Electricity prices dropped in the latest auction by Allegheny Energy Inc. (AYE) to supply customers in Pennsylvania, with the average residential price settling at $65.29 per megawatt-hour.

Allegheny said its generation business won all five individual contracts awarded in the auction. The power company, based in Greensburg, Pa., operates both a utility business that delivers electricity to consumers in western and central Pennsylvania and a generation business that sells wholesale power at market prices rather than regulated rates.

Allegheny's utility business is buying power to supply customers once rate caps expire at the end of next year. Customers can either shop for a supplier or stay with the utility, which passes through the energy costs.

Across the country, electricity prices have been hit by weak demand and a sharp drop in natural gas prices from highs in the summer of 2008. Prices have declined with each auction Allegheny has held. The average price for residential supply in the third auction, which state regulators approved Friday, was 10.3% and 8.9% below auctions held in April and June, respectively. The price for small and medium commercial customers also cleared lower at $67.24 a megawatt hour.

In a filing with U.S. Securities and Exchange Commission, Allegheny estimated the new contracts will result in an increased energy margin of $10 a megawatt-hour before taxes for 2011 compared to 2010. The contracts in the auction were for 17 and 29 months and represented about 1.8 million megawatt-hours of total generation supply.

Allegheny has scheduled five additional auctions to finish buying supply for the 29-month period starting Jan. 1, 2011. Allegheny estimates that if the remaining auction produces prices in line with the average of the first three auctions, a typical residential customer bill in 2011 will increase $8.74, or 9.6%, a month over 2010 levels.

Other Pennsylvania utilities are going through similar processes as the state moves to market-based prices from rate caps. PPL Corp. (PPL) will see rate caps for its customers expire at the end of the year, while utilities owned by Exelon Corp. (EXC) and FirstEnergy Corp. (FE) will move to market-based rates in 2011.

Shares of Allegheny ended up 1.6% at $26.42.

-By Mark Peters, Dow Jones Newswires; 212-416-2457; mark.peters@dowjones.com