Cost Allocation Method

					Ergon Energy Cost Allocation Method – Approved V1
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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
Ergon Energy Cost Allocation Method – Approved V1
_______________________________________________________________




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           Description of Change               Author         Date      Pages
  number                                                              Issued
                                                                                (including
                                                                                this page)

 Approval        Original Document for Approval         Allan        24Sep08       27
   1.0                                              Vollmerhause
 Approval       Amended Document for Approval        Leon Hawley     15Dec08       27
   2.0
 Approval       Amended Document for Approval            Allan       22Jan09       29
   3.0                                              Vollmerhause/
                                                    Leon Hawley
 Approval       Amended Document for Approval            Allan       13Feb09       30
   4.0                                              Vollmerhause/
                                                    Leon Hawley
APPROVED       Approved Document – AER Letter           Allan        5Mar09        30
   V1                   5 March 2009                Vollmerhause/
                                                    Leon Hawley


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 2.0.




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TABLE OF CONTENTS

Version History and Date of Issue......................................................................................1
1      Background .................................................................................................................3
2      Terminology ................................................................................................................3
3      Date of Commencement.............................................................................................3
4      Nature, Scope and Purpose of CAM .........................................................................3
5      How this CAM will be used by EECL DNSP..............................................................4
6      Accountabilities for CAM within EECL DNSP ..........................................................4
7      Ergon Energy’s Corporate Structure ........................................................................6
8      Operating structure of EECL DNSP ..........................................................................7
9      EECL DNSP’s Categories of Distribution Services ...............................................11
10     Types of Persons to Whom Distribution Services are Provided..........................12
11     EECL DNSP’s CAM Principles & Policies...............................................................13
12     Record Keeping ........................................................................................................20
13     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 ..................................................................28




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1    Background
Clause 6.15.4 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.




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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
      6.5.6 of the Rules;

•     Forecast capital expenditure to be submitted to the AER in accordance with clause
      6.5.7 of the Rules;

•     Prices for a Negotiated Distribution Service determined in accordance with clause
      6.7.1 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.




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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                         General Manager
                 Regulatory Affairs                        Commercial



               Manager Reg Affairs -                    Financial Planning &
                 Perf & Reporting                       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.




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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.




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Sparq Solutions Pty Ltd (SPARQ)

During 2004-05 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)                                   (SPARQ)
                             Ergon Energy                              Sparq Solutions
                           Corporation Limited                             Pty Ltd
                           ACN: 087 646 062                           ACN: 110 073 400
                                                                       50% ownership




           (EEQ)                                       (EET)
        Ergon Energy                                Ergon Energy
      Queensland Pty Ltd                         Telecommunications
      ACN: 121 177 802                            ACN: 106 459 465
       100% ownership                              100% 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.




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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.




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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.



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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 6.15.4(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 2013-14.
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 6.15.4(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.




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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 &                                                                   Respon-
     Payroll                                                                     sibility
    Related                                                                      Centre
     Costs                                                                      Segment

                                                                                              Lines of
                                                                                             Business

  Inventory         Direct     Direct Attribution
 & Materials        Costs                                                        Activity
    Costs                                                                       Segment


                                                             District                       Distribution
                                                                                             Services

  Material         Shared      Allocation using                                 Product
 Purchasing         Costs      causal allocators                                 Code
   Costs                                                                        Segment




     Project /                                                                  Expense
    Works Mgt                                                                   Element
      Costs                                                                     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 4.



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               Figure 4: AER’s Likely Service Classification for EECL DNSP

Distribution Services                        AER Service Classification

Network services                             Standard Control Services

Connection services                          Standard Control Services

Metering services                            Standard Control Services

Street lighting services                     Alternative Control Services

Quoted services                              Alternative Control Services

Fee based services                           Alternative Control Services

Unregulated activities                       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




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•    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 2007. The nature of this relationship is illustrated in Figure 5:

                        Figure 5: Triangular Contractual Relationship


                                    Customer




        Retailer                                              Distributor
                             Standard or Negotiated
                             Coordination Agreement

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.




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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.




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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 4.

