Board Members present: Susie Smith, Jeff Osanka, Mike Dyer, Sandra Bishop (via telephone from Portland, Oregon), and Dorothy Anderson.
Others present: Randy Berggren, Cathy Bloom, Tom Buckhouse, Eric Hiaasen, Roseanna McArthur, John Mitchell, Jim Origliosso, Scott Spettel, Dick Varner, Shirley West, Debra Wright, and Krista Hince of the EWEB staff; and C. Daniel Lindstrom, Minutes Recorder.
President Smith called the Work Session of the Eugene Water & Electric Board (EWEB) Board of Commissioners to order at 5:40 p.m.
KLAMATH FALLS COGENERATION PROJECT
General Manager Randy Berggren reminded the Board of his report on November 17, 1998, regarding the purchase of 80 megawatts of power from a cogeneration project under development in Klamath Falls. At that time, he said, he had been convinced there was little chance that representatives of the project would seek to continue negotiations with EWEB.
Mr. Berggren reported that a new proposal to purchase power from the project had been received. He said the proposal did not fully meet conditions set by EWEB negotiators, but that it was credible and that its economic benefits were sufficiently attractive to warrant negotiating additional terms and conditions which might lead to a long-term purchase contract.
Mr. Berggren provided background information on how the potential purchase had developed. He also explained the risks and timing involved in it.
Mr. Berggren explained that EWEB had initially considered purchase of power from the project along with a number of other members of OURCA (Oregon Utility Resource Coordinating Association. He said the developers of the project, PacifiCorp and the City of Klamath Falls, had predetermined two conditions regarding the sale:
He said OURCA participants had agreed that EWEB would seek to negotiate an acceptable contract for purchase of the 80 megawatts, maintain a share for its independent use, and become a vehicle by which the others would receive additional shares through assignment of the contract obligations or a "pass through" sale from EWEB.
Mr. Berggren said it was anticipated that a major pre-financing sale of power from the project to a credit-worthy public utility such as EWEB would bring a significant advantage to the interest rate the project received when its bonds were sold. He explained that an element of purchase negotiations had been sharing of the cost savings of such lower rates with EWEB to provide an economic benefit to off-set risks associated with the project. He said the project needed to be financed by March 1999 because of the nature of the Klamath Falls investment in the project. He said he had confirmed that bond sale deadlines could be met if the EWEB Board approved the sale at its first meeting in January.
Mr. Berggren described discussions he had held with members of OURCA to ensure their continued commitment to acquire power from the EWEB purchase. He said it appeared the levels of power desired by interested utilities would be higher than could be fully met with an 80 megawatt purchase.
Mr. Berggren explained that one risk to EWEB in the purchase under consideration was that contracts to acquire shares of it by OURCA members could not be fully negotiated before the January 1999 date for the decision to be made by the Board. He said he believed it would be possible to secure non-binding letters expressing interest in purchasing certain amounts of the power by that date, but that such letters would not establish the normal level of security in such matters.
Mr. Berggren described discussions held with Klamath Falls' counsel Larry Cable regarding the difficulty of moving the business risk entailed in the venture to the secondary purchasing parties through the contracts to be established. He said it was unlikely that the full risk could be passed on and that EWEB could have some unusual risk if there was an unanticipated catastrophe in the project.
Mr. Berggren added that it was unlikely OURCA members purchasing power from EWEB would be willing to establish purchase agreements which would last more that five-years, creating an additional concern because the Klamath Falls contract was anticipated to be for a minimum of 28 years. He noted that a positive outcome of such uncertainty could be that higher sales prices could result from increases in market prices.
Mr. Dyer asked if the terms of the proposed arrangement with Klamath Falls could be characterized as a "take or pay" contract. Mr. Berggren replied that, on the whole, the description was not accurate, but that elements such as a previously proposed requirement to pay a minimum of debt service even if the project did not operate could be described in that way. He noted; however, that any conditions which were "take or pay" would be corrected as EWEB cannot accept a "take or pay" condition.
Power Management & Planning Manager Scott Spettel stated that the most significant economic question being asked in development of the Klamath Falls Cogeneration project was whether it was an appropriate time to turn natural gas into electricity. He said that siting of the project, vendor arrangements, available tax incentives, and the location of the project in relationship to major markets led him to believe it would be built. He said that pricing risks involved with the proposed "cost-plus" nature of the purchase were of concern.
