Document:

<PAGE>
                                                                   Exhibit 10.12

     EMPLOYMENT AGREEMENT (the "Agreement") made as of this 18th day of July,
2003 (the "Effective Date") between Allegheny Energy Service Corporation
("AESC") for itself and as agent for its parent, Allegheny Energy, Inc. ("AEI"),
the affiliates and subsidiaries of AESC and AEI, and any successors or assigns
of any of the foregoing (the "AE Companies"), and David B. Hertzog (the
"Executive").

     WHEREAS, AESC desires to employ the Executive on the terms and conditions
set forth herein and the Executive is willing to be employed on such terms and
conditions;

     NOW, THEREFORE, in consideration of the covenants contained herein, and for
other good and valuable consideration, the parties hereto agree as follows:

     1. Employment and Term.

          (a) Employment. AESC hereby offers to employ the Executive, and the
Executive hereby accepts such employment with AESC, for the Term set forth in
Section 1(b) and on the terms and conditions set forth in this Agreement.

          (b) Term. The term of the Executive's employment under this Agreement
shall commence on July 28th, 2003 (the "Start Date") and, unless terminated
earlier pursuant to Section 7, shall continue for a period of five (5) years
from the Start Date (the "Term").

     2. Duties. During the Term as provided in Section 1(b) hereof, the
Executive shall serve as Vice President and General Counsel of AEI and AESC, and
shall report directly to the Chief Executive Officer. The Executive shall be
responsible for the legal functions of the AE Companies. The Executive shall
devote his best skill and substantially full time efforts (reasonable sick leave
and vacations excepted) to the performance of his duties under this Agreement.

          Nothing contained herein shall preclude the Executive from (i) serving
on the board of directors of any business organization; (ii) engaging in
charitable and community activities; (iii) participating in industry and trade
organization activities; (iv) managing his and his family's personal investments
and affairs; (v) providing transitional and related services with respect to his
former law practice; and (vi) delivering lectures, fulfilling speaking
engagements or teaching at educational institutions; provided, that such
activities do not materially interfere with the regular performance of his
duties and responsibilities under this Agreement and do not violate his
obligations under Section 10 of this Agreement.

     3. Base Salary. For services performed by the Executive for the AE
Companies pursuant to this Agreement, AESC shall pay the Executive a base salary
(a "Base Salary") at the rate of at least $450,000 per year, payable in
accordance with AESC's regular payroll practices (but no less frequently than

<PAGE>

monthly). Base Salary may be increased, but not decreased, from time to time
during the term of this Agreement in the sole discretion of the Board of
Directors of AEI (the "Board").

     4. Bonus.

          (a) Annual Bonus. During the Term, the Executive shall be eligible to
receive incentive compensation (an "Annual Bonus") under the Allegheny Energy,
Inc. Annual Incentive Plan, as amended from time to time, with a target bonus
opportunity of 77.78% of Base Salary (the "Target Bonus") and a maximum bonus
opportunity of 155.56% of Base Salary (the "Maximum Bonus"). For purposes of
clarity, for calendar year 2003, the Executive's Target Bonus shall be $175,000
and his Maximum Bonus shall be $350,000. For years subsequent to 2003, the
parameters under AEI's Annual Incentive Plan (including the parameters
applicable to the Executive) shall be determined by the Management Review
Committee of the Board. The Executive's Annual Bonus for any year shall be
payable in cash no later than January 31 of the next succeeding year.

          (b) Make Whole Payment. To induce the Executive to enter into this
Agreement, and to compensate him for the significant financial and other
benefits he will forfeit at his current employer as a result of accepting
employment hereunder and to secure for itself the benefit of the Executive's
particular qualification and experience, AESC shall pay to the Executive, in a
lump sum in cash on the Start Date, a special hiring payment in an amount equal
to Eight Hundred Thousand Dollars ($800,000).

     5. Long-Term Incentive Plan.

          (a) Initial Grant of Options.

               (i) Option Grant. Subject to obtaining authorization under the
Public Utilities Holding Company Act of 1935, on January 2, 2004, the Executive
shall receive a grant of stock options for 300,000 shares of AEI Common Stock
under the Allegheny Energy, Inc. 1998 Long-Term Incentive Plan (the "LTIP") at a
per share exercise price equal to the per share closing price of AEI Common
Stock on January 2, 2004, as quoted in the NYSE Composite Transaction Listing in
The Wall Street Journal (the "Options"). Such grant shall be evidenced by an
award agreement substantially in the form of Exhibit A. If such approval is not
obtained, AESC will grant the Executive, on January 2, 2004, stock appreciation
rights on 300,000 shares, payable only in cash and otherwise containing
substantially the same terms as the options described herein, or will make an
alternative adjustment, reasonably acceptable to the Executive, to the
Executive's compensation of equivalent value and opportunity based on
Black-Scholes concepts.

               (ii) Vesting. Subject to earlier vesting under Section 8,
one-fifth of the Options shall vest on each of the first, second, third, fourth
and fifth anniversary of the Effective Date; provided the Executive is still
employed by the AE Companies on the applicable vesting date. Upon the occurrence

                                       2

<PAGE>

of a Change in Control (as defined in Section 7(c)(iii)), all of the Options
shall become immediately vested.

               (iii) Adjustment in Numbers of Shares. Notwithstanding Section
5(a)(i), if before any Options are granted there occurs an event resulting in an
adjustment pursuant to Section 9.08 of the LTIP, a corresponding adjustment
shall be made to the number of such Options set forth in Section 5(a)(i). In
addition, any event resulting in an adjustment pursuant to Section 9.08 of the
LTIP shall result in a corresponding adjustment to the number of Options that
vest on each of the dates specified in Section 5(a)(ii).

          (b) Stock Units.

               (i) Grant of Stock Units. On January 2, 2004, the Executive shall
receive a grant of 300,000 stock units (the "Units"). Such Units shall be
evidenced by a Stock Unit Agreement substantially in the form of Exhibit B (the
"Stock Unit Agreement"). Each Unit shall represent one share of AEI Common
Stock.

               (ii) Crediting. The Executive shall be credited with additional
Units on each date AEI pays cash dividends to the stockholders in an amount
equal to the result of dividing (A) the product of the total number of Units
credited to the Executive on the record date for such dividend and the per share
amount of such dividend by (B) the per share closing price of AEI Common Stock
on the date the relevant dividend is paid by AEI to the holders of AEI Common
Stock as quoted in the NYSE Composite Transaction Listing in The Wall Street
Journal. Each Unit credited to the Executive shall be treated as ownership of a
share of AEI Common Stock for purposes of any stock ownership requirements
applicable to the Executive pursuant to AEI guidelines.

               (iii) Vesting. Subject to earlier vesting under Section 8,
one-fifth of the Units granted hereunder (and the additional Units credited with
respect thereto) shall become vested and payable to the Executive on each of the
first, second, third, fourth and fifth anniversary of the Effective Date;
provided the Executive is still employed by the AE Companies on the applicable
vesting date, unless the Executive has made a timely election to defer payment
thereof in accordance with the Stock Unit Agreement. Upon the occurrence of a
Change in Control, the Units together with any additional Units credited with
respect thereto shall be immediately vested and payable to the Executive.

               (iv) Payment. Payment in respect of any vested Units shall be
made in the discretion of the AE Companies in either (A) registered shares of
AEI Common Stock equal to the number of Units vested or (B) a prompt lump sum
cash payment equal to the result of multiplying the number of vested Units by
the per share closing price of AEI Common Stock as quoted on the date the Units
vest pursuant to Section 5(b)(iii) above in the NYSE Composite Transaction
Listing in The Wall Street Journal.

                                       3

<PAGE>

               (v) Adjustment in Numbers of Units. Notwithstanding Section
5(b)(i), if (at any time, whether before or after the Units are granted) there
occurs an event resulting in an adjustment pursuant to Section 9.08 of the LTIP,
a corresponding adjustment shall be made to the number of Units set forth in
Section 5(b)(i).

          (c) Additional Units.

               (i) Grant of Additional Units.

                    (1) If the per share closing price of AEI Common Stock as
quoted on January 2, 2004 in the NYSE Composite Transaction listing in The Wall
Street Journal (the "2004 Closing Price") exceeds the Blended Price (the excess
being the "Differential"), by at least $0.50, AESC shall grant to the Executive,
on January 2, 2004, an additional number of Units equal to the quotient of
$300,000 divided by the 2004 Closing Price; and

                    (2) For every whole dollar in excess of $0.50 by which the
2004 Closing Price exceeds the Blended Price, AESC shall grant to the Executive,
on January 2, 2004, in addition to the Units granted in clause (1) above, Units
equal to the quotient of $300,000 divided by the 2004 Closing Price (such units,
together with the Units granted pursuant to subsection (1), the "Additional
Units"). Each Additional Unit shall represent one share of AEI Common Stock. The
Additional Units shall be included in the Stock Unit Agreement.

                    (3) The "Blended Price" shall be equal to the sum of (A)
0.25 multiplied by the per share closing price on the Effective Date of AEI
Common Stock as quoted in the NYSE Composite Transaction listing in The Wall
Street Journal and (B) 0.75 multiplied by the per share closing price of AEI
Common Stock on the earlier of (x) the fifth business day after the date on the
on which AEI publicly announces its financial results for the 2002 fiscal year
or (y) January 2, 2004, as quoted in the NYSE Composite Transactions listing in
The Wall Street Journal.

               (ii) Crediting. The Executive shall be credited with additional
Units on each date AEI pays cash dividends to the stockholders in an amount
equal to the result of dividing (i) the product of the total number of
Additional Units credited to the Executive on the record date for such dividend
and the per share amount of such dividend by (ii) the per share closing price of
AEI Common Stock on the date the relevant dividend is paid by AEI to the holders
of AEI Common Stock as quoted in the NYSE Composite Transaction Listing in The
Wall Street Journal. Each Additional Unit credited to the Executive shall be
treated as ownership of a share of AEI Common Stock for purposes of any stock
ownership requirements applicable to the Executive pursuant to AEI guidelines.

               (iii) Vesting. Subject to earlier vesting under Section 8,
one-fifth of the Additional Units granted hereunder (and the additional Units
credited with respect thereto) shall become vested and payable to the Executive
on each of the first, second, third, fourth and fifth anniversary of the

                                       4

<PAGE>

Effective Date; provided the Executive is still employed by the AE Companies on
the applicable vesting date, unless the Executive has made a timely election to
defer payment thereof in accordance with the Stock Unit Agreement. Upon the
occurrence of a Change in Control, the Additional Units together with any
additional Units credited with respect thereto shall be immediately vested and
payable to the Executive.

               (iv) Payment. Payment in respect of any vested Additional Units
shall be made in the discretion of the AE Companies in either (A) registered
shares of AEI Common Stock equal to the number of Additional Units vested or (B)
a prompt lump sum cash payment equal to the result of multiplying the number of
vested Additional Units by the per share closing price of AEI Common Stock as
quoted on the date the Units vest pursuant to Section 5(c)(iii) above in the
NYSE Composite Transaction Listing in The Wall Street Journal.