11.1 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    Reg     Iso Gen   Iso Gen     Cust    Non   Extnl   Solar    Total
                            Opex   Capex   Opex      Capex       Serv    Reg           Cities

Direct Costs (Page 14)      150     600      55          17       40      10    18        10     900

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%




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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     Reg       Iso Gen     Iso Gen   Cust      Non    Extnl   Solar    Total
                   Opex    Capex     Opex        Capex     Serv      Reg            Cities

Direct Costs        150      600       55          17         40       10    18        10     900

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        18%      72%                   2%         5%      1%     2%              100%

  - Network                            76%         24%                                       100%
    Generation




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 3.




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             Table 3 - Example of Percentage of Total Costs by Lines of Business

                                          Lines of Business

                Reg     Reg     Iso Gen   Iso Gen     Cust    Non    Extnl   Solar    Cost
                Opex    Capex   Opex      Capex       Serv    Reg            Cities   Pool $

Corporate         45     180      16         5          12      3       6       3       270

Energy
Services:-
Ops North          5      18                            2                               25

- Network                          4         1                                           5
Generation

Total Support     50     198      20         6          14      3       6       3       300
Cost Pool

Direct Costs      150    600      55        17          40      10     18       10      900
(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 - 52120) 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.




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Table 4 – Example of Application of Shared Costs to Actual Direct Costs

                                            Lines of Business

                Reg     Reg       Iso Gen   Iso Gen   Cust      Non      Extnl     Solar    Total $
                Opex    Capex     Opex      Capex     Serv      Reg                Cities

Example         52160    C2000     50000    C2090     56000     58260     60000     61510
Activity Code

Actual Costs     100      100       100       100       100      100       100       100      800
(e.g. labour)

% Rate (from     33%      33%       37%      40%       33%       33%       33%       30%
Table 3)

Shared Costs      33       33       37        40        33        33        33        30      272
applied

Total *          133      133       137       140       133      133       133       130      1072

* 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.




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Table 5 – Adjustment of Shared Cost Percentage Rates

                                                   Lines of Business

                         Reg Opex   Reg     Iso Gen   Iso Gen    Cust   Non    Extnl   Solar     Total $
                                    Capex   Opex      Capex      Serv   Reg            Cities

Total Support Cost          50       198      20          6        14    3       6        3        300
Pool ( Table 3)

Direct Costs (Table 2)      150      600      55         17        40    10     18        10       900

% Rate (Table 3)           33%       33%     37%        40%       33%   33%    33%       30%

Actual Support Cost         55       190      18          8        13    4       6        2        296
Pool

Actual Direct Costs         160      550      50         17        41    11     18        8        855

Revised % rate to be       34%       35%     36%        47%       32%   36%    33%       25%
applied

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.




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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 2.2.2 of the CAG.

11.4 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 2.2.3 of
the CAG.

11.5 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 2.2.4 of the CAG.

11.6 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 2.2.5 of the
CAG.

11.7 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 2.2.6 of the CAG.

11.8 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 2.2.7 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



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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.




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     Ergon Energy Cost Allocation Method – Approved V1
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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   Salaries and wages        Standard Control         Directly attributed based on the
     related costs         and other payroll         Services                 labour costing process which
                           related costs                                      provides for entry of labour hours
                                                     Alternative Control
                           (superannuation,                                   based on timesheet data.
                                                     Services
                           payroll tax, workers
                                                                              The payroll related costs are
                           compensation, annual      Unregulated Activities
                                                                              charged as a percentage of the
                           and long service etc).
                                                                              payroll cost attributed to an
                                                                              activity.

     Inventory             Inventory costs,          Standard Control         Attributed via Chart of Accounts
                           including an associated   Services                 based on Activity. The
                           charge to cover the                                administration cost is charged as
                                                     Alternative Control
                           costs of administration                            a percentage of the cost of
                                                     Services
                           etc of the internally                              inventory attributed to an Activity.
                           managed Logistics         Unregulated Activities
                           Group

     Fleet charges         Motor vehicle leasing     Standard Control         Directly attributed via the
                           and internal operating    Services                 equipment hire process which
                           costs                                              charges fleet costs based on a
                                                     Alternative Control
                                                                              unit charge peculiar to the vehicle
                           Management and            Services
                                                                              used.
                           administration costs,
                                                     Unregulated Activities
                           Fleet internal,
                           Inspection costs,
                           Registration, and
                           Depreciation.

