Commissioner Simpson pulled the Minutes of January 6, 2005.

Commissioner Bishop pulled items 2 and 8.

Commissioner Farmer called for a motion on the remaining items.

Commissioner Menegat, seconded by Commissioner Lanning, moved to approve the remaining items on the consent calendar.  The motion passed unanimously.

Assistant Treasurer Cathy Bloom, and PriceWaterhouseCoopers, Auditors Michelle Tachouet, and Roger Mills provided a presentation on the annual audit.

Mr. Mills said his firm regarded EWEB similar to an FCC registrant client that had publicly traded equity to the extent that it made offerings in a public market that brought a fiduciary responsibility to the board and Price Waterhouse Coopers as the auditors of the utility. He said the presentation that evening included the required communications made to an audit committee in a publicly registered environment for an FCC client. He called attention to page 3 of the document that held the results of the audit. He stressed that an audit was reasonable but not absolute assurance that financial statements were fairly presented. He said substantial auditing procedures had been used to support the opinion presented. He said the audit procedures had been executed consistently with the audit plan that had been presented to the board on December 7, 2004 but noted that the scope of the plan had been expanded to include discussions of Trojan. He said the unqualified opinion given was to include Trojan in EWEB’s financial statements for the first time since 1997. He said there were some difficult decisions to work through and commended EWEB’s management for its work during the audit process.

Ms. Tachouet outlined the significant transactions and accounting/auditing and reporting issues. She said the issues presented on page 4 of the report were consistent with the areas presented to the Board in December as requiring additional focus and emphasis during the audit. She said specific procedures had been performed regarding derivative accounting and implementation which required that any derivative transactions that were booked out during the year be reported on a Net Basis on the income statement rather than a gross basis.

Ms. Tachouet said specific emphasis had been given to unbilled revenue. She said she was in agreement with management’s estimate and performed detailed procedures around revenue and large receivable accounts though either vouching the subsequent receipt of cash or actually confirming directly with customers.

Ms. Tachouet said no issues had been found regarding depreciating assets. 

Ms. Tachouet said regulatory accounting was a unique accounting practice within the industry that allowed the utility to defer costs that would normally be expended in the current period because those costs would be recovered in a later period.

Calling attention to page 5 of the presentation “Summary of EWEB Restatement”, Mr. Mills said his firm did not take the process lightly. He said there was a concern over the utility not including Trojan in its Board level financial statements and a possible inconsistency with the description of EWEB’s obligations as a Board in its offering statements and those described in EWEB’s financial statements. He said the decision had gone back to 1997 and there were two primary reasons for removing Trojan. The first was the 1970 net billing agreements with BPA had a discussion of an assignment of Trojan costs from the Board to BPA. He said the second was that there was a restructuring of the board in 1997 and a pledge of revenue in electric systems bonds that had been removed from bond covenants so that the electric system no longer had a direct pledge of revenue in the offering statement to Trojan project costs. He said the issue was that under the net billing agreement, assignment was not a novation in the legal context. He said liabilities where EWEB was the primary obligor needed to be reported on financial statements. He said, in the eyes of the other participating agencies in the Trojan Project, (PGE and PacificCorp), EWEB was looked to as the primary obligor. He said the offering statement for Trojan was very clear in stating that EWEB was the primary obligor but reiterated that there was no longer a pledge of electric system revenue. He acknowledged that EWEB management and counsel had disagreed on the Trojan issue but said, ultimately, a fair presentation was to include Trojan in any picture of the utility’s financials.

In response to a question from President Farmer regarding the amount of the bond, Mr. Mills said the liability was the liability for the bonds and decommissioning.  He said the assets were any cash assets that had already been passed through as well as the receivable due from BPA.

In response to a question from President Farmer regarding whether that would change the bond rating of the utility, Jim Origliosso said it would not. He said the official statements that had gone to the rating agencies for review fully disclosed the entire legal relationship with Trojan in every detail.