               (v) Adjustment in Numbers of Additional Units. Notwithstanding
Section 5(c)(i), if (at any time, whether before or after the Additional Units
are granted) there occurs an event resulting in an adjustment pursuant to
Section 9.08 of the LTIP, a corresponding adjustment shall be made to the number
of Additional Units set forth in Section 5(c)(i). In addition, if such an event
shall occur prior to January 2, 2004, similar corresponding adjustments shall be
taken into account in calculating the Differential.

          (d) Grant on Pre-January 2004 Change in Control. In the event that a
Change in Control occurs prior to January 2, 2004, in lieu of the grants
described in paragraphs (a), (b) and (c) of this Section, the Executive shall be
entitled to receive the grants specified in the last sentence of Section
8(c)(vi) determined as if the date of such Change in Control were the Date of
Termination referred to therein.

          (e) Other Participation. In addition, the Executive shall participate
in the LTIP, as amended from time to time, on a basis determined by the Board to
be appropriate for the Executive.

     6. Other Benefits. In addition to the compensation provided in Sections 3,
4 and 5 hereof, the Executive shall also be entitled to the following:

          (a) Participation in Employee Benefit Plans. The Executive shall
participate in each employee benefit plan maintained in force by the AE
Companies, from time to time, in a manner and to an extent at least as favorable
as then is available to the most favorably treated senior executives of the AE
Companies (other than the Chief Executive Officer of AEI) under each of such
plans; provided, that the Executive shall not participate in the Allegheny
Energy, Inc. Supplemental Executive Retirement Plan (the "SERP") or other
non-qualified pension plans of the AE Companies. Such plans may include
tax-qualified and disability, medical, group life insurance, supplemental life
insurance coverage, business travel insurance, sick leave, and other retirement
and welfare benefit plans, programs and arrangements. AESC represents that, as
of the Effective Date, the Executive meets all eligibility criteria for

                                       5

<PAGE>

participation in such plans other than the requirements under any tax-qualified
plans maintained by any of the AE Companies.

          (b) Fringe Benefits. In addition to the foregoing, the Executive shall
be entitled to the use, maintenance, insurance and repair of a company car and
other fringe benefits no less favorable than those available to the most
favorably treated senior executives of the AE Companies (other than the Chief
Executive Officer of AEI).

          (c) Benefit in Lieu of Pension. Upon a termination of the Executive's
employment with AESC for any reason, the Executive shall be entitled to a prompt
lump sum cash payment equal to $20,833.33 for each month that the Executive was
employed with AESC, subject to increase pursuant to Section 8(b)(v) or Section
8(c)(v) (the "Pension Benefit"). In lieu of such lump sum, the Executive may
elect to receive payment of the Pension Benefit in any form provided for under
the SERP (or any successor plan) in an actuarial equivalent amount as determined
under the SERP.

          (d) Expense Reimbursement. AESC shall reimburse the Executive, upon a
proper accounting, for reasonable and necessary business expenses and
disbursements incurred by him in the course of the performance of his duties
under this Agreement.

          (e) Vacation. The Executive shall be entitled to vacation and paid
time off during the initial and each successive year during the Term of at least
four weeks per year or, if greater than four weeks per year, such period as the
Board shall approve, without reduction in salary or other benefits.

          (f) Temporary Living Expenses. AESC will reimburse the Executive (and
gross up the Executive for any income taxes incurred by the Executive as a
result of such reimbursement) for the temporary living costs and expenses which
the Executive reasonably incurs for himself and his family in the performance of
his responsibilities hereunder for a period of twelve months following the Start
Date and for the cost of his travel to his home on weekends.

          (g) Fees and Expenses. AESC will reimburse the Executive for
reasonable legal and other professional fees and out-of-pocket expenses incurred
by the Executive in connection with the preparation and negotiation of this
Agreement and any other related agreements.

                                       6

<PAGE>

     7. Termination. Unless earlier terminated in accordance with the following
provisions of this Section 7, AESC shall continue to employ the Executive and
the Executive shall remain employed by AESC during the entire Term as set forth
in Section 1(b). Section 8 hereof sets forth certain obligations of AESC in the
event that the Executive's employment hereunder is terminated.

          (a) Death. Except to the extent otherwise expressly stated herein,
including without limitation as provided in Section 8(a) with respect to certain
payment obligations of AESC, this Agreement shall terminate immediately in the
event of the Executive's death.

          (b) Termination by AESC or the Executive. In accordance with the
procedures hereinafter set forth, AESC may terminate the Executive from his
employment hereunder for Cause, Disability or otherwise and the Executive may
resign from his employment hereunder for Good Reason or otherwise. Any
termination of the Executive by AESC or resignation by the Executive shall be
communicated by a Notice of Termination to the Executive (in the case of
termination) or to AESC (in the case of the Executive's resignation) given in
accordance with Section 15 of this Agreement. During any period that the
Executive fails to perform his full-time duties as a result of incapacity due to
physical or mental illness, AESC shall continue to pay the Executive's full Base
Salary in accordance with Section 3 of this Agreement (reduced dollar-for-dollar
by the amount of disability benefits, if any, paid to the Executive in
accordance with any disability policy or program of AESC), together with all
compensation and benefits payable to the Executive under the terms of any
compensation or benefit plan, program or arrangement maintained by AESC during
such period, until the Executive's employment is terminated for Disability
pursuant to this Section 7(b). Notwithstanding the foregoing, the Executive may
not be terminated for Cause unless the Executive shall be granted the
opportunity for a hearing before the Board, such hearing to be held within 15
days after the Executive's receipt of a Notice of Termination if the Executive
requests such hearing within 10 days after receipt of such Notice of
Termination. If the Executive is furnished written notice by the Board within 10
days after such hearing confirming that, in its judgment, grounds for
termination for Cause exist on the basis set forth in the original Notice of
Termination, the Executive shall thereupon be terminated for Cause.

          (c) Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth below:

               (i) "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of (A) the Executive's Base Salary under Section 3 through
the Date of Termination to the extent not theretofore paid, (B) to the extent
not theretofore paid, the amount of any bonus, incentive compensation, deferred
compensation and other cash compensation earned and accrued by the Executive as
of the Date of Termination under the terms of any compensation and benefits
plans, programs or arrangements maintained in force by AESC, and (C) any
vacation pay, expense reimbursements and other cash entitlements accrued by the

                                       7

<PAGE>

Executive, in accordance with AESC policy, as of the Date of Termination to the
extent not theretofore paid.

               (ii) "Cause" shall mean either of the following:

               (A) the Executive's engaging in willful gross misconduct or
willful gross neglect in connection with the Executive's employment, which
misconduct or neglect is committed in bad faith or without reasonable belief
that such misconduct or neglect is in the best interests of the AE Companies and
which causes material economic harm to the AE Companies; or

               (B) the conviction of the Executive of a felony involving theft
or moral turpitude, or a guilty or nolo contendere plea by the Executive with
respect to such a felony.

               (iii) "Change in Control" shall mean the first to occur of any of
the following events:

               (A) Any "person" (as defined in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding for
this purpose, (i) any of the AE Companies, or (ii) any employee benefit plan of
AEI or any of the AE Companies, or any person or entity organized, appointed or
established by AEI or any of the AE Companies for or pursuant to the terms of
any such plan which acquires beneficial ownership of voting securities of AEI,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of AEI representing more
than 20% of the combined voting power of AEI's then outstanding securities;
provided, however, that no Change in Control will be deemed to have occurred as
a result of a change in ownership percentage resulting solely from an
acquisition of securities by AEI; or

               (B) Persons who, as of the Effective Date constitute the Board
(the "Incumbent Directors") cease for any reason, including without limitation,
as a result of a tender offer, proxy contest, merger or similar transaction, to
constitute at least a majority thereof, provided that any person becoming a
director of AEI subsequent to the Effective Date shall be considered an
Incumbent Director if such person's election or nomination for election was
approved by a vote of at least two-thirds (2/3) of the Incumbent Directors; but
provided further, that any such person whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of members of the Board or other actual or threatened solicitation of
proxies or consents by or on behalf of a "person" (as defined in Section 13(d)
and 14(d) of the Exchange Act) other than the Board, including by reason of
agreement intended to avoid or settle any such actual or threatened contest or
solicitation, shall not be considered an Incumbent Director; or

               (C) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of AEI (a
"Business Combination"), in each case, unless, following such Business

                                       8

<PAGE>

Combination, all or substantially all of the individuals and entities who were
the beneficial owners of outstanding voting securities of AEI immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the company resulting from such Business Combination (including, without
limitation, a company which, as a result of such transaction, owns AEI or all or
substantially all of AEI's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the outstanding voting
securities of AEI; or

               (D) Approval by the stockholders of AEI of a complete liquidation
or dissolution of AEI.

               (iv) "Date of Termination" shall mean (A) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that Executive shall not have returned to the
full-time performance of Executive's duties during such thirty (30) day period),
and (B) if the Executive's employment is terminated for any other reason, the
date specified in the Notice of Termination (which, in the case of a termination
by AESC, shall not be less than thirty (30) days (except in the case of a
termination for Cause) nor more than sixty (60) days and, in the case of a
termination by the Executive, shall not be less than fifteen (15) days nor more
than sixty (60) days, respectively, from the date such Notice of Termination is
given).

               (v) "Disability" shall be deemed the reason for the termination
of the Executive's employment, if, as a result of the Executive's incapacity due
to physical or mental illness, Executive shall have been absent from the
full-time performance of the Executive's duties with the AE Companies for a
period of six (6) consecutive months, AESC shall have given the Executive a
Notice of Termination for Disability, and, within thirty (30) days after such
Notice of Termination is given, the Executive shall not have returned to the
full-time performance of the Executive's duties. At any time and from time to
time, upon reasonable request by AESC, the Executive shall submit to reasonable
medical examination for the purpose of determining the existence, nature and
extent of any such Disability.

               (vi) "Good Reason" shall mean, without the Executive's written
consent:

               (A) The material diminution in the Executive's title, duties or
reporting lines, or the assignment to the Executive of any duties inconsistent
in any material respect with the Executive's position (including titles and
reporting relationships), authority, duties or responsibilities as contemplated
by Section 2 of this Agreement, excluding any isolated and inadvertent action
not taken in bad faith and which is remedied by the AESC within ten (10) days

                                       9

<PAGE>

after receipt of notice thereof given by the Executive;

               (B) Any failure by AESC to comply with any of the provisions of
Sections 3, 4, 5, 6, 12 or 21 of this Agreement, other than an isolated and
inadvertent failure not committed in bad faith and which is remedied by AESC
within ten (10) days after receipt of notice thereof given by the Executive, or
any material breach of the representations and warranties set forth in Section
11;

               (C) The Executive being required to relocate to a principal place
of employment which is more than fifty (50) miles from either Hagerstown,
Maryland or Monroeville, Pennsylvania;

               (D) Any purported termination by AESC of the Executive's
employment otherwise than as expressly permitted by this Agreement;

               (E) The failure of AESC to obtain the assumption in writing of
its obligation to perform this Agreement as required pursuant to Section 14; or

               (F) The termination of Paul Evanson's employment with AESC
without "Cause" (as defined under Paul Evanson's employment agreement with AESC
dated as of June 9, 2003) or Paul Evanson's resignation from AESC for "Good
Reason" (as defined under such employment agreement), other than a resignation
for "Good Reason" based solely on events described in Section 8(e)(vii)(F) of
such employment agreement.

