Cost Allocation Method

Transcription

1 Cost Allocation Method Ergon Energy Corporation Limited Document Summary Author: Allan Vollmerhause / Leon Hawley Approved By: Greg Evans Version: Approved V1 Status: Approved AER Letter 5 March 2009

2 Version History and Date of Issue Section 3.2(a)(1) and (2) of the Australian Energy Regulator s Cost Allocation Guidelines requires that this Cost Allocation Method include a version number and date of issue. This is detailed in the following table. Version number Approval 1.0 Approval 2.0 Approval 3.0 Approval 4.0 APPROVED V1 Description of Change Author Date Issued Original Document for Approval Allan Vollmerhause Pages (including this page) 24Sep08 27 Amended Document for Approval Leon Hawley 15Dec08 27 Amended Document for Approval Amended Document for Approval Approved Document AER Letter 5 March 2009 Allan Vollmerhause/ Leon Hawley Allan Vollmerhause/ Leon Hawley Allan Vollmerhause/ Leon Hawley 22Jan Feb Mar09 30 Minor updates will be designated as iterations of the approved document, e.g. minor wording changes to supporting text will be designated as version 1.1. More substantial changes will be given a new version number, e.g. changes to the allocation of material costs will be designated as version

3 TABLE OF CONTENTS Version History and Date of Issue Background Terminology Date of Commencement Nature, Scope and Purpose of CAM How this CAM will be used by EECL DNSP Accountabilities for CAM within EECL DNSP Ergon Energy s Corporate Structure Operating structure of EECL DNSP EECL DNSP s Categories of Distribution Services Types of Persons to Whom Distribution Services are Provided EECL DNSP s CAM Principles & Policies Record Keeping Monitoring Compliance...21 A. Directly Attributable Costs...22 B. Basis for Percentage Allocation between Four Districts (EECL, EEEQ, EETL and SPRQ)...23 C. Mapping Activities to Distribution Services...24 D. Allocation of Corporate Support Costs

4 1 Background Clause of the National Electricity Rules (Rules) requires each Distribution Network Service Provider (DNSP) to submit its proposed Cost Allocation Method (CAM) to the Australian Energy Regulator (AER) for its approval. The CAM must be provided within 12 months after the commencement of the Rules and must give effect to, and be consistent with, the AER s Cost Allocation Guidelines (CAG). 2 Terminology The following terminology is used in this CAM with respect to Ergon Energy: Ergon Energy Group this refers to the following four entities: Ergon Energy Corporation Limited (EECL), Ergon Energy Queensland Pty Ltd (EEQ), Ergon Energy Telecommunications Limited (EET) and Sparq Solutions Pty Ltd (SPARQ); EECL this refers to the parent entity of the Ergon Energy Group; and EECL DNSP this refers to that part of EECL that provides Distribution Services in the National Electricity Market (NEM). 3 Date of Commencement Section 3.2(a)(9) of the Australian Energy Regulator s (AER s) Cost Allocation Guidelines (CAG) requires that this Cost Allocation Method (CAM) include a commencement date. This CAM will commence on 1 July 2010 and will remain in force until EECL DNSP and the AER agree that it will cease or that it will be amended. Upon its commencement on 1 July 2010, this CAM will supersede and replace the Cost Allocation Methods and Procedures, which EECL DNSP has operated under while it has been regulated by the Queensland Competition Authority (QCA). 4 Nature, Scope and Purpose of CAM Section 3.2(a)(3) of the CAG requires that this CAM include a statement of its nature, scope and purpose. As required by section 3.1 of the CAG, this CAM has been prepared by EECL DNSP for submission to the AER in order to give effect to, and be consistent with, the CAG. This CAM includes the matters required by section 3.2 of the CAG

5 As required by sections 1.5 and 2.1 of the CAG, this CAM will be used by EECL DNSP for the purposes of attributing costs to, or allocating costs between, its Distribution Services, and other unregulated activities within the Ergon Energy Group. This will ensure that only efficient costs are allocated to different Distribution Services and that the prices paid by EECL DNSP s end customers for these services are not inappropriately inflated or discounted. 5 How this CAM will be used by EECL DNSP Section 3.2(a)(3) of the CAG requires that this CAM include a statement of the way in which it will be used by EECL DNSP. This CAM will be used by EECL DNSP for, amongst other things, the purposes set out in section 5.1(b) of the CAG, being: Forecast operating expenditure to be submitted to the AER in accordance with clause of the Rules; Forecast capital expenditure to be submitted to the AER in accordance with clause of the Rules; Prices for a Negotiated Distribution Service determined in accordance with clause of the Rules (although EECL DNSP will not have any such services in the next regulatory control period); Annual statements in accordance with a future regulatory information instrument; and Actual or estimated capital expenditure for the purposes of increasing the value of its regulatory asset base under Schedule 6.2.1(f) of the Rules. 6 Accountabilities for CAM within EECL DNSP Section 3.2(a)(3) of the CAG requires that this CAM include: Details of the accountabilities within EECL DNSP for implementing the CAM; and Responsibilities within EECL DNSP for updating, maintaining and applying the CAM and for internally monitoring and reporting on its application. EECL DNSP, and the broader Ergon Energy Group, is committed to applying the detailed principles and policies described in this CAM as the basis for directly attributing costs to, or allocating costs between, categories of Distribution Services provided by EECL DNSP, and unregulated activities within the Ergon Energy Group

