Board Members present: Patrick Lanning, Sandra Bishop, Dorothy Anderson, Mel Menegat, and Ron Farmer.

Others present: Randy Berggren, General Manager; Jim Wiley, Debra Smith, Jim Origliosso, Dick Varner, Roseanna McArthur, Tom Buckhouse, Mat Northway, and Krista Hince of the EWEB staff; Kim Young, City of Eugene Minutes Recorder, and John Simpson, Commissioner-elect.

BREAKFAST

President Lanning called the Special Board Meeting of the Eugene Water & Electric Board (EWEB) to order at 8:30 a.m, after everyone had a chance to eat their breakfast.

WELCOME AND OVERVIEW

Debra Smith, Assistant to the General Manager, welcomed Commissioners and staff to the financial planning retreat.

Ms. Smith reminded Commissioners that they had discussed the goals and strategies at a previous retreat but follow-up to that work had been sidelined by financial issues and no further progress had been made. She noted the Board's top goal was that of financial stability. She anticipated the staff strategies work group would meet on August 10 and invited the Board's input prior to that date. Ms. Smith anticipated the Commissioners would resume discussion of goals and strategies in September.

Ms. Smith briefly over viewed the agenda, emphasizing the staff goal of getting clear Board direction regarding the assumptions underlying the draft 2005 budget, which staff would spend August preparing. Fiscal Services Supervisor Dick Varner added that staff anticipated a rate adjustment could be one possible result of the meeting. Ms. Smith noted that discussion on a rate adjustment was already scheduled.

General Manager Randy Berggren provided some context for the day's discussion, reminding the Commissioners of its discussion about raising rates for the purpose of building EWEB's reserves and the timing of such an action, were it taken. The Board expressed a strong desire to build EWEB's reserves sooner rather than later, such as within three years. That was predicated upon an improved budget outlook, which was dependent on the water year. Mr. Berggren noted the negative impact on EWEB's generation capacity created by the fourth year of drought, which affected EWEB's ability to build reserves. He anticipated EWEB would have a contribution shortfall of $7 to $8 million, although it would likely end the year "in the black" to the order of several million dollars. If the drought persisted, it created a serious risk level for EWEB.

Mr. Berggren emphasized EWEB's need for a generation assumption it could rely upon. He recalled the Board's May 2005 agreement to change the utility's generation assumption and said the question before the Board was how to fund that shift. He proposed that the Board examine different generation levels and their relationship to reserve levels. Mr. Berggren noted that the Board had been provided with a back grounder on the topic and various graphs demonstrating different generation assumptions. The background information included an 85 percent generation assumption. Mr. Berggren emphasized that the more conservative the Board was in its assumptions, the fewer reserves were needed, but then EWEB would lose revenues. Staff continued to assume that the Board wanted the operational reserves in place by December 2006.

Mr. Berggren noted the growing scientific consensus about the impact of global warming, which would also affect generation assumptions. EWEB's data was based on historic weather patterns, which may no longer be relevant, and that fact was perhaps another reason for the Board to be more conservative in its generation assumptions.

EXPENSE REDUCTIONS DISCUSSION

Mr. Berggren encouraged the Board to "turn over the rocks" in its discussion and to consider what he termed "the big four," or EWEB's "sacred cows": 1) conservation program levels; 2) low-income programs; 3) education and environmental stewardship, and 4) contributions-in-lieu of tax (CILT) payments to the City of Springfield. He said that staff did not list the CILT paid to Eugene because of staff's sense it was not a short-term effort even though considerable effort had been made in the past to lower the payment and because it was not much different from what other public utilities on the west coast pay.

Mr. Berggren said that various scenarios created by staff using the 85 percent generation assumption indicated that at best, EWEB would be required to convert the surcharge to a permanent rate increase; at worst, a rate adjustment of 9.4 percent would be required on top of that. He said to avoid a rate increase of that magnitude, the Board would have to weigh tradeoffs that involved community values.

