Board Members present: Sandra Bishop, Dorothy Anderson, Mel Menegat, Ron Farmer, Commissioners. President Lanning was excused.

Others present: Randy Berggren, Dick Varner, Debra Smith, Tom Buckhouse, Dick Helgeson, Ken Beeson, Jim Origliosso, Marty Douglass, Cathy Bloom, Bill Welch, Steve Mangan, Mike Logan, Tom Williams, and Krista Hince of the EWEB staff; Ruth Atcherson, City of Eugene Minutes Recorder; and John Simpson, Commissioner-elect.

Vice President Bishop convened the Work Session of the Eugene Water & Electric Board (EWEB).

WEYERHAEUSER POWER SALES CONTRACT STATUS

Power Resource Division Director Dick Helgeson reported on the Weyerhaeuser Power Sales Agreement status with the aid of a power point presentation. He noted the pace of negotiations had accelerated in the previous month as news of the intended increase in power rates had come to light. He said the utility was now trying to move some proposals forward.

Key Accounts Manager Steve Mangan explained that Weyerhaeuser was the largest customer the utility served and had a relationship with the utility spanning approximately 50 years. He stated that Weyerhaeuser consumed circa 440,000 megawatt hours (MWh) per year and placed approximately 57,000 kilowatts (KW) of demand on the system, representing about $16 million in annual revenue to EWEB. He related that its paper mills were under pressure as they were competing in a world market and were having a difficult time attracting capital. Weyerhaeuser had requested concessions from all of its vendors.

In response to a question from Commissioner Farmer, Mr. Mangan estimated that total annual sales for Weyerhaeuser at that mill amounted to $350 million.

Commissioner Farmer asked how the conservation measures at the mill compared to other such facilities. Mr. Mangan replied that they used more electricity than other mills.

Energy Resource Projects Manager Ken Beeson discussed the meetings with Weyerhaeuser, now occurring once a week. He reported that the tentative agreement with Weyerhaeuser had been submitted with substantive issues identified. He projected that the final agreement would likely be forged within the next few weeks. He related that feedback from Weyerhaeuser indicated they could work with the proposed time frame wherein staff would bring the proposal for final approval to the Board meeting scheduled for December 21, 2004.

Commissioner Menegat asked what advantage lay in beginning the contract prior to the May 1 date. Mr. Beeson replied that one thing Weyerhaeuser sought was a lower rate than what they would pay with the November rate increase.

In response to a question from Commissioner Farmer, Mr. Beeson said the length of the contract had yet to be set. Mr. Helgeson predicted it would be no less than five years and no more than ten years in duration.

Mr. Beeson highlighted the substantive issues which were the centerpiece of the negotiations: cost of service, conservation, and generation.

Fiscal Service Supervisor Dick Varner stated that power supply cost a great deal to Weyerhaeuser. He related that the company's rate was "around" $46 per MWh, which had been indicated to be higher than costs for other mills. He said the utility had discussed several concepts with Weyerhaeuser, including whether the mill should be melded EWEB customers or whether they would want to purchase their power supply from the Bonneville Power Administration (BPA). He noted the company had indicated a preference for the latter as it was thought to be less volatile. He outlined the staff proposal, as delineated in the memorandum entitled Weyerhaeuser Power Sale Contract Status dated October 29, 2004.

In response to a question from Commissioner Farmer, Mr. Varner said Weyerhaeuser was leaning towards having their power supply costs based on the BPA only and not the whole EWEB portfolio.

Commissioner Farmer wondered why Weyerhaeuser did not hedge the power. Mr. Varner surmised that they viewed power from the BPA as less volatile because there was less secondary generation than EWEB conducted. He also thought Weyerhaeuser believed it had more leverage in lobbying with BPA. Mr. Helgeson concurred. He sensed that rather than pay the risk pricing in rates, they wanted to take the risk as it arose. He noted they had a similar arrangement with the Grace Harbor utility in Washington State.

