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T Review of Pass-through Costs - ,i Pass-through costs will be reviewed for reasonableness. Analyti- cal review calculations will be performed on franchise fees, ~T dumping fees and interest expense to ensure they have been calcu- lated correctly. These costs will also be related to the opera- ting statistics to determine any adverse trends which may be ~ developing. Review of Non-Franchised Expenses - '~'T The reconciliation of franchised and non-franchised expenses to the audited financial statements will be tested to ensure that only franchised expenses are included in the rate application. [ Determination of Reasonable Profit - l ' The level of profit has been established by the Model Franchise ~! Agreement to be an operating ratio of 91% applied to the net operating costs. This calculation will be reviewed. i~ Review of Cost-Savings Program - Proposals for programs which may result in significant cost savings will be reviewed for reasonableness. The Company's ~ support for their estimates will be reviewed. Also, actual results from previously approved incentive programs will be ~:{ reviewed against original projections to determine the actual cost savings achieved. Calculation of Balancing Account - The rates are set in a manner which projects the results of future events. The nature of such projections is that they will vary from the actual results of operations. In order to elimi- hate the need for either the Company or the ratepayers to assume the risk of this variance, actual results are compared to projected results and the difference is accounted for in the balancing account. Calculation of the Revenue Requirement - The final revenue requirement for the coming year will be calculated after giving effect to any adjustments determined through the steps outlined above. The revenue requirement is: RR = D + I + Pr + PT + CS + BA Where RR is revenue requirement, D is direct costs, I is indirect - costs, Pr is allowable profit, PT is pass-through costs, CS is cost-savings program savings and BA is balancing account balance. This revenue requirement will be compared to the projected - revenues for the coming year to determine the amount of revenue adjustment necessary.