In regard to further expense reduction, Mr. Berggren said that there was not a lot of fat left and further reductions could reduce EWEB's service capacity in several areas and increase the utility's risk. He specifically spoke of information technology (IT) investments and noted that staff from the Federal Energy Regulatory Commission (FERC) had recently suggested to him that EWEB was understaffed in regard to its capacity to meet regulatory requirements. He believed the Board would only be able to realize a relatively small amount in such reductions without further hampering EWEB's ability to deliver services. Significant dollar reductions could only be realized by reductions in the "big four."

Mr. Berggren reminded the Board of the Carmen-Smith relicensing effort, which would be an expensive one. He asked how EWEB could take those costs into account and position itself to address them, and suggested the Board consider how that strategy could be integrated with the issue of the reserves.

Mr. Berggren proposed the Board discuss the various scenarios with the goal of narrowing its ultimate choice to the most practical one in terms of generation assumption and utility expense.

Mr. Berggren invited comment from the Board.

Commissioner Menegat expressed interest in more information about what EWEB needed for the most effective and efficient operations. He believed if the utility was contemplating a rate increase, it should institute one that was adequate. Mr. Berggren believed that staff could provide that information. Staff had attempted to identify where the increased needs and areas of weakness were, and he noted the relationship of the relicensing effort to those increased needs.

Commissioner Farmer requested that staff provide the Board with one-page papers addressing the following topics: 1) the financial impact of not spending money on the Carmen-Smith relicensing effort and what EWEB would realize if the facility was sold; 2) how much of the funding spent on the "sacred cows" came from other sources, such as the Bonneville Power Administration (BPA); and 3) a summary of service contracts, such as contracts for professional services.

Vice President Bishop expressed interest in knowing which contracts were legally required, such as contracts for canal inspections, versus other service contracts.

In response to a question asked earlier by the Board, Mr. Berggren distributed copies of a graph entitled "Customers per Employee." Mr. Varner reviewed the document.

President Lanning agreed with the remarks of Commissioner Menegat. He said that EWEB had set aside things in the past that would cost it more in the future. He wanted EWEB to look to the future.

Commissioner Farmer requested information about potential capital expenditures over and above those previously approved. Ms. Smith indicated that work was in process.

Commissioner Farmer said that EWEB needed to build its reserves first to meet its expenses before it spend money on discrete items. He anticipated that would require the Board to make hard choices that would allow it to build reserves and still have a budget that allowed EWEB to live within its means.

Ms. Smith believed that Commissioner Farmer's sentiments were widely shared. Treasurer Jim Origliosso added that the issue would be what constituted a discrete, or nondiscretionary, expense.

Ms. Smith called for a brief break.

ISSUES PRESENTATION

Conservation Program

Power Resources Director Dick Helgeson provided an overview of Conservation Program Funding Options, copies of which were distributed to Commissioners. He noted the Integrated Electric Resource Plan (IERP) Working Group had recommended higher levels of Demand-Side management. The overview included three alternatives for the future. Mr. Berggren encouraged the Board to focus on the big picture rather than the programmatic element of the issue. Commissioners asked questions clarifying the information presented, and made the following points:

• What is the demand for conservation? Do we want to make decisions based on demand? Suggest EWEB manage demand through the program design while keeping a sense of the target, based on what was acquired. (Farmer)
• Cannot base conservation on demand or it would not happen. We need to deal with the long- and short-term cash flow issue. EWEB needs more stability in the way it determined the level of conservation dollars. Do not feel confident in giving up five percent; conservation as a statement of community values. Acknowledges that five percent was instituted when rates were stable; suggest deviation from percentage for limited duration, and default back to five percent. (Bishop)
• The IERP will have specific megawatt references. If conservation is to be a resource as opposed to conservation as a social program, why not use a specific megawatt target instead of the five percent? (Berggren)
• Concerned about what happens when BPA dollars dedicated to conservation go away. (Helgeson)
• There's nothing wrong with megawatt targets, but what about renewables? That takes money--set aside dollars for that. (Anderson)
• Does EWEB add for conservation? If the Board increased the rates for stability, could take an exception to the policy without losing the principle. (Berggren)
• Interested in a short-term plan to restore financial stability and restore EWEB to a place where it had the ability to spend what it liked on conservation. Another crisis will put all programs at risk. Want something to show how EWEB compares with the industry if it reduced the percentage. Suggest we use a comparison group for union negotiations. (Farmer)
• Looking for a more global comparison that includes other countries, such as Germany and Denmark, who are ahead of the United States in the use of renewables. (Lanning)
• Disturbed by the fact that EWEB is not accomplishing what it agreed to in terms of conservation with the BPA. Stress the importance of conservation particularly in regard to the new IERP. All the power we can save puts us ahead. Question which is the most effective, a dollar target or a megawatt target? (Menegat)
• Strongly support maintaining low-income programs. (Menegat)
• There appears to be reluctance to ramp down conservation programs on the part of the Board. The IERP is taking conservation very seriously--suggest ramp down to Alternative 1? (Berggren)

