Board Members present: Dorothy Anderson, Patrick Lanning, Sandra Bishop, Paul Conte, and Ron Farmer.

Others present: Randy Berggren, JoAnn Andersen, Tom Buckhouse, Ken Beeson, Terry Bequette, Marty Douglass, Bill Fletcher, Debra Smith, Jim Oligliosso, Jim Wiley, Dick Varner, Scott Spettel, Roseanna McArthur, Lance Robertson, and Krista Hince of the EWEB staff; Gavin O'Neill, City of Eugene Minutes Recorder; and Ben Doty and members of the public.

President Anderson called the Work Session to order at 5:30 p.m.

TELECOM UPDATE

Debra Smith, Telecommunications Manager, provided a presentation on the future direction of telecommunications at EWEB. She reminded the Commissioners of their February, 2001 decision to drop Plan A, the short-term plan that would have provided universal access within three years, and their direction to staff to develop a decision tree as a first step to determining where next to go with telecommunications. At that time, staff had recommended that further work be done on a business plan for Plan B, or "MetroNet," which was intended to meet all the utility's telecommunication objectives over a longer period of time.

Ms. Smith suggested that what was now before the Board was a combination of earlier plans C and D, two approaches that she characterized as asset utilization strategies that maximized EWEB's investments in its existing infrastructure. She highlighted the current staff recommendation, outlined in a memorandum to the Board from Ms. Smith dated September 25, 2002, entitled Telecommunications Future Strategy, which was for the Board to direct Mr. Berggren to negotiate and execute an agreement with NoaNet that facilitated the connection of NoaNet customers to the EWEB backbone and leased dark fiber to NoaNet for the use of its customers. She emphasized that the agreement would be consistent with the pricing model outlined in the memorandum, with terms not to exceed three years.

Ms. Smith noted that the Board's approval of the recommendation would also require changes to the Board's telecommunications objectives and approval of the pricing model. She said that the agreement would be subject to a credit review of NoaNet or some other approach that satisfied the Board in regard to EWEB's credit exposure. Ms. Smith anticipated that any policy decisions the Board made in relationship to NoaNet would be applied to other service providers.

Ms. Smith introduced Ben Doty, Chief Executive Officer of NoaNet. Mr. Doty provided an overview of NoaNet's goals and objectives.

Mr. Doty said that Eugene was one of the five major information centers in Washington and Eugene. He presented a map of Bonneville Power Administration (BPA) fiber optic and transmission routes in Oregon and Washington. NoaNet was a non-profit co-operative. Its prime members were community-owned electric utilities. NoaNet was providing Internet access to remote sites in Washington and Oregon.

Commissioner Farmer asked Mr. Doty if NoaNet Oregon was a separate entity from NoaNet Washington. He indicated that the bank for which he worked, Bank of America, had financed NoaNet Washington, and that he did not want a conflict of interest. Mr. Doty said that the two entities were separate. NoaNet Oregon had a separate staff from NoaNet Washington. He explained that NoaNet Oregon's regulatory agency is the Oregon Public Utilities Commission (PUC), and it was funded by the Co-Op Finance Corporation in Oregon. NoaNet was the only telecom venture in the United States funded by the CFC in the previous 18 months.

Mr. Doty went on to explain that NoaNet offered "cost-based broadband digital transport." NoaNet could transport the digital traffic of a telephone company. NoaNet saw itself bringing state of the art technology to rural America, including schools, libraries, and hospitals. Its network supported voice, video, and data. Mr. Doty stated that unlike other companies, NoaNet charged no "mileage fee." This meant it offered a fixed cost regardless of whether one was dealing with a next door neighbor or someone in Seattle. This made for a very competitive price in rural areas where the "mileage fees" were high. NoaNet had a "pay as you grow" philosophy so that the customer was not paying for fiber they were not using. This created a cost-effective way to scale applications for small businesses who wanted to grow. Mr. Doty said that by joining the co-op, EWEB would become an enabling tool for the people and businesses in the surrounding rural areas to prosper and grow. He saw this as an investment in the community. NoaNet could bring competition to an area previously served by a monopoly provider.

Commissioner Farmer asked if any organization from the "loops" south and west of Eugene were willing or able to financially step up and "light" the fibers. Mr. Doty said NoaNet was lighting these fibers themselves.

Mr. Farmer asked if NoaNet was in competition with another company. Mr. Doty said NoaNet was trying to work in cooperation with whatever companies have an interest in the shared goals of NoaNet to bring this technology to Oregon, though presently no one seemed to be in a position to take NoaNet up on their offer.

Ms. Smith reminded the Board that EWEB was currently working with NoaNet to help it complete its network, or local loop, in Eugene/Springfield. NoaNet was leasing fiber in EWEB's "backbone" for its own purposes. EWEB was connecting NoaNet to IP Services, which was providing the network management for all of NoaNet Oregon.

Ms. Smith spoke to the policy level issues. She reviewed the Board's telecommunication objectives. She said EWEB was now looking at plans that did not meet some of these objectives. She referred to the September 25, 2002, memorandum titled "Telecommunications Future Strategy." She referred to page six of the document, titled "Board Adopted Telecommunications Objectives," and stated that in her estimation, it was impossible to develop a plan that satisfies all eight objectives. She wanted clarity as to which objectives were still priorities. She said by applying an actual scenario, such as the dark fiber strategy, the board could move away from a philosophical discussion in which all eight objectives remained a priority.

Mr. Conte said he would like to discuss the dark fiber scenario independent of the eight objectives.

Ms. Bishop asked Ms. Smith to identify which of the eight objectives the dark fiber scenario does not satisfy.