Mr. Mills said the actual bond amount was approximately $40 million but EWEB’s share of the decommissioning was an additional $40 million. He said the eventual receivable from BPA would be 61 million. 

Mr. Origliosso said the rating agencies understood the relationship with BPA and what it was responsible for as well as what EWEB was responsible for. He said that was the main reason why the bond ratings were maintained. 

In response to a question from President Farmer regarding whether the cash flow statements would show money coming in from Trojan and money going out to reduce liability, Mr. Mills confirmed that was true and added that there was an income statement showing amounts coming in from BPA and amounts going out for interest expense and decommissioning.

Calling attention to page 6 of the presentation regarding required communications to the audit committee, Ms. Tachouet read through the following statements listed by PriceWaterhouseCoopers: ·       

• Our audit was designed to enable us to obtain reasonable, not absolute, assurance that the financial statements are free of material misstatement. Our 2004 Strategic Audit Plan, presented to the Board of Commissioners on December 7, 2004, set forth the planned scope of our audit.
• EWEB’s significant accounting policies are presented in Note 1 of the 2004 financial statements. Such policies have been applied on a consistent basis, with the exception of the treatment of EWEB’s 30 percent share of the Trojan Project.
• Significant management judgments and accounting estimates are required as part of the recognition of environmental reserves, allowances and benefit plan assets/liabilities. These judgments and estimates have been competed on a consistent and reasonable basis.
• We have included at Appendix I a summary of all adjustments identified during the audit, including those that were posted to the December 31, 2004 financial statements.
• No major difficulties were encountered in performing out traditional financial statement audit. However, restatements are inherently difficult.
• EWEB is exposed to various risks. Those that could significantly impact the financial statements include environmental contingencies, legal contingencies, and benefit plan costs. We believe EWEB’s reserves for these risks are appropriate and disclosure is transparent.
• Extended procedures to address EWEB’s ability to continue as a going concern were not necessary during the current year. Based on the results of our audit, we have concluded that there are no material uncertainties related to events and conditions, specifically going concern issues.
• We are responsible to read and consider the content of any documents that include the audited financial information of EWEB, including bond-offering documents. We reviewed the Trojan offering documents, which included EWEB’s 2004 audited financial statements.
• During our audit we received full cooperation of management and employees. We had no disagreements with management on accounting or financial reporting matters.
• We are not aware of any consultations with other accountants.
• There were no issues discussed with management prior to our appointment.
• No reportable conditions were noted within the framework of the control structure review for purposes of determining out audit procedures, as described in the letter of engagement.
• We noted no irregularities or instances of fraud or illegal acts during the course of our audit. We would notify the Board immediately if we became aware of any such instances.

Mr. Mills indicated that this was the point where the Board could make the auditors aware of anything.

No issues were brought forward. ·       

• We are independent accountants within the Code of Professional Conduct of the American Institute of Certified Public Accountants.
• In response to a question from President Farmer regarding an under accrual of purchased power and why revenue was overstated, Ms. Tachouet said there were cut off issues. She said management recorded their best estimate for wholesale revenues as of the end of the year but noted that the auditors had the ability to go back and look at actual revenues billed and paid at the end of the year. She said the difference was between the estimate and actual figures. Mr. Mills said he had seen no consistent occurrence that would point to a root cause. He said the financial statements made by management were fair.

In terms of the recommendation letter for addressing perceived risks from the auditors, Mr. Mills highlighted the larger items listed in the letter and noted the EWEB management responses to those recommendations.

President Farmer stressed that Board questions should be focused on the findings in the auditor’s report and not focus on issues where management had a difference of opinion. He said additional agenda time would be dedicated to issues where management had a difference of opinion. 

Mr. Mills stressed that the Board had made progress on all of the recommendations that were listed. He noted that the auditors were benchmarking EWEB against much larger utilities but said the recommendations were coming from the “Best Practices” frame of reference.

