Board Members Present: Dorothy Anderson, Patrick Lanning, Ron Farmer, and Paul Conte. Commissioner Sandra Bishop was excused.

Others present: Randy Berggren, Dick Varner, Debra Smith, Andrea Mason, Roseanna McArthur, Tom Buckhouse, Jim Origliosso, Dick Helgeson, and Krista Hince of the EWEB staff; and Kimberly Young, City of Eugene Minutes Recorder.

President Dorothy Anderson called the Board Planning Session to order.

TUESDAY - JULY 9, 2002

INTRODUCTION/AGENDA REVIEW

Those present introduced themselves.

General Manager Randy Berggren reported that he would facilitate the retreat to ensure that the Board's time was used effectively. He said he would focus the Board on where he perceived there was a divergence of opinion, as he thought that would be important to staff as it was developing the fiscal year (FY) 2003 budget.

Mr. Berggren stressed the retreat focuses of familiarizing the Board with the status of the work the utility has in progress, the fitness of the organization as evidenced through the strategic model, and the priority work assessments for the FY03 budget.

Mr. Berggren reviewed the retreat agenda. He said that he would provide the Board with his assessment of the "bottom line" as it regarded each agenda topic. Regarding the five-year financial budget assumptions, Mr. Berggren said that the Board would hear that EWEB was performing better than anticipated for 2002, and that was good news. He said that EWEB's commercial paper debt repayment strategy was significantly ahead of projections. The Tool Kit implemented as part of the FY2002 budget was meeting the targets established. EWEB had limited financial flexibility for 2003; no rate increases were planned, and minimum reserves would be maintained. EWEB has constrained capital funding, constrained borrowing capability, and constrained operations and maintenance funding. Mr. Berggren summarized by saying there was no new money for additional work in the 2003 budget.

Regarding the goals and strategies, Mr. Berggren said that EWEB made good progress on its 2002 strategy work. Work in 2002 on several change strategies was completed and are now considered part of our routine or business as usual. Most strategies continue into 2003, as part of multi-year efforts, he would recommend remaining capacity for additional work be allocated to such tasks as updating the integrated electric resource plan and examining the capital funding requirements for underground cable and pole replacement.

Regarding the priority assessment, Mr. Berggren said that rates stability and commercial paper debt repayment were EWEB's top priorities. He perceived that the Board and staff were in sync on EWEB's priorities. New priorities need to focus on updating and reviewing core business needs.

By way of providing context regarding the organization internally, Mr. Berggren said he believed that the organization, while fit and surviving, was under stress. He reviewed the many factors that contributed to the stress and that also impacted customers, including the three rate increases over the past 18 months on top of the recession, and the February 2002 wind storm. He noted the increase in customer write-offs for debt collection being experienced by EWEB, which increased from $150,000 in 1992 to close to $1 million in 2000-2001. Through 2001-2002, EWEB had dropped that figure to about $500,000 annually. Mr. Berggren said that was not easy given that the inability of many customers to pay. He noted the additional resource impact created by the activities peripheral to that topic, including increased customer contacts and staff time spent on payment arrangements and credit activities.

Mr. Berggren believed that customers were increasingly skeptical about EWEB and more judgmental because they were affected by media reports about other energy-related topics, such as the failure of Enron and the 2001 energy crisis, and misinformed about the nature of EWEB, such as not knowing it was publicly owned. That skepticism was reflected in EWEB's customer surveys.

Mr. Berggren noted the impact of increased customer activity on EWEB and provided the Board with statistics on the drop in employees to customers over the last ten years, saying there was a 17 percent growth in customers over that time and an eight percent reduction in employees. He spoke of the lost call rate, calling it unacceptable, and noting that a six-percent target was being suggested to the Board. However, he believed it would further aggravate the staffing pressure. Mr. Berggren recalled EWEB's FTE reduction strategy and said the solution to the lost call problem could be as high as five FTE. He reported that EWEB's walk-in traffic had increased by 22 percent since October 2001. That, on top of increased call volume, meant some employees were under extreme stress. Employees were feeling stressed, worried, and in some cases under attack by the customers, which was a major change from the past.

