FORM OF SERVICE AGREEMENT
This Service Agreement is executed this _____ day of __________, 2002, by
and between New RC Service Company, a Delaware corporation and a mutual service
company formed under the terms of the Public Utility Holding Company Act of 1935
("Service Company') and ______________, a ________________ Corporation and an
associate company of the New RC system ("Client Company" and collectively with
other associate companies that have or may in the future execute this form of
Service Agreement, the "Client Companies").
WITNESSETH
WHEREAS, the Securities and Exchange Commission (hereinafter referred to as
the "SEC") has approved and authorized as meeting the requirements of Section
13(b) of the Public Utility Holding Company Act of 1935 (hereinafter referred to
as the "Act"), the organization and conduct of the business of the Service
Company in accordance herewith, as a wholly-owned subsidiary service company of
New RC; and
WHEREAS, the Service Company and certain Client Companies have entered into
this Service Agreement whereby the Service Company agrees to provide and the
Client Companies agree to accept and pay for various services as provided herein
and determined in accordance with applicable rules and regulations under the
Act, which require the Service Company to fairly and equitably allocate costs
among all associate companies to which it renders services; and
WHEREAS, economies and efficiencies benefiting the Client Companies will
result from the performance by Service Company of the services as herein
provided:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 The Service Company shall furnish to a Client Company, as
requested by a Client Company, upon the terms and conditions hereinafter set
forth, such of the services described in Appendix A hereto (as such may be
amended from time to time) at such times, for such periods and in such manner as
the Client Company may from time to time request and which the Service Company
concludes it is equipped to perform. The Service Company shall also provide a
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by a Client Company and
which the Service Company concludes it is equipped to perform. In supplying such
services, the Service Company may arrange, where it deems appropriate, for the
services of such experts, consultants, advisors and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
Section 1.2 Each Client Company shall take from the Service Company such of
the services described in Section 1.1 and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
such Client Company and which the Service Company concludes it is equipped to
perform.
Section 1.3 The services described herein shall be directly assigned,
distributed or allocated by activity, project, program, work order or other
appropriate basis. A Client Company shall have the right from time to time to
amend, alter or rescind any activity, project program or work order provided
that (i) any such amendment or alteration which results in a material change in
the scope of the services to be performed or equipment to be provided is agreed
to by the Service Company, (ii) the cost for the services covered by the
activity, project, program or work order shall include any additional expense
incurred by the Service Company as a direct result of such amendment, alteration
or rescission of the activity, project, program, or work order, and (iii) no
amendment, alteration or rescission of an activity, project, program, or work
order shall release a Client Company from liability for all costs already
incurred by the Service Company pursuant to the activity, project, program, or
work order, regardless of whether the services associated with such costs have
been completed.
ARTICLE II - COMPENSATION
Section 2.1. As compensation for the services to be rendered hereunder,
each Client Company shall pay to the Service Company all costs which reasonably
can be identified and related to particular services performed by the Service
Company for or on Client's behalf, such costs to be determined in accordance
with Rule 91 and other applicable rules and regulations under the Act. Where
more than one Client Company is involved in or has received benefits from a
service performed, costs will be directly assigned, distributed or allocated, as
set forth in Appendix A hereto, between or among such companies on a basis
reasonably related to the service performed.
Section 2.2. It is the intent of this Service Agreement that the payment
for services rendered by the Service Company to the Client Companies under this
Service Agreement shall cover all the costs of its doing business (less the cost
of services provided to associated companies not a party to this Service
Agreement and other non-associated companies), including but not limited to,
salaries and wages, office supplies and expenses, outside services employed,
insurance, injuries and damages, employee benefits, miscellaneous general
expenses, rents (including property leased from Client Companies for use by the
Service Company), maintenance of structures and equipment, depreciation and
amortization, and compensation for use of capital as permitted by Rule 91 under
the Act.
Section 2.3. The method of assignment, distribution or allocation of costs
described in Appendix A shall be subject to review annually, or more frequently
if appropriate. Such method of assignment, distribution or allocation of costs
may be modified or changed by the Service Company upon the express approval of
the modification by each affected Client Company without the necessity of an
amendment to this Service Agreement provided that in each instance, costs of
all services rendered hereunder shall be fairly and equitable assigned,
distributed or allocated, all in accordance with the requirements of the Act and
any orders promulgated thereunder and notice of such change is provided to the
Client Company.
