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FORM OF SERVICE AGREEMENT BETWEEN SHARED SERVICES CORPORATION
AND ENERGY EAST SYSTEM CLIENT COMPANY
SERVICE AGREEMENT
This Service Agreement is made and entered into this _____ day of
___________, by and between __________________ ("Client Company") and Shared
Services Corporation ("Service Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the business
of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of Energy East Corporation ("Energy East"); and
WHEREAS, Client Company is a subsidiary of Energy East and an associate of
Service Company; and
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees to
accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services (collectively, the "Client
Companies"), including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
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ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods and
in such manner as Client Company may from time to time request and that Service
Company concludes it is able to perform. Service Company shall also provide
Client Company with such special services, so long as such special services do
not materially add to those services described in Appendix A hereto, as may be
requested by Client Company and that Service Company concludes it is able to
perform. In supplying such services, Service Company may arrange, where it deems
appropriate, for the services of such experts, consultants, advisers, and other
persons with necessary qualifications as are required for or pertinent to the
provision of such services.
Section 1.2 Client Company shall take from Service Company such of the
services described in Appendix A, and such additional general or special
services, as limited by subsection 1.1 hereof, as are requested from time to
time by Client Company and that Service Company concludes it is able to perform.
Section 1.3 The cost of the services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend or alter any activity,
project, program or work order provided that (i) any such amendment or
alteration that results in a material change in the scope of the services to be
performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Service Company as a direct result of such
amendment or alteration of the activity, project, program or work order, and
(iii) no amendment or alteration of an activity, project, program or work order
shall release Client Company from liability for all costs already incurred by or
contracted for by Service Company pursuant to the activity, project, program or
work order, regardless of whether the services associated with such costs have
been completed.
Section 1.4 Service Company shall use its best efforts to maintain a staff
trained and experienced in the services described in Appendix A.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs that reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company costs
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to Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 It is the intent of this Service Agreement that charges for
services shall be distributed among Client Companies, to the extent possible,
based upon direct assignment. The amounts remaining after direct assignment
shall be allocated among the Client Companies using the methods identified in
Appendix A. The method of assignment or allocation of cost shall be subject to
review by the Service Company annually, or more frequently if appropriate. Such
method of assignment or allocation of costs may be modified or changed by the
Service Company without the necessity of an amendment to this Service Agreement;
provided that, in each instance, all services rendered hereunder shall be at
actual cost thereof, fairly and equitably assigned or allocated, all in
accordance with the requirements of the Act and any orders promulgated
thereunder. The Service Company shall review with the Client Company any
proposed material change in the method of assignment or allocation of costs
hereunder and the parties must agree to any such changes before they are
implemented. In addition, no such agreed upon material change shall be made
unless and until the Service Company shall have first given written notice to
the SEC not less than 60 days prior to the proposed effective date thereof.
Section 2.3 Service Company shall render a monthly report to Client Company
that shall reflect the information necessary to identify the costs charged for
that month. Client Company shall remit to Service Company all charges billed to
it within 30 days of receipt of the monthly report.
Section 2.4 It is the intent of this Service Agreement that the payment for
services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business including, but not
limited to, salaries and wages, office supplies and expenses, outside services
employed, property insurance, injuries and damages, employee pensions and
benefits, miscellaneous general expenses, rents, maintenance of structures and
equipment, depreciation and amortization, and compensation for use of capital as
permitted by Rule 91 of the SEC's regulations under the Act.
Section 2.5 Service Company and Client Company agree that the amount of
compensation to be paid by Client Company hereunder is subject to the review and
determination of the regulatory commission of the appropriate jurisdiction.
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ARTICLE III- TERM
This Service Agreement shall become effective as of the date first written
above, subject only to the receipt of any required regulatory approvals from any
State regulatory commission with jurisdiction over Client Company and the SEC,
and shall continue in force until terminated by Service Company or Client
Company, upon not less than 90 days prior written notice to the other party.
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 State regulatory commission with jurisdiction over Client Company
adopted before or after the date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 4.2 New direct or indirect subsidiaries of Energy East, which may
come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto 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 as specified in
Appendix A, subject to the requirements of Section 2.2, as may become necessary
to achieve a fair and equitable assignment, distribution, or allocation of
Service Company costs among all associate companies including the new
subsidiaries.
