EUGENE WATER & ELECTRIC BOARD
SPECIAL BOARD MEETING
EWEB BOARD ROOM
OCTOBER 7, 2003
5:30 P.M.
Board Members Present: Patrick Lanning, Ron Farmer, Sandra Bishop, and Dorothy Anderson. Commissioner Mel Menegat was excused.
Others present: Randy Berggren, Dick Varner, Dick Helgeson, Debra Smith, Jim Wiley, Tom Buckhouse, Lance Robertson, Roseanna McArthur, Marty Douglass, JoAnn Andersen, Jim Origliosso, Ken Beeson, and Krista Hince of the EWEB staff; and Ruth Atcherson, City of Eugene Minutes Recorder.
President Lanning called the Special Board Meeting of the Eugene Water & Electric Board (EWEB) order at 5:30 p.m.
AGENDA CHECK
There were no changes to the agenda.
APPROVAL OF CONSENT CALENDAR
Minutes
Business Service Agreements
Vice President Farmer moved approval of the Consent Calendar. The motion died for lack of a second.
Commissioner Bishop pulled the minutes from the Special Board Meeting held on March 13, 2003.
President Lanning pulled the minutes from the Special Board Meeting held on May 10, 2003.
Commissioner Bishop, with a second from Vice President Farmer, moved to approve the Consent Calendar with the exception of the meeting minutes from the Special Board Meetings held on March 13 and May 10, 2003. The motion passed unanimously.
ITEMS FROM BOARD MEMBERS
Commissioner Anderson reported that during her recent trip to Denmark she had learned that 15 percent of their energy production came from wind power.
Commissioner Bishop related that she had been getting customer complaints on residential deposits and that she had determined there to be no fault on the part of the policy or customer service. She reported that the complaints had been followed through. She encouraged staff to put agreements made with customers in writing as a customer may not clearly remember verbal agreements.
Regarding the Wanapa project, Commissioner Bishop reported that the Confederated Tribes had set up a federally chartered tribal corporation, which would separate the work done in partnership with the Eugene Water & Electric Board (EWEB) from tribal politics. She said this would make them outside of the reach of the Internal Revenue Service. She felt this was an indication of the level of commitment the Confederated Tribes had to the project.
Vice President Farmer asked, regarding the backgrounder discussing the meeting of the McKenzie Watershed Council, if the letter discussed there had been received. Commissioner Anderson responded that she had met with the new director of the Council and discussed the timing of the letter. She stated that the director had decided to take it before the Executive Committee of the Council on October 17 and then forward it on to the EWEB Board of Commissioners. She related she had explained to the director that the letter may not make it before the Board prior to the meeting scheduled for October 21.
Commissioner Bishop, noting that a new County Commissioner had been selected to represent East Lane County, suggested that the EWEB Board make an overture to the new Commissioner. Mr. Berggren asked if the Commissioners would like staff to craft a letter of welcome and an offer to give the County Commissioner a tour of one of the facilities along the McKenzie River. There was general agreement among the Board to do so.
President Lanning reported he had met with Lance Robertson, External Communications Coordinator and Marty Douglass, Public Affairs Manager, regarding Public Power Week. He said he wished to provide educational opportunities for the public to better understand that EWEB was a publicly owned utility. Vice President Farmer stressed that whatever was set before the public should be part of a larger message conveyed throughout the year. He suggested a theme or message be developed. President Lanning recommended that this be a future Board agenda item.
CORRESPONDENCE
General Manager Randy Berggren reported the following:
Commissioner Bishop explained that she felt it to be important that Commissioners should speak to the public and that Commissioner attendance was very important. Vice President Farmer agreed to speak at the meeting as President Lanning was unavailable.
BOARD AGENDAS
Mr. Berggren highlighted the scheduled agendas for the Board, as listed on the attachment entitled Eugene Water & Electric Board; Board Agenda Report, October 7, 2003. He noted that he had added, for consideration for a future Board meeting, an item regarding communication themes, as suggested during the Items from Board Members segment of the meeting.
Commissioner Bishop said, though Commissioner Handling of Customer Inquiries was listed under Completed Items from Board Agendas, she still felt confused as to how resolutions to the customer inquiries would be conveyed to Board members. Mr. Berggren responded that the Board had addressed this and that staff was committed to share with Board members how issues were ultimately resolved.
Commissioner Bishop asked Commissioners whether they wanted to be made aware of smaller litigious actions against the utility. Vice President Farmer recommended the Board determine at what level a litigation should become a concern of the Board. He thought this should be included in a pro forma Board Governance manual.