6 Responsibility for outworking this commitment within EECL DNSP, and the broader Ergon Energy Group, principally rests with the Chief Financial Officer through the General Manager Commercial and the General Manager Regulatory Affairs. The day-to-day responsibility for the CAM, including updating, maintaining, applying, internally monitoring and reporting on its application, including ensuring compliance with the CAG, is the responsibility of Financial Planning and Information Manager and the Regulatory Affairs Performance and Reporting Manager. The organisational structure for CAM responsibilities is shown in Figure 1. Figure 1: Responsibility for CAM EECL Board of Directors Chief Executive Chief Financial Officer General Manager Regulatory Affairs General Manager Commercial Manager Reg Affairs - Perf & Reporting Financial Planning & Information Manager The Ergon Energy Group has implemented an Enterprise Resource Planning (ERP) system, Mincom Ellipse, which provides the capability to record and report all financial information based on the CAM principles for both statutory and regulatory purposes. Supporting systems are used for input into the ERP for, amongst other things, calculating the quantities and/or percentage of allocators. This provides an auditable record of the source of the data for these calculations. The Financial Planning & Information Manager and Manager Regulatory Affairs - Performance & Reporting will regularly monitor the inputs and outputs of these systems for compliance with the CAM and the CAG

7 7 Ergon Energy s Corporate Structure Section 3.2(a)(4) of the CAG requires that this CAM include a description of EECL DNSP s corporate structure. The Ergon Energy Group comprises companies involved in the purchase, distribution and sale of electricity in the National Electricity Market (NEM) and in other areas of Queensland outside of the NEM. The primary purposes of the Ergon Energy Group are the distribution of electricity by EECL DNSP and the purchase and sale of electricity by EEQ in regional Queensland. The significant entities within the Ergon Energy Group are described below. Ergon Energy Corporation Limited (EECL) EECL is the parent entity of the Ergon Energy Group. EECL is also the distribution network owner and distribution network service provider (DNSP). The legal entity EECL is responsible for a range of regulated Distribution Services and unregulated activities: Regulated Distribution Services EECL DNSP s Distribution Services are all classified as Direct Control Services for the purposes of Chapter 6 of the Rules it has no Negotiated Distribution Services. The Direct Control Services are then classified between Standard Control Services and Alternative Control Services. The nature of these services is described in section 9 of this CAM; and Unregulated activities EECL provides a range of distribution-related activities that are not Distribution Services as they do not involve the distribution system, as well as other unregulated activities, such as isolated generation, and the distribution of electricity to remote communities outside of the NEM. None of these activities is regulated by the AER. Ergon Energy Qld Pty Ltd (EEQ) EEQ is a wholly owned subsidiary of EECL and is responsible for providing non-competing electricity retail services in regional Queensland to non-contestable customers. These retail services are not regulated by the AER. Ergon Energy Telecommunications Pty Ltd (EET) EET is a wholly owned subsidiary of EECL and is a licensed telecommunications carrier providing wholesale high-speed data capacity to the Ergon Energy Group and to external customers

8 Sparq Solutions Pty Ltd (SPARQ) During a joint venture company, SPARQ, was formed by EECL and ENERGEX Limited. The two shareholders each own a 50% share in SPARQ. The company constitution restricts SPARQ to providing Information Technology and Telecommunication (ITT) services to only EECL and ENERGEX. The majority of these ITT services provided to Ergon Energy are related to the provision of Distribution Services by EECL DNSP while the remainder are related to the provision of other services and activities by EECL and other parts of the Ergon Energy Group. The structure of the Ergon Energy Group is shown in Figure 2. Figure 2: Ergon Energy Group Structure (EECL) Ergon Energy Corporation Limited ACN: (SPARQ) Sparq Solutions Pty Ltd ACN: % ownership (EEQ) Ergon Energy Queensland Pty Ltd ACN: % ownership (EET) Ergon Energy Telecommunications ACN: % ownership 8 Operating structure of EECL DNSP Section 3.2(a)(4) of the CAG requires that this CAM include a description of EECL DNSP s operational structure. From an operational perspective, EECL is structured on the basis of Business Units, rather than according to regulated Distribution Services and unregulated activities. A brief summary of these Business Units is provided in Figure 3 below