Vice President Bishop asked who was ultimately responsible for paying the bill. Mr. Varner replied that EWEB was evaluating the credit of Weyerhaeuser Corporate and not just this mill as the larger entity would have to stand behind any bills that were due.

Commissioner Menegat asked how much the power reserve would be lowered by should the BPA assume the risk related to Weyerhaeuser Corporate. Mr. Varner responded that it would be on the order of $1.5 to $2 million less than EWEB currently carried in the reserve.

Regarding transmission and delivery, Mr. Varner reported that some discussion had occurred on the inclusion of partial overhead costs in the cost methodology.

Commissioner Farmer wondered if this contract was setting a precedent and could potentially "open a Pandora's Box." Mr. Varner responded that few other customers were comparable to Weyerhaeuser and none were of the same magnitude.

Mr. Varner related that the Weyerhaeuser contribution to the Low Income Energy Assistance Program (LIEAP) had been reduced from over $200,000 to $40,000. He added that the mill would likely prefer to only pay the mandated minimum of $500, but that EWEB would not consent to this.

Regarding the contribution in lieu of taxes (CILT) to the City of Springfield, Mr. Varner stated that in the last contract EWEB agreed to charge the same melded rate that it charged all other customers or approximately 6.6 percent. He said the new agreement proposed to continue the current rate with several caveats, listed in the memorandum.

Commissioner Farmer surmised that EWEB was paying six percent to the City of Eugene and three percent to the City of Springfield and Weyerhaeuser was paying only 6.6 percent of the $16 million, which meant EWEB was paying $238,000. Mr. Varner acknowledged this was so. Mr. Helgeson added that to date it had been thought there was enough benefit to the other customers that it was reasonable to spread the costs.

In response to a question from Commissioner Farmer, Mr. Varner explained that the margin consisted of approximately $500,000 in support for EWEB's operations and the net margin equaled $250,000. He added that when the agreement had been signed in 1995, EWEB had obtained a 10-year power sales agreement and, additionally, a 20-year power generation agreement. Commissioner Farmer did not understand why EWEB was paying each city for the same sale. Mr. Varner responded that the City of Eugene was going to get its 6 percent no matter what and the payments to the City of Springfield were initiated when the mill land was annexed to that City. He added that there was some risk that Springfield would take actions to hamper EWEB's use of public rights of way that could be onerous should EWEB change or discontinue the payments.

Commissioner Farmer clarified that he was not opposed to giving CILT money to Springfield, but rather that he felt the City of Eugene should not be paid the CILT for power sold to Springfield.

In response to a question from Commissioner Anderson, Mr. Varner said the City would receive nothing if Weyerhaeuser received its power from another utility.

Mr. Welch reported on the conservation aspect of the Weyerhaeuser contract. He noted that EWEB had done industrial conservation for 14 years. He called the negotiation a good opportunity to rethink how money was allocated for conservation. He indicated that Weyerhaeuser had spent 42 million KWh in conservation and EWEB had put approximately $4 million worth of incentive to attain that conservation, some of which came from the BPA. After EWEB started assessing the 5 percent charge in 1998, he said EWEB had collected a little over $4.5 million in the 5 percent allocation and Weyerhaeuser wished to have a little more of that money. He stated that it was a resource acquisition strategy, placed in a pool from which to draw conservation incentives. He added that staff would go to Weyerhaeuser and identify conservation projects. Then upon verification that a project had reached completion, EWEB would pay conservation incentives based on savings. He said, in looking at the rates and the cost break-down beyond the costs of power and transmission, conservation comprised one of the larger portions of the cost. He recommended that EWEB reexamine this and preserve the intent of the incentives while finding Weyerhaeuser some rate relief. He underscored EWEB's intention to remain committed to the acquisition of conservation in a cost-effective way.

In response to a question from Commissioner Menegat, Mr. Welch stated that the "money part" was set apart from the conservation portion. He explained that it had been a capital based program, money had to be spent to get the incentives, but now that savings were consistent measures could be undertaken in the operations and maintenance portion of the mill.