     Project / Works       Materials, contracted     Standard Control         Attributed via Chart of Accounts
     Management costing    services and other        Services                 based on Account Code.
                           costs that can be
                                                     Alternative Control
                           directly attributed to
                                                     Services
                           activities / projects.
                                                     Unregulated Activities




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     Ergon Energy Cost Allocation Method – Approved V1
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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.




                                                 - 23 -
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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                     AER Service Classification
     Network services                          Standard Control Services
     Connection services                       Standard Control Services
     Metering services                         Standard Control Services
     Street lighting services                  Alternative Control Services
     Quoted services                           Alternative Control Services
     Fee based services                        Alternative Control Services
     Unregulated activities                    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.




                                               - 24 -
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        Chart of Account Activities            Line of Business    Distribution Service
                                                                   Category
Code/Range              Description
               Network Operating Costs
52000-52099    Network Operations                                  Standard Control Services
52000          Regulated Network Operations    Regulated Opex      Network Services
52010          Embedded Generation             Regulated Opex      Network Services
52050          Grid Generation                 Regulated Opex      Network Services
               Network Maintenance Costs
52100-52999    Preventive Maintenance                              Standard Control Services
52100          Communications                  Regulated Opex      Network Services
52120          Lines                           Regulated Opex      Network Services
52130          Meters                          Regulated Opex      Network Services
52140          Protection                      Regulated Opex      Network Services
52150          Sub Stations                    Regulated Opex      Network Services
52160          Vegetation                      Regulated Opex      Network Services
52170          Inspection                      Regulated Opex      Network Services
53000-54099    Corrective Maintenance                              Standard Control Services
53100          Communications                  Regulated Opex      Network Services
53120          Lines                           Regulated Opex      Network Services
53130          Meters                          Regulated Opex      Network Services
53140          Protection                      Regulated Opex      Network Services
53150          Sub Stations                    Regulated Opex      Network Services
53160          Vegetation                      Regulated Opex      Network Services
54100-54199    Forced Maintenance                                  Standard Control Services
54100          Forced Maintenance              Regulated Opex      Network Services
(Not Ranged)   Other Operating Costs           Regulated Opex      Standard Control Services
(Not Ranged)   Meter Reading                                       Standard Control Services
56020          Meter Reading Mass Market       Regulated Opex      Metering Services
59000-59999    Customer Services                                   Standard Control Services
59060          Fault Call Management           Customer Services   Network Services
59070          ECPO Investigations             Customer Services   Connection Services
56000-56999    Network Customer Services                           Standard Control Services /


                                           - 25 -
Ergon Energy Cost Allocation Method – Approved V1
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        Chart of Account Activities               Line of Business      Distribution Service
                                                                        Category
Code/Range              Description
                                                                        Alternative Control
                                                                        Services
56000          Customer Installation Services     Customer Services     Connection Services
56010          Network Metering                   Customer Services     Network Services
56030          Outage Communication               Customer Services     Network Services
56040          Guaranteed Service Levels          Customer Services     Connection Services
56050          Prescribed Services for            Customer Services     Alternative Control Services –
               Retailers                                                Fee Based Services or
                                                                        Quoted Services
56050          Prescribed Services Other          Customer Services     Alternative Control Services –
                                                                        Fee Based Services or
                                                                        Quoted Services
56070          Public/Consumer Safety             Customer Services     Network Services
(Not Ranged)   Other Operating Costs                                    Standard Control Services
61510          Sustainability & Development       Regulated Opex        Network Services
62000          Training & Development             Regulated Opex        Network Services
(Not Ranged)   Street Lighting                                          Alternative Control
                                                                        Services
52180          Preventive Maintenance             Regulated Opex        Street Lighting Services
53180          Corrective Maintenance             Regulated Opex        Street Lighting Services
54180          Forced Maintenance                 Regulated Opex        Street Lighting Services
50000-51999    Isolated Generation &              Isolated Generation   Unregulated Activities
               Distribution                       Opex
58000- 58999   Non Regulated Operations &         Non Regulated Opex    Unregulated Activities
               Maintenance
59000-59499    Customer Services                                        Unregulated Activities
59000          Customer Service Strategy          Non Regulated Opex    Unregulated Activities
59010          Customer Contact / Advisory        Non Regulated Opex    Unregulated Activities
               Services
59020          Establishment                      Non Regulated Opex    Unregulated Activities
59030          Billing Services                   Non Regulated Opex    Unregulated Activities
59040          NCC Sales                          Non Regulated Opex    Unregulated Activities
59050          Collection Services                Non Regulated Opex    Unregulated Activities
59500-596000   Subsidiary & Related Party         Non Regulated Opex    Unregulated Activities
               Services



