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

Others Present: Randy Berggren, Dick Helgeson, Debra Smith, Kevin McCarthy, Roseanna McArthur, Jim Wiley, Dick Varner, Tom Buckhouse, Jim Origliosso, and Krista Hince of the EWEB staff.

President Lanning called the Special Board Meeting of the Eugene Water & Electric Board (EWEB) to order at 11:30 a.m.

DISCUSS FINANCIAL SCENARIOS

General Manager Randy Berggren provided an overview of the background information provided to the Board in support of the discussion pursuant to the July 14, 2004, financial retreat at which a number of scenarios to address the continuing impact of drought on EWEB's ability to establish reserves and financial stability were considered. He said the options and four scenarios also addressed areas within the existing budget and operations where cost savings might be realized to support a reserve-building strategy along with rate action. He briefly reviewed the following background documents:

· "Carmen Smith Relicensing Costs" - July 30, 2004, memorandum from Dick Helgeson regarding staff's preliminary view on the financial impacts of going forward with the Carmen Smith Project relicensing.

· "2005-09 Conservation Program Funding Options" - July 29, 2004, memorandum from Power Resources Division Director Dick Helgeson and Energy Management Services Manager Mat Northway providing a detailed view of the options presented in staff's financial scenarios and giving historical perspective on a "pre-2001" funding alternative

· "EWEB's Fleet Requirements" - July 26, 2004, memorandum from Corporate Division Director Roseanna McArthur providing background information on the capital funding needed to catch-up the fleet replacement strategy and equip the increased capital spending. An update was sent electronically and included a sense of the depreciated value of EWEB's fleet, which was currently 43 percent of original cost, which was not replacement cost.

· "Electric Utility Cost Comparison Information" - July 28, 2004, memorandum from Key Account Manager Mike Logan updating the rate comparative information provided to the Board previously and including rates under the two financial scenarios brought forward from the July 14, 2004, retreat.

· "2005 Budget Assumptions" - July 28, 2004, memorandum from Fiscal Services Supervisor Dick Varner providing an overview of the assumptions staff would use in the 2005 budget; comparative information on low-income and education grants was included.

Mr. Berggren noted that Mike Logan had identified a potential data error in one utility in his July  28, 2004, memorandum. He said the error, relating to Seattle City Light, was in the average residential usage chart under average monthly usage and a corrected chart would be provided.

Mr. Berggren asked for a sense of direction from the Board regarding scenarios 2 and 4 so staff could prepare for a fall rate action as development of the 2005 budget moved forward.

President Lanning called for questions and comments on each of the background documents.

Carmen Smith Relicensing

Commissioner Menegat commented that one of the major questions confronting the Board and a particular concern of his was whether the rate increase was driving the budget or the budget was driving the rate increase. He said he supported proceeding with Carmen Smith relicensing.

Commissioner Farmer asked for an explanation of the term "annual value." Dick Helgeson explained that for purposes of the Carmen Smith relicensing background memorandum, "annual value" was simply the output of the unit valued at both Bonneville Power Administration and market prices. He said on an annual basis in today's dollars relative to today's power prices, the range would be $9 to $13 million. He said that speculatively that figure over a 40-year period brought back to a net present value could be in excess of $200 million, although long-term estimates were not detailed in the memorandum. He said the purpose in the relicensing process was to make a determination as to what investment and changes in operation were necessary and how those affect the value for the new license term. He said the figure was a gross number, although the operating costs contained no debt service on that facility at the present time.

Commissioner Farmer said he would reserve judgment on the project until further modeling was done to determine if it was economically feasible. Mr. Berggren said that from his perspective the project was of such substantial value that EWEB could not afford to not proceed with relicensing and make a final determination at the end of the relicensing application period.

Vice President Bishop concurred that a decision should not be made at this time and deferred until the end of the relicensing period when more information was available.

Commissioner Anderson agreed with Vice President Bishop's remarks, as did President Lanning.

Conservation Program Funding Options

Commissioner Menegat said he had some initial concerns about not proceeding with full utilization of funds for conservation; however, after considering the other situations confronting EWEB he now supported Alternative 1 recommended by staff.

Commissioner Anderson asked to what extent a rate increase under the different scenarios would be balanced by a reduced need for energy. Mr. Varner replied that the base case assumption kept the five percent funding internally and added the BPA funds to that; all of the alternatives represented reductions in the overall outlays for conservation. He said that the reference to savings and a change in the rate level in his memorandum, to the extent that each of the alternatives resulted in a cumulative five-year reduction over whatever would be associated with the base case, was what would have an impact on the need for a revenue increase to cover the 85 percent of normal water assumption. Mr. Berggren offered another perspective on the issue. He said the two alternatives being considered included a 3.5 percent or a 7.5 percent above the surcharge. He said the budget assumption included Alternative 1, but if Alternative 1 was eliminated in favor of the base case, the 3.5 percent could increase to 4 percent.