Mr. Farmer said he was unclear about the economic viability of the dark fiber scenario. He saw a cost of half a million dollars with no return.

Ms. Smith clarified that the costs Mr. Farmer was concerned about were costs necessary to support EWEB's "backbone," while the revenue generated from the dark fiber scenario would be largely incremental because there would rarely be additional expenses.

Mr. Oligliosso explained the basic risk involved. EWEB would provide a construction and maintenance service to NoaNet. NoaNet would be EWEB's one customer. NoaNet would tell EWEB what to build, and where. NoaNet would pay for EWEB to build. NoaNet would give EWEB title and EWEB would maintain it. EWEB would be at risk for work performed in advance of payment. Mr. Oligliosso explained this was a standard risk in construction scenarios. He mentioned some security controls that could be employed to limit EWEB's risk. This plan had no equity risk, and no additional financing risk. EWEB would simply be a service provider for NoaNet.

Mr. Conte said that this was an opportunity to recover some of the costs of weather damage to EWEB's current electrical poles and power lines. He asked if EWEB's costs go up, not on the lateral, but regarding the "backbone." Ms. Smith answered no.

Ms. Smith identified objective 2, "Publicly Owned and Managed," and objective 3, "Universal Service," as the main points that warranted discussion.

Ms. Smith said that number 2, "Publicly Owned and Managed," presented a problem because in a dark fiber lease scenario EWEB had no control over the ultimate pricing for the customer. However, Ms. Smith said that NoaNet's "no mileage fee" policy would provide a cost benefit to the consumer that EWEB could not provide alone without incurring financial risk.

President Anderson referenced objective 3, "Universal Service," and said EWEB should not lose site of the goal of universal service for Eugene. Ms. Smith said she did not want to give the false impression that a dark fiber lease and an alliance with NoaNet are steps toward universal service for Eugene. She said she believed developing technology would emerge in the near future, making universal service a reality.

Mr. Berggren added that while this asset utilization strategy was probably a step away from realizing universal access, EWEB's alternative was to wait for new technology to emerge rather than maximize the value of EWEB's existing system.

Ms. Bishop said that while her prime concern entering into the telecommunications business was universal service, she no longer viewed the concept as economically viable for EWEB. She said that by leasing dark fiber, at least EWEB was utilizing the system and offering more opportunities to more customers. She said that EWEB should continue to regard universal service as a value but that this goal should not restrict every decision the board makes. Refusing to lease dark fiber was not going to bring Eugene any closer to universal service.

Mr. Farmer asked how much revenue EWEB stood to gain from this asset utilization strategy. Ms. Smith said she estimated EWEB's earnings reaching $100,000 annually over the next five years. Mr. Farmer said this did not sound like an asset recapture strategy, it sounded like a community access issue.

Ms. Smith said that NoaNet was just one of many potential customers. With policy in place, EWEB could attract more customers and significantly increase this revenue.

Mr. Origliosso said the debt service on the backbone system bonds were about one million dollars annually. He said this plan, at full build-out, would recapture 10 percent of the debt.

Mr. Conte said he supported the dark fiber leasing strategy if it was financially sound, and he wanted to hear Ms. Smith review the pricing model, but he first wanted to know if the board, as a whole, was opposed to the idea of fiber leasing before continuing with the presentation.

Mr. Lanning asked why NoaNet was the only business EWEB considered for the arrangement. Ms. Smith answered that no other organization had approached the board. She said EWEB did not do a Request For Proposal (RFP) for this project. NoaNet's business model relied heavily on electric utilities so it was natural for NoaNet to initiate a conversation with EWEB. She said there had not been much telecommunication infrastructure built in the Eugene community. She said EWEB had been open to anyone who wanted to talk about these issues, including AT&T, but discussions had not gotten very far for a variety of reasons.

Ms. Bishop said that she was comfortable considering plans that did not meet every objective in the aforementioned memo. She suggested the board review its objective list in February.

Mr. Farmer said he was concerned about the "firewall" keeping EWEB's telecommunications business separate from their other responsibilities. In response, Mr. Oligliosso said EWEB's telecommunication system was not large enough yet to worry about a "firewall." He said staff had proposed for the 2003 budget to tag EWEB'S telecommunication actions with the highest level of internal accounting status. Staff would be able to report on any level of telecommunication activity.

Mr. Berggren said he was concerned with financial details; for example, were EWEB's telecommunication rates functioning effectively.

Mr. Oligliosso said all financial information, including rate effectiveness, would be tracked and available at any given time.

Ms. Smith presented the pricing model and referred to the aforementioned memorandum, "Telecommunications Future Strategy." She referred specifically to pages 7 through 10, all titled "EWEB-Telecommunications Service Provider Rate Calculation."

Ms. Smith said EWEB had produced two rates in the past. The first was for School District 4-J, which was an Operations and Maintenance (O&M) rate only. The second was a "public purpose" rate for NoaNet. Ms. Smith clarified that she was not looking for the board to approve the actual rate of $21.02, but to approve the methodology by which the rate was calculated. She referred the board to page 7 to check the methodology. She explained "fiber mile per month" or "strand miles" as a rate times the number of fibers leased times 12 months. This equaled annual revenue. Ms. Smith said her rates fit the market.

Mr. Farmer asked what would happen to the revenue. Mr. Oligliosso said it would be allocated to a specific revenue job within a project and it would then be comparable to the costs.

Mr. Farmer asked if there would be a reserve fund. Mr. Berggren said the electric company reserve fund stands behind the telecommunications system but a separate reserve fund would be considered if practical.

The Board agreed to take action on the Telecommunication Interim Direction issue during the Regular Board Meeting.

The meeting adjourned at 7:30 p.m.

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Assistant Secretary President