EUGENE WATER & ELECTRIC BOARD
SPECIAL BOARD MEETING
EWEB BOARD ROOM
OCTOBER 19, 2004
7:30 P.M.
Board Members Present: Sandra Bishop, Vice President; Dorothy Anderson, Mel Menegat, commissioners.
Others present: Jim Wiley, Debra Smith, Dick Helgeson, Ken Beeson, Dick Varner, Lance Robertson, Mel Damewood, Brenda Sirois, Cathy Bloom, Tom Buckhouse, Scott Spettel, Jim Maloney, Eric Hiaasen, Deborah Brewer, Will Bondioli, and Krista Hince of the EWEB staff; John Simpson, Commissioner-elect; Ruth Atcherson, minutes recorder for the City of Eugene.
Vice President Bishop convened the Special Board Meeting of the Eugene Water & Electric Board (EWEB).
She extended heartfelt condolences to General Manager Berggren for the recent loss of his father. She thanked staff for "picking up the slack."
AGENDA CHECK
Electric Division Director Jim Wiley pulled Item 5 from the Consent Calendar as it had been determined that the Board needed more discussion regarding the land sale.
PUBLIC INPUT
There was no one present who wished to speak at this time.
CONSENT CALENDAR
Minutes
Resolution
Business Service Agreements
Purchase and Sale Agreement
Commissioner Anderson pulled the minutes from the Work Session held on August 17.
Commissioner Menegat, seconded by Commissioner Anderson, moved approval of the Consent Calendar with the exception of Item 5 and the minutes from the Work Session held on August 17. The motion passed unanimously, 3:0.
ITEMS FROM BOARD MEMBERS
Commissioner Anderson reported that the McKenzie Watershed Council (MWC) held its annual planning retreat. She said attendance was "superb" and the group had been very enthusiastic, adding that our Commissioner-elect John Simpson had been present. She conveyed her pride in the organization as EWEB had been one of the cofounders of the MWC and it had grown up well.
Commissioner Menegat stated that he attended the River Road Neighborhood Association on October 11. He related that the rate increase had been discussed and concern had been expressed regarding EWEB's reduction to the education program.
Commissioner Menegat reported that he had attended a Western Generation Association meeting via telephone conference on October 15. He related that the discussion centered on engineering items and the upcoming budget meetings, among others.
Vice President Bishop announced that the Northwest Energy Coalition conference was scheduled for the first weekend of November. She said she would attend as would John Simpson.
Vice President Bishop thanked staff for the "major customer" reception. She felt it was a tribute to the EWEB staff that almost all of the questions that were raised were addressed to the director of the Bonneville Power Administration (BPA).
CORRESPONDENCE
Mr. Wiley reported the following:
BOARD AGENDAS
Mr. Wiley proposed that EWEB have its first meeting in November on Monday, November 1. The Board agreed to the schedule change.
Mr. Wiley discussed the upcoming retreat, scheduled for October 28. He noted that the meeting would break for lunch at 11:00 a.m. so that the Board and staff could return to the EWEB site for an awards luncheon and to receive a SHARP award. The retreat was scheduled to reconvene at 1 p.m. He said the Board would meet in Executive Session the following day to discuss the Brand S property.
Regarding future Board agendas, Mr. Wiley stated that Item 4 of the 'items to be added to future agendas' list, a discussion of the impact of generation assumption changes and how it would affect the General Manager's goals, had been had been scheduled for the Work Session on November 1.
BOND RESOLUTION AUTHORIZING THE ISSUANCE OF BONDS FOR 2005
Assistant Treasurer Cathy Bloom explained that the Resolution authorized EWEB to issue up to $2 million under the Uniform Revenue Bond Act (URBA) process for the Carmen Smith project and also allowed EWEB to take $5.4 million from the remaining URBA authority to use for other capital improvements. She said the Resolution was broad because it was not yet determined how much the improvements would ultimately cost. Because of this, staff was recommending authorization for the maximum amount that could be issued. She outlined the process: the Board was asked first to approve the bonding, then it would be brought before the City Council for approval, and then, upon their approval, the Board would once again approve the bond in its final amount.
Commissioner Menegat moved to approve a resolution requesting the City of Eugene to authorize the issuance and sale of electric utility system revenue bonds in the aggregate principal amount not to exceed fifteen million four hundred thousand dollars ($15,400,000) for the purpose of financing electric utility system improvements; and providing for related matters. Commissioner Anderson provided the second. The motion passed unanimously, 3:0.
INTEGRATED ELECTRIC RESOURCE PLAN UPDATE AND STRATEGY
Brenda Sirois, Resource Planning Analyst, provided a power point presentation on the Integrated Electric Resource Plan (IERP).
Commissioner Anderson had thought that the "lost opportunity" option was only for the short-term and then would be revisited, should it be deemed prudent. She noted the graphs in the power point seemed to indicate it was a point for longer-term consideration. Ms. Sirois responded that Commissioner Anderson's interpretation of the option was correct.