               (vii) "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.

     8. Obligations of AESC Upon Termination.

          (a) Termination by AESC for Cause or Termination by Executive without
Good Reason, Death or Disability. In the event of a termination of the
Executive's employment by AESC for Cause, a termination by the Executive without
Good Reason, or in the event this Agreement terminates pursuant to Section 7(a)
or Section 7(b) by reason of the death or Disability of the Executive:

               (i) AESC shall pay all Accrued Obligations to the Executive, or
to his beneficiaries, heirs or estate in the event of the Executive's death, in
a lump sum in cash within thirty (30) days after the Date of Termination.

               (ii) The Executive, or his beneficiaries, heirs or estate in the
event of the Executive's death, shall be entitled to receive all benefits
accrued by him as of the Date of Termination under all benefit plans and
qualified and nonqualified retirement, pension, 401(k) and similar plans and

                                       10

<PAGE>

arrangements of AESC and AEI, and the LTIP, in such manner and at such time as
are provided under the terms of such plans and arrangements.

               (iii) If the termination of employment is by reason of the
Executive's death or Disability all stock options and other equity awards,
including, without limitation, the Options, the Units and the Additional Units
(together with any additional units credited with respect to the Units or the
Additional Units (the "Total Units"), granted to the Executive shall vest on the
Date of Termination (and all options shall thereupon become fully exercisable
and the Total Units shall thereupon become payable), and all stock options shall
continue to be exercisable for two (2) years after the Date of Termination;
provided, however, that in no event shall such options be exercised later than
the date of expiration of the options determined pursuant to the option award
letters (determined as if the Executive's employment with AESC had not
terminated). Notwithstanding the foregoing, in the event that the Executive is
terminated as a result of death or Disability prior to January 2, 2004, the
Executive (or his beneficiaries, heirs or estate in the event of the Executive's
death) shall receive (A) a grant of stock options for 300,000 shares
(appropriately adjusted to take into account any event resulting in an
adjustment under Section 9.08 of the LTIP) of AEI Common Stock under the LTIP at
a per share exercise price equal to the per share closing price of AEI Common
Stock on the Date of Termination, as quoted in the NYSE Composite Transaction
Listing in The Wall Street Journal (such grant shall be evidenced by an award
agreement substantially in the form of Exhibit A) which shall be fully vested
and shall be exercisable as provided in the preceding sentence and (B) within
five (5) business days of the Date of Termination, a number of registered shares
of AEI Common Stock equal to the sum of (x) 300,000 (appropriately adjusted to
take into account any event resulting in an adjustment under Section 9.08 of the
LTIP) plus (y) the number of Additional Units which would have been granted to
the Executive under Section 5(c), except that the Date of Termination shall be
substituted for January 2, 2004 (in each place such date appears in Section
5(c)(i)) or, in the discretion of the AE Companies, cash in an amount equal to
such number of registered shares multiplied by the per share closing price of
AEI Common Stock on the Date of Termination as quoted in the NYSE Composite
Transaction Listing in The Wall Street Journal.

               (iv) If the termination of employment is by reason of the
Executive's death or Disability, the Executive, or his beneficiaries, heirs or
estate in the event of the Executive's death, shall be entitled to receive a
prompt lump sum cash payment equal to the Executive's Target Bonus for the year
of the Executive's death or Disability, pro-rated for the number of days in such
year that the Executive was employed with AESC (calculated from and after the
Start Date in the case of a termination during 2003).

               (v) AESC shall pay the Executive or his beneficiaries, heirs or
estate a prompt lump sum cash payment equal to the Pension Benefit.

                                       11

<PAGE>

          (b) Termination by AESC without Cause or Termination by the Executive
for Good Reason. If (x) the Executive's employment is terminated by AESC other
than for Cause (i.e., without Cause), death or Disability or (y) the Executive
terminates employment with Good Reason:

               (i) AESC shall pay to the Executive all Accrued Obligations in a
lump sum in cash within thirty (30) days after the Date of Termination.

               (ii) The Executive shall be entitled to receive all benefits
accrued by him as of the Date of Termination under all benefit plans and
qualified and nonqualified retirement, pension, 401(k) and similar plans and
arrangements of AESC, and the LTIP, in such manner and at such time as are
provided under the terms of such plans and arrangements.

               (iii) AESC shall pay to the Executive in a lump sum in cash
within thirty (30) days after the Date of Termination an amount equal to the
product of the Severance Factor multiplied by the sum of (A) the Executive's
Base Salary (as in effect immediately prior to the Date of Termination,
determined without regard to any decrease resulting in Good Reason) plus (B) the
Executive's Target Bonus for the year in which the Date of Termination occurs
(which Target Bonus shall be deemed to equal $350,000 in the case of a
termination during 2003). For purposes hereof, the "Severance Factor" shall
equal the greater of (x) two and (y) a fraction, the numerator of which is the
number of whole or partial months remaining in the Term on the Date of
Termination and the denominator of which is twelve; provided, however, that the
Severance Factor shall not exceed three.

               (iv) For the greater of two (2) years from the Date of
Termination or through the remainder of the Term, but in no event for more than
three (3) years from the Date of Termination, AESC shall either (A) arrange to
provide the Executive and his dependents, at AESC's cost, with life, disability,
medical and dental coverage, whether insured or not insured, providing
substantially similar benefits to those which the Executive and his dependents
were receiving immediately prior to the Date of Termination, or (B) in lieu of
providing such coverage, pay to the Executive no less frequently than quarterly
in advance an amount which, after taxes, is sufficient for the Executive to
purchase equivalent benefits coverage referred to in clause (A).

               (v) AESC shall make a prompt lump sum payment to the Executive
equal to the greater of (x) $1,250,000 and (y) the Pension Benefit.

               (vi) All stock options and other equity awards, including,
without limitation, any Options or Total Units shall vest on the Date of
Termination to the extent that such awards would have vested had the Executive
continued his employment with AESC until the later of two (2) years from the
Date of Termination or the remainder of the Term, and all stock options shall
continue to be exercisable for three (3) years after the Date of Termination;
provided, however, that in no event shall such options be exercised later than
the date of expiration of the options determined pursuant to the option award

                                       12

<PAGE>

letters (determined as if the Executive's employment with AESC had not
terminated). In the event that the Executive is terminated pursuant to this
Section 8(b) prior to January 2, 2004, the Executive shall receive (A) a grant
of stock options for 300,000 shares (appropriately adjusted to take into account
any event resulting in an adjustment under Section 9.08 of the LTIP) of AEI
Common Stock under the LTIP at a per share exercise price equal to the per share
closing price of AEI Common Stock on the Date of Termination, as quoted in the
NYSE Composite Transaction Listing in The Wall Street Journal (such grant shall
be evidenced by an award agreement substantially in the form of Exhibit A) which
shall be fully vested and shall be exercisable as provided in the preceding
sentence and (B) within five (5) business days of the Date of Termination, a
number of registered shares of AEI Common Stock equal to the sum of (x) 300,000
(appropriately adjusted to take into account any event resulting in an
adjustment pursuant to Section 9.08 of the LTIP) plus (y) the number of
Additional Units which would have been granted to the Executive under Section
5(c), except that the Date of Termination shall be substituted for January 2,
2004 (in each place such date appears in Section 5(c)(i)) or, in the discretion
of the AE Companies, cash in an amount equal to such number of registered shares
multiplied by the per share closing price of AEI Common Stock on the Date of
Termination, as quoted in the NYSE Composite Transaction Listing in The Wall
Street Journal.

               (vii) The Executive shall be entitled to receive a prompt lump
sum cash payment equal to the Executive's Target Bonus for the year of the
Executive's termination, pro-rated for the number of days in such year that the
Executive was employed with AESC (calculated from and after the Start Date in
the case of a termination during 2003).

          (c) Termination in connection with a Change in Control. If (x) the
Executive's employment is terminated by AESC other than for Cause (i.e., without
Cause) or the Executive terminates his employment with AESC for Good Reason,
either following the occurrence of a Change in Control or prior to the
occurrence of a Change in Control if it is reasonably demonstrated by the
Executive that such termination or the event constituting Good Reason either (1)
was at the request of a third party who has taken steps reasonably calculated to
effect the Change in Control, or (2) otherwise arose in connection with or
anticipation of the Change in Control or (y) the Executive terminates employment
for any reason by sending AESC a Notice of Termination during the thirty (30)
day period immediately following the expiration of the six (6) month period
commencing on the occurrence of a Change in Control, then, in lieu of the
payments and benefits set forth in Section 8(b):

               (i) AESC shall pay to the Executive all Accrued Obligations in a
lump sum in cash within thirty (30) days after the Date of Termination.

               (ii) The Executive shall be entitled to receive all benefits
accrued by him as of the Date of Termination under all benefit plans and
qualified and nonqualified retirement, pension, 401(k) and similar plans and
arrangements of AESC, and the LTIP, in such manner and at such time as are

                                       13

<PAGE>

provided under the terms of such plans and arrangements.

               (iii) AESC shall pay to the Executive in a lump sum in cash
within thirty (30) days after the Date of Termination an amount equal to the
three times the sum of the Executive's (A) Base Salary (as in effect immediately
prior to the Date of Termination, determined without regard to any decrease
resulting in Good Reason) and (B) Target Bonus for the year in which the Date of
Termination occurs (which Target Bonus shall be deemed to equal $350,000 in the
case of a termination during 2003).

               (iv) For three years from the Date of Termination, AESC shall
either (A) arrange to provide the Executive and his dependents, at AESC's cost,
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A).

               (v) AESC shall make a prompt lump sum payment to the Executive
equal to the greater of (x) $1,250,000 and (y) the Pension Benefit.

