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~at~ ~ Process Review of Costs - Direct and indirect costs will be reviewed for reasonableness. The consultants will review variances from year to year and obtain explanations for significant items. Also, projections prepared in previous years will be compared with actual results. Significant differences will be investigated and explanations sought from the Company. Costs will be correlated with the operating statistics provided by the Company and explanations for unusual trends or variances will be sought. Specific expenses will receive a more detailed review for reasonableness. Any and all accounts may be selected for this additional testing. Each year the consultants will identify those accounts which will be reviewed and ask that the Company provide detailed support for the costs included in the rate application. Detail testing back to supporting documents will be performed to determine the appropriateness of the expense. Certain costs be particularly sensitive and subject to may greater scrutiny during the review. While perhaps desirable, it is not possible to establish specific fixed amounts which can be established as reasonable for these costs. Instead, we offer the following guidelines. Officers' salaries should be deemed to be reasonable if they are consistent with salary suhveys of compar- able positions in comparable businesses. Travel expenses should be deemed to be reasonable if they represent the necessary costs directly associated with the management of the Cities' franchised activities (e.g., a seminar or a conference related to solid waste collection). Keeping in mind that the Company has a long- term and exclusive franchise, there should be few entertainment expenses which would benefit the ratepayers and, therefore, any such expense should adequately document the benefit to the rate- payers directly resulting from the expense. In general, the SBTSA may wish to apply its member cities' policies with regard to these costs as the standard of reasonableness. Projections of expenses into future periods will be reviewed for reasonableness. The Company should document the assumptions used in preparing the projections and provide support for those assumptions. The projections should reflect the best estimates of changes in service that the Company can make (i.e., changes to automated collection, increasing disposal fees, new equipment purchases, etc.). Review of Allocations - The allocations of indirect costs to the operating divisions will be reviewed for reasonableness. The allocation bases will be compared to those established in this manual to ensure that they are consistently applied. The allocation statistics will also be reviewed to identify any unusual trends and ensure that they are being accumulated and calculated correctly. 17