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

Others Present: Jim Wiley, Dick Varner, Debra Smith, Tom Buckhouse, Roseanna McArthur, Brenda Sirois, Dick Helgeson, Mat Northway, Jim Maloney, and Krista Hince of the EWEB staff; Ruth Atcherson and Joe Sams, City of Eugene Minutes Recorders; and John Simpson, Commissioner-elect.

Electric Division Director Jim Wiley opened the retreat by outlining the agenda for the day. He said the meeting would adjourn at 11 a.m. to allow all those in attendance to be present for the SHARP awards ceremony and luncheon at the Eugene Water & Electric Board (EWEB) headquarters.

Mr. Wiley reported that there had been a break in a major water main the previous evening and asked Water and Steam Division Director Tom Buckhouse to speak about it.

Mr. Buckhouse explained that a City contractor had been replacing a sewer line and had wedged a tool that was used to break open the sewer line between the water line and concrete. EWEB crews worked diligently to repair the break and the repair was completed by midnight. However, he said, due to the proximity of the open sewer line, the water pipe had required disinfecting and water service was not completely restored until 7 a.m.

Integrated Electric Resource Portfolio Work Session

Power Resources Director Dick Helgeson said the definition of portfolio attributes was consistent with the values and views of the group. He explained that staff had, with the input from the Board and the working group, defined a strategy path and laid out a tree of decisions with milestones and options to be considered. He called attention to the handout entitled Objective of Work Session. He surmised the utility was "heading in the right direction" with its resource planning. He added that the only remaining question was at what level the Integrated Electric Resource Portfolio (IERP) should be engaged.

Energy Resource Project Manager Jim Maloney provided an overview of potential portfolios and compared them. He explained that the two comparitors were a baseline portfolio and a sample portfolio with two hypothetical power generation projects, one that utilized wind and one that utilized water power. He noted that the graph labeled Firm Load-Resource Balance for Lost Opportunity Option assumed a 25 megawatt hour (MWH) decrease in the power allocation from the Bonneville Power Administration (BPA) in 2011. The third graph was entitled Monthly Load Resource Balance Lost Opportunity Resource Additions. He pointed out that it seemed like the load growth in some months was close to the MWH load forecast using the Firm Resource Balance with New Lost Opportunity Resources.

Fiscal Services Supervisor Dick Varner commented that power trading rid the utility of excess power and helped to offset costs.

Regarding the risks and benefits of buying and selling in regional markets, Mr. Maloney said EWEB had not done well in 2002. Mr. Varner explained that "everyone" had been stuck buying non-firm hydroelectric power that year. He said the utility had counted on the secondary power to balance its budget.

Commissioner Farmer asked if there was a scenario that considered EWEB with excessive loads it was unable to sell. Mr. Maloney responded that there were cases like this and EWEB had experienced such a scenario in the past. He said the BPA sometimes would spill water over the dams rather than selling power in a flooded market. He stated that it was possible to see depressed loads for a while.

Mr. Varner recalled that prices had dropped into the upper teens and lower twenties for wholesale in 1992 because, though there had not been a "bumper crop" of hydroelectric power, the utility had relatively close to minimal power available and depressed loads.

Mr. Maloney asked those present to consider what the net revenue impact would be for the Medium Case Revenue Estimate. He predicted there would be a reduced revenue requirement after 2010, though it would cost slightly more in the short-term. Mr. Varner thought it would require a one percent short-term increase.

Mr. Maloney discussed the graph entitled Example of Revenue Requirements for L/O Option "Low" Market Scenario. He explained that when the market was low surplus power sold for considerably less. Mr. Varner projected that electric rates would have to be increased by one to two and a half percent to compensate in this scenario.

Mr. Wiley asked where the reserves fit into that scenario. Mr. Varner responded that the scenario would help in the short term, but reserves would be wiped out within a few years.

Continuing, Mr. Maloney discussed the graph entitled Example of Revenue Requirements for L/O Option High-Medium Market Scenario (0.75). Several staff members discussed liquefied natural gas, the recent rise in prices, and the difficulties in bringing it to market.

President Lanning asked what case applied to the utility as it currently stood. Mr. Maloney replied that EWEB fell approximately into the medium case scenario.

