Board Members Present: Dorothy Anderson, Susie Smith, Patrick Lanning, and Sandra Bishop. Vice President Peter Bartel was excused.

Others Present: Dick Helgeson, JoAnn Andersen, Tom Buckhouse, Marty Douglass, Lance Robertson, Roseanna McArthur, Jim Origliosso, Dick Varner, Jim Wiley, John Yanov, and Krista Hince of the EWEB staff; members of the public, and Kris Aanderud, City of Eugene Minutes Recorder.

President Anderson called the work session of the Eugene Water & Electric Board (EWEB) order.

2002-06 FINANCIAL FORECAST

A. Electric Proforma

Dick Varner, Fiscal Services Supervisor, introduced the 2002-06 pro-forma for the fiscal forecast. Materials were provided to EWEB Board members and a PowerPoint presentation was made, a copy of which was also provided. Included in the 2002-06 financial forecasts were the following issues:

• Power Cost Trends and Issues
• Assume normal precipitation and hydro conditions (risk of 2nd bad water year)
• BPA holds rates through first year, augmentation costs thereafter
• BPA rates can change every 6 months
• varies based on loads, market prices and generation performance
• 25MW entitlement comes back, loads stay down
• Loads may come back as prices decline or due to economy
• BPA may adjust entitlement in out years if loads stay down
• 4-5 average MW additional purchase of renewable energy each year at market
• Other new resource acquisitions are revenue neutral

Commissioner Smith expressed a concern that there be funding for substantial improvements in the five-year Master Plan and asked if there was any anticipation for capital expenditures during the fiscal period. Mr. Varner responded that there may be capital purchases, all of which would fit within the assumptions provided. He added that the one wildcard would be the geothermal project, which would not fit the cost pro-forma.

Mr. Varner continued to review pro-forma issues:

Labor and Benefits Trends and Issues

• Aggregate wage adjustment of 4 percent per year
• PERS buydown and other reforms stabilize employer rates
• Health insurance costs continue with a 15 to 20 percent increase annually
• No explicit funding for new FTE

Electric Non-Labor Costs

• 3 percent per year for most items, 3.5 percent for some generation related items
• Retiree medical insurance climbing as fast or faster than employee costs
• Increased funding of capital from rates - get much closer to depreciation
• Additional funding for bad debt write-offs and low income assistance

Other Issues

• Increase debt service from relicensing and other system improvements
• DSM funding at 5 percent from revenues plus conservation and renewables discount
• High uncertainty in year end 2001 reserve position
• No provision for major Master Plan funding

Rates

• Major increase in 2001 - average over 30 percent
• Major decrease by 2003 - wind up 10 percent or so above current rates
• Annual increases of 3 percent or so 2004-06
• Potential for 6 month adjustments due to BPA
• Potential for annual adjustments based on power results

President Anderson asked if grant funds were received for riparian work, how would this impact efforts. Mr. Varner said that until there was a better definition of the Master Plan and what assumptions might be made for financial revenues, it would be a "shot in the dark."

Commissioner Smith suggested that if there was a way to set aside funds, a five-year minimum for reinvestment for building safety and similar issues, she would feel more comfortable. She said that she was not suggesting a major financial commitment, but that funds need to be identified for capital needs. She said that planning for capital needs to avoid a spike, rather than collecting funds or looking at another form of debt financing would be preferable.

Commissioner Bishop asked if the legislature passed the bill which would allow for bonding for PERS. Mr. Varner said it was passed and that it will allow EWEB to sell bonds for employer rates. He said that this should stabilize the rates.

Commissioner Bishop asked if the telecom debt on the bonds would show up in 2002, in the amount of $750,000. Mr. Varner said that was correct, but added that income was projected just over $300,000 from MetroNet and other projects, which would decrease the net expense to approximately $400,000.

Commissioner Bishop asked what would be paid "in-lieu-of-taxes" on the $300,000 revenue. Mr. Varner responded that there would be some franchise fees and expenses to the City. Mr. Yanov added that seven percent of MetroNet revenues would go directly to the City.