Mr. Varner said the calculation had not been run, but he did not think the issue was significant in the near term; the cumulative impacts over a longer period of time could be. He said in the past between 2 and 2.5 average megawatts of conservation investment had been targeted each year and to the extent the base case would run at a higher level, all of the near term forecasts were most likely based on the 2.5 megawatt scenario rather than the 3+ megawatts currently in the base case. He said both the base case and Alternative 1 maintained EWEB on the trajectory it was currently on.

Commissioner Anderson commented that it would be difficult to achieve that much conservation under the base case. Mr. Helgeson said that 3.2 megawatts was at the high end of what EWEB had ever achieved in terms of its programmatic work and those levels were achieved immediately following a sizable rate increase in 2001. He said it had been a struggle to meet that target in the current year. In response to a follow-up question, he said the intent was to use BPA funds to provide incentives instead of adding staff.

Commissioner Farmer remarked that EWEB's desire to create a reserve was driving the discussions and placing substantial pressure on rates. He said he was concerned with comparison information that showed EWEB in the middle of the market nationally and close to the top regionally in terms of rates. He said the two areas in which some reduction of expenses could be achieved were conservation and low income programs. He said that tiered rates would be out of control under the scenario.

Vice President Bishop said she was reluctant to lower conservation commitments but was willing to consider compromises because it appeared the base case was not workable. She emphasized that conservation was the underlying basis for all decisions.

President Lanning said he shared Commissioner Farmer's concern regarding conservation and the impact on the budget. He said he was inclined to support Alternative 1 from the perspective that it placed EWEB at the level the Board intended when the large rate increases went into effect, although he would continue to study the information provided.

Fleet Requirements

Commissioner Menegat commented that there were not funds available to proceed with the capital plan to upgrade EWEB's fleet and asked what source of funding would be used for the staff recommendation to implement the fleet replacement capital plan. Mr. Berggren responded that the original five-year capital plan that drove rate action for replacement of aging facilities included in all of the labor estimates in the original analysis the overhead rates for equipment and transportation throughout each year of the plan; however, the amortization scheduled varied by vehicle from 7 to 15 years and the full cost of the equipment was not captured, only the annualized value of the overheads used in the accounting system. He said approximately $300,000 was available under the original rate action. Debra Smith said the staff request was to commit to an ongoing annual adequate level of funding between $800,000 and $900,000, plus $1 million spread over five years to "catch up."

Commissioner Farmer asked if there was a relationship between the funds required for the fleet replacement strategy and the Carmen Smith relicensing. Mr. Berggren replied that the only relationship was that a bond authorization for the first phase of Carmen Smith would free approximately $6 million over five years in the capital budget and those funds could be used for other areas of concern in the organization, such as fleet replacement.

Commissioner Farmer expressed concern with how the purposes of the rate increase and a Carmen Smith bond issuance were being presented to the public. Mr. Berggren said that the bond could specify funding for both Carmen Smith and fleet replacement.

Vice President Bishop commented that she had received considerable public feedback about EWEB's use of large vehicles for what appeared to be minor tasks such as delivering informational handouts and asked what the policy was for replacing vehicles and using vehicles. Kevin McCarthy, EWEB's Fleet Manager, responded that a fleet replacement strategy typical of the industry was replacement at 10 years/100,000 miles, depending on the type of vehicles, and some larger equipment typically had a 15-year useful life. He said that EWEB had fallen behind over the years, which put it in the position of "catching up" and made it critical to have a regular, sustained replacement strategy. He indicated that EWEB did utilize personal vehicles with mileage reimbursement and state motor pool vehicles where possible and appropriate.

Vice President Bishop asked if there was consideration of alternative fuel vehicles. Mr. McCarthy said there was one electric truck in the fleet and a Prius sedan in the motor fuel. He said that research and development of alternative fuel work and line vehicles was ongoing. He said that personal mileage reimbursement was at the federal published rate of $.375 per mile and that meter readers drove three-quarter ton pickup trucks because of the need to reach areas not easily accessible in a passenger sedan.

Commissioner Menegat asked how the staff recommendation for funding a fleet replacement strategy would relate to a rate increase. Mr. Berggren said that the funding was incorporated in the rate increase.

Vice President Bishop asked if the replacement vehicles would be purchased under the cooperative purchasing agreement with the State. Mr. McCarthy replied that acquisition of vehicles 17,000 pounds or less was done through the State of Oregon purchasing cooperative; vehicles over that weight were procured through a competitive bid process.

