Board members Present: Dorothy Anderson, Patrick Lanning, Sandra Bishop, Paul Conte, and Ron Farmer.

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

President Dorothy Anderson called the Work Session to order.

2003 BUDGET AND WORK PLAN FOR THE WATER AND STEAM BUDGET

Dick Helgeson, Director of Water & Steam Divisions, and Dick Varner, Fiscal Services Supervisor, joined the Board for the item.

Mr. Varner provided an overview of the water budget. He highlighted the fact that the budget did not require a rate action, and included a moderate surplus in operations and maintenance that would provide the utility with some reserves in the event sales were lower than expected. He said that there were some small projects being carried over in the capital budget.

Mr. Varner noted major cost drivers in the budget, including increases in property and retiree insurance.

Mr. Varner noted the recommendation for three additional full-time equivalent (FTE) positions, in particular the FTE proposed to address the lost-call issue; one of the five proposed FTE in that service area would be charged to the water utility.

Mr. Varner indicated growth projections in sales had not materialized; the 2003 projection estimated some growth but was below budgeted revenue in 2002.

Commissioner Farmer determined from Mr. Varner that staff's projection of decreased use by Hynix was based on its current level of operations. Mr. Helgeson indicated projections were also affected by the closure of Agripac.

Mr. Varner reviewed revenue projections and called attention to the $300,000 budget surplus the utility would keep in reserve.

Mr. Helgeson provided an overview of the Water Division capital budget.

Responding to a question from Commissioner Farmer regarding the timing for when Hayden Bridge came online, Mr. Helgeson anticipated the project would be done by the end of the year, and the facilities commissioned sometime toward the end of the first quarter of 2003.

Commissioner Farmer asked if the Board had given staff direction to proceed with the anticipated intergovernmental agreement with the City of Eugene to do maintenance on City-owned fire hydrants. Mr. Helgeson said that staff had signaled to the Board at various times over the last year that the City was interested in having EWEB take on the work. He noted that EWEB had previously done the work and transferred ownership of the hydrants and maintenance to the City in the early 1980s when the City decided it no longer wished to pay EWEB for the service. Now the City had concerns about its ability to do the work, and EWEB had the capability and resources to do the work. If the City funded the effort, he did not think it would have an impact on operations. The cost was about $150,000 annually over three years. He said, in response to a follow-up question from Commissioner Farmer, that staff had a good sense of the effort involved; he thought the inventory was in pretty good shape overall and emphasized the importance of proper maintenance to preclude future problems. Mr. Helgeson said the arrangement would allow EWEB to gain experience and adjust the cost if needed in the future. He indicated that the agreement would specifically address what was covered by the annual cost.

President Anderson confirmed with Mr. Helgeson that EWEB could condition its agreement with the City on the condition of the hydrants. General Manager Randy Berggren said that he had been clear in his conversation with Acting City Manager Jim Carlson that EWEB was providing a fee for service over the three-year agreement period.

Mr. Helgeson clarified that staff was merely making provision in the budget for the eventuality; any intergovernmental agreement between the City and EWEB would be brought to the Commissioners as a separate action.

Responding to a question from Commissioner Bishop, Mr. Berggren said that EWEB had been very clear it was not assuming system ownership, and that would be clear in the intergovernmental agreement. Commissioner Bishop said she believed staff was on the right track.

President Anderson asked where financial support for the McKenzie Watershed Council was reflected in the budget. Mr. Helgeson said that those costs were included in the Corporate Services budget.

Commissioner Bishop asked where the cost of securing the water rights extension were reflected in the budget. Mr. Helgeson referred her to the budget for planning and engineering. He noted that Debra Smith, Telecommunications Project Manager, had been ask to be project manager.

Responding to a question from Vice President Lanning, Mr. Helgeson clarified that there was one new position in the Water Division's 2003 budget, a plant operator. Mr. Berggren further clarified that the unplanned for impact in the budget was the FTE being added to address the lost call issue, which was allocated on the basis of its administrative costs.

Commissioner Farmer commented on the increase in administrative and general (A&G) expenses, saying that at a time when EWEB was attempting to get its house in order that was an area where he expected the most discipline to be shown. Mr. Varner emphasized the impact of increases in property and retirement insurance, the costs of the water rights effort, and the continued ramp up in source protection efforts as major drivers in that area. Commissioner Farmer observed that it was difficult for the rate payer to perceive from a review of the budget. Mr. Helgeson acknowledged that it was difficult to get the true picture from the mere presentation of numbers. He said that staff could provide the Board with a break-out of those items. Commissioner Farmer indicated that was not necessary; in that he was offering a general comment.

Commissioner Bishop determined from Mr. Berggren that the costs of the construction operation was reflected in both the water capital budget and the electric capital budget. The staff in question were the same.

Mr. Varner provided a financial overview of the steam utility. He identified three major issues in this area: 1) fuel price risk, given that fuel price represented more than half the cost of operations, 2) sales volume risk, and 3) nonfuel cost escalation.

Mr. Helgeson provided a comparison of fuel prices over the past few years and noted their volatility over time. He indicated that sales projections determined fuel projections.

Mr. Helgeson noted projected sales of 209 million pounds of steam, and projected purchases of 3 million therms of gas to make and distribute the steam. He indicated the total fuels budget of $1.5 million was close to what was projected the previous year.

