EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (the “Agreement” ) made as of this 1st day of January, 2006 (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 John Campbell (the “ Executive ”).

WHEREAS, pursuant to a letter agreement, dated July 7, 2004, between the Executive and AEI (the “ Letter Agreement ”), the Executive has been employed by AESC as President, Allegheny Energy Supply;

WHEREAS, AESC wishes to continue to retain the services of the Executive as President, Allegheny Energy Supply, LLC (“ AE Supply ”);

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:

(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 7, shall continue until the close of business on July 13, 2009 (the “Term” ).

(c)         Prior Agreements . The parties agree that this Agreement shall replace and supersede the Letter Agreement and the Change in Control Agreement, dated as of July 12, 2004, between AESC and the Executive (the “ Change in Control Agreement ”), both of which, effective as of the date hereof, are hereby terminated and shall be of no further force or effect.

2.           Duties . During the Term as provided in Section 1(b) hereof, the Executive shall serve as President of AE Supply, and shall report directly to the Chief Executive Officer of AESC. The Executive shall be responsible for the operations and day-to-day business affairs of AE Supply. 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 10 of this Agreement.

3.                Base Salary . For services performed by the Executive pursuant to this Agreement, AESC shall pay the Executive a base salary (a “Base Salary” ) at the rate of at least $300,000 per year, payable in accordance with AESC’s regular payroll practices (but no less frequently than 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 ”).

(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 50.0% of Base Salary (the “Target Bonus” ) and a maximum bonus opportunity of 100.0% of Base Salary (the “Maximum Bonus” ). The parameters under AEI’s Annual Incentive Plan (including the parameters applicable to the Executive) shall be determined by the Management Compensation and Development Committee of the Board. The Executive’s Annual Bonus for any year shall be payable in cash no later than March 15 of the next succeeding year.

(b)             Sign-on Bonus . This Agreement acknowledges that pursuant to the Letter Agreement, the Executive received a sign-on bonus of $100,000. In the event of a termination of the Executive’s employment by AESC for Cause or a termination of employment by the Executive without Good Reason prior to July 12, 2006, the Executive shall repay such sign-on bonus within 15 days of the Date of Termination.

(i)            Option Grant . This Agreement acknowledges that pursuant to the Letter Agreement, the Executive received a grant of stock options for 150,000 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 July 12, 2004 (the “ Start Date ”), the date on which such stock options were granted, as quoted in the NYSE Composite Transaction Listing in The Wall Street Journal (the “ Options ”).

(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 Start Date (it being acknowledged that as of the date hereof, one-fifth of the Options already has vested on the first anniversary of the Start Date); provided the Executive is still employed by the AE Companies on the applicable vesting date. Upon the occurrence 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 . 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).

(i)            Grant of Stock Units . This Agreement acknowledges that pursuant to the Letter Agreement, the Executive received on the Start Date a grant of 25,000 stock units (the “Units” ) under the Allegheny Energy, Inc. Stock Unit Plan. 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 to the Executive (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 Start Date (it being acknowledged that as of the date hereof, one-fifth of the Units already has vested on the first anniversary of the Start 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 Plan. 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 registered shares of AEI Common Stock equal to the number of Units vested.

(v)           Adjustment in Numbers of Units . Notwithstanding Section 5(b)(i), if 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)              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. 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.

(b)             Special SERP Provisions. The Executive shall participate in the Supplemental Executive Retirement Plan (the “SERP” ) on the terms and conditions set forth therein except that (i) solely for purposes of determining the Executive’s eligibility for benefits and the amount of the Executive’s benefits under the SERP, if the Executive remains employed by the AE Companies on the fifth anniversary of the Start Date he will be credited with five additional Years of Service under the SERP on the fifth anniversary of the Start Date, and (ii) solely for purposes of determining Executive’s eligibility for benefits under the SERP, he will be deemed to have reached age 55 on the date that his employment with the AE Companies ends for any reason. No adjustment will be made to the Executive’s age for purposes of computing the actual amount of his benefits under the SERP.

(c)              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.

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

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 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. AESC may terminate the Executive from his employment hereunder for Cause (as defined in Section 7(c)), Disability or otherwise and the Executive may resign from his employment hereunder. 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 14 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).

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

(A)            the Executive’s conviction of, or plea of guilty or nolo contendere to a felony or a lesser crime or offense which, in the reasonable opinion of AESC, could adversely affect the business or reputation of the AE Companies;

(B)             the Executive’s repeated failure to follow specific lawful directions of the Board or any officer to whom he reports;

(C)             the Executive’s willful misconduct, gross neglect, fraud, embezzlement or dishonesty either in connection with his duties hereunder or which otherwise causes damage or, in the reasonable opinion of AESC, is likely to cause damage, to the AE Companies;

(E)             the Executive’s willful violation of any policy, procedure or guideline of the AE Companies that could materially and adversely affect the business or reputation of the AE Companies;

(G)            the Executive’s material violation of the confidentiality, non-competition or non-solicitation covenants in this Agreement.

(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 Start 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 Start 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 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 terminates as a result of his death, the date of death, (B) 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 (C) 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 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 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, 11 or 20 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;

(C)             The Executive being required to relocate to a principal place of employment which is more than fifty (50) miles from his principal place of employment at the time of the Change of Control;

(D)            Any purported termination by AESC of the Executive’s employment otherwise than as expressly permitted by this Agr