Section 2.4. The Service Company shall render a monthly statement to each
Client Company that shall reflect the billing information necessary to identify
the costs charged for that month. By the end of the month following billing,
each Client Company shall remit to the Service Company all charges billed to it.
Monthly charges may be billed on an estimated basis, but adjustments will be
made within ninety (90) days to assure that xxxxxxxx are in accord with Sections
2.1 and 2.2 above.
ARTICLE III - TERM
Section 3.1 This Service Agreement shall become effective as of the day of
above written, and shall continue in force for five (5) years until terminated
by either party upon no less than ninety (90) days' prior written notice to the
other party. Upon each five (5) year anniversary of this agreement, the parties
may extend this agreement, with or without modifications, for an additional five
(5) years by mutual written agreement to such an extension. This Service
Agreement shall also be subject to termination or modification at any time,
without notice, if and to the extent performance under this Service Agreement
may conflict with the Act or with any rule, regulation or order of the SEC or
any other regulatory body adopted before or after the date of this Service
Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1. All accounts and records of the Service Company shall be kept
in accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act and, in particular, the Uniform System of Accounts for
Mutual Service Companies and Subsidiary Service Companies in effect from and
after the date hereof, except as specifically approved by the SEC.
Section 4.2. Other existing subsidiaries and new direct or indirect
subsidiaries of New RC which may come into existence after the effective date of
this Service Agreement may become additional Client Companies (collectively, the
"New Client Companies") subject to this Service Agreement by execution of this
form of agreement, as it may be amended at that time. In addition, the parties
hereto upon the express approval of each affected Client Company shall make such
changes in the scope and character of the services to be rendered and the method
of assigning, distributing or allocating costs of such services among the Client
Companies and the New Client Companies under this Service Agreement as may
become necessary.
Section 4.3 The Service Company shall permit a Client Company access to its
accounts and records, including the basis and computation of allocations.
Section 4.4. This Service Agreement and any amendments hereto shall not be
effective until any necessary regulatory approvals have been obtained.
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
NEW RC SERVICE COMPANY
By: /s/ ______________________
[title]
[Client Company]
By:/s/ _______________________
[title]
Appendix A
Page 1 of 15
This appendix describes (i) the Policies and Procedures (see pages 9-15) to be
used to accumulate costs of Service Company services and (ii) the direct
assignment of costs to Client Companies and allocation of costs to Client
Companies that cannot practicably be direct charged. Definitions of the ratios
are provided in Appendix B. The Service Company may provide to associate Client
Companies the following services, which may be used by the Client Company:
I. Executive Management
a. The Executive Management function includes the services of the Chairman,
CEO, President, COO, Corporate Secretary and supporting staff.
b. To the extent possible, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the blended ratio.
II. Procurement and Administrative Services
a. The Procurement and Administrative Services functions provide security,
including asset protection and investigative services; purchasing and
storeroom management; procurement and materials management; vehicle
resource management, including company vehicle maintenance; general
services including mail, graphics, records management and other office
services; building services including facilities management and building
maintenance; and real estate services, including right-of-way.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the following ratios:
1. security - labor $ ratio
Appendix A
Page 2 of 15
2. purchasing and storeroom management and procurement and materials
management - materials stock expense ratio
3. vehicle resource management - vehicle $ ratio
4. general services - employee ratio
5. building services (facilities cost) - square footage ratio
6. real estate - real estate investment ratio
III. Financial Services
a. The Financial Services function includes corporate planning; strategic
planning; budgeting; treasury and finance including risk management, cash
management, financing, and funded plans administration; investor relations;
shareholder services; accounting services including general ledger,
corporate accounting, accounts payable, payroll, asset and project
accounting and tax accounting services; regulatory affairs; insurance and
claims processing; and insurance and claims administration.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the following ratios:
1. insurance administration - blended ratio
2. claims administration - historical claims ratio
3. regulatory affairs - utility asset cost ratio
4. accounts payable accounting services - # of checks issued ratio
5. payroll accounting services - # of employees paid ratio
6. asset and project accounting services - asset system cost ratio
Appendix A
Page 3 of 15
7. all other financial services - O&M ratio
c. Insurance premiums and claims that are not direct charged will be
allocated as follows:
1. property insurance and miscellaneous insurance coverage - asset
cost ratio
2. general liability insurance - labor $ ratio
2. Directors and Officers insurance - asset cost ratio
IV. Human Resources
a. The Human Resources function provides compensation and benefit services;
personnel, employment and staffing; employee/labor relations; skills
training and management development; performance improvement; and
organizational development.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the following ratios:
1. cost of benefits - To the extent practicable, each Client Company
will be directly charged their cost of employee benefits. Employee
benefit costs that cannot be directly charged to Client Companies will
be allocated based on the employee ratio.