Mr. Maloney explained the Example of Checkpoint Assessment. He clarified that forward electrical market prices were the actual prices at which electricity was being traded. Regarding Regional Transmission Availability, Mr. Varner expressed concern that the utility was building east-side transmission facilities while the load was increasing on the west side.

Commissioner Anderson worried that the intrinsic value of obtaining more sustainable resources for the long-term good of the community would be overlooked. Mr. Maloney stated that even if EWEB itself was not working to expand renewable energy resources, it could still support other people doing so.

Resource Planning Analyst Brenda Sirois briefly outlined three plausible futures and three potential scenarios for EWEB into the future.

Mr. Varner emphasized that there were no specific numbers attached to the scenarios at present as the financial aspects had yet to be developed.

Regarding the third scenario, Mr. Maloney felt one could make a case for shifting the strategy from a focus on renewables to a greater focus on local distributed generation, as in the near-term this would provide more surplus power supply. He related that Mr. Spettel had reviewed the BPA contract and determined that it would likely maintain the current allocation to EWEB through the next contract. He said, should there be an indication that the BPA allocation would be significantly lower, more resources would need to be brought on line.

Ms. Sirois briefly summarized the IERP Update Strategy.

Commissioner Farmer expressed uncertainty as to how the variables would affect the outcome in the third scenario. Mr. Varner responded that it was an example for consideration. He suggested that as time progressed, the utility would have more of a concept of the magnitude of changes in the demands placed upon it and the supply available to it. Mr. Helgeson added that each of the variables was represented in the models. He said one would use the decision tree as a tool and make decisions along the way. Another way of saying it, he said, would be that one would look at the parameters, dial in assumptions or forward conditions and the result would be the economic model.

Ms. Sirois stated that the strategy included many "on and off ramps." She explained that, should the utility stay in the "lost opportunity" option for the next 20 years, staff would be monitoring all of the factors. She said staff was trying to have a plan adopted that considered all of the variables.

President Lanning conveyed his uncertainty as to why this route was being chosen. He commented that the IERP working group had a strategy and now it seemed it had become a "decision tree with off ramps. Mr. Maloney responded that it had to do with the severe financial constraints that had come to light. He said that the Board and staff had directed the IERP strategy to take it slowly in order to allow flexibility. Ms. Smith likened it to someone baking a cake without knowing how much of the ingredients were available. She said staff could only guess at the ingredients and the quantities available in the IERP.

Vice President Bishop asked what was meant by "lost opportunity." Mr. Maloney replied that it was a regional concept regarding primarily renewable resources.

President Lanning remarked that when setting up the working group, the goal had been to develop a long-term policy. He felt like staff and the Board had pulled back from that objective. He suggested that the dams on the McKenzie River might not have been built had the people who built it only considered the expense and not the long-term benefit. He thought the updated strategy was being reactionary.

Mr. Helgeson agreed, adding that the question was how aggressively the utility should move into its future vision. He noted that the IERP working group had not been asked to balance the financial circumstances of the utility with its vision.

Commissioner Anderson stressed the level of importance the working group had placed in front of the objectives. She said the group outlined the need to move forward with its values and objectives in mind.

Vice President Bishop concurred, stating that the Board wished to assure that the values and objectives of the group were not collapsed under financial matters.

Ms. Sirois stated that the document would define long-term portfolio objectives with the short-term financial constraints in mind.

Mr. Varner likened the process to having a steering wheel and an accelerator pedal, as the strategy would steer the utility's process and its financial state would determine whether it proceeded in a quick or slow manner.

Vice President Bishop preferred the "lost opportunity" path as it provided the most flexibility.

Commissioner Menegat supported the "lost opportunity" strategy. He said the utility was always willing to consider those opportunities. He thought it prudent to proceed with some caution because should the utility lose two major customers or should it encounter another situation that would affect the utility's system or programs, it was important to retain some flexibility. He added that he was willing to look at rate increases, should they be recommended, though he was not ready to commit to such increases in the present.

Commissioner Anderson expressed her support for the "lost opportunity" strategy, but indicated she did not have a preference between DSM and distributed generation.