               (vi) All stock options and other equity awards including, without
limitation, the Options and the Total Units shall vest on the Date of
Termination (and all options shall thereupon become fully exercisable and the
Total Units shall thereupon become payable), and all stock options shall
continue to be exercisable for [three (3)] years after the Date of Termination;
provided, however, that in no event shall such options be exercised later than
the date of expiration of the options determined pursuant to the option award
letters (determined as if the Executive's employment with AESC had not
terminated). Notwithstanding the foregoing, in the event that the Executive is
terminated pursuant to this Section 8(c) prior to January 2, 2004, the Executive
shall receive (A) a grant of stock options for 300,000 shares (appropriately
adjusted to take into account any event resulting in an adjustment under Section
9.08 of the LTIP) of AEI Common Stock under the LTIP at a per share exercise
price equal to the per share closing price of AEI Common Stock on the Date of
Termination, as quoted in the NYSE Composite Transaction Listing in The Wall
Street Journal (such grant shall be evidenced by an award agreement
substantially in the form of Exhibit A) which shall be fully vested and shall be
exercisable as provided in the preceding sentence and (B) within five (5)
business days of the Date of Termination, a number of registered shares of AEI
Common Stock equal to the sum of (x) 300,000 (appropriately adjusted to take
into account any event resulting in an adjustment pursuant to Section 9.08 of
the LTIP) plus (y) the number of Additional Units which would have been granted
to the Executive under Section 5(c), except that the Date of Termination shall
be substituted for January 2, 2004 (in each place such date appears in Section
5(c)(i)) or, in the discretion of the AE Companies, cash in an amount equal to
such number of registered shares multiplied by the per share closing price of

                                       14

<PAGE>

AEI Common Stock on the Date of Termination, as quoted in the NYSE Composite
Transaction Listing in The Wall Street Journal.

               (vii) The Executive shall be entitled to receive a prompt lump
sum cash payment equal to the Executive's Target Bonus for the year of the
Executive's termination, pro-rated for the number of days in such year that the
Executive was employed with AESC (calculated from and after the Start Date in
the case of a termination during 2003).

          (d) Termination Following Expiration of the Term. In the event of a
termination of the Executive's employment with AESC for any reason upon or
following the expiration date of the Term set forth in Section 1(b), determined
after taking into account any extensions of the Term, in lieu of any amounts or
benefits provided under clauses (a) or (b) above, AESC shall pay or provide to
the Executive the amounts or benefits described in clauses (i), (ii), (v) and
(vii) of Section 8(b). In addition, upon any such termination of the Executive's
employment with AESC, each stock option and other equity and equity-related
award granted to the Executive shall thereupon be vested to the extent of the
greater of (A) the percentage determined by dividing (1) the number of days from
the grant date of such option or award through the Date of Termination, by (2)
the number of days from such grant date until the date such option or award
would have been fully vested by its terms, or (B) the extent specified in the
applicable option or award agreement, and all such options shall continue to be
exercisable until the date specified in the applicable option agreement or, if
later, until the first anniversary of the Termination Date; provided, however,
that no such option shall remain exercisable beyond the expiration date
specified in the applicable option agreement (determined as if the Executive's
employment with AESC had not terminated).

     9. No Mitigation. AESC agrees that the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts payable to the
Executive by AESC hereunder. Further, the amount of any payment or benefit
provided for in this Agreement shall not be reduced by any compensation earned
by the Executive as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
AESC, or otherwise.

     10. Covenants. In exchange for the remuneration outlined above, in addition
to providing services for the AE Companies as set forth in this Agreement, the
Executive agrees to the following covenants:

          (a) Confidential Information. The Executive acknowledges that all
Confidential Information shall at all times remain the property of the AE
Companies. In this Agreement "Confidential Information" means all information
including, but not limited to, proprietary information and/or trade secrets, and
all information disclosed to the Executive or known by the Executive as a
consequence of or through the Executive's employment, which is not generally
known to the public or in the industry in which the AE Companies are or may

                                       15

<PAGE>

become engaged, about the AE Companies' businesses, products, processes, and
services, including, but not limited to, information relating to research,
development, computer program designs, computer data, flow charts, source or
object codes, products or services under development, pricing and pricing
strategies, marketing and selling strategies, power generating, servicing,
purchasing, accounting, engineering, costs and costing strategies, sources of
supply, customer lists, customer requirements, business methods or practices,
training and training programs, and the documentation thereof. It will be
presumed that information supplied to the AE Companies from outside sources is
Confidential Information unless and until it is designated otherwise.

          The Executive will safeguard, to the extent possible in the
performance of his work for the AE Companies, all documents and things that
contain or embody Confidential Information. Except in the course of the
Executive's duties to the AE Companies or as may be compelled by law or
appropriate legal process, the Executive will not, during his employment by the
AE Companies, or permanently thereafter, directly or indirectly use, divulge,
disseminate, disclose, lecture upon, or publish any Confidential Information,
without having first obtained written permission from the AE Companies to do so.

          (b) Employment with Conflicting Organizations. During his employment
by the AE Companies, the Executive will not work with or advise any person(s)
conducting a business similar to the business conducted by the AE Companies,
except as part of the Executive's duties assigned by the AE Companies.

          (c) Noncompetition. For a period of one (1) year after termination of
the Executive's employment with the AE Companies for any reason, whether
terminated for Cause or without Cause, the Executive will not accept employment
from or aid or render services, directly or indirectly, to any Conflicting
Organization unless AESC provides the Executive with its prior, express written
consent.

          The Executive acknowledges that his education and experience enables
him to obtain employment in many different areas of endeavor and to work for
different types of employers, so it will not be necessary for the Executive to
violate the provisions of this Section to remain economically viable.

          "Conflicting Organization" means the following organizations, their
subsidiaries and affiliates, and their respective successors and assigns:

          .    FirstEnergy Corporation

          .    American Electric Power, Inc.

          .    Excelon Corporation

          .    Pennsylvania Power and Light Resources, Inc.

                                       16

<PAGE>

          .    Baltimore Gas and Electric Company

          .    Potomac Electric and Power Company

          .    Dominion Resources, Inc.

          .    DQE, Inc.

Notwithstanding the foregoing, the provisions of this Section 10(c) and of
Section 10(d) shall not apply in the case of any breach of AESC's obligations
under Section 8, Section 12 or Section 21 which remains uncured for more than
ten days after notice is received from the Executive of such breach.

          (d) Nonsolicitation. The Executive agrees that, during his employment
with AESC and for a period of two (2) years following the termination of his
employment with AESC, whether terminated with Cause or without Cause, he shall
not, directly or indirectly, solicit or induce, or attempt to solicit or induce,
any employee of the AE Companies to leave the AE Companies for any reason
whatsoever, or hire or solicit the services of any employee of the AE Companies,
unless AESC provides the Executive with its prior written consent.

          (e) Reformation to Applicable Law. It is the intention of the parties
that the provisions of this Section 10 shall be enforceable to the fullest
extent permissible by law. If any of the provisions in this Section 10 are
hereafter construed to be invalid or unenforceable in any jurisdiction, the same
shall not affect the remainder of the provisions in this Section 10 or the
enforceability therein in any other jurisdiction where such provisions shall be
given full effect. If any provision of this Section 10 shall be deemed
unenforceable, in whole or in part, this Section 10 shall be deemed to be
amended to delete or modify the offending part so as to alter this Section 10 to
render it valid and enforceable.

          (f) Enforcement. The Executive acknowledges that valid consideration
has been received, that the provisions of this Section 10 are reasonable, that
they are the result of arms length negotiations between the parties, that in the
event of a violation of the provisions contained herein, the AE Companies'
damages would be difficult to ascertain, and that the legal remedy available to
the AE Companies for any breach of this Section 10 on the part of the Executive
will be inadequate. Therefore, the Executive expressly acknowledges and agrees
that in the event of any threatened or actual breach of this Section 10, the AE
Companies shall be entitled to specific enforcement of this Section 10 through
injunctive or other equitable relief in a court with appropriate jurisdiction.

          (g) Return of Confidential Information. Upon termination of the
Executive's employment, for whatever reason, or upon request by the AE
Companies, the Executive will deliver to the AE Companies all Confidential
Information including, but not limited to, the originals and all copies of
notes, sketches, drawings, specifications, memoranda, correspondence and

                                       17

<PAGE>

documents, records, notebooks, computer systems, computer disks and computer
tapes and other repositories of Confidential Information then in the Executive's
possession or under the Executive's control, whether prepared by the Executive
or by others.

     11. Representations and Warranties.

          (a) AESC represents and warrants that:

               (i) AESC and AEI are fully authorized by action of the Board (and
of any other person or body whose action is required) to enter into this
Agreement and to perform their obligations hereunder; and upon the execution and
delivery of this Agreement by the parties, this Agreement shall be the valid and
binding obligation of AESC and AEI, enforceable against AESC and AEI in
accordance with its terms.

               (ii) Prior to the exercise or expiration of the Options, AEI
shall at all times keep authorized and in reserve, and shall keep available,
solely for issuance and delivery upon the exercise of the Options, the shares of
AEI Common Stock issuable upon the exercise of the Options, and upon issuance,
such shares shall be will be duly and validly authorized, issued and
outstanding, fully paid, nonassessable and free and clear of all pledges, liens,
encumbrances, adverse claims, preemptive rights, redemption rights, rights of
first refusal, rights of first offer, and other restrictions (other than arising
under federal or state securities or "blue sky" laws).

               (iii) Each of AESC and AEI are corporations duly organized,
validly existing and in good standing under the laws of the State of Maryland
and have full corporate power and authority to conduct their business as
proposed to be conducted.

               (iv) The execution and delivery by AESC and AEI of this Agreement
and the consummation of the transactions contemplated hereby will not result in
the violation of any law, statute, rule, regulation, order, writ, injunction,
judgment or decree of any court or governmental authority to or by which either
of them is bound, or of any provision of the Certificate of Incorporation or
By-Laws of either of them, and will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute (with due notice
or lapse of time or both) a default under, any agreement or instrument to which
either of them is a party or by which either of them is bound or to which any of
either of their properties or assets is subject, nor result in the creation or
imposition of any lien upon any of the properties or assets of either of them.
Neither AESC nor AEI is subject to any restriction which would prohibit either
of them from entering into or performing its obligations under this Agreement.

               (v) The issuance of the Options and the shares issuable upon
exercise of the Options or the payment of the Units, as contemplated by this
Agreement, the option award agreements and the Stock Unit Agreement are exempt
from the registration requirements of the Securities Act of 1933, and from the

                                       18

<PAGE>

registration or qualification requirements of the state securities or "blue sky"
laws of any applicable State or other U.S. jurisdiction.

               (vi) All terms relating to the Options, as set forth herein and
in the option award agreements, are in compliance with the LTIP.

          (b) The Executive represents and warrants that he is not subject to
any employment agreement or non-competition agreement, that could subject any of
the AE Companies to any future liability or obligation to any third party as a
result of the execution of this Agreement and the Executive's appointment to the
positions with AESC and AEI as described above.

