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

Others present: Randy Berggren, Debra Smith, Dick Helgeson, Jim Wiley, Dick Varner, Marty Douglass, Terry Bequette, Ken Beeson, Lance Robertson, Roseanna McArthur, Jim Origliosso, JoAnn Andersen, Mark Freeman, Krista Hince, and Ruth Atcherson, City of Eugene Minutes Recorder.

President Lanning called the Work Session of the Eugene Water & Electric Board (EWEB) to order at 6:30 p.m.

RESERVE 2004 BOARD STRATEGIES AND BEYOND

General Manager Randy Berggren explained the discussion was intended to take up the last significant issue to consider prior to closure on the proposed 2004 budget, that of increasing the reserve. He noted the Board's work on the Capital Plan during the previous meeting. He listed the issues to determine the amount of reserve and when the utility could arrive at the desired level of reserves. He related staff's suggestion of a permanent rate action to apply toward reserve replenishment. He thought that, should the reserve achieve the appropriate level of funding, the rate action could be used to offset future rate actions to be applied toward the increasing expenses of operations and management (O & M).

Fiscal Services Supervisor Dick Varner went over the Electric Utility Rate Strategy, accompanied by a Powerpoint presentation.

In response to a question from Vice President Farmer, Mr. Varner affirmed the reserve fund sought to reach full targeted funding in 2007.

Regarding the "Base Case" scenarios, Mr. Varner commented that the difficulty lay in instigating rate increases in anticipation of the Bonneville Power Administration (BPA) "true-ups." He noted that, had the Board taken a rate action in the previous spring, the rates would have overshot the BPA reconciliation. He said the Board could choose to attempt to anticipate BPA rates, though it had not been able to correctly do so thus far, or it could follow BPA increases with rate actions. He recommended the latter.

In response to a question from President Lanning, Mr. Varner said the 2.5 percent increase in rates was the amount the utility would need to meet the increases passed along by the BPA. He noted that the BPA was projecting a need to collect $39 million in Slice "true-up" from its customers in 2004, which would be a $4 million bill to the utility, and $68 million in "true-ups" in 2005 and 2006. He predicted the utility would be hit hard by these bills.

Mr. Varner remarked that it would be difficult to provide a simplified story for customers because they will get news articles from the BPA stating that the BPA rates had not been increased, though the costs to EWEB would in fact be increased. He noted that following the BPA would make it difficult to show a visible decrease to customers when the surcharge was removed.

Commissioner Anderson asked if there was any possibility the outcome of the current litigation would have an effect on Slice charges. Mr. Varner said the big issue in the suit was how the BPA treated the refinancing of the Washington Public Power Supply Station (WPPSS) debt. Mr. Berggren added that it was a one-time issue and, presently, still in the stages of arbitration.

Mr. Varner went over the three alternatives staff recommended for consideration. He commented that the relationship between EWEB and the BPA post-2006 was as yet unknown.

Mr. Berggren noted that most power customers had contracts that went through 2011. He stated that there was a push at the regional council and customer group levels to get a new definition of the role of the BPA in the region, largely centered around what BPA's acquisition would be as it related to resource development versus customers obligations to meet their own load growth. He reported that he had heard from BPA staff that the BPA did not, at this point, have an expectation that the contracts would change in 2006.

Mr. Varner felt this would likely set the utility up for two rate increases within one year. He thought that, with a little work, the utility could finesse the timing differences between when a rate increase for O&M would be needed and when reserves were fully funded so that one would transition into the other and possibly avoid an increase in 2006. He added that this would require much management of O & M costs on the part of the utility.

Mr. Varner stated, in response to a question from Commissioner Bishop, that the utility had enough power to meet the load needs in a "bad hydro" year. He said the secondary revenue from selling excess power kept the utility from needing to raise rates by 15 to 20 percent. Commissioner Bishop recommended making the generation assumption more clearly understood.

Mr. Varner referred Commissioners to the tables that delineated the Electric Rate Action Alternatives: Path 1 - Anticipate BPA Changes in Near Term and Path 2 - Follow BPA.

Mr. Berggren noted that no assumptions regarding the settlement agreement with Bonneville had been included in the alternatives. He felt there was a high likelihood it would not be approved, barring "some major politics" at the executive government level, but should it be approved the BPA pass-through rate actions would cease.

Mr. Varner recapped the direction being sought:

• Should the utility follow BPA or anticipate BPA?
• What alternatives are there for replenishing should the reserves be utilized?
• What plan for the timing and size of future rate actions should be instituted?

Commissioner Anderson thought it most prudent to follow the BPA actions and not try to anticipate them with rate actions. She recommended the second alternative listed under Path 2.

Commissioner Menegat concurred with Commissioner Anderson regarding the timing of rate actions. He preferred pursuing the first alternative under Path 2 in order to expedite the reserve fund replenishment. He recommended underscoring for the public the hardship the energy crisis of 2001 had imposed upon the utility.

Vice President Farmer also supported enacting rate changes pursuant to BPA actions. He commented that he would prefer "getting our house in order sooner than later." He felt that should the target be pushed out further, the utility might not ever find itself fully funded. He worried that the utility was at risk of not being able to afford the relicensing of the Carmen-Smith facility. He preferred the first alternative under Path 2.

Commissioner Bishop tended to be more favorably disposed toward the second alternative proposed under Path 2. She expressed a willingness to push the reserve replenishment out over several years given the financial disparities the members of the community were experiencing.

President Lanning asked how the different 'Paths' would impact the budget. Mr. Berggren did not foresee an immediate impact on the 2004 budget, noting the Board's unanimous support for following the BPA with rate actions rather than trying to anticipate them. He said the budget included an assumption that the Board would take a rate action. He called the discussion an expression of orientation around the two alternatives.

Mr. Varner said it was not mandatory that the Board indicate whether they supported alternative 1 or 2 at this time, but that this could be decided in the summer of 2004.

In response to a question from Vice President Farmer, Mr. Varner stated that the average monthly power bill was $70. Vice President Farmer surmised, then, that the difference between a one percent and a two percent increase in the monthly bill was the difference between 70 cents and $1.40.

President Lanning said that he had come prepared to support the second alternative, but felt the relicensing of the Carmen-Smith facility was a big cost driver. He added that he wanted to be very clear with customers regarding the elimination of the surcharge. He indicated his preference for the second alternative and that rate actions should follow BPA actions.

Vice President Farmer questioned the timing of the revocation of the surcharge and the rate action, noting the surcharge and increase were both at 5.7 percent. He urged staff to make it less of a coincidence. Commissioner Bishop concurred, stressing there should be a clear transition between the two so that there was a notable difference.

Mr. Varner asserted that the line on the bill for the surcharge would disappear and this would be a visible reminder that it had ended.

Vice President Farmer asked why the reserves that were not the capital reserve were not combined to make one reserve. Mr. Varner responded that the utility was trying to build a wall between the purposes of the separate reserve funds, but that during the energy crisis it had been clear that the walls could be breached.

Commissioner Anderson approved of the separation, stating that improved the appearance of fiscal responsibility.

President Lanning expressed his comfort with the elimination of the surcharge and the rate action occurring simultaneously. He voiced a concern that the rate action could possibly be higher than 5.7 percent.

Noting that both Vice President Farmer and Commissioner Bishop would not be present for the scheduled action on the draft budget, Mr. Berggren asked them to voice any further concerns. Both Commissioners affirmed they supported the draft budget and were comfortable with the vote occurring in their absence.

President Lanning closed the Work Session at 7:28 p.m.

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Assistant Secretary President