Mr. Helgeson said there was a sense that some terms for resources could be under negotiation in the near-term. He stated that staff was trying to determine some initial tolerance for the amount to be negotiated for. Mr. Varner added that it was important for staff to know the Board's "appetite" for other resources, whether it was $500,000 or $2 million. He stressed that he was already starting financial planning for 2005 to 2010. Mr. Helgeson clarified that there was nothing in the pro forma aside from building a baseline.

President Lanning advocated for a rate investment as opposed to a rate increase. He was uncertain what that investment should be. He felt the Board should instruct staff to bring anything that could benefit customers before it for consideration.

In response to a question from Commissioner Menegat, Mr. Varner stated that a .75 percent rate increase would be needed in 2006 to pay for a $1 million investment. Assistant to the General Manager Debra Smith added that 2006 was projected to be the next time that a rate increase other than a BPA "pass through" would be considered. Mr. Varner predicted the increase to be something in the five to six percent increase without taking into consideration any investments. He explained that operations and management expenses and the utility's debt service continued to ramp up over time.

Ms. Smith asked if Commissioner Anderson approved of the "decision tree." Commissioner Anderson replied that she felt it would work as long as the long-term objectives were kept in mind.

Commissioner Farmer remarked that there seemed to be much discussion and no decisions. He felt the sense given him by staff was that the utility did not know enough about the future so decisions could not be made. He opined that waiting until "everything looked rosy" to make a decision might mean no decisions would ever be made. He said the Board and staff should proceed with decision-making and then, as more information came in, decisions could be changed or modified.

Commissioner Menegat supported moving ahead with the "lost opportunity" strategy, but was not willing to go to rate payers in the spring of 2005 to ask for a two to five percent increase for the energy plan. He said he would likely support a rate action in 2006. He added that he did not feel he had enough information to make a strong resource decision at this time.

Commissioner Farmer conveyed his concern that the utility would continue to have medium to high load growth demand. He predicted the majority of the development and subsequent load growth in the local market would occur in the Cities of Springfield, Cottage Grove, Coburg, and other outlying areas and would not increase the burden on EWEB as much. He opined that the utility always needed more resources.

Vice President Bishop remarked that, in looking at load growth, the loss of the two major contracts could be a bonus. Mr. Varner replied that it would, but only in the short-term. Mr. Helgeson asked if this meant she preferred the baseline strategy. Vice President Bishop responded that she felt the utility needed to be considered within the context of the region. She asserted that EWEB was the only public utility that relied solely upon hydroelectric power. She said other resources should be sought to support EWEB's main load so that EWEB did not need to rely on factors over which it had no control.

Ms. Smith asked Commissioner Farmer if he had a preference between DSM and distributed generation. Commissioner Farmer responded that he was uncertain. He agreed, however, with Vice President Bishop that without local growth, the utility could face an operating problem.

Mr. Maloney said, in response to Vice President Bishop, that in the near-term, having too much power and being able to sell it made a profit for the utility. He suggested that when one looked at the futures available to the utility, high markets were good for EWEB for this reason.

Commissioner Farmer stated, in response to a question from Ms. Smith, that he would not consider a rate investment in the spring of 2006 because he was not convinced that a demand for it existed.

President Lanning supported the terminology of a "rate investment" rather than a "rate increase" and indicated he would even support it as early as 2005. He said he would have the courage to say to the voters that it was in the utility's long-term best interest. In response to a question from Ms. Smith, he said he had no preference between DSM and distributed generation. He added that the IERP working group had made a recommendation and averred the Board and staff should use that recommendation as a guide.

Commissioner Farmer remarked that he felt some uncertainty regarding utilization of the "strategy tree."

Commissioner Anderson voiced her support for the idea of a rate investment. She thought it would merit consideration in 2006, adding that she felt most customers would understand the reasoning behind it.

In closing, Ms. Smith read the adopted objectives aloud, as follows:

• Insure products and services are affordable and competitive;
• Make progress toward a sustainable energy future;
• Demonstrate environmental stewardship;
• Be responsive to customers and owners;
• Maintain long-term vision within the near-term decision context;
• Strive for flexibility in the resource portfolio.

The group took a 15 minute break at 10:13 a.m.