2. all other human resources services - employee ratio
Appendix A
Page 4 of 15
V. Legal and Internal Audit Services
a. The Legal and Internal Audit Services function provides internal audit
services and legal counsel related to general corporate issues.
b. Costs will be charged as follows:
1. legal services - To the extent practicable, services will be
directly charged using a standard rate per hour as described in
the Policies and Procedures found on pages 9-15 of Appendix A,
except where another direct charge method is specifically
identified. Services that are not direct charged will be
accumulated in Cost Centers. Legal services related to New RC
corporate activities, such as review of consolidated financial
reports, will be charged to the appropriate Service Company Cost
Center and included in those functions billed to Client
Companies, as discussed on pages 11 and 12 of Appendix A. Any
residual resulting from standard rates being different from
actual costs will be allocated to the Client Companies based on
the actual legal direct labor charges during the prior year.
2. audit services - To the extent practicable, services will be
directly charged using a standard rate per hour, as described in
the Policies and Procedures found on pages 9-15 of Appendix A,
except where another direct charge method is specifically
identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged
will be allocated based on the O&M ratio.
VI. Customer Services
a. The Customer Services function includes customer service centers,
billing, credit & collections, cash remittance processing, administrative &
technical support, quality assurance & training, and the Special Billing
group. The Special Billing group provides billing of non-energy materials
and services.
Appendix A
Page 5 of 15
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the following ratios:
1. special billing - # of special bills ratio
2. all other customer care - # customers ratio
VII. Marketing Services
a. The Marketing Services function includes sales; market product and sales
planning; market and customer research; direct response marketing;
marketing communication; and general corporate advertising/branding.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the O&M ratio.
VIII. Information Technology
a. The Information Technology function provides employee labor,
contractors, and other operating support of voice and information
technology services which currently include the following telephone and
related items: solutions management including, applications delivery and
support; information management, including data administration and
security; operations management mainframe support; help desk; desktop
support; network support; consulting services, including business
technology management; mid- range operations, support for non-mainframe,
non-network systems; general management and administration. The individual
services provided will change with technology but will continue to be
comparable to those commercially available.
Appendix A
Page 6 of 15
b. To the extent practicable, service costs will be directly charged to
Orders, Projects, or Cost Centers using a standard rate per hour, as
described in the Policies and Procedures found on pages 9-15 of Appendix A,
except where other direct charge units or services have been specifically
identified. Costs not directly charged but associated with one of the staff
activities or other services directly charged will be distributed on a pro
rata basis to the users of that particular service. General information
technology management and administrative costs that aren't directly charged
will be distributed based on the blended ratio to the companies using the
IT service.
IX. Communications Services
a. The Communications Services function includes general corporate
communications; governmental affairs; community relations; sponsorships &
contributions; and employee communications.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the O&M ratio.
X. Environmental and Safety Services
a. The Environmental and Safety Services function includes oversight of
environmental concerns related to air, water, land and waste, as well as
compliance with relevant regulations. This function also includes reporting
and compliance with safety regulations, and oversight of corporate safety
awareness programs.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. Costs that are not directly charged will be
allocated based on the blended ratio.
Appendix A
Page 7 of 15
XI. Regulated Electric and Gas Delivery
a. The Regulated Electric and Gas Delivery function includes the following
electric and gas delivery services: delivery senior management; delivery
business planning including, asset management, business planning, financial
analysis, distribution planning, engineering standards, interconnection
planning and arrangements, transmission planning, and value added services;
engineering services including distribution, substation and transmission
engineering, system protection, drafting and construction management;
system operations services including senior management, finance director
and administrative support, electric and energy system operations,
distribution operations, and operations planning and analysis; electric
maintenance services including non-regional management and administrative
support; forestry supervision; meter shop; other delivery services
including process improvement, training, safety, performance analysis,
benchmarking, and enabling systems.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. All costs that are not direct charged will be
allocated based on the following ratios:
1. system operations services - Kwh output ratio*
2. maintenance services - Kwh output ratio*
3. other delivery services - T&D O&M ratio
* (See Appendix B for gas conversion factor.)
