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

Others present: Jim Wiley, Dick Varner, Debra Smith, Jim Origliosso, Dean Ahlsten, Marty Douglass, Tom Buckhouse, Mel Damewood, Roseanna McArthur, Terry Bequette, and Krista Hince of the EWEB staff; Ruth Atcherson, City of Eugene Minutes Recorder; and John Simpson, Commissioner-elect;.

President Lanning convened the Work Session of the Eugene Water & Electric Board (EWEB) at 5:37 p.m.

He stated that a third agenda item would be included in the Work Session on the Bonneville Power

Administration rate announcement and the financial implications this had for EWEB.

FIVE YEAR ELECTRIC CAPITAL PLAN

Dean Ahlsten, Electric Engineering Manager, provided a PowerPoint presentation on the Electric Division 5-Year Capital Plan. He highlighted a list of significant projects and emergent work that impacted the current year update of the plan, as follows:

• Walterville Fish Return Structure
• Smith Falls Runner Repair/Replacements;
• Willamette Substation Rebuild;
• Fleet Replacements;
• Energy Management and Control System Upgrades;
• Technology/Efficiency Upgrades;
• Capital Project carryovers from 2004, primarily at generation facilities.

Commissioner Farmer asked what customer contributions were. Mr. Ahlsten replied that they consisted primarily of payments by developers and customers for line extensions and subdivision work.

Mr. Ahlsten noted that planned telecommunications projects included a fiber link between the Hayden Bridge Filter Plant and substation to the Walterville powerhouse. He explained that this would provide for a ring topology for the microwave radio system that was planned. He said there would also be a short link between EWEB and the Lane County Sheriff's Office. Commissioner Anderson asked if this was a step toward extending the fiber system to Leaburg. Mr. Ahlsten responded that it would tie into existing fiber circuits up to Leaburg Dam and that 5-year plan included microwave all the way to the Carmen Smith Project.

Mr. Ahlsten indicated that the five-year plan would address aging infrastructure and system reliability issues. He added that the pro forma anticipated a $5 million capital reserve at the end of the fifth year.

Vice President Bishop asked what the timeframe was for the Willamette Substation. Mr. Ahlsten responded that it was scheduled for design in 2005 and construction in 2006 and 2007.

In response to another question from Vice President Bishop, Mr. Ahlsten clarified that "runners" was a term used for hydroelectric turbines. He explained that the Smith Falls project would replace turbines that have failed prematurely due to high sedimentation deposits during annual peak runoff periods. He indicated that engineers were still studying whether the machines would be replaced or repaired. While the budget was prepared with replacement in mind, he thought there was still a possibility the turbines could be repaired at a lesser cost.

In response to a question from Commissioner Farmer, Mr. Ahlsten said 60 percent of the budget for the substation and generation plants will be spent on replacing old equipment. In terms of the distribution system, he stated that over time spending would be ramped up to allow for annual replacement of between two and three percent of EWEB's wood pole plant and proactive replacement of UG cable systems. He indicated that even with this increased level of capital expenditures it would take approximately 10 to 15 years to make up for prior deferral of investment in the system.

Commissioner Farmer asked what it would cost to bring all of the poles up to a standard considered acceptable by 2009. Mr. Ahlsten responded that EWEB owned 18,000 poles and had facilities on 5,000 Qwest owned poles and the average age was approximately 30 years. He elaborated, stating that it was approximately a $3,000 expense per pole replacement, thus the total expenditure could exceed $20 million over the next several years.

Corporate Services Director Roseanna McArthur assumed there were similar questions about the fleet. She shared some additional information regarding fleet replacement, stating that at the recommended replacement rate, by 2009 the book value of fleet assets would be approximately 65 percent of replacement cost.

Electric Division Director Jim Wiley added that the average age of substation power transformers were also over 30 years. He indicated they are still providing reliable service and replacements and would be based performance and O&M costs.

