functions for which
remediation and testing are not possible or which do not provide
reasonable assurance.

        The Company has expended significant time and money over
the past several years on upgrading and replacing its large and
complex computer systems and software to achieve greater
efficiency as well as Y2K readiness.  As a result, the Company
expects these systems to achieve a state of Y2K readiness on or
about March 31, 1999, subject to continuing review and testing.
   
        Various equipment used by the System includes thousands
of embedded chips.  Most are not date sensitive, but identifying
those which are, and which are critical to operations, is a labor
intensive task.  Identification, remediation, and testing in many
cases require the assistance of the original equipment
manufacturers.  Even they frequently cannot state with certainty
if the chips they used are date sensitive.  The System's review
calls for the inventory and assessment of suspect embedded chips
in critical systems to be completed by December 31, 1998, with
remediation initiated as needs are identified, and with 1999 to
complete remediation and testing.

        Integrated electric utilities are uniquely reliant on
each other to avoid, in a worst case situation, cascading failure
of the entire electrical system.  The System is working with the
Edison Electric Institute (EEI), the Electric Power Research
Institute (EPRI), the North American Electric Reliability Council
(NERC), and the East Central Area Reliability Agreement group
(ECAR) to capitalize on industry-wide experiences and to
participate in industry-wide testing and contingency planning.
The effort with regard to vendors and other organizations is to
obtain reasonable assurance of their readiness to conduct
operations at the Year 2000 and beyond and, where reasonable
assurance is questionable, to develop contingency plans.  Of
particular concern are telecommunications systems which are
integral to the System's electricity production and distribution
operations.  While the System will develop contingency plans for
critical telecommunication needs, there can be no assurance that
the contingency plans could cope with a significant failure of
major telecommunication systems.

        The Company is aware of the importance of electricity to
its service territory and its customers and is using its best
efforts to avoid any serious Y2K problems.  Despite the System's
best efforts, including working with internal resources, external
vendors, and industry associations, the Company cannot guarantee
that it will be able to conduct all of its operations without Y2K
interruptions.  To the extent that any Y2K problem may be
encountered, the Company is committed to resolution as
expeditiously as possible to minimize the effect.


<PAGE>
      
                       - 18 -


        Expenditures for Y2K readiness are not expected to have a
material effect on the Company's results of operations or
financial position primarily because of the significant time and
money expended over the past several years on upgrading and
replacing its large mainframe computer systems and software.
While the remaining Y2K work is significant, it primarily
represents an internal labor intensive effort of assessment,
remediation, and component testing for non-compliant embedded
chips in equipment, and a substantial labor intensive effort of
multiple systems testing, documentation, and working with other
parties.  While outside contractors and equipment vendors will be
employed for some of the work, the Company believes it must rely
on System employees for most of the effort because of their
experience with systems and equipment.  The Company currently
estimates that its incremental expenditures for the remaining Y2K
effort will not exceed $4 million.

        The descriptions herein of the elements of the Company's
Y2K effort are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995.  Of necessity,
this effort is based on estimates of assessment, remediation,
testing and contingency planning activities and dates for
perceived problems not yet identified.  There can be no assurance
that actual results will not materially differ from expectations.


*       Environmental Issues

        The Environmental Protection Agency (EPA) issued its
final regional NOx State Implementation Plan (SIP) call rule on
September 24, 1998.  EPA's SIP call rule finds that 22 eastern
states (including Maryland, Pennsylvania, and West Virginia) and
the District of Columbia are all contributing significantly to
ozone non-attainment in downwind states.  The final rule declares
that this downwind non-attainment will be eliminated (or
sufficiently mitigated) if the upwind states reduce their NOx
emissions by an amount that is precisely set by EPA on a state-by-
state basis.  The final SIP call rule requires that all state-
adopted NOx reduction measures must be incorporated into SIPs by
September 24, 1999 and must be implemented by May 1, 2003.  The
Company's compliance with these requirements would require the
installation of post-combustion control technologies on most, if
not all, of its power stations at a cost of approximately $105
million.  The Company continues to work with other coal-burning
utilities and other affected constituencies in coal-producing
states to challenge this EPA action.