Mr. Berggren noted record activity in the energy management program in 2001-2002 and said that EWEB's ability to fund that level of program activity was threatened.

Mr. Berggren noted the impact of other Board Tool Kit decisions, such as its decision to reduce operations and maintenance expenses, reduce FTEs, and place a ceiling on merit increases, on employee morale and outlook. There was limited dollars for employee development and training and reduced capacity to enhance employee support systems or tools. That was on top of increased work loads from other related decisions. He said that employees were understanding but stressed. He thought morale was generally good, but anxiety levels had increased.

Mr. Berggren anticipated that EWEB employees and retirees would perceive upcoming benefit changes to be a "take-away." He said that, in combination with other factors, had lead to another unionization effort on the part of the IBEW. It was the third such effort in the last five years. There had been two votes taken in that time, and the union drive failed in both cases, although the difference in the last election was eight votes. He did not think EWEB could take the results of this effort for granted, attributing that to a desire on the part of employees to protect themselves from the volatility of the politics and business climate that existed. However, he believed that IBEW had some credibility issues that had hindered their recent organization effort.

Mr. Berggren emphasized the increased work load created by the master plan implementation, the customer communications required by the energy crisis and drought, the Walterville and Leaburg relicensing efforts, the settlement agreements with the federal fisheries agencies, the Water Supply Plan, the telecommunications work, and the fluctuating nature of wholesale power markets. He also noted work on the upcoming Bonneville Power Administration (BPA) contract and the work EWEB had done in regard to the bond sales for unplanned finance and debt work.

Commissioner Farmer asked if there was a specific strategy in place to address the unionization efforts, and who was leading that. Mr. Berggren said that there was a strategic approach in place that reflected the Board's direction. He said that EWEB did not resist unionization; if employees wanted a union, they could chose to have one. He said that EWEB would not agree to a union proposal until the employees voted for one.

Commissioner Farmer said that many private companies were under stress and asked if Mr. Berggren believed that stress levels were greater at EWEB than in the general economy. Mr. Berggren said it was hard for him to say, given that his experience was internal to EWEB. He said that EWEB was much better off than some companies and perhaps not as well off as others. However, he believed the organization stress at EWEB was higher than at any time since his arrival in 1985.

Five-Year Financials/Budget Assumptions

Dick Varner, Fiscal Services Supervisor, provided a PowerPoint Presentation on the five-year financial forecast and budget assumptions. Copies of the presentation were provided to Board members.

Mr. Varner emphasized that key to the forecast was how fast the economy came out of the recession, which was an unknown at this time. Another key assumption was normal generation over the forecast period. Mr. Varner said the projections use forward price curves based on what power was trading for today. He acknowledged that the actions taken by the BPA were an unknown factor, but said it appeared the agency's power rates would not go down until late 2003 or early 2004.

Mr. Varner touched on labor and benefits costs, saying the forecast assumed wages would increase about four percent yearly, that FTE reductions would be gradually restored to 2002 levels in 2004, and projected a PERS rate increase from 15 to 19 percent in 2003. Medical insurance costs were projected to increase as well.

Mr. Varner noted assumptions about debt issuance in the upcoming years.

Mr. Varner reported that the forecast did not include any significant resources acquisitions. He noted that the forecast did not include the Arrowrock project.

Mr. Varner provided the financial details of the electric and water utility forecasts.

Mr. Varner invited questions.

Commissioner Conte determined from Mr. Varner that the forecast assumed no changes in the Contribution-in-Lieu-of-Taxes (CILT) that EWEB paid the City. Mr. Berggren added that, based upon the Board's direction, staff was attempting to negotiate a relief mechanism to the CILT to lower EWEB's obligation in case it encountered a situation similar to what was experienced in 2001. The forecast assumed no such situation, and thus assumed the status quo relationship regarding EWEB's CILT obligation.

Commissioner Farmer referred to the cash flow scenario for the electric utility and asked why debt payments continued to escalate, not drop, after the short-term debt was paid. Mr. Varner clarified that the cash flow scenario did not include the short-term debt.

