AMENDED AND RESTATED EMPLOYMENT AGREEMENT

AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “ Agreement ”) made as of this 26th day of July, 2007 (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 Paul J. Evanson (the “ Executive ”).

WHEREAS, the Executive is currently an employee of AESC, and is party to an Employment Agreement with AESC and AEI dated June 9, 2003, as amended effective February 18, 2004 (the “ Prior Agreement ”);

WHEREAS, AESC desires to procure the continued services of the Executive, and the Executive is willing to continue in the employment of AESC, upon the terms and subject to the conditions set forth in this Agreement; and

WHEREAS, AESC and AEI and the Executive desire to amend and restate the Prior Agreement as set forth herein;

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

(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 the Effective Date and, unless terminated earlier pursuant to Section 8, shall continue until June 15, 2010 (the “ Term ”).

2.    Duties. During the Term as provided in Section 1(b) hereof, the Executive shall serve as Chairman of the Board of Directors of AEI (the “ Board ”), President and Chief Executive Officer of AEI and AESC, and shall, in his capacity as an officer, report to the Board. The Executive shall have overall charge of the business and affairs 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; and (v) 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 11 of this Agreement.

3.    Base Salary. For services performed by the Executive for the AE Companies pursuant to this Agreement during the Term, AESC shall pay the Executive a base salary (a “ Base Salary ”) at the rate of $1,020,900 per year for the period from the Effective Date through June 15, 2008 and at the rate of at least $1,200,000 per year for the remainder of the Term following June 15, 2008. The Base Salary shall be payable in accordance with AESC’s regular payroll practices (but no less frequently than monthly). The Base Salary may be increased from time to time during the Term in the sole discretion of the Board; provided, however , that, at a minimum, Base Salary shall be increased (but not decreased) on each June 15 during the Term to reflect increases in the U.S. Department of Labor Consumer Price Index - U.S. City Average Index.

4.    Annual Bonus. The Executive shall be eligible to receive incentive compensation (the “ Annual Bonus Compensation ”) in respect of the Company’s 2007 fiscal year and each succeeding fiscal year of the Company commencing during the Term. The bonus opportunity for each such year shall be based on the percentages of the Executive’s Base Salary as of the last day of the applicable fiscal year, as set forth below:

The Annual Bonus Compensation shall be awarded under the Allegheny Energy, Inc. Annual Incentive Plan, as amended from time to time, (the “ AIP ”), to the maximum extent permitted by that plan, with any excess component being awarded pursuant to a separate arrangement outside of that plan. The parameters of the award made under AIP shall be determined by the Board and substantially similar parameters shall apply with respect to any component of the Annual Bonus Compensation awarded outside the AIP. The Executive’s Annual Bonus Compensation for any year shall be payable in cash no later than March 15 of the next succeeding year. For purposes of this Agreement, the Executive’s “ Target Bonus ” as of any given date shall be a dollar amount equal to the Executive’s Base Salary as of such date multiplied by the applicable Target Percentage as of such date, as specified above.

(a)   Equity Awards. AESC shall grant to the Executive an annual equity award (collectively, the “ Equity Awards ”) in each of 2008 and 2009 with respect to AEI Common Stock, each such award having an initial grant date value of $8,400,000. The Equity Awards shall be granted under the Allegheny Energy, Inc. 1998 Long-Term Incentive Plan or such other equity-based incentive plan as may be adopted and approved hereafter by AEI shareholders (the “ LTIP ”) and shall be evidenced by award agreements. Such grants shall be awarded effective as of the normal annual equity award grant date for annual awards to AEI employees generally in 2008 and 2009, as determined by the Board (the “ Grant Date ”) (but in no event later than June 15 of each such year), and shall be in the form and subject to the terms set forth in this Agreement and such additional terms not inconsistent with this Agreement as shall be established by the Board in consultation with the Executive. The Equity Awards may consist of incentives in the form of stock options, stock appreciation rights, restricted stock, stock units, equity-based performance shares or units or similar awards or a combination of the foregoing, as determined by the Board in consultation with the Executive. Any stock options or stock appreciation rights granted as part of the Equity Awards shall have a per share exercise price equal to the fair market value of the underlying shares as of the Grant Date (as determined in accordance with the LTIP) and the value of such stock options or rights for purposes of this Section 5(a) shall be based on the Black Scholes valuation or other approved valuation methods used as of the Grant Date by AEI in valuing AEI employee option grants for purposes of AEI’s financial reporting obligations.

(b)  Vesting . The mix of incentives and the vesting and other material terms of the incentives under each Equity Award shall be no less favorable to the Executive than those applicable to similar type incentives granted to other senior executives of AEI on or about the Grant Date of the relevant incentives under such Equity Award; provided, however, that the vesting of the Equity Awards shall be subject to Section 9 and upon the occurrence of a Change in Control (as defined in Section 8(e)(iii)) the Equity Awards shall become immediately vested (and, if such Equity Awards include stock units, such stock units shall become immediately payable). With respect to any portion of an Equity Award granted in the form of performance shares or performance units, notwithstanding the application of any accelerated vesting provisions set forth in Section 9 below, such portion of the Equity Award shall be subject to earning and performance measurement over the same performance period as is applicable to identical awards granted to other employees of the AE Companies at the time such Equity Award is granted.

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 under each of such plans; provided , that the Executive shall not participate in the Allegheny Energy, Inc. Supplemental Executive Retirement Plan or other nonqualified 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 participation in such plans.