2005 Budget Assumptions

Mr. Wiley introduced the budget discussion. He agreed it had been a difficult year and the rate increase process had been trying. He thanked the Board for understanding the issues and passing the rate action for the purpose of meeting capital needs. He said staff had simplified the budget process and the Executive Management Team (EMT) and Mr. Varner had been working diligently to come up for a budget plan for the coming year.

Mr. Varner provided an overview of the 2005 Budget Planning process, as outlined in the attachment he circulated. He said with the foundation laid in the Work Session held in July, staff had begun the planning process utilizing more conservative generation assumptions. He stressed the importance of adequately funding capital plans as staff did not want to come before the Board needing more money.

Regarding the contract with Weyerhauser, Mr. Varner clarified they had the option, depending on the relative cost of the market versus their retail rate, to take their generation either against their retail load or to sell it on the market. He said this explained the nuance between the numbers in the July forecast and the 2005 budget as it would likely be presented in November.

In response to a question from Commissioner Farmer, Mr. Varner said the budget assumed an 85 percent water year.

Mr. Varner explained that the increase in operations and maintenance labor budget was due to staff's recognition that in previous years overtime costs had been under-budgeted. He said the

Mr. Wiley clarified, at Commissioner Farmer's request, that much of the overtime was caused by responding to emergencies. Mr. Varner added that, given the sporadic nature of such work, it did not make financial sense to budget for more positions.

Mr. Varner stated that some positions had been added, nonetheless, due to anticipated retirement which posed challenges to the utility. He stressed the importance of having trained personnel ready to step in for employees who were leaving.

Corporate Services Director Roseanna McArthur discussed the outstanding lawsuit filed by retirees and noted that legal expenses were anticipated to grow. She also noted that the Carmen Smith issue, wherein employees alleged they were not paid overtime they were due, was still pending.

Commissioner Farmer asked if the legal costs were recoverable should the utility win. Ms. McArthur replied that she would determine what would fall on the insurance and what would fall on the petitioners should the utility win.

Mr. Varner explained that more money was being placed into reserve funds for payment of debt service because of inclining rates. Commissioner Farmer asked why the rates were inclined. Mr. Varner replied that as debts were refinanced, the utility backloaded the principle payments. He projected the debts to increase from $17.5 million to $20 million over the next few years.

Mr. Varner said the discrepancy between the projected budget and the actual budget under Balance Sheet Changes was due to taking a hard look at actuarial studies. Because of this, he said the outlook for post-retirement medical reserves was more favorable. Additionally, Georgia Pacific had indicated it would be running its mill at 2003 levels, which meant the utility could make $500,000 to $750,000 from distribution.

Commissioner Farmer commented that it would be beneficial to have the 2004 budget before the Board for comparison purposes. He thought it would inform projections for volume and the revenue that resulted from it.

Mr. Buckhouse reviewed the draft water budget. He noted, under expenditures, that the utility had not accurately projected power costs for the water facility, thus the discrepancy between the projected and actual budgets. He also noted that chemical costs had climbed more severely than had been anticipated.

In response to a question from Commissioner Menegat, Mr. Varner said the Master Plan for capital spending was adequately covered by the money in hand until 2005. He predicted capital projects that were rate-funded would be "tight" in the next few years and could require staff to return to the Board for further guidance. He did not think the utility could bank on the economy recovering.

Mr. Varner explained that an 85 percent water assumption had been based on analysis of the five worst consecutive years, from 1937 to 1941.

Regarding the maintenance of pay scales with national trends, Mr. Varner stated that EWEB would not be going out in the coming year and surveying the current market. He averred that Eugene pay on a national basis was roughly average.

Regarding capital projects, Commissioner Farmer asked what the procedure would be if a project began to take substantially longer to complete. Mr. Wiley replied that there was a level of shifting of resources from one project to another that was typical as projects panned out to be less or more resource intensive. Ms. Smith reiterated that any large increases of 20 percent or $200,000 over budget would be brought before the Board for approval. Mr. Wiley underscored that every fall the Board was presented with a budgetary true-up for capital projects.