In response to a question from President Farmer regarding risks to be addressed, Mr. Mills said the Board could make a risk decision not to address the recommendations listed but noted that this would impact how he conducted the audit. He said the risk profile impacted the level of detail required in the audit.  He reiterated that the recommendations were regarded as best practices but acknowledged that some of the recommendations might be cost prohibitive to a smaller utility and added that the utility’s risk profile was different from a power trading operation that speculated on energy pricing.

In response to a question from Commissioner Farmer regarding accounting policies and GASB rules, Mr. Mills said the best place to start was with what was relevant to the utility.

President Farmer questioned how the Board could get a frame of reference to determine which GASB practices were important to the utility.

Mr. Mills said the Board needed to act as a committee to make those decisions.  As an example he cited some of his clients that were investor owned utilities provided continuing education for audit committees. He said each significant accounting policy could be covered over a two year period.

President Farmer suggested that this was a determination that the board needed to discuss.

In response to a question from President Farmer regarding whether an internal auditor should report to the Board as opposed to the General Manager, Mr. Mills said he was talking about direct line communication with the Board. He acknowledged that some one would need to provide administrative oversight for the auditor but stressed the importance of structuring a relationship with the board that empowered the auditor with a level of objectivity.

In response to a question from President Farmer regarding whether there was a difference between an internal auditor and an outside contracted auditor, Mr. Mills said the outsourcing model worked well when a specific skill set was needed. He used information technology as an example.  He acknowledged that an outside auditor without knowledge of the organization might have more difficulty making meaningful process recommendations.

Commissioner Bishop said there was a significant difference between the transparency implicit in a public utility and a for profit company. She called for a future discussion on the matter of an internal auditor.

In response to a question from Commissioner Bishop regarding the level of specific problem areas that had increased from the previous year and what the reasoning was, Mr. Mills said the power trading points and information technology security points were the same as the previous year. He added that his assessment was that the overall control environment had significantly improved. He added that audit procedures had been significantly changed. He said the auditing profession had also undergone a significant change in the previous few years.

In response to a question from Commissioner Bishop regarding whether there was anything in power trading or risk management that was particularly alarming, Mr. Mills stressed that he was not a power-trading expert but noted that the most significant thing he saw was how the utility analyzed risk. He cited the value at risk model which a model incorporating volume and price statistics for the market.

In response to a question from Commissioner Bishop regarding whether there was any more risk with the scheduling that was done for other entities or with other power trades, Mr. Mills said the differences were notes 2 and 13 in the provided report.

WEYERHAEUSER JOINT OPERATING AGREEMENT

New Resource Projects Manager Ken Beeson provided a power point presentation on the Weyerhaeuser Joint Operating Agreement. He said he was asking the Board for approval of a resolution authorizing the General Manager to execute the 2005 amendment to the EWEB/Weyerhaeuser Joint Operating Agreement and Amendment Number 1 of the EWEB/Weyerhaeuser Power Sales Agreement.

In response to a question from Commissioner Lanning regarding a discrepancy in the benefit cost ratio in the background memo, Mr. Beeson noted that the 1.7:1 figure was an error in the background memo that had been corrected. He said the actual figure was 1.4:1.

In response to a question from President Farmer regarding whether all four units produced equally, Mr. Beeson said one was owned by EWEB were owned by EWEB and 3 were owned by Weyerhaeuser. He said units 1 &2 were small and did not operate very often. He said units 3 & 4 were larger and operated most of the time.

President Farmer said it appeared that EWEB was paying more than 25 percent of the cost.

Mr. Beeson said there was one unit that was running most of the time and three units that could be run under specific conditions. He said the number four unit, which was owned by EWEB, was the only turbine that would be able to run at 900 PSI. He said number three would be used as a back up turbine when number four turbine was down for repairs. He said turbines one and two were mothballed and were too inefficient to run.  He said the costs and output were split 50/50.

In response to a question from Commissioner Simpson regarding whether there was any waste heat in the steam process, Mr. Spettel said there was low quality waste heat after the steam was extracted at a low-pressure end of the turbine but said it was negligible. He stressed that almost all of the useful energy was utilized.