Commissioner Lanning asked how the estimate of four percent wage adjustment was established. Mr. Varner said that it was based on historical wage increases and adjustments in the market.

Commissioner Lanning asked what the long term plan might be to address the retiree medical insurance costs. Mr. Varner said that a project was scheduled for 2002 to study this issue.

A. Water Pro-forma

Mr. Varner reviewed the 2002-06 Financial Forecasts for Water Utility, as noted below:

Water Labor and Benefits trends and issues

• Aggregate wage adjustment of 4 percent per year
• PERS buy down and other reforms stabilize employer rates
• Health insurance costs continue with 15 to 20 percent increases
• Increased FTE for operation of expanded Hayden Bridge and SCADA

Non-labor costs

• Power costs driven by electric rate changes
• 3 percent per year for most items, 3.5 percent for chemicals
• Increased funding for source protection
• Retiree medical insurance climbing as fast or faster than employee costs
• Increased funding of capital from rates - get much closer to depreciation
• Additional funding for bad debt write-offs and no additional funds for low- income assistance for water bills

Commissioner Smith asked if the quarter million was envisioned to provide for contractual services or FTE with benefits. Mr. Varner said that it was intended to hire based on contractual services. Dick Helgeson added that about $100,000- $150,000 would be used for FTE for monitoring and other activities which were part of the conservation protection program.

Mr. Varner continued the review of Water Utility pro-formas.

Other issues

• Water conservation funding at 5 percent of revenues
• High uncertainty in year end 2001 reserve position
• No provision for major Master Plan funding
• Lost margin on transfer of Glenwood by 2005

Water rates

• Major increase in 2001 - average over 10 percent
• Annual increases of 4 to 6 percent 2003-2006
• Rate increase at high end of range in year SUB starts providing water to Glenwood

President Anderson asked if there was any payment from SUB for the service provided to Glenwood. Mr. Helgeson said that there was no specific payment. President Anderson said that it was lost income and that there should be some payment for the potential lost income. Mr. Helgeson said that there was an assumption that the rates would be stable for the next three years, which would provide parity.

Commissioner Lanning asked if there was any way to anticipate the impact of the Hynix announcement. Mr. Varner said that Hynix has announced a six-month shutdown for retooling. He said that it should not be a big deal on the electric side, but that without more information on the water side, it was difficult to determine the full impact. He added that he hoped that additional information would be available from Hynix in the next week or two, but that he did not anticipate it would have a big impact on this budget year.

A. Steam Pro-forma

Mr. Varner also reviewed issues for the steam utility, including:

• Forecast not complete - doing in context of steam plan update
• Uncertainty about Sacred Heart contract
• Natural gas prices looking positive for reduction in fuel rate
• May need to increase base rate for non-fuel cost escalation

Mr. Helgeson added that he had been in contact with Sacred Heart and that discussions were continuing to determine the impact of their plans.

Mr. Varner then reviewed the proposed schedule for the 2002 work plan and budget; a detailed copy of which was provided to Board members.

Commissioner Lanning asked if he could get information on the demographics for salaries and retirements. He suggested that an individual session would be sufficient. Mr. Varner asked him to schedule to receive that information.

2002 BUDGET ASSUMPTIONS

Mr. Varner reviewed the 2002 budget assumptions, including:

2002 Budget Assumptions

• Labor and Benefits
• 4 percent of payroll available for merit increases, promotions, etc.
• Staffing changes funded from reallocation of FTE and reductions in Non-labor O&M - 1.5 FTE in Water, early hires in EMS for Conservation Program
• PERS at 21.42 percent effective July 1, 2001, increase to 24 percent July 1, 2002
• Medical benefits increase 11 percent (reduced from 17 percent due to plan changes)
• Work Compensation is flat
• Other benefits increase due to changes in disability coverage
• Non-labor O & M
• Increases generally limited to 3 percent above 2001 budget
• 3.5 percent increase assumed for services associated with power productions contracts and for water treatment chemicals
• Increased write-offs for bad debts to $600,000 between Electric and Water. $2.5 million low income bill assistance in Electric.
• Increased retiree medical insurance by 15 percent - less benefit from plan changes on retiree side
• Increase in power costs for water utility tied to electric rate increase
• Customer
• 1.5 percent increase in customers
• 1.5 percent increase in non-contract classes
• Price elasticities in Electric and shut down at Weyco cause reduction of about 25 aMW from that level