(b)  Fringe Benefits . In addition to the foregoing, the Executive shall be entitled to (i) an exclusive personal secretary and other assistance of his choosing; (ii) a country club and dining club membership; (iii) use, maintenance, insurance and repair of a company car; and (iv) other fringe benefits and other similar benefits no less favorable than those available to the most favorably treated senior executives of the AE Companies, except as previously agreed by the Executive.

(c)  Benefit in Lieu of Pension . To continue to compensate the Executive for the significant pension benefits he ceased to accrue at his prior employer as a result of accepting employment with AESC, upon a termination of the Executive’s employment with AESC for any reason, the Executive shall be entitled to a cash payment equal to $66,667 for each month that the Executive was employed with AESC, subject to increase pursuant to Section 9(b)(v) (the “ Pension Benefit ”). For the avoidance of doubt, the Executive’s employment with AESC commenced on June 16, 2003, pursuant to the Prior Agreement.

(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 five weeks per year or, if greater than five weeks per year, (i) the amount of vacation and paid time off available to the most favorably treated senior executive of the AE Companies or, (ii) such period as the Board shall approve, without reduction in salary or other benefits.

(f)   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.

7.    Special Vesting of Units . The Units and the Additional Units (as such terms are defined in the Prior Agreement) awarded to the Executive under Section 5(b) and Section 5(c) of the Prior Agreement and any additional Units credited with respect thereto shall become fully vested and payable to the Executive if at any time after the occurrence of an Equity Vesting Event any Equity Person (as such terms are defined in Section 8(e)(vi) of this Agreement) exercises veto power over a corporate action of the AE Companies which has been recommended by the Executive.

8.    Termination . Unless earlier terminated in accordance with the following provisions of this Section 8, 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 9 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 9(a) with respect to certain payment obligations of AESC, this Agreement shall terminate immediately in the event of the Executive’s death.

(i)          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 16 of this Agreement.

(ii)          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 8(b).

(iii)          If the Executive intends to resign his employment with the Company hereunder for any reason other than a resignation for Good Reason, the Executive shall provide a Notice of Termination to AESC at least ninety (90) days in advance of the proposed effective date of such resignation.

(iv)          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. 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, subject to Section 8(c), thereupon be terminated for Cause.

(c)  Dispute Concerning Termination . If within fifteen (15) days after any Notice of Termination is given (or, in the case of any purported termination of the Executive’s employment for Cause, within ten days after the notice from the Board described in the last sentence of Section 8(b)(iv)), or, if later, prior to the Date of Termination (as determined without regard to this Section 8(c)), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that (i) the Date of Termination shall be extended by a notice of dispute given by Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence; and (ii) in the event of an extension in the Date of Termination pursuant to this Section 8(c), the Executive shall be under no obligation to continue to perform any duties beyond the Date of Termination set forth in the original Notice of Termination.

(d)  Compensation During Dispute . If a purported termination occurs and the Date of Termination is extended in accordance with Section 8(c) hereof, AESC shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary), shall continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, and shall continue vesting of all equity awards including, without limitation, the Equity Awards (as defined in Section 5(a)) and any equity awards granted in connection with the Prior Agreement, until the Date of Termination, as determined in accordance with Section 8(c) hereof. Amounts paid under this Section 8(d) are in addition to all other amounts due under this Agreement (other than the Executive’s Accrued Obligations) and shall not be offset against or reduce any other amounts due under this Agreement. However, if such dispute is resolved in favor of the AE Companies, the Executive shall return to the AE Companies, and reimburse the AE Companies for, all amounts of cash compensation and equity compensation that the Executive received, became vested in or retained, and all proceeds relating to any equity compensation that the Executive realized (on a pre-tax basis), but which the Executive would not have been able to receive, become vested in, retained or realized absent the triggering and application of Sections 8(c) and 8(d).

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

(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 Sections 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 Sections 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 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 ninety (90) days nor more than one-hundred twenty (120) days (or, in the case of a resignation solely for Good Reason, not 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)          “ Equity Vesting Event ” shall mean the occurrence of a Change in Control (as defined in Section 8(e)(iii)(A) above), except that (1) the ownership threshold shall be 10% and (2) the 10% ownership threshold shall be met if in any twelve (12) consecutive month period two (2) or more persons become beneficial owners, directly or indirectly, of securities of AEI collectively representing 10% or more of the combined voting power of AEI’s then outstanding securities, (regardless of whether such persons would be considered a single “person” under Section 13(g) of the Exchange Act) pursuant to which the person or persons acquiring beneficial ownership of voting securities of AEI pursuant to this Section 8(e)(vi) (each an “ Equity Person ”) receives the right to veto a corporate action of the AE Companies.

(vii)         “ Good Reason ” shall mean, without the Executive’s written consent:

(A)       The failure to elect or reelect the Executive to the Board or to any of the other positions specified in Section 2 (including changes resulting from a transaction immediately after which the Executive is not the Chief Executive Officer and Chairman of the ultimate majority parent company of the businesses of the AE Companies following the transaction), the material diminution in the Executive’s title or duties, or the assignment to the Executive of any duties inconsistent in any material respect with the Executive’s position, titles, authority, duties, responsibilities or reporting relationships 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 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, 7, 13 or 22 of this Agreement, other than an isolated and inadvertent failure not committed in bad faith and which is remedied by AE