October 4, 2011 Mr. William R.

Kleese Chief Executive Officer Valero Energy Corporation One Valero Way San Antonio, TX 78249 Dear Mr. Kleese: Thank you for your letter of September 27, 2011. Let me first say that I appreciate the concerns raised in your letter regarding reliability issues associated with the Valero Texas City Refinery. While I disagree with Valero’s characterizations of some events discussed in your letter, I certainly understand Valero’s sensitivity to reliability issues. TNMP and PNMR are committed to ongoing enhancement of service reliability in Texas City as well as the other areas served by TNMP. While TNMP has endeavored to apprise industrial consumers and other stakeholders in Texas City of its efforts to meet or exceed industry reliability standards, it is clear that we must do a better job of communicating that progress to the senior management of those consumers served by TNMP. Toward that end, TNMP will be contacting you in the near future to arrange a meeting where we can discuss the service reliability to your Texas City Refinery in more detail. However, I address the pertinent matters raised in your letter below. In regard to the September 22, 2011 outage, a 138kV potential transformer (PT) used as part of the transmission voltage metering at a substation serving your Texas City Refinery failed. The cause of the failure is being reviewed. This PT was installed in 2006, and there are no external indications of degradation. The manufacturer picked up the failed PT on September 30, 2011 in order to conduct further tests. Once the failed PT is evaluated by the manufacturer, TNMP will be informed of the date that the test results will be available. TNMP has tested the oil in the remaining PTs on that line. The oil tests found no degradation. The physical insulation of the current transformers (CTs) and breakers on that line was also tested. All the CTs and breakers passed the insulation tests. We will apprise Valero of the results of the testing of the failed PT once those are received. As to the July 25, 2011, event, TNMP and Valero’s Texas City personnel did work to coordinate de-energizing a line supplying power to the Texas City Refinery so that necessary maintenance could be performed. On the scheduled day, there was

Mr. William R. Kleese Page 2 October 4, 2011

apparently a miscommunication. TNMP contacted the engineer previously designated by Valero as the contact for switch confirmations. Only after the designated engineer confirmed that the Refinery was ready, did TNMP proceed to de -energize the line. Thereafter, TNMP conducted an internal review of the event and provided your Texas City Refinery with initial report draft on August 2, 2011. On August 4, 2011 TNMP provided Valero with a final report on the incident and met with your employees to discuss the event. I understand that the meeting was productive as improved joint procedures were established to avoid similar incidents. TNMP, like other utilities, has acknowledged that the unprecedented drought conditions caused voltage issues related to line contamination to arise ahead of the scheduled maintenance typically employed to avoid such issues. TNMP‘s maintenance schedule was based on the historic experience associated with maintaining its system in the Texas City area. When issues arose in late April, TNMP immediately employed preventative cleaning of substations and other facilities. The weekly inspection schedules were accelerated and the company invested in additional inspection equipment, began coating and replacing insulators, and also retained outside labor in order to meet the accelerated maintenance schedule. With the intensity and persistence of the drought conditions, TNMP increased its investment in equipment and labor to support the robust effort needed to deal with the ongoing d rought conditions. Consequently, TNMP has now revised its line contamination PM schedule to be more responsive to climate conditions and has incorporated the line de contamination procedures and tasks employed during this summer as standard PM practices. Further, TNMP’s support for strengthened reliability is not limited to line contamination PM. This spring, TNMP initiated a process improvement review to prepare for new NERC requirements and to evaluate operation and maintenance practices. To that end TNMP has already increased the inspection and testing of substations and other facilities. This summer TNMP also commissioned an independent relay study to ensure that the most reliable settings are being employed on the Texas City industrial area transmission system. Additionally, TNMP, along with Valero, has participated in regular meetings with other Texas City industrial consumers to exchange information and discuss technical practices that can increase the reliability of not only TNMP’s system, but also t hose private systems operated by industrial consumers that interconnect with TNMP. Most recently, on September 20, 2011, Dashiell, a vendor used by several industrial stakeholders as well as TNMP, presented its best practices regarding substation PM. I understand that Valero has been very supportive of the practices employed by Dashiell. TNMP reviewed the information following that presentation and incorporated

Mr. William R. Kleese Page 4 October 4, 2011

cc:

Public Utility Commission of Texas Commissioner Donna L. Nelson, Chair Commissioner Kenneth W. Anderson, Jr. Commissioner Rolando Pablos J. Neal Walker President, Texas-New Mexico Power Company

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