In response to a question from Commissioner Simpson regarding how the steam was generated, Mr. Spettel said it was generated from boilers that used a waste product from the pulp process called black liquor. He noted that there was not enough black liquor produced for all the fuel needs so natural gas was used as a supplementary fuel.

In response to a question from Commissioner Bishop regarding the power service agreement provisions and how amendment worked, Mr. Spettel said there was a joint generation operating agreement. He said the agreement was an effort to simplify the billing agreement between the two agencies.

In response to a question from Commissioner Simpson regarding whether the number four turbine ran 24 hours per day, Mr. Spettel said it would run 24/7 except when the mill had an outage. He said the turbine operated at 97 percent efficiency. 

In response to a question from Commissioner Bishop regarding what points would be approved in the resolution, Mr. Beeson noted that they were summarized in the background memo. He added that they were also listed in the attached Joint Operating Amendment and the Power Sale Agreement included in the meeting packet.

Commissioner Lanning, seconded by Commissioner Menegat, moved to approve the attached Resolution authorizing the General Manager to execute the 2005 Amendment to the EWEB/Weyerhaeuser Joint Operating Agreement and Amendment Number 1 to the EWEB/Weyerhaeuser Power Sales Agreement. The motion passed unanimously.

ITEMS REMOVED FROM THE CONSENT CALENDAR

Commissioner Simpson noted that on page 6 of the January 6 minutes, bottom line first word needed to be changed from “diligence” to “design.”

Commissioner Simpson, seconded by Commissioner Lanning moved to approve the minutes of January 6, 2005 as amended. The motion passed unanimously.

Regarding the two Business Service Agreements pulled (Goodwill Works and Garten Services), Commissioner Bishop said she had found the background memo on the contracts very alarming. She commented that the Board was being asked to take action on contracts, one of which was worth over $1 million. She noted that she felt constrained in talking about the contracts because it involved a legal case and a member of the audience who was party to a suit against EWEB and requested that the two contracts be discussed in Executive Session. She said it was not appropriate for the Board to enter into a contract when there was a major legal case pending.

In response to a question from President Farmer regarding the time sensitive nature of the contracts involved with the contracts, Mr. Berggren said they were ongoing landscaping and janitorial services. He said if there was an Executive Session then it should happen as soon as possible. He said he would arrange an Executive Session if that was the will of the Board but noted that the status of the litigation was under appeal and no new information was available. He added that this was a separate issue from providing janitorial services. He reiterated that he would schedule an Executive Session but said he did not believe that an Executive Session was necessary. 

Commissioner Simpson said he was in favor of an Executive Session discussion.

Commissioner Menegat said he had no objection to an Executive Session but noted that public input had been received on the question of whether other eligible contractors had been considered.

Mr. Berggren said in management’s view the contract was strictly to the letter of the law. He said an Executive Session would not change the status of the contracts and the litigation had not yet had any new developments. He questioned what would get resolved in an Executive Session. 

Purchasing/Risk Manger Ed Case stressed that the contracts that were about to expire and the litigation issue were two separate things.

Commissioner Bishop questioned whether the chair had ruled that there would be an Executive Session. 

Mr. Berggren reiterated that he did not believe an Executive Session was needed to discuss the contracts and their continuation. He said a discussion of the litigation would necessitate an Executive Session. 

President Farmer said he would entertain a motion for an Executive Session.

Commissioner Bishop said she would have an open discussion about the janitorial contracts but what she had to say might have an impact on the litigation. She stated that she was waiving privilege.

Mr. Case said the pool used to choose janitorial services covered the entire State of Oregon.

In response to a question from Commissioner Simpson regarding whether the utility had access to that pool, Mr. Case said the utility had access to that pool. He said the issue was establishing a stable work environment for disabled Oregonians; therefore, contracted services with an acceptable price were encouraged to be retained.

In response to a question from Commissioner Simpson regarding whether the price of the contract could be changed, Mr. Case noted that all of the contracts had escalation clauses for costs.