Commissioner Farmer remarked that technology projects include hidden costs. He noted that there were frequent Consent Calendar items for ongoing service and consultant contracts for computer software and technology. He asked if there was a sense of what this cost associated with planned technology projects would be. Ms. McArthur responded that in some cases there would service and maintenance cost savings associated with planned technology projects. For example the GIS migration project would combine three separate platforms into a single vendor's system. She said it was not unusual to have maintenance costs equal to 15 to 18 percent of the original cost.

In response to another question from Commissioner Farmer, Ms. McArthur stated that most of EWEB's information technology assets could be moved to a new facility.

Vice President Bishop asked if any of the Leaburg Canal funding was intended to go to property owners there. Mr. Ahlsten replied that $250,000 was for mitigation of seismic and landslide risk and approximately $1 million for the fish return project. No money was allocated for property damage.

Vice President Bishop asked if any landowners had been compensated. Mr. Ahlsten was uncertain. He knew of one claim from a filbert farmer, adding that the utility had installed pump back systems to resolve the drainage problem the farmer had experienced.

Mr. Ahlsten stated, in response to another question from Vice President Bishop, that the 2006 budget would be proposed to include some money for mitigation of property impacts associated with the Leaburg Lake raise project.

President Lanning asked what factors were taken into consideration when determining that $5 million should be placed in the capital reserve fund. Mr. Ahlsten replied that the intent was to maintain a reserve adequate to cover one or two major equipment failures. Mr. Wiley added that there is a high probability that generator #2 at Leaburg would need to be replaced in the near future. He said the utility has taken some risk by moving that project out beyond the 5-year capital planning horizon.

FIVE YEAR WATER CAPITAL PLAN

Water Engineering Manger Mel Damewood said he would speak on the capital plan process and how the five-year capital plan had been determined. He stated that the bulk of the discussion would revolve around financial issues. He provided an overview of the 2005-2009 Water Capital Plan and the 2005 Capital Budget accompanied by a power point presentation.

Regarding the vehicle expenditures, Mr. Damewood noted that the utility would have to purchase more construction equipment in 2006.

Commissioner Farmer noted that the Direct SDC Requirements graph seemed to indicate the utility was losing money there. He asked if the utility was, in fact, getting deeper in debt. Mr. Damewood responded that Mr. Varner intended to maintain $2 million in the systems development charge (SDC) fund in case the bottom dropped out of the charges.

Commissioner Farmer asked if there was anything in the 2005 to 2009 time period that contemplated perfecting the utility's Willamette River water rights. Mr. Damewood said, in response, this was not being contemplated at this time. He stated that the big assumption was that this was an option, should the utility not be able to attain groundwater rights. He was hopeful that the utility could trade funds on that, but was unsure of the legality of it. He added that building a treatment plant for the Willamette River would cost $1 a gallon, approximately, thus giving a plant that processed 10 million gallons a price tag of $10 million. He reiterated that the utility was moving forward as if the groundwater project was going through.

Commissioner Farmer encouraged staff to be cautious of the risk in relying on SDC charges. He noted that the cities and County had just commissioned a study on land supply to determine how much developable land existed within the urban growth boundary (UGB). He predicted the SDC charge income would drop off radically in the next five years. Mr. Damewood responded that it had remained steady with infill development. He added that SDCs would relate to build out; the utility would be required to build less infrastructure with less development.

President Lanning asked how much the utility was paying on average for the CIP. Mr. Damewood replied that the utility had spent circa $12.5 million in 2003 and circa $10.5 million in the present year. He predicted this amount would level off and then decrease as capital improvements that had been deferred were completed.

Fiscal Services Supervisor Dick Varner, in response to a question from Vice President Bishop, said the water utility was not as leveraged out as the electric utility.

BONNEVILLE POWER ADMINISTRATION RATE ANNOUNCEMENT

Mr. Wiley called attention to the two press BPA releases Public Affairs Manager Marty Douglass had provided the Board. He explained that Mr. Varner would explain what the rates were and how they were going to affect EWEB.

