EUGENE WATER & ELECTRIC BOARD
SPECIAL BOARD MEETING
(WORK SESSION)
EWEB BOARD ROOM
DECEMBER 21, 2004
5:30 P.M.

Board Members present: Sandra Bishop, Dorothy Anderson, and Mel Menegat. President Lanning and Commissioner Farmer were excused.

Others present: Randy Berggren, Dick Helgeson, Ken Beeson, Mel Damewood, and Krista Hince of the EWEB staff; Lynn Taylor, City of Eugene Minutes Recorder; and John Simpson, Commissioner-elect.

Vice President Bishop convened the work session of the Eugene Water & Electric Board (EWEB).

WILLAMETTE WATER COMPANY

Water Engineering Manager Mel Damewood stated that his purpose was to obtain the Board's affirmation of the appropriateness of the conditions of principles related to the potential purchase by EWEB of the Willamette Water Company (WWC). He said the first principle was that the purchase of WWC would occur without any cost to existing EWEB customers and the second principle was to base the purchase price on a ten-year amortization based on the rates that were currently charged to WWC customers, minus the EWEB wholesale costs for selling them water, minus the operation and maintenance of the system over that ten-year period of time, and the escalations of those costs.

Mr. Damewood said the ten-year amortization was challenged by Commissioner Farmer, who cited his own business experience and requested that more information be obtained from WWC regarding its 2003 financial statements and annual reports to the Public Utilities Commission (PUC). He said President Lanning and Commissioner Farmer both raised the question of what would be the added benefits to WWC customers of EWEB's purchase of that water system. He reviewed a December 13, 2004, memorandum from Tom Buckhouse that addressed those questions.

According to Mr. Damewood, WWC had a total replacement value of $2.9 million with a depreciation value of $2 million and since 1972 had worked with EWEB to install all of its facilities per EWEB's standards. He said the system was comprised entirely of ductile iron pipe with a 100-year service life and at most portions of the system were 32 years old. In addition, he said there was no competition for the system's customers and staff recommended staying with the ten-year amortization.

Mr. Damewood related that benefits to WWC customers in the event of EWEB acquiring the system included access to EWEB service and WWC water rates could be frozen for the ten-year period. He said that renegotiating the purchase price with WWC as a consequence of freezing the rates, escalating the normal rate increases for wholesale customers and subtracting the escalated labor rates resulted in a net reduction of $80-90,000 from the initial price. He said that WWC had not yet responded to the new principles and asked for comments from Board members.

Vice President Bishop asked if the principles had been discussed with Commissioner Farmer. Mr. Damewood said that feedback from Commissioner Farmer had not yet been obtained.

Vice President Bishop thanked staff for addressing Board members' concerns. She observed that the fact that the WWC business environment was a non-competitive one resonated with her and justified the strategies being proposed. Mr. Berggren said that staff would remain open to any additional feedback from Commissioner Farmer and details of the principles had been provided to him.

Commissioner Bishop commented that the principles were acceptable to her.

Vice President Bishop said the proposal appeared to be a Ano lose@ situation, given that the WWC system was in good condition and WWC customers' rates would be frozen for ten years.

Commissioner Menegat thanked staff for their response and expressed his agreement with the basic concepts as presented. He said he understood that the WWC system's fire response capacity was not the same as EWEB's but did meet State standards. Mr. Damewood said there was one area in the system, the Shady Oaks area, which he considered to have a fairly low fire flow; however, the State Fire Marshal had determined that the fire flow in that area was adequate.

Commissioner Menegat asked what would be required to increase the fire flow if the standards changed. Mr. Damewood replied that if a new WWC user initiated the standard change, the new user was responsible for the cost of upgrading the system.

Audience member and Commissioner-elect John Simpson asked if there were any dead end runs or water quality issues in the WWC system. Mr. Damewood replied that there were dead ends in the system; EWEB had conducted water quality checks and the results came back as clear. He said that routine flushing programs in the area would be necessary to maintain the water quality and the cost was built into operation and maintenance costs for calculation of purchase of the system. He said that the issue would come back to the Board when a response was received from WWC.

WEYERHAEUSER CONTRACT REVIEW

Energy Resource Project Manager Ken Beeson provided an update on the status of the Weyerhaeuser Power Service Agreement. He noted that a preliminary draft of the sale agreement had been provided to Board members and was being reviewed by legal counsel; Weyerhaeuser had tentatively agreed to the substantive issues and the Board would be asked at its January 4, 2005, meeting to grant the general manager authorization to execute the agreement. He said the agreement would be substantively complete at that point and the Board's Resolution would reflect the fact that some small changes might still be made to the draft agreement as EWEB and Weyerhaeuser completed negotiations.

