Exhibit B-4 (Revised)
Energy East Management Corporation
Policies and Procedures
INTRODUCTION
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Energy East Management Corporation (EE Management) will provide administrative,
management and other services to the subsidiaries and business units within the
Energy East Corporation ("Client Entities") in accordance with the terms of
Service Agreements that EE Management will enter into with its associated
public-utility companies and each of its associate non-utility companies that it
serves. EE Management will be subject to the rules and regulations of the
Security and Exchange Commission (SEC) pursuant to the Public Utility Holding
Company Act of 1935, as amended (PUCHA), and in particular, Section 13 thereof.
In addition, each of the individual utility companies also has state commission
requirements related to affiliate transactions. These requirements, where
necessary, have also been included into these policies and procedures.
The major objective of EE Management is to consolidate certain support services
in order to provide those services to the Client Entities more effectively and
efficiently than each company could provide for itself. To achieve this end, EE
Management will strive to be economic and efficient in providing value-added
services to all customers.
SERVICE AGREEMENTS AND WORK REQUESTS
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EE Management and each Client Entity will enter into a Service Agreement that
will set forth, in general terms, the services to be performed by EE Management
either directly for or on behalf of each Client Entity. In accordance with the
Service Agreements, EE Management and each Client Entity will prepare work
requests (W/R) forms describing the services being provided. (See below for more
information on work requests.)
ACCOUNTING REQUIREMENTS
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EE Management will maintain an accounting system that enables EE Management to
assign costs using the data fields within its Books of Account to identify the
Client Entity, services performed and how these costs will be charged either
directly, distributed or generally allocated. EE Management will also utilize
the "Uniform System of Accounts for Mutual Service Companies and Subsidiary
Service Companies" as prescribed by the SEC, as modified to include additional
account numbers from the Federal Energy Regulatory Commission's Uniform System
of Accounts to provide for the accumulation of costs of certain utility
operating activities.
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Specifically, EE Management will utilize W/R numbers in combination with
Accounts, Resource Codes, Product/Service Codes and Client Entity numbers for
purposes of charging or allocating costs to the appropriate Client Entities. A
W/R number will be established with each EE Management service as it is the W/R
number that determines how the costs are to be allocated to the Client Entities.
EE Management will use the following types of W/R numbers: (A definition of
terms used below can be found in Attachment I.)
DIRECT SERVICE W/R number will be used when the service being
performed is for a specific Client Entity. The Client Entity will be charged
100% of the costs. When the transaction is recorded on EE Management 's Books of
Account, a Client Entity Code will also be used to identify the Client Entity.
For example, if EE Management is providing legal services such as representing a
specific utility company in a regulatory proceeding, 100% of the fully
distributed costs associated with this activity will be charged to the specific
utility including direct and indirectly attributable charges.
DISTRIBUTED SERVICE W/R number will be used for specific services that
will distributed to two or more Client Entities. For example, if EE Management
prepares the federal consolidated federal tax return for all of the Energy East
companies, the EE Management costs including direct and indirectly attributable
charges to prepare the tax return will be allocated to all of the companies
using the distributed service W/R number apportioned using an appropriate
allocation factor. Please refer to Appendix A in the Service Agreements for a
list of the allocation factors that may be used.
INDIRECT SERVICE W/R number will be used to charge costs that are of a
general nature and cannot be specifically identified to a Client Entity. The
allocation to the Client Entities will be based on the Massachusetts Formula.
For example, an Indirect Service W/R number will be used for those legal costs
that cannot be specifically identified to a particular task or company, such as
attending meetings or training. The Indirect Service W/R number will be used to
allocate these general costs to all of the Client Entities, including the
holding company, that benefit from services provided by the Legal Function.
CONSTRUCTION OVERHEAD SERVICE W/R number will be used to accumulated
overhead costs to be charged to capital projects on the Books of Account of the
Client Entity, such as continuing property record overheads.
WORK REQUEST (W/R) AND APPROVAL PROCEDURES
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Each service function of EE Management will be instructed on which W/R numbers
to use when performing specific services or activities. Whenever feasible, EE
Management will directly charge the Client Entities. These services will be
reviewed and agreed upon by the Client Entities at the beginning of each
calendar year. An example of a direct routine service is providing accounting
services for a specific subsidiary. An example of a distributed charge that
would be allocated is the payroll processing function for several Client
Entities.