PUBLIC INPUT
There were no members of the public wishing to speak at this time.
BOARD GOVERNANCE - RELATIONSHIP WITH CITY COUNCIL
Mr. Berggren noted that he had discussed with Vice President Farmer the possibility of meeting with the Eugene City Council on a more regular basis. He asked the Board if it wanted to consider this as a part of future Board Governance.
Vice President Farmer characterized the relationship the EWEB Board had with the City Council as a "mediocre" one. He expressed interest in exploring ways to have better interaction and communication with councilors. He felt that it would benefit everyone.
Commissioner Anderson remarked that the Councilors were busy and it was difficult to make appointments with them. She added that she kept contact with Councilor Nancy Nathanson.
Commissioner Bishop agreed that fostering a better relationship with Councilors was a prudent move. She suggested providing them with the opportunity to tour EWEB facilities.
Vice President Farmer recommended that some kind of tracking system be developed to ensure such meetings occur on a regular basis. He also suggested Commissioners be matched with Councilors according to the wards they represented. Commissioner Bishop said staff support was needed for this. Mr. Berggren stated that he would add it to the list of Governance items.
RESERVE STRATEGY - 2004 ELECTRIC BUDGET WORK PLANS
Mr. Berggren explained that staff hoped to obtain direct Board feedback on funding targets for the major reserves. He said a balanced budget proposal would be presented as well, noting that the capital plan for the budget matched what had been previously discussed. He stated that the operation and management budget represented a three percent increase over the 2003 originally approved budget and included two significant new items: the enhanced and expanded commitment EWEB was making to its Public Utilities Commission work on the communications level violations and the increased maintenance on the Leaburg canal.
Mr. Berggren pointed out that four less FTE were requested in the budget as part of the goals of the previous year's budget.
Dick Varner, Fiscal Services Supervisor, stated that reserves and financing were a key element of the long term financial planning of the utility. He related that the current situation was highly risky as the utility had in the past several years taken on more debt, most of the flexibility in the budget was now gone because of the financial "tool kits" used to balance past budgets, and that without reserves there was little to shield customers from the vagaries of the power market.
With the aid of a power point presentation, Mr. Varner provided an overview of the Electric Utility Reserves and Funding Strategy.
In response to Vice President Farmer, Mr. Varner said there was no reason the utility could not have more in reserve than what was needed. Vice President Farmer opined that the utility should have at least 45 days cash flow in reserve.
President Lanning asked why the reference point was the financial reserves for the end of the year. Mr. Varner replied that it was because the end of the year represented a medium position in the financial flow of the utility. He added that cash tended to degrade over the summer as much of the capital projects were undertaken. President Lanning asked what level of reserves the utility held at that point. Mr. Varner stated that during the late summer/early fall the utility had approximately $10 million in reserves. Vice President Farmer surmised that this equated 20 days cash flow.
Regarding the surcharge, Mr. Varner related that staff recommended maintaining the surcharge until there was a $10 million balance in the reserve funds. He commented that the longer the surcharge was in effect, the more it resembled a rate increase and suggested the Board consider whether it should be incorporated into the base rates.
In discussing water flows, Mr. Varner said that the generation assumption was based on a median of 60 years of generation. He noted a "bad water year" tended to impact the utility more than a "good water year" benefitted it.
Commissioner Anderson remarked that, while she felt maintaining the surcharge was prudent, politically it would present a challenge and the public would likely oppose it. She felt the integrity of EWEB was at stake.
President Lanning concurred with Commissioner Anderson. He emphasized that a commitment had been made to the customers to remove the surcharge in a timely fashion.
Commissioner Bishop also advocated for not extending the surcharge, per the agreement with customers.
Vice President Farmer commented that the decision the Board would make about the power reserve fund would be the most important decision made. He voiced his support for trying to accumulate $20 million in reserves, adding that it should go into an account that could not be touched until it reached that goal.
Commissioner Bishop said the economy may be improving, but it may be a few years before the improvement seeps into the power market.
Vice President Farmer remarked that the budget did not have a revenue mechanism to build reserves. He suggested a surcharge be dedicated to raise the reserve fund in a more expeditious fashion.
President Lanning agreed in principle with this, but did not support instituting a surcharge. He called the surcharge an emergency need, stating that the reserve fund represented a strategic need.
Regarding the capital reserve plan, Mr. Varner said there was potential for a surplus after five years, but that projects would likely arise that would dissipate the surplus.
