Board Members present: Susie Smith, Dorothy Anderson, Peter Bartel, and Mike Dyer. Commissioner Bishop was absent and excused.
Others present: Garry Kunkel, Electric Division Director; Terry Bequette, Cathy Bloom, Cathy Hamilton, Dick Helgeson, Roseanna McArthur, Kris Middlewood, Jim Origliosso, Scott Spettel, Dick Varner, Debra Wright, and Krista Hince of the EWEB staff; and Daniel Lindstrom, Minutes Recorder.
President Smith called the Work Session of the Eugene Water & Electric Board (EWEB) to order at 5:40 p.m.
Treasurer Jim Origliosso stated that the Work Session would consider EWEB Financial Policies. He said Commissioners were encouraged to provide feedback and suggestions for change and that the policies and recommended changes would be placed before the Board for approval at its October meeting. He reviewed the agenda of the Work Session.
CONTEXT FOR FINANCIAL POLICIES
Mr. Origliosso stated that EWEB bond resolutions were "weak," in that they did not have many proscriptive requirements. He said existing financial policies filled gaps in the resolutions, facilitated acquiring bonds, provided flexibility in their issuance, and led to lower rates.
Mr. Origliosso said that financial policies were used by staff to analyze, solve, and present financial problems to the Board. He explained that, with "Financial Strategies," they formed the basis for the EWEB Financial Management Plan.
Mr. Origliosso reported that the most recent comprehensive review of financial policies had taken place in 1995 and that it was currently appropriate to reexamine them, since new bonds were about to be issued.
FINANCIAL POLICIES REVIEW
Mr. Origliosso distributed copies of a document entitled "EWEB Financial Policies as of August 17, 1999." He explained that it contained information about existing policies - whether they had been approved by the Board, the source of their establishment, if staff suggested they needed change or interpretation, the financial structures on which they were based, and comments. He reviewed the policies.
Financial Entity
EWEB will account for separate financial entities and will clearly define relationships among those entities to facilitate management decision making.
Mr. Origliosso suggested that refinement of the Financial Entity policy, or a new policy, might be needed to manage issues related to the identification of "business lines." He said facilitation of bonding for future construction required by the Telecommunications element of the Electric Division was an example of situations not addressed. He said other "lines" could include Electric Division generation, transmission, wholesale, and customer sales/service operations.
Rate Sufficiency
Rates and charges will be adequate to provide revenues sufficient to maintain a high degree of financial soundness over and above requirements for compliance with existing bond covenants.
Mr. Origliosso suggested that the Rate Sufficiency policy was more conservative that was likely required and that interpretation of it might be needed. He said it provided support for EWEB's existing good bond ratings. He said rates were driven by conservative budget assumptions.
Rate Stability
Certain funds will be held in reserve for the purpose of mitigating the customer rate impact of unanticipated events.
Mr. Origliosso suggested that funding of the Operating Reserve was not described well in the Rate Stability policy. He said a "rate stabilization" procedure for how revenue from current income could be deferred to future years would be a way to budget for reserve accounts.
Budget
The authorized annual spending plan each year will be balanced such that resources meet or exceed requirements in each fiscal year.
Mr. Origliosso suggested that an interpretation of the Budget policy could clarify that rate increase assumptions could by used to balance budgets.
Capital Investment
Net investment in utility plant assets will be maintained, including such capital additions and reserves as may be necessary to support growth in loads and customer base.
Mr. Origliosso suggested that an interpretation of the Capital Investment policy was needed to deal with issues related to the Capital Improvement Reserve exceeding its full funding, placing unneeded strain on operating funds.
Major Capital Improvements
Funds to acquire major capital improvements will be provided in accordance with the estimated useful economic lives of such assets.
Mr. Origliosso explained that changes in the Major Capital Improvements policy were necessary to accommodate changes in tax law restricting the ability of publically held utilities to issue tax exempt bonds for capital improvements.
Capitalization
Major utility expenditures for labor, materials and/or services which result in revenue or benefits in future reporting periods will be capitalized and allocated to match such future revenue or benefits through periodic amortization or depreciation.
Mr. Origliosso said the Capitalization policy did not require change, but that auditing confusion regarding capital/expense determinations needed to be addressed.
Investment
EWEB's investment portfolio will be managed to achieve safety of capital, achieve market rates of return, and provide sufficient liquidity to meet disbursement schedules.