Mr. Spettel drew a chart to describe profits in the project after revenues covered costs. He said the City of Klamath Falls had set 1.6 mills per kilowatt of power produced by the project as its anticipated return, but had reduced the required recovery to 1.25 mills in sales to EWEB because of the financing benefit it brought to the project. He said EWEB negotiators had responded to the proposal by suggesting that a 1.05 mill recovery rate for the city be established. He said the proposal was rejected, but that an arrangement providing for incentive rebates based on total sales was close to being mutually agreed upon.
Commissioner Dyer asked how the proposed 1.05 mill recovery rate related to the cost of comparable power purchased at open market rates. Mr. Spettel replied that power purchased on the open market was generally priced to produce a .25 mill recovery rate per kilowatt of power produced, but that other factors also needed to be taken into consideration in the higher Klamath Falls expectation.
Commissioner Dyer asked if an overall comparison of the purchase proposal could be made to open market power purchases. Resource Planning Analyst Eric Hiaasen said that a full-range of "stress testing" and probability analysis of the proposal had not yet been completed, but that elements of several scenarios had been investigated--a comparison of fuel price forecasts and power price forecasts; a "confidential in-house market view" which revealed that PacifiCorp had estimated lower than generally assumed fuel prices and also low power sales prices; and a five-year scenario produced by assuming that fuel was purchased and power sold at current price levels. He said that, in each case, the proposed purchase was advantageous. He said the initial studies indicated that, over the life of the project, the cost of its power would average six to nine percent below that of the general market.
Commissioner Dyer asked what risk assumptions were included in projection of the potential advantages of the purchase. Mr. Hiaasen replied that risk analyses were not yet complete, but that they would be reported to Commissioners before a decision was to be made on a contract proposal.
Mr. Berggren stated that a nine percent advantage over market rates was attractive, but that a ten to eleven percent advantage would provide a safety net for "losing years" and be a basis for a firm recommendation to establish a contract. He said he believed there were sufficient additional "terms to play" in negotiation of the contract which could raise the advantage into double digits.
Commissioner Dyer asked what the profit of the City of Klamath Falls would be with an anticipated recovery of 1.6 mills per kilowatt of power produced by the project. Mr. Hiaasen replied that it would total approximately $4 million each year.
President Smith asked how use of the EWEB bond rating to improve bond purchases used in development of the project could affect EWEB's future bonding capacity. Treasurer Jim Origliosso said that the rating would not be affected and that the debt capacity of EWEB would not be curtailed.
President Smith asked how much of the success of the Klamath Falls project depended on the stability of PacifiCorp. Mr. Berggren said he believed the project would be part of any successor agency to PacifiCorp and there would be a continued obligation to provide power to EWEB at the contracted rate. He said consideration of the effects of any change in ownership would be included in calculations of the risks involved.
President Smith asked how dealing with Special Counsel Larry Cable was complicated by the fact that he also served as counsel to Klamath Falls Energy corporation about the Klamath Cogeneration Project. Mr. Berggren replied that Mr. Cable had been extremely careful to not encourage EWEB participation in the project. He added that Klamath Falls was committed to full disclosure regarding the project and that any contract to be acted on by the Board would be thoroughly reviewed by alternate counsel.
President Smith stated that she had no mistrust of Mr. Cable, but wanted an extremely thorough independent legal analysis of any proposed contract related to the Klamath Falls Cogeneration Project.
President Smith asked whether EWEB would have on-going oversight of the Cogeneration project if a contract was established. She said she believed such oversight would be appropriate because of the 28 year duration of the contract.
Mr. Berggren replied that the oversight suggested by President Smith would not be normal because, with minor unique exceptions, EWEB's relationship to the project would only be as a purchaser of the power it produced. He said he was less than hopeful that an oversight role could be negotiated into a contract for purchase.
President Smith said that not having oversight produced a risk value which needed to be considered.
President Smith suggested that it was possible that the anticipated benefit to the City of Klamath Falls from technology proposed to be used in the project would not be feasible. She said that such a possibility was another risk to be considered in a potential long-term contract. Mr. Berggren replied that the concern raised by President Smith would need to be further explored. He said it would be considered in "due diligence" considerations.
Vice President Osanka asked if it would be possible to guarantee in a purchase contract that future technology developments used in production of power in the project would not involve the use of nuclear energy or other processes unacceptable to EWEB. Mr. Berggren replied that he was unsure of how to accomplish the goal Vice President Osanka had suggested. He also said that he did not believe it was possible to achieve such a stipulation in negotiations regarding the current contract.