        The Company previously reported that the EPA had
identified the Company and its regulated affiliates and
approximately 875 others as potentially responsible parties in a
Superfund site subject to cleanup.  A final determination has not
been made for the Company's share of the remediation costs based
on the amount of materials sent to the site.  The Company has
also been named as a defendant along with multiple other
affiliated and nonaffiliated defendants in pending asbestos cases
involving one or more plaintiffs.  The Company believes that
provisions for liabilities and insurance recoveries are such that
final resolution of these claims will not have a material effect
on its financial position.


<PAGE>

                             - 19 -


*       Electric Energy Competition

        Allegheny Energy is working actively within its states to
advance customer choice.  However, Allegheny Energy believes that
federal legislation is necessary to ensure that electric
restructuring is implemented consistently across state and
regional boundaries so that all electric customers have an equal
opportunity to benefit from competition and customer choice by a
date certain.  Federal legislation is also needed to remove
barriers to competition, including the repeal of both the Public
Utility Holding Company Act of 1935 and PURPA.  Allegheny Energy
has been working with Congress to advance these goals.

        In addition to deregulation activities in Maryland, the
Company serves customers in West Virginia and Virginia which are
exploring the move toward competition and deregulation.

        The West Virginia Legislature passed a bill on March 14,
1998 which sets the stage for the restructuring of the electric
utility industry in West Virginia.  The bill directed the Public
Service Commission of West Virginia (West Virginia PSC) to
determine if deregulation is in the best interests of the state
and, if so, to develop a transition plan.  It also set up a task
force of all interested parties to participate in the plan
development.  The West Virginia PSC has been conducting meetings
of the Task Force on Restructuring over the summer to examine if
competition is in the best interest of the state and, if so, to
develop a transition plan.  All interested parties have
participated in the process with little apparent progress
concerning a defined plan for restructuring. Due to the workshop
participants' inability to file a consensus position on or before
November 16, 1998, the West Virginia PSC has scheduled additional
meetings in November to discuss how the West Virginia PSC and
workshop participants "should continue to explore electric
industry restructuring."  Evidentiary hearings originally
scheduled for September 29, 1998 to address utility unbundling
and stranded cost filings were cancelled.

        In early March 1998, the Virginia Senate joined the House
of Delegates in approving a timetable for restructuring the
state's electric utility industry to allow retail competition.
The legislation will give Virginians choice of their electric
power suppliers beginning on January 1, 2004.  The details will
be worked out over the coming year by a special Senate-House
subcommittee that has been studying restructuring for two years.
The joint legislative subcommittee studying utility restructuring
has held a series of meetings to examine the issues associated
with restructuring.  Two subcommittees have been established to
examine structure and transmission issues and stranded costs.
All interested parties have been invited to participate in the
process.  The Virginia State Corporation Commission (Virginia
SCC) ordered two utilities, but not the Company, to develop and
submit their retail pilot programs to the Virginia SCC by
November 1, 1998.  The Company has been filing monthly reports on
the status of Independent System Operator (ISO) discussions with
the Virginia SCC.


<PAGE>

                             - 20 -


                   THE POTOMAC EDISON COMPANY
                                
            Part II - Other Information to Form 10-Q
              for Quarter Ended September 30, 1998
                                
                                
ITEM 1.  LEGAL PROCEEDINGS
                                
         On October 5, 1998, Allegheny Energy, Inc. (Allegheny
Energy), filed a lawsuit in the United States District Court for
the Western District of Pennsylvania against DQE, Inc. (DQE) for
specific performance of the Agreement and Plan of Merger among
DQE, Allegheny Power System, Inc., and AYP Sub, Inc., dated as of
April 5, 1997 (the "Merger Agreement"), or for damages.
Allegheny Energy also filed motions for a temporary restraining
order and preliminary injunction against DQE.  On October 28,
1998, the court denied Allegheny Energy's motions for a temporary
restraining order and preliminary injunction. On October 30,
1998, Allegheny Energy appealed the order to the Third Circuit
Court of Appeals.  Allegheny Energy cannot predict the outcome of
the litigation between it and DQE.
                                
                                
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
                                
    (a)  Exhibits:
         (27)  Financial Data Schedule
                                 
    (b)  The Company filed a Form 8-K on October 8, 1998.
                                
                                
                                
                             Signature
                                
                                
         Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
                                
                                    
                                           THE POTOMAC EDISON COMPANY
                                    
                                           /s/      T. J. KLOC
                                             T. J. Kloc, Controller
                                           (Chief Accounting Officer)
                                
                                
November 16, 1998