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Step 3 - Forecasting Costs The Allowed Costs of Operations for the Prior Year and Current Year (Year to Date) will form the bases for forecasting the costs associated with the Current Year and the Rate Year, as described below: Labor, Vehicle and Container Maintenance and Other Operating Expenses Labor, Vehicle and Container Maintenance and Other Operating Expenses will be projected for the Current Year, using actual data up to the most recent month available and Contractor's Plans for the remainder of the year. The basis for calculating the current year- end total cost shall be fully explained in writing. The costs for the Rate Year will be forecasted by increasing the estimated costs for the Current Year according to documented assumptions based on governmental forecasts or budgeted anticipated increases (i.e. staff increases due to projected tonnage growth). Depreciation and Other Fixed Costs Depreciation on existing assets will be based on Contractor's depreciation schedule. Depreciation on new assets will be calculated by dividing the actual prices of the assets by the number of years of the assets economic life. The result is the Forecasted Depreciation Expense for the appropriate Rate Year. Regional and Corporate Overhead and Other Corporate Charges. Regional and corporate overhead and other corporate charges shall be no more than Contractor's allowed amounts for these items in 1998 escalated by the change in the Consumer Price Index for the San Francisco-Oakland-San Jose Metropolitan Area. Data Processing expense will be no greater than the 1997 Data Processing expense plus 3%per year. Profit Profit for each Rate Year shall be calculated by dividing the Forecasted Allowed Annual Cost of Operations, for the appropriate Rate Year, by ninety-one percent (91 %) and subtracting the Forecasted Annual Costs of Operations for the appropriate Rate Year from the dividend. SBWMA Compensation Adjustment Guidelines June 6, 2000 PAGE 10