The NOPR follows a 2021 Notice of Inquiry (NOI) in which FERC sought comments. Multiple RTO/ISO regions have already elected not to compensate the provision of reactive power within the standard power factor range, including CAISO, SPP and MISO. PJM compensates generating facilities within the standard power factor using the AEP Methodology and ISO-NE and NYISO use a flat rate design. Transmission providers outside of RTOs/ISOs that pay compensation generally use the AEP Methodology. Many Transmission providers outside of RTOs/ISOs do not provide any compensation.

FERC is proposing to revise Schedule 2 of its pro forma OATT to prohibit transmission providers from including in their transmission rates any charges associated with the supply of reactive power within the standard power factor range from generating facilities. As a result, transmission providers would only be required to pay for reactive power when the transmission provider asks interconnection customers to operate their facilities outside the standard power factor range.

The problem with the current reactive power system, according to FERC, is that “providing reactive power within the standard power factor range is a ‘no cost’ or de minimis cost service in addition to being a resource’s obligation under its interconnection agreement and good utility practice.” That is because the same equipment is used for the production of real power and reactive power. FERC stated that to the extent that generators incur any costs associated with providing reactive power within the standard power factor range, those costs can be recovered through energy or capacity sales and, thus, do not require separate compensation.

Within the RTO/ISO regions that do not currently compensate for reactive power outside the standard power factor range, FERC found no evidence of an insufficient supply of reactive power or that generating facilities in these regions have been unable to recover any costs associated with the production of reactive power. FERC also found that investors of facilities in those regions have been able to develop generating facilities that can satisfy the obligations in their interconnection agreements without separate reactive power compensation.

FERC emphasized that compensation for any reactive power production outside of the standard power factor range was beyond the scope of the rulemaking. Transmission providers are required to provide compensation for any production of reactive power outside of the standard power factor range because it may result in increased costs, including opportunity costs to the generating facility. For example, if a transmission provider requires a generating facility to provide reactive power outside of the standard power factor range, the generator may have to reduce its MW output to comply with such a request, which could then limit the generator’s opportunity to receive revenues for real power sales.

In the NOPR, FERC preliminarily found that where transmission providers require transmission customers to pay for the provision of reactive power within the standard power factor range, transmission rates may be unjust and unreasonable because the rates include costs without a sufficient economic basis or justification. FERC also seeks comments on the following issues, among others:  

• Whether there will be a reliability impact of eliminating compensation for reactive power within the standard power factor range in regions where generating facilities currently receive such compensation.
• Whether the elimination of reactive power compensation will affect the ability of generators to recover their costs in the markets that currently provide reactive power compensation within the standard power factor range.
• How eliminating reactive power compensation within the standard power factor range may affect investment decisions to build, or finish building, generation facilities, and how it could otherwise affect generators’ business decisions in those markets.
• Whether the proposed compliance and implementation timeline would allow sufficient time for changes to be implemented in response to a final rule or whether a transition period or some other transition mechanism beyond the 90-day implementation period proposed in this NOPR is necessary.
• For regions that have an established capacity market, whether the compliance date should 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.

Entities are requested to submit comments within 60 days after the NOPR is published in the Federal Register. Reply comments are due 90 days after the publication of the NOPR in the Federal Register. FERC’s Order is available here, Compensation for Reactive Power Within the Standard Power Factor Range, 186 FERC ¶ 61,203 (2024) (NOPR). 

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