Mr. Varner noted that staff may be returning in 2005 with a proposal for a rate pass-through. Vice President Bishop commented that passing through a decrease could help the utility's credibility. Mr. Varner responded that the utility had done so two years earlier, but had simultaneously instituted the surcharge.

Mr. Varner pointed out that the spring 2004 BPA rate decrease would require lengthy explanation. Vice President Bishop asked if it had been true that the utility could not have predicted that the BPA would do what it had done, which was to protect its "Block" product customers at the expense of its "Slice" product customers. Mr. Varner responded that it appeared they had been willing to draw on reserves in order not to pass through the full impact of their rates to non-"Slice" customers. He added that BPA reserves were lower now than they were two years ago.

Mr. Varner stated that the amount of money going into the Public Employees Retirement System (PERS) reserves would be held flat until the legal morass was further resolved and the financial implications were better known.

Continuing, Mr. Varner delineated some of the labor costs for the Board, as follows:

• Pay increases to labor amounted to over $1 million or an increase of 3 to 3.5 percent;
• Based on past underbudgeting, $400,000 was now budgeted for overtime;
• The net health insurance increase, without factoring in new employees was 3 percent, but the real number was 7 to 8 percent, or circa $400,000.

Mr. Varner discussed the increases in FTE positions. Commissioner Farmer remarked that the number of FTE positions the utility had was a management issue. He felt the Board should be concerned with the financial picture. Ms. Smith responded that staff had Board instruction from five years earlier that specified that all changes in the number of FTE positions should come before the Board.

The morning session of the retreat adjourned for lunch and the SHARP awards at 11 a.m.

The afternoon Budget Planning Session began again at 1:00 p.m.

Overall O&M Budgets

Fiscal Services Supervisor Dick Varner noted that water and steam budgets were balanced. He said there was a $3-4 million surplus which was more than what was expected when the rate increase was planned. He said this was because of handling Weyerhaeuser and the market had risen recently. He said there would be a $1.5 million carry over to the 2006 capital plan. He said water reserves would be used for debt service and to fund a reservoir.

DIVISION WORK PRESENTATIONS

Electric Division

Mr. Wiley said there was a drastic reduction in the budgeted amount for Hydro Relicensing at Walterville and Leaburg. He said the work would center around an analysis of raising Leaburg Lake. He said resources could now be moved to address aging infrastructure. He noted that the capital budget was projected to decrease but added that the O&M budget was up.

Mr. Wiley outlined the drivers for the budget in 2005. He cited aging infrastructure as a primary driver but also noted generation compliance, PUC/NESC compliance, and Carmen Smith Relicensing as other drivers.

Mr. Wiley said there were a number of old meters that needed to be replaced since they were running slower than the newer meters that had been installed.

Assistant to the General Manager Debra Smith added that under-metering customers was not resulting in a loss of revenue because accounting staff were constantly reaccruing electric use.

Mr. Varner said more accurate metering in the future could help allay future raises in rates.

Ms. Smith stressed the importance of accurate metering but also emphasized that replacing meters would not be a revenue panacea.

Regarding Transmission/Substations, Mr. Wiley said detailed engineering was needed for the new Willamette Substation. He said there would be an increase in generation costs. He noted that this was because of replacement of aging infrastructure in generation facilities.

Regarding generation compliance, Mr. Wiley stressed the importance of bringing on a compliance manager. He said there were significant ongoing compliance issues with the new licensing projects. He cited gravel augmentation on the McKenzie River as an example. He also cited annual reports due on cultural resources. He said he was starting a new program for generation compliance that would address the high degree of ongoing work.

Regarding PUC/NESC compliance, Mr. Wiley said there would be a lot of pole work being done in the near future. He said the PUC was happy with the work going on to date.

Regarding Carmen Smith Relicensing, Mr. Wiley said there was a significant amount of work going on. He stressed the need for scientific evidence for backing up any work on environmental enhancements. He said the community believed that more minimum flow was better but noted that studies had shown that more minimum flow was actually not more beneficial to endangered species.

In response to a question from Vice President Bishop regarding when the rebuilding of the Willamette Substation would take place, Mr. Wiley said that work would happen in 2006-07.