Power Resources Director Dick Helgeson described the Acost of service@ section as the heart of the agreement wherein the rates would be determined. He discussed details of the cost of service components, which included:

•  Power supply B provided at the Bonneville Power Administration (BPA) melded rate

•  Deliver charge B share of allocated costs across the EWEB system, including the Annual Slice True-up

•  Low-Income charge B proportional share of low-income funding requirement for non-residential customers

•  Contributions in Lieu of Taxes (CILT) B payment based on Oregon statute, EWEB Board policy, and agreements with City of Eugene and City of Springfield, currently 6.6 percent; however, contract language would allow, if there was a precipitous drop in the applicable rates for Weyerhaeuser's account that fell below the system average, Weyerhaeuser would get the benefit

Vice President Bishop asked for clarification of the CILT language regarding a drop in rates. Mr. Helgeson said that if the direct taxes on Weyerhaeuser's revenues dropped below the current system average of 6.6 percent, effectively the cities of Eugene and Springfield would have to agree to drop their CILT rate on Weyerhaeuser to approximately three percent in order for that to fall below 6.6 percent. He said the language would assure Weyerhaeuser that it would benefit the same as other customers.

Commissioner Anderson asked if Weyerhaeuser had discussed with an attorney the issue of being charged a tax by the City of Eugene when they were not within the city. Mr. Helgeson said that the issue had been explored and the tax was appropriate since Weyerhaeuser received services from EWEB and as part of EWEB's franchise under the municipal charter the obligation existed and payments were authorized under Oregon statutes.

Vice President Bishop pointed out that the taxes were collected by EWEB and not directly by the cities.

Continuing, Mr. Helgeson said that the proposed conservation principles were consistent with the Board's emphasis on investments in conversation while finding a way to reduce or eliminate from Weyerhaeuser's perspective the competitive energy burden that placed on their facility. He said the contract would permit Weyerhaeuser to self-fund investments in its facility that would produce energy savings equivalent to its share of EWEB's annual conservation projects. He said that Weyerhaeuser would have an obligation each year to generate activity that would represent a proportional share of EWEB's annual target and provisions for true-up if targets were not met, as well as ensuring that administrative and other fixed costs were covered.

Mr. Helgeson mentioned that there was a separate agreement with Weyerhaeuser with respect to joint operation of the co-generation facility (co-gen). He listed several elements that arose during contract discussions that could result in possible amendments to the generation joint operating agreement as long as there was a clear business purpose and no adverse impact for EWEB:

•  Allow Weyerhaeuser to purchase 50 percent share to run against load

•  Weyerhaeuser would pay all operation and maintenance costs

•  Weyerhaeuser would pay difference between retail rate and operation and maintenance costs

•  EWEB would have surplus entitlement

•  Output of unit would be fixed at 8 megawatts

In response to a question from Vice President Bishop regarding the surplus entitlement, Mr. Helgeson replied that the benefit to EWEB was a stable expectation of output at 8 megawatts that could be sold on the open market and Weyerhaeuser would benefit through having more control over operation of the unit.

Mr. Beeson said the term of the agreement was proposed to go through September 30, 2011 and could be extended annually by joint agreement.

Mr. Beeson referred to a recent memorandum regarding the proposed transfer of the Sierra Pine service to the Springfield Utility Board (SUB). He said the transfer was scheduled to come before the Board for authorization at its January 18, 2005, meeting. He related that SierraPine purchased a portion of the Weyerhaeuser in 1999 and became an EWEB customer. He said at the time that happened, SUB expressed an interest in serving SierraPine and EWEB had deferred that decision to SierraPine, which until recently had preferred to retain EWEB as the provider. He said that SierraPine had submitted a written request to transfer service to SUB following EWEB's recent rate increase. He indicated that EWEB staff had been working with SUB staff on details of the transfer, including a transfer agreement between EWEB and SUB, adding a point of delivery to the existing transmission wheeling agreement, a termination agreement with SierraPine, and an interconnection and operation agreement between SUB and EWEB.

According to Mr. Beeson, when the transfer is concluded SUB would own equipment inside the Weyerhaeuser complex and the agreement would make EWEB whole on the value of its investments in the complex not covered by BPA conservation augmentation program reimbursement, which was approximately $60,000.

Mr. Helgeson added that in the process EWEB wanted to resolve issues with BPA about how the transfer would affect its entitlements.

Commissioner Anderson urged staff to remain firm on the issue of the conservation reimbursement.

Commissioner Menegat said he was satisfied after reviewing the draft agreement. He asked if Weyerhaeuser had the ability to vary output of the co-gen facility. Mr. Helgeson said there was very little opportunity to vary the output.

Vice President Bishop asked if the negotiations had strengthened the relationship with Weyerhaeuser or been detrimental to it. Mr. Berggren replied that the negotiations were challenging and the negotiator for Weyerhaeuser had a unique and eccentric style, although EWEB staff was a good match. He said the negotiation period, assuming the agreement was approved, was relatively quick and resulted in satisfactory outcomes for both sides. Mr. Helgeson agreed with Mr. Berggren's assessment and commented that it took him a while to adjust to the different style and approach.

Vice President Bishop expressed her approval of the flexibility of the conservation section, which achieved the same results while giving the customer relief. She thanked staff for their efforts.