Commissioner Bishop asked if the 1.5 percent increase in customers could be separated from 1.5 percent increase in sales. Mr. Varner said that a normal assumption would anticipate the increased level in customers and sales, but that the 25 aMW decrease was anticipated below the projected growth. The projected growth equaled approximately 4 to 5 percent. Mr. Varner resumed the budget assumptions:

• Capital
• Increase capital from rates in Electric by $2.4 million
• All customer work in Electric now paid by customer
• Increase capital from rates in Water by $200,000
• Additional $2.5 million in debt service in Electric due to issuing $35 million in bonds. Addition of $700,000+ debt service on Phase 1 telecom bonds
• Rate funding for conservation in Electric and Water at 5 percent of retail revenues. In Electric, this is supplemented by .5 mills per kWh BPA conservation and renewables discount.
• None-rate Income
• $314,000 from MetroNet for Debt Service, rental fees and share of overheads
• $200,000 from increase in sewer billing fees
• $150,000 in payments from SUB for services related to Glenwood in Electric
• Wholesale Power
• Average hydro with exception of shutdown of Walterville for 6 months for construction of relicensing improvements and carryover of low water from 2001 drought
• Surplus sales at current forwards - average of about $60 per Mwh
• Purchase of additional renewables equal to 1.5 percent of load.

Commissioner Smith asked if there was any sense of EWEB's position for claims for back payments for proceeds from wholesale power marketing during the energy shortage. Mr. Varner said that it would depend on how the payments might be structured. He said that there was a proposal from the Oregon Attorney General's office to the Federal Energy Regulatory Commission (FERC) that load serving utilities that sold surplus power off their systems be exempt. The premise was that these utilities do not have market power or influence on the price, but were taking the market price available. Mr. Varner said that this would be an important exemption for EWEB. He added that EWEB bought power for reasonably expected loads on the EWEB system.

Mr. Varner said another potential would be not only abrogating the real-time activity, but also abrogate the former purchase activity as well. If EWEB cannot have $200,000-$300,000 to $400,000 sales in the real time market, then EWEB should not be paying $200,000- $300,000 to $400,000 for purchases made when the same market conditions were present. This would also leave EWEB in "not a bad position." The worst possibility would be to deal with real-time activities, including municipals, in which case EWEB might be liable for rebating tens of millions of dollars. In turn, EWEB would be looking at rebates from its customers, including the City of Eugene, Weyerhaeuser, and an endless chain of events. Mr. Varner said that EWEB had paid the City of Eugene $3 million to $4 million in-lieu-of-taxes based on the margin that EWEB was getting. If there were no margins, EWEB would be looking to recover these funds from the City of Eugene. He noted that EWEB sold $90 million worth of electricity to California, which placed EWEB about in the middle of the list. This places EWEB in a similar position as Portland General Electric, Avista and investor owned utilities find themselves in at this time.

Mr. Varner noted that the Oregon Attorney General was an intervener in the FERC case. Mr. Varner said that there was a settlement discussion in front of an administrative judge and the decision of the administrative law judge has been forwarded to FERC. In addition, there was a recommendation from the Oregon Attorney General to exempt load serving utilities, which would apply to EWEB. The full FERC was scheduled to hear this issue in the next week. There was also a recommendation to hold a separate proceeding to deal with just northwest power issues, which would run for approximately 60 days. He said that discussions with EWEB attorneys continue.

President Anderson suggested the Work Session be adjourned and that the Regular EWEB Board meeting start at 7:00 p.m. There was no objection.

The meeting was adjourned at 6:53 p.m.

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Assistant Secretary President