     12. Indemnification.

          (a) AESC agrees that (i) if the Executive is made a party, or is
threatened to be made a party, to any threatened or actual action, suit or
proceeding, whether civil, criminal, administrative, investigative, appellate or
other (each, a "Proceeding") by reason of the fact that he is or was a director,
officer, employee, agent, manager, consultant or representative of any of the AE
Companies or is or was serving at the request of any of the AE Companies as a
director, officer, member, employee, agent, manager, consultant or
representative of another entity or (ii) if any claim, demand, request,
investigation, dispute, controversy, threat, discovery request or request for
testimony or information (each, a "Claim") is made, or threatened to be made,
that arises out of or relates to the Executive's service in any of the foregoing
capacities, then the Executive shall promptly be indemnified and held harmless
by AESC to the fullest extent legally permitted or authorized by AESC's or AEI's
certificate of incorporation, bylaws or Board resolutions or, if greater, by the
laws of the State of Maryland, against any and all costs, expenses, liabilities
and losses (including, without limitation, attorney's fees, judgments, interest,
expenses of investigation, penalties, fines, ERISA excise taxes or penalties and
amounts paid or to be paid in settlement) incurred or suffered by the Executive
in connection therewith, and such indemnification shall continue as to the
Executive even if he has ceased to be a director, member, employee, agent,
manager, consultant or representative of AESC or other entity and shall inure to
the benefit of the Executive's heirs, executors and administrators. AESC shall
advance to the Executive all costs and expenses incurred by him in connection
with any such Proceeding or Claim within 15 days after receiving written notice
requesting such an advance. Such notice shall include, to the extent required by
applicable law, an undertaking by the Executive to repay the amount advanced if
he is ultimately determined not to be entitled to indemnification against such
costs and expenses.

          (b) Neither the failure of any of the AE Companies (including the
Board, independent legal counsel or stockholders) to have made a determination
in connection with any request for indemnification or advancement under Section
12(a) that the Executive has satisfied any applicable standard of conduct, nor a
determination by AESC (including the Board, independent legal counsel or

                                       19

<PAGE>

stockholders) that the Executive has not met any applicable standard of conduct,
shall create a presumption that the Executive has not met an applicable standard
of conduct.

          (c) During the Term of Employment and for a period of six years
thereafter, AEI shall keep in place a directors and officers' liability
insurance policy (or policies) providing comprehensive coverage to the Executive
equal to at least the greater of (i) $25,000,000 per year and (ii) the coverage
that AEI provides for any other present or former senior executive or director
of AEI relating to the period of the Executive's employment.

     13. Withholding. AESC shall be entitled to withhold from payments due
hereunder any required federal, state or local withholding or other taxes.

     14. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the beneficiaries, heirs and representatives of the Executive and the
successors and assigns of AESC. AESC shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation, or otherwise) to all or a majority its assets or
AEI's assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that AESC and AEI would be required to perform this Agreement
if no such succession had taken place. Regardless whether such agreement is
executed, this Agreement shall be binding upon any successor of AESC and AEI in
accordance with the operation of law and such successor shall be deemed "AESC"
and/or AEI for purposes of this Agreement.

     15. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as follows:

          (a)  to the Board or AESC, to:

               Allegheny Energy, Inc.
               10435 Downsville Pike
               Hagerstown, MD 21740-1766
               Attn: Chief Executive Officer

          (b)  to the Executive, to:

               David B. Hertzog
               The address on file with the records of AESC

Addresses may be changed by written notice sent to the other party at the last
recorded address of that party.

                                       20

<PAGE>

     16. No Assignment. Except as provided in Section 14 in the case of AEI and
AESC or by will or the laws of descent and distribution in the case of the
Executive, this Agreement is not assignable by any party and no payment to be
made hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or other charge.

     17. Execution in Counterparts. This Agreement will be executed by the
parties hereto in two or more counterparts, each of which shall be deemed to be
an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.

     18. Arbitration. Except as otherwise provided herein, all disputes and
claims relating directly or indirectly to this Agreement shall be settled by
arbitration at New York, New York in accordance with the Federal Arbitration Act
and the Commercial Arbitration Rules of the American Arbitration Association.
The arbitrator shall be selected by agreement of the parties or, if they do not
agree on an arbitrator within thirty (30) days after one party has notified the
other of its desire to have the question settled by arbitration, then the
arbitrator shall be selected pursuant to the procedures of the American
Arbitration Association. The determination reached in such arbitration shall be
final and binding on all parties. Any arbitration award or judgment may be
entered in any court of competent jurisdiction. This agreement to arbitrate
shall survive any termination or expiration of this Agreement. Notwithstanding
the foregoing, claims for equitable or injunctive relief will not be subject to
arbitration. Costs of arbitration or litigation including, without limitation,
attorneys' fees of both parties shall be borne by AESC, except that each party
shall bear its own costs if the arbitrator or court determines that the claims
or defenses of the Executive were without any reasonable basis.

     19. Jurisdiction and Governing Law. For all conflicts arising out of this
Agreement, each party agrees to submit to the laws of the State of New York and
applicable federal law without regard to conflicts of laws principles.

     20. Severability. If any provision of this Agreement shall be adjudged by
any court of competent jurisdiction to be invalid or unenforceable for any
reason, such judgment shall not affect, impair or invalidate the remainder of
this Agreement.

     21. Tax Indemnity. The provisions of Exhibit C hereto shall apply with
respect to any Excise Tax (as defined therein) imposed on the Executive.

     22. Liability of AEI. AEI shall be jointly and severally liable with AESC
with respect to all obligations of AESC under this Agreement.

     23. Prior Understandings. This Agreement embodies the entire understanding
of the parties hereto, and supersedes all other oral or written agreements or
understandings between them regarding the subject matter hereof. Other than
Section 10(e), no change, alteration or modification hereof may be made except
in writing, signed by each of the parties hereto. The headings in this Agreement

                                       21

<PAGE>

are for convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.

     24. Remedies Cumulative; No Waiver. No remedy conferred upon either party
by this Agreement is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder or now or hereafter existing at law or in equity. No
delay or omission by either party in exercising any right, remedy or power
hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by such party from
time to time and as often as may be deemed expedient or necessary by such party
in such party's sole discretion.

     25. Survival of Provisions. Notwithstanding anything in this Agreement to
the contrary, the following provisions of this Agreement shall survive the
termination of this Agreement: Sections 5(b), 8, 9, 10, 11, 12, 14, 16, 18, 19,
20, 21, 22, 23 and 24, and all other terms and provisions of this Agreement that
by their nature extend beyond the termination of this Agreement. 26. Executive
Acknowledgment. The Executive hereby acknowledges that he has read and
understands the provisions of this Agreement, that he has been given the
opportunity for his legal counsel to review this Agreement, that the provisions
of this Agreement are reasonable and that he has received a copy of this
Agreement.

     27. Termination of Agreement. This Agreement shall be of no force and
effect if it is not executed and returned to AESC by the Executive prior to
11:59 pm on July 20th, 2003.

                                       22

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.

Allegheny Energy Service Corporation

By: /s/ Paul J. Evanson
    -----------------------------------------
    Name: Paul J. Evanson
    Title: Chairman & Chief Executive Officer

Allegheny Energy, Inc.

By: /s/ Paul J. Evanson
    ----------------------------------------
    Name: Paul J. Evanson
    Title: Chairman & Chief Executive Officer

/s/ David B. Hertzog
------------------------------
David B. Hertzog

                                       23

<PAGE>

                                    Exhibit C

                                  Tax Indemnity

     Gross-Up. Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment, award, benefit or
distribution (including any acceleration) by AESC (or any of the AE Companies)
or any entity which effectuates a transaction described in Section
280G(b)(2)(A)(i) of the Internal Revenue Code of 1986, as amended (the "Code")
(or any of its affiliates) to or for the benefit of the Executive (whether
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this Exhibit C) (a "Payment")
would be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Exhibit C, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income taxes.

     Determination. All determinations required to be made under this Exhibit C,
including whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by AESC's independent auditors or such other
certified public accounting firm of national standing reasonably acceptable to
the Executive as may be designated by AESC (the "Accounting Firm") which shall
provide detailed supporting calculations both to AESC and the Executive within
15 business days of the receipt of notice from the Executive that there has been
a Payment, or such earlier time as is requested by AESC. All fees and expenses
of the Accounting Firm shall be borne solely by AESC. Any Gross-Up Payment, as
determined pursuant to this Exhibit C, shall be paid by AESC to the Executive
within five days of the later of (i) the due date for the payment of any Excise
Tax, and (ii) the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion to such effect, and to the
effect that failure to report the Excise Tax, if any, on the Executive's
applicable federal income tax return will not result in the imposition of a
negligence or similar penalty. Any determination by the Accounting Firm shall be
binding upon AESC and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial

<PAGE>

determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by AESC should have been made
("Underpayment") or Gross-up Payments are made by AESC which should not have
been made ("Overpayments"), consistent with the calculations required to be made
hereunder. In the event the Executive is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by AESC to or
for the benefit of the Executive. In the event the amount of Gross-up Payment
exceeds the amount necessary to reimburse the Executive for his Excise Tax, the
Accounting Firm shall determine the amount of the Overpayment that has been made
and any such Overpayment shall be promptly paid by the Executive (to the extent
he has received a refund if the applicable Excise Tax has been paid to the
Internal Revenue Service) to or for the benefit of AESC. The Executive shall
cooperate, to the extent his expenses are reimbursed by AESC, with any
reasonable requests by AESC in connection with any contests or disputes with the
Internal Revenue Service in connection with the Excise Tax.<PAGE>
                                                                   Exhibit 10.14

                              EMPLOYMENT AGREEMENT
                             WITH
                                  ------------------
                                 JANUARY 3, 2001

     The parties, to this Employment Agreement (this "Agreement") are Allegheny
Energy Supply LLC, a Delaware limited liability company ("Company"), and
             (the "Employee"). The Employee is currently employed by Merrill
------------
Lynch Capital Services, Inc. ("Merrill Lynch") as a member of the Global Energy
Markets business unit ("Global Energy Markets"). The Company and its parent,
Allegheny Energy Inc. ("Parent"), have entered into an asset contribution and
purchase agreement, dated on or about of January 2, 2001 (the "Purchase
Agreement") with Merrill Lynch & Co., Inc. and Merrill Lynch (collectively,
"ML") pursuant to which the Company will purchase the business and assets of
Global Energy Markets and Global Energy Markets shall become a division of the
Company (the "Trading Division"). The Company desires to ensure itself of the
services of the Employee as of and following the Closing Date (as defined in the
Purchase Agreement) and the Employee desires to accept such employment on the
terms and conditions set forth in this Agreement.

     Accordingly, the parties, intending to be legally bound, agree as follows:

          1. Employment and Term. The Company offers to employ the Employee as a
           in the Trading Division, and the Employee accepts that employment
----------
with the Company, for the Term set forth below. The term of the Employee's
employment under this Agreement (the "Term") shall commence as of the Closing
Date (the "Commencement Date") and end on the second anniversary of that date,
subject .to extension of the Term as set forth in the immediately following
sentence or earlier expiration .of the Term as provided in Section 4. Unless
either the Company or the Employee provides notice to the other of non-renewal
not later than 90 days prior to the scheduled expiration of the Term-as then in
effect, the Term shall be extended for-an additional period of one year, and the
preceding clause of this sentence shall again apply with respect to each
subsequent extension of the Term.