9 Figure 3: EECL Operational Structure EECL Operational Business Units Energy Services Customer Services Corporate Support Business Units Office of the Chief Executive Corporate Governance Finance & Strategic Services Employee & Shared Services Customer & Stakeholder Engagement Non Regulated Business Units Corporate Sustainability & Innovation The following is a brief description of the functions of the Business Units within EECL that are covered by this CAM. Energy Services - Responsible for the provision of network related Distribution Services and unregulated activities; Customer Services - Responsible for the provision of customer related Distribution Services and unregulated activities; Corporate Support Business Units - Responsible for the provision of support functions to the EECL operational business units (Energy Services, Customer Services) and to the other legal entities within the Ergon Energy Group (EEQ, EET, Sparq). Services are also provided to the Corporate Sustainability & Innovation Business Unit; and Corporate Sustainability & Innovation Responsible for ensuring the most innovative and sustainable way of providing a secure and reliable electricity supply. Also responsible for reducing customer demand on our network and minimising the environmental impact of our operations. The approach to allocating costs between Distribution Services and unregulated activities is based on the Ergon Energy Group s Chart of Accounts. All of the Distribution Services listed in Appendix C are provided by Energy Services and Customer Services

10 The Ergon Energy Group s Chart of Accounts is based on an Activity Based Costing Methodology (ABCM). The highest level of the Chart of Accounts is District. The four Districts codes within Mincom Ellipse representing the company structure are: EECL; EEEQ (this is the company EEQ); EETL (this is the company EET); and SPRQ (this is the company SPARQ) The allocation of costs within the Ergon Energy Group is carried out in Mincom Ellipse. This system supports and maintains the following cost components: Payroll and payroll related costs; Inventory and Materials; Material Purchasing; and Project / Works Management Costing. There are three sources of shared costs that are allocated within the Ergon Energy Group: Costs that relate to the following seven Business Units within EECL that provide support services across the four Districts: o Office of the Chief Executive; o Corporate Governance; o Finance & Strategic Services; o Employee & Shared Services; o Customer & Stakeholder Engagement; o Customer Services; and o Corporate Sustainability & Innovation. Note: Corporate Sustainability & Innovation costs will only form part of the shared cost pool when their activities fall within the regulated space. Costs associated with services provided by EET and SPARQ. These costs are initially included in the support costs above (Finance & Strategic Services). The allocators used to allocate the shared costs listed above between the four districts are detailed in Appendix D; and Costs from the Energy Services business unit that predominantly represent labour and administration costs that have not been directly attributed. These costs include, but are not limited to, senior management, technical and operations support, including maintenance and construction standards, mapping, technical data records and field investigations and auditing. The same allocators detailed in Appendix B are also used to allocate these shared costs between the four Districts

11 The shared costs that are allocated within EECL are further allocated between Lines of Business which are groupings of all the activities undertaken in the provision of Distribution Services and unregulated activities (refer to Appendix C for the linkage and mapping of Activities to Lines of Business and Distribution Service Categories). The following are the current Lines of Business which fully cover all of the business functions for EECL: Regulated Opex; Regulated Capex; Customer Services; Isolated Generation Opex; Isolated Generation Capex; Non-Regulated Opex; Non-Regulated Capex; External Works: o Powerlink; and o Virginia Workshops. Solar Cities. Changes may need to be made to these Lines of Business within the regulatory control period if EECL s work activity changes. For the purposes of clause (f) of the Rules, if new lines of business are added or any of the above cease, such changes will be submitted for approval. Note that Solar Cities is scheduled to terminate in the period From an operational viewpoint alterations, including additions, within the Activity Ranges as detailed in Appendix C do not represent a change in the Lines of Business per se, but merely a change in the level of detail recorded and therefore these changes would not require an amendment and re-approval of the CAM in accordance with the provisions of clause (f) of the Rules. When costs are incurred they are processed against an account code consisting of the four Chart of Account Segments: Activity this Segment defines the nature of the work being undertaken. The Activities are classified according to the various Lines of Business; Responsibility Centre this Segment is used to describe the organisational unit that is accountable for the work being undertaken. There are several hundred Responsibility Centres for EECL DNSP. Responsibility centres are grouped to form a Business Unit ; Product Code this Segment is used to define the product being provided to external customers; and Expense Element this Segment identifies the nature of the cost item being processed - for example, labour, materials, fleet etc. It is also used to record the various types of revenue received

12 All costs processed within Mincom Ellipse contain all four Segments and, together with the use of optional sub-ledger data for projects, equipment and works orders, provide a robust basis for the attribution and allocation of costs. By processing all costs under all four Segments, EECL can undertake analysis and reporting against any of the four Segments. The way in which costs are processed in the Chart of Accounts is illustrated in Figure 3. Figure 3 Chart of Account Cost Relationship Costs Chart of Accounts Payroll & Payroll Related Costs Responsibility Centre Segment Lines of Business Inventory & Materials Costs Direct Costs Direct Attribution Activity Segment District Distribution Services Material Purchasing Costs Shared Costs Allocation using causal allocators Product Code Segment Project / Works Mgt Costs Expense Element Segment 9 EECL DNSP s Categories of Distribution Services Section 3.2(a)(5) of the CAG requires that this CAM include a specification of the categories of EECL DNSP s Distribution Services to which costs are to be attributed or allocated. At the time of drafting this CAM, EECL DNSP s Distribution Services have not been classified by the AER in a Distribution Determination. However, pursuant to clause 6.8.1, and in accordance with Part B, of the Rules, the AER has determined in a Framework and Approach paper its likely approach to classifying EECL DNSP s Distribution Services for the AER s Distribution Determination for the 2010 to 2015 regulatory control period. The AER s Framework and Approach paper indicates that it will apply the service classifications set out in Figure

