Seattle City Light

1. Seattle City Light Rates Advisory Committee December 10, 2003

2. Update on Events Since December 24, 1999 Or How We Survived the Western Power Crisis

3. 2003 Forecast: Now vs. Then

4. 1996-2000: Prelude to Crisis • Amendment of BPA contract in 1996 • Computed requirements prior to 10/1/96 • Limited to 195 aMW post-10/1/96 • Saved money through 1998, when prices were low • Sale of Centralia Plant in May 2000 • Seattle owned 8% share • 103 MW of capacity, 81 aMW of energy • Result: Increased exposure to market risk • By 2000, new resources under consideration • BPA & Klamath Falls

5. The “Perfect Storm” • Starting in May 2000 wholesale prices rose sharply • Prices moderated in September & October • Rose again in December and stayed high through May 2001 • Water conditions in the water year beginning October 1, 2000 were among the worst ever • SCL hydro output in 2001 was 55% of normal • SCL’s 2001 net wholesale market purchases increased from a planned 24 aMW to 222 aMW.

6. The City’s Response: Short-Term • Four rate increases in 2001 • Aggregate increase: 57% • Conservation and curtailment of energy use • 5% reduction in retail sales from 2000 to 2001 • Automatic pass-through of BPA rate changes • 100% bond financing of CIP • $503.7 million long-term bond issue in March 2001 • Funded 2 years of capital needs • Refinanced past expenditures and bonds

7. The City’s Response: Short-Term (cont.) • Use of short-term debt to cover operating needs • $182 million RANs in April 2001 • $125 million RANs in November 2002 • Loans from City Cash Pool • Deferral of $300 million in 2001 power costs • Amortization at $100 million per year in 2002, 2003 and 2004

8. City Cash Pool as a Source of Liquidity • City pools cash from all City funds and manages Cash Pool as a common investment portfolio • City Finance Director can authorize temporary loan to any fund for up to 90 days • Beyond 90 days City Council must approve by ordinance • Council has authorized Cash Pool loans for three periods • Up to $110 million from December 2001 through March 31, 2003 • Up to $50 million from May 2003 through August 31, 2003 • Up to $100 million from October 31, 2003 through December 31, 2004

9. Steady Reduction in Short-Term Debt through 2004($ in millions)

10. SCL Response: The Long-Term Solution • Acquisition of resources to reduce dependence on wholesale market • Increase in BPA purchases from 195 aMW to over 550 aMW, effective October 1, 2001 • 100 MW from Klamath Falls Cogen from July 2001 through June 2006 (renewable for another 5 years) • 50+ aMW from Stateline Wind Project, effective January 2002 • New financial policies that recognize higher level of risk

11. New Financial Policies • Old policies required rates to be set to achieve 1.80 coverage of 1st lien debt service • Provided about 80 percent probability of covering operating costs and debt service, given pre-2001 volatility • New policies require current rates to stay in place until all short-term debt is repaid (mid-2004) and operating cash balance reaches $30 million • When debt is repaid, rates will be set to achieve 95% probability of covering operating costs and debt service • Implies 1st lien debt service covered 2.2 times, all debt service covered 2.0 times • Implies 50+% cash financing of capital

12. 2004 Outlook • Conservative estimate of wholesale revenue • Assumes average sales price of $31 per MWh; current forward peak price is $38 • Equivalent to about 75% exceedance scenario • $144 million assumed in forecast • $180+ million at average water and current forward prices • All short-term debt repaid in 3rd Quarter • Operating cash balance reaches $30 million • New financial policies are triggered

13. The Rate Process and RAC’s Role

14. Components of Rate Proposal • Revenue Requirements Analysis • Determines total revenue required to cover costs and meet financial guidelines • Cost of Service and Cost Allocation Report • Allocates the revenue requirements among the various customer classes • Rate Design Report • Develops the specific charges that will recover the revenue requirement from each class.

15. Rate Review Schedule (tentative) • Formulation of SCL Proposal: Jan.-June 2004 • SCL Proposal to Mayor’s Office: July 1, 2004 • Together with 2005-2006 Budget and CIP • Executive Review: July-August, 2004 • Mayor’s Proposal to Council: Late September, 2004 (with Budget/CIP) • Council Review: October-November, 2004 • Passage of Rate Ordinance: November 2004 • New Rates Effective: January 1, 2005

16. RAC’s Role Council Resolution 28004 (The Rate Policy Resolution): “….As one mechanism for citizen participation, a Citizen’s Rate Advisory Committee shall participate in the review of each proposed rate increase. The Committee shall be composed of individuals representative of the rate groups and various user categories within the rate groups. The Committee shall review and make recommendations to the City Light Superintendent, the Mayor and the City Council on issues associated with the rate review process.”

17. Advisory Board • Six-person Advisory Board appointed by Mayor and Council • Technical experts with utility or business experience • Randy Hardy: Former head of SCL & BPA • Sara Patton: Executive Director of NW Energy Coalition • Carol Arnold: Regulatory lawyer in energy field • Jay Lapin: Former CEO of General Electric/Japan • Maura O’Neill: Local businesswoman with utility experience • Don Wise: Local real estate executive • Role of Board to be reviewed after three years

18. Advisory Board (cont.) • Areas of focus: • “….policies, business strategies, and performance oversight related to the utility’s finances, power supply, power marketing, risk management, environmental protection, energy conservation, and other areas….” (Ordinance 121059)