Low-Income Programs

Ms. Smith provided an overview, noting that Lane County Health and Human Services was likely to be the new provider. She asked if EWEB should make a reduction in this area, and if so, how it should be applied. Mr. Berggren suggested the Board consider giving relief to the utility's commercial/industrial users, who do not benefit directly from such programs. There was a perception of inequity because EWEB goes beyond the requirements of Section 1139, and it was a competitiveness issues for such companies.

Commissioners asked questions clarifying the information presented, and made the following points:

• Place the cost of the program where it resides--on the residential side. (Bishop)
• Concern about the potential of legal challenge to current approach. (Farmer)
• Shifting the allocation will result in relief to commercial and industrial users rather than a cost-savings. (Berggren)
• Issue is one of equity. It should be taken off the table as it was not a funding source. (Bishop)
• Consider as a standalone issue in rate-setting. (Berggren)
• Agree issue for commercial/industrial customers is one of equity--request legal opinion. (Menegat)
• For industrial/commercial users this is an equity issue--must adjust regardless of funding levels. (Farmer)

LUNCH

Commissioners and Staff took a brief lunch break and reconvened at 12:40 p.m.

CONTINUATION OF ISSUES PRESENTATION

Education Grants Program

Assistant Secretary Krista Hince distributed a document regarding the Education Grants Program and various options for the future, authored by EWEB staff member John Femal. Ms. Smith reviewed three options for making reductions in this area. Members asked questions clarifying the information presented.

City of Springfield In-Lieu-of-Tax Payment

Mr. Origliosso provided an overview of the in-lieu-of-tax payments to Springfield, noting that staff had agreed not to propose that the Board consider the payment made to Eugene given that City's resistance to reducing the amount EWEB paid. He said EWEB currently paid Springfield about $500,000 annually in the form of a voluntary contribution. The payment was based on the justification that Springfield was losing tax revenues from Weyerhaeuser because EWEB was serving it. Mr. Origliosso believed that if EWEB was to reduce the payment, Springfield would work aggressively to have that company and Sierra Pines, also served by EWEB, to be served by the Springfield Utility Board (SUB) instead, placing that revenue at risk and eliminating the benefit of serving that company to existing EWEB ratepayers.

Vice President Bishop believed that stopping the payment was "a really bad idea."

Commissioner Anderson suggested that the payment be abandoned and invested in renewables, which might make the shift more publicly acceptable.

Scenario Discussion

Mr. Varner provided an overview of a memorandum from himself to the Board entitled "Bridging the Gap." He reviewed the four bridging scenarios outlined in attachments to the memorandum. Commissioners asked questions clarifying the information presented.

Carmen Smith Funding Strategy

Mr. Origliosso provided an overview of the Carmen Smith relicensing effort. He said the timing of the license issuance and project timing was unknown. He said that the estimated $6.3 million in capital project costs would come from rates. He estimated it would cost approximately $7.4 million for the relicensing effort itself, and suggesting the potential of borrowing for that cost rather than attempting to cover it with rates.

Responding to a question from Commissioner Farmer, Mr. Origliosso confirmed that the money borrowed would be paid back using revenues from rates over a longer period of time.