Commissioner Farmer asked how the mill conserved 4 percent. Mr. Helgeson said they accounted for their capital investments differently than they accounted for power supply costs. He added that the mill did not seem concerned that it might not meet its conservation level.

Commissioner Farmer expressed concern that the conservation measures, if followed through exactly, would reduce the income to the utility by $640,000, while the utility would only be paid $500,000. Mr. Helgeson responded that EWEB sold its excess power and, at the moment, it was a "good deal" for EWEB to have the power to sell that resulted from conservation measures.

In response to another question from Commissioner Farmer, Mr. Varner said Weyerhaeuser received conservation credit for 3,500 MWh at a cost of $140,000. Commissioner Farmer expressed concern regarding the $640,000 reduction on Weyerhaeuser's bill. Mr. Varner assured him that while the income to the utility was reduced by that amount, so were its expenditures.

Mr. Varner noted the mill still benefitted by avoiding the CILT on that amount, even if the cost was exactly the same between the mill and the utility.

Mr. Helgeson related that the utility had installed a generator at the mill, which the mill had expressed interest in purchasing. He explained that some modifications would make it possible to increase the generator's output by four MW. He related that staff had proposed to sell the generator for $7 to $8 million should the mill run it against EWEB's load and $11 or $12 million should the mill want to market out the power. He stressed that EWEB was not willing to compromise the benefits for the remaining life of the contract and would ensure that it was properly compensated, which could ultimately place more money into the reserve fund. He added that this was all subject to Board review and approval.

Commissioner Menegat conveyed his appreciation for the staff work that had gone into the negotiation and the memoranda and presentation that the Board received. He called Weyerhaeuser "an important facility for our community" and said the utility needed to do what it could to reach an agreement so long as it did not jeopardize the other rate payers.

Commissioner Farmer felt the discount in LIEAP costs was very generous. He encouraged staff not to feel obligated to provide much more in the way of discounts.

Vice President Bishop called for a five-minute break and reconvened at 6:52 p.m.

GENERAL MANAGER'S GOAL STATUS FOR THIRD QUARTER 2004 (Includes Operation Performance Measures and Strategic Update)

General Manager Randy Berggren provided a brief overview of the Goal and Strategy Updates; Quarter 3, 2004, Operating Initiative Status Updates; Quarter 3, 2004, and the 2004 General Manger Goals Status as of September 30, 2004.

Regarding Electric Systems Reliability, Mr. Berggren said the utility continued to be on the "edge of target." He added that EWEB was experiencing its seasonal increase in outages resulting from suicidal squirrels. He stated that the next level of "critter protection" was being investigated. He noted that the Westmoreland neighborhood had experienced a 33 minute outage resulting from squirrel interference on the previous day.

Mr. Berggren predicted that there were no major issues that could not be corrected prior to the next year, with the exception of the environmental citation received from the Army Corps of Engineers (ACOE).

In response to a question from Commissioner Farmer, Water & Steam Division Director Tom Buckhouse assured him that the utility tried to maintain a residual of chlorine in the water and that the 80 percent level that daily values fell to in September was in no way unhealthy. Commissioner Farmer commented that the measurement was not meaningful if it did not indicate an impact either positive or negative. Mr. Berggren thought it would be beneficial to look at the establishment of a different measurement and also to measure the chlorine residual at more than one point in the water system (currently it was only measured at the Hayden Bridge facility).

Commissioner Farmer commented that it was good to see the reduction in lost days of work.

Commissioner Farmer, noting that page three of the report indicated an $800,000 variance in the non-power operating and maintenance budget, and asked if this presented potentially negative ramifications over time. Assistant to the General Manager Debra Smith replied that the number was from the August 15 report and was no longer there. Mr. Berggren thought the current number was circa $13,000.

