FERC Ends Reactive Power Compensation

On October 17, 2024, the Federal Energy Regulatory Commission (FERC) issued Order No. 904, Compensation for Reactive Power Within the Standard Power Factor Range (the “Final Rule”), determining it unjust and unreasonable for transmission providers to charge transmission customers for a generating facility’s provision of reactive power within the standard power factor range.¹

The Final Rule provides that each FERC-regulated transmitting utility must revise its pro forma open-access transmission tariff, pro forma large generator interconnection agreement, and pro forma small generator interconnection agreement, to prohibit the inclusion in transmission rates of any charges related to the provision of reactive power within the standard power factor range. This effectively terminates all typical compensation for reactive power in the United States.

Background

Power generation facilities produce, and sometimes sell, reactive power, a byproduct of power generation (the primary products being capacity and energy). Reactive power compensation is predicated on the generator demonstrating to FERC that it can produce reactive power and support the costs of associated equipment and facilities. In New England and New York, eligible generators are compensated based on their size and reactive capability. However, in California and the Southwest Power Pool—two FERC-regulated regions—there is no compensable reactive power product. In all other FERC-regulated regions, a generator must undergo a formal FERC ratemaking proceeding, which is always intricate and contentious, in order to be compensated for reactive power. When successful, a reactive power rate filing typically operates as a flat monthly payment from the applicable transmission provider.

The Final Rule and Its Significance

The Final Rule makes clear that no payments will be made to new or existing generators for reactive power within the standard power factor range. As a result, transmission providers are only required to pay an interconnection customer for reactive power when the transmission provider requests or directs the customer to operate its facility outside the standard power factor range of .95/.95 leading/lagging, known as the “deadband.”

Most importantly, the Final Rule does not allow for grandfathering of existing reactive rates:

We disagree… that generating facilities with reactive rates on file prior to the effective date of the final rule be provided legacy treatment. Given that the Commission finds above that allowing transmission providers to compensate generating facilities, affiliated and unaffiliated, for providing reactive power within the standard power factor range has resulted in unjust and unreasonable transmission rates, it would raise undue discrimination concerns to continue to provide payment through Schedule 2 for reactive power supply within the standard power factor range to generating facilities with rates already on file when those rates have been found to be unjust and unreasonable. Although commenters point to other situations where the Commission has provided legacy treatment for existing rates, in those situations the existing rate had not been found to be unjust and unreasonable.

All transmission providers, whether in RTO/ISO or non-RTO/ISO regions, must submit a compliance filing within 60 days of the effective date of the Final Rule, including a proposed effective date within 90 days from the date of the compliance filing. FERC will allow ISO-NE, NYISO, and PJM to each request a later effective date, for FERC’s consideration, to allow them to develop and propose changes to their market rules necessary to accommodate the elimination of compensation for reactive power within the standard power factor range.

As of now, there are no filings with FERC for rehearing of the Final Rule, although we do expect rehearing requests (and, potentially, appeals to federal courts of appeals). Any such rehearing filing will not stay the effectiveness of the Final Rule.

¹ We described the proceedings before FERC to ban payments to new and existing generators for reactive power within the standard power factor range in a previous Legal Update.