President Lanning agreed with Commissioner Farmer's concerns about borrowing funds for fleet replacement and asked staff to provide the board with actual figures for annual vehicle expenditures.

Budget Assumptions

Mr. Berggren observed that the driving assumption was of 85 percent of the 60-year average for hydro facilities and Slice, consistent with direction from the board for a more conservative budget assumption for generation in 2005, and the rates reflected two scenarios. He said one scenario assumed a 3.5 percent increase and the other assumed a 7.5 percent increase.

Commissioner Menegat asked if the 3.5 percent scenario impacted the residential rate payer if the low income aspect was not applied to commercial and business accounts. Assistant to the General Manager Debra Smith said that a discussion of reallocation issues was scheduled for the next Board meeting. Mr. Berggren said that shifting funding accountability back to the residential sector could raise the average cost from $12 to $20 per customer on an annual basis but that had not been translated into a specific overall rate action. Ms. Smith said that several scenarios and background materials would be presented to the Board.

Mr. Berggren said the critical direction needed from the Board was which of the two scenarios the staff should be pursuing.

Commissioner Anderson asked if the 7.5 percent scenario would provide for no new operations and maintenance (O&M) increases over the next year. Ms. Smith said that the five- year forecast projected O&M increases in 2006 and 2008 and the concept of the scenario was to include all of that into a rate increase, leaving only BPA pass-throughs for the next five years.

Commissioner Menegat asked if there were any other expense reductions considered other than the $1 million identified in the 7.5 percent scenario. Ms. Smith said that only those in the scenario had been discussed and incorporated.

Vice President Bishop asked if the net 3.5 percent increase overall plus the BPA pass through meant the BPA pass through was in addition. Mr. Berggren said that it was in addition.

Commissioner Menegat said his concern was with continually returning to ratepayers with rate increases and while he initially supported the 7.5 percent scenario because it would obtain the necessary funds; however, all costs were continuing to increase and the reserves were not intended to pay for increased costs. He said his preference was now for the 3.5 percent scenario and looking ahead to 2006 for an increase for additional O&M costs.

In response to a question from Vice President Bishop, Mr. Berggren said that EWEB had 77,000 residential customers with approximately 30,000 account changeovers per year and 1,500 to 2,000 new customers annually.

Vice President Bishop agreed with Commissioner Menegat regarding a preference for small rate increases directly attributable to actual costs. She said she was hesitant to support a large rate increase with the assumption that it would be phased out.

Commissioner Anderson remarked that another 7.5 percent increase was too much in one year and she preferred the 3.5 percent scenario.

President Lanning said he also supported the 3.5 percent scenario. He asked for clarification that the net 3.5 percent increase would also make the surcharge permanent. Mr. Berggren said the assumption was that the surcharge was carried forward in some form.

Mr. Berggren confirmed that the staff should move forward with the assumption of a net 3.5 percent increase, supported by the assumptions outlined in the July 28, 2004, memorandum from Dick Varner related to 2005 budget assumptions.

Commissioner Menegat asked for clarification of the assumption that the Board had tentatively agreed to seek a $10 million bond authorization to fund the work necessary to relicense the Carmen Smith Project. He indicated his support for funding the Carmen Smith relicensing work.

Commissioner Anderson asked for clarification on conservation related to preserving a base funding level equal to five percent of the current base rates without the surcharge. She noted that the surcharge would be removed in November 2004 and asked if it would be replaced. Mr. Berggren said it would be replaced by another revenue that would include the five percent. Mr. Origliosso indicated during the Board's discussion of the five percent guideline at the retreat there was consensus that since that rate action was specifically targeted to a reserve position, funds should be deferred to reserves instead of conservation until the reserves materialized. He said the Board would have an opportunity in October 2004 during the Integrated Electric Resource Plan process to make some decisions regarding long-term funding for conservation and perhaps move from the percent of revenues target to a more acquisition-based megawatts per year target. Mr. Berggren clarified that the five percent was included in a rate action but not go to conservation until reserves were established.

Continuing, Mr. Berggren reviewed the remaining assumptions in Mr. Varner's July 28, 2004, memorandum.

Commissioner Menegat reiterated his concern that the rate increase was driving the budget and was not certain he could support an additional rate increase in the spring if a deficiency in the budget was identified. He noted the 5.7 percent surcharge could be extended through April 2005 and asked if there had been consideration of not increasing rates in the winter and waiting until the spring. Mr. Berggren said that would change the timing of reserve building shown in the pro forma, which assumed there would be a fall rate action. Treasurer Jim Origlioso commented that the two principal assumptions driving the budget were going to be 85 percent of generation and building of reserves to the $13 million level.

Mr. Berggren thanked the Board for its efforts on the budget over the past several months.

President Lanning adjourned the meeting at 1:05 p.m.

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Assistant Secretary President