Commissioner Farmer remarked that the LIEAP information on page 12 did not address whether the utility was "getting the money out the door." Ms. Smith responded that a better job was being done in facilitating the release of those funds to people in need of assistance.

Commissioner Farmer recommended that staff to do a better job of communicating why rate increases had been necessary. He thought making the message simpler would assist in the community understanding of it.

In response to another question from Commissioner Farmer, Treasurer Jim Origliosso stated that most utilities larger than EWEB had the ability to allow customers to pay on line and most that were smaller than EWEB were not able to. Commissioner Farmer remarked that he paid his bills on line through his bank and questioned whether EWEB needed to set such a system up. Mr. Origliosso predicted that such a system would likely achieve an ultimate usage rate of eight percent.

Continuing, Commissioner Farmer encouraged staff to be pro-active with the Carmen Smith relicensing project.

Regarding Operating Initiative 7: Employee Benefits Redesign and RFP, Commissioner Menegat underscored the importance of maintaining clear communication with employees regarding their benefits. Regarding Strategy 2.3 - Implement Approved Union Contract, he opined that, given the length of the bargaining process and the good faith the utility bargained in, perhaps the bullet point on decertification of the union should not be the top point on the list.

In response to a budget question from Commissioner Menegat, Mr. Wiley explained that money had been diverted from other projects and maintenance activities in order to pay for cost overruns incurred by the utility's work to correct its National Electric Safety Code (NESC) violations.

Commissioner Menegat commended EWEB staff for the work done to improve relations with the McKenzie River valley residents. He was pleased with the progress made in meetings with local residents and expressed hope that the utility would continue to forge a relationship with them.

Mr. Berggren recommended that Agenda Item 7 be moved to the Work Session given that there was time remaining. There were no objections.

2004 THIRD QUARTER BUDGET AND FINANCIAL PERFORMANCE

Assistant Treasurer Cathy Bloom reviewed the Third Quarter Financial Statements. She said results were good. She noted the net operating revenue for the electric utility was based on the rate increase and a projected increase in consumption related to the season.

Commissioner Farmer wondered why there was such a discrepancy between the budgeted projection and actual revenue from wholesale power sales. Mr. Varner clarified that one needed to look at the wholesale revenue and the purchased power expense together. He explained that the electric utility had a certain amount of firm output that it could count on from its hydroelectric facilities and then it had secondary energy that was dependent on the wet season. He reminded the Board that last year had budgeted on a 100 percent generation assumption, as had previous years, and it was now thought a wiser course of action was to budget on an 85 percent generation assumption. He said wholesale sales were only possible when the energy was there and available and, as such, what the utility would wind up doing in the present year were very small margin buys and sells.

Vice President Bishop objected to the use of the phrase "negative budget variance" to indicate a downward adjustment from the amount in the planned budget. Mr. Berggren responded that it was standard accounting language.

In response to a question from Commissioner Farmer, Mr. Varner stated that the contribution margin only held sales to wholesale and retail customers and the total operating revenue had other things such as sewer billing fees and property rental, i.e. operating revenue from an accounting point of view but not revenues from the sale of power.

Assistant Treasurer Cathy Bloom reviewed the statements for the water and steam utilities.

Commissioner Farmer did not understand why, though it had been expected that revenues from the steam utility would be down, it had been dropped by nearly half. Ms. Bloom responded that consumption had fallen dramatically. Mr. Buckhouse added that there were two peak seasons for steam utility sales. He predicted that, as the utility entered into the fourth quarter, the revenue projections would be more aligned with realized revenue. He added that the projection had also been based on a colder winter than the area had experienced. In recognition that the winter steam utility sales were not meeting projected revenue amounts, he reported that EWEB was now changing its assumptions about the seasons.

Commissioner Farmer conveyed his appreciation for the page in the presentation that discussed the contribution margin. He commented that the volume growth had been nominal for three years and asked the Board and staff to consider how rising expenses would continue to be paid for.

Vice President Bishop adjourned the meeting at 7:32 p.m.

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Assistant Secretary President