All activities performed by EE Management for the Client Entities must have a
completed service request form. For routine and general services provided, a
Service Request will be prepared at the beginning of each year. For non-routine
or special services, a Service Request form will be initiated by the Client
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Entities or by EE Management. Example of non-routine or special services include
requests to prepare rate case testimony, and special studies or analyses. The
method of cost allocation will be determined on a case-by-case basis consistent
with the nature of the work performed. Approvals are required by the
organization that is requesting the work, the EE Management provider and the W/R
Administrator in the Accounting Function.
WORK REQUEST FORM
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The following describes the information required to complete the Work Request
Form.
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Work Request Name To be assigned by EE Management -
Accounting Function
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Work Request Number To be assigned by EE Management -
Accounting Function
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Work Request Description Description of services to be provided
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Estimated Cost The service provider will estimate the
cost prior to approval of the request
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Customer Name Name of Client Entity
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Customer Number Business Unit number assigned to the
Client Entity
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Billing Methodology Indicate whether costs will
be directly charged or attributed
through an allocation; To be assigned by
the Customer, Service Provider or EE
Management - Accounting Function
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Allocation Methodology Description of basis and calculation
method including allocation factors; To
be assigned by the Customer, Service
Provider or EE Management - Accounting
Function
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Start Date & End Date Date work is to be started and ended,
if applicable; To be agreed upon by the
customer and service provider
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Change Date Date scope of work is to be modified; To
be agreed upon by customer and service
provider
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Reason for Change Description of change in scope of work
or other changes
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EE Management Books of Account Account number and other fields utilized
to ensure proper classification,
including resource and product codes, as
appropriate
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Customer's Books of Account Account number and other fields utilized
to ensure proper classification,
including resource and product codes,
as appropriate
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Form Prepared By/Date: Name of person requesting service and
date of request
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Contact Person/Tel Number Name of individual to contact for
additional information and telephone no.
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Approvals:
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Customer/Date Manager that is responsible for paying
for the service must approve the work
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Service Provider/Date Manager of the Function of EE Management
providing the service
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W/R Administrator/Date EE Management - Accounting Function
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The Books of Account will utilize the following data fields:
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Business Unit The Business Unit on whose of Books of
Account the transactions are being
recorded
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Function The Function code which identifies the
Function providing the service
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Account The account number to which the
accounting transaction is being
recorded.
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Resource Code Identifies the type of cost being
provided such as labor, fee, or
allocation
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Product/Service Code Identifies whether the service is
routine, regulatory, etc.
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Client Entity Number Business Unit number assigned to the
Client Entity
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Work Request Number Identifies the type of service such as
direct, distributed, indirect or
construction overhead.
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WORK REQUEST (W/R) GUIDELINES
-----------------------------
A request for a new W/R number may be appropriate when a new service or project
is identified. However, depending on the scope, the cost of the new service or
project may be able to be captured in an existing W/R. The following guidelines
should be used to determine when a new W/R is appropriate.
1. No existing W/R uses the billing methodology that is needed for the
new service/project.
2. No existing W/R distributes costs to the desired Client Entity for the
new service/project.
3. There is a specific regulatory requirement to allocate costs in a
specific manner regardless of amount for the new service/project.
4. A change to an existing W/R may be authorized rather than setting up a
new W/R if an existing W/R covers the billing methodology to the
appropriate Client Entity and the estimated annual cost is under
$50,000. If cost is over $50,000, a new W/R will be established.
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The allocation factors will be based on cost drivers applicable to the service
being provided. EE Management will decide on the appropriate allocation factors
for each W/R.
MONITORING AND CONTROL
----------------------
The W/R Administrator in EE Management - Accounting Function is responsible for
reviewing, monitoring and maintaining the W/R system. The Administrator also
authorizes new W/Rs and ensures that the allocation factors are appropriate,
up-to-date and accurate, and that billing is accurate and timely. The
Administrator is responsible for ensuring that the allocation procedures
followed are in accordance with the current SEC regulations.
Prior to billing each month, a detailed review of the accumulated charges is
performed by the company receiving the charges and the EE Management -
Accounting Function. Once both companies agree that the charges being billed are
accurate and appropriate, an invoice is prepared and rendered to the receiving
company. The W/R Administrator is responsible for coordinating this process.
APPROVAL OF W/R ALLOCATION FACTORS
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The SEC prior to use must approve all new or revised allocation factors. The EE
Management W/R Administrator will be responsible for evaluating new and existing
allocation methods and determining, if SEC approval is required. The EE
Management W/R Administrator will coordinate the SEC approval efforts, if
necessary, with the Legal Function.
A list of all current allocations must be filed with the SEC annually on Form
U-13-60.