Commissioner Lanning asked if Commissioner Bishop did lobbying work in that area of administrative process, Commissioner Bishop confirmed that it was. She said her professional work was involved in that area of law. She expressed a desire to see a copy of the state statute.

Commissioner Bishop said she did not believe that the escalation clause in the contract was statutory. She said she did not want to sign a five-year contract that did not specify price increases. She said it was an economic risk to sign a contract that had no definite price. She suggested an annual contract with specific prices listed.

In response to a question from Commissioner Lanning regarding whether David Hinkley was associated with the work she performed, Commissioner Bishop said David Hinkley was a researcher for the Fair Competition Alliance, which was one of her clients. She said the Fair Competition Alliance was privy to information from the lawsuit but stressed that she had no access.

In response to a question from President Farmer regarding whether Commissioner Bishop had a conflict of interest, Ms. Bishop said there was no conflict of interest because she had no way to gain by the discussion or action taken by the Board.

In response to a question from President Farmer regarding whether her client, (The Fair Competition Alliance), was involved in EWEB’s litigation, Commissioner Bishop said it was not. She noted that there were a number of similar private lawsuits on record brought by individual members of the Fair Competition Alliance, and that David Hinkley was a researcher for the Fair Competition Alliance and did bring the lawsuit against EWEB as an individual ratepayer, but she felt she did not have a conflict of interest.

In response to a question from Commissioner Simpson regarding whether there was any reason why there could not be an annual contract, Mr. Case said there was ability to get out of the contract at any time. He said the only difference between that an annual renewal was that there was no renewal process every year. He added that if QRF wanted to raise prices of the contract they would have to go through a justification process.

Commissioner Lanning said he had thoroughly reviewed the background information and felt that they were appropriate.

Commissioner Lanning, seconded by Commissioner Menagat, moved to approve items 2 and 8 on the Consent Calendar as proposed by staff.

Commissioner Bishop said the main reason she had pulled the items from the consent calendar was the concern over entering into a five-year contract that allowed people at the State level to change the price. She said the justification process was simply a form that was signed off on by an official regardless of the amount proposed. She said there was no language in the contract protecting EWEB.

Commissioner Bishop said another contract from the same company had the price raise by 35 percent. She suggested putting reserves aside for possible cost increases in the contract price. She acknowledged that there had been no price increases in the past.

Commissioner Bishop called attention to the background memo and noted that the purpose of the contract was to provide employment to people with disabilities. She said she was unaware of how many employees used by the service agency were actually disabled. She said it was the fiduciary duty of the Board to get the best service at the most reasonable rate.

Mr. Case quoted “It is the intent of the Oregon Legislative Assembly that there be close cooperation between the Oregon Department of Administrative Service, (DAS), Public Contracting Agencies and qualified non- profit agencies for disabled individuals.  DAS, on behalf of the public contracting agencies and qualified non – profit agencies for disable individuals is authorized to enter into such contractual agreements, cooperative work relationships, and other arrangements as may be necessary for effective coordination and efficient realizations of the objectives of the law.”  He said it was the intent of the legislature that an expanded and constant market for sheltered workshops be established and DAS had been directed to coordinate that expansion with public contracting agencies. 

In response to a question from President Farmer regarding if prices were to be raised the contract could be canceled, Mr. Case said the probability was that QRF and EWEB would get together to try to find a reasonable rate. He said if an acceptable rate could not be found then the contract could be canceled.

In response to a question from Commissioner Simpson regarding whether the employees of QRF were paid minimum wage, Mr. Case confirmed that they were paid minimum wage.

Commissioner Menegat said he was satisfied with the fact that staff would come to the Board if there were significant increases in the contract price.

Commissioner Bishop said she would vote no on the motion because she did not believe EWEB should enter into a five-year contract.

The motion passed 3:2 with Commissioners Bishop and Simpson voting in opposition.

The meeting adjourned at 9:30 p.m.