XII. Energy Business
a. The Energy Business function includes services of energy senior
management, financial analysis, and generation management. This function
also provides non-regulated operations and management; merchant functions
including marketing,
Appendix A
Page 8 of 15
portfolio management, risk management, and strategic planning; and supply
engineering and support including technical support and project management.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. Services that are not direct charged will be
accumulated in Cost Centers. All costs that are not direct charged will be
allocated based on the following ratios:
1. management and administration - O&M ratio
2. merchant functions - merchant cost ratio
3. supply engineering and support - O&M ratio
4. fuel supply function - Kwh generated ratio
XIII. Internal Consulting Services
a. The internal consulting services function will provide consulting in
areas such as the alignment of people, processes and technologies with a
goal of improving productivity and reducing costs for a business line or
shared service department.
b. To the extent practicable, services will be directly charged using a
standard rate per hour, as described in the Policies and Procedures found
on pages 9-15 of Appendix A, except where another direct charge method is
specifically identified. This may include charges to other Service Company
departments when they are a client. Any such charges within the Service
Company will be included in those functions billed to Client Companies.
Services that are not direct charged will be accumulated in Cost Centers.
Costs that are not directly charged will be allocated to Client Companies
based on the blended ratio.
Appendix A
Page 9 of 15
Policies and Procedures
General
Service Company will provide services to Client Companies in accordance
with the terms of the Service Agreement. The Service Agreement will be
administered in accordance with the Act.
Service Level Agreements
The Service Company and each Client Company will prepare Service Level
Agreements ("SLA") to specify, in general terms, the services to be performed by
each department of the Service Company for each business group of a Client
Company. The purpose of the SLA is to establish shared services expectations
between the Service Company and each Client Company. The SLA is an
administrative tool used to facilitate the matching of a Client Company's needs
to the capabilities of the Service Company, and therefore, the SLA is not a
legally binding contract. Each SLA shall be reviewed and agreed upon at least
annually by authorized representatives of the Service Company and each Client
Company. In conjunction with this annual review of each SLA, the allocation
methods and ratios presented in Appendix A and B shall be reviewed and agreed
upon by the parties.
An SLA typically contains the following elements:
1. Scope of Services
2. Service Level Expectations
3. Unit Cost Expectations
4. Performance Measures
5. Billing Process
6. Major Contingencies
Appendix A
Page 10 of 15
Each SLA is approved by the individual(s) authorized to represent the
department of the Service Company and the business group of a Client Company
related to the services to be provided.
Cost Management
Service Company will maintain a cost management information system that
allows it to accumulate costs via cost objects. Cost objects are collection
tools and include: Orders, Projects, and Cost Centers. Orders and Projects
constitute a work order system for charging costs to specific jobs. These tools
collect costs for a limited amount of time and either transfer the dollars to a
cost center, if they are an expense, or to an asset and/or balance sheet account
for capitalized costs. Cost Centers collect resource costs and are the final
receiver of expenses collected in Orders as described above. This system
supports the philosophy of separating costs by business group and legal entity
on a fully costed basis. Service Company will use this system to maintain an
accounting system to record all costs of operations.
The cost of work performed by the Service Company will be collected in
Orders, Projects and Cost Centers. Time records and expense statements will be
used to track resource consumption. Labor related costs are expected to be the
most significant costs for the Service Company. To the extent practicable, the
Service Company employees shall be required to direct charge their time to an
appropriate cost object through the time reporting system. The following
guidelines are provided to ensure accuracy and efficient time keeping by Service
Company employees:
1. Time should be entered daily into the appropriate time reporting
system. If this is not practical, the employee should prepare manually
prepared time records, substantiating later electronic time entry.
2. In no event should time entry be delayed past the end of the pay
period.
3. Employees should keep track of time in one-hour increments.
4. Employee time shall be approved by the employee's supervisor using the
time reporting system.