                                              - 26 -
Ergon Energy Cost Allocation Method – Approved V1
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        Chart of Account Activities               Line of Business   Distribution Service
                                                                     Category
Code/Range              Description
60000-61499    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          Regulated Capex    Connection Services
               Requested Works
C2070          Commercial & Industrial            Regulated Capex    Connection Services
               Customer Requested Works
C2080          Other Customer Requested           Regulated Capex    Connection Services
               Works
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 -              Regulated Capex    Network Services
               Constructed
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 -               Regulated Capex    Network Services
               Constructed
C4000-C4999    Non-Regulated Capex                                   Unregulated Activities




                                              - 27 -
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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    Based on work allocation



     General Counsel                 Board of Directors              Allocated directly to legal entity



                                     Company Secretary               Based on work allocation

                                     Legal                           Allocated directly to legal entity

                                     Business Risk & Compliance      Based on work allocation

                                     Insurance Premiums              Based on historical precedence

                                     Internal Audit                  Audit Plan Hours

     Finance & Strategic Services    Group Management including      Based on work allocation
                                     Change & Communications

                                     Taxation                        Based on work allocation

                                     Business Integration Services   Allocated directly to legal entity

                                     Regulatory Affairs              Allocated directly to legal entity

                                     Strategic Planning              Based on revenue for each
                                                                     entity

                                     Corporate Strategy & Finance    Based on work allocation

                                     Financial Control               Based on work allocation

                                     Board Reporting & Treasury      Based on work allocation

                                     Retail Commercial Support       Allocated directly to legal entity

                                     Financial Reporting             Based on work allocation

                                     Business Performance            Allocated directly to legal entity

                                     Financial Planning &            Based on work allocation
                                     Management Information

                                     TaDS Commercial                 Allocated directly to legal entity

                                     Commercial Support              Based on work allocation

                                     Project Accounting              Allocated directly to legal entity



                                                         - 28 -
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 Corporate Business Unit          Nature of Cost Item                      Allocators
                              Strategy & Management             Based on work allocation

                              Business Solutions                Based on work allocation

                              Solutions Delivery                Based on work allocation

                              ICT Portfolio                     Based on head count and work
                                                                allocation

                              Solutions Support                 Number of Ellipse Users

Employees & Shared Services   Group Management                  Headcount including Sparq

                              Learning & Development            Headcount including Sparq

                              Culture & Change                  Headcount including Sparq

                              Environment                       Headcount including Sparq

                              Human Resources                   Headcount including Sparq

                              Workplace Health & Safety         Headcount including Sparq

                              TEC Bonuses                       Headcount excluding Sparq

                              International Recruitment         Allocated directly to legal entity

                              Programs – WHS Courses            Headcount excluding Sparq

                              Programs – Learning &             Headcount excluding Sparq
                              Development

                              Business Support                  Headcount including Sparq

                              Corporate Services Relationship   Headcount including Sparq
                              Manager

                              Group Services Management         Headcount excluding Sparq

                              Business Services                 Based on work allocation

                              Payroll Services                  Number of pay runs

                              Travel Services                   Number of travel requests

                              Records Services                  Based on head count

                              Document & Information            Based on work allocation
                              Services

                              Commercial Services               Allocated directly to legal entity

                              Procurement & Logistics           Based on head count & work
                                                                allocation

                              Payments                          Number of invoice and credit
                                                                card transactions

                              Corporate Property                Based on head count

Customer & Stakeholder        Customer Advocate                 Based on work allocation
Relations

                              Corporate Communications          Based on work allocation

                              Investor Relations                Based on work allocation




                                                 - 29 -
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 Corporate Business Unit        Nature of Cost Item               Allocators
                            Stakeholder Relations       Based on work allocation

                            Marketing                   Based on work allocation




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