13 Figure 4: AER s Likely Service Classification for EECL DNSP Distribution Services Network services Connection services Metering services Street lighting services Quoted services Fee based services Unregulated activities AER Service Classification Standard Control Services Standard Control Services Standard Control Services Alternative Control Services Alternative Control Services Alternative Control Services Unclassified This CAM is based on the service classifications set out in Figure 4. EECL DNSP has mapped each Activity category and sub-category within its Chart of Accounts to a Distribution Service (i.e. a Standard or Alternative Control Service) or unregulated activity. This mapping is detailed in Appendix C of this CAM. New Activities added from time to time for the provision of Distribution Services will be mapped to the appropriate service classification 10 Types of Persons to Whom Distribution Services are Provided Section 3.2(a)(5) of the CAG requires that this CAM include an explanation of the types of persons to whom EECL DNSP s Distribution Services are provided. EECL DNSP provides its Distribution Services to: Electricity Retailers Retailers purchase wholesale energy that is transported through Powerlink s transmission system, and EECL DNSP s distribution system, to end-use customers. EECL DNSP provides Distribution Services to: o EEQ; and o Competing electricity retailers operating in EECL DNSP s distribution area. End-Use Customers EECL DNSP provides customer connection services to over 600,000 premises in its distribution area. Customer connection services include the connection of the premises to a supply network as well as the supply of electricity from the supply network to the premises; and

14 Community Approximately 1.4 million people currently rely on EECL DNSP every day for the safety, quality, reliability and availability of their electricity supply. A tripartite contractual relationship was established between EECL DNSP, end-use customers and retailers upon the introduction of full retail competition (FRC) in Queensland on 1 July The nature of this relationship is illustrated in Figure 5: Figure 5: Triangular Contractual Relationship Customer Retailer Standard or Negotiated Coordination Agreement Distributor EECL DNSP provides customer connection services to customers under either a Standard or Negotiated Connection Contract. The interaction with retailers is managed through a Standard or Negotiated Coordination Agreement, which sets out how EECL DNSP and the electricity retailer agree to streamline their respective relationships with customers and to coordinate with each other in the performance of certain functions and obligations. EECL DNSP also provides certain Distribution Services directly to the customer s connection point, with no involvement from a retailer as an intermediary. EECL DNSP s Standard Connection Contract and Standard Coordination Agreement are detailed in Annexures A and C (respectively) of the Queensland Electricity Industry Code. 11 EECL DNSP s CAM Principles & Policies Section 3.2(a)(6) of the CAG requires that this CAM include EECL DNSP s detailed principles and policies for attributing costs directly to, or allocating costs between, categories of Distribution Services and unregulated activities in order to meet the requirements of section 2.2 of the CAG

15 Treatment of Directly Attributed Costs EECL DNSP provides the following information to address the requirements of section 2.2.1(b)(1) of the CAG in relation to the treatment of Directly Attributable Costs. Costs are directly attributed within Mincom Ellipse as follows: Payroll and Payroll Related Costs these costs are directly attributed via the Ergon Energy Group s labour costing process which provides for the entry of labour hours based on timesheet data. Labour rates include provision for payroll related costs (such as superannuation, payroll tax, workers compensation, annual and long service leave); Inventory and Materials inventory items are issued via a requisition to the job based on EECL DNSP s stores average cost. All stores items also attract an associated charge (oncost) representing the administration costs of EECL DNSP s Logistics Group, which manages inventory and materials; Fleet charges are allocated to jobs via an equipment hire process, which allocates fleet costs based on a unit charge associated with the particular class of vehicle used; and Project / Works Management Costing purchase orders, field release orders, credit card purchases and other non-order payments are processed directly to jobs as part of the Project / Works Management Costing process. An example of directly attributed costs would be field staff booking a number of hours of their time, all materials used to complete the job, a number of hours of borer lifter time (fleet charges) and also possibly raising a purchase orders to hire external equipment required to complete the job against a work order relating to the Corrective Maintenance Activity. Because there is a direct mapping of Activities to Distribution Services and unregulated activities, when costs are directly attributed to Activities they are also, by extension, directly attributed to Distribution Services and/or unregulated activities. The records maintained in Mincom Ellipse are capable of being audited. The basis of direct attribution can therefore be audited or otherwise verified by a third party, including the AER. Appendix A of this CAM details the basis on which costs are directly attributed to Distribution Services and unregulated activities

