On March 21, 2024, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) proposing to discontinue compensation for the reactive service that electric generation provides “within the standard power factor range,” i.e., 0.95 leading to 0.95 lagging, as provided in a generation interconnection agreement.^[1] This is the cost-based compensation that generating companies have been collecting from a rate designed by applying the AEP methodology.^[2]

If a Final Rule is adopted as proposed in the NOPR, generating companies with existing rate schedules that allow for compensation no longer would be allowed to collect as of the date the Final Rule becomes effective or the date the compliance Tariff filing of the applicable regional transmission organization (RTO) such as PJM or utility outside of an RTO becomes effective.

Although FERC acknowledged that the transmission grid must have reactive power to function, FERC reasoned compensation for reactive support that is provided within the standard power factor range no longer is just and reasonable because:

• FERC previously determined that generating companies are “only meeting their obligations under their interconnection agreements and in accordance with good utility practice” by providing reactive support to the transmission grid, i.e., the quid pro quo to connect to the grid to sell power.
• Generating companies incur “no additional costs or de minimis costs [to provide reactive support] beyond that which they already incur to provide real power.”
• Generating companies can cover the costs to provide reactive power in other ways such as through energy or capacity sales.
• There is no evidence that the lack of compensation will lead to an insufficient supply of reactive power.
• Some regions of the United States appear to be paying for more reactive support than is needed, which means customers are paying for a benefit they may not receive.

Compensation would still be available when an RTO or utility requests reactive power outside of the standard power factor range. FERC reasoned reactive power outside the range is needed to transmit power across the grid to serve load, whereas reactive power within the range is needed to allow energy to enter the grid. FERC did not provide support for its distinction.

FERC asks for comment on (a) the proposal generally, (b) whether eliminating compensation will affect generating companies’ (i) ability to cover costs in markets where compensation currently is allowed and (ii) investment decisions to develop generation, and (c) whether some transition period is appropriate to allow for generating resources with existing rate schedules to continue to collect compensation for a limited period of time. Initial comments will be due late May or early June.

---