The Secretary of Energy Washington , DC 20585 May 14, 2012

The Honorable Maria Cantwell United States Senate Washington, DC 20510 Dear Senator Cantwell: Thank you for your April 11, 20 12 letter and your support for the Department of Energy' s (DOE) Power Marketing Administrations (PMAs). I am happy to address your questions regarding my March 16, 2012 Memorandum (Memo) setting forth my foundational goals for the PMAs. As highlighted in testimony DOE submitted on April26 to the House Natural Resources Committee, the Memo outlines broad concepts for achieving these goals in a manner that will be customized to reflect the unique attributes of each PMA. The core of this process will be a robust collaboration between DOE, each PMA, its stakeholders, customers, and its congressional delegations that we will conduct before any subsequent memoranda for individual PMAs are issued. DOE will begin its review with the Western Area Power Administration (WAP A). DOE intends to move sequentially and will assess our approach to the other PMAs in light of our experience with WAP A. We hope to initiate the WAPA review soon and anticipate it will take until late 2012 to complete. I understand your keen interest in any actions that may affect the Bonneville Power Administration (BPA) and its customers and stakeholders - and in particular BPA's requirement to offer cost-based rates. As articulated in the Memo, we will comply with all applicable laws relating to the rates for the sale of electricity to preference customers, which include cost-based rate structures. Indeed, maintaining cost-based rates is consistent with the overall goal of the Memo and DOE to minimize electricity costs for consumers while remaining competitive in a global economy. As you know, among the PMAs' primary obligations are to: (1) market electricity to preference customers so as to encourage the most widespread use of Federal power at the lowest possible rates to consumers, consistent with sound business principles; and (2) maintain and operate their portion of the Nation' s transmission grid. 1 Within this context, the goals set forth in the Memo relate primarily to the PMAs' transmission infrastructure and not to the marketing of federally generated power to the preference customers. As part owners and operators of the Nation 's transmission grid, the Federal Government must ensure its aging facilities are maintained and, if necessary, updated or replaced to ensure the transmission grid can accommodate today' s electricity market. I am committed

The PMAs have many responsibilities beyond these two missio ns. For example, BPA has a third primary mission: fish and wildlife protection

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to ensuring the PMAs' transmission system is managed to support cost-effective expansion, grid reliability, and open, non-discriminatory access consistent with the PMAs' statutory requirements. The Federal Government can and should lead the way in ensuring that our Nation has a reliable transmission grid that eliminates barriers to a competitive marketplace. As we pursue that goal, please rest assured I will not call for the creation of a regional transmission organization in the Pacific Northwest. Some portions of the Western Interconnection grid are currently under-utilized. Additionally, a recent report2 conducted by the North American Electric Reliability Corporation (NERC) and the Federal Energy Regulatory Commission (FERC) highlighted the need for better coordination among all of the entities in the Western Interconnection to avoid future widespread blackouts. The Report concludes that the transmission system "was not being operated in a secure N-1 3 state. This failure stemmed primarily from weaknesses in two broad areas- operations planning and real-time situational awareness .... " State utility commissioners from twelve western states and the Western Electricity Coordinating Council have been investigating an energy imbalance market (ElM) that would seek to eliminate that under-utilization. W AP A is investigating how it would undertake such an initiative, should a determination be made that the benefits of this system will outweigh the costs. On the other hand, BP A is looking at both an ElM and an alternative that could help improve grid operations in the Western Interconnection. As referenced in your letter, these are regionally derived solutions and I have advised both W AP A and BP A that I welcome the timely consideration of both options. As we undertake the process outlined in the Memo, and as referenced in footnote 2 of the Memo, I recognize that in some cases, one or more of the PMAs may already be accomplishing the activities covered in the Memo. As you note in your letter, BP A has already taken substantial actions during my tenure to further the goals stated in the Memo. Lastly, as my Memo states clearly, all activities must be consistent with each PMA's enabling statutes and existing contractual arrangements. As part ofthe collaborative process, DOE will address any issues raised by you or your constituents concerning specific legal authorities. Legal counsel for the PMAs and DOE will ensure that all of the directives presented in the forthcoming individualized memoranda are conducted within the legal framework set forth by Congress for that specific PMA. Your letter raises many important concerns. I assure you that DOE has not predetermined any specific actions that will be taken with respect to BPA or any of the other PMAs. We are committed to consulting extensively with the Pacific Northwest delegation, Congressional Committees of jurisdiction, BPA ratepayers and other stakeholders as this process moves forward.

Arizona-Southern California Outages on September 8, 2011 : Causes and Recommendations, April 2012. "Secure N-1 state" refers to the ability of the transmission system to accommodate the failure of a single element. NERC requires that the grid be operated so that "it generally remains in a reliable condition, without instability, uncontrolled separation or cascading, even with the occurrence of any single contingency, such as the loss of a generator, transformer, or transmission line. This is commonly known as the "N-1 criterion." !d. , p. 5

Thank you again for your interest in making our PMAs the best they can be. If you would like to discuss any of these issues further, please do not hesitate to contact me, or Mr. Jeff Lane, Assistant Secretary for Congressional and Intergovernmental Affairs, at (202) 586-5450. Sincerely,

Steven Chu