Commissioner Bishop opined that $5 million was not enough money to have in reserve funds for capital projects. She said, however, that given the context of other resources it would have to be adequate.
Vice President Farmer noted that the utility had progressed from a five-year outlook of a $22 million deficit to a five-year outlook of a $4.5 to $5 million surplus. He recommended the Board determine if the tack to take was to "pay as the utility goes" and also how much debt to accrue.
Mr. Varner remarked, in response to President Lanning, that Board feedback was leaning toward increasing the amount of money in capital reserves. Mr. Berggren agreed, adding that this thinking needed to be integrated in the longer point of view and the Board should consider what the implications of the Carmen Smith relicensing would be.
Regarding the unfunded actuarial liability (UAL), Mr. Varner stressed that there was no money to support payments to retirees over the long term. He felt the utility should eke out positive budget performance and fund the supplemental retirement budget. He noted there was no specific plan at this time to address this, though staff was looking into process improvement activities that could be undertaken to generate savings.
In response to a question from Commissioner Bishop, Mr. Varner explained that if the utility could set aside $4 million in an account it would create enough interest to pay for the current UAL. Mr. Berggren added that the supplemental retirement was specific to EWEB, the result of a program developed in the late 1970s and early 1980s.
President Lanning asked how long the UAL was projected to be an issue. Mr. Varner replied that staff thought it could be 8 to 12 years before it would be funded. He added that funding the UAL would take pressure off the operating budget.
In response to a question from Vice President Farmer, Mr. Varner explained that the non-power operating reserve, funded at $1 million to cover a disaster should the Federal Emergency Management Agency (FEMA) not provide payment, was segregated from a policy perspective so that staff could not administratively cross the line and access the money for another reason.
Mr. Varner highlighted the Electric Cash Reserves as delineated in the table on page 5 of the copies of the power point presentation before the commissioners.
Regarding the table entitled Electric Rate Action Projections, President Lanning asked what electric rate actions projections were being used to build the year end targets. Mr. Varner replied that staff was most likely using alternatives b1 or b2. He added that this was partially based on the generation assumption. He said "cash in the bank" would mean that the generation assumption could be less conservative.
Mr. Varner explained the three alternatives preferred by staff:
He added that the numbers were the net of the existing surcharge being removed and another sort of rate action put in its place.
Mr. Berggren commented that the BPA pass through numbers were uncertain and should the settlement come through on the litigation, the pass through numbers could "go away."
President Lanning, after some discussion of the surcharge, speculated that the Board could be considering extending the surcharge as it was up for renewal in the spring while also considering a capital and a BPA pass through at that time. Mr. Berggren stressed that this was with the caveat that the area would have a normal rain season. He said the next three months would be critical.
President Lanning called for a short break. Commissioners reconvened at 7:57 p.m.
Mr. Varner introduced the next power point presentation. Commissioners were provided with a photocopied version of the presentation, entitled 2004 Electric Budget. He stated that approval was being sought for the budget at the board meeting scheduled for the early part of December. He noted that the water and steam division budgets would be discussed at the next meeting.
Mr. Varner related that, as the pro forma developed during the summer, the targeted elements had been "hit." He felt the budget to be consistent with the directions provided by the Board. He explained that the rate increase for capital was a result of chronic underfunding over the past several years. Mr. Berggren added that an increase for the capital budget had been approved in 2002 but the energy crisis had forced the utility to give it up.
Mr. Varner provided an overview of the assumptions and issues that helped shape the budget.
Regarding the increasing cost of dealing with PUC issues, Mr. Varner said this mostly consisted of reallocating crews from operations to projects generated by the relicensing. He stated that, on the capital side, it translated to many more utility pole replacements than had originally been planned for, adding that this was in the current capital budget as presented. He noted that Mr. Wiley had projected that the canal maintenance costs could increase by as much as $400,000 to $500,000.
Vice President Farmer asked if the latter cost was going to be annual. Mr. Varner responded that it could be less in next year's budget as the reseeding of the canal banks would be completed. Mr. Berggren noted that maintenance costs had been far less prior to the requirement set forth by FERC to clearcut trees along the banks.
Mr. Varner discussed the difficulties the utility had with generator and turbine manufacturers. He stated that originally it had been planned to get the units back in early 2004, but that now it was projected that the utility would get one back by February or March, 2004, and the other possibly as late as July, 2004. He said this cost a great deal in generation revenue. Vice President Farmer asked if there was any legal recourse. Mr. Varner replied that staff was looking into this. Mr. Berggren predicted that the utility could get reimbursed for the lost revenue at approximately $200,000, but that this would not approach the actual loss.