Section 4.3 Service Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
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IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
SHARED SERVICES CORPORATION
BY:
-------------------------------
Name:
Title:
CLIENT COMPANY
BY:
--------------------------------
Name:
Title:
The undersigned requests all services described in Appendix A and listed in the
Work Request Summary from Shared Services Corporation. Services will begin
_________________________.
CLIENT COMPANY
BY:
--------------------------------
Name:
Title:
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Appendix A
Description of Services to be Provided by Shared Services Corporation (Service
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 Shared Services Corporation ("Shared Services") and to
assign or allocate such costs to subsidiaries within Energy East ("Client
Entities").
Description of Services
A description of each of the services performed by Shared Services, which may be
modified from time to time, is presented below.
1. Accounting Services at the Utility Subsidiary level. These activities
include the maintenance of books and records, Utility Subsidiary annual
capital and operating budget preparation (on a per company basis)
analysis and interpretation of the companies' operating results,
preparation of financial reports required for regulatory filings,
preparation of financial reports to support corporate financial
consolidation, fixed asset accounting and supervision of compliance
with applicable laws and regulations.
2. Treasury services include the coordination of activities relating to
cash management, bank reconciliation and administering insurance
programs, and tax services for the coordination of income, property and
revenue tax compliance and tax accounting at the Utility Subsidiary
level.
3. Accounts Payable Services including the accurate and timely payment of
invoices and employee expense reports, allocation of expenses to the
proper general ledger accounts, production of annual reports to the
IRS, maintenance of vendor information and source documents, processing
checks and wire transfers, and performing bank reconciliations.
4. Human Resources services for administering system-wide employee
policies at the Utility Subsidiary level. Shared services
responsibilities would include the supervision of compliance with legal
requirements in the areas of employment, compensation, benefits and
employee health, welfare, and safety and contract negotiation and
relations management with labor unions; and employee performance
management program. Shared Services may also maintain the employee
master files relating to each employee as well as manage recruiting,
training, and promotions.
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5. Payroll Services including the supervision and coordination of the
calculations, records and control requirements necessary to generate
payment of employee salaries and wages and to maintain relevant
employee information.
6. Records Retention Services such as coordinating and maintaining a
program for ensuring safe on- and off-site records retention in
accordance with applicable regulations.
7. Regulatory management services including coordination of the Utility
Subsidiaries' rates and regulatory economics departments including
rate-related compliance matters.
8. Legal services would include legal support for all of the Utility
Subsidiaries, including managing litigation, contract review and
negotiations and participating in state and federal regulatory
proceedings.
9. Transmission and supply services include activities related to the
coordination and direction of electric and/or gas transmission,
storage, and supply functions for the Utility Subsidiaries in
compliance with the system-wide policies provided by EEMC.
10. Information Technology Services will include centralized information
technology services for the Utility Subsidiaries such as Data Center
Operations, IS Networking and Telecommunications systems operations and
maintenance, software applications development and maintenance,
technology development, end user support, and printing and mailing of
utility customer bills.
11. Supply Chain Services will include centralized purchasing services such
as procurement of materials and supplies, fleet services, contract
administration and materials management for the Utility Subsidiaries.
12. Customer Service includes call center operations including responding
to client entities' customer calls, customer billing, accounts
receivable, credit and collections services, customer satisfaction
monitoring and management of low-income programs.
13. Engineering Services will supply centralized customary engineering
services for Energy East system companies including design engineering,
general engineering, construction engineering and GIS technology
development, meter services and testing and operations.
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Shared Services' accounting, billing and cost allocation methods utilize the
"Uniform System of Accounts for Mutual Service Companies and Subsidiary Service
Companies" utilizing, however, the chart of accounts specified in the FERC
Uniform System of Accounts for Public Utilities and Licensees (18 C.F.R. Part
101).
Cost Assignment
---------------
Shared Services maintains 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. All Shared Services employees will maintain a record of
their time. Employees will utilize separate work requests to record their
activities, including the services provided directly to Client Entities. All
employees will charge their time on a daily basis using designated increments.
The time sheets will be reviewed and approved by employees' supervisors. The
wages 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 records will be maintained for three years. 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 Entity will be directly assigned or
billed to that Client Entity.
2. Costs accumulated in a work request number for services specifically
performed for two or more Client Entities will be distributed among
those Client Entities 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.
3. Costs accumulated in a work request number for services of a general
nature that are applicable to all Client Entities will be allocated
among all Client Entities and billed to them using the global allocator
factor.
Cost Allocation
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Shared Services uses cost allocation methods designed to fully distribute costs.
Shared Service's cost allocation methodology is comprised of the following three
steps:
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., payroll department costs
are allocated on the number of employees for each Client Entity.