Mr. Varner said the BPA rate reduction announcement was based on the level of the combination of financial based and safety net based cost recovery adjustments (FBCRAC and SNCRAC). He explained the three cost recovery adjustments, as follows:

• Load-based: to the extent extra power had to be purchased to serve all of the loads that were committed to, the cost of the power became and adder to the rates;
• Financial-based: if BPA had to draw on reserves it would increase rates up to a certain percentage to help mitigate that;
• Safety net-based: in the case of a missed treasury payment, or if the BPA's analysis indicates a more than 50 percent probability of missing a treasury payment, another rate increase would be applied to insure that the payment would not be missed.

He said the BPA had exercised all three cost recovery adjustments. Because of this, he reported that the FBCRAC and the SNCRAC had totaled 22 percent, and this was an adder on the Block contract and the LBCRAC was an adder on the Slice contract. He stated that the original numbers the rate proposal had been built around in July had been, in part, based on BPA information that the 22 percent number would drop to 15 percent. The latest announcement indicated that it would drop to 11 percent. He explained that the four percent reduction translated to approximately $500,000 over a 12 month period in benefit. He clarified that, contractually, about a quarter of the benefit would go to Hynix because their rates were tied to the Block rates and they were approximately 25 percent of the Block take from the BPA.

Mr. Varner related that staff had pressed the BPA to predict the amount of the Slice true-up for January of 2006. He said the recent rate action was prepared based on a $7.6 million Slice true-up, but information from the BPA that had accompanied the "good news" indicated that the forecast was for an $8.6 million impact to the utility. The resulting net in "bad news" was $700,000, which translated to an increase of three-tenths of one percent to electric rates to the "adder" that the public hearing had been held about. He stated that the large industrial customers would have a half percent increase to their "adder." He added that he would print this in a backgrounder with charts to further explain to the Board.

Commissioner Anderson asked if it had been set for the year or if it was based on assumptions regarding what would happen with water and fish expenses. Mr. Varner responded that it did not vary with water, but was affected by the BPA's expenditures. Commissioner Anderson wondered if it would be affected by an abundance of rain and snow. Mr. Varner reiterated that the only thing that would lower the Slice true-up was if actual expenditures were lower than budgeted expenditures. He said more information would be known in the spring, with final numbers coming in November and December.

In response to a question from Commissioner Farmer, Mr. Varner stated that the BPA was continuing to spend more money than what they said they would spend when they put rates together in 2001. He attributed this to overestimation of fish credits and that the BPA had been optimistic regarding administration costs. He also felt the BPA had spent more on fish and wildlife than had been originally thought. He surmised it would be risky, given that the utility did not have adequate reserves, to count on the BPA being able to significantly under-run their budget.

Vice President Bishop asked if the Emerald Public Utility District (EPUD) had lowered its rates due to being a Block customer. Mr. Varner replied that EPUD saw the full benefit of it. He noted that the Springfield Utility Board (SUB) was also seeing the full benefit, but was faced with other rising costs that precluded any rate reduction.

Vice President Bishop wondered if EWEB's large contracts would leave for other utilities. Mr. Varner responded that Weyerhaeuser and Sierra Pine contracts were due to expire in May, 2005, and both large customers had "conversations" with SUB. He felt EWEB was relatively insulated from the impact of losing either large customer, but the City of Eugene would lose contributions in lieu of tax (CILT) payments and would feel the impact. He also thought it would cause EWEB to scale back its conservation programs.

Commissioner Farmer asked if the departure of the larger customers would affect the low income energy assistance program (LIEAP). Mr. Varner affirmed that the program would also be impacted.

In response to a question from Commissioner Anderson, Mr. Varner stated that EWEB had a contract with the larger customers that specified that, should they depart, EWEB would receive the unamortized value of the conservation. He added that it was as yet unknown whether that clause would hold up in court.

Mr. Varner explained, at Commissioner Anderson's request, that Slice customers were legally challenging the methodology by which the BPA calculated the true-ups. He said success in the lawsuit would either force the BPA to draw down reserves more or there would be rate pressure on the non-Slice customers.

Commissioner Farmer complimented Mr. Douglass on being proactive about the Register Guard story. He encouraged him to continue to be proactive.

President Lanning adjourned the meeting at 7:23 p.m.

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Assistant Secretary President