Appendix A
Page 11 of 15
Costs will be charged to Client Company Cost Centers, Orders or Projects as
work is performed and costs are incurred. The billing process agreed upon in the
SLA will be used by Service Company personnel to guide the establishment of the
necessary cost objects to charge costs to a Client Company. When a service
requested by a Client Company was not specified in the most recent SLA, a new
cost object may be created. In this instance, the new cost object will be agreed
upon by the Service Company department to provide the service and the business
group of the Client Company to receive the service. The Controller's department
is responsible to ensure that all of the billing methodologies are consistent
with the Service Agreement approved by the SEC. The establishment of cost
objects within the cost management information system for use by the Service
Company will be strictly controlled by the Controller's department. The
Controller's department will ensure that all cost objects have been authorized
by the appropriate Service Company department and the Client Company business
group.
Service Company will use a standard costing system. Resource cost centers
collect the actual costs of labor and related costs. As products or services are
provided by the Service Company cost centers, the services are directly charged
to Orders, Projects or other Cost Centers at standard rates. Standard rates,
which are calculated annually, are based upon anticipated resource costs and
activity levels, e.g. available hours to perform work. Any residual amounts or
costs that can not be practicably direct billed remain in the resource cost
center to be allocated to Client Companies on an appropriate basis, as defined
in the Service Agreement and approved by the SEC. The amount billed to the
Client Company is charged to Client Company Orders, Projects and Client Cost
Centers created to collect the costs of the services provided to that company.
Service Company will have a tiered approach to billing Client Companies.
First and foremost, costs will be directly charged when practicable. Secondly,
costs will be allocated to the appropriate Client Cost Centers using the
appropriate allocation ratio. Finally, any residuals will be allocated using the
appropriate allocation ratio.
A. Direct Charges: Labor related services consumed for an Order, Project or
activity performed specifically for a Client Cost Center will be directly
charged to that cost object at a standard rate per unit of labor or unit of
services. The standard rate includes direct
Appendix A
Page 12 of 15
costs such as labor, materials and supplies, including procurement and
storeroom costs, and overhead costs such as, vehicle costs, occupancy
costs, common IT services, and benefits and payroll taxes. When
identifiable, any non-labor costs, those costs not included in the billed
standard rates, will be directly charged to a Client Company Project, Order
or Cost Center. Any residuals or variances will be assigned or allocated to
the appropriate Client Company.
B. Allocations: Costs accumulated that apply to all Client Companies or to a
group of Client Companies, which have not been directly charged as
described in A, above, will be allocated based on the allocation ratios
defined in Appendix B. Allocation ratios will be reevaluated by the Service
Company and expressly approved by each Client Company on at least an annual
basis. More frequent reevaluations will be made when significant residuals
result. Any revisions to allocation methods will be agreed upon with the
Client Companies before modifications are implemented. The Controller's
department shall be responsible for ensuring that any revisions to
allocation methodologies are approved by the Client Companies and the SEC
on a timely basis.
C. Service Company Cross Charges: Certain Service Company overhead costs, such
as the cost of benefits, purchasing and storeroom management, and building
services are charged to Service Company functions that utilize these
services and included in their standard rate for billing to Client
Companies. In addition, certain Service Company direct charges, such as
information technology services, vehicles and legal are charged to Service
Company functions to the extent these functions utilize these services.
These charges are included in the amounts that these functions xxxx to
Client Companies.
Monitoring
The Controller's Department shall be responsible for reviewing, monitoring,
and maintaining the process for the accumulation of Service Company costs
charged to Client Companies, either through direct charges or allocations. In
connection with the responsibility, the Controller's department shall:
Appendix A
Page 13 of 15
1. Review and approve all SLA's
2. Control the establishment of all cost objects for billing Service
Company charges
3. Analyze the reasonableness of charges in the cost management
information system.
4. Review and evaluate the reasonableness of the monthly xxxx to each
Client Company
The Controller's department shall be responsible for updating all
allocations used by the cost management information system. Supporting
workpapers will be maintained with the Controller's department. The Controller's
department will be responsible to ensure that all allocations are proper,
accurate, and current. Also, the Controller's department shall be responsible
for ensuring that the allocation methodologies have been approved by the SEC.
Any modification of an allocation methodology which requires filing under 60-day
letter procedures based on existing SEC guidelines shall be filed on a timely
basis. The current guidelines require SEC approval of a modification of an
allocation methodology if the change will cause the lesser of $50,000 or five
percent (5%) change in the annual allocation of costs among Client Companies.
The Controller's department shall be responsible for ensuring to the extent
practicable that the allocation methodologies are consistent with any orders or
directives issued by utility rate setting regulatory bodies having jurisdiction
over the Company.