          2. Duties. The Employee shall report to and perform such duties as may
be assigned from time to time by the President of the Trading Division (the
"President") and/or such other senior executives of the Trading Division as the
President may designate. The Employee shall perform his or her duties at the
Trading Division's offices in New York, New York, reasonable periods of travel
for business purposes excepted. The Employee shall devote his or her best
efforts to promote the Trading Division's interests, and he or she shall perform
his or her duties and responsibilities faithfully, diligently and to the best of
his or her ability, consistent with sound business practices. The Employee shall
devote his or her full working time to the business and affairs of the Trading
Division. Nothing in this Agreement shall preclude the Employee from devoting
reasonable periods required for engaging in charitable and community activities
and managing his or her personal investments; provided, that such activities do
not; in the good faith determination of the President, interfere in any material
respect with the regular performance of his or her duties and responsibilities
under this Agreement.

          3. Base Salary. During the Term, the Company shall pay the Employee a
base salary (the "Base Salary") at an annual rate not less than $           .
                                                                 -----------

<PAGE>

          The Base Salary shall be payable in accordance with the Company's
regular payroll practices (but no less frequently than monthly). During the
Term, Employee's Base Salary shall not be reduced.

          4. Incentive Compensation. During the Term, the Employee shall be
entitled to receive incentive compensation (a "Bonus") in such amounts and times
as the Board of Directors of the Company (the "Board"), after consultation with
the President, may determine in its discretion to award to the Employee under
any incentive compensation or other bonus plan or plans for senior executives of
the Company as may be established by the Company from time to time
(collectively, the "Employee Bonus Plan"). It is anticipated that any Employee
Bonus Plan would make the payment and amount of any Bonus conditioned upon the
Company attaining certain financial and other performance goals and .the
Employee meeting certain individual performance goals (some of .which could be
subjective in nature). Notwithstanding the foregoing, the Employee shall be paid
a Bonus of at least $            for any calendar year during the Term (the
                     -----------
"Minimum Bonus"). Any such Bonus will be paid no later than March 15 of the year
immediately following the year for which it is earned.

          5. Employee Benefits and Expense Reimbursement. During the Term, the
Employee shall be entitled to participate in and receive benefits as a senior
executive under and subject to the terms and conditions of all of the Parent's
employee benefit plans, programs and arrangements, as they may be duly amended,
terminated, approved or adopted by the Board from time to time, as more fully
outlined on Exhibit A attached hereto. During the Term, the Employee shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Employee in performing services under this Agreement, provided that such
expenses are properly accounted for and are in accordance with the policies and
practices for senior executives in effect from time to time as established by
the Board.

          6. Membership Interest Options. On the Commencement Date, the Company
shall grant the Employee an option to acquire membership interests in the
Company which represent % of the outstanding membership interests of the Company
on     the date of grant (calculated on a fully diluted basis and after taking
   ---
into account all options granted by the Company and any equity granted or to be
granted to ML as contemplated by the Purchase Agreement) under such terms and
conditions as set forth on Exhibit B attached hereto.

          7. Covenants of the Employee. In order to induce the Company to enter
into this Agreement, the Employee hereby covenants and agrees as follows:

          (a) Assignment. The Employee irrevocably assigns to the Company, or to
any party designated by the Company, his or her entire right; title and.
interest in all Developments that are made, conceived, or developed by the
Employee, in whole or in part, alone or jointly with others, within the scope of
his or her affiliation with the Company. Such assignment shall include, without
limitation, all Intellectual Property Rights in such Developments.
"Developments" shall mean all discoveries, inventions, designs, improvements,
enhancements, ideas, concepts; techniques, know-how, software, documentation or
other works of authorship, whether or not copyrightable or patentable, related
to any business or technology that has been developed or is under development by
the Company. "Intellectual Property Rights" shall mean all forms of intellectual
property rights and protections that may be obtained for, or may pertain to, the
Confidential Information (as defined in Section 6(e)) and Developments and may
include without limitation all right, title and interest in and to (i) all
letters patent and all filed, pending or potential applications for letters

                                        2

<PAGE>

patent, including any reissue, reexamination, division, continuation or
continuation-in-part applications throughout the world now or hereafter filed;
(ii) all trade secrets, and all trade secret rights and equivalent rights
arising under the common law, state law, Federal law and laws of foreign
countries; (iii) all mask works, copyrights other literary property or author's
rights, whether or not protected by copyright or as a mask work, under common
law, state law, Federal law and laws of foreign countries; and (iv) all
proprietary indicia, trademarks, tradenames, symbols, logos and/or brand names
under common law, state law, Federal law and laws of foreign countries.

          (b) Records. All papers, books and records of every kind and
description relating to the business and affairs of the Company, or any of its
affiliates, whether or not prepared by the Employee, other than personal notes
prepared by or at the direction of the Employee, shall be the sole and exclusive
property of the Company, and the Employee shall surrender them to the Company
immediately upon expiration of the Term and at any time upon request by the
Board.

          (c) Non-Competition. The Employee shall not, during the Restricted
Period (as defined below), anywhere in the. Restricted. Area (as defined below),
engage in or become associated as an employee, consultant, partner, owner,
agent, stockholder, officer or director of, or otherwise have a business
relationship with, any person or organization engaged in, or about to become
engaged in, a business that competes with the business of the Company or any of
its subsidiaries as it relates to the Trading Division business. As used herein,
the "Restricted Period" shall mean the period commencing on the date hereof and
continuing until the date six (6) months after the date of the Employee's
termination of employment by the Company for Cause or by the Employee for reason
other than Good Reason, and the "Restricted Area" shall mean the United States
of America. Notwithstanding the foregoing, this Section 7(c) shall not prohibit
the Employee from owning up to 2% of the outstanding shares of any entity that
competes with the Company or any of its subsidiaries.

          (d) Non-Solicitation. During the Restricted Period, the Employee shall
not solicit for employment on the Employee's own behalf, or on behalf of any
other enterprise, any individual who is or has been an employee, agent or
independent contractor of the Company during the Restricted Period.

          (e) Confidentiality. During the Restricted Period and thereafter, the
Employee shall not, directly or indirectly, disclose to anyone, or use in
competition with the Company or any of its subsidiaries, any Confidential
Information of or pertaining to the Company, including without limitation, any
trade secrets, advertising arrangements, costs, financial data, employee
information or information as to organization structure of the Company or any of
its subsidiaries. "Confidential Information" shall mean confidential or other
proprietary information that is owned by the Company or any of its subsidiaries,
including without limitation, hardware and software designs, product
specifications and documentation, business and product plans, customer lists,
and other confidential business information. Confidential Information shall not
include information which: (i) is or becomes public knowledge without any action
by, -or involvement of, the Employee in violation of this Agreement; (ii) is
disclosed by the Employee with the prior written approval of the Company; or
(iii) is disclosed pursuant to any judicial or governmental order or in any
dispute with the Company, provided that the Employee gives the Company
sufficient prior notice to contest such order. The Employee shall not disclose
to the Company or any of its subsidiaries, use in the Company's or any of its

                                       3

<PAGE>

subsidiaries' business, or cause the Company or any of its subsidiaries to use,
any confidential or proprietary information or materials of any third party.

     (f) Blue Pencil. The provisions contained in this Section 7 as to the time
periods, geographic area and scope of activities restricted shall be deemed
divisible, so that if any provision contained in this Section 7 is determined to
be invalid or unenforceable, that provision shall be deemed modified so as to be
valid and enforceable to the full extent lawfully permitted.

     (g) Enforcement. The Employee agrees and warrants that the covenants
contained herein are reasonable, that valid, consideration has been and will be
received therefor, and that the agreements set forth herein are the result of
arms-length negotiations between the parties hereto. The Employee recognizes
that the provisions of this Section 7 are vitally important to the continuing
welfare of the Company, and its affiliates, and that money damages constitute a
totally inadequate remedy for any violation thereof. Accordingly, in the event
of any such violation by the Employee, the Company, and its affiliates, in
addition to any other remedies they may have, shall have the right to institute
and maintain a proceeding to compel specific performance thereof or to issue an
injunction restraining any action by the Employee in violation of this Section
7.

          8. Termination of Employment.

          (a) Death or Disability. The Employee's employment under this
Agreement shall terminate upon his or her death or disability. Whether the
Employee is disabled shall be determined by an independent physician who is
selected by the Company with the approval of the Employee, which approval shall
not be unreasonably withheld. The Employee shall be deemed to be disabled at the
end of any period of 180 consecutive days during which, by reason of physical or
mental injury or disease, the Employee has been unable to perform the Employee's
usual and customary duties under this Agreement.

          (b) Termination by the Company. The Company may terminate the
Employee's employment under this Agreement with or without Cause (as defined
below) by giving written notice to the Employee of such termination. In the
event of a termination without Cause, the Company shall provide the Employee
with at least 30 days' advance written notice of his termination. For purposes
of this Agreement, the Company shall have "Cause" to terminate the Employee's
employment under this Agreement in the event of (i) the Employee's willful and
continued failure to perform and to discharge his or her duties and
responsibilities under this Agreement for any reason,(other than the Employee's
disability) after the Board has provided the Employee with written notice of its
intent to terminate his employment under this clause (i) and the Employee has
failed to resume the performance of such duties within fifteen (15) days
following receipt of such notice, (ii) any other willful misconduct by the
Employee that is materially and demonstrably injurious economically to the
Company, (iii) the Employee's final conviction of a felony involving moral
turpitude, or (iv) the Employee's willful and intentional violation of the
provisions of Section 7. For purposes of this Section 8(b), no act, or failure
to act, by Employee shall be considered "willful" unless committed in bad faith
and without a reasonable belief that the act or omission was in the best
interests of the Company.

          (c) Termination by the Employee. The Employee may terminate his or her
employment under this Agreement with or without Good Reason (as defined below)

                                       4

<PAGE>

by giving prior written notice to the Company. If the Employee terminates his or
her employment without Good Reason, he or she shall provide the Company with at
least 21 days advance written notice of his intent to terminate his or her
employment. For purposes of this Agreement, the Employee shall have Good Reason
to terminate his or her employment upon (i) the Company's breach of a material
provision of this Agreement or (ii) upon the Company providing the Employee with
a notice not to renew the Term as contemplated under Section 1 of this
Agreement.

          9. Compensation Upon Termination.

          (a) As a Result of Death, Disability, Cause or Resignation. If the
Employee's employment under this Agreement is terminated for any reason, then
the Employee (or in the case of his or her death, his or her estate or
beneficiary, as the case may be) shall be entitled to receive the following
benefits (collectively, the "Pre-Termination Benefits"): (i) the amount of his
or her Accrued Obligations (as defined below), such amount to be paid in, a
single lump sum cash. payment within 15 days of- the date of termination, and
(ii) any payments which the Employee, his or her spouse, beneficiaries or estate
may be entitled to receive pursuant to any employee benefits plan or program of
the Company. As used in this Agreement, "Accrued Obligations" means, as of the
date of termination, (A) any accrued but unpaid Base Salary, (B) any accrued and
unpaid expense reimbursements, and (C) any accrued, but unpaid vacation. In
addition, in the event of a termination under Section 8(a), the Employee (or his
or her estate or beneficiaries, as the case maybe) shall be paid a pro-rata
amount of the greater of his or her Minimum Bonus (if applicable) or target
Bonus for the year of termination (the "Pro-Rata Bonus").