Mr. Varner highlighted the table delineating the Contribution Margin. Regarding Wheeling costs, he explained that the BPA had changed the interpretation of what the utility could do with its Integration of Resources (IR) contract. He stated that under the IR contract the utility had the ability to redirect its surplus power without paying extra for transmission. He said the BPA had decided not to allow this anymore. As a result, the utility had shifted to a Network Transmission (NT) contract, still an increase in costs.
Vice President Farmer asked why wholesale revenues were dropping off. Mr. Varner replied that there had been a lot of "call" options in 2003. He said this raised both revenues and expense. He related that in 2004 there were not as many "call" options and more "put" options so there was not as much opportunity to strike on a "call" option and resell the power over and above what was needed for the EWEB system. He commented that the utility had "squeezed a lot of value" out of its options during the past year.
In regard to the Non-Power Operations and Management Comparison, President Lanning asked what the increase in the Net Capital and Debt Service from $17 million in 2003 to $35 million in 2004 could be attributed to. Mr. Varner explained that the $17 million amount was comprised of what was paid for debt service combined with the revenue-financed capitalized conservation. He said no revenue was spent on capital in 2003, it had all been financed. The 2004 number included the increase in debt service, a small increase in revenue-financed conservation, and all of the capital program was planned to be funded by rates.
Mr. Varner underscored the need for a 5.7 percent increase in electric rates to meet the needs of the 2004 Electric Capital Budget, and reiterated that without it $12.7 million in projects would have to be cut.
In response to a question from Vice President Farmer, Mr. Varner clarified that $3.3 million of the electric distribution capital costs were paid for by developers.
Regarding the table of Payroll and Benefits, Mr. Varner stated that the budget had been revised to indicate the utility would have 470 employees and not 479 as previously planned. He noted that, due to an unusually high rate of vacancy, the utility was currently staffed at less than 470. Mr. Berggren added that this was driven by the Public Employees Retirement System debacle.
Ms. McArthur related that the utility was faced with a 38 percent increase in health benefits premiums, but this did not apply to retiree benefits. Mr. Varner noted that the benefits for retirees would cost circa $1.2 to $1.3 million, listed under administration and general costs.
Vice President Farmer commented that, while salaries had increased by approximately 10 percent, benefits had increased by 50 percent. He urged staff and the Board to seek an innovative way to address this. Mr. Berggren agreed that medical costs had been significantly higher than standard inflation. Vice President Farmer felt the increase should be partly borne by the employees.
Mr. Berggren provided an overview of the 2004 Work Plans. He noted there was a typographical error in the Telecommunications section under the 2003 Budget. It should read $320,588.
Mr. Berggren highlighted the primary differences in the work plans. He noted that the utility had decided not to pursue the program for telecommunications in the 2003 budget, amounting to $250,000, due to the expense. As a part of the tool kit reductions, he said the position for process improvement work had been left vacant and this had saved $75,000. He added that Ms. Smith would be picking up the process improvement work in the 2004 budget. He stated that a placeholder had been put into the budget for $235,000 for a pilot project which would use power lines to conduct broad band.
Jim Wiley, Director of the Electric Division discussed the Electric Division Budget Comparison. He said he submitted a budget that was $11.6 million less than the previous year. He stated that the reduction had been due to the completion of the vast majority of the FERC-related projects at the Leaburg facility. He stressed that the maintenance on the Walterville/Leaburg canal banks had been an unanticipated cost increase.
Mr. Wiley related that the delays in the Leaburg project had been due to a "non-performance" problem with the generator for Unit 1. He said there would be a detailed explanation of the generator difficulties the utility had experienced at the facility in the next board agenda packet.
Regarding the Carmen Smith relicensing studies, Mr. Wiley projected it would cost $7.5 million over the span of time it would take to complete.
Continuing, Mr. Wiley explained that utility poles were being inspected, as per National Electric Safety Code (NESC) requirements and that many more than had been anticipated would need work. He said the utility was "grossly behind" as only 200 of 9,000 had been completed. He stated that the budget reflected an amount that would pay for 6,000 poles, though it was not likely that this many would be completed during the coming year.
Vice President Farmer expressed concern that the utility could face a fine. Mr. Wiley reassured him, stating that the utility had five years to complete the project. Mr. Berggren added that four of eight crews would be dedicated to the utility pole inspection in the coming year.
Mr. Wiley called the condition of the utility poles a "true indication" of the aging infrastructure. He commented that some cross-arms were so rotten, the wires supported them.