Billing
Monthly, the Service Company will prepare and submit a xxxx to each Client
Company. The Controller's department shall be responsible for reviewing the
monthly bills, as necessary, with the pertinent officers of the Client
Companies, or their designees, who are responsible for approval of the bills.
Each xxxx will be approved on a timely basis by the appropriate officer of each
Client Company.
The monthly bills will contain the following information:
1. The Client Company.
Appendix A
Page 14 of 15
2. The cost of each service billed to the Client Company.
3. For each service, the xxxx will show each Client Company order,
project, or cost center charged for the service.
The cost management information system will contain detailed information
supporting each service charged to a Client Company. Using the cost management
information system, the Controller's department will provide the officer of the
Client Company, or his designee, detailed information on direct and allocated
charges as may be required in order to approve the xxxx.
Furthermore, each Client Company cost center head and project manager is
responsible for validating, in a timely manner, costs charged to their cost
center or project, including amounts billed by the Service Company. This
validation is a key component of New RC's system of internal controls. Using the
cost management information system, cost centers are able to drill down on all
costs billed to them by the Service Company to determine the specifics of each
cost. The Controller's department will assist Client Company cost centers, as
necessary, to research and validate charges to their cost centers.
When an erroneous charge is discovered, the Controller's department is
responsible for correction of the error in the subsequent month.
Dispute Resolution
If there is a dispute between a Client Company and the Service Company
concerning the appropriateness of an amount billed to a Client Company, the
Controller's department will meet with the appropriate representatives for the
Client Company cost center and the Service Company to resolve the dispute. If
the dispute cannot be resolved by the Controller's department, the issue will be
referred to the Chief Financial Officer and the Service Company Operating
Committee for final resolution.
Internal Audit
The Internal Audit department shall perform an audit of the Service Company
billing process within every three years. Computer systems, xxxxxxxx, and source
documents will be examined to ensure on a test basis that the services provided
are authorized, documented, and
Appendix A
Page 15 of 15
accurately recorded in the accounting records. The audits will include an
examination of the allocation factors used to ensure that the methodologies have
been approved by the SEC. Also, the audits will evaluate the adequacy of the
system of internal controls over the billing process and the reasonableness of
each allocation methodology used to distribute costs to the Client Companies.
Evaluation and Measurement
In order to encourage the Service Company to operate efficiently and cost
effectively, and provide high quality service, the Service Company will
establish benchmarking as well as initiate a customer review process. The
customer review process will be based on a customer-oriented service philosophy
and measure success based on customer satisfaction. It will allow for customer
input into the volume and value of the products and services provided by the
Service Company, including benchmarking of the cost/quality of the services by
the Client Company. These reviews will be part of the annual budget development
process and the completion of the Service Level Agreements between the Service
Company and its customers. In addition to the review process with customers, the
Service Company will establish a benchmarking plan for services where it is
practicable to establish external benchmarks within 24 months to continue to
improve the effectiveness of services offered to the Client Companies and to
ensure that the services offered are cost competitive. Also, Client Companies
may request benchmarking of services provided by the Service Company.
Appendix B
Page 1 of 4
Definition of Service Company Allocation Methods
Ratio Title Ratio Description
----------- -----------------
Employee Ratio A ratio the numerator of which is the number of employees of
a Client Company, the denominator of which is the number of
employees in all Client Companies using the service. This
ratio will be calculated quarterly.
Square Footage A ratio the numerator of which is the number of total square
Ratio feet of space occupied by a Client Company, the denominator
of which is the total number of square feet of space
occupied by all Client Companies using the service.
Telephone Ratio A ratio the numerator of which is the number of telephones
used by a Client Company, the denominator of which is the
number of telephones used by all Client Companies using the
service.
CPU Time Ratio A ratio the numerator of which is the number of hours of CPU
time used for a particular system application, the
denominator of which is the total number of CPU hours used
by all companies. Costs are allocated to Orders based on
this ratio. That cost is then either included in the cost of
other Service Company services or directly routed to the
appropriate Client Company.
End User Ratio A ratio the numerator of which is the number of users of
computer systems within a Client Company, the denominator of
which is the total number of users of computer systems
within all Client Companies using the service.
Labor $ Ratio A ratio the numerator of which is the amount of labor $ of a
Client Company, the denominator of which is total labor $
for all Client Companies using the service. This ratio will
be calculated monthly.