Commissioner Farmer asked why the BPA's rates would not go down in the future. Mr. Varner said that, over the remainder of the rate period, the agency locked itself into some prices that looked good at the time they were negotiated, but now were significantly above market. Mr. Berggren added that the BPA took the same approach as California, and filled its short position in the market with five-year contracts; subsequently, prices came down. Mr. Varner said that the issue was complicated by the agency's decision to set rates on cost assumptions from 1996-97 regional review that had not held true, and by the fact that the agency's assumption staffing levels could be decreased on the power management side was not realized. The agency also overestimated the revenues it would realize for surplus power.

Mr. Berggren said that, given the many over-optimistic assumptions made by the BPA on power market prices and expense reductions, the agency would be able to do relatively little in the next five years. When the five-year contracts expired and the agency was back in a real time market, the normal cost escalation pressures would begin to escalate on the BPA. He said his discussions with BPA staff did not change his conviction that the 50 percent increase in wholesale power prices in the northwest would ever be reduced.

Commissioner Farmer asked how far off the forecast could be before EWEB was in fiscal trouble. Mr. Berggren indicated that he would provide the Board with the scenario views so that the Board could get a sense of "priority on risk of uncertainty."

Commissioner Lanning asked if the forecast contained assumptions about on-site facility upgrades. Mr. Varner indicated that the budget contained about $110,000 annually for capital improvements that kept the current facilities operating.

The Board took a brief meeting break.

2002 Goals and Strategy Review

Mr. Berggren provided an update on progress on EWEB's goals and strategies, summarizing the information contained in a document in the meeting packet entitled Eugene Water & Electric Board 2002 Goal and Strategy Update-July 3, 2002. Members asked questions throughout the review clarifying the information presented.

Regarding Strategy 1-1, Tell EWEB's story of excellent community citizenship, Commissioner Lanning thought it reasonable to say to a customer that EWEB had to pass on market increases, but EWEB was choosing to implement tiered rates on its own. He questioned whether the EWEB Board was doing as much as it could in this area. He said that the issue of trust was new and he thought the Board needed to do more. Mr. Berggren reminded Commissioner Lanning that the Board previously agreed that as part of the 2002 budget year, staff would do an early review of the tiered rates approach, and staff planned to return with that review in September, 2002. He noted that the strategy in question assumed no shifts in EWEB's approach. Commissioner Lanning expressed concern that EWEB was not communicating with its customers sufficiently about the tiered rates because of the lost call rate. Mr. Berggren said that the September report would address that issue as well.

Roseanna McArthur, Corporate Services Director, mentioned that there was a communications plan in place that helped to address such issues and laid the groundwork for effective delivery of EWEB's story regardless of the issue.

Commissioner Farmer said that EWEB needed to have a strategy to communicate the fact it had no control over the rate increase, and should not be afraid to tell customers when the Bonneville Power Administration "screwed up." Mr. Berggren said that staff worked hard over the last 18 months to help customers understand the link between the actions taken by the BPA and their affect on EWEB. It was difficult to get the local newspaper to communicate that information at a time when the paper had editorially targeted EWEB for its perceived shortcomings. Responding to a question from Commissioner Farmer, Mr. Berggren said that EWEB had done a series of op-ed pieces to respond to questions and criticism.

Debra Smith, Telecommunications Project Manager, confirmed, in response to a question from Commissioner Farmer about Strategy 1-2, Implement communitywide public telecommunications, that there was $5 million left after the sale of the telecommunications bonds. She suggested there may be an opportunity to use those bond proceeds for some electric capital work. Mr. Varner added that staff was looking to use about $1 million of the $5 million for such projects as the communications tie to Lane Community College. Commissioner Farmer asked if it would be more difficult to make MetroNet more financially feasible in the future if the bond proceeds were used for other purposes. Ms. Smith said yes, in the sense it could be considered an equity contribution, or the seed money, to finance telecommunications. She thought that could still be true. EWEB could make judicious use of some of those funds without significant risk. She added that EWEB was at the point of having to use the moneys.