16 Treatment of Shared Costs (Overheads) At the commencement of each financial year, budget data is used to set an initial shared cost percentage rate. Shared costs are also commonly referred to as support costs or overheads. The sum of the shared costs (overheads) (described in Section 8) is allocated to a Line of Business based on the ratio of the direct costs for each Line of Business. The direct costs are determined by reference to the Responsibility Centre and Activities segments of the Chart of Accounts. There are tens of thousands of Responsibility Centre and Activity segment combinations and the use of Lines of Business allows this process to be effectively controlled and managed. The linkage of a range of Activities to the Line of Business concept ensures consistent application of shared costs across common operational service areas (e.g. Preventive, Corrective and Forced Network Maintenance). It also provides a more granular application of shared costs as some Responsibility Centres do not undertake activities across all Lines of Business (e.g. Network Generation Responsibility Centre). A worked example of this process is provided in the following Tables 1, 2, 3 and Percentage Rates Table 1 provides an example of the way in which the percentage rates for allocating shared costs between Lines of Business are derived. Table 1 Example of Derivation of Percentage Rates Lines of Business Reg Opex Reg Capex Iso Gen Opex Iso Gen Capex Cust Serv Non Reg Extnl Solar Cities Total Direct Costs (Page 14) Direct Costs % 17% 68% 6% 2% 3% 1% 2% 1% 100% Support Costs Corporate (Page 9) 17% 68% 6% 2% 3% 1% 2% 1% 100% Energy Services: (Page 8) - Ops North 17% 68% 6% 2% 3% 1% 2% 93% - Network Generation 6% 2% 8%

17 The total directly attributable costs for each of the Lines of Business are summed, and the relevant percentage of the total is determined, for each Line of Business. The nature of the work performed by individual Responsibility Centres is used to determine the allocation of the direct cost pools to Line/s of Business (refer to Responsibility Centres, Ops North and Network Generation in Table 2 below). Note that the Corporate cost pool is allocated across all Lines of Business. In order to fully allocate the cost pool the percentage rates determined in Table 1 are grossed up so that they total 100% (refer Table 2 below) Table 2 Example of Summation of Percentage Rates by Lines of Business Lines of Business Reg Opex Reg Capex Iso Gen Opex Iso Gen Capex Cust Serv Non Reg Extnl Solar Cities Total Direct Costs Direct Costs % 17% 67% 6% 2% 4% 1% 2% 1% 100% Support Costs Corporate 17% 67% 6% 2% 4% 1% 2% 1% 100% Energy Services: - Ops North - Network Generation 18% 72% 2% 5% 1% 2% 100% 76% 24% 100% The value to be spread for each cost pool is then allocated to the Line of Business based on the rate determined in Table 2. The total for each Line of Business is accumulated and expressed as a percentage of the total costs. This is the rate that will be applied to all actual direct costs posted against that Line of Business. An example of this is illustrated in Table

18 Table 3 - Example of Percentage of Total Costs by Lines of Business Lines of Business Reg Opex Reg Capex Iso Gen Opex Iso Gen Capex Cust Serv Non Reg Extnl Solar Cities Cost Pool $ Corporate Energy Services:- Ops North - Network Generation Total Support Cost Pool Direct Costs (Table 2) % Rate 33% 33% 37% 40% 33% 30% 33% 30% 11.2 Application & Review of the Shared Cost Percentage Rate As actual transaction costs are posted to an account code (consisting of the four Segments Responsibility Centre, Activity, Product Code and Expense Element) the Shared Cost Percentage Rate for the relevant Line of Business to be applied to the transaction cost is determined by reference to the Activity segment of the account code. The Activity segment described in the Chart of Accounts defines the nature of the work that is being performed (e.g. Preventive Regulated Maintenance Lines ) with ranges used to also determine the nature of the work being either of a Regulated or Non Regulated nature. As part of an overnight process, two separate transactions are generated and posted to allocate shared costs, namely: 1. one that contains an expense element of 8100 Business Overhead is posted to the Line of Business account; and 2. one that contains an expense element of 8350 Business Overhead Recovery is posted to the Support Pool Recovery account

19 Table 4 Example of Application of Shared Costs to Actual Direct Costs Lines of Business Reg Opex Reg Capex Iso Gen Opex Iso Gen Capex Cust Serv Non Reg Extnl Solar Cities Total $ Example Activity Code C C Actual Costs (e.g. labour) % Rate (from Table 3) 33% 33% 37% 40% 33% 33% 33% 30% Shared Costs applied Total * * Total of directly attributed and allocated shared costs by individual activity within a Line of Business. In this way, EECL DNSP can ensure that its Distribution Services are fully costed as there is a direct mapping between its Activities and its Distribution Services and unregulated services. This mapping is set out in Appendix C of this CAM. The Shared Cost Percentage Rates for the various Lines of Business are reviewed at least quarterly throughout the financial year. They are adjusted, as required, by increasing or decreasing the shared cost percentage rates if the allocation of the shared cost pools is being under or over allocated, to ensure that the actual allocations made remain in proportion to the actual costs incurred (see worked example in Table 5 below). The percentage rate required to fully allocate the shared cost pools is influenced by an increase or decrease in the actual direct costs of each Line of Business and/or an increase or decrease in the actual shared cost pool to be allocated

