On March 21, 2024, FERC proposed to prohibit transmission providers from being compensated through their transmission rates charges for reactive power that is within the standard power factor range from generating facilities.  Similarly, FERC proposed to revise both the large generator interconnection agreement (“LGIA”) and small generator interconnection agreement (“SGIA”) to remove the requirement that a transmission provider pay an interconnection customer for reactive power within the standard power factor range if the transmission provider pays its own or affiliated generators for the same service.  If the Notice of Proposed Rulemaking (“NOPR”) becomes final as proposed, transmission providers would only be required to pay an interconnection customer for reactive power when the transmission provider asks the interconnection customer to operate its facility outside the standard power factor range set forth in its interconnection agreement.

FERC’s reactive power NOPR follows its November 18, 2021, Notice of Inquiry (“NOI”) regarding numerous issues associated with reactive power filings that have resulted from significant changes to electric markets and the generation resource mix, including the potential for overcompensation.  The NOI sought comments on various aspects of reactive power compensation and potential alternative approaches that could be used to develop reactive power capability revenue requirements.  (see November 30, 2021 edition of the WER).

Based on its review of the comments submitted in response to the NOI, as well as the Commission’s experience with reactive power compensation in recent years, FERC’s NOPR finds that allowing transmission providers to compensate generating facilities for providing reactive power within the standard power factor range has resulted in unjust and unreasonable transmission rates.  FERC notes in the NOPR that generating facilities that provide reactive power within the standard power factor range are only meeting their obligations under their interconnection agreements and incur no additional costs or costs beyond that which they already incur to provide real power.  FERC also observes that the costs to transmission customers resulting from reactive power compensation have increased substantially without any commensurate increase in reliability benefits.  According to FERC, without a sufficient economic basis or justification for separate cost-based compensation, transmission rates that include charges for reactive power within the standard power factor range may be unjust and unreasonable.

FERC proposes specific revisions to implement their proposal. First, FERC proposes to revise Schedule 2 of the open access transmission tariff (“OATT”) to prohibit separate compensation for the provision of reactive power within the standard power factor range specified in an interconnection agreement.  Second, FERC proposes to revise section 9.6.3 of the LGIA and section 1.8.2 of the SGIA so that transmission providers would be required to pay an interconnection customer for reactive power only when the transmission provider requests the interconnection customer to operate its facility outside the power factor range set forth in its interconnection agreement.  FERC also proposes to require transmission providers to submit compliance filings implementing these changes within 60 days of the final rule’s effective date.

Finally, the NOPR seeks comment on the proposed compliance and implementation timeline with respect to the following areas:

• Whether a transition period necessary? 
• What factors, if any, such as potential business or investment impacts, should be considered in determining whether any transition period is appropriate, how any transition period for reactive power compensation may be structured to minimize impacts, and for what duration any transition period should last? 
• For regions that have an established capacity market, should transmission providers be allowed to make the implementation date of their compliance filing align with the region’s capacity market timelines in order to allow costs associated with reactive power production, if any, to be incorporated into capacity market bids? 
• If the Commission allows existing generation resources that have previously received compensation for reactive power supply to continue to receive compensation for a limited period while prohibiting new generation resources from receiving reactive power compensation, how should it determine eligibility for continued compensation in a manner that is just and reasonable and not unduly discriminatory or preferential?

Comments are due 60 days after the NOPR’s publication in the Federal Register. Reply comments are due 90 days after publication in the Federal Register.

FERC’s NOPR, issued in Docket No.RM22-2-000, can be found here.