EXHIBIT B-3
FORM OF SERVICE AGREEMENT
BETWEEN UTILITY SUBSIDIARY AND OTHER
SUBSIDIARY OR ENERGY EAST CORPORATION
SERVICE AGREEMENT
This Service Agreement is made and entered into this _____ day of
___________, by and between __________________ ("Client Company") and
___________________ ("Utility Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC"), pursuant to
Section 13(b) of the Public Utility Holding Company Act of 1935 ("Act") has
authorized Utility Company to provide certain services to its associate
companies within the Energy East Corporation ("Energy East") registered holding
company system; and
WHEREAS, Client Company is an associate company of Utility Company within
the Energy East system; and
WHEREAS, Utility Company and Client Company have entered into this Service
Agreement whereby Utility 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 Utility 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:
ARTICLE I - SERVICES
Section 1.1 Utility 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 Utility
Company concludes it is able to perform. Utility 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 Utility Company concludes it is able to
perform. In supplying such services, Utility Company
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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 Utility Company such of the
services described in Section 1.1, 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 Utility 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 Utility Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Utility 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 Utility 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 Utility 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 Utility Company all costs that reasonably can be
identified and related to particular services performed by Utility Company for
or on its behalf. The methods for assigning or allocating Utility Company costs
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 Utility Company annually, or more frequently if appropriate. Such
method of assignment or allocation of costs may be modified or changed by the
Utility 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 Utility Company shall review with the Client Company any
proposed
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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
Utility 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 Utility 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 Utility Company all charges billed to
it within 30 days of receipt of the monthly report. Any amounts not paid by the
due date will be subject to a late charge of .5% per month until remittance is
received.
Section 2.4 It is the intent of this Service Agreement that the payment for
services rendered by Utility 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 Utility 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.
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 Utility Company or Client
Company if Client Company is a utility and the SEC, and shall continue in force
until terminated by Utility 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 of any State regulatory
commission with jurisdiction over Utility Company or Client Company if Client
Company is a utility adopted before or after the date of this Service Agreement.
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ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Utility Company shall be kept in
accordance with the General Rules and Regulations promulgated by the FERC or
other regulatory body.
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 Utility Company and subject to a service
agreement with Utility 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
Utility Company costs among all associate companies including the new
subsidiaries.
Section 4.3 Utility Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
Section 4.4 This Service Agreement hereby supercedes and replaces any other
service agreement existing between the Utility Company and the Client Company.
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
UTILITY COMPANY
BY:
-----------------------------------
Name:
Title:
CLIENT COMPANY
BY:
-----------------------------------
Name:
Title:
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The undersigned requests all services described in Appendix A and listed in the
Work Request Summary from Utility Company. Services will begin
_________________________.
CLIENT COMPANY
BY:
-----------------------------------
Name:
Title:
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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
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 including, but not limited to, financial and
administrative, corporate planning, legal, project management, government
and legislative affairs, regulatory support, human resources
administration, executive management and other management support services.
. Costs are directly charged to the benefiting client entity or distributed
based on one of the allocation methods described below.
7. Technical and operations services including, but not limited to,
engineering and planning, training, construction and facility management,
maintenance, purchasing, billing, information services, environmental
licensing and permitting,
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supply planning and transportation, energy services, and other operational
or technical services. 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 or, where
applicable, the system of accounts required by the state regulatory body.
Cost Assignment
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.
3. Costs accumulated in a work request number for services of a general
nature which are applicable to all Client Entities will be allocated among all
Client Entities, and billed to them using the global allocator factor.
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.
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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 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).
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 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:
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.
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.
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.
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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.
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
companycustomers. 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.
Communications Ratio - Based on the number of phones, ports, or email addresses
utilized by Client companies. This ratio is determined annually based on the
actual count of the phones, ports, or email addresses 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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Number of Payroll Checks Ratio - Based on the number of payroll checks processed
for each of the client companies. This ratio will be determined annually based
on an actual count of checks processed during the previous period and may be
adjusted periodically due to a significant change.
Number of Radio Units Ratio - Based on the number of radio units utilized by
each of the client companies. This ratio will be determined annually based on an
actual count of radios and may be adjusted periodically due to a significant
change.
Global Allocation Factor - This formula will be determined annually based on the
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. This formula is commonly referred to as the Massachusetts
formula.
Property Values Allocator - Costs allocated to companies based on the actual
property values recorded on each companies' books. The numerator of which is for
an individually affected operating company, product, or service and the
denominator of which is for all affected operating companies, products, or
services. The allocation will be determined annually or at such time as may be
required due to significant changes.
Labor Dollars Ratio - This ratio is determined annually based on the sum of
labor dollars for the immediately proceeding fiscal year. The numerator of which
is for an individually affected operating company and the denominator of which
is for all affected operating companies.
Revenue Dollars Ratio - This ratio is based on the sum of revenue dollars for
the immediately proceeding twelve consecutive months for the fiscal year ended
September. The numerator of which is for an individually affected operating
company, product, or service and the denominator of which is for all affected
operating companies, products, or services.
Vehicle Count Ratio - This ratio is based on the actual vehicle count submitted
to the insurance carrier at the time of quote. The numerator of which is for an
individually affected operating company, product, or service and the denominator
of which is for all affected operating companies, products, or services.
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