REGIONAL ISSUES UPDATE

Mr. Helgeson distributed a handout, Regional Issues Update, to the Board. He related that this was his first report to the Board in his new capacity with the Power Resources Division and he was willing to provide quarterly updates on the regional issues landscape if the Board wished. He said his presentation would concentrate on regional issues in which the Board might be particularly interested and invited feedback from members on those issues that should be the focus of future reports.

Mr. Helgeson sketched a picture of the regional landscape, which included multiple players and constituencies and issues that were complex and interdependent. He said that context was continuously evolving with recurring themes and many issues played out over long periods of time. He stressed the difficulties in setting priorities and measuring progress and the potential for regional issues to consume vast resources. He said it was necessary to determine the amount of resource to put into the work and assure that efforts were focused on things that were most important to the utility with the greatest long-term impact.

Commissioner Anderson expressed her frustration with how divided public utilities were and how that complicated issues when utilities were not aligned on matters like conservation.

Mr. Helgeson characterized EWEB's current approach as Asink or swim,@ with marginal resources and impact, low profile, somewhat reactive and issues driving and decentralized. He proposed a new approach of strategic issues management that would be driven by Board policies, goals, and strategies. He said the approach should have well-defined objectives and desired outcomes and focus on a few high priority annual initiatives. He said the current approach had .75 FTE (full-time equivalent) distributed across ten positions assigned to activities and the new approach should be better resources with centralized coordination to support a focused, sustained effort.

Commissioner Anderson asked if the .75 FTE would be included in the 2005 budget. Mr. Helgeson replied that the restructuring had provisions in the budget for a full position to focus on regional issues and the intent was to fill the position in January 2005.

Mr. Helgeson explained the activity levels and drivers related to regional involvement:

Activity Drivers

•  Policy Board legacy, vision, values

•  Strategy Corporate goals and objectives

•  Functional Division responsibilities and initiatives

•  Tactical Work plan tasks and assignments

Continuing, Mr. Helgeson said his intent was to keep the Board informed and involved at the policy level and determine the extent to which the Board wished to be involved at other levels consistent with its governance purview. He said the work of the Power Resources Division should be directed toward managing EWEB's supply portfolio and the environment in which it operated in a way that allowed for competitiveness and consistency with the Board's values and plans. He suggested that the Board could work with him develop some policy statements or directives to provide direction to the division in developing its annual budget and work plan for regional issues.

Vice President Bishop observed that some public utility boards were very actively involved in regional issues. She said she would like more information on how staff was deployed to various groups and committees. She cautioned that Board members' more active involvement in regional issues would need to be well coordinated and for the purpose of representing the Board's position. Mr. Helgeson replied that he could provide a list and description of the various groups. He agreed with Vice President Bishop's remarks about the need to focus and coordinate efforts within a governance context in order to be effective.

Commissioner Anderson approved of Mr. Helgeson's suggested approach, noting that the Board should establish priorities as many of the issues regional groups were involved with were so complex and identifying a few priorities would allow Board members to better comprehend those issues.

Commissioner Menegat expressed concern about and interest in any issue that could affect relicensing and suggested that could be a Board priority. He said he supported the proposed approach and encouraged the Board and staff to move on it as quickly as possible.

Mr. Helgeson listed a number of issues on the regional and national horizons:

Commissioner Anderson commented that environmental groups were split on the RTO/Grid West proposals and asked if the issue was close to resolution. Mr. Helgeson said that preliminary bylaws signaling the initial formation of a regional grid operation had been issued. He said he would prepare a backgrounder and schedule the topic for discussion at the Board's next meeting.

Referring to BPA power allocation, Mr. Helgeson said that BPA currently had an obligation to meet the loads of the public agencies and when new resources were acquired the obligation was served at a melded rate. He said the concept, looking forward to the new contracts in 2011, was to avoid repeating what happened in 2000 and instead take the amount of power available from the federal base system and allocate it to the public utilities consistent with proportional loads and historical relationship to BPA and a utility could contract BPA for more power at a second tier rate instead of a melded rate. He said that would level the playing field and allow a utility to fund conservation to avoid the higher cost or acquire a resource to provide for the additional need. He said that such an approach would require settling with the IOUs and DSIs and listed a number of benefits and disadvantages. He said the subject would be discussed by the Board in more detail over the next several months.

Mr. Helgeson stated that the Slice True-up contract allowed BPA to charge or credit EWEB for deviations between the actual costs and forecasted costs, although there continued to be disputes over interpretation of the language. He said there was approximately $80 million at stake for Slice customers as a whole and if they prevailed in litigation or mediation it would mean about $8 million for EWEB. He indicated that EWEB did not expect to prevail on all of the disputed issues and would prefer to settle the matter reasonably in mediation if it could come to terms with BPA. He said he would provide backgrounders on some of the issues and provide regular quarterly updates to the Board.

Vice President Bishop adjourned the work session at 7:35 p.m.