Vice President Osanka said he believed it would be important to inform developers of the cogeneration project that EWEB would be unable to participate as a purchaser of its power if nuclear energy became involved. Mr. Berggren replied that he did not believe there was a risk of nuclear production becoming involved in the project. He added that he was more concerned that all of the environmental aspects of the project were acceptable.
Commissioner Dyer said he believed the project would be developed and that the question which needed to be addressed was whether EWEB would purchase power from it.
Vice President Osanka replied that he was concerned technology developments during the next 28 years might create a power production process which would be unacceptable to EWEB.
Commissioner Anderson asked for an explanation of the next steps in contract negotiations. Mr. Berggren replied that after learning whether Commissioners approved continuing contract negotiations, he would report the decision to representatives of the project. He said he would include in the report that he believed final terms for the contract had almost been achieved, that "due diligence" efforts would continue, and that a recommendation for a contract could be placed before the Board as early as its first meeting in January. He added that his comments should not be interpreted to mean that it was a foregone conclusion that there would be a recommendation for a contract to be approved.
President Smith said that she believed a counter-offer should be made to representatives of the project which would allow EWEB increased value in the project. Mr. Berggren said doing so needed to be approached cautiously because of pre-conceived notions regarding the return on its investment the City of Klamath Falls should receive.
Commissioner Dyer asked if Larry Cable would evaluate contract proposals made by EWEB regarding the project for Klamath Falls. Mr. Berggren replied that he would not do so, but that such proposals would be submitted to counsel of PacifiCorp.
Commissioner Dyer said that financial considerations were his only hesitation about the proposed contract. He suggested that if the price to EWEB was adequately advantageous or if other benefits were included, he would not be concerned about selling excess power to OURCA members because profit could be made from sales on the open market.
Vice President Osanka said he would find it helpful to have the proposed contract placed within the context of other EWEB power purchases. Mr. Berggren stated that EWEB was a 320 average megawatt system. Mr. Hiaasen added that the full context of the issues involved would depend on resolution of retail access proposals evolving through Federal deregulation of the electric power industry.
Vice President Osanka asked if it would be possible to characterize the proposed contract as a means of providing stability to EWEB. Mr. Berggren replied that it had the potential to do so. Mr. Spettel suggested that the contract also had the potential of becoming an example of a base power sale price the Bonneville Power Administration (BPA) needed to stay matched.
Mr. Berggren stated that he had been reminded that attention should be given to a concern that language of a BPA subscription proposal could suggest that, if EWEB contracted for 75 megawatts from the cogeneration project, the BPA could declare that it no longer had an obligation to provide an equivalent load for EWEB at a premium price. He said such a consideration would be included in due diligence investigations.
Vice President Osanka stated that he was pleased that environmental activist groups in the Klamath Falls area supported the cogeneration project. He said he hoped the Board would be assured that the support continued to exist.
Commissioner Anderson said she had mixed emotions regarding the contract under consideration. She said she believed the project would succeed, that it was environmentally sound, and that the power it would produce was needed. She suggested that strong efforts be invested in achieving potential extra benefit for EWEB in the project. Mr. Berggren replied that he believed it would be possible to achieve acceptable success in the negotiation process.
Mr. Spettel said he believed there was consensus among Board members that a contract had enough potential value to "hunker down and try to get a deal."
Commissioner Bishop asked how many OURCA members were interested in purchasing power from the project through EWEB. Mr. Berggren replied that there were approximately five utilities with such an interest.
Commissioner Bishop said she believed the project was adequately valuable to pursue establishing a power purchase contract and that there were no overwhelming reasons to pull out of negotiations at the current time.
Commissioner Bishop asked if there would be an advantage to "locking in" gas prices for the project for five years. Mr. Berggren replied that such a decision could bring certainty into the project.
Commissioner Bishop said she agreed with President Smith that there was no reason to mistrust Larry Cable, but that she believed the current situation was extremely awkward. She recalled that Mr. Cable had an "iron-clad" agreement with EWEB that its interests always took precedence in his practice. Mr. Berggren replied that such a policy did exist, but that Mr. Cable had been unable to back out of service to the cogeneration project. He said that a recent communication from Mr. Cable had reiterated the need to seek independent counsel regarding any contract which might be developed regarding EWEB's purchase of power from the project.
