B-3
Appendix A
Description of Services to be Provided by Utility Company and Determination of
Charges for Such Services to the Client Companies
This document sets forth the methodologies used to accumulate the costs of
services performed by the Utility Company and to assign or allocate such costs
to other subsidiaries and other business units within Energy East ("Client
Entities").
DESCRIPTION OF SERVICES
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A description of each of the services performed by the Utility Company, which
may be modified from time to time, is presented below.
1. Call center services include responding to client entities' customer
calls. These costs are allocated using the call center ratio.
2. Customer billing services consists of preparing and mailing bills for
client entities. These costs are allocated using the customer billing
ratio.
3. Network support services includes the cost of the network server and
the management of the local and area-wide data networks for client
entities. These costs are allocated using the Lan/Wan service ratio.
4. Telephone and voice services include the cost of telephone equipment,
hook-up, management of the internal telephone network and maintenance
of the voice mail systems and wiring needed to perform these services
for client entities. These costs are allocated using the telephone and
voice service ratio. This excludes actual usage that is billed
directly to the client entity.
5. Credit and Collection services include the cost of collection
activities for client entities. These costs are allocated using the
customer billing ratio.
6. Management support services such as financial and administrative,
corporate planning, legal, information services, etc. as needed during
the transition period. Costs are directly charged to the benefiting
client entity or distributed based on one of the allocation methods
described below.
Utility Company's accounting, billing and cost allocation methods utilize the
Federal Energy Regulatory Commission's Uniform System of Accounts.
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COST ASSIGNMENT
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The Utility Company will maintain an accounting system that enables costs to be
identified by Work Request (W/R) number. These W/R numbers used in combination
with Accounts, Resource Codes, Product/Service Codes and Client Entity numbers
will indicate whether the cost is a direct charge or the result of an allocated
charge. The primary inputs to the accounting system are time reports, accounts
payable invoices and journal entries. Charges for labor are calculated using the
employees' hourly rate. Indirect attributable costs are charged to the services
performed in proportion to the directly assigned costs or other appropriate cost
allocators.
Cost will be accumulated by work request number and assigned as follows:
1. Costs accumulated in a work request number for services specifically
performed for a single Client will be directly assigned or billed to
the Client.
2. Costs accumulated in a work request number for services specifically
performed for two or more Clients will be distributed among the
Clients using methods determined on a case-by-case basis consistent
with the nature of the work performed and on one of the allocation
methods described below.
COST ALLOCATION
The Utility Company uses cost allocation methods designed to fully distribute
costs. The Utility Company's cost allocation methodology is comprised of the
following:
1. To "direct charge" all labor, materials and other expenses to client
entities whenever feasible.
2. To allocate directly attributable costs to client entities based upon
a measurable cost causing relationship, i.e., Call Center costs are
allocated on the actual calls received for each client.
Costs that can be directly attributed to direct charges are allocated in
proportion to the direct charges or other appropriate cost allocations. For
example, direct labor charged to prepare testimony for a specific utility not
only includes the direct payroll charge (the hourly rate times the hours
reported) but also includes the cost of that individual's proportional payroll
overhead cost, and such other overheads as common asset usage, occupancy charges
and management overhead charges (commonly referred in aggregate as an
Administrative and General Overhead).
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ALLOCATION METHODS
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ALLOCATIONS RELATED TO DIRECT LABOR CHARGES
The following allocations will be applied to the Direct Labor Charges:
Payroll Overhead Charge will be calculated to recover costs associated with
labor, such as pension, benefits, lost time and payroll taxes. The payroll
overhead costs will be charged to client companies based on direct labor
charges. The rate is computed by dividing the annual payroll overhead expenses
by the annual base labor dollars.
Other Allocations applied to Direct Labor Charges will consist of the following:
1. Common Asset Usage Overhead:
The Common Asset Usage Overhead allocates the cost of furniture and
desktop equipment (including PC's) used by the Utility Company. The
rate is calculated by dividing the economic carrying costs of the
assets by the total actual labor dollars of employees using those
assets. This overhead is directly applied to all Utility Company labor
charged or allocated to clients.
2. Occupancy Overhead:
The Occupancy Overhead allocates costs related to the workspace
occupied by Utility Company employees. The rate is calculated by
dividing the economic carrying costs for the buildings by the total
actual labor dollars of employees working in those buildings. This
overhead is directly applied to all Utility Company labor charged or
allocated to clients.
3. Management Overhead:
This overhead represents the management cost of a function within the
Utility Company. It is based on the ratio of Utility Company
supervisory wages to all other wages. This fixed rate is applied to
all direct labor charged to clients.
AN ALTERNATIVE ALLOCATION APPLIED TO DIRECT LABOR CHARGES OR OTHER DIRECT
CHARGES
An alternative allocation applied to direct labor charges or other direct
charges is commonly referred to as an Administrative and General Support Adder.
This overhead is a general overhead used in place of other specific
administrative and general support overheads and is added to total costs of
client services. The purpose is to recover indirect administrative and general
expenses incurred and not otherwise charged directly to these clients for
certain activities. The adder also includes expenses associated with office
facilities, including furniture and office equipment, used in performing these
administrative functions.
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ALLOCATIONS RELATED TO DISTRIBUTED SERVICES
The following ratios will be used to allocate costs for services not directly
assigned but pooled and allocated based on a causal measurement:
Call Center Ratio - Based on the number of calls received from Client company
customers. This ratio is determined annually based on the actual count of calls
received at the end of the previous calendar year and may be adjusted
periodically due to a significant change.
Customer Billing Ratio - Based on the number of bills sent to customers on
behalf of the Client companies. This ratio is determined annually based on the
actual count of bills sent at the end of the previous calendar year and may be
adjusted periodically due to a significant change.
Lan/Wan Service Ratio - Based on the number of PCs connected at each of the
Client companies. This ratio is determined annually based on the actual count of
PCs connected at each of the Client companies at the end of previous calendar
year and may be adjusted periodically due to a significant change.
Telephone and Voice Service Ratio - Based on the number of phones utilized by
Client companies. This ratio is determined annually based on the actual count of
phones utilized at the end of previous calendar year and may be adjusted
periodically due to a significant change.
Number of Employees Ratio - Based on the number of employees benefiting from the
performance of a service. This ratio will be determined annually based on actual
count of applicable employees at the end of the previous calendar year and may
be adjusted periodically due to a significant change.
Accounts Payable Ratio - Based on the number of invoices processed for each of
the specific Clients. This ratio is determined annually based on the actual
count of invoices at the end of the previous calendar year and may be adjusted
periodically due to a significant change.
Asset Ratio - This ratio is determined annually based of the average of gross
assets during the previous calendar year and may be adjusted due to a
significant change.
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