Mr. Helgeson noted that because of EWEB's contractual agreement with Sacred Heart Hospital, it did not have to hedge its risks related to fuel costs with that entity. That was deducted from the portion of the budget that the fuels charge was based on. Responding to a question from Commissioner Farmer about the reason for EWEB's agreement with the hospital, Mr. Helgeson said that the hospital was the largest steam customer and all steam was sent to one location that was relatively close to the plant. He noted that the hospital had its own boilers that it choose not to operate because of the economics of operation relative to the steam provided by EWEB. He added that the contract helped EWEB defray a large portion of its fixed costs, and it contained automatic escalators for the base rate and a pass-through for fuel. He believed other customers understood the advantage of having Sacred Heart Hospital in the system.

Responding to a question from Commissioner Farmer about taking a similar approach to other customers, Mr. Varner indicated the approach had been tried, but prices were extremely volatile from month to month. He said that EWEB attempted to stabilize prices for customers by providing a rate that was relatively constant across the years. Commissioner Farmer suggested that if EWEB took that approach, it would not have to hedge prices. Mr. Helgeson said that many of those customers would chose another energy source with more predictable costs as a result. He added that EWEB had done quite well over the year in managing those fuel price risks. Last year EWEB had done better than its fuels budget projections, and had $100,000 in excess of fuels costs; staff would later propose to hold that $100,000 in reserve as part of its risk management strategy.

Commissioner Bishop determined from Mr. Helgeson that EWEB's bypass contract with Northwest Natural Gas was specific to the local distribution component of the system. It was a ten-year contract, and provided for deeply discounted delivery from Interstate 5 to the steam plant. It was about ten percent of what the company would normally cost for the service. In response to a follow-up question from Commissioner Bishop, Mr. Helgeson did not perceive any benefit in acquiring the gas line from the company given the low cost of service.

Mr. Helgeson discussed EWEB's plans for managing fuel risks in the coming year, which involved the use of the $100,000 surplus previously mentioned and a price cap, or what he characterized as a price risk swap between electric and steam utilities. Eric Hiaasen, Mid-Term Trader, provided more information on the price cap being proposed, which he labeled a "costless collar." The Electric Division agreed to put a cap on the price the Steam Division would pay in return for the Steam Utility agreeing to put an effective floor on the gas prices it pays. If gas prices went higher, there would be money flowing from the Electric Division to the Steam Division to hold the price at $3.97 in the winter and $3.72 in the summer. If prices were to fall, the Steam Utility costs would fall to $3.13 in the winter and $2.94 in the summer, and after that the Steam Utility would be paying the Electric Utility to make those minimum prices.

Responding to a question from Commissioner Farmer, Mr. Varner said that the issue was what is the marginal revenue from sale of the surplus, and the spot price of electricity was pretty highly correlated to the spot price of gas. If gas prices were low, EWEB would get less revenue than it expected by selling its surplus into the market; that was bad for the electric customers, because it meant the surcharge would not be paid as fast; conversely, if gas prices were high, that meant electricity prices were probably high, and the Electric Utility would be selling its surplus at much higher rates than forecasted in the budget, and there would be money to pay the hedge for the Steam Utility and money to pay down the surcharge more quickly.

Commissioner Farmer determined from Mr. Varner that if EWEB bought all its power from the Bonneville Power Administration and had no production capacity of its own, his previous statements would no longer apply.

Commissioner Farmer asked if the strategy meant that dollars were merely being exchanged between the Electric and Steam utilities, and was EWEB really hedged from the big picture. Mr. Varner said that the strategy offered protection to steam customers against high prices, and offered protection to electric customers against low prices. The two sets of customers have opposite interests, and EWEB was attempting to balance the interests of both. Commissioner Farmer suggested that when one "netted it out at the end of the year on a consolidated financial statement, you really have not hedged anything." Mr. Hiaasen acknowledged the swap being proposed was essentially the same at the end of the year for both utilities as though one had not hedged at all, but the important difference was that if gas prices were high, the consolidated utility would be doing well, because the Electric Utility would be making considerable money from its wholesale power sales; if gas prices were lower, the consolidated utility would not do well because of the sheer size of the Electric Utility, but the Steam Utility would look well.

Mr. Helgeson added that staff was saying that it thought gas prices were higher than the fundamentals suggested they ought to be; that was reflected in the fact that it took a high price to purchase certainty of service. He suggested it was not worth it to the customers for EWEB to secure its position in the market when gas prices, on an adjusted basis, would be lower in the near-term. So the question was, do you hold back the $100,000 surplus to cover the most likely range of risk, or spend that money and more to get price protection. He believed that the strategy was the best for EWEB's customers in the next year.

Referring to the second major issue he identified, Mr. Varner indicated that there would be some risk if sales volumes were low and the utility did not receive the commodity charge revenue. However, that revenue was a relatively small part of the business. He believed the forecast for sales was on the conservative side, and did not perceive risk there.

Mr. Helgeson discussed the third issue, the increase in nonfuel operating costs. He said that EWEB was offsetting higher labor and materials costs by an FTE reduction. That reduction was being realized through an employee retirement; the position would not be refilled. The budget included a small surplus and no adjustment to the base rates would be required.

Mr. Helgeson noted that no capital projects were planned for the Steam Utility. He anticipated that the utility would look at its long-range contingency planning for site and market risk in the coming year.

Mr. Helgeson summarized the staff recommendation, as previously presented.

President Anderson adjourned the meeting at 7:20 p.m.

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Assistant Secretary President