Mr. Origliosso suggested that new Oregon Revised Statutes allowing the use of derivatives for power supply purchases could be included in the interpretation provided for the Investment policy. He said the Investment Committee needed to be restructured for better efficiency.
Commissioner Bartel asked about investment income projected in the current budget. Mr. Origliosso replied that most EWEB investing was done through the State's Local Government Investment Pool. He said more aggressive investment practices could be followed with increased availability of funds.
Risk Management
Risks attendant to EWEB's operations will be pro-actively managed in a cost-effective and efficient manner consistent with prudent utility practice
Mr. Origliosso suggested that no changes were needed to the Risk Management policy, but that minor changes to power risk management policies would be recommended as markets and industry practices matured.
EWEB Risk Manager Debra Wright referred to her memorandum dated August 12, regarding implementation of wholesale power risk management policies, distributed with the agenda of the meeting. She explained that Board responsibilities for risk management included in the memorandum were based on "Generally Accepted Risk Principles" developed and published by Price Waterhouse Coopers. She reviewed the responsibilities, as follows:
Ms. Wright reviewed Wholesale Power Risk Management Policies included in her memorandum, as follows:
Ms. Wright stated that the Special Meeting of the Board to follow the Work Session would consider a recommendation that Wholesale Power Risk Management Policy 3 be changed, as follows:
The maximum exposure limit for EWEB's net position
value variance of net power cost from approved
budget will not exceed sixty-five percent of the
forecasted budgeted
year-end cash operating reserves.
Ms. Wright explained that the changes were being recommended to better reflect the experience of the Risk Management Committee and to avoid ambiguous terms which the committee had not been able to satisfactorily interpret.
Ms. Wright displayed a document entitled "Electric Utility Contribution Margin Calculation" and explained its operation and significance. She said the spreadsheet was a valuable tool for understanding the evaluation and limits of wholesale power marketing. She said it was hoped Commissioners would become familiar with its use.
Ms. Wright asked how frequently the Board wished to receive information about wholesale power risk management practices. President Smith said she was most concerned how the practices affected operational and management decisions. Ms. Wright stated that the Risk Management Committee agreed that the calculation tool needed to be utilized with flexibility, but that it had become a valuable and accurate measurement tool. Mr. Origliosso added that "back casting" had been used to make changes in the risk management practices and to bring stability to wholesale power marketing.
Billing and Collections
Services will be billed in an accurate and timely manner and collected with fair and equitable consideration of all customers.
Mr. Origliosso said that impacts of the proposed Universal Service Plan approach needed to be considered in relationship to the Billing and Collections policy, but that he believed it was broad enough to support the approach without change.
Cost Management
EWEB will take cost management actions to maintain a high degree of price competitiveness from across all products lines, while being highly responsive to the needs of the community.
Mr. Origliosso stated that changes were being prepared to the Cost Management policy regarding authorized non-power costs. He explained that what to bring to the Board as Budget Amendments was an example of what needed to be addressed in the changes. He said the new policy would be presented to the Board for approval.
BOARD DISCUSSION
Commissioner Dyer said he believed the existing EWEB Financial Policies were basic and displayed common sense.
Commissioner Bartel asked for illustrations of capital expenditures which would and would not be eligible for tax exempt bonding. Mr. Origliosso replied that construction of an electric substation would likely be eligible for tax exempt funding, but that a generation plant with a number of participants would not. He explained that "private use" of a project was a simplification of determining factors.
President Smith said she questioned the wisdom of raising rates to provide rate stability because she did not believe current rate payers should pay for future needs. She suggested it would be more appropriate to set rate stabilization as a purpose of the Operating Reserves and allow adding to and using it as a budgetary operation. Commissioner Dyer said he agreed and suggested that a rigorous method of calculating needed Operating Reserves should be developed.
Commissioner Bartel said he believed Wholesale Power Risk Management Policies were very responsible.
President Smith determined there was consensus to adjourn the Work Session and convene the scheduled Special Meeting early, adjusting its agenda to accommodate those who would not anticipate consideration of the 9th Circuit of Appeals decision on Leaburg and Walterville Hydroelectric licenses until after 7:30 p.m.
The Work Session adjourned at 6:55 p.m.
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Assistant Secretary President