          (b) By the Company other than for Cause or by the Employee for Good
Reason. If, the Company terminates the Employee's employment without Cause or
the Employee terminates his or her employment for Good Reason, the Employee
shall be entitled to receive the Pre-Termination Benefits and the following
benefits (the "Post-Termination Benefits") within fifteen (15) business days
following his/her termination of employment:

               (i) a cash amount equal to 50% of the Employee's Base Salary at
the highest rate in effect at any time during the twelve (12)-month period prior
to the date of termination, payable in a lump-sum; and

               (ii) the Pro-Rata Bonus.

          10. Miscellaneous.

          (a) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the heirs and representatives of the Employee and the successors
and assigns of the Company.

          (b) Notices. Any notice or other communication under this Agreement
shall be in writing and shall be considered given when mailed by registered,
return receipt requested mail, to the parties at the following addresses (or at
such other address as a party may specify by notice to the others):

                                       5

<PAGE>

               (i)  to the Company, to:

                    Allegheny Energy Supply LLC

                    Richard J. Gagliardi
                    Vice President, Administration
                    Allegheny Energy, Inc.
                    10435 Downsville Pike
                    Hagerstown, MD  21740-1766

               (ii) to the Employee, to:

                    -----------------------------

                    -----------------------------

                    -----------------------------

Addresses may be changed by written notice sent to the other party at the last
recorded address of that party.

          (c) Execution in Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which together shall constitute but a single instrument.

          (d) Jurisdiction and Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be performed in New York.

          (e) Severability. If any provision of this Agreement, or the
application of any provision to any person or circumstance, shall for any reason
and to any extent be invalid or unenforceable, the remainder of this Agreement
and the application of that provision to other persons or circumstances shall
not be affected but shall be enforced to the full extent permitted by law.

          (f) Prior Understandings. This Agreement embodies the entire
understanding of the parties hereof, and supersedes all other oral or written
agreements or understandings between them regarding the subject matter hereof.
No change, alteration or modification hereof may be made except in a writing,
signed by each of the parties hereto.

          (g) Mitigation. The Employee shall not be required to mitigate'
amounts payable under this Agreement by seeking other employment or otherwise,
and there shall be no offset against amounts due the Employee under this
Agreement on account of subsequent employment except as specifically provided
herein. Additionally,-amounts owed to the Employee under this Agreement shall
not be offset by any claims the Company may have against the Employee and the
Company's obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder, shall not be affected by any
other circumstances, including, without limitation, any counterclaim,
recoupment, defense or other right which the Company may have against the
Employee or others.

                                       6

<PAGE>

          11. Indemnification. The Company agrees that if the Employee is made a
party or is threatened to be made a party to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that the Employee is or was a trustee, director or officer of
the Company or any subsidiary of the Company or is or was serving at the request
of the Company or any subsidiary as a trustee, director, officer, member,
employee or agent of another corporation or a partnership, joint venture, trust
or other enterprise, including, without limitation, service with respect to
employee benefit plans, whether or not the basis of such Proceeding is alleged
action in an official capacity as a trustee, director, officer, member, employee
or agent while serving as a trustee, director, officer, member, employee or
agent, the Employee shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expenses incurred or suffered by the Employee in
connection therewith, and such indemnification shall continue as to the Employee
even if the Employee has ceased to be an officer, director, trustee or agent, or
is no longer employed by the Company and shall inure to the benefit of his
heirs, executors and administrators.

          12. Arbitration. Except as provided for in Section 7 of this
Agreement, if any contest or dispute arises between the parties with respect to
this Agreement, such contest or dispute shall be submitted to binding
arbitration for resolution in, New York; New York in accordance with the rules
and procedures of the Employment Dispute Resolution Rules of the American
Arbitration Association then in effect. The decision of the arbitrator shall be
final and binding on both parties, and any court of competent jurisdiction may
enter judgment upon the award. The Company shall pay all expenses relating to
such arbitration, including, but, not limited to, the Employee's reasonable
legal fees and expenses; provided, that, the Employee is victorious on the
material claims raised in such dispute; provided, further, that, if the
arbitrator determines that the Employee has acted in bad faith and without a
reasonable belief that he or she would be successful in the material issues
raised in such dispute, the arbitrator may order the Employee to pay the
Company's reasonable legal fees in such dispute.

          13. Successors.

          (a) Company' s Successors. No rights or obligations of the Company
under this Agreement may be assigned or transferred except that the Company may
assign this Agreement to any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company if such successor expressly assumes and agrees to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as herein before
defined and any successor to its business and/or assets (by merge, purchase or
otherwise) which executes and delivers the agreement provided for in this
Section 13 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.

          (b) Employee's Successors. No rights ox obligations of the Employee
under this Agreement may be assigned or transferred by the Employee other than
his rights to payments or benefits hereunder, which may be transferred only by
will or the laws of descent and distribution.

                                       7

<PAGE>

Upon the Employee's death, this Agreement and all rights of the Employee
hereunder shall inure to the benefit of and be enforceable by the Employee's
beneficiary or beneficiaries, personal or legal representatives, or estate, to
the extent any such person succeeds to the Employee's interests under this
Agreement. The Employee shall be entitled to select and change a beneficiary or
beneficiaries to receive any benefit or compensation payable hereunder following
the Employee's death by giving the Company written notice thereof. In the event
of the Employee's death or a judicial determination of his incompetence,
reference in this Agreement to the Employee shall be deemed, where appropriate,
to refer to his beneficiary(ies), estate or other legal representative(s). If
the Employee should die following his date of termination while any amounts
would still be payable to him hereunder if he had continued to live, all such
amounts unless otherwise provided herein shall be paid in accordance with the
terms of this Agreement to such person or persons so appointed in writing by the
Employee, or otherwise to his legal representatives or estate.

          14. Non-Disclosure. Unless otherwise required by applicable law or the
rules of any stock exchange or quotation system on which the securities of the
Employer are listed, or by legal process, each of the parties to this Agreement
shall hold the terms of this Agreement in the strictest confidence and shall not
disclose or otherwise make public any of the terms and conditions of this
Agreement; provided, that, any disclosure made by Executive to his spouse,
attorney(s) or financial adviser(s) shall not be deemed to be a breach of this
Section 14.

     IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.

                                        ALLEGHENY ENERGY SUPPLY LLC

                                        By:
                                            ------------------------------------

                                        Name:
                                              ----------------------------------

                                        Title:
                                               ---------------------------------

                                        EMPLOYEE

                                        ----------------------------------------

                                       8

<PAGE>

                                                                       EXHIBIT A

                            Summary of Benefits Plans

     The following benefit plans, programs and arrangements are in effect as of
the Commencement Date but are subject to amendment or termination by the Parent
and/or the Company from time to time:

     .    Allegheny Energy Retirement Plan
     .    Allegheny Energy Supplemental Executive Retirement Plan
     .    Allegheny Energy Employee Stock Ownership and Savings Plan
     .    Allegheny Energy Flexible Benefits Program
          .    Allegheny Energy Medical Plan
          .    Allegheny Energy Dental Plan
          .    Allegheny Energy Long-term Disability Plan
          .    Allegheny Energy Health Care Flexible Spending Account Plan
          .    Allegheny Energy Dependent Care Flexible Spending Account Plan
     .    Allegheny Energy Group Life Insurance Plan
     .    Group Universal Life Program
     .    Allegheny Energy Travel Accident Insurance Plan
     .    Allegheny Energy Death Benefit Plan
     .    Allegheny Energy Separation Allowance Plan
     .    Allegheny Energy Sick Pay Plan
     .    Allegheny Energy Vacation and Personal Convenience Time
     .    Allegheny Energy Executive Compensation Plan
     .    Miscellaneous Benefits Programs, including, but not limited to:
          .    Personal Computer Loan Program
          .    Allegheny Energy Scholarship Program
          .    Educational Assistance Program

<PAGE>

                                                                       EXHIBIT B

                              EXECUTIVE SUMMARY OF
                           ALLEGHENY ENERGY SUPPLY LLC
                                   OPTION PLAN

   This is only a summary of some of the more important terms of the proposed
    Plan. The actual grants to participants will be governed by the terms of
          The Plan document and the individual award agreements between
  Allegheny Energy Supply LLC and participants; provided, that, such terms and
    conditions SHALL NOT be inconsistent with the terms and conditions of an
                   employee's individual employment agreement.

          1. Purpose.

     This Plan is intended to serve as a vehicle under which Allegheny Energy
Supply LLC (the "Company") can offer to designated employees, directors and
consultants the opportunity to obtain equity interests in the Company through
the grant of options to purchase membership interests in the Company. The Plan
will (i) serve as a tool for recruiting and retaining top talent, (ii) allow
eligible individuals to share the benefits of future growth in the value of the
Company and (iii) better align the financial interests of participants with
those of the Company's shareholders.

          2. Plan Administration; Equity Interests Authorized.

     The Plan will be administered by the Board of Directors of the Company (the
"Board"), except that the Board may delegate some or all of this authority to a
Board committee or one or more officers of the Company. The Board will be
responsible for, among other things, selecting the participants who will receive
options under the Plan and establishing the terms and conditions of each option
which shall not be inconsistent with- the terms and conditions of an
individual's employment agreement. In determining option grants for employees
other than Mr. Gordon, the Board will consult with and act upon the
recommendations of Mr. Gordon. A total of 1.25% of the equity interests in the
Company on the closing date (calculated on a fully diluted basis and after
taking into account all options granted by the Company and all equity granted or
contemplated to be granted to Merrill Lynch as contemplated by the Purchase
Agreement) will be reserved for issuance under the Plan. These equity interests
will have the same rights and privileges as those held by Allegheny Energy, Inc.

          3. Terms of Options to be Awarded.

     The following is a brief description of the options to be granted under the
Plan:

     . The Board, after consultation with Mr. Gordon as contemplated above, will
determine the terms and conditions of the options, within certain guidelines set
forth in the Plan and individual employment agreements.

                                       1

<PAGE>

     . All recipients of options will be required to sign an option agreement
that (along with the Plan) will contain all of the terms and conditions
applicable to the options which shall not be inconsistent with the terms and
conditions of an individual's employment agreement.

     . The options granted under the Plan will be non-qualified options or, if
permitted by law, incentive stock options to the maximum extent permitted by
law.

     . The options will have a ten-year term (subject to earlier expiration on
termination of employment, as described below). The exercise price of each
option will be equal to the fair market value on the date of grant of the
membership interest subject to the option. For the initial grants, the exercise
price will be based on a $5.75 billion valuation for the Company, which shall be
deemed the fair market value of the Company on the grant date.

     . The options will become vested and exercisable in substantially equal
installments on each of the first two anniversaries after the date of grant.
There will be accelerated vesting on all options: (i) in the event of a change
in control or (ii) if the employee's employment is terminated fey the Company
without Cause or by the employee with Good Reason (as such terms are defined in
any employee's employment agreement). Upon an IPO, 50% of each employee's
options will vest on an accelerated basis.