20 Table 5 Adjustment of Shared Cost Percentage Rates Lines of Business Reg Opex Reg Capex Iso Gen Opex Iso Gen Capex Cust Serv Non Reg Extnl Solar Cities Total $ Total Support Cost Pool ( Table 3) Direct Costs (Table 2) % Rate (Table 3) 33% 33% 37% 40% 33% 33% 33% 30% Actual Support Cost Pool Actual Direct Costs Revised % rate to be applied 34% 35% 36% 47% 32% 36% 33% 25% The revision of the percentage rate will ensure that the actual support costs for each pool are appropriately allocated to the actual directly attributed costs of activities supported by the relevant cost pool. The shared cost percentage rate for each Line of Business will therefore vary between years depending on: The number of Lines of Business; The amount of costs directly attributed to the each Line of Business; The amount of shared cost pools allocated to EECL; and The allocation of shared costs to each Line of Business. At year end it is inevitable that the percentage rates struck throughout the year will not result in a 100% allocation of the shared cost pool. EECL s experience has been that the balance remaining in the shared cost pool is not materially significant. EECL adopts the materiality definition used in the Australian Accounting Standards. When it is not materially significant, the balance will reside in the Regulated Opex Line of Business. In the unlikely event that a materially significant variance arises, manual adjustment entries across the relevant Lines of Business consistent with the actual direct cost percentages in line with the methodology shown in Table 1, will be undertaken

21 11.3 Substance over Legal Form EECL DNSP confirms that the application of this CAM will ensure that it shall attribute costs directly to, or allocate costs between, categories of Distribution Services on the substance of the underlying transaction or event, rather than the legal form, in accordance with the requirements of section of the CAG Attribution of Direct Costs EECL DNSP confirms that the application of this CAM will ensure that only costs that are directly attributable to the provision of a particular category of Distribution Services will be directly attributed to those services, in accordance with the requirements of section of the CAG Attribution of Shared Costs EECL DNSP confirms that the application of this CAM will ensure that shared costs are allocated between categories of Distribution Services using an appropriate causal allocator, in accordance with the requirements of section of the CAG Not Allocate the Same Cost More than Once EECL DNSP confirms that the application of this CAM will ensure that it does not allocate the same cost more than once, in accordance with the requirements of section of the CAG Consistency with Distribution Ring-Fencing Guidelines EECL DNSP confirms that the detailed principles, policies and approach that it will use to attribute costs directly to, or allocate costs between, categories of Distribution Services are consistent with clause 6.17 of the Rules, as is required by section of the CAG No Reallocation of Costs between Categories of Distribution Services EECL DNSP confirms that it will not reattribute or reallocate costs to another service during the course of a regulatory control period, as is required by section of the CAG. 12 Record Keeping Section 3.2(a)(7) of the CAG requires that this CAM describe how EECL DNSP will maintain records of the attribution or allocation of costs to, or between, categories of Distribution Services. The Ergon Energy Group s ERP system, Mincom Ellipse, provides the capability to record and report all financial information based on the CAM principles and policies for both statutory and regulatory purposes. Outputs from this system include the standard suite of financial reports such as, Trial Balance, General Ledger, Profit & Loss Statement, Balance Sheet and numerous other views of the posting of financial transactions (directly allocated and shared costs) which can

22 be produced depending upon the nature of the enquiry. Transactions, once posted, cannot be deleted so that prior year data is therefore also maintained. Supporting systems are used for input into the ERP for, amongst other things, calculating the quantities and/or percentage of allocators for the allocation of support costs to cost pools and to the relevant Lines of Business and Distribution Services. These include a Corporate Support Costs Allocation Model and an Overhead Analysis Model which provide an auditable record of the source of the data for these calculations. If requested by the AER, EECL DNSP will provide supporting work papers, which will demonstrate the application of the CAM and the calculations recorded in these systems. 13 Monitoring Compliance Section 3.2(a)(8) of the CAG requires that this CAM describe how EECL DNSP will monitor its compliance with this CAM and the CAG. Responsibility for outworking this CAM principally rests with the Chief Financial Officer through the General Manager Commercial and the General Manager Regulatory Affairs. The day-to-day responsibility for the CAM, including updating, maintaining, applying, internally monitoring and reporting on its application, including ensuring compliance with the CAG, is the responsibility of the Financial Planning and Information Manager and the Regulatory Affairs Performance and Reporting Manager

