Present: Patrick Lanning, Ron Farmer, Dorothy Anderson, Sandra Bishop, and Mel Menegat.

Staff Present: Randy Berggren, Debra Smith, Dick Helgeson, Jim Wiley, Dick Varner, Marty Douglass, Tom Buckhouse, Ken Beeson, Dean Ahlsten, Cathy Bloom, Lance Robertson, Roseanna McArthur, Jim Origliosso, Dave Koski, Mark Freeman, and Krista Hince of the EWEB staff; and Ruth Atcherson, City of Eugene Minutes Recorder.

2004 CAPITAL PLAN

President Lanning called the Work Session of the Eugene Water & Electric Board (EWEB) to order at 8 p.m. Noting the time, he conveyed his intention of reassessing the agenda for the Regular Board Meeting scheduled to follow the Work Session and of allowing Ken Beeson, Energy Resource Projects Manager, his full allotted time for the Work Session presentation. He felt the Capital Plan to be an essential piece of the 2004 budget.

Mr. Beeson said he would provide a brief presentation and utilize the bulk of the Work Session for Board questions and discussion. He stated that the rate increase included in the Capital Plan was a significant part of the rate assumption. As such, he recommended the Board share any reservations about it at this time.

Mr. Beeson explained that the staff had identified a significant shortfall between projected capital expenditures and projected funds. He related that staff had worked over the past year to develop a clear five-year Capital Improvement Plan (CIP) that represented necessary electric system improvement work and this had resulted in a recommendation for a rate increase of 5.5 to 6 percent.

Mr. Beeson gave a power point presentation on the Electric Capital Plan 2004-2008 dated November 4, 2003.

Mr. Beeson stated that historically the Electric Utility had base-level capital expenditures in the $8 million to $10 million range. He defined base-level expenditures as those not funded by bonds, telecommunications funding, or the DSM funding. He said the capital funding allocation from rates had been $6 to $7 million over this period of years and the remainder had been made up from reserves, debt, and, for a period of years, payments from the Hynix Corporation. He pointed out that Capital expenditures had also been held down by the delay of system additions.

Mr. Beeson stressed that the utility was over the debt-to-assets financial target and was unable to issue any new debt.

Continuing, Mr. Beeson underscored the reasons EWEB needed to increase the level of Capital expenditures, among them the aging infrastructure and an increase in new load. He noted, regarding the latter, that the certain parts of the electric system had reached capacity for new customers. Regarding the infrastructure, he reiterated that some of the system had been mandated to be improved by the Public Utility Commission (PUC).

In summary, Mr. Beeson reiterated staff's request for Board support for the CIP and the rate increase needed to fund the CIP. He noted that staff was also recommended that the remaining $5 million in debt authority be maintained as a reserve.

In response to a question from Commissioner Anderson, Mr. Beeson clarified that while the Capital budget did include the items needed to be completed to meet the Federal Energy Regulation Commission (FERC) licensing requirements for the Carmen Smith project, it did not include funds for any capital improvements that may be determined necessary.

Commissioner Bishop conveyed her appreciation for the work that staff had put into the CIP.

In response to a question from Vice President Farmer, Mr. Varner stated that the depreciation of the Capital improvements over the past decade was approximately $10 million per year, increasing, more recently, to $15 million per year. He said the utility broke even through most of the 1990s and had built a capital reserve of $20 million by the end of that decade. Current rates of depreciation were about the same or more than $15 million.

Vice President Farmer asked if there had been any need to borrow money to accomplish Capital projects. Mr. Varner replied that there had not been a need to borrow until the energy crisis impacted the utility.

Vice President Farmer advocated for setting up an accounting function that insured that Capital reserves would only be spent on capital projects. Mr. Varner responded that it would be difficult to segregate reserves. He suggested the Board monitor Capital expenditures on an annual basis and determine whether leftover reserves should remain dedicated to Capital improvements.

Mr. Origliosso commented that policy dictated that such reserves could be allocated to capital reserve funds during the budget process.

Mr. Wiley reiterated that the primary reason the capital reserves had been siphoned elsewhere had been to aid in recovering from the energy crisis.

In response to another question from Vice President Farmer, Mr. Origliosso suggested putting the level of Capital reserves in context with the system, currently worth $500 million. He explained that the reserves served to replace a small percentage of the whole system and replacement and refurbishment were ongoing processes.

Mr. Berggren emphasized that the system capacity had been maximized and the need for the capital expenditures, delayed due to the energy crisis, had become imminent.

Vice President Farmer recommended that staff craft one message for the public outlining the rate action and what financial needs the rate was being increased to meet. Mr. Berggren responded that staff was seeking to do so.

Commissioner Menegat echoed Vice President Farmer's concerns. He voiced his support for the CIP. He felt that staff had looked "long and hard" at the utility's needs and how to meet them.

Commissioner Bishop requested staff make the distinction between the costs incurred by expansion and new customers and those costs generated by maintenance and upgrades. She wanted to assure that the expenses related to expansion were being paid for by new development. Mr. Varner pointed out that the utility's policy was that a developer paid the cost to connect to the system and upgrades to the existing system were paid for by EWEB.

Mr. Wiley noted that the new substation and related improvements in the Coburg Road-Beltline area would be paid for by EWEB.

Mr. Beeson pointed out that a significant portion of the 2004 Capital Budget was slated to be spent on replacement and upgrade work and that, according to Attachment A: Electric Capital Plan, customers would be paying $17 million toward improvements.

President Lanning asked how approval of the CIP would help the utility avoid future orders from the PUC. Mr. Wiley replied that all of the utility poles were required to be brought into compliance with the National Electric Safety Code within the next five years. He explained that the work over the five years will create a record to refer to in order to determine what utilities need more work, as well as allowing the utility to update utility poles and bring them up to safety code.

Mr. Berggren added that once the code was met, the utility should not have to fall under the scrutiny of the PUC.

Mr. Beeson related this back to the lack of spending over the past decade, stating that EWEB had not been spending enough on equipment replacement as related to the size of its system.

Vice President Farmer opined that in a perfect world the utility would be able to build its reserves and then lower its rates.

In response to a question from Commissioner Bishop, Lance Robertson, External Communications Coordinator, assured her that information about this plan would be provided to the public in a larger context, though it was difficult to discuss the surcharge at this point as it was yet unknown exactly when it would be discontinued.

Commissioner Bishop advised staff against utilizing a direct mailing to customers. She suggested using a bill stuffer to disseminate information. She also noted that she had heard feedback that the Web site needed work. She advocated for hiring a "Web master" to maintain the site. Mr. Robertson responded that the utility had a contract with a Web service provider.

Commissioner Anderson suggested an informational piece, signed by the Board of Commissioners, be published in The Pipeline.

President Lanning remarked that direct mail could be an effective tool. He felt the "customer/owners" should have a high level of detail.

Commissioner Bishop concurred with staff that a rate increase was needed at this time to meet capital needs.

President Lanning affirmed that the utility had a need to fund the program at the level that would require rates to rise to meet it. He conveyed his appreciation for the detail provided to the Board, calling it a strong justification for a rate action.

President Lanning closed the Work Session at 9 p.m.

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Assistant Secretary President