Historical A ratio the numerator of which is the total claims expense
Claims Ratio of a Client Company, the denominator of which is the total
claims expense for all Client Companies using the service.
Appendix B
Page 2 of 4
Asset Cost Ratio A ratio the numerator of which is the total cost of assets
in a Client Company, the denominator of which is the total
costs of assets for all Client Companies using the service.
Assets are limited to plant, property and investments.
O&M Ratio A ratio the numerator of which is the total direct (i.e.,
excludes charges allocated by the Service Company)
operations and maintenance expense, excluding depreciation
and fuel costs, of a Client Company, the denominator of
which is total direct operations and maintenance expense,
excluding depreciation and fuel costs, of all Client
Companies using the service.
# Customer Ratio A ratio the numerator of which is the number of customers
served by a Client Company, the denominator of which is the
total number of customers for all the Client Companies using
the service.
# Utility A ratio the numerator of which is the number of utility
Customers Ratio customers served by a Client Company, the denominator of
which is the total number of utility customers for all
Client Companies using the service.
Materials Stock A ratio the numerator of which is the materials stock
Expense Ratio expense of a Client Company, the denominator of which is the
total materials stock expense of all Client Companies using
the service.
Real Estate A ratio the numerator of which is the cost of real estate
Investment leases and land and buildings owned by a Client Company, the
denominator of which is the total cost of real estate leases
and land and buildings for all Client Companies using the
service.
# of Special Bills A ratio the numerator of which is the number of special
Ratio bills issued for a Client Company, the denominator of which
is the total number of special bills issued for all Client
Companies.
Utility Asset Cost A ratio the numerator of which is the total cost of utility
Ratio assets in a Client Company, the denominator of which is the
total costs of utility assets for all Client Companies using
the service.
Appendix B
Page 3 of 4
T&D O&M Ratio A ratio the numerator of which is the total direct (i.e.,
excludes charges allocated by the Service Company),
operations and maintenance expense, excluding depreciation
and fuel costs, of a Transmission and Distribution Client
Company, the denominator of which is total direct operations
and maintenance expense, excluding depreciation and fuel
costs, of all Transmission and Distribution Client
Companies.
Kwh Generated Ratio A ratio the numerator of which is the number of kilowatt
hours generated by a Client Company, the denominator of
which is the total number of kilowatt hours generated by all
Client Companies using the service.
Kwh Output Ratio A ratio the numerator of which is the number of kilowatt
hours purchased and generated by a Client Company, the
denominator of which is the total number of kilowatt hours
purchased and generated by all Client Companies using the
service.
Merchant Cost Ratio A ratio the numerator of which is the dollar amount of
direct charges of the merchant function to a specific Client
Company, the denominator of which is the total dollar amount
of direct charges of the merchant function to all Client
Companies using the service.
Vehicle $ Ratio A ratio the numerator of which is the dollar amount of
vehicle charges in a specific Client Company, the
denominator of which is the total amount of vehicle charges
in all Client Companies using the service.
Blended Ratio A composite ratio which is comprised of an average of the
Employee Ratio, the Labor $ Ratio, and the Asset Cost Ratio,
for all Client Companies using the service.
# of Checks Issued A ratio the numerator of which is the number of checks
Ratio issued for a Client Company, the denominator of which is the
total number of checks issued for all Client Companies using
the service.
# of Employees A ratio the numerator of which is the number of employees
Paid Ratio paid for a Client Company, the denominator of which is the
total number of employees paid for all Client Companies
using the service.
Appendix B
Page 4 of 4
Asset System Cost A ratio the numerator of which is the total cost of assets
Ratio for a Client Company on the asset & project system, the
denominator of which is the total cost of assets for all
Client Companies using the service on the asset & project
system.
Data Storage Ratio A ratio the numerator of which is the gigabytes of data
storage space used for a particular system application, the
denominator of which is the total gigabytes of data storage
space used for all system applications. Costs are allocated
to Orders or Cost Centers based on this ratio. That cost is
then either included in the cost of other Service Company
services or directly routed to the appropriate Client
Company.
Note: Where applicable, the following will be utilized to convert gas sales to
equivalent electric sales: 0.303048 cubic feet of gas equals 1 kilowatt-hour of
electric sales (Based on electricity at 3412 Btu/Kwh and natural gas at 1034
Btu/cubic foot.)