TIME REPORTING
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Employees of EE Management must record their time in order to bill the Client
Entity accurately. All EE Management employees will maintain a record of their
time. Those employees who provide services directly to system companies will
charge their time on a daily basis using designated increments: (1) based on
actual time records or (2) based on a fixed distribution that will be adjusted
for exceptions. The fixed distribution percentages will be reviewed on a
quarterly basis. The wage of those employees, such as administrative assistants
and secretaries, who generally assist employees who provide services directly to
system companies, will be allocated based on the allocation of the wages of the
employees they assist. Time must be entered in the payroll system by the payroll
cutoff dates. The EE Management W/R Administrator or his/her staff may be
contacted to obtain the appropriate W/R number and another accounting data
needed to complete the time reporting requirement accurately. Time records will
be retained for three years.
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BILLING AND REVIEW
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Each Client Entity will receive a monthly invoice from EE Management. Each
invoice will contain the following information:
Client Entity Name
Type of Service Provided
Work Request Number
Total Direct Charges by Resource Code
Total Distributed Charges
Total Indirect Charges
Total Construction Overhead Charges
Amount
Detailed reports including individual transactions will be attached to the
invoice. Upon receipt of the invoice, the Client Entities will review and
approve the bill. Any discrepancies found at this time will be discussed with
the W/R Administrator and corrections will be made to the subsequent month's
bill. The term for payment is 30 days from date of invoice.
DISPUTE RESOLUTION PROCEDURE
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In the event there is dispute between the Client Entity and a EE Management
service provider regarding the allocation factors, amount or another billing
component, representatives from the Client Entity receiving the service and the
EE Management service provider along with the W/R Administrator will meet to
discuss the issue. If a resolution cannot be reached among the parties, the
issue will be referred to each parties' executive management for final
resolution.
INTERNAL AUDIT REVIEW
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EE Management's Internal Audit Function will selectively conduct annual reviews
of its operating methods as well as computer systems to ensure that the services
provided are authorized, documented and accurately recorded in EE Management's
Books of Account. The Internal Audit Function will also conduct reviews of the
W/R allocation methods to ensure that such methods comply with those approved by
the SEC.
BUDGETING
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After the transition phase (approximately 6 months after the effective date of
the merger), budgeting for EE Management will be a joint effort between EE
Management and the Client Entities. All managers of EE Management will be
responsible for preparing annual budgets in order to provide budget information
to the Client Entity. Services to be provided to the Client Entities will be
identified and agreed upon and cost estimates will prepared annually. These
estimates will be approved by the Client Entities as previously noted. Budget
variance reports will be generated each month and EE Management will have the
primary responsibility for analyzing and explaining cost variances. EE
Management will be accountable for costs for services that are considered
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general and administrative management activities. EE Management and Client
Entities will jointly be accountable for the cost of discretionary services.
EVALUATION
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EE Management will complete benchmarking reviews on selected services provided
in such areas as accounting, legal, information systems and treasury on an
annual basis. The results of those studies will be factored into future service
company operations.
In order to assess EE Management's ability to operate efficiently and cost
effectively, and its ability to provide high quality service, EE Management will
initiate a customer review process. The customer review process will permit
Client Entities to provide input as to the timely and value of services being
provided.
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Attachment I
DEFINITIONS
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Fully Distributed Cost (FDC) is a cost allocation methodology designed to ensure
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that all costs incurred related to providing products and services are charged
to the consumer of the products and services through direct charges or
allocations. Direct charges, directly attributable charges, and indirectly
attributable charges to the cost causing entity achieve fully distributed
costing. Within each category, the elements of cost may include taxes, interest
on borrowed capital, other overheads and compensation for a reasonable return on
capital, as applicable. (SEC Reg. 250.91)
Direct Charges are those costs that can the directly assigned to a particular
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affiliate, business segment, service or product line.
Directly Attributable Charges (measurable) are costs that are allocated to a
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particular affiliate, business segment, service or product line based on causal
relationship that is measurable.
Indirectly Attributable Charges (global) are costs that do not bear a specific
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identifiable causal relationship with a particular affiliate, business segment,
service or product line. Indirectly Attributable costs will be allocated using
the Massachusetts Formula Cost Allocation.
Massachusetts Formula is a method of allocating indirectly attributable costs
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based upon the simple arithmetic mean of an affiliate's share of the total of
all of the companies within the registered holding company structure of gross
payroll, gross revenues and gross plant.
Cost Drivers are a measurable cost causing events or outputs used to allocate
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directly attributable charges.
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