In the summer and fall of 2001, PJM Interconnection President and CEO Phillip
G. Harris testified three times about electric system reliability issues before
legislative committees. Harris first testified before the U.S. Senate Committee
on Governmental Affairs and then before the U.S. House of Representatives Subcommittee
on Energy Policy, Natural Resources and Regulatory affairs. Finally, he testified
before the U.S. House of Representatives Subcommitte on Energy and Air Quality.

In an environment of public mistrust and disillusionment, the utilities sector
has its work cut out. Each customer-oriented company is going to have to deliver
more than just the power — it will need to balance the needs of the marketplace
and reliability while delivering innovative, customer-centric solutions and products,
and all in a highly competitive environment.

Smith: What is the greatest challenge facing the energy industry
today?
Harris: We find ourselves at a key decision point in the history of the
electric industry. Our institutions can function only if they earn the trust
of the public. And, more than ever, the public is demanding affordability, reliability
and environmental sensitivity. If the public is to have trust in the marketplace,
the public demands that the marketplace produce real, fair and just results.
We must roll up our sleeves and reaffirm our commitment to finding the best
market-based solutions that deliver real value to the customer. And we need
21st Century tools to do the job.

Smith: What are the key ingredients of success?
Harris: The critical test remains the test of use. Competition in the
supply of electricity in the mid-Atlantic region is working and is producing
significant benefits to the consumer. With strong and visionary leadership from
the FERC (Federal Energy Regulatory Commission), with its having adequate resources
to do its job and with its willingness to take bold action to get critical market
structures in place, it can, and most recently has, taken on a vital and appropriate
role as a regulator to protect the public interest. Our story in the mid-Atlantic
is one of success — not as a result of any special magic but rather as
a result of our commitment to reliability and market-based solutions driven
by a clear commitment from the regulators, both state and federal, to take the
critical steps needed to make the markets work.

PJM is governed by an independent Board that is guided by three unique fiduciary
duties. First, to create and operate robust competitive bulk power markets;
second, to maintain the reliability of the network; and third, to avoid undue
influence by any one sector of the marketplace.

Each of these responsibilities is co-dependent on each other and each work to
make the markets work. Our history is one of complete openness and transparency
— openness of our actions and openness of the markets. PJM posts prices
every five minutes on our Web site. We have a transparent process to maintain
reliability and to undertake regional planning. And it works. In 2000, our spot
market prices cleared below $100/MWh 99 percent of the time and more than 70
percent of the time those prices were less than $30/MWh.

Smith: What is the FERC’s role in all this?
Harris: We need a strong regulator with adequate resources — funding,
advanced technology and skilled personnel — to work with the RTOs (Regional
Transmission Organizations) to monitor these markets and make critical design
corrections. We have made over 140 such design changes to our markets and have
sought and received the FERC’s support when our Board or the members identified
needed changes.

We need a regulator willing and able to speak clearly on its vision for the
country and then look to the institutions it has helped to foster to carry out
that vision. We applaud the FERC’s recent actions to create large RTOs in the
country as setting forth an important vision. At PJM, we believe we are well
poised, working with our colleagues and market participants in the Northeast,
to take the critical and bold steps needed to make that vision a reality. We
are well aware of the challenges that lie ahead. We’ve been through many of
these issues before. But PJM as we know it today was born out of a vision to
create a robust competitive wholesale market. We believe we’ve delivered on
that vision and the American consumer in our region is better off as a result.

Smith: What are some of the specific ways PJM has delivered
on the vision?
Harris: We view our responsibility for reliability as job one. Restructuring
cannot and need not mean any compromise to the reliability we have come to count
on. We also understand that, unlike the old paradigm, we can develop market
solutions that both ensure reliability and enhance the marketplace. Our reliability
is stronger now than it has ever been. That has only occurred because we have
integrated the workings of the market and the maintenance of reliability. You
cannot separate out the two.

The market monitoring function of the RTO is critical to maintaining the robustness
of our marketplace. PJM’s Market Monitoring Unit has authority to review the
marketplace, to issue cease and desist letters and to go to the FERC to seek
enforcement actions. We believe that an independent market monitor that works
alongside the system operator provides the needed daily interaction that is
critical to understanding the workings of the market rules and ensures that
the market remains competitive. We see a strong market monitor working with
the RTO board and with the Commission as key to this vital task. This function
is very much akin to the role of an auditor acting under SEC guidelines and
advising a corporate board of directors. We envision board guidelines, approved
by the FERC and carried out in accordance with FERC directives to guide this
important task.

Smith: What concerns do you have when you take in the current landscape?
Harris: We are concerned that some of the proposed RTOs being formed
around the country are simply grid operators with little responsibility for
operating critical markets. We think the lack of a neutral transparent spot
market will cause significant problems in those regions in the future. In order
to jump-start such markets, our members have authorized us to make our market
rules available at nominal cost to newly developing RTOs around the country.
We are undertaking this effort because we firmly believe that we should all
learn from our past experiences rather than reinvent the wheel on costly untested
systems that have not withstood the test of use.

Smith: What are issues PJM believes are important for Congress’ consideration?
Harris: We have proposed before Congress that the FERC be granted the
authority and flexibility to adopt and enforce solutions that balance the needs
of the marketplace and reliability. We remain concerned that the reliability
legislation submitted by the North American Electric Reliability Council seeks
to codify outdated tools and cumbersome structures when nimbleness and agility
are needed to meet the speed and integrated nature of the 21st Century marketplace.
We don’t think we should lock into stone yesterday’s solution, which only address
one half of the equation and therefore urge the Congress’ consideration of a
more simplified and balanced approach.

We also need to ensure that the FERC’s regulatory toolbox is filled appropriately
to oversee the workings of the marketplace. To that end, we recommended several
initiatives. The FERC should employ tools to work with the states to ensure
the smooth operation of the marketplace. Through joint boards and deference
to regional solutions, an appropriate balance can be reached that respects the
rights of the states while also recognizing the interstate nature of the grid.
The FERC should be able to ensure that cooperatives, municipals and federal
power marketing agencies provide comparable access to their transmission grids
that they provide to themselves.

The FERC should be empowered to require all transmission entities to participate
in RTOs to ensure a synchronous market and holistic regional planning. Legislation
should require the FERC to promote competitive markets, including the deployment
of demand response tools. The FERC should have the authority to encourage and
defer to regional siting decisions made by states through an open transparent
regional planning process. Mandatory and enforceable reliability rules, established
by the FERC with input and advise from the industry, should be applied to all
system operators and subsequently enforced through RTOs. The FERC should have
the unfettered ability, in the first instance, to balance competing market and
reliability issues.