Mr. Berggren said he had not heard Commissioners suggest ending negotiations regarding a contract to purchase power from the proposed Klamath Falls cogeneration project. He said that he had heard concerns raised about elements of the negotiations, as follows:
Mr. Berggren said he would commit staff time to the negotiations to enable presentation of a recommendation regarding a contract to purchase approximately 75 megawatts of power from the Klamath Falls Cogeneration Project by the first meeting of the Board of Commissioners in January 1999.
President Smith requested that the Board be kept informed of the status of negotiations in a timely fashion.
ACCUMULATED ASSETS
Mr. Berggren stated that the Universal Service Plan discussed at the November 17 Work Session would again be considered at a January Board meeting. He said Commissioners would benefit from receiving basic information regarding EWEB's accumulated assets.
EWEB Treasurer Jim Origliosso referred to his memorandum regarding accumulated assets dated November 25, 1998, and its attached memorandum dated October 28, 1997, distributed with the agenda of the meeting. He said many changes had taken place regarding accumulated assets during the year they had been under consideration by the Board. He displayed a chart which illustrated how a majority of accumulated assets had been acquired during 1996-97 because of low costs for power purchased by the Electric Utility. He noted that the average price of purchased power had increased during 1998, eliminating additional accumulation of assets. He said that $26.5 million in unrestricted cash was available in October 1997 and $26.7 million at the current time and that approximately $6.5 million and $6.7 million respectively was in excess of immediate needs.
Mr. Origliosso noted that policy-level direction regarding the use of accumulated assets had begun to emerge during Board deliberations and that preliminary staff recommendations regarding funding of the elements being considered were:
Commissioner Dyer and President Smith stated that they did not believe the Board should consider as much as $1 million for Low Income Assistance programs.
Commissioner Dyer said he was concerned that other potential priorities for the use of accumulated assets were not being fully considered.
Mr. Origliosso reviewed other opportunities for use of accumulated assets considered by staff and the Board. He said that developing land trusts and dealing with relicensing issues had been determined to be more feasibly dealt with by the issuing of bonds; that the Telecommunications Project was already funded through bonds; that the "lighter" of two employee Medical Trust possibilities was being recommended for funding; that low income assistance programs had been subsumed into the Universal Service Plan under consideration; and that determining rate revenue rebates had been determined to be too difficult to make equitable.
Vice President Osanka said that he believed it was important to recognize that a majority view on the use of accumulated assets did not represent the views of others with a different opinion.
President Smith said that she believed issues related to establishing a land trust had not been resolved and that the Universal Service Plan proposal needed additional discussion before it was acceptable.
President Smith suggested that consideration might also be given to using accumulated assets to reduce the increased Public Employee Retirement System (PERS) payment which would be required in the near future. Mr. Origliosso stated that EWEB did not consider the current PERS increase proposal acceptable and planned to seek an alternative in the near future. He said even a reduced requirement could consume the entire amount of accumulated assets and that it would be more appropriate to consider funding it as a rate-related issue.
Commissioner Bishop said she agreed that rate revenue rebates should not be considered for the practical reason that it would be difficult to equitably make such a distribution.
Vice President Osanka stated that page 5 of the October 29, 1997, memorandum of Mr. Origliosso dealt with the concerns raised by Commissioner Bishop and could be a convincing argument for reconsideration of the concern. Commissioner Bishop said that she continued to believe there were "too many variables" to use accumulated assets for any consideration of a rate revenue rebate.
President Smith said consideration of rate rebates could be discussed further at a later time. She asked Commissioners if they would be able to give conceptual approval to the use of $2.2 million of accumulated assets to replace reserve funds committed to a Year 2000 readiness program.
Commissioner Osanka stated that he believed such approval would be procedurally inappropriate in a Board Work Session.
Commissioner Dyer said that the program was funded in the 1999 Budget.
President Smith replied that the statement of Commissioner Dyer was accurate, but that the funding had been taken from targeted reserves and that she was proposing approval of the recommendation to use $2.2 million of accumulated assets to re-fund the reserves. Commissioner Bishop said that she needed more information about why the reserves should be re-funded before she could agree to the recommendation.
Commissioner Bishop said that she was confused about what would be included in the proposed Universal Service Program. She said the concept of the program paying for itself seemed to have been lost. President Smith replied that such issues would be discussed at a January Board meeting in response to a revision of the program under development by staff.
The Work Session adjourned at 7:40 p.m.