Small Group Exercise

Commissioners and staff broke into three groups and brain stormed alternative financial scenarios. Group 1 included Vice President Bishop, Commissioner Menegat, Mr. Helgeson, and Mr. Origliosso; Group 2 included Commissioners Farmer and Anderson, Mr. Northway, Mr. Berggren, and Mr. Buckhouse; Group 3 included President Lanning, Mr. Varner, Ms. McArthur, and Mr. Wiley.

Next Steps

Mr. Berggren indicated that staff would use the results of the small group exercises to begin the development of the budget.

Ms. Smith asked Commissioners for their final thoughts.

Vice President Bishop indicated opposition to the fourth scenario discussed by Mr. Varner, which would require a large rate increase to occur all at once. She wanted a "real time" relationship between rates and needs, rather than an approach that called on the Board to attempt to guess at the future. She thought it would be difficult to justify such a large increase on ratepayers at the current time.

Vice President Bishop thought the conservation and low-income programs were related but should be discussed separately. She thought the existing need in the low-income program was not adequately met at this time, which concerned her.

Vice President Bishop encouraged the Commissioners to separate the issue of how it measured conservation from its actual budget actions. She suggested the Commissioners could take an exception to its policy in the upcoming budget. The Board could build the reserves for a one- to two-year period and then reinstate the percentage. Vice President Bishop advocated that the Board examine the percentage in light of its assumptions. She pointed out that conservation was the least expensive energy source.

In regard to the work done by the IERP working group, Vice President Bishop pointed out the working group did not consider issues related to budget and finance.

Commissioner Farmer did not think the Board was talking about the future but about changing its assumptions now. He suggested the potential of building the reserves over a greater period of time. He expressed ambivalence about the education grants, acknowledging that there was not much funding involved and indicating he was open to compromise. Commissioner Farmer was interested in something in the mid-range in terms of conservation programs. In regard to the low-income programs, he was interested in staying above what other utilities were doing, but not by a factor of two or three.

Commissioner Anderson perceived a balancing act between the conservation and low-income programs. She did not feel strongly attached to any particular number, but did not want to see drastic cuts in either program. She believed that EWEB needed to continue to stay focused on conservation as an energy resource. She asked how much EWEB could effectively spend on low-income programs.

Commissioner Menegat supported the low-income and conservation programs, but believed EWEB might have arrived at a point where reductions might be appropriate if rate increases were to be instituted. He supported Commissioner Farmer's suggestion about extending the time for building reserves.

Commissioner Menegat thanked staff for its candor and expertise.

President Lanning said that there was a cost to long-term budgeting the Board needed to keep in mind. He determined from Ms. Smith that the fleet issue had been overlooked in the capital budget discussion. Ms. Smith agreed it should have been addressed at that time. President Lanning appreciated the issue had been brought forward now.

Speaking to the conservation levels, Mr. Berggren noted that those numbers were established with no assessment of need or staff analysis. He asked the Board to consider whether it wanted any rate adjustments related to the reserve issue to include a five percent factor for conservation.

Commissioner Farmer questioned whether EWEB could base its conservation levels on volume rather than individual unit price. Commissioner Anderson observed that the law required a conservation level of three percent. She noted that even Scenario 3 did not break faith with the current commitment, and suggested that the ultimate decision about the level of conservation could be made through the IERP. Commissioner Menegat agreed.

Commissioner Menegat expressed interest in the volume approach mentioned by Commissioner Farmer. He suggested that staff offer the Board a recommendation on the topic.

Mr. Helgeson suggested that conservation levels should be tied to something stable and sustainable. He believed that increased energy prices would lead to increased demand for conservation measures, noting that many people sought EWEB's assistance with conservation measures during the last energy crisis. Commissioner Farmer concurred.

Energy Management Manager Mat Northway pointed out that volume sales went down when rates went up. He believed EWEB needed something more stable than rates and revenues to tie conservation to.

Commissioner Farmer believed there was no reason to increase the dollars spent on conservation during the time period that EWEB spent building its reserves. President Lanning and Commissioner Menegat concurred.

ADJOURN

Ms. Smith indicated that staff would poll Board members for a date on which to hold another special meeting.

The meeting adjourned at 4:10 p.m.

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Assistant Secretary President