23 A. Directly Attributable Costs The costs that can be directly attributable to Activities are directly attributed. Activities are mapped to Distribution Services. The framework for directly attributing costs is reflected in: The business rules within Mincom Ellipse; The use of an Activity Based Costing Method; and The Chart of Accounts. The costs of doing Activities (field work) are directly attributed, whereas the costs of support Activities are allocated. The nature of the directly attributed costs and how these are attributed to Distribution Services is shown in the following table. Nature of Cost Description Attributed to Basis of Costing Payroll and Payroll related costs Salaries and wages and other payroll related costs (superannuation, payroll tax, workers compensation, annual and long service etc). Standard Control Services Alternative Control Services Unregulated Activities Directly attributed based on the labour costing process which provides for entry of labour hours based on timesheet data. The payroll related costs are charged as a percentage of the payroll cost attributed to an activity. Inventory Inventory costs, including an associated charge to cover the costs of administration etc of the internally managed Logistics Group Standard Control Services Alternative Control Services Unregulated Activities Attributed via Chart of Accounts based on Activity. The administration cost is charged as a percentage of the cost of inventory attributed to an Activity. Fleet charges Motor vehicle leasing and internal operating costs Management and administration costs, Fleet internal, Inspection costs, Registration, and Depreciation. Standard Control Services Alternative Control Services Unregulated Activities Directly attributed via the equipment hire process which charges fleet costs based on a unit charge peculiar to the vehicle used. Project / Works Management costing Materials, contracted services and other costs that can be directly attributed to activities / projects. Standard Control Services Alternative Control Services Unregulated Activities Attributed via Chart of Accounts based on Account Code

24 B. Basis for Percentage Allocation between Four Districts (EECL, EEEQ, EETL and SPRQ) EECL provides support services across the four districts of the Ergon Energy Group EECL, EEEQ, EETL and SPRQ. Therefore, there is a need to allocate the shared costs between the four districts. The costs of providing these services are initially incurred by Business Units within EECL (refer Section 8) and are allocated to the subsidiary companies on the same basis, and by using the same causal allocators, as is used for the internal allocation of costs within EECL. The choice of driver to allocate these support services depends on the type of service provided. The allocators are derived as part of the Ergon Energy Group s budgeting, reporting and performance systems process, in particular: In developing the budget process, the Ergon Energy Group accumulated data on a large number of potential bases for allocation. These were developed to ensure that as wide a range of criteria as possible was considered when arriving at the most appropriate allocator for a particular cost; and Also the Ergon Energy Group identified a large number of separate functions when detailing the support costs. This large number of line items indicates a level of thoroughness in identifying all the functions performed by support personnel. Where these costs are identified as relating solely to a legal entity within the Ergon Energy Group, they are directly allocated to that entity. For transaction related costs, the number of transactions undertaken (e.g. number of invoices processed) is the driver selected for the allocation of the costs. In other cases, an estimate of time spent in providing the level of services to the users is used as the driver to calculate the allocation of work and costs to each entity

25 C. Mapping Activities to Distribution Services As detailed in Section 9, the AER s Likely Service Classification for EECL DNSP is as follows: Distribution Service Network services Connection services Metering services Street lighting services Quoted services Fee based services Unregulated activities AER Service Classification Standard Control Services Standard Control Services Standard Control Services Alternative Control Services Alternative Control Services Alternative Control Services Unclassified The Activity segment in the Chart of Accounts, which describes the work being undertaken, is mapped to the category of Distribution Service provided as a result of doing that work, in accordance with the table below. Should new activities be created they will be mapped in accordance with the code ranges and appropriate Distribution Service shown below

26 Code/Range Chart of Account Activities Line of Business Distribution Service Category Description Network Operating Costs Network Operations Standard Control Services Regulated Network Operations Regulated Opex Network Services Embedded Generation Regulated Opex Network Services Grid Generation Regulated Opex Network Services Network Maintenance Costs Preventive Maintenance Standard Control Services Communications Regulated Opex Network Services Lines Regulated Opex Network Services Meters Regulated Opex Network Services Protection Regulated Opex Network Services Sub Stations Regulated Opex Network Services Vegetation Regulated Opex Network Services Inspection Regulated Opex Network Services Corrective Maintenance Standard Control Services Communications Regulated Opex Network Services Lines Regulated Opex Network Services Meters Regulated Opex Network Services Protection Regulated Opex Network Services Sub Stations Regulated Opex Network Services Vegetation Regulated Opex Network Services Forced Maintenance Standard Control Services Forced Maintenance Regulated Opex Network Services (Not Ranged) Other Operating Costs Regulated Opex Standard Control Services (Not Ranged) Meter Reading Standard Control Services Meter Reading Mass Market Regulated Opex Metering Services Customer Services Standard Control Services Fault Call Management Customer Services Network Services ECPO Investigations Customer Services Connection Services Network Customer Services Standard Control Services /