Responding to a question from Commissioner Farmer regarding Strategy 1-3, Implement master site plan, Mr. Berggren said that Deborrah Brewer, Intergovernmental Affairs Coordinator, represented EWEB in the federal courthouse planning process. Commissioner Conte said that it did not appear that EWEB was represented in the detailed decision-making. Mr. Berggren said that EWEB had fought to become involved in the decision-making process. He said that the City planners often took for granted what EWEB would and should do with its property, which was part of the ongoing City-EWEB relationship issue that EWEB continued to work on. President Anderson added that she thought EWEB was making progress in that arena. Commissioner Farmer said that elevation of EWEB's role in the decision-making process was extremely important to him. He wanted to ensure all EWEB's options were protected and its property not devalued. Mr. Berggren concurred.

Mr. Berggren continued his review.

Regarding Strategy 2-2, Integrate Sustainability Practices into Day-to-Day Operations, Commissioner Conte asked how EWEB would address a potentially controversial development that was feared would lead to degradation of water quality in the McKenzie River. Mr. Berggren said that such proposals would be more directly connected to EWEB's watershed protection work in the basin and EWEB would engage the issue through that mechanism.

Dick Helgeson, Director of Water & Steam Divisions, noted the existence of EWEB's water source protection program. He added that people were often mobilized by concern about impacts on the drinking water source, but EWEB was not always able to document a clear connection between such developments and any impact that might show up at EWEB's intake pipes. He said that EWEB needed to be careful about how and where it engaged those issues. Mr. Berggren said that water quality was a very powerful issue, and people often attacked new development proposals on that basis. For that reason, EWEB needed to be careful how its position was represented. Commissioner Conte asked how EWEB evaluated upriver developments given that one development did not create a problem, but multiple developments could have an impact. Mr. Helgeson said that EWEB's focus was on the lower stretches of the river, where development pressure and runoff issues existed. EWEB did extensive water quality monitoring in that part of the river. He said that EWEB could revisit that approach, but proximity of impact near the intake was the highest priority.

Responding to questions generated by Strategy 3-3, Improve the efficiency of the Billing and Collections Process, Ms. McArthur reviewed the changed billing process for residential customers.

Mr. Berggren continued his review.

Referring to Strategy 4-1, Reduce revenue requirement uncertainty, Commissioner Farmer asked if there were written policies related to hedging. Mr. Varner responded that power risk management guidelines were developed in 1998-99. Jim Origliosso, Treasurer, added that the Board had a role in reviewing and refining EWEB's risk management policies as industry changes occurred; in turn, that drove changes in traders' guidelines and procedures. Mr. Varner further noted the existence of EWEB's five-person risk management committee. Mr. Berggren noted the involvement of Coopers and Lybrand in the initial development of the policies. Commissioner Conte encouraged the staff to consider whether additional outside investments in the form of consultant time on approaches that diminished risk or enhanced return might be appropriate in this area.

Mr. Berggren continued his review.

Commissioner Farmer determined from Mr. Varner that the $11 million in bond proceeds was for the water utility and separate from the electric utility. Mr. Varner said that over the next six months, staff would look at the question of what funding source was available to pay the cost of the source, and to some extent that was based on the nature of the supply (new or purely as a back-up source) as some element of the expenditure may be eligible to be paid for from systems development charge revenues. Mr. Farmer asked what debt capacity existed on the water side. Mr. Origliosso estimated $20 million in debt could be assumed on the water side without much impact. EWEB had SDC availability beyond what was committed to current projects. Ms. Smith added that the appropriate funding for the groundwater source was a future Board topic and she anticipated that the Board would receive more information soon.

Mr. Berggren asked the Board if it had items it wished to highlight for the following day. He indicated that the retreat would recommence the next day at 8 a.m.

Responding to a question from Commissioner Lanning, Mr. Berggren said that the lost call issue was not included in the goals and strategies; he raised the issue as one that needed to be addressed through the budget process.

The meeting adjourned at 8:45 p.m.

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Assistant Secretary President