Reactive power is needed to maintain efficient and reliable operation of the integrated transmission system. However, reactive power cannot be transmitted significant distances, and therefore must be produced in close proximity to where it is needed. For that reason, the FERC requires each new generation facility to be capable of supplying reactive power service.

Generators that receive market-based rates for the supply of real power may also receive cost-based rates for supplying reactive power. The generally-accepted methodology for calculation of cost-based charges for reactive power service was established by the FERC in American Electric Power Service Corp., Opinion No. 440, 88 FERC ¶ 61,141 (1999). Since that time, there has been considerable disagreement over application of the AEP methodology in individual cases.

As new generation units commence service, the generation owner may file a proposed annual revenue requirement for the supply of reactive power from that unit with the FERC, along with cost support to justify the revenue requirement. Upon initial review, the FERC may determine that the annual revenue requirement proposed by the generator has not been shown to be just and reasonable. When that happens, the rate application usually is set for an evidentiary hearing with the opportunity for the generator, the FERC Trial Staff, and any interveners to negotiate reasonable charges for reactive power service with the assistance of a FERC administrative law judge serving as a mediator.

Although most reactive power rate cases set for hearing by the FERC are settled, Panda Stonewall LLC, which operates a 812 MW gas-fired combined-cycle generating facility, chose to go the litigation route. In a July 2017 filing, Panda Stonewall proposed to collect reactive power charges of almost $6.2 million annually. In contrast, the FERC Trial Staff asserted that the just and reasonable annual revenue requirement for reactive power service by Panda Stonewall is less than $1.8 million. An Initial Decision was issued in that proceeding on April 26, 2019. Panda Stonewall LLC, 167 FERC ¶ 63,010 (2019). Parties to Panda Stonewallhave 30 days from the issuance of the Initial Decision in which to file Briefs on Exceptions with the FERC, and it is reasonable to expect that they will do so.

One week after issuance of the Initial Decision in Panda Stonewall, a group of merchant power generators (including Panda Power Generation Infrastructure Fund, LLC) filed a Petition for declaratory Order in which they asked the FERC to address various issues that frequently arise in reactive power rate cases on a generic basis. Indicated Generation Owners, Docket No. EL19-70-000, Petition for Declaratory Order of Ares EIF Management LLC, et al., filed May 3, 2019. Issues raised in the Petition include the following:

• Appropriate capital structure and rate of return for a merchant generator.
• Recovery of firm fuel transportation costs.
• Recovery of designated indirect project costs.
• Use of nameplate power factor to allocate costs to reactive power function.
• Reliance on data provided by engineering, procurement, and construction contractor to apportion costs under the AEP methodology.
• Appropriate allocation factor for accessory electric equipment.

Parties to reactive power rate cases generally profess to be following the AEP methodology. However, in the absence of clear and comprehensive guidance from the FERC, there may be considerable disagreement over the level of charges for reactive power service by a particular generator that is just and reasonable. When that occurs, the generator is faced with the choice of either settling for an annual revenue requirement that is substantially lower than what it believes is justified, or incurring the costs of litigation.

Based on the amounts at issue in reactive power rate cases, most recent cases have settled on annual revenue requirements that are significantly less than those initially proposed by the generators. See, e.g., Blackstone Wind Farm, Docket No. ER18-2337-000 (settlement revenue requirement 63% of that requested); St. Joseph Energy Center, LLC, Docket No. ER18-1156-000 (settlement revenue requirement of 71% of that requested); Hunlock Energy LLC, Docket No. ER18-649-000; settlement revenue requirement of 31% of that requested). The Indicated Generation Owners believe that certain “ambiguities in the application of [the AEP] methodology have hindered efforts by generators to recover their actual costs of providing reactive power.” They also believe that there has been a tendency for other parties in reactive power rate cases, including the FERC Trial Staff, to disregard applicable FERC precedent in an effort to negotiate reduced charges for reactive power service.

Issues raised in the Petition were addressed in Panda Stonewall in the context of the record developed in that case. The Initial Decision in Panda Stonewall and the Petition provide the FERC with ample opportunity to clarify how the AEPmethodology is to be applied. Individuals interested in weighing in on these issues may file motions to intervene and protests in the Petition proceeding on or before June 3, 2019.

Rulings by the FERC in these two proceedings may be expected to enhance the ability of generation owners to propose charges for reactive power service that are within a range of reasonableness, thereby obviating the need for the FERC to set the case for hearing. When reactive power rate cases are set for hearing, rulings on issues raised in the Petition may also help to reduce costs of participating in reactive power cases by narrowing the scope of the issues to be resolved on a case-by-case basis and making it easier for parties to negotiate settlements that are just and reasonable. We will continue to monitor reactive power rate cases pending before the FERC for guidance on how frequently-arising issues in such cases should be resolved.