In response to a question from Vice President Bishop regarding when the City of Eugene planned to change the traffic infrastructure around the new Federal Courthouse, Ms. Smith said the timing was open but was planned for 2005-06.

Water/Steam Division

Water & Steam Division Director Tom Buckhouse noted that there were a number of areas that were below the 2004 budget. He noted that there was labor transferring in sections between the 2004 and 2005 budgets.

Regarding cost drivers, Mr. Buckhouse cited Laurel Hill 850 Reservoir, Ground Water Well Field Development, and the Hayden Bridge South Filter Basin. He noted that some of those projects were scheduled to be done in 2004 but had been delayed.

Regarding Steam operation, Mr. Buckhouse noted that the University of Oregon had increased its costs so it had not been economical to switch steam operations to that location. He said he was not planning on a summer steam supply from the University in the next summer either.

In response to a question from Vice President Bishop regarding when the study of operating with the University of Oregon steam plant would be finished, Mr. Buckhouse said he had received a letter from the University that they were ready to move forward. He said the work would start in the next couple of weeks.

Mr. Buckhouse said the reason for not transferring to the University steam plant during the summer was because the University had increased its costs so much that EWEB could save no money from the transfer.

Power Resources Division

Power Resources Director Dick Helgeson said the power resources division budget did not contain the power budget. He outlined the 2005 proposed budget which included moving power management O&M back to approved staffing levels, Energy Management Services tracking with the five percent revenue funding target, filling the Regional Affairs position in Power Resources Administration, and continued use of power resources capital for continued DG/PV and EWEB/UO Co-generation studies. He outlined the figures shown for 2004 and 2005 budgets. He noted that membership fees for PPC and APPA would increase in 2005.

Mr. Helgeson said staff were anticipating that the University of Oregon would need to invest in its physical plant facilities that would result in an increase in co-generation of steam with EWEB.

In response to a question from Commissioner Farmer regarding what the division would contribute to bottom line figures, Mr. Helgeson said figures would vary from year to year depending on things like water availability. He said the figure could be found in the contribution margin.

General Manager's Division

Speaking for the General Manager's Division, Debra Smith said that with the new budget the telecom infrastructure budget was now in the Electric Division. She noted that there were still some R&D activities that would be under the GM Division. She outlined the budget figures shown in the meeting packet. She noted that there would be a reduction in school grants but added that there would be an increase in lobbying expenses due to the new legislative session.

Vice President Bishop raised a concern with not using independent representation. She said EWEB was now involved with a number of other parties in a contract lobby firm. She read a list of a number of other entities that were also represented by that firm. She said EWEB's interests were now in a balancing act with other firms. She said this was an unacceptable situation and did not bode well for the reputation of EWEB.

Ms. Smith said staff had not committed to what would happen after the current year of lobbying. She said Libby Henry, the current lobbyist, was not willing to continue her services under any circumstances. She said there was lots of time to re-evaluate what would happen later in the legislative session. She suggested having a Board discussion on the issue after the first of the year.

Vice President Bishop reiterated her desire to have an independent lobbyist that had EWEB as its only client.

In response to a question from Commissioner Anderson regarding the reason for moving the low income into the General Manager's Division, Ms. Smith said there had been some tension between debt collection and low income customers. She said the low income program was working much better in the GM Division.

Corporate Services Division

Corporate Services Division Director Roseanna McArthur provided the staff report for the Corporate Services Division budget. She said it was a service division and some of the labor resources for that division showed up (were charged out) in other division budgets. She said this caused some confusion during budget time. She cited Information Services as an example. She outlined the projected figures for the division budget in 2005. She noted that approximately $800,000 of the information resource management increase was for new phone equipment and rewiring. She said that figure would come down if the utility decided to move to a new location.

Ms. McArthur noted that new locks had been installed throughout the facility, which was an unexpected expense, and added that security personnel were no longer contracted but hired in-house.

Ms. McArthur noted that fleet management costs were a little higher because of overtime hours.