In response to a question from Commissioner Anderson, Mr. Maloney said demand side management (DSM3) would not be impacted by waiting. He explained that opportunities for DSM came and went, but noted it was easier to realize the savings when a home was built then to augment it later. Commissioner Anderson surmised that under one of the proposals DSM could be added along with the "lost opportunity" option.
Vice President Bishop asked staff to discuss the timing and what Board approval was needed. Power Management and Planning Manager Scott Spettel responded that staff was trying to get an overall strategy in place. Regarding specific resources, he was not comfortable with a great deal of specificity as there were too many unknown factors at this point. But, he said, should the Board indicate a strong preference for one thing over another it would provide an opportunity for staff to bring forward further proposals.
Commissioner Anderson supported staff's approach as she found the advisory committee to be a little nervous because of the number of unknowns. She expressed her preference for the "lost opportunity" approach. She averred that it did not deviate much from the objectives of the 1993 IERP process.
Commissioner Menegat concurred. He conveyed his appreciation for all of the work that had gone into the process. He also preferred to support DSM3 and the "lost opportunity" options. He noted the level of importance given to wind power by the committee.
Vice President Bishop asked how realistic it was for the utility to come up with the finances to pursue some of the IERP. She wondered what the actual constraints were and how the risk could be weighed against the benefits. Mr. Spettel responded that staff brought long-term acquisitions before the Board. He thought the fiscal circumstances the utility faced posed new challenges to planning. He worried that the process would move into 2006 and staff would have to return before the Board with a request for more money.
Energy Resource Project Manager Jim Maloney noted that, among all of the paths through the strategy tree, there was a fairly consistent approach regarding the types of energy resources. He pointed out that there was no development of coal or nuclear energy resources, but there was an emphasis on development of conservation, renewables, and high efficiency cogeneration.
Vice President Bishop asked if staff was hearing any inconsistencies between the feedback from the Board and the work group's recommendation. Ms. Sirois replied that it was the same resource "stack" and the only difference was the rate at which it would be acquired. Mr. Maloney agreed, adding that the feedback was consistent with the work of the group.
Vice President Bishop asked if there had been any discussion of the impacts the utility would feel if it lost some of its large customers. Mr. Maloney said such scenarios had been discussed and analyzed. Mr. Spettel added that there were tools to apply to problems the large customers were facing.
Ms. Sirois summarized Board input, stating that it seemed the direction being given was to pursue a path through the strategy tree of "lost opportunity" DSM and "lost opportunity" resources. She noted the Board was not adverse to a rate investment impact in the 2006 to 2010 timeframe, but wanted an analysis of some of the risk and the cost.
Vice President Bishop called for a five minute break at 8:25 p.m.
FINANCIAL GAS HEDGE FOR THE STEAM UTILITY
Fiscal Services Supervisor Dick Varner indicated that staff would begin by having Mid-Term Trader Eric Hiaasen explain alternative approaches to address fuel price risk, but would not request Board action until the increases in commodity and steam fuels charges had been considered. As an example, he explained that should the Board decide to charge the cost of natural gas in the forward markets and take the risk that the price would go higher and maximize the benefit if the price fell, the Board should not opt to hedge prices. But, should the Board want some protection against prices rising and wanted to keep it short-term, he said there were alternatives to just buying a "plain hedge."
Mr. Hiaasen referred to the chart entitled Figure 1. General Service Fuel Charge Rate over 4 years for six alternative hedging strategies. He said there were two fixed price options consisting of, first, signing a fixed price contract for four years for all volumes that the steam utility anticipated it needed or, second, signing a fixed four-year flat contract which would levelize gas costs, though it would allow for increases in delivery charges. He stated that this would lock customers into a $13.50 range, which would be a significant rate reduction for the first year. He noted, however, that this would lock customers into a higher rate for four years, should market prices fall as had been predicted. He explained that the graph indicated probability distribution.
Mr. Hiaasen said Simulation #5 demonstrated current strategy, which was to lock this year's prices and not to worry about prices in future years. Simulation #6 indicated no hedging at all. He did not recommend it.
Mr. Hiaasen outlined Simulations #3 and #4. He stated that it would buy down the first year of gas prices below market value in exchange for locking in prices above market value in the next few years. He said it would also include buying an embedded call option in the second, third, and fourth years, for part of the volumes, 25 percent in the second year and 35 percent in the third year.
In response to a question from Vice President Bishop, Mr. Hiaasen explained that an embedded call option meant that, for instance, in 100 units of natural gas, in the first year the units come at a fixed price below current market value, and in the second year 75 units would be at the fixed price (increased from the first year) and 25 would be a "call option" and would be at the same price as other fixed price volumes. He added that the price did not need to be the same, rather the staff chose to do so to simplify the process. He clarified that, if the index price at the Canadian/United States border was set and it was above the fixed price, the utility did not pay more than the capped price, the gas marketer would send the utility money, and the cost was brought back down to the cap. He said should the cost drop below the price, the utility would pay just the indexed price. Continuing, he stated that in the third year the split for the fixed price and call option units would be 65/35 and in the fourth year the split would be 55/45. He averred that this would benefit customers as, should prices fall, there would be a greater portion over time that would get the reduced price, and should prices dramatically increase, the portion that remained at the fixed price would help to keep customer rates down.