27 Code/Range Chart of Account Activities Line of Business Distribution Service Category Description Alternative Control Services Customer Installation Services Customer Services Connection Services Network Metering Customer Services Network Services Outage Communication Customer Services Network Services Guaranteed Service Levels Customer Services Connection Services Prescribed Services for Retailers Customer Services Alternative Control Services Fee Based Services or Quoted Services Prescribed Services Other Customer Services Alternative Control Services Fee Based Services or Quoted Services Public/Consumer Safety Customer Services Network Services (Not Ranged) Other Operating Costs Standard Control Services Sustainability & Development Regulated Opex Network Services Training & Development Regulated Opex Network Services (Not Ranged) Street Lighting Alternative Control Services Preventive Maintenance Regulated Opex Street Lighting Services Corrective Maintenance Regulated Opex Street Lighting Services Forced Maintenance Regulated Opex Street Lighting Services Isolated Generation & Distribution Non Regulated Operations & Maintenance Isolated Generation Opex Non Regulated Opex Unregulated Activities Unregulated Activities Customer Services Unregulated Activities Customer Service Strategy Non Regulated Opex Unregulated Activities Customer Contact / Advisory Services Non Regulated Opex Unregulated Activities Establishment Non Regulated Opex Unregulated Activities Billing Services Non Regulated Opex Unregulated Activities NCC Sales Non Regulated Opex Unregulated Activities Collection Services Non Regulated Opex Unregulated Activities Subsidiary & Related Party Services Non Regulated Opex Unregulated Activities

28 Code/Range Chart of Account Activities Line of Business Distribution Service Category Description External Services External Unregulated Activities C2000-C3999 Regulated Capex Standard Control Services Regulated System Capex C2000 Network Refurbishment Regulated Capex Network Services C2010 Load Energy Management Regulated Capex Network Services C2020 Ageing Asset Replacement Regulated Capex Network Services C2030 Reliability Improvement Regulated Capex Network Services C2040 Augmentation Regulated Capex Network Services C2050 Other System Capex Regulated Capex Network Services C2060 Domestic & Rural Customer Requested Works Regulated Capex Connection Services C2070 Commercial & Industrial Customer Requested Works Regulated Capex Connection Services C2080 Other Customer Requested Works Regulated Capex Connection Services C2090 Generation Regulated Capex Network Services TBA Connection Services Large Regulated Capex Alternative Control Services Quoted Services Regulated Non System Capex C3000 Land & Buildings - Direct Regulated Capex Network Services C3050 Land & Buildings - Constructed Regulated Capex Network Services C3100 Vehicles & Mobile Plant - Direct Regulated Capex Network Services C3200 Computer Facilities - Direct Regulated Capex Network Services C3250 Computer Facilities - Constructed Regulated Capex Network Services C3300 Change Program - Direct Regulated Capex Network Services C3350 Change Program - Constructed Regulated Capex Network Services C3400 Other Fixed Assets - Direct Regulated Capex Network Services C3450 Other Fixed Assets - Constructed Regulated Capex Network Services C4000-C4999 Non-Regulated Capex Unregulated Activities

29 D. Allocation of Corporate Support Costs Notes: Work allocation an estimate of the time spent by support staff in providing the services is based on data provided by mangers as part of the budget preparation process. This allocator has been chosen where it is possible to identify the time spent by support staff in providing different services; and Legal Entity those legal entities that form the Ergon Energy Group (refer Figure 2). Costs are allocated directly when time spent by support staff or other resources is fully dedicated to providing services to a particular legal entity. Corporate Business Unit Nature of Cost Item Allocators Office of the Chief Executive Costs of the Chief Executive General Counsel Board of Directors Allocated directly to legal entity Finance & Strategic Services Company Secretary Legal Business Risk & Compliance Insurance Premiums Internal Audit Group Management including Change & Communications Taxation Business Integration Services Regulatory Affairs Strategic Planning Corporate Strategy & Finance Financial Control Board Reporting & Treasury Retail Commercial Support Financial Reporting Business Performance Financial Planning & Management Information TaDS Commercial Commercial Support Project Accounting Allocated directly to legal entity Based on historical precedence Audit Plan Hours Allocated directly to legal entity Allocated directly to legal entity Based on revenue for each entity Allocated directly to legal entity Allocated directly to legal entity Allocated directly to legal entity Allocated directly to legal entity

30 Corporate Business Unit Nature of Cost Item Allocators Strategy & Management Business Solutions Solutions Delivery ICT Portfolio Solutions Support Based on head count and work allocation Number of Ellipse Users Employees & Shared Services Group Management Headcount including Sparq Customer & Stakeholder Relations Learning & Development Culture & Change Environment Human Resources Workplace Health & Safety TEC Bonuses International Recruitment Programs WHS Courses Programs Learning & Development Business Support Corporate Services Relationship Manager Group Services Management Business Services Payroll Services Travel Services Records Services Document & Information Services Commercial Services Procurement & Logistics Payments Corporate Property Customer Advocate Corporate Communications Investor Relations Headcount including Sparq Headcount including Sparq Headcount including Sparq Headcount including Sparq Headcount including Sparq Headcount excluding Sparq Allocated directly to legal entity Headcount excluding Sparq Headcount excluding Sparq Headcount including Sparq Headcount including Sparq Headcount excluding Sparq Number of pay runs Number of travel requests Based on head count Allocated directly to legal entity Based on head count & work allocation Number of invoice and credit card transactions Based on head count

31 Corporate Business Unit Nature of Cost Item Allocators Stakeholder Relations Marketing