Customer/Financial Services

Speaking for the Customer Service/Financial Division, Dick Varner outlined the figures shown in the meeting packet. The budget drivers for the division were as listed:

• As part of the Customer Service Transition Assessment Implementation, functions were re-organized between various programs
• Materials management added staffing to deal with ramp up in capital work
• Resources shifted to Program 13048
• Increase in debt service from 2005 bond issues plus increase in debt service on 1997 and 2001 bonds
• Reimbursement of self-insurance account of $100,000
• As part of the Customer Service Transition Assessment implementation, functions were reassigned to program 13048
• Increase in Interest earnings primarily from larger anticipated cash balances
• Increases in draws from construction funds and reserve accounts for Carmen Smith, Ground Water and other Capital Improvements offset by a decrease in draws for Leaburg/Walterville

Goals and Initiatives

Ms. Smith distributed 2005 initiative budgets. She noted that the Board would see a list of 2004 initiatives on the following day. She said the bulk of the money was spent on keeping the utility going. She went through the listed goals and the initiatives and costs associated with them.

GENERAL DISCUSSION AND NEXT STEPS

Mr. Wiley called for feedback or follow-up questions from the board. He noted that the first public hearing on the budget would be held on November 16 with a second hearing scheduled for December 7.

In response to a question from Commissioner Farmer regarding reasons for rate increases in the utility, Mr. Varner said the biggest driver was going from 100 percent water to 85 percent water. He said there were increasing expenditures and decreasing revenues.

Commissioner Farmer acknowledged that revenue was declining but said he had no way of comparing that percentage with the rate percentage.

Mr. Varner said he would provide figures showing Kilowatt hours and dollars associated with those costs.

Commissioner Farmer said it would be tough for him to accept labor increases that were projected. He said it would be hard to explain to a rate payer given all the increases in other areas. He said the projected labor costs were not appropriate.

Commissioner Anderson noted that staff had previously been cut too far back and staff were currently overloaded.

Mr. Wiley said infrastructure issues could not be addressed when there was no one to work on them.

Commissioner Farmer said he did not want to micro manage labor costs but reiterated his discomfort with the projected increase in labor costs.

There was general discussion of how positions had been deferred from being filled over time. Ms. McArthur said that was being re-evaluated every time an employee retired. She noted that there had been a large amount of turnover in the last ten years.

Mr. Varner noted that there was an element of risk in waiting to replace a person until they retired from the organization.

Ms. McArthur said employee numbers had been declining during the 1990s and noted that quite a few projects had been put off for a number of years and were now showing up in the budget. She acknowledged that this would look like a large increase for the year.

President Lanning asked what the increases for employees for customers had been.

President Lanning asked whether increases in employee numbers for the capital plan were permanent.

Ms. Smith called for input from the Board regarding what their key issues were. She noted that Commissioner Farmer had put his concerns on record but noted that she wanted staff to be clear on its direction from the Board.

Commissioner Anderson said there was a role for the Board in staffing priorities.

Commissioner Farmer reiterated his concern over hiring more employees in the same year that there were two significant rate increases. He said he did not want to get into the argument of where positions needed to be filled.

Ms. McArthur said it would be difficult for existing employees to go without merit increases. She said lowering the budgeted amount for labor would affect those increases if the required work was going to be done. She said the number of people asked for were necessary to accomplish the desired work.

Ms. Smith said staff could do some work around labor figures and return that information to the Board.

Commissioner Lanning said he had not thought that part of the rate increase would go for hiring 21 new employees on a permanent basis.

Commissioner Farmer agreed and that he had not come into the budget process thinking that this many new employees were necessary.

Commissioner Anderson said staff had done its job and felt it was necessary to hire that many employees. She said staff had informed the Board that it was under capacity in employees in past meetings.

Commissioner Menegat said he was not surprised about the number of projected new hires. He said the utility had gutted itself in certain areas and a program was necessary to reestablish EWEB as an effective entity. He stressed that the utility was on its way back and said he was comfortable with the staff projections.

Commissioner Farmer reiterated his concerns and remarked that he would rather see the employees phased in over two years. He said it was hard to raise rates and justify that to rate payers while hiring new employees.

Ms. McArthur noted that re-licensing had also added to the work load and the need for hiring more employees.

Mr. Varner urged the Board to forward any further questions to staff in time for the November 16, meeting.

The meeting adjourned at 4:30 p.m.

_____________ ______________________________________

Assistant Secretary President