Commissioner Anderson asked if the price would be guaranteed. Mr. Hiaasen replied that the third and fourth simulations contained more risk for price increase, but also provided for more opportunity for benefit should prices fall.
Commissioner Menegat asked how the $14 price had been arrived at. Mr. Varner responded that the amount was determined by the how much the natural gas cost per ton of steam generation.
Commissioner Anderson asked if natural gas prices were going down. Mr. Hiaasen replied that this was, as yet, unknown. He said Hurricane Ivan had changed the gas producing capability of the Gulf of Mexico area and the early cold weather was driving prices up, but the recession could drive the price down, as would mild weather. He also anticipated that people would react to gas prices and use less, which could drive prices down. He stated that existing gas fields and, perhaps, the continent as a whole, had peaked in its natural gas producing ability. He discussed bringing liquid natural gas in by ship, which required a receiving terminal, the construction of which tended to raise local opposition. Most terminals, as a result, were located in the Gulf of Mexico. He noted that some people thought the solution was to build a large pipeline to Alaska, adding that this would take at least ten years. He commented that there was much uncertainty on the part of potential investors in natural gas related construction as there was no certain future for such facilities.
In closing, Mr. Hiaasen believed there would continue to be a fundamental shortage of natural gas in North America which would likely boost prices. He predicted prices would fall somewhat in the short-term, but then would rise.
PROPOSED INCREASES IN STEAM FUELS AND COMMODITY CHARGES
Water & Steam Division Director Tom Buckhouse said staff came before the Board every year to explain what the fuel rates were going to be and what the commodities rates would be. This year, he opined, was more difficult. He reiterated that the current fuel rate was $10.50, but was projected to rise to $13 to $15.
Steam Operations Supervisor Will Bondioli harkened back to Commissioner Menegat's question regarding how numbers were arrived at. He clarified that he made estimates on the volume that would be sold by looking at the history of steam power generation and sales. Through the spreadsheet process, he calculated efficiencies of distribution and efficiencies of production to determine how much gas to buy to generate the power for customers. It informed him what fuel charge was necessary to offset costs.
Mr. Bondioli had been forced to look at lowering the amount of heat the utility would sell. He said he built the current budget on a six percent reduction in sales based on drops in power usage most likely due to increased conservation to offset fuel costs.
Additionally, Mr. Bondioli stated that the University of Oregon had indicated that it would no longer have a summer shutdown. This had caused his operation to shift from a nine-month operation to a 12-month operation which had, in turn, increased operations and management costs, creating a $128,000 shortfall. He hoped to recoup this increase through an increase in commodities charges.
Mr. Bondioli said the reason staff was looking at a long-term hedge was the uncertainty in the fuel market. He also pointed out that 30 to 35 percent of the steam business was to PeaceHealth and the contract was going to expire on December 31. He felt it provided an opportunity to talk to the customer about energy costs and natural gas costs. He related that PeaceHealth had expressed a preference for flattening out the rate for the steam power. He stated that the renewal of the contract would come before the Board in the Consent Calendar.
Vice President Bishop surmised that Simulation #1, #2, #4, and #6 could be eliminated. Mr. Buckhouse reiterated that staff recommended Simulation #3. Mr. Hiaasen added that Simulation #4 gave an attractive first year, but looked to increase costs in the subsequent three years.
Commissioner Menegat moved to approve and adopt the revised fuels charge and increased commodity charge as proposed in the Proposed General Service Steam Rate Schedule, to become effective with steam billings rendered on or after December 1, 2004. Commissioner Anderson provided the second. The motion passed unanimously, 3:0.
Regarding the second action requested at the meeting, Commissioner Menegat asked what the General Manager's authority was prior to the resolution before the Board. Mr. Varner responded that he had no authority without asking the Board for specific approval.
Commissioner Menegat moved adoption of Resolution 0504 authorizing the General Manager to enter into natural gas-related financial risk mitigation contracts. Commissioner Anderson provided the second. The motion passed unanimously, 3:0.
ITEMS REMOVED FROM THE CONSENT CALENDAR
Commissioner Anderson offered the following correction to the minutes from the Work Session held on August 17, 2004:
· Page 6, paragraph 3: "She felt the Greenhill Roosevelt site had potential for becoming an ugly industrial site."
Commissioner Menegat, seconded by Commissioner Anderson, moved approval of the minutes from the Work Session held on August 17, 2004, as amended. The motion passed unanimously, 3:0.
Vice President Bishop adjourned the meeting at 9:19 p.m.
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Assistant Secretary President