     . If an employee is terminated for Cause (other than pursuant to clause (i)
of the definition of Cause in the employee's employment agreement), all options
(whether or not vested) will automatically terminate as of the date of
termination. If the employee's employment should terminate by reason of death,
retirement or disability, all unvested options will terminate as of such
termination of employment and all vested options will remain exercisable for 12
months following such termination of employment. If the employee's employment
should terminate for any other reason, all unvested options will terminate as of
such termination of employment and all vested options will remain exercisable
for (X) if such termination should occur prior to an IPO, the longer of (1) 6
months following such termination of employment or (2) 30 days after any date in
which the employee is not restricted from exercising the option or (Y) if such
termination should occur on or after an IPO, the longer of (1) 3 months
following such-termination of employment or (2) 30 days after any date in which
the employee is not .restricted from exercising the option.

     . In the event of any change in the outstanding membership interest units
of the Company by reason of any share (or unit) dividend or split,
recapitalization, merger, consolidation, spin-off, combination or exchange of
shares (or units) or other corporate change (e.g., if the Company becomes a
corporation, the interests shall be converted into common stock in the most tax
efficient manner as is reasonably possible), or any, distribution to holders of
the shares (or units) other than regular cash dividends, the number and kind of
shares (or units) subject to any outstanding Option granted hereunder and the
exercise price thereof shall be adjusted by the Board to preserve the value of
such Options.

     . Prior to an IPO, employees will be permitted to borrow the exercise price
and any withholding taxes from the Company, with interest at the prevailing rate

                                       2

<PAGE>

for a fully secured note to purchase equity securities. The loan will be 100%
recourse as to interest and 50% recourse as to principal, and will be fully
secured by the purchased interests. It will have a term of up to five years with
no required amortization or prepayment right prior to the maturity date.

          4. Restrictions on Membership Interests.

     Membership interests issued upon the exercise of options will be subject to
the following terms and conditions:

     . All interests issued upon the exercise of options will be subject to
transfer restrictions that are customary for a private company. The Company will
have a "right of first refusal" with respect to any proposed sale of shares.

     . All options, whether or not vested, will expire if the participant
violates noncompetition, confidentiality or similar obligations to the Company
and, in the event of any such violation, the participant will be obligated to
pay back to the Company any option gains realized during the prior six months.

     . Each participant who is granted an award under the Plan must agree to
cooperate fully with the Company and underwriters in connection with any public
offering of the Company's securities.

     . If Allegheny Energy, Inc. proposes to sell 50% or more of the outstanding
equity interests to a third party, then it may compel participants to sell to
the same buyer a proportionate number of interests (bring-along right).
Employees will have the right to participate on a proportionate basis in any
such transaction (tag-along right).

     . Upon an employee's termination of employment for any reason and if prior
to an IPO, the employee may elect to require the Company to purchase, for their
Fair Market Value (defined below) his membership interests within the later of
(i) 180 days of the employee's termination of employment or (ii) 30 days
following the date in which the option has been fully exercised (or ceases to be
exercisable). Such period shall be stayed (not longer than 6 months) for the
period determined by the Company's auditors such that such repurchase does not
require the Company to take a compensation expense for financial accounting
purposes. If such put right is .not exercised by the employee, then at any time
thereafter prior to an IPO the Company shall have the right to elect to require
the employee to sell the membership interests to the Company for their Fair
Market Value. Upon any repurchase of interests as set forth above, the purchase
price will be payable (with interest) in eight quarterly installments over two
years.

     . Prior to an IPO, the "Fair Market Value" of the Company shall mean the
P/E Valuation. For purposes of this Agreement, the "PIE Valuation" shall mean
the product of (A) and (B), where (A) is equal to the trailing 12 months'
earnings of the Company (excluding any one-time, non-recurring or extraordinary
items) and (B) is equal to the Industry P/E (as defined below). For purposes of
the Plan, the "Industry P/E" shall mean the average of the actual price to
earnings ratios, using prices and trailing 12-month earnings (excluding any
one-time, non-recurring or extraordinary items) at the end of the month prior to
the calculation, for all generating companies that have been created through an

                                       3

<PAGE>

initial public offering or spinoff of generation from companies, which prior to
the initial public offering or spinoff, were predominately regulated electric or
electric and gas companies ("Utility GENCOs"). By way of example, if such
calculation were performed today, Utility GENCOs would include Southern Energy,
Inc., NRG Energy, Inc. and Orion Power Holdings, Inc. Notwithstanding the
foregoing, within 30 days of the relevant valuation date, either party or both
may challenge the valuation of the Company based on the P/E Valuation by
providing written notice to the other party. In the event of such a challenge,
the Fair Market Value of the Company shall be determined as set forth below.

     . If a challenge to the P/E Valuation is made as set forth above, the "Fair
Market Value" of the Company shall mean, as of any date, the fair market value
of all of the Company's equity securities determined as of the applicable date
on the basis of an assumed sale of all of the Company's equity securities in an
arms' length private sale between a willing buyer and a willing seller, neither
acting under compulsion, as determined by an independent third party appraiser
mutually acceptable to the Company and the employee (which determination shall
take into account all relevant factors determinative of value, but without any
discount for lack of liquidity); provided, that, if the parties are unable to
agree on an independent appraiser within 15 days of a determination date, the
appraiser shall be a nationally recognized investment banking firm selected
jointly by the investment banker that was proposed by the Company and the
investment banker that was proposed the employee. If the determination of the
investment banker is within, from and including, 90% to through 110% of the P/E
Valuation determined as set forth above, the P/E Valuation shall be used to
determine the Fair Market Value of the Company and the party that made the
challenge shall pay all of the expenses of such investment banker and if both
parties made such a challenge, the expenses shall be borne solely by the
Company. If the investment banker's valuation of the Company is not within such
parameters, the determination of such investment banker as to Fair Market Value
shall be final and binding upon the Company and the employee and the expenses of
such investment banker shall be borne by the unsuccessful party in such
challenge; provided, that, if both parties have mutually agreed to challenge the
results, the expenses shall be borne solely by the Company. Notwithstanding the
foregoing, if an employee challenges a P/E Valuation and as a result an
independent appraisal is completed, then the Fair Market Value used for that
employee shall apply to any other employee whose termination of employment
occurs within 12 months following the effective date of such appraisal unless
such other employee can demonstrate to the reasonable satisfaction of the Board
that changes in circumstances have rendered such appraisal materially
inaccurate.

                                       4

<PAGE>

                            AMENDMENT AND ASSIGNMENT
                             OF EMPLOYMENT AGREEMENT

                                 March 28, 2002

          The parties to this Amendment and Assignment of Employment Agreement
(the "Amendment and Assignment") are Allegheny Energy, Inc., a Maryland
corporation ("Allegheny Energy"), Allegheny Energy Supply LLC, a Delaware
limited liability company ("Supply") and a majority-owned subsidiary of
Allegheny Energy, and a successor to Allegheny Energy Global Markets LLC, a
Delaware limited liability company, (the "Global Markets"), Allegheny Energy
Service Corporation, a Maryland corporation (the "Employer") and a wholly-owned
subsidiary of Allegheny Energy, and Aarif Kassam (the "Executive").

          Supply and the Executive entered into an Employment Agreement, dated
January 3, 2001 (the "Employment Agreement"). Subsequently, Supply and the
Executive agreed to amend and assign the Employment Agreement to Global Markets,
subject to Supply's guarantee of Global Markets' obligations under the
Employment Agreement. The Employment Agreement provides for the grant of certain
options to the Executive to acquire membership interests in Supply. As of the
date of this Amendment and Assignment, Allegheny Energy is granting an option to
the Executive to acquire shares of Allegheny Energy, Inc. common stock pursuant
to the terms of a Stock Option Notice and subject to the provisions of the
Allegheny Energy, Inc. Long Term Incentive Plan (the "Allegheny Energy Option").
In consideration of the Allegheny Energy Option, the Executive agrees to waive
any and all rights to, and disclaim any and all interests in, any options to
purchase an interest in Supply as described in or otherwise contemplated under
the Employment Agreement and any such options shall be deemed canceled and void,
ab initio.

          Further, the parties deem it desirable for the Executive to be
employed by the Employer instead of Global Markets, effective as of January 1,
2002, under equivalent terms and conditions to those set forth in the Employment
Agreement, as amended herein and as it may be amended from time to time.

          Accordingly, intending to be legally bound, the parties acknowledge
and agree that:

          1. Section 6 of the Employment Agreement is deleted and all references
in the Employment Agreement to Section 6 are deleted and of no further effect.
The Executive agrees and acknowledges that any grant or other issuance of any
option to purchase an interest in Supply, whether pursuant to the Employment
Agreement or otherwise, is hereby canceled and void, ab initio.

          2. Exhibit B attached to the Employment Agreement is deleted in its
entirety and all references in the Employment Agreement to Exhibit B are
deleted.

          3. Supply hereby assigns its rights and obligations under the
Employment Agreement to the Employer, effective January 1, 2002, and the
Executive hereby consents to such assignment.

          Notwithstanding the assignment set forth in the preceding paragraph,
Supply irrevocably guarantees to the Executive the prompt performance and

<PAGE>

payment of the obligations of the Employer to the Executive under the Employment
Agreement, including without limitation, the indemnification provided for in
Section 11 of the Employment Agreement. This is a guarantee of performance and
payment and not of collection only, and recourse may be had in the first
instance against Supply without first proceeding against the Employer. The
obligations of the Employer under this guarantee shall not be affected or
impaired by reason of the happening from time to time of any event, including,
without limitation, any of the following: (i) any failure, omission or delay on
the part of Executive to enforce, assert or exercise any right conferred on the
Executive in the Employment Agreement or otherwise or (ii) any bankruptcy,
insolvency or reorganization of, any arrangement or assignment for benefit of
creditors by, or any trusteeship with respect to the Employer or any of its
assets. Supply shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business, assets or stock Supply to expressly assume the guarantee and to
fulfill the obligations hereunder as if no succession had taken place.

          4. Section 13(a) of the Employment Agreement is hereby deemed amended
to the extent necessary to give full effect to the assignment contemplated by
Section 3 of this Amendment and Assignment.

          5. Except as expressly amended above, the terms and conditions of the
Employment Agreement shall continue in full force and effect.

          The foregoing Amendment and Assignment is hereby accepted and the
terms and conditions thereof hereby accepted and agreed to by the undersigned.

                                       ALLEGHENY ENERGY, INC.

                                       By:
                                           -------------------------------------
                                           Senior Vice President

                                       ALLEGHENY ENERGY SUPPLY LLC

                                       By:
                                           ------------------------------------
                                           President and Chief Operating Officer

                                       ALLEGHENY ENERGY SERVICE CORPORATION

                                       By:
                                           ------------------------------------
                                           Senior Vice President

                                       EXECUTIVE

                                       By:
                                           ------------------------------------

                                       2

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00056-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00056-of-00352.parquet"}]]