US FERC: The End of Reactive Power Compensation for Generators?

Many electric power generating companies have filed with the Federal Energy Regulatory Commission (“FERC”) to collect reactive power compensation. FERC has now opened a rulemaking proceeding that would largely wind down most payment for reactive power.

Background

Reactive power functions as a supplementary byproduct of power generation (the primary products being capacity and energy). Reactive power compensation is predicated on the reactive generator demonstrating to FERC that it can produce reactive power and support its costs of equipment and facilities most closely associated with reactive power. When successful, a reactive power rate filing typically operates as a flat monthly dollar figure that the reactive generator receives from the applicable transmission provider.

The treatment of reactive power varies widely from market to market. Of the six FERC-jurisdictional regional transmission organizations or independent system operators (each, an “RTO”), only three currently compensate generating facilities for reactive power provided within the standard power factor range. California Independent System Operator Corporation, Southwest Power Pool, Inc., and Midcontinent Independent System Operator, Inc. do not pay separately for reactive power within the standard power factor range. In the ISO New England and New York ISO control areas, reactive power rates are fixed uniformly by the applicable ISO tariffs. In the PJM Interconnection, L.L.C. market, reactive filings are typically developed generator-by-generator and are controversial and contested.

Reactive Filing Difficulties

The preparation of a reactive case can involve significant time and expense, and a reactive filing normally results in FERC staff data inquiries and ultimately in forced-settlement proceedings before administrative law judges. A typical new reactive proceeding requires a 10- to 20-month FERC proceeding. All new reactive rates result in significant reductions compared to initial reactive rate filings and produce refund exposure. Additionally, the cost of a reactive case can equal up to a year or more of the proposed reactive compensation. Once a reactive rate is set, FERC may reopen and reduce that rate in a variety of circumstances. Reactive rates also come with reporting requirements and with 60- to 90-day freezes on direct and indirect merger and acquisition transactions and on purchases and sales of the interests in, and on the assets of, reactive generators.

Reactive filings can also raise significant issues under interconnection and power sales agreements, which may reserve reactive power to the interconnecting utility or the power purchaser. In these cases, a generator might not have the contractual right to sell its reactive output, even if FERC approves the reactive rate. The generator that sells reactive power other than to the contracted purchasing party might be in default of that contract and might also be in violation of FERC tariffs and market rules that prohibit the simultaneous sale of the same product to two different purchasers.

The Proposal and Its Significance

In the notice of proposed rulemaking released late last week (the “Reactive NOPR”), FERC is proposing to prospectively terminate reactive compensation to generators for maintaining the ability to produce reactive power within the standard power factor range of .95/.95 leading/lagging (the “deadband”). The Reactive NOPR proposes that, within 90 days after transmission providers have submitted revised compliance tariffs implementing the changes to reactive rates, deadband reactive power rates (which are nearly all reactive rates) would be terminated prospectively. The Reactive NOPR also inquires whether a 90-day transition period is necessary. Although the Reactive NOPR invites comments (which will likely be due in late May or the beginning of June), it is widely expected that the NOPR will result in the end of deadband reactive compensation. Going forward, generators should be very cautious—even more so than in the past—about assuming that projections of any reactive revenue are reasonable.

If a final rule is adopted as proposed in the NOPR, generating companies with existing rate schedules that allow for compensation no longer will be allowed to collect as of the date that the compliance tariff filing of the applicable RTO or utility outside of an RTO becomes effective. The Reactive NOPR contemplates that compensation would still be available when an RTO or utility requests reactive power outside of the standard power factor range.

Areas for Commenting

FERC asks for comments 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 time.