3. To allocate indirectly attributable costs that are common to all Client
Entities using the global allocator factor taking into consideration
the relative size of each Client Entity with regards to gross revenues,
gross payroll expense and plant.
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
subsidiary 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).
General and administrative costs that are not associated with a specific,
identifiable, causal relationship are pooled and allocated to all utility
subsidiary companies.
Allocation Methods
------------------
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 Entities 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 Shared Services employees.
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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 Shared Services labor
charged or allocated to Client Entities.
2. Occupancy Overhead:
The Occupancy Overhead allocates costs related to the workspace
occupied by Shared Services 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 Shared Services labor charged or
allocated to Client Entities.
3. Management Overhead:
This overhead represents the management cost of a function within
Shared Services. It is based on the ratio of Shared Services
supervisory wages to all other wages. This fixed rate is applied to all
direct labor charged to Client Entities.
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 Clients Entities for
certain activities. The adder also includes expenses associated with office
facilities, including furniture and office equipment, used in performing these
administrative functions.
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:
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.
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Accounts Payable Ratio - Based on the number of invoices processed for each of
the specific Client Entities. 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.
Number of Customers Ratio - Based on the number of customers at each utility
subsidiary benefiting from the performance of a service. This ratio will be
determined annually based on the average annual customer count and may be
adjusted periodically due to a significant change.
Regulated Global - 8 Allocator Factor - This formula will be determined annually
based on the regulated Utility Subsidiaries' average of gross plant (original
plant in service), gross payroll charges (salaries and wages, including
overtime, shift premium and lost time, but excluding pension, payroll taxes and
other employee benefits) and gross revenues during the previous calendar year
and may be adjusted for any known and reasonable quantifiable events or at such
time as may be required due to significant changes. The eight applicable
regulated Utility Subsidiaries include: New York State Electric & Gas
Corporation (NYSEG), Rochester Gas & Electric Corporation (RG&E), Central Maine
Power Company (CMP), Berkshire Gas Company (BGC), The Southern Connecticut Gas
Company (SCG), Connecticut Natural Gas Corporation (CNG), Maine Natural Gas
Corporation (MNG), and New Hampshire Gas Corporation (NHGC).
Regulated Global - 6 Allocator Factor - This formula is derived through
utilization of the same data as the Regulated Global - 8 allocator factor above,
but it is limited to data of the following six Utility Subsidiaries: NYSEG, CMP,
SCG, CNG, RGE, and BGC.
Regulated Global - 5 Allocator Factor - This formula is derived through
utilization of the same data as the Regulated Global - 8 allocator factor above,
but it is limited to data of the following five Utility Subsidiaries: NYSEG,
CMP, SCG, CNG, and RGE.
Regulated Global - 4 Allocator Factor - This formula is derived through
utilization of the same data as the Regulated Global - 8 allocator factor above,
but it is limited to data of the following four Utility Subsidiaries: NYSEG,
CMP, SCG, and CNG.
Electric Transmission Allocator Factor - This formula is used to allocate costs
for the coordination and direction of electric transmission issues for the
benefit of regulated electric Utility Subsidiaries and departments. The formula
is derived through utilization of the same data as the Regulated Global
allocator factors noted above, but it is limited to data of the electric
operating companies or departments, namely, NYSEG, RG&E, and CMP.
Commodity - Global Allocator Factor - This formula is used to allocate the cost
of commodity planning, procurement, and sale when the service is applicable to
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or benefits all Client Entities, regardless of whether they are a gas, electric,
or combined company. The formula is derived through utilization of the gas
and/or electric supply costs of the Client Entities and reflects the proportion
of such costs occurring between these entities.
Commodity - Regulated Gas Allocator Factor - This formula is used to allocate
costs for gas commodity planning, procurement and sale for regulated gas Utility
Subsidiaries. The formula is derived through utilization of the gas supply costs
of the regulated gas Utility Subsidiaries and reflects the proportion of such
costs occurring between these entities.
Procurement Total Spending -
Based on the total dollar spending against Purchase Orders and P-Card within
each legal entity at period end.
Fleet Administration -
A ratio based on the number of vehicles/equipment managed for each legal entity.
The numerator of the ratio is the number of vehicles/equipment managed for a
legal entity and the denominator is the number of vehicles/equipment managed for
all legal entities at period end.
Materials Management -
Based on the number of issues from Active Inventory for each legal entity at
period end.
Composite Supply Chain -
Average of allocation factors for Procurement, Fleet and Materials Management
within each legal entity at period end.
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