In response to a question from President Lanning, Mr. Wiley said that redirecting the crews to the pole inspection project would mean less underground cable replacement would occur and less FEMA upgrades for reliability and other reliability projects would be taken on.
Regarding canal bank maintenance, Mr. Wiley said the utility would need to purchase a special $250,000 mower and labor costs for the mowing would be $75,000.
Commissioner Bishop asked if any undergrounding projects were planned for the coming year. Mr. Wiley responded that the Lane Transit District/Bus Rapid Transit project on Franklin Boulevard would incorporate some undergrounding.
President Lanning asked if the natural step process had been done regarding the canal bank maintenance. He questioned the merit of purchasing the mower. Mr. Wiley said the budget process had to be completed first, but the natural step process would be followed prior to a major purchase such as the mower.
Speaking to the Corporate Services Division work plan, Roseanna McArthur, Director of Corporate Services, noted there was money from the Water Division in the budget. She provided an overview of the plan.
President Lanning asked if the network security was planning and assessment only. Ms. McArthur clarified that some people had not been replaced as part of the savings for the tool kit and that now one of those positions would become a security administrator and, thus, a portion of the amount was due to the labor cost.
EWEB Treasurer, Jim Origliosso provided an overview of the Financial Services Division.
In response to a question from Commissioner Anderson, Mr. Origliosso said a "new body of knowledge" had come out regarding power trading. He explained that the new paradigm involved a separation of functions, so that the power traders were responsible for one portion and the remainder was in a different area of the utility, independent of the power trading.
Facilities Services Director Tom Buckhouse discussed the Facilities Services Division, noting that the budget was projected to go down by a small amount, mostly due to the tool kit.
Commissioner Bishop asked where the funding for the headquarters. Mr. Buckhouse said it was deferred due to the tool kit in 2003 and was now included in the 2004 budget.
Customer Services Division Director JoAnn Andersen presented the Customer Services Division Budget and Work Plan Issues.
In response to a question from Commissioner Bishop, Mr. Berggren said the conservation and renewable discount was being maintained at the 5 percent level, in order to continue the tool kit reductions.
BPA RATE PASS THROUGH
Mr. Varner conveyed staff's recommendation to leave the rates alone and reassess the rates in the spring, 2004.
Mr. Berggren asked how the reduced rates would affect the BPA pass through in the spring. Mr. Varner responded that it would increase by 2 percent.
Commissioner Anderson moved to accept the staff recommendation to reassess rates in spring, 2004. Commissioner Bishop provided the second.
President Lanning called for discussion.
Vice President Farmer called it a mistake to vote on individual elements of electric rates without forming a plan of action. He said he could not support the motion.
Mr. Berggren stressed the importance of acting in an expeditious fashion.
Vice President Farmer asked for clarification on rate actions. Mr. Varner explained that a shortened process would, including public hearings, take approximately eight weeks before the rate action would appear on a utility bill. He said a rate action that included a cost of service analysis could take four to five months. Vice President Farmer asserted there should be consensus on a coordinated basis on rate management. He felt it to be bad policy to "piecemeal it together."
Mr. Berggren commented that the utility was in this position because of the BPA's rate actions. Mr. Varner reiterated that the recommended action was to take an exception so that the decrease would not be passed through to the customer, only to return in the spring and raise rates again.
Commissioner Bishop called it the Board's obligation as the utility was forced to address the pass through. She agreed that the Board should look at "the bigger picture" for rate decisions, but had to react to the BPA pass through.
The motion passed, 3:1; Vice President Farmer voting in opposition.
Commissioner Bishop left the meeting.
ITEMS REMOVED FROM THE CONSENT CALENDAR
President Lanning offered the following corrections to the minutes of the Special Board Meeting held on May 10, 2003:
President Lanning moved, with a second from Vice President Farmer, to approve the minutes of the meeting of the Special Board meeting held on May 10, 2003 as amended. The motion passed unanimously.
Commissioner Anderson moved to approve the minutes of the Special Board meeting held on March 13, 2003. President Lanning provided the second.
There was general discussion on the process, as the minutes had been pulled by Commissioner Bishop.
Commissioner Anderson move, seconded by Vice President Farmer, to approve the March 13, 2003 minutes pulled by Commissioner Bishop. The motion failed, 2:1; Commissioner Anderson voting in favor. It was decided that the minutes would be brought back for correction at the next Board Meeting.
